S&P Affirms Axis Specialty ‘A’ Ratings

June 7, 2004

Standard & Poor’s Ratings Services announced that it has affirmed its “A” counterparty credit and financial strength ratings on Bermuda’s Axis Specialty Ltd. and its operating units: Axis Specialty Europe Ltd., Axis Specialty Insurance Co., Axis Reinsurance Co., and Axis Surplus Insurance Co.

S&P also said it has assigned its ‘A’ counterparty credit and financial strength ratings to Axis Re Ltd., the reinsurance subsidiary that writes global reinsurance from Ireland and its branch in Zurich. “The rating is based on a 75 percent quota share treaty and a stop-loss treaty attaching at an 80 percent loss ratio and capped at 120 percent, both with lead company Axis Specialty Ltd,” said S&P.

The outlook on all of the companies is stable. S&P said it “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 at the current rating level.”

The rating agency listed the following as “Major Rating Factors:”

— Seasoned management, ownership, and sponsorship. 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 and clients that have contributed to Axis’s acquisition of its initial book of business over the past two years. Management and all staff own shares in the company, aggregating 5 percent of outstanding common.
— Extremely strong current capital. Capitalization is substantial on an absolute basis and currently at a ‘AAA’ standard. Axis’s capital adequacy ratio, based on Standard & Poor’s risk-based capital adequacy model for property/casualty insurers, was 237 percent as of Dec. 31, 2003. Capital adequacy is expected to remain a rating strength.
— Very strong initial operating results. For 2002 and 2003, Axis has generated extremely strong underwriting and operating performance, with combined ratios averaging 72 percent. At year-end 2003, 81 percent of loss reserves were held as IBNR as a cushion for potential loss development. Even without financial leverage, Axis’s ROE was 22 percent and ROR was 33 percent in 2003, which compares favorably with those of its peers.
— Good risk management. Management demonstrates 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 risks.
— Extremely strong balance sheet. Axis has an extremely strong balance sheet funded entirely with common equity, very few intangibles, no legacy reserve or recoverable concerns, and a healthy reserve balance.
— Short track record. Although Axis has demonstrated very strong operating performance to date, it has a short nine-quarter track record, and the ability of its franchise to navigate weak markets is as yet untested.
— High-risk coverages. Axis’s management team has considerable experience in what are considered higher risk coverages, such as terrorism/war and political risk. Although risk is well controlled and monitored, Axis has the potential to suffer high-severity losses at any given time and may be subject to higher volatility in its operating performance than has been realized to date. This risk is mitigated by conservative reserving and an extremely strong balance sheet.”

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