Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

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

For the Quarterly Period Ended September 30, 2014

OR

 

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

For the Transition Period From             to            

001-33289

Commission File Number

ENSTAR GROUP LIMITED

(Exact name of registrant as specified in its charter)

 

Bermuda   N/A

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

P.O. Box HM 2267

Windsor Place, 3rd Floor

22 Queen Street

Hamilton HM JX

Bermuda

(Address of principal executive office, including zip code)

(441) 292-3645

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer  

¨       (Do not check if a smaller reporting company)

   Smaller reporting company   ¨

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

As of November 5, 2014, the registrant had outstanding 15,759,738 voting ordinary shares and 3,439,652 non-voting convertible ordinary shares, each par value $1.00 per share.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

       

Page

  PART I—FINANCIAL INFORMATION  

Item 1.

 

Financial Statements:

 
 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (Unaudited)

  2
 

Condensed Consolidated Statements of Earnings for the Three and Nine Month Periods Ended September 30, 2014 and 2013 (Unaudited)

  3
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Month Periods Ended September 30, 2014 and 2013 (Unaudited)

  4
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Month Periods Ended September 30, 2014 and 2013 (Unaudited)

  5
 

Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2014 and 2013 (Unaudited)

  6
 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

  7
 

Report of Independent Registered Public Accounting Firm

  68

Item 2.

 

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

  69

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  123

Item 4.

 

Controls and Procedures

  125
  PART II—OTHER INFORMATION  

Item 1.

 

Legal Proceedings

  126

Item 1A.

 

Risk Factors

  126

Item 6.

 

Exhibits

  126

Signature

  127


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2014 and December 31, 2013

 

     September 30,
2014
    December 31,
2013
 
     (expressed in thousands of
U.S. dollars, except share data)
 

ASSETS

    

Short-term investments, trading, at fair value

   $ 161,807      $ 281,002   

Short-term investments, available-for-sale, at fair value (amortized cost: 2014—$574; 2013—$32,477)

     574        32,504   

Fixed maturities, trading, at fair value

     3,997,454        3,381,719   

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

     845,610        859,387   

Fixed maturities, available-for-sale, at fair value (amortized cost: 2014—$239,124; 2013—$210,825)

     238,220        213,860   

Equities, trading, at fair value

     134,398        182,033   

Other investments, at fair value

     842,555        569,293   
  

 

 

   

 

 

 

Total investments

     6,220,618        5,519,798   

Cash and cash equivalents

     921,615        643,841   

Restricted cash and cash equivalents

     502,402        397,657   

Accrued interest receivable

     40,648        38,864   

Accounts receivable

     83,608        75,351   

Premiums receivable

     405,209        111,748   

Income taxes recoverable

     5,633        5,481   

Deferred tax assets

     34,278        34,295   

Prepaid reinsurance premiums

     140,453        —     

Reinsurance balances recoverable

     1,479,267        1,363,819   

Funds held by reinsured companies

     150,300        237,789   

Deferred acquisition costs

     36,172        —     

Goodwill and intangible assets

     202,986        150,071   

Other assets

     26,256        41,441   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 10,249,445      $ 8,620,155   
  

 

 

   

 

 

 

LIABILITIES

    

Losses and loss adjustment expenses

   $ 4,851,911      $ 4,219,905   

Policy benefits for life and annuity contracts

     1,228,643        1,273,100   

Unearned premiums

     439,862        70,698   

Insurance and reinsurance balances payable

     373,291        281,028   

Accounts payable and accrued liabilities

     99,379        97,103   

Income taxes payable

     20,732        23,721   

Deferred tax liabilities

     48,838        53,328   

Loans payable

     320,233        452,446   

Other liabilities

     62,900        70,444   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     7,445,789        6,541,773   
  

 

 

   

 

 

 
COMMITMENTS AND CONTINGENCIES
REDEEMABLE NONCONTROLLING INTEREST
     365,631        100,859   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Share capital

    

Authorized, issued and fully paid, par value $1 each (authorized 2014: 156,000,000; 2013: 156,000,000)

    

Ordinary shares (issued and outstanding 2014: 15,759,738; 2013: 13,802,706)

     15,760        13,803   

Non-voting convertible ordinary shares:

    

Series A (issued 2014: 2,972,892; 2013: 2,972,892)

     2,973        2,973   

Series C (issued and outstanding 2014: 2,725,637; 2013: 2,725,637)

     2,726        2,726   

Series E (issued and outstanding 2014: 714,015; 2013: Nil)

     714        —     

Treasury shares at cost (Series A non-voting convertible ordinary shares 2014: 2,972,892; 2013: 2,972,892)

     (421,559     (421,559

Additional paid-in capital

     1,320,398        962,145   

Accumulated other comprehensive income

     3,980        13,978   

Retained earnings

     1,289,266        1,181,457   
  

 

 

   

 

 

 

Total Enstar Group Limited Shareholders’ Equity

     2,214,258        1,755,523   

Noncontrolling interest

     223,767        222,000   
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     2,438,025        1,977,523   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 10,249,445      $ 8,620,155   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

2


Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three and Nine Month Periods Ended September 30, 2014 and 2013

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2014     2013     2014     2013  
   

(expressed in thousands of U.S. dollars, except share and

per share data)

 

INCOME

       

Net premiums earned

  $ 195,987      $ 58,674      $ 474,561      $ 165,931   

Fees and commission income

    6,801        2,398        21,308        7,805   

Net investment income

    27,984        25,009        85,981        70,224   

Net realized and unrealized (losses) gains

    (18,336     37,010        54,648        39,211   
 

 

 

   

 

 

   

 

 

   

 

 

 
    212,436        123,091        636,498        283,171   
 

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

       

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

    17,533        (20,388     65,232        (38,649

Life and annuity policy benefits

    26,549        31,095        81,090        57,417   

Acquisition costs

    36,261        6,149        99,801        18,149   

Salaries and benefits

    54,525        29,716        141,598        79,013   

General and administrative expenses

    41,039        29,126        100,466        67,074   

Interest expense

    3,307        3,270        10,570        8,796   

Net foreign exchange losses (gains)

    6,365        (673     7,435        (3,994
 

 

 

   

 

 

   

 

 

   

 

 

 
    185,579        78,295        506,192        187,806   
 

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

    26,857        44,796        130,306        95,365   

INCOME TAXES

    (5,660     (1,340     (21,388     (13,726
 

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

    21,197        43,456        108,918        81,639   

Less: Net loss (earnings) attributable to noncontrolling interest

    5,232        (3,469     (1,109     (10,496
 

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

  $ 26,429      $ 39,987      $ 107,809      $ 71,143   
 

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE—BASIC

       

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

  $ 1.38      $ 2.42      $ 5.94      $ 4.31   
 

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE—DILUTED

       

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

  $ 1.37      $ 2.39      $ 5.84      $ 4.26   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding—basic

    19,198,475        16,525,012        18,142,531        16,521,865   

Weighted average ordinary shares outstanding—diluted

    19,331,390        16,720,715        18,445,885        16,698,640   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Month Periods Ended September 30, 2014 and 2013

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  
     (expressed in thousands of U.S. dollars)  

NET EARNINGS

   $ 21,197      $ 43,456      $ 108,918      $ 81,639   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income, net of tax:

        

Unrealized holding losses on fixed income investments arising during the period

     (3,852     (137     (3,393     (1,689

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

     87        (33     (47     (312
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized losses arising during the period, net of reclassification adjustment

     (3,765     (170     (3,440     (2,001

Currency translation adjustment

     (14,815     9,053        (8,043     (12,448
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (18,580     8,883        (11,483     (14,449
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     2,617        52,339        97,435        67,190   

Less comprehensive loss (income) attributable to noncontrolling interest

     8,922        (4,206     376        (5,810
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 11,539      $ 48,133      $ 97,811      $ 61,380   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

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Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Nine Month Periods Ended September 30, 2014 and 2013

 

     Nine Months Ended
September 30,
 
     2014     2013  
     (expressed in thousands
of U.S. dollars)
 

Share Capital—Ordinary Shares

    

Balance, beginning of period

   $ 13,803      $ 13,752   

Issue of shares

     1,914        4   

Share awards granted/vested

     43        45   
  

 

 

   

 

 

 

Balance, end of period

   $ 15,760      $ 13,801   
  

 

 

   

 

 

 

Share Capital—Series A Non-Voting Convertible Ordinary Shares

    

Balance, beginning and end of period

   $ 2,973      $ 2,973   
  

 

 

   

 

 

 

Share Capital—Series C Non-Voting Convertible Ordinary Shares

    

Balance, beginning and end of period

   $ 2,726      $ 2,726   
  

 

 

   

 

 

 

Share Capital—Series E Non-Voting Convertible Ordinary Shares

    

Balance, beginning of period

   $ —        $ —     

Issue of shares

     714        —     
  

 

 

   

 

 

 

Balance, end of period

   $ 714      $ —     
  

 

 

   

 

 

 

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

    

Balance, beginning of period

   $ —        $ —     

Issue of stock

     714        —     

Converted to Series E Non-Voting Convertible Ordinary Shares

     (714  
  

 

 

   

 

 

 

Balance, end of period

   $ —        $ —     
  

 

 

   

 

 

 

Treasury Shares

    

Balance, beginning and end of period

   $ (421,559   $ (421,559
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance, beginning of period

   $ 962,145      $ 958,571   

Issue of shares and warrants

     354,368        487   

Amortization of equity incentive plan

     3,885        2,212   
  

 

 

   

 

 

 

Balance, end of period

   $ 1,320,398      $ 961,270   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income Attributable to Enstar Group Limited

    

Balance, beginning of period

   $ 13,978      $ 24,439   

Currency translation adjustment

    

Balance, beginning of period

     14,264        27,822   

Change in currency translation adjustment

     (7,791     (8,254
  

 

 

   

 

 

 

Balance, end of period

     6,473        19,568   

Defined benefit pension liability

    

Balance, beginning of period

     (2,249     (7,180

Change in defined benefit pension liability

     0        0   
  

 

 

   

 

 

 

Balance, end of period

     (2,249     (7,180

Unrealized gain on investments

    

Balance, beginning of period

     1,963        3,797   

Change in unrealized gain on investments, net of tax

     (2,207     (1,509
  

 

 

   

 

 

 

Balance, end of period

     (244     2,288   
  

 

 

   

 

 

 

Balance, end of period

   $ 3,980      $ 14,676   
  

 

 

   

 

 

 

Retained Earnings

    

Balance, beginning of period

   $ 1,181,457      $ 972,853   

Net earnings attributable to Enstar Group Limited

     107,809        71,143   
  

 

 

   

 

 

 

Balance, end of period

   $ 1,289,266      $ 1,043,996   
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance, beginning of period

   $ 222,000      $ 221,478   

Return of capital

     (9,980     —     

Contribution of capital

     18,081        —     

Transfer of net loss to redeemable noncontrolling interest

     1,028        —     

Dividends paid

     (13,908     (1,740

Net earnings attributable to noncontrolling interest*

     7,131        10,469   

Foreign currency translation adjustments

     (246     (4,194

Net movement in unrealized holding losses on investments

     (339     (492
  

 

 

   

 

 

 

Balance, end of period

   $ 223,767      $ 225,521   
  

 

 

   

 

 

 

 

* Excludes net loss attributable to redeemable noncontrolling interest; refer to Note 12.

See accompanying notes to the unaudited condensed consolidated financial statements

 

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Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Month Periods Ended September 30, 2014 and 2013

 

     Nine Months Ended
September 30,
 
     2014     2013  
    

(expressed in thousands of

U.S. dollars)

 

OPERATING ACTIVITIES:

    

Net earnings

   $ 108,918      $ 81,639   

Adjustments to reconcile net earnings to cash flows provided by operating activities:

    

Net realized and unrealized investment (gains) losses

     (28,509     10,996   

Net realized and unrealized gains from other investments

     (26,139     (50,207

Other items

     3,083        3,656   

Depreciation and amortization

     3,082        761   

Net amortization of premiums and accretion of discounts

     42,488        36,929   

Net movement of trading securities held on behalf of policyholders

     3,013        2,187   

Sales and maturities of trading securities

     2,302,138        2,063,258   

Purchases of trading securities

     (1,585,871     (2,257,188

Changes in assets and liabilities:

    

Reinsurance balances recoverable

     287,760        213,042   

Funds held by reinsured companies

     98,099        —     

Other assets

     40,553        237,585   

Losses and loss adjustment expenses

     (630,417     (314,862

Policy benefits for life and annuity contracts

     (44,457     21,490   

Insurance and reinsurance balances payable

     (77,625     (31,637

Accounts payable and accrued liabilities

     (14,752     (38,459

Other liabilities

     (43,539     (104,790
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     437,825        (125,600
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Acquisitions, net of cash acquired

   $ 37,540      $ (308,710

Sales and maturities of available-for-sale securities

     98,314        181,066   

Purchase of available-for-sale securities

     (97,322     (112

Maturities of held-to-maturity securities

     5,477        253   

Movement in restricted cash and cash equivalents

     (81,966     (86,640

Funding of other investments

     (278,265     (68,097

Redemption of other investments

     30,707        18,656   

Other investing activities

     837        15   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (284,678     (263,569
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Distribution of capital to noncontrolling interest

   $ (9,980   $ —     

Contribution by redeemable noncontrolling interest

     272,722        32,480   

Contribution by noncontrolling interest

     18,081        —     

Dividends paid to noncontrolling interest

     (13,908     (1,740

Receipt of loans

     70,000        274,800   

Repayment of loans

     (199,245     (39,505
  

 

 

   

 

 

 

Net cash flows provided by financing activities

     137,670        266,035   
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS

     (13,043     (11,196
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     277,774        (134,330

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     643,841        654,890   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 921,615      $ 520,560   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

    

Net income taxes paid

   $ 31,207      $ 24,010   

Interest paid

   $ 13,589      $ 7,326   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 and December 31, 2013

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

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation and Consolidation

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 preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the unaudited condensed consolidated financial statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include, but are not limited to:

 

    reserves for losses and loss adjustment expenses;

 

    policy benefits for life and annuity contracts;

 

    gross and net premiums written and net premiums earned;

 

    reinsurance balances recoverable, including the provisions for uncollectible amounts;

 

    other-than-temporary impairments in the carrying value of available-for-sale and held-to- maturity investment securities;

 

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

 

    valuation of goodwill and intangible assets; and

 

    fair value estimates associated with accounting for acquisitions.

The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Certain reclassifications have been made to the prior period reported amounts of net increase (reduction) in ultimate losses and loss adjustment expense liabilities, acquisition costs and life and annuity policy benefits to conform to the current period presentation. These reclassifications had no impact on income or net earnings previously reported.

 

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ENSTAR GROUP LIMITED

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

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

 

New Accounting Standards Adopted in 2014

ASU 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). The objective of ASU 2013-11 is to improve the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 seeks to reduce the diversity in practice by providing guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 is effective for annual and interim reporting periods beginning after December 15, 2013, with both early adoption and retrospective application permitted. The adoption of the guidance did not have a material impact on the Company’s consolidated statements of operations and financial position.

2. ACQUISITIONS

Companion Property and Casualty Insurance Company

On August 26, 2014, the Company and Sussex Holdings, Inc. (“Sussex”), an indirect, wholly owned subsidiary of the Company, entered into a definitive agreement for the purchase of all of the shares of Companion Property and Casualty Insurance Company (“Companion”) from Blue Cross and Blue Shield of South Carolina, an independent licensee of the Blue Cross Blue Shield Association. Companion is a South Carolina-based insurance group writing property, casualty, specialty and workers compensation business, and has also provided fronting and third party administrative services.

The total consideration for the transaction will be $218 million in cash. The Company expects to finance the purchase price through a combination of cash on hand and a bank loan facility to be finalized before closing. The Company is a party to the acquisition agreement and has guaranteed the performance by Sussex of its payment and other acquisition-related obligations set forth in the agreement.

Completion of the transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close in the fourth quarter of 2014.

Torus Insurance Holdings Limited

On April 1, 2014, Kenmare Holdings Ltd. (“Kenmare”), a wholly-owned subsidiary of the Company, together with Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P., which are managed by Stone Point Capital LLC (collectively, “Trident”), completed the previously announced acquisition of Torus Insurance Holdings Limited (“Torus”). Torus is an A- rated global specialty insurer with six wholly-owned insurance vehicles, including Lloyd’s Syndicate 1301. At closing, Torus became directly owned by Bayshore Holdings Ltd. (“Bayshore”), which was 60% owned by Kenmare and 40% owned by Trident.

 

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ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

The purchase price for Torus was established in the amended and restated amalgamation agreement as $646.0 million, to be paid partly in cash and partly in the Company’s stock. The number of Company shares to be issued was fixed at the signing of the amalgamation agreement on July 8, 2013 and was determined by reference to an agreed-upon value per share of $132.448, which was the average closing price of the Company’s voting ordinary shares, par value $1.00 per share (the “Voting Ordinary Shares”), over the 20 trading days prior to such signing date. On the day before closing of the amalgamation, the Voting Ordinary Shares had a closing price of $136.31 per share. At closing, the Company contributed cash of $41.6 million towards the purchase price and $3.6 million towards related transaction expenses, as well as 1,898,326 Voting Ordinary Shares and 714,015 shares of Series B Convertible Participating Non-Voting Perpetual Preferred Stock of the Company (the “Non-Voting Preferred Shares”). Based on a price of $136.31 per share, the Company’s contribution of cash and shares to the purchase price totaled $397.7 million in the aggregate. Trident contributed cash of $258.4 million towards the purchase price and $2.4 million towards related transaction expenses. Based on a price of $136.31 per share, the aggregate purchase price paid by the Company and Trident was $656.1 million.

FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. (collectively, “First Reserve”) received 1,501,211 Voting Ordinary Shares, 714,015 Non-Voting Preferred Shares and cash consideration in the transaction. Following the approval of the Company’s shareholders of an amendment to its bye-laws on June 10, 2014, First Reserve’s Non-Voting Preferred Shares converted on a share-for-share basis into 714,015 shares of newly created Series E Non-Voting Convertible Common Shares (the “Series E Non-Voting Ordinary Shares”). Corsair Specialty Investors, L.P. (“Corsair”) received 397,115 Voting Ordinary Shares and cash consideration in the transaction. The remaining Torus shareholders received all cash. As a result of the amalgamation, First Reserve now owns approximately 9.5% and 11.5%, respectively, of the Company’s Voting Ordinary Shares and outstanding share capital.

Upon the closing of the Torus acquisition, Bayshore, Kenmare and Trident entered into a Shareholders’ Agreement (the “Bayshore Shareholders’ Agreement”), which was subsequently amended, as described in “Dowling Co-investments in Bayshore and Northshore” below.

 

Purchase price

   $ 656,088   
  

 

 

 

Net assets acquired at fair value

   $ 643,088   
  

 

 

 

Excess of purchase price over fair value of net assets acquired

   $ 13,000   
  

 

 

 

The purchase price was allocated to the acquired assets and liabilities of Torus based on estimated fair values at the acquisition date. The Company recognized goodwill of $13.0 million, all of which was recorded within the Torus segment and is attributable primarily to Torus’ assembled workforce (refer to note 19 for a description of the Company’s segments). The Company also recognized indefinite lived intangible assets of $23.9 million and other definite lived intangible assets of $20.0 million.

 

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ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

The Company has not completed the process of determining the fair value of its losses and loss adjustment expense reserves, goodwill and intangible assets acquired in the Torus transaction. These valuations will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value recorded for these items is a provisional estimate and may be subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill.

Prior to acquisition, Torus ceased underwriting certain lines of business in order to focus on core property, casualty and specialty lines. The results of the discontinued lines of business which were placed into run-off are included within the Company’s non-life run-off segment.

Torus is a global specialty insurer that offers a diverse range of property, casualty and specialty insurance through its operations in the U.K., Continental Europe, the U.S., and Bermuda.

 

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ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed in the Torus transaction at the acquisition date, allocated by segment.

 

     Torus      Non-life
Run-off
     Total  

ASSETS

        

Short-term investments, trading, at fair value

   $ 73,425       $ 25,888       $ 99,313   

Fixed maturities, trading, at fair value

     736,765         329,235         1,066,000   

Other investments

     2,068         —           2,068   
  

 

 

    

 

 

    

 

 

 

Total investments

     812,258         355,123         1,167,381   

Cash and cash equivalents

     225,118         114,490         339,608   

Restricted cash and cash equivalents

     22,779         —           22,779   

Premiums receivable

     307,950         —           307,950   

Reinsurance balances recoverable—reserves

     210,742         152,057         362,799   

Reinsurance balances recoverable—paids

     21,122         20,100         41,222   

Prepaid reinsurance premiums

     144,221         25,221         169,442   

Intangible assets

     43,900         —           43,900   

Other assets

     37,621         —           37,621   
  

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

   $ 1,825,711       $ 666,991       $ 2,492,702   
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

Losses and loss adjustment expenses

   $ 675,424       $ 588,822       $ 1,264,246   

Insurance and reinsurance balances payable

     140,997         29,047         170,044   

Unearned premium

     343,840         49,122         392,962   

Other liabilities

     22,362         —           22,362   
  

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES

     1,182,623         666,991         1,849,614   
  

 

 

    

 

 

    

 

 

 

NET ASSETS ACQUIRED AT FAIR VALUE

     643,088         —           643,088   

Goodwill

     13,000         —           13,000   
  

 

 

    

 

 

    

 

 

 

ACQUISITION DATE FAIR VALUE

   $ 656,088       $ —         $ 656,088   
  

 

 

    

 

 

    

 

 

 

The following table summarizes the provisional intangible assets recorded in connection with the acquisition:

 

     Amount      Economic
Useful Life

Syndicate capacity

   $ 4,000       Indefinite

U.S. insurance licences

     19,900       Indefinite

Technology

     15,000       4 years

Brand

     5,000       6 years
  

 

 

    

Intangible assets as of the acquisition date

   $ 43,900      
  

 

 

    

The fair value of the Lloyd’s syndicate capacity was estimated using the multi-period excess-earnings method, a form of the income approach. Lloyd’s syndicate capacity represents Torus’s authorized premium income limit to write insurance business in the Lloyd’s market. The capacity is renewed annually at no cost to the Company but may be freely purchased or sold, subject to Lloyd’s

 

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ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

approval. The ability to write insurance business within the syndicate capacity is indefinite, with the premium income limit being set annually by the Company, subject to Lloyd’s approval.

U.S. insurance licenses represent the intangible asset related to Torus’ licenses and have been valued based on recent market transactions.

Technology represents the intangible asset related to Torus’ capitalized software and has been valued on a replacement cost basis.

Brand represents the intangible asset related to the Torus name and was valued using the income approach.

From April 1, 2014, the date of acquisition, to September 30, 2014, the Company earned premiums of $258.5 million, recorded net increase in ultimate losses and loss adjustment expense liabilities of $159.6 million on those earned premiums, and recorded $18.7 million in net loss in its consolidated statement of earnings related to the active underwriting portion of the Torus segment.

From the date of acquisition to September 30, 2014, the Company earned premiums of $29.1 million, recorded net increase in ultimate losses and loss adjustment expense liabilities of $17.6 million on those earned premiums, and recorded $7.4 million in net earnings in its consolidated statement of earnings related to Torus’ non-life run-off business.

Supplemental Pro Forma Financial Information (Unaudited)

The operating results for Torus have been included in the unaudited condensed consolidated financial statements from the date of acquisition. The following pro forma condensed combined statement of earnings for the three months ended September 30, 2013 and the nine months ended September 30, 2014 and 2013 combines the historical consolidated statements of earnings of the Company with those historical consolidated statements of earnings of Torus, giving effect to the business combinations and related transactions as if they had occurred on January 1, 2013 and 2014, as applicable. The unaudited pro forma financial information presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition of Torus had taken place at the beginning of each period presented, nor is it indicative of future results.

 

     Three Months Ended
September 30, 2013
    Nine Months Ended
September 30, 2013
    Nine Months Ended
September 30, 2014
 

Total income

   $ 263,504      $ 747,867      $ 783,691   

Total expenses

     (258,974     (721,365     (669,054

Total noncontrolling interest

     12,498        12,121        (3,455
  

 

 

   

 

 

   

 

 

 

Net earnings

   $ 17,028      $ 38,623      $ 111,182   
  

 

 

   

 

 

   

 

 

 

Changes in Ownership Interests relating to Holding Companies for our Active Underwriting Businesses

Atrium Employee Equity Awards

On April 17, 2014, Northshore Holdings Ltd. (“Northshore”), the parent company of Atrium Underwriting Group Limited (“Atrium”) and Arden Reinsurance Company Ltd. (“Arden”), implemented

 

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ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

long-term incentive plans that awarded time-based restricted shares of Northshore to certain Atrium employees. These equity awards will have the effect of modestly reducing Kenmare’s equity interest in Northshore (as well as Trident’s equity interest) over the course of the vesting periods as Atrium employees acquire shares. Shares generally vest over two to three years, although certain awards began vesting in 2014.

Dowling Co-investments in Bayshore and Northshore

On May 8, 2014, Dowling Capital Partners I, L.P. (“Dowling”) purchased common shares of both Bayshore and Northshore from Kenmare and Trident (on a pro rata basis in accordance with their respective interests) for an aggregate amount of $15.4 million.

Prior to the sale of shares to Dowling, Kenmare and Trident owned 60% and 40% of Bayshore, respectively, and 57.1% and 38.1% of Northshore on a fully diluted basis, respectively (assuming full vesting of Atrium employees’ restricted shares totaling 4.8%). Following the sale of Bayshore shares to Dowling, Kenmare, Trident and Dowling own 59.0%, 39.3% and 1.7% of Bayshore, respectively. Following the sale of Northshore shares to Dowling, Kenmare, Trident, certain Atrium employees and Dowling own 56.1%, 37.4%, 4.8% and 1.7% of Northshore, respectively, on a fully diluted basis.1

In connection with the sale of Bayshore shares, the Bayshore Shareholders’ Agreement was amended and restated. The Amended and Restated Bayshore Shareholders’ Agreement, among other things, provides that Kenmare has the right to appoint three members to the Bayshore board of directors and Trident has the right to appoint two members. The Amended and Restated Bayshore Shareholders’ Agreement includes a five-year period (the “Restricted Period”) during which no shareholder can transfer its ownership interest in Bayshore to a third party unless approved by a super-majority of the shareholders. Following the Restricted Period: (i) each shareholder must offer Kenmare and Trident the right to buy its shares before the shares are offered to a third party; (ii) Kenmare can require each other shareholder to participate in a sale of Bayshore to a third party as long as Kenmare owns 55% of the aggregate number of outstanding shares of Bayshore held by Kenmare and Trident; (iii) each shareholder has the right to be included on a pro rata basis in any sales made by another shareholder; and (iv) each of Kenmare, Trident and Dowling has the right to buy its pro rata share of any new securities issued by Bayshore.

The Amended and Restated Bayshore Shareholders’ Agreement also provides that during the 90-day period following the fifth anniversary of the Torus closing, and at any time following the seventh anniversary of such closing, Kenmare would have the right to purchase the Bayshore shares owned by all other shareholders of Bayshore at their then fair market value, which would be payable in cash. Following the seventh anniversary of the Torus closing, Trident would have the right to require Kenmare to purchase all of Trident’s shares in Bayshore for their then current fair market value and Dowling would have the right to participate in such transaction by requiring Kenmare to purchase all of its shares in Bayshore on the same terms. Kenmare would have the option to pay for such shares either in cash or by delivering the Company’s Voting Ordinary Shares.

In connection with the sale of Northshore shares, the Northshore Shareholders’ Agreement was amended and restated. The Amended and Restated Northshore Shareholders’ Agreement provides for

 

1  Refer to Note 12 for Northshore percentages based on employee shares vested as at September 30, 2014.

 

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ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

 

substantially the same rights and obligations as the Amended and Restated Bayshore Shareholders’ Agreement, except that the fifth and seventh anniversaries refer to the Arden closing (which occurred on September 9, 2013).

3. SIGNIFICANT NEW BUSINESS

2014

Reciprocal of America

On July 6, 2012, our wholly-owned subsidiary, Providence Washington Insurance Company, entered into a definitive loss portfolio transfer reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers’ compensation business. The estimated total liabilities to be assumed are approximately $163.4 million, with an equivalent amount of assets to be received as consideration. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close in the fourth quarter of 2014.

Shelbourne RITC Transactions

Effective January 1, 2014, Lloyd’s Syndicate 2008 (“S2008”), which is managed by the Company’s wholly-owned subsidiary and Lloyd’s managing agent, Shelbourne Syndicate Services Limited, entered into a reinsurance to close contract of the 2011 and prior underwriting years of account of another Lloyd’s syndicate, under which S2008 assumed total net insurance reserves of approximately £17.0 million (approximately $28.1 million) for cash consideration of an equal amount.

Effective December 31, 2012, S2008 entered into a 100% quota share reinsurance agreement with another Lloyd’s syndicate in respect of its 2009 and prior years of account (the “2009 Liabilities”), under which S2008 assumed total gross insurance reserves of approximately £193.0 million (approximately $313.3 million) for consideration of an equal amount. Effective January 1, 2014, the 2012 Lloyd’s underwriting year of account of S2008 entered into a partial RITC transaction with respect to the 2009 Liabilities.

4. INVESTMENTS

The Company holds: (i) trading portfolios of fixed maturity investments, short-term investments and equities; (ii) a held-to-maturity portfolio of fixed maturity investments; and (iii) available-for-sale portfolios of fixed maturity and short-term investments. The Company’s trading and available-for-sale portfolios are recorded at fair value. The Company’s held-to-maturity portfolio is recorded at amortized cost.

In the normal course of the Company’s investing activities, it actively manages allocations to non-controlling tranches of structured securities issued by variable interest entities (“VIEs”). These structured securities include residential mortgage-backed, commercial mortgage-backed and asset-backed securities and are included in the tables below.

In addition to these securities, the Company also invests in private equity funds, fixed income funds, fixed income hedge funds, equity and real estate debt funds and collateralized loan obligation (“CLO”) equity-tranched securities, which are all variable interests issued by VIEs. For these variable

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

interests, the Company does not have the power to direct the activities that are most significant to the economic performance of the VIEs and, accordingly, it is not the primary beneficiary for any of these VIEs. The Company’s maximum exposure to loss on these interests is limited to the amount of its investment. The Company has not provided financial or other support with respect to these structured securities other than its original investment.

Trading

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

 

     September 30,
2014
     December 31,
2013
 

U.S. government and agency

   $ 707,269       $ 439,946   

Non-U.S. government

     430,425         476,224   

Corporate

     2,115,706         2,123,675   

Municipal

     28,386         41,034   

Residential mortgage-backed

     322,835         218,457   

Commercial mortgage-backed

     154,011         114,637   

Asset-backed

     400,629         248,748   
  

 

 

    

 

 

 

Total fixed maturity and short-term investments

     4,159,261         3,662,721   

Equities—U.S.

     75,881         115,285   

Equities—International

     58,517         66,748   
  

 

 

    

 

 

 
   $ 4,293,659       $ 3,844,754   
  

 

 

    

 

 

 

Included within residential and commercial mortgage-backed securities as at September 30, 2014 were securities issued by U.S. governmental agencies with a fair value of $283.8 million (as at December 31, 2013: $177.9 million).

The increase in the Company’s investments classified as trading securities of $448.9 million was due primarily to additional fixed maturity investments acquired in the Torus acquisition.

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

 

As at September 30, 2014

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 568,933         13.7

AA

     1,875,772         45.1

A

     1,193,664         28.7

BBB

     361,677         8.7

Non-Investment Grade

     130,217         3.1

Not Rated

     28,998         0.7
  

 

 

    

 

 

 
   $ 4,159,261         100.0
  

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

As at December 31, 2013

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 502,057         13.7

AA

     1,430,107         39.1

A

     1,191,142         32.5

BBB

     408,466         11.1

Non-Investment Grade

     53,148         1.5

Not Rated

     77,801         2.1
  

 

 

    

 

 

 
   $ 3,662,721         100.0
  

 

 

    

 

 

 

Held-to-maturity

The Company holds a portfolio of held-to-maturity securities to support the annuity business acquired through its March 31, 2013 acquisition of the closed U.S. life and annuities operations of HSBC Holdings plc (now referred to as “Pavonia”). The amortized cost and estimated fair values of the Company’s fixed maturity investments classified as held-to-maturity were as follows:

 

As at September 30, 2014

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

U.S. government and agency

   $ 20,158       $ 4       $ (404   $ 19,758   

Non-U.S. government

     36,794         164         (623     36,335   

Corporate

     788,658         5,262         (11,540     782,380   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 845,610       $ 5,430       $ (12,567   $ 838,473   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

As at December 31, 2013

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

U.S. government and agency

   $ 19,992       $ 6       $ (1,866   $ 18,132   

Non-U.S. government

     23,592         19         (1,284     22,327   

Corporate

     815,803         105         (56,808     759,100   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 859,387       $ 130       $ (59,958   $ 799,559   
  

 

 

    

 

 

    

 

 

   

 

 

 

As at September 30, 2014 and December 31, 2013, none of these securities were considered to be other than temporarily impaired.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

The contractual maturities of the Company’s fixed maturity investments classified as held-to-maturity 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.

 

As at September 30, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 17,247       $ 17,243         2.1

Due after one year through five years

     106,407         106,924         12.7

Due after five years through ten years

     105,614         103,824         12.4

Due after ten years

     616,342         610,482         72.8
  

 

 

    

 

 

    

 

 

 
   $ 845,610       $ 838,473         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2013

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 17,541       $ 17,579         2.2

Due after one year through five years

     87,698         86,611         10.8

Due after five years through ten years

     133,102         126,541         15.8

Due after ten years

     621,046         568,828         71.2
  

 

 

    

 

 

    

 

 

 
   $ 859,387       $ 799,559         100.0
  

 

 

    

 

 

    

 

 

 

The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity investments classified as held-to-maturity:

 

As at September 30, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 54,111       $ 53,487         6.4

AA

     253,193         248,484         29.6

A

     491,773         490,111         58.5

BBB

     35,697         35,744         4.3

Non-Investment Grade

     10,482         10,275         1.2

Not Rated

     354         372         0.0
  

 

 

    

 

 

    

 

 

 
   $ 845,610       $ 838,473         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2013

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 47,949       $ 44,552         5.6

AA

     259,163         239,188         29.9

A

     496,986         463,001         57.9

BBB

     49,281         47,157         5.9

Non-Investment Grade

     5,478         5,125         0.6

Not Rated

     530         536         0.1
  

 

 

    

 

 

    

 

 

 
   $ 859,387       $ 799,559         100.0
  

 

 

    

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Available-for-sale

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

 

As at September 30, 2014

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

U.S. government and agency

   $ 27,942       $ 205       $ (47   $ 28,100   

Non-U.S. government

     76,407         638         (1,620     75,425   

Corporate

     89,408         906         (990     89,324   

Residential mortgage-backed

     3,634         91         (90     3,635   

Asset-backed

     42,307         36         (33     42,310   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 239,698       $ 1,876       $ (2,780   $ 238,794   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

As at December 31, 2013

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

U.S. government and agency

   $ 28,050       $ 303       $ (10   $ 28,343   

Non-U.S. government

     84,443         1,871         (22     86,292   

Corporate

     76,942         1,221         (259     77,904   

Residential mortgage-backed

     17,523         102         (118     17,507   

Asset-backed

     36,344         4         (30     36,318   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 243,302       $ 3,501       $ (439   $ 246,364   
  

 

 

    

 

 

    

 

 

   

 

 

 

Included within residential mortgage-backed securities as at September 30, 2014 were securities issued by U.S. governmental agencies with a fair value of $1.0 million (as at December 31, 2013: $12.5 million).

The following tables summarize the Company’s fixed maturity 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 securities have continuously been in an unrealized loss position:

 

     12 Months or Greater      Less Than 12 Months     Total  

As at September 30, 2014

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

U.S. government and agency

   $ —         $ —         $ 22,370       $ (47   $ 22,370       $ (47

Non-U.S. government

     —           —           42,046         (1,620     42,046         (1,620

Corporate

     —           —           56,755         (990     56,755         (990

Residential mortgage-backed

     —           —           1,316         (90     1,316         (90

Asset-backed

     —           —           18,350         (33     18,350         (33
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ —         $ —         $ 140,837       $ (2,780   $ 140,837       $ (2,780
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

     12 Months or Greater      Less Than 12 Months     Total  

As at December 31, 2013

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

U.S. government and agency

   $ —         $ —         $ 11,416       $ (10   $ 11,416       $ (10

Non-U.S. government

     —           —           20,406         (22     20,406         (22

Corporate

     —           —           51,478         (259     51,478         (259

Residential mortgage-backed

     —           —           13,632         (118     13,632         (118

Asset-backed

     —           —           24,898         (30     24,898         (30
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ —         $ —         $ 121,830       $ (439   $ 121,830       $ (439
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

As at September 30, 2014 and December 31, 2013, the number of securities classified as available-for-sale in an unrealized loss position was 175 and 135, respectively, with a fair value of $140.8 million and $121.8 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was nil. As of September 30, 2014, none of these securities were considered to be other than temporarily impaired.

The contractual maturities of the Company’s fixed maturity 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.

 

As at September 30, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 53,038       $ 53,178         22.3

Due after one year through five years

     134,717         133,021         55.7

Due after five years through ten years

     3,487         3,334         1.4

Due after ten years

     2,515         3,316         1.4
  

 

 

    

 

 

    

 

 

 
     193,757         192,849         80.8

Residential mortgage-backed

     3,634         3,635         1.5

Asset-backed

     42,307         42,310         17.7
  

 

 

    

 

 

    

 

 

 
   $ 239,698       $ 238,794         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2013

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 45,295       $ 45,596         18.5

Due after one year through five years

     141,400         143,445         58.2

Due after five years through ten years

     69         70         0.1

Due after ten years

     2,671         3,428         1.4
  

 

 

    

 

 

    

 

 

 
     189,435         192,539         78.2

Residential mortgage-backed

     17,523         17,507         7.1

Asset-backed

     36,344         36,318         14.7
  

 

 

    

 

 

    

 

 

 
   $ 243,302       $ 246,364         100.0
  

 

 

    

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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

 

As at September 30, 2014

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 119,096       $ 118,266         49.5

AA

     67,051         66,719         27.9

A

     40,943         41,250         17.3

BBB

     12,608         12,559         5.3
  

 

 

    

 

 

    

 

 

 
   $ 239,698       $ 238,794         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2013

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 125,729       $ 127,433         51.7

AA

     74,692         75,181         30.5

A

     33,834         34,607         14.1

BBB

     8,957         8,963         3.6

Not Rated

     90         180         0.1
  

 

 

    

 

 

    

 

 

 
   $ 243,302       $ 246,364         100.0
  

 

 

    

 

 

    

 

 

 

Other-Than-Temporary Impairment Process

The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale and held-to-maturity represent impairment losses that are other-than-temporary and whether a credit loss exists in accordance with its accounting policies. 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 available-for-sale in an unrealized gain position, and other relevant factors. For the nine months ended September 30, 2014, the Company did not recognize any other-than-temporary impairment losses due to required sales. The Company determined that, as at September 30, 2014, no credit losses existed.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Other Investments

The estimated fair values of the Company’s other investments were as follows:

 

     September 30,
2014
     December 31,
2013
 

Private equity funds

   $ 212,532       $ 161,229   

Fixed income funds

     311,088         194,375   

Fixed income hedge funds

     66,822         68,157   

Equity funds

     154,280         109,355   

Real estate debt fund

     33,636         32,113   

CLO equities

     23,166         —     

CLO equity fund

     36,506         —     

Other

     4,525         4,064   
  

 

 

    

 

 

 
   $ 842,555       $ 569,293   
  

 

 

    

 

 

 

Private equity funds

This class comprises several private equity funds that invest primarily in the financial services industry. All of the Company’s investments in private equity funds 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. These restrictions have been in place since the dates the initial investments were made by the Company.

As of September 30, 2014 and December 31, 2013, the Company had $212.5 million and $161.2 million, respectively, of other investments recorded in private equity funds, which represented 2.8% and 2.5% of total investments, cash and cash equivalents and restricted cash and cash equivalents at September 30, 2014 and December 31, 2013, respectively. 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. Management regularly reviews and discusses fund performance with the Company’s fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments.

Fixed income funds

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

Fixed income hedge funds

This class comprises hedge funds that invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of three years from the time of the Company’s initial investment.

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Once eligible, redemptions will be permitted quarterly with 90 days’ notice.

Equity funds

This class comprises equity funds that invest in a diversified portfolio of international publicly-traded equity securities.

Real estate debt fund

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

CLO equities

This class comprises investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by the Company in these securities.

CLO equity fund

This class comprises a fund that invests primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.

Other

This class primarily comprises a fund that provides loans to educational institutions throughout the U.S. and its territories. Through these investments, the Company participates in the performance of the underlying loan pools. This investment matures when the loans are paid down and cannot be redeemed before maturity. Also included within this class is a catastrophe bond acquired as part of the Company’s acquisition of Torus.

Redemption restrictions on other investments

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

Certain funds included in other investments may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible debt. In such cases, a common mechanism

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

used is a “side-pocket,” whereby the illiquid security is assigned to a separate memorandum capital account or designated account. Typically, the investor loses its redemption rights in the designated account. Only when the illiquid security is sold, or is otherwise deemed liquid by the fund, may investors redeem their interest in the side-pocket.

At September 30, 2014, the Company had $2.3 million of investments subject to side-pockets ($3.2 million as of December 31, 2013). As of September 30, 2014, management has not made any adjustments to the fair value estimate reported by the fund managers for the side-pocketed investments.

The following tables present the fair value, unfunded commitments and redemption frequency for the funds included within other investments. These investments are all valued at net asset value as at September 30, 2014 and December 31, 2013:

 

September 30, 2014

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

Redemption

Frequency

Private equity funds

   $ 212,532       $ —         $ 212,532       $ 106,604       Not eligible

Fixed income funds

     311,088         —           311,088         —         Daily to monthly

Fixed income hedge funds

     66,822         2,263         64,559         —         Quarterly after lock-up periods expire

Equity funds

     154,280         —           154,280         —         Bi-monthly

Real estate debt fund

     33,636         —           33,636         —         Monthly

CLO equity fund

     36,506         —           36,506         —         Not eligible

Other

     2,503         —           2,503         655       Not eligible
  

 

 

    

 

 

    

 

 

    

 

 

    
   $ 817,367       $ 2,263       $ 815,104       $ 107,259      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

December 31, 2013

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

Redemption

Frequency

Private equity funds

   $ 161,229       $ —         $ 161,229       $ 113,585       Not eligible

Fixed income funds

     194,375         —           194,375         —         Daily to monthly

Fixed income hedge funds

     68,157         3,150         65,007         —         Quarterly after lock-up periods expire

Equity funds

     109,355         —           109,355         —         Bi-monthly

Real estate debt fund

     32,113         —           32,113         —         Monthly

Other

     4,064         —           4,064         655       Not eligible
  

 

 

    

 

 

    

 

 

    

 

 

    
   $ 569,293       $ 3,150       $ 566,143       $ 114,240      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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 judgment 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.

Fixed Maturity Investments

The Company’s fixed maturity investments portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors with oversight from the Company’s Investment Committee. Fair values for all securities in the fixed maturity investments portfolio are independently provided by the investment custodians, investment accounting service providers and investment managers, each of which utilize internationally recognized independent pricing services. Interactive Data Corporation is, however, the main pricing service utilized to estimate the fair value measurements for the Company’s fixed maturity investments. The Company records the unadjusted price provided by the investment custodians, investment accounting service providers or the investment managers and validates this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to the Company’s knowledge of the current investment market. The Company’s internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.

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

 

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

 

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

 

    Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, 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 September 30, 2014, 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 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

 

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Table of Contents

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

 

and current transactions are not orderly. In this event, securities are classified within Level 3. As at September 30, 2014, the Company had no residential or commercial mortgage-backed securities classified as Level 3.

Equities

The Company’s equities are predominantly traded on the major exchanges and are primarily managed by two external advisors. The Company uses Interactive Data Corporation, an internationally recognized pricing service, to estimate the fair value for all of its equities. The Company’s equities are widely diversified and there is no significant concentration in any specific industry.

The Company has categorized all of its investments in equities other than preferred stock as Level 1 investments because the fair values of these investments are based on quoted prices in active markets for identical assets or liabilities. The fair value estimates of the Company’s preferred stock is based on observable market data and, as a result, has been categorized as Level 2, with the exception of one investment in preferred stock that has been categorized as Level 3.

Other investments

The Company has ongoing due diligence processes with respect to funds in which it invests and their managers. These processes are designed to assist the Company in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements for funds annually, and regularly reviews and discusses the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, the Company may incorporate adjustments to the reported net asset value (and not use the permitted practical expedient) on an investment by investment basis. These adjustments may involve significant management judgment. As at September 30, 2014, there were no significant adjustments made to the reported net asset value.

For its investments in private equity funds, the Company measures fair value by obtaining the most recently provided capital statement from the external fund manager or third-party administrator. The funds calculate net asset value on a fair value basis. For all publicly-traded companies within these funds, the Company adjusts the reported net asset value based on the latest share price as of the Company’s reporting date. The Company has classified its investments in private equity funds as Level 3.

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

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

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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

The Company measures the fair value of its direct investment in CLO equities based on valuations provided by the Company’s external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is valued based on valuations provided by the broker or lead underwriter of the investment (the “broker”). At September 30, 2014, the Company’s externally-managed investments in CLO equities were valued using valuations provided by the external CLO equity manager and the Company’s internally-managed CLO equities investments were valued using valuations provided by the brokers. The Company’s CLO equities investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of relevant trades in secondary markets.

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

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

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

For its investments in the CLO equity fund, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager. The Company uses an income approach to corroborate the reasonableness of reported net asset value. The CLO equity

 

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

fund investment has been classified as Level 3 due to a lack of observable and relevant trades in secondary markets.

The Company’s other investments have been valued based on the latest available capital statements, and have all been classified as Level 3.

Fair Value Measurements

In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification 820, the Company has categorized its investments that are recorded at fair value among levels as follows:

 

     September 30, 2014  
     Quoted Prices
in

Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total Fair
Value
 

U.S. government and agency

   $ —         $ 735,369       $ —         $ 735,369   

Non-U.S. government

     —           505,850         —           505,850   

Corporate

     —           2,204,416         614         2,205,030   

Municipal

     —           28,386         —           28,386   

Residential mortgage-backed

     —           326,470         —           326,470   

Commercial mortgage-backed

     —           154,011         —           154,011   

Asset-backed

     —           442,939         —           442,939   

Equities—U.S.

     65,743         5,263         4,875         75,881   

Equities—International

     26,238         32,279         —           58,517   

Other investments

     —           467,391         375,164         842,555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 91,981       $ 4,902,374       $ 380,653       $ 5,375,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

28


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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

     December 31, 2013  
     Quoted Prices
in

Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total Fair
Value
 

U.S. government and agency

   $ —         $ 468,289       $ —         $ 468,289   

Non-U.S. government

     —           562,516         —           562,516   

Corporate

     —           2,200,970         609         2,201,579   

Municipal

     —           41,034         —           41,034   

Residential mortgage-backed

     —           235,964         —           235,964   

Commercial mortgage-backed

     —           114,637         —           114,637   

Asset-backed

     —           285,066         —           285,066   

Equities—U.S.

     97,470         13,090         4,725         115,285   

Equities—International

     35,677         31,071         —           66,748   

Other investments

     —           303,724         265,569         569,293   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 133,147       $ 4,256,361       $ 270,903       $ 4,660,411   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present the Company’s fair value hierarchy for those assets classified as held-to-maturity in the consolidated balance sheet but for which disclosure of the fair value is required as of September 30, 2014 and December 31, 2013:

 

     September 30, 2014  
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total Fair
Value
 

U.S. government and agency

   $ —         $ 19,758       $ —         $ 19,758   

Non-U.S. government

     —           36,335         —           36,335   

Corporate

     —           782,380         —           782,380   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ —         $ 838,473       $ —         $ 838,473   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total Fair
Value
 

U.S. government and agency

   $ —         $ 18,132       $ —         $ 18,132   

Non-U.S. government

     —           22,327         —           22,327   

Corporate

     —           759,100         —           759,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ —         $ 799,559       $ —         $ 799,559   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

29


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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

During 2014 and 2013, the Company had no transfers between Levels 1 and 2.

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 September 30, 2014:

 

     Fixed
Maturity
Investments
     Other
Investments
    Equity
Securities
     Total  

Level 3 investments as of July 1, 2014

   $ 610       $ 328,164      $ 4,875       $ 333,649   

Purchases

     —           64,923        —           64,923   

Sales

     —           (20,015     —           (20,015

Total realized and unrealized gains through earnings

     4         2,092        —           2,096   

Net transfers into and/or (out of) Level 3

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Level 3 investments as of September 30, 2014

   $ 614       $ 375,164      $ 4,875       $ 380,653   
  

 

 

    

 

 

   

 

 

    

 

 

 

The amount of net gains for the three months ended September 30, 2014 included in earnings attributable to the fair value of changes in assets still held at September 30, 2014 was $2.1 million. All of this amount was included in net realized and unrealized gains.

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 September 30, 2013.

 

     Fixed
Maturity
Investments
    Other
Investments
    Equity
Securities
    Total  

Level 3 investments as of July 1, 2013

   $ 606      $ 249,314      $ 4,500      $ 254,420   

Purchases

     —          5,376        —          5,376   

Sales

     —          (8,825     —          (8,825

Total realized and unrealized (losses) gains through earnings

     (9     11,376        (100     11,267   

Net transfers into and/or (out of) Level 3

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Level 3 investments as of September 30, 2013

   $ 597      $ 257,241      $ 4,400      $ 262,238   
  

 

 

   

 

 

   

 

 

   

 

 

 

The amount of net (losses) gains for the three months ended September 30, 2013 included in earnings attributable to the fair value of changes in assets still held at September 30, 2013 was $11.3 million. All of this amount was included in net realized and unrealized gains.

 

30


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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

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

 

     Fixed
Maturity
Investments
     Other
Investments
    Equity
Securities
     Total  

Level 3 investments as of January 1, 2014

   $ 609       $ 265,569      $ 4,725       $ 270,903   

Purchases

     —           116,676        —           116,676   

Sales

     —           (30,707     —           (30,707

Total realized and unrealized gains through earnings

     5         23,626        150         23,781   

Net transfers into and/or (out of) Level 3

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Level 3 investments as of September 30, 2014

   $ 614       $ 375,164      $ 4,875       $ 380,653   
  

 

 

    

 

 

   

 

 

    

 

 

 

The amount of net gains for the nine months ended September 30, 2014 included in earnings attributable to the fair value of changes in assets still held at September 30, 2014 was $23.8 million. All of this amount was included in net realized and unrealized gains.

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 nine months ended September 30, 2013.

 

     Fixed
Maturity
Investments
     Other
Investments
    Equity
Securities
     Total  

Level 3 investments as of January 1, 2013

   $ 540       $ 202,730      $ 3,402       $ 206,672   

Purchases

     —           39,533        —           39,533   

Sales

     —           (18,578     —           (18,578

Total realized and unrealized gains through earnings

     57         33,556        998         34,611   

Net transfers into and/or (out of) Level 3

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Level 3 investments as of September 30, 2013

   $ 597       $ 257,241      $ 4,400       $ 262,238   
  

 

 

    

 

 

   

 

 

    

 

 

 

The amount of net gains for the nine months ended September 30, 2013 included in earnings attributable to the fair value of changes in assets still held at September 30, 2013 was $34.6 million. All of this amount was included in net realized and unrealized gains.

 

31


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ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Net Realized and Unrealized Gains

Components of net realized and unrealized gains (losses) are as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
             2014                     2013                     2014                     2013          

Gross realized gains on available-for-sale securities

   $ —        $ 89      $ 185      $ 354   

Gross realized losses on available-for-sale securities

     (87     (56     (138     (42

Net realized gains (losses) on trading securities

     4,141        (4,508     22,068        5,082   

Net unrealized (losses) gains on trading securities

     (14,141     21,360        6,394        (16,390

Net realized and unrealized (losses) gains on other investments

     (8,249     20,125        26,139        50,207   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized (losses) gains

   $ (18,336   $ 37,010      $ 54,648      $ 39,211   
  

 

 

   

 

 

   

 

 

   

 

 

 

Proceeds from sales and maturities of available-for-sale securities

   $ 19,347      $ 20,923      $ 98,314      $ 181,066   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income

Major categories of net investment income are summarized as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
             2014                     2013                     2014                     2013          

Interest from fixed maturity investments

   $ 40,184      $ 33,690      $ 114,034      $ 89,067   

Interest from cash and cash equivalents and short-term investments

     1,575        3,739        5,000        11,048   

Net amortization of bond premiums and discounts

     (14,344     (13,668     (42,488     (36,929

Dividends from equities

     1,040        913        4,070        3,309   

Other investments

     (152     7        588        (39

Interest on other receivables

     (193     246        689        1,819   

Other income

     2,278        1,088        9,464        3,079   

Interest on deposits held with clients

     340        298        1,362        3,166   

Policy loan interest

     296        —          911        —     

Investment expenses

     (3,040     (1,304     (7,649     (4,296
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 27,984      $ 25,009      $ 85,981      $ 70,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

 

Restricted Assets

The Company is required to maintain investments and cash and cash equivalents on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments and cash and cash equivalents 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 assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted assets, including restricted cash of $502.4 million and $397.7 million, as of September 30, 2014 and December 31, 2013 was as follows:

 

     September 30,
2014
     December 31,
2013
 

Collateral in trust for third party agreements

   $ 2,754,358       $ 2,002,374   

Assets on deposit with regulatory authorities

     667,465         608,940   

Collateral for secured letter of credit facilities

     320,694         310,938   
  

 

 

    

 

 

 
   $ 3,742,517       $ 2,922,252   
  

 

 

    

 

 

 

The increase in restricted assets of $820.3 million since December 31, 2013 is primarily as a result of the acquisition of Torus.

5. REINSURANCE BALANCES RECOVERABLE

The following table provides the total reinsurance balances recoverable as at September 30, 2014 and December 31, 2013:

 

    September 30, 2014     December 31, 2013  
    Non-life
Run-off
    Atrium     Torus     Life and
Annuities
    Total     Non-life
Run-off
    Atrium     Life and
Annuities
    Total  

Recoverable from reinsurers on:

                 

Outstanding losses

  $ 620,451      $ 9,681      $ 175,828      $ 24,300      $ 830,260      $ 788,705      $ 10,777      $ 28,556      $ 828,038   

Losses incurred but not reported

    328,444        15,706        170,538        752        515,440        402,675        9,887        782        413,344   

Fair value adjustments

    (52,030     4,391        (14,502     —          (62,141     (69,847     4,391        —          (65,456
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total reinsurance reserves recoverable

    896,865        29,778        331,864        25,052        1,283,559        1,121,533        25,055        29,338        1,175,926   

Paid losses recoverable

    153,552        477        39,552        2,127        195,708        177,459        7,845        2,589        187,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,050,417      $ 30,255      $ 371,416      $ 27,179      $ 1,479,267      $ 1,298,992      $ 32,900      $ 31,927      $ 1,363,819   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

ENSTAR GROUP LIMITED

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

5. REINSURANCE BALANCES RECOVERABLE—(Continued)

 

The Company’s acquired insurance and reinsurance run-off subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. The Company’s insurance and reinsurance subsidiaries remain 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.

On an annual basis, both Torus and Atrium purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s total third party reinsurance cover is with Lloyd’s Syndicates or other highly rated reinsurers. The majority of Torus’ total third party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.

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

As of September 30, 2014 and December 31, 2013, the Company had, excluding reinsurance recoverables related to its life and annuities segment, reinsurance balances recoverable of $1.45 billion and $1.33 billion, respectively. The increase of $120.2 million in reinsurance balances recoverable was primarily a result of the Torus acquisition, partially offset by commutations and cash collections made during the period ended September 30, 2014.

As at September 30, 2014, the reinsurance balances recoverable associated with the Company’s life and annuities business consists of term life business ceded by Pavonia to reinsurers under various quota share arrangements. All of the reinsurers are rated A- and above by a major rating agency.

For September 30, 2014 and December 31, 2013, the provision for uncollectible reinsurance recoverable relating to reinsurance balances recoverable was $324.4 million and $338.6 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the balances are first allocated to applicable reinsurers using management judgment. As part of this process, ceded incurred but not reported (“IBNR”) reserves are allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total non-life run-off reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of September 30, 2014 decreased to 18.0% as compared to 19.9% as of December 31, 2013, primarily as a result of reinsurance balances recoverable of Torus acquired during the year that required minimal provisions for uncollectible reinsurance recoverable, and cash collections from reinsurers with minimal bad debt provisions.

Top Ten Reinsurers

At September 30, 2014 and December 31, 2013, the top ten reinsurers of the Company’s business accounted for 62.5% and 68.3%, respectively, of total reinsurance balances recoverable (which includes total reinsurance reserves and paid losses recoverable) and included $338.5 million and $290.1 million, respectively, of IBNR reserves recoverable. With the exception of one non-rated

 

34


Table of Contents

ENSTAR GROUP LIMITED

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

5. REINSURANCE BALANCES RECOVERABLE—(Continued)

 

reinsurer from which $173.2 million was recoverable (December 31, 2013: $256.2 million recoverable from one non-rated reinsurer and $41.1 million recoverable from one BBB+ rated reinsurer), the other top ten reinsurers, as at September 30, 2014 and December 31, 2013, were all rated A- or better. Reinsurance balances recoverable by reinsurer were as follows:

 

     September 30, 2014     December 31, 2013  
     Reinsurance
Recoverables
     % of
Total
    Reinsurance
Recoverables
     % of
Total
 

Top 10 reinsurers

   $ 924,362         62.5   $ 930,943         68.3

Other reinsurers’ balances > $1 million

     540,597         36.5     423,013         31.0

Other reinsurers’ balances < $1 million

     14,308         1.0     9,863         0.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,479,267         100.0   $ 1,363,819         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

As at September 30, 2014 and December 31, 2013, reinsurance balances recoverable with a carrying value of $330.1 million and $256.2 million, respectively, were associated with two and one reinsurers, respectively, which represented 10% or more of total non-life run-off reinsurance balances recoverable. One of the reinsurers accounting for $156.9 million of reinsurance balances recoverable as at September 30, 2014 was rated A+, while the remaining $173.2 million of reinsurance balances recoverable as at September 30, 2014 were secured by trust funds held for the benefit of the Company’s insurance and reinsurance subsidiaries.

6. LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table provides the total losses and loss adjustment expense liabilities as at September 30, 2014 and December 31, 2013:

 

    September 30, 2014     December 31, 2013  
    Non-life
Run-off
    Atrium     Torus     Total     Non-life
Run-off
    Atrium     Total  

Outstanding

  $ 2,328,269      $ 80,129      $ 368,451      $ 2,776,849      $ 2,541,934      $ 79,826      $ 2,621,760   

Incurred but not reported

    1,586,706        109,547        509,529        2,205,782        1,717,870        98,583        1,816,453   

Fair value adjustment

    (164,136     36,984        (3,568     (130,720     (255,291     36,983        (218,308
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,750,839      $ 226,660      $ 874,412      $ 4,851,911      $ 4,004,513      $ 215,392      $ 4,219,905   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The increase in losses and loss adjustment expense liabilities for the Company between December 31, 2013 and September 30, 2014 was primarily attributable to the Company’s acquisition of Torus on April 1, 2014.

Refer to Note 8 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for more information on establishing reserves for losses and loss adjustment expenses liabilities.

 

35


Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The total net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the Company’s non-life run-off, Atrium and Torus segments for the three and nine months ended September 30, 2014 and 2013 was as follows:

 

    Three Months Ended September 30,  
    2014     2013  
    Non-life
Run-off
    Atrium     Torus     Total     Non-life
Run-off
    Total  

Net losses paid

  $ 127,908      $ 15,800      $ 62,083      $ 205,791      $ 92,438      $ 92,438   

Net change in case and LAE reserves

    (107,780     (177     (22,858     (130,815     (67,734     (67,734

Net change in IBNR reserves

    (98,664     (135     39,013        (59,786     (28,332     (28,332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

    (78,536     15,488        78,238        15,190        (3,628     (3,628

Reduction in provisions for bad debt

    (5,019     —          —          (5,019     (5,465     (5,465

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

    (13,317     53        977        (12,287     (16,320     (16,320

Amortization of fair value adjustments

    19,649        —          —          19,649        5,025        5,025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

  $ (77,223   $ 15,541      $ 79,215      $ 17,533      $ (20,388   $ (20,388
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

    Nine Months Ended September 30,  
    2014     2013  
    Non-life
Run-off
    Atrium     Torus     Total     Non-life
Run-off
    Total  

Net losses paid

  $ 332,169      $ 40,643      $ 76,331      $ 449,143      $ 219,780      $ 219,780   

Net change in case and LAE reserves

    (248,599     2,839        19,406        (226,354     (189,267     (189,267

Net change in IBNR reserves

    (190,742     5,663        62,740        (122,339     (23,667     (23,667
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

    (107,172     49,145        158,477        100,450        6,846        6,846   

Paid loss recoveries on bad debt provisions

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

Reduction in provisions for bad debt

    (5,019     —          —          (5,019     (5,465     (5,465

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

    (39,549     138        978        (38,433     (49,518     (49,518

Amortization of fair value adjustments

    19,340        —          100        19,440        9,488        9,488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

  $ (143,606   $ 49,283      $ 159,555      $ 65,232      $ (38,649   $ (38,649
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

Non-Life Run-off Segment

Three Months Ended September 30, 2014 and 2013

The tables below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended September 30, 2014 and 2013 of the non-life run-off segment (losses incurred and paid are reflected net of reinsurance recoverables):

 

     Non-life Run-off  
     Three Months Ended
September 30,
 
     2014     2013  

Balance as at July 1 (1)

   $ 4,031,262      $ 4,041,236   

Less: total reinsurance reserves recoverable

     935,319        888,970   
  

 

 

   

 

 

 
     3,095,943        3,152,266   

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

    

Current period

     8,841        24,222   

Prior periods

     (86,064     (44,610
  

 

 

   

 

 

 

Total net reduction in ultimate losses and loss adjustment expense liabilities

     (77,223     (20,388
  

 

 

   

 

 

 

Net losses paid:

    

Current period

     (3,081     (5,756

Prior periods

     (124,827     (86,682
  

 

 

   

 

 

 

Total net losses paid

     (127,908     (92,438
  

 

 

   

 

 

 

Effect of exchange rate movement

     (36,838     33,182   

Acquired on purchase of subsidiaries

     —          140,443   

Assumed business

     —          1,178   
  

 

 

   

 

 

 

Net balance as at September 30

     2,853,974        3,214,243   

Plus: total reinsurance reserves recoverable

     896,865        1,186,175   
  

 

 

   

 

 

 

Balance as at September 30

   $ 3,750,839      $ 4,400,418   
  

 

 

   

 

 

 

 

(1) During the three months ended September 30, 2014, the Company reallocated $50.7 million of losses and loss adjustment expense liabilities from the Torus segment to the non-life run-off segment.

 

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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the non-life run-off segment for the three months ended September 30, 2014 and 2013 was as follows (a reclassification of $3.9 million was made from 2013 current period net losses paid to acquisition costs in order to conform to current year presentation):

 

    Non-Life Run-off  
    Three Months Ended September 30,  
    2014     2013  
    Prior Period     Current
Period
    Total     Prior Period     Current
Period
    Total  

Net losses paid

  $ 124,827      $ 3,081      $ 127,908      $ 86,682      $ 5,756      $ 92,438   

Net change in case and LAE reserves

    (108,933     1,153        (107,780     (76,055     8,321        (67,734

Net change in IBNR reserves

    (103,271     4,607        (98,664     (38,477     10,145        (28,332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

    (87,377     8,841        (78,536     (27,850     24,222        (3,628

Reduction in provisions for bad debt

    (5,019     —          (5,019     (5,465     —          (5,465

Reduction in provisions for unallocated loss adjustment expense liabilities

    (13,317     —          (13,317     (16,320     —          (16,320

Amortization of fair value adjustments

    19,649        —          19,649        5,025        —          5,025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

  $ (86,064   $ 8,841      $ (77,223   $ (44,610   $ 24,222      $ (20,388
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in case and loss adjustment expenses (“LAE”) reserves comprises the movement during the period 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 change in IBNR reserves represents the change in the Company’s actuarial estimates of losses incurred but not reported, less amounts recoverable.

Three Months Ended September 30, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended September 30, 2014 of $77.2 million included an increase in net ultimate losses and loss adjustment expense liabilities of $8.8 million related to current period earned premium of $13.9 million (primarily for the portion of the run-off business acquired with Torus). Excluding current period net ultimate losses and loss adjustment expense liabilities of $8.8 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $86.1 million, which was attributable to a reduction in estimates of net ultimate losses of $87.4 million, reduction in provisions for bad debt of $5.0 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $13.3 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $19.6 million.

 

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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

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

 

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

 

  (ii) an aggregate reduction in IBNR reserves of $36.3 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures in thirteen of the Company’s insurance and reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for these subsidiaries was reduced as a result of the combined impact on all classes of business of loss development activity during 2014, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts; and

 

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

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

Three Months Ended September 30, 2013

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended September 30, 2013 of $20.4 million included incurred losses and net change in IBNR reserves of $24.2 million related to premiums earned in the period by SeaBright Holdings, Inc. (“SeaBright”). Excluding SeaBright’s increase in estimates of net ultimate losses of $24.2 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $44.6 million, which was attributable to a reduction in estimates of net ultimate losses of $27.9 million, reduction in provisions for bad debt of $5.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $16.3 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments of $5.0 million.

Excluding the impact of net ultimate losses of $24.2 million relating to SeaBright, the reduction in estimates of net ultimate losses of $27.9 million (comprised of net incurred loss development of $10.6 million and reduction in IBNR reserves of $38.5 million) related primarily to:

 

  (i) the Company’s quarterly review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $10.4 million;

 

  (ii)

an aggregate reduction in IBNR reserves of $12.5 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures in ten of the Company’s insurance and reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for these subsidiaries was reduced as a result of the combined impact on all classes of business of loss development activity during 2013,

 

40


Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

  including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts; and

 

  (iii) a reduction in estimates of net ultimate losses of $5.0 million following the completion of one commutation of assumed reinsurance liabilities.

The reduction in provisions for bad debt of $5.5 million for the nine months ended September 30, 2013 resulted from the collection of receivables against which bad debt provisions had been provided for in earlier periods.

Nine Months Ended September 30, 2014 and 2013

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the nine months ended September 30, 2014 and 2013 of the non-life run-off segment (losses incurred and paid are reflected net of reinsurance recoverables):

 

     Non-Life Run-off  
     Nine Months Ended
September 30,
 
     2014     2013  

Balance as at January 1

   $ 4,004,513      $ 3,650,127   

Less: total reinsurance reserves recoverable

     1,121,533        876,220   
  

 

 

   

 

 

 
     2,882,980        2,773,907   

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

    

Current period

     20,482        88,259   

Prior periods

     (164,088     (126,908
  

 

 

   

 

 

 

Total net reduction in ultimate losses and loss adjustment expense liabilities

     (143,606     (38,649
  

 

 

   

 

 

 

Net losses paid:

    

Current period

     (3,873     (11,081

Prior periods

     (317,090     (208,699
  

 

 

   

 

 

 

Total net losses paid

     (320,963     (219,780
  

 

 

   

 

 

 

Effect of exchange rate movement

     (29,832     (2,180

Acquired on purchase of subsidiaries

     436,765        619,510   

Assumed business

     28,630        81,435   
  

 

 

   

 

 

 

Net balance as at September 30

     2,853,974        3,214,243   

Plus: total reinsurance reserves recoverable

     896,865        1,186,175   
  

 

 

   

 

 

 

Balance as at September 30

   $ 3,750,839      $ 4,400,418   
  

 

 

   

 

 

 

 

41


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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

Loss reserves acquired on purchase of subsidiaries during the nine months ended September 30, 2014 of $436.8 million related to the acquisition of certain lines of business within Torus, which were placed into run-off prior to acquisition. Total net losses paid are shown net of paid loss recoveries on bad debt provisions of $11.2 million.

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the non-life run-off segment for the nine months ended September 30, 2014 and 2013 was as follows (a reclassification of $12.0 million was made from 2013 current period net losses paid to acquisition costs so as to conform to current year presentation):

 

    Non-Life Run-off  
    Nine Months Ended September 30,  
    2014     2013  
    Prior Period     Current
Period
    Total     Prior Period     Current
Period
    Total  

Net losses paid

  $ 328,296      $ 3,873      $ 332,169      $ 208,699      $ 11,081      $ 219,780   

Net change in case and LAE reserves

    (250,778     2,179        (248,599     (212,966     23,699        (189,267

Net change in IBNR reserves

    (205,172     14,430        (190,742     (77,146     53,479        (23,667
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

    (127,654     20,482        (107,172     (81,413     88,259        6,846   

Paid loss recoveries on provisions for bad debt

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

Reduction in provisions for bad debt

    (5,019     —          (5,019     (5,465     —          (5,465

Reduction in provisions for unallocated loss adjustment expense liabilities

    (39,549     —          (39,549     (49,518     —          (49,518

Amortization of fair value adjustments

    19,340        —          19,340        9,488        —          9,488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

  $ (164,088   $ 20,482      $ (143,606   $ (126,908   $ 88,259      $ (38,649
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the nine months ended September 30, 2014 of $143.6 million included an increase in net ultimate losses and loss adjustment expense liabilities of $20.5 million related to current period earned premium of $33.5 million (primarily for the portion of the run-off business acquired with Torus). Excluding current period net ultimate losses and loss adjustment expense liabilities of $20.5 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $164.1 million, which was attributable to a reduction in estimates of net ultimate losses of $127.7 million, paid loss recoveries on provisions for bad debt of $11.2 million, reduction in provisions for bad debt of $5.0 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $39.5 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $19.3 million.

 

42


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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

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

 

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

 

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

 

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

 

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

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

Nine Months Ended September 30, 2013

The net reduction in ultimate losses and loss adjustment expense liabilities for the nine months ended September 30, 2013 of $38.6 million included incurred losses and net change in IBNR reserves of $88.3 million related to premiums earned in the period by SeaBright. Excluding SeaBright’s increase in estimates of net ultimate losses of $88.3 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $126.9 million, which was attributable to a reduction in estimates of net ultimate losses of $81.4 million, reduction in provisions for bad debt of $5.5 million and reduction in provisions for unallocated loss adjustment expense liabilities of $49.5 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments of $9.5 million.

Excluding the impact of net ultimate losses of $88.3 million relating to SeaBright, the reduction in estimates of net ultimate losses of $81.4 million (comprised of net favorable incurred loss development of $4.3 million and reduction in IBNR reserves of $77.1 million) related primarily to:

 

  (i) the Company’s quarterly review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $27.0 million;

 

  (ii) a reduction in estimates of net ultimate losses of $21.7 million relating to the settlement of six commutations and policy buy-backs of assumed and ceded exposures including the commutation of one of the Company’s top ten ceded reinsurance balances recoverable; and

 

  (iii)

an aggregate reduction in IBNR reserves of $32.7 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required

 

43


Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

  to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures in eleven of the Company’s insurance and reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for these subsidiaries was reduced as a result of the combined impact on all classes of business of loss development activity during 2013, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts.

The reduction in provisions for bad debt of $5.5 million for the nine months ended September 30, 2013 resulted from the collection of receivables against which bad debt provisions had been provided for in earlier periods.

Atrium and Torus Segments

The Company did not have an active underwriting business for the three or nine months ended September 30, 2013. The Company began reporting with respect to its Atrium segment in the fourth quarter of 2013 following the acquisition of Atrium and began reporting with respect to its Torus segment in this second quarter of 2014 following the acquisition of Torus.

The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three and nine months ended September 30, 2014 (losses incurred and paid are reflected net of reinsurance recoverables):

 

     Three Months Ended
September 30, 2014
 
     Atrium     Torus  

Balance as at July 1 (1)

   $ 226,920      $ 866,809   

Less: total reinsurance reserves recoverable

     26,993        336,150   
  

 

 

   

 

 

 
     199,927        530,659   

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

    

Current period

     19,348        84,580   

Prior periods

     (3,807     (5,365
  

 

 

   

 

 

 

Total net increase in ultimate losses and loss adjustment expense liabilities

     15,541        79,215   
  

 

 

   

 

 

 

Net losses paid:

    

Current period

     (8,914     (22,787

Prior periods

     (6,886     (39,296
  

 

 

   

 

 

 

Total net losses paid

     (15,800     (62,083

Effect of exchange rate movement

     (2,786     (5,243
  

 

 

   

 

 

 

Net balance as at September 30

     196,882        542,548   

Plus: total reinsurance reserves recoverable

     29,778        331,864   
  

 

 

   

 

 

 

Balance as at September 30

   $ 226,660      $ 874,412   
  

 

 

   

 

 

 

 

(1) During the three months ended September 30, 2014, the Company reallocated $50.7 million of losses and loss adjustment expense liabilities from the Torus segment to the non-life run-off segment.

 

44


Table of Contents

ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

     Nine Months Ended
September 30, 2014
 
     Atrium     Torus  

Balance as at January 1

   $ 215,392      $ —     

Less: total reinsurance reserves recoverable

     25,055        —     
  

 

 

   

 

 

 
     190,337        —     

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:

    

Current period

     59,566        164,920   

Prior periods

     (10,283     (5,365
  

 

 

   

 

 

 

Total net increase in ultimate losses and loss adjustment expense liabilities

     49,283        159,555   
  

 

 

   

 

 

 

Net losses paid:

    

Current period

     (18,730     (25,637

Prior periods

     (21,913     (50,694
  

 

 

   

 

 

 

Total net losses paid

     (40,643     (76,331

Effect of exchange rate movement

     (2,095     (5,358

Acquired on purchase of subsidiaries

     —          464,682   
  

 

 

   

 

 

 

Net balance as at September 30

     196,882        542,548   

Plus: total reinsurance reserves recoverable

     29,778        331,864   
  

 

 

   

 

 

 

Balance as at September 30

   $ 226,660      $ 874,412   
  

 

 

   

 

 

 

 

45


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ENSTAR GROUP LIMITED

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

6. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

 

The total net (reduction) increase in ultimate losses and loss adjustment expense liabilities for the Company’s Atrium and Torus segments for the three and nine months ended September 30, 2014 was as follows:

 

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

Net losses paid

   $ 6,886      $ 8,914       $ 15,800      $ 39,296      $ 22,787      $ 62,083   

Net change in case and LAE reserves

     (5,128     4,951         (177     (14,819     (8,039     (22,858

Net change in IBNR reserves

     (5,486     5,351         (135     (29,117     68,130        39,013   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (3,728     19,216         15,488        (4,640     82,878        78,238   

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

     (79     132         53        (725     1,702        977   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (3,807   $ 19,348       $ 15,541      $ (5,365   $ 84,580      $ 79,215   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Net losses paid

   $ 21,913      $ 18,730       $ 40,643       $ 50,694      $ 25,637      $ 76,331   

Net change in case and LAE reserves

     (12,970     15,809         2,839         19,595        (189     19,406   

Net change in IBNR reserves

     (18,906     24,569         5,663         (74,929     137,669        62,740   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

(Reduction) increase in estimates of net ultimate losses

     (9,963     59,108         49,145         (4,640     163,117        158,477   

(Reduction) increase in provisions for unallocated loss adjustment expense liabilities

     (320     458         138         (725     1,703        978   

Amortization of fair value adjustments

     —          —           —           —          100        100   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities

   $ (10,283   $ 59,566       $ 49,283       $ (5,365   $ 164,920      $ 159,555   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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ENSTAR GROUP LIMITED

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

 

7. POLICY BENEFITS FOR LIFE AND ANNUITY CONTRACTS

Policy benefits for life and annuity contracts as at September 30, 2014 and December 31, 2013 were as follows:

 

     September 30,
2014
    December 31,
2013
 

Life

   $ 350,700      $ 380,874   

Annuities

     941,556        963,323   
  

 

 

   

 

 

 
     1,292,256        1,344,197   

Fair value adjustments

     (63,613     (71,097
  

 

 

   

 

 

 
   $ 1,228,643      $ 1,273,100   
  

 

 

   

 

 

 

Refer to Note 9 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for more information on establishing policy benefit reserves.

8. PREMIUMS WRITTEN AND EARNED

The following tables provide a summary of net premiums written and earned in our non-life run-off, Atrium, Torus and life and annuities segments for the three and nine month periods ended September 30, 2014 and 2013:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2014     2013     2014     2013  
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
    Premiums
Written
    Premiums
Earned
 

Non-life run-off

               

Gross

  $ 8,308      $ 18,364      $ 1,394      $ 30,758      $ 16,347      $ 43,539      $ 17,936      $ 110,308   

Ceded

    (2,012     (4,490     (1,825     (2,624     (3,191     (10,054     (7,489     (10,038
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 6,296      $ 13,874      $ (431   $ 28,134      $ 13,156      $ 33,485      $ 10,447      $ 100,270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Atrium

               

Gross

  $ 34,081      $ 38,800      $ —        $ —        $ 121,515      $ 115,099      $ —        $ —     

Ceded

    (3,899     (3,950     —          —          (13,619     (13,613     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 30,182      $ 34,850      $ —        $ —        $ 107,896      $ 101,486      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Torus

               

Gross

  $ 157,655      $ 176,978      $ —        $ —        $ 328,301      $ 362,731      $ —        $ —     

Ceded

    (43,776     (56,749     —          —          (83,981     (104,263     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

  $ 113,879      $ 120,229      $ —        $ —        $ 244,320      $ 258,468      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Life and annuities

               

Life

  $ 26,701      $ 27,035      $ 29,459      $ 30,540      $ 79,885      $ 81,122      $ 63,193      $ 65,661   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 177,058      $ 195,987      $ 29,028      $ 58,674      $ 445,257      $ 474,561      $ 73,640      $ 165,931   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

47


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ENSTAR GROUP LIMITED

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

8. PREMIUMS WRITTEN AND EARNED—(Continued)

 

Atrium

Net premiums written and earned by Atrium totaled $30.2 million and $34.9 million, respectively, for the three months ended September 30, 2014, and $107.9 million and $101.5 million, respectively, for the nine months ended September 30, 2014.

Torus

Net premiums written and earned by Torus totaled $113.9 million and $120.2 million, respectively, for the three months ended September 30, 2014, and $244.3 million and $258.5 million, respectively, for the nine months ended September 30, 2014.

In addition, the Company has, for the three months ended September 30, 2014, included net premiums written and earned of $5.2 million and $13.2 million, respectively, in its non-life run-off segment relating to certain lines of business within Torus, which were placed into run-off prior to acquisition. For the nine months ended September 30, 2014, the Company included in its non-life run-off segment net premiums written and earned of $10.5 million and $29.1 million, respectively, relating to these Torus lines.

Life and annuities

Life and annuity premiums written in the Company’s life and annuities segment totaled $26.7 million and $29.5 million for the three months ended September 30, 2014 and 2013, respectively. Net earned premiums over the same periods totaled $27.0 million and $30.5 million, respectively.

Life and annuity premiums written in the Company’s life and annuities segment totaled $79.9 million and $63.2 million for the nine months ended September 30, 2014 and 2013, respectively. Net earned premiums over the same periods totaled $81.1 million and $65.7 million, respectively.

The Company’s life companies continue to collect premiums in relation to the unexpired policies assumed on acquisition.

9. RETROSPECTIVELY RATED CONTRACTS

On October 1, 2003, SeaBright began selling workers’ compensation insurance policies for which the premiums varied based on loss experience. Accrued retrospective premiums are determined based upon the loss experience of business subject to such experience rating adjustment, and are determined by and allocated to individual policyholder accounts. Accrued retrospective premiums are recorded as additions to written or earned premium, and return retrospective premiums are recorded as reductions from written or earned premium. During the period from February 7, 2013, the date of the Company’s acquisition of SeaBright, to September 30, 2014, none of the Company’s direct premiums written related to retrospectively rated contracts. As at September 30, 2014, the Company recognized $8.7 million (December 31, 2013: $8.8 million) for retrospective premiums receivable and $26.8 million (December 31, 2013: $27.5 million) for return retrospective premiums.

 

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ENSTAR GROUP LIMITED

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

 

10. GOODWILL AND INTANGIBLE ASSETS

The following table shows the Company’s goodwill and intangible assets as at September 30, 2014 and December 31, 2013:

 

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

Balance as at December 31, 2013

  $ 60,071      $ 27,000      $ 63,000      $ 150,071      $ 223,947   

Acquired during the period

    13,000        20,000        23,900        56,900        (65,000

Intangible assets amortization

    —          (3,985     —          (3,985     (26,755
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as at September 30, 2014

  $ 73,071      $ 43,015      $ 86,900      $ 202,986      $ 132,192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets with a definite life include:

 

  (i) Fair value adjustments (“FVA”) relate to outstanding losses and loss adjustment expenses, policy benefits for life and annuity contracts, unearned premiums and reinsurance recoverables and are included as a component of each balance sheet item. FVA are amortized in proportion to future premiums for policy benefits for life and annuity contracts, over the estimated payout or recovery period for outstanding losses and loss adjustment expenses and reinsurance recoverables and as the unearned premiums expire for business in-force as of the acquisition date; and

 

  (ii) Other intangible assets relate to the values associated with the distribution channel, technology and brand related to the Company’s acquisitions of Atrium and Torus. These assets are amortized on a straight-line basis over a period ranging from four to fifteen years.

Intangible asset amortization for the three and nine months ended September 30, 2014 was $24.1 million and $30.7 million, respectively, as compared to $15.1 million and $22.1 million for the comparative periods in 2013.

Intangible assets with an indefinite life include the values associated with the Lloyd’s syndicate capacity for Torus and Atrium, Torus’ U.S. insurance licenses, and Atrium’s management contract with Syndicate 609 in relation to underwriting, actuarial and support services it provides.

 

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ENSTAR GROUP LIMITED

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

10. GOODWILL AND INTANGIBLE ASSETS—(Continued)

 

The gross carrying value, accumulated amortization and net carrying value of intangible assets by type at September 30, 2014 and December 31, 2013 were as follows:

 

    September 30, 2014     December 31, 2013  
    Gross Carrying
Value
    Accumulated
Amortization
    Net Carrying
Value
    Gross Carrying
Value
    Accumulated
Amortization
    Net Carrying
Value
 

Intangible assets with a definite life:

           

Fair value adjustments:

           

Losses and loss adjustment expense liabilities

  $ 449,987      $ (319,267   $ 130,720      $ 500,485      $ (282,178   $ 218,307   

Reinsurance balances recoverable

    (193,617     131,476        (62,141     (179,116     113,659        (65,457

Policy benefits for life and annuity contracts

    86,332        (22,719     63,613        86,332        (15,235     71,097   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 342,702      $ (210,510   $ 132,192      $ 407,701      $ (183,754   $ 223,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other:

           

Distribution channel

  $ 20,000      $ (1,110   $ 18,890      $ 20,000      $ —        $ 20,000   

Technology

    15,000        (1,875     13,125        —          —          —     

Brand

    12,000        (1,000     11,000        7,000        —          7,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 47,000      $ (3,985   $ 43,015      $ 27,000      $ —        $ 27,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intangible assets with an indefinite life:

           

Lloyd’s syndicate capacity

  $ 36,900      $ —        $ 36,900      $ 32,900      $ —        $ 32,900   

Licenses

    19,900        —          19,900        —          —          —     

Management contract

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 86,900      $ —        $ 86,900      $ 63,000      $ —        $ 63,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As at September 30, 2014 and December 31, 2013, the allocation of the goodwill to the Company’s non-life run-off, Atrium and Torus segments was $21.2 million, $38.9 million and $13.0 million, respectively. The Company has not yet completed the process of determining the fair value of the Torus segment goodwill acquired, which it expects to complete within the measurement period (which cannot exceed 12 months from acquisition date).

 

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ENSTAR GROUP LIMITED

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

 

11. LOANS PAYABLE

As of September 30, 2014 and December 31, 2013, the outstanding balances associated with the Company’s outstanding credit facilities were:

 

Facility

   Date of Facility      Facility Term      September 30,
2014
     December 31,
2013
 

EGL Revolving Credit Facility

     September 16, 2014         5 Years       $ 319,550       $ —     

Prior EGL Revolving Credit Facility

     July 8, 2013         5 Years         —           258,800   

SeaBright Facility

     December 21, 2012         3 Years         —           111,000   

Clarendon Facility

     July 12, 2011         4 Years         —           78,995   
        

 

 

    

 

 

 

Total long-term bank debt

           319,550         448,795   

Accrued interest

           683         3,651   
        

 

 

    

 

 

 

Total loans payable

         $ 320,233       $ 452,446   
        

 

 

    

 

 

 

EGL Revolving Credit Facility

On September 16, 2014, the Company and certain of its subsidiaries, as borrowers and as guarantors, entered into a new Revolving Credit Facility Agreement with National Australia Bank Limited (“NAB”), Barclays Bank PLC (“Barclays”), and Royal Bank of Canada (“RBC”), as mandated lead arrangers and original lenders, and NAB as agent (the “Credit Agreement”).

The Credit Agreement provides for an unsecured five-year revolving credit facility (expiring in September 2019) pursuant to which the Company is permitted to borrow up to an aggregate of $500 million (the “EGL Revolving Credit Facility”), which is available to fund permitted acquisitions and for general corporate purposes. The Credit Agreement replaces and refinances the Company’s Prior Credit Agreement (as defined below). The Company’s ability to draw on the EGL Revolving Credit Facility is subject to customary conditions.

Interest is payable at the end of each interest period chosen by the Company or, at the latest, each six months. The interest rate is LIBOR plus a margin factor initially set at 2.75%. The margin factor is subject to variation (ranging from 2.50% to 3.25%) in the event of a change to the Company’s long term senior unsecured debt rating assigned by Standard & Poor’s Ratings Services or Fitch Ratings Ltd. Any unused portion of the EGL Revolving Credit Facility will be subject to a commitment fee of 35% of the applicable margin factor. The EGL Revolving Credit Facility imposes various financial and business covenants on the Company and its subsidiaries, including certain limitations on mergers and consolidations, acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets, and limitations on liens.

During the existence of any event of default (as specified in the Credit Agreement), the agent may cancel the commitments of the lenders, declare all or a portion of outstanding amounts immediately due and payable or declare all or a portion of outstanding amounts payable upon demand. During the existence of any payment default, the interest rate would be increased by 1.0%. The EGL Revolving Credit Facility terminates and all amounts borrowed must be repaid on the fifth anniversary of the date of the Credit Agreement.

The Credit Agreement refinances and replaces, in its entirety, the Company’s Revolving Credit Facility Agreement, originally dated June 14, 2011, as amended from time to time, and as amended

 

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ENSTAR GROUP LIMITED

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

11. LOANS PAYABLE—(Continued)

 

and restated pursuant to the Restatement Agreement, dated July 8, 2013, among the Company and certain of its subsidiaries, NAB and Barclays, as mandated lead arrangers, NAB, Barclays and RBC, as original lenders, and NAB as agent (the “Prior Credit Agreement”). The Prior Credit Agreement had permitted the Company to borrow up to an aggregate of $375 million on a secured basis over a five-year term (the “Prior EGL Revolving Credit Facility”). Effective September 16, 2014 and concurrent with its entry into the Credit Agreement, the Company terminated the Prior Credit Agreement. Outstanding borrowings under the Prior EGL Revolving Credit Facility totaled $319.6 million and were refinanced on September 16, 2014 with borrowings pursuant to the EGL Revolving Credit Facility.

The Company was in compliance with all covenants under the Prior Credit Agreement and no material early termination fees were incurred in connection with the termination.

The Prior EGL Revolving Credit Facility had been secured by a first priority lien on the stock of certain of the Company’s subsidiaries and certain bank accounts held with Barclays in the name of the Company and into which amounts received in respect of any capital release from certain of the Company’s subsidiaries were required to be paid. In connection with the termination of the Prior Credit Agreement, all security pursuant to the Prior EGL Revolving Credit Facility was released, effective September 16, 2014.

As of September 30, 2014, the unused portion of the EGL Revolving Credit Facility was approximately $180.5 million. As of September 30, 2014, all of the covenants relating to the EGL Revolving Credit Facility were met.

Clarendon Facility

On September 30, 2014, the Company fully repaid the remaining $66.0 million of outstanding principal and accrued interest on its term facility related to the acquisition of Clarendon National Insurance Company (the “Clarendon Facility”) out of the proceeds of distributions from Clarendon. The Company had previously repaid $13.0 million of the outstanding principal on the Clarendon Facility on March 17, 2014. All security pursuant to the Clarendon Facility was released in connection with the full repayment of the facility.

SeaBright Facility

On June 25, 2014, the Company fully repaid the remaining $89.0 million of outstanding principal and accrued interest on its term facility related to the acquisition of SeaBright (the “SeaBright Facility”) out of the proceeds of distributions from SeaBright. The Company had previously repaid $22.0 million of the outstanding principal on the SeaBright Facility on March 31, 2014. All security pursuant to the SeaBright Facility was released in connection with the full repayment of the facility.

12. REDEEMABLE NONCONTROLLING INTEREST

Redeemable noncontrolling interest (“RNCI”) comprises the ownership interest held by Trident in both Bayshore and Northshore. As of September 30, 2014, Trident’s RNCI was as follows:

 

     As at September 30, 2014  
     Bayshore     Northshore  

Trident

     39.32     38.97
  

 

 

   

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

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

12. REDEEMABLE NONCONTROLLING INTEREST—(Continued)

 

Northshore owns 100% of Atrium and Arden and Bayshore owns 100% of Torus. The RNCI is classified outside of permanent shareholders’ equity on the Company’s consolidated balance sheets due to the redemption rights held. The redemption rights held by Trident are described in Note 3 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Company recognizes changes in the redemption value of the RNCI in Bayshore’s and Northshore’s earnings as if the balance sheet date were also the redemption date. As at September 30, 2014 and December 31, 2013, there were no adjustments recorded through retained earnings as the redemption value of Trident’s interests approximated their carrying values.

On March 30, 2014, Trident contributed $260.8 million to Bayshore in relation to its 40% share of both the purchase price of Torus and the transaction costs related to the acquisition. On May 8, 2014, Dowling purchased common shares of both Northshore and Bayshore from Kenmare and Trident (on a pro rata basis in accordance with their respective interests) for an aggregate amount of $15.4 million. On April 30, 2014, the 2014 portion of time-based restricted shares of Northshore awarded to Atrium employees vested, which resulted in a deemed capital contribution of $1.9 million. The impact on Trident of these transactions was to reduce its RNCI in both Bayshore and Northshore from 40% to 39.32% and 38.97%, respectively.

During the second quarter of 2014, a Fitzwilliam Insurance Limited (“Fitzwilliam”) segregated cell, of which Kenmare owned 60% and Trident owned 40%, entered into a 100% quota share reinsurance of Torus’ non-life run-off reserves with effect from January 1, 2014. On September 30, 2014, Kenmare and Trident transferred their interests in the Fitzwilliam cell to Bayshore, with Trident’s $18.1 million portion of the total capital contribution to Bayshore increasing its RNCI in Bayshore.

A reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI is as follows:

 

Redeemable noncontrolling interest

   Trident  

Balance as at December 31, 2013

   $ 100,859   

Capital contributions

     272,722   

Net loss attributable to RNCI

     (6,022

Accumulated other comprehensive income attributable to RNCI

     (900

Transfer of net loss from noncontrolling interest

     (1,028
  

 

 

 

Balance as at September 30, 2014

   $ 365,631   
  

 

 

 

13. SHARE CAPITAL

As at September 30, 2014 and December 31, 2013, the authorized share capital was 111,000,000 ordinary shares (“Voting Ordinary Shares”) and non-voting convertible ordinary shares (“Non-Voting Ordinary Shares”), each par value $1.00 per share, and 45,000,000 preference shares of par value $1.00 per share. Each Voting Ordinary Share entitles the holder thereof to one vote. In accordance with the Company’s bye-laws, however, any U.S. shareholder or direct foreign shareholder group whose shares constitute 9.5% or more of the voting power of the Voting Ordinary Shares would be entitled to less than one vote for each Voting Ordinary Share held by them.

 

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ENSTAR GROUP LIMITED

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

13. SHARE CAPITAL—(Continued)

 

In connection with the agreement to acquire Torus, on July 8, 2013, the Company’s Board of Directors’ created 4,000,000 shares of Series B Convertible Participating Non-Voting Perpetual Preferred Stock, par value $1.00 per share (the “Non-Voting Preferred Shares”), from the authorized and unissued preference shares. On completion of the Torus acquisition on April 1, 2014, the Company issued in total 1,501,211 Voting Ordinary Shares and 714,015 Non-Voting Preferred Shares to First Reserve and 397,115 Voting Ordinary Shares to Corsair.

At the Company’s annual general meeting on June 10, 2014, the Company’s shareholders approved the amendment to its bye-laws to create the Series E Non-Voting Ordinary Shares, an additional series of Non-Voting Ordinary Shares. Pursuant to the terms of the Non-Voting Preferred Shares, the Non-Voting Preferred Shares held by First Reserve converted on a share-for share basis into Series E Non-Voting Ordinary Shares immediately following the annual general meeting.

Additionally, the amended bye-laws approved by the Company’s shareholders provide that all other Non-Voting Ordinary Shares authorized under the Company’s bye-laws but not classified as Series A, B, C or D Non-Voting Ordinary Shares will be classified as Series E Non-Voting Ordinary Shares.

The Series E Non-Voting Ordinary Shares:

 

    have all of the economic rights (including dividend rights) attaching to Voting Ordinary Shares but are non-voting except in certain limited circumstances;

 

    will automatically convert at a one-for-one exchange ratio (subject to adjustment for share splits, dividends, recapitalizations, consolidations or similar transactions) into Voting Ordinary Shares if the registered holder transfers them in a widely dispersed offering;

 

    may only vote on matters as required under Bermuda law, and if required to vote under Bermuda law in connection with any merger, consolidation or amalgamation of the Company, would have aggregate voting power not to exceed 0.01% of the aggregate voting power of the Company’s issued share capital; and

 

    require the registered holders’ written consent in order to vary the rights of the shares in a significant and adverse manner.

Series B, C and D Non-Voting Ordinary Shares are described in Note 15 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. No Series B or Series D Non-Voting Ordinary Shares are issued and outstanding.

 

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ENSTAR GROUP LIMITED

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

 

14. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Basic earnings per ordinary share:

           

Net earnings attributable to Enstar Group Limited

   $ 26,429       $ 39,987       $ 107,809       $ 71,143   

Weighted average ordinary shares outstanding—basic

     19,198,475         16,525,012         18,142,531         16,521,865   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 1.38       $ 2.42       $ 5.94       $ 4.31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per ordinary share:

           

Net earnings attributable to Enstar Group Limited

   $ 26,429       $ 39,987       $ 107,809       $ 71,143   

Weighted average ordinary shares outstanding—basic

     19,198,475         16,525,012         18,142,531         16,521,865   

Share equivalents:

           

Unvested shares

     56,455         116,503         47,955         118,756   

Restricted share units

     10,671         18,521         17,527         17,588   

Preferred shares

     —           —           183,081         —     

Warrants

     65,789         60,679         54,791         40,431   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average ordinary shares outstanding—diluted

     19,331,390         16,720,715         18,445,885         16,698,640   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 1.37       $ 2.39       $ 5.84       $ 4.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

15. 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 17 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The information below includes both the employee and director components of the Company’s share based compensation.

 

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ENSTAR GROUP LIMITED

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

15. EMPLOYEE BENEFITS—(Continued)

 

2006 Equity Incentive Plan

The employee share awards for the nine months ended September 30, 2014 and 2013 are summarized as follows:

 

     Nine Months Ended September 30,  
     2014     2013  
     Number of
Shares
    Weighted
Average
Fair Value

of
the Award
    Number
of
Shares
    Weighted
Average
Fair Value
of
the Award
 

Nonvested—January 1

     115,159      $ 15,997        160,644      $ 17,989   

Granted

     28,816        3,830        6,344        767   

Vested

     (46,957     (6,256     (49,253     (5,715
  

 

 

     

 

 

   

Nonvested—September 30

     97,018      $ 14,624        117,735      $ 15,656   
  

 

 

     

 

 

   

The total unrecognized compensation cost related to the Company’s non-vested share awards under the Equity Plan as at September 30, 2014 and 2013 was $5.2 million and $5.7 million, respectively. This cost is expected to be recognized over the next 2.3 years. Compensation costs of $1.2 million and $2.8 million relating to these share awards were recognized in the Company’s statement of earnings for the three and nine months ended September 30, 2014, respectively, as compared to costs of $0.7 million and $2.2 million, respectively, for the three and nine months ended September 30, 2013.

For the nine months ended September 30, 2014 and 2013, 24,412 and nil shares, respectively, were awarded to non-executive officer employees under the 2006 Equity Incentive Plan (the “Equity Plan”), in addition to the 3,006 and 3,768 shares issued related to the Company’s employee share purchase plan during the same periods, respectively.

Cash-Settled Stock Appreciation Rights

During the nine months ended September 30, 2014, the Company granted cash-settled stock appreciation right awards (“SARs”) under the Equity Plan. SARs give the holder the right, upon exercise, to receive in cash the difference between the market price per share of the Company’s ordinary shares at the time of exercise and the exercise price of the SARs. The exercise price of the SAR is equal to the market price of the Company’s ordinary shares on the date of the grant. Vested SARs are exercisable for periods not to exceed either 4 or 10 years from the date of grant.

The Company has recorded compensation expense for the SARs based on the estimated fair value on the date of grant using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, expected term, expected dividend yield and risk-free interest rate. SARs are liability-classified awards for which compensation expense and the liability are re-measured using the then-current Black Scholes assumptions at each interim reporting date based upon the portion of the requisite service period rendered.

During the three and nine months ended September 30, 2014, the Company granted 678,586 and 1,051,901 SARs, respectively, to certain employees pursuant to the terms of the Equity Plan and

 

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ENSTAR GROUP LIMITED

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

15. EMPLOYEE BENEFITS—(Continued)

 

recorded a compensation expense of $2.2 million and $3.2 million, respectively, in respect of the awards.

The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black-Scholes option valuation model as at September 30, 2014:

 

     September 30,
2014
 

Weighted average fair value of the SARs

   $ 31.62   

Weighted average volatility

     24.01

Weighted average risk-free interest rate

     0.97

Dividend yield

     —     

The following table summarizes SARs activity:

 

    Number of
SAR’s
    Weighted
Average
Exercise
Price per
SAR
    Weighted
Average
Remaining
Contractual
Term (in years)
    Aggregate
Intrinsic Value (1)
 

Outstanding as at January 1, 2014

    —          —         

Granted

    1,051,901      $ 140.17       
 

 

 

       

Outstanding as at September 30, 2014

    1,051,901      $ 140.17        2.52      $ —     
 

 

 

       

 

(1) The aggregate intrinsic value is calculated as the pre-tax difference between the exercise price of the underlying share awards and the closing price per share of the Company’s ordinary shares of $136.32 on September 30, 2014.

2011-2015 Annual Incentive Compensation Program

The accrued expense relating to the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program for the three and nine months ended September 30, 2014 was $4.4 million and $18.8 million, respectively, as compared to of $7.1 million and $12.6 million, respectively, for the three and nine months ended September 30, 2013.

Enstar Group Limited Employee Share Purchase Plan

For both the three and nine months ended September 30, 2014 and 2013, compensation costs of less than $0.1 million and $0.2 million, respectively, relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan (“Share Plan”) were recognized in the Company’s statement of earnings. For the nine months ended September 30, 2014 and 2013, 4,404 and 3,768 shares, respectively, have been issued to employees under the Share Plan.

Deferred Compensation and Ordinary Share Plan for Non-Employee Directors

For the nine months ended September 30, 2014 and 2013, 2,974 and 2,640 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 (the “Deferred

 

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ENSTAR GROUP LIMITED

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

15. EMPLOYEE BENEFITS—(Continued)

 

Compensation Plan”). The Company recorded expenses related to the restricted share units for the three and nine month periods ended September 30, 2014 of $0.1 million and $0.4 million, respectively, as compared to $0.1 million and $0.3 million, respectively, for the three and nine months ended September 30, 2013.

Following the resignations of Whit Armstrong and Charles T. Akre, Jr. from the Board of Directors, 11,749 restricted share units previously credited to their accounts under the Deferred Compensation Plan were converted into the same number of the Company’s ordinary shares on July 1, 2014, with fractional shares paid in cash. Also on July 1, 2014, 14,922 restricted stock units previously credited to Mr. Armstrong’s account under a deferred compensation plan assumed in the Company’s merger with Enstar USA, Inc., now a wholly-owned subsidiary of the Company, were converted into the same number of the Company’s ordinary shares.

Pension Plan

The Company provides pension benefits to eligible employees through various plans sponsored by the Company. All pension plans, except for the noncontributory defined benefit pension plan acquired in the Providence Washington transaction in 2010 (the “PWAC Plan”), are structured as defined contribution plans.

Pension expense for the three and nine months ended September 30, 2014 was $2.8 million and $8.1 million, respectively, as compared to $1.4 million and $4.5 million, respectively, for the three and nine months periods ended September 30, 2013. The increase for the three and nine months ended September 30, 2014 over the same periods in 2013 was attributable to the increase in employee headcount (and associated additional defined contribution plan expense) as a result of the April 2014 acquisition of Torus and the November 2013 acquisition of Atrium.

The Company recorded pension expense relating to the PWAC Plan of $0.1 million and $0.4 million for the three and nine month periods ended September 30, 2014, respectively, as compared to $0.1 million and $0.5 million, respectively, for the three and nine months periods ended September 30, 2013. The PWAC Plan is described in Note 17 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

16. TAXATION

Effective January 1, 2014, the Company accounts for income taxes using the estimated annual effective tax rate. The Company makes the best estimate of the annual effective tax rate expected to be applicable for the full fiscal year and applies the rate to the year-to-date income. Discrete tax adjustments are recorded in the quarter in which the event occurs.

Earnings before income taxes includes the following components:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
           2014                 2013                 2014                  2013        

Domestic (Bermuda)

   $ (22,740   $ (913   $ 11,238       $ 77,134   

Foreign

     49,597        45,709        119,068         18,231   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 26,857      $ 44,796      $ 130,306       $ 95,365   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

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

16. TAXATION—(Continued)

 

Tax expense (benefit) for income taxes is comprised of:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
           2014                 2013                 2014                 2013        

Current:

        

Domestic (Bermuda)

   $ —        $ —        $ —        $ —     

Foreign

     6,540        6,842        26,522        21,172   
  

 

 

   

 

 

   

 

 

   

 

 

 
     6,540        6,842        26,522        21,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred:

        

Domestic (Bermuda)

     —          —          —          —     

Foreign

     (880     (5,502     (5,134     (7,446
  

 

 

   

 

 

   

 

 

   

 

 

 
     (880     (5,502     (5,134     (7,446
  

 

 

   

 

 

   

 

 

   

 

 

 

Total tax expense

   $ 5,660      $ 1,340      $ 21,388      $ 13,726   
  

 

 

   

 

 

   

 

 

   

 

 

 

Under current Bermuda law, the Company and its Bermuda subsidiaries are exempted from paying any taxes in Bermuda on their income or capital gains until March 2035.

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 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
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Earnings before income tax

   $ 26,857      $ 44,796      $ 130,306      $ 95,365   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expected tax rate

     0.0     0.0     0.0     0.0

Foreign taxes at local expected rates

     19.3