Axa Outlook Reduced to Negative by Fitch on Lower Rates

Axa SA (CS), France’s largest insurer, had its outlook lowered by Fitch Ratings to negative as earnings are pressured by bond yields at near-record lows.

The outlook for the Paris-based company was cut from stable on “concerns about the group’s ability to improve profitability, notably in the context of low interest rates,” the ratings firm said yesterday in a statement.

Falling yields for fixed-income securities have hurt insurers’ investment income as proceeds from maturing bonds are reinvested at lower rates. The yield on the 10-year government bond in France has declined to 2.26 percent from about 3.14 percent at the end of last year. The yield on the 10-year U.S. Treasury is at 1.69 percent, down from 1.88 percent.

Axa is expanding in Asia, seeking 10 percent annual growth in per-share operating earnings through 2015. Axa and Allianz SE, Europe’s biggest insurers, reported profits that beat analysts’ estimates in the first half of the year, helped by higher earnings at their life and health businesses.

Fitch said Axa’s operating profits have grown over four years because of a more-favorable underwriting environment in non-saving related businesses. Further improvement will be a “major challenge” in the low-interest rate environment, the ratings company said. Guillaume Borie, a spokesman for Axa, declined to comment.

Life insurers are paying the price for guarantees made to U.S. variable-annuity clients before 2008, when stock markets were in the midst of a five-year rally and the yield on the 10- year Treasury was more than 4 percent. Liabilities climbed as yields dropped below 2 percent, making it harder for insurers to generate returns to cover the obligations.

‘Market Volatility’

Axa’s U.S. results are “volatile due to the company’s variable annuity business, which has been impacted by low interest rates, equity market volatility, and lower-than- expected lapses,” the ratings firm said. “Management’s steps to reduce variable annuity risk and volatility will contribute to more stable statutory earnings in the longer term.”

The Axa Equitable unit in the U.S. has said it plans to offer a payment to clients who cancel their standalone guaranteed death benefit riders on some contracts issued between 2002 and 2007.

The insurer declined 0.1 percent to 12.34 euros at 1:38 p.m. in Paris. It has advanced 23 percent this year, compared with the 16 percent gain by insurance companies in the Bloomberg World Insurance Index. (BWINSU)

To contact the reporter on this story: Susanna Pak in New York at spak10@bloomberg.net

To contact the editor responsible for this story: Dan Reichl at dreichl@bloomberg.net