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Axa emerges bruised but in good shape

By David McEwen

Friday 7th March 2003

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Axa has been a relatively modest achiever since converting from mutual status in 1996. It hasn't been regarded as belonging in quite the same league as the other Aussie icon brands like AMP.

But in one of the toughest periods faced by the financial industry, Axa has revealed a surprising resilience.

While AMP and others have been pummelled by losses suffered on the sharemarket and the falling value of overseas operations, Axa has emerged slightly bruised but still in wonderful shape.

In the year to December 31, Axa reported a profit after tax but before non-recurring items of $316 million, up 14% on the result for the corresponding period (2001, $277 million). This result was above most analysts' expectation and was due to a surge in investment earnings ­ not from shares, of course, but from Axa's US bond portfolio, which gained value last year as yields fell.

Axa is not as heavily exposed to overseas shares as some of its competitors. The diversity of its investments has saved it from much of the damage suffered by others.

Investment earnings for the group for the 12 months were $111 million, up 88% (2001, $59 million).

The key points were a 50% rise in operating earnings from its core financial protection and wealth management business in New Zealand and Australia to $126 million (2001, $84 million); investment earnings after tax of $44 million (2001, $52 million), reflecting falls in equity markets; strong growth in total funds under management and administration, up 19% to $41 billion (2001, $34 billion); a continued positive contribution to profit from its income protection portfolio with operating profits of $17 million (2001, $20 million loss); and further reductions in recurring management expenses down 5% to $358 million.

In its latest report to investors (a hefty document that mirrors the soon-to-be-released annual report) Axa repeats the goals set out at the start of its transformation in 2000, which it calls its K5 objectives. Unlike many other "mission statements" this is not just a catchy name thought up by the PR department, to be ignored soon after. Axa frequently reports on the progress in achieving these objectives. The broad aim was to invest heavily in becoming a leader in wealth management, where it had been a small player and to strengthen its financial protection side while getting rid of all non-core assets.

Wealth management was strengthened through a series of acquisitions, which included investment advisers Ipac Securities and Sterling Grace. Ipac Securities, which was acquired for $205 million last June, has $4.7 billion and over 20,000 retail and wholesale clients under management and was a key move up the wealth management scale.

At the same time its health insurance business (deemed non-core) was sold last June to a Macquarie Bank-led consortium for $595 million and its banking interests went for $95 million in December.

Thanks to the proceeds of these sales, Axa's capital position is very strong, with an excess over regulatory-required capital of almost $800 million, at end-December 2002.

Axa claims to be making progress in most of the K5 objectives, including "increasing the size and productivity of aligned advisers."

This follows a bad experience in its Hong Kong operation in 2000, where Axa's agents left in their droves ­ taking their clients with them ­ to join competitors that had offered them huge upfront incentives. Axa refused to become part of a poaching war, deciding instead to improve the quality and efficiency of those who remained.

Axa has emerged a very solid company in a very uncertain environment. Somewhat surprisingly, its share price has been in steep decline for some time ­ the result, perhaps, of a sick industry rather than a sick company.

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