Research Update: AXIS Capital Holdings Ltd.'s $500M, 5.75% Senior Debt Issue Rated 'BBB+'

Business Wire, Nov 22, 2004

NEW YORK -- On. Nov. 22, 2004, Standard & Poor's Ratings Services assigned its 'BBB ' senior debt rating to Bermuda-based AXIS Capital Holdings Ltd.'s (AXIS Capital) $500 million, 5.75% senior notes, which are due in 2014. At the same time, Standard & Poor's affirmed its 'BBB ' counterparty credit rating on AXIS Capital and its 'A' financial strength ratings on AXIS Specialty Ltd. and AXIS Capital's other interactively rated subsidiaries. The outlook on all these companies is stable.

The notes issuance is a takedown on AXIS Capital's $2.4 billion universal shelf, which was filed on Aug. 6, 2004. Standard & Poor's expects proceeds from the issuance to be used for general corporate purposes. Including the issuance, the group's (collectively referred to as AXIS) financial leverage--as measured by total debt to total capital--is expected to be about 14%, which is conservative for the rating.

The ratings are based on AXIS's seasoned management, very strong capital adequacy, very strong operating results, good risk management, and very strong balance sheet. Partially offsetting these factors are AXIS's relatively short track record and high-risk coverages.

AXIS' operating performance remained strong through the first nine months of 2004, with a year-to-date combined ratio of 86.4% and an ROR of 19% despite $227 million in net hurricane losses in the third quarter of 2004. Capital adequacy has declined because of continued growth in premium writings but remains very strong, with an estimated capital adequacy ratio of 160%-170% as of June30, 2004.

Outlook

Standard & Poor's expects AXIS to continue to generate very strong average operating returns, though results in any period are subject to volatility from large losses. Capital adequacy is expected to remain very strong, and financial leverage is not expected to exceed 15% over the medium term.

Major Rating Factors

--Seasoned management. Management's strength is in both its depth and breadth, with proven track records at Lloyd's, in Bermuda, and in other jurisdictions as well as expertise in property and specialty lines of business. Most have extensive relationships with insurers, which have contributed to AXIS's acquisition of its initial book of business over the past two years. Management and staff own shares in the company, totaling about 5% of outstanding common shares.

Very strong current capital. Capitalization is substantial on an absolute basis and is currently at the 'AA' level. Capital adequacy has declined moderately because of continued growth in premium writings but remains very strong, with an estimated capital adequacy ratio of 160%-170% as of June 30, 2004. Capital adequacy is expected to remain a rating strength.

--Very strong initial operating results. For 2002 and 2003, AXIS generated extremely strong underwriting and operating performance, with an average combined ratio of 72%. Even without financial leverage, AXIS had an ROE of 22% and an ROR of 33% in 2003, which compare favorably with peers' results. Despite $227 million in hurricane losses in the third quarter of 2004, AXIS also performed relatively well through the first nine months of 2004, with year-to-date combined ratio of 86.4% and an ROR of 19%.

--Good risk management. Management has demonstrated a sound understanding of the underwriting strengths and weaknesses of business it writes, with a good grasp of pricing, risk selection, attachments points, policy limits, loss modeling, and reinsurance. AXIS uses technology actively and also peer-reviews all treaties.

--Very strong balance sheet. AXIS has a very strong balance sheet with very few intangibles, no legacy reserve or recoverable concerns, and a healthy reserve cushion. Including the recent senior notes issuance, AXIS's financial leverage -- as measured by total debt to total capital -- is expected to be about 14%, which is conservative for the rating.

--Relatively short track record. Although AXIS has demonstrated very strong operating performance to date, the group's operating history is relatively short and, as a result, the ability of its franchise to navigate weak markets is relatively untested.

--High-risk coverages. AXIS's management team has considerable experience in what are considered higher-risk coverages, such as terrorism/war and political risks. Although risk is well controlled and monitored, AXIS could suffer high-severity losses at any given time and might be subject to higher volatility in its operating performance than has been realized to date. This risk is mitigated by conservative reserving and a very strong balance sheet.

Ratings List
AXIS Capital Holdings Ltd.
    Counterparty credit rating          BBB /Stable/--
    Senior debt rating                  BBB 
AXIS Specialty Ltd.
AXIS Re Ltd.
    Counterparty credit rating          A/Stable/--
    Financial strength rating           A/Stable
AXIS Specialty Europe Ltd.
AXIS Specialty Insurance Co.
Axis Reinsurance Company
AXIS Surplus Insurance Co.
    Financial strength rating           A/Stable