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 March 31, 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 May 6, 2015, the registrant had outstanding 15,817,694 voting ordinary shares and 3,439,652 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 March 31, 2015 and December 31, 2014 (Unaudited)

  2
 

Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

  3
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

  4
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

  5
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

  6
 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

  7
 

Report of Independent Registered Public Accounting Firm

  52

Item 2.

 

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

  53

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

91

Item 4.

 

Controls and Procedures

 

93

  PART II—OTHER INFORMATION  

Item 1.

 

Legal Proceedings

 

94

Item 1A.

 

Risk Factors

 

94

Item 5.

 

Other Information

 

94

Item 6.

 

Exhibits

 

94

Signature

 

95


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2015 and December 31, 2014

 

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

ASSETS

     

Short-term investments, trading, at fair value

   $ 180,807       $ 130,516   

Fixed maturities, trading, at fair value

     4,671,075         3,832,291   

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

     805,298         813,233   

Fixed maturities, available-for-sale, at fair value (amortized cost: 2015—$215,183;
2014—$244,110)

     208,890         241,111   

Equities, trading, at fair value

     172,083         150,130   

Other investments, at fair value

     919,323         836,868   
  

 

 

    

 

 

 

Total investments

     6,957,476         6,004,149   

Cash and cash equivalents

     982,501         963,402   

Restricted cash and cash equivalents

     510,513         534,974   

Accrued interest receivable

     42,002         37,581   

Accounts receivable

     119,890         79,237   

Premiums receivable

     438,511         391,008   

Income taxes recoverable

     6,465         11,510   

Deferred tax assets

     51,577         50,506   

Prepaid reinsurance premiums

     160,208         114,197   

Reinsurance balances recoverable

     1,787,299         1,331,555   

Funds held by reinsured companies

     116,079         134,628   

Deferred acquisition costs

     97,347         61,706   

Goodwill and intangible assets

     199,809         201,150   

Other assets

     39,495         21,282   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 11,509,172       $ 9,936,885   
  

 

 

    

 

 

 

LIABILITIES

     

Losses and loss adjustment expenses

   $ 5,724,623       $ 4,509,421   

Policy benefits for life and annuity contracts

     1,210,214         1,220,864   

Unearned premiums

     592,172         468,626   

Insurance and reinsurance balances payable

     287,521         276,723   

Accounts payable and accrued liabilities

     168,690         126,721   

Income taxes payable

     18,961         22,450   

Deferred tax liabilities

     41,058         43,958   

Loans payable

     429,998         320,041   

Other liabilities

     103,535         50,642   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     8,576,772         7,039,446   
  

 

 

    

 

 

 
COMMITMENTS AND CONTINGENCIES
REDEEMABLE NONCONTROLLING INTEREST
     383,186         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: 15,811,196; 2014: 15,761,365)

     15,811         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: 714,015; 2014: 714,015)

     714         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

     1,323,482         1,321,715   

Accumulated other comprehensive income

     (30,025      (12,686

Retained earnings

     1,440,053         1,395,206   
  

 

 

    

 

 

 

Total Enstar Group Limited Shareholders’ Equity

     2,334,175         2,304,850   

Noncontrolling interest

     215,039         217,970   
  

 

 

    

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     2,549,214         2,522,820   
  

 

 

    

 

 

 

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY

   $ 11,509,172       $ 9,936,885   
  

 

 

    

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

2


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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three Months Ended March 31, 2015 and 2014

 

    Three Months Ended
March 31,
 
    2015     2014  
    (expressed in thousands of
U.S. dollars, except share and
per share data)
 

INCOME

   

Net premiums earned

  $ 198,906      $ 61,658   

Fees and commission income

    11,480        6,998   

Net investment income

    33,893        24,348   

Net realized and unrealized gains

    43,020        34,573   
 

 

 

   

 

 

 
  287,299      127,577   
 

 

 

   

 

 

 

EXPENSES

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

  70,136      (12,051

Life and annuity policy benefits

  22,847      26,809   

Acquisition costs

  34,550      13,161   

Salaries and benefits

  57,772      31,390   

General and administrative expenses

  38,826      22,250   

Interest expense

  4,003      3,734   

Net foreign exchange (gains) losses

  (5,071   1,596   
 

 

 

   

 

 

 
  223,063      86,889   
 

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

  64,236      40,688   

INCOME TAXES

  (10,744   (7,276
 

 

 

   

 

 

 

NET EARNINGS

  53,492      33,412   

Less: Net earnings attributable to noncontrolling interest

  (8,645   (3,825
 

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

$ 44,847    $ 29,587   
 

 

 

   

 

 

 

EARNINGS PER SHARE—BASIC

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

$ 2.33    $ 1.79   
 

 

 

   

 

 

 

EARNINGS PER SHARE—DILUTED

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

$ 2.32    $ 1.77   
 

 

 

   

 

 

 

Weighted average ordinary shares outstanding—basic

  19,237,461      16,564,083   

Weighted average ordinary shares outstanding—diluted

  19,334,637      16,705,324   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2015 and 2014

 

     Three Months Ended
March 31,
 
     2015     2014  
     (expressed in
thousands of U.S.
dollars)
 

NET EARNINGS

   $ 53,492      $  33,412   
  

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

Unrealized holding losses on investments arising during the period

  (4,356   (447

Reclassification adjustment for net realized and unrealized (losses) gains included in net earnings

  (106   119   
  

 

 

   

 

 

 

Unrealized losses arising during the period, net of reclassification adjustment

  (4,462   (328

Currency translation adjustment

  (15,886   2,058   
  

 

 

   

 

 

 

Total other comprehensive (loss) income

  (20,348   1,730   
  

 

 

   

 

 

 

Comprehensive income

  33,144      35,142   

Less comprehensive income attributable to noncontrolling interest

  (5,636   (4,994
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED

$ 27,508    $ 30,148   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2015 and 2014

 

     Three Months Ended
March 31,
 
     2015     2014  
     (expressed in thousands
of U.S. dollars)
 

Share Capital—Ordinary Shares

    

Balance, beginning of period

   $ 15,761      $ 13,803   

Issue of shares

     3        2   

Share awards granted/vested

     47        42   
  

 

 

   

 

 

 

Balance, end of period

$ 15,811    $ 13,847   
  

 

 

   

 

 

 

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 and end of period

$ 714    $ —     
  

 

 

   

 

 

 

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

  449      155   

Amortization of equity incentive plan

  1,318      689   
  

 

 

   

 

 

 

Balance, end of period

$ 1,323,482    $ 962,989   
  

 

 

   

 

 

 

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

  (14,180   748   
  

 

 

   

 

 

 

Balance, end of period

  (16,959   15,012   

Defined benefit pension liability

Balance, beginning and end of period

  (7,726   (2,249
  

 

 

   

 

 

 

Unrealized gain on investments

Balance, beginning of period

  (2,181   1,963   

Change in unrealized gain on investments, net of tax

  (3,159   (188
  

 

 

   

 

 

 

Balance, end of period

  (5,340   1,775   
  

 

 

   

 

 

 

Balance, end of period

$ (30,025 $ 14,538   
  

 

 

   

 

 

 

Retained Earnings

Balance, beginning of period

$ 1,395,206    $ 1,181,457   

Net earnings attributable to Enstar Group Limited

  44,847      29,587   
  

 

 

   

 

 

 

Balance, end of period

$ 1,440,053    $ 1,211,044   
  

 

 

   

 

 

 

Noncontrolling Interest

Balance, beginning of period

$ 217,970    $ 222,000   

Reallocation to redeemable noncontrolling interest

  —        1,028   

Net (loss) earnings attributable to noncontrolling interest*

  (920   3,017   

Foreign currency translation adjustments

  (1,891   1,309   

Net movement in unrealized holding losses on investments

  (120   (34
  

 

 

   

 

 

 

Balance, end of period

$ 215,039    $ 227,320   
  

 

 

   

 

 

 

 

* Excludes net earnings attributable to redeemable noncontrolling interest. See Note 12 to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2015 and 2014

 

     Three Months Ended
March 31,
 
     2015      2014  
     (expressed in thousands of
U.S. dollars)
 

OPERATING ACTIVITIES:

     

Net earnings

   $ 53,492       $ 33,412   

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

     

Net realized and unrealized investment gains

     (19,458      (17,576

Net realized and unrealized gains from other investments

     (23,562      (16,997

Other items

     2,773         (1,318

Depreciation and amortization

     1,421         211   

Net amortization of premiums and discounts

     12,603         12,462   

Net movement of trading securities held on behalf of policyholders

     1,580         (164

Sales and maturities of trading securities

     926,919         636,516   

Purchases of trading securities

     (1,187,652      (558,633

Changes in assets and liabilities:

     

Reinsurance balances recoverable

     36,691         107,994   

Funds held by reinsured companies

     18,552         36,167   

Other assets

     (93,123      (18,970

Losses and loss adjustment expenses

     (34,221      (180,986

Policy benefits for life and annuity contracts

     (9,603      (17,836

Insurance and reinsurance balances payable

     20,555         (57,421

Unearned premiums

     38,041         —     

Accounts payable and accrued liabilities

     39,250         16,710   

Other liabilities

     (3,663      (4,643
  

 

 

    

 

 

 

Net cash flows used in operating activities

  (219,405   (31,072
  

 

 

    

 

 

 

INVESTING ACTIVITIES:

Acquisitions, net of cash acquired

$ 140,458    $ —     

Sales and maturities of available-for-sale securities

  49,241      59,238   

Purchase of available-for-sale securities

  (24,484   (53,307

Maturities of held-to-maturity securities

  5,239      261   

Movement in restricted cash and cash equivalents

  39,740      (209,502

Purchase of other investments

  (78,895   (63,217

Redemption of other investments

  13,882      2,983   

Other investing activities

  (233   (235
  

 

 

    

 

 

 

Net cash flows provided by (used in) investing activities

  144,948      (263,779
  

 

 

    

 

 

 

FINANCING ACTIVITIES:

Contribution by redeemable noncontrolling interest

$ —      $ 260,800   

Receipt of loans

  109,000      70,000   

Repayment of loans

  —        (35,000
  

 

 

    

 

 

 

Net cash flows provided by financing activities

  109,000      295,800   
  

 

 

    

 

 

 

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

  (15,444   1,033   
  

 

 

    

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

  19,099      1,982   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

  963,402      643,841   
  

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

$ 982,501    $ 645,823   
  

 

 

    

 

 

 

Supplemental Cash Flow Information

Net income taxes paid

$ 11,715    $ 13,725   

Interest paid

$ 4,003    $ 5,929   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 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;

 

    other-than-temporary impairments in the carrying value of available-for-sale investment securities;

 

    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.

The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

New Accounting Standards Adopted in 2015

Accounting Standards Update (“ASU”) 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

In January 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-01, which eliminates the concept of extraordinary items from U.S. GAAP as part of its simplification

 

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ENSTAR GROUP LIMITED

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

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

 

initiative. As a result, a registrant will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, the guidance does not affect the reporting and disclosure requirements for material items that are unusual in nature or infrequently occurring. The guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted if applied from the beginning of the fiscal year of adoption. Registrants may apply the guidance prospectively or retrospectively to all prior periods presented in the financial statements. The Company adopted the new guidance effective January 1, 2015 and its adoption did not have an impact on its consolidated financial statements and disclosures.

ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the FASB issued ASU No. 2014-08, which changed the definition of discontinued operations as well as certain presentation and disclosure requirements. Under the new guidance, only those disposed components or components held-for-sale representing a strategic shift that have or will have a major impact on operations and financial results of a registrant, or that are businesses held-for-sale at acquisition will be reported in discontinued operations. In addition, under the new guidance, continuing involvement by the registrant will no longer preclude a disposal group from being presented as discontinued operations. However, the new guidance requires registrants to disclose the nature of any continuing involvement including cashflows to or from the discontinued operation, as long as the discontinued operation is included in the financial statements presented. Expanded disclosures about discontinued operations and disposals of individually significant components that do not qualify for discontinued operations presentation will however be required by the new guidance. The Company adopted this guidance effective January 1, 2015 and its adoption did not have a material impact on its consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, which changes the presentation of debt issuance costs in financial statements. Under the guidance, a registrant would present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The guidance 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 this guidance to have a material impact on its consolidated financial statements and disclosures.

ASU 2015-02, Amendments to the Consolidation Analysis

In February 2015, the FASB issued ASU No. 2015-02, which requires registrants to evaluate whether they should consolidate certain legal entities. The new consolidation guidance changes the way registrants evaluate whether (1) they should consolidate limited partnerships and similar entities; (2) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (3) variable interests in a VIE held by related parties of the registrant require the registrant to consolidate the VIE. The new guidance also eliminates the VIE consolidation model based on

 

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ENSTAR GROUP LIMITED

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

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

 

majority exposure to variability that applied to certain investment companies and similar entities. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which decision making rights are conveyed through a contractual arrangement. The guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements and 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, completed the acquisitions of two Delaware limited liability companies from subsidiaries of Wilton Re Limited 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 $173.0 million, which will be paid in two installments. The first installment of $89.1 million was paid on closing and was financed by borrowings under the Company’s 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.

Sussex Property and Casualty 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 the previously announced Term Facility Agreement with National Australia Bank Limited and Barclays Bank PLC (the “Sussex Facility”) and 50% from cash on hand.

 

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ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

Immediately following the acquisition, Companion was placed into run-off, and accordingly is no longer writing new insurance policies. Since its acquisition, Companion has renewed expiring insurance policies when it was obligated to do so.

The Company changed the name of Companion to Sussex Property and Casualty 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

$ —     
  

 

 

 

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.

 

10


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ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

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 premiums

  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 March 31, 2015, the Company earned premiums of $20.6 million, recorded net increase in ultimate losses and loss adjustment expense liabilities of $18.5 million on those earned premiums, and recorded $2.2 million in net losses attributable to Enstar Group Limited in its consolidated statement of earnings.

3. SIGNIFICANT NEW BUSINESS

Reciprocal of America

On January 15, 2015, the Company’s wholly-owned subsidiary, Providence Washington Insurance Company, completed the previously announced 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 net 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 net insurance reserves of approximately £17.2 million (approximately $26.9 million) for cash consideration of an equal amount.

 

11


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ENSTAR GROUP LIMITED

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

 

4. INVESTMENTS

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

In the normal course of the Company’s investing activities, it actively manages allocations to non-controlling tranches of structured securities issued by VIEs. These structured securities include residential mortgage-backed, commercial mortgage-backed and asset-backed securities and are included in the tables below.

The Company’s other investments are comprised of private equity funds, fixed income funds, fixed income hedge funds, equity and real estate debt funds. The Company also holds both direct and indirect investments in collateralized loan obligation (“CLO”) equity-tranched securities, which are all variable interests issued by VIEs. The indirect investments are in the form of CLO equity funds. For these variable interests, the Company does not have the power to direct the activities that are most significant to the economic performance of the VIEs and, accordingly, it is not the primary beneficiary for any of these VIEs. The Company’s maximum exposure to loss on these interests is limited to the amount of its investment. The Company has not provided financial or other support with respect to these structured securities other than its original investment.

Trading

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

 

     March 31,
2015
     December 31,
2014
 

U.S. government and agency

   $ 723,375       $ 744,660   

Non-U.S. government

     334,611         368,945   

Corporate

     2,495,393         1,986,873   

Municipal

     130,083         25,607   

Residential mortgage-backed

     409,006         308,621   

Commercial mortgage-backed

     171,270         139,907   

Asset-backed

     588,144         388,194   
  

 

 

    

 

 

 

Total fixed maturity and short-term investments

  4,851,882      3,962,807   

Equities—U.S.

  127,174      106,895   

Equities—International

  44,909      43,235   
  

 

 

    

 

 

 
$ 5,023,965    $ 4,112,937   
  

 

 

    

 

 

 

Included within residential and commercial mortgage-backed securities as at March 31, 2015 were securities issued by U.S. governmental agencies with a fair value of $363.1 million (as at December 31, 2014: $263.4 million).

Included within corporate securities as at March 31, 2015 were senior secured loans of $37.3 million (as at December 31, 2014: $33.5 million).

The increase in the Company’s investments classified as trading securities of $911.0 million was due primarily to additional fixed maturity investments acquired in the Sussex acquisition.

 

12


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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 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 March 31, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 808,208       $ 790,275         16.3

More than one year through two years

     833,382         819,657         16.9

More than two years through five years

     1,458,942         1,463,838         30.2

More than five years through ten years

     454,522         456,041         9.4

More than ten years

     156,784         153,651         3.2
  

 

 

    

 

 

    

 

 

 
  3,711,838      3,683,462      76.0

Residential mortgage-backed

  408,795      409,006      8.4

Commercial mortgage-backed

  170,851      171,270      3.5

Asset-backed

  589,503      588,144      12.1
  

 

 

    

 

 

    

 

 

 
$ 4,880,987    $ 4,851,882      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 March 31, 2015

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 1,612,614         33.2

AA

     820,519         16.9

A

     1,662,483         34.3

BBB

     616,042         12.7

Non-Investment Grade

     131,941         2.7

Not Rated

     8,283         0.2
  

 

 

    

 

 

 
$ 4,851,882      100.00
  

 

 

    

 

 

 

 

13


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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 March 31, 2015

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

U.S. government and agency

   $ 20,166       $ 523       $ (6    $ 20,683   

Non-U.S. government

     38,454         883         (16      39,321   

Corporate

     746,678         26,046         (499      772,225   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 805,298    $ 27,452    $ (521 $ 832,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 March 31, 2015 and December 31, 2014, none of these securities were considered to be other than temporarily impaired.

 

14


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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 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 March 31, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 5,266         5,265         0.6

More than one year through two years

     20,989         21,046         2.5

More than two years through five years

     66,983         67,608         8.1

More than five years through ten years

     98,772         100,095         12.1

More than ten years

     613,288         638,215         76.7
  

 

 

    

 

 

    

 

 

 
$ 805,298    $ 832,229      100.0
  

 

 

    

 

 

    

 

 

 

 

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 March 31, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 65,697       $ 67,871         8.2

AA

     164,440         168,402         20.2

A

     512,591         531,204         63.8

BBB or lower

     56,803         58,560         7.0

Non-Investment Grade

     5,451         5,875         0.7

Not Rated

     316         317         0.1
  

 

 

    

 

 

    

 

 

 
$ 805,298    $ 832,229      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
  

 

 

    

 

 

    

 

 

 

 

15


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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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 March 31, 2015

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

U.S. government and agency

   $ 28,264       $ 247       $ (8    $ 28,503   

Non-U.S. government

     67,740         105         (4,867      62,978   

Corporate

     101,856         1,222         (2,910      100,168   

Residential mortgage-backed

     2,833         84         (198      2,719   

Asset-backed

     14,490         33         (1      14,522   
  

 

 

    

 

 

    

 

 

    

 

 

 
$ 215,183    $ 1,691    $ (7,984 $ 208,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 March 31, 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 March 31, 2015

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

U.S. government and agency

   $ 526       $ (1   $ 4,844       $ (7   $ 5,370       $ (8

Non-U.S. government

     8,728         (1,707     19,600         (3,160     28,328         (4,867

Corporate

     8,161         (231     23,364         (2,679     31,525         (2,910

Residential mortgage-backed

     41         —          1,465         (198     1,506         (198

Asset-backed

     1,020         (1     255         —          1,275         (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
$ 18,476    $ (1,940 $ 49,528    $ (6,044 $ 68,004    $ (7,984
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

16


Table of Contents

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

     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 March 31, 2015 and December 31, 2014, the number of securities classified as available-for-sale in an unrealized loss position was 126 and 212, respectively, with a fair value of $68.0 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 29 and 120, respectively. As of March 31, 2015, none of these securities were considered to be other than temporarily impaired.

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 March 31, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 56,681       $ 54,226         26.0

More than one year through two years

     55,516         53,140         25.4

More than two years through five years

     79,485         77,428         37.1

More than five years through ten years

     3,990         3,695         1.8

More than ten years

     2,188         3,160         1.5
  

 

 

    

 

 

    

 

 

 
  197,860      191,649      91.8

Residential mortgage-backed

  2,833      2,719      1.3

Asset-backed

  14,490      14,522      6.9
  

 

 

    

 

 

    

 

 

 
$ 215,183    $ 208,890      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
  

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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 March 31, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 114,734       $ 110,600         53.0

AA

     34,929         33,115         15.8

A

     46,748         46,564         22.3

BBB

     18,772         18,611         8.9
  

 

 

    

 

 

    

 

 

 
$ 215,183    $ 208,890      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
  

 

 

    

 

 

    

 

 

 

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 three months ended March 31, 2015, the Company did not recognize any other-than-temporary impairment losses due to required sales. The Company determined that, as at March 31, 2015, no credit losses existed.

Other Investments

The estimated fair values of the Company’s other investments were as follows:

 

     March 31,
2015
     December 31,
2014
 

Private equity funds

   $ 214,540       $ 197,269   

Fixed income funds

     333,986         335,026   

Fixed income hedge funds

     77,036         59,627   

Equity funds

     157,974         150,053   

Real estate debt fund

     74,658         33,902   

CLO equities

     43,249         41,271   

CLO equity funds

     16,217         16,022   

Other

     1,663         3,698   
  

 

 

    

 

 

 
$ 919,323    $ 836,868   
  

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Private equity funds

This class comprises several private equity funds that invest primarily in the financial services industry. All of the Company’s investments in 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 March 31, 2015 and December 31, 2014, the Company had $214.5 million and $197.3 million, respectively, of other investments recorded in 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.

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.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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 March 31, 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.

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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

 

March 31, 2015

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

Redemption
Frequency

Private equity funds

   $ 214,540       $ —         $ 214,540       $ 95,243       Not eligible

Fixed income funds

     333,986         —           333,986         —         Daily, monthly and quarterly

Fixed income hedge funds

     77,036         1,596         75,440         —         Quarterly after lock-up periods expire

Equity funds

     157,974         —           157,974         —         Bi-monthly

Real estate debt fund

     74,658         —           74,658         —         Monthly

CLO equity funds

     16,217         10,925         5,292         —        

Quarterly after lock-up periods expire

Other

     1,332         —           1,332         655       Not eligible
  

 

 

    

 

 

    

 

 

    

 

 

    
$ 875,743    $ 12,521    $ 863,222    $ 95,898   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

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.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

    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.

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

 

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 March 31, 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.

 

    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 both March 31, 2015 and December 31, 2014, 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.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Other investments

The Company has ongoing due diligence processes with respect to funds 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 fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements for funds annually, and regularly reviews and discusses the fund performance with the fund 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 March 31, 2015, there were no material adjustments made to the reported net asset value.

For its investments in private equity funds, the Company measures fair value by obtaining the most recently provided capital statement from the external fund manager or third-party administrator. The funds calculate net asset value on a fair value basis. For all publicly-traded companies within these funds, 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 equity funds as Level 3.

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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.

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.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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:

 

     March 31, 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

   $ —         $ 751,878       $ —         $ 751,878   

Non-U.S. government

     —           397,589         —           397,589   

Corporate

     —           2,595,561         —           2,595,561   

Municipal

     —           130,083         —           130,083   

Residential mortgage-backed

     —           411,725         —           411,725   

Commercial mortgage-backed

     —           171,270         —           171,270   

Asset-backed

     —           602,666         —           602,666   

Equities—U.S.

     121,979         5,195         —           127,174   

Equities—International

     26,377         18,532         —           44,909   

Other investments

     —           491,961         427,362         919,323   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

$ 148,356    $ 5,576,460    $ 427,362    $ 6,152,178   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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

     —           487,078         349,790         836,868   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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 March 31, 2015 and December 31, 2014:

 

     March 31, 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

   $ —         $ 20,683       $ —         $ 20,683   

Non-U.S. government

     —           39,321         —           39,321   

Corporate

     —           772,225         —           772,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

$ —      $ 832,229    $ —      $ 832,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended March 31, 2015 and 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 March 31, 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

     —           81,978                 81,978   

Sales

     (600      (13,882      (5,000      (19,482

Total realized and unrealized gains through earnings

     —           9,476         150         9,626   

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

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 investments as of March 31, 2015

$    $ 427,362    $    $ 427,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of net gains for the three months ended March 31, 2015 included in earnings attributable to the fair value of changes in assets still held at March 31, 2015 was $9.6 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 three months ended March 31, 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

     —           23,292         —           23,292   

Sales

     —           (2,983      —           (2,983

Total realized and unrealized gains through earnings

     (2      10,773         25         10,796   

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

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 investments as of March 31, 2014

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

 

 

    

 

 

    

 

 

    

 

 

 

The amount of net gains for the three months ended March 31, 2014 included in earnings attributable to the fair value of changes in assets still held at March 31, 2014 was $10.8 million. All of this amount was included in net realized and unrealized gains.

Net Realized and Unrealized Gains

Components of net realized and unrealized gains for the three months ended March 31, 2015 and 2014 are as follows:

 

     Three Months Ended
March 31,
 
     2015      2014  

Gross realized gains on available-for-sale securities

   $ 114       $ 26   

Gross realized losses on available-for-sale securities

     (8      (145

Net realized gains on trading securities

     12,583         5,917   

Net unrealized gains on trading securities

     6,769         11,778   

Net realized and unrealized gains on other investments

     23,562         16,997   
  

 

 

    

 

 

 

Net realized and unrealized gains

$ 43,020    $ 34,573   
  

 

 

    

 

 

 

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

$ 49,241    $ 59,238   
  

 

 

    

 

 

 

 

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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 months ended March 31, 2015 and 2014 are summarized as follows:

 

     Three Months Ended
March 31,
 
     2015      2014  

Interest from fixed maturity investments

   $ 38,852       $ 34,206   

Interest from cash and cash equivalents and short-term investments

     2,719         1,625   

Net amortization of bond premiums and discounts

     (12,603      (12,462

Dividends from equities

     1,681         1,404   

Income from other investments

     882         92   

Interest on other receivables

     281         226   

Other income

     2,903         22   

Interest on deposits held with clients

     480         730   

Policy loan interest

     293         311   

Investment expenses

     (1,595      (1,806
  

 

 

    

 

 

 
$ 33,893    $ 24,348   
  

 

 

    

 

 

 

Other investments includes interest distributions from the Company’s direct investments in CLO equities.

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 $510.5 million and $535.0 million, as of March 31, 2015 and December 31, 2014, was as follows:

 

     March 31,
2015
     December 31,
2014
 

Collateral in trust for third party agreements

   $ 2,738,471       $ 2,630,259   

Assets on deposit with regulatory authorities

     1,094,838         653,192   

Collateral for secured letter of credit facility

     326,282         300,468   
  

 

 

    

 

 

 
$ 4,159,591    $ 3,583,919   
  

 

 

    

 

 

 

The increase in restricted assets of $575.7 million since December 31, 2014 is primarily as a result of the acquisition of Companion.

 

29


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ENSTAR GROUP LIMITED

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

 

5. DERIVATIVE INSTRUMENTS

From time to time, the Company uses foreign currency forward contracts as part of its overall foreign currency risk management strategy or to obtain exposure to a particular financial market, as well as for yield enhancement. These derivatives are not designated as hedging investments.

The following table sets forth the changes in realized gains (losses) on derivative instruments recorded in net earnings for the periods ended March 31, 2015 and 2014, respectively:

 

Foreign Exchange Forward
Contract

  Contract Date     Settlement Date     Contract
Amount
    Settlement
Amount
    Net Foreign
Exchange Gains
(Losses)
 
          March 31,
2015
    March 31,
2014
 

Australian dollar

    November 26, 2013        January 3, 2014        AU$45,000        $41,036      $ —        $ (130

U.S. dollar

    July 1, 2013        January 3, 2014        $40,887        AU$45,000        —          130   

6. REINSURANCE BALANCES RECOVERABLE

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

 

    March 31, 2015     December 31, 2014    

 

 
    Non-life
Run-off
    Atrium     Torus     Life and
Annuities
    Total     Non-life
Run-off
    Atrium     Torus     Life and
Annuities
    Total  

Recoverable from reinsurers on:

                   

Outstanding losses

  $ 728,386      $ 7,381      $ 151,986      $ 24,119      $ 911,872      $ 568,386      $ 9,582      $ 181,067      $ 25,125      $ 784,160   

Losses incurred but not reported

    510,400        15,117        138,543        465        664,525        278,696        14,565        154,850        467        448,578   

Fair value adjustments

    (27,853     4,131        (9,989     —          (33,711     (46,373     4,131        (10,708     —          (52,950
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reinsurance reserves recoverable

  1,210,933      26,629      280,540      24,584      1,542,686      800,709      28,278      325,209      25,592      1,179,788   

Paid losses recoverable

  193,418      494      48,437      2,264      244,613      129,750      1,289      19,845      883      151,767   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 1,404,351    $ 27,123    $ 328,977    $ 26,848    $ 1,787,299    $ 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.

 

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ENSTAR GROUP LIMITED

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

6. REINSURANCE BALANCES RECOVERABLE—(Continued)

 

 

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.

As at March 31, 2015 and December 31, 2014, the Company had reinsurance balances recoverable of $1.79 billion and $1.33 billion, respectively. The increase of $455.7 million in reinsurance balances recoverable was primarily a result of the Companion acquisition.

Top Ten Reinsurers

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

 

  As at March 31, 2015   As at December 31, 2014  
    Reinsurance Balances Recoverable     Reinsurance Balances Recoverable  
    Non-life
run-off
    Atruim     Torus     Life and
annuities
    Total     % of
Total
    Non-life
run-off
    Atrium     Torus     Life and
annuities
    Total     % of
Total
 

Top 10 reinsurers

  $ 894,811      $ 22,165      $ 123,762      $ 15,039      $ 1,055,777        59.1   $ 667,325      $ 23,635      $ 158,117      $ 15,089      $ 864,166        64.9

Other reinsurers’ balances > $1 million

    495,363        4,496        202,217        10,419        712,495        39.9     256,929        4,917        181,196        10,692        453,734        34.1

Other reinsurers’ balances < $1 million

    14,177        462        2,998        1,390        19,027        1.0     6,205        1,015        5,741        694        13,655        1.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 1,404,351    $ 27,123    $ 328,977    $ 26,848    $ 1,787,299      100.0 $ 930,459    $ 29,567    $ 345,054    $ 26,475    $ 1,331,555      100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At March 31, 2015 and December 31, 2014, the top ten reinsurers of the Company’s business accounted for 59.1% and 64.9%, respectively, of total reinsurance balances recoverable (which includes total reinsurance reserves and paid losses recoverable) and included $471.0 million and $310.9 million, respectively, of incurred but not reported (“IBNR”) reserves recoverable. With the exception of three non-rated reinsurers from which $416.8 million was recoverable (December 31, 2014: $175.2 million related to one reinsurer), the other top ten reinsurers, as at March 31, 2015 and December 31, 2014, were all rated A- or better.

As at March 31, 2015, there were no reinsurers which 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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ENSTAR GROUP LIMITED

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

6. 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 March 31, 2015 and December 31, 2014. The provisions for bad debt all relate to the non-life run-off segment.

 

  As at March 31, 2015   As at December 31, 2014  
  Reinsurance Balances Recoverable   Reinsurance Balances Recoverable  
  Gross   Provisions
for Bad
Debt
  Net   Gross   Provisions
for Bad
Debt
  Net  

Reinsurers rated A - or above

$ 1,247,567    $ 52,494    $ 1,195,073    $ 1,126,944    $ 80,995    $ 1,045,949   

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

  491,776      0      491,776      204,544      0      204,544   

Reinsurers rated below A -, unsecured

  305,951      205,501      100,450      289,976      208,914      81,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 2,045,294    $ 257,995    $ 1,787,299    $ 1,621,464    $ 289,909    $ 1,331,555   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  12.6   17.9
   

 

 

       

 

 

   

7. LOSSES AND LOSS ADJUSTMENT EXPENSES

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

 

    March 31, 2015     December 31, 2014  
    Non-life
Run-off
    Atrium     Torus     Total     Non-life
Run-off
    Atrium     Torus     Total  

Outstanding

  $ 2,653,574      $ 69,312      $ 355,437      $ 3,078,323      $ 2,202,187      $ 73,803      $ 387,171      $ 2,663,161   

Incurred but not reported

    2,192,144        107,902        475,509        2,775,555        1,406,420        113,149        477,264        1,996,833   

Fair value adjustment

    (152,456     25,659        (2,458     (129,255     (173,597     25,659        (2,635     (150,573
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 4,693,262    $ 202,873    $ 828,488    $ 5,724,623    $ 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 March 31, 2015 was primarily attributable to the Company’s acquisition of Companion.

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 expenses liabilities.

 

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ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

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 months ended March 31, 2015 and 2014 was as follows:

 

    Three Months Ended March 31,  
    2015     2014  
    Non-life
Run-off
    Atrium     Torus     Total     Non-life
Run-off
    Atrium     Total  

Net losses paid

  $ 65,260      $ 11,911      $ 52,148      $ 129,319      $ 87,687      $ 12,835      $ 100,522   

Net change in case and LAE reserves

    (7,000     (1,019     (1,786     (9,805     (62,398     775        (61,623

Net change in IBNR reserves

    (37,278     (3,810     25,739        (15,349     (37,348     3,469        (33,879
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (reduction) in estimates of net ultimate losses

  20,982      7,082      76,101      104,165      (12,059   17,079      5,020   

Reduction in provisions for bad debt

  (19,814   —        —        (19,814   —        —        —     

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

  (13,975   (62   656      (13,381   (13,359   52      (13,307

Amortization of fair value adjustments

  (293   —        (541   (834   (3,764   —        (3,764
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

$ (13,100 $ 7,020    $ 76,216    $ 70,136    $ (29,182 $ 17,131    $ (12,051
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

Non-Life Run-off Segment

The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2015 and 2014 of the non-life run-off segment (losses incurred and paid are reflected net of reinsurance recoverables):

 

     Non-life Run-off  
     Three Months Ended
March 31,
 
     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

  20,726      1,432   

Prior periods

  (33,826   (30,614
  

 

 

    

 

 

 

Total net reduction in ultimate losses and loss adjustment expense liabilities

  (13,100   (29,182
  

 

 

    

 

 

 

Net losses paid:

Current period

  (4,571   (532

Prior periods

  (60,689   (87,155
  

 

 

    

 

 

 

Total net losses paid

  (65,260   (87,687
  

 

 

    

 

 

 

Effect of exchange rate movement

  (38,238   (1,025

Acquired on purchase of subsidiaries

  774,758      —     

Assumed business

  189,868      28,630   
  

 

 

    

 

 

 

Net balance as at March 31

  3,482,329      2,793,716   

Plus: total reinsurance reserves recoverable

  1,210,933      1,028,162   
  

 

 

    

 

 

 

Balance as at March 31

$ 4,693,262    $ 3,821,878   
  

 

 

    

 

 

 

 

34


Table of Contents

ENSTAR GROUP LIMITED

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

7. 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 three months ended March 31, 2015 and 2014 was as follows:

 

    Non-life Run-off  
    Three Months Ended March 31,  
    2015     2014  
    Prior Period     Current
Period
    Total     Prior Period     Current
Period
    Total  

Net losses paid

  $ 60,689      $ 4,571      $ 65,260      $ 87,155      $ 532      $ 87,687   

Net change in case and LAE reserves

    (9,994     2,994        (7,000     (63,249     851        (62,398

Net change in IBNR reserves

    (50,439     13,161        (37,278     (37,397     49        (37,348
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (reduction) in estimates of net ultimate losses

  256      20,726      20,982      (13,491   1,432      (12,059

Reduction in provisions for bad debt

  (19,814   —        (19,814   —        —        —     

Reduction in provisions for unallocated loss adjustment expense liabilities

  (13,975   —        (13,975   (13,359   —        (13,359

Amortization of fair value adjustments

  (293   —        (293   (3,764   —        (3,764
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

$ (33,826 $ 20,726    $ (13,100 $ (30,614 $ 1,432    $ (29,182
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

Three Months Ended March 31, 2015

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended March 31, 2015 of $13.1 million included current period incurred losses and loss adjustment expenses of $20.7 million related to current period net earned premium of $19.3 million primarily related to Sussex. Excluding current period net ultimate losses and loss adjustment expense liabilities of $20.7 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $33.8 million, which was attributable to a reduction in provisions for bad debt of $19.8 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $14.0 million, relating to 2015 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $0.3 million, partially offset by an increase in estimates of net ultimate losses of $0.3 million.

 

35


Table of Contents

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The reduction in provisions for bad debt of $19.8 million for the three months ended March 31, 2015 resulted from the cash collection and commutation of certain reinsurance receivables against which bad debt provisions had been provided for in earlier periods.

Three Months Ended March 31, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended March 31, 2014 of $29.2 million included current period incurred losses and loss adjustment expenses of $1.4 million related to current period net earned premiums of $1.4 million related to SeaBright Holdings, Inc. (“SeaBright”). Excluding SeaBright’s current period net ultimate losses and loss adjustment expense liabilities of $1.4 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $30.6 million, which was attributable to a reduction in estimates of net ultimate losses of $13.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $13.4 million, relating to 2014 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $3.8 million.

Excluding the impact of current period losses incurred of $1.4 million relating to SeaBright, the reduction in estimates of net ultimate losses was $13.5 million, which was primarily related to:

 

  (i) the Company’s quarterly 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; and

 

  (ii) favorable claims settlements during the three months ended March 31, 2014 resulting in a reduction in estimates of net ultimate losses of approximately $6.7 million.

 

36


Table of Contents

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

Atrium and Torus Segments

The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2015 and 2014 for the Atrium segment and for the three months ended March 31, 2015 for the Torus segment (losses incurred and paid are reflected net of reinsurance recoverables):

 

     Three Months Ended March 31,  
     Atrium      Torus(1)  
     2015      2014      2015  

Balance as at January 1

   $ 212,611       $ 215,392       $ 861,800   

Less: total reinsurance reserves recoverable

     28,278         25,055         325,209   
  

 

 

    

 

 

    

 

 

 
  184,333      190,337      536,591   

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

Current period

  14,878      21,314      77,410   

Prior periods

  (7,858   (4,183   (1,196
  

 

 

    

 

 

    

 

 

 

Total net increase in ultimate losses and loss adjustment expense liabilities

  7,020      17,131      76,216   
  

 

 

    

 

 

    

 

 

 

Net losses paid:

Current period

  (2,870   (4,684   (3,723

Prior periods

  (9,041   (8,151   (48,425
  

 

 

    

 

 

    

 

 

 

Total net losses paid

  (11,911   (12,835   (52,148

Effect of exchange rate movement

  (3,198   (7   (12,710
  

 

 

    

 

 

    

 

 

 

Net balance as at March 31

  176,244      194,626      547,948   

Plus: total reinsurance reserves recoverable

  26,629      25,626      280,540   
  

 

 

    

 

 

    

 

 

 

Balance as at March 31

$ 202,873    $ 220,252    $ 828,488   
  

 

 

    

 

 

    

 

 

 

 

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

 

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ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities for the Company’s Atrium segment for the three months ended March 31, 2015 and 2014 and for the Torus segment for the three months ended March 31, 2015 were as follows:

 

    Three Months Ended March 31,  
    Atrium     Torus  
    2015     2014     2015  
    Prior
Period
    Current
Period
    Total     Prior
Period
    Current
Period
    Total     Prior
Period
    Current
Period
    Total  

Net losses paid

  $ 9,041      $ 2,870      $ 11,911      $ 8,151      $ 4,684      $ 12,835      $ 48,425      $ 3,723      $ 52,148   

Net change in case and LAE reserves

    (3,711     2,692        (1,019     (3,985     4,760        775        (10,331     8,545        (1,786

Net change in IBNR reserves

    (12,993     9,183        (3,810     (8,401     11,870        3,469        (37,677     63,416        25,739   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

  (7,663   14,745      7,082      (4,235   21,314      17,079      417      75,684      76,101   

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

  (195   133      (62   52      —        52      (1,070   1,726      656   

Amortization of fair value adjustments

  —        —        —        —        —        —        (541   —        (541
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

$ (7,858 $ 14,878    $ 7,020    $ (4,183 $ 21,314    $ 17,131    $ (1,196 $ 77,410    $ 76,216   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

8. POLICY BENEFITS FOR LIFE AND ANNUITY CONTRACTS

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

 

     March 31,
2015
     December 31,
2014
 

Life

   $ 336,387       $ 344,215   

Annuities

     933,292         938,121   
  

 

 

    

 

 

 
  1,269,679      1,282,336   

Fair value adjustments

  (59,465   (61,472
  

 

 

    

 

 

 
$ 1,210,214    $ 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.

 

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ENSTAR GROUP LIMITED

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

 

9. 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 month periods ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  
     2015      2014  
     Premiums
Written
     Premiums
Earned
     Premiums
Written
     Premiums
Earned
 

Non-life run-off

           

Gross

   $ 10,785       $ 27,755       $ 1,319       $ 2,768   

Ceded

     2,762         (9,263      (276      (241
  

 

 

    

 

 

    

 

 

    

 

 

 

Net

$ 13,547    $ 18,492    $ 1,043    $ 2,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

Atrium

Gross

$ 48,913    $ 38,153    $ 47,577    $ 38,157   

Ceded

  (4,555   (4,281   (5,852   (5,518
  

 

 

    

 

 

    

 

 

    

 

 

 

Net

$ 44,358    $ 33,872    $ 41,725    $ 32,639   
  

 

 

    

 

 

    

 

 

    

 

 

 

Torus

Gross

$ 190,697    $ 168,532    $ —      $ —     

Ceded

  (65,874   (44,910   —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net

$ 124,823    $ 123,622    $ —      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Life and annuities

Life

$ 22,733    $ 22,920    $ 25,996    $ 26,492   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 205,461    $ 198,906    $ 68,764    $ 61,658   
  

 

 

    

 

 

    

 

 

    

 

 

 

10. GOODWILL AND INTANGIBLE ASSETS

The following table shows the Company’s goodwill and intangible assets as at March 31, 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
 

Balance as at December 31, 2014

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

Acquired during the period

     —           —          —           —          (2,760

Intangible assets amortization

     —           (1,341     —           (1,341     (1,326
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance as at March 31, 2015

$ 73,071    $ 39,707    $ 87,031    $ 199,809    $ 155,009   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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.

Intangible asset amortization for the three months ended March 31, 2015 and 2014 was $2.7 million and $1.5 million, respectively.

 

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ENSTAR GROUP LIMITED

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

10. GOODWILL AND INTANGIBLE ASSETS—(Continued)

 

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

 

    March 31, 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 expense

  $ 429,063      $ (299,808   $ 129,255      $ 449,986      $ (299,413   $ 150,573   

Reinsurance balances recoverable

    (175,453     141,742        (33,711     (193,617     140,667        (52,950

Policy benefits for life and annuity contracts

    86,332        (26,867     59,465        86,332        (24,860     61,472   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 339,942    $ (184,933 $ 155,009    $ 342,701    $ (183,606 $ 159,095   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

Distribution channel

  20,000    $ (1,777   18,223      20,000      (1,444   18,556   

Technology

  15,000      (3,750   11,250      15,000      (3,125   11,875   

Brand

  12,000      (1,766   10,234      12,000      (1,383   10,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 47,000    $ (7,293 $ 39,707    $ 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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at March 31, 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.

11. 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.

 

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ENSTAR GROUP LIMITED

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

11. LOANS PAYABLE—(Continued)

 

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.

As of March 31, 2015, all of the covenants relating to the EGL Revolving Credit Facility and the Sussex Facility were met.

Amounts of loans payable outstanding, and accrued interest, as of March 31, 2015 and December 31, 2014 total $430.0 million and $320.0 million, respectively, and comprise:

 

Facility

   Date of Facility      Facility Term      March 31,
2015
     December 31,
2014
 

EGL Revolving Credit Facility

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

Sussex Facility

     December 24, 2014         4 Years         109,000         —     
        

 

 

    

 

 

 

Total long-term bank debt

  428,550      319,550   

Accrued interest

  1,448      491   
        

 

 

    

 

 

 

Total loans payable

$ 429,998    $ 320,041   
        

 

 

    

 

 

 

12. 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

   March 31,
2015
     December 31,
2014
 

Balance as at beginning of period

   $ 374,619       $ 100,859   

Capital contributions

     —           272,722   

Net earnings attributable to RNCI

     9,564         4,059   

Accumulated other comprehensive income attributable to RNCI

     (997      (1,993

Transfer of net loss from noncontrolling interest

     —           (1,028
  

 

 

    

 

 

 

Balance at end of period

$ 383,186    $ 374,619   
  

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

 

13. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  
     2015      2014  

Basic earnings per ordinary share:

     

Net earnings attributable to Enstar Group Limited

   $ 44,847       $ 29,587   

Weighted average ordinary shares outstanding—basic

     19,237,461         16,564,083   
  

 

 

    

 

 

 

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

$ 2.33    $ 1.79   
  

 

 

    

 

 

 

Diluted earnings per ordinary share:

Net earnings attributable to Enstar Group Limited

$ 44,847    $ 29,587   

Weighted average ordinary shares outstanding—basic

  19,237,461      16,564,083   

Share equivalents:

Unvested shares

  26,322      79,967   

Restricted share units

  10,424      20,475   

Warrants

  60,430      40,799   
  

 

 

    

 

 

 

Weighted average ordinary shares outstanding—diluted

  19,334,637      16,705,324   
  

 

 

    

 

 

 

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

$ 2.32    $ 1.77   
  

 

 

    

 

 

 

14. EMPLOYEE BENEFITS

The Company’s share-based compensation plans provide for the grant of various awards to its employees and to members of the Board of Directors. These are described in Note 16 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The information below includes both the employee and director components of the Company’s share based compensation.

2006 Equity Incentive Plan

The employee share awards for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

     Three Months Ended March 31,  
     2015      2014  
     Number of
Shares
     Weighted
Average
Fair Value
of
the Award
     Number of
Shares
     Weighted
Average
Fair Value
of
the Award
 

Nonvested—beginning of period

     101,181       $ 15,470         115,159       $ 14,313   

Granted

     39,280         5,459         1,559         170   

Forfeited

     (2,932      448         —           —     

Vested

     (50,588      7,350         (44,112      (5,920
  

 

 

       

 

 

    

Nonvested—end of period

  86,941    $ 12,333      72,606    $ 9,897   
  

 

 

       

 

 

    

 

42


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ENSTAR GROUP LIMITED

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

14. EMPLOYEE BENEFITS—(Continued)

 

The total unrecognized compensation cost related to the Company’s non-vested share awards under the 2006 Equity Incentive Plan (the “Equity Plan”) as at March 31, 2015 and 2014 was $8.5 million and $4.0 million, respectively. This cost is expected to be recognized over the next 1.9 years, which is the weighted average contractual life of the awards. Compensation costs of $1.4 million and $0.7 million relating to these share awards were recognized in the Company’s statement of earnings for the three months ended March 31, 2015 and 2014, respectively.

For the three months ended March 31, 2015 and 2014, 39,280 and 1,559 shares, respectively, were awarded to non-executive officer employees under the Equity Plan.

Cash-Settled Stock Appreciation Rights

Refer to Note 16 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 cash-settled stock appreciation rights (“SARs”).

During the three months ended March 31, 2015 and 2014, the Company granted 190,000 and nil SARs, respectively, to certain employees pursuant to the terms of the Equity Plan. Compensation costs of $(0.1) million and $nil relating to the outstanding SARs awards were recognized in the Company’s statements of earnings for the three months ended March 31, 2015 and 2014, respectively.

The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black-Scholes option valuation model as at March 31, 2015:

 

     As at
March 31, 2015
 

Weighted average fair value of the SARs

   $ 27.36   

Weighted average volatility

     19.72   

Weighted average risk-free interest rate

     0.62

Dividend yield

     —     

The following table summarizes SARs activity:

 

     March 31, 2015  
     Number of
SARs
     Weighted
Average
Exercise
Price per
SAR
     Weighted
Average
Remaining
Contractual
Term (in years)
     Aggregate
Intrinsic Value (1)
 

Balance, beginning of period

     1,068,001       $ 140.53          $ 13,199   

Granted

     190,000            

Forfeited

     (12,480         
  

 

 

          

Balance, end of period

  1,245,521    $ 140.47      2.24    $ 2,387   
  

 

 

          

 

(1) The aggregate intrinsic value is calculated as the pre-tax difference between the exercise price of the underlying share awards and the closing price per share of the Company’s ordinary shares of $152.89 at the beginning of the period, and $141.86 at the end of the period.

 

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ENSTAR GROUP LIMITED

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

14. EMPLOYEE BENEFITS—(Continued)

 

2011-2015 Annual Incentive Compensation Program

The accrued expense relating to the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program for the three months ended March 31, 2015 and 2014, was $7.9 million and $5.2 million, respectively.

Enstar Group Limited Employee Share Purchase Plan

For each of the three months ended March 31, 2015 and 2014, compensation costs of less than $0.1 million relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan (“Share Plan”) were recognized in the Company’s statement of earnings. For the three months ended March 31, 2015 and 2014, 3,260 and 1,559 shares, respectively, were issued to employees under the Share Plan.

Northshore Incentive Plans

Northshore Holdings Limited, a holding company that owns Atrium and its subsidiaries and Arden (“Northshore”), has implemented long-term incentive plans that award time-based restricted shares of Northshore to certain Atrium employees. Shares generally vest over two to three years, although certain awards began vesting in 2014. These share awards have been classified by the Company as liability awards.

For the three months ended March 31, 2015 and 2014, compensation costs of $1.5 million and $nil relating to the long-term incentive plans were recorded as part of salaries and benefits within the Company’s statement of earnings.

Deferred Compensation and Ordinary Share Plan for Non-Employee Directors

For the three months ended March 31, 2015 and 2014, 572 and 1,029 restricted share units, respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors (the “Deferred Compensation Plan”). The Company recorded expenses of $0.1 million related to the restricted share units for each of the three month periods ended March 31, 2015 and 2014.

Following the resignation of Kenneth J. LeStrange from the Board of Directors, 1,560 restricted share units previously credited to his account under the Deferred Compensation Plan were converted into the same number of the Company’s ordinary shares on January 2, 2015, with fractional shares paid in cash.

Pension Plan

The Company provides pension benefits to eligible employees through various plans sponsored by the Company. All pension plans, except for the noncontributory defined benefit pension plan acquired in the Providence Washington transaction in 2010 (the “PWAC Plan”), are structured as defined contribution plans.

Pension expense for the three months ended March 31, 2015 and 2014 were $2.4 million and $2.1 million, respectively. The increase for 2015 over 2014 was attributable to the increase in employee headcount (and associated additional defined contribution plan expense) as a result of the April 2014 acquisition of Torus and the January 2015 acquisition of Companion.

 

44


Table of Contents

ENSTAR GROUP LIMITED

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

14. EMPLOYEE BENEFITS—(Continued)

 

The Company recorded pension expense relating to the PWAC Plan of $0.2 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively. The PWAC Plan is described in Note 16 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

15. TAXATION

The Company accounts for income taxes using the estimated annual effective tax rate. The Company makes the best estimate of the annual effective tax rate expected to be applicable for the full fiscal year and applies the rate to the year-to-date income. Discrete tax adjustments are recorded in the quarter in which the event occurs.

Earnings before income taxes includes the following components:

 

     Three Months Ended March 31,  
              2015                        2014           

Domestic (Bermuda)

   $ (24,209    $ 7,010   

Foreign

     88,445         33,678   
  

 

 

    

 

 

 

Total

$ 64,236    $ 40,688   
  

 

 

    

 

 

 

Tax expense (benefit) for income taxes is comprised of:

 

     Three Months Ended March 31,  
              2015                        2014           

Current:

     

Domestic (Bermuda)

   $ —         $ —     

Foreign

     13,641         10,267   
  

 

 

    

 

 

 
  13,641      10,267   
  

 

 

    

 

 

 

Deferred:

Domestic (Bermuda)

  —        —     

Foreign

  (2,897   (2,991
  

 

 

    

 

 

 
  (2,897   (2,991
  

 

 

    

 

 

 

Total tax expense

$ 10,744    $ 7,276   
  

 

 

    

 

 

 

Under current Bermuda law, the Company and its Bermuda subsidiaries are exempted from paying any taxes in Bermuda on their income or capital gains until March 2035.

The Company has operating subsidiaries and branch operations in the United Kingdom, Australia, the United States and Europe and is subject to federal, foreign, state and local taxes in those jurisdictions. In addition, certain distributions from some foreign sources may be subject to withholding taxes.

The expected income tax provision for the foreign operations computed on pre-tax income at the weighted-average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.

 

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Table of Contents

ENSTAR GROUP LIMITED

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

15. TAXATION—(Continued)

 

The actual income tax rate differed from the amount computed by applying the effective rate of 0% under Bermuda law to earnings before income taxes as shown in the following reconciliation:

 

     Three Months Ended March 31,  
              2015                       2014           

Earnings before income tax

   $ 64,236      $ 40,688   
  

 

 

   

 

 

 

Expected tax rate

  0.0   0.0

Foreign taxes at local expected rates

  12.1   17.3

Change in uncertain tax positions

  0.0   (5.5 )% 

Change in valuation allowance

  (2.4 )%    5.7

Prior year true-up

  6.8   0.0

Other

  0.2   0.4
  

 

 

   

 

 

 

Effective tax rate

  16.7   17.9
  

 

 

   

 

 

 

The Company has estimated future taxable income of its foreign subsidiaries and has provided a valuation allowance in respect of those loss carryforwards where it does not expect to realize a benefit. The Company has considered all available evidence using a “more likely than not” standard in determining the amount of the valuation allowance.

The Company had no unrecognized tax benefits relating to uncertain tax positions as at both March 31, 2015 and December 31, 2014.

The Company’s operating subsidiaries in specific countries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, the Company’s major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2011, 2011 and 2008, respectively.

Because the Company operates in many jurisdictions, its net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which it operates. The Company cannot predict what, if any, legislation, will actually be proposed or enacted, or what the effect of any such legislation might be on the Company’s financial condition and results of operations.

16. RELATED PARTY TRANSACTIONS

Stone Point Capital LLC

Following several private transactions occurring from May 2012 to July 2012, Trident acquired 1,350,000 of the Company’s Voting Ordinary Shares (which now constitutes approximately 8.5% of the Company’s outstanding Voting Ordinary Shares). On November 6, 2013, the Company appointed James D. Carey to its Board of Directors. Mr. Carey is the sole member of an entity that is one of four general partners of the entities serving as general partners for Trident, is a member of the investment committees of such general partners, and is a member and senior principal of Stone Point Capital LLC, the manager of the Trident funds.

In addition, the Company has entered into certain agreements with Trident with respect to Trident’s co-investments in the Atrium, Arden, and Torus acquisitions. These include investors’ agreements and shareholders’ agreements, which provide for, among other things: (i) the Company’s right to redeem Trident’s equity interest in the Atrium/Arden and Torus transactions in cash at fair

 

46


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ENSTAR GROUP LIMITED

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

16. RELATED PARTY TRANSACTIONS—(Continued)

 

market value within the 90 days following the fifth anniversary of the Arden and Torus closings, respectively, and at any time following the seventh anniversary of the Arden and Torus closings, respectively; and (ii) Trident’s right to have its equity co-investment interests in the Atrium/Arden and Torus transactions redeemed by the Company at fair market value (which the Company may satisfy in either cash or its ordinary shares) following the seventh anniversaries of the Arden closing and Torus closing, respectively. As of March 31, 2015, the Company has included $383.2 million (December 31, 2014: $374.6 million) as redeemable noncontrolling interest on its balance sheet relating to these Trident co-investment transactions. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the boards of Torus and the holding companies established in connection with the Atrium/Arden and Torus co-investment transactions. Trident also has a second representative on these boards who is a Stone Point Capital LLC employee.

As at March 31, 2015, the Company has investments in four funds (carried within other investments) and a registered investment company affiliated with entities owned by Trident or otherwise affiliated with Stone Point Capital LLC. The fair value of the investments in the four funds was $245.6 million and $202.6 million as at March 31, 2015 and December 31, 2014, respectively, while the fair value of the Company’s investment in the registered investment company was $26.8 million and $25.6 as at March 31, 2015 and December 31, 2014, respectively. For the three months ended March 31, 2015 and 2014, the Company recognized $2.3 million and $1.2 million respectively, in net realized and unrealized gains in respect of these investments.

The Company also has separate accounts managed by Eagle Point Credit Management, which is an affiliate of entities owned by Trident, with respect to which the Company incurred approximately $0.1 million and $0.1 million in management fees for the three months ended March 31, 2015 and 2014, respectively.

In addition, the Company has invested in two funds managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as director. The fair value of the Company’s investments in Sound Point Capital funds was $41.1 million and $39.9 million as at March 31, 2015 and December 31, 2014, respectively. For the three months ended March 31, 2015 and 2014, the Company has recognized $1.3 million and $0.4 million, respectively, in net realized and unrealized gains in respect of Sound Point Capital investments.

Goldman Sachs & Co.

Affiliates of Goldman Sachs own approximately 4.2% of the Company’s Voting Ordinary Shares and 100% of the Company’s Series C Non-Voting Ordinary Shares. Sumit Rajpal, a managing director of Goldman Sachs, was appointed to the Board of Directors in connection with Goldman Sachs’ investment in the Company. As of March 31, 2015 and December, 31, 2014, the Company had investments in two funds (carried within other investments) affiliated with entities owned by Goldman Sachs, which had a fair value of $36.5 million and $36.3 million, respectively. As of March 31, 2015 and December 31, 2014, the Company had an indirect investment in non-voting interests of two companies affiliated with Hastings Insurance Group Limited which had a fair value of $23.9 million and $25.1 million respectively. Goldman Sachs affiliates have an approximately 50% interest in the Hastings companies, and Mr. Rajpal serves as a director of the entities in which the Company has invested. For the three months ended March 31, 2015 and 2014, the Company recognized $(1.7) million and $0.7 million, in net realized and unrealized losses and gains, respectively, in respect of the Goldman Sachs-affiliated investments.

 

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ENSTAR GROUP LIMITED

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

16. RELATED PARTY TRANSACTIONS—(Continued)

 

During 2015, a Goldman Sachs affiliate began providing investment management services to one of the Company’s subsidiaries pursuant to an arms-length agreement reflecting customary terms and conditions. The Company’s interests are held in accounts managed by affiliates of Goldman Sachs, with respect to which the Company incurred approximately $0.1 million and $nil in management fees for the three months ended March 31, 2015 and 2014, respectively.

Affiliates of Goldman Sachs own approximately 22% of Global Atlantic Financial Group (“GAFG”), which owns entities that provide reinsurance to Arden. As at March 31, 2015 and December 31, 2014, the Company’s total reinsurance recoverable from GAFG entities amounted to $40.8 million and $230.5 million, respectively. As at December 31, 2014, reinsurance balances recoverable from a particular non-rated GAFG entity with a carrying value of $175.2 million represented 10% or more of the Company’s total reinsurance balances recoverable. The $175.2 million recoverable from that GAFG entity at December 31, 2014 was secured by a trust fund. The balance of $40.8 million and $55.3 million as at March 31, 2015 and December 31, 2014 respectively, was recoverable from GAFG entities rated A- and higher.

17. COMMITMENTS AND CONTINGENCIES

Concentration of Credit Risk

The Company’s portfolio of cash and fixed maturity investments is managed pursuant to guidelines that follow what it believes are prudent standards of diversification. The guidelines limit the allowable holdings of a single issue and issuers, and as a result the Company does not believe that there are any significant concentrations of credit risk associated with its portfolio of cash and fixed maturity investments.

The Company’s portfolio of other investments is managed pursuant to guidelines that emphasize diversification and liquidity. Pursuant to these guidelines, the Company manages and monitors risk across a variety of investment funds and vehicles, markets and counterparties. The Company believes that there are no significant concentrations of credit risk associated with its other investments.

As of March 31, 2015, the Company’s investments are held by 29 different custodians. These custodians are all large financial institutions that are highly regulated. The largest concentration of fixed maturity investments, by fair value, at a single custodian was $4.2 billion and $3.6 billion as of March 31, 2015 and December 31, 2014, respectively.

Investments

The following table provides a summary of the Company’s outstanding unfunded investment commitments as of March 31, 2015 and December 31, 2014:

 

March 31, 2015

     December 31, 2014  

Original

Commitments

   Commitments      Original
Commitments
     Commitments  
   Funded      Unfunded         Funded      Unfunded  

$286,000

   $ 190,102       $ 95,898       $ 311,000       $ 211,115       $ 99,885   

Guarantees

As at March 31, 2015 and December 31, 2014, the Company had, in total, parental guarantees supporting a subsidiary’s insurance obligations in the amount of $249.2 million and $238.6 million, respectively.

 

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ENSTAR GROUP LIMITED

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

17. COMMITMENTS AND CONTINGENCIES—(Continued)

 

Acquisitions and Significant New Business

As of March 31, 2015, the Company has entered into a definitive agreement with respect to the purchase of NSA, which is expected to close in the third quarter of 2015. The NSA acquisition agreement is described in Note 2—“Acquisitions.”

Legal Proceedings

The Company is, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation and arbitration regarding claims. In addition to claims litigation, the Company may be subject to other lawsuits and regulatory actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or omissions, employment claims or regulatory activity. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on its business, results of operations or financial condition. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental and other claims.

18. SEGMENT INFORMATION

The Company monitors and reports its results of operations in four segments: non-life run-off, Atrium, Torus and life and annuities. These segments are described in Note 1 and Note 21 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The Company’s total assets by segment were as follows (the elimination items include the elimination of intersegment assets):

 

     March 31, 2015      December 31, 2014  

Total assets:

     

Non-life run-off

   $ 7,560,657       $ 5,936,187   

Atrium

     739,914         598,037   

Torus

     2,631,091         2,876,734   

Life and annuities

     1,373,107         1,344,593   

Less:

     

Eliminations

     (795,597      (818,666
  

 

 

    

 

 

 
$ 11,509,172    $ 9,936,885   
  

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

18. SEGMENT INFORMATION—(Continued)

 

The following tables set forth selected and unaudited condensed consolidated statement of earnings results by segment for the three months ended March 31, 2015 and 2014 (the elimination items include the elimination of intersegment revenues and expenses):

 

  Three Months Ended March 31, 2015  
  Non-life
run-off
  Atrium   Torus   Life and
annuities
  Eliminations   Consolidated  

INCOME

Net premiums earned

$ 18,492    $ 33,872    $ 123,622    $ 22,920    $ —      $ 198,906   

Fees and commission income

  4,837      9,528      14      —        (2,899   11,480   

Net investment income

  21,904      585      2,194      9,370      (160   33,893   

Net realized and unrealized gains

  34,660      91      4,702      3,567      —        43,020   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  79,893      44,076      130,532      35,857      (3,059   287,299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

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

  (13,100   7,020      76,216      —        —        70,136   

Life and annuity policy benefits

  —        —        —        22,847      —        22,847   

Acquisition costs

  (1,705   9,406      24,143      2,706      —        34,550   

Salaries and benefits

  32,044      8,169      15,420      2,139      —        57,772   

General and administrative expenses

  22,947      3,454      14,793      531      (2,899   38,826   

Interest expense

  2,520      1,483      —        160      (160   4,003   

Net foreign exchange losses (gains)

  5,138      (2,515   (6,380   (1,314   —        (5,071
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  47,844      27,017      124,192      27,069      (3,059   223,063   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

  32,049      17,059      6,340      8,788      —        64,236   

INCOME TAXES

  (5,107   (1,884   (682   (3,071   —        (10,744
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

  26,942      15,175      5,658      5,717      —        53,492   

Less: Net loss (earnings) attributable to noncontrolling interest

  404      (6,728   (2,321   —        —        (8,645
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

$ 27,346    $ 8,447    $ 3,337    $ 5,717    $ —      $ 44,847   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ENSTAR GROUP LIMITED

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

18. SEGMENT INFORMATION—(Continued)

 

    Three Months Ended March 31, 2014  
    Non-life
run-off
    Atrium     Torus     Life and
annuities
    Eliminations     Consolidated  

INCOME

           

Net premiums earned

  $ 2,527      $ 32,639      $ —        $ 26,492      $ —        $ 61,658   

Fees and commission income

    2,955        4,821        —          21        (799     6,998   

Net investment income

    14,333        480        —          9,989        (454     24,348   

Net realized and unrealized gains (losses)

    29,629        (107     —          5,051        —          34,573   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  49,444      37,833      —        41,553      (1,253   127,577   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

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

  (29,182   17,131      —        —        —        (12,051

Life and annuity policy benefits

  —        —        —        26,809      —        26,809   

Acquisition costs

  —        9,561      —        3,600      —        13,161   

Salaries and benefits

  25,846      3,533      —        2,011      —        31,390   

General and administrative expenses

  15,763      4,041      893      2,352      (799   22,250   

Interest expense

  2,561      1,173      —        454      (454   3,734   

Net foreign exchange losses (gains)

  2,130      (551   6      11      —        1,596   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  17,118      34,888      899      35,237      (1,253   86,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

  32,326      2,945      (899   6,316      —        40,688   

INCOME TAXES

  (3,651   (1,339   —        (2,286   —        (7,276
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

  28,675      1,606      (899   4,030      —        33,412   

Less: Net earnings attributable to noncontrolling interest

  (3,075   (1,110   360      —        —        (3,825
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED

$ 25,600    $ 496    $ (539 $ 4,030    $ —      $ 29,587   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Enstar Group Limited:

We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries as of March 31, 2015, the related condensed consolidated statements of earnings and comprehensive income for the three-month periods ended March 31, 2015 and 2014, and the related condensed consolidated statements of changes in shareholders’ equity and cash flows for the three-month periods ended March 31, 2015 and 2014. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2014, and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended; and in our report dated March 2, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG Audit Limited

Hamilton, Bermuda

May 11, 2015

 

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Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Table of Contents:

 

Section

   Page  

Business Overview

     53   

Key Performance Indicator

     54   

Recent Developments

     54   

Acquisitions

     55   

Significant New Business

     55   

Consolidated Results of Operations—for the Three Months Ended March 31, 2015 and 2014

     56   

Results of Operations by Segment—for the Three Months Ended March 31, 2015 and 2014

     58   

Non-life Run-off Segment

     58   

Atrium Segment

     65   

Torus Segment

     71   

Life and Annuities Segment

     75   

Liquidity and Capital Resources

     78   

Reinsurance Balances Recoverable

     79   

Cash Flows

     81   

Investments

     82   

Loans Payable

     87   

Aggregate Contractual Obligations

     88   

Commitments and Contingencies

     88   

Critical Accounting Policies

     89   

Off-Balance Sheet and Special Purpose Entity Arrangements

     89   

Cautionary Statement Regarding Forward-Looking Statements

     89   

The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2015 and 2014 should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Business Overview

Enstar Group Limited, or Enstar, is a Bermuda-based holding company that was formed in 2001 and became publicly traded in 2007. We are listed on the NASDAQ Global Select Market under the ticker symbol “ESGR.” We and our operating subsidiaries acquire and manage diversified insurance businesses through a network of service companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations.

Our core focus is acquiring and managing insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and providing management, consulting and other services to the insurance and reinsurance industry. Since our formation, we have completed the acquisition of over 65 insurance and reinsurance companies and portfolios of insurance and reinsurance business. We also operate active underwriting businesses, including Atrium Underwriting Group Limited and subsidiaries, or Atrium, which manage and underwrite specialist insurance and reinsurance business for Lloyd’s Syndicate 609, and Torus Insurance Holdings Limited and subsidiaries, or Torus, an A- rated global specialty insurance group with multiple global underwriting platforms. We partnered with the Trident V funds in the Atrium and Torus acquisitions, with Enstar owning an approximate 59.0% interest and Trident V owning an approximate 39.3% interest in the acquired companies (and Dowling Capital Partners owning a 1.7% interest). In addition, we operate closed life and annuities businesses.

 

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The substantial majority of our acquisitions have been in the non-life run-off business, which for us generally includes property and casualty, workers’ compensation, asbestos and environmental, construction defect, marine, aviation and transit, and other closed business. While our core focus remains the acquisition and management of non-life run-off business, in recent years, we expanded our business by entering into the active underwriting business. We believe that our active underwriting businesses provide an additional earnings stream, and also enhance our ability to compete for acquisition targets by providing opportunities for us, primarily through Torus, to acquire renewal rights or provide loss portfolio reinsurance in connection with such acquisitions, which may be attractive to certain vendors or may present alternative ways in which proposed transactions can be structured.

Overall, Enstar has four segments of business that are each managed, operated and reported on differently: (i) non-life run-off; (ii) Atrium; (iii) Torus; and (iv) life and annuities. For the three months ended March 31, 2014, we monitored and reported our results of operations in three segments (non-life run-off, active underwriting, and life and annuities). The active underwriting segment included the results of operations of Atrium and Arden Reinsurance Company Ltd., or Arden, as well as holding company expenses for Bayshore Holdings Limited, or Bayshore, that preceded the acquisition of Torus. Following the acquisition of Torus on April 1, 2014, we began reporting and monitoring our results on operations in our four current segments.

The table below summarizes the total number of employees we had as at March 31, 2015 and December 31, 2014 by operating segment:

 

     March 31,
2015
     December 31,
2014
 

Non-life run-off

     643         521   

Atrium

     160         157   

Torus

     477         474   

Life and annuities

     48         49   
  

 

 

    

 

 

 

Total

  1,328      1,201   
  

 

 

    

 

 

 

The increase in head count for our non-life run-off segment was primarily atributable to the staff we assumed on completion of the acquisition of Companion Property and Casualty Insurance Company, or Companion.

Key Performance Indicator

Our primary corporate objective is growing our net book value per share. We believe this is driven primarily by growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions, effectively managing companies and portfolios of business that we have acquired, and executing on our active underwriting strategies. We increased our book value per share on a fully diluted basis by $1.42 from $119.22 per share as at December 31, 2014 to $120.64 as at March 31, 2015. The increase was due to net earnings for the three months ended March 31, 2015 partially offset by changes in accumulated other comprehensive income over the same period.

Recent Developments

Our transactions take the form of either acquisitions of companies or portfolio transfers, where a reinsurance contract transfers risk from the insurance or reinsurance company to one of our companies. Acquisitions and portfolio transfers (also referred to as “significant new business”) completed or signed since the beginning of 2015 are outlined below.

 

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Acquisitions

Nationale Suisse Assurance

On February 5, 2015, our wholly-owned subsidiary, Harper Holding SARL, entered into a definitive agreement with Nationale Suisse to acquire its Belgian subsidiary, Nationale Suisse Assurance S.A., or NSA. NSA is a Belgium-based insurance company writing non-life insurance (which we expect to operate in run-off as part of our non-life run-off segment) and life insurance (which we expect to operate in run-off as part of our 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). We expect to finance the purchase price from cash on hand. As part of the agreement, Torus has agreed to acquire NSA’s two specialty underwriting agencies, Vander Haeghen & Co and Arena. Torus is renewing certain business currently underwritten by NSA, including the business placed by these agencies, as well as other select lines. 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, we, through our wholly-owned subsidiary Guillamene Holdings Limited, completed the acquisitions of two Delaware limited liability companies from subsidiaries of Wilton Re Limited 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 $173.0 million, which will be paid in two installments. The first installment of $89.1 million was paid on closing and was financed by borrowings under our 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.

Sussex Property and Casualty Insurance Company (formerly known as Companion)

On January 27, 2015, we and our wholly-owned subsidiary Sussex Holdings, Inc., or Sussex Holdings, completed the acquisition of Companion from Blue Cross 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 loan facility and 50% from cash on hand. We changed the name of Companion to Sussex Property and Casualty Insurance Company, or Sussex, following the acquisition and are operating the company as part of our non-life run-off business. In addition, Torus is renewing certain business from Companion.

Significant New Business

Reciprocal of America

On January 15, 2015, our wholly-owned subsidiary, Providence Washington Insurance Company, completed a loss portfolio transfer reinsurance transaction with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business that has been in run-off since 2003. The total net 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 our wholly-owned subsidiary and Lloyd’s managing agent, Shelbourne Syndicate Services Limited, entered into a

 

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reinsurance to close (or RITC) contract of the 2012 and prior underwriting years of account of another Lloyd’s syndicate. In the RITC transaction, Syndicate 2008 assumed total net insurance reserves of approximately £17.2 million (approximately $26.9 million) for cash consideration of an equal amount.

Consolidated Results of Operations — For the Three Months Ended March 31, 2015 and 2014

The following table sets forth our consolidated statements of earnings data for each of the periods indicated:

 

     Three Months Ended March 31,  
             2015                     2014          
     (expressed in thousands of
U.S. dollars)
 

INCOME

    

Net premiums earned

   $ 198,906      $ 61,658   

Fees and commission income

     11,480        6,998   

Net investment income

     33,893        24,348   

Net realized and unrealized gains

     43,020        34,573   
  

 

 

   

 

 

 
  287,299      127,577   
  

 

 

   

 

 

 

EXPENSES

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

  70,136      (12,051

Life and annuity policy benefits

  22,847      26,809   

Acquisition costs

  34,550      13,161   

Salaries and benefits

  57,772      31,390   

General and administrative expenses

  38,826      22,250   

Interest expense

  4,003      3,734   

Net foreign exchange (gains) losses

  (5,071   1,596   
  

 

 

   

 

 

 
  223,063      86,889   
  

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

  64,236      40,688   

INCOME TAXES

  (10,744   (7,276
  

 

 

   

 

 

 

NET EARNINGS

  53,492      33,412   

Less: Net earnings attributable to noncontrolling interest

  (8,645   (3,825
  

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

$ 44,847    $ 29,587   
  

 

 

   

 

 

 

The following table provides a split by operating segment of the net earnings attributable to Enstar Group Limited:

 

     Three Months Ended March 31,  
             2015                      2014          
     (in thousands of U.S. dollars)  

Segment split of earnings (losses) attributable to Enstar Group Limited:

     

Non-life run-off

   $ 27,346       $ 25,600   

Atrium

     8,447         496   

Torus

     3,337         (539

Life and annuities

     5,717         4,030   
  

 

 

    

 

 

 

Net earnings attributable to Enstar Group Limited

$ 44,847    $ 29,587   
  

 

 

    

 

 

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related footnotes. Some of the information contained in this discussion and analysis includes forward-looking

 

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statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Cautionary Statement Regarding Forward-Looking Statements” included in Item 2 of this Quarterly Report on Form 10-Q and in “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.

We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $53.5 million and $33.4 million for the three months ended March 31, 2015 and 2014, respectively. Our comparative results were impacted by our 2014 and 2015 acquisitions, among other factors. Subsequent to March 31, 2014, we completed the acquisitions of Torus (on April 1, 2014) and Companion (on January 27, 2015), which we renamed Sussex. The change in consolidated net earnings for the three month periods ended March 31, 2015 and 2014 is more specifically attributable to the following:

Net premiums earned – Combined net premiums earned for our four operating segments were $198.9 million and $61.7 million for the three months ended March 31, 2015 and 2014, respectively. The significant increase in 2015 was due primarily to the net premiums earned by Torus and Sussex as described in greater detail in the segment discussions below.

Net investment income – Net investment income was $33.9 million and $24.3 million for the three months ended March 31, 2015 and 2014, respectively. The increase was largely attributable to the net investment income earned on a larger base of cash and fixed maturity investments as a result of the Torus and Sussex transactions, although this was partially offset by lower reinvestment yields on new purchases of fixed maturity investments.

Net realized and unrealized gains – Net realized and unrealized gains were $43.0 million and $34.6 million for the three months ended March 31, 2015 and 2014, respectively. The increase was attributable primarily to an increase in realized and unrealized gains on our fixed maturity and other investments and decreases in U.S. investment yields during the first quarter of 2015 (particularly in longer dated fixed maturity investments) as compared to marginal decreases in treasury yields for the same period in 2014.

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities – For the three months ended March 31, 2015, net ultimate losses and loss adjustment expense liabilities increased by $70.1 million, compared to a reduction of $12.1 million in the three months ended March 31, 2014. The total increase of $82.2 million for the three months ended March 31, 2015 compared to the comparative period in 2014 was due primarily to increases in current period net ultimate losses and loss adjustment expense liabilities of $90.3 million, which largely consisted of current period loss development related to the issuance of new insurance policies, partially offset by a reduction in prior period net ultimate losses and loss adjustment expense liabilities.

Life and annuity policy benefits – Life and annuity policy benefits were $22.8 million and $26.8 million for the three months ended March 31, 2015 and 2014, respectively. The movements for the three month periods ended March 31, 2015 and 2014 related entirely to our life and annuities segment and are described in greater detail in the segment discussion below.

Acquisition costs – Acquisition costs were $34.6 million and $13.2 million for the three months ended March 31, 2015 and 2014, respectively. The increase for 2015 was due to the acquisition costs associated with the net premiums earned by Torus.

Salaries and benefits – Salaries and benefits were $57.8 million and $31.4 million for the three months ended March 31, 2015 and 2014, respectively. This increase in 2015 was due predominantly to the salaries and benefits costs associated with our increased head count relating to the Torus and

 

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Sussex acquisitions, in addition to an increase in our bonus accrual amount for the three months ended 2015 due to higher net earnings.

General and administrative expenses – General and administrative expenses for the three months ended March 31, 2015 and 2014 were $38.8 million and $22.3 million, respectively. The increase for 2015 was due principally to general and administrative expenses associated with the Torus and Sussex acquisitions.

Net foreign exchange gains (losses) – Net foreign exchange gains (losses) for the three months ended March 31, 2015 and 2014 were $5.1 million and $(1.6) million, respectively. The net foreign exchange gains for the three months ended March 31, 2015 were primarily attributable to our holding surplus Euro and British pound liabilities at a time when the U.S. dollar was strengthening against these currencies.

Income tax expense – Income tax expenses were $10.7 million and $7.3 million for the three months ended March 31, 2015 and 2014, respectively. The effective tax rate was 16.7% for the three months ended March 31, 2015 compared with 17.9% for the same period in 2014. Income tax expense is generated through our foreign operations outside of Bermuda, principally in the United States, U.K and Australia. Our income tax expense may fluctuate significantly from period to period depending on the geographic distribution of pre-tax earnings or loss in any given period between different jurisdictions with different tax rates.

Noncontrolling interest – Net earnings attributable to noncontrolling interest for the three months ended March 31, 2015 increased by $4.8 million to $8.6 million. The increase in 2015 was primarily attributable to increased earnings during the period associated with our Torus and Atrium segments (in which there are redeemable noncontrolling interests and noncontrolling interests).

Overall, net earnings attributable to Enstar Group Limited increased $15.3 million, or 51.6%, from $29.6 million for the three months ended March 31, 2014, to $44.8 million for the three months ended March 31, 2015.

Results of Operations by Segment – For the Three Months Ended March 31, 2015 and 2014

Non-life Run-off Segment

Our non-life run-off segment comprises the operations of our subsidiaries that are running off their property and casualty and other non-life lines of business, including the run-off businesses of Arden and Torus. It also includes our smaller management business, in which we manage the run-off portfolios of third parties through our service companies.

 

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The following is a discussion and analysis of our results of operations for our non-life run-off segment for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  
             2015                     2014          
     (in thousands of U.S. dollars)  

INCOME

    

Net premiums earned

   $ 18,492      $ 2,527   

Fees and commission income

     4,837        2,955   

Net investment income

     21,904        14,333   

Net realized and unrealized gains

     34,660        29,629   
  

 

 

   

 

 

 
  79,893      49,444   
  

 

 

   

 

 

 

EXPENSES

Net reduction in ultimate losses and loss adjustment expense liabilities

  (13,100   (29,182

Acquisition costs

  (1,705   —     

Salaries and benefits

  32,044      25,846   

General and administrative expenses

  22,947      15,763   

Interest expense

  2,520      2,561   

Net foreign exchange losses

  5,138      2,130   
  

 

 

   

 

 

 
  47,844      17,118   
  

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

  32,049      32,326   

INCOME TAXES

  (5,107   (3,651
  

 

 

   

 

 

 

NET EARNINGS

  26,942      28,675   

Less: Net losses (earnings) attributable to noncontrolling interest

  404      (3,075
  

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

$ 27,346    $ 25,600   
  

 

 

   

 

 

 

Summary Comparison of the Three Months Ended March 31, 2015 and 2014

In our non-life run-off segment, we reported consolidated net earnings, before net losses (earnings) attributable to noncontrolling interest, of approximately $26.9 million and $28.7 million for the three months ended March 31, 2015 and 2014, respectively.

The decrease in earnings of $1.8 million was attributable primarily to the following:

 

  (i) an increase in salaries and benefits of $6.2 million;

 

  (ii) an increase in general and administrative expenses of $7.2 million; and

 

  (iii) an increase in net foreign exchange losses of $3.0 million; partially offset by

 

  (iv) an increase in net investment income of $7.6 million;

 

  (v) an increase in net realized and unrealized gains of $5.0 million; and

 

  (vi) an increase of $3.2 million in net reduction in ultimate losses and loss adjustment expense liabilities related to prior periods.

Occasionally we write premium in our non-life run-off segment even though we do not actively seek to issue new policies in this segment. This written premium relates to the obligatory renewal of certain policies that we are in the process of placing into run-off, and the related earned premium tends to be largely or entirely offset by increases in net ultimate losses and loss adjustment expense liabilities related to these current period premiums. For the three months ended March 31, 2015 the total of: (i) net premiums earned of $18.5 million, less (ii) current period increase in net ultimate

 

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losses and loss adjustment expense liabilities of $20.7 million, plus (iii) acquisition costs of $1.7 million amounted to $(0.5) million and primarily related to the Sussex. For the three months ended March 31, 2014, the total of: (i) net premiums earned of $2.5 million, less (ii) current period increase in net ultimate losses and loss adjustment expense liabilities of $1.4 million, amounted to $1.1 million and related to SeaBright Holdings Inc., or SeaBright.

Noncontrolling interest in earnings for the non-life run-off segment decreased by $3.5 million to $(0.4) million for the three months ended March 31, 2015 as a result of lower earnings in those companies in which there are noncontrolling interests.

Net earnings for the non-life run-off segment attributable to Enstar Group Limited increased by $1.7 million from $25.6 million for the three months ended March 31, 2014 to $27.3 million for the three months ended March 31, 2015.

Net Premiums Earned:

 

     Three Months Ended March 31,  
     2015     Variance      2014  
     (in thousands of U.S. dollars)  

Gross premiums written

   $ 10,785         $ 1,319   

Ceded reinsurance premiums written

     2,762           (276
  

 

 

      

 

 

 

Net premiums written

  13,547    $ 12,504      1,043   
  

 

 

      

 

 

 

Gross premiums earned

  27,755      2,768   

Ceded reinsurance premiums earned

  (9,263   (241
  

 

 

      

 

 

 

Net premiums earned

$ 18,492    $ 15,965    $ 2,527   
  

 

 

      

 

 

 

Premiums Written

Gross non-life run-off premiums written for the three months ended March 31, 2015 consisted of direct premiums written and premiums assumed primarily by Sussex. Sussex was placed into run-off immediately following the acquisition, but it is renewing expiring insurance policies where it is obligated to do so by applicable regulations. In future periods, we would expect to have declining levels of gross and net premiums written relating to the Sussex run-off business.

Premiums Earned

Gross non-life run-off premiums earned for the three months ended March 31, 2015 and 2014, totaled $27.8 million and $2.8 million, respectively. Ceded reinsurance premiums earned for the three months ended March 31, 2015 and 2014 totaled $9.3 million and $0.2 million, respectively. Accordingly, net premiums earned for the three months ended March 31, 2015 and 2014 totaled $18.5 million and $2.5 million, respectively. Premiums written and earned in 2015 primarily relate to Sussex whereas premiums written and earned in 2014 related to SeaBright.

With our expectation that premiums written by Sussex will decrease significantly over time, we believe that there will be a similar reduction in premiums earned as policies non-renew. As noted above, net premiums earned in our non-life run-off segment are largely or entirely offset by increases in net ultimate losses and loss adjustment expense liabilities related to policies issued in the current period. See also our discussion of “Net Reduction in Ultimate Losses and Loss Adjustment Expense Liabilities” below.

 

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Net Investment Income and Net Realized and Unrealized Gains:

 

     Three Months Ended March 31,  
     Net Investment Income      Net Realized and Unrealized Gains  
     2015      Variance      2014            2015          Variance          2014        
     (in thousands of U.S. dollars)  

Total

   $ 21,904       $ 7,571       $ 14,333       $ 34,660       $ 5,031       $ 29,629   
  

 

 

       

 

 

    

 

 

       

 

 

 

Net investment income for the non-life run-off segment for the three months ended March 31, 2015 increased by $7.6 million to $21.9 million, as compared to $14.3 million for the three months ended March 31, 2014. The increase was a result of the following:

 

  (i) an increase of $0.8 million in investment income from equities and other investments;

 

  (ii) an increase of $2.9 million in other investment income related primarily to recoveries received in excess of their cost on acquired insolvent debts; and

 

  (iii) an increase in investment income of $3.9 million that arose primarily as a result of increased investment balances on our cash and fixed maturity portfolios as compared to those in 2014 due to our acquisition of Companion.

Net realized and unrealized gains for the non-life run-off segment for the three months ended March 31, 2015 and 2014 were $34.7 million and $29.6 million, respectively. The increase of $5.0 million was primarily attributable to:

 

  (i) an increase of $4.9 million in net realized and unrealized gains in our private equity and other investment holdings attributable to:

 

    an increase in net realized and unrealized gains on equity funds in 2015 due to higher global equity returns in underlying portfolios as compared to those earned in 2014;

 

    an increase in income earned on our private equity funds in 2015, due to higher returns earned in 2015 as compared to those earned in 2014; and

 

    higher returns on our senior secured loan fund investments.

 

  (ii) an increase of $1.3 million related to fixed maturity securities largely due to a decrease in treasury yields; partially offset by

 

  (iii) a decrease of $1.2 million in net realized and unrealized gains on our equity portfolio. The decrease between 2015 and 2014 was due mostly to lower gains in our U.S. large capitalization equity exposure for the three months ended March 31, 2015 as compared to the same period in 2014.

Annualized Returns

The below table presents the annualized investment returns (inclusive of net investment income and net realized and unrealized gains (losses)) earned by the non-life run-off segment on its cash and investments for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  
     Annualized Return     Average Cash and
Investment Balances
 
         2015             2014         2015      2014  
                 (in thousands of U.S. dollars)  

Cash and fixed maturity investments

     2.65     2.14   $ 3,844,998       $ 4,025,517   

Other investments and equities

     13.78     11.81     901,587         764,879   

Combined overall

     4.77     3.67     4,746,585         4,790,396   

 

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The average credit ratings by fair value of our fixed maturity investments for our non-life run-off segment as at March 31, 2015 and 2014 were A+.

Net Reduction in Ultimate Losses and Loss Adjustment Expense Liabilities:

The following table shows the components of the movement in the net reduction in ultimate losses and loss adjustment expense liabilities for the non-life run-off segment for the three months ended March 31, 2015 and 2014:

 

    Three Months Ended March 31,  
    2015     2014  
    Prior
Periods
    Current
Period
    Total     Prior
Periods
    Current
Period
    Total  
    (in thousands of U.S. dollars)  

Net losses paid

  $ 60,689      $ 4,571      $ 65,260      $ 87,155      $ 532      $ 87,687   

Net change in case and LAE reserves

    (9,994     2,994        (7,000