Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From              to             

001-33289

Commission File Number

ENSTAR GROUP LIMITED

(Exact name of registrant as specified in its charter)

 

Bermuda   N/A

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

P.O. Box HM 2267

Windsor Place, 3rd Floor

22 Queen Street

Hamilton HM JX

Bermuda

(Address of principal executive office, including zip code)

(441) 292-3645

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer  

¨       (Do not check if a smaller reporting company)

   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of August 3, 2015, the registrant had outstanding 15,939,972 voting ordinary shares and 3,315,215 non-voting convertible ordinary shares, each par value $1.00 per share.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

       

Page

  PART I—FINANCIAL INFORMATION  

Item 1.

 

Financial Statements:

 
 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 (Unaudited)

  1
 

Condensed Consolidated Statements of Earnings for the Three and Six Month Periods Ended June 30, 2015 and 2014 (Unaudited)

  2
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Month Periods Ended June 30, 2015 and 2014 (Unaudited)

  3
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Month Periods Ended June 30, 2015 and 2014 (Unaudited)

  4
 

Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2015 and 2014 (Unaudited)

  5
 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

  6
 

Report of Independent Registered Public Accounting Firm

  65

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  66

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  123

Item 4.

 

Controls and Procedures

  126
  PART II—OTHER INFORMATION  

Item 1.

 

Legal Proceedings

  127

Item 1A.

 

Risk Factors

  127

Item 6.

 

Exhibits

  128

Signature

  129


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2015 and December 31, 2014

 

     June 30,
2015
    December 31,
2014
 
     (expressed in thousands of
U.S. dollars, except share data)
 

ASSETS

    

Short-term investments, trading, at fair value

   $ 210,438      $ 130,516   

Fixed maturities, trading, at fair value

     5,016,891        3,832,291   

Fixed maturities, held-to-maturity, at amortized cost

     802,595        813,233   

Fixed maturities, available-for-sale, at fair value (amortized cost: 2015—$190,072;
2014—$244,110)

     185,647        241,111   

Equities, trading, at fair value

     129,276        150,130   

Other investments, at fair value

     959,283        836,868   

Other investments, at cost

     140,375        —     
  

 

 

   

 

 

 

Total investments

     7,444,505        6,004,149   

Cash and cash equivalents

     1,076,959        963,402   

Restricted cash and cash equivalents

     612,373        534,974   

Accrued interest receivable

     41,992        37,581   

Accounts receivable

     169,434        79,237   

Premiums receivable

     414,978        391,008   

Income taxes recoverable

     5,279        11,510   

Deferred tax assets

     54,092        50,506   

Prepaid reinsurance premiums

     145,485        114,197   

Reinsurance balances recoverable

     1,613,622        1,331,555   

Funds held by reinsured companies

     116,376        134,628   

Deferred acquisition costs

     105,619        61,706   

Goodwill and intangible assets

     198,155        201,150   

Other assets

     333,491        21,282   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 12,332,360      $ 9,936,885   
  

 

 

   

 

 

 

LIABILITIES

    

Losses and loss adjustment expenses

   $ 6,143,471      $ 4,509,421   

Policy benefits for life and annuity contracts

     1,206,131        1,220,864   

Unearned premiums

     580,636        468,626   

Insurance and reinsurance balances payable

     300,887        276,723   

Accounts payable and accrued liabilities

     241,781        126,721   

Income taxes payable

     25,487        22,450   

Deferred tax liabilities

     41,086        43,958   

Loans payable

     650,507        320,041   

Other liabilities

     314,416        50,642   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     9,504,402        7,039,446   
  

 

 

   

 

 

 
COMMITMENTS AND CONTINGENCIES
REDEEMABLE NONCONTROLLING INTEREST
     395,030        374,619   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Share capital

    

Authorized, issued and fully paid, par value $1 each (authorized 2015: 156,000,000; 2014: 156,000,000)

    

Ordinary shares (issued and outstanding 2015: 15,827,102; 2014: 15,761,365)

     15,827        15,761   

Non-voting convertible ordinary shares:

    

Series A (issued 2015: 2,972,892; 2014: 2,972,892)

     2,973        2,973   

Series C (issued and outstanding 2015: 2,725,637; 2014: 2,725,637)

     2,726        2,726   

Series E (issued and outstanding 2015: 701,615; 2014: 714,015)

     702        714   

Treasury shares at cost (Series A non-voting convertible ordinary shares 2015: 2,972,892; 2014: 2,972,892)

     (421,559     (421,559

Additional paid-in capital

     1,365,016        1,321,715   

Accumulated other comprehensive income

     (21,473     (12,686

Retained earnings

     1,454,598        1,395,206   
  

 

 

   

 

 

 

Total Enstar Group Limited Shareholders’ Equity

     2,398,810        2,304,850   

Noncontrolling interest

     34,118        217,970   
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     2,432,928        2,522,820   
  

 

 

   

 

 

 

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY

   $ 12,332,360      $ 9,936,885   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

1


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three and Six Month Periods Ended June 30, 2015 and 2014

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  
     (expressed in thousands of U.S. dollars, except share and per
share data)
 

INCOME

        

Net premiums earned

   $ 212,023      $ 216,916      $ 410,929      $ 278,574   

Fees and commission income

     9,131        7,509        20,611        14,507   

Net investment income

     46,493        33,649        80,386        57,997   

Net realized and unrealized (losses) gains

     (11,249     38,411        31,771        72,984   
  

 

 

   

 

 

   

 

 

   

 

 

 
     256,398        296,485        543,697        424,062   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Net increase in ultimate losses and loss adjustment expense liabilities

     65,900        59,749        136,036        47,699   

Life and annuity policy benefits

     28,090        27,732        50,937        54,541   

Acquisition costs

     37,094        50,379        71,644        63,540   

Salaries and benefits

     52,691        55,683        110,463        87,073   

General and administrative expenses

     41,272        37,177        80,098        59,427   

Interest expense

     4,876        3,529        8,879        7,263   

Net foreign exchange losses (gains)

     2,452        (525     (2,619     1,070   
  

 

 

   

 

 

   

 

 

   

 

 

 
     232,375        233,724        455,438        320,613   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

     24,023        62,761        88,259        103,449   

INCOME TAXES

     (5,816     (8,452     (16,560     (15,728
  

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

     18,207        54,309        71,699        87,721   

Less: Net earnings attributable to noncontrolling interest

     (3,662     (2,516     (12,307     (6,341
  

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 14,545      $ 51,793      $ 59,392      $ 81,380   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE—BASIC

        

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

   $ 0.76      $ 2.78      $ 3.09      $ 4.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE—DILUTED

        

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

   $ 0.75      $ 2.68      $ 3.07      $ 4.52   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding—basic

     19,252,359        18,636,085        19,244,951        17,605,808   

Weighted average ordinary shares outstanding—diluted

     19,383,753        19,327,516        19,364,775        18,004,873   

See accompanying notes to the unaudited condensed consolidated financial statements

 

2


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Six Month Periods Ended June 30, 2015 and 2014

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  
     (expressed in thousands of U.S. dollars)  

NET EARNINGS

   $ 18,207      $ 54,309      $ 71,699      $ 87,721   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Unrealized holding gains (losses) on investments arising during the period

     2,162        906        (2,194     459   

Reclassification adjustment for net realized and unrealized losses included in net earnings

     (38     (253     (144     (134
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) arising during the period, net of reclassification adjustment

     2,124        653        (2,338     325   

Currency translation adjustment

     3,299        4,714        (12,587     6,772   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     5,423        5,367        (14,925     7,097   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     23,630        59,676        56,774        94,818   

Less comprehensive income attributable to noncontrolling interest

     (533     (3,552     (6,169     (8,546
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 23,097      $ 56,124      $ 50,605      $ 86,272   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

3


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Month Periods Ended June 30, 2015 and 2014

 

    Six Months Ended
June 30,
 
    2015     2014  
    (expressed in thousands
of U.S. dollars)
 

Share Capital—Ordinary Shares

   

Balance, beginning of period

  $ 15,761      $ 13,803   

Issue of shares

    6        1,901   

Conversion of Series E Non-Voting Convertible Ordinary Shares

    12        —     

Share awards granted/vested

    48        43   
 

 

 

   

 

 

 

Balance, end of period

  $ 15,827      $ 15,747   
 

 

 

   

 

 

 

Share Capital—Series A Non-Voting Convertible Ordinary Shares

   

Balance, beginning and end of period

  $ 2,973      $ 2,973   
 

 

 

   

 

 

 

Share Capital—Series C Non-Voting Convertible Ordinary Shares

   

Balance, beginning and end of period

  $ 2,726      $ 2,726   
 

 

 

   

 

 

 

Share Capital—Series E Non-Voting Convertible Ordinary Shares

   

Balance, beginning of period

  $ 714      $ —     

Shares converted to Ordinary Shares

    (12     —     

Conversion of Series B Convertible Participating Non-Voting Perpetual Preferred Stock

    —          714   
 

 

 

   

 

 

 

Balance, end of period

  $ 702      $ 714   
 

 

 

   

 

 

 

Share Capital—Series B Convertible Participating Non-Voting Perpetual Preferred Stock

   

Balance, beginning of period

  $ —        $ —     

Issue of stock

    —          714   

Convert to Series E Non-Voting Convertible Ordinary Shares

    —          (714
 

 

 

   

 

 

 

Balance, end of period

  $ —        $ —     
 

 

 

   

 

 

 

Treasury Shares

   

Balance, beginning and end of period

  $ (421,559   $ (421,559
 

 

 

   

 

 

 

Additional Paid-in Capital

   

Balance, beginning of period

  $ 1,321,715      $ 962,145   

Issue of shares and warrants, net

    911        353,832   

Amortization of equity incentive plan

    2,821        1,525   

Equity attributable to Enstar Group Limited on acquisition of noncontrolling shareholders’ interest in subsidiaries

    39,569        —     
 

 

 

   

 

 

 

Balance, end of period

  $ 1,365,016      $ 1,317,502   
 

 

 

   

 

 

 

Accumulated Other Comprehensive Income Attributable to Enstar Group Limited

   

Balance, beginning of period

  $ (12,686   $ 13,978   

Currency translation adjustment

   

Balance, beginning of period

    (2,779     14,264   

Change in currency translation adjustment

    (10,227     4,791   

Purchase of noncontrolling shareholders’ interest in subsidiaries

    2,937        —     
 

 

 

   

 

 

 

Balance, end of period

    (10,069     19,055   

Defined benefit pension liability

   

Balance, beginning and end of period

    (7,726     (2,249
 

 

 

   

 

 

 

Unrealized (losses) gains on investments

   

Balance, beginning of period

    (2,181     1,963   

Change in unrealized (losses) gains on investments, net of tax

    (1,809     101   

Purchase of noncontrolling shareholders’ interest in subsidiaries

    312        —     
 

 

 

   

 

 

 

Balance, end of period

    (3,678     2,064   
 

 

 

   

 

 

 

Balance, end of period

  $ (21,473   $ 18,870   
 

 

 

   

 

 

 

Retained Earnings

   

Balance, beginning of period

  $ 1,395,206      $ 1,181,457   

Net earnings attributable to Enstar Group Limited

    59,392        81,380   
 

 

 

   

 

 

 

Balance, end of period

  $ 1,454,598      $ 1,262,837   
 

 

 

   

 

 

 

Noncontrolling Interest

   

Balance, beginning of period

  $ 217,970      $ 222,000   

Sale of noncontrolling shareholders’ interest in subsidiaries

    (182,819     —     

Return of capital

    —          (9,980

Contribution of capital

    680        35,699   

Dividends Paid

    (323     —     

Reallocation to redeemable noncontrolling interest

    —          1,028   

Net earnings attributable to noncontrolling interest*

    291        7,460   

Foreign currency translation adjustments

    (1,558     1,993   

Net movement in unrealized holding losses on investments

    (123     (156
 

 

 

   

 

 

 

Balance, end of period

  $ 34,118      $ 258,044   
 

 

 

   

 

 

 

 

* Excludes net loss attributable to redeemable noncontrolling interest. See Note 11 to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements

 

4


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Month Periods Ended June 30, 2015 and 2014

 

     Six Months Ended
June 30,
 
     2015     2014  
     (expressed in thousands of
U.S. dollars)
 

OPERATING ACTIVITIES:

    

Net earnings

   $ 71,699      $ 87,721   

Adjustments to reconcile net earnings to cash flows provided by operating activities:

    

Net realized and unrealized investment losses (gains)

     2,847        (38,596

Net realized and unrealized gains from other investments

     (34,618     (34,388

Other items

     5,553        158   

Depreciation and amortization

     2,744        2,019   

Net amortization of premiums and discounts

     25,518        28,144   

Net movement of trading securities held on behalf of policyholders

     1,728        (164

Sales and maturities of trading securities

     1,669,290        1,699,428   

Purchases of trading securities

     (2,299,395     (1,188,935

Changes in assets and liabilities:

    

Reinsurance balances recoverable

     210,401        240,415   

Funds held by reinsured companies

     20,773        101,571   

Other assets

     (113,235     (48,924

Losses and loss adjustment expenses

     (188,793     (363,957

Policy benefits for life and annuity contracts

     (14,028     (31,244

Insurance and reinsurance balances payable

     33,828        (127,555

Unearned premiums

     26,505        12,367   

Accounts payable and accrued liabilities

     111,531        (10,906

Other liabilities

     (10,393     (2,957
  

 

 

   

 

 

 

Net cash flows (used in) provided by operating activities

     (478,045     324,197   
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Acquisitions, net of cash acquired

     56,369        37,540   

Sales and maturities of available-for-sale securities

     97,733        78,967   

Purchase of available-for-sale securities

     (48,548     (71,025

Maturities of held-to-maturity securities

     5,246        311   

Movement in restricted cash and cash equivalents

     242,365        (94,022

Purchase of other investments

     (133,411     (120,768

Redemption of other investments

     42,415        10,692   

Other investing activities

     (2,016     (9
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     260,153        (158,314
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Distribution of capital to noncontrolling interest

     —          (9,980

Contribution by redeemable noncontrolling interest

     15,728        254,635   

Contribution by noncontrolling interest

     680        35,699   

Dividends paid to noncontrolling interest

     (7,433     —     

Receipt of loans

     374,700        70,000   

Repayment of loans

     (46,000     (133,250
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     337,675        217,104   
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS

     (6,226     1,327   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     113,557        384,314   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     963,402        643,841   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 1,076,959      $ 1,028,155   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

                

Net income taxes paid

   $ 13,343      $ 17,018   

Interest paid

   $ 7,952      $ 10,236   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015 and December 31, 2014

(Tabular information expressed in thousands of U.S. dollars except share and per share data)

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation and Consolidation

The Company’s condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. The results of operations for any interim period are not necessarily indicative of the results for a full year. Inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries.

The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the unaudited condensed consolidated financial statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include, but are not limited to:

 

    reserves for losses and loss adjustment expenses;

 

    policy benefits for life and annuity contracts;

 

    gross and net premiums written and net premiums earned;

 

    reinsurance balances recoverable, including the provisions for uncollectible amounts;

 

    impairment charges, including the other-than-temporary impairment of the carrying value of available-for-sale investment securities and the impairment of investments in life settlements;

 

    valuation of certain other investments that are measured using significant unobservable inputs;

 

    valuation of goodwill and intangible assets; and

 

    fair value estimates associated with accounting for acquisitions.

Significant New Accounting Policies

As a result of the acquisition of the life settlement contracts from Wilton Re Limited (“Wilton Re”) as described in Note 2—“Acquisitions” and the completion of the transaction with Voya Financial, Inc. (“Voya”) as described in Note 3—“Significant New Business and Transactions,” the Company has adopted certain significant new accounting policies during the three months ended June 30, 2015. Other than the policies described below, there have been no material changes to the Company’s significant accounting policies from those described in Note 2 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

6


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

 

(a) Life Settlements

Investments in life settlements are accounted for under the investment method whereby the Company recognizes its initial investment in the life settlement contracts at the transaction price plus all initial direct external costs. Continuing costs to keep the policy in force, primarily life insurance premiums, increase the carrying amount of the investment. The Company recognizes income on individual investments in life settlements when the insured dies, at an amount equal to the excess of the investment proceeds over the carrying amount of the investment at that time. The investments are subject to quarterly impairment review on a contract-by-contract basis. Impaired contracts are written down to their estimated fair value with the impairment charges included within net realized and unrealized (losses) gains.

(b) Retroactive reinsurance

Retroactive reinsurance policies provide indemnification of losses and loss adjustment expenses with respect to past loss events, and related claims are generally expected to be paid over long periods of time. At the inception of a contract, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the premiums received. Deferred charges are amortized over the estimated ultimate claim payment period with the periodic amortization reflected in earnings as a component of losses and loss adjustment expenses. Deferred charge balances are adjusted periodically to reflect new estimates of the amount and timing of remaining loss payments. Significant changes in the estimated amount and the timing of payments of unpaid losses may have a significant effect on the unamortized deferred reinsurance charges and the amount of periodic amortization. Deferred charges are evaluated for recoverability quarterly on an individual contract basis with reference to anticipated future investment income.

Recently Issued Accounting Pronouncements Not Yet Adopted

Accounting Standards Update (“ASU”) 2015-09, Disclosures about Short-Duration Contracts

In May 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-09, which makes targeted improvements to disclosure requirements for insurance companies that issue short-duration contracts. The ASU requires enhanced disclosures, on an annual basis, related to the reserve for losses and loss expenses which include (1) net incurred and paid claims development information by accident year, (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the reserve for losses and loss expenses, (3) for each accident year presented of incurred claims development, information about claim frequency (unless impracticable), and the amounts of incurred but not reported (IBNR) liabilities, including expected development on reported claims included in the reserve for losses and loss expenses, (4) a description of, and any significant changes to, the methods for determining both IBNR and expected development on reported claims, and (5) for each accident year presented of incurred claims development, quantitative information about claims frequency, as well as a description of methodologies used for determining claim frequency information. The ASU is effective for annual periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statement disclosures.

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

 

ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value or its Equivalent

In May 2015, the FASB issued ASU No. 2015-07, which will eliminate the requirement to categorize investments in the fair value hierarchy if their fair value is measured at the net asset value (“NAV”) per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. In addition, the scope of current disclosure requirements for investments eligible to be measured at NAV is limited to investments for which the practical expedient is applied. Reporting entities are required to adopt the ASU retrospectively. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of this guidance, however it does not expect the adoption of the guidance to have a material impact on its consolidated financial statement disclosures.

2. ACQUISITIONS

Nationale Suisse Assurance S.A.

On February 5, 2015, the Company’s wholly-owned subsidiary, Harper Holding SARL, entered into a definitive agreement with Nationale Suisse to acquire its Belgian subsidiary, Nationale Suisse Assurance S.A. (“NSA”). NSA is a Belgium-based insurance company writing non-life insurance (which the Company expects to operate in run-off as part of its non-life run-off segment) and life insurance (which the Company expects to operate in run-off as part of its life and annuities segment).

The total consideration for the transaction will be 33.7 million (approximately $38.5 million) (subject to certain possible closing adjustments). The Company expects to finance the purchase price from cash on hand. Completion of the transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close during the third quarter of 2015.

Wilton Re Life Settlements

On May 5, 2015, the Company, through its wholly owned subsidiary, Guillamene Holdings Limited (“Guillamene”), completed the acquisitions of two Delaware companies from subsidiaries of Wilton Re that own interests in life insurance policies acquired in the secondary and tertiary markets and through collateralized lending transactions.

The total consideration for the transaction was $173.1 million, which will be paid in two installments. The first installment of $89.1 million was paid on closing and was financed in part by borrowings under the Company’s revolving credit facility (the “EGL Revolving Credit Facility”). The second installment of $83.9 million, due on the first anniversary of closing, is expected to be funded from cash on hand.

 

Purchase price

   $ 173,058   
  

 

 

 

Net assets acquired at fair value

   $ 173,058   
  

 

 

 

Excess of purchase price over fair value of net assets acquired

   $ —     
  

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. ACQUISITIONS—(Continued)

 

The purchase price was allocated to the acquired assets and liabilities of the two companies acquired based on estimated fair values at the acquisition date.

Results related to Guillamene are included within the Company’s life and annuities segment.

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the acquisition date.

 

     Guillamene  

ASSETS

  

Other investments

     142,182   

Cash and cash equivalents

     5,043   

Other assets

     26,376   
  

 

 

 

TOTAL ASSETS

   $ 173,601   

TOTAL LIABILITIES

     543   
  

 

 

 

NET ASSETS ACQUIRED AT FAIR VALUE

   $ 173,058   
  

 

 

 

From the date of acquisition to June 30, 2015, the Company recorded $1.4 million in net earnings attributable to Enstar Group Limited in its consolidated statement of earnings related to Guillamene’s life settlement contract business.

Canada Pension Plan Investment Board (“CPPIB”), together with management of Wilton Re, own 100% of the common stock of Wilton Re. Subsequent to the closing of the Company’s transaction with Wilton Re, CPPIB separately acquired certain voting and non-voting shares of the Company pursuant to the CPPIB-First Reserve Transaction, as described in Note 3 – “Significant New Business and Transactions”.

Sussex Insurance Company (formerly known as Companion)

On January 27, 2015, the Company and Sussex Holdings, Inc. (“Sussex Holdings”), a wholly owned subsidiary of the Company, completed the acquisition of Companion Property and Casualty Insurance Company (“Companion”) from Blue Cross and Blue Shield of South Carolina, an independent licensee of the Blue Cross Blue Shield Association. Companion is a South Carolina-based insurance group writing property, casualty, specialty and workers compensation business, and has also provided fronting and third party administrative services.

The total consideration for the transaction was $218.0 million in cash, which was financed 50% through borrowings under a Term Facility Agreement with National Australia Bank Limited and Barclays Bank PLC (the “Sussex Facility”) and 50% from cash on hand.

The Company changed the name of Companion to Sussex Insurance Company (“Sussex”) following the acquisition and is operating the company as part of its non-life run-off business.

 

Purchase price

   $ 218,000   
  

 

 

 

Net assets acquired at fair value

   $ 218,000   
  

 

 

 

Excess of purchase price over fair value of net assets acquired

   $ —     
  

 

 

 

 

9


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. ACQUISITIONS—(Continued)

 

The purchase price was allocated to the acquired assets and liabilities of Sussex based on estimated fair values at the acquisition date.

The Company has not completed the process of determining the fair value of its losses and loss adjustment expense reserves acquired in the Sussex acquisition. The valuation will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value recorded is a provisional estimate and may be subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed.

Results related to Sussex are included within the Company’s non-life run-off segment.

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the acquisition date.

 

     Sussex  

ASSETS

  

Short-term investments, trading, at fair value

   $ 85,309   

Fixed maturities, trading, at fair value

     523,227   

Equities, trading, at fair value

     31,439   
  

 

 

 

Total investments

     639,975   

Cash and cash equivalents

     358,458   

Restricted cash and cash equivalents

     15,279   

Accrued interest receivable

     3,984   

Premiums receivable

     35,279   

Reinsurance balances recoverable

     486,570   

Prepaid reinsurance premiums

     28,751   

Other assets

     47,143   
  

 

 

 

TOTAL ASSETS

   $ 1,615,439   
  

 

 

 

LIABILITIES

  

Losses and loss adjustment expenses

   $ 1,255,040   

Insurance and reinsurance balances payable

     3,030   

Unearned premium

     85,505   

Funds withheld

     42,090   

Other liabilities

     11,774   
  

 

 

 

TOTAL LIABILITIES

     1,397,439   
  

 

 

 

NET ASSETS ACQUIRED AT FAIR VALUE

   $ 218,000   
  

 

 

 

From the date of acquisition to June 30, 2015, the Company earned premiums of $36.5 million, recorded net increase in ultimate losses and loss adjustment expense liabilities of $37.2 million on those earned premiums, and recorded $1.5 million in net losses attributable to Enstar Group Limited in its consolidated statement of earnings related to Sussex’s non-life run-off business.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. SIGNIFICANT NEW BUSINESS AND TRANSACTIONS

JCF II Funds

On June 30, 2015, the Company entered into a Sale and Purchase Agreement with J.C. Flowers II L.P., J.C. Flowers II-A L.P., J.C. Flowers II-B, L.P. and Financial Service Opportunities L.P., collectively, the JCF II Funds, pursuant to which the Company will purchase all of the non-voting preference shares of Cumberland Holdings Ltd. and Courtenay Holdings Ltd., which represents all of the noncontrolling interest owned directly by the JCF II Funds in the Company, for an aggregate price of $140.0 million. The purchase and sale transaction is scheduled to close no later than October 1, 2015 and the closing is not subject to any material conditions. Immediately prior to the repurchase, the JCF II Funds’ noncontrolling interest totaled $182.8 million.

CPPIB Investment

On June 3, 2015, CPPIB purchased 1,501,211 voting ordinary shares of the Company and 404,771 shares of Series E non-voting convertible ordinary shares of the Company from FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII-A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. (collectively, “First Reserve”, and the transaction, the “CPPIB-First Reserve Transaction”), which resulted in CPPIB owning a 9.5% voting interest and a 9.9% aggregate economic interest in the Company. In connection with the CPPIB-First Reserve Transaction, the Company and CPPIB entered into a Shareholder Rights Agreement granting CPPIB contractual shareholder rights that are substantially similar to those rights previously held by First Reserve. Simultaneously, First Reserve waived all of its rights under the Shareholder Rights Agreement, dated April 1, 2014, among the Company, First Reserve and Corsair Specialty Investors, L.P. (“Corsair”), including its right to designate a representative to the Company’s Board of Directors.

The new Shareholder Rights Agreement grants CPPIB the right to designate one representative to the Company’s Board of Directors. This designation right terminates if CPPIB ceases to beneficially own at least 75% of the total number of voting and non-voting shares acquired in the CPPIB-First Reserve Transaction. Pursuant to this contractual right, CPPIB expects to designate a representative to the Company’s Board of Directors at a future time. First Reserve also assigned to CPPIB substantially all of its rights under the Registration Rights Agreement, dated April 1, 2014, among the Company, First Reserve and Corsair, other than certain rights related to the Company’s resale shelf registration statement filed with the Securities and Exchange Commission on April 29, 2014.

Voya Financial

On May 27, 2015, the Company, through its wholly owned subsidiary Fitzwilliam Insurance Limited (“Fitzwilliam”), entered into two 100% reinsurance agreements and related administration services agreements with a subsidiary of Voya, pursuant to which Fitzwilliam reinsured all of the run-off workers compensation and occupational accident assumed reinsurance business of the Voya subsidiary and that of its Canadian branch. Pursuant to the transaction, the Voya subsidiary transferred assets into two reinsurance collateral trusts securing the obligations of Fitzwilliam under the coinsurance agreements. Fitzwilliam assumed reinsurance reserves of $572.4 million, received total assets of $307.0 million and recorded a deferred charge of $265.4 million included within other assets.

The Company transferred approximately $67.2 million of additional funds to the trusts to further support the obligations under the reinsurance agreements, which the Company funded through a draw

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3. SIGNIFICANT NEW BUSINESS AND TRANSACTIONS—(Continued)

 

on the EGL Revolving Credit Facility. In addition to the trusts, the Company provided a limited parental guarantee supporting certain obligations of Fitzwilliam initially in the amount of $58.0 million.

Reciprocal of America

On January 15, 2015, the Company’s wholly-owned subsidiary, Providence Washington Insurance Company, completed the loss portfolio transfer reinsurance transaction with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business in run-off. The total insurance reserves assumed were approximately $162.1 million, with an equivalent amount of cash and/or investments being received as consideration.

Shelbourne RITC Transaction

Effective January 1, 2015, Lloyd’s Syndicate 2008, which is managed by the Company’s wholly-owned subsidiary and Lloyd’s managing agent, Shelbourne Syndicate Services Limited, entered into a reinsurance to close contract (“RITC”) of the 2012 and prior underwriting years of account of another Lloyd’s syndicate, under which Syndicate 2008 assumed total insurance reserves of approximately £17.2 million (approximately $26.9 million) for cash consideration of an equal amount.

4. INVESTMENTS

The Company holds: (i) trading portfolios of fixed maturity investments, short-term investments, equities and other investments, carried at fair value; (ii) a held-to-maturity portfolio of fixed maturity investments carried at amortized cost; (iii) available-for-sale portfolios of fixed maturity investments carried at fair value; and (iv) other investments carried at cost.

Trading

The estimated fair values of the Company’s fixed maturity investments, short-term investments and equities classified as trading securities were as follows:

 

     June 30
2015
     December 31,
2014
 

U.S. government and agency

   $ 808,811       $ 744,660   

Non-U.S. government

     338,026         368,945   

Corporate

     2,605,138         1,986,873   

Municipal

     117,883         25,607   

Residential mortgage-backed

     429,877         308,621   

Commercial mortgage-backed

     204,036         139,907   

Asset-backed

     723,558         388,194   
  

 

 

    

 

 

 

Total fixed maturity and short-term investments

     5,227,329         3,962,807   

Equities—U.S.

     105,972         106,895   

Equities—International

     23,304         43,235   
  

 

 

    

 

 

 
   $ 5,356,605       $ 4,112,937   
  

 

 

    

 

 

 

Included within residential and commercial mortgage-backed securities as at June 30, 2015 were securities issued by U.S. governmental agencies with a fair value of $386.4 million (as at December 31, 2014: $263.4 million).

 

12


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

Included within the corporate securities as at June 30, 2015 were senior secured loans of $75.4 million (as at December 31, 2014: $33.5 million).

The contractual maturities of the Company’s short-term and fixed maturity investments classified as trading are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

As at June 30, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 945,331       $ 928,833         17.8

More than one year through two years

     799,988         794,281         15.2

More than two years through five years

     1,576,115         1,574,989         30.1

More than five years through ten years

     506,853         500,832         9.6

More than ten years

     75,409         70,923         1.4
  

 

 

    

 

 

    

 

 

 
     3,903,696         3,869,858         74.1

Residential mortgage-backed

     430,924         429,877         8.2

Commercial mortgage-backed

     204,560         204,036         3.9

Asset-backed

     721,476         723,558         13.8
  

 

 

    

 

 

    

 

 

 
   $ 5,260,656       $ 5,227,329         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 837,557       $ 829,644         20.9

More than one year through two years

     787,810         780,979         19.7

More than two years through five years

     1,161,708         1,159,917         29.3

More than five years through ten years

     289,359         289,911         7.3

More than ten years

     66,793         65,634         1.7
  

 

 

    

 

 

    

 

 

 
     3,143,227         3,126,085         78.9

Residential mortgage-backed

     307,847         308,621         7.8

Commercial mortgage-backed

     139,984         139,907         3.5

Asset-backed

     389,529         388,194         9.8
  

 

 

    

 

 

    

 

 

 
   $ 3,980,587       $ 3,962,807         100.0
  

 

 

    

 

 

    

 

 

 

The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity and short-term investments classified as trading:

 

As at June 30, 2015

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 1,823,334         34.9

AA

     848,336         16.2

A

     1,725,866         33.0

BBB

     648,686         12.4

Non-Investment Grade

     177,855         3.4

Not Rated

     3,252         0.1
  

 

 

    

 

 

 
   $ 5,227,329         100.0
  

 

 

    

 

 

 

 

13


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

As at December 31, 2014

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 527,466         13.3

AA

     1,747,389         44.1

A

     1,164,604         29.4

BBB

     391,107         9.9

Non-Investment Grade

     111,777         2.8

Not Rated

     20,464         0.5
  

 

 

    

 

 

 
   $ 3,962,807         100.0
  

 

 

    

 

 

 

Held-to-maturity

The Company holds a portfolio of held-to-maturity securities to support the annuity business acquired with Pavonia Holdings (US) Inc. (“Pavonia”). The amortized cost and estimated fair values of the Company’s fixed maturity investments classified as held-to-maturity were as follows:

 

As at June 30, 2015

   Amortized
Cost
     Gross
Unrealized
Holding
Gains
     Gross
Unrealized
Holding
Losses
Non-OTTI
     Fair
Value
 

U.S. government and agency

   $ 20,075       $ 12       $ (434    $ 19,653   

Non-U.S. government

     38,293         177         (651      37,819   

Corporate

     744,227         3,689         (17,285      730,631   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 802,595       $ 3,878       $ (18,370    $ 788,103   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

As at December 31, 2014

   Amortized
Cost
     Gross
Unrealized
Holding
Gains
     Gross
Unrealized
Holding
Losses
Non-OTTI
     Fair
Value
 

U.S. government and agency

   $ 20,257       $ 322       $ (20    $ 20,559   

Non-U.S. government

     38,613         325         (249      38,689   

Corporate

     754,363         16,182         (3,421      767,124   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 813,233       $ 16,829       $ (3,690    $ 826,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

As at June 30, 2015 and December 31, 2014, none of these securities were considered to be other than temporarily impaired.

The contractual maturities of the Company’s fixed maturity investments classified as held-to-maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

As at June 30, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 20,792         20,834         2.6

More than one year through two years

     18,678         18,694         2.4

More than two years through five years

     65,825         66,225         8.4

More than five years through ten years

     100,563         99,232         12.6

More than ten years

     596,737         583,118         74.0
  

 

 

    

 

 

    

 

 

 
   $ 802,595       $ 788,103         100.0
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

As at December 31, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 10,369       $ 10,350         1.2

More than one year through two years

     19,939         19,957         2.4

More than two years through five years

     68,945         69,031         8.4

More than five years through ten years

     99,171         98,922         12.0

More than ten years

     614,809         628,112         76.0
  

 

 

    

 

 

    

 

 

 
   $ 813,233       $ 826,372         100.0
  

 

 

    

 

 

    

 

 

 

The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity investments classified as held-to-maturity:

 

As at June 30, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 65,406       $ 64,367         8.2

AA

     167,775         162,490         20.6

A

     507,058         499,397         63.3

BBB

     56,599         55,960         7.1

Non-Investment Grade

     5,445         5,575         0.7

Not Rated

     312         314         0.1
  

 

 

    

 

 

    

 

 

 
   $ 802,595       $ 788,103         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 53,893       $ 54,895         6.6

AA

     245,460         246,764         29.9

A

     466,317         476,642         57.7

BBB

     42,107         42,748         5.2

Non-Investment Grade

     5,456         5,323         0.6
  

 

 

    

 

 

    

 

 

 
   $ 813,233       $ 826,372         100.0
  

 

 

    

 

 

    

 

 

 

Available-for-sale

The amortized cost and estimated fair values of the Company’s fixed maturity investments classified as available-for-sale were as follows:

 

As at June 30, 2015

   Amortized
Cost
     Gross
Unrealized
Holding
Gains
     Gross
Unrealized
Holding
Losses
Non-OTTI
     Fair
Value
 

U.S. government and agency

   $ 25,481       $ 199       $ (10    $ 25,670   

Non-U.S. government

     36,454         56         (3,210      33,300   

Corporate

     117,513         1,060         (2,487      116,086   

Municipal

     264         2         —           266   

Residential mortgage-backed

     2,439         82         (134      2,387   

Asset-backed

     7,921         17         —           7,938   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 190,072       $ 1,416       $ (5,841    $ 185,647   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

As at December 31, 2014

   Amortized
Cost
     Gross
Unrealized
Holding
Gains
     Gross
Unrealized
Holding
Losses
Non-OTTI
     Fair
Value
 

U.S. government and agency

   $ 24,167       $ 182         (7    $ 24,342   

Non-U.S. government

     72,913         386         (2,805      70,494   

Corporate

     101,745         964         (1,653      101,056   

Residential mortgage-backed

     3,305         76         (138      3,243   

Asset-backed

     41,980         15         (19      41,976   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 244,110       $ 1,623       $ (4,622    $ 241,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included within residential mortgage-backed securities as at June 30, 2015 were securities issued by U.S. governmental agencies with a fair value of $1.0 million (as at December 31, 2014: $1.1 million).

The following tables summarize the Company’s fixed maturity investments classified as available-for-sale in an unrealized loss position as well as the aggregate fair value and gross unrealized loss by length of time the securities have continuously been in an unrealized loss position:

 

     12 Months or Greater     Less Than 12 Months     Total  

As at June 30, 2015

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. government and agency

   $ —         $ —        $ 5,375       $ (10   $ 5,375       $ (10

Non-U.S. government

     1,784         (306     24,063         (2,904     25,847         (3,210

Corporate

     7,934         (61     51,043         (2,426     58,977         (2,487

Residential mortgage-backed

     753         (4     588         (130     1,341         (134
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 10,471       $ (371   $ 81,069       $ (5,470   $ 91,540       $ (5,841
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     12 Months or Greater     Less Than 12 Months     Total  

As at December 31, 2014

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. government and agency

   $ 528       $ —        $ 3,678       $ (6   $ 4,206       $ (6

Non-U.S. government

     17,051         (1,534     20,300         (1,271     37,351         (2,805

Corporate

     39,964         (1,003     40,072         (651     80,036         (1,654

Residential mortgage-backed

     2,073         (138     —           —          2,073         (138

Asset-backed

     11,215         (12     14,720         (7     25,935         (19
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 70,831       $ (2,687   $ 78,770       $ (1,935   $ 149,601       $ (4,622
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As at June 30, 2015 and December 31, 2014, the number of securities classified as available-for-sale in an unrealized loss position was 159 and 212, respectively, with a fair value of $91.5 million and $149.6 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 19 and 120, respectively. As of June 30, 2015, none of these securities were considered to be other than temporarily impaired.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

The contractual maturities of the Company’s fixed maturity investments classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

As at June 30, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 32,587       $ 30,763         16.5

More than one year through two years

     62,134         61,416         33.1

More than two years through five years

     80,542         78,917         42.5

More than five years through ten years

     4,449         4,226         2.3
  

 

 

    

 

 

    

 

 

 
     179,712         175,322         94.4

Residential mortgage-backed

     2,439         2,387         1.3

Asset-backed

     7,921         7,938         4.3
  

 

 

    

 

 

    

 

 

 
   $ 190,072       $ 185,647         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 54,491       $ 53,496         22.2

More than one year through two years

     53,936         52,343         21.7

More than two years through five years

     86,157         84,970         35.2

More than five years through ten years

     1,890         1,858         0.8

More than ten years

     2,351         3,225         1.3
  

 

 

    

 

 

    

 

 

 
     198,825         195,892         81.2

Residential mortgage-backed

     3,305         3,243         1.4

Asset-backed

     41,980         41,976         17.4
  

 

 

    

 

 

    

 

 

 
   $ 244,110       $ 241,111         100.0
  

 

 

    

 

 

    

 

 

 

The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity investments classified as available-for-sale:

 

As at June 30, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 73,246       $ 70,245         37.8

AA

     38,071         36,810         19.9

A

     54,183         54,218         29.2

BBB

     24,572         24,374         13.1
  

 

 

    

 

 

    

 

 

 
   $ 190,072       $ 185,647         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 117,866       $ 115,691         48.0

AA

     62,707         61,970         25.7

A

     49,039         49,063         20.3

BBB

     14,498         14,387         6.0
  

 

 

    

 

 

    

 

 

 
   $ 244,110       $ 241,111         100.0
  

 

 

    

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

Other-Than-Temporary Impairment Process

The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale and held-to-maturity represent impairment losses that are other-than-temporary and whether a credit loss exists in accordance with its accounting policies. In assessing whether it is more likely than not that the Company will be required to sell a fixed maturity investment before its anticipated recovery, the Company considers various factors including its future cash flow requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short-term investments and fixed maturity investments available-for-sale in an unrealized gain position, and other relevant factors. For the six months ended June 30, 2015, the Company did not recognize any other-than-temporary impairment losses due to required sales. The Company determined that, as at June 30, 2015, no credit losses existed.

Other Investments, at fair value

The estimated amounts of the Company’s other investments carried at fair value were as follows:

 

     June 30,
2015
     December 31,
2014
 

Private equities and private equity funds

   $ 204,324       $ 197,269   

Fixed income funds

     335,917         335,026   

Fixed income hedge funds

     97,812         59,627   

Equity funds

     159,494         150,053   

Real estate debt fund

     76,216         33,902   

CLO equities

     67,475         41,271   

CLO equity fund

     16,432         16,022   

Other

     1,613         3,698   
  

 

 

    

 

 

 
   $ 959,283       $ 836,868   
  

 

 

    

 

 

 

Private equities and private equity funds

This class comprises several private equities and private equity funds that invest primarily in the financial services industry. All of the Company’s investments in private equities and private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate those investments. These restrictions have been in place since the dates the initial investments were made by the Company.

As of June 30, 2015 and December 31, 2014, the Company had $204.3 million and $197.3 million, respectively, of other investments recorded in private equities and private equity funds. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. Management regularly reviews and discusses fund performance with the Company’s fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

Fixed income funds

This class comprises a number of positions in diversified fixed income funds that are managed by third party managers. Underlying investments vary from high grade corporate bonds to non-investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices. The funds have liquidity terms that vary from daily up to quarterly.

Fixed income hedge funds

This class comprises hedge funds that invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of three years from the time of the Company’s initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice.

Equity funds

This class comprises equity funds that invest in a diversified portfolio of international publicly-traded equity securities.

Real estate debt fund

This class comprises a real estate debt fund that invests primarily in U.S. commercial real estate loans and securities. A redemption request for this fund can be made 10 days after the date of any monthly valuation; the fund states that it will make commercially reasonable efforts to redeem the investment within the next monthly period.

CLO equities

This class comprises investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by the Company in these securities.

CLO equity funds

This class comprises two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.

Other

As at June 30, 2015, this class primarily comprises a fund that provides loans to educational institutions throughout the U.S. and its territories. Through these investments, the Company participates in the performance of the underlying loan pools. This investment matures when the loans are paid down and cannot be redeemed before maturity. Previously included within this class was a catastrophe bond acquired as part of the Company’s acquisition of Torus Insurance Holdings Limited and its subsidiaries (“Torus”) on April 1, 2014. This catastrophe bond matured during the three months ended March 31, 2015.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

Redemption restrictions on other investments

Certain funds included in other investments are subject to a lock-up period. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem the investment. Funds that do provide for periodic redemptions may, depending on the funds’ governing documents, have the ability to deny or delay a redemption request, which is called a “gate.” The fund may restrict redemptions because the aggregate amount of redemption requests as of a particular date exceeds a specified level. The gate is a method for executing an orderly redemption process that allows for redemption requests to be executed in a timely manner to reduce the possibility of adversely affecting the remaining investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion to be settled in cash sometime after the redemption date.

Certain funds included in other investments may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible debt. In such cases, a common mechanism used is a “side-pocket,” whereby the illiquid security is assigned to a separate memorandum capital account or designated account. Typically, the investor loses its redemption rights in the designated account. Only when the illiquid security is sold, or is otherwise deemed liquid by the fund, may investors redeem their interest in the side-pocket.

At June 30, 2015, the Company had $12.5 million of investments subject to gates/side-pockets ($13.0 million as of December 31, 2014). As of June 30, 2015, management has not made any adjustments to the fair value estimate reported by the fund managers for the gate/side-pocketed investments.

The following tables present the fair value, unfunded commitments and redemption frequency for the funds included within other investments at fair value. These investments are all valued at net asset value as at June 30, 2015 and December 31, 2014:

 

June 30, 2015

   Total Fair
Value
     Gated/Side
Pocket
Investments
     Investments
without Gates
or Side Pockets
     Unfunded
Commitments
    

Redemption
Frequency

Private equity funds

   $ 199,324       $ —         $ 199,324       $ 88,805       Not eligible

Fixed income funds

     335,917         —           335,917         —         Daily, monthly and quarterly

Fixed income hedge funds

     97,812         1,294         96,518         9,352       Quarterly after lock-up periods expire

Equity funds

     159,494         —           159,494         —         Bi-monthly

Real estate debt fund

     76,216         —           76,216         —         Monthly

CLO equity funds

     16,432         11,202         5,230         —         Quarterly after lock-up periods expire

Other

     1,299         —           1,299          Not eligible
  

 

 

    

 

 

    

 

 

    

 

 

    
   $ 886,494       $ 12,496       $ 873,998       $ 98,157      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

December 31, 2014

   Total Fair
Value
     Gated/Side
Pocket
Investments
     Investments
without Gates
or Side Pockets
     Unfunded
Commitments
    

Redemption
Frequency

Private equity funds

   $ 197,269       $ —         $ 197,269       $ 99,885       Not eligible

Fixed income funds

     335,026         —           335,026         —         Daily, monthly and quarterly

Fixed income hedge funds

     59,627         1,958         57,669         —         Quarterly after lock-up periods expire

Equity funds

     150,053         —           150,053         —         Bi-monthly

Real estate debt fund

     33,902         —           33,902         —         Monthly

CLO equity funds

     16,022         11,022         5,000         —         Quarterly after lock-up periods expire

Other

     1,363         —           1,363         —         Not eligible
  

 

 

    

 

 

    

 

 

    

 

 

    
   $ 793,262       $ 12,980       $ 780,282       $ 99,885      
  

 

 

    

 

 

    

 

 

    

 

 

    

Other Investments, at cost

The Company’s other investments carried at cost were as follows:

 

     June 30,
2015
     December 31,
2014
 

Life settlements

   $ 140,375       $ —     
  

 

 

    

 

 

 

Investments in Life Settlements

Investments in life settlements are accounted for under the investment method, whereby we recognize our initial investment in life settlements at the transaction price plus all initial direct external costs. Continuing costs to keep the policy in force, primarily life insurance premiums, increase the carrying amount of the investment. We recognize income on individual investments in life settlements when the insured dies, at an amount equal to the excess of the investment proceeds over the carrying amount of the investment at that time. These investments are subject to impairment review, as discussed below.

During the three and six month periods ended June 30, 2015, the amount of net investment income included in earnings attributable to investments in life settlements was $2.0 million. For 2014 the Company did not have an investment in life settlements.

Impairment of Investments in Life Settlements

Impairment to investments in life settlement contracts may occur in the future due to the fact that continued payment of premiums required to maintain policies will cause the expected lifetime undiscounted cash flows for some policies to become negative in future reporting periods, even in the absence of future changes to the mortality assumptions. Impairment may also occur due to our future sale or lapse of select policies at a value that is below carrying amount.

Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds from the investment in life settlements would not be sufficient to

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

recover our estimated future carrying amount of the investment in life settlements, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market longevity assumptions and market yields. Impairment charges, if any, are included in net realized and unrealized gains. There were no impairment charges recognized in the period.

Fair Value of Financial Instruments

Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. The Company uses a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:

 

    Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.

 

    Level 2—Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

 

    Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company’s own judgment about assumptions that market participants might use.

The following is a summary of valuation techniques or models the Company uses to measure fair value by asset and liability classes.

Fixed Maturity Investments

The Company’s fixed maturity investments portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors with oversight from the Company’s Investment Committee. Fair values for all securities in the fixed maturity investments portfolio are independently provided by the investment custodians, investment accounting service providers and investment managers, each of which utilize internationally recognized independent pricing services. Interactive Data Corporation is, however, the main pricing service utilized to estimate the fair value measurements for the Company’s fixed maturity investments. The Company records the unadjusted price provided by the investment custodians, investment accounting service providers or the investment managers and validates this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to the Company’s knowledge of the current investment market. The Company’s internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

The independent pricing services used by the investment custodians, investment accounting service providers and investment managers obtain actual transaction prices for securities that have quoted prices in active markets. For determining the fair value of securities that are not actively traded, in general, pricing services use “matrix pricing” in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.

The following describes the techniques generally used to determine the fair value of the Company’s fixed maturity investments by asset class.

 

    U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

 

    Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

 

    Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at June 30, 2015, the Company had no corporate securities classified as Level 3.

 

    Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

 

    Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

    Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at June 30, 2015, the Company had no residential or commercial mortgage-backed securities classified as Level 3.

Equities

The Company’s equities are predominantly traded on the major exchanges and are primarily managed by an external advisor. The Company uses Interactive Data Corporation, an internationally recognized pricing service, to estimate the fair value for all of its equities. The Company’s equities are widely diversified and there is no significant concentration in any specific industry.

The Company has categorized all of its investments in equities other than preferred stock as Level 1 investments because the fair values of these investments are based on quoted prices in active markets for identical assets or liabilities. The fair value estimates of the Company’s preferred stock is based on observable market data and, as a result, has been categorized as Level 2.

Other investments, at fair value

The Company has ongoing due diligence processes with respect to the other investments in which it invests and their managers. These processes are designed to assist the Company in assessing the quality of information provided by, or on behalf of, each other investment and in determining whether such information continues to be reliable or whether further review is warranted. Certain other investments do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements annually, and regularly reviews and discusses the performance with the managers to corroborate the reasonableness of the reported net asset values. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, the Company may incorporate adjustments to the reported net asset value (and not use the permitted practical expedient) on an investment by investment basis. These adjustments may involve significant management judgment. As at June 30, 2015, there were no material adjustments made to the reported net asset value.

For its investments in private equities and private equity funds, the Company measures fair value by obtaining the most recently provided capital statement from the external manager or third-party administrator. The capital statements calculate the net asset value on a fair value basis. For all publicly-traded companies, the Company adjusts the reported net asset value based on the latest share price as of the Company’s reporting date. The Company has classified its investments in private equities and private equity funds as Level 3.

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

The fixed income funds and equity funds in which the Company invests have been classified as Level 2 investments because their fair value is estimated using the published net asset value and because the fixed income funds and equity funds are highly liquid.

For its investments in fixed income hedge funds, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The investments in the funds are classified as Level 3.

The real estate debt fund in which the Company invests has been valued based on the most recent published net asset value. This investment has been classified as Level 3.

The Company measures the fair value of its direct investment in CLO equities based on valuations provided by the Company’s external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is valued based on valuations provided by the broker or lead underwriter of the investment (the “broker”). The Company’s CLO equity investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of relevant trades in secondary markets.

In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase (or decrease) in either of these significant inputs in isolation would result in lower (or higher) fair value estimates for direct investments in the Company’s CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs because they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (or decrease) in either of these significant inputs in isolation would result in higher (or lower) fair value estimates for direct investments in the Company’s CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.

On a quarterly basis, the Company receives the valuation from the external CLO manager and brokers and then reviews the underlying cash flows and key assumptions used by the manager/broker. The Company reviews and updates the significant unobservable inputs based on information obtained from secondary markets. These inputs are the responsibility of the Company and the Company assesses the reasonableness of the inputs (and if necessary, updates the inputs) through communicating with industry participants, monitoring of the transactions in which the Company participates (for example, to evaluate default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends that may impact future cash flows.

If valuations from the external CLO equity manager or brokers were not available, the Company would use an income approach based on certain observable and unobservable inputs to value these investments. An income approach is also used to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income approach is followed, the valuation is based on available trade information, such as expected cash flows and market assumptions on default and loss severity rates. Other inputs used in the valuation process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

For its investments in the CLO equity funds, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager. The Company uses an income approach to corroborate the reasonableness of reported net asset value. The CLO equity funds have been classified as Level 3 due to a lack of observable and relevant trades in secondary markets.

The Company’s remaining other investments have been valued based on the latest available capital statements, and have all been classified as Level 3.

Fair Value Measurements

In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification (“ASC”) 820, the Company has categorized its investments that are recorded at fair value among levels as follows:

 

    June 30, 2015  
    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total Fair
Value
 

U.S. government and agency

  $ —        $ 834,481      $ —        $ 834,481   

Non-U.S. government

    —          371,326        —          371,326   

Corporate

    —          2,721,224        —          2,721,224   

Municipal

    —          118,149        —          118,149   

Residential mortgage-backed

    —          432,264        —          432,264   

Commercial mortgage-backed

    —          204,036        —          204,036   

Asset-backed

    —          731,496        —          731,496   

Equities—U.S.

    90,464        15,508        —          105,972   

Equities—International

    15,220        8,084        —          23,304   

Other investments, at fair value

    —          495,378        463,905        959,283   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 105,684      $ 5,931,946      $ 463,905      $ 6,501,535   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

26


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

    December 31, 2014  
    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total Fair
Value
 

U.S. government and agency

  $ —        $ 769,002      $ —        $ 769,002   

Non-U.S. government

    —          439,439        —          439,439   

Corporate

    —          2,087,329        600        2,087,929   

Municipal

    —          25,607        —          25,607   

Residential mortgage-backed

    —          311,864        —          311,864   

Commercial mortgage-backed

    —          139,907        —          139,907   

Asset-backed

    —          430,170        —          430,170   

Equities—U.S.

    96,842        5,203        4,850        106,895   

Equities—International

    24,365        18,870        —          43,235   

Other investments, at fair value

    —          487,078        349,790        836,868   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 121,207      $ 4,714,469      $ 355,240      $ 5,190,916   
 

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present the Company’s fair value hierarchy for those assets classified as held-to-maturity in the consolidated balance sheet but for which disclosure of the fair value is required as of June 30, 2015 and December 31, 2014:

 

     June 30, 2015  
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Fair
Value
 

U.S. government and agency

   $ —         $ 19,653       $ —         $ 19,653   

Non-U.S. government

     —           37,819         —           37,819   

Corporate

     —           730,631         —           730,631   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ —         $ 788,103       $ —         $ 788,103   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Fair
Value
 

U.S. government and agency

   $ —         $ 20,559       $ —         $ 20,559   

Non-U.S. government

     —           38,689         —           38,689   

Corporate

     —           767,124         —           767,124   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ —         $ 826,372       $ —         $ 826,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

During the six months ended June 30, 2015 and the year ended December 31, 2014, the Company had no transfers between Levels 1 and 2.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended June 30, 2015:

 

     Fixed
Maturity
Investments
     Other
Investments
     Equity
Securities
     Total  

Level 3 investments as of April 1, 2015

   $ —         $ 427,362       $ —         $ 427,362   

Purchases

     —           54,407         —           54,407   

Sales

     —           (28,533      —           (28,533

Total realized and unrealized gains through earnings

     —           10,669         —           10,669   

Net transfers into and/or (out of) Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 investments as of June 30, 2015

   $ —         $ 463,905       $ —         $ 463,905   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of net gains for the three months ended June 30, 2015 included in earnings attributable to the fair value of changes in assets still held at June 30, 2015 was $10.7 million. All of this amount was included in net realized and unrealized gains.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended June 30, 2014.

 

     Fixed
Maturity
Investments
     Other
Investments
     Equity
Securities
     Total  

Level 3 investments as of April 1, 2014

   $ 607       $ 296,651       $ 4,750       $ 302,008   

Purchases

     —           28,461         —           28,461   

Sales

     —           (7,709      —           (7,709

Total realized and unrealized gains through earnings

     3         10,761         125         10,889   

Net transfers into and/or (out of) Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 investments as of June 30, 2014

   $ 610       $ 328,164       $ 4,875       $ 333,649   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of net gains for the three months ended June 30, 2014 included in earnings attributable to the fair value of changes in assets still held at June 30, 2014 was $10.9 million. All of this amount was included in net realized and unrealized gains.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the six months ended June 30, 2015:

 

     Fixed
Maturity
Investments
     Other
Investments
     Equity
Securities
     Total  

Level 3 investments as of January 1, 2015

   $ 600       $ 349,790       $ 4,850       $ 355,240   

Purchases

     —           136,385         —           136,385   

Sales

     (600      (42,415      (5,000      (48,015

Total realized and unrealized gains through earnings

     —           20,145         150         20,295   

Net transfers into and/or (out of) Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 investments as of June 30, 2015

   $ —         $ 463,905       $ —         $ 463,905   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of net gains for the six months ended June 30, 2015 included in earnings attributable to the fair value of changes in assets still held at June 30, 2015 was $20.3 million. All of this amount was included in net realized and unrealized gains.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the six months ended June 30, 2014:

 

     Fixed
Maturity
Investments
     Other
Investments
     Equity
Securities
     Total  

Level 3 investments as of January 1, 2014

   $ 609       $ 265,569       $ 4,725       $ 270,903   

Purchases

     —           51,753         —           51,753   

Sales

     —           (10,692      —           (10,692

Total realized and unrealized gains through earnings

     1         21,534         150         21,685   

Net transfers into and/or (out of) Level 3

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 investments as of June 30, 2014

   $ 610       $ 328,164       $ 4,875       $ 333,649   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of net gains for the six months ended June 30, 2014 included in earnings attributable to the fair value of changes in assets still held at June 30, 2014 was $21.7 million. All of this amount was included in net realized and unrealized gains.

Fair Value Measurements for Life Settlements

The Company measures the fair value of its investments in life settlements (acquired in the Guillamene transaction on May 5, 2015), carried at cost, on a non-recurring basis, generally quarterly,

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Impaired investments in life settlements are written down to their estimated fair value and the impairment charges are included in net realized and unrealized (losses) gains. For the three and six months ended June 30, 2015, no impairment charges attributable to life settlements were included in net realized and unrealized (losses) gains.

The estimated fair value of investments in life settlements at June 30, 2015 was $146.8 million (December 31, 2014 - $nil). The fair value estimates use unobservable inputs and as such are classified within level 3 in the fair value hierarchy.

Net Realized and Unrealized (Losses) Gains

Components of net realized and unrealized (losses) gains for the three and six months ended June 30, 2015 and 2014 were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Gross realized gains on available-for-sale securities

   $ 39       $ 253       $ 153       $ 279   

Gross realized losses on available-for-sale securities

     (1      —           (9      (145

Net realized gains on trading securities

     7,055         12,010         19,638         17,927   

Net unrealized (losses) gains on trading securities

     (29,398      8,757         (22,629      20,535   

Net realized and unrealized gains on other investments

     11,056         17,391         34,618         34,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized and unrealized (losses) gains

   $ (11,249    $ 38,411       $ 31,771       $ 72,984   
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from sales and maturities of available-for-sale securities

   $ 48,492       $ 26,179       $ 97,733       $ 78,967   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. INVESTMENTS—(Continued)

 

Net Investment Income

Major categories of net investment income for the three and six months ended June 30, 2015 and 2014 are summarized as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Interest from fixed maturity investments

   $ 41,466       $ 39,644       $ 80,318       $ 73,850   

Interest from cash and cash equivalents and short-term investments

     1,387         1,800         4,106         3,425   

Net amortization of bond premiums and discounts

     (12,915      (15,682      (25,518      (28,144

Dividends from equities

     1,315         1,626         2,996         3,030   

Other investments

     3,558         648         4,440         740   

Interest on other receivables

     358         656         639         882   

Other income

     11,714         7,164         14,617         7,186   

Net income from investments in life settlements

     1,959         —           1,959         —     

Interest on deposits held with clients

     139         292         619         1,022   

Policy loan interest

     272         304         565         615   

Investment expenses

     (2,760      (2,803      (4,355      (4,609
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 46,493       $ 33,649       $ 80,386       $ 57,997   
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted Assets

The Company is required to maintain investments and cash and cash equivalents on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted assets, including restricted cash of $612.4 million and $535.0 million, as of June 30, 2015 and December 31, 2014 was as follows:

 

     June 30,
2015
     December 31,
2014
 

Collateral in trust for third party agreements

   $ 3,098,311       $ 2,630,259   

Assets on deposit with regulatory authorities

     1,091,505         653,192   

Collateral for secured letter of credit facility

     262,243         300,468   
  

 

 

    

 

 

 
   $ 4,452,059       $ 3,583,919   
  

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5. REINSURANCE BALANCES RECOVERABLE

The following table provides the total reinsurance balances recoverable as at June 30, 2015 and December 31, 2014:

 

     June 30, 2015  
     Non-life
Run-off
    Atrium      Torus     Life and
Annuities
     Total  

Recoverable from reinsurers on:

            

Outstanding losses

   $ 684,305      $ 6,520       $ 191,193      $ 24,048       $ 906,066   

Losses incurred but not reported

     515,797        16,317         105,189        449         637,752   

Fair value adjustments

     (22,049     3,174         (9,333     —           (28,208
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total reinsurance reserves recoverable

     1,178,053        26,011         287,049        24,497         1,515,610   

Paid losses recoverable

     77,233        770         19,585        424         98,012   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,255,286      $ 26,781       $ 306,634      $ 24,921       $ 1,613,622   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2014  
     Non-life
Run-off
    Atrium      Torus     Life and
Annuities
     Total  

Recoverable from reinsurers on:

            

Outstanding losses

   $ 568,386      $ 9,582       $ 181,067      $ 25,125       $ 784,160   

Losses incurred but not reported

     278,696        14,565         154,850        467         448,578   

Fair value adjustments

     (46,373     4,131         (10,708     —           (52,950
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total reinsurance reserves recoverable

     800,709        28,278         325,209        25,592         1,179,788   

Paid losses recoverable

     129,750        1,289         19,845        883         151,767   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 930,459      $ 29,567       $ 345,054      $ 26,475       $ 1,331,555   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s acquired insurance and reinsurance run-off subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. The Company’s insurance and reinsurance subsidiaries remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, the Company evaluates and monitors concentration of credit risk among its reinsurers. Provisions are made for amounts considered potentially uncollectible.

On an annual basis, both Atrium Underwriting Group Limited and its subsidiaries (“Atrium”) and Torus purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s total third party reinsurance cover is with Lloyd’s Syndicates or other highly rated reinsurers. The majority of Torus’ total third party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.

The fair value adjustments, determined on acquisition of insurance and reinsurance subsidiaries, are based on the estimated timing of loss and loss adjustment expense recoveries and an assumed interest rate equivalent to a risk free rate for securities with similar duration to the reinsurance recoverables acquired plus a spread to reflect credit risk, and are amortized over the estimated recovery period, as adjusted for accelerations in timing of payments as a result of commutation settlements.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. REINSURANCE BALANCES RECOVERABLE—(Continued)

 

As of June 30, 2015 and December 31, 2014, the Company had reinsurance balances recoverable of $1.61 billion and $1.33 billion, respectively. The increase of $282.0 million in reinsurance balances recoverable was primarily a result of the Companion acquisition, partially offset by commutations and cash collections made during the six months ended June 30, 2015 in the Company’s non-life run-off and Torus segments.

Top Ten Reinsurers

The following table shows, for each segment, the total reinsurance balances recoverable by reinsurer as at June 30, 2015 and December 31, 2014:

 

     As at June 30, 2015  
     Reinsurance Balances Recoverable  
     Non-life
run-off
     Atrium      Torus      Life and
annuities
     Total      % of Total  

Top ten reinsurers

   $ 882,658       $ 21,365       $ 121,542       $ 14,564       $ 1,040,129         64.5

Other reinsurers balances > $1 million

     357,401         4,856         179,497         10,219         551,973         34.2

Other reinsurers balances < $1 million

     15,227         560         5,595         138         21,520         1.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,255,286       $ 26,781       $ 306,634       $ 24,921       $ 1,613,622         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     As at December 31, 2014  
     Reinsurance Balances Recoverable  
     Non-life
run-off
     Atrium      Torus      Life and
annuities
     Total      % of Total  

Top ten reinsurers

   $ 667,325       $ 23,635       $ 158,117       $ 15,089       $ 864,166         64.9

Other reinsurers balances > $1 million

     256,929         4,917         181,196         10,692         453,734         34.1

Other reinsurers balances < $1 million

     6,205         1,015         5,741         694         13,655         1.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 930,459       $ 29,567       $ 345,054       $ 26,475       $ 1,331,555         100.0
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2015 and December 31, 2014, the top ten reinsurers of the Company’s business accounted for 64.5% and 64.9%, respectively, of total reinsurance balances recoverable (which includes total reinsurance reserves and paid losses recoverable) and included $464.8 million and $310.9 million, respectively, of incurred but not reported (“IBNR”) reserves recoverable. With the exception of three non-rated reinsurers from which $400.2 million was recoverable (December 31, 2014: $175.2 million related to one reinsurer), the other top ten reinsurers, as at June 30, 2015 and December 31, 2014, were all rated A- or better.

As at June 30, 2015, reinsurance balances recoverable with a carrying value of $175.3 million were associated with one reinsurer that represented 10% or more of total reinsurance balances recoverable. At December 31, 2014, reinsurance balances recoverable with a carrying value of $314.5 million were associated with two reinsurers which represented 10% or more of total reinsurance balances recoverable.

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. REINSURANCE BALANCES RECOVERABLE—(Continued)

 

Provisions for Uncollectible Reinsurance Balances Recoverable

The following table shows the total reinsurance balances recoverable by rating of reinsurer along with the Company’s provisions for uncollectible reinsurance balances recoverable (“provisions for bad debt”) as at June 30, 2015 and December 31, 2014. The provisions for bad debt all relate to the non-life run-off segment.

 

     As at June 30, 2015  
     Reinsurance Balances Recoverable  
     Gross      Provisions
for Bad Debt
    Net  

Reinsurers rated A- or above

   $ 1,122,408       $ 53,911      $ 1,068,497   

Reinsurers rated below A-, secured (trust funds or letters of credit)

     471,033         —          471,033   

Reinsurers rated below A-, unsecured

     277,522         203,430        74,092   
  

 

 

    

 

 

   

 

 

 

Total

   $ 1,870,963       $ 257,341      $ 1,613,622   
  

 

 

    

 

 

   

 

 

 

Provisions for bad debt as a percentage of gross reinsurance balances recoverable

        13.8  
     

 

 

   
     As at December 31, 2014  
     Reinsurance Balances Recoverable  
     Gross      Provisions
for Bad Debt
    Net  

Reinsurers rated A- or above

   $ 1,126,944       $ 80,995      $ 1,045,949   

Reinsurers rated below A-, secured (trust funds or letters of credit)

     204,544         —          204,544   

Reinsurers rated below A-, unsecured

     289,976         208,914        81,062   
  

 

 

    

 

 

   

 

 

 

Total

   $ 1,621,464       $ 289,909      $ 1,331,555   
  

 

 

    

 

 

   

 

 

 

Provisions for bad debt as a percentage of gross reinsurance balances recoverable

        17.9  
     

 

 

   

6. LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table provides the total losses and loss adjustment expense liabilities as at June 30, 2015 and December 31, 2014:

 

     June 30, 2015  
     Non-life
Run-off
     Atrium      Torus      Total  

Outstanding

   $ 2,996,468       $ 69,261       $ 437,776       $ 3,503,505   

Incurred but not reported

     2,218,816         115,215         438,356         2,772,387   

Fair value adjustment

     (151,147      21,023         (2,297      (132,421
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,064,137       $ 205,499       $ 873,835       $ 6,143,471   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

     December 31, 2014  
     Non-life
Run-off
     Atrium      Torus      Total  

Outstanding

   $ 2,202,187       $ 73,803       $ 387,171       $ 2,663,161   

Incurred but not reported

     1,406,420         113,149         477,264         1,996,833   

Fair value adjustment

     (173,597      25,659         (2,635      (150,573
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,435,010       $ 212,611       $ 861,800       $ 4,509,421   
  

 

 

    

 

 

    

 

 

    

 

 

 

The overall increase in losses and loss adjustment expense liabilities for the Company between December 31, 2014 and June 30, 2015 was primarily attributable to the Company’s acquisition of Companion and the completion of the Voya transaction.

Refer to Note 8 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on establishing reserves for losses and loss adjustment expense liabilities.

The total net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the Company’s non-life run-off, Atrium and Torus segments for the three and six months ended June 30, 2015 and 2014 was as follows:

 

     Three Months Ended June 30, 2015  
     Non-life
Run-off
     Atrium      Torus      Total  

Net losses paid

   $ 164,440       $ 12,121       $ 39,415       $ 215,976   

Net change in case and LAE reserves

     (104,330      136         46,729         (57,465

Net change in IBNR reserves

     (75,957      5,186         (5,690      (76,461
  

 

 

    

 

 

    

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (15,847      17,443         80,454         82,050   

Reduction in provisions for bad debt

     (625      —           —           (625

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

     (7,711      (8      1,053         (6,666

Amortization of fair value adjustments

     (4,687      (3,678      (494      (8,859
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (28,870    $ 13,757       $ 81,013       $ 65,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

35


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

     Three Months Ended June 30, 2014  
     Non-life
Run-off
     Atrium      Torus      Total  

Net losses paid

   $ 116,575       $ 12,008       $ 14,249       $ 142,832   

Net change in case and LAE reserves

     (78,421      2,241         42,264         (33,916

Net change in IBNR reserves

     (54,730      2,329         23,727         (28,674
  

 

 

    

 

 

    

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (16,576      16,578         80,240         80,242   

Paid loss recoveries on bad debt provisions

     (11,206      —           —           (11,206

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

     (12,874      33         —           (12,841

Amortization of fair value adjustments

     3,454         —           100         3,554   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (37,202    $ 16,611       $ 80,340       $ 59,749   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended June 30, 2015  
     Non-life
Run-off
     Atrium      Torus      Total  

Net losses paid

   $ 229,700       $ 24,032       $ 91,563       $ 345,295   

Net change in case and LAE reserves

     (111,330      (883      44,943         (67,270

Net change in IBNR reserves

     (113,235      1,376         20,049         (91,810
  

 

 

    

 

 

    

 

 

    

 

 

 

Increase in estimates of net ultimate losses

     5,135         24,525         156,555         186,215   

Reduction in provisions for bad debt

     (20,439      —           —           (20,439

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

     (21,686      (70      1,711         (20,045

Amortization of fair value adjustments

     (4,980      (3,678      (1,037      (9,695
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (41,970    $ 20,777       $ 157,229       $ 136,036   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

36


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

     Six Months Ended June 30, 2014  
     Non-life
Run-off
     Atrium      Torus      Total  

Net losses paid

   $ 204,262       $ 24,843       $ 14,249       $ 243,354   

Net change in case and LAE reserves

     (140,819      3,016         42,264         (95,539

Net change in IBNR reserves

     (92,078      5,798         23,727         (62,553
  

 

 

    

 

 

    

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (28,635      33,657         80,240         85,262   

Paid loss recoveries on bad debt provisions

     (11,206      —           —           (11,206

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

     (26,233      85         —           (26,148

Amortization of fair value adjustments

     (309      —           100         (209
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (66,383    $ 33,742       $ 80,340       $ 47,699   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Life Run-off Segment

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended June 30, 2015 and 2014 of the non-life run-off segment (losses incurred and paid are reflected net of reinsurance balances recoverable):

 

     Non-life Run-off  
     Three Months Ended June 30,  
     2015      2014  

Balance as at April 1

   $ 4,693,262       $ 3,821,878   

Less: total reinsurance reserves recoverable

     1,210,933         1,028,162   
  

 

 

    

 

 

 
     3,482,329         2,793,716   

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

     

Current period

     22,547         10,209   

Prior periods

     (51,417      (47,411
  

 

 

    

 

 

 

Total net reduction in ultimate losses and loss adjustment expense liabilities

     (28,870      (37,202
  

 

 

    

 

 

 

Net losses paid:

     

Current period

     (9,434      (260

Prior periods

     (155,006      (105,108
  

 

 

    

 

 

 

Total net losses paid

     (164,440      (105,368
  

 

 

    

 

 

 

Effect of exchange rate movement

     25,876         8,032   

Acquired on purchase of subsidiaries

     —           386,074   

Assumed business

     305,763         —     
  

 

 

    

 

 

 

Net balance as at June 30

     3,620,658         3,045,252   

Plus: total reinsurance reserves recoverable

     1,178,053         935,319   

Plus: total deferred charge on retroactive reinsurance

     265,426         —     
  

 

 

    

 

 

 

Balance as at June 30

   $ 5,064,137       $ 3,980,571   
  

 

 

    

 

 

 

 

37


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

Total net losses paid for the three months ended June 30, 2014 are shown net of paid loss recoveries on bad debt provisions of $11.2 million.

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the non-life run-off segment for the three months ended June 30, 2015 and 2014 was as follows:

 

     Non-Life Run-off  
     Three Months Ended June 30, 2015  
     Prior
Period
     Current
Period
     Total  

Net losses paid

   $ 155,006       $ 9,434       $ 164,440   

Net change in case and LAE reserves

     (108,819      4,489         (104,330

Net change in IBNR reserves

     (84,581      8,624         (75,957
  

 

 

    

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (38,394      22,547         (15,847

Reduction in provisions for bad debt

     (625      —           (625

Reduction in provisions for unallocated loss adjustment expense liabilities

     (7,711      —           (7,711

Amortization of fair value adjustments

     (4,687      —           (4,687
  

 

 

    

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (51,417    $ 22,547       $ (28,870
  

 

 

    

 

 

    

 

 

 
     Non-Life Run-off  
     Three Months Ended June 30, 2014  
     Prior
Period
     Current
Period
     Total  

Net losses paid

   $ 116,315       $ 260       $ 116,575   

Net change in case and LAE reserves

     (78,596      175         (78,421

Net change in IBNR reserves

     (64,504      9,774         (54,730
  

 

 

    

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (26,785      10,209         (16,576

Paid loss recoveries on bad debt provisions

     (11,206      —           (11,206

Reduction in provisions for unallocated loss adjustment expense liabilities

     (12,874      —           (12,874

Amortization of fair value adjustments

     3,454         —           3,454   
  

 

 

    

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (47,411    $ 10,209       $ (37,202
  

 

 

    

 

 

    

 

 

 

Net change in case and loss adjustment expense (“LAE”) reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to the Company by its policyholders and attorneys, less changes in case reserves recoverable advised by the Company to its reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR reserves represents the change in the Company’s actuarial estimates of losses incurred but not reported, less amounts recoverable.

 

38


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

Three Months Ended June 30, 2015

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended June 30, 2015 of $28.9 million included incurred losses of $22.5 million related to current period earned premium of $17.2 million, related primarily to the portion of the run-off business acquired with Sussex. Excluding current period incurred losses of $22.5 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $51.4 million, which was attributable to a reduction in estimates of net ultimate losses of $38.4 million, reduction in provisions for bad debt of $0.6 million, reduction in provisions for unallocated loss adjustment expense liabilities of $7.7 million, relating to 2015 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.7 million.

The reduction in estimates of net ultimate losses relating to prior periods of $38.4 million was primarily related to:

 

  (i) the Company’s review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $6.4 million;

 

  (ii) a reduction in IBNR reserves of $23.0 million primarily as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid loss and loss adjustment expenses relating to non-commuted exposures in Lloyd’s Syndicate 2008. The prior period estimate of aggregate IBNR liabilities was reduced as a result of the continued favorable trend of loss development compared to prior forecasts; and

 

  (iii) favorable claims settlements during the three months ended June 30, 2015 resulting in a reduction in estimates of net ultimate losses of approximately $9.0 million.

Three Months Ended June 30, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended June 30, 2014 of $37.2 million included incurred losses of $10.2 million related to current period earned premium, related primarily to the portion of the run-off business acquired with Torus. Excluding current period incurred losses of $10.2 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $47.4 million, which was attributable to a reduction in estimates of net ultimate losses of $26.8 million, paid loss recoveries on bad debt provisions of $11.2 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $12.9 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $3.5 million.

The reduction in estimates of net ultimate losses relating to prior periods of $26.8 million was primarily related to:

 

  (i) the Company’s review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $6.8 million;

 

  (ii)

a reduction in IBNR reserves of $10.0 million primarily as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial

 

39


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

  methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid loss and loss adjustment expenses relating to non-commuted exposures in Lloyd’s Syndicate 2008. The prior period estimate of aggregate IBNR liabilities was reduced as a result of the continued favorable trend of loss development compared to prior forecasts; and

 

  (iii) favorable claims settlements during the three months ended June 30, 2014 resulting in a reduction in estimates of net ultimate losses of approximately $12.8 million.

Six Months Ended June 30, 2015 and 2014

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the six months ended June 30, 2015 and 2014 of the non-life run-off segment (losses incurred and paid are reflected net of reinsurance balances recoverable):

 

     Non-Life Run-off  
     Six Months Ended
June 30,
 
     2015      2014  

Balance as at January 1

   $ 3,435,010       $ 4,004,513   

Less: total reinsurance reserves recoverable

     800,709         1,121,533   
  

 

 

    

 

 

 
     2,634,301         2,882,980   

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

     

Current period

     43,273         11,641   

Prior periods

     (85,243      (78,024
  

 

 

    

 

 

 

Total net reduction in ultimate losses and loss adjustment expense liabilities

     (41,970      (66,383
  

 

 

    

 

 

 

Net losses paid:

     

Current period

     (14,005      (792

Prior periods

     (215,695      (192,263
  

 

 

    

 

 

 

Total net losses paid

     (229,700      (193,055
  

 

 

    

 

 

 

Effect of exchange rate movement

     (12,362      7,006   

Acquired on purchase of subsidiaries

     774,758         386,074   

Assumed business

     495,631         28,630   
  

 

 

    

 

 

 

Net balance as at June 30

     3,620,658         3,045,252   

Plus: total reinsurance reserves recoverable

     1,178,053         935,319   

Plus: total deferred charge on retroactive reinsurance

     265,426         —     
  

 

 

    

 

 

 

Balance as at June 30

   $ 5,064,137       $ 3,980,571   
  

 

 

    

 

 

 

Total net losses paid for the six months ended June 30, 2014 are shown net of paid loss recoveries on bad debt provisions of $11.2 million.

 

40


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the non-life run-off segment for the six months ended June 30, 2015 and 2014 was as follows:

 

     Non-Life Run-off  
     Six Months Ended June 30, 2015  
     Prior Period      Current
Period
     Total  

Net losses paid

   $ 215,695       $ 14,005       $ 229,700   

Net change in case and LAE reserves

     (118,813      7,483         (111,330

Net change in IBNR reserves

     (135,020      21,785         (113,235
  

 

 

    

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (38,138      43,273         5,135   

Reduction in provisions for bad debt

     (20,439      —           (20,439

Reduction in provisions for unallocated loss adjustment expense liabilities

     (21,686      —           (21,686

Amortization of fair value adjustments

     (4,980      —           (4,980
  

 

 

    

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (85,243    $ 43,273       $ (41,970
  

 

 

    

 

 

    

 

 

 
     Non-Life Run-off  
     Six Months Ended June 30, 2014  
     Prior Period      Current
Period
     Total  

Net losses paid

   $ 203,470       $ 792       $ 204,262   

Net change in case and LAE reserves

     (141,845      1,026         (140,819

Net change in IBNR reserves

     (101,901      9,823         (92,078
  

 

 

    

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (40,276      11,641         (28,635

Paid loss recoveries on bad debt provisions

     (11,206      —           (11,206

Reduction in provisions for unallocated loss adjustment expense liabilities

     (26,233      —           (26,233

Amortization of fair value adjustments

     (309      —           (309
  

 

 

    

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (78,024    $ 11,641       $ (66,383
  

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2015

The net reduction in ultimate losses and loss adjustment expense liabilities for the six months ended June 30, 2015 of $42.0 million included incurred losses of $43.3 million related to current period earned premium of $35.8 million primarily related to the portion of the run-off business acquired with Sussex. Excluding current period incurred losses of $43.3 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $85.2 million, which was attributable to a reduction in estimates of net ultimate losses of $38.1 million, reduction in provisions for bad debt of $20.4 million, a reduction in provisions for unallocated loss adjustment expense liabilities of $21.7 million, relating to

 

41


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

2015 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $5.0 million.

The reduction in estimates of net ultimate losses relating to prior periods of $38.1 million was related primarily to:

 

  (i) the Company’s review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $6.4 million;

 

  (ii) a reduction in IBNR reserves of $23.0 million primarily as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid loss and loss adjustment expenses relating to non-commuted exposures in Lloyd’s Syndicate 2008. The prior period estimate of aggregate IBNR liabilities was reduced as a result of the continued favorable trend of loss development compared to prior forecasts; and

 

  (iii) favorable claims settlements during the six months ended June 30, 2015 resulting in a reduction in estimates of net ultimate losses of approximately $8.7 million.

The reduction in provisions for bad debt of $20.4 million for the six months ended June 30, 2015 resulted from the cash collection and commutation of certain reinsurance receivables against which bad debt provisions had been provided for in earlier periods.

Six Months Ended June 30, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the six months ended June 30, 2014 of $66.4 million included incurred losses of $11.6 million related to current period earned premium of $17.3 million primarily related to the portion of the run-off business acquired with Torus. Excluding current period incurred losses of $11.6 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $78.0 million, which was attributable to a reduction in estimates of net ultimate losses of $40.3 million, paid loss recoveries on bad debt provisions of $11.2 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $26.2 million, relating to 2014 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $0.3 million.

The reduction in estimates of net ultimate losses relating to prior periods of $40.3 million was related primarily to:

 

  (i) the Company’s review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $13.6 million;

 

  (ii)

a reduction in IBNR reserves of $10.0 million primarily as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid loss and loss adjustment expenses relating to non-commuted

 

42


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

  exposures in Lloyd’s Syndicate 2008. The prior period estimate of aggregate IBNR liabilities was reduced as a result of the continued favorable trend of loss development compared to prior forecasts; and

 

  (iii) favorable claims settlements during the six months ended June 30, 2014 resulting in a reduction in estimates of net ultimate losses of approximately $19.5 million.

Atrium Segment

The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended June 30, 2015 and 2014 for the Atrium segment (losses incurred and paid are reflected net of reinsurance recoverables):

 

     Atrium  
     Three Months Ended June 30,  
           2015                  2014        

Balance as at April 1

   $ 202,873       $ 220,252   

Less: total reinsurance reserves recoverable

     26,629         25,626   
  

 

 

    

 

 

 
     176,244         194,626   

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

     

Current period

     17,495         18,904   

Prior periods

     (3,738      (2,293
  

 

 

    

 

 

 

Total net increase in ultimate losses and loss adjustment expense liabilities

     13,757         16,611   
  

 

 

    

 

 

 

Net losses paid:

     

Current period

     (4,538      (5,132

Prior periods

     (7,583      (6,876
  

 

 

    

 

 

 

Total net losses paid

     (12,121      (12,008

Effect of exchange rate movement

     1,608         698   
  

 

 

    

 

 

 

Net balance as at June 30

     179,488         199,927   

Plus: total reinsurance reserves recoverable

     26,011         26,993   
  

 

 

    

 

 

 

Balance as at June 30

   $ 205,499       $ 226,920   
  

 

 

    

 

 

 

 

43


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

     Atrium  
     Six Months Ended
June 30,
 
     2015      2014  

Balance as at January 1

   $ 212,611       $ 215,392   

Less: total reinsurance reserves recoverable

     28,278         25,055   
  

 

 

    

 

 

 
     184,333         190,337   

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

     

Current period

     32,373         40,218   

Prior periods

     (11,596      (6,476
  

 

 

    

 

 

 

Total net increase in ultimate losses and loss adjustment expense liabilities

     20,777         33,742   
  

 

 

    

 

 

 

Net losses paid:

     

Current period

     (7,408      (9,816

Prior periods

     (16,624      (15,027
  

 

 

    

 

 

 

Total net losses paid

     (24,032      (24,843

Effect of exchange rate movement

     (1,590      691   
  

 

 

    

 

 

 

Net balance as at June 30

     179,488         199,927   

Plus: total reinsurance reserves recoverable

     26,011         26,993   
  

 

 

    

 

 

 

Balance as at June 30

   $ 205,499       $ 226,920   
  

 

 

    

 

 

 

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities for the Atrium segment for the three and six months ended June 30, 2015 and 2014 was as follows:

 

    Atrium  
    Three Months Ended June 30,  
    2015     2014  
    Prior
Period
    Current
Period
    Total     Prior
Period
    Current
Period
    Total  

Net losses paid

  $ 7,583      $ 4,538      $ 12,121      $ 6,876      $ 5,132      $ 12,008   

Net change in case and LAE reserves

    (3,946     4,082        136        (3,857     6,098        2,241   

Net change in IBNR reserves

    (3,560     8,746        5,186        (5,019     7,348        2,329   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (reduction) in estimates of net ultimate losses

    77        17,366        17,443        (2,000     18,578        16,578   

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

    (137     129        (8     (293     326        33   

Amortization of fair value adjustments

    (3,678     —          (3,678     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

  $ (3,738   $ 17,495      $ 13,757      $ (2,293   $ 18,904      $ 16,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

44


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

    Atrium  
    Six Months Ended June 30,  
    2015     2014  
    Prior
Period
    Current
Period
    Total     Prior
Period
    Current
Period
    Total  

Net losses paid

  $ 16,624      $ 7,408      $ 24,032      $ 15,027      $ 9,816      $ 24,843   

Net change in case and LAE reserves

    (7,657     6,774        (883     (7,842     10,858        3,016   

Net change in IBNR reserves

    (16,553     17,929        1,376        (13,420     19,218        5,798   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

    (7,586     32,111        24,525        (6,235     39,892        33,657   

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

    (332     262        (70     (241     326        85   

Amortization of fair value adjustments

    (3,678     —          (3,678     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

  $ (11,596   $ 32,373      $ 20,777      $ (6,476   $ 40,218      $ 33,742   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Torus Segment

The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended June 30, 2015 and 2014 for the Torus segment (losses incurred and paid are reflected net of reinsurance recoverables):

 

     Torus  
     Three Months Ended June 30,  
           2015                  2014        

Balance as at April 1

   $ 828,488       $ —     

Less: total reinsurance reserves recoverable

     280,540         —     
  

 

 

    

 

 

 
     547,948         —     

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

     

Current period

     81,293         80,340   

Prior periods

     (280      —     
  

 

 

    

 

 

 

Total net increase in ultimate losses and loss adjustment expense liabilities

     81,013         80,340   
  

 

 

    

 

 

 

Net losses paid:

     

Current period

     (7,518      (2,851

Prior periods

     (31,896      (11,398
  

 

 

    

 

 

 

Total net losses paid

     (39,414      (14,249

Effect of exchange rate movement

     (2,761      (114

Acquired on purchase of subsidiaries

     —           515,373   
  

 

 

    

 

 

 

Net balance as at June 30

     586,786         581,350   

Plus: total reinsurance reserves recoverable

     287,049         336,150   
  

 

 

    

 

 

 

Balance as at June 30

   $ 873,835       $ 917,500   
  

 

 

    

 

 

 

 

45


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

     Torus  
     Six Months Ended June 30,  
           2015                  2014(1)        

Balance as at January 1

   $ 861,800       $ —     

Less: total reinsurance reserves recoverable

     325,209         —     
  

 

 

    

 

 

 
     536,591         —     

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

     

Current period

     158,703         80,340   

Prior periods

     (1,474      —     
  

 

 

    

 

 

 

Total net increase in ultimate losses and loss adjustment expense liabilities

     157,229         80,340   
  

 

 

    

 

 

 

Net losses paid:

     

Current period

     (11,241      (2,851

Prior periods

     (80,322      (11,398
  

 

 

    

 

 

 

Total net losses paid

     (91,563      (14,249

Effect of exchange rate movement

     (15,471      (114

Acquired on purchase of subsidiaries

     —           515,373   
  

 

 

    

 

 

 

Net balance as at June 30

     586,786         581,350   

Plus: total reinsurance reserves recoverable

     287,049         336,150   
  

 

 

    

 

 

 

Balance as at June 30

   $ 873,835       $ 917,500   
  

 

 

    

 

 

 

 

(1) The Company began reporting with respect to its Torus segment following the acquisition of Torus in the second quarter of 2014.

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities for the Torus segment for the three and six months ended June 30, 2015 and 2014 was as follows:

 

    Torus  
    Three Months Ended June 30,  
    2015     2014  
    Prior
Period
    Current
Period
    Total     Prior
Period
    Current
Period
    Total  

Net losses paid

  $ 31,896      $ 7,518      $ 39,414      $ 11,398      $ 2,851      $ 14,249   

Net change in case and LAE reserves

    6,397        40,332        46,729        34,414        7,850        42,264   

Net change in IBNR reserves

    (38,584     32,894        (5,690     (45,812     69,539        23,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

    (291     80,744        80,453        —          80,240        80,240   

Increase (reduction) in provisions for unallocated loss adjustment expense liabilities

    506        549        1,055        —          —          —     

Amortization of fair value adjustments

    (495     —          (495     —          100        100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

  $ (280   $ 81,293      $ 81,013      $ —        $ 80,340      $ 80,340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

46


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

     Torus  
     Six Months Ended June 30,  
     2015     2014  
     Prior
Period
    Current
Period
     Total     Prior
Period
    Current
Period
     Total  

Net losses paid

   $ 80,322      $ 11,241       $ 91,563      $ 11,398      $ 2,851       $ 14,249   

Net change in case and LAE reserves

     (3,934     48,877         44,943        34,414        7,850         42,264   

Net change in IBNR reserves

     (76,262     96,311         20,049        (45,812     69,539         23,727   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Increase in estimates of net ultimate losses

     126        156,429         156,555        —          80,240         80,240   

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

     (563     2,274         1,711        —          —           —     

Amortization of fair value adjustments

     (1,037     —           (1,037     —          100         100   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (1,474   $ 158,703       $ 157,229      $ —        $ 80,340       $ 80,340   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

7. POLICY BENEFITS FOR LIFE AND ANNUITY CONTRACTS

Policy benefits for life and annuity contracts as at June 30, 2015 and December 31, 2014 were as follows:

 

     June 30,
2015
     December 31,
2014
 

Life

   $ 333,486       $ 344,215   

Annuities

     929,959         938,121   
  

 

 

    

 

 

 
     1,263,445         1,282,336   

Fair value adjustments

     (57,314      (61,472
  

 

 

    

 

 

 
   $ 1,206,131       $ 1,220,864   
  

 

 

    

 

 

 

Refer to Note 9 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on establishing policy benefit reserves.

 

47


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

8. PREMIUMS WRITTEN AND EARNED

The following tables provide a summary of net premiums written and earned in our non-life run-off, Atrium, Torus and life and annuities segments for the three and six month periods ended June 30, 2015 and 2014:

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2015     2014     2015     2014  
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
 

Non-life
run-off

               

Gross

  $ 14,797      $ 53,184      $ 6,720      $ 22,406      $ 24,914      $ 78,157      $ 8,039      $ 25,174   

Ceded

    (39,590     (35,886     (904     (5,322     (39,867     (42,367     (1,180     (5,563
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ (24,793   $ 17,298      $ 5,816      $ 17,084      $ (14,953   $ 35,790      $ 6,859      $ 19,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Atrium

               

Gross

  $ 35,786      $ 37,913      $ 39,857      $ 38,142      $ 84,699      $ 76,067      $ 87,434      $ 76,299   

Ceded

    (3,966     (3,956     (3,868     (4,145     (8,521     (8,238     (9,720     (9,663
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 31,820      $ 33,957      $ 35,989      $ 33,997      $ 76,178      $ 67,829      $ 77,714      $ 66,636   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Torus

               

Gross

  $ 241,057      $ 195,963      $ 170,646      $ 185,753      $ 431,754      $ 364,495      $ 170,646      $ 185,753   

Ceded

    (59,692     (58,267     (40,205     (47,514     (125,566     (103,177     (40,205     (47,514
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 181,365      $ 137,696      $ 130,441      $ 138,239      $ 306,188      $ 261,318      $ 130,441      $ 138,239   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Life and
annuities

               

Life

  $ 22,922      $ 23,072      $ 27,189      $ 27,596      $ 45,655      $ 45,992      $ 53,185      $ 54,088   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 211,314      $ 212,023      $ 199,435      $ 216,916      $ 413,068      $ 410,929      $ 268,199      $ 278,574   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

9. GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGE

The following table shows the Company’s goodwill, intangible assets and deferred charge as at June 30, 2015 and December 31, 2014:

 

    Goodwill     Intangible
assets with a
definite life-
Other
    Intangible
assets with an
indefinite life
    Total     Intangible
assets with a
definite life -
FVA
    Deferred
charge
 

Balance as at December 31, 2014

  $ 73,071      $ 41,048      $ 87,031      $ 201,150      $ 159,095      $ —     

Acquired during the period

    —          —          —          —          (2,759     265,426   

Intangible assets amortization

    —          (2,995     —          (2,995     5,191        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as at June 30, 2015

  $ 73,071      $ 38,053      $ 87,031      $ 198,155      $ 161,527      $ 265,426   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

48


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGE—(Continued)

 

Refer to Note 11 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on intangible assets with a definite and an indefinite life. Refer to Note 1—”Significant Accounting Policies—(b) Retroactive reinsurance” above for more information on deferred charge.

Intangible asset amortization for the three and six month periods ended June 30, 2015 was $(4.9) million and $(2.2) million, respectively, as compared to $7.9 million and $6.7 million for the comparative periods in 2014.

The gross carrying value, accumulated amortization and net carrying value of intangible assets by type at June 30, 2015 and December 31, 2014 were as follows:

 

    June 30, 2015     December 31, 2014  
    Gross
Carrying
Value
    Accumulated
Amortization
    Net
Carrying
Value
    Gross
Carrying
Value
    Accumulated
Amortization
    Net
Carrying
Value
 

Intangible assets with a definite life:

           

Fair value adjustments:

           

Losses and loss adjustment expenses

  $ 429,063      $ (296,642   $ 132,421      $ 449,986      $ (299,413   $ 150,573   

Reinsurance balances recoverable

    (175,453     147,245        (28,208     (193,617     140,667        (52,950

Policy benefits for life and annuity contracts

    86,332        (29,018     57,314      $ 86,332      $ (24,860   $ 61,472   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 339,942      $ (178,415   $ 161,527      $ 342,701      $ (183,606   $ 159,095   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

           

Distribution channel

  $ 20,000      $ (2,111   $ 17,889        20,000        (1,444     18,556   

Technology

    15,000        (4,686     10,314        15,000        (3,125     11,875   

Brand

    12,000        (2,150     9,850        12,000        (1,383     10,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 47,000      $ (8,947   $ 38,053      $ 47,000      $ (5,952   $ 41,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets with an indefinite life:

           

Lloyd’s syndicate capacity

  $ 37,031        —          37,031        37,031        —          37,031   

Licenses

    19,900        —          19,900        19,900        —          19,900   

Management contract

    30,100        —          30,100        30,100        —          30,100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 87,031      $ —        $ 87,031      $ 87,031      $ —        $ 87,031   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred charge on retroactive reinsurance

  $ 265,426      $ —        $ 265,426      $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at June 30, 2015 and December 31, 2014, the allocation of the goodwill to the Company’s non-life run-off, Atrium and Torus segments was $21.2 million, $38.9 million and $13.0 million, respectively.

 

49


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. LOANS PAYABLE

The Company’s long-term debt consists of its EGL Revolving Credit Facility, which can be used for permitted acquisitions and for general corporate purposes, and the Sussex Facility, an acquisition term loan facility used to partially finance the Company’s acquisition of Companion on January 27, 2015.

The EGL Revolving Credit Facility was entered into on September 16, 2014. On February 27, 2015, the EGL Revolving Credit Facility was amended and restated primarily in order to: (1) increase the size of the facility from $500 million to $665 million; (2) add Lloyd’s Bank plc as a new lender within the facility, and (3) reallocate the amounts provided by each of the four lenders under the facility such that each lender agreed to provide an equal amount of $166.25 million, on and subject to the terms of the restated facility agreement.

On December 24, 2014, Sussex Holdings, a wholly-owned subsidiary of the Company, as borrower and guarantor, entered into the Sussex Facility with National Australia Bank Limited and Barclays Bank PLC. The Sussex Facility provides for a four-year term loan facility pursuant to which Sussex Holdings was permitted to borrow up to an aggregate of $109.0 million to fund 50% of the consideration payable for the acquisition of Companion. Sussex Holdings fully drew down on the Sussex Facility and completed the acquisition of Companion on January 27, 2015.

Borrowings and repayments under the Company’s loan facilities during the six months ended June 30, 2015 are described below.

EGL Revolving Credit Facility

The Company’s borrowings under the facility increased from $319.6 million as at December 31, 2014 to $544.3 million as at June 30, 2015. The increase of $224.7 million was attributable to the following drawdowns:

 

  (i) a total of $149.7 million related to the Wilton Re life settlements acquisition and the Voya transaction;

 

  (ii) $50.0 million to capitalize a newly-formed Bermuda registered wholly-owned reinsurance company; and

 

  (iii) $25.0 million for general corporate purposes.

Sussex Facility

On May 5, 2015, the Company repaid $5.0 million of the outstanding principal of the Sussex Facility, reducing the outstanding principal to $104.0 million as at June 30, 2015.

As of June 30, 2015, all of the covenants relating to the EGL Revolving Credit Facility and the Sussex Facility were met.

 

50


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. LOANS PAYABLE—(Continued)

 

Amounts of loans payable outstanding, and accrued interest, as of June 30, 2015 and December 31, 2014 total $650.5 million and $320.0 million, respectively, and comprise:

 

Facility

   Date of Facility      Facility Term      June 30,
2015
     December 31,
2014
 

EGL Revolving Credit Facility

     September 16, 2014         5 Years       $ 544,250       $ 319,550   

Sussex Facility

     December 24, 2014         4 Years         104,000         —     
        

 

 

    

 

 

 

Total long-term bank debt

           648,250         319,550   

Accrued interest

           2,257         491   
        

 

 

    

 

 

 

Total loans payable

         $ 650,507       $ 320,041   
        

 

 

    

 

 

 

11. REDEEMABLE NONCONTROLLING INTEREST

Refer to Note 13 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on redeemable noncontrolling interest (“RNCI”).

A reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI is as follows:

 

Redeemable noncontrolling interest

   June 30,
2015
     December 31,
2014
 

Balance as at beginning of period

   $ 374,619       $ 100,859   

Capital contributions

     15,728         272,722   

Dividends paid

     (7,110      —     

Net earnings attributable to RNCI

     12,016         4,059   

Accumulated other comprehensive income attributable to RNCI

     (223      (1,993

Transfer of net loss from noncontrolling interest

     —           (1,028
  

 

 

    

 

 

 

Balance at end of period

   $ 395,030       $ 374,619   
  

 

 

    

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per share for the three and six month periods ended June 30, 2015 and 2014:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Basic earnings per ordinary share:

           

Net earnings attributable to Enstar Group Limited

   $ 14,545       $ 51,793       $ 59,392       $ 81,380   

Weighted average ordinary shares outstanding—basic

     19,252,359         18,636,085         19,244,951         17,605,808   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per ordinary share attributable to Enstar Group Limited—basic

   $ 0.76       $ 2.78       $ 3.09       $ 4.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per ordinary share:

           

Net earnings attributable to Enstar Group Limited

   $ 14,545       $ 51,793       $ 59,392       $ 81,380   

Weighted average ordinary shares outstanding—basic

     19,252,359         18,636,085         19,244,951         17,605,808   

Share equivalents: