XL deal changes AXA's DNA into that of a P&C player

AXA is acquiring Bermuda-based property/casualty commercial lines re/insurer XL Group for $15.3 billion (€12.4 billion) in cash.

P&C business represented some 39 percent of AXA’s 2016 pre-tax underlying earnings. After adding the XL Group and excluding AXA US, which is set to be sold, P&C will represent around 50 percent of its pre-tax underlying earnings, according to a March 5 presentation.

The benefits of the move include risk diversification, a reduction of exposure to fluctuations in the financial markets while it also reinforces the group’s growth potential, according to the company.

The combination of the businesses will generate cost synergies through rationalization, capital synergies, reinsurance synergies and revenue synergies totalling around $0.4 billion pre-tax per year.

“There are cost synergies, but the focus is on a common growth vision,” said AXA CEO Thomas Buberl during a March 5 presentation.

Strong “complementarities” will fuel future earnings growth and value creation, the presentation states. In addition, the P&C commercial market is “ripe for innovation and new business models”.

Propelling growth

Gregory Hendrick, XL chief operating officer, said that combining with AXA will offer XL the opportunity to access a whole new set of customers in markets where the insurer previously had no reach.

“XL has a great franchise around what we would call broadly specialty products, professional, environmental and cyber. We see real opportunities to take those products, combine them with the powerhouse that AXA is in the small commercial market space and really sell to a whole new set of customers and distribution that we’ve not had access to before, particularly the smaller brokers in Europe and even in some of the AXA agents.

“AXA Corporate Solutions has a great franchise here in Europe. The benefit from our US underwriting expertise that we will bring to the table will only enhance the positions that AXA Corporate Solutions has with their existing customers and really be able to move forward to a lead position,” Hendrick added.

At the same time, AXA will be able to expand its reach in the US. “We have a very good footprint in the US,” Hendrick said. “We are going to be able to leverage the great expertise that AXA has around small and mid-market commercial and hopefully bring it to bear in the US,” he explained.

Reinsurance part of the strategy

In addition to enhancing its global footprint with access to US and London markets, AXA is adding reinsurance operations to its portfolio. Gross premium written at XL Group’s reinsurance operations grew to $4.68 billion in 2017 from $3.98 billion in 2016.

“Reinsurance has been a core part of our operations at XL almost from its very foundation,” said Hendrick.

“It gives us an ability to enter into markets in a broad way with very limited infrastructure. More importantly it gives us a sense of what is going on in the market. We are able to see what is happening across the P&C spectrum,” Hendrick explained.

Buberl noted that AXA wants to retain the reinsurance business not least because of the access to financial markets it enables.

Hendrick explained that a focal point of the reinsurance business is alternative capital as pension funds, sovereign funds, high net worth families want to participate in the property/catastrophe risk market.

XL Group wants to “bridge the gap between traditional reinsurance and insurance market into that alternative capital space,” Hendrick said. “Thomas and Mike (XL Group CEO Mike McGavick) see a big future on the growth of that potential. That’s one of the big things that the reinsurance operation brings to the table,” Hendrick added.

Size matters

The AXA/XL deal was also driven by the need for scale, McGavick explained.

“Our acquisition of Catlin was a recognition that scale matters more and more in insurance operations,” McGavick said.

“The fact is that operating globally is essential and that this is a very expensive infrastructure to maintain. Capital is made very dear by Solvency II and other regulatory pushes around the world. Scale makes a huge difference in competitive position. We gained greater scale through Catlin, no doubt, but the reality was that we still weren’t in the top group in the world,” he noted.

XL Group acquired Catlin for $4.1 billion in January 2015. The XL Group’s gross premiums written grew to $14.99 billion in 2017 from $13.89 billion in 2016.

“When Thomas came forward and presented the compelling vision for maintaining the brand, maintaining the strength and accelerating its (growth) progress through being a part of this more powerful group it was a very compelling vision indeed,” McGavick said.

Together, AXA and XL Group will become the biggest global P&C commercial lines insurer with gross written premium of €30.2 billion in 2016, according to the presentation.

In order to further strengthen the focus on P&C, AXA is exiting the US life business. AXA intends to initially list a minority stake of its US operations in the first half of 2018 to create “significant additional financial flexibility to accelerate AXA’s transformation.”

“We need to do the full exit in order to move from a predominantly life-focused insurer to a predominantly P/C focused insurer,” Buberl said.