Edgar Filing: Enstar Group LTD

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2017

Commission File Number 001-33289

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.)

Windsor Place, 3rd Floor, 22 Queen Street, Hamilton HM JX, Bermuda

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (441) 292-3645

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 August 2, 2017, the registrant had outstanding 16,421,611 voting ordinary shares and 3,004,443
non-voting convertible ordinary shares, each par value $1.00 per share.

Table of Contents

Enstar Group Limited

Quarterly Report on Form 10-Q

For the Period Ended June 30, 2017

Table of Contents



		Page
PART I

Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	91
Item 4.	Controls and Procedures	93

PART II

Item 1.	Legal Proceedings	95
Item 1A.	Risk Factors	95
Item 6.	Exhibits	95

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2017 and December 31, 2016



	June 30, 2017			December 31, 2016
	(expressed in thousands of U.S. dollars, except share data)
ASSETS
Short-term investments, trading, at fair value	$	327,595		$	222,918
Short-term investments, available-for-sale, at fair value (amortized cost: 2017 — $nil; 2016 — $287)	—			268
Fixed maturities, trading, at fair value	5,644,098			4,388,242
Fixed maturities, available-for-sale, at fair value (amortized cost: 2017 — $228,762; 2016 — $269,577)	228,771			267,499
Equities, trading, at fair value	106,240			95,047
Other investments, at fair value	890,943			937,047
Other investments, at cost	128,296			131,651
Total investments	7,325,943			6,042,672
Cash and cash equivalents	681,068			954,871
Restricted cash and cash equivalents	423,683			363,774
Funds held - directly managed	1,205,592			994,665
Premiums receivable	443,201			406,676
Deferred tax assets	13,988			11,374
Prepaid reinsurance premiums	247,901			219,115
Reinsurance balances recoverable	1,477,433			1,460,743
Reinsurance balances recoverable, at fair value	554,759			—
Funds held by reinsured companies	84,073			82,073
Deferred acquisition costs	76,643			58,114
Goodwill and intangible assets	182,504			184,855
Other assets	851,227			842,356
Assets held for sale	1,262,756			1,244,456
TOTAL ASSETS	$	14,830,771		$	12,865,744

LIABILITIES
Losses and loss adjustment expenses	$	5,749,087		$	5,987,867
Losses and loss adjustment expenses, at fair value	1,892,297			—
Policy benefits for life and annuity contracts	114,727			112,095
Unearned premiums	588,082			548,343
Insurance and reinsurance balances payable	470,055			394,021
Deferred tax liabilities	22,393			28,356
Debt obligations	640,787			673,603
Other liabilities	781,494			705,318
Liabilities held for sale	1,142,560			1,150,787
TOTAL LIABILITIES	11,401,482			9,600,390

COMMITMENTS AND CONTINGENCIES

REDEEMABLE NONCONTROLLING INTEREST	457,646			454,522

SHAREHOLDERS’ EQUITY
Share capital authorized, issued and fully paid, par value $1 each (authorized 2017 and 2016: 156,000,000):
Ordinary shares (issued and outstanding 2017: 16,385,570; 2016: 16,175,250)	16,386			16,175
Non-voting convertible ordinary shares:
Series C (issued and outstanding 2017: 2,599,672; 2016: 2,792,157)	2,600			2,792
Series E (issued and outstanding 2017: 404,771; 2016: 404,771)	405			405
Series C Preferred Shares (issued 2017: 388,571; 2016: 388,571)	389			389
Treasury shares at cost (Preferred shares 2017: 388,571; 2016: 388,571)	(421,559		)	(421,559		)
Additional paid-in capital	1,386,332			1,380,109
Accumulated other comprehensive loss	(18,611		)	(23,549		)
Retained earnings	1,996,283			1,847,550
Total Enstar Group Limited Shareholders’ Equity	2,962,225			2,802,312
Noncontrolling interest	9,418			8,520
TOTAL SHAREHOLDERS’ EQUITY	2,971,643			2,810,832
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY	$	14,830,771		$	12,865,744

See accompanying notes to the unaudited condensed consolidated financial statements

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three and Six Months Ended June 30, 2017 and 2016



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(expressed in thousands of U.S. dollars, except share and per share data)
INCOME
Net premiums earned	$	155,571		$	208,709		$	304,469		$	401,596
Fees and commission income	18,667			10,487			30,581			16,911
Net investment income	49,417			44,932			98,156			95,212
Net realized and unrealized gains	51,877			34,503			110,396			72,780
Other income	10,856			3,289			23,054			5,699
	286,388			301,920			566,656			592,198
EXPENSES
Net incurred losses and loss adjustment expenses	9,620			96,462			87,512			179,680
Life and annuity policy benefits	4,289			(1,613		)	3,988			(1,455		)
Acquisition costs	30,355			43,847			51,176			88,876
General and administrative expenses	106,490			104,206			208,958			197,140
Interest expense	7,573			5,421			14,441			10,819
Net foreign exchange losses (gains)	7,122			(1,856		)	10,837			(84		)
Loss on sale of subsidiary	9,609			—			9,609			—
	175,058			246,467			386,521			474,976
EARNINGS BEFORE INCOME TAXES	111,330			55,453			180,135			117,222
INCOME TAXES	(4,731		)	(8,050		)	(1,802		)	(15,419		)
NET EARNINGS FROM CONTINUING OPERATIONS	106,599			47,403			178,333			101,803
NET EARNINGS (LOSSES) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE	(4,871		)	2,378			(4,500		)	2,583
NET EARNINGS	101,728			49,781			173,833			104,386
Less: Net earnings attributable to noncontrolling interest	(11,542		)	(9,187		)	(28,967		)	(18,272		)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	90,186		$	40,594		$	144,866		$	86,114

Earnings per ordinary share attributable to Enstar Group Limited:
Basic:
Net earnings from continuing operations	$	4.90		$	1.98		$	7.71		$	4.33
Net earnings (losses) from discontinued operations	(0.25		)	0.12			(0.23		)	0.13
Net earnings per ordinary share	$	4.65		$	2.10		$	7.48		$	4.46
Diluted:
Net earnings from continuing operations	$	4.87		$	1.97		$	7.66		$	4.30
Net earnings (losses) from discontinued operations	(0.25		)	0.12			(0.23		)	0.13
Net earnings per ordinary share	$	4.62		$	2.09		$	7.43		$	4.43
Weighted average ordinary shares outstanding:
Basic	19,387,650			19,295,280			19,381,225			19,289,119
Diluted	19,511,429			19,430,464			19,506,077			19,420,541

See accompanying notes to the unaudited condensed consolidated financial statements

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Six Months Ended June 30, 2017 and 2016



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(expressed in thousands of U.S. dollars)
NET EARNINGS	$	101,728		$	49,781		$	173,833		$	104,386
Other comprehensive income, net of tax:
Unrealized holding gains on fixed income investments arising during the period	1,693			2,400			2,379			9,364
Reclassification adjustment for net realized gains included in net earnings	(102		)	(113		)	(251		)	(135		)
Unrealized gains arising during the period, net of reclassification adjustment	1,591			2,287			2,128			9,229
Currency translation adjustment	2,315			(4,542		)	4,257			6,053
Total other comprehensive income (loss)	3,906			(2,255		)	6,385			15,282
Comprehensive income	105,634			47,526			180,218			119,668
Less: Comprehensive income attributable to noncontrolling interest	(12,333		)	(9,353		)	(30,415		)	(19,919		)
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED	$	93,301		$	38,173		$	149,803		$	99,749

See accompanying notes to the unaudited condensed consolidated financial statements

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2017 and 2016



	Six Months Ended June 30,
	2017			2016
	(expressed in thousands of U.S. dollars)
Share Capital — Ordinary Shares
Balance, beginning of period	$	16,175		$	16,133
Issue of shares	19			34
Conversion of Series C Non-Voting Convertible Ordinary Shares	192			—
Balance, end of period	$	16,386		$	16,167
Share Capital — Series A Non-Voting Convertible Ordinary Shares
Balance, beginning of period	$	—		$	2,973
Shares converted to Series C Convertible Participating Non-Voting Perpetual Preferred Stock	—			(2,973		)
Balance, end of period	$	—		$	—
Share Capital — Series C Non-Voting Convertible Ordinary Shares
Balance, beginning of period	$	2,792		$	2,726
Conversion to Ordinary Shares	(192		)	—
Balance, end of period	$	2,600		$	2,726
Share Capital — Series E Non-Voting Convertible Ordinary Shares
Balance, beginning and end of period	$	405		$	405
Share Capital — Series C Convertible Participating Non-Voting Perpetual Preferred Stock
Balance, beginning of period	$	389		$	—
Conversion of Series A Non-Voting Convertible Ordinary Stock	—			389
Balance, beginning and end of period	$	389		$	389
Treasury Shares
Balance, beginning and end of period	$	(421,559	)	$	(421,559	)
Additional Paid-in Capital
Balance, beginning of period	$	1,380,109		$	1,373,044
Issue of shares and warrants	66			360
Conversion of Series A Non-Voting Convertible Ordinary Stock	—			2,584
Amortization of equity incentive plan	6,157			602
Balance, end of period	$	1,386,332		$	1,376,590
Accumulated Other Comprehensive Loss
Balance, beginning of period	$	(23,549	)	$	(35,162	)
Currency translation adjustment
Balance, beginning of period	(18,993		)	(23,790		)
Change in currency translation adjustment	4,253			6,053
Balance, end of period	(14,740		)	(17,737		)
Defined benefit pension liability
Balance, beginning and end of period	(4,644		)	(7,723		)
Unrealized gains (losses) on investments
Balance, beginning of period	88			(3,649		)
Change in unrealized gains (losses) on investments	685			7,582
Balance, end of period	773			3,933
Balance, end of period	$	(18,611	)	$	(21,527	)
Retained Earnings
Balance, beginning of period	$	1,847,550		$	1,578,312
Net earnings attributable to Enstar Group Limited	144,866			86,114
Accretion of redeemable noncontrolling interests to redemption value	(1,015		)	(1,803		)
Cumulative effect of change in accounting principle	4,882			—
Balance, end of period	$	1,996,283		$	1,662,623
Noncontrolling Interest (excludes Redeemable Noncontrolling Interest)
Balance, beginning of period	$	8,520		$	3,911
Net earnings attributable to noncontrolling interest	898			(270		)
Balance, end of period	$	9,418		$	3,641

See accompanying notes to the unaudited condensed consolidated financial statements

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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2017 and 2016



	Six Months Ended June 30,
	2017			2016
	(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
Net earnings	$	173,833		$	104,386
Net losses (earnings) from discontinued operations	4,500			(2,583		)
Adjustments to reconcile net earnings to cash flows used in operating activities:
Net realized (gains) losses on sale of investments	(74		)	(747		)
Net unrealized (gains) on investments	(88,304		)	(72,033		)
Other non-cash items	5,352			3,811
Depreciation and other amortization	18,797			18,833
Net change in trading securities held on behalf of policyholders	25,597			(996		)
Sales and maturities of trading securities	2,225,349			1,633,179
Purchases of trading securities	(3,616,862		)	(1,546,895		)
Net loss on sale of subsidiary	9,609			—
Changes in:
Reinsurance balances recoverable	(570,731		)	131,841
Funds held by reinsured companies	(212,927		)	(1,081,542		)
Losses and loss adjustment expenses	1,646,721			701,414
Policy benefits for life and annuity contracts	64			(6,534		)
Insurance and reinsurance balances payable	75,890			42,715
Unearned premiums	39,739			34,200
Other operating assets and liabilities	898			(143,086		)
Net cash flows used in operating activities	(262,549		)	(184,037		)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired	—			9,924
Sales and maturities of available-for-sale securities	45,932			55,443
Purchase of available-for-sale securities	(162		)	(47,798		)
Purchase of other investments	(67,516		)	(18,230		)
Redemption of other investments	152,650			77,971
Other investing activities	(9,708		)	(1,597		)
Net cash flows provided by investing activities	121,196			75,713
FINANCING ACTIVITIES:
Dividends paid to noncontrolling interest	(27,458		)	—
Receipt of loans	489,100			154,048
Repayment of loans	(528,500		)	(140,500		)
Net cash flows provided by (used in) financing activities	(66,858		)	13,548
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS	636			451
NET DECREASE IN CASH AND CASH EQUIVALENTS	(207,575		)	(94,325		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	1,318,645			1,295,169
CHANGE IN CASH OF BUSINESSES HELD FOR SALE	(6,319		)	—
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,104,751		$	1,200,844

Supplemental Cash Flow Information:
Income taxes paid, net of refunds	$	6,538		$	15,830
Interest paid	$	8,959		$	10,578

Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents	681,068			759,584
Restricted cash and cash equivalents	423,683			441,260
Cash, cash equivalents and restricted cash	$	1,104,751		$	1,200,844

See accompanying notes to the unaudited condensed consolidated financial statements

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ENSTAR GROUP LIMITED

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017 and December 31, 2016

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

1. SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation and Consolidation

These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. 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 items considered necessary for a fair presentation under U.S. GAAP. The results of operations for any interim period are not necessarily indicative of results of the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. All significant inter-company transactions and balances have been eliminated. Results of operations for acquired subsidiaries are included from the date of acquisition. In these notes, the terms "we," "us," "our," or "the Company" refer to Enstar Group Limited and its consolidated subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings.

The preparation of these 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Results of changes in estimates are reflected in earnings in the period in which the change is made. Our principal estimates include, but are not limited to:


•	liability for losses and loss adjustment expenses ("LAE");


•	liability for policy benefits for life and annuity contracts;


•	reinsurance balances recoverable;


•	gross and net premiums written and net premiums earned;


•	impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale or held-to-maturity, and impairments on goodwill, intangible assets and deferred charges;


•	fair value measurements of investments;


•	fair value estimates associated with accounting for acquisitions;


•	fair value estimates associated with loss portfolio transfer reinsurance agreements for which we have elected the fair value option; and


•	redeemable noncontrolling interests.

Significant New Accounting Policies

As a result of electing the fair value option in relation to the two new transactions described in Note 2 - "Significant New Business", we adopted a significant new accounting policy during the six months ended June 30, 2017. Other than the policy described below, there have been no material changes to the Company’s significant accounting policies from those described in Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

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ENSTAR GROUP LIMITED

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

Retroactive Reinsurance - Fair Value Option

In our Non-life Run-off segment we have elected to apply the fair value option for certain loss portfolio transfer reinsurance transactions. This is an irrevocable election that applies to all balances under the insurance contract, including funds held assets, reinsurance recoverable, and the liability for losses and loss adjustment expenses.

The Company uses an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and reinsurance recoverable asset. Note 6 - "Fair Value Measurements" describes the internal model, including the observable and unobservable inputs used in the model.

New Accounting Standards Adopted in 2017

Accounting Standards Update ("ASU") 2017-08, Premium Amortization on Purchased Callable Debt Securities

In March 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-08, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The adoption of this guidance did not have a material impact on our consolidated financial statements.

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The impact of adopting this guidance on our consolidated financial statements was a cumulative-effect adjustment of $4.9 million to opening retained earnings for the excess tax benefit not previously recognized.

ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting

In March 2016, the FASB issued ASU 2016-07, which simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. Entities are therefore required to apply the guidance prospectively to increases in the level of ownership interest or degree of influence occurring after the ASU’s effective date. The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The adoption of this guidance did not have any impact our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016 describes accounting pronouncements that were not adopted as of December 31, 2016. Those pronouncements are not yet adopted unless discussed above in "New Accounting Standards Adopted in 2017". In addition, the following pronouncements were issued during the six months ended June 30, 2017 and are not yet adopted.

ASU 2017-09, Stock Compensation - Scope of Modification Accounting

In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU’s amendments are effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

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ENSTAR GROUP LIMITED

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

ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued ASU 2017-07, which amends the requirements in ASC 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The ASU requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the statement of earnings, and (2) present the other components elsewhere in the statement of earnings and outside of income from operations if such a subtotal is presented. The ASU also requires entities to disclose the captions within the statement of earnings that contain the other components if they are not presented on appropriately described separate lines. In addition, only the service-cost component of the net benefit cost is eligible for capitalization, which is a change from current practice, under which entities capitalize the aggregate net benefit cost when applicable. The ASU’s amendments are effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

In February 2017, the FASB issued ASU 2017-05 to clarify the scope of the Board’s guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The ASU clarifies that ASC 610-20 applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. The ASU also requires an entity to derecognize the nonfinancial asset or in-substance nonfinancial asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary pursuant to ASC 810, and (2) control of the asset is transferred in accordance with ASC 606. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017. We expect to adopt this guidance on January 1, 2018 using the modified retrospective approach. We do not expect this adoption to have a material impact on our consolidated financial statements.

2. SIGNIFICANT NEW BUSINESS

RSA

On February 7, 2017, we entered into an agreement to reinsure U.K. employers' liability legacy business of RSA Insurance Group PLC ("RSA"). Pursuant to the transaction, our subsidiary assumed gross insurance reserves of £1,046.4 million ($1,301.8 million), relating to 2005 and prior year business. Net insurance reserves assumed were £927.5 million ($1,153.9 million) and the reinsurance premium paid to Enstar’s subsidiary was £801.6 million ($997.2 million). We elected the fair value option for this reinsurance contract. The initial fair value adjustment on the gross reserves was $174.1 million, and on the net reserves was $156.7 million. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and assumptions.

Following the initial reinsurance transaction, which transferred the economics of the portfolio up to the policy's limits, we and RSA are pursuing a portfolio transfer of the business under Part VII of the Financial Services and Markets Act 2000, which would provide legal finality for RSA's obligations. The transfer is subject to court, regulatory and other approvals.

QBE

On January 11, 2017, we closed a transaction to reinsure multi-line property and casualty business of QBE Insurance Group Limited ("QBE"). Our subsidiary assumed gross reinsurance reserves of approximately $1,019.0 million (net reserves of $447.0 million) relating to the portfolio, which primarily includes workers' compensation, construction defect, and general liability discontinued lines of business. We elected the fair value option for this reinsurance contract. The initial fair value adjustment on the gross reserves was $180.0 million, and on the net reserves was $43.2 million. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and assumptions.

In addition our subsidiary has pledged a portion of the premium as collateral to a subsidiary of QBE, and we have provided additional collateral and a limited parental guarantee.

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ENSTAR GROUP LIMITED

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

3. HELD-FOR-SALE BUSINESSES

On May 12, 2017, we entered into a definitive agreement to sell Laguna Life DAC (“Laguna”) for total consideration of €25.6 million (approximately $29.2 million) to a subsidiary of Monument Re Limited. The transaction is expected to close in the third quarter of 2017. The closing of the transaction is subject to customary closing conditions, including regulatory approvals. The proceeds of the sale are expected to be used for general corporate purposes.

On February 17, 2017, we entered into a definitive agreement to sell Pavonia Holdings (US) Inc. and its subsidiaries (“Pavonia”) for total consideration of $120.0 million to Southland National Holdings, Inc. The transaction is expected to close in the third or fourth quarter of 2017. The closing of the transaction is subject to customary closing conditions, including regulatory approvals. The proceeds of the sale are expected to be used to pay down our revolving credit facility following closing.

Pavonia and Laguna comprise a substantial portion of the Life and Annuities segment. We have classified the assets and liabilities of the businesses to be sold as held-for-sale. Laguna was classified as held-for-sale as at June 30, 2017 with the prior balance sheet not being reclassified as Laguna did not qualify as a discontinued operation. The following table summarizes the components of assets and liabilities held-for-sale on our consolidated balance sheet as at June 30, 2017 and December 31, 2016 for Pavonia and as at June 30, 2017 for Laguna:



	June 30, 2017								December 31, 2016
	Pavonia		Laguna			Total			Pavonia
Assets:
Short-term investments, trading, at fair value	$	—	$	4,153		$	4,153		$	—
Fixed maturities, trading, at fair value	298,574		35,380			333,954			326,382
Fixed maturities, held-to-maturity, at amortized cost	755,381		—			755,381			765,554
Equities, trading, at fair value	4,833		—			4,833			4,428
Other investments, at fair value	15,385		—			15,385			15,114
Cash and cash equivalents	17,322		6,319			23,641			18,018
Restricted cash and cash equivalents	34,682		—			34,682			5,202
Deferred tax assets	31,500		—			31,500			31,500
Reinsurance balances recoverable	17,650		55			17,705			18,029
Other assets	50,406		725			51,131			60,229
Assets of businesses held for sale	1,225,733		46,632			1,272,365			1,244,456
Less: Accrual of loss on sale	—		(9,609		)	(9,609		)	—
Total assets held for sale	$	1,225,733	$	37,023		$	1,262,756		$	1,244,456

Liabilities:
Policy benefits for life and annuity contracts	$	1,129,888	$	6,639		$	1,136,527		$	1,144,850
Other liabilities	4,867		1,166			6,033			5,937
Total liabilities held for sale	$	1,134,755	$	7,805		$	1,142,560		$	1,150,787

As of June 30, 2017 and December 31, 2016, included in the table above were restricted investments of $768.1 million and $786.0 million, respectively.

The cumulative currency translation adjustments ("CTA") balance in accumulated other comprehensive income (loss) ("AOCI"), a component of shareholders' equity, included $(13.5) million and $(14.8) million as at June 30, 2017 and December 31, 2016, respectively, related to Pavonia. Upon completion of the sale, the CTA will be included in earnings as a reduction of the gain on sale.

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ENSTAR GROUP LIMITED

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

The Pavonia business qualifies as a discontinued operation. The following table summarizes the components of net earnings (losses) from discontinued operations on the consolidated statements of earnings for the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
INCOME
Net premiums earned	$	13,605		$	18,219		$	27,930		$	34,741
Net investment income	10,277			9,088			20,306			18,697
Net realized and unrealized gains	1,154			3,484			2,776			3,171
Other income	395			759			755			762
	25,431			31,550			51,767			57,371
EXPENSES
Life and annuity policy benefits	24,112			21,391			44,782			42,213
Acquisition costs	2,280			2,642			4,316			4,878
General and administrative expenses	3,718			4,713			6,775			7,128
Other expenses	—			3			(16		)	6
	30,110			28,749			55,857			54,225
EARNINGS (LOSSES) BEFORE INCOME TAXES	(4,679		)	2,801			(4,090		)	3,146
INCOME TAXES	(192		)	(423		)	(410		)	(563		)
NET EARNINGS (LOSSES) FROM DISCONTINUED OPERATIONS	$	(4,871	)	$	2,378		$	(4,500	)	$	2,583

The net losses relating to Laguna for the three and six months ended June 30, 2017 were $0.9 million and $1.1 million, respectively. The net earnings relating to Laguna for the three and six months ended June 30, 2016 were $0.4 million and $0.5 million, respectively. These amounts were not significant to our consolidated operations and therefore we have not classified Laguna as a discontinued operation for current or prior periods. As at June 30, 2017 we have recorded a loss on the sale of Laguna of $9.6 million, which has been included in earnings from continuing operations before income taxes in our consolidated statement of earnings. The CTA balance for Laguna was a loss of $8.3 million as at June 30, 2017. Upon completion of the sale of Laguna, the CTA will be reclassified out of AOCI and included in earnings as a component of the loss on sale of Laguna.

The following table presents the cash flows of Pavonia for the six months ended June 30, 2017, and 2016:



	Six Months Ended June 30,
	2017		2016
Operating activities	$	23,540	$	(32,295	)
Investing activities	5,244		40,495
Change in cash and cash equivalents	$	28,784	$	8,200

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ENSTAR GROUP LIMITED

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

4. INVESTMENTS

We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair value; (ii) available-for-sale portfolios of fixed maturity and short-term investments carried at fair value; and (iii) other investments carried at either fair value or cost.

Trading

The fair values of our fixed maturity investments, short-term investments and equities classified as trading were as follows:



	June 30, 2017		December 31, 2016
U.S. government and agency	$	692,454	$	840,274
Non-U.S. government	832,839		267,363
Corporate	3,139,580		2,387,322
Municipal	88,722		47,181
Residential mortgage-backed	365,179		373,528
Commercial mortgage-backed	303,087		217,212
Asset-backed	549,832		478,280
Total fixed maturity and short-term investments	5,971,693		4,611,160
Equities — U.S.	106,240		95,047
	$	6,077,933	$	4,706,207

Included within residential and commercial mortgage-backed securities as at June 30, 2017 were securities issued by U.S. governmental agencies with a fair value of $248.3 million (as at December 31, 2016: $362.9 million). Included within corporate securities as at June 30, 2017 were senior secured loans of $57.0 million (as at December 31, 2016: $90.7 million).

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



As at June 30, 2017	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	838,980	$	840,532	14.1	%
More than one year through two years	632,842		636,638		10.6	%
More than two years through five years	1,315,420		1,323,779		22.2	%
More than five years through ten years	1,121,737		1,139,373		19.1	%
More than ten years	781,744		813,273		13.6	%
Residential mortgage-backed	365,226		365,179		6.1	%
Commercial mortgage-backed	305,330		303,087		5.1	%
Asset-backed	541,584		549,832		9.2	%
	$	5,902,863	$	5,971,693	100.0	%

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ENSTAR GROUP LIMITED

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

Available-for-sale

The amortized cost and fair values of our fixed maturity and short-term investments classified as available-for-sale were as follows:



As at June 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses Non-OTTI			Fair Value
U.S. government and agency	$	4,208	$	—	$	(19	)	$	4,189
Non-U.S. government	82,458		894		(1,057		)	82,295
Corporate	132,314		1,632		(1,445		)	132,501
Municipal	5,944		14		(11		)	5,947
Residential mortgage-backed	41		—		—			41
Asset-backed	3,797		1		—			3,798
	$	228,762	$	2,541	$	(2,532	)	$	228,771



As at December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses Non-OTTI			Fair Value
U.S. government and agency	$	12,784	$	32	$	(106	)	$	12,710
Non-U.S. government	86,897		1,303		(2,777		)	85,423
Corporate	159,243		2,040		(2,628		)	158,655
Municipal	6,585		12		(21		)	6,576
Residential mortgage-backed	488		39		—			527
Asset-backed	3,867		9		—			3,876
	$	269,864	$	3,435	$	(5,532	)	$	267,767

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



As at June 30, 2017	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	60,862	$	60,383	26.4	%
More than one year through two years	30,313		29,616		12.9	%
More than two years through five years	54,675		54,677		23.9	%
More than five years through ten years	42,760		43,669		19.1	%
More than ten years	36,314		36,587		16.0	%
Residential mortgage-backed	41		41		—	%
Asset-backed	3,797		3,798		1.7	%
	$	228,762	$	228,771	100.0	%

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ENSTAR GROUP LIMITED

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

Gross Unrealized Losses

The following tables summarize our fixed maturity and short-term investments in a gross unrealized loss position:



	12 Months or Greater					Less Than 12 Months					Total
As at June 30, 2017	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturity and short-term investments, at fair value
U.S. government and agency	$	—	$	—		$	4,190	$	(19	)	$	4,190	$	(19	)
Non-U.S. government	6,330		(727		)	24,596		(330		)	30,926		(1,057		)
Corporate	7,856		(1,168		)	36,979		(277		)	44,835		(1,445		)
Municipal	—		—			2,711		(11		)	2,711		(11		)
Total fixed maturity and short-term investments	$	14,186	$	(1,895	)	$	68,476	$	(637	)	$	82,662	$	(2,532	)



	12 Months or Greater					Less Than 12 Months					Total
As at December 31, 2016	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fixed maturity and short-term investments, at fair value
U.S. government and agency	$	—	$	—		$	10,743	$	(106	)	$	10,743	$	(106	)
Non-U.S. government	8,316		(1,794		)	30,086		(983		)	38,402		(2,777		)
Corporate	8,003		(1,800		)	42,304		(828		)	50,307		(2,628		)
Municipal	—		—			3,132		(21		)	3,132		(21		)
Total fixed maturity and short-term investments	$	16,319	$	(3,594	)	$	86,265	$	(1,938	)	$	102,584	$	(5,532	)

As at June 30, 2017 and December 31, 2016, the number of securities classified as available-for-sale in an unrealized loss position was 105 and 156, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 35 and 41, respectively.

Other-Than-Temporary Impairment

For the six months ended June 30, 2017 and 2016, we did not recognize any other-than-temporary impairment losses on our available-for-sale securities. We determined that no credit losses existed as at June 30, 2017 and 2016. A description of our other-than-temporary impairment process is included in Note 2 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016. There were no changes to our process during the six months ended June 30, 2017.

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ENSTAR GROUP LIMITED

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

Credit Ratings

The following table sets forth the credit ratings of our fixed maturity and short-term investments as of June 30, 2017:



	Amortized Cost		Fair Value		% of Total Investments		AAA Rated			AA Rated			A Rated			BBB Rated			Non- Investment Grade			Not Rated
Fixed maturity and short-term investments, at fair value
U.S. government and agency	$	696,264	$	696,643	11.2	%	$	694,993		$	1,650		$	—		$	—		$	—		$	—
Non-U.S. government	889,325		915,134		14.8	%	103,509			721,105			68,785			20,825			—			910
Corporate	3,236,766		3,272,081		52.8	%	181,948			430,591			1,628,525			916,671			113,010			1,336
Municipal	93,292		94,669		1.5	%	27,067			52,969			13,175			1,458			—			—
Residential mortgage-backed	365,267		365,220		5.9	%	257,904			20,365			6,948			—			78,503			1,500
Commercial mortgage-backed	305,330		303,087		4.9	%	103,087			42,854			83,588			54,538			3,323			15,697
Asset-backed	545,381		553,630		8.9	%	274,401			51,935			87,377			55,302			82,602			2,013
Total	$	6,131,625	$	6,200,464	100.0	%	$	1,642,909		$	1,321,469		$	1,888,398		$	1,048,794		$	277,438		$	21,456
% of total fair value							26.5		%	21.3		%	30.5		%	16.9		%	4.5		%	0.3		%

Other Investments, at fair value

The following table summarizes our other investments carried at fair value:



	June 30, 2017		December 31, 2016
Private equities and private equity funds	$	269,016	$	300,529
Fixed income funds	249,573		249,023
Fixed income hedge funds	70,900		85,976
Equity funds	230,720		223,571
CLO equities	56,805		61,565
CLO equity funds	13,050		15,440
Other	879		943
	$	890,943	$	937,047

The valuation of our other investments is described in Note 6 - "Fair Value Measurements." Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month lag. We regularly review and discuss fund performance with the 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. The following is a description of the nature of each of these investment categories:


•	Private equities and private equity funds invest primarily in the financial services industry. All of our investments in private equities and private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates of our initial investments.

•

Fixed income funds comprise 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 invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of up to three years from the time of initial investment. Once eligible, redemptions are permitted quarterly with 90 days’ notice.

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


•	Equity funds invest in a diversified portfolio of international publicly traded equity securities. The funds have liquidity terms that vary from daily to every two weeks.


•	CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by us in these securities.


•	CLO equity funds comprise two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. One of the funds has a fair value of $1.4 million, part of a self-liquidating structure that is expected to pay out over one to five years. The other fund has a fair value of $11.6 million and is eligible for redemption in 2018.


•	Other primarily comprises a fund that provides loans to educational institutions throughout the United States and its territories.

Investments of $0.4 million in fixed income hedge funds were subject to gates or side-pockets, where redemptions are subject to the sale of underlying investments. A gate is the ability to deny or delay a redemption request, whereas a side-pocket is a designated account for which the investor loses its redemption rights.

As at June 30, 2017, we had unfunded commitments to private equity funds of $183.7 million.

Other Investments, at cost

Our other investments carried at cost of $128.3 million as of June 30, 2017 consist of life settlement contracts. During the six months ended June 30, 2017 and 2016, net investment income included $9.3 million and $10.0 million, respectively, related to investments in life settlements. There were impairment charges of $6.3 million and $2.9 million recognized in net realized and unrealized gains/losses during the six months ended June 30, 2017 and 2016, respectively, related to investments in life settlements. The following table presents further information regarding our investments in life settlements as of June 30, 2017 and December 31, 2016.



	June 30, 2017					December 31, 2016
	Number of Contracts	Carrying Value		Face Value (Death Benefits)		Number of Contracts	Carrying Value		Face Value (Death Benefits)
Remaining Life Expectancy of Insureds:
0 – 1 year	2	$	467	$	700	2	$	461	$	700
1 – 2 years	8	12,025		20,075		7	11,396		18,337
2 – 3 years	11	17,655		36,718		11	15,338		29,715
3 – 4 years	17	13,369		24,507		17	17,013		32,189
4 – 5 years	10	12,778		29,110		16	10,377		23,302
Thereafter	173	72,002		409,239		181	77,066		431,034
Total	221	$	128,296	$	520,349	234	$	131,651	$	535,277

Remaining life expectancy for year 0-1 in the table above references policies whose current life expectancy is less than 12 months as of the reporting date. Remaining life expectancy is not an indication of expected maturity. Actual maturity in any category above may vary significantly (either earlier or later) from the remaining life expectancies reported.

At June 30, 2017, our best estimate of the life insurance premiums required to keep the policies in force, payable in the 12 months ending June 30, 2018 and the four succeeding years ending June 30, 2022 is $17.9 million, $17.8 million, $17.7 million, $16.3 million and $15.7 million, respectively.

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ENSTAR GROUP LIMITED

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

Net Realized and Unrealized Gains

Components of net realized and unrealized gains for the three and six months ended June 30, 2017 and 2016 were as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net realized gains (losses) on sale:
Gross realized gains on fixed maturity securities, available-for-sale	$	177		$	114		$	337		$	379
Gross realized losses on fixed maturity securities, available-for-sale	(75		)	(1		)	(86		)	(244		)
Net realized gains (losses) on fixed maturity securities, trading	65			1,490			(987		)	(416		)
Net realized gains on equity securities, trading	236			555			810			1,028
Net realized investment losses on funds held - directly managed	(289		)	—			(4,142		)	—
Total net realized gains (losses) on sale	$	114		$	2,158		$	(4,068	)	$	747
Net unrealized gains:
Fixed maturity securities, trading	$	11,226		$	37,871		$	34,542		$	81,067
Equity securities, trading	1,871			405			10,557			2,129
Change in fair value of other investments	19,696			(5,931		)	43,205			(11,163		)
Change in fair value of embedded derivative on funds held - directly managed	17,912			—			24,840			—
Change in value of fair value option on funds held - directly managed	1,058			—			1,320			—
Total net unrealized gains	51,763			32,345			114,464			72,033
Net realized and unrealized gains	$	51,877		$	34,503		$	110,396		$	72,780

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $12.3 million and $21.6 million for the three and six months ended June 30, 2017, respectively, and $18.2 million and $33.6 million for the three and six months ended June 30, 2016, respectively.

Net Investment Income

Major categories of net investment income for the three and six months ended June 30, 2017 and 2016 are summarized as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Fixed maturity investments	$	33,741		$	30,888		$	64,071		$	58,086
Short-term investments and cash and cash equivalents	2,801			854			5,441			2,012
Equity securities	1,137			1,325			1,863			2,385
Other investments	3,387			5,693			6,896			11,727
Funds held	311			7,633			350			15,237
Funds held - directly managed	8,603			—			15,605			—
Life settlements and other	2,687			1,718			9,583			10,161
Gross investment income	52,667			48,111			103,809			99,608
Investment expenses	(3,250		)	(3,179		)	(5,653		)	(4,396		)
Net investment income	$	49,417		$	44,932		$	98,156		$	95,212

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ENSTAR GROUP LIMITED

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

Restricted Assets

We are required to maintain investments and cash and cash equivalents on deposit to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. We also utilize trust accounts to collateralize business with our 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 our restricted assets, including restricted cash of $423.7 million and $363.8 million, as of June 30, 2017 and December 31, 2016, respectively, was as follows:



	June 30, 2017		December 31, 2016
Collateral in trust for third party agreements	$	3,357,930	$	1,975,022
Assets on deposit with regulatory authorities	765,581		882,400
Collateral for secured letter of credit facilities	175,355		177,263
Funds at Lloyd's ⁽¹⁾	224,364		220,328
	$	4,523,230	$	3,255,013

⁽¹⁾Our underwriting businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has a loss that cannot be funded from other sources. We have an unsecured letter of credit agreement for Funds at Lloyd’s purposes ("FAL Facility") to issue up to $140.0 million of letters of credit, with a provision to increase the facility up to $200.0 million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and expires in 2021. As at June 30, 2017, our combined Funds at Lloyd's were comprised of cash and investments of $224.4 million and unsecured letters of credit of $122.0 million.

The increase in the collateral in trust for third-party agreements was primarily due to the loss portfolio transfer reinsurance transactions with RSA and QBE described in Note 2 - "Significant New Business".

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ENSTAR GROUP LIMITED

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

5. FUNDS HELD - DIRECTLY MANAGED

Funds held - directly managed is comprised of the following:

•

The funds held balance in relation to the Allianz transaction, described in Note 4 - "Significant New Business" in our consolidated financial statements in Form 10-K for the year ended December 31, 2016, moved from a fixed crediting rate to a variable rate of return on the underlying investments on October 1, 2016. This variable return reflects the economics of the investment portfolio underlying the funds held asset and qualifies as an embedded derivative. We have recorded the aggregate of the funds held, typically held at cost, and the embedded derivative as a single amount in our consolidated balance sheet. As at June 30, 2017 and December 31, 2016, the funds held at cost had a carrying value of $1,030.2 million and $1,023.0 million, respectively, and the embedded derivative had a fair value of $(3.5) million and $(28.3) million, respectively, the aggregate of which was $1,026.7 million and $994.7 million, respectively, as included in the table below.


•	The fair value option was elected for the QBE reinsurance transaction described in Note 2 - "Significant New Business". As at June 30, 2017, the funds held had an amortized cost of $177.5 million and fair value of $178.9 million.

The following table presents the fair values of assets and liabilities underlying the funds held - directly managed account as at June 30, 2017 and December 31, 2016:



	June 30, 2017		December 31, 2016
Fixed maturity investments:
U.S. government and agency	$	52,548	$	47,885
Non-U.S. government	6,074		5,961
Corporate	778,757		663,556
Municipal	55,268		38,927
Commercial mortgage-backed	200,502		151,395
Asset-backed	96,395		79,806
Total fixed maturity investments	$	1,189,544	$	987,530
Other assets	16,048		7,135
	$	1,205,592	$	994,665

The contractual maturities of our fixed maturity investments underlying the funds held - directly managed account are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



As at June 30, 2017	Amortized Cost		Fair Value		% of Total Fair Value
One year or less	$	31,307	$	31,294	2.6	%
More than one year through two years	30,705		30,741		2.6	%
More than two years through five years	301,223		301,915		25.4	%
More than five years through ten years	274,655		273,612		23.0	%
More than ten years	252,411		255,085		21.4	%
Commercial mortgage-backed	205,173		200,502		16.9	%
Asset-backed	96,229		96,395		8.1	%
	$	1,191,703	$	1,189,544	100.0	%

Table of Contents

ENSTAR GROUP LIMITED

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

Credit Ratings

The following table sets forth the credit ratings of our fixed maturity investments underlying the funds held - directly managed account as of June 30, 2017.



	Amortized Cost		Fair Value		% of Total Investments		AAA Rated		AA Rated	A Rated	BBB Rated

U.S. government and agency	$	52,516	$	52,548	4.4	%	$	52,548	$