Standard & Poor’s Rating Services said today that it has lowered its long-term counterparty credit ratings and insurer financial strength ratings on the core entities of France-based AXA group to ‘AA-‘ from ‘AA’. At the same time, we revised the counterparty credit rating on the holding company AXA to ‘A’ from ‘A+’. The outlook on all of the ratings is stable.
“The rating action reflects our opinion that, although recovering, it is unlikely that AXA’s capital adequacy and operating performance will recover to levels in line with an ‘AA’ rating in the next one or two years. The rating remains supported by what we view as a “very strong” competitive position, a positive management and strategy, and a “strong” enterprise risk management, compared with “excellent” previously,” said Standard & Poor’s credit analyst Lotfi Elbarhdadi.
Financial flexibility and operating performance are, in our opinion, now consistent with the current level of the insurer financial strength rating on the group. Weighing on the group’s overall credit strength, according to our criteria, is capitalization that we still view as a relative credit weakness, despite its recovery in recent months. We consider that the group’s strong enterprise risk management will likely prevent the group from experiencing losses that exceed its risk tolerance.
The change in AXA’s ERM assessment to strong from excellent reflects mostly the delay in the completion of AXA’s risk appetite framework relative to our expectations and the fact that the financial crisis highlighted some shortcomings of AXA’s risk management. We believe the actions AXA took in the U.S. illustrate the group’s ability to quickly deploy corrective actions. However, we believe that the newly reinforced framework is yet to be tested over time.
The stable outlook reflects our opinion that AXA group’s business fundamentals, earnings, and management and strategy are likely to counterbalance the pressure on the ratings due to capitalization at the current rating level. We could consider a positive rating action if AXA group shows strong signs of higher underlying earnings prospects, along with capital adequacy improved to levels supportive of an ‘AA’ rating. We may lower the ratings if capital adequacy shows signs of weakening further, if ERM practices deteriorate, or if profitability deteriorates.
