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Why shares in AMP Limited (ASX:AMP) may be about to get sold off again

Just as you thought the worst was over for AMP Limited’s (ASX: AMP) share price, round two of a sell-off could be just around the corner.

The stock is already down 36% to $3.34 since the start of the calendar year as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index added 4%, but it could go lower as our largest wealth manager is being called back to testify at the Haynes Royal Commission next month.

It was revelations at its first round with the Royal Commission that sent AMP careening to a 15-year low of $3.30 last month when the company was being grilled about ripping off financial advice clients.

The stock is likely to retest the low when it goes back to the Royal Commission to answer questions about general and life insurance practices.

It’s not the only large listed insurer that will have to testify. Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG) have also been summoned, according to the Australian Financial Review.

The Royal Commission’s look into the insurance sector will focus on the sale and design of life insurance and general insurance products, the handling of claims under life insurance and general insurance policies, and the administration of life insurance by superannuation trustees.

The inquiry comes amid accusations that young superannuants with low account balances are being sold life insurance that is inappropriate for their circumstances.

The government is thinking about barring the practice but that could lead to an up to 26% jump in life insurance premiums for everyone else, according to estimates by KPMG.

Local insurers are also under pressure recently from a high number of life and natural disaster claims. The AFR reports that this is the reason behind Commonwealth Bank of Australia’s (ASX: CBA) decision to sell its life insurance business to AIA and Suncorp said last month that it was also divesting its life insurance division.

However, AMP is probably in the worst position given lingering doubts about the sustainability of its business model despite posting a reasonable first half result three weeks ago.

Don’t be fooled by AMP’s seemingly low valuation. It’s no bargain and the stock is likely to fall for another reason besides the Royal Commission.

The group just appointed a new chief executive Francesco De Ferrari and I am expecting him to clear the decks as most new CEOs do when taking over a burning ship.

This means he is likely to unveil more shocks to investors in the near-term as he rebases the business. I would wait for that event before deciding whether to jump back in.

In the meantime, there are other blue-chip stocks with decent dividend yields that make better alternatives to AMP.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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