Edgar Filing: Enstar Group LTD

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended September 30, 2013

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

For the Transition Period From to

001-33289

Commission File Number

ENSTAR GROUP LIMITED

(Exact name of registrant as specified in its charter)


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

P.O. Box HM 2267

Windsor Place, 3rd Floor

22 Queen Street

Hamilton HM JX

Bermuda

(Address of principal executive office, including zip code)

(441) 292-3645

(Registrant’s telephone number, including area code)

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

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

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

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

As of November 6, 2013, the registrant had outstanding 13,901,662 voting ordinary shares and 2,725,637 non-voting convertible ordinary shares, each par value $1.00 per share.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 (Unaudited)		3
	Condensed Consolidated Statements of Earnings for the Three and Nine Month Periods Ended September 30, 2013 and 2012 (Unaudited)		4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Month Periods Ended September 30, 2013 and 2012 (Unaudited)		5
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Month Periods Ended September 30, 2013 and 2012 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2013 and 2012 (Unaudited)		7
	Notes to the Condensed Consolidated Financial Statements (Unaudited)		8
	Report of Independent Registered Public Accounting Firm		59
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		60
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		103
Item 4.	Controls and Procedures		104

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings		106
Item 1A.	Risk Factors		106
Item 5.	Other Information		106
Item 6.	Exhibits		107
Signature			108

PART I—FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2013 and December 31, 2012


	September 30, 2013			December 31, 2012
	(expressed in thousands of U.S. dollars, except share data)
ASSETS
Short-term investments, trading, at fair value	$	387,838		$	319,111
Short-term investments, held-to-maturity, at amortized cost		10,111			—
Fixed maturities, trading, at fair value		3,461,075			2,253,210
Fixed maturities, held-to-maturity, at amortized cost		870,454			—
Fixed maturities, available-for-sale, at fair value (amortized cost: 2013—$60,092; 2012—$245,396)		63,591			251,121
Equities, trading, at fair value		145,723			114,588
Other investments, at fair value		518,307			414,845

Total investments		5,457,099			3,352,875
Cash and cash equivalents		520,560			654,890
Restricted cash and cash equivalents		386,605			299,965
Accrued interest receivable		42,215			22,932
Accounts receivable		59,745			15,399
Premiums receivable		153,623			—
Income taxes recoverable		11,718			11,302
Deferred tax asset		41,478			9,421
Reinsurance balances recoverable		1,395,345			1,122,919
Funds held by reinsured companies		235,156			365,252
Goodwill		21,222			21,222
Other assets		17,503			6,066

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

LIABILITIES
Losses and loss adjustment expenses	$	4,400,418		$	3,650,127
Policy benefits for life and annuity contracts		1,288,148			11,027
Unearned premium		34,136			—
Insurance and reinsurance balances payable		213,033			143,123
Accounts payable and accrued liabilities		74,587			73,258
Income taxes payable		19,635			23,023
Deferred tax liabilities		7,260			14,486
Loans payable		355,663			107,430
Other liabilities		73,478			84,536

TOTAL LIABILITIES		6,466,358			4,107,010

COMMITMENTS AND CONTINGENCIES
REDEEMABLE NONCONTROLLING INTEREST		32,507			—

SHAREHOLDERS’ EQUITY
Share capital
Authorized, issued and fully paid, par value $1 each (authorized 2013: 156,000,000; 2012: 156,000,000)
Ordinary shares (issued and outstanding 2013: 13,801,425; 2012: 13,752,172)		13,801			13,752
Non-voting convertible ordinary shares:
Series A (issued 2013: 2,972,892; 2012: 2,972,892)		2,973			2,973
Series B, C and D (issued and outstanding 2013: 2,725,637; 2012: 2,725,637)		2,726			2,726
Treasury shares at cost (Series A non-voting convertible ordinary shares 2013: 2,972,892; 2012: 2,972,892)		(421,559	)		(421,559	)
Additional paid-in capital		961,270			958,571
Accumulated other comprehensive income		14,676			24,439
Retained earnings		1,043,996			972,853

Total Enstar Group Limited Shareholders’ Equity		1,617,883			1,553,755

Noncontrolling interest		225,521			221,478

TOTAL SHAREHOLDERS’ EQUITY		1,843,404			1,775,233

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY	$	8,342,269		$	5,882,243

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(expressed in thousands of U.S. dollars, except share and per share data)
INCOME
Net premiums earned—non-life run-off	$	28,134		$	—		$	100,270		$	—
Net premiums earned—life and annuities		30,540			822			65,661			2,692
Consulting fees		2,398			1,944			7,805			5,913
Net investment income		25,009			19,658			70,224			60,995
Net realized and unrealized gains		37,010			28,280			39,211			55,353

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

EXPENSES
Net reduction in ultimate losses and loss adjustment expense liabilities:
Losses incurred on current period premiums earned		28,134			—			100,270			—
Reduction in estimates of net ultimate losses		(27,850	)		(58,506	)		(81,413	)		(120,221	)
Reduction in provisions for bad debt		(5,465	)		—			(5,465	)		(2,782	)
Reduction in provisions for unallocated loss adjustment expense liabilities		(16,320	)		(12,579	)		(49,518	)		(37,092	)
Amortization of fair value adjustments		5,025			8,538			9,488			18,365

		(16,476	)		(62,547	)		(26,638	)		(141,730	)
Life and annuity policy benefits		33,332			822			63,555			2,692
Salaries and benefits		29,716			25,138			79,013			69,968
General and administrative expenses		29,126			14,409			67,074			43,423
Interest expense		3,270			1,713			8,796			5,886
Net foreign exchange (gains) losses		(673	)		977			(3,994	)		2,618

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

EARNINGS BEFORE INCOME TAXES		44,796			70,192			95,365			142,096
INCOME TAXES		(1,340	)		(14,700	)		(13,726	)		(30,347	)

NET EARNINGS		43,456			55,492			81,639			111,749
Less: Net earnings attributable to noncontrolling interest		(3,469	)		(7,776	)		(10,496	)		(13,638	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	39,987		$	47,716		$	71,143		$	98,111

EARNINGS PER SHARE—BASIC
Net earnings per ordinary share attributable to Enstar Group Limited shareholders	$	2.42		$	2.90		$	4.31		$	5.97

EARNINGS PER SHARE—DILUTED
Net earnings per ordinary share attributable to Enstar Group Limited shareholders	$	2.39		$	2.86		$	4.26		$	5.88

Weighted average ordinary shares outstanding—basic		16,525,012			16,437,780			16,521,865			16,433,943
Weighted average ordinary shares outstanding—diluted		16,720,715			16,676,529			16,698,640			16,674,356

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(expressed in thousands of U.S. dollars)
NET EARNINGS	$	43,456		$	55,492		$	81,639		$	111,749

Other comprehensive income, net of tax:
Unrealized holding gains on investments arising during the period		36,840			25,464			37,210			53,135
Reclassification adjustment for net realized and unrealized gains included in net earnings		(37,010	)		(28,280	)		(39,211	)		(55,353	)

Unrealized losses arising during the period, net of reclassification adjustment		(170	)		(2,816	)		(2,001	)		(2,218	)
Currency translation adjustment		9,053			3,597			(12,448	)		2,689

Total other comprehensive income (loss)		8,883			781			(14,449	)		471

Comprehensive income		52,339			56,273			67,190			112,220
Less comprehensive income attributable to noncontrolling interest		(4,206	)		(7,652	)		(5,810	)		(13,921	)

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	48,133		$	48,621		$	61,380		$	98,299

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

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


	Nine Months Ended September 30,
	2013			2012
	(expressed in thousands of U.S. dollars)
Share Capital—Ordinary Shares
Balance, beginning of period	$	13,752		$	13,665
Issue of shares		4			4
Share awards granted/vested		45			44

Balance, end of period	$	13,801		$	13,713

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

Share Capital—Series B, C and D Non-Voting Convertible Ordinary Shares
Balance, beginning and end of period	$	2,726		$	2,726

Treasury Shares

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

Additional Paid-in Capital
Balance, beginning of period	$	958,571		$	956,329
Share awards granted/vested		—			415
Issue of shares, net		487			381
Amortization of equity incentive plan		2,212			2,066

Balance, end of period	$	961,270		$	959,191

Accumulated Other Comprehensive Income Attributable to Enstar Group Limited
Balance, beginning of period	$	24,439		$	27,096
Foreign currency translation adjustments		(8,254	)		1,332
Net movement in unrealized holding losses on investments		(1,509	)		(1,145	)

Balance, end of period	$	14,676		$	27,283

Retained Earnings
Balance, beginning of period	$	972,853		$	804,836
Net earnings attributable to Enstar Group Limited		71,143			98,111

Balance, end of period	$	1,043,996		$	902,947

Noncontrolling Interest
Balance, beginning of period	$	221,478		$	297,345
Return of capital		—			(35,366	)
Dividends paid		(1,740	)		(18,985	)
Net earnings attributable to noncontrolling interest*		10,469			13,638
Foreign currency translation adjustments		(4,194	)		1,356
Net movement in unrealized holding losses on investments		(492	)		(1,073	)

Balance, end of period	$	225,521		$	256,915

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

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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


	Nine Months Ended September 30,
	2013			2012
	(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
Net earnings	$	81,639		$	111,749
Adjustments to reconcile net earnings to cash flows used in operating activities:
Net realized and unrealized investment losses (gains)		10,996			(42,825	)
Net realized and unrealized gains from other investments		(50,207	)		(12,528	)
Other items		3,656			3,296
Depreciation and amortization		761			1,004
Amortization of bond premiums and discounts		36,929			23,017
Net movement of trading securities held on behalf of policyholders		2,187			15,529
Sales and maturities of trading securities		2,063,258			1,709,227
Purchases of trading securities		(2,257,188	)		(2,008,346	)
Changes in assets and liabilities:
Reinsurance balances recoverable		213,042			543,427
Other assets		237,585			73,590
Losses and loss adjustment expenses		(314,862	)		(645,708	)
Policy benefits for life and annuity contracts		21,490			192
Insurance and reinsurance balances payable		(31,637	)		(25,546	)
Accounts payable and accrued liabilities		(38,459	)		(12,954	)
Other liabilities		(104,790	)		10,747

Net cash flows used in operating activities		(125,600	)		(256,129	)

INVESTING ACTIVITIES:
Acquisitions, net of cash acquired		(308,710	)		—
Sales and maturities of available-for-sale securities		181,066			296,537
Purchases of held-to-maturity securities		(112	)		—
Maturities of held-to-maturity securities		253			—
Movement in restricted cash and cash equivalents		(86,640	)		84,080
Funding of other investments		(68,097	)		(182,671	)
Redemption of bond funds		18,656			103
Other investing activities		15			(636	)

Net cash flows (used in) provided by investing activities		(263,569	)		197,413

FINANCING ACTIVITIES:
Distribution of capital to noncontrolling interest		—			(7,236	)
Contribution to surplus of subsidiary by redeemable noncontrolling interest		32,480			—
Dividends paid to noncontrolling interest		(1,740	)		(18,985	)
Receipt of loans		274,800			—
Repayment of loans		(39,505	)		(115,875	)

Net cash flows provided by (used in) financing activities		266,035			(142,096	)

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS		(11,196	)		(5,307	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(134,330	)		(206,119	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		654,890			850,474

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	520,560		$	644,355

Supplemental Cash Flow Information
Net income taxes paid	$	24,010		$	22,093
Interest paid	$	7,326		$	5,556

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 and December 31, 2012

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

(unaudited)

1.	SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation and Consolidation

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

Significant New Accounting Policies

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

(a) Premium revenue recognition

Non-life run-off

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

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.	SIGNIFICANT ACCOUNTING POLICIES—(cont’d)

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

Life and annuities

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

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

(b) Premiums Receivable

Non-life run-off

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

(c) Life and annuity benefits

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.	SIGNIFICANT ACCOUNTING POLICIES—(cont’d)

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

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

(d) Investments

Short-term investments and fixed maturity investments

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

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

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

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.	SIGNIFICANT ACCOUNTING POLICIES—(cont’d)

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

(e) Redeemable noncontrolling interest

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

New Accounting Standards Adopted in 2013

ASU 2011-11, Disclosures About Offsetting Assets and Liabilities

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

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.	SIGNIFICANT ACCOUNTING POLICIES—(cont’d)

Recently Issued Accounting Pronouncements Not Yet Adopted

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

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

2.	ACQUISITIONS

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

Torus Insurance Holdings Limited

Amalgamation Agreement

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.	ACQUISITIONS—(cont’d)

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

Stock Issuance

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

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.	ACQUISITIONS—(cont’d)

Trident Co-investment in Torus

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

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

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

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

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

Atrium and Arden

Acquisition Agreements

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.	ACQUISITIONS—(cont’d)

Trident Co-investment in Atrium and Arden

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

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

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

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

Completion of Acquisition of Arden

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.	ACQUISITIONS—(cont’d)

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


Purchase price	$	79,600

Net assets acquired at fair value	$	79,600

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


ASSETS
Short-term investments, trading, at fair value	$	28,852
Fixed maturities, trading, at fair value		55,428
Other investments		2,867

Total investments		87,147
Cash and cash equivalents		23,037
Restricted cash and cash equivalents		31,812
Premiums receivable		124,252
Reinsurance balances recoverable		351,210
Other assets		17,582

TOTAL ASSETS		635,040

LIABILITIES
Losses and loss adjustment expenses		480,157
Insurance and reinsurance balances payable		59,304
Unearned premium		10,412
Other liabilities		5,567

TOTAL LIABILITIES		555,440

NET ASSETS ACQUIRED AT FAIR VALUE	$	79,600

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

SeaBright

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.	ACQUISITIONS—(cont’d)

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

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

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


Purchase price	$	252,091

Net assets acquired at fair value	$	252,091

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


ASSETS
Short-term investments, trading, at fair value	$	25,171
Fixed maturities, trading, at fair value		683,780

Total investments		708,951
Cash and cash equivalents		41,846
Accrued interest receivable		6,344
Premiums receivable		112,510
Reinsurance balances recoverable		117,462
Other assets		4,515

TOTAL ASSETS		991,628

LIABILITIES
Losses and loss adjustment expenses		592,774
Unearned premium		93,897
Loans payable		12,000
Insurance balances payable		3,243
Other liabilities		37,623

TOTAL LIABILITIES		739,537

NET ASSETS ACQUIRED AT FAIR VALUE	$	252,091

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

Pavonia

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.	ACQUISITIONS—(cont’d)

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

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


Purchase price	$	155,564

Net assets acquired at fair value	$	155,564

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


ASSETS
Short-term investments, trading, at fair value	$	40,404
Short-term investments, held-to-maturity, at fair value		10,268
Fixed maturities, trading, at fair value		329,985
Fixed maturities, held-to-maturity, at fair value		876,474

Total investments		1,257,131
Cash and cash equivalents		81,849
Accrued interest receivable		15,183
Funds held by reinsured companies		47,761
Other assets		59,002

TOTAL ASSETS		1,460,926

LIABILITIES
Policyholder benefits for life and annuity contracts		1,255,632
Reinsurance balances payable		39,477
Unearned premium		5,618
Other liabilities		4,635

TOTAL LIABILITIES		1,305,362

NET ASSETS ACQUIRED AT FAIR VALUE	$	155,564

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2.	ACQUISITIONS—(cont’d)

Pro Forma Financial Information—Pavonia and Arden

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


Three Months Ended September 30,	2013			2012
Total income	$	123,123		$	130,583
Total expenses		(80,013	)		(81,527	)
Noncontrolling interest		(3,330	)		(7,469	)

Net earnings	$	39,780		$	41,587

Net earnings per ordinary share—basic	$	2.41		$	2.53

Net earnings per ordinary share—diluted	$	2.38		$	2.49


Nine Months Ended September 30,	2013			2012
Total income	$	347,553		$	507,945
Total expenses		(270,002	)		(285,894	)
Noncontrolling interest		(8,903	)		(60,402	)

Net earnings	$	68,648		$	161,649

Net earnings per ordinary share—basic	$	4.16		$	9.84

Net earnings per ordinary share—diluted	$	4.11		$	9.69

3.	SIGNIFICANT NEW BUSINESS

Shelbourne

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

American Physicians

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

3.	SIGNIFICANT NEW BUSINESS—(cont’d)

Reciprocal of America

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

4.	INVESTMENTS

Trading

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


	September 30, 2013		December 31, 2012
U.S. government and agency	$	430,315	$	361,906
Non-U.S. government		453,378		265,722

Corporate		2,331,145		1,598,876
Municipal		61,732		20,446
Residential mortgage-backed		185,262		115,594
Commercial mortgage-backed		112,933		130,848
Asset-backed		274,148		78,929

Total fixed maturity and short-term investments		3,848,913		2,572,321
Equities—U.S.		106,004		92,406
Equities—International		39,719		22,182

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

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


As at September 30, 2013	Fair Value		% of Total Fair Value
AAA	$	522,425		13.5	%
AA		1,400,357		36.4	%
A		1,317,261		34.2	%
BBB or lower		576,068		15.0	%
Not Rated		32,802		0.9	%

	$	3,848,913		100.0	%

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)


As at December 31, 2012	Fair Value		% of Total Fair Value
AAA	$	418,297		16.3	%
AA		958,267		37.2	%
A		812,428		31.6	%
BBB or lower		376,347		14.6	%
Not Rated		6,982		0.3	%

	$	2,572,321		100.0	%

Held-to-maturity

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


	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
As at September 30, 2013
U.S. government and agency	$	19,865	$	—	$	(1,534	)	$	18,331
Non-U.S. government		31,371		15		(1,631	)		29,755
Corporate		820,995		136		(48,227	)		772,904
Residential mortgage-backed		192		1		(1	)		192
Asset-backed		8,142		5		—			8,147

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

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

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

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


As at September 30, 2013	Amortized Cost		Fair Value		% of Total Fair Value
Due in one year or less	$	15,302	$	15,321		1.8	%
Due after one year through five years		85,513		84,538		10.2	%
Due after five years through ten years		103,299		99,912		12.0	%
Due after ten years		668,117		621,219		74.9	%

		872,231		820,990		98.9	%
Residential mortgage-backed		192		192		0.1	%
Asset-backed		8,142		8,147		1.0	%

	$	880,565	$	829,329		100.0	%

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)


As at September 30, 2013	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	56,217	$	53,761		6.5	%
AA		258,176		241,188		29.1	%
A		500,614		470,615		56.7	%
BBB or lower		54,990		53,192		6.4	%
Not Rated		10,568		10,573		1.3	%

	$	880,565	$	829,329		100.0	%

Available-for-sale

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


	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
As at September 30, 2013
U.S. government and agency	$	3,728	$	329	$	—		$	4,057
Non-U.S. government		35,123		1,849		—			36,972
Corporate		17,472		1,233		—			18,705
Residential mortgage-backed		3,531		150		(52	)		3,629
Asset-backed		238		—		(10	)		228

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


	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
As at December 31, 2012
U.S. government and agency	$	4,503	$	454	$	—		$	4,957
Non-U.S. government		120,634		3,373		(151	)		123,856
Corporate		115,139		2,379		(524	)		116,994
Residential mortgage-backed		4,308		230		(40	)		4,498
Commercial mortgage-backed		474		7		—			481
Asset-backed		338		9		(12	)		335

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

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


	12 Months or Greater					Less Than 12 Months					Total
As at September 30, 2013	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Residential mortgage-backed	$	954	$	(50	)	$	179	$	(2	)	$	1,133	$	(52	)
Asset-backed		91		(6	)		137		(4	)		228		(10	)

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


	12 Months or Greater					Less Than 12 Months					Total
As at December 31, 2012	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-U.S. government	$	2,646	$	(82	)	$	2,399	$	(69	)	$	5,045	$	(151	)
Corporate		13,936		(86	)		8,689		(438	)		22,625		(524	)
Residential mortgage-backed		1,124		(40	)		—		—			1,124		(40	)
Asset-backed		174		(12	)		—		—			174		(12	)

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

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

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


As at September 30, 2013	Amortized Cost		Fair Value		% of Total Fair Value
Due in one year or less	$	12,254	$	12,563		19.8	%
Due after one year through five years		41,286		43,724		68.8	%
Due after ten years		2,783		3,447		5.4	%

		56,323		59,734		94.0	%
Residential mortgage-backed		3,531		3,629		5.7	%
Asset-backed		238		228		0.3	%

	$	60,092	$	63,591		100.0	%

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)


As at December 31, 2012	Amortized Cost		Fair Value		% of Total Fair Value
Due in one year or less	$	173,113	$	173,949		69.3	%
Due after one year through five years		64,089		68,298		27.2	%
Due after ten years		3,074		3,560		1.4	%

		240,276		245,807		97.9	%
Residential mortgage-backed		4,308		4,498		1.8	%
Commercial mortgage-backed		474		481		0.2	%
Asset-backed		338		335		0.1	%

	$	245,396	$	251,121		100.0	%

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


As at September 30, 2013	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	37,136	$	38,968		61.3	%
AA		10,133		10,761		16.9	%
A		3,824		4,479		7.0	%
BBB or lower		8,901		9,155		14.4	%
Not Rated		98		228		0.4	%

	$	60,092	$	63,591		100.0	%


As at December 31, 2012	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	107,615	$	110,829		44.1	%
AA		59,535		60,742		24.2	%
A		72,773		73,935		29.4	%
BBB or lower		5,281		5,197		2.1	%
Not Rated		192		418		0.2	%

	$	245,396	$	251,121		100.0	%

Other-Than-Temporary Impairment Process

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

Other Investments

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


	September 30, 2013		December 31, 2012
Private equity funds	$	154,641	$	127,696
Fixed income funds		191,203		156,235
Fixed income hedge funds		66,370		53,933
Equity fund		69,791		55,881
Real estate debt fund		31,885		16,179
Other		4,417		4,921

	$	518,307	$	414,845

These investments are discussed in further detail below.

Private equity funds

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

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

Fixed income funds

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

Fixed income hedge funds

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

Equity fund

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

Real estate debt fund

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

Other

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

Redemption restrictions on other investments

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

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

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

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


September 30, 2013	Total Fair Value		Gated/Side Pocket Investments		Investments without Gates or Side Pockets		Unfunded Commitments		Redemption Frequency
Private equity funds	$	154,641	$	—	$	154,641	$	101,859	Not eligible
Fixed income funds		191,203		—		191,203		—	Daily to monthly
Fixed income hedge funds		66,370		2,855		63,515		—	Quarterly after lock-up periods expire
Equity fund		69,791		—		69,791		—	Bi-monthly
Real estate debt fund		31,885		—		31,885		—	Monthly
Other		4,417		—		4,417		655	Not eligible

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)


December 31, 2012	Total Fair Value		Gated/Side Pocket Investments		Investments without Gates or Side Pockets		Unfunded Commitments		Redemption Frequency
Private equity funds	$	127,696	$	—	$	127,696	$	86,936	Not eligible
Fixed income funds		156,235		—		156,235		—	Daily to monthly
Fixed income hedge funds		53,933		—		53,933		—	Quarterly after lock-up periods expire
Equity fund		55,881		—		55,881		—	Bi-monthly
Real estate debt fund		16,179		—		16,179		—	Monthly
Other		4,921		—		4,921		655	Not eligible

	$	414,845	$	—	$	414,845	$	87,591

Fair Value of Financial Instruments

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

•

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

•

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

•

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

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

Fixed Maturity Investments

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

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

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

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

•

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

•

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

•

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

•

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

•

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

•

Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at September 30, 2013, the Company had no residential or commercial mortgage-backed securities classified as Level 3.

Equities

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

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

Other investments

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

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

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

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

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

Fair Value Measurements

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


	September 30, 2013
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
U.S. government and agency	$	—	$	434,372	$	—	$	434,372
Non-U.S. government		—		490,350		—		490,350
Corporate		—		2,349,253		597		2,349,850
Municipal		—		61,732		—		61,732
Residential mortgage-backed		—		188,891		—		188,891
Commercial mortgage-backed		—		112,933		—		112,933
Asset-backed		—		274,376		—		274,376
Equities—U.S.		94,037		7,567		4,400		106,004
Equities—International		19,910		19,809		—		39,719
Other investments		—		261,066		257,241		518,307

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


	December 31, 2012
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
U.S. government and agency	$	—	$	366,863	$	—	$	366,863
Non-U.S. government		—		389,578		—		389,578
Corporate		—		1,715,330		540		1,715,870
Municipal		—		20,446		—		20,446
Residential mortgage-backed		—		120,092		—		120,092
Commercial mortgage-backed		—		131,329		—		131,329
Asset-backed		—		79,264		—		79,264
Equities—U.S.		83,947		5,058		3,401		92,406
Equities—International		10,377		11,805		—		22,182
Other investments		—		212,115		202,730		414,845

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

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


	September 30, 2013
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
U.S. government and agency	$	—	$	18,331	$	—	$	18,331
Non-U.S. government		—		29,755		—		29,755
Corporate		—		772,904		—		772,904
Residential mortgage-backed		—		192		—		192
Asset-backed		—		8,147		—		8,147

Total investments	$	—	$	829,329	$	—	$	829,329

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

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


	Fixed Maturity Investments			Other Investments			Equity Securities			Total
Level 3 investments as of July 1, 2013	$	606		$	249,314		$	4,500		$	254,420
Purchases		—			5,376			—			5,376
Sales		—			(8,825	)		—			(8,825	)
Total realized and unrealized (losses) gains through earnings		(9	)		11,376			(100	)		11,267
Net transfers into and/or (out of) Level 3		—			—			—			—

Level 3 investments as of September 30, 2013	$	597		$	257,241		$	4,400		$	262,238

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


	Fixed Maturity Investments		Other Investments			Equity Securities			Total
Level 3 investments as of July 1, 2012	$	562	$	181,740		$	3,310		$	185,612
Purchases		—		7,084			—			7,084
Sales		—		(1,171	)		—			(1,171	)
Total realized and unrealized gains (losses) through earnings		2		576			(18	)		560
Net transfers into and/or (out of) Level 3		—		—			—			—

Level 3 investments as of September 30, 2012	$	564	$	188,229		$	3,292		$	192,085

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

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


	Fixed Maturity Investments		Other Investments			Equity Securities		Total
Level 3 investments as of January 1, 2013	$	540	$	202,730		$	3,402	$	206,672
Purchases		—		39,533			—		39,533
Sales		—		(18,578	)		—		(18,578	)
Total realized and unrealized gains through earnings		57		33,556			998		34,611
Net transfers into and/or (out of) Level 3		—		—			—		—

Level 3 investments as of September 30, 2013	$	597	$	257,241		$	4,400	$	262,238

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


	Fixed Maturity Investments		Other Investments			Equity Securities		Total
Level 3 investments as of January 1, 2012	$	519	$	137,727		$	2,975	$	141,221
Purchases		—		57,246			—		57,246
Sales		—		(14,335	)		—		(14,335	)
Total realized and unrealized gains through earnings		45		7,591			317		7,953
Net transfers into and/or (out of) Level 3		—		—			—		—

Level 3 investments as of September 30, 2012	$	564	$	188,229		$	3,292	$	192,085

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

Net Realized and Unrealized Gains

Components of net realized and unrealized gains are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Gross realized gains on available-for-sale securities	$	89			3,735		$	354		$	5,209
Gross realized losses on available-for-sale securities		(56	)		(27	)		(42	)		(450	)
Net realized (losses) gains on trading securities		(4,508	)		3,824			5,082			12,684
Net unrealized gains (losses) on trading securities		21,360			13,059			(16,390	)		25,382
Net realized and unrealized gains on other investments		20,125			7,689			50,207			12,528

Net realized and unrealized gains	$	37,010			28,280		$	39,211		$	55,353

Proceeds from sales and maturities of available-for-sale securities	$	20,923			112,928		$	181,066		$	296,537

Net Investment Income

Major categories of net investment income are summarized as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Interest from fixed maturity investments	$	33,690		$	20,027		$	89,067		$	62,019
Interest from cash and cash equivalents and short-term investments		3,739			4,525			11,048			11,684
Net amortization of bond premiums and discounts		(13,668	)		(6,208	)		(36,929	)		(22,634	)
Dividends from equities		913			593			3,309			1,904
Other investments		7			—			(39	)		—
Interest on other receivables		246			1,027			1,819			6,242
Other income		1,088			733			3,079			4,091
Interest on deposits held with clients		298			377			3,166			988
Investment expenses		(1,304	)		(1,416	)		(4,296	)		(3,299	)

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4.	INVESTMENTS—(cont’d)

Restricted Assets

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


	September 30 2013		December 31, 2012
Collateral in trust for third party agreements	$	1,619,130	$	570,391
Assets on deposit with regulatory authorities		547,331		212,012
Collateral for secured letter of credit facility		345,304		246,608

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

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

5.	DERIVATIVE INSTRUMENTS

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

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


Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount	Settlement Amount		Fair Value as at
Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount	Settlement Amount		September 30, 2013			December 31, 2012
Australian dollar		July 1, 2013		January 3, 2014	AU$45.0 million	$	41,036	$	(1,039	)	$	—
Australian dollar		February 8, 2012		May 10, 2013	AU$35.0 million		36,099		—			(238	)
British pound		March 6, 2012		March 6, 2013	UKP17.0 million		26,611		—			(1,023	)

								$	(1,039	)	$	(1,261	)

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.	DERIVATIVE INSTRUMENTS—(cont’d)

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


								Net Foreign Exchange Losses
Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount	Settlement Amount		Three Months Ended September 30,
Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount	Settlement Amount		2013			2012
Australian dollar		July 1, 2013		January 3, 2014	AU$45.0 million	$	41,036	$	(1,039	)	$	—
Australian dollar		February 8, 2012		December 19, 2012	AU$25.0 million		26,165		—			(518	)
Australian dollar		February 8, 2012		May 10, 2013	AU$35.0 million		36,099		—			(785	)
British pound		March 6, 2012		March 6, 2013	UKP17.0 million		26,611		—			(370	)

								$	(1,039	)	$	(1,673	)


								Net Foreign Exchange Gains (Losses)
Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount	Settlement Amount		Nine Months Ended September 30,
Foreign Currency Forward Contract	Contract Date		Settlement Date		Contract Amount	Settlement Amount		2013			2012
Australian dollar		July 1, 2013		January 3, 2014	AU$45.0 million	$	41,036	$	(1,039	)	$	—
Australian dollar		February 8, 2012		December 19, 2012	AU$25.0 million		26,165		—			(297	)
Australian dollar		February 8, 2012		May 10, 2013	AU$35.0 million		36,099		303			(841	)
British pound		March 6, 2012		March 6, 2013	UKP17.0 million		26,611		1,023			167

								$	287		$	(971	)

6.	PREMIUMS WRITTEN AND EARNED

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


	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
	Premiums Written			Premiums Earned			Premiums Written			Premiums Earned
*Non-life run-off*
Direct	$	1,510		$	30,198		$	17,414		$	108,399
Assumed		(116	)		560			522			1,909
Ceded		(1,825	)		(2,624	)		(7,489	)		(10,038	)

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

*Life and annuities*
Life	$	29,459		$	30,540		$	63,193		$	65,661

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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


	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Premiums Written		Premiums Earned		Premiums Written		Premiums Earned
*Life and annuities*
Life	$	822	$	822	$	2,692	$	2,692

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

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

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

7.	REINSURANCE BALANCES RECOVERABLE


	September 30, 2013
	Non-life Run-off			Life and Annuities		Total
Recoverable from reinsurers on:
Outstanding losses	$	842,736		$	29,456	$	872,192
Losses incurred but not reported		414,587			813		415,400
Fair value adjustments		(71,148	)		—		(71,148	)

Total reinsurance reserves recoverable		1,186,175			30,269		1,216,444
Paid losses recoverable		177,990			911		178,901

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


	December 31, 2012
	Non-life Run-off			Life and Annuities		Total
Recoverable from reinsurers on:
Outstanding losses	$	665,303		$	—	$	665,303
Losses incurred but not reported		295,922			—		295,922
Fair value adjustments		(85,005	)		—		(85,005	)

Total reinsurance reserves recoverable		876,220			—		876,220
Paid losses recoverable		246,408			291		246,699

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.	REINSURANCE BALANCES RECOVERABLE—(cont’d)

Non-life run-off

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

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

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

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

Top Ten Reinsurers—Non-Life Run-Off

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


	September 30, 2013					December 31, 2012
	Reinsurance Balances Recoverable		% of Total			Reinsurance Balances Recoverable		% of Total
Top ten reinsurers	$	929,913		68.2	%	$	708,953		63.1	%
Other reinsurers’ balances > $1 million		421,153		30.9	%		409,666		36.5	%
Other reinsurers’ balances < $1 million		13,099		0.9	%		4,300		0.4	%

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.	REINSURANCE BALANCES RECOVERABLE—(cont’d)

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

Life and annuities

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

8.	LOSSES AND LOSS ADJUSTMENT EXPENSE LIABILITIES


	September 30, 2013			December 31, 2012
Outstanding	$	2,762,931		$	2,358,330
Incurred but not reported		1,870,692			1,588,309
Fair value adjustment		(233,205	)		(296,512	)

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Three Months Ended September 30, 2013

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


	Three Months Ended September 30,
	2013			2012
Balance as at July 1 (1)	$	4,041,236		$	3,797,609
Less: total reinsurance reserves recoverable		888,970			1,064,854

		3,152,266			2,732,755
Net reduction in ultimate losses and loss adjustment expense liabilities related to:
Current period		28,134			—
Prior periods		(44,610	)		(62,547	)

Total net reduction in ultimate losses and loss adjustment expense liabilities		(16,476	)		(62,547	)

Net losses paid related to:
Current period		(9,668	)		—
Prior periods		(86,682	)		(80,675	)

Total net losses paid		(96,350	)		(80,675	)

Effect of exchange rate movement		33,182			11,686
Acquired on purchase of subsidiaries		140,443			—
Assumed business		1,178			19,403

Net balance as at September 30		3,214,243			2,620,622
Plus: total reinsurance reserves recoverable		1,186,175			1,004,572

Balance as at September 30	$	4,400,418		$	3,625,194

(1)

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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


	Three Months Ended September 30,
	2013									2012
	Prior Periods			Current Period			Total			Prior Periods			Current Period		Total
Net losses paid	$	(86,682	)	$	(9,668	)	$	(96,350	)	$	(80,675	)	$	—	$	(80,675	)
Net change in case and LAE reserves		76,055			(8,321	)		67,734			104,881			—		104,881
Net change in IBNR reserves		38,477			(10,145	)		28,332			34,300			—		34,300

Reduction (increase) in estimates of net ultimate losses		27,850			(28,134	)		(284	)		58,506			—		58,506
Reduction in provisions for bad debt		5,465			—			5,465			—			—		—
Reduction in provisions for unallocated loss adjustment expense liabilities		16,320			—			16,320			12,579			—		12,579
Amortization of fair value adjustments		(5,025	)		—			(5,025	)		(8,538	)		—		(8,538	)

Net reduction (increase) in ultimate losses and loss adjustment expense liabilities	$	44,610		$	(28,134	)	$	16,476		$	62,547		$	—	$	62,547

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

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

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

(i)

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

(ii)

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

(iii)

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

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

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

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

(i)

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

(ii)

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

(iii)

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Nine Months Ended September 30, 2013

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


	Nine Months Ended September 30,
	2013			2012
Balance as at January 1 (1)	$	3,650,127		$	4,272,081
Less: total reinsurance reserves recoverable		876,220			1,383,003

		2,773,907			2,889,078
Net reduction in ultimate losses and loss adjustment expense liabilities related to:
Current period		100,270			—
Prior periods		(126,908	)		(141,730	)

Total net reduction in ultimate losses and loss adjustment expense liabilities		(26,638	)		(141,730	)

Net losses paid related to:
Current period		(23,092	)		—
Prior periods		(208,699	)		(216,120	)

Total net losses paid		(231,791	)		(216,120	)

Effect of exchange rate movement		(2,180	)		8,870
Acquired on purchase of subsidiaries		619,510			—
Assumed business		81,435			80,524

Net balance as at September 30		3,214,243			2,620,622
Plus: total reinsurance reserves recoverable		1,186,175			1,004,572

Balance as at September 30	$	4,400,418		$	3,625,194

(1)

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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


	Nine Months Ended September 30,
	2013									2012
	Prior Periods			Current Period			Total			Prior Periods			Current Period		Total
Net losses paid	$	(208,699	)	$	(23,092	)	$	(231,791	)	$	(216,120	)	$	—	$	(216,120	)
Net change in case and LAE reserves		212,966			(23,699	)		189,267			272,837			—		272,837
Net change in IBNR reserves		77,146			(53,479	)		23,667			63,504			—		63,504

Reduction (increase) in estimates of net ultimate losses		81,413			(100,270	)		(18,857	)		120,221			—		120,221
Reduction in provisions for bad debt		5,465			—			5,465			2,782			—		2,782
Reduction in provisions for unallocated loss adjustment expense liabilities		49,518			—			49,518			37,092			—		37,092
Amortization of fair value adjustments		(9,488	)		—			(9,488	)		(18,365	)		—		(18,365	)

Net reduction (increase) in ultimate losses and loss adjustment expense liabilities	$	126,908		$	(100,270	)	$	26,638		$	141,730		$	—	$	141,730

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

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

(i)

(ii)

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

(iii)

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

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

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

(i)

(ii)

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

(iii)

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

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

9.	POLICY BENEFITS FOR LIFE AND ANNUITY CONTRACTS

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


	September 30, 2013			December 31, 2012
Life	$	392,128		$	11,027
Annuities		969,754			—

		1,361,882			11,027
Fair value adjustments		(73,734	)		—

	$	1,288,148		$	11,027

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10.

RETROSPECTIVELY RATED CONTRACTS

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

11.

INTANGIBLE ASSETS


	Intangible Assets With a Definite Life
Balance as at December 31, 2012	$	211,507
Acquired during the period		46,370
Intangible assets amortization		(22,086	)

Balance as at September 30, 2013	$	235,791

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

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


	September 30, 2013									December 31, 2012
	Gross Carrying Value			Accumulated Amortization			Net Carrying Value			Gross Carrying Value			Accumulated Amortization			Net Carrying Value
Fair value adjustments:
Losses and loss adjustment expenses	$	516,027		$	(282,822	)	$	233,205		$	552,455		$	(255,943	)	$	296,512
Reinsurance recoverables		(181,911	)		110,763			(71,148	)		(178,377	)		93,372			(85,005	)
Policy benefits for life and annuity contracts		86,332			(12,598	)		73,734			—			—			—

Total fair value adjustments	$	420,448		$	(184,657	)	$	235,791		$	374,078		$	(162,571	)	$	211,507

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12.

LOANS PAYABLE

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


Facility	Date of Facility		Facility Term		September 30, 2013		December 31, 2012
EGL Revolving Credit Facility		July 8, 2013		5 Years	$	163,800	$	—
SeaBright Facility		December 21, 2012		3 Years		111,000		—
Clarendon Facility		July 12, 2011		4 Years		78,995		106,500

Total long-term bank debt						353,795		106,500
Accrued interest						1,868		930

Total loans payable					$	355,663	$	107,430

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

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

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

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

Amendment and Restatement of EGL Revolving Credit Facility Agreement

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12.

LOANS PAYABLE—(cont’d)

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

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

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

SeaBright Surplus Notes

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

Clarendon Facility

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

13.

EMPLOYEE BENEFITS

The Company’s share-based compensation plans provide for the grant of various awards to its employees and to members of the Board of Directors. These are described in Note 11 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The information below includes both the employee and director components of the Company’s share-based compensation.

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13.

EMPLOYEE BENEFITS—(cont’d)

Employee share plans

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


	September 30, 2013						September 30, 2012
	Number of Shares			Weighted Average Fair Value of the Award			Number of Shares			Weighted Average Fair Value of the Award
Nonvested—January 1		160,644		$	17,989			203,930		$	20,026
Granted		6,344			767			4,363			359
Vested		(49,253	)		(5,715	)		(47,649	)		(4,623	)

Nonvested—September 30		117,735		$	15,656			160,644		$	16,008

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

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

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

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

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

Enstar Group Limited Employee Share Purchase Plan

Compensation costs of less than $0.1 million relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan were recognized in the Company’s statement of earnings for each of the three and nine month periods ended September 30, 2013 and 2012. For the nine month periods ended September 30, 2013 and 2012, 3,768 and 4,172 shares, respectively, were issued to employees under such plan.

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13.

EMPLOYEE BENEFITS—(cont’d)

Deferred Compensation and Ordinary Share Plan for Non-Employee Directors

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

Pension Plan

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

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

14.

SHARE CAPITAL

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

Series B Convertible Participating Non-Voting Perpetual Preferred Stock

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

The Non-Voting Preferred Shares:

•

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

•

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14.

SHARE CAPITAL—(cont’d)

•

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

•

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

•

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

15.

REDEEMABLE NONCONTROLLING INTEREST

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

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


	Redeemable Noncontrolling Interest

Balance as at December 31, 2012	$	—
Redeemable noncontrolling interest, initial contribution		32,480
Net earnings attributable to redeemable noncontrolling interest		27

Balance as at September 30, 2013	$	32,507

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16.

EARNINGS PER SHARE

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Basic earnings per ordinary share:
Net earnings attributable to Enstar Group Limited	$	39,987	$	47,716	$	71,143	$	98,111
Weighted average ordinary shares outstanding—basic		16,525,012		16,437,780		16,521,865		16,433,943

Net earnings per ordinary share attributable to Enstar Group Limited—basic	$	2.42	$	2.90	$	4.31	$	5.97

Diluted earnings per ordinary share:
Net earnings attributable to Enstar Group Limited	$	39,987	$	47,716	$	71,143	$	98,111
Weighted average ordinary shares outstanding—basic		16,525,012		16,437,780		16,521,865		16,433,943
Share equivalents:
Unvested shares		116,503		160,644		118,756		163,062
Restricted share units		18,521		15,046		17,588		14,263
Warrants		60,679		—		40,431		—
Options		—		63,059		—		63,088

Weighted average ordinary shares outstanding—diluted		16,720,715		16,676,529		16,698,640		16,674,356

Net earnings per ordinary share attributable to Enstar Group Limited—diluted	$	2.39	$	2.86	$	4.26	$	5.88

17.

RELATED PARTY TRANSACTIONS

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

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17.

RELATED PARTY TRANSACTIONS—(cont’d)

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

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

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

18.

TAXATION

Earnings before income taxes include the following components:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012
Domestic (Bermuda)	$	(913	)	$	(5,939	)	$	77,134	$	11,841
Foreign		45,709			76,131			18,231		130,255

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

Tax expense for income taxes is comprised of:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Current:
Domestic (Bermuda)	$	—		$	—	$	—		$	—
Foreign		6,842			13,397		21,172			22,842

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

Deferred:
Domestic (Bermuda)		—			—		—			—
Foreign		(5,502	)		1,303		(7,446	)		7,505

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

Total tax expense	$	1,340		$	14,700	$	13,726		$	30,347

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18.

TAXATION—(cont’d)

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

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

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Earnings before income tax	$	44,796		$	70,192		$	95,365		$	142,096

Expected tax rate		—	%		—	%		—	%		—	%
Foreign taxes at local expected rates		23.2	%		26.1	%		(2.1	)%		24.4	%
Change in uncertain tax positions		0.0	%		0.1	%		(2.8	)%		0.1	%
Change in valuation allowance		(16.2	)%		(5.4	)%		21.5	%		(3.3	)%
Other		(4.0	)%		0.1	%		(2.2	)%		0.2	%

Effective tax rate		3.0	%		20.9	%		14.4	%		21.4	%

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

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

The Company’s operating subsidiaries in specific countries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, the Company’s major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2006, 2009 and 2006, respectively.

19.

COMMITMENTS AND CONTINGENCIES

Concentration of Credit Risk

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19.

COMMITMENTS AND CONTINGENCIES—(cont’d)

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

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

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

Leases

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


2013	$	1,811
2014		6,671
2015		5,929
2016		3,468
2017		1,148
2018		474

	$	19,501

Investments

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


September 30, 2013			December 31, 2012
Original Commitments	Commitments		Original Commitments	Commitments
Original Commitments	Funded	Unfunded	Original Commitments	Funded	Unfunded
$286,000	$183,486	$102,514	$251,000	$163,408	$87,592

Guarantees

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19.

COMMITMENTS AND CONTINGENCIES—(cont’d)

Acquisitions

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

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

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

Legal Proceedings

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

The Company is, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on its business, results of operations or financial condition. Nevertheless, there can be no assurance that lawsuits,

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19.

COMMITMENTS AND CONTINGENCIES—(cont’d)

arbitrations or other litigation will not have a material adverse effect on the Company’s business, financial condition or results of operations. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental claims. There can be no assurance that any such future litigation will not have a material adverse effect on the Company’s business, financial condition or results of operations.

20.

SEGMENT REPORTING

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

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

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

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

The Company’s total assets by segment were:


	September 30, 2013		December 31, 2012
Total assets—non-life run-off	$	6,930,513	$	5,829,384
Total assets—life and annuities		1,411,756		52,859

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

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20.

SEGMENT REPORTING—(cont’d)

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


	Three Months Ended September 30, 2013									Three Months Ended September 30, 2012
	Non-Life Run-off			Life and Annuities			Consolidated			Non-Life Run-off			Life and Annuities			Consolidated
INCOME
Net premiums earned	$	28,134		$	30,540		$	58,674		$	—		$	822		$	822
Consulting fees		2,398			—			2,398			1,944			—			1,944
Net investment income		15,290			9,719			25,009			19,399			259			19,658
Net realized and unrealized gains		35,515			1,495			37,010			27,467			813			28,280

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

EXPENSES
Net reduction in ultimate losses and loss adjustment expense liabilities:		(16,476	)		—			(16,476	)		(62,547	)		—			(62,547	)
Life and annuity policy benefits		—			33,332			33,332			—			822			822
Salaries and benefits		28,213			1,503			29,716			25,066			72			25,138
General and administrative expenses		23,781			5,345			29,126			14,200			209			14,409
Interest expense		2,796			474			3,270			1,713			—			1,713
Net foreign exchange (gains) losses		(608	)		(65	)		(673	)		1,019			(42	)		977

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

EARNINGS BEFORE INCOME TAXES		43,631			1,165			44,796			69,359			833			70,192
INCOME TAXES		(1,356	)		16			(1,340	)		(14,647	)		(53	)		(14,700	)

NET EARNINGS		42,275			1,181			43,456			54,712			780			55,492
Less: Net earnings attributable to noncontrolling interest		(3,469	)		—			(3,469	)		(7,776	)		—			(7,776	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	38,806		$	1,181		$	39,987		$	46,936		$	780		$	47,716

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20.

SEGMENT REPORTING—(cont’d)


	Nine Months Ended September 30, 2013									Nine Months Ended September 30, 2012
	Non-Life Run-off			Life and Annuities			Consolidated			Non-Life Run-off			Life and Annuities			Consolidated
INCOME
Net premiums earned	$	100,270		$	65,661		$	165,931		$	—		$	2,692		$	2,692
Consulting fees		7,805			—			7,805			5,913			—			5,913
Net investment income		50,162			20,062			70,224			60,328			667			60,995
Net realized and unrealized gains (losses)		48,555			(9,344	)		39,211			53,656			1,697			55,353

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

EXPENSES
Net reduction in ultimate losses and loss adjustment expense liabilities		(26,638	)		—			(26,638	)		(141,730	)		—			(141,730	)
Life and annuity policy benefits		—			63,555			63,555			—			2,692			2,692
Salaries and benefits		76,303			2,710			79,013			69,676			292			69,968
General and administrative expenses		55,485			11,589			67,074			42,115			1,308			43,423
Interest expense		7,847			949			8,796			5,886			—			5,886
Net foreign exchange (gains) losses		(4,122	)		128			(3,994	)		2,722			(104	)		2,618

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

EARNINGS (LOSS) BEFORE INCOME TAXES		97,917			(2,552	)		95,365			141,228			868			142,096
INCOME TAXES		(13,713	)		(13	)		(13,726	)		(30,294	)		(53	)		(30,347	)

NET EARNINGS (LOSS)		84,204			(2,565	)		81,639			110,934			815			111,749
Less: Net earnings attributable to noncontrolling interest		(10,496	)		—			(10,496	)		(13,638	)		—			(13,638	)

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	73,708		$	(2,565	)	$	71,143		$	97,296		$	815		$	98,111

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Enstar Group Limited:

We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries as of September 30, 2013, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012, and the related condensed consolidated statements of changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2013 and 2012. These condensed consolidated financial statements are the responsibility of the Company’s management.

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

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2012, and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended; and in our report dated February 28, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG Audit Limited

Hamilton, Bermuda

November 7, 2013

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2013 and 2012 should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Business Overview

Enstar Group Limited, or Enstar, was formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry. Since our formation, we have completed the acquisition of over 60 insurance and reinsurance companies and portfolios of insurance and reinsurance business and are now administering those businesses in run-off, including 12 Reinsurance to Close, or “RITC” transactions, with Lloyd’s of London insurance and reinsurance syndicates in run-off, whereby the portfolio of run-off liabilities is transferred from one Lloyd’s syndicate to another. With the exception of our 2011 acquisition of a small life company, all of these acquisitions had been in the property and casualty, or “non-life run-off,” insurance business, which continues to remain our primary focus.

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

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

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

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

Acquisitions

Torus Insurance Holdings Limited

Amalgamation Agreement

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

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

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

Stock Issuance

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

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

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

Trident Co-investment in Torus

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

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

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

Atrium and Arden

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

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

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

Trident Co-investment in Atrium and Arden

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

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

Pavonia

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

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

SeaBright

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

Significant New Business

Shelbourne

Effective January 1, 2013, Lloyd’s Syndicate 2008, or Syndicate 2008, which is managed by our wholly-owned subsidiary and Lloyd’s managing agent, Shelbourne Syndicate Services Limited, entered into an RITC 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 Syndicate 2008 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, we, through our wholly-owned subsidiary, Providence Washington Insurance Company, or PWIC, completed the assignment and assumption of a portfolio of workers’ compensation business from American Physicians Assurance Corporation and APSpecialty Insurance Company. Total assets and liabilities assumed were approximately $35.3 million.

Reciprocal of America

Segment Reporting

Due to our acquisition of the Pavonia companies, we reevaluated our segment reporting. We now measure our results of operations in two segments: (i) non-life run-off and (ii) life and annuities.

Non-life Run-off Segment

Our non-life run-off segment comprises the operations and financial results of our subsidiaries that are running off their property and casualty business.

Life and Annuities Segment

Our life and annuities segment comprises the operations and financial results of our subsidiaries that are operating our closed-block of life and annuity business, which primarily consists of the companies we acquired in the Pavonia acquisition on March 31, 2013. This business is described in more detail below. Certain new critical accounting policies applicable to this segment are described in “Critical Accounting Policies.”

Annuities

The current operations of one of the Pavonia companies relates solely to the assumption of a closed block of structured settlement, lottery, and other immediate annuities (also known as the Periodic Payment Annuity, or PPA, business). The company no longer writes new business. Reserves relating to the PPA business constitute approximately 80% of the aggregate reserves acquired in the Pavonia acquisition. The contracts within the portfolio are largely structured settlements, although the portfolio also includes a smaller amount of lottery annuities and supplementary contracts.

The PPA business was issued from 1982 to 1995, although the majority of the reserves pertain to the period from 1985 to 1989. The contracts within the portfolio operate pursuant to a variety of different payment features, such as life contingency payments, certain payments (or a combination thereof), one-time lump payments, or payments patterns such as level, compound increase or fixed amount increase payments. Regardless of payment structure, however, the portfolio generally has known and predictable cash flows, which makes the asset-liability matching process and the mitigation of interest rate risk a vital component to our management of this portfolio. We have a long-duration held-to-maturity investment portfolio designed to manage the cash flow obligations of the PPA business.

Life Business

The other operations of the acquired Pavonia companies relate to non-annuity portfolios, which include credit life and disability insurance, term life, and corporate owned life insurance business. This business is significantly shorter in duration than that of the PPA business and, given the premium income associated with these portfolios, the reserves (based upon net present value of future cash flows) remain highly sensitive to lapse rates as well as mortality rates.

Results of Operations

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(expressed in thousands of U.S. dollars)
INCOME
Net premiums earned—non-life run-off	$	28,134		$	—		$	100,270		$	—
Net premiums earned—life and annuities		30,540			822			65,661			2,692
Consulting fees		2,398			1,944			7,805			5,913
Net investment income		25,009			19,658			70,224			60,995
Net realized and unrealized gains		37,010			28,280			39,211			55,353

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

EXPENSES
Net reduction in ultimate losses and loss adjustment expense liabilities:
Losses incurred on current period premiums earned		28,134			—			100,270			—
Reduction in estimates of net ultimate losses		(27,850	)		(58,506	)		(81,413	)		(120,221	)
Reduction in provisions for bad debt		(5,465	)		—			(5,465	)		(2,782	)
Reduction in provisions for unallocated loss adjustment expense liabilities		(16,320	)		(12,579	)		(49,518	)		(37,092	)
Amortization of fair value adjustments		5,025			8,538			9,488			18,365