Fitch Affirms Enstar's IDR at 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Enstar Group Limited's (Enstar) long-term IDR at 'BBB' and senior shelf registration at 'BBB-'. The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating affirmation reflects Enstar's solid business franchise acquiring and managing non-life run-off companies, consistently strong profitability driven by favorable reserve development, reasonable operating and financial leverage and favorable earnings coverage. Partially offsetting these positive characteristics include the company's risk profile that is potentially subject to change based on future acquisitions and capital needs, reserves that are long-tailed and are thus highly volatile, and more recent expansion into life run-off and active non-life business that adds risks outside of the company's core non-life run off business.

Enstar has a leading position in the specialized niche market for non-life run-off (re)insurance business, with a very experienced, disciplined and highly knowledgeable management team. The company has, overall, been successful with its run-off acquisition and risk management strategy, generating favorable returns and significant growth in book value per share.

Fitch views Enstar's profitability as strong, with $214 of net income and a 10.5% return on common equity in 2014, following $209 million and 12.6%, respectively in 2013. Fitch notes that Enstar has posted positive net earnings in every year of its operating history dating back to 2002.

The key source of Enstar's positive operating performance is its ability to ultimately settle reserves below acquired fair value through both effective claims management and commutations. Enstar has achieved this result by utilizing a comprehensive, in-depth approach prior to acquiring run-off business and then post-acquisition, employing its specialized expertise in the favorable settlement of claims.

Over the most recent five year period (2010-2014), Enstar has reduced its estimates of net ultimate prior period losses in its non-life run off business by $1.4 billion. This includes $289 million in 2014, representing 14.6% and 10.0% of total beginning of year shareholders' equity and total loss/LAE reserves, respectively.

Enstar maintains a modest financial leverage ratio of 11.2% at Dec. 31, 2014, down from 18.6% at Dec. 31, 2013, as debt declined due to repayments and shareholders' equity increased 29% from net income and a share issuance in April 2014 to fund the purchase of Torus Insurance Holdings Limited (Torus). Enstar utilizes a reasonable amount of operating leverage, as measured by net leverage and gross leverage ratios of 2.1x and 2.6x, respectively, in 2014. Operating earnings-based interest coverage has been extremely strong, averaging a favorable 20.7x from 2010-2014, with 14.6x in 2014 and 16.2x in 2013.

Enstar's entrance into life runoff beginning in 2011 and then active underwriting business starting in late 2013 is meant to diversify and complement the company's core non-life run-off business. However, it also carries risks given Enstar's relatively small market size and lack of experience in closed life and annuities business and in operating active businesses. In 2014, Enstar posted reasonable combined ratios in its active operations of 100.8% in Torus and 85.1% in Atrium Underwriting Group Limited.

RATING SENSITIVITIES

Key rating triggers that could result in a rating downgrade include failure to generate continued material levels of favorable non-life run-off reserve development; additional capital needs to support the current run-off business; significant new transaction(s) that increases risk profile; net leverage ratio above 3.5x; sizable underwriting losses in its active business; financial leverage ratio approaching 30%; and operating earnings-based interest coverage below 5x.

Fitch considers a rating upgrade to be unlikely in the near term due to the nature of Enstar's business model in acquiring large blocks of run-off business, and more recently active operations, which at the company's current size/scale can materially alter the company's balance sheet. While this risk has been managed well to date, this dynamic currently limits the rating to the low investment grade level, since it adds potential capital and earnings variability at levels greater than experienced by most insurance companies with more traditional business models.

Key rating triggers that could lead to an upgrade over the long term include attaining a greater size/scale such that individual block acquisitions have a more muted impact on the overall financial profile; more stable non-life run-off portfolio growth; improvement in Enstar's competitive position in profitable market segments outside of non-life run-off, including its active underwriting business; and material risk-adjusted capital growth.

Fitch affirms the following ratings with a Stable Outlook:

Enstar Group Limited

--Long-term IDR at 'BBB';

--Senior shelf registration at 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Insurance Rating Methodology (Sept. 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981112

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Contacts

Fitch Ratings
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1-312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1-312-368-3211
or
Media Relations
Alyssa Castelli, New York, 1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, 1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1-312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1-312-368-3211
or
Media Relations
Alyssa Castelli, New York, 1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, 1-212-908-0526
elizabeth.fogerty@fitchratings.com