23 November 2019
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Is AMP a buy yet?

Andrew Main
27 September 2018

Speculating on whether AMP Ltd is a buy yet is a sport for the truly brave, akin perhaps to seeing how many press-ups you can do before you sag face first onto the floor.

Perhaps it’s better to just sit in a chair until the urge passes. But that’s the whole point: if everyone else is treating AMP as an exercise in self flagellation it might actually present a buying opportunity. Might, I said.

Let’s look at a few cons and pros, in that order.

The insurer has had its reputation drop lower even than the banks, due mostly to a cover-up of the fact that it had been charging dead people for financial advice.

That emerged back in April, shortly before the exits of CEO Craig Meller and chair Catherine Brenner.

Yes, lower than the banks. This is Australia’s biggest and oldest life insurance company, established as a mutual in 1849 and demutualised in 1998.

AMP policyholders suddenly became shareholders in the looming float of the company, and that’s where the trouble really started.

We can now see that demutualisation broke the golden thread between policyholders and management. In a mutual organisation, like a Co-Op, profits flow back to a central pool and dividends are paid out only after the directors decide there’s enough money in the kitty to pay out on all likely claims.

Demutualising an organisation pushes the dividend payout expectation up the ladder and of course, if you are a shareholder and not a policyholder, you are going to be very happy with that.

But where does the policyholder sit in all of this? Lower down the ladder, is the very simple answer.  And we haven’t even mentioned the financial advice clients, for whom the mutual issue isn’t relevant but who have clearly been treated as badly as policyholders in some cases. 

That said, moaning about the negative consequences of demutualisation all those years ago is a bit like bewailing the outcome of the Brexit referendum in the UK. 

It happened, whether we like it or not, and the board of AMP now has to deal with the consequences by devising a structure that lifts the retail (insurance and or advice) client back up the ladder again, and that will not be easy. Not that AMP management have a choice: anything short of putting the client first and foremost will leave the group at its current level of reputation.

There’s a serious question mark over the grandfathering of commissions, of course, made worse by the fact that there are lots of semi retired advisers whose only reason to go into the office is to keep qualifying for the commission stream.

That’s no way to run a company.

What about a positive or two? I’d suggest that the two nasty episodes of charging dead people, firstly for financial advice and secondly for life cover, are a failure of systems and not deliberate actions. You know how it is with direct debit payments of any description: their default position is that they keep being extracted from the relevant account unless someone specifically overrides them.

Dying creates the particular problem that the person doing the paying is no longer around to sound the alarm, and clearly AMP’s systems were not up to the task. 

It’s also true that when a person dies, their family is so damn busy sorting out their funeral, estate and affairs that they don’t always sound the alarm either. That will have to be fixed, and fast.

I should add, as if it’s not obvious, that the Banking Royal Commission’s interim report is due to be delivered this Sunday and it would be an optimistic investor who took the view that Commissioner Hayne is going to be any kinder to AMP than has been the Court of Public Opinion.

The horribly long gap, in both “zombie” cases, between the problem being discovered and dealt with by AMP management, never mind honestly reported, will almost certainly be a focus of his commentary. 

AMP’s reputation has been smashed but there are other positive factors to play with, if not just yet.

One, Chairman David Murray is a sound choice. He came in at almost zero notice post Catherine Brenner’s exit.  He’s forgotten more about Australia’s financial System than most people will ever learn, having conducted a well-regarded inquiry into it back in 2014. 

The biggest complaint against him seems to be that he still supports the vertically integrated model for banks, but that’s not so much of an issue in a life company. 

And acting CEO Mike Wilkins is going to be at the very least a safe pair of hands until the newly appointed CEO Francesco de Ferrari takes over in December.

Wilkins is a general insurer by background rather than a life insurer but he has a very solid pedigree in having steered Promina and then IAG from 1999 through to 2015.

IAG has been relatively unscathed by the Commission, with the exception of subsidiary Swann Insurance which specialised in a variety of “add on” insurance provided to finance clients of car dealers.  Clients who bought unnecessary or poor value insurance are now being compensated, but the whiff of scandal is a modest one compared with some of the pungent ordure elsewhere.

And for a moment on Monday it looked as though APRA chairman Wayne Byres was complimenting AMP.

He said in a speech that “Right now it seems inconceivable that any of Australia’s big banks or major insurers might not exist at some future point.”

But even that had a smack down in it.

“The same was no doubt once said about dominant companies such as Remington typewriters, Kodak, or Blockbuster Video.”

So, is AMP a buy? Not until it clearly puts the policyholder and the financial advisory client back at the top of the pile where he or she belongs. But for now,  it’s nothing more than a scary punt.

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