Volatile international markets left their mark on insurers

By Peter V O'Brien

Friday 5th April 2002

INSURERS' SHARE PRICES

Company	Price 28.3.02	Price 28.9.01	% change 28.9-28.3	2001/02 high	2001/02 low

AMP	$23.25	$22.00	+5.7	$27.21	$19.00
Axa	$3.66	$2.85	+28.4	$3.90	$2.65
Tower	$5.05	$4.66	+7.7	$5.91	$4.25
Australian all ordinaries index September 28-March 28:			-12.6%
NZSE 40 capital index September 28-March 28:			-11.7%

Recent share price movements in demutualised insurance companies reflected the direct link between their investment returns and changes in international financial markets.

The companies sped up and broadened the drive to be providers and managers of comprehensive financial services.

Their basic business is taking money from the public and investing it. That activity distinguishes them from industrial companies and specialists in non-financial services.

An industrial company's share price is related to the organisation's trading prospects in its sector, its product range, general economic demand its and marketing abilities, all of which impinge on corporate profitability and subsequently on investment ratings.

The fortunes of a financial services company depend on movements in investment markets, local and international, across the range of asset groups.

Such companies have no "products" other than investment portfolios. Managerial skills and some luck affects returns at the margin but the returns from broadly based investments rise and fall in line with overall market movements.

The changes show up in share prices, which are adjusted for alterations to analysts' predictions of profits, earnings per share, price/earnings multiples and future prospects.

Share-price changes over the past six months for AMP, Axa and Tower are in the table and compared with movements in the Australian all ordinaries index and the NZSE40 capital index.

The relationship between the indices and share-price movements were not identical. They never would be, but the two tend to move together.

Movements in the table can be compared with those of the six months before September 28. Most of that period was also before September 11. The latter date had a significant effect on investment markets.

AMP's share-price fell 10.7% from April 2, 2001, to September 28 (in New Zealand dollar terms), Axa 15.7% and Tower 16.8%. The Australian all ordinaries was down 5.5% and the NZSE40 capital 8.1%.

Price falls between September 11 and September 12 were: AMP, 7.86%; Axa, 6.15% and Tower 3.9%, so there was a "recovery" in the ensuing 16 days.

People looking at investment in the sector, or increasing current positions, should consider a fundamental issue.

An investment in the shares of a financial services company is basically an investment in its portfolios and management expertise. The latter may be effectively funds held in trust for superannuation funds, unit trusts and similar vehicles but the company's earnings from management are usually related to the returns on the portfolios.

An individual investor has to decide whether it is better to buy, say, $10,000 worth of shares, in one of the demutualised groups or put $10,000 into their investment vehicles and rely on the fund managers' ability.

The issue is not as clearcut as it may seem. A quirk of the fund-management business means the companies often take in part of each other's washing.

Most fund managers are wedded to benchmark weightings. A listed company with a 10% weighting in the NZSE40 index, for example, will have a weighting fairly close to 10% in a fund's portfolio of New Zealand equities.

The weighting will vary, even daily, depending on several factors, but substantial deviations often require approval from people other than the individual manager(s).

AMP equity portfolios might hold Axa and Tower shares, Axa may invest in AMP, and Tower in AMP and Axa.

Each company's or portfolio's holding in the other companies could be insignificant in the context of their equity investments but there is some irony in the managers of one company investing in the managerial ability of others. Individual investors should put that element into their equations.

The companies' reliance on healthy markets was seen in references to the investment climate in their latest reports.

AMP's preliminary report for the year ended December 31 said the company's result reflected a solid performance in "a difficult year of global market volatility." It referred to "the most challenging international markets for many years."

Axa talked about "lower levels" and "the fall" in global equity markets.

Tower reported a net profit of $277.2 million for the year ended September 30 "in what most pundits have described as the worst investment climate in a quarter of a century."

It would be unusual for the companies' share prices to outstrip the market substantially in the absence of some extraordinary coup or radical restructuring.

Individuals have the choice of direct shareholdings in the companies or investment in their products.

Correction: Recent discussions here of the retail sector and share price rises and falls in the first quarter overlooked Kirkcaldie & Stains' 1:2 cash issue at $3.50. The company's issue adjusted share price fall in the first quarter was 12.3% (ranked seventh worst), not minus 21.3% (ranked fifth worst) as shown last week.

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