Fifth Pillar crumbles: why AMP policy-holders’ losses are Resolution’s profits.

This is now an election issue. AMP Life has more than a million policy-holders. Perhaps thrice that in stakeholders if dependents are included. Those, that is, who stand to benefit from life insurance claims. That AMP’s shareholders took the long handle to the stock so savagely last week suggests, not only that the bizarre decision to sell to little-known Bermudan bust-up merchants is a a poor one, but that it reeks of executive desperation as well.

These are not just day traders playing about in the stock. The magnitude of the share price crash suggests big sophisticated investors are crying “get me out”. Does AMP need capital? Has it run the numbers and realised it is too costly to tap the markets and is better off banking just $2 billion in cash upfront for $100 billion in policies? The Fifth Pillar is crumbling. This oped from a four-decade veteran of life insurance who preferred to remain anonymous.

So far, in the developing saga of the proposed sale of AMP Life to Resolution Life, there has been scant mention of the AMP’s main stakeholders, its policyholders.

AMP’s own announcements only mention them cursorily and as “customers”, and it is apparent the interests of all these existing, long-term and loyal policyholders have been given very little or no consideration in the Resolution deal.

Yet these same policyholders’ interests and rights by definition have to be of paramount consideration. After all, the “Resolution deal” proposes to sell the management of around $100 billion of their money, future benefits or claims.

Compare this to the proposed Resolution $2 billion cash upfront and $1 billion or so still “in-the-bush” of deal payments.

The point is crystal clear. Everything else must be considered as secondary to the overarching rights and interests of the literally millions of existing AMP policyholders and their dependents. So far the latter have barely rated a mention.

Schemozzle: AMP sells life insurance to asset acrobats from Bermuda

The AMP directors, in proposing the Resolution deal, have quite obviously completely ignored their duties and obligations to act in the best interests of AMP’s policyholders and, instead, have done the exact opposite. The AMP Life company which controls and manages the AMP policyholder funds, premiums and benefits, is owned by its shareholders, not the policyholders; a similar situation to the major banks. Shareholders own the banks that in turn look after the accounts of the wider public.

The directors of these financial institutions are responsible for looking after the interests of both the shareholders and, even more importantly, their customers and policyholders. It is they who are putting up the money and, without them, there would be nothing to look after.

The ongoing Royal Commission into Banking and Life Insurance has reminded everyone of these obvious dual directorial and managerial responsibilities lest they, for some reason, be in any doubt.

Further, not doing “the right thing” by policyholders has already cost the last tranche of AMP directors their jobs which makes this Resolution proposal even more unbelievable.

Importantly, the proposal to close AMP to new business will break the mutually beneficial symbiotic relationship between AMP’s policyholders and the management company’s shareholders or owners.

That is, in order to attract new customers, you need to look after the old ones which is the mantra of any successful going concern. But the AMP directors in their wisdom have for some hare-brained reason decided to throw this rational thought process right out of the window.

Worse, they want to also create a situation where Resolution, the proposed new managers of AMP’s existing business, will be seriously conflicted from day one simply because any dollar they manage to avoid paying to AMP’s existing policyholders will end up down the track in the pockets of Resolution shareholders.

Repeat, a loss for an AMP policyholders will result in an extra profit for Resolution’s owners and directors.

There will be every incentive for Resolution to run the business down and get the loyal existing AMP policyholders off the books as quickly and as cheaply as possible and all of this has been proposed by the AMP directors in complete and total dereliction of their obligations to policyholders.

Some other points which must be seriously considered in this regard:

• Who is going to police the conduct of the overseas-based Resolution to ensure it treats the AMP policyholders fairly and properly according to Australian community standards and their Australian law contracts? APRA and ASIC have been proven by the Royal Commission to be not up to this job with Australian based financial institutions let alone an overseas one.
• Who is going to ensure Resolution will continue to pay/credit fair equitable bonuses and interest on policyholder funds? An internet search reveals complaints that Resolution had cut the bonus rates of another company that it had purchased down to “0.01 per cent”
• Who is going to ensure Resolution admits and pays all legitimate claims in a timely manner?
• Who is going to ensure Resolution properly manages and secures AMP policyholder records?
• Who is going to ensure Resolution provides policyholders with accurate and timely communications and provides them with good contact facilities and does not instead decide to use a “wait on the phone forever” overseas call centre designed to deliberately frustrate legitimate complaints and feedback?

Remember, if a policy is surrendered early at a discount the only winner will be Resolution so who is going to ensure that they do the right thing when they are de facto incentivised under the proposed deal to the complete opposite.

Another very important point is that “the deal” is not good for AMP’s employees and advisors. Many will lose their jobs immediately, anybody working on new business, product development. The “lucky” rest will be “sold” as part of the deal to Resolution to service the existing policyholders but as Resolution’s will be incentivised to run the business down as fast as possible, their long-term job prospects are not bright.

Of course this is not good for the Australian economy and taxpayers either. Further to this important topic of tax, exactly who is going to ensure that Resolution will pay full Australian taxes on any gains it wrings out of the existing AMP policyholders?

Note to the Australian Tax Office: Resolution has a Bermuda-based subsidiary. Why?

What of AMP shareholders then? They are heading for the exits. The share price has fallen off a cliff, down circa 30 per cent over the last three days – a loss of $2.8 billion in market value.

All the shareholders will be left with after the proposed deal is done is ownership of yet another “run of the mill” fund manager.

Finally, a few things for APRA to ponder. Closing AMP to new business is going to make raising any extra capital for reserves – should there be a severe market downturn – more than a tad tricky, if not impossible. Why put more money into a closed business?

Some are saying the market fall/correction/crash has already started. Resolution is going to be more than reluctant to come up with more funding. Indeed, the chairman was quoted in the press as having “paid up” more than he wanted for AMP (even though as of yet presumably not a dollar has changed hands as it is all proposed).

It is worth noting that AMP has always held reserves well above the minimum statutory levels given over 12 per cent of its policyholders’ funds are subject to capital guarantees. However, if the deal proceeds, there is nothing stop Resolution moving reserves down to the statutory minimum and “trousering” the extra buffer in Bermuda.

Regulators need to hit this on the head now before more damage is done.

PS. The stock is down again this morning. Huge volumes. One of Australia’s most venerable financial institutions is now “in play”. Investment bankers will be approaching global banks and insurance companies to elicit interest in a full takeover bid for AMP.