Covéa, the French non-life mutual, is interested in acquiring AXA XL’s reinsurance business, AXA Re, in deal that could be valued at €5 billion, according to press reports.

The news story, which originally appeared in Bloomberg, “is credible,” according to Berenberg Capital Markets in a research note. The research analyst pointed to the fact that Covéa has been in the market for an acquisition for the past few years.

In 2018, Covéa attempted a hostile takeover of reinsurer SCOR, but ultimately abandoned the deal in early 2019. Then in early 2020, the company sought to purchase PartnerRe from EXOR, but pulled out of the deal as a result of last year’s economic turmoil caused by the COVID-19 crisis.

Neither AXA nor Covéa has confirmed the negotiations.

AXA Re now accounts for just over 25% of the group’s premiums, or €5 billion (US$6 billion) out of €19 billion (US$22.7 billion), said Berenberg, noting that the business also accounts for approximately 33%, or €400 million ($477.4 million), of AXA XL’s €1.2 billion (US$1.4 billion) earnings target for full-year 2021.

Berenberg believes such “a deal would be very positive to the AXA valuation” for reasons that include:

  • The deal would have a potential upside of 4%-6% for AXA.
  • It would remove earnings volatility. “Essentially, while we believe that the commercial lines and speciality part of AXA XL are good fits with AXA, the reinsurance business adds too much volatility. Therefore, in our view AXA is not the best long-term owner of this business.”
  • An estimated gain of up to €1 billion ($1.2 billion), assuming a potential sale price of €4 billion-€5 billion ($4.7 billion-$6 billion), worth up to €0.40 a share.
  • Assuming a €5 billion sale price and if AXA XL’s reinsurance unit reports a €400 million ($477.4 million) net profit, then the deal would create a 12x price-to-earnings ratio, which is well above AXA’s own 8x P/E. “This clearly would create value.”
  • By reducing required capital, it would potentially add to AXA’s group solvency, which Berenberg estimates is approximately 205% for Q2 2021, down from 208% in Q1 2021.

Berenberg has a “buy” rating on AXA as it believes “hardening markets in commercial lines and in reinsurance will help its earnings growth top its 3-7% target range for 2020-23[Estimated].”

The research note was authored by analysts Michael Huttner and Thomas Bateman.

Source: Bernberg Capital Markets

*This story ran previously in our sister paper Insurance Journal.