Investors buy as insurers rev their engines

By Peter V O'Brien

Friday 2nd April 2004

A previous discussion of financial services groups AMP, Tower and Axa Asia Pacific concluded that shares in Axa could be held for the company's solidity and the strength of its French parent.

AMP was rated a hold/buy for recovery, as was Tower, with sale of the latter being an option. Figures in the table show Axa and Tower outperformed both the NZSX50 gross index and the NZSX40 capital index over the period, the latter now effectively consigned to history.

The 50 gross index rose 12.3% between October 3 and March 26, while the 40 capital measure went up 5.8%.

AMP's movement was adjusted for a cash issue, the October figure already taking account of an earlier issue to institutions.

Tower's share-price movement lagged the indices but was not far behind the 40 capital, which is still the only meaningful comparative measurement of changes to the capital value of shares, despite the NSX's muddled thinking.

Promina was included in the table for comparative purposes. The company specialises in general insurance but has a large book of financial services products in managed funds and (its term) "wealth management."

There was also the practical point that Promina fits nowhere else.

Its shares were issued to New Zealand investors last May at $NZ1.90 each. A 123% capital gain in less than a year was a tidy return.

The company's report for the year ended December 31 said Promina would have a $250-300 million capital raising in the first half of this year, subject to Australian prudential regulation authority and other regulatory approvals. There was no further news at the time of writing.

The report said three-year capital management plans were based on a "detailed model for growth, the objectives of which are to have sufficient capital to maintain our desired solvency levels, maintain a sustainable dividend and franking capacity and enable organic growth."

A company with the bulk of its business in general insurance has different capital and general balance sheet requirements from those specialising in life insurance, superannuation and managed fund products.

Assuming Promina has a cash issue on favourable terms, there could be a good opportunity for current and potential shareholders.

The company has well known names in its stable, including Vero (formerly Royal & SunAlliance) and, in New Zealand financial services, Asteron, New Zealand Guardian Trust and Guardian Trust Funds Management.

New Zealand's AA Insurance is also part of the group.

The woes of AMP and Tower are well known.

There are signs both companies are working through their problems, particularly in AMP, where it appears the demerger of the UK operations and financial restructuring of the core business are producing benefits.

Chief executive Andrew Mohl said in the preliminary report for the year ended December 31 that fund inflows to AMP Financial Services were about 25% ahead of the same period of 2003 (to early March) and strong growth was expected in that business.

That was logical given the relative buoyancy of international investment markets, subject to the usual short-term wobbles when another bomb, or bombs, go off somewhere.

Tower's annual meeting in mid-February was told profit for the first three months of the current year was "ahead of budget" and Tower Australia had "returned to profitability." Both statements could have meant anything, in the absence of the budget figure and the level of the Australian profitability.

At least there was an indication the company was scaling the cliffs from its descent into the abyss, albeit with slow steps.

Axa is the intriguing component of the sector, a view investors apparently share, given the 20.7% price rise in six months after a 27% gain in the March-October period of 2003.

A movement from $2.33 in March last year to $3.50 on Friday was 50.2%, although it must be acknowledged there was a 36.3% decline in the preceding 12 months, from $3.66 to $2.33.

Axa issues statements when it has something to say, or has to report, the latter being the case in February when the preliminary report for the year ended December 31 ran to a mere 164 pages. Profit before accounting for sale of the health insurance business and non-recurring items went from 2002's $A273 million to $A537 million, a gain of 97%. The report indicated all sections of the business were doing well, particularly Hong Kong.

Axa included a one-line comment, almost a throwaway, which could benefit shareholders.

"We will continue to investigate capital management strategies to maximise returns for our shareholders, and expect that decisions on any change will be made prior to announcing our interim results," due in late August.

That alone could make the shares attractive at current prices.

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