French insurance, investment and retirement solutions giant AXA has announced this morning that it will acquire Bermudian insurance and reinsurance specialist XL Group in a $15.3 billion deal, confirming the rumours that emerged over the last weekend.
We wrote on Saturday that a deal was rumoured to be on the cards, after it was reported that XL Group could be a target of the French insurance giant.
The confirmation came rapidly, with AXA reporting this a “major leap forward in AXA’s strategic journey” citing the creation of the world’s number one global property & casualty (P&C) commercial lines player across all lines of business.
The boards of the two companies have approved the deal and the total consideration expected to be paid for XL is $15.3 billion, a 33% premium to XL Group’s closing share price on March 2nd.
XL Group’s shares had already risen by more than 20% this year, so the price being paid represents a 50%+ premium on the Bermudian insurance and reinsurance firm’s valuation of last year.
The pair cite strong complementary business synergies, which are expected to fuel future growth and value creation. However AXA shareholders appear unconvinced currently, with the French firm’s shares down almost 8% so far this morning.
AXA CEO Thomas Buberl commented on the announcement of the deal, “This transaction is a unique strategic opportunity for AXA to shift its business profile from predominantly L&S business to predominantly P&C business, and will enable the Group to become the #1 global P&C Commercial lines insurer based on gross written premiums. The transaction offers significant long-term value creation for our stakeholders with increased risk diversification, higher cash remittance potential and reinforced growth prospects. The future AXA will see its profile significantly rebalanced towards insurance risks and away from financial risks.
“XL Group has the right geographical footprint, world-class teams with recognized expertise and is renowned for innovative client solutions. Our combined P&C Commercial lines operations, will have a strong position in the large and upper mid-market space, including in specialty lines and reinsurance, and will complement and further enhance AXA’s already strong presence in the SME segment. The two companies share a common culture around people, risk management and innovation, positioning AXA uniquely for the evolving future of the P&C industry.”
Mike McGavick, CEO of XL Group, added, “Today marks an unrivalled opportunity to accelerate our strategy with a new strength and dimension. With every confidence in how we have positioned XL Group for the future, it is a substantial testament to AXA’s leadership and commitment to maintaining the XL Group brand and culture that we have come to an alignment. We are excited at the opportunity to build the scale, geographical footprint, product portfolio, and the unmatched commitment to innovation that relevance in the global insurance industry requires. In AXA we have found like-minded partners committed to the absolute necessity to innovate and move this industry forward.”
In explaining the strategic rationale behind the acquisition, AXA is quick to explain that XL Group’s platform and global commercial insurance and reinsurance lines specialisms will provide it with diversification and that the arrangement will also enhance the firm’s access to alternative capital.
It’s actually quite telling of the influence of the capital markets and their future role in reinsurance that a company the size of AXA would single this out, both within its press release and an analyst presentation this morning.
It reflects the opportunity that the combined AXA – XL machine will have, to leverage the broad distribution and reach of AXA’s networks, alongside the commercial specialisms of XL and match the resulting risk with the most efficient forms of capital, which at times will no doubt be alternative in nature.
“XL Group provides both a premier specialty platform complementing and diversifying AXA’s existing commercial lines insurance portfolio, and reinsurance capabilities that will allow AXA an access to enhanced diversification and alternative capital,” AXA explained.
The combination will result in a P&C commercial player with total P&C revenues of approximately $60 billion.
AXA said it would accelerate the IPO of parts of its U.S. business to effect the acquisition, as well as using EUR 3.5 billion of cash and EUR 3 billion of subordinated debt to finance the deal.
The combined group is called ‘AXA + Xl Group’ in the analyst presentation, but whether that brand survives or eventually morphs into a pure AXA brand is unknown at this time.
Interestingly, the combined operations of XL Group, AXA Corporate Solutions (AXA’s large commercial P&C and specialty business) and AXA Art are set to be led by Greg Hendrick, currently President and Chief Operating Officer of XL Group.
Hendrick is set to become CEO of the combined group, AXA + XL Group, and will join AXA Group’s management committee, reporting to CEO Thomas Buberl.
Hendrick will be tasked with working alongside Doina Palici-Chehab, AXA Corporate Solutions’ Executive Chairwoman, and Rob Brown, AXA Corporate Solutions’ CEO, to create an integrated organisation and leadership team for this new company, AXA said.
Mike McGavick, XL Group’s current CEO, is set to become Vice-Chairman of the combined P&C Commercial lines operations and will also act as a special adviser to Thomas Buberl, AXA Group CEO, to advise on the integration of the pair and other strategic issues.
AXA said it expects to benefit from synergies of $400 million pre-tax earnings per annum, made up of $200 million of cost synergies, another $100 million from revenues synergies and around $100 million of savings due to reinsurance net of additional reinsurance bought to align with AXA Group’s risk appetite.
AXA said the goal is to, “Create the most innovative insurer known for solving complex risks enabled by the best talent in the industry with leading data and analytics, digital operations and lower cost of capital.”
With around $5 billion of XL Group’s gross written premiums being in the reinsurance business, there is a significant amount of diversification available thanks to this strategic joining as well as opportunities to now grow that business significantly, not least by putting reinsurance capital behind pools of AXA originated risk.
That’s where alternative capital could have an enormous role to play at the future AXA + XL Group entity, providing efficient capital to back certain risks, while the groups balance-sheet can take those most appropriate to it.
AXA repeatedly cites XL’s reinsurance business and the access to diversification and alternative capital this will provide.
The firm said that this will, “Improves AXA’s expertise and allows access to alternative sources of capital including a majority owned ILS manager and $1.7bn of in-force catastrophe bonds.”
As we discussed in our article on Saturday, “XL Group also has its own ILS interests, not least the fact it now leverages around $3 billion of alternative reinsurance capital, from investors in its catastrophe bond issues, collateralized players and ILS funds, as well as through its own ILS fund management venture New Ocean Capital Management.
“New Ocean Capital Management, which XL is one of the founders and lead backers of, has around $600 million of commitments from its ILS investors for the 2018 underwriting year and XL’s catastrophe bond issues now total an impressive close to $2 billion.”
AXA also has its ILS interests under the AXA Investment Managers brand it has an insurance-linked securities (ILS) and reinsurance linked investment management arm with over $1 billion of ILS and catastrophe bond assets under management.
There are compelling reasons to think that the use of alternative capital could increase, as the merging of AXA and XL takes shape, given the potential synergies, XL’s proven appetite for accessing the capital markets and the enhanced access to risk being part of AXA will give it.
However, it’s also important to note that AXA itself recently decided not to renew its own catastrophe bond, as the firm said that at the moment it finds traditional reinsurance pricing more attractive and sees the costs of sponsoring cat bonds, both financially and in terms of effort, as high.
But with XL bringing significant new catastrophe risks in the peak zone regions and an already in-force number of catastrophe bonds, it’s possible that synergies there could help AXA to also return to the cat bond market in combined issues in future.
The ILS management operations could also benefit from greater access to diversified sources of risk through this deal, with New Ocean perhaps able to access European property cat risks more directly from AXA now, adding to its own diversification and helping it to scale further.
But most compelling, for us, is the prospect of AXA’s reach combined with XL’s commercial and specialty expertise, backed by pools of capacity including alternative, with risks more directly accessed and distributed to the most efficient capacity pools.
That’s the kind of transformational transaction that all insurance and reinsurance players must now be looking towards.
M&A activity in insurance and reinsurance now shows us that no deal is too small, looking at AXA – XL, AIG – Validus, and the Swiss Re – SoftBank discussions.
It’s no longer the case that it is mid-sized Bermudians looking for a home, or partner. Now it is global giants looking for diversification, specialisms, access to risk capital and transformational acquisitions that can position them for the future.
While ILS and access to alternative capital is increasingly featuring as a rationale for M&A deals, again reflecting the importance of this trend and how deep its reach into risk markets will be.
That means anybody could be next, from the smallest specialists to the largest global insurance and reinsurance giants, as the industry adapts to the evolved landscape and looks to bring itself rapidly up to speed in order to embrace this new normal future it faces.
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