Seven-month Hitch

Sydney Morning Herald

Saturday May 10, 2003

Anthony Hughes.

Andrew Mohl clearly believes the demerger and capital raising will put AMP back on track. He explains why to Anthony Hughes.

Photo: Brendan Esposito Seven months must seem like an eon for AMP's under siege chief executive Andrew Mohl. In his short spell in the job, he's had to deliver bad news after bad news to the financial services group's one million shareholders.

If the profit downgrades, write-offs and British capital problems weren't enough, Mr Mohl also had to contend with another slump in the share price this week, unusual trading in the shares and resurfaced criticism of the financial services' group approach to its disclosure obligations.

In an interview this week at AMP's Circular Quay headquarters, he defended the $1.7 billion capital raising and demerger plan that cut the company's share price by more than 40 per cent, admitted he would be prepared to take a pay haircut and blamed hedge funds and momentum traders for depressing the price.

Q: What would happen to AMP if it didn't raise $1.7 billion to $1.9 billion in capital?

A: It's hypothetical. We have raised it because we wanted the financial strength, we wanted to see our credit rating protected, we wanted to be in control of our own destiny. We are demerging, we need to raise the money. We need the UK entity to be largely debt-free because up until now it's been sheltered under the financial strength of the Australian business and we need to pay down loans from the Australian business to the UK and that's why the capital will be going into debt reduction.

Q: But did you need to raise the money regardless of the demerger to maintain solvency levels?

A: If we hadn't demerged there was no way we would have raised $1.7 billion.

Q: Are you concerned with the volume of stock being traded the talk of hedge fund activity and the decline in the share price beyond the $5.50 institutional placement price?

A: We believe the trading post the lifting of the trading halt has been good in the sense the book-build price of $5.50 in broad terms has been validated. There was some criticism that institutions were getting the stock cheap and this was not a good deal for retail shareholders. People now realise if anything the opposite is true that the book-build worked and retail investors can now pay either that price or a 5 per cent discount to the after-market price and the vast majority will get more opportunity to buy shares than they would in a rights issue.

We were very cautious that if we were to make statements around write-downs, earnings and demerger plans and announce a capital raising without an underwriting arrangement in place which would take three to four months that we would put ourselves into the hands of the speculative players in the market.

Q: But hasn't that happened anyway?

A: We have seen enormous trading. We have had as much trading this week as we had in the first six months of last year. The vast majority has been by people who have no interest in the long-term future of AMP. They are simply playing with the stock so they can influence momentum and make a short-term buck. This is exactly why concluding the placement in 48 hours rather than go through three or four months of this sort of trading was so much more superior for everyone associated with the long-term interests of the company.

The price currently reflects huge volumes based on momentum trading and hedge fund activity, which we can understand in the current situation but ultimately is irrelevant in terms of AMP's positioning in Australia and the UK.

Q: The market seems to be valuing the UK business at nothing. If it's worth something, why isn't it reflected in the share price?

A: The Australian entity is projected to make a profit of about $430 million based on the current market level; the UK entity about $270 million. Clearly the Australian entity would have a higher price/earnings ratio given its strong balance sheet means it has a 29 per cent return on equity. The UK entity is a capital release story over time with a very cyclically sensitive asset management business in Henderson included with it. We believe the two entities are much cleaner, they're regional, they are going to have their own boards, their own identity and this will be far superior for shareholders than the conglomerate structure we have today.

Q: On disclosure issues, wasn't the market misinformed when, in the wake of the February 26 full-year results, AMP's share price recovered thanks to the FTSE recovery in line with the inference you made at those results and that there would be no capital raising?

A: On February 26, I did an interview in which there was the famous fighting for survival quote extravagantly displayed in the Herald in a different context. People at the time were saying I was talking the stock down if you remember. The stock rose from $5.92 to $8.73 prior to our announcement on May 1. There was the same phenomenon, huge volatility, enormous flows in and out, periods of great pessimism followed by periods of buying. Fundamentally when we look at the businesses of AMP and the issues we were dealing with and what Project Beacon [the internal code name for the demerger] was all about, nothing really changed between February and April.

On this week's share price slump, Andrew Mohl says the loss of value that occurred was illusory it was never really there.

Photo: Rob Homer The fundamental issues were the same: what we were going to do about our risk exposure to the UK, what we were going to do about the negative impacts of the UK business.

[Project Beacon] has three major strands to it. The demerger, the de-risking and the de-gearing of the group to facilitate that, and we brought these three things together without it leaking to the media despite brilliant journalism out there. The board, literally in that room behind me, signed off on these proposals late on the evening of the 30th of April. I have talked to ASIC, the ASX, APRA and the FSA. Regulators were involved and they understand what we were doing and why and how the whole thing came together. What people don't understand about disclosure is that of course we were thinking about these issues. We had some knowledge about the possibility of these announcements during April, but we had not made decisions. Continuous disclosure requires a company to announce what it has decided to do, not what it's thinking about. The idea we would come out with a statement that we are thinking about separation, raising capital and the write-downs but we can't give you any details is just laughable. The market would have just gone berserk.

The loss of value that occurred [this week] was illusory. The value was never really there. If it did exist, it had gone with the bear market collapse. Stocks go up and down all the time.

Q: But only two months ago, the auditors signed off the full-year accounts as true and fair and now all of a sudden there's a massive $2.6 billion write-off? Is that acceptable?

A: Again, the accounts for 2002 were based on a different strategy the [UK] life funds continuing to hold significant equities exposure and risk and based on AMP remaining as a conglomerate and AMP's UK contemporary business being part of the long-term strategy. We have changed strategy fundamentally. We have moved out of equities and into lower risk assets and we have provided for both actual and potential losses associated with that and we are now valuing the contemporary business in the UK on a fair market value basis, not a long-term basis.

We have probably been conservative in that process. We have been clear in our minds that sure it was two months but it's a fundamentally different basis of valuation because the strategy has changed both in terms of risk reduction and what the group is trying to change.

The valuations we were doing in December were not just going into a room and saying what do you reckon mate. We had KPMG do a separate piece of work that was reviewed with Ernst & Young [AMP's auditor] and the board's audit and compliance committee. Merrill Lynch did some research, some good research this time, reflecting on the fact that the UK life companies still had very significant intangibles on their books. It's all from acquisitions. Life companies are trading at discounts to embedded valuation [a life insurance valuation standard based on valuing new business flows]. The market puts no value on their new business let alone any goodwill on their balance sheets. In many respects, we are ahead of the game.

Q: You talk about reducing the equities exposure to 5 per cent in the UK life funds. Is it the right time to do this and aren't there also risks in owning a lot of bonds?

A: We are a conservative investor because we don't want to lose a lot on behalf of policyholders and the shareholders. That's why we need conservative asset allocation. But we are going to get much tighter about the matching of assets and liabilities than has been the case historically.

What people don't understand is that until recently the UK life industry has existed and thrived on what you would regard as an extraordinarily large asset/liability mismatch risk basically taking these funds providing guarantees to pay policyholders above a bank type rate and then investing the money into equities and it's a very risky business. And it works while there are large estates [an asset buffer] that can take the flex with the volatility in markets. But once the estate has been largely dissipated by the fall of 45 per cent [in the FTSE]. From a shareholders' point of view, by investing fresh capital into these funds so they can hold equities you are underwriting 100 per cent of the losses and getting only 10 per cent of the gains.

Q: What will happen to your pay as a result of the demerger?

A: It has not been decided but obviously it needs to be reviewed by the board. I'm prepared to come down from $8.4 million [the most he can earn under the incentive and base salary package previously proposed].

Q: What damage has the AMP brand suffered from these latest problems?

A: The ASSIRT numbers [on Australian retail fund inflows] are interesting. We have had a small outflow in the March quarter. It was a weak quarter for us but the industry's net flows were down almost 90 per cent, so what we have seen is a market pretty much coming to a halt. It's gone from $5 billion at its peak to a few hundred million. We have held up extremely well. To us it just shows what a strong Australian business we have got because it's coping with very significant challenges from the corporate entity which we hope to put behind us as a result of the demerger.

© 2003 Sydney Morning Herald

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