Fitch Affirms Enstar’s ‘BBB’ IDR; Outlook 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 are the company's risk profile, which 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.
Enstar maintains a reasonable financial leverage ratio of 21.0% at
Enstar utilizes a reasonable amount of operating leverage, as measured by net leverage and gross leverage ratios of 2.9x and 3.5x, respectively, at
Fitch views Enstar's profitability as strong, with positive net earnings in every year of its operating history dating back to 2002. The more limited earnings posted through the first six months of 2015 reflect the seasonality of run-off business, with the majority of reserve settlements and commutations completed during the fourth quarter, as this coincides with reserve reviews and efforts by companies to finalize deals prior to year-end reporting.
The key source of the company's favorable 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 (2010 -2014), Enstar has reduced its estimates of net ultimate prior period losses in its non-life run off business by
Enstar has an outsized credit exposure to run-off reinsurance recoverables. At
Enstar's entrance into active underwriting business starting in late 2013 and life run off beginning in 2011 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 operating active businesses and in closed life and annuities business. In 1H2015, Enstar posted reasonable combined ratios in its active operations of 100.5% in
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
--IDR at 'BBB';
--Senior shelf registration at 'BBB-'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub.
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