AXA’s Deal Fallout Creates a Buying Opportunity
The insurance giant shocked investors with off-script megadeal for XL Group but sense should start to show soon
A huge acquisition out of the blue is a surefire way to leave your shareholders shell-shocked. Insurance giant AXA AXAHY -0.28% SA did just this in March with its $15 billion deal for XL Group of the U.S. But as investors get over their shock, shares of the French company should rebound.
Thomas Buberl did promise radical change when he became AXA chief executive in 2016, but investors were expecting investment in digital technologies and smaller deals to boost its property, casualty and health businesses. A year later AXA unveiled plans to list its U.S. life arm, AXA Equitable, a capital-hungry business unconnected to the rest of the group. The initial public offering would raise up to $4 billion that investors expected would fund share buybacks and investment in growth.
Then Mr. Buberl dropped his bombshell: Small deals and buybacks were off, and instead he had negotiated one of the industry’s biggest takeovers in years.
AXA’s stock fell 10% that day. After three weeks, its valuation had fallen from 10 times forecast earnings, in line with Italy’s Generali and not far behind Allianz of Germany, to just 8 times earnings. This discount has remained.
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AXA bought XL to fill in one swoop the gaps in the coverage it can offer to large corporations. Along with the sale of its U.S. life business, the move will reshape AXA’s earnings. Life and savings in the future will account for 35% of pretax profits, down from 43% today.
One reason investors were unhappy with the deal is that a flood of yield-seeking capital has flowed into alternative forms of reinsurance, putting pressure on pricing throughout the property-insurance industry. To counter this, Mr. Buberl pledged to cut the group’s exposure to reinsurance. At the same time, higher interest rates may cause investors to shift money back to more traditional investments.
A bigger share of profits from general insurance than from life should give AXA a higher valuation, argues Mr. Buberl. Simply returning to the same valuation as Generali would lift the stock price by about 10% on current prices.
This isn’t far-fetched: At Zurich Insurance Group and Allianz, life business accounted for 31% and 37%, respectively, of first-half profits, and investors value Zurich and Allianz more highly than AXA. Similarly in the U.S., Chubb and Travelers trade at a premium overMetLife and Prudential Financial .
The problem for AXA investors isn’t so much with Mr. Buberl’s strategy; they also worry about the extra debt needed and how that might strain AXA’s balance sheet. But AXA is dealing with the debt question. The sale of an old European life book helped AXA improve its debt-reduction target at half-year results this month.
The missing piece is what this all means for capital returns. General insurance produces more cash profits more quickly than long-term life business and that should boost AXA’s ability to pay dividends. Mr. Buberl pledged more detail on this at AXA’s investor day in November.
Mr. Buberl should be able to show that AXA’s radical remaking means more cash before the year is out. His boldness has brought risks, but before long should also bring rewards.