AXA to Buy Insurer XL Group for $15.3 Billion -- 5th Update
March 05 2018 - 04:49PM
Dow Jones News
By Matthew Dalton and Ben Dummett
French financial giant AXA SA said Monday it would buy XL Group
Ltd. for $15.3 billion to create one of the world's largest
property and casualty insurers, drawing a sharp rebuke from
investors who pushed AXA's shares down nearly 10% in Paris.
Analysts said AXA likely overpaid for a company still struggling
after a calamitous hurricane season that has cost the insurance
industry tens of billions of dollars. The proposed deal also put
AXA into conflict with investors as it prepares to spin off its
U.S. life insurance and money-management business to the public
later this year.
"From my calls with investors so far, they all point to three
things: wrong asset, wrong timing and wrong price," said Gianluca
Ferrari, an analyst at Mediobanca. "This is probably adding more
institutional investor risk to the U.S. IPO."
AXA said the transaction would cut its exposure to financial
markets and refocus its business on insurance products that aren't
sensitive to swings in interest rates and stock prices. XL,
however, presents AXA with a different kind of risk: It is heavily
exposed to the business of insuring against natural disasters. The
Bermuda-based company lost $560 million last year mainly because of
the string of powerful hurricanes that slammed the U.S. and the
Caribbean.
AXA Chief Executive Thomas Buberl said he would unload some of
that risk when the French giant takes control of XL.
"We will not run the business with the same natural-catastrophe
exposure, " Mr. Buberl said in an interview.
In light of the XL deal, Paris-based AXA said it would
accelerate existing plans to split off its large U.S.
life-insurance business in a public offering. That division owns a
majority stake in AllianceBernstein, a money manager struggling
against competition from cheaper index funds.
XL's shares are trading near a 10-year high, rallying since the
beginning of the year after rumors swirled that the company was a
takeover target. AXA is offering to pay $57.60 a share, which
represents a 33% premium to Friday's closing price. Mr. Buberl said
that price is justified by the benefits that will come with the
scale of the new business.
"We have significant synergies on the cost side and on the
capital side, " he said.
The offer for XL dashes the near-term investor hopes that AXA
would use the IPO proceeds to buy back shares and for modest
acquisitions. The offer also departs from AXA's historical strategy
of focusing on bite-size deals and seeking growth in Asia over the
U.S. reinsurance market. "Strategically, we think this is not an
obvious fit for AXA," UBS said.
Mr. Buberl said that buybacks are still a possibility once the
combined business is generating more cash.
AXA's management doesn't face a single large shareholder that
could block the transaction. BlackRock Inc. is AXA's largest
investor, with a little more than 5% of shares. A BlackRock
spokesman declined to comment.
XL generated revenue of $11 billion last year, but hurricanes,
California wildfires, two Mexican earthquakes and other
catastrophes forced the company to pay out $2.1 billion in damage
claims.
Reinsurers such as XL are struggling to raise premiums despite
these disasters -- which would typically allow the industry to
raise rates -- amid competition from catastrophe bonds. Such bonds,
which essentially package insurance risk as debt, have attracted
investments from pension funds and other investors seeking higher
returns.
Although global property catastrophe policy rates were up just
under 5% at the start of 2018, policy prices were still below those
of 2016 even though 2017 marked the "most expensive catastrophe
loss year on record," according to a study by reinsurance broker
JLT Re.
That is pushing companies with reinsurance businesses to seek
greater scale through deals. The purchase of XL represents the
second acquisition of a Bermuda-based insurer and reinsurer this
year after American International Group Inc. agreed in January to
buy Validus Holdings Ltd for $5.56 billion.
The XL deal also highlights a broader consolidation trend in the
insurance sector. In February, reinsurance giant Swiss Re AG
confirmed a Wall Street Journal report that it was in talks to sell
a minority stake to Japan's SoftBank Group Corp.
To finance the deal, AXA said it would use EUR6 billion ($7.4
billion) in proceeds from the coming IPO of its U.S. business, EUR3
billion in cash and issue EUR3 billion in debt. AXA filed for the
offering of the U.S. business, AXA Equitable Holdings, in November
with U.S. regulators, though shares have yet to be sold to the
public.
"This means we intend to progressively sell down the AXA Group's
stake in AXA Equitable Holdings over the next couple of years,
subject, of course, to market conditions," Mr. Buberl said.
He cautioned, however, that the IPO wasn't necessary to buy
XL.
AXA and XL's boards have both approved the deal but the
transaction remains subject to approval from XL's shareholders and
regulators.
Write to Matthew Dalton at Matthew.Dalton@wsj.com and Ben
Dummett at ben.dummett@wsj.com
(END) Dow Jones Newswires
March 05, 2018 16:34 ET (21:34 GMT)
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