AMP Life Ltd Credit Update
- AMP Life Ltd (Baa2/Negative subordinated rating by Moody’s only).
- AMPLF Float 12/09/35 (callable at 100px 12/25).
- There is a very low risk of a missed call on the AMPLF Float 12/09/35.
- AMP Life no longer has access to public equity markets and so the company’s ability to raise funds in debt capital markets depends on them calling and appropriately re-issuing a new tier 2 subordinated instrument.
- Given the headline issues surrounding Genworth, we believe the better relative risk/return trade is in the AMPLF Float 12/09/35.
- Whilst the GNW Float 07/03/30 looks relatively cheap at face value, the risks are heavily skewed to the downside following the recent news by CBA that it intends to review their exclusive agreement with Genworth, which ends 31 December 2022.
- Even pre-CBA news, Genworth’s earnings and margins have been in structural decline, whilst the gearing on balance sheet has increased.
- AMP Life is a wholly owned subsidiary of Resolution Life. AMP Life provides various financial products and services, including income protection and conventional life insurance products. Whilst governance risks may be relevant within AMP Ltd, we have no concerns regarding AMP Life. The company has an established appropriate risk management and governance framework, with a focus on both financial and non-financial risks.
- Aside from AMP in the corporate name, there is very little connection to AMP Ltd. Many products would have been originally distributed through licenced AMP group financial advisers, where some of these advisers may still have input via the client/adviser relationship. Furthermore, there will a gradual rebrand of products across the three lines of business (retirement income, individual risk, and group risk products) as time goes forward. Thus, the AMP title will gradually be wilted away and fall off the face of this earth.
- AMP Life has the strongest regulatory capital position amongst the large Australian life insurance companies. As at 31 December 2019, AMP Life held regulatory capital equivalent to 2.36x (versus the asset-weighted average regulatory capital cover of 2.03x for the Australian life insurance industry).
- AMP Life has very low leverage, with adjusted financial leverage sitting at 33.5% as at 31 December 2019. In our view, AMP Life’s profitability should improve as best estimate assumptions have strengthened and lapse rates have stabilised. The combination of these two forces will provide a good buffer for higher claim experience (when and if that occurs).
Chart 1. Australian Insurance Tier 2s Relative Value
Chart 2. AMP Life Ltd Comparable Bonds