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Edited Transcript of AMP.AX earnings conference call or presentation 8-Aug-19 2:30am GMT

Half Year 2019 AMP Ltd Earnings Call

Sydney Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of AMP Ltd earnings conference call or presentation Thursday, August 8, 2019 at 2:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Francesco De Ferrari

AMP Limited - CEO & Executive Director

* Gordon John Lefevre

AMP Limited - CFO

* Howard Marks

AMP Limited - Director of IR

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Presentation

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Howard Marks, AMP Limited - Director of IR [1]

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Welcome everyone to AMP's Interim 2019 Results and Strategy Update. My name is Howard Marks, and I'm Director of Investor Relations. With me are CEO, Francesco De Ferrari; and CFO, Gordon Lefevre, who will run through the update with you. Today's announcement includes 4 components. The interim results, update on the sale of Life, the new strategy and an overview of the capital raise. There's a lot to get through. And as such, we will not have time for Q&A today as part of the call. However, once you have the time to digest the materials, I would encourage you to contact myself or Michael Vercoe with any questions.

So if we're ready, over to you, Francesco.

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Francesco De Ferrari, AMP Limited - CEO & Executive Director [2]

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So thank you, Howard, and good morning to everyone. I'm really excited to be here on such an important milestone in the history of this company. As Howard said, there's a lot to get through. So I want to kick off and highlight a few key items from my perspective. Let me go to the agenda.

The first half results, '19, as we have said before, is going to be a transition year for AMP. The first half results, 3 key messages: one, a very solid performance in both AMP Capital and AMP Bank; two, they highlight the extent of the industry disruption in our Wealth and Life businesses; and three, you would have seen us take a significant impairment on balance sheet items, which is necessary to reset the business and to deliver the new strategy. Now these impairments are largely noncash, noncapital items. On the second point, we're announcing a new restructured deal with Resolution Life to divest our life business. This restructured deal increases the certainty of execution and has a greater cash consideration, enabling funding of a new strategy and potential future capital returns. Third, I will take you through the strategy: what our 3-year strategy looks like in order to reposition the group to become a more focused, higher growth and higher return business. The strategy is centered around 4 key drivers. The first is recycling capital from low to higher returning businesses. The second is taking action to simplify the organization and committing to reduce costs by $300 million. The third is investing to build the best Wealth Management business in Australia. As number 4, we continue to grow AMP Capital and AMP Bank.

And then finally, we're announcing a capital raise today. This capital raise is fundamental for us to continue to grow AMP Capital and AMP Bank and kick start the implementation of the new strategy as we wait for the Life deal to complete.

And now before I hand over to Gordon to tackle the first 2 items, I'd personally like to thank him for the support he has provided in these first 8 months of a very tumultuous period for this company. Gordon will retire after having brought AMP to the beginning of the new exciting journey. So Gordon, as I turn over the floor to you, from all of us and from me, a very big personal thank you.

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Gordon John Lefevre, AMP Limited - CFO [3]

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Good morning all, and thank you, Francesco. So I'm going to start the presentation today at Slide 5. For those of you following, I'll refer to the slides as I go in your packs, so that I can ensure that you get a few placeholders along the way.

As Francesco has said, 2019 is a transitional year for AMP. Our full year results in February this year, we flagged that the operating earnings would rebase in 2019 for our retained businesses. You're seeing that come through in these results, which are 22% down on the first half of 2018. Our bottom line result includes a $2.4 billion impairment charge, and consequently, today, we are reporting a very significant accounting loss. The majority of those impairments have little impact on our capital position. As a result, capital above minimum regulatory levels is in line with 6 months ago, and we have maintained a strong balance sheet. We have announced today revised terms of the sale for AMP Life to Resolution Life. This will increase capital on completion and enable us to reduce debt, further strengthening the balance sheet and funding AMP's future strategy. I'll provide you with more detail on our capital position and the AMP Life sale shortly.

But first, let me touch on the results for each of our retained businesses. So staying on Slide 5. Australian Wealth Management maintained its focus on improving client outcomes, whilst adapting to fundamentally changed industry dynamics and regulatory conditions. Operating earnings halved year-on-year and reflect a significant rebasing as we remove internal distribution fees and investment revenue for products moving with the AMP Life sale perimeter and additionally show increased costs where we absorb major regulatory and compliance projects that were previously reported below the line.

Net cash outflows were $3.1 billion in the half, at similar levels to the second half of 2018. This includes $1.2 billion in pension payments. Our flagship MyNorth continues to attract net new funds. Outflows were offset by strong investment markets and assets under managed balances were 7.7% up relative to 6 months ago. Margins declined to levels previously guided and reflect mix effects and repricing initiatives, which ensure that we remain competitive.

New Zealand Wealth Management's performance was resilient. Adjusting for the effect of earnings lost through the AMP Life sale, operating performance improved markedly in the last 6 months, helped to some extent by stronger investment markets.

AMP Bank is holding up well in a very competitive environment. Operating profits were modestly up in the last 6 months and 9% down year-on-year primarily due to increased costs. Consistent with the Australian Wealth Management business, these cost increases reflect changes in how we report major regulatory and compliance program costs. Pleasingly, for operating performance, mortgage lending grew against the second half in a slowing housing market and deposits were well up. Margins were stable despite increased funding costs.

AMP Capital produced a very strong result, with earnings up 28% year-on-year. The result again emphasizes our strength and capabilities in real assets. Managed fund balances continue to grow as we invest committed capital at stable margins. There's considerable momentum in this part of AMP Capital and with $5.1 billion of uncalled committed capital, considerable growth potential. Performance and transaction fees were well up, supported by the sale of management rights in one of our investment trusts. Offsetting revenue increases was an 11% year-on-year increase in controllable costs, reflecting increased staff numbers as we invest to grow this business.

So moving now to Slide 11, which outlines costs. The waterfall shows factors giving rise to a 17% increase in controllable costs ex-AMP capital year-on-year. There are 2 primary reasons for this abnormally large increase. The first is the reporting change that I've already touched on. Up to $50 million of project costs for major regulatory and compliance change programs are being included in controllable costs for the first time in 2019. Additionally, insurance premiums for directors and officers and professional indemnity cover increased sharply, a challenge that is occurring across the sector. These 2 factors alone account for an increase of $41 million or approximately 10% year-on-year. As we called out at the full results, controllable costs in 2019 ex-AMP Capital are expected to increase by approximately $100 million or slightly more than 10%. We are confirming that guidance again today. And in addition, confirming that AMP Capital will target a 60% to 65% cost-to-income ratio. Beyond 2019, and as part of the strategy, we'll create a simpler and leaner business and thereby reducing costs over the medium term.

Slide 12 sets up key financial items outside of the business unit results. I'm going to go through to Slide 13 and pick up on the remediation program costs that are part of that Slide 12. So this shows details relating to our client remediation program that was announced 1 year ago. We're making good progress with the program. It's on track to complete within the original 3-year time frame that we had set. We have agreed major policy positions with ASIC and are now starting up activities, having substantially completed program, design and build. An additional $41 million post-tax of remediation costs has been expensed in the first half. This reflects additional program cost estimates, modest increases in the overall provision and reimbursements to clients for lost earnings that we expense every 6 months, and hence don't include in provisions. We estimate that these reimbursements will be in the order of $10 million post-tax every half year whilst the program is running. In total, we have now paid a little over $60 million in both remediation to clients and project expenses. We expect to pay a further $700 million in the coming years. We are adequately provided for remediation costs.

Slide 14 sets out a summary of the asset impairments that we booked in this first half. Industry dynamics for AMP's Wealth Management and advice businesses have changed fundamentally in the last 3 years. Disruption to the sector, combined with the evolution of a new strategy for the group, have required us to consider the appropriateness of carrying values for certain assets. Our intent was to put the spotlight on all assets impacted by the changes that I've outlined. In doing that, what we're looking to do here is to bottom out with a single charge, any major write-downs. So impairments totaling $2.4 billion post-tax have been booked, and these are largely noncash. They reflect goodwill write-downs totaling $2 billion. We have fully impaired goodwill assigned to the Australian Wealth Management business and residual goodwill in AMP Life. We have further made $380 million of write-downs of previously capitalized project costs and advice related assets. These advice assets include write-downs for purchased client registers, notified registered purchases that are in the pipeline and practice finance loans. The impairment recognizes the pending cessation of grandfather commissions and impacts relating to changes to the master terms for our buyer of last resort scheme. This is entirely consistent with the strategy we are announcing today, which includes the reshaping of our outlined adviser network.

On to Slide 15, where we set up our capital position. Eligible Level 3 capital available today is broadly in line with 6 months ago and fully factors in the impairments that we've made at June 30, and that I just explained. We're holding $1.7 billion of capital above our minimum regulatory requirements. That is in line with the Board limits for this target surplus. Consistently, we target holding a surplus above minimum regulatory requirements to avoid breaching regulatory capital limits. This target is adjusted from period to period depending on business conditions and our assessment of future risks. This is accepted industry practice and is in line with prudential standards. The board has resolved not to declare an interim dividend, and we'll maintain a consistent approach to capital management until the sale of AMP Life completes.

To complete this part of the presentation, I'll provide a few comments on the second half and full year outlook. You can follow this on Slide 17 in your packs. Second half earnings will be down on the first half. This will reflect the following: Australian Wealth Management operating earnings declining further and driven by Protect Your Super (sic) [Protecting Your Super] legislation that will reduce operating earnings after tax by up to a further $10 million in the second half of 2019. We have guided to a $30 million impact from the full year 2020 for PYS. There's ongoing margin compression from product mixes and the repricing of MyNorth. Margins are expected to decline overall by 11 basis points over 2019. And lastly, there are the adjustments for the sale of AMP Life, which reduced operating earnings in 2019 by $85 million. As previously guided, that split evenly between the 2 halves. New Zealand Wealth Management and AMP Bank are both expected to have earnings broadly in line with the first half; and AMP Capital, once again, will report a lower earnings in the second half, given the seasonality and bias towards performance fees that we have in the first half. Controllable costs will be $100 million higher than 2018. I've already touched on that. Costs to strengthening governance, risk management and internal controls are tracking in line with our previous estimate, which is $35 million post-tax for 2019.

Moving finally then to the AMP Life sale. We're on Slide 19. We set out the impacts of the revised sale agreement we've announced today. Those revised sell terms with Resolution modify the transaction we disclosed in October of last year. The sale is a very important step in ensuring that AMP's future is focused on higher growth businesses. And Francesco will outline that in his presentation on the strategy shortly. The revised agreement deliveries $3 billion in consideration for AMP Life, comprising $2.5 billion in cash and $500 million equity in a new Australian-domiciled holding company, that will be established and controlled by Resolution Life. This entity will acquire 100% of AMP Life. From settlement of the transaction, AMP's circa 20% interest in the holding company will provide ongoing entitlements to a share of the vehicle's earnings, distributions and franking credits. The company represents a platform for continued growth and consolidation in the Australian in-force life insurance market. As one of the founding shareholders, AMP will partner Resolution Life and benefit from their very considerable global experience in this domain. From July 1, 2018 through to final completion, Resolution Life assumes the risk for all experienced and lapse losses. Accordingly, they are entitled to any AMP Life earnings during that period. The revised terms of the deal fully reflect the impact of Protecting Your Super legislation and any strengthening in best estimate assumptions since the 30th of June 2018. The transaction is expected to settle in the first half of 2020 and AMP will continue to report the results of AMP Life in its accounts until completion.

The transaction is still subject to regulatory approvals in Australia, New Zealand and China. We're maintaining very constructive engagement and dialogue with regulators in all these jurisdictions. In relation to New Zealand, with our full support and input, Resolution Life will submit a change in control application, which aligns with our understanding of RBNZ's requirements and addresses their previous concerns.

In relation to AMP's holding in China Life pension company, recognize the importance of our strategic partnership, we'll transfer that investment from AMP Life to AMP Limited. We are continuing to progress constructive engagement with China Life and relevant Chinese regulatory authorities in order to achieve this transfer within the time frames required by the sale agreement. There are no additional requirements from the ASX resulting from the changed terms of this transaction. We will not be seeking shareholder approval.

Slide 21 shows the pro forma capital position post the sale. Capital in excess of target surplus immediately available on settlement of the transaction will be approximately $1.15 billion. And that's relative to $755 million from the original deal. The new deal contributes $600 million more cash and our originally disclosed estimates for separation costs and debt repayments remain unchanged. AMP anticipates that any surplus capital, including the proceeds from the capital raise announced today, will be used to accelerate delivery of the new AMP strategy first. After those initiatives are fully funded, AMP will review capital options available to it, with the intent of returning excess capital to shareholders, subject to any unforeseen circumstances.

So stepping back, the revised deal is simpler. It delivers more cash, creates a partnership with Resolution founded on a company we know a lot about, which will deliver ongoing free cash and which has future growth and value-creation potential. This transaction is essential in contributing to the funding of AMP's strategy, delivering us a client-led simpler and growth-oriented business going forward.

So with that, let me hand over to Francesco for the next part of the presentation, so he can take you through that very exciting strategy.

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Francesco De Ferrari, AMP Limited - CEO & Executive Director [4]

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So thank you, Gordon, and let me take you through, as Gordon said, the thinking on our strategy.

First, Slide 27. Let me give you a view of the portfolio. So at the Board level, we looked at the businesses we own, and we assess this portfolio, as you will see in the top part of the slide, with respect to the industry context, the disruption that these businesses are going through, the past earnings performance, returns and capital volatility and the degree of transformation required. We use this as input to then formulate the go-forward strategy and what portfolio decisions we would take so that we could build a group that's focused on higher growth and higher return businesses and comprised of businesses where we fundamentally feel we can have a competitive advantage and can win.

So on this, 2 portfolio decisions were taken and reconfirmed. The first, as we heard about, is the divestment of AMP Life. We will though, as Gordon said, retain a partnership and a minority interest with Resolution Life to participate in the market consolidation opportunity of in-force life in this country. The second portfolio decision was on New Zealand. Now in New Zealand, we fundamentally have a great business that has probably the best advice business in the country, but we believe this business would benefit from a more autonomous operations and is ultimately better owned by New Zealand-domiciled entity. And so as we localize the business with the sale of the insurance part, we will explore the options to divest.

Now that leaves us 3 businesses in the middle, which is we feel, as a Board, a very focused portfolio of core businesses. Now clarity on these portfolio decisions provides the foundation on which we can start reinventing the group. Going forward, from a geographical point of view, we will essentially have 2 main geographical focuses: a domestic Australia business, where we have a unique opportunity to reinvent wealth management in this country; and an international business with AMP Capital, where we today have a globally competitive capability.

Now fixing the business model and having a focused business model is only half the story. We also need to fundamentally change how we work. And this comes through 3 main things. We are going to work on transforming the culture, improving execution and driving cost of capital efficiency.

So let me take you through what this focused model, we think, can achieve. If we look at the value chain in Australia, it is a very fragmented value chain, but that has significant revenue pools. I am on Slide 29. Now with our focused portfolio of businesses, we are uniquely positioned to play in every segment of this value chain. But we are going to do this fundamentally different to how we've done in the past. In the past, AMP has, like all other financial services companies, traditionally been product-led through captive distribution. We are fundamentally going to change the business model and pivot to be client-led. Now what does that mean in terms of revenue opportunities? First is, you will see on this slide, we start from a position of strength in most of our businesses. But really, as you pivot the business horizontally, you will find that a lot of the opportunities are coming at the extremes of the value chain. So you will see we have a huge opportunity in retail banking with a $70 billion revenue fee pool. And we have another really good opportunity at the other extreme of the value chain in advice. With all the large players leaving advice, we feel we have a great opportunity to take a leadership position in this part of the value chain, which is the part of the value chain that's closest to clients. And in my experience, the most defensible in the long term. Now in order to be successful in this, we effectively need to reinvent Wealth Management in Australia.

Now if you allow me a quick digression, doing that really starts from, "What is going to be the mission of this company?" What are we going to stand for at AMP? Now when building the new AMP, I believe, the unique opportunity we have is to take a market leadership position by helping address 3 large unmet societal needs. We want to work on improving financial literacy, we want to provide holistic solutions for client needs, not just superannuation, and most importantly, we want to make quality, affordable advice accessible to all. Now these are big missions. And so where do we stand? Where do we start? Well, on Slide 32, the first place we need to start is by reinventing our business in Australia. Now as we break this down in Australia Wealth Management, this means 2 core things. It means fixing our legacy, which is around reshaping our advice network and simplifying our master trust business at the same time as we grow a contemporary wealth manager, taking a truly client-led approach, changing our client mix and offering best-of-breed products enabled by strong technology. We feel that will allow us to capture a larger share of the $5 billion revenue pool in advice.

In the bank, on the other side of the value chain, the bank is critical to help us unlock the $70 billion revenue opportunity. Now on the bank, we want to continue the growth trajectory that the bank has been on, benefiting from its low-cost and direct banking model. But at the same time, we want to drive upside from an improved integration with Wealth Management and an increased deposit funding of our strategy.

Now let me take you through more detail of some of these key items. In terms of fixing the legacy on Slide 36 -- 33, sorry, it's about reshaping advice. Now today, at AMP, we don't have, like the rest of the market, the appropriate level of return for the operational risk we're taking in advice. And so we are announcing that we are rebalancing this equation, essentially with 3 actions. The first is reshaping the network. This is not about the numbers, it's about the quality and the professionalism of our partner advisers. Now in any distribution for us, there is a large concentration. This profession is going through significant industry disruption, and the new educational standards are further going to accentuate that. And this is going to make it hard for small practices to survive. Our focus, as we've always done, is going to be there and partner with them and help them transition their business. The second driver is we need to move to more appropriate market-based valuations on our buyback multiples. And third is we're investing to uplift productivity and compliance of the network. As you see on this slide, we estimate this will cost $550 million of capital outlay, mostly front-loaded in the next 18 to 24 months. Now we appreciate that this transition is going to be challenging for some advisers, and we're committed to help. I've been in similar transformation in other markets years ago, that went through exactly the same phase. And I can tell you for the practices and the advisers that are committing to seeing this through, the ones that emerge on the other side of this disruption were much healthier, much more profitable and much more sustainable practices. And so I am optimistic that this will end up positively.

The other element of [leaning] and fixing our legacy is simplifying our superannuation business to improve client outcomes. Now our objective is we want to run the best-in-class retail superannuation business to compete head-on with the industry super funds. Now core to doing this is going to be to deliver best-in-class governance and better client outcomes, including dealing with a grandfather commission legacy head-on. And on the other side, simplifying our Master Trust Super business in terms of arriving at fewer products and platforms. We aim to act on this in 2020. Now if you take these 2 big parts of addressing our legacy, the reshape the advice and simplifying our legacy product range, this will mean that we will see subdued performance in our Wealth Management business over the next 3 years as we repivot this to essentially a legacy-dominated to a more contemporary-dominated business.

Now this is about the legacy. What are we going to do to build the best wealth business in Australia? There are 4 key principles to this. I think the most important one is this concept of whole-of-wealth solutions. Now I think it's not something that I've really seen implemented in this market. And it goes back to the fact that most financial services firms are really product-led distribution organizations rather than advice-led client organizations. Now if we rethink essentially how we do this and we pivot to clients and we look at the business horizontally rather than vertically, this might seem like a simple, but it has a very profound change in the opportunities that come out of this.

So a few of my observations on sort of the distribution of wealth in this country and the complexities around that. One is we have a very complicated tax environment. The second observation is that the average superannuation balance is probably not enough for most people to retire on, especially in this low interest rate environment. There are very little savings outside of superannuation. And there is a significant concentration of wealth in property investments, which are very -- in a very illiquid asset class, and so managing debt levels is absolutely critical. If you take a product view, you can solve for each one of these. But in reality, my experience has been that the best and the right solutions come from taking a holistic view of the client across all these issues, and being able then to tailor the right solution to a client's problem, not to a single product need. Now if you start looking at the client horizontally rather than vertically, you will also find in a group like AMP, that we have millions of clients of superannuation that are not really handled with banking products and vice versa. So it does provide a significant number of opportunities that we can harvest from our existing client base. I think the other -- my experience has been that the other big fundamental driver of this business is to provide best-of-breed product. So whether it is in-house or from the market, we always need to bring our clients the best-of-breed product.

The second big principle is rebalancing of our client channels. I've already mentioned this being truly client-centric and client-led means we need to get closer to our end clients and grow our direct channel. So while we're maintaining our Broker and Corporate Super relationships in the middle, we need to reshape our aligned network. On the left-hand side, we need to invest heavily in building our direct and digital service proposition. As I said before, this will allow us to capture a greater share of the advice revenues, which is the most defensible part of the value chain. The third large principle for us in creating affordable advice that everybody can access is creating a tiered service delivery model. This requires the investment to build self-directed and on-demand services to give clients options, so clients can consume the service when they want, and they can choose how to pay for it. Now today, we really operate, if you look at the slide in the top bar, which is the face-to-face advice. If I look at other examples that I've seen being successful in markets like the U.S. or the U.K., there is a huge opportunity in this market to tap unmet needs for advice in all the other parts below the face-to-face advice. And that speaks also to the societal need we're talking about of making advice affordable for all.

The fourth principle is that wealth management, given the number of clients that we want to touch, has to be much more of a data and tech-enabled business. Now our tiered advice delivery has to be backed up by a strong digital backbone. The good news here is that you all see on this slide, which is Slide 38, is that AMP actually starts from very strong technological foundations, and we've developed a lot of really leading-edge pieces of technology such as Goals 360, myAMP, Bett3r and MoneyBrilliant and a lot of these are already in the cloud. So we're pretty advanced from a technological point of view, but we've developed most of these solutions in vertical silos. Now this pivoting to clients allows us to look at our technological applications horizontally, as we bring them together and integrate them into one seamless client experience. So to recap on the Wealth Management side, our core objective is to reinvent Wealth Management by addressing the legacy, by pivoting the business from being product to client-led and take leadership in this market in delivering whole-of-wealth solutions. This is going to allow us to capture greater shares of the extremes of the value chain, offsetting the compression that is happening in the middle.

Now if I move to our second big piece -- part of the business, which is our leading global investment management capabilities represented by AMP Capital, we really have a lot of very exciting growth opportunities here. This business has been growing double-digit per year over the last 5 years. And as you would have seen from what Gordon presented in the first half, has had a stellar first half result.

Now looking at AMP Capital, this is really about, on Slide 40, differentiated capabilities. This is really 2 big businesses. One is we have a globally competitive real asset business across real estate and infrastructure, where our aim is to continue to expand our global footprint by leveraging our strong track record, where we will continue the successful launch of closed-end funds, and where the low interest rate environment I was talking about creates a significant positive macro underlying as clients need to look for higher and higher yields in these illiquid asset classes. So a very positive outlook for our real asset business, both domestically and globally.

If we look at public markets, public markets has been a little bit more challenged in the past as all asset management businesses globally. And we've taken action, restructuring a lot of our capabilities over the last 2 to 3 years. Now we are investing in differentiated capability and very specialized products. But we also need to simplify the product set and operating model to better support our superannuation and wealth management business, ultimately focused at a simpler product range, driving better outcome to clients. So on the capability, 2 very differentiated set of opportunities.

If we look at clients and geographically, this is a pretty well-known story. AMP Capital allows us to play and win globally. We have 319 direct institutional international clients, and this number has been growing more than 25% every single year for the last 3 years. Now just you will see on this slide, which is Slide 41, the breadth of opportunities. Just to focus on one, an easy one, which is China. I mean, we have -- we're in a unique position of having 2 joint ventures with the largest insurance company in the world. I was in -- and we're the only foreign company to be a strategic shareholder of a Chinese pension company. I was in China last week, and I was particularly impressed with the performance of CLPC, which is our pension joint venture. The assets in this joint venture grew 20% in the first half alone. And we have won 100% of the occupational mandates as China starts to build a better pension for its public servants. And so the opportunities for growth are really very exciting. So in this respect, AMP Capital is really a jewel in our portfolio and allows us to diversify the revenue and opportunity mix beyond our domestic market.

Now those are the 2 big changes of a focused business model. But as I said earlier, simplifying our business model is not enough. We also need to fundamentally adapt how we work. Now this is going through a few key things, and I'll try to go through them quickly. One is about reinvigorating our culture. This is all around being client-led, being entrepreneurial and being accountable. Now this is summed up by, as you might have heard me say before, the 3 questions I tend to ask all employees as they reflect on what they do -- which is very typical in the company that has 170 years of history, you do tend to get some ingrained behavior. So it is typically of -- would you be doing what you're doing every day if this were your own business? Would you be investing and spending the money if this were coming out of your own wallet? And most importantly, would you buy the products and services that we're selling if you're on the other side of the sales conversation? Now ultimately, everybody needs to be comfortable and be able to answer yes to each one of these 3 questions. So changing culture and reinvigorating culture, absolutely critical. The second driver is creating a simpler and leaner business, repositioning our group to be fit for the future. Now this will be one of the main drivers of value over the next 3 years. We are committed to achieving $300 million in annualized cost savings by 2022, and this will be achieved through 3 main levers: driving operating efficiency, a leaner structure in the corporate center with greater end-to-end accountability in the businesses and the restructuring of the legacy business as I've talked about before.

Now building the new AMP requires investments of $1 billion to $1.3 billion over the next 3 years to transform the business. Now these investments are roughly getting deployed in 3 broad buckets. A third is going into investing for growth. That is about reinventing wealth management, modernizing our platforms, building our digital backbone to support growth, not just in wealth management, but across Bank and AMP Capital. A third is going to drive the cost -- the $300 million of cost improvements I just mentioned. And the third is going in investments to derisk the business, which means partnering with our advice network and reshaping the aligned advice and simplifying the Master Trust.

Now a big program of investment for an ambitious strategy. This will be delivered and sequenced in 3 phases. The first phase and the one -- the foundation of all of it is to simplify first and foremost, then we can move to strengthening and scaling the business. You would have heard me say this at year-end last year, this is going to be a 3-year plan as we bring all our businesses to grow.

So to summarize, there are 4 key strategic priorities over the next 3 years as we repivot AMP to be a higher growth and higher return business. #1 is we are recycling capital from low to higher return businesses with the partnership and sale of AMP Life. The second is we are taking actions to simplify the organization, and we're committed to reducing costs by $300 million. The third is we are investing to build the best Wealth Management business in Australia. As #4, we continue to grow our successful businesses of AMP Capital and AMP Bank. Now as we deliver on these 4 strategic priorities, this will allow us to build and have a higher returning businesses and allow us to pay out 40% to 60% of our net profit on a sustainable basis.

You see on this slide, which is Slide 47. Also, the projected mix of businesses and earnings on a 3-year outlook. Now just if you can just allow me one final comment on the strategy piece, I really believe we have a unique opportunity here to reinvent our business. We need to remain single-minded on delivering for our clients, simplifying our business and setting them on a path for long-term and sustainable growth. Today, we are drawing a line on the sand, and it is a very historic day for AMP, and I'm officially very excited to kick off the transformation of this great Australian company.

Now I pass it back to Howard to introduce the capital raise.

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Howard Marks, AMP Limited - Director of IR [5]

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Thanks, Francesco. This concludes the half year results and strategy update. We will now detail the rationale and mechanics of the capital raising to be undertaken by AMP announced this morning. Due to regulatory restrictions, that portion of the call is restricted to eligible investors, and we will disconnect ineligible investors from now on. If you are in the United States and are permitted to join the capital raising call, you must dial-in using passcode provided to you. If you are in the U.S. and have not received a separate passcode, you must disconnect after the full year results announcement as we've just done. And if you have not -- and if you have not otherwise been disconnected, as you cannot listen to the remainder of the call.

Francesco, if you are ready, please?

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Francesco De Ferrari, AMP Limited - CEO & Executive Director [6]

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Okay. Thank you for bearing with us. We are at Item #4, the capital raise. So we are raising today $650 million via fully underwritten placement to institutional investors with a separate non-underwritten share purchase plan for eligible shareholders in Australia and New Zealand. As a client-focused business, it is incredibly important that our balance sheet remains unquestionably strong. As Gordon outlined earlier, the AMP Life transaction will bring a significant capital injection -- but not until completion first half of next year, after regulatory approvals are obtained. Accordingly, we are proceeding today with a capital raise to accelerate the delivery of our strategy, which, as we've just heard, will tackle legacy issues in Australian Wealth Management, restructure the organization to reduce costs and invest in building the best Wealth Management business in Australia while also having the necessary capital resources to maintain our great growth momentum in AMP Bank and AMP Capital.

Now if I turn to our pro forma capital position on Slide 3. As Gordon highlighted this morning, our capital position at the close of the half year was $1.7 billion above minimum regulatory requirements, which is in line with the target surplus the Board has defined. The slides provide a pro forma view of our capital position post-raising and post-completion of the Life sale when all these proceeds have been received. Following the completion of the Life sale, we expect that our surplus above minimum regulatory requirements will be in the order of $2.6 billion. With the removal of AMP Life from the group, the capital surplus requirements for the remaining businesses will reduce substantially. This will leave us with a pro forma capital in excess of target surplus on settlement of approximately $1.8 billion. We will be using this excess to first fund the delivery of the strategy, including our 3-year investment program. And beyond this program, as we've said today, the Board has indicated it will assess all capital management options with the intent that any excess above the target surplus will be returned to shareholders.

Now if I move to Slide 4 in terms of the use of proceeds. I already spoke about our investment plan in the strategy presentation today. That comprises $1 billion to $1.3 billion of investment directed to 3 broad buckets. A third in growth initiatives, particularly developing our direct, our employed advice channels, addressing the bank's core system and investing in our asset management platform. A third to realize the cost improvement that we talked about, mainly driving simplification, increased efficiency in operations and technology and a leaner center moving to end-to-end accountability in the business units. And finally 1/3 of the investments are going towards de-risking the business and addressing our legacy issues.

If I move to Slide 5 in terms of the offer overview and turning to the offer itself. Our [joint] managers, Crédit Suisse and UBS, have fully underwritten the placement and are in the process of conducting the raising. We are in trading halt today while we do this. Offer terms are on the screen and in your packs, including the risks applicable to our business. You will see there is details about a fully underwritten placement and institutional bookbuild at a floor price of $1.50 with a final placement price to be announced on the ASX tomorrow morning. The share purchase plan will be offered following completion of the placement. It will be open to eligible Australian and New Zealand shareholders with the opportunity to acquire up to $15,000 of new shares on pricing terms equal to or more attractive than the placement. The share purchase plan is not underwritten, and we will send the final SPP booklet containing further details to eligible shareholders on Friday, the 16th of August. Finally, new shares issued by the placement and SPP will rank equally with existing fully paid ordinary shares from their time of issue.

On Slide 6, you see the key offer dates. I highlighted a number of these items already, so I won't go through this in detail. But I stress that the placement will be conducted today. The trading halt will be lifted tomorrow and the settlement of the new shares will happen on Tuesday, the 13th of August. The share purchase plan will [commend] at the end of next week and will be allotted and begin trading in mid-September.

So to summarize, the large set of -- long set of announcements that we had today. So today, we've announced our first half results, which effectively helped draw a line in the sand on the past and include impairments to reposition our business. We've announced a restructured deal with Resolution to divest AMP Life. This revised transaction increases certainty of execution and has a greater cash component. We've outlined a 3-year strategy to reposition the new AMP to become a simpler client-led higher growth and higher return business. And finally, we've announced a $650 million capital raise to kick start the implementation of our new strategy and continued growth of our successful businesses as we complete the Life transaction.

With this, I thank you for being so patient and going through all these announcements. It is a really historic day and milestone, and we're all excited to get on with building the future of this company.

So thank you very much, and I wish you all a very nice day.