Investors advised to steer clear of AMP
Higher-than-expected payouts for AMP's life insurance business could continue in the medium term and investors will likely "sit on the sidelines until greater clarity emerges" at its August results, brokerage Deutsche Bank warned.
With the unemployment rate tipped to increase through 2013, the Deutsche Bank analyst Kieren Chidgey estimated a 1 percentage point rise in unemployment could equate to $45 million in disability claims.
But others said Monday's share price slump - when AMP shares shed 13 per cent to a 10-month low, and other life insurers fell in sympathy - had taken the downgrade into account.
AMP could also benefit from a change in federal government, broker JP Morgan said, if the Coalition watered down Labor's financial planning laws and opened up awards to retail super funds.
Shares in AMP closed down 0.7 per cent to $4.31 on Tuesday, wider than the benchmark's 0.3 per cent fall. This capped off a 13 per cent slide on Monday after it confirmed problems in wealth protection would cause first-half underlying profit to fall to between $415 million and $435 million, as it battled the impact of a slowing economy and difficulties in getting some policyholders off claims.
Many of the problems relate to income protection products which guarantee a portion of a policyholder's salary for a period of time if they are unable to work. Claims have risen rapidly in recent years as job losses rise among white-collar workers. Meanwhile, a slowing economy has prompted some people to opt out of death and disability cover.
With payouts for AMP's life insurance business likely to be $32 million higher than expected over the first five months this year, CIMB analysts Richard Coles and Michael Leonard said there was "no easy fix to the double-edge sword of negative disability claims and rising lapses". The downgrade highlighted the "continuing earnings risk facing not only AMP, but also the life insurance industry as a whole at present," the analysts said.
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Analysts say investors are wary of AMP because rising unemployment, potential weakness in its flagship wealth management business and higher insurance prices could push people to drop cover. Higher-than-expected payouts in AMP's life insurance arm and ongoing uncertainty over claims and lapses have increased earnings risk, so many investors are expected to sit on the sidelines until clearer results emerge.
Deutsche Bank estimated that a 1 percentage point rise in the unemployment rate could equate to about $45 million in additional disability claims for AMP, highlighting sensitivity of its income protection business to job losses.
AMP shares fell after the company confirmed problems in wealth protection that would reduce first‑half underlying profit. The share price slid 13% to a 10‑month low on Monday, and then closed down a further 0.7% at $4.31 the following trading day.
Analysts from CIMB said payouts for AMP’s life insurance business were about $32 million higher than expected over the first five months of the year. That, combined with rising disability claims and policy lapses, is expected to weigh on first‑half underlying profit.
Most of the problems relate to income protection products (which guarantee part of a policyholder’s salary if they can’t work), rising disability claims, and customers opting out of death and disability cover. AMP’s wealth management operations are also seen as potentially weak amid the slowdown.
The article notes analysts advising caution rather than immediate action: many investors are likely to 'sit on the sidelines' until greater clarity emerges at AMP’s August results. That suggests analysts recommend waiting for more information rather than making hasty decisions.
JP Morgan said AMP could benefit from a Coalition government if it watered down Labor’s financial planning laws and opened awards to retail super funds, which might create a more favourable regulatory or market environment for AMP.
AMP’s downgrade—forecasting first‑half underlying profit of $415 million to $435 million—highlights the continuing earnings risk across the life insurance industry from the double‑edged impact of rising disability claims and increasing lapses, especially in a slowing economy.
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