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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