S&P Affirms AXIS’ Ratings; Positive Outlook

November 6, 2008

Standard & Poor’s Ratings Services has affirmed its ‘BBB+’ counterparty credit rating on Bermuda-based insurance and reinsurance holding company AXIS Capital Holdings Ltd. and its ‘A’ counterparty credit and financial strength ratings on AXIS Capital’s operating subsidiaries (collectively referred to as AXIS). The outlook on all these companies remains positive.

“The affirmations follow AXIS’ announcement of its third-quarter 2008 operating results, in which the group reported a net loss of $249 million,” explained credit analyst Laline Carvalho. “The loss was primarily because of a combination of large catastrophe losses from Hurricanes Ike and Gustav and realized and unrealized losses on its investment portfolio.”

S&P said it “believes AXIS’ losses for the third quarter of 2008, albeit high, are reasonable for the group’s capital base and earnings generating power. For the first nine months of 2008, AXIS remained profitable, with net income of $220 million, though this was significantly lower than the $749 million reported for the first nine months of 2007.

“Although AXIS’ third-quarter 2008 combined ratio was high at 128 percent, its combined ratio for the first nine months of the year was a reasonable 97 percent. We expect that the combined ratio will improve further for full-year 2008, assuming a normalized level of catastrophe losses for the fourth quarter. For the first half of 2008, AXIS’ underwriting performance was in line with our expectations, with a very strong combined ratio of 81 percent. Favorable reserve development, albeit contributing a significant 11 points to the third-quarter combined ratio, is consistent with what AXIS has reported in previous years and in our opinion reflects a conservative approach to the way the group sets its initial reserves.”

S&P added that the “ratings on AXIS Capital Holdings Ltd. and its operating subsidiaries are based on the group’s strong competitive position, strong operating results, seasoned management team, excellent insurance risk controls, and very strong consolidated capital adequacy.

“Offsetting these strengths are the group’s short track record compared with those of longer-established insurance and reinsurance peers and its exposure to severity-related risks.”

In addition S&P said it expects “that AXIS’ underwriting results for full-year 2008 will remain strong, with the full-year combined ratio at 93 percent-95 percent, assuming a normalized level of catastrophe losses in the fourth quarter. Capital adequacy will likely remain very strong for the remainder of the year and into 2009. Financial leverage–as measured by total debt plus preferred to total capital–should remain conservative and supportive of the ratings at less than 25 percent over the medium term.”

The rating agency also noted that the positive outlook “indicates that we could upgrade AXIS by one notch during the next year. Factors that would contribute to an upgrade include the continuation of strong operating performance, continued evidence of excellent risk controls in its underwriting, and prudent cycle management.”

However, S&P also indicated that, if the Company’s operating performance does not meet its expectations, or if the group’s cycle management is weaker than expected, “we could revise the outlook to stable. We could also revise the outlook to stable if AXIS were to incur significant reserve development related to the catastrophes incurred during the third quarter of 2008 or if the group incurs higher-than-expected losses in its investment portfolio.”

Source: Standard & Poor’s – www.standardandpoors.com

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