AXA-XL: Why such a negative reaction?

AXA’s £11.1bn acquisition of XL Group is the biggest acquisition in the French insurer’s history, and one that chief executive Thomas Buberl says will make them “number one in commercial insurance” globally.

So if the deal is designed to launch AXA into the stratosphere, why has there been such negative reaction?

Why so negative?

The first signs that the deal wasn’t received well began with a drop in AXA’s share price.

On Monday 5 March, when the deal was announced, AXA’s market value dropped by almost €5bn to €56bn and although it has now levelled out, it has remained around that lower level.

It quickly became clear that analysts, investors and market watchers had two major doubts – namely, that AXA paid too much and had bitten off more than it can chew.

“The purchase price looks quite high even after synergy effects and AXA’s debt ratio is again rather stretched,” say analysts at Germany’s Bankhaus Lampe.

Macquarie says the deal would increase group leverage from 25% to 32%.

The expansion into the US is also being questioned.

AXA acquired XL to grow in commercial lines globally, and the XL deal means it suddenly has a significant reinsurance and general insurance exposure in the US.

UBS Group AG analyst Colm Kelly has doubts.

“This is not an obvious fit for AXA,” he wrote in a note to clients. “AXA has grown via bolt-on acquisitions to achieve scale, not large-scale M&A.”

In the UK, XL Catlin’s main business is as a London property/casualty and reinsurance player.

Broker Network’s insurer relations director, Dan McNally outlines how the deal throws up some difficulties.

He says: “A key challenge for AXA in the UK may be to what degree they can bring the new specialist capability to the front lines in their regional branches, as often such businesses in other insurers remain all too London-centric and miss a real opportunity as a result.”

The rating agencies are usually more cautious than analysts, but even they have reacted badly.

Moody’s said that in light of the deal, it is analysing AXA’s rating with a “negative outlook.”

A spokesperson for Moody’s says: “The negative outlook reflects the impact of the proposed financing for the acquisition of XL.”

If AXA wants Moody’s outlook to stabilise, it will have to ensure XL’s staff and management keep their jobs and keep its Solvency II ratio within the target range of 170-230%.

Not all bad

However, at least AXA got the thumbs up from its UK brokers.

Broker Network’s McNally says, “the deal appears to give AXA a broader and more diversified portfolio”.

Aston Scott group chief executive, Peter Blanc calls the deal “exciting,” and “a game-changer” globally.

He says: “I think it was unexpected because it was audacious. I think it is exciting though, a real game-changer for both AXA and XL.

“It gives AXA a huge amount of new capabilities. It gives them a chance to go for those bigger deals, and now XL have the branding behind them to start really making moves outside of the US.”

What about the UK?

Frequently, brokers are concerned that a merger between two insurance companies limits choice as products, offices and functions are streamlined.

But they say that XL and AXA are so different, that there is not much to fear.

Steve White, Biba chief executive thinks the deal will not see a change in the quality of the work the two companies already carry out.

“AXA and XL are very different insurers, and both have been most supportive of brokers bringing them a great range of product solutions and we do not expect this to change going forward,” he says.

Peter Blanc adds: “I don’t think it will affect the UK market too much at first. Maybe after some time, it will. But because what they both do over here is so different, I think it will take time for there to be any real noticeable difference.”