Document

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 September 30, 2018
Commission File Number 001-33289

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12537747&doc=12
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 every Interactive Data File required to be submitted 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 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 at November 5, 2018, the registrant had outstanding 17,951,076 voting ordinary shares and 3,509,682 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 September 30, 2018

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
CONSOLIDATED FINANCIAL STATEMENTS
Page    


1

Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2018 (unaudited) and December 31, 2017
 
September 30,
2018
 
December 31,
2017
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
231,950

 
$
180,211

Fixed maturities, trading, at fair value
6,313,330

 
5,696,073

Fixed maturities, available-for-sale, at fair value (amortized cost: 2018 — $163,696; 2017 — $208,097)
163,144

 
210,285

Equities, trading, at fair value
130,314

 
106,603

Other investments, at fair value
2,036,430

 
913,392

Other investments, at cost

 
125,621

Total investments (Note 5 and Note 7)
8,875,168

 
7,232,185

Cash and cash equivalents
553,419

 
955,150

Restricted cash and cash equivalents
474,590

 
257,686

Funds held - directly managed (Note 6)
1,217,182

 
1,179,940

Premiums receivable
574,419

 
425,702

Deferred tax assets (Note 19)
13,782

 
13,001

Prepaid reinsurance premiums
191,669

 
245,101

Reinsurance balances recoverable (Note 9)
1,183,003

 
1,478,806

Reinsurance balances recoverable, at fair value (Note 7 and Note 9)
792,553

 
542,224

Funds held by reinsured companies
254,029

 
175,383

Deferred acquisition costs
125,132

 
64,984

Goodwill and intangible assets (Note 13)
219,295

 
180,589

Other assets
646,987

 
831,320

Assets held for sale (Note 4)

 
24,351

TOTAL ASSETS
$
15,121,228

 
$
13,606,422

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses (Note 10)
$
5,516,012

 
$
5,603,419

Losses and loss adjustment expenses, at fair value (Note 7 and Note 10)
3,019,721

 
1,794,669

Policy benefits for life and annuity contracts (Note 11)
107,466

 
117,207

Unearned premiums
743,024

 
583,197

Insurance and reinsurance balances payable
381,114

 
236,697

Deferred tax liabilities (Note 19)
14,942

 
15,262

Debt obligations (Note 14)
394,470

 
646,689

Other liabilities
570,474

 
972,457

Liabilities held for sale (Note 4)

 
11,271

TOTAL LIABILITIES
10,747,223

 
9,980,868

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 21)

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST (Note 15)
458,328

 
479,606

 
 
 
 
SHAREHOLDERS’ EQUITY (Note 16)
 
 
 
Ordinary shares (par value $1 each, issued and outstanding 2018: 21,443,789; 2017: 19,406,722):

 

Voting Ordinary shares (issued and outstanding 2018: 17,934,107; 2017: 16,402,279)
17,934

 
16,402

Non-voting convertible ordinary Series C Shares (issued and outstanding 2018 and 2017: 2,599,672)
2,600

 
2,600

Non-voting convertible ordinary Series E Shares (issued and outstanding 2018: 910,010; 2017: 404,771)
910

 
405

Preferred Shares:
 
 
 
Series C Preferred Shares (issued and held in treasury 2018 and 2017: 388,571)
389

 
389

Series D Preferred Shares (issued and outstanding 2018: 16,000)
400,000

 

Treasury shares, at cost (Series C Preferred shares 2018 and 2017: 388,571)
(421,559
)
 
(421,559
)
Additional paid-in capital
1,812,727

 
1,395,067

Accumulated other comprehensive income
9,170

 
10,468

Retained earnings
2,083,193

 
2,132,912

Total Enstar Group Limited Shareholders’ Equity
3,905,364

 
3,136,684

Noncontrolling interest
10,313

 
9,264

TOTAL SHAREHOLDERS’ EQUITY
3,915,677

 
3,145,948

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
15,121,228

 
$
13,606,422


See accompanying notes to the unaudited condensed consolidated financial statements

2

Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three and Nine Months Ended September 30, 2018 and 2017
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(expressed in thousands of U.S. dollars,
except share and per share data)
INCOME
 
 
 
 
 
 
 
Net premiums earned
$
264,597

 
$
148,025

 
$
663,628

 
$
452,494

Fees and commission income
6,950

 
15,895

 
23,633

 
46,476

Net investment income
69,430

 
52,028

 
202,218

 
150,184

Net realized and unrealized gains (losses)
(57,223
)
 
29,301

 
(254,671
)
 
139,697

Other income (expenses)
11,543

 
(3,848
)
 
34,477

 
19,206

 
295,297

 
241,401

 
669,285

 
808,057

EXPENSES
 
 
 
 
 
 
 
Net incurred losses and loss adjustment expenses
153,974

 
75,712

 
266,327

 
163,224

Life and annuity policy benefits
423

 
1,060

 
217

 
5,048

Acquisition costs
54,242

 
24,281

 
137,684

 
75,457

General and administrative expenses
102,553

 
100,325

 
300,425

 
309,283

Interest expense
4,640

 
6,410

 
21,573

 
20,851

Net foreign exchange losses
1,040

 
4,775

 
1,389

 
15,612

Loss on sale of subsidiary

 
6,740

 

 
16,349

 
316,872

 
219,303

 
727,615

 
605,824

EARNINGS (LOSS) BEFORE INCOME TAXES
(21,575
)
 
22,098

 
(58,330
)
 
202,233

INCOME TAXES
(746
)
 
(1,432
)
 
(4,564
)
 
(3,234
)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
(22,321
)
 
20,666

 
(62,894
)
 
198,999

NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES

 
3,495

 

 
(1,005
)
NET EARNINGS (LOSS)
(22,321
)
 
24,161

 
(62,894
)
 
197,994

Net loss (earnings) attributable to noncontrolling interest
11,489

 
14,832

 
19,096

 
(14,135
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
(10,832
)
 
38,993

 
(43,798
)
 
183,859

Dividends on preferred shares
(5,133
)
 

 
(5,133
)
 

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(15,965
)
 
$
38,993

 
$
(48,931
)
 
$
183,859

 
 
 
 
 
 
 
 
Earnings (Loss) per ordinary share attributable to Enstar Group Limited:
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
$
(0.74
)
 
$
1.83

 
$
(2.39
)
 
$
9.54

Net earnings (loss) from discontinued operations

 
0.18

 

 
(0.05
)
Net earnings (loss) per ordinary share
$
(0.74
)
 
$
2.01

 
$
(2.39
)
 
$
9.49

Diluted:
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
$
(0.74
)
 
$
1.81

 
$
(2.39
)
 
$
9.47

Net earnings (loss) from discontinued operations

 
0.18

 

 
(0.05
)
Net earnings (loss) per ordinary share
$
(0.74
)
 
$
1.99

 
$
(2.39
)
 
$
9.42

Weighted average ordinary shares outstanding:
 
 
 
 
 
 
 
Basic
21,440,914

 
19,392,120

 
20,444,634

 
19,384,897

Diluted
21,665,356

 
19,559,168

 
20,653,544

 
19,515,987

See accompanying notes to the unaudited condensed consolidated financial statements

3

Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
NET EARNINGS (LOSS)
$
(22,321
)
 
$
24,161

 
$
(62,894
)
 
$
197,994

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized holding gains (losses) on fixed income available-for-sale investments arising during the period
(1,310
)
 
2,219

 
(3,007
)
 
4,598

Reclassification adjustment for net realized gains (losses) included in net earnings
2

 
(3
)
 
53

 
(254
)
Unrealized gains (losses) arising during the period, net of reclassification adjustments
(1,308
)
 
2,216

 
(2,954
)
 
4,344

Change in currency translation adjustment
(143
)
 
4,194

 
1,258

 
8,451

Reclassification to earnings on disposal of subsidiary

 
7,440

 

 
7,440

Total currency translation adjustment
(143
)
 
11,634

 
1,258

 
15,891

Total other comprehensive income (loss)
(1,451
)
 
13,850

 
(1,696
)
 
20,235

Comprehensive income (loss)
(23,772
)
 
38,011

 
(64,590
)
 
218,229

Comprehensive (income) loss attributable to noncontrolling interest
11,505

 
14,432

 
19,494

 
(15,983
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
(12,267
)
 
$
52,443

 
$
(45,096
)
 
$
202,246

See accompanying notes to the unaudited condensed consolidated financial statements


4

Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2018 and 2017
 
Nine Months Ended September 30,
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
Share Capital — Voting Ordinary Shares
 
 
 
Balance, beginning of period
$
16,402

 
$
16,175

Issue of shares
1,532

 
24

Conversion of Series C Non-Voting Convertible Ordinary Shares

 
192

Balance, end of period
$
17,934

 
$
16,391

Share Capital — Series C Non-Voting Convertible Ordinary Shares
 
 
 
Balance, beginning of period
$
2,600

 
$
2,792

Conversion to Ordinary Shares

 
(192
)
Balance, end of period
$
2,600

 
$
2,600

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

 
$
405

Issue of shares
505

 

Balance, end of period
$
910

 
$
405

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

 
$
389

Share Capital — Series D Perpetual Noncumulative Preferred Shares
 
 
 
Balance, beginning of period
$

 
$

Issue of shares
400,000

 

Balance, end of period
$
400,000

 
$

Treasury Shares (Series C Preferred shares)
 
 
 
Balance, beginning and end of period
$
(421,559
)
 
$
(421,559
)
Additional Paid-in Capital
 
 
 
Balance, beginning of period
$
1,395,067

 
$
1,380,109

Issue of voting ordinary shares
413,679

 
647

Issuance costs of Series D preferred shares
(10,781
)
 

Amortization of share-based compensation
14,762

 
10,473

Balance, end of period
$
1,812,727

 
$
1,391,229

Accumulated Other Comprehensive Income (Loss)
 
 
 
Balance, beginning of period
$
10,468

 
$
(23,549
)
Currency translation adjustment
 
 
 
Balance, beginning of period
11,171

 
(18,993
)
Change in currency translation adjustment
1,270

 
8,440

Reclassification to earnings on disposal of subsidiary

 
7,440

Balance, end of period
12,441

 
(3,113
)
Defined benefit pension liability
 
 
 
Balance, beginning and end of period
(3,143
)
 
(4,644
)
Unrealized gains (losses) on available-for-sale investments
 
 
 
Balance, beginning of period
2,440

 
88

Change in unrealized gains (losses) on available-for-sale investments
(2,568
)
 
2,508

Balance, end of period
(128
)
 
2,596

Balance, end of period
$
9,170

 
$
(5,161
)
Retained Earnings
 
 
 
Balance, beginning of period
$
2,132,912

 
$
1,847,550

Net earnings (losses) attributable to Enstar Group Limited
(62,894
)
 
197,994

Net loss (earnings) attributable to noncontrolling interest
19,096

 
(14,135
)
Dividends on preferred shares
(5,133
)
 

Change in redemption of redeemable noncontrolling interests
785

 
760

Cumulative effect of change in accounting principle
(1,573
)
 
4,882

Balance, end of period
$
2,083,193

 
$
2,037,051

Noncontrolling Interest (excludes Redeemable Noncontrolling Interest)
 
 
 
Balance, beginning of period
$
9,264

 
$
8,520

Contribution of capital
49

 
22

Net earnings attributable to noncontrolling interest
1,000

 
1,945

Balance, end of period
$
10,313

 
$
10,487

 
See accompanying notes to the unaudited condensed consolidated financial statements

5

Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
 
Nine Months Ended
September 30,
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings (loss)
$
(62,894
)
 
$
197,994

Net loss from discontinued operations

 
1,005

Adjustments to reconcile net earnings (losses) to cash flows used in operating activities:
 
 
 
Realized losses (gains) on sale of investments
15,794

 
(5,012
)
Unrealized losses (gains) on investments
190,598

 
(108,011
)
Depreciation and other amortization
25,276

 
28,925

Net change in trading securities held on behalf of policyholders

 
25,597

Sales and maturities of trading securities
3,380,333

 
4,111,406

Purchases of trading securities
(4,081,938
)
 
(5,611,677
)
Net loss on sale of subsidiary

 
16,349

Other non-cash items
12,978

 
10,544

Changes in:
 
 
 
Reinsurance balances recoverable
(305,434
)
 
(628,654
)
Funds held by reinsured companies
(115,888
)
 
(206,985
)
Losses and loss adjustment expenses
1,103,802

 
1,590,764

Policy benefits for life and annuity contracts
(5,928
)
 
170

Insurance and reinsurance balances payable
144,805

 
(140,356
)
Unearned premiums
159,827

 
20,330

Other operating assets and liabilities
(370,376
)
 
215,365

Net cash flows provided by (used in) operating activities
90,955

 
(482,246
)
INVESTING ACTIVITIES:
 
 
 
Acquisitions, net of cash acquired
2,317

 
(670
)
Sale of subsidiary, net of cash sold

 
19,690

Sales and maturities of available-for-sale securities
48,889

 
60,202

Purchase of available-for-sale securities
(10,385
)
 
(2,565
)
Purchase of other investments
(784,316
)
 
(98,203
)
Redemption of other investments
340,298

 
202,581

Other investing activities
(8,155
)
 
(16,831
)
Net cash flows provided by (used in) investing activities
(411,352
)
 
164,204

FINANCING ACTIVITIES:
 
 
 
Issuance of preferred shares, net of issuance costs
389,219

 

Dividends on preferred shares
(5,133
)
 

Contribution by noncontrolling interest
49

 
22

Dividends paid to noncontrolling interest

 
(27,458
)
Receipt of loans
441,022

 
534,100

Repayment of loans
(689,819
)
 
(564,203
)
Net cash flows provided by (used in) financing activities
135,338

 
(57,539
)
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
232

 
6,292

NET DECREASE IN CASH AND CASH EQUIVALENTS
(184,827
)
 
(369,289
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,212,836

 
1,318,645

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,028,009

 
$
949,356

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
16,268

 
$
11,107

Interest paid
$
24,618

 
$
18,043

 
 
 
 
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
553,419

 
624,451

Restricted cash and cash equivalents
474,590

 
324,905

Cash, cash equivalents and restricted cash
$
1,028,009

 
$
949,356


See accompanying notes to the unaudited condensed consolidated financial statements

6

Table of Contents


ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and December 31, 2017
(Tabular information expressed in thousands of U.S. dollars except share and per share data)

1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
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, 2017. All significant inter-company transactions and balances have been eliminated. 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.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP 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. Our 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. Accounting policies that we believe are most dependent on assumptions and estimates are considered to be our critical accounting policies and are related to the determination of:
liability for losses and loss adjustment expenses ("LAE");
liability for policy benefits for life 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, 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.
New Accounting Standards Adopted in 2018
Accounting Standards Update ("ASU") 2017-09, Stock Compensation - Scope of Modification Accounting
In May 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification ("ASC") 718 - Compensation - Stock Compensation. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of

7

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




the awards are the same immediately before and after the modification. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.

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 ASC 715 - Compensation - Retirement Benefits, 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 prior practice, under which entities capitalize the aggregate net benefit cost when applicable. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
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, which clarifies 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 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 adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, which requires immediate recognition of the tax consequences of many intercompany asset transfers other than inventory. The adoption of this guidance did not have a material impact on our consolidated financial statements and disclosures.
ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15, which amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
ASU 2016-01, Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued ASU 2016-01, which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many of the current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.
In February 2018, the FASB also issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities, which clarifies that entities should use a prospective transition approach only for equity securities they elect to measure using the new measurement alternative. The amendments also clarify that an entity that voluntarily discontinues using the measurement alternative for an equity security without a readily determinable fair value must measure that security and all identical or similar investments of the same issuer at fair value. Under this guidance, this election is irrevocable and will apply to all future purchases of identical or similar investments of the same issuer. The amendments also clarify other aspects of ASU 2016-01 on how to apply the measurement alternative and the presentation requirements for financial liabilities measured under the fair value option. The adoption of this guidance is contingent on the adoption of ASU 2016-01.

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We adopted ASU 2016-01 on January 1, 2018 using the modified retrospective approach and recorded a cumulative-effect adjustment of $1.6 million to reduce opening retained earnings for certain of our other investments that were previously classified as available-for-sale securities and for which changes in fair value were previously included in accumulated other comprehensive income. We also adopted ASU 2018-03 following our adoption of ASU 2016-01 and this adoption did not have any impact on our consolidated financial statements and related disclosures.
ASUs 2014-09, 2016-08, 2016-10, 2016-12, Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other FASB topics, primarily our premium revenues which are covered by ASC 944 - Financial Services - Insurance, and revenues from our investment portfolios which are covered by other FASB topics. While contracts within the scope of ASC 944 are excluded from the scope of the ASU, certain insurance-related contracts are within the scope of the ASU, for example contracts under which service providers charge their customers fixed fees in exchange for an agreement to provide services for an uncertain future event. Certain of the ASU’s provisions also apply to transfers of non-financial assets and include guidance on recognition and measurement.
In March 2016, the FASB also issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations, which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB then issued ASU 2016-10, Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing, which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB further issued ASU 2016-12, Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients, which clarifies the following aspects in ASU 2014-09 - (1a) collectability, (2) presentation of sales taxes and other similar taxes collected from customers, (3) non-cash considerations, (4) contract modifications at transition, (5) completed contracts at transition, and (6) technical correction.
We adopted ASU 2014-09 and the related amendments, as codified in ASC 606 - Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective method with prior periods not being restated. Premium revenues and those related to our investment portfolios, which collectively comprise most of our total revenues, are within the scope of other FASB topics and therefore are excluded from the scope of the revenue recognition standard. For other revenue types, which are within the scope of the new guidance, we evaluated individual contracts against the provisions of the new guidance to identify any contracts where the timing and measurement of those revenues may differ based upon the new guidance. The adoption did not have a material impact on our consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 describes accounting pronouncements that were not adopted as of December 31, 2017. Those pronouncements are not yet adopted unless discussed above in "New Accounting Standards Adopted in 2018." In addition, the following relevant pronouncements were issued during the nine months ended September 30, 2018 or thereafter and are yet to be adopted.
ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued ASU 2018-17, which clarifies that when determining whether a decision-making fee is a variable interest, a reporting entity should consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety, as currently required in GAAP. This amendment will, (1) likely result in more decision makers not having a variable interest through their decision-making arrangements, and (2) create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a variable interest entity ("VIE"). The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. All entities are required to apply this guidance retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. While some of our subsidiaries are involved in certain decision-making arrangements for which they earn fees that are considered variable interests, they do not meet the primary beneficiary definition under the VIE guidance with respect to these arrangements.

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Therefore, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and the related disclosures.
ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance in ASC 820 - Fair Value Measurement, by removing and modifying certain existing disclosure requirements, while also adding new disclosure requirements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted, with the amendments being applied either prospectively or retrospectively, as specified in the ASU. In addition, an entity may elect to early adopt the removal or modification of disclosures immediately and delay the adoption of the new disclosure requirements until the effective date. We are currently assessing the impact of adopting this guidance however we do not expect the new or modified disclosures to have a material impact on the disclosures in our consolidated financial statements.
ASU 2018-12, Targeted Improvements to the Accounting for Certain Long-Duration Insurance Contracts
In August 2018, the FASB issued ASU 2018-12, which amends the accounting and disclosure model for certain long-duration insurance contracts under U.S GAAP. The goal of the ASU's amendments is to improve the following aspects of financial reporting related to long-duration insurance contracts: (1) measurement of the liability for future policy benefits related to non-participating traditional and limited-payment contracts, (2) measurement and presentation of market risk benefits, (3) amortization of deferred acquisition costs, and (4) presentation and disclosures. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020, although early adoption is permitted. Once the transfer of our remaining life insurance policies from our subsidiary Alpha Insurance SA to Monument Insurance Group Limited is completed, as discussed in Note 11 - "Policy Benefits for Life Contracts", we will not have any residual exposures relating to long duration insurance contracts. Therefore, the adoption of this guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
ASU 2018-11, Targeted Improvements to ASC 842 - Leases and ASU 2018-10, Codification Improvements to ASC 842 - Leases
In July 2018, the FASB issued ASU 2018-11, which adds a transition option for all entities and a practical expedient only for lessors to the ASU 2016-02 - Leases guidance initially issued by the FASB in February 2016 and codified in ASC 842. The transition option which we will elect, allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can opt to continue to apply the legacy guidance in ASC 840 - Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. This means that entities that elect this option will only provide annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components.
In July 2018, the FASB also issued ASU 2018-10, which clarifies how to apply certain aspects of ASC 842. The amendments in the ASU address a number of issues in the new leases guidance, including (a) the rate implicit in the lease, (b) impairment of the net investment in the lease, (c) lessee reassessment of lease classification, (d) lessor reassessment of lease term and purchase options, (e) variable payments that depend on an index or rate, and (f) certain transition adjustments.

The amendments arising from both ASU 2018-11 and ASU 2018-10 have the same effective date and transition requirements as ASC 842, which we expect to adopt on January 1, 2019, when it becomes effective. Being a financial services company, the majority of our operating leases cover office space and facilities required to conduct our operations. Therefore on adoption of the leases guidance, we do not expect the right-of-use asset and the corresponding lease liability to be recorded relating to these operating lease arrangements, to be material as a proportion of our total assets and liabilities. In addition, the leases guidance is not expected to have a significant impact on the net lease expense that we will recognize in our consolidated statements of earnings as a result of our operating lease arrangements.

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ASU 2018-09, Codification Improvements
In July 2018, the FASB issued ASU 2018-09, which affects a wide variety of Topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The amendments in the ASU represent changes that clarify, correct errors in, or make minor improvements to the Codification. Ultimately, the amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. Some of the amendments in this ASU do not require transition guidance and are effective upon issuance of the ASU, while many of the amendments have transition guidance with effective dates for annual periods beginning after December 15, 2018. The adoption of the amendments in this ASU are not expected to have a material impact on our consolidated financial statements and related disclosures.
2. ACQUISITIONS
Maiden Re North America
On August 31, 2018, we entered into a definitive agreement to acquire Maiden Reinsurance North America, Inc. (“Maiden Re North America”) from a subsidiary of Maiden Holdings, Ltd.  Maiden Re North America is a diversified insurance company domiciled in Missouri that provides property and casualty treaty reinsurance, casualty facultative reinsurance and accident and health treaty reinsurance.  As part of the transaction, we will novate and assume certain reinsurance agreements from Maiden Re North America's Bermuda reinsurer, including certain reinsurance agreements with Maiden Re North America.
The net consideration payable in the transaction is $307.5 million, subject to certain closing adjustments. We will assume approximately $1.3 billion of net loss and loss adjustment expense reserves and unearned premium reserves upon closing.
We will operate the business in run-off, and we expect to finance the purchase price through a combination of cash on hand and borrowings under our revolving credit facility. 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 in the fourth quarter of 2018.
KaylaRe
Overview
On May 14, 2018, we completed the previously announced transaction to acquire all of the outstanding shares and warrants of KaylaRe Holdings, Ltd. ("KaylaRe"). In consideration for the acquired shares and warrants of KaylaRe, we issued an aggregate of 2,007,017 ordinary shares to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares. Effective May 14, 2018, we consolidated KaylaRe into our consolidated financial statements, and any balances between KaylaRe and Enstar are now eliminated upon consolidation.
The completion of the KaylaRe transaction enhanced our group capital position and enabled the Company to assume full ownership of another platform from which we can provide non-life run-off solutions to our clients.
Refer to Note 20 - "Related Party Transactions" for additional information relating to KaylaRe.

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Purchase Price
The components of the consideration paid to acquire all of the outstanding shares and warrants of KaylaRe were as follows:
Fair value of Enstar ordinary shares issued
 
$
414,750

Fair value of previously held equity method investment
 
336,137

Adjustment for the fair value of preexisting relationships
 
37,169

Total purchase price
 
$
788,056

Net assets acquired at fair value (excluding preexisting relationships)
 
$
746,320

Excess of purchase price over fair value of net assets acquired
 
$
41,736

The purchase price was allocated to the acquired assets and liabilities of KaylaRe based on their estimated fair values at the acquisition date. We recognized goodwill of $41.7 million on the transaction, primarily attributable to (i) the capital synergies from integrating KaylaRe into our group capital structure, (ii) investment management capabilities on a total return basis, and (iii) the incremental acquired capital to be utilized for future non-life run-off transactions.
Fair Value of Enstar Ordinary Shares Issued
The fair value of the Enstar ordinary shares issued was based on the closing price of $206.65 as at May 14, 2018, the date the transaction closed.
Number of Enstar Ordinary shares issued
 
2,007,017
Closing price of Enstar Ordinary shares as of May 14, 2018
 
$
206.65

Fair value of Enstar Ordinary shares issued to shareholders of KaylaRe
 
$
414,750

Fair Value of Previously Held Equity Method Investment
Prior to the close of the transaction, Enstar held a 48.2% interest in KaylaRe, which was accounted for as an equity method investment in accordance with ASC 323 - Investments - Equity Method and Joint Ventures. The acquisition of the remaining 51.8% equity interest in KaylaRe was considered a step acquisition, whereby we remeasured the previously held equity method investment to fair value. We considered multiple factors in determining the fair value of the previously held equity method investment, including, (i) the price negotiated with the selling shareholders for the 51.8% equity interest in KaylaRe, (ii) recent market transactions for similar companies, and (iii) current trading multiples for comparable companies. Based on this analysis, a valuation multiple of 1.05 to KaylaRe's carrying book value was determined to be appropriate to remeasure the previously held equity method investment at fair value. This resulted in the recognition of a gain of $16.0 million on completion of the step acquisition of KaylaRe, which was recorded in other income (loss) during the three months ended June 30, 2018.
Carrying value of previously held equity method investment prior to the close of the transaction
 
$
320,130

Price-to-book multiple
 
1.05
Fair value of previously held equity method investment prior to the close of the transaction
 
$
336,137

 
 
 
Gain recognized on remeasurement of previously held equity method investment to fair value
 
$
16,007

Adjustment for the Fair Value of Preexisting Relationships
Enstar had contractual preexisting relationships with KaylaRe, which were deemed to be effectively settled at fair value on the acquisition date. The differences between the carrying value and the fair value of the preexisting relationships was included as part of the purchase price in accordance with ASC 805 - Business Combinations. The fair value of the balances relating to preexisting reinsurance relationships with KaylaRe was determined using a discounted cash flow approach and, where applicable, consideration was given to stated contractual settlement provisions, when determining the loss to be recorded on the deemed settlement of these preexisting relationships. The fair values of the balances arising from the non-reinsurance preexisting relationships with KaylaRe were deemed

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to equal their carrying values given their short-term nature and the expectation that they would all be settled within the next twelve months.
As a result of effectively settling all the contractual preexisting relationships with KaylaRe, the Company recognized a loss of $15.6 million which was recorded in other income (loss) in the three months ended June 30, 2018, as summarized below:
ASSETS
Carrying value
 
Fair value
 
Loss on deemed settlement
Funds held by reinsured companies
$
386,793

 
$
386,793

 
$

Deferred acquisition costs/Value of business acquired
33,549

 
40,268

 
6,719

TOTAL ASSETS
420,342

 
427,061

 
6,719

LIABILITIES
 
 
 
 
 
Losses and LAE
339,747

 
333,205

 
(6,542
)
Unearned premiums
105,602

 
105,602

 

Insurance and reinsurance balances payable
25,897

 
23,559

 
(2,338
)
Other liabilities
1,864

 
1,864

 

TOTAL LIABILITIES
473,110

 
464,230

 
(8,880
)
NET ASSETS (LIABILITIES)
$
(52,768
)
 
$
(37,169
)
 
$
15,599

Fair Value of Net Assets Acquired and Liabilities Assumed
The following table summarizes the fair values of the assets acquired and liabilities assumed (excluding preexisting relationships) in the KaylaRe transaction at the acquisition date, which have all been allocated to the Non-life Run-off segment.
ASSETS
 
 
Fixed maturities, trading, at fair value
 
$
126,393

Other investments, at fair value
 
626,476

Total investments
 
752,869

Cash and cash equivalents
 
5,657

Premiums receivable
 
10,965

Deferred acquisition costs
 
275

Other assets
 
614

TOTAL ASSETS
 
$
770,380

LIABILITIES
 
 
Losses and LAE
 
$
4,059

Unearned premiums
 
10,984

Insurance and reinsurance balances payable
 
13

Other liabilities
 
9,004

TOTAL LIABILITIES
 
24,060

NET ASSETS ACQUIRED AT FAIR VALUE
 
$
746,320


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The table below summarizes the results of the KaylaRe operations which are included in our condensed consolidated statement of earnings from the acquisition date to September 30, 2018:
Premiums earned
 
$
10,188

Incurred losses and LAE
 
(9,190
)
Acquisition costs
 
(332
)
Underwriting income
 
666

Net investment income
 
1,972

Net unrealized gains
 
(6,621
)
General and administrative expenses
 
(573
)
Net loss
 
$
(4,556
)

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3. SIGNIFICANT NEW BUSINESS
Coca-Cola
On August 1, 2018, we entered into a reinsurance transaction with The Coca-Cola Company and its subsidiaries ("Coca-Cola"), pursuant to which we reinsured certain of Coca-Cola's retention and deductible risks under its subsidiaries' U.S. workers' compensation, auto liability, general liability and product liability insurance coverage. We assumed total gross reserves of $120.8 million for cash consideration of $103.6 million and recorded a deferred charge of $17.2 million, included in other assets. We transferred the cash consideration received of $103.6 million into a trust to support our obligations under the reinsurance agreement.
Zurich Australia
On February 23, 2018, we entered into a reinsurance agreement with Zurich Australian Insurance Limited, a subsidiary of Zurich Insurance Group ("Zurich") to reinsure its New South Wales Vehicle Compulsory Third Party ("CTP") insurance business. Under the agreement, which was effective as of January 1, 2018, we assumed gross loss reserves of AUD$359.4 million ($280.8 million) in exchange for a reinsurance premium consideration of AUD$343.9 million ($268.7 million). We elected the fair value option for this reinsurance contract and recorded an initial fair value adjustment of AUD$15.5 million ($12.1 million) on the assumed gross loss reserves. Refer to Note 7 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business, we and Zurich are pursuing a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's Insurance Act 1973 (Cth), which will provide legal finality for Zurich's obligations. The transfer is subject to court, regulatory and other approvals.
Neon RITC Transaction
On February 16, 2018, we completed a reinsurance-to-close (“RITC”) transaction with Neon Underwriting Limited ("Neon"), under which we reinsured to close the 2015 and prior underwriting years of account (comprising underwriting years 2008 to 2015) of Neon's Syndicate 2468, with effect from January 1, 2018. We assumed gross loss reserves of £403.9 million ($546.3 million) and net loss reserves of £342.1 million ($462.6 million) relating to the portfolio in exchange for a reinsurance premium consideration of £329.1 million ($445.1 million). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $20.6 million and $17.5 million on the gross and net loss reserves assumed, respectively. Refer to Note 7 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the closing of the transaction, we have taken responsibility for claims handling and provided complete finality to Neon's obligations.
Novae RITC Transaction
On January 29, 2018, we entered into an RITC transaction with AXIS Managing Agency Limited, under which we reinsured to close the 2015 and prior underwriting years of account of Novae Syndicate 2007 ("Novae"), with effect from January 1, 2018. We assumed gross loss reserves of £860.1 million ($1,163.2 million) and net loss reserves of £630.7 million ($853.0 million) relating to the portfolio in exchange for a reinsurance premium consideration of £594.1 million ($803.5 million). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $67.5 million and $49.5 million on the gross and net loss reserves assumed, respectively. Refer to Note 7 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the closing of the transaction, we have taken responsibility for claims handling and provided complete finality to Novae's obligations.

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4. DIVESTITURES, HELD-FOR-SALE BUSINESSES AND DISCONTINUED OPERATIONS
Pavonia
On December 29, 2017, we completed the previously announced sale of our subsidiary, Pavonia Holdings (US) Inc. ("Pavonia"), to Southland National Holdings, Inc. ("Southland"), a Delaware corporation and a subsidiary of Global Bankers Insurance Group, LLC. The aggregate purchase price was $120.0 million. We used the proceeds to make repayments under its revolving credit facility.
Pavonia owns Pavonia Life Insurance Company of Michigan (“PLIC MI”) and Enstar Life (US), Inc. Pursuant to the amended stock purchase agreement between us and Southland, which partially restructured the transaction, Southland has agreed to acquire Pavonia Life Insurance Company of New York ("PLIC NY") for $13.1 million in a second closing that is subject to regulatory approval. In the event that the second closing has not occurred by December 29, 2018 (unless further extended by the parties), we will evaluate strategic alternatives for PLIC NY, which may include the pursuit of an alternative sale transaction or a plan to retain the business. The additional purchase price represents the cash consideration we paid to PLIC MI when we acquired PLIC NY from PLIC MI as a result of the restructuring of the first closing of the transaction.
Pavonia was a substantial portion of our previously reported Life and Annuities segment. We 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 December 31, 2017:
 
December 31,
2017
Assets:
 
Fixed maturities, trading, at fair value
$
20,770

Equities, trading, at fair value
765

Cash and cash equivalents
6,314

Restricted cash and cash equivalents
13

Reinsurance balances recoverable
1,728

Other assets
269

Assets of businesses held for sale
29,859

Less: Accrual of loss on sale
(5,508
)
Total assets held for sale
$
24,351

 
 
Liabilities:
 
Policy benefits for life and annuity contracts
$
10,666

Other liabilities
605

Total liabilities held-for-sale
$
11,271

As at December 31, 2017, included in the table above were restricted investments of $1.4 million.
As at September 30, 2018, included within Other assets and Other liabilities on our consolidated balance sheet were amounts of $23.3 million and $10.3 million, respectively, relating to PLIC NY.

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




The Pavonia business qualified as a discontinued operation during the three and nine months ended September 30, 2017. The following table summarizes the components of net earnings from discontinued operations on the unaudited condensed consolidated statements of earnings for the three and nine months ended September 30, 2017:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2017
INCOME
 
 
 
Net premiums earned
$
14,082

 
$
42,012

Net investment income
10,077

 
30,383

Net realized and unrealized gains (losses)
(233
)
 
2,543

Other income
384

 
1,139

 
24,310

 
76,077

EXPENSES
 
 
 
Life and annuity policy benefits
15,320

 
60,102

Acquisition costs
2,412

 
6,728

General and administrative expenses
2,809

 
9,584

Other expenses
4

 
(12
)
 
20,545

 
76,402

EARNINGS (LOSSES) BEFORE INCOME TAXES
3,765

 
(325
)
INCOME TAXES
(270
)
 
(680
)
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS
$
3,495

 
$
(1,005
)
The following table presents the cash flows of Pavonia for the nine months ended September 30, 2017:
 
Nine Months Ended
September 30,
 
2017
Operating activities
$
42,558

Investing activities
8,129

Change in cash of businesses held-for-sale
$
50,687

Laguna
On August 29, 2017, we completed a transaction to sell Laguna Life DAC (“Laguna”) for total consideration of €25.6 million (approximately $30.8 million) to a subsidiary of Monument Re Limited ("Monument"). We have an investment in Monument, as described further in Note 20 - "Related Party Transactions". Laguna was classified as held-for-sale during 2017 prior to its sale.
The net losses relating to Laguna for the three and nine months ended September 30, 2017 were $0.9 million and $1.1 million, respectively. These amounts were not significant to our consolidated operations and therefore we did not classify Laguna as a discontinued operation for prior periods. Following the closing of the sale of Laguna, we recorded a loss on sale of subsidiary of $6.7 million and $16.3 million for the three and nine months ended September 30, 2017, respectively, which was included in earnings from continuing operations before income taxes in our consolidated statement of earnings. The total loss recorded on the sale of Laguna of $16.3 million included a cumulative currency translation adjustment balance of $6.3 million, which upon completion of the sale during the third quarter of 2017 was reclassified from accumulated other comprehensive income and included in earnings as a component of the loss on sale of Laguna.


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5. 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 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:
 
September 30,
2018
 
December 31,
2017
U.S. government and agency
$
493,080

 
$
554,036

Non-U.S. government
1,018,212

 
607,132

Corporate
3,703,029

 
3,363,060

Municipal
76,599

 
100,221

Residential mortgage-backed
275,485

 
288,713

Commercial mortgage-backed
411,575

 
421,548

Asset-backed
567,300

 
541,574

Total fixed maturity and short-term investments
6,545,280

 
5,876,284

Equities — U.S.
72,765

 
106,363

Equities — International
57,549

 
240

 
$
6,675,594

 
$
5,982,887

Included within residential and commercial mortgage-backed securities as at September 30, 2018 were securities issued by U.S. governmental agencies with a fair value of $147.3 million (as at December 31, 2017: $152.4 million). Included within corporate securities as at September 30, 2018 were senior secured loans of $24.3 million (as at December 31, 2017: $68.9 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 September 30, 2018
 
Amortized
Cost
 
Fair Value
 
% of Total Fair Value
One year or less
 
$
428,656

 
$
424,195

 
6.5
%
More than one year through two years
 
544,754

 
531,717

 
8.1
%
More than two years through five years
 
1,641,037

 
1,601,237

 
24.4
%
More than five years through ten years
 
1,506,829

 
1,464,185

 
22.4
%
More than ten years
 
1,301,979

 
1,269,586

 
19.4
%
Residential mortgage-backed
 
274,833

 
275,485

 
4.2
%
Commercial mortgage-backed
 
423,471

 
411,575

 
6.3
%
Asset-backed
 
567,538

 
567,300

 
8.7
%
 
 
$
6,689,097

 
$
6,545,280

 
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 investments classified as available-for-sale were as follows:
As at September 30, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (Non-OTTI)
 
Fair Value
U.S. government and agency
 
$
703

 
$

 
$
(5
)
 
$
698

Non-U.S. government
 
75,741

 
851

 
(1,036
)
 
75,556

Corporate
 
83,836

 
1,085

 
(1,413
)
 
83,508

Municipal
 
3,401

 

 
(34
)
 
3,367

Residential mortgage-backed
 
15

 

 

 
15

 
 
$
163,696

 
$
1,936

 
$
(2,488
)
 
$
163,144

As at December 31, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (Non-OTTI)
 
Fair Value
U.S. government and agency
 
$
4,210

 
$

 
$
(23
)
 
$
4,187

Non-U.S. government
 
84,776

 
1,249

 
(588
)
 
85,437

Corporate
 
113,561

 
2,436

 
(876
)
 
115,121

Municipal
 
5,146

 
8

 
(18
)
 
5,136

Residential mortgage-backed
 
31

 

 

 
31

Asset-backed
 
373

 

 

 
373

 
 
$
208,097

 
$
3,693

 
$
(1,505
)
 
$
210,285

 The contractual maturities of our fixed maturity 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 September 30, 2018
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair
Value
One year or less
 
$
18,265

 
$
17,641

 
10.8
%
More than one year through two years
 
26,556

 
26,332

 
16.2
%
More than two years through five years
 
31,604

 
31,634

 
19.4
%
More than five years through ten years
 
55,804

 
55,818

 
34.2
%
More than ten years
 
31,452

 
31,704

 
19.4
%
Residential mortgage-backed
 
15

 
15

 
%
 
 
$
163,696

 
$
163,144

 
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 investments classified as available-for-sale that are in a gross unrealized loss position:
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at September 30, 2018
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
698

 
$
(5
)
 
$

 
$

 
$
698

 
$
(5
)
Non-U.S. government
 
4,233

 
(406
)
 
21,719

 
(630
)
 
25,952

 
(1,036
)
Corporate
 
8,562

 
(917
)
 
33,808

 
(496
)
 
42,370

 
(1,413
)
Municipal
 
617

 
(12
)
 
2,750

 
(22
)
 
3,367

 
(34
)
Total fixed maturity investments
 
$
14,110

 
$
(1,340
)
 
$
58,277

 
$
(1,148
)
 
$
72,387

 
$
(2,488
)
  
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at December 31, 2017
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
2,344

 
$
(16
)
 
$
1,842

 
$
(7
)
 
$
4,186

 
$
(23
)
Non-U.S. government
 
11,101

 
(373
)
 
20,965

 
(215
)
 
32,066

 
(588
)
Corporate
 
9,177

 
(807
)
 
24,200

 
(69
)
 
33,377

 
(876
)
Municipal
 
369

 
(5
)
 
3,605

 
(13
)
 
3,974

 
(18
)
Total fixed maturity investments
 
$
22,991

 
$
(1,201
)
 
$
50,612

 
$
(304
)
 
$
73,603

 
$
(1,505
)
As at September 30, 2018 and December 31, 2017, the number of securities classified as available-for-sale in an unrealized loss position was 103 and 96, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 33 and 37, respectively.

Other-Than-Temporary Impairment
For the nine months ended September 30, 2018 and 2017, 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 September 30, 2018 or December 31, 2017. A description of our other-than-temporary impairment process is included in Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017. There were no changes to our process during the nine months ended September 30, 2018.


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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 (including both trading and available-for-sale investments) and short-term investments as at September 30, 2018:
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
502,168

 
$
493,778

 
7.4
%
 
$
489,939

 
$
3,839

 
$

 
$

 
$

 
$

Non-U.S. government
 
1,109,697

 
1,093,768

 
16.3
%
 
340,583

 
541,087

 
65,286

 
121,197

 
25,615

 

Corporate
 
3,893,368

 
3,786,537

 
56.4
%
 
154,961

 
445,858

 
1,986,880

 
1,016,401

 
180,730

 
1,707

Municipal
 
81,703

 
79,966

 
1.2
%
 
8,739

 
53,094

 
14,277

 
3,856

 

 

Residential mortgage-backed
 
274,848

 
275,500

 
4.1
%
 
163,190

 
2,526

 
11,331

 
1,540

 
92,180

 
4,733

Commercial mortgage-backed
 
423,471

 
411,575

 
6.1
%
 
210,902

 
47,118

 
70,164

 
60,296

 
9,936

 
13,159

Asset-backed
 
567,538

 
567,300

 
8.5
%
 
237,239

 
46,971

 
115,349

 
73,415

 
93,918

 
408

Total
 
$
6,852,793

 
$
6,708,424

 
100.0
%
 
$
1,605,553

 
$
1,140,493

 
$
2,263,287

 
$
1,276,705

 
$
402,379

 
$
20,007

% of total fair value
 
 
 
 
 
 
 
23.9
%
 
17.0
%
 
33.8
%
 
19.0
%
 
6.0
%
 
0.3
%

Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
September 30,
2018
 
December 31,
2017
Private equities and private equity funds
 
$
256,618

 
$
289,556

Fixed income funds
 
383,328

 
229,999

Hedge funds
 
879,571

 
63,773

Equity funds
 
381,983

 
249,475

CLO equities
 
48,368

 
56,765

CLO equity fund
 
41,501

 
12,840

Private credit funds
 
39,751

 
10,156

Call options on equity
 
4,590

 

Other
 
720

 
828

 
 
$
2,036,430

 
$
913,392

The valuation of our other investments is described in Note 7 - "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. One of our funds has a lock-up period of up to two years and is eligible for quarterly redemptions thereafter with 65 days notice. All other funds have liquidity terms that vary from daily up to 45 day's notice. Investments of $0.3 million in fixed income funds were subject to gates or side-pockets, where

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




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.
Hedge funds may invest in a wide range of instruments, including debt and equity securities, and utilize various sophisticated strategies to achieve their objectives. We invest in a mixture of fixed income, equity and multi-strategy hedge funds. Our hedge funds have various lock-up periods of up to three years and redemption terms, predominantly 60 and 90 days. Certain of our hedge funds which are past their lock up periods are currently eligible for redemption while others are still in the lock-up period.
Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities. The funds have liquidity terms that vary from daily up to quarterly.
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 fund invests primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. The fund has a fair value of $41.5 million and is eligible for redemption.
Private credit funds invest in direct senior or collateralized loans. The investments are subject to restrictions on redemption and sales that are determined by the governing documents and limit our ability to liquidate our positions in the funds.
Call options on equities comprise directly held options to purchase the common equity of publicly traded corporations.
Other primarily comprises a fund that provides loans to educational institutions throughout the United States and its territories.
The increase in our other investments carried at fair value between December 31, 2017 and September 30, 2018 was primarily attributable to $626.5 million of other investments acquired as part of the KaylaRe acquisition and net additional subscriptions of $538.1 million.
As at September 30, 2018, we had unfunded commitments to private equity funds of $200.0 million.

Other Investments, at cost
During the three months ended June 30, 2018, we sold our investments in life settlement contracts, which were carried at cost. During the nine months ended September 30, 2018 and 2017, net investment income included $6.5 million and $10.6 million, respectively, related to investments in life settlements. There were impairment charges of $6.6 million and $7.5 million recognized in net realized and unrealized gains/losses during the nine months ended September 30, 2018 and 2017, respectively, related to investments in life settlements.

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




Net Investment Income
Major categories of net investment income for the three and nine months ended September 30, 2018 and 2017 are summarized as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity investments
$
48,062

 
$
37,931

 
$
140,097

 
$
102,002

Short-term investments and cash and cash equivalents
3,247

 
2,048

 
8,425

 
7,489

Funds held
1,502

 
247

 
8,651

 
597

Funds held - directly managed
9,776

 
8,516

 
27,990

 
24,121

Investment income from fixed maturities and cash and cash equivalents
62,587

 
48,742

 
185,163

 
134,209

Equity securities
946

 
1,344

 
3,788

 
3,207

Other investments
8,324

 
3,120

 
14,600

 
10,016

Life settlements and other

 
1,443

 
6,509

 
11,026

Investment income from equities and other investments
9,270

 
5,907

 
24,897

 
24,249

Gross investment income
71,857

 
54,649

 
210,060

 
158,458

Investment expenses
(2,427
)
 
(2,621
)
 
(7,842
)
 
(8,274
)
Net investment income
$
69,430

 
$
52,028

 
$
202,218

 
$
150,184

Net Realized and Unrealized Gains and Losses
Components of net realized and unrealized gains and losses for the three and nine months ended September 30, 2018 and 2017 were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net realized gains (losses) on sale:
 
 
 
 
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
$

 
$
8

 
$
27

 
$
345

Gross realized losses on fixed maturity securities, available-for-sale
 
(2
)
 
(5
)
 
(80
)
 
(91
)
Net realized gains (losses) on fixed maturity securities, trading
 
(8,797
)
 
4,595

 
(19,310
)
 
3,608

Net realized gains on equity securities, trading
 
666

 
340

 
3,569

 
1,150

Net realized gains (losses) on funds held - directly managed
 
(1,904
)
 
422

 
(2,849
)
 
(3,720
)
Total net realized gains (losses) on sale
 
$
(10,037
)
 
$
5,360

 
$
(18,643
)
 
$
1,292

Net unrealized gains (losses):
 
 
 
 
 
 
 
 
Fixed maturity securities, trading
 
$
(13,423
)
 
$
(10,747
)
 
$
(159,691
)
 
$
23,795

Equity securities, trading
 
1,830

 
2,652

 
6,152

 
13,209

Other Investments
 
(35,188
)
 
27,802

 
(37,059
)
 
71,007

Change in fair value of embedded derivative on funds held – directly managed
 
(182
)
 
3,967

 
(41,107
)
 
28,807

Change in value of fair value option on funds held - directly managed
 
(223
)
 
267

 
(4,323
)
 
1,587

Total net unrealized gains (losses)
 
(47,186
)
 
23,941

 
(236,028
)
 
138,405

Net realized and unrealized gains (losses)
 
$
(57,223
)
 
$
29,301

 
$
(254,671
)
 
$
139,697

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $0.4 million and $5.9 million for the three months ended September 30, 2018 and 2017, respectively, and $10.9 million and $27.5 million for the nine months ended September 30, 2018 and 2017, respectively.


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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 $474.6 million and $257.7 million, as at September 30, 2018 and December 31, 2017, respectively, was as follows: 
 
 
September 30,
2018
 
December 31,
2017
Collateral in trust for third party agreements
 
$
3,354,994

 
$
3,118,892

Assets on deposit with regulatory authorities
 
563,139

 
599,829

Collateral for secured letter of credit facilities
 
134,286

 
151,467

Funds at Lloyd's (1)
 
422,657

 
234,833

 
 
$
4,475,076

 
$
4,105,021

(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. On February 8, 2018, we amended and restated our unsecured letter of credit agreement for Funds at Lloyd's purposes ("FAL Facility") to issue up to $325.0 million letters of credit, with a provision to increase the facility up to $400.0 million, subject to lenders approval. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2022. As at September 30, 2018, our combined Funds at Lloyd's were comprised of cash and investments of $422.7 million and unsecured letters of credit of $295.0 million.
The increase in the collateral in trust for third-party agreements and Funds at Lloyd's was primarily due to the loss portfolio transfer reinsurance transactions as described in Note 3 - "Significant New Business".

6. 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 4 - "Significant New Business" in our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017. This receives a variable return reflecting the eco