Axa US IPO flops

Axa’s spinoff of its US business through a New York initial public offering fell far short of the company’s expectations on Thursday.

The IPO is part of the French insurer’s effort to raise cash for its planned US$15.3 billion acquisition of XL, but the sale of a 25% stake in Axa Equitable ended up pricing well below its marketed range.

Bankers had pitched the deal at US$24 to US$27 a share, which would have raised between US$3.3 billion and US$3.7 billion, but closed the book at a substantially reduced US$20 to raise just US$2.7 billion — a full US$1 billion below the top of the range.

Axa has been putting a brave face on it. Chief executive Thomas Buberl told the Financial Times he was “very happy� with the deal and spokesman Emmanuel Touzeau said on Twitter that “the transaction is perfectly in line with the financing plan of the acquisition of the XL Group�.

In addition to the funds it raised through the offering, Axa also received US$3.2 billion from the pre-IPO reorganisation of its US business, including the repayment of internal loans and the purchase of Alliance Bernstein.

However, analysts say the poor IPO has left Axa short of cash and could force it to issue more debt to make up the gap.

“With €3.4 billion euros still required to cover the XL purchase, Axa will need to find an alternative source of funding for €300-600 million on our calculations,� said Jefferies in a note.

Despite the disappointment, it was the biggest IPO in the US since the Snap IPO a year ago and the biggest insurance IPO in the US since 2002. The share price edged up slightly to close its first day of trading at US$20.34, up 1.7%.

Investors are rarely impressed by acquisitions and Axa’s plan to buy XL is no different. The company’s stock has fallen around 14% since the deal was announced in early March and the IPO flop won’t help investors to feel any better about Buberl’s strategy, which is to reposition the company from predominantly life and savings products to predominantly property-casualty. Axa claims the acquisition will make it the biggest global P&C commercial lines insurer based on gross written premiums.

Persistently low interest rates and tougher capital standards have made life portfolios less attractive.

“The transaction offers significant long-term value creation for our stakeholders with increased risk diversification, higher cash remittance potential and reinforced growth prospects,� said Buberl when announcing the acquisition. “In the future, Axa will see its profile significantly rebalanced towards insurance risks and away from financial risks.�

The optics of this strategy can’t have been helped by the high-profile property losses from hurricanes Harvey, Irma and Maria in 2017. And those with longer memories may recall the experience that primary insurers had as owners of reinsurers in the 1990s, when poor exposure management led to earnings volatility, underwriting losses and capital strains.

“The assumption now is that access to diversified sources of risk, allied with greater confidence that historic technical issues are now better managed through advanced risk quantification techniques, is sufficiently enticing for large primary companies looking for growth,� said James Kent, global chief executive of Willis Re, in a recent report.

Certainly this is what Axa and other companies pursuing similar strategies will be hoping.

This post was syndicated from InsuranceAsia News. Click here to read the full text on the original website.

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