Weak wealth outcome drags major bank’s credit rating

Moody’s has bumped down its credit rating for the AMP Group, Life and Bank, from A2 to A3. The agency’s outlook on the life business has remained negative.

The group’s lowered ratings were due to weaker operating results in 2019, particularly for the wealth management segment as it faces ongoing challenges.

AMP noted the changes were not related to current volatility in capital markets and are not material to its operations, with it continuing to have a “strong balance sheet and capital position”.

But Moody’s has anticipated that moving forward, the group will feel hits across its net cash flows, operating margins and earnings in 2020.

In 2019, reputational damage from the royal commission for AMP’s wealth business materialised through $6.3 billion in net cash outflows, following $3.97 billion the year before.

Moody’s also noted a decline in the persistency ratio (opening assets under management minus cash outflows during the period, divided by opening AUM), which fell from a peak of 90 per cent in 2016 to 86 per cent in the past year.

The agency expects the business to continue to show outflows in the coming year as it works to repair its reputation.

Earnings in wealth had also decreased with the cessation of contracts from AMP Life, leading to lower revenue.

“We expect ongoing margin compression along with higher regulatory and compliance costs will continue to constrain the group's earnings in 2020,” the Moody’s analysis said.

“Furthermore, the group currently faces execution risk as it launches a three-year transformational strategy, which carries an investment need of between $1 billion to 1.3 billion.”

The insurance financial strength rating downgrade for AMP Life was reflected weaker profitability and elevated product risk of the wealth protection business as well as the expectation of a weaker market position going forward, with the incoming sale of the life insurance business to Resolution Life.

Moody’s review considers the credit profile for the group to be weaker as a whole post-sale of the life segment.

The transaction is expected to be completed this year.

The company reported an operating loss, prior to underlying investment income, of $21 million for fiscal year 2019, compared with a loss of $3 million the year before.

An increase in income protection and total and permanent disability claims had seen $246 million of capitalised losses, following on from a capitalised loss charge of $209 million in 2018.

Further to the capitalised losses, the Australian wealth protection business and New Zealand business continue to report experience losses, Moody’s said, adding that product risk remains elevated.

“As a result, we expect ongoing pressure to negatively impact the future profitability of AMP Life,” the analysis noted.

Meanwhile, AMP’s Bank was reported to have good profitability, but its earnings are expected to come under negative pressure as low interest rates and intense competition rise in 2020.

Moody’s added the outlook could be moved to stable for AMP Life if it were to continue to maintain a strong level of capitalisation and recover its earnings strength post-sale, as well as prevent its market franchise being deteriorated as a standalone company.

It also is exposed to reputational damage from the Hayne commission.

Likewise, Moody’s said its ratings for the group and bank could be improved if the wealth and superannuation business bounce back in profitability, funds retention and with low levels of financial leverage, if the business maintained a strong profile and was supported by the regulatory and competitive environment.

But with the ratings currently on review for downgrade, “upward rating pressure is unlikely”, it said.

All other credit ratings assigned to AMP by other agencies have remained unchanged.