AMP's short term insurance problems mask long term super uncertainty

Insurance may have crimped AMP's first half earnings but structural changes to superannuation pose a greater long term threat.

When it comes to consistency in wealth destruction, it is difficult to imagine a corporation as adept as wealth management specialist AMP.

Yet again the insurance and financial services group has delivered a result that could at best be described as disappointing as steep declines in its insurance business offset improved performances in wealth management and investment.

It is worth remembering that after demutualisation, late last century, AMP hit the boards north of $20 a share. It now trades at less than a quarter of that, and at $4.50, is around the same level as a decade ago.

A 10% decline in first half underlying earnings to $440 million was slightly better than the deflated expectations unveiled by the company a little over a month ago.

The company also announced it would swap Craigs – a Mellor for a Dunn – as chief executive. Dunn has been at the helm for six years and the succession indicates that at least something is going right internally (see Alan Kohler's weekend briefing).

Once the fifth pillar of the Australian financial system, AMP has yet to fully integrate its AXA acquisition, a purchase that delivered it enough bulk to ward off further incursions on its turf from the big four banks.

While insurance has been this year’s weak spot, AMP faces a tumultuous future as the certainty of its fee scoop in superannuation now is under a cloud.

Legislative changes to superannuation – where super fund managers now are required to detail their fees and connections to clients and the introduction of the simplified My Super – are expected to drastically cut fees and charges.

Superannuation is one of those rarities in the business world. An industry mandated by government decree that guarantees revenue inflows of 9% of salaries every fortnight has transferred vast wealth into the industry and those who manage it.

For AMP shareholders, that flow of wealth has been elusive. And the business model is likely to come under increasing pressure.

In its presentation this morning, the company pointed to a significant drop in revenue to assets under management margins to 3.5% by 2017.

But even that level would appear to be an enormous clip from client funds which is unlikely to be sustainable once the company is forced to disclose exactly how much it is taking. Vast swathes of Australians are signed up to long term contracts with AMP with little knowledge of exactly how much they are paying.

The company may overcome its short term problems with insurance. But it faces a far greater challenge in the longer term in its asset management business.