CHICAGO--(BUSINESS WIRE)--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, sizable reinsurance recoverable balance from runoff business and expansion into active non-life business and life run-off 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 $220 million of net income and a 9.1% return on common equity in 2015, following $214 million and 10.5%, respectively in 2014. Enstar has posted positive net earnings in every year of its operating history dating back to 2002. The company's active operations posted underwriting profitability in 2015 with combined ratios of 98.6% in StarStone Insurance Bermuda Limited and 81.5% in Atrium Underwriting Group Limited, generating $763 million of active non-life net premiums written in 2015.
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. Over the most recent five year period (2011 - 2015), Enstar has reduced its estimates of net ultimate prior period losses in its non-life run off business by $1.4 billion. This includes $311 million in 2015, representing 12.3% and 11.8% of total beginning of year shareholders' equity and total loss/LAE reserves, respectively.
Enstar's reserves have grown sizably in recent years as the company has acquired new runoff and active underwriting operations, with total net non-life loss/LAE reserves of $4.1 billion at Dec. 31, 2015, up 48% from $2.8 billion at year-end 2012. The reserve mix has also shifted with the largest exposure being runoff workers compensation reserves at 37% of total net non-life loss/LAE reserves at year-end 2015, followed by active operations representing 20%. At year-end 2012, the largest exposures were to general casualty and asbestos at 26% and 17%, respectively, of total net non-life loss/LAE reserves.
Non-life run-off reserves should continue to grow in 2016 following Enstar's recently announced reinsurance agreement (subject to final regulatory approval) with Allianz SE to assume 50% of certain U.S. run-off portfolios of workers' compensation, construction defect, and asbestos, pollution, and toxic tort business. Enstar will assume net reinsurance reserves of approximately $1.1 billion, with Allianz retaining $1.1 billion. Enstar is also engaged to provide consulting services for the entire $2.2 billion portfolio.
Fitch expects that as net reserve levels increase, Enstar's capitalization will remain very strong, with a net leverage ratio maintained at 3.5 or below. Net leverage and gross leverage ratios of 2.6x and 3.2x, respectively, in 2015 are in line with Fitch's median 'A' debt (re)insurance sector credit factors. These levels are up from 2.1x and 2.6x, respectively, in 2014 as Enstar increased its premiums from active underwriting and added $1.5 billion of non-life run-off net reserves from purchases and assumed business in 2015.
Enstar maintains a reasonable financial leverage ratio of 19.2% at Dec. 31, 2015, up from 11.2% at Dec. 31, 2014. Debt increased by $280 million primarily to partially fund acquisitions and significant new business. Fitch expects financial leverage to remain below 25%. Enstar's fixed-charge coverage ratio has been extremely strong, averaging a favorable 18.4x from 2010 to 2015, with 14.9x in 2015. Fitch expects annual fixed charge coverage to be maintained at 9x-10x or better.
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:
Enstar Group Limited
--IDR at 'BBB';
--Senior shelf registration at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 16 Sep 2015)
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