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Insurer Axa's profit surges despite low interest rates

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(Reuters) — Europe's second-biggest insurer, Axa S.A., 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% on a comparable basis to €3.01 billion ($4.04 billion) in the first half, boosted by strong earnings growth and lower restructuring costs, the company said in a statement.

Profit also benefitted from gains realized 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 €2.70 billion ($3.69 billion), 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 nonlife and a high level of realized 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% after its results, have fallen more than 13% 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% of its activities little exposed to financial markets, a 1 percentage point further decrease in interest rates would shave only €100 million ($136.9 million) off of earnings, Mr. 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 eurozone.

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 ($2.60 billion) by 2015 from €1.7 billion ($2.33 billion) previously by targeting €200 million ($273.9 million) in costs associated with acquiring new life and savings clients.

It has already achieved €1.3 billion ($1.78 billion) in cost savings, mainly through productivity gains as the company invests €800 million ($1.10 billion) in new technologies between 2013 and 2015.

Total revenue rose 2.0% on a comparable basis to €49.71 billion ($68.07 billion), and underlying earnings rose 8.0% over the period to €2.78 billion ($3.81 billion).

Earnings benefited 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," Mr. Harlin said.

In terms of its balance sheet, Axa's gearing was stable at 24%, in line with the group's target of 23% to 25%.

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% stake in its Russian partnership, he added.

With insurers sharing costs of air disasters, the downing of a Malaysia Airlines plane in Ukraine and other recent air accidents would cost Axa €15 million to €20 million ($20.5 million to $27.4 million), Mr. 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," Mr. de Castries added.

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