CBL criticism believed to be behind Reserve Bank's tougher line on AMP deal

Pressure on the Reserve Bank to take a tougher line on the insurance sector in the wake of CBL's failure is believed to be behind the regulators' stance on the sale of AMP's life insurance business.

AMP said the sale of its life insurance business to British firm Resolution Life was "highly unlikely to proceed" due to challenges in meeting conditions for approval by New Zealand insurance regulator the RBNZ.

The A$3.3 billion deal was due to see AMP handover its New Zealand and Australian life insurance business while its wealth and advice business remained under the dual-listed financial services business.

But AMP said Resolution Life had notified it on Saturday that the Reserve Bank would not consider Resolution's change of control application unless it agreed to have separate, ringfenced assets held in New Zealand for the benefit of New Zealand policyholders.

"As a result, Resolution Life does not expect RBNZ to approve an application that would satisfy the condition precedent."

AMP said addressing those requirements would adversely impact the commercial return of the sale for both AMP and Resolution Life.

"The failure to meet this condition precedent is exceptionally disappointing as the sale of AMP Life is a foundational element of AMP's strategy."

The Reserve Bank said it remained engaged with AMP Life NZ and Resolution Life but the proposal for the change of ownership of AMP Life NZ to Bermuda-based Resolution Life was subject to approval by the Reserve Bank.

"In its considerations, the Reserve Bank has maintained a clear focus on the interest of policyholders, while observing regulatory requirements."

Geoff Bascand, Reserve Bank deputy governor and general manager of financial stability, said the Reserve Bank was maintaining its supervisory responsibilities as set out under the Insurance Prudential Supervision Act, and these had not changed since the terms of the contract were agreed in 2018.

"The reality is, the commercial terms of the contract can't be met satisfactorily between AMP Life NZ and Resolution Life.

"The contract between the AMP Life NZ and Resolution Life was agreed without consideration of the Reserve Bank's requirements."

But the situation comes just weeks after a damning report on the Reserve Bank's handling of failed construction insurer CBL Corporation which found the central bank should have acted sooner and been more forceful.

Russell Hutchinson, managing director of insurance consultancy Chatswood Consulting, said the Reserve Bank had faced increased scrutiny in the wake of CBL's collapse and was now reacting to that pressure.

"I don't think it has anything to do with AMP or Resolution. The Reserve Bank has had increased scrutiny over what has happened with CBL.

"They have a right and responsibility to take a tougher line."

Hutchinson said he expected AMP and Resolution to work out a way to make the deal get over the line with some way of sharing the costs of having a vehicle in New Zealand that would meet the requirements of the regulator.

The other possibility was to look for another buyer.

But Hutchinson said there had already been a number of transactions in the sector and AMP had probably already gone through the process of looking at all the potential buyers.

Hutchinson said situation sent a message to the industry that the regulator was prepared to use its supervisory powers.

"For those planning future transactions it means they have to look more critically at what the regulator will do and expect more questions to be asked. It will be tougher than what they experienced in the past."

Another insurance market source, said he believed the AMP situation was a direct repercussion of the CBL report.

He said the report made it clear the Reserve Bank shouldn't let things happen until it was satisfied that all its conditions were met.

And he said that was a good thing.

It also sent a signal to the rest of the industry that regulatory approvals were no longer just a box ticking exercise.

Michael Naylor, an insurance expert at Massey University said normally these deals were discussed with the regulator and worked through ahead of time.

"But they have applied and said: "is this okay?" and the Reserve Bank has said no they need to change it. Resolution has talked with the Reserve Bank and it won't make money and has walked away."

He said other players could be interested in buying the business and he expected AMP would still find a buyer at the right price.

But the challenge was that banks were pulling out of the insurance sector and that meant it was not the only deal in town.

Naylor said insurers were going to have to invest heavily in their technology going forward which meant there was unlikely to be as much cashflow and profit in the sector.

The AMP NZ business has around 200,000 policyholders and that made it attractive as life insurance clients tended to stay with the same provider.

But the sector as a whole was shrinking with fewer young people buying policies or taking out lower levels of cover, Naylor said.

AMP said it was now working with Resolution Life to find a new solution.

"This will require negotiation of new terms and is not certain," AMP said.

The company said it would retain AMP Life and manage it as a specialist life insurance and mature business if a revised transaction couldn't be achieved.

The sale had been met with scepticism by several key shareholders who questioned the value of the deal.

The transaction came in the wake of the company's mauling during Australia's Royal Commission of Inquiry into the financial services sector, where the fees-for-no-service scandal prompted a clear-out of AMP's top brass and millions of dollars in remediation to customers.

AMP has since been hit with a number of shareholder class action suits and compliance orders from regulators amid ongoing concerns over the company's management.

More than A$10 billion has been wiped from the company's value since March 2018 with shares in the company falling from A$5.43 to an all-time low of A$1.97 last month.

AMP shares were worth A$2.15 before trade on Monday and were down A28.5c to A$1.865 in early trading on the ASX. On the NZX they were down 17c to $2.06 by mid-afternoon.

AMP said it expected to report a Level 3 eligible capital surplus above minimum regulatory requirements and in line with board limits for target capital surplus in its first-half results on August 8.

But it said an interim dividend for the six months to June 30 was "unlikely" due to the uncertainty around the Life deal.

The company paid an interim dividend of A10 cents per share in August 2018.

AMP cut its full-year dividend from A14.5 cents to A4.0 cents per share in February after full-year profit plummeted 97 per cent to a worse-than-expected A$28 million.

-Additional reporting news.com.au.