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, 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 July 30, 2018, the registrant had outstanding 17,947,289 voting ordinary shares and 3,509,682 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, 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 June 30, 2018 (unaudited) and December 31, 2017
 
June 30,
2018
 
December 31,
2017
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
259,396

 
$
180,211

Fixed maturities, trading, at fair value
6,428,929

 
5,696,073

Fixed maturities, available-for-sale, at fair value (amortized cost: 2018 — $168,565; 2017 — $208,097)
169,321

 
210,285

Equities, trading, at fair value
130,404

 
106,603

Other investments, at fair value
1,768,333

 
913,392

Other investments, at cost
—

 
125,621

Total investments
8,756,383

 
7,232,185

Cash and cash equivalents
819,709

 
955,150

Restricted cash and cash equivalents
363,884

 
257,686

Funds held - directly managed
1,229,896

 
1,179,940

Premiums receivable
573,773

 
425,702

Deferred tax assets
13,230

 
13,001

Prepaid reinsurance premiums
196,052

 
245,101

Reinsurance balances recoverable
1,157,438

 
1,478,806

Reinsurance balances recoverable, at fair value
837,373

 
542,224

Funds held by reinsured companies
259,432

 
175,383

Deferred acquisition costs
128,781

 
64,984

Goodwill and intangible assets
219,865

 
180,589

Other assets
647,396

 
831,320

Assets held for sale
—

 
24,351

TOTAL ASSETS
$
15,203,212

 
$
13,606,422

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses
$
5,387,021

 
$
5,603,419

Losses and loss adjustment expenses, at fair value
3,221,366

 
1,794,669

Policy benefits for life and annuity contracts
108,963

 
117,207

Unearned premiums
754,046

 
583,197

Insurance and reinsurance balances payable
354,100

 
236,697

Deferred tax liabilities
14,983

 
15,262

Debt obligations
439,610

 
646,689

Other liabilities
524,882

 
972,457

Liabilities held for sale
—

 
11,271

TOTAL LIABILITIES
10,804,971

 
9,980,868

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST
471,093

 
479,606

 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Ordinary shares (par value $1 each, issued and outstanding 2018: 21,439,272; 2017: 19,406,722):

 

Voting Ordinary shares (issued and outstanding 2018: 17,929,590; 2017: 16,402,279)
17,930

 
16,402

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

 
2,600

Non-voting convertible ordinary Series E Shares (issued and outstanding 2018: 910,010 and 2017: 404,771)
910

 
405

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

 
389

Series D Preferred Shares (issued and outstanding 2018: 16,000)
400,000

 
—

Treasury shares, at cost (Series C Preferred shares 2018 and 2017: 388,571)
(421,559
)
 
(421,559
)
Additional paid-in capital
1,808,063

 
1,395,067

Accumulated other comprehensive income
10,604

 
10,468

Retained earnings
2,098,484

 
2,132,912

Total Enstar Group Limited Shareholders’ Equity
3,917,421

 
3,136,684

Noncontrolling interest
9,727

 
9,264

TOTAL SHAREHOLDERS’ EQUITY
3,927,148

 
3,145,948

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
15,203,212

 
$
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 and Six Months Ended June 30, 2018 and 2017
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(expressed in thousands of U.S. dollars,
except share and per share data)
INCOME
 
 
 
 
 
 
 
Net premiums earned
$
228,812

 
$
155,571

 
$
399,031

 
$
304,469

Fees and commission income
8,352

 
18,667

 
16,683

 
30,581

Net investment income
66,469

 
49,417

 
132,788

 
98,156

Net realized and unrealized gains (losses)
(54,418
)
 
51,877

 
(197,448
)
 
110,396

Other income
6,294

 
10,856

 
22,934

 
23,054

 
255,509

 
286,388

 
373,988

 
566,656

EXPENSES
 
 
 
 
 
 
 
Net incurred losses and loss adjustment expenses
92,819

 
9,620

 
112,353

 
87,512

Life and annuity policy benefits
(160
)
 
4,289

 
(206
)
 
3,988

Acquisition costs
53,334

 
30,355

 
83,442

 
51,176

General and administrative expenses
102,612

 
106,490

 
197,872

 
208,958

Interest expense
8,922

 
7,573

 
16,933

 
14,441

Net foreign exchange gains (losses)
(5,519
)
 
7,122

 
349

 
10,837

Loss on sale of subsidiary
—

 
9,609

 
—

 
9,609

 
252,008

 
175,058

 
410,743

 
386,521

EARNINGS (LOSS) BEFORE INCOME TAXES
3,501

 
111,330

 
(36,755
)
 
180,135

INCOME TAXES
(3,646
)
 
(4,731
)
 
(3,818
)
 
(1,802
)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
(145
)
 
106,599

 
(40,573
)
 
178,333

NET LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

 
(4,871
)
 
—

 
(4,500
)
NET EARNINGS (LOSS)
(145
)
 
101,728

 
(40,573
)
 
173,833

Net loss (earnings) attributable to noncontrolling interest
8,389

 
(11,542
)
 
7,607

 
(28,967
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
8,244

 
$
90,186

 
$
(32,966
)
 
$
144,866

 
 
 
 
 
 
 
 
Earnings (Loss) per ordinary share attributable to Enstar Group Limited:
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
$
0.40

 
$
4.90

 
$
(1.65
)
 
$
7.71

Net loss from discontinued operations
—

 
(0.25
)
 
—

 
(0.23
)
Net earnings (loss) per ordinary share
$
0.40

 
$
4.65

 
$
(1.65
)
 
$
7.48

Diluted:
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
$
0.40

 
$
4.87

 
$
(1.65
)
 
$
7.66

Net loss from discontinued operations
—

 
(0.25
)
 
—

 
(0.23
)
Net earnings (loss) per ordinary share
$
0.40

 
$
4.62

 
$
(1.65
)
 
$
7.43

Weighted average ordinary shares outstanding:
 
 
 
 
 
 
 
Basic
20,462,788

 
19,387,650

 
19,938,815

 
19,381,225

Diluted
20,671,232

 
19,511,429

 
20,140,367

 
19,506,077

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 and Six Months Ended June 30, 2018 and 2017
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
NET EARNINGS (LOSS)
$
(145
)
 
$
101,728

 
$
(40,573
)
 
$
173,833

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized holding gains (losses) on fixed income investments arising during the period
(1,351
)
 
1,693

 
(1,697
)
 
2,379

Reclassification adjustment for net realized gains (losses) included in net earnings
21

 
(102
)
 
51

 
(251
)
Unrealized gains (losses) arising during the period, net of reclassification adjustments
(1,330
)
 
1,591

 
(1,646
)
 
2,128

Change in currency translation adjustment
176

 
2,315

 
1,401

 
4,257

Total other comprehensive income (loss)
(1,154
)
 
3,906

 
(245
)
 
6,385

Comprehensive income (loss)
(1,299
)
 
105,634

 
(40,818
)
 
180,218

Comprehensive (income) loss attributable to noncontrolling interest
8,745

 
(12,333
)
 
7,989

 
(30,415
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
7,446

 
$
93,301

 
$
(32,829
)
 
$
149,803

See accompanying notes to the unaudited condensed consolidated financial statements


4
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Six Months Ended June 30, 2018 and 2017
 
Six Months Ended June 30,
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
Share Capital — Voting Ordinary Shares
 
 
 
Balance, beginning of period
$
16,402

 
$
16,175

Issue of shares
1,528

 
19

Conversion of Series C Non-Voting Convertible Ordinary Shares
—

 
192

Balance, end of period
$
17,930

 
$
16,386

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 of period
$
405

 
$
405

Issue of shares
505

 
—

Balance, beginning and end of period
$
910

 
$
405

Share Capital — Series C Convertible Participating Non-Voting Perpetual Preferred Shares
 
 
 
Balance, beginning and end of period
$
389

 
$
389

Share Capital — Series D Perpetual Noncumulative Preferred Shares
 
 
 
Balance, beginning of period
$
—

 
$
—

Issue of shares
400,000

 
—

Balance, end of period
$
400,000

 
$
—

Treasury Shares (Series C Preferred 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 voting ordinary shares
413,204

 
66

Issuance costs of preferred shares
(10,518
)
 
—

Amortization of share-based compensation
10,310

 
6,157

Balance, end of period
$
1,808,063

 
$
1,386,332

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
1,410

 
4,253

Balance, end of period
12,581

 
(14,740
)
Defined benefit pension liability
 
 
 
Balance, beginning and end of period
(3,143
)
 
(4,644
)
Unrealized gains (losses) on available-for-sale investments
 
 
 
Balance, beginning of period
2,440

 
88

Change in unrealized gains (losses) on available-for-sale investments
(1,274
)
 
685

Balance, end of period
1,166

 
773

Balance, end of period
$
10,604

 
$
(18,611
)
Retained Earnings
 
 
 
Balance, beginning of period
$
2,132,912

 
$
1,847,550

Net earnings (losses) attributable to Enstar Group Limited
(32,966
)
 
144,866

Accretion of redeemable noncontrolling interests to redemption value
111

 
(1,015
)
Cumulative effect of change in accounting principle
(1,573
)
 
4,882

Balance, end of period
$
2,098,484

 
$
1,996,283

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

 
$
8,520

Contribution of capital
49

 
—

Net earnings attributable to noncontrolling interest
414

 
898

Balance, end of period
$
9,727

 
$
9,418

 
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 Six Months Ended June 30, 2018 and 2017
 
Six Months Ended
June 30,
 
2018
 
2017
 
(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings (loss)
$
(40,573
)
 
$
173,833

Net loss from discontinued operations
—

 
4,500

Adjustments to reconcile net earnings (losses) to cash flows used in operating activities:
 
 
 
Realized losses (gains) on sale of investments
7,661

 
(74
)
Unrealized losses (gains) on investments
143,817

 
(88,304
)
Other non-cash items
10,626

 
5,352

Depreciation and other amortization
17,593

 
18,797

Net change in trading securities held on behalf of policyholders
—

 
25,597

Sales and maturities of trading securities
1,983,155

 
2,225,349

Purchases of trading securities
(2,834,926
)
 
(3,616,862
)
Net loss on sale of subsidiary
—

 
9,609

Changes in:
 
 
 
Reinsurance balances recoverable
(339,827
)
 
(570,731
)
Funds held by reinsured companies
(134,005
)
 
(212,927
)
Losses and loss adjustment expenses
1,209,709

 
1,646,721

Policy benefits for life and annuity contracts
(5,059
)
 
64

Insurance and reinsurance balances payable
117,741

 
75,890

Unearned premiums
170,849

 
39,739

Other operating assets and liabilities
(419,311
)
 
898

Net cash flows used in operating activities
(112,550
)
 
(262,549
)
INVESTING ACTIVITIES:
 
 
 
Acquisitions, net of cash acquired
5,657

 
—

Sales and maturities of available-for-sale securities
44,112

 
45,932

Purchase of available-for-sale securities
(9,226
)
 
(162
)
Purchase of other investments
(462,336
)
 
(67,516
)
Redemption of other investments
324,633

 
152,650

Other investing activities
(7,841
)
 
(9,708
)
Net cash flows provided by (used in) investing activities
(105,001
)
 
121,196

FINANCING ACTIVITIES:
 
 
 
Issuance of preferred shares, net of issuance costs
389,482

 
—

Contribution by noncontrolling interest
49

 
—

Dividends paid to noncontrolling interest
—

 
(27,458
)
Receipt of loans
374,069

 
489,100

Repayment of loans
(578,062
)
 
(528,500
)
Net cash flows provided by (used in) financing activities
185,538

 
(66,858
)
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
2,770

 
636

NET DECREASE IN CASH AND CASH EQUIVALENTS
(29,243
)
 
(207,575
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,212,836

 
1,318,645

CHANGE IN CASH OF BUSINESSES HELD FOR SALE
—

 
(6,319
)
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,183,593

 
$
1,104,751

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
13,928

 
$
6,538

Interest paid
$
16,247

 
$
8,959

 
 
 
 
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
819,709

 
681,068

Restricted cash and cash equivalents
363,884

 
423,683

Cash, cash equivalents and restricted cash
$
1,183,593

 
$
1,104,751


See accompanying notes to the unaudited condensed consolidated financial statements

6
Table of Contents


ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.

7
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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 that were previously classified as available-for-sale securities and for which changes in fair value were previously

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




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." In addition, the following relevant pronouncements were issued during the six months ended June 30, 2018 or thereafter and are yet to be adopted.
ASU 2018-11, Targeted Improvements to ASC 842 - Leases and ASU 2018-10, Codification Improvements to ASC 842 - Leases

In July 2018, the FASB issued ASU 2018-11, which adds a transition option for all entities and a practical expedient only for lessors to the ASU 2016-02 - Leases guidance initially issued by the FASB in February 2016 and codified in ASC 842. The transition option which we will elect, allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can opt to continue to apply the legacy guidance in ASC 840 - Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. This means that entities that elect this option will only provide annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components.

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In July 2018, the FASB also issued ASU 2018-10, which clarifies how to apply certain aspects of ASC 842. The amendments in the ASU address a number of issues in the new leases guidance, including (a) the rate implicit in the lease, (b) impairment of the net investment in the lease, (c) lessee reassessment of lease classification, (d) lessor reassessment of lease term and purchase options, (e) variable payments that depend on an index or rate, and (f) certain transition adjustments.

The amendments arising from both ASU 2018-11 and ASU 2018-10 have the same effective date and transition requirements as ASC 842, which we expect to adopt on January 1, 2019, when it becomes effective. Our implementation of the new leases standard taking into account these amendments to the guidance is ongoing, however we do not anticipate that the adoption of ASU 2016-02 and the amendments in ASU 2018-11 and ASU 2018-10 will have a material impact on our consolidated financial statements and related disclosures.

ASU 2018-09, Codification Improvements

In July 2018, the FASB issued ASU 2018-09, which affects a wide variety of Topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The amendments in the ASU represent changes that clarify, correct errors in, or make minor improvements to the Codification. Ultimately, the amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. Some of the amendments in this ASU do not require transition guidance and are effective upon issuance of the ASU, while many of the amendments have transition guidance with effective dates for annual periods beginning after December 15, 2018. The adoption of the amendments in this ASU are not expected to have a material impact on our consolidated financial statements and related disclosures.

2. ACQUISITIONS
Overview
On May 14, 2018, the Company completed the previously announced transaction to acquire all of the outstanding shares and warrants of KaylaRe Holdings, Ltd. ("KaylaRe"). In consideration for the acquired shares and warrants of KaylaRe, the Company issued an aggregate of 2,007,017 ordinary shares to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares. Effective May 14, 2018, we consolidated KaylaRe into our consolidated financial statements, and any balances between KaylaRe and Enstar are now eliminated upon consolidation.
The completion of the KaylaRe transaction enhanced our group capital position and enabled the Company to assume full ownership of another platform from which we can provide non-life run-off solutions to our clients.
Refer to Note 20 - "Related Party Transactions" for additional information relating to KaylaRe.

Purchase Price
The components of the consideration paid to acquire all of the outstanding shares and warrants of KaylaRe were as follows:
Fair value of Enstar ordinary shares issued
 
$
414,750

Fair value of previously held equity method investment
 
336,137

Adjustment for the fair value of preexisting relationships
 
37,169

Total purchase price
 
$
788,056

Net assets acquired at fair value (excluding preexisting relationships)
 
$
746,320

Excess of purchase price over fair value of net assets acquired
 
$
41,736

The purchase price was allocated to the acquired assets and liabilities of KaylaRe based on their estimated fair values at the acquisition date. We recognized goodwill of $41.7 million on the transaction, primarily attributable to (i) the capital synergies from integrating KaylaRe into our group capital structure, (ii) investment management capabilities on a total return basis, and (iii) the incremental acquired capital to be utilized for future non-life run-off transactions.

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




Fair Value of Enstar Ordinary Shares Issued
The fair value of the Enstar ordinary shares issued was based on the closing price of $206.65 as at May 14, 2018, the date the transaction closed.
Number of Enstar Ordinary shares issued
 
2,007,017
Closing price of Enstar Ordinary shares as of May 14, 2018
 
$
206.65

Fair value of Enstar Ordinary shares issued to shareholders of KaylaRe
 
$
414,750

Fair Value of Previously Held Equity Method Investment
Prior to the close of the transaction, Enstar held a 48.2% interest in KaylaRe, which was accounted for as an equity method investment in accordance with ASC 323 - Investments - Equity Method and Joint Ventures. The acquisition of the remaining 51.8% equity interest in KaylaRe was considered a step acquisition, whereby the Company remeasured the previously held equity method investment to fair value. The Company considered multiple factors in determining the fair value of the previously held equity method investment, including, (i) the price negotiated with the selling shareholders for the 51.8% equity interest in KaylaRe, (ii) recent market transactions for similar companies, and (iii) current trading multiples for comparable companies. Based on this analysis, a valuation multiple of 1.05 to KaylaRe's carrying book value was determined to be appropriate to remeasure the previously held equity method investment at fair value. This resulted in the recognition of a gain of $16.0 million on completion of the step acquisition of KaylaRe, which was recorded in other income (loss) for the three and six months ended June 30, 2018.
Carrying value of previously held equity method investment prior to the close of the transaction
 
$
320,130

Price-to-book multiple
 
1.05
Fair value of previously held equity method investment prior to the close of the transaction
 
$
336,137

 
 
 
Gain recognized on remeasurement of previously held equity method investment to fair value
 
$
16,007

Adjustment for the Fair Value of Preexisting Relationships
Enstar had contractual preexisting relationships with KaylaRe, which were deemed to be effectively settled at fair value on the acquisition date. The differences between the carrying value and the fair value of the preexisting relationships was included as part of the purchase price in accordance with ASC 805 - Business Combinations. The fair value of the balances relating to preexisting reinsurance relationships with KaylaRe was determined using a discounted cash flow approach and, where applicable, consideration was given to stated contractual settlement provisions, when determining the loss to be recorded on the deemed settlement of these preexisting relationships. The fair values of the balances arising from the non-reinsurance preexisting relationships with KaylaRe were deemed to equal their carrying values given their short-term nature and the expectation that they would all be settled within the next twelve months.
As a result of effectively settling all the contractual preexisting relationships with KaylaRe, the Company recognized a loss of $15.6 million which was recorded in other income (loss) in the three and six months ended June 30, 2018, as summarized below:


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




ASSETS
Carrying value
 
Fair value
 
Loss on deemed settlement
Funds held by reinsured companies
$
386,793

 
$
386,793

 
$
—

Deferred acquisition costs/Value of business acquired
33,549

 
40,268

 
6,719

TOTAL ASSETS
420,342

 
427,061

 
6,719

LIABILITIES
 
 
 
 
 
Losses and LAE
339,747

 
333,205

 
(6,542
)
Unearned premiums
105,602

 
105,602

 
—

Insurance and reinsurance balances payable
25,897

 
23,559

 
(2,338
)
Other liabilities
1,864

 
1,864

 
—

TOTAL LIABILITIES
473,110

 
464,230

 
(8,880
)
NET ASSETS (LIABILITIES)
$
(52,768
)
 
$
(37,169
)
 
$
15,599

Fair Value of Net Assets Acquired and Liabilities Assumed
The following table summarizes the fair values of the assets acquired and liabilities assumed (excluding preexisting relationships) in the KaylaRe transaction at the acquisition date, which have all been allocated to the Non-life Run-off segment.
ASSETS
 
 
Fixed maturities, trading, at fair value
 
$
126,393

Other investments, at fair value
 
626,476

Total investments
 
752,869

Cash and cash equivalents
 
5,657

Premiums receivable
 
10,965

Deferred acquisition costs
 
275

Other assets
 
614

TOTAL ASSETS
 
$
770,380

LIABILITIES
 
 
Losses and LAE
 
$
4,059

Unearned premiums
 
10,984

Insurance and reinsurance balances payable
 
13

Other liabilities
 
9,004

TOTAL LIABILITIES
 
24,060

NET ASSETS ACQUIRED AT FAIR VALUE
 
$
746,320

The table below summarizes the results of the KaylaRe operations which are included in our condensed consolidated statement of earnings from the acquisition date to June 30, 2018:
Premiums earned
 
$
5,381

Incurred losses and LAE
 
(4,960
)
Acquisition costs
 
(135
)
Underwriting income
 
286

Net investment income
 
791

Net unrealized gains
 
15,247

 
 
$
16,324


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




3. 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 7 - "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.
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 7 - "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 7 - "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.
4. 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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ENSTAR GROUP LIMITED
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 June 30, 2018, included within Other assets and Other liabilities on our consolidated balance sheet were amounts of $23.0 million and $10.0 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 and six months ended June 30, 2017:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2017
INCOME
 
 
 
Net premiums earned
$
13,605

 
$
27,930

Net investment income
10,277

 
20,306

Net realized and unrealized gains
1,154

 
2,776

Other income
395

 
755

 
25,431

 
51,767

EXPENSES
 
 
 
Life and annuity policy benefits
24,112

 
44,782

Acquisition costs
2,280

 
4,316

General and administrative expenses
3,718

 
6,775

Other expenses
—

 
(16
)
 
30,110

 
55,857

LOSS BEFORE INCOME TAXES
(4,679
)
 
(4,090
)
INCOME TAXES
(192
)
 
(410
)
NET LOSS FROM DISCONTINUED OPERATIONS
$
(4,871
)
 
$
(4,500
)

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




The following table presents the cash flows of Pavonia for the six months ended June 30, 2017:
 
Six Months Ended
June 30,
 
2017
Operating activities
$
23,540

Investing activities
5,244

Change in cash and cash equivalents
$
28,784

Laguna
On August 29, 2017, we completed a transaction to sell Laguna Life DAC (“Laguna”) for total consideration of €25.6 million (approximately $30.8 million) to a subsidiary of Monument Re Limited ("Monument"). We have an investment in Monument, as described further in Note 20 - "Related Party Transactions". Laguna was classified as held-for-sale during 2017 prior to its sale.
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. These amounts were not significant to our consolidated operations and therefore we have not classified Laguna as a discontinued operation for prior periods. As at June 30, 2017 we recorded a loss on the sale of Laguna of $9.6 million, which was included in earnings from continuing operations before income taxes in our consolidated statement of earnings. The total loss recorded on the sale of Laguna, for the year ended December 31, 2017 was $16.3 million, which included a cumulative currency translation adjustment balance of $6.3 million, which upon completion of the sale during the third quarter of 2017 was reclassified from accumulated other comprehensive income and included in earnings as a component of the loss on sale of Laguna.
5. 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:
 
June 30,
2018
 
December 31,
2017
U.S. government and agency
$
536,132

 
$
554,036

Non-U.S. government
979,974

 
607,132

Corporate
3,787,366

 
3,363,060

Municipal
89,339

 
100,221

Residential mortgage-backed
306,025

 
288,713

Commercial mortgage-backed
403,001

 
421,548

Asset-backed
586,488

 
541,574

Total fixed maturity and short-term investments
6,688,325

 
5,876,284

Equities — U.S.
90,256

 
106,363

Equities — International
40,148

 
240

 
$
6,818,729

 
$
5,982,887

Included within residential and commercial mortgage-backed securities as at June 30, 2018 were securities issued by U.S. governmental agencies with a fair value of $160.2 million (as at December 31, 2017: $152.4 million). Included within corporate securities as at June 30, 2018 were senior secured loans of $13.9 million (as at December 31, 2017: $68.9 million).

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




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, 2018
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair
Value
One year or less
 
$
480,852

 
$
475,705

 
7.1
%
More than one year through two years
 
546,766

 
537,849

 
8.0
%
More than two years through five years
 
1,672,267

 
1,633,309

 
24.4
%
More than five years through ten years
 
1,476,591

 
1,435,235

 
21.5
%
More than ten years
 
1,325,143

 
1,310,713

 
19.6
%
Residential mortgage-backed
 
304,249

 
306,025

 
4.6
%
Commercial mortgage-backed
 
415,135

 
403,001

 
6.0
%
Asset-backed
 
584,876

 
586,488

 
8.8
%
 
 
$
6,805,879

 
$
6,688,325

 
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 June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
2,429

 
$
—

 
$
(9
)
 
$
2,420

Non-U.S. government
 
75,679

 
1,423

 
(915
)
 
76,187

Corporate
 
86,696

 
1,472

 
(1,184
)
 
86,984

Municipal
 
3,743

 
1

 
(32
)
 
3,712

Residential mortgage-backed
 
18

 
—

 
—

 
18

 
 
$
168,565

 
$
2,896

 
$
(2,140
)
 
$
169,321

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 June 30, 2018
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair
Value
One year or less
 
$
20,321

 
$
19,692

 
11.6
%
More than one year through two years
 
20,422

 
20,211

 
11.9
%
More than two years through five years
 
40,382

 
40,544

 
24.0
%
More than five years through ten years
 
56,263

 
56,890

 
33.6
%
More than ten years
 
31,159

 
31,966

 
18.9
%
Residential mortgage-backed
 
18

 
18

 
—
%
 
 
$
168,565

 
$
169,321

 
100.0
%
Gross Unrealized Losses
The following tables summarize our fixed maturity investments classified as available-for-sale that are in a gross unrealized loss position:
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at June 30, 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
 
$
2,293

 
$
(8
)
 
$
127

 
$
(1
)
 
$
2,420

 
$
(9
)
Non-U.S. government
 
4,270

 
(390
)
 
18,007

 
(525
)
 
22,277

 
(915
)
Corporate
 
7,266

 
(822
)
 
24,914

 
(362
)
 
32,180

 
(1,184
)
Municipal
 
367

 
(7
)
 
2,913

 
(25
)
 
3,280

 
(32
)
Total fixed maturity investments
 
$
14,196

 
$
(1,227
)
 
$
45,961

 
$
(913
)
 
$
60,157

 
$
(2,140
)
  
 
 
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 investments
 
$
22,991

 
$
(1,201
)
 
$
50,612

 
$
(304
)
 
$
73,603

 
$
(1,505
)
As at June 30, 2018 and December 31, 2017, the number of securities classified as available-for-sale in an unrealized loss position was 96. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 30 and 37, respectively.
Other-Than-Temporary Impairment
For the six months ended June 30, 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 June 30, 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 six months ended June 30, 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 June 30, 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
 
$
544,615

 
$
538,552

 
7.9
%
 
$
537,959

 
$
593

 
$
—

 
$
—

 
$
—

 
$
—

Non-U.S. government
 
1,061,120

 
1,056,161

 
15.4
%
 
375,722

 
568,567

 
46,510

 
59,407

 
5,955

 
—

Corporate
 
3,970,353

 
3,874,350

 
56.5
%
 
169,098

 
461,745

 
2,073,323

 
1,064,563

 
105,329

 
292

Municipal
 
94,078

 
93,051

 
1.4
%
 
18,303

 
58,518

 
12,811

 
3,419

 
—

 
—

Residential mortgage-backed
 
304,267

 
306,043

 
4.4
%
 
187,130

 
4,046

 
13,154

 
410

 
97,140

 
4,163

Commercial mortgage-backed
 
415,135

 
403,001

 
5.9
%
 
210,884

 
47,233

 
65,830

 
57,420

 
9,822

 
11,812

Asset-backed
 
584,876

 
586,488

 
8.5
%
 
263,152

 
52,827

 
117,250

 
75,577

 
77,211

 
471

Total
 
$
6,974,444

 
$
6,857,646

 
100.0
%
 
$
1,762,248

 
$
1,193,529

 
$
2,328,878

 
$
1,260,796

 
$
295,457

 
$
16,738

% of total fair value
 
 
 
 
 
 
 
25.7
%
 
17.4
%
 
34.0
%
 
18.4
%
 
4.3
%
 
0.2
%
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
June 30,
2018
 
December 31,
2017
Private equities and private equity funds
 
$
252,965

 
$
289,556

Fixed income funds
 
342,166

 
229,999

Hedge funds
 
670,963

 
63,773

Equity funds
 
387,490

 
249,475

CLO equities
 
53,840

 
56,765

CLO equity fund
 
40,864

 
12,840

Private credit funds
 
14,319

 
10,156

Call options on equity
 
4,998

 
—

Other
 
728

 
828

 
 
$
1,768,333

 
$
913,392

The valuation of our other investments is described in Note 7 - "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 may invest in a wide range of instruments, including debt and equity securities, and utilize various sophisticated strategies to achieve their objectives. We invest in a mixture of fixed income, equity and multi-strategy hedge funds. Our hedge funds have various lock-up periods of up to three years and redemption

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




terms, predominantly 60 and 90 days. Certain of our hedge funds which have exceeded that lock up period are currently eligible for redemption while others are still in the lock-up period.
•
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 $40.9 million and is eligible for redemption.
•
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.
The increase in our other investments carried at fair value between December 31, 2017 and June 30, 2018 was primarily attributable to $626.5 million of other investments acquired as part of the KaylaRe acquisition and net additional subscriptions of $231.6 million.
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, 2018, we had unfunded commitments to other investments of $200.0 million.
Other Investments, at cost
During the three months ended June 30, 2018 we sold our investments in life settlement contracts, which were carried at cost. During the six months ended June 30, 2018 and 2017, net investment income included $6.5 million and $9.3 million, respectively, related to investments in life settlements. There were impairment charges of $6.6 million and $6.3 million recognized in net realized and unrealized gains/losses during the six months ended June 30, 2018 and 2017, respectively, related to investments in life settlements. The following table presents further information regarding our investments in life settlements as at December 31, 2017:
 
 
December 31, 2017
 
 
Number of Contracts
 
Carrying
Value
 
Face Value (Death Benefits)
Remaining Life Expectancy of Insureds:
 
 
 
 
 
 
0 – 1 year
 
—

 
$
—

 
$
—

1 – 2 years
 
11

 
17,655

 
29,471

2 – 3 years
 
10

 
7,524

 
19,906

3 – 4 years
 
20

 
16,119

 
32,411

4 – 5 years
 
13

 
13,960

 
32,730

Thereafter
 
162

 
70,363

 
390,843

Total
 
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.

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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 for the three and six months ended June 30, 2018 and 2017 are summarized as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Fixed maturity investments
 
$
48,147

 
$
33,741

 
$
92,035

 
$
64,071

Short-term investments and cash and cash equivalents
 
3,096

 
2,801

 
5,178

 
5,441

Funds held
 
2,754

 
311

 
5,883

 
350

Funds held - directly managed
 
9,588

 
8,603

 
18,214

 
15,605

Investment income from fixed maturities and cash and cash equivalents
 
63,585

 
45,456

 
121,310

 
85,467

Equity securities
 
1,352

 
1,137

 
2,842

 
1,863

Other investments
 
2,962

 
3,387

 
6,276

 
6,896

Life settlements and other
 
1,116

 
2,687

 
7,775

 
9,583

Investment income from equities and other investments
 
5,430

 
7,211

 
16,893

 
18,342

Gross investment income
 
69,015

 
52,667

 
138,203

 
103,809

Investment expenses
 
(2,546
)
 
(3,250
)
 
(5,415
)
 
(5,653
)
Net investment income
 
$
66,469

 
$
49,417

 
$
132,788

 
$
98,156

Net Realized and Unrealized Gains and Losses
Components of net realized and unrealized gains and losses for the three and six months ended June 30, 2018 and 2017 were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net realized gains (losses) on sale:
 
 
 
 
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
$
20

 
$
177

 
$
27

 
$
337

Gross realized losses on fixed maturity securities, available-for-sale
 
(41
)
 
(75
)
 
(78
)
 
(86
)
Net realized losses on fixed maturity securities, trading
 
(3,566
)
 
65

 
(10,513
)
 
(987
)
Net realized gains on equity securities, trading
 
2,000

 
236

 
2,903

 
810

Net realized losses on funds held - directly managed
 
(1,041
)
 
(289
)
 
(945
)
 
(4,142
)
Total net realized gains (losses) on sale
 
$
(2,628
)
 
$
114

 
$
(8,606
)
 
$
(4,068
)
Net unrealized gains (losses):
 
 
 
 
 
 
 
 
Fixed maturity securities, trading
 
$
(45,967
)
 
$
11,226

 
$
(146,268
)
 
$
34,542

Equity securities, trading
 
487

 
1,871

 
4,322

 
10,557

Other Investments
 
7,791

 
19,696

 
(1,871
)
 
43,205

Change in fair value of embedded derivative on funds held – directly managed
 
(13,044
)
 
17,912

 
(40,925
)
 
24,840

Change in value of fair value option on funds held - directly managed
 
(1,057
)
 
1,058

 
(4,100
)
 
1,320

Total net unrealized gains (losses)
 
(51,790
)
 
51,763

 
(188,842
)
 
114,464

Net realized and unrealized gains (losses)
 
$
(54,418
)
 
$
51,877

 
$
(197,448
)
 
$
110,396

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $3.0 million and $12.3 million for the three months ended June 30, 2018 and 2017, respectively, and $10.5 million and $21.6 million for the six months ended June 30, 2018 and 2017, respectively.

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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 $363.9 million and $257.7 million, as at June 30, 2018 and December 31, 2017, respectively, was as follows: 
 
 
June 30,
2018
 
December 31,
2017
Collateral in trust for third party agreements
 
$
3,399,091

 
$
3,118,892

Assets on deposit with regulatory authorities
 
585,922

 
599,829

Collateral for secured letter of credit facilities
 
133,277

 
151,467

Funds at Lloyd's (1)
 
417,333

 
234,833

 
 
$
4,535,623

 
$
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 June 30, 2018, our combined Funds at Lloyd's were comprised of cash and investments of $417.3 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 3 - "Significant New Business".
6. 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 June 30, 2018 and December 31, 2017, the funds held at cost had a carrying value of $1,087.6 million and $994.8 million, respectively, and the embedded derivative had a fair value of $(36.3) million and $4.7 million, respectively, the aggregate of which was $1,051.3 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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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 June 30, 2018 and December 31, 2017:
 
June 30,
2018
 
December 31,
2017
Fixed maturity investments:
 
 
 
U.S. government and agency
$
87,017

 
$
69,850

Non-U.S. government
22,625

 
2,926

Corporate
672,437

 
695,490

Municipal
58,933

 
58,930

Residential mortgage-backed
60,260

 
29,439

Commercial mortgage-backed
221,133

 
211,186

Asset-backed
98,339

 
97,565

Total fixed maturity investments
$
1,220,744

 
$
1,165,386

Other assets
9,152

 
14,554

 
$
1,229,896

 
$
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.