10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
Commission File Number 001-33289

ENSTAR GROUP LIMITED
(Exact name of Registrant as specified in its charter)
BERMUDA
N/A
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

Windsor Place, 3rd Floor, 22 Queen Street, Hamilton HM JX, Bermuda
(Address of principal executive offices, including zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of May 6, 2016, the registrant had outstanding 16,213,824 voting ordinary shares and 3,130,408 non-voting convertible ordinary shares, each par value $1.00 per share.
 

Table of Contents



Enstar Group Limited
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2016

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
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2016 and December 31, 2015
 
March 31,
2016
 
December 31,
2015
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
128,925

 
$
87,350

Short-term investments, available-for-sale, at fair value (amortized cost: 2016 — $7,689; 2015 — $8,630)
7,687

 
8,622

Fixed maturities, trading, at fair value
5,072,003

 
4,990,794

Fixed maturities, held-to-maturity, at amortized cost
788,190

 
790,866

Fixed maturities, available-for-sale, at fair value (amortized cost: 2016 — $282,345; 2015 — $300,160)
282,800

 
293,679

Equities, trading, at fair value
118,260

 
115,941

Other investments, at fair value
953,991

 
1,034,032

Other investments, at cost
131,168

 
133,071

Total investments
7,483,024

 
7,454,355

Cash and cash equivalents
746,053

 
821,925

Restricted cash and cash equivalents
506,941

 
511,339

Premiums receivable
418,407

 
381,412

Deferred tax assets
118,459

 
121,035

Prepaid reinsurance premiums
143,868

 
121,427

Reinsurance balances recoverable
1,402,216

 
1,474,004

Funds held by reinsured companies
1,195,138

 
109,358

Deferred acquisition costs
98,740

 
89,123

Goodwill and intangible assets
187,888

 
191,304

Other assets
549,616

 
556,850

TOTAL ASSETS
$
12,850,350

 
$
11,832,132

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses
$
6,641,507

 
$
5,720,149

Policy benefits for life and annuity contracts
1,299,123

 
1,304,697

Unearned premiums
567,453

 
542,771

Insurance and reinsurance balances payable
285,374

 
274,598

Deferred tax liabilities
92,846

 
92,588

Loans payable
580,614

 
600,250

Other liabilities
372,653

 
358,633

TOTAL LIABILITIES
9,839,570

 
8,893,686

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST
429,126

 
417,663

 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Share capital authorized, issued and fully paid, par value $1 each (authorized 2016 and 2015: 156,000,000):

 

Ordinary shares (issued and outstanding 2016: 16,163,284; 2015: 16,133,334)
16,163

 
16,133

Non-voting convertible ordinary shares:
 
 
 
Series A (issued 2016: 2,972,892; 2015: 2,972,892)
2,973

 
2,973

Series C (issued and outstanding 2016: 2,725,637; 2015: 2,725,637)
2,726

 
2,726

Series E (issued and outstanding 2016: 404,771; 2015: 404,771)
405

 
405

Treasury shares at cost (Series A non-voting convertible ordinary shares 2016 and 2015: 2,972,892)
(421,559
)
 
(421,559
)
Additional paid-in capital
1,373,203

 
1,373,044

Accumulated other comprehensive loss
(19,104
)
 
(35,162
)
Retained earnings
1,622,957

 
1,578,312

Total Enstar Group Limited Shareholders’ Equity
2,577,764

 
2,516,872

Noncontrolling interest
3,890

 
3,911

TOTAL SHAREHOLDERS’ EQUITY
2,581,654

 
2,520,783

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
12,850,350

 
$
11,832,132


See accompanying notes to the unaudited condensed consolidated financial statements

1
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 2016 and 2015
 
 
Three Months Ended
March 31,
 
2016
 
2015
 
(expressed in thousands of U.S.
dollars, except share and per share data)
INCOME
 
 
 
Net premiums earned
$
209,409

 
$
198,906

Fees and commission income
5,347

 
11,480

Net investment income
60,063

 
30,415

Net realized and unrealized gains (losses)
37,964

 
43,020

Other income
2,413

 
3,478

 
315,196

 
287,299

EXPENSES
 
 
 
Net incurred losses and loss adjustment expenses
83,218

 
70,136

Life and annuity policy benefits
20,980

 
22,847

Acquisition costs
47,265

 
34,550

Salaries and benefits
57,560

 
57,772

General and administrative expenses
36,886

 
38,826

Interest expense
5,401

 
4,003

Net foreign exchange losses (gains)
1,772

 
(5,071
)
 
253,082

 
223,063

EARNINGS BEFORE INCOME TAXES
62,114

 
64,236

INCOME TAXES
(7,509
)
 
(10,744
)
NET EARNINGS
54,605

 
53,492

Less: Net earnings attributable to noncontrolling interest
(9,085
)
 
(8,645
)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
45,520

 
$
44,847

EARNINGS PER SHARE — BASIC
 
 
 
Net earnings per ordinary share attributable to Enstar Group Limited shareholders
$
2.36

 
$
2.33

EARNINGS PER SHARE — DILUTED
 
 
 
Net earnings per ordinary share attributable to Enstar Group Limited shareholders
$
2.35

 
$
2.32

Weighted average ordinary shares outstanding — basic
19,282,946

 
19,237,461

Weighted average ordinary shares outstanding — diluted
19,408,894

 
19,334,637


See accompanying notes to the unaudited condensed consolidated financial statements


2
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2016 and 2015
 
 
Three Months Ended
March 31,
 
2016
 
2015
 
(expressed in thousands of U.S. dollars, except share data)
NET EARNINGS
$
54,605

 
$
53,492

Other comprehensive income, net of tax:
 
 
 
Unrealized holding gains (losses) on fixed income investments arising during the period
6,920

 
(4,356
)
Reclassification adjustment for net realized losses (gains) included in net earnings
22

 
(106
)
Unrealized gains (losses) arising during the period, net of reclassification adjustment
6,942

 
(4,462
)
Currency translation adjustment
10,595

 
(15,886
)
Total other comprehensive income (loss)
17,537

 
(20,348
)
Comprehensive income
72,142

 
33,144

Less comprehensive income attributable to noncontrolling interest
(10,566
)
 
(5,636
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
61,576

 
$
27,508


See accompanying notes to the unaudited condensed consolidated financial statements


3
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2016 and 2015
 
Three Months Ended
March 31,
 
2016
 
2015
 
(expressed in thousands of U.S. dollars)
Share Capital — Ordinary Shares
 
 
 
Balance, beginning of period
$
16,133

 
$
15,761

Issue of shares
30

 
50

Balance, end of period
$
16,163

 
$
15,811

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

 
$
2,973

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

 
$
2,726

Share Capital — Series E Non-Voting Convertible Ordinary Shares
 
 
 
Balance, beginning and end of period
$
405

 
$
714

Treasury Shares
 
 
 
Balance, beginning and end of period
$
(421,559
)
 
$
(421,559
)
Additional Paid-in Capital
 
 
 
Balance, beginning of period
$
1,373,044

 
$
1,321,715

Issue of shares and warrants
(79
)
 
449

Amortization of equity incentive plan
238

 
1,318

Balance, end of period
$
1,373,203

 
$
1,323,482

Accumulated Other Comprehensive Income (Loss)
 
 
 
Balance, beginning of period
$
(35,162
)
 
$
(12,686
)
Currency translation adjustment
 
 
 
Balance, beginning of period
(23,790
)
 
(2,779
)
Change in currency translation adjustment
10,595

 
(14,180
)
Balance, end of period
(13,195
)
 
(16,959
)
Defined benefit pension liability
 
 
 
Balance, beginning and end of period
(7,723
)
 
(7,726
)
Unrealized gains (losses) on investments
 
 
 
Balance, beginning of period
(3,649
)
 
(2,181
)
Change in unrealized losses on investments
5,463

 
(3,159
)
Balance, end of period
1,814

 
(5,340
)
Balance, end of period
$
(19,104
)
 
$
(30,025
)
Retained Earnings
 
 
 
Balance, beginning of period
$
1,578,312

 
$
1,395,206

Net earnings attributable to Enstar Group Limited
45,520

 
44,847

Accretion of redeemable noncontrolling interests to redemption value
(875
)
 
—

Balance, end of period
$
1,622,957

 
$
1,440,053

Noncontrolling Interest (excludes redeemable noncontrolling interests)
 
 
 
Balance, beginning of period
$
3,911

 
$
217,970

Net earnings (loss) attributable to noncontrolling interest
(21
)
 
(920
)
Foreign currency translation adjustments
—

 
(1,891
)
Net movement in unrealized holding losses on investments
—

 
(120
)
Balance, end of period
$
3,890

 
$
215,039

 

 See accompanying notes to the unaudited condensed consolidated financial statements

4
Table of Contents


ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2016 and 2015
 
Three Months Ended
March 31,
 
2016
 
2015
 
(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings
$
54,605

 
$
53,492

Adjustments to reconcile net earnings to cash flows provided by (used in) operating activities:
 
 
 
Realized losses (gains) on sale of investments
1,417

 
(12,689
)
Unrealized losses (gains) on investments
(39,381
)
 
(30,331
)
Other non-cash items
1,053

 
2,773

Depreciation and other amortization
13,629

 
14,024

Net change in trading securities held on behalf of policyholders
(1,093
)
 
1,580

Sales and maturities of trading securities
655,590

 
926,919

Purchases of trading securities
(732,815
)
 
(1,187,652
)
Changes in:
 
 
 
Reinsurance balances recoverable
72,596

 
36,691

Funds held by reinsured companies
(4,255
)
 
18,552

Losses and loss adjustment expenses
(165,467
)
 
(34,221
)
Policy benefits for life and annuity contracts
(11,468
)
 
(9,603
)
Insurance and reinsurance balances payable
10,207

 
20,555

Unearned premiums
24,682

 
38,041

Other operating assets and liabilities
(41,388
)
 
(57,536
)
Net cash flows provided by (used in) operating activities
(162,088
)
 
(219,405
)
INVESTING ACTIVITIES:
 
 
 
Acquisitions, net of cash acquired
$
—

 
$
140,458

Sales and maturities of available-for-sale securities
25,846

 
49,241

Purchase of available-for-sale securities
(3,582
)
 
(24,484
)
Maturities of held-to-maturity securities
271

 
5,239

Movement in restricted cash and cash equivalents
4,547

 
39,740

Purchase of other investments
(17,773
)
 
(78,895
)
Redemption of other investments
94,836

 
13,882

Other investing activities
(1,219
)
 
(233
)
Net cash flows provided by (used in) investing activities
102,926

 
144,948

FINANCING ACTIVITIES:
 
 
 
Receipt of loans
$
—

 
$
109,000

Repayment of loans
(20,500
)
 
—

Net cash flows provided by (used in) financing activities
(20,500
)
 
109,000

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
3,790

 
(15,444
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(75,872
)
 
19,099

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
821,925

 
963,402

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
746,053

 
$
982,501

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
10,687

 
$
11,715

Interest paid
$
4,534

 
$
4,003


See accompanying notes to the unaudited condensed consolidated financial statements

5
Table of Contents


ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016 and December 31, 2015

(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 consolidated 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, 2015. Inter-company accounts and transactions have been eliminated. Results of operations for subsidiaries acquired are included from the dates on which we acquired them. In these notes, the terms "we," "us," "our," or "the Company" refer to Enstar Group Limited and its consolidated subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings.
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Results of changes in estimates are reflected in earnings in the period in which the change is made. Our principal estimates include, but are not limited to:
•
liability for losses and loss adjustment expenses ("LAE");
•
liability for policy benefits for life and annuity contracts;
•
reinsurance balances recoverable;
•
gross and net premiums written and net premiums earned;
•
impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale or held-to-maturity, and impairments on goodwill, intangible assets and deferred charges.
•
fair value measurements of investments;
•
fair value estimates associated with accounting for acquisitions; and
•
redeemable noncontrolling interests.
New Accounting Standards Adopted in 2016
Accounting Standards Update ("ASU") 2015-16, Business Combinations, Simplifying the Accounting for Measurement-Period Adjustment
In September 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-16, which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Under the new guidance, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adoption of this guidance did not have a material impact on our consolidated financial statements and disclosures.

6
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value or its Equivalent
In May 2015, the FASB issued ASU No. 2015-07, which eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at the net asset value ("NAV") per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. In addition, the scope of current disclosure requirements for investments eligible to be measured at NAV is limited to investments for which the practical expedient is applied. While the adoption of this guidance impacted our disclosures, it did not have an impact on our consolidated financial statements.
ASU 2015-02, Amendments to the Consolidation Analysis
In February 2015, the FASB issued ASU 2015-02, which requires entities to evaluate whether they should consolidate certain legal entities. The new consolidation guidance changes the way entities evaluate whether (1) they should consolidate limited partnerships and similar entities; (2) fees paid to a decision maker or service provider are variable interests in a variable interest entity ("VIE"), and (3) variable interests in a VIE held by related parties of a registrant require the registrant to consolidate the VIE. The new guidance also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which decision making rights are conveyed through a contractual arrangement. The adoption of this guidance did not have a material impact on our consolidated financial statements and disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
In March 2016, the FASB issued ASU 2016-08, which amends the principal-versus agent implementation guidance and illustrations in its new revenue standard (ASU 2014-09). The ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. Similar to ASU 2014-09, this guidance is effective for interim and reporting periods beginning after December 15, 2017, as amended by the one-year deferral and the early adoption provisions in ASU 2015-14. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued ASU 2016-07, which simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. Entities are therefore required to apply the guidance prospectively to increases in the level of ownership interest or degree of influence occurring after the ASU’s effective date. The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

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

ASU 2016-02, Leases
In February 2016, the FASB issued ASU 2016-02, which amends the guidance on the classification, measurement and disclosure of leases for both lessors and lessees. The ASU requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet and to disclose qualitative and quantitative information about leasing arrangements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
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. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
2. SIGNIFICANT NEW BUSINESS
2016
On March 31, 2016, we completed our previously announced transaction with Allianz SE ("Allianz") to reinsure portfolios of Allianz's run-off business. Pursuant to the reinsurance agreement effective January 1, 2016, our subsidiary reinsured 50% of certain portfolios of workers' compensation, construction defect, and asbestos, pollution, and toxic tort business originally held by Fireman's Fund Insurance Company, and assumed net reinsurance reserves of approximately $1.1 billion. Affiliates of Allianz retained approximately $1.1 billion of reinsurance premium as funds withheld collateral for the obligations of our subsidiary under the reinsurance agreement, and we transferred approximately $110.0 million to a reinsurance trust to further support our subsidiary's obligations. Interest on the funds withheld is earned by us based upon an initial fixed interest rate. We have also provided a limited parental guarantee, which is subject to a maximum cap.  The combined monetary total of the support offered by us through the trust and parental guarantee is calculated in accordance with contractually defined terms and is capped at $270.0 million.
In addition to the reinsurance transaction described above, we have entered into a claims consulting agreement with San Francisco Reinsurance Company, an affiliate of Allianz, with respect to the entire $2.2 billion portfolio, including the 50% share retained by affiliates of Allianz.

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

3. INVESTMENTS
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair value; (ii) a held-to-maturity portfolio of fixed maturity investments carried at amortized cost; (iii) available-for-sale portfolios of short-term and fixed maturity investments carried at fair value; and (iv) other investments carried at either fair value or cost.
Trading
The fair values of our fixed maturity investments, short-term investments and equities classified as trading were as follows:
 
March 31,
2016
 
December 31,
2015
U.S. government and agency
$
806,426

 
$
750,957

Non-U.S. government
349,935

 
359,002

Corporate
2,685,453

 
2,631,682

Municipal
11,416

 
22,247

Residential mortgage-backed
450,720

 
391,247

Commercial mortgage-backed
276,134

 
284,575

Asset-backed
620,844

 
638,434

Total fixed maturity and short-term investments
5,200,928

 
5,078,144

Equities — U.S.
110,987

 
108,793

Equities — International
7,273

 
7,148

 
$
5,319,188

 
$
5,194,085

Included within residential and commercial mortgage-backed securities as at March 31, 2016 were securities issued by U.S. governmental agencies with a fair value of $421.1 million (as at December 31, 2015: $359.4 million). Included within corporate securities as at March 31, 2016 were senior secured loans of $91.8 million (as at December 31, 2015: $94.4 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 March 31, 2016
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair
Value
One year or less
 
$
752,003

 
$
743,560

 
14.3
%
More than one year through two years
 
941,118

 
940,001

 
18.1
%
More than two years through five years
 
1,392,710

 
1,403,136

 
27.0
%
More than five years through ten years
 
563,722

 
568,004

 
10.9
%
More than ten years
 
196,207

 
198,529

 
3.8
%
Residential mortgage-backed
 
450,055

 
450,720

 
8.7
%
Commercial mortgage-backed
 
278,868

 
276,134

 
5.3
%
Asset-backed
 
646,907

 
620,844

 
11.9
%
 
 
$
5,221,590

 
$
5,200,928

 
100.0
%

9
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Held-to-maturity
We hold a portfolio of held-to-maturity securities to support our annuity business. The amortized cost and fair values of our fixed maturity investments classified as held-to-maturity were as follows: 
As at March 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
19,955

 
$
324

 
$
(50
)
 
$
20,229

Non-U.S. government
 
40,338

 
186

 
(574
)
 
39,950

Corporate
 
727,897

 
17,160

 
(7,594
)
 
737,463

 
 
$
788,190

 
$
17,670

 
$
(8,218
)
 
$
797,642

As at December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair Value
U.S. government and agency
 
$
19,771

 
$
8

 
$
(458
)
 
$
19,321

Non-U.S. government
 
40,503

 
48

 
(1,493
)
 
39,058

Corporate
 
730,592

 
3,398

 
(23,298
)
 
710,692

 
 
$
790,866

 
$
3,454

 
$
(25,249
)
 
$
769,071

The contractual maturities of our fixed maturity investments classified as held-to-maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 
As at March 31, 2016
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair
Value
One year or less
 
$
20,271

 
$
20,281

 
2.5
%
More than one year through two years
 
13,348

 
13,376

 
1.7
%
More than two years through five years
 
69,041

 
70,127

 
8.8
%
More than five years through ten years
 
115,637

 
115,896

 
14.5
%
More than ten years
 
569,893

 
577,962

 
72.5
%
 
 
$
788,190

 
$
797,642

 
100.0
%

10
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Available-for-sale
The amortized cost and fair values of our short-term and fixed maturity investments classified as available-for-sale were as follows:
As at March 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
12,651

 
$
127

 
$
—

 
$
12,778

Non-U.S. government
 
90,610

 
1,609

 
(2,276
)
 
89,943

Corporate
 
175,621

 
2,819

 
(1,950
)
 
176,490

Municipal
 
5,946

 
59

 
—

 
6,005

Residential mortgage-backed
 
590

 
51

 
—

 
641

Asset-backed
 
4,616

 
14

 
—

 
4,630

 
 
$
290,034

 
$
4,679

 
$
(4,226
)
 
$
290,487

As at December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
25,102

 
$
80

 
$
(341
)
 
$
24,841

Non-U.S. government
 
89,631

 
42

 
(3,889
)
 
$
85,784

Corporate
 
182,773

 
1,040

 
(3,429
)
 
$
180,384

Municipal
 
5,959

 
4

 
(36
)
 
$
5,927

Residential mortgage-backed
 
665

 
51

 
(1
)
 
$
715

Asset-backed
 
4,660

 
—

 
(10
)
 
$
4,650

 
 
$
308,790

 
$
1,217

 
$
(7,706
)
 
$
302,301

 The contractual maturities of our short-term and 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 March 31, 2016
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair
Value
One year or less
 
$
56,628

 
$
55,194

 
19.0
%
More than one year through two years
 
65,181

 
64,237

 
22.1
%
More than two years through five years
 
88,747

 
88,172

 
30.3
%
More than five years through ten years
 
38,113

 
39,088

 
13.5
%
More than ten years
 
36,159

 
38,525

 
13.3
%
Residential mortgage-backed
 
590

 
641

 
0.2
%
Asset-backed
 
4,616

 
4,630

 
1.6
%
 
 
$
290,034

 
$
290,487

 
100.0
%

11
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Gross Unrealized Losses
The following tables summarize our fixed maturity and short-term investments in a gross unrealized loss position:
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at March 31, 2016
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity and short-term investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. government
 
$
14,821

 
$
(1,995
)
 
$
10,222

 
$
(281
)
 
$
25,043

 
$
(2,276
)
Corporate
 
28,331

 
(1,737
)
 
21,342

 
(213
)
 
49,673

 
(1,950
)
Total
 
$
43,152

 
$
(3,732
)
 
$
31,564

 
$
(494
)
 
$
74,716

 
$
(4,226
)
Fixed maturity investments, at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
—

 
$
—

 
$
458

 
$
(50
)
 
$
458

 
$
(50
)
Non-U.S. government
 
6,323

 
(248
)
 
14,706

 
(326
)
 
21,029

 
(574
)
Corporate
 
33,646

 
(2,327
)
 
140,928

 
(5,267
)
 
174,574

 
(7,594
)
Total
 
39,969

 
(2,575
)
 
156,092

 
(5,643
)
 
196,061

 
(8,218
)
Total fixed maturity and short-term investments
 
$
83,121

 
$
(6,307
)
 
$
187,656

 
$
(6,137
)
 
$
270,777

 
$
(12,444
)
  
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at December 31, 2015
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity and short-term investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
523

 
$
(2
)
 
$
21,694

 
$
(339
)
 
$
22,217

 
$
(341
)
Non-U.S. government
 
18,995

 
(2,633
)
 
50,080

 
(1,256
)
 
69,075

 
(3,889
)
Corporate
 
54,295

 
(2,394
)
 
81,047

 
(1,035
)
 
135,342

 
(3,429
)
Municipal
 
—

 
—

 
4,609

 
(36
)
 
4,609

 
(36
)
Residential mortgage-backed
 
71

 
(1
)
 
—

 
—

 
71

 
(1
)
Asset-backed
 
4,649

 
(10
)
 
—

 
—

 
4,649

 
(10
)
Total
 
$
78,533

 
$
(5,040
)
 
$
157,430

 
$
(2,666
)
 
$
235,963

 
$
(7,706
)
Fixed maturity investments, at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
7,221

 
$
(48
)
 
$
12,024

 
$
(410
)
 
$
19,245

 
$
(458
)
Non-U.S. government
 
24,424

 
(1,255
)
 
8,885

 
(238
)
 
33,309

 
(1,493
)
Corporate
 
209,000

 
(9,038
)
 
330,833

 
(14,260
)
 
539,833

 
(23,298
)
Total
 
240,645

 
(10,341
)
 
351,742

 
(14,908
)
 
592,387

 
(25,249
)
Total fixed maturity and short-term investments

 
$
319,178

 
$
(15,381
)
 
$
509,172

 
$
(17,574
)
 
$
828,350

 
$
(32,955
)
As at March 31, 2016 and December 31, 2015, the number of securities classified as available-for-sale in an unrealized loss position was 136 and 332, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 79 and 124, respectively.
As at March 31, 2016 and December 31, 2015, the number of securities classified as held-to-maturity in an unrealized loss position was 36 and 109, respectively. Of these securities, the number of securities that had been in unrealized loss position for twelve months or longer was 11 and 53, respectively.

12
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other-Than-Temporary Impairment
For the three months ended March 31, 2016, we did not recognize any other-than-temporary impairment losses on either our available-for-sale or held-to-maturity securities. We determined that no credit losses existed as at March 31, 2016. A description of our other-than-temporary impairment process is included in Note 2 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015. There were no changes to our process during the three months ended March 31, 2016.
Credit Ratings
The following table sets forth the credit ratings of our fixed maturity and short-term investments as of March 31, 2016:
 
 
Amortized
Cost
 
Fair Value
 
% of Total
Investments
 
AAA
Rated
 
AA Rated
 
A Rated
 
BBB
Rated
 
Non-
Investment
Grade
 
Not Rated
Fixed maturity and short-term investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
809,975

 
$
819,204

 
13.0
%
 
$
812,731

 
$
6,473

 
$
—

 
$
—

 
$
—

 
$
—

Non-U.S. government
 
444,600

 
439,878

 
7.0
%
 
132,415

 
198,483

 
65,524

 
21,926

 
21,530

 
—

Corporate
 
2,858,804

 
2,861,943

 
45.6
%
 
182,580

 
443,654

 
1,345,139

 
733,329

 
155,018

 
2,223

Municipal
 
17,209

 
17,421

 
0.3
%
 
5,117

 
8,835

 
3,469

 
—

 
—

 
—

Residential mortgage-backed
 
450,645

 
451,361

 
7.2
%
 
438,487

 
471

 
8,916

 
2,443

 
1,040

 
4

Commercial mortgage-backed
 
278,868

 
276,134

 
4.4
%
 
119,984

 
34,359

 
61,460

 
18,866

 
3,266

 
38,199

Asset-backed
 
651,523

 
625,474

 
9.9
%
 
237,526

 
135,991

 
145,566

 
49,652

 
56,553

 
186

Total
 
5,511,624

 
5,491,415

 
87.4
%
 
1,928,840

 
828,266

 
1,630,074

 
826,216

 
237,407

 
40,612

% of total fair value
 
 
 
 
 
 
 
35.1
%
 
15.1
%
 
29.7
%
 
15.1
%
 
4.3
%
 
0.7
%
Fixed maturity investments, at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
19,955

 
20,229

 
0.3
%
 
18,826

 
1,376

 
—

 
—

 
—

 
27

Non-U.S. government
 
40,338

 
39,950

 
0.6
%
 
—

 
11,320

 
28,630

 
—

 
—

 
—

Corporate
 
727,897

 
737,463

 
11.7
%
 
47,698

 
109,845
 
488,176
 
91,624

 
—

 
120

Total
 
788,190

 
797,642

 
12.6
%
 
66,524

 
122,541

 
516,806

 
91,624

 
—

 
147

% of total fair value
 
 
 
 
 
 
 
8.3
%
 
15.4
%
 
64.7
%
 
11.5
%
 
—
%
 
0.1
%
Total fixed maturity and short-term investments
 
$
6,299,814

 
$
6,289,057

 
100.0
%
 
$
1,995,364

 
$
950,807

 
$
2,146,880

 
$
917,840

 
$
237,407

 
$
40,759

% of total fair value
 
 
 
 
 
 
 
31.7
%
 
15.1
%
 
34.1
%
 
14.6
%
 
3.8
%
 
0.7
%








13
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
March 31,
2016
 
December 31,
2015
Private equities and private equity funds
 
$
249,398

 
$
254,883

Fixed income funds
 
267,839

 
291,736

Fixed income hedge funds
 
109,636

 
109,400

Equity funds
 
150,348

 
147,390

Multi-strategy hedge fund
 
98,432

 
99,020

Real estate debt fund
 
—

 
54,829

CLO equities
 
58,975

 
61,702

CLO equity funds
 
12,167

 
13,928

Call options on equities
 
6,060

 
—

Other
 
1,136

 
1,144

 
 
$
953,991

 
$
1,034,032

The valuation of our other investments is described in Note 4 - "Fair Value Measurements." Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month lag. We regularly review and discuss fund performance with the fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments. The following is a description of the nature of each of these investment categories:
•
Private equities and private equity funds invest primarily in the financial services industry. All of our investments in private equities and private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates of our initial investments.
•
Fixed income funds comprise a number of positions in diversified fixed income funds that are managed by third-party managers. Underlying investments vary from high-grade corporate bonds to non-investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices. The funds have liquidity terms that vary from daily up to quarterly.
•
Fixed income hedge funds invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of up to three years from the time of initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice.
•
Equity funds invest in a diversified portfolio of international publicly traded equity securities. The funds are eligible for bi-monthly redemption.
•
Multi-strategy hedge fund comprises an investment in a hedge fund that invests in a variety of asset classes including funds, fixed income, equity securities and other investments. The fund is eligible for redemption after July 1, 2016.
•
Real estate debt fund invests primarily in U.S. commercial real estate loans and securities. A redemption request for this fund can be made 10 days after the date of any monthly valuation. The fund was redeemed during the three months ended March 31, 2016.
•
CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by us in these securities.
•
CLO equity funds comprise two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. One of the funds has a fair value of $3.7 million, part of a self-liquidating structure that is expected to pay out over two to six years. The other fund has a fair value of $8.5 million and is eligible for redemption in 2018.

14
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•
Call options on equities comprise directly held options to purchase the common equity of publicly traded corporations.
•
Other primarily comprises a fund that provides loans to educational institutions throughout the United States and its territories.
Investments of $1.0 million in fixed income hedge funds were subject to gates or side-pockets, where redemptions are subject to the sale of underlying investments. A gate is the ability to deny or delay a redemption request, whereas a side-pocket is a designated account for which the investor loses its redemption rights.
As at March 31, 2016, we had unfunded commitments to private equity funds of $140.0 million.
Other Investments, at cost
Our other investments carried at cost of $131.2 million as of March 31, 2016 consist of life settlement contracts acquired during 2015. In the period ended March 31, 2015, we did not have an investment in life settlements. During the three months ended March 31, 2016, net investment income included $8.8 million related to investments in life settlements. There were no impairment charges recognized during the period ended March 31, 2016. The following table presents further information regarding our investments in life settlements as of March 31, 2016 and December 31, 2015.
 
 
March 31, 2016
 
December 31, 2015

 
Number of Contracts
 
Carrying
Value
 
Face Value (Death Benefits)
 
Number of Contracts
 
Carrying
Value
 
Face Value (Death Benefits)
Remaining Life Expectancy of Insureds:
 
 
 
 
 
 
 
 
 
 
 
 
0 – 1 year
 
2

 
$
425

 
$
700

 
2

 
$
417

 
$
700

1 – 2 years
 
3

 
2,601

 
4,500

 
4

 
3,032

 
5,000

2 – 3 years
 
16

 
24,226

 
50,407

 
19

 
24,072

 
39,123

3 – 4 years
 
17

 
13,306

 
29,960

 
14

 
9,695

 
20,932

4 – 5 years
 
17

 
8,126

 
20,348

 
16

 
9,025

 
22,457

Thereafter
 
205

 
82,484

 
451,305

 
221

 
86,830

 
491,499

Total
 
260

 
$
131,168

 
$
557,220

 
276

 
$
133,071

 
$
579,711

Remaining life expectancy for year 0-1 in the table above references policies whose current life expectancy is less than 12 months as of the reporting date. Remaining life expectancy is not an indication of expected maturity. Actual maturity in any category above may vary significantly (either earlier or later) from the remaining life expectancies reported.
At March 31, 2016, our best estimate of the life insurance premiums required to keep the policies in force, payable in the 12 months ending March 31, 2017 and the four succeeding years ending March 31, 2021 is $17.3 million, $17.1 million, $17.3 million, $17.4 million and $16.0 million, respectively.

15
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net Realized and Unrealized Gains (Losses)
Components of net realized and unrealized gains (losses) for the three months ended March 31, 2016 and 2015 are summarized as follows:
 
 
Three Months Ended
March 31,
 
 
2016

2015
Net realized gains (losses) on sale:
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
$
265

 
$
114

Gross realized (losses) on fixed maturity securities, available-for-sale
 
(243
)
 
(8
)
Net realized investment gains (losses) on fixed maturity securities, trading
 
(1,912
)
 
1,866

Net realized investment gains on equity securities, trading
 
473

 
10,717

Total net realized gains (losses) on sale
 
(1,417
)
 
12,689

Net unrealized gains (losses):
 


 
 
Fixed maturity securities, trading
 
41,740

 
13,888

Equity securities, trading
 
1,606

 
(7,119
)
Other investments
 
(3,965
)
 
23,562

Total net unrealized gains
 
39,381

 
30,331

Net realized and unrealized gains
 
$
37,964

 
$
43,020

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $15.4 million and $43.3 million for the three months ended March 31, 2016 and 2015, respectively.
Net Investment Income
Major categories of net investment income for the three months ended March 31, 2016 and 2015 are summarized as follows:
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Fixed maturity investments
 
$
36,578

 
$
26,249

Short-term investments and cash and cash equivalents
 
1,179

 
2,719

Equity securities
 
1,122

 
1,681

Other investments
 
6,034

 
882

Funds held
 
7,604

 
174

Life settlements and other
 
8,826

 
305

Gross investment income
 
61,343

 
32,010

Investment expenses
 
(1,280
)
 
(1,595
)
Net investment income
 
$
60,063

 
$
30,415


16
Table of Contents
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 $506.9 million and $511.3 million, as of March 31, 2016 and December 31, 2015, respectively, was as follows: 
 
 
March 31,
2016
 
December 31,
2015
Collateral in trust for third party agreements
 
$
2,896,984

 
$
3,053,692

Assets on deposit with regulatory authorities
 
956,879

 
915,346

Collateral for secured letter of credit facilities
 
202,923

 
212,544

Funds at Lloyd's (1)
 
318,525

 
382,624

 
 
$
4,375,311

 
$
4,564,206

(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. As at March 31, 2016, our combined Funds at Lloyd's were comprised of cash and investments of $279.4 million and letters of credit supported by collateral of $39.2 million.
4. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
•
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
•
Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted third party pricing sources or management's assumptions and internal valuation models may be used to determine the fair values.

17
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We have categorized our investments that are recorded at fair value on a recurring basis among levels based on the observability of inputs as follows:  
 
 
March 31, 2016
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
U.S. government and agency
 
$
—

 
$
819,204

 
$
—

 
$
819,204

Non-U.S. government
 
—

 
439,878

 
—

 
439,878

Corporate
 
—

 
2,835,211

 
26,732

 
2,861,943

Municipal
 
—

 
17,421

 
—

 
17,421

Residential mortgage-backed
 
—

 
451,361

 
—

 
451,361

Commercial mortgage-backed
 
—

 
248,313

 
27,821

 
276,134

Asset-backed
 
—

 
567,451

 
58,023

 
625,474

Equities — U.S.
 
101,826

 
9,161

 
—

 
110,987

Equities — International
 
2,945

 
4,328

 
—

 
7,273

Other investments
 
—

 
317,207

 
74,289

 
391,496

Total investments
 
$
104,771

 
$
5,709,535

 
$
186,865

 
$
6,001,171

 
 
 
December 31, 2015
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Fair
Value
U.S. government and agency
 
$
—

 
$
775,798

 
$
—

 
$
775,798

Non-U.S. government
 
—

 
444,786

 
—

 
444,786

Corporate
 
—

 
2,812,066

 
—

 
2,812,066

Municipal
 
—

 
28,174

 
—

 
28,174

Residential mortgage-backed
 
—

 
391,962

 
—

 
391,962

Commercial mortgage-backed
 
—

 
255,169

 
29,406

 
284,575

Asset-backed
 
—

 
458,328

 
184,756

 
643,084

Equities — U.S.
 
99,467

 
9,326

 
—

 
108,793

Equities — International
 
2,702

 
4,446

 
—

 
7,148

Other investments
 
—

 
321,076

 
77,016

 
398,092

Total investments
 
$
102,169

 
$
5,501,131

 
$
291,178

 
$
5,894,478

Certain of our other investments are measured at fair value using NAV per share (or its equivalent) as a practical expedient and have not been classified within the fair value hierarchy above. The following table reconciles our other investments in the tables above with the amounts presented on our consolidated balance sheets:
Other investments:
 
March 31, 2016
 
December 31, 2015
Other investments measured at fair value
 
$
391,496

 
$
398,092

Other investments measured at NAV as practical expedient
 
562,495

 
635,940

Total other investments shown on balance sheets
 
$
953,991

 
$
1,034,032



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

Valuation Methodologies of Financial Instruments Measured at Fair Value
Fixed Maturity Investments
The fair values for all securities in the fixed maturity investments portfolio are independently provided by the investment accounting service providers, investment managers and investment custodians, each of which utilize internationally recognized independent pricing services. We record the unadjusted price provided by the investment accounting service providers, investment managers or investment custodians and validate this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to our knowledge of the current investment market. Our internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
The independent pricing services used by the investment accounting service providers, investment managers and investment custodians obtain actual transaction prices for securities that have quoted prices in active markets. For determining the fair value of securities that are not actively traded, in general, pricing services use "matrix pricing" in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.
The following describes the techniques generally used to determine the fair value of our fixed maturity investments by asset class.
•
U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified as Level 2.
•
Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, such as in periods of low trading activity or when transactions are not orderly, we obtain non-binding quotes from broker-dealers. Broker-dealer quotes for which significant inputs are unable to be corroborated with market observable information are classified as Level 3. We had one security classified as Level 3 as at March 31, 2016.
•
Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair values of these securities are classified as Level 2.
•
Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. Broker-dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are classified as Level 3.

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

Equities
Our investments in equities are predominantly traded on the major exchanges and are primarily managed by our external advisors. We use an internationally recognized pricing service to estimate the fair value of our equities. Our equities are widely diversified and there is no significant concentration in any specific industry.
We have categorized all of our investments in equities other than preferred stock as Level 1 investments because the fair values of these investments are based on quoted prices in active markets for identical assets or liabilities. The fair value estimates of our investments in preferred stock are based on observable market data and, as a result, have been categorized as Level 2.
Other investments, at fair value
We have ongoing due diligence processes with respect to the other investments carried at fair value in which we invest and their managers. These processes are designed to assist us in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, we obtain the audited financial statements for funds annually, and regularly review and discuss the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values.
The use of NAV as an estimate of the fair value for investments in certain entities that calculate NAV is a permitted practical expedient. Due to the time lag in the NAV reported by the fund managers we adjust the valuation for capital calls and distributions. Other investments measured at fair value using NAV as a practical expedient have not been classified in the fair value hierarchy. Other investments for which we do not use NAV as a practical expedient have been valued using prices from independent pricing services, investment managers and broker-dealers.
The following describes the techniques generally used to determine the fair value of our other investments.
•
For our investments in private equities and private equity funds, we measure fair value by obtaining the most recently available NAV from the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
Our investments in fixed income funds and equity funds have been valued based on a combination of prices from independent pricing services, external fund managers or third-party administrators. For the publicly available prices we have classified the investments as Level 2. For the non-publicly available prices we are using NAV as a practical expedient and therefore these have not been categorized within the fair value hierarchy.
•
For our investments in fixed income and multi-strategy hedge funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
Our investment in the real estate debt fund has been valued based on the most recently available NAV from the external fund manager. The fair value of this investment is measured using the NAV practical expedient and therefore has not been categorized within the fair value hierarchy. As at March 31, 2016 this fund was fully redeemed.
•
We measure the fair value of our direct investment in CLO equities based on valuations provided by our external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is valued based on valuations provided by the broker or lead underwriter of the investment (the "broker"). Our CLO equity investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of relevant trades in secondary markets.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase (or decrease) in either of these significant inputs in isolation would result in lower (or higher) fair value estimates for direct investments in CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs because they are based on the historical average of actual spreads and the weighted average life of the current underlying

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

portfolios, respectively. A significant increase (or decrease) in either of these significant inputs in isolation would result in higher (or lower) fair value estimates for direct investments in CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, we receive the valuation from the external CLO manager and brokers and then review the underlying cash flows and key assumptions used by the manager/broker. We review and update the significant unobservable inputs based on information obtained from secondary markets. These inputs are our responsibility and we assess the reasonableness of the inputs (and if necessary, update the inputs) through communicating with industry participants, monitoring of the transactions in which we participate (for example, to evaluate default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends that may impact future cash flows.
If valuations from the external CLO equity manager or brokers are not available, we use an income approach based on certain observable and unobservable inputs to value these investments. An income approach is also used to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income approach is followed, the valuation is based on available trade information, such as expected cash flows and market assumptions on default and loss severity rates. Other inputs used in the valuation process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates.
•
For our investments in the CLO equity funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
For our investments in call options on publicly traded equities, we measure fair value by obtaining the latest option price as of our reporting date. These have been classified as Level 2.
Changes in Leveling of Financial Instruments
Transfers into or out of levels are recorded at their fair values as of the end of the reporting period, consistent with the date of determination of fair value. During the three months ended March 31, 2016, we transferred a corporate security valued at $26.7 million from Level 2 to Level 3 and we transferred $97.8 million of asset-backed securities from Level 3 to Level 2. The transfer from Level 2 to Level 3 related to a security valued using a single unadjusted broker-dealer quote where we were unable to obtain sufficient information to determine whether the inputs used by the broker were observable. Where we utilize single unadjusted broker-dealer quotes, they are generally provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The transfers from Level 3 to Level 2 were based upon us obtaining market observable information regarding the valuations of the specific assets. During the three months ended March 31, 2016 and 2015, there were no transfers between Levels 1 and 2.
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
 
 
Fixed
Maturity
Investments
 
Other Investments
 
Equity Securities
 
Total
 
Fixed
Maturity
Investments
 
Other Investments
 
Equity Securities
 
Total
Beginning fair value
 
$
214,162

 
$
77,016

 
$
—

 
$
291,178

 
$
600

 
$
42,267

 
$
4,850

 
$
47,717

Purchases
 
—

 
6,221

 
—

 
6,221

 
—

 
12,935

 
—

 
12,935

Sales
 
(24,103
)
 
(4,658
)
 
—

 
(28,761
)
 
(600
)
 
(8,624
)
 
(5,000
)
 
(14,224
)
Total realized and unrealized gains (losses)
 
(6,427
)
 
(4,290
)
 
—

 
(10,717
)
 
—

 
(2,493
)
 
150

 
(2,343
)
Net transfers into (out of) Level 3
 
(71,056
)
 
—

 
—

 
(71,056
)
 
—

 
—

 
—

 
—

Ending fair value
 
$
112,576

 
$
74,289

 
$
—

 
$
186,865

 
$
—

 
$
44,085

 
$
—

 
$
44,085

Net realized and unrealized gains related to Level 3 assets in the table above are included in net realized and unrealized (losses) gains in our unaudited condensed consolidated statements of earnings.

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

Disclosure of Fair Values for Financial Instruments Carried at Cost
The following tables present our fair value hierarchy for those assets carried at cost or amortized cost in the unaudited condensed consolidated balance sheet but for which disclosure of the fair value is required:
 
 
March 31, 2016
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value
 
Carrying Value
Fixed maturity investments, held-to-maturity: