Fitch Assigns Initial 'BBB' IDR to Enstar; Rates Shelf Registration 'BBB-'

lunes 15 de septiembre de 2014 09:13 GYT

(The following statement was released by the rating agency) CHICAGO, September 15 (Fitch) Fitch Ratings has assigned an initial 'BBB' Issuer Default Rating (IDR) to Enstar Group Limited (Enstar). The Rating Outlook is Stable. In addition, Fitch has assigned a 'BBB-' rating to any unsecured senior debt securities proposed to be issued under Enstar's recently filed registration statement. KEY RATING DRIVERS Fitch's assignment of Enstar's ratings reflect the company'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 historical 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 include substantial asbestos & environmental exposure 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 considers Enstar to have a small to medium overall market position and size/scale with GAAP shareholders' equity of $2.5 billion at June 30, 2014. Enstar maintains a reasonable financial leverage ratio of 13.6% at June 30, 2014, down from 18.6% at Dec. 31, 2013, as debt declined due to repayments and shareholders' equity increased from a share issuance in April 2014 to fund the purchase of Torus Insurance Holdings Limited. Use of leverage has historically been and currently consists of bank debt and not senior note issuances. Fitch expects financial leverage to remain below 25% following any senior unsecured debt issuance under the shelf registration. Operating earnings-based interest coverage has been extremely strong, averaging a favorable 20x from 2009-2013, with 16.2x in 2013. GAAP earnings coverage dropped to 5.1x through the first six months of 2014, reflecting the seasonality of earnings that have historically been more limited in the first half of the year. Fitch expects coverage to be maintained at 7x or better following any senior debt issuance. 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. The company 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 (2009-2013), Enstar has reduced its estimates of net ultimate prior period losses in its non-life run off business by $1.36 billion, averaging 22% and 11% of total beginning of year shareholders' equity and total loss/LAE reserves, respectively. These reductions related to various longer-tail lines including general casualty, workers' compensation and other liabilities. They also include asbestos, and to a lesser extent environmental liabilities, although asbestos liabilities have generally declined in amount as the company has expanded and diversified its reserve profile. Fitch views Enstar's profitability as strong, characterized by high returns on common equity, with the most recent five-year average (2009?2013) at 15.2% and returns of 12.6% in 2013 and 11.4% in 2012. These results are in line with or better than peer averages and align with Fitch's median 'A' debt (re)insurance sector credit factors. Fitch notes that Enstar has posted 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 2014 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. Enstar has an outsized credit exposure to run-off reinsurance recoverables. At June 30, 2014, consolidated GAAP reinsurance balances recoverables on unpaid losses and loss expenses totaled $1.5 billion, with 72% derived from the non-life run off business. This level represents a sizable 62% (51%, net of collateral), of shareholders' equity, which Fitch considers to align with 'BB' debt sector credit factors ('BBB', net of collateral). This magnitude of reinsurance balances creates a risk exposure to reinsurers as well as increased potential for reinsurer disputes. However, the majority of the recoverables relate to reinsurers that are rated 'A-' or better or have balances secured by trust funds held for the benefit of Enstar. Favorably, Enstar includes a conservative allowance for uncollectible reinsurance recoverable of $339 million (18% of total gross recoverables balance) at June 30, 2014. Enstar's entrance into life run-off 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. Fitch expects Enstar to approach these new areas in a controlled and prudent manner, utilizing an experienced team of existing and new outside members to operate and manage the business. The company utilizes a reasonable amount of operating leverage, as measured by net leverage and gross leverage ratios of 2.3x and 3.0x, respectively, in 2013. Fitch expects these levels to increase to approximately 2.8x and 3.4x, respectively, in 2014 as the company looks to write additional premiums as part of its recently acquired active underwriting platforms. These higher levels remain in line with Fitch's median 'A' debt (re)insurance sector credit factors. RATING SENSITIVITIES Key rating triggers that could result in a 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 the company'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 impact/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 assigns the following ratings with a Stable Outlook: Enstar Group Limited --IDR 'BBB'; --Senior shelf registration 'BBB-'. Contact: Primary Analyst Brian C. Schneider, CPA, CPCU, ARe Senior Director +1-312-606-2321 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst James B. Auden, CFA Managing Director +1-312-368-3146 Committee Chairperson Keith M. Buckley, CFA Managing Director +1-312-368-3211 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: --Insurance Rating Methodology (Sept. 4, 2014). Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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