Fitch keeps AXIS outlook ‘negative’ due to adverse earnings trends

Fitch Ratings has affirmed the 'A+' (Strong) Insurer Financial Strength (IFS) ratings of the operating subsidiaries of AXIS Capital Holdings and AXIS Capital's 'A-' Issuer Default Rating (IDR) but has kept the Rating Outlook as Negative.

The Negative Outlook reflects adverse earnings trends that reached a nadir in 2017 with heavy catastrophe losses resulting in a decline in capital adequacy, Fitch said. Improved capital metrics along with continued positive earnings trends could lead to a return to a Stable Rating Outlook, the agency noted.

AXIS Capital's ratings continue to be supported by a strong business profile and very strong capitalization, Fitch said. Operating results have improved through the first half of 2018 after material deterioration in 2017 due to heavy catastrophe losses from hurricanes Harvey, Irma and Maria as well as two earthquakes in Mexico and California wildfires.

AXIS Capital's 'Strong' Business Profile considers the company's market position and size/scale based on premiums and stockholders' equity metrics, Fitch said. Over the last several years, AXIS Capital has taken strategic actions in an effort to adapt to challenging market dynamics and offset its exposure to catastrophe-related losses, the agency noted. The company is differentiated from reinsurance peers by its balance between direct insurance business and reinsurance business, it added.

AXIS Capital returned to profitability in the first half of 2018, reporting a combined ratio of 92 percent, which is somewhat favourably influenced by purchase accounting used with the Novae acquisition, Fitch said. This year-to-date result does not reflect losses from hurricane Florence, but does represent a significant improvement from full year 2017, the agency said. AXIS Capital reported a greater than 113 percent combined ratio and net loss of $416 million in 2017 following three hurricanes, two earthquakes and wildfires.

AXIS Capital bolstered its catastrophe reinsurance coverage using both traditional and ILS reinsurance markets, reducing probable maximum losses (PML's) to levels reported before the Novae acquisition, Fitch said. Management estimates that the new reinsurance programme would have lowered its retained losses from hurricanes Harvey and Irma by as much as 20 percent.

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