Moody’s Investors Service has changed the ratings’ outlook of AXIS Capital Holdings Limited from stable to negative, citing lower capitalisation and higher operating and financial leverage relative to peers.
At the same time, Moody’s has affirmed the ratings of AXIS Capital and its subsidiaries, including the Baa1 guaranteed senior debt of its finance subsidiaries and the A2 insurance financial strength of its operating subsidiaries.
Despite the firm’s diversified business mix across both specialty insurance and reinsurance lines, with knowledge and expertise in niche markets, a robust reserve position and solid historical returns, Moody’s highlights a number of challenges that offset the re/insurer’s strengths.
This includes AXIS’ meaningful catastrophe exposure including terrorism risk, heightened operating and financial leverage when compared to peers, and also the firm’s focus on long-tail lines and specialty classes of business.
The re/insurer fell to a net loss in the fourth-quarter of 2018, driven by attritional losses within its property and casualty segment. Moody’s notes that AXIS has taken steps to reduce its volatility, mostly via reinsurance utilisation, however, it remains that when compared with its peers, the firm’s operating and financial leverage is high.
A return to a stable outlook could happen if the firm’s risk-adjusted capitalisation strengthens; its debt-to-capital level moves to below 25%; its cat risk profile remains reasonable while capitalisation strengthens; or if returns on capital consistently hit the mid-single-digits.
However, a number of things could also lead to a rating downgrade, such as increased cat exposure; an unexpectedly large loss in non-core product lines; sustained high gross underwriting leverage; debt-to-capital level consistently above 25%; low profits; and a reduction in shareholder’ equity by over 10% over a rolling 12 month period.
