Homebound

In September 2002, during his first week as CEO of AMP, Andrew Mohl faced a brutal convergence of financial, regulatory, investor and public relations crises that threatened to capsize the venerable Australian financial institution. As disasters are wont to do, however, that tumultuous first week served to concentrate Mohl's mind on the problems at hand.

"Many insiders and outsiders complain of the largesse in AMP, of our arrogance, our bureaucracy, our slowness in decision making and our insularity," he wrote in a blunt memo to the bank's staff at the end of the week. "These cannot be tolerated, and we will be moving quickly to remove them."

Mohl, who had run AMP's asset management and financial services divisions, fought to keep the insurance and mutual fund company afloat by raising emergency capital and injecting money into its hemorrhaging British life insurance business. He also slaughtered a few sacred cows at the Australian financial icon.

For a start, the CEO dispensed with some of the trappings of his office, including a furnished apartment in London's tony Mayfair district and chauffeur-driven Mercedes in London and Sydney. He ordered that "level 24," the executive floor of AMP's harborside headquarters in Sydney, be redesigned to give all staffers access to it; top managers would work in glass-walled offices. "It had felt like you needed a date with God to get to level 24," Mohl tells Institutional Investor.

Today AMP is a much-trimmed-down, and considerably fitter, version of its old Aussie self: Just as Mohl has shrunk the company's bloated ego, he has reduced its assets under management by two thirds, from about A$225 billion ($191 billion) to A$75 billion.

The U.K. insurance business that was sucking capital out of AMP has been jettisoned, along with the firm's brash global ambitions and the accompanying cultural headaches, which had bedeviled its strategy from the start. "Now we talk about a culture where humility, fairness and openness are paramount," says Mohl. "You won't see Ferraris downstairs, no matter how well people are paid. It says a lot about our identity and the relationship we have with our clients."

Competitors and investors alike credit Mohl, a 49-year-old Melbourne-born economist who once worked for the Reserve Bank of Australia, with having pulled off a complex demerger and turnaround at AMP in so short a period. In mid-February, AMP announced earnings of A$934 million for 2004, the group's first full-year profit in three years, as well as a capital return to shareholders in the form of a A$1 billion cash dividend and a buyback of hybrid securities.The earnings stand in striking contrast to AMP's A$5.5 billion loss in 2003, the largest ever for an Australian company. Revived financial markets, of course, have done their bit to help calm that perfect storm Mohl confronted in his first week.

NOW THE CEO, HAVING "BROUGHT THE COMPANY back home," in his words, confronts a batch of new challenges. AMP, which ranks as Australia's second-largest money manager, behind Commonwealth Bank of Australia, aspires to be nothing more (or less) than, as Mohl puts it, a "regional wealth management group." Even on its own Asia-Pacific turf, the company has put expansion by acquisition on hold, selling its 5.4 percent strategic stake in AXA Asia Pacific Holdings, for example. AMP had at one time contemplated acquiring the Australian subsidiary of the big French insurer.

Instead, Mohl is counting heavily on AMP's being able to hold down a big share of the growing and evolving local financial services market. Certainly, he has something to target: Canberra's national pension scheme mandates that every company in Australia contribute 9 percent of its employees' wages to a national superannuation plan. Some A$30 billion in investable assets is spun off every year.

Yet domesticity is not proving to be all bliss for AMP's Australian-football-crazy CEO. The firm must contend in the Australian asset management scrum with a swarm of nimble new boutiques, not to mention the aggressive subsidiaries of international giants and the nation's burly banks. Moreover, AMP's share price remains a nagging concern. It rose 44 percent last year and has more than doubled from the depths of 2003 -- to A$6.68 as of May 23 -- but the company's market cap remains off by about one fifth from its 2001 peak of A$22 billion.

"What we saw last year was a lot of value investors in the stock," maintains an upbeat Mohl. "Now we have got some strong long-term holders buying into the company."

AMP is Australia's second most widely held stock. About 45 percent of its shares are owned by Australian retail investors (most of them AMP customers), 33 percent by Australian institutional investors and 22 percent by foreign institutional investors.

Of course, a still-discounted share price leaves AMP somewhat exposed to a takeover, either by a big Australian bank or by an international player drawn to one of the most munificent retirement savings systems in the world. National Australia Bank and its local bank rivals have all been mentioned as possible AMP suitors. Mohl, however, would likely resist any bid that didn't involve bucketsful of money.

AMP is one of Australia's most recognized brands. But from late 2002 through much of 2003, there was a serious question as to whether the company that began selling life insurance in 1849 as the Australian Mutual Provident Society would survive.

The company had marked its momentous demutualization in 1998 by distributing A$21 billion of shares to its 1.4 million policyholders. Soon afterward it was spending more billions on an extraordinary acquisition spree that was driven by the desire of two successive CEOs to transform Australia's biggest insurer and funds manager into a global financial services group.

In August 1998, just weeks after AMP debuted on the Australian Stock Exchange, it launched a successful hostile bid for Sydney-based GIO Australia Holdings, ultimately paying A$3.1 billion for the general insurer. Within 12 months of its demutualization, AMP had paid an additional A$1 billion for fund management group Henderson Global Investors and A$3.6 billion for mutual life insurer National Provident Institution, both in the U.K. These two were merged with AMP's other British businesses, London Life and Pearl Assurance Group, which it had bought in 1989 and 1990, respectively.

Global expansion was especially dear to the two CEOs who preceded Mohl: George Trumbull, an American hired by AMP's board from U.S. insurer Cigna Corp. in 1994 to shake up what the directors had come to see as a moribund organization, and Paul Batchelor, whom Trumbull poached from demutualized Melbourne-based insurer and fund manager Colonial Group in 1997 to be his CFO, and who succeeded him in 1999.

Their personalities were decidedly different. Trumbull was loud, brash and immensely well liked within and without the organization; Batchelor was quiet, introspective and less popular. Nevertheless, they shared a grand vision for AMP. Their ambitions were undermined, however, by an unfortunate mixture of poor oversight, bad timing and tumbling stock markets. AMP's expansion strategy flouted two time-honored maxims: Financial groups, especially, should conduct thorough due diligence before they make acquisitions, and Australian financial companies should probably stay home, because most have learned through bitter experience how hard it is to pull off expansion beyond their own shores (as National Australia Bank found when it lost A$4 billion on its purchase of U.S. mortgage lender HomeSide Lending).

AMP's GIO move was the first to unravel, when it was revealed that reinsurance losses from 1998's Hurricane George, which wreaked havoc from the Caribbean to the southern U.S., and other natural disasters that year would be much greater than expected. Just weeks after it completed the purchase in late 1999, AMP was forced to write down the value of GIO by A$942 million. Because it had made a hostile bid, AMP had never had a chance to pore over GIO's internal accounts.

The GIO fiasco dented AMP's reputation but didn't dampen its appetite for global expansion. That didn't happen until more than two years later, when the U.K. businesses that AMP had hoped would be its stepping-stones into the vast U.S. market suffered a solvency crisis. In 2001 plunging world stock markets left the U.K.'s capital-guaranteed pension plans underfunded, and insurers offering the plans had to keep topping them up to ensure that they could meet their obligations -- sort of like a large-scale margin call. AMP had to inject funds from its Australian operations to keep its U.K. life insurance business afloat, imperiling its own solvency (and largely accounting for that record A$5.5 billion loss in 2003).

"It took 150 years to grow the company, and imported management went close to destroying it within five years," grumbles Doug Little, a former AMP employee who is now managing director of Melbourne-based fund manager Constellation Capital Management. Hubris played a big part in AMP's overreaching. Says Mohl: "People felt at that time that AMP had a right to exist. We were large and strong. We were bigger than the share market. We were AMP."

Trumbull, the architect of the gung-ho expansion strategy, made his exit in August 1999, before his contract expired and with a nudge from the board. Four month earlier GIO had revealed that it faced potentially major losses from its reinsurance business. As a going-away present, Trumbull had received a record payout for an Australian business chief: A$13.2 million.

Batchelor, Trumbull's handpicked CFO, succeeded him as CEO for 36 months before being sacked at an emergency board meeting convened in London on September 23, 2002, to deal with the U.K. capital crisis. (Batchelor reportedly asked for A$20 million as his good-bye gift; he was given A$1.4 million, and the board more or less dared him to sue, which he declined to do.)

While the board was firing Batchelor, Mohl was waiting by himself in a nearby room, unaware of what was happening to his boss; at the time, Mohl was managing director of AMP Financial Services. After dismissing Batchelor the board offered Mohl the CEO job on an interim basis, starting immediately. The next week was horrendous, but Mohl acquitted himself well. He asked for and was promptly given the job on a permanent basis; an executive search was called off.

At the end of that first week as CEO, Mohl had unveiled his strategy for repairing the damage. His five-point plan called for the company to refocus on its core businesses, drop unprofitable product lines, lower overall costs, improve disclosure and reconstitute its smug culture.

The new CEO acted quickly. Within three months he had purged more than half of the senior executive team, initiated a sweeping internal strategic review, restructured AMP's Australian banking unit to free up A$500 million of critical capital and slashed the head office staff by 40 percent, the Australian financial services division by 10 percent and the U.K. operations by 5 percent.

Still, the bad news continued unabated in the fall of 2002, as the markets kept tumbling. Mohl had rashly pledged to shareholders that there would be no further earnings downgrades or capital injections; he was unable to keep either promise. II subsequently asked the CEO to compare what he discovered during a January 2003 visit to the U.K. subsidiaries with what he had expected to find. "Everything was worse," Mohl said. "Projections for earnings were worse; the need for capital was worse."

The Australian media had a field day with the notoriously arrogant AMP's woes. Things got so bad that when the company finally had some good news to report, the national financial daily, the Australian Financial Review, blared in a February 2004 headline: "AMP Shock: It's a profit upgrade." The company's lustrous brand had by this point sustained serious damage. In Australia the company's network of more than 2,000 self-employed financial planners grew agitated.

AMP began to contemplate selling its U.K. life insurance operations -- "tipping the fat boy out of the canoe," as the company's chairman, former BHP Petroleum boss Peter Willcox, put it. Says Mohl: "We were under no illusion that the status quo was going to change. It was serious."

Thus began Project Beacon, a sweeping internal analysis of AMP's troubles. The company examined sell-off scenarios for individual businesses but realized that it would have to offer steep discounts because it was viewed as a distressed seller. Several parties, including NAB, approached AMP, but they mostly wanted parts of the company that weren't on the market. NAB, for instance, was fishing for AMP's Australian operations. "We had people come along with offers that were good for themselves but not particularly useful for us," Mohl notes.

The company concluded that holding on to the U.K. businesses was not an option. It made no strategic sense: The life insurers were a drain on the Australian parent, and midsize money management arm Henderson, though profitable, was tied up with the insurers' offices and managed much of their funds. So it was logical to combine the lot and sell everything as a package.

AMP decided to hive off the U.K. businesses by creating a new listed entity called HHG that comprised Henderson and the life insurers. The announcement of the demerger took place on May 1, 2003, the same day that AMP launched a A$1.5 billion share placement -- at the time, the largest of its kind in Australia -- to repay loans it had made to the British businesses. HHG would at least begin life as a debt-free entity, albeit one with minimal cash flow.

The demerger "was one of the most complicated transactions we've worked on," says Peter Hunt, CEO of Caliburn Partnership, a Sydney-based advisory firm that labored on the deal alongside UBS. The participants had to compile and digest a welter of financial and legal detail -- including solvency regulations on two continents -- and contend with lingering doubts on the part of the market and not a few AMP employees that the deal could ever be pulled off.

To make the demerger fly, AMP directors held 94 board or subcommittee meetings in 2003. Struggling to span time zones, Mohl and other members of AMP's senior staff regularly put in 12-to-18-hour days. They whooped with relief when the deal was completed in late December 2003. "It took us a year and 100 days, but we had saved the company," says Mohl.

EIGHTEEN MONTHS LATER AMP barely feels the amputated limb. Mohl is particularly pleased with how the demerger has focused the market's attention on the strength of his company's Australian and New Zealand franchise.

"It really is a compelling story," the CEO contends. "We're the preeminent brand in the marketplace. We cover the value chain from advice to products and platforms to managing the funds, and we've got a very strong position in each part of the value chain. We are the market leader in advice, we are the market leader in superannuation, and we're No. 2 in asset management."

AMP met or surpassed Mohl's goals for 2004. Strong cash flow enabled it to reduce debt faster than expected: Standard & Poor's rates AMP an A­; it had sunk from AA in 1999 to BBB+ in May 2003. The company has cut costs by its targeted 3 percent. And AMP's investment performance has been juiced up: The flagship AMP Balanced Fund, for instance, with A$3.6 billion in assets, returned 18 percent after fees in 2004, ranking it No. 3 out of 32 Australian balanced funds.

The company's management team is one of the youngest in the country. Craig Dunn, head of financial services, is 41; Stephen Dunne, head of AMP Capital Investors, is 39. Mohl prefers executives who are young, bright, capable and committed, and who share his vision.

"We need a flexible, innovative style of leadership from middle and senior management," he says. "People like me need to stand back and give people the reins to do creative things."

It's just as well that AMP's management team is so young: It's going to need plenty of stamina. One of the company's toughest challenges will be remaining Australia's lowest-cost provider of wealth management products in the face of eager competitors like AXA Asia Pacific (the country's only other big listed fund manager and insurer), the major banks and a host of smaller rivals. Mohl is not one to throw money around. When he handled AMP Financial Services, he cut its cost-to-income ratio from 48 percent to 41 percent in two years; Dunn has stunned observers by pushing the ratio down even further, to 37 percent, in 24 months.

Dunn's major accomplishment has been to capitalize on what he calls the "burning platform" of AMP-in-crisis to force radical change within the company. He shifted from a functional to a business-line approach and promoted accountability by devolving more authority on line managers, moving from one profit-and-loss statement and balance sheet within the division to ten.

"We had a lot of talented people, but not enough of them were running businesses," says Dunn, a former head of strategy at Colonial Group, and one of the few Batchelor appointees to survive the Mohl management makeover. "When we have ten line managers, I don't have to make all the decisions."

Dunn, trained as an accountant, split AMP Financial Services into two businesses: One distributes products through AMP's network of self-employed financial planners, and the other creates those products, which range from retail and corporate superannuation plans to home loans to credit cards. Dunn says this arrangement allows AMP Financial Services to reap the benefits of a broad group and match the focus of competitors in each segment of the business.

AMP Financial Services serves as AMP's earnings turbine. In each of the past five years, it has generated an operating profit of between A$545 million and A$596 million and spun off more than A$4 billion in cash. That cash propped up the U.K. businesses and, more recently, lowered AMP's leverage.

But AMP Financial Services' margins may be about to get a bit tighter. Corporate tax increases that begin on July 1 are expected to slice more than A$50 million from profits. Also in July, legislation takes effect that will allow employees to choose their own retirement account funds -- employers do it now. That change, combined with the increased popularity of so-called DIY (do it yourself) superannuation funds that let people manage their own money and an influx of retirement services providers, has spawned sharp price competition for superannuation and pension products.

The AMP brand retains its drawing power, however. "It's an iconic brand -- it has been so resilient," says Dunn. A roughly A$1.7 billion turnaround last year in net cash inflows from retail investors returned AMP to its once-habitual No. 1 ranking.

Nonetheless, Dunn believes that replicating last year's success will be a challenge. "As soon as you say, 'We've done as good as we can do,' it's akin to old age," he asserts. While noting that "2004 was better than anyone anticipated," he points out that "we've got to make sure that it is not something we do every so often. We have to keep repeating it."

Meanwhile, Dunne, head of AMP Capital Investors, the arm that manages A$75 billion in funds, faces a trial-by-ordeal of a different sort. His was the division most affected by the dramatic events of the past few years. At the time of demutualization, AMP Asset Management (as it was then known) was the uncontested No. 1 money manager in Australia. But that was before Trumbull went on his London shopping expedition and AMP Asset Management became, in Dunne's phrase, a "branch office" of Henderson. All decisions for the Australian asset management business were made out of London.

AMP has been supplanted as Australia's foremost money manager by Commonwealth, which bought Colonial in 2000 and now has A$102 billion under management. Dunne's brief, however, is not necessarily to unseat Commonwealth: Mohl is emphatic that his ambition for AMP is to be Australia's most profitable money manager, not merely its biggest.

In any case, AMP is hardly the only challenger to Commonwealth these days. Although the number of players offering superannuation and pension products has been shrinking because of consolidation, just the opposite has been happening with fund managers, whose numbers have more than doubled, to 100, in the past decade.

Boutique fund managers pose a particular competitive threat. They have captured 12 percent of funds under management in Australia since emerging in the mid-1990s, and their numbers are proliferating. Dunne reckons that the boutiques have brought fundamental change to the market -- notably, by demonstrating that the barriers to entry aren't as formidable as large firms imagined. "Even if you've got no brand, no track record, you still get run over in terms of funds flow," he quips. But boutiques are attracting more than just fund flows: They are also capturing top people, who are attracted by small firms' independence and their often-thick pay packets.

Dunne's response to the brain-drain threat has been to form bigger portfolio teams that are less reliant on the brilliance of one or two individuals, while adopting a pay structure that is hard-wired to performance. "It's talent management," he says. "Keeping them, growing them, stretching them. The best thing to do is not to demotivate them."

AMP Capital is falling back on its traditional strengths. Dunne has withdrawn completely from managing international equities; his division now peddles other firms' foreign funds to its customers. To be sure, AMP Capital is still multistyle and offers a wide range of its own funds (more than 70 in all), specializing in Australian stocks, private equity and real estate. The financial services business is based on the open-architecture model, meaning that it offers not only AMP Capital's funds but also those of its rivals.

Dunne is happy (though never satisfied) with AMP Capital's performance: 86 percent of its funds outperformed their benchmarks in 2004, compared with 74 percent in 2003 and 60 percent in 2002.

In a January report Assirt, a Sydney-based independent research group, said that AMP is "better focused" since the demerger but faces a number of challenges. The most significant, Assirt analysts said, are "rebuilding its brand reputation and growing its assets under management in the independent financial adviser channel."

A few more years of solid performance should do wonders to burnish AMP's brand name. And the company is working hard to cultivate assets in the financial adviser channel, which provides nearly 80 percent of AMP's Australian cash inflows.

AMP Financial Services' Dunn, meanwhile, discerns a big opportunity in the "advice space," a relatively immature market in Australia. "How do you make AMP to financial planning what Biro is to pens and Hoover is to vacuums?" he asks. Even though Australia has the highest per capita share ownership in the world, Dunn says that few "middle Australians" solicit financial advice and that this is the market he is pursuing. "Our brand is middle Australia," he declares.

A HUGE HURDLE REMAINS FOR AMP: GROWING not just the company's assets but the company itself. But a second foreign acquisition spree can be safely ruled out.

"If we were going to do a major transaction, it would far more likely be in this geography," Mohl emphasizes. "But the reality of this market is that there are no distressed sellers and there are multiple, multiple buyers."

He regards merger talk as a distraction. "This is the first year since demutualization that we are focusing on the business," he says with visible relief. "We were buying GIO, selling GIO, buying National Provident Institution. Always doing something, never actually focusing on the business that investors in AMP trusted us to manage."

Nevertheless, AMP is looking to expand its asset management capability in Asia. "It won't involve very much in the way of capital," the CEO says, trying to put things in perspective. "We recognize that we have capabilities that are transferable to other markets, but we will have to be very selective in how we go about that."

Dunne would like to establish a beachhead in at least two Asian markets outside Japan over the next couple of years, and he plans to pursue partnerships as the point of entry. The model may be the Nikko AMP Global REIT Fund, launched by AMP at the beginning of 2004 in conjunction with Nikko Asset Management Co., Henderson and U.S. real estate manager Kim Redding & Associates. Assets are already at A$1.5 billion.

AMP may not be a pursuer at the moment, but it most assuredly is being pursued. NAB is the most persistent suitor. Reportedly, it made a A$22-a-share offer back in 2000 (when AMP was trading at A$18) but was rejected by AMP's board. (Neither company will confirm those talks.) NAB made further overtures in 2003, but it has sold its small stake in AMP. Melbourne-based Australia and New Zealand Banking Group, Sydney-based Commonwealth and Sydney-based Westpac Banking Corp. also have been mentioned as possible bidders.

Mohl, however, dismisses the banks' forays into fund management. "There isn't one of them that can demonstrate how they have done anything other than destroy shareholder value with their acquisitions," he says. "They are not natural owners of businesses like these." Still, the CEO concedes, "we are a pivotal part of the financial system. The banks would hate to see one of their competitors own us."