AXA Group To Buy XL Group For $153B In Mega Insurance Deal

AXA Group has inked an acquisition deal to buy XL Group Ltd (NYSE:XL) for $15.3 billion in cash. The transaction is expected to conclude in the second half of 2018, subject to customary closing conditions and an approval pending from XL Group’s shareholders.

The purchase is likely to help AXA Group emerge a leader in the bracket of global Property and Casualty Commercial lines insurers based on gross written premiums.

Following this announcement, shares of XL Group have surged 31.06% in the pre-market trading session.

The Purchase Consideration

Valued at $15.3 billion or €12.4 billion, the deal translates into a 33% premium to XL Group’s closing price of $43.30 on Mar 2. Therefore, shareholders of the company to be acquired will now be entitled to receive $57.60 per share.

Financing the Deal

AXA Group will utilize €3.5 billion cash in hand, €6 billion from the planned initial public offering in the United States and €3 billion subordinated debt. The acquirer already has €9 billion of backup bridge financing in place.

Acquisition Rationale

French insurer AXA Group is primarily focused on Life and Saving insurance business. This acquisition is in sync with its strategy to intensify focus on Property and Casualty insurance business. The company has also filed for an initial public offering in the United States for its US business and is already a leading life insurance and annuity company in the region.

With $15 billion of gross written premiums in 2017, XL Group scores as a premier provider in P&C Commercial and Tier 1 specialty lines with its solid presence across North America, Europe, Lloyd’s platform as well as the Asia-Pacific zone.

Shares of XL Group have rallied 23.2%, outperforming the industry’s nearly 1% gain year to date.

While AXA Group’s reinsurance business provides key access to its diversification and alternative capital, it has robust links to the large and mid-market segments. Thus XL Group’s integration into the acquirer’s portfolio is a strategic fit for the company.

Additionally, XL Group is anticipated to leverage AXA Group to build scale, widen its geographic exposure as well as expand its product portfolio.

AXA Group estimates pre-tax annual savings of about $0.4 billion consisting of $0.2 billion from cost synergies, $0.1 billion from revenue synergies and $0.1 billion through reinsurance net of additional reinsurance bought to align with AXA Group’s risk appetite.

The buyout is cash accretive with more than 80% remittance ratio drawn from XL Group and the same will possibly dilute the impact for IPO in 2018 itself. Also, once complete, the acquisition is expected to lower sensitivities to financial markets, reduce beta and cost of equity, enhance cash remittance potential and accelerate the company’s growth profile. Return on investment is estimated to be 10%.

AXA Group reaffirmed its Ambition 2020 target to grow earnings by 3-7%.

Zacks Rank

XL Group carries a Zacks Rank #3 (Hold). With the acquisition projected to add synergies to both companies, we expect analysts to raise their estimates for driving the Zacks Rank.

Insurers Following Suit

Following the organic route, ramping up one’s operational profile seems a well-accepted strategy among insurers as acquisitions create a rage in the insurance domain. Recently, Assured Guaranty US Holdings Inc., a subsidiary of Assured Guaranty Ltd. (NYSE:AGO) has acquired a minority interest in Cadia (Malta) Limited to invest in alternative investments. Also, Brown & Brown, Inc.’s (NYSE:BRO) unit, Brown & Brown Insurance Agency of Virginia, has recently purchased all the assets of Kerxton Insurance Agency, Inc. and Fitness Underwriters, Inc. Moreover, Arthur J. Gallagher & Co. (NYSE:AJG) has bought Williams Insurance Agency, Inc. to enhance its existing restaurant, public entity, entertainment, construction and private trust capabilities.

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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