Investors remain wary of AMP, as analysts consider the cost of rising unemployment, potential weakness in its flagship wealth management business and the risk that insurance price rises will encourage more people to drop their cover.
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.