Weakness in AMP continues with last at $11.27 down 4.4% for the day - directly related to weakness in world markets and specifically in FTSE.
How low do we believe it will go???
AMP are trying everything to reassure the market that AMP is strong enough to mitigate and substantial decline in FTSE... the recent ASX announcement regarding the JP Morgan Conference makes interesting reading for those following the stock.
Regards,
Hotdog
Speech Notes for JP Morgan Conference
AMP LIMITED 2002-10-04 ASX-SIGNAL-G
HOMEX - Sydney
+++++++++++++++++++++++++ TITLE SLIDE
Good afternoon everyone.
* I'm Tom Fraser, Managing Director of UK Financial Services. UKFS is one of the 3 large business units within the AMP Group.
* This presentation today is similar to a presentation by AMP's CEO Andrew Mohl to US investors earlier this week
* What I want to do in the next 20 mins is talk to you about AMP and it's plans to achieve a major turnaround in this potentially great business worldwide. I'd also like to talk in more detail about the UKFS business and the Pearl fund capital requirements
* Then it'll be over to you to ask questions.
* So let me start by telling you a bit about the overall AMP group
* AMP is a wealth management company, with key operations in Australia, New Zealand and the UK. Wealth management is all we do and have done through our 153 year history.
* We have the great privilege of helping about 8 million people around the world, save for and enjoy a better life in retirement as well as our original role of giving families protection from unexpected loss of life or physical disability to income earners.
* We operate in an industry with strong long term growth prospects.
* Throughout the industrialised world, communities are growing older and this is changing societies and economies everywhere.
* Over the next 50 years, the number of people over 60 will treble.
* Governments simply can't afford to pay them all a pension. So they are beginning to shift that responsibility back to the individual.
* Of course, the flipside to this picture is increasing government and third party scrutiny not surprising when you are dealing with peoples' long term savings.
* Strong fund flows and growth also ensure a highly competitive industry with increasing pressure on margins.
* At AMP, we believe we are well placed to capitalise on this global market phenomenon with our expertise in advice-based distribution, pension fund design and administration, investments and a powerful brand in Australasia.
* So, you may well ask, with this heritage and capabilities, why have AMP shares been trading recently at under $11 or 50% lower than it's peak 2001 levels?
* To state the obvious, investors have clearly not been comfortable with the returns being achieved by the business relative to the risks being run, compounded by a prolonged bear market that has highlighted the leveraged nature of our business to equity markets.
THE WEEK THAT WAS
* Let me make a couple of comments about what has been happening with AMP recently.
* While the UK has been a key focus for the better part of this year, last week in particular was a tumultuous week for all of us at AMP.
* As you can see by the list on the slide, we've had to do more in the seven days commencing 23 September than most companies manage in seven months.
* Further, these last two weeks was preceded by an extended period of speculation and uncertainty, which has also been reflected in our share price.
* AMP basically had two key problems.
* One has been the impact of incredibly tough markets on AMP businesses, including the regulatory capital position in the UK funds. AMP, like most businesses with insurance operations in the UK, has been hurt by the severe bear market conditions that have nearly halved average share prices since the peak.
* Our other problem has been caused by how AMP has communicated to stakeholders the impact of these markets on our UK business and the actions being taken to address it, in particular, the minimum regulatory capital position of the Pearl with-profits fund.
* One of AMP's key priorities is improving the level of confidence in AMP of our customers, our shareholders, our planners and our employees.
* As a listed company in Australia, AMP has to meet the highest standards in its communications given its status in the investment and wider community.
* Andrew Mohl - confirmed on Monday as AMP's new CEO - has already publicly declared AMP will be more transparent and open with every stakeholder
* The series of statements made by AMP in the past two weeks have already demonstrated this resolve and the rest of the AMP senior management team and I are passionate about continuing this standard of disclosure in all our communications.
* AMP communications will be clear, simple and to the point.
* For the business, AMP's primary focus will be on driving up the returns from invested capital and shareholder equity.
ROIC
* The chart shows return on invested capital for our three major businesses. This calculation includes all goodwill on acquisitions in the baseline capital and all non-recurring gains or losses in the returns. The impact of gearing is reflected only in the Group return on equity.
* AMP's underlying philosophy is that if the businesses can average returns of at least 1.5 times the cost of capital or 13 to 15% return on capital, then Group return on equity can approach or even exceed 18% with the benefits of gearing
* Looking at the portfolio, Australian Financial Services is now achieving a 15% return and is set to move higher in 2003 with improved capital management.
* Our asset manager, Henderson Global Investors, is around 11% including sizeable goodwill. This is lower than we would like but solid in the face of the third year of bear markets.
* Returns in UK Financial Services have been steadily falling and were down to 9.3% in 1H 02. This reflects the program to transform the UK business and ongoing impact of weak markets and poor investor sentiment. This ROIC was before the allocation of an additional GBP500m of capital to be allocated in 2002 which will lower returns further.
* AMP now has around half its capital invested in the UK financial services businesses and the returns we're getting, after adjusting for risk, need to be better.
* We need to improve those risk-adjusted returns and that will be our key focus.
* Finally, AMP International which is not shown in the chart, has just under 10% of the Group's capital invested in AMP Banking and a number of Asian and European ventures and is generating little net return at present.
* Overall, at the Group level, return on equity on a normalised basis, that is, after smoothing the effects of volatile investment markets, is around 12% currently, down from FY 00 and FY 01 levels. This is a mediocre return given the quality of assets in the Group and below the average in our international peer group.
* The impacts of weak investment markets have lowered ROE on an actual basis to just 7% this year. Markets, of course, go up and down, so the return on equity on a normalised basis is the superior indicator.
COSTS
* As a wealth management group, our revenues are strongly leveraged to global equity markets, and there's very little sign of improvement in these markets at the moment.
* This means that one of AMP's priorities has to be controlling costs.
* As this slide demonstrates, we've got quite a solid record on cost management.
* But we think we can do more.
* AMP has taken about $160m out of the cost base of Australian Financial Services over the past 3 years where the cost to income ratio is down to 41%.
* Henderson has kept tight control over its cost base and managed to push its cost to income ratio down towards best practice levels, despite a marked decline in revenues as markets have fallen.
* And we're in the early stages of a GBP100 million cost reduction programme completed in FY 2003 in UKFS which is progressing to plan with a cost ratio under 60% for the first time in 1H 02.
* Clearly, it's the UK where we've got great potential for taking out costs and where we'll be looking particularly hard to make more savings.
* Now that's been a quick helicopter view of AMP, looking at some of the macro measures across the Group.
Let's look more closely at the AMP portfolio of major businesses. You can see that there are some high quality assets, and some others that need a bit of work and attention.
BUSINESS UNIT PERFORMANCE SUMMARY
* In Australia and New Zealand, AMP has a strong financial services business, which holds leading market positions and services about 3.5 million customers through a flexible, multi-channel distribution platform.
* At the heart of this business are 2300 financial planners - the largest and most productive financial planning franchise in the entire market.
* This is a business that has been transformed over the past decade from a low productivity, sales driven, capital intensive, product based insurance company into a profit focused, advice-based wealth manager, with capital efficient, new generation investment products. That transition reflects an AMP core competency - the ability to transform in a transitioning market.
* Probably the best financial measure of this transformation is the improvement in the value of new business. This is a measure of the future value to shareholders of the new business we are writing today.
* This measure has improved more than six-fold in four years, rising from A$37 million in 1997 (pre-demutualisation) to A$249 million last year.
* For all that, the executives in this business believe the job is not much more than half-done and have aggressive plans for the years ahead.
HENDERSON
* Our international asset manager, Henderson Global Investors, is another quality asset.
* Henderson has got a strong market position in Australia, good market share in the UK, is building momentum in Europe and in Asia, and is increasingly focused on higher margin specialist products.
* It's still got some capability and scale gaps, but it knows where these are and it has practical plans to plug them.
* These are not great times for any asset manager, but Hendersons have battened down the hatches to ride out the storm. While earnings are down slightly, this is a strong result in relative terms and reflects the diversified nature of the Henderson's business with its mix of internal and external funds and listed and unlisted assets.
* Of course, investment performance is critical to the success of an asset manager.
* Henderson has delivered good investment performances over recent years, but this record has come under pressure in recent times in some key asset classes.
* Henderson's earnings are expected to be subdued in the second half of this year and will only recover slowly even if markets recover shortly given the pricing and Assets Under Management lags. But we remain confident of the quality of this franchise in the longer term.
UKFS
* Turning to the UK Financial Services business, we've got both capital and strategic issues to deal with in this market.
* In strategic terms, the UK market is about as complex and uncertain as any and we are coping with a raft of regulatory reviews and the expectation of major market reforms ahead. These will almost certainly lead to lower margins overall and potentially lower sales volumes in real terms.
* We have been criticised for lack of scale, brand, capital and distribution power to compete in this challenging new world and we accept those criticisms as valid.
* Our Australian experience, however, tells us that in an open architecture world, large traditional companies carry considerable baggage and focused innovative "new world" companies can excel in distribution, product design and packaging and asset management and capture significant market share.
* We are positioning ourselves with a range of options for this new world including:
# 100% owned IFA distribution (Towry Law);
# IFA distribution through the acquired NPI;
# Corporate Pensions channel;
# Direct channels;
# Pearl's Direct salesforce; and
# the development of Wrap capability to support both owned and IFA distribution.
* We will be focusing on our mature portfolio of funds and customers with a view to enhancing the embedded value to shareholders through cost, retention and balance sheet management initiatives. Now to explain Pearl minimum regulatory capital..
PEARL MINIMUM REGULATORY CAPITAL
* The capital issues are complex but manageable.
* To summarise, one of our funds, the Pearl with-profits fund, which currently doesn't meet the "minimum regulatory capital requirements" set by the UK regulator, the Financial Services Authority.
* These requirements set a level of reserves of the fund sufficient to withstand substantial further falls in markets and this particular fund is struggling to do this at current FTSE levels.
* But remember, this is regulatory capital we are talking about.
* In terms of economic solvency, the fund remains sound and comfortably able to meet policyholders' reasonable expectations. The Pearl fund has over GBP1.4bn in additional economic assets sitting within the fund, which are currently inadmissible for the minimum regulatory capital perspective.
* To manage the regulatory situation, we have taken a number of initiatives involving fund assets and liabilities and we have agreed a plan of action with the UK Financial Services Authority that is expected to see the Pearl with-profits fund meet MRC requirements by the end of the year.
* These initiatives include managing liabilities through accelerating product changes, managing the fund exposure to equities and reducing bonuses. On the asset side we have worked to improve assets for regulatory solvency.
* The capital actions flagged here cover us for FTSE levels of 3700, in addition, we have submitted a contingency plan to the FSA to satisfy RMM down to FTSE levels of 3000 at year end which will not involve additional investment of shareholder capital.
FINANCIAL STRENGTH OF THE GROUP
* Over recent months the ongoing speculation on capital position has created much concern about financial strength. As discussed earlier, this is centered on the Pearl With Profits fund. Let me reiterate here - the issue is minimum regulatory capital (not economic solvency). The issue is restricted to one fund sitting within one business unit in the UK.
* There is no question as to the economic strength of the AMP Group. AMP Life and AMP Pearl are AA- rated by Standard & Poors for insurance financial strength. The AA banding indicates 'very strong financial security characteristics'.
* Add to this the recent Standard & Poor's announced intention to move AMP Group Holdings to Credit Watch positive upon successful completion of the Reset Preferred Securities issue that further supports the groupwide financial strength.
* AMP recognises that much of this speculation was in part fuelled by our ongoing but at times unclear disclosures - the volume of which has far exceeded that released by local market companies. That is part of our challenge of complying with multiple regulators whose disclosure requirements can differ significantly.
* We need to ensure that even when disclosure is voluminous, it is simple and clear.
KEY PERFORMANCE INDICATORS
* AMP management and the Board are focused on achieving a much stronger return on equity in the medium term.
* The Board have agreed to align management incentives with relative total shareholder returns and earnings per share growth.
* This will align executive focus with the interests of shareholders.
* AMP is confident that as well as continuing to grow our businesses strongly at lower unit costs that it can also achieve a major release of capital into the medium term to help achieve strong outcomes in these drivers.
# Australian Financial Services is more than self-funding in capital terms for at least five years and will continue to generate strong cash flows from its powerful competitive position.
# Hendersons is a light user of capital as a modern asset manager.
# UK Financial Services has been a consumer of additional capital in the past period but we expect to turn this around from here on both through active management of the mature book and growth oriented to the new book. And maybe, just maybe, a major recovery in share markets.
THE NEW CHIEF EXECUTIVE'S REFORM AGENDA
*In managing the business to achieve a much stronger return on invested capital, Andrew Mohl has made it quite clear AMP will be pursuing a five-pronged reform agenda:
# First, addressing channels and product lines with inadequate returns on capital - our decisions will include exits and closures, as well as transformation programs to rejuvenate low return areas based on cost cutting and capital initiatives.
# Secondly, closely managing our growth ambitions in the near term outside our main businesses to ensure maximum focus on the areas where our A$14 billion of capital is invested.
# Thirdly, increasing the transparency and quality of our disclosure so that AMP is regarded as a truly outstanding corporate citizen.
# Fourthly, Andrew intends to tackle some of the sacred cows and embedded behaviours in our business that inevitably develop in a longstanding company, particularly one with all but four years of its 153 year history as a mutual society.
# Finally, and most importantly, he will be leading AMP with passion, commitment and absolute integrity, role modelling what some call "values based leadership", which is a leadership style wonderfully aligned with our rich heritage and fervently desired by all the people of AMP.
LOGO
* With a focus on core businesses, true values based leadership, and a passion to execute with excellence to deliver quality products and services for our customers, this will lay the foundation for a major turnaround in the fortunes of AMP.
* We believe that success comes from running core businesses very well. Our strategy is hardly unique so to be successful, we must execute brilliantly.
* That's why Andrew and the management team are religious that success in financial services is 10% strategy, 90% execution.
* We will seek to create a virtuous circle where momentum feeds on itself and morale and confidence rise with each step forward towards our shared objectives.
* That's the way AMP will be run - and that's the way forward.
AMP Price at posting:
0.0¢ Sentiment: None Disclosure: Held