Don't confuse AMP's current woes with its shambolic British foray

THERE'S a couple of ways of looking at AMP.

Measured by its share price, the group has been a lacklustre performer. Its shares peaked at just over $15.50 a share in mid 2001, and the group rejected a merger approach from the NAB about two years later. From 2002 onwards, however, the bitter fruit of its incompetent expansion into the British insurance market began to be harvested, in losses that would eventually top $2 billion, and collapse AMP's share price to a low of just $3.07 in October 2003.

That nadir was reached pretty much at the point AMP got its act together again, by completing a retreat back onto what is still undoubtedly the best quality insurance and superannuation services franchise in this country, and investors who backed the group's capital raisings at that time are now the only happy campers on AMP's register.

The best part of a decade had been wasted, but AMP's crown jewel - the Australian franchise- was intact, and in the following years its strength became apparent, as AMP grew profits and produced capital returns that totalled $1.20 a share between 2005 and 2007.

AMP's recovery was engineered by Andrew Mohl, an economist by training who joined AMP from ANZ and got the CEO role almost by default after the UK business hit the wall and the architect of the UK expansion, Peter Bachelor, was sacked.

Mohl was working with quality raw material, and AMP's reconstruction effort coincided with the emergence of the bull market: from the 2003 nadir, AMP's share price climbed steadily in unspectacularly, to a peak of $10.94 on October 10 last year.

Then the credit squeeze-cum-market meltdown hit. AMP's shares tested the $6 barrier in July and at the beginning of this month, and even after a market-beating 36 cents, 5.6% per cent bounce yesterday on the back of the June half profit result were still at $6.78, or 38% below last October's peak, and 57% below their all-time high in 2001.

There is however a crucial difference between the pain AMP investors are feeling now, and the pain the felt because of the group's shambolic UK expansion. The first reversal was the market equivalent of AMP sticking a fork into its eye, a genuine 'Doh' moment: this latest one is a product of external pressures that have not fundamentally weakened AMP's core franchise. AMP's 38% decline since the October high last year is in fact perfectly matched by the decline in the value of the financial component of the S&P/ASX 200 share price index.

Yesterday's profit result showed obvious impacts from the market meltdown. Inflows of cash into superannuation have fallen because those who can are tending to hold cash back to avoid the risk of more market mayhem, and there are also second line mark-to-market impacts of the group as it revalues its investment portfolios to take the downturn in both fixed interest and equity markets into account.

Bottom line profit in the June half was down 42% from $475 million to $274 million, but down a much less frightening 2% to $427 million excluding two provisions - a mark to market loss of $122 million that represents the impact of the market downturn on the value of AMP investment assets, and a second charge of $41 million to cover possible losses on bonds that back annuity streams AMP has committed to deliver. The underlying profit of $427 million and a 3% increase in operating earnings to $412 million were both slightly positive surprises compared with broker estimates, and combined with the group's confirmation that its exposure to securities endangered by the sub-prime-credit crisis is minimal to produce yesterday's share price bounce.

Chief executive Craig Dunn said the obvious thing yesterday, that the current economic and markets environment is challenging for a business that is in the business of charging others to invest on their behalf.

But stripped of the current volatility AMP's fundamental strength is undiminished. The group announced for example that cash cashflows in the year to June were sharply down from a year earlier, at $631 million compared with $1.66 billion - but that reflects two industry-wide trends: a slowdown in allocations of discretionary money to the AMP and its competitors, as Australians hold back money during the market mayhem, and the fact that the final quarter of the year to June 2007 saw a rush of money into Superannuation to capture the once-off injection that Peter Costello's superannuation tax reform package allowed. Against its peers, AMP is still attracting money in competitive amounts.

mmaiden@theage.com.au