It seems like AMP Limited (ASX: AMP) has decided to defend the deal which revolved around unloading the life insurance business. The aforesaid decision comes after fund managers have been valuing the transaction at a heavy discount. The present chief executive officer or CEO of AMP named Mike Wilkins has agreed that it was a complicated deal. However, he also threw light on the deal by stating this sale is necessary if the changes which have been done in the life insurance market are considered. According to the chief executive, these changes are permanent, and it would be wrong to underestimate these. The outlook of the AMP’s management is not positive which has led to the decision of unloading the life insurance business.
The management of the company stated that it had decided to unload the life insurance operations as they were unable to face the tough competition with the global market players. These global players are benefiting from the huge scale, decreased the cost of capital as well as geographical diversification. The company stated that in order to keep the upward momentum in the life insurance business, they had to put large chunks of money in the life insurance operations. Moving forward, these operations would be exposed to the volatility in the earnings. As per the press release which the company had released on October 31, 2018, the regulatory environment in Australia is also impacting the broader Australian wealth protection business. The company also stated that the profitability of the life insurance industry in Australia is expected to witness the negative impacts moving forward.
The operations or systems which are supporting the products has been creating the operating complexity. The company believes that additional capital would be needed in order to comply with the regulatory requirements which might arise in the future. Thus, these bunch of factors is the key headwinds for the AMP’s life insurance business and this could also impact the shareholders’ returns. However, on October 31, 2018, the management of AMP also stated that the large chunks of the net cash proceeds which the company would be getting as a result of the sale would be distributed to the shareholders. The selling price which has been estimated is at a multiple of approximately 11x of the annualized underlying profit which amounted to $305 million. It also represents 0.7x of the embedded values inclusive of the Australian tax credits. In the life insurance space, the embedded value represents a measure of the future cash flows.
At the time of writing, AMP Limited is trading at A$2.480 per share which implies that the stock has advanced A$0.170 per share or 7.359%. The company’s market capitalization is currently $6.79 billion, and it has an annual dividend yield of 10.61%. However, the company’s stock price is presently trading in the lower range. The stock has been witnessing a downtrend from the past few months. It has delivered a return of -42.82% within the span of six months.
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