FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the Quarterly Period Ended September 30, 2013

OR

 

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

For the Transition Period From                      to                     

001-33289

Commission File Number

 

 

ENSTAR GROUP LIMITED

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda   N/A
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

P.O. Box HM 2267

Windsor Place, 3rd Floor

22 Queen Street

Hamilton HM JX

Bermuda

(Address of principal executive office, including zip code)

(441) 292-3645

(Registrant’s telephone number, including area code)

 

 

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

As of November 6, 2013, the registrant had outstanding 13,901,662 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

 

          Page  
PART I—FINANCIAL INFORMATION   

Item 1.

   Financial Statements:   
  

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 (Unaudited)

     3   
  

Condensed Consolidated Statements of Earnings for the Three and Nine Month Periods Ended September 30, 2013 and 2012 (Unaudited)

     4   
  

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Month Periods Ended September 30, 2013 and 2012 (Unaudited)

     5   
  

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Month Periods Ended September 30, 2013 and 2012 (Unaudited)

     6   
  

Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2013 and 2012 (Unaudited)

     7   
  

Notes to the Condensed Consolidated Financial Statements (Unaudited)

     8   
  

Report of Independent Registered Public Accounting Firm

     59   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      60   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      103   

Item 4.

   Controls and Procedures      104   
PART II—OTHER INFORMATION   

Item 1.

   Legal Proceedings      106   

Item 1A.

   Risk Factors      106   

Item 5.

   Other Information      106   

Item 6.

   Exhibits      107   

Signature

     108   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2013 and December 31, 2012

 

    September 30,
2013
    December 31,
2012
 
    (expressed in thousands of
U.S. dollars, except share data)
 

ASSETS

   

Short-term investments, trading, at fair value

  $ 387,838      $ 319,111   

Short-term investments, held-to-maturity, at amortized cost

    10,111        —    

Fixed maturities, trading, at fair value

    3,461,075        2,253,210   

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

    870,454        —    

Fixed maturities, available-for-sale, at fair value (amortized cost: 2013—$60,092; 2012—$245,396)

    63,591        251,121   

Equities, trading, at fair value

    145,723        114,588   

Other investments, at fair value

    518,307        414,845   
 

 

 

   

 

 

 

Total investments

    5,457,099        3,352,875   

Cash and cash equivalents

    520,560        654,890   

Restricted cash and cash equivalents

    386,605        299,965   

Accrued interest receivable

    42,215        22,932   

Accounts receivable

    59,745        15,399   

Premiums receivable

    153,623        —    

Income taxes recoverable

    11,718        11,302   

Deferred tax asset

    41,478        9,421   

Reinsurance balances recoverable

    1,395,345        1,122,919   

Funds held by reinsured companies

    235,156        365,252   

Goodwill

    21,222        21,222   

Other assets

    17,503        6,066   
 

 

 

   

 

 

 

TOTAL ASSETS

  $ 8,342,269      $ 5,882,243   
 

 

 

   

 

 

 

LIABILITIES

   

Losses and loss adjustment expenses

  $ 4,400,418      $ 3,650,127   

Policy benefits for life and annuity contracts

    1,288,148        11,027   

Unearned premium

    34,136        —     

Insurance and reinsurance balances payable

    213,033        143,123   

Accounts payable and accrued liabilities

    74,587        73,258   

Income taxes payable

    19,635        23,023   

Deferred tax liabilities

    7,260        14,486   

Loans payable

    355,663        107,430   

Other liabilities

    73,478        84,536   
 

 

 

   

 

 

 

TOTAL LIABILITIES

    6,466,358        4,107,010   
 

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

   

REDEEMABLE NONCONTROLLING INTEREST

    32,507        —     
 

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

   

Share capital

   

Authorized, issued and fully paid, par value $1 each (authorized 2013: 156,000,000; 2012: 156,000,000)

   

Ordinary shares (issued and outstanding 2013: 13,801,425; 2012: 13,752,172)

    13,801        13,752   

Non-voting convertible ordinary shares:

   

Series A (issued 2013: 2,972,892; 2012: 2,972,892)

    2,973        2,973   

Series B, C and D (issued and outstanding 2013: 2,725,637; 2012: 2,725,637)

    2,726        2,726   

Treasury shares at cost (Series A non-voting convertible ordinary shares 2013: 2,972,892; 2012: 2,972,892)

    (421,559     (421,559

Additional paid-in capital

    961,270        958,571   

Accumulated other comprehensive income

    14,676        24,439   

Retained earnings

    1,043,996        972,853   
 

 

 

   

 

 

 

Total Enstar Group Limited Shareholders’ Equity

    1,617,883        1,553,755   
 

 

 

   

 

 

 

Noncontrolling interest

    225,521        221,478   
 

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

    1,843,404        1,775,233   
 

 

 

   

 

 

 

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY

  $ 8,342,269      $ 5,882,243   
 

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

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Table of Contents

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three and Nine Month Periods Ended September 30, 2013 and 2012

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
        2013             2012             2013             2012      
    (expressed in thousands of U.S. dollars,
except share and per share data)
 

INCOME

       

Net premiums earned—non-life run-off

  $ 28,134      $ —       $ 100,270      $ —    

Net premiums earned—life and annuities

    30,540        822        65,661        2,692   

Consulting fees

    2,398        1,944        7,805        5,913   

Net investment income

    25,009        19,658        70,224        60,995   

Net realized and unrealized gains

    37,010        28,280        39,211        55,353   
 

 

 

   

 

 

   

 

 

   

 

 

 
    123,091        50,704        283,171        124,953   
 

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

       

Net reduction in ultimate losses and loss adjustment expense liabilities:

       

Losses incurred on current period premiums earned

    28,134        —         100,270        —    

Reduction in estimates of net ultimate losses

    (27,850     (58,506     (81,413     (120,221

Reduction in provisions for bad debt

    (5,465     —         (5,465     (2,782

Reduction in provisions for unallocated loss adjustment expense liabilities

    (16,320     (12,579     (49,518     (37,092

Amortization of fair value adjustments

    5,025        8,538        9,488        18,365   
 

 

 

   

 

 

   

 

 

   

 

 

 
    (16,476     (62,547     (26,638     (141,730

Life and annuity policy benefits

    33,332        822        63,555        2,692   

Salaries and benefits

    29,716        25,138        79,013        69,968   

General and administrative expenses

    29,126        14,409        67,074        43,423   

Interest expense

    3,270        1,713        8,796        5,886   

Net foreign exchange (gains) losses

    (673     977        (3,994     2,618   
 

 

 

   

 

 

   

 

 

   

 

 

 
    78,295        (19,488     187,806        (17,143
 

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

    44,796        70,192        95,365        142,096   

INCOME TAXES

    (1,340     (14,700     (13,726     (30,347
 

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

    43,456        55,492        81,639        111,749   

Less: Net earnings attributable to noncontrolling interest

    (3,469     (7,776     (10,496     (13,638
 

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

  $ 39,987      $ 47,716      $ 71,143      $ 98,111   
 

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE—BASIC

       

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

  $ 2.42      $ 2.90      $ 4.31      $ 5.97   
 

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE—DILUTED

       

Net earnings per ordinary share attributable to Enstar Group Limited shareholders

  $ 2.39      $ 2.86      $ 4.26      $ 5.88   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding—basic

    16,525,012        16,437,780        16,521,865        16,433,943   

Weighted average ordinary shares outstanding—diluted

    16,720,715        16,676,529        16,698,640        16,674,356   

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 and Nine Month Periods Ended September 30, 2013 and 2012

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (expressed in thousands of U.S. dollars)  

NET EARNINGS

   $ 43,456      $ 55,492      $ 81,639      $ 111,749   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

        

Unrealized holding gains on investments arising during the period

     36,840        25,464        37,210        53,135   

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

     (37,010     (28,280     (39,211     (55,353
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized losses arising during the period, net of reclassification adjustment

     (170     (2,816     (2,001     (2,218

Currency translation adjustment

     9,053        3,597        (12,448     2,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     8,883        781        (14,449     471   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     52,339        56,273        67,190        112,220   

Less comprehensive income attributable to noncontrolling interest

     (4,206     (7,652     (5,810     (13,921
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED

   $ 48,133      $ 48,621      $ 61,380      $ 98,299   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Nine Month Periods Ended September 30, 2013 and 2012

 

     Nine Months Ended
September 30,
 
     2013     2012  
     (expressed in thousands
of U.S. dollars)
 

Share Capital—Ordinary Shares

    

Balance, beginning of period

   $ 13,752      $ 13,665   

Issue of shares

     4        4   

Share awards granted/vested

     45        44   
  

 

 

   

 

 

 

Balance, end of period

   $ 13,801      $ 13,713   
  

 

 

   

 

 

 

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      $ 2,726   
  

 

 

   

 

 

 

Treasury Shares

    

Balance, beginning and end of period

   $ (421,559   $ (421,559
  

 

 

   

 

 

 

Additional Paid-in Capital

    

Balance, beginning of period

   $ 958,571      $ 956,329   

Share awards granted/vested

     —         415   

Issue of shares, net

     487        381   

Amortization of equity incentive plan

     2,212        2,066   
  

 

 

   

 

 

 

Balance, end of period

   $ 961,270      $ 959,191   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income Attributable to Enstar Group Limited

    

Balance, beginning of period

   $ 24,439      $ 27,096   

Foreign currency translation adjustments

     (8,254     1,332   

Net movement in unrealized holding losses on investments

     (1,509     (1,145
  

 

 

   

 

 

 

Balance, end of period

   $ 14,676      $ 27,283   
  

 

 

   

 

 

 

Retained Earnings

    

Balance, beginning of period

   $ 972,853      $ 804,836   

Net earnings attributable to Enstar Group Limited

     71,143        98,111   
  

 

 

   

 

 

 

Balance, end of period

   $ 1,043,996      $ 902,947   
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance, beginning of period

   $ 221,478      $ 297,345   

Return of capital

     —         (35,366

Dividends paid

     (1,740     (18,985

Net earnings attributable to noncontrolling interest*

     10,469        13,638   

Foreign currency translation adjustments

     (4,194     1,356   

Net movement in unrealized holding losses on investments

     (492     (1,073
  

 

 

   

 

 

 

Balance, end of period

   $ 225,521      $ 256,915   
  

 

 

   

 

 

 

 

* Excludes earnings attributable to redeemable noncontrolling interest. See Note 15 to the unaudited condensed consolidated financial statements.

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 Nine Month Periods Ended September 30, 2013 and 2012

 

     Nine Months Ended
September 30,
 
     2013     2012  
     (expressed in thousands
of U.S. dollars)
 

OPERATING ACTIVITIES:

    

Net earnings

   $ 81,639      $ 111,749   

Adjustments to reconcile net earnings to cash flows used in operating activities:

    

Net realized and unrealized investment losses (gains)

     10,996        (42,825

Net realized and unrealized gains from other investments

     (50,207     (12,528

Other items

     3,656        3,296   

Depreciation and amortization

     761        1,004   

Amortization of bond premiums and discounts

     36,929        23,017   

Net movement of trading securities held on behalf of policyholders

     2,187        15,529   

Sales and maturities of trading securities

     2,063,258        1,709,227   

Purchases of trading securities

     (2,257,188     (2,008,346

Changes in assets and liabilities:

    

Reinsurance balances recoverable

     213,042        543,427   

Other assets

     237,585        73,590   

Losses and loss adjustment expenses

     (314,862     (645,708

Policy benefits for life and annuity contracts

     21,490        192   

Insurance and reinsurance balances payable

     (31,637     (25,546

Accounts payable and accrued liabilities

     (38,459     (12,954

Other liabilities

     (104,790     10,747   
  

 

 

   

 

 

 

Net cash flows used in operating activities

     (125,600     (256,129
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Acquisitions, net of cash acquired

     (308,710     —    

Sales and maturities of available-for-sale securities

     181,066        296,537   

Purchases of held-to-maturity securities

     (112     —    

Maturities of held-to-maturity securities

     253        —    

Movement in restricted cash and cash equivalents

     (86,640     84,080   

Funding of other investments

     (68,097     (182,671

Redemption of bond funds

     18,656        103   

Other investing activities

     15        (636
  

 

 

   

 

 

 

Net cash flows (used in) provided by investing activities

     (263,569     197,413   
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Distribution of capital to noncontrolling interest

     —         (7,236

Contribution to surplus of subsidiary by redeemable noncontrolling interest

     32,480        —    

Dividends paid to noncontrolling interest

     (1,740     (18,985

Receipt of loans

     274,800        —    

Repayment of loans

     (39,505     (115,875
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     266,035        (142,096
  

 

 

   

 

 

 

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

     (11,196     (5,307
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (134,330     (206,119

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     654,890        850,474   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 520,560      $ 644,355   
  

 

 

   

 

 

 

Supplemental Cash Flow Information

    

Net income taxes paid

   $ 24,010      $ 22,093   

Interest paid

   $ 7,326      $ 5,556   

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

September 30, 2013 and December 31, 2012

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

(unaudited)

 

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation and Consolidation

The Company’s condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. The results of operations for any interim period are not necessarily indicative of the results for a full year. Inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Certain reclassifications have been made to the prior period reported amounts of net premiums earned—life and annuities, life and annuity policy benefits and losses and loss adjustment expenses to conform to the current period presentation. These reclassifications had no impact on income or net earnings previously reported.

Significant New Accounting Policies

As a result of the acquisitions of SeaBright Holdings, Inc. (“SeaBright”), five companies from a subsidiary of HSBC Holdings plc (the “Pavonia companies”), and Arden Reinsurance Company Limited (“Arden”), each described in Note 2—“Acquisitions”, the Company has adopted certain new significant accounting policies during the nine months ended September 30, 2013. Other than the policies described below, there have been no material changes to the Company’s significant accounting policies from those described in Note 2 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

(a) Premium revenue recognition

Non-life run-off

Premiums written are earned on a pro-rata basis over the period the coverage is provided. Reinsurance premiums are recorded at the inception of the policy, unless policy language stipulates otherwise, and are estimated based upon information in underlying contracts and information provided by clients and/or brokers. Changes in reinsurance premium estimates are expected and may result in significant adjustments in future periods. These estimates change over time as additional information regarding changes in underlying exposures is obtained. Any subsequent differences arising on such estimates are recorded as premiums written in the period they are determined.

Unearned premiums represent the portion of premiums written that relate to the unexpired terms of policies in force. Premiums ceded are similarly pro-rated over the period the coverage is provided with the unearned portion being deferred as prepaid reinsurance premiums.

Certain contracts that the Company has written are retrospectively rated and additional premium will be due should losses exceed pre-determined, contractual thresholds. These required additional premiums are based upon

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1. SIGNIFICANT ACCOUNTING POLICIES—(cont’d)

 

contractual terms and management judgment is involved with respect to the estimate of the amount of losses that the Company expects to be ceded. Additional premiums are recognized at the time loss thresholds specified in the contract are exceeded and are earned over the coverage period, or are earned immediately if the period of risk coverage has passed. Changes in estimates of losses recorded on contracts with additional premium features will result in changes in additional premiums based on contractual terms.

Life and annuities

The Pavonia companies, prior to going into run-off, wrote various U.S. and Canadian life insurance, including credit life and disability insurance, term life insurance, assumed life reinsurance and annuities. The Pavonia companies will continue to recognize premiums on term life insurance, assumed life reinsurance and credit life and disability insurance.

Premiums from term life insurance, credit life and disability insurance and assumed life reinsurance are generally recognized as revenue when due from policyholders. Term life, assumed life reinsurance and credit life and disability policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with such revenue to result in the recognition of profit over the life of the contracts.

(b) Premiums Receivable

Non-life run-off

Premiums receivable represent amounts currently due and amounts not yet due on insurance and reinsurance policies. Premiums for insurance policies are generally due at inception. Premiums for reinsurance policies generally become due over the period of coverage based on the policy terms. The Company monitors the credit risk associated with premiums receivable, taking into consideration that credit risk is reduced by the Company’s contractual right to offset loss obligations or unearned premiums against premiums receivable. Amounts deemed uncollectible are charged to net earnings in the period they are determined. Changes in the estimate of premiums written will result in an adjustment to premiums receivable in the period they are determined. Certain contracts are retrospectively rated and provide for a final adjustment to the premium based on the final settlement of all losses. Premiums receivable on such contracts are adjusted based on the estimate of losses the Company expects to incur, and are not considered due until all losses are settled.

(c) Life and annuity benefits

The Company’s life and annuity benefit and claim reserves are calculated using standard actuarial techniques and cash flow models in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 944, Financial Services—Insurance. The Company establishes and maintains its life and annuity reserves at a level that the Company estimates will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third party servicing obligations as they become payable. The Company reviews its life and annuity reserves regularly and performs loss recognition testing based upon cash flow projections.

Since the development of the life and annuity reserves is based upon cash flow projection models, the Company must make estimates and assumptions based on experience and industry mortality tables, longevity and morbidity rates, lapse rates, expenses and investment experience, including a provision for adverse deviation.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1. SIGNIFICANT ACCOUNTING POLICIES—(cont’d)

 

The assumptions used to determine policy benefit reserves are determined at the inception of the contracts, reviewed and adjusted at the point of acquisition as required, and are locked-in throughout the life of the contract unless a premium deficiency develops. The assumptions are reviewed no less than annually and are unlocked if they would result in a material adverse reserve change. The Company establishes these estimates based upon transaction-specific historical experience, information provided by the ceding company for the assumed business and industry experience. Actual results could differ materially from these estimates. As the experience on the contracts emerges, the assumptions are reviewed by management. The Company determines whether actual and anticipated experience indicates that existing policy reserves, together with the present value of future gross premiums, are sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. If such a review indicates that reserves should be greater than those currently held, then the locked-in assumptions are revised and a charge for life and annuity benefits is recognized at that time.

Because of the many assumptions and estimates used in establishing reserves and the long-term nature of the contracts, the reserving process, while based on actuarial techniques, is inherently uncertain.

(d) Investments

Short-term investments and fixed maturity investments

Short-term investments comprise investments with a maturity greater than three months but less than one year from the date of purchase. Fixed maturities comprise investments with a maturity of one year and greater from the date of purchase.

Short-term investments and fixed maturities classified as trading are carried at fair value, with realized and unrealized holding gains and losses included in net earnings and reported as net realized and unrealized gains and losses. Investment purchases and sales are recorded on a trade-date basis. Realized gains and losses on the sale of investments are based upon specific identification of the cost of investments.

Short-term investments and fixed maturity investments classified as held-to-maturity securities, which are securities that the Company has the positive intent and ability to hold to maturity, are carried at amortized cost. The cost of short-term investments and fixed maturities are adjusted for amortization of premiums and accretion of discounts.

Fixed maturity investments classified as available-for-sale are carried at fair value, with unrealized gains and losses excluded from net earnings and reported as a separate component of accumulated other comprehensive income. Realized gains and losses on sales of investments classified as available-for-sale are recognized in the consolidated statements of earnings. Amortization of premium or discount is recognized using the effective yield method and included in net investment income. For mortgage-backed and asset-backed investments, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised on a regular basis.

Fixed maturity investments classified as available-for-sale and held-to-maturity are reviewed quarterly to determine if they have sustained an impairment of value that is, based on management’s judgment, considered to be other than temporary. The process includes reviewing each fixed maturity investment that is below cost and: (1) determining if the Company has the intent to sell the fixed maturity investment; (2) determining if it is more likely than not that the Company will be required to sell the fixed maturity investment before its anticipated

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1. SIGNIFICANT ACCOUNTING POLICIES—(cont’d)

 

recovery; and (3) assessing whether a credit loss exists, that is, whether the Company expects that the present value of the cash flows expected to be collected from the fixed maturity investment is less than the amortized cost basis of the investment. In evaluating credit losses, the Company considers a variety of factors in the assessment of a fixed maturity investment including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline below cost and par; (3) the potential for the investment to recover in value; (4) an analysis of the financial condition of the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the investment to make scheduled interest or principal payments. If management concludes an investment is other-than-temporarily impaired (“OTTI”), then the difference between the fair value and the amortized cost of the investment is presented as an OTTI charge in the consolidated statements of earnings, with an offset for any noncredit-related loss component of the OTTI charge to be recognized in other comprehensive income. Accordingly, only the credit loss component of the OTTI amount would have an impact on the Company’s earnings.

(e) Redeemable noncontrolling interest

In connection with the acquisition of Arden and with the proposed acquisitions of Torus Insurance Holdings Limited and Atrium Underwriting Group Limited, certain subsidiaries have or will have issued shares to a noncontrolling interest. These shares provide certain redemption rights to the holder which may be settled in the Company’s own shares or cash, at the Company’s option. The Company classifies redeemable noncontrolling interest with redemption features that are not solely within the control of the Company within temporary equity in its consolidated balance sheets and carries them at the redemption value, which is fair value. The Company recognizes changes in the fair value that exceed the carrying value of redeemable noncontrolling interest through retained earnings as if the balance sheet date were also the redemption date. For a description of the redemption rights refer to Note 2—Acquisitions.

New Accounting Standards Adopted in 2013

ASU 2011-11, Disclosures About Offsetting Assets and Liabilities

In December 2011, the FASB issued new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new disclosures are designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards. The Company adopted the amended guidance effective January 1, 2013. The adoption of the guidance did not have a material impact on the consolidated financial statements.

ASU 2013-02, Presentation of Items Reclassified from Accumulated Other Comprehensive Income

In February 2013, the FASB issued new disclosure requirements for items reclassified from accumulated other comprehensive income. This guidance requires entities to disclose in a single location (either on the face of the financial statement that reports net earnings or in the notes) the effects of reclassification out of accumulated other comprehensive income. The Company adopted this guidance effective January 1, 2013. The adoption of the guidance did not have a material impact on the consolidated financial statements.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1. SIGNIFICANT ACCOUNTING POLICIES—(cont’d)

 

Recently Issued Accounting Pronouncements Not Yet Adopted

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

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

 

2. ACQUISITIONS

The Company accounts for acquisitions using the purchase method of accounting, which requires that the acquirer record the assets and liabilities acquired at their estimated fair value. The fair values of each of the reinsurance assets and liabilities acquired relating to our acquisitions are derived from estimates of the associated projected cash flows, based on actuarially prepared information and management’s run-off strategy. Refer to Note 2 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for more information on the accounting for acquisitions.

Torus Insurance Holdings Limited

Amalgamation Agreement

On July 8, 2013, the Company, Veranda Holdings Ltd (“Veranda”), an entity in which the Company owns an indirect 60% interest through its 60% interest in Bayshore Holdings Limited (“Bayshore”), Hudson Securityholders Representative LLC and Torus Insurance Holdings Limited (“Torus”) entered into an Agreement and Plan of Amalgamation (the “Amalgamation Agreement”). The Amalgamation Agreement provides for the amalgamation (the “Amalgamation”) of Veranda and Torus (the combined entity, the “Amalgamated Company”). Torus is a global specialty insurer and holding company of six wholly-owned insurance vehicles, including one Lloyd’s syndicate.

The purchase price for the Amalgamation is $692.0 million. The Company and Kenmare Holdings Ltd. (its wholly-owned subsidiary) (“Kenmare”) will provide 60% of the purchase price and related expenses of the Amalgamation. Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P. (collectively, “Trident”), the owner of the remaining 40% interest in Bayshore, the parent company of Veranda, will provide 40% of the purchase price and related expenses associated with the Amalgamation. The Company will issue a combination of approximately 1,902,000 voting ordinary shares, par value $1.00 per share (the “Voting Ordinary Shares”), and approximately 710,000 newly-created Series B convertible non-voting preference shares, par value $1.00 per share (the “Non-Voting Preferred Shares”), having an aggregate value of approximately $346.0 million to partially fund the purchase price. Kenmare will contribute in cash approximately $69.2 million and Trident will contribute in cash the remaining approximately $276.8 million of the purchase

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2. ACQUISITIONS—(cont’d)

 

price. Following the Amalgamation, the Company and Trident will continue to own, respectively, a 60% and 40% indirect interest in the Amalgamated Company through their ownership of Bayshore.

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

Stock Issuance

FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. (collectively, “First Reserve”) will receive Voting Ordinary Shares, Non-Voting Preferred Shares and cash consideration in the transaction. In the event that the number of Voting Ordinary Shares deliverable to First Reserve at the closing of the Amalgamation would cause First Reserve, as of immediately after such closing, to beneficially own Voting Ordinary Shares that constitute more than 9.5% of the voting power of all shares of the Company, then the Company will issue to First Reserve, at the closing, the total number of shares of Voting Ordinary Shares representing 9.5% of the voting power of all shares of the Company as of immediately after the closing and Non-Voting Preferred Shares representing the remainder of the shares that First Reserve is entitled to under the Amalgamation Agreement. Corsair Specialty Investors, L.P. (“Corsair”) will receive both Voting Ordinary Shares and cash consideration in the transaction. The remaining Torus shareholders will receive all cash. Following the Amalgamation, First Reserve will own approximately 9.5% and 11.5%, respectively, of the Company’s Voting Ordinary Shares and outstanding share capital and Corsair will own approximately 2.5% and 2.1%, respectively, of the Company’s Voting Ordinary Shares and outstanding share capital.

The Company and First Reserve will enter into a Shareholder Rights Agreement at the closing of the Amalgamation, under which the Company has agreed that First Reserve will have the right to designate one representative to the Company’s Board of Directors. This designation right terminates if First Reserve ceases to beneficially own at least 75% of the total number of Voting Ordinary Shares and Non-Voting Preferred Shares acquired by it under the Amalgamation Agreement.

The Company will also enter into a Registration Rights Agreement with First Reserve and Corsair at the closing of the Amalgamation that provides First Reserve and Corsair with certain rights to cause the Company to register under the Securities Act of 1933, as amended (the “Act”), the Voting Ordinary Shares (including the Voting Ordinary Shares into which the Non-Voting Preferred Shares may convert) issued pursuant to the Amalgamation and any securities issued by the Company in connection with the foregoing by way of a share dividend or share split or in connection with any recapitalization, reclassification or similar reorganization (the foregoing, collectively, “Registrable Securities”). Pursuant to the Registration Rights Agreement, the Company must file a resale shelf registration statement for the Registrable Securities within 20 business days after the closing of the Amalgamation. In addition, at any time following the six-month anniversary of the closing of the Amalgamation, First Reserve will be entitled to make three written requests for the Company to register all or any part of the Registrable Securities under the Act, subject to certain exceptions and conditions set forth in the Registration Rights Agreement. Corsair will have the right to make one such request. First Reserve and Corsair will also be granted “piggyback” registration rights with respect to the Company’s registration of Voting Ordinary Shares for its own account or for the account of one or more of its securityholders.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2. ACQUISITIONS—(cont’d)

 

Trident Co-investment in Torus

In connection with the Amalgamation Agreement, the Company, Kenmare and Trident entered an Investors Agreement on July 8, 2013 governing their investments in Bayshore, and Kenmare and Trident entered into individual equity commitment letters obligating each to fund its respective portion of the purchase price for the Amalgamation described above. Completion of Kenmare’s and Trident’s funding obligations is conditioned on, among other things, the satisfaction of certain conditions tied directly to the satisfaction of the closing conditions under the Amalgamation Agreement.

Upon the funding of the equity commitments at the closing of the Amalgamation, Kenmare and Trident have agreed to enter into a Shareholders’ Agreement (the “Bayshore Shareholders’ Agreement”). Among other things, the Bayshore Shareholders’ Agreement will provide that Kenmare would appoint three members to the Bayshore board of directors and Trident would appoint two members.

The Bayshore Shareholders’ Agreement includes a five-year period during which neither party can transfer its ownership interest in Bayshore to a third party (the “Restricted Period”). Following the Restricted Period: (i) each party must offer the other party the right to buy its shares before the shares are offered to a third party; (ii) Kenmare can require Trident to participate in a sale of Bayshore to a third party as long as Kenmare owns 55% of Bayshore; (iii) each party has the right to be included on a pro rata basis in any sales made by the other party; and (iv) each party has the right to buy its pro rata share of any new securities issued by Bayshore.

During the 90-day period following the fifth anniversary of the closing of the Amalgamation, and at any time following the seventh anniversary of such closing, Kenmare would have the right to redeem Trident’s shares in Bayshore at their then fair market value, which would be payable in cash. Following the seventh anniversary of the closing, Trident would have the right to require Kenmare to purchase Trident’s shares for their then current fair market value, which Kenmare would have the option to pay either in cash or by delivering the Company’s Voting Ordinary Shares.

Trident is a holder of approximately 9.7% of the Company’s Voting Ordinary Shares. Refer to Note 17 for information regarding the Company’s other transactions with affiliates of Trident.

Atrium and Arden

Acquisition Agreements

On June 5, 2013, the Company entered into definitive agreements with Arden Holdings Limited with respect to the Company’s acquisitions of Atrium Underwriting Group Limited (“Atrium”) and Arden Reinsurance Company Limited (“Arden”). The two transactions are governed by separate purchase agreements and the acquisition of each company was not conditioned on the acquisition of the other.

Atrium is an underwriting business at Lloyd’s of London, which manages Syndicate 609 and provides approximately one quarter of the syndicate’s capital. Atrium specializes in accident and health, aviation, marine property, non-marine property, professional liability, property and casualty binding authorities, reinsurance, upstream energy, war and terrorism insurance, cargo and fine art. The purchase price for Atrium will be approximately $183.0 million. Completion of the transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close by the end of 2013. The purchaser of Atrium will be owned 60% by Kenmare and 40% by Trident.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2. ACQUISITIONS—(cont’d)

 

Trident Co-investment in Atrium and Arden

On July 3, 2013, Kenmare entered into an Investors Agreement with Trident with respect to the acquisitions of Atrium and Arden, pursuant to which Trident acquired a 40% interest in Northshore Holdings Ltd., previously a wholly-owned subsidiary of Kenmare (“Northshore”). In connection with the Investors Agreement, Kenmare and Trident provided individual equity commitment letters to Northshore pursuant to which Kenmare and Trident were obligated to provide 60% and 40%, respectively, of the Atrium and Arden purchase prices and related expenses. On September 6, 2013, Kenmare and Trident each funded their individual equity commitments with respect to the Arden acquisition.

Completion of Kenmare’s and Trident’s funding obligations with respect to the Atrium closing is conditioned on, among other things, the satisfaction of certain conditions tied directly to the satisfaction of the closing conditions under the Atrium purchase agreement. In the event that the Atrium acquisition does not close, Trident’s obligations under its commitment letter would terminate as to both Arden and Atrium and Kenmare would be required to purchase at cost Trident’s 40% interest in Northshore.

On September 6, 2013, in connection with the closing of the Arden acquisition, Northshore, Kenmare and Trident entered into the Shareholders’ Agreement (the “Northshore Shareholders’ Agreement”). The Northshore Shareholders’ Agreement, among other things, provides that Kenmare has the right to appoint three members to the Northshore board of directors and Trident has the right to appoint two members. The Northshore Shareholders’ Agreement will also grant Trident the right to designate one member of the Atrium board of directors after the Atrium closing. The Northshore Shareholders’ Agreement includes a five-year period during which neither party can transfer its ownership interest in Northshore to a third party (the “Restricted Period”). Following the Restricted Period: (i) each party must offer the other party the right to buy its shares before the shares are offered to a third party; (ii) Kenmare can require Trident to participate in a sale of Northshore to a third party as long as Kenmare owns 55% of Northshore; (iii) each party has the right to be included on a pro rata basis in any sales made by the other party; and (iv) each party has the right to buy its pro rata share of any new securities issued by Northshore.

The Northshore Shareholders’ Agreement also provides that during the 90-day period following the fifth anniversary of the Arden closing, and at any time following the seventh anniversary of such closing, Kenmare would have the right to redeem Trident’s shares in Northshore at their then fair market value, which would be payable in cash. Following the seventh anniversary of the Arden closing, Trident would have the right to require Kenmare to purchase Trident’s shares in Northshore for their then current fair market value, which Kenmare would have the option to pay either in cash or by delivering the Company’s Voting Ordinary Shares.

Completion of Acquisition of Arden

On September 9, 2013, Kenmare, the Company’s wholly-owned subsidiary, together with Trident, completed the acquisition of Arden. Arden is a Bermuda-based reinsurance company that provides reinsurance to Atrium and is currently in the process of running off certain other discontinued businesses. The purchaser of Arden is 60% owned by Kenmare and 40% owned by Trident. The purchase price for Arden was $79.6 million. Kenmare’s portion of the purchase price was $47.8 million, and was financed by a draw under the Company’s revolving credit facility.

The Company has not completed the determination of fair value of Arden’s reinsurance balances recoverable and losses and loss adjustment expenses primarily because the fair value of these items is impacted

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2. ACQUISITIONS—(cont’d)

 

by certain related party transactions between Arden and Atrium that have been provisionally estimated pending the Company’s completion of the acquisition of Atrium. Final fair value determinations are expected to be completed by December 31, 2013 and will be completed within the measurement period, which cannot exceed 12 months from the date of acquisition. As a result, the fair value recorded for these items is a provisional estimate and may be subject to adjustment. Any adjustments may impact the individual and aggregate amounts recorded for assets acquired and liabilities assumed.

 

Purchase price

   $ 79,600   
  

 

 

 

Net assets acquired at fair value

   $ 79,600   
  

 

 

 

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

 

ASSETS

  

Short-term investments, trading, at fair value

   $ 28,852   

Fixed maturities, trading, at fair value

     55,428   

Other investments

     2,867   
  

 

 

 

Total investments

     87,147   

Cash and cash equivalents

     23,037   

Restricted cash and cash equivalents

     31,812   

Premiums receivable

     124,252   

Reinsurance balances recoverable

     351,210   

Other assets

     17,582   
  

 

 

 

TOTAL ASSETS

     635,040   
  

 

 

 

LIABILITIES

  

Losses and loss adjustment expenses

     480,157   

Insurance and reinsurance balances payable

     59,304   

Unearned premium

     10,412   

Other liabilities

     5,567   
  

 

 

 

TOTAL LIABILITIES

     555,440   
  

 

 

 

NET ASSETS ACQUIRED AT FAIR VALUE

   $ 79,600   
  

 

 

 

From the date of acquisition to September 30, 2013, the Company recorded revenues and net earnings related to Arden of $0.7 million and $0.1 million, respectively, in its consolidated statement of earnings.

SeaBright

On February 7, 2013, the Company completed its acquisition of SeaBright, through the merger of its indirect, wholly-owned subsidiary, AML Acquisition, Corp. (“AML Acquisition”), with and into SeaBright (the “Merger”), with SeaBright surviving the Merger as the Company’s indirect, wholly-owned subsidiary. SeaBright owns SeaBright Insurance Company, an Illinois-domiciled insurer that is commercially domiciled in California, which wrote direct workers’ compensation business. The aggregate cash purchase price paid by the Company for all equity securities of SeaBright was approximately $252.1 million, which was funded in part with $111.0 million borrowed under a four-year term loan facility provided by National Australia Bank and Barclays Bank PLC.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2. ACQUISITIONS—(cont’d)

 

Immediately following the acquisition, SeaBright was placed into run-off, and accordingly is no longer writing new insurance policies. Since its acquisition, SeaBright had renewed expiring insurance policies when it was obligated to do so by regulators, but has received approvals from all states relieving it of this obligation to renew any further policies.

Gross and net premiums written by SeaBright from the date of the acquisition to September 30, 2013 totaled $17.9 million and $10.4 million, respectively. Now that SeaBright’s exit from the mandatory renewal process has been approved, the Company expects that SeaBright will no longer generate premiums written other than for small adjustments related to premium audits and reinstatement premiums on previously written policies.

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

 

Purchase price

   $ 252,091   
  

 

 

 

Net assets acquired at fair value

   $ 252,091   
  

 

 

 

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

 

ASSETS

  

Short-term investments, trading, at fair value

   $ 25,171   

Fixed maturities, trading, at fair value

     683,780   
  

 

 

 

Total investments

     708,951   

Cash and cash equivalents

     41,846   

Accrued interest receivable

     6,344   

Premiums receivable

     112,510   

Reinsurance balances recoverable

     117,462   

Other assets

     4,515   
  

 

 

 

TOTAL ASSETS

     991,628   
  

 

 

 

LIABILITIES

  

Losses and loss adjustment expenses

     592,774   

Unearned premium

     93,897   

Loans payable

     12,000   

Insurance balances payable

     3,243   

Other liabilities

     37,623   
  

 

 

 

TOTAL LIABILITIES

     739,537   
  

 

 

 

NET ASSETS ACQUIRED AT FAIR VALUE

   $ 252,091   
  

 

 

 

From the date of acquisition to September 30, 2013, the Company earned premiums of $100.3 million, recorded losses incurred of $100.3 million on those earned premiums, and recorded $16.1 million in net losses related to SeaBright in its consolidated statement of earnings.

Pavonia

On March 31, 2013, the Company and its wholly-owned subsidiary, Pavonia Holdings (US), Inc. (“Pavonia”), completed the acquisition of all of the shares of Household Life Insurance Company of Delaware

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2. ACQUISITIONS—(cont’d)

 

(“HLIC DE”) and HSBC Insurance Company of Delaware (“HSBC DE”) from Household Insurance Group Holding Company, a subsidiary of HSBC Holdings plc. HLIC DE and HSBC DE are both Delaware-domiciled insurers in run-off. HLIC DE owns three other insurers domiciled in Michigan, New York, and Arizona, which are also in run-off (collectively with HLIC DE and HSBC DE, the “Pavonia companies”). The aggregate cash purchase price was $155.6 million and was financed in part by a drawing of $55.7 million under the Company’s revolving credit facility. The Pavonia companies wrote various U.S. and Canadian life insurance, including credit life and disability insurance, term life insurance, assumed life reinsurance and annuities.

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

 

Purchase price

   $ 155,564   
  

 

 

 

Net assets acquired at fair value

   $ 155,564   
  

 

 

 

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

 

ASSETS

  

Short-term investments, trading, at fair value

   $ 40,404   

Short-term investments, held-to-maturity, at fair value

     10,268   

Fixed maturities, trading, at fair value

     329,985   

Fixed maturities, held-to-maturity, at fair value

     876,474   
  

 

 

 

Total investments

     1,257,131   

Cash and cash equivalents

     81,849   

Accrued interest receivable

     15,183   

Funds held by reinsured companies

     47,761   

Other assets

     59,002   
  

 

 

 

TOTAL ASSETS

     1,460,926   
  

 

 

 

LIABILITIES

  

Policyholder benefits for life and annuity contracts

     1,255,632   

Reinsurance balances payable

     39,477   

Unearned premium

     5,618   

Other liabilities

     4,635   
  

 

 

 

TOTAL LIABILITIES

     1,305,362   
  

 

 

 

NET ASSETS ACQUIRED AT FAIR VALUE

   $ 155,564   
  

 

 

 

As of March 31, 2013, the date of acquisition of the Pavonia companies, all of the companies were either in run-off or, immediately following the acquisition, were placed into run-off, and accordingly are no longer writing any new policies. The Pavonia companies will continue to collect premiums in relation to the unexpired policies assumed on acquisition.

For the period from the date of the acquisition to September 30, 2013, the Company had earned premiums of $63.5 million, recorded life and annuity claim costs of $61.4 million on those earned premiums, and recorded $1.7 million in net losses related to the Pavonia companies in its consolidated statement of earnings.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2. ACQUISITIONS—(cont’d)

 

Pro Forma Financial Information—Pavonia and Arden

The following pro forma condensed combined income statement for the three months ended September 30, 2013 and 2012 and nine months ended September 30, 2013 and 2012 combines the historical consolidated statements of earnings of the Company (inclusive of those of SeaBright since its acquisition on February 7, 2013) with those of Arden and the Pavonia companies, giving effect to the business combinations and related transactions of Arden and the Pavonia companies as if they had occurred on January 1, 2013 and 2012, respectively. The unaudited pro forma data does not necessarily represent results that would have occurred if the acquisitions of Arden and the Pavonia companies had taken place at the beginning of each period presented, nor is it necessarily indicative of future results.

 

Three Months Ended September 30,

   2013     2012  

Total income

   $ 123,123      $ 130,583   

Total expenses

     (80,013     (81,527

Noncontrolling interest

     (3,330     (7,469
  

 

 

   

 

 

 

Net earnings

   $ 39,780      $ 41,587   
  

 

 

   

 

 

 

Net earnings per ordinary share—basic

   $ 2.41      $ 2.53   
  

 

 

   

 

 

 

Net earnings per ordinary share—diluted

   $ 2.38      $ 2.49   
  

 

 

   

 

 

 

Nine Months Ended September 30,

   2013     2012  

Total income

   $ 347,553      $ 507,945   

Total expenses

     (270,002     (285,894

Noncontrolling interest

     (8,903     (60,402
  

 

 

   

 

 

 

Net earnings

   $ 68,648      $ 161,649   
  

 

 

   

 

 

 

Net earnings per ordinary share—basic

   $ 4.16      $ 9.84   
  

 

 

   

 

 

 

Net earnings per ordinary share—diluted

   $ 4.11      $ 9.69   
  

 

 

   

 

 

 

 

3. SIGNIFICANT NEW BUSINESS

Shelbourne

Effective January 1, 2013, Lloyd’s Syndicate 2008 (“S2008”), which is managed by the Company’s wholly-owned subsidiary and Lloyd’s managing agent, Shelbourne Syndicate Services Limited, entered into a reinsurance to close contract of the 2009 underwriting year of account of another Lloyd’s syndicate and a 100% quota share reinsurance agreement with a further Lloyd’s syndicate in respect of its 2010 underwriting year of account, under which S2008 assumed total gross insurance reserves of approximately £33.8 million (approximately $51.4 million) for consideration of an equal amount.

American Physicians

On April 26, 2013, the Company, through its wholly-owned subsidiary, Providence Washington Insurance Company (“PWIC”), completed the assignment and assumption of a portfolio of workers’ compensation business from American Physicians Assurance Corporation and APSpecialty Insurance Company (collectively “APS”). Total assets and liabilities assumed were approximately $35.3 million.

 

19


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

3. SIGNIFICANT NEW BUSINESS—(cont’d)

 

Reciprocal of America

On July 6, 2012, PWIC entered into a definitive loss portfolio transfer reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers’ compensation business. The estimated total liabilities to be assumed are approximately $169.0 million, with an equivalent amount of assets to be received as consideration. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close in the fourth quarter of 2013.

 

4. INVESTMENTS

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:

 

     September 30,
2013
     December 31,
2012
 

U.S. government and agency

   $ 430,315       $ 361,906   

Non-U.S. government

     453,378         265,722   

Corporate

     2,331,145         1,598,876   

Municipal

     61,732         20,446   

Residential mortgage-backed

     185,262         115,594   

Commercial mortgage-backed

     112,933         130,848   

Asset-backed

     274,148         78,929   
  

 

 

    

 

 

 

Total fixed maturity and short-term investments

     3,848,913         2,572,321   

Equities—U.S.

     106,004         92,406   

Equities—International

     39,719         22,182   
  

 

 

    

 

 

 
   $ 3,994,636       $ 2,686,909   
  

 

 

    

 

 

 

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 September 30, 2013

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 522,425         13.5

AA

     1,400,357         36.4

A

     1,317,261         34.2

BBB or lower

     576,068         15.0

Not Rated

     32,802         0.9
  

 

 

    

 

 

 
   $ 3,848,913         100.0
  

 

 

    

 

 

 

 

20


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

As at December 31, 2012

   Fair
Value
     % of Total
Fair Value
 

AAA

   $ 418,297         16.3

AA

     958,267         37.2

A

     812,428         31.6

BBB or lower

     376,347         14.6

Not Rated

     6,982         0.3
  

 

 

    

 

 

 
   $ 2,572,321         100.0
  

 

 

    

 

 

 

Held-to-maturity

The Company holds a portfolio of held-to-maturity securities to support the Pavonia annuity business. The amortized cost and estimated fair values of the Company’s fixed maturity securities and short-term investments classified as held-to-maturity were as follows:

 

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

As at September 30, 2013

          

U.S. government and agency

   $ 19,865       $ —        $ (1,534   $ 18,331   

Non-U.S. government

     31,371         15         (1,631     29,755   

Corporate

     820,995         136         (48,227     772,904   

Residential mortgage-backed

     192         1         (1     192   

Asset-backed

     8,142         5         —         8,147   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 880,565       $ 157       $ (51,393   $ 829,329   
  

 

 

    

 

 

    

 

 

   

 

 

 

As at September 30, 2013, all securities classified as residential mortgage-backed were securities issued by U.S. governmental agencies.

As at December 31, 2012, the Company had no investments classified as held-to-maturity.

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

 

As at September 30, 2013

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 15,302       $ 15,321         1.8

Due after one year through five years

     85,513         84,538         10.2

Due after five years through ten years

     103,299         99,912         12.0

Due after ten years

     668,117         621,219         74.9
  

 

 

    

 

 

    

 

 

 
     872,231         820,990         98.9

Residential mortgage-backed

     192         192         0.1

Asset-backed

     8,142         8,147         1.0
  

 

 

    

 

 

    

 

 

 
   $ 880,565       $ 829,329         100.0
  

 

 

    

 

 

    

 

 

 

 

21


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. 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 held-to-maturity:

 

As at September 30, 2013

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 56,217       $ 53,761         6.5

AA

     258,176         241,188         29.1

A

     500,614         470,615         56.7

BBB or lower

     54,990         53,192         6.4

Not Rated

     10,568         10,573         1.3
  

 

 

    

 

 

    

 

 

 
   $ 880,565       $ 829,329         100.0
  

 

 

    

 

 

    

 

 

 

Available-for-sale

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

 

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

As at September 30, 2013

          

U.S. government and agency

   $ 3,728       $ 329       $ —       $ 4,057   

Non-U.S. government

     35,123         1,849         —         36,972   

Corporate

     17,472         1,233         —         18,705   

Residential mortgage-backed

     3,531         150         (52     3,629   

Asset-backed

     238         —          (10     228   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 60,092       $ 3,561       $ (62   $ 63,591   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

As at December 31, 2012

          

U.S. government and agency

   $ 4,503       $ 454       $ —       $ 4,957   

Non-U.S. government

     120,634         3,373         (151     123,856   

Corporate

     115,139         2,379         (524     116,994   

Residential mortgage-backed

     4,308         230         (40     4,498   

Commercial mortgage-backed

     474         7         —         481   

Asset-backed

     338         9         (12     335   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 245,396       $ 6,452       $ (727   $ 251,121   
  

 

 

    

 

 

    

 

 

   

 

 

 

Included within residential mortgage-backed securities as at September 30, 2013 are securities issued by U.S. governmental agencies with a fair value of $2,782 (as at December 31, 2012: $3,500 within residential and commercial mortgage-backed securities).

 

22


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

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

 

     12 Months or Greater     Less Than 12 Months     Total  

As at September 30, 2013

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

Residential mortgage-backed

   $ 954       $ (50   $ 179       $ (2   $ 1,133       $ (52

Asset-backed

     91         (6     137         (4     228         (10
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,045       $ (56   $ 316       $ (6   $ 1,361       $ (62
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     12 Months or Greater     Less Than 12 Months     Total  

As at December 31, 2012

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

Non-U.S. government

   $ 2,646       $ (82   $ 2,399       $ (69   $ 5,045       $ (151

Corporate

     13,936         (86     8,689         (438     22,625         (524

Residential mortgage-backed

     1,124         (40     —          —         1,124         (40

Asset-backed

     174         (12     —          —         174         (12
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 17,880       $ (220   $ 11,088       $ (507   $ 28,968       $ (727
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As at September 30, 2013 and December 31, 2012, the number of securities classified as available-for-sale in an unrealized loss position was 14 and 30, respectively, with a fair value of $1.4 million and $29.0 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 9 and 23, respectively. As of September 30, 2013, none of these securities were considered to be other than temporarily impaired.

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

 

As at September 30, 2013

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 12,254       $ 12,563         19.8

Due after one year through five years

     41,286         43,724         68.8

Due after ten years

     2,783         3,447         5.4
  

 

 

    

 

 

    

 

 

 
     56,323         59,734         94.0

Residential mortgage-backed

     3,531         3,629         5.7

Asset-backed

     238         228         0.3
  

 

 

    

 

 

    

 

 

 
   $ 60,092       $ 63,591         100.0
  

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

As at December 31, 2012

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

Due in one year or less

   $ 173,113       $ 173,949         69.3

Due after one year through five years

     64,089         68,298         27.2

Due after ten years

     3,074         3,560         1.4
  

 

 

    

 

 

    

 

 

 
     240,276         245,807         97.9

Residential mortgage-backed

     4,308         4,498         1.8

Commercial mortgage-backed

     474         481         0.2

Asset-backed

     338         335         0.1
  

 

 

    

 

 

    

 

 

 
   $ 245,396       $ 251,121         100.0
  

 

 

    

 

 

    

 

 

 

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

 

As at September 30, 2013

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 37,136       $ 38,968         61.3

AA

     10,133         10,761         16.9

A

     3,824         4,479         7.0

BBB or lower

     8,901         9,155         14.4

Not Rated

     98         228         0.4
  

 

 

    

 

 

    

 

 

 
   $ 60,092       $ 63,591         100.0
  

 

 

    

 

 

    

 

 

 

 

As at December 31, 2012

   Amortized
Cost
     Fair
Value
     % of Total
Fair Value
 

AAA

   $ 107,615       $ 110,829         44.1

AA

     59,535         60,742         24.2

A

     72,773         73,935         29.4

BBB or lower

     5,281         5,197         2.1

Not Rated

     192         418         0.2
  

 

 

    

 

 

    

 

 

 
   $ 245,396       $ 251,121         100.0
  

 

 

    

 

 

    

 

 

 

Other-Than-Temporary Impairment Process

The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale and held-to-maturity represent impairment losses that are other-than-temporary and whether a credit loss exists in accordance with its accounting policies. In assessing whether it is more likely than not that the Company will be required to sell a fixed maturity investment before its anticipated recovery, the Company considers various factors including its future cash flow requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short-term investments and fixed maturity investments available-for-sale in an unrealized gain position, and other relevant factors. For the nine months ended September 30, 2013, the Company did not recognize any other-than-temporary impairment losses due to required sales. The Company determined that, as at September 30, 2013, no credit losses existed.

 

24


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

Other Investments

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

 

     September 30,
2013
     December 31,
2012
 

Private equity funds

   $ 154,641       $ 127,696   

Fixed income funds

     191,203         156,235   

Fixed income hedge funds

     66,370         53,933   

Equity fund

     69,791         55,881   

Real estate debt fund

     31,885         16,179   

Other

     4,417         4,921   
  

 

 

    

 

 

 
   $ 518,307       $ 414,845   
  

 

 

    

 

 

 

These investments are discussed in further detail below.

Private equity funds

This class comprises several private equity funds that invest primarily in the financial services industry. All of the Company’s investments in private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate those investments. These restrictions have been in place since the dates the initial investments were made by the Company.

As of September 30, 2013 and December 31, 2012, the Company had $154.6 million and $127.7 million, respectively, of other investments recorded in private equity funds, which represented 2.4% and 3.0% of total investments, cash and cash equivalents and restricted cash and cash equivalents at September 30, 2013 and December 31, 2012, respectively. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. Management regularly reviews and discusses fund performance with their fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments

Fixed income funds

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

Fixed income hedge funds

This class comprises hedge funds that invest in a diversified portfolio of debt securities. The hedge funds are not currently eligible for redemption due to imposed lock-up periods of three years from the time of the Company’s initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice. The first investment in the funds will be eligible for redemption in March 2014.

Equity fund

This class is comprised of an equity fund that invests in a diversified portfolio of international publicly-traded equity securities.

 

25


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

Real estate debt fund

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

Other

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

Redemption restrictions on other investments

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

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

At September 30, 2013, the Company had $2.9 million of investments subject to side-pockets ($nil as of December 31, 2012). Management has not made any adjustments to the fair value estimate reported by the fund managers for the side-pocketed investments.

The following tables present the fair value, unfunded commitments and redemption frequency for all other investments. These investments are all valued at net asset value as at September 30, 2013 and December 31, 2012:

 

September 30, 2013

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

Private equity funds

  $ 154,641      $ —        $ 154,641      $ 101,859      Not eligible

Fixed income funds

    191,203        —          191,203        —        Daily to monthly

Fixed income hedge funds

    66,370        2,855        63,515        —        Quarterly after lock-up periods expire

Equity fund

    69,791        —          69,791        —        Bi-monthly

Real estate debt fund

    31,885        —          31,885        —        Monthly

Other

    4,417        —          4,417        655      Not eligible
 

 

 

   

 

 

   

 

 

   

 

 

   
  $ 518,307      $ 2,855      $ 515,452      $ 102,514     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

26


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

December 31, 2012

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

Private equity funds

  $ 127,696      $ —        $ 127,696      $ 86,936      Not eligible

Fixed income funds

    156,235        —          156,235        —        Daily to monthly

Fixed income hedge funds

    53,933        —          53,933        —        Quarterly after lock-up periods expire

Equity fund

    55,881        —          55,881        —        Bi-monthly

Real estate debt fund

    16,179        —          16,179        —        Monthly

Other

    4,921        —          4,921        655      Not eligible
 

 

 

   

 

 

   

 

 

   

 

 

   
  $ 414,845      $ —        $ 414,845      $ 87,591     
 

 

 

   

 

 

   

 

 

   

 

 

   

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. Fair values for all securities in the fixed maturities portfolio are independently provided by the investment custodian, investment accounting service provider and investment managers, each of which utilize internationally recognized independent pricing services. Interactive Data Corporation is, however, the main pricing service utilized to estimate the fair value measurements for the Company’s fixed maturity investments. The Company records the unadjusted price provided by the investment custodian, investment accounting service provider or the investment manager and validates this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to the Company’s

 

27


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

knowledge of the current investment market. The Company’s internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.

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

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

 

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

 

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

 

    Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at September 30, 2013, 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.

 

28


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

    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 September 30, 2013, the Company had no residential or commercial mortgage-backed securities classified as Level 3.

Equities

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

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

Other investments

The Company has ongoing due diligence processes with respect to funds in which it invests and their managers. These processes are designed to assist the Company in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements for funds annually, and regularly reviews and discusses the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, the Company may incorporate adjustments to the reported net asset value (and not use the permitted practical expedient) on an investment by investment basis. These adjustments may involve significant management judgment.

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

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

 

29


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

For its investments in fixed income hedge funds, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The investments in the funds are classified as Level 3.

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

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

Fair Value Measurements

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

 

     September 30, 2013  
     Quoted Prices in
Active Markets
for Identical
Assets

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

(Level 3)
     Total Fair
Value
 

U.S. government and agency

   $ —         $ 434,372       $ —         $ 434,372   

Non-U.S. government

     —           490,350         —           490,350   

Corporate

     —           2,349,253         597         2,349,850   

Municipal

     —           61,732         —           61,732   

Residential mortgage-backed

     —           188,891         —           188,891   

Commercial mortgage-backed

     —           112,933         —           112,933   

Asset-backed

     —           274,376         —           274,376   

Equities—U.S.

     94,037         7,567         4,400         106,004   

Equities—International

     19,910         19,809         —           39,719   

Other investments

     —           261,066         257,241         518,307   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 113,947       $ 4,200,349       $ 262,238       $ 4,576,534   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 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

   $ —        $ 366,863       $ —        $ 366,863   

Non-U.S. government

     —          389,578         —          389,578   

Corporate

     —          1,715,330         540         1,715,870   

Municipal

     —          20,446         —          20,446   

Residential mortgage-backed

     —          120,092         —          120,092   

Commercial mortgage-backed

     —          131,329         —          131,329   

Asset-backed

     —          79,264         —          79,264   

Equities—U.S.

     83,947         5,058         3,401         92,406   

Equities—International

     10,377         11,805         —          22,182   

Other investments

     —          212,115         202,730         414,845   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 94,324       $ 3,051,880       $ 206,671       $ 3,352,875   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

The following table presents the Company’s fair value hierarchy for those assets classified as held-to-maturity in the consolidated balance sheet but for which disclosure of the fair value is required as of September 30, 2013 (there were no assets classified as held-to-maturity as of December 31, 2012):

 

     September 30, 2013  
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Fair
Value
 

U.S. government and agency

   $ —         $ 18,331       $ —         $ 18,331   

Non-U.S. government

     —           29,755         —           29,755   

Corporate

     —           772,904         —           772,904   

Residential mortgage-backed

     —           192         —           192   

Asset-backed

     —           8,147         —           8,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ —         $ 829,329       $ —         $ 829,329   
  

 

 

    

 

 

    

 

 

    

 

 

 

During 2013 and 2012, the Company had no transfers between Levels 1 and 2.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended September 30, 2013:

 

    Fixed
Maturity
Investments
    Other
Investments
    Equity
Securities
    Total  

Level 3 investments as of July 1, 2013

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

Purchases

    —          5,376        —          5,376   

Sales

    —          (8,825     —          (8,825

Total realized and unrealized (losses) gains through earnings

    (9     11,376        (100     11,267   

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

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Level 3 investments as of September 30, 2013

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

 

 

   

 

 

   

 

 

   

 

 

 

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

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended September 30, 2012:

 

    Fixed
Maturity
Investments
    Other
Investments
    Equity
Securities
    Total  

Level 3 investments as of July 1, 2012

  $ 562      $ 181,740      $ 3,310      $ 185,612   

Purchases

    —         7,084        —         7,084   

Sales

    —         (1,171     —         (1,171

Total realized and unrealized gains (losses) through earnings

    2        576        (18     560   

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

    —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Level 3 investments as of September 30, 2012

  $ 564      $ 188,229      $ 3,292      $ 192,085   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

31


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

The amount of net gains (losses) for the three months ended September 30, 2013 included in earnings attributable to the fair value of changes in assets still held at September 30, 2012 was $0.3 million. All of this amount was included in net realized and unrealized gains.

The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the nine months ended September 30, 2013:

 

    Fixed
Maturity
Investments
    Other
Investments
    Equity
Securities
    Total  

Level 3 investments as of January 1, 2013

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

Purchases

    —          39,533        —          39,533   

Sales

    —          (18,578     —          (18,578

Total realized and unrealized gains through earnings

    57        33,556        998        34,611   

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

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Level 3 investments as of September 30, 2013

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

 

 

   

 

 

   

 

 

   

 

 

 

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

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

    —         57,246        —         57,246   

Sales

    —         (14,335     —         (14,335

Total realized and unrealized gains through earnings

    45        7,591        317        7,953   

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

    —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Level 3 investments as of September 30, 2012

  $ 564      $ 188,229      $ 3,292      $ 192,085   
 

 

 

   

 

 

   

 

 

   

 

 

 

The amount of net gains (losses) for the nine months ended September 30, 2012 included in earnings attributable to the fair value of changes in assets still held at September 30, 2012 was $8.1 million. All of this amount was included in net realized and unrealized gains.

 

32


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

Net Realized and Unrealized Gains

Components of net realized and unrealized gains are as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2013             2012             2013             2012      

Gross realized gains on available-for-sale securities

   $ 89        3,735      $ 354      $ 5,209   

Gross realized losses on available-for-sale securities

     (56     (27     (42     (450

Net realized (losses) gains on trading securities

     (4,508     3,824        5,082        12,684   

Net unrealized gains (losses) on trading securities

     21,360        13,059        (16,390     25,382   

Net realized and unrealized gains on other investments

     20,125        7,689        50,207        12,528   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains

   $ 37,010        28,280      $ 39,211      $ 55,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 20,923        112,928      $ 181,066      $ 296,537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income

Major categories of net investment income are summarized as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2013             2012             2013             2012      

Interest from fixed maturity investments

   $ 33,690      $ 20,027      $ 89,067      $ 62,019   

Interest from cash and cash equivalents and short-term investments

     3,739        4,525        11,048        11,684   

Net amortization of bond premiums and discounts

     (13,668     (6,208     (36,929     (22,634

Dividends from equities

     913        593        3,309        1,904   

Other investments

     7        —         (39     —    

Interest on other receivables

     246        1,027        1,819        6,242   

Other income

     1,088        733        3,079        4,091   

Interest on deposits held with clients

     298        377        3,166        988   

Investment expenses

     (1,304     (1,416     (4,296     (3,299
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 25,009      $ 19,658      $ 70,224      $ 60,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. INVESTMENTS—(cont’d)

 

Restricted Assets

The Company is required to maintain investments and cash and cash equivalents on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted assets as of September 30, 2013 and December 31, 2012 was as follows:

 

     September 30
2013
     December 31,
2012
 

Collateral in trust for third party agreements

   $ 1,619,130       $ 570,391   

Assets on deposit with regulatory authorities

     547,331         212,012   

Collateral for secured letter of credit facility

     345,304         246,608   
  

 

 

    

 

 

 
   $ 2,511,765       $ 1,029,011   
  

 

 

    

 

 

 

The increase of approximately $1.48 billion in restricted assets related primarily to restricted assets acquired in connection with the Company’s acquisitions of SeaBright, the Pavonia companies and Arden.

 

5. DERIVATIVE INSTRUMENTS

The Company uses foreign currency forward contracts as part of its overall foreign currency risk management strategy or to obtain exposure to a particular financial market, as well as for yield enhancement. These derivatives were not designated as hedging investments.

The following table sets forth the foreign currency forward contracts outstanding as at September 30, 2013 and December 31, 2012 and the estimated fair value of derivative instruments recorded within other assets on the condensed consolidated balance sheet:

 

Foreign Currency

Forward Contract

   Contract Date      Settlement
Date
     Contract
Amount
   Settlement
Amount
     Fair Value as at  
               September 30,
2013
    December 31,
2012
 

Australian dollar

     July 1, 2013         January 3, 2014       AU$45.0
million
   $ 41,036       $ (1,039   $ —    

Australian dollar

     February 8, 2012         May 10, 2013       AU$35.0
million
     36,099         —         (238

British pound

     March 6, 2012         March 6, 2013       UKP17.0
million
     26,611         —         (1,023
              

 

 

   

 

 

 
               $ (1,039   $ (1,261
              

 

 

   

 

 

 

 

34


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5. DERIVATIVE INSTRUMENTS—(cont’d)

 

The following tables set forth the changes in fair value and realized (losses) gains on derivative instruments recorded in net earnings for the three and nine month periods ended September 30, 2013 and 2012, respectively.

 

                               Net Foreign Exchange Losses  

Foreign Currency

Forward Contract

   Contract Date      Settlement
Date
     Contract
Amount
   Settlement
Amount
     Three Months Ended
September 30,
 
                       2013                     2012          

Australian dollar

     July 1, 2013         January 3, 2014       AU$45.0
million
   $ 41,036       $ (1,039   $ —    

Australian dollar

     February 8, 2012         December 19, 2012       AU$25.0
million
     26,165         —         (518

Australian dollar

     February 8, 2012         May 10, 2013       AU$35.0
million
     36,099         —         (785

British pound

     March 6, 2012         March 6, 2013       UKP17.0
million
     26,611         —         (370
              

 

 

   

 

 

 
               $ (1,039   $ (1,673
              

 

 

   

 

 

 

 

                               Net Foreign Exchange Gains
(Losses)
 

Foreign Currency

Forward Contract

   Contract Date      Settlement
Date
     Contract
Amount
   Settlement
Amount
     Nine Months Ended
September 30,
 
                       2013                     2012          

Australian dollar

     July 1, 2013         January 3, 2014       AU$45.0
million
   $ 41,036       $ (1,039   $ —    

Australian dollar

     February 8, 2012         December 19, 2012       AU$25.0
million
     26,165         —         (297

Australian dollar

     February 8, 2012         May 10, 2013       AU$35.0
million
     36,099         303        (841

British pound

     March 6, 2012         March 6, 2013       UKP17.0
million
     26,611         1,023        167   
              

 

 

   

 

 

 
               $ 287      $ (971
              

 

 

   

 

 

 

 

6. PREMIUMS WRITTEN AND EARNED

The following tables provide a summary of net premiums written and earned in our non-life run-off segment and our life and annuities segment for the three and nine month periods ended September 30, 2013 and 2012.

 

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

Non-life run-off

        

Direct

   $ 1,510      $ 30,198      $ 17,414      $ 108,399   

Assumed

     (116     560        522        1,909   

Ceded

     (1,825     (2,624     (7,489     (10,038
  

 

 

   

 

 

   

 

 

   

 

 

 

Net

   $ (431   $ 28,134      $ 10,447      $ 100,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Life and annuities

        

Life

   $ 29,459      $ 30,540      $ 63,193      $ 65,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

6. PREMIUMS WRITTEN AND EARNED—(cont’d)

 

     Three Months Ended September 30, 2012      Nine Months Ended September 30, 2012  
         Premiums Written              Premiums Earned              Premiums Written              Premiums Earned      

Life and annuities

           

Life

   $ 822       $ 822       $ 2,692       $ 2,692   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net premiums written by SeaBright totaled $10.5 million and $(0.4) million from the date of acquisition to September 30, 2013 and for the three months ended September 30, 2013, respectively, and net earned premiums, over the same periods, totaled $100.3 million and $28.1 million, respectively. SeaBright continues to collect premiums in respect of premium audits and reinstatement premiums on previously written policies.

Life and annuity premiums written by the Company’s life and annuities segment, which includes both Pavonia and Laguna Life Limited (“Laguna”), totaled $29.5 million and $63.2 million for the three and nine months ended September 30, 2013, respectively, and net earned premiums, over the same periods, totaled $30.5 million and $65.7 million, respectively. The Company’s life companies continue to collect premiums in relation to the unexpired policies assumed on acquisition.

For the three and nine months ended September 30, 2012, our life and annuities segment, which consisted of Laguna only, had net written and earned premiums of $0.8 million and $2.7 million, respectively.

 

7. REINSURANCE BALANCES RECOVERABLE

 

     September 30, 2013  
     Non-life
Run-off
    Life and
Annuities
     Total  

Recoverable from reinsurers on:

       

Outstanding losses

   $ 842,736      $ 29,456       $ 872,192   

Losses incurred but not reported

     414,587        813         415,400   

Fair value adjustments

     (71,148     —           (71,148
  

 

 

   

 

 

    

 

 

 

Total reinsurance reserves recoverable

     1,186,175        30,269         1,216,444   

Paid losses recoverable

     177,990        911         178,901   
  

 

 

   

 

 

    

 

 

 
   $ 1,364,165      $ 31,180       $ 1,395,345   
  

 

 

   

 

 

    

 

 

 

 

     December 31, 2012  
     Non-life
Run-off
    Life and
Annuities
     Total  

Recoverable from reinsurers on:

       

Outstanding losses

   $ 665,303      $ —         $ 665,303   

Losses incurred but not reported

     295,922        —           295,922   

Fair value adjustments

     (85,005     —           (85,005
  

 

 

   

 

 

    

 

 

 

Total reinsurance reserves recoverable

     876,220        —           876,220   

Paid losses recoverable

     246,408        291         246,699   
  

 

 

   

 

 

    

 

 

 
   $ 1,122,628      $ 291       $ 1,122,919   
  

 

 

   

 

 

    

 

 

 

 

36


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

7. REINSURANCE BALANCES RECOVERABLE—(cont’d)

 

Non-life run-off

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

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

As of September 30, 2013 and December 31, 2012, the Company had total non-life run-off reinsurance balances recoverable of $1.36 billion and $1.12 billion, respectively. The increase of $241.5 million in total non-life run-off reinsurance balances recoverable was primarily a result of the completion of acquisitions in the period partially offset by commutations and cash collections made during the nine months ended September 30, 2013.

At September 30, 2013 and December 31, 2012, the provision for uncollectible reinsurance recoverable relating to total non-life run-off reinsurance balances recoverable was $337.4 million and $343.9 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the balances are first allocated to applicable reinsurers which involves management judgment. As part of this process, ceded incurred but not reported (“IBNR”) reserves are allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total non-life run-off reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of September 30, 2013 decreased to 19.8% as compared to 23.4% as of December 31, 2012, primarily as a result of reinsurance balances recoverable of companies acquired during the period having minimal provisions for uncollectible reinsurance recoverable.

Top Ten Reinsurers—Non-Life Run-Off

At September 30, 2013 and December 31, 2012, the top ten reinsurers of the Company’s non-life run-off business accounted for 68.2% and 63.1%, respectively, of total non-life reinsurance balances recoverable (which includes loss reserves recoverable and recoverables on paid losses) and included $284.1 million and $194.5 million, respectively, of IBNR reserves recoverable. With the exception of one BBB+ rated reinsurer and one non-rated reinsurer from which $34.2 million and $256.1 million, respectively, was recoverable (December 31, 2012: $37.7 million and $nil, respectively), the other top ten reinsurers, as at September 30, 2013 and December 31, 2012, were all rated A- or better. Reinsurance balances recoverable by reinsurer were as follows:

 

     September 30, 2013     December 31, 2012  
     Reinsurance
Balances
Recoverable
     % of
Total
    Reinsurance
Balances
Recoverable
     % of
Total
 

Top ten reinsurers

   $ 929,913         68.2   $ 708,953         63.1

Other reinsurers’ balances > $1 million

     421,153         30.9     409,666         36.5

Other reinsurers’ balances < $1 million

     13,099         0.9     4,300         0.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,364,165         100.0   $ 1,122,919         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

37


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

7. REINSURANCE BALANCES RECOVERABLE—(cont’d)

 

As at September 30, 2013, reinsurance balances recoverable from a single non-rated reinsurer with a carrying value of $256.1 million represented 10% or more of the Company’s total non-life run-off reinsurance balances recoverable, as compared to $144.1 million from an A+ rated reinsurer as at December 31, 2012. Of the $256.1 million and $144.1 million recoverable from reinsurers at September 30, 2013 and December 31, 2012, $256.1 million and $121.7 million, respectively, were secured by trust funds held for the benefit of the Company’s insurance and reinsurance subsidiaries. Refer to Note 17 for information regarding affiliations with this reinsurer.

Life and annuities

As at September 30, 2013, the reinsurance balances recoverable associated with the Company’s life and annuities business consists of term life business ceded by Pavonia to reinsurers under various quota share arrangements. All of the reinsurers are rated A- and above by a major rating agency.

 

8. LOSSES AND LOSS ADJUSTMENT EXPENSE LIABILITIES

 

     September 30,
2013
    December 31,
2012
 

Outstanding

   $ 2,762,931      $ 2,358,330   

Incurred but not reported

     1,870,692        1,588,309   

Fair value adjustment

     (233,205     (296,512
  

 

 

   

 

 

 
   $ 4,400,418      $ 3,650,127   
  

 

 

   

 

 

 

Losses and loss adjustment expense liabilities increased by $750.3 million in the nine months ended September 30, 2013 primarily as a result of the completion of the acquisitions of SeaBright and Arden, the assumption of Lloyd’s syndicate business by S2008 and the assumption by PWIC of a portfolio of workers’ compensation business from APS.

 

38


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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

Three Months Ended September 30, 2013

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expense liabilities for the three months ended September 30, 2013 and 2012. Losses incurred and paid are reflected net of reinsurance recoverables.

 

     Three Months Ended September 30,  
                 2013                             2012              

Balance as at July 1 (1)

   $ 4,041,236      $ 3,797,609   

Less: total reinsurance reserves recoverable

     888,970        1,064,854   
  

 

 

   

 

 

 
     3,152,266        2,732,755   

Net reduction in ultimate losses and loss adjustment expense liabilities related to:

    

Current period

     28,134        —     

Prior periods

     (44,610     (62,547
  

 

 

   

 

 

 

Total net reduction in ultimate losses and loss adjustment expense liabilities

     (16,476     (62,547
  

 

 

   

 

 

 

Net losses paid related to:

    

Current period

     (9,668     —     

Prior periods

     (86,682     (80,675
  

 

 

   

 

 

 

Total net losses paid

     (96,350     (80,675
  

 

 

   

 

 

 

Effect of exchange rate movement

     33,182        11,686   

Acquired on purchase of subsidiaries

     140,443        —     

Assumed business

     1,178        19,403   
  

 

 

   

 

 

 

Net balance as at September 30

     3,214,243        2,620,622   

Plus: total reinsurance reserves recoverable

     1,186,175        1,004,572   
  

 

 

   

 

 

 

Balance as at September 30

   $ 4,400,418      $ 3,625,194   
  

 

 

   

 

 

 

 

(1) The Company has reclassified outstanding losses and loss adjustment expense liabilities of $12.7 million to policy benefits for life and annuity contracts as at July 1, 2012 to conform to the current period presentation. These amounts are associated with Laguna, which now forms part of the Company’s life and annuities segment that was established following the acquisition of the Pavonia companies.

 

39


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended September 30, 2013 and 2012 was due to the following:

 

    Three Months Ended September 30,  
    2013     2012  
    Prior Periods     Current Period     Total     Prior Periods     Current Period     Total  

Net losses paid

  $ (86,682   $ (9,668   $ (96,350   $ (80,675   $ —        $ (80,675

Net change in case and LAE reserves

    76,055        (8,321     67,734        104,881        —          104,881   

Net change in IBNR reserves

    38,477        (10,145     28,332        34,300        —          34,300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reduction (increase) in estimates of net ultimate losses

    27,850        (28,134     (284     58,506        —          58,506   

Reduction in provisions for bad debt

    5,465        —          5,465        —          —          —     

Reduction in provisions for unallocated loss adjustment expense liabilities

    16,320        —          16,320        12,579        —          12,579   

Amortization of fair value adjustments

    (5,025     —          (5,025     (8,538     —          (8,538
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 44,610      $ (28,134   $ 16,476      $ 62,547      $ —        $ 62,547   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, less amounts recoverable.

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended September 30, 2013 of $16.5 million included incurred losses and net change in IBNR reserves of $28.1 million related to premiums earned in the period by SeaBright. Excluding SeaBright’s increase in net ultimate losses of $28.1 million, ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $44.6 million, which was attributable to a reduction in estimates of net ultimate losses of $27.9 million, a reduction in provision for bad debt of $5.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $16.3 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments of $5.0 million.

Excluding the impact of net ultimate losses of $28.1 million relating to SeaBright, the reduction in estimates of net ultimate losses of $27.9 million (comprised of net incurred loss development of $10.6 million and reduction in IBNR reserves of $38.5 million) related primarily to:

 

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

 

  (ii)

an aggregate reduction in IBNR reserves of $12.4 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial

 

40


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

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

 

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

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

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended September 30, 2012 of $62.5 million was attributable to a reduction in estimates of net ultimate losses of $58.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $12.6 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments of $8.5 million.

The reduction in estimates of net ultimate losses of $58.5 million (comprised of net favorable incurred loss development of $24.2 million and reductions in IBNR reserves of $34.3 million) related primarily to:

 

  (i) the Company’s review of historic case reserves for eleven of its insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 4,400 advised case reserves with an aggregate value of $27.6 million;

 

  (ii) an aggregate reduction in IBNR reserves of $9.7 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expense relating to non-commuted exposures in twelve of the Company’s insurance and reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for these subsidiaries was reduced as a result of the combined impact on all classes of business of loss development activity during 2012, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts; and

 

  (iii) a reduction in estimates of net ultimate losses of $21.2 million following the completion of two commutations and four policy buybacks and settlements of assumed reinsurance liabilities.

 

41


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

Nine Months Ended September 30, 2013

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expense liabilities for the nine months ended September 30, 2013 and 2012. Losses incurred and paid are reflected net of reinsurance recoverables.

 

     Nine Months Ended September 30,  
                 2013                             2012              

Balance as at January 1 (1)

   $ 3,650,127      $ 4,272,081   

Less: total reinsurance reserves recoverable

     876,220        1,383,003   
  

 

 

   

 

 

 
     2,773,907        2,889,078   

Net reduction in ultimate losses and loss adjustment expense liabilities related to:

    

Current period

     100,270        —     

Prior periods

     (126,908     (141,730
  

 

 

   

 

 

 

Total net reduction in ultimate losses and loss adjustment expense liabilities

     (26,638     (141,730
  

 

 

   

 

 

 

Net losses paid related to:

    

Current period

     (23,092     —     

Prior periods

     (208,699     (216,120
  

 

 

   

 

 

 

Total net losses paid

     (231,791     (216,120
  

 

 

   

 

 

 

Effect of exchange rate movement

     (2,180     8,870   

Acquired on purchase of subsidiaries

     619,510        —     

Assumed business

     81,435        80,524   
  

 

 

   

 

 

 

Net balance as at September 30

     3,214,243        2,620,622   

Plus: total reinsurance reserves recoverable

     1,186,175        1,004,572   
  

 

 

   

 

 

 

Balance as at September 30

   $ 4,400,418      $ 3,625,194   
  

 

 

   

 

 

 

 

(1) The Company has reclassified outstanding losses and loss adjustment expense liabilities of $11.0 million and $10.8 million to policy benefits for life and annuity contracts as at January 1, 2013 and 2012, respectively, to conform to the current period presentation. These amounts are associated with Laguna, which now forms part of the Company’s life and annuities segment that was established following the acquisition of the Pavonia companies.

 

42


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

The net reduction in ultimate losses and loss adjustment expense liabilities for the nine months ended September 30, 2013 and 2012 was due to the following:

 

    Nine Months Ended September 30,  
    2013     2012  
    Prior Periods     Current
Period
    Total     Prior Periods     Current
Period
    Total  

Net losses paid

  $ (208,699   $ (23,092   $ (231,791   $ (216,120   $ —        $ (216,120

Net change in case and LAE reserves

    212,966        (23,699     189,267        272,837        —          272,837   

Net change in IBNR reserves

    77,146        (53,479     23,667        63,504        —          63,504   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reduction (increase) in estimates of net ultimate losses

    81,413        (100,270     (18,857     120,221        —          120,221   

Reduction in provisions for bad debt

    5,465        —          5,465        2,782        —          2,782   

Reduction in provisions for unallocated loss adjustment expense liabilities

    49,518        —          49,518        37,092        —          37,092   

Amortization of fair value adjustments

    (9,488     —          (9,488     (18,365     —          (18,365
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 126,908      $ (100,270   $ 26,638      $ 141,730      $ —        $ 141,730   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The net reduction in ultimate losses and loss adjustment expense liabilities for the nine months ended September 30, 2013 of $26.6 million included incurred losses and net change in IBNR reserves of $100.3 million related to premiums earned in the period by SeaBright. Excluding SeaBright’s increase in estimates of net ultimate losses of $100.3 million, ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $126.9 million, which was attributable to a reduction in estimates of net ultimate losses of $81.4 million, a reduction in provisions for bad debt of $5.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $49.5 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments of $9.5 million.

Excluding the impact of net ultimate losses of $100.3 million relating to SeaBright, the reduction in estimates of net ultimate losses of $81.4 million (comprised of net favorable incurred loss development of $4.3 million and reduction in IBNR reserves of $77.1 million) related primarily to:

 

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

 

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

 

  (iii) an aggregate reduction in IBNR reserves of $32.7 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures in eleven of the Company’s insurance and reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for these subsidiaries was reduced as a result of the combined impact on all classes of business of loss development activity during 2013, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts.

 

43


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

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

The net reduction in ultimate losses and loss adjustment expense liabilities for the nine months ended September 30, 2012 of $141.7 million was attributable to a reduction in estimates of net ultimate losses of $120.2 million, a reduction in provisions for bad debt of $2.8 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $37.1 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments of $18.4 million.

The reduction in estimates of net ultimate losses of $120.2 million for the nine months ended September 30, 2012 (comprised of net favorable incurred loss development of $56.7 million and reductions in IBNR reserves of $63.5 million) related primarily to:

 

  (i) the Company’s review of historic case reserves for eleven of its insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 4,400 advised case reserves with an aggregate value of $27.6 million;

 

  (ii) an aggregate reduction in IBNR reserves of $9.7 million as a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures in twelve of the Company’s most seasoned insurance and reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for these subsidiaries was reduced as a result of the combined impact on all classes of business of loss development activity during 2012, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts; and

 

  (iii) a reduction in estimates of net ultimate losses of $82.9 million following the completion of eight commutations and four policy buybacks and settlements of assumed reinsurance liabilities, including one of the Company’s largest ten policyholder exposures as at January 1, 2012, and two commutations of ceded reinsurance recoverables, one of which was among the Company’s largest ten reinsurance recoverable balances as at January 1, 2012.

The reduction in provisions for bad debt of $2.8 million for the nine months ended September 30, 2012 resulted from the collection of receivables against which bad debt provisions had been provided for in earlier periods.

 

9. POLICY BENEFITS FOR LIFE AND ANNUITY CONTRACTS

Policy benefits for life and annuity contracts as at September 30, 2013 and December 31, 2012 were as follows:

 

     September 30, 2013     December 31, 2012  

Life

   $ 392,128      $ 11,027   

Annuities

     969,754        —    
  

 

 

   

 

 

 
     1,361,882        11,027   

Fair value adjustments

     (73,734     —    
  

 

 

   

 

 

 
   $ 1,288,148      $ 11,027   
  

 

 

   

 

 

 

 

44


Table of Contents

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

10. RETROSPECTIVELY RATED CONTRACTS

On October 1, 2003, SeaBright began selling workers’ compensation insurance policies for which the premiums varied based on loss experience. Accrued retrospective premiums are determined based upon the loss experience of business subject to such experience rating adjustment, and are determined by and allocated to individual policyholder accounts. Accrued retrospective premiums are recorded as additions to written or earned premium, and return retrospective premiums are recorded as reductions from written or earned premium. During the period from February 7, 2013, the date of acquisition, to September 30, 2013, none of the Company’s direct premiums written related to retrospectively rated contracts. The Company accrued $10.7 million for retrospective premiums receivable and $26.3 million for return retrospective premiums as at September 30, 2013.

 

11. INTANGIBLE ASSETS

 

     Intangible
Assets With a
Definite Life
 

Balance as at December 31, 2012

   $ 211,507   

Acquired during the period

     46,370   

Intangible assets amortization

     (22,086
  

 

 

 

Balance as at September 30, 2013

   $ 235,791   
  

 

 

 

Intangible assets with a definite life represent the fair value adjustments (“FVA”) related to outstanding losses and loss adjustment expenses, policy benefits for life and annuity contracts and reinsurance recoverables. The FVA are recorded as a component of each line item. FVA are amortized in proportion to future premiums for policy benefits for life and annuity contracts and over the estimated payout or recovery period for outstanding losses and loss adjustment expenses and reinsurance recoverables.

The gross carrying value, accumulated amortization and net carrying value of intangible assets with a definite life by type at September 30, 2013 and December 31, 2012 were as follows:

 

     September 30, 2013     December 31, 2012  
     Gross
Carrying
Value
    Accumulated
Amortization
    Net Carrying
Value
    Gross
Carrying
Value
    Accumulated
Amortization
    Net
Carrying
Value
 

Fair value adjustments:

            

Losses and loss adjustment expenses

   $ 516,027      $ (282,822   $ 233,205      $ 552,455      $ (255,943   $ 296,512   

Reinsurance recoverables

     (181,911     110,763        (71,148     (178,377     93,372        (85,005

Policy benefits for life and annuity contracts

     86,332        (12,598     73,734        —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value adjustments

   $ 420,448      $ (184,657   $ 235,791      $ 374,078      $ (162,571   $ 211,507   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

12. LOANS PAYABLE

Total amounts of loans payable outstanding, including accrued interest, as of September 30, 2013 and December 31, 2012, totaled $355.7 million and $107.4 million, respectively, and were comprised as follows:

 

Facility

   Date of Facility      Facility Term      September 30,
2013
     December 31,
2012
 

EGL Revolving Credit Facility

     July 8, 2013         5 Years       $ 163,800       $ —    

SeaBright Facility

     December 21, 2012         3 Years         111,000         —    

Clarendon Facility

     July 12, 2011         4 Years         78,995         106,500   
        

 

 

    

 

 

 

Total long-term bank debt

           353,795         106,500   

Accrued interest

           1,868         930   
        

 

 

    

 

 

 

Total loans payable

         $ 355,663       $ 107,430   
        

 

 

    

 

 

 

The Company’s long-term debt consists of loan facilities used to partially finance certain of the Company’s acquisitions or significant new business transactions and its Revolving Credit Facility (the “EGL Revolving Credit Facility”), which can be used for permitted acquisitions and general corporate purposes. The Company’s credit facility related to the Company’s 2011 acquisition of Clarendon National Insurance Company (the “Clarendon Facility”) and its term facility related to the acquisition of SeaBright (the “SeaBright Facility”) are described in Note 9 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

On February 5, 2013, the Company, through AML Acquisition, fully drew down the $111.0 million SeaBright Facility in connection with the acquisition of SeaBright.

On February 5, 2013, March 26, 2013 and September 6, 2013, the Company borrowed $56.0 million, $60.0 million and $47.8 million, respectively, under the EGL Revolving Credit Facility. As of September 30, 2013, the unused portion of the EGL Revolving Credit Facility was $211.2 million.

As of September 30, 2013, all of the covenants relating to the three credit facilities were met.

Amendment and Restatement of EGL Revolving Credit Facility Agreement

On July 8, 2013, the Company, and certain of its subsidiaries, as borrowers, as well as certain of its subsidiaries, as guarantors, entered into an amendment and restatement of its existing Revolving Credit Facility Agreement with National Australia Bank Limited (“NAB”) and Barclays Bank PLC (“Barclays”), as mandated lead arrangers, NAB, Barclays and Royal Bank of Canada, as original lenders, and NAB as agent (the “Restated Credit Agreement”). The Restated Credit Agreement provides for a five-year EGL Revolving Credit Facility (expiring in July 2018) pursuant to which the Company is permitted to borrow up to an aggregate of $375.0 million, which is available to fund permitted acquisitions and for general corporate purposes. The previously existing Revolving Credit Facility Agreement had provided for a three-year $250.0 million facility that was set to terminate in June 2014. The Company’s ability to draw on the EGL Revolving Credit Facility is subject to customary conditions.

The EGL Revolving Credit Facility is secured by a first priority lien on the stock of certain of the Company’s subsidiaries and certain bank accounts held with Barclays in the name of the Company and into which amounts received in respect of any capital release from certain of the Company’s subsidiaries are required

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

12. LOANS PAYABLE—(cont’d)

 

to be paid. Interest is payable at the end of each interest period chosen by the Company or, at the latest, each six months. The interest rate is LIBOR plus 2.75%, plus an incremental amount tied to certain regulatory costs, if any, that may be incurred by the lenders. Any unused portion of the EGL Revolving Credit Facility will be subject to a commitment fee of 1.10%. The EGL Revolving Credit Facility imposes various financial and business covenants on the Company, the guarantors and certain other material subsidiaries, including limitations on mergers and consolidations, acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets, restrictions on dividends and limitations on liens.

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

On September 6, 2013, the Company borrowed $47.8 million under the EGL Revolving Credit Facility to fund Kenmare’s portion of the purchase price for Arden.

SeaBright Surplus Notes

On August 26, 2013, the Company fully repaid the outstanding principal and accrued interest of $12.1 million associated with the subordinated floating rate surplus notes issued by SeaBright in a private placement in May 2004. Interest expense on the surplus notes the three months ended September 30, 2013 and the period from February 7, 2013 (the date of acquisition of SeaBright) to September 30, 2013 was $0.1 million and $0.3 million, respectively.

Clarendon Facility

On July 31, 2013, the Company repaid $27.5 million of the outstanding principal on its Clarendon Facility reducing the outstanding principal to $79.0 million.

 

13. 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 11 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The information below includes both the employee and director components of the Company’s share-based compensation.

During the nine months ended September 30, 2013, the Company completed the acquisitions of SeaBright, the Pavonia companies and Arden, which resulted in an increase in the number of employees from 383 at December 31, 2012 to 620 at September 30, 2013. The Company did not assume any significant post-retirement benefit obligations on completion of these acquisitions.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

13. EMPLOYEE BENEFITS—(cont’d)

 

Employee share plans

Employee share awards for the nine months ended September 30, 2013 and 2012 are summarized as follows:

 

     September 30, 2013     September 30, 2012  
     Number of
Shares
    Weighted
Average
Fair
Value of
the Award
    Number of
Shares
    Weighted
Average
Fair
Value of
the Award
 

Nonvested—January 1

     160,644      $ 17,989        203,930      $ 20,026   

Granted

     6,344        767        4,363        359   

Vested

     (49,253     (5,715     (47,649     (4,623
  

 

 

     

 

 

   

Nonvested—September 30

     117,735      $ 15,656        160,644      $ 16,008   
  

 

 

     

 

 

   

2006 Equity Incentive Plan / 2011-2015 Annual Incentive Compensation Program

For the three and nine months ended September 30, 2013 and 2012, 2,576 and 191 shares, respectively, were awarded to employees under the 2006 Equity Incentive Plan (the “Equity Plan”).

The total unrecognized compensation cost related to the Company’s non-vested share awards under the Equity Plan as at September 30, 2013 and 2012 was $5.7 million and $8.3 million, respectively. This cost is expected to be recognized evenly over the next 2.1 years. Compensation costs of $0.7 million and $2.2 million relating to these share awards were recognized in the Company’s statement of earnings for the three and nine months ended September 30, 2013, respectively, as compared to $0.7 million and $2.1 million, respectively, for the three and nine months ended September 30, 2012.

The total value of the awards for the three and nine months ended September 30, 2013 was $0.4 million. The total value of the awards for the three and nine months ended September 30, 2012 was $0.1 million and $0.2 million, respectively. The total value for each such period was charged against the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program (the “Incentive Program”) accrual established for the year ended December 31, 2011.

The accrued expense relating to the Incentive Program for the three and nine months ended September 30, 2013 was $7.1 million and $12.6 million, respectively, as compared to $8.6 million and $17.5 million, respectively, for the three and nine months ended September 30, 2012.

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 were recognized in the Company’s statement of earnings for each of the three and nine month periods ended September 30, 2013 and 2012. For the nine month periods ended September 30, 2013 and 2012, 3,768 and 4,172 shares, respectively, were issued to employees under such plan.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

13. EMPLOYEE BENEFITS—(cont’d)

 

Deferred Compensation and Ordinary Share Plan for Non-Employee Directors

For the nine months ended September 30, 2013 and 2012, 2,640 and 2,360 restricted share units, respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors. The Company recorded expenses related to the restricted share units for the three and nine month periods ended September 30, 2013 of $0.1 million and $0.3 million, respectively, as compared to $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2012, respectively.

Pension Plan

The Company provides pension benefits to eligible employees through various plans sponsored by the Company. All pension plans, except for the noncontributory defined benefit pension plan acquired in the 2010 PW Acquisition Co. transaction (the “PWAC Plan”), are structured as defined contribution plans. Pension expense for the three and nine months ended September 30, 2013 was $1.4 million and $4.5 million, respectively, as compared to $0.2 million and $3.1 million, respectively, for the three and nine month periods ended September 30, 2012.

In addition, the Company recorded pension expense relating to the PWAC Plan for the three and nine month periods ended September 30, 2013 of $0.1 million and $0.5 million, respectively, as compared to $0.2 million and $0.5 million for the three and nine month periods ended September 30, 2012, respectively. The PWAC Plan is described in Note 11 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

14. SHARE CAPITAL

As at September 30, 2013 and December 31, 2012, the authorized share capital was 111,000,000 ordinary shares and non-voting convertible ordinary shares, each par value $1.00 per share and 45,000,000 preference shares of par value $1.00 per share.

Series B Convertible Participating Non-Voting Perpetual Preferred Stock

In connection with the Torus acquisition, on July 8, 2013, the Company’s Board of Directors created 4,000,000 shares of Series B Convertible Participating Non-Voting Perpetual Preferred Stock, par value $1.00 per share (the “Non-Voting Preferred Shares”), from the authorized and unissued preference shares. No Non-Voting Preferred Shares have been issued. The Company will issue a combination of approximately 1,902,000 Voting Ordinary Shares and approximately 710,000 Non-Voting Preferred Shares to certain shareholders of Torus at closing of the Amalgamation. Refer to Note 2 for more information regarding the Torus acquisition.

The Non-Voting Preferred Shares:

 

    rank on parity with the Voting Ordinary Shares and non-voting ordinary shares, but would rank senior to any other class or series of share capital of the Company, unless the terms of any such class or series shall provide otherwise;

 

    would receive dividends when, and if, and in the same amounts (on an as-converted basis), dividends are declared on the Voting Ordinary Shares and/or non-voting ordinary shares;

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

14. SHARE CAPITAL—(cont’d)

 

    automatically convert on a one-to-one basis into: (i) Voting Ordinary Shares upon the transfer of such Non-Voting Preferred Shares to any person other than an affiliate of First Reserve if that transfer qualifies as a widely dispersed offering and (ii) a new series of non-voting ordinary shares of the Company upon the approval by the Company’s shareholders of an amendment to the Company’s bye-laws to authorize such series;

 

    have a liquidation preference of $0.001 per share, and thereafter are entitled to participate (on an as-converted basis) with the Voting Ordinary Shares and the non-voting ordinary shares in the distribution of remaining assets; and

 

    have no voting rights other than: (i) in the event of a proposed change to the Company’s organizational documents that would significantly and adversely affect the rights of the Non-Voting Preferred Shares, (ii) certain share exchanges or reclassifications of the Non-Voting Preferred Shares, (iii) certain mergers or consolidations of the Company, or (iv) a voluntary liquidation or dissolution of the Company.

 

15. REDEEMABLE NONCONTROLLING INTEREST

The redeemable noncontrolling interest comprises the 40% ownership interest in Northshore held by Trident. The redeemable noncontrolling interest is classified outside of permanent shareholders’ equity on the Company’s consolidated balance sheets due to the redemption rights held by Trident, which are described in Note 2—Acquisitions. The Company recognizes changes in the redemption value of the Trident interest in Northshore’s earnings as if the balance sheet date was also the redemption date. As at September 30, 2013, there were no adjustments recorded through retained earnings as the redemption value of the Trident interest approximated its carrying value.

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

 

     Redeemable
Noncontrolling
Interest
 
  

Balance as at December 31, 2012

   $ —     

Redeemable noncontrolling interest, initial contribution

     32,480   

Net earnings attributable to redeemable noncontrolling interest

     27   
  

 

 

 

Balance as at September 30, 2013

   $ 32,507   
  

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

16. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per ordinary share for the three and nine month periods ended September 30, 2013 and 2012:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2013     2012     2013     2012  

Basic earnings per ordinary share:

       

Net earnings attributable to Enstar Group Limited

  $ 39,987      $ 47,716      $ 71,143      $ 98,111   

Weighted average ordinary shares outstanding—basic

    16,525,012        16,437,780        16,521,865        16,433,943   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2.42      $ 2.90      $ 4.31      $ 5.97   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per ordinary share:

       

Net earnings attributable to Enstar Group Limited

  $ 39,987      $ 47,716      $ 71,143      $ 98,111   

Weighted average ordinary shares outstanding—basic

    16,525,012        16,437,780        16,521,865        16,433,943   

Share equivalents:

       

Unvested shares

    116,503        160,644        118,756        163,062   

Restricted share units

    18,521        15,046        17,588        14,263   

Warrants

    60,679        —         40,431        —    

Options

    —         63,059        —         63,088   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares outstanding—diluted

    16,720,715        16,676,529        16,698,640        16,674,356   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2.39      $ 2.86      $ 4.26      $ 5.88   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

17. RELATED PARTY TRANSACTIONS

Through several private transactions occurring from May 2012 to July 2012, Trident acquired approximately 9.7% of the Company’s ordinary shares. On November 6, 2013, the Company appointed James D. Carey to its Board of Directors. Mr. Carey is the sole member of an entity that is one of four general partners of the entities serving as general partners for the Trident funds, is a member of the investment committees of such general partners, and is a member and senior principal of Stone Point Capital LLC, the manager of the Trident funds.

The Company has investments in three funds (carried within other investments) affiliated with entities owned by Trident. Mr. Carey is a manager of one of these funds. As of September 30, 2013, the fair value of the investments in the three funds was $86.4 million. The Company has also invested in a fund managed by Sound Point Capital, an entity in which Mr. Carey has an approximately 4% indirect ownership interest and serves as director. As of September 30, 2013, the fair value of this investment was $21.0 million.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

17. RELATED PARTY TRANSACTIONS—(cont’d)

 

On July 3, 2013 and July 8, 2013, the Company entered into certain agreements with Trident with respect to Trident’s co-investments in the Atrium and Arden acquisitions and the Torus acquisition, respectively. Refer to Note 2 for a description of these co-investment transactions. Mr. Carey serves as a Trident representative on the boards of the holding companies established in connection with these co-investment transactions.

Affiliates of Goldman Sachs & Co. (“Goldman Sachs”) own approximately 4.8% of the Company’s voting ordinary shares and 100% of the Company’s outstanding non-voting convertible ordinary shares. Sumit Rajpal, a managing director of Goldman Sachs, was appointed to the Board of Directors in connection with Goldman Sachs’ investment in the Company. The Company has investments in one fund affiliated with entities owned by Goldman Sachs. As of September 30, 2013, the fair value of the investment in the fund, carried within other investments, was $1.6 million.

Affiliates of Goldman Sachs own approximately 22% of Global Atlantic Financial Group (“GAFG”), which owns entities that provide reinsurance to Arden. As at September 30, 2013, the Company’s total reinsurance recoverable from GAFG entities amounted to $344.3 million. As at September 30, 2013, reinsurance balances recoverable from a particular non-rated GAFG entity with a carrying value of $256.1 million represented 10% or more of the Company’s total non-life run-off reinsurance balances recoverable. The $256.1 million recoverable from that GAFG entity at September 30, 2013 was secured by a trust fund. The balance of $88.1 million as at September 30, 2013 was recoverable from GAFG entities rated A- and higher.

 

18. TAXATION

Earnings before income taxes include the following components:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
               2013                         2012                         2013                          2012            

Domestic (Bermuda)

   $ (913   $ (5,939   $ 77,134       $ 11,841   

Foreign

     45,709        76,131        18,231         130,255   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 44,796      $ 70,192      $ 95,365       $ 142,096   
  

 

 

   

 

 

   

 

 

    

 

 

 

Tax expense for income taxes is comprised of:

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
              2013                         2012                         2013                         2012            

Current:

       

Domestic (Bermuda)

  $ —       $ —       $ —       $ —    

Foreign

    6,842        13,397        21,172        22,842   
 

 

 

   

 

 

   

 

 

   

 

 

 
    6,842        13,397        21,172        22,842   
 

 

 

   

 

 

   

 

 

   

 

 

 

Deferred:

       

Domestic (Bermuda)

    —         —         —         —    

Foreign

    (5,502     1,303        (7,446     7,505   
 

 

 

   

 

 

   

 

 

   

 

 

 
    (5,502     1,303        (7,446     7,505   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total tax expense

  $ 1,340      $ 14,700      $ 13,726      $ 30,347   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

18. TAXATION—(cont’d)

 

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

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

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

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

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2013     2012     2013     2012  

Earnings before income tax

  $ 44,796      $ 70,192      $ 95,365      $ 142,096   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expected tax rate

    —       —       —       —  

Foreign taxes at local expected rates

    23.2     26.1     (2.1 )%      24.4

Change in uncertain tax positions

    0.0     0.1     (2.8 )%      0.1

Change in valuation allowance

    (16.2 )%      (5.4 )%      21.5     (3.3 )% 

Other

    (4.0 )%      0.1     (2.2 )%      0.2
 

 

 

   

 

 

   

 

 

   

 

 

 

Effective tax rate

    3.0     20.9     14.4     21.4
 

 

 

   

 

 

   

 

 

   

 

 

 

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 $2.2 million and $5.8 million relating to uncertain tax positions as of September 30, 2013 and December 31, 2012, respectively. During the nine months ended September 30, 2013, there were reductions to unrecognized tax benefits of $3.6 million due to the expiration of statutes of limitation.

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 2006, 2009 and 2006, respectively.

 

19. COMMITMENTS AND CONTINGENCIES

Concentration of Credit Risk

The Company’s portfolio of cash and fixed maturities is managed pursuant to guidelines that follow what it believes are prudent standards of diversification. The guidelines limit the allowable holdings of a single issue and

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

19. COMMITMENTS AND CONTINGENCIES—(cont’d)

 

issuers, and as a result the Company does not believe that there are any significant concentrations of credit risk associated with its portfolio of cash and fixed maturities.

The Company’s portfolio of other investments is managed pursuant to guidelines that emphasize diversification and liquidity. Pursuant to these guidelines, the Company manages and monitors risk across a variety of investment funds and vehicles, markets and counterparties. The Company believes that there are no significant concentrations of credit risk associated with its other investments.

The Company’s investments are held by 35 different custodians. These custodians are all large financial institutions that are highly regulated. These institutions have controls over their investment processes that are certified annually. The largest concentration of fixed maturities investments at a single custodian, by fair value, was $2.2 billion and $1.8 billion as of September 30, 2013 and December 31, 2012, respectively.

Leases

The Company leases office space under operating leases expiring in various years through 2018. The leases are renewable at the option of the lessee under certain circumstances. The following is a schedule of future minimum rental payments for the next five years on non-cancellable leases as of September 30, 2013, inclusive of those related to the acquisitions of SeaBright and the Pavonia companies:

 

2013

   $ 1,811   

2014

     6,671   

2015

     5,929   

2016

     3,468   

2017

     1,148   

2018

     474   
  

 

 

 
   $ 19,501   
  

 

 

 

Investments

The following table provides a summary of the Company’s outstanding aggregate unfunded investment commitments as at September 30, 2013 and December 31, 2012:

 

September 30, 2013

  

December 31, 2012

Original

Commitments

  

Commitments

  

Original

Commitments

  

Commitments

  

Funded

  

Unfunded

     

Funded

  

Unfunded

$286,000

   $183,486    $102,514    $251,000    $163,408    $87,592
                          

Guarantees

As at September 30, 2013 and December 31, 2012, the Company had, in total, parental guarantees supporting a subsidiary’s insurance obligations in the amount of $219.7 million and $213.3 million, respectively.

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

19. COMMITMENTS AND CONTINGENCIES—(cont’d)

 

Acquisitions

The Company has entered into definitive agreements with respect to: (i) the Reciprocal of America loss portfolio transfer, which is expected to close in the fourth quarter of 2013; (ii) the purchase of Atrium Underwriting Group Limited, which is expected to close in the fourth quarter of 2013; and (iii) the Amalgamation of Veranda and Torus Insurance Holdings Limited, which is expected to close in the first quarter of 2014. The Torus and Atrium acquisition agreements are described in Note 2—“Acquisitions,” and the Reciprocal of America agreement is described in Note 3—“Significant New Business.”

In connection with the acquisitions of Torus and Atrium/Arden, the Company has entered into two separate Investors Agreements with Trident, entered into a Shareholders’ Agreement with Trident on September 6, 2013 in connection with the closing of the Arden acquisition (which will apply equally to the Atrium acquisition on closing), and will enter into a Shareholders’ Agreement with Trident at the closing of the Torus Amalgamation. The Company’s obligations and rights relating to the Investors and Shareholders’ Agreements are described in Note 2—“Acquisitions.”

Pursuant to the Amalgamation Agreement to acquire Torus, the Company has agreed that at the closing of the Amalgamation, it will issue a combination of Voting Ordinary Shares and Non-Voting Preferred Shares having a value of approximately $346.0 million to partially fund the purchase price, as described in Note 2. At closing, the Company will also enter into the Shareholder Rights Agreement with First Reserve and the Registration Rights Agreement with First Reserve and Corsair; the obligations and rights under these agreements are also described in Note 2.

Legal Proceedings

In connection with the Company’s acquisition of SeaBright, two purported class action lawsuits were filed against SeaBright, the members of its board of directors, the Company’s merger subsidiary (AML Acquisition, Corp.) and, in one of the cases, the Company. The first suit was filed September 13, 2012 in the Superior Court of the State of Washington and the second suit was filed September 20, 2012 in the Court of Chancery of the State of Delaware. The lawsuits alleged, among other things, that SeaBright’s directors breached their fiduciary duties when negotiating, approving and seeking stockholder approval of the Merger, and that SeaBright and the Company or the Company’s merger subsidiary aided and abetted the alleged breaches of fiduciary duties. The Company believed these suits were without merit; nevertheless, in order to avoid the potential cost and distraction of continued litigation and to eliminate any risk of delay to the closing of the Merger, the Company, SeaBright and the SeaBright director defendants agreed to settle the two lawsuits, without admitting any liability or wrongdoing. The settlement required SeaBright to make supplemental information available to its stockholders through a filing of a Current Report on Form 8-K with the U.S. Securities and Exchange Commission. The settlement did not change the amount of the merger consideration that the Company paid to SeaBright’s stockholders in any way, nor did it alter any deal terms. On July 19, 2013, the Superior Court of the State of Washington entered an order approving the settlement, which became become final and unappealable on August 19, 2013. On August 23, 2013, the Court of Chancery of the State of Delaware dismissed the Delaware action.

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 adverse effect on its business, results of operations or financial condition. Nevertheless, there can be no assurance that lawsuits,

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

19. COMMITMENTS AND CONTINGENCIES—(cont’d)

 

arbitrations or other litigation will not have a material adverse 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 adverse effect on the Company’s business, financial condition or results of operations.

 

20. SEGMENT REPORTING

Due to the Company’s acquisition of the Pavonia companies on March 31, 2013, the Company reevaluated its segment reporting during the second quarter of 2013 and began measuring the results of its operations in two segments: (i) non-life run-off and (ii) life and annuities.

The Company’s non-life run-off segment comprises the operations and financial results of those subsidiaries running off their property and casualty business.

The Company’s life and annuities segment comprises the operations and financial results of those subsidiaries, primarily the Pavonia companies, operating in the closed-block of life and annuity business. Certain new significant accounting policies applicable to the life and annuities segment are described in Note 1—“Significant New Accounting Policies.”

Invested assets are managed on a subsidiary by subsidiary basis, and investment income and realized and unrealized gains on investments are recognized in each segment as earned.

The Company’s total assets by segment were:

 

     September 30, 2013      December 31, 2012  

Total assets—non-life run-off

   $ 6,930,513       $ 5,829,384   

Total assets—life and annuities

     1,411,756         52,859   
  

 

 

    

 

 

 

Total assets

   $ 8,342,269       $ 5,882,243   
  

 

 

    

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

20. SEGMENT REPORTING—(cont’d)

 

The following tables set forth selected and consolidated statement of earnings results by segment for the three and nine month periods ended September 30, 2013 and 2012:

 

    Three Months Ended September 30, 2013     Three Months Ended September 30, 2012  
    Non-Life
  Run-off  
    Life and
  Annuities  
      Consolidated       Non-Life
  Run-off  
    Life and
  Annuities  
      Consolidated    

INCOME

           

Net premiums earned

  $ 28,134      $ 30,540      $ 58,674      $ —        $ 822      $ 822   

Consulting fees

    2,398        —          2,398        1,944        —          1,944   

Net investment income

    15,290        9,719        25,009        19,399        259        19,658   

Net realized and unrealized gains

    35,515        1,495        37,010        27,467        813        28,280   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    81,337        41,754        123,091        48,810        1,894        50,704   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

           

Net reduction in ultimate losses and loss adjustment expense liabilities:

    (16,476     —          (16,476     (62,547     —          (62,547

Life and annuity policy benefits

    —          33,332        33,332        —          822        822   

Salaries and benefits

    28,213        1,503        29,716        25,066        72        25,138   

General and administrative expenses

    23,781        5,345        29,126        14,200        209        14,409   

Interest expense

    2,796        474        3,270        1,713        —          1,713   

Net foreign exchange (gains) losses

    (608     (65     (673     1,019        (42     977   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    37,706        40,589        78,295        (20,549     1,061        (19,488
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS BEFORE INCOME TAXES

    43,631        1,165        44,796        69,359        833        70,192   

INCOME TAXES

    (1,356     16        (1,340     (14,647     (53     (14,700
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS

    42,275        1,181        43,456        54,712        780        55,492   

Less: Net earnings attributable to noncontrolling interest

    (3,469     —          (3,469     (7,776     —          (7,776
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED

  $ 38,806      $ 1,181      $ 39,987      $ 46,936      $ 780      $ 47,716   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

20. SEGMENT REPORTING—(cont’d)

 

    Nine Months Ended September 30, 2013     Nine Months Ended September 30, 2012  
    Non-Life
  Run-off  
    Life and
  Annuities  
      Consolidated       Non-Life
  Run-off  
    Life and
  Annuities  
      Consolidated    

INCOME

           

Net premiums earned

  $ 100,270      $ 65,661      $ 165,931      $ —        $ 2,692      $ 2,692   

Consulting fees

    7,805        —          7,805        5,913        —          5,913   

Net investment income

    50,162        20,062        70,224        60,328        667        60,995   

Net realized and unrealized gains (losses)

    48,555        (9,344     39,211        53,656        1,697        55,353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    206,792        76,379        283,171        119,897        5,056        124,953   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

           

Net reduction in ultimate losses and loss adjustment expense liabilities

    (26,638     —          (26,638     (141,730     —          (141,730

Life and annuity policy benefits

    —          63,555        63,555        —          2,692        2,692   

Salaries and benefits

    76,303        2,710        79,013        69,676        292        69,968   

General and administrative expenses

    55,485        11,589        67,074        42,115        1,308        43,423   

Interest expense

    7,847        949        8,796        5,886        —          5,886   

Net foreign exchange (gains) losses

    (4,122     128        (3,994     2,722        (104     2,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    108,875        78,931        187,806        (21,331     4,188        (17,143
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS (LOSS) BEFORE INCOME TAXES

    97,917        (2,552     95,365        141,228        868        142,096   

INCOME TAXES

    (13,713     (13     (13,726     (30,294     (53     (30,347
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS (LOSS)

    84,204        (2,565     81,639        110,934        815        111,749   

Less: Net earnings attributable to noncontrolling interest

    (10,496     —          (10,496     (13,638     —          (13,638
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED

  $ 73,708      $ (2,565   $ 71,143      $ 97,296      $ 815      $ 98,111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Enstar Group Limited:

We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries as of September 30, 2013, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012, and the related condensed consolidated statements of changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2013 and 2012. These condensed consolidated 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 the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2012, 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 28, 2013, 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, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG Audit Limited

Hamilton, Bermuda

November 7, 2013

 

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

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2013 and 2012 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, 2012.

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 completed the acquisition of over 60 insurance and reinsurance companies and portfolios of insurance and reinsurance business and are now administering those businesses in run-off, including 12 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. With the exception of our 2011 acquisition of a small life company, all of these acquisitions had been in the property and casualty, or “non-life run-off,” insurance business, which continues to remain our primary focus.

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 acquired companies and portfolios of business 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. We also provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.

In March 2013, we acquired several life insurance and annuities companies from a subsidiary of HSBC Holdings plc, all of which are in run-off. We view the acquisition of these closed-life and annuities businesses as a natural extension of our run-off business and an enhancement to our global run-off strategy. Although our closed-life and annuities businesses are no longer writing new policies, the closed-life businesses continue to generate premiums with respect to their in-force policies. Our strategy in our life and annuities business differs from our non-life run-off business, in particular because we are unable to shorten the duration of the liabilities of these businesses through either commutations or policy buy-backs. Instead, we will hold the policies associated with the life and annuities business to their natural maturity, while efficiently managing our invested assets in those businesses to match the duration and cash flows of the liability profile. In addition to diversifying our loss reserve base, we believe our newly acquired closed-life business has the potential to provide us with a more regular earnings and cash flow stream, which may counter the volatility of our core non-life run-off business.

In June 2013, we continued the evolution of our business with our agreement to acquire Atrium Underwriting Group, the managing agent for the active underwriting business of a leading specialist underwriting syndicate at Lloyd’s of London. We continued our expansion into active underwriting in July 2013 when we announced our agreement to acquire Torus Insurance Holdings Limited, a highly rated global specialty insurer (an acquisition that we expect to close in the first quarter of 2014). In subsequent quarters, beginning with the fourth quarter of 2013, the active underwriting businesses acquired will constitute a new operating segment for us. We will generate revenue from premiums on the new business written, and will have additional operating expenses, in part as a result of the approximately 750 new employees and a number of new offices that we expect to acquire as a result of both transactions. In addition, our total investments will significantly increase from the acquired investment portfolios. While our core focus remains on acquiring insurance and reinsurance companies that are in run-off, we believe these acquisitions diversify Enstar into the active market and enhance the opportunities available to our core run-off business.

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.

 

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Acquisitions

Torus Insurance Holdings Limited

Amalgamation Agreement

On July 8, 2013, we, Veranda Holdings Ltd., or Veranda, an entity in which we own an indirect 60% interest through a 60% interest in Bayshore Holdings Limited, or Bayshore, Hudson Securityholders Representative LLC and Torus Insurance Holdings Limited, or Torus, entered into an Agreement and Plan of Amalgamation, or the Amalgamation Agreement. The Amalgamation Agreement provides for the amalgamation, or the Amalgamation, of Veranda and Torus (or the combined entity, the Amalgamated Company). Torus is a global specialty insurer and holding company of six wholly-owned insurance vehicles, including one Lloyd’s syndicate.

The purchase price for the Amalgamation is $692.0 million. We and Kenmare Holdings Ltd. (our wholly-owned subsidiary), or Kenmare, will provide 60% of the purchase price and related expenses of the Amalgamation. Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P., or collectively, Trident, the owner of the remaining 40% interest in Bayshore, the parent company of Veranda, will provide 40% of the purchase price and related expenses associated with the Amalgamation. We will issue a combination of approximately 1,902,000 voting ordinary shares, par value $1.00 per share, or the Voting Ordinary Shares, and approximately 710,000 newly-created Series B convertible non-voting preference shares, par value $1.00 per share, or the Non-Voting Preferred Shares, having an aggregate value of approximately $346.0 million to partially fund the purchase price. Kenmare will contribute in cash approximately $69.2 million and Trident will contribute in cash the remaining approximately $276.8 million of the purchase price. Following the Amalgamation, we and Trident will continue to own, respectively, a 60% and 40% indirect interest in the Amalgamated Company through our ownership of Bayshore.

Completion of the Amalgamation is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close during the first quarter of 2014. As a result of the Torus acquisition, we expect to add approximately 600 employees in a number of new offices in various countries.

Stock Issuance

FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P., or collectively, First Reserve, will receive Voting Ordinary Shares, Non-Voting Preferred Shares and cash consideration in the transaction. In the event that the number of Voting Ordinary Shares deliverable to First Reserve at the closing of the Amalgamation would cause First Reserve, as of immediately after such closing, to beneficially own Voting Ordinary Shares that constitute more than 9.5% of the voting power of all of our shares, then we will issue to First Reserve, at the closing, the total number of shares of Voting Ordinary Shares representing 9.5% of the voting power of all our shares as of immediately after the closing and Non-Voting Preferred Shares representing the remainder of the shares that First Reserve is entitled to under the Amalgamation Agreement. Corsair Specialty Investors, L.P., or Corsair, will receive both Voting Ordinary Shares and cash consideration in the transaction. The remaining Torus shareholders will receive all cash. Following the Amalgamation, First Reserve will own approximately 9.5% and 11.5%, respectively, of our Voting Ordinary Shares and outstanding share capital and Corsair will own approximately 2.5% and 2.1%, respectively, of our Voting Ordinary Shares and outstanding share capital.

We and First Reserve will enter into a Shareholder Rights Agreement at the closing of the Amalgamation, under which we have agreed that First Reserve will have the right to designate one representative to our Board of Directors. This designation right terminates if First Reserve ceases to beneficially own at least 75% of the total number of Voting Ordinary Shares and Non-Voting Preferred Shares acquired by it under the Amalgamation Agreement.

 

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We will also enter into a Registration Rights Agreement with First Reserve and Corsair at the closing of the Amalgamation that provides First Reserve and Corsair with certain rights to cause us to register under the Securities Act of 1933, as amended, or the Act, the Voting Ordinary Shares (including the Voting Ordinary Shares into which the Non-Voting Preferred Shares may convert) issued pursuant to the Amalgamation and any securities issued by us in connection with the foregoing by way of a share dividend or share split or in connection with any recapitalization, reclassification or similar reorganization, or the foregoing, collectively, Registrable Securities. Pursuant to the Registration Rights Agreement, we must file a resale shelf registration statement for the Registrable Securities within 20 business days after the closing of the Amalgamation. In addition, at any time following the six-month anniversary of the closing of the Amalgamation, First Reserve will be entitled to make three written requests for us to register all or any part of the Registrable Securities under the Act, subject to certain exceptions and conditions set forth in the Registration Rights Agreement. Corsair will have the right to make one such request. First Reserve and Corsair will also be granted “piggyback” registration rights with respect to our registration of Voting Ordinary Shares for our own account or for the account of one or more of our securityholders.

Trident Co-investment in Torus

In connection with the Amalgamation Agreement, we, Kenmare and Trident entered an Investors Agreement on July 8, 2013 governing each entity’s investments in Bayshore, Kenmare and Trident entered into individual equity commitment letters obligating each to fund its respective portion of the purchase price for the Amalgamation described above. Completion of Kenmare’s and Trident’s funding obligations is conditioned on, among other things, the satisfaction of certain conditions tied directly to the satisfaction of the closing conditions under the Amalgamation Agreement.

Upon the funding of the equity commitments at the closing of the Amalgamation, Kenmare and Trident have agreed to enter into a Shareholders’ Agreement, or the Bayshore Shareholders’ Agreement. Among other things, the Bayshore Shareholders’ Agreement will provide that Kenmare would appoint three members to the Bayshore board of directors and Trident would appoint two members. The Bayshore Shareholders’ Agreement includes a five-year period during which neither party can transfer its ownership interest in Bayshore to a third party, or the Restricted Period. Following the Restricted Period: (i) each party must offer the other party the right to buy its shares before the shares are offered to a third party; (ii) Kenmare can require Trident to participate in a sale of Bayshore to a third party as long as Kenmare owns 55% of Bayshore; (iii) each party has the right to be included on a pro rata basis in any sales made by the other party; and (iv) each party has the right to buy its pro rata share of any new securities issued by Bayshore.

During the 90-day period following the fifth anniversary of the closing of the Amalgamation, and at any time following the seventh anniversary of such closing, Kenmare would have the right to redeem Trident’s shares in Bayshore at their then fair market value, which would be payable in cash. Following the seventh anniversary of the closing, Trident would have the right to require Kenmare to purchase Trident’s shares for their then current fair market value, which Kenmare would have the option to pay either in cash or by delivering our Voting Ordinary Shares.

Trident is a holder of approximately 9.7% of our Voting Ordinary Shares.

Atrium and Arden

On June 5, 2013, we entered into definitive agreements with Arden Holdings Limited with respect to our acquisitions of Atrium Underwriting Group Limited, or Atrium, and Arden Reinsurance Company Limited, or Arden. The two transactions are governed by separate purchase agreements and the acquisition of each company was not conditioned on the acquisition of the other.

Atrium is an underwriting business at Lloyd’s of London, which manages Syndicate 609 and provides approximately one quarter of the syndicate’s capital. Atrium specializes in accident and health, aviation, marine

 

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property, non-marine property, professional liability, property and casualty binding authorities, reinsurance, upstream energy, war and terrorism insurance, cargo and fine art. The purchase price for Atrium will be approximately $183.0 million. Completion of the transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close by the end of 2013. The purchaser of Atrium will be owned 60% by Kenmare and 40% by Trident. As a result of the Atrium acquisition, we expect to add approximately 150 employees and five offices in various countries.

On September 9, 2013, Kenmare, together with Trident, completed the acquisition of Arden. Arden is a Bermuda-based reinsurance company that provides reinsurance to the Atrium group of companies and is currently in the process of running off certain other discontinued businesses. The purchaser of Arden is owned 60% by Kenmare and 40% by Trident. The purchase price for Arden was $79.6 million. Kenmare’s portion of the purchase price was $47.8 million and was financed by a drawing under our revolving credit facility.

Trident Co-investment in Atrium and Arden

On July 3, 2013, Kenmare entered into an Investors Agreement with Trident with respect to the acquisitions of Atrium and Arden, pursuant to which Trident acquired a 40% interest in Northshore Holdings Ltd., previously a wholly-owned subsidiary of Kenmare, or Northshore. In connection with the Investors Agreement, Kenmare and Trident provided individual equity commitment letters to Northshore pursuant to which Kenmare and Trident were obligated to provide 60% and 40%, respectively, of the Atrium and Arden purchase prices and related expenses. On September 6, 2013, Kenmare and Trident each funded their individual equity commitments with respect to the Arden acquisition.

Completion of Kenmare’s and Trident’s funding obligations with respect to the Atrium closing is conditioned on, among other things, the satisfaction of certain conditions tied directly to the satisfaction of the closing conditions under the Atrium purchase agreement. In the event that the Atrium acquisition does not close, Trident’s obligations under its commitment letter would terminate as to both Arden and Atrium and Kenmare would be required to purchase at cost Trident’s 40% interest in Northshore.

On September 6, 2013, in connection with the closing of the Arden acquisition, Northshore, Kenmare and Trident entered into the Shareholders’ Agreement, or the Northshore Shareholders’ Agreement. The Northshore Shareholders’ Agreement, among other things, provides that Kenmare has the right to appoint three members to the Northshore board of directors and Trident has the right to appoint two members. The Northshore Shareholders’ Agreement will also grant Trident the right to designate one member of the Atrium board of directors after the Atrium closing. The Northshore Shareholders’ Agreement includes a five-year period during which neither party can transfer its ownership interest in Northshore to a third party, or the Restricted Period. Following the Restricted Period: (i) each party must offer the other party the right to buy its shares before the shares are offered to a third party; (ii) Kenmare can require Trident to participate in a sale of Northshore to a third party as long as Kenmare owns 55% of Northshore; (iii) each party has the right to be included on a pro rata basis in any sales made by the other party; and (iv) each party has the right to buy its pro rata share of any new securities issued by Northshore.

The Northshore Shareholders’ Agreement also provides that during the 90-day period following the fifth anniversary of the Arden closing, and at any time following the seventh anniversary of such closing, Kenmare would have the right to redeem Trident’s shares in Northshore at their then fair market value, which would be payable in cash. Following the seventh anniversary of the Arden closing, Trident would have the right to require Kenmare to purchase Trident’s shares in Northshore for their then current fair market value, which Kenmare would have the option to pay either in cash or by delivering our Voting Ordinary Shares.

 

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Pavonia

On March 31, 2013, we and our wholly-owned subsidiary, Pavonia Holdings (US), Inc., or Pavonia, completed the acquisition of all of the shares of Household Life Insurance Company of Delaware, or HLIC DE, and HSBC Insurance Company of Delaware, or HSBC DE, from Household Insurance Group Holding Company, a subsidiary of HSBC Holdings plc. HLIC DE and HSBC DE are both Delaware-domiciled insurers in run-off. HLIC DE owns three other insurers domiciled in Michigan, New York, and Arizona, respectively, all of which are in run-off (collectively with HLIC DE and HSBC DE, the Pavonia companies). The aggregate cash purchase price was $155.6 million and was financed in part by a drawing of $55.7 million under our revolving credit facility. The Pavonia companies wrote various U.S. and Canadian life insurance, including credit life and disability insurance, term life insurance, assumed life reinsurance and annuities.

As of the date of acquisition of Pavonia, all of the companies were either in run-off or, immediately following the acquisition, were placed into run-off, and accordingly are no longer writing new policies. We will continue to collect premiums on business that remains in-force.

SeaBright

On February 7, 2013, we completed our acquisition of SeaBright Holdings, Inc., or SeaBright, through the merger of our indirect, wholly-owned subsidiary, AML Acquisition, Corp., with and into SeaBright, or the Merger, with SeaBright surviving the Merger as our indirect, wholly-owned subsidiary. SeaBright owns SeaBright Insurance Company, an Illinois-domiciled insurer that is commercially domiciled in California, which wrote workers’ compensation business. The aggregate cash purchase price paid for all equity securities of SeaBright was approximately $252.1 million, which was funded in part with $111.0 million borrowed under a four-year term loan facility provided by National Australia Bank and Barcla