10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

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

For the Quarterly Period Ended September 30, 2015

OR

 

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

For the Transition Period From              to             

001-33289

Commission File Number

ENSTAR GROUP LIMITED

(Exact name of registrant as specified in its charter)

 

Bermuda   N/A

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

P.O. Box HM 2267

Windsor Place, 3rd Floor

22 Queen Street

Hamilton HM JX

Bermuda

(Address of principal executive office, including zip code)

(441) 292-3645

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer  

¨        (Do not check if a smaller reporting company)

   Smaller reporting company   ¨

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

As of November 3, 2015, the registrant had outstanding 16,130,640 voting ordinary shares and 3,130,408 non-voting convertible ordinary shares, each par value $1.00 per share.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

       

Page

  PART I—FINANCIAL INFORMATION  

Item 1.

 

Financial Statements:

 
 

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

  1
 

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

  2
 

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

  3
 

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

  4
 

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

  5
 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

  6

Item 2.

 

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

  57

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  98

Item 4.

 

Controls and Procedures

  101
  PART II—OTHER INFORMATION  

Item 1.

 

Legal Proceedings

  102

Item 1A.

 

Risk Factors

  102

Item 6.

 

Exhibits

  102

Signature

  103


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2015 and December 31, 2014

 

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

ASSETS

    

Short-term investments, trading, at fair value

   $ 161,612      $ 130,516   

Fixed maturities, trading, at fair value

     4,925,459        3,832,291   

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

     798,570        813,233   

Fixed maturities, available-for-sale, at fair value (amortized cost: 2015—$190,023;
2014—$244,110)

     184,932        241,111   

Equities, trading, at fair value

     123,739        150,130   

Other investments, at fair value

     988,387        836,868   

Other investments, at cost

     136,069        —     
  

 

 

   

 

 

 

Total investments

     7,318,768        6,004,149   

Cash and cash equivalents

     1,026,052        963,402   

Restricted cash and cash equivalents

     484,304        534,974   

Premiums receivable

     513,276        391,008   

Deferred tax assets

     54,465        50,506   

Prepaid reinsurance premiums

     130,271        114,197   

Reinsurance balances recoverable

     1,571,560        1,331,555   

Funds held by reinsured companies

     112,129        134,628   

Deferred acquisition costs

     112,806        61,706   

Goodwill and intangible assets

     192,752        201,150   

Other assets

     537,227        149,610   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 12,053,610      $ 9,936,885   
  

 

 

   

 

 

 

LIABILITIES

    

Losses and loss adjustment expenses

   $ 6,019,206      $ 4,509,421   

Policy benefits for life and annuity contracts

     1,196,343        1,220,864   

Unearned premiums

     540,735        468,626   

Insurance and reinsurance balances payable

     327,067        276,723   

Deferred tax liabilities

     38,550        43,958   

Loans payable

     730,720        320,041   

Other liabilities

     359,032        199,813   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     9,211,653        7,039,446   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

REDEEMABLE NONCONTROLLING INTEREST

     383,314        374,619   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Share capital:

    

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

    

Ordinary shares (issued and outstanding 2015: 16,127,708; 2014: 15,761,365)

     16,128        15,761   

Non-voting convertible ordinary shares:

    

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

     2,973        2,973   

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

     2,726        2,726   

Series E (issued and outstanding 2015: 404,771; 2014: 714,015)

     405        714   

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

     (421,559     (421,559

Additional paid-in capital

     1,369,268        1,321,715   

Accumulated other comprehensive income

     (35,507     (12,686

Retained earnings

     1,503,640        1,395,206   
  

 

 

   

 

 

 

Total Enstar Group Limited Shareholders’ Equity

     2,438,074        2,304,850   

Noncontrolling interest

     20,569        217,970   
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     2,458,643        2,522,820   
  

 

 

   

 

 

 

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY

   $ 12,053,610      $ 9,936,885   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

1


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three and Nine Month Periods Ended September 30, 2015 and 2014

 

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

INCOME

        

Net premiums earned

   $ 231,051      $ 195,987      $ 641,980      $ 474,561   

Fees and commission income

     8,977        6,801        29,588        21,308   

Net investment income

     43,169        27,984        123,555        85,981   

Net realized and unrealized (losses) gains

     (15,130     (18,336     16,641        54,648   
  

 

 

   

 

 

   

 

 

   

 

 

 
     268,067        212,436        811,764        636,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Net incurred losses and loss adjustment expenses

     32,359        17,533        168,395        65,232   

Life and annuity policy benefits

     22,989        26,549        73,926        81,090   

Acquisition costs

     49,806        36,261        121,450        99,801   

Salaries and benefits

     55,440        54,525        165,903        141,598   

General and administrative expenses

     44,895        41,039        124,993        100,466   

Interest expense

     5,156        3,307        14,035        10,570   

Net foreign exchange (gains) losses

     (841     6,365        (3,460     7,435   
  

 

 

   

 

 

   

 

 

   

 

 

 
     209,804        185,579        665,242        506,192   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

     58,263        26,857        146,522        130,306   

INCOME TAXES

     (12,262     (5,660     (28,822     (21,388
  

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

     46,001        21,197        117,700        108,918   

Less: Net losses (earnings) attributable to noncontrolling interest

     3,041        5,232        (9,266     (1,109
  

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 49,042      $ 26,429      $ 108,434      $ 107,809   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE—BASIC

        

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

   $ 2.55      $ 1.38      $ 5.63      $ 5.94   
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE—DILUTED

        

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

   $ 2.53      $ 1.37      $ 5.59      $ 5.84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding—basic

     19,256,184        19,198,475        19,248,737        18,142,531   

Weighted average ordinary shares outstanding—diluted

     19,408,627        19,331,390        19,387,285        18,445,885   

See accompanying notes to the unaudited condensed consolidated financial statements

 

2


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Month Periods Ended September 30, 2015 and 2014

 

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

NET EARNINGS

   $ 46,001      $ 21,197      $ 117,700      $ 108,918   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax:

        

Unrealized holding losses on investments arising during the period

     (2,002     (3,852     (4,196     (3,393

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

     (27     87        (171     (47
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized losses arising during the period, net of reclassification adjustment

     (2,029     (3,765     (4,367     (3,440

Currency translation adjustment

     (11,290     (14,815     (23,877     (8,043
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

     (13,319     (18,580     (28,244     (11,483
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     32,682        2,617        89,456        97,435   

Less comprehensive loss (income) attributable to noncontrolling interest

     2,326        8,922        (3,843     376   
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 35,008      $ 11,539      $ 85,613      $ 97,811   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

3


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Nine Month Periods Ended September 30, 2015 and 2014

 

     Nine Months Ended
September 30,
 
     2015     2014  
    

(expressed in thousands

of U.S. dollars)

 

Share Capital—Ordinary Shares

    

Balance, beginning of period

   $ 15,761      $ 13,803   

Issue of shares

     10        1,914   

Conversion of Series E Non-Voting Convertible Ordinary Shares

     309        —     

Share awards granted/vested

     48        43   
  

 

 

   

 

 

 

Balance, end of period

   $ 16,128      $ 15,760   
  

 

 

   

 

 

 

Share Capital—Series A Non-Voting Convertible Ordinary Shares

    

Balance, beginning and end of period

   $ 2,973      $ 2,973   
  

 

 

   

 

 

 

Share Capital—Series C Non-Voting Convertible Ordinary Shares

    

Balance, beginning and end of period

   $ 2,726      $ 2,726   
  

 

 

   

 

 

 

Share Capital—Series E Non-Voting Convertible Ordinary Shares

    

Balance, beginning of period

   $ 714      $ —     

Shares converted to ordinary shares

     (309     —     

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

     —          714   
  

 

 

   

 

 

 

Balance, end of period

   $ 405      $ 714   
  

 

 

   

 

 

 

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

    

Balance, beginning of period

   $ —        $ —     

Issue of stock

     —          714   

Convert to Series E Non-Voting Convertible Ordinary Shares

     —          (714
  

 

 

   

 

 

 

Balance, end of period

   $ —        $ —     
  

 

 

   

 

 

 

Treasury Shares

    

Balance, beginning and end of period

   $ (421,559   $ (421,559
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance, beginning of period

   $ 1,321,715      $ 962,145   

Issue of shares

     1,352        354,368   

Amortization of equity incentive plan

     4,504        3,885   

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

     41,697        —     
  

 

 

   

 

 

 

Balance, end of period

   $ 1,369,268      $ 1,320,398   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Balance, beginning of period

   $ (12,686   $ 13,978   

Currency translation adjustment

    

Balance, beginning of period

     (2,779     14,264   

Change in currency translation adjustment

     (22,501     (7,791

Purchase of noncontrolling shareholders’ interest in subsidiaries

     2,937        —     
  

 

 

   

 

 

 

Balance, end of period

     (22,343     6,473   

Defined benefit pension liability

    

Balance, beginning and end of period

     (7,726     (2,249
  

 

 

   

 

 

 

Unrealized gain on investments

    

Balance, beginning of period

     (2,181     1,963   

Change in unrealized gain on investments, net of tax

     (3,569     (2,207

Purchase of noncontrolling shareholders’ interest in subsidiaries

     312        —     
  

 

 

   

 

 

 

Balance, end of period

     (5,438     (244
  

 

 

   

 

 

 

Balance, end of period

   $ (35,507   $ 3,980   
  

 

 

   

 

 

 

Retained Earnings

    

Balance, beginning of period

   $ 1,395,206      $ 1,181,457   

Net earnings attributable to Enstar Group Limited

     108,434        107,809   
  

 

 

   

 

 

 

Balance, end of period

   $ 1,503,640      $ 1,289,266   
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance, beginning of period

   $ 217,970      $ 222,000   

Sale of noncontrolling shareholders’ interest in subsidiaries

     (195,347     —     

Return of capital

     —          (9,980

Contribution of capital

     680        18,081   

Dividends paid

     (733     (13,908

Reallocation to redeemable noncontrolling interest

     —          1,028   

Net (losses) earnings attributable to noncontrolling interest*

     (308     7,131   

Foreign currency translation adjustments

     (1,558     (246

Net movement in unrealized holding losses on investments

     (135     (339
  

 

 

   

 

 

 

Balance, end of period

   $ 20,569      $ 223,767   
  

 

 

   

 

 

 

 

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

See accompanying notes to the unaudited condensed consolidated financial statements

 

4


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Month Periods Ended September 30, 2015 and 2014

 

     Nine Months Ended
September 30,
 
     2015     2014  
    

(expressed in thousands

of U.S. dollars)

 

OPERATING ACTIVITIES:

    

Net earnings

   $ 117,700      $ 108,918   

Adjustments to reconcile net earnings to cash flows (used in) provided by operating activities:

    

Net realized and unrealized investment losses (gains)

     12,939        (28,509

Net realized and unrealized gains from other investments

     (29,580     (26,139

Other non-cash items

     4,129        3,083   

Depreciation and other amortization

     42,659        45,570   

Net change in trading securities held on behalf of policyholders

     (8,452     3,013   

Sales and maturities of trading securities

     2,690,081        2,302,138   

Purchases of trading securities

     (3,189,379     (1,585,871

Changes in:

    

Reinsurance balances recoverable

     251,660        287,760   

Funds held by reinsured companies

     25,020        98,099   

Losses and loss adjustment expenses

     (307,872     (630,417

Policy benefits for life and annuity contracts

     (23,843     (44,457

Insurance and reinsurance balances payable

     60,518        (77,625

Unearned premiums

     (13,396     (23,766

Other operating assets and liabilities

     (169,635     6,028   
  

 

 

   

 

 

 

Net cash flows (used in) provided by operating activities

     (537,451     437,825   
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Acquisitions, net of cash acquired

   $ 56,369      $ 37,540   

Sales and maturities of available-for-sale securities

     113,128        98,314   

Purchase of available-for-sale securities

     (65,036     (97,322

Maturities of held-to-maturity securities

     6,520        5,477   

Movement in restricted cash and cash equivalents

     370,434        (81,966

Purchase of other investments

     (189,164     (278,265

Redemption of other investments

     62,732        30,707   

Other investing activities

     (2,949     837   
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     352,034        (284,678
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Distribution of capital to noncontrolling interest

   $ —        $ (9,980

Contribution by redeemable noncontrolling interest

     15,728        272,722   

Contribution by noncontrolling interest

     680        18,081   

Dividends paid to redeemable noncontrolling interest

     (16,128     —     

Dividends paid to noncontrolling interest

     (733     (13,908

Purchase of noncontrolling interest

     (150,400     —     

Receipt of loans

     537,700        70,000   

Repayment of loans

     (128,500     (199,245
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     258,347        137,670   
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY

    

CASH AND CASH EQUIVALENTS

     (10,280     (13,043
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     62,650        277,774   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     963,402        643,841   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 1,026,052      $ 921,615   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

                

Income taxes paid, net of refunds

   $ 25,119      $ 31,207   

Interest paid

   $ 13,455      $ 13,589   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015 and December 31, 2014

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

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation and Consolidation

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments consisting of normal recurring items considered necessary for a fair presentation under U.S. GAAP. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014. Inter-company accounts and transactions have been eliminated. Results of operations for subsidiaries acquired are included from the dates on which we acquired them. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. On September 14, 2015, Torus Insurance Holdings Limited, previously referred to as “Torus,” changed its name to StarStone Insurance Holdings Limited (“StarStone”).

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Results of changes in estimates are reflected in earnings in the period in which the change is made. Our principal estimates include, but are not limited to:

 

    reserves for losses and loss adjustment expenses (“LAE”);

 

    policy benefits for life and annuity contracts;

 

    gross and net premiums written and net premiums earned;

 

    reinsurance balances recoverable, including the provisions for uncollectible amounts;

 

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

 

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

 

    valuation of goodwill and intangible assets; and

 

    fair value estimates associated with accounting for acquisitions.

Significant New Accounting Policies

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

 

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ENSTAR GROUP LIMITED

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

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

 

(a) Life Settlements

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

(b) Retroactive reinsurance

Retroactive reinsurance policies provide indemnification of losses and loss adjustment expenses (“LAE”) with respect to past loss events. At the inception of a contract, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the premiums received. Deferred charges, recorded in other assets, are amortized over the estimated claim payment period of the related contract with the periodic amortization reflected in earnings as a component of losses and LAE. Deferred charges amortization may also be accelerated periodically to reflect changes to the amount and timing of remaining estimated loss payments. Deferred charges are evaluated for recoverability quarterly on an individual contract basis.

Recently Issued Accounting Pronouncements Not Yet Adopted

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

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

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

In May 2015, the FASB issued ASU No. 2015-07, which will eliminate the requirement to categorize investments in the fair value hierarchy if their fair value is measured at the net asset value (“NAV”) per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance.

 

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ENSTAR GROUP LIMITED

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

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

 

Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. In addition, the scope of current disclosure requirements for investments eligible to be measured at NAV is limited to investments for which the practical expedient is applied. Reporting entities are required to adopt the ASU retrospectively. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. We are currently evaluating the impact of this guidance, however we do not expect the adoption of the guidance to have a material impact on our consolidated financial statement disclosures.

ASU 2015-16, Business Combinations, Simplifying the Accounting for Measurement-Period Adjustments

In September 2015, the FASB issued ASU 2015-16, which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Under the new guidance, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.

2. ACQUISITIONS

Nationale Suisse Assurance S.A.

On February 5, 2015, we entered into a definitive agreement with Nationale Suisse to acquire its Belgian subsidiary, Nationale Suisse Assurance S.A. (“NSA”). NSA is a Belgium-based insurance company writing non-life insurance and life insurance.

The total consideration for the transaction will be 39.7 million (approximately $44.4 million) (subject to certain possible closing adjustments). We expect to finance the purchase price from cash on hand. We have received conditional governmental and regulatory approvals and completion of the transaction is conditioned on the satisfaction of various customary closing conditions. The transaction is expected to close during the fourth quarter of 2015.

Wilton Re Life Settlements

On May 5, 2015, we completed the acquisitions of two Delaware companies from subsidiaries of Wilton Re that own interests in life insurance policies acquired in the secondary and tertiary markets and through collateralized lending transactions.

The total consideration for the transaction was $173.1 million, which will be paid in two installments. The first installment of $89.1 million was paid on closing. The second installment of $83.9 million, due on the first anniversary of closing, is expected to be funded from cash on hand. The companies are operating as part of the life and annuities segment.

 

Purchase price

   $ 173,058   
  

 

 

 

Net assets acquired at fair value

   $ 173,058   
  

 

 

 

Excess of purchase price over fair value of net assets acquired

   $ —     
  

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

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

 

ASSETS

  

Other investments

   $ 142,182   

Cash and cash equivalents

     5,043   

Other assets

     26,376   
  

 

 

 

TOTAL ASSETS

   $ 173,601   

TOTAL LIABILITIES

     543   
  

 

 

 

NET ASSETS ACQUIRED AT FAIR VALUE

   $ 173,058   
  

 

 

 

From the date of acquisition to September 30, 2015, we recorded $5.3 million in net earnings attributable to Enstar Group Limited related to the life settlement contract business.

Canada Pension Plan Investment Board (“CPPIB”), together with management of Wilton Re, own 100% of the common stock of Wilton Re. Subsequent to the closing of our transaction with Wilton Re, CPPIB separately acquired certain of our voting and non-voting shares pursuant to the CPPIB-First Reserve Transaction, as described in Note 15—“Related Party Transactions”.

Sussex Insurance Company (formerly known as Companion)

On January 27, 2015, we completed the acquisition of Companion Property and Casualty Insurance Company (“Companion”) from Blue Cross and Blue Shield of South Carolina, an independent licensee of the Blue Cross Blue Shield Association. Companion is a South Carolina-based insurance group with property, casualty, specialty and workers compensation business, and has also provided fronting and third party administrative services. The total consideration for the transaction was $218.0 million in cash, which was financed 50% through borrowings under a Term Facility Agreement with National Australia Bank Limited and Barclays Bank PLC (the “Sussex Facility”) and 50% from cash on hand. We changed the name of Companion to Sussex Insurance Company (“Sussex”) following the acquisition and the company is operating as part of the non-life run-off segment. In addition, StarStone is renewing certain business from Sussex.

 

Purchase price

   $ 218,000   
  

 

 

 

Net assets acquired at fair value

   $ 218,000   
  

 

 

 

Excess of purchase price over fair value of net assets acquired

   $ —     
  

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

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

 

ASSETS

  

Short-term investments, trading, at fair value

   $ 85,309   

Fixed maturities, trading, at fair value

     523,227   

Equities, trading, at fair value

     31,439   
  

 

 

 

Total investments

     639,975   

Cash and cash equivalents

     358,458   

Restricted cash and cash equivalents

     15,279   

Accrued interest receivable

     3,984   

Premiums receivable

     35,279   

Reinsurance balances recoverable

     486,570   

Prepaid reinsurance premiums

     28,751   

Other assets

     47,143   
  

 

 

 

TOTAL ASSETS

   $ 1,615,439   
  

 

 

 

LIABILITIES

  

Losses and LAE

   $ 1,255,040   

Insurance and reinsurance balances payable

     3,030   

Unearned premium

     85,505   

Funds withheld

     42,090   

Other liabilities

     11,774   
  

 

 

 

TOTAL LIABILITIES

     1,397,439   
  

 

 

 

NET ASSETS ACQUIRED AT FAIR VALUE

   $ 218,000   
  

 

 

 

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

From the date of acquisition to September 30, 2015, we earned premiums of $48.9 million, recorded net incurred losses and LAE of $52.0 million on those earned premiums, and recorded $1.4 million in net earnings attributable to Enstar Group Limited related to Sussex’s non-life run-off business.

3. SIGNIFICANT NEW BUSINESS

Sun Life

On September 30, 2015, we entered into two 100% reinsurance agreements and a related administration services agreement with Sun Life pursuant to which we reinsured all of the run-off workers compensation carve-out and occupational accident business of Sun Life. We assumed

 

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Table of Contents

ENSTAR GROUP LIMITED

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

3. SIGNIFICANT NEW BUSINESS—(Continued)

 

reinsurance reserves of $128.3 million, received total assets of $122.5 million and recorded a deferred charge of $5.8 million included in other assets. We transferred approximately $30.6 million of additional funds into trust to further support our obligations under the reinsurance agreements. We provided limited parental guarantees, subject to an overall maximum of approximately $36.8 million.

Voya Financial

On May 27, 2015, we entered into two 100% reinsurance agreements and related administration services agreements with a subsidiary of Voya, pursuant to which we reinsured all of the run-off workers compensation and occupational accident assumed reinsurance business of the Voya subsidiary and that of its Canadian branch. Pursuant to the transaction, the Voya subsidiary transferred assets into two reinsurance collateral trusts securing our obligations under the reinsurance agreements. We assumed reinsurance reserves of $572.4 million, received total assets of $307.0 million and recorded a deferred charge of $265.4 million included in other assets. We transferred approximately $67.2 million of additional funds to the trusts to further support our obligations under the reinsurance agreements. We provided a limited parental guarantee, subject to a maximum cap with respect to the reinsurance liabilities. As of September 30, 2015, the amount of the parental guarantee was $58.0 million.

Reciprocal of America

On January 15, 2015, we completed a loss portfolio transfer reinsurance transaction with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business that has been in run-off since 2003. The total insurance reserves assumed were $162.1 million with an equivalent amount of cash and investments received as consideration.

4. INVESTMENTS

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Trading

The fair values of our fixed maturity investments, short-term investments and equities classified as trading were as follows:

 

     September 30
2015
     December 31,
2014
 

U.S. government and agency

   $ 709,010       $ 744,660   

Non-U.S. government

     334,941         368,945   

Corporate

     2,633,548         1,986,873   

Municipal

     55,238         25,607   

Residential mortgage-backed

     361,678         308,621   

Commercial mortgage-backed

     266,503         139,907   

Asset-backed

     726,153         388,194   
  

 

 

    

 

 

 

Total fixed maturity and short-term investments

     5,087,071         3,962,807   

Equities—U.S.

     116,568         106,895   

Equities—International

     7,171         43,235   
  

 

 

    

 

 

 
   $ 5,210,810       $ 4,112,937   
  

 

 

    

 

 

 

Included within residential and commercial mortgage-backed securities as at September 30, 2015 were securities issued by U.S. governmental agencies with a fair value of $324.8 million (as at December 31, 2014: $263.4 million). Included within corporate securities as at September 30, 2015 were senior secured loans of $94.8 million (as at December 31, 2014: $33.5 million).

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

 

As at September 30, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 786,859       $ 772,118         15.2

More than one year through two years

     774,490         768,279         15.1

More than two years through five years

     1,592,842         1,591,580         31.3

More than five years through ten years

     475,739         473,923         9.3

More than ten years

     129,135         126,837         2.5

Residential mortgage-backed

     361,438         361,678         7.1

Commercial mortgage-backed

     266,587         266,503         5.2

Asset-backed

     731,469         726,153         14.3
  

 

 

    

 

 

    

 

 

 
   $ 5,118,559       $ 5,087,071         100.0
  

 

 

    

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Held-to-maturity

We hold a portfolio of held-to-maturity securities to support our annuity business. The amortized cost and fair values of our fixed maturity investments classified as held-to-maturity were as follows:

 

As at September 30, 2015

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

U.S. government and agency

   $ 19,873       $ 21       $ (175    $ 19,719   

Non-U.S. government

     38,130         247         (726      37,651   

Corporate

     740,567         5,935         (13,001      733,501   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 798,570       $ 6,203       $ (13,902    $ 790,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

As at December 31, 2014

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

U.S. government and agency

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

Non-U.S. government

     38,613         325         (249      38,689   

Corporate

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

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

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

 

As at September 30, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 17,783       $ 17,809         2.3

More than one year through two years

     12,110         12,147         1.5

More than two years through five years

     64,989         65,500         8.3

More than five years through ten years

     100,188         99,682         12.6

More than ten years

     603,500         595,733         75.3
  

 

 

    

 

 

    

 

 

 
   $ 798,570       $ 790,871         100.0
  

 

 

    

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Available-for-sale

The amortized cost and fair values of our fixed maturity investments classified as available-for-sale were as follows:

 

As at September 30, 2015

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

U.S. government and agency

   $ 24,195       $ 205       $ —         $ 24,400   

Non-U.S. government

     35,806         40         (4,005      31,841   

Corporate

     120,842         1,154         (2,541      119,455   

Municipal

     1,996         6         (1      2,001   

Residential mortgage-backed

     1,488         62         (39      1,511   

Asset-backed

     5,696         28         —           5,724   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 190,023       $ 1,495       $ (6,586    $ 184,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

As at December 31, 2014

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

U.S. government and agency

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

Non-U.S. government

     72,913         386         (2,805      70,494   

Corporate

     101,745         964         (1,653      101,056   

Residential mortgage-backed

     3,305         76         (138      3,243   

Asset-backed

     41,980         15         (19      41,976   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

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

 

As at September 30, 2015

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

One year or less

   $ 37,155       $ 34,242         18.5

More than one year through two years

     59,933         58,513         31.7

More than two years through five years

     79,717         78,102         42.2

More than five years through ten years

     3,752         3,592         1.9

More than ten years

     2,282         3,248         1.8

Residential mortgage-backed

     1,488         1,511         0.8

Asset-backed

     5,696         5,724         3.1
  

 

 

    

 

 

    

 

 

 
   $ 190,023       $ 184,932         100.0
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Gross Unrealized Losses

The following tables summarize our fixed maturity and short-term investments in a gross unrealized loss position:

 

    12 Months or Greater
    Less Than 12
Months
    Total  

At September 30, 2015

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

Fixed maturity and short-term investments, at fair value

           

Non-U.S. government

  $ 19,784      $ (3,501   $ 7,212      $ (504   $ 26,996      $ (4,005

Corporate

    29,922        (2,135     26,227        (406     56,149        (2,541

Municipal

    —          —          1,017        (1     1,017        (1

Residential mortgage-backed

    157        (34     499        (5     656        (39
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 49,863      $ (5,670   $ 34,955      $ (916   $ 84,818      $ (6,586
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturity investments, at amortized cost

           

U.S. government and agency

    12,311        (144     478        (31     12,789        (175

Non-U.S. government

    24,062        (726     —          —          24,062        (726

Corporate

    398,626        (11,568     64,148        (1,433     462,774        (13,001
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 434,999      $ (12,438   $ 64,626      $ (1,464   $ 499,625      $ (13,902
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity and short-term investments

  $ 484,862      $ (18,108   $ 99,581      $ (2,380   $ 584,443      $ (20,488
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    12 Months or Greater
    Less Than 12
Months
    Total  

At December 31, 2014

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

Fixed maturity and short-term investments, at fair value

           

U.S. government and agency

  $ 528      $ (1   $ 3,678      $ (6   $ 4,206      $ (7

Non-U.S. government

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

Corporate

    39,964        (1,003     40,072        (650     80,036        (1,653

Residential mortgage-backed

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

Asset-backed

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 70,831      $ (2,688   $ 78,770      $ (1,934   $ 149,601      $ (4,622
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturity investments, at amortized cost

           

U.S. government and agency

    7,312        (19     245        (1     7,557        (20

Non-U.S. government

    25,960        (249     —          —          25,960        (249

Corporate

    243,908        (3,377     6,030        (44     249,938        (3,421
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 277,180      $ (3,645   $ 6,275      $ (45   $ 283,455      $ (3,690
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity and short-term investments

  $ 348,011      $ (6,333   $ 85,045      $ (1,979   $ 433,056      $ (8,312
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

As at September 30, 2015 and December 31, 2014, the number of securities classified as available-for-sale in an unrealized loss position was 162 and 212, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 88 and 120, respectively.

As at September 30, 2015 and December 31, 2014, the number of securities classified as held-to-maturity in an unrealized loss position was 86 and 61, respectively. Of these securities, the number of securities that had been in unrealized loss position for twelve months or longer was 76 and 57, respectively.

For the three and nine months ended September 30, 2015, we did not recognize any other-than-temporary impairment losses on either our available-for-sale or held-to-maturity securities. We determined that no credit losses existed as at September 30, 2015. A description of our other-than-temporary impairment process is included in our Annual Report on Form 10-K for the year ended December 31, 2014. There were no changes to our process during the nine months ended September 30, 2015.

Credit Ratings

The following table sets forth the credit ratings of our fixed maturity and short-term investments as of September 30, 2015:

 

At September 30, 2015

  Amortized
Cost
    Fair Value     % of
Total
    AAA
Rated
    AA Rated     A Rated     BBB
Rated
    Non-Investment
Grade
    Not Rated  

Fixed maturity and short-term investments, at fair value

                 

U.S. government and agency

  $ 727,688      $ 733,410        12.1   $ 691,436      $ 8,703      $ 33,271      $ —        $ —        $ —     

Non-U.S. government

    382,513        366,782        6.1     112,493        170,320        49,078        10,947        23,944        —     

Corporate

    2,774,076        2,753,003        45.4     164,337        444,919        1,418,644        610,486        114,612        5   

Municipal

    57,627        57,239        0.9     3,998        22,945        30,296        —          —          —     

Residential mortgage-backed

    362,926        363,189        6.0     346,584        858        8,631        5,877        1,234        5   

Commercial mortgage-backed

    266,587        266,503        4.4     111,729        30,440        53,522        26,802        3,983        40,027   

Asset-backed

    737,165        731,877        12.1     313,262        164,445        133,164        42,921        77,532        553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    5,308,582        5,272,003        87.0     1,743,839        842,630        1,726,606        697,033        221,305        40,590   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total fair value

      100       33.1     16.0     32.7     13.2     4.2     0.8

Fixed maturity investments, at amortized cost

                 

U.S. government and agency

    19,873        19,719        0.3     18,306        1,373        —        $ —          —          40   

Non-U.S. government

    38,130        37,651        0.6     —          29,897        7,754        —          —          —     

Corporate

    740,567        733,501        12.1     46,679        132,153        493,297        61,197        —          175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    798,570        790,871        13.0     64,985        163,423        501,051        61,197        —          215   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total fair value

      100       8.2     20.7     63.4     7.7     0     0.0

Total fixed maturity and short-term investments

  $ 6,107,152      $ 6,062,874        100.0   $ 1,808,824        $1,006,053      $ 2,227,657      $ 758,230      $ 221,305      $ 40,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total fair value

      100       29.8     16.6     36.7     12.5     3.7     0.7

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Other Investments, at fair value

The following table summarizes our other investments carried at fair value:

 

     September 30,
2015
     December 31,
2014
 

Private equities and private equity funds

   $ 245,563       $ 197,269   

Fixed income funds

     329,768         335,026   

Fixed income hedge funds

     105,212         59,627   

Equity funds

     142,118         150,053   

Real estate debt fund

     76,326         33,902   

CLO equities

     72,118         41,271   

CLO equity funds

     15,765         16,022   

Other

     1,517         3,698   
  

 

 

    

 

 

 
   $ 988,387       $ 836,868   
  

 

 

    

 

 

 

The valuation of our other investments is described later in this note under “Fair Value Measurements”. Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month lag. Management regularly reviews and discusses fund performance with the fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments. The following is a description of the nature of each of these investment categories:

 

    Private equities and private equity funds invest primarily in the financial services industry. All of our investments in private equities and private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates of our initial investments.

 

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

 

    Fixed income hedge funds invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of three years from the time of our initial investment. Once eligible, redemptions are permitted quarterly with 90 days’ notice.

 

    Equity funds invest in a diversified portfolio of international publicly-traded equity securities.

 

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

 

    CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by us in these securities.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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

 

    Other primarily comprises a fund that provides loans to educational institutions throughout the U.S. and its territories. Through these investments, we participate in the performance of the underlying loan pools. This investment matures when the loans are paid down and cannot be redeemed before maturity.

Redemption restrictions and unfunded commitments

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

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

The following table presents the fair value, unfunded commitments and redemption frequency as at September 30, 2015 for all funds included within other investments at fair value:

 

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

Redemption
Frequency

Private equity funds

  $ 240,563      $ —        $ 240,563      $ 68,477      Not eligible

Fixed income funds

    329,768        —          329,768        —        Daily, monthly and quarterly

Fixed income hedge funds

    105,212        31,097        74,115        —        Quarterly after lock-up periods expire

Equity funds

    142,118        —          142,118        —        Bi-monthly

Real estate debt fund

    76,326        —          76,326        —        Monthly

CLO equity funds

    15,765        10,367        5,398        —        Quarterly after lock-up periods expire

Other funds

    1,199        —          1,199        3,073      Not eligible
 

 

 

   

 

 

   

 

 

   

 

 

   
  $ 910,951      $ 41,464      $ 869,487      $ 71,550     
 

 

 

   

 

 

   

 

 

   

 

 

   

These investments are all valued at net asset value as at September 30, 2015. As of September 30, 2015, management has not made any adjustments to the fair value estimate reported by the fund managers for the gated/side-pocketed investments.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Other Investments, at cost

Our other investments carried at cost of $136.1 million as of September 30, 2015 consist of life settlement contracts acquired during the year. Refer to Note 2—“Acquisitions” for information about this transaction, and Note 1—“Significant Accounting Policies” for a description of our accounting policies. For 2014 we did not have an investment in life settlements. During the three and nine month periods ended September 30, 2015, net investment income included $7.4 million and $9.3 million, respectively, related to investments in life settlements.

There were no impairment charges recognized during the period since acquisition. Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds from the investment in life settlements are not sufficient to recover our estimated future carrying amount of the investment in life settlements, which is the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value which is determined on a discounted cash flow basis, incorporating current market longevity assumptions and market yields. Impairment charges, if any, are included in net realized and unrealized gains.

Fair Value Measurements

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

 

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

 

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

 

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

We have categorized our investments that are recorded at fair value on a recurring basis among levels based on the observability of inputs as follows:

 

    September 30, 2015  
    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    Significant
Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
    Total Fair
Value
 

U.S. government and agency

  $ —        $ 733,410      $ —        $ 733,410   

Non-U.S. government

    —          366,782        —          366,782   

Corporate

    —          2,753,003        —          2,753,003   

Municipal

    —          57,239        —          57,239   

Residential mortgage-backed

    —          363,189        —          363,189   

Commercial mortgage-backed

    —          266,503        —          266,503   

Asset-backed

    —          731,877        —          731,877   

Equities—U.S.

    101,297        15,271        —          116,568   

Equities—International

    2,620        4,551        —          7,171   

Other investments

    —          471,890        516,497        988,387   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 103,917      $ 5,763,715      $ 516,497      $ 6,384,129   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2014  
    Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    Significant
Other
Observable
Inputs

(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
    Total Fair
Value
 

U.S. government and agency

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

Non-U.S. government

    —          439,439        —          439,439   

Corporate

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

Municipal

    —          25,607        —          25,607   

Residential mortgage-backed

    —          311,864        —          311,864   

Commercial mortgage-backed

    —          139,907        —          139,907   

Asset-backed

    —          430,170        —          430,170   

Equities—U.S.

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

Equities—International

    24,365        18,870        —          43,235   

Other investments

    —          487,078        349,790        836,868   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

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

 

 

   

 

 

   

 

 

   

 

 

 

The following is a summary of valuation techniques or models we use to measure fair value.

Fixed Maturity Investments

Our fixed maturity investments portfolio is managed by our Chief Investment Officer and outside investment advisors with oversight from our Investment Committee. Fair values for all securities in the fixed maturity investments portfolio are independently provided by the investment custodians, investment accounting service providers and investment managers, each of which utilize internationally

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

recognized independent pricing services. Interactive Data Corporation is, however, the main pricing service utilized to estimate the fair value measurements for our fixed maturity investments. We record the unadjusted price provided by the investment custodians, investment accounting service providers or the investment managers and validate this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to our knowledge of the current investment market. Our internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.

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

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

 

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

 

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

 

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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

 

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

Equities

Our investments in equities are predominantly traded on the major exchanges and are primarily managed by our external advisor. We use Interactive Data Corporation, an internationally recognized pricing service, to estimate the fair value of our equities. Our equities are widely diversified and there is no significant concentration in any specific industry.

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

Other investments, at fair value

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

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

For our investments in private equities and private equity funds, we measure fair value by obtaining the most recently provided capital statement from the external fund manager or third-party administrator. The capital statements calculate the net asset value on a fair value basis. Where we can identify publicly-traded companies held within a fund, we adjust the reported net asset value based on the latest share price as of our reporting date. We have classified our investments in private equities and private equity funds as Level 3.

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

For our investments in fixed income hedge 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 investments in the funds are classified as Level 3.

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

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

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

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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

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

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

Changes in Leveling of Financial Instruments

During the nine months ended September 30, 2015 and the year ended December 31, 2014, there were no transfers between Levels 1 and 2, or between Levels 2 and 3. Transfers into or out of Level 3 are recorded at their fair values as of the end of the reporting period, consistent with the date of determination of fair value. Transfers are based on the evidence available to corroborate significant inputs with market observable information.

The following table presents a reconciliation of the beginning and ending balances for our investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended September 30, 2015 and 2014:

 

    Three months ended September 30, 2015     Three months ended September 30, 2014  
    Fixed
Maturity
Investments
    Other
Investments
    Equity
Securities
    Total     Fixed
Maturity
Investments
    Other
Investments
    Equity
Securities
    Total  

Beginning fair value

  $ —        $ 463,905      $ —        $ 463,905      $ 610      $ 328,164      $ 4,875      $ 333,649   

Purchases

    —          56,839        —          56,839        —          64,923        —          64,923   

Sales

    —          (21,488     —          (21,488     —          (20,015     —          (20,015

Net realized and unrealized gains

    —          17,241        —          17,241        4        2,092        —          2,096   

Net transfers into (out of) Level 3

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending fair value

  $ —        $ 516,497      $ —        $ 516,497      $ 614      $ 375,164      $ 4,875      $ 380,653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains related to Level 3 assets in the table above are included in Net realized and unrealized (losses) gains in our unaudited condensed consolidated statements of earnings.

 

24


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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

The following table presents a reconciliation of the beginning and ending balances for our investments measured at fair value on a recurring basis using Level 3 inputs during the nine months ended September 30, 2015 and 2014:

 

    Nine Months Ended September 30, 2015     Nine Months Ended September 30, 2014  
    Fixed
Maturity
Investments
    Other
Investments
    Equity
Securities
    Total     Fixed
Maturity
Investments
    Other
Investments
    Equity
Securities
    Total  

Beginning fair value

  $ 600      $ 349,790      $ 4,850      $ 355,240      $ 609      $ 265,569      $ 4,725      $ 270,903   

Purchases

    —          193,224        —          193,224        —          116,676        —          116,676   

Sales

    (600     (63,903     (5,000     (69,503     —          (30,707     —          (30,707

Net realized and unrealized gains

    —          37,386        150        37,536        5        23,626        150        23,781   

Net transfers into (out of) Level 3

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending fair value

  $ —        $ 516,497      $ —        $ 516,497      $ 614      $ 375,164      $ 4,875      $ 380,653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains related to Level 3 assets in the table above are included in net realized and unrealized (losses) gains in our unaudited condensed consolidated statements of earnings.

Disclosure of Fair Values for Financial Instruments Carried at Cost

The following tables present our fair value hierarchy for those assets carried at cost or amortized cost in the consolidated balance sheet but for which disclosure of the fair value is required as of September 30, 2015 and December 31, 2014:

 

     September 30, 2015  
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Fair Value      Total
Carrying
Value
 

Fixed maturity investments, held-to-maturity:

              

U.S. government and agency

   $ —         $ 19,719       $ —         $ 19,719       $ 19,873   

Non-U.S. government

     —           37,651         —           37,651         38,130   

Corporate

     —           733,501         —           733,501         740,567   

Other investments:

              

Life settlements

     —           —           150,140         150,140         136,069   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 790,871       $ 150,140       $ 941,011       $ 934,639   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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

(Level 3)
     Fair Value      Total
Carrying
Value
 

Fixed maturity investments, held-to-maturity:

              

U.S. government and agency

   $ —         $ 20,559       $ —         $ 20,559       $ 20,257   

Non-U.S. government

     —           38,689         —           38,689         38,613   

Corporate

     —           767,124         —           767,124         754,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 826,372       $ —         $ 826,372       $ 813,233   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of investments in life settlement contracts, in the tables above, is determined using a discounted cash flow methodology that utilizes market assumptions for longevity as well as market yields based on reported transactions. Due to the individual life nature of each investment in life settlement contracts and the illiquidity of the existing market, significant inputs to the fair value are unobservable.

Disclosure of fair value of amounts relating to insurance contracts is not required. Our remaining assets and liabilities were generally carried at cost or amortized cost, which approximates fair value as of September 30, 2015 and December 31, 2014. The fair value measurements were based on observable inputs and therefore would be considered to be Level 1 or Level 2.

Net Realized and Unrealized (Losses) Gains

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Gross realized gains on available-for-sale securities

   $ 126       $ —         $ 279       $ 185   

Gross realized losses on available-for-sale securities

     (99      (87      (108      (138

Net realized (losses) gains on trading securities

     (1,248      4,141         18,390         22,068   

Net unrealized (losses) gains on trading securities

     (8,871      (14,141      (31,500      6,394   

Net realized and unrealized (losses) gains on other investments

     (5,038      (8,249      29,580         26,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized and unrealized (losses) gains

   $ (15,130    $ (18,336    $ 16,641       $ 54,648   
  

 

 

    

 

 

    

 

 

    

 

 

 

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $15.4 million and $113.1 million for the three and nine month periods ended September 30, 2015, and from sales of $19.3 million and $98.3 million for the three and nine month periods ended September 30, 2014, respectively.

 

26


Table of Contents

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Net Investment Income

Major categories of net investment income are summarized as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Interest from fixed maturity investments

   $ 44,438       $ 40,184       $ 124,756       $ 114,034   

Interest from cash and cash equivalents and short-term investments

     1,181         1,575         5,287         5,000   

Net amortization of bond premiums and discounts

     (13,260      (14,344      (38,778      (42,488

Dividends from equities

     1,407         1,040         4,403         4,070   

Other investments

     3,451         (152      7,891         588   

Interest on other receivables

     (1,337      (193      (698      689   

Other income

     2,883         2,278         17,500         9,464   

Net income from investments in life settlements

     7,360         —           9,319         —     

Interest on deposits held with clients

     33         340         652         1,362   

Policy loan interest

     320         296         885         911   

Investment expenses

     (3,307      (3,040      (7,662      (7,649
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 43,169       $ 27,984       $ 123,555       $ 85,981   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income of $17.5 million for the nine months ended September 30, 2015 is primarily comprised of gains on acquired insolvent debts.

Restricted Assets

We are required to maintain investments and cash and cash equivalents on deposit with various regulatory authorities to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. We also utilize trust accounts to collateralize business with our insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of our restricted assets, including restricted cash of $484.3 million, as of September 30, 2015 was as follows:

 

     September 30,
2015
 

Collateral in trust for third party agreements

   $ 3,036,252   

Assets on deposit with regulatory authorities

     1,076,492   

Collateral for secured letter of credit facility

     252,328   
  

 

 

 
   $ 4,365,072   
  

 

 

 

 

27


Table of Contents

ENSTAR GROUP LIMITED

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

5. REINSURANCE BALANCES RECOVERABLE

 

    September 30, 2015         December 31, 2014  
    Non-life
Run-off
    Atrium     StarStone     Life and
Annuities
    Total         Non-life
Run-off
    Atrium     StarStone     Life and
Annuities
    Total  

Recoverable from reinsurers on unpaid:

                     

Outstanding losses

  $ 658,816      $ 7,018      $ 179,405      $ 21,771      $ 867,010        $ 568,386      $ 9,582      $ 181,067      $ 25,125      $ 784,160   

Losses incurred but not reported

    526,430        17,140        88,471        309        632,350          278,696        14,565        154,850        467        448,578   

Fair value adjustments

    (21,923     3,174        (8,678     —          (27,427       (46,373     4,131        (10,708     —          (52,950
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reinsurance reserves recoverable

    1,163,323        27,332        259,198        22,080        1,471,933          800,709        28,278        325,209        25,592        1,179,788   

Paid losses recoverable

    70,862        117        27,962        686        99,627          129,750        1,289        19,845        883        151,767   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,234,185      $ 27,449      $ 287,160      $ 22,766      $ 1,571,560        $ 930,459      $ 29,567      $ 345,054      $ 26,475      $ 1,331,555   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our insurance and reinsurance run-off subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. We remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, we evaluate and monitor concentration of credit risk among our reinsurers. Provisions are made for amounts considered potentially uncollectible.

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

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

As of September 30, 2015 and December 31, 2014, we had reinsurance balances recoverable of approximately $1.6 billion and $1.3 billion, respectively. The increase of $240.0 million in reinsurance balances recoverable was primarily a result of the Sussex acquisition, partially offset by commutations and cash collections made during the nine months ended September 30, 2015 in our non-life run-off and StarStone segments.

 

28


Table of Contents

ENSTAR GROUP LIMITED

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

5. REINSURANCE BALANCES RECOVERABLE—(Continued)

 

Top Ten Reinsurers

 

    As at September 30, 2015     As at December 31, 2014  
    Reinsurance Balances Recoverable     Reinsurance Balances Recoverable  
    Non-life
run-off
    Atrium     StarStone     Life and
annuities
    Total     % of
Total
    Non-life
run-off
    Atrium     StarStone     Life and
annuities
    Total     % of
Total
 

Top ten reinsurers

  $ 833,793      $ 21,869      $ 127,672      $ 13,687      $ 997,021        63.4   $ 667,325      $ 23,635      $ 158,117      $ 15,089      $ 864,166        64.9

Other reinsurers > $1 million

    384,519        4,979        154,873        8,677        553,048        35.2     256,929        4,917        181,196        10,692        453,734        34.1

Other reinsurers < $1 million

    15,873        601        4,615        402        21,491        1.4     6,205        1,015        5,741        694        13,655        1.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,234,185      $ 27,449      $ 287,160      $ 22,766      $ 1,571,560        100.0   $ 930,459      $ 29,567      $ 345,054      $ 26,475      $ 1,331,555        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The top ten reinsurers, as at September 30, 2015 and December 31, 2014, were all rated A- or better, with the exception of three non-rated reinsurers from which $390.4 million was recoverable (December 31, 2014: $175.2 million related to one reinsurer). For the three non-rated reinsurers, we hold security in the form of pledged assets in trust or letters of credit issued to us. As at September 30, 2015, reinsurance balances recoverable of $167.7 million related to Lloyd’s of London syndicates which represented 10% or more of total reinsurance balances recoverable. Lloyd’s is rated ‘A+’ by Standard & Poor’s and ‘A’ by A.M. Best. At December 31, 2014, reinsurance balances recoverable with a carrying value of $314.5 million were associated with two reinsurers which represented 10% or more of total reinsurance balances recoverable.

Provisions for Uncollectible Reinsurance Balances Recoverable

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

 

    As at September 30, 2015     As at December 31, 2014  
    Reinsurance Balances Recoverable     Reinsurance Balances Recoverable  
    Gross     Provisions
for Bad
Debt
    Net     Provision
as a
% of Gross
    Gross     Provisions
for Bad
Debt
    Net     Provision
as a
% of Gross
 

Reinsurers rated A- or above

  $ 1,116,398      $ 53,538      $ 1,062,860        4.8   $ 1,126,944      $ 80,995      $ 1,045,949        7.2

Reinsurers rated below A-, secured

    451,288        —          451,288        0.0     204,544        —          204,544        0.0

Reinsurers rated below A-, unsecured

    253,776        196,364        57,412        77.4     289,976        208,914        81,062        72.0
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total

  $ 1,821,462      $ 249,902      $ 1,571,560        13.7   $ 1,621,464      $ 289,909      $ 1,331,555        17.9
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

29


Table of Contents

ENSTAR GROUP LIMITED

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

 

6. LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table provides our losses and loss adjustment expense liabilities by segment as at September 30, 2015 and December 31, 2014:

 

    September 30, 2015     December 31, 2014  
    Non-life
Run-off
    Atrium     StarStone     Total     Non-life
Run-off
    Atrium     StarStone     Total  

Outstanding

  $ 2,915,660      $ 67,680      $ 433,749      $ 3,417,089      $ 2,202,187      $ 73,803      $ 387,171      $ 2,663,161   

Incurred but not reported

    2,173,892        115,700        443,816        2,733,408        1,406,420        113,149        477,264        1,996,833   

Fair value adjustment

    (150,180     21,023        (2,134     (131,291     (173,597     25,659        (2,635     (150,573
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,939,372      $ 204,403      $ 875,431      $ 6,019,206      $ 3,435,010      $ 212,611      $ 861,800      $ 4,509,421   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The increase in our liability for losses and LAE between December 31, 2014 and September 30, 2015 was primarily attributable to our acquisition of Sussex and the completion of the Sun Life and Voya transactions.

Refer to Note 8 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2014 for more information on establishing the liability for losses and LAE.

The net incurred losses and LAE in our segments for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

    Three Months Ended September 30,  
    2015     2014  
    Non-life
Run-off
    Atrium     StarStone     Total     Non-life
Run-off
    Atrium     StarStone     Total  

Net losses paid

  $ 143,012      $ 12,459      $ 63,661      $ 219,132      $ 127,908      $ 15,800      $ 62,083      $ 205,791   

Net change in case and LAE reserves

    (99,186     (1,712     14,547        (86,351     (107,780     (177     (22,858     (130,815

Net change in IBNR reserves

    (99,242     353        18,121        (80,768     (98,664     (135     39,013        (59,786
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

    (55,416     11,100        96,329        52,013        (78,536     15,488        78,238        15,190   

Reduction in provisions for bad debt

    (3,632     —          —          (3,632     (5,019     —          —          (5,019

(Reduction) increase in provisions for unallocated LAE

    (20,269     1        555        (19,713     (13,317     53        977        (12,287

Amortization of fair value adjustments

    4,184        —          (493     3,691        19,649        —          —          19,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net incurred losses and LAE

  $ (75,133   $ 11,101      $ 96,391      $ 32,359      $ (77,223   $ 15,541      $ 79,215      $ 17,533   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

    Nine Months Ended September 30,  
    2015     2014  
    Non-life
Run-off
    Atrium     StarStone     Total     Non-life
Run-off
    Atrium     StarStone     Total  

Net losses paid

  $ 372,712      $ 36,491      $ 155,224      $ 564,427      $ 332,169      $ 40,643      $ 76,331      $ 449,143   

Net change in case and LAE reserves

    (210,516     (2,595     59,490        (153,621     (248,599     2,839        19,406        (226,354

Net change in IBNR reserves

    (212,477     1,729        38,170        (172,578     (190,742     5,663        62,740        (122,339
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

    (50,281     35,625        252,884        238,228        (107,172     49,145        158,477        100,450   

Paid loss recoveries on bad debt provisions

    —          —          —          —          (11,206     —          —          (11,206

Reduction in provisions for bad debt

    (24,071     —          —          (24,071     (5,019     —          —          (5,019

(Reduction) increase in provisions for unallocated LAE

    (41,955     (69     2,266        (39,758     (39,549     138        978        (38,433

Amortization of fair value adjustments

    (796     (3,678     (1,530     (6,004     19,340        —          100        19,440   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net incurred losses and LAE

  $ (117,103   $ 31,878      $ 253,620      $ 168,395      $ (143,606   $ 49,283      $ 159,555      $ 65,232   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

Non-Life Run-off Segment

The table below provides a reconciliation of the beginning and ending liability for losses and LAE in the Non-Life Run-off segment for the three and nine months ended September 30, 2015 and 2014:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Balance as at beginning of period

   $ 5,064,137       $ 4,031,262       $ 3,435,010       $ 4,004,513   

Less: total reinsurance reserves recoverable

     1,178,053         935,319         800,709         1,121,533   

Less: total deferred charge on retroactive reinsurance

     265,426         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,620,658         3,095,943         2,634,301         2,882,980   

Net incurred losses and LAE:

           

Current period

     10,565         8,841         53,838         20,482   

Prior periods

     (85,698      (86,064      (170,941      (164,088
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net incurred losses and LAE

     (75,133      (77,223      (117,103      (143,606
  

 

 

    

 

 

    

 

 

    

 

 

 

Net losses paid:

           

Current period

     (4,558      (3,081      (18,563      (3,873

Prior periods

     (138,454      (124,827      (354,149      (317,090
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net losses paid

     (143,012      (127,908      (372,712      (320,963
  

 

 

    

 

 

    

 

 

    

 

 

 

Effect of exchange rate movement

     (12,344      (36,838      (24,706      (29,832

Acquired on purchase of subsidiaries

     1,593         —           776,351         436,765   

Assumed business

     116,810         —           612,441         28,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net balance as at September 30

     3,508,572         2,853,974         3,508,572         2,853,974   

Plus: total reinsurance reserves recoverable

     1,163,323         896,865         1,163,323         896,865   

Plus: total deferred charge on retroactive reinsurance

     267,477         —           267,477         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as at September 30

   $ 4,939,372       $ 3,750,839       $ 4,939,372       $ 3,750,839   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

32


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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The net incurred losses and LAE in the Non-Life Run-off segment for the three months ended September 30, 2015 and 2014 were as follows:

 

     Non-Life Run-off  
     Three Months Ended September 30,  
     2015     2014  
     Prior
Period
    Current
Period
     Total     Prior
Period
    Current
Period
     Total  

Net losses paid

   $ 138,454      $ 4,558       $ 143,012      $ 124,827      $ 3,081       $ 127,908   

Net change in case and LAE reserves

     (101,820     2,634         (99,186     (108,933     1,153         (107,780

Net change in IBNR reserves

     (102,615     3,373         (99,242     (103,271     4,607         (98,664
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (65,981     10,565         (55,416     (87,377     8,841         (78,536

Reduction in provisions for bad debt

     (3,632     —           (3,632     (5,019     —           (5,019

Reduction in provisions for unallocated LAE

     (20,269     —           (20,269     (13,317     —           (13,317

Amortization of fair value adjustments

     4,184        —           4,184        19,649        —           19,649   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net incurred losses and LAE

   $ (85,698   $ 10,565       $ (75,133   $ (86,064   $ 8,841       $ (77,223
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net change in case and LAE reserves comprises the movement during the period in specific case reserves 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 incurred but not reported (“IBNR”) reserves represents the change in our actuarial estimates of gross IBNR, less amounts recoverable.

Three Months Ended September 30, 2015

The net reduction in incurred losses and LAE for the three months ended September 30, 2015 of $75.1 million included net incurred losses and LAE of $10.6 million related to current period earned premium of $16.8 million primarily for the portion of the run-off business acquired with Sussex. The net incurred losses and LAE relating to prior periods were reduced by $85.7 million, due to a reduction in our estimates of net ultimate losses of $66.0 million, a reduction in our provisions for bad debt of $3.6 million and a reduction in our provisions for unallocated LAE of $20.3 million, relating to 2015 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.2 million.

 

33


Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The reduction in estimates of net ultimate losses relating to prior periods of $66.0 million was primarily related to:

 

  (i) our review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $18.6 million;

 

  (ii) an aggregate reduction in IBNR reserves of $14.1 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to historical loss development data to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures in eleven of our insurance and reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for these subsidiaries was reduced as a result of the combined impact on all classes of business of loss development activity during 2015, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts; and

 

  (iii) net favorable claims settlements during the three months ended September 30, 2015 resulting in a reduction in estimates of net ultimate losses of $33.3 million.

The reduction in provisions for bad debt of $3.6 million for the three months ended September 30, 2015 resulted from the collection of receivables against which bad debt provisions had been provided for in earlier periods.

Three Months Ended September 30, 2014

The net reduction in incurred losses and LAE for the three months ended September 30, 2014 of $77.2 million included net incurred losses and LAE of $8.8 million related to current period earned premium of $13.9 million primarily for the portion of the run-off business acquired with StarStone. The net incurred losses and LAE relating to prior periods were reduced by $86.1 million, due to a reduction in estimates of net ultimate losses of $87.4 million, a reduction in our provisions for bad debt of $5.0 million and a reduction in our provisions for unallocated LAE of $13.3 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $19.6 million.

The reduction in our estimates of net ultimate losses relating to prior periods of $87.4 million was primarily related to:

 

  (i) our review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $12.3 million;

 

  (ii)

an aggregate reduction in IBNR reserves of $36.3 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to historical loss development data to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures in thirteen of our insurance and reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for these subsidiaries was reduced as a result of the combined impact on all classes

 

34


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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

  of business of loss development activity during 2014, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts; and

 

  (iii) a reduction in estimates of net ultimate losses of $44.4 million following the completion of 6 commutations of assumed reinsurance liabilities.

The reduction in provisions for bad debt of $5.0 million for the three months ended September 30, 2014 resulted from the collection of receivables against which bad debt provisions had been provided for in earlier periods.

The net incurred losses and LAE in the Non-Life Run-off segment for the nine months ended September 30, 2015 and 2014 were as follows:

 

     Non-Life Run-off  
     Nine Months Ended September 30,  
     2015     2014  
     Prior
Period
    Current
Period
     Total     Prior
Period
    Current
Period
     Total  

Net losses paid

   $ 354,149      $ 18,563       $ 372,712      $ 328,296      $ 3,873       $ 332,169   

Net change in case and LAE reserves

     (220,633     10,117         (210,516     (250,778     2,179         (248,599

Net change in IBNR reserves

     (237,635     25,158         (212,477     (205,172     14,430         (190,742
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (104,119     53,838         (50,281     (127,654     20,482         (107,172

Reduction in provisions for bad debt

     (24,071     —           (24,071     (16,225     —           (16,225

Reduction in provisions for unallocated LAE

     (41,955     —           (41,955     (39,549     —           (39,549

Amortization of fair value adjustments

     (796     —           (796     19,340        —           19,340   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net incurred losses and LAE

   $ (170,941   $ 53,838       $ (117,103   $ (164,088   $ 20,482       $ (143,606
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Nine Months Ended September 30, 2015

The net reduction in incurred losses and LAE for the nine months ended September 30, 2015 of $117.1 million included net incurred losses and LAE of $53.8 million related to current period earned premium of $49.8 million primarily related to the portion of the run-off business acquired with Sussex. The net incurred losses and LAE relating to prior periods were reduced by $170.9 million, due to a reduction in estimates of net ultimate losses of $104.1 million, a reduction in our provisions for bad debt of $24.1 million, a reduction in our provisions for unallocated LAE of $42.0 million, relating to 2015 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $0.8 million.

 

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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The reduction in estimates of net ultimate losses relating to prior periods of $104.1 million was related primarily to:

 

  (i) our review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $25.0 million;

 

  (ii) a reduction in IBNR reserves of $33.4 million primarily as a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to historical loss development data to estimate loss reserves required to cover liabilities for unpaid loss and LAE relating to non-commuted exposures in twelve of our insurance and reinsurance subsidiaries. The prior period estimate of aggregate IBNR liabilities was reduced as a result of the continued favorable trend of loss development compared to prior forecasts; and

 

  (iii) net favorable claims settlements during the nine months ended September 30, 2015 resulting in a reduction in estimates of net ultimate losses of approximately $45.7 million.

The reduction in provisions for bad debt of $24.1 million for the nine months ended September 30, 2015 resulted from the cash collection and commutation of certain reinsurance receivables against which bad debt provisions had been provided for in earlier periods.

Nine Months Ended September 30, 2014

The net reduction in incurred losses and LAE for the nine months ended September 30, 2014 of $143.6 million included net incurred losses and LAE of $20.5 million related to current period earned premium of $33.5 million primarily for the portion of the run-off business acquired with StarStone. Net incurred losses and LAE relating to prior periods were reduced by $164.1 million, due to a reduction in estimates of net ultimate losses of $127.7 million, a reduction in our provisions for bad debt of $16.2 million and a reduction in our provisions for unallocated LAE of $39.5 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $19.3 million.

The reduction in estimates of net ultimate losses relating to prior periods of $127.7 million was related primarily to:

 

  (i) our review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $25.9 million;

 

  (ii) a reduction in IBNR reserves of $46.3 million primarily as a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to historical loss development data to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures in fourteen of our insurance and reinsurance subsidiaries. The prior period estimate of aggregate IBNR liabilities was reduced as a result of the combined impact on all classes of business of loss development activity during 2014, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts;

 

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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

  (iii) a reduction in estimates of net ultimate losses of $44.4 million following the completion of six commutations of assumed reinsurance liabilities; and

 

  (iv) favorable claims settlements during the nine months ended September 30, 2014 resulting in a reduction in estimates of net ultimate losses of approximately $11.1 million.

Atrium Segment

The tables below provide a reconciliation of the beginning and ending reserves for losses and LAE in the Atrium segment for the three and nine months ended September 30, 2015 and 2014:

 

     Atrium  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Balance as at beginning of period

   $ 205,499      $ 226,920      $ 212,611      $ 215,392   

Less: total reinsurance reserves recoverable

     26,011        26,993        28,278        25,055   
  

 

 

   

 

 

   

 

 

   

 

 

 
     179,488        199,927        184,333        190,337   

Net incurred losses and LAE:

        

Current period

     16,416        19,348        48,788        59,566   

Prior periods

     (5,315     (3,807     (16,910     (10,283
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net incurred losses and LAE

     11,101        15,541        31,878        49,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net losses paid:

        

Current period

     (6,065     (8,914     (13,473     (18,730

Prior periods

     (6,394     (6,886     (23,018     (21,913
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net losses paid

     (12,459     (15,800     (36,491     (40,643

Effect of exchange rate movement

     (1,059     (2,786     (2,649     (2,095
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance as at September 30

     177,071        196,882        177,071        196,882   

Plus: total reinsurance reserves recoverable

     27,332        29,778        27,332        29,778   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as at September 30

   $ 204,403      $ 226,660      $ 204,403      $ 226,660   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

37


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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The net incurred losses and LAE in the Atrium segment for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

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

Net losses paid

   $ 6,394      $ 6,065       $ 12,459      $ 6,886      $ 8,914       $ 15,800   

Net change in case and LAE reserves

     (4,251     2,539         (1,712     (5,128     4,951         (177

Net change in IBNR reserves

     (7,342     7,695         353        (5,486     5,351         (135
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (5,199     16,299         11,100        (3,728     19,216         15,488   

(Reduction) increase in provisions for unallocated LAE

     (116     117         1        (79     132         53   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net incurred losses and LAE

   $ (5,315   $ 16,416       $ 11,101      $ (3,807   $ 19,348       $ 15,541   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     Atrium  
     Nine Months Ended September 30,  
     2015     2014  
     Prior
Period
    Current
Period
     Total     Prior
Period
    Current
Period
     Total  

Net losses paid

   $ 23,018      $ 13,473       $ 36,491      $ 21,913      $ 18,730       $ 40,643   

Net change in case and LAE reserves

     (11,908     9,313         (2,595     (12,970     15,809         2,839   

Net change in IBNR reserves

     (23,895     25,624         1,729        (18,906     24,569         5,663   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (12,785     48,410         35,625        (9,963     59,108         49,145   

(Reduction) increase in provisions for unallocated LAE

     (447     378         (69     (320     458         138   

Amortization of fair value adjustments

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net incurred losses and LAE

   $ (16,910   $ 48,788       $ 31,878      $ (10,283   $ 59,566       $ 49,283   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

38


Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

StarStone Segment

The tables below provide a reconciliation of the beginning and ending reserves for losses and LAE in the StarStone segment for the three and nine months ended September 30, 2015 and 2014:

 

     StarStone  
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014(1)  

Balance as at beginning of period

   $ 873,835      $ 866,809      $ 861,800      $ —     

Less: total reinsurance reserves recoverable

     287,049        336,150        325,209        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     586,786        530,659        536,591        —     

Net incurred losses and LAE:

        

Current period

     96,360        84,580        255,062        164,920   

Prior periods

     31        (5,365     (1,442     (5,365
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net incurred losses and LAE

     96,391        79,215        253,620        159,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net losses paid:

        

Current period

     (25,358     (22,787     (36,599     (25,637

Prior periods

     (38,303     (39,296     (118,624     (50,694
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net losses paid

     (63,661     (62,083     (155,223     (76,331

Effect of exchange rate movement

     (3,285     (5,243     (18,756     (5,358

Acquired on purchase of subsidiaries

     —          —          —          464,682   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance as at September 30

     616,232        542,548        616,232        542,548   

Plus: total reinsurance reserves recoverable

     259,199        331,864        259,199        331,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as at September 30

   $ 875,431      $ 874,412      $ 875,431      $ 874,412   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We began reporting with respect to the StarStone segment following the acquisition of StarStone in the second quarter of 2014.

 

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Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The net incurred losses and LAE in the StarStone segment for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

    StarStone  
    Three Months Ended September 30,  
    2015     2014  
    Prior
Period
    Current
Period
    Total     Prior
Period
    Current
Period
    Total  

Net losses paid

  $ 38,303      $ 25,358      $ 63,661      $ 39,296      $ 22,787      $ 62,083   

Net change in case and LAE reserves

    (4,188     18,735        14,547        (14,819     (8,039     (22,858

Net change in IBNR reserves

    (34,054     52,175        18,121        (29,117     68,130        39,013   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (reduction) in estimates of net ultimate losses

    61        96,268        96,329        (4,640     82,878        78,238   

Increase (reduction) in provisions for unallocated LAE

    463        92        555        (725     1,702        977   

Amortization of fair value adjustments

    (493     —          (493     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net incurred losses and LAE

  $ 31      $ 96,360      $ 96,391      $ (5,365   $ 84,580      $ 79,215   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    StarStone  
    Nine Months Ended September 30,  
    2015     2014  
    Prior
Period
    Current
Period
    Total     Prior
Period
    Current
Period
    Total  

Net losses paid

  $ 118,625      $ 36,599      $ 155,224      $ 50,694      $ 25,637      $ 76,331   

Net change in case and LAE reserves

    (8,122     67,612        59,490        19,595        (189     19,406   

Net change in IBNR reserves

    (110,315     148,486        38,170        (74,929     137,669        62,740   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (reduction) in estimates of net ultimate losses

    187        252,697        252,884        (4,640     163,117        158,477   

(Reduction) increase in provisions for unallocated LAE

    (99     2,365        2,266        (725     1,703        978   

Amortization of fair value adjustments

    (1,530     —          (1,530     —          100        100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net incurred losses and LAE

  $ (1,442   $ 255,062      $ 253,620      $ (5,365   $ 164,920      $ 159,555   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ENSTAR GROUP LIMITED

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

 

7. POLICY BENEFITS FOR LIFE AND ANNUITY CONTRACTS

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

 

     September 30,
2015
     December 31,
2014
 

Life

   $ 327,083       $ 344,215   

Annuities

     924,666         938,121   
  

 

 

    

 

 

 
     1,251,749         1,282,336   

Fair value adjustments

     (55,406      (61,472
  

 

 

    

 

 

 
   $ 1,196,343       $ 1,220,864   
  

 

 

    

 

 

 

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

8. PREMIUMS WRITTEN AND EARNED

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

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2015     2014     2015     2014  
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
 

Non-life run-off

               

Gross

  $ 6,874      $ 31,257      $ 8,308      $ 18,364      $ 31,788      $ 109,414      $ 16,347      $ 43,539   

Ceded

    (3,064     (17,223     (2,012     (4,490     (42,931     (59,590     (3,191     (10,054
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 3,810      $ 14,034      $ 6,296      $ 13,874      $ (11,143   $ 49,824      $ 13,156      $ 33,485   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Atrium

               

Gross

  $ 31,348      $ 36,083      $ 34,081      $ 38,800      $ 116,047      $ 112,150      $ 121,515      $ 115,099   

Ceded

    (2,888     (3,052     (3,899     (3,950     (11,409     (11,290     (13,619     (13,613
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 28,460      $ 33,031      $ 30,182      $ 34,850      $ 104,638      $ 100,860      $ 107,896      $ 101,486   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

StarStone

               

Gross

  $ 173,424      $ 205,361      $ 157,655      $ 176,978      $ 605,178      $ 569,856      $ 328,301      $ 362,731   

Ceded

    (35,139     (42,828     (43,776     (56,749     (160,705     (146,005     (83,981     (104,263
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 138,285      $ 162,533      $ 113,879      $ 120,229      $ 444,473      $ 423,851      $ 244,320      $ 258,468   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Life and annuities

               

Life

  $ 21,365      $ 21,453      $ 26,701      $ 27,034      $ 67,020      $ 67,445      $ 79,885      $ 81,122   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 191,920      $ 231,051      $ 177,058      $ 195,987      $ 604,988      $ 641,980      $ 445,257      $ 474,561   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ENSTAR GROUP LIMITED

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

 

9. GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGE

The following table presents a reconciliation of the beginning and ending goodwill, intangible assets and deferred charge during the nine months ended September 30, 2015:

 

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

Balance as at December 31, 2014

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

Acquired during the period

    —          —          —          —          (2,759     271,176   

Intangible assets amortization

    —          (8,398     —          (8,398     2,934        (3,699
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as at September 30, 2015

  $ 73,071      $ 32,650      $ 87,031      $ 192,752      $ 159,270      $ 267,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Intangible asset amortization for the three and nine month periods ended September 30, 2015 was $11.4 million and $9.2 million, respectively, as compared to $24.1 million and $30.7 million for the comparative periods in 2014.

For the three and nine months ended September 30, 2015 we recognized an impairment charge of $4.0 million related to the Torus brand in relation to the StarStone rebranding exercise.

 

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ENSTAR GROUP LIMITED

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

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

 

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

 

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

Intangible assets with a definite life:

           

Fair value adjustments:

           

Losses and loss adjustment expenses

  $ 429,063      $ (297,772   $ 131,291      $ 449,986      $ (299,413   $ 150,573   

Reinsurance balances recoverable

    (175,453     148,026        (27,427     (193,617     140,667        (52,950

Policy benefits for life and annuity contracts

    86,332        (30,926     55,406        86,332        (24,860     61,472   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 339,942      $ (180,672   $ 159,270      $ 342,701      $ (183,606   $ 159,095   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

           

Distribution channel

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

Technology

    15,000        (5,623     9,377        15,000        (3,125     11,875   

Brand

    12,000        (6,283     5,717        12,000        (1,383     10,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 47,000      $ (14,350   $ 32,650      $ 47,000      $ (5,952   $ 41,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets with an indefinite life:

           

Lloyd’s syndicate capacity

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

Licenses

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

Management contract

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deferred charge on retroactive reinsurance

  $ 271,176      $ (3,699   $ 267,477      $ —        $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at September 30, 2015 and December 31, 2014, the allocation of the goodwill to our non-life run-off, Atrium and StarStone segments was $21.2 million, $38.9 million and $13.0 million, respectively.

 

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ENSTAR GROUP LIMITED

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

 

10. LOANS PAYABLE

We utilize debt facilities primarily for permitted acquisitions and, from time to time, for general corporate purposes. Under these facilities, loans payable as of September 30, 2015 and December 31, 2014 were as follows:

 

Facility

   Origination Date      Term      September 30,
2015
     December 31,
2014
 

EGL Revolving Credit Facility

     September 16, 2014         5 Years       $ 624,750       $ 319,550   

Sussex Facility

     December 24, 2014         4 Years         104,000         —     
        

 

 

    

 

 

 

Total long-term bank debt

           728,750         319,550   

Accrued interest

           1,970         491   
        

 

 

    

 

 

 

Total loans payable

         $ 730,720       $ 320,041   
        

 

 

    

 

 

 

On February 27, 2015, the EGL Revolving Credit Facility was amended and restated primarily in order to: (1) increase the size of the facility from $500 million to $665 million; (2) add Lloyd’s Bank plc as a new lender within the facility, and (3) reallocate the amounts provided by each of the four lenders under the facility such that each lender agreed to provide an equal amount of $166.25 million, on and subject to the terms of the restated facility agreement. We utilized an additional $224.7 million under the facility during the year primarily for the acquisition of the life settlements from Wilton Re, the Voya transaction, and also to capitalize a newly-formed wholly-owned reinsurance company in Bermuda. As of September 30, 2015, there was $40.3 million of available unutilized capacity under this facility. Subsequent to September 30, 2015 we repaid $139.0 million of the outstanding principal on the facility, which increased our current available unutilized capacity to $179.3 million.

On December 24, 2014, we entered into the Sussex Facility with National Australia Bank Limited and Barclays Bank plc. This facility was fully utilized to borrow $109.0 million to fund 50% of the acquisition of Sussex which was completed on January 27, 2015. A repayment of $5.0 million was made on May 5, 2015.

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

11. NONCONTROLLING INTERESTS

Redeemable Noncontrolling Interest

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

 

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ENSTAR GROUP LIMITED

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

11. NONCONTROLLING INTERESTS—(Continued)

 

The following is a reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI:

 

     September 30,
2015
     December 31,
2014
 

Balance as at beginning of period

   $ 374,619       $ 100,859   

Capital contributions

     15,728         272,722   

Dividends paid

     (16,128      —     

Net earnings attributable to RNCI

     9,575         4,059   

Accumulated other comprehensive income attributable to RNCI

     (480      (1,993

Transfer of net loss from noncontrolling interest

     —           (1,028
  

 

 

    

 

 

 

Balance as at end of period

   $ 383,314       $ 374,619   
  

 

 

    

 

 

 

Refer to Note 15 “Related Party Transactions” Stone Point Capital LLC for additional information regarding RNCI.

Noncontrolling Interest

On June 30, 2015, we entered into a Sale and Purchase Agreement with J.C. Flowers II L.P., J.C. Flowers II-A L.P., J.C. Flowers II-B, L.P. and Financial Service Opportunities L.P., (collectively, the “JCF II Funds”), pursuant to which we purchased all of the non-voting preference shares of Cumberland Holdings Ltd. and Courtenay Holdings Ltd., which represent all of the noncontrolling interest owned directly by the JCF II Funds in our subsidiaries, for an aggregate price of $140.0 million. Immediately prior to the repurchase, the book value of the JCF II Funds’ noncontrolling interest was $182.8 million. The transaction closed on September 30, 2015.

On September 3, 2015, we entered into a Sale and Purchase Agreement with Shinsei Bank, Limited (“Shinsei”), pursuant to which we purchased all of the Class B shares of Comox Holdings Ltd., which represents all of the noncontrolling interest owned directly by Shinsei in our subsidiaries, for an aggregate price of $10.4 million. Immediately prior to the repurchase, the book value of Shinsei’s noncontrolling interest was $12.5 million. The transaction closed on September 8, 2015.

 

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ENSTAR GROUP LIMITED

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

 

12. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the three and nine month periods ended September 30, 2015 and 2014:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
                2015                             2014                             2015                             2014              

Basic earnings per ordinary share:

       

Net earnings attributable to Enstar Group Limited

  $ 49,042      $ 26,429      $ 108,434      $ 107,809   

Weighted average ordinary shares outstanding—basic

    19,256,184        19,198,475        19,248,737        18,142,531   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2.55      $ 1.38      $ 5.63      $ 5.94   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per ordinary share:

       

Net earnings attributable to Enstar Group Limited

  $ 49,042      $ 26,429      $ 108,434      $ 107,809   

Weighted average ordinary shares outstanding—basic

    19,256,184        19,198,475        19,248,737        18,142,531   

Share equivalents:

       

Unvested shares

    51,253        56,455        49,863        47,955   

Restricted share units

    13,321        10,671        12,466        17,527   

Preferred shares

    —          —          —          183,081   

Warrants

    87,869        65,789        76,219        54,791   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding—diluted

    19,408,627        19,331,390        19,387,285        18,445,885   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2.53      $ 1.37      $ 5.59      $ 5.84   
 

 

 

   

 

 

   

 

 

   

 

 

 

13. EMPLOYEE BENEFITS

We provide various employee benefits including share-based compensation, an employee share purchase plan, an annual incentive compensation program, and pensions. These are described in Note 16 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2014.

Share-based compensation expense for the three and nine months ended September 30, 2015 was $2.1 million and $10.6 million, respectively, as compared to $3.5 million and $6.4 million for the comparative periods in 2014.

Employee share purchase plan expense for each of the three and nine months ended September 30, 2015 and 2014, was less than $0.1 million and $0.2 million, respectively.

Annual incentive compensation program expense for the three and nine months ended September 30, 2015 was $6.5 million and $13.5 million, respectively, as compared to $4.4 million and $18.8 million for the comparative periods in 2014.

 

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ENSTAR GROUP LIMITED

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

13. EMPLOYEE BENEFITS—(Continued)

 

Pension expense for the three and nine months ended September 30, 2015 was $2.5 million and $7.7 million, respectively, as compared to $2.9 million and $8.5 million for the comparative periods in 2014.

14. TAXATION

We use the estimated annual effective tax rate method for computing our interim tax provision. This method applies our best estimate of the effective tax rate expected for the full year to our year-to-date earnings before income taxes. We provide for income tax expense or benefit based upon our pre-tax earnings and the provisions of currently enacted tax laws. Discrete tax adjustments are recorded in the quarter in which the event occurs.

The following table presents our earnings before income taxes by jurisdiction:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
           2015                  2014                 2015                 2014        

Domestic (Bermuda)

   $ 3,141       $ (22,740   $ (3,663   $ 11,238   

Foreign

     55,122         49,597        150,185        119,068   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 58,263       $ 26,857      $ 146,522      $ 130,306   
  

 

 

    

 

 

   

 

 

   

 

 

 

The following table presents our current and deferred income tax expense (benefit) by jurisdiction:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
           2015                  2014                 2015                 2014        

Current:

         

Domestic (Bermuda)

   $ —         $ —        $ —        $ —     

Foreign

     10,855         6,540        33,590        26,522   
  

 

 

    

 

 

   

 

 

   

 

 

 
     10,855         6,540        33,590        26,522   
  

 

 

    

 

 

   

 

 

   

 

 

 

Deferred:

         

Domestic (Bermuda)

     —           —          —          —     

Foreign

     1,407         (880     (4,768     (5,134
  

 

 

    

 

 

   

 

 

   

 

 

 
     1,407         (880     (4,768     (5,134
  

 

 

    

 

 

   

 

 

   

 

 

 

Total tax expense

   $ 12,262       $ 5,660      $ 28,822      $ 21,388   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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ENSTAR GROUP LIMITED

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

14. TAXATION—(Continued)

 

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

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
            2015                     2014                     2015                     2014          

Earnings before income tax

  $ 58,263      $ 26,857      $ 146,522      $ 130,306   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expected tax rate

    0.0  %      0.0  %      0.0  %      0.0  % 

Foreign taxes at local expected rates

    21.3  %      19.3  %      19.2  %      17.4  % 

Change in uncertain tax positions

    —    %      —    %      —    %      (1.7 )% 

Change in valuation allowance

    (0.5 )%      (0.4 )%      (2.8 )%      —    % 

Prior year true-up

    —    %      —    %      3.0  %      —    % 

Other

    0.2  %      2.2  %      0.3  %      0.7  % 
 

 

 

   

 

 

   

 

 

   

 

 

 

Effective tax rate

    21.0  %      21.1  %      19.7  %      16.4  % 
 

 

 

   

 

 

   

 

 

   

 

 

 

Our effective tax rate is driven by the geographical distribution of our pre-tax net earnings between our taxable and non-taxable jurisdictions. Under current Bermuda law, we are exempted from paying any taxes in Bermuda on income or capital gains until March 2035. The local expected rates for foreign taxes, in the table above, were computed as the sum of the calculations of pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable weighted average statutory tax rate.

We have foreign operating subsidiaries and branch operations principally located in the United Kingdom, Australia, the United States and Europe which are subject to federal, foreign, state and local taxes in those jurisdictions. In addition, certain distributions from some foreign sources may be subject to withholding taxes. Because we operate in many jurisdictions, our net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which we operate.

We have estimated the future taxable income of its foreign subsidiaries and have provided a valuation allowance in respect of loss carryforwards where we do not expect to realize a benefit. We have considered all available evidence using a “more likely than not” standard in determining the amount of the valuation allowance.

We had no unrecognized tax benefits relating to uncertain tax positions as at both September 30, 2015 and December 31, 2014.

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

 

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ENSTAR GROUP LIMITED

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

 

15. RELATED PARTY TRANSACTIONS

Stone Point Capital LLC

Following several private transactions occurring from May 2012 to July 2012, Trident acquired 1,350,000 of our Voting Ordinary Shares (which now constitutes approximately 8.4% of our outstanding Voting Ordinary Shares). On November 6, 2013, we appointed James D. Carey to its Board of Directors. Mr. Carey is the sole member of an entity that is one of four general partners of the entities serving as general partners for Trident, is a member of the investment committees of such general partners, and is a member and senior principal of Stone Point Capital LLC, the manager of the Trident funds.

In addition, we have entered into certain agreements with Trident with respect to Trident’s co-investments in the Atrium, Arden, and StarStone acquisitions. These include investors’ agreements and shareholders’ agreements, which provide for, among other things: (i) our right to redeem Trident’s equity interest in the Atrium/Arden and StarStone transactions in cash at fair market value within the 90 days following the fifth anniversary of the Arden and StarStone closings, respectively, and at any time following the seventh anniversary of the Arden and StarStone closings, respectively; and (ii) Trident’s right to have its equity co-investment interests in the Atrium/Arden and StarStone transactions redeemed by us at fair market value (which we may satisfy in either cash or its ordinary shares) following the seventh anniversaries of the Arden closing and StarStone closing, respectively. As of September 30, 2015, we have included $383.3 million (December 31, 2014: $374.6 million) as redeemable noncontrolling interest on its balance sheet relating to these Trident co-investment transactions. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the boards of StarStone and the holding companies established in connection with the Atrium/Arden and StarStone co-investment transactions. Trident also has a second representative on these boards who is a Stone Point Capital employee.

As at September 30, 2015, we have investments in four funds (carried within other investments) and a registered investment company affiliated with entities owned by Trident or otherwise affiliated with Stone Point Capital LLC. The fair value of the investments in the four funds was $260.5 million and $202.6 million as at September 30, 2015 and December 31, 2014, respectively, while the fair value of our investment in the registered investment company was $24.3 million and $25.6 million as at September 30, 2015 and December 31, 2014, respectively. For the nine months ended September 30, 2015 and 2014, we recognized net losses of $0.7 million and net gains of $2.4 million respectively in net realized and unrealized (losses) gains in respect of these investments.

We also have separate accounts managed by Eagle Point Credit Management, and PRIMA Capital Advisors, which are affiliates of entities owned by Trident, with respect to which we incurred approximately $0.3 million and $0.2 million in management fees for each of the nine months ended September 30, 2015 and 2014, respectively.

During 2015, we received investment-related consulting services from a firm in which Trident V is a minority investor, pursuant to arms-length terms and conditions. We incurred approximately $0.2 million in expenses for these services for the nine months ended September 30, 2015. In addition, we are invested in two funds (carried within other investments) managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as director. The fair value of our investments in Sound Point Capital funds was $40.9 million and $39.9 million as at September 30, 2015 and December 31, 2014, respectively. For the nine months ended September 30, 2015 and 2014, we have recognized $1.0 million and $0.8 million, respectively, in net realized and unrealized gains in respect of Sound Point Capital investments.

 

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15. RELATED PARTY TRANSACTIONS—(Continued)

 

We also have separate accounts managed by Sound Point Capital pursuant to an arms-length agreement reflecting customary terms and conditions, with respect to which we incurred approximately $0.1 million and $nil in management fees for the nine months ended September 30, 2015 and 2014, respectively.

Goldman Sachs & Co.

Affiliates of Goldman Sachs own approximately 4.1% of our Voting Ordinary Shares, 100% of our Series C Non-Voting Ordinary Shares, and 100% of the outstanding warrants. Sumit Rajpal, a managing director of Goldman Sachs, was appointed to the Board of Directors in connection with Goldman Sachs’ investment in Enstar. As of September 30, 2015 and December, 31, 2014, we had investments in two funds (carried within other investments) affiliated with entities owned by Goldman Sachs, which had a fair value of $39.8 million and $36.3 million, respectively. As of September 30, 2015 and December 31, 2014, we had an indirect investment in non-voting interests of two companies affiliated with Hastings Insurance Group Limited which had a fair value of $37.6 million and $25.1 million respectively. Goldman Sachs affiliates have an approximately 50% interest in the Hastings companies, and Mr. Rajpal serves as a director of the entities in which we have invested. For the nine months ended September 30, 2015 and 2014, we recognized $14.0 million and $1.1 million in net realized and unrealized gains, respectively, in respect of the Goldman Sachs-affiliated investments.

During 2015, a Goldman Sachs affiliate began providing investment management services to one of our subsidiaries pursuant to an arms-length agreement reflecting customary terms and conditions. Our interests are held in accounts managed by affiliates of Goldman Sachs, with respect to which we incurred approximately $0.4 million and $nil in management fees for the nine months ended September 30, 2015 and 2014, respectively.

CPPIB

Canada Pension Plan Investment Board (“CPPIB”), together with management of Wilton Re, own 100% of the common stock of Wilton Re. Subsequent to the closing of our transaction with Wilton Re (described in Note 2—“Acquisitions”), on June 3, 2015, CPPIB purchased voting and non-voting shares in Enstar from FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII-A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. (collectively, “First Reserve”, and the transaction, the “CPPIB-First Reserve Transaction”). These shares constitute a 9.3% voting interest and a 9.9% aggregate economic interest in Enstar. On September 29, 2015, CPPIB exercised its acquired right to appoint a representative to our Board of Directors. CPPIB has also signed a definitive agreement to acquire additional voting shares that would increase its ownership in Enstar to a 13.9% voting interest and a 13.8% aggregate economic interest, subject to regulatory approval.

16. COMMITMENTS AND CONTINGENCIES

Concentration of Credit Risk

We believe that there are no significant concentrations of credit risk associated with our cash and cash equivalents, fixed maturity investments, or other investments. Cash, cash equivalents and fixed maturity investments are managed pursuant to guidelines that follow prudent standards of

 

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diversification and limit the allowable holdings of a single issue and issuers. Other investments are managed pursuant to guidelines that emphasize diversification and liquidity. Pursuant to these guidelines, we manage and monitor risk across a variety of investment funds and vehicles, markets and counterparties. We are also subject to custodial credit risk on our fixed maturity and equity investments, which we manage by diversifying our holdings amongst large financial institutions that are highly regulated.

We have exposure to credit risk on certain of our assets pledged to ceding companies under insurance contracts. In addition, we are potentially exposed should any insurance intermediaries be unable to fulfill their contractual obligations with respect to payments of balances owed to and by us.

Credit risk exists in relation to our reinsurance balances recoverable. We remain liable to the extent that retrocessionaires do not meet their contractual obligations and, therefore, we evaluate and monitor concentration of credit risk among our reinsurers. These amounts are discussed in Note 5—“Reinsurance Balances Recoverable”.

We limit the amount of credit exposure to any one counterparty and none of our counterparty credit exposures, excluding U.S. Government instruments, exceeded 10% of shareholders’ equity as of September 30, 2015.

Unfunded Investment Commitments

As at September 30, 2015, we had original commitments to investment funds of $320.0 million, of which $248.4 million has been funded, and $71.6 million remains outstanding as an unfunded commitment.

Guarantees

As at September 30, 2015 and December 31, 2014, we had, in total, parental guarantees supporting our insurance obligations in the amount of $382.5 million and $238.6 million, respectively.

Acquisitions and Significant New Business

As of September 30, 2015, we had entered into a definitive agreement with respect to the purchase of NSA which is expected to close in the fourth quarter of 2015. The NSA acquisition agreement is described in Note 2—“Acquisitions”.

Legal Proceedings

We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation and arbitration regarding claims. Estimated losses relating to claims arising in the ordinary course of business, including the anticipated outcome of any pending arbitration or litigation are included in the liability for losses and LAE in our consolidated balance sheets. In addition to claims litigation, we may be subject to other lawsuits and regulatory actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or omissions, employment claims or regulatory activity. We do not believe that the resolution of any

 

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currently pending legal proceedings, either individually or taken as a whole, will have a material effect on our business, results of operations or financial condition. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental and other claims.

17. SEGMENT INFORMATION

We monitor and report our results of operations in four segments: Non-Life Run-off, Atrium, StarStone and Life and Annuities. These segments are described in both Note 1 and Note 21 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2014.

Our total assets by segment were as follows:

 

     September 30, 2015      December 31, 2014  

Total assets:

     

Non-life run-off

   $ 7,851,758       $ 5,936,187   

Atrium

     617,738