Endurance (ENH) Ratings Affirmed by S&P Following Montpelier Re Deal

Standard & Poor's Ratings Services said today that it affirmed its 'BBB+' long-term counterparty credit rating on Endurance Specialty Holdings Ltd. (NYSE: ENH) (ESHL) and its 'A' financial strength and long-term counterparty credit ratings on ESHL's core operating subsidiaries. The outlook is stable.

At the same time, we raised our long-term counterparty credit rating on Montpelier Re Holdings Ltd. (MRH) to 'BBB+' from 'BBB' and subsequently withdrew the ratings on MRH. We also raised our senior unsecured debt rating on MRH's $300 million 4.7% senior notes due in 2022 to 'BBB+' from 'BBB'.

We also placed our 'A-' financial strength and long-term counterparty credit ratings on MRH's operating subsidiary Montpelier Reinsurance Ltd. on CreditWatch with positive implications.

"The upgrade of MRH and subsequent ratings withdrawal reflects the merger of this legal entity with ESHL, Endurance's ultimate holding company, immediately upon close of the acquisition," said Standard & Poor's credit analyst Laline Carvalho. The upgrade of MRH's senior notes reflects the fact that these notes are now direct obligations of ESHL and rank pari passu with ESHL's other senior unsecured obligations. The CreditWatch Positive on Montpelier Reinsurance Ltd., MRH's Bermuda operating insurance subsidiary, reflects our expectation that this legal entity will be merged into ESHL's Bermuda operating insurance subsidiary Endurance Specialty Insurance Ltd. by the end of 2015.

The affirmation of our ratings on Endurance reflects our view that the transaction will enhance the group's distribution channel capabilities, including access to Lloyd's of London and third-party alternative capital operation Blue Capital. With pro-forma 2014 consolidated gross premiums written of $3.6 billion and shareholders' equity of $4.1 billion, we also believe Endurance's increased market presence and larger pro-forma balance sheet should somewhat shield the group from increasingly competitive market conditions in its lines of business. Although we believe there is some integration and execution risk related to the acquisition, we expect these concerns to be partially mitigated by Endurance's rapid integration of Montpelier. In addition, MRH's relatively narrow lines of business and few operating offices should help Endurance integrate the business.

We expect to resolve the CreditWatch on Montpelier Reinsurance Ltd. during the next three to six months following the group's confirmation that it has received all necessary regulatory approvals to merge this legal entity with Endurance Specialty Insurance Ltd. Assuming the merger takes place, we would expect to raise our financial strength and counterparty credit ratings on Montpelier Reinsurance Ltd. to 'A' with a stable outlook to reflect our ratings and outlook on Endurance Specialty Insurance Ltd.

The stable outlook on the group reflects our expectation that the group will maintain a strong competitive position, very strong capital and earnings profile, and moderate financial leverage that supports the ratings.

We could lower the ratings if:

• The group suffers significant property catastrophe losses outside its stated tolerances, becoming a negative outlier relative to peers;
• Its overall underwriting performance deteriorates significantly and lags similarly rated peers';
• Earnings volatility rises in a multiyear period because of its property catastrophe or agriculture businesses; or
• Its capital adequacy deteriorates materially.

Given the Montpelier acquisition's potential integration and execution challenges, in addition to operational risk related to the group's aggressive organic premium growth rate targets, we don't expect to raise our ratings on Endurance in the next 24 months. A positive rating action would depend on a successful track record of strong earnings in the group's growing book of business, combined with an improved view of Endurance's competitive position, and/or an improved financial risk profile to strong from its current moderately strong level.

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