AMP battens down the hatches

AMP chief executive Craig Dunn said yesterday that the big superannuation group was well set up to weather a year of volatile market conditions. The group has very little debt, modest refinancing commitments, makes the bulk of its profit from operating rather than investment earnings and has stable funds' flows into its superannuation and retirement income products.

Dunn was speaking at the release of the company's 2007 results. AMP reported a $960 million underlying profit for the 2007 calendar year, an increase of 10 per cent over the previous year. The group's return on equity was 37 per cent and its cost to income ratio fell from 39.4 to 38.6 per cent.

AMP's assets under management increased from $122 billion to $129 billion.

Companies like AMP tend to get marked down in bear markets or volatile trading periods. Investors worry that investment earnings will suffer and drag down the overall result. They also figure that flows into investment products will be disrupted.

In the last bear market in 2003 AMP reported operating earnings of $540 million and investment income of $210 million. The ratio of operating to investment income was 2.5 to 1.

In 2007 AMP reported operating earnings of $891 million and investment income of $158 million. That is a ratio of 5.6 to 1.

Dunn said the change in the company's earnings ratio over the past four years meant that any reduction in investment caused by volatile markets would have a greatly reduced impact on overall earnings.

Another safety measure is the group's low gearing.  The company has debt of $1.2 billion and a gearing ratio of 10 per cent. It has an interest cover ratio of 17 times.

Dunn said he was confident that all debt maturities in the coming year would be repaid or refinanced. Group debt repayment due this year is $382 million.

It is made up of a $70 million commercial paper issue maturing in March and $312 million of euro medium-term notes maturing in November.

So low is the group's gearing that Dunn said he was considering a Tier 2 debt capital issue to fund a share buy-back. He said that plan had been deferred for the time being.

AMP Banking has a 13.6 per cent capital adequacy ratio. The banking operation reported operating earnings of around $10 million.

Less than five per cent of the bank's mortgages are low doc. It has a 90-day arrears rate of 0.28 per cent.

The mortgage book increased from $7.2 billion to $8.1 billion. The deposit book fell from $1.8 billion to $1.5 billion.

Dunn said the composition of the AMP business, with the bulk of money going into superannuation and retirement income funds, would remain relatively stable throughout any market downturn. Inflows into AMP retail products were up 47 per cent in 2007.