5 December 2008
Life Insurance and WM
Buck the trend
James Coghill, CFA
Research Analyst
(61) 2 8258 1660
james.coghill@db.com
Scott Olsson
Research Analyst
(61) 02 8258 2764
scott.olsson@db.com
Mid-year tilt evolves to an overweight view on Wealth Managers
In the lead up to the equities downturn, we argued against investing in WMs on
the basis that cyclically high multiples were being applied to grossly overstated
earnings. With AMP's and AXA's FY09F EPS having reduced 30% and 14% since
Oct 2007, we feel the opposite is now occurring. "Buck the trend" estimates
AMP's FY09F EPS forecasts are 15% below a normalised trend - a cornerstone for
our upgrade to Buy (separate note). After tilting our negative WM view in June this
year with an AXA upgrade, we are now moving to an overweight sector call.
Deutsche Bank AG/Sydney
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LOCATED IN APPENDIX 1.
Sector Strategy
Top picks
AMP (AMP.AX),AUD5.20 Buy
AXA Asia Pacific Holdings (AXA.AX),AUD4.40 Buy
Companies featured
AMP (AMP.AX),AUD5.20 Buy
2007A 2008E 2009E
P/E (x) 20.2 15.0 13.4
Div yield (%) 4.5 8.5 7.7
Price/book (x) 9.7 4.3 4.2
AXA Asia Pacific Holdings (AXA.AX),AUD4.40 Buy
2007A 2008E 2009E
P/E (x) 20.0 19.5 11.5
Div yield (%) 2.9 5.1 5.5
Price/book (x) 3.4 2.1 2.0
Perpetual (PPT.AX),AUD32.59 Hold
2008A 2009E 2010E
P/E (x) 20.0 15.2 13.8
Div yield (%) 5.1 7.5 8.3
Price/book (x) 5.7 4.9 5.1
Tower Australia (TAL.AX),AUD1.90 Hold
2008A 2009E 2010E
P/E (x) 14.4 9.1 8.2
Div yield (%) 1.7 3.2 3.7
Price/book (x) 1.6 1.0 0.9
Global Markets Research Company
“Buck the trend” looks through the cycle and quantifies “trend” earnings
In “Spring tide”, 12 Nov 2007, we argued that equities outperformance had
overstated Super FUM growth by an average 7.3% per annum over the four years
to June 2007. We also highlighted that this Super bubble had been compounded
by abnormal inflows, which were around 7% above trend in 2007.
Super FUM projected to be well below trend by mid-2009
Much has changed over the past 12 months. The correction to equity markets has
been swift and severe. Despite this, it is still no easy task assessing the cyclical
bias in Super and the extent to which WMs profits are inflated or depressed by
equity returns. By mid-2009, “Buck the trend” estimates Super could be 16%
lower than the 2007 peak at around $1010bn. Relative to a scenario where
equities delivered a constant 9% return over the past decade, we believe “actual”
Super will be ~25% lower than it would have been in a more normal world.
Our “trend” earnings framework estimates AMP is under-earning by 15%
Unsurprisingly, 2H07 was the most distorted half for AMP, earning at a rate 25%
ahead of trend. The worst half was 1H03, some 12% below trend, although
following the 50% collapse in equities off their highs this year, 2009F is rapidly
developing into the most depressed year relative to trend – around 15% below
AMP’s normalised earnings capability. AXA’s volatility around trend is lower due to
business mix but the pattern over time is much the same, as one would expect.
PE multiples once again lying, but in the other direction
We’ve reviewed PE relatives using trend earnings and compared these to longerterm
average PE relatives for AMP (1.25x) and AXA (1.15x). AMP, for example,
appears relatively full valued at around a 1.3 PE relative based on actual FY09F
earnings estimates, but this premium is 15% lower on trend earnings. We are
now at a point where it is increasingly difficult to find a value measure that screens
negatively on the sector – we review these in detail in the note.
AXA remains preferred WM exposure, AMP close behind
AXA’s regional diversity, higher sustainable growth rates and valuation discount
support our preference, although following 15% outperformance over AMP since
June it’s a closer call now. Price targets reflect 12-month roll-forward of sum-ofparts
valuations which are based mainly on embedded-value methodologies for
Risk business and DCF models for WM operations. Downside risks to our cautious
sector view include equity market underperformance, pending Government review
of Super, higher than expected fee margin pressure and pressure on inflows – see

Table of Contents
Buck the trend ................................................................................... 4
Executive Summary ..................................................................................................................4
Super update - where are we 12 months after tipping point?...................................................6
Super – now underperforming “normal” expectations.............................................................8
WMs’ FUM and profits – eliminating bull and bear market spikes............................................9
WMs’ FUM and profits – has the downgrade cycle run its course? .......................................12
Valuation volatility over the cycle ............................................................................................13
Valuation and EPS trends ............................................................... 18
Earnings momentum...............................................................................................................18
Long-term P/E trends and valuation comparisons...................................................................19
Valuation methodology ...........................................................................................................20
Risks ......................................................................................................................................20
Running the numbers - AMP...................................................................................................21
Running the numbers - AXA....................................................................................................22
Running the numbers - CGF....................................................................................................23
Running the numbers - PPT ....................................................................................................24
Wealth management in pictures .................................................... 25
Retail Managed Funds net inflows – overall market ...............................................................25
Retail funds net inflows by major player .................................................................................26
Retail funds under management – overall market...................................................................27
Retail funds under management – major players....................................................................28
Retail funds gross inflows by major player .............................................................................29
Risk insurance in pictures............................................................... 30
Total risk market – winners, losers and industry growth trends..............................................30
Individual risk market ..............................................................................................................33
Group risk market....................................................................................................................35
AMP – individual risk business trends.....................................................................................36
AXA – individual risk business trends......................................................................................37
TAL – individual risk business trends ......................................................................................38