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As filed with the Securities and Exchange Commission on June 5, 2008
Registration No. 333-      
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
Form S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
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 Number)
 
 
 
 
P.O. Box HM 2267
Windsor Place, 3rd Floor, 18 Queen Street
Hamilton HM JX
Bermuda
(441) 292-3645
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Corporation Service Company
80 State Street
Albany, New York 12207-2543
(800) 927-9800
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
Robert C. Juelke, Esq.
Drinker Biddle & Reath LLP
One Logan Square
18th & Cherry Streets
Philadelphia, Pennsylvania 19103
(215) 988-2700
  Anthony J. Ribaudo, Esq.
Sidley Austin LLP
One South Dearborn
Chicago, Illinois 60603
(312) 853-7000
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box.  o
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box.  o
 
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
    Proposed Maximum
    Amount of
Title of Each Class of
    Amount to be
    Offering
    Aggregate
    Registration
Securities to be Registered     Registered     Price per Share     Offering Price     Fee
Ordinary Shares, par value $1.00 per share
    (1)     (1)     $310,500,000(2)     $12,203
                         
 
(1) Pursuant to Rule 457(o) under the Securities Act, the amount of the registration fee is based on the proposed maximum aggregate offering price.
 
(2) Includes ordinary shares with a maximum aggregate offering price of $40,500,000, which the underwriters have the option to purchase to cover over-allotments, if any.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE OR THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE AND THE SELLING SHAREHOLDERS ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
SUBJECT TO COMPLETION, DATED JUNE 5, 2008
 
PROSPECTUS
 
ENSTAR GROUP LIMITED
 
2,583,900
 
Ordinary Shares
 
 
We are selling 1,913,983 ordinary shares and the selling shareholders identified in this prospectus are selling 669,917 ordinary shares. We will not receive any of the proceeds from the sale of the shares by the selling shareholders.
 
Our ordinary shares are listed on the Nasdaq Global Select Market under the symbol “ESGR.” The last reported sale price on June 4, 2008 was $104.49 per share.
 
The underwriters have an option to purchase a maximum of 387,585 ordinary shares from us and certain of the selling shareholders to cover over-allotments of shares.
 
Investing in our ordinary shares involves a high degree of risk. We urge you to read carefully the section entitled “Risk Factors” on page 8 of this prospectus, as well as all other information included or incorporated by reference in this prospectus, before you decide whether to invest in our ordinary shares.
 
                                 
          Underwriting
    Proceeds to
    Proceeds to
 
    Price to
    Discounts and
    Enstar
    Selling
 
    Public     Commissions     Group Limited     Shareholders  
 
Per Share
  $                $                $                $             
Total
  $       $       $       $  
 
Delivery of the ordinary shares will be made on or about           , 2008.
 
None of the Securities and Exchange Commission, any state securities commission or insurance regulators, the Registrar of Companies in Bermuda or the Bermuda Monetary Authority has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Fox-Pitt Kelton Cochran Caronia Waller
Dowling & Partners Securities
 
 
The date of this prospectus is          , 2008


 

 
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 Opinion of Conyers Dill & Pearman, Bermuda counsel, regarding legality of securities
 Form of Director Indemnification Agreement
 Deloitte & Touche Letter Regarding Unaudited Financial Information
 Consent of Deloitte & Touche (for Enstar Group Limited)
 Consent of Ernst & Young for Church Bay Limited (formerly AMPG (1992) Limited)
 Consent of Ernst & Young for Gordian Runoff Limited
 Consent of Ernst & Young for TGI Australia Limited
 Consent of Ernst & Young for Harrington Sound Limited (formerly AMP General Insurance Limited)
 Consent of Ernst & Young for Enstar Australia Limited (formerly Cobalt Solutions Australia Limited)
 
 
You should rely only on the information contained or incorporated by reference in this prospectus. We or the selling shareholders have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the selling shareholders are not making an offer to sell securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this prospectus is accurate only as of the date of the prospectus, and any information we have incorporated by reference is accurate only as of the date of the document incorporated by reference, in each case, regardless of the time of delivery of the prospectus. Our business, financial condition, results of operations and prospects may have changed since those dates.
 
Shares may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act of 2003, the Exchange Control Act 1972 and related regulations of Bermuda which regulate the sale of securities in Bermuda. In addition, specific permission is required from the Bermuda Monetary Authority, pursuant to the provisions of the Exchange Control Act 1972 and related regulations, for all issuances and transfers of securities of Bermuda companies, other than in cases where the Bermuda Monetary Authority has granted a general permission. The Bermuda Monetary Authority in its policy dated June 1, 2005 provides that where any equity securities, including our ordinary shares, of a Bermuda company are listed on an appointed stock exchange, general permission is given for the issue and subsequent transfer of any securities of such company from and/or to a non-resident, for as long as any equity securities of such company remain so listed. The Nasdaq Global Select Market is deemed to be an appointed stock exchange under Bermuda law. The Bermuda Monetary Authority and the Registrar of Companies accept no responsibility for the financial soundness of any proposal or for the correctness of any of the statements made or opinions expressed in this prospectus.
 
For so long as Enstar Group Limited owns Bermuda insurance companies, each shareholder or prospective shareholder will be responsible for notifying the Bermuda Monetary Authority in writing of his becoming a controller, directly or indirectly, of 10%, 20%, 33% or 50% of Enstar Group Limited within 45 days of becoming such a controller. The Bermuda Monetary Authority may serve a notice of objection on


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any controller of Enstar Group Limited if it appears to the Bermuda Monetary Authority that the person is no longer fit and proper to be such a controller.
 
In the United Kingdom, this communication is directed only at persons who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons together being referred to as relevant persons). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to such relevant persons and will be engaged in only with such relevant persons.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus and the documents incorporated by reference contain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our ordinary shares and the insurance and reinsurance sectors in general. Statements that include words such as “estimate,” “project,” “plan,” “intend,” “expect,” “anticipate,” “believe,” “would,” “should,” “could,” “seek,” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not statements of historical fact, reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in and incorporated by reference in this prospectus.
 
Factors that could cause actual results to differ materially from those suggested by the forward-looking statements include:
 
  •  risks associated with implementing our business strategies and initiatives;
 
  •  the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;
 
  •  risks relating to the availability and collectability of our reinsurance;
 
  •  tax, regulatory or legal restrictions or limitations applicable to us or the insurance and reinsurance business generally;
 
  •  increased competitive pressures, including the consolidation and increased globalization of reinsurance providers;
 
  •  emerging claim and coverage issues;
 
  •  lengthy and unpredictable litigation affecting assessment of losses and/or coverage issues;
 
  •  loss of key personnel;
 
  •  changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at management’s discretion;
 
  •  operational risks, including system or human failures;
 
  •  risks that we may require additional capital in the future which may not be available or may be available only on unfavorable terms;
 
  •  the risk that ongoing or future industry regulatory developments will disrupt our business, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;
 
  •  changes in Bermuda law or regulation or the political stability of Bermuda;
 
  •  changes in tax laws or regulations applicable to us or our subsidiaries, or the risk that we or one of our non-U.S. subsidiaries become subject to significant, or significantly increased, income taxes in the United States or elsewhere;
 
  •  losses due to foreign currency exchange rate fluctuations;
 
  •  changes in accounting policies or practices; and
 
  •  changes in economic conditions, including interest rates, inflation, currency exchange rates, equity markets and credit conditions, which could affect our investment portfolio.
 
The factors listed above should not be construed as exhaustive. Certain of these factors are described in more detail in the “Risk Factors” section of this prospectus, on page 8. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. You are therefore advised to consult any further disclosures we make on related subjects in our reports to the U.S. Securities and Exchange Commission.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our ordinary shares. We urge you to read this entire prospectus carefully, including the U.S. Securities and Exchange Commission filings that we have incorporated by reference into this prospectus. You should pay special attention to the “Risk Factors” section of this prospectus. Unless otherwise mentioned or unless the context requires otherwise, all references in this prospectus to “Enstar,” “we,” “us,” “our” or the “Company” mean Enstar Group Limited and its subsidiaries.
 
Enstar Group Limited
 
We were formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry. Since our formation, we, through our subsidiaries, have completed several acquisitions of insurance and reinsurance companies and are currently administering those businesses in run-off. Insurance and reinsurance companies we acquire that are in run-off no longer underwrite new policies. In addition, we provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.
 
Our primary corporate objective is to grow our tangible net book value. We believe growth in our tangible net book value is driven primarily by growth in our net earnings, which is in turn partially driven by successfully completing new acquisitions.
 
We evaluate each opportunity presented by carefully reviewing the portfolio’s risk exposures, claim practices, reserve requirements and outstanding claims, and seek an appropriate discount and/or seller indemnification to reflect the uncertainty contained in the portfolio’s reserves. Based on this initial analysis, we can determine if a company or portfolio of business would add value to our current portfolio of run-off business. If we determine to pursue the purchase of a company in run-off, we then proceed to price the acquisition in a manner we believe will result in positive operating results based on certain assumptions including, without limitation, our ability to favorably resolve claims, negotiate with direct insureds and reinsurers, and otherwise manage the nature of the risks posed by the business.
 
Initially, at the time we acquire a company in run-off, we estimate the fair value of liabilities acquired based on external actuarial advice, as well as our own views of the exposures assumed. While we earn a larger share of our total return on an acquisition from commuting the liabilities that we have assumed, we also try to maximize reinsurance recoveries on the assumed portfolio.
 
Our ordinary shares are listed on the Nasdaq Global Select Market under the ticker symbol “ESGR.” Our principal executive offices are located at Windsor Place, 3rd Floor, 18 Queen Street, Hamilton HM JX, Bermuda, and our telephone number is (441) 292-3645. Our website is www.enstargroup.com. The information on our website does not constitute part of this prospectus and should not be relied upon in connection with making any investment in our securities.


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Competitive Strengths
 
We believe that our competitive strengths have enabled us, and will continue to enable us, to capitalize on the opportunities that exist in the run-off market. These strengths include:
 
  •  Experienced Management Team with Proven Track Record.  Dominic F. Silvester, our Chief Executive Officer, Paul J. O’Shea and Nicholas A. Packer, our Executive Vice Presidents and Joint Chief Operating Officers, Richard J. Harris, our Chief Financial Officer, and John J. Oros, our Executive Chairman, each have over 19 years of experience in the insurance and reinsurance industry. The extensive depth and knowledge of our management team provides us with the ability to identify, select and price companies and portfolios in run-off and to successfully manage those companies and portfolios.
 
  •  Disciplined Approach to Acquisitions and Claims Management.  We believe in generating profits through a disciplined, conservative approach to both acquisitions and claims management. We closely analyze new business opportunities to determine a company’s inherent value and our ability to profitably manage that company or a portfolio of that company in run-off. We believe that our review and claims management process, combined with management of global exposures across our acquired businesses, allows us to price acquisitions on favorable terms and to profitably run off the companies and portfolios that we acquire and manage.
 
  •  Long-Standing Market Relationships.  Our management team has well-established personal relationships across the insurance and reinsurance industry. We use these market relationships to identify and source business opportunities. We have also relied on these market relationships to establish ourselves as a leader in the run-off market.
 
  •  Highly Qualified, Experienced and Ideally Located Employee Base.  We have been successful in recruiting a highly qualified team of experienced claims, reinsurance, financial, actuarial and legal staff in major insurance and reinsurance centers, including Bermuda, the United Kingdom, the United States and Australia. We believe the quality and breadth of experience of our staff enable us to extract value from our acquired businesses and to offer a wide range of professional services to the industry.
 
  •  Financial Strength and Disciplined Investment Approach.  As of March 31, 2008, we had approximately $464.8 million of shareholders’ equity. We have maintained a strong balance sheet by following conservative investment practices while seeking appropriate returns. As of March 31, 2008, approximately 91% of our invested assets were invested in fixed maturity securities, 98.7% of which were investment grade and 50.9% of which were government securities. This financial strength allows us to aggressively price acquisitions that fit within our core competency. We believe that our financial strength has allowed us to be recognized as a leader in the acquisition and management of run-off companies and portfolios. Our conservative approach to managing our balance sheet reflects our commitment to maintaining our financial strength.
 
Strategy
 
We intend to maximize our growth in tangible net book value by using the following strategies:
 
  •  Solidify Our Leadership Position in the Run-Off Market by Leveraging Management’s Experience and Relationships.  We intend to continue to utilize the extensive experience and significant relationships of our senior management team to solidify our position as a leader in the run-off segment of the insurance and reinsurance market. The experience and reputation of our management team is expected to generate opportunities for us to acquire or manage companies and portfolios in run-off, and to price effectively the acquisition or management of such businesses. Most importantly, we believe the experience of our management team will continue to allow us to manage the run-off of such businesses efficiently and profitably.


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  •  Professionally Manage Claims.  We are professional and disciplined in managing claims against companies and portfolios we own or manage. Our management understands the need to dispose of certain risks expeditiously and cost-effectively by constantly analyzing changes in the market and efficiently settling claims with the assistance of our experienced claims adjusters and in-house and external legal counsel. When we acquire or begin managing a company or portfolio, we initially determine which claims are valid through the use of experienced in-house adjusters and claims experts. We pay valid claims on a timely basis, while relying on well-documented policy terms and exclusions where applicable and litigation when necessary to defend against paying invalid claims under existing policies and reinsurance agreements.
 
  •  Commute Assumed Liabilities and Ceded Reinsurance Assets.  Using detailed analysis and actuarial projections, we negotiate with the policyholders of the insurance and reinsurance companies or portfolios we own or manage with a goal of commuting insurance and reinsurance liabilities for one or more agreed upon payments at a discount to the ultimate liability. Such commutations can take the form of policy buy-backs and structured settlements over fixed periods of time. By acquiring companies that are direct insurers, reinsurers or both, we are able to negotiate favorable entity-wide commutations with reinsurers that would not be possible if our subsidiaries had remained independent entities. We also negotiate with reinsurers to commute their reinsurance agreements providing coverage to our subsidiaries on terms that we believe to be favorable based on then-current market knowledge. We invest the proceeds from reinsurance commutations with the expectation that such investments will produce income, which, together with the principal, will be sufficient to satisfy future obligations with respect to the acquired company or portfolio.
 
  •  Continue to Commit to Highly Disciplined Acquisition, Management and Reinsurance Practices.  We utilize a disciplined approach to minimize risk and increase the probability of positive operating results from companies and portfolios we acquire or manage. We carefully review acquisition candidates and management engagements for consistency with accomplishing our long-term objective of producing positive operating results. We focus our investigation on risk exposures, claims practices and reserve requirements. In particular, we carefully review all outstanding claims and case reserves, and follow a highly disciplined approach to managing allocated loss adjustment expenses, such as the cost of defense counsel, expert witnesses and related fees and expenses.
 
  •  Manage Capital Prudently.  We pursue prudent capital management relative to our risk exposure and liquidity requirements to maximize profitability and long-term growth in shareholder value. Our capital management strategy is to deploy capital efficiently to acquisitions and to establish, and re-establish when necessary, adequate loss reserves to protect against future adverse developments.
 
Challenges
 
We face a number of challenges in implementing our strategies, including the following:
 
  •  Management of Insurance and Reinsurance Companies in Run-Off.  Insurance and reinsurance companies we acquire that are in run-off no longer underwrite new policies and are subject to the risk that their stated loss and loss adjustment expense reserves may not be sufficient to cover future losses and the cost of run-off. Our ability to achieve positive operating results depends on our pricing of acquisitions on favorable terms relative to the risks posed by the acquired businesses and then successfully managing the acquired businesses. If we are not able to price acquisitions on favorable terms, efficiently manage claims and control run-off expenses, we may have to cover losses sustained with retained earnings, which would materially and adversely impact our ability to grow our business and may result in losses.
 
  •  Loss and Loss Adjustment Expense Reserves.  Our insurance and reinsurance subsidiaries are required to maintain reserves to cover their estimated ultimate liability for losses and loss adjustment expenses for both reported and unreported incurred claims. The amounts our insurance and reinsurance subsidiaries pay on claims and the related costs of adjusting those claims may deviate from the loss and loss adjustment


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  expense reserves they maintain. If actual losses and loss adjustment expenses exceed their reserves, their net income and capital would decrease.
 
  •  Investment Portfolios and Investment Income.  A significant portion of our income is derived from our invested assets. The value of our investment portfolio and the investment income that we receive from our portfolio fluctuates depending on general economic and market conditions. A decline in the value of our investments classified as trading and available-for-sale may reduce our net income or cause us to incur a loss.
 
  •  Integration of Acquired Insurance and Reinsurance Companies in Run-Off.  Our pursuit of growth through acquisitions and/or strategic investments in insurance and reinsurance companies in run-off depends in part on our ability to integrate acquired companies and portfolios. The integration of companies or portfolios we acquire may result in substantial diversion of management resources or unanticipated litigation. Any failure by us to effectively integrate acquired companies and portfolios may have a material adverse effect on our business, financial condition or results of operations.
 
  •  Retaining Executive Officers and Maintaining Relationships with Certain Directors.  Our success depends in part upon the continued services of our senior management team, particularly our Chief Executive Officer, Dominic F. Silvester, our Executive Vice Presidents and Joint Chief Operating Officers, Paul J. O’Shea and Nicholas A. Packer, our Chief Financial Officer, Richard J. Harris, and our Executive Chairman, John J. Oros, and our relationships with John J. Oros and J. Christopher Flowers, one of our directors and one of our largest shareholders. The loss of any member of our senior management team or other key personnel, our inability to recruit and retain additional qualified personnel as we grow or the loss of our relationships with John J. Oros or J. Christopher Flowers, could materially and adversely affect our business and results of operations and could prevent us from fully implementing our strategy.
 
For a discussion of these challenges and other risks relating to our business and an investment in our ordinary shares, see “Risk Factors” on page 8.
 
Recent Developments
 
On June 16, 2006, our indirect subsidiary, Enstar US, Inc., or Enstar US, entered into a definitive agreement with Dukes Place Holdings, L.P., a portfolio company of GSC European Mezzanine Fund II, L.P., for the purchase of 44.4% of the outstanding capital stock of Stonewall Acquisition Corporation. Stonewall Acquisition Corporation is the parent of two Rhode Island-domiciled insurers, Stonewall Insurance Company, or Stonewall, and Seaton Insurance Company, or Seaton, both of which are in run-off. The purchase price is $20.4 million. On May 27, 2008, the Rhode Island Department of Business Regulation issued an order approving the proposed acquisition. It is anticipated that the transaction will close in the immediate future.


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The Offering
 
Ordinary shares offered by us
1,913,983 shares
 
Ordinary shares offered by the selling shareholders
669,917 shares
 
Over-allotment option granted by us and certain of the selling shareholders
387,585 shares
 
Ordinary shares to be outstanding after the offering, not including the over-allotment option
13,858,272 shares
 
Senior management dispositions
In connection with the offering, certain members of senior management will be selling ordinary shares with an aggregate value of approximately $20 million. For a further discussion of these sales, see “Principal and Selling Shareholders — Selling Shareholders” on page 95.
 
Use of proceeds
We intend to use the net proceeds received from the ordinary shares offered by us to fund future acquisitions of insurance and reinsurance companies or portfolios in run-off and for general corporate purposes.
 
We will not receive any proceeds from the sale of shares by the selling shareholders in this offering.
 
Nasdaq Global Select Market symbol
“ESGR”
 
The total number of ordinary shares to be outstanding after this offering does not reflect:
 
  •  526,641 shares that may be issued pursuant to outstanding stock options and restricted share units;
 
  •  1,134,503 shares that have been reserved for future issuance pursuant to our 2006 Equity Incentive Plan;
 
  •  200,000 shares that have been reserved for future issuance pursuant to the Enstar Group Limited Employee Share Purchase Plan; and
 
  •  96,866 shares that have been reserved for future issuance pursuant to the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-employee Directors.
 
Unless otherwise specifically stated, information in this prospectus assumes the underwriters do not exercise their over-allotment option to purchase additional shares in this offering.


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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
 
The following table provides a summary of our historical consolidated financial and operating data as of the dates and for the periods indicated. We derived the summary historical consolidated financial data as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005 from our audited consolidated financial statements included in this prospectus. We derived the summary historical consolidated financial data as of December 31, 2005, 2004 and 2003 and for the years ended December 31, 2004 and 2003 from our audited consolidated financial statements not included in this prospectus. We derived the summary historical consolidated financial data as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 from our unaudited condensed consolidated financial statements included in this prospectus, which include all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of our financial position and results of operations as of the date and for the periods presented. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period.
 
This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and notes thereto included elsewhere in this prospectus.
 
Since our inception, we have made several acquisitions which impact the comparability between periods of the information reflected below. See “Business — Recent Acquisitions” on page 68 for information about our acquisitions.
 
                                                         
    Three Months Ended March 31,     Years Ended December 31,  
    2008     2007     2007     2006     2005     2004     2003  
    (In thousands of U.S. dollars, except per share data)  
 
Summary Consolidated Statements of Earnings Data:
                                                       
Consulting fees
  $ 6,055     $ 4,661     $ 31,918     $ 33,908     $ 22,006     $ 23,703     $ 24,746  
Net investment (losses) income and net realized gains/losses
    (494 )     20,509       64,336       48,001       29,504       10,502       7,072  
Net (increase)/reduction in loss and loss adjustment expenses liabilities
    (685 )     (2,510 )     24,482       31,927       96,007       13,706       24,044  
Total other expenses
    (25,009 )     (22,721 )     (67,904 )     (49,838 )     (57,299 )     (35,160 )     (21,782 )
Minority interest
    (3,376 )     (2,248 )     (6,730 )     (13,208 )     (9,700 )     (3,097 )     (5,111 )
Share of income of partly owned companies
                      518       192       6,881       1,623  
                                                         
Net (loss)/earnings from continuing operations
    (23,509 )     (2,309 )     46,102       51,308       80,710       16,535       30,592  
Extraordinary gain — Negative goodwill (2008 and 2006: net of minority interest)
    35,196       15,683       15,683       31,038             21,759        
                                                         
Net earnings
  $ 11,687     $ 13,374     $ 61,785     $ 82,346     $ 80,710     $ 38,294     $ 30,592  
                                                         
Per Share Data(1)(2):
                                                       
(Loss)/earnings per share before extraordinary gain — basic
  $ (1.97 )   $ (0.21 )   $ 3.93     $ 5.21     $ 8.29     $ 1.72     $ 3.19  
Extraordinary gain per share — basic
    2.95       1.41       1.34       3.15             2.26        
                                                         
Earnings per share — basic
  $ 0.98     $ 1.20     $ 5.27     $ 8.36     $ 8.29     $ 3.98     $ 3.19  
                                                         
(Loss)/earnings per share before extraordinary gain — diluted
  $ (1.97 )   $ (0.21 )   $ 3.84     $ 5.15     $ 8.14     $ 1.71     $ 3.19  
Extraordinary gain per share — diluted
    2.95       1.41       1.31       3.11             2.24        
                                                         
Earnings per share — diluted
  $ 0.98     $ 1.20     $ 5.15     $ 8.26     $ 8.14     $ 3.95     $ 3.19  
                                                         
Weighted average shares outstanding — basic
    11,927,542       11,160,448       11,731,908       9,857,914       9,739,560       9,618,905       9,582,396  
Weighted average shares outstanding — diluted(3)
    11,927,542       11,160,448       12,009,683       9,966,960       9,918,823       9,694,528       9,582,396  
Cash dividends paid per share
                    $ 2.92           $ 0.81     $ 5.62  
 


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    As of
       
    March 31,     As of December 31,  
    2008     2007     2006     2005     2004     2003  
    (In thousands of U.S. dollars, except per share data)  
 
Summary Balance Sheet Data:
                                               
Total investments
  $ 1,217,695     $ 637,196     $ 747,529     $ 539,568     $ 591,635     $ 268,417  
Cash and cash equivalents
    1,798,386       1,163,333       513,563       345,329       350,456       127,228  
Reinsurance balances receivable
    758,659       465,277       408,142       250,229       341,627       175,091  
Total assets
    3,994,956       2,417,143       1,774,252       1,199,963       1,347,853       632,347  
Loss and loss adjustment expense liabilities
    2,700,687       1,591,449       1,214,419       806,559       1,047,313       381,531  
Loans payable
    329,963       60,227       62,148                    
Total shareholders’ equity
    464,842       450,599       318,610       260,906       177,338       147,616  
Book Value per Share(4):
                                               
Basic
  $ 38.97     $ 38.41     $ 32.32     $ 26.79     $ 18.44     $ 15.40  
Diluted
  $ 38.97     $ 37.52     $ 31.97     $ 26.30     $ 18.29     $ 15.40  
 
 
(1) Earnings per share is a measure based on net earnings divided by weighted average ordinary shares outstanding. Basic earnings per share is defined as net earnings available to ordinary shareholders divided by the weighted average number of ordinary shares outstanding for the period, giving no effect to dilutive securities. Diluted earnings per share is defined as net earnings available to ordinary shareholders divided by the weighted average number of shares and share equivalents outstanding calculated using the treasury stock method for all potentially dilutive securities. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted earnings per share.
 
(2) The weighted average ordinary shares outstanding shown for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 reflect the conversion of Class A, B, C and D shares to ordinary shares on January 31, 2007, as part of the recapitalization completed in connection with the merger of our wholly-owned subsidiary with and into The Enstar Group, Inc. as if the conversion occurred on January 1, 2007, 2006, 2005, 2004 and 2003. For the year ended December 31, 2007, the ordinary shares issued to acquire The Enstar Group, Inc. are reflected in the calculation of the weighted average ordinary shares outstanding from January 31, 2007, the date of issue. As a result both the book value per share and the earnings per share calculations, previously reported, have been amended to reflect this change.
 
(3) The calculations of diluted earnings per share for the three months ended March 31, 2008 and March 31, 2007 and the calculation of diluted book value per share as of March 31, 2008 do not include share equivalents relating to unvested shares, restricted shares and options because to do so would have been anti-dilutive.
 
(4) Basic book value per share is defined as total shareholders’ equity available to ordinary shareholders divided by the number of ordinary shares outstanding as of the end of the period, giving no effect to dilutive securities. Diluted book value per share is defined as total shareholders’ equity available to ordinary shareholders divided by the number of ordinary shares and ordinary share equivalents outstanding at the end of the period, calculated using the treasury stock method for all potentially dilutive securities. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted book value per share.

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RISK FACTORS
 
You should carefully consider these risks along with the other information included in this prospectus, including the matters addressed under “Forward-Looking Statements,” before investing in any of our securities. If any of the following risks actually occur, our business could be harmed. In that case, the trading price of our ordinary shares could decline, and you might lose all or part of your investment.
 
Risks Relating to Our Business
 
If we are unable to implement our business strategies, our business and financial condition may be adversely affected.
 
Our future results of operations will depend in significant part on the extent to which we can implement our business strategies successfully, including our ability to realize the anticipated growth opportunities, expanded market visibility and increased access to capital. Our business strategies include continuing to operate our portfolio of run-off insurance and reinsurance companies and related management engagements, as well as pursuing additional acquisitions and management engagements in the run-off segment of the insurance and reinsurance market. We may not be able to implement our strategies fully or realize the anticipated results of our strategies as a result of significant business, economic and competitive uncertainties, many of which are beyond our control.
 
The effects of emerging claims and coverage issues may result in increased provisions for loss reserves and reduced profitability in our insurance and reinsurance subsidiaries. Such adverse business issues may also reduce the level of incentive-based fees generated by our consulting operations. Adverse global economic conditions, such as rising interest rates and volatile foreign exchange rates, may cause widespread failure of our insurance and reinsurance subsidiaries’ reinsurers to satisfy their obligations, as well as failure of companies to meet their obligations under debt instruments held by our subsidiaries. If the run-off industry becomes more attractive to investors, competition for run-off acquisitions and management and consultancy engagements may increase and, therefore, reduce our ability to continue to make profitable acquisitions or expand our consultancy operations. If we are unable to successfully implement our business strategies, we may not be able to achieve future growth in our earnings and our financial condition may suffer and, as a result, holders of our ordinary shares may receive lower returns.
 
Our inability to successfully manage our portfolio of insurance and reinsurance companies in run-off may adversely impact our ability to grow our business and may result in losses.
 
We were founded to acquire and manage companies and portfolios of insurance and reinsurance in run-off. Our run-off business differs from the business of traditional insurance and reinsurance underwriting in that our insurance and reinsurance companies in run-off no longer underwrite new policies and are subject to the risk that their stated provisions for losses and loss adjustment expense, or LAE, will not be sufficient to cover future losses and the cost of run-off. Because our companies in run-off no longer collect underwriting premiums, our sources of capital to cover losses are limited to our stated reserves, reinsurance coverage and retained earnings. As of March 31, 2008, our gross reserves for losses and loss adjustment expense totaled $2.7 billion, and our reinsurance receivables totaled $758.7 million.
 
In order for us to achieve positive operating results, we must first price acquisitions on favorable terms relative to the risks posed by the acquired businesses and then successfully manage the acquired businesses. Our inability to price acquisitions on favorable terms, efficiently manage claims, collect from reinsurers and control run-off expenses could result in us having to cover losses sustained under assumed policies with retained earnings, which would materially and adversely impact our ability to grow our business and may result in material losses.


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Our inability to successfully manage the companies and portfolios for which we have been engaged as a third-party manager may adversely impact our financial results and our ability to win future management engagements.
 
In addition to acquiring insurance and reinsurance companies in run-off, we have entered into several management agreements with third parties to manage their companies or portfolios of business in run-off. The terms of these management engagements typically include incentive payments to us based on our ability to successfully manage the run-off of these companies or portfolios. We may not be able to accomplish our objectives for these engagements as a result of unforeseen circumstances such as the length of time for claims to develop, the extent to which losses may exceed reserves, changes in the law that may require coverage of additional claims and losses, our ability to commute reinsurance policies on favorable terms and our ability to manage run-off expenses. If we are not successful in meeting our objectives for these management engagements, we may not receive incentive payments under our management agreements, which could adversely impact our financial results, and we may not win future engagements to provide these management services, which could slow the growth of our business. Consulting fees generated from management agreements amounted to $31.9 million, $33.9 million and $22.0 million for the years ended December 31, 2007, December 31, 2006 and December 31, 2005, respectively.
 
If our insurance and reinsurance subsidiaries’ loss reserves are inadequate to cover their actual losses, our insurance and reinsurance subsidiaries’ net income and capital and surplus would be reduced.
 
Our insurance and reinsurance subsidiaries are required to maintain reserves to cover their estimated ultimate liability for losses and loss adjustment expenses for both reported and unreported incurred claims. These reserves are only estimates of what our subsidiaries think the settlement and administration of claims will cost based on facts and circumstances known to the subsidiaries. Our commutation activity and claims settlement and development in recent years has resulted in net reductions in provisions for loss and loss adjustment expenses of $24.5 million, $31.9 million and $96.0 million for the years ended December 31, 2007, December 31, 2006 and December 31, 2005, respectively. Although this recent experience indicates that our loss reserves have been more than adequate to meet our liabilities, because of the uncertainties that surround estimating loss reserves and loss adjustment expenses, our insurance and reinsurance subsidiaries cannot be certain that ultimate losses will not exceed these estimates of losses and loss adjustment expenses. If our subsidiaries’ reserves are insufficient to cover their actual losses and loss adjustment expenses, our subsidiaries would have to augment their reserves and incur a charge to their earnings. These charges could be material and would reduce our net income and capital and surplus.
 
The difficulty in estimating the subsidiaries’ reserves is increased because our subsidiaries’ loss reserves include reserves for potential asbestos and environmental, or A&E, liabilities. At December 31, 2007, our insurance and reinsurance companies had recorded gross A&E loss reserves of $677.6 million, or 42.6% of the total gross loss reserves. Net A&E loss reserves at December 31, 2007 amounted to $420.0 million, or 36.1% of total net loss reserves. A&E liabilities are especially hard to estimate for many reasons, including the long waiting periods between exposure and manifestation of any bodily injury or property damage, the difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and the difficulty in properly allocating liability for the asbestos or environmental damage. Developed case law and adequate claim history do not always exist for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. In view of the changes in the legal and tort environment that affect the development of such claims, the uncertainties inherent in valuing A&E claims are not likely to be resolved in the near future. Ultimate values for such claims cannot be estimated using traditional reserving techniques and there are significant uncertainties in estimating the amount of our subsidiaries’ potential losses for these claims. Our subsidiaries have not made any changes in reserve estimates that might arise as a result of any proposed U.S. federal legislation related to asbestos. To further understand this risk, see “Business — Reserves for Unpaid Losses and Loss Adjustment Expense” on page 71.


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Our insurance and reinsurance subsidiaries’ reinsurers may not satisfy their obligations to our insurance and reinsurance subsidiaries.
 
Our insurance and reinsurance subsidiaries are subject to credit risk with respect to their reinsurers because the transfer of risk to a reinsurer does not relieve our subsidiaries of their liability to the insured. In addition, reinsurers may be unwilling to pay our subsidiaries even though they are able to do so. As of March 31, 2008, the balances receivable from reinsurers amounted to $758.7 million, of which $380.9 million was associated with two reinsurers with Standard & Poor’s credit ratings of AA-. The failure of one or more of our subsidiaries’ reinsurers to honor their obligations in a timely fashion may affect our cash flows, reduce our net income or cause us to incur a significant loss. Disputes with our reinsurers may also result in unforeseen expenses relating to litigation or arbitration proceedings.
 
The value of our insurance and reinsurance subsidiaries’ investment portfolios and the investment income that our insurance and reinsurance subsidiaries receive from these portfolios may decline as a result of market fluctuations and economic conditions.
 
We derive a significant portion of our income from our invested assets. The net investment income that our subsidiaries realize from investments in fixed-income securities will generally increase or decrease with interest rates. The fair market value of our subsidiaries’ fixed-income securities generally increases or decreases in an inverse relationship with fluctuations in interest rates and can also decrease as a result of any downturn in the business cycle that causes the credit quality of those securities to deteriorate. The fair market value of our subsidiaries’ fixed-income securities classified as trading or available-for-sale in our subsidiaries’ investment portfolios amounted to $843.9 million at March 31, 2008. The changes in the market value of our subsidiaries’ securities that are classified as trading or available-for-sale are reflected in our financial statements. Permanent impairments in the value of our subsidiaries’ fixed-income securities are also reflected in our financial statements. As a result, a decline in the value of the securities in our subsidiaries’ investment portfolios may reduce our net income or cause us to incur a loss.
 
In addition to fixed-income securities, we have invested, and may from time to time continue to invest, in limited partnerships, limited liability companies and equity funds. These and other similar investments may be illiquid. As of March 31, 2008, we had an aggregate of $105.4 million of such investments. For more information, see “Business — Investment Portfolio” on page 84.
 
We have made, and expect to continue to make, strategic acquisitions of insurance and reinsurance companies in run-off, and these activities may not be financially beneficial to us or our shareholders.
 
We have pursued and, as part of our strategy, we will continue to pursue growth through acquisitions and/or strategic investments in insurance and reinsurance companies in run-off. We have made several acquisitions and investments and we expect to continue to make such acquisitions and investments. We cannot be certain that any of these acquisitions or investments will be financially advantageous for us or our shareholders.
 
The negotiation of potential acquisitions or strategic investments, as well as the integration of an acquired business or portfolio, could result in a substantial diversion of management resources. Acquisitions could involve numerous additional risks such as potential losses from unanticipated litigation or levels of claims, an inability to generate sufficient revenue to offset acquisition costs and financial exposures in the event that the sellers of the entities we acquire are unable or unwilling to meet their indemnification, reinsurance and other obligations to us.
 
Our ability to manage our growth through acquisitions or strategic investments will depend, in part, on our success in addressing these risks. Any failure by us to effectively implement our acquisition or strategic investment strategies could have a material adverse effect on our business, financial condition or results of operations.


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Our past and future acquisitions may expose us to operational risks such as cash flow shortages, challenges to recruit appropriate levels of personnel, financial exposures to foreign currencies, additional integration costs and management time and effort.
 
We have made several acquisitions and may in the future make additional strategic acquisitions, either of other companies or selected portfolios of insurance or reinsurance in run-off. These acquisitions may expose us to operational challenges and risks, including:
 
  •  funding cash flow shortages that may occur if anticipated revenues are not realized or are delayed, whether by general economic or market conditions or unforeseen internal difficulties;
 
  •  funding cash flow shortages that may occur if expenses are greater than anticipated;
 
  •  the value of assets being lower than expected or diminishing because of credit defaults or changes in interest rates, or liabilities assumed being greater than expected;
 
  •  integrating financial and operational reporting systems, including assurance of compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and our Exchange Act reporting requirements;
 
  •  establishing satisfactory budgetary and other financial controls;
 
  •  funding increased capital needs and overhead expenses;
 
  •  obtaining management personnel required for expanded operations; and
 
  •  the assets and liabilities we may acquire may be subject to foreign currency exchange rate fluctuation.
 
Our failure to manage successfully these operational challenges and risks could have a material adverse effect on our business, financial condition or results of operations.
 
Fluctuations in the reinsurance industry may cause our operating results to fluctuate.
 
The reinsurance industry historically has been subject to significant fluctuations and uncertainties. Factors that affect the industry in general may also cause our operating results to fluctuate. The industry’s profitability may be affected significantly by:
 
  •  fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may affect the ultimate payout of loss amounts and the costs of administering books of reinsurance business;
 
  •  volatile and unpredictable developments, which may adversely affect the recoverability of reinsurance from our reinsurers;
 
  •  changes in reserves resulting from different types of claims that may arise and the development of judicial interpretations relating to the scope of insurers’ liability; and
 
  •  the overall level of economic activity and the competitive environment in the industry.
 
The effects of emerging claim and coverage issues on our business are uncertain.
 
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect the adequacy of our provision for losses and loss adjustment expenses by either extending coverage beyond the intent of insurance policies and reinsurance contracts envisioned at the time they were written, or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have acquired companies or portfolios of insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under these insurance or reinsurance contracts may not be known for many years after a contract has been issued. To further understand this risk, see “Business — Reserves for Unpaid Losses and Loss Adjustment Expense” on page 71.


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Insurance laws and regulations restrict our ability to operate, and any failure to comply with these laws and regulations, or any investigations by government authorities, may have a material adverse effect on our business.
 
We are subject to extensive regulation under insurance laws of a number of jurisdictions, and compliance with legal and regulatory requirements is expensive. These laws limit the amount of dividends that can be paid to us by our insurance and reinsurance subsidiaries, prescribe solvency standards that they must meet and maintain, impose restrictions on the amount and type of investments that they can hold to meet solvency requirements and require them to maintain reserves. Failure to comply with these laws may subject our subsidiaries to fines and penalties and restrict them from conducting business. The application of these laws may affect our liquidity and ability to pay dividends on our ordinary shares and may restrict our ability to expand our business operations through acquisitions. At December 31, 2007, the required statutory capital and surplus of our insurance and reinsurance companies amounted to $88.0 million compared to the actual statutory capital and surplus of $483.8 million. As of December 31, 2007, $55.5 million of our total investments of $637.2 million were not admissible for statutory solvency purposes.
 
The insurance industry has experienced substantial volatility as a result of current investigations, litigation and regulatory activity by various insurance, governmental and enforcement authorities, including the U.S. Securities and Exchange Commission, or the SEC, concerning certain practices within the insurance industry. These practices include the sale and purchase of finite reinsurance or other non-traditional or loss mitigation insurance products and the accounting treatment for those products. Insurance and reinsurance companies that we have acquired, or may acquire in the future, may have been or may become involved in these investigations and have lawsuits filed against them. Our involvement in any investigations and related lawsuits would cause us to incur legal costs and, if we were found to have violated any laws, we could be required to pay fines and damages, perhaps in material amounts.
 
If we fail to comply with applicable insurance laws and regulations, we may be subject to disciplinary action, damages, penalties or restrictions that may have a material adverse effect on our business.
 
Our subsidiaries may not have maintained or be able to maintain all required licenses and approvals or that their businesses fully comply with the laws and regulations to which they are subject, or the relevant insurance regulatory authority’s interpretation of those laws and regulations. In addition, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If our subsidiaries do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities may preclude or suspend our subsidiaries from carrying on some or all of their activities, place one of more of them into rehabilitation or liquidation proceedings, or impose monetary penalties on them. These types of actions may have a material adverse effect on our business and may preclude us from making future acquisitions or obtaining future engagements to manage companies and portfolios in run-off.
 
Exit and finality opportunities provided by solvent schemes of arrangement may not continue to be available, which may result in the diversion of our resources to settle policyholder claims for a substantially longer run-off period and increase the associated costs of run-off of our insurance and reinsurance subsidiaries.
 
With respect to our U.K. and Bermudian insurance and reinsurance subsidiaries, we are able to pursue strategies to achieve complete finality and conclude the run-off of a company by promoting solvent schemes of arrangement. Solvent schemes of arrangement have been a popular means of achieving financial certainty and finality for insurance and reinsurance companies incorporated or managed in the U.K. and Bermuda, by making a one-time full and final settlement of an insurance and reinsurance company’s liabilities to policyholders. A solvent scheme of arrangement is an arrangement between a company and its creditors or any class of them. For a solvent scheme of arrangement to become binding on the creditors, a meeting of each class of creditors must be called, with the permission of the local court, to consider and, if thought fit, approve the solvent scheme arrangement. The requisite statutory majority of creditors of not less than 75% in value and 50% in number of those creditors actually attending the meeting, either in person or by proxy, must vote in favor of a solvent scheme of arrangement. Once the solvent scheme of arrangement has been approved by the statutory majority of voting creditors of the company it requires the sanction of the local court at a hearing at which creditors may appear. The court must be satisfied that the scheme is fair.


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In July 2005, the case of British Aviation Insurance Company, or BAIC, was the first solvent scheme of arrangement to fail to be sanctioned by the English High Court, following opposition by certain creditors. The primary reason for the failure of the BAIC arrangement was the failure to adequately provide for different classes of creditors to vote separately on the arrangement. It was thought at the time that the BAIC judgment might signal the decline of solvent schemes of arrangement. However, since BAIC, more than 25 solvent schemes of arrangement have been sanctioned, such that the prevailing view is that the BAIC judgment was very fact-specific to the case in question, and solvent schemes generally should continue to be promoted and sanctioned as a viable means for achieving finality for our insurance and reinsurance subsidiaries. Following the BAIC judgment, insurance and reinsurance companies must now take more care in drafting a solvent scheme of arrangement to fit the circumstances of the company including the determination of the appropriate classes of creditors. Should a solvent scheme of arrangement promoted by any of our insurance or reinsurance subsidiaries fail to receive the requisite approval by creditors or sanction by the court, we will have to run off these liabilities until expiry, which may result in the diversion of our resources to settle policyholder claims for a substantially longer run-off period and increase the associated costs of run-off, resulting potentially in a material adverse effect on our financial condition and results of operations.
 
We are dependent on our executive officers, directors and other key personnel and the loss of any of these individuals could adversely affect our business.
 
Our success substantially depends on our ability to attract and retain qualified employees and upon the ability of our senior management and other key employees to implement our business strategy. We believe that there are only a limited number of available qualified personnel in the business in which we compete. We rely substantially upon the services of Dominic F. Silvester, our Chief Executive Officer, Paul J. O’Shea and Nicholas A. Packer, our Executive Vice Presidents and Joint Chief Operating Officers, Richard J. Harris, our Chief Financial Officer, John J. Oros, our Executive Chairman, and our subsidiaries’ executive officers and directors to identify and consummate the acquisition of insurance and reinsurance companies and portfolios in run-off on favorable terms and to implement our run-off strategy. Each of Messrs. Silvester, O’Shea, Packer, Oros and Harris has an employment agreement with us. In addition to serving as our Executive Chairman, Mr. Oros is a managing director of J.C. Flowers & Co. LLC, an investment firm specializing in privately negotiated equity and equity-related investments in the financial services industry. Mr. Oros splits his time commitment between us and J.C. Flowers & Co. LLC, with the expectation that Mr. Oros will spend approximately 50% of his working time with us; however, there is no minimum work commitment set forth in our employment agreement with Mr. Oros. J. Christopher Flowers, one of our directors and one of our largest shareholders, is a Managing Director of J.C. Flowers & Co. LLC. We believe that our relationships with Mr. Oros and Mr. Flowers and their affiliates provide us with access to additional acquisition and investment opportunities, as well as sources of co-investment for acquisition opportunities that we do not have the resources to consummate on our own. The loss of the services of any of our management or other key personnel, or the loss of the services of or our relationships with any of our directors, including in particular Mr. Oros and Mr. Flowers, or their affiliates, could have a material adverse effect on our business.
 
Further, if we were to lose any of our key employees in Bermuda, we would likely hire non-Bermudians to replace them. Under Bermuda law, non-Bermudians (other than spouses of Bermudians, holders of permanent resident’s certificates or holders of a working resident’s certificate) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government upon showing that, after proper public advertisement in most cases, no Bermudian (or spouse of a Bermudian, holder of a permanent resident’s certificate or holders of a working resident’s certificate) is available who meets the minimum standard requirements for the advertised position. The Bermuda government’s policy limits the duration of work permits to six years, with certain exemptions for key employees and job categories where there is a worldwide shortage of qualified employees.


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Conflicts of interest might prevent us from pursuing desirable investment and business opportunities.
 
Our directors and executive officers may have ownership interests or other involvement with entities that could compete against us, either in the pursuit of acquisition targets or in general business operations. On occasion, we have also participated in transactions in which one or more of our directors or executive officers had an interest. In particular, we have invested, and expect to continue to invest, in or with entities that are affiliates of or otherwise related to Mr. Oros and/or Mr. Flowers. The interests of our directors and executive officers in such transactions or such entities may result in a conflict of interest for those directors and officers. The independent members of our board of directors review any material transactions involving a conflict of interest, and the board of directors will take other actions as may be deemed appropriate by them in particular circumstances, such as forming a special committee of independent directors or engaging third-party financial advisers to evaluate such transactions. We may not be able to pursue all advantageous transactions that we would otherwise pursue in the absence of a conflict should our board of directors be unable to determine that any such transaction is on terms as favorable as we could otherwise obtain in the absence of a conflict.
 
Our consulting business generates a significant amount of our total income, and the failure to develop new consulting relationships could materially adversely affect our results of operations and financial condition.
 
A significant amount of our existing consulting business is dependent on a relatively small number of our clients. While our senior management team has industry relationships that we believe will allow us to successfully identify and enter into agreements with new clients for our consulting business, we cannot assure you that we will be successful in entering into such agreements. A material reduction in consulting fees paid by one or more of our clients or the failure to identify new clients for our consulting services could have a material adverse effect on our business, financial condition and results of operations.
 
We may require additional capital in the future that may not be available or may only be available on unfavorable terms.
 
Our future capital requirements depend on many factors, including our ability to manage the run-off of our assumed policies and to establish reserves at levels sufficient to cover losses. We may need to raise additional funds through financings in the future. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result, and, in any case, such securities may have rights, preferences and privileges that are senior to those of our already outstanding securities. If we cannot obtain adequate capital, our business, results of operations and financial condition could be adversely affected.
 
We are a holding company, and we are dependent on the ability of our subsidiaries to distribute funds to us.
 
We are a holding company and conduct substantially all of our operations through subsidiaries. Our only significant assets are the capital stock of our subsidiaries. As a holding company, we are dependent on distributions of funds from our subsidiaries to pay dividends, fund acquisitions or fulfill financial obligations in the normal course of our business. Our subsidiaries may not generate sufficient cash from operations to enable us to make dividend payments, acquire additional companies or insurance or reinsurance portfolios or fulfill other financial obligations. The ability of our insurance and reinsurance subsidiaries to make distributions to us is limited by applicable insurance laws and regulations, and the ability of all of our subsidiaries to make distributions to us may be restricted by, among other things, other applicable laws and regulations.
 
Fluctuations in currency exchange rates may cause us to experience losses.
 
We maintain a portion of our investments, insurance liabilities and insurance assets denominated in currencies other than U.S. dollars. Consequently, we and our subsidiaries may experience foreign exchange losses.
 
We publish our consolidated financial statements in U.S. dollars. Therefore, fluctuations in exchange rates used to convert other currencies, particularly Australian dollars, Euros, British pounds and other European currencies, into U.S. dollars will impact our reported consolidated financial condition, results of operations and cash flows from year to year.


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Risks Relating to this Offering and Ownership of Our Ordinary Shares
 
Our stock price may experience volatility, thereby causing a potential loss of value to our investors.
 
The market price for our ordinary shares may fluctuate substantially due to, among other things, the following factors:
 
  •  announcements with respect to an acquisition or investment;
 
  •  changes in the value of our assets;
 
  •  our quarterly operating results;
 
  •  sales, or the possibility or perception of future sales, by our existing shareholders;
 
  •  changes in general conditions in the economy and the insurance industry;
 
  •  the financial markets; and
 
  •  adverse press or news announcements.
 
A few significant shareholders may influence or control the direction of our business. If the ownership of our ordinary shares continues to be highly concentrated, it may limit your ability and the ability of other shareholders to influence significant corporate decisions.
 
The interests of Messrs. Flowers, Silvester, Packer and O’Shea, Trident II, L.P. and its affiliates, or Trident, and Beck Mack & Oliver LLC, or Beck Mack, may not be fully aligned with your interests, and this may lead to a strategy that is not in your best interest. As of May 15, 2008, Messrs. Flowers, Silvester, Packer and O’Shea, Trident and Beck Mack beneficially owned approximately 10.3%, 18.8%, 6.0%, 6.1%, 11.2% and 7.6%, respectively, of our outstanding ordinary shares. Although they do not act as a group, Trident, Beck Mack and each of Messrs. Flowers, Silvester, Packer and O’Shea exercise significant influence over matters requiring shareholder approval, and their concentrated holdings may delay or deter possible changes in control of Enstar, which may reduce the market price of our ordinary shares. For further information on aspects of our bye-laws that may discourage changes of control of Enstar, see “— Some aspects of our corporate structure may discourage third-party takeovers and other transactions or prevent the removal of our board of directors and management” below.
 
Some aspects of our corporate structure may discourage third-party takeovers and other transactions or prevent the removal of our board of directors and management.
 
Some provisions of our bye-laws have the effect of making more difficult or discouraging unsolicited takeover bids from third parties or preventing the removal of our current board of directors and management. In particular, our bye-laws make it difficult for any U.S. shareholder or Direct Foreign Shareholder Group (a shareholder or group of commonly controlled shareholders of Enstar that are not U.S. persons) to own or control ordinary shares that constitute 9.5% or more of the voting power of all of our ordinary shares. The votes conferred by such shares will be reduced by whatever amount is necessary so that after any such reduction the votes conferred by such shares will constitute 9.5% of the total voting power of all ordinary shares entitled to vote generally. The primary purpose of this restriction is to reduce the likelihood that we will be deemed a “controlled foreign corporation” within the meaning of Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal tax purposes. However, this limit may also have the effect of deterring purchases of large blocks of our ordinary shares or proposals to acquire us, even if some or a majority of our shareholders might deem these purchases or acquisition proposals to be in their best interests. In addition, our bye-laws provide for a classified board, whose members may be removed by our shareholders only for cause by a majority vote, and contain restrictions on the ability of shareholders to nominate persons to serve as directors, submit resolutions to a shareholder vote and request special general meetings.
 
These bye-law provisions make it more difficult to acquire control of us by means of a tender offer, open market purchase, proxy contest or otherwise. These provisions may encourage persons seeking to acquire control of us to negotiate with our directors, which we believe would generally best serve the interests of our shareholders. However, these provisions may have the effect of discouraging a prospective acquirer from making a tender offer or otherwise attempting to obtain control of us. In addition, these bye-law provisions may prevent the removal of our


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current board of directors and management. To the extent these provisions discourage takeover attempts, they may deprive shareholders of opportunities to realize takeover premiums for their shares or may depress the market price of the shares.
 
The market value of our ordinary shares may decline if large numbers of shares are sold, including pursuant to existing registration rights.
 
We have entered into a registration rights agreement with Trident, Mr. Flowers and Mr. Silvester and certain other of our shareholders. This agreement provides that Trident, Mr. Flowers and Mr. Silvester may request that we effect a registration statement under the Securities Act of certain of their ordinary shares. In addition, they and the other shareholders party to the agreement have “piggyback” registration rights, which may result in their participation in an offering initiated by us. As of the date of this prospectus, an aggregate of 4,794,873 ordinary shares held by Trident, Mr. Flowers and Mr. Silvester are subject to the agreement. Of these shares, 478,513 are being sold by Trident in this offering. By exercising their registration rights, these holders could cause a large number of ordinary shares to be registered and generally become freely tradable without restrictions under the Securities Act immediately upon the effectiveness of the registration. Our ordinary shares have in the past been, and may from time to time continue to be, thinly traded, and significant sales, pursuant to the existing registration rights or otherwise, could adversely affect the market price for our ordinary shares and impair our ability to raise capital through offerings of our equity securities.
 
Because we are incorporated in Bermuda, it may be difficult for shareholders to serve process or enforce judgments against us or our directors and officers.
 
We are a Bermuda company. In addition, certain of our officers and directors reside in countries outside the United States. All or a substantial portion of our assets and the assets of these officers and directors are or may be located outside the United States. Investors may have difficulty effecting service of process within the United States on our directors and officers who reside outside the United States or recovering against us or these directors and officers on judgments of U.S. courts based on civil liabilities provisions of the U.S. federal securities laws even though we have appointed an agent in the United States to receive service of process.
 
Further, no claim may be brought in Bermuda against us or our directors and officers for violation of U.S. federal securities laws, as such laws do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.
 
We believe that there is doubt as to whether the courts of Bermuda would enforce judgments of U.S. courts obtained in actions against us or our directors and officers, as well as our independent auditors, predicated upon the civil liability provisions of the U.S. federal securities laws or original actions brought in Bermuda against us or these persons predicated solely upon U.S. federal securities laws. Further, there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts, and there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts.
 
Some remedies available under the laws of U.S. jurisdictions, including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda courts as contrary to that jurisdiction’s public policy. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for you to recover against us based upon such judgments.
 
Shareholders who own our ordinary shares may have more difficulty in protecting their interests than shareholders of a U.S. corporation.
 
The Bermuda Companies Act, or the Companies Act, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. As a result of these differences, shareholders who own our shares may have more difficulty protecting their interests than shareholders who own shares of a U.S. corporation. For example, class actions and derivative actions are generally not available to shareholders under Bermuda law. Under Bermuda law, only shareholders holding 5% or more of our outstanding ordinary shares or numbering 100 or more are entitled to propose a resolution at an Enstar general meeting.


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We do not intend to pay cash dividends on our ordinary shares.
 
We do not intend to pay a cash dividend on our ordinary shares. Rather, we intend to use any retained earnings to fund the development and growth of our business. From time to time, our board of directors will review our alternatives with respect to our earnings and seek to maximize value for our shareholders. In the future, we may decide to commence a dividend program for the benefit of our shareholders. Any future determination to pay dividends will be at the discretion of our board of directors and will be limited by our position as a holding company that lacks direct operations, the results of operations of our subsidiaries, our financial condition, cash requirements and prospects and other factors that our board of directors deems relevant. In addition, there are significant regulatory and other constraints that could prevent us from paying dividends in any event. As a result, capital appreciation, if any, on our ordinary shares may be your sole source of gain for the foreseeable future.
 
Our board of directors may decline to register a transfer of our ordinary shares under certain circumstances.
 
Our board of directors may decline to register a transfer of ordinary shares under certain circumstances, including if it has reason to believe that any non-de minimis adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders may occur as a result of such transfer. Further, our bye-laws provide us with the option to repurchase, or to assign to a third party the right to purchase, the minimum number of shares necessary to eliminate any such non-de minimis adverse tax, regulatory or legal consequence. In addition, our board of directors may decline to approve or register a transfer of shares unless all applicable consents, authorizations, permissions or approvals of any governmental body or agency in Bermuda, the United States or any other applicable jurisdiction required to be obtained prior to such transfer shall have been obtained. The proposed transferor of any shares will be deemed to own those shares for dividend, voting and reporting purposes until a transfer of such shares has been registered on our shareholders register.
 
It is our understanding that while the precise form of the restrictions on transfer contained in our bye-laws is untested, as a matter of general principle, restrictions on transfers are enforceable under Bermuda law and are not uncommon. These restrictions on transfer may also have the effect of delaying, deferring or preventing a change in control.
 
Risks Relating to Taxation
 
We might incur unexpected U.S., U.K. or Australia tax liabilities if companies in our group that are incorporated outside of those jurisdictions are determined to be carrying on a trade or business there.
 
We and a number of our subsidiaries are companies formed under the laws of Bermuda or other jurisdictions that do not impose income taxes; it is our contemplation that these companies will not incur substantial income tax liabilities from their operations. Because the operations of these companies generally involve, or relate to, the insurance or reinsurance of risks that arise in higher tax jurisdictions, such as the United States, United Kingdom and Australia, it is possible that the taxing authorities in those jurisdictions may assert that the activities of one or more of these companies creates a sufficient nexus in that jurisdiction to subject the company to income tax there. There are uncertainties in how the relevant rules apply to insurance businesses, and in our eligibility for favorable treatment under applicable tax treaties. Accordingly, it is possible that we could incur substantial unexpected tax liabilities.
 
U.S. persons who own our ordinary shares might become subject to adverse U.S. tax consequences as a result of “related person insurance income,” or RPII, if any, of our non-U.S. insurance company subsidiaries.
 
If the RPII rules of the Code were to apply to us, a U.S. person who owns our ordinary shares directly or indirectly through foreign entities on the last day of the taxable year would be required to include in income for U.S. federal income tax purposes the shareholder’s pro rata share of our non-U.S. subsidiaries’ RPII for the entire taxable year, determined as if that RPII were distributed proportionately to the U.S. shareholders at that date regardless whether any actual distribution is made. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization would generally be treated as unrelated business taxable income. Although we and


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our subsidiaries intend to generally operate in a manner so as to qualify for certain exceptions to the RPII rules, there can be no assurance that these exceptions will be available. Accordingly, there can be no assurance that U.S. Persons who own our ordinary shares will not be required to recognize gross income inclusions attributable to RPII.
 
In addition, the RPII rules provide that if a shareholder who is a U.S. person disposes of shares in a foreign insurance company that has RPII and in which U.S. persons collectively own 25% or more of the shares, any gain from the disposition will generally be treated as dividend income to the extent of the shareholder’s share of the corporation’s undistributed earnings and profits that were accumulated during the period that the shareholder owned the shares (whether or not those earnings and profits are attributable to RPII). Such a shareholder would also be required to comply with certain reporting requirements, regardless of the amount of shares owned by the shareholder. These rules should not apply to dispositions of our ordinary shares because we will not be directly engaged in the insurance business. The RPII rules, however, have not been interpreted by the courts or the IRS, and regulations interpreting the RPII rules exist only in proposed form. Accordingly, there is no assurance that our views as to the inapplicability of these rules to a disposition of our ordinary shares will be accepted by the IRS or a court.
 
U.S. persons who own our ordinary shares would be subject to adverse tax consequences if we or one or more of our non-U.S. subsidiaries were considered a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes.
 
We believe that we and our non-U.S. subsidiaries will not be PFICs for U.S. federal income purposes for the current year. Moreover, we do not expect to conduct our activities in a manner that will cause us or any of our non-U.S. subsidiaries to become a PFIC in the future. However, there can be no assurance that the IRS will not challenge this position or that a court will not sustain such challenge. Accordingly, it is possible that we or one or more of our non-U.S. subsidiaries might be deemed a PFIC by the IRS or a court for the current year or any future year. If we or one or more of our non-U.S. subsidiaries were a PFIC, it could have material adverse tax consequences for an investor that is subject to U.S. federal income taxation, including subjecting the investor to a substantial acceleration and/or increase in tax liability. There are currently no regulations regarding the application of the PFIC provisions of the Code to an insurance company, so the application of those provisions to insurance companies remains unclear in certain respects.
 
We may become subject to taxes in Bermuda after March 28, 2016.
 
The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966, as amended, of Bermuda, has given us and each of our Bermuda subsidiaries an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or our Bermuda subsidiaries or any of our or their respective operations, shares, debentures or other obligations until March 28, 2016. Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016. In the event that we become subject to any Bermuda tax after such date, it could have a material adverse effect on our financial condition and results of operations.


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USE OF PROCEEDS
 
We expect to receive net proceeds from this offering of approximately $193.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the proceeds from this offering, including any additional proceeds we receive from the underwriters’ exercise of their over-allotment option, to fund future acquisitions of insurance and reinsurance companies in run-off and for general corporate purposes. Until we apply the proceeds from the sale of the securities, we may temporarily invest any proceeds that are not immediately applied to the above purposes in U.S. government or agency obligations, commercial paper, money market accounts, short-term marketable securities, bank deposits or certificates of deposit, repurchase agreements collateralized by U.S. government or agency obligations or other short-term investments.
 
We will not receive any proceeds from the sale of ordinary shares by the selling shareholders.


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CAPITALIZATION
 
The following table sets forth our capitalization as of March 31, 2008:
 
  •  on an actual basis; and
 
  •  on an as adjusted basis to reflect the application of the net proceeds of approximately $193.0 million from the sale by us of 1,913,983 ordinary shares in this offering at an assumed offering price of $104.49 per share, which was the closing price of our ordinary shares on the Nasdaq Global Select Market on June 4, 2008.
 
You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
 
                 
    As of March 31, 2008  
    Actual     As Adjusted  
    (In thousands, except per share data)  
 
Cash and cash equivalents
  $ 1,480,695     $ 1,673,695  
Restricted cash and cash equivalents
    317,691       317,691  
                 
Total cash, cash equivalents and restricted cash
    1,798,386       1,991,386  
                 
Loans payable
  $ 329,963     $ 329,963  
                 
Shareholders’ equity
               
Share capital
               
Authorized issued and fully paid, par value $1.00 each
               
Ordinary shares issued and outstanding
    11,948       13,862  
Non-voting convertible ordinary shares issued and outstanding
    2,973       2,973  
Treasury stock at cost
    (421,559 )     (421,559 )
Additional paid-in capital
    593,712       784,798  
Accumulated other comprehensive income
    5,785       5,785  
Retained earnings
    271,983       271,983  
                 
Total shareholders’ equity
    464,842       657,842  
                 
Total capitalization
  $ 794,805     $ 987,805  
                 
 
The number of ordinary shares issued and outstanding on an as adjusted basis above excludes ordinary shares that (i) may be issued pursuant to outstanding stock options and restricted share units and (ii) have been reserved for future issuance pursuant to our 2006 Equity Incentive Plan, Enstar Group Limited Employee Share Purchase Plan and Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-employee Directors.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
 
The following table provides selected historical consolidated financial and operating data as of the dates and for the periods indicated. We derived the selected historical consolidated financial and operating data as of December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005 from our audited consolidated financial statements included in this prospectus. We derived the selected historical consolidated financial data as of December 31, 2005, 2004 and 2003 and for the years ended December 31, 2004 and 2003 from our audited consolidated financial statements not included in this prospectus. We derived the selected historical consolidated financial and operating data as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 from our unaudited condensed consolidated financial statements included in this prospectus, which include all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of our financial position and results of operations as of the date and for the periods presented. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period.
 
This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and notes thereto included elsewhere in this prospectus.
 
Since our inception, we have made several acquisitions which impact the comparability between periods of the information reflected below. See “Business — Recent Acquisitions” on page 68 for information about our acquisitions.
 
                                                         
    Three Months Ended March 31,     Years Ended December 31,  
    2008     2007     2007     2006     2005     2004     2003  
    (In thousands of U.S. dollars, except per share data)  
 
Summary Consolidated Statements of Earnings Data:
                                                       
Consulting fees
  $ 6,055     $ 4,661     $ 31,918     $ 33,908     $ 22,006     $ 23,703     $ 24,746  
Net investment (losses) income and net realized gains/losses
    (494 )     20,509       64,336       48,001       29,504       10,502       7,072  
Net (increase)/reduction in loss and loss adjustment expenses liabilities
    (685 )     (2,510 )     24,482       31,927       96,007       13,706       24,044  
Total other expenses
    (25,009 )     (22,721 )     (67,904 )     (49,838 )     (57,299 )     (35,160 )     (21,782 )
Minority interest
    (3,376 )     (2,248 )     (6,730 )     (13,208 )     (9,700 )     (3,097 )     (5,111 )
Share of income of partly owned companies
                      518       192       6,881       1,623  
                                                         
Net (loss)/earnings from continuing operations
    (23,509 )     (2,309 )     46,102       51,308       80,710       16,535       30,592  
Extraordinary gain — Negative goodwill (2008 and 2006: net of minority interest)
    35,196       15,683       15,683       31,038             21,759        
                                                         
Net earnings
  $ 11,687     $ 13,374     $ 61,785     $ 82,346     $ 80,710     $ 38,294     $ 30,592  
                                                         
Per Share Data(1)(2):
                                                       
(Loss)/earnings per share before extraordinary gain — basic
  $ (1.97 )   $ (0.21 )   $ 3.93     $ 5.21     $ 8.29     $ 1.72     $ 3.19  
Extraordinary gain per share — basic
    2.95       1.41       1.34       3.15             2.26        
                                                         
Earnings per share — basic
  $ 0.98     $ 1.20     $ 5.27     $ 8.36     $ 8.29     $ 3.98     $ 3.19  
                                                         
(Loss)/earnings per share before extraordinary gain — diluted
  $ (1.97 )   $ (0.21 )   $ 3.84     $ 5.15     $ 8.14     $ 1.71     $ 3.19  
Extraordinary gain per share — diluted
    2.95       1.41       1.31       3.11             2.24        
                                                         
Earnings per share — diluted
  $ 0.98     $ 1.20     $ 5.15     $ 8.26     $ 8.14     $ 3.95     $ 3.19  
                                                         
Weighted average shares outstanding — basic
    11,927,542       11,160,448       11,731,908       9,857,914       9,739,560       9,618,905       9,582,396  
Weighted average shares outstanding — diluted(3)
    11,927,542       11,160,448       12,009,683       9,966,960       9,918,823       9,694,528       9,582,396  
Cash dividends paid per share
                    $ 2.92           $ 0.81     $ 5.62  


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    As of
                               
    March 31,     As of December 31,  
    2008     2007     2006     2005     2004     2003  
    (In thousands of U.S. dollars, except per share data)  
 
Summary Balance Sheet Data:
                                               
Total investments
  $ 1,217,695     $ 637,196     $ 747,529     $ 539,568     $ 591,635     $ 268,417  
Cash and cash equivalents
    1,798,386       1,163,333       513,563       345,329       350,456       127,228  
Reinsurance balances receivable
    758,659       465,277       408,142       250,229       341,627       175,091  
Total assets
    3,994,956       2,417,143       1,774,252       1,199,963       1,347,853       632,347  
Loss and loss adjustment expense liabilities
    2,700,687       1,591,449       1,214,419       806,559       1,047,313       381,531  
Loans payable
    329,963       60,227       62,148                    
Total shareholders’ equity
    464,842       450,599       318,610       260,906       177,338       147,616  
Book Value per Share(4):
                                               
Basic
  $ 38.97     $ 38.41     $ 32.32     $ 26.79     $ 18.44     $ 15.40  
Diluted
  $ 38.97     $ 37.52     $ 31.97     $ 26.30     $ 18.29     $ 15.40  
 
 
(1) Earnings per share is a measure based on net earnings divided by weighted average ordinary shares outstanding. Basic earnings per share is defined as net earnings available to ordinary shareholders divided by the weighted average number of ordinary shares outstanding for the period, giving no effect to dilutive securities. Diluted earnings per share is defined as net earnings available to ordinary shareholders divided by the weighted average number of shares and share equivalents outstanding calculated using the treasury stock method for all potentially dilutive securities. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted earnings per share.
 
(2) The weighted average ordinary shares outstanding shown for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 reflect the conversion of Class A, B, C and D shares to ordinary shares on January 31, 2007, as part of the recapitalization completed in connection with the merger of our wholly-owned subsidiary with and into The Enstar Group, Inc., as if the conversion occurred on January 1, 2007, 2006, 2005, 2004 and 2003. For the year ended December 31, 2007, the ordinary shares issued to acquire The Enstar Group, Inc. are reflected in the calculation of the weighted average ordinary shares outstanding from January 31, 2007, the date of issue. As a result both the book value per share and the earnings per share calculations, previously reported, have been amended to reflect this change.
 
(3) The calculation of diluted earnings per share for the three months ended March 31, 2008 and March 31, 2007 and the calculation of diluted book value per share as of March 31, 2008 do not include share equivalents relating to unvested shares, restricted shares and options because to do so would have been anti-dilutive.
 
(4) Basic book value per share is defined as total shareholders’ equity available to ordinary shareholders divided by the number of ordinary shares outstanding as of the end of the period, giving no effect to dilutive securities. Diluted book value per share is defined as total shareholders’ equity available to ordinary shareholders divided by the number of ordinary shares and ordinary share equivalents outstanding at the end of the period, calculated using the treasury stock method for all potentially dilutive securities. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted book value per share.


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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL INFORMATION
 
The following unaudited pro forma condensed combined consolidated financial information is based on our historical financial statements and the historical financial statements of Gordian Runoff Limited, TGI Australia Limited, AG Australia Holdings Ltd., Gordian Runoff (UK) Limited, Shelly Bay Holdings Limited (formerly AMP General Insurance Holdings Limited), Enstar Australia Limited (formerly Cobalt Solutions Australia Limited), Harrington Sound Limited (formerly AMP General Insurance Limited), and Church Bay Limited (formerly AMPG (1992) Limited), or the acquired companies collectively referred to herein as Gordian, and have been prepared to illustrate the effects of the acquisition of all of the outstanding share capital of Gordian by Enstar Australia Holdings Pty Limited, or Enstar Australia, our wholly-owned subsidiary, which was completed on March 5, 2008. The following data is presented as if the acquisition was completed as of January 1, 2007. The unaudited pro forma condensed combined consolidated financial information (i) is based on the acquisition price we paid of approximately $405.4 million to the former shareholders of Gordian and (ii) reflects the purchase of Gordian under the purchase method of accounting and represents a current estimate of the financial information based on available information from us and Gordian.
 
The pro forma information includes adjustments to record the assets and liabilities of Gordian at their estimated fair market values and is subject to adjustment as additional information becomes available and as additional analyses are performed. To the extent there are significant changes to Gordian’s business, the assumptions and estimates herein could change significantly. The pro forma financial information is presented for illustrative purposes only under one set of assumptions and does not reflect the financial results of the combined companies had consideration been given to other assumptions or to the impact of possible operating efficiencies, asset dispositions, and other factors. Further, the pro forma financial information does not necessarily reflect the historical results of the combined company that actually would have occurred had the transaction been in effect during the period indicated or that may be obtained in the future. The following unaudited pro forma condensed combined consolidated financial information does not include a balance sheet dated March 31, 2008 because our condensed combined consolidated balance sheet dated March 31, 2008 (included in our historical financial statements in this prospectus on page F-42) reflected the Gordian acquisition, which occurred March 5, 2008.
 
The unaudited pro forma condensed combined consolidated financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements, including the related notes, included elsewhere in this prospectus, as well as the historical financial statements of Gordian included in our Current Report on Form 8-K/A, filed with the SEC on May 21, 2008 and incorporated herein by reference, with the exception of historical information for AG Australia Holdings Ltd., Gordian Runoff (UK) Limited and Shelly Bay Holdings Limited (formerly AMP General Insurance Holdings Limited) as these entities were materially insignificant to the transaction as a whole.


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ENSTAR GROUP LIMITED
 
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF EARNINGS
For the Three-Month Period Ended March 31, 2008
 
                                 
    Enstar Group
          Adjustment
       
    Limited(a)     Gordian     Entries     Combined  
    (Expressed in thousands of U.S. dollars, except per share data)  
 
INCOME
                               
Consulting fees
  $ 6,018     $ 227     $     $ 6,245  
Net investment (loss) income and net realized gains (losses)
    (7,766 )     13,854       (5,194 )(b)     894  
                                 
      (1,748 )     14,081       (5,194 )     7,139  
                                 
EXPENSES
                               
Net increase (reduction) in loss and loss adjustment expense liabilities
    1,631       (23,815 )     4,339  (c)     (17,845 )
Salaries and benefits
    11,095       596             11,691  
General and administrative expenses
    12,817       3,465             16,282  
Interest expense
    3,315             3,965  (c)     7,280  
Foreign exchange gain
    (4,234 )     (100 )           (4,334 )
                                 
      24,624       (19,854 )     8,304       13,074  
                                 
(LOSS) EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST
    (26,372 )     33,935       (13,498 )     (6,135 )
INCOME TAXES
    1,738       (3,994 )     1,558  (c)     (698 )
MINORITY INTEREST
    (3,376 )                 (3,376 )
                                 
(LOSS) EARNINGS FROM CONTINUING OPERATIONS(d)
  $ (28,010 )   $ 29,941     $ (11,940 )   $ (10,009 )
                                 
Loss per share — basic and diluted
  $ (2.35 )                   $ (0.84 )
Weighted average shares outstanding — basic and diluted
    11,927,542                       11,927,542  
 
Notes to the Pro Forma Condensed Combined Consolidated Statement of Earnings
 
Note a
The Enstar Group Limited statement of earnings excludes the results of Gordian for the period from date of acquisition, March 5, 2008 to March 31, 2008.
         
Note b        
Adjustment to exclude net unrealized gains reported by Gordian to conform to Enstar Group Limited’s accounting policy for investments   $ (5,194 )
         
Note c
       
Adjustment to interest expense to reflect the financing costs of the acquisition for the period
    (3,965 )
Adjustment to recognize the amortization of increased run-off provisions
    (215 )
Adjustment to recognize amortization of fair value adjustments recorded at date of acquisition
    (4,124 )
To adjust income taxes for pro forma adjustments at the statutory rate of 30%
    1,558  
         
Total expenses
  $ (6,746 )
         
Note d
Earnings from continuing operations exclude extraordinary gains.


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ENSTAR GROUP LIMITED

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended December 31, 2007
 
                                 
    Enstar Group
          Adjustment
       
    Limited     Gordian     Entries     Combined  
    (Expressed in thousands of U.S. dollars, except per share data)  
 
INCOME
                               
Consulting fees
  $ 31,918     $ 7,499     $     $ 39,417  
Net investment income and net realized gains
    64,336       59,600       (4,395 )(c)     119,541  
                                 
      96,254       67,099       (4,395 )     158,958  
                                 
EXPENSES
                               
Net reduction in loss and loss adjustment expense liabilities
    (24,482 )     (102,974 )     19,833  (a)     (107,623 )
Salaries and benefits
    46,977       12,708             59,685  
General and administrative expenses
    31,413       10,717             42,130  
Interest expense
    4,876             28,461  (b)     33,337  
Foreign exchange gain
    (7,921 )     (4,910 )           (12,831 )
                                 
      50,863       (84,459 )     48,294       14,698  
                                 
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
    45,391       151,558       (52,689 )     144,260  
INCOME TAXES
    7,441       (40,472 )     1,319  (c)     (31,712 )
MINORITY INTEREST
    (6,730 )                 (6,730 )
                                 
EARNINGS (LOSS) FROM CONTINUING OPERATIONS(d)
  $ 46,102     $ 111,086     $ (51,370 )   $ 105,818  
                                 
Earnings per share — basic
  $ 3.93                     $ 9.02  
Earnings per share — diluted
  $ 3.84                     $ 8.81  
Weighted average shares outstanding — basic
    11,731,908                       11,731,908  
Weighted average shares outstanding — diluted
    12,009,683                       12,009,683  
 
Notes to the Pro Forma Condensed Combined Consolidated Statement of Earnings
 
Note a
Amortization of fair value adjustments.
 
Note b
Represents the loan interest expense based on the assumption that the loan used to fund the acquisition was made on January 1, 2007.
 
Note c
Represents the after tax impact of Gordian’s adoption of our accounting policy for investments.
 
Note d
Earnings from continuing operations exclude extraordinary gains.


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ENSTAR GROUP LIMITED
 
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
As of December 31, 2007
 
                                 
    Enstar Group
          Adjustment
       
    Limited     Gordian     Entries     Combined  
    (Expressed in thousands of U.S. dollars)  
 
ASSETS
                               
Total investments
  $ 637,196     $ 393,841           $ 1,031,037  
Cash and cash equivalents
    995,237       633,400       (89,390 )(a)     1,396,999  
                      (142,248 )(b)        
Restricted cash and cash equivalents
    168,096                   168,096  
Reinsurance balances receivable
    465,277       145,186       (37,630 )(c)     572,833  
Other assets
    151,337       355,911       (18,867 )(c)     158,837  
                      (329,544 )(b)        
                                 
Total Assets
  $ 2,417,143     $ 1,528,338     $ (617,679 )   $ 3,327,802  
                                 
                                 
LIABILITIES                                
Loss and loss adjustment expenses
  $ 1,591,449     $ 578,052     $ (29,917 )(c)   $ 2,139,584  
Reinsurance balances payable
    189,870       8,214       (1,502 )(c)     196,582  
Loans payable
    60,227             276,500  (a)     336,727  
Other liabilities
    61,561       17,959       7,499  (c)     87,019  
                                 
      1,903,107       604,225       252,580       2,759,912  
                                 
                                 
Minority Interest
    63,437             39,522  (a)     102,959  
                                 
SHAREHOLDERS’ EQUITY                                
Share capital
    14,893       396,872       (396,872 )(a)     14,893  
Treasury stock
    (421,559 )                 (421,559 )
Additional paid-in capital
    590,934                   590,934  
Accumulated other comprehensive income
    6,035             4,598  (d)     10,633  
Retained earnings
    260,296       527,241       (58,820 )(a)     270,030  
                      (32,576 )(c)        
                      (471,792 )(b)        
                      (4,598 )(d)        
                      50,280  (a)        
                                 
      450,599       924,113       (909,781 )     464,931  
                                 
Total Liabilities & Shareholders’ Equity
  $ 2,417,143     $ 1,528,338     $ (617,679 )   $ 3,327,802  
                                 


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Notes to the Pro Forma Condensed Combined Consolidated Balance Sheet
 
Note a
To record the acquisition of Gordian by Enstar Group Limited using the purchase method of accounting. A summary of the adjustments is as follows:
 
                 
Purchase price
          $ 401,086  
Direct costs of acquisitions
            4,326  
                 
Total purchase price (cash of $128,912 and notes payable of $276,500)
            405,412  
Net assets acquired at fair value:
               
Cash and investments
    872,755          
Reinsurance balances receivable
    99,645          
Other assets
    31,253          
Losses and loss adjustment expenses
    (509,638 )        
Insurance and reinsurance balances payable
    (22,660 )        
Other liabilities
    (15,663 )        
                 
Net assets acquired at fair value
            455,692  
                 
Excess of net assets over purchase price (negative goodwill)
          $ (50,280 )
                 
 
Cash of $39,522 to fund the acquisition was provided by a third party who retained a minority interest in the transaction.
 
Note b
To reflect the return of capital of $471,292 paid by Gordian to its former parent prior to completion of the acquisition.
 
Note c
To record the fair value adjustments recorded as at date of acquisition.
 
Note d
To record the adjustment required to conform to Enstar Group Limited’s accounting policy for investments.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Business Overview
 
We were formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry. On January 31, 2007, we completed the merger, or the Merger, of CWMS Subsidiary Corp, a Georgia corporation and our wholly-owned subsidiary, with and into The Enstar Group, Inc., a Georgia corporation. As a result of the Merger, The Enstar Group, Inc., renamed Enstar USA, Inc., is now our wholly-owned subsidiary. The Enstar Group, Inc. owned an approximate 32% economic and a 50% voting interest in us prior to the Merger.
 
Since our formation, we, through our subsidiaries, have completed several acquisitions of insurance and reinsurance companies and are now administering those businesses in run-off. In 2006, we completed 3 acquisitions of companies having combined total net assets of $222.9 million. In 2007, we completed 5 acquisitions of companies having combined total net assets of $625.3 million. Thus far in 2008, we have completed 2 acquisitions of companies having combined total net assets of $521.6 million. We derive our net earnings from the ownership and management of these companies primarily by settling insurance and reinsurance claims below the recorded loss reserves and from returns on the portfolio of investments retained to pay future claims. In addition, we provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.
 
In the primary (or direct) insurance business, the insurer assumes risk of loss from persons or organizations that are directly subject to the given risks. Such risks may relate to property, casualty, life, accident, health, financial or other perils that may arise from an insurable event. In the reinsurance business, the reinsurer agrees to indemnify an insurance or reinsurance company, referred to as the ceding company, against all or a portion of the insurance risks arising under the policies the ceding company has written or reinsured. When an insurer or reinsurer stops writing new insurance business, either entirely or with respect to a particular line of business, the insurer, reinsurer, or the line of discontinued business is in run-off.
 
In recent years, the insurance industry has experienced significant consolidation. As a result of this consolidation and other factors, the remaining participants in the industry often have portfolios of business that are either inconsistent with their core competency or provide excessive exposure to a particular risk or segment of the market (i.e., property/casualty, asbestos, environmental, director and officer liability, etc.). These non-core and/or discontinued portfolios are often associated with potentially large exposures and lengthy time periods before resolution of the last remaining insured claims resulting in significant uncertainty to the insurer or reinsurer covering those risks. These factors can distract management, drive up the cost of capital and surplus for the insurer or reinsurer, and negatively impact the insurer’s or reinsurer’s credit rating, which makes the disposal of the unwanted company or portfolio an attractive option. Alternatively, the insurer may wish to maintain the business on its balance sheet, yet not divert significant management attention to the run-off of the portfolio. The insurer or reinsurer, in either case, is likely to engage a third party, such as us, that specializes in run-off management to purchase the company or portfolio of the company, or to manage the company or portfolio in run-off.
 
In the sale of a run-off company, a purchaser, such as us, typically pays a discount to the book value of the company based on the risks assumed and the relative value to the seller of no longer having to manage the company in run-off. Such a transaction can be beneficial to the seller because it receives an up-front payment for the company, eliminates the need for its management to devote any attention to the disposed company and removes the risk that the established reserves related to the run-off business may prove to be inadequate. The seller is also able to redeploy its management and financial resources to its core businesses.
 
Alternatively, if the insurer or reinsurer hires a third party, such as us, to manage its run-off business, the insurer or reinsurer will, unlike in a sale of the business, receive little or no cash up front. Instead, the management arrangement may provide that the insurer or reinsurer will retain the profits, if any, derived from the run-off with certain incentive payments allocated to the run-off manager. By hiring a run-off manager, the insurer or reinsurer can outsource the management of the run-off business to experienced and capable individuals, while allowing its own management team to focus on the insurer’s or reinsurer’s core businesses. Our desired approach to managing


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run-off business is to align our interests with the interests of the owners through both fixed management fees and certain incentive payments. Under certain management arrangements to which we are a party, however, we receive only a fixed management fee and do not receive any incentive payments.
 
Following the purchase of a run-off company or the engagement to manage a run-off company or portfolio of business, it is incumbent on the new owner or manager to conduct the run-off in a disciplined and professional manner in order to efficiently discharge liabilities associated with the business while preserving and maximizing its assets. Our approach to managing our acquired companies in run-off as well as run-off companies or portfolios of businesses on behalf of third-party clients includes negotiating with third-party insureds and reinsureds to commute their insurance or reinsurance agreement (sometimes called policy buy-backs) for an agreed upon up-front payment by us, or the third-party client, and to more efficiently manage payment of insurance and reinsurance claims. We attempt to commute policies with direct insureds or reinsureds in order to eliminate uncertainty over the amount of future claims. We also attempt, where appropriate, to negotiate favorable commutations with reinsurers by securing the receipt of a lump-sum settlement from the reinsurer in complete satisfaction of the reinsurer’s liability in respect of any future claims. We, or our third-party client, are then fully responsible for any claims in the future. We typically invest proceeds from reinsurance commutations with the expectation that such investments will produce income, which, together with the principal, will be sufficient to satisfy future obligations with respect to the acquired company or portfolio.
 
With respect to our U.K. and Bermuda insurance and reinsurance subsidiaries, we are able to pursue strategies to achieve complete finality and conclude the run-off of a company by promoting solvent schemes of arrangement. Solvent schemes of arrangement, or a Solvent Scheme, have been a popular means of achieving financial certainty and finality, for insurance and reinsurance companies incorporated or managed in the U.K. and Bermuda by making a one-time full and final settlement of an insurance and reinsurance company’s liabilities to policyholders. Such a Solvent Scheme is an arrangement between a company and its creditors or any class of them. For a Solvent Scheme to become binding on the creditors, a meeting of each class of creditors must be called, with the permission of the local court, to consider and, if thought fit, approve the Solvent Scheme. The requisite statutory majority of creditors of not less than 75% in value and 50% in number of those creditors actually attending the meeting, either in person or by proxy, must vote in favor of a Solvent Scheme. Once a Solvent Scheme has been approved by the statutory majority of voting creditors of the company it requires the sanction of the local court. While a Solvent Scheme provides an alternative exit strategy for run-off companies it is not our strategy to make such acquisitions with this strategy solely in mind. Our preferred approach is to generate earnings from the disciplined and professional management of acquired run-off companies and then consider exit strategies, including a Solvent Scheme, when the majority of the run-off is complete. To understand risks associated with this strategy, see “Risk Factors — Risks Relating to Our Business — Exit and finality opportunities provided by solvent schemes of arrangement may not continue to be available, which may result in the diversion of our resources to settle policyholder claims for a substantially longer run-off period and increase the associated costs of run-off of our insurance and reinsurance subsidiaries.”
 
We manage our business through two operating segments: reinsurance and consulting.
 
Our reinsurance segment comprises the operations and financial results of its insurance and reinsurance subsidiaries. The financial results of this segment primarily consist of investment income less net reductions in loss and loss adjustment expense liabilities, direct expenses (including certain premises costs and professional fees) and management fees paid to our consulting segment.
 
Our consulting segment comprises the operations and financial results of those subsidiaries that provide management and consulting services, forensic claims inspections services and reinsurance collection services to third-party clients. This segment also provides management services to the reinsurance segment in return for management fees. The financial results of this segment primarily consist of fee income less overhead expenses comprised of staff costs, information technology costs, certain premises costs, travel costs and certain professional fees.
 
For a further discussion of our segments, see Note 19 to the Consolidated Financial Statements for the year ended December 31, 2007 included elsewhere in this prospectus.


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As of March 31, 2008 we had $3,995.0 million of total assets and $464.8 million of shareholders’ equity. We operate our business internationally through our insurance and reinsurance subsidiaries and our consulting subsidiaries in Bermuda, the United Kingdom, the United States, Europe and Australia.
 
Financial Statement Overview
 
Consulting Fee Income
 
We generate consulting fees based on a combination of fixed and success-based fee arrangements. Consulting income will vary from period to period depending on the timing of completion of success-based fee arrangements. Success-based fees are recorded when targets related to overall project completion or profitability goals are achieved. Our consulting segment, in addition to providing services to third parties, also provides management services to the reinsurance segment based on agreed terms set out in management agreements between the parties. The fees charged by the consulting segment to the reinsurance segment are eliminated against the cost incurred by the reinsurance segment on consolidation.
 
Net Investment Income and Net Realized Gains/(Losses)
 
Our net investment income is principally derived from interest earned primarily on cash and investments offset by investment management fees paid. Our investment portfolio currently consists of the following: (1) bond portfolios that are classified as both trading and held-to-maturity and carried at fair value and amortized cost, respectively; (2) cash and cash equivalents; (3) other investments that are accounted for on the equity basis; and (4) fixed and short-term investments that are classified as trading and are carried at fair value.
 
Our current investment strategy seeks to preserve principal and maintain liquidity while trying to maximize investment return through a high-quality, diversified portfolio. The volatility of claims and the effect they have on the amount of cash and investment balances, as well as the level of interest rates and other market factors, affect the return we are able to generate on our investment portfolio. It is our current investment policy to hold our bond portfolio to maturity, and not to trade or have such portfolio available-for-sale. When we make a new acquisition we will often restructure the acquired investment portfolio, which may generate one-time realized gains or losses.
 
The majority of cash and investment balances are held within our reinsurance segment.
 
Net Reduction in Loss and Loss Adjustment Expense Liabilities
 
Our insurance-related earnings are primarily comprised of reductions, or potentially increases, of net loss and loss adjustment expense liabilities. These liabilities are comprised of:
 
  •  outstanding loss or case reserves, or OLR, which represent management’s best estimate of the likely settlement amount for known claims, less the portion that can be recovered from reinsurers;
 
  •  reserves for losses incurred but not reported, or IBNR reserves, which are reserves established by us for claims that are not yet reported but can reasonably be expected to have occurred based on industry information, management’s experience and actuarial evaluation, less the portion that can be recovered from reinsurers; and
 
  •  reserves for future loss adjustment expense liabilities which represent management’s best estimate of the future costs of managing the run-off of claims liabilities.
 
Net loss and loss adjustment expense liabilities are reviewed by our management each quarter and by independent actuaries annually as of year end. Reserves reflect management’s best estimate of the remaining unpaid portion of these liabilities. Prior period estimates of net loss and loss adjustment expense liabilities may change as our management considers the combined impact of commutations, policy buy-backs, settlement of losses on carried reserves and the trend of incurred loss development compared to prior forecasts.
 
Commutations provide an opportunity for us to exit exposures to entire policies with insureds and reinsureds at a discount to the previously estimated ultimate liability. Our internal and external actuaries eliminate all prior historical loss development that relates to commuted exposures and apply their actuarial methodologies to the


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remaining aggregate exposures and revised historical loss development information to reassess estimates of ultimate liabilities.
 
Policy buy-backs provide an opportunity for us to settle individual policies and losses usually at a discount to carried advised loss reserves. As part of our routine claims settlement operations, claims will settle at either below or above the carried advised loss reserve. The impact of policy buy-backs and the routine settlement of claims updates historical loss development information to which actuarial methodologies are applied, often resulting in revised estimates of ultimate liabilities. Our actuarial methodologies include industry benchmarking which, under certain methodologies (discussed further under “— Critical Accounting Policies” below), compares the trend of our loss development to that of the industry. To the extent that the trend of our loss development compared to the industry changes in any period, it is likely to have an impact on the estimate of ultimate liabilities. Additionally, consolidated net reductions, or potentially increases, in loss and loss adjustment expense liabilities include reductions, or potentially increases, in the provisions for future losses and loss adjustment expenses related to the current period’s run-off activity. Net reductions in net loss and loss adjustment expense liabilities are reported as negative expenses by us in our reinsurance segment. The unallocated loss adjustment expenses paid by the reinsurance segment comprise management fees paid to the consulting segment and are eliminated on consolidation. The consulting segment costs in providing run-off services are classified as salaries and general and administrative expenses. For more information on how the reserves are calculated, see “— Critical Accounting Policies — Loss and Loss Adjustment Expenses” below.
 
As our reinsurance subsidiaries are in run-off, our premium income is insignificant, consisting primarily of adjustment premiums triggered by loss payments.
 
Salaries and Benefits
 
We are a service-based company and, as such, employee salaries and benefits are our largest expense. We have experienced significant increases in our salaries and benefits expenses as we have grown our operations, and we expect that trend to continue if we are able to successfully expand our operations.
 
On September 15, 2006, our board of directors and shareholders adopted the Enstar Group Limited 2006 Equity Incentive Plan, or the Equity Incentive Plan, and the Enstar Group Limited 2006-2010 Annual Incentive Compensation Plan, or the Annual Incentive Plan, which are administered by the Compensation Committee of our board of directors.
 
The Annual Incentive Plan provides for the annual grant of bonus compensation, or, each, a bonus award, to certain of our officers and employees of us and our subsidiaries, including our senior executive officers. Bonus awards for each calendar year from 2006 through 2007 were determined, and for each calendar year from 2008 through 2010 will be determined, based on our consolidated net after-tax profits. The Compensation Committee determines the amount of bonus awards in any calendar year, based on a percentage of our consolidated net after-tax profits. The percentage is 15% unless the Compensation Committee exercises its discretion to change the percentage no later than 30 days after our year-end. For the years ended December 31, 2007 and 2006 the percentage was left unchanged by the Compensation Committee. The Compensation Committee determines, in its sole discretion, the amount of bonus awards payable to each participant.
 
Bonus awards are payable in cash, ordinary shares or a combination of both. Ordinary shares issued in connection with a bonus award will be issued pursuant to the terms and subject to the conditions of the Equity Incentive Plan.
 
For information on the awards made under both the Annual and Equity Incentive plans for the years ended December 31, 2007 and December 31, 2006, and the three months ended March 31, 2008 and March 31, 2007, see Note 12 to our Consolidated Financial Statements for the year ended December 31, 2007, included elsewhere in this prospectus, and our Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2007, included elsewhere in this prospectus.
 
With the exception of the expense relating to the Annual Incentive Plan, which is allocated to both the reinsurance and consulting segments, the costs of all of our employees are accounted for as part of the consulting segment.


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General and Administrative Expenses
 
General and administrative expenses include rent and rent-related costs, professional fees (legal, investment, audit and actuarial) and travel expenses. We have operations in multiple jurisdictions and our employees travel frequently in connection with the search for acquisition opportunities and in the general management of the business. While certain general and administrative expenses, such as rent and related costs and professional fees, are incurred directly by the reinsurance segment, the remaining general and administrative expenses are incurred by the consulting segment. To the extent that such costs incurred by the consulting segment relate to the management of the reinsurance segment, they are recovered by the consulting segment through the management fees charged to the reinsurance segment.
 
Foreign Exchange Gain/(Loss)
 
Our reporting and functional currency is U.S. dollars. Through our subsidiaries, however, we hold a variety of foreign (non-U.S.) currency assets and liabilities, the principal exposures being Australian dollars, Euros and British pounds. At each balance sheet date, recorded balances that are denominated in a currency other than U.S. dollars are adjusted to reflect the current exchange rate. Revenue and expense items are translated into U.S. dollars at average rates of exchange for the period. The resulting exchange gains or losses are included in our net income. We seek to manage our exposure to foreign currency exchange by broadly matching our foreign currency assets against our foreign currency liabilities.
 
Income Tax/(Recovery)
 
Under current Bermuda law, we and our Bermuda-based subsidiaries are not required to pay taxes in Bermuda on either income or capital gains. These companies have received an undertaking from the Bermuda government that, in the event of income or capital gains taxes being imposed, they will be exempted from such taxes until the year 2016. Our non-Bermuda subsidiaries record income taxes based on their graduated statutory rates, net of tax benefits arising from tax loss carryforwards. On January 1, 2007 we adopted the provisions of the U.S. Financial Accounting Standards Board, or the FASB, Interpretation No. 48. “Accounting for Uncertainty in Income Taxes,” or FIN 48. As a result of the implementation of FIN 48, we recognized a $4.9 million increase to the January 1, 2007 balance of retained earnings.
 
Minority Interest
 
The acquisitions of Hillcot Re Limited (formerly Toa-Re Insurance Company (UK) Limited) in March 2003 and of Brampton Insurance Company Limited (formerly Aioi Insurance Company of Europe Limited) in March 2006 were effected through Hillcot Holdings Limited, or Hillcot, a Bermuda-based company in which we have a 50.1% economic interest. The results of operations of Hillcot are included in our consolidated statements of operations with the remaining 49.9% economic interest in the results of Hillcot reflected as a minority interest.
 
On February 29, 2008, we completed the acquisition of Guildhall Insurance Company Limited, or Guildhall, a U.K.-based insurance and reinsurance company in run-off and on March 5, 2008, we completed the acquisition of AMP Limited’s Australian-based closed reinsurance and insurance operations, or Gordian. We have a 70% economic interest in Guildhall and Gordian. The results of operations of Guildhall and Gordian are included in our consolidated statements of operations with the remaining 30% economic interest in the results of Guildhall and Gordian reflected as a minority interest.
 
We own 50.1% of Shelbourne Group Limited, or Shelbourne, which in turn owns 100% of Shelbourne Syndicate Services Limited, the Managing Agency for Lloyd’s Syndicate 2008, a syndicate approved by Lloyd’s of London on December 16, 2007. We have committed to provide approximately 65% of the capital required by Lloyd’s Syndicate 2008, which is authorized to undertake Reinsurance to Close Transactions, or RITC transactions (the transferring of the liabilities from one Lloyd’s Syndicate to another), of Lloyd’s Syndicates in Run-off.
 
Negative Goodwill
 
Negative goodwill represents the excess of the fair value of businesses acquired by us over the cost of such businesses. In accordance with the Statements of Financial Standards issued by FASB No. 141 “Business


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Combinations,” or FAS 141, this amount is recognized upon the acquisition of the businesses as an extraordinary gain. The fair values of the reinsurance assets and liabilities acquired are derived from probability-weighted ranges of the associated projected cash flows, based on actuarially prepared information and our management’s run-off strategy. Any amendment to the fair values resulting from changes in such information or strategy will be recognized when they occur. For more information on how the goodwill is determined, see “— Critical Accounting Policies — Goodwill” below.
 
Critical Accounting Policies
 
Certain amounts in our consolidated financial statements require the use of best estimates and assumptions to determine reported values. These amounts could ultimately be materially different than what has been provided for in our consolidated financial statements. We consider the assessment of loss reserves and reinsurance recoverable to be the values requiring the most inherently subjective and complex estimates. In addition, the assessment of the possible impairment of goodwill involves certain estimates and assumptions. As such, the accounting policies for these amounts are of critical importance to our consolidated financial statements.
 
Loss and Loss Adjustment Expenses
 
The following table provides a breakdown of gross loss and loss adjustment expense reserves by type of exposure as of December 31, 2007 and 2006:
 
                                                 
    2007     2006  
    OLR     IBNR     Total     OLR     IBNR     Total  
    (In thousands of U.S. dollars)  
 
Asbestos
  $ 180,068     $ 402,289     $ 582,357     $ 158,861     $ 389,143     $ 548,004  
Environmental
    39,708       55,544       95,252       43,957       74,115       118,072  
All Other
    382,040       464,789       846,829       312,913       161,855       474,768  
                                                 
Total
  $ 601,816     $ 922,622     $ 1,524,438     $ 515,731     $ 625,113     $ 1,140,844  
                                                 
Unallocated Loss Adjustment Expenses
                    67,011                       73,575  
                                                 
Total
                  $ 1,591,449                     $ 1,214,419  
                                                 
 
The following table provides a breakdown of loss and loss adjustment expense reserves (net of reinsurance balances recoverable) by type of exposure as of December 31, 2007 and 2006:
 
                                 
    2007     2006  
    Total     % of Total     Total     % of Total  
    (In thousands of U.S. dollars)  
 
Asbestos
  $ 355,213       30.5 %   $ 336,744       38.6 %
Environmental
    64,764       5.6       52,342       6.0  
All Other
    676,497       58.1       409,598       47.0  
Unallocated Loss Adjustment Expenses
    67,011       5.8       73,575       8.4  
                                 
Total
  $ 1,163,485       100 %   $ 872,259       100 %
                                 
 
Our “All Other” exposure category consists of a mix of general casualty (approximately 60% of “All Other” net reserves), personal accident (approximately 20% of “All Other” net reserves) and other miscellaneous exposures, which are generally long-tailed in nature.
 
As of December 31, 2007, the IBNR reserves (net of reinsurance balances receivable) accounted for $570.7 million, or 49.1%, of our total net loss reserves. The reserve for IBNR (net of reinsurance balance receivable) accounted for $359.4 million, or 41.2%, of our total net loss reserves at December 31, 2006.


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Annual Loss and Loss Adjustment Reviews
 
Because a significant amount of time can lapse between the assumption of risk, the occurrence of a loss event, the reporting of the event to an insurance or reinsurance company and the ultimate payment of the claim on the loss event, the liability for unpaid losses and loss adjustment expenses is based largely upon estimates. Our management must use considerable judgment in the process of developing these estimates. The liability for unpaid losses and loss adjustment expenses for property and casualty business includes amounts determined from loss reports on individual cases and amounts for IBNR reserves. Such reserves are estimated by management based upon loss reports received from ceding companies, supplemented by our own estimates of losses for which no ceding company loss reports have yet been received.
 
In establishing reserves, management also considers independent actuarial estimates of ultimate losses. Our independent actuaries employ generally accepted actuarial methodologies to estimate ultimate losses and loss adjustment expenses. A loss reserve study prepared by an independent actuary provides the basis of our reserves for losses and loss adjustment expenses.
 
As of December 31, 2007, 2002 was the most recent year in which policies were underwritten by any of our insurance and reinsurance subsidiaries. As a result, all of our unpaid claims liabilities are considered to have a long-tail claims payout. Gross loss reserves relate primarily to casualty exposures, including latent claims, of which approximately 42.6% relate to A&E exposures.
 
Within the annual loss reserve studies produced by our external actuaries, exposures for each subsidiary are separated into homogeneous reserving categories for the purpose of estimating IBNR. Each reserving category contains either direct insurance or assumed reinsurance reserves and groups relatively similar types of risks and exposures (for example, asbestos, environmental, casualty, property) and lines of business written (for example, marine, aviation, non-marine). Based on the exposure characteristics and the nature of available data for each individual reserving category, a number of methodologies are applied. Recorded reserves for each category are selected from the indications produced by the various methodologies after consideration of exposure characteristics, data limitations and strengths and weaknesses of each method applied. This approach to estimating IBNR has been consistently adopted in the annual loss reserve studies for each period presented.
 
The ranges of gross loss and loss adjustment expense reserves implied by the various methodologies used by each of our insurance subsidiaries as of December 31, 2007 were:
 
                         
    Low     Selected     High  
 
Asbestos
  $ 275,219     $ 582,357     $ 589,784  
Environmental
    48,684       95,252       111,724  
All Other
    761,674       846,829       920,634  
Unallocated Loss Adjustment Expenses
    67,011       67,011       67,011  
                         
Total
  $ 1,152,588     $ 1,591,449     $ 1,689,153  
                         
 
Latent Claims
 
Our loss reserves are related largely to casualty exposures including latent exposures relating primarily to A&E. In establishing the reserves for unpaid claims, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, reserves are established to cover loss development related to both known and unasserted claims.
 
The estimation of unpaid claim liabilities is subject to a high degree of uncertainty for a number of reasons. First, unpaid claim liabilities for property and casualty exposures in general are impacted by changes in the legal environment, jury awards, medical cost trends and general inflation. Moreover, for latent exposures in particular, developed case law and adequate claim history do not exist. There is significant coverage litigation related to these exposures, which creates further uncertainty in the estimation of the liabilities. As a result, for these types of exposures, it is especially unclear whether past claim experience will be representative of future claim experience.


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Ultimate values for such claims cannot be estimated using reserving techniques that extrapolate losses to an ultimate basis using loss development factors, and the uncertainties surrounding the estimation of unpaid claim liabilities are not likely to be resolved in the near future. There can be no assurance that the reserves established by us will be adequate or will not be adversely affected by the development of other latent exposures.
 
Our asbestos claims are primarily products liability claims submitted by a variety of insureds who operated in different parts of the asbestos distribution chain. While most such claims arise from asbestos mining and primary asbestos manufacturers, we have also been receiving claims from tertiary defendants such as smaller manufacturers, and the industry has seen an emerging trend of non-products claims arising from premises exposures. Unlike products claims, primary policies generally do not contain aggregate policy limits for premises claims, which, accordingly, remain at the primary layer and, thus, rarely impact excess insurance policies. As the vast majority of Enstar’s policies are excess policies, this trend has had only a marginal effect on our asbestos exposures thus far.
 
Asbestos reform efforts have been underway at both the federal and state level to address the cost and scope of asbestos claims to the American economy. While congressional efforts to create a federal trust fund that would replace the tort system for asbestos claims failed, several states, including Texas and Florida, have passed reforms based on “medical criteria” requiring certain levels of medically documented injury before a lawsuit can be filed, resulting in a drop of year-on-year case filings in those states adopting this reform measure.
 
Asbestos claims primarily fall into two general categories: impaired and unimpaired bodily injury claims. Property damage claims represent only a small fraction of asbestos claims. Impaired claims primarily include individuals suffering from mesothelioma or a cancer such as lung cancer. Unimpaired claims include asbestosis and those whose lung regions contain pleural plaques. Unimpaired claims are not life threatening and do not cause changes to one’s ability to function or to one’s lifestyle.
 
Unlike traditional property and casualty insurers that either have large numbers of individual claims arising from personal lines such as auto, or small numbers of high value claims as in medical malpractice insurance lines, our primary exposures arise from A&E claims that do not follow a consistent pattern. For instance, we may encounter a small insured with one large environmental claim due to significant groundwater contamination, while a Fortune 500 company may submit numerous claims for relatively small values. Moreover, there is no set pattern for the life of an environmental or asbestos claim. Some of these claims may resolve within two years whereas others have remained unresolved for nearly two decades. Therefore, our open and closed claims data do not follow any identifiable or discernible pattern.
 
Furthermore, because of the reinsurance nature of the claims we manage, we focus on the activities at the (re)insured level rather than at the individual claims level. The counterparties with whom we typically interact are generally insurers or large industrial concerns and not individual claimants. Claims do not follow any consistent pattern. They arise from many insureds or locations and in a broad range of circumstances. An insured may present one large claim or hundreds or thousands of small claims. Plaintiffs’ counsel frequently aggregate thousands of claims within one lawsuit. The deductibles to which claims are subject vary from policy to policy and year to year. Often claims data is only available to reinsurers, such as us, on an aggregated basis. Accordingly, we have not found claim count information or average reserve amounts to be reliable indicators of exposure for our reserve estimation process or for management of our liabilities. We have found data accumulation and claims management more effective and meaningful at the (re)insured level rather than at the underlying claim level. As a result, we have designed our reserving methodologies to be independent of claim count information. As the level of exposures to a (re)insured can vary substantially, we focus on the aggregate exposures and pursue commutations and policy buy-backs with the larger (re)insureds.
 
We employ approximately 32 full time equivalent employees, including two U.S. attorneys, actuaries, and experienced claims-handlers to directly administer our A&E liabilities. We have established a provision for future expenses of $29.8 million, which reflects the total anticipated costs to administer these claims to expiration.
 
Our future asbestos loss development may be influenced by many factors including:
 
  •  Onset of future asbestos-related illness in individuals exposed to asbestos over the past 50 or more years.
 
  •  Future viability of the practice of resolving asbestos liability for defendant companies through bankruptcy.


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  •  Enactment of tort reforms establishing stricter medical criteria for asbestos awards.
 
  •  Attempts to resolve all U.S.-related asbestos litigation through federal legislation.
 
The influence of each of these factors is not easily quantifiable and our historical asbestos loss development is of limited value in determining future asbestos loss development using traditional actuarial reserving techniques.
 
Significant trends affecting insurer liabilities and reserves in recent years had little effect on environmental claims, except for claims arising out of damages to natural resources. New Jersey has pioneered the use of natural resources damages to advance further pursuit of funds from potentially responsible parties, or PRPs who may have been contributors to the source contamination. A successful action in 2006 against Exxon Mobil has increased the likelihood that the use of natural resource damages will expand within New Jersey and perhaps other states. These actions target primary policies and will likely have less effect on excess carriers because damages, when awarded, are typically spread across many PRPs and across many policy years. As a result, claims do not generally reach excess insurance layers.
 
Our future environmental loss development may also be influenced by other factors including:
 
  •  Existence of currently undiscovered polluted sites eligible for clean-up under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and related legislation.
 
  •  Costs imposed due to joint and several liability if not all PRPs are capable of paying their share.
 
  •  Success of legal challenges to certain policy terms such as the “absolute” pollution exclusion.
 
  •  Potential future reforms and amendments to CERCLA, particularly as the resources of Superfund — the funding vehicle, established as part of CERCLA, to provide financing for cleanup of polluted sites where no PRP can be identified — become exhausted.
 
The influence of each of these factors is not easily quantifiable and, as with asbestos-related exposures, our historical environmental loss development is of limited value in determining future environmental loss development using traditional actuarial reserving techniques.
 
Finally, the issue of lead paint liability represents a potential emerging trend in latent claim activity that could potentially result in future reserve adjustments. After a series of successful defense efforts by defendant lead pigment manufacturers in lead paint litigation, in 2005, a Rhode Island court ruled in favor of the government in a nuisance claim against the defendant manufacturers. Although the damages portion of the case has yet to be decided, the plaintiff could receive a significant award. Further, there are similar pending claims in several jurisdictions including California and Ohio. Insureds have yet to meet policy terms and conditions to establish coverage for lead paint public nuisance claims as opposed to traditional bodily injury and property damage claims, but there is the potential for significant impact to excess insurers should plaintiffs prevail in successive nuisance claims pending in other jurisdictions and coverage is established.
 
Our independent, external actuaries use industry benchmarking methodologies to estimate appropriate IBNR reserves for our A&E exposures. These methods are based on comparisons of our loss experience on A&E exposures relative to industry loss experience on A&E exposures. Estimates of IBNR are derived separately for each of our relevant subsidiaries and, for some subsidiaries, separately for distinct portfolios of exposure. The discussion that follows describes, in greater detail, the primary actuarial methodologies used by our independent actuaries to estimate IBNR for A&E exposures.
 
In addition to the specific considerations for each method described below, many general factors are considered in the application of the methods and the interpretation of results for each portfolio of exposures. These factors include the mix of product types (e.g., primary insurance versus reinsurance of primary versus reinsurance of reinsurance), the average attachment point of coverages (e.g., first-dollar primary versus umbrella over primary versus high-excess), payment and reporting lags related to our international domicile subsidiaries, payment and reporting pattern acceleration due to large “wholesale” settlements (e.g., policy buy-backs and commutations) pursued by us, lists of individual risks remaining and general trends within the legal and tort environments.


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1. Paid Survival Ratio Method.  In this method, our expected annual average payment amount is multiplied by an expected future number of payment years to get an indicated reserve. Our historical calendar year payments are examined to determine an expected future annual average payment amount. This amount is multiplied by an expected number of future payment years to estimate a reserve. Trends in calendar year payment activity are considered when selecting an expected future annual average payment amount. Accepted industry benchmarks are used in determining an expected number of future payment years. Each year, annual payments data is updated, trends in payments are re-evaluated and changes to benchmark future payment years are reviewed. This method has advantages of ease of application and simplicity of assumptions. A potential disadvantage of the method is that results could be misleading for portfolios of high excess exposures where significant payment activity has not yet begun.
 
2. Paid Market Share Method.  In this method, our estimated market share is applied to the industry estimated unpaid losses. The ratio of our historical calendar year payments to industry historical calendar year payments is examined to estimate our market share. This ratio is then applied to the estimate of industry unpaid losses. Each year, calendar year payment data is updated (for both us and industry), estimates of industry unpaid losses are reviewed and the selection of our estimated market share is revisited. This method has the advantage that trends in calendar year market share can be incorporated into the selection of company share of remaining market payments. A potential disadvantage of this method is that it is particularly sensitive to assumptions regarding the time-lag between industry payments and our payments.
 
3. Reserve-to-Paid Method.  In this method, the ratio of estimated industry reserves to industry paid-to-date losses is multiplied by our paid-to-date losses to estimate our reserves. Specific considerations in the application of this method include the completeness of our paid-to-date loss information, the potential acceleration or deceleration in our payments (relative to the industry) due to our claims handling practices, and the impact of large individual settlements. Each year, paid-to-date loss information is updated (for both us and the industry) and updates to industry estimated reserves are reviewed. This method has the advantage of relying purely on paid loss data and so is not influenced by subjectivity of case reserve loss estimates. A potential disadvantage is that the application to our portfolios which do not have complete inception-to-date paid loss history could produce misleading results. To address this potential disadvantage, a variation of the method is also considered by multiplying the ratio of estimated industry reserves to industry losses paid during a recent period of time (e.g., 5 years) times our paid losses during that period.
 
4. IBNR:Case Ratio Method.  In this method, the ratio of estimated industry IBNR reserves to industry case reserves is multiplied by our case reserves to estimate our IBNR reserves. Specific considerations in the application of this method include the presence of policies reserved at policy limits, changes in overall industry case reserve adequacy and recent loss reporting history for us. Each year, our case reserves are updated, industry reserves are updated and the applicability of the industry IBNR:case ratio is reviewed. This method has the advantage that it incorporates the most recent estimates of amounts needed to settle open cases included in current case reserves. A potential disadvantage is that results could be misleading where our case reserve adequacy differs significantly from overall industry case reserve adequacy.
 
5. Ultimate-to-Incurred Method.  In this method, the ratio of estimated industry ultimate losses to industry incurred-to-date losses is applied to our incurred-to-date losses to estimate our IBNR reserves. Specific considerations in the application of this method include the completeness of our incurred-to-date loss information, the potential acceleration or deceleration in our incurred losses (relative to the industry) due to our claims handling practices and the impact of large individual settlements. Each year incurred-to-date loss information is updated (for both us and the industry) and updates to industry estimated ultimate losses are reviewed. This method has the advantage that it incorporates both paid and case reserve information in projecting ultimate losses. A potential disadvantage is that results could be misleading where cumulative paid loss data is incomplete or where our case reserve adequacy differs significantly from overall industry case reserve adequacy.
 
Under the Paid Survival Ratio Method, the Paid Market Share Method and the Reserve-to-Paid Method, we first determine the estimated total reserve and then deduct the reported outstanding case reserves to arrive at an estimated IBNR reserve. The IBNR:Case Ratio Method first determines an estimated IBNR reserve which is then added to the advised outstanding case reserves to arrive at an estimated total loss reserve. The Ultimate-to-Incurred


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Method first determines an estimate of the ultimate losses to be paid and then deducts paid-to-date losses to arrive at an estimated total loss reserve and then deducts outstanding case reserves to arrive at the estimated IBNR reserve.
 
Within the annual loss reserve studies produced by our external actuaries, exposures for each subsidiary are separated into homogeneous reserving categories for the purpose of estimating IBNR. Each reserving category contains either direct insurance or assumed reinsurance reserves and groups relatively similar types of risks and exposures (e.g., asbestos, environmental, casualty and property) and lines of business written (e.g., marine, aviation and non-marine). Based on the exposure characteristics and the nature of available data for each individual reserving category, a number of methodologies are applied. Recorded reserves for each category are selected from the indications produced by the various methodologies after consideration of exposure characteristics, data limitations, and strengths and weaknesses of each method applied. This approach to estimating IBNR has been consistently adopted in the annual loss reserve studies for each period presented.
 
As of December 31, 2007, we had 19 separate insurance and/or reinsurance subsidiaries whose reserves are categorized into approximately 146 reserve categories in total, including 22 distinct asbestos reserving categories and 20 distinct environmental reserving categories.
 
The five methodologies described above are applied for each of the 22 asbestos reserving categories and each of the 20 environmental reserving categories. As is common in actuarial practice, no one methodology is exclusively or consistently relied upon when selecting a recorded reserve. Consistent reliance on a single methodology to select a recorded reserve would be inappropriate in light of the dynamic nature of both the A&E liabilities in general, and our actual exposure portfolios in particular.
 
In selecting a recorded reserve, management considers the range of results produced by the methods, and the strengths and weaknesses of the methods in relation to the data available and the specific characteristics of the portfolio under consideration. Trends in both our data and industry data are also considered in the reserve selection process. Recent trends or changes in the relevant tort and legal environments are also considered when assessing methodology results and selecting an appropriate recorded reserve amount for each portfolio.
 
The following key assumptions were used to estimate A&E reserves at December 31, 2007:
 
1. $65 Billion Ultimate Industry Asbestos Losses — This level of industry-wide losses and its comparison to industry-wide paid, incurred and outstanding case reserves is the base benchmarking assumption applied to Paid Market Share, Reserve-to-Paid, IBNR:Case Ratio and the Ultimate-to-Incurred asbestos reserving methodologies.
 
2. $35 Billion Ultimate Industry Environmental Losses — This level of industry-wide losses and its comparison to industry-wide paid, incurred and outstanding case reserves is the base benchmarking assumption applied to Paid Market Share, Reserve-to-Paid, IBNR:Case Ratio and the Ultimate-to-Incurred environmental reserving methodologies.
 
3. Loss Reporting Lag — Our subsidiaries assumed a mix of insurance and reinsurance exposures generally through the London market. As the available industry benchmark loss information, as supplied by our independent consulting actuaries, is compiled largely from U.S. direct insurance company experience, our loss reporting is expected to lag relative to available industry benchmark information. This time-lag used by each of our insurance subsidiaries varies from 2 to 5 years depending on the relative mix of domicile, percentages of product mix of insurance, reinsurance and retrocessional reinsurance, primary insurance, excess insurance, reinsurance of direct, and reinsurance of reinsurance within any given exposure category. Exposure portfolios written from a non-U.S. domicile are assumed to have a greater time-lag than portfolios written from a U.S. domicile. Portfolios with a larger proportion of reinsurance exposures are assumed to have a greater time-lag than portfolios with a larger proportion of insurance exposures.
 
The assumptions above as to Ultimate Industry Asbestos and Environmental losses have not changed from the immediately preceding period. For our company as a whole, the average selected lag for asbestos has decreased from 3 years to 2.8 years and the average selected lag for environmental has increased from 2.5 years to 2.6 years. The changes arise largely as a result of the acquisition of new portfolios of A&E exposures.


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The following tables provide a summary of the impact of changes in industry ultimate losses, from the selected $65 billion for asbestos and $35 billion for environmental, and changes in the time-lag, from the selected averages of 2.8 years for asbestos and 2.6 years for environmental, for us behind industry development that it is assumed relates to our insurance and reinsurance companies. Please note that the table below demonstrates sensitivity to changes to key assumptions using methodologies selected for determining loss and allocated loss adjustment expenses, or ALAE, at December 31, 2007 and differs from the table on page 33, which demonstrates the range of outcomes produced by the various methodologies.
 
         
    Asbestos
 
Sensitivity to Industry Asbestos Ultimate Loss Assumption
  Loss Reserves  
 
Asbestos — $65 billion (selected)
  $ 582,357  
Asbestos — $60 billion
    498,509  
 
         
    Environmental
 
Sensitivity to Industry Environmental Ultimate Loss Assumption
  Loss Reserves  
 
Environmental — $35 billion (selected)
  $ 95,252  
Environmental — $40 billion
    131,858  
Environmental — $30 billion
    58,646  
 
                 
    Asbestos
    Environmental
 
Sensitivity to Time-Lag Assumption*
  Loss Reserves     Loss Reserves  
 
Selected average of 2.8 years asbestos, 2.6 years environmental
  $ 582,357     $ 95,252  
Increase all portfolio lags by six months
    645,169       99,454  
Decrease all portfolio lags by six months
    528,015       91,599  
 
 
* using $65 billion/$35 billion Asbestos/Environmental Industry Ultimate Loss assumptions
 
Industry publications indicate that the range of ultimate industry asbestos losses is estimated to be between $55 billion and $65 billion. Based on management’s experience of substantial loss development on our asbestos exposure portfolios, we have selected the upper end of the range as the basis for our asbestos loss reserving. Although the industry publications suggest a low end of the range of industry ultimate losses of $55 billion, we consider that unlikely and believe that it is more reasonable to assume that the lower end of this range of ultimate losses could be $60 billion.
 
Guidance from industry publications is more varied in respect of estimates of ultimate industry environmental losses. Consistent with an industry published estimate, we believe the reasonable range for ultimate industry environmental losses is between $30 billion and $40 billion. We have selected the midpoint of this range as the basis for our environmental loss reserving based on advice supplied by our independent consulting actuaries. Another industry publication, released prior to the one relied upon by us, indicates that ultimate industry environmental losses could be $56 billion. However, based on our own loss experience, including successful settlement activity by us, the decline in new claims notified in recent years and improvements in environmental clean-up technology, we do not believe that the $56 billion estimate is a reasonable basis for our reserving for environmental losses.
 
Management’s current estimate of the time lag that relates to our insurance and reinsurance subsidiaries compared to the industry is considered reasonable given the analysis performed by our internal and external actuaries to date.
 
Over time, additional information regarding such exposure characteristics may be developed for any given portfolio. This additional information could cause a shift in the lag assumed.
 
Non-Latent Claims
 
Non-latent claims are less significant to us, both in terms of reserves held and in terms of risk of significant reserve deficiency. For non-latent loss exposure, a range of traditional loss development extrapolation techniques is applied. Incremental paid and incurred loss development methodologies are the most commonly used methods.


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Traditional cumulative paid and incurred loss development methods are used where inception-to-date, cumulative paid and reported incurred loss development history is available.
 
These methods assume that cohorts, or groups, of losses from similar exposures will increase over time in a predictable manner. Historical paid and incurred loss development experience is examined for earlier accident years to make inferences about how later accident years’ losses will develop. Where company-specific loss information is not available or not reliable, industry loss development information published by industry sources such as the Reinsurance Association of America is considered. These methods calculate an estimate of ultimate losses and then deduct paid-to-date losses to arrive at an estimated total loss reserve. Outstanding losses are then deducted from estimated total loss reserves to calculate the estimated IBNR reserve. Management does not expect changes in underlying reserving assumptions to have a material impact on net loss and loss adjustment expense reserves as they are primarily sensitive to changes due to loss development.
 
Quarterly Reserve Reviews
 
In addition to an in-depth annual review, we also perform quarterly reserve reviews. This is done by examining quarterly paid and incurred loss development to determine whether it is consistent with reserves established during the preceding annual reserve review and with expected development. Loss development is reviewed separately for each major exposure type (e.g., asbestos, environmental, etc.), for each of our relevant subsidiaries, and for large “wholesale” commutation settlements versus “routine” paid and advised losses. This process is undertaken to determine whether loss development experience during a quarter warrants any change to held reserves.
 
Loss development is examined separately by exposure type because different exposures develop differently over time. For example, the expected reporting and payout of losses for a given amount of asbestos reserves can be expected to take place over a different time frame and in a different quarterly pattern from the same amount of environmental reserves.
 
In addition, loss development is examined separately for each of our relevant subsidiaries. While the most significant exposures for most of our subsidiaries are latent A&E exposures, there are differing profiles to the exposure across our subsidiaries. Companies can differ in their exposure profile due to the mix of insurance versus reinsurance, the mix of primary versus excess insurance, the underwriting years of participation and other criteria. These differing profiles lead to different expectations for quarterly and annual loss development by company.
 
Our quarterly paid and incurred loss development is often driven by large, “wholesale” settlements — such as commutations and policy buy-backs — which settle many individual claims in a single transaction. This allows for monitoring of the potential profitability of large settlements which, in turn, can provide information about the adequacy of reserves on remaining exposures which have not yet been settled. For example, if it were found that large settlements were consistently leading to large negative, or favorable, incurred losses upon settlement, it might be an indication that reserves on remaining exposures are redundant. Conversely, if it were found that large settlements were consistently leading to large positive, or adverse, incurred losses upon settlement, it might be an indication — particularly if the size of the losses were increasing — that certain loss reserves on remaining exposures are deficient. Moreover, removing the loss development resulting from large settlements allows for a review of loss development related only to those contracts which remain exposed to losses. Were this not done, it is possible that savings on large wholesale settlements could mask significant underlying development on remaining exposures.
 
Once the data has been analyzed as described above, an in-depth review is performed on classes of exposure with significant loss development. Discussions are held with appropriate personnel, including individual company managers, claims handlers and attorneys, to better understand the causes. If it were determined that development differs significantly from expectations, reserves would be adjusted.
 
Quarterly loss development is expected to be fairly erratic for the types of exposure insured and reinsured by us. Several quarters of low incurred loss development can be followed by spikes of relatively large incurred losses. This is characteristic of latent claims and other insurance losses which are reported and settled many years after the inception of the policy. Given the high degree of statistical uncertainty, and potential volatility, it would be unusual to adjust reserves on the basis of one, or even several, quarters of loss development activity. As a result, unless the


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incurred loss activity in any one quarter is of such significance that management is able to quantify the impact on the ultimate liability for loss and loss adjustment expenses, reductions or increases in loss and loss adjustment expense liabilities are carried out in the fourth quarter based on the annual reserve review described above.
 
As described above, our management regularly reviews and updates reserve estimates using the most current information available and employing various actuarial methods. Adjustments resulting from changes in our estimates are recorded in the period when such adjustments are determined. The ultimate liability for loss and loss adjustment expenses is likely to differ from the original estimate due to a number of factors, primarily consisting of the overall claims activity occurring during any period, including the completion of commutations of assumed liabilities and ceded reinsurance receivables, policy buy-backs and general incurred claims activity.
 
Reinsurance Balances Receivable
 
Our acquired reinsurance subsidiaries, prior to acquisition by us, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance they assumed. Loss reserves represent total gross losses, and reinsurance receivables represent anticipated recoveries of a portion of those unpaid losses as well as amounts receivable from reinsurers with respect to claims that have already been paid. While reinsurance arrangements are designed to limit losses and to permit recovery of a portion of direct unpaid losses, reinsurance does not relieve us of our liabilities to our insureds or reinsureds. Therefore, we evaluate and monitor concentration of credit risk among our reinsurers, including companies that are insolvent, in run-off or facing financial difficulties. Provisions are made for amounts considered potentially uncollectible.
 
Goodwill
 
We follow FAS No. 142 “Goodwill and Other Intangible Assets” which requires that recorded goodwill be assessed for impairment on at least an annual basis. In determining goodwill, we must determine the fair value of the assets of an acquired company. The determination of fair value necessarily involves many assumptions. Fair values of reinsurance assets and liabilities acquired are derived from probability-weighted ranges of the associated projected cash flows, based on actuarially prepared information and our management run-off strategy. Fair value adjustments are based on the estimated timing of loss and loss adjustment expense payments and an assumed interest rate, and are amortized over the estimated payout period, as adjusted for accelerations on commutation settlements, using the constant yield method options. Interest rates used to determine the fair value of gross loss reserves are based upon risk free rates applicable to the average duration of the loss reserves. Interest rates used to determine the fair value of reinsurance receivables are increased to reflect the credit risk associated with the reinsurers from who the receivables are, or will become, due. If the assumptions made in initially valuing the assets change significantly in the future, we may be required to record impairment charges which could have a material impact on our financial condition and results of operations.
 
FAS No. 141 “Business Combinations” also requires that negative goodwill be recorded in earnings. During 2004, 2006 and 2007, we took negative goodwill into earnings upon the completion of the acquisition of certain companies and presented it as an extraordinary gain.
 
New Accounting Pronouncements
 
In December 2007, the FASB issued FAS No. 141(R) “Business Combinations,” or FAS 141(R). FAS 141(R) replaces FAS 141, but retains the fundamental requirements in FAS 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. FAS 141(R) also requires acquisition-related costs to be recognized separately from the acquisition, recognize assets acquired and liabilities assumed arising from contractual contingencies at their acquisition-date fair values and recognized goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period


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beginning on or after December 15, 2008 (January 1, 2009 for calendar year-end companies). We are currently evaluating the provisions of FAS 141(R) and its potential impact on future financial statements.
 
In December 2007, the FASB issued FAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51,” or FAS 160. FAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FAS 160 requires consolidated net income to be reported at the amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement also establishes a method of accounting for changes in a parent’s ownership interest in a subsidiary that does result in deconsolidation. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (January 1, 2009 for calendar year-end companies). The presentation and disclosure of FAS 160 shall be applied retrospectively for all periods presented. We are currently evaluating the provisions of FAS 160 and its potential impact on future financial statements.
 
In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133,” or FAS 161. FAS 161 expands the disclosure requirements of FAS 133 and requires the reporting entity to provide enhanced disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and credit-risk related contingent features in derivative agreements. FAS 161 will be effective for fiscal years beginning after November 15, 2008 (January 1, 2009, for calendar year-end companies), and interim periods within those fiscal years. We are currently evaluating the provisions of FAS 161 and its potential impact on future financial statements.
 
Results of Operations
 
The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.
 
                                         
    Three Months Ended March 31,     Year Ended December 31,  
    2008     2007     2007     2006     2005  
    (In thousands of U.S. dollars)  
 
Consulting fees
  $ 6,055     $ 4,661     $ 31,918     $ 33,908     $ 22,006  
Net investment income
    590       19,938       64,087       48,099       28,236  
Net realized (losses) gains
    (1,084 )     571       249       (98 )     1,268  
                                         
TOTAL INCOME
    5,561       25,170       96,254       81,909       51,510  
                                         
Net increase (reduction) in loss and loss adjustment expense liabilities
    685       2,510       (24,482 )     (31,927 )     (96,007 )
Salaries and benefits
    11,357       12,802       46,977       40,121       40,821  
General and administrative expenses
    11,911       5,673       31,413       18,878       10,962  
Interest expense
    3,315       3,176       4,876       1,989        
Foreign exchange (gain) loss
    (1,335 )     54       (7,921 )     (10,832 )     4,602  
                                         
TOTAL EXPENSES
    25,933       24,215       50,863       18,229       (39,622 )
                                         
Net (loss) earnings before minority interest
    (20,372 )     955       45,391       63,680       91,132  
Share of net earnings of partly owned companies
                      518       192  
Income tax recovery (expense)
    239       (1,016 )     7,441       318       (914 )
Minority interest
    (3,376 )     (2,248 )     (6,730 )     (13,208 )     (9,700 )
                                         
Net (loss) earnings before extraordinary gain
    (23,509 )     (2,309 )     46,102       51,308       80,710  
Extraordinary gain — Negative goodwill (2008 and 2006: net of minority interest)
    35,196       15,683       15,683       31,038        
                                         
NET EARNINGS
  $ 11,687     $ 13,374     $ 61,785     $ 82,346     $ 80,710  
                                         


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Comparison of the Three Months Ended March 31, 2008 and 2007
 
We reported consolidated net earnings of approximately $11.7 million for the three months ended March 31, 2008 compared to approximately $13.4 million for the same period in 2007. Included as part of net earnings for 2008 and 2007 are extraordinary gains related to negative goodwill of $35.2 million (net of minority interest of $15.1 million) and $15.7 million, respectively. The increased loss, before extraordinary gain, of approximately $21.2 million was primarily a result of the following:
 
  •  a decrease in investment income (net of realized (losses)/gains) of $21.0 million, primarily due to write-downs of $26.2 million in respect of adjustments to the fair values of our investments classified as other investments;
 
  •  a net increase in salaries and general and administrative expenses of $4.8 million, primarily as a result of bank loan structure fees;
 
  •  an increase in minority interest of $1.1 million; partially offset by
 
• a decrease in income tax expense of $1.3 million;
 
  •  increased consulting fee income of $1.4 million; and
 
• a lower increase in loss and loss adjustment expense liabilities of $1.8 million.
 
Consulting Fees:
 
                         
    Three Months Ended March 31,  
    2008     2007     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 13,303     $ 10,859     $ 2,444  
Reinsurance
    (7,248 )     (6,198 )     (1,050 )
                         
Total
  $ 6,055     $ 4,661     $ 1,394  
                         
 
We earned consulting fees of approximately $6.1 million and $4.7 million for the three months ended March 31, 2008 and 2007, respectively. The increase in consulting fees primarily related to new business.
 
Internal management fees of $7.2 million and $6.2 million were paid in the quarters ended March 31, 2008 and 2007, respectively, by our reinsurance companies to our consulting companies. The increase in internal fees paid to the consulting segment was due primarily to increased use of internal audit and collection services along with fees paid by reinsurance companies that were acquired subsequent to March 31, 2007.
 
Net Investment Income and Net Realized Gains/(Losses):
 
                                                 
    Three Months Ended March 31,  
    Net Investment Income           Net Realized Gains/(Losses)        
    2008     2007     Variance     2008     2007     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ (4,908 )   $ 693     $ (5,601 )   $     $     $  
Reinsurance
    5,498       19,245       (13,747 )     (1,084 )     571       (1,655 )
                                                 
Total
  $ 590     $ 19,938     $ (19,348 )   $ (1,084 )   $ 571     $ (1,655 )
                                                 
 
Net investment income for the three months ended March 31, 2008 decreased by $19.3 million to $0.6 million, as compared to $19.9 million for the same period in 2007. The decrease was primarily attributable to cumulative writedowns of approximately $26.2 million in the fair value of our investments in New NIB Partners L.P., J.C. Flowers II, L.P., Affirmative Insurance LLC and GSC European Mezzanine Fund II, LP. The writedowns arose primarily due to subprime and structured credit related exposures held within various of the limited partnerships’ portfolio investments. For a discussion of these investments, see “Business — Investment Portfolio — Other Investments” on page 85.


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The average return on the cash and fixed maturities investments for the three months ended March 31, 2008 was 3.24%, as compared to the average return of 5.31% for the three months ended March 31, 2007. The decrease in yield was primarily the result of the decreasing U.S. interest rates — the U.S. Federal funds rate has decreased from 4.25% on January 1, 2008 to 2.25% on March 31, 2008 — partially offset by an increase in cash and cash equivalent amounts held by us.
 
Net realized (losses) gains for the three months ended March 31, 2008 and 2007 were $(1.1) million and $0.6 million, respectively. Based on our current investment strategy in respect of our fixed maturity portfolios, we do not expect net realized gains and losses to be significant.
 
Fair Value Measurements:
 
On January 1, 2008, we adopted FAS 157, “Fair Value Measurements,” or FAS 157, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. For a further discussion of the new standard, refer to Note 1 of our Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2008 included elsewhere in this prospectus.
 
The following is a summary of valuation techniques or models we use to measure fair value by asset and liability classes, which have not changed significantly since December 31, 2007.
 
Fixed Maturity Investments
 
Our fixed maturity portfolio is managed by three investment advisors. Through these third parties, we use nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of our fixed maturity investments. These pricing services include Lehman Index, Reuters Pricing Service, FT Interactive Data and others.
 
The pricing service uses market quotations for securities (e.g., public common and preferred securities) that have quoted prices in active markets. When quoted market prices are unavailable, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing.
 
With the exception of one security held within our trading portfolio, the fair value estimates of our fixed maturity investments are based on observable market data. We have therefore included these as Level 2 investments within the fair value hierarchy. The one security in our trading portfolio that does not have observable inputs has been included as a Level 3 investment within the fair value hierarchy.
 
To validate the techniques or models used by the pricing services, we compare the fair value estimates to our knowledge of the current market and will challenge any prices deemed not to be representative of fair value.
 
Further, on a quarterly basis, we evaluate whether the fair value of a fixed maturity security is other-than-temporarily impaired when its fair value is below amortized cost. To make this assessment we consider several factors including (i) the time period during which there has been a decline below cost, (ii) the extent of the decline below cost, (iii) our intent and ability to hold the security, (iv) the potential for the security to recover in value, (v) an analysis of the financial condition of the issuer, and (vi) an analysis of the collateral structure and credit support of the security, if applicable. If we conclude a security is other-than-temporarily impaired, we write down the amortized cost of the security to fair value, with a charge to net realized investment gains (losses) in the Consolidated Statement of Operations.
 
Equity Securities
 
Our equity securities are managed by an external advisor. Through this third party, we use nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of our equity securities. These pricing services include FT Interactive Data and others.


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We have categorized all of our equity securities as Level 1 investments as they are based on quoted prices in active markets for identical assets or liabilities.
 
Other Investments
 
For our investments in limited partnerships, limited liability companies and equity funds, we measure fair value by obtaining the most recently published net asset value as advised by the external fund manager or third party administrator. The financial statements of each fund generally are audited annually, using fair value measurement for the underlying investments. For all public companies within the funds we have valued the investments based on the latest share price. Affirmative Investment LLC’s value is based on the market value of the shares of Affirmative Insurance Holdings, Inc.
 
All of our other investments relating to our investments in limited partnerships and limited liability companies are subject to restrictions on redemptions and sales which are determined by the governing documents and limit our ability to liquidate those investments in the short term. We have classified our other investments as Level 3 investments as they reflect our own assumptions about assumptions that market participants might use.
 
For the three months ended March 31, 2008, we incurred a $26.5 million loss in fair value on our other investments. This unrealized loss was included in our net investment income.
 
The following table summarizes all of our financial assets and liabilities measured at fair value at March 31, 2008, by FAS 157 hierarchy:
 
                                 
    Quoted Prices in
    Significant
             
    Active Markets
    Other
    Significant
       
    for
    Observable
    Unobservable
       
    Identical Assets
    Inputs
    Inputs
    Total Fair
 
    (Level 1)     (Level 2)     (Level 3)     Value  
    (In thousands of U.S. dollars)  
 
Assets
                               
Fixed maturity investments
  $     $ 953,853     $ 1,051     $ 954,904  
Equity securities
    4,615                   4,615  
Other investments
                105,391       105,391  
                                 
Total
  $ 4,615     $ 953,853     $ 106,442     $ 1,064,910  
                                 
As a percentage of total assets
    0.1 %     23.9 %     2.7 %     26.7 %
 
Net Increase in Loss and Loss Adjustment Expense Liabilities:
 
The net increase in loss and loss adjustment expense liabilities for the three months ended March 31, 2008 and 2007 was $0.7 million and $2.5 million, respectively. For 2008, the increase was attributable to an increase in bad debt provisions of $1.3 million, the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $6.5 million, partially offset by the reduction in estimates of loss adjustment expense liabilities of $7.1 million, to reflect 2008 run-off activity. For 2007, the increase was attributable to an increase in estimates of ultimate losses of $2.2 million, the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $5.6 million, partially offset by the reduction in estimates of loss adjustment expense liabilities of $5.3 million to reflect 2007 run-off activity. The increase in estimates of ultimate losses of $2.2 million resulted from the commutation of one of our largest reinsurance receivables.


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The following table shows the components of the movement in the net increase in loss and loss adjustment expense liabilities for the three months ended March 31, 2008 and 2007.
 
                 
    Three Months Ended March 31,  
    2008     2007  
    (In thousands of
 
    U.S. dollars)  
 
Net Losses Paid
  $ (3,375 )   $ (523 )
Net Change in Case and LAE Reserves
    4,542       8,167  
Net Change in IBNR
    (482 )     (5,134 )
                 
Net Reduction in Loss and Loss Adjustment Expense Liabilities
  $ 685     $ 2,510  
                 
 
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2008 and March 31, 2007. Losses incurred and paid are reflected net of reinsurance recoverables.
 
                 
    Three Months Ended March 31,  
    2008     2007  
    (In thousands of U.S. dollars)  
 
Balance as of January 1
  $ 1,591,449     $ 1,214,419  
Less: Reinsurance recoverables
    427,964       342,160  
                 
      1,163,485       872,259  
Incurred Related to Prior Years
    685       2,510  
Paids Related to Prior Years
    3,375       523  
Effect of Exchange Rate Movement
    9,413       1,361  
Retroactive Reinsurance Contracts Assumed
    394,913        
Acquired on Acquisition of Subsidiaries
    465,887       428,921  
                 
Net Balance as of March 31
  $ 2,037,758     $ 1,305,574  
Plus: Reinsurance recoverables
    662,929       316,487  
                 
Balance as of March 31
  $ 2,700,687     $ 1,622,061  
                 
 
Salaries and Benefits:
 
                         
    Three Months Ended March 31,  
    2008     2007     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 9,295     $ 9,938     $ 643  
Reinsurance
    2,062       2,864       802  
                         
Total
  $ 11,357     $ 12,802     $ 1,445  
                         
 
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $11.4 million and $12.8 million for the three months ended March 31, 2008 and 2007, respectively. The decrease in the salaries and benefits for the consulting segment was due primarily to the payment of a special bonus in 2007 to John J. Oros and Nimrod T. Frazer, totaling $2.0 million, in recognition of their contributions to the successful completion of the Merger and the reduction in stock-based compensation expense from $1.7 million to $0.2 million for the three months ended March 31, 2007 compared to 2008. These expense reductions were offset by the growth in staff numbers from 200 as of March 31, 2007 to 253 as of March 31, 2008 following our expansion during 2007 and 2008.
 
We expect that staff costs will continue to increase moderately during 2008 as we continue to grow and add staff. Bonus accrual expenses will be variable and dependent on our overall profitability.


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General and Administrative Expenses:
 
                         
    Three Months Ended March 31,  
    2008     2007     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 3,622     $ 3,368     $ (254 )
Reinsurance
    8,289       2,305       (5,984 )
                         
Total
  $ 11,911     $ 5,673     $ (6,238 )
                         
 
General and administrative expenses attributable to the consulting segment increased by $0.3 million during the three months ended March 31, 2008, as compared to the three months ended March 31, 2007. General and administrative expenses attributable to the reinsurance segment increased by $6.0 million during the three months ended March 31, 2008, as compared to the three months ended March 31, 2007. The increased costs for the current period relate primarily to additional expenses of $4.5 million relating to bank loan structure fees incurred in respect of acquisitions completed during the three months ended March 31, 2008 along with increased costs of approximately $1.1 million incurred by companies acquired subsequent to March 31, 2007.
 
Interest Expense:
 
                         
    Three Months Ended March 31,  
    2008     2007     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    3,315       3,176       (139 )
                         
Total
  $ 3,315     $ 3,176     $ (139 )
                         
 
Interest expense of $3.3 million and $3.2 million was recorded for the three months ended March 31, 2008 and 2007, respectively. The increase in interest expense is attributable to the increase in bank borrowings used in the funding of acquisitions subsequent to March 31, 2007, primarily in relation to the acquisitions of Gordian and Guildhall. For a discussion of these acquisitions, see “Business — Recent Acquisitions” on page 68.
 
Minority Interest:
 
                         
    Three Months Ended March 31  
    2008     2007     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    (3,376 )     (2,248 )     (1,128 )
                         
Total
  $ (3,376 )   $ (2,248 )   $ (1,128 )
                         
 
We recorded a minority interest in earnings of $3.4 million and $2.2 million for the three months ended March 31, 2008 and 2007, respectively. The total for the three months ended March 31, 2008 relates to the minority economic interest held by third parties in the earnings of Gordian, Guildhall, Shelbourne and Hillcot. For the same period in 2007, the minority interest related to Hillcot. For a discussion of these acquisitions, see “Business — Recent Acquisitions” on page 68.
 
Negative Goodwill:
 
                         
    Three Months Ended March 31  
    2008     2007     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    35,196       15,683       19,513  
                         
Total
  $ 35,196     $ 15,683     $ 19,513  
                         


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Negative goodwill of $35.2 million and $15.7 million, was recorded for the three months ended March 31, 2008 and 2007, respectively. For the three months ended March 31, 2008 the negative goodwill of $35.2 million, net of minority interest of $15.1 million, arose in connection with our acquisition of Gordian and represents the excess of the cumulative fair value of net assets acquired of $455.7 million over the cost of $405.4 million. This excess has, in accordance with SFAS 141 “Business Combinations,” been recognized as an extraordinary gain. The 2008 negative goodwill arose primarily as a result of income earned by Gordian between the date of the balance sheet on which the agreed purchase price was based, June 30, 2007, and the date the acquisition closed, March 5, 2008, and the desire of the vendors to achieve a substantial reduction in regulatory capital requirements and therefore to dispose of Gordian at a discount to fair value.
 
For the three months ended March 31, 2007 the negative goodwill of $15.7 million was earned in connection with our acquisition of Inter-Ocean Reinsurance Company Ltd, or Inter-Ocean, and represents the excess of the cumulative fair value of net assets acquired of $73.2 million over the cost of $57.5 million. The negative goodwill arose primarily as a result of the strategic desire of the vendors to achieve an exit from such operations and therefore to dispose of the companies at a discount to fair value. For a discussion of this acquisition, see “Business — Recent Acquisitions” on page 68.
 
Comparison of Year Ended December 31, 2007 and 2006
 
We reported consolidated net earnings of approximately $61.8 million for the year ended December 31, 2007 compared to approximately $82.3 million in 2006. Included as part of net earnings for 2007 and 2006 are extraordinary gains of $15.7 million and $31.0 million, respectively, relating to negative goodwill, net of minority interest. Net earnings before extraordinary gain for 2007 were approximately $46.1 compared to $51.3 million in 2006. The decrease was primarily a result of a lower net reduction in loss and loss adjustment expense liabilities, higher general and administrative expenses and lower consulting fee income, offset by higher investment income and income tax recoveries along with a lower charge in respect of minority interest.
 
Consulting Fees:
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 59,465     $ 54,546     $ 4,919  
Reinsurance
    (27,547 )     (20,638 )     (6,909 )
                         
Total
  $ 31,918     $ 33,908     $ (1,990 )
                         
 
We earned consulting fees of approximately $31.9 million and $33.9 million for the years ended December 31, 2007 and 2006, respectively. The decrease in consulting fees was due primarily to the acquisition of B.H. Acquisition Ltd., or B.H. Acquisition, which now forms part of the reinsurance segment and whose fee income is now eliminated. In 2006, we had recorded $1.3 million of fee income in respect of B.H. Acquisition.
 
Internal management fees of $27.5 million and $20.6 million were paid in 2007 and 2006, respectively, by our reinsurance companies to our consulting companies. The increase in fees paid by the reinsurance segment was due primarily to the fees paid by reinsurance companies that were acquired in 2007 along with those companies acquired during 2006.
 
Net Investment Income and Net Realized Gains (Losses):
 
                                                 
    Year Ended December 31,  
    Net Investment Income     Net Realized Gains (Losses)  
    2007     2006     Variance     2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 228     $ 1,225     $ (997 )   $     $     $  
Reinsurance
    63,859       46,874       16,985       249       (98 )     347  
                                                 
Total
  $ 64,087     $ 48,099     $ 15,988     $ 249     $ (98 )   $ 347  
                                                 


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Net investment income for the year ended December 31, 2007 increased by $16.0 million to $64.1 million, compared to $48.1 million for the year ended December 31, 2006. The increase was primarily attributable to our increase in average cash and investment balances from $1,093.2 million to $1,401.2 million for the years ended December 31, 2006 and 2007, respectively, as a result of cash and investment portfolios of reinsurance companies acquired in the year.
 
The average return on the cash and investments for the year ended December 31, 2007 was 4.57%, as compared to the average return of 4.40% for the year ended December 31, 2006. The increase in yield was primarily the result of increasing U.S. interest rates — the average U.S. federal funds rate has increased from 4.96% in 2006 to 5.05% in 2007. The average Standard & Poor’s credit rating of our fixed income investments at December 31, 2007 was AAA.
 
Net realized gains (losses) for the year ended December 31, 2007 and 2006 were $0.2 million and $(0.1) million, respectively.
 
Subsequent to the year ended December 31, 2007, the U.S. federal funds rate was cut from 4.25% to 3.00% with indications that additional cuts may be forthcoming. The rate was 2.25% as of March 31, 2008. Therefore, we anticipate that the average return on investable assets held at December 31, 2007 will be lower in 2008 as compared to a comparable period in 2007.
 
Net Reduction in Loss and Loss Adjustment Expense Liabilities:
 
Net reduction in loss and loss adjustment expense liabilities for the year ended December 31, 2007 was $24.5 million, excluding the impacts of adverse foreign exchange rate movements of $18.6 million and including both net reduction in loss and loss adjustment expense liabilities of $9.0 million relating to companies acquired during the year and premium and commission adjustments triggered by incurred losses of $0.3 million.
 
The net reduction in loss and loss adjustment expense liabilities for 2007 of $24.5 million was attributable to a reduction in estimates of net ultimate losses of $30.7 million and a reduction in estimates of loss adjustment expense liabilities of $22.0 million, relating to 2007 run-off activity, partially offset by an increase in aggregate provisions for bad debt of $1.7 million, primarily relating to companies acquired in 2006, and the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $26.5 million.
 
The reduction in estimates of net ultimate losses of $30.7 million comprised net adverse incurred loss development of $1.0 million offset by reductions in estimates of IBNR reserves of $31.7 million. An increase in estimates of ultimate losses of $2.1 million relating to one of our insurance entities was offset by reductions in estimates of net ultimate losses of $32.8 million in our remaining insurance and reinsurance entities.
 
The net adverse incurred loss development of $1.0 million and reductions in IBNR reserves of $31.7 million, respectively, comprised the following:
 
(i) net adverse incurred loss development in one of our reinsurance entities of $36.6 million, whereby advised case reserves of $16.9 million were settled for net paid losses of $53.5 million. This adverse incurred loss development resulted from the settlement of case and LAE reserves above carried levels and from new loss advices, partially offset by approximately 12 commutations of assumed and ceded exposures below carried reserve levels. Actuarial analysis of the remaining unsettled loss liabilities resulted in a decrease in the estimate of IBNR loss reserves of $13.1 million after consideration of the $36.6 million adverse incurred loss development during the year, and the application of the actuarial methodologies to loss data pertaining to the remaining non-commuted exposures. Of the 12 commutations completed for this entity, 3 were among its top 10 cedant exposures. The remaining 9 were of a smaller size, consistent with our approach of targeting significant numbers of cedant and reinsurer relationships as well as targeting significant individual cedant and reinsurer relationships. The entity in question also benefits from substantial stop loss reinsurance protection whereby the ultimate adverse loss development of $23.4 million was largely offset by a recoverable from a single AA rated reinsurer such that a net ultimate loss of $2.1 million was retained by us;
 
(ii) net favorable incurred loss development of $29.0 million, comprising net paid loss recoveries, relating to another one of our reinsurance companies, offset by increases in net IBNR loss reserves of


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$29.0 million, resulting in no ultimate gain or loss. This reinsurance company has retrocessional arrangements providing for full reinsurance of all risks assumed; and
 
(iii) net favorable incurred loss development of $6.6 million in our remaining insurance and reinsurance entities together with reductions in IBNR reserves of $26.3 million. The net favorable incurred loss development in our remaining insurance and reinsurance entities of $6.6 million, whereby net advised case and LAE reserves of $2.6 million were settled for net paid loss recoveries of $4.0 million, arose from the settlement of non-commuted losses in the year below carried reserves and approximately 57 commutations of assumed and ceded exposures at less than case and LAE reserves. We adopt a disciplined approach to the review and settlement of non-commuted claims through claims adjusting and the inspection of underlying policyholder records such that settlements of assumed exposures may often be achieved below the level of the originally advised loss and settlements of ceded receivables may often be achieved at levels above carried balances. The net reduction in the estimate of IBNR loss and loss adjustment expense liabilities relating to our remaining insurance and reinsurance companies amounted to $26.3 million and results from the application of our reserving methodologies to (i) the reduced historical incurred loss development information relating to remaining exposures after the 57 commutations, and (ii) reduced case and LAE reserves in the aggregate. Of the 57 commutations completed during 2007 for our remaining reinsurance and insurance companies, 5 were among their top 10 cedant and/or reinsurance exposures. The remaining 52 were of a smaller size, consistent with our approach of targeting significant numbers of cedant and reinsurer relationships, as well as targeting significant individual cedant and reinsurer relationships.
 
The following table shows the components of the movement in net reduction in loss and loss adjustment expense liabilities for the years ended December 31, 2007 and 2006.
 
                 
    Year Ended December 31,  
    2007     2006  
    (In thousands of
 
    U.S. dollars)  
 
Net Losses Paid
  $ (20,422 )   $ (75,293 )
Net Reduction in Case and LAE Reserves
    17,660       43,645  
Net Reduction in IBNR
    27,244       63,575  
                 
Net Reduction in Loss and Loss Adjustment Expenses
  $ 24,482     $ 31,927  
                 
 
Net reduction in case and LAE reserves comprises the movement during the year in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net reduction in IBNR represents the change in our actuarial estimates of losses incurred but not reported.


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The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the years ended December 31, 2007 and 2006. Losses incurred and paid are reflected net of reinsurance recoverables.
 
                 
    Year Ended December 31,  
    2007     2006  
    (In thousands of U.S. dollars)  
 
Balance as of January 1,
  $ 1,214,419     $ 806,559  
Less: Reinsurance recoverables
    342,160       213,399  
                 
      872,259       593,160  
Incurred related to prior years
    (24,482 )     (31,927 )
Paids related to prior years
    (20,422 )     (75,293 )
Effect of exchange rate movement
    18,625       24,856  
Acquired on acquisition of subsidiaries
    317,505       361,463  
                 
Net balance as of December 31,
  $ 1,163,485     $ 872,259  
Plus: Reinsurance recoverables
    427,964       342,160  
                 
Balance as of December 31,
  $ 1,591,449     $ 1,214,419  
                 
 
Salaries and Benefits:
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 36,222     $ 28,255     $ (7,967 )
Reinsurance
    10,755       11,866       1,111  
                         
Total
  $ 46,977     $ 40,121     $ (6,856 )
                         
 
Salaries and benefits, which include expenses relating to our Annual Incentive Plan and employee share plans, were $47.0 million and $40.1 million for the years ended December 31, 2007 and 2006, respectively. The increase in salaries and benefits for the consulting segment was due to the following factors: 1) The growth in staff numbers from 195, as of December 31, 2006, to 221, as of December 31, 2007; 2) On May 23, 2006 we entered into an agreement and plan of merger and a recapitalization agreement which resulted in the existing annual incentive compensation plan being cancelled and the modification of the accounting treatment for share-based awards from a book value plan to a fair value plan. The net effect of these changes was to reduce the total salaries and benefits by $2.0 million; and 3) In March 2007, payment of a special bonus to Mr. John J. Oros and Mr. Nimrod T. Frazer, totaling $2.0 million, in recognition of their contributions to the successful completion of the Merger.
 
We expect that staff costs will increase in 2008 due primarily to the approximately 30 new employees retained or hired upon completion of the Gordian acquisition. Bonus accrual expenses will be variable and dependent on our overall profit.
 
General and Administrative Expenses:
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 21,844     $ 12,751     $ (9,093 )
Reinsurance
    9,569       6,127       (3,442 )
                         
Total
  $ 31,413     $ 18,878     $ (12,535 )
                         
 
General and administrative expenses attributable to the consulting segment increased by $9.1 million during the year ended December 31, 2007, as compared to the year ended December 31, 2006 due primarily to the


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following: 1) increased professional fees of $4.2 million relating to legal, accounting and filing costs associated with our reporting obligations as a public company; 2) a one-time expense of $1.6 million relating to the over-recovery by us of current and prior years value added taxes; and 3) increased rent costs of $1.4 million as a result of one of our U.K. subsidiaries moving to new offices.
 
General and administrative expenses attributable to the reinsurance segment increased by $3.4 million during the year ended December 31, 2007, as compared to the year ended December 31, 2006. The increased costs for the period related primarily to the following: 1) additional general and administrative expenses of $2.5 million incurred in relation to companies that we acquired in 2007; and 2) a write-off of a receivable of $0.9 million in respect of value added tax recoveries. We expect that general and administrative expenses attributable to the reinsurance segment will increase in 2008 due to the costs associated with the acquisitions completed in early 2008.
 
Interest Expense:
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    4,876       1,989       2,887  
                         
Total
  $ 4,876     $ 1,989     $ 2,887  
                         
 
Interest expense of $4.9 million and $2.0 million was recorded for the years ended December 31, 2007 and 2006, respectively.
 
For 2007, this amount relates to the interest on new loans from a London-based bank to partially assist with the financing of the acquisitions of Inter-Ocean and Marlon Insurance Company Limited and Marlon Management Services Limited, or together referred to herein as Marlon, along with interest charges from prior years loans that were made to partially assist with the financing of the acquisitions of Brampton Insurance Company Limited, or Brampton, and Cavell Holdings Limited (UK), or Cavell.
 
For 2006, interest expense also includes an amount relating to the interest on funds that were borrowed from B.H. Acquisition, which, for 2007, was a wholly-owned subsidiary, as well as interest on a vendor promissory note that formed part of the acquisition cost for Brampton. The vendor promissory note was repaid in May 2006. During 2007 the Inter-Ocean bank loan was repaid in full. In February 2008, the Cavell and Marlon bank loans were also repaid in full.
 
Foreign Exchange Gain/(Loss):
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ (192 )   $ (146 )   $ (46 )
Reinsurance
    8,113       10,978       (2,865 )
                         
Total
  $ 7,921     $ 10,832     $ (2,911 )
                         
 
We recorded foreign exchange gains of $7.9 million and $10.8 million for the years ended December 31, 2007 and December 31, 2006, respectively.
 
The foreign exchange gain for the year ended December 31, 2007 arose primarily as a result of: 1) the holding of surplus British Pounds; and 2) the holding by Cavell of surplus net Canadian and Australian dollars, as required by local regulatory obligations, at a time when these currencies have been appreciating against the U.S. Dollar. The gain for the year ended December 31, 2006 arose primarily as a result of having surplus British Pounds that arose as a result of our acquisitions of Brampton, Cavell, and Unione Italiana (U.K.) Reinsurance Company, or Unione, at a time when the British Pound had strengthened against the U.S. Dollar.


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As our functional currency is the U.S. Dollar, we seek to manage our exposure to foreign currency exchange by broadly matching foreign currency assets against foreign currency liabilities.
 
Share of Income of Partly-Owned Company:
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
          518       (518 )
                         
Total
  $     $ 518     $ (518 )
                         
 
Our share of equity in earnings of partly owned companies for the years ended December 31, 2007 and 2006 was $Nil and $0.5 million, respectively. These amounts represented our proportionate share of equity in the earnings of B.H. Acquisition.
 
On January 31, 2007, B.H. Acquisition became our wholly-owned subsidiary and, as a result, we now consolidate the results of B.H. Acquisition.
 
Income Tax Recovery (Expense):
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ (597 )   $ 490     $ (1,087 )
Reinsurance
    8,038       (172 )     8,210  
                         
Total
  $ 7,441     $ 318     $ 7,123  
                         
 
We recorded an income tax recovery of $7.4 million and $0.3 million for the years ended December 31, 2007 and 2006, respectively.
 
Income tax (expense)/recovery of $(0.6) million and $0.5 million were recorded in the consulting segment for the years ended December 31, 2007 and 2006, respectively. The variance between the two periods arose because of: 1) The inclusion for 2007, as a result of the Merger, of the tax expense of Enstar USA, Inc.; and 2) In 2006, we applied available loss carryforwards from our U.K. insurance companies to relieve profits in our U.K. consulting companies.
 
During 2007, in the reinsurance segment, the statute of limitations expired on certain previously recorded liabilities related to uncertain tax positions. The benefit to us was $8.5 million.
 
Minority Interest:
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    (6,730 )     (13,208 )     6,478  
                         
Total
  $ (6,730 )   $ (13,208 )   $ 6,478  
                         
 
We recorded a minority interest in earnings of $6.7 million for the year ended December 31, 2007 reflecting the 49.9% minority economic interest held by a third party in the earnings from Hillcot, Brampton and Shelbourne, and $13.2 million for the year ended December 31, 2006 reflecting the 49.9% minority economic interest held by a third party in the earnings from Hillcot and Brampton.
 
The decrease in minority interest was primarily a result of reduced foreign exchange gains in Brampton and a decrease in net reduction in loss and loss adjustment expense liabilities for Hillcot Re Limited and Brampton.


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Negative Goodwill:
 
                         
    Year Ended December 31,  
    2007     2006     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    15,683       31,038       (15,355 )
                         
Total
  $ 15,683     $ 31,038     $ (15,355 )
                         
 
Negative goodwill of $15.7 million and $31.0 million, net of minority interest of $4.3 million, was recorded for the years ended December 31, 2007 and 2006, respectively. For 2007, the negative goodwill of $15.7 million was earned in connection with our acquisition of Inter-Ocean and represents the excess of the cumulative fair value of net assets acquired of $73.2 million over the cost of $57.5 million. This excess has, in accordance with SFAS 141 “Business Combinations,” been recognized as an extraordinary gain in 2007. The negative goodwill arose primarily as a result of the strategic desire of the vendors to achieve an exit from such operations and therefore to dispose of the company at a discount to fair value.
 
Negative goodwill of $31.0 million, net of minority interest of $4.3 million, was recorded for the year ended December 31, 2006 in connection with our acquisitions of Brampton, Cavell and Unione during the year. This amount represents the excess of the cumulative fair value of net assets acquired of $222.9 million over the cost of $187.5 million. This excess has, in accordance with SFAS 141 “Business Combinations,” been recognized as an extraordinary gain in 2006.
 
The negative goodwill of $4.3 million (net of minority interest) relating to Brampton arose as a result of the income earned by Brampton between the date of the balance sheet on which the agreed purchase price was based, December 31, 2004, and the date the acquisition closed, March 30, 2006. The negative goodwill of $26.7 million relating to the purchases of Cavell and Unione arose primarily as a result of the strategic desire of the vendors to achieve an exit from such operations and, therefore, to dispose of the companies at a discount to fair value.
 
Comparison of Year Ended December 31, 2006 and 2005
 
We reported consolidated net earnings of approximately $82.3 million for the year ended December 31, 2006 compared to approximately $80.7 million in 2005. Included as part of net earnings for 2006 is an extraordinary gain of $31.0 million relating to negative goodwill, net of minority interest. Net earnings before extraordinary gain for 2006 were approximately $51.3 million compared to $80.7 million in 2005. The decrease was primarily a result of a lower net reduction in loss and loss adjustment expense liabilities and higher general and administrative expenses offset by higher consulting fee income, investment income and increased foreign exchange gains.
 
Consulting Fees:
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 54,546     $ 38,046     $ 16,500  
Reinsurance
    (20,638 )     (16,040 )     (4,598 )
                         
Total
  $ 33,908     $ 22,006     $ 11,902  
                         
 
We earned consulting fees of approximately $33.9 million and $22.0 million for the years ended December 31, 2006 and 2005, respectively. Included in these amounts was approximately $1.3 million in consulting fees charged to wholly-owned subsidiaries of B.H. Acquisition, a partly-owned equity affiliate, in both 2006 and 2005. The increase in consulting fees was due primarily to the increase of approximately $8.9 million in management and incentive-based fees earned by our U.S. subsidiaries along with increased incentive-based fees generated by our Bermuda management company.


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Internal management fees of $20.6 million and $16.0 million were paid in 2006 and 2005, respectively, by our reinsurance companies to our consulting companies. The increase in fees paid by the reinsurance segment was due primarily to the fees paid by reinsurance companies that were acquired in 2006.
 
Net Investment Income and Net Realized Gains/(Losses):
 
                                                 
    Year Ended December 31,  
    Net Investment Income     Net Realized Gains/(Losses)  
    2006     2005     Variance     2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 1,225     $ 576     $ 649     $     $     $  
Reinsurance
    46,874       27,660       19,214       (98 )     1,268       (1,366 )
                                                 
Total
  $ 48,099     $ 28,236     $ 19,863     $ (98 )   $ 1,268     $ (1,366 )
                                                 
 
Net investment income for the year ended December 31, 2006 increased by $19.9 million to $48.1 million, compared to $28.2 million for the year ended December 31, 2005. The increase was attributable to the increase in prevailing interest rates during the year along with an increase in average cash and investment balances from $913.5 million to $1,093.2 million for the years ended December 31, 2005 and 2006, respectively, relating to cash and investment portfolios of reinsurance companies acquired in the year.
 
The average return on the cash and fixed maturities investments for the year ended December 31, 2006 was 4.40%, as compared to the average return of 3.23% for the year ended December 31, 2005. The increase in yield was primarily the result of increasing U.S. interest rates — the U.S. federal funds rate has increased from 2.25% on January 1, 2005 to 4.25% on December 31, 2005 and to 5.25% on December 31, 2006. The average Standard & Poor’s credit rating of our fixed income investments at December 31, 2006 was AAA.
 
Net realized (losses)/gains for the year ended December 31, 2006 and 2005 were $(0.1) million and $1.3 million, respectively.
 
Net Reduction in Loss and Loss Adjustment Expense Liabilities:
 
Net reduction in loss and loss adjustment expense liabilities for the year ended December 31, 2006 was $31.9 million and was attributable to a reduction in estimates of net ultimate losses of $21.4 million, a reduction in estimates of loss adjustment expense liabilities of $15.1 million to reflect 2006 run-off activity, compared to a reduction of $10.5 million in 2005 (the larger reduction relating to companies acquired during 2006), a reduction in aggregate provisions for bad debt of $6.3 million compared to $20.2 million in 2005, resulting from the collection of certain reinsurance receivables against which bad debt provisions had been provided in earlier periods, partially offset by the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $10.9 million compared to $7.9 million in 2005, the increased charge reflecting amortization relating to companies acquired during 2006. The reduction in estimates of net ultimate losses of $21.4 million comprised of net adverse incurred loss development of $37.9 million offset by reductions in estimates of IBNR reserves of $59.3 million, of which an increase in estimates of ultimate losses of $3.4 million relating to one of our insurance entities was offset by reductions in estimates of net ultimate losses of $24.8 million in our remaining insurance and reinsurance entities.
 
The adverse incurred loss development of $37.9 million, whereby advised case and LAE reserves of $37.4 million were settled for net paid losses of $75.3 million, comprised adverse incurred loss development of $59.2 million relating to one of our insurance companies partially offset by favorable incurred loss development of $21.3 million relating to our remaining insurance and reinsurance companies.
 
The adverse incurred loss development of $59.2 million relating to one of our insurance companies was comprised of net paid loss settlements of $81.3 million less reductions in case and LAE reserves of $22.1 million and resulted from the settlement of case and LAE reserves above carried levels and from new loss advices, partially offset by approximately 10 commutations of assumed and ceded exposures below carried reserves levels. Actuarial analysis of the remaining unsettled loss liabilities resulted in an increase in the estimate of IBNR loss reserves of $35.0 million after consideration of the $59.2 million adverse incurred loss development during the year, and the


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application of the actuarial methodologies to loss data pertaining to the remaining non-commuted exposures. Other factors contributing to the increase include the establishment of a reserve to cover potential exposure to lead paint claims, a significant increase in asbestos reserves related to the entity’s single largest cedant (following a detailed review of the underlying exposures), and a change in the assumed asbestos and environmental loss reporting time-lag as discussed further below. Of the 10 commutations completed for this entity, 2 were among its top 10 cedant and/or reinsurance exposures. The remaining 8 were of a smaller size, consistent with our approach of targeting significant numbers of cedant and reinsurer relationships as well as targeting significant individual cedant and reinsurer relationships. The entity in question also benefits from substantial stop loss reinsurance protection whereby the adverse loss development of $59.2 million was largely offset by a recoverable from a single AA rated reinsurer. The increase in estimated net ultimate losses of $3.4 million was retained by us.
 
The favorable incurred loss development of $21.3 million, relating to our remaining insurance and reinsurance companies, whereby net advised case reserves of $15.3 million were settled for net paid loss recoveries of $6.0 million, arose from approximately 35 commutations of assumed and ceded exposures at less than case and LAE reserves, where receipts from ceded commutations exceeded settlements of assumed exposures, and the settlement of non-commuted losses in the year below carried reserves. We adopt a disciplined approach, through claims adjusting and the inspection of underlying policyholder records, to the review and settlement of non-commuted claims such that settlements may often be achieved below the level of the originally advised loss.
 
The net reduction in the estimate of IBNR loss and loss adjustment expense liabilities relating to our remaining insurance and reinsurance companies (i.e., excluding the net $55.8 million reduction in IBNR reserves relating to the entity referred to above) amounted to $3.5 million. This net reduction was comprised of an increase of $19.8 million resulting from (i) a change in assumptions as to the appropriate loss reporting time lag for Asbestos related exposures from 2 to 3 years and for environmental exposures from 2 to 2.5 years, which resulted in an increase in net IBNR reserves of $6.4 million, and (ii) a reduction in ceded IBNR recoverables of $13.4 million resulting from the commutation of ceded reinsurance protections. The increase in IBNR of $19.8 million is offset by a reduction of $23.3 million resulting from the application of our reserving methodologies to (i) the reduced historical incurred loss development information relating to remaining exposures after the 35 commutations, and (ii) reduced case and LAE reserves in the aggregate.
 
Of the 35 commutations completed during 2006 for our remaining reinsurance and insurance companies, 10 were among their top 10 cedant and/or reinsurance exposures. The remaining 25 were of a smaller size, consistent with our approach of targeting significant numbers of cedant and reinsurer relationships, as well as targeting significant individual cedant and reinsurer relationships.
 
The following table shows the components of the movement in net reduction in loss and loss adjustment expense liabilities for the years ended December 31, 2006 and 2005.
 
                 
    Year Ended December 31,  
    2006     2005  
    (In thousands of
 
    U.S. dollars)  
 
Net Losses Paid
  $ (75,293 )   $ (69,007 )
Net Change in Case and LAE Reserves
    43,645       95,156  
Net Change in IBNR
    63,575       69,858  
                 
Net Reduction in Loss and Loss Adjustment Expenses
  $ 31,927     $ 96,007  
                 
 
Net change in case and LAE reserves comprises the movement during the year in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the change in our actuarial estimates of losses incurred but not reported.


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The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the years ended December 31, 2006 and 2005. Losses incurred and paid are reflected net of reinsurance recoverables.
 
                 
    Year Ended December 31,  
    2006     2005  
    (In thousands of
 
    U.S. dollars)  
 
Net Reserves for Losses and Loss Adjustment Expenses, January 1
  $ 593,160     $ 736,660  
Incurred related to prior years
    (31,927 )     (96,007 )
Paids related to prior years
    (75,293 )     (69,007 )
Effect of exchange rate movement
    24,856       3,652  
Acquired on acquisition of subsidiaries
    361,463       17,862  
                 
Net Reserves for Losses and Loss Adjustment Expenses, December 31
  $ 872,259     $ 593,160  
                 
 
Salaries and Benefits:
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 28,255     $ 26,864     $ (1,391 )
Reinsurance
    11,866       13,957       2,091  
                         
Total
  $ 40,121     $ 40,821     $ 700  
                         
 
Salaries and benefits, which include expenses relating to our Annual Incentive Compensation Program and employee share plans, were $40.1 million and $40.8 million for the years ended December 31, 2006 and 2005, respectively. On May 23, 2006, we entered into a merger agreement and a recapitalization agreement, which agreements provided for the cancellation of our then-existing incentive compensation plan, or the Old Incentive Plan, which plan was replaced with the Annual Incentive Plan. As a result of the execution of these agreements, the accounting treatment for share based awards under the Old Incentive Plan changed from book value to fair value. As a result of this modification, we recognized additional stock-based compensation of $15.6 million during the quarter ended June 30, 2006. The total stock-based compensation expense recognized in the year ended December 31, 2006, including the $15.6 million mentioned previously, was $22.3 million as compared to $3.8 million for the year ended December 31, 2005. As a result of the cancellation of the Old Incentive Plan, $21.2 million of prior years unpaid bonus accrual was reversed during the quarter ended June 30, 2006. The expense associated with the new annual incentive compensation plan was $14.5 million for the year ended December 31, 2006 as compared to an expense of $14.2 million relating to the prior plan for the year ended December 31, 2005.
 
General and Administrative Expenses:
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 12,751     $ 9,246     $ (3,505 )
Reinsurance
    6,127       1,716       (4,411 )
                         
Total
  $ 18,878     $ 10,962     $ (7,916 )
                         
 
General and administrative expenses attributable to the consulting segment increased by $3.5 million during the year ended December 31, 2006, as compared to the year ended December 31, 2005. This increase was due primarily to increases in rent and rent related costs due to an increase in office space along with an increase in professional fees and travel relating to due diligence work on potential acquisition opportunities.
 
General and administrative expenses attributable to the reinsurance segment increased by $4.4 million during the year ended December 31, 2006, as compared to the year ended December 31, 2005. Of the increased costs for the


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year, $3.8 million relate to general and administrative expenses incurred in relation to companies acquired by us in 2006 and, of the $3.8 million, $2.5 million relate to non-recurring costs associated with new acquisitions along with expenses incurred in arranging loan facilities with a London-based bank.
 
Interest Expense:
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    1,989             1,989  
                         
Total
  $ 1,989     $     $ 1,989  
                         
 
Interest expense of $2.0 million was recorded for the year ended December 31, 2006. This amount relates to the interest on the funds that were borrowed from B.H. Acquisition and a London-based bank to partially assist with the financing of the acquisitions of Brampton and Cavell, as well as interest on the vendor promissory note that formed part of the acquisition cost for Brampton. The vendor promissory note was repaid in May 2006.
 
Foreign Exchange Gain/(Loss):
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ (146 )   $ (10 )   $ (136 )
Reinsurance
    10,978       (4,592 )     15,570  
                         
Total
  $ 10,832     $ (4,602 )   $ 15,434  
                         
 
We recorded a foreign exchange gain of $10.8 million for the year ended December 31, 2006, as compared to a foreign exchange loss of $4.6 million for 2005. The gain for the year ended December 31, 2006 arose primarily as a result of having surplus British Pounds that arose as a result of our acquisitions of Brampton, Cavell, and Unione at a time when the British Pound had strengthened against the U.S. Dollar. The foreign exchange loss in 2005 arose as a result of having surplus British Pounds and Euros at various points in the year at a time when the both the British Pound and Euro had weakened against the U.S. Dollar. The U.S. Dollar to British Pound rate at January 1, 2005, December 31, 2005 and December 31, 2006 was $1.92, $1.72 and $1.959, respectively. Similarly, the U.S. Dollar to Euro rate at January 1, 2005, December 31, 2005 and December 31, 2006 was $1.36, $1.18 and $1.32, respectively.
 
As our functional currency is the U.S. Dollar, we seek to manage our exposure to foreign currency exchange by broadly matching foreign currency assets against foreign currency liabilities. The 2006 and 2005 currency mismatches were addressed and corrected by converting surplus foreign currency to U.S. Dollars at the time the mismatch was identified.
 
Share of Income of Partly-Owned Company:
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    518       192       326  
                         
Total
  $ 518     $ 192     $ 326  
                         
 
Our share of equity in earnings of partly-owned companies for the years ended December 31, 2006 and 2005 was $0.5 million and $0.2 million, respectively. These amounts represented our proportionate share of equity in the earnings of B.H. Acquisition.


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Income Tax Recovery (Expense):
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $ 490     $ (883 )   $ 1,373  
Reinsurance
    (172 )     (31 )     (141 )
                         
Total
  $ 318     $ (914 )   $ 1,232  
                         
 
Income taxes of $0.3 million and $(0.9) million were recorded for the years ended December 31, 2006 and 2005, respectively. The income taxes recovered (incurred) were in respect of our U.K. and U.S. subsidiaries.
 
Minority Interest:
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    (13,208 )     (9,700 )     (3,508 )
                         
Total
  $ (13,208 )   $ (9,700 )   $ (3,508 )
                         
 
We recorded a minority interest in earnings of $13.2 million and $9.7 million for the years ended December 31, 2006 and 2005, respectively, reflecting the 49.9% minority economic interest held by a third party in the earnings from Hillcot and Brampton.
 
Negative Goodwill:
 
                         
    Year Ended December 31,  
    2006     2005     Variance  
    (In thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    31,038             31,038  
                         
Total
  $ 31,038     $     $ 31,038  
                         
 
Negative goodwill of $31.0 million, net of minority interest of $4.3 million, was recorded for the year ended December 31, 2006 in connection with our acquisitions of Brampton, Cavell and Unione during the year. This amount represents the excess of the cumulative fair value of net assets acquired of $222.9 million over the cost of $187.5 million. This excess has, in accordance with SFAS 141 “Business Combinations,” been recognized as an extraordinary gain in 2006.
 
The negative goodwill of $4.3 million, net of minority interest, relating to Brampton arose as a result of the income earned by Brampton between the date of the balance sheet on which the agreed purchase price was based, December 31, 2004, and the date the acquisition closed, March 30, 2006. The negative goodwill of $26.7 million relating to the purchases of Cavell and Unione arose primarily as a result of the strategic desire of the vendors to achieve an exit from such operations and, therefore, to dispose of the companies at a discount to fair value.
 
Liquidity and Capital Resources
 
As we are a holding company and have no substantial operations of our own, our assets consist primarily of investments in subsidiaries. The potential sources of the cash flows to the holding company consist of dividends, advances and loans from our subsidiary companies.
 
Our future cash flows depend upon the availability of dividends or other statutorily permissible payments from our subsidiaries. The ability to pay dividends and make other distributions is limited by the applicable laws and regulations of the jurisdictions in which our insurance and reinsurance subsidiaries operate, including Bermuda, the


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United Kingdom and Europe, which subject these subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, certain of our insurance and reinsurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends and other payments that these subsidiaries can pay to us, which in turn may limit our ability to pay dividends and make other payments. As of December 31, 2007 and 2006, our insurance and reinsurance subsidiaries’ solvency and liquidity were in excess of the minimum levels required. Retained earnings of our insurance and reinsurance subsidiaries are not currently restricted as minimum capital solvency margins are covered by share capital and additional paid-in-capital.
 
Our capital management strategy is to preserve sufficient capital to enable us to make future acquisitions while maintaining a conservative investment strategy. We believe that restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies will not have a material impact on our ability to meet our cash obligations.
 
Our sources of funds primarily consist of the cash and investment portfolios acquired on the completion of the acquisition of an insurance or reinsurance company in run-off. These acquired cash and investment balances are classified as cash provided by investing activities. We expect to use these funds acquired, together with collections from reinsurance debtors, consulting income, investment income and proceeds from sales and redemption of investments, to pay losses and loss expenses, salaries and benefits and general and administrative expenses, with the remainder used for acquisitions, additional investments and, in the past, for dividend payments to shareholders. We expect that our reinsurance segment will have a net use of cash from operations as total net claim settlements and operating expenses will generally be in excess of investment income earned. We expect that our consulting segment operating cash flows will generally be breakeven. We expect our operating cash flows, together with our existing capital base and cash and investments acquired on the acquisition of our insurance and reinsurance subsidiaries, to be sufficient to meet cash requirements and to operate our business. We currently do not intend to pay cash dividends on our ordinary shares.
 
We maintain a short duration conservative investment strategy whereby, as of March 31, 2008, 69.4% of our cash and fixed income portfolio was held with a maturity of less than one year and 82.6% had maturities of less than five years. Excluding the impact of commutations and any schemes of arrangement, should they be completed, we expect approximately 10.1% of the gross reserves to be settled within one year and approximately 63.9% of the reserves to be settled within five years. However, our strategy of commuting our liabilities has the potential to accelerate the natural payout of losses to less than five years. Therefore, the relatively short-duration investment portfolio is maintained in order to provide liquidity for commutation opportunities and preclude us from having to liquidate longer dated securities. As a result, we do not anticipate having to sell longer dated investments in order to meet future policyholder liabilities. However, if we had to sell a portion of our held-to-maturity portfolio to meet policyholder liabilities we would, at that point, amend the classification of the held-to-maturity portfolio to an available-for-sale portfolio. This reclassification would require the investment portfolio to be recorded at market value as opposed to amortized cost. As of March 31, 2008, such a reclassification would result in an insignificant decrease in the value of our cash and investments, reflecting the unrealized loss position of the held-to-maturity portfolio as of March 31, 2008.
 
At March 31, 2008, total cash and cash investments were $3.02 billion, compared to $1.80 billion at December 31, 2007. The increase of $1.22 billion was due primarily to cash and investments of $1.32 billion acquired upon the acquisitions of Gordian and Guildhall and upon completion of the Shelbourne RITC transactions.
 
At December 31, 2007, total cash and investments were $1.80 billion, compared to $1.26 billion at December 31, 2006. The increase of $539.4 million was due primarily to cash and investments of $554.5 acquired upon the acquisition of subsidiaries offset by: 1) net paid losses relating to claims of $20.4 million; and 2) purchase costs of acquisitions, net of external financing, of $52.5 million.
 
Source of Funds
 
We primarily generate our cash from the acquisitions we complete. These acquired cash and investment balances are classified as cash provided by investing activities.


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We expect that for the reinsurance segment there will be a net use of cash from operations due to total claim settlements and operating expenses being in excess of investment income earned and that for the consulting segment operating cash flows will be breakeven. As a result, the net operating cash flows for us, to expiry, are expected to be negative as we pay out cash in claims settlements and expenses in excess of cash generated via investment income and consulting fees.
 
Operating
 
Net cash provided by our operating activities for the three months ended March 31, 2008 was $374.4 million compared to $123.6 million for the three months ended March 31, 2007. This increase in cash flows was attributable to net assets assumed on retro-active reinsurance contracts and higher consulting fee income, partially offset by the purchases of trading security investments held by us and higher general and administrative and interest expenses, for the three months ended March 31, 2008 as compared to the same period in 2007.
 
Net cash provided by operating activities for the year ended December 31, 2007 was $73.7 million compared to $4.2 million for the year ended December 31, 2006. This increase in cash flows was attributable mainly to reinsurance collections and the sales of trading securities, offset by higher general and administrative expenses and interest expense incurred for the year ended December 31, 2007 as compared to the same period in 2006.
 
Net cash provided by (used in) operating activities for the year ended December 31, 2006 was $4.2 million compared to $(6.3) million for the year ended December 31, 2005. This increase in cash flows was attributable primarily to higher investment and consulting income, offset by higher general and administrative expenses and interest expense incurred for the year ended December 31, 2006 as compared to the same period in 2005.
 
Investing
 
Investing cash flows consist primarily of cash acquired net of acquisitions along with net proceeds on the sale and purchase of investments. Net cash (used in) provided by investing activities was $(243.2) million during the three months ended March 31, 2008 compared to $77.1 million during the three months ended March 31, 2007. The decrease in the cash flows was due to the increase in restricted cash and available-for-sale securities acquired in relation to the acquisition during the three months ended March 31, 2008 and the decrease in cash acquired on purchase of subsidiaries during the three months ended March 31, 2008 as compared to the same period of 2007.
 
Net cash provided by investing activities was $475.1 million during the year ended December 31, 2007 compared to $179.3 million during the year ended December 31, 2006. The increase in the year was due mainly to the sale and maturity of investments held by us.
 
Net cash provided by (used in) investing activities was $179.3 million during the year ended December 31, 2006 compared to $(14.1) million during the year ended December 31, 2005. The increase in the year was due primarily to the sale and maturity of investments held by us.
 
Financing
 
Net cash provided by financing activities was $354.2 million during the three months ended March 31, 2008 compared to $9.6 million during the three months ended March 31, 2007. Cash provided by financing activities in 2008 was primarily attributable to the combination of the receipt of bank loans and capital contributions by minority interest shareholders relating to the purchase of Guildhall and Gordian and the financing of Shelbourne.
 
Net cash used in financing activities was $4.5 million during the year ended December 31, 2007 compared to $13.6 million during the year ended December 31, 2006. The decrease in cash used in financing activities was primarily attributable to the combination of redemption of shares and dividends paid during 2006, which did not occur in 2007, and vendor loans offset by the repurchase of our shares during 2007.
 
Net cash used in financing activities was $13.6 million during the year ended December 31, 2006 compared to $0.8 million during the year ended December 31, 2005. The increase in cash used in our financing activities was attributable primarily to the combination of redemption of shares and dividends paid and vendor loans offset by net loan finance receipts and capital contributions by the minority interest shareholder of a subsidiary.


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Investments
 
As of March 31, 2008 and December 31, 2007, the maturity distribution of our fixed income investment portfolio was as follows:
 
                                 
    March 31, 2008     December 31, 2007  
    Amortized
          Amortized
       
    Cost     Fair Value     Cost     Fair Value  
    (In thousands of U.S. dollars)  
 
Due within 1 year
  $ 293,559     $ 293,619     $ 102,469     $ 102,346  
After 1 through 5 years
    394,268       398,663       269,303       272,735  
After 5 through 10 years
    224,496       229,277       77,486       78,965  
After 10 years
    182,742       187,006       102,442       102,933  
                                 
    $ 1,095,065     $ 1,108,565     $ 551,700     $ 556,979  
                                 
 
For more information, see “Business — Investment Portfolio” on page 84.
 
Long-Term Debt
 
From time to time we incur long-term debt to fund a portion of the purchase price of acquisitions.
 
In February 2008, our wholly-owned subsidiary, Cumberland Holdings Limited, or Cumberland, entered into a term facility agreement jointly with a London-based bank and a German bank, or the Cumberland Facility. On March 4, 2008, we drew down AU$215.0 million (approximately $197.5 million) from the Facility A Commitment, or Facility A, and AU$86.0 million (approximately $79.0 million) from the Facility B Commitment, or Facility B, to partially fund the Gordian acquisition.
 
  •  The interest rate on Facility A is LIBOR plus 2%. Facility A is repayable in five years and is secured by a first charge over Cumberland’s shares in Gordian. Facility A contains various financial and business covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. As of March 31, 2008, all of the financial covenants relating to Facility A were met.
 
  •  The interest rate on Facility B is LIBOR plus 2.75%. Facility B is repayable in six years and is secured by a first charge over Cumberland’s shares in Gordian. Facility B contains various financial and business covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. As of March 31, 2008, all of the financial covenants relating to Facility B were met.
 
In February 2008, our wholly-owned subsidiary, Rombalds Limited, or Rombalds, entered into a term facility agreement with a London-based bank, or the Rombalds Facility. On February 28, 2008, we drew down $32.5 million from the Rombalds Facility to partially fund the acquisition of Guildhall. The interest rate on the Rombalds Facility is LIBOR plus 2%. The facility is repayable in five years and is secured by a first charge over Rombalds’ shares in Guildhall. The Rombalds Facility contains various financial and business covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. As of March 31, 2008, all of the financial covenants relating to the Rombalds Facility were met.
 
As of the date of this prospectus, we had no other outstanding long-term debt.
 
Commitments
 
We have committed to invest up to $100 million in J.C. Flowers II, L.P., or the Flowers Fund. During 2008, we funded a total of $24.4 million of our outstanding capital commitment to the Flowers Fund, bringing our remaining outstanding commitment to the fund to $49.7 million as of March 31, 2008. We intend to use cash on hand to fund our remaining commitment.


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On March 28, 2008, we committed to subscribe for our pro-rata share of the rights offering in New NIB Partners L.P., or New NIB. Our total commitment was €5.0 million (approximately $7.9 million) and was paid to New NIB on April 11, 2008. We own approximately 1.6% of New NIB, which owns approximately 79% of NIBC Holding N.V. (formerly, NIB Capital N.V.) and its affiliates, or NIBC.
 
On March 31, 2008, we guaranteed the obligations of two of our subsidiaries in respect of letters of credit issued on their behalf by London-based banks in the amount of £19.5 million (approximately $38.7 million) in respect of capital commitments to Lloyd’s Syndicate 2008 and insurance contract requirements of one of the subsidiaries. The guarantees will be triggered should losses incurred by the subsidiaries exceed available cash on hand resulting in the letters of credit being drawn. As of the date of this prospectus, we have not recorded any liabilities associated with the guarantees.
 
We have made a capital commitment of up to $10 million in the GSC European Mezzanine Fund II, LP, or GSC. GSC invests in mezzanine securities of middle and large market companies throughout Western Europe. As of March 31, 2008, the capital contributed to GSC was $5.3 million, with the remaining commitment being $4.7 million. The $10 million represents 8.5% of the total commitments made to GSC.
 
Aggregate Contractual Obligations
 
The following table shows our aggregate contractual obligations by time period remaining to due date as of March 31, 2008.
 
                                         
          Less Than
    1-3
    3-5
    More Than
 
Payments Due by Period:
  Total     1 Year     Years     Years     5 Years  
          (In millions of U.S. dollars)        
 
Contractual Obligations
                                       
Investment commitments
  $ 62.3     $ 24.6     $ 35.5     $ 1.8     $ 0.4  
Operating lease obligations
    7.8       1.3       3.6       1.8       1.1  
Loan repayments
    327.2       19.4             229.3       78.5  
Gross reserves for losses and loss adjustment expenses
    2,700.7       272.1       831.9       620.7       976.0  
                                         
    $ 3,098.0     $ 317.4     $ 871.0     $ 853.6     $ 1,056.0  
                                         
 
The amounts included in gross reserves for losses and loss adjustment expenses reflect the estimated timing of expected loss payments on known claims and anticipated future claims. Both the amount and timing of cash flows are uncertain and do not have contractual payout terms. For a discussion of these uncertainties, see “— Critical Accounting Policies — Loss and Loss Adjustment Expenses” on page 33.
 
We have an accrued liability of approximately $12.5 million for unrecognized tax benefits as of March 31, 2008. We are not able to make reasonably reliable estimates of the period in which any cash settlements that may arise with any of the respective tax authorities would be made. Therefore the liability for unrecognized tax benefits is not included in the table above.
 
Off-Balance Sheet and Special Purpose Entity Arrangements
 
At March 31, 2008, we have not entered into any off-balance sheet arrangements.
 
Quantitative And Qualitative Disclosures About Market Risk
 
Our balance sheets include a substantial amount of assets and to a lesser extent liabilities whose fair values are subject to market risks. Market risk represents the potential for an economic loss due to adverse changes in the fair value of a financial instrument. Our most significant market risks are primarily associated with changes in interest rates and foreign currency exchange rates. The following provides analysis on the potential effects that these market risk exposures could have on the future earnings.


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Interest Rate Risk
 
We have calculated the effect that an immediate parallel shift in the U.S. interest rate yield curve would have on our investments at March 31, 2008. The modeling of this effect was performed on our investments classified as either trading or available-for-sale, as a shift in the yield curve would not have an impact on our fixed income investments classified as held to maturity because they are carried at purchase cost adjusted for amortization of premiums and discounts. The results of this analysis are summarized in the table below.
 
Interest Rate Movement Analysis
 
                                         
    Interest Rate Shift in Basis Points  
    −50     −25     0     +25     +50  
    (In thousands of U.S. dollars)  
 
Total Market Value
  $ 725,690     $ 677,182     $ 628,673     $ 580,164     $ 531,656  
Market Value Change from Base
    15.0 %     8.0 %     0.0 %     (8.0 )%     (15.0 )%
Change in Unrealized Value
  $ 97,017     $ 48,509     $     $ (48,509 )   $ (97,017 )
 
As a holder of fixed income securities we also have exposure to credit risk. In an effort to minimize this risk, our investment guidelines have been defined to ensure that the fixed income portfolio is invested in high-quality securities. As of March 31, 2008, approximately 89.9% of our fixed income investment portfolio was rated AA- or better by Standard & Poor’s.
 
Effects of Inflation
 
We do not believe that inflation has had a material effect on our consolidated results of operations. Loss reserves are established to recognize likely loss settlements at the date payment is made. Those reserves inherently recognize the anticipated effects of inflation. The actual effects of inflation on our results cannot be accurately known, however, until claims are ultimately resolved.
 
Foreign Currency Risk
 
Through our subsidiaries, we conduct business in a variety of non-U.S. currencies, the principal exposures being in the currencies set out in the table below. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates. As our functional currency is the U.S. Dollar, exchange rate fluctuations may materially impact our results of operations and financial position. We currently do not use foreign currency hedges to manage our foreign currency exchange risk. We, where possible, manage our exposure to foreign currency exchange risk by broadly matching our non-U.S. Dollar denominated assets against our non-U.S. Dollar denominated liabilities. This matching process is done quarterly in arrears and therefore any mismatches occurring in the period may give rise to foreign exchange gains and losses, which could adversely affect our operating results. We are, however, required to maintain assets in non-U.S. Dollars to meet certain local country branch requirements, which restricts our ability to manage these exposures through the matching of our assets and liabilities.
 
The table below summarizes our gross and net exposure as of March 31, 2008 to foreign currencies:
 
                                                 
    GBP     Euro     AUD     CDN     Other     Total  
    (In millions of U.S. dollars)  
 
Total Assets
  $ 1,087.6     $ 146.7     $ 221.7     $ 18.4     $ 25.0     $ 1,499.4  
Total Liabilities
    900.0       143.7       89.8       7.3       24.4       1,165.2  
                                                 
Net Foreign Currency Exposure
  $ 187.6     $ 3.0     $ 131.9     $ 11.1     $ 0.6     $ 334.2  
                                                 
 
Excluding any tax effects, as of March 31, 2008, a 10% change in the U.S. Dollar relative to the other currencies held by us would have resulted in a $33.4 million change in the net assets held by us.


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BUSINESS
 
Company Overview
 
We were formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry. Since our formation, we, through our subsidiaries, have completed several acquisitions of insurance and reinsurance companies and are now administering those businesses in run-off. Insurance and reinsurance companies we acquire that are in run-off no longer underwrite new policies. In addition, we provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.
 
Our primary corporate objective is to grow our tangible net book value. We believe growth in our tangible net book value is driven primarily by growth in our net earnings, which is in turn partially driven by successfully completing new acquisitions.
 
We evaluate each opportunity presented by carefully reviewing the portfolio’s risk exposures, claim practices, reserve requirements and outstanding claims, and seek an appropriate discount and/or seller indemnification to reflect the uncertainty contained in the portfolio’s reserves. Based on this initial analysis, we can determine if a company or portfolio of business would add value to our current portfolio of run-off business. If we determine to pursue the purchase of a company in run-off, we then proceed to price the acquisition in a manner we believe will result in positive operating results based on certain assumptions including, without limitation, our ability to favorably resolve claims, negotiate with direct insureds and reinsurers, and otherwise manage the nature of the risks posed by the business.
 
Initially, at the time we acquire a company in run-off, we estimate the fair value of liabilities acquired based on external actuarial advice, as well as our own views of the exposures assumed. While we earn a larger share of our total return on an acquisition from commuting the liabilities that we have assumed, we also try to maximize reinsurance recoveries on the assumed portfolio.
 
In the primary (or direct) insurance business, the insurer assumes risk of loss from persons or organizations that are directly subject to the given risks. Such risks may relate to property, casualty, life, accident, health, financial or other perils that may arise from an insurable event. In the reinsurance business, the reinsurer agrees to indemnify an insurance or reinsurance company, referred to as the ceding company, against all or a portion of the insurance risks arising under the policies the ceding company has written or reinsured. When an insurer or reinsurer stops writing new insurance business, either entirely or with respect to a particular line of business, the insurer, reinsurer, or the line of discontinued business is in run-off.
 
In recent years, the insurance industry has experienced significant consolidation. As a result of this consolidation and other factors, the remaining participants in the industry often have portfolios of business that are either inconsistent with their core competency or provide excessive exposure to a particular risk or segment of the market (i.e., property/casualty, asbestos, environmental, director and officer liability, etc.). These non-core and/or discontinued portfolios are often associated with potentially large exposures and lengthy time periods before resolution of the last remaining insured claims resulting in significant uncertainty to the insurer or reinsurer covering those risks. These factors can distract management, drive up the cost of capital and surplus for the insurer or reinsurer, and negatively impact the insurer’s or reinsurer’s credit rating, which makes the disposal of the unwanted company or portfolio an attractive option. Alternatively, the insurer may wish to maintain the business on its balance sheet, yet not divert significant management attention to the run-off of the portfolio. The insurer or reinsurer, in either case, is likely to engage a third party, such as us, that specializes in run-off management to purchase the company or portfolio, or to manage the company or portfolio in run-off.
 
In the sale of a run-off company, a purchaser, such as us, typically pays a discount to the book value of the company based on the risks assumed and the relative value to the seller of no longer having to manage the company in run-off. Such a transaction can be beneficial to the seller because it receives an up-front payment for the company, eliminates the need for its management to devote any attention to the disposed company and removes the risk that


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the established reserves related to the run-off business may prove to be inadequate. The seller is also able to redeploy its management and financial resources to its core businesses.
 
Alternatively, if the insurer or reinsurer hires a third party, such as us, to manage its run-off business, the insurer or reinsurer will, unlike in a sale of the business, receive little or no cash up front. Instead, the management arrangement may provide that the insurer or reinsurer will retain the profits, if any, derived from the run-off with certain incentive payments allocated to the run-off manager. By hiring a run-off manager, the insurer or reinsurer can outsource the management of the run-off business to experienced and capable individuals, while allowing its own management team to focus on the insurer’s or reinsurer’s core businesses. Our desired approach to managing run-off business is to align our interests with the interests of the owners through both fixed management fees and certain incentive payments. Under certain management arrangements to which we are a party, however, we receive only a fixed management fee and do not receive any incentive payments.
 
Following the purchase of a run-off company or the engagement to manage a run-off company or portfolio of business, it is incumbent on the new owner or manager to conduct the run-off in a disciplined and professional manner in order to efficiently discharge the liabilities associated with the business while preserving and maximizing its assets. Our approach to managing our acquired companies in run-off, as well as run-off companies or portfolios of businesses on behalf of third-party clients, includes negotiating with third-party insureds and reinsureds to commute their insurance or reinsurance agreement for an agreed upon up-front payment by us, or the third-party client, and to more efficiently manage payment of insurance and reinsurance claims. We attempt to commute policies with direct insureds or reinsureds in order to eliminate uncertainty over the amount of future claims. Commutations and policy buy-backs provide an opportunity for the company to exit exposures to certain policies and insureds generally at a discount to the ultimate liability and provide the ability to eliminate exposure to further losses. Such a strategy also contributes to the reduction in the length of time and future cost of the run-off.
 
Following the acquisition of a company in run-off, or new consulting engagement, we will spend time analyzing the acquired exposures and reinsurance receivables on a policyholder-by-policyholder basis. This analysis enables us to identify those policyholders and reinsurers we wish to approach to discuss commutation or policy buy-back. Furthermore, following the acquisition of a company in run-off, or new consulting engagement, we will often be approached by policyholders or reinsurers requesting commutation or policy buy-back. In these instances we will also carry out a full analysis of the underlying exposures in order to determine the viability of a proposed commutation or policy buy-back. From the initial analysis of the underlying exposures it may take several months, or even years, before a commutation or policy buy-back is completed. In a number of cases, if we and the policyholder or reinsurer are unable to reach a commercially acceptable settlement, the commutation or policy buy-back may not be achievable, in which case we will continue to settle valid claims from the policyholder, or collect reinsurance receivables from the reinsurer, as they become due.
 
Insureds and reinsureds are often willing to commute with us, subject to receiving an acceptable settlement, as this provides certainty of recovery of what otherwise may be claims that are disputed in the future, and often provides a meaningful up-front cash receipt that, with the associated investment income, can provide funds to meet future claim payments or even commutation of their underlying exposure. Therefore, subject to negotiating an acceptable settlement, all of our insurance and reinsurance liabilities and reinsurance receivables are able to be either commuted or settled by way of policy buy-back over time. Many sellers of companies that we acquire have secure claims paying ratings and ongoing underwriting relationships with insureds and reinsureds, which often hinders their ability to commute the underlying insurance or reinsurance policies. Our lack of claims paying rating and our lack of potential conflicts with insureds and reinsureds of companies we acquire provides a greater ability to commute the newly acquired policies than that of the sellers.
 
We also attempt, where appropriate, to negotiate favorable commutations with reinsurers by securing the receipt of a lump-sum settlement from the reinsurer in complete satisfaction of the reinsurer’s liability in respect of any future claims. We, or the third-party client, are then fully responsible for any claims in the future. We typically invest proceeds from reinsurance commutations with the expectation that such investments will produce income, which, together with the principal, will be sufficient to satisfy future obligations with respect to the acquired company or portfolio.


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Competitive Strengths
 
We believe that our competitive strengths have enabled us, and will continue to enable us, to capitalize on the opportunities that exist in the run-off market. These strengths include:
 
  •  Experienced Management Team with Proven Track Record.  Dominic F. Silvester, our Chief Executive Officer, Paul J. O’Shea and Nicholas A. Packer, our Executive Vice Presidents and Joint Chief Operating Officers, Richard J. Harris, our Chief Financial Officer, and John J. Oros, our Executive Chairman, each have over 19 years of experience in the insurance and reinsurance industry. The extensive depth and knowledge of our management team provides us with the ability to identify, select and price companies and portfolios in run-off and to successfully manage those companies and portfolios.
 
  •  Disciplined Approach to Acquisitions and Claims Management.  We believe in generating profits through a disciplined, conservative approach to both acquisitions and claims management. We closely analyze new business opportunities to determine a company’s inherent value and our ability to profitably manage that company or a portfolio of that company in run-off. We believe that our review and claims management process, combined with management of global exposures across our acquired businesses, allows us to price acquisitions on favorable terms and to profitably run off the companies and portfolios that we acquire and manage.
 
  •  Long-Standing Market Relationships.  Our management team has well-established personal relationships across the insurance and reinsurance industry. We use these market relationships to identify and source business opportunities. We have also relied on those market relationships to establish ourselves as a leader in the run-off market.
 
  •  Highly Qualified, Experienced and Ideally Located Employee Base.  We have been successful in recruiting a highly qualified team of experienced claims, reinsurance, financial, actuarial and legal staff in major insurance and reinsurance centers, including Bermuda, the United Kingdom, the United States and Australia. We believe the quality and breadth of experience of our staff enable us to extract value from our acquired businesses and to offer a wide range of professional services to the industry.
 
  •  Financial Strength and Disciplined Investment Approach.  As of March 31, 2008, we had approximately $464.8 million of shareholders’ equity. We have maintained a strong balance sheet by following conservative investment practices while