Insurers see improving times

By Peter V O'Brien

Friday 24th September 2004

The share price performance of financial services companies slowed down over the past six months, after substantially outperforming the market between October and March.

Relevant price information for the past year is in the table. Financial services companies in the current context are those with bases in life and general insurance. That definition allowed comparisons whose wide-ranging financial businesses and funds management arose from a life insurance base (AMP, Axa Asian Pacific Holdings and Tower) with Promina Group where the base was in general insurance.

An earlier discussion (NBR, April 2) said there were signs that AMP and Tower were working through their problems, particularly AMP where it appeared the demerger of UK operations and financial restructuring of the core business were producing benefits.

The company confirmed this view in its report for the six months ended June. Net profit before "other items" was $A412 million, an increase of 72% over the corresponding period of the previous year. Profit after other items was $A378 million, compared with a $A2.2 billion loss.

Chief executive Andrew Mohl said AMP's focus after the demerger had been on reducing unit costs, growing cash flows, outperforming on investments and lowering the group's gearing.

Controllable costs fell 1% in the period and the cost to income ratio was five percentage points lower at 42%. The latter improvement was unusual for a financial services group and suggested fat had built up in the group in the days before the problems hit.

AMP's cashflows improved and investment performance was strong.

The company said 81% of Australian assets under management outperformed their benchmarks for the year ended June.

That did not necessarily indicate an outstanding performance, in the absence of figures for AMP and for the benchmarks but was encouraging.

Group debt levels were lowered by about 66% in the period and the gearing ratio (debt plus equity) fell from 55% to 29%. Such figures would make people wonder what was going on at AMP before the troubles and the subsequent cleanup and reorganisation.

The outlook for AMP looks reasonable but the market had discounted most of the profit improvement and reorganisation gains before the latest report and before the comparative dates in the table.

Axa's price gain came partly from an offer from the parent company, France's Axa SA, to acquire the 48.4% of company it did not own for $A3.75 for each Axa Asia Pacific share, to be paid 50% in cash and 50% in Axa SA shares.

The Australian company recently declared a dividend of 5.25A¢, which effectively adjusted the offer's value to $A3.6975 a share. Axa Asia Pacific's share price in Australia last week was $A3.93, so the market seemed to think Axa SA's offer undervalued the company.

The results of an independent valuation and a review of the valuation and offer by a committee of independent Axa Asia Pacific directors is scheduled for October. Axa's operating performance justified a good share price. Profit for the six months ended June rose 20% over the corresponding period of the previous year, to $A193.5 million before non-recurring items.

Chief executive Les Owen said the past 18 months had seen strong evidence that a four-year repositioning plan was leading to improved operating and financial performance.

General insurer and financial services provider Promina continued its run of solid profit gains in the six months ended June.

Net profit was $A204 million, a 51% jump over the first half of 2003.

The company said the full 2004 result was likely to outperform its "longer-term expectations."

The market adjusted the share price to reflect actual performance and optimism about the future.

Tower was an example of a stock rebounding from an oversold position as the business responded to reorganisation, which chairman Olaf O'Duill described in the report for the six months ended March as "a programme of change and rebuilding across the group."

The company earned $20.5 million compared with a loss of $154.4 million in the corresponding period, the latter amount including a $108.1 million deficit arising from changed accounting treatment.

Tower's share price gains over the past 12 months were spectacular, albeit from a depressed, oversold base.

The profit performance of financial services companies depends heavily on the health of international investment markets. Their health was good recently and should remain so in the immediate future. Further share price gains seem available before the stocks become overbought.

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