For clients with superannuation accounts that have selected the “Blend” Australian equity option we have bought AMP Limited (AMP), a diversified and vertically integrated Australasian wealth manager and insurer. The group includes Australia’s largest financial planning network, a fund management business with an increasing exposure to Asia and a small but growing retail banking business. For clients with superannuation accounts that have selected the “Blend” Australian equity option we have bought AMP Limited (AMP), a diversified and vertically integrated Australasian wealth manager and insurer. The group includes Australia’s largest financial planning network, a fund management business with an increasing exposure to Asia and a small but growing retail banking business.

We are positive on the medium-term outlook for AMP for the following reasons:

  • the mandated growth in superannuation assets given its strong market position;
  • a very strong balance sheet with the potential for further capital management initiatives;
  • reduced earnings volatility due to the quota share agreement for the retail insurance portfolio;
  • offshore relationships are driving increased assets under management at higher margins;
  • home loan market share growth driven by cross-selling of products and the active acquisition of mortgage brokers. Further mortgage rate increases are a positive for net interest margins; and
  • improving investor confidence drives a switch into higher margin equity products.

The major challenges facing AMP include:

  • regulatory and government policy changes that undermine confidence in the superannuation system;
  • ongoing average margin compression given fee pressures faced by the industry;
  • a competitive insurance market with increasing claims and higher policy lapses; and
  • earnings growth hampered by the Mature business in run-off and the New Zealand and wealth protection businesses being ‘managed for value and capital efficiency’

This purchase was funded from the sale of QBE Insurance (QBE) following the recent downgrade to guidance due to heightened claims activity in the Emerging Markets division. While the underwriting performance in the group’s three major regions appear to be in line with expectations, this latest downgrade does raise questions around the extent of further remediation required across the overall portfolio. Also, given this latest downgrade occurred so soon after the AGM where the CEO confidently reiterated previous guidance, it raises questions around the timeliness with which information on the group’s complex operations are provided to management. As such we believe it prudent to remove QBE at this stage pending greater clarity on attritional claims and expense ratios, and finalisation of the global reserve calculations for the first half.