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 March 31, 2018
Commission File Number 001-33289

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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
þ
 
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 at May 1, 2018, the registrant had outstanding 16,431,192 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 March 31, 2018

Table of Contents
 
 
 
Page
PART I
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.

Table of Contents


PART I — FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Page    



1
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2018 (unaudited) and December 31, 2017
 
March 31,
2018
 
December 31,
2017
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
214,526

 
$
180,211

Fixed maturities, trading, at fair value
6,338,962

 
5,696,073

Fixed maturities, available-for-sale, at fair value (amortized cost: 2018 — $192,859; 2017 — $208,097)
194,936

 
210,285

Equities, trading, at fair value
140,476

 
106,603

Other investments, at fair value
1,129,685

 
913,392

Other investments, at cost
117,889

 
125,621

Total investments
8,136,474

 
7,232,185

Cash and cash equivalents
652,827

 
955,150

Restricted cash and cash equivalents
483,136

 
257,686

Funds held - directly managed
1,176,913

 
1,179,940

Premiums receivable
535,041

 
425,702

Deferred tax assets
13,429

 
13,001

Prepaid reinsurance premiums
295,988

 
245,101

Reinsurance balances recoverable
1,479,960

 
1,478,806

Reinsurance balances recoverable, at fair value
888,736

 
542,224

Funds held by reinsured companies
814,777

 
175,383

Deferred acquisition costs
83,541

 
64,984

Goodwill and intangible assets
179,363

 
180,589

Other assets
871,467

 
831,320

Assets held for sale
—

 
24,351

TOTAL ASSETS
$
15,611,652

 
$
13,606,422

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses
$
5,466,617

 
$
5,603,419

Losses and loss adjustment expenses, at fair value
3,519,453

 
1,794,669

Policy benefits for life and annuity contracts
116,849

 
117,207

Unearned premiums
712,170

 
583,197

Insurance and reinsurance balances payable
356,483

 
236,697

Deferred tax liabilities
14,807

 
15,262

Debt obligations
860,507

 
646,689

Other liabilities
974,688

 
972,457

Liabilities held for sale
—

 
11,271

TOTAL LIABILITIES
12,021,574

 
9,980,868

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST
480,767

 
479,606

 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Share capital authorized, issued and fully paid, par value $1 each (authorized 2018 and 2017: 156,000,000):

 

Ordinary shares (issued and outstanding 2018: 16,412,892; 2017: 16,402,279)
16,413

 
16,402

Non-voting convertible ordinary shares:
 
 
 
Series C (issued and outstanding 2018 and 2017: 2,599,672)
2,600

 
2,600

Series E (issued and outstanding 2018 and 2017: 404,771)
405

 
405

Series C Preferred Shares (issued 2018 and 2017: 388,571)
389

 
389

Treasury shares at cost (Preferred shares 2018 and 2017: 388,571)
(421,559
)
 
(421,559
)
Additional paid-in capital
1,400,624

 
1,395,067

Accumulated other comprehensive income
11,403

 
10,468

Retained earnings
2,089,760

 
2,132,912

Total Enstar Group Limited Shareholders’ Equity
3,100,035

 
3,136,684

Noncontrolling interest
9,276

 
9,264

TOTAL SHAREHOLDERS’ EQUITY
3,109,311

 
3,145,948

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
15,611,652

 
$
13,606,422


See accompanying notes to the unaudited condensed consolidated financial statements

2
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 2018 and 2017
 
Three Months Ended March 31,
 
2018
 
2017
 
(expressed in thousands of U.S. dollars,
except share and per share data)
INCOME
 
 
 
Net premiums earned
$
170,219

 
$
148,898

Fees and commission income
8,331

 
11,914

Net investment income
66,319

 
48,739

Net realized and unrealized gains (losses)
(143,030
)
 
58,519

Other income
16,640

 
12,198

 
118,479

 
280,268

EXPENSES
 
 
 
Net incurred losses and loss adjustment expenses
19,534

 
77,892

Life and annuity policy benefits
(46
)
 
(301
)
Acquisition costs
30,108

 
20,821

General and administrative expenses
95,260

 
102,468

Interest expense
8,011

 
6,868

Net foreign exchange losses
5,868

 
3,715

 
158,735

 
211,463

EARNINGS (LOSSES) BEFORE INCOME TAXES
(40,256
)
 
68,805

INCOME TAXES
(172
)
 
2,929

NET EARNINGS (LOSSES) FROM CONTINUING OPERATIONS
(40,428
)
 
71,734

NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE
—

 
371

NET EARNINGS (LOSSES)
(40,428
)
 
72,105

Net earnings attributable to noncontrolling interest
(782
)
 
(17,425
)
NET EARNINGS (LOSSES) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
(41,210
)
 
$
54,680

 
 
 
 
Earnings (Losses) per ordinary share attributable to Enstar Group Limited:
Basic:
 
 
 
Net earnings (losses) from continuing operations
$
(2.12
)
 
$
2.80

Net earnings from discontinued operations
—

 
0.02

Net earnings (losses) per ordinary share
$
(2.12
)
 
$
2.82

Diluted:
 
 
 
Net earnings (losses) from continuing operations
$
(2.12
)
 
$
2.78

Net earnings from discontinued operations
—

 
0.02

Net earnings (losses) per ordinary share
$
(2.12
)
 
$
2.80

Weighted average ordinary shares outstanding:
 
 
 
Basic
19,409,021

 
19,374,728

Diluted
19,602,512

 
19,501,663

See accompanying notes to the unaudited condensed consolidated financial statements

3
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2018 and 2017
 
 
Three Months Ended
March 31,
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
NET EARNINGS (LOSSES)
$
(40,428
)
 
$
72,105

Other comprehensive income, net of tax:
 
 
 
Unrealized holding gains (losses) on fixed income investments arising during the period
(346
)
 
686

Reclassification adjustment for net realized (losses) gains included in net earnings
30

 
(149
)
Unrealized gains (losses) arising during the period, net of reclassification adjustment
(316
)
 
537

Currency translation adjustment
1,225

 
1,942

Total other comprehensive income
909

 
2,479

Comprehensive income (loss)
(39,519
)
 
74,584

Comprehensive income attributable to noncontrolling interest
(756
)
 
(18,082
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
(40,275
)
 
$
56,502

See accompanying notes to the unaudited condensed consolidated financial statements


4
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ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2018 and 2017
 
Three Months Ended
March 31,
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
Share Capital — Ordinary Shares
 
 
 
Balance, beginning of period
$
16,402

 
$
16,175

Issue of shares
11

 
14

Conversion of Series C Non-Voting Convertible Ordinary Shares
—

 
192

Balance, end of period
$
16,413

 
$
16,381

Share Capital — Series C Non-Voting Convertible Ordinary Shares
 
 
 
Balance, beginning of period
$
2,600

 
$
2,792

Conversion to Ordinary Shares
—

 
(192
)
Balance, end of period
$
2,600

 
$
2,600

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 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
$
1,395,067

 
$
1,380,109

Issue of shares and warrants
(94
)
 
(511
)
Amortization of share-based compensation
5,651

 
2,823

Balance, end of period
$
1,400,624

 
$
1,382,421

Accumulated Other Comprehensive Income (Loss)
 
 
 
Balance, beginning of period
$
10,468

 
$
(23,549
)
Currency translation adjustment
 
 
 
Balance, beginning of period
11,171

 
(18,993
)
Change in currency translation adjustment
1,229

 
1,933

Balance, end of period
12,400

 
(17,060
)
Defined benefit pension liability
 
 
 
Balance, beginning and end of period
(3,143
)
 
(4,644
)
Unrealized gains (losses) on investments
 
 
 
Balance, beginning of period
2,440

 
88

Change in unrealized gains (losses) on investments
(294
)
 
(111
)
Balance, end of period
2,146

 
(23
)
Balance, end of period
$
11,403

 
$
(21,727
)
Retained Earnings
 
 
 
Balance, beginning of period
$
2,132,912

 
$
1,847,550

Net earnings (losses) attributable to Enstar Group Limited
(41,210
)
 
54,680

Accretion of redeemable noncontrolling interests to redemption value
(369
)
 
(1,156
)
Cumulative effect of change in accounting principle
(1,573
)
 
4,882

Balance, end of period
$
2,089,760

 
$
1,905,956

Noncontrolling Interest (excludes Redeemable Noncontrolling Interest)
 
 
 
Balance, beginning of period
$
9,264

 
$
8,520

Contribution of capital
49

 
—

Net earnings (loss) attributable to noncontrolling interest
(37
)
 
697

Balance, end of period
$
9,276

 
$
9,217

 
See accompanying notes to the unaudited condensed consolidated financial statements

5
Table of Contents


ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2018 and 2017
 
Three Months Ended
March 31,
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings (losses)
$
(40,428
)
 
$
72,105

Net earnings from discontinued operations
—

 
(371
)
Adjustments to reconcile net earnings (losses) to cash flows used in operating activities:
 
 
 
Realized losses (gains) on sale of investments
6,074

 
329

Unrealized losses (gains) on investments
106,128

 
(55,511
)
Other non-cash items
6,363

 
1,225

Depreciation and other amortization
6,703

 
9,302

Net change in trading securities held on behalf of policyholders
—

 
83

Sales and maturities of trading securities
864,352

 
1,073,433

Purchases of trading securities
(1,672,449
)
 
(2,275,239
)
Changes in:
 
 
 
Reinsurance balances recoverable
(347,798
)
 
(540,939
)
Funds held by reinsured companies
(636,367
)
 
(221,277
)
Losses and loss adjustment expenses
1,587,609

 
1,769,233

Policy benefits for life and annuity contracts
(2,980
)
 
(1,972
)
Insurance and reinsurance balances payable
119,830

 
36,508

Unearned premiums
128,973

 
30,607

Other operating assets and liabilities
(200,224
)
 
8,345

Net cash flows used in operating activities
(74,214
)
 
(94,139
)
INVESTING ACTIVITIES:
 
 
 
Sales and maturities of available-for-sale securities
22,700

 
24,724

Purchase of available-for-sale securities
(5,039
)
 
(7,188
)
Purchase of other investments
(275,862
)
 
(38,237
)
Redemption of other investments
32,276

 
69,326

Other investing activities
(4,304
)
 
(4,981
)
Net cash flows provided by (used in) investing activities
(230,229
)
 
43,644

FINANCING ACTIVITIES:
 
 
 
Contribution by noncontrolling interest
49

 
—

Receipt of loans
345,400

 
437,100

Repayment of loans
(132,938
)
 
(381,000
)
Net cash flows provided by financing activities
212,511

 
56,100

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
15,059

 
(10,275
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(76,873
)
 
(4,670
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,212,836

 
1,318,645

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,135,963

 
$
1,313,975

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
2,461

 
$
3,917

Interest paid
$
10,530

 
$
6,385

 
 
 
 
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
652,827

 
921,562

Restricted cash and cash equivalents
483,136

 
392,413

Cash, cash equivalents and restricted cash
$
1,135,963

 
$
1,313,975

See accompanying notes to the unaudited condensed consolidated financial statements

6
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018 and December 31, 2017
(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, 2017. 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 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, 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.

New Accounting Standards Adopted in 2018
Accounting Standards Update ("ASU") 2017-09, Stock Compensation - Scope of Modification Accounting
In May 2017, the Financial Accounting Standards Board ("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 - Compensation - Stock Compensation. 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 adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.

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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 - Compensation - Retirement Benefits, 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 prior practice, under which entities capitalize the aggregate net benefit cost when applicable. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
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, which clarifies 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 adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, which requires immediate recognition of the tax consequences of many intercompany asset transfers other than inventory. The adoption of this guidance did not have a material impact on our consolidated financial statements and disclosures.
ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15, which amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
ASU 2016-01, Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued ASU 2016-01, which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many of the current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.
In February 2018, the FASB also issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities, which clarifies that entities should use a prospective transition approach only for equity securities they elect to measure using the new measurement alternative. The amendments also clarify that an entity that voluntarily discontinues using the measurement alternative for an equity security without a readily determinable fair value must measure that security and all identical or similar investments of the same issuer at fair value. Under this guidance, this election is irrevocable and will apply to all future purchases of identical or similar investments of the same issuer. The amendments also clarify other aspects of ASU 2016-01 on how to apply the measurement alternative and the presentation requirements for financial liabilities measured under the fair value option. The adoption of this guidance is contingent on the adoption of ASU 2016-01.
We adopted ASU 2016-01 on January 1, 2018 using the modified retrospective approach and recorded a cumulative-effect adjustment of $1.6 million to reduce opening retained earnings for certain of our other investments

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




that were previously classified as available-for-sale securities and for which changes in fair value were previously included in accumulated other comprehensive income. We also adopted ASU 2018-03 following our adoption of ASU 2016-01 and this adoption did not have any impact on our consolidated financial statements and related disclosures.
ASUs 2014-09, 2016-08, 2016-10, 2016-12, Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other FASB topics, primarily our premium revenues which are covered by ASC 944 - Financial Services - Insurance, and revenues from our investment portfolios which are covered by other FASB topics. While contracts within the scope of ASC 944 are excluded from the scope of the ASU, certain insurance-related contracts are within the scope of the ASU, for example contracts under which service providers charge their customers fixed fees in exchange for an agreement to provide services for an uncertain future event. Certain of the ASU’s provisions also apply to transfers of non-financial assets and include guidance on recognition and measurement.
In March 2016, the FASB also issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations, which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB then issued ASU 2016-10, Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing, which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB further issued ASU 2016-12, Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients, which clarifies the following aspects in ASU 2014-09 - (1a) collectability, (2) presentation of sales taxes and other similar taxes collected from customers, (3) non-cash considerations, (4) contract modifications at transition, (5) completed contracts at transition, and (6) technical correction.
We adopted ASU 2014-09 and the related amendments, as codified in ASC 606 - Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective method with prior periods not being restated. Premium revenues and those related to our investment portfolios, which collectively comprise most of our total revenues, are within the scope of other FASB topics and therefore are excluded from the scope of the revenue recognition standard. For other revenue types, which are within the scope of the new guidance, we evaluated individual contracts against the provisions of the new guidance to identify any contracts where the timing and measurement of those revenues may differ based upon the new guidance. The adoption did not have a material impact on our consolidated financial statements and related disclosures.
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, 2017 describes accounting pronouncements that were not adopted as of December 31, 2017. Those pronouncements are not yet adopted unless discussed above in "New Accounting Standards Adopted in 2018." There were no other relevant pronouncements.
2. SIGNIFICANT NEW BUSINESS
Zurich Australia
On February 23, 2018, we entered into a reinsurance agreement with Zurich Australian Insurance Limited, a subsidiary of Zurich Insurance Group ("Zurich") to reinsure its New South Wales Vehicle Compulsory Third Party ("CTP") insurance business. Under the agreement, which was effective as of January 1, 2018, we assumed gross loss reserves of AUD$359.4 million ($280.8 million) in exchange for a reinsurance premium consideration of AUD$343.9 million ($268.7 million). We elected the fair value option for this reinsurance contract and recorded an initial fair value adjustment of AUD$15.5 million ($12.1 million) on the assumed gross loss reserves. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business, we and Zurich are pursuing a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's Insurance Act 1973 (Cth), which will provide legal finality for Zurich's obligations. The transfer is subject to court, regulatory and other approvals.

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Neon RITC Transaction
On February 16, 2018, we closed the reinsurance-to-close (“RITC”) transaction with Neon Underwriting Limited ("Neon"), under which we reinsured to close the 2015 and prior underwriting years of account (comprising underwriting years 2008 to 2015) of Neon's Syndicate 2468, with effect from January 1, 2018. We assumed gross loss reserves of £403.9 million ($546.3 million) and net loss reserves of £342.1 million ($462.6 million) relating to the portfolio in exchange for a reinsurance premium consideration of £329.1 million ($445.1 million). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $20.6 million and $17.5 million on the gross and net loss reserves assumed, respectively. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the closing of the transaction, we have taken responsibility for claims handling and provided complete finality to Neon's obligations.
Novae RITC Transaction
On January 29, 2018, we entered into an RITC transaction with AXIS Managing Agency Limited, under which we reinsured to close the 2015 and prior underwriting years of account of Novae Syndicate 2007 ("Novae"), with effect from January 1, 2018. We assumed gross loss reserves of £860.1 million ($1,163.2 million) and net loss reserves of £630.7 million ($853.0 million) relating to the portfolio in exchange for a reinsurance premium consideration of £594.1 million ($803.5 million). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $67.5 million and $49.5 million on the gross and net loss reserves assumed, respectively. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the closing of the transaction, we have taken responsibility for claims handling and provided complete finality to Novae's obligations.
3. DIVESTITURES, HELD-FOR-SALE BUSINESSES AND DISCONTINUED OPERATIONS
Pavonia
On December 29, 2017, the Company completed the previously announced sale of its subsidiary, Pavonia Holdings (US) Inc. ("Pavonia"), to Southland National Holdings, Inc. ("Southland"), a Delaware corporation and a subsidiary of Global Bankers Insurance Group, LLC. The aggregate purchase price was $120.0 million. The Company used the proceeds to make repayments under its revolving credit facility.
Pavonia owns Pavonia Life Insurance Company of Michigan (“PLIC MI”) and Enstar Life (US), Inc. Pursuant to the amended stock purchase agreement between the Company and Southland, which partially restructured the transaction, Southland will acquire Pavonia Life Insurance Company of New York ("PLIC NY") for $13.1 million in a second closing that is expected to occur in 2018, subject to regulatory approval. The additional purchase price represents the cash consideration we paid to PLIC MI when we acquired PLIC NY from PLIC MI as a result of the restructuring of the first closing of the transaction.

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




Pavonia was a substantial portion of our previously reported Life and Annuities segment. We classified the assets and liabilities of the businesses to be sold as held-for-sale. The following table summarizes the components of assets and liabilities held-for-sale on our consolidated balance sheet as at December 31, 2017:
 
December 31,
2017
Assets:
 
Fixed maturities, trading, at fair value
$
20,770

Equities, trading, at fair value
765

Cash and cash equivalents
6,314

Restricted cash and cash equivalents
13

Reinsurance balances recoverable
1,728

Other assets
269

Assets of businesses held for sale
29,859

Less: Accrual of loss on sale
(5,508
)
Total assets held for sale
$
24,351

 
 
Liabilities:
 
Policy benefits for life and annuity contracts
$
10,666

Other liabilities
605

Total liabilities held for sale
$
11,271

As at December 31, 2017, included in the table above were restricted investments of $1.4 million.
As at March 31, 2018, included within Other assets and Other liabilities on our consolidated balance sheet were amounts of $23.5 million and $11.0 million, respectively, relating to PLIC NY.
The Pavonia business qualifies as a discontinued operation. The following table summarizes the components of net earnings from discontinued operations on the unaudited condensed consolidated statements of earnings for the three months ended March 31, 2017:
 
Three Months Ended
March 31,
 
2017
INCOME
 
Net premiums earned
$
14,325

Net investment income
10,029

Net realized and unrealized gains (losses)
1,622

Other income
360

 
26,336

EXPENSES
 
Life and annuity policy benefits
20,670

Acquisition costs
2,036

General and administrative expenses
3,057

Other expenses
(16
)
 
25,747

EARNINGS BEFORE INCOME TAXES
589

INCOME TAXES
(218
)
NET EARNINGS FROM DISCONTINUED OPERATIONS
$
371


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




The following table presents the cash flows of Pavonia for the three months ended March 31, 2017:
 
Three Months Ended
March 31,
 
2017
Operating activities
$
15,463

Investing activities
1,237

Change in cash and cash equivalents
$
16,700


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 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:
 
March 31,
2018
 
December 31,
2017
U.S. government and agency
$
470,639

 
$
554,036

Non-U.S. government
1,000,302

 
607,132

Corporate
3,772,357

 
3,363,060

Municipal
95,740

 
100,221

Residential mortgage-backed
262,498

 
288,713

Commercial mortgage-backed
407,088

 
421,548

Asset-backed
544,864

 
541,574

Total fixed maturity and short-term investments
6,553,488

 
5,876,284

Equities — U.S.
102,932

 
106,363

Equities — International
37,544

 
240

 
$
6,693,964

 
$
5,982,887

Included within residential and commercial mortgage-backed securities as at March 31, 2018 were securities issued by U.S. governmental agencies with a fair value of $123.3 million (as at December 31, 2017: $152.4 million). Included within corporate securities as at March 31, 2018 were senior secured loans of $70.9 million (as at December 31, 2017: $68.9 million).

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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 March 31, 2018
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair
Value
One year or less
 
$
417,571

 
$
417,566

 
6.4
%
More than one year through two years
 
550,136

 
547,148

 
8.3
%
More than two years through five years
 
1,534,602

 
1,524,622

 
23.3
%
More than five years through ten years
 
1,468,068

 
1,461,882

 
22.3
%
More than ten years
 
1,327,767

 
1,387,820

 
21.2
%
Residential mortgage-backed
 
259,309

 
262,498

 
4.0
%
Commercial mortgage-backed
 
417,110

 
407,088

 
6.2
%
Asset-backed
 
540,310

 
544,864

 
8.3
%
 
 
$
6,514,873

 
$
6,553,488

 
100.0
%
Available-for-sale
The amortized cost and fair values of our fixed maturity investments classified as available-for-sale were as follows:
As at March 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
2,429

 
$
—

 
$
(13
)
 
$
2,416

Non-U.S. government
 
81,983

 
1,419

 
(416
)
 
82,986

Corporate
 
104,665

 
2,058

 
(947
)
 
105,776

Municipal
 
3,760

 
4

 
(28
)
 
3,736

Residential mortgage-backed
 
22

 
—

 
—

 
22

 
 
$
192,859

 
$
3,481

 
$
(1,404
)
 
$
194,936

As at December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
4,210

 
$
—

 
$
(23
)
 
$
4,187

Non-U.S. government
 
84,776

 
1,249

 
(588
)
 
85,437

Corporate
 
113,561

 
2,436

 
(876
)
 
115,121

Municipal
 
5,146

 
8

 
(18
)
 
5,136

Residential mortgage-backed
 
31

 
—

 
—

 
31

Asset-backed
 
373

 
—

 
—

 
373

 
 
$
208,097

 
$
3,693

 
$
(1,505
)
 
$
210,285

 The contractual maturities of our fixed maturity 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.

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As at March 31, 2018
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair
Value
One year or less
 
$
37,572

 
$
37,357

 
19.2
%
More than one year through two years
 
16,731

 
16,693

 
8.6
%
More than two years through five years
 
48,971

 
49,426

 
25.3
%
More than five years through ten years
 
52,467

 
53,569

 
27.5
%
More than ten years
 
37,096

 
37,869

 
19.4
%
Residential mortgage-backed
 
22

 
22

 
—
%
 
 
$
192,859

 
$
194,936

 
100.0
%
Gross Unrealized Losses
The following tables summarize our fixed maturity investments in a gross unrealized loss position:
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at March 31, 2018
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
2,288

 
$
(12
)
 
$
127

 
$
(1
)
 
$
2,415

 
$
(13
)
Non-U.S. government
 
6,191

 
(321
)
 
9,836

 
(95
)
 
16,027

 
(416
)
Corporate
 
8,628

 
(678
)
 
38,795

 
(269
)
 
47,423

 
(947
)
Municipal
 
368

 
(7
)
 
3,123

 
(21
)
 
3,491

 
(28
)
Total fixed maturity and short-term investments
 
$
17,475

 
$
(1,018
)
 
$
51,881

 
$
(386
)
 
$
69,356

 
$
(1,404
)
  
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at December 31, 2017
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
2,344

 
$
(16
)
 
$
1,842

 
$
(7
)
 
$
4,186

 
$
(23
)
Non-U.S. government
 
11,101

 
(373
)
 
20,965

 
(215
)
 
32,066

 
(588
)
Corporate
 
9,177

 
(807
)
 
24,200

 
(69
)
 
33,377

 
(876
)
Municipal
 
369

 
(5
)
 
3,605

 
(13
)
 
3,974

 
(18
)
Total fixed maturity and short-term investments
 
$
22,991

 
$
(1,201
)
 
$
50,612

 
$
(304
)
 
$
73,603

 
$
(1,505
)
As at March 31, 2018 and December 31, 2017, the number of securities classified as available-for-sale in an unrealized loss position was 113 and 96, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 32 and 37, respectively.
Other-Than-Temporary Impairment
For the three months ended March 31, 2018 and 2017, 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 March 31, 2018 or December 31, 2017. A description of our other-than-temporary impairment process is included 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, 2017. There were no changes to our process during the three months ended March 31, 2018.

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Credit Ratings
The following table sets forth the credit ratings of our fixed maturity and short-term investments as at March 31, 2018:
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
478,946

 
$
473,055

 
7.0
%
 
$
472,466

 
$
589

 
$
—

 
$
—

 
$
—

 
$
—

Non-U.S. government
 
1,044,537

 
1,083,288

 
16.1
%
 
323,183

 
609,204

 
84,316

 
60,547

 
6,038

 
—

Corporate
 
3,867,651

 
3,878,133

 
57.4
%
 
168,725

 
416,632

 
2,037,741

 
1,074,943

 
178,958

 
1,134

Municipal
 
99,846

 
99,476

 
1.5
%
 
19,574

 
63,724

 
12,778

 
3,400

 
—

 
—

Residential mortgage-backed
 
259,331

 
262,520

 
3.9
%
 
144,650

 
5,774

 
14,437

 
657

 
96,079

 
923

Commercial mortgage-backed
 
417,110

 
407,088

 
6.0
%
 
211,536

 
47,498

 
72,257

 
53,254

 
7,619

 
14,924

Asset-backed
 
540,310

 
544,864

 
8.1
%
 
264,078

 
41,558

 
76,995

 
71,665

 
89,278

 
1,290

Total
 
$
6,707,731

 
$
6,748,424

 
100.0
%
 
$
1,604,212

 
$
1,184,979

 
$
2,298,524

 
$
1,264,466

 
$
377,972

 
$
18,271

% of total fair value
 
 
 
 
 
 
 
23.8
%
 
17.6
%
 
34.0
%
 
18.7
%
 
5.6
%
 
0.3
%
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
March 31,
2018
 
December 31,
2017
Private equities and private equity funds
 
$
246,151

 
$
289,556

Fixed income funds
 
230,174

 
229,999

Hedge funds
 
172,446

 
63,773

Equity funds
 
399,980

 
249,475

CLO equities
 
56,346

 
56,765

CLO equity fund
 
11,910

 
12,840

Private credit funds
 
4,419

 
10,156

Call options on equity
 
7,480

 
—

Other
 
779

 
828

 
 
$
1,129,685

 
$
913,392

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 45 days notice.
•
Hedge funds invest in a diversified portfolio of debt and equity securities. The fixed income 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. The majority of our portfolio of fixed income hedge funds are

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eligible for redemption. The equity hedge fund has imposed lock-up periods of up to three years from the time of initial investment. Once eligible, redemptions are permitted semi-annually with 60 days’ notice.
•
Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities. The funds have liquidity terms that vary from daily up to quarterly.
•
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 fund invests primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. The fund has a fair value of $11.9 million and is eligible for redemption in 2018.
•
Private credit funds invest in direct senior or collateralized loans. The investments are subject to restrictions on redemption and sales that are determined by the governing documents and limit our ability to liquidate our positions in the funds.
•
Call options on equities comprise directly held options to purchase the common equity of publicly traded corporations.
•
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 March 31, 2018, we had unfunded commitments to other investments of $212.1 million.
Other Investments, at cost
Our other investments carried at cost of $117.9 million as at March 31, 2018 consist of life settlement contracts. During the three months ended March 31, 2018 and 2017, net investment income included $6.5 million and $6.9 million, respectively, related to investments in life settlements. There were impairment charges of $2.2 million and $0.1 million recognized in net realized and unrealized gains/losses during the three months ended March 31, 2018 and 2017, respectively, related to investments in life settlements. The following table presents further information regarding our investments in life settlements as at March 31, 2018 and December 31, 2017.
 
 
March 31, 2018
 
December 31, 2017
 
 
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
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

1 – 2 years
 
9

 
11,540

 
21,340

 
11

 
17,655

 
29,471

2 – 3 years
 
12

 
10,505

 
24,180

 
10

 
7,524

 
19,906

3 – 4 years
 
16

 
10,688

 
22,728

 
20

 
16,119

 
32,411

4 – 5 years
 
15

 
14,982

 
34,130

 
13

 
13,960

 
32,730

Thereafter
 
154

 
70,174

 
386,654

 
162

 
70,363

 
390,843

Total
 
$
206

 
$
117,889

 
$
489,032

 
$
216

 
$
125,621

 
$
505,361

Remaining life expectancy for year 0-1 in the table above references policies whose current life expectancy is less than 12 months as at 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 March 31, 2018, our best estimate of the life insurance premiums required to keep the policies in force, payable in the 12 months ending March 31, 2019 and each of the four succeeding years ending March 31, 2023 is $17.0 million, $17.2 million, $16.1 million, $15.6 million and $15.3 million, respectively.

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




Net Investment Income
Major categories of net investment income for the three months ended March 31, 2018 and 2017 are summarized as follows:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Fixed maturity investments
 
$
43,888

 
$
30,330

Short-term investments and cash and cash equivalents
 
2,082

 
2,640

Funds held
 
3,129

 
39

Funds held - directly managed
 
8,626

 
7,002

Investment income from fixed maturities and cash and cash equivalents
 
57,725

 
40,011

Equity securities
 
1,490

 
726

Other investments
 
3,314

 
3,509

Life settlements and other
 
6,659

 
6,896

Investment income from equities and other investments
 
11,463

 
11,131

Gross investment income
 
69,188

 
51,142

Investment expenses
 
(2,869
)
 
(2,403
)
Net investment income
 
$
66,319

 
$
48,739

Net Realized and Unrealized Gains and Losses
Components of net realized and unrealized gains and losses for the three months ended March 31, 2018 and 2017 were as follows:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
Net realized gains (losses) on sale:
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
7

 
160

Gross realized losses on fixed maturity securities, available-for-sale
 
(37
)
 
(11
)
Net realized losses on fixed maturity securities, trading
 
(6,947
)
 
(1,052
)
Net realized gains on equity securities, trading
 
903

 
574

Net realized gains (losses) on funds held - directly managed
 
96

 
(3,853
)
Total net realized gains (losses) on sale
 
$
(5,978
)
 
$
(4,182
)
Net unrealized gains (losses):
 
 
 
 
Fixed maturity securities, trading
 
$
(100,301
)
 
$
23,316

Equity securities, trading
 
3,835

 
8,686

Other Investments
 
(9,662
)
 
23,509

Change in fair value of embedded derivative on funds held – directly managed
 
(27,881
)
 
6,928

Change in value of fair value option on funds held - directly managed
 
(3,043
)
 
262

Total net unrealized gains (losses)
 
(137,052
)
 
62,701

Net realized and unrealized gains (losses)
 
$
(143,030
)
 
$
58,519

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $7.5 million and $24.7 million for the three months ended March 31, 2018 and 2017, respectively.


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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 $483.1 million and $257.7 million, as at March 31, 2018 and December 31, 2017, respectively, was as follows: 
 
 
March 31,
2018
 
December 31,
2017
Collateral in trust for third party agreements
 
$
3,369,669

 
$
3,118,892

Assets on deposit with regulatory authorities
 
595,149

 
599,829

Collateral for secured letter of credit facilities
 
159,574

 
151,467

Funds at Lloyd's (1)
 
375,847

 
234,833

 
 
$
4,500,239

 
$
4,105,021

(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. On February 8, 2018, we amended and restated our unsecured letter of credit agreement for Funds at Lloyd's purposes ("FAL Facility") to issue up to $325.0 million letters of credit, with a provision to increase the facility up to $400.0 million, subject to lenders approval. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2022. As at March 31, 2018, our combined Funds at Lloyd's were comprised of cash and investments of $375.8 million and unsecured letters of credit of $295.0 million.
The increase in the collateral in trust for third-party agreements and Funds at Lloyd's was primarily due to the loss portfolio transfer reinsurance transactions as described in Note 2 - "Significant New Business".
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 our Annual Report on Form 10-K for the year ended December 31, 2017. This receives a variable return reflecting 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 March 31, 2018 and December 31, 2017, the funds held at cost had a carrying value of $1,021.7 million and $994.8 million, respectively, and the embedded derivative had a fair value of $(23.3) million and $4.7 million, respectively, the aggregate of which was $998.4 million and $999.5 million, respectively, as included in the table below.
•
The funds held balance in relation to the QBE reinsurance transaction described in Note 4 - "Significant New Business" in our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017, for which we elected the fair value option.


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




The following table presents the fair values of assets and liabilities underlying the funds held - directly managed account as at March 31, 2018 and December 31, 2017:
 
March 31,
2018
 
December 31,
2017
Fixed maturity investments:
 
 
 
U.S. government and agency
$
79,240

 
$
69,850

Non-U.S. government
9,114

 
2,926

Corporate
666,085

 
695,490

Municipal
57,055

 
58,930

Residential mortgage-backed
45,987

 
29,439

Commercial mortgage-backed
206,248

 
211,186

Asset-backed
90,600

 
97,565

Total fixed maturity investments
$
1,154,329

 
$
1,165,386

Other assets
22,584

 
14,554

 
$
1,176,913

 
$
1,179,940

The contractual maturities of the 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 March 31, 2018
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair Value
One year or less
 
$
28,380

 
$
28,259

 
2.5
%
More than one year through two years
 
83,964

 
83,289

 
7.2
%
More than two years through five years
 
234,632

 
229,926

 
19.9
%
More than five years through ten years
 
244,905

 
236,622

 
20.5
%
More than ten years
 
235,198

 
233,398

 
20.2
%
Residential mortgage-backed
 
46,892

 
45,987

 
4.0
%
Commercial mortgage-backed
 
215,199

 
206,248

 
17.9
%
Asset-backed
 
90,499

 
90,600

 
7.8
%
 
 
$
1,179,669

 
$
1,154,329

 
100.0
%
Credit Ratings
The following table sets forth the credit ratings of the fixed maturity investments underlying the funds held - directly managed account as at March 31, 2018:
 
 
Amortized
Cost
 
Fair Value
 
% of Total
Investments
 
AAA
Rated
 
AA Rated
 
A Rated
 
BBB
Rated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
80,077

 
$
79,240

 
6.9
%
 
$
79,240

 
$
—

 
$
—

 
$
—

Non-U.S. government
 
8,952

 
9,114

 
0.8
%
 
—

 
—

 
2,889

 
6,225

Corporate
 
681,752

 
666,085

 
57.7
%
 
7,326

 
26,174

 
301,212

 
331,373

Municipal
 
56,298

 
57,055

 
4.9
%
 
—

 
19,972

 
29,676

 
7,407

Residential mortgage-backed
 
46,892

 
45,987

 
4.0
%
 
45,987

 
—

 
—

 
—

Commercial mortgage-backed
 
215,199

 
206,248

 
17.9
%
 
197,795

 
6,472

 
1,981

 
—

Asset-backed
 
90,499

 
90,600

 
7.8
%
 
86,901

 
3,699

 
—

 
—

Total
 
$
1,179,669

 
$
1,154,329

 
100.0
%
 
$
417,249

 
$
56,317

 
$
335,758

 
$
345,005

% of total fair value
 
 
 
 
 
 
 
36.1
%
 
4.9
%
 
29.1
%
 
29.9
%


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




Net Investment Income
Major categories of net investment income underlying the funds held - directly managed for the three months ended March 31, 2018 and 2017 are summarized as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Fixed maturity investments
 
$
8,818

 
$
7,485

Short-term investments and cash and cash equivalents
 
79

 
65

Gross investment income
 
8,897

 
7,550

Investment expenses
 
(271
)
 
(548
)
Investment income on funds held - directly managed
 
$
8,626

 
$
7,002

Net Realized Gains (Losses) and Change in Fair Value due to Embedded Derivative and Fair Value Option
Net realized gains (losses) and change in fair value for the three months ended March 31, 2018 and 2017 are summarized as follows:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net realized gains (losses) on fixed maturity securities
 
$
96

 
$
(3,853
)
Change in fair value of embedded derivative
 
(27,881
)
 
6,928

Change in value of fair value option on funds held - directly managed
 
(3,043
)
 
262

Net realized gains (losses) and change in fair value of funds held - directly managed
 
$
(30,828
)
 
$
3,337

6. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
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. We use 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 we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
•
Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted third party pricing sources or management's assumptions and internal valuation models may be used to determine the fair values.
In addition, certain of our other investments are measured at fair value using net asset value ("NAV") per share (or its equivalent) as a practical expedient and have not been classified within the fair value hierarchy above. We have categorized our investments that are recorded at fair value on a recurring basis among levels based on the observability of inputs, or at fair value using NAV per share (or its equivalent) as follows:

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




 
 
March 31, 2018
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value Based on NAV as Practical Expedient
 
Total Fair
Value
Investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturity investments:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
—

 
$
473,055

 
$
—

 
$
—

 
$
473,055

Non-U.S. government
 
—

 
1,083,288

 
—

 
—

 
1,083,288

Corporate
 
—

 
3,792,106

 
86,027

 
—

 
3,878,133

Municipal
 
—

 
99,476

 
—

 
—

 
99,476

Residential mortgage-backed
 
—

 
260,613

 
1,907

 
—

 
262,520

Commercial mortgage-backed
 
—

 
389,454

 
17,634

 
—

 
407,088

Asset-backed
 
—

 
522,867

 
21,997

 
—

 
544,864

 
 
$
—

 
$
6,620,859

 
$
127,565

 
$
—

 
$
6,748,424

Equities:
 
 
 
 
 
 
 
 
 
 
Equities — U.S.
 
$
100,635

 
$
2,297

 
$
—

 
$
—

 
$
102,932

Equities — International
 
37,304

 
240

 
—

 
—

 
37,544

 
 
$
137,939

 
$
2,537

 
$
—

 
$
—

 
$
140,476

Other investments:
 
 
 
 
 
 
 
 
 
 
Private equities and private equity funds
 
$
—

 
$
—

 
$
—

 
$
246,151

 
$
246,151

Fixed income funds
 
—

 
203,274

 
—

 
26,900

 
230,174

Hedge funds
 
—

 
—

 
—

 
172,446

 
172,446

Equity funds
 
—

 
117,024

 
—

 
282,956

 
399,980

CLO equities
 
—

 
—

 
56,346

 
—

 
56,346

CLO equity fund
 
—

 
—

 
—

 
11,910

 
11,910

Private credit funds
 
—

 
—

 
—

 
4,419

 
4,419

Call options on equities
 
—

 
7,480

 
—

 
—

 
7,480

Other
 
—

 
—

 
313

 
466

 
779

 
 
$
—

 
$
327,778

 
$
56,659

 
$
745,248

 
$
1,129,685

Total Investments