Axa's XL deal may be 'outlier' in European insurance M&A

Axa's planned $15.3 billion takeover of Bermuda-based reinsurance group XL Group Ltd may be the exception rather than the rule in Europe, despite conditions being favorable for more big acquisitions.

The deal took the market by surprise when it was announced March 5, not least because Axa had previously guided analysts to expect deals of between €1 billion and €3 billion. Its share price dropped 9.7% to €22.62 on the day of the deal announcement, before recovering slightly to €22.83 on March 6.

Conducive environment

Several factors are conducive to further big deals involving Europe's largest insurance groups. Capital levels are high at most companies, and there are opportunities to borrow more money. Generally low organic growth opportunities in the European life and nonlife businesses also make acquisitions a potentially attractive prospect. Furthermore, Europe's Solvency II capital regime is pushing insurers to consider expanding into new areas.

"You get quite a bit of credit for diversification under Solvency II, which you could say could encourage acquisitions in areas in which companies don't presently operate," S&P Global Ratings insurance ratings director Mark Nicholson said.

Allianz Group, in particular, has said it is looking for more acquisitions, with nonlife insurers at the top of its list. It was rumored to be interested in XL in early February, and it has surplus capital: Its 229% solvency ratio under Europe's Solvency II insurance capital regime is above its target range of between 180% and 220%. It embarked on a €2 billion share buyback in January 2018, having just completed a €3 billion buyback.

"Allianz is the obvious one that could do an acquisition," said Macquarie analyst Andy Hughes.

And as XL did for Axa, the Bermuda insurance market could provide a useful source of companies to acquire. Fitch Ratings predicted in a Feb. 9 commentary that interest in M&A among insurers and reinsurers would persist in 2018, particularly in Bermuda. It argued that increasing scale and diversification for the companies there could help cushion them from market challenges such as price competition and low investment yields.

In a March 6 research note about the Axa/XL deal, Jefferies analyst Mark Cathcart highlighted the potential for the acquisition to transform XL's fortunes, adding: "We have long considered the Bermudan industry structurally disadvantaged compared to European peers because it lacks global diversification and [due to] the high credit rating necessary to be competitive in its core markets over the long term."

Bermuda's insurers and reinsurers are traditionally weighted toward U.S. nonlife business.

Just an outlier?

But although many of the necessary conditions are there to prompt big deals, they may not come to fruition, with Axa CEO Thomas Buberl acknowledging during a March 5 conference call that "hardly any people like" large, transformative deals.

S&P Global's Nicholson said: "I am hesitant to say we won't see any more deals [like Axa/XL] because sometimes one thing can prompt another. But if you had asked me at the start of the year, I'd have thought acquisitions would have been smaller and more accretive in scale rather than very dramatic, as this one has been."

He added: "This could prove to be an outlier."

While Allianz is the one that looks most like it has the firepower to do a big deal, its needs are not the same as Axa's, according to Macquarie's Hughes. One of the drivers for Axa buying XL was shifting its portfolio more toward the nonlife insurance business.

"Allianz already has a big commercial business, so they will be less keen to pay a big price for a commercial business they already have," he said. "I don't think they are in the same situation as Axa was in wanting to make a structural shift in the business."

Allianz seems unwilling to buy nonlife business at today's high prices, with CEO Oliver Bäte telling journalists at the company's Feb. 16 annual results conference that "prices are pretty high" and "so far, we haven't found anything that is fitting."

But as the Axa deal has shown, it is difficult to say with confidence what will happen next in European insurance M&A.

"The reason this took people by surprise was that they thought that Axa was going to do small bolt-on deals and suddenly it comes up with a $15 billion one," Hughes said.

"Predicting this is not an easy thing."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.