On Wednesday, Moody’s Investors Service announced that the rating agency lowered the insurance financial strength ratings of the principal operating subsidiaries of Endurance Specialty Holdings Ltd. to A3 from A2.

Moody’s also lowered senior debt ratings for the holding company—to Baa2 from Baa1.

All the ratings have a stable outlook.

Explaining the downgrades, Moody’s said Endurance’s credit profile has deteriorated over the past couple of years, and that catastrophe losses dampened profitability.

The company’s common equity capital remains 12.8 percent below year-end 2010 levels, Moody’s said, noting that a $344 million share repurchase was executed in first-quarter 2011, and then “two heavy back-to-back catastrophe loss years” in 2011 and 2012 left Endurance unable to fully replenish equity capital.

Moody’s notes that the company has taken actions to meaningfully reduce catastrophe risk to levels that are more in line with peer companies, and that the Endurance is performing better this year as a result. Moody’s also suggested that that a recent change in leadership, putting John R. Charman at the helm as chairman and chief executive officer, bodes well for further improvement if strategies that Charman has articulated prove to be successful.

Still “Moody’s views Endurance’s overall credit profile to be more appropriately positioned at A3 for insurance financial strength at the current time,” the rating agency said in a statement.

Charman, who was previously CEO of AXIS Capital Holdings Limited for 11 years “following a long and distinguished track record in the Lloyd’s market,” has said he aims to increase the scale of the company, maintain moderate peak risk exposures, improve core underwriting profitability and increase geographic and product diversification, Moody’s noted.

For more on Charman’s strategies, see related article, “Endurance Building ‘Relevance’ Through Leadership Changes, CFO Says.”

“If successful, these strategic and operational initiatives could improve Endurance’s competitive position and its business and financial profile relative to its peers over the next few years,” Moody’s said.

Among the positive factors supporting Moody’s ratings of Endurance are the group’s good position in specialty insurance and reinsurance lines, its conservative reserving philosophy and investment profile, as well as a sizable capital base.

Weighing in the other direction, however, in addition to weak core profitability and increased financial and operational leverage metrics (relative to better historical levels), are also factors such as weaker product and geographic diversification than peer companies, as well as inherent underwriting volatility in many of the company’s core lines, Moody’s said, pointing to catastrophe-exposed property risks and certain casualty-based exposures.

Moody’s said the ratings could be upgraded in the future if diversification improves, if returns-on-capital consistently rise to the low double-digit percentage range, and if the catastrophe risk exposure remains at current levels. Commenting on diversification, Moody’s suggested that improved geographic distribution would reduce gross written premiums for U.S.-based exposures to roughly two-thirds of the worldwide total, and improved product distribution would lower net written premiums for crop insurance to less than 20 percent of the total.

Source: Moody’s Investors Service, Inc.