AMP’s big problem

Diversified wealth manager AMP (ASX: AMP) has released its third-quarter results for cash flows and assets under management (AUM) as well as updated the market on its troubled wealth protection division.

The good

While AMP experienced net cash outflows from external platforms of $233 million, this was significantly outweighed by $567 million of retail net cash inflows on AMP platforms during the quarter. The Australian wealth management division continued to perform well with AUM increasing by 5% over the quarter to $96.7 billion, helped along by $206 million in net inflows.

AMP also continued to grow its self-managed super fund business, AMP Bank and AMP Capital divisions. At the end of the third quarter the mortgage book stood at $12.9 billion, the deposit book had grown to $8.6 billion and AMP Capital’s AUM were up 4% to $135.9 billion from $131 billion.

The bad

Experience losses in the wealth protection division for the third quarter were $24 million and follows a tough first half. Management informed investors that it expects to strengthen its ‘incurred but not reported reserves’ (IBNR), which is expected to increase experience losses by around $15 million in the fourth quarter. When combined with an expected capitalised loss that will need to be recognised as well during the fourth quarter, management has guided the market to expect a $55 million to $65 million reduction in operating results for the fourth quarter. Ultimately these losses will impact the full year result as well.

In other insurance news, Insurance Australia Group (ASX: IAG) — which has significant exposure to the regions of NSW that have been subject to the recent horrific bush fires — has updated the market that it has so far received around 600 claims but it is too early to give an accurate indication of cost. Australia’s other major listed general insurers, Suncorp (ASX: SUN) and QBE Insurance (ASX: QBE), are presumed to have less exposure to this market and as yet have not provided any market guidance as to their likely exposure.

Foolish takeaway

The 4% fall in the share price of AMP to $4.72 by mid-afternoon on the day of the third-quarter release sums up what the market thought of the wealth protection division’s woes. The market doesn’t like surprises or to see earnings going down, however with the stock significantly underperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past 12 months — AMP’s return has been flat compared with a near 20% return from the index — further research by investors who think there could be some upside to fair value from current prices could prove worthwhile.

AMP has a dividend payout policy based on 70%-80% of underlying profits, making its forecast yield quite attractive. Discover  another great dividend payer in brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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