(Bloomberg) -- AMP Ltd., Australia’s third-largest life insurer, said it expects to take a A$668 million ($507 million) charge on its wealth protection business amid “deteriorating” conditions across the industry. Its shares fell the most in more than three years.
The company also announced a reinsurance deal with one of the world’s largest reinsurers, Munich Re, to cover 50 percent of A$750 million of annual premium income as it seeks to “reduce the magnitude of earnings volatility” and release an estimated A$500 million in capital. The deal is expected to cut the unit’s annual profits by A$25 million from fiscal 2017, AMP said in a statement Friday.
“We’ve seen consistent deterioration in the insurance sector over the course of 2016,” AMP Chief Executive Officer Craig Meller said in the statement. “Today’s actions are designed to re-set the wealth protection business.”
AMP is among insurers struggling in an industry facing rising claims, policy lapses and low investment returns. Insurers’ revenue fell 36 percent to A$28 billion in the year to June 30 from a year earlier, according data from the Australian Prudential Regulation Authority.
The stock plunged as much as 9.7 percent, the biggest intraday fall since June 2013, and was 5.6 percent lower at A$4.86 at 10:51 a.m. in Sydney. The stock has declined 17 percent this year.
AMP expects to book around A$500 million in capital losses and one-off items and the wealth protection business’s embedded value will fall by A$1 billion in the year to Dec. 31, according to the statement. The division’s profit margins are expected to decline by about A$65 million in the 2017 financial year, it said.
The impairment charges won’t impact AMP’s fiscal 2016 underlying profit, according to the statement. The company’s dividend policy of paying out 70 percent to 90 percent of underlying profits remains unchanged.
AMP’s tie-up with Munich Re “de-risks the company to some extent,” although the insurer’s future earnings remain a “black box” amid ongoing claims issues across the life industry, said David Walker, who helps oversee A$600 million at Clime Asset Management in Sydney. “AMP’s share price has done nothing for nearly seven years,” said Walker, who doesn’t own the stock. “But the company’s still not cheap enough for us to invest in.”
Updates with value changes in sixth paragraph, manager comments in eighth.