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

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

For the Quarterly Period Ended March 31, 2015

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

For the Transition Period From to

001-33289

Commission File Number

ENSTAR GROUP LIMITED

(Exact name of registrant as specified in its charter)

Bermuda

N/A

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

P.O. Box HM 2267

Windsor Place, 3rd Floor

22 Queen Street

Hamilton HM JX

Bermuda

(Address of principal executive office, including zip code)

(441) 292-3645

(Registrant’s telephone number, including area code)

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

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

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

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

As of May 6, 2015, the registrant had outstanding 15,817,694 voting ordinary shares and 3,439,652 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 March 31, 2015 and December 31, 2014 (Unaudited)	2
	Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
	Report of Independent Registered Public Accounting Firm	52
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	53
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	91
Item 4.	Controls and Procedures	93

	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	94
Item 1A.	Risk Factors	94
Item 5.	Other Information	94
Item 6.	Exhibits	94
Signature		95

PART I—FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2015 and December 31, 2014


	March 31, 2015			December 31, 2014
	(expressed in thousands of U.S. dollars, except share data)
ASSETS
Short-term investments, trading, at fair value	$	180,807		$	130,516
Fixed maturities, trading, at fair value		4,671,075			3,832,291
Fixed maturities, held-to-maturity, at amortized cost		805,298			813,233
Fixed maturities, available-for-sale, at fair value (amortized cost: 2015—$215,183; 2014—$244,110)		208,890			241,111
Equities, trading, at fair value		172,083			150,130
Other investments, at fair value		919,323			836,868

Total investments		6,957,476			6,004,149
Cash and cash equivalents		982,501			963,402
Restricted cash and cash equivalents		510,513			534,974
Accrued interest receivable		42,002			37,581
Accounts receivable		119,890			79,237
Premiums receivable		438,511			391,008
Income taxes recoverable		6,465			11,510
Deferred tax assets		51,577			50,506
Prepaid reinsurance premiums		160,208			114,197
Reinsurance balances recoverable		1,787,299			1,331,555
Funds held by reinsured companies		116,079			134,628
Deferred acquisition costs		97,347			61,706
Goodwill and intangible assets		199,809			201,150
Other assets		39,495			21,282

TOTAL ASSETS	$	11,509,172		$	9,936,885

LIABILITIES
Losses and loss adjustment expenses	$	5,724,623		$	4,509,421
Policy benefits for life and annuity contracts		1,210,214			1,220,864
Unearned premiums		592,172			468,626
Insurance and reinsurance balances payable		287,521			276,723
Accounts payable and accrued liabilities		168,690			126,721
Income taxes payable		18,961			22,450
Deferred tax liabilities		41,058			43,958
Loans payable		429,998			320,041
Other liabilities		103,535			50,642

TOTAL LIABILITIES		8,576,772			7,039,446

COMMITMENTS AND CONTINGENCIES REDEEMABLE NONCONTROLLING INTEREST		383,186			374,619

SHAREHOLDERS’ EQUITY
Share capital
Authorized, issued and fully paid, par value $1 each (authorized 2015: 156,000,000; 2014: 156,000,000)
Ordinary shares (issued and outstanding 2015: 15,811,196; 2014: 15,761,365)		15,811			15,761
Non-voting convertible ordinary shares:
Series A (issued 2015: 2,972,892; 2014: 2,972,892)		2,973			2,973
Series C (issued and outstanding 2015: 2,725,637; 2014: 2,725,637)		2,726			2,726
Series E (issued and outstanding 2015: 714,015; 2014: 714,015)		714			714
Treasury shares at cost (Series A non-voting convertible ordinary shares 2015: 2,972,892; 2014: 2,972,892)		(421,559	)		(421,559	)
Additional paid-in capital		1,323,482			1,321,715
Accumulated other comprehensive income		(30,025	)		(12,686	)
Retained earnings		1,440,053			1,395,206

Total Enstar Group Limited Shareholders’ Equity		2,334,175			2,304,850
Noncontrolling interest		215,039			217,970

TOTAL SHAREHOLDERS’ EQUITY		2,549,214			2,522,820

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY	$	11,509,172		$	9,936,885

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three Months Ended March 31, 2015 and 2014


	Three Months Ended March 31,
	2015			2014
	(expressed in thousands of U.S. dollars, except share and per share data)
INCOME
Net premiums earned	$	198,906		$	61,658
Fees and commission income		11,480			6,998
Net investment income		33,893			24,348
Net realized and unrealized gains		43,020			34,573

		287,299			127,577

EXPENSES
Net increase (reduction) in ultimate losses and loss adjustment expense liabilities		70,136			(12,051	)
Life and annuity policy benefits		22,847			26,809
Acquisition costs		34,550			13,161
Salaries and benefits		57,772			31,390
General and administrative expenses		38,826			22,250
Interest expense		4,003			3,734
Net foreign exchange (gains) losses		(5,071	)		1,596

		223,063			86,889

EARNINGS BEFORE INCOME TAXES		64,236			40,688
INCOME TAXES		(10,744	)		(7,276	)

NET EARNINGS		53,492			33,412
Less: Net earnings attributable to noncontrolling interest		(8,645	)		(3,825	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	44,847		$	29,587

EARNINGS PER SHARE—BASIC
Net earnings per ordinary share attributable to Enstar Group Limited shareholders	$	2.33		$	1.79

EARNINGS PER SHARE—DILUTED
Net earnings per ordinary share attributable to Enstar Group Limited shareholders	$	2.32		$	1.77

Weighted average ordinary shares outstanding—basic		19,237,461			16,564,083
Weighted average ordinary shares outstanding—diluted		19,334,637			16,705,324

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2015 and 2014


	Three Months Ended March 31,
	2015			2014
	(expressed in thousands of U.S. dollars)
NET EARNINGS	$	53,492		$	33,412

Other comprehensive (loss) income, net of tax:
Unrealized holding losses on investments arising during the period		(4,356	)		(447	)
Reclassification adjustment for net realized and unrealized (losses) gains included in net earnings		(106	)		119

Unrealized losses arising during the period, net of reclassification adjustment		(4,462	)		(328	)
Currency translation adjustment		(15,886	)		2,058

Total other comprehensive (loss) income		(20,348	)		1,730

Comprehensive income		33,144			35,142
Less comprehensive income attributable to noncontrolling interest		(5,636	)		(4,994	)

COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	27,508		$	30,148

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2015 and 2014


	Three Months Ended March 31,
	2015			2014
	(expressed in thousands of U.S. dollars)
Share Capital—Ordinary Shares
Balance, beginning of period	$	15,761		$	13,803
Issue of shares		3			2
Share awards granted/vested		47			42

Balance, end of period	$	15,811		$	13,847

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

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

Share Capital—Series E Non-Voting Convertible Ordinary Shares
Balance, beginning and end of period	$	714		$	—

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

Additional Paid-in Capital
Balance, beginning of period	$	1,321,715		$	962,145
Issue of shares and warrants, net		449			155
Amortization of equity incentive plan		1,318			689

Balance, end of period	$	1,323,482		$	962,989

Accumulated Other Comprehensive Income Attributable to Enstar Group Limited
Balance, beginning of period	$	(12,686	)	$	13,978
Currency translation adjustment
Balance, beginning of period		(2,779	)		14,264
Change in currency translation adjustment		(14,180	)		748

Balance, end of period		(16,959	)		15,012
Defined benefit pension liability
Balance, beginning and end of period		(7,726	)		(2,249	)

Unrealized gain on investments
Balance, beginning of period		(2,181	)		1,963
Change in unrealized gain on investments, net of tax		(3,159	)		(188	)

Balance, end of period		(5,340	)		1,775

Balance, end of period	$	(30,025	)	$	14,538

Retained Earnings
Balance, beginning of period	$	1,395,206		$	1,181,457
Net earnings attributable to Enstar Group Limited		44,847			29,587

Balance, end of period	$	1,440,053		$	1,211,044

Noncontrolling Interest
Balance, beginning of period	$	217,970		$	222,000
Reallocation to redeemable noncontrolling interest		—			1,028
Net (loss) earnings attributable to noncontrolling interest*		(920	)		3,017
Foreign currency translation adjustments		(1,891	)		1,309
Net movement in unrealized holding losses on investments		(120	)		(34	)

Balance, end of period	$	215,039		$	227,320

*	Excludes net earnings attributable to redeemable noncontrolling interest. See Note 12 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 Three Months Ended March 31, 2015 and 2014


	Three Months Ended March 31,
	2015			2014
	(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
Net earnings	$	53,492		$	33,412
Adjustments to reconcile net earnings to cash flows provided by operating activities:
Net realized and unrealized investment gains		(19,458	)		(17,576	)
Net realized and unrealized gains from other investments		(23,562	)		(16,997	)
Other items		2,773			(1,318	)
Depreciation and amortization		1,421			211
Net amortization of premiums and discounts		12,603			12,462
Net movement of trading securities held on behalf of policyholders		1,580			(164	)
Sales and maturities of trading securities		926,919			636,516
Purchases of trading securities		(1,187,652	)		(558,633	)
Changes in assets and liabilities:
Reinsurance balances recoverable		36,691			107,994
Funds held by reinsured companies		18,552			36,167
Other assets		(93,123	)		(18,970	)
Losses and loss adjustment expenses		(34,221	)		(180,986	)
Policy benefits for life and annuity contracts		(9,603	)		(17,836	)
Insurance and reinsurance balances payable		20,555			(57,421	)
Unearned premiums		38,041			—
Accounts payable and accrued liabilities		39,250			16,710
Other liabilities		(3,663	)		(4,643	)

Net cash flows used in operating activities		(219,405	)		(31,072	)

INVESTING ACTIVITIES:
Acquisitions, net of cash acquired	$	140,458		$	—
Sales and maturities of available-for-sale securities		49,241			59,238
Purchase of available-for-sale securities		(24,484	)		(53,307	)
Maturities of held-to-maturity securities		5,239			261
Movement in restricted cash and cash equivalents		39,740			(209,502	)
Purchase of other investments		(78,895	)		(63,217	)
Redemption of other investments		13,882			2,983
Other investing activities		(233	)		(235	)

Net cash flows provided by (used in) investing activities		144,948			(263,779	)

FINANCING ACTIVITIES:
Contribution by redeemable noncontrolling interest	$	—		$	260,800
Receipt of loans		109,000			70,000
Repayment of loans		—			(35,000	)

Net cash flows provided by financing activities		109,000			295,800

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS		(15,444	)		1,033

NET INCREASE IN CASH AND CASH EQUIVALENTS		19,099			1,982
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		963,402			643,841

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	982,501		$	645,823

Supplemental Cash Flow Information
Net income taxes paid	$	11,715		$	13,725
Interest paid	$	4,003		$	5,929

See accompanying notes to the unaudited condensed consolidated financial statements

ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015 and December 31, 2014

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

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation and Consolidation

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

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

•

reserves for losses and loss adjustment expenses;

•

policy benefits for life and annuity contracts;

•

gross and net premiums written and net premiums earned;

•

reinsurance balances recoverable, including the provisions for uncollectible amounts;

•

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

•

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

•

valuation of goodwill and intangible assets; and

•

fair value estimates associated with accounting for acquisitions.

The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

New Accounting Standards Adopted in 2015

Accounting Standards Update (“ASU”) 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items

In January 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-01, which eliminates the concept of extraordinary items from U.S. GAAP as part of its simplification

ENSTAR GROUP LIMITED

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

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

initiative. As a result, a registrant will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, the guidance does not affect the reporting and disclosure requirements for material items that are unusual in nature or infrequently occurring. The guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted if applied from the beginning of the fiscal year of adoption. Registrants may apply the guidance prospectively or retrospectively to all prior periods presented in the financial statements. The Company adopted the new guidance effective January 1, 2015 and its adoption did not have an impact on its consolidated financial statements and disclosures.

ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

In April 2014, the FASB issued ASU No. 2014-08, which changed the definition of discontinued operations as well as certain presentation and disclosure requirements. Under the new guidance, only those disposed components or components held-for-sale representing a strategic shift that have or will have a major impact on operations and financial results of a registrant, or that are businesses held-for-sale at acquisition will be reported in discontinued operations. In addition, under the new guidance, continuing involvement by the registrant will no longer preclude a disposal group from being presented as discontinued operations. However, the new guidance requires registrants to disclose the nature of any continuing involvement including cashflows to or from the discontinued operation, as long as the discontinued operation is included in the financial statements presented. Expanded disclosures about discontinued operations and disposals of individually significant components that do not qualify for discontinued operations presentation will however be required by the new guidance. The Company adopted this guidance effective January 1, 2015 and its adoption did not have a material impact on its consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, which changes the presentation of debt issuance costs in financial statements. Under the guidance, a registrant would present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of this guidance, however it does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and disclosures.

ASU 2015-02, Amendments to the Consolidation Analysis

In February 2015, the FASB issued ASU No. 2015-02, which requires registrants to evaluate whether they should consolidate certain legal entities. The new consolidation guidance changes the way registrants evaluate whether (1) they should consolidate limited partnerships and similar entities; (2) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (3) variable interests in a VIE held by related parties of the registrant require the registrant to consolidate the VIE. The new guidance also eliminates the VIE consolidation model based on

ENSTAR GROUP LIMITED

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

1. SIGNIFICANT ACCOUNTING POLICIES—(Continued)

majority exposure to variability that applied to certain investment companies and similar entities. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which decision making rights are conveyed through a contractual arrangement. The guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements and disclosures.

2. ACQUISITIONS

Nationale Suisse Assurance S.A.

On February 5, 2015, the Company’s wholly-owned subsidiary, Harper Holding SARL, entered into a definitive agreement with Nationale Suisse to acquire its Belgian subsidiary, Nationale Suisse Assurance S.A. (“NSA”). NSA is a Belgium-based insurance company writing non-life insurance (which the Company expects to operate in run-off as part of its non-life run-off segment) and life insurance (which the Company expects to operate in run-off as part of its life and annuities segment).

The total consideration for the transaction will be €33.7 million (approximately $38.5 million) (subject to certain possible closing adjustments). The Company expects to finance the purchase price from cash on hand. 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 during the third quarter of 2015.

Wilton Re Life Settlements

On May 5, 2015, the Company, through its wholly owned subsidiary, Guillamene Holdings Limited, completed the acquisitions of two Delaware limited liability companies from subsidiaries of Wilton Re Limited that own interests in life insurance policies acquired in the secondary and tertiary markets and through collateralized lending transactions.

The total consideration for the transaction was $173.0 million, which will be paid in two installments. The first installment of $89.1 million was paid on closing and was financed by borrowings under the Company’s revolving credit facility. The second installment of $83.9 million, due on the first anniversary of closing, is expected to be funded from cash on hand.

Sussex Property and Casualty Insurance Company (formerly known as Companion)

On January 27, 2015, the Company and Sussex Holdings, Inc. (“Sussex Holdings”), a wholly-owned subsidiary of the Company, completed the acquisition of Companion Property and Casualty Insurance Company (“Companion”) from Blue Cross and Blue Shield of South Carolina, an independent licensee of the Blue Cross Blue Shield Association. Companion is a South Carolina-based insurance group writing property, casualty, specialty and workers compensation business, and has also provided fronting and third party administrative services.

The total consideration for the transaction was $218.0 million in cash, which was financed 50% through borrowings under the previously announced Term Facility Agreement with National Australia Bank Limited and Barclays Bank PLC (the “Sussex Facility”) and 50% from cash on hand.

ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

Immediately following the acquisition, Companion was placed into run-off, and accordingly is no longer writing new insurance policies. Since its acquisition, Companion has renewed expiring insurance policies when it was obligated to do so.

The Company changed the name of Companion to Sussex Property and Casualty Insurance Company (“Sussex”) following the acquisition and is operating the company as part of its non-life run-off business.


Purchase price	$	218,000

Net assets acquired at fair value	$	218,000

Excess of purchase price over fair value of net assets acquired	$	—

The purchase price was allocated to the acquired assets and liabilities of Sussex based on estimated fair values at the acquisition date.

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

Results related to Sussex are included within the Company’s non-life run-off segment.

ENSTAR GROUP LIMITED

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

2. ACQUISITIONS—(Continued)

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the acquisition date.


	Sussex
ASSETS
Short-term investments, trading, at fair value	$	85,309
Fixed maturities, trading, at fair value		523,227
Equities, trading, at fair value		31,439

Total investments		639,975
Cash and cash equivalents		358,458
Restricted cash and cash equivalents		15,279
Accrued interest receivable		3,984
Premiums receivable		35,279
Reinsurance balances recoverable		486,570
Prepaid reinsurance premiums		28,751
Other assets		47,143

TOTAL ASSETS	$	1,615,439

LIABILITIES
Losses and loss adjustment expenses	$	1,255,040
Insurance and reinsurance balances payable		3,030
Unearned premiums		85,505
Funds withheld		42,090
Other liabilities		11,774

TOTAL LIABILITIES		1,397,439

NET ASSETS ACQUIRED AT FAIR VALUE	$	218,000

From the date of acquisition to March 31, 2015, the Company earned premiums of $20.6 million, recorded net increase in ultimate losses and loss adjustment expense liabilities of $18.5 million on those earned premiums, and recorded $2.2 million in net losses attributable to Enstar Group Limited in its consolidated statement of earnings.

3. SIGNIFICANT NEW BUSINESS

Reciprocal of America

On January 15, 2015, the Company’s wholly-owned subsidiary, Providence Washington Insurance Company, completed the previously announced loss portfolio transfer reinsurance transaction with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business in run-off. The total net insurance reserves assumed were approximately $162.1 million, with an equivalent amount of cash and/or investments being received as consideration.

Shelbourne RITC Transaction

Effective January 1, 2015, Lloyd’s Syndicate 2008, 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 (“RITC”) of the 2012 and prior underwriting years of account of another Lloyd’s syndicate, under which Syndicate 2008 assumed total net insurance reserves of approximately £17.2 million (approximately $26.9 million) for cash consideration of an equal amount.

ENSTAR GROUP LIMITED

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

4. INVESTMENTS

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

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

The Company’s other investments are comprised of private equity funds, fixed income funds, fixed income hedge funds, equity and real estate debt funds. The Company also holds both direct and indirect investments in collateralized loan obligation (“CLO”) equity-tranched securities, which are all variable interests issued by VIEs. The indirect investments are in the form of CLO equity funds. For these variable interests, the Company does not have the power to direct the activities that are most significant to the economic performance of the VIEs and, accordingly, it is not the primary beneficiary for any of these VIEs. The Company’s maximum exposure to loss on these interests is limited to the amount of its investment. The Company has not provided financial or other support with respect to these structured securities other than its original investment.

Trading

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


	March 31, 2015		December 31, 2014
U.S. government and agency	$	723,375	$	744,660
Non-U.S. government		334,611		368,945
Corporate		2,495,393		1,986,873
Municipal		130,083		25,607
Residential mortgage-backed		409,006		308,621
Commercial mortgage-backed		171,270		139,907
Asset-backed		588,144		388,194

Total fixed maturity and short-term investments		4,851,882		3,962,807
Equities—U.S.		127,174		106,895
Equities—International		44,909		43,235

	$	5,023,965	$	4,112,937

Included within residential and commercial mortgage-backed securities as at March 31, 2015 were securities issued by U.S. governmental agencies with a fair value of $363.1 million (as at December 31, 2014: $263.4 million).

Included within corporate securities as at March 31, 2015 were senior secured loans of $37.3 million (as at December 31, 2014: $33.5 million).

The increase in the Company’s investments classified as trading securities of $911.0 million was due primarily to additional fixed maturity investments acquired in the Sussex acquisition.

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

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


As at March 31, 2015	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	808,208	$	790,275		16.3	%
More than one year through two years		833,382		819,657		16.9	%
More than two years through five years		1,458,942		1,463,838		30.2	%
More than five years through ten years		454,522		456,041		9.4	%
More than ten years		156,784		153,651		3.2	%

		3,711,838		3,683,462		76.0	%
Residential mortgage-backed		408,795		409,006		8.4	%
Commercial mortgage-backed		170,851		171,270		3.5	%
Asset-backed		589,503		588,144		12.1	%

	$	4,880,987	$	4,851,882		100.0	%


As at December 31, 2014	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	837,557	$	829,644		20.9	%
More than one year through two years		787,810		780,979		19.7	%
More than two years through five years		1,161,708		1,159,917		29.3	%
More than five years through ten years		289,359		289,911		7.3	%
More than ten years		66,793		65,634		1.7	%

		3,143,227		3,126,085		78.9	%
Residential mortgage-backed		307,847		308,621		7.8	%
Commercial mortgage-backed		139,984		139,907		3.5	%
Asset-backed		389,529		388,194		9.8	%

	$	3,980,587	$	3,962,807		100.0	%

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


As at March 31, 2015	Fair Value		% of Total Fair Value
AAA	$	1,612,614		33.2	%
AA		820,519		16.9	%
A		1,662,483		34.3	%
BBB		616,042		12.7	%
Non-Investment Grade		131,941		2.7	%
Not Rated		8,283		0.2	%

	$	4,851,882		100.00	%

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)


As at December 31, 2014	Fair Value		% of Total Fair Value
AAA	$	527,466		13.3	%
AA		1,747,389		44.1	%
A		1,164,604		29.4	%
BBB		391,107		9.9	%
Non-Investment Grade		111,777		2.8	%
Not Rated		20,464		0.5	%

	$	3,962,807		100.0	%

Held-to-maturity

The Company holds a portfolio of held-to-maturity securities to support the annuity business acquired with Pavonia Holdings (US) Inc. (“Pavonia”). The amortized cost and estimated fair values of the Company’s fixed maturity investments classified as held-to-maturity were as follows:


As at March 31, 2015	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
U.S. government and agency	$	20,166	$	523	$	(6	)	$	20,683
Non-U.S. government		38,454		883		(16	)		39,321
Corporate		746,678		26,046		(499	)		772,225

	$	805,298	$	27,452	$	(521	)	$	832,229


As at December 31, 2014	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
U.S. government and agency	$	20,257	$	322	$	(20	)	$	20,559
Non-U.S. government		38,613		325		(249	)		38,689
Corporate		754,363		16,182		(3,421	)		767,124

	$	813,233	$	16,829	$	(3,690	)	$	826,372

As at March 31, 2015 and December 31, 2014, none of these securities were considered to be other than temporarily impaired.

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

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


As at March 31, 2015	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	5,266		5,265		0.6	%
More than one year through two years		20,989		21,046		2.5	%
More than two years through five years		66,983		67,608		8.1	%
More than five years through ten years		98,772		100,095		12.1	%
More than ten years		613,288		638,215		76.7	%

	$	805,298	$	832,229		100.0	%


As at December 31, 2014	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	10,369	$	10,350		1.2	%
More than one year through two years		19,939		19,957		2.4	%
More than two years through five years		68,945		69,031		8.4	%
More than five years through ten years		99,171		98,922		12.0	%
More than ten years		614,809		628,112		76.0	%

	$	813,233	$	826,372		100.0	%

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


As at March 31, 2015	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	65,697	$	67,871		8.2	%
AA		164,440		168,402		20.2	%
A		512,591		531,204		63.8	%
BBB or lower		56,803		58,560		7.0	%
Non-Investment Grade		5,451		5,875		0.7	%
Not Rated		316		317		0.1	%

	$	805,298	$	832,229		100.0	%


As at December 31, 2014	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	53,893	$	54,895		6.6	%
AA		245,460		246,764		29.9	%
A		466,317		476,642		57.7	%
BBB		42,107		42,748		5.2	%
Non-Investment Grade		5,456		5,323		0.6	%

	$	813,233	$	826,372		100.0	%

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

Available-for-sale

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


As at March 31, 2015	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
U.S. government and agency	$	28,264	$	247	$	(8	)	$	28,503
Non-U.S. government		67,740		105		(4,867	)		62,978
Corporate		101,856		1,222		(2,910	)		100,168
Residential mortgage-backed		2,833		84		(198	)		2,719
Asset-backed		14,490		33		(1	)		14,522

	$	215,183	$	1,691	$	(7,984	)	$	208,890


As at December 31, 2014	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses Non-OTTI			Fair Value
U.S. government and agency	$	24,167	$	182		(7	)	$	24,342
Non-U.S. government		72,913		386		(2,805	)		70,494
Corporate		101,745		964		(1,653	)		101,056
Residential mortgage-backed		3,305		76		(138	)		3,243
Asset-backed		41,980		15		(19	)		41,976

	$	244,110	$	1,623	$	(4,622	)	$	241,111

Included within residential mortgage-backed securities as at March 31, 2015 were securities issued by U.S. governmental agencies with a fair value of $1.0 million (as at December 31, 2014: $1.1 million).

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


	12 Months or Greater					Less Than 12 Months					Total
As at March 31, 2015	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government and agency	$	526	$	(1	)	$	4,844	$	(7	)	$	5,370	$	(8	)
Non-U.S. government		8,728		(1,707	)		19,600		(3,160	)		28,328		(4,867	)
Corporate		8,161		(231	)		23,364		(2,679	)		31,525		(2,910	)
Residential mortgage-backed		41		—			1,465		(198	)		1,506		(198	)
Asset-backed		1,020		(1	)		255		—			1,275		(1	)

	$	18,476	$	(1,940	)	$	49,528	$	(6,044	)	$	68,004	$	(7,984	)

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)


	12 Months or Greater					Less Than 12 Months					Total
As at December 31, 2014	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government and agency	$	528	$	—		$	3,678	$	(6	)	$	4,206	$	(6	)
Non-U.S. government		17,051		(1,534	)		20,300		(1,271	)		37,351		(2,805	)
Corporate		39,964		(1,003	)		40,072		(651	)		80,036		(1,654	)
Residential mortgage-backed		2,073		(138	)		—		—			2,073		(138	)
Asset-backed		11,215		(12	)		14,720		(7	)		25,935		(19	)

	$	70,831	$	(2,687	)	$	78,770	$	(1,935	)	$	149,601	$	(4,622	)

As at March 31, 2015 and December 31, 2014, the number of securities classified as available-for-sale in an unrealized loss position was 126 and 212, respectively, with a fair value of $68.0 million and $149.6 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 29 and 120, respectively. As of March 31, 2015, none of these securities were considered to be other than temporarily impaired.

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


As at March 31, 2015	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	56,681	$	54,226		26.0	%
More than one year through two years		55,516		53,140		25.4	%
More than two years through five years		79,485		77,428		37.1	%
More than five years through ten years		3,990		3,695		1.8	%
More than ten years		2,188		3,160		1.5	%

		197,860		191,649		91.8	%
Residential mortgage-backed		2,833		2,719		1.3	%
Asset-backed		14,490		14,522		6.9	%

	$	215,183	$	208,890		100.0	%


As at December 31, 2014	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	54,491	$	53,496		22.2	%
More than one year through two years		53,936		52,343		21.7	%
More than two years through five years		86,157		84,970		35.2	%
More than five years through ten years		1,890		1,858		0.8	%
More than ten years		2,351		3,225		1.3	%

		198,825		195,892		81.2	%
Residential mortgage-backed		3,305		3,243		1.4	%
Asset-backed		41,980		41,976		17.4	%

	$	244,110	$	241,111		100.0	%

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

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


As at March 31, 2015	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	114,734	$	110,600		53.0	%
AA		34,929		33,115		15.8	%
A		46,748		46,564		22.3	%
BBB		18,772		18,611		8.9	%

	$	215,183	$	208,890		100.0	%


As at December 31, 2014	Amortized Cost		Fair Value		% of Total Fair Value
AAA	$	117,866	$	115,691		48.0	%
AA		62,707		61,970		25.7	%
A		49,039		49,063		20.3	%
BBB		14,498		14,387		6.0	%

	$	244,110	$	241,111		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 three months ended March 31, 2015, the Company did not recognize any other-than-temporary impairment losses due to required sales. The Company determined that, as at March 31, 2015, no credit losses existed.

Other Investments

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


	March 31, 2015		December 31, 2014
Private equity funds	$	214,540	$	197,269
Fixed income funds		333,986		335,026
Fixed income hedge funds		77,036		59,627
Equity funds		157,974		150,053
Real estate debt fund		74,658		33,902
CLO equities		43,249		41,271
CLO equity funds		16,217		16,022
Other		1,663		3,698

	$	919,323	$	836,868

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

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 March 31, 2015 and December 31, 2014, the Company had $214.5 million and $197.3 million, respectively, of other investments recorded in private equity funds. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. Management regularly reviews and discusses fund performance with the Company’s fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments.

Fixed income funds

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

Fixed income hedge funds

This class comprises hedge funds that invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of three years from the time of the Company’s initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice.

Equity funds

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

Real estate debt fund

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

CLO equities

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

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

CLO equity funds

This class comprises two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.

Other

As at March 31, 2015, this class primarily comprises a fund that provides loans to educational institutions throughout the U.S. and its territories. Through these investments, the Company participates in the performance of the underlying loan pools. This investment matures when the loans are paid down and cannot be redeemed before maturity. Previously included within this class was a catastrophe bond acquired as part of the Company’s acquisition of Torus Insurance Holdings Limited and its subsidiaries (“Torus”) on April 1, 2014. This catastrophe bond matured during the three months ended March 31, 2015.

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 March 31, 2015, the Company had $12.5 million of investments subject to gates/side-pockets ($13.0 million as of December 31, 2014). As of March 31, 2015, management has not made any adjustments to the fair value estimate reported by the fund managers for the side-pocketed investments.

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

The following tables present the fair value, unfunded commitments and redemption frequency for the funds included within other investments. These investments are all valued at net asset value as at March 31, 2015 and December 31, 2014:


March 31, 2015	Total Fair Value		Gated/Side Pocket Investments		Investments without Gates or Side Pockets		Unfunded Commitments		Redemption Frequency
Private equity funds	$	214,540	$	—	$	214,540	$	95,243	Not eligible
Fixed income funds		333,986		—		333,986		—	Daily, monthly and quarterly
Fixed income hedge funds		77,036		1,596		75,440		—	Quarterly after lock-up periods expire
Equity funds		157,974		—		157,974		—	Bi-monthly
Real estate debt fund		74,658		—		74,658		—	Monthly
CLO equity funds		16,217		10,925		5,292		—	Quarterly after lock-up periods expire
Other		1,332		—		1,332		655	Not eligible

	$	875,743	$	12,521	$	863,222	$	95,898


December 31, 2014	Total Fair Value		Gated/Side Pocket Investments		Investments without Gates or Side Pockets		Unfunded Commitments		Redemption Frequency
Private equity funds	$	197,269	$	—	$	197,269	$	99,885	Not eligible
Fixed income funds		335,026		—		335,026		—	Daily, monthly and quarterly
Fixed income hedge funds		59,627		1,958		57,669		—	Quarterly after lock-up periods expire
Equity funds		150,053		—		150,053		—	Bi-monthly
Real estate debt fund		33,902		—		33,902		—	Monthly
CLO equity funds		16,022		11,022		5,000		—	Quarterly after lock-up periods expire
Other		1,363		—		1,363		—	Not eligible

	$	793,262	$	12,980	$	780,282	$	99,885

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.

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

•

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

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

Fixed Maturity Investments

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

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

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

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 March 31, 2015, the Company had no corporate securities classified as Level 3.

•

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

•

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

•

Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at both March 31, 2015 and December 31, 2014, the Company had no residential or commercial mortgage-backed securities classified as Level 3.

Equities

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

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

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

Other investments

The Company has ongoing due diligence processes with respect to funds in which it invests and their managers. These processes are designed to assist the Company in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements for funds annually, and regularly reviews and discusses the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, the Company may incorporate adjustments to the reported net asset value (and not use the permitted practical expedient) on an investment by investment basis. These adjustments may involve significant management judgment. As at March 31, 2015, there were no material adjustments made to the reported net asset value.

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

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

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

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

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

In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase (or decrease) in either of these significant inputs in isolation would result in lower (or higher) fair value estimates for direct investments in the Company’s CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs because they are based on the historical

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (or decrease) in either of these significant inputs in isolation would result in higher (or lower) fair value estimates for direct investments in the Company’s CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.

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

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

For its investments in the CLO equity funds, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager. The Company uses an income approach to corroborate the reasonableness of reported net asset value. The CLO equity funds have been classified as Level 3 due to a lack of observable and relevant trades in secondary markets.

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

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

Fair Value Measurements

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


	March 31, 2015
	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	$	—	$	751,878	$	—	$	751,878
Non-U.S. government		—		397,589		—		397,589
Corporate		—		2,595,561		—		2,595,561
Municipal		—		130,083		—		130,083
Residential mortgage-backed		—		411,725		—		411,725
Commercial mortgage-backed		—		171,270		—		171,270
Asset-backed		—		602,666		—		602,666
Equities—U.S.		121,979		5,195		—		127,174
Equities—International		26,377		18,532		—		44,909
Other investments		—		491,961		427,362		919,323

Total investments	$	148,356	$	5,576,460	$	427,362	$	6,152,178


	December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
U.S. government and agency	$	—	$	769,002	$	—	$	769,002
Non-U.S. government		—		439,439		—		439,439
Corporate		—		2,087,329		600		2,087,929
Municipal		—		25,607		—		25,607
Residential mortgage-backed		—		311,864		—		311,864
Commercial mortgage-backed		—		139,907		—		139,907
Asset-backed		—		430,170		—		430,170
Equities—U.S.		96,842		5,203		4,850		106,895
Equities—International		24,365		18,870		—		43,235
Other investments		—		487,078		349,790		836,868

Total investments	$	121,207	$	4,714,469	$	355,240	$	5,190,916

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

The following tables present the Company’s fair value hierarchy for those assets classified as held-to-maturity in the consolidated balance sheet but for which disclosure of the fair value is required as of March 31, 2015 and December 31, 2014:


	March 31, 2015
	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	$	—	$	20,683	$	—	$	20,683
Non-U.S. government		—		39,321		—		39,321
Corporate		—		772,225		—		772,225

Total investments	$	—	$	832,229	$	—	$	832,229


	December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
U.S. government and agency	$	—	$	20,559	$	—	$	20,559
Non-U.S. government		—		38,689		—		38,689
Corporate		—		767,124		—		767,124

Total investments	$	—	$	826,372	$	—	$	826,372

During the three months ended March 31, 2015 and year ended December 31, 2014, 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 March 31, 2015:


	Fixed Maturity Investments			Other Investments			Equity Securities			Total
Level 3 investments as of January 1, 2015	$	600		$	349,790		$	4,850		$	355,240
Purchases		—			81,978			—			81,978
Sales		(600	)		(13,882	)		(5,000	)		(19,482	)
Total realized and unrealized gains through earnings		—			9,476			150			9,626
Net transfers into and/or (out of) Level 3		—			—			—			—

Level 3 investments as of March 31, 2015	$	—		$	427,362		$	—		$	427,362

The amount of net gains for the three months ended March 31, 2015 included in earnings attributable to the fair value of changes in assets still held at March 31, 2015 was $9.6 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—(Continued)


	Fixed Maturity Investments			Other Investments			Equity Securities		Total
Level 3 investments as of January 1, 2014	$	609		$	265,569		$	4,725	$	270,903
Purchases		—			23,292			—		23,292
Sales		—			(2,983	)		—		(2,983	)
Total realized and unrealized gains through earnings		(2	)		10,773			25		10,796
Net transfers into and/or (out of) Level 3		—			—			—		—

Level 3 investments as of March 31, 2014	$	607		$	296,651		$	4,750	$	302,008

The amount of net gains for the three months ended March 31, 2014 included in earnings attributable to the fair value of changes in assets still held at March 31, 2014 was $10.8 million. All of this amount was included in net realized and unrealized gains.

Net Realized and Unrealized Gains

Components of net realized and unrealized gains for the three months ended March 31, 2015 and 2014 are as follows:


	Three Months Ended March 31,
	2015			2014
Gross realized gains on available-for-sale securities	$	114		$	26
Gross realized losses on available-for-sale securities		(8	)		(145	)
Net realized gains on trading securities		12,583			5,917
Net unrealized gains on trading securities		6,769			11,778
Net realized and unrealized gains on other investments		23,562			16,997

Net realized and unrealized gains	$	43,020		$	34,573

Proceeds from sales and maturities of available-for-sale securities	$	49,241		$	59,238

ENSTAR GROUP LIMITED

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

4. INVESTMENTS—(Continued)

Net Investment Income

Major categories of net investment income for the three months ended March 31, 2015 and 2014 are summarized as follows:


	Three Months Ended March 31,
	2015			2014
Interest from fixed maturity investments	$	38,852		$	34,206
Interest from cash and cash equivalents and short-term investments		2,719			1,625
Net amortization of bond premiums and discounts		(12,603	)		(12,462	)
Dividends from equities		1,681			1,404
Income from other investments		882			92
Interest on other receivables		281			226
Other income		2,903			22
Interest on deposits held with clients		480			730
Policy loan interest		293			311
Investment expenses		(1,595	)		(1,806	)

	$	33,893		$	24,348

Other investments includes interest distributions from the Company’s direct investments in CLO equities.

Restricted Assets

The Company is required to maintain investments and cash and cash equivalents on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted assets, including restricted cash of $510.5 million and $535.0 million, as of March 31, 2015 and December 31, 2014, was as follows:


	March 31, 2015		December 31, 2014
Collateral in trust for third party agreements	$	2,738,471	$	2,630,259
Assets on deposit with regulatory authorities		1,094,838		653,192
Collateral for secured letter of credit facility		326,282		300,468

	$	4,159,591	$	3,583,919

The increase in restricted assets of $575.7 million since December 31, 2014 is primarily as a result of the acquisition of Companion.

ENSTAR GROUP LIMITED

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

5. DERIVATIVE INSTRUMENTS

From time to time, 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 are not designated as hedging investments.

The following table sets forth the changes in realized gains (losses) on derivative instruments recorded in net earnings for the periods ended March 31, 2015 and 2014, respectively:

Foreign Exchange Forward
Contract

Contract Date

Settlement Date

Contract
Amount

Settlement
Amount

Net Foreign
Exchange Gains
(Losses)

March 31,
2015

March 31,
2014

Australian dollar

November 26, 2013

January 3, 2014

AU$45,000

$41,036

—

(130

)

U.S. dollar

July 1, 2013

January 3, 2014

$40,887

AU$45,000

—

130

6. REINSURANCE BALANCES RECOVERABLE

The following table provides the total reinsurance balances recoverable as at March 31, 2015 and December 31, 2014:


	March 31, 2015													December 31, 2014
	Non-life Run-off			Atrium		Torus			Life and Annuities		Total			Non-life Run-off			Atrium		Torus			Life and Annuities		Total
Recoverable from reinsurers on:
Outstanding losses	$	728,386		$	7,381	$	151,986		$	24,119	$	911,872		$	568,386		$	9,582	$	181,067		$	25,125	$	784,160
Losses incurred but not reported		510,400			15,117		138,543			465		664,525			278,696			14,565		154,850			467		448,578
Fair value adjustments		(27,853	)		4,131		(9,989	)		—		(33,711	)		(46,373	)		4,131		(10,708	)		—		(52,950	)

Total reinsurance reserves recoverable		1,210,933			26,629		280,540			24,584		1,542,686			800,709			28,278		325,209			25,592		1,179,788
Paid losses recoverable		193,418			494		48,437			2,264		244,613			129,750			1,289		19,845			883		151,767

	$	1,404,351		$	27,123	$	328,977		$	26,848	$	1,787,299		$	930,459		$	29,567	$	345,054		$	26,475	$	1,331,555

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

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

ENSTAR GROUP LIMITED

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

6. REINSURANCE BALANCES RECOVERABLE—(Continued)

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 at March 31, 2015 and December 31, 2014, the Company had reinsurance balances recoverable of $1.79 billion and $1.33 billion, respectively. The increase of $455.7 million in reinsurance balances recoverable was primarily a result of the Companion acquisition.

Top Ten Reinsurers

The following table shows, for each segment, the total reinsurance balances recoverable by reinsurer as at March 31, 2015 and December 31, 2014:


	As at March 31, 2015													As at December 31, 2014
	Reinsurance Balances Recoverable													Reinsurance Balances Recoverable
	Non-life run-off		Atruim		Torus		Life and annuities		Total		% of Total			Non-life run-off		Atrium		Torus		Life and annuities		Total		% of Total
Top 10 reinsurers	$	894,811	$	22,165	$	123,762	$	15,039	$	1,055,777		59.1	%	$	667,325	$	23,635	$	158,117	$	15,089	$	864,166		64.9	%
Other reinsurers’ balances > $1 million		495,363		4,496		202,217		10,419		712,495		39.9	%		256,929		4,917		181,196		10,692		453,734		34.1	%
Other reinsurers’ balances < $1 million		14,177		462		2,998		1,390		19,027		1.0	%		6,205		1,015		5,741		694		13,655		1.0	%

Total	$	1,404,351	$	27,123	$	328,977	$	26,848	$	1,787,299		100.0	%	$	930,459	$	29,567	$	345,054	$	26,475	$	1,331,555		100.0	%

At March 31, 2015 and December 31, 2014, the top ten reinsurers of the Company’s business accounted for 59.1% and 64.9%, respectively, of total reinsurance balances recoverable (which includes total reinsurance reserves and paid losses recoverable) and included $471.0 million and $310.9 million, respectively, of incurred but not reported (“IBNR”) reserves recoverable. With the exception of three non-rated reinsurers from which $416.8 million was recoverable (December 31, 2014: $175.2 million related to one reinsurer), the other top ten reinsurers, as at March 31, 2015 and December 31, 2014, were all rated A- or better.

As at March 31, 2015, there were no reinsurers which represented 10% or more of total reinsurance balances recoverable. At December 31, 2014, reinsurance balances recoverable with a carrying value of $314.5 million were associated with two reinsurers, which represented 10% or more of total reinsurance balances recoverable.

ENSTAR GROUP LIMITED

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

6. REINSURANCE BALANCES RECOVERABLE—(Continued)

Provisions for Uncollectible Reinsurance Balances Recoverable

The following table shows the total reinsurance balances recoverable by rating of reinsurer along with the Company’s provisions for uncollectible reinsurance balances recoverable (“provisions for bad debt”) as at March 31, 2015 and December 31, 2014. The provisions for bad debt all relate to the non-life run-off segment.


	As at March 31, 2015							As at December 31, 2014
	Reinsurance Balances Recoverable							Reinsurance Balances Recoverable
	Gross		Provisions for Bad Debt			Net		Gross		Provisions for Bad Debt			Net
Reinsurers rated A - or above	$	1,247,567	$	52,494		$	1,195,073	$	1,126,944	$	80,995		$	1,045,949
Reinsurers rated below A -, secured (trust funds or letters of credit)		491,776		0			491,776		204,544		0			204,544
Reinsurers rated below A -, unsecured		305,951		205,501			100,450		289,976		208,914			81,062

Total	$	2,045,294	$	257,995		$	1,787,299	$	1,621,464	$	289,909		$	1,331,555

Provisions for bad debt as a percentage of gross reinsurance balances recoverable				12.6	%						17.9	%

7. LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table provides the total losses and loss adjustment expense liabilities as at March 31, 2015 and December 31, 2014:


	March 31, 2015											December 31, 2014
	Non-life Run-off			Atrium		Torus			Total			Non-life Run-off			Atrium		Torus			Total
Outstanding	$	2,653,574		$	69,312	$	355,437		$	3,078,323		$	2,202,187		$	73,803	$	387,171		$	2,663,161
Incurred but not reported		2,192,144			107,902		475,509			2,775,555			1,406,420			113,149		477,264			1,996,833
Fair value adjustment		(152,456	)		25,659		(2,458	)		(129,255	)		(173,597	)		25,659		(2,635	)		(150,573	)

Total	$	4,693,262		$	202,873	$	828,488		$	5,724,623		$	3,435,010		$	212,611	$	861,800		$	4,509,421

The overall increase in losses and loss adjustment expense liabilities for the Company between December 31, 2014 and March 31, 2015 was primarily attributable to the Company’s acquisition of Companion.

Refer to Note 8 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on establishing reserves for losses and loss adjustment expenses liabilities.

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

The total net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the Company’s non-life run-off, Atrium and Torus segments for the three months ended March 31, 2015 and 2014 was as follows:


	Three Months Ended March 31,
	2015												2014
	Non-life Run-off			Atrium			Torus			Total			Non-life Run-off			Atrium		Total
Net losses paid	$	65,260		$	11,911		$	52,148		$	129,319		$	87,687		$	12,835	$	100,522
Net change in case and LAE reserves		(7,000	)		(1,019	)		(1,786	)		(9,805	)		(62,398	)		775		(61,623	)
Net change in IBNR reserves		(37,278	)		(3,810	)		25,739			(15,349	)		(37,348	)		3,469		(33,879	)

Increase (reduction) in estimates of net ultimate losses		20,982			7,082			76,101			104,165			(12,059	)		17,079		5,020
Reduction in provisions for bad debt		(19,814	)		—			—			(19,814	)		—			—		—
(Reduction) increase in provisions for unallocated loss adjustment expense liabilities		(13,975	)		(62	)		656			(13,381	)		(13,359	)		52		(13,307	)
Amortization of fair value adjustments		(293	)		—			(541	)		(834	)		(3,764	)		—		(3,764	)

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities	$	(13,100	)	$	7,020		$	76,216		$	70,136		$	(29,182	)	$	17,131	$	(12,051	)

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

Non-Life Run-off Segment

The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2015 and 2014 of the non-life run-off segment (losses incurred and paid are reflected net of reinsurance recoverables):


	Non-life Run-off
	Three Months Ended March 31,
	2015			2014
Balance as at January 1	$	3,435,010		$	4,004,513
Less: total reinsurance reserves recoverable		800,709			1,121,533

		2,634,301			2,882,980
Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:
Current period		20,726			1,432
Prior periods		(33,826	)		(30,614	)

Total net reduction in ultimate losses and loss adjustment expense liabilities		(13,100	)		(29,182	)

Net losses paid:
Current period		(4,571	)		(532	)
Prior periods		(60,689	)		(87,155	)

Total net losses paid		(65,260	)		(87,687	)

Effect of exchange rate movement		(38,238	)		(1,025	)
Acquired on purchase of subsidiaries		774,758			—
Assumed business		189,868			28,630

Net balance as at March 31		3,482,329			2,793,716
Plus: total reinsurance reserves recoverable		1,210,933			1,028,162

Balance as at March 31	$	4,693,262		$	3,821,878

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the non-life run-off segment for the three months ended March 31, 2015 and 2014 was as follows:


	Non-life Run-off
	Three Months Ended March 31,
	2015								2014
	Prior Period			Current Period		Total			Prior Period			Current Period		Total
Net losses paid	$	60,689		$	4,571	$	65,260		$	87,155		$	532	$	87,687
Net change in case and LAE reserves		(9,994	)		2,994		(7,000	)		(63,249	)		851		(62,398	)
Net change in IBNR reserves		(50,439	)		13,161		(37,278	)		(37,397	)		49		(37,348	)

Increase (reduction) in estimates of net ultimate losses		256			20,726		20,982			(13,491	)		1,432		(12,059	)
Reduction in provisions for bad debt		(19,814	)		—		(19,814	)		—			—		—
Reduction in provisions for unallocated loss adjustment expense liabilities		(13,975	)		—		(13,975	)		(13,359	)		—		(13,359	)
Amortization of fair value adjustments		(293	)		—		(293	)		(3,764	)		—		(3,764	)

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities	$	(33,826	)	$	20,726	$	(13,100	)	$	(30,614	)	$	1,432	$	(29,182	)

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

Three Months Ended March 31, 2015

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended March 31, 2015 of $13.1 million included current period incurred losses and loss adjustment expenses of $20.7 million related to current period net earned premium of $19.3 million primarily related to Sussex. Excluding current period net ultimate losses and loss adjustment expense liabilities of $20.7 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $33.8 million, which was attributable to a reduction in provisions for bad debt of $19.8 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $14.0 million, relating to 2015 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $0.3 million, partially offset by an increase in estimates of net ultimate losses of $0.3 million.

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

The reduction in provisions for bad debt of $19.8 million for the three months ended March 31, 2015 resulted from the cash collection and commutation of certain reinsurance receivables against which bad debt provisions had been provided for in earlier periods.

Three Months Ended March 31, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended March 31, 2014 of $29.2 million included current period incurred losses and loss adjustment expenses of $1.4 million related to current period net earned premiums of $1.4 million related to SeaBright Holdings, Inc. (“SeaBright”). Excluding SeaBright’s current period net ultimate losses and loss adjustment expense liabilities of $1.4 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $30.6 million, which was attributable to a reduction in estimates of net ultimate losses of $13.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $13.4 million, relating to 2014 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $3.8 million.

Excluding the impact of current period losses incurred of $1.4 million relating to SeaBright, the reduction in estimates of net ultimate losses was $13.5 million, which was primarily related to:

(i)

the Company’s quarterly review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $6.8 million; and

(ii)

favorable claims settlements during the three months ended March 31, 2014 resulting in a reduction in estimates of net ultimate losses of approximately $6.7 million.

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

Atrium and Torus Segments

The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2015 and 2014 for the Atrium segment and for the three months ended March 31, 2015 for the Torus segment (losses incurred and paid are reflected net of reinsurance recoverables):


	Three Months Ended March 31,
	Atrium						Torus⁽¹⁾
	2015			2014			2015
Balance as at January 1	$	212,611		$	215,392		$	861,800
Less: total reinsurance reserves recoverable		28,278			25,055			325,209

		184,333			190,337			536,591
Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:
Current period		14,878			21,314			77,410
Prior periods		(7,858	)		(4,183	)		(1,196	)

Total net increase in ultimate losses and loss adjustment expense liabilities		7,020			17,131			76,216

Net losses paid:
Current period		(2,870	)		(4,684	)		(3,723	)
Prior periods		(9,041	)		(8,151	)		(48,425	)

Total net losses paid		(11,911	)		(12,835	)		(52,148	)
Effect of exchange rate movement		(3,198	)		(7	)		(12,710	)

Net balance as at March 31		176,244			194,626			547,948
Plus: total reinsurance reserves recoverable		26,629			25,626			280,540

Balance as at March 31	$	202,873		$	220,252		$	828,488

(1)	The Company began reporting with respect to its Torus segment following the acquisition of Torus in the second quarter of 2014.

ENSTAR GROUP LIMITED

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

7. LOSSES AND LOSS ADJUSTMENT EXPENSES—(Continued)

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities for the Company’s Atrium segment for the three months ended March 31, 2015 and 2014 and for the Torus segment for the three months ended March 31, 2015 were as follows:


	Three Months Ended March 31,
	Atrium															Torus
	2015								2014							2015
	Prior Period			Current Period		Total			Prior Period			Current Period		Total		Prior Period			Current Period		Total
Net losses paid	$	9,041		$	2,870	$	11,911		$	8,151		$	4,684	$	12,835	$	48,425		$	3,723	$	52,148
Net change in case and LAE reserves		(3,711	)		2,692		(1,019	)		(3,985	)		4,760		775		(10,331	)		8,545		(1,786	)
Net change in IBNR reserves		(12,993	)		9,183		(3,810	)		(8,401	)		11,870		3,469		(37,677	)		63,416		25,739

(Reduction) increase in estimates of net ultimate losses		(7,663	)		14,745		7,082			(4,235	)		21,314		17,079		417			75,684		76,101
(Reduction) increase in provisions for unallocated loss adjustment expense liabilities		(195	)		133		(62	)		52			—		52		(1,070	)		1,726		656
Amortization of fair value adjustments		—			—		—			—			—		—		(541	)		—		(541	)

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities	$	(7,858	)	$	14,878	$	7,020		$	(4,183	)	$	21,314	$	17,131	$	(1,196	)	$	77,410	$	76,216

8. POLICY BENEFITS FOR LIFE AND ANNUITY CONTRACTS

Policy benefits for life and annuity contracts as at March 31, 2015 and December 31, 2014 were as follows:


	March 31, 2015			December 31, 2014
Life	$	336,387		$	344,215
Annuities		933,292			938,121

		1,269,679			1,282,336
Fair value adjustments		(59,465	)		(61,472	)

	$	1,210,214		$	1,220,864

Refer to Note 9 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on establishing policy benefit reserves.

ENSTAR GROUP LIMITED

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

9. PREMIUMS WRITTEN AND EARNED

The following tables provide a summary of net premiums written and earned in our non-life run-off, Atrium, Torus and life and annuities segments for the three month periods ended March 31, 2015 and 2014:


	Three Months Ended March 31,
	2015						2014
	Premiums Written			Premiums Earned			Premiums Written			Premiums Earned
Non-life run-off
Gross	$	10,785		$	27,755		$	1,319		$	2,768
Ceded		2,762			(9,263	)		(276	)		(241	)

Net	$	13,547		$	18,492		$	1,043		$	2,527

Atrium
Gross	$	48,913		$	38,153		$	47,577		$	38,157
Ceded		(4,555	)		(4,281	)		(5,852	)		(5,518	)

Net	$	44,358		$	33,872		$	41,725		$	32,639

Torus
Gross	$	190,697		$	168,532		$	—		$	—
Ceded		(65,874	)		(44,910	)		—			—

Net	$	124,823		$	123,622		$	—		$	—

Life and annuities
Life	$	22,733		$	22,920		$	25,996		$	26,492


Total	$	205,461		$	198,906		$	68,764		$	61,658

10. GOODWILL AND INTANGIBLE ASSETS

The following table shows the Company’s goodwill and intangible assets as at March 31, 2015 and December 31, 2014:


	Goodwill		Intangible assets with a definite life- Other			Intangible assets with an indefinite life		Total			Intangible assets with a definite life- FVA
Balance as at December 31, 2014	$	73,071	$	41,048		$	87,031	$	201,150		$	159,095
Acquired during the period		—		—			—		—			(2,760	)
Intangible assets amortization		—		(1,341	)		—		(1,341	)		(1,326	)

Balance as at March 31, 2015	$	73,071	$	39,707		$	87,031	$	199,809		$	155,009

Refer to Note 11 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on intangible assets with a definite and an indefinite life.

Intangible asset amortization for the three months ended March 31, 2015 and 2014 was $2.7 million and $1.5 million, respectively.

ENSTAR GROUP LIMITED

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

10. GOODWILL AND INTANGIBLE ASSETS—(Continued)

The gross carrying value, accumulated amortization and net carrying value of intangible assets by type at March 31, 2015 and December 31, 2014 were as follows:


	March 31, 2015									December 31, 2014
	Gross Carrying Value			Accumulated Amortization			Net Carrying Value			Gross Carrying Value			Accumulated Amortization			Net Carrying Value
Intangible assets with a definite life:
Fair value adjustments:
Losses and loss adjustment expense	$	429,063		$	(299,808	)	$	129,255		$	449,986		$	(299,413	)	$	150,573
Reinsurance balances recoverable		(175,453	)		141,742			(33,711	)		(193,617	)		140,667			(52,950	)
Policy benefits for life and annuity contracts		86,332			(26,867	)		59,465			86,332			(24,860	)		61,472

Total	$	339,942		$	(184,933	)	$	155,009		$	342,701		$	(183,606	)	$	159,095

Other:
Distribution channel		20,000		$	(1,777	)		18,223			20,000			(1,444	)		18,556
Technology		15,000			(3,750	)		11,250			15,000			(3,125	)		11,875
Brand		12,000			(1,766	)		10,234			12,000			(1,383	)		10,617

Total	$	47,000		$	(7,293	)	$	39,707		$	47,000		$	(5,952	)	$	41,048

Intangible assets with an indefinite life:
Lloyd’s syndicate capacity		37,031			—			37,031			37,031			—			37,031
Licenses		19,900			—			19,900			19,900			—			19,900
Management contract		30,100			—			30,100			30,100			—			30,100

Total	$	87,031		$	—		$	87,031		$	87,031		$	—		$	87,031

As at March 31, 2015 and December 31, 2014, the allocation of the goodwill to the Company’s non-life run-off, Atrium and Torus segments was $21.2 million, $38.9 million and $13.0 million, respectively.

11. LOANS PAYABLE

The Company’s long-term debt consists of its EGL Revolving Credit Facility, which can be used for permitted acquisitions and for general corporate purposes, and the Sussex Facility, an acquisition term loan facility used to partially finance the Company’s acquisition of Companion on January 27, 2015.

The EGL Revolving Credit Facility was entered into on September 16, 2014. On February 27, 2015, the EGL Revolving Credit Facility was amended and restated primarily in order to: (1) increase the size of the facility from $500 million to $665 million; (2) add Lloyd’s Bank plc as a new lender within the facility, and (3) reallocate the amounts provided by each of the four lenders under the facility such that each lender agreed to provide an equal amount of $166.25 million, on and subject to the terms of the restated facility agreement.

ENSTAR GROUP LIMITED

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

11. LOANS PAYABLE—(Continued)

On December 24, 2014, Sussex Holdings, a wholly-owned subsidiary of the Company, as borrower and guarantor, entered into the Sussex Facility with National Australia Bank Limited and Barclays Bank PLC. The Sussex Facility provides for a four-year term loan facility pursuant to which Sussex Holdings was permitted to borrow up to an aggregate of $109.0 million to fund 50% of the consideration payable for the acquisition of Companion. Sussex Holdings fully drew down on the Sussex Facility and completed the acquisition of Companion on January 27, 2015.

As of March 31, 2015, all of the covenants relating to the EGL Revolving Credit Facility and the Sussex Facility were met.

Amounts of loans payable outstanding, and accrued interest, as of March 31, 2015 and December 31, 2014 total $430.0 million and $320.0 million, respectively, and comprise:


Facility	Date of Facility		Facility Term		March 31, 2015		December 31, 2014
EGL Revolving Credit Facility		September 16, 2014		5 Years	$	319,550	$	319,550
Sussex Facility		December 24, 2014		4 Years		109,000		—

Total long-term bank debt						428,550		319,550
Accrued interest						1,448		491

Total loans payable					$	429,998	$	320,041

12. REDEEMABLE NONCONTROLLING INTEREST

Refer to Note 13 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on redeemable noncontrolling interest (“RNCI”).

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


Redeemable noncontrolling interest	March 31, 2015			December 31, 2014
Balance as at beginning of period	$	374,619		$	100,859
Capital contributions		—			272,722
Net earnings attributable to RNCI		9,564			4,059
Accumulated other comprehensive income attributable to RNCI		(997	)		(1,993	)
Transfer of net loss from noncontrolling interest		—			(1,028	)

Balance at end of period	$	383,186		$	374,619

ENSTAR GROUP LIMITED

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

13. EARNINGS PER SHARE

The following table sets forth the comparison of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014:


	Three Months Ended March 31,
	2015		2014
Basic earnings per ordinary share:
Net earnings attributable to Enstar Group Limited	$	44,847	$	29,587
Weighted average ordinary shares outstanding—basic		19,237,461		16,564,083

Net earnings per ordinary share attributable to Enstar Group Limited—basic	$	2.33	$	1.79

Diluted earnings per ordinary share:
Net earnings attributable to Enstar Group Limited	$	44,847	$	29,587
Weighted average ordinary shares outstanding—basic		19,237,461		16,564,083
Share equivalents:
Unvested shares		26,322		79,967
Restricted share units		10,424		20,475
Warrants		60,430		40,799

Weighted average ordinary shares outstanding—diluted		19,334,637		16,705,324

Net earnings per ordinary share attributable to Enstar Group Limited—diluted	$	2.32	$	1.77

14. 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 16 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The information below includes both the employee and director components of the Company’s share based compensation.

2006 Equity Incentive Plan

The employee share awards for the three months ended March 31, 2015 and 2014 are summarized as follows:


	Three Months Ended March 31,
	2015					2014
	Number of Shares			Weighted Average Fair Value of the Award		Number of Shares			Weighted Average Fair Value of the Award
Nonvested—beginning of period		101,181		$	15,470		115,159		$	14,313
Granted		39,280			5,459		1,559			170
Forfeited		(2,932	)		448		—			—
Vested		(50,588	)		7,350		(44,112	)		(5,920	)

Nonvested—end of period		86,941		$	12,333		72,606		$	9,897

ENSTAR GROUP LIMITED

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

14. EMPLOYEE BENEFITS—(Continued)

The total unrecognized compensation cost related to the Company’s non-vested share awards under the 2006 Equity Incentive Plan (the “Equity Plan”) as at March 31, 2015 and 2014 was $8.5 million and $4.0 million, respectively. This cost is expected to be recognized over the next 1.9 years, which is the weighted average contractual life of the awards. Compensation costs of $1.4 million and $0.7 million relating to these share awards were recognized in the Company’s statement of earnings for the three months ended March 31, 2015 and 2014, respectively.

For the three months ended March 31, 2015 and 2014, 39,280 and 1,559 shares, respectively, were awarded to non-executive officer employees under the Equity Plan.

Cash-Settled Stock Appreciation Rights

Refer to Note 16 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on cash-settled stock appreciation rights (“SARs”).

During the three months ended March 31, 2015 and 2014, the Company granted 190,000 and nil SARs, respectively, to certain employees pursuant to the terms of the Equity Plan. Compensation costs of $(0.1) million and $nil relating to the outstanding SARs awards were recognized in the Company’s statements of earnings for the three months ended March 31, 2015 and 2014, respectively.

The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black-Scholes option valuation model as at March 31, 2015:


	As at March 31, 2015
Weighted average fair value of the SARs	$	27.36
Weighted average volatility		19.72
Weighted average risk-free interest rate		0.62	%
Dividend yield		—

The following table summarizes SARs activity:


	March 31, 2015
	Number of SARs			Weighted Average Exercise Price per SAR		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value ⁽¹⁾
Balance, beginning of period		1,068,001		$	140.53			$	13,199
Granted		190,000
Forfeited		(12,480	)

Balance, end of period		1,245,521		$	140.47		2.24	$	2,387

(1)	The aggregate intrinsic value is calculated as the pre-tax difference between the exercise price of the underlying share awards and the closing price per share of the Company’s ordinary shares of $152.89 at the beginning of the period, and $141.86 at the end of the period.

ENSTAR GROUP LIMITED

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

14. EMPLOYEE BENEFITS—(Continued)

2011-2015 Annual Incentive Compensation Program

The accrued expense relating to the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program for the three months ended March 31, 2015 and 2014, was $7.9 million and $5.2 million, respectively.

Enstar Group Limited Employee Share Purchase Plan

For each of the three months ended March 31, 2015 and 2014, 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 (“Share Plan”) were recognized in the Company’s statement of earnings. For the three months ended March 31, 2015 and 2014, 3,260 and 1,559 shares, respectively, were issued to employees under the Share Plan.

Northshore Incentive Plans

Northshore Holdings Limited, a holding company that owns Atrium and its subsidiaries and Arden (“Northshore”), has implemented long-term incentive plans that award time-based restricted shares of Northshore to certain Atrium employees. Shares generally vest over two to three years, although certain awards began vesting in 2014. These share awards have been classified by the Company as liability awards.

For the three months ended March 31, 2015 and 2014, compensation costs of $1.5 million and $nil relating to the long-term incentive plans were recorded as part of salaries and benefits within the Company’s statement of earnings.

Deferred Compensation and Ordinary Share Plan for Non-Employee Directors

For the three months ended March 31, 2015 and 2014, 572 and 1,029 restricted share units, respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors (the “Deferred Compensation Plan”). The Company recorded expenses of $0.1 million related to the restricted share units for each of the three month periods ended March 31, 2015 and 2014.

Following the resignation of Kenneth J. LeStrange from the Board of Directors, 1,560 restricted share units previously credited to his account under the Deferred Compensation Plan were converted into the same number of the Company’s ordinary shares on January 2, 2015, with fractional shares paid in cash.

Pension Plan

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

Pension expense for the three months ended March 31, 2015 and 2014 were $2.4 million and $2.1 million, respectively. The increase for 2015 over 2014 was attributable to the increase in employee headcount (and associated additional defined contribution plan expense) as a result of the April 2014 acquisition of Torus and the January 2015 acquisition of Companion.

ENSTAR GROUP LIMITED

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

14. EMPLOYEE BENEFITS—(Continued)

The Company recorded pension expense relating to the PWAC Plan of $0.2 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively. The PWAC Plan is described in Note 16 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

15. TAXATION

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

Earnings before income taxes includes the following components:


	Three Months Ended March 31,
	2015			2014
Domestic (Bermuda)	$	(24,209	)	$	7,010
Foreign		88,445			33,678

Total	$	64,236		$	40,688

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


	Three Months Ended March 31,
	2015			2014
Current:
Domestic (Bermuda)	$	—		$	—
Foreign		13,641			10,267

		13,641			10,267

Deferred:
Domestic (Bermuda)		—			—
Foreign		(2,897	)		(2,991	)

		(2,897	)		(2,991	)

Total tax expense	$	10,744		$	7,276

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.

ENSTAR GROUP LIMITED

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

15. TAXATION—(Continued)

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


	Three Months Ended March 31,
	2015			2014
Earnings before income tax	$	64,236		$	40,688

Expected tax rate		0.0	%		0.0	%
Foreign taxes at local expected rates		12.1	%		17.3	%
Change in uncertain tax positions		0.0	%		(5.5	)%
Change in valuation allowance		(2.4	)%		5.7	%
Prior year true-up		6.8	%		0.0	%
Other		0.2	%		0.4	%

Effective tax rate		16.7	%		17.9	%

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 no unrecognized tax benefits relating to uncertain tax positions as at both March 31, 2015 and December 31, 2014.

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 2011, 2011 and 2008, respectively.

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

16. RELATED PARTY TRANSACTIONS

Stone Point Capital LLC

Following several private transactions occurring from May 2012 to July 2012, Trident acquired 1,350,000 of the Company’s Voting Ordinary Shares (which now constitutes approximately 8.5% of the Company’s outstanding Voting 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 Trident, 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.

In addition, the Company has entered into certain agreements with Trident with respect to Trident’s co-investments in the Atrium, Arden, and Torus acquisitions. These include investors’ agreements and shareholders’ agreements, which provide for, among other things: (i) the Company’s right to redeem Trident’s equity interest in the Atrium/Arden and Torus transactions in cash at fair

ENSTAR GROUP LIMITED

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

16. RELATED PARTY TRANSACTIONS—(Continued)

market value within the 90 days following the fifth anniversary of the Arden and Torus closings, respectively, and at any time following the seventh anniversary of the Arden and Torus closings, respectively; and (ii) Trident’s right to have its equity co-investment interests in the Atrium/Arden and Torus transactions redeemed by the Company at fair market value (which the Company may satisfy in either cash or its ordinary shares) following the seventh anniversaries of the Arden closing and Torus closing, respectively. As of March 31, 2015, the Company has included $383.2 million (December 31, 2014: $374.6 million) as redeemable noncontrolling interest on its balance sheet relating to these Trident co-investment transactions. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the boards of Torus and the holding companies established in connection with the Atrium/Arden and Torus co-investment transactions. Trident also has a second representative on these boards who is a Stone Point Capital LLC employee.

As at March 31, 2015, the Company has investments in four funds (carried within other investments) and a registered investment company affiliated with entities owned by Trident or otherwise affiliated with Stone Point Capital LLC. The fair value of the investments in the four funds was $245.6 million and $202.6 million as at March 31, 2015 and December 31, 2014, respectively, while the fair value of the Company’s investment in the registered investment company was $26.8 million and $25.6 as at March 31, 2015 and December 31, 2014, respectively. For the three months ended March 31, 2015 and 2014, the Company recognized $2.3 million and $1.2 million respectively, in net realized and unrealized gains in respect of these investments.

The Company also has separate accounts managed by Eagle Point Credit Management, which is an affiliate of entities owned by Trident, with respect to which the Company incurred approximately $0.1 million and $0.1 million in management fees for the three months ended March 31, 2015 and 2014, respectively.

In addition, the Company has invested in two funds managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as director. The fair value of the Company’s investments in Sound Point Capital funds was $41.1 million and $39.9 million as at March 31, 2015 and December 31, 2014, respectively. For the three months ended March 31, 2015 and 2014, the Company has recognized $1.3 million and $0.4 million, respectively, in net realized and unrealized gains in respect of Sound Point Capital investments.

Goldman Sachs & Co.

Affiliates of Goldman Sachs own approximately 4.2% of the Company’s Voting Ordinary Shares and 100% of the Company’s Series C Non-Voting 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. As of March 31, 2015 and December, 31, 2014, the Company had investments in two funds (carried within other investments) affiliated with entities owned by Goldman Sachs, which had a fair value of $36.5 million and $36.3 million, respectively. As of March 31, 2015 and December 31, 2014, the Company had an indirect investment in non-voting interests of two companies affiliated with Hastings Insurance Group Limited which had a fair value of $23.9 million and $25.1 million respectively. Goldman Sachs affiliates have an approximately 50% interest in the Hastings companies, and Mr. Rajpal serves as a director of the entities in which the Company has invested. For the three months ended March 31, 2015 and 2014, the Company recognized $(1.7) million and $0.7 million, in net realized and unrealized losses and gains, respectively, in respect of the Goldman Sachs-affiliated investments.

ENSTAR GROUP LIMITED

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

16. RELATED PARTY TRANSACTIONS—(Continued)

During 2015, a Goldman Sachs affiliate began providing investment management services to one of the Company’s subsidiaries pursuant to an arms-length agreement reflecting customary terms and conditions. The Company’s interests are held in accounts managed by affiliates of Goldman Sachs, with respect to which the Company incurred approximately $0.1 million and $nil in management fees for the three months ended March 31, 2015 and 2014, respectively.

Affiliates of Goldman Sachs own approximately 22% of Global Atlantic Financial Group (“GAFG”), which owns entities that provide reinsurance to Arden. As at March 31, 2015 and December 31, 2014, the Company’s total reinsurance recoverable from GAFG entities amounted to $40.8 million and $230.5 million, respectively. As at December 31, 2014, reinsurance balances recoverable from a particular non-rated GAFG entity with a carrying value of $175.2 million represented 10% or more of the Company’s total reinsurance balances recoverable. The $175.2 million recoverable from that GAFG entity at December 31, 2014 was secured by a trust fund. The balance of $40.8 million and $55.3 million as at March 31, 2015 and December 31, 2014 respectively, was recoverable from GAFG entities rated A- and higher.

17. COMMITMENTS AND CONTINGENCIES

Concentration of Credit Risk

The Company’s portfolio of cash and fixed maturity investments 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 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 maturity investments.

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.

As of March 31, 2015, the Company’s investments are held by 29 different custodians. These custodians are all large financial institutions that are highly regulated. The largest concentration of fixed maturity investments, by fair value, at a single custodian was $4.2 billion and $3.6 billion as of March 31, 2015 and December 31, 2014, respectively.

Investments

The following table provides a summary of the Company’s outstanding unfunded investment commitments as of March 31, 2015 and December 31, 2014:


March 31, 2015					December 31, 2014
Original Commitments	Commitments				Original Commitments		Commitments
Original Commitments	Funded		Unfunded		Original Commitments		Funded		Unfunded
$286,000	$	190,102	$	95,898	$	311,000	$	211,115	$	99,885

Guarantees

As at March 31, 2015 and December 31, 2014, the Company had, in total, parental guarantees supporting a subsidiary’s insurance obligations in the amount of $249.2 million and $238.6 million, respectively.

ENSTAR GROUP LIMITED

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

17. COMMITMENTS AND CONTINGENCIES—(Continued)

Acquisitions and Significant New Business

As of March 31, 2015, the Company has entered into a definitive agreement with respect to the purchase of NSA, which is expected to close in the third quarter of 2015. The NSA acquisition agreement is described in Note 2—“Acquisitions.”

Legal Proceedings

The Company is, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation and arbitration regarding claims. In addition to claims litigation, the Company may be subject to other lawsuits and regulatory actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or omissions, employment claims or regulatory activity. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on its business, results of operations or financial condition. 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 and other claims.

18. SEGMENT INFORMATION

The Company monitors and reports its results of operations in four segments: non-life run-off, Atrium, Torus and life and annuities. These segments are described in Note 1 and Note 21 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The Company’s total assets by segment were as follows (the elimination items include the elimination of intersegment assets):


	March 31, 2015			December 31, 2014
Total assets:
Non-life run-off	$	7,560,657		$	5,936,187
Atrium		739,914			598,037
Torus		2,631,091			2,876,734
Life and annuities		1,373,107			1,344,593
Less:
Eliminations		(795,597	)		(818,666	)

	$	11,509,172		$	9,936,885

ENSTAR GROUP LIMITED

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

18. SEGMENT INFORMATION—(Continued)

The following tables set forth selected and unaudited condensed consolidated statement of earnings results by segment for the three months ended March 31, 2015 and 2014 (the elimination items include the elimination of intersegment revenues and expenses):


	Three Months Ended March 31, 2015
	Non-life run-off			Atrium			Torus			Life and annuities			Eliminations			Consolidated
INCOME
Net premiums earned	$	18,492		$	33,872		$	123,622		$	22,920		$	—		$	198,906
Fees and commission income		4,837			9,528			14			—			(2,899	)		11,480
Net investment income		21,904			585			2,194			9,370			(160	)		33,893
Net realized and unrealized gains		34,660			91			4,702			3,567			—			43,020

		79,893			44,076			130,532			35,857			(3,059	)		287,299

EXPENSES
Net (reduction) increase in ultimate losses and loss adjustment expense liabilities		(13,100	)		7,020			76,216			—			—			70,136
Life and annuity policy benefits		—			—			—			22,847			—			22,847
Acquisition costs		(1,705	)		9,406			24,143			2,706			—			34,550
Salaries and benefits		32,044			8,169			15,420			2,139			—			57,772
General and administrative expenses		22,947			3,454			14,793			531			(2,899	)		38,826
Interest expense		2,520			1,483			—			160			(160	)		4,003
Net foreign exchange losses (gains)		5,138			(2,515	)		(6,380	)		(1,314	)		—			(5,071	)

		47,844			27,017			124,192			27,069			(3,059	)		223,063

EARNINGS BEFORE INCOME TAXES		32,049			17,059			6,340			8,788			—			64,236
INCOME TAXES		(5,107	)		(1,884	)		(682	)		(3,071	)		—			(10,744	)

NET EARNINGS		26,942			15,175			5,658			5,717			—			53,492
Less: Net loss (earnings) attributable to noncontrolling interest		404			(6,728	)		(2,321	)		—			—			(8,645	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	27,346		$	8,447		$	3,337		$	5,717		$	—		$	44,847

ENSTAR GROUP LIMITED

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

18. SEGMENT INFORMATION—(Continued)


	Three Months Ended March 31, 2014
	Non-life run-off			Atrium			Torus			Life and annuities			Eliminations			Consolidated
INCOME
Net premiums earned	$	2,527		$	32,639		$	—		$	26,492		$	—		$	61,658
Fees and commission income		2,955			4,821			—			21			(799	)		6,998
Net investment income		14,333			480			—			9,989			(454	)		24,348
Net realized and unrealized gains (losses)		29,629			(107	)		—			5,051			—			34,573

		49,444			37,833			—			41,553			(1,253	)		127,577

EXPENSES
Net (reduction) increase in ultimate losses and loss adjustment expense liabilities		(29,182	)		17,131			—			—			—			(12,051	)
Life and annuity policy benefits		—			—			—			26,809			—			26,809
Acquisition costs		—			9,561			—			3,600			—			13,161
Salaries and benefits		25,846			3,533			—			2,011			—			31,390
General and administrative expenses		15,763			4,041			893			2,352			(799	)		22,250
Interest expense		2,561			1,173			—			454			(454	)		3,734
Net foreign exchange losses (gains)		2,130			(551	)		6			11			—			1,596

		17,118			34,888			899			35,237			(1,253	)		86,889

EARNINGS BEFORE INCOME TAXES		32,326			2,945			(899	)		6,316			—			40,688
INCOME TAXES		(3,651	)		(1,339	)		—			(2,286	)		—			(7,276	)

NET EARNINGS		28,675			1,606			(899	)		4,030			—			33,412
Less: Net earnings attributable to noncontrolling interest		(3,075	)		(1,110	)		360			—			—			(3,825	)

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	25,600		$	496		$	(539	)	$	4,030		$	—		$	29,587

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Enstar Group Limited:

We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries as of March 31, 2015, the related condensed consolidated statements of earnings and comprehensive income for the three-month periods ended March 31, 2015 and 2014, and the related condensed consolidated statements of changes in shareholders’ equity and cash flows for the three-month periods ended March 31, 2015 and 2014. 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, 2014, 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 March 2, 2015, 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, 2014, 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

May 11, 2015

Item 2.

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

Table of Contents:


Section	Page
Business Overview		53
Key Performance Indicator		54
Recent Developments		54
Acquisitions		55
Significant New Business		55
Consolidated Results of Operations—for the Three Months Ended March 31, 2015 and 2014		56
Results of Operations by Segment—for the Three Months Ended March 31, 2015 and 2014		58
Non-life Run-off Segment		58
Atrium Segment		65
Torus Segment		71
Life and Annuities Segment		75
Liquidity and Capital Resources		78
Reinsurance Balances Recoverable		79
Cash Flows		81
Investments		82
Loans Payable		87
Aggregate Contractual Obligations		88
Commitments and Contingencies		88
Critical Accounting Policies		89
Off-Balance Sheet and Special Purpose Entity Arrangements		89
Cautionary Statement Regarding Forward-Looking Statements		89

The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2015 and 2014 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, 2014.

Business Overview

Enstar Group Limited, or Enstar, is a Bermuda-based holding company that was formed in 2001 and became publicly traded in 2007. We are listed on the NASDAQ Global Select Market under the ticker symbol “ESGR.” We and our operating subsidiaries acquire and manage diversified insurance businesses through a network of service companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations.

Our core focus is acquiring and managing insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and providing management, consulting and other services to the insurance and reinsurance industry. Since our formation, we have completed the acquisition of over 65 insurance and reinsurance companies and portfolios of insurance and reinsurance business. We also operate active underwriting businesses, including Atrium Underwriting Group Limited and subsidiaries, or Atrium, which manage and underwrite specialist insurance and reinsurance business for Lloyd’s Syndicate 609, and Torus Insurance Holdings Limited and subsidiaries, or Torus, an A- rated global specialty insurance group with multiple global underwriting platforms. We partnered with the Trident V funds in the Atrium and Torus acquisitions, with Enstar owning an approximate 59.0% interest and Trident V owning an approximate 39.3% interest in the acquired companies (and Dowling Capital Partners owning a 1.7% interest). In addition, we operate closed life and annuities businesses.

The substantial majority of our acquisitions have been in the non-life run-off business, which for us generally includes property and casualty, workers’ compensation, asbestos and environmental, construction defect, marine, aviation and transit, and other closed business. While our core focus remains the acquisition and management of non-life run-off business, in recent years, we expanded our business by entering into the active underwriting business. We believe that our active underwriting businesses provide an additional earnings stream, and also enhance our ability to compete for acquisition targets by providing opportunities for us, primarily through Torus, to acquire renewal rights or provide loss portfolio reinsurance in connection with such acquisitions, which may be attractive to certain vendors or may present alternative ways in which proposed transactions can be structured.

Overall, Enstar has four segments of business that are each managed, operated and reported on differently: (i) non-life run-off; (ii) Atrium; (iii) Torus; and (iv) life and annuities. For the three months ended March 31, 2014, we monitored and reported our results of operations in three segments (non-life run-off, active underwriting, and life and annuities). The active underwriting segment included the results of operations of Atrium and Arden Reinsurance Company Ltd., or Arden, as well as holding company expenses for Bayshore Holdings Limited, or Bayshore, that preceded the acquisition of Torus. Following the acquisition of Torus on April 1, 2014, we began reporting and monitoring our results on operations in our four current segments.

The table below summarizes the total number of employees we had as at March 31, 2015 and December 31, 2014 by operating segment:


	March 31, 2015		December 31, 2014
Non-life run-off		643		521
Atrium		160		157
Torus		477		474
Life and annuities		48		49

Total		1,328		1,201

The increase in head count for our non-life run-off segment was primarily atributable to the staff we assumed on completion of the acquisition of Companion Property and Casualty Insurance Company, or Companion.

Key Performance Indicator

Our primary corporate objective is growing our net book value per share. We believe this is driven primarily by growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions, effectively managing companies and portfolios of business that we have acquired, and executing on our active underwriting strategies. We increased our book value per share on a fully diluted basis by $1.42 from $119.22 per share as at December 31, 2014 to $120.64 as at March 31, 2015. The increase was due to net earnings for the three months ended March 31, 2015 partially offset by changes in accumulated other comprehensive income over the same period.

Recent Developments

Our transactions take the form of either acquisitions of companies or portfolio transfers, where a reinsurance contract transfers risk from the insurance or reinsurance company to one of our companies. Acquisitions and portfolio transfers (also referred to as “significant new business”) completed or signed since the beginning of 2015 are outlined below.

Acquisitions

Nationale Suisse Assurance

On February 5, 2015, our wholly-owned subsidiary, Harper Holding SARL, entered into a definitive agreement with Nationale Suisse to acquire its Belgian subsidiary, Nationale Suisse Assurance S.A., or NSA. NSA is a Belgium-based insurance company writing non-life insurance (which we expect to operate in run-off as part of our non-life run-off segment) and life insurance (which we expect to operate in run-off as part of our life and annuities segment). The total consideration for the transaction will be €33.7 million (approximately $38.5 million) (subject to certain possible closing adjustments). We expect to finance the purchase price from cash on hand. As part of the agreement, Torus has agreed to acquire NSA’s two specialty underwriting agencies, Vander Haeghen & Co and Arena. Torus is renewing certain business currently underwritten by NSA, including the business placed by these agencies, as well as other select lines. 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 during the third quarter of 2015.

Wilton Re Life Settlements

On May 5, 2015, we, through our wholly-owned subsidiary Guillamene Holdings Limited, completed the acquisitions of two Delaware limited liability companies from subsidiaries of Wilton Re Limited that own interests in life insurance policies acquired in the secondary and tertiary markets and through collateralized lending transactions.

The total consideration for the transaction was $173.0 million, which will be paid in two installments. The first installment of $89.1 million was paid on closing and was financed by borrowings under our revolving credit facility. The second installment of $83.9 million, due on the first anniversary of closing, is expected to be funded from cash on hand.

Sussex Property and Casualty Insurance Company (formerly known as Companion)

On January 27, 2015, we and our wholly-owned subsidiary Sussex Holdings, Inc., or Sussex Holdings, completed the acquisition of Companion from Blue Cross Blue Shield of South Carolina, an independent licensee of the Blue Cross Blue Shield Association. Companion is a South Carolina-based insurance group writing property, casualty, specialty and workers compensation business, and has also provided fronting and third-party administrative services. The total consideration for the transaction was $218.0 million in cash, which was financed 50% through borrowings under a term loan facility and 50% from cash on hand. We changed the name of Companion to Sussex Property and Casualty Insurance Company, or Sussex, following the acquisition and are operating the company as part of our non-life run-off business. In addition, Torus is renewing certain business from Companion.

Significant New Business

Reciprocal of America

On January 15, 2015, our wholly-owned subsidiary, Providence Washington Insurance Company, completed a loss portfolio transfer reinsurance transaction with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business that has been in run-off since 2003. The total net insurance reserves assumed were approximately $162.1 million, with an equivalent amount of cash and/or investments being received as consideration.

Shelbourne RITC Transaction

Effective January 1, 2015, Lloyd’s Syndicate 2008, which is managed by our wholly-owned subsidiary and Lloyd’s managing agent, Shelbourne Syndicate Services Limited, entered into a

reinsurance to close (or RITC) contract of the 2012 and prior underwriting years of account of another Lloyd’s syndicate. In the RITC transaction, Syndicate 2008 assumed total net insurance reserves of approximately £17.2 million (approximately $26.9 million) for cash consideration of an equal amount.

Consolidated Results of Operations — For the Three Months Ended March 31, 2015 and 2014

The following table sets forth our consolidated statements of earnings data for each of the periods indicated:


	Three Months Ended March 31,
	2015			2014
	(expressed in thousands of U.S. dollars)
INCOME
Net premiums earned	$	198,906		$	61,658
Fees and commission income		11,480			6,998
Net investment income		33,893			24,348
Net realized and unrealized gains		43,020			34,573

		287,299			127,577

EXPENSES
Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:		70,136			(12,051	)
Life and annuity policy benefits		22,847			26,809
Acquisition costs		34,550			13,161
Salaries and benefits		57,772			31,390
General and administrative expenses		38,826			22,250
Interest expense		4,003			3,734
Net foreign exchange (gains) losses		(5,071	)		1,596

		223,063			86,889

EARNINGS BEFORE INCOME TAXES		64,236			40,688
INCOME TAXES		(10,744	)		(7,276	)

NET EARNINGS		53,492			33,412
Less: Net earnings attributable to noncontrolling interest		(8,645	)		(3,825	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	44,847		$	29,587

The following table provides a split by operating segment of the net earnings attributable to Enstar Group Limited:


	Three Months Ended March 31,
	2015		2014
	(in thousands of U.S. dollars)
Segment split of earnings (losses) attributable to Enstar Group Limited:
Non-life run-off	$	27,346	$	25,600
Atrium		8,447		496
Torus		3,337		(539	)
Life and annuities		5,717		4,030

Net earnings attributable to Enstar Group Limited	$	44,847	$	29,587

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related footnotes. Some of the information contained in this discussion and analysis includes forward-looking

statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Cautionary Statement Regarding Forward-Looking Statements” included in Item 2 of this Quarterly Report on Form 10-Q and in “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.

We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $53.5 million and $33.4 million for the three months ended March 31, 2015 and 2014, respectively. Our comparative results were impacted by our 2014 and 2015 acquisitions, among other factors. Subsequent to March 31, 2014, we completed the acquisitions of Torus (on April 1, 2014) and Companion (on January 27, 2015), which we renamed Sussex. The change in consolidated net earnings for the three month periods ended March 31, 2015 and 2014 is more specifically attributable to the following:

Net premiums earned – Combined net premiums earned for our four operating segments were $198.9 million and $61.7 million for the three months ended March 31, 2015 and 2014, respectively. The significant increase in 2015 was due primarily to the net premiums earned by Torus and Sussex as described in greater detail in the segment discussions below.

Net investment income – Net investment income was $33.9 million and $24.3 million for the three months ended March 31, 2015 and 2014, respectively. The increase was largely attributable to the net investment income earned on a larger base of cash and fixed maturity investments as a result of the Torus and Sussex transactions, although this was partially offset by lower reinvestment yields on new purchases of fixed maturity investments.

Net realized and unrealized gains – Net realized and unrealized gains were $43.0 million and $34.6 million for the three months ended March 31, 2015 and 2014, respectively. The increase was attributable primarily to an increase in realized and unrealized gains on our fixed maturity and other investments and decreases in U.S. investment yields during the first quarter of 2015 (particularly in longer dated fixed maturity investments) as compared to marginal decreases in treasury yields for the same period in 2014.

Net increase (reduction) in ultimate losses and loss adjustment expense liabilities – For the three months ended March 31, 2015, net ultimate losses and loss adjustment expense liabilities increased by $70.1 million, compared to a reduction of $12.1 million in the three months ended March 31, 2014. The total increase of $82.2 million for the three months ended March 31, 2015 compared to the comparative period in 2014 was due primarily to increases in current period net ultimate losses and loss adjustment expense liabilities of $90.3 million, which largely consisted of current period loss development related to the issuance of new insurance policies, partially offset by a reduction in prior period net ultimate losses and loss adjustment expense liabilities.

Life and annuity policy benefits – Life and annuity policy benefits were $22.8 million and $26.8 million for the three months ended March 31, 2015 and 2014, respectively. The movements for the three month periods ended March 31, 2015 and 2014 related entirely to our life and annuities segment and are described in greater detail in the segment discussion below.

Acquisition costs – Acquisition costs were $34.6 million and $13.2 million for the three months ended March 31, 2015 and 2014, respectively. The increase for 2015 was due to the acquisition costs associated with the net premiums earned by Torus.

Salaries and benefits – Salaries and benefits were $57.8 million and $31.4 million for the three months ended March 31, 2015 and 2014, respectively. This increase in 2015 was due predominantly to the salaries and benefits costs associated with our increased head count relating to the Torus and

Sussex acquisitions, in addition to an increase in our bonus accrual amount for the three months ended 2015 due to higher net earnings.

General and administrative expenses – General and administrative expenses for the three months ended March 31, 2015 and 2014 were $38.8 million and $22.3 million, respectively. The increase for 2015 was due principally to general and administrative expenses associated with the Torus and Sussex acquisitions.

Net foreign exchange gains (losses) – Net foreign exchange gains (losses) for the three months ended March 31, 2015 and 2014 were $5.1 million and $(1.6) million, respectively. The net foreign exchange gains for the three months ended March 31, 2015 were primarily attributable to our holding surplus Euro and British pound liabilities at a time when the U.S. dollar was strengthening against these currencies.

Income tax expense – Income tax expenses were $10.7 million and $7.3 million for the three months ended March 31, 2015 and 2014, respectively. The effective tax rate was 16.7% for the three months ended March 31, 2015 compared with 17.9% for the same period in 2014. Income tax expense is generated through our foreign operations outside of Bermuda, principally in the United States, U.K and Australia. Our income tax expense may fluctuate significantly from period to period depending on the geographic distribution of pre-tax earnings or loss in any given period between different jurisdictions with different tax rates.

Noncontrolling interest – Net earnings attributable to noncontrolling interest for the three months ended March 31, 2015 increased by $4.8 million to $8.6 million. The increase in 2015 was primarily attributable to increased earnings during the period associated with our Torus and Atrium segments (in which there are redeemable noncontrolling interests and noncontrolling interests).

Overall, net earnings attributable to Enstar Group Limited increased $15.3 million, or 51.6%, from $29.6 million for the three months ended March 31, 2014, to $44.8 million for the three months ended March 31, 2015.

Results of Operations by Segment – For the Three Months Ended March 31, 2015 and 2014

Non-life Run-off Segment

Our non-life run-off segment comprises the operations of our subsidiaries that are running off their property and casualty and other non-life lines of business, including the run-off businesses of Arden and Torus. It also includes our smaller management business, in which we manage the run-off portfolios of third parties through our service companies.

The following is a discussion and analysis of our results of operations for our non-life run-off segment for the three months ended March 31, 2015 and 2014:


	Three Months Ended March 31,
	2015			2014
	(in thousands of U.S. dollars)
INCOME
Net premiums earned	$	18,492		$	2,527
Fees and commission income		4,837			2,955
Net investment income		21,904			14,333
Net realized and unrealized gains		34,660			29,629

		79,893			49,444

EXPENSES
Net reduction in ultimate losses and loss adjustment expense liabilities		(13,100	)		(29,182	)
Acquisition costs		(1,705	)		—
Salaries and benefits		32,044			25,846
General and administrative expenses		22,947			15,763
Interest expense		2,520			2,561
Net foreign exchange losses		5,138			2,130

		47,844			17,118

EARNINGS BEFORE INCOME TAXES		32,049			32,326
INCOME TAXES		(5,107	)		(3,651	)

NET EARNINGS		26,942			28,675
Less: Net losses (earnings) attributable to noncontrolling interest		404			(3,075	)

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	27,346		$	25,600

Summary Comparison of the Three Months Ended March 31, 2015 and 2014

In our non-life run-off segment, we reported consolidated net earnings, before net losses (earnings) attributable to noncontrolling interest, of approximately $26.9 million and $28.7 million for the three months ended March 31, 2015 and 2014, respectively.

The decrease in earnings of $1.8 million was attributable primarily to the following:

(i)

an increase in salaries and benefits of $6.2 million;

(ii)

an increase in general and administrative expenses of $7.2 million; and

(iii)

an increase in net foreign exchange losses of $3.0 million; partially offset by

(iv)

an increase in net investment income of $7.6 million;

(v)

an increase in net realized and unrealized gains of $5.0 million; and

(vi)

an increase of $3.2 million in net reduction in ultimate losses and loss adjustment expense liabilities related to prior periods.

Occasionally we write premium in our non-life run-off segment even though we do not actively seek to issue new policies in this segment. This written premium relates to the obligatory renewal of certain policies that we are in the process of placing into run-off, and the related earned premium tends to be largely or entirely offset by increases in net ultimate losses and loss adjustment expense liabilities related to these current period premiums. For the three months ended March 31, 2015 the total of: (i) net premiums earned of $18.5 million, less (ii) current period increase in net ultimate

losses and loss adjustment expense liabilities of $20.7 million, plus (iii) acquisition costs of $1.7 million amounted to $(0.5) million and primarily related to the Sussex. For the three months ended March 31, 2014, the total of: (i) net premiums earned of $2.5 million, less (ii) current period increase in net ultimate losses and loss adjustment expense liabilities of $1.4 million, amounted to $1.1 million and related to SeaBright Holdings Inc., or SeaBright.

Noncontrolling interest in earnings for the non-life run-off segment decreased by $3.5 million to $(0.4) million for the three months ended March 31, 2015 as a result of lower earnings in those companies in which there are noncontrolling interests.

Net earnings for the non-life run-off segment attributable to Enstar Group Limited increased by $1.7 million from $25.6 million for the three months ended March 31, 2014 to $27.3 million for the three months ended March 31, 2015.

Net Premiums Earned:


	Three Months Ended March 31,
	2015			*Variance*		2014
	(in thousands of U.S. dollars)
Gross premiums written	$	10,785				$	1,319
Ceded reinsurance premiums written		2,762					(276	)

Net premiums written		13,547		$	12,504		1,043

Gross premiums earned		27,755					2,768
Ceded reinsurance premiums earned		(9,263	)				(241	)

Net premiums earned	$	18,492		$	15,965	$	2,527

Premiums Written

Gross non-life run-off premiums written for the three months ended March 31, 2015 consisted of direct premiums written and premiums assumed primarily by Sussex. Sussex was placed into run-off immediately following the acquisition, but it is renewing expiring insurance policies where it is obligated to do so by applicable regulations. In future periods, we would expect to have declining levels of gross and net premiums written relating to the Sussex run-off business.

Premiums Earned

Gross non-life run-off premiums earned for the three months ended March 31, 2015 and 2014, totaled $27.8 million and $2.8 million, respectively. Ceded reinsurance premiums earned for the three months ended March 31, 2015 and 2014 totaled $9.3 million and $0.2 million, respectively. Accordingly, net premiums earned for the three months ended March 31, 2015 and 2014 totaled $18.5 million and $2.5 million, respectively. Premiums written and earned in 2015 primarily relate to Sussex whereas premiums written and earned in 2014 related to SeaBright.

With our expectation that premiums written by Sussex will decrease significantly over time, we believe that there will be a similar reduction in premiums earned as policies non-renew. As noted above, net premiums earned in our non-life run-off segment are largely or entirely offset by increases in net ultimate losses and loss adjustment expense liabilities related to policies issued in the current period. See also our discussion of “Net Reduction in Ultimate Losses and Loss Adjustment Expense Liabilities” below.

Net Investment Income and Net Realized and Unrealized Gains:


	Three Months Ended March 31,
	Net Investment Income						Net Realized and Unrealized Gains
	2015		*Variance*		2014		2015		*Variance*		2014
	(in thousands of U.S. dollars)
Total	$	21,904	$	7,571	$	14,333	$	34,660	$	5,031	$	29,629

Net investment income for the non-life run-off segment for the three months ended March 31, 2015 increased by $7.6 million to $21.9 million, as compared to $14.3 million for the three months ended March 31, 2014. The increase was a result of the following:

(i)

an increase of $0.8 million in investment income from equities and other investments;

(ii)

an increase of $2.9 million in other investment income related primarily to recoveries received in excess of their cost on acquired insolvent debts; and

(iii)

an increase in investment income of $3.9 million that arose primarily as a result of increased investment balances on our cash and fixed maturity portfolios as compared to those in 2014 due to our acquisition of Companion.

Net realized and unrealized gains for the non-life run-off segment for the three months ended March 31, 2015 and 2014 were $34.7 million and $29.6 million, respectively. The increase of $5.0 million was primarily attributable to:

(i)

an increase of $4.9 million in net realized and unrealized gains in our private equity and other investment holdings attributable to:

•

an increase in net realized and unrealized gains on equity funds in 2015 due to higher global equity returns in underlying portfolios as compared to those earned in 2014;

•

an increase in income earned on our private equity funds in 2015, due to higher returns earned in 2015 as compared to those earned in 2014; and

•

higher returns on our senior secured loan fund investments.

(ii)

an increase of $1.3 million related to fixed maturity securities largely due to a decrease in treasury yields; partially offset by

(iii)

a decrease of $1.2 million in net realized and unrealized gains on our equity portfolio. The decrease between 2015 and 2014 was due mostly to lower gains in our U.S. large capitalization equity exposure for the three months ended March 31, 2015 as compared to the same period in 2014.

Annualized Returns

The below table presents the annualized investment returns (inclusive of net investment income and net realized and unrealized gains (losses)) earned by the non-life run-off segment on its cash and investments for the three months ended March 31, 2015 and 2014:


	Three Months Ended March 31,
	Annualized Return						Average Cash and Investment Balances
	2015			2014			2015		2014
							(in thousands of U.S. dollars)
Cash and fixed maturity investments		2.65	%		2.14	%	$	3,844,998	$	4,025,517
Other investments and equities		13.78	%		11.81	%		901,587		764,879
Combined overall		4.77	%		3.67	%		4,746,585		4,790,396

The average credit ratings by fair value of our fixed maturity investments for our non-life run-off segment as at March 31, 2015 and 2014 were A+.

Net Reduction in Ultimate Losses and Loss Adjustment Expense Liabilities:

The following table shows the components of the movement in the net reduction in ultimate losses and loss adjustment expense liabilities for the non-life run-off segment for the three months ended March 31, 2015 and 2014:


	Three Months Ended March 31,
	2015								2014
	Prior Periods			Current Period		Total			Prior Periods			Current Period		Total
	(in thousands of U.S. dollars)
Net losses paid	$	60,689		$	4,571	$	65,260		$	87,155		$	532	$	87,687
Net change in case and LAE reserves		(9,994	)		2,994		(7,000	)		(63,249	)		851		(62,398	)
Net change in IBNR reserves		(50,439	)		13,161		(37,278	)		(37,397	)		49		(37,348	)

Increase (reduction) in estimates of net ultimate losses		256			20,726		20,982			(13,491	)		1,432		(12,059	)
Reduction in provisions for bad debt		(19,814	)		—		(19,814	)		—			—		—
Reduction in provisions for unallocated loss adjustment expense liabilities		(13,975	)		—		(13,975	)		(13,359	)		—		(13,359	)
Amortization of fair value adjustments		(293	)		—		(293	)		(3,764	)		—		(3,764	)

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities	$	(33,826	)	$	20,726	$	(13,100	)	$	(30,614	)	$	1,432	$	(29,182	)

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

Three Months Ended March 31, 2015

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended March 31, 2015 of $13.1 million included current period incurred losses and loss adjustment expenses of $20.7 million related to current period net earned premium of $19.3 million, primarily related to Sussex. Excluding current period net ultimate losses and loss adjustment expense liabilities of $20.7 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $33.8 million, which was attributable to a reduction in provisions for bad debt of $19.8 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $14.0 million, relating to 2015 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $0.3 million, partially offset by an increase in estimates of net ultimate losses of $0.3 million.

Three Months Ended March 31, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended March 31, 2014 of $29.2 million included current period incurred losses and loss adjustment expense liabilities of $1.4 million related to current period net earned premiums of $1.4 million related to SeaBright. Excluding SeaBright’s current period net ultimate losses and loss adjustment expense liabilities of $1.4 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $30.6 million, which was attributable to a reduction in estimates of net ultimate losses of $13.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $13.4 million, relating to 2014 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $3.8 million.

Excluding the impact of current period losses incurred of $1.4 million relating to SeaBright, the reduction in estimates of net ultimate losses was $13.5 million, which was primarily related to:

(i)

our quarterly review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimate aggregate value of approximately $6.8 million; and

(ii)

favorable claim settlements for the three months ended March 31, 2014 resulting in a reduction in estimates of net ultimate losses of approximately $6.7 million.

Salaries and Benefits:


	Three Months Ended March 31,
	2015		*Variance*			2014
	(in thousands of U.S. dollars)
Total	$	32,044	$	(6,198	)	$	25,846

Salaries and benefits for the non-life run-off segment, which include expenses relating to our discretionary bonus and employee share plans, were $32.0 million and $25.8 million for the three months ended March 31, 2015 and 2014, respectively. The increase in salaries and benefits was related primarily to:

(i)

an increase in the discretionary bonus provision of approximately $2.3 million due to the increase in net earnings for the three months ended March 31, 2015 as compared to 2014. Expenses relating to our discretionary bonus plan will be variable and are dependent on our overall profitability; and

(ii)

an increase in our average head count in our non-life run-off segment from approximately 524 for the three months ended March 31, 2014 to approximately 582 for the three months ended March 31, 2015 primarily as a result of the Sussex acquisition.

General and Administrative Expenses:


	Three Months Ended March 31,
	2015		*Variance*			2014
	(in thousands of U.S. dollars)
Total	$	22,947	$	(7,184	)	$	15,763

General and administrative expenses increased by $7.2 million to $22.9 million for the three months ended March 31, 2015, as compared to $15.7 million for the three months ended March 31, 2014. Included within the expenses for the three months ended March 31, 2015 are $6.2 million

related to Sussex (of which $2.6 million related to acquisition-specific expenses). Excluding the Sussex-related expenses, general and administrative expenses increased by $1.0 million primarily due to an increase in professional fees, computer and office-related expenses.

Net Foreign Exchange Losses:

Three Months Ended March 31,

2015

Variance