Brian Gaynor: Soggy markets have insurers under siege

Life insurance companies are under siege throughout the world and the industry has had more than its fair share of problems in Australasia. This week AMP reported a loss of A$896 million ($964 million) for the December year and its share price has fallen from a 2001 high of $27.21 to $7.75.

On the home front, the chairman and chief executive of Tower have departed and the company's share price has slumped from a high of $5.87 to $2.03. The mass departure of directors and senior executives has become a common feature of the industry and shareholders have become upset at the huge retirement allowances they are being paid.

The poor performance of both AMP and Tower has been mainly due to dismal returns from overseas expansions and the downturn in world equity markets.

The contributing factors to AMP's larger loss for the last December year were:

* A general downturn in the group's three main activities: Australian Financial Services, UK Financial Services and Henderson Global Investors, its fund management business. These three businesses, and AMP Banking, reported operating earnings of $730 million for the year compared with $889 million for the December 2001 year. Second-half results were lower, particularly in Britain.

* Investment earnings attributable to shareholders were $49 million compared with a loss of $26 million in 2001 and a profit of $617 million in the previous year. The company has been affected by the continuing depressed conditions on international sharemarkets.

* Write-offs of $1.6 billion, including $767 million in Britain and $460 million relating to former AMP International assets. The group also made a $344 million restructuring provision, mainly for redundancy payments, write-offs of capitalised expenditure and other closure costs.

A proportion of these redundancy payments are being made to individuals who were responsible for the poorly performing operations. The former head of UK Financial Services received A$6.1 million in the latest year and the previous boss of Henderson Global Investors, $3.2 million. Paul Batchelor, AMP's departed chief executive, is expected to receive between $15 million and $20 million and former chairman Stan Wallis, who resigned this week, will receive a retirement benefit of $1.6 million on top of his normal fees.

These payments are being greeted with dismay in Australia and are seriously damaging confidence in the business community and sharemarket. There is almost no support for massive golden goodbyes to individuals who have been either totally or partially in charge of operations that have produced dismal results.

Analysts believe the worst is over as far as AMP is concerned, but investor sentiment towards the company could remain negative, particularly as there will be a big focus on the huge redundancy payments at the next annual meeting.

AXA Asia Pacific had much better news this week when it reported net earnings of A$330 million for the December year compared with $308 million previously. The good result was mainly due to the strong performance of the group's non-health activities in Australia and New Zealand and excellent returns from its Hong Kong investment activities.

Operating earnings from Australasian activities increased from $84 million to $126 million, in large part because of the growth of its wealth management business, a return to profitability of its income protection business and further cost cutting.

Earnings from business activities in Hong Kong declined from $180 million to $156 million, Australian health insurance earnings fell from $82 million to $43 million and losses in China and Southeast Asia were reduced from $7 million to $3 million.

Investment earnings attributable to shareholders were $111 million compared with $59 million in the December 2001 year and $204 million in 2000. The good investment result was primarily due to a $27 million profit on a foreign exchange translation from assets held in New Zealand and a surge in Hong Kong investment returns from $7 million to $67 million. The strong performance of the group's Hong Kong bond portfolio was the main contributor to this.

Several analysts are expecting AXA to achieve a profit in excess of $400 million for the current year. These figures may be too optimistic as it will be difficult for the company to repeat its strong investment performance in Hong Kong.

Net earnings of $350 million look more realistic, giving the company a prospective price/earnings ratio of 11.

That suggests the stock is fairly cheap on a long-term basis but negative sentiment towards the insurance sector, and weak investment markets, will probably deter investors from investing in AXA in the short term.

Tower reported a net loss of $75 million for the last September year compared with a profit of $77 million previously.

Unlike the other two major Australasian life companies, its core business had a poor year, particularly its life operations in Australia. The group reported a loss of $33 million on its life operations compared with a profit of $49 million in 2001. The poor result was substantially because of policy surrenders and the write-off of capitalised IT expenditure.

The write-downs of $34 million included a provision of $36 million against Bridges Financial Services in Australia. Many analysts believe that Bridges, a master trust and financial planning group acquired for A$168 million in 2000, is still overvalued.

Tower's investment returns attributable to its shareholders rose slightly because the Australian and New Zealand sharemarkets did relatively better in the last September year, compared with the previous one.

The Wellington-based life company is in a state of turmoil as it has no permanent chief executive, its long-standing chairman Colin Beyer has resigned and GPG has taken a 9.9 per cent stake and is throwing its weight around.

The group paid an interim dividend of 14c but did not pay a final. Based on 14c it has a dividend yield of 6.9 per cent and a prospective price/earnings ratio of 5, based on analysts' forecasts.

There is no guarantee that a 14c dividend will be paid in the current year and/or that the profit projections will be met.

One of the major problems facing AMP and Tower is the depressed state of investment markets. The combined investment earnings attributable to the shareholders of the two companies has fallen from $646 million in 2000 to just $67 million last year. AXA has done relatively better because of the strong performance of its Hong Kong bond portfolio, but it is questionable if this can be repeated again this year.

In addition, the life companies have reported huge investment losses attributable to policyholders. Tower had total investment losses, losses attributable to both shareholders and policyholders, of $53 million for the last September year compared with a profit of $94 million previously.

Returns from the group's fixed interest, equities and property portfolios all deteriorated. The equities portfolio had a loss of $182 million and fixed interest and property had profits of $104 million and $28 million respectively.

Although most of the poor investment performance is not attributable to shareholders, it does hit the returns to policyholders and makes it more difficult for the company to sell these products.

Investment markets are extremely important as far as life companies are concerned, both in terms of investment earnings attributable to shareholders and the ability to sell product to customers. Thus, there is unlikely to be sustained gains in the share prices of AMP, AXA and Tower until international investment markets pick up.

* Disclosure of interest: Brian Gaynor is an AMP shareholder.

* Email Brian Gaynor