Fitch Affirms AXIS Capital Holdings Ratings
Fitch Ratings has affirmed the ‘A-’ Issuer Default Rating [IDR] of AXIS Capital Holdings Ltd. and the ‘A+’ Insurer Financial Strength [IFS] ratings its operating subsidiaries. The Rating Outlook is Stable.
A statement from the ratings agency said, “AXIS Capital’s ratings continue to be supported by a good competitive position and strong capitalization. Operating results were challenged by catastrophe losses during the first half of 2016 but remain generally consistent with current ratings. Further, there is an expectation for continued weakness in the reinsurance sector that will challenge AXIS Capital’s earnings.
“Underwriting ratios remained consistent with Fitch’s median guidelines for the current rating category. AXIS Capital’s calendar year underwriting ratios deteriorated modestly during the first six months of 2016 as AXIS Capital reported a combined ratio of 97.2%, including 6.8 percentage points from catastrophe and weather-related losses and 8.0 points of favorable reserve development. Both reinsurance and insurance segments reported higher combined ratios relative to comparable periods.
“Profitability during the first half of 2016 was below expectations for the current rating category, but ratios averaged over the past several years remain supportive of current ratings. Return on equity was 6% during the first half of 2016, down from 8.3% in the comparable period of 2015. Pre-tax operating earnings covered fixed charges by 5.4X through the first half of 2016, which was down compared to 7.0x in the comparable period of 2015.
“In addition, the ratings reflect Fitch’s negative sector outlook on global reinsurance, as the fundamentals of the reinsurance sector have deteriorated with declining premium pricing and weakening of terms and conditions, particularly for property catastrophe risk. This is leading to consolidation in the reinsurance sector as companies aim to enhance their relative competitive positions.
“During July, reinsurance start up, Harrington Re, was capitalized with $600 million, which included a $100 million investment from AXIS and a $50 million equity investment from Blackstone affiliates. Harrington Re’s book will be comprised of premiums ceded by AXIS Reinsurance Co., but it may also have access to AXIS Capital’s primary book as well. Harrington Re provides AXIS Capital with additional capacity and a source of fee income.
“AXIS Capital’s market position and size/scale is considered ‘medium’ based on premiums and stockholders’ equity metrics. Companies with AXIS Capital’s market position and size/scale typically have IFS ratings in the ‘A’ category but can reach into the lower ‘AA’ category. It remains to be seen if recent mergers in the reinsurance sector will disadvantage small and medium-sized competitors that did not increase scale through acquisition.
“AXIS Capital utilizes a reasonable amount of operating leverage relative to other Bermuda insurers with significant catastrophe exposure. The company reported an operating leverage ratio of 0.7x at June 30, 2016, which was calculated on a rolling four quarters basis. The financial leverage ratio was 14% at June 30, 2016, essentially unchanged over the last several years and quite strong relative to Fitch’s median guidelines for the current rating category.”
