Friday 19th July 2019
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Resolution Life may be able to wrestle more than a billion dollars from the A$3.3 billion sale price of AMP's life insurance business after a known risk came to fruition when the Reserve Bank of New Zealand didn't play ball, say Jarden analysts.
AMP surprised investors this week when it said New Zealand's central bank changed the rules when it insisted that Resolution have separate, ring-fenced assets held in New Zealand to back Kiwi policyholders. The Australian financial services firm said renegotiating the deal may cut the sale price by A$700 million, but Jarden analysts estimate a revised price could be as much as a third lower.
They say the deal was agreed on the assumption Resolution Life would be able to keep the branch structure in place.
"However, this was also a known risk and the ring-fencing of assets would not in itself be a deal-breaker in our view," they said in a note to clients.
"We view the RBNZ hurdle as an opportunity for Resolution Life to step back from the deal and reassess price and structure."
AMP's dual-listed shares slumped 15 percent on Monday when it announced the deal may be off. They were recently at $1.88 on the NZX and have more than halved during the past 12 months.
AMP's announcement prompted criticism of New Zealand's central bank from Australian commentators, at a time when the RBNZ has been pushing for stricter capital requirements on the four major lenders that dominate trans-Tasman banking.
Deputy governor Geoff Bascand rejected claims New Zealand's regulatory regime had changed and laid the blame on the insurers for not considering its requirements. The central bank later released a statement that it had shared its expectations after AMP and Resolution first contacted the regulator last September, a month before the transaction was made public. Resolution only filed its formal application to the RBNZ on June 7.
AMP had softened its language when talking about the deal in recent months. At its annual meeting in May, chair David Murray noted that the transaction, including regulatory approvals in multiple jurisdictions, was "difficult and complex" and that some regulators had changed their requirements since the deal was agreed. The firm was still eyeing a September quarter completion and those views were reiterated in a June 3 update.
The company today declined to comment on the timing of the announcement, or why Resolution only lodged its application in June.
Jarden said AMP's exemptions from supplying fit and proper certificates for new directors and solvency standards on its subsidiaries were common. However, the exemption to ring-fence assets in New Zealand was only granted to six of 88 licensed insurers, including AMP. The other firms were global reinsurers with Australian subsidiaries.
The analysts said the RBNZ hurdle could cut the sale price by A$200 million but was just one of several reasons to write down the value of AMP Life by about A$1.1 billion. Other reasons included capitalised losses that would have shifted to Resolution had the deal gone ahead, and Australian government law changes to protect pensions from fees and insurance costs and revive consumer confidence in the superannuation system.
"While the smallest component of this is the New Zealand capital requirement, this has provided the opportunity to reassess the deal structure and ultimately the price of the asset sale," they said.
Jarden said AMP's wealth strategy is now on hold because if it accepts a cheaper price or holds on to the assets, it won't have enough capital to transform its wealth management business. It can continue to operate as-is by not paying dividends and avoid a dilutive equity raising.
"But, doing nothing, the business is on a gradual decline in earnings, which could decline much quicker pending competitive behaviour and regulatory change," they said.
"Therefore a dilutive equity raising may be required to start the transformation process."
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