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Technically Speaking: Insurer investors ogle UK court's orphan funds' distribution order

Friday 4th August 2000

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AMP Axa Asia Pacific

Tower

New Zealand has had a short but chequered history of demutualised insurance company listings.

The demutualised insurers have lived down their dull-as-ditchwater image to produce some of the most turbulent
corporate events in our sharemarket in recent times.

There have been attempted takeover shenanigans accompanied by mudslinging persiflage driven by corporate raider GPG against Tower, which remains a focus of raiding rumours because of its relatively small size.

A more serious bid was placed for Colonial by CBA in a bank-gets-insurer play of a type evident in global corporate trends. We may not have seen the last of the incredible vanishing insurance company vogue.

AMP ramped expectations for its listing price too strongly as God's gift to the Australasian sharemarkets, was embarrassed on the day by a mistake made by a broker in setting share prices much too high above anything the company has since achieved, and blundered into shelling out too much for haemorrhaging Australian insurer GIO.

It then had to pay its former American boss lots of money to go away quietly and pursue private interests.

National Mutual sacrificed its established household brand name Australasia-wide to become Axa Asia Pacific (AAP) - remember the excruciating "What's an Axa?" campaign - an identity change that could inauspiciously remind observers of the firm's once much-vaunted heavy investment in Asian countries still struggling to recover from the mess caused by Thailand's ignominious bout of economic diarrhoea in 1997.

The Asian economic crisis is not over yet, if warnings about risks from another Asia-wide currency collapse are realised, and AAP may get more of the chop.

A new twist has been a reported court ruling (NBR, July 28) in the UK allowing French group Axa, parent of AAP, to distribute "orphan assets" worth $5.6 billion to shareholders and policy holders. Orphan assets are surpluses built up by life insurers to cover potential claims. They represent overcapitalisation by insurers.

Repayment could influence insurance company debt-and-asset ratios, credit ratings and share prices.

Apparently some $132 billion of orphaned assets are held by British-based insurers alone. AMP is thought to have $8.4 billion in the orphan category and is said to be looking over Axa's shoulder to see what happens next.

Enter, perhaps, the Father Christmas-like figure of Sir Ronald Brierley, longtime friend of assets languishing unloved, who would no doubt be keen to see shareholders' rights take precedence over policy holders' rights.

Insurance companies could replace IT firms as the hot sector if they can be gutted of orphaned assets by kindly raiders philanthropically concerned to assume legal guardianship of the foundling pots of gold.

One possible plan would be to siphon off the orphaned assets and flick the liposucted insurance businesses off to banks.

No doubt shareholders in AAP, AMP and Tower would be thrilled if they could get any piece of the possible action (see charts).

No doubt also the Australian Stock Exchange and the NZSE will be quick to require formal statement from the insurers as to whether and in what way the British ruling has any material bearing on share prices for insurance companies listed in this part of the world.

Many have vested interest in a fully informed sharemarket concerning the orphan assets issue.

Another angle on insurers that could get punters enthused is the proposed Cullen cash cow to prefund pensions that might come their way.

The good doctor's pet version might not be the one eventually chosen, but due to his persistence the momentum now exists for compulsory retirement saving to become a dominating political issue for the remaining term of this government.

All political parties will be obliged to take some stance on compulsory retirement saving such that it is not so much whether we will have it but rather what form it will take that will become the issue.

With their managed funds activities, insurers are bound to be keen on anything that increases their revenues, and compulsory retirement saving fits the bill.

Not to mention that insurers could buy their own shares with public money and thus keep their listed equity values at the firm end of the range. Who says socialism is not good for capitalism?

To put matters in perspective though, at just 38% of British insurer orphaned assets, the eventual $50 billion the Cullen cash cow is supposed to grow into is peanuts by American mutual fund standards.

There fund managers routinely oversee and allocate investor monies in multiples of $US100 million, and the $2 billion floated as the kitty to kick the cow off down the primrose path to raiding by a returned National government is a tad more than AMP presently has in its NZSE-listed Winz passive share fund.

So insurance company speculators expecting to be enriched by Dr Cullen should hold off cracking open the champagne yet.

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