The major rating agencies have unanimously decided to place AXA’s ratings on a negative watch following the news of its planned acquisition of Bermudian insurance and reinsurance firm XL Group.
At the same time, the rating agencies are positive on XL’s ratings and even suggest they may be upgraded as a result of the deal.
AXA is set to acquire 100% of XL Group Ltd. for $15.3 billion (€12.4bn), a total transaction value representing a premium of 33% to XL Group’s closing share price prior to the announcement of the deal.
First to come out with its thoughts on the acquisition was Standard & Poor’s, which said that it was putting the long-term ratings on AXA and core or strategic subsidiaries on CreditWatch with negative implications, “as we believe the transaction, if completed, could materially weaken AXA’s capital adequacy as per our definition, if the group fails to successfully deconsolidate its U.S. life and AM operations in the coming years.”
S&P said it will likely resolve the credit watch in the next three months, once it knows how the financing of the deal is progressing.
S&P affirmed XL’s ratings, saying it was likely to “assess XL to be at least strategically important to AXA
once the acquisition closes.”
Fitch Ratings then said it could downgrade AXA and placed its ratings on the insurers entities on a rating watch negative status.
Again, the IPO and how AXA will finance the deal is cited as a key reason for the negativity.
A.M. Best put the ratings of XL under review with developing implications, a status it said will remain in place until the acquisition is completed. Best noted that it could result in a positive rating outcome, “depending on the levels of implicit and explicit support provided to XL and its subsidiaries after the close of the transaction.”
Moody’s then put AXA’s rating outlook to negative as well, citing “the impact of the proposed financing for the acquisition of XL, which will meaningfully increase AXA’s financial leverage at least in the short-term, and the significant increase in goodwill amount on AXA’s balance sheet.”
Moody’s also explained that, “The business of XL, which has a weaker credit profile than AXA, is intrinsically volatile with moderate levels of profitability in recent years. This is notwithstanding the complementary nature and diversification of XL’s business which will significantly enhance AXA’s global commercial lines presence and, together with the proposed sell-down of its existing US operations (life & savings and AB), will reduce AXA’s sensitivity to financial markets.”
XL will represent around a third of AXA’s property and casualty premiums and Moody’s notes the volatility that is possible with the reinsurance business as well.
Moody’s has placed XL’s ratings on review for a potential upgrade due to the announced acquisition.
The financing is just one aspect of the deal and execution risk as well as the potential for some overlap is cited by many of the rating agencies, demonstrating that they do not feel this is a very easy M&A deal to complete.
That reflects the fact that their will be pain felt, in integrating XL into AXA’s business we’d imagine, and likely some redundancies due to potential overlaps as well in time.
That said, the rating agencies all cite positive synergies, the fact XL brings areas of underwriting business that will be complementary and additive for AXA, as well as the new scale and reach XL’s underwriting business will gain through the AXA network of businesses and their distribution.
