Over the past couple of months, we have seen some potential moves into the Insurance sector by some big tech players, specifically Amazon and Softbank. We have covered both of those at Daily Fintech, here and here, for Amazon and Softbank respectively.
On the incumbent side, we have seen carriers undergo a number of initiatives in the wake of the Insurtech movement that has increased over the past couple of years.
We’ve seen carriers go about this in a number of ways: partnering with start-ups/experienced software providers, setting up in-house accelerators/incubators as well as corporate venture funds.
There has been some M&A over the past couple of years, both within the P&C Insurance sector as can be seen in the chart below from CB Insights and in general, as can be seen here from Coverager.
This week, AXA announced a purchase of XL Group for 15.3bn. Though the ACE-Chubb deal was bigger, the timing of the AXA/XL Group deal makes it much more significant given the current environment we are operating in (one in which Insurtech is currently one of, if not the biggest words being uttered in the boardrooms, conferences and social media feeds within the Insurance industry.)
This week, I take a look at:
- Details of the transaction
- Business overviews of AXA and XL Group
- What has each company done in regards to Insurtech?
- Why this deal makes sense and is in line with AXA’s strategic objectives
- What are the challenges with this deal?
Details of the transaction
As can be seen in the press release, AXA purchased XL Group for $15.3bn (12.4bn Euro) in cash. ‘XL Group shareholders will receive USD 57.60 per share. This represents a premium of 33% to XL Group closing share price on March 2, 2018.’
This deal will be ‘financed by ca. Euro 3.5 billion of cash at hand, ca. Euro 6.0 billion from the planned US IPO and related transactions and ca. Euro 3.0 billion of subordinated debt’.
The initial reactions to the deal are not too favorable, for reasons such as ‘Axa didn’t appear to be seeking major purchases’, is ‘a company long out of the habit of large scale M&A’ and that ‘Axa is still paying rather more than what the market reckoned XL was worth’.
The market reaction can be seen a bit more clearly through AXA’s stock price the past couple of days.
On the surface, I can understand the initial negative sentiment of this deal. I also have my reservations which I will cover later in this article.
However, to know more about this transaction and why it happened, we must look at both businesses a bit more closely.
Business overviews of AXA and XL Group
To understand a bit more about the businesses of both AXA and XL Group, I took a look at both organization’s financials. AXA’s can be found here and XL Group’s here. All graphics in this section are from the full-year 2017 investor presentations and financial statements.
AXA’s 2017 sales mix can be seen below for Life and Savings:
And for Property and Casualty:
XL Group’s 2017 sales mix can be seen below:
I do note that these three slides show APE, Revenues and GPW. I’ve noted these all as ‘sales’ because as one can see from the financial statements below, these figures are the most representative of the actual new business sales done for each company.
AXA Life and Savings:
Why is this important?
Looking at these graphs and numbers show two things:
- AXA is not buying a back book of business here. AXA already has a huge back book of business that it earns revenue from. They only rely on new business sales for roughly ⅓ of their total revenue whereas XL Group is much more reliant on new business sales for its revenue.
- AXA is acquiring a company that has a large primary market footprint in lines of business AXA does not currently operate in as much and has a reinsurance arm that should be able to bring some more in-house underwriting specialty to AXA’s overall Group.
In addition to the two points above, the slide below from the announcement presentation of this deal (thanks Coverager!) gives a high level view of how these two businesses complement each other further, aside from just products.
The 4th point for both companies discusses innovation. So, before I go into my views on this deal, let’s take a look at what both companies have been doing on the innovation front.
What has each company done in regards to Insurtech?
Neither of these organizations are a stranger when it comes to Insurtech.
Both have set up VC arms, with AXA Strategic Ventures managing $450m of funds and XL Innovate managing $500m. They have built up quite impressive portfolios, seen here for AXA Strategic Ventures and here for XL Innovate. AXA Strategic Ventures is also one of the most active corporate VC funds globally, according to CB Insights.
Further, both have in-house innovation units.
These are two companies that are not taking the ‘fast follower’ approach to Insurtech. They are two of the pioneers.
Now that we’ve got the background out of the way, let’s take a look at why this deal makes sense as well as some of the challenges they have moving forward.
Why this deal makes sense and is in line with AXA’s strategic objectives
Back in June 2016, AXA unveiled its 4 year strategic plan entitled Ambition 2020. Thomas Buberl, AXA’s Group CEO (who at the time was the Deputy CEO) is quoted describing the two-pillar strategy of Focus and Transform as follows:
“Focus, the first pillar of our strategy, is about taking actions today to ensure we deliver what our stakeholders expect from us. We will further grow our operations in selected areas, such as commercial lines, capital light savings products and in Asia, leveraging our strengths and best practices. We will also continue to improve our cost efficiency and technical margins. These initiatives will support our target of an average annual increase in underlying earnings per share of between 3% and 7% over the plan period.”
“At the same time, the second pillar of our strategy is to transform our company to ensure tomorrow’s growth. We want to adapt our business model from payer to partner. This means accelerating business innovation to meet our customers’ rapidly evolving needs in the digital world and developing further in areas such as prevention and care. The success of this transformation will be based on the engagement and energy of our employees, agents and partners, adapting their capabilities to best serve our customers.”
Further on, it’s Life and P&C ambitions, the press release also states:
Life & Savings Ambition:
“In Life & Savings, the objective is to overcome the headwinds to growth from low interest rates and build on the successful transformation of our business mix already achieved in mature markets. We will focus on growing our very profitable Protection & Health business both in large and emerging markets, while tackling the Savings challenge by promoting hybrid and capital light products, leveraging our strong distribution footprint and internal asset management capabilities.”
Property & Casualty Ambition:
“In Property & Casualty, our focus will be on actively growing our commercial lines footprint and accelerating our development in high growth countries while continuing to transform our retail operations to better address changing customer needs. We intend to efficiently manage throughout the cycle to continue to improve our profitability, leveraging our technical capabilities, our unique data potential and new technologies”
Once I read this press release, it became a bit more clear as to why this deal makes so much sense. This deal fits perfectly with what AXA is trying to do. Yet, some are down on the deal because AXA paid a premium for XL Group.
XL Group gives AXA the opportunity to really start on the ‘Focus’ pillar by shifting it’s business away from long-tail, capital intensive life and savings products (as can be evidenced as well through its US IPO plans) and into more commercial lines. Not only can AXA shift to commercial lines, but they have a company in XL Group that is very well experienced in it.
From the ‘Transform’ pillar, AXA can continue to focus on its payer to partner strategy as it has already started doing in the Health Insurance lines with its acquisition of acquisition of Maestro Health and partnering with Oscar as mentioned earlier.
Further, AXA and XL Group can use its collective experience in innovation and investments in Insurtech start-ups to ‘Transform’ its digital strategies across the board.
So, yes, they paid a premium for it. After all, they weren’t the only ones looking at buying them.
When one of your largest global competitors is looking to make a similar move, someone needs to pull the trigger.
While I do feel it makes sense, there are still some challenges that remain to ensure the merger is ultimately a success.
What are the challenges with this deal?
It remains to be seen how these two companies will operate and what sort of integration they will have with each other (both in terms of day to day operations as well as technology).
Depending on the level of integration, I see three main challenges moving forward with this deal:
- Focus in the short term – While I mentioned above that this deal fits in with the ‘Focus’ pillar of AXA’s Ambition 2020, this will not happen overnight and will take time.
- Cultural differences – Somewhat related to the above, there will be cultural differences for both companies to tackle. While AXA has done some business in the commercial lines, it also has a huge business in personal lines. Both types of businesses differ massively in terms of product approach, administration and sales process.
- Size – Bigger doesn’t always mean better and faster. Sometimes it can mean less focus (point #1) and slower to move (more governance/hierarchy/legacy). As mentioned earlier, both companies have invested heavily in innovation and Insurtech, but bringing it all together could pose a challenge.
With the rise of Insurance technology both enhancing and disrupting the Insurance industry, as well as the threat of big tech entering the sector, some level of consolidation is expected. This is a great way for incumbents to stay relevant – i.e. ‘Too big to disrupt’.
In most industries, this may hold true. For Insurance, it’s a slightly different ballgame, primarily due to the legacy systems, processes and regulation that is inherent in our industry.
The bigger the company, the more enhancements it needs to do to its systems and processes. Further, the more heavily regulated and scrutinized they are going to be.
This deal makes a lot of sense on paper. However, the practical challenges around it do raise some concerns.
Regardless, I like the move. It’s bold and ambitious. It’s AXA’s way of saying, ‘we have been around for a long time and we intend to continue to be.’
Big tech has advantages if and when it enters Insurance due to their expertise in building ecosystems.
However, big tech is at at a disadvantage and lack of knowledge when it comes to long-term risk management.
AXA has found a great partner to help diversify and enhance its ability to manage risk.
Now, they just need to ensure they can move forward on that journey in harmony.
Stephen Goldstein is an experienced Insurance executive and Insurtech dealmaker with a core focus on growing revenue, launching go to market initiatives and advising industry leaders.
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