Monday 15th July 2019
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New Zealand’s Reserve Bank has put a spanner in the works of AMP’s proposed A$3.3 billion sale of its Australian and New Zealand life and other wealth protection businesses to British-based Resolution Life Group.
That’s because the New Zealand insurance company prudential regulator is insisting that Resolution Life must agree to have separate, ring-fenced assets held in New Zealand for the benefit of the New Zealand policyholders.
If the sale can be renegotiated – which is by no means certain – it will probably lower the likely price by about A$700 million.
The sale “is highly unlikely to proceed on the current terms due to the challenges in meeting the condition precedent for RBNZ approval,” AMP says in a statement.
The Australasian company says the condition RBNZ is insisting on “is inconsistent with the current branch structure.”
AMP has been selling life insurance policies in New Zealand since 1854 and currently has about 200,000 policies in force in this country.
AMP shares fell as much as 17.6 percent to A$1.7725 on ASX after the announcement, wiping A$1.1 billion off the company's market capitalisation, before recovering to A$1.95 a short time ago.
The shares, which are listed on both ASX and NZX, had already fallen more than 50 percent since March last year.
The sale agreement with Resolution Life was conditional on RBNZ approving the continuation of the New Zealand arm’s current branch structure, which exempts AMP from a number of New Zealand legislative requirements, including the need for ring-fenced assets.
AMP says Resolution Life notified it over the weekend that it doesn’t expect the conditions of the sale to be met because of RBNZ’s condition.
“AMP believes that this reflects RBNZ’s position and that addressing these requirements would adversely impact the commercial return of the sale for both AMP and Resolution Life,” it says.
“The failure to meet this condition precedent is exceptionally disappointing as the sale of AMP Life is a foundational element of AMP’s strategy.”
RBNZ says it remains “constructively engaged” with both AMP and the Bermuda-based Resolution Life and has “maintained a clear focus on the interests of policyholders while observing regulatory requirements.”
Deputy governor and general manager of financial stability, Geoff Bascand, says that RBNZ’s supervisory responsibilities set out under the Insurance Prudential Supervision Act haven’t changed since AMP and Resolution signed their contract in 2018.
“The reality is, the commercial terms of the contract can’t be met satisfactorily” and that contract’s terms were agreed “without consideration of the Reserve Bank’s requirements.”
The sale was among the sweeping restructuring changes AMP announced last October which had also included the proposed float on NZX of the New Zealand wealth management business. AMP has previously said that float would be delayed until the completion of the sale of the life businesses to Resolution Life.
The decision to shake up the business followed damning revelations emanating from Australia’s royal commission into financial services, including charging dead people and others for services never delivered and that the company had misled its regulator, which led to a string of board and senior management departures.
A report by the two New Zealand life insurance industry regulators, the Financial Markets Authority and RBNZ, released in January this year made a number of damning conclusions about the sector, including that it is vulnerable to misconduct, is ignoring whether its products are suitable for customers and is slow to make changes.
In particular, the regulators note that about 25 percent of the $2.57 billion New Zealanders pay in annual premiums goes on agents’ commissions, far more than in other countries – Mexico and Hungary are the next highest at about 15 percent with Australia at about 12 percent and the United States about 9 percent.
AMP ceased selling new life insurance policies from Jan. 1 this year ahead of the sale of that business.
“Recognising that the transaction is unlikely to proceed in its current form, AMP is now working with Resolution Life to determine whether there is a solution that addresses policyholder interests, regulatory requirements and provides certainty of execution,” AMP said today.
“This will require negotiation of new terms and is not certain.”
In particular, best estimate assumptions of the life businesses’ long-term value have fallen by about A$400 million since June 30 last year, which was to have been the effective date of the sale, and the impact of Australia’s Protecting Your Super legislation will reduce its value by about another A$300 million.
“There is a range of other factors, both positive and negative, that would be taken into consideration in any future sale price, including the effects of the Putting Members’ Interests First Bill,” AMP says.
The impact on earnings from unwinding the risk sharing agreement with Resolution Life from June 30 last year won’t be substantial, the company says.
AMP’s New Zealand life insurance arm reported a 45 percent slump in operating earnings to A$39 million for calendar 2018 while the New Zealand wealth management business reported flat earnings of NZ$57 million.
The Australian parent’s overall result was a 97 percent slump in net profit to just A$28 million, down from A$848 million in 2017.
The AMP board “will review any revised transaction to determine if it is in the best interests of policyholders, the company and its shareholders,” the company says.
“If a revised transaction cannot be achieved on acceptable terms, and receive regulatory approval, AMP will retain AMP Life and manage it as a specialist life insurance and mature business with a focus on policyholder outcomes, cost and capital efficiency,” it says.
Because of the uncertainty around the transaction, the board expects “to continue its prudent approach to capital management” by not paying a first-half dividend.
The Australian Financial Review reports that investors had been expecting both a 6 cents per share first-half dividend and a capital return of A$755 million after the sale. The AFR also suggests that even if AMP retains ownership of the life businesses, RBNZ may cease to allow it to treat the New Zealand operations as a branch office.
It says that although RBNZ may be wanting to achieve greater financial stability and to no longer rely on oversight from the Australian Prudential Regulatory
Authority, "its lack of trust in the regulatory oversight of AMP Life by APRA should not be conveyed in a way that immediately wipes $1 billion off the value of AMP."
AMP's first-half accounts are yet to be finalised but the company expects the life business will meet board targets for capital above minimum regulatory requirements.
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