A.M. Best Co. announced that it has downgraded the financial strength rating of Paris-based AXA Re and its core subsidiaries to A- (Excellent) from A (Excellent).
The companies affected are: AXA Corporate Solutions Assurance; SPS Reassurance; CGRM (Compagnie Generale Re Monte Carlo); AXA Re Asia Pacific Pte Ltd., and AXA Corporate Solutions Insurance Company. Best assigned a “stable” outlook to all the ratings.
“This rating action reflects A.M. Best’s view that the improvement in AXA Re’s earnings is unlikely to be sufficient to restore AXA Re’s consolidated risk-adjusted capitalisation,” said the announcement. “On a consolidated basis, AXA Re remains highly exposed to reinsurance recoverables (reinsurance receivables to shareholders’ funds), leaving it exposed to increased credit and liquidity risks. However, AXA Re is expected to substantially reduce this ratio as part of its ongoing reorganization process.”
Best’s bulletin indicated that it “believes this reorganization will most likely stabilize AXA Re’s position and continues to have discussions with the company’s management to understand the full impact of such reorganization and closely assess the core status of the rated subsidiaries. AXA Re’s excellent business position in the reinsurance and industrial insurance market continues to be a positive rating factor.”
The rating agency also said it “believes that improved earnings and an anticipated significant reduction in net written premiums in 2003 will lead to an immediate improvement in AXA Re’s risk-based capital adequacy but below a level consistent with a Superior financial strength rating.”
It noted that in the current market conditions, “AXA Re’s consolidated earnings have improved with a reported profit of EUR 30 million (USD 35 million) in the first six months of 2003, compared to a loss of EUR 111 million (USD 127 million) at year-end 2002. Over this period, the combined ratio of reinsurance activities only fell from 114 percent to 105 percent, reflecting the positive impact of strategic actions initiated in 2002 and earlier this year (i.e., the run-off of non-profitable business and capital intensive activities, pricing discipline and better risk management).” It also indicated that there could be “further, but marginal, improvements in the company’s consolidated combined ratio in the short to medium term.”
A significant problem, cited by Best, is the group’s “continued high exposure to reinsurance recoverables,” which continues to “be a concern, particularly in light of the deteriorating credit quality in the reinsurance sector.” Best noted, however, that it “expects AXA Re to substantially reduce this leverage over time.”
It also stressed that despite a “strategic refocus leading to a reduction in premiums,” AXA Re has “maintained an excellent business position in the reinsurance market and remains one of the leading global reinsurers. The company was ranked as the eighth largest in Best’s recent survey of global reinsurers. The bulletin noted that “AXA Re posted consolidated gross premiums of EUR 2.6 billion (USD 3 billion) in the first six months of 2003, a decrease of 31 percent compared to the previous period,” and Best said it “expects a similar reduction for the full year 2003.”
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