Rating Agencies Lower AXA’s U.S. Reinsurance Companies on Restructuring Plans

January 14, 2003

Yesterday’s announcement by France’s AXA Group that it would significantly curtail reinsurance operations in the U.S. (See IJ Website Jan.13) – ceasing both its financial guaranty reinsurance activities and its life and non-life reinsurance through U.S. subsidiaries – produced an immediate reaction from the rating agencies, as they rushed to lower their ratings on the affected subsidiaries.

A.M. Best Co. announced that it has downgraded the financial strength ratings of AXA Corporate Solutions Reinsurance Co. and its wholly owned subsidiary, AXA Corporate Solutions Life Reinsurance to B (Fair) from A (Excellent).

Moody’s Investors Service lowered its rating on AXA Re Finance (AXARF) to A3, from Aa1 and said it remains “under review for possible downgrade.” Standard & Poor’s lowered its ratings on the subsidiary all the way from ‘AAA’ to ‘BBB.’ While Fitch cut AXARF’s ratings by two notches from ‘AAA’ to ‘AA.’

Moody’s announcement stressed that “the A3 rating reflects the dramatic change in credit profile of AXA Re Finance given management’s sudden shift in business direction from a strongly capitalized ongoing business to a runoff entity. The review for possible downgrade reflects the need to evaluate the evolving fortunes of AXA Re Finance as it enters runoff and as its parent redeploys its capital.”

Best also announced that it had removed the ratings from under review, but indicated that it had lowered its ratings on some of AXA’s other operations, AXA Re Property and Casualty Insurance Co., AXA Re America Insurance Co. and AXA Corporate Solutions Lloyds Insurance Company of Texas to A- (Excellent) from A (Excellent). “All ratings of the non-reinsurance companies placed under review with negative implications are pending further discussions with management regarding the ultimate parent’s, AXA RE SA’s, additional financial support for these U.S. program business entities,” said Best.

The rating agency also announced that it had raised the financial strength rating of AXA Corporate Solutions Insurance Co., the issuing company of AXA’s U.S. marine, aviation, space and reverse-flow insurance business to A (Excellent) from A- (Excellent) and removed them from under review.

Best observed that the divisions that continue to receive the support of the parent group can be categorized as maintaining “an excellent level of capitalization.” The assignment of a “negative outlook” reflects “the current rating outlook of its ultimate parent.” By contrast the downgrades on the other operations reflect the inherent diminution of support from the parent, and its decision to “run-off those entities.”

Best noted that “the overall U.S. non-life reinsurance operations have been highly unprofitable in recent years primarily due to the WTC losses in 2001,” and that the “life reinsurance business of AXA Corporate Solutions Life Reinsurance has been severely impacted by the underlying equity market deterioration given its exposure to the reinsurance of guaranteed minimum death benefit and guaranteed minimum income benefit products.”

In a separate bulletin Best affirmed the financial strength ratings of A (Excellent) of AXA Corporate Solutions (AXACS) and its core subsidiaries, and removed them from “under review” status with a “negative” outlook.

“The ratings recognize the gradual restoration of AXACS’s consolidated capitalization and forecast continued improvement in prospective operating performance after consideration of the restructuring measures implemented to date. The negative outlook reflects the continued challenges associated with completing the current restructuring programme and AXACS’s ability to fully capitalize on the current hardening environment. It also factors some uncertainty regarding the prospective role of each subsidiary within the new group structure,” said the announcement.

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