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What's going on?
French insurance giant AXA announced on Monday that it plans to buy XL Group, a major American insurance company, for $15 billion.
What does this mean?
The move is a sign of AXA bringing forward plans to revamp its business by becoming one of the worlds biggest property and casualty insurers, turning away from its traditional life insurance focus (an area more exposed to volatility in financial markets). AXA is currently in the process of selling off its US life insurance business, which also majority-owns struggling money manager AllianceBernstein, via an initial public offering.
Amid a general wave of consolidation in the insurance industry, buying XL also means AXA can beef up its reinsurance business although the move does seem to be at odds with AXAs previous plans to expand into emerging markets.
Why should I care?
The bigger picture: Mergers are helping reinsurers engineer profits, even if they cant boost revenues.
Insurance claims from natural disasters (like last summer’s hurricanes) totaled a record $135 billion last year, and all those payouts hit reinsurance companies (who insured the insurers themselves against losses) hard. But despite the uptick in extreme weather, reinsurers are struggling to charge higher premiums on future policies: competition from “catastrophe bonds” might have something to do with it. Many in the sector now appear to see joining forces as a way to save costs and ensure profitability: American insurer AIG bought reinsurer Validus for $5 billion back in January, for example.
For markets: The deal was great for XLs investors but AXAs didnt appear enthused.
AXA offered to buy XL at a roughly 33% premium to its Friday share price, and XLs stock rocketed up in anticipation of a deal getting done. AXAs investors were less impressed, however: some think that its bid is overpriced, and they arent too pleased that the proceeds of AXAs forthcoming sale of its American operations may now go towards the purchase of XL (instead of, say, being returned to shareholders).
Originally posted as part of the Finimize daily email.
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