Enstar Group Limited 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 March 31, 2012

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

18 Queen Street

Hamilton HM JX

Bermuda

(Address of principal executive office, including zip code)

(441) 292-3645

(Registrant’s telephone number, including area code)

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

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. (Check one):

 

Large accelerated filer þ

  Accelerated filer ¨    Non-accelerated filer ¨   Smaller reporting company ¨

(Do not check if a smaller reporting company)

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

As of May 2, 2012, the registrant had outstanding 13,855,820 voting ordinary shares and 2,725,637 non-voting convertible ordinary shares, each par value $1.00 per share.

 

 

 


Table of Contents

Table of Contents

 

            
PART I — FINANCIAL INFORMATION   
Item 1.  

Financial Statements:

  
 

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (Unaudited)

     3   
 

Condensed Consolidated Statements of Earnings for the Three Month Periods Ended March  31, 2012 and 2011 (Unaudited)

     4   
 

Condensed Consolidated Statements of Comprehensive Income for the Three Month Periods Ended March 31, 2012 and 2011 (Unaudited)

     5   
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Month Periods Ended March 31, 2012 and 2011 (Unaudited)

     6   
 

Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2012 and 2011 (Unaudited)

     7   
 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

     8   
 

Report of Independent Registered Public Accounting Firm

     28   
Item 2.  

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

     29   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     42   
Item 4.  

Controls and Procedures

     42   
PART II — OTHER INFORMATION   
Item 1.  

Legal Proceedings

     43   
Item 1A.  

Risk Factors

     43   
Item 6.  

Exhibits

     43   
Signature      44   

 

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Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2012 and December 31, 2011

 

     March 31,
2012
    December 31,
2011
 
     (expressed in thousands of U.S.
dollars, except share data)
 

ASSETS

    

Short-term investments, trading, at fair value

   $ 317,611      $ 410,269   

Fixed maturities, available-for-sale, at fair value (amortized cost: 2012 — $506,480; 2011 — $590,588)

     518,037        607,316   

Fixed maturities, trading, at fair value

     2,194,250        2,035,369   

Equities, trading, at fair value

     96,060        89,981   

Other investments, at fair value

     237,933        192,264   
  

 

 

   

 

 

 

Total investments

     3,363,891        3,335,199   

Cash and cash equivalents

     792,815        850,474   

Restricted cash and cash equivalents

     446,047        373,191   

Accrued interest receivable

     28,352        26,924   

Accounts receivable

     21,454        50,258   

Income taxes recoverable

     11,702        10,559   

Reinsurance balances receivable

     1,641,308        1,789,582   

Funds held by reinsured companies

     102,093        107,748   

Goodwill

     21,222        21,222   

Other assets

     30,899        40,981   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 6,459,783      $ 6,606,138   
  

 

 

   

 

 

 

LIABILITIES

    

Losses and loss adjustment expenses

   $ 4,138,623      $ 4,282,916   

Reinsurance balances payable

     174,746        208,540   

Accounts payable and accrued liabilities

     97,181        75,983   

Income taxes payable

     18,638        16,985   

Loans payable

     243,101        242,710   

Other liabilities

     121,879        95,593   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     4,794,168        4,922,727   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

SHAREHOLDERS’ EQUITY

    

Share capital

    

Authorized, issued and fully paid, par value $1 each (authorized 2012: 156,000,000; 2011: 156,000,000)

    

Ordinary shares (issued and outstanding 2012: 13,710,291; 2011: 13,665,051)

     13,710        13,665   

Non-voting convertible ordinary shares:

    

Series A (issued 2012: 2,972,892; 2011: 2,972,892)

     2,973        2,973   

Series B, C and D (issued and outstanding 2012: 2,725,637; 2011: 2,725,637)

     2,726        2,726   

Treasury shares at cost (Series A non-voting convertible ordinary shares 2012: 2,972,892; 2011: 2,972,892)

     (421,559     (421,559

Additional paid-in capital

     957,504        956,329   

Accumulated other comprehensive income

     30,875        27,096   

Retained earnings

     814,510        804,836   
  

 

 

   

 

 

 

Total Enstar Group Limited Shareholders’ Equity

     1,400,739        1,386,066   

Noncontrolling interest

     264,876        297,345   
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     1,665,615        1,683,411   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 6,459,783      $ 6,606,138   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three Month Periods Ended March 31, 2012 and 2011

 

     Three Months Ended March 31,  
               2012                          2011             
     (expressed in thousands of U.S.
dollars, except share and per share data)
 

INCOME

    

Consulting fees

   $ 2,194      $ 4,036   

Net investment income

     22,783        18,542   

Net realized and unrealized gains

     23,042        3,368   

Gain on bargain purchase

            13,105   
  

 

 

   

 

 

 
     48,019        39,051   
  

 

 

   

 

 

 

EXPENSES

    

Net reduction in ultimate loss and loss adjustment expense liabilities:

    

Reduction in estimates of net ultimate losses

     (3,298     (2,612

Reduction in provisions for bad debt

     (2,255       

Reduction in provisions for unallocated loss adjustment expense liabilities

     (12,852     (11,537

Amortization of fair value adjustments

     7,587        10,077   
  

 

 

   

 

 

 
     (10,818     (4,072

Salaries and benefits

     20,451        10,382   

General and administrative expenses

     14,858        17,750   

Interest expense

     2,111        1,966   

Net foreign exchange losses

     2,268        7,334   
  

 

 

   

 

 

 
     28,870        33,360   
  

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

     19,149        5,691   

INCOME TAXES

     (3,742     (617
  

 

 

   

 

 

 

NET EARNINGS

     15,407        5,074   

Less: Net earnings attributable to noncontrolling interest

     (5,733     (1,571
  

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 9,674      $ 3,503   
  

 

 

   

 

 

 

EARNINGS PER SHARE — BASIC:

    

Net earnings attributable to Enstar Group Limited ordinary shareholders

   $ 0.59      $ 0.27   
  

 

 

   

 

 

 

EARNINGS PER SHARE — DILUTED:

    

Net earnings attributable to Enstar Group Limited ordinary shareholders

   $ 0.58      $ 0.26   
  

 

 

   

 

 

 

Weighted average ordinary shares outstanding — basic

     16,427,595        12,945,838   

Weighted average ordinary shares outstanding — diluted

     16,671,710        13,220,332   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Month Periods Ended March 31, 2012 and 2011

 

     Three Months Ended March 31,  
       2012         2011    
     (expressed in thousands of U.S. dollars)  

NET EARNINGS

   $ 15,407      $ 5,074   
  

 

 

   

 

 

 

Other comprehensive income, net of tax:

    

Unrealized holding gains on investments arising during the period

     25,015        8,736   

Reclassification adjustment for net realized and unrealized gains included in net earnings

     (23,042     (3,368

Decrease in defined benefit pension liability

            272   

Currency translation adjustment

     2,985        2,206   
  

 

 

   

 

 

 

Total other comprehensive income

     4,958        7,846   
  

 

 

   

 

 

 

Comprehensive income

     20,365        12,920   

Less comprehensive income attributable to noncontrolling interest

     (6,913     (2,514
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 13,452      $ 10,406   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three Month Periods Ended March 31, 2012 and 2011

 

     Three Months Ended
March 31,
 
     2012     2011  
    

(expressed in thousands

of U.S. dollars)

 

Share Capital — Ordinary Shares

    

Balance, beginning of period

   $ 13,665      $ 12,940   

Issue of shares

     2        2   

Share awards granted/vested

     43        42   
  

 

 

   

 

 

 

Balance, end of period

   $ 13,710      $ 12,984   
  

 

 

   

 

 

 

Share Capital — Series A Non-Voting Convertible Ordinary Shares

    

Balance, beginning and end of period

   $ 2,973      $ 2,973   
  

 

 

   

 

 

 

Share Capital — Series B, C and D Non-Voting Convertible Ordinary Shares

    

Balance, beginning and end of period

   $ 2,726      $   
  

 

 

   

 

 

 

Treasury Shares

    

Balance, beginning and end of period

   $ (421,559   $ (421,559
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance, beginning of period

   $ 956,329      $ 667,907   

Issue of shares

     152        126   

Share awards granted/vested

     364        168   

Amortization of share awards

     659        550   
  

 

 

   

 

 

 

Balance, end of period

   $ 957,504      $ 668,751   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income Attributable to Enstar Group Limited

    

Balance, beginning of period

   $ 27,096      $ 35,017   

Foreign currency translation adjustments

     1,837        1,595   

Increase in defined benefit pension liability

            272   

Net movement in unrealized holding gains on investments

     1,942        5,036   
  

 

 

   

 

 

 

Balance, end of period

   $ 30,875      $ 41,920   
  

 

 

   

 

 

 

Retained Earnings

    

Balance, beginning of period

   $ 804,836      $ 651,143   

Net earnings attributable to Enstar Group Limited

     9,674        3,503   
  

 

 

   

 

 

 

Balance, end of period

   $ 814,510      $ 654,646   
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance, beginning of period

   $ 297,345      $ 267,400   

Return of capital

     (28,132     (16,200

Dividends paid

     (11,250       

Net earnings attributable to noncontrolling interest

     5,733        1,571   

Foreign currency translation adjustments

     1,148        611   

Net movement in unrealized holding gains on investments

     32        332   
  

 

 

   

 

 

 

Balance, end of period

   $ 264,876      $ 253,714   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Month Periods Ended March 31, 2012 and 2011

 

     Three Months Ended
March 31,
 
     2012     2011  
     (expressed in thousands of
U.S. dollars)
 

OPERATING ACTIVITIES:

    

Net earnings

   $ 15,407      $ 5,074   

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

    

Gain on bargain purchase

            (13,105

Net realized and unrealized investment gains

     (23,042     (3,368

Share of net gain from other investments

     (2,340     (2,993

Other items

     1,653        (1,339

Depreciation and amortization

     317        384   

Amortization of bond premiums and discounts

     8,915        4,538   

Net movement of trading securities held on behalf of policyholders

     5,261        7,110   

Sales and maturities of trading securities

     555,018        374,473   

Purchases of trading securities

     (607,978     (654,563

Changes in assets and liabilities:

    

Reinsurance balances receivable

     148,381        (43,567

Other assets

     43,322        11,793   

Losses and loss adjustment expenses

     (145,654     90,505   

Reinsurance balances payable

     (33,831     (40,079

Accounts payable and accrued liabilities

     (7,123     (51,265

Other liabilities

     27,647        26,048   
  

 

 

   

 

 

 

Net cash flows used in operating activities

     (14,047     (290,354
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Acquisitions, net of cash acquired

            (7,949

Sales and maturities of available-for-sale securities

     90,276        101,109   

Movement in restricted cash and cash equivalents

     (72,856     85,384   

Funding of other investments

     (42,021     (4,108

Redemption of bond funds

            10,136   

Other investing activities

     (433     (143
  

 

 

   

 

 

 

Net cash flows (used in) provided by investing activities

     (25,034     184,429   
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Distribution of capital to noncontrolling interest

            (16,200

Dividends paid to noncontrolling interest

     (11,250       

Repayment of loans

            (40,500
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (11,250     (56,700
  

 

 

   

 

 

 

TRANSLATION ADJUSTMENT

     (7,328     (6,143
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (57,659     (168,768

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     850,474        799,154   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 792,815      $ 630,386   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

    

Net income taxes (recovered) paid

   $ (159   $ 25,254   

Interest paid

   $ 1,717      $ 2,231   

See accompanying notes to the unaudited condensed consolidated financial statements

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and December 31, 2011

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

(unaudited)

 

1. BASIS OF PREPARATION AND CONSOLIDATION

The Company’s condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. The results of operations for any interim period are not necessarily indicative of the results for a full year. Inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Adoption of New Accounting Standards

In May 2011, the U.S. Financial Accounting Standards Board (“FASB”) issued amendments to disclosure requirements for common fair value measurement. These amendments result in a common definition of fair value and common requirements for measurement of and disclosure requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change some fair value measurement principles and disclosure requirements. The Company adopted this amended accounting guidance effective January 1, 2012. The adoption of the amended guidance did not have a material impact on the consolidated financial statements.

In June 2011, FASB issued amendments to disclosure requirements for presentation of comprehensive income. This guidance requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this amended accounting guidance effective January 1, 2012. The adoption of the amended guidance had no impact on the consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In December 2011, FASB issued new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivatives. The new disclosures are designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under IFRS. The new disclosure requirements are effective retrospectively for annual and interim reporting periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of adopting these revised disclosure requirements on the consolidated financial statements.

 

2. RESTRICTED CASH AND CASH EQUIVALENTS

Restricted cash and cash equivalents were $446.0 million and $373.2 million as of March 31, 2012 and December 31, 2011, respectively. The restricted cash and cash equivalents are used as collateral against letters of credit and as guarantees under trust agreements. Letters of credit and guarantees are issued to ceding insurers as security for the obligations of insurance subsidiaries under reinsurance agreements with those ceding insurers.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

3. INVESTMENTS

Available-for-sale

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

 

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

As at March 31, 2012

          

U.S. government and agency

   $ 17,720       $ 514       $ (560   $ 17,674   

Non-U.S. government

     150,477         4,058         (293     154,242   

Corporate

     296,550         6,235         (691     302,094   

Residential mortgage-backed

     12,924         524         (102     13,346   

Commercial mortgage-backed

     11,493         2,043                13,536   

Asset-backed

     17,316         50         (221     17,145   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 506,480       $ 13,424       $ (1,867   $ 518,037   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

As at December 31, 2011

          

U.S. government and agency

   $ 17,816       $ 546       $ (433   $ 17,929   

Non-U.S. government

     160,128         9,227         (828     168,527   

Corporate

     366,954         7,937         (2,578     372,313   

Residential mortgage-backed

     13,544         276         (108     13,712   

Commercial mortgage-backed

     12,680         3,044         (7     15,717   

Asset-backed

     19,466         65         (413     19,118   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 590,588       $ 21,095       $ (4,367   $ 607,316   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

     12 Months or Greater     Less Than 12 Months     Total  

As at March 31, 2012

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

U.S. government and agency

   $       $      $ 8,832       $ (560   $ 8,832       $ (560

Non-U.S. government

     7,678         (59     8,151         (234     15,829         (293

Corporate

     33,410         (443     21,788         (248     55,198         (691

Residential mortgage-backed

     1,184         (99     36         (3     1,220         (102

Commercial mortgage-backed

     41                97                138           

Asset-backed

     1,868         (50     10,258         (171     12,126         (221
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 44,181       $ (651   $ 49,162       $ (1,216   $ 93,343       $ (1,867
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

     12 Months or Greater     Less Than 12 Months     Total  

As at December 31, 2011

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

U.S. government and agency

   $       $      $ 8,318       $ (433   $ 8,318       $ (433

Non-U.S. government

     14,982         (466     16,305         (362     31,287         (828

Corporate

     47,197         (1,367     54,106         (1,211     101,303         (2,578

Residential mortgage-backed

     1,299         (105     36         (3     1,335         (108

Commercial mortgage-backed

                    215         (7     215         (7

Asset-backed

     7,577         (187     6,491         (226     14,068         (413
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 71,055       $ (2,125   $ 85,471       $ (2,242   $ 156,526       $ (4,367
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As at March 31, 2012 and December 31, 2011, the number of securities classified as available-for-sale in an unrealized loss position was 77 and 107, respectively, with a fair value of $93.3 million and $156.5 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 41 and 59, respectively. As of March 31, 2012, none of these securities were considered to be other than temporarily impaired. The Company has no intent to sell, and it is not more likely than not that the Company will be required to sell, these securities before their fair values recover above the adjusted cost. The unrealized losses from these securities were not as a result of credit, collateral or structural issues.

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

 

As at March 31, 2012

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 217,441       $ 218,654         42.2

Due after one year through five years

     242,826         250,585         48.4

Due after five years through ten years

     1,411         1,663         0.3

Due after ten years

     3,069         3,108         0.6
  

 

 

    

 

 

    

 

 

 
     464,747         474,010         91.5

Residential mortgage-backed

     12,924         13,346         2.6

Commercial mortgage-backed

     11,493         13,536         2.6

Asset-backed

     17,316         17,145         3.3
  

 

 

    

 

 

    

 

 

 
   $ 506,480       $ 518,037         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2011

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 230,550       $ 230,377         37.9

Due after one year through five years

     308,062         322,131         53.0

Due after five years through ten years

     3,296         3,367         0.6

Due after ten years

     2,990         2,894         0.5
  

 

 

    

 

 

    

 

 

 
     544,898         558,769         92.0

Residential mortgage-backed

     13,544         13,712         2.3

Commercial mortgage-backed

     12,680         15,717         2.6

Asset-backed

     19,466         19,118         3.1
  

 

 

    

 

 

    

 

 

 
   $ 590,588       $ 607,316         100.0
  

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

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

 

As at March 31, 2012

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 162,374       $ 166,152         32.1

AA

     143,345         145,348         28.0

A

     168,300         173,440         33.5

BBB or lower

     32,073         32,278         6.2

Not Rated

     388         819         0.2
  

 

 

    

 

 

    

 

 

 
   $ 506,480       $ 518,037         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2011

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 204,967       $ 214,873         35.4

AA

     131,092         132,971         21.9

A

     210,040         215,225         35.4

BBB or lower

     44,100         43,526         7.2

Not Rated

     389         721         0.1
  

 

 

    

 

 

    

 

 

 
   $ 590,588       $ 607,316         100.0
  

 

 

    

 

 

    

 

 

 

Trading

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

 

     March 31,
2012
     December 31,
2011
 

U.S. government and agency

   $ 371,817       $ 400,908   

Non-U.S. government

     247,363         212,251   

Corporate

     1,643,471         1,595,930   

Municipal

     25,405         25,416   

Residential mortgage-backed

     90,017         97,073   

Commercial mortgage-backed

     89,025         70,977   

Asset-backed

     44,763         43,083   

Equities

     96,060         89,981   
  

 

 

    

 

 

 
   $ 2,607,921       $ 2,535,619   
  

 

 

    

 

 

 

 

11


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

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

 

As at March 31, 2012

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 417,616         16.6

AA

     898,303         35.8

A

     835,494         33.2

BBB or lower

     355,890         14.2

Not Rated

     4,558         0.2
  

 

 

    

 

 

 
   $ 2,511,861         100.0
  

 

 

    

 

 

 

 

As at December 31, 2011

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 881,951         36.0

AA

     400,394         16.4

A

     796,608         32.6

BBB or lower

     341,307         14.0

Not Rated

     25,378         1.0
  

 

 

    

 

 

 
   $ 2,445,638         100.0
  

 

 

    

 

 

 

Other Investments

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

 

     March 31,
2012
     December 31,
2011
 

Private equities

   $ 108,890       $ 107,388   

Bond funds

     60,579         54,537   

Hedge funds

     47,647         24,395   

Real estate debt fund

     15,097           

Other

     5,720         5,944   
  

 

 

    

 

 

 
   $ 237,933       $ 192,264   
  

 

 

    

 

 

 

As of March 31, 2012 and December 31, 2011, the Company had $108.9 million and $107.4 million, respectively, of other investments recorded in private equities, which represented 2.4% of total investments, cash and cash equivalents, and restricted cash and cash equivalents, at March 31, 2012 and December 31, 2011, respectively. All of the Company’s investments in private equities are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short term. These restrictions have been in place since the initial investments. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. These investments are accounted for at estimated fair value determined by the Company’s proportionate share of the net asset value of the investee reduced by any impairment charges. As of March 31, 2012 and December 31, 2011, the Company had unfunded capital commitments relating to its other investments of $76.4 million and $77.5 million, respectively. Information regarding other investments the Company has with related parties is described in “Note 9 — Related Party Transactions”.

 

12


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

The Company’s bond fund holdings comprise a number of positions in diversified bond mutual funds managed by third-party managers.

Other-Than-Temporary Impairment Process

The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale represent impairments that are other-than-temporary and whether a credit loss exists in accordance with its accounting policies. The Company had no planned sales of its fixed maturity investments classified as available-for-sale as at March 31, 2012. 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 three months ended March 31, 2012, the Company did not recognize any other-than-temporary impairments due to required sales. The Company determined that, as at March 31, 2012, no credit losses existed.

Fair Value of Financial Instruments

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

 

   

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

 

   

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

 

   

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company’s own 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 portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors with oversight from the Company’s Investment Committee. The Company uses inputs from Interactive Data, a nationally recognized pricing service, as well as pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of its fixed maturity investments.

In general, the pricing services use observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmark curves, benchmarking of like securities, non-binding broker-dealer quotes, reported trades and sector groupings to determine the fair value. In addition, pricing services use valuation

 

13


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

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

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

 

   

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

 

   

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

 

   

Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at March 31, 2012, 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 and current transactions are not orderly. In this event, securities are classified within Level 3. As at March 31, 2012, the Company had no residential or commercial mortgage-backed securities classified as Level 3.

 

14


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

To validate the techniques or models used by the pricing services, the Company compares the fair value estimates to its knowledge of the current market and challenges any prices deemed not to be representative of fair value. As of March 31, 2012, there were no material differences between the prices obtained from the pricing services and the fair value estimates developed by the Company.

Equity Securities

The Company’s equity securities are managed by two external advisors. The Company uses Interactive Data, a nationally recognized pricing service, to estimate the fair value measurements for all of its equity securities. The Company’s equity securities are widely diversified and there is no significant concentration in any specific industry.

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

Other Investments

For its investments in private equities, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. The financial statements of each fund generally are audited annually under U.S. GAAP, using fair value measurement for the underlying investments. The Company has classified private equities as Level 3 investments because they reflect the Company’s own judgment about the assumptions that market participants might use.

For its investment in the hedge funds, the Company also 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 in the fair value hierarchy.

For its investment in the real estate debt fund, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The investment in the fund is classified as Level 3 in the fair value hierarchy.

For its investment in the College and University Loan Trust, the Company measures fair value by obtaining the most recently published financial statements of the trust. The financial statements of the trust are audited annually under U.S. GAAP. The investment in the trust is classified as Level 3 in the fair value hierarchy.

 

15


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

The following table presents the fair value, unfunded commitments, and redemption frequency for all Level 3 investments valued at net asset value as at March 31, 2012:

 

     Total Fair
Value
     Unfunded
Commitments
    

Redemption

Frequency

Private equity funds(a)

   $ 108,890       $ 75,657       Not eligible

Fixed income hedge funds(b)

     47,647               Quarterly after lock-up periods expire

Real estate debt fund(c)

     15,097              

10 days notice after monthly valuation

College and University Loan Trust(d)

     4,153               Not eligible

Other

     580         784       Not eligible
  

 

 

    

 

 

    
   $ 176,367       $ 76,441      
  

 

 

    

 

 

    

 

(a) This class includes several private equity funds that invest primarily in the financial services industry. For all publicly-traded companies within the funds, the Company has valued those investments based on the latest share price. 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 initial investment.

 

(b) This class is comprised of hedge funds that invest in a diversified portfolio of debt securities. The adviser of the funds intend to seek attractive risk-adjusted total returns for the fund’s investors by acquiring, originating, and actively managing a diversified portfolio of debt securities, with a focus on various forms of asset-backed securities and loans. The funds state that they focus on investments that the adviser believes to be fundamentally undervalued with current market prices that are believed to be compelling relative to intrinsic value. The units of account that are valued by the Company are its interests in the funds and not the underlying holdings of the funds. Thus, the inputs used by the Company to value its investment in the funds may differ from the inputs used to value the underlying holdings of the funds. The hedge funds are not currently eligible for redemption due to an imposed lock-up period of three years from the time of the Company’s initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice.

 

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

 

(d) The value of the College and University Facility Loan Trust (“Loan Trust”) is based on the latest audited financial statements of the Loan Trust. The Company holds Class B certificates of the Loan Trust and accordingly receives semi-annual distributions. The Company’s investment in the Loan Trust has no redemption rights.

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

 

16


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

Fair Value Measurements

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

 

     March 31, 2012  
     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

   $       $ 389,491       $       $ 389,491   

Non-U.S. government

             401,605                 401,605   

Corporate

             1,945,025         540         1,945,565   

Municipal

             25,405                 25,405   

Residential mortgage-backed

             103,363                 103,363   

Commercial mortgage-backed

             102,561                 102,561   

Asset-backed

             61,908                 61,908   

Equities

     87,878         4,832         3,350         96,060   

Other investments

             60,579         177,354         237,933   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 87,878       $ 3,094,769       $ 181,244       $ 3,363,891   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     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

   $       $ 418,837       $       $ 418,837   

Non-U.S. government

             380,778                 380,778   

Corporate

             1,967,724         519         1,968,243   

Municipal

             25,416                 25,416   

Residential mortgage-backed

             110,785                 110,785   

Commercial mortgage-backed

             86,694                 86,694   

Asset-backed

             62,201                 62,201   

Equities

     82,381         4,625         2,975         89,981   

Other investments

             54,537         137,727         192,264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 82,381       $ 3,111,597       $ 141,221       $ 3,335,199   
  

 

 

    

 

 

    

 

 

    

 

 

 

During 2012 and 2011, the Company had no transfers between Levels 1 and 2.

 

17


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2012:

 

     Fixed
Maturity
Investments
     Other
Investments
    Equity
Securities
     Total  

Level 3 investments as of January 1, 2012

   $ 519       $ 137,727      $ 2,975       $ 141,221   

Purchases

             38,163                38,163   

Sales

             (1,143             (1,143

Total realized and unrealized gains through earnings

     21         2,607        375         3,003   

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

                              
  

 

 

    

 

 

   

 

 

    

 

 

 

Level 3 investments as of March 31, 2012

   $ 540       $ 177,354      $ 3,350       $ 181,244   
  

 

 

    

 

 

   

 

 

    

 

 

 

The amount of net gains/(losses) for the year included in earnings attributable to the fair value of changes in assets still held at March 31, 2012 was $2.5 million. Of this amount, $0.4 million was included in net realized and unrealized gains and $2.1 million was included in net investment income. Of the Company’s Level 3 investments classified as other investments, 99.4% are valued on a net asset value basis.

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

 

     Fixed
Maturity
Investments
     Other
Investments
    Equity
Securities
     Total  

Level 3 investments as of January 1, 2011

   $ 1,444       $ 132,435      $ 3,575       $ 137,454   

Purchases

             4,157                4,157   

Sales

             (49             (49

Total realized and unrealized gains through earnings

     69         3,419        400         3,888   

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

                              
  

 

 

    

 

 

   

 

 

    

 

 

 

Level 3 investments as of March 31, 2011

   $ 1,513       $ 139,962      $ 3,975       $ 145,450   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

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

 

     Three Months Ended
March 31,
 
     2012     2011  

Gross realized gains on available-for-sale securities

   $ 430      $ 221   

Gross realized losses on available-for-sale securities

     (423     (286

Net realized gains on trading securities

     4,095        1,364   

Net unrealized gains on trading securities

     18,940        2,069   
  

 

 

   

 

 

 

Net realized and unrealized gains

   $ 23,042      $ 3,368   
  

 

 

   

 

 

 

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

   $ 90,276      $ 101,109   
  

 

 

   

 

 

 

 

18


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. INVESTMENTS — (cont’d)

 

Major categories of net investment income are summarized as follows:

 

     Three Months Ended
March 31,
 
     2012     2011  

Interest from fixed maturities

   $ 20,493      $ 14,408   

Amortization of bond premiums and discounts

     (8,706     (3,672

Dividends from equities

     621        264   

Other investments

     2,568        3,069   

Interest from cash and cash equivalents and short-term investments

     4,371        2,256   

Other receivables

     1,210        1,731   

Other income

     2,564        536   

Interest on deposits held with clients

     297        258   

Investment expenses

     (635     (308
  

 

 

   

 

 

 
   $ 22,783      $ 18,542   
  

 

 

   

 

 

 

Restricted Investments

The Company is required to maintain investments on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The investments in trust as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted investments as of March 31, 2012 and December 31, 2011 was as follows:

 

     March 31,
2012
     December 31,
2011
 

Assets used for collateral in trust for third-party agreements

   $ 525,955       $ 571,041   

Deposits with regulatory authorities

     197,110         200,136   

Others

     54,767         59,763   
  

 

 

    

 

 

 
   $ 777,832       $ 830,940   
  

 

 

    

 

 

 

 

4. DERIVATIVE INSTRUMENTS

The Company uses foreign currency forward exchange contracts as part of its overall foreign currency risk management strategy or to obtain exposure to a particular financial market and for yield enhancement. However, the Company may choose not to hedge certain foreign currency exchange exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates or enhance yield.

On February 8, 2012, the Company entered into two foreign currency forward exchange contracts, pursuant to which it sold AU$25.0 million for $26.2 million and AU$35.0 million for $36.1 million. The contracts have settlement dates of December 19, 2012 and May 10, 2013, respectively.

In October 2010, the Company entered into a foreign currency forward exchange contract where it sold AU$45.0 million for $42.5 million with a contract settlement date of June 30, 2011.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

4. DERIVATIVE INSTRUMENTS — (cont’d)

 

The estimated fair value of derivative instruments outstanding and recorded on the balance sheet was $(0.1) million and $nil as of March 31, 2012 and December 31, 2011, respectively. The Company recognized in net earnings for the three months ended March 31, 2012 and 2011 a foreign exchange loss of $0.1 million and $0.4 million, respectively, on foreign currency forward exchange contracts.

 

5. REINSURANCE BALANCES RECEIVABLE

 

     March 31,
2012
    December 31,
2011
 

Recoverable from reinsurers on:

    

Outstanding losses

   $ 781,562      $ 837,693   

Losses incurred but not reported

     638,250        678,437   

Fair value adjustments

     (125,206     (133,127
  

 

 

   

 

 

 

Total reinsurance reserves recoverable

     1,294,606        1,383,003   

Paid losses

     346,702        406,579   
  

 

 

   

 

 

 
   $ 1,641,308      $ 1,789,582   
  

 

 

   

 

 

 

Reinsurance balances receivable decreased by $148.3 million primarily as a result of cash collections made during the three months ended March 31, 2012. At March 31, 2012 and December 31, 2011, the provision for uncollectible reinsurance recoverable relating to total reinsurance balances receivable was $349.7 million and $341.1 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance balances receivable are first allocated to applicable reinsurers. This determination is based on a detailed process rather than an estimate, although an element of judgment is applied. As part of this process, ceded IBNR is allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total reinsurance balances receivable (excluding provision for uncollectible reinsurance recoverable) as of March 31, 2012, increased to 17.6% as compared to 16.0% as of December 31, 2011, primarily a result of the collection of reinsurance balances receivable against which there were minimal provisions for uncollectible reinsurance recoverable.

The fair value adjustment, determined on acquisition of reinsurance subsidiaries, was based on the estimated timing of loss and loss adjustment expense recoveries and an assumed interest rate equivalent to a risk free rate for securities with similar duration to the reinsurance receivables acquired plus a spread to reflect credit risk, and is amortized over the estimated recovery period, as adjusted for accelerations on commutation settlements using the constant yield method.

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

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

5. REINSURANCE BALANCES RECEIVABLE — (cont’d)

 

At March 31, 2012, the Company’s top 10 reinsurers accounted for 70.0% (December 31, 2011: 70.0%) of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) and included $426.6 million of IBNR reserves recoverable (December 31, 2011: $451.3 million). With the exception of one BBB+ rated reinsurer from which $54.6 million was recoverable, the other top 10 reinsurers, as at March 31, 2012, were all rated A+ or better. As at December 31, 2011, with the exception of one BBB+ rated reinsurer from which $55.2 million was recoverable, the other top 10 reinsurers were all rated A+ or better. Reinsurance recoverables by reinsurer were as follows:

 

     March 31, 2012     December 31, 2011  
     Reinsurance
Recoverable
     % of
Total
    Reinsurance
Recoverable
     % of
Total
 

Top 10 reinsurers

   $ 1,148,360         70.0   $ 1,252,929         70.0

Other reinsurers’ balances > $1 million

     484,945         29.5     532,303         29.7

Other reinsurers’ balances < $1 million

     8,003         0.5     4,350         0.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,641,308         100.0   $ 1,789,582         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

As at March 31, 2012 and December 31, 2011, reinsurance balances receivable with a carrying value of $221.6 million and $235.8 million, respectively, were associated with one reinsurer, which represented 10% or more of total reinsurance balances receivable. Of the $221.6 million receivable from the reinsurer as at March 31, 2012, $151.0 million is secured by a trust fund held for the benefit of the Company. As at March 31, 2012, the reinsurer had a credit rating of A+, as provided by a major rating agency. In the event that all or any of the reinsuring companies that have not secured their obligations are unable to meet their obligations under existing reinsurance agreements, the Company will be liable for such defaulted amounts.

 

6. LOSSES AND LOSS ADJUSTMENT EXPENSES

 

     March 31,
2012
    December 31,
2011
 

Outstanding

   $ 2,438,343      $ 2,549,648   

Incurred but not reported

     2,061,419        2,110,299   

Fair value adjustment

     (361,139     (377,031
  

 

 

   

 

 

 
   $ 4,138,623      $ 4,282,916   
  

 

 

   

 

 

 

Refer to Note 10 of Item 8 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for more information on establishing reserves.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2012 and 2011. Losses incurred and paid are reflected net of reinsurance recoverables.

 

     Three Months Ended
March 31,
 
     2012     2011  

Balance as at January 1

   $ 4,282,916      $ 3,291,275   

Less: total reinsurance reserves recoverable

     1,383,003        525,440   
  

 

 

   

 

 

 
     2,899,913        2,765,835   

Effect of exchange rate movement

     14,253        34,372   

Net reduction in ultimate loss and loss adjustment expense liabilities

     (10,818     (4,072

Net losses paid

     (61,731     (88,131

Acquired on purchase of subsidiaries

            10,439   

Retroactive reinsurance contracts assumed

     2,400        93,067   
  

 

 

   

 

 

 

Net balance as at March 31

     2,844,017        2,811,510   

Plus: total reinsurance reserves recoverable

     1,294,606        583,478   
  

 

 

   

 

 

 

Balance as at March 31

   $ 4,138,623      $ 3,394,988   
  

 

 

   

 

 

 

The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2012 and 2011 was due to the following:

 

     Three Months Ended
March 31,
 
     2012     2011  

Net losses paid

   $ (61,731   $ (88,131

Net change in case and LAE reserves

     60,136        83,430   

Net change in IBNR reserves

     4,893        7,313   
  

 

 

   

 

 

 

Reduction in estimates of net ultimate losses

     3,298        2,612   

Reduction in provisions for bad debt

     2,255          

Reduction in provisions for unallocated loss adjustment expense liabilities

     12,852        11,537   

Amortization of fair value adjustments

     (7,587     (10,077
  

 

 

   

 

 

 

Net reduction in ultimate loss and loss adjustment expense liabilities

   $ 10,818      $ 4,072   
  

 

 

   

 

 

 

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

The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2012 of $10.8 million was attributable to a reduction in estimates of net ultimate losses of $3.3 million, a reduction in provisions for bad debt of $2.3 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $12.9 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $7.6 million.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

The reduction in estimates of net ultimate losses of $3.3 million comprised net incurred loss development of $1.6 million and reductions in IBNR reserves of $4.9 million.

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

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

 

7. EMPLOYEE BENEFITS

The Company’s share-based compensation plans provide for the grant of various awards to its employees and to members of the Board of Directors. These are described in Note 14 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The information below includes both the employee and director components of the Company’s share-based compensation.

(a)    Employee share plans

Employee share awards for the three months ended March 31, 2012 are summarized as follows:

 

     Number of
Shares
    Weighted
Average Fair
Value of
the Award
 

Nonvested — January 1

     203,930      $ 20,026   

Granted

     1,564        140   

Vested

     (44,850     (4,404
  

 

 

   

Nonvested — March 31

     160,644      $ 15,902   
  

 

 

   

 

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

For the three months ended March 31, 2012 and 2011, 191 and 16,328 shares, respectively, were awarded to directors, officers and employees under the 2006 Equity Incentive Plan. The total value of the award for the three months ended March 31, 2012 was less than $0.1 million and was charged against the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program (“2011 Program”) accrual established for the year ended December 31, 2011. The total value of the award for the three months ended March 31, 2011 was $1.5 million and was charged against the 2006-2010 Annual Incentive Compensation Program (“2006 Program”) accrual established for the year ended December 31, 2010. The 2006 Program ended effective December 31, 2010. On February 23, 2011, the Company adopted the 2011 Program.

In addition, for the three months ended March 31, 2011, 50,000 restricted shares were awarded to certain employees under the 2006 Equity Incentive Plan. The total unrecognized compensation cost related to the Company’s nonvested share awards as at March 31, 2012 and 2011 was $9.7 million and $12.5 million, respectively. This cost is expected to be recognized evenly over the next 3.5 years. Compensation costs of $0.7 million and $0.5 million relating to these share awards were recognized in the Company’s statement of earnings for the three months ended March 31, 2012 and 2011, respectively.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

7. EMPLOYEE BENEFITS — (cont’d)

 

The accrued expenses relating to the 2011 Program for the three months ended March 31, 2012 and 2011 were $1.7 million and $nil, respectively.

 

  (ii) Enstar Group Limited Employee Share Purchase Plan

Compensation costs of less than $0.1 million relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan have been recognized in the Company’s statement of earnings for each of the three months ended March 31, 2012 and 2011, respectively. For the three months ended March 31, 2012 and 2011, 1,373 and 1,439 shares, respectively, were issued to employees.

(b)    Options

 

     Number of
Shares
     Weighted
Average

Exercise
Price
     Instrinsic
Value of
Shares
 

Outstanding — January 1, 2012

     98,075       $ 40.78       $ 5,631   

Exercised

                       
  

 

 

       

Outstanding — March 31, 2012

     98,075       $ 40.78       $ 5,708   
  

 

 

       

Stock options outstanding and exercisable as of March 31, 2012 were as follows:

 

Exercise Price

   Number of
Options
     Weighted
Average
Exercise Price
     Weighted Average
Remaining
Contractual Life
 

$40.78

     98,075       $ 40.78         1.4 years   

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

For the three months ended March 31, 2012 and 2011, 822 and 1,283 restricted share units, respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors.

(d)    Pension plan

The Company provides pension benefits to eligible employees through various plans sponsored by the Company. All pension plans are structured as defined contribution plans, except for the PWAC Plan discussed below. Pension expense for the three months ended March 31, 2012 and 2011 was $1.9 million and $1.1 million, respectively.

The Company acquired, as part of the acquisition of PW Acquisition Company (“PWAC”), a noncontributory defined benefit pension plan (the “PWAC Plan”) that covers substantially all PWAC employees hired before April 1, 2003 and provides pension and certain death benefits. Effective April 1, 2004, PWAC froze the PWAC Plan. As at both March 31, 2012 and December 31, 2011, PWAC had an accrued liability of $10.5 million for the unfunded PWAC Plan liability.

The Company recorded pension expense relating to the PWAC Plan, for the three months ended March 31, 2012 and 2011 of $0.2 million and $0.2 million, respectively.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

8. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per ordinary share for the three months ended March 31, 2012 and 2011:

 

     2012      2011  

Basic earnings per ordinary share:

     

Net earnings attributable to Enstar Group Limited

   $ 9,674       $ 3,503   

Weighted average ordinary shares outstanding — basic

     16,427,595         12,945,838   
  

 

 

    

 

 

 

Earnings per ordinary share attributable to Enstar Group Limited — basic

   $ 0.59       $ 0.27   
  

 

 

    

 

 

 

Diluted earnings per ordinary share:

     

Net earnings attributable to Enstar Group Limited

   $ 9,674       $ 3,503   

Weighted average ordinary shares outstanding — basic

     16,427,595         12,945,838   

Share equivalents:

     

Nonvested shares

     167,925         174,486   

Restricted share units

     13,508         17,489   

Options

     62,682         82,519   
  

 

 

    

 

 

 

Weighted average ordinary shares outstanding — diluted

     16,671,710         13,220,332   
  

 

 

    

 

 

 

Earnings per ordinary share attributable to Enstar Group Limited — diluted

   $ 0.58       $ 0.26   
  

 

 

    

 

 

 

 

9. RELATED PARTY TRANSACTIONS

The Company has entered into certain transactions with companies and partnerships that are affiliated with J. Christopher Flowers. Mr. Flowers is one of the largest shareholders of the Company and until May 6, 2011 was a member of the Company’s Board of Directors.

During the three months ended March 31, 2012, the Company funded $0.2 million of its remaining outstanding capital commitment to entities affiliated with Mr. Flowers. The Company had, as of March 31, 2012 and December 31, 2011, excluding its investments in Varadero International, Ltd. and Varadero Partners, L.P., (collectively, “Varadero”) hedge funds affiliated with the Company and Mr. Flowers with respect to which the Company has funded 100% of its capital commitments), investments in entities affiliated with Mr. Flowers with a total value of $103.3 million and $102.3 million, respectively, and outstanding commitments to entities managed by Mr. Flowers, as of those same dates, of $71.3 million and $71.5 million, respectively. The Company’s outstanding commitments may be drawn down over approximately the next four years.

As at March 31, 2012, related party investments associated with Mr. Flowers, including the Company’s investments with Varadero, accounted for 93.2% of the total unfunded capital commitments of the Company and 63.4% of the total amount of investments classified as other investments by the Company.

On January 1, 2012, Lloyd’s Syndicate 2008 (“S2008”) transferred the assets and liabilities relating to its 2009 and prior underwriting years of account into its 2010 underwriting year of account by means of a reinsurance to close transaction (“RITC”) following which the existing noncontrolling interest held by JCF FPK I L.P. and J.C. Flowers Fund II ceased, resulting in the Company now providing 100% of the investment in S2008. As at March 31, 2012, $28.1 million payable by the Company in respect of noncontrolling interest related to this RITC transaction has been included in the Company’s balance sheet as part of accounts payable and accrued liabilities.

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

10. TAXATION

Earnings before income taxes includes the following components:

 

     Three Months Ended
March 31,
 
       2012         2011    

Domestic (Bermuda)

   $ (19,241   $ (3,614

Foreign

     32,657        7,734   
  

 

 

   

 

 

 

Total

   $ 13,416      $ 4,120   
  

 

 

   

 

 

 

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

 

     Three Months Ended
March 31,
 
       2012          2011    

Current:

     

Domestic (Bermuda)

   $       $   

Foreign

     2,858         (2,634
  

 

 

    

 

 

 
     2,858         (2,634
  

 

 

    

 

 

 

Deferred:

     

Domestic (Bermuda)

               

Foreign

     884         3,251   
  

 

 

    

 

 

 
     884         3,251   
  

 

 

    

 

 

 

Total tax expense

   $ 3,742       $ 617   
  

 

 

    

 

 

 

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
March 31,
 
     2012     2011  

Earnings before income tax

   $ 13,416      $ 4,120   
  

 

 

   

 

 

 

Expected tax rate

        

Foreign taxes at local expected rates

     38.6     50.9

Benefit of loss carryovers

         (5.7 )% 

Change in uncertain tax positions

     0.4     1.2

Change in valuation allowance

     (12.4 )%      4.3

Impact of Australian tax consolidation

         (44.5 )% 

Other

     1.3     8.8
  

 

 

   

 

 

 

Effective tax rate

     27.9     15.0
  

 

 

   

 

 

 

 

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Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

10. TAXATION — (cont’d)

 

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

The Company had unrecognized tax benefits of $5.7 million and $5.6 million relating to uncertain tax positions as of March 31, 2012 and December 31, 2011, respectively.

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

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

 

12. COMMITMENTS AND CONTINGENCIES

During the three months ended March 31, 2012, the Company eliminated its guarantee of the obligation to one of its subsidiaries in respect of a letter of credit issued on its behalf by a London-based bank in the amount of £7.5 million (approximately $11.7 million) relating to insurance contract requirements of that subsidiary.

During the three months ended March 31, 2012, the Company funded $0.8 million of its $5.0 million commitment to Dowling Capital Partners I, L.P.

The Company is, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on its business, results of operations or financial condition. Nevertheless, there can be no assurance that such pending legal proceedings will not have a material effect on the Company’s business, financial condition or results of operations. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental claims. There can be no assurance that any such future litigation will not have a material effect on the Company’s business, financial condition or results of operations.

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

of Enstar Group Limited

We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries (the “Company”) as of March 31, 2012, and the related condensed consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for the three-month periods ended March 31, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2011 and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended; and in our report dated February 24, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche Ltd.

Hamilton, Bermuda

May 4, 2012

 

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Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our results of operations for the three months ended March 31, 2012 and 2011. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Business Overview

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

Since our formation, we have acquired 35 insurance and reinsurance companies and 17 portfolios of insurance and reinsurance business and are now administering those businesses in run-off. Of the 17 portfolios of insurance and reinsurance business, 10 were Reinsurance to Close, or “RITC” transactions, with Lloyd’s of London insurance and reinsurance syndicates in run-off, whereby the portfolio of run-off liabilities is transferred from one Lloyd’s syndicate to another. Insurance and reinsurance companies and portfolios of insurance and reinsurance business we acquire that are in run-off no longer underwrite new policies. We derive our net earnings from the ownership and management of these companies and portfolios of business in run-off primarily by settling insurance and reinsurance claims below the acquired value of loss reserves and from returns on the portfolio of investments retained to pay future claims. In addition, we provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.

Our primary corporate objective is to grow our net book value per share. We believe growth in our net book value is driven primarily by growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions and effectively managing companies and portfolios of business that we previously acquired.

 

29


Table of Contents

Results of Operations

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

 

     Three Months Ended March 31,  
             2012                     2011          
     (in thousands of U.S. dollars)  

INCOME

    

Consulting fees

   $ 2,194      $ 4,036   

Net investment income

     22,783        18,542   

Net realized and unrealized gains

     23,042        3,368   

Gain on bargain purchase

            13,105   
  

 

 

   

 

 

 
     48,019        39,051   
  

 

 

   

 

 

 

EXPENSES

    

Net reduction in ultimate loss and loss adjustment expense liabilities:

    

Reduction in estimates of net ultimate losses

     (3,298     (2,612

Reduction in provisions for bad debt

     (2,255       

Reduction in provisions for unallocated loss adjustment expense liabilities

     (12,852     (11,537

Amortization of fair value adjustments

     7,587        10,077   
  

 

 

   

 

 

 
     (10,818     (4,072

Salaries and benefits

     20,451        10,382   

General and administrative expenses

     14,858        17,750   

Interest expense

     2,111        1,966   

Net foreign exchange losses

     2,268        7,334   
  

 

 

   

 

 

 
     28,870        33,360   
  

 

 

   

 

 

 

Earnings before income taxes

     19,149        5,691   

Income taxes

     (3,742     (617
  

 

 

   

 

 

 

NET EARNINGS

     15,407        5,074   

Less: Net earnings attributable to noncontrolling interest

     (5,733     (1,571
  

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 9,674      $ 3,503   
  

 

 

   

 

 

 

Comparison of the Three Months Ended March 31, 2012 and 2011

We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $15.4 million and $5.1 million for the three months ended March 31, 2012 and 2011, respectively. The increase in earnings of approximately $10.3 million was attributable primarily to the following:

 

  (i) an increase in net realized and unrealized gains of $19.7 million due to mark-to-market changes in the market value of our equity securities, along with realized and unrealized gains on our fixed maturity investments classified as trading;

 

  (ii) an increase in net investment income of $4.2 million primarily as a result of the increased size of our overall cash and investment portfolio in 2012, principally due to the Clarendon acquisition we completed in July 2011;

 

  (iii) an increase in net reduction in ultimate loss and loss adjustment expense liabilities of $6.7 million;

 

  (iv) a decrease in net foreign exchange losses of $5.1 million; and

 

  (v) a decrease in general and administrative expenses of $2.9 million due primarily to an overall decrease in other professional fees; partially offset by

 

 

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  (vi) a gain on bargain purchase of $13.1 million in 2011, which arose in relation to our acquisition of Laguna Life Limited, or Laguna (as compared to no gain on bargain purchase in 2012);

 

  (vii) an increase in salaries and benefits costs of $10.1 million due primarily to our increased overall headcount from 339 at March 31, 2011 to 406 at March 31, 2012 combined with a decrease, in 2011, in salary costs as a result of a release back to earnings of $4.0 million, which constituted the unallocated portion of the 2010 year end bonus accrual provision;

 

  (viii) an increase in income taxes of $3.1 million due in large part to an increase in net earnings within our taxable subsidiaries; and

 

  (ix) a decrease in consulting fee income of $1.8 million due to lower fees earned from third-party agreements during 2012.

We recorded noncontrolling interest in earnings of $5.7 million and $1.6 million for the three months ended March 31, 2012 and 2011, respectively. Net earnings attributable to Enstar Group Limited increased from $3.5 million for the three months ended March 31, 2011 to $9.7 million for the three months ended March 31, 2012.

Consulting Fees:

 

     Three Months Ended March 31,  
       2012          2011          Variance    
     (in thousands of U.S. dollars)  

Total

   $ 2,194       $ 4,036       $ (1,842
  

 

 

    

 

 

    

 

 

 

Our consulting companies earned fees of approximately $2.2 million and $4.0 million for the three months ended March 31, 2012 and 2011, respectively. The decrease in consulting fees of $1.8 million related primarily to the decrease in management fees earned from third-party agreements. Consulting fee income as a percentage of net earnings has declined in recent periods, and we would expect it to remain at or around current levels in future periods, excluding the impact of any one-time incentive-based fees that we might receive. While we intend to continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, our core focus continues to be acquiring and managing insurance and reinsurance companies and portfolios of business in run-off.

Net Investment Income and Net Realized and Unrealized Gains:

 

     Three Months Ended March 31,  
     Net Investment Income      Net Realized and  Unrealized
Gains
 
     2012      2011      Variance      2012      2011      Variance  
     (in thousands of U.S. dollars)  

Total

   $ 22,783       $ 18,542       $ 4,241       $ 23,042       $ 3,368       $ 19,674   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income for the three months ended March 31, 2012 increased by $4.2 million to $22.8 million, as compared to $18.5 million for the three months ended March 31, 2011. The increase was primarily attributable to the increased size of our overall cash and investment portfolio as a result of the Clarendon acquisition, which we completed in July 2011.

Net realized and unrealized gains for the three months ended March 31, 2012 and 2011 were $23.0 million and $3.4 million, respectively. The increase was due to mark-to-market realized and unrealized gains earned on our equity securities and on our fixed maturity investments classified as trading.

The average annualized return on our cash and investments (including net realized and unrealized gains but excluding any writedowns or appreciation related to our other investments) for the three months ended March 31, 2012 was 3.67% as compared to the average annualized return of 1.87% for the three months ended

 

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March 31, 2011. The average credit rating of our fixed maturity investments at March 31, 2012 was AA-. During 2011, the rating agency Standard & Poors downgraded the U.S. sovereign debt from AAA to AA+. This, combined with the assets we acquired upon the acquisition of Clarendon (which had a lower proportion of investments with AAA credit ratings), resulted in us having a lower percentage of AAA-rated investments than we had as at March 31, 2011.

Fair Value Measurements

In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification, or ASC, 820 we have categorized our investments that are recorded at fair value among levels as follows:

 

     March 31, 2012  
     Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable  Inputs
(Level 3)
     Total Fair
Value
 
     (in thousands of U.S. dollars)  

U.S. government and agency

   $       $ 389,491       $       $ 389,491   

Non-U.S. government

             401,605                 401,605   

Corporate

             1,945,025         540         1,945,565   

Municipal

             25,405                 25,405   

Residential mortgage-backed

             103,363                 103,363   

Commercial mortgage-backed

             102,561                 102,561   

Asset-backed

             61,908                 61,908   

Equities

     87,878         4,832         3,350         96,060   

Other investments

             60,579         177,354         237,933   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 87,878       $ 3,094,769       $ 181,244       $ 3,363,891   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gain on Bargain Purchase:

 

     Three Months Ended March 31,  
     2012      2011      Variance  
     (in thousands of U.S. dollars)  

Total

   $       $ 13,105       $ (13,105
  

 

 

    

 

 

    

 

 

 

Gain on bargain purchase of $13.1 million was recorded for the three months ended March 31, 2011; we did not record a gain on bargain purchase for the three months ended March 31, 2012. The gain on bargain purchase was earned in connection with our acquisition of Laguna and represented the excess of the cumulative fair value of net assets acquired of $34.3 million over the cost of $21.2 million. This excess was, in accordance with the provisions of the Business Combinations topic ASC 805, recognized as income for the three months ended March 31, 2011. The gain on bargain purchase arose mainly as a result of our reassessment, upon acquisition, of the total required estimated costs to manage the business to expiry. Our assessment of costs was lower than the acquired costs recorded by the vendor in the financial statements of Laguna.

 

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Net Reduction in Ultimate Loss and Loss Adjustment Expense Liabilities:

The following table shows the components of the movement in the net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31,
 
     2012     2011  
     (in thousands of U.S.
dollars)
 

Net losses paid

   $ (61,731   $ (88,131

Net change in case and LAE reserves

     60,136        83,430   

Net change in IBNR reserves

     4,893        7,313   
  

 

 

   

 

 

 

Reduction in estimates of net ultimate losses

     3,298        2,612   

Reduction in provisions for bad debt

     2,255          

Reduction in provisions for unallocated loss adjustment expense liabilities

     12,852        11,537   

Amortization of fair value adjustments

     (7,587     (10,077
  

 

 

   

 

 

 

Net reduction in ultimate loss and loss adjustment expense liabilities

   $ 10,818      $ 4,072   
  

 

 

   

 

 

 

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

The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2012 of $10.8 million was attributable to a reduction in estimates of net ultimate losses of $3.3 million, a reduction in provisions for bad debt of $2.3 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $12.9 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $7.6 million.

The reduction in estimates of net ultimate losses of $3.3 million comprised net incurred loss development of $1.6 million and reductions in IBNR reserves of $4.9 million.

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

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

 

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The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2012 and 2011. Losses incurred and paid are reflected net of reinsurance recoverables.

 

     Three Months Ended
March 31,
 
     2012     2011  
     (in thousands of U.S. dollars)  

Balance as at January 1

   $ 4,282,916      $ 3,291,275   

Less: total reinsurance reserves recoverable

     1,383,003        525,440   
  

 

 

   

 

 

 
     2,899,913        2,765,835   

Effect of exchange rate movement

     14,253        34,372   

Net reduction in ultimate loss and loss adjustment expense liabilities

     (10,818     (4,072

Net losses paid

     (61,731     (88,131

Acquired on purchase of subsidiaries

            10,439   

Retroactive reinsurance contracts assumed

     2,400        93,067   
  

 

 

   

 

 

 

Net balance as at March 31

     2,844,017        2,811,510   

Plus: total reinsurance reserves recoverable

     1,294,606        583,478   
  

 

 

   

 

 

 

Balance as at March 31

   $ 4,138,623      $ 3,394,988   
  

 

 

   

 

 

 

Salaries and Benefits:

 

     Three Months Ended March 31,  
     2012      2011      Variance  
     (in thousands of U.S. dollars)  

Total

   $ 20,451       $ 10,382       $ (10,069
  

 

 

    

 

 

    

 

 

 

Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $20.5 million and $10.4 million for the three months ended March 31, 2012 and 2011, respectively.

The principal changes in salaries and benefits were:

 

  (i) increased staff costs due to an increase in average staff numbers from 339 for the three months ended March 31, 2011 to 406 for the three months ended March 31, 2012;

 

  (ii) the reduction in the discretionary bonus accrual of $4.0 million due to the release back to earnings in 2011 of the unallocated portion of the 2010 year end bonus accrual provision; and

 

  (iii) an increase in the bonus accrual for the three months ended March 31, 2012 as compared to 2011 of approximately $1.5 million. Expenses relating to our discretionary bonus plan will be variable and are dependent on our overall profitability.

General and Administrative Expenses:

 

     Three Months Ended March 31,  
     2012      2011      Variance  
     (in thousands of U.S. dollars)  

Total

   $ 14,858       $ 17,750       $ 2,892   
  

 

 

    

 

 

    

 

 

 

General and administrative expenses decreased by $2.9 million during the three months ended March 31, 2012, as compared to the three months ended March 31, 2011. The decrease in expenses for 2012 related primarily to:

 

  (i) a decrease in legal expenses of approximately $1.7 million due primarily to the non-recurrence of legal fees incurred in 2011 in relation to certain litigation that has since been settled with no material impact on our financial position; and

 

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  (ii) a decrease in other professional fees of approximately $1.8 million related predominantly to transition fees incurred in 2011 in connection with previously completed acquisitions; partially offset by

 

  (iii) an increase in other general and administrative expenses of approximately $0.6 million.

Net Foreign Exchange Loss:

 

     Three Months Ended March 31,  
       2012          2011          Variance    
     (in thousands of U.S. dollars)  

Total

   $ 2,268       $ 7,334       $ 5,066   
  

 

 

    

 

 

    

 

 

 

We recorded a net foreign exchange loss of $2.3 million for the three months ended March 31, 2012 as compared to $7.3 million for the three months ended March 31, 2011. The net foreign exchange loss for the three months ended March 31, 2012 arose primarily as a result of the translation of a U.S. dollar distribution in one of our subsidiaries whose functional currency is Australian dollars. The distribution was at a rate of approximately AU$1 = $1.08, which was in excess of the U.S. dollar foreign exchange rate at December 31, 2011 of approximately AU$1 = $1.025.

Income Tax Expense:

 

     Years Ended December 31,  
     2012      2011      Variance  
     (in thousands of U.S. dollars)  

Total

   $ 3,742       $ 617       $ (3,125
  

 

 

    

 

 

    

 

 

 

We recorded income tax expense of $3.7 million and $0.6 million for the three months ended March 31, 2012 and 2011, respectively. The increase in taxes was due principally to higher overall earnings in our taxable subsidiaries.

Noncontrolling interest:

 

     Three Months Ended March 31,  
     2012      2011      Variance  
     (in thousands of U.S. dollars)  

Total

   $ 5,733       $ 1,571       $ (4,162
  

 

 

    

 

 

    

 

 

 

We recorded a noncontrolling interest in earnings of $5.7 million and $1.6 million for the three months ended March 31, 2012 and 2011, respectively. The increase for the three months ended March 31, 2012 in noncontrolling interest was due to the increase in earnings for those companies where there exists a noncontrolling interest.

Liquidity and Capital Resources

Source of Funds

We primarily generate our cash from the acquisitions we complete. These acquired cash and investment balances are classified as cash provided by investing activities.

We expect the net operating cash flows for us, to expiry, to be negative as we pay out cash in claims settlements and expenses in excess of cash generated via investment income and consulting fees.

 

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Table of Contents

The following table summarizes our consolidated cash flows from operating, investing and financing activities for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March 31,
 

Total cash (used in) provided by:

   2012     2011  
     (in thousands of U.S. dollars)  

Operating activities

   $ (14,047   $ (290,354

Investing activities

     (25,034     184,429   

Financing activities

     (11,250     (56,700

Effect of exchange rate changes on cash

     (7,328     (6,143
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

   $ (57,659   $ (168,768
  

 

 

   

 

 

 

See “Item 1. Financial Statements — Unaudited Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2012 and 2011” for further information.

Operating

Net cash used in our operating activities for the three months ended March 31, 2012 was $14.0 million compared to $290.4 million for the three months ended March 31, 2011. This $276.4 million decrease in cash used in operating activities was due primarily to the following:

 

  (i) an increase of $180.5 million in the sales and maturities of trading securities between 2012 and 2011;

 

  (ii) a decrease of $46.6 million in the purchases of trading securities; and

 

  (iii) an increase in the net changes in assets and liabilities of $39.3 million.

Investing

Investing cash flows consist primarily of cash acquired net of acquisitions along with net proceeds on the sale and purchase of investments. Net cash used in investing activities was $25.0 million during the three months ended March 31, 2012 compared to net cash provided by investing activities of $184.4 million during the three months ended March 31, 2011. The decrease of $209.4 million in investing cash flows between 2012 and 2011 was due principally to the following:

 

  (i) a decrease of $72.9 million in restricted cash and cash equivalents during 2012, compared to an increase of $85.4 million in 2011;

 

  (ii) an increase of $37.9 million in the funding of other investments between 2012 and 2011; and

 

  (iii) a decrease in cash flows from bond fund redemptions from $10.1 million in 2011 to nil in 2012.

Financing

Net cash used in financing activities was $11.3 million during the three months ended March 31, 2012 compared to $56.7 million during the three months ended March 31, 2011. The decrease of $45.4 million in cash used in financing activities was mainly attributable to the following:

 

  (i) a decrease of $16.2 million in distribution of capital to noncontrolling interest between 2012 and 2011; and

 

  (ii) a decrease of $40.5 million in loan repayments between 2012 and 2011; partially offset by

 

  (iii) an increase of $11.3 million in dividends paid to noncontrolling interest between 2012 and 2011.

 

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Table of Contents

Long-Term Debt

Our long-term debt consists of loan facilities used to partially finance certain of our acquisitions or significant new business transactions along with a loan outstanding in relation to the Repurchase Agreements related to our ordinary shares entered into with three of our executives and certain trusts and a corporation affiliated with the executives. We draw down on the loan facilities at the time of the acquisition or significant new business transaction, although in some circumstances we have made additional draw-downs to refinance existing debt of the acquired company. We incurred interest expense on our loan facilities and loan outstanding relating to the Repurchase Agreements of $2.1 million and $2.0 million for the three months ended March 31, 2012 and 2011, respectively.

Total amounts of loans payable outstanding, including accrued interest, as of March 31, 2012 and December 31, 2011 totaled $243.1 million and $242.7 million, respectively.

As of March 31, 2012, all of the covenants relating to the Company’s outstanding credit facilities were met. Refer to Note 11 of Item 8 included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Eurozone Exposure

At March 31, 2012, we did not own any investments in fixed maturity securities (which includes bonds that are classified as cash and cash equivalents) or bond funds issued by the sovereign governments of Portugal, Italy, Ireland, Greece or Spain. Our fixed maturity securities and bond funds exposures to Eurozone Governments (which includes regional and municipal governments including guaranteed agencies) by rating and maturity date are highlighted in the following tables:

 

     Rating         
     AAA      AA      A      BBB and
below
     Total  
     (in thousands of U.S. dollars)  

Germany

   $ 23,698       $      $       $      $ 23,698   

Supranational (1)

     42,255         829                         43,084   

Netherlands

     10,373         2,577                         12,950   

Norway

     2,316                                 2,316   

France

     2,283         9,537                         11,820   

Sweden

     19,002         18,012                         37,014   

Austria

             11,511                         11,511   

Russia

                             712         712   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     99,927         42,466                 712         143,105   

Euro Region Government Funds

             12,003                         12,003   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 99,927       $ 54,469       $       $ 712       $ 155,108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Maturity Date (2)         
     3 months
or less
     3 to 6
months
     6 months
to 1 year
     1 to 2
years
     more
than 2
years
     Total  
     (in thousands of U.S. dollars)  

Germany

   $ 1,002       $ 5,257       $ 9,924       $ 798       $ 6,717       $ 23,698   

Supranational(1)

     4,826                 19,513         15,030         3,715         43,084   

Netherlands

             1,006                 7,559         4,385         12,950   

Norway

                     996         923         397         2,316   

France

                             8,832         2,988         11,820   

Sweden

                     9,519                 27,495         37,014   

Austria

                     10,094                 1,417         11,511   

Russia

                                     712         712   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,828       $ 6,263       $ 50,046       $ 33,142       $ 47,826       $ 143,105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Supranationals are defined as international government or quasi-government organizations.

 

(2) Our bond fund holdings have daily liquidity and are not included in the maturity date table.

At March 31, 2012, we owned investments in corporate securities (which includes securities classified as cash and cash equivalents) issued by entities whose ultimate parent companies were located within the Eurozone. This includes securities that were issued by subsidiaries whose location was outside of the Eurozone. Our exposures by country and listed by rating, sector and maturity date are highlighted in the following tables:

 

     Rating         
     AAA      AA      A      BBB      BB and
below
     Total  
     (in thousands of U.S. dollars)  

Germany

   $      $      $ 51,805       $ 13,686       $      $ 65,491   

Belgium

             466         2,948                         3,414   

Portugal

                                     19,842         19,842   

Denmark

                     2,437                         2,437   

Netherlands

     808         19,948         5,995                         26,751   

Sweden

     23,681         15,025         44,242         2,748         6,888         92,584   

Norway

                                     21,307         21,307   

France

     28,129         3,626         22,403         1,940                 56,098   

Spain

     2,890                 4,976         9,014                 16,880   

Italy

             529         5,000         11,470                 16,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 55,508       $ 39,594       $ 139,806       $ 38,858       $ 48,037       $ 321,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Sector         
     Financial      Energy      Industrial      Telecom      Utility      Total  
     (in thousands of U.S. dollars)  

Germany

   $ 5,699       $      $ 20,338       $ 13,686       $ 25,768       $ 65,491   

Belgium

     3,414                                         3,414   

Portugal

                                     19,842         19,842   

Denmark

                     2,437                         2,437   

Netherlands

     26,751                                         26,751   

Sweden

     78,006                 9,635                 4,943         92,584   

Norway

     21,307                                         21,307   

France

     42,584         3,626         3,653         642         5,593         56,098   

Spain

     7,866         1,405                 2,421         5,188         16,880   

Italy

     529                         6,371         10,099         16,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 186,156       $ 5,031       $ 36,063       $ 23,120       $ 71,433       $ 321,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Maturity Date         
     3 months
or less
     3 to 6
months
     6 months
to 1 year
     1 to 2
years
     more
than 2
years
     Total  
     (in thousands of U.S. dollars)  

Germany

   $ 34,146       $ 10,731       $ 2,606       $ 13,421       $ 4,587       $ 65,491   

Belgium

                                     3,414         3,414   

Portugal

                     19,842                         19,842   

Denmark

     2,437                                         2,437   

Netherlands

     6,797         10,091                         9,863         26,751   

Sweden

     13,495         14,605         14,355         6,164         43,965         92,584   

Norway

                             16,018         5,289         21,307   

France

     21,674         10,914         7,888         7,646         7,976         56,098   

Spain

             1,073         6,535         9,272                 16,880   

Italy

     5,000                 5,100         6,899                 16,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 83,549       $ 47,414       $ 56,326       $ 59,420       $ 75,094       $ 321,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investments we hold in the United Kingdom and Switzerland are not included in the tables above. None of the securities were considered impaired at March 31, 2012.

Commitments and Contingencies

During the three months ended March 31, 2012, we eliminated our guarantee of the obligation to one of our subsidiaries in respect of a letter of credit issued on its behalf by a London-based bank in the amount of £7.5 million (approximately $11.7 million) relating to insurance contract requirements of that subsidiary.

During the three months ended March 31, 2012, we funded $0.8 million of our $5.0 million commitment to Dowling Capital Partners I, L.P.

There have been no other material changes in our commitments or contingencies since December 31, 2011. Refer to Item 7 included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more information.

Critical Accounting Estimates

Our critical accounting estimates are discussed in Management’s Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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Off-Balance Sheet and Special Purpose Entity Arrangements

At March 31, 2012, we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.

Cautionary Statement Regarding Forward-Looking Statements

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

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

 

   

risks associated with implementing our business strategies and initiatives;

 

   

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

 

   

risks relating to the availability and collectability of our reinsurance;

 

   

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

 

   

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

 

   

losses due to foreign currency exchange rate fluctuations;

 

   

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

 

   

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

 

   

emerging claim and coverage issues;

 

   

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

 

   

loss of key personnel;

 

   

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

 

   

operational risks, including system or human failures;

 

   

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

 

   

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

 

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

 

   

changes in accounting policies or practices.

The factors listed above should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and Risk Factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2011 as well as in the other materials filed and to be filed with the U.S. Securities and Exchange Commission. We undertake no obligation to publicly update or review any forward looking statement, whether as a result of new information, future developments or otherwise.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in our market risk exposures since December 31, 2011. For more information refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

Our management has performed an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in our internal control over financial reporting that occurred during the three months ended March 31, 2012. Based upon that evaluation there were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on our business, results of operations or financial condition. Nevertheless, we cannot assure you that lawsuits, arbitrations or other litigation will not have a material adverse effect on our business, financial condition or results of operations. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental claims. There can be no assurance that any such future litigation will not have a material adverse effect on our business, financial condition or results of operations.

 

Item 1A. RISK FACTORS

Our results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011. The risk factors identified therein have not materially changed.

 

Item 6. EXHIBITS

The information required by this item is set forth on the exhibit index that follows the signature page of this report.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 4, 2012.

 

   

ENSTAR GROUP LIMITED

    By:  

/s/ Richard J. Harris

      Richard J. Harris
     

Chief Financial Officer, Authorized Signatory and

Principal Accounting and Financial Officer

 

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EXHIBIT INDEX

 

Exhibit

No.

  

Description

    3.1    Memorandumof Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K/A filed on May 5, 2011).
    3.2   

ThirdAmended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to

Exhibit3.1(b) of the Company’s Form 10-Q filed on August 5, 2011).

    3.3    Certificate of Designations for the Series A Convertible Participating Non-Voting Perpetual Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 21, 2011).
  10.1*    Amended and Restated Employment Agreement, effective May 1, 2007 and amended and restated June 4, 2007, by and between Enstar Group Limited and Dominic F. Silvester, as amended by Letter Agreement, effective January 1, 2011, and Letter Agreement, dated April 19, 2012.
  10.2*    Employment Agreement, effective May 1, 2007, by and between the Company and Paul J. O’Shea, as amended by Letter Agreement, effective January 1, 2011, and Letter Agreement, dated April 25, 2012.
  10.3*    Employment Agreement, effective May 1, 2007, by and between Enstar Group Limited and Nicholas A. Packer, as amended by Letter Agreement, effective January 1, 2011, and Letter Agreement, dated April 25, 2012.
  10.4*    Employment Agreement, effective May 1, 2007, by and between Enstar Group Limited and Richard J. Harris, as amended by Letter Agreement, effective January 1, 2011, and Letter Agreement, dated April 19, 2012.
  15.1*    Deloitte & Touche Ltd. Letter Regarding Unaudited Interim Financial Information.
  31.1*    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1**    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2**    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101**    Interactive Data Files.

 

  * Filed herewith

 

** Furnished herewith

 

45

<![CDATA[Amended & Restated Employment Agree. Between Enstar & Dominic F. Silvester]]>

Exhibit 10.1

 

Enstar Group Limited

P.O. Box 2267, Windsor Place, 3rd Floor

18 Queen Street

Hamilton, HM JX

Bermuda

April 19, 2012

Attn: Dominic F. Silvester, Chief Executive Officer

Re: Extension of Employment Agreement Term

Dear Dominic,

In recognition of your valuable service to Enstar Group Limited over the past few years, we wish to amend your Amended and Restated Employment Agreement, dated May 1, 2007, as amended, which is attached as Exhibit A, to extend its Term (as defined in the Employment Agreement) for an additional term of five years. The modified Term shall be five years commencing on January 1, 2012, as further extended or unless sooner terminated in accordance with the other provisions of the Employment Agreement. For purposes of Section A of Exhibit A to your Employment Agreement, “the fifth anniversary of the date hereof” shall now read “December 31, 2016”.

If you agree to this extension of the Term of your Employment Agreement, please sign the letter in the space provided below and return it to me.

 

Sincerely,
Enstar Group Limited

/s/ Richard J. Harris

Richard J. Harris, Chief Financial Officer

 

Accepted and agreed to

this 19th day of April, 2012

/s/ Dominic F. Silvester

Dominic F. Silvester


Exhibit A – Existing Employment Agreement


AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”) is dated as of May 1, 2007, between Enstar Group Limited (formerly known as Castlewood Holdings Limited), a Bermuda corporation (“Company”), and Dominic F. Silvester (“Executive”).

BACKGROUND

Company desires to employ Executive, and Executive desires to be an employee of Company, on the terms and conditions contained in this Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows:

TERMS

1. CAPACITY AND DUTIES

1.1 Employment; Acceptance of Employment. Company hereby employs Executive and Executive hereby agrees to continue employment by Company for the period and upon the terms and conditions hereinafter set forth. Effective on the date hereof, this Agreement amends and restates the Employment Agreement between Company and Executive, dated as of May 1, 2007 in its entirety, and the rights and obligations of each party shall be governed by this Agreement.

1.2 Capacity and Duties.

(a) Executive shall serve as Chief Executive Officer of Company. Executive shall perform such duties and shall have such authority consistent with his position as may from time to time be specified by the Board of Directors of Company. Executive shall report directly to the Board of Directors of Company and his principal place of business shall be Company’s office in Bermuda and his secondary places of business may be in continental Europe. It is recognised that extensive travel may be necessary or appropriate in connection with the performance of Executive’s duties hereunder.

(b) Executive shall devote his full working time and energy, skill and best efforts to the performance of his duties hereunder, in a manner that will comply with Company’s rules and policies and will faithfully and diligently further the business and interests of Company. Executive shall not be employed by or participate or engage in or in any manner be a part of the management or operation of any business enterprise other than Company without the prior written consent of Company, which consent may be


granted or withheld in the reasonable discretion of the Board of Directors of Company. Notwithstanding anything herein to the contrary, nothing shall preclude Executive from (i) serving on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations, (ii) engaging in charitable, community and other business affairs, and (iii) managing his personal investments and affairs, provided that such activities do not materially interfere with the proper performance of his responsibilities and duties hereunder.

2. TERM OF EMPLOYMENT

2.1 Term. The term of Executive’s employment hereunder shall be five years commencing on the date hereof, as further extended or unless sooner terminated in accordance with the other provisions hereof (the “Term”). Except as hereinafter provided, on the fifth anniversary of the commencement date and on each subsequent anniversary thereof, the Term shall be automatically extended for one year unless either party shall have given to the other party written notice of termination of this Agreement at least 120 days prior to such anniversary. If written notice of termination is given as provided above, Executive’s employment under this Agreement shall terminate on the last day of the Term.

3. COMPENSATION

3.1 Basic Compensation. As compensation for Executive’s services during the first twelve months of the Term, Company shall pay to Executive a salary at the annual rate of $600,000 payable in periodic installments in accordance with Company’s regular payroll practices in effect from time to time. For each subsequent twelve-month period of Executive’s employment hereunder, Executive’s salary shall be in the amount of his initial annual salary with such increases, as may be established by the Board of Directors of Company in consultation with Executive provided that the increase in base salary with respect to each subsequent twelve-month period shall not be less than the product of Executive’s base salary multiplied by the annual percentage increase in the retail price index (expressed as a decimal) for the United States, as reported in the most recent report of the U.S. Department of Labor for the preceding twelve-month period. Once increased, Executive’s annual salary cannot be decreased without the written consent of Executive. Executive’s annual salary, as determined in accordance with this Section 3.1, is hereinafter referred to as his “Base Salary.”

3.2 Performance Bonus. Executive shall, following the completion of each fiscal year of Company during the Term, be eligible for a performance bonus in accordance with Company’s performance bonus plan. Executive shall also be eligible for additional equity and other incentive awards, at a level commensurate with his position and in accordance with the policies and practices of the Company.


3.3 Employee Benefits. During the Term, Executive shall be entitled to participate in such of Company’s employee benefit plans and benefit programs, as may from time to time be provided by Company. In addition, during the Term, Executive shall be entitled to the following:

(a) a housing allowance equal to $8,500 per month;

(b) a life insurance policy in the amount of five times the Executive’s Base Salary, provided that Executive assists Company in the procurement of such policy (including, without limitation, submitting to any required physical examinations and completing accurately any applicable applications and or questionnaires);

(c) fully comprehensive medical and dental coverage on a worldwide basis for the Executive, his spouse and dependents and an annual medical examination for same;

(d) long term disability coverage, including coverage for serious illness, and full compensation paid by Company during the period up to and until Executive begins receiving benefits under such long term disability plan. In the event that the generally applicable group long-term disability plan contains a limitation on benefits that would result in Executive’s being entitled to benefit payments under such plan which are less than 50% of his salary, Company shall provide Executive with an individual disability policy paying a benefit amount that, when coupled with the group policy benefit payable, would provide Executive with aggregate benefits in connection with his long-term disability equal to 50% of such salary (provided that, if an individual policy can not be obtained for such amount on commercially reasonable rates and on commercially reasonable terms, Company shall provide Executive with a policy providing for the greatest amount of individual coverage that is available on such standard terms and rates). Provision of any individual disability policy will also be contingent upon Executive being able to be insured at commercially reasonable rates and on commercially reasonable terms and upon Executive assisting Company in the procurement of such policy (including, without limitation, submitting to any required physical examinations and completing accurately any applicable applications and or questionnaires);

(e) payment from the company of an amount equal to 10% of Executive’s Base Salary each year to Executive as contribution to his pension plans; and

(f) During the Term, Executive will be reimbursed for one return trip for his family to/from Bermuda each calendar year. Executive’s wife may travel business class and his children may travel premium economy class.

3.4 Vacation. During the Term, Executive shall be entitled to a paid vacation of 30 days per year (including 30 days during 2007).

3.5 Expense Reimbursement. Company shall reimburse Executive for all reasonable out-of-pocket expenses incurred by him in connection with the performance of his duties hereunder in accordance with its regular reimbursement policies as in effect from time to time.


4. TERMINATION OF EMPLOYMENT

4.1 Death of Executive. If Executive dies during the Term, and for the year in which Executive dies, Company achieves the performance goals established in accordance with any incentive plan in which Executive participates, Company shall pay Executive’s estate an amount equal to the bonus that Executive would have received had he been employed by Company for the full year, multiplied by a fraction, the numerator of which is the number of calendar days Executive was employed in such year and the denominator of which is 365. In addition, Executive’s spouse and dependents (if any) shall be entitled for a period of 36 months, to continue to receive medical benefits coverage (as described in Section 3.3) at Company’s expense if and to the extent Company was paying for such benefits for Executive’s spouse and dependents at the time of Executive’s death.

4.2 Disability. If Executive is or has been materially unable for any reason to perform his duties hereunder for 120 days during any period of 150 consecutive days, Company shall have the right to terminate Executive’s employment upon 30 days’ prior written notice to Executive at any time during the continuation of such inability, in which event Company shall thereafter be obligated to continue to pay Executive’s Base Salary for a period of 36 months, periodically in accordance with Company’s regular payroll practices and, within 30 days of such notice, shall pay any other amounts (including salary, bonuses, expense reimbursement, etc.) that have been fully earned by, but not yet paid to, Executive under this Agreement as of the date of such termination. The amount of payments to Executive under disability insurance policies paid for by Company shall be credited against and shall reduce the Base Salary otherwise payable by Company following termination of employment. If, for the year in which Executive’s employment is terminated pursuant to this Section, Company achieves the performance goals established in accordance with any incentive plan in which Executive participates, Company shall pay Executive an amount equal to the bonus that Executive would have received had he been employed by Company for the full year, multiplied by a fraction, the numerator of which is the number of calendar days Executive was employed in such year and the denominator of which is 365. Executive shall be entitled for a period of 36 months, to continue to receive at Company’s expense medical benefits coverage (as described in Section 3.3) for Executive and Executive’s spouse and dependents (if any) if and to the extent Company was paying for such benefits to Executive and Executive’s spouse and dependents at the time of such termination.

4.3 Termination for Cause. Executive’s employment hereunder shall terminate immediately upon notice that the Board of Directors of Company is terminating Executive for Cause (as defined herein), in which event Company shall not thereafter be obligated to make any further payments hereunder other than amounts (including salary, expense reimbursement, etc.) that have been fully earned by, but not yet paid to, Executive under this Agreement as of the date of such termination. “Cause” shall mean (a) fraud or dishonesty in connection with Executive’s employment that results in a


material injury to Company, (b) conviction of any felony or crime involving fraud or misrepresentation or (c) after Executive has received written notice of the specific material and continuing failure of Executive to perform his duties hereunder (other than death or disability) and has failed to cure such failure within 30 days of receipt of the notice, or (d) material and continuing failure to follow reasonable instructions of the Board of Directors after Executive has received at least prior written notice of the specific material and continuing failure to follow instructions and has failed to cure such failure within 30 days of receipt of the notice.

4.4 Termination without Cause or for Good Reason.

(a) If (1) Executive’s employment is terminated by Company for any reason other than Cause or the death or disability of Executive, or (2) Executive’s employment is terminated by Executive for Good Reason (as defined herein):

(i) Company shall pay Executive any amounts (including salary, bonuses, expense reimbursement, etc.) that have been fully earned by, but not yet paid to, Executive under this Agreement as of the date of such termination;

(ii) Company shall pay Executive a lump sum amount equal to three times the Base Salary payable to him;

(iii) Executive shall be entitled to continue to receive medical benefits coverage (as described in Section 3.3) for Executive and Executive’s spouse and dependents (if any) at Company’s expense for a period of 36 months;

(iv) Anything to the contrary in any other agreement or document notwithstanding, each outstanding equity incentive award granted to Executive before, on or within three years after the date hereof shall become immediately vested and exercisable on the date of such termination; and

(v) In addition, if, for the year in which Executive is terminated, Company achieves the performance goals established in accordance with any incentive plan in which Executive participates, Company shall pay an amount equal to the bonus that Executive would have received had he been employed by Company for the full year.

(b) Upon making the payments described in this Section 4.4, Company shall have no further obligation to Executive under this Agreement.

(c) “Good Reason” shall mean the following:

(i) material breach of Company’s obligations hereunder, provided that Executive shall have given written notice thereof to Company, and Company shall have failed to remedy the circumstances within 30 days;

(ii) the relocation of Executive’s principal business office outside of Bermuda without the Executive’s prior agreement; or

(iii) any material reduction in Executive’s duties or authority.


4.5 Change in Control.

(a) If, during the Term, there should be a Change of Control (as defined herein), and within 1 year thereafter either (i) Executive’s employment should be terminated for any reason other than for Cause or (ii) Executive terminates his employment for Good Reason (as defined in Section 4.4):

(i) Company shall pay Executive any amounts (including salary, bonuses, expense reimbursement, etc.) that have been fully earned by, but not yet paid to, Executive under this Agreement as of the date of such termination;

(ii) Company shall pay Executive a lump sum amount equal to three times Executive’s then current Base Salary;

(iii) Executive shall be entitled to continue to receive medical benefits coverage (as described in Section 3.3) for Executive and Executive’s spouse and dependents (if any) at Company’s expense for a period of 36 months;

(iv) Anything to the contrary in any other agreement or document notwithstanding, each outstanding equity incentive award granted to Executive before, on or after the date hereof shall become immediately vested and exercisable on the date of such termination; and

(v) In addition, if, for the year in which Executive is terminated, Company achieves the performance goals established in accordance with any incentive plan in which Executive participates, Company shall pay an amount equal to the bonus that Executive would have received had he been employed by Company for the full year.

(b) Upon making the payments described in this Section 4.5, Company shall have no further obligation to Executive under this Agreement.

(c) A “Change in Control” of Company shall mean:

(i) the acquisition by any person, entity or “group” required to file a Schedule 13D or Schedule 14D-1 under the Securities Exchange Act of 1934 (the “1934 Act”) (excluding, for this purpose, Company, its subsidiaries, any employee benefit plan of Company or its subsidiaries which acquires ownership of voting securities of Company, and any group that includes Executive) of beneficial ownership (within the meaning of Rule 13d-3 under the 1934 Act) of 50% or more of either the then outstanding ordinary shares or the combined voting power of Company’s then outstanding voting securities entitled to vote generally in the election of directors;


(ii) the election or appointment to the Board of Directors of Company, or resignation of or removal from the Board, of directors with the result that the individuals who as of the date hereof constituted the Board (the “Incumbent Board”) no longer constitute at least a majority of the Board, provided that any person who becomes a director subsequent to the date hereof whose appointment, election, or nomination for election by Company’s shareholders, was approved by a vote of at least a majority of the Incumbent Board (other than an appointment, election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of Company) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or

(iii) approval by the shareholders of Company of: (i) a reorganization, merger or consolidation by reason of which persons who were the shareholders of Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power of the reorganized, merged or consolidated company’s then outstanding voting securities entitled to vote generally in the election of directors, or (ii) a liquidation or dissolution of Company or the sale, transfer, lease or other disposition of all or substantially all of the assets of Company (whether such assets are held directly or indirectly).

5. RESTRICTIVE COVENANTS

5.1 Restrictive Covenants.

(a) Executive acknowledges that he is one of a small number of key executives and that in such capacity, he will have access to confidential information of the Company and will engage in key client relationships on behalf of the Company and that it is fair and reasonable for protection of the legitimate interests of the Company and the other key executives of the Company that he should accept the restrictions described in Exhibit A hereto.

(b) Promptly following Executive’s termination of employment, Executive shall return to the Company all property of the Company, and all documents, accounts, letters and papers of every description relating to the affairs and business of the Company or any of its subsidiaries, and copies thereof in Executive’s possession or under his control.

(c) Executive acknowledges and agrees that the covenants and obligations of Executive in Exhibit A and this Section 5.1 relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations will cause the Company irreparable injury for which adequate remedies are not available at


law. Therefore, Executive agrees that the Company shall be entitled to an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in Exhibit A and this Section 5.1. These injunctive remedies are cumulative and are in addition to any other rights and remedies the Company may have at law or in equity.

(d) Executive agrees that if he applies for, or is offered employment by (or is to provide consultancy services to) any other person, firm, company, business entity or other organization whatsoever (other than an affiliate of the Company) during the restriction periods set forth in Exhibit A, he shall promptly, and before entering into any contract with any such third party, provide to such third party a full copy of Exhibit A and this Section 5.1 in order to ensure that such other party is fully aware of Executive’s obligations hereunder.

5.2 Intellectual Property Rights. Executive recognizes and agrees that Executive’s duties for the Company may include the preparation of materials, including written or graphic materials for the Company or its affiliate, and that any such materials conceived or written by Executive shall be done within the scope of his employment as a “work made for hire.” Executive agrees that because any such work is a “work made for hire,” the Company (or the relevant affiliate of the Company) will solely retain and own all rights in said materials, including rights of copyright. Executive agrees to disclose and assign to the Company his entire right, title and interest in and to all inventions and improvements related to the Company’s business or to the business of the Company’s affiliates (including, but not limited to, all financial and sales information), whether patentable or not, whether made or conceived by him individually or jointly with others at any time during his employment by the Company hereunder. Such inventions and improvements are to become and remain the property of the Company and Executive shall take such actions as are reasonably necessary to effectuate the foregoing.

6. MISCELLANEOUS

6.1 Key Employee Insurance. Company shall have the right at its expense to purchase insurance on the life of Executive, in such amounts as it shall from time to time determine, of which Company shall be the beneficiary. Executive shall submit to such physical examinations as may reasonably be required and shall otherwise cooperate with Company in obtaining such insurance.

6.2 Indemnification/Litigation. Company shall indemnify and defend Executive against all claims arising out of Executive’s activities as an officer or employee of Company or its affiliates to the fullest extent permitted by law and under Company’s organizational documents. At the request of Company, Executive shall during and after the Term render reasonable assistance to Company in connection with any litigation or other proceeding involving Company or any of its affiliates. Company shall provide reasonable compensation to Executive for such assistance rendered after the Term.


6.3 No Mitigation. In no event shall Executive be required to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under this Agreement, and such amounts shall not be reduced whether or not Executive obtains other employment after termination of his employment hereunder.

6.4 Severability. The invalidity or unenforceability of any particular provision or part of any provision of this Agreement shall not affect the other provisions or parts hereof.

6.5 Assignment; Benefit. This Agreement shall not be assignable by Executive, and shall be assignable by Company only with the Executive’s consent and only to any person or entity which may become a successor in interest (by purchase of assets or stock, or by merger, or otherwise) to Company in the business or substantially all of the business presently operated by it. Any Change in Control is deemed an assignment. Subject to the foregoing, this Agreement and the rights and obligations set forth herein shall inure to the benefit of, and be binding upon, the parties hereto and each of their respective permitted successors, assigns, heirs, executors and administrators.

6.6 Notices. All notices hereunder shall be in writing and shall be sufficiently given if hand-delivered, sent by documented overnight delivery service or registered or certified mail, postage prepaid, return receipt requested or by facsimile, receipt acknowledged, addressed as set forth below or to such other person and/or at such other address as may be furnished in writing by any party hereto to the other. Any such notice shall be deemed to have been given as of the date received, in the case of personal delivery, or on the date shown on the receipt or confirmation therefor, in all other cases. Any and all service of process and any other notice in any action, suit or proceeding shall be effective against an