AXIS Capital Holdings Ltd. must deal with a ratings downgrade issued by A.M. Best over concerns about its financial performance.

On May 5, A.M. Best downgraded the financial strength rating to “A” (Excellent) from “A+” (Superior) for AXIS and its subsidiaries. The Bermuda-based specialty insurer and reinsurer’s other credit ratings also took a hit. At the same time, A.M. Best revised its credit ratings outlook for AXIS and its subsidiaries to stable from negative.

The ratings news came a day after AXIS released its Q1 2020 financial results, which included a $185 million net loss and $235 million in catastrophe losses attributable to COVID-19. A.M. Best’s downgrade does not mention the pandemic. Rather, it cites a deterioration in its view of AXIS’ broader operating performance as a contributing factor.

“While AXIS still maintains positive overall results and has taken corrective measures, particularly in its insurance segment, to improve its earnings profile, A.M. Best believes that the group’s operating performance is no longer in line with companies with a strong operating performance assessment or its own historical results,” A.M. Best said. “This is evident by the group’s five-year average return-on-equity and combined ratios, which fall short of A.M. Best’s strong operating performance benchmarks.”

A.M. Best noted that AXIS still maintains healthy levels of risk-adjusted capitalization and that its financial situation gives it financial flexibility at all levels. It also pointed out that the company has regularly produced “consistent common and preferred dividends” and enacted regular share repurchases.

But AXIS, like other carriers, has experienced a decline in favorable reserve releases over the last five years, A.M. Best said. As well, it has elevated “financial leverage metrics” compared to peers as well as more intangible assets, thanks largely to its Novae acquisition.

Losses and COVID-19 Struggles

AXIS booked $185 million in net losses for Q1 2020, or $2.20 per diluted common share, versus $98 million in net income, or $1.16 per common diluted share during the 2019 first quarter.

AXIS said it produced estimated pre-tax catastrophe and weather-related losses of $300 million, net of reinsurance and reinstatement premiums. COVID-19-related losses reaching $235 million encompassed most of that amount.

“Like all [insurers and reinsurers], our financial results have been impacted by COVID-19,” AXIS Capital President and CEO Albert Benchimol said in prepared remarks. “The losses from the pandemic overshadowed what otherwise would have been an excellent quarter for AXIS.”

Benchimol said AXIS continues to “have a well-balanced book of business, great relationships with our producers, and – despite the remote work environment – we are continuing to deliver the same high level of service to our customers.”

The consolidated combined ratio for Q1 2020 hit 119.8, much higher than a 96.9 combined ratio produced in Q1 2019.

For the quarter, AXIS said its consolidated gross premiums written reached $2.4 billion, down $152 million, or 6 percent, compared to the previous year. Reinsurance premiums dipped $242 million, or 14 percent, but that was partially offset by a $90 million (11 percent) increase in the insurance segment.

Net premiums written dropped by $98 million, or 6 percent in the quarter, hitting $1.7 billion. That figure includes a $150 million (12 percent) decrease in the reinsurance segment that was partially offset by a $52 million (10 percent) jump in the insurance segment.

Net investment income came in at $93 million in the quarter, but the figure is $14 million lower than the same period a year ago, a result AXIS blames on lower hedge fund returns.

Source: A.M. Best, AXIS Capital Holdings