Axa explored XL Re spin-off ahead of $15bn deal

Axa approached a number of reinsurers before agreeing its $15.3bn acquisition of XL to sound out their interest in doing a back-to-back transaction to buy XL Re, The Insurance Insider can reveal.

Sources told this publication that Axa was looking to gauge whether a spin-off of $4.7bn reinsurer XL Re via a private sale was viable before it pressed ahead with the deal.

Banking and industry sources said that Axa was unable to gain traction in discussions, primarily because potential counterparties were concerned about revenue dis-synergies.

Despite the absence of interest at an attractive price, Axa chose to proceed with the XL deal, and this publication is not aware of any current plans to sell off or float the reinsurance business.

Nevertheless, Axa’s decision to test the market’s appetite for XL Re suggests that the prime motivator of the takeover and the real locus of value for Axa in XL was its primary business.

The news has emerged as Axa disclosed that it had secured all necessary regulatory approvals for the acquisition, which is now set to close on 12 September.

As the companies prepare to close the transaction, the reinsurance market is still trying to fathom the implications of the mega-acquisition, with the market looking hard for clues to Axa’s strategy for the reinsurance book.

An Axa spokesperson told The Insurance Insider: “We had a thorough review of XL Group’s businesses before we announced the deal early March, and we are fully committed to both XL’s insurance and reinsurance businesses."

When the deal was announced in March, Axa group CEO Thomas Buberl explicitly denied that it would look to spin off XL Re.

“I've been asked a lot, are you going to get rid of the reinsurance? The answer is 'no'.”

In explaining his answer, the Axa CEO said that the lines between primary lines and reinsurance are increasingly blurred.

“Today, it's not anymore a question of ‘are you in primary insurance or are you in reinsurance?’. The question is: 'what access do you have to capital pools in the market?'.”

He continued: “Are you using your own shareholder money? Are you using reinsurance? Or are you using even capital market instruments like insurance-linked securities?”

Axa has made it clear that it will move to de-risk XL Re, with steps already taken by XL that have moved the business in the same direction.

Axa chief risk officer Alban De Mailly Nesle told analysts in March: “We have the reinsurance part where we decided to reduce our risk appetite and, therefore, to reduce the amount of capital that we need to have on this compared to XL.”

On the same call, Buberl repeatedly referenced scope for business to be written on behalf of third-party capital, potentially pointing the way towards a strategic pivot in that direction.

“It is a question today, where do you access the capital markets? What risks do you take on your own balance sheet? And what risk do you actually get out?”

Buberl continued: “And what you see is XL is very leading in the space of originating, packaging but only keeping a small share of the risk and placing the risk elsewhere, so reinsurance all through capital instruments.”

This is extremely important and extremely attractive, Buberl added.

A move either to sell off or to migrate XL Re’s risk to third-party capital providers could create a dollar earnings problem for the business given that broadly two-thirds of underwriting income is derived from that part of the book.

XL declined to comment.