AXIS Capital outlook changed to 'negative' by Moody's

Rating agency Moody's has revised its outlook of Bermuda-based AXIS Capital Holdings and its operating subsidiaries to negative from stable, reflecting the re/insurer's lower capitalisation and higher operating and financial leverage relative to peers.

According to Moody's, AXIS' ratings reflect its diversified mix of specialty insurance and reinsurance businesses with expertise in niche markets, good historical operating returns, a solid reserve position, and high quality fixed income portfolio.

It said, "these strengths are tempered by meaningful catastrophe exposure including terrorism risk, elevated operating and financial leverage relative to similarly-rated peers; the company's focus on long-tail lines, which heightens vulnerability to reserve volatility; and exposure to specialty lines, which inherently carry more risk than standard lines."

For 2018, AXIS reported net income of $0.4 million and a combined ratio of 99.9 percent, reflecting a series of mid-sized global catastrophe losses, though much improved from the net loss of $416 million in 2017.

Following the acquisition of Novae Group in October 2017, the company's operating and financial leverage increased significantly. The rating agency stated that while the company has taken steps to reduce volatility in part through reinsurance, AXIS' financial leverage (29.4 percent at year-end 2018, or 26.6 percent pro forma excluding senior notes maturing April 2019) and gross underwriting leverage (4.2x at year-end 2018) remain high relative to similarly-rated, catastrophe-exposed peers.

Moody's added that the company could return to stable outlook, provided it strengthens its risk-adjusted capitalisation; maintains a reasonable catastrophe risk profile; and returns on capital consistently in the mid-single digit range.

Meanwhile, the factors that could lead to a further downgrade include sustained elevated gross underwriting leverage; adjusted debt-to-capital ratio consistently above 25 percent; low profitability with multi-year returns on capital below the mid-single digit range; reduction in total shareholders' equity by more than 10 percent over a rolling twelve month period; significant increase in the firm's catastrophe risk appetite; and unexpectedly large losses in proof-of-concept or non-core product lines.

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