December 22, 2017 / 6:47 PM / a year ago

Fitch Downgrades AXA Financial, Inc.; Removes Ratings from Negative Watch

(The following statement was released by the rating agency) NEW YORK, December 22 (Fitch) Fitch Ratings has downgraded AXA Financial, Inc.'s (AXF) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-' and the Insurer Financial Strength (IFS) ratings of AXF's insurance operating subsidiaries to 'A' (Strong) from 'A+' (Strong). Fitch also removed AXF's IDR and IFS ratings off Rating Watch Negative and assigned a Stable Outlook. At the same time, Fitch affirmed AXF's short-term commercial paper rating at 'F1'. A full list of rating actions follows at the end of this release. Today's rating actions reflect the revision in Fitch's view of AXF's strategic importance relative to AXA group to be an 'Important' subsidiary of AXA S.A. as a result of proposed changes as outlined in the Form S-1 filing by AXA Equitable Holdings, Inc. (AEH). Notably, changes to company's debt profile, which is expected to become externally funded from largely AXA affiliate funded, and changes to the company's operating accounting framework to U.S. GAAP from IFRS are consistent with a greater separation of the U.S. operating segment from the AXA SA group. AXF's ratings largely reflect the company's standalone credit profile, and AXA S.A.'s ownership is considered neutral to AXF's ratings. The partial IPO is expected to occur in the first-half 2018. KEY RATING DRIVERS AXF's ratings reflect the company's strong business profile, strong balance sheet profile, and strong operating performance. The ratings also consider the AXF's above-average equity market exposure, pressure from low interest rates on legacy in-force profitability, and competitive challenges across the company's major business lines. Fitch considers AXF's business profile to be strong given the company's strong distribution capabilities, strong brand name, and good business diversification. AXF maintains strong competitive positions in the group retirement market, individual variable annuities (VA), individual variable life and indexed universal life, and asset management. Fitch's view on business profile also considers the company's above-average product exposure to equity markets given the minimum guarantees from the company's legacy VA block and sizeable portion of its earnings derived from fee income on the company's separate accounts, which is largely linked to equities. AXF is also exposed to equities indirectly through management fees from its asset management business. Fitch considers the company's statutory capital to be strong. AXA Equitable Life Insurance Company (AXA Equitable), the largest U.S. life subsidiary, reported risk-based capital (RBC) ratio at 467% at Dec. 31, 2016. The company expects stronger capitalization post-IPO given its plans to recapture the variable annuity business from its Arizona captive and manage the exposure at AXA Equitable. As part of the variable annuity recapture, AXF expects to downstream capital into the operating insurance entities. RBC is expected to be above 500% in 2018 and beyond. Fitch also expects financial leverage to increase but remain below 30% given its expectation to refinance current internally funded debt with externally issued debt in 2018. Fitch considers AXF's earnings profile to be strong and within expectations of its current rating. Operating profitability has been largely driven by strong performance in the individual annuity segment, which has been supported by strong equity markets in recent years. The company's group retirement and asset management segments also provide consistent and moderate earnings contributions to the overall result. The percentage of operating earnings from asset management is expected to increase post IPO as a result of the transfer of AXA S.A's shares of AllianceBernstein L.P. (AB), AXF's asset management business, to AXF. After completion of the IPO, AXF's ownership of AB is expected to increase to approximately 66% from 45%. The affirmation of AXF's short-term commercial paper rating reflects an explicit guarantee of the commercial paper program by AXA S.A., which is not expected to be in place after completion of the IPO. RATING SENSITIVITIES The key rating sensitivities that could result in an upgrade include: --Improvement in operating ROE on a continued basis over 11%; --Sustained GAAP operating earnings-based interest coverage above 10x; --Reported RBC above 450% and financial leverage below 25%; --Material decline in legacy VA exposure with no large writedowns. The key rating sensitivities that could result in a downgrade include: --Sustained decline in operating ROE below 6%; --A decline in reported RBC below 375% and financial leverage exceeding 30%; --Sustained GAAP operating earnings-based interest coverage below 6x; --An unexpected material reserve charge in the variable annuity book. FULL LIST OF RATING ACTIONS Fitch has downgraded, removed from Rating Watch Negative, and assigned a Stable Outlook to the following ratings: AXA Financial, Inc. --Long-term IDR to 'BBB+' from 'A-'; --Senior unsecured debt to 'BBB' from 'BBB+'. AXA Equitable Life Insurance Company --IFS to 'A' from 'A+' --Long-term IDR to 'A-' from 'A'; AXA Equitable Life and Annuity Company MONY Life Insurance Company of America U.S. Financial Life Insurance Company --IFS to 'A' from 'A+'. Fitch also affirmed the following ratings due to an explicit guarantee from AXA S.A.: AXA Financial, Inc. --Commercial paper at 'F1'. Contact: Primary Analyst Nelson Ma, CFA Director +1-212-908-0273 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Douglas Meyer, CFA Managing Director +1-312-368-2061 Committee Chairperson Julie A. Burke, CPA, CFA Managing Director +1-312-368-3158 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on Applicable Criteria Insurance Rating Criteria (pub. 30 Nov 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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