October 30, 2018 / 11:48 PM / 20 days ago

Australia's AMP defends sale of life insurance arm

MELBOURNE, Oct 31 (Reuters) - Australia’s largest wealth manager, AMP Ltd, on Wednesday defended its valuation of its life insurance arm after a fund manager threatened to campaign for a board spill over the sale of the business last week for A$3.3 billion ($2.3 billion).

The firm promised to return to shareholders most of the net cash proceeds from the sale, sending its shares up 3.5 percent in early trade on Wednesday, outpacing a 0.3 percent rise on the broader market.

Once one of Australia’s blue chip companies, AMP has been hammered by capital outflows and fleeing shareholders after a national inquiry into abuses in the banking and insurance industries found deep flaws in its governance and ethics.

Its stock plunged further last week to a record low after it said it would sell its life insurance arm to British Resolution Life at almost a fifth below book value.

Sydney-based fund manager Merlon Capital Partners sent a letter to the board attacking what it called a “preposterous” and “inept” deal and seeking an explanation on how the sale could be stopped.

“We are prepared to lobby other investors to convene an Extraordinary General Meeting calling for ... a board spill if the matters are not adequately addressed within the next week,” the letter dated Oct 27 said.

AMP said on Wednesday it had sold the business because it was no longer able to compete against global competitors with lower cost of capital, greater scale and geographic diversification.

It would have had to inject significant capital to keep the business growing and would have remained exposed to volatile earnings, AMP said. With the exit it was able to release capital and gain the certainty of the sale proceeds.

The sale price represented a multiple of about 11 times annualised underlying profit of A$305 million and 0.7 times embedded values including Australian tax credits, it said in a statement to the stock exchange.

Embedded value is a measure of future cash flows in life insurance.

“It is simply unfathomable to us the board could consider it in the best interest of shareholders to sell businesses representing 46 per cent of AMP’s recurring earnings before interest at such a low multiple and large discount to already written-down embedded values,” Merlon Capital said in the letter to AMP, seen by Reuters.

Merlon was not immediately available to comment on whether AMP’s response was satisfactory.

The fund manager’s letter was first reported by the Australian Financial Review newspaper.

AMP and its Australian peers have been scrambling to sell their life insurance businesses to pre-empt break-ups forced on them by the government in response to evidence of sector-wide abuse of market power, and to avoid competition with larger entrants from Asia.

Commonwealth Bank of Australia on Wednesday said it would sell its global asset management business, Colonial First State, to Japan’s Mitsubishi UFJ Trust and Banking Corp for A$4.13 billion.

$1 = 1.4083 Australian dollars Reporting by Sonali Paul; Additional reporting by Paulina Duran; Editing by Stephen Coates

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