AXA's Asian Accent

Background, by Eureka Report editor James Kirby: AXA Australia, the ASX-listed financial services company, is set to become a predominantly Asian company next year, managing director Les Owen tells Robert Gottliebsen* in today's video interview. Owen, who has held the top job at the French-controlled company since 2000, says revenues driven by its Hong Kong office will exceed Australian revenues by early 2008.

As AXA chases the big four banks '” ANZ, the Commonwealth, NAB and Westpac '” for a share of the fast-growing wealth management sector, Owen indicates he has no plans to mirror arch-rival AMP in returning capital to shareholders. Rather, he wants to push the company deeper in to China, the holy grail for wealth management companies all over the world.

One of AXA Australia's biggest challenges in the coming years will be to get Chinese investors to move out of property (the most common asset held in a country where the sharemarket is underdeveloped) and into productive assets such as managed funds.

With wealth management revenues such as fund management operations growing four times faster than “financial protection” revenues such as life insurance, Owen says the group has sufficient capital to back virtually any expansion he may plan in the immediate future.

British-born Owen, a former chief executive of AXA Sun Alliance in Britain, has spent his entire career in global insurance market, including several years in Asia. Despite being head of a major listed company, he keeps a much lower profile than many of his peers at the leading banks and insurance companies.

Melbourne-based AXA Australia reported a net profit for 2005 of $542 million '” up a health 18% on the 2004 figure of $459 million to $542 million. The group's 30% franked dividend was 19% better at 14¢ a share.

Robert Gottliebsen spoke to Les Owen after the profit announcement.

Robert Gottliebsen: On your sums, when will the value of the Asian business of AXA Asia Pacific exceed the value of the Australian operation?

Les Owen: Well, if we hit aspirational growth objectives in Australia and New Zealand, and in Hong Kong and in the rest of Asia, then given that Asia’s a very high growth region, I would expect we might see the cross-over point when more than 50% of our illustrative enterprise value is represented by Asia '” maybe the end of 2007 or beginning of 2008 '¦ something like that. The value of new business is already more than 50% weighted to Asia. The value of the in-force is still more than 50% weighted to Australia and New Zealand, so as we grow new business at a faster rate in Asia than Australia and New Zealand, that flip-around will come.

That will make you different from any other financial services business in Australia.

I think so, yes. The other listeds, whether they’re banks or insurers or wealth managers, are predominantly Australian. We’re already nearly 50% rated to Asia and so it does make us quite different and '” unless those strategies change '” even more different in three or four years’ time.

Where will the Asian momentum come from?

Well for us, obviously, the Asian momentum would be driven by and from Hong Kong. We have a large very successful business in Hong Kong. We’ve been there for 20 years. We still see room for increases in life insurance penetration in Hong Kong. We see the Hong Kong economy growing very strongly, obviously to some extent piggy-backing off the Chinese economy. What we also see in Hong Kong, as indeed in the rest of Asia by the way, is very high savings ratios. But a lot of those savings held in property or bank deposits are a big opportunity for us: to convert some of those savings into more growth-oriented products and retirement plans. So we still see very strong growth in Hong Kong for the foreseeable future.

You’ve been in China a long time. Why has the growth been so slow there?

Our projections, and indeed most people’s projections, would say that the only change in the world’s top 10 life insurance markets in the next 10 years will be the entry of China. Therefore, if AXA wants to remain one of the global leaders, we have to be big in each of the top 10 markets, so we have to be big in China.

Strategically being in China and being successful in China over a 10-year time-frame is very important to us. In the short term, there are some issues in China about growth and profitable sustainable growth. I mean, first, although the Chinese economy’s been growing very strongly, in fact the Chinese stockmarket in the past two or three years has delivered negative returns, whereas property prices have been increasing dramatically.

So what we’re finding is higher net worth, or high net income individuals (who are probably mainly our target customer base) are at the moment looking to put every penny they’ve got into property rather than necessarily into our sorts of saving products. That led, for example, in 2004 to the Chinese life insurance market actually falling a little. It’s recovered in 2005 but it’s still got lower growth than the projected long-term growth.

I think the second reason is to do with the availability of experienced, professional qualified, local managers at CEO level or at city general manager level, of heads of distribution; the supply of experienced people is quite limited and, of course, everybody '” the domestic insurers and the foreign joint venture insurers '” are all after the same pool of people. Our view is that we don’t want to go into new cities until we feel we’ve got strong enough management teams. Some of our competitors are going into new cities more quickly than we are. I don’t think they have stronger management teams than we have, so I think probably they’re taking a bit more of a risk. As we can train and develop local management talent, that ought to then feed into faster growth in China.

Will AXA Asia Pacific have sufficient capital to undertake that Asian expansion?

Yes, in terms of organic expansion plans '” and even if we got very ambitious and stretched targets, to meet those and even indeed to some extent to exceed them from organic growth, we’ve got plenty of capital and we’ll be generating plenty of capital internally to feed that, so we don’t need to raise capital from the external market for our planned organic growth.

If another acquisition came along, for example, as you know we’ve recently made the acquisition of MLC in Hong Kong and Indonesia. If another one came along that was somewhat bigger than that, then perhaps we need to raise external capital but not our planned organic growth.

So you’re not likely to return capital, like the AMP?

Well we certainly would not intend to hold excess capital on our balance sheet that we have no need for, for any longer than is necessary, but hopefully if we can meet our growth aspirations we’ll have plenty of uses for that capital, that I think will deliver hopefully higher returns to our shareholders and returning it to them and just investing in the market generally.

How fast will the Australian operation grow in the next four or five years?

Our medium-term strategic planning says that we’d expect wealth management to grow at 12–14% per annum. We still think that although we’ve grown our market share in recent years, we can close the gap between us and the top five more and therefore we would want to be growing at above-market growth rates '” in the high teens, I think, in wealth management.

In financial protection in Australia, we’re projecting total financial protection premiums growing at 5–6% per annum. We’d hope to be growing more like 9–10% per annum, so we have above-market growth prospects in Australia and New Zealand as well as in Asia.

* Robert Gottliebsen is a business commentator with The Australian.