Report Card

Thursday 22nd March 2001

Insurance companies tend to have large numbers of shareholders for their size. Axa Asia Pacific Holdings (formerly National Mutual Holdings), for example, has a market capitalisation of around $235 million and 422,721 shareholders in Australia and New Zealand. By comparison Nufarm, another transtasman company of a similar size, has fewer than 120,000 shareholders.

This high number of shareholders is a result of demutualisation, where shares were issued to policyholders.

Axa's annual report shows it has 96,931 shareholders in New Zealand. This is 22% of the total, yet New Zealand gets precious little attention in the report.

The opening paragraph on page two of the report, describing the company's superannuation services reads: "There has never been a time in Australia's history when making the right choices about superannuation has been more important." New Zealanders may be poor savers but surely there is some superannuation industry in this part of the world.

There is one part of the chief executive's report devoted entirely to this country. A single paragraph talks of the number of businesses that have been disposed of and proffers the news that Axa "will be integrating the support functions of the New Zealand business into Australia to drive further efficiencies."

The relative lack of attention of New Zealand may be a reflection of the minimal power of those 96,931 shareholders. Between them they hold just 4% of the company.

It may also reflect that Axa is required by the Australian government to ensure its chairman and a majority of directors are Australian citizens.

Like most reports, the numbers that look the best have been given the most prominence. Where tax and abnormals are negative, the gross profit figure is traditionally quoted. Where those numbers are positive, then net profit gets all the attention.

In Axa's case it refers to the net profit result of A$374 million in the year to September, up 24%.

The reasons for preferring this particular number are found in the profit and loss statement, where it is revealed the company enjoyed a $A50 million tax benefit, instead of the $A13 million liability it incurred in 1999, and a doubling of abnormal gains to $A54 million.

Operating performance before such distortions shows the company made $A309 million, down 10% on the previous year. No revenue figures are given but the cash-flow statement shows income from premiums, interest, dividends and fees rose 387% to $A7.3 billion.

Even these figures are deceptive because Axa adopted new accounting regulations during the year, meaning numbers cannot be directly compared with the previous period. Australian accounting standard 1038, governing life insurance companies, requires Axa to include the assets, liabilities, revenues and expenses of its life subsidiaries in its consolidated accounts for the first time.

As detailed notes to the accounts show, the company has had to "derecognise" $A2.8 billion in assets previously booked as "value of future new business of life insurance subsidiaries" and "value of life business in force."

This valuation practice was already at odds with the Australian Securities and Investment Commission, which believed such asset gains were internally generated goodwill, which is not supposed to be booked, or purchased goodwill, which has to be written off over a maximum of 20 years. Axa disputes this interpretation.

Fortunately, the report shows "restated comparative information" aligning its previous result with the latest one as if they have both been prepared under the new accounting standard. It is a pity this is buried in the notes to the accounts rather than at the front of the book where it would be seen by more people.

When comparing like with like, AXA's gross operating profit was down 35% to $A309 million from $A473 million. After abnormal items and tax, it made $A413 million, up 25%.

One very good thing about this report is a spread entitled "understanding your investment." This offers simplified earnings and assets statements, with explanations on each line showing what has caused significant changes from 1999.

This is a welcome feature considering the number of potentially unskilled investors among Axa's huge number of shareholders.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. www.mcewen.co.nz, davidm@mcewen.co.nz

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