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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
Commission File Number 001-33289

https://cdn.kscope.io/8164126115261a50078abc709fe5b36e-enlogo2016a01.gif
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.)

Windsor Place, 3rd Floor, 22 Queen Street, Hamilton HM JX, Bermuda
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (441) 292-3645

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 5, 2017, the registrant had outstanding 16,418,069 voting ordinary shares and 3,004,443
non-voting convertible ordinary shares, each par value $1.00 per share.
 

Table of Contents



Enstar Group Limited
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2017

Table of Contents
 
 
 
Page
PART I
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.

Table of Contents


PART I — FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2017 and December 31, 2016
 
March 31,
2017
 
December 31,
2016
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
263,511

 
$
222,918

Short-term investments, available-for-sale, at fair value (amortized cost: 2017 — $nil; 2016 — $287)
—

 
268

Fixed maturities, trading, at fair value
5,585,818

 
4,388,242

Fixed maturities, available-for-sale, at fair value (amortized cost: 2017 — $244,199; 2016 — $269,577)
242,686

 
267,499

Equities, trading, at fair value
106,337

 
95,047

Other investments, at fair value
932,155

 
937,047

Other investments, at cost
133,127

 
131,651

Total investments
7,263,634

 
6,042,672

Cash and cash equivalents
921,562

 
954,871

Restricted cash and cash equivalents
392,413

 
363,774

Funds held - directly managed
1,209,689

 
994,665

Premiums receivable
430,023

 
406,676

Deferred tax assets
12,436

 
11,374

Prepaid reinsurance premiums
234,107

 
219,115

Reinsurance balances recoverable
1,450,865

 
1,460,743

Reinsurance balances recoverable, at fair value
551,253

 
—

Funds held by reinsured companies
88,326

 
82,073

Deferred acquisition costs
72,088

 
58,114

Goodwill and intangible assets
183,685

 
184,855

Other assets
835,607

 
842,356

Assets held for sale
1,237,189

 
1,244,456

TOTAL ASSETS
$
14,882,877

 
$
12,865,744

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses
$
5,835,758

 
$
5,987,867

Losses and loss adjustment expenses, at fair value
1,924,829

 
—

Policy benefits for life and annuity contracts
111,709

 
112,095

Unearned premiums
578,951

 
548,343

Insurance and reinsurance balances payable
430,769

 
394,021

Deferred tax liabilities
23,265

 
28,356

Debt obligations
730,845

 
673,603

Other liabilities
757,357

 
705,318

Liabilities held for sale
1,142,247

 
1,150,787

TOTAL LIABILITIES
11,535,730

 
9,600,390

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST
473,064

 
454,522

 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Share capital authorized, issued and fully paid, par value $1 each (authorized 2017 and 2016: 156,000,000):

 

Ordinary shares (issued and outstanding 2017: 16,381,083; 2016: 16,175,250)
16,381

 
16,175

Non-voting convertible ordinary shares:
 
 
 
Series C (issued and outstanding 2017: 2,599,672; 2016: 2,792,157)
2,600

 
2,792

Series E (issued and outstanding 2017: 404,771; 2016: 404,771)
405

 
405

Series C Preferred Shares (issued and outstanding 2017: 388,571; 2016: 388,571)
389

 
389

Treasury shares at cost (Preferred shares 2017: 388,571; 2016: 388,571)
(421,559
)
 
(421,559
)
Additional paid-in capital
1,382,421

 
1,380,109

Accumulated other comprehensive loss
(21,727
)
 
(23,549
)
Retained earnings
1,905,956

 
1,847,550

Total Enstar Group Limited Shareholders’ Equity
2,864,866

 
2,802,312

Noncontrolling interest
9,217

 
8,520

TOTAL SHAREHOLDERS’ EQUITY
2,874,083

 
2,810,832

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
14,882,877

 
$
12,865,744


See accompanying notes to the unaudited condensed consolidated financial statements

1
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 2017 and 2016
    
 
Three Months Ended
March 31,
 
2017
 
2016
 
(expressed in thousands of U.S. dollars, except share and per share data)
INCOME
 
 
 
Net premiums earned
$
148,898

 
$
192,887

Fees and commission income
11,914

 
6,424

Net investment income
48,739

 
50,280

Net realized and unrealized gains
58,519

 
38,277

Other income
12,198

 
2,410

 
280,268

 
290,278

EXPENSES
 
 
 
Net incurred losses and loss adjustment expenses
77,892

 
83,218

Life and annuity policy benefits
(301
)
 
158

Acquisition costs
20,821

 
45,029

General and administrative expenses
102,468

 
92,934

Interest expense
6,868

 
5,398

Net foreign exchange losses
3,715

 
1,772

 
211,463

 
228,509

EARNINGS BEFORE INCOME TAXES
68,805

 
61,769

INCOME TAXES
2,929

 
(7,369
)
NET EARNINGS FROM CONTINUING OPERATIONS
71,734

 
54,400

NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE
371

 
205

NET EARNINGS
72,105

 
54,605

Less: Net earnings attributable to noncontrolling interest
(17,425
)
 
(9,085
)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
54,680

 
$
45,520

 
 
 
 
Earnings per ordinary share attributable to Enstar Group Limited:
 
 
 
Basic:
 
 
 
Net earnings from continuing operations
$
2.80

 
$
2.34

Net earnings from discontinued operations
0.02

 
0.02

Net earnings per ordinary share
$
2.82

 
$
2.36

Diluted:
 
 
 
Net earnings from continuing operations
$
2.78

 
$
2.33

Net earnings from discontinued operations
0.02

 
0.02

Net earnings per ordinary share
$
2.80

 
$
2.35

Weighted average ordinary shares outstanding:
 
 
 
Basic
19,374,728

 
19,282,946

Diluted
19,501,663

 
19,408,894


See accompanying notes to the unaudited condensed consolidated financial statements

2
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2017 and 2016
 
    
 
Three Months Ended
March 31,
 
2017
 
2016
 
(expressed in thousands of U.S. dollars)
NET EARNINGS
$
72,105

 
$
54,605

Other comprehensive income, net of tax:
 
 
 
Unrealized holding gains on fixed income investments arising during the period
686

 
6,964

Reclassification adjustment for net realized gains included in net earnings
(149
)
 
(22
)
Unrealized gains arising during the period, net of reclassification adjustment
537

 
6,942

Currency translation adjustment
1,942

 
10,595

Total other comprehensive income
2,479

 
17,537

Comprehensive income
74,584

 
72,142

Less comprehensive income attributable to noncontrolling interest
(18,082
)
 
(10,566
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
56,502

 
$
61,576


See accompanying notes to the unaudited condensed consolidated financial statements


3
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2017 and 2016
 
Three Months Ended
March 31,
 
2017
 
2016
 
(expressed in thousands of U.S. dollars)
Share Capital — Ordinary Shares
 
 
 
Balance, beginning of period
$
16,175

 
$
16,133

Issue of shares
14

 
30

Conversion of Series C Non-Voting Convertible Ordinary Shares
192

 
—

Balance, end of period
$
16,381

 
$
16,163

Share Capital — Series A Non-Voting Convertible Ordinary Shares
 
 
 
Balance, beginning and end of period
$
—

 
$
2,973

Share Capital — Series C Non-Voting Convertible Ordinary Shares
 
 
 
Balance, beginning of period
$
2,792

 
$
2,726

Conversion to Ordinary Shares
(192
)
 
—

Balance, end of period
$
2,600

 
$
2,973

Share Capital — Series E Non-Voting Convertible Ordinary Shares
 
 
 
Balance, beginning and end of period
$
405

 
$
405

Share Capital — Series C Convertible Participating Non-Voting Perpetual Preferred Stock
 
 
 
Balance, beginning and end of period
$
389

 
$
—

Treasury Shares
 
 
 
Balance, beginning and end of period
$
(421,559
)
 
$
(421,559
)
Additional Paid-in Capital
 
 
 
Balance, beginning of period
$
1,380,109

 
$
1,373,044

Issue of shares and warrants
(511
)
 
(79
)
Amortization of equity incentive plan
2,823

 
238

Balance, end of period
$
1,382,421

 
$
1,373,203

Accumulated Other Comprehensive Loss
 
 
 
Balance, beginning of period
$
(23,549
)
 
$
(35,162
)
Currency translation adjustment
 
 
 
Balance, beginning of period
(18,993
)
 
(23,790
)
Change in currency translation adjustment
1,933

 
10,595

Balance, end of period
(17,060
)
 
(13,195
)
Defined benefit pension liability
 
 
 
Balance, beginning and end of period
(4,644
)
 
(7,723
)
Unrealized gains (losses) on investments
 
 
 
Balance, beginning of period
88

 
(3,649
)
Change in unrealized gains (losses) on investments
(111
)
 
5,463

Balance, end of period
(23
)
 
1,814

Balance, end of period
$
(21,727
)
 
$
(19,104
)
Retained Earnings
 
 
 
Balance, beginning of period
$
1,847,550

 
$
1,578,312

Net earnings attributable to Enstar Group Limited
54,680

 
45,520

Accretion of redeemable noncontrolling interests to redemption value
(1,156
)
 
(875
)
Cumulative effect of change in accounting principle
4,882

 
—

Balance, end of period
$
1,905,956

 
$
1,622,957

Noncontrolling Interest (excludes Redeemable Noncontrolling Interest)
 
 
 
Balance, beginning of period
$
8,520

 
$
3,911

Net earnings attributable to noncontrolling interest
697

 
—

Foreign currency translation adjustments
—

 
(21
)
Balance, end of period
$
9,217

 
$
3,890

 
See accompanying notes to the unaudited condensed consolidated financial statements

4
Table of Contents


ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2017 and 2016
 
Three Months Ended
March 31,
 
2017
 
2016
 
(expressed in thousands
 of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings
$
72,105

 
$
54,605

Net earnings from discontinued operations
(371
)
 
(205
)
Adjustments to reconcile net earnings to cash flows used in operating activities:
 
 
 
Net realized (gains) losses on sale of investments
(8,252
)
 
1,411

Net unrealized (gains) on investments
(50,267
)
 
(39,688
)
Other non-cash items
1,225

 
1,053

Depreciation and other amortization
9,302

 
10,745

Net change in trading securities held on behalf of policyholders
83

 
(1,093
)
Sales and maturities of trading securities
1,076,770

 
642,180

Purchases of trading securities
(2,275,239
)
 
(711,545
)
Changes in:
 
 
 
Reinsurance balances recoverable
(540,939
)
 
72,067

Funds held by reinsured companies
(221,277
)
 
(1,085,780
)
Losses and loss adjustment expenses
1,769,233

 
916,058

Policy benefits for life and annuity contracts
(1,972
)
 
(2,954
)
Insurance and reinsurance balances payable
36,508

 
11,719

Unearned premiums
30,607

 
24,682

Other operating assets and liabilities
8,345

 
(44,550
)
Net cash flows used in operating activities
(94,139
)
 
(151,295
)
INVESTING ACTIVITIES:
 
 
 
Sales and maturities of available-for-sale securities
24,724

 
25,846

Purchase of available-for-sale securities
(7,188
)
 
(3,582
)
Purchase of other investments
(38,237
)
 
3,487

Redemption of other investments
69,326

 
62,838

Other investing activities
(4,981
)
 
(1,219
)
Net cash flows provided by investing activities
43,644

 
87,370

FINANCING ACTIVITIES:
 
 
 
Receipt of loans
437,100

 
—

Repayment of loans
(381,000
)
 
(20,500
)
Net cash flows provided by (used in) financing activities
56,100

 
(20,500
)
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
(10,275
)
 
3,939

NET DECREASE IN CASH AND CASH EQUIVALENTS
(4,670
)
 
(80,486
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,318,645

 
1,295,169

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,313,975

 
$
1,214,683

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
3,917

 
$
10,687

Interest paid
$
6,385

 
$
4,534

 
 
 
 
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
921,562

 
718,479

Restricted cash and cash
392,413

 
496,204

Cash, cash equivalents and restricted cash
$
1,313,975

 
$
1,214,683

See accompanying notes to the unaudited condensed consolidated financial statements

5
Table of Contents


ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 and December 31, 2016

(Tabular information expressed in thousands of U.S. dollars except share and per share data)
 
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation and Consolidation
These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. 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 items considered necessary for a fair presentation under U.S. GAAP. The results of operations for any interim period are not necessarily indicative of results of the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. All significant inter-company transactions and balances have been eliminated. Results of operations for acquired subsidiaries are included from the date of acquisition. In these notes, the terms "we," "us," "our," or "the Company" refer to Enstar Group Limited and its consolidated subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings.
The preparation of these 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Results of changes in estimates are reflected in earnings in the period in which the change is made. Our principal estimates include, but are not limited to:
•
liability for losses and loss adjustment expenses ("LAE");
•
liability for policy benefits for life and annuity contracts;
•
reinsurance balances recoverable;
•
gross and net premiums written and net premiums earned;
•
impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale or held-to-maturity, and impairments on goodwill, intangible assets and deferred charges;
•
fair value measurements of investments;
•
fair value estimates associated with accounting for acquisitions;
•
fair value estimates associated with loss portfolio transfer reinsurance agreements for which we have elected the fair value option; and
•
redeemable noncontrolling interests.
Significant New Accounting Policies
As a result of electing the fair value option in relation to the two new transactions described in Note 2 - "Significant New Business", the Company has adopted a significant new accounting policy during the three months ended March 31, 2017. Other than the policy described below, there have been no material changes to the Company’s significant accounting policies from those described in Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

6
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Retroactive Reinsurance - Fair Value Option
In our Non-life Run-off segment we have elected to apply the fair value option for certain loss portfolio transfer reinsurance transactions. This is an irrevocable election that applies to all balances under the insurance contract, including funds held assets, reinsurance recoverable, and the liability for losses and loss adjustment expenses.
The Company uses an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and reinsurance recoverable asset. Note 6 - "Fair Value Measurements" describes the internal model, including the observable and unobservable inputs used in the model.
New Accounting Standards Adopted in 2017
Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The impact of adopting this guidance on our consolidated financial statements was a cumulative-effect adjustment of $4.9 million to opening retained earnings for the excess tax benefit not previously recognized.

ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities

In March 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-08, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The adoption of this guidance did not have a material impact on our consolidated financial statements.

ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting

In March 2016, the FASB issued ASU 2016-07, which simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. Entities are therefore required to apply the guidance prospectively to increases in the level of ownership interest or degree of influence occurring after the ASU’s effective date. The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The adoption of this guidance did not have any impact our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Note 2 "Significant Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2016 describes accounting pronouncements that were not adopted as of December 31, 2016. Those pronouncements are not yet adopted unless discussed above in "New Accounting Standards Adopted in 2017". In addition, the following pronouncements were issued during the three months ended March 31, 2017 and are not yet adopted.

ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued ASU 2017-07, which amends the requirements in Accounting Standards Codification (“ASC”) 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The ASU requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the statement of earnings, and (2) present the other components elsewhere in the statement of earnings and outside of income from operations if such a subtotal is presented. The ASU also requires entities to disclose the captions within the statement of earnings that contain the other components if they are not presented on appropriately described separate lines. In addition, only the service-cost component of the net benefit cost is eligible for capitalization, which is a change from current practice, under which entities capitalize the aggregate net benefit cost when applicable. The ASU’s amendments are effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

7
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets    

In February 2017, the FASB issued ASU 2017-05 to clarify the scope of the Board’s guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The ASU clarifies that ASC 610-20 applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. The ASU also clarifies that if a transaction is partially within the scope of ASC 610-20 and partially within the scope of other guidance, an entity should apply the separation and allocation guidance in ASC 606. The ASU also requires an entity to derecognize the nonfinancial asset or in-substance nonfinancial asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary pursuant to ASC 810, and (2) control of the asset is transferred in accordance with ASC 606. The effective date of the ASU is aligned with the requirements in the new revenue standard, which is effective for interim and annual reporting periods beginning after December 15, 2017. Similar to the new revenue standard, the ASU allows an entity to use a full or modified retrospective adoption approach. Similar to the new revenue standard, we expect to adopt this guidance on January 1, 2018 using the modified retrospective approach, however we do not expect this adoption to have a material impact on our consolidated financial statements.
2. SIGNIFICANT NEW BUSINESS
RSA
On February 7, 2017, we entered into an agreement to reinsure U.K. employers' liability legacy business of RSA Insurance Group PLC ("RSA"). Pursuant to the transaction, our subsidiary assumed gross insurance reserves of £1,046.4 million ($1,301.8 million), relating to 2005 and prior year business. Net insurance reserves assumed were £927.5 million ($1,153.9 million) and the reinsurance premium paid to Enstar’s subsidiary was £801.6 million ($997.2 million). We elected the fair value option for this reinsurance contract. The initial fair value adjustment on the gross reserves was $174.1 million, and on the net reserves was $156.7 million. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and assumptions.
Following the initial reinsurance transaction, which transferred the economics of the portfolio up to the policy's limits, we and RSA are pursuing a portfolio transfer of the business under Part VII of the Financial Services and Markets Act 2000, which would provide legal finality for RSA's obligations.  The transfer is subject to court, regulatory and other approvals.
QBE
On January 11, 2017, we closed a transaction to reinsure multi-line property and casualty business of QBE Insurance Group Limited ("QBE"). Our subsidiary assumed gross reinsurance reserves of approximately $1,019.0 million (net reserves of $447.0 million) relating to the portfolio, which primarily includes workers' compensation, construction defect, and general liability discontinued lines of business. We elected the fair value option for this reinsurance contract. The initial fair value adjustment on the gross reserves was $180.0 million, and on the net reserves was $43.2 million. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and assumptions.
In addition our subsidiary has pledged a portion of the premium as collateral to a subsidiary of QBE, and we have provided additional collateral and a limited parental guarantee.

8
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




3. HELD-FOR-SALE BUSINESS
On February 17, 2017, we entered into a definitive agreement to sell Pavonia Holdings (US) Inc. and its subsidiaries (“Pavonia”) for total consideration of $120.0 million to Southland National Holdings, Inc. The transaction is expected to close in the third or fourth quarter of 2017. The closing of the transaction is subject to customary closing conditions, including regulatory approvals. The proceeds of the sale are expected to be used to pay down our revolving credit facility following closing.
Pavonia is a substantial portion of the Life and Annuities segment. We have classified the assets and liabilities of the businesses to be sold as held-for-sale. The following table summarizes the components of assets and liabilities held-for-sale on our consolidated balance sheet as at March 31, 2017 and December 31, 2016:
 
March 31,
2017
 
December 31,
2016
Assets:
 
 
 
Fixed maturities, trading, at fair value
$
299,451

 
$
326,382

Fixed maturities, held-to-maturity, at amortized cost
761,821

 
765,554

Equities, trading, at fair value
4,640

 
4,428

Other investments, at fair value
15,261

 
15,114

Cash and cash equivalents
26,893

 
18,018

Restricted cash and cash equivalents
13,027

 
5,202

Deferred tax assets
31,500

 
31,500

Reinsurance balances recoverable
17,754

 
18,029

Other assets
66,842

 
60,229

Total assets held for sale
$
1,237,189

 
$
1,244,456

 
 
 
 
Liabilities:
 
 
 
Policy benefits for life and annuity contracts
$
1,136,230

 
$
1,144,850

Other liabilities
6,017

 
5,937

Total liabilities held for sale
$
1,142,247

 
$
1,150,787

As of March 31, 2017 and December 31, 2016, included in the table above were restricted investments of $781.2 million and $786.0 million, respectively.
The cumulative currency translation adjustment ("CTA") balance in accumulated other comprehensive income (loss), a component of shareholders’ equity, included $(14.4) million and $(14.8) million as at March 31, 2017 and December 31, 2016, respectively, related to Pavonia. Upon completion of the sale, the CTA will be included in earnings as a reduction of the gain on sale.















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




The Pavonia business qualifies as a discontinued operation. The following table summarizes the components of net earnings (losses) from discontinued operations on the consolidated statements of earnings for the three months ended March 31, 2017 and 2016:

 
March 31,
2017
 
March 31,
2016
INCOME
 
 
 
Net premiums earned
$
14,325

 
$
16,522

Net investment income
10,029

 
9,609

Net realized and unrealized gains (losses)
1,622

 
(313
)
Other income
360

 
3

 
$
26,336

 
$
25,821

EXPENSES
 
 
 
Life and annuity policy benefits
20,670

 
20,822

Acquisition costs
2,036

 
2,236

General and administrative expenses
3,057

 
2,413

Other expenses
(16
)
 
3

 
$
25,747

 
$
25,474

EARNINGS BEFORE INCOME TAXES
589

 
347

INCOME TAXES
(218
)
 
$
(140
)
NET EARNINGS FROM DISCONTINUED OPERATIONS
371

 
207


The following table presents the cash flows of Pavonia for the three months ended March 31, 2017, and 2016:
 
March 31,
2017
 
March 31,
2016
Operating activities
$
15,463

 
$
(10,793
)
Investing activities
1,237

 
11,008

Change in cash of businesses held for sale
$
16,700

 
$
215




10
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




4. INVESTMENTS
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair value; (ii) available-for-sale portfolios of fixed maturity and short-term investments carried at fair value; and (iii) other investments carried at either fair value or cost.
Trading
The fair values of our fixed maturity investments, short-term investments and equities classified as trading were as follows:
 
March 31,
2017
 
December 31,
2016
U.S. government and agency
$
776,216

 
$
840,274

Non-U.S. government
896,757

 
267,363

Corporate
3,080,120

 
2,387,322

Municipal
54,830

 
47,181

Residential mortgage-backed
334,767

 
373,528

Commercial mortgage-backed
223,567

 
217,212

Asset-backed
483,072

 
478,280

Total fixed maturity and short-term investments
5,849,329

 
4,611,160

Equities — U.S.
106,337

 
95,047

 
$
5,955,666

 
$
4,706,207

Included within residential and commercial mortgage-backed securities as at March 31, 2017 were securities issued by U.S. governmental agencies with a fair value of $268.2 million (as at December 31, 2016: $362.9 million). Included within corporate securities as at March 31, 2017 were senior secured loans of $57.1 million (as at December 31, 2016: $90.7 million).
The contractual maturities of our fixed maturity and short-term investments classified as trading are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
As at March 31, 2017
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair
Value
One year or less
 
$
893,102

 
$
886,878

 
15.2
%
More than one year through two years
 
734,677

 
732,586

 
12.5
%
More than two years through five years
 
1,450,747

 
1,445,942

 
24.7
%
More than five years through ten years
 
1,031,378

 
1,034,548

 
17.7
%
More than ten years
 
693,101

 
707,969

 
12.1
%
Residential mortgage-backed
 
338,576

 
334,767

 
5.7
%
Commercial mortgage-backed
 
227,756

 
223,567

 
3.8
%
Asset-backed
 
475,082

 
483,072

 
8.3
%
 
 
$
5,844,419

 
$
5,849,329

 
100.0
%



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




Available-for-sale
The amortized cost and fair values of our fixed maturity and short-term investments classified as available-for-sale were as follows:
As at March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
11,003

 
$
—

 
$
(98
)
 
$
10,905

Non-U.S. government
 
83,938

 
821

 
(2,165
)
 
82,594

Corporate
 
138,986

 
1,861

 
(1,977
)
 
138,870

Municipal
 
5,967

 
16

 
(11
)
 
5,972

Residential mortgage-backed
 
467

 
37

 
—

 
504

Asset-backed
 
3,838

 
3

 
—

 
3,841

 
 
$
244,199

 
$
2,738

 
$
(4,251
)
 
$
242,686

As at December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
12,784

 
$
32

 
$
(106
)
 
$
12,710

Non-U.S. government
 
86,897

 
1,303

 
(2,777
)
 
85,423

Corporate
 
159,243

 
2,040

 
(2,628
)
 
158,655

Municipal
 
6,585

 
12

 
(21
)
 
6,576

Residential mortgage-backed
 
488

 
39

 
—

 
527

Asset-backed
 
3,867

 
9

 
—

 
3,876

 
 
$
269,864

 
$
3,435

 
$
(5,532
)
 
$
267,767

 The contractual maturities of our fixed maturity and short-term investments classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As at March 31, 2017
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair
Value
One year or less
 
$
50,370

 
$
49,092

 
20.2
%
More than one year through two years
 
47,021

 
45,851

 
18.9
%
More than two years through five years
 
64,942

 
64,279

 
26.5
%
More than five years through ten years
 
41,016

 
42,091

 
17.3
%
More than ten years
 
36,545

 
37,028

 
15.3
%
Residential mortgage-backed
 
467

 
504

 
0.2
%
Asset-backed
 
3,838

 
3,841

 
1.6
%
 
 
$
244,199

 
$
242,686

 
100.0
%

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




Gross Unrealized Losses
The following tables summarize our fixed maturity and short-term investments in a gross unrealized loss position:
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at March 31, 2017
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity and short-term investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
—

 
$
—

 
$
10,777

 
$
(98
)
 
$
10,777

 
$
(98
)
Non-U.S. government
 
6,230

 
(1,144
)
 
32,082

 
(1,021
)
 
38,312

 
(2,165
)
Corporate
 
6,782

 
(1,414
)
 
41,181

 
(563
)
 
47,963

 
(1,977
)
Municipal
 
—

 
—

 
2,603

 
(11
)
 
2,603

 
(11
)
Total fixed maturity and short-term investments
 
$
13,012

 
$
(2,558
)
 
$
86,643

 
$
(1,693
)
 
$
99,655

 
$
(4,251
)
  
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at December 31, 2016
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity and short-term investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
—

 
$
—

 
$
10,743

 
$
(106
)
 
$
10,743

 
$
(106
)
Non-U.S. government
 
8,316

 
(1,794
)
 
30,086

 
(983
)
 
38,402

 
(2,777
)
Corporate
 
8,003

 
(1,800
)
 
42,304

 
(828
)
 
50,307

 
(2,628
)
Municipal
 
—

 
—

 
3,132

 
(21
)
 
3,132

 
(21
)
Total fixed maturity and short-term investments
 
$
16,319

 
$
(3,594
)
 
$
86,265

 
$
(1,938
)
 
$
102,584

 
$
(5,532
)
As at March 31, 2017 and December 31, 2016, the number of securities classified as available-for-sale in an unrealized loss position was 140 and 156, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 32 and 41, respectively.
Other-Than-Temporary Impairment
For the three months ended March 31, 2017 and 2016, we did not recognize any other-than-temporary impairment losses on our available-for-sale securities. We determined that no credit losses existed as at March 31, 2017 and 2016. A description of our other-than-temporary impairment process is included in Note 2 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016. There were no changes to our process during the three months ended March 31, 2017.

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




Credit Ratings
The following table sets forth the credit ratings of our fixed maturity and short-term investments as of March 31, 2017:
 
 
Amortized
Cost
 
Fair Value
 
% of Total
Investments
 
AAA Rated
 
AA Rated
 
A Rated
 
BBB
Rated
 
Non-
Investment
Grade
 
Not Rated
Fixed maturity and short-term investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
790,244

 
$
787,121

 
12.9
%
 
$
782,678

 
$
4,443

 
$
—

 
$
—

 
$
—

 
$
—

Non-U.S. government
 
974,929

 
979,351

 
16.1
%
 
140,016

 
748,030

 
71,630

 
18,798

 
—

 
877

Corporate
 
3,216,890

 
3,218,990

 
52.8
%
 
163,042

 
474,830

 
1,683,839

 
769,272

 
122,925

 
5,082

Municipal
 
60,836

 
60,802

 
1.0
%
 
25,856

 
28,906

 
4,623

 
1,417

 
—

 
—

Residential mortgage-backed
 
339,043

 
335,271

 
5.5
%
 
284,488

 
11,122

 
6,128

 
279

 
33,253

 
1

Commercial mortgage-backed
 
227,756

 
223,567

 
3.7
%
 
89,253

 
44,067

 
45,729

 
28,142

 
23

 
16,353

Asset-backed
 
478,920

 
486,913

 
8.0
%
 
200,514

 
58,461

 
106,377

 
42,694

 
76,729

 
2,138

Total
 
6,088,618

 
6,092,015

 
100.0
%
 
1,685,847

 
1,369,859

 
1,918,326

 
860,602

 
232,930

 
24,451

% of total fair value
 
 
 
 
 
 
 
27.7
%
 
22.5
%
 
31.5
%
 
14.1
%
 
3.8
%
 
0.4
%
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
March 31,
2017
 
December 31,
2016
Private equities and private equity funds
 
$
284,385

 
$
300,529

Fixed income funds
 
253,499

 
249,023

Fixed income hedge funds
 
78,537

 
85,976

Equity funds
 
244,488

 
223,571

CLO equities
 
56,964

 
61,565

CLO equity funds
 
13,350

 
15,440

Other
 
932

 
943

 
 
$
932,155

 
$
937,047

The valuation of our other investments is described in Note 6 - "Fair Value Measurements." Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month lag. We regularly review and discuss fund performance with the 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. The following is a description of the nature of each of these investment categories:
•
Private equities and private equity funds invest primarily in the financial services industry. All of our investments in private equities and private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates of our initial investments.
•
Fixed income funds comprise 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 invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of up to three years from the time of initial investment. Once eligible, redemptions are permitted quarterly with 90 days’ notice.

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




•
Equity funds invest in a diversified portfolio of international publicly traded equity securities. The funds have liquidity terms that vary from daily to every two weeks.
•
CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by us in these securities.
•
CLO equity funds comprise two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. One of the funds has a fair value of $2.0 million, part of a self-liquidating structure that is expected to pay out over one to five years. The other fund has a fair value of $11.4 million and is eligible for redemption in 2018.
•
Other primarily comprises a fund that provides loans to educational institutions throughout the United States and its territories.
Investments of $0.5 million in fixed income hedge funds were subject to gates or side-pockets, where redemptions are subject to the sale of underlying investments. A gate is the ability to deny or delay a redemption request, whereas a side-pocket is a designated account for which the investor loses its redemption rights.
As at March 31, 2017, we had unfunded commitments to private equity funds of $142.6 million.
Other Investments, at cost
Our other investments carried at cost of $133.1 million as of March 31, 2017 consist of life settlement contracts. During the three months ended March 31, 2017 and 2016, net investment income included $6.9 million and $8.8 million, respectively, related to investments in life settlements. There were impairment charges of $0.1 million and $nil recognized in net realized and unrealized gains/losses during the three months ended March 31, 2017 and 2016, respectively. The following table presents further information regarding our investments in life settlements as of March 31, 2017 and December 31, 2016.
 
 
March 31, 2017
 
December 31, 2016

 
Number of Contracts
 
Carrying
Value
 
Face Value (Death Benefits)
 
Number of Contracts
 
Carrying
Value
 
Face Value (Death Benefits)
Remaining Life Expectancy of Insureds:
 
 
 
 
 
 
 
 
 
 
 
 
0 – 1 year
 
2

 
$
471

 
$
700

 
2

 
$
461

 
$
700

1 – 2 years
 
7

 
11,748

 
18,206

 
7

 
11,396

 
18,337

2 – 3 years
 
11

 
15,802

 
29,743

 
11

 
15,338

 
29,715

3 – 4 years
 
16

 
17,041

 
31,205

 
17

 
17,013

 
32,189

4 – 5 years
 
17

 
17,943

 
38,302

 
16

 
10,377

 
23,302

Thereafter
 
172

 
70,122

 
407,607

 
181

 
77,066

 
431,034

Total
 
225

 
$
133,127

 
$
525,763

 
234

 
$
131,651

 
$
535,277

Remaining life expectancy for year 0-1 in the table above references policies whose current life expectancy is less than 12 months as of the reporting date. Remaining life expectancy is not an indication of expected maturity. Actual maturity in any category above may vary significantly (either earlier or later) from the remaining life expectancies reported.
At March 31, 2017, our best estimate of the life insurance premiums required to keep the policies in force, payable in the 12 months ending March 31, 2018 and the four succeeding years ending March 31, 2022 is $17.5 million, $17.4 million, $17.6 million, $16.0 million and $15.2 million, respectively.

15
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Net Realized and Unrealized Gains
Components of net realized and unrealized gains for the three months ended March 31, 2017 and 2016 were as follows:
 
 
Three Months Ended
March 31,
 
 
2017

2016
Net realized gains (losses) on sale:
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
$
160

 
$
265

Gross realized losses on fixed maturity securities, available-for-sale
 
(11
)
 
(243
)
Net realized losses on fixed maturity securities, trading
 
(1,052
)
 
(1,906
)
Net realized gains on equity securities, trading
 
574

 
473

Net realized gains on other investments
 
12,434

 
—

Net realized investment losses on funds held - directly managed
 
(3,853
)
 
—

Total net realized gains (losses) on sale
 
$
8,252

 
$
(1,411
)
Net unrealized gains:
 


 
 
Fixed maturity securities, trading
 
$
23,316

 
$
43,196

Equity securities, trading
 
8,686

 
1,724

Other investments
 
11,075

 
(5,232
)
Change in fair value of embedded derivative on funds held - directly managed
 
6,928

 
—

Change in value of fair value option on funds held - directly managed
 
262

 
—

Total net unrealized gains
 
50,267

 
39,688

Net realized and unrealized gains
 
$
58,519

 
$
38,277

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $24.7 million and $15.4 million for the three months ended March 31, 2017 and 2016, respectively.
Net Investment Income
Major categories of net investment income for the three months ended March 31, 2017 and 2016 are summarized as follows:
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Fixed maturity investments
 
$
30,330

 
$
27,198

Short-term investments and cash and cash equivalents
 
2,640

 
1,158

Equity securities
 
726

 
1,060

Other investments
 
3,509

 
6,034

Funds held
 
39

 
7,604

Funds held - directly managed
 
7,002

 
—

Life settlements and other
 
6,896

 
8,443

Gross investment income
 
51,142

 
51,497

Investment expenses
 
(2,403
)
 
(1,217
)
Net investment income
 
$
48,739

 
$
50,280


16
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Restricted Assets
We are required to maintain investments and cash and cash equivalents on deposit to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. We also utilize trust accounts to collateralize business with our 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 our restricted assets, including restricted cash of $392.4 million and $363.8 million, as of March 31, 2017 and December 31, 2016, respectively, was as follows: 
 
 
March 31,
2017
 
December 31,
2016
Collateral in trust for third party agreements
 
$
3,260,539

 
$
1,975,022

Assets on deposit with regulatory authorities
 
795,290

 
882,400

Collateral for secured letter of credit facilities
 
175,069

 
177,263

Funds at Lloyd's (1)
 
220,216

 
220,328

 
 
$
4,451,114

 
$
3,255,013

(1) Our underwriting businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has a loss that cannot be funded from other sources. We have an unsecured letter of credit agreement for Funds at Lloyd’s purposes ("FAL Facility") to issue up to $140.0 million of letters of credit, with a provision to increase the facility up to $200.0 million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and expires in 2021. As at March 31, 2017, our combined Funds at Lloyd's were comprised of cash and investments of $220.2 million and unsecured letters of credit of $122.0 million.
The increase in the collateral in trust for third-party agreements was primarily due to the loss portfolio transfer reinsurance transactions with RSA and QBE described in Note 2 - "Significant New Business".

17
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




5. FUNDS HELD - DIRECTLY MANAGED
Funds held - directly managed is comprised of the following:
•
The funds held balance in relation to the Allianz transaction, described in Note 2 - "Significant New Business" in our consolidated financial statements in Form 10-K for the year ended December 31, 2016, moved from a fixed crediting rate to a variable rate of return on the underlying investments on October 1, 2016. This variable return reflects the economics of the investment portfolio underlying the funds held asset and qualifies as an embedded derivative. We have recorded the aggregate of the funds held, typically held at cost, and the embedded derivative as a single amount in our consolidated balance sheet. As at March 31, 2017 and December 31, 2016, the funds held at cost had a carrying value of $1,054.3 million and $1,023.0 million, respectively, and the embedded derivative had a fair value of $(21.4) million and $(28.3) million, respectively, the aggregate of which was $1,032.9 million and $994.7 million, respectively, as included in the table below.
•
The fair value option was elected for the QBE reinsurance transaction described in Note 2 - "Significant New Business". As at March 31, 2017, the funds held had an amortized cost of $176.5 million and fair value of $176.8 million.
The following table presents the fair values of assets and liabilities underlying the funds held - directly managed account as at March 31, 2017 and December 31, 2016:
 
March 31,
2017
 
December 31,
2016
Fixed maturity investments:
 
 
 
U.S. government and agency
$
34,187

 
$
47,885

Non-U.S. government
6,059

 
5,961

Corporate
786,315

 
663,556

Municipal
54,019

 
38,927

Commercial mortgage-backed
174,748

 
151,395

Asset-backed
96,207

 
79,806

Total fixed maturity investments
$
1,151,535

 
$
987,530

Other assets
58,154

 
7,135

 
$
1,209,689

 
$
994,665

The contractual maturities of our fixed maturity investments underlying the funds held - directly managed account are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As at March 31, 2017
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair Value
More than one year through two years
 
$
34,050

 
$
34,058

 
3.0
%
More than two years through five years
 
314,843

 
313,321

 
27.2
%
More than five years through ten years
 
277,009

 
271,393

 
23.5
%
More than ten years
 
269,532

 
261,808

 
22.7
%
Commercial mortgage-backed
 
181,047

 
174,748

 
15.2
%
Asset-backed
 
96,184

 
96,207

 
8.4
%
 
 
$
1,172,665

 
$
1,151,535

 
100.0
%


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




Credit Ratings
The following table sets forth the credit ratings of our fixed maturity investments underlying the funds held - directly managed account as of March 31, 2017.
 
 
Amortized
Cost
 
Fair Value
 
% of Total
Investments
 
AAA
Rated
 
AA Rated
 
A Rated
 
BBB
Rated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
34,198

 
$
34,187

 
3.0
%
 
$
34,187

 
$
—

 
$
—

 
$
—

Non-U.S. government
 
6,019

 
6,059

 
0.5
%
 
—

 
—

 
2,948

 
3,111

Corporate
 
799,530

 
786,315

 
68.2
%
 
7,199

 
63,529

 
312,830

 
402,757

Municipal
 
55,687

 
54,019

 
4.7
%
 
—

 
17,861

 
28,960

 
7,198

Commercial mortgage-backed
 
181,047

 
174,748

 
15.2
%
 
169,738

 
3,007

 
2,003

 
—

Asset-backed
 
96,184

 
96,207

 
8.4
%
 
92,523

 
3,684

 
—

 
—

Total
 
$
1,172,665

 
$
1,151,535

 
100.0
%
 
$
303,647

 
$
88,081

 
$
346,741

 
$
413,066

% of total fair value
 
 
 
 
 
 
 
26.4
%
 
7.6
%
 
30.1
%
 
35.9
%
Net Realized Gains and Change in Fair Value due to Embedded Derivative and Fair Value Option
Net realized gains and change in fair value for the three months ended March 31, 2017 are summarized as follows:
 
 
2017
Net realized losses on fixed maturity securities
 
$
(3,853
)
Change in fair value of embedded derivative
 
6,928

Change in value of fair value option on funds held - directly managed
 
262

Net realized gains (losses) and change in fair value of funds held - directly managed
 
$
3,337

There were no funds held - directly managed as at March 31, 2016.
Net Investment Income
Major categories of net investment income underlying the funds held - directly managed for the three months ended March 31, 2017 are summarized as follows:
 
 
2017
Fixed maturity investments
 
$
7,485

Short-term investments and cash and cash equivalents
 
65

Gross investment income
 
7,550

Investment expenses
 
(548
)
Investment income on funds held - directly managed
 
$
7,002

6. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
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. We use 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 we have 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

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




rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted third party pricing sources or management's assumptions and internal valuation models may be used to determine the fair values.
We have categorized our assets and liabilities that are recorded at fair value on a recurring basis among levels based on the observability of inputs as follows:  
 
 
March 31, 2017
Investments:
 
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
 
$
—

 
$
787,121

 
$
—

 
$
787,121

Non-U.S. government
 
—

 
979,351

 
—

 
979,351

Corporate
 
—

 
3,162,811

 
56,179

 
3,218,990

Municipal
 
—

 
60,802

 
—

 
60,802

Residential mortgage-backed
 
—

 
335,271

 
—

 
335,271

Commercial mortgage-backed
 
—

 
198,715

 
24,852

 
223,567

Asset-backed
 
—

 
457,831

 
29,082

 
486,913

Equities — U.S.
 
102,192

 
4,145

 
—

 
106,337

Other investments
 
—

 
375,650

 
69,627

 
445,277

Total investments
 
$
102,192

 
$
6,361,697

 
$
179,740

 
$
6,643,629

 
 
 
 
 
 
 
 
 
Funds Held - Directly Managed:
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
—

 
$
34,187

 
$
—

 
$
34,187

Non-U.S. government
 
—

 
6,059

 
—

 
6,059

Corporate
 
—

 
786,315

 
—

 
786,315

Municipal
 
—

 
54,019

 
—

 
54,019

Commercial mortgage-backed
 
—

 
174,748

 
—

 
174,748

Asset-backed
 
—

 
96,207

 
—

 
96,207

Other funds held assets
 
—

 
58,154

 
—

 
58,154

 
 
$
—

 
$
1,209,689

 
$
—

 
$
1,209,689

 
 
 
 
 
 
 
 
 
Reinsurance recoverable:
 
 
 
 
 
 
Reinsurance recoverable
 
$
—

 
$
—

 
$
551,253

 
$
551,253

 
 
$
—

 
$
—

 
$
551,253

 
$
551,253

 
 
 
 
 
 
 
 
 
Other Assets:
 
 
 
 
 
 
 
 
Derivative Instruments
 
$
—

 
$
54

 
$
—

 
$
54

 
 
$
—

 
$
54

 
$
—

 
$
54

 
 
 
 
 
 
 
 
 
Losses and LAE:
 
 
 
 
 
 
Losses and LAE
 
$
—

 
$
—

 
$
1,924,829

 
$
1,924,829

 
 
$
—

 
$
—

 
$
1,924,829

 
$
1,924,829

 
 
 
 
 
 
 
 
 
Other Liabilities:
 
 
 
 
 
 
 
 
Derivative Instruments
 
$
—

 
$
965

 
$
—

 
$
965

 
 
$
—

 
$