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XL boss says need for scale drove $15B deal, but investors punish Axa

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XL boss says need for scale drove $15B deal, but investors punish Axa

The need for scale to compete in today's global insurance market helped persuade XL Group Ltd to sell to French insurer Axa in a $15.3 billion cash deal, XL CEO Mike McGavick said March 5.

Axa confirmed early the same day that it is buying Bermuda-based insurance and reinsurance group XL and combining it with its Axa Corporate Solutions large global commercial insurance unit. XL bulked itself up in 2015 by buying Lloyd's of London insurer Catlin, but McGavick said this was not enough to get the company where it needed to be.

Speaking to journalists at a press conference, McGavick said: "If you think about our acquisition of Catlin, it was a recognition that scale matters more and more in insurance operations." He added that maintaining the infrastructure required to operate globally was expensive, as is the cost of capital thanks to regulations such as Europe's Solvency II regime.

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"If you think about those two things alone, you realize that scale makes a huge difference in competitive position. We gained greater scale through Catlin no doubt, but the reality was we still weren't in the top group in the world," McGavick said.

"While our board was not looking to sell, when [Axa CEO] Thomas [Buberl] came forward and outlined a vision for maintaining the brand, maintaining the strength and accelerating its progress through being a part of this more powerful group, it was a very compelling vision indeed."

McGavick said the deal was also attractive because the two companies fit together well with little overlap, and that they shared certain attributes such as approach to customer service.

"When you add that all together and realize that the actual overlaps aren't that large, so the impact on XL's people and on Axa people will be less than it might be ordinarily in such an advanced integration, this is incredibly exciting for all of us. That convinced our board and our management this was the right thing to do," he said.

Share buybacks

For Axa, the capital consumed by the deal mean that the French giant will not be able to return capital to shareholders through share buybacks, which CFO Gérald Harlin acknowledged may disappoint some analysts and investors. Axa's stock price suggested just that, with the company closing down 9.7% in March 5 trading. XL finished the day up more than 29% at $55.92.

"I know that lots of investors and analysts consider [buybacks] extremely valuable but keep in mind that it is a shrinking of a company and here we are expanding our company," Harlin said. He added that the acquisition "is a strategic move and we cannot say that a share buyback is a strategic move."

Cost cutting

The companies expect the deal to generate a variety of synergies, including $200 million of pretax cost savings a year and $100 million of pretax profit benefit a year from cross-selling XL products through Axa's distribution and through combined efforts to target high-growth markets and multinational clients.

The combined company also expects to spend $100 million a year less on reinsurance, and predicts that the group's solvency capital requirement under Solvency II will fall by 30% by 2020, resulting in an improvement of between 5 and 10 percentage points of Axa's Solvency II ratio.

Harlin pointed out that some of the savings would come from delisting XL from the New York Stock Exchange. He said: "XL is a listed company. That means a lot of infrastructure that will no longer be needed."

AXA CEO Buberl insisted, though, that cost was not the main focus of the deal: "This is not about cost cutting, it is about finding the best fit and this is about complementarity with a vision for growth."

McGavick said the addition of XL, which focuses on specialty insurance and reinsurance, would boost the combined entity's ability to keep pace with changes in the insurance market.

"Specialty insurance has always been the originator of new policies, of new concepts for how to insure, and the reinsurance community as the back end of the risk has been the one driving new business models into the sector, particularly through the [insurance-linked securities] market and its expansion," he said.

"In terms of the immediate benefits, the ability to cross-sell the products we have will be one of the quickest sources of growth and additional profit that can come from this work, and in the medium and longer term then, we can kick in our complementary efforts in innovation."