Negative outlook follows announced acquisition of XL Group
London, 07 March 2018 -- Moody's Investors Service has today affirmed AXA's A2 senior unsecured
debt rating and A3/A3(hyb) subordinated debt ratings, as well as
the Aa3 insurance financial strength (IFSR) ratings of AXA's main operating
subsidiaries. The rating outlook has been changed to negative from
stable. This rating action follows AXA's recent announcement
that it has entered into an agreement to acquire 100% of XL Group
Ltd (XL) in an all-cash transaction valued at approximately $15.3
billion (or €12.4 billion). The transaction is expected
to close during the second half of 2018, subject to XL Group shareholder
approval, various regulatory approvals and other customary closing
conditions.
A list of all the ratings affected by this rating action is available
at the end of this press release.
RATINGS RATIONALE
The negative outlook reflects the impact of the proposed financing for
the acquisition of XL, which will meaningfully increase AXA's
financial leverage at least in the short-term, and the significant
increase in goodwill amount on AXA's balance sheet. Furthermore,
the business of XL, which has a weaker credit profile than AXA,
is intrinsically volatile with moderate levels of profitability in recent
years. This is notwithstanding the complementary nature and diversification
of XL's business which will significantly enhance AXA's global
commercial lines presence and, together with the proposed sell-down
of its existing US operations (life & savings and AB), will
reduce AXA's sensitivity to financial markets.
In addition to cash at hand, AXA proposes to finance the acquisition
with subordinated debt, and from the planned IPO of the existing
US operations and related pre-IPO transactions. Together
with XL's existing debt and the around $4.4 billion
of debt that AXA US is proposing to raise, Moody's estimates
AXA's adjusted financial leverage to meaningfully increase from
around 25% to over 30%. In mitigation, AXA
is targeting a reduction in its debt gearing from an estimated 32%
to below 28% within two years (including the US IPO related debt
issuance). The proposed funding structure presents some execution
risk given that it is linked to the planned US IPO. As a result
there is a risk that leverage could increase further if AXA had to tap
into its backup bridge financing if the timing of the US IPO was delayed
for whatever reason, and also if IPO proceeds were below current
expectations.
The acquisition will also negatively impact AXA's solvency although
as a result of its operating return and planned US IPO, AXA estimates
its YE18 Solvency II ratio to be 190-200%, which is
within the Group's target range albeit slightly down from 205%
at YE17.
A further challenge for AXA in acquiring XL, which represents around
one third of AXA's P&C premium, is the intrinsic volatility
of XL's reinsurance businesses and certain insurance lines, moderate
levels of profitability in recent years, and exposure to natural
and man-made catastrophes. Moody's considers AXA's
current stability of earnings, which benefits in part from its focus
on retail and SME P&C risks, as a key credit strength and the
XL acquisition is likely to introduce more volatility to AXA's results
even if it proposes to reduce XL's current catastrophe exposure.
More positively, AXA's market position will benefit from the
competitive advantage associated with XL's fully built global P&C
insurance and reinsurance platform which will significantly enhance AXA's
global commercial lines presence. The combined business will have
a leading commercial lines revenue base of c.€30 billion out
of total P&C revenue of c.€48 billion. Furthermore,
XL's strongly diversified business, with its global focus
on larger corporates, specialty and reinsurance business,
complements and diversifies AXA's existing commercial lines insurance
portfolio. In this regard, Moody's notes that AXA 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.
In acquiring XL and selling down its existing US operations, AXA
is also accelerating its ambition of becoming more reliant on technical
margins and less on financial market-related earnings. Including
XL and excluding AXA US, the P&C contribution to the Group's
pre-tax underlying earnings increases from 39% to 50%.
Furthermore, Moody's views the disposal of the existing US
operations, which represented close to 20% of the Group's
underlying earnings as at YE17, as positive for AXA's economic
capitalisation, with XL helping to rebalance reduced earnings diversification.
WHAT COULD CHANGE THE RATING UP/DOWN
The following factors could lead to a downgrade: (1) Unsuccessful
integration of XL resulting in increasing earnings volatility for the
Group; (2) Unsuccessful execution of proposed financing for the acquisition
of XL, resulting in a sustained rise in adjusted financial leverage
beyond 30%; (3) Deterioration in profitability as evidenced
by a Return on Capital (Moody's definition) consistently below 5%
and fixed charge coverage consistently below 5x; (4) Group Solvency
II ratio falling below 170%;
Any downgrade/upgrade of AXA's ratings would place downward/upward
pressure on those subsidiaries which receive support from AXA.
Given the negative outlook, there is limited upward pressure on
AXA's ratings at present, however Moody's stated that the
following factors would lead it to stabilise the outlook for AXA:
(1) Successful execution of proposed financing for XL acquisition resulting
in an adjusted financial leverage below 30% on a sustained basis;
(2) Smooth integration of XL's business with retention of key senior
management and underwriting personnel following the closing of the transaction;
(3) Solvency II ratio remaining comfortably within target range of 170-230%.
LIST OF AFFECTED RATINGS
Issuer: AXA
..Affirmations:
....Senior Unsecured Regular Bond/Debenture,
affirmed A2
....Senior Unsecured Medium-Term Note
Program, affirmed (P)A2
....Subordinate Medium-Term Note Program,
affirmed (P)A3
....Junior Subordinate Medium-Term
Note Program, affirmed (P)A3
....Subordinate Regular Bond/Debenture,
affirmed A3
....Subordinate Regular Bond/Debenture,
affirmed A3 (hyb)
....Junior Subordinated Regular Bond/Debenture,
affirmed A3 (hyb)
....Junior Subordinated Regular Bond/Debenture,
affirmed Baa1 (hyb)
....Commercial Paper, affirmed P-1
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA France IARD
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA France Vie
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA Belgium
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA Krankenversicherung AG
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA Lebensversicherung AG
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA Versicherung AG
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA Insurance UK plc
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA insurance dac
..Affirmation:
....Insurance Financial Strength Rating,
affirmed A1
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: AXA Versicherungen AG
..Affirmation:
....Insurance Financial Strength Rating,
affirmed Aa3
..Outlook Action:
....Outlook changed to Negative from Stable
Issuer: Guardian Royal Exchange plc
..Affirmation:
....Backed Senior Unsecured Regular Bond/Debenture,
affirmed A2
..Outlook Action:
....Outlook changed to Negative from Stable
PRINCIPAL METHODOLOGIES
The principal methodologies used in rating AXA, AXA Belgium and
AXA Versicherungen AG were Global Property and Casualty Insurers published
in May 2017, and Global Life Insurers published in April 2016.
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 Global Property and Casualty Insurers published in May
2017. The principal methodology used in rating AXA France Vie,
AXA Krankenversicherung AG and AXA Lebensversicherung AG was Global Life
Insurers published in April 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
