September 11 set insurer challenges

Friday 10th May 2002

AMP has more than a million shareholders who own more than a billion shares.

New Zealanders have a decent representation on the share register as many have held on to shares issued when the financial services group demutualised in 1999.

However, New Zealand gets nary a mention in the company's latest annual report, although neither does Australia. Despite its Australasian base and origins, AMP fancies itself as a world player and its annual report takes a global view. Australia and New Zealand tend to get lumped together when mentioned.

One graph explains why. Cashflows from Australia and New Zealand last year made up a mere 35% of the company's total while the UK produced 56% and the balance came from 17 other countries.

The report's highlight pages are devoted to three items: AMP's $A690 million in net profit for the year to December, the improvement in dividends per share from 47AC to 51Ac and a 14% increase in "core recurring operating margins."

The first point is hardly a highlight as it is 40% down on 2000's $A1.15 billion, although last year's September 11-related market upheavals affected all major financial services companies.

To help explain this impact, the report devotes a page to explaining how its bottom line profit was arrived at. Numerous adjustments result in a conclusion that AMP's "normalised contribution" from its assets would have been an attractive $A1.25 billion. Curse those terrorists!

Given 1999 also was a terrible year for AMP (net loss of $A424 million), mainly thanks to writeoffs related to a foolish takeover of insurance group GIO, it is understandable why it prefers to make a fuss about normalised results.

It shouldn't do both. Real numbers are more important to shareholders than any number of what ifs.

Investors don't appear to have bought the normalised figures argument and, coupled with fears that normality may not be achieved this year either, AMP's share has softened substantially lately.

AMP has demonstrated its faith in normalised results by paying out an increased dividend in each of the past four years regardless of the real bottom line.

Total dividend payments for 2001 were $A573 million, up from $A517 million in 2000. This came out of net profit of $A690 million last year compared with $A1.15 billion the year before. This means last year it paid out 83% of net earnings compared with just 46% of 2000's. Prudently, the company is still paying out less than it earned, unlike some companies which go into hock to keep shareholders happy during hard times.

Other key figures are less attractive. Total assets fell to $A173.4 billion from $A177 billion, although liabilities also shrank to enable net assets to show a modest rise to $A17.3 billion from $A16.9 billion.

Cashflows were negative $A944 million from positive $282 million in 2000 - although this turnaround was not uncommon for insurance and investment companies in last year's tumultuous markets.

Given the size and complexity of the business, the report does a good job in presenting regular checklists of priorities for 2001 and assessments of how well they were achieved.

Chairman Stan Wallis and chief executive Paul Batchelor in their joint report stress the company is moving away from its reliance on variable investment income.

"We have been deliberately reducing our reliance on investment income over the past few years. The market volatility of the past year indicates the importance of our efforts to redirect capital resources into operating businesses," they say.

They are refreshingly straight up about the company's prospects, saying they "expect 2002 to be another tough year for global financial services markets. However, our experience in 2001 has reinforced what we must do to deliver sustainable results to our shareholders."

Their six-point set of "business priorities" boils down to nothing more visionary than leveraging assets to increase revenues and continuing to cut costs.

More is likely be required of insurance and investment companies given the challenges and uncertainties of the post-September 11 environment.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, email: davidm@mcewen.co.nz

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