OREANDA-NEWS. 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 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 June 30, 2015, up from 11.2% at Dec. 31, 2014. Debt increased by $329 million primarily to partially fund the acquisitions of Sussex Insurance Company (renamed from Companion Property and Casualty Insurance Company) in January 2015 from Blue Cross and Blue Shield of South Carolina and largely placed into run off and the life settlement contracts in May 2015 from Wilton Re Limited. Fitch expects financial leverage to remain below 25%. Enstar's fixed-charge coverage ratio has been extremely strong, averaging a favorable 20.7x from 2010 to 2014, with 14.6x in 2014. Fitch expects annual fixed charge coverage to be maintained at 9x - 10x or better.

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 June 30, 2015, which 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 $1.3 billion of non-life run-off net reserves from purchases and assumed business through the first half of 2015.

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 $1.4 billion, averaging 19% and 11% of total beginning of year shareholders' equity and total loss/LAE reserves, respectively.

Enstar has an outsized credit exposure to run-off reinsurance recoverables. At June 30, 2015, consolidated GAAP reinsurance balances recoverables on unpaid losses and loss expenses totaled $1.6 billion, with 78% derived from the non-life run off business. This level represents a sizable 66% (47%, 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, 95% 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 $257 million (14% of total gross recoverables balance) at June 30, 2015.

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 StarStone Insurance Holdings Limited (StarStone; renamed from Torus Insurance Holdings Limited in Sept. 2015) and 76.3% 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
--IDR at 'BBB';
--Senior shelf registration at 'BBB-'.