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 posted net income of $82.5 million for the first three months of 2012, improved from a $93.7 million net loss for full year 2011 due to more modest catastrophe losses thus far in 2012. Results for 2011 included $466.7 million of catastrophe losses from the Thailand floods, Japanese earthquake and tsunami, New Zealand earthquake, Australia floods, U.S. tornadoes and storms, Hurricane Irene, and Danish floods that adversely affected primarily the reinsurance segment.
ENH's GAAP combined ratio was 96.5% in the first three months of 2012 compared to 112.9% for full year 2011, which included 24.8 points for catastrophe losses. Excluding the impact of catastrophes (5.5 points) and favorable reserve development (4.1 points), ENH's combined ratio for the first three months of 2012 was 95.1%, down from 97.4% for full year 2011. This improvement was due to reduced agriculture losses in the insurance segment, as growing conditions in the southern U.S. have improved thus far in 2012 as compared to 2011.
ENH's financial leverage and run-rate interest coverage remain supportive of the company's ratings. Fitch believes that ENH uses a modest amount of financial leverage with an equity-credit-adjusted financial leverage ratio of approximately 16.4% at March 31, 2012. ENH's GAAP operating earnings-based interest and preferred dividend coverage was 5.0x through the first three months of 2012 and averaged 6.5 from 2007 to 2011.
The key rating triggers that could result in a downgrade include material declines in ENH's capitalization that caused its net written premiums-to-equity ratio to exceed 1.2x or assets to equity to exceed 3.5x or material adverse prior year reserve development that leads Fitch to question the company's historically strong underwriting results with relatively low volatility. 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 and asset leverage) and enhanced competitive positioning, while maintaining run-rate earnings and low earnings volatility over an extended time period.
Fitch has affirmed the following ratings with a Stable Outlook:
Endurance Specialty Holdings Ltd.
--IDR at 'A-';
--$200 million 6.15% senior unsecured notes due 2015 at 'BBB+';
--$335 million 7% senior unsecured notes due 2034 at 'BBB+';
--$200 million 7.75% series A non-cumulative perpetual preferred shares at 'BBB-';
--$230 million 7.5% series B non-cumulative perpetual preferred shares at 'BBB-'.
Endurance Specialty Insurance Ltd.
Endurance Reinsurance Corporation of America
Endurance American Specialty Insurance Company
Endurance American Insurance Company
American Agri-Business Insurance Company
Endurance Risk Solutions Assurance Co.
--IFS at 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology
Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321
70 W. Madison Street
Chicago, IL 60602
Greg Dickerson, +1-212-908-0220
R. Andrew Davidson, CFA, +1-312-368-3144
Brian Bertsch, New York, +1-212-908-0549