S&P Global Ratings has revised its outlook on AXA Group and its core and highly strategic subsidiaries to positive from stable.
At the same time, S&P affirmed its ‘AA-’ long-term insurer financial strength and issuer credit ratings on the core operating subsidiaries of AXA and withdrew the ‘AA-’ financial strength rating on AXA Insurance Co. at the issuer’s request.
The rating agency also affirmed its ‘A+’ long-term insurer financial strength and issuer credit ratings on the operating holding company and on all the highly strategic operating subsidiaries of the group. Issue ratings on the company outstanding debt was also affirmed.
Stable to positive
According to S&P, the outlook was revised from stable to positive due to AXA Group’s expected continuous profitability growth for 2024-2026. The agency also believes that its capital-light strategy will strengthen the company’s S&P Global Ratings’ capital adequacy.
It is positively viewed that AXA Group confirmed it will meet its full-year 2024 target of 6%-8% growth in underlying earnings per share, even in an active year for Nat CAT as well. AXA Group has focused on growing the top line while improving the combined (loss and expense) ratio of its property and casualty (P&C) and health insurance short-tail lines, as well as expanding its life protection and unit-linked portfolios, all business lines with lighter capital requirements than traditional life business.
Additionally, S&P believes that AXA’s sale of AXA Investment Managers and AXA Select to BNP Paribas for €5.4bn ($5.7bn) will result in a modest but positive strengthening of the company’s capital adequacy. AXA announced a share-buyback of €3.8bn to compensate for the earnings dilution of the sale, leaving over €1bn to reinforce the growth of core insurance operations.
Profitability
The positive view of AXA’s profitability also takes into account the resiliency of its profit generating capacity, which is linked to the wide geographic and business diversification of activities.
P&C, life and health represented respectively 61%, 30% and 9% of AXA’s pre-tax profit in 2023. AXA has narrowed its footprint in recent years and now operates mostly in countries where it enjoys positions among the top five insurers, such as in the Hong Kong Special Administrative Region.
AXA is also a leader in underwriting large corporate commercial lines through AXA XL. With diversification, AXA compensated for underperformance in 2023. The company is also expected to report meaningful recovery in earnings in full-year 2024 and enjoy earnings growth in 2025, as evidenced by progress made in the first half of 2024.
The significant reduction in Nat CAT exposure in recent years and robust reinsurance programmes for both CAT and long-tail risks also reinforces the resiliency of AXA’s profitability. AXA also announced that Hurricanes Milton and Helene would in aggregate cost less than €200m pre-tax and net of reinsurance.
Growth
S&P expects AXA to achieve a top-line growth of 5%-6%, a P&C combined ratio between 90% and 95%, a recovery in the health combined ratio and a profit growth in life business in line with top-line growth. This should lead to net income (before minorities) rising to over €8bn in 2026 from €7.4bn in 2023.
The agency also believes that AXA’s exposure to French assets is less than 20% of its general accounts investments and the company would not deplete its regulatory capital base of €57.4bn as of end-2023 in a hypothetical stress test involving a hypothetical default of France.
However, there is still uncertainty on AXA’s capacity to durably maintain capital adequacy under S&P’s model above the 99.95% level, which is needed for the assessment of AXA’s financial risk profile more positively.
Balance sheet
AXA’s wide geographic diversification and large balance sheet, with €445bn in general account investments, result in an inherent degree of sensitivity to market movements.
In 1H2024, this sensitivity resulted in modest negative impacts on other comprehensive income and contractual service margin. Additionally, the very high solvency ratio displayed by AXA (221% on 30 September 2024) allowed the group to partially refinance called hybrids with senior debt, which had a slight negative impact on both Solvency II own funds and S&P Global Ratings’ total adjusted capital since 2022.
View
The positive outlook reflects S&P’s view that AXA will post growing profitability that compares favourably with peers, with a combined ratio at 90%- 95% and a return on equity close to 15% and demonstrate resilience to adverse market and CAT events thanks to its globally diversified business profile.
Ratings could be lowered over the next two years if, contrary to expectations, adverse market developments materially reduced AXA’s capital adequacy for a prolonged period, or if a consistent weakening of the company’s operating performance, combined with its ratchet dividend policy, led to materially negative internal capital generation.
On the other hand, ratings may be raised over the next two years if AXA delivers on forecast profitability metrics, its performance compares favourably relative to peers and strengthens capital adequacy buffers consistently above the 99.95% capital level under S&P’s model. The strength of AXA’s technical reserves and their capacity to mitigate unexpected losses may also be considered.