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Directors’ report continued

The result for the year ended 31 December 2007 was a
consolidated profit attributable to shareholders of AMP Limited,
after accounting mismatches, of $985 million – compared to
$915 million for the previous corresponding period.

There was a 10 per cent increase in underlying profi t to
$960 million for the year to 31 December 2007, from $873 million
for the year ended 31 December 2006. This reflected solid cash
flows, growth in assets under management and fees, and lower
unit costs, which more than offset the lower investment income
due to the impact of capital initiatives in the past three years
that have reduced invested capital.

Underlying profit smoothes out the effect of investment market
volatility by using average long-term rates of return to calculate
investment income in a period, rather than actual investment
income, which can be higher or lower than the average long-term
rate. Underlying profit is AMP’s preferred measure of profi tability
and it is the basis for calculation of AMP’s dividends
to shareholders.

The business made good progress on its key short-term
performance indicators in the period under review.

–
Underlying return on equity (RoE) increased to 37.9%
from 30.3% in 2006.
–
Total operating earnings grew by 12.4% to $770 million.
–
Cost-to-income ratio fell by 0.8 percentage points to 38.6%.
–
Value of new business rose 12.9% on 2006 to $393 million
and embedded value grew by 17.2% in the year before
transfers (3% discount margin).
–
68% of Australian assets under management met or
exceeded their benchmarks in the year to December.
AMP generated total investment gains (before tax) attributable
to shareholders, policyholders and other equity interests of
$8,128 million for the year ended 31 December 2007, compared
to $11,791 million for the year to 31 December 2006, refl ecting
weaker investment markets in 2007 relative to 2006.

Total AMP group assets under management were $129 billion
at 31 December 2007, up 6 per cent from $122 billion at
31 December 2006.

Today, AMP is a low capital-intensive wealth-management group.
AMP intends to continue to invest for growth in 2008 while
prudently managing the business through the volatile market
conditions that marked the beginning of the year.

Capital management

On 15 February 2007, AMP announced that, subject to
shareholder approval, AMP Limited shareholders would receive
a capital return of 40 cents per share totalling $750 million.
AMP’s shareholders approved the capital return at the Annual
General Meeting in May 2007, and payment was made on
18 June 2007. The Australian Taxation Office ruled that the
capital return would be treated as a reduction in the cost base
of the shares and not as a taxable dividend.

Capital and reserves of the group decreased to $1,927 million at
31 December 2007, from $2,412 million at 31 December 2006,
as a result of the capital return and dividends paid during 2007,
partially offset by 2007 profits and movements in reserves and
contributed equity.

AMP group debt increased by $208 million in 2007. Interest cover
(underlying basis) increased from 14.9 times in 2006 to 17.3 times
in 2007. Gearing on a Standard and Poor’s basis was 10 per cent
at December 2007.

As a result of the sale of the Cobalt/Gordian operations there
will be an increase in Group Office capital. AMP plans to use this

increase in Group Office capital to pay shareholders an additional
2 cents per share in each of the next four dividend payments,
commencing with the final 2007 dividend to be paid in April 2008.

AMP’s capital management strategy is now moving to focus on
optimising its capital mix which is currently biased to equity
capital. The next capital management initiative is likely to be a
Tier 2 debt issue to fund an on-market buy back of share capital.
AMP has chosen to defer any initiative, with the timing of any
issue yet to be decided and dependent on credit and equity
markets stabilising.

AMP is maintaining its dividend payout ratio policy of 85 per
cent of underlying profit, with a target of 85 per cent franking.

Impact of accounting mismatches on profi t

During the year, the aggregate of accounting mismatches
reduced the net profit attributable to the shareholders of AMP
Limited by $71 million from $1,056 million, before the accounting
mismatches, to $985 million after accounting mismatches.
The accounting mismatches have reduced the net profi t of
AMP Limited by approximately 7 per cent, although having
no impact on cash flow and value.

The accounting mismatches arise in respect of:

–
gains and losses on ‘treasury shares’ (2007: loss $30 million;
2006: loss $77 million)
–
gains and losses on investments in controlled entities
of the life statutory funds (2007: loss $37 million;
2006: loss $20 million)
–
gains and losses on owner-occupied property
(2007: loss $11 million; 2006: loss $26 million), and
–
discounting of deferred tax balances in the valuation of
investment contract liabilities (2007: gain $7 million;
2006: gain $62 million).
So that the AMP Limited Financial Report for year ended
31 December 2007 can be drawn up in accordance with Australian
Accounting Standards, and to present a true and fair view of the
results of operations, the presentation of the Income statement
has been reformatted in order to explain the impact of the
accounting mismatches.

Accounting mismatches are one of the significant impacts arising
from the application of Australian equivalents to International
Financial Reporting Standards (AIFRS).

As detailed in the accounting policies Note 1(d) in the Financial
Report, accounting mismatches arise because the valuation rules
for liabilities to policyholders differ from the valuation rules for
certain assets which support them. The application of the rules to
these policyholder assets has an illogical impact on shareholder
profit. For example, where policyholder funds own AMP Limited
shares, the increase in AMP Limited’s share price (rebased for
the capital returns) from $9.72 to $9.95 in the 12 months to
December 2007 (2006: increase from $7.09 to $9.72) has driven
an accounting loss of $30 million (2006: loss of $77 million)
in the consolidated result.

The International Accounting Standards Board (IASB) has
discussed accounting mismatches at previous meetings. The
IASB has confirmed that it would be preferable to eliminate such
accounting mismatches, and is reviewing alternative accounting
treatments to address the accounting mismatch issue. The current
discussions are part of the wider Insurance Contracts project,
and as such are not expected to be resolved in the short term.

Political donations

AMP’s policy is that it does not make donations to political parties.
No political donations were made during 2007.

 

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