Fitch Places AXIS On Rating Watch Positive

January 27, 2015

Fitch Ratings has placed the ‘A+’ Insurer Financial Strength [IFS] ratings of AXIS Capital Holdings Ltd. and its operating subsidiaries on Rating Watch Positive following its announced merger with PartnerRe Ltd. [PRE].

The ratings agency said, “Today’s affirmation follows the announcement that AXIS Capital entered into a definitive agreement to combine with PRE. The transaction is structured as a 100% stock merger of equals with no new debt issued, valuing the combined entity at an $11 billion market capitalization. The transaction is expected to close in the second half of 2015, subject to regulatory and shareholder approval of both companies. Assuming no material changes to the credit of AXIS Capital, Fitch may not take any rating action prior to closing.

“In the near term, Fitch recognizes that the most significant risks of the transaction are the possible complications arising during the process of integrating the operations and risk management practices of the two companies. Nevertheless, execution and integration risk should be somewhat reduced given the similar reinsurance lines of business written by PRE and AXIS Capital and cooperative nature of the deal, with key AXIS Capital senior management and underwriters expected to be retained.

“Another concern with the transaction is the softening market for reinsurers, characterized by falling prices and, less visibly, weakening terms and conditions. Favorably, increased scale in reinsurance from the merger could potentially prove beneficial in the current competitive market environment where stronger, more established reinsurers are maintaining capacity at the expense of smaller, weaker players. Companies with greater reinsurance scale and better market access will face less pressure to retain unprofitable accounts in a period of competitive market conditions.

“In the near term, Fitch views the transaction as positive for AXIS Capital given the one-notch higher credit quality profile of PRE. Over a longer term horizon, successful execution of this combination could provide positive credit benefits relating to diversification of earnings and business profile, leveraging the benefits of a larger organization. Also, potential expense savings could improve the overall profitability of the combined organization.

“The merger with PRE will expand the company into a meaningfully larger global specialty [re]insurer, with greater size and scale. Fitch estimates pro forma annual net premiums written [NPW] for the combined company will be approximately $9.7 billion based on trailing 12 month Sept. 30, 2014 figures and pro forma total shareholders’ equity [S/E] increases to $12.8 billion.

“Fitch expects the combined company to have moderate operating and financial leverage of approximately 0.8x [NPW to total S/E] and 15%, respectively, with strong fixed-charge coverage of 8x-9x. AXIS had similarly favorable ratios for the same period, with annualized NPW to total S/E of 0.7x, a financial leverage ratio of 20.2% [approximately 15% following December 2014 debt maturity] and fixed-charge coverage of 6.7x [approximately 8x run-rate].”

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