Fitch Ratings reiterated the Issuer Default Rating (“IDR”) of 'A' and senior debt rating of 'A-' of AXIS Capital Holdings Limited (AXS), according to Reuters. Concurrently, the rating agency reiterated the Insurer Financial Strength (“IFS”) of 'A+' of the operating subsidiaries. The ratings carry a stable outlook.
The rating affirmations came on the back of the history of continued solid underwriting performance, sturdy capitalization and conservative investment portfolio and reserving practices.
AXIS Capital’s combined ratio - the percentage of premiums paid out as claims and expenses, a measure of underwriting profitability - was 85.3% (10-year average). Further, combined ratio improved significantly year over year to 93.6% in the first half of 2012.
However, considerable exposure to catastrophes somewhat dwarfs the positives. Nevertheless, the company is striving to lower it by reinsurance programs.
The rating agency stated that though favorable reserve development has aided earnings, maintaining the level will be difficult amidst the weak macro environment. However, it believes that a diverse range of premium generating avenues will not only shield the company from the adversities of a singular market space but will also allow it to compete in different markets. Also, AXIS Capital has increased its shareholders' equity over the last decade.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe the company’s strong score with the credit rating agencies will help it write more business going forward.
Fitch stated the ratings might be revised upward provided there is considerable increase in surplus and catastrophe exposure reduces significantly.
Ratings might be subject to downgrade if capital erodes due to worse-than-expected catastrophe losses, failure in raising capital subsequent to losses, considerable damage to underwriting results, operating earnings coverage stays below 7.0x for a longer term, operating leverage moves ahead of 1.0x net written premiums-to-equity ratio, reserves plummets or financial leverage moves ahead of 25%.
We retain our Neutral recommendation on AXIS Capital. The company currently carries a Zacks Rank #2, reflecting a short-term Buy rating. ACE Limited (ACE), which closely competes with AXIS Capital, shares the same Zacks rank.
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