TEXT-S&P cuts AXA group ratings to 'A+', outlook is stable
Overview -- Retained earnings and recent investment market appreciation are reducing pressure on France-based global multiline insurer AXA group's balance sheet, in our opinion, but we still view its risk-adjusted capital adequacy level and sensitivity to market conditions as rating weaknesses. -- Furthermore, uncertain investment markets, low interest rates, and the economic recession in the eurozone are likely to dampen the group's earnings growth potential and its ability to markedly strengthen capital adequacy. -- Therefore, we are lowering our long-term ratings on the core insurance operating entities of AXA group to 'A+' from 'AA-'. -- The stable outlook reflects our opinion that the group's ongoing execution of its strategic goals is likely to strengthen earnings retention and risk reduction. This should in turn further alleviate the pressure on, and reduce the sensitivity of, the group's risk-adjusted capital adequacy over 2013 and 2014. Rating Action On Dec. 18, 2012, Standard & Poor's Ratings Services lowered its counterparty credit and insurer financial strength ratings on the core operating entities of France-based composite insurer AXA group to 'A+' from 'AA-'. The outlook is stable. We also took the following actions: -- We lowered our long- and short-term counterparty ratings on parent AXA and holding entity AXA Financial Inc. to 'A-/A-2' from 'A/A-1'. -- We lowered our long--term counterparty credit rating on AXA Bank Europe S.A. to 'A' from 'A+' and affirmed our 'A-1' short-term counterparty credit rating. -- We lowered our issue ratings on AXA's debt, including the ratings on senior unsecured debt to 'A-' from 'A', subordinated debt to 'BBB' from 'BBB+', and deeply subordinated debt to 'BBB-' from 'BBB'. Rationale The downgrade reflects our views that unfavorable investment market conditions and weak economic prospects are likely to dampen AXA group's earnings growth prospects, despite its actions to deemphasize capital-consuming products and business lines. The group's risk-adjusted capital adequacy, according to our criteria, and its sensitivity to changing market conditions continue to be weaknesses for its financial strength ratings, although we believe earnings retention and recently improving investment market conditions have provided capital adequacy support over the past year. The sensitivity of the group's risk-adjusted capital adequacy to market conditions is still high, in our view, and we believe that this sensitivity is likely to continue weighing on the ratings. We expect, however, the group's capital adequacy to continue strengthening through retained earnings and controlled growth in capital requirements thanks to the effects of derisking actions. Our ratings remain supported by AXA group's very strong competitive position and very strong operating performance. In our opinion, this is supported by the sizeable business line and geographic diversification of the group. AXA group holds leading positions in mature markets and promising positions in developing markets. Among global multiline insurers (GMIs), the group's competitive position and operating earnings compare favorably in terms of geographic and business segment balance. This effectively translates into visible pricing power, as evidenced by property/casualty (P/C) underwriting earnings improvements over the past three years, and into product redesign abilities in its life and savings segment, which enables the group to tailor new products adapted to a challenging environment and increase its focus on high-margin contracts. The asset management segment performance remains subdued, but adds good diversification, which we view positively in assessing the group's overall competitive position and operating performance. In our base-case assumptions, we expect the group's underlying earnings to grow in the mid-single digits over 2013 and 2014, on the back of stable contributions from its major business segments, continued improvement in the P/C combined ratio (a measure of underwriting profitability), and steady life and savings margins. We view also AXA group's management and corporate strategy as supportive for the rating. The group's enterprise risk management practices are "strong" according to our criteria. The group has consistently made strategic plans public and monitored their execution in light of changing operating and financial environments. We consider that AXA group's strategic actions, such as focusing on less capital consuming products and emphasizing cost and capital efficiency, will likely address over the long term the challenges that the group faces linked to its exposure to the life and savings business in Europe and the U.S. External factors, such as the continued recession in the eurozone (European Economic and Monetary Union), protracted period of low interest rates, and still-high potential volatility in investment markets might be a challenge, however. We view the group's ERM abilities as comparing favorably with those of other GMIs. Outlook The stable outlook reflects our opinion that AXA group's ongoing execution of its strategy is likely to lead to strengthened earnings retention and risk reduction. This should, in our opinion, reduce the sensitivity of its risk-adjusted capital adequacy over 2013 and 2014, and ultimately reinforce its position to a level that would sustainably support the current ratings. We could lower the ratings if the group didn't meet our base-case earnings projections or, in particular, if its risk-adjusted capital adequacy levels, based on our criteria, didn't continue strengthening over the next year or two. We could raise the ratings on AXA group, all other things being equal, if it exceeded our earnings projections under our base case and if we witnessed a pronounced and sustainable improvement in risk-adjusted capital adequacy, in particular through earnings retention or controlled capital requirements. Related Criteria And Research -- Principles Of Credit Ratings, Feb. 16, 2011 -- Interactive Ratings Methodology, April 22, 2009 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 -- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 -- Criteria Update: Factoring Country Risk Into Insurer Financial Strength Ratings, Feb 11, 2003 -- General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 -- Group Methodology, April 22, 2009 -- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 Ratings List Downgraded; Outlook Action To From AXA France IARD MONY Life Insurance Co. of America DBV Deutsche Beamtenversicherung Lebensversicherung AG DBV Deutsche Beamten-Versicherung AG AXA Versicherungen AG AXA Versicherung AG AXA Life and Annuity Co. AXA Lebensversicherung AG AXA Krankenversicherung AG AXA Insurance U.K. PLC AXA France Vie AXA Belgium Counterparty Credit Rating Local Currency A+/Stable/-- AA-/Negative/-- AXA France IARD MONY Life Insurance Co. of America MONY Life Insurance Co. DBV Deutsche Beamtenversicherung Lebensversicherung AG DBV Deutsche Beamten-Versicherung AG AXA Versicherungen AG AXA Versicherung AG AXA Life and Annuity Co. AXA Lebensversicherung AG AXA Krankenversicherung AG AXA Insurance U.K. PLC AXA Insurance Co. AXA France Vie AXA Equitable Life Insurance Co. AXA Corporate Solutions Assurance AXA Belgium Financial Strength Rating Local Currency A+/Stable/-- AA-/Negative/-- AXA Counterparty Credit Rating A-/Stable/A-2 A/Negative/A-1 AXA Equitable Life Insurance Co. Counterparty Credit Rating Local Currency A+/Stable/A-1 AA-/Negative/A-1+ AXA Financial Inc. Counterparty Credit Rating Local Currency A-/Stable/-- A/Negative/-- Downgraded; Outlook Action; Ratings Affirmed To From AXA Bank Europe S.A. Counterparty Credit Rating A/Stable/A-1 A+/Negative/A-1 MONY Life Insurance Co. Counterparty Credit Rating Local Currency A+/Stable/-- AA-/Negative/-- Downgraded To From AXA France IARD AXA Equitable Life Insurance Co. Financial Enhancement Rating Local Currency A+/--/-- AA-/--/-- AXA Bank Europe S.A. Certificate Of Deposit A/A-1 A+/A-1 AXA Senior Unsecured A- A Subordinated BBB BBB+ Junior Subordinated BBB- BBB Commercial Paper A-2 A-1 AXA Equitable Life Insurance Co. Subordinated A- A AXA Financial Inc. Senior Unsecured A- A AXA Financial Inc. Commercial Paper A-2 A-1 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.