AMP has signed a deal with Munich Re in which the latter will reinsure 50% of $750 million of annual premium income, costing AMP $25 million annually but freeing up a further $500 million in capital.
AMP Chief Executive, Craig Meller announced the deal after the life insurer reported another period of deteriorating experience with $44 million in losses for the third quarter of 2016, following a $42 million loss in the first half of this year.
The agreement with Munich Re will take affect from 1 November 2016 and will operate as a binding quota share agreement across the AMP Life retail portfolio (including income protection and lump sum business) and is subject to regulatory approval.
AMP said the agreement created the potential to release up to $500 million of capital and would reduce the magnitude of earnings volatility from the Australian wealth protection business for the AMP group, with further tranches of reinsurance to be pursued in the future when time and conditions suit.
AMP Chief Executive Craig Meller said: “We’ve seen consistent deterioration in the insurance sector over the course of 2016 and, despite the progress on claims transformation to date, it has significantly impacted the performance of our wealth protection business.”
“Today’s actions are designed to re-set the wealth protection business. They will improve the group’s earnings stability, free-up capital and help bring into focus the growth potential of AMP,” Meller said.
In announcing the Munich Re agreement and the third quarter loss, AMP also stated it believed the current deteriorating experience across the life insurance sector was structural in nature and revised its best estimate assumptions across both AMP Life and NMLA (including retail and group income protection, claims and lapses) from year end.
As a result of this revision, AMP stated that underlying profits would be hit by capitalised losses and other one off experience items in the order of $500 million in for the 2016 financial year. The reduction in Australian wealth protection profit margins for the 2017 financial year would reach $90 million, including the $25 million associated with the execution of the reinsurance agreement.
Of the $44 million loss in the third quarter of 2016, retail income protection experience and retail lump sum experience accounted for more than half with $18 million in losses and $8 million in losses, respectively. Group insurance accounted for a further $12 million in losses while lapse experience added a further $6 million in losses.
Am I getting this right? If $500 million in capital is released, that is the same as “we sold a proportion of our business worth $500 million to Munich Re”?
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