AMP’s governance ‘failures’ negatively impact rating outlook

The credit rating agency has released a report on the wealth giant’s life business, and it warned that the revelations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is negatively impacting the group’s credit rating outlook.

The royal commission unveiled allegations of charging fees to customers when no service was provided; that the group intentionally misled the Australian Securities and Investments Commission (ASIC); and that there was potentially improper amendment of an independent report to the AMP board that was provided to ASIC.

Since the allegations were made public during the second round of hearings, the ASX-listed lender, which recently announced the immediate resignation of its CEO and several of its board members, apologised “unreservedly for the misconduct and failures in regulatory disclosures”.

However, it has lost more than $1 billion in shareholder value since March, and it is facing four separate class actions from shareholders and could potentially face criminal charges.

AMP’s ratings were first placed on negative outlook by Moody’s in November 2016, following the company’s announcement of a write-down of goodwill attributable to the Australian wealth protection business and the strengthening of best estimate assumptions, leading to capitalised losses and other one-off experience items.

At that time, the change in outlook “reflected the weaker operating environment that led to the deterioration in performance of AMP’s life insurance products and the uncertainty regarding the performance of those products and their impact on the company’s profitability and capital”.

Following the release of Moody’s Investors Service’s Issuer Comment on AMP Life Limited, Frank Mirenzi, a Moody’s vice president and senior credit officer, added: “While it is still too early to predict the potential outcomes from the allegations against AMP raised by the commission, AMP’s governance failures are credit-negative for the company and are appropriately reflected by our negative outlook on its rating.

“AMP’s credit profile is under pressure, despite its strong capitalisation and market position, because of the potential for reputational damage and additional legal and compliance costs associated with the allegations of governance failures.”

Moody’s also highlighted that the current operating environment for life insurance “remains challenging”, as overseas insurance firms, which potentially have lower capital costs, begin to enter the Australian market.

“The profit outlook for traditional life insurance products remains uncertain given the competitive environment, higher cost of claims and potential regulatory changes to the bundling of insurance products within superannuation that would require customers to option for insurance rather than paying for the insurance as a default setting,” the analysts continued.

“We note that AMP’s future strategy for its wealth protection business is uncertain and the group has an ongoing review of this and its mature and New Zealand businesses, which could, in our view, ultimately lead to a sale of this business or a further reinsurance arrangements.”

Despite these challenges, the credit rating agency’s report conceded that AMP recently provided “a reasonably stable first-quarter trading update”, which saw only “a small” 2 per cent fall in total assets under management in its Australian wealth management division, “reflecting negative investment markets during the quarter, while assets under management in its funds management arm, AMP Capital, remained relatively flat quarter-on-quarter”.

Moody’s concluded: “However, the potential for reputational damage to impact net investment cash flows to the group are likely to be more prevalent within the second quarter, given the timing of the testimony and disclosures.

“To this extent, there is the possibility that second-quarter investment cash flows could be weaker than the first-quarter results and weaker than the prior corresponding period.”

[Related: AMP to ‘vigorously defend’ shareholder lawsuits]