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Fitch Rates Enstar's Series E Preference Shares 'BB+'.

Chicago: Fitch Ratings has assigned a 'BB+' rating to Enstar Group Limited's (Enstar) new issuance of perpetual non-cumulative preference shares, series E. The new preference shares rank pari passu with Enstar's existing $400 million series D preference shares issued in June 2018, and are thus rated equivalent. Net proceeds from this new issue will be used for general corporate purposes, including funding for acquisitions, working capital and other business opportunities.


Under Fitch's rating methodology, the new non-cumulative perpetual preference shares receive 100% equity credit in evaluating financial leverage. Fitch considers the preference shares to have 'minimal' non-performance risk with notching set two below the Issuer Default Rating (IDR) based on 'Poor' recovery expectations, with no additional notching for non-performance.

Enstar's financial leverage ratio (FLR) was a modest 9.2% at Sept. 30, 2018 and declines to approximately 8.9% to 8.7% pro forma for a $100 million - $200 million preference share issuance. Enstar's debt at Sept. 30, 2018 includes $46.5 million outstanding borrowings under a revolving credit facility and $350 million of senior notes issued in 2017. Pro forma debt plus preferred equity to total capital increases to 20.3% - 22.0% from 18.4% at Sept. 30, 2018.

Enstar's operating earnings-based fixed-charge coverage was favorable, averaging a very strong 12.8x from 2013 to 2017, with 8.2x for 9M18. Fitch expects annual fixed-charge coverage to be at least a strong 6x - 8x following the preferred share issuance.

The new securities are expected to receive 100% credit in Fitch's capital adequacy ratio as Tier 2 qualifying regulatory capital by the Bermuda Monetary Authority.


Key rating sensitivities that could lead to an upgrade include maintaining a FLR at or below 20%, fixed-charge coverage of at least 10.0x, sustained risk-adjusted capital growth with a capitalization score under Fitch's Prism factor-based model of at least 'Very Strong' and a net leverage ratio at or below 2.5x.

Any potential future upgrade would likely be limited to one notch, however, 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 capital, earnings and business/exposure mix variability at levels greater than experienced by most insurance companies operating under more traditional business models.

Key rating sensitivities that could result in a downgrade include the following:

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

--Additional capital needs to support the current runoff business;

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

--Net leverage ratio above 3.5x;

--Declines in the financial strength of the active business due to sizeable underwriting losses or other factors;

--FLR approaching 30%; and

--Fixed-charge coverage below 5.0x.

Enstar's preference share ratings could also be lowered by one notch to reflect higher non-performance risk should Fitch view Bermuda's regulatory environment as becoming more restrictive in its supervision of (re)insurers with respect to hybrid features.


Fitch assigns the following rating:

Enstar Group Limited

--Preference shares, series E 'BB+'.

Fitch currently rates Enstar as follows:

Enstar Group Limited

--Long Term Issuer Default Rating 'BBB'; Rating Outlook: Positive;

--$400 million 7.0% fixed-to-floating rate preference shares, series D 'BB+';

--$350 million 4.5% senior unsecured notes due 2022 'BBB-';

--Senior shelf registration 'BBB-'.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 17, 2019
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