Fitch Ratings has affirmed Enstar Group Limited's Long-Term Issuer Default Rating (IDR) at 'BBB+', senior unsecured notes at 'BBB', senior shelf registration at 'BBB' and preference shares at 'BBB-'.

The Rating Outlook is Stable.

Fitch's rating affirmation reflects Enstar's solid business franchise acquiring and managing non-life runoff companies, strong profitability derived from consistent favorable reserve development, very strong capitalization and reasonable financial leverage. Offsets to these positives include the company's runoff risk profile.

Key Rating Drivers

Moderate Company Profile: Enstar has a moderate company profile, maintaining a leading position in its core non-life runoff (re)insurance operations. Enstar has been successful with its runoff acquisition strategy, generating favorable 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.

Reserve Reductions Drive Earnings: 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. Over the most recent five-year period (2018-2022), Enstar reduced its estimates of net ultimate prior-period losses/loss adjustment expenses (LAE) in its non-life runoff business by $1.8 billion (excluding amortization and fair value amounts that are generally offset in investment results), averaging 8% and 5% of beginning of year shareholders' equity and net non-life runoff loss/LAE reserves, respectively.

Strong Earnings: Enstar's most recent 10-year average (2013-2022) ROE was a strong 11.4%. The company posted a net loss of $0.9 billion in 2022 driven by $1.5 billion of unrealized 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 1Q23, 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.

Very Strong Capitalization: Capital remains solid, with shareholders' equity of $4.9 billion at March 31, 2023, down 5% from $5.2 billion at YE 2022 due to $0.3 billion of non-voting convertible ordinary share repurchases held by Canada Pension Plan Investment Board. Enstar utilizes 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 YE 2022, which compares to 'Extremely Strong' at YE 2021.

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

Moderate Financial Leverage; Strong Coverage: Enstar's financial leverage ratio (FLR) was in line with the rating category at 25.7% as of March 31, 2023, up slightly from 24.4% at Dec. 31, 2022 due to the decline in shareholders' equity. Fitch expects Enstar's FLR to return to 25% 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 prior to Enstar's exit from active underwriting. Fitch expects Enstar to maintain fixed charge coverage of at least near 6.0x.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Failure to generate strong earnings from continued material levels of favorable non-life runoff reserve development;

Failure to maintain a score under Fitch's Prism factor-based capital model of at least a solidly 'Very Strong';

Significant new transaction(s) that Fitch views as materially increasing the overall risk profile;

Net leverage ratio above 2.5x;

FLR above 25%;

Fixed-charge coverage below 6.0x;

Hybrid securities ratings could also be lowered by one notch to reflect higher nonperformance risk should Fitch views Bermuda's regulatory environment as becoming more restrictive in its supervision of (re)insurers with respect to hybrid features.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch views a potential upgrade as unlikely due to the nature of the company's business model in acquiring large blocks of runoff 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.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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