AXA -- AFFIRMED AT A2 SENIOR UNSECURED DEBT
The affirmation of AXA's ratings reflects the Group's very strong franchise, business and geographic diversification, resilient underlying earnings performance, strong asset/liability management, and prudent reserving practices. The change in outlook to stable from negative reflects Moody's expectation that (1) financial leverage will reduce driven by deleveraging, growth in retained earnings, and the deconsolidation of the Group's US life business, AXA Equitable Holdings, Inc. ("EQH"); (2) the integration of XL Group's business will continue to run relatively smoothly, with AXA able to manage the resultant increase in its earnings volatility and; (3) the Group's Solvency II ratio remains comfortably within the company's target range of 170-220%, with significantly reduced dependence on US equivalence.
AXA's adjusted financial leverage increased meaningfully during 2018 to 28.9%, albeit from its lowest level for many years of 23.5% at year-end 2017. The increase was driven by a combination of debt to finance AXA's acquisition of XL Group, assumption of XL debt, the consolidation of EQH's external debt, and reduced equity. However, going forward, Moody's expects leverage to reduce driven by (1) the redemption of debt; (2) a strong level of retained earnings to boost shareholders' equity and; (3) the effect from H1 19 of deconsolidating EQH from the balance sheet of AXA whose stake in EQH is now below 50%. The deleveraging and deconsolidation will also benefit AXA's earnings coverage which reduced at YE18 to around 7x (YE17: 8.3x) when excluding the EQH goodwill write-down and exceptional costs impact.
The rating agency said that while XL's business has significantly enhanced AXA's global commercial lines presence, its profitability has been weak in recent years, particularly in 2017 and 2018 which were impacted by significant natural catastrophe losses. While the acquisition has introduced more volatility to AXA's results, XL's risk appetite has been meaningfully reduced and is now aligned with that of AXA's. Although the acquisition has doubled AXA's "normalized" catastrophe exposure, its modelled 1-in-20 year earnings deviation of €500 million is manageable within the context of underlying earnings of over €6 billion in 2018. Furthermore, the integration process, although not complete, has gone relatively smoothly with only a limited loss of business and senior personnel to-date, benefiting from the complementary nature of XL's business.
In acquiring XL and selling down its US life operations, AXA has also accelerated its ambition of becoming more reliant on technical margins and less on financial market-related earnings. Going forward, Moody's expects AXA's operating performance to be relatively stable, benefiting from its diversified income streams and improving the combined ratio. In this regard, Moody's notes that, although the Group reported net consolidated income after tax in 2018 of -€373 million, split +€2,140 million Group share and -€2,513 million minority interests, driven by the EQH goodwill write-down, its return on capital metric (Moody's definition) was similar to the 6% recorded over the last few years when excluding the EQH goodwill write-down and exceptional costs impact.
In terms of capitalisation, although AXA's Solvency II ratio declined in 2018 to 193% (YE17: 205%) driven by the XL acquisition, it remains comfortably within the Group's range of 170-220%. AXA also expects XL's business to bring material risk diversification and capital benefits under Solvency II (+5 to 10pts) following the approval/integration of XL Group's internal model which is expected in 2020. Going forward, Moody's expects the Group's material retained earnings potential to boost shareholders' equity.
In addition, Moody's views the disposal of AXA's US life business, which represented around 18% of the Group's underlying earnings as at year-end 2018, as positive for AXA's economic capitalisation. Moody's has viewed the quality of AXA's capital as lower than some Aa-rated peers because AXA's reported Solvency II ratio has been significantly inflated by the use of regulatory equivalence for the US business. Such equivalence has now been reduced materially following the sell-down of EQH. This is notwithstanding the very large EQH goodwill impairment of c.€6.3 billion, split €3 billion Group share and €3.3 billion minority interests, as a result of AXA selling stakes below book value.
EUROPEAN-BASED SUBSIDIARIES' RATINGS AFFIRMED
The affirmation of the Aa3 IFSRs of AXA's main subsidiaries in France (AXA France Vie and AXA France IARD), Switzerland (AXA Versicherungen AG), Germany (AXA Lebensversicherung AG, AXA Versicherung AG and AXA Krankenversicherung AG), Belgium (AXA Belgium) and the UK (AXA Insurance UK plc) mirrors the rating action on AXA's debt ratings. The ratings of these entities benefit from one or two notches of implicit support, reflecting their strong contribution to AXA's revenues and profits and their strategic relevance to the group.
Moody's has also affirmed the A1 IFSR of AXA Insurance dac, AXA's Irish subsidiary which benefits from implicit support from the AXA Group. Although relatively small, AXA Insurance dac is a leading and profitable P&C insurer in its market and fits well within the strategy of the AXA Group.
XL GROUP - AFFIRMED AT A1 IFSR, OUTLOOK CHANGED TO POSITIVE
The A1 IFS ratings of XL Group, which operates as a strategic business unit within the larger AXA organization under the "AXA XL" brand, reflect one notch of implicit support from AXA. AXA XL's strong market positions within P&C insurance and reinsurance, its diversified earnings streams by geography and product, as well as good capitalization and sound holding company liquidity. These strengths are tempered by the intrinsic volatility of AXA XL's reinsurance businesses and certain insurance lines, moderate levels of profitability in recent years and exposure to natural and man-made catastrophes.
The positive outlook on XL Group's ratings reflects the potential for the alignment of XL Group's IFS ratings with those of its parent at the Aa3 level within the next 12-18 months. While the XL Group companies do not benefit from explicit support from AXA, the group's scale and strategic importance to AXA, as well as common branding, suggest a significant level of implicit support. The successful completion of the integration of XL Group, improved profitability and lower catastrophe risk exposure could result in an upgrade of the ratings.
WHAT COULD CHANGE THE RATING UP/DOWN
AXA AND EUROPEAN BASED SUBSIDIARIES
In terms of rating drivers going forward, Moody's said that positive rating pressure could arise from: 1) Sustained decrease in adjusted financial leverage to below 20% and/or; 2) sustainable capitalisation at a very high level, both in absolute terms and compared to the peer group and/or; 3) improvements in profitability as evidenced by a Return on Capital (Moody's definition) consistently above 8% and fixed charge coverage consistently above 9x across the underwriting cycle.
Conversely, negative rating pressure could arise from: 1) Sustained rise in adjusted financial leverage beyond 30% and/or; 2) deterioration in profitability as evidenced by a Return on Capital (Moody's definition) consistently below 5% and fixed charge coverage below 5x across the underwriting cycle and/or; 3) Group Solvency II ratio falling below 170% and/or; 4) a meaningful deterioration in asset quality.
Any upgrade/downgrade of AXA's ratings would place upward/downward pressure on those subsidiaries which receive support from AXA.
WHAT COULD CHANGE THE RATING UP/DOWN
XL
The following factors could result in an upgrade of AXA XL's ratings: 1) an upgrade of AXA and/or; 2) evidence suggesting successful integration and continued implicit support from AXA and/or; 3) maintenance of the reduction in the firm's catastrophe risk appetite already achieved along with better-than-peer performance through the cycle and/or; 4) improved profitability with returns on capital consistently in the high-single digits.
Conversely, the following factors could result in a return to a stable outlook: 1) a downgrade of AXA and/or; 2) evidence suggesting diminished implicit support from AXA and/or; 3) a significant decline in shareholders' equity over a rolling twelve month period without a commensurate reduction in risk.
LIST OF AFFECTED RATINGS
Issuer: AXA
..Affirmations:
....Senior Unsecured Regular Bond/Debenture, affirmed A2
....Senior Unsecured Medium-Term Note Program, affirmed (P)A2
....Subordinate Regular Bond/Debenture, affirmed A3(hyb)
....Subordinate Regular Bond/Debenture, affirmed A3
....Subordinate Medium-Term Note Program, affirmed (P)A3
....Junior Subordinated Regular Bond/Debenture, affirmed A3(hyb)
....Junior Subordinated Regular Bond/Debenture, affirmed Baa1(hyb)
....Junior Subordinate Medium-Term Note Program, affirmed (P)A3
....Commercial Paper, affirmed P-1
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA Lebensversicherung AG
..Affirmation:
....Insurance Financial Strength Rating, affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA insurance dac
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA Insurance UK plc
..Affirmation:
....Insurance Financial Strength Rating, affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA Versicherungen AG
..Affirmation:
....Insurance Financial Strength Rating, affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA Krankenversicherung AG
..Affirmation:
....Insurance Financial Strength Rating, affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA Versicherung AG
..Affirmation:
....Insurance Financial Strength Rating, affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: Guardian Royal Exchange plc
..Affirmation:
....Backed Senior Unsecured Regular Bond/Debenture, affirmed A2
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA Belgium
..Affirmation:
....Insurance Financial Strength Rating, affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA France IARD
..Affirmation:
....Insurance Financial Strength Rating, affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: AXA France Vie
..Affirmation:
....Insurance Financial Strength Rating, affirmed Aa3
..Outlook Action:
....Outlook changed to Stable from Negative
Issuer: XL Insurance Switzerland
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Positive from Stable
Issuer: XLIT Ltd.
..Affirmations:
....Senior Unsecured Regular Bond/Debenture, affirmed A3
....Backed Senior Unsecured Regular Bond/Debenture, affirmed A3
....Backed Subordinate Regular Bond/Debenture, affirmed Baa1(hyb)
....Preferred Stock, affirmed Baa2(hyb)
....Preferred Stock non-cumulative, affirmed Baa2(hyb)
..Outlook Action:
....Outlook changed to Positive from Stable
Issuer: XL Reinsurance America Inc.
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Positive from Stable
Issuer: Greenwich Insurance Company
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Positive from Stable
Issuer: Indian Harbor Insurance Company
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Positive from Stable
Issuer: XL Insurance Company of New York, Inc.
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Positive from Stable
Issuer: XL Specialty Insurance Company
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Positive from Stable
Issuer: XL Bermuda Ltd
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Positive from Stable
Issuer: XL Insurance Company SE
..Affirmation:
....Insurance Financial Strength Rating, affirmed A1
..Outlook Action:
....Outlook changed to Positive from Stable
PRINCIPAL METHODOLOGIES
The principal methodologies used in rating AXA, AXA Belgium and AXA Versicherungen AG were Property and Casualty Insurers published in May 2018, and Life Insurers published in May 2018. The principal methodology used in rating AXA France IARD, AXA Versicherung AG, AXA Insurance UK plc, AXA insurance dac and Guardian Royal Exchange plc was Property and Casualty Insurers published in May 2018. The principal methodology used in rating AXA France Vie, AXA Krankenversicherung AG and AXA Lebensversicherung AG was Life Insurers published in May 2018. The principal methodology used in rating XL Insurance Switzerland, XLIT Ltd., XL Reinsurance America Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance Company of New York, Inc., XL Specialty Insurance Company, XL Bermuda Ltd and XL Insurance Company SE was Reinsurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
