Shares in financial services giant AMP Limited (ASX: AMP) are up 3% in lunchtime trade to $5.20 after the group revealed better-than-expected performance from its wealth management division, although it wasn't all good news. Below is a summary of the result.
- Financial year (FY) 2016 net loss of $344 million
- FY 2016 underlying profit of $486 million (excluding write downs associated with the life insurance business)
- Reported group earnings include a $668 million impairment related to underperformance of life insurance business
- Life insurance business saw total experience losses for the year of $105 million
- Wealth Management business posted operating earnings of $401 million, down 2.2% on FY 2015
- Wealth Management's assets under management finished up 5% to $121 billion
- Plans for an up to $500 million share buy-back announced
- Final dividend maintained at 14 cents per share
- AMP is committed to a 3% reduction in controllable costs in FY17 (excluding AMP Capital)
As can be seen from the summary of the results today's news headlines have been stolen by the shocking performance of AMP's Wealth Protection business that is largely involved in the provision of life and other retail insurance services.
I suggested back in May 2016 and beforehand that AMP should put its life insurance business up for sale as other smarter operators like Macquarie Group Ltd (ASX: MQG) and even National Australia Bank Ltd (ASX: NAB) had already moved to divest their life insurance assets to specialised players like Zurich or Nippon.
In fact the writing has been on the wall for bit-part life insurance industry operators for the past five years or so as even large global players like Allianz, Prudential, Zurich and AIA Group face headwinds in mature western markets, while emerging markets prove growth graveyards as they're insufficiently developed to support the life insurance sector.
The result has been the global life insurance industry hitting a brick wall as consumers in mature markets wise up to demand more in return for their premiums, or simply let the policies lapse altogether. AMP's management then has a tough task ahead of it in either trying to sell or radically reform what looks a structurally challenged business.
I also wonder what AMP means by its commitment to cut "controllable costs" by 3% "excluding AMP Capital and allowing for continued investment in growth businesses and channel experiences". It seems "controllable costs" is probably just a euphemism for waste and the group's lack of cost control alongside its life insurance problems are two among many reasons that make it a stock to avoid in my opinion.
Despite all the tailwinds of the superannuation sector and its scale advantages, AMP shares are down 51% over the last 10 years and investors in financial services businesses would be better off looking at businesses led by founders with heavy insider ownership of the shares. Two that come to mind are Magellan Financial Group Ltd (ASX: MFG) and WAM Capital Limited (ASX: WAM), I expect both will thump the returns provided by AMP over the years ahead.
