Covéa, the French non-life insurance mutual, is interested in acquiring the reinsurance business of AXA XL, AXA Re, as part of a transaction that could be valued at 5 billion euros, according to the press.
The report, which originally appeared in Bloomberg, “is credible,” according to Berenberg Capital Markets in a research note. The analyst underlined the fact that Covéa had been in the market for an acquisition for a few years.
In 2018, Covéa attempted a hostile takeover bid from the reinsurer SCOR, but finally abandoned the operation in early 2019. Then, in early 2020, the company sought to buy PartnerRe from EXOR, but withdrew from the operation due to last year’s economic turmoil caused by the COVID-19 crisis.
Neither AXA nor Covéa have 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), Berenberg said, noting that the business also represents approximately 33%, or 400 million ($ 477.4 million) of AXA XL’s profit target of 1.2 billion euros ($ 1.4 billion) for the year. 2021.
Berenberg believes that such an “agreement would be very positive for the valuation of AXA” for reasons which include:
- The transaction would have an upside potential of 4 to 6% for AXA.
- This would eliminate earnings volatility. “Essentially, while we think the business lines and specialty part of AXA XL is a good fit with AXA, the reinsurance business adds too much volatility. Therefore, in our opinion, AXA is not the best long-term owner of this business. “
- An estimated gain of up to € 1 billion, assuming a potential sale price of € 4-5 billion, valued up to € 0.40 per share.
- Assuming a sale price of 5 billion euros and if AXA XL’s reinsurance unit reports a net profit of 400 million euros, then the transaction would create a price / earnings ratio of 12x, which is much higher than P / E 8x from AXA. “It would clearly create value. “
- By reducing the required capital, this would potentially increase the solvency of the AXA group, which Berenberg estimates at around 205% for the second quarter of 2021, compared to 208% in the first quarter of 2021.
Berenberg has a “buy” rating on AXA because he believes that “the tightening of the commercial insurance and reinsurance markets will help its earnings growth to exceed its target range of 3-7% for 2020-23.[Estimated]. “
The research note was written by analysts Michael Huttner and Thomas Bateman.
Source: Bernberg Capital Markets