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S&P downgrades AMP's life insurance, bank over misconduct

Thursday 30th August 2018

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S&P Global Ratings cut AMP's life insurance credit rating and said it has a dim view of the group's creditworthiness after revelations from Australia's Royal Commission into misconduct in the financial services sector.

The ratings agency downgraded AMP Life to A+ from AA-, and put it on a negative outlook. Separately, it affirmed AMP Bank's 'A' long-term and 'A-1' short-term issuer credit ratings, and revised the outlook to negative from stable. 

Dual-listed parent AMP kept its A credit rating, which S&P said reflected "the recent and prospective increasing importance of nonregulated cash flows to the group's operating income given that we expect reinsurance arrangements to further dampen life risk earnings going forward."

The rating agency said AMP Bank's downgraded outlook followed pressure on the group credit profile.

"Our outlooks on AMP group companies are negative," S&P said. "The lowering of the rating on AMP Life reflects a deterioration in the creditworthiness of the entire AMP group as a result of fallout from the Royal Commission revelations. We now consider the group credit profile to be 'A+' rather than 'AA-', which is in line with the stand-alone creditworthiness of AMP Life."

In a statement, AMP said the changes "are not material to the operations of AMP Life or any other entity in the AMP Group."

"AMP Limited remains well capitalised and at 30 June 2018 held a surplus over Minimum Regulatory Requirements of A$1.8 billion," it said. 

AMP's New Zealand financial services division reported a 13 percent decline in operating earnings to $60.4 million in the six months ended June 30, citing skinnier profit margins from its wealth protection and mature life insurance products. The Australian group's underlying earnings fell 7.2 percent to A$503 million.

The ratings agency said the group's competitiveness had weakened as a result of the brand and reputational damage from the commission. In July, the group announced it would make an A$415 million provision to compensate customers affected by bad or non-existent advice since 2008. 

S&P said this remediation "undermined the group's earnings and there are indications asset management flows have also suffered. In addition, the insurance risk business continues to underperform our expectations."

The agency said more pressure could come if further penalties, fines, legal action, or remediation action takes place. It removed the negative implications rating it had put on the CreditWatch it applied to AMP in May, following disclosures the firm made to the royal commission. CreditWatch ratings show S&P's opinion on the potential direction of a short-term or long-term rating. 

Still, S&P said AMP has a strong business franchise and very strong capitalisation and AMP Life has a strong business profile and robust capital. It now sees AMP Life as a strategically important subsidiary of the group, rather than core, as management have said the life insurance risk business could be sold as part of a portfolio review.

Over the next two years, S&P may cut its ratings further if the group has to make more remediation payments, or its operating performance worsens. It could also return to a stable outlook if there's evidence the remediation has improved risk management and the group is robustly capitalised and remains strongly competitive.

AMP's dual-listed shares last traded at $3.65 on the NZX, down 1.4 percent today. They have dropped 35 percent this year.


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