AMP's share price fell as much as 10 per cent on Friday afternoon after the company announced its profit will take a $565 million hit due to "the deteriorating experience across the life insurance sector".
In an announcement on the ASX on Friday morning, AMP said it anticipated capitalised losses of $500 million in the 2016 financial year across its life insurance business.
AMP's wealth protection profit markets for the 2017 financial year will also be reduced "in the order of $65 million", said the statement.
The company has fully impaired its wealth protection business by $668 million when preparing its 2016 year-end financial statements.
"This reflects a decline in the potential recoverable amount for the Australian wealth protection business in line with reductions in embedded value," said AMP.
At the same time, AMP has announced a binding quota share agreement with reinsurance company Munich Re in a move to make its wealth protection business less capital intensive.
The agreement, which will take effect from 1 November 2016, will see Munich Re reinsure 50 per cent of $750 million of annual premium income from AMP Life’s retail portfolio.
“The agreement creates the potential to release up to $500 million of capital from AMP Life subject to regulatory approval. This initial tranche of reinsurance will reduce the magnitude of earnings volatility from the Australian wealth protection business for the AMP group,” AMP said.
The deal follows the wealth protection business reported Q3 losses of $44 million, with AMP chief executive Craig Meller saying that uncertainty around superannuation legislation, recent market volatility and lower consumer confidence subduing cashflows.
“We’ve seen consistent deterioration in the insurance sector over the course of 2016 and, despite the progress on claims transformation to date, it has significantly impacted the performance of our wealth protection business,” he said.
“Today’s actions are designed to re-set the wealth protection business. They will improve the group’s earnings stability, free-up capital and help bring into focus the growth potential of AMP.”
The $44 million losses reflected an $18 million loss in retail income protection, a $12 million loss in group insurance claims, an $8 million loss in retail lump sum, and a $6 million lapse experience loss.
AMP said 2017 financial year profit margins for the wealth protection business are expected to reduce by $90 million dollars, “impacted by a combination of strengthened assumptions – $65 million – and execution of the reinsurance agreement – $25 million”.
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