European insurance. Thirst for growth

In buying Switzerland's Winterthur, AXA illustrates big European insurers' quest for scale and geographical diversity

HENRI DE CASTRIES, the chief executive of AXA, is not lacking in ambition. Last autumn he unveiled a plan to double the sales and triple the profits of the French insurance and asset-management group by 2012, relying heavily on internal growth. On June 14th Mr de Castries made a foray in another direction, unveiling the purchase of Winterthur, a European insurer, from Credit Suisse for SFr12.3 billion ($10 billion) in cash.

A dashing figure who once worked in the French treasury, Mr de Castries called the purchase of Winterthur "a unique opportunity". In reality, it was not his first choice. But having previously been rebuffed by Generali, a giant Italian insurer strong in central as well as southern Europe, he chose to look elsewhere. This week's deal lifts AXA nearer to the top of Europe's insurance league, and keeps it in the company of a handful of global insurers distinguished by their size and geographical diversity.

In addition to paying cash for Winterthur, AXA has agreed to refinance SFr1.6 billion of Winterthur's debt, much of it owed to Credit Suisse, which has long been eager to get rid of its mediocre insurance unit. AXA considered buying Winterthur two years ago (for much less money), but those talks came to nothing. After the purchase was revealed this week, it was no surprise that Credit Suisse's share price rose and AXA's fell.

Analysts had mixed views on the deal. Mr de Castries has emphasised the breadth of Winterthur's operations: it serves 13m clients in 17 countries with a mix of life, property and casualty, and pension products. But nearly half its premiums come from Switzerland, a small and mature market, and another quarter from Germany (see chart), where it has 3.3m customers and 1,600 tied agents.

Standard & Poor's, a rating agency, was sceptical. Expressing concern about how easily the French company would absorb its acquisition, it marked its outlook for AXA down to "stable" from "positive". Rob Jones, an analyst with the agency, considers the Swiss market to be especially difficult. Others were more blunt: "Winterthur is quite a lot of things, but growth it ain't," said Chris Hitchings, of Keefe Bruyette & Woods, an investment bank. In his view, AXA made the purchase because there were no better deals available.

However, Marc-Philippe Juilliard, of Fitch, another ratings agency, sees decent growth prospects. First, he says, the purchase will increase AXA's market share and distribution network in western Europe. In Germany and Spain, in particular, there is room for a life insurer to grow. Winterthur has good distribution in both.

In addition, Mr Juilliard says, the deal boosts AXA's presence in other markets with longer-term potential. These include Asia and central Europe, where Winterthur has a pension-fund business. AXA already earns more than 7% of its gross premium income in Japan, the world's second-largest insurance market, and Winterthur will give it a bit more. In Hong Kong the combined firm will have more than 10% of the life-insurance market, he says. In China AXA will gain Winterthur's minority stake in Taikang Life, a big insurer, and a licence to write property and casualty contracts.

Most big European insurers are looking farther afield for growth opportunities these days, partly because they are bumping up against each other in the mature markets close to home. Asia is getting particular attention. For instance, Aviva, a British insurer that is one of AXA's main rivals in Europe, had hoped to grab a bigger market share in China by acquiring Prudential, a British rival of similar size, but its bid was unsuccessful.

Capital requirements are also pushing the quest for size and diversity. New rules now being drafted, known as Solvency 2, may favour insurers with more diversified portfolios of risk.

But size is not everything. This week's deal came soon after AXA agreed to sell its reinsurance business to a group of private-equity firms. The sale was seen as a way for AXA to decrease its exposure to volatility, allowing it to concentrate on its core insurance business. The company says it is already more diversified than many rivals, and therefore needs less capital at the group level. Perhaps buying Winterthur offers a bit more insurance on that score.

In buying Switzerland's Winterhur, AXA illustrates big European insurers' quest for scale and goegraphical diversity.