British Insurance Deal Keeps Amp On The Road To Financial Recovery
The Age
Saturday December 11, 2004
ALMOST a year ago to the day, AMP shareholders filed slowly, unhappily and fearfully into Sydney's Horden Pavilion to vote reluctantly on the proposed demerger of their Australasian businesses from the British life insurance operations that had dragged the group to the brink of the abyss.
Months of attempts to circumvent the need for the extraordinarily complex demerger, and to permanently cut the ties that exposed AMP shareholders to the voracious appetite of the British policyholders for their capital, had failed.AMP had talked to many "tyre kickers" who expressed interest in buying the massive closed life funds and their $66 billion of policy liabilities, but the best offers it received were highly conditional, sought massive indemnities and were pitched around $2 billion.HHG's insurers have embedded value of more than $3 billion and Henderson, which would have been included in a sale within the $2 billion price tag, has been valued at more than $1.5 billion.In the end AMP, desperate to distance itself from the British policyholders and regulators, ended its pursuit of a clean sale and pressed ahead with the controversial demerger. The terms of that demerger included an ongoing stake in the renamed HHG plc and a standby commitment to support the $250 million minimum of new capital the British regulator had insisted HHG raise as the price of its approval of the demerger.In a year, both AMP and HHG have been transformed, albeit in a far more favourable environment for financial services businesses than existed throughout the turbulent and traumatic lead-up to their separation. A leaner, more focused, less complicated AMP is thriving and HHG has now done what AMP failed to do and on much better terms than had been anticipated.Cast off from AMP, HHG was an amalgam of two businesses. It had a good international fund manager in Henderson Global Investors and a massive set of life insurance books, closed to new business, in run-off mode that might take decades to liquidate.HHG had modest free capital because of the regulatory capital requirements generated by the life books and was unable to generate cash returns to shareholders. Its appeal was in its ability to maximise the capital and cash it released over time as the life businesses were wound down. Yesterday HHG announced the sale of those life books to a private equity consortium for $2.6 billion - 79 per cent of embedded value. It will also transfer $3.8 billion of employee pension fund assets and liabilities to the buyer, Life Company Investor Group.The sale will leave HHG with the highly rated Henderson Global Investors business and a financial advisory business, Towry Law. It will enable the group to return $2.2 billion to its shareholders in cash while retaining nearly $400 million for its own purposes.The sale is terrific news for AMP and its shareholders. Because the demerger gave AMP shareholders one HHG share for every AMP share they held, there is massive overlap between their retail investor bases. Most of the 880,000 HHG shareholders are Australian retail investors who have hung onto their shares. They are about to get an early, and substantial, cash return. When HHG listed in London last year, it also raised new capital from British institutions. That enabled it to release AMP from its standby commitment but also diluted AMP's original 15 per cent shareholding to about 11 per cent. That stake is in AMP's books at about $324 million. AMP's share of HHG's cash returns could be about $224 million, and it will still have its shareholding in HHG.The shareholding could have strategic value. Henderson is highly regarded but, in the context of the international funds management sector, is a mid-sized player. It has been protected from takeover by the massive baggage of the life books. Once it is free of them, it would make an attractive target and AMP's stake would be a launching pad for an offer that generated more cash and capital for AMP and the former AMP shareholders who have retained their shares. HHG's cash will give AMP extra capacity to reward shareholders who stuck with it through its travails.The news of the sale of the HHG life books pushed HHG's share price to record levels and edged AMP's price above $6.80. The combination is now at levels not seen since the sky fell in on AMP last May, albeit well short of the heights reached in the aftermath of its demutualisation and listing.That tends to understate the extent of the recovery in value, given that shareholders had an opportunity to buy shares at less than $5 each in AMP's first raising last year, and at less than $4 in its second. Some institutions were also able to buy into HHG's initial raising at 72 ? a share. The HHG sale vindicates the strategy behind the demerger, as does AMP's own revitalised performance. AMP's Andrew Mohl and his chairman, Peter Willcox, were so confident that a stand-alone HHG would eventually be able to realise the latent value within its life books that they bought HHG shares heavily on their own account. They would have had a number of reasons to be delighted with the news they woke to yesterday.-- bartho@theage.com.au
© 2004 The Age