AMP 2014 Voting Intentions

Company/ASX Code : AMP Limited (AMP)
Registry : Computershare Services
Poll/Show of Hands : Poll
Webcast : Yes
Venue :
10am (AEST), Savoy Ballroom
Grand Hyatt Melbourne 123 Collins Street
Melbourne, Victoria 3000
Monitor : Mr Richard Wilkins
AGM Details / NoM : Thursday 8th May, 2014
ASA Position
Not Applicable
Item 1: Consideration of financial report

In 2013 AMP disappointed shareholders, as underlying profit fell from $950m to $849m. Underlying Return on Equity (ROE) of 10.7% was down from 12.7% in 2012, and compared with 31.6% in 2009. This reflects both lower Australian wealth protection profits and underlying investment income, combined with the dilutive effect of a higher capital base. Underlying earnings per share fell from 32.9c to 28.8c, which was 25% lower than in 2009. In line with previous years’ practice AMP has provided some profit guidance for 2014 on elements of the business, but no guidance for overall group profitability.

Dividends for 2013 fell from 25c to 23c but were at the top of AMP’s policy range of a 70-80% payout of underlying earnings per share; they were 70% franked, up from 55% in 2012. AMP has substantial tax losses which will mitigate tax liabilities for some years but consequently limit its capacity to frank dividend payments.

AMP generated good growth and strong profits in most of its businesses during 2013, but overall profit was affected by a 40% reduction in underlying investment income on shareholders funds. This reflected lower market interest rates, because over 90% is held in cash and fixed interest investments. More concerning is the 66% fall in the operating earnings of the Wealth Protection (WP) division (ie the life insurance business excluding the Mature segment). These two adverse factors more than offset the strong results achieved by the other operating divisions. AMP recognises that there are several causes of the decline in the Wealth Protection profit contribution in the last two years, and that rectifying these problems “will require a deep cultural shift and very significant changes to the way AMP does business”.

The poor results in WP were attributed to several factors, including high churn rates of life policies, and an increase in both lapses and claims within group income protection (IP) and disability classes. These problems appear to have been emerging for some years, but became much more acute in 2013. Many of these issues affect the Australian insurance industry as a whole but others are more specific to AMP. The Board and management concede that they were slow to recognise these adverse trends, but have now identified the issues and instituted corrective strategies. It will take some years to implement fully the major changes needed, including more realistic pricing of business, especially in group risk cover, and in remuneration practices for financial planners. New products will be offered in 2015. The WP division may suffer slightly worse results in 2014 before new practices take effect. Action to remediate group risk business was undertaken in 2013, but one scheme which contributed over 70% of group risk losses will not be repriced until June 2014. The strengthening of actuarial assumptions across retail IP and lump sum products is expected to reduce profit margins by around $35m in 2014. AMP anticipates that 2014 claims in IP and group risk cover will be broadly in line with 2013 experience; lapse rates are expected to worsen by 1% in 2014, gradually reverting to levels in line with 2012 experience by 2017.

Most divisions showed strong underlying earnings growth v 2012, as follows: Wealth Management (+16%), AMP Bank (+34%), Mature (+7%) and NZ (+33%). AMP Capital maintained stable earnings. In 2013, AMP Capital established a joint venture funds management company in China with China Life; this follows the partnership established in 2012 with Mitsubishi Bank of Japan. AMP’s total assets under management (AUM) rose 15% to $197B at 31 December 2013. AMP has leading market shares in most of its business units; it has the largest aligned planner/distribution network in Australia and NZ, as well as extensive relationships with non-aligned planners.

In 2013 AMP maintained its low gearing level and increased its already strong capital position, which is now $2.1B above the minimum regulatory requirement. Capital adequacy standards are still being strengthened by regulators; AMP has determined to maintain high levels of capital through this period of regulatory change, although this prudent policy does come at the cost of diluting ROE. At 31 December 2013, AMP had access to significant liquidity through group cash of A$796m and undrawn borrowing facilities of A$500m.

AMP has almost completed the integration of AXA, achieving synergy benefits of $150m pa after tax, greater than predicted, although at higher cost of $310m after tax. AMP is applying this experience to a further improvement program within the combined business, which will incur one-off costs of A$320m pre-tax over the next 3 years. AMP is ahead of plan to achieve $200m pa pre-tax run rate savings from this restructuring by December 2016.

The group’s cost to income ratio of 49.4% was up 2.1% on 2012, as reductions in controllable costs of 2.6% on 2012 were more than offset by lower income. Controllable costs for 2014 are expected to increase by around 1.5% from 2013, as benefits of the business efficiency program offset CPI and wage cost growth.

Craig Meller was appointed CEO, effective January 1, following Craig Dunn. Chairman Peter Mason has developed a strong Board and overseen a smooth succession of CEOs: he will be retiring at the AGM to be replaced by former Macquarie Banker and Australian of the Year Simon McKeon.

Apart from the difficulties in the life industry, two other significant impacts in recent years have been the low market yields on the investments that support shareholders funds, and the decision to hold higher levels of capital during the period of tightening capital regulation by APRA and other bodies. Although these factors have caused short term detriment to the reported results, they should place AMP at advantage to underpin its growth plans in the coming years. AMP could expect to earn significantly higher investment returns when market interest rates rise to their historical levels. In addition, despite competitive pressures on wealth management margins, increasing global savings trends, supported by mandated superannuation in Australia and NZ, provide for an attractive long term outlook.

ASA Position
Item 2a: Re-election of Ms Patty Akopiantz

We consider that all of the five directors standing at the AGM are well qualified for their roles. All of the directors have given AMP formal confirmation of their ability to meet their commitments as directors, as required by AMP’s governance charter. Ms Akopiantz was appointed to the AMP Limited Board and the People & Remuneration Committee in March 2011. She is also a director of AMP’s subsidiary AMP Bank Ltd (since November 2011), a member of its Audit Committee (since June 2012) and became Chairman of that committee in February 2013. She is a director of one not for profit organisation.

ASA Position
Item 2b: Re-election of Ms Catherine Brenner

Ms Brenner was appointed a director of AMP Limited in June 2010 and became Chairman of its Nomination Committee in May 2013. She was appointed Chairman of AMP’s subsidiary, AMP Life Limited in May 2011, having been a director of AMP Life and a member of its Audit Committee since May 2009. She has been Chairman of National Mutual Life and a member of its Audit Committee since March 2011, when AMP acquired AXA. She is also a director of Boral and Coca Cola Amatil and two not for profit organisations. Although her workload is substantial, the AMP Chairman has assured us that Ms Brenner is able to satisfy her commitments to AMP.

ASA Position
Item 2c: Re-election of Mr Brian Clark

Mr Clark was appointed a director of AMP Limited and a member of the Nomination Committee in 2008, and a member of the People & Remuneration Committee in 2009. In 2008 he was appointed a director of the subsidiary AMP Capital and a member of its Audit committee. He became chairman of AMP Capital in March 2009. He is also a director of Boral Limited.

ASA Position
Item 2d: Re-election of Mr Peter Shergold

Professor Shergold was appointed a director of AMP Ltd and member of the Audit Committee in 2008. He has been a director of the subsidiaries AMP Life since 2008 and National Mutual Life since March 2011. He has been a member of their respective audit committees since March 2011. He was appointed a director of Veda Group (listed) in October 2013, is a director of one non-listed company and chairman of another. In addition Professor Shergold has involvement with boards or Councils of five not for profit bodies, being chairman of two and member of three others. These include the significant role of Chancellor and chair of the board of trustees of the University of Western Sydney. Although Prof Shergold is very well qualified to be an AMP director, we are concerned that his workload considerably exceeds ASA’s guidelines for listed company directors, which is that no-one should serve on more than 5 boards and a chairmanship counts for two directorships. We have raised this concern with the AMP Chairman, who has assured us that Prof Shergold should continue to be able to meet his commitments to AMP. We expect to vote in favour, providing Prof Shergold can reconfirm this directly to shareholders at the AGM.

ASA Position
Item 2e: Re-election of Trevor Matthews

Mr Matthews was appointed to the AMP Limited Board in March 2014. He is a qualified actuary and has extensive Life insurance industry experience in Australia, Canada, Japan and UK, including as CEO of Friends Provident, Standard Life and Aviva UK. He has been a member of several Government and insurance industry advisory boards both in Australia and overseas. He is a director of Cover-More Group Ltd (listed), two non-listed companies and is an advisor to a Japanese insurer.

ASA Position
Item 3: Remuneration Report

AMP’s remuneration report is well written and makes ample, and understandable, disclosure of all necessary remuneration matters. In recent years AMP has introduced some improvements to its remuneration practices. Despite this, they still include a number of material features that ASA is uncomfortable with; we have expressed concern about these in previous years and we have recommended voting against this resolution each year from 2010 to 2013.

We commend the following elements, which are aligned with shareholders interests: 65% of the short term incentives (STI) are assessed on financial measures and the other 35% on non-financial but transparent criteria; for all the top executive group and other senior executives below that level, 60% of the STI is paid in cash with the remainder issued as equity with a deferral of 2 years; AMP discloses the size of the STI pool which is not excessive by the standards of the financial sector (although this does not include the bonus pool for AMP Capital, which is commercially sensitive); the average STI awarded in 2013 to the top 10 executives was 43% of their maximum possible, down from 63% in 2012, reflecting the weaker results; the long term incentives (LTI) awarded to the top executives in 2010 lapsed in 2013 (as did the 2009 LTIs in 2012) because AMP’s total shareholder return (TSR) was only at the 37th percentile of the benchmark group. The LTI will now be assessed against two different performance measures split 50/50; a test of Return on Equity (ROE) has been introduced alongside the previous “Relative TSR” test. We applaud AMP for requiring its directors and the most senior executives to build up and maintain a substantial (specified) value of AMP shares whilst they hold those appointments.

Despite these favourable features, there are a number of material elements which go against ASA’s guidelines. In 2013 base salary was only 31% of the CEO’s & 36 % of other senior executives’ potential total pay, rather than approximately 50% of total package as fixed pay, which is ASA’s preferred guideline. These figures use the midpoint of potential STI. If the maximum STI opportunity is used instead of the midpoint, the base pay would have represented only 24% of total potential 2013 pay for the CEO, and an average of 28% for the other most senior executives. Thus even though the STI fell in 2013, the senior executives still received an STI of about 75-92% of their respective base pay, because the maximum potential is an excessive 175% to 200% of base salary. This is not apparent from Table 1.3, which shows only the 60% component of STI that was paid in cash.

Over the last 5 years, AMP’s share price has (overall) gone sideways, and EPS and DPS declined. Underlying profit has risen only 10% since 2009 despite shareholders funds tripling. “Shareholder alignment” shouldn’t merely mean that the STI pool is an almost constant percentage of profit, irrespective of size of profit. There should be a steeper relationship, so that in principle no STI should be awarded if group ROE is under say 10% , or below equivalent appropriate divisional minimum levels of Return on Business Unit Equity: STI should reward only genuine improvement and effort above historical levels. It’s hard to avoid the impression that large STIs are expected and almost automatic. For example, all but one of the top executives got roughly equal % of their maximum STI opportunity even though they would have markedly different capacity to influence group profit. The STIs for staff outside the top 9 or 10 executives are not disclosed: we would hope that they reflect a strong correlation between individual/divisional results. The stated STI criteria are suitable, but it's unclear whether these have been applied, and the STI allocated, in a way that is most beneficial for shareholder interests. Our criticism of generous STIs applies to most banks and insurers, and we acknowledge that it would be hard to change industry practice. However, ASA would welcome reconsideration of AMP’s STI arrangements to ensure that generous STIs are awarded only for exceptional performance but little or nothing is awarded for achieving only modest growth or improvements over the previous year.

The new CEO’s base pay for 2014 is 8% lower than his predecessor; the STI ratio is slightly less generous than in 2013, so his total potential package could be about 12% below Mr Dunn’s. The pay arrangements for other senior executives will be disclosed in next year’s report. Vesting of 50% of the LTIs will occur on both performance measures at the 50th percentile of the benchmark group rising to 100% if the 75th percentile is achieved; ASA would prefer it to be spread more gradually against performance. The LTIs vest after a performance period of only 3 years, whereas ASA’s preferred position is at least 4 years. We approve the fact that AMP no longer permits retesting at a later date. Under the Relative TSR test, LTI awards can vest even if the absolute return to shareholders over the 3 years is negative- i.e. a loss- as long as AMP’s performance is “ less negative” than the median of its benchmark group. This is the major flaw in using relative TSR as a performance measure, although we acknowledge that it is widely used. That situation has not yet arisen at AMP, but if it did we hope that the Board would exercise its discretion to reduce the awards.

We also dislike the so-called “fair value” method used to determine the allocation price and hence number of LTI performance rights, including allowing for dividends not paid before the performance hurdles have been achieved. These discounting methods have the effect of significantly understating the true potential value of the awards. For example in 2013, the “fair values“ of the 2 tranches of performance rights were assessed at $2.00 and $4.21, when the market value of AMP shares was $4.97 on the grant day. Thus the number of rights granted was 1.18X and 2.48X (on the ROE and TSR tranches respectively) the number if market value had been used instead. We acknowledge that several companies in the banking and finance sector use these methods, but we would at least urge AMP and its peers to state what the potential LTI value is using the actual market value at the time of grant, as well as the discounted “fair value”.

Several of the preceding features put too much emphasis on gaining incentives over only 2 or 3 years, and increase the risk of short termism; we believe that this is inappropriate for most of AMP’s businesses. For these reasons, on balance, we recommend voting against the remuneration report.

ASA Position
Item 4: Approval of CEO's LTI grant

The new CEO’s base salary is 8% lower than his predecessor’s; the maximum LTI remains at 125% of base pay (using the “fair value” method) but his maximum STI has been reduced from 200% to 175% of base pay. Using “fair value” the total potential pay for Mr Meller would be $6.4m compared with $7.4m for Mr Dunn.

These figures use the accounting “fair value”, which as noted above, tends to be at a significant discount to market value. As an example, if one uses the same average 175% relativity of market value to fair value as occurred in 2013, Mr Meller’s potential LTI value could be about $3.5m rather than the fair value stated to be $2.0m. Thus his total potential pay using market value could be about $7.9m compared with a maximum potential of about $9.0m for Mr Dunn. We commend the reduction, and acknowledge that some or all of the incentives may not be awarded or vest; however, we consider that these potential levels of pay are too high, both in absolute terms and as a multiple of base salary, and contain a degree of incentive which does not strike an appropriate balance between rewarding entrepreneurialism and running a financial institution for long term stability.

If the resolution fails, the CEO’s LTI will be delivered as an equivalent amount of cash subject to the same performance hurdles—i.e. shareholders do not vote on the amount of the LTI. The resolution is only about the method of delivery of the award: the financial result will be the same.

We recommend shareholders vote against this resolution in line with a vote against the remuneration report.

This document has been prepared by the Australian Shareholders Association Limited ABN 40 000 625 669 (“ASA”). It is not a disclosure document, it does not constitute investment or legal advice and it does not take into account any person’s particular investment objectives. The statements and information contained in this document are not intended to represent recommendations of a particular course of action to any particular person. Readers should obtain their own independent investment and legal advice in relation to the matters contemplated by this document. To the fullest extent permitted by law, neither ASA nor any of its officers, directors, employees, contractors, agents or related bodies corporate:

  • makes any representations, warranties or guarantees (express or implied) as to the accuracy, reliability, completeness or fitness for purpose of any statements or information contained in this document; or
  • shall have any liability (whether in contract, by reason of negligence or negligent misstatement or otherwise) for any statements or information contained in, or omissions from this document; nor for any person’s acts or omissions undertaken or made in reliance of any such statements, information or omissions.

This document may contain forward looking statements. Such statements are predictions only and are subject to uncertainties. Given these uncertainties, readers are cautioned not to place reliance on any such statements. Any such statements speak only to the date of issue of this document and ASA disclaims any obligation to disseminate any updates or revisions to any such statements to reflect changed expectations or circumstances.