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AXAs decision to pull out of the U.S. life and non-life reinsurance market and refocus its reinsurance business prompted downgrades from the major rating agencies.

AXA Re Finance, a unit of AXA Group, Paris, announced the reorganization, which included cessation of U.S. financial guaranty reinsurance activities carried by AXA Re Finance and cessation of underwriting and renewing contracts on life and non-life reinsurance businesses through its U.S. subsidiaries, AXA Corporate Solutions Reinsurance Company and AXA Corporate Solutions Life Reinsurance Company.

Existing business will be put in runoff, AXA says.

The company says it will remain active in the U.S market through AXA Re Finance and will focus on property-catastrophe non-life reinsurance, including marine and aviation insurance.

Citing tight profit margins for the affected reinsurance lines of business, AXA spokeswoman Clara Rodrigo, says the moves will make it possible to efficiently optimize returns and concentrate on profitable businesses.

Business margins in reinsurance are tighter and consequently, it is necessary to have “better control of the business” and assess underwriting risk, she says.

Although property-casualty reinsurance can be a volatile market, Rodrigo says AXA Re has “good processes in place to assess risk.”

Gross written premiums on the reorganized businesses in 2001 and the first half of 2002 are, respectively:

E533 million and E307 million for AXA Corporate Solutions Reinsurance Co.;

E134 million and E81 million for AXA Corporate Solutions Life Reinsurance Co.; and,

E74 million and E47 million for the financial guaranty activities in the U.S. of AXA Re Finance.

Fitch Ratings, New York, downgraded the insurer financial strength rating of AXA Re Finance to AA from AAA and placed the unit on Rating Watch Negative. The action, Fitch says, “reflects AXA Re Finances status as a company in runoff.” As such, according to Fitch, it has less incentive to maintain its capital at current levels.

The AA insurer financial strength ratings of AXA Corporate Solutions Re (US) and AXA Corporate Solutions Life Re (US) were affirmed and withdrawn by Fitch at the request of the companies.

Managements message is that a recent injection of capital in the reinsurance operations will not be repeated, says Marc-Philippe Juilliard, a director with Fitch in Paris.

Scale is important in the life reinsurance business, which could be a reason AXA decided to withdraw from that line, he says, adding that insufficient profitability is the key reason for not underwriting new business.

Moodys Investors Service, New York, downgraded AXA Re Finance to A3 from Aa1, reflecting “the dramatic change in credit profile of AXA Re Finance given managements sudden shift in business direction from a strongly capitalized ongoing business to a runoff entity.”

It continues, “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.”

Speaking of the financial guaranty portion of AXA Res business, Jack Dorer, a Moodys senior vice president, says it was not providing the returns management wanted. Generally, he explains, returns in the financial guaranty business are a couple of percentage points lower than for a primary guarantor.

Moodys says it believes the financial guaranty companies that have relied on AXA Re Finance for reinsurance will not be affected by the changes because the unit reinsured less than 3% of any financial guarantors insurance in force and represented no more than 20% of the guarantors reinsurance usage.

Additionally, Moodys noted the possibility that financial guarantors could take back business ceded to AXA Re Finance.

Standard & Poors Corp., New York, lowered the units financial strength rating to BBB from AAA and removed the ratings from CreditWatch. It also said the outlook is now stable. The ratings were then withdrawn at managements request.

The ratings, according to S&P, are consistent with a runoff company in which once-diversified portfolios can become more concentrated and have higher risk. S&P also said it believes capital will be sufficient to support operations, and AXA Group would not allow its global franchise to wind down in a disorderly fashion.

“AXA Re has always been an opportunistic underwriter” and has pretty strong incentive to refocus on Europe and Asia, says Yann LePallec, director of financial services with S&P in Paris.

The decision on how to deploy resources could go beyond just a capital issue and involve wider reorganization goals such as how to deploy field force resources, says Jose Sanchez-Crispo, manager of A.M. Best-Europe, based in London.

Among action Best took on AXA companies was a downgrade of the financial strength ratings of AXA Corporate Solutions Re and AXA Corporate Solutions Life Re to B (Fair) from A (Excellent.) The ratings were assigned a negative outlook.

A.M. Best said it believes financial support for AXA Corporate Solutions Re and AXA Corporate Solutions Life Re is diminished by the decision to run them off.

Last year, Best says, AXA Corporate Solutions Life Re business was impacted by the underlying equity market deterioration, given its exposure to guaranteed minimum death and income benefit products.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 20, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.