Axa bets market set for rebound with USD15.3b XL deal

Axa SA Chief Executive Officer Thomas Buberl is betting the worst is over for insurance.

His USD15.3 billion purchase of XL Group Ltd., the company’s biggest ever, will make Axa the top provider of commercial casualty coverage just as premiums rise after last year’s hurricanes and California wildfires. The deal will also allow the insurer to focus on parts of the industry that are less sensitive to financial markets, a key target for insurers after investment income was hurt by a decade of low interest rates.

Shareholders were less than enthusiastic about the deal. The Paris-based firm fell the most since June 2016 after the announcement, with analyst Daniel Bischof of Baader Helvea AG saying that the deal has a sound logic, but the price is at the upper end of expectations. Axa is paying $57.60 a share, a premium of about one-third compared with the stock’s closing price on Friday. XL’s shares had gained 23 percent this year before yesterday’s announcement.

The price “means a substantial part of the expected synergies were passed on to existing shareholders,” Bischof wrote. It should result in a lower cost of equity for Axa and reinforces the firm’s growth potential, he said.

Insurance premiums had been falling for most of the past decade, driven by a lack of natural disasters and competition from hedge funds. The $306 billion of losses last year from weather-related disasters including Hurricanes Harvey, Irma and Maria is finally leading to increases in pricing, prompting an uptick in deals.

Buberl, the 44-year-old CEO, agreed the biggest-ever purchase of a U.S. insurer by a European buyer less than two years after taking the position. XL had also attracted interest from competitors including Germany’s Allianz SE, Bloomberg reported earlier.

“This is not an obvious fit for Axa,” UBS Group AG analyst Colm Kelly wrote in a note to clients. In recent years, “Axa has grown via bolt-on acquisitions to achieve scale, not large-scale M&A.”

The deal does chime with Buberl’s plan to focus on products that require technical expertise and regular customer contact, which may allow the firm sell additional policies to the clients. It will lead to annual pretax synergies of $400 million and will be cash-accretive, according to Axa’s statement yesterday.

“From a P&C perspective, Axa needed in my view a stronger presence in the U.S.” Davide Serra, CEO of money manager Algebris Investments, said in an interview on Bloomberg Television. Focusing on that segment “over the medium term, it’s a safer bet.”

The insurer plans to finance the acquisition using cash in hand, subordinated debt and proceeds from an IPO of its existing U.S. operations. It’s also arranged 9 billion euros ($11 billion) of backup bridge financing.

The IPO, which Axa announced last year, will see the insurer list its U.S. Life & Savings unit and its 64 percent stake in AllianceBernstein in the second quarter. Axa plans to accelerate its sell-off of the combined businesses following the XL deal.

Companies like XL Group have become takeover targets after the heavy toll of natural disasters last year pushed prices for coverage higher. Last month, the firm’s CEO Michael McGavick said he was optimistic about XL’s progress on the back of a solid capital position and growth in premiums. 

The biggest insurance takeover this year had been American International Group Inc.’s January agreement to buy Validus Holdings Ltd. for more than $5 billion in cash. SoftBank Group Corp. wants to buy a stake in reinsurer Swiss Re AG and Phoenix Group Holdings is buying Standard Life Aberdeen Plc’s insurance business.

Formerly a regional insurer in Normandy, Axa built itself into Europe’s second-largest insurer through major takeovers in the 1990s. Recent deals have been smaller-scale, acquiring assets or setting up partnerships in emerging markets including China, Nigeria and Colombia. MDT/Bloomberg