Fitch Ratings has affirmed Enstar Group Limited’s long-term issuer default rating at “BBB+”, senior unsecured notes at “BBB”, senior shelf registration at “BBB” and preference shares at “BBB-”.

The rating outlook for Enstar is stable.

Fitch said that its rating affirmation reflects Enstar’s solid business franchise acquiring and managing non-life run-off companies, strong profitability derived from consistent favourable reserve development, very strong capitalisation and reasonable financial leverage. Offsets to these positives include the company’s run-off risk profile.

Enstar received a moderate company profile, maintaining a leading position in its core non-life run-off reinsurance operations. Enstar has been successful with its run-off acquisition strategy, generating favourable returns and significant growth in book value. Offsetting this, the risk profile is potentially subject to change based on future acquisitions and capital needs, with considerable exposure to long-tailed reserves.

A key source of Enstar’s positive performance is its ability to ultimately settle reserves below acquired fair value through both effective claims management and commutations. From 2018 to 2022, Enstar reduced its estimates of net ultimate prior-period losses/loss adjustment expenses in its non-life run-off business by $1.8 billion (excluding amortisation and fair-value amounts that are generally offset in investment results), averaging 8 per cent and 5 per cent of beginning of year shareholders’ equity and net non-life run-off loss/LAE reserves, respectively.

Enstar’s most recent ten-year average — 2013 to 2022 — return on equity was a strong 11.4 per cent. The company posted a net loss of $0.9 billion in 2022 driven by $1.5 billion of unrealised losses that flow directly into net income. This included $1.1 billion on fixed maturities from rising interest rates and widening credit spreads. Enstar posted net income of $0.4 billion in the first quarter of this year, which included a $0.2 billion net gain attributable to Enstar from the novation of Enhanzed Reinsurance Ltd’s reinsurance closed block of life annuity policies to Monument Insurance Group Limited.

Capital remains solid, with shareholders’ equity of $4.9 billion at March 31, down 5 per cent from $5.2 billion at year end 2022 owing to $0.3 billion of non-voting convertible ordinary share repurchases held by Canada Pension Plan Investment Board.

Enstar utilises a reasonable amount of operating leverage, with a net leverage ratio of 2.4x at March 31, 2023. Enstar scored “very strong” on Fitch’s Prism factor-based capital model at year end 2022, which compares to “extremely strong” at year end 2021.

The decline reflects a 20 per cent drop in available capital driven by net unrealised losses on fixed-income securities. Enstar has the ability to hold bonds to maturity; therefore, is not expected to realise investment losses, except under a stress liquidity event.

Enstar’s financial leverage ratio was in line with the rating category at 25.7 per cent as of March 31, up slightly from 24.4 per cent at December 31, 2022 owing to the decline in shareholders’ equity. Fitch expects Enstar’s FLR to return to 25 per cent or below as shareholders’ equity grows. Enstar’s fixed-charge coverage ratio averaged 4.8x from 2018 to 2022.

Fixed-charge coverage improved to 5.5x in 2022 and 5.8x in 2021 from a lower 4.1x in 2020 and 2.4x in 2019, as these years were affected by StarStone Insurance Bermuda Limited's underwriting losses before Enstar’s exit from active underwriting. Fitch expects Enstar to maintain fixed-charge coverage of at least near 6.0x.

Fitch listed a potential upgrade as unlikely owing to the nature of the company’s business model in acquiring large blocks of run-off business that can materially alter the company’s balance sheet.

While this risk has been managed well to date, it adds potential near-term capital, earnings and business/exposure mix variability at levels greater than experienced by most insurers operating under more traditional business models.