UPDATE 2-Insurer AXA's profit surges despite low interest rates

Fri Aug 1, 2014 5:20am EDT

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* Profit tops estimates, AXA lifts cost-savings target (Adds quotes, details)

By Leigh Thomas

PARIS, Aug 1 (Reuters) - Europe's second-biggest insurer, AXA, posted a better-than-expected first-half profit on Friday and raised its cost-savings target, shrugging off the impact of falling interest rates.

Net income rose 25 percent on a comparable basis to 3.01 billion euros ($4.03 billion) in the first half, boosted by strong earnings growth and lower restructuring costs, the company said in a statement.

Profits also benefitted from gains realised on the rising value of its financial assets and derivatives as interest rates fell over the period.

The result beat analysts' average forecast for net income of 2.696 billion euros, according to a poll of 20 analysts provided by the company.

"This has largely been driven by positive tax one-offs in the life division, some exceptional dividends in non-life and a high level of realised gains," said Berenberg analyst Peter Eliot in a research note.

New technologies have also allowed the company to make cost-cutting productivity gains.

AXA's shares, which opened up 3 percent after its results, have fallen more than 13 percent since the start of the year as insurance stocks suffered from investor perceptions that low interest rates crimp earnings from their vast fixed-income holdings, making it trickier to make fixed payouts to clients.

"These excellent results were achieved in a low-rate environment, which shows that market concerns about this context and its impact on AXA are exaggerated," Deputy Chief Executive Denis Duverne told reporters.

With 70 percent of its activities little exposed to financial markets, a one percentage point further decrease in interest rates would shave only 100 million euros off of earnings, Duverne said.

Yields on government bonds in France and Germany have fallen to record lows after the European Central Bank cut its refinancing rate barely above zero in a bid to stave off the threat of inflation taking hold in the euro zone.

GROWTH AND RISKS

AXA is seeking to lift profitability through tariff hikes and higher-margin products while reducing its costs.

The company said in a statement it was raising its cost savings target to 1.9 billion euros by 2015 from 1.7 billion previously by targetting 200 million in costs associated with acquiring new life and savings clients.

It has already achieved 1.3 billion euros in cost-savings mainly through productivity gains as the company invests 800 million euros in new technologies between 2013 and 2015.

Total revenue rose 2.0 percent on a comparable basis to 49.71 billion euros, and underlying earnings rose 8.0 percent over the period to 2.78 billion.

Earnings benefitted from particularly strong growth in AXA's life and savings business, but were negatively impacted by higher natural catastrophe charges in its property and casualty line stemming from June hailstorms in Europe, said finance head Gerald Harlin.

"We are confident in our capacity to grow in 2014. Compared to 2013, we expect to increase new business volume in life and savings and grow casualty revenues," Harlin said.

In terms of its balance sheet, AXA's gearing was stable at 24 percent, in line with the group's target of 23-25 percent.

Chief Executive Henri de Castries was relaxed about AXA's exposure to the crisis between Ukraine and Russia because the group's business in those countries is minor, albeit profitable.

As a result, AXA did not expect to sell its 30-percent stake in its Russian partnership, he added.

With insurers sharing costs of air disasters, the downing of an Malaysia Airlines plane in Ukraine and other recent air accidents would cost AXA 15-20 million euros, Duverne said.

"We think that these disasters, whose combined cost is greater than the premiums received by the market in 2014, should have an impact on tariffs next year," De Castries added. (1 US dollar = 0.7471 euro) (Reporting by Leigh Thomas; Editing by Jeremy Gaunt)

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