Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
Commission File Number 001-33289
ENSTAR GROUP LIMITED
(Exact name of Registrant as specified in its charter)
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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 every Interactive Data File required to be submitted 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 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.
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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 November 5, 2018, the registrant had outstanding 17,951,076 voting ordinary shares and 3,509,682 non-voting convertible ordinary shares, each par value $1.00 per share.
Enstar Group Limited
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2018
Table of Contents
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PART I | |
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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CONSOLIDATED FINANCIAL STATEMENTS | Page |
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ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2018 (unaudited) and December 31, 2017 |
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| September 30, 2018 | | December 31, 2017 |
| (expressed in thousands of U.S. dollars, except share data) |
ASSETS | | | |
Short-term investments, trading, at fair value | $ | 231,950 |
| | $ | 180,211 |
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Fixed maturities, trading, at fair value | 6,313,330 |
| | 5,696,073 |
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Fixed maturities, available-for-sale, at fair value (amortized cost: 2018 — $163,696; 2017 — $208,097) | 163,144 |
| | 210,285 |
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Equities, trading, at fair value | 130,314 |
| | 106,603 |
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Other investments, at fair value | 2,036,430 |
| | 913,392 |
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Other investments, at cost | — |
| | 125,621 |
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| 8,875,168 |
| | 7,232,185 |
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Cash and cash equivalents | 553,419 |
| | 955,150 |
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Restricted cash and cash equivalents | 474,590 |
| | 257,686 |
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| 1,217,182 |
| | 1,179,940 |
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Premiums receivable | 574,419 |
| | 425,702 |
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| 13,782 |
| | 13,001 |
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Prepaid reinsurance premiums | 191,669 |
| | 245,101 |
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Reinsurance balances recoverable (Note 9) | 1,183,003 |
| | 1,478,806 |
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| 792,553 |
| | 542,224 |
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Funds held by reinsured companies | 254,029 |
| | 175,383 |
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Deferred acquisition costs | 125,132 |
| | 64,984 |
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| 219,295 |
| | 180,589 |
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Other assets | 646,987 |
| | 831,320 |
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| — |
| | 24,351 |
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TOTAL ASSETS | $ | 15,121,228 |
| | $ | 13,606,422 |
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LIABILITIES | | | |
Losses and loss adjustment expenses (Note 10) | $ | 5,516,012 |
| | $ | 5,603,419 |
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| 3,019,721 |
| | 1,794,669 |
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Policy benefits for life and annuity contracts (Note 11) | 107,466 |
| | 117,207 |
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Unearned premiums | 743,024 |
| | 583,197 |
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Insurance and reinsurance balances payable | 381,114 |
| | 236,697 |
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| 14,942 |
| | 15,262 |
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| 394,470 |
| | 646,689 |
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Other liabilities | 570,474 |
| | 972,457 |
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| — |
| | 11,271 |
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TOTAL LIABILITIES | 10,747,223 |
| | 9,980,868 |
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| 458,328 |
| | 479,606 |
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Ordinary shares (par value $1 each, issued and outstanding 2018: 21,443,789; 2017: 19,406,722): |
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Voting Ordinary shares (issued and outstanding 2018: 17,934,107; 2017: 16,402,279) | 17,934 |
| | 16,402 |
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Non-voting convertible ordinary Series C Shares (issued and outstanding 2018 and 2017: 2,599,672) | 2,600 |
| | 2,600 |
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Non-voting convertible ordinary Series E Shares (issued and outstanding 2018: 910,010; 2017: 404,771) | 910 |
| | 405 |
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Preferred Shares: | | | |
Series C Preferred Shares (issued and held in treasury 2018 and 2017: 388,571) | 389 |
| | 389 |
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Series D Preferred Shares (issued and outstanding 2018: 16,000) | 400,000 |
| | — |
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Treasury shares, at cost (Series C Preferred shares 2018 and 2017: 388,571) | (421,559 | ) | | (421,559 | ) |
Additional paid-in capital | 1,812,727 |
| | 1,395,067 |
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Accumulated other comprehensive income | 9,170 |
| | 10,468 |
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Retained earnings | 2,083,193 |
| | 2,132,912 |
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Total Enstar Group Limited Shareholders’ Equity | 3,905,364 |
| | 3,136,684 |
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Noncontrolling interest | 10,313 |
| | 9,264 |
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TOTAL SHAREHOLDERS’ EQUITY | 3,915,677 |
| | 3,145,948 |
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TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY | $ | 15,121,228 |
| | $ | 13,606,422 |
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See accompanying notes to the unaudited condensed consolidated financial statements
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three and Nine Months Ended September 30, 2018 and 2017
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (expressed in thousands of U.S. dollars, except share and per share data) |
INCOME | | | | | | | |
Net premiums earned | $ | 264,597 |
| | $ | 148,025 |
| | $ | 663,628 |
| | $ | 452,494 |
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Fees and commission income | 6,950 |
| | 15,895 |
| | 23,633 |
| | 46,476 |
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Net investment income | 69,430 |
| | 52,028 |
| | 202,218 |
| | 150,184 |
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Net realized and unrealized gains (losses) | (57,223 | ) | | 29,301 |
| | (254,671 | ) | | 139,697 |
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Other income (expenses) | 11,543 |
| | (3,848 | ) | | 34,477 |
| | 19,206 |
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| 295,297 |
| | 241,401 |
| | 669,285 |
| | 808,057 |
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EXPENSES | | | | | | | |
Net incurred losses and loss adjustment expenses | 153,974 |
| | 75,712 |
| | 266,327 |
| | 163,224 |
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Life and annuity policy benefits | 423 |
| | 1,060 |
| | 217 |
| | 5,048 |
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Acquisition costs | 54,242 |
| | 24,281 |
| | 137,684 |
| | 75,457 |
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General and administrative expenses | 102,553 |
| | 100,325 |
| | 300,425 |
| | 309,283 |
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Interest expense | 4,640 |
| | 6,410 |
| | 21,573 |
| | 20,851 |
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Net foreign exchange losses | 1,040 |
| | 4,775 |
| | 1,389 |
| | 15,612 |
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Loss on sale of subsidiary | — |
| | 6,740 |
| | — |
| | 16,349 |
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| 316,872 |
| | 219,303 |
| | 727,615 |
| | 605,824 |
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EARNINGS (LOSS) BEFORE INCOME TAXES | (21,575 | ) | | 22,098 |
| | (58,330 | ) | | 202,233 |
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INCOME TAXES | (746 | ) | | (1,432 | ) | | (4,564 | ) | | (3,234 | ) |
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS | (22,321 | ) | | 20,666 |
| | (62,894 | ) | | 198,999 |
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NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | — |
| | 3,495 |
| | — |
| | (1,005 | ) |
NET EARNINGS (LOSS) | (22,321 | ) | | 24,161 |
| | (62,894 | ) | | 197,994 |
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Net loss (earnings) attributable to noncontrolling interest | 11,489 |
| | 14,832 |
| | 19,096 |
| | (14,135 | ) |
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED | (10,832 | ) | | 38,993 |
| | (43,798 | ) | | 183,859 |
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Dividends on preferred shares | (5,133 | ) | | — |
| | (5,133 | ) | | — |
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NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS | $ | (15,965 | ) | | $ | 38,993 |
| | $ | (48,931 | ) | | $ | 183,859 |
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Earnings (Loss) per ordinary share attributable to Enstar Group Limited: | | | | |
Basic: | | | | | | | |
Net earnings (loss) from continuing operations | $ | (0.74 | ) | | $ | 1.83 |
| | $ | (2.39 | ) | | $ | 9.54 |
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Net earnings (loss) from discontinued operations | — |
| | 0.18 |
| | — |
| | (0.05 | ) |
Net earnings (loss) per ordinary share | $ | (0.74 | ) | | $ | 2.01 |
| | $ | (2.39 | ) | | $ | 9.49 |
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Diluted: | | | | | | | |
Net earnings (loss) from continuing operations | $ | (0.74 | ) | | $ | 1.81 |
| | $ | (2.39 | ) | | $ | 9.47 |
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Net earnings (loss) from discontinued operations | — |
| | 0.18 |
| | — |
| | (0.05 | ) |
Net earnings (loss) per ordinary share | $ | (0.74 | ) | | $ | 1.99 |
| | $ | (2.39 | ) | | $ | 9.42 |
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Weighted average ordinary shares outstanding: | | | | | | | |
Basic | 21,440,914 |
| | 19,392,120 |
| | 20,444,634 |
| | 19,384,897 |
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Diluted | 21,665,356 |
| | 19,559,168 |
| | 20,653,544 |
| | 19,515,987 |
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See accompanying notes to the unaudited condensed consolidated financial statements
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (expressed in thousands of U.S. dollars) |
NET EARNINGS (LOSS) | $ | (22,321 | ) | | $ | 24,161 |
| | $ | (62,894 | ) | | $ | 197,994 |
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Other comprehensive income, net of tax: | | | | | | | |
Unrealized holding gains (losses) on fixed income available-for-sale investments arising during the period | (1,310 | ) | | 2,219 |
| | (3,007 | ) | | 4,598 |
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Reclassification adjustment for net realized gains (losses) included in net earnings | 2 |
| | (3 | ) | | 53 |
| | (254 | ) |
Unrealized gains (losses) arising during the period, net of reclassification adjustments | (1,308 | ) | | 2,216 |
| | (2,954 | ) | | 4,344 |
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Change in currency translation adjustment | (143 | ) | | 4,194 |
| | 1,258 |
| | 8,451 |
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Reclassification to earnings on disposal of subsidiary | — |
| | 7,440 |
| | — |
| | 7,440 |
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Total currency translation adjustment | (143 | ) | | 11,634 |
| | 1,258 |
| | 15,891 |
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Total other comprehensive income (loss) | (1,451 | ) | | 13,850 |
| | (1,696 | ) | | 20,235 |
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Comprehensive income (loss) | (23,772 | ) | | 38,011 |
| | (64,590 | ) | | 218,229 |
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Comprehensive (income) loss attributable to noncontrolling interest | 11,505 |
| | 14,432 |
| | 19,494 |
| | (15,983 | ) |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED | $ | (12,267 | ) | | $ | 52,443 |
| | $ | (45,096 | ) | | $ | 202,246 |
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See accompanying notes to the unaudited condensed consolidated financial statements
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2018 and 2017 |
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| Nine Months Ended September 30, |
| 2018 | | 2017 |
| (expressed in thousands of U.S. dollars) |
Share Capital — Voting Ordinary Shares | | | |
Balance, beginning of period | $ | 16,402 |
| | $ | 16,175 |
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Issue of shares | 1,532 |
| | 24 |
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Conversion of Series C Non-Voting Convertible Ordinary Shares | — |
| | 192 |
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Balance, end of period | $ | 17,934 |
| | $ | 16,391 |
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Share Capital — Series C Non-Voting Convertible Ordinary Shares | | | |
Balance, beginning of period | $ | 2,600 |
| | $ | 2,792 |
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Conversion to Ordinary Shares | — |
| | (192 | ) |
Balance, end of period | $ | 2,600 |
| | $ | 2,600 |
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Share Capital — Series E Non-Voting Convertible Ordinary Shares | | | |
Balance, beginning of period | $ | 405 |
| | $ | 405 |
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Issue of shares | 505 |
| | — |
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Balance, end of period | $ | 910 |
| | $ | 405 |
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Share Capital — Series C Convertible Participating Non-Voting Perpetual Preferred Shares | | | |
Balance, beginning and end of period | $ | 389 |
| | $ | 389 |
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Share Capital — Series D Perpetual Noncumulative Preferred Shares | | | |
Balance, beginning of period | $ | — |
| | $ | — |
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Issue of shares | 400,000 |
| | — |
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Balance, end of period | $ | 400,000 |
| | $ | — |
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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 |
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Issue of voting ordinary shares | 413,679 |
| | 647 |
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Issuance costs of Series D preferred shares | (10,781 | ) | | — |
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Amortization of share-based compensation | 14,762 |
| | 10,473 |
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Balance, end of period | $ | 1,812,727 |
| | $ | 1,391,229 |
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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 | 1,270 |
| | 8,440 |
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Reclassification to earnings on disposal of subsidiary | — |
| | 7,440 |
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Balance, end of period | 12,441 |
| | (3,113 | ) |
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 |
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Change in unrealized gains (losses) on available-for-sale investments | (2,568 | ) | | 2,508 |
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Balance, end of period | (128 | ) | | 2,596 |
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Balance, end of period | $ | 9,170 |
| | $ | (5,161 | ) |
Retained Earnings | | | |
Balance, beginning of period | $ | 2,132,912 |
| | $ | 1,847,550 |
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Net earnings (losses) attributable to Enstar Group Limited | (62,894 | ) | | 197,994 |
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Net loss (earnings) attributable to noncontrolling interest | 19,096 |
| | (14,135 | ) |
Dividends on preferred shares | (5,133 | ) | | — |
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Change in redemption of redeemable noncontrolling interests | 785 |
| | 760 |
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Cumulative effect of change in accounting principle | (1,573 | ) | | 4,882 |
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Balance, end of period | $ | 2,083,193 |
| | $ | 2,037,051 |
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Noncontrolling Interest (excludes Redeemable Noncontrolling Interest) | | | |
Balance, beginning of period | $ | 9,264 |
| | $ | 8,520 |
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Contribution of capital | 49 |
| | 22 |
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Net earnings attributable to noncontrolling interest | 1,000 |
| | 1,945 |
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Balance, end of period | $ | 10,313 |
| | $ | 10,487 |
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See accompanying notes to the unaudited condensed consolidated financial statements
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017 |
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| Nine Months Ended September 30, |
| 2018 | | 2017 |
| (expressed in thousands of U.S. dollars) |
OPERATING ACTIVITIES: | | | |
Net earnings (loss) | $ | (62,894 | ) | | $ | 197,994 |
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Net loss from discontinued operations | — |
| | 1,005 |
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Adjustments to reconcile net earnings (losses) to cash flows used in operating activities: | | | |
Realized losses (gains) on sale of investments | 15,794 |
| | (5,012 | ) |
Unrealized losses (gains) on investments | 190,598 |
| | (108,011 | ) |
Depreciation and other amortization | 25,276 |
| | 28,925 |
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Net change in trading securities held on behalf of policyholders | — |
| | 25,597 |
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Sales and maturities of trading securities | 3,380,333 |
| | 4,111,406 |
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Purchases of trading securities | (4,081,938 | ) | | (5,611,677 | ) |
Net loss on sale of subsidiary | — |
| | 16,349 |
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Other non-cash items | 12,978 |
| | 10,544 |
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Changes in: | | | |
Reinsurance balances recoverable | (305,434 | ) | | (628,654 | ) |
Funds held by reinsured companies | (115,888 | ) | | (206,985 | ) |
Losses and loss adjustment expenses | 1,103,802 |
| | 1,590,764 |
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Policy benefits for life and annuity contracts | (5,928 | ) | | 170 |
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Insurance and reinsurance balances payable | 144,805 |
| | (140,356 | ) |
Unearned premiums | 159,827 |
| | 20,330 |
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Other operating assets and liabilities | (370,376 | ) | | 215,365 |
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Net cash flows provided by (used in) operating activities | 90,955 |
| | (482,246 | ) |
INVESTING ACTIVITIES: | | | |
Acquisitions, net of cash acquired | 2,317 |
| | (670 | ) |
Sale of subsidiary, net of cash sold | — |
| | 19,690 |
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Sales and maturities of available-for-sale securities | 48,889 |
| | 60,202 |
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Purchase of available-for-sale securities | (10,385 | ) | | (2,565 | ) |
Purchase of other investments | (784,316 | ) | | (98,203 | ) |
Redemption of other investments | 340,298 |
| | 202,581 |
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Other investing activities | (8,155 | ) | | (16,831 | ) |
Net cash flows provided by (used in) investing activities | (411,352 | ) | | 164,204 |
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FINANCING ACTIVITIES: | | | |
Issuance of preferred shares, net of issuance costs | 389,219 |
| | — |
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Dividends on preferred shares | (5,133 | ) | | — |
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Contribution by noncontrolling interest | 49 |
| | 22 |
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Dividends paid to noncontrolling interest | — |
| | (27,458 | ) |
Receipt of loans | 441,022 |
| | 534,100 |
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Repayment of loans | (689,819 | ) | | (564,203 | ) |
Net cash flows provided by (used in) financing activities | 135,338 |
| | (57,539 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS | 232 |
| | 6,292 |
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NET DECREASE IN CASH AND CASH EQUIVALENTS | (184,827 | ) | | (369,289 | ) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 1,212,836 |
| | 1,318,645 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 1,028,009 |
| | $ | 949,356 |
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Supplemental Cash Flow Information: | | | |
Income taxes paid, net of refunds | $ | 16,268 |
| | $ | 11,107 |
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Interest paid | $ | 24,618 |
| | $ | 18,043 |
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| | | |
Reconciliation to Consolidated Balance Sheets: | | | |
Cash and cash equivalents | 553,419 |
| | 624,451 |
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Restricted cash and cash equivalents | 474,590 |
| | 324,905 |
|
Cash, cash equivalents and restricted cash | $ | 1,028,009 |
| | $ | 949,356 |
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See accompanying notes to the unaudited condensed consolidated financial statements
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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
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. 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.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP 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. Our 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. Accounting policies that we believe are most dependent on assumptions and estimates are considered to be our critical accounting policies and are related to the determination of:
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• | liability for losses and loss adjustment expenses ("LAE"); |
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• | liability for policy benefits for life contracts; |
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• | reinsurance balances recoverable; |
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• | gross and net premiums written and net premiums earned; |
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• | impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale, and impairments on goodwill, intangible assets and deferred charges; |
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• | fair value measurements of investments; |
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• | fair value estimates associated with accounting for acquisitions; |
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• | fair value estimates associated with loss portfolio transfer reinsurance agreements for which we have elected the fair value option; and |
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• | 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
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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.
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 nine months ended September 30, 2018 or thereafter and are yet to be adopted.
ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued ASU 2018-17, which clarifies that when determining whether a decision-making fee is a variable interest, a reporting entity should consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety, as currently required in GAAP. This amendment will, (1) likely result in more decision makers not having a variable interest through their decision-making arrangements, and (2) create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a variable interest entity ("VIE"). The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. All entities are required to apply this guidance retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. While some of our subsidiaries are involved in certain decision-making arrangements for which they earn fees that are considered variable interests, they do not meet the primary beneficiary definition under the VIE guidance with respect to these arrangements.
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Therefore, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and the related disclosures.
ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance in ASC 820 - Fair Value Measurement, by removing and modifying certain existing disclosure requirements, while also adding new disclosure requirements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted, with the amendments being applied either prospectively or retrospectively, as specified in the ASU. In addition, an entity may elect to early adopt the removal or modification of disclosures immediately and delay the adoption of the new disclosure requirements until the effective date. We are currently assessing the impact of adopting this guidance however we do not expect the new or modified disclosures to have a material impact on the disclosures in our consolidated financial statements.
ASU 2018-12, Targeted Improvements to the Accounting for Certain Long-Duration Insurance Contracts
In August 2018, the FASB issued ASU 2018-12, which amends the accounting and disclosure model for certain long-duration insurance contracts under U.S GAAP. The goal of the ASU's amendments is to improve the following aspects of financial reporting related to long-duration insurance contracts: (1) measurement of the liability for future policy benefits related to non-participating traditional and limited-payment contracts, (2) measurement and presentation of market risk benefits, (3) amortization of deferred acquisition costs, and (4) presentation and disclosures. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020, although early adoption is permitted. Once the transfer of our remaining life insurance policies from our subsidiary Alpha Insurance SA to Monument Insurance Group Limited is completed, as discussed in Note 11 - "Policy Benefits for Life Contracts", we will not have any residual exposures relating to long duration insurance contracts. Therefore, the adoption of this guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
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.
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. Being a financial services company, the majority of our operating leases cover office space and facilities required to conduct our operations. Therefore on adoption of the leases guidance, we do not expect the right-of-use asset and the corresponding lease liability to be recorded relating to these operating lease arrangements, to be material as a proportion of our total assets and liabilities. In addition, the leases guidance is not expected to have a significant impact on the net lease expense that we will recognize in our consolidated statements of earnings as a result of our operating lease arrangements.
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
Maiden Re North America
On August 31, 2018, we entered into a definitive agreement to acquire Maiden Reinsurance North America, Inc. (“Maiden Re North America”) from a subsidiary of Maiden Holdings, Ltd. Maiden Re North America is a diversified insurance company domiciled in Missouri that provides property and casualty treaty reinsurance, casualty facultative reinsurance and accident and health treaty reinsurance. As part of the transaction, we will novate and assume certain reinsurance agreements from Maiden Re North America's Bermuda reinsurer, including certain reinsurance agreements with Maiden Re North America.
The net consideration payable in the transaction is $307.5 million, subject to certain closing adjustments. We will assume approximately $1.3 billion of net loss and loss adjustment expense reserves and unearned premium reserves upon closing.
We will operate the business in run-off, and we expect to finance the purchase price through a combination of cash on hand and borrowings under our revolving credit facility. Completion of the transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close in the fourth quarter of 2018.
KaylaRe
Overview
On May 14, 2018, we 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, we 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.
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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 we remeasured the previously held equity method investment to fair value. We 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) during the three 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
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 months ended June 30, 2018, as summarized below:
|
| | | | | | | | | | | |
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 |
|
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 September 30, 2018:
|
| | | | |
Premiums earned | | $ | 10,188 |
|
Incurred losses and LAE | | (9,190 | ) |
Acquisition costs | | (332 | ) |
Underwriting income | | 666 |
|
Net investment income | | 1,972 |
|
Net unrealized gains | | (6,621 | ) |
General and administrative expenses | | (573 | ) |
Net loss | | $ | (4,556 | ) |
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. SIGNIFICANT NEW BUSINESS
Coca-Cola
On August 1, 2018, we entered into a reinsurance transaction with The Coca-Cola Company and its subsidiaries ("Coca-Cola"), pursuant to which we reinsured certain of Coca-Cola's retention and deductible risks under its subsidiaries' U.S. workers' compensation, auto liability, general liability and product liability insurance coverage. We assumed total gross reserves of $120.8 million for cash consideration of $103.6 million and recorded a deferred charge of $17.2 million, included in other assets. We transferred the cash consideration received of $103.6 million into a trust to support our obligations under the reinsurance agreement.
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 completed a 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.
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. DIVESTITURES, HELD-FOR-SALE BUSINESSES AND DISCONTINUED OPERATIONS
Pavonia
On December 29, 2017, we completed the previously announced sale of our 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. We 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 us and Southland, which partially restructured the transaction, Southland has agreed to acquire Pavonia Life Insurance Company of New York ("PLIC NY") for $13.1 million in a second closing that is subject to regulatory approval. In the event that the second closing has not occurred by December 29, 2018 (unless further extended by the parties), we will evaluate strategic alternatives for PLIC NY, which may include the pursuit of an alternative sale transaction or a plan to retain the business. 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.
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 September 30, 2018, included within Other assets and Other liabilities on our consolidated balance sheet were amounts of $23.3 million and $10.3 million, respectively, relating to PLIC NY.
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Pavonia business qualified as a discontinued operation during the three and nine months ended September 30, 2017. The following table summarizes the components of net earnings from discontinued operations on the unaudited condensed consolidated statements of earnings for the three and nine months ended September 30, 2017:
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2017 | | 2017 |
INCOME | | | |
Net premiums earned | $ | 14,082 |
| | $ | 42,012 |
|
Net investment income | 10,077 |
| | 30,383 |
|
Net realized and unrealized gains (losses) | (233 | ) | | 2,543 |
|
Other income | 384 |
| | 1,139 |
|
| 24,310 |
| | 76,077 |
|
EXPENSES | | | |
Life and annuity policy benefits | 15,320 |
| | 60,102 |
|
Acquisition costs | 2,412 |
| | 6,728 |
|
General and administrative expenses | 2,809 |
| | 9,584 |
|
Other expenses | 4 |
| | (12 | ) |
| 20,545 |
| | 76,402 |
|
EARNINGS (LOSSES) BEFORE INCOME TAXES | 3,765 |
| | (325 | ) |
INCOME TAXES | (270 | ) | | (680 | ) |
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS | $ | 3,495 |
| | $ | (1,005 | ) |
The following table presents the cash flows of Pavonia for the nine months ended September 30, 2017:
|
| | | |
| Nine Months Ended September 30, |
| 2017 |
Operating activities | $ | 42,558 |
|
Investing activities | 8,129 |
|
Change in cash of businesses held-for-sale | $ | 50,687 |
|
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 nine months ended September 30, 2017 were $0.9 million and $1.1 million, respectively. These amounts were not significant to our consolidated operations and therefore we did not classify Laguna as a discontinued operation for prior periods. Following the closing of the sale of Laguna, we recorded a loss on sale of subsidiary of $6.7 million and $16.3 million for the three and nine months ended September 30, 2017, respectively, 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 of $16.3 million 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.
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
U.S. government and agency | $ | 493,080 |
| | $ | 554,036 |
|
Non-U.S. government | 1,018,212 |
| | 607,132 |
|
Corporate | 3,703,029 |
| | 3,363,060 |
|
Municipal | 76,599 |
| | 100,221 |
|
Residential mortgage-backed | 275,485 |
| | 288,713 |
|
Commercial mortgage-backed | 411,575 |
| | 421,548 |
|
Asset-backed | 567,300 |
| | 541,574 |
|
Total fixed maturity and short-term investments | 6,545,280 |
| | 5,876,284 |
|
Equities — U.S. | 72,765 |
| | 106,363 |
|
Equities — International | 57,549 |
| | 240 |
|
| $ | 6,675,594 |
| | $ | 5,982,887 |
|
Included within residential and commercial mortgage-backed securities as at September 30, 2018 were securities issued by U.S. governmental agencies with a fair value of $147.3 million (as at December 31, 2017: $152.4 million). Included within corporate securities as at September 30, 2018 were senior secured loans of $24.3 million (as at December 31, 2017: $68.9 million).
The contractual maturities of our fixed maturity and short-term investments classified as trading are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
| | | | | | | | | | | |
As at September 30, 2018 | | Amortized Cost | | Fair Value | | % of Total Fair Value |
One year or less | | $ | 428,656 |
| | $ | 424,195 |
| | 6.5 | % |
More than one year through two years | | 544,754 |
| | 531,717 |
| | 8.1 | % |
More than two years through five years | | 1,641,037 |
| | 1,601,237 |
| | 24.4 | % |
More than five years through ten years | | 1,506,829 |
| | 1,464,185 |
| | 22.4 | % |
More than ten years | | 1,301,979 |
| | 1,269,586 |
| | 19.4 | % |
Residential mortgage-backed | | 274,833 |
| | 275,485 |
| | 4.2 | % |
Commercial mortgage-backed | | 423,471 |
| | 411,575 |
| | 6.3 | % |
Asset-backed | | 567,538 |
| | 567,300 |
| | 8.7 | % |
| | $ | 6,689,097 |
| | $ | 6,545,280 |
| | 100.0 | % |
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Available-for-sale
The amortized cost and fair values of our fixed maturity investments classified as available-for-sale were as follows:
|
| | | | | | | | | | | | | | | | |
As at September 30, 2018 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses (Non-OTTI) | | Fair Value |
U.S. government and agency | | $ | 703 |
| | $ | — |
| | $ | (5 | ) | | $ | 698 |
|
Non-U.S. government | | 75,741 |
| | 851 |
| | (1,036 | ) | | 75,556 |
|
Corporate | | 83,836 |
| | 1,085 |
| | (1,413 | ) | | 83,508 |
|
Municipal | | 3,401 |
| | — |
| | (34 | ) | | 3,367 |
|
Residential mortgage-backed | | 15 |
| | — |
| | — |
| | 15 |
|
| | $ | 163,696 |
| | $ | 1,936 |
| | $ | (2,488 | ) | | $ | 163,144 |
|
|
| | | | | | | | | | | | | | | | |
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.
|
| | | | | | | | | | | |
As at September 30, 2018 | | Amortized Cost | | Fair Value | | % of Total Fair Value |
One year or less | | $ | 18,265 |
| | $ | 17,641 |
| | 10.8 | % |
More than one year through two years | | 26,556 |
| | 26,332 |
| | 16.2 | % |
More than two years through five years | | 31,604 |
| | 31,634 |
| | 19.4 | % |
More than five years through ten years | | 55,804 |
| | 55,818 |
| | 34.2 | % |
More than ten years | | 31,452 |
| | 31,704 |
| | 19.4 | % |
Residential mortgage-backed | | 15 |
| | 15 |
| | — | % |
| | $ | 163,696 |
| | $ | 163,144 |
| | 100.0 | % |
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 September 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 | | $ | 698 |
| | $ | (5 | ) | | $ | — |
| | $ | — |
| | $ | 698 |
| | $ | (5 | ) |
Non-U.S. government | | 4,233 |
| | (406 | ) | | 21,719 |
| | (630 | ) | | 25,952 |
| | (1,036 | ) |
Corporate | | 8,562 |
| | (917 | ) | | 33,808 |
| | (496 | ) | | 42,370 |
| | (1,413 | ) |
Municipal | | 617 |
| | (12 | ) | | 2,750 |
| | (22 | ) | | 3,367 |
| | (34 | ) |
Total fixed maturity investments | | $ | 14,110 |
| | $ | (1,340 | ) | | $ | 58,277 |
| | $ | (1,148 | ) | | $ | 72,387 |
| | $ | (2,488 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 September 30, 2018 and December 31, 2017, the number of securities classified as available-for-sale in an unrealized loss position was 103 and 96, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 33 and 37, respectively.
Other-Than-Temporary Impairment
For the nine months ended September 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 September 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 nine months ended September 30, 2018.
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Credit Ratings
The following table sets forth the credit ratings of our fixed maturity (including both trading and available-for-sale investments) and short-term investments as at September 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 | | $ | 502,168 |
| | $ | 493,778 |
| | 7.4 | % | | $ | 489,939 |
| | $ | 3,839 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Non-U.S. government | | 1,109,697 |
| | 1,093,768 |
| | 16.3 | % | | 340,583 |
| | 541,087 |
| | 65,286 |
| | 121,197 |
| | 25,615 |
| | — |
|
Corporate | | 3,893,368 |
| | 3,786,537 |
| | 56.4 | % | | 154,961 |
| | 445,858 |
| | 1,986,880 |
| | 1,016,401 |
| | 180,730 |
| | 1,707 |
|
Municipal | | 81,703 |
| | 79,966 |
| | 1.2 | % | | 8,739 |
| | 53,094 |
| | 14,277 |
| | 3,856 |
| | — |
| | — |
|
Residential mortgage-backed | | 274,848 |
| | 275,500 |
| | 4.1 | % | | 163,190 |
| | 2,526 |
| | 11,331 |
| | 1,540 |
| | 92,180 |
| | 4,733 |
|
Commercial mortgage-backed | | 423,471 |
| | 411,575 |
| | 6.1 | % | | 210,902 |
| | 47,118 |
| | 70,164 |
| | 60,296 |
| | 9,936 |
| | 13,159 |
|
Asset-backed | | 567,538 |
| | 567,300 |
| | 8.5 | % | | 237,239 |
| | 46,971 |
| | 115,349 |
| | 73,415 |
| | 93,918 |
| | 408 |
|
Total | | $ | 6,852,793 |
| | $ | 6,708,424 |
| | 100.0 | % | | $ | 1,605,553 |
| | $ | 1,140,493 |
| | $ | 2,263,287 |
| | $ | 1,276,705 |
| | $ | 402,379 |
| | $ | 20,007 |
|
% of total fair value | | | | | | | | 23.9 | % | | 17.0 | % | | 33.8 | % | | 19.0 | % | | 6.0 | % | | 0.3 | % |
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
|
| | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
Private equities and private equity funds | | $ | 256,618 |
| | $ | 289,556 |
|
Fixed income funds | | 383,328 |
| | 229,999 |
|
Hedge funds | | 879,571 |
| | 63,773 |
|
Equity funds | | 381,983 |
| | 249,475 |
|
CLO equities | | 48,368 |
| | 56,765 |
|
CLO equity fund | | 41,501 |
| | 12,840 |
|
Private credit funds | | 39,751 |
| | 10,156 |
|
Call options on equity | | 4,590 |
| | — |
|
Other | | 720 |
| | 828 |
|
| | $ | 2,036,430 |
| | $ | 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. One of our funds has a lock-up period of up to two years and is eligible for quarterly redemptions thereafter with 65 days notice. All other funds have liquidity terms that vary from daily up to 45 day's notice. Investments of $0.3 million in fixed income funds were subject to gates or side-pockets, where |
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
| |
• | 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 terms, predominantly 60 and 90 days. Certain of our hedge funds which are past their lock up periods 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 $41.5 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 September 30, 2018 was primarily attributable to $626.5 million of other investments acquired as part of the KaylaRe acquisition and net additional subscriptions of $538.1 million.
As at September 30, 2018, we had unfunded commitments to private equity funds 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 nine months ended September 30, 2018 and 2017, net investment income included $6.5 million and $10.6 million, respectively, related to investments in life settlements. There were impairment charges of $6.6 million and $7.5 million recognized in net realized and unrealized gains/losses during the nine months ended September 30, 2018 and 2017, respectively, related to investments in life settlements.
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 nine months ended September 30, 2018 and 2017 are summarized as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Fixed maturity investments | $ | 48,062 |
| | $ | 37,931 |
| | $ | 140,097 |
| | $ | 102,002 |
|
Short-term investments and cash and cash equivalents | 3,247 |
| | 2,048 |
| | 8,425 |
| | 7,489 |
|
Funds held | 1,502 |
| | 247 |
| | 8,651 |
| | 597 |
|
Funds held - directly managed | 9,776 |
| | 8,516 |
| | 27,990 |
| | 24,121 |
|
Investment income from fixed maturities and cash and cash equivalents | 62,587 |
| | 48,742 |
| | 185,163 |
| | 134,209 |
|
Equity securities | 946 |
| | 1,344 |
| | 3,788 |
| | 3,207 |
|
Other investments | 8,324 |
| | 3,120 |
| | 14,600 |
| | 10,016 |
|
Life settlements and other | — |
| | 1,443 |
| | 6,509 |
| | 11,026 |
|
Investment income from equities and other investments | 9,270 |
| | 5,907 |
| | 24,897 |
| | 24,249 |
|
Gross investment income | 71,857 |
| | 54,649 |
| | 210,060 |
| | 158,458 |
|
Investment expenses | (2,427 | ) | | (2,621 | ) | | (7,842 | ) | | (8,274 | ) |
Net investment income | $ | 69,430 |
| | $ | 52,028 |
| | $ | 202,218 |
| | $ | 150,184 |
|
Net Realized and Unrealized Gains and Losses
Components of net realized and unrealized gains and losses for the three and nine months ended September 30, 2018 and 2017 were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Net realized gains (losses) on sale: | | | | | | | | |
Gross realized gains on fixed maturity securities, available-for-sale | | $ | — |
| | $ | 8 |
| | $ | 27 |
| | $ | 345 |
|
Gross realized losses on fixed maturity securities, available-for-sale | | (2 | ) | | (5 | ) | | (80 | ) | | (91 | ) |
Net realized gains (losses) on fixed maturity securities, trading | | (8,797 | ) | | 4,595 |
| | (19,310 | ) | | 3,608 |
|
Net realized gains on equity securities, trading | | 666 |
| | 340 |
| | 3,569 |
| | 1,150 |
|
Net realized gains (losses) on funds held - directly managed | | (1,904 | ) | | 422 |
| | (2,849 | ) | | (3,720 | ) |
Total net realized gains (losses) on sale | | $ | (10,037 | ) | | $ | 5,360 |
| | $ | (18,643 | ) | | $ | 1,292 |
|
Net unrealized gains (losses): | | | | | | | | |
Fixed maturity securities, trading | | $ | (13,423 | ) | | $ | (10,747 | ) | | $ | (159,691 | ) | | $ | 23,795 |
|
Equity securities, trading | | 1,830 |
| | 2,652 |
| | 6,152 |
| | 13,209 |
|
Other Investments | | (35,188 | ) | | 27,802 |
| | (37,059 | ) | | 71,007 |
|
Change in fair value of embedded derivative on funds held – directly managed | | (182 | ) | | 3,967 |
| | (41,107 | ) | | 28,807 |
|
Change in value of fair value option on funds held - directly managed | | (223 | ) | | 267 |
| | (4,323 | ) | | 1,587 |
|
Total net unrealized gains (losses) | | (47,186 | ) | | 23,941 |
| | (236,028 | ) | | 138,405 |
|
Net realized and unrealized gains (losses) | | $ | (57,223 | ) | | $ | 29,301 |
| | $ | (254,671 | ) | | $ | 139,697 |
|
The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $0.4 million and $5.9 million for the three months ended September 30, 2018 and 2017, respectively, and $10.9 million and $27.5 million for the nine months ended September 30, 2018 and 2017, respectively.
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 $474.6 million and $257.7 million, as at September 30, 2018 and December 31, 2017, respectively, was as follows:
|
| | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
Collateral in trust for third party agreements | | $ | 3,354,994 |
| | $ | 3,118,892 |
|
Assets on deposit with regulatory authorities | | 563,139 |
| | 599,829 |
|
Collateral for secured letter of credit facilities | | 134,286 |
| | 151,467 |
|
Funds at Lloyd's (1) | | 422,657 |
| | 234,833 |
|
| | $ | 4,475,076 |
| | $ | 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 September 30, 2018, our combined Funds at Lloyd's were comprised of cash and investments of $422.7 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 September 30, 2018 and December 31, 2017, the funds held at cost had a carrying value of $1,074.1 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 $1,037.8 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. |
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 September 30, 2018 and December 31, 2017:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Fixed maturity investme |