Public

AMP (AMP) 2014 AGM Report

Company/ASX Code : AMP Limited (AMP)
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
# of Attendees : approximately 200
# Holdings represented by ASA : 1082
Value of Proxies : $26.9 million
# Shares Represented by ASA : 5.2 million
Market Capitalisation : $15.3 billion

The Chairman, Peter Mason, reported that AMP had generated good growth in most of its businesses in 2013. The life insurance business profit had fallen sharply, owing to worsening insurance claims and lapse experience. The company had continued to invest in growth potential areas, such as SMSF, AMP Bank and the North platform.  AMP’s joint ventures with market leaders in Japan and China are bearing fruit. AMP is taking a longer-term view on growth by investing selectively in Asia and internationally, through a low capital, low-risk approach.

Mr Mason said that AMP needed to be more customer-centric, especially in life insurance. This was supported by all Directors standing for election. He spoke about the appointment of the new CEO, Craig Meller, who had been MD of AMP Financial Services for 6 years. In accordance with AMP Board tenure guidelines, and having overseen the succession to the new CEO, Mr. Mason was retiring from the Board. The new Chairman is Simon McKeon, who joined the Board in March 2013. Rick Allert also announced his retirement from the Board.

The final dividend of 11.5 cents a share will be 70% franked.

Financial Report

Statutory Profit after tax of $672 million was similar to the previous year’s result. Underlying profit was $849 million, down from $950 million in 2012. Wealth Management, AMP Bank, Mature and NZ Operations had strongly increased profits, by 16% on average. AMP Capital’s profit was similar to that in 2012.

AMP has almost completed the integration of AXA, acquired in March 2011, and achieved synergy benefits of $150m pa after tax. AMP is applying this experience to a second program of business efficiency improvement, targeting savings of $200 million pa by December 2016. The 2013 results were generally very good but were offset by 3 adverse factors. AMP has decided to hold very high levels of capital during the protracted process of tightening regulatory capital rules (which is prudent); moreover, further large falls in interest rates dampened the returns on that high capital base. These factors are largely external, which AMP will have to endure until the capital requirements are settled and interest rates revert to historical levels.

The third and most serious adverse factor is the widespread problems in the Australian life industry. AMP accepts the need to make sweeping changes to the life division’s business models. Mr Meller said “In the March 2014 quarter AMP’s experience of both insurance claims and policy lapses has been in line with expectations. 'We recognise that restoring the profitability of this business will be a significant challenge, and it will not be achieved quickly or easily, but we are confident we have the size, the expertise and the capability to deliver a much better performance in this part of our business over the medium term, for the benefit of our shareholders and our customers”.  The March 2014 quarter results and cash flows were otherwise strong.

ASA’s Monitor asked ”Why didn’t AMP executives see the adverse market signs developing? Was there a flaw in the reporting processes?”

The Chairman said that the executives and the Board were aware of the changes in market conditions, but were surprised by their severity and suddenness; several changes in customer behaviour appear to be permanent. AMP has already taken action to reverse these declines, and will make further changes in 2014 including premium increases, as will other life insurers.  ASA asked when these actions would be reflected in improved profits. The CEO replied that 2011 was the peak year for the life division's earnings, and recovery to those levels will only be gradual - it will not happen in 2014. The Monitor referred to an E-mail from an ASA member, and longstanding AMP customer, who had asked AMP Customer Service, “How can AMP help me to own my tomorrow?” with no adequate response. It seems that the Board’s grand plan to “better understand customer needs” has not yet reached the front line!

Wealth Management

AMP has flagged that increasing competition for low-priced super (such as MySuper) will reduce revenue and tighten margins between 2011 and 2017. So far it appears that AMP has been able to offset (just) the effect of that revenue compression by reducing controllable costs. ASA asked whether AMP could pass on some of the future margin compression to external fund managers, to maintain or boost its own profitability. The Chairman said that there will inevitably be resistance to that, but the business efficiency program aims to save $40 miliion per annum in variable costs by 2016; external manager fees represented a major part of that.

Election of Directors

ASA supported the re- election of Patricia Akopiantz, Catherine Brenner, Brian Clark and Peter Shergold and the election of Trevor Matthews. We noted that Peter Shergold had only one listed company directorship; however, he is Chancellor of the University of Western Sydney, and has senior positions in six other organisations. Could he devote sufficient time to AMP? He responded persuasively, and assured the meeting that he would fully meet his obligations as an AMP Director. This was warmly endorsed by the Chairman.

A shareholder suggested that AMP Directors should have some insurance industry experience. The Chairman noted the recent appointment of Mr. Matthews to the Board.  He added that AMP had a number of businesses, and that it was important for the Board members to have a wide range of skills.  AMP’s major operating subsidiaries such as AMP Bank and the life companies have independent directors with very strong financial experience, to the great benefit of AMP, even though they are not on the parent company board.  

All five Directors addressed the meeting, and were elected with approval votes of 98.9% or higher

Adoption of Remuneration Report

The ASA Monitor was, surprisingly, the only shareholder speaker on this resolution. He said that although the Remuneration Report was well written, and contained some good elements, it did not comply with ASA policies in several material respects. The Chairman acknowledged that ASA’s commentary and recommendations on remuneration policy at AMP had been consistent for several years, and that ASA had discussed this with the AMP Chair each year. In particular he was aware that ASA wanted the LTI plan to be measured over (at least) four years rather than three.

ASA said that the aim of the remuneration strategy was to create increased value for shareholders. However, the scheme had undue focus on short term incentives. For example, the CEO’s short term incentive opportunity is 200% of his base salary. This was unacceptable, as it could lead to short term decisions which were detrimental in the longer term.

The targets for the financial criteria were not disclosed in detail. The Monitor said that the weighting of 35% for non financial measures should be reduced. On the 8th of May, 2009, the AMP share price was $5.17. Five years later it was $5.18. The dividend in 2009 was 30 cents, as compared with 23 cents in 2013. The purpose of the incentive schemes is to increase shareholder value, yet this had failed to occur. The monitor said it was a flawed scheme, and that ASA would vote against its adoption. The Chairman responded that 40% of the senior executives’ STI must be paid in shares that are held for 2 years, and this gives a strong incentive for executives to be focused on shareholder value. He also observed that the LTIs awarded in 2009 and 2010 had all lapsed as the minimum hurdle of 50th percentile TSR against peers had not been met. The remuneration report received an approval vote of 97.4%, which indicates that it was supported by the major shareholders.

Approval for the CEO’s long term incentive for the year ending December 31, 2014

ASA voted against the resolution for similar reasons to those for the remuneration report. This received a 3.6% vote against it.

Summary

Despite AMP’s major new business developments, and the merger with AXA in 2011, AMP has created little shareholder value over the last 5 years. Although profit has increased, that is on a much higher capital base. AMP’s decision to hold very high levels of capital is prudent, but a major strategic change from about 4 years ago, and it may become a permanent feature. Although this gives a very strong capital base, it will permanently and heavily dilute return on equity and earnings per share (eps), even when market interest rates rise. 

Although attractive from a strategic perspective, the AXA merger appears so far to have been overpriced and earnings-dilutive. Since 2009, AMP’s underlying eps have declined from 38.3c to 28.8c; dividends have fallen from 30c to 23c.The combined effects of the high level of surplus capital and low market interest rates will be a drag on earnings in 2014 and perhaps in 2015 as well. The profit contribution from the life business is likely to be at best static in 2014. The second business efficiency program, to save $200 million pa is welcome but overdue and will not show its full benefits until late 2016.

During the last 5 years a tsunami of money has washed into superannuation funds; including the effects of the AXA merger, AMP’s assets under management have almost doubled to $197 billion, yet these highly favourable circumstances have not been reflected in profitability.

AMP’s long term strategy appears sound, but the group has been slow to grasp the opportunities and recognise the significant adverse trends in the life insurance business model and customer behaviour. With more insightful strategy and  better business models, AMP should have improved its share price and increased dividend payments. Shareholders must hope that AMP will in future deal with both its opportunities and challenges faster and more aggressively, to create much better shareholder value - as befits the market leader. As the new Chairman said: “the current business model for life insurance in Australia needs to change. This is not a quick fix, but it is something we are intensely focused on achieving. Getting this right will help our customers and the community more generally, and it will lift a drag on our share price”.