European insurance. Italian tortoise, French hare

AXA and Generali will be the main players in insurance consolidation in Europe

HENRI DE CASTRIES, chief executive of AXA, France's biggest insurer and one of the largest in Europe, is in an upbeat mood. AXA has weathered the recent crisis in insurance without having to ask its shareholders for new capital. It recently completed the takeover of MONY, an American life insurer, after some protracted wrangling with MONY's shareholders, who had gone to court arguing that the French offer was too low. Business in both life and non-life insurance is improving. However, Mr de Castries is not one to sit still for long. “If the price is right we will buy companies,” he says, even if AXA then has to spend money on turning its acquisitions around, as it has in the past.

Despite a wave of mergers in the 1990s, the advent of the euro and a lot of talk about a single market, Europe's insurance industry remains largely a domestic business. In any further consolidation, AXA ought to play a leading role, along with Italy's Generali, which is also in good shape. Germany's Allianz, a bigger rival, has had an unusually difficult couple of years, as it has digested Dresdner Bank, a struggling institution it bought in 2001.

AXA has a record of bold takeovers - of America's Equitable in 1991, of Union des Assurances de Paris, the French market leader, in 1996, and of Britain's Guardian Royal Exchange in 1999. It has tended to buy troubled companies with powerful distribution franchises cheaply and restore them to health within a few years.

The company has also cut costs, by a total of €1.3 billion in 2002 and 2003. About 2,000 back-office jobs were moved to India. Spending on technology, advertising and outside advice was cut. Bosses of local subsidiaries were obliged to join in. “In our family, we are used to dealing with feudalism,” says Mr de Castries, who descends from old military stock.

In France AXA is number two in life insurance and the market leader in property and casualty cover. In America it hopes to build on Equitable's success with MONY. However, its position in too many other countries is weak. Mr de Castries admits that AXA is having difficulties in Germany, where it is sixth in life insurance and third in non-life, and in Britain, although business there is slowly improving, with life insurance making a bit of money. In southern Europe its presence is still tiny. It has only 1% of life premiums in Italy, Europe's fastest-growing insurance market, 2.7% in Portugal and 3.4% in Spain. “We are looking for additional distribution or similar product range,” says Mr de Castries.

Generali, the other possible big shopper, has a stronger balance sheet than AXA but lacks the French company's history of successful acquisitions. Apart from a failed attempt to buy Assurances Generales de France in 1999, Generali mostly stood by during Europe's previous consolidation wave. Its management's hands were tied by powerful minority shareholders, especially Mediobanca, a Milan investment bank. Because shareholders did not want their stock diluted, Generali could not finance purchases by issuing new shares. “Generali missed an excellent opportunity during the recent bear market to make acquisitions and to raise capital,” say insurance analysts at J.P. Morgan.

It is now better placed to buy. Shareholders interfere less than in the past. Generali has a war chest of several billion euros, even without having raised new capital. It says it will continue largely to ignore Britain, where it thinks returns are too thin, as well as America and Japan, and instead focus on Germany, Italy, Spain, France and central Europe. Its officials argue that insurers in foreign markets should either be very strong or get out, because of the importance of economies of scale.

AXA and Generali are bound to hoover up smaller companies in their main markets, but what might they buy abroad? Britain's Standard Life is on sale, but Mr de Castries is not interested in the troubled mutual, and Generali is not interested in Britain at all. On the other hand, Prudential, a British life insurer, would fit well into AXA's existing operations as well as bulking up its presence in Britain. Winterthur, a subsidiary of Credit Suisse, might also be sold soon, although its boss, Leonhard Fischer, denies it.

However, the creation of a true pan-European giant, involving two or all of AXA, Generali and Allianz, is highly improbable. Yet AXA and Generali would make a good geographical fit. AXA could compensate for Generali's weakness in France and America and Generali make up for AXA's tiny share in southern and central Europe. Each would strengthen the other's asset-management arm. Such a union might, one day, even rival America's AIG, the world's biggest insurer.

Never shy of bold moves, AXA is keener than Generali on the idea of a merger, but both agree it is academic. The two firms are iconic businesses in their respective countries. France is even more protective of its national champions than Italy, but Generali is Italy's only financial company of real scale. Although he is French, Antoine Bernheim, Generali's chairman, wants to keep his firm in Italian hands. When continental Europeans built up AXA, Generali and Allianz, they all hoped their insurer would become Europe's champion. Yet for the foreseeable future, it seems likely that each will dominate only at home; none will rule the whole continent.

AXA and Generali will be the main players in insurance consolidation in Europe.

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