UK deal bolsters AMP's prospects

By Nick Stride

Friday 27th September 2002

A deal between AMP and the UK Financial Services Authority has brought welcome relief to the company's share price after a week of pummelling by the markets.

AMP's British woes saw more than a $250 million wiped from the value of New Zealanders' shares since June.

But the shares bounced on Wednesday after AMP announced it would not have to pump any further capital into the British operation despite further hefty falls on the London sharemarket.

And it was business as usual at AMP New Zealand, the country's largest funds manager.

AMP has about 92,000 local shareholders, well down from the 274,000 policyholders who got stock when the financial services giant demutualised in 1998.

The shares this week bottomed at $12.50 but bounced up to $13.70 within an hour of the good news. However, they took another dive in early trading yesterday.

The company's woes, which have claimed the scalp of chief executive Paul Batchelor, stem from the with-profits fund run by its Pearl subsidiary.

Britain's minimum regulatory capital (MRC) rules require insurers to maintain liquid funds in a fixed proportion to the market value of equity investments. The plunging FTSE100 index has meant the Pearl fund, along with numerous funds run by other managers, breached the rules. AMP last week had to pledge £500 million ($1.66 billion) to Pearl.

It revealed every 100 point fall in the FTSE index below 3700 would require a further £120 million.

The index fell to 3646 in Tuesday's trading but AMP has cut a deal whereby it can include in the fund's valuation assets previously inadmissible for regulatory purposes, and can use various other measures. It said these would allow Pearl to meet the MRC rules down an index value of 3000.

Before the deal it had £1.4 billion of inadmissible assets.

It emphasised that, while the Pearl fund was large, it accounted for only 10% of AMP's new business in the UK. It will be closed to subscriptions at the end of next year and sooner if necessary.

British insurers and the British subsidiaries of groups such as AMP have been battered by their high exposure to equities. Some are reported to have invested as much as four-fifths of their assets in shares.

Like others, AMP, encouraged by the equities bull market that ended last year, took on too much risk at low prices.

Plunging markets have revealed huge contingent liabilities.

Pearl, for instance, had effectively guaranteed some investors in its with-profits life fund a return of 4% but found itself making negative real investment returns.

AMP's falls over the last three months have wiped $6.7 billion from its market capitalisation but analysts say better times are around the corner for patient investors.

If sharemarkets stop falling, higher returns and lower risk will stabilise the sector.

But investment strategists are divided on whether markets have yet seen the bottom.

Comments from our readers

No comments yet