AXA’s life sale could hit economies of scale

AXA’s decision to sell its traditional UK life and pensions business to life acquisition vehicle Resolution for £2.75bn could have adverse effects on the remaining units, according to one equity analyst.

“The deal makes sense in terms of the strategy to reorient the business and move towards growth markets and away from mature markets like the UK, but it could certainly have an impact on economies of scale,” said Helvea analyst Marc Effgen.

He acknowledged that the remaining units may benefit from the greater focus and attention management would be able to afford them in the newly streamlined group, but added, “I’m guessing they had some joint costs that they shared.”

The £2.75bn Resolution will pay AXA for the units consists of £2.25bn in cash and £0.5bn of Resolution senior deferred consideration notes. The amount corresponds to 0.86 times the sold units’ embedded value, or 0.8 times a pro-forma embedded value of £3.4bn reflecting adjustments, mainly on liquidity premium and cost of capital, to align with Resolution’s methodology and assumptions.

Effgen said it was interesting that Axa was selling the units at less than 0.86 times embedded value. “They are taking a relatively big loss on the sale,” he said.

AXA said in statement that the sale of the units is consistent with its intention to focus on growing its wealth management business in the UK life and savings market. It added that it remained fully committed to its other UK-based businesses, including AXA Insurance, AXA PPP Healthcare, Bluefin and the UK operations of AXA Investment Managers.

As a result of the sale, rating agency Moody’s has downgraded the insurance financial strength ratings of AXA’s UK life operations by one notch to A1, and is keeping the rating on review for a possible further downgrade. The agency said the downgrade reflected the removal of parental rating support. It has an A2 senior debt rating on AXA.