Fitch Ratings has affirmed the ratings of Endurance Specialty Holdings Ltd (ENH) and its reinsurance operating subsidiaries, including the Issuer Default Rating (IDR) for ENH at ‘A-‘, and the Insurer Financial Strength (IFS) rating of Endurance Specialty Insurance Ltd. at ‘A’. The Rating Outlook is Stable. A full rating list is shown below.
Fitch’s rationale for the affirmation of ENH’s ratings reflects the company’s favorable earnings and interest coverage, moderate financial leverage, and high-quality and liquid investment portfolio. The ratings also reflect the inherent earnings volatility derived from the company’s catastrophe exposure, potential uncertainty in the company’s loss reserve estimates for long-tail business lines and anticipated challenges in the overall competitive but generally improving property/casualty market rate environment.
ENH announced an initial net loss estimate from Hurricane Sandy of $160 million pre-tax, with approximately $125 million from the company’s reinsurance segment and the remainder from the insurance segment. Fitch considers this level to be manageable given the company’s strong capitalization (net loss represents about 6% of shareholders’ equity at Sept. 30, 2012), although the loss estimate is still subject to significant uncertainty.
Fitch views Endurance Specialty Holdings Ltd.’s (ENH) profitability as strong but volatile, characterized by low combined ratios and high returns on capital in most years, with ENH averaging a 91.8% combined ratio and 11.6% return on equity over the recent five-year period (2007-2011). Fitch views this as an important factor supporting the company’s ratings and as evidence of ENH’s underwriting skills.
ENH’s combined ratio improved to 96.2% for the first nine months of 2012 compared with 112.9% for full-year 2011, which included 24.8 points for catastrophe losses. Excluding the impact of catastrophes (3.4 points) and favorable reserve development (6.2 points), ENH’s combined ratio for the first nine months of 2012 was 99%, up from 97.4% for full-year 2011. This deterioration was due to increased agriculture losses in the insurance segment due to summer drought conditions in certain parts of the Midwestern U.S.
ENH’s financial leverage and run-rate interest coverage remain supportive of the company’s ratings. Fitch believes that ENH’s financial leverage ratio (adjusted for equity credit and excluding unrealized net gains on fixed income investments) continues to be moderate at 16.4% as of Sept. 30, 2012, down from 17.3% at Dec. 31, 2011. ENH’s GAAP operating earnings-based interest and preferred dividend coverage has been strong, averaging 6.5x from 2007 to 2011, which included negative earnings coverage in 2011 due to the increased catastrophe losses.
The key rating triggers that could result in a downgrade include material declines in ENH’s capitalization that caused net written premiums-to-equity ratio to exceed 1.2x; financial leverage ratio maintained above 25%; run-rate operating earnings-based interest and preferred dividend coverage of less than 5x; and material adverse prior year reserve development. Also, catastrophe losses that are unfavorably inconsistent with the company’s publicly disclosed modeling projections or accident year combined ratios in excess of 100% for three consecutive years could result in a downgrade.
The key rating triggers that could result in an upgrade include material improvement in key financial metrics (e.g. net written premium to equity) to more overcapitalized levels and enhanced competitive positioning with favorable operating results and manageable earnings volatility in line with higher-rated peers over an extended time period.
Fitch has affirmed the following ratings with a Stable Outlook: