Good AMP Profit Offset By Abnormals
GOOD OPERATING PROFIT PERFORMANCE AT AMP OFFSET BY ABNORMALS
AMP Limited today announced a A$398 million loss after tax and abnormals for the first half of fiscal year 1999.
This result reflects the recognition by AMP of a number of abnormal items, which, in combination with lower investment income, has resulted in the post-abnormal loss. These abnormals include a write-down of the GIO valuation by A$554 million, recognising the impact of the significant unexpected losses in their reinsurance unit. Adjustments were also made for occurrences at the UK operations, such as A$117 million in extra reserving for new mortality assumptions for annuity business and a A$120 million provision for pension mis-selling settlements.
Mr Paul Batchelor, AMP's Chief Executive Officer, said: "These unacceptably large abnormal items have taken the net results into negative territory. In our results, AMP has recognised that GIO constitutes a major problem. Poor underwriting and risk management in prior years has created a problem at GIO's reinsurance division. We are now actively exploring opportunities to recover value from our investment in GIO."
Mr Batchelor added that corrective action had also been taken to remedy the historical problems which have arisen in the UK. In July, life insurance valuation tables were released which reflected an increase in average life expectancy. The A$117 million in extra reserving covers these new mortality assumptions.
The UK Government also set new guidelines for pension mis-selling issues after 30 June 1999, which increased compensation amounts. Following a Government-funded publicity campaign, there was an increase in customer claims. The provision covers higher than expected costs to provide redress to customers who were disadvantaged by opting out of their employer-sponsored schemes into personal pension plans.
Before abnormals, AMP's after tax profit was A$410 million. This result was supported by a 23% improvement in overall operating margins, offsetting a reduction in investment income from lower worldwide equity market returns and the company's continued redeployment of capital for operational purposes.
Mr Batchelor said he was pleased with the core contributions from key business units, such as AMP Financial Services ("AMPFS"), UK Financial Services ("UKFS"), AMP Asset Management ("AMPAM") and Henderson Investors. A higher proportion of operating margins in total earnings will improve the consistency of the company's profits by reducing its reliance on investment income.
He observed: "The new operational discipline we have introduced over the last few years is being rewarded with further improvement of our earnings quality. In fact, operating margins excluding GIO were up 56%, a significant improvement over 1998. In addition, we have leveraged off our brand strengths and distribution diversity to create volume growth. This in turn creates a good platform for future profit growth."
In comparison with the corresponding half of the previous year, contributions from operating margins have risen from 26% to 47%, albeit on a lower total result driven by lower investment markets. The operating margins show the profit the company generates through managed business activities. AMP intends to further increase the proportional importance of operating margins within total profits to reduce dependence on volatile returns of investment in capital markets.
"Building up our operational activities requires the use of shareholder capital, which means we temporarily forsake lower quality immediate investment income to be able to build up higher and more stable operating returns in the future," Mr Batchelor said. "This has inevitably affected total earnings over this period. However, the excellent results of our existing businesses, such as AMP Financial Services, indicate our approach is working. Under Ray Greenshields' management, AMPFS has been able to deliver excellent results through the optimisation of existing business, and a 41% increase in new business from the corresponding period on the back of large market share gains. AMPFS net cash inflow was A$894 million," Mr Batchelor added.
Similar progress elsewhere in the group led to a 55% rise in net premium income. Meanwhile, both Henderson Investors and AMPAM recorded strong growth in acquiring new investment management mandates. Concurrently, a company-wide systematic reduction in the cost base has amplified the beneficial impact of this sales growth.
Increased fee income and improved investment performance, coupled with the successful integration of Henderson, helped AMP's asset management business to increase operating margins by 56%. In Australia and New Zealand, AMPAM has maintained its leadership in terms of funds under management and has further diversified its revenues by adding transaction and arrangement fees.
Mr Batchelor said: "The Henderson acquisition has been completed successfully, we assumed responsibility for NPI's asset management business, and upgraded all systems to meet Y2K requirements. Henderson is now the third largest fund manager for retail collective investment products in the UK."
The AMP Group's continuing transformation into a well-diversified international financial services provider is also demonstrated by growth in the UK Financial Services unit; a 7% increase in external funds under management and a 15% growth in new mortgage sales at AMP Banking. Abroad, AMP has recently signed a Memorandum of Understanding with Unit Trust of India and established representative offices in Beijing and Tokyo. The Group intends to build further value-added businesses by using its core activities as an operational platform.
AMP's confidence in the future is shown in its increased dividend. The company has announced it will raise its dividend by 11% to 20c. The dividend is fully franked and the increase delivers on promises made in the prospectus two years ago.
Mr Batchelor said: "A higher proportion of operating margins in overall profits gives us the necessary stability of core earnings to be able to increase our pay-out. We are conscious of the importance of income for our large base of retail shareholders and we want to deliver steadily increasing returns to them over time."
"In our key markets of Australia, New Zealand and the UK, AMP is well positioned in an attractive growth industry. We look forward to realising our potential for our shareholders in the future," Mr Batchelor said.
Comparative Summary 1H99 1H98 2H98
Operating margins 192 156 277
Investment income 218 447 147
Operating profit before abnormals 410 603 424
Abnormal items (808) -0- -0-
Operating profit after tax (398) 603 424