International financial services rating agency, S&P Global Ratings, has revised its outlook on AXIS Capital Holdings Ltd. to negative from stable, after its recently announced planned acquisition of Novae Group for $604 million.
S&P has revealed that while it’s affirmed its ‘A-‘ long-term counterparty credit and senior debt ratings on AXIS Capital and its ‘A+’ long-term counterparty credit and financial strength ratings on the re/insurer’s core operating subsidiaries, it’s revised its outlook to negative from stable.
“The negative outlook reflects our concerns about the level of redundancy at the ‘AAA’ level on a pro-forma consolidated basis,” explains S&P.
Following AXIS’ planned acquisition of Novae Group, which was announced last week, S&P expects the firm’s current capital redundancies to shrink substantially over the next couple of years. The change in outlook from stable to negative, says S&P, also reflects the potential “stress on the new consolidated group’s business profile,” in response to expected growth in the London marketplace and also the potential for earnings volatility as headwinds continue to impact the firm’s key insurance and reinsurance segments.
S&P also warns that the revised outlook to negative could result in a ratings downgrade for the company over the next two years, stating it would lower its ratings by one notch “if AXIS cannot successfully integrate Novae because of potential cultural challenges, earnings volatility, and difficulty rebuilding its capital adequacy at the ‘AAA’ level.”
However, should the acquisition of Novae enhance AXIS’ “breadth and depth in the London market, generates sustainable strong earnings, and rebuilds its capital adequacy at the ‘AAA’ level to pre-acquisition levels,” S&P could affirm the current ratings and revise its outlook to stable, from the now negative.
In the current soft market cycle merger & acquisition (M&A) activity has flourished. However, as warned by S&P last year amidst a flurry of re/insurance industry M&A activity, the majority of re/insurance M&A is actually negative, with synergies rarely achieved.
