AMP wasn't such a bargain, was it?

To their credit, those who thought AMP looked like a bargain at $12 also had lingering doubts about hidden grenades inside the UK business. They were right.

News last week that the new management would downgrade the UK earnings by $100 million roughly one-third was destabilising because it called into question how much the new management team was aware of what the previous management team had hidden in the closet.

About a third of this directly related to yet another fall in the UK equities market, and another related to ``pension mis-selling" for neither of which can the new chief executive Andrew Mohl be held accountable.

The third element of the profit fall is more worrying because it's about underestimating the cumulative effect of the weak equity markets on margins. This means either that the processes are lacking or that AMP's funds underperformed the index.

And given that management isn't talking, in the blackout period before the release of the company's results, we are in limbo as to what it really means.

There is little doubt that on fundamentals the AMP was sold down too much last week. It had based all its December prospective profit assumptions on a UK index that, in hindsight, was optimistic.

In the current market most companies will be oversold on bad news and AMP is more susceptible than most.

But how does one accurately factor in the market impact of a war with Iraq? More importantly, how does one work out the effect of increased fears of a war with Iraq?

The UN report this week that it was not satisfied with the undertakings from Iraq and the increase in the likelihood that the US will take action was all investors needed to plunge international equity markets into turmoil.

On Monday night, Britain's benchmark FTSE 100 index collapsed 3.41 per cent, enough to send AMP shares down to a low of $9.10 yesterday.

None of this is Mohl's fault, but it is his problem.

For investors perhaps the biggest concern is how much more capital AMP is prepared to funnel into its problem UK operations.

It has freed $500 million from its credit card and banking divisions and there is a big question mark over whether propping up the UK life operations isn't just throwing good money after bad.

AMP is not alone. All the life companies in the UK are suffering the same problems.

Of course, AMP's UK businesses could sell equities and cash up businesses to limit the downside and capital shortfall.

But then it won't be able to take advantage of any upside in the market when it eventually recovers. It would be crystallising its losses.

But if the FTSE 100 keeps falling there is not a lot of fat left for AMP. At the 3000-point mark AMP runs into capital problems again and a war in Iraq could stimulate a rapid fall from the index's current 3480 levels.

If the war is protracted the FTSE 100 will suffer a lot more.

On Monday night the UK insurers were off 8 per cent and if their capital problems increase it's easy to see them attempting to cash up by selling equities that back their policy liabilities and shareholders' funds.

This would promote a downward spiral. One gets the distinct impression that Mohl would love to be rid of all the UK assets other than the Henderson funds management business.

But they are unsaleable right now in part because the value of the liabilities attached to the businesses in run-off are larger than their asset values.

If Mohl can't accurately assess the problems within the UK businesses, how can outsiders?

Any more shock waves in international markets will have a nasty effect on AMP's share price and continue to deter those interested in the Australian operations.