AMP (ASX:AMP)

Mike Wilkins
Interim CEO
Market Cap (AUD): 7.43B
Sector: Financials
Last Trade (AUD): 2.58 +0.05 (+1.98%)
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1. About

 

AMP Limited is a leading wealth management company. The Company's strength lies in the breadth of its solutions and services, across financial advice, investment management, and its offerings in banking, superannuation, self-managed superannuation funds (SMSFs), life insurance, and retirement income and investing. AMP was founded almost 170 years ago, established in Australia, its reach now spans around the world, where the Company uses its expertise to advise clients and customers in Asia, the Middle East, Europe, the United Kingdom and North America. The Company now operates in 11 countries.[1]

Key facts about AMP

  • Leader in the Australian market for financial advice, retail superannuation, and life insurance
  • Leader in the New Zealand market for corporate superannuation, retail funds, and superannuation, and one of the largest KiwiSaver Scheme and life insurance providers
  • Partner with over 55,000 Australian companies, including some of Australia's leading blue-chip companies, to provide their employees with corporate superannuation offerings
  • Over 100,000 AMP Bank customers
  • Investment management business with over 480 clients in Australia and New Zealand, and over 290 international clients in areas including Hong Kong, China, Japan, the UK, Europe, the Middle East and the US
  • Over 3.8 million customers in Australia and New Zealand
  • Approximately 750,000 shareholders

2. Business model

 

The Group operates the following divisions:[2]

 

Divisions

Revenue ($M)

% of Revenue

% of Profit (after Tax)

Profit drivers[3]

WM

$1,603.0

53.3%

36.5%

Operating earnings dropped by $10 M (2.5%) from 2016 to $391 M in 2017. The decline in operating earnings was largely due to margin compression from MySuper transitions, increased variable remuneration associated with improved group performance plus a reset of the investment management agreement with AMP Capital

AMP Capital

$658

21.9%

14.6%

AMP group’s 85% share of AMP Capital’s 2017 operating earnings was $156 M, up 8% from $144 M in 2016. AMP Capital’s operating earnings benefited from strong fee income growth of 7%, partially offset by a 5% increase in controllable costs

WP

$110

3.7%

10.3%

Operating earnings improved by $525 M to $110 M in 2017 from 2016, with improved experience more than offsetting lower profit margins. Profit margins fell by $76 M (43%) from 2016 to $99 M in 2017, largely due to the strengthening of assumptions at 2016, the implementation of a 50% quota share reinsurance arrangement with Munich Reinsurance Company of Australasia (Munich Re) on 1 November 2016

AMP Bank

$364

12.1%

13.1%

Operating earnings increased $20 M (17%) to $140 M in 2017 from 2016. Total revenue increased 17% in 2017 from 2016, primarily driven by growth in the loan portfolio

NZFS

$125

4.2%

11.7%

In NZD terms, operating earnings increased by $1 M (1%) to $135 M as a result of higher profit margins, partially offset by lower experience profits. In Australian dollar terms, operating earnings decreased by $1 M (1%) following the depreciation of the New Zealand dollar relative to the Australian dollar

Mature

$150

5.0%

14.0%

2017 operating earnings of $150 M decreased $1 M from 2016 due to the expected portfolio run-off ($9 M decrease) offset by improved experience ($5 M increase), investment markets ($2 M increase) and lower controllable costs ($1 M increase)

3. Strategy

 

AMP is positioned to take advantage of positive long-term demographic and market trends, operating in large and growing markets where competition is rational and where AMP has a distinct competitive advantage. The company is pursuing a clear strategy for long-term growth with four key priorities:[4]

  • tilting investment to higher growth businesses with strong market positions, while releasing and recycling capital from lower growth businesses
  • transforming the core Australian business to focus on helping customers achieve their goals
  • managing costs to continue growing profitably in a margin compressed world, and
  • expanding internationally by leveraging AMP’s key strengths into new markets, specifically Europe, North America, China and Japan

 

This strategy is expected to drive improved business performance and growth with the expectation that AMP will meet its 15% return on equity hurdle in 2018.

AMP is well progressed with a portfolio review of the manage for value businesses with all alternatives being considered. As a result, AMP is in discussions with a number of interested parties. While the portfolio review is yet to be concluded, AMP expects to be in a position to provide a further update at or before AMP’s 2018 AGM.

  • Tilt investment to higher growth businesses

AMP is focused on delivering growth across the portfolio by focusing investment in its high growth businesses, including Australian wealth management, AMP Bank and AMP Capital.

A key priority is to grow in the expanding $3.3 trillion Australian wealth management market, where AMP holds the number one market share position in superannuation, advice, and SMSF and the number two market share position in retirement incomes. AMP is investing in Australian wealth management to grow its distinctive competitive advantages. In 2018, AMP is targeting additional revenue equivalent to 2% of AUM fees from its Advice and SMSF businesses. This investment will also help Australians get more advice, more often through its goals-based operating system which will also improve productivity and drive new revenue streams.

AMP Bank continues to grow strongly and represents a significant opportunity for AMP by integrating debt and cash flow management strategies into its goals-based offers, particularly across its aligned advice network and broker proposition. AMP Bank offers an opportunity for the group to engage with customers earlier in their financial life cycle, with products and services that provide higher levels of interaction. Delivering on this strategy is expected to double the value of AMP Bank over five years. AMP Capital has demonstrated consistent and sustainable earnings growth and is focused on growing domestically while also extending its geographic reach and investment in distribution capabilities across selected markets. By utilising its strengths in the management of real assets, AMP Capital has further opportunity to capture attractive revenues and is targeting double-digit earnings growth through the cycle

  • Transform

AMP is transforming its core Australian businesses to be more customer centric, based on helping more people achieve their life goals. AMP is aiming to make its goals-based approach to financial advice more relevant, accessible and affordable for its customers, and at the same time, more efficient and profitable for AMP and its strong network of aligned advisers. AMP is also giving customers more ways to interact with the company by creating an omni-channel experience with new digital and direct channels that complement its existing multi-branded face-to-face advice experience. AMP is rolling out its technology-enabled, goals-based advice platform to AMP Advice. In second half 2017, AMP formalised a partnership with US advice business United Capital to collaborate as AMP develops its new operating system. By the end of 2017, 26 practices with over 200 financial advisers were operating under the new AMP Advice model. They will deliver a better and more relevant customer outcome and experience, greater adviser productivity and improved advice practice profitability

  • Manage costs

AMP continues to deliver market-leading cost efficiency and in 2017 operating model and organisational design changes delivered efficiency gains which reduced controllable costs by 3%. AMP (excluding AMP Capital) has an ambition to keep controllable costs flat in the medium term. Run rate savings from initiatives in 2017 and benefits from other strategic cost initiatives will help deliver this outcome in 2018.

  • Expand internationally

AMP is expanding internationally, primarily through AMP Capital, in high-growth regions where its expertise and capabilities are in demand. AMP has built strong partnerships with national champion companies in China and Japan and is capitalising on demand for its infrastructure, real estate and fixed income capabilities across Asia, Europe and North America. In the second half of 2017, AMP announced an agreement to purchase a minority stake in US-based real estate investment manager PCCP to provide commercial debt and equity capital for middle market investments throughout the US. AMP’s relationships with China Life continue to strengthen. China Life Asset Management Company Limited (CLAMP) is the fastest growing new asset management company in China while China Life Pension Company (CLPC) ranks first in trustee services with 31% market share and third in investment management with 11% market share. CLPC is expected to benefit from the implementation of new regulations for Occupational Pensions in China in coming years. AMP is targeting earnings of around $50 million per annum from the China businesses within five years.                                        

4. Markets

 

The Group operates in markets including:[5]

 

Industry (Australia)

Industry Revenue

Growth Rate (annual 13-18)

Superannuation Funds

$289 billion (2018)

7.9%

Life Insurance

$66 billion (2017)

(3.5%)

Superannuation Funds Management services

$10 billion (2018)

8..6%

5. Competition

 

Major competitors include:[6]

 

  • National Australia Bank (ASX:NAB)
  • Australia and New Zealand Banking Group (ASX:ANZ)
  • Macquarie Group Ltd (ASX:MQG)

6. History

 

1849[7]

The Australian Mutual Provident Society opens for business

 

1860  

Benjamin Short joins AMP as its first agent

 

1869  

The National Mutual Life Association of Australasia opens for business

 

1899  

James Tuscon Thompson joins National Mutual as its first agent

 

1962

The iconic AMP building in Sydney's Circular Quay is opened by then Prime Minister, Robert Menzies

 

1995  

National Mutual demutualised and lists on the Australian Stock Exchange

 

1998  

AMP demutualised and lists on the Australian Stock Exchange. AMP Bank opens for business and the AMP Foundation is formed

 

2000

AMP plays a major part in the first Olympics of the new century, supporting the Sydney 2000 Olympic Games, the Paralympic Games and the Olympic Torch Relay

 

2009  

AMP and China Life Group forms strategic partnership

 

2011

AMP and AXA Asia Pacific merge. AMP and Mitsubishi UFJ Trust and Banking form strategic partnership

 

2014  

AMP to acquires 19.9% of China Life Pension Company

 

2015  

AMP completes 19.9% acquisition of China Life Pension Company

 

2017  

AMP and United Capital forms strategic partnership

7. Team

 

Board of Directors[8]

 

AMP Limited Board

 

David Murray AO – Chairman

Mike Wilkins AO – Acting Chief Executive Officer[9]

Patricia (Patty) Akopiantz – Independent Director (step down and will serve until the of end 2018)[10]

Andrew Harmos – Independent Director

Trevor Matthews – Independent Director

John O’Sullivan – Independent Director

Geoff Roberts – Independent Director

Peter Varghese AO – Independent Director

John Fraser – Non-Executive Director

Francesco De Ferrari – Chief Executive Officer (effective from 1 December 2018)[11]

 

AMP Superannuation Limited Board

 

Richard (Rick) Allert AO – Independent Chairman

Michele Dolin (retired) – Independent Director

Louise Dudley – Independent Director

Darryl Mackay – Director

 

AMP Life Limited Board

 

Trevor Matthews – Independent Chairman

Megan Beer – Director

Andrew Harmos – Independent Director

Geoff Roberts – Independent Director

Mike Wilkins AO – Director

 

AMP Bank Limited Board

 

Patricia (Patty) Akopiantz – Independent Chairman

Sally Bruce – Director

Gordon Lefevre – Director

Wendy Thorpe – Director

Peter Varghese AO – Independent Director

Trudy Vonhoff – Independent Director

 

AMP Capital Holdings Limited Board (AMPCHL)

 

John Nesbitt – Independent Chairman

Grant Bailey – Independent Director

Debra Hazleton – Independent Director

Akira Suzuki – Director

Adam Tindall – Director

Peter Varghese AO – Independent Director

 

Management Team

 

Mike Wilkins AO – Acting Chief Executive Officer

Megan Beer – Group Executive, Insurance

Sally Bruce – Group Executive, AMP Bank

David Cullen – Group General Counsel

Jennifer (Jenny) Fagg – Chief Risk Officer

Gordon Lefevre – Chief Financial Officer

Helen Livesey – Group Executive, Public Affairs and Chief of Staff

Jack Regan – Group Executive, Advice and New Zealand

Craig Ryman – Group Executive, Technology and Operations

Paul Sainsbury – Group Executive, Wealth Solutions and Customer

Adam Tindall – Chief Executive Officer, AMP Capital

Fiona Wardlaw – Group Executive, People, and Culture


read more

8. Financials

 

2018 Half Year Results Presentation

 

Financial Year 2016/2017 (ended 31 December):[12]

 

Divisions

Revenue ($M)

% Change

Profit/(Loss) (after Tax) ($M)

% Change

WM

$1,603

(0.3%)

$391

(2.5%)

AMP Capital

$658

7.3%

$156

8.3%

WP

$110

(126.5%)

$110

(126.5%)

AMP Bank

$364

17.0%

$140

16.7%

NZFS

$125

(0.8%)

$125

(0.8%)

Mature

$150

(0.7%)

$150

(0.7%)

Total

$3,010

25.7%

$1,072

103.4%

9. Risk

 

Major risks include:[13]

 

Enterprise Risk Management (ERM)

The Enterprise Risk Management (ERM) framework is designed to enable AMP to identify, assess, respond, monitor and review current and emerging risks that can affect its business. The Company recognises that effective risk management is supported by appropriate behaviour by its employees and the Company is committed to driving a risk aware culture. AMP’s ERM framework includes a risk management strategy which establishes the principles, requirements, roles and responsibilities for the management of risk across AMP. It also includes a risk appetite statement which articulates the nature and level of risk the board is willing to accept in the pursuit of strategic objectives. Alignment between AMP’s corporate strategy and the risk appetite of the AMP Limited Board ensures that risks taken are consistent with the nature and level of risk the board is willing to accept.

 

Key business challenges

Given the nature of its business environment the Company continues to face challenges that could have an adverse impact on the delivery of its strategy. The most significant business challenges (in no

particular order of importance) include. but are not limited to:

Competitor and customer environment

Its strategy is set based on existing and expected business environmental factors including business cycle, technology, customer preferences and competitive landscape. Significant changes in these environmental factors may disrupt AMP’s business operations. For example, a significant change in customer preferences may impact sales volumes, revenue and customer satisfaction. AMP has programs in place aimed at anticipating and responding to threats and opportunities that arise from changing customer preferences and competitor strategies and capabilities

 

Cyber security threats

Cyber risk continues to be a focus area across all industries. The Company recognises that cyber risk will continue to be a threat in a rapidly changing technological environment and that the magnitude and costs of cybercrime vary depending on the nature of the attack. AMP is committed to investing in enhancing its cyber security network and the Company has several detective, preventative and responsive controls to protect its assets and networks. While the Company is committed to enhancing its cyber security network, the Company recognises it is inevitable that cyber-attacks will occur. In assessing and mitigating cybercrime, the Company regularly considers vulnerabilities and potential ways to mitigate failures of people, processes and technology.

 

Organisational change

AMP’s promise to help people ‘own tomorrow’ requires continuous updating of products, services and customer experiences. Managing continuous change can place significant pressure on employees. AMP has invested heavily into developing new approaches, models and ways of working to drive efficiency. The Company recognises that failure to appropriately manage the implementation of these changes can cause disruption to AMP’s business operations. To manage this, AMP has dedicated resources with appropriate skills and expertise who establish change programs and manage the transition.

 

Business, employee and business partner conduct

The conduct of financial institutions is an area of significant focus. There is a risk that business practices and management, staff or business partner behaviours may not deliver the outcomes desired by AMP or meet the expectations of regulators and customers. An actual or perceived shortcoming in conduct by AMP or its business partners may undermine its reputation and draw increased attention from regulators. AMP is committed to establishing a culture of help, integrity and performance. Its code of conduct outlines the minimum standards of behaviour and decision making and its expectations for how the Company treat its employees, customers, business partners and shareholders. AMP also works to provide a safe and respectful environment that encourages all staff to be confident and speak out about any potential conduct issues. All employees, contractors and third parties can use the Your Call program to raise concerns including regarding unethical behaviours as a whistleblower. The Group Chief Risk Officer (CRO) is AMP’s designated Whistleblower Protection Officer, and has direct access to the CEO and board. Further to this, the Company is committed to ensuring the right culture is embedded in its everyday practices, with risk explicitly considered as part of the remuneration framework. The Group CRO is also given an additional discretion to adjust the bonus pool for significant failures in conduct or risk management.

 

Regulatory environment

AMP operates in multiple jurisdictions across the globe. Each one of these jurisdictions has legislative and regulatory requirements that AMP is committed to meeting. These requirements are also subject to reform. AMP has established internal policies, frameworks and procedures to seek to ensure its domestic and international regulatory obligations are met in each jurisdiction. Processes are also in place to manage the implications of regulatory change on its business performance. AMP has developed a curriculum of mandatory compliance training that all employees must undertake to ensure awareness of their general compliance obligations.

Regulatory and compliance risks, breaches, consultations and general interactions are reported as part of its internal risk and compliance reporting process, and to the relevant regulators as and when required. At any point in time, a number of investigations, consultations and general interactions may be in progress with its key regulators. The Company actively participates in these interactions and fully cooperate with regulators on such matters.

The Australian financial services industry is currently responding to a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, established on 14 December 2017. The outcomes of this Royal Commission for AMP and the industry are uncertain at this time. AMP has welcomed the opportunity to contribute to the Royal Commission and supports its intent to provide certainty to the financial system and help restore the community’s trust and confidence in the industry.

 

Material risk

Strategic risk

Risk of loss or forgone value associated with strategic decisions and competitive positioning of the business and its ability to respond in a timely manner to changes in the regulatory, customer or competitive landscape.

 

Concentration risk

The risk of loss due to a series of exposures with the potential to produce large enough losses. It may arise in the form of credit concentration, market correlation, cross risk types, pandemic, which may have been accumulated over time.

 

Operational risk

Risk of loss resulting from inadequate or failed internal processes and systems or from external events.

 

Financial risk

 

Market risk

Interest rate risk

The risk of an impact on the AMP group’s profit after tax and equity arising from fluctuations of the fair value or future cash flows of financial instruments due to changes in market interest rates. Interest rate movements could result from changes in the absolute levels of interest rates, the shape of the yield curve, the margin between yield curves and the volatility of interest rates.

 

Currency risk

The risk of an impact on the AMP group’s profit after tax and equity arising from fluctuations of the fair value of a financial asset, liability or commitment due to changes in foreign exchange rates.

 

Equity price risk

The risk of an impact on the AMP group’s profit after tax and equity arising from fluctuations of the fair value or future cash flows of a financial instrument due to changes in equity prices.

 

Liquidity risk

The risk that the AMP group is not able to meet its obligations as they fall due because of an inability to liquidate assets or obtain adequate funding when required.

 

Refinancing risk

The risk that the AMP group is not able to refinance the full quantum of its ongoing debt requirements on appropriate terms and pricing.

 

Credit risk

Credit default risk is the risk of financial or reputational loss due to a counterparty failing to meet their contractual commitments in full and on time. Concentration of credit risk arises when a number of financial instruments or contracts are entered into with the same counterparty or where a number of counterparties are engaged in similar business activities that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

 

Life insurance risk

AMP Life issues contracts that transfer significant insurance risk from the policyholder, covering death, disability or longevity of the insured, often in conjunction with the provision of wealth management products. The products carrying insurance risk are designed to ensure that policy wording and promotional materials are clear, unambiguous and do not leave AMP Life open to claims from causes that were not anticipated. The variability inherent in insurance risk, including concentration risk, is managed by having a large geographically diverse portfolio of individual risks, underwriting and the use of reinsurance. Underwriting is managed through a dedicated underwriting department, with formal underwriting limits and appropriate training and development of underwriting staff. Individual policies carrying insurance risk are generally underwritten individually on their merits. Individual policies which are transferred from a group scheme are generally issued without underwriting. Group risk insurance policies meeting certain criteria are underwritten on the merits of the employee group as a whole. Claims are managed through a dedicated claims management team, with formal claims acceptance limits and appropriate training and development of staff with an objective to ensure payment of all genuine claims. Claims experience is assessed regularly and appropriate actuarial reserves are established to reflect up-to-date experience and any anticipated future events. This includes reserves for claims incurred but not yet reported.

AMP Life reinsures (cedes) to reinsurance companies a proportion of their portfolio or certain types of insurance risk, including catastrophe. This serves primarily to:

  • reduce the net liability on large individual risks
  • obtain greater diversification of insurance risks
  • provide protection against large losses
  • reduce overall exposure to risk
  • reduce the amount of capital required to support the business

References

  1. ^ https://corporate.amp.com.au/about-amp/what-we-do/what-we-do-key-facts-our-history
  2. ^ Annual Report 2017, P. 63
    https://www.listcorp.com/asx/amp/amp/news/correction-of-2017-annual-report-1843489.html
  3. ^ Annual Report 2017, P. 21
    https://www.listcorp.com/asx/amp/amp/news/correction-of-2017-annual-report-1843489.html
  4. ^ Annual Report 2017, P. 06, 21-22
    https://www.listcorp.com/asx/amp/amp/news/correction-of-2017-annual-report-1843489.html
  5. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=523
    http://www.ibisworld.com.au/industry/default.aspx?indid=522  
    http://www.ibisworld.com.au/industry/default.aspx?indid=1890
  6. ^ http://www.hoovers.com/company-information/cs/competition.amp_limited.74235c6c59a3fe8a.html
    https://markets.ft.com/data/equities/tearsheet/profile?s=AMP:ASX
  7. ^ https://corporate.amp.com.au/about-amp/what-we-do/what-we-do-key-facts-our-history  https://www.listcorp.com/asx/amp/amp/news/amp-to-acquire-19-9-percentage-of-china-life-pension-company-637405.html
    https://www.listcorp.com/asx/amp/amp/news/amp-01-2015-amp-completes-19-9-percentage-china-life-acquisition-656957.html
  8. ^ https://corporate.amp.com.au/about-amp/board-and-management/amp-limited-board
    https://corporate.amp.com.au/about-amp/board-and-management/the-directors-of-amp-superannuation-limited-and-n-m--superannuat
    https://corporate.amp.com.au/about-amp/board-and-management/the-directors-of-amp-superannuation-limited-and-n-m--superannuat
    https://corporate.amp.com.au/about-amp/board-and-management/amp-bank-board
    https://corporate.amp.com.au/about-amp/board-and-management/amp-capital-board
    https://corporate.amp.com.au/about-amp/board-and-management/amp-management
  9. ^ https://www.listcorp.com/asx/amp/amp/news/amp-appoints-francesco-de-ferrari-as-chief-executive-officer-1956181.html
  10. ^ https://www.listcorp.com/asx/amp/amp/news/three-non-executive-directors-to-step-down-from-amp-1880255.html
  11. ^ https://www.listcorp.com/asx/amp/amp/news/amp-appoints-francesco-de-ferrari-as-chief-executive-officer-1956181.html
  12. ^ Annual Report 2017, P. 63
    https://www.listcorp.com/asx/amp/amp/news/correction-of-2017-annual-report-1843489.html
  13. ^ Annual Report 2017, P.23-24, 80-84, 97
    https://www.listcorp.com/asx/amp/amp/news/correction-of-2017-annual-report-1843489.html