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e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Quarterly Period Ended March 31, 2011
OR
o		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, 3^rd Floor
18 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 o

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 o No o

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


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o

(Do not check if a 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 o No þ

As of May 4, 2011, the registrant had outstanding 13,698,066 ordinary shares, par value $1.00 per share.

TABLE OF CONTENTS


		Page

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 (Unaudited)		1
	Condensed Consolidated Statements of Earnings for the Three-Month Periods Ended March 31, 2011 and 2010 (Unaudited)		2
	Condensed Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 2011 and 2010 (Unaudited)		3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three-Month Periods Ended March 31, 2011 and 2010 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2011 and 2010 (Unaudited)		5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)		6
	Report of Independent Registered Public Accounting Firm		28
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		39
Item 4.	Controls and Procedures		39

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		40
Item 1A.	Risk Factors		40
Item 5.	Other Information		40
Item 6.	Exhibits		41
Signatures			42
EX-10.1
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EX-15.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION


Item 1.	*FINANCIAL STATEMENTS*

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2011 and December 31, 2010


	March 31,			December 31,
	2011			2010
	(expressed in thousands of U.S. dollars, except share data)

ASSETS
Short-term investments, available-for-sale, at fair value (amortized cost: 2011 — $nil 2010 — $7,209)	$	—		$	7,263
Short-term investments, trading, at fair value		425,727			507,978
Fixed maturities, available-for-sale, at fair value (amortized cost: 2011 — $974,385; 2010 — $1,068,540)		1,006,350			1,094,947
Fixed maturities, trading, at fair value		913,847			524,122
Equities, trading, at fair value		63,655			60,082
Other investments, at fair value		233,878			234,714

Total investments		2,643,457			2,429,106
Cash and cash equivalents		630,386			799,154
Restricted cash and cash equivalents		570,815			656,200
Accrued interest receivable		23,884			19,980
Accounts receivable		20,208			24,790
Income taxes recoverable		6,458			7,968
Reinsurance balances receivable		1,006,627			961,442
Funds held by reinsured companies		244,959			274,699
Goodwill		21,222			21,222
Other assets		63,028			41,343

TOTAL ASSETS	$	5,231,044		$	5,235,904


LIABILITIES
Losses and loss adjustment expenses	$	3,394,988		$	3,291,275
Reinsurance balances payable		191,434			231,435
Accounts payable and accrued liabilities		41,168			94,390
Income taxes payable		28,498			50,075
Loans payable		204,430			245,278
Other liabilities		157,097			107,630

TOTAL LIABILITIES		4,017,615			4,020,083

COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Share capital
Authorized, issued and fully paid, par value $1 each (authorized 2011: 156,000,000; 2010: 156,000,000)
Ordinary shares (issued and outstanding 2011: 12,983,532; 2010:12,940,021)		12,984			12,940
Non-voting convertible ordinary shares (issued 2011: 2,972,892; 2010: 2,972,892)		2,973			2,973
Treasury shares at cost (non-voting convertible ordinary shares 2011: 2,972,892; 2010: 2,972,892)		(421,559	)		(421,559	)
Additional paid-in capital		668,751			667,907
Accumulated other comprehensive income		41,920			35,017
Retained earnings		654,646			651,143

Total Enstar Group Limited Shareholders’ Equity		959,715			948,421
Noncontrolling interest		253,714			267,400

TOTAL SHAREHOLDERS’ EQUITY		1,213,429			1,215,821

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,231,044		$	5,235,904

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three-Month Periods Ended March 31, 2011 and 2010


	Three Months Ended
	March 31,
	2011			2010
	(expressed in thousands of U.S. dollars, except share and per share data)

INCOME
Consulting fees	$	4,036		$	14,128
Net investment income		18,542			26,121
Net realized and unrealized gains		3,368			2,202
Gain on bargain purchase		13,105			—

		39,051			42,451

EXPENSES
Net reduction in ultimate loss and loss adjustment expense liabilities:
Reduction in estimates of net ultimate losses		(2,612	)		(1,942	)
Reduction in provisions for bad debt		—			(5,339	)
Reduction in provisions for unallocated loss adjustment expense liabilities		(11,537	)		(8,965	)
Amortization of fair value adjustments		10,077			6,650

		(4,072	)		(9,596	)
Salaries and benefits		10,382			15,190
General and administrative expenses		17,750			10,487
Interest expense		1,966			2,394
Net foreign exchange loss		7,334			7,588

		33,360			26,063

EARNINGS BEFORE INCOME TAXES AND SHARE OF NET EARNINGS OF PARTLY OWNED COMPANY		5,691			16,388
INCOME TAXES		(617	)		(5,922	)
SHARE OF NET EARNINGS OF PARTLY OWNED COMPANY		—			7,150

NET EARNINGS		5,074			17,616
Less: Net earnings attributable to noncontrolling interest		(1,571	)		(1,695	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	3,503		$	15,921

EARNINGS PER SHARE — BASIC:
Net earnings attributable to Enstar Group Limited ordinary shareholders	$	0.27		$	1.17

EARNINGS PER SHARE — DILUTED:
Net earnings attributable to Enstar Group Limited ordinary shareholders	$	0.26		$	1.15

Weighted average shares outstanding — basic		12,945,838			13,619,741
Weighted average shares outstanding — diluted		13,220,332			13,831,697

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three-Month Periods Ended March 31, 2011 and 2010


	Three Months Ended
	March 31,
	2011			2010
	(expressed in thousands of U.S. dollars)

NET EARNINGS	$	5,074		$	17,616

Other comprehensive income:
Unrealized holding gains on investments arising during the period		8,736			760
Reclassification adjustment for net realized and unrealized gains included in net earnings		(3,368	)		(2,202	)
Decrease in defined benefit pension liability		272			—
Currency translation adjustment		2,206			5,572

Total other comprehensive income		7,846			4,130

Comprehensive income		12,920			21,746
Less comprehensive income attributable to noncontrolling interest		(2,514	)		(3,160	)

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	10,406		$	18,586

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
For the Three-Month Periods Ended March 31, 2011 and 2010


	Three Months Ended
	March 31,
	2011			2010
	(expressed in thousands of U.S. dollars)

Share Capital — Ordinary Shares
Balance, beginning of period	$	12,940		$	13,581
Issue of shares		2			41
Share awards granted/vested		42			79

Balance, end of period	$	12,984		$	13,701

Share Capital — Non-Voting Convertible Ordinary Shares
Balance, beginning and end of period	$	2,973		$	2,973

Treasury Shares
Balance, beginning and end of period	$	(421,559	)	$	(421,559	)

Additional Paid-in Capital
Balance, beginning of period	$	667,907		$	721,120
Share awards granted/vested		168			5,286
Issue of shares		126			215
Amortization of share awards		550			149

Balance, end of period	$	668,751		$	726,770

Accumulated Other Comprehensive Income Attributable to Enstar Group Limited
Balance, beginning of period	$	35,017		$	8,709
Foreign currency translation adjustments		1,595			3,887
Net movement in unrealized holdings gains (losses) on investments		5,036			(1,221	)
Decrease in defined benefit pension liability		272			—

Balance, end of period	$	41,920		$	11,375

Retained Earnings
Balance, beginning of period	$	651,143		$	477,057
Net earnings attributable to Enstar Group Limited		3,503			15,921

Balance, end of period	$	654,646		$	492,978

Noncontrolling Interest
Balance, beginning of period	$	267,400		$	274,271
Return of capital		(16,200	)		—
Dividends paid		—			(6,010	)
Net earnings attributable to noncontrolling interest		1,571			1,695
Foreign currency translation adjustments		611			1,685
Net movement in unrealized holding gains (losses) on investments		332			(220	)

Balance, end of period	$	253,714		$	271,421

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three-Month Periods Ended March 31, 2011 and 2010


	Three Months Ended March 31,
	2011			2010
	(expressed in thousands of U.S. dollars)

OPERATING ACTIVITIES:
Net earnings	$	5,074		$	17,616
Adjustments to reconcile net earnings to cash flows used in operating activities:
Gain on bargain purchase		(13,105	)		—
Share of undistributed net earnings of partly owned company		—			(7,150	)
Net realized and unrealized investment gain		(3,368	)		(2,202	)
Share of net gain from other investments		(2,993	)		(7,797	)
Other items		(1,339	)		(1,878	)
Depreciation and amortization		384			335
Amortization of bond premiums and discounts		4,538			780
Net movement of trading securities held on behalf of policyholders		7,110			3,342
Sales and maturities of trading securities		374,473			32,106
Purchases of trading securities		(654,563	)		(127,351	)
Changes in assets and liabilities:
Reinsurance balances receivable		(43,567	)		(149,686	)
Other assets		11,793			(18,204	)
Losses and loss adjustment expenses		90,505			145,230
Reinsurance balances payable		(40,079	)		2,351
Accounts payable and accrued liabilities		(51,265	)		(17,638	)
Other liabilities		26,048			(12,744	)

Net cash flows used in operating activities		(290,354	)		(142,890	)

INVESTING ACTIVITIES:
Acquisitions, net of cash acquired		(7,949	)		157,184
Sales and maturities of available-for-sale securities		101,109			40,993
Purchase of held-to-maturity securities		—			(381,817	)
Maturity of held-to-maturity securities		—			166,960
Movement in restricted cash and cash equivalents		85,384			(55,479	)
Funding of other investments		(4,108	)		(3,048	)
Redemption of bond funds		10,136			—
Other investing activities		(143	)		(2	)

Net cash flows provided by (used in) investing activities		184,429			(75,209	)

FINANCING ACTIVITIES:
Repayment of loans		(40,500	)		—
Distribution of capital to noncontrolling interest		(16,200	)		—
Dividends paid to noncontrolling interest		—			(6,010	)

Net cash flows used in financing activities		(56,700	)		(6,010	)

TRANSLATION ADJUSTMENT		(6,143	)		19,589

NET DECREASE IN CASH AND CASH EQUIVALENTS		(168,768	)		(204,520	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		799,154			1,266,445

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	630,386		$	1,061,925





Supplemental Cash Flow Information
Net income taxes paid	$	25,254		$	15,372
Interest paid	$	2,231		$	3,687

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and December 31, 2010

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

(unaudited)


1.	BASIS OF PREPARATION AND CONSOLIDATION

The Company’s condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. The results of operations for any interim period are not necessarily indicative of the results for a full year. Inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Adoption of New Accounting Standards

Effective January 1, 2011, the Company adopted the new guidance issued by the U.S. Financial Accounting Standards Board (“FASB”), which provides additional guidance for performing Step 1 of the test for goodwill impairment when an entity has reporting units with zero or negative carrying values. As of March 31, 2011, none of the Company’s reporting units were at risk of failing Step 1 of the test for goodwill impairment. Under the new guidance, Step 2 of the goodwill impairment test must be performed when adverse qualitative factors indicate that goodwill is more likely than not impaired. The adoption of the revised guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2011, the Company adopted the new guidance issued by FASB, which specifies that if a public entity presents comparative financial statements, the entity should disclose, in its supplementary pro-forma information, revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The adoption of the revised guidance did not have a material impact on the consolidated financial statements.

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements, or do not apply to its operations.


2.	ACQUISITIONS

The Company accounts for acquisitions using the purchase method of accounting, which requires that the acquirer record the assets and liabilities acquired at their estimated fair value. The fair values of reinsurance assets and liabilities acquired are derived from probability weighted ranges of the associated projected cash flows, based on actuarially prepared information and management’s run-off strategy. Any amendment to the fair values resulting from changes in such information or strategy will be recognized when the changes occur.

Laguna

On March 25, 2011, the Company, through its wholly-owned subsidiary, Kenmare Holdings Ltd. (“Kenmare”), completed the acquisition of Laguna Life Limited, formerly known as CitiLife Financial Limited (“Laguna”), from Citigroup Insurance Holding Corporation (“Citigroup”), an affiliate of Citigroup Inc. Laguna is an Ireland-based life insurer that is in run-off. The purchase price was €15.0 million (approximately $21.2 million) and was funded from available cash on hand. The previously disclosed purchase price of €30.0 million (approximately $42.4

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


2.	ACQUISITIONS — (cont’d)

million) was reduced, prior to completion of the acquisition, after Citigroup received approval from Laguna’s regulator to distribute €15.0 million (approximately $21.2 million) to its shareholders.

The purchase price and fair value of the assets acquired in the Laguna acquisition were as follows:


Purchase price	$	21,223

Net assets acquired at fair value	$	34,328

Excess of net assets over purchase price (gain on bargain purchase)	$	(13,105	)

The gain on bargain purchase of approximately $13.1 million, relating to the acquisition of Laguna, arose primarily as a result of the reassessment by the Company, upon acquisition, of the total required estimated costs to manage the business to expiry. The Company’s assessment of costs was lower than the acquired costs recorded by the vendor in the financial statements of Laguna.

The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition:


Cash	$	13,274
Investments:
Short-term investments, trading		1,154
Fixed maturities, trading		30,765

Total investments		31,919
Reinsurance balances receivable		1,459
Other assets		1,325
Losses and loss adjustment expenses		(11,898	)
Accounts payable		(1,751	)

Net assets acquired at fair value	$	34,328

From March 25, 2011, the date of acquisition, to March 31, 2011, the Company has recorded $nil revenues and net earnings related to Laguna in its consolidated statement of earnings.

Clarendon

On December 22, 2010, the Company, through its wholly-owned subsidiary, Clarendon Holdings, Inc., entered into a definitive agreement for the purchase of Clarendon National Insurance Company (“Clarendon”) from Clarendon Insurance Group, Inc., an affiliate of Hannover Re. Clarendon is a New Jersey-domiciled insurer that is in run-off. The purchase price is approximately $200 million and will be financed in part by a bank loan facility provided by a London-based bank entered into on March 4, 2011 and in part from available cash on hand. Completion of the transaction is conditioned on, among other things, regulatory approval and satisfaction of various customary closing conditions. The transaction is expected to close in the second quarter of 2011.


3.	SIGNIFICANT NEW BUSINESS

Shelbourne RITC Transactions

In December 2007, Enstar, in conjunction with JCF FPK I L.P. (“JCF FPK”) and a newly-hired executive management team, formed U.K.-based Shelbourne Group Limited (“Shelbourne”) to invest in Reinsurance to Close or “RITC” transactions (the transferring of liabilities from one Lloyd’s syndicate to another) with Lloyd’s of London insurance and reinsurance syndicates in run-off. The Company owns approximately 56.8% of Shelbourne,

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


3.	SIGNIFICANT NEW BUSINESS — (cont’d)

which in turn owns 100% of Shelbourne Syndicate Services Limited, the Managing Agency for Lloyd’s Syndicate 2008, a syndicate approved by Lloyd’s of London on December 16, 2007 to undertake RITC transactions with Lloyd’s syndicates in run-off.

JCF FPK is a joint investment program between Fox-Pitt, Kelton, Cochran, Caronia & Waller (USA) LLC (“FPK”) and J.C. Flowers II, L.P. (the “Flowers Fund”). The Flowers Fund is a private investment fund advised by J.C. Flowers & Co. LLC. J. Christopher Flowers, one of the Company’s largest shareholders and formerly a member of the Company’s board of directors, is the Chairman and Chief Executive Officer of J.C. Flowers & Co. LLC. In addition, an affiliate of the Flowers Fund controlled approximately 41% of FPK until its sale of FPK in December 2009.

In February 2011, Lloyd’s Syndicate 2008 entered into RITC agreements with two Lloyd’s syndicates with total gross insurance reserves of approximately $129.6 million. The capital commitment to Lloyd’s Syndicate 2008 with respect to these two RITC agreements amounted to £21.3 million (approximately $34.1 million), which was fully funded by the Company from available cash on hand.


4.	RESTRICTED CASH AND CASH EQUIVALENTS

Restricted cash and cash equivalents were $570.8 million and $656.2 million as of March 31, 2011 and December 31, 2010, respectively. The restricted cash and cash equivalents are used as collateral against letters of credit and as guarantees under trust agreements. Letters of credit are issued to ceding insurers as security for the obligations of insurance subsidiaries under reinsurance agreements with those ceding insurers.


5.	INVESTMENTS

Available-for-sale

The amortized cost and estimated fair value of the Company’s fixed maturity securities and short-term investments classified as available-for-sale were as follows:


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

As at March 31, 2011
U.S. government and agency	$	63,952	$	662	$	(131	)	$	64,483
Non-U.S. government		236,004		11,308		(5	)		247,307
Corporate		612,486		17,939		(336	)		630,089
Residential mortgage-backed		18,839		591		(180	)		19,250
Commercial mortgage-backed		17,178		1,706		(2	)		18,882
Asset backed		25,926		631		(218	)		26,339

	$	974,385	$	32,837	$	(872	)	$	1,006,350

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)


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

As at December 31, 2010
U.S. government and agency	$	65,115	$	766	$	(92	)	$	65,789
Non-U.S. government		248,487		8,832		(314	)		257,005
Corporate		695,372		16,513		(1,615	)		710,270
Residential mortgage-backed		20,036		305		(234	)		20,107
Commercial mortgage-backed		19,667		2,083		(11	)		21,739
Asset backed		27,072		574		(346	)		27,300

	$	1,075,749	$	29,073	$	(2,612	)	$	1,102,210

The following tables summarize the Company’s fixed maturity securities and short-term investments classified as available-for-sale in an unrealized loss position as well as the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:


	12 Months or Greater					Less Than 12 Months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

As at March 31, 2011
U.S. government and agency	$	—	$	—		$	32,910	$	(131	)	$	32,910	$	(131	)
Non-U.S. government		—		—			4,995		(5	)		4,995		(5	)
Corporate		23,241		(281	)		18,403		(55	)		41,644		(336	)
Residential mortgage-backed		2,142		(179	)		31		(1	)		2,173		(180	)
Commercial mortgage-backed		1,499		(1	)		445		(1	)		1,944		(2	)
Asset backed		5,324		(217	)		211		(1	)		5,535		(218	)

	$	32,206	$	(678	)	$	56,995	$	(194	)	$	89,201	$	(872	)


	12 Months or Greater					Less Than 12 Months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

As at December 31, 2010
U.S. government and agency	$	801	$	—		$	22,976	$	(92	)	$	23,777	$	(92	)
Non-U.S. government		7,710		(32	)		31,128		(282	)		38,838		(314	)
Corporate		22,039		(318	)		107,735		(1,297	)		129,774		(1,615	)
Residential mortgage-backed		2,368		(168	)		11,274		(66	)		13,642		(234	)
Commercial mortgage-backed		530		(10	)		1,516		(1	)		2,046		(11	)
Asset backed		10,554		(346	)		87		—			10,641		(346	)

	$	44,002	$	(874	)	$	174,716	$	(1,738	)	$	218,718	$	(2,612	)

As at March 31, 2011 and December 31, 2010, the number of securities classified as available-for-sale in an unrealized loss position was 77 and 136, respectively, with a fair value of $89.2 million and $218.7 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)

months or longer was 40 and 32, respectively. As of March 31, 2011, none of these securities were considered to be other than temporarily impaired. The Company has no intent to sell and it is not more likely than not that the Company will be required to sell these securities before their fair values recover above the adjusted cost. The unrealized losses from these securities were not as a result of credit, collateral or structural issues.

The contractual maturities of the Company’s fixed maturity securities and short-term investments, classified as available-for-sale, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized		Fair		% of Total
	Cost		Value		Fair Value

As at March 31, 2011
Due in one year or less	$	387,872	$	397,483		39.5	%
Due after one year through five years		518,079		537,321		53.4	%
Due after five years through ten years		3,611		3,846		0.4	%
Due after ten years		2,880		3,229		0.3	%

		912,442		941,879		93.6	%
Residential mortgage-backed		18,839		19,250		1.9	%
Commercial mortgage-backed		17,178		18,882		1.9	%
Asset backed		25,926		26,339		2.6	%

	$	974,385	$	1,006,350		100.0	%


	Amortized		Fair		% of Total
	Cost		Value		Fair Value

As at December 31, 2010
Due in one year or less	$	373,683	$	379,203		34.4	%
Due after one year through five years		625,463		643,252		58.3	%
Due after five years through ten years		5,307		5,539		0.5	%
Due after ten years		4,521		5,070		0.5	%

		1,008,974		1,033,064		93.7	%
Residential mortgage-backed		20,036		20,107		1.8	%
Commercial mortgage-backed		19,667		21,739		2.0	%
Asset backed		27,072		27,300		2.5	%

	$	1,075,749	$	1,102,210		100.0	%

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)

The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity securities and short-term investments classified as available-for-sale:


	Amortized		Fair		% of Total
	Cost		Value		Fair Value

As at March 31, 2011
AAA	$	391,116	$	406,612		40.4	%
AA		255,904		263,424		26.2	%
A		263,827		270,869		26.9	%
BBB or lower		63,150		64,934		6.4	%
Not Rated		388		511		0.1	%

	$	974,385	$	1,006,350		100.0	%


	Amortized		Fair		% of Total
	Cost		Value		Fair Value

As at December 31, 2010
AAA	$	405,682	$	416,526		37.8	%
AA		267,917		273,500		24.8	%
A		332,401		341,447		31.0	%
BBB or lower		69,359		70,274		6.4	%
Not Rated		390		463		0.0	%

	$	1,075,749	$	1,102,210		100.0	%

Trading

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


	March 31,		December 31,
	2011		2010

U.S. government and agency	$	200,531	$	162,014
Non-U.S. government		205,083		129,861
Corporate		814,112		637,114
Municipal		1,567		2,297
Residential mortgage-backed		82,507		82,399
Commercial mortgage-backed		29,857		17,102
Asset backed		5,917		1,313
Equities		63,655		60,082

	$	1,403,229	$	1,092,182

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)


	Fair		% of Total
	Value		Fair Value

As at March 31, 2011
AAA	$	555,704		41.5	%
AA		224,801		16.8	%
A		479,129		35.8	%
BBB or lower		64,528		4.8	%
Not Rated		15,412		1.1	%

	$	1,339,574		100.0	%


	Fair		% of Total
	Value		Fair Value

As at December 31, 2010
AAA	$	395,881		38.4	%
AA		177,302		17.2	%
A		400,314		38.8	%
BBB or lower		51,983		5.0	%
Not Rated		6,620		0.6	%

	$	1,032,100		100.0	%

Other Investments


	March 31,		December 31,
	2011		2010

Private equities	$	110,485	$	104,109
Bond funds		93,916		102,279
Hedge fund		23,230		22,037
Other		6,247		6,289

	$	233,878	$	234,714

At March 31, 2011 and December 31, 2010, the Company had $110.5 million and $104.1 million, respectively, of other investments recorded in private equities, which represented 2.9% and 2.4% of total investments and cash and cash equivalents at March 31, 2011 and December 31, 2010, respectively. All of the Company’s investments in private equities are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short term. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. These investments are accounted for at estimated fair value determined by the Company’s proportionate share of the net asset value of the investee reduced by any impairment charges. As at March 31, 2011 and December 31, 2010, the Company had unfunded capital commitments relating to its other investments of $80.8 million and $84.7 million, respectively. See Note 12 for details of other investments with related parties.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)

Our bond fund holdings comprise a number of positions in diversified bond mutual funds managed by third-party managers.

Other-Than-Temporary Impairment Process

The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale represent impairments that are other-than-temporary by reviewing each fixed maturity investment that is impaired and: (1) determining if the Company has the intent to sell the fixed maturity investment or (2) determining if it is more likely than not that the Company will be required to sell the fixed maturity investment before its anticipated recovery; and (3) assessing whether a credit loss exists, that is, where the Company expects that the present value of the cash flows expected to be collected from the fixed maturity investment is less than the amortized cost basis of the investment.

The Company had no planned sales of its fixed maturity investments classified as available-for-sale as at March 31, 2011. In assessing whether it is more likely than not that the Company will be required to sell a fixed maturity investment before its anticipated recovery, the Company considers various factors including its future cash flow requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short term investments and fixed maturity investments classified as available-for-sale in an unrealized gain position, and other relevant factors. For the three months ended March 31, 2011, the Company did not recognize any other-than-temporary impairments due to required sales.

In evaluating credit losses, the Company considers a variety of factors in the assessment of a fixed maturity investment including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline below cost and par; (3) the potential for the fixed maturity investment to recover in value; (4) an analysis of the financial condition of the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the fixed maturity investment to make scheduled interest or principal payments.

Based on the factors described above, the Company determined that, as at March 31, 2011, no credit losses existed.

Fair Value of Financial Instruments

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


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

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

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

The following is a summary of valuation techniques or models the Company uses to measure fair value by asset and liability classes.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)

Fixed Maturity Investments

The Company’s fixed maturity portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors. The Company uses inputs from nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of its fixed maturity investments. These pricing services include FT Interactive Data, Barclays Capital Aggregate Index (formerly Lehman Index), Reuters Pricing Service and others.

In general, the pricing services use observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmark curves, benchmarking of like securities, non-binding broker-dealer quotes, reported trades and sector groupings to determine the fair value. In addition, pricing services use valuation models, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.

The following describes the techniques generally used to determine the fair value of the Company’s fixed maturities 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 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 include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

	•	Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at March 31, 2011, the Company had one corporate security classified as Level 3.

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

	•	Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds, and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.

	•	Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds, and

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)


		default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at March 31, 2011, the Company had one commercial mortgage-backed security classified as Level 3.

To validate the techniques or models used by the pricing services, the Company compares the fair value estimates to its knowledge of the current market and challenges any prices deemed not to be representative of fair value.

As of March 31, 2011, there were no material differences between the prices obtained from the pricing services and the fair value estimates developed by the Company.

Equity Securities

The Company’s equity securities are managed by two external advisors. The Company uses nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of its equity securities. These pricing services include FT Interactive Data and others.

The Company has categorized all of its investments in common stock as Level 1 investments because the fair values of these securities are based on quoted prices in active markets for identical assets or liabilities. The Company has categorized all of its investments in preferred stock as Level 2 (except one which was categorized as Level 3) because their fair value estimates are based on observable market data.

Other Investments

For its investments in private equities, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The 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. The Company’s private equity investments are mainly in the financial services industry. The fund advisors continue to evaluate the overall market environment, as well as specific areas in the financial services sector, in order to identify segments they believe will offer the most attractive investment opportunities. The financial statements of each fund generally are audited annually under U.S. GAAP, using fair value measurement for the underlying investments. For all publicly-traded companies within the funds, the Company has valued those investments based on the latest share price. The value of Affirmative Investment LLC (in which the Company owns a non-voting 7% membership interest) is based on the market value of the shares of Affirmative Insurance Holdings, Inc., a publicly-traded company.

All of the Company’s investments in private equities are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate those investments in the short term. These restrictions have been in place since the initial investments. The capital commitments are discussed in detail in Note 12 to the unaudited condensed consolidated financial statements. The Company has classified private equities as Level 3 investments because they reflect the Company’s own judgment about the assumptions that market participants might use.

For its investment in the hedge fund, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The 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. The adviser of the fund intends to seek attractive risk-adjusted total returns for the fund’s investors by acquiring, originating, and actively managing a diversified portfolio of debt securities, with a focus on various forms of asset-backed securities and loans. The fund will focus on investments that the adviser believes to be

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)

fundamentally undervalued with current market prices that are believed to be compelling relative to intrinsic value. The units of account that are valued by the Company are its interests in the fund and not the underlying holdings of such fund. Thus, the inputs used by the Company to value its investment in the fund may differ from the inputs used to value the underlying holdings of such fund. The hedge fund is not currently eligible for redemption due to imposed lock-up periods of three years from the time of the initial investment. Once eligible, redemptions will be permitted quarterly with 90 days notice. There are no unfunded capital commitments in relation to the hedge fund. The investment in the fund is classified as Level 3 in the fair value hierarchy.

The bond funds in which the Company invests have been classified as Level 2 investments because their fair value is estimated using the net asset value reported by Bloomberg and they have daily liquidity.

Fair Value Measurements

In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification, the Company has categorized its investments that are recorded at fair value among levels as follows:


	March 31, 2011
	Quoted Prices in				Significant
	Active Markets		Significant Other		Unobservable
	for Identical Assets		Observable Inputs		Inputs		Total Fair
	(Level 1)		(Level 2)		(Level 3)		Value

U.S. government and agency	$	—	$	265,014	$	—	$	265,014
Non-U.S. government		—		452,390		—		452,390
Corporate		—		1,443,650		551		1,444,201
Municipal		—		1,567		—		1,567
Residential mortgage-backed		—		101,757		—		101,757
Commercial mortgage-backed		—		47,777		962		48,739
Asset backed		—		32,256		—		32,256
Equities		59,680		—		3,975		63,655
Other investments		—		93,916		139,962		233,878

Total investments	$	59,680	$	2,438,327	$	145,450	$	2,643,457

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)


	December 31, 2010
	Quoted Prices in				Significant
	Active Markets		Significant Other		Unobservable
	for Identical Assets		Observable Inputs		Inputs		Total Fair
	(Level 1)		(Level 2)		(Level 3)		Value

U.S. government and agency	$	—	$	227,803	$	—	$	227,803
Non-U.S. government		—		386,866		—		386,866
Corporate		—		1,346,854		530		1,347,384
Municipal		—		2,297		—		2,297
Residential mortgage-backed		—		102,506		—		102,506
Commercial mortgage-backed		—		37,927		914		38,841
Asset backed		—		28,613		—		28,613
Equities		56,369		138		3,575		60,082
Other investments		—		102,279		132,435		234,714

Total investments	$	56,369	$	2,235,283	$	137,454	$	2,429,106

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2011:


	Fixed
	Maturity		Other			Equity
	Investments		Investments			Securities		Total

Level 3 investments as of January 1, 2011	$	1,444	$	132,435		$	3,575	$	137,454
Purchases		—		4,157			—		4,157
Sales		—		(49	)		—		(49	)
Total realized and unrealized losses through earnings		69		3,419			400		3,888
Net transfers in and/or (out) of Level 3		—		—			—		—

Level 3 investments as of March 31, 2011	$	1,513	$	139,962		$	3,975	$	145,450

The amount of net gains/(losses) for the period included in earnings attributable to the fair value of changes in assets still held at March 31, 2011 was $2.5 million. Of this amount, $0.5 million was included in net realized and unrealized gains and $2.0 million was included in net investment income.


	Fixed
	Maturity		Other		Equity
	Investments		Investments		Securities		Total

Level 3 investments as of January 1, 2010	$	641	$	81,801	$	3,300	$	85,742
Net purchases (sales and distributions)		579		3,049		—		3,628
Total realized and unrealized losses through earnings		116		6,444		150		6,710
Net transfers in and/or (out) of Level 3		—		—		—		—

Level 3 investments as of March 31, 2010	$	1,336	$	91,294	$	3,450	$	96,080

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.	INVESTMENTS — (cont’d)

The amount of net gains for the period included in earnings attributable to the fair value of changes in assets still held at March 31, 2010 was $7.9 million. Of this amount, $0.3 million was included in net realized and unrealized gains and $7.6 million was included in net investment income.

During the three months ended March 31, 2011 and 2010, proceeds from the sales and maturities of available-for-sale securities were $101.1 and $41.0 million, respectively. Gross realized gains on the sale of available-for-sale securities were, for the three months ended March 31, 2011 and 2010, $0.2 million and less than $0.1 million, respectively, and gross realized losses on the sale of available-for-sale securities, were $0.3 million and $nil, respectively. Unrealized gains on trading securities were $2.0 million and $1.7 million for the three months ended March 31, 2011 and 2010, respectively.

Restricted Investments

The Company is required to maintain investments on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The investments held in trust as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted investments as of March 31, 2011 and December 31, 2010 was as follows:


	March 31,		December 31,
	2011		2010

Assets used for collateral in trust for third-party agreements	$	452,444	$	371,834
Deposits with regulatory authorities		33,064		33,970
Others		63,722		62,437

	$	549,230	$	468,241


6.	DERIVATIVE INSTRUMENTS

In October 2010, the Company entered into a foreign currency forward exchange contract as part of its overall foreign currency risk management strategy. On the value date, June 30, 2011, the Company will sell AU$45.0 million for $42.5 million. The contract exchange rate is AU$1 for $0.9439. As at March 31, 2011, the change in the fair value of the contract was $(0.4) million, the effect of which the Company has recognized as a foreign exchange loss included as part of its net earnings.


7.	REINSURANCE BALANCES RECEIVABLE


	March 31,			December 31,
	2011			2010

Recoverable from reinsurers on:
Outstanding losses	$	460,464		$	425,336
Losses incurred but not reported		162,325			141,118
Fair value adjustments		(39,311	)		(41,014	)

Total reinsurance reserves recoverable		583,478			525,440
Paid losses		423,149			436,002

	$	1,006,627		$	961,442

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


7.	REINSURANCE BALANCES RECEIVABLE — (cont’d)

The fair value adjustment, determined on acquisition of reinsurance subsidiaries, was 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 receivables acquired plus a spread to reflect credit risk, and is amortized over the estimated recovery period, as adjusted for accelerations on commutation settlements, using the constant yield method.

The Company’s acquired reinsurance subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of reinsurance assumed. The Company remains liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, the Company evaluates and monitors concentration of credit risk among its reinsurers. Provisions are made for amounts considered potentially uncollectible.

At March 31, 2011, the Company’s top 10 reinsurers accounted for 72.7% (December 31, 2010: 75.5%) of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) and included $102.9 million of incurred but not reported, or IBNR, recoverable (December 31, 2010: $99.6 million). Reinsurance recoverables by reinsurer were as follows:


	March 31, 2011					December 31, 2010
	Reinsurance		% of			Reinsurance		% of
	Recoverable		Total			Recoverable		Total

Top 10 reinsurers	$	731,955		72.7	%	$	726,201		75.5	%
Other reinsurers’ balances > $1 million		235,843		23.4	%		198,737		20.7	%
Other reinsurers’ balances < $1 million		38,829		3.9	%		36,504		3.8	%

Total	$	1,006,627		100.0	%	$	961,442		100.0	%

At March 31, 2011 and December 31, 2010, the provision for uncollectible reinsurance relating to losses recoverable was $419.0 million and $381.4 million, respectively. To estimate the provision for uncollectible reinsurance recoverables, the reinsurance recoverables are first allocated to applicable reinsurers. This determination is based on a detailed process rather than an estimate, although an element of judgment is applied. As part of this process, ceded IBNR is allocated by reinsurer.

The Company uses a detailed analysis to estimate uncollectible reinsurance. The primary components of the analysis are reinsurance recoverable balances by reinsurer and bad debt provisions applied to these balances to determine the portion of a reinsurer’s balance deemed to be uncollectible. These provisions require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer (in order to determine their ability to settle the reinsurance balances), as well as other key considerations and assumptions, such as claims and coverage issues.

As at March 31, 2011 and December 31, 2010, reinsurance receivables with a carrying value of $405.2 million and $398.8 million, respectively, were each associated with two reinsurers which represented 10% or more of total reinsurance balances receivable. As at March 31, 2011, the two reinsurers had credit ratings of AA- or higher. In the event that all or any of the reinsuring companies are unable to meet their obligations under existing reinsurance agreements, the Company will be liable for such defaulted amounts.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


8.	LOSSES AND LOSS ADJUSTMENT EXPENSES

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2011 and March 31, 2010. Losses incurred and paid are reflected net of reinsurance recoverables.


	Three Months Ended March 31,
	2011			2010

Balance as at January 1	$	3,291,275		$	2,479,136
Less: total reinsurance reserves recoverable		525,440			347,728

		2,765,835			2,131,408
Effect of exchange rate movement		34,372			(35,975	)
Net reduction in ultimate loss and loss adjustment expense liabilities		(4,072	)		(9,596	)
Net losses paid		(88,131	)		(83,225	)
Acquired on purchase of subsidiaries		10,439			222,042
Retroactive reinsurance contracts assumed		93,067			230,389

Net balance as at March 31		2,811,510			2,455,043
Plus: total reinsurance reserves recoverable		583,478			435,680

Balance as at March 31	$	3,394,988		$	2,890,723

The following table shows the components of the movement in the net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2011 and 2010:


	Three Months Ended March 31,
	2011			2010

Net losses paid	$	(88,131	)	$	(83,225	)
Net change in case and loss adjustment expense reserves		83,430			78,854
Net change in incurred but not reported reserves		7,313			6,313

Reduction in estimates of net ultimate losses		2,612			1,942
Reduction in provisions for bad debt		—			5,339
Reduction in provisions for unallocated loss adjustment expense liabilities		11,537			8,965
Amortization of fair value adjustments		(10,077	)		(6,650	)

Net reduction in ultimate loss and loss adjustment expense liabilities	$	4,072		$	9,596

Net reduction in case and loss adjustment expense reserves, or LAE reserves, comprises the movement during the quarter in specific case reserve liabilities as a result of claims settlements or changes advised to the Company by its policyholders and attorneys, less changes in case reserves recoverable advised by the Company to its reinsurers as a result of the settlement or movement of assumed claims. Net reduction in IBNR represents the change in the Company’s actuarial estimates of losses incurred but not reported.

The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2011 of $4.1 million was attributable to a reduction in estimates of net ultimate losses of $2.6 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $11.5 million, relating to 2011 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $10.1 million.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


8.	LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d)

The reduction in estimates of net ultimate losses of $2.6 million comprised net incurred loss development of $4.7 million and reductions in IBNR reserves of $7.3 million.

The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2010 of $9.6 million was attributable to a reduction in estimates of net ultimate losses of $1.9 million, a reduction in aggregate provisions for bad debt of $5.3 million and a reduction in provisions for unallocated loss and loss adjustment expense liabilities of $9.0 million, relating to 2010 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $6.7 million.

The reduction in estimates of net ultimate losses of $1.9 million comprised net incurred loss development of $4.4 million and reductions in IBNR reserves of $6.3 million. The reductions in provisions for bad debts of $5.3 million resulted from the collection of receivables against which bad debt provisions had been provided in earlier periods.


9.	LOANS PAYABLE

The Company’s long-term debt consists of loan facilities used to partially finance certain of the Company’s acquisitions or significant new business transactions along with a loan outstanding in relation to the share repurchase agreements (the “Repurchase Agreements”) entered into with three of its executives and certain trusts and a corporation affiliated with the executives. The Unionamerica, Knapton and Enstar Group Facilities and the Repurchase Agreements are described in Note 11 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Total amounts of loans payable outstanding as of March 31, 2011 and December 31, 2010 totaled $204.4 million and $245.3 million, respectively, and were comprised as follows:


Facility	Date of Facility	March 31, 2011		December 31, 2010

Unionamerica — Facility A	December 30, 2008	$	30,242	$	71,259
Unionamerica — Facility B	December 30, 2008		—		154
Knapton	April 20, 2010		21,528		21,532
Enstar Group — Facility A	December 29, 2010		52,100		52,100
Enstar Group — Facility B	December 29, 2010		62,900		62,900

Total long-term bank debt			166,770		207,945
Repurchase Agreements	October 1, 2010		37,660		37,333

Total loans payable		$	204,430	$	245,278

In January 2011, the accrued interest outstanding of $0.2 million relating to Unionamerica Facility B was settled. In addition, on March 3, 2011, the Company repaid $40.5 million of the outstanding loan balance of Unionamerica Facility A.

On March 4, 2011, the Company, through Clarendon Holdings, Inc., entered into a $106.5 million term facility agreement (the “Clarendon Facility”) with a London-based bank. The Clarendon Facility provides for a four-year term loan facility, which will be available to be drawn to fund up to 50% of the purchase price of Clarendon. As of March 31, 2011, Clarendon Holdings, Inc. has not borrowed any of the amount available under the Clarendon Facility. The Clarendon Facility will be secured by a security interest in all of the assets of Clarendon Holdings, Inc., as well as a first priority lien on the stock of both Clarendon Holdings, Inc. and Clarendon. Interest is payable at the end of each interest period chosen by Clarendon Holdings, Inc. or, at the latest, each six months. The interest rate is

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.	LOANS PAYABLE — (cont’d)

LIBOR plus 2.75%. The Clarendon Facility is subject to various financial and business covenants, including limitations on mergers and consolidations, restrictions as to disposition of stock, restrictions on the declaration and payment of dividends and limitations on liens on the stock.

As of March 31, 2011, all of the covenants relating to the Company’s outstanding credit facilities were met.


10.	EMPLOYEE BENEFITS

The Company’s share-based compensation plans provide for the grant of various awards to its employees and to members of the board of directors. These are described in Note 14 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The information below includes both the employee and director components of the Company’s share-based compensation.


*(a)*	*Employee share plans*

Employee stock awards for the three months ended March 31, 2011 are summarized as follows:


				Weighted
				Average Fair
	Number of			Value of
	Shares			the Award

Nonvested — January 1, 2011		153,930		$	13,019
Granted		67,767			5,625
Vested		(17,767	)		(1,575	)

Nonvested — March 31, 2011		203,930		$	20,369


(i)	2006-2010 Annual Incentive Compensation Program, 2011-2015 Annual Incentive Compensation Program and 2006 Equity Incentive Plan

For the three months ended March 31, 2011 and 2010, 16,328 and 78,664 shares were awarded to directors, officers and employees under the 2006 Equity Incentive Plan. The total values of the awards for the three months ended March 31, 2011 and 2010 were $1.5 million and $5.4 million, respectively, and were charged against the 2006-2010 Annual Incentive Compensation Program accrual established for the years ended December 31, 2010 and 2009, respectively. On February 23, 2011, the Company adopted the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program.

In addition, for the three months ended March 31, 2011 and 2010, 50,000 and 153,930 restricted shares were awarded to certain employees under the 2006 Equity Incentive Plan. The total unrecognized compensation cost related to the non-vested share awards as at March 31, 2011 and 2010 was $12.5 million and $10.5 million, respectively. This cost is expected to be recognized over the next 4.5 years. Compensation costs of $0.5 million and $0.1 million relating to the share award were recognized in the Company’s statement of earnings for the three months ended March 31, 2011 and 2010, respectively.

The accrued expense relating to the 2006-2010 Annual Incentive Compensation Program for the three months ended March 31, 2011 and 2010 was $nil and $2.8 million, respectively.


(ii)	Enstar Group Limited Employee Share Purchase Plan

On February 26, 2008, the Company’s board of directors approved the Amended and Restated Enstar Group Limited Employee Share Purchase Plan (the “Purchase Plan”), and subsequently, on June 11, 2008, the Company’s shareholders approved the Purchase Plan at the Annual General Meeting.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


10.	EMPLOYEE BENEFITS — (cont’d)

Compensation costs of less than $0.1 million relating to the shares issued have been recognized in the Company’s statement of earnings for each of the three-month periods ended March 31, 2011 and 2010. As at March 31, 2011, 15,593 shares have, in total, been issued to employees under the Purchase Plan.


*(b)*	*Options*


				Weighted
				Average		Intrinsic
	Number of			Exercise		Value of
	Shares			Price		Shares

Outstanding — January 1, 2011		152,015		$	34.55	$	7,606
Granted		—			—		—
Exercised		(49,037	)		19.63		(3,709	)
Forfeited		—			—		—

Outstanding — March 31, 2011		102,978		$	41.61	$	5,996

Stock options outstanding and exercisable as of March 31, 2011 were as follows:

Ranges of

Weighted Average

Exercise

Number of

Weighted Average

Remaining

Prices

Options

Exercise Price

Contractual Life

$40 - $60

102,978

41.65

2.5 years


*(c)*	*Deferred Compensation and Stock Plan for Non-Employee Directors*

For the three months ended March 31, 2011 and 2010, 1,283 and 1,472 restricted share units, respectively, were credited to the accounts of Non-Employee Directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors.


*(d)*	*Pension plan*

The Company provides pension benefits to eligible employees through various plans sponsored by the Company. All pension plans, except as disclosed below, are structured as defined contribution plans. Pension expense for the three months ended March 31, 2011 and 2010 was $1.1 million and $0.9 million, respectively.

The Company acquired, as part of the acquisition of PW Acquisition Company (“PWAC”) on July 20, 2010, a noncontributory defined benefit pension plan (the “PWAC Plan”) that covers substantially all PWAC employees hired before April 1, 2003 and provides pension and certain death benefits. Effective April 1, 2004, PWAC froze the PWAC Plan. As at the date of acquisition of PWAC by the Company, the PWAC Plan had an unfunded liability of $6.7 million that had been accrued by PWAC. Subsequent to acquisition, an actuarial review was performed of the PWAC Plan which determined that the PWAC Plan’s unfunded liability was $8.1 million. As at March 31, 2011, PWAC had an accrued liability of $7.9 million for the unfunded PWAC Plan liability.

The Company recorded pension expense relating to the PWAC Plan, for the three months ended March 31, 2011, of $0.2 million.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


11.	EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per share for the three-month periods ended March 31, 2011 and 2010:


	2011		2010

Basic earnings per share:
Net earnings attributable to Enstar Group Limited	$	3,503	$	15,921
Weighted average shares outstanding — basic		12,945,838		13,619,741

Earnings per share attributable to Enstar Group Limited — basic	$	0.27	$	1.17

Diluted earnings per share:
Net earnings attributable to Enstar Group Limited	$	3,503	$	15,921
Weighted average shares outstanding — basic		12,945,838		13,619,741
Share equivalents:
Unvested shares		174,486		39,313
Restricted share units		17,489		14,397
Options		82,519		158,246

Weighted average shares outstanding — diluted		13,220,332		13,831,697

Earnings per share attributable to Enstar Group Limited — diluted	$	0.26	$	1.15


12.	RELATED PARTY TRANSACTIONS

The Company has entered into certain transactions with companies and partnerships that are affiliated with J. Christopher Flowers. Mr. Flowers is one of the largest shareholders of the Company and formerly was a member of the Company’s board of directors.

During the three months ended March 31, 2011, the Company funded $3.9 million of its remaining outstanding capital commitment to entities affiliated with Mr. Flowers. The Company had, as of March 31, 2011 and December 31, 2010, excluding its investment in Varadero International Ltd. (a hedge fund affiliated with the Company and Mr. Flowers with respect to which the Company has funded 100% of its capital commitment), investments in entities affiliated with Mr. Flowers with a total value of $102.4 million and $96.1 million, respectively, and outstanding commitments to entities managed by Mr. Flowers, as of those same dates, of $80.7 million and $84.6 million, respectively. The Company’s outstanding commitments may be drawn down over approximately the next five years.

As at March 31, 2011, related party investments associated with Mr. Flowers accounted for 99.9% of the total unfunded capital commitments of the Company and 53.7% of the total amount of investments classified as other investments by the Company.


13.	TAXATION

Income tax expense for the three months ended March 31, 2011 and March 31, 2010 was $0.6 million and $5.9 million, respectively.

Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes in Bermuda on their income or capital gains. On March 25, 2011, the Company received confirmation from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the period for which the Company and its Bermuda subsidiaries will be exempt from taxation in Bermuda would be extended until March 2035.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


13.	TAXATION — (cont’d))

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

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

The actual income tax rate for the three months ended March 31, 2011 and 2010 differed from the amount computed by applying the effective rate of 0% under Bermuda law to earnings before income taxes as shown in the following reconciliation:


	Three Months Ended March 31,
	2011			2010

Earnings before income tax	$	4,120		$	21,843

Expected tax rate		0.0	%		0.0	%
Foreign taxes at local expected rates		50.9	%		54.2	%
Benefit of loss carryovers		0.0	%		(11.8	)%
Change in uncertain tax positions		1.2	%		0.3	%
Change in valuation allowance		(12.7	)%		(15.1	)%
Impact of Australian tax consolidation		(21.1	)%		—
Other		(3.3	)%		(0.5	)%

Effective tax rate		15.0	%		27.1	%

The Company had net deferred tax assets of approximately $8.3 million and $3.2 million as of March 31, 2011 and December 31, 2010, respectively. Deferred income taxes arise from the recognition of temporary differences between income determined for financial reporting purposes and income tax purposes. The temporary differences that give rise to significant portions of the deferred tax assets and liabilities are net operating loss carryforwards, claims reserves, due principally to the discounting for tax, and investments.

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

As of March 31, 2011 and December 31, 2010, the Company has unrecognized tax benefits of $5.6 million and $5.6 million, respectively, relating to uncertain tax positions.

The Company’s operating subsidiaries in specific countries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, the Company’s major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2005, 2008 and 2005, respectively.

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


14.	SUBSEQUENT EVENTS

On April 20, 2011, the Company entered into an Investment Agreement (the “Investment Agreement”) with GSCP VI AIV Navi, Ltd., GSCP VI Offshore Navi, Ltd., GSCP VI Parallel AIV Navi, Ltd., GSCP VI Employee Navi, Ltd., and GSCP VI GmbH Navi, L.P. (collectively, the “Purchasers”), each of which is an affiliate of Goldman, Sachs & Co. Under the Investment Agreement, the Company agreed to issue and sell, and the Purchasers agreed to purchase, at several different closings described immediately below, securities representing 19.9% of the Company’s outstanding share capital pro forma for all of the issuances, with the right to acquire an additional 2.0% on a fully diluted basis pro forma for all the issuances through the exercise of warrants as described below, although the Purchasers’ voting interest in the Company purchased pursuant to the Investment Agreement will be less than 4.9%. The securities that the Purchasers have acquired or, subject to certain conditions, will be acquiring at these closings can be further summarized as follows:


	•	At the first closing, which occurred on April 20, 2011 (the “First Closing”), 531,345 of the Company’s voting ordinary shares, par value $1.00 per share (“Voting Common Shares”), and 749,869 of the Company’s newly created Series A convertible non-voting preference shares, par value $1.00 per share (the “Non-Voting Preferred Shares”), at a purchase price of $86.00 per share, or approximately $110.2 million in the aggregate. Subject to the receipt of shareholder approval of certain amendments to the Company’s bye-laws to, among other things, create three new classes of non-voting ordinary shares (the “Shareholder Approval”), the Non-Voting Preferred Shares will convert on a share-for-share basis (subject to adjustment in certain circumstances) into non-voting ordinary shares of the Company, par value $1.00 (the “Non-Voting Common Shares”). At the First Closing, the Company also issued to the Purchasers warrants to acquire 340,820 Non-Voting Preferred Shares or, subject to the receipt of the Shareholder Approval, Non-Voting Common Shares for an exercise price of $115.00 per share, subject to certain adjustments (the “Warrants”). The Purchasers may, at their election, satisfy the exercise price of the Warrants on a cashless basis by surrender of shares otherwise issuable upon exercise of the Warrants in accordance with a formula set forth in the Warrants. The Warrants expire on the ten year anniversary of the First Closing.

	•	At the second closing (the “Second Closing”), which is expected to occur after receipt of applicable regulatory approvals and satisfaction of other closing conditions (but not before December 23, 2011), 134,184 Voting Common Shares and 827,504 Non-Voting Preferred Shares (unless the Company receives the Shareholder Approval, in which case the Purchasers will purchase Non-Voting Common Shares instead of Non-Voting Preferred Shares at the Second Closing), at a purchase price of $86.00 per share, or approximately $82.7 million in the aggregate.

	•	Subject to approval by the Company’s shareholders of the issuance of securities in excess of limits imposed by the listing requirements of the Nasdaq Stock Market and satisfaction of other closing conditions, at a third closing (the “Third Closing”), 1,148,264 Non-Voting Preferred Shares (unless the Company receives the Shareholder Approval, in which case the Purchasers will purchase Non-Voting Common Shares instead of Non-Voting Preferred Shares at the Third Closing), at a purchase price of $86.00 per share, or approximately $98.7 million in the aggregate. If the Third Closing occurs, it is expected to occur simultaneously with the Second Closing.

The Purchasers may also elect, at their option, to receive Non-Voting Preferred Shares or, if applicable, Non-Voting Common Shares in lieu of Voting Common Shares that might otherwise be issuable to them at any of the closings discussed above. Any such non-voting shares would be convertible on a share-for-share basis, subject to certain adjustments, into Voting Common Shares at the option of the Purchasers. The total investment expected to be made by the Purchasers for the purchase of the Voting Common Shares, the Non-Voting Common Shares, the Non-Voting Preferred Shares and the Warrants is approximately $291.6 million.

In addition, certain directors and officers of the Company and other persons have entered into voting agreements (the “Voting Agreements”) with the Company concurrently with the signing of the Investment

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


14.	SUBSEQUENT EVENTS — (cont’d)

Agreement with respect to shares representing 34.3% of the Company’s outstanding voting power. Under the Voting Agreements, each such shareholder has committed, among other things, to vote all voting securities of the Company that such shareholder holds and is entitled to vote in favor of the matters required to be approved by the Company’s shareholders in connection with the Investment Agreement.

In connection with the First Closing, the Company appointed Sumit Rajpal, a managing director of Goldman, Sachs & Co., to its board of directors, effective May 16, 2011.


15.	SEGMENT INFORMATION

Due to the growing insignificance of the Company’s consulting activities in relation to its core reinsurance operations, the Company has reevaluated its segment reporting and concluded that it has one reportable segment. Due to the decreasing relative significance of consulting activities and the associated revenues and earnings, the Company no longer monitors the results of consulting activities separately for evaluating business performance and for making resource allocation decisions. Accordingly, effective January 1, 2011, the Company will no longer report separately the results of its consulting activities. Prior to 2011, the Company reported two segments: reinsurance and consulting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

of Enstar Group Limited

We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries (the “Company”) as of March 31, 2011, and the related condensed consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for the three-month periods ended March 31, 2011 and 2010. These interim financial statements are the responsibility of the Company’s management.

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

Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2010 and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended; and in our report dated March 4, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche

Hamilton, Bermuda

May 6, 2011


Item 2.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

The following is a discussion and analysis of our results of operations for the three months ended March 31, 2011 and 2010. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Business Overview

Enstar Group Limited, or Enstar, was formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry.

Since our formation, we have acquired 31 insurance and reinsurance companies and 15 portfolios of insurance and reinsurance business and are now administering those businesses in run-off. Insurance and reinsurance companies and portfolios of insurance and reinsurance business we acquire that are in run-off no longer underwrite new policies. We derive our net earnings from the ownership and management of these companies and portfolios of business in run-off primarily by settling insurance and reinsurance claims below the acquired value of loss reserves and from returns on the portfolio of investments retained to pay future claims. In addition, we provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.

Recent Transactions

Laguna

On March 25, 2011, we, through our wholly-owned subsidiary, Kenmare Holdings Ltd., or Kenmare, completed the acquisition of Laguna Life Limited, formerly known as CitiLife Financial Limited, or Laguna, from Citigroup Insurance Holding Corporation, or Citigroup, an affiliate of Citigroup Inc. Laguna is an Ireland-based life insurer that is in run-off. The purchase price was €15.0 million (approximately $21.2 million) and was funded from available cash on hand. The previously disclosed purchase price of €30.0 million (approximately $42.4 million) was reduced, prior to completion of the acquisition, after Citigroup received approval from Laguna’s regulator to distribute €15.0 million (approximately $21.2 million) to its shareholders.

Clarendon

On December 22, 2010, we, through our wholly-owned subsidiary, Clarendon Holdings, Inc., entered into a definitive agreement for the purchase of Clarendon National Insurance Company, or Clarendon, from Clarendon Insurance Group, Inc., an affiliate of Hannover Re. Clarendon is a New Jersey-domiciled insurer that is in run-off. The purchase price is approximately $200 million and will be financed in part by a bank loan facility provided by a London-based bank entered into on March 4, 2011 and in part from available cash on hand. Completion of the transaction is conditioned on, among other things, regulatory approval and satisfaction of various customary closing conditions. The transaction is expected to close in the second quarter of 2011.

Significant New Business

Shelbourne RITC Transactions

In December 2007, we, in conjunction with JCF FPK I L.P., or JCF FPK, and a newly-hired executive management team, formed U.K.-based Shelbourne Group Limited, or Shelbourne, to invest in Reinsurance to Close or “RITC” transactions (the transferring of liabilities from one Lloyd’s syndicate to another) with Lloyd’s of London insurance and reinsurance syndicates in run-off. We own approximately 56.8% of Shelbourne, which in turn owns 100% of Shelbourne Syndicate Services Limited, the Managing Agency for Lloyd’s Syndicate 2008, a syndicate approved by Lloyd’s of London on December 16, 2007 to undertake RITC transactions with Lloyd’s syndicates in run-off.

JCF FPK is a joint investment program between Fox-Pitt, Kelton, Cochran, Caronia & Waller (USA) LLC, or FPK, and J.C. Flowers II, L.P., or the Flowers Fund. The Flowers Fund is a private investment fund advised by J.C. Flowers & Co. LLC. J. Christopher Flowers, one of our largest shareholders and formerly a member of our board of directors, is the Chairman and Chief Executive Officer of J.C. Flowers & Co. LLC. In addition, an affiliate of the Flowers Fund controlled approximately 41% of FPK until its sale of FPK in December 2009.

Results of Operations

The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.


	Three Months Ended March 31,
	2011			2010
	(in thousands of U.S. dollars)

INCOME
Consulting fees	$	4,036		$	14,128
Net investment income		18,542			26,121
Net realized and unrealized gains		3,368			2,202
Gain on bargain purchase		13,105			—

		39,051			42,451

EXPENSES
Net reduction in ultimate loss and loss adjustment expense liabilities:
Reduction in estimates of net ultimate losses		(2,612	)		(1,942	)
Reduction in provisions for bad debt		—			(5,339	)
Reduction in provisions for unallocated loss adjustment expense liabilities		(11,537	)		(8,965	)
Amortization of fair value adjustments		10,077			6,650

		(4,072	)		(9,596	)
Salaries and benefits		10,382			15,190
General and administrative expenses		17,750			10,487
Interest expense		1,966			2,394
Net foreign exchange loss		7,334			7,588

		33,360			26,063

Earnings before income taxes and share of net earnings of partly owned company		5,691			16,388
Income taxes		(617	)		(5,922	)
Share of net earnings of partly owned company		—			7,150

NET EARNINGS		5,074			17,616
Less: Net earnings attributable to noncontrolling interest		(1,571	)		(1,695	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	3,503		$	15,921

Comparison of the Three Months Ended March 31, 2011 and 2010

We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $5.1 million and $17.6 million for the three months ended March 31, 2011 and 2010, respectively. The decrease in earnings of approximately $12.5 million was primarily attributable to the following:


	(i)	a decrease in consulting fees of $10.1 million mainly related to lower fees earned from incentive based engagements;

	(ii)	lower net reduction in ultimate loss and loss adjustment expense liabilities of $5.5 million;

	(iii)	an increase in general and administrative expenses of $7.3 million due predominantly to an increase in professional fees relating largely to audit and third-party management fees as a result of 2010 acquisition activity;

	(iv)	a decrease in net investment income of $7.6 million primarily as a result of lower unrealized gains in our private equity portfolio, classified as other investments, from $7.7 million in 2010 to $0.9 million in 2011; and

	(v)	a decrease in our share of net earnings of partly owned company from $7.2 million in 2010 to $nil in 2011 as a result of our disposition of our investment in the partly owned company during 2010; partially offset by

	(vi)	the gain on bargain purchase of $13.1 million in 2011, which arose in relation to our acquisition of Laguna;

	(vii)	a decrease in income tax expense of $5.3 million due in large part to lower net earnings within our taxable subsidiaries; and

	(viii)	a decrease in salary and benefit costs of $4.8 million due primarily to the release back to earnings of the unallocated portion of the 2010 year end bonus accrual provision.

We recorded noncontrolling interest in earnings of $1.6 million and $1.7 million for the three months ended March 31, 2011 and 2010, respectively. Net earnings attributable to Enstar Group Limited decreased from $15.9 million for the three months ended March 31, 2010 to $3.5 million for the three months ended March 31, 2011.

We no longer report our results of operations by segments. We previously reported our results of operations under the consulting and reinsurance business segments, but we believe the consulting business no longer meets the criteria of an operating segment, as more fully described in Note 15 to our unaudited condensed consolidated financial statements.

Consulting Fees:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	4,036	$	14,128	$	(10,092	)

We earned consulting fees of approximately $4.0 million and $14.1 million for the three months ended March 31, 2011 and 2010, respectively. The decrease in consulting fees primarily related to the decrease in incentive fees earned from third-party agreements. Consulting fee income as a percentage of net earnings has declined in recent periods, and we would expect it to remain at or around current levels in future periods, excluding the impact of any one time incentive based fees that we might receive. While we intend to continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, our core focus continues to be acquiring and managing insurance and reinsurance companies and portfolios of business in run-off.

Net Investment Income and Net Realized and Unrealized Gains:


	Three Months Ended March 31,
	Net Investment Income							Net Realized and Unrealized Gains
	2011		2010		Variance			2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	18,542	$	26,121	$	(7,579	)	$	3,368	$	2,202	$	1,166

Net investment income for the three months ended March 31, 2011 decreased by $7.6 million to $18.5 million, as compared to $26.1 million for the same period in 2010. The decrease was attributable largely to lower unrealized gains in our private equity portfolio, classified as other investments, from $7.7 million in 2010 to $0.9 million in 2011.

The average return on the cash and fixed maturities for the three months ended March 31, 2011 was 1.87%, as compared to the average return of 2.18% for the three months ended March 31, 2010. The average credit rating of our fixed maturity investments at March 31, 2011 was AA-.

Net realized and unrealized gains for the three months ended March 31, 2011 and 2010 were $3.4 million and $2.2 million, respectively. The net realized and unrealized gains relate predominantly to mark-to-market changes in the market value of our equity investments.

Fair Value Measurements

In accordance with the provisions of the Fair Value Measurements and Disclosures topic of the U.S. Financial Accounting Standards Board (FASB) Codification, we have categorized our investments that are recorded at fair value among levels as follows:


	March 31, 2011
	(in thousands of U.S. dollars)
	Quoted Prices in
	Active Markets		Significant Other		Significant
	for Identified Assets		Observable Inputs		Unobservable Inputs		Total Fair
	(Level 1)		(Level 2)		(Level 3)		Value

U.S. government and agency	$	—	$	265,014	$	—	$	265,014
Non-U.S. government		—		452,390		—		452,390
Corporate		—		1,443,650		551		1,444,201
Municipal		—		1,567		—		1,567
Residential mortgage-backed		—		101,757		—		101,757
Commercial mortgage-backed		—		47,777		962		48,739
Asset backed		—		32,256		—		32,256
Equities		59,680		—		3,975		63,655
Other investments		—		93,916		139,962		233,878

Total investments	$	59,680	$	2,438,327	$	145,450	$	2,643,457

Gain on Bargain Purchase:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	13,105	$	—	$	13,105

Gain on bargain purchase of $13.1 million and $nil, was recorded for the three months ended March 31, 2011 and 2010, respectively. The gain on bargain purchase was earned in connection with our acquisition of Laguna and represents the excess of the cumulative fair value of net assets acquired of $34.3 million over the cost of $21.2 million. This excess has, in accordance with the provisions of the Business Combinations topic of the FASB Codification, been recognized as income for the three months ended March 31, 2011. The gain on bargain purchase

arose mainly as a result of our reassessment, upon acquisition, of the total required estimated costs to manage the business to expiry. Our assessment of costs was lower than the acquired costs recorded by the vendor in the financial statements of Laguna.

Net Reduction in Ultimate Loss and Loss Adjustment Expense Liabilities:

The following table shows the components of the movement in the net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2011 and 2010:


	Three Months Ended March 31,
	2011			2010
	(in thousands of U.S. dollars)

Net losses paid	$	(88,131	)	$	(83,225	)
Net change in case and LAE reserves		83,430			78,854
Net change in IBNR		7,313			6,313

Reduction in estimates of net ultimate losses		2,612			1,942
Reduction in provisions for bad debt		—			5,339
Reduction in provisions for unallocated loss adjustment expense liabilities		11,537			8,965
Amortization of fair value adjustments		(10,077	)		(6,650	)

Net reduction in ultimate loss and loss adjustment expense liabilities	$	4,072		$	9,596

Net reduction in case and loss adjustment expense reserves, or LAE reserves, comprises the movement during the quarter in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net reduction in incurred but not reported, or IBNR, represents the change in our actuarial estimates of losses incurred but not reported.

The reduction in estimates of net ultimate losses of $2.6 million comprised net incurred loss development of $4.7 million and reductions in IBNR reserves of $7.3 million.

The reduction in estimates of net ultimate losses of $1.9 million comprised net incurred loss development of $4.4 million and reductions in IBNR reserves of $6.3 million. The reductions in aggregate provisions for bad debt of $5.3 million resulted from the collection of receivables against which bad debt provisions had been provided in earlier periods.

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2011 and 2010. Losses incurred and paid are reflected net of reinsurance recoverables.


	Three Months Ended
	March 31,
	2011			2010
	(in thousands of U.S. dollars)

Balance as of January 1	$	3,291,275		$	2,479,136
Less: total reinsurance reserves recoverable		525,440			347,728

		2,765,835			2,131,408
Effect of exchange rate movement		34,372			(35,975	)
Net reduction in ultimate loss and loss adjustment expense liabilities		(4,072	)		(9,596	)
Net losses paid		(88,131	)		(83,225	)
Acquired on purchase of subsidiaries		10,439			222,042
Retroactive reinsurance contracts assumed		93,067			230,389

Net balance as at March 31	$	2,811,510		$	2,455,043
Plus: total reinsurance reserves recoverable		583,478			435,680

Balance as of March 31	$	3,394,988		$	2,890,723

Salaries and Benefits:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	10,382	$	15,190	$	4,808

Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $10.4 million and $15.2 million for the three months ended March 31, 2011 and 2010, respectively.

The decrease in salaries and benefits was attributable to:


	(i)	the reduction in the discretionary bonus accrual of $6.3 million due to the release back to earnings in 2011 of approximately $4.0 million relating to the unallocated portion of the 2010 year end bonus accrual provision and the reduction in net earnings for the three months ended March 31, 2011 as compared to 2010; partially offset by

	(ii)	increased staff costs due to an increase in the average staff numbers from 296 for the three months ended March 31, 2010 to 339 for the three months ended March 31, 2011; and

	(iii)	an increase from $0.1 million for the three months ended March 31, 2010 to $0.5 million for the three months ended March 31, 2011 in relation to the amortization of the unrecognized compensation costs in respect of the restricted shares that were awarded under our 2006 Equity Incentive Plan to an executive officer in 2011 and certain employees in 2010.

Expenses relating to our discretionary bonus plan will be variable and are dependent on our overall profitability.

General and Administrative Expenses:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	17,750	$	10,487	$	(7,263	)

General and administrative expenses increased by $7.3 million during the three months ended March 31, 2011, as compared to the three months ended March 31, 2010. The increase was due principally to: (i) increased legal fees of approximately $1.1 million due to ongoing due diligence and financing activities; (ii) increased audit and audit

related fees of $0.6 million due to our overall growth; (iii) increased third-party management fees paid of $1.2 million due primarily to transition fees paid in respect of a recently completed acquisition, along with other contractor fees; (iv) increased other professional and consulting fees of $1.1 million; (v) increased rent and rent related expenses of $0.7 million due largely to a rent recovery reflected in 2010; (vi) increased irrecoverable value added tax and disallowed federal excise taxes paid of $0.9 million; and (vii) increased bank and letter of credit charges of $0.7 million.

Interest Expense:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	1,966	$	2,394	$	428

Interest expense of $2.0 million and $2.4 million was recorded for the three months ended March 31, 2011 and 2010, respectively. The decrease in interest expense was attributable predominantly to the reduction in principal levels on loans outstanding and an overall lower interest rate on loan amounts outstanding during the three months ended March 31, 2011.

Net Foreign Exchange Loss:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	7,334	$	7,588	$	254

We recorded a net foreign exchange loss of $7.3 million and $7.6 million for the three months ended March 31, 2011 and 2010, respectively. The net foreign exchange loss arose primarily as a result of: (i) holding surplus British pound liabilities at a time when the British pound was appreciating against the U.S. dollar; (ii) the currency mismatch that is created by holding foreign currency available-for-sale security assets whereby any net foreign currency translation gains or losses on those assets are reflected in the balance sheet as part of accumulated other comprehensive income, but the net foreign currency gains or losses on the corresponding liabilities impact the statement of earnings; (iii) net foreign exchange losses arising as a result of holding surplus U.S. dollar assets in one of our subsidiaries whose functional currency is Australian dollars at a time when the U.S. dollar was depreciating against the Australian dollar; and (iv) a decrease in the fair value of our Australian dollar foreign currency forward exchange contract, which was recognized as part of net foreign exchange loss.

Income Tax Expense:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	617	$	5,922	$	5,305

We recorded income tax expense of $0.6 million and $5.9 million for the three months ended March 31, 2011 and 2010, respectively. The decrease in taxes for the three months ended March 31, 2011 was due predominantly to lower earnings as a result of lower incentive fees earned from third-party agreements as compared to those earned in the same period for 2010, along with reduced tax expense attributable to lower overall net earnings in our tax paying subsidiaries.

Share of Net Earnings of Partly Owned Company:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	—	$	7,150	$	(7,150	)

For the three months ended March 31, 2011, we recorded $nil as our share of net earnings of partly owned company as compared to $7.2 million for the three months ended March 31, 2010. The decrease was attributable to the fact that we no longer have an investment in a partly owned company; during 2010, we disposed of our 44.4% indirect interest in Stonewall Insurance Company and we acquired a 100% interest in Seaton Insurance Company.

Noncontrolling Interest:


	Three Months Ended March 31,
	2011		2010		Variance
	(in thousands of U.S. dollars)

Total	$	1,571	$	1,695	$	124

We recorded a noncontrolling interest in earnings of $1.6 million and $1.7 million for the three months ended March 31, 2011 and 2010, respectively. The decrease for the three months ended March 31, 2011 in noncontrolling interest was due primarily to a decrease in earnings for those companies where there exists a noncontrolling interest.

Liquidity and Capital Resources

Long-term Debt

During the three months ended March 31, 2011, there were several developments regarding the two facilities under the term facilities agreement we entered into in connection with our acquisition of Unionamerica Holdings Limited in December 2008. In January 2011, the accrued interest outstanding of $0.2 million relating to Unionamerica Facility B was settled. In addition, on March 3, 2011, we repaid $40.5 million of the outstanding loan balance of Unionamerica Facility A. As of March 31, 2011, the remaining outstanding loan balance of Unionamerica Facility A, inclusive of accrued interest, was $30.2 million.

On March 4, 2011, we, through Clarendon Holdings, Inc., entered into a $106.5 million term facility agreement, or the Clarendon Facility, with a London-based bank. The Clarendon Facility provides for a four-year term loan facility, which will be available to fund up to 50% of the purchase price of our acquisition of Clarendon, described above. As of March 31, 2011, Clarendon Holdings, Inc. has not borrowed any of the amount available under the Clarendon Facility. The Clarendon Facility will be secured by a security interest in all of the assets of Clarendon Holdings, Inc., as well as a first priority lien on the stock of both Clarendon Holdings, Inc. and Clarendon. Interest is payable at the end of each interest period chosen by Clarendon Holdings, Inc. or, at the latest, each six months. The interest rate is LIBOR plus 2.75%. The Clarendon Facility is subject to various financial and business covenants, including limitations on mergers and consolidations, restrictions as to disposition of stock and limitations on liens on the stock.

As of March 31, 2011, all of the covenants relating to our outstanding credit facilities were met.

Private Placement

On April 20, 2011, we entered into an Investment Agreement (or the Investment Agreement) with GSCP VI AIV Navi, Ltd., GSCP VI Offshore Navi, Ltd., GSCP VI Parallel AIV Navi, Ltd., GSCP VI Employee Navi, Ltd., and GSCP VI GmbH Navi, L.P. (or, collectively, the Purchasers), each of which is an affiliate of Goldman, Sachs & Co. Under the Investment Agreement, we agreed to issue and sell, and the Purchasers agreed to purchase, at several different closings described below, securities representing 19.9% of our outstanding share capital pro forma for all of the issuances, with the right to acquire an additional 2.0% on a fully diluted basis pro forma for all the issuances through the exercise of warrants as described below, although the Purchasers’ voting interest in us purchased pursuant to the Investment Agreement will be less than 4.9%. The Investment Agreement and the securities that the Purchasers have acquired, or subject to certain conditions, will be acquiring at each of the closings are further summarized above in Note 14 to our unaudited condensed consolidated financial statements.

In connection with the first closing under the Investment Agreement, which occurred on April 20, 2011, we issued to the Purchasers 531,345 of our voting ordinary shares, par value $1.00 per share (or the Voting Common Shares), and 749,869 of our Series A convertible non-voting preference shares, par value $1.00 per share (or the

Non-Voting Preferred Shares), at a purchase price of $86.00 per share, and warrants to acquire 340,820 Non-Voting Preferred Shares or, subject to the receipt of shareholder approval of certain amendments to our bye-laws to, among other things, create three new classes of non-voting ordinary shares (or the Shareholder Approval), Non-Voting Common Shares for an exercise price of $115.00 per share, for aggregate proceeds of approximately $110.2 million.

In connection with the second closing under the Investment Agreement, which is expected to occur after receipt of applicable regulatory approvals and satisfaction of other closing conditions (but not before December 23, 2011), we would issue to the Purchasers 134,184 Voting Common Shares and 827,504 Non-Voting Preferred Shares (unless we receive the Shareholder Approval, in which case we would issue Non-Voting Common Shares instead of Non-Voting Preferred Shares), at a purchase price of $86.00 per share, for aggregate proceeds of approximately $82.7 million.

In connection with the third closing under the Investment Agreement, which is subject to approval by our shareholders of the issuances of securities in excess of limits imposed by the listing requirements of the Nasdaq Stock Market and satisfaction of other closing conditions, we would issue to the Purchasers 1,148,264 Non-Voting Preferred Shares (unless we receive the Shareholder Approval, in which case we would issue Non-Voting Common Shares instead of Non-Voting Preferred Shares), at a purchase price of $86.00 per share, for aggregate proceeds of approximately $98.7 million. If the third closing occurs, it is expected to occur simultaneously with the second closing.

The proceeds received and to be received in connection with the closings under the Investment Agreement will provide us with capital and financial flexibility to pursue desirable acquisitions of insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off.

In connection with the first closing under the Investment Agreement, we appointed Sumit Rajpal, a managing director of Goldman, Sachs & Co., to our board of directors, effective May 16, 2011.

Other than the above, there have been no material changes to our liquidity position or capital resource requirements since December 31, 2010. For more information refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.

Cash Flows

With respect to the three month periods ended March 31, 2011 and 2010, net cash used in our operating activities was $290.4 million and $142.9 million, respectively. The increase in cash used was attributable primarily to:


	(i)	an increase in the net amount of purchases, sales and maturities of trading securities of $184.8 million. This increase reflects the decision of our investment committee to increase the allocation of our investment portfolio to trading securities; and

	(ii)	a decrease in the net changes in assets and liabilities of $44.1 million.

Net cash provided by (used in) investing activities for the three month periods ended March 31, 2011 and 2010 was $184.4 million and $(75.2) million, respectively. The increase in cash flows was attributable primarily to:


	(i)	an increase of $101.1 million in the sales and maturities of available-for-sale securities due to the decision of our investment committee to increase the allocation of our investment portfolio to trading securities;

	(ii)	a decrease in the net amount of purchases and maturities of held-to-maturity securities of $214.9 million due to the decision of our investment committee, discussed above, to increase the allocation of our investment portfolio to trading securities; and

	(iii)	a decrease of $85.4 million of restricted cash and cash equivalents arising as a result of the purchase of restricted investments classified as trading securities.

Net cash used in financing activities for the three month periods ended March 31, 2011 and 2010 was $56.7 million and $6.0 million, respectively. The increase of $50.7 million in cash used in financing activities was attributable primarily to the following:


	(i)	an increase of $40.5 million in the repayment of outstanding bank loans; and

	(ii)	an increase of $16.2 million in distribution of capital paid to noncontrolling interest in 2011; partially offset by

	(iii)	a decrease of $6.0 million in dividends paid to noncontrolling interest.

Commitments and Contingencies

In February 2011, Lloyd’s Syndicate 2008 entered into RITC agreements with two Lloyd’s syndicates with total gross insurance reserves of approximately $129.6 million. Our capital commitment to Lloyd’s Syndicate 2008 with respect to these two RITC agreements amounted to £21.3 million (approximately $34.1 million).

There have been no other material changes in our commitments or contingencies since December 31, 2010. Refer to Item 7 included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Critical Accounting Estimates

Our critical accounting estimates are discussed in Management’s Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

Off-Balance Sheet and Special Purpose Entity Arrangements

At March 31, 2011, we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our ordinary shares and the insurance and reinsurance sectors in general. Statements that include words such as “estimate,” “project,” “plan,” “intend,” “expect,” “anticipate,” “believe,” “would,” “should,” “could,” “seek,” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not statements of historical fact, reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this quarterly report.

Factors that could cause actual results to differ materially from those suggested by the forward-looking statements include:


	•	risks associated with implementing our business strategies and initiatives;

	•	the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;

	•	risks relating to the availability and collectability of our reinsurance;

	•	risks that we may require additional capital in the future which may not be available or may be available only on unfavorable terms;

	•	changes and uncertainty in economic conditions, including interest rates, inflation, currency exchange rates, equity markets and credit conditions, which could affect our investment portfolio, our ability to finance future acquisitions and our profitability;

	•	operational risks as a result of our past and future acquisitions, such as cash flow shortages, personnel recruitment challenges, additional integration costs and excessive management time and effort;


	•	losses due to foreign currency exchange rate fluctuations;

	•	tax, regulatory or legal restrictions or limitations applicable to us or the insurance and reinsurance business generally;

	•	increased competitive pressures, including the consolidation and increased globalization of reinsurance providers;

	•	emerging claim and coverage issues;

	•	lengthy and unpredictable litigation affecting assessment of losses and/or coverage issues;

	•	loss of key personnel;

	•	changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at management’s discretion;

	•	operational risks, including system or human failures;

	•	the risk that ongoing or future industry regulatory developments will disrupt our business, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;

	•	changes in Bermuda law or regulation or the political stability of Bermuda;

	•	changes in tax laws or regulations applicable to us or our subsidiaries, or the risk that we or one of our non-U.S. subsidiaries become subject to significant, or significantly increased, income taxes in the United States or elsewhere; and

	•	changes in accounting policies or practices.

The factors listed above should be not construed as exhaustive and should be read in conjunction with the other cautionary statements and Risk Factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as in the other materials filed and to be filed with the U.S. Securities and Exchange Commission. We undertake no obligation to publicly update or review any forward looking statement, whether as a result of new information, future developments or otherwise.


Item 3.	*QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK*

There have been no material changes in our market risk exposures since December 31, 2010. For more information refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2010.


Item 4.	*CONTROLS AND PROCEDURES*

Evaluation of Disclosure Controls and Procedures

Our management performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2011. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

Our management has performed an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in our internal control over financial reporting that occurred during the three months ended March 31, 2011. Based upon that evaluation there were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.	*LEGAL PROCEEDINGS*

We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on our business, results of operations or financial condition. Nevertheless, we cannot assure you that lawsuits, arbitrations or other litigation will not have a material adverse effect on our business, financial condition or results of operations. 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 claims. There can be no assurance that any such future litigation will not have a material adverse effect on our business, financial condition or results of operations.


Item 1A.	*RISK FACTORS*

Our results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010. The risk factors identified therein have not materially changed.


Item 5.	*OTHER INFORMATION*

On May 6, 2011, J. Christopher Flowers resigned from our board of directors. Mr. Flowers’ departure from our board of directors was not due to any disagreement, including any disagreement relating to our operations, policies or practices.


Item 6.	*EXHIBITS*


Exhibit
No.			Description

	10	.1*	Term Facility Agreement dated March 4, 2011 between Clarendon Holdings, Inc. and National Bank Limited.
	10	.2+	Enstar Group Limited 2011-2015 Annual Incentive Compensation Program (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 7, 2011).
	10	.3*+	Letter Agreement, effective January 1, 2011, by and between Enstar Group Limited and Dominic F. Silvester, amending Amended and Restated Employment Agreement by and between Enstar Group Limited and Dominic F. Silvester.
	10	.4*+	Letter Agreement, effective January 1, 2011, by and between Enstar Group Limited and Paul J. O’Shea, amending Employment Agreement by and between Enstar Group Limited and Paul J. O’Shea.
	10	.5*+	Letter Agreement, effective January 1, 2011, by and between Enstar Group Limited and Nicholas A. Packer, amending Employment Agreement by and between Enstar Group Limited and Nicholas A. Packer.
	10	.6*+	Letter Agreement, effective January 1, 2011, by and between Enstar Group Limited and Richard J. Harris, amending Employment Agreement by and between Enstar Group Limited and Richard J. Harris.
	15	.1*	Deloitte & Touche Letter Regarding Unaudited Interim Financial Information.
	31	.1*	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2*	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1**	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2**	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Filed herewith

**		Furnished herewith

+		Denotes management contract or compensatory arrangement

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 6, 2011.

ENSTAR GROUP LIMITED


	By:	/s/ Richard J. Harris

Richard J. Harris,

Chief Financial Officer, Authorized Signatory and

Principal Accounting and Financial Officer

EXHIBIT INDEX


Exhibit
No.			Description

	10	.1*	Term Facility Agreement dated March 4, 2011 between Clarendon Holdings, Inc. and National Bank Limited.
	10	.2+	Enstar Group Limited 2011-2015 Annual Incentive Compensation Program (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 7, 2011).
	10	.3*+	Letter Agreement, effective January 1, 2011, by and between Enstar Group Limited and Dominic F. Silvester, amending Amended and Restated Employment Agreement by and between Enstar Group Limited and Dominic F. Silvester.
	10	.4*+	Letter Agreement, effective January 1, 2011, by and between Enstar Group Limited and Paul J. O’Shea, amending Employment Agreement by and between Enstar Group Limited and Paul J. O’Shea.
	10	.5*+	Letter Agreement, effective January 1, 2011, by and between Enstar Group Limited and Nicholas A. Packer, amending Employment Agreement by and between Enstar Group Limited and Nicholas A. Packer.
	10	.6*+	Letter Agreement, effective January 1, 2011, by and between Enstar Group Limited and Richard J. Harris, amending Employment Agreement by and between Enstar Group Limited and Richard J. Harris.
	15	.1*	Deloitte & Touche Letter Regarding Unaudited Interim Financial Information.
	31	.1*	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2*	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1**	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2**	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Filed herewith

**		Furnished herewith

+		Denotes management contract or compensatory arrangement

exv10w1

Clarendon Holdings, Inc.

as Borrower

and

Clarendon Holdings, Inc.

as Original Obligor

and

National Australia Bank Limited

as Arranger

and

National Australia Bank Limited

as Agent and Security Agent

US$106,500,000 Term Facility Agreement

Execution Text

Contents


1 Definitions and Interpretation			1
2 The Facility			20
3 Purpose			21
4 Conditions of Loans			22
5 Loans			22
6 Repayment			23
7 Illegality, Voluntary Prepayment and Cancellation			23
8 Mandatory Prepayment			24
9 Restrictions			28
10 Interest			29
11 Interest Periods			30
12 Changes To The Calculation Of Interest			30
13 Fees			31
14 Tax Gross Up And Indemnities			32
15 Increased Costs			35
16 Indemnities			36
17 Mitigation By The Lenders			37
18 Costs And Expenses			38
19 Representations			39
20 Information Undertakings			49
21 Financial Covenants			56
22 General Undertakings			58
23 Events Of Default			68
24 Changes To The Lenders			73
25 Changes to the Obligors			78
26 Role Of The Agent, The Arranger, The Security Agent And Others			79
27 Conduct Of Business By The Finance Parties			86
28 Sharing Among The Finance Parties			87
29 Payment Mechanics			88
30 Set-Off			91
31 Notices			91
32 Calculations And Certificates			94
33 Partial Invalidity			94
34 Remedies And Waivers			95
35 Amendments And Waivers			95
36 Counterparts			96


37 Governing Law			96
38 Enforcement			96
Schedule 1 The Original Parties			98
Schedule 2 Conditions Precedent			99
Schedule 3 Requests			107
Schedule 4 Mandatory Cost Formula			109
Schedule 5 Form of Transfer Certificate			112
Schedule 6 Form of Assignment Agreement			116
Schedule 7 Form of Accession Letter			118
Schedule 8 Form of Compliance Certificate			119
Schedule 9 LMA Form of Confidentiality Undertaking			121
Schedule 10 Timetables			125
Schedule 11 Group Structure			126
Schedule 12 Security Agent			127

Term Facility Agreement

Dated 4 March 2011

Between:

(1)		Clarendon Holdings, Inc., a company incorporated under the laws of the State of Delaware, United States of America whose registered office is at c/o The Corporation Trust Company, Corporate Trust Center, 1209 Orange Street, Wilmington, DE 19801 with company number 4911106 (the Borrower);

(2)		The members of the Group listed in Part 1 of Schedule 1 (The Original Parties) as Original Obligors (the Original Obligors);

(3)		National Australia Bank Limited as mandated lead arranger (the Arranger);

(4)		The Financial Institutions listed in Part 2 and Part 3 of Schedule 1 (The Original Parties) as lenders (the Original Lenders);

(5)		National Australia Bank Limited as agent of the other Finance Parties (the Agent); and

(6)		National Australia Bank Limited as Security Agent for the Secured Parties.

It is agreed:

1		Definitions and Interpretation

1.1		In this Agreement:

		Acceptable Bank means a bank or financial institution which has a rating for its long-term unsecured and non-credit-enhanced debt obligations of A+ or higher by Standard & Poor’s Rating Services or Fitch Ratings Ltd or A1 or higher by Moody’s Investor Services Limited or a comparable rating from an internationally recognised credit rating agency or any other bank or financial institution approved by the Agent.

		Accession Letter means a document substantially in the form set out in Schedule 7 (Form of Accession Letter).

		Accounting Principles means:

	(a)		in the case of the Annual Financial Statements and Quarterly Financial Statements for a Regulated Insurance Entity, SAP;

	(b)		in the case of the Annual Financial Statements for a non Regulated Insurance Entity, GAAP; and

	(c)		in the case of Quarterly Financial Statements of the Borrower, GAAP.

		Acquisition means the acquisition by the Borrower of the Target Shares on the terms of the Acquisition Documents.

		Acquisition Agreement means the stock purchase agreement (including all documents and agreements attached to the Acquisition Agreement or otherwise referred to therein, copies of which have been provided to the Agent) relating to the sale and purchase of the Target Shares dated 21 December 2010 entered into and made between, among others, the Borrower and the Vendor as amended from time to time by amendments reasonably acceptable to the Agent.

Acquisition Costs means all fees, costs and expenses, stamp, registration and other Taxes incurred (or required to be paid) by the Borrower or any other member of the Group in connection with the Acquisition or the Transaction Documents.

Acquisition Documents means the Acquisition Agreement, the Disclosure Letters and any other document designated as an Acquisition Document by the Agent and the Borrower.

Additional Cost Rate has the meaning given to it in Schedule 4 (Mandatory Cost Formula).

Additional Obligor means a company which becomes an Obligor in accordance with Clause 25 (Changes to the Obligors).

Additional Security Agent has the meaning given to it in Schedule 12 (Security Agent).

Affiliate means, in relation to any person, a Subsidiary or a Holding Company of that person or any other Subsidiary of that Holding Company.

Agent’s Spot Rate of Exchange means the Agent’s spot rate of exchange for the purchase of the relevant currency with the Base Currency in the London foreign exchange market at or about 11:00 a.m. on a particular day.

Assignment Agreement means an agreement substantially in the form set out in Schedule 6 (Form of Assignment Agreement) or any other form agreed between the relevant assignor and assignee.

Auditors means one of PricewaterhouseCoopers, Ernst & Young, KPMG or Deloitte & Touche or such other firm approved in advance by the Majority Lenders (such approval not to be unreasonably withheld or delayed).

Authorisation means an authorisation, consent, approval, resolution, licence, exemption, filing, notarisation or registration.

Authority means the New Jersey State Insurance Department and any other insurance department or other Governmental Authority in any relevant jurisdiction.

Availability Period means the period from and including the date of this Agreement to and including 1 August 2011.

Available Commitment means a Lender’s Commitment minus:

	(a)		the amount of its participation in any outstanding Loans; and

	(b)		in relation to any proposed Loan, the amount of its participation in any Loans that are due to be made on or before the proposed Utilisation Date.

Available Facility means the aggregate for the time being of each Lender’s Available Commitment.

Base Currency means US Dollars.

Base Currency Equivalent means, the amount of the relevant currency required to purchase the relevant amount of US Dollars at the Agent’s Spot Rate of Exchange.

Break Costs means the amount (if any) by which:

(a)

the interest, excluding the Margin, which a Lender should have received for the period from the date of receipt of all or any part of its participation in a Loan or Unpaid Sum to the last day of the current Interest Period in respect of that Loan or Unpaid Sum, had the principal amount or Unpaid Sum received been paid on the last day of that Interest Period;

exceeds:

(b)

the amount which that Lender would be able to obtain by placing an amount equal to the principal amount or Unpaid Sum received by it on deposit with a leading bank in the London interbank market for a period starting on the Business Day following receipt or recovery and ending on the last day of the current Interest Period.

Business Day means a day (other than a Saturday or Sunday) on which banks are open for general business in London and New York.

Cash Equivalent Investments means at any time:

	(a)		certificates of deposit maturing within one year after the relevant date of calculation and issued by an Acceptable Bank;

	(b)		any investment in marketable debt obligations issued or guaranteed by the government of the United States of America, the United Kingdom, any member state of the European Economic Area or any Participating Member State or by an instrumentality or agency of any of them having an equivalent credit rating, maturing within one year after the relevant date of calculation and not convertible or exchangeable to any other security;

	(c)		commercial paper not convertible or exchangeable to any other security:

	(i)		for which a recognised trading market exists;

	(ii)		issued by an issuer incorporated in the United States of America, the United Kingdom, any member state of the European Economic Area or any Participating Member State;

	(iii)		which matures within one year after the relevant date of calculation; and

	(iv)		which has a credit rating of either A-1 or higher by Standard & Poor’s Rating Services or F1 or higher by Fitch Ratings Ltd or P-1 or higher by Moody’s Investor Services Limited, or, if no rating is available in respect of the commercial paper, the issuer of which has, in respect of its long-term unsecured and non-credit enhanced debt obligations, an equivalent rating;

	(d)		Sterling bills of exchange eligible for rediscount at the Bank of England and accepted by an Acceptable Bank (or their dematerialised equivalent);

	(e)		any investment accessible within 30 days in money market funds which have a credit rating of either A-1 or higher by Standard & Poor’s Rating Services or F1 or higher by Fitch Rating Ltd or P-1 or higher by Moody’s Investor Services Limited and which invest substantially all their assets in securities of the types described in sub-paragraphs (a) to (d) above; or

	(f)		any other debt security approved by the Majority Lenders,

in each case, to which any member of the Group is alone (or together with other members of the Group) beneficially entitled at that time and which is not issued or guaranteed by any member of the Group or subject to any Security (other than Security arising under the Transaction Security Documents).

Change of Control means:

(a)

the Shareholder ceases to have the power (whether by way of ownership of shares, proxy, contract, agency or otherwise) to:

	(i)		cast, or control the casting of, 100% of the maximum number of votes that might be cast at a general meeting of the Borrower;

	(ii)		appoint or remove all of the directors or other equivalent officers of the Borrower; or

	(iii)		give directions with respect to the operating and financial policies of the Borrower with which the directors or other equivalent officers of the Borrower are obliged to comply;

	(b)		the cessation of full beneficial ownership by the Shareholder of all of the issued share capital of the Borrower;

	(c)		Enstar ceases to have Control of the Borrower;

	(d)		the cessation of full beneficial ownership by Enstar of all of the issued share capital of the Borrower;

	(e)		the cessation of full beneficial ownership by the Borrower of all of the issued share capital of the Target or a member of the Target Group;

	(f)		any entity, person (within the meaning of Section 14(d) of the Securities Exchange Act of 1934, as amended (Exchange Act)) or group of persons (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) that before such event was beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of less than 20 per cent. of a member of the Group’s Voting Stock shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Exchange Act), directly or indirectly, of Voting Stock of that member of the Group (or other securities convertible into such Voting Stock) representing 20 per cent. or more of the combined voting power of all Voting Stock of the applicable member of the Group.

Charged Property means the Target Shares, the shares of the Borrower and all of the assets of the Borrower which from time to time are, or are expressed to be, the subject of the Transaction Security.

Chief Financial Officer means the finance director of the relevant company or group from time to time (or any director of the relevant company or group acting as such officer’s deputy in that capacity or performing those functions).

Closing Date means the date on which Completion occurs.

Code means, at any date, the US Internal Revenue Code of 1986, as amended, and the regulations promulgated and the judicial and administrative decisions rendered under it, all as the same may be in effect at such date.

Commitment means:

	(a)		in relation to an Original Lender, the amount in the Base Currency set opposite its name under the heading “Commitment” in Part 2 or Part 3 of Schedule 1 (The Original Parties) and the amount of any other Commitment transferred to it under this Agreement; and

	(b)		in relation to any other Lender, the amount in the Base Currency of any Commitment transferred to it under this Agreement,

to the extent not cancelled, reduced or transferred by it under this Agreement.

Completion means the completion of the Acquisition in accordance with Article II of the Acquisition Agreement.

Compliance Certificate means a certificate substantially in the form set out in Schedule 8 (Form of Compliance Certificate).

Confidentiality Undertaking means a confidentiality undertaking substantially in a recommended form of the LMA as set out in Schedule 9 (LMA Form of Confidentiality Undertaking) or in any other form agreed between the Borrower and the Agent.

Consolidated Net Surplus means as such term is defined in Clause 21.1 (Financial definitions).

Constitutional Documents means the certificate of incorporation and by-laws.

Control means

(a)

the power (whether by way of ownership of shares, proxy, contract, agency or otherwise) to:

	(i)		cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the Borrower;

	(ii)		appoint or remove all, or the majority, of the directors or other equivalent officers of the Borrower; or

	(iii)		give directions with respect to the operating and financial policies of the Borrower with which the directors or other equivalent officers of the Borrower are obliged to comply; or

(b)

the holding beneficially of more than 50% of the issued share capital of the Borrower (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital).

Default means an Event of Default or any event or circumstance specified in Clause 23 (Events of Default) which would (with the expiry of a grace period, the giving of notice, the making of any determination under the Finance Documents or any combination of any of the foregoing) be an Event of Default.

Delegate means any delegate, agent, attorney or co-trustee appointed by the Security Agent.

Disclosure Letters means the Seller Parent’s Disclosure Letter and the Seller’s Disclosure Letter as such terms are defined in the Acquisition Agreement.

Disruption Event means either or both of:

	(a)		a material disruption to those payment or communications systems or to those financial markets which are, in each case, required to operate in order for payments to be made in connection with the Facility (or otherwise in order for the transactions contemplated by the Finance Documents to be carried out) which disruption is not caused by, and is beyond the control of, any of the Parties; or

	(b)		the occurrence of any other event which results in a disruption (of a technical or systems-related nature) to the treasury or payments operations of a Party preventing that, or any other Party:

	(i)		from performing its payment obligations under the Finance Documents; or

	(ii)		from communicating with other Parties in accordance with the terms of the Finance Documents,

and which (in either such case) is not caused by, and is beyond the control of, the Party whose operations are disrupted.

Employee Plan means an employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which a member of the Group or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an employer as defined in Section 3(5) of ERISA.

Enstar means Enstar Group Limited, a company incorporated under the laws of Bermuda with registered number EC30916.

ERISA means the United States Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, and the regulations promulgated and rulings issued under it.

ERISA Affiliate means any person that for purposes of Title I and Title IV of ERISA and Sections 412 and 430 of the Code would be deemed at any relevant time to be a single employer with a member of the Group, pursuant to Section 414(b), (c), (m) or (o) of the Code or Section 4001(b)(i) of ERISA.

ERISA Event means:

	(a)		any reportable event, as defined in Section 4043 of ERISA, with respect to an Employee Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified of such event;

	(b)		(i) the filing of a notice of intent to terminate any Employee Plan, if such termination would require material additional contributions in order to be considered a standard termination within the meaning of Section 4041(b) of ERISA, (ii) the filing under Section 4041(c) of ERISA of a notice of intent to terminate any Employee Plan as a distress termination, or (iii) the termination of any Employee Plan under Section 4041(c) of ERISA as a distress termination;

	(c)		the institution of proceedings under Section 4042 of ERISA by the PBGC for the termination of, or the appointment of a trustee to administer, any Employee Plan;

	(d)		the failure to make a required contribution to any Employee Plan that would result in the imposition of an encumbrance under Section 430(k) of the Code or Section 303(k) of ERISA or the filing of any request for a minimum funding waiver under Section 412(c) of the Code with respect to any Employee Plan or Multiemployer Plan;

	(e)		an engagement in a non-exempt prohibited transaction within the meaning of Section 4975(c) of the Code or Section 406 of ERISA;

	(f)		the complete or partial withdrawal of any member of the Group or any ERISA Affiliate from a Multiemployer Plan; and

	(g)		an Obligor or an ERISA Affiliate incurring any liability under Title IV of ERISA with respect to any Employee Plan (other than premiums due and not delinquent under Section 4007 of ERISA).

Event of Default means any event or circumstance specified as such in Clause 23 (Events of Default).

Facility means the term loan facility made available under this Agreement as described in Clause 2.1 (The Facility).

Facility Office means

	(a)		in respect of a Lender, the office or offices notified by that Lender to the Agent in writing on or before the date it becomes a Lender (or, following that date, by not less than five Business Days’ written notice) as the office or offices through which it will perform its obligations under this Agreement; or

	(b)		in respect of any other Finance Party, the office in the jurisdiction in which it is resident for tax purposes.

Fee Letter means

	(a)		any letter or letters dated on or about the date of this Agreement between National Australia Bank Limited in its capacity as Arranger and the Borrower (or the Agent and the Borrower or the Security Agent and the Borrower) setting out any of the fees referred to in Clause 13 (Fees); and

	(b)		any agreement setting out fees payable to a Finance Party under any Finance Document.

Finance Document means this Agreement, any Accession Letter, any Compliance Certificate, any Fee Letter, the Subordination Deed, any Selection Notice, any Transaction Security Document, any Utilisation Request and any other document designated as a Finance Document by the Agent and the Borrower.

Finance Party means the Agent, the Arranger, the Security Agent or a Lender.

Financial Indebtedness means any indebtedness for or in respect of:

	(a)		moneys borrowed and debit balances at banks or other financial institutions;

	(b)		any amount raised by acceptance under any acceptance credit facility or dematerialised equivalent;

	(c)		any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

	(d)		the amount of any liability in respect of any lease or hire purchase contract which would, in accordance with the Accounting Principles, be treated as a finance or capital lease;

	(e)		receivables sold or discounted (other than any receivables to the extent they are sold on a non-recourse basis);

	(f)		any Treasury Transaction (and, when calculating the value of that Treasury Transaction, only the marked to market value as at the relevant date on which Financial Indebtedness is calculated (or, if any actual amount is due as a result of the termination or close-out of that Treasury Transaction, that amount) shall be taken into account);

	(g)		any counter-indemnity obligation in respect of a guarantee, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institution;

	(h)		any amount of any liability under an advance or deferred purchase agreement if (1) one of the primary reasons behind entering into the agreement is to raise finance or (2) the agreement is in respect of the supply of assets or services and payment is due more than 90 days after the date of supply. For the avoidance of doubt, this shall not include amounts payable pursuant to section 2.2 of the Acquisition Agreement;

	(i)		any amount raised under any other transaction (including any forward sale or purchase, sale and sale back or sale and leaseback agreement) having the commercial effect of a borrowing; and

	(j)		the amount of any liability in respect of any guarantee for any of the items referred to in paragraphs (a) to (i) above.

Financial Quarter has the meaning given to that term in Clause 21.1 (Financial definitions).

Financial Year has the meaning given to that term in Clause 21.1 (Financial definitions).

First Utilisation Date means the first Utilisation Date.

Forecast Cash Flows means the forecast of cash flows in agreed form relating to the Group prepared by Enstar.

FSA means the UK Financial Services Authority.

GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the US accounting profession), which are applicable to the circumstances as of the date of determination.

Governmental Authority means any nation or government, any state or other political sub-division thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

Group means the Borrower and each of its Subsidiaries for the time being.

Group Structure Chart means the group structure chart in Schedule 11 (Group Structure).

Holding Account means the account in the name of the Borrower held with the Agent at 88 Wood Street, London EC2V 7QQ, Sort Code: 16-55-90 and Account number: 3505-301566-501 (as the same may be redesignated, substituted or replaced from time to time).

Holding Company means, in relation to a company or corporation, any other company or corporation in respect of which it is a Subsidiary.

Information Memorandum means the document concerning the Obligors and the Target Group which, at the request of the Borrower and on its behalf, is to be prepared in relation to this transaction, approved by the Borrower and distributed by an Arranger prior to the Syndication Date in connection with the syndication of the Facility.

Information Package means the Forecast Cash Flows and the Report.

Insolvency Representative means any liquidator, administrator, receiver, receiver and manager, administrative receiver, custodian, trustee or similar officer in any jurisdiction.

Insurance Code means the insurance laws, regulations and pronouncements applicable to each Regulated Insurance Entity or any person in connection with each Regulated Insurance Entity, including, without limitation, the laws and regulations of each Regulated Insurance Entity’s state of domicile and any successor statute, regulation or pronouncement of similar import, as amended or otherwise modified and in effect from time to time including, without limitation, the Florida and New Jersey Insurance Code.

Insurance Regulator means the Government Authority charged with supervision of insurance companies in the jurisdiction of domicile of the applicable entity.

Intellectual Property means

	(a)		any patents, trade marks, service marks, designs, business names, copyrights, design rights, moral rights, inventions, confidential information, knowhow and other intellectual property rights and interests, whether registered or unregistered; and

	(b)		the benefit of all applications and rights to use such assets of each member of the Group.

Interest Period means, in relation to a Loan, each period determined in accordance with Clause 11 (Interest Periods) and, in relation to an Unpaid Sum, each period determined in accordance with Clause 10.3 (Default Interest).

IRS means the United States Internal Revenue Service or any successor.

Joint Venture means any joint venture entity, whether a company, unincorporated firm, undertaking, association, joint venture or partnership or any other similar entity.

Legal Opinion means any legal opinion delivered to the Agent under Clause 4.1 (Initial conditions precedent) or Clause 25 (Changes to the Obligors).

Legal Reservations means:

	(a)		the principle that equitable remedies may be granted or refused at the discretion of a court and the limitation of enforcement by laws relating to insolvency, reorganisation and other laws generally affecting the rights of creditors;

	(b)		the time barring of claims under the Limitation Acts, the possibility that an undertaking to assume liability for or indemnify a person against non-payment of UK stamp duty may be void and defences of set-off or counterclaim;

	(c)		similar principles, rights and defences under the laws of any Relevant Jurisdiction; and

	(d)		any other matters which are set out as qualifications or reservations as to matters of law of general application in the Legal Opinions.

Lender means

	(a)		any Original Lender; and

	(b)		any bank, financial institution, trust, fund or other entity which has become a Party in accordance with Clause 24 (Changes to the Lenders),

which in each case has not ceased to be a Party in accordance with the terms of this Agreement.

LIBOR means, in relation to any Loan:

	(a)		the applicable Screen Rate; or

	(b)		(if no Screen Rate is available for the currency or Interest Period of that Loan) the arithmetic mean of the rates (rounded upwards to four decimal places) as supplied to the Agent at its request quoted by the Reference Banks to leading banks in the London interbank market,

as of the Specified Time on the Quotation Day for the offering of deposits in US Dollars and for a period comparable to the Interest Period for that Loan.

LMA means the Loan Market Association.

Loan means a loan made or to be made under the Facility or the principal amount outstanding for the time being of that loan.

Majority Lenders means a Lender or Lenders whose Commitments aggregate more than 66²/₃ per cent of the Total Commitments (or, if the Total Commitments have been reduced to zero, aggregated more than 66 ²/₃ per cent. of the Total Commitments immediately prior to that reduction).

Mandatory Cost means the percentage rate per annum calculated by the Agent in accordance with Schedule 4 (Mandatory Cost Formula).

Mandatory Prepayment Account means the interest-bearing account in the name of the Borrower held with the Agent at 88 Wood Street, London EC2V 7QQ, Sort Code: 16-55-90 and Account number: 3505-301566-500 (as the same may be redesignated, substituted or replaced from time to time).

Margin means 2.75 (two point seven five) per cent. per annum.

Margin Stock means margin stock or margin security within the meaning of Regulations T, U and X.

Material Adverse Effect means a material adverse effect on:

	(a)		the business, operations, property, condition (financial or otherwise) or prospects of the Group taken as a whole; or

	(b)		the ability of an Obligor to perform its payment obligations under the Finance Documents and/or its obligations under Clause 21.2 (Financial condition); or

	(c)		the validity or enforceability of, or the effectiveness or ranking of any Security granted or purporting to be granted pursuant to any of, the Finance Documents or the rights or remedies of any Finance Party under any of the Finance Documents.

Month means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month, except that:

	(a)		(subject to paragraph (c) below) if the numerically corresponding day is not a Business Day, that period shall end on the next Business Day in that calendar month in which that period is to end if there is one, or if there is not, on the immediately preceding Business Day;

	(b)		if there is no numerically corresponding day in the calendar month in which that period is to end, that period shall end on the last Business Day in that calendar month; and

	(c)		if an Interest Period begins on the last Business Day of a calendar month, that Interest Period shall end on the last Business Day in the calendar month in which that Interest Period is to end.

The above rules will only apply to the last Month of any period. Monthly shall be construed accordingly.

Multiemployer Plan means a multiemployer plan (as defined in Section (3)(37) of ERISA) contributed to for any employees of a member of the Group or any ERISA Affiliate.

Obligor means an Original Obligor or an Additional Obligor.

Obligors’ Agent means the Borrower, appointed to act on behalf of each Obligor in relation to the Finance Documents pursuant to Clause 2.3 (Obligors’ Agent).

Original Financial Statements means:

	(a)		in relation to the Borrower, its opening balance sheet; and

	(b)		in relation to any member of the group other than the Borrower, its unaudited statutory annual statement and, if available on the date the Original Financial Statements are provided, its audited statutory financial statement, in each case for its Financial Year ended 31 December 2010.

NAIC means the National Association of Insurance Commissioners or any successor thereto, or in the absence of the National Association of Insurance Commissioners or such successor, any other association, agency or organisation performing advisory, coordination or other similar functions among insurance departments, insurance commissioners and similar Governmental Authorities of the various states of the United States with the goal of promoting uniformity in the practices of such Governmental Authorities.

Participating Member State means any member state of the European Communities that adopts or has adopted the euro as its lawful currency in accordance with legislation of the European Community relating to Economic and Monetary Union.

Party means a party to this Agreement.

PBGC means the US Pension Benefit Guaranty Corporation, or any entity succeeding to all or any of its functions under ERISA.

Permitted Disposal means any sale, lease, licence, transfer or other disposal permitted by Clause 22.27 (Intra-Group transactions) or which is not an intra-Group transaction and is on arm’s length terms:

	(a)		of cash made by any member of the Group in the ordinary course of trading of the disposing entity;

	(b)		of Cash Equivalent Investments for cash or in exchange for other Cash Equivalent Investments; and

	(c)		arising as a result of any Permitted Security.

Permitted Distribution means

	(a)		a Target Distribution;

	(b)		the payment of a dividend, the making of a loan or the movement of cash by way of a share buyback by the Borrower, in each case, declared as a result of the receipt of a Target Distribution into the Holding Account provided the following conditions are satisfied:

	(i)		the Borrower’s obligations under Clause 8.2 (Disposal, Insurance, Acquisition Proceeds and Target Distributions) have been complied with in full;

	(ii)		no Default is continuing at the time such dividend is to be paid or would occur if such dividend is paid;

	(iii)		at the time the relevant dividend is to be paid no circumstances exist such that (in the opinion of the Agent) on the publication of any accounts by reference to which Net Surplus Cover in Clause 21.2 (Financial condition) is calculated, there would be a breach of that financial covenant on its next following test date if the dividend was paid;

	(iv)		the Borrower has given the Agent not less than 5 Business Days’ written notice of the Borrower’s intention to pay the proposed dividend and has at the same time delivered to the Agent a certificate signed by a director of the Borrower certifying that (1) he is not aware of any Default which is continuing or of any Default which is likely to occur on or prior to the anticipated date of payment and (2) containing calculations to show that the Net Surplus Cover financial covenant in Clause 21.2 (Financial condition) will be complied with following the payment of the proposed dividend on the next following test date; and

	(v)		the Agent shall not have (1) objected to the payment of such dividend before the expiry of the 5 Business Day notice period referred to in paragraph (iv) above because any of the conditions

for payment under this paragraph (b) has not been met or (2) requested reasonable further information to establish whether the conditions established by this definition are met. If the Agent objects, it shall state which conditions of this paragraph (b) it does not consider to have been satisfied, in which case the Borrower shall not pay the proposed dividend unless (in the case of a breach of the Net Surplus Cover financial covenant) it obtains a certificate from the Auditors confirming to the Agent that in their opinion the financial conditions necessary to allow the payment of the relevant dividend have been satisfied, or in the case of any other Default the Agent becomes satisfied that the conditions for payment under this paragraph (b) have been met; and

(c)

the payment of a dividend to the Target or its wholly-owned Subsidiaries,

provided that no such Target Distribution, payment, distribution or other action detailed in paragraphs (a) or (b) above will be permitted at any time after the occurrence of a Default which is continuing.

Permitted Financial Indebtedness means Financial Indebtedness arising under:

	(a)		a Permitted Loan;

	(b)		a Permitted Guarantee;

	(c)		any Finance Document; or

	(d)		any letters of credit secured on the assets of the Target Group that match liabilities held on the balance sheet of the Target Group in favour of the cedant (who is also the beneficiary of such letter of credit).

Permitted Guarantee means

	(a)		any guarantee of Permitted Financial Indebtedness which is referred to in the definition of, or otherwise constitutes, Permitted Financial Indebtedness provided that Clause 22.27 (Intra-Group transactions) is complied with; or

	(b)		any guarantee given in respect of the netting or set-off arrangements permitted pursuant to paragraph (a) of the definition of Permitted Security,

provided that no new guarantee will be permitted at any time after the occurrence of a Default which is continuing.

Permitted Loan means

	(a)		Financial Indebtedness which is referred to in the definition of, or otherwise constitutes, Permitted Financial Indebtedness provided Clause 22.27 (Intra-Group transactions) is complied with; or

	(b)		any loan permitted by Clause 22.27 (Intra-Group transactions); or

	(c)		any loan invested pursuant to Clause 21.4 (Equity cure- Regulatory Cover) or Clause 21.5 (Equity cure- Net Surplus Cover).

Permitted Payment means a payment of fees on arms’ length terms by any member of the Group to any Subsidiary of Enstar that is not a member of the Group for management services up to a maximum aggregate amount of all such payments not exceeding:

(a)

in 2011, US$20,441,000;

	(b)		in 2012, US$12,559,000;

	(c)		in 2013, US$10,106,000;

	(d)		in 2014, US$8,880,000;

	(e)		in 2015, US$7,820,000,

provided that no such payment will be permitted at any time after the occurrence of a Default which is continuing.

Permitted Security means

	(a)		any netting or set-off arrangement entered into by any member of the Group in the ordinary course of its banking arrangements for the purpose of netting debit and credit balances of members of the Group but only so long as (1) such arrangement does not permit credit balances of Obligors to be netted or set-off against debit balances of members of the Group which are not Obligors and (2) such arrangement does not give rise to other Security over the assets of Obligors in support of liabilities of members of the Group which are not Obligors;

	(b)		any Quasi Security arising as a result of a disposal which is a Permitted Disposal;

	(c)		any Transaction Security;

	(d)		any lien arising by operation of law and in the ordinary course of trading and not as a result of any default or omission by any member of the Group;

	(e)		any Security or Quasi-Security over or affecting any asset acquired by a member of the Group after the date of this Agreement if:

	(i)		the Security or Quasi-Security was not created in contemplation of the acquisition of that asset by a member of the Group;

	(ii)		the principal amount secured has not been increased in contemplation of or since the acquisition of that asset by a member of the Group; and

	(iii)		the Security or Quasi-Security is removed or discharged within 3 months of the date of acquisition of such asset;

(f)

any Security or Quasi-Security over or affecting any asset of any company which becomes a member of the Group after the date of this Agreement, where the Security or Quasi-Security is created prior to the date on which that company becomes a member of the Group if:

	(i)		the Security or Quasi-Security was not created in contemplation of the acquisition of that company;

	(ii)		the principal amount secured has not increased in contemplation of or since the acquisition of that company; and

	(iii)		the Security or Quasi—Security is removed or discharged within 3 months of that company being a member of the Group; and

(g)

any Security or Quasi-Security arising under any retention of title, hire purchase or conditional sale arrangement or arrangements having similar effect in respect of goods supplied to a member of the Group in the ordinary

course of trading and on the supplier’s standard or usual terms and not arising as a result of any default or omission by any member of the Group.

Permitted Share Issue means an issue of shares:

	(a)		by a member of the Group (other than the Borrower) which is a Subsidiary to its immediate Holding Company to the extent permitted by Clause 22.27 (Intra-Group Transactions) and where (if the existing shares of the Subsidiary are the subject of the Transaction Security) the newly-issued shares also become subject to the Transaction Security on the same terms provided that no such issue of shares will be permitted at any time after the occurrence of a Default which is continuing; or

	(b)		by the Borrower to the Shareholder where the proceeds of such share issue are applied to remedy a breach of the Regulatory Cover or the Net Surplus Cover financial covenant in Clause 21.2 (Financial condition) pursuant to Clause 21.4 (Equity cure- Regulatory Cover) or Clause 21.5 (Equity cure- Net Surplus Cover).

Permitted Transaction means

	(a)		any disposal required, Financial Indebtedness incurred, guarantee, indemnity or Security or Quasi-Security given, or other transaction arising, under the Finance Documents; or

	(b)		transactions (other than (i) any sale, lease, licence, transfer or other disposal; and (ii) the granting or creation of Security, the incurring or permitting to subsist of Financial Indebtedness or the disposal of the shares of any member of the Group), conducted in the ordinary course of trading on arm’s length terms,

provided that no such disposal, transaction or other action detailed in paragraphs (a) or (b) above that is not already existing will be permitted at any time after the occurrence of a Default which is continuing.

Quarter Date has the meaning given to that term in Clause 21.1 (Financial definitions).

Quarterly Financial Statement has the meaning given to that term in Clause 20 (Information Undertakings).

Quasi-Security has the meaning given to that term in Clause 22.12 (Negative pledge).

Quotation Day means, in relation to any period for which an interest rate is to be determined, two Business Days before the first day of that period, unless market practice differs in the London interbank market for a currency, in which case the Quotation Day for that currency will be determined by the Agent in accordance with market practice in the London interbank market (and if quotations would normally be given by leading banks in the London interbank market on more than one day, the Quotation Day will be the last of those days).

Rating Agency means Standard & Poor’s Rating Services or other equivalent internationally recognised statistical rating organisation.

Receiver means a receiver or receiver and manager or administrative receiver of the whole or any part of the Charged Property.

Reference Banks means National Australia Bank Limited and such other banks as may be appointed by the Agent in consultation with the Borrower.

Regulated Insurance Entity means any member of the Target Group which:

	(a)		operates in the insurance industry; and

	(b)		is regulated by the relevant supervisory or regulatory body in the insurance market(s) in which it operates.

Regulations T, U and X means, respectively, Regulations T, U and X of the Board of Governors of the Federal Reserve System of the United States (or any successor) as now and from time to time in effect from the date of this Agreement.

Regulatory Cover has the meaning given to it in Clause 21.1 (Financial definitions).

Related Fund in relation to a fund (first fund), means a fund which is managed or advised by the same investment manager or adviser as the first fund or, if it is managed by a different investment manager or adviser, a fund whose investment manager or adviser is an Affiliate of the investment manager or adviser of the first fund.

Relevant Jurisdiction means, in relation to an Obligor:

	(a)		its jurisdiction of incorporation;

	(b)		any jurisdiction where any asset subject to or intended to be subject to the Transaction Security to be created by it is situated;

	(c)		any jurisdiction where it conducts its business; and

	(d)		the jurisdiction whose laws govern the perfection of any of the Transaction Security Documents entered into by it.

Relevant Period has the meaning given to that term in Clause 21.1 (Financial definitions).

Repeating Representations means each of the representations set out in Clauses 19.2 (Status) to Clause 19.7 (Governing law and enforcement), Clause 19.11 (No default), paragraph 19.12.6 of Clause 19.12 (No misleading information), Clause 19.13 (Original Financial Statements), Clause 19.18 (Ranking) to Clause 19.20 (Legal and beneficial ownership) and Clause 19.32 (Pensions).

Report means the InsurMath report titled “Actuarial Comments on Clarendon” in form and substance satisfactory to the Agent and capable of being relied upon by National Australia Bank Limited and the other Secured Parties.

SAP means, as to the Target Group, the statutory accounting practices prescribed or permitted by its Insurance Regulator.

Screen Rate means the British Bankers’ Association Interest Settlement Rate for US Dollars and the relevant period displayed on the appropriate page of the Reuters screen. If the agreed page is replaced or service ceases to be available, the Agent may specify another page or service displaying the appropriate rate after consultation with the Borrower and the Lenders.

SEC means the United States Securities and Exchange Commission or any successor thereto.

Secured Parties means each Finance Party from time to time party to this Agreement, any Receiver or Delegate.

Security means a mortgage, charge, pledge, lien or other security interest securing any obligation of any person or any other agreement or arrangement having a similar effect.

Security Agent means National Australia Bank Limited in its capacity as security agent and trustee for the other Finance Parties under this Agreement and the Transaction Security Documents and any Additional Security Agent or Delegate appointed by it in accordance with the terms of this Agreement.

Selection Notice means a notice substantially in the form set out in Part 2 of Schedule 3 (Requests) given in accordance with Clause 11 (Interest periods).

Shareholder means Enstar Investments Inc. and its, or any subsequent successors, assigns or transferees.

Specified Time means a time determined in accordance with Schedule 10 (Timetables).

Sterling and £ means the lawful currency of the UK.

Subordination Deed means the subordination deed dated on or about the date of this Agreement between, inter alia, the Shareholder, the Original Obligors and the Agent.

Subsidiary means an entity of which a person:

	(a)		has direct or indirect Control; or

	(b)		owns directly or indirectly more than fifty per cent. (50%) of the share capital or similar right of ownership; or

	(c)		is entitled to receive more than fifty per cent. (50%) of the dividends or distributions,

and any entity (whether or not so controlled) treated as a subsidiary in the latest financial statements of that person from time to time.

Syndication Date means any day on which an Arranger confirms that the primary syndication of the Facility has been completed.

Target means Clarendon National Insurance Company, a company incorporated under the laws of the State of New Jersey.

Target Distribution means:

	(a)		the payment of a dividend, the making of a loan or the movement of cash by way of a share buyback by a member of the Target Group to the Target; and/or

	(b)		the payment (or subsequent payment) of a dividend, the making of a loan or the movement of cash by way of a share buyback by the Target to the Borrower,

where, in each case it is deposited in the Holding Account and the amount has been notified to the Agent in advance.

Target Group means the Target and its Subsidiaries.

Target Shares means all of the issued shares of the Target.

Tax means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same).

Termination Date means the date falling four years from the First Utilisation Date.

Total Commitments means the aggregate of the Commitments, being US$106,500,000 at the date of this Agreement.

Transaction Documents means the Finance Documents, the Acquisition Documents and the Constitutional Documents of the Borrower.

Transaction Security means the Security created or expressed to be created in favour of the Security Agent pursuant to the Transaction Security Documents.

Transaction Security Documents means each of the documents listed under paragraph 2.3 of part 1A of Schedule 2 (Conditions Precedent) and any original documents of title to be provided under the Transaction Security Documents and required to be delivered to the Agent under Schedule 2 (Conditions Precedent) together with any other document entered into by any Obligor creating or expressed to create any Security over all or any part of its assets in respect of the obligations of any of the Obligors under any of the Finance Documents.

Transfer Certificate means a certificate substantially in the form set out in Schedule 5 (Form of Transfer Certificate) or any other form agreed between the Agent and the Borrower.

Transfer Date means, in relation to an assignment or transfer, the later of:

	(a)		the proposed Transfer Date specified in the relevant Assignment Agreement or Transfer Certificate; and

	(b)		the date on which the Agent executes the relevant Assignment Agreement or Transfer Certificate.

Treasury Transactions means any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price.

UK means the United Kingdom of Great Britain and Northern Ireland.

Unfunded Pension Liability means the excess of an Employee Plan’s benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that plan’s assets, determined in accordance with the assumptions used for funding the Employee Plan pursuant to Section 430 of the Code for the applicable plan year.

Unpaid Sum means any sum due and payable but unpaid by an Obligor under the Finance Documents.

US and United States means the United States of America, its territories, possessions and other areas subject to the jurisdiction of the United States of America.

US Dollars or US$ means the lawful currency of the United States of America.

US Tax means any federal, state, local income, gross receipts, license, premium, windfall profits, customs duties, capital stock, franchise, profits, withholding, social security (or similar), real property, personal property, sales, use, registration, value added, alternative or add-on minimum, estimated or other tax of any kind

whatsoever, imposed by the US including any interest, penalty or addition thereto, whether disputed or not.

Utilisation Date means the date on which a Loan is made.

Utilisation Request means a notice substantially in the relevant form set out in Schedule 3 (Requests).

VAT means value added tax as provided for in the Value Added Tax Act 1994 and any other tax of a similar nature payable in the United States or any other jurisdiction.

Vendor means the seller under the Acquisition Agreement.

Voting Stock means capital stock issued by a corporation, or equivalent interests in any other person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such person, even if the right so to vote has been suspended by the happening of such a contingency.

1.2		Construction

1.2.1		Unless a contrary indication appears, a reference in this Agreement to:

	(a)		the Agent, any Arranger, any Finance Party, any Lender, any Obligor, any Party, any Secured Party, the Security Agent or any other person shall be construed so as to include its successors in title, permitted assigns and permitted transferees and, in the case of the Security Agent, any person for the time being appointed as Security Agent or Security Agents in accordance with this Agreement;

	(b)		a document in agreed form is a document which is previously agreed in writing by or on behalf of the Borrower and the Agent or, if not so agreed, is in the form specified by the Agent;

	(c)		assets includes present and future properties, revenues and rights of every description;

	(d)		a Finance Document or a Transaction Document or any other agreement or instrument is a reference to that Finance Document or Transaction Document or other agreement or instrument as amended, novated, supplemented, extended or restated (in any case, however fundamentally);

	(e)		guarantee means any guarantee, letter of credit, bond, indemnity or similar assurance against loss, or any obligation, direct or indirect, actual or contingent, to purchase or assume any indebtedness of any person or to make an investment in or loan to any person or to purchase assets of any person where, in each case, such obligation is assumed in order to maintain or assist the ability of such person to meet its indebtedness;

	(f)		wholly owned subsidiary means a company or corporation that has no members except for:

	(i)		another company or corporation and that other company’s or corporation’s wholly-owned subsidiaries; or

	(ii)		persons acting on behalf of that other company or corporation and that other company’s or corporation’s wholly-owned subsidiaries.

	(g)		including and in particular shall not be construed restrictively but shall mean including without prejudice to the generality of the foregoing and in particular, but without limitation;

	(h)		indebtedness includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money, whether present or future, actual or contingent;

	(i)		a person includes any individual, firm, company, corporation, government, state or agency of a state or any association, joint venture, trust or partnership (whether or not having separate legal personality) of two or more of the foregoing;

	(j)		a regulation includes any regulation, rule, official directive, request, or guideline (whether or not having the force of law) of any governmental, intergovernmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organisation;

	(k)		a provision of law is a reference to that provision as amended or re-enacted and any subordinate legislation made under it; and

	(l)		a time of day is a reference to London time.

1.3		Section, Clause and Schedule headings are for ease of reference only.

1.4		Unless a contrary indication appears, a term used in any other Finance Document or in any notice given under or in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement.

1.5		A Default (other than an Event of Default) is continuing if it has not been remedied or waived and an Event of Default is continuing if it has not been waived.

1.6		Any consent, waiver or approval required from a Finance Party under a Finance Document must be in writing and will be of no effect if not in writing.

1.7		Reference to a monetary sum specified in Sterling in Clause 19 (Representations), Clause 20 (Information Undertakings), Clause 21 (Financial Covenants), Clause 22 (General Undertakings) and/or Clause 23 (Events of Default) shall be deemed to include reference to the Base Currency Equivalent of such sum.

1.8		Third Party Rights

1.8.1		Unless expressly provided to the contrary in a Finance Document a person who is not a Party has no right under the Contracts (Rights of Third Parties) Act 1999 (Third Parties Act) to enforce or enjoy the benefit of any term of this Agreement.

1.8.2		Notwithstanding any term of any Finance Document, the consent of any person who is not a Party is not required to rescind or vary this Agreement at any time.

2		The Facility

2.1		The Facility

		The Lenders make available to the Borrower a term loan facility in an aggregate amount equal to the Total Commitments.

2.2		Finance Parties’ rights and obligations

2.2.1		The obligations of each Finance Party under the Finance Documents are several. Failure by a Finance Party to perform its obligations under the Finance Documents

does not affect the obligations of any other Party under the Finance Documents. No Finance Party is responsible for the obligations of any other Finance Party under the Finance Documents.

2.2.2		The rights of each Finance Party under or in connection with the Finance Documents are separate and independent rights and any debt arising under the Finance Documents to a Finance Party from an Obligor shall be a separate and independent debt.

2.2.3		A Finance Party may, except as otherwise stated in the Finance Documents, separately enforce its rights under the Finance Documents.

2.3		Obligors’ Agent

2.3.1		Each Obligor (other than the Borrower) by its execution of this Agreement or an Accession Letter irrevocably appoints the Borrower to act on its behalf as its agent in relation to the Finance Documents and irrevocably authorises:

	(a)		the Borrower on its behalf to supply all information concerning itself contemplated by the Finance Documents to the Finance Parties and to give all notices and instructions, to execute on its behalf any Accession Letter, to make such agreements and to effect the relevant amendments, supplements and variations capable of being given, made or effected by any Obligor notwithstanding that they may affect the Obligor, without further reference to or the consent of that Obligor; and

	(b)		each Finance Party to give any notice, demand or other communication to that Obligor pursuant to the Finance Documents to the Borrower,

and in each case the Obligor shall be bound as though the Obligor itself had given the notices and instructions or executed or made the agreements or effected the amendments, supplements or variations, or received the relevant notice, demand or other communication.

2.3.2		Every act, omission, agreement, undertaking, settlement, waiver, amendment, supplement, variation, notice or other communication given or made by the Obligors’ Agent or given to the Obligors’ Agent under any Finance Document on behalf of another Obligor or in connection with any Finance Document (whether or not known to any other Obligor and whether occurring before or after such other Obligor became an Obligor under any Finance Document) shall be binding for all purposes on that Obligor as if that Obligor had expressly made, given or concurred with it. In the event of any conflict between any notices or other communications of the Obligors’ Agent and any other Obligor, those of the Obligors’ Agent shall prevail.

3		Purpose

3.1		Purpose

		The Borrower shall apply all amounts borrowed by it under the Facility towards:

3.1.1		paying to the Vendor an amount from the Facility not exceeding US$106,500,000 to purchase the Target Shares under the Acquisition Agreement provided that such amount equates to no more than 50% of the purchase price of the Target Shares (excluding fees and other expenses) as at the First Utilisation Date; and

3.1.2		paying the arrangement fee payable pursuant to Clause 13.2 (Arrangement fee).

3.2		Monitoring

		No Finance Party is bound to monitor or verify the application of any amount borrowed pursuant to this Agreement.

4		Conditions of Loans

4.1		Initial conditions precedent

		The Lenders will only be obliged to comply with Clause 5.4 (Lenders’ participation) in relation to any Loan if, on or before the Utilisation Date for that Loan, the Agent has received all of the documents and other evidence listed in Part 1 of Schedule 2 (Conditions Precedent) in form and substance satisfactory to the Agent. The Agent shall notify the Obligors’ Agent and the Lenders in writing promptly upon being so satisfied.

4.2		Further conditions precedent

		Subject to Clause 4.1 (Initial conditions precedent), the Lenders will only be obliged to comply with Clause 5.4 (Lenders’ participation) if on the date of the Utilisation Request and on the proposed Utilisation Date:

	(a)		in relation to any Loan on the First Utilisation Date, all the representations and warranties in Clause 19 (Representations) (other than Clause 19.12 (No misleading information) which are made on the date of this Agreement only) or, in relation to any other Loan, the Repeating Representations to be made by each Obligor are true; and

	(b)		none of the events described in Clause 12.2 (Market disruption) has occurred which has resulted in any Lender being unable to fund its participation in the proposed Loan.

4.3		Maximum number of Loans

4.3.1		The Borrower may not deliver a Utilisation Request if as a result of the proposed Loan more than two Loans would be outstanding.

4.3.2		The Borrower may not request that a Loan be divided.

5		Loans

5.1		Delivery of a Utilisation Request

		The Borrower may utilise the Facility by delivery to the Agent of a duly completed Utilisation Request not later than the Specified Time.

5.2		Completion of a Utilisation Request for Loans

5.2.1		Each Utilisation Request for a Loan is irrevocable and will not be regarded as having been duly completed unless:

	(a)		the proposed Utilisation Date is a Business Day within the Availability Period;

	(b)		the currency and amount of the Loan comply with Clause 5.3 (Currency); and

	(c)		the proposed Interest Period complies with Clause 11 (Interest Periods).

5.2.2

Only one Loan may be requested in each Utilisation Request.

5.3		Currency

		The currency specified in a Utilisation Request must be US Dollars.

5.4		Lenders’ participation

5.4.1		If the conditions set out in this Agreement have been met, each Lender shall make its participation in each Loan available by the Utilisation Date through its Facility Office.

5.4.2		The amount of each Lender’s participation in each Loan will be equal to the proportion borne by its Available Commitment to the Available Facility immediately prior to making the Loan.

5.5		Cancellation of Commitment

		The Total Commitments which, at that time, are unutilised shall be immediately cancelled at the end of the Availability Period.

6		Repayment

		The Borrower shall repay the Loan in full on the Termination Date.

7		Illegality, Voluntary Prepayment and Cancellation

7.1		Illegality

		If it becomes unlawful in any applicable jurisdiction for a Lender to perform any of its obligations as contemplated by this Agreement or to fund, issue or maintain its participation in any Loan:

	(a)		that Lender, shall promptly notify the Agent upon becoming aware of that event;

	(b)		upon the Agent notifying the Obligors’ Agent, the Commitment of that Lender will be immediately cancelled; and

	(c)		the Borrower shall repay that Lender’s participation in the Loans made to the Borrower on the last day of the Interest Period for each Loan occurring after the Agent has notified the Obligors’ Agent or, if earlier, the date specified by the Lender in the notice delivered to the Agent (being no earlier than the last day of any applicable grace period permitted by law).

7.2		Voluntary cancellation

		Subject to Clause 7.3 (Voluntary prepayment of Loans) the Borrower may, if it gives the Agent not less than seven Business Days’ (or such shorter period as the Majority Lenders may agree) prior notice, cancel the whole or any part (being a minimum amount of US$5,000,000) of the Available Facility.

7.3		Voluntary prepayment of Loans

7.3.1		The Borrower may, if it gives the Agent not less than seven Business Days’ (or such shorter period as the Majority Lenders may agree) prior notice, prepay the whole or any part of a Loan as specified in the relevant notice (but, if in part, being an amount that reduces the amount of the Loan by a minimum amount of US$5,000,000 or its equivalent).

7.3.2		A Loan may only be prepaid after the last day of the Availability Period (or, if earlier, the day on which the applicable Available Facility is zero).

7.4		Right of cancellation and repayment in relation to a single Lender

7.4.1		If:

	(a)		any sum payable to any Lender by an Obligor is required to be increased under Clause 14.2 (Tax gross-up); or

	(b)		any Lender claims indemnification from the Obligors’ Agent or an Obligor under Clause 14.3 (Tax indemnity) or Clause 15.1 (Increased costs),

		the Obligors’ Agent may, whilst the circumstance giving rise to the requirement or indemnification continues, give the Agent notice of cancellation of the Commitment of that Lender and its intention to procure the repayment of that Lender’s participation in the Loans.

7.4.2		On receipt of a notice referred to in Clause 7.4.1 above in relation to a Lender, the Commitment of that Lender shall immediately be reduced to zero.

7.4.3		On the last day of each Interest Period which ends after the Obligors’ Agent has given notice under Clause 7.4.1 above in relation to a Lender (or, if earlier, the date specified by the Obligors’ Agent in that notice), the Borrower shall repay that Lender’s participation in that Loan together with all interest and other amounts accrued under the Finance Documents.

8		Mandatory Prepayment

8.1		Exit

8.1.1		For the purpose of this Clause 8.1:

		Flotation: means

	(a)		a successful application being made for the admission of any part of the share capital of any member of the Group (or Holding Company of any member of the Group other than Enstar) to the Official List of the UK Listing Authority or any equivalent in another country and the admission of any part of the share capital of any member of the Group (or Holding Company of any member of the Group other than Enstar or any of its Holding Companies) to trading on the London Stock Exchange plc or any equivalent in another country; or

	(b)		the grant of permission to deal in any part of the issued share capital of any member of the Group (or Holding Company of any member of the Group other than Enstar or any of its Holding Companies) on the Alternative Investment Market or the European Acquisition of Securities Dealers Automated Quotation System or on any recognised investment exchange (as that term is used in the Financial Services and Markets Act 2000) or in or on any exchange or market replacing the same or any other exchange or market in any country.

8.1.2

Upon the occurrence of:

	(a)		any Flotation;

	(b)		a Change of Control; or

	(c)		the total of all outstanding Loans falling below US$5,000,000 after the First Utilisation Date,

		the Facility will be cancelled and all outstanding Loans, together with accrued interest, and all other amounts accrued under the Finance Documents, shall become immediately due and payable.

8.2		Disposal, Insurance, Acquisition Proceeds and Target Distributions

8.2.1		For the purposes of Clauses 8.3 (Application of mandatory prepayments) and Clause 8.4 (Mandatory Prepayment Accounts and Holding Accounts):

		Acquisition Proceeds: means the proceeds of a claim against, or recovery or refund from (Recovery Claim) the Vendor or any of its Affiliates (or any employee, officer or adviser) in relation to the Acquisition Documents or against the provider of any Report (in its capacity as a provider of that Report) except for Excluded Acquisition Proceeds, and after deducting:

	(a)		any reasonable expenses which are incurred by any member of the Group to persons who are not members of the Group; and

	(b)		any Tax incurred and required to be paid by a member of the Group (as reasonably determined by the relevant member of the Group on the basis of existing rates and taking into account any available credit, deduction or allowance),

in each case in relation to that Recovery Claim.

Disposal: means a sale, lease, licence, transfer, loan or other disposal by a person of any asset, undertaking or business (whether by a voluntary or involuntary single transaction or series of transactions).

Disposal Proceeds: means the consideration receivable by any member of the Group (including any amount receivable in repayment of intercompany debt) for any Disposal made by any member of the Group except for Excluded Disposal Proceeds and after deducting:

	(a)		any reasonable expenses which are incurred by any member of the Group with respect to that Disposal to persons who are not members of the Group; and

	(b)		any Tax incurred and required to be paid by the seller in connection with that Disposal (as reasonably determined by the seller, on the basis of existing rates and taking account of any available credit, deduction or allowance).

Excluded Acquisition Proceeds: means any proceeds of a Recovery Claim which the Borrower notifies the Agent are, or are to be, applied:

	(a)		in payment of amounts payable to the Vendor pursuant to the Acquisition Agreement by way of adjustment to the purchase price in respect of the Acquisition (except to the extent relating to a working capital adjustment);

	(b)		to satisfy (or reimburse a member of the Group which has discharged) any liability, charge or claim upon a member of the Group by a person which is not a member of the Group; or

	(c)		in the replacement, reinstatement and/or repair of assets of members of the Group which have been lost, destroyed or damaged,

in each case as a result of the events or circumstances giving rise to that Recovery Claim, if those proceeds are so applied as soon as possible (but in any event within 180 days, or such longer period as the Majority Lenders may agree) after receipt.

Excluded Disposal Proceeds: means Disposal Proceeds which have been derived from a Disposal permitted by Clause 22.27 (Intra-Group transactions) or of a type described in paragraphs (a) or (b) or (c) (but only if and to the extent that such Disposal is in exchange for other Cash Equivalent Investments) of the definition of Permitted Disposal.

Excluded Insurance Proceeds: means any proceeds of an insurance claim which the Borrower notifies the Agent are, or are to be, applied:

	(a)		to meet a third party claim; or

	(b)		in amelioration of the loss in respect of which the relevant insurance claim was made,

in each case as soon as possible (but in any event within 180 days, or such longer period as the Majority Lenders may agree) after receipt.

Insurance Proceeds: means the proceeds of any insurance claim received by any member of the Group except for Excluded Insurance Proceeds and after deducting any reasonable expenses in relation to that claim which are incurred by any member of the Group to persons who are not members of the Group.

8.2.2

The Borrower shall prepay Loans in the following amounts at the times and in the order of application contemplated by Clause 8.3 (Application of mandatory prepayments):

	(a)		the amount of Acquisition Proceeds;

	(b)		the amount of Disposal Proceeds;

	(c)		the amount of Insurance Proceeds; and

	(d)		the amount of all Target Distributions in the amount equal to the percentage of Target Distribution as set out in the second column below when the Net Surplus Cover ratio in Clause 21.2 (Financial Condition) is as specified in the first column below (as demonstrated in writing by the Borrower to the satisfaction of the Agent).


	Percentage of Target Distribution
	proceeds to be applied in prepayment
Net Surplus Cover ratio	of the Facility
Less than or equal to 2.50:1		100	%
Greater than 2.50:1 but less than or equal to 3.00:1		75	%
Greater than 3.00:1		50	%

8.3		Application of mandatory prepayments

8.3.1		A prepayment made under Clause 8.2 (Disposal, Insurance, Acquisition Proceeds and Target Distributions) shall:

(a)

be applied in prepayment of Loans as contemplated in Clauses 8.3.1(b) to 8.3.3 inclusive below; and

(b)

unless the Obligors’ Agent makes an election under Clause 8.3.2 below, be applied in prepayment of the Loans within 5 Business Days of receipt of such proceeds or Target Distribution.

8.3.2		Subject to Clause 8.3.3 below, the Obligors’ Agent may elect that any prepayment under Clause 8.2 (Disposal, Insurance, Acquisition Proceeds and Target Distributions) be applied in prepayment of a Loan on the last day of the Interest Period relating to that Loan. If the Obligors’ Agent makes that election then a proportion of the Loan equal to the amount of the relevant prepayment will be due and payable on the last day of its Interest Period.

8.3.3		If the Obligors’ Agent has made an election under Clause 8.3.2 above but a Default has occurred and is continuing, that election shall no longer apply and a proportion of the Loan in respect of which the election was made equal to the amount of the relevant prepayment shall be immediately due and payable (unless the Majority Lenders otherwise agree in writing).

8.3.4		If the Borrower is not required to apply 100% of a Target Distribution in prepayment of the Facility under Clause 8.2.2 above then it may still apply up to 100% of such Target Distribution in prepayment of the Facility, and shall not be liable to pay a prepayment fee under Clause 9.3 (Prepayment Fee) in respect of such prepayment.

8.4		Mandatory Prepayment Accounts and Holding Accounts

8.4.1		The Obligors’ Agent shall ensure that:

	(a)		Disposal Proceeds, Insurance Proceeds, Acquisition Proceeds and any Target Distribution in respect of which the Obligors’ Agent has made an election under Clause 8.3 (Application of mandatory prepayments) are paid into a Mandatory Prepayment Account as soon as reasonably practicable after receipt by a member of the Group; and

	(b)		Excluded Disposal Proceeds to be applied in replacement of assets, Excluded Insurance Proceeds and Excluded Acquisition Proceeds are paid into a Holding Account as soon as reasonably practicable after receipt by a member of the Group.

8.4.2

The Borrower irrevocably authorises the Agent to apply:

	(a)		amounts credited to the Mandatory Prepayment Account; and

	(b)		amounts credited to the Holding Account which have not been duly applied as contemplated within 180 days of receipt of the relevant proceeds (or such longer time period as the Majority Lenders may agree),

to pay amounts due and payable under Clause 8.3 (Application of mandatory prepayments) and otherwise under the Finance Documents. The Borrower further irrevocably authorises the Agent to so apply amounts credited to the Holding Account in respect of Excluded Disposal Proceeds to be applied in replacement of assets, Excluded Insurance Proceeds and Excluded Acquisition Proceeds whether or not 180 days have elapsed since receipt of those proceeds if a Default has occurred and is continuing. The Borrower also irrevocably authorises the Agent to transfer any amounts credited to the Holding Account referred to in this Clause 8.4.2 to the Mandatory Prepayment Account pending payment of amounts due and payable under the Finance Documents (but if all such amounts have been paid any such amounts remaining credited to the Mandatory Prepayment Account may (unless a Default has occurred) be transferred back to the Holding Account).

8.4.3		A Lender, Security Agent or Agent with which a Mandatory Prepayment Account or Holding Account is held acknowledges and agrees that (1) interest shall accrue at normal commercial rates offered by such Lender, Security Agent or Agent in Europe on amounts credited to those accounts and that the account holder shall be entitled to receive such interest (which shall be paid in accordance with the mandate relating to such account) unless a Default is continuing, and (2) each such account is subject to the Transaction Security.

8.4.4		If the Borrower is not required to apply 100% of a Target Distribution in prepayment of the Facility under Clause 8.2.2 (Disposal, Insurance, Acquisition Proceeds and Target Distributions) and does not apply the money towards prepayment in accordance with Clause 8.3.4 (Application of mandatory prepayments) then the Borrower may withdraw such money from the Holding Account unless a Default has occurred and apply such monies at its discretion.

8.5		Excluded proceeds

		Where Excluded Acquisition Proceeds, Excluded Disposal Proceeds and Excluded Insurance Proceeds include amounts which are intended to be used for a specific purpose within a specified period (as set out in the relevant definition of Excluded Acquisition Proceeds, Excluded Disposal Proceeds or Excluded Insurance Proceeds), the Obligors’ Agent shall ensure that those amounts are used for that purpose and shall promptly deliver a certificate to the Agent at the time of such application and at the end of such period confirming the amount (if any) which has been so applied within the requisite time periods provided for in the relevant definition.

9		Restrictions

9.1		Notices of Cancellation or Prepayment

		Any notice of cancellation, prepayment, authorisation or other election given by any Party under Clause 7 (Illegality, Voluntary Prepayment and Cancellation), Clause 8.3 (Application of mandatory prepayments) or Clause 8.4 (Mandatory Prepayment Accounts and Holding Accounts) (subject to the terms of those Clauses) shall be irrevocable and, unless a contrary indication appears in this Agreement, any such notice shall specify the date or dates upon which the relevant cancellation or prepayment is to be made and the amount of that cancellation or prepayment.

9.2		Interest and other amounts

		Any prepayment under this Agreement shall be made together with accrued interest on the amount prepaid and, subject to any prepayment fee payable under Clause 9.3 (Prepayment Fee) and any Break Costs, without premium or penalty.

9.3		Prepayment Fee

		In the event that all of the Loans are prepaid as a result of a refinancing with a third party funder or sale of the Target on or before the first anniversary of the First Utilisation Date (other than under Clause 7.1 (Illegality), Clause 7.4 (Right of repayment and cancellation in relation to a single Lender), Clause 8.2 (Disposal, Insurance, Acquisition Proceeds and Target Distributions) or Clause 23 (Events of Default)), the Borrower shall pay to the Agent for the account of the Lenders a fee computed at the rate of one per cent. (1%) of the amount prepaid. Any such fee will be paid on the same date as the prepayment which causes the fee to be payable.

9.4		No Reborrowing of Facility

		The Borrower may not reborrow any part of the Facility which is repaid or prepaid.

9.5		Prepayment in accordance with Agreement

		No Borrower shall repay or prepay all or any part of the Loans or cancel all or any part of the Commitments except at the times and in the manner expressly provided for in this Agreement.

9.6		No reinstatement of Commitments

		No amount of the Total Commitments cancelled under this Agreement may be subsequently reinstated.

9.7		Agent’s receipt of Notices

		If the Agent receives a notice under Clause 7 (Illegality, Voluntary Prepayment and Cancellation) or an election under Clause 8.3 (Application of mandatory prepayments), it shall promptly forward a copy of that notice or election to either the Obligors’ Agent or the affected Lender, as appropriate.

10		Interest

10.1		Calculation of Interest

		The rate of interest on each Loan for each Interest Period is the percentage rate per annum which is the aggregate of the applicable:

	(a)		Margin;

	(b)		LIBOR; and

	(c)		Mandatory Cost, if any,

		(together the Interest).

10.2		Payment of Interest

		The Borrower shall pay accrued interest on each Loan on the last day of each Interest Period (and, if the Interest Period is longer than six Months, on the dates falling at six Monthly intervals after the first day of the Interest Period).

10.3		Default interest

10.3.1		If an Obligor fails to pay any amount payable by it under a Finance Document on its due date, interest shall accrue on the Unpaid Sum from the due date up to the date of actual payment (both before and after judgment) at a rate which, subject to Clause 10.3.2 below, is 1 per cent higher than the rate which would have been payable if the Unpaid Sum had, during the period of non-payment, constituted a Loan in the currency of the Unpaid Sum for successive Interest Periods, each of a duration selected by the Agent (acting reasonably). Any interest accruing under this Clause 10.3 shall be immediately payable by the Obligor on demand by the Agent.

10.3.2		If any overdue amount consists of all or part of a Loan which became due on a day which was not the last day of an Interest Period relating to that Loan:

(a)

the first Interest Period for that overdue amount shall have a duration equal to the unexpired portion of the current Interest Period relating to that Loan; and

(b)

the rate of interest applying to the overdue amount during that first Interest Period shall be 1 per cent higher than the rate which would have applied if the overdue amount had not become due.

10.3.3		Default interest (if unpaid) arising on an overdue amount will be compounded with the overdue amount at the end of each Interest Period applicable to that overdue amount but will remain immediately due and payable.

10.4		Notification of rates of interest

		The Agent shall promptly notify the Lenders and the Borrower of the determination of a rate of interest under this Agreement.

11		Interest Periods

11.1		Selection of Interest Periods and Terms

11.1.1		The Borrower may select an Interest Period for a Loan in the Utilisation Request for that Loan or (if the Loan has already been borrowed) in a Selection Notice.

11.1.2		Each Selection Notice for a Loan is irrevocable and must be delivered to the Agent by the Borrower not later than the Specified Time.

11.1.3		If the Borrower fails to deliver a Selection Notice to the Agent in accordance with Clause 11.1.2 above, the relevant Interest Period will be three Months.

11.1.4		Subject to this Clause 11, the Borrower may select an Interest Period of two, three or six Months or any other period agreed between the Borrower and the Agent (acting on the instructions of all the Lenders).

11.1.5		An Interest Period for a Loan shall not extend beyond the Termination Date.

11.1.6		Each Interest Period for a Loan shall start on the Utilisation Date or (if already made) on the last day of its preceding Interest Period.

11.2		Non-Business Days

		If an Interest Period would otherwise end on a day which is not a Business Day, that Interest Period will instead end on the next Business Day in that calendar month (if there is one) or the preceding Business Day (if there is not).

12		Changes To The Calculation Of Interest

12.1		Absence of quotations

		Subject to Clause 12.2 (Market disruption), if LIBOR is to be determined by reference to the Reference Banks but a Reference Bank does not supply a quotation by the Specified Time on the Quotation Day, the applicable LIBOR shall be determined on the basis of the quotations of the remaining Reference Banks.

12.2		Market disruption

12.2.1		If a Market Disruption Event occurs in relation to a Loan for any Interest Period, then the rate of interest on each Lender’s share of that Loan for the Interest Period shall be the percentage rate per annum which is the sum of:

	(a)		the applicable Margin;

	(b)		the rate notified to the Agent by that Lender as soon as practicable and in any event before interest is due to be paid in respect of that Interest Period,

to be that which expresses as a percentage rate per annum the cost to that Lender of funding its participation in that Loan from whatever source it may reasonably select; and

(c)

the Mandatory Cost, if any, applicable to that Lender’s participation in the Loan.

12.2.2

In this Agreement Market Disruption Event means:

	(a)		at or about noon on the Quotation Day for the relevant Interest Period the Screen Rate is not available and none or only one of the Reference Banks supplies a rate to the Agent to determine LIBOR for the relevant currency and Interest Period; or

	(b)		before close of business in London on the Quotation Day for the relevant Interest Period, the Agent receives notifications from a Lender or Lenders (whose participations in a Loan exceed 30 per cent of that Loan) that the cost to it of obtaining matching deposits in the London Interbank market would be in excess of LIBOR.

12.3		Alternative basis of interest or funding

12.3.1		If a Market Disruption Event occurs and the Agent or the Borrower so requires, the Agent and the Obligors’ Agent shall enter into negotiations (for a period of not more than 30 days) with a view to agreeing a substitute basis for determining the rate of interest.

12.3.2		Any alternative basis agreed pursuant to Clause 12.3.1 above shall, with the prior consent of all the Lenders and the Obligors’ Agent, be binding on all Parties.

12.4		Break Costs

12.4.1		The Borrower shall, within three Business Days of demand by a Finance Party, pay to that Finance Party its Break Costs attributable to all or any part of a Loan or Unpaid Sum being paid by the Borrower on a day other than the last day of an Interest Period for that Loan or Unpaid Sum.

12.4.2		Each Lender shall, as soon as reasonably practicable after a demand by the Agent, provide a certificate confirming the amount of its Break Costs for any Interest Period in which they accrue.

13		Fees

13.1		Commitment fee

13.1.1		The Borrower shall pay to the Agent (for the account of each Lender) a fee in the Base Currency computed at the rate of one per cent. (1.00%) per annum on the daily undrawn and uncancelled amount of the Facility during the Availability Period.

13.1.2		The accrued commitment fee is payable on the last day of each successive period of three Months which ends during the Availability Period, on the last day of the Availability Period and on the cancelled amount of the relevant Lender’s Commitment at the time the cancellation is effective.

13.2		Arrangement fee

		The Borrower shall pay to National Australia Bank Limited in its capacity as an Arranger an arrangement fee in the amount, manner and at the times agreed in a Fee Letter.

13.3		Agency fee

		The Borrower shall pay to the Agent (for its own account) an agency fee in the amount, manner and at the times agreed in a Fee Letter.

14		Tax Gross Up And Indemnities

14.1		Definitions

14.1.1		In this Agreement:

	(a)		Excluded Taxes: means, with respect to any Finance Party or other recipient of a payment to be made by an Obligor, (a) any withholding tax imposed pursuant to U.S. Internal Revenue Code Sections 1471-74, and (b) in the case of a non-US Lender, any withholding tax that is imposed on amounts payable to such non-US Lender at the time such non-US Lender becomes a party hereto (or designates a new Facility Office), except to the extent that such non-US Lender (or its assignor, if any) was entitled, at the time of designation of a new Facility Office (or assignment), to receive additional amounts from an Obligor with respect to such withholding tax pursuant to Clause 14.2 (Tax gross-up). In this regard, it is the agreement and understanding of the parties hereto that, under current law, the Borrower is not required to make any deduction for or on account of Tax from any payment it may make under any Finance Document to or for the benefit of any Original Lender, provided that such Original Lender provides a properly completed Internal Revenue Service Form W-8BEN with respect to its qualification for the benefit of the Australia-US tax treaty as a financial institution and, at such time as Internal Revenue Code Sections 1471-74 become effective and would otherwise impose a withholding tax notwithstanding the Australia-US tax treaty, complies with applicable requirements, if any, for avoiding the imposition of withholding tax thereunder.

	(b)		Protected Party: means a Finance Party which is or will be subject to any liability or required to make any payment for or on account of Tax in relation to a sum received or receivable (or any sum deemed for the purposes of Tax to be received or receivable) under a Finance Document.

	(c)		Tax Credit: means a credit against, relief or remission for, refund or repayment of, any Tax.

	(d)		Tax Deduction: means a deduction or withholding for or on account of Tax from a payment under a Finance Document.

	(e)		Tax Payment: means either the increase in a payment made by an Obligor to a Finance Party under Clause 14.2 (Tax gross-up) or a payment under Clause 14.3 (Tax indemnity).

14.1.2		Unless a contrary indication appears, in this Clause 14 a reference to determines or determined means a determination made in the absolute discretion of the person making the determination.

14.2		Tax gross-up

14.2.1		Each Obligor shall make all payments to be made by it under the Finance Documents without any Tax Deduction, other than a Tax Deduction for Excluded Taxes, unless a Tax Deduction is required by law.

14.2.2		The Borrower shall promptly upon becoming aware that an Obligor must make a Tax Deduction, other than a Tax Deduction for Excluded Taxes, (or that there is any change in the rate or the basis of a Tax Deduction that it must make) notify the Agent accordingly. Similarly, a Lender shall notify the Agent on becoming so aware in respect of a payment payable to that Lender. If the Agent receives such notification from a Lender it shall notify the Borrower and that Obligor.

14.2.3		If a Tax Deduction other than a Tax Deduction for Excluded Taxes is required by law to be made by an Obligor from any payment due from it under the Finance Documents, the amount of the payment due from that Obligor shall be increased to an amount which (after making any Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax Deduction had been required.

14.2.4		If an Obligor is required to make a Tax Deduction, that Obligor shall make that Tax Deduction and any payment required in connection with that Tax Deduction within the time allowed and in the minimum amount required by law.

14.2.5		Within 30 days of making either a Tax Deduction or any payment required in connection with that Tax Deduction, the Obligor making that Tax Deduction shall deliver to the Agent for the Finance Party entitled to the payment evidence reasonably satisfactory to that Finance Party that the Tax Deduction has been made or (as applicable) any appropriate payment paid to the relevant taxing authority.

14.3		Tax indemnity

14.3.1		The Borrower shall (within three Business Days of demand by the Agent) pay to a Protected Party an amount equal to the loss, liability or cost which that Protected Party determines will be or has been (directly or indirectly) suffered for or on account of Tax by that Protected Party in respect of a Finance Document.

14.3.2		Clause 14.3.1 above shall not apply:

(a)

with respect to any Finance Party or any other recipient of a payment to be made by or on account of any obligation of an Obligor hereunder, to:

	(i)		taxes imposed on or measured by its overall net income (however denominated), and franchise taxes imposed on it, by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located; or

	(ii)		any branch profits taxes imposed by the United States or any similar tax imposed by any other jurisdiction in which that Finance Party’s Facility Office is located; or

(b)

to the extent a loss, liability or cost:

	(i)		is compensated for by an increased payment under Clause 14.2 (Tax gross-up); or

	(ii)		A Protected Party making, or intending to make a claim under Clause 14.3.1 above, shall promptly notify the Agent of the event which will give, or has given, rise to the claim, following which the Agent shall notify the Borrower.

(iii)

A Protected Party shall, on receiving a payment from an Obligor under Clauses 14.3.1 to 14.3.2, notify the Agent.

14.4		Tax Credit

14.4.1		If an Obligor makes a Tax Payment and the relevant Finance Party determines that:

	(a)		a Tax Credit is attributable either to an increased payment of which that Tax Payment forms part or to that Tax Payment; and

	(b)		that Finance Party has obtained, utilised and retained that Tax Credit, the Finance Party shall pay an amount to the Obligor which that Finance Party determines will leave it (after that payment) in the same after-Tax position as it would have been in had the Tax Payment not been required to be made by the Obligor.

14.5		Stamp taxes

		The Borrower shall pay and, within three Business Days of demand, indemnify each Secured Party and the Arranger against any cost, loss or liability such Secured Party or such Arranger incurs in relation to all stamp duty, registration, excise and other similar Taxes payable in respect of any Finance Document.

14.6		Value added tax

14.6.1		All consideration expressed to be payable under a Finance Document by any Party to a Finance Party shall be deemed to be exclusive of any VAT. Subject to Clause 14.6.2 below, if VAT is chargeable on any supply made by any Finance Party to any Party in connection with a Finance Document, that Party shall pay to the Finance Party (in addition to and at the same time as paying the consideration) an amount equal to the amount of the VAT (and such Finance party shall promptly provide an appropriate VAT invoice to such Party).

14.6.2		If VAT is chargeable on any supply made by any Finance Party (Supplier) to any other Finance Party (Recipient) in connection with a Finance Document, and any Party is required by the terms of any Finance Document to pay an amount equal to the consideration for such supply to the Supplier, such Party shall also pay to the Supplier (in addition to and at the same time as paying such amount) an amount equal to the amount of such VAT.

14.6.3		Where a Finance Document requires any Party to reimburse a Finance Party for any costs or expenses, that Party shall also at the same time pay and indemnify the Finance Party against all VAT incurred by the Finance Party in respect of the costs or expenses to the extent that the Finance Party reasonably determines that it is not entitled to credit or repayment from the relevant tax authority in respect of the VAT.

14.7		Survival of Obligations

		Without prejudice to the survival of any other section of this Agreement, the agreements and obligations of each Obligor and each Finance Party contained in this Clause 14 shall survive the payment in full by the Obligors of all principal and interest here this Agreement until six (6) months after the expiry of the applicable statute of limitation with respect to the relevant Taxes and obligations related to them.

14.8		Tax Shelter

		Notwithstanding anything to the contrary, it is hereby agreed that from the commencement of discussions with respect to transactions contemplated by this Agreement (Transactions), any party to this Agreement (and any employee, representative or other agent of any party to this Agreement) may disclose to any and all persons,