Edgar Filing: Enstar Group LTD

Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended June 30, 2013

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

For the Transition Period From to

001-33289

Commission File Number

ENSTAR GROUP LIMITED

(Exact name of registrant as specified in its charter)

Bermuda

N/A

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

P.O. Box HM 2267

Windsor Place, 3rd Floor

22 Queen Street

Hamilton HM JX

Bermuda

(Address of principal executive office, including zip code)

(441) 292-3645

(Registrant’s telephone number, including area code)

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

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

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


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

(Do not check if a smaller reporting company)

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

As of August 6, 2013, the registrant had outstanding 13,900,434 voting ordinary shares and 2,725,637 non-voting convertible ordinary shares, each par value $1.00 per share.

TABLE OF CONTENTS


		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (Unaudited)		1
	Condensed Consolidated Statements of Earnings for the Three and Six Month Periods Ended June 30, 2013 and 2012 (Unaudited)		2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Month Periods Ended June 30, 2013 and 2012 (Unaudited)		3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Month Periods Ended June 30, 2013 and 2012 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2013 and 2012 (Unaudited)		5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)		6
	Report of Independent Registered Public Accounting Firm		51
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		52
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		90
Item 4.	Controls and Procedures		91

	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		93
Item 1A.	Risk Factors		93
Item 6.	Exhibits		95
Signature			96

PART I — FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2013 and December 31, 2012


	June 30,			December 31,
	2013			2012
	(expressed in thousands of U.S. dollars, except share data)
ASSETS
Short-term investments, trading, at fair value	$	401,702		$	319,111
Short-term investments, held-to-maturity, at amortized cost		10,135			—
Fixed maturities, trading, at fair value		3,227,790			2,253,210
Fixed maturities, held-to-maturity, at amortized cost		873,425			—
Fixed maturities, available-for-sale, at fair value (amortized cost: 2013 — $78,359; 2012 — $245,396)		82,441			251,121
Equities, trading, at fair value		146,227			114,588
Other investments, at fair value		468,412			414,845

Total investments		5,210,132			3,352,875
Cash and cash equivalents		616,897			654,890
Restricted cash and cash equivalents		407,062			299,965
Accrued interest receivable		42,102			22,932
Accounts receivable		51,820			15,399
Premiums receivable		46,017			—
Income taxes recoverable		11,478			11,302
Deferred tax asset		41,711			9,421
Reinsurance balances recoverable		1,178,884			1,122,919
Funds held by reinsured companies		222,708			365,252
Goodwill		21,222			21,222
Other assets		24,715			6,066

TOTAL ASSETS	$	7,874,748		$	5,882,243


LIABILITIES
Losses and loss adjustment expenses	$	4,041,236		$	3,650,127
Policy benefits for life and annuity contracts		1,293,270			11,027
Unearned premium		52,056			—
Insurance and reinsurance balances payable		164,522			143,123
Accounts payable and accrued liabilities		63,571			73,258
Income taxes payable		19,854			23,023
Deferred tax liabilities		8,520			14,486
Loans payable		347,903			107,430
Other liabilities		93,595			84,536

TOTAL LIABILITIES		6,084,527			4,107,010

COMMITMENTS AND CONTINGENCIES
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: 13,800,197; 2012: 13,752,172)		13,800			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		960,399			958,571
Accumulated other comprehensive income		6,529			24,439
Retained earnings		1,004,009			972,853

Total Enstar Group Limited Shareholders’ Equity		1,568,877			1,553,755

Noncontrolling interest		221,344			221,478

TOTAL SHAREHOLDERS’ EQUITY		1,790,221			1,775,233

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	7,874,748		$	5,882,243

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three and Six Month Periods Ended June 30, 2013 and 2012


	Three Months Ended June 30,						Six Months Ended June 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	$	41,216		$	—		$	72,136		$	—
Net premiums earned — life and annuities		34,380			896			35,121			1,870
Consulting fees		2,960			1,775			5,407			3,969
Net investment income		27,252			20,894			45,215			41,337
Net realized and unrealized (losses) gains		(27,919	)		1,691			2,201			27,073

		77,889			25,256			160,080			74,249

EXPENSES
Net reduction in ultimate loss and loss adjustment expense liabilities:
Losses incurred on current period premiums earned		41,216			—			72,136			—
Reduction in estimates of net ultimate losses		(48,500	)		(58,417	)		(53,562	)		(61,715	)
Reduction in provisions for bad debt		—			(527	)		—			(2,782	)
Reduction in provisions for unallocated loss adjustment expense liabilities		(16,795	)		(11,661	)		(33,198	)		(24,513	)
Amortization of fair value adjustments		2,369			2,240			4,462			9,827

		(21,710	)		(68,365	)		(10,162	)		(79,183	)
Life and annuity policy benefits		29,482			896			30,223			1,870
Salaries and benefits		25,687			24,379			49,297			44,830
General and administrative expenses		20,002			14,156			37,948			29,014
Interest expense		3,091			2,062			5,526			4,173
Net foreign exchange (gains) losses		(8,403	)		(627	)		(3,321	)		1,642

		48,149			(27,499	)		109,511			2,346

EARNINGS BEFORE INCOME TAXES		29,740			52,755			50,569			71,903
INCOME TAXES		(4,542	)		(11,905	)		(12,386	)		(15,647	)

NET EARNINGS		25,198			40,850			38,183			56,256
Less: Net earnings attributable to noncontrolling interest		(6,001	)		(129	)		(7,027	)		(5,862	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR
GROUP LIMITED	$	19,197		$	40,721		$	31,156		$	50,394

EARNINGS PER SHARE — BASIC
Net earnings per ordinary share attributable to Enstar Group Limited shareholders	$	1.16		$	2.48		$	1.89		$	3.07

EARNINGS PER SHARE — DILUTED
Net earnings per ordinary share attributable to Enstar Group Limited shareholders	$	1.15		$	2.44		$	1.87		$	3.02

Weighted average ordinary shares outstanding — basic		16,525,026			16,436,401			16,519,640			16,432,001
Weighted average ordinary shares outstanding — diluted		16,693,943			16,674,792			16,685,444			16,673,250

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Six Month Periods Ended June 30, 2013 and 2012


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(expressed in thousands of U.S. dollars)
NET EARNINGS	$	25,198		$	40,850		$	38,183		$	56,256

Other comprehensive income, net of tax:
Unrealized holding (losses) gains on investments arising during the period		(28,010	)		317			371			27,672
Reclassification adjustment for net realized and unrealized losses (gains) included in net earnings		27,919			(1,691	)		(2,201	)		(27,073	)

Unrealized (losses) gains arising during the period, net of reclassification adjustment		(91	)		(1,374	)		(1,830	)		599
Currency translation adjustment		(20,278	)		(3,892	)		(21,501	)		(908	)

Total other comprehensive loss		(20,369	)		(5,266	)		(23,331	)		(309	)

Comprehensive income		4,829			35,584			14,852			55,947
Less comprehensive (income) loss attributable to noncontrolling interest		(781	)		643			(1,606	)		(6,269	)

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	4,048		$	36,227		$	13,246		$	49,678

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS’ EQUITY

For the Six Month Periods Ended June 30, 2013 and 2012


	Six Months Ended June 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		2			3
Share awards granted/vested		46			44

Balance, end of period	$	13,800		$	13,712

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		—			381
Issue of shares, net		319			280
Amortization of equity incentive plan		1,509			1,361

Balance, end of period	$	960,399		$	958,351

Accumulated Other Comprehensive Income Attributable to Enstar Group Limited
Balance, beginning of period	$	24,439		$	27,096
Foreign currency translation adjustments		(16,415	)		(1,487	)
Net movement in unrealized holding (losses) gains on investments		(1,495	)		771

Balance, end of period	$	6,529		$	26,380

Retained Earnings
Balance, beginning of period	$	972,853		$	804,836
Net earnings attributable to Enstar Group Limited		31,156			50,394

Balance, end of period	$	1,004,009		$	855,230

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		7,027			5,862
Foreign currency translation adjustments		(5,086	)		579
Net movement in unrealized holding losses on investments		(335	)		(172	)

Balance, end of period	$	221,344		$	249,263

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Month Periods Ended June 30, 2013 and 2012


	Six Months Ended June 30,
	2013			2012
	(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
Net earnings	$	38,183		$	56,256
Adjustments to reconcile net earnings to cash flows used in operating activities:
Net realized and unrealized investment losses (gains)		27,881			(22,234	)
Net realized and unrealized gains from other investments		(30,082	)		(4,839	)
Other items		2,175			1,754
Depreciation and amortization		505			631
Net amortization of bond premiums and discounts		23,261			16,426
Net movement of trading securities held on behalf of policyholders		2,096			11,317
Sales and maturities of trading securities		1,442,946			1,125,863
Purchases of trading securities		(1,527,521	)		(1,319,669	)
Changes in assets and liabilities:
Reinsurance balances recoverable		60,437			382,569
Other assets		266,219			56,350
Losses and loss adjustment expenses		(203,471	)		(483,702	)
Policy benefits for life and annuity contracts		37,639			—
Insurance and reinsurance balances payable		(20,466	)		(45,702	)
Accounts payable and accrued liabilities		(49,419	)		17,670
Other liabilities		(81,806	)		20,755

Net cash flows used in operating activities		(11,423	)		(186,555	)

INVESTING ACTIVITIES:
Acquisitions, net of cash acquired		(283,960	)		—
Sales and maturities of available-for-sale securities		160,143			183,609
Maturities of held-to-maturity securities		137			—
Movement in restricted cash and cash equivalents		(107,097	)		89,775
Funding of other investments		(24,410	)		(126,130	)
Redemption of bond funds		—			103
Other investing activities		298			(454	)

Net cash flows (used in) provided by investing activities		(254,889	)		146,903

FINANCING ACTIVITIES:
Distribution of capital to noncontrolling interest		—			(7,236	)
Dividends paid to noncontrolling interest		(1,740	)		(18,985	)
Receipt of loans		227,000			—
Repayment of loans		—			(115,875	)

Net cash flows provided by (used in) financing activities		225,260			(142,096	)

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS		3,059			4,157

NET DECREASE IN CASH AND CASH EQUIVALENTS		(37,993	)		(177,591	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		654,890			850,474

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	616,897		$	672,883

Supplemental Cash Flow Information
Net income taxes paid	$	16,424		$	15,367
Interest paid	$	3,817		$	4,689

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 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 investment income and net realized and unrealized gains and losses, 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”) and five companies from a subsidiary of HSBC Holdings plc (the “Pavonia companies”), each described in Note 2 — “Acquisitions”, the Company has adopted certain new significant accounting policies during the six months ended June 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 would be due should losses exceed pre-determined, contractual thresholds. These required additional premiums are based upon 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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1.	SIGNIFICANT ACCOUNTING POLICIES — (cont’d)

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. 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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1.	SIGNIFICANT ACCOUNTING POLICIES — (cont’d)

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 judgement, 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 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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

1.	SIGNIFICANT ACCOUNTING POLICIES — (cont’d)

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.

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.

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 non-life run-off and life and annuity acquisitions are derived from estimates of

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.	ACQUISITIONS — (cont’d)

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 1,901,000 voting ordinary shares, par value $1.00 per share (the “Voting Ordinary Shares”), and approximately 711,000 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 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 by the end of 2013.

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.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.	ACQUISITIONS — (cont’d)

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.

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 noted 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 ordinary voting shares.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.	ACQUISITIONS — (cont’d)

Trident is a holder of approximately 9.7% of the Company’s ordinary shares. Refer to Note 16 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 under which the Company will acquire Atrium Underwriting Group Limited (“Atrium”) and Arden Reinsurance Company Limited (“Arden”). 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. 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 purchase price for Atrium will be approximately $183.0 million and the purchase price for Arden will be approximately $79.6 million. Completion of each transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The two transactions are governed by separate purchase agreements and the acquisition of each company is not conditioned on the acquisition of the other. Both transactions are currently expected to close by the end of 2013.

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 agreed to provide 60% and 40%, respectively, of the Atrium and Arden purchase prices and related expenses. Kenmare expects to fund its equity commitment from available cash on hand.

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 Atrium and Arden purchase agreements. In the event that the Arden acquisition closes, but the Atrium acquisition does not close, Trident’s obligations under its commitment letter would terminate as to both companies and Trident would return its 40% interest in Northshore to Kenmare.

Upon the funding of the equity commitments at the closing of the Atrium and Arden transactions, Kenmare and Trident have agreed to enter into a Shareholders’ Agreement (the “Northshore Shareholders’ Agreement”). Among other things, the Northshore Shareholders’ Agreement will provide that Kenmare would appoint three members to the Northshore board of directors and Trident would appoint two members. Trident would also have the right to designate one member of the Atrium board of directors.

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.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.	ACQUISITIONS — (cont’d)

During the 90-day period following the fifth anniversary of the earlier of the closings of the Atrium and Arden transactions, and at any time following the seventh anniversary of the earlier of such closings, 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 earlier of the closings, 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 ordinary voting shares.

Trident is a holder of approximately 9.7% of the Company’s ordinary shares. Refer to Note 16 for information regarding the Company’s other transactions with affiliates of Trident.

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.

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 now received approvals from all states relieving it of this obligation.

Gross and net premiums written by SeaBright from the date of the acquisition to June 30, 2013 totaled $16.5 million and $10.9 million, respectively. Because SeaBright’s exit from the mandatory renewal process was approved, we expect that SeaBright will no longer generate premiums written.

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.	ACQUISITIONS — (cont’d)


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 June 30, 2013, the Company had earned premiums of $72.1 million, recorded losses incurred of $72.1 million on those earned premiums, and recorded $13.5 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 (“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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.	ACQUISITIONS — (cont’d)


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 June 30, 2013, the Company had earned premiums of $33.7 million, recorded life and annuity claim costs of $28.8 million on those earned premiums, and recorded $1.9 million in net losses related to the Pavonia companies in its consolidated statement of earnings.

The following pro forma condensed combined income statement for the three months ended June 30, 2012 and six months ended June 30, 2013 and 2012 combines the historical consolidated statements of earnings of the Company with those of the Pavonia companies, giving effect to the business combinations and related transactions 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 acquisition had taken place at the beginning of each period presented, nor is it necessarily indicative of future results.


Three Months Ended June 30,	2012
Total income	$	101,858
Total expenses		(59,255	)
Noncontrolling interest		(129	)

Net earnings	$	42,474

Net earnings per ordinary share — basic	$	2.58

Net earnings per ordinary share — diluted	$	2.55


Six Months Ended June 30,	2013			2012
Total income	$	206,930		$	226,753
Total expenses		(185,762	)		(156,932	)
Noncontrolling interest		(7,027	)		(5,862	)

Net earnings	$	14,141		$	63,959

Net earnings per ordinary share — basic	$	0.86		$	3.89

Net earnings per ordinary share — diluted	$	0.85		$	3.84

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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 $174.0 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:


	June 30, 2013		December 31, 2012
U.S. government and agency	$	430,055	$	361,906
Non-U.S. government		428,614		265,722
Corporate		2,199,924		1,598,876
Municipal		83,435		20,446
Residential mortgage-backed		163,765		115,594
Commercial mortgage-backed		143,288		130,848
Asset-backed		180,411		78,929

Total fixed maturity and short-term investments		3,629,492		2,572,321
Equities — U.S.		110,212		92,406
Equities — International		36,015		22,182

	$	3,775,719	$	2,686,909

The increase of $1.09 billion in the Company’s investments in fixed maturity securities, short-term investments and equities classified as trading securities for the six months ended June 30, 2013 was primarily a result of the completion of the acquisitions of SeaBright and the Pavonia companies.

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 trading:


As at June 30, 2013	Fair Value		% of Total Fair Value
AAA	$	485,322		13.4	%
AA		1,364,018		37.6	%
A		1,264,866		34.8	%
BBB or lower		492,537		13.6	%
Not Rated		22,749		0.6	%

	$	3,629,492		100.0	%


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 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:


As at June 30, 2013	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
U.S. government and agency	$	19,835	$	—	$	(1,257	)	$	18,578
Non-U.S. government		21,854		12		(984	)		20,882
Corporate		833,376		13		(45,280	)		788,109
Residential mortgage-backed		261		1		—			262
Asset-backed		8,234		5		(5	)		8,234

	$	883,560	$	31	$	(47,526	)	$	836,065

The Company’s short-term investments and fixed maturity securities classified as held-to-maturity securities as at June 30, 2013 were acquired in connection with the acquisition of the Pavonia companies. As at December 31, 2012, the Company had no investments classified as held-to-maturity.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

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 June 30, 2013	Amortized Cost		Fair Value		% of Total Fair Value
Due in one year or less	$	10,134	$	10,134		1.2	%
Due after one year through five years		81,739		80,541		9.6	%
Due after five years through ten years		113,384		109,464		13.1	%
Due after ten years		669,808		627,430		75.0	%

		875,065		827,569		98.9	%
Residential mortgage-backed		261		262		0.1	%
Asset-backed		8,234		8,234		1.0	%

	$	883,560	$	836,065		100.0	%


As at June 30, 2013	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	56,580	$	54,245		6.5	%
AA		262,453		246,528		29.5	%
A		498,644		471,057		56.3	%
BBB or lower		65,353		63,705		7.6	%
Not Rated		530		530		0.1	%

	$	883,560	$	836,065		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:


As at June 30, 2013	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
U.S. government and agency	$	4,174	$	353	$	—		$	4,527
Non-U.S. government		39,550		2,038		—			41,588
Corporate		30,598		1,568		(1	)		32,165
Residential mortgage-backed		3,777		168		(40	)		3,905
Asset-backed		260		3		(7	)		256

	$	78,359	$	4,130	$	(48	)	$	82,441

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)


As at December 31, 2012	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
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 June 30, 2013 are securities issued by U.S. governmental agencies with a fair value of $2,999 (as at December 31, 2012: $3,500 within residential and commercial mortgage-backed securities).

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 security has continuously been in an unrealized loss position:


	12 Months or Greater					Less Than 12 Months					Total
As at June 30, 2013	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate	$	53	$	(1	)	$	—	$	—		$	53	$	(1	)
Residential mortgage-backed		1,016		(38	)		100		(2	)		1,116		(40	)
Asset-backed		109		(7	)		—		—			109		(7	)

	$	1,178	$	(46	)	$	100	$	(2	)	$	1,278	$	(48	)


	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 June 30, 2013 and December 31, 2012, the number of securities classified as available-for-sale in an unrealized loss position was 12 and 30, respectively, with a fair value of $1.3 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 10 and 23, respectively. As of June 30, 2013, none of these securities were considered to be other than temporarily impaired.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

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 June 30, 2013	Amortized Cost		Fair Value		% of Total Fair Value
Due in one year or less	$	31,011	$	31,683		38.4	%
Due after one year through five years		40,587		43,197		52.5	%
Due after ten years		2,724		3,400		4.1	%

		74,322		78,280		95.0	%
Residential mortgage-backed		3,777		3,905		4.7	%
Asset-backed		260		256		0.3	%

	$	78,359	$	82,441		100.0	%


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 June 30, 2013	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	44,025	$	46,068		55.9	%
AA		18,694		19,606		23.8	%
A		5,679		6,372		7.7	%
BBB or lower		9,869		10,090		12.2	%
Not Rated		92		305		0.4	%

	$	78,359	$	82,441		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	%

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

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 six months ended June 30, 2013, the Company did not recognize any other-than-temporary impairment losses due to required sales. The Company determined that, as at June 30, 2013, no credit losses existed.

Other Investments

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


	June 30, 2013		December 31, 2012
Private equity funds	$	150,932	$	127,696
Fixed income funds		156,625		156,235
Fixed income hedge funds		62,039		53,933
Equity fund		62,473		55,881
Real estate debt fund		31,928		16,179
Other		4,415		4,921

	$	468,412	$	414,845

These investments are discussed in further detail below.

Private equity funds

This class is comprised of 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 June 30, 2013 and December 31, 2012, the Company had $150.9 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 June 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 is comprised of 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.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

Fixed income hedge funds

This class is comprised of 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.

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 loans. 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 June 30, 2013 and December 31, 2012, the Company had no investments subject to gates or side-pockets.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

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 June 30, 2013 and December 31, 2012:


June 30, 2013	Total Fair Value		Gated/Side Pocket Investments		Investments without Gates or Side Pockets		Unfunded Commitments		Redemption Frequency
Private equity funds	$	150,932	$	—	$	150,932	$	93,085	Not eligible
Fixed income funds		156,625		—		156,625		—	Daily to monthly
Fixed income hedge funds		62,039		—		62,039		—	Quarterly after lock-up periods expire
Equity fund		62,473		—		62,473		—	Bi-monthly
Real estate debt fund		31,928		—		31,928		—	Monthly
Other		4,415		—		4,415		655	Not eligible

	$	468,412	$	—	$	468,412	$	93,740


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.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

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 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.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

•

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 June 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.

•

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 June 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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

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.

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:


	June 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	$	—	$	434,582	$	—	$	434,582
Non-U.S. government		—		470,202		—		470,202
Corporate		—		2,231,483		606		2,232,089
Municipal		—		83,435		—		83,435
Residential mortgage-backed		—		167,670		—		167,670
Commercial mortgage-backed		—		143,288		—		143,288
Asset-backed		—		180,667		—		180,667
Equities — U.S.		105,712		—		4,500		110,212
Equities — International		36,015		—		—		36,015
Other investments		—		219,098		249,314		468,412

Total investments	$	141,727	$	3,930,425	$	254,420	$	4,326,572

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)


	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

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 June 30, 2013 (there were no assets classified as held-to-maturity as of December 31, 2012):


	June 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	$	—	$	18,578	$	—	$	18,578
Non-U.S. government		—		20,882		—		20,882
Corporate		—		788,109		—		788,109
Residential mortgage-backed		—		262		—		262
Asset-backed		—		8,234		—		8,234

Total investments	$	—	$	836,065	$	—	$	836,065

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 June 30, 2013:


	Fixed Maturity Investments		Other Investments			Equity Securities		Total
Level 3 investments as of April 1, 2013	$	555	$	214,687		$	4,000	$	219,242
Purchases		—		25,166			—		25,166
Sales		—		(469	)		—		(469	)
Total realized and unrealized gains through earnings		51		9,930			500		10,481
Net transfers into and/or (out of) Level 3		—		—			—		—

Level 3 investments as of June 30, 2013	$	606	$	249,314		$	4,500	$	254,420

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 June 30, 2013 included in earnings attributable to the fair value of changes in assets still held at June 30, 2013 was $10.2 million. All of this amount was included in net realized and unrealized gains.


	Fixed Maturity Investments		Other Investments			Equity Securities			Total
Level 3 investments as of April 1, 2012	$	540	$	177,354		$	3,350		$	181,244
Purchases		—		11,999			—			11,999
Sales		—		(12,021	)		—			(12,021	)
Total realized and unrealized gains through earnings		22		4,408			(40	)		4,390
Net transfers into and/or (out of) Level 3		—		—			—			—

Level 3 investments as of June 30, 2012	$	562	$	181,740		$	3,310		$	185,612

The amount of net gains/(losses) for the three months ended June 30, 2012 included in earnings attributable to the fair value of changes in assets still held at June 30, 2012 was $5.3 million. All of this amount was included in net realized and unrealized gains.


	Fixed Maturity Investments		Other Investments			Equity Securities		Total
Level 3 investments as of January 1, 2013	$	540	$	202,730		$	3,402	$	206,672
Purchases		—		34,158			—		34,158
Sales		—		(9,754	)		—		(9,754	)
Total realized and unrealized gains through earnings		66		22,180			1,098		23,344
Net transfers into and/or (out of) Level 3		—		—			—		—

Level 3 investments as of June 30, 2013	$	606	$	249,314		$	4,500	$	254,420

The amount of net gains/(losses) for the six months ended June 30, 2013 included in earnings attributable to the fair value of changes in assets still held at June 30, 2013 was $23.6 million. All of this amount was included in net realized and unrealized gains.


	Fixed Maturity Investments		Other Investments			Equity Securities		Total
Level 3 investments as of January 1, 2012	$	519	$	137,727		$	2,975	$	141,221
Purchases		—		50,162			—		50,162
Sales		—		(13,164	)		—		(13,164	)
Total realized and unrealized gains through earnings		43		7,015			335		7,393
Net transfers into and/or (out of) Level 3		—		—			—		—

Level 3 investments as of June 30, 2012	$	562	$	181,740		$	3,310	$	185,612

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.	INVESTMENTS — (cont’d)

The amount of net gains/(losses) for the six months ended June 30, 2012 included in earnings attributable to the fair value of changes in assets still held at June 30, 2012 was $7.8 million. All of this amount was included in net realized and unrealized gains.

Net Realized and Unrealized Gains (Losses)

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Gross realized gains on available-for-sale securities	$	345			1,044		$	410		$	1,474
Gross realized losses on available-for-sale securities		(114	)		—			(131	)		(423	)
Net realized gains on trading securities		3,581			4,765			9,590			8,860
Net unrealized gains (losses) on trading securities		(42,882	)		(6,617	)		(37,750	)		12,323
Net realized and unrealized gains on other investments		11,151			2,499			30,082			4,839

Net realized and unrealized gains (losses)	$	(27,919	)		1,691		$	2,201		$	27,073

Proceeds from sales and maturities of available-for-sale securities	$	100,512			93,333		$	160,143		$	183,609

Net Investment Income

Major categories of net investment income are summarized as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Interest from fixed maturity investments	$	34,752		$	21,499		$	55,377		$	41,992
Interest from cash and cash equivalents and short-term investments		4,228			2,788			7,309			7,159
Net amortization of bond premiums and discounts		(14,748	)		(7,720	)		(23,261	)		(16,426	)
Dividends from equities		1,305			690			2,396			1,311
Other investments		(106	)		—			(45	)		—
Interest on other receivables		955			4,005			1,573			5,215
Other income		593			566			1,990			3,358
Interest on deposits held with clients		1,673			314			2,868			611
Investment expenses		(1,400	)		(1,248	)		(2,992	)		(1,883	)

	$	27,252		$	20,894		$	45,215		$	41,337

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 June 30, 2013 and December 31, 2012 was as follows:


	June 30,		December 31,
	2013		2012
Collateral in trust for third party agreements	$	707,593	$	570,391
Assets on deposit with regulatory authorities		248,593		212,012
Collateral for secured letter of credit facility		355,729		246,608

	$	1,311,915	$	1,029,011

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 and for yield enhancement. These derivatives were not designated as hedging investments.

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


									Fair Value as at
Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount		Settlement Amount		June 30, 2013		December 31, 2012
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	)

									$	—	$	(1,261	)

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.	DERIVATIVE INSTRUMENTS — (cont’d)

The following table sets out the changes in fair value and realized gains on derivative instruments recorded in net earnings for the three and six month periods ended June 30, 2013 and 2012, respectively.


									Net Foreign Exchange Gains
									Three Months Ended June 30,
Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount		Settlement Amount		2013		2012
Australian dollar		February 8, 2012		December 19, 2012		AU$25.0 million	$	26,165	$	—	$	270
Australian dollar		February 8, 2012		May 10, 2013		AU$35.0 million		36,099		453		378
British pound		March 6, 2012		March 6, 2013		UKP17.0 million		26,611		—		496

									$	453	$	1,144



									Net Foreign Exchange Gains (Losses)
									Six Months Ended June 30,
Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount		Settlement Amount		2013		2012
Australian dollar		February 8, 2012		December 19, 2012		AU$25.0 million	$	26,165	$	—	$	538
Australian dollar		February 8, 2012		May 10, 2013		AU$35.0 million		36,099		303		221
British pound		March 6, 2012		March 6, 2013		UKP17.0 million		26,611		1,023		(56	)

									$	1,326	$	703

6.	PREMIUMS WRITTEN AND EARNED

Net premiums written by SeaBright totaled $10.9 million and $1.2 million from the date of acquisition to June 30, 2013 and for the three months ended June 30, 2013, respectively, and net earned premiums, over the same periods, totaled $72.1 million and $41.2 million, respectively.

Life and annuity premiums written by the Company’s life and annuities segment, which includes both Pavonia and Laguna Life Limited (“Laguna”) for 2013, totaled $33.0 million and $33.7 million for the three and six months ended June 30, 2013, respectively, and net earned premiums, over the same periods, totaled $34.4 million and $35.1 million, respectively.

For the three and six months ended June 30, 2012, our life and annuities segment, which consisted of Laguna only, had net written and earned premiums of $0.9 million and $1.9 million, respectively.


	Three Months Ended June 30, 2013						Six Months Ended June 30, 2013
	Premiums Written			Premiums Earned			Premiums Written			Premiums Earned
*Non-life run-off*
Direct	$	4,048		$	44,620		$	15,904		$	78,201
Assumed		396			794			638			1,349
Ceded		(3,274	)		(4,198	)		(5,664	)		(7,414	)

Net	$	1,170		$	41,216		$	10,878		$	72,136


*Life and annuities*
Life	$	32,993		$	34,380		$	33,734		$	35,121

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
	Premiums Written		Premiums Earned		Premiums Written		Premiums Earned

*Life and annuities*
Life	$	896	$	896	$	1,870	$	1,870

7.	REINSURANCE BALANCES RECOVERABLE


	June 30,			December 31,
	2013			2012
*Non-life run-off*
Recoverable from reinsurers on:
Outstanding losses	$	667,098		$	665,303
Losses incurred but not reported		297,593			295,922
Fair value adjustments		(75,721	)		(85,005	)

Total reinsurance reserves recoverable		888,970			876,220
Paid losses recoverable		247,664			246,408

		1,136,634			1,122,628


*Life and annuitie*s
Recoverable losses incurred but not reported		40,763			—
Paid losses recoverable		1,487			291

		42,250			291

	$	1,178,884		$	1,122,919

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.

As of June 30, 2013 and December 31, 2012, the Company had total non-life run-off reinsurance balances recoverable of $1.14 billion and $1.12 billion, respectively. The increase of $14.0 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 six months ended June 30, 2013.

At June 30, 2013 and December 31, 2012, the provision for uncollectible reinsurance recoverable relating to total non-life run-off reinsurance balances recoverable was $338.3 million and $343.9 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the balances are first allocated to applicable reinsurers. This determination is based on a detailed process, although management judgment is involved. 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 June 30, 2013 decreased to 22.9% as compared to 23.4% as of December 31, 2012,

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.	REINSURANCE BALANCES RECOVERABLE — (cont’d)

primarily as a result of reinsurance balances recoverable of companies acquired during the period against which there were minimal provisions for uncollectible reinsurance recoverable.

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.

At June 30, 2013 and December 31, 2012, the Company’s top ten reinsurers accounted for 64.8% and 63.1%, respectively, of total non-life run-off reinsurance balances recoverable (which includes loss reserves recoverable and recoverables on paid losses) and included $218.6 million and $194.5 million, respectively, of IBNR reserves recoverable. With the exception of one BBB+ rated reinsurer from which $45.6 million was recoverable (December 31, 2012: $37.7 million), the other top ten reinsurers, as at June 30, 2013 and December 31, 2012, were all rated A- or better. Reinsurance balances recoverable by reinsurer were as follows:


	June 30, 2013					December 31, 2012
	Reinsurance Balances Recoverable		% of Total			Reinsurance Balances Recoverable		% of Total
Top ten reinsurers	$	736,093		64.8	%	$	708,953		63.1	%
Other reinsurers’ balances > $1 million		384,105		33.8	%		409,666		36.5	%
Other reinsurers’ balances < $1 million		16,436		1.4	%		4,300		0.4	%

Total	$	1,136,634		100.0	%	$	1,122,919		100.0	%

As at June 30, 2013 and December 31, 2012, reinsurance balances recoverable with a carrying value of $252.4 million and $144.1 million, respectively, were associated with two and one reinsurers, respectively, which represented 10% or more of total non-life run-off reinsurance balances recoverable. Of the $252.4 million and $144.1 million recoverable from reinsurers as at June 30, 2013 and December 31, 2012, $93.0 million and $121.6 million, respectively, is secured by a trust fund held for the benefit of the Company’s insurance and reinsurance subsidiaries. As at June 30, 2013 and December 31, 2012, the two and one reinsurers, respectively, had a minimum credit rating of A+, as provided by a major rating agency.

8.	LOSSES AND LOSS ADJUSTMENT EXPENSES


	June 30,			December 31,
	2013			2012
Outstanding	$	2,518,434		$	2,358,330
Incurred but not reported		1,780,170			1,588,309
Fair value adjustment		(257,368	)		(296,512	)

	$	4,041,236		$	3,650,127

Refer to Note 8 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for more information on establishing reserves.

Loss and loss adjustment expenses increased by $391.1 million in the six months ended June 30, 2013 primarily as a result of the completion of the acquisition of SeaBright, the assumption of Lloyd’s syndicate business by S2008 and the assumption by PWIC of a portfolio of worker’s compensation business from APS.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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


	Three Months Ended June 30,
	2013			2012
Balance as at April 1 (1)	$	4,143,799		$	4,126,536
Less: total reinsurance reserves recoverable		947,750			1,294,606

		3,196,049			2,831,930
Net reduction in ultimate loss and loss adjustment expense liabilities related to:
Current period		41,216			—
Prior periods		(62,926	)		(68,365	)

Total net reduction in ultimate loss and loss adjustment expense liabilities		(21,710	)		(68,365	)

Net losses paid related to:
Current period		(8,496	)		—
Prior periods		(40,884	)		(72,771	)

Total net losses paid		(49,380	)		(72,771	)

Effect of exchange rate movement		(9,411	)		(16,760	)
Assumed business		36,718			58,721

Net balance as at June 30		3,152,266			2,732,755
Plus: total reinsurance reserves recoverable		888,970			1,064,854

Balance as at June 30	$	4,041,236		$	3,797,609

(1)

The Company has reclassified outstanding loss and loss adjustment expenses of $11.1 million and $12.1 million to policy benefits for life and annuity contracts as at April 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.

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


	Three Months Ended June 30,
	2013									2012
	Prior Periods			Current Period			Total			Prior Periods			Current Period		Total
Net losses paid	$	(40,884	)	$	(8,496	)	$	(49,381	)	$	(72,771	)	$	—	$	(72,771	)
Net change in case and LAE reserves		74,166			(10,133	)		64,033			108,829			—		108,829
Net change in IBNR reserves		15,218			(22,587	)		(7,368	)		22,359			—		22,359

Reduction (increase) in estimates of net ultimate losses		48,500			(41,216	)		7,284			58,417			—		58,417
Reduction in provisions for bad debt		—			—			—			527			—		527
Reduction in provisions for unallocated loss adjustment expense liabilities		16,795			—			16,795			11,661			—		11,661
Amortization of fair value adjustments		(2,369	)		—			(2,369	)		(2,240	)		—		(2,240	)

Net reduction (increase) in ultimate loss and loss adjustment expense liabilities	$	62,926		$	(41,216	)	$	21,710		$	68,365		$	—	$	68,365

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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 loss and loss adjustment expense liabilities for the three months ended June 30, 2013 of $21.7 million included incurred losses of $41.2 million related to premiums earned in the period by SeaBright. Excluding SeaBright’s incurred losses of $41.2 million, ultimate loss and loss adjustment expenses relating to prior periods were reduced by $62.9 million, which was attributable to a reduction in estimates of net ultimate losses of $48.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $16.8 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $2.4 million.

Excluding the impact of losses incurred of $41.2 million relating to SeaBright, the reduction in estimates of net ultimate losses of $48.5 million was primarily related 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 $8.3 million;

(ii)

net favorable incurred loss development of $25.0 million (excluding the impact of redundant case reserves of $8.3 million) which included the settlement of net ceded case reserves of $26.2 million (excluding ceded IBNR recoverable) for net paid receipts of $74.3 million relating to the settlement of five 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)

a reduction in IBNR reserves of $20.2 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 loss and loss adjustment expenses relating to non-commuted exposures in one of its Bermuda-based reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for this subsidiary was reduced as a result of the favorable trend of loss development during 2013 compared to prior forecasts.

The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended June 30, 2012 of $68.4 million was attributable to a reduction in estimates of net ultimate losses of $58.4 million, a reduction in provisions for bad debt of $0.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $11.7 million, relating to 2012 runoff activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $2.2 million.

The reduction in estimates of net ultimate losses of $58.4 million for the three months ended June 30, 2012, comprised of net favorable incurred loss development of $36.0 million and reductions in IBNR reserves of $22.4 million, primarily related to the completion of six commutations 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 balances recoverable as at January 1, 2012.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

The reduction in provisions for bad debt of $0.5 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.

The table below provides a reconciliation of the beginning and ending reserves for loss and loss adjustment expenses for the six months ended June 30, 2013 and 2012. Losses incurred and paid are reflected net of reinsurance recoverables.


	Six Months Ended June 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 loss and loss adjustment expense liabilities related to:
Current period		72,136			—
Prior periods		(82,298	)		(79,183	)

Total net reduction in ultimate loss and loss adjustment expense liabilities		(10,162	)		(79,183	)

Net losses paid related to:
Current period		(13,423	)		—
Prior periods		(122,018	)		(135,481	)

Total net losses paid		(135,441	)		(135,481	)

Effect of exchange rate movement		(35,362	)		(2,780	)
Acquired on purchase of subsidiaries		479,982			—
Assumed business		79,342			61,121

Net balance as at June 30		3,152,266			2,732,755
Plus: total reinsurance reserves recoverable		888,970			1,064,854

Balance as at June 30	$	4,041,236		$	3,797,609

(1)

The Company has reclassified outstanding loss and loss adjustment expenses 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.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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


	Six Months Ended June 30,
	2013									2012
	Prior Periods			Current Period			Total			Prior Periods			Current Period		Total
Net losses paid	$	(122,018	)	$	(13,423	)	$	(135,441	)	$	(135,481	)	$	—	$	(135,481	)
Net change in case and LAE reserves		137,612			(15,379	)		122,233			169,944			—		169,944
Net change in IBNR reserves		37,968			(43,334	)		(5,366	)		27,252			—		27,252

Reduction (increase) in estimates of net ultimate losses		53,562			(72,136	)		(18,574	)		61,715			—		61,715
Reduction in provisions for bad debt		—			—			—			2,782			—		2,782
Reduction in provisions for unallocated loss adjustment expense liabilities		33,198			—			33,198			24,513			—		24,513
Amortization of fair value adjustments		(4,462	)		—			(4,462	)		(9,827	)		—		(9,827	)

Net reduction (increase) in ultimate loss and loss adjustment expense liabilities	$	82,298		$	(72,136	)	$	10,162		$	79,183		$	—	$	79,183

The net reduction in ultimate loss and loss adjustment expense liabilities for the six months ended June 30, 2013 of $10.2 million included incurred losses of $72.1 million related to premiums earned in the period by SeaBright. Excluding SeaBright’s incurred losses of $72.1 million, ultimate loss and loss adjustment expenses relating to prior periods were reduced by $82.3 million, which was attributable to a reduction in estimates of net ultimate losses of $53.6 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $33.2 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.5 million.

Excluding the impact of losses incurred of $72.1 million relating to SeaBright, the reduction in estimates of net ultimate losses of $53.6 million was primarily related to:

(i)

(ii)

net adverse incurred loss development of $1.0 million (excluding the impact of redundant case reserves of $16.6 million) which included the settlement of net ceded case reserves of $26.2 million (excluding ceded IBNR recoverable) for net paid receipts of $74.3 million relating to the settlement of five 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)

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Bermuda-based reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for this subsidiary was reduced as a result of the favorable trend of loss development during 2013 compared to prior forecasts.

The net reduction in ultimate loss and loss adjustment expense liabilities for the six months ended June 30, 2012 of $79.2 million was attributable to a reduction in estimates of net ultimate losses of $61.7 million, a reduction in provisions for bad debt of $2.8 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $24.5 million, relating to 2012 runoff activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $9.8 million.

The reduction in estimates of net ultimate losses of $61.7 million for the six months ended June 30, 2012, comprised of net favorable incurred loss development of $34.4 million and reductions in IBNR reserves of $27.3 million, primarily related to the completion of six commutations 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 balances recoverable as at January 1, 2012.

The reduction in provisions for bad debt of $2.8 million resulted from the collection of recoverables 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 June 30, 2013 and December 31, 2012 were as follows:


	June 30, 2013			December 31, 2012
Life	$	400,723		$	11,027
Annuities		976,184			—

		1,376,907			11,027
Fair value adjustments		(83,637	)		—

	$	1,293,270		$	11,027

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 June 30, 2013, none of the Company’s direct premiums written related to retrospectively rated contracts. The Company accrued $9.3 million for retrospective premiums receivable and $25.8 million for return retrospective premiums as at June 30, 2013.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.

INTANGIBLE ASSETS


	Intangible Assets With a Definite Life
Balance as at December 31, 2012	$	211,507
Recognized during the period		60,746
Intangible assets amortization		(6,969	)

Balance as at June 30, 2013	$	265,284

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 June 30, 2013 and December 31, 2012 were as follows:


	June 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	$	530,534		$	(273,166	)	$	257,368		$	552,455		$	(255,943	)	$	296,512
Reinsurance recoverables		(181,853	)		106,132			(75,721	)		(178,377	)		93,372			(85,005	)
Policy benefits for life and annuity contracts		86,143			(2,506	)		83,637			—			—			—

Total fair value adjustments	$	434,824		$	(169,540	)	$	265,284		$	374,078		$	(162,571	)	$	211,507

12.

LOANS PAYABLE

The Company’s long-term debt consists of loan facilities used to partially finance certain of the Company’s acquisitions or significant new business transactions, its Revolving Credit Facility (the “EGL Revolving Credit Facility”), which can be used for permitted acquisitions and general corporate purposes, and surplus notes acquired in connection with the SeaBright acquisition. The Company’s three outstanding credit facilities (its term facility related to the Company’s 2011 acquisition of Clarendon National Insurance Company (the “Clarendon Facility”), its term facility related to the acquisition of SeaBright (the “SeaBright Facility”), and the EGL Revolving Credit 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.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12.

LOANS PAYABLE — (cont’d)

On February 5, 2013 and March 26, 2013, the Company borrowed $56.0 million and $60.0 million, respectively, under the EGL Revolving Credit Facility. As of June 30, 2013, the unused portion of the EGL Revolving Credit Facility was $134.0 million.

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

Total amounts of loans payable outstanding, including accrued interest, as of June 30, 2013 and December 31, 2012, totaled $347.9 million and $107.4 million, respectively, and were comprised as follows:


Facility	Date of Facility		Facility Term	June 30, 2013		December 31, 2012
EGL Revolving Credit Facility		June 30, 2011	3 Years	$	116,000	$	—
SeaBright Facility		December 21, 2012	3 Years		111,000		—
Clarendon Facility		July 12, 2011	4 Years		106,500		106,500

Total long-term bank debt					333,500		106,500
SeaBright Surplus Notes					12,000		—
Accrued interest					2,403		930

Total loans payable				$	347,903	$	107,430

Amendment and Restatement of EGL Revolving Credit Facility

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 revolving credit facility (expiring in July 2018) pursuant to which the Company is permitted to borrow up to an aggregate of $375.0 million (the “Credit Facility”), which is available to fund permitted acquisitions and for general corporate purposes. The 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 Credit Facility is subject to customary conditions.

The 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 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 Credit Facility will be subject to a commitment fee of 1.10%. The 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 Credit Facility terminates and all amounts borrowed must be repaid on the fifth anniversary of the date of the Restated Credit Agreement.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12.

LOANS PAYABLE — (cont’d)

SeaBright Surplus Notes

On May 26, 2004, SeaBright issued, in a private placement, $12.0 million in subordinated floating rate Surplus Notes due in 2034. The note holder is ICONS, Ltd., with Wilmington Trust Company acting as Trustee. Interest, paid quarterly in arrears, is calculated at the beginning of the interest payment period using the three-month LIBOR plus 400 basis points. The quarterly interest rate cannot exceed the initial interest rate by more than 10% per year, cannot exceed the corporate base (prime) rate by more than 2% and cannot exceed the highest rate permitted by New York law. The rate or amount of interest required to be paid in any quarter is also subject to limitations imposed by the Illinois Insurance Code. Interest amounts not paid as a result of these limitations become “Excess Interest,” which SeaBright may be required to pay in the future, subject to the same limitations and all other provisions of the Surplus Notes Indenture. Excess Interest has not applied during the periods the notes have been outstanding. The interest rate in effect as at June 30, 2013 was 4.3%.

Interest and principal may be paid only upon the prior approval of the Illinois Department of Insurance. In the event of default, as defined, or failure to pay interest due to lack of Illinois Department of Insurance approval, SeaBright would be prohibited from paying dividends on its capital stock. If an event of default occurs and is continuing, the principal and accrued interest would become immediately due and payable.

The notes are redeemable prior to 2034 by SeaBright, in whole or in part, on any interest payment date. The Company has received approval from the Illinois Department of Insurance to redeem the notes in whole, and has notified both the trustee and note holder that the Company will redeem the notes on August 24, 2013, the next interest payment date.

Interest expense for the three months ended June 30, 2013 and the period from February 7, 2013 (the date of acquisition of SeaBright) to June 30, 2013 was $0.1 million and $0.2 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 six months ended June 30, 2013 the Company completed the acquisitions of SeaBright and the Pavonia companies, which resulted in an increase in the number of employees from 383 at December 31, 2012 to 634 at June 30, 2013. The Company did not assume any significant post-retirement benefit obligations on completion of these acquisitions.

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 six months ended June 30, 2013 and 2012 are summarized as follows:


	June 30, 2013						June 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		2,540			273			2,931			243
Vested		(48,025	)		(5,571	)		(46,217	)		(4,508	)

Nonvested — June 30		115,159		$	15,314			160,644		$	15,894

2011-2015 Annual Incentive Compensation Program

For the three and six months ended June 30, 2013 and 2012, nil and 191 shares, respectively, were awarded to directors, officers and employees under the 2006 Equity Incentive Plan (the “Equity Plan”). The total value of the award for the three and six months ended June 30, 2012 was $0.1 million and $0.2 million, respectively, and 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 six months ended June 30, 2013 was $1.1 million and $3.3 million, respectively, as compared to $7.2 million and $8.9 million, respectively, for the three and six months ended June 30, 2012.

2006 Equity Incentive Plan

The total unrecognized compensation cost related to the Company’s non-vested share awards under the Equity Plan as at June 30, 2013 and 2012 was $6.2 million and $9.7 million, respectively. This cost is expected to be recognized evenly over the next 2.3 years. Compensation costs of $0.7 million and $1.5 million relating to these share awards were recognized in the Company’s statement of earnings for the three and six months ended June 30, 2013, respectively, as compared to $0.7 million and $1.4 million, respectively, for the three and six months ended June 30, 2012.

Enstar Group Limited Employee Share Purchase Plan

Compensation costs of less than $0.1 million and $0.2 million, respectively, relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan were recognized in the Company’s statement of earnings for each of the three and six month periods ended June 30, 2013 and 2012. For the six month periods ended June 30, 2013 and 2012, 2,540 and 2,740 shares, respectively, were issued to employees under such plan.

Deferred Compensation and Ordinary Share Plan for Non-Employee Directors

For the six months ended June 30, 2013 and 2012 , 1,826 and 1,540 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 each of the three and six month periods ended June 30, 2013 and 2012 of $0.1 million and $0.2 million, respectively.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13.

EMPLOYEE BENEFITS — (cont’d)

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 six months ended June 30, 2013 was $1.8 million and $3.1 million, respectively, as compared to $1.0 million and $2.9 million, respectively, for the three and six month periods ended June 30, 2012.

In addition, the Company recorded pension expense relating to the PWAC Plan of $0.2 million and $0.4 million for each of the three and six month periods ended June 30, 2013 and 2012. 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 June 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 Director’s 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 1,901,000 Voting Ordinary Shares and approximately 711,000 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, as 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;

•

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’