Fitch Ratings has upgraded Enstar Group Limited's Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'BBB', senior unsecured notes to 'BBB' from 'BBB-' and preference shares and junior subordinated notes to 'BBB-' from 'BB+'.

The Rating Outlook is Stable.

Key Rating Drivers

Today's rating action reflects Enstar's strong long-term financial performance driven by net ultimate non-life runoff loss/loss adjustment expenses (LAE) reserve reductions, and very strong capitalization, with continued reasonable financial leverage. Enstar's ratings also reflects the company's solid business franchise acquiring and managing non-life runoff companies. Offsets to these positives include the company's risk profile, which is potentially subject to change based on future acquisitions and capital needs, and considerable exposure to long-tailed reserves.

Enstar's operating earnings are primarily driven by reductions in the net ultimate non-life runoff loss/LAE reserves. Over the most recent five-year period (2017-2021), Enstar reduced its estimates of net ultimate prior-period losses/LAE in its non-life runoff business by $1.4 billion (excluding amortization and fair value amounts that are generally offset in investment results), averaging 7% and 5% of beginning of year shareholders' equity and net non-life runoff loss/LAE reserves, respectively.

Enstar's most recent five-year average (2017-2021) ROE was a very strong 13.8%. The company posted $0.4 billion of net income in 2021 (7.4% ROE), which included net realized and unrealized investment gains of $0.1 billion. This follows exceptionally strong net income of $1.7 billion in 2020 (32.8% ROE), driven by net unrealized investment gains that flow directly into net income. In 2020, the company reported a $1.2 billion unrealized gain in InRe Fund L.P., a hedge fund managed by an affiliate of Hillhouse Capital Management, Ltd., driven by strong equity market performance. In 2021, Enstar redeemed $2.7 billion and liquidated the InRe Fund as part of a strategic realignment to reduce its exposure to hedge fund investments.

Capital remains solid, with shareholders' equity of $5.8 billion at March 31, 2022, down 9% from $6.3 billion at YE 2021, driven by net unrealized losses on fixed-income securities due to a rise in interest rates. Enstar utilizes a reasonable amount of operating leverage, with net leverage and gross leverage ratios of 2.3x and 2.5x, respectively, at Dec. 31, 2021. Enstar scored 'Extremely Strong' on Fitch's Prism factor-based capital model at YE 2021, which is consistent with prior years. Fitch expects this score to be maintained in 2022, even as unrealized bond losses from rising interest rates reduce available capital.

Enstar's financial leverage ratio (FLR) was reasonable at 24.1% as of March 31, 2022, up from 21.0% at Dec. 31, 2021, reflecting $500 million of junior subordinated notes due 2042 issued in January 2022 to repay at maturity the outstanding $280 million of 4.5% senior notes due March 2022. Enstar's fixed-charge coverage ratio averaged a strong 5.2x from 2017 to 2021. Fixed-charge coverage improved to 5.8x in 2021 from a lower 4.1x in 2020 and 2.2x in 2019, as these years were impacted by StarStone Insurance Bermuda Limited's underwriting losses prior to Enstar's exit from active underwriting.

Fitch views Enstar's overall business profile as moderate compared with other non-life (re)insurance organizations, maintaining a leading position in its core non-life runoff (re)insurance operations, with a very experienced, disciplined and highly knowledgeable management team. Enstar has been successful with its runoff acquisition strategy, generating favorable returns and significant growth in book value per share. In 2020/2021, Enstar exited its active underwriting platforms of StarStone and Atrium Underwriting Group Limited.

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 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%; or a fixed-charge coverage below 6.0x.

Enstar's hybrid securities ratings could also be lowered by one notch to reflect higher nonperformance risk should Fitch view 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

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