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Relative value opportunity in property & casualty sector

| December 11, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Axis Capital Holdings Ltd. (AXS) offers attractive spread pick to property & casualty peers in the 5- to 10-year part of the curve. The AXS 29s are trading considerably wide of BBB/A peers in the 10-year part of the curve and appear to compensate investors for the risks commensurate with the issuer. While there is some near-term ratings risk of potential downgrades, that downside appears largely priced in, as AXS is trading well wide of mid-BBB rated peers in the property & casualty and reinsurance space.

Exhibit 1: AXS vs P&C/Reinsurance Comps

Source: Amherst Pierpont, Bloomberg/TRACE BVAL Indications

Bond recommendations

AXS 3.9% 7/15/29 @ +160-155 (cuff); G~172; ~2.49%; ~$110.55
AXS 4.0% 12/06/27 @ +135-130 (cuff); G~161; ~2.23%; ~$111.00

Issuer: AXIS Specialty Finance LLC (unconditionally guaranteed by AXS)

CUSIPs: 05463HAB7, 05464HAC4
Amounts outstanding: $300 million, $350 million
Ratings: Baa1/NEG, A-/NEG, BBB+/NEG
Global Issues
Operating Comps: AGCL, PRE, RE, RNR, XL, Y

AXS is a hybrid reinsurance/property & casualty operator, some of whose closest operating comps include Alleghany (Y: Baa1/BBB+), Arch Capital (ACGL: Baa1/A-/BBB+) and PartnerRe (PRE: Baa1/BBB/BBB). The company generates about 53% of premiums from insurance and the remaining 47% from reinsurance. AXS offers a wide product array across property and casualty lines, professional liability, workers’ compensation, and growing specialty lines such as marine/aviation.

Part of the initial rationale for the negative outlooks from the rating agencies included temporarily deficient capital following the acquisition of Novae Group Ltd for $460 million, which closed in late 2017.  AXS has since resolved that issue, regaining capital adequacy at the AAA level, according to the agencies. Other concerns regard ongoing weakness in operational metrics, not just those related to COVID-19, which AXS should be able to resolve through continued improvements in pricing and better risk selection.

AXS took a conservative approach to COVID-related exposures, booking a $235 million charge in the first quarter of 2020. They have not made any additional adjustments or disclosures in the two quarters since then. AXS experienced an earnings setback in the third quarter of 2020 due to elevated cat losses on numerous global and weather-related events in the quarter.

AXS has a solid liquidity profile. The company has just over $1 billion on the balance sheet following the losses booked year-to-date. Their first senior debt maturity is not until 2027, however they have $250 million in loans due in 2021 and $500 million in loans due in 2023. AXS could opt to bring a senior debt deal to meet those near-term obligations, which could benefit secondary bonds by lending some price discovery in the issuer.

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