Fitch Rates AXIS Specialty Finance PLC Debt 'A-'; Affirms Ratings

CHICAGO--()--Fitch Ratings has assigned an 'A-' rating to the $500 million senior unsecured notes (two tranches of $250 million each) issuance completed today by AXIS Specialty Finance PLC, a subsidiary of AXIS Capital Holdings, Limited (AXIS Capital). The notes are fully and unconditionally guaranteed by AXIS Capital and its ratings are therefore based on AXIS Capital's Fitch Issuer Default rating (IDR) of 'A'. Fitch has also affirmed the 'A+' Insurer Financial Strength (IFS) ratings of AXIS Capital's operating subsidiaries. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

Fitch expects that the net proceeds from the new senior debt issuance will refinance $500 million of existing debt maturing in 2014. Financial leverage was 14.5% at year-end 2013 and temporarily increases to 20% following this transaction.

KEY RATING DRIVERS

Fitch's ratings reflect AXIS Capital's diverse revenue stream, solid history of underwriting results, strong capitalization, and conservative reserving practices and investment profile. Offsetting factors include the company's significant catastrophe exposure.

AXIS Capital reported net earnings of $684 million in 2013, compared with $495 million in 2012. The favorable results were driven by fewer catastrophe losses in 2013 and continued solid underlying results in both its insurance and reinsurance segments. The company reported a combined ratio of 91.0% in 2013 (including 5.3pp related to catastrophe losses and 5.9pp of favorable reserve development) compared with 96.2% in 2012 (including 12.7pp of catastrophe losses and 7.1pp of favorable reserve development).

AXIS Capital reported net written premium growth of 18% during 2013, largely driven by growth in its new business lines: accident & health and agriculture. Also contributing to increased premiums were higher premium rates and exposure growth through geographic expansion in its liability, professional lines, and property book. Additionally, business mix changes led to a reduction in the ceded premiums ratio.

Fitch views AXIS Capital's catastrophe exposure as significant but in line with peer companies. Among other measures, the company manages its exposure to catastrophic events by zone and return period, such that a one-in-250-year single event within a single zone is estimated at no more than 25% of prior quarter-end common stockholders' equity. Estimated catastrophe and weather-related pre-tax net losses (net of related reinstatement premiums) totaled $198 million in 2013, primarily driven by U.S. tornadoes and hailstorms along with flooding in Canada, Argentina and Europe. Comparatively, the company recognized $436 million of pretax losses including crop losses (net of reinstatements) during 2012.

AXIS Capital's history of favorable reserve development has benefited earnings; however, Fitch expects favorable development to diminish going forward as underwriting experience from recent soft market accident years mature. The company reported favorable prior-year reserve development of $219 million in 2013 compared with $245 million in 2012.

Fitch views AXIS Capital's capitalization as solid with operating leverage (as measured by prior 12 months net premiums written to shareholders' equity) of 0.66x as of Dec. 31, 2013. The company's shareholders' equity increased by 1.5% to $5.9 billion at year-end 2013. Earnings and preferred stock proceeds (which receive 100% equity credit) were slightly offset by unrealized investment losses and capital returned to shareholders via share repurchases and dividends.

The company maintains a relatively high-quality investment portfolio with moderate exposure to risky asset classes, defined as equities, below-investment-grade bonds, and alternative investments (i.e.: hedge funds, etc.). These investments have increased over the past several years but remain within Fitch's rating guidelines.

RATING SENSITIVITIES

Key rating triggers that may lead to a downgrade include a significant loss of capital resulting from a major catastrophic event that is worse than expectations or industry and peer company results; an inability to raise capital following a large loss event; a failure to maintain an underwriting profit for an extended period; an increase in operating leverage above a 1.0x net written premiums-to-equity ratio; significant reserve deficiencies; GAAP fixed-charge coverage (including preferred dividends) below 7.0x for a sustained period; or financial leverage above 25%.

Key rating triggers that may lead to an upgrade include a significant increase in capital that meaningfully reduces operating leverage, and reduced exposure to catastrophe losses. However, given publicly traded companies' sensitivity around managing capital, Fitch believes the company is unlikely to move toward this level of overcapitalization.

Fitch assigns the following ratings:

AXIS Specialty Finance PLC

--$250 million 2.65% senior notes due 2019 at 'A-';

--$250 million 5.15% senior notes due 2045 at 'A-'.

Fitch has affirmed the following ratings:

AXIS Capital Holdings, Ltd.

--IDR at 'A';

--5.75% senior debt rating at 'A-';

--Series B 7.5% preferred securities rating at 'BBB';

--Series C 6.875% preferred securities rating at 'BBB';

--Series D 5.5% preferred securities rating at 'BBB'.

AXIS Specialty Finance LLC

--5.875% senior debt rating at 'A-'.

AXIS Specialty Limited (Bermuda)

AXIS Reinsurance Company

AXIS Insurance Company

AXIS Surplus Insurance Company

AXIS Specialty Insurance Company

--IFS ratings at 'A+'.

Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (November 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

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Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA, +1-312-368-3136
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas M. Pawlowski, CFA, +1-312-368-2054
Senior Director
or
Committee Chairperson
Jeff Mohrenweiser, +1-312-368-3182
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA, +1-312-368-3136
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas M. Pawlowski, CFA, +1-312-368-2054
Senior Director
or
Committee Chairperson
Jeff Mohrenweiser, +1-312-368-3182
Senior Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com