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Life sale gives AMP clean slate to rebuild: analysts

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AMP will complete the $3 billion sale of its life business tomorrow, marking the end of an era for the once dominant player in the Australian and New Zealand income protection sector.

Analysts say the sale of AMP Life to UK-based Resolution Life is the right move, giving the business capital it needs to rebuild its remaining core banking and wealth units, following damaging revelations of misconduct exposed by the Hayne royal commission.

“It’s important from a clean slate point of view,” Macquarie Securities Insurance Equities Analyst Andrew Buncombe told insuranceNEWS.com.au. "It helps them move forward.”

With the loss-making Australian life industry struggling to reverse its fortunes, the move by AMP to exit the business looked in hindsight to be a good decision.

“I think the original impression of the sale price was that it looked very low,” Mr Buncombe said. “However, over the past 12 months as the deal has gotten regulatory sign-offs, the way the Australian life market has rolled through to this point in time, it doesn’t look so bad.

“The most important thing right now is to look forward to the new business and how they can grow it and get their capital base more efficient.”

Morningstar Associate Equity Analyst Shaun Ler says the life business has been a drag on AMP, as it is very capital-intensive, with management “having never really shown they are able to write insurance more profitably than other players”.

“As a result, the business has been plagued by quite a number of claims and profitability is very volatile,” he told insuranceNEWS.com.au. “Sometimes it makes a lot of money, sometimes it doesn’t.

“If you compare the return on equity or the return on capital, it is the least profitable within the business. So it makes sense for them, from a shareholder point of view, to sell off this low return capital-intensive business and to invest the proceeds to fix up whatever problems the other core businesses have.”

AMP announced last week the sale will close tomorrow as planned, after clearing the last remaining regulatory hurdle in New Zealand where it has been engaged in talks with the central bank.

The deal has already secured the go-ahead from Australian regulators and the China Banking and Insurance Regulatory Commission.

AMP says an update to the market will be provided on Wednesday.

As part of the revised sale agreement last August, AMP will receive $2.5 billion in cash and $500 million in equity interest in a new holding company that will own AMP Life. The equity interest will give AMP about a 20% stake in Resolution Life Australia

AMP Chairman David Murray told shareholders at the May AGM that surplus proceeds from the sale will be used to fund the group’s new strategy to grow its banking, wealth management and investment management arms.

Morningstar says in a research update that it expects AMP to be in a “period of transition for the next three years at least” as the business looks to rebuild from the royal commission’s damaging findings.