Somehow between 25 May and 10 August AMP managed to lose $800m of excess capital down the back of the couch. On Thursday, In an otherwise unremarkable set of full-year results, AMP announced to the market the good news that it had undertaken a reinsurance deal with Munich Re which should release $500m of capital. This was in addition to another $500m released by a similar transaction in 2016, which was soon after ear-marked for a $500m share buy-back. Unfortunately for shareholders, the good news stopped there.
This year’s $500m would not be spent on another share buy-back. In fact, the original $500m buy-back would be “paused” despite the company having only returned $200m to date. The reason given for the pause was to consider the “range of business growth opportunities”. The company was at pains to point out these are the same opportunities described at its April 2017 investor day. So why do these growth opportunities now consume this year’s $500m reinsurance windfall and require stopping the original buy-back, $300m short? What changed since the May investor day? Currently, nobody on the buy or the sell-side really knows.
On 14x next year’s earnings AMP still looks inexpensive versus other wealth and investment managers. However, for earnings to grow and the stock to perform the management team needs to demonstrate its credentials allocating its excess capital. Investors could be forgiven for being sceptical, given the company currently seems to be having trouble calculating its excess capital.
Article contributed by Hamish Chalmers, Watermark Funds Management