Axa’s purchase of Swiss insurer Winterthur may have come as a surprise to the market, but the opportunistic deal makes sense for the French insurer, according to equity analysts.
“This deal fortifies Axa’s position in Europe,” Mikir Shah, analyst at Fox-Pitt, Kelton, told Reactions. “It gives them a huge multi-country bolt-on, and added to that there are cost saving and revenue bonuses too.”
According to the terms of the deal, announced on June 14, Axa will pay Credit Suisse SFr12.3 billion (US$9.9 billion) for Winterthur and refinance SFr1.6 billion of the Swiss insurer’s debt as part of the deal, including SFr1.1 billion in outstanding loans from Credit Suisse.
In a report Shah describes the price as reasonable, at marginally more than his fair value estimate of SFr12 billion. And Tim Dawson, equity analyst at Swiss investment bank Helvea says: “The price was in line with our valuation. But it was not cheap.”
Axa believes the deal will lead to a 7% increase in earnings for the company by 2009, a prediction that Shah largely concurs with in his report. He estimates the deal will mean a 6.2% earnings enhancement for Axa by 2008. There will also be cost savings as a result of overlapping businesses, which Axa estimates will be as much as SFr440 million before tax by the end of 2008.
One reason the deal was initially thought unlikely was the perceived stagnation of the Swiss insurance market. But Shah points out in his report that Winterthur achieved a 26% new business profit margin on life sales in the country in 2005 and that the non-life business managed a 100.8% combined ratio in the same year – something the management of Winterthur believes it could improve on this year.
“I think the market was initially surprised at the rumours and then the sale, but has come round to the realisation that the Winterthur of now is different to the Winterthur of a few years back,” Shah told Reactions. “The business has been turned around – you might even say transformed.”
But despite Axa’s announcement that the acquisition fits well with its “strategic focus on growth complemented by bolt-on acquisitions,” Dawson believes the acquisition marks a change in strategy. “It definitely shifts Axa’s focus away from traditional growth markets,” he says. But he adds: “It’s a fairly low-risk transaction.”
Shah agrees in his report. “This deal is not transformational and potentially rebalances Axa away from some of its strongest growth markets,” he wrote.
With the purchase of Winterthur, Axa will acquire the largest non-life insurer and the second-largest life insurer in Switzerland. The deal will also allow the company to consolidate its position in Germany, Belgium, the Netherlands, Spain and the U.K. In addition, Axa gains a presence in Eastern Europe – Winterthur is one of the top five pension providers in Poland, the Czech Republic, Hungary and Slovakia.