Strong growth in operating performance

10 DECEMBER 2001

(All figures are reported in Australian Dollars)

AXA ASIA PACIFIC HOLDINGS LIMITED

Strong growth in operating performance – total profit impacted by weak stock markets

AXA Asia Pacific Holdings today announced Operating Earnings after income tax for the twelve months ended 30 September 2001 of $362 million, 47 per cent higher than the comparable result of $247 million for the twelve months to 30 September 2000.
Investment Earnings of $88 million reflected the impact of stock market falls and were 57 per cent lower (2000 - $203 million).
Profit after Income Tax before Non-Recurring items was down 8 per cent to $292 million (2000 - $318 million).

Group Result
AXA APH Group 2001
$ million 2000
$ million %
Change
Operating Earnings 362 247 47
Capitalised losses (37) (8) (362)
Investment Earnings 88 203 (57)
Corporate Expenses, including Goodwill Amortisation (41) (52) 21
Interest Expense (80) (72) (11)
Profit after Income Tax before Non-Recurring Items 292 318 (8)
Non-Recurring Items 28 56 (50)
Profit after Income Tax and Non-Recurring Items 320 374 (14)

Non-Recurring items include $48 million profit after tax on the sale of the property asset management activities in May 2001 and a net $4 million loss arising on other asset disposals, comprising the write-down of the Taiwan life insurance business before it was sold in October 2001 and gains on winding-up subsidiaries.

Australia and New Zealand

Operating Earnings after income tax for the twelve months ended 30 September 2001 were $207 million, an increase of 95 per cent (2000 - $106 million)

Australia and New Zealand 2001
$ million 2000
$ million % Change
Operating Earnings
Funds Management 57 39 46
Risk 66 27 144
Health 84 40 110
Total Operating Earnings 207 106 95
Capitalised Losses (37) (8) (362)
Investment Earnings 42 90 (53)
Profit after Income Tax before Non-Recurring Items 212 188 13

All three business areas contributed to the improvement in operating earnings with the Health business profits doubling. Membership growth and the maintenance of below average claims and management expense ratios drove this excellent performance. After adjusting for capitalised losses in relation to the individual income protection portfolio, the increase in the risk business (life and income protection) operating profit was 36%.

Investment Earnings declined 53 per cent to $42 million (2000 - $90 million). Negative returns on the equity portfolio offset the gains made on fixed interest assets.

AXA China Region

AXA China Region 2001
$ million 2000
$ million* % Change

Operating Earnings 155 134 16
Investment Earnings 36 114 (68)
Profit after Income Tax before Non-Recurring Items 191 248 (23)
* Group share (ownership 100% from December 1999, previously 76.5%)
Operating Earnings were $155 million, up 16 per cent (2000 Group Share - $134 million).

Operating Earnings in Hong Kong dollars on a 100 per cent basis were 4 per cent lower than the previous comparable period. This was due to higher discontinuance rates following the policy twisting activities of ex-agents. Discontinuance experience has significantly improved in the most recent months of the period.

Investment Earnings were down 74 per cent as a result of the fall in equity markets. The fixed interest portfolio represents around 69 per cent of total investments and this benefited from a reduction in interest rates over the year, offset by a widening of the risk spread between government and corporate bonds. The equity portfolio experienced a negative 33 per cent return.

International Businesses

International 2001
$ million 2000
$ million % Change
Operating Earnings - 7 (100)
Investment Earnings 10 (1) 1,100
Profit after Income Tax before Non-Recurring Items 10 6 67

Commenting on the results for the twelve months and on progress generally Group Chief Executive Les Owen said:
“The 47 per cent rise in Operating Earnings after Tax shows that the efforts we have been making to improve our business fundamentals are starting to show results.

Australia and New Zealand

“The fact that we were able to achieve significant improvements in operating performance in each of the funds management, risk and health businesses in Australia and New Zealand signals that all the hard work we have done in strategically reshaping the operations is starting to pay off. Obviously the Health business has had a stand-out year, but this result is as much due to excellent management of the basic business ratios as to the one-off increase in membership generated by the Lifetime Health Cover initiative. I am equally pleased to report good progress in the critically important areas of retail savings and investments.

“At the half-year I referred to some early signs of gathering momentum in our new business flows. This progress has continued and, in total, our Australian retail product net inflows grew by 63 per cent. Superannuation and retirement income products saw an increase in net inflows of 157% and our market leading master trust, Summit, continues to demonstrate strong growth with net inflows up 14 per cent and with total funds under administration reaching $2.6 billion, up 28 per cent.

“In March we launched our new range of 13 mezzanine unit trusts, followed in July by the launch of 13 new retail unit trusts. All of these funds use the proven asset management expertise of our joint venture partner Alliance Capital. It is particularly encouraging to report that research houses have provided very positive responses to these new product offerings with 17 of the 26 unit trusts receiving 4 or 5 start ratings from Assirt. These funds have only been available for a short while and there is no doubt that flows, particularly to international equities, have been adversely affected by the reduction in consumer confidence since the tragic events of 11th September. We are optimistic, however, that with this product range we are very well placed to see increasing fund flows as markets recover and consumer confidence increases.
We have also initiated a major project aimed at reducing outflows from our older, closed product range ‘Retirement Security Plan’.

“In May we announced the outsourcing of our direct property asset management activities to Deutsche Asset Management Ltd and the sale of our property trusts. This transaction provides us with world-class property asset management scale and capability. We will continue to distribute direct property backed products through AXA’s retail distribution network.

“In October we announced the very significant acquisition of Sterling Grace Portfolio Management Group Limited, which operates as Spicers in New Zealand and Monitor Money in Australia.
“In New Zealand, Spicers and AXA will, together, be the pre-eminent retail investment manager and provider of financial planning services with around 13 per cent market share in funds under administration. In Australia we will be able to use the vertically integrated financial advisory business of Monitor Money to help accelerate our growth and penetration into the independent financial planning market. This acquisition was a very important step in our strategy of strengthening distribution of wealth management products and developing our position in financial planning.

“We have made further progress in achieving improved efficiency and recurring management expenses were 13 per cent lower than in the previous twelve months. A large part of these savings are being reinvested back in the business via the K5 transformation programme, targetted at growing our new business revenues, continuing to improve our cost efficiency and improving service to our distribution networks and to our customers.

“The individual income protection portfolio remains, as explained at the half-year result, an area of continuing close management attention. We have taken aggressive action on pricing and product design to lead this market segment back to long-term sustainability and appropriate returns for shareholders. We have tightened underwriting standards and enhanced both the quantity and capability of our claims management teams. We have again strengthened reserves reflecting experience with both claims incidence and average duration rates. We are cautiously encouraged by improvement in both these areas in recent months. We are confident that our new business is profitable. We continue to pay very close attention to the management of claims from our inforce portfolio and we firmly intend to manage this back to profitablity.

AXA China Region

“The business environment in Hong Kong has been very challenging but, despite this, the operating earnings grew by 16 per cent to $155 million. The fall in value of the Australian dollar against the US dollar and the 100 per cent ownership for the full year were together responsible for much of this gain. On a local currency comparison basis operating earnings by AXA CR were down by 4 per cent on 2000. This is largely due to the temporary increases in lapse rates that followed the agent defections in 2000 and subsequent policy twisting activities.

“It is clear to us that the tactics used by some of our competitors in offering enormous up-front payments to agency leaders to move, and take large numbers of agents with them, have not been successful. There have been few agent resignations as a result of poaching since early 2001. The activity of competitors has abated as they digest the increase in their acquisition

expense ratios and the failure to induce large numbers of agents to move. Our new recruitment strategy is paying off and our agent numbers have grown in recent months. Encouragingly, persistency rates have improved in the second half of the year and are returning to normal levels.

“The fall in global equity markets in the 12 months to 30 September had a significant impact on investment earnings. Although the fall in yields produced gains on our bond portfolio, investment earnings were sharply down.

“We have done a great deal of work over the year to develop a new distribution strategy in Hong Kong. The traditional agency model will continue to dominate but we are making changes to aspects of the management system to more closely align the interests of AXA with those of the agents and reduce the likelihood of any future poaching activity being successful. Our company-managed agency has grown strongly and we are building a salaried adviser channel targeting specific market segments and servicing orphan clients. We will also pilot a new agency model over the next few months and are increasing our penetration of the broker market.

“The unit linked product range that we launched in January 2001 has achieved considerable success and accounted for over 50 per cent of new business sales since launch. It was also instrumental in helping improve agent productivity, which is 31 per cent up on the previous period.

“AXA CR was voted “Best Insurance Company in Hong Kong” for the second year in a row. This reflects the strength of the company’s reputation and customer satisfaction. I am confident that these strengths, together with our relatively low cost base, critical mass in the new Mandatory Provident Fund market, existing client base and multi distribution strategy will ensure that AXA CR delivers profitable growth in the future.

Other Asian Life Businesses

“Our other international operations represent enormous potential for longer term growth. It was particularly pleasing to be able to announce in October that AXA-Minmetals Assurance Company Limited, the life insurance joint venture based in Shanghai in which we hold a 25 per cent stake, had been granted a sub-license by the China Insurance Regulatory Commission to open a branch in one of the cities opened to foreign insurers. AXA expects Minmetals to announce its plans for expansion in the first half of next year and the new branch should be operational before the end of 2002. There is no doubt that the Chinese insurance market will be one of the major world markets in the medium to long term and we are well placed, as the leading Australian life company with an interest in China, to participate in this very exciting growth opportunity.

“Our operations in Singapore, Indonesia, Thailand and the Philippines continue to develop and have all generated strong growth in new business. The two bancassurance relationships - with Metrobank in the Phillipines and with Krung Thai Bank in Thailand – are now established and operating. They will play an important role in our future growth in those countries. We announced in October that we were exiting the Taiwan market, where we could not foresee achieving a reasonable market share without a very substantial and expensive acquisition.

Dividend

“As previously announced we are changing the company's balance date from September to December, starting this year. In March 2002 we will issue our full year report to shareholders for the 15-months to 31 December 2001. The final dividend for the 15 months ended 31 December 2001 will be declared when our results for this period are announced in February.

Conclusion

“In Australia and New Zealand we are making good progress in our transformation programme. The significant improvements in operating performance we have achieved over the last 12 months show that the programme has already had a positive impact on results and there are many more initiatives planned for 2002/2003.

“AXA CR is a strong and successful business playing a leading role in a rapidly developing and exciting business environment. We are implementing a business-transformation programme in AXA CR to ensure that it is placed well to lead market change rather than simply react to it, and to continue to deliver profitable growth in the future.

“China is widely expected to be a growing economic force. As that economy develops it will create huge potential for our core activities of wealth management and financial protection. AXA is well-positioned to play a significant part in the growth of these markets.”

ENDS

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