S&P Reacts to Winterthur Sale; AXA Revised to ‘Stable’; Winterthur to ‘Positive’

June 14, 2006

Standard & Poor’s Ratings Services reacted quickly to the announcement that AXA and Credit Suisse have reached an agreement to sell Winterthur, the Swiss bank’s insurance division to the French insurer for CHF 12.3 billion (around $10 billion – €7.9 billion) (See related article above).

S&P revised its outlook on AXA and all of its core subsidiaries to stable from positive. At the same time it affirmed its “AA- rating on AXA and its core subsidiaries. “The outlook revision reflects the execution risk associated with the integration of a group the size of Winterthur, which is rated lower than AXA,” explained S&P credit analyst Laura Santori.

S&P also noted: “Integration of Winterthur would boost AXA’s geographic diversification with the addition of two new markets, Switzerland and Central and Eastern Europe (CEE), and the consolidation of AXA’s position in other markets such as Germany, Spain, Belgium, the U.K., and Japan. We believe, however, that the benefits of diversification would be somewhat offset by the risk inherent with entrance into the Swiss group life market–a mature market with strict regulation of minimum interest guaranteed and conversion rates–and in CEE, where Winterthur has yet to establish a track record of profitable growth.

“The acquisition would also result in increased exposure to the German life market, which we believe would marginally deteriorate AXA’s risk profile, considering that in our view, AXA’s German life subsidiary is still not meeting the group’s standard for growth and profitability. Winterthur’s earnings profile has significantly improved over the past year, following extensive restructuring, limiting the downside risk of the purchase on AXA’s operating performance.”

“The deal’s financing, a mix of a rights issue, deeply subordinated perpetual debt, and subordinated and senior debt would leave the group’s capitalization and financial flexibility at very strong levels,” Santori observed. “The current ratings on AXA and its core insurance companies reflect the group’s very strong competitive position, capitalization, and operating performance.”

S&P also indicated that the “stable outlook might be revised to positive if, over the coming months, the integration of Winterthur proceeds without any negative impact on AXA’s financial profile or if the acquisition is not completed. On the contrary, if AXA’s operating performance and capitalization materially worsen, we could revise the outlook to negative.”

S&P also placed its “A-” long-term counterparty credit and financial strength ratings on Winterthur CreditWatch with positive implications, following the announcement.

“The CreditWatch placement indicates that the ratings on Winterthur might be raised by two notches, reflecting Standard & Poor’s expectation that the company will be strategically important to AXA,” stated S&P credit analyst Hiltrud Besgen.

S&P indicated that “Winterthur and its related subsidiaries are expected to constitute a significant proportion of AXA’s book of business and provide AXA with enhanced diversification. The CreditWatch status is expected to be resolved upon completion of the deal once regulatory approval has been received.”

As for Credit Suisse, jettisoning Winterthur resulted in S&P raising its long-term counterparty credit rating to ‘A+’ from ‘A’, affirming its short-term ‘A-1’ counterparty credit rating and its stable outlook.

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