brw daily...

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    Hmmm... BRW Daily...

    Andrew Mohl's mission impossible
    By Adele Ferguson
    Monday, February 24, 2003

    When AMP releases its annual results on February 26, the market will be paying close attention to the composition of its expected $900 million loss and the value it places on its troublesome British financial services operations. The embedded value of these operations was £1.9 billion at June 30, but since then it has had to add £1.5 billion to regulatory capital. If the embedded value is zero, it could reduce the group's total embedded value to $6 a share. The company was trading at $8.12 on February 17.

    AMP's chief executive, Andrew Mohl, and his team are wrestling with how to restore the group's battered credibility and arrest its problems in Britain. They could be facing mission impossible, given that Britain's benchmark FTSE 100 share index is expected to sink deeper into a bear market due to factors such as the Iraq crisis, poor economic data, and a review of the defined benefits scheme in Britain for the December year-end that is likely to result in an equity allocation reduction.

    AMP's British financial services operations represent more than a third of group assets and almost half its capital base. Poor risk-management processes and insufficient management information systems, coupled with a falling stockmarket and the draining of funds from its orphan estate (capital that is not attributed to policyholders or shareholders and can be drawn down only with approval from the Financial Services Authority) has resulted in the company being forced to find more than £1.5 billion of regulatory capital in the past 12 months. It has done this by transferring funds from Australia, raising $1.5 billion in a reset preferred securities issue, as well as selling some businesses and reclassifying some assets. All of this culminated in a second downgrading in its credit rating by Standard & Poor's earlier this month.

    This has made shareholders more aware of the regulatory solvency problems that AMP faces as the FTSE falls. In December, Mohl announced a revised forecast for the business, then a few weeks later announced another $100 million downward revision to AMP's estimate for earnings from its reeling British financial services business. The only sensible interpretation of this is that management does not fully understand the situation and the effect of the FTSE on the company. Before Mohl took the top job he ran AMP's Australian financial services business.

    To try to stem the bleeding, AMP put these businesses into run-off last year, which means they are not writing any new policies. But so long as AMP owns the British financial services operation, it will be haunted by its problems. AMP has been taking money from the orphan estate to keep bonus rates going in Britain and bolster some of its British businesses. Just how much it has taken from the orphan estate will be revealed in this year's annual report. The orphan estate was valued at $6.2 billion at December 31, 2001, and $5.4 billion at June 30, 2002. The company has admitted that there is nothing left in the orphan estate but if it is overdrawn, this would force the FSA to further scrutinise the group's solvency levels in Britain.

    Mohl and his team are considering all options to try to restore a share price that has bombed in the past year from $18.50, to a record low of $7.92. One option is to securitise its run-off business in Britain, close its new business, and sell it to a competitor. The embedded value of the British financial services business at June 30, 2002, was £1.9 billion. If the £1.5 billion regulatory capital is deducted from this, it could try to sell the business for up to £400 million. The problem is that the industry is in a mess and there are few buyers looking for a business that lacks transparency and whose solvency is questionable.

    AMP's problems started when the market learnt, in a prospectus released in late September, that its Pearl with-profit fund had fallen, by an unspecified amount, below the minimum capital requirement of the FSA. BRW revealed in August that AMP had been working closely with the FSA to improve its solvency position in Britain.

    If the FTSE 100 goes below 3000 (it was 3692 on February 17), Mohl will have to inject more capital into its British operations. This is becoming more likely, as the FTSE 100 has fallen almost 10% since Mohl made his first earnings revision on December 4.

    AMP would then struggle to make an equity issue because nobody knows how low the stock can go. An option is to sell its Henderson global funds management operation, which has market value of about $3 billion, and outsource its investment management capacity, in a model similar to that adopted by MLC.

    If AMP's share price drifts towards $6 it will become a takeover target for a domestic bank such as National Australia Bank. International banks such as HSBC or Citigroup have also been touted as interested parties at the right price.

    As world equity markets continue to collapse, the horror story for AMP will continue. Even its funds management business in Australia will come under attack. It is the second largest fund manager in Australia but in the past three half-yearly results its performance has been flat. If it remains flat, or worse, when it reports its annual results next week, its share price will continue to test new lows.

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