e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS
PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-33289
ENSTAR GROUP LIMITED
(Exact name of registrant as
specified in its charter)
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BERMUDA
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N/A
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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P.O. Box HM 2267
Windsor Place, 3rd Floor, 18 Queen Street
Hamilton HM JX
Bermuda
(Address of principal executive
offices, including zip code)
Registrants telephone number, including area code:
(441) 292-3645
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Ordinary shares, par value $1.00 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting Company o
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(Do
not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates, computed by reference to the
closing price as of the last business day of the
registrants most recently completed second fiscal quarter,
June 30, 2008, was approximately $481,913,775.
As of March 4, 2009, the registrant had outstanding
13,319,012 ordinary shares, $1.00 par value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A relating to its 2009 annual general meeting
of shareholders are incorporated by reference in Part III
of this
Form 10-K.
PART I
Company
Overview
We were formed in August 2001 under the laws of Bermuda to
acquire and manage insurance and reinsurance companies in
run-off, and to provide management, consulting and other
services to the insurance and reinsurance industry. Since our
formation, we, through our subsidiaries, have completed 22
acquisitions of insurance and reinsurance companies and are now
administering those businesses in run-off. Insurance and
reinsurance companies we acquire that are in run-off no longer
underwrite new policies. In addition, we provide management and
consultancy services, claims inspection services and reinsurance
collection services to our affiliates and third-party clients
for both fixed and success-based fees.
Our primary corporate objective is to grow our tangible net book
value. We believe growth in our tangible net book value is
driven primarily by growth in our net earnings, which is in turn
partially driven by successfully completing new acquisitions.
We evaluate each opportunity presented by carefully reviewing
the portfolios risk exposures, claim practices, reserve
requirements and outstanding claims, and seek an appropriate
discount
and/or
seller indemnification to reflect the uncertainty contained in
the portfolios reserves. Based on this initial analysis,
we can determine if a company or portfolio of business would add
value to our current portfolio of run-off business. If we
determine to pursue the purchase of a company in run-off, we
then proceed to price the acquisition in a manner we believe
will result in positive operating results based on certain
assumptions including, without limitation, our ability to
favorably resolve claims, negotiate with direct insureds and
reinsurers, and otherwise manage the nature of the risks posed
by the business.
Initially, at the time we acquire a company in run-off, we
estimate the fair value of liabilities acquired based on
external actuarial advice, as well as our own views of the
exposures assumed. While we earn a larger share of our total
return on an acquisition from commuting the liabilities that we
have assumed, we also try to maximize reinsurance recoveries on
the assumed portfolio.
In the primary (or direct) insurance business, the insurer
assumes risk of loss from persons or organizations that are
directly subject to the given risks. Such risks may relate to
property, casualty, life, accident, health, financial or other
perils that may arise from an insurable event. In the
reinsurance business, the reinsurer agrees to indemnify an
insurance or reinsurance company, referred to as the ceding
company, against all or a portion of the insurance risks arising
under the policies the ceding company has written or reinsured.
When an insurer or reinsurer stops writing new insurance
business, either entirely or with respect to a particular line
of business, the insurer, reinsurer, or the line of discontinued
business is in run-off.
In recent years, the insurance industry has experienced
significant consolidation. As a result of this consolidation and
other factors, the remaining participants in the industry often
have portfolios of business that are either inconsistent with
their core competency or provide excessive exposure to a
particular risk or segment of the market (i.e.,
property/casualty, asbestos, environmental, director and officer
liability, etc.). These non-core
and/or
discontinued portfolios are often associated with potentially
large exposures and lengthy time periods before resolution of
the last remaining insured claims resulting in significant
uncertainty to the insurer or reinsurer covering those risks.
These factors can distract management, drive up the cost of
capital and surplus for the insurer or reinsurer, and negatively
impact the insurers or reinsurers credit rating,
which makes the disposal of the unwanted company or portfolio an
attractive option. Alternatively, the insurer may wish to
maintain the business on its balance sheet, yet not divert
significant management attention to the run-off of the
portfolio. The insurer or reinsurer, in either case, is likely
to engage a third party, such as us, that specializes in run-off
management to purchase the company or portfolio, or to manage
the company or portfolio in run-off.
In the sale of a run-off company, a purchaser, such as us,
typically pays a discount to the book value of the company based
on the risks assumed and the relative value to the seller of no
longer having to manage the company in run-off. Such a
transaction can be beneficial to the seller because it receives
an up-front payment for the company, eliminates the need for its
management to devote any attention to the disposed company and
removes the risk that
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the established reserves related to the run-off business may
prove to be inadequate. The seller is also able to redeploy its
management and financial resources to its core businesses.
Alternatively, if the insurer or reinsurer hires a third party,
such as us, to manage its run-off business, the insurer or
reinsurer will, unlike in a sale of the business, receive little
or no cash up front. Instead, the management arrangement may
provide that the insurer or reinsurer will retain the profits,
if any, derived from the run-off with certain incentive payments
allocated to the run-off manager. By hiring a run-off manager,
the insurer or reinsurer can outsource the management of the
run-off business to experienced and capable individuals, while
allowing its own management team to focus on the insurers
or reinsurers core businesses. Our desired approach to
managing run-off business is to align our interests with the
interests of the owners through both fixed management fees and
certain incentive payments. Under certain management
arrangements to which we are a party, however, we receive only a
fixed management fee and do not receive any incentive payments.
Following the purchase of a run-off company or the engagement to
manage a run-off company or portfolio of business, it is
incumbent on the new owner or manager to conduct the run-off in
a disciplined and professional manner in order to efficiently
discharge the liabilities associated with the business while
preserving and maximizing its assets. Our approach to managing
our acquired companies in run-off, as well as run-off companies
or portfolios of businesses on behalf of third-party clients,
includes negotiating with third-party insureds and reinsureds to
commute their insurance or reinsurance agreement for an agreed
upon up-front payment by us, or the third-party client, and to
more efficiently manage payment of insurance and reinsurance
claims. We attempt to commute policies with direct insureds or
reinsureds in order to eliminate uncertainty over the amount of
future claims. Commutations and policy buy-backs provide an
opportunity for the company to exit exposures to certain
policies and insureds generally at a discount to the ultimate
liability and provide the ability to eliminate exposure to
further losses. Such a strategy also contributes to the
reduction in the length of time and future cost of the run-off.
Following the acquisition of a company in run-off, or new
consulting engagement, we will spend time analyzing the acquired
exposures and reinsurance receivables on a
policyholder-by-policyholder
basis. This analysis enables us to identify those policyholders
and reinsurers we wish to approach to discuss commutation or
policy buy-back. Furthermore, following the acquisition of a
company in run-off, or new consulting engagement, we will often
be approached by policyholders or reinsurers requesting
commutation or policy buy-back. In these instances we will also
carry out a full analysis of the underlying exposures in order
to determine the viability of a proposed commutation or policy
buy-back. From the initial analysis of the underlying exposures
it may take several months, or even years, before a commutation
or policy buy-back is completed. In a number of cases, if we and
the policyholder or reinsurer are unable to reach a commercially
acceptable settlement, the commutation or policy buy-back may
not be achievable, in which case we will continue to settle
valid claims from the policyholder, or collect reinsurance
receivables from the reinsurer, as they become due.
Insureds and reinsureds are often willing to commute with us,
subject to receiving an acceptable settlement, as this provides
certainty of recovery of what otherwise may be claims that are
disputed in the future, and often provides a meaningful up-front
cash receipt that, with the associated investment income, can
provide funds to meet future claim payments or even commutation
of their underlying exposure. Therefore, subject to negotiating
an acceptable settlement, all of our insurance and reinsurance
liabilities and reinsurance receivables are able to be either
commuted or settled by way of policy buy-back over time. Many
sellers of companies that we acquire have secure claims paying
ratings and ongoing underwriting relationships with insureds and
reinsureds, which often hinders their ability to commute the
underlying insurance or reinsurance policies. Our lack of claims
paying rating and our lack of potential conflicts with insureds
and reinsureds of companies we acquire provides a greater
ability to commute the newly acquired policies than that of the
sellers.
We also attempt, where appropriate, to negotiate favorable
commutations with reinsurers by securing the receipt of a
lump-sum settlement from the reinsurer in complete satisfaction
of the reinsurers liability in respect of any future
claims. We, or the third-party client, are then fully
responsible for any claims in the future. We typically invest
proceeds from reinsurance commutations with the expectation that
such investments will produce income, which, together with the
principal, will be sufficient to satisfy future obligations with
respect to the acquired company or portfolio.
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Strategy
We intend to maximize our growth in tangible net book value by
using the following strategies:
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Solidify Our Leadership Position in the Run-Off Market by
Leveraging Managements Experience and
Relationships. We intend to continue to utilize
the extensive experience and significant relationships of our
senior management team to solidify our position as a leader in
the run-off segment of the insurance and reinsurance market. The
experience and reputation of our management team is expected to
generate opportunities for us to acquire or manage companies and
portfolios in run-off, and to price effectively the acquisition
or management of such businesses. Most importantly, we believe
the experience of our management team will continue to allow us
to manage the run-off of such businesses efficiently and
profitably.
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Professionally Manage Claims. We are
professional and disciplined in managing claims against
companies and portfolios we own or manage. Our management
understands the need to dispose of certain risks expeditiously
and cost-effectively by constantly analyzing changes in the
market and efficiently settling claims with the assistance of
our experienced claims adjusters and in-house and external legal
counsel. When we acquire or begin managing a company or
portfolio, we initially determine which claims are valid through
the use of experienced in-house adjusters and claims experts. We
pay valid claims on a timely basis, while relying on
well-documented policy terms and exclusions where applicable and
litigation when necessary to defend against paying invalid
claims under existing policies and reinsurance agreements.
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Commute Assumed Liabilities and Ceded Reinsurance Assets.
Using detailed analysis and actuarial projections, we
negotiate with the policyholders of the insurance and
reinsurance companies or portfolios we own or manage with a goal
of commuting insurance and reinsurance liabilities for one or
more agreed upon payments at a discount to the ultimate
liability. Such commutations can take the form of policy
buy-backs and structured settlements over fixed periods of time.
By acquiring companies that are direct insurers, reinsurers or
both, we are able to negotiate favorable entity-wide
commutations with reinsurers that would not be possible if our
subsidiaries had remained independent entities. We also
negotiate with reinsurers to commute their reinsurance
agreements providing coverage to our subsidiaries on terms that
we believe to be favorable based on then-current market
knowledge. We invest the proceeds from reinsurance commutations
with the expectation that such investments will produce income,
which, together with the principal, will be sufficient to
satisfy future obligations with respect to the acquired company
or portfolio.
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Continue to Commit to Highly Disciplined Acquisition,
Management and Reinsurance Practices. We utilize
a disciplined approach to minimize risk and increase the
probability of positive operating results from companies and
portfolios we acquire or manage. We carefully review acquisition
candidates and management engagements for consistency with
accomplishing our long-term objective of producing positive
operating results. We focus our investigation on risk exposures,
claims practices and reserve requirements. In particular, we
carefully review all outstanding claims and case reserves, and
follow a highly disciplined approach to managing allocated loss
adjustment expenses, such as the cost of defense counsel, expert
witnesses and related fees and expenses.
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Manage Capital Prudently. We pursue prudent
capital management relative to our risk exposure and liquidity
requirements to maximize profitability and long-term growth in
shareholder value. Our capital management strategy is to deploy
capital efficiently to acquisitions and to establish, and
re-establish when necessary, adequate loss reserves to protect
against future adverse developments.
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Recent
Transactions
Unionamerica
On December 30, 2008, our indirect subsidiary Royston
Run-Off Limited, or Royston, completed the acquisition of
Unionamerica Holdings Limited, or Unionamerica, from St. Paul
Fire and Marine Insurance Company, an affiliate of The Travelers
Companies, Inc., or Travelers. Unionamerica is comprised of the
discontinued operations of Travelers U.K.-based London
Market business, which were placed into run-off between 1992 and
2003. The purchase price of $343.4 million was financed by
$184.6 million of bank financing provided to
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Royston through a term facilities agreement; approximately
$49.8 million from J.C. Flowers II, L.P., or the
Flowers Fund, by way of its non-voting equity interest in
Royston Holdings Ltd., the direct parent company of Royston; and
the remainder from available cash on hand.
The Flowers Fund is a private investment fund advised by J.C.
Flowers & Co. LLC. J. Christopher Flowers, a member of
our board of directors and one of our largest shareholders, is
the founder and Managing Member of J.C. Flowers &
Co. LLC. John J. Oros, our Executive Chairman and a member of
our board of directors, is a Managing Director of J.C.
Flowers & Co. LLC. Mr. Oros splits his time
between J.C. Flowers & Co. LLC and us.
Hillcot
Re
On October 27, 2008, our wholly-owned subsidiary Kenmare
Holdings Ltd., purchased the entire issued share capital of
Hillcot Re Ltd., or Hillcot Re, the wholly-owned subsidiary of
Hillcot Holdings Limited, or Hillcot, for consideration of
$54.4 million. Prior to the completion of the transaction,
we owned 50.1% of the outstanding share capital of Hillcot and
Shinsei Bank, Ltd., or Shinsei, owned the remaining 49.9%. Upon
completion of the transaction, Hillcot paid a distribution to
Shinsei of approximately $27.1 million representing its
49.9% share of the consideration. J. Christopher Flowers, a
member of our board of directors and one of our largest
shareholders, is a director and the largest shareholder of
Shinsei. The purchase price of $54.4 million was funded
from approximately 50% available cash on hand and the remaining
from inter-company advances. Hillcot Re is a U.K.-based
reinsurer that is in run-off.
Capital
Assurance
On August 18, 2008, we completed the acquisition of all of
the outstanding capital stock of Capital Assurance Company Inc.
and Capital Assurance Services, Inc. for a total purchase price
of approximately $5.3 million. Capital Assurance Company,
Inc. is a Florida-domiciled insurer that is in run-off. The
acquisition was funded from available cash on hand.
EPIC
On August 14, 2008, we completed the acquisition of all of
the outstanding capital stock of Electricity Producers Insurance
Company (Bermuda) Limited, or EPIC, from its parent British
Nuclear Fuels plc. The purchase price, including acquisition
expenses, of £36.7 million (approximately
$68.8 million) was financed by approximately
$32.8 million from a credit facility provided by a
London-based bank; approximately $10.2 million from the
Flowers Fund by way of non-voting equity participation, and the
remainder from available cash on hand. The interest on the bank
loan is LIBOR plus 2.25%. The facility was repayable within four
years and is secured by a first charge over our shares in EPIC.
In October 2008, we fully repaid the outstanding principal and
accrued interest on the credit facility.
Goshawk
On June 20, 2008 we, through our wholly-owned subsidiary
Enstar Acquisitions Limited, or EAL, announced a cash offer to
all of the shareholders of Goshawk Insurance Holdings Plc, or
Goshawk, at 5.2 pence (approximately $0.103) for each share, or
the Offer, conditioned, among other things, on receiving
acceptance from shareholders owning 90% of the shares of
Goshawk. Goshawk owns Rosemont Reinsurance Limited, a
Bermuda-based reinsurer that wrote primarily property and marine
business, which was placed into run-off in October 2005. The
Offer valued Goshawk at approximately £45.7 million in
the aggregate.
On July 17, 2008, after acquiring more than 30% of the
shares of Goshawk through market purchases, EAL was obligated to
remove all of the conditions of the Offer except for the receipt
of acceptances from shareholders owning 50% of the shares of
Goshawk. On July 25, 2008, the acceptance condition was met
and the Offer became unconditional. On August 19, 2008, the
Offer closed with shareholders representing approximately 89.44%
of Goshawk accepting the Offer for total consideration of
£40.9 million (approximately $80.9 million).
The total purchase price, including acquisition costs, of
approximately $82.0 million was financed by a drawdown of
$36.1 million from a credit facility provided by a
London-based bank, a contribution of $11.7 million
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of the acquisition price from the Flowers Fund, by way of
non-voting equity participation, and the remainder from
available cash on hand. The interest rate on the credit facility
is LIBOR plus 2.25% and the facility is repayable within three
years and is secured by a first charge over our shares in
Goshawk.
In connection with the acquisition, Goshawks bank loan of
$16.3 million was refinanced by the drawdown of
$12.2 million (net of fees) from a credit facility provided
by a London-based bank and $4.1 million from the Flowers
Fund.
Seaton
and Stonewall
On June 13, 2008, our indirect subsidiary Virginia Holdings
Ltd., or Virginia, completed the acquisition of 44.4% of the
outstanding capital stock of Stonewall Acquisition Corporation
from Dukes Place Holdings, L.P., a portfolio company of GSC
European Mezzanine Fund II, L.P. Stonewall Acquisition
Corporation is the parent of two Rhode Island-domiciled
insurers, Stonewall Insurance Company and Seaton Insurance
Company, both of which are in run-off. The purchase price was
$20.4 million and was funded from available cash on hand.
Gordian
On March 5, 2008, we completed the acquisition of AMP
Limiteds, or AMPs, Australian-based closed
reinsurance and insurance operations, or Gordian. The purchase
price, including acquisition expenses, of AU$436.9 million
(approximately $405.4 million) was financed by
approximately AU$301.0 million (approximately
$276.5 million), including an arrangement fee of
AU$4.5 million (approximately $4.2 million), from bank
financing provided jointly by a London-based bank and a German
bank (in which the Flowers Fund is a significant shareholder of
the German bank); approximately AU$41.6 million
(approximately $39.5 million) from the Flowers Fund, by way
of non-voting equity participation; and approximately
AU$98.7 million (approximately $93.6 million) from
available cash on hand.
Guildhall
On February 29, 2008, we completed the acquisition of
Guildhall Insurance Company Limited, or Guildhall, a U.K.-based
reinsurance company that has been in run-off since 1986. The
purchase price, including acquisition expenses, of approximately
£33.4 million (approximately $65.9 million) was
financed by the drawdown of approximately
£16.5 million (approximately $32.5 million) from
a U.S. dollar facility loan agreement with a London-based
bank; approximately £5.0 million (approximately
$10.0 million) from the Flowers Fund, by way of non-voting
equity participation; and approximately £11.9 million
(approximately $23.5 million) from available cash on hand.
Shelbourne
In December 2007, we, in conjunction with JCF FPK I L.P., or JCF
FPK, and a newly-hired executive management team, formed
Shelbourne Group Limited, or Shelbourne, to invest in
Reinsurance to Close or RITC transactions (the
transferring of liabilities from one Lloyds Syndicate to
another) with Lloyds of London insurance and reinsurance
syndicates in run-off. JCF FPK is a joint investment program
between Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC, or FPK
and the Flowers Fund. Shelbourne is a holding company of a
Lloyds Managing Agency, Shelbourne Syndicate Services
Limited. We own 50.1% of Shelbourne, which in turn owns 100% of
Shelbourne Syndicate Services Limited, the Managing Agency for
Lloyds Syndicate 2008, a syndicate approved by
Lloyds of London on December 16, 2007 to undertake
RITC transactions with Lloyds syndicates in run-off. In
February 2008, Lloyds Syndicate 2008 entered into RITC
agreements with four Lloyds syndicates with total gross
insurance reserves of approximately $471.2 million.
Since January 1, 2008, we have committed capital of
approximately £36.0 million (approximately
$72.0 million) by way of a letter of credit issued by a
London-based bank to Lloyds Syndicate 2008. The letter of
credit was secured by a parental guarantee from us in the amount
of £12.0 million (approximately $24.0 million);
approximately £11.0 million (approximately
$22.0 million) from the Flowers Fund (acting in its own
capacity and not
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through JCF FPK), by way of a non-voting equity participation;
and approximately £13.0 million (approximately
$26.0 million) from available cash on hand. JCF FPKs
capital commitment to Lloyds Syndicate 2008 is
approximately £14.0 million (approximately
$28.0 million).
Marlon
On August 28, 2007, we completed the acquisition of Marlon
Insurance Company Limited, a reinsurance company in run-off, and
Marlon Management Services Limited for total consideration of
approximately $31.2 million, which was funded by
$15.3 million borrowed under a facility loan agreement with
a London-based bank and available cash on hand. Marlon Insurance
Company Limited and Marlon Management Services Limited, together
referred to herein as Marlon, are both U.K.-based companies. In
February 2008, the facility loan was repaid in full.
Tate &
Lyle
On June 12, 2007, we completed the acquisition of
Tate & Lyle Reinsurance Ltd., or Tate &
Lyle, for total consideration of approximately
$5.9 million. Tate & Lyle is a Bermuda-based
reinsurance company in run-off.
Inter-Ocean
On February 23, 2007, we, through our wholly-owned
subsidiary Oceania Holdings Ltd, or Oceania, completed the
acquisition of Inter-Ocean Holdings Ltd., or Inter-Ocean. The
total purchase price was approximately $57.5 million, which
was funded by $26.8 million borrowed under a facility loan
agreement with a London-based bank and available cash on hand.
Inter-Ocean owns two reinsurers, one based in Bermuda and one
based in Ireland. Both of these companies wrote international
reinsurance and had in place retrocessional policies providing
for the full reinsurance of all of the risks they assumed. In
October 2007, Oceania repaid its bank debt in full.
The
Enstar Group, Inc.
On January 31, 2007, we completed the merger, or the
Merger, of CWMS Subsidiary Corp. with and into The Enstar Group,
Inc., or EGI, and, as a result, EGI, renamed Enstar USA, Inc.,
is now our wholly-owned subsidiary. Prior to the Merger, EGI
owned approximately 32% economic and 50% voting interests in us.
As a result of the completion of the Merger, B.H. Acquisition
Ltd. is now our wholly-owned subsidiary.
Unione
In November 2006, we, through our indirect subsidiary Virginia,
purchased Unione Italiana (U.K.) Reinsurance Company Limited, or
Unione, a U.K. company, for approximately $17.4 million.
Unione underwrote business from the 1940s though to 1995.
Prior to acquisition, Unione closed the majority of its
portfolio by way of a solvent scheme of arrangement in the U.K.
Uniones remaining business is a portfolio of international
insurance and reinsurance which has been in run-off since 1971.
Cavell
In October 2006, we, through our subsidiary Virginia, purchased
Cavell Holdings Limited (U.K.), or Cavell, for approximately
£31.8 million (approximately $60.9 million).
Cavell owns a U.K. reinsurance company and a Norwegian
reinsurer, both of which wrote portfolios of international
reinsurance business and went into run-off in 1993 and 1992,
respectively. The purchase price was funded by
$24.5 million borrowed under a facility loan agreement with
a London-based bank and available cash on hand. In February
2008, Virginia repaid its bank debt in full.
Aioi
Europe
In March 2006, we and Shinsei, through Hillcot, completed the
acquisition of Aioi Insurance Company of Europe Limited, or Aioi
Europe, a London-based subsidiary of Aioi Insurance Company,
Limited. Aioi Europe underwrote general insurance and
reinsurance business in Europe for its own account from 1982
until 2002 when it
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generally ceased underwriting and placed its general insurance
and reinsurance business into run-off. The aggregate purchase
price paid for Aioi Europe was £62.0 million
(approximately $108.9 million), with
£50.0 million in cash paid upon the closing of the
transaction and £12.0 million in the form of a
promissory note, payable twelve months from the date of the
closing. Upon completion of the transaction, Aioi Europe changed
its name to Brampton Insurance Company Limited. In April 2006,
Hillcot borrowed approximately $44.0 million from a
London-based bank to partially assist with the financing of the
Aioi Europe acquisition. Following a repurchase by Aioi Europe
of its shares valued at £40.0 million in May 2006,
Hillcot repaid the promissory note and reduced the bank
borrowing to $19.2 million, which was repaid in May 2008.
Fieldmill
In May 2005, we, through one of our subsidiaries, purchased
Fieldmill Insurance Company Limited (formerly known as
Harleysville Insurance Company (UK) Limited) for approximately
$1.4 million.
Mercantile,
Harper and Longmynd
During 2004, we, through one of our subsidiaries, completed the
acquisition of Mercantile Indemnity Company Ltd., Harper
Insurance Limited (formerly Turegum Insurance Company), and
Longmynd Insurance Company Ltd. (formerly Security Insurance
Company (UK) Ltd.), all of which were in run-off, for a total
purchase price of approximately $4.5 million.
Share
Offering
In July 2008, we completed the sale to the public of 1,372,028
newly-issued ordinary shares, inclusive of the
underwriters over-allotment, or the Offering. The shares
were priced at $87.50 per share and we received net proceeds of
approximately $116.8 million, after underwriting fees and
other expenses of approximately $3.3 million. FPK served as
lead managing underwriter in the Offering. The Flowers Fund and
certain of its affiliated investment partnerships purchased
285,714 ordinary shares with a value of approximately
$25.0 million in the Offering at the public offering price.
An affiliate of the Flowers Fund controls approximately 41% of
FPK.
Management
of Run-Off Portfolios
We are a party to several management engagements pursuant to
which we have agreed to manage the run-off portfolios of third
parties. Such arrangements are advantageous for third-party
insurers because they allow a third-party insurer to focus their
management efforts on their core competency while allowing them
to maintain the portfolio of business on their balance sheet. In
addition, our expertise in managing portfolios in run-off allows
the third-party insurer the opportunity to potentially realize
positive operating results if we achieve our objectives in
management of the run-off portfolio. We specialize in the
collection of reinsurance receivables through our subsidiary
Kinsale Brokers Limited. Through our subsidiaries, Enstar (US)
Inc. and Cranmore Adjusters Limited, we also specialize in
providing claims inspection services whereby we are engaged by
third-party insurance and reinsurance providers to review
certain of their existing insurance and reinsurance exposures,
relationships, policies
and/or
claims history.
Our primary objective in structuring our management arrangements
is to align the third-party insurers interests with our
interests. Consequently, management agreements typically are
structured so that we receive fixed fees in connection with the
management of the run-off portfolio and also typically receive
certain incentive payments based on a portfolios positive
operating results.
Management
Agreements
We have nine management agreements with third-party clients to
manage certain run-off portfolios with gross loss reserves, as
of December 31, 2008, of approximately $1.4 billion.
The fees generated by these engagements include both fixed and
incentive-based remuneration based on our success in achieving
certain objectives. These
9
agreements do not include the recurring engagements managed by
our claims inspection and reinsurance collection subsidiaries,
Cranmore Adjusters Limited and Kinsale Brokers Limited,
respectively.
Claims
Management and Administration
An integral factor to our success is our ability to analyze,
administer, manage and settle claims and related expenses, such
as loss adjustment expenses. Our claims teams are located in
different offices within our organization and provide global
claims support. We have implemented effective claims handling
guidelines along with claims reporting and control procedures in
all of our claims units. To ensure that claims are appropriately
handled and reported in accordance with these guidelines, all
claims matters are reviewed regularly, with all material claims
matters being circulated to and authorized by management prior
to any action being taken.
When we receive notice of a claim, regardless of size and
regardless of whether it is a paid claim request or a reserve
advice, it is reviewed and recorded within the claims system,
reserving our rights where appropriate. Claims reserve movements
and payments are reviewed daily, with any material movements
being reported to management for review. This enables
flash reporting of significant events and potential
insurance or reinsurance losses to be communicated to senior
management worldwide on a timely basis irrespective from which
geographical location or business unit location the exposure
arises.
We are also able to efficiently manage claims and obtain savings
through our extensive relationships with defense counsel (both
in-house and external), third-party claims administrators and
other professional advisors and experts. We have developed
relationships and protocols to reduce the number of outside
counsel by consolidating claims of similar types and complexity
with experienced law firms specializing in the particular type
of claim. This approach has enabled us to more efficiently
manage outside counsel and other third parties, thereby reducing
expenses, and to establish closer relationships with ceding
companies.
When appropriate, we negotiate with direct insureds to buy back
policies either on favorable terms or to mitigate against
existing
and/or
potential future indemnity exposures and legal costs in an
uncertain and constantly evolving legal environment. We also
pursue commutations on favorable terms with ceding companies of
reinsurance business in order to realize savings or to mitigate
against potential future indemnity exposures and legal costs.
Such buy-backs and commutations typically eliminate all past,
present and future liability to direct insureds and reinsureds
in return for a lump sum payment.
With regard to reinsurance receivables, we manage cash flow by
working with reinsurers, brokers and professional advisors to
achieve fair and prompt payment of reinsured claims, taking
appropriate legal action to secure receivables where necessary.
We also attempt where appropriate to negotiate favorable
commutations with our reinsurers by securing a lump sum
settlement from reinsurers in complete satisfaction of the
reinsurers past, present and future liability in respect
of such claims. Properly priced commutations reduce the expense
of adjusting direct claims and pursuing collection of
reinsurance receivables (both of which may often involve
extensive legal expense), realize savings, remove the potential
future volatility of claims and reduce required regulatory
capital.
Reserves
for Unpaid Losses and Loss Adjustment Expense
Applicable insurance laws and generally accepted accounting
practices require us to maintain reserves to cover our estimated
losses under insurance policies that we have assumed and for
loss adjustment expense, or LAE, relating to the investigation,
administration and settlement of policy claims. Our LAE reserves
consist of both reserves for allocated loss adjustment expenses,
or ALAE, and for unallocated loss adjustment expenses, or ULAE.
ALAE are linked to the settlement of an individual claim or
loss, whereas ULAE reserve is based on our estimates of future
costs to administer the claims.
We and our subsidiaries establish losses and LAE reserves for
individual claims by evaluating reported claims on the basis of:
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|
|
our knowledge of the circumstances surrounding the claim;
|
|
|
|
the severity of the injury or damage;
|
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|
|
the jurisdiction of the occurrence;
|
10
|
|
|
|
|
the potential for ultimate exposure;
|
|
|
|
the type of loss; and
|
|
|
|
our experience with the line of business and policy provisions
relating to the particular type of claim.
|
Because a significant amount of time can lapse between the
assumption of risk, the occurrence of a loss event, the
reporting of the event to an insurance or reinsurance company
and the ultimate payment of the claim on the loss event, the
liability for unpaid losses and LAE is based largely upon
estimates. Our management must use considerable judgment in the
process of developing these estimates. The liability for unpaid
losses and LAE for property and casualty business includes
amounts determined from loss reports on individual cases and
amounts for losses incurred but not reported, or IBNR. Such
reserves, including IBNR reserves, are estimated by management
based upon loss reports received from ceding companies,
supplemented by our own estimates of losses for which no ceding
company loss reports have yet been received.
In establishing reserves, management also considers actuarial
estimates of ultimate losses. Our actuaries employ generally
accepted actuarial methodologies and procedures to estimate
ultimate losses and loss expenses. Our loss reserves are largely
related to casualty exposures including latent exposures
primarily relating to asbestos and environmental, or A&E,
as discussed below. In establishing the reserves for unpaid
claims, management considers facts currently known and the
current state of the law and coverage litigation. Liabilities
are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to
indicate the involvement of a specific insurance policy, and
management can reasonably estimate its liability. In addition,
reserves are established to cover loss development related to
both known and unasserted claims.
The estimation of unpaid claim liabilities is subject to a high
degree of uncertainty for a number of reasons. Unpaid claim
liabilities for property and casualty exposures in general are
impacted by changes in the legal environment, jury awards,
medical cost trends and general inflation. Moreover, for latent
exposures in particular, developed case law and adequate claims
history do not exist. There is significant coverage litigation
involved with these exposures which creates further uncertainty
in the estimation of the liabilities. Therefore, for these types
of exposures, it is especially unclear whether past claim
experience will be representative of future claim experience.
Ultimate values for such claims cannot be estimated using
reserving techniques that extrapolate losses to an ultimate
basis using loss development factors, and the uncertainties
surrounding the estimation of unpaid claim liabilities are not
likely to be resolved in the near future. There can be no
assurance that the reserves established by us will be adequate
or will not be adversely affected by the development of other
latent exposures. The actuarial methods used to estimate
ultimate loss and ALAE for our latent exposures are discussed
below.
For the non-latent loss exposures, a range of traditional loss
development extrapolation techniques is applied. Incremental
paid and incurred loss development methodologies are the most
commonly used methods. Traditional cumulative paid and incurred
loss development methods are used where
inception-to-date,
cumulative paid and reported incurred loss development history
is available. These methods assume that groups of losses from
similar exposures will increase over time in a predictable
manner. Historical paid and incurred loss development experience
is examined for earlier underwriting years to make inferences
about how later underwriting years losses will develop.
Where company-specific loss information is not available or not
reliable, industry loss development information published by
reliable industry sources such as the Reinsurance Association of
America is considered.
The reserving process is intended to reflect the impact of
inflation and other factors affecting loss payments by taking
into account changes in historical payment patterns and
perceived trends. However, there is no precise method for the
subsequent evaluation of the adequacy of the consideration given
to inflation, or to any other specific factor, or to the way one
factor may affect another.
The loss development tables below show changes in our gross and
net loss reserves in subsequent years from the prior loss
estimates based on experience as of the end of each succeeding
year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of losses for
individual years. A redundancy means the original estimate was
higher than the current estimate; a deficiency means that the
current
11
estimate is higher than the original estimate. The Reserve
redundancy/(deficiency) line represents, as of the date
indicated, the difference between the latest re-estimated
liability and the reserves as originally estimated.
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|
|
|
|
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|
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|
Gross Loss and Loss
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Adjustment Expense
|
|
Year Ended December 31,
|
|
Reserves
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Reserves assumed
|
|
$
|
419,717
|
|
|
$
|
284,409
|
|
|
$
|
381,531
|
|
|
$
|
1,047,313
|
|
|
$
|
806,559
|
|
|
$
|
1,214,419
|
|
|
$
|
1,591,449
|
|
|
$
|
2,798,287
|
|
1 year later
|
|
|
348,279
|
|
|
|
302,986
|
|
|
|
365,913
|
|
|
|
900,274
|
|
|
|
909,984
|
|
|
|
1,227,427
|
|
|
|
1,436,051
|
|
|
|
|
|
2 years later
|
|
|
360,558
|
|
|
|
299,281
|
|
|
|
284,583
|
|
|
|
1,002,773
|
|
|
|
916,480
|
|
|
|
1,084,852
|
|
|
|
|
|
|
|
|
|
3 years later
|
|
|
359,771
|
|
|
|
278,020
|
|
|
|
272,537
|
|
|
|
1,012,483
|
|
|
|
853,139
|
|
|
|
|
|
|
|
|
|
|
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4 years later
|
|
|
332,904
|
|
|
|
264,040
|
|
|
|
243,692
|
|
|
|
953,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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5 years later
|
|
|
316,257
|
|
|
|
242,278
|
|
|
|
216,875
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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6 years later
|
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|
294,945
|
|
|
|
238,315
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|
|
|
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|
|
|
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|
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|
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7 years later
|
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|
290,926
|
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|
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|
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|
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|
|
|
|
|
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|
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|
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|
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|
Year Ended December 31,
|
|
Gross Paid Losses
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
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|
1 year later
|
|
$
|
97,036
|
|
|
$
|
43,721
|
|
|
$
|
19,260
|
|
|
$
|
110,193
|
|
|
$
|
117,666
|
|
|
$
|
90,185
|
|
|
$
|
407,692
|
|
|
|
|
|
2 years later
|
|
|
123,844
|
|
|
|
64,900
|
|
|
|
43,082
|
|
|
|
226,225
|
|
|
|
198,407
|
|
|
|
197,751
|
|
|
|
|
|
|
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|
3 years later
|
|
|
142,282
|
|
|
|
84,895
|
|
|
|
61,715
|
|
|
|
305,913
|
|
|
|
268,541
|
|
|
|
|
|
|
|
|
|
|
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|
4 years later
|
|
|
160,193
|
|
|
|
101,414
|
|
|
|
75,609
|
|
|
|
375,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later
|
|
|
174,476
|
|
|
|
110,155
|
|
|
|
87,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
6 years later
|
|
|
181,800
|
|
|
|
121,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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7 years later
|
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|
189,023
|
|
|
|
|
|
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|
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|
Reserve redundancy/ (deficiency)
|
|
$
|
128,791
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|
|
$
|
46,094
|
|
|
$
|
164,656
|
|
|
$
|
93,479
|
|
|
$
|
(46,580
|
)
|
|
$
|
129,567
|
|
|
$
|
155,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expense
|
|
Year Ended December 31,
|
|
Reserves
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Reserves assumed
|
|
$
|
224,507
|
|
|
$
|
184,518
|
|
|
$
|
230,155
|
|
|
$
|
736,660
|
|
|
$
|
593,160
|
|
|
$
|
872,259
|
|
|
$
|
1,163,485
|
|
|
$
|
2,403,712
|
|
1 year later
|
|
|
190,768
|
|
|
|
176,444
|
|
|
|
220,712
|
|
|
|
653,039
|
|
|
|
590,153
|
|
|
|
875,636
|
|
|
|
1,034,588
|
|
|
|
|
|
2 years later
|
|
|
176,118
|
|
|
|
178,088
|
|
|
|
164,319
|
|
|
|
652,195
|
|
|
|
586,059
|
|
|
|
753,551
|
|
|
|
|
|
|
|
|
|
3 years later
|
|
|
180,635
|
|
|
|
138,251
|
|
|
|
149,980
|
|
|
|
649,355
|
|
|
|
532,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later
|
|
|
135,219
|
|
|
|
129,923
|
|
|
|
136,611
|
|
|
|
600,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later
|
|
|
124,221
|
|
|
|
119,521
|
|
|
|
108,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later
|
|
|
114,375
|
|
|
|
112,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later
|
|
|
106,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Net Paid Losses
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
1 year later
|
|
$
|
38,634
|
|
|
$
|
10,557
|
|
|
$
|
11,354
|
|
|
$
|
78,488
|
|
|
$
|
79,398
|
|
|
$
|
43,896
|
|
|
$
|
112,321
|
|
|
|
|
|
2 years later
|
|
|
32,291
|
|
|
|
24,978
|
|
|
|
6,312
|
|
|
|
161,178
|
|
|
|
125,272
|
|
|
|
(70,430
|
)
|
|
|
|
|
|
|
|
|
3 years later
|
|
|
44,153
|
|
|
|
17,304
|
|
|
|
9,161
|
|
|
|
206,351
|
|
|
|
(14,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later
|
|
|
34,483
|
|
|
|
24,287
|
|
|
|
(1,803
|
)
|
|
|
67,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later
|
|
|
39,232
|
|
|
|
9,686
|
|
|
|
2,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later
|
|
|
23,309
|
|
|
|
14,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later
|
|
|
24,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve redundancy/ (deficiency)
|
|
$
|
117,587
|
|
|
$
|
72,418
|
|
|
$
|
121,489
|
|
|
$
|
135,721
|
|
|
$
|
60,356
|
|
|
$
|
118,708
|
|
|
$
|
128,897
|
|
|
|
|
|
12
The following table provides a reconciliation of the liability
for losses and LAE, net of reinsurance ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Net reserves for losses and loss adjustment expenses, beginning
of period
|
|
$
|
1,163,485
|
|
|
$
|
872,259
|
|
|
$
|
593,160
|
|
|
$
|
736,660
|
|
|
$
|
230,155
|
|
Incurred related to prior years
|
|
|
(242,104
|
)
|
|
|
(24,482
|
)
|
|
|
(31,927
|
)
|
|
|
(96,007
|
)
|
|
|
(13,706
|
)
|
Paids related to prior years
|
|
|
(174,013
|
)
|
|
|
(20,422
|
)
|
|
|
(75,293
|
)
|
|
|
(69,007
|
)
|
|
|
(19,019
|
)
|
Effect of exchange rate movement
|
|
|
(124,989
|
)
|
|
|
18,625
|
|
|
|
24,856
|
|
|
|
3,652
|
|
|
|
4,124
|
|
Retroactive reinsurance contracts assumed
|
|
|
373,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired on acquisition of subsidiaries
|
|
|
1,408,046
|
|
|
|
317,505
|
|
|
|
361,463
|
|
|
|
17,862
|
|
|
|
535,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and loss adjustment expenses, end of
period
|
|
$
|
2,403,712
|
|
|
$
|
1,163,485
|
|
|
$
|
872,259
|
|
|
$
|
593,160
|
|
|
$
|
736,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the table above, incurred losses and loss adjustment expenses
related to prior years represents changes in estimates of prior
period net loss and loss adjustment expense liabilities
comprising net incurred loss movements during a period and
changes in estimates of net IBNR liabilities. Net incurred loss
movements during a period comprise increases or reductions in
specific case reserves advised during the period to us by our
policyholders and attorneys, or by us to our reinsurers, less
claims settlements made during the period by us to our
policyholders, plus claim receipts made to us by our reinsurers.
Prior period estimates of net IBNR liabilities may change as our
management considers the combined impact of commutations, policy
buy-backs, settlement of losses on carried reserves and the
trend of incurred loss development compared to prior forecasts.
The trend of incurred loss development in any period comprises
the movement in net case reserves less net claims settled during
the period. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
Loss and Loss Adjustment Expenses on page 66 for an
explanation of how the loss reserving methodologies are applied
to the movement, or development, of net incurred losses during a
period to estimate IBNR liabilities.
Commutations provide an opportunity for us to exit exposures to
entire policies with insureds and reinsureds at a discount to
the previously estimated ultimate liability. Our internal and
external actuaries eliminate all prior historical loss
development that relates to commuted exposures and apply their
actuarial methodologies to the remaining aggregate exposures and
revised historical loss development information to reassess
estimates of ultimate liabilities.
Policy buy-backs provide an opportunity for us to settle
individual policies and losses usually at a discount to carried
advised loss reserves. As part of our routine claims settlement
operations, claims will settle at either below or above the
carried advised loss reserve. The impact of policy buy-backs and
the routine settlement of claims updates historical loss
development information to which actuarial methodologies are
applied often resulting in revised estimates of ultimate
liabilities. Our actuarial methodologies include industry
benchmarking which, under certain methodologies (discussed
further under Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies on
page 65), compares the trend of our loss development to
that of the industry. To the extent that the trend of our loss
development compared to the industry changes in any period, it
is likely to have an impact on the estimate of ultimate
liabilities.
Year
Ended December 31, 2008
Net reduction in loss and loss adjustment expense liabilities
for the year ended December 31, 2008 was
$242.1 million, excluding the impacts of favorable foreign
exchange rate movements of $36.1 million (relating to
companies acquired in 2007 and earlier) and including both net
reduction in loss and loss adjustment expense liabilities of
$149.4 million relating to companies acquired during the
year and premium and commission adjustments triggered by
incurred losses of $0.1 million.
The net reduction in loss and loss adjustment expense
liabilities for 2008 of $242.1 million was attributable to
a reduction in estimates of net ultimate losses of
$161.4 million, a reduction in aggregate provisions for bad
debt of $36.1 million (excluding $3.1 million relating
to one of our entities that benefited from substantial stop loss
13
reinsurance protection discussed below) and a reduction in
estimates of loss adjustment expense liabilities of
$69.1 million, relating to 2008 run-off activity, partially
offset by the amortization, over the estimated payout period, of
fair value adjustments relating to companies acquired amounting
to $24.5 million.
The reduction in estimates of net ultimate losses of
$161.4 million comprised the following:
(i) A reduction in estimates of net ultimate losses of
$21.7 million in one of our insurance entities that
benefited from substantial stop loss reinsurance protection. Net
adverse incurred loss development relating to this entity of
$21.6 million was offset by reductions in IBNR reserves of
$94.8 million and reductions in provisions for bad debt of
$3.1 million resulting in a net reduction in estimates of
ultimate losses of $76.3 million. This entity benefited,
until December 18, 2008, from substantial stop loss
reinsurance protection whereby $54.6 million of the net
reduction in ultimate losses of $76.3 million was ceded to
a single AA- rated reinsurer such that we retained a reduction
in estimates of net ultimate losses relating to this entity of
$21.7 million. On December 18, 2008, we commuted the
stop loss reinsurance protection with the reinsurer for the
receipt $190.0 million payable by the reinsurer to us over
four years together with interest compounded at 3.5% per annum.
The commutation resulted in no significant financial impact to
us. The net adverse incurred loss development relating to this
entity of $21.6 million, whereby advised net case reserves
of $25.0 million were settled for net paid losses of
$46.6 million, primarily related to six commutations of
assumed and ceded liabilities completed during 2008. Actuarial
analysis of the remaining unsettled loss liabilities resulted in
a decrease in the estimate of IBNR loss reserves of
$94.8 million after consideration of the $21.6 million
adverse incurred loss development during the year, and the
application of the actuarial methodologies to loss data
pertaining to the remaining non-commuted exposures. Of the six
commutations completed for this entity, of which the three
largest were completed during the three months ended
December 31, 2008, one was among its top ten cedant
exposures. The remaining five were of a smaller size, consistent
with our approach of targeting significant numbers of cedant and
reinsurer relationships as well as targeting significant
individual cedant and reinsurer relationships.
(ii) A reduction in estimates of net ultimate losses of
$139.7 million in our remaining insurance and reinsurance
entities which comprised net favorable incurred loss development
of $24.1 million and reductions in IBNR reserves of
$115.6 million. The net favorable incurred loss development
in our remaining insurance and reinsurance entities of
$24.1 million, whereby net advised case and LAE reserves of
$123.5 million were settled for net paid loss recoveries of
$99.4 million, arose from the settlement of non-commuted
losses in the year below carried reserves and approximately
59 commutations of assumed and ceded exposures at less than
case and LAE reserves. Approximately 82% of savings generated
from commutations related to commutations completed during the
three months ended December 31, 2008. We adopt a
disciplined approach to the review and settlement of
non-commuted claims through claims adjusting and the inspection
of underlying policyholder records such that settlements of
assumed exposures may often be achieved below the level of the
originally advised loss, and settlements of ceded receivables
may often be achieved at levels above carried balances. The net
reduction in the estimate of IBNR loss and loss adjustment
expense liabilities relating to our remaining insurance and
reinsurance companies amounted to $115.6 million and
results from the application of our reserving methodologies to
(a) the reduced historical incurred loss development
information relating to remaining exposures after the 59
commutations, and (b) reduced case and LAE reserves in the
aggregate. Of the 59 commutations completed during 2008 for our
remaining reinsurance and insurance companies, two (both of
which were completed during the three months ended
December 31, 2008), were among our top ten cedant
and/or
reinsurance exposures. The remaining 57 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships, as well as targeting
significant individual cedant and reinsurer relationships.
Another of our reinsurance companies has retrocessional
arrangements providing for full reinsurance of all risks
assumed. During the year, this entity commuted its largest
assumed liability and related retrocessional protection whereby
the subsidiary paid net losses of $222.0 million and
reduced net IBNR by the same amount resulting in no gain or loss
to us.
The reduction in aggregate provisions for bad debt of
$36.1 million (excluding $3.1 million relating to one
of our entities that benefited from substantial stop loss
reinsurance protection discussed above) resulted from the
collection, primarily during the three months ended
December 31, 2008, of certain reinsurance receivables
against
14
which bad debt provisions had been provided in earlier periods
together with revised estimations of bad debt provisions based
on additional information obtained during the three months ended
December 31, 2008.
Year
Ended December 31, 2007
Net reduction in loss and loss adjustment expense liabilities
for the year ended December 31, 2007 was
$24.5 million, excluding the impacts of adverse foreign
exchange rate movements of $18.6 million and including both
net reduction in loss and loss adjustment expense liabilities of
$9.0 million relating to companies acquired during the year
and premium and commission adjustments triggered by incurred
losses of $0.3 million.
The net reduction in loss and loss adjustment expense
liabilities for 2007 of $24.5 million was attributable to a
reduction in estimates of net ultimate losses of
$30.7 million and a reduction in estimates of loss
adjustment expense liabilities of $22.0 million, relating
to 2007 run-off activity, partially offset by an increase in
aggregate provisions for bad debt of $1.7 million,
primarily relating to companies acquired in 2006, and the
amortization, over the estimated payout period, of fair value
adjustments relating to companies acquired amounting to
$26.5 million.
The reduction in estimates of net ultimate losses of
$30.7 million comprised net adverse incurred loss
development of $1.0 million offset by reductions in
estimates of IBNR reserves of $31.7 million. An increase in
estimates of net ultimate losses of $2.1 million relating
to one of our insurance entities was offset by reductions in
estimates of net ultimate losses of $32.8 million in our
remaining insurance and reinsurance entities.
The net adverse incurred loss development of $1.0 million
and reductions in IBNR reserves of $31.7 million,
respectively, comprised the following:
(i) Net adverse incurred loss development in one of our
reinsurance entities of $36.6 million, whereby advised case
reserves of $16.9 million were settled for net paid losses
of $53.5 million. This net adverse incurred loss
development resulted from the settlement of case and LAE
reserves above carried levels and from new loss advices,
partially offset by approximately 12 commutations of assumed and
ceded exposures below carried reserve levels. Actuarial analysis
of the remaining unsettled loss liabilities resulted in a
decrease in the estimate of IBNR loss reserves of
$13.1 million after consideration of the $36.6 million
adverse incurred loss development during the year, and the
application of the actuarial methodologies to loss data
pertaining to the remaining non-commuted exposures. Of the 12
commutations completed for this entity, three were among our top
ten cedant exposures. The remaining 9 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships as well as targeting
significant individual cedant and reinsurer relationships. The
entity in question also benefits from substantial stop loss
reinsurance protection whereby the ultimate adverse loss
development of $23.4 million was largely offset by a
recoverable from a single AA- rated reinsurer such that a net
ultimate loss of $2.1 million was retained by us.
(ii) Net favorable incurred loss development of
$29.0 million, comprising net paid loss recoveries,
relating to another one of our reinsurance companies, offset by
increases in net IBNR loss reserves of $29.0 million,
resulting in no ultimate gain or loss. This reinsurance company
has retrocessional arrangements providing for full reinsurance
of all risks assumed.
(iii) Net favorable incurred loss development of
$6.5 million in our remaining insurance and reinsurance
entities together with reductions in IBNR reserves of
$26.3 million. The net favorable incurred loss development
in our remaining insurance and reinsurance entities of
$6.6 million, whereby net advised case and LAE reserves of
$2.5 million were settled for net paid loss recoveries of
$4.0 million, arose from the settlement of non-commuted
losses in the year below carried reserves and approximately 57
commutations of assumed and ceded exposures at less than case
and LAE reserves. We adopt a disciplined approach to the review
and settlement of non-commuted claims through claims adjusting
and the inspection of underlying policyholder records such that
settlements of assumed exposures may often be achieved below the
level of the originally advised loss, and settlements of ceded
receivables may often be achieved at levels above carried
balances. The net reduction in the estimate of IBNR loss and
loss adjustment expense liabilities relating to our remaining
insurance and reinsurance companies amounted to
$26.3 million and resulted from the application of our
reserving methodologies to (a) the reduced historical
incurred loss development information relating to remaining
exposures after the 57 commutations, and (b) reduced case
and LAE reserves in the aggregate. Of
15
the 57 commutations completed during 2007 for our remaining
reinsurance and insurance companies, five were among our top ten
cedant
and/or
reinsurance exposures. The remaining 52 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships, as well as targeting
significant individual cedant and reinsurer relationships.
Year
Ended December 31, 2006
Net reduction in loss and loss adjustment expense liabilities
for the year ended December 31, 2006 was
$31.9 million, excluding the impacts of adverse foreign
exchange rate movements of $24.9 million and including both
net reduction in loss and loss adjustment expense liabilities of
$2.7 million relating to companies acquired during the year
and premium and commission adjustments triggered by incurred
losses of $1.3 million.
The net reduction in loss and loss adjustment expense
liabilities for 2006 of $31.9 million was attributable to a
reduction in estimates of net ultimate losses of
$21.4 million, a reduction in estimates of loss adjustment
expense liabilities of $15.1 million relating to 2006
run-off activity, a reduction in aggregate provisions for bad
debt of $6.3 million, resulting from the collection of
certain reinsurance receivables against which bad debt
provisions had been provided in earlier periods, partially
offset by the amortization, over the estimated payout period, of
fair value adjustments relating to companies acquired amounting
to $10.9 million.
The reduction in estimates of net ultimate losses of
$21.4 million comprised net adverse incurred loss
development of $37.9 million offset by reductions in
estimates of IBNR reserves of $59.3 million. An increase in
estimates of ultimate losses of $3.4 million relating to
one of our insurance entities was offset by reductions in
estimates of net ultimate losses of $24.8 million in our
remaining insurance and reinsurance entities.
The adverse incurred loss development of $37.9 million,
whereby advised case and LAE reserves of $37.4 million were
settled for net paid losses of $75.3 million, comprised
adverse incurred loss development of $59.2 million relating
to one of our insurance companies partially offset by favorable
incurred loss development of $21.3 million relating to our
remaining insurance and reinsurance companies.
The adverse incurred loss development of $59.2 million
relating to one of our insurance companies was comprised of net
paid loss settlements of $81.3 million less reductions in
case and LAE reserves of $22.1 million and resulted from
the settlement of case and LAE reserves above carried levels and
from new loss advices, partially offset by approximately ten
commutations of assumed and ceded exposures below carried
reserves levels. Actuarial analysis of the remaining unsettled
loss liabilities resulted in an increase in the estimate of IBNR
loss reserves of $35.0 million after consideration of the
$59.2 million adverse incurred loss development during the
year, and the application of the actuarial methodologies to loss
data pertaining to the remaining non-commuted exposures. Factors
contributing to the increase include the establishment of a
reserve to cover potential exposure to lead paint claims, a
significant increase in asbestos reserves related to the
entitys single largest cedant (following a detailed review
of the underlying exposures), and a change in the assumed
A&E loss reporting time-lag as discussed further below. Of
the ten commutations completed for this entity, two were among
our top ten cedant
and/or
reinsurance exposures. The remaining eight were of a smaller
size, consistent with our approach of targeting significant
numbers of cedant and reinsurer relationships as well as
targeting significant individual cedant and reinsurer
relationships. The entity in question also benefits from
substantial stop loss reinsurance protection whereby the adverse
loss development of $59.2 million was largely offset by a
recoverable from a single AA- rated reinsurer. The increase in
estimated net ultimate losses of $3.4 million was retained
by us.
The net favorable incurred loss development of
$21.3 million, relating to our remaining insurance and
reinsurance companies, whereby net advised case reserves of
$15.3 million were settled for net paid loss recoveries of
$6.0 million, arose from approximately 35 commutations of
assumed and ceded exposures at less than case and LAE reserves,
where receipts from ceded commutations exceeded settlements of
assumed exposures, and the settlement of non-commuted losses in
the year below carried reserves. We adopt a disciplined approach
to the review and settlement of non-commuted claims through
claims adjusting and the inspection of underlying policyholder
records such that settlements may often be achieved below the
level of the originally advised loss.
The net reduction in the estimate of IBNR loss and loss
adjustment expense liabilities relating to our remaining
insurance and reinsurance companies (i.e., excluding the net
$55.8 million reduction in IBNR reserves relating to
16
the entity referred to above) amounted to $3.5 million.
This net reduction was comprised of an increase of
$19.8 million resulting from (i) a change in
assumptions as to the appropriate loss reporting time lag for
asbestos related exposures from two to three years and for
environmental exposures from two to two and one-half years,
which resulted in an increase in net IBNR reserves of
$6.4 million, and (ii) a reduction in ceded IBNR
recoverables of $13.4 million resulting from the
commutation of ceded reinsurance protections. The increase in
IBNR of $19.8 million is offset by a reduction of
$23.3 million resulting from the application of our
reserving methodologies to (i) the reduced historical
incurred loss development information relating to remaining
exposures after the 35 commutations, and (ii) reduced case
and LAE reserves in the aggregate. Of the 35 commutations
completed during 2006 for the remaining of our reinsurance and
insurance companies, ten were among our top ten cedant
and/or
reinsurance exposures. The remaining 25 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships as well as targeting
significant individual cedant and reinsurer relationships.
Year
Ended December 31, 2005
Net reduction in loss and loss adjustment expense liabilities
for the year ended December 31, 2005 was
$96.0 million, excluding the impacts of adverse foreign
exchange rate movements of $3.7 million and including both
net reduction in loss and loss adjustment expense liabilities of
$7.4 million relating to companies acquired during the year
and premium and commission adjustments triggered by incurred
losses of $1.3 million.
The net reduction in loss and loss adjustment expense
liabilities for 2005 of $96.0 million was attributable to a
reduction in estimates of net ultimate losses of
$73.2 million, a reduction in estimates of loss adjustment
expense liabilities of $10.5 million, relating to 2005
run-off activity, and a reduction in aggregate provisions for
bad debt of $20.2 million, resulting from the collection of
certain reinsurance receivables against which bad debt
provisions had been provided in earlier periods, partially
offset by the amortization, over the estimated payout period, of
fair value adjustments relating to companies acquired amounting
to $7.9 million.
The reduction in estimates of net ultimate losses of
$73.2 million was comprised of favorable incurred loss
development during the year of $5.9 million and reductions
in estimates of IBNR reserves of $67.3 million. The
favorable incurred loss development, whereby advised case and
LAE reserves of $74.9 million were settled for net paid
losses of $69.0 million, arose from approximately 68
commutations of assumed and ceded exposures at less than case
and LAE reserves and the settlement of noncommuted losses in the
year below carried reserves. We adopt a disciplined approach,
through claims adjusting and the inspection of underlying
policyholder records, to the review and settlement of
non-commuted claims such that settlements may often be achieved
below the level of the originally advised loss.
The $67.3 million reduction in the estimate of IBNR loss
and loss adjustment expense liabilities resulted from the
application of our reserving methodologies to (i) the
reduced historical incurred loss development information
relating to remaining exposures after the 68 commutations, and
(ii) reduced case and LAE reserves in the aggregate. The
application of our reserving methodologies to the reduced
historical incurred loss development information relating to our
remaining exposures after elimination of the historical loss
development relating to the 68 commuted exposures had the
following effects (with the methodologies that weighed most
heavily in the analysis for this period listed first):
|
|
|
|
|
Under the
Ultimate-to-Incurred
Method, the application of the ratio of estimated industry
ultimate losses to industry
incurred-to-date
losses to our reduced
incurred-to-date
losses resulted in reduced estimates of loss reserves.
|
|
|
|
Application of the Paid Survival Ratio Method to the reduced
historical loss development information resulted in lower
expected average annual payment amounts compared to the previous
year, which, when multiplied by the expected industry benchmark
for future number of payment years, led to reductions in our
estimated loss reserves.
|
|
|
|
Under the Paid Market Share Method, our reduced historical
calendar year payments resulted in a reduction of our indicated
market share of industry paid losses and thus our market share
of estimated industry loss reserves.
|
17
|
|
|
|
|
Under the
Reserve-to-Paid
Method, the application of the ratio of industry reserves to
industry
paid-to-date
losses to our reduced
paid-to-date
losses resulted in reduced estimates of loss reserves.
|
|
|
|
Under the IBNR:Case Ratio Method, the application of ratios of
industry IBNR reserves to industry case reserves to our case
reserves resulted in reduced estimates of IBNR loss reserves as
a result of the aggregate reduction, combining the impact of
commutations and settlement of non-commuted losses, in our case
and LAE reserves of $74.9 million during the year. As such
case and LAE reserves were settled for less than
$74.9 million, the IBNR reserves determined under the
IBNR:Case Ratio Method associated with such case reserves were
eliminated. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
Loss and Loss Adjustment Expenses on page 66 for a
further explanation of how the loss reserving methodologies are
applied to the movement, or development, of net incurred losses
during a period to estimate IBNR liabilities. Of the 68
commutations completed during 2005, ten were among the top ten
cedant
and/or
reinsurance exposures of our individual reinsurance subsidiaries
involved. The remaining 58 were of smaller size, consistent with
our approach of targeting significant numbers of cedant and
reinsurer relationships as well as targeting significant
individual cedant and reinsurer relationships.
|
Year
Ended December 31, 2004
Net reduction in loss and loss adjustment expense for the year
ended 2004 amounted to $13.7 million, excluding the impacts
of adverse foreign exchange rate movements of $4.1 million
and including premium and commission adjustments triggered by
incurred losses of $0.1 million.
Total favorable net incurred loss development during 2004 of
$14.7 million, whereby advised case and LAE reserves of
$33.7 million were settled for net paid losses of
$19.0 million, included adverse incurred development of
A&E exposures the combination of which resulted in a net
increase in IBNR loss reserves of $15.7 million. The
increase in IBNR of $15.7 million offset by the favorable
incurred development of $14.7 million resulted in an
increase in net ultimate losses of $1.0 million. The
favorable incurred loss development arose from approximately 36
commutations of assumed and ceded exposures at less than case
and LAE reserves and the settlement of losses in the year below
carried reserves. Of the 36 commutations completed during 2004,
three were among the top ten cedant
and/or
reinsurance exposures of our individual reinsurance subsidiaries
involved. The remaining 33 were of smaller size, consistent with
our approach of targeting significant numbers of cedant and
reinsurer relationships as well as targeting significant
individual cedant and reinsurer relationships. There was no
change to the provisions for bad debts in 2004. In 2004, we
reduced our estimate of loss adjustment expense liabilities by
$14.7 million relating to 2004 run-off activity.
Asbestos
and Environmental (A&E) Exposure
General
A&E Exposures
A number of our subsidiaries wrote general liability policies
and reinsurance prior to our acquisition of them under which
policyholders continue to present asbestos-related injury claims
and claims alleging injury, damage or
clean-up
costs arising from environmental pollution. These policies, and
the associated claims, are referred to as A&E exposures.
The vast majority of these claims are presented under policies
written many years ago.
There is a great deal of uncertainty surrounding A&E
claims. This uncertainty impacts the ability of insurers and
reinsurers to estimate the ultimate amount of unpaid claims and
related LAE. The majority of these claims differ from any other
type of claim because there is inadequate loss development and
there is significant uncertainty regarding what, if any,
coverage exists, to which, if any, policy years claims are
attributable and which, if any, insurers/reinsurers may be
liable. These uncertainties are exacerbated by lack of clear
judicial precedent and legislative interpretations of coverage
that may be inconsistent with the intent of the parties to the
insurance contracts and expand theories of liability. The
insurance and reinsurance industry as a whole is engaged in
extensive litigation over these coverage and liability issues
and is, thus, confronted with continuing uncertainty in its
efforts to quantify A&E exposures.
18
Our A&E exposure is administered out of our offices in the
United Kingdom and Rhode Island and centrally administered from
the United Kingdom. In light of the intensive claim settlement
process for these claims, which involves comprehensive fact
gathering and subject matter expertise, our management believes
that it is prudent to have a centrally administered claim
facility to handle A&E claims on behalf of all of our
subsidiaries. Our A&E claims staff, working in conjunction
with two
U.S.-qualified
attorneys experienced in A&E liabilities, proactively
administers, on a cost-effective basis, the A&E claims
submitted to our insurance and reinsurance subsidiaries.
We use industry benchmarking methodologies to estimate
appropriate IBNR reserves for our A&E exposures. These
methods are based on comparisons of our loss experience on
A&E exposures relative to industry loss experience on
A&E exposures. Estimates of IBNR are derived separately for
each relevant subsidiary of ours and, for some subsidiaries,
separately for distinct portfolios of exposure. The discussion
that follows describes, in greater detail, the primary actuarial
methodologies used by our independent actuaries to estimate IBNR
for A&E exposures.
In addition to the specific considerations for each method
described below, many general factors are considered in the
application of the methods and the interpretation of results for
each portfolio of exposures. These factors include the mix of
product types (e.g. primary insurance versus reinsurance of
primary versus reinsurance of reinsurance), the average
attachment point of coverages (e.g. first-dollar primary versus
umbrella over primary versus high-excess), payment and reporting
lags related to the international domicile of our subsidiaries,
payment and reporting pattern acceleration due to large
wholesale settlements (e.g. policy buy-backs and
commutations) pursued by us, lists of individual risks remaining
and general trends within the legal and tort environments.
1. Paid Survival Ratio Method. In this
method, our expected annual average payment amount is multiplied
by an expected future number of payment years to get an
indicated reserve. Our historical calendar year payments are
examined to determine an expected future annual average payment
amount. This amount is multiplied by an expected number of
future payment years to estimate a reserve. Trends in calendar
year payment activity are considered when selecting an expected
future annual average payment amount. Accepted industry
benchmarks are used in determining an expected number of future
payment years. Each year, annual payments data is updated,
trends in payments are re-evaluated and changes to benchmark
future payment years are reviewed. This method has advantages of
ease of application and simplicity of assumptions. A potential
disadvantage of the method is that results could be misleading
for portfolios of high excess exposures where significant
payment activity has not yet begun.
2. Paid Market Share Method. In this
method, our estimated market share is applied to the industry
estimated unpaid losses. The ratio of our historical calendar
year payments to industry historical calendar year payments is
examined to estimate our market share. This ratio is then
applied to the estimate of industry unpaid losses. Each year,
calendar year payment data is updated (for both us and
industry), estimates of industry unpaid losses are reviewed and
the selection of our estimated market share is revisited. This
method has the advantage that trends in calendar-year market
share can be incorporated into the selection of company share of
remaining market payments. A potential disadvantage of this
method is that it is particularly sensitive to assumptions
regarding the time-lag between industry payments and our
payments.
3. Reserve-to-Paid
Method. In this method, the ratio of estimated
industry reserves to industry
paid-to-date
losses is multiplied by our
paid-to-date
losses to estimate our reserves. Specific considerations in the
application of this method include the completeness of our
paid-to-date
loss information, the potential acceleration or deceleration in
our payments (relative to the industry) due to our claims
handling practices, and the impact of large individual
settlements. Each year,
paid-to-date
loss information is updated (for both us and the industry) and
updates to industry estimated reserves are reviewed. This method
has the advantage of relying purely on paid loss data and so is
not influenced by subjectivity of case reserve loss estimates. A
potential disadvantage is that the application to our portfolios
which do not have complete
inception-to-date
paid loss history could produce misleading results. To address
this potential disadvantage, a variation of the method is also
considered, which multiplies the ratio of estimated industry
reserves to industry losses paid during a recent period of time
(e.g. 5 years) times our paid losses during that period.
19
4. IBNR:Case Ratio Method. In this
method, the ratio of estimated industry IBNR reserves to
industry case reserves is multiplied by our case reserves to
estimate our IBNR reserves. Specific considerations in the
application of this method include the presence of policies
reserved at policy limits, changes in overall industry case
reserve adequacy and recent loss reporting history for us. Each
year, our case reserves are updated, industry reserves are
updated and the applicability of the industry IBNR:case ratio is
reviewed. This method has the advantage that it incorporates the
most recent estimates of amounts needed to settle open cases
included in current case reserves. A potential disadvantage is
that results could be misleading where our case reserve adequacy
differs significantly from overall industry case reserve
adequacy.
5. Ultimate-to-Incurred
Method. In this method, the ratio of estimated
industry ultimate losses to industry
incurred-to-date
losses is applied to our
incurred-to-date
losses to estimate our IBNR reserves. Specific considerations in
the application of this method include the completeness of our
incurred-to-date
loss information, the potential acceleration or deceleration in
our incurred losses (relative to the industry) due to our claims
handling practices and the impact of large individual
settlements. Each year
incurred-to-date
loss information is updated (for both us and the industry) and
updates to industry estimated ultimate losses are reviewed. This
method has the advantage that it incorporates both paid and case
reserve information in projecting ultimate losses. A potential
disadvantage is that results could be misleading where
cumulative paid loss data is incomplete or where our case
reserve adequacy differs significantly from overall industry
case reserve adequacy.
Under the Paid Survival Ratio Method, the Paid Market Share
Method and the Reserve-to-Paid Method, we first determine the
estimated total reserve and then deduct the reported outstanding
case reserves to arrive at an estimated IBNR reserve. The
IBNR:Case Ratio Method first determines an estimated IBNR
reserve which is then added to the advised outstanding case
reserves to arrive at an estimated total loss reserve. The
Ultimate-to-Incurred Method first determines an estimate of the
ultimate losses to be paid and then deducts paid-to-date losses
to arrive at an estimated total loss reserve and then deducts
outstanding case reserves to arrive at the estimated IBNR
reserve.
Within the annual loss reserve studies produced by our external
actuaries, exposures for each subsidiary are separated into
homogeneous reserving categories for the purpose of estimating
IBNR. Each reserving category contains either direct insurance
or assumed reinsurance reserves and groups relatively similar
types of risks and exposures (e.g. asbestos, environmental,
casualty and property) and lines of business written (e.g.
marine, aviation and non-marine). Based on the exposure
characteristics and the nature of available data for each
individual reserving category, a number of methodologies are
applied. Recorded reserves for each category are selected from
the indications produced by the various methodologies after
consideration of exposure characteristics, data limitations and
strengths and weaknesses of each method applied. This approach
to estimating IBNR has been consistently adopted in the annual
loss reserve studies for each period presented.
As of December 31, 2008, we had 24 separate insurance
and/or
reinsurance subsidiaries whose reserves are categorized into
approximately 195 reserve categories in total, including 26
distinct asbestos reserving categories and 19 distinct
environmental reserving categories.
The five methodologies described above are applied for each of
the 26 asbestos reserving categories and each of the 19
environmental reserving categories. As is common in actuarial
practice, no one methodology is exclusively or consistently
relied upon when selecting a recorded reserve. Consistent
reliance on a single methodology to select a recorded reserve
would be inappropriate in light of the dynamic nature of both
the A&E liabilities in general, and our actual exposure
portfolios in particular.
In selecting a recorded reserve, our management considers the
range of results produced by the methods, and the strengths and
weaknesses of the methods in relation to the data available and
the specific characteristics of the portfolio under
consideration. Trends in both our data and industry data are
also considered in the reserve selection process. Recent trends
or changes in the relevant tort and legal environments are also
considered when assessing methodology results and selecting an
appropriate recorded reserve amount for each portfolio.
The liability for unpaid losses and LAE, inclusive of A&E
reserves, reflects our best estimate for future amounts needed
to pay losses and related LAE as of each of the balance sheet
dates reflected in the financial statements herein in accordance
with GAAP. As of December 31, 2008, we had net loss
reserves of $748.5 million for asbestos-related claims and
$97.9 million for environmental pollution-related claims.
The following table
20
provides an analysis of our gross and net loss and ALAE reserves
from A&E exposures at year-end 2008, 2007 and 2006 and the
movement in gross and net reserves for those years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Provisions for A&E
claims and ALAE at January 1
|
|
$
|
677,610
|
|
|
$
|
419,977
|
|
|
$
|
666,075
|
|
|
$
|
389,086
|
|
|
$
|
578,079
|
|
|
$
|
385,021
|
|
A&E losses and ALAE incurred during the
year
|
|
|
(54,337
|
)
|
|
|
(14,448
|
)
|
|
|
22,728
|
|
|
|
23,294
|
|
|
|
90,482
|
|
|
|
43,617
|
|
A&E losses and ALAE
paid during the year
|
|
|
(58,916
|
)
|
|
|
108,583
|
|
|
|
(57,184
|
)
|
|
|
(25,457
|
)
|
|
|
(80,333
|
)
|
|
|
(60,635
|
)
|
Provision for A&E
claims and ALAE
acquired during the
year
|
|
|
379,613
|
|
|
|
332,309
|
|
|
|
45,991
|
|
|
|
33,054
|
|
|
|
77,847
|
|
|
|
21,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for A&E
claims and ALAE at December 31
|
|
$
|
943,970
|
|
|
$
|
846,421
|
|
|
$
|
677,610
|
|
|
$
|
419,977
|
|
|
$
|
666,075
|
|
|
$
|
389,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, excluding the impact of loss reserves acquired
during the year, our reserves for A&E liabilities decreased
by $113.3 million on a gross basis and increased by
$94.1 million on a net basis. The reduction in gross
reserves arose from paid claims, successful commutations, policy
buy-backs, generally favorable claim settlements during the year
and a reduction in IBNR resulting from actuarial analysis of
remaining liabilities. The increase in net reserves arose as a
result of (i) the commutation of a substantial stop loss
protection in one of our reinsurance entities which had the
effect of reducing ceded A&E IBNR recoverable by
$163.4 million; partially offset by (ii) a reduction
in net reserves of $69.3 million which arose from
successful commutations, policy buy-backs, generally favorable
claims settlements and a reduction in IBNR resulting from
actuarial analysis of remaining net liabilities. This
commutation, which settled for a total amount receivable of
$190.0 million (including $163.4 million related to
A&E IBNR recoverable), resulted in net A&E losses
and ALAE recovered during the year of $108.6 million.
During 2007, excluding the impact of loss reserves acquired
during the year, our reserves for A&E liabilities decreased
by $34.5 million on a gross basis and by $2.2 million
on a net basis. The reduction arose from paid claims, successful
commutations, policy buy-backs, generally favorable claim
settlements and a reduction in IBNR resulting from actuarial
analysis of remaining liabilities during the year.
During 2006, excluding the impact of loss reserves acquired
during the year, our reserves for A&E liabilities increased
by $10.1 million on a gross basis and decreased by
$17.0 million on a net basis. The increase in gross
reserves arose from adverse incurred development and actuarial
analysis of remaining liabilities from one particular insurance
subsidiary of ours amounting to $104.7 million less claim
settlements of $73.2 million. As the entity in question
benefits from substantial reinsurance protection, the gross
incurred loss of $104.7 million is reduced to
$10.1 million on a net basis.
Asbestos continues to be the most significant and difficult mass
tort for the insurance industry in terms of claims volume and
expense. We believe that the insurance industry has been
adversely affected by judicial interpretations that have had the
effect of maximizing insurance recoveries for asbestos claims,
from both a coverage and liability perspective. Generally, only
policies underwritten prior to 1986 have potential asbestos
exposure, since most policies underwritten after this date
contain an absolute asbestos exclusion.
In recent years, especially from 2001 through 2003, the industry
has experienced increasing numbers of asbestos claims, including
claims from individuals who do not appear to be impaired by
asbestos exposure. Since 2003, however, new claim filings have
been fairly stable. It is possible that the increases observed
in the early part of the decade were triggered by various state
tort reforms (discussed immediately below). At this point, we
cannot predict whether claim filings will return to pre-2004
levels, remain stable, or begin to decrease.
21
Since 2001, several U.S. states have proposed, and in many
cases enacted, tort reform statutes that impact asbestos
litigation by, for example, making it more difficult for a
diverse group of plaintiffs to jointly file a single case,
reducing forum-shopping by requiring that a
potential plaintiff must have been exposed to asbestos in the
state in which
he/she files
a lawsuit, or permitting consolidation of discovery. These
statutes typically apply to suits filed after a stated date.
When a statute is proposed or enacted, asbestos defendants often
experience a marked increase in new lawsuits, as
plaintiffs attorneys seek to file suit before the
effective date of the legislation. Some of this increased claim
volume likely represents an acceleration of valid claims that
would have been brought in the future, while some claims will
likely prove to have little or no merit. As many of these claims
are still pending, we cannot predict what portion of the
increased number of claims represent valid claims. Also, the
acceleration of claims increases the uncertainty surrounding
projections of future claims in the affected jurisdictions.
During the same timeframe as tort reform, the U.S. federal
and various U.S. state governments sought comprehensive
asbestos reform to manage the growing court docket and costs
surrounding asbestos litigation, in addition to the increasing
number of corporate bankruptcies resulting from overwhelming
asbestos liabilities. Whereas the federal government has failed
to establish a national asbestos trust fund to address the
asbestos problem, several states, including Texas and Florida,
have implemented a medical criteria reform approach that only
permits litigation to proceed when a plaintiff can establish and
demonstrate actual physical impairment.
Much like tort reform, asbestos litigation reform has also
spurred a significant increase in the number of lawsuits filed
in advance of the laws enactment. We cannot predict
whether the drop off in the number of filed claims is due to the
accelerated number of filings or an actual trend decline in
alleged asbestos injuries.
Environmental
Pollution Exposures
Environmental pollution claims represent another significant
exposure for us. However, environmental pollution claims have
been developing as expected over the past few years as a result
of stable claim trends. Claims against Fortune
500 companies are generally declining, and while insureds
with single-site exposures are still active, in many cases
claims are being settled for less than initially anticipated due
to improved site remediation technology and effective policy
buy-backs.
Despite the stability of recent trends, there remains
significant uncertainty involved in estimating liabilities
related to these exposures. Unlike asbestos claims which are
generated primarily from allegedly injured private individuals,
environmental claims generally result from governmentally
initiated activities. First, the number of waste sites subject
to cleanup is unknown. Approximately 1,255 sites are
included on the National Priorities List (NPL) of the United
States Environmental Protection Agency. State authorities have
separately identified many additional sites and, at times,
aggressively implement site cleanups. Second, the liabilities of
the insureds themselves are difficult to estimate. At any given
site, the allocation of remediation cost among the potentially
responsible parties varies greatly depending upon a variety of
factors. Third, as with asbestos liability and coverage issues,
judicial precedent regarding liability and coverage issues
regarding pollution claims does not provide clear guidance.
There is also uncertainty as to the U.S. federal
Superfund law itself and, at this time, we cannot
predict what, if any, reforms to this law might be enacted by
the U.S. federal government, or the effect of any such
changes on the insurance industry.
Other
Latent Exposures
While we do not view health hazard exposures such as silica and
tobacco as becoming a material concern, recent developments in
lead litigation have caused us to watch these matters closely.
Recently, municipal and state governments have had success,
using a public nuisance theory, pursuing the former makers of
lead pigment for the abatement of lead paint in certain home
dwellings. As lead paint was used almost exclusively into the
early 1970s, large numbers of old housing stock contain
lead paint that can prove hazardous to people and, particularly,
children. Although governmental success has been limited thus
far, we continue to monitor developments carefully due to the
size of the potential awards sought by plaintiffs. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies Latent Claims on
page 67 for a further discussion of recent lead paint
developments.
22
Investments
Investment
Strategy and Guidelines
We derive a significant portion of our income from our invested
assets. As a result, our operating results depend in part on the
performance of our investment portfolio. Because of the
unpredictable nature of losses that may arise under our
insurance and reinsurance subsidiaries insurance or
reinsurance policies and as a result of our opportunistic
commutation strategy, our liquidity needs can be substantial and
may arise at any time. Except for that portion of our portfolio
that is invested in non-investment grade securities, we
generally follow a conservative investment strategy designed to
emphasize the preservation of our invested assets and provide
sufficient liquidity for the prompt payment of claims and
settlement of commutation payments.
As of December 31, 2008, we had cash and cash equivalents
of $2.21 billion. Our cash and cash equivalent portfolio is
comprised mainly of high-grade fixed deposits, commercial paper
with maturities of less than three months and liquid reserve
funds.
Our investment portfolio consists primarily of investment
grade-rated, liquid, fixed-maturity securities of
short-to-medium
term duration, and mutual funds 95.1% of our total
investment portfolio as of December 31, 2008 consisted of
investment grade securities. In addition, we have other
investments, which are non-investment grade
securities these investments accounted for 4.9% of
our total investment portfolio as of December 31, 2008.
Assuming the commitments to the other investments were fully
funded as of December 31, 2008 out of cash balances on hand
at that time, the percentage of investments held in other than
investment grade securities would increase to 12.2%.
We strive to structure our investments in a manner that
recognizes our liquidity needs for future liabilities. In that
regard, we attempt to correlate the maturity and duration of our
investment portfolio to our general liability profile. If our
liquidity needs or general liability profile unexpectedly
change, we may not continue to structure our investment
portfolio in its current manner and would adjust as necessary to
meet new business needs.
Our investment performance is subject to a variety of risks,
including risks related to general economic conditions, market
volatility, interest rate fluctuations, foreign exchange risk,
liquidity risk and credit and default risk. Interest rates are
highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and
political conditions and other factors beyond our control. A
significant increase in interest rates could result in
significant losses, realized or unrealized, in the value of our
investment portfolio. A significant portion of our
non-investment grade securities consists of alternative
investments that subject us to restrictions on redemption, which
may limit our ability to withdraw funds for some period of time
after the initial investment. The values of, and returns on,
such investments may also be more volatile.
Investment
Committee and Investment Manager
The investment committee of our board of directors supervises
our investment activity. The investment committee regularly
monitors our overall investment results which it ultimately
reports to the board of directors.
We have engaged Goldman Sachs & Co, UBS, MEAG New York
Corporation, AMP Capital and National Australia Bank to provide
investment management services. On a fair value basis 87.9% of
our fixed income portfolio is managed by these companies. We
have agreed to pay investment management fees to the managers.
These fees, which vary depending on the amount of assets under
management, are included in net investment income.
Investment
Portfolio
Accounting
Treatment
Our investments primarily consist of fixed income securities.
Our fixed income investments are comprised of
available-for-sale,
held to maturity and trading investments as defined in
FAS 115, Accounting for Certain Investments in Debt
and Equity Securities. Held to maturity investments are
carried at their amortized cost and both the
available-for-sale
and trading investments are carried at their fair value on the
balance sheet date. Unrealized holdings gains and losses on
trading investments, which represent the difference between the
amortized
23
cost and the fair market value of securities, are recognized in
realized gains and losses. Unrealized gains and losses on
available-for-sale securities are recognized as part of other
comprehensive income.
Composition
as of December 31, 2008
As of December 31, 2008, our aggregate invested assets
totaled approximately $3.5 billion. Aggregate invested
assets include cash and cash equivalents, restricted cash and
cash equivalents, fixed-maturity securities, equities,
short-term investments and other investments.
The following table shows the types of securities in our
portfolio, including cash equivalents, and their fair market
values and amortized costs as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Cash and cash equivalents(1)
|
|
$
|
2,209,873
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,209,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government & agencies
|
|
|
437,181
|
|
|
|
12,404
|
|
|
|
(193
|
)
|
|
|
449,392
|
|
Non-U.S.
government securities
|
|
|
182,066
|
|
|
|
9,498
|
|
|
|
|
|
|
|
191,564
|
|
Corporate securities
|
|
|
588,086
|
|
|
|
3,869
|
|
|
|
(6,870
|
)
|
|
|
585,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
|
1,207,333
|
|
|
|
25,771
|
|
|
|
(7,063
|
)
|
|
|
1,226,041
|
|
Other investments
|
|
|
147,652
|
|
|
|
|
|
|
|
(87,415
|
)
|
|
|
60,237
|
|
Equities
|
|
|
5,087
|
|
|
|
|
|
|
|
(1,340
|
)
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
1,360,072
|
|
|
|
25,771
|
|
|
|
(95,818
|
)
|
|
|
1,290,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash & investments
|
|
$
|
3,569,945
|
|
|
$
|
25,771
|
|
|
$
|
(95,818
|
)
|
|
$
|
3,499,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes restricted cash and cash equivalents of
$343.3 million |
U.S.
Government and Agencies
U.S. government and agency securities are comprised
primarily of bonds issued by the U.S. Treasury, the Federal
Home Loan Bank, the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association.
Non-U.S.
Government Securities
Non-U.S. government
securities represent the fixed income obligations of
non-U.S. governmental
entities. These are comprised primarily of bonds issued by the
Australian, United Kingdom, French, Canadian and German
governments.
Corporate
Securities
Corporate securities are comprised of bonds issued by
corporations that are diversified across a wide range of issuers
and industries. The largest single issuer of corporate
securities in our portfolio was Goldman Sachs Group, which
represented 4.3% of the aggregate amount of corporate securities
on an amortized cost basis and had a credit rating of A by
Standard & Poors, as of December 31, 2008.
Other
Investments
In December 2005, we invested in New NIB, a Province of Alberta
limited partnership, in exchange for an approximately 1.6%
limited partnership interest. New NIB was formed for the purpose
of purchasing, together with certain affiliated entities, 100%
of the outstanding share capital of NIBC. J. Christopher
Flowers, a member of our board of directors and one of our
largest shareholders, is a director of New NIB and is on the
supervisory board of NIBC. Certain affiliates of J.C. Flowers I
L.P., which is managed by J.C. Flowers & Co. LLC, of
which Mr. Flowers
24
and John J. Oros, our Executive Chairman, are managing
directors, also participated in the acquisition of NIBC. Certain
of our officers and directors made personal investments in New
NIB.
We own a non-voting 7.0% membership interest in Affirmative
Investment LLC, or Affirmative. J.C. Flowers I LP, a private
investment fund formed by J.C. Flowers & Co. LLC, of
which Mr. Flowers and Mr. Oros are managing directors,
owns the remaining 93.0% interest in Affirmative. Affirmative
owns approximately 51.2% of the outstanding stock of Affirmative
Insurance Holdings, a publicly traded company.
We have a capital commitment of up to $10.0 million in the
GSC European Mezzanine Fund II, LP, or GSC. GSC invests in
mezzanine securities of middle and large market companies
throughout Western Europe. As of December 31, 2008, the
capital contributed to GSC was $5.9 million, with the
remaining commitment being $4.1 million. The
$10.0 million represents 8.5% of the total commitments made
to GSC.
In 2006 we committed to invest up to $100.0 million in the
Flowers Fund. As of December 31, 2008, the capital
contributed to the Flowers Fund was $96.0 million, with the
remaining commitment being approximately $4.0 million.
During 2008, we received $0.9 million in advisory service
fees from the Flowers Fund.
During 2008 we committed to invest up to $100.0 million in
the J.C. Flowers III L.P., or Fund III. As of December 31,
2008, the capital contributed to Fund III was $0.1 million,
with the remaining commitment being $99.9 million.
Fund III is a private investment fund advised by J.C.
Flowers & Co. LLC, of which Messrs. Flowers and
Oros are managing directors.
On January 16, 2009, we committed to invest approximately
$8.7 million in JCF III Co-invest I L.P., in
connection with its investment in certain of the operations,
assets and liabilities of IndyMac Bank, F.S.B.
Unrealized losses in our other investments of $87.4 million
include writedowns during 2008 of $84.1 million in the fair
value of our private equity investments. The writedowns were
primarily related to mark-to-market adjustments in the fair
value of their underlying assets, which are primarily
investments in financial institutions, arising as a result of
the current global credit and liquidity crises.
Equities
During 2007 we purchased two equity portfolios that invest in
both small and large market capitalization publicly traded
U.S. companies. The equity portfolios are actively managed
by a third-party manager.
Ratings
as of December 31, 2008
The investment ratings (provided by major rating agencies) for
our fixed income investments held as of December 31, 2008
and the percentage of investments they represented on that date
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Amortized
|
|
|
Fair Market
|
|
|
Total Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Market Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
U.S. government & agencies
|
|
$
|
439,447
|
|
|
$
|
451,658
|
|
|
|
36.8
|
%
|
AAA or equivalent
|
|
|
405,780
|
|
|
|
415,245
|
|
|
|
33.9
|
%
|
AA
|
|
|
187,092
|
|
|
|
187,771
|
|
|
|
15.3
|
%
|
A or equivalent
|
|
|
150,387
|
|
|
|
148,383
|
|
|
|
12.1
|
%
|
BBB and lower
|
|
|
24,627
|
|
|
|
22,984
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,207,333
|
|
|
$
|
1,226,041
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Maturity
Distribution as of December 31, 2008
The maturity distribution for our fixed income investments held
as of December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Due within one year
|
|
$
|
510,081
|
|
|
$
|
1,205
|
|
|
$
|
(105
|
)
|
|
$
|
511,181
|
|
Due after one year through five years
|
|
|
535,430
|
|
|
|
10,673
|
|
|
|
(3,735
|
)
|
|
|
542,368
|
|
Due after five years through ten years
|
|
|
128,741
|
|
|
|
11,988
|
|
|
|
(2,050
|
)
|
|
|
138,679
|
|
Due after ten years
|
|
|
33,081
|
|
|
|
1,905
|
|
|
|
(1,173
|
)
|
|
|
33,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,207,333
|
|
|
$
|
25,771
|
|
|
$
|
(7,063
|
)
|
|
$
|
1,226,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Returns for the Years ended December 31, 2008 and
2007
Our investment returns for the years ended December 31,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Net investment income
|
|
$
|
26,601
|
|
|
$
|
64,087
|
|
Net realized (losses) gains
|
|
|
(1,655
|
)
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
Net investment income and net realized (losses) gains
|
|
$
|
24,946
|
|
|
$
|
64,336
|
|
|
|
|
|
|
|
|
|
|
Effective annualized yield (1)
|
|
|
4.62
|
%
|
|
|
4.57
|
%
|
|
|
|
(1) |
|
Effective annualized yield is calculated by dividing net
investment income, excluding writedowns on other investments, by
the average balance of aggregate cash and cash equivalents,
equities and fixed income securities on a carrying value basis.
Trading securities where the investment return is for the
benefit of insureds and reinsurers are excluded from the
calculation. |
Regulation
General
The business of insurance and reinsurance is regulated in most
countries, although the degree and type of regulation varies
significantly from one jurisdiction to another. We have a
significant presence in Bermuda, the United Kingdom, Australia
and, to a lesser extent, the United States and are subject to
extensive regulation under the applicable statutes in these
countries. A summary of the regulations governing us in these
countries is set forth below.
Bermuda
As a holding company, we are not subject to Bermuda insurance
regulations. However, the Insurance Act 1978 of Bermuda and
related regulations, as amended, or, together, the Insurance
Act, regulate the insurance business of our operating
subsidiaries in Bermuda and provide that no person may carry on
any insurance business in or from within Bermuda unless
registered as an insurer by the Bermuda Monetary Authority, or
BMA, under the Insurance Act. Insurance as well as reinsurance
is regulated under the Insurance Act.
The Insurance Act also imposes on Bermuda insurance companies
certain solvency and liquidity standards and auditing and
reporting requirements and grants the BMA powers to supervise,
investigate, require information and the production of documents
and intervene in the affairs of insurance companies. Certain
significant aspects of the Bermuda insurance regulatory
framework are set forth below.
Classification of Insurers. The Insurance Act
distinguishes between insurers carrying on long-term business
and insurers carrying on general business. There are six
classifications of insurers carrying on general business, with
Class 4 insurers subject to the strictest regulation. Our
regulated Bermuda subsidiaries, which are incorporated to
26
carry on general insurance and reinsurance business, are
registered as Class 2, 3A, or 4 insurers in Bermuda and are
regulated as such under the Insurance Act. These regulated
Bermuda subsidiaries are not licensed to carry on long-term
business. Long-term business broadly includes life insurance and
disability insurance with terms in excess of five years. General
business broadly includes all types of insurance that are not
long-term business.
Principal Representative. An insurer is
required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For
the purpose of the Insurance Act, each of our regulated Bermuda
subsidiaries principal offices is at P.O. Box HM
2267, Windsor Place, 3rd Floor, 18 Queen Street, in
Hamilton, Bermuda, and each of their principal representatives
is Enstar Limited. Without a reason acceptable to the BMA, an
insurer may not terminate the appointment of its principal
representative, and the principal representative may not cease
to act in that capacity, unless 30 days notice in
writing is given to the BMA. It is the duty of the principal
representative, forthwith on reaching the view that there is a
likelihood that the insurer will become insolvent or that a
reportable event has, to the principal
representatives knowledge, occurred or is believed to have
occurred, to notify the BMA and, within 14 days of such
notification, to make a report in writing to the BMA setting
forth all the particulars of the case that are available to the
principal representative. For example, any failure by the
insurer to comply substantially with a condition imposed upon
the insurer by the BMA relating to a solvency margin or a
liquidity or other ratio would be a reportable event.
Independent Approved Auditor. Every registered
insurer must appoint an independent auditor who will audit and
report annually on the statutory financial statements and the
statutory financial return of the insurer, both of which, in the
case of our regulated Bermuda subsidiaries, are required to be
filed annually with the BMA. In addition, the independent
auditor of a Class 4 insurer is required to audit and
report on the insurers financial statement, prepared under
generally accepted accounting principles or international
financial reporting standards, or GAAP financial standards. The
independent auditor must be approved by the BMA and may be the
same person or firm that audits our consolidated financial
statements and reports for presentation to our shareholders. Our
regulated Bermuda subsidiaries independent auditor is
Deloitte & Touche, who also audits our consolidated
financial statements.
Loss Reserve Specialist. As a registered
Class 2, 3A, or 4 insurer, each of our regulated Bermuda
insurance and reinsurance subsidiaries is required, every year,
to submit an opinion of its approved loss reserve specialist
with its statutory financial return in respect of its losses and
loss expenses provisions. The loss reserve specialist, who will
normally be a qualified casualty actuary, must be approved by
the BMA.
Statutory Financial Statements. Each of our
regulated Bermuda subsidiaries must prepare annual statutory
financial statements, and the Class 4 insurer is required
to prepare GAAP financial statements. The Insurance Act
prescribes rules for the preparation and substance of the
statutory financial statements, which include, in statutory
form, a balance sheet, an income statement, a statement of
capital and surplus and notes thereto. Each of our regulated
Bermuda subsidiaries is required to give detailed information
and analyses regarding premiums, claims, reinsurance and
investments. The statutory financial statements are not prepared
in accordance with U.S. GAAP and are distinct from the
financial statements prepared for presentation to an
insurers shareholders under the Companies Act. As a
general business insurer, each of our regulated Bermuda
subsidiaries is required to submit to the BMA the annual
statutory financial statements as part of the annual statutory
financial return, and the Class 4 insurer is also required
to submit GAAP financial statements. The statutory financial
statements and the statutory financial return do not form part
of the public records maintained by the BMA, but the GAAP
financial statements are available for public inspection.
Annual Statutory Financial Return. Each of our
regulated insurance and reinsurance subsidiaries is required to
file with the BMA a statutory financial return no later than six
months, in the case of a Class 2, or four months in the
case of a Class 3A or 4, after its fiscal year end unless
specifically extended upon application to the BMA. The statutory
financial return for an insurer includes, among other matters, a
report of the approved independent auditor on the statutory
financial statements of the insurer, solvency certificates, the
statutory financial statements, and the opinion of the loss
reserve specialist. The solvency certificates must be signed by
the principal representative and at least two directors of the
insurer certifying that the minimum solvency margin has been met
and whether the insurer has complied with the conditions
attached to its certificate of registration. The independent
approved auditor is required to state whether, in its opinion,
it was reasonable for the directors to make these
certifications. If an
27
insurers accounts have been audited for any purpose other
than compliance with the Insurance Act, a statement to that
effect must be filed with the statutory financial return.
Minimum Liquidity Ratio. The Insurance Act
provides a minimum liquidity ratio for general business
insurers, like our regulated Bermuda insurance and reinsurance
subsidiaries. An insurer engaged in general business is required
to maintain the value of its relevant assets at not less than
75% of the amount of its relevant liabilities. Relevant assets
include, but are not limited to, cash and time deposits, quoted
investments, unquoted bonds and debentures, first liens on real
estate, investment income due and accrued, accounts and premiums
receivable and reinsurance balances receivable. There are some
categories of assets that unless specifically permitted by the
BMA, do not automatically qualify as relevant assets, such as
unquoted equity securities, investments in and advances to
affiliates and real estate and collateral loans. Relevant
liabilities are total general business insurance reserves and
total other liabilities less deferred income tax and sundry
liabilities (i.e., liabilities that are not otherwise
specifically defined).
Minimum Solvency Margin, Enhanced Capital Requirement and
Restrictions on Dividends and
Distributions. Under the Insurance Act, the value
of the general business assets of a Class 2, 3A, or 4
insurer, such as our regulated Bermuda subsidiaries, must exceed
the amount of its general business liabilities by an amount
greater than the prescribed minimum solvency margin. Each of our
regulated Bermuda subsidiaries is required, with respect to its
general business, to maintain a minimum solvency margin equal to
the greatest of:
For Class 2 insurers:
|
|
|
|
|
$250,000;
|
|
|
|
20% of net premiums written (being gross premiums written less
any premiums ceded by the insurer) if net premiums do not exceed
$6,000,000 or $1,200,000 plus 10% of net premiums written in
excess of $6,000,000; and
|
|
|
|
10% of net losses and loss expense reserves.
|
For Class 3A insurers:
|
|
|
|
|
$1,000,000;
|
|
|
|
20% of net premiums written (being gross premiums written less
any premiums ceded by the insurer) if net premiums do not exceed
$6,000,000 or $1,200,000 plus 15% of net premiums written in
excess of $6,000,000; and
|
|
|
|
15% of net losses and loss expense reserves.
|
For Class 4 insurers:
|
|
|
|
|
$100,000,000;
|
|
|
|
50% of net premiums written (with credit for reinsurance ceded
not exceeding 25% of gross premiums); and
|
|
|
|
15% of net discounted aggregate losses and loss expense reserves.
|
In addition, a Class 4 insurer must also meet an Enhanced
Capital Requirement. Each year a Class 4 insurer is also
required to file with the BMA a capital and solvency return
within four months of its relevant fiscal year end (unless
specifically extended). The prescribed form of capital and
solvency return comprises the insurers Bermuda Solvency
Capital Requirement model, a schedule of fixed income
investments by rating categories, a schedule of net loss and
loss expense provisions by line of business, a schedule of
premiums written by line of business, a schedule of risk
management and a schedule of fixed income securities.
Each of our regulated Bermuda insurance and reinsurance
subsidiaries is prohibited from declaring or paying any
dividends during any fiscal year if it is in breach of its
minimum solvency margin or minimum liquidity ratio or if the
declaration or payment of such dividends would cause it to fail
to meet such margin or ratio. In addition, if it has failed to
meet its minimum solvency margin or minimum liquidity ratio on
the last day of any fiscal year, each of our regulated Bermuda
subsidiaries will be prohibited, without the approval of the
BMA, from declaring or paying any dividends during the next
fiscal year.
28
Each of our regulated Bermuda insurance and reinsurance
subsidiaries is prohibited, without the approval of the BMA,
from reducing by 15% or more its total statutory capital as set
out in its previous years financial statements.
Additionally, under the Companies Act, we and each of our
regulated Bermuda subsidiaries may declare or pay a dividend, or
make a distribution from contributed surplus, only if we have no
reasonable grounds for believing that the subsidiary is, or will
be after the payment, unable to pay its liabilities as they
become due, or that the realizable value of its assets will
thereby be less than the aggregate of its liabilities and its
issued share capital and share premium accounts.
Supervision, Investigation and
Intervention. The BMA may appoint an inspector
with extensive powers to investigate the affairs of our
regulated Bermuda insurance and reinsurance subsidiaries if the
BMA believes that such an investigation is in the best interests
of its policyholders or persons who may become policyholders. In
order to verify or supplement information otherwise provided to
the BMA, the BMA may direct our regulated Bermuda insurance and
reinsurance subsidiaries to produce documents or information
relating to matters connected with its business. In addition,
the BMA has the power to require the production of documents
from any person who appears to be in possession of those
documents. Further, the BMA has the power, in respect of a
person registered under the Insurance Act, to appoint a
professional person to prepare a report on any aspect of any
matter about which the BMA has required or could require
information. If it appears to the BMA to be desirable in the
interests of the clients of a person registered under the
Insurance Act, the BMA may also exercise the foregoing powers in
relation to any company that is, or has at any relevant time
been, (1) a parent company, subsidiary company or related
company of that registered person, (2) a subsidiary company
of a parent company of that registered person, (3) a parent
company of a subsidiary company of that registered person or
(4) a controlling shareholder of that registered person,
which is a person who either alone or with any associate or
associates, holds 50% or more of the shares of that registered
person or is entitled to exercise, or control the exercise of,
more than 50% of the voting power at a general meeting of
shareholders of that registered person. If it appears to the BMA
that there is a risk of a regulated Bermuda insurance and
reinsurance subsidiary becoming insolvent, or that a regulated
Bermuda insurance and reinsurance subsidiary is in breach of the
Insurance Act or any conditions imposed upon its registration,
the BMA may, among other things, direct such subsidiary
(1) not to take on any new insurance business, (2) not
to vary any insurance contract if the effect would be to
increase its liabilities, (3) not to make certain
investments, (4) to liquidate certain investments,
(5) to maintain in, or transfer to the custody of a
specified bank, certain assets, (6) not to declare or pay
any dividends or other distributions or to restrict the making
of such payments
and/or
(7) to limit such subsidiarys premium income.
Disclosure of Information. In addition to
powers under the Insurance Act to investigate the affairs of an
insurer, the BMA may require insurers and other persons to
furnish information to the BMA. Further, the BMA has been given
powers to assist other regulatory authorities, including foreign
insurance regulatory authorities, with their investigations
involving insurance and reinsurance companies in Bermuda. Such
powers are subject to restrictions. For example, the BMA must be
satisfied that the assistance being requested is in connection
with the discharge of regulatory responsibilities of the foreign
regulatory authority. Further, the BMA must consider whether
cooperation is in the public interest. The grounds for
disclosure are limited and the Insurance Act provides sanctions
for breach of the statutory duty of confidentiality. Under the
Companies Act, the Minister of Finance has been given powers to
assist a foreign regulatory authority that has requested
assistance in connection with inquiries being carried out by it
in the performance of its regulatory functions. The
Ministers powers include requiring a person to furnish him
or her with information, to produce documents to him or her, to
attend and answer questions and to give assistance in connection
with inquiries. The Minister must be satisfied that the
assistance requested by the foreign regulatory authority is for
the purpose of its regulatory functions and that the request is
in relation to information in Bermuda that a person has in his
possession or under his control. The Minister must consider,
among other things, whether it is in the public interest to give
the information sought.
Notification by Shareholder Controller of New or Increased
Control. Any person who, directly or indirectly,
becomes a holder of at least 10%, 20%, 33% or 50% of our
ordinary shares must notify the BMA in writing within
45 days of becoming such a holder or 30 days from the
date the person has knowledge of having such a holding,
whichever is later. The BMA may, by written notice, object to
such a person if it appears to the BMA that the person is not
fit and proper to be such a holder. The BMA may require the
holder to reduce their holding of ordinary shares
29
and direct, among other things, that voting rights attaching to
the ordinary shares shall not be exercisable. A person that does
not comply with such a notice or direction from the BMA will be
guilty of an offense.
Objection to Existing Shareholder
Controller. For so long as we have as a
subsidiary an insurer registered under the Insurance Act, the
BMA may at any time, by written notice, object to a person
holding 10% or more of the ordinary shares if it appears to the
BMA that the person is not, or is no longer fit and proper to
be, such a holder. In such a case, the BMA may require the
shareholder to reduce its holding of ordinary shares and direct,
among other things, that such shareholders voting rights
attaching to ordinary shares shall not be exercisable. A person
who does not comply with such a notice or direction from the BMA
will be guilty of an offense.
Certain Other Bermuda Law
Considerations. Although we are incorporated in
Bermuda, we are classified as a non-resident of Bermuda for
exchange control purposes by the BMA. Pursuant to our
non-resident status, we may engage in transactions in currencies
other than Bermuda dollars and there are no restrictions on our
ability to transfer funds (other than funds denominated in
Bermuda dollars) in and out of Bermuda or to pay dividends to
U.S. residents who are holders of our ordinary shares.
Under Bermuda law, exempted companies are companies formed for
the purpose of conducting business outside Bermuda from a
principal place of business in Bermuda. As exempted
companies, neither we nor any of our regulated Bermuda
subsidiaries may, without the express authorization of the
Bermuda legislature or under a license or consent granted by the
Minister of Finance, participate in certain business
transactions, including: (1) the acquisition or holding of
land in Bermuda (except that held by way of lease or tenancy
agreement that is required for our business and held for a term
not exceeding 50 years, or that is used to provide
accommodation or recreational facilities for our officers and
employees and held with the consent of the Bermuda Minister of
Finance, for a term not exceeding 21 years), (2) the
taking of mortgages on land in Bermuda to secure an amount in
excess of $50,000, or (3) the carrying on of business of
any kind for which we are not licensed in Bermuda, except in
limited circumstances such as doing business with another
exempted undertaking in furtherance of our business carried on
outside Bermuda. Each of our regulated Bermuda subsidiaries is a
licensed insurer in Bermuda, and, as such, may carry on
activities from Bermuda that are related to and in support of
its insurance business.
Ordinary shares may be offered or sold in Bermuda only in
compliance with the provisions of the Investment Business Act
2003 of Bermuda, which regulates the sale of securities in
Bermuda. In addition, the BMA must approve all issues and
transfers of securities of a Bermuda exempted company. Where any
equity securities (meaning shares that entitle the holder to
vote for or appoint one or more directors or securities that by
their terms are convertible into shares that entitle the holder
to vote for or appoint one or more directors) of a Bermuda
company are listed on an appointed stock exchange (which
includes Nasdaq), the BMA has given general permission for the
issue and subsequent transfer of any securities of the company
from and/or
to a non-resident for so long as any such equity securities of
the company remain so listed.
The Bermuda government actively encourages foreign investment in
exempted entities like us and our regulated Bermuda
subsidiaries that are based in Bermuda, but which do not operate
in competition with local businesses. We and our regulated
Bermuda subsidiaries are not currently subject to taxes computed
on profits or income or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or
inheritance tax or to any foreign exchange controls in Bermuda.
Under Bermuda law, non-Bermudians (other than spouses of
Bermudians, holders of a permanent residents certificate
or holders of a working residents certificate) may not
engage in any gainful occupation in Bermuda without an
appropriate governmental work permit. Work permits may be
granted or extended by the Bermuda government upon showing that,
after proper public advertisement in most cases, no Bermudian
(or spouse of a Bermudian, holder of a permanent residents
certificate or holder of a working residents certificate)
is available who meets the minimum standard requirements for the
advertised position. In 2004, the Bermuda government announced a
new immigration policy limiting the duration of work permits to
six years, with specified exemptions for key
employees. The categories of key employees include
senior executives (chief executive officers, presidents through
vice presidents), managers with global responsibility, senior
financial posts (treasurers, chief financial officers through
controllers, specialized qualified accountants, quantitative
modeling analysts), certain legal professionals (general
counsels, specialist attorneys, qualified legal librarians and
knowledge managers), senior insurance professionals (senior
underwriters, senior claims adjusters), experienced/specialized
brokers,
30
actuaries, specialist investment traders/analysts and senior
information technology engineers/managers. All of our executive
officers who work in our Bermuda office have obtained work
permits.
United
Kingdom
General. On December 1, 2001, the U.K.
Financial Services Authority, or the FSA, assumed its full
powers and responsibilities as the single statutory regulator
responsible for regulating the financial services industry in
respect of the carrying on of regulated activities
(including deposit taking, insurance, investment management and
most other financial services business by way of business in the
U.K.), with the purpose of maintaining confidence in the U.K.
financial system, providing public understanding of the system,
securing the proper degree of protection for consumers and
helping to reduce financial crime. It is a criminal offense for
any person to carry on a regulated activity in the U.K. unless
that person is authorized by the FSA and has been granted
permission to carry on that regulated activity or falls under an
exemption.
Insurance business (which includes reinsurance business) is
authorized and supervised by the FSA. Insurance business in the
United Kingdom is divided between two main categories: long-term
insurance (which is primarily investment-related) and general
insurance. It is not possible for an insurance company to be
authorized in both long-term and general insurance business.
These two categories are both divided into classes
(for example: permanent health and pension fund management are
two classes of long-term insurance; damage to property and motor
vehicle liability are two classes of general insurance). Under
the Financial, Services and Markets Act 2000, or the FSMA,
effecting or carrying out contracts of insurance, within a class
of general or long-term insurance, by way of business in the
United Kingdom, constitutes a regulated activity requiring
individual authorization. An authorized insurance company must
have permission for each class of insurance business it intends
to write.
Certain of our regulated U.K. subsidiaries, as authorized
insurers, would be able to operate throughout the European
Union, subject to certain regulatory requirements of the FSA and
in some cases, certain local regulatory requirements. An
insurance company with FSA authorization to write insurance
business in the United Kingdom can seek consent from the FSA to
allow it to provide cross-border services in other member states
of the E.U. As an alternative, FSA consent may be obtained to
establish a branch office within another member state. Although
in run-off, our regulated U.K. subsidiaries remain regulated by
the FSA, but may not underwrite new business.
As FSA authorized insurers, the insurance and reinsurance
businesses of our regulated U.K. subsidiaries are subject to
close supervision by the FSA. The FSA has implemented specific
requirements for senior management arrangements, systems and
controls of insurance and reinsurance companies under its
jurisdiction, which place a strong emphasis on risk
identification and management in relation to the prudential
regulation of insurance and reinsurance business in the United
Kingdom.
Supervision. The FSA carries out the
prudential supervision of insurance companies through a variety
of methods, including the collection of information from
statistical returns, review of accountants reports, visits
to insurance companies and regular formal interviews.
The FSA has adopted a risk-based approach to the supervision of
insurance companies. Under this approach the FSA performs a
formal risk assessment of insurance companies or groups carrying
on business in the U.K. periodically. The periods between U.K.
assessments vary in length according to the risk profile of the
insurer. The FSA performs the risk assessment by analyzing
information which it receives during the normal course of its
supervision, such as regular prudential returns on the financial
position of the insurance company, or which it acquires through
a series of meetings with senior management of the insurance
company. After each risk assessment, the FSA will inform the
insurer of its views on the insurers risk profile. This
will include details of any remedial action that the FSA
requires and the likely consequences if this action is not taken.
Solvency Requirements. The Integrated
Prudential Sourcebook requires that insurance companies maintain
a required solvency margin at all times in respect of any
general insurance undertaken by the insurance company. The
calculation of the required margin in any particular case
depends on the type and amount of insurance business a company
writes. The method of calculation of the required solvency
margin is set out in the Integrated Prudential Sourcebook, and
for these purposes, all insurers assets and liabilities
are subject to specific valuation rules which are set out in the
Integrated Prudential Sourcebook. Failure to maintain the
required solvency margin is one of the
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grounds on which wide powers of intervention conferred upon the
FSA may be exercised. For fiscal years ending on or after
January 1, 2004, the calculation of the required solvency
margin has been amended as a result of the implementation of the
EU Solvency I Directives. In respect of liability business
accepted, 150% of the actual premiums written and claims
incurred must be included in the calculation, which has had the
effect of increasing the required solvency margin of our
regulated U.K. subsidiaries. We continuously monitor the
solvency capital position of the U.K. subsidiaries and maintains
capital in excess of the required solvency margin.
Insurers are required to calculate an Enhanced Capital
Requirement, or ECR, in addition to their required solvency
margin. This represents a more risk-sensitive calculation than
the previous required solvency margin requirements and is used
by the FSA as its benchmark in assessing its Individual Capital
Adequacy Standards. Insurers must maintain financial resources
which are adequate, both as to amount and quality, to ensure
that there is no significant risk that its liabilities cannot be
met as they come due. In order to carry out the assessment as to
the necessary financial resources that are required, insurers
are required to identify the major sources of risk to its
ability to meet its liabilities as they come due, and to carry
out stress and scenario tests to identify an appropriate range
of realistic adverse scenarios in which the risk crystallizes
and to estimate the financial resources needed in each of the
circumstances and events identified. In addition, the FSA gives
Individual Capital Guidance, or ICG, regularly to insurers and
reinsurers following receipt of individual capital assessments,
prepared by firms themselves. The FSAs guidance may be
that a company should hold more or less than its then current
level of regulatory capital, or that the companys
regulatory capital should remain unaltered. We calculated the
ECR for our regulated U.K. subsidiaries for the period ended
December 31, 2007 and submitted those calculations in
March 2008 to the FSA as part of their statutory filings.
The ECR calculations for its regulated U.K. subsidiaries for the
year ended December 31, 2008 will be submitted by no later
than March 31, 2009.
In addition, an insurer (other than a pure reinsurer) that is
part of a group is required to perform and submit to the FSA an
audited Group Capital Adequacy Return (GCAR). The GCAR is a
solvency margin calculation return in respect of its ultimate
parent undertaking, in accordance with the FSAs rules.
This return is not part of an insurers own solvency return
and hence will not be publicly available. Although there is no
requirement for the parent undertaking solvency calculation to
show a positive result, the FSA may take action where it
considers that the solvency of the insurance company is or may
be jeopardized due to the group solvency position. Further, an
insurer is required to report in its annual returns to the FSA
all material related party transactions (e.g., intra-group
reinsurance, whose value is more than 5% of the insurers
general insurance business amount).
Restrictions on Dividend Payments. U.K.
company law prohibits our regulated U.K. subsidiaries from
declaring a dividend to their shareholders unless they have
profits available for distribution. The
determination of whether a company has profits available for
distribution is based on its accumulated realized profits less
its accumulated realized losses. While the United Kingdom
insurance regulatory laws impose no statutory restrictions on a
general insurers ability to declare a dividend, the FSA
strictly controls the maintenance of each insurance
companys required solvency margin within its jurisdiction.
The FSAs rules require our regulated U.K. subsidiaries to
obtain FSA approval for any proposed or actual payment of a
dividend.
Reporting Requirements. U.K. insurance
companies must prepare their financial statements under the
Companies Act of 1985 (as amended), which requires the filing
with Companies House of audited financial statements and related
reports. In addition, U.K. insurance companies are required to
file with the FSA regulatory returns, which include a revenue
account, a profit and loss account and a balance sheet in
prescribed forms. Under the Interim Prudential Sourcebook for
Insurers, audited regulatory returns must be filed with the FSA
within two months and 15 days (or three months where the
delivery of the return is made electronically) of the
companys year end. Our regulated U.K. insurance
subsidiaries are also required to submit abridged quarterly
information to the FSA.
Supervision of Management. The FSA closely
supervises the management of insurance companies through the
approved persons regime, by which any appointment of persons to
perform certain specified controlled functions
within a regulated entity, must be approved by the FSA.
Change of Control. FSMA regulates the
acquisition of control of any U.K. insurance company
authorized under FSMA. Any company or individual that (together
with its or his associates) directly or indirectly acquires 10%
or more of the shares in a U.K. authorized insurance company or
its parent company, or is entitled to exercise or control the
exercise of 10% or more of the voting power in such authorized
insurance company or its parent
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company, would be considered to have acquired
control for the purposes of the relevant
legislation, as would a person who had significant influence
over the management of such authorized insurance company or its
parent company by virtue of his shareholding or voting power in
either. A purchaser of 10% or more of our ordinary shares would
therefore be considered to have acquired control of
our regulated U.K. subsidiaries.
Under FSMA, any person proposing to acquire control
over a U.K. authorized insurance company must give prior
notification to the FSA of his intention to do so. The FSA would
then have three months to consider that persons
application to acquire control. In considering
whether to approve such application, the FSA must be satisfied
that both the acquirer is a fit and proper person to have such
control and that the interests of consumers would
not be threatened by such acquisition of control.
Failure to make the relevant prior application could result in
action being taken against us by the FSA.
Intervention and Enforcement. The FSA has
extensive powers to intervene in the affairs of an authorized
person, culminating in the ultimate sanction of the removal of
authorization to carry on a regulated activity. FSMA imposes on
the FSA statutory obligations to monitor compliance with the
requirements imposed by FSMA, and to enforce the provisions of
FSMA-related rules made by the FSA. The FSA has power, among
other things, to enforce and take disciplinary measures in
respect of breaches of both the Interim Prudential Sourcebook
for Insurers and breaches of the conduct of business rules
generally applicable to authorized persons.
The FSA also has the power to prosecute criminal offenses
arising under FSMA, and to prosecute insider dealing under
Part V of the Criminal Justice Act of 1993, and breaches of
money laundering regulations. The FSAs stated policy is to
pursue criminal prosecution in all appropriate cases.
Passporting. European Union directives allow
our regulated U.K. subsidiaries to conduct business in European
Union states other than the United Kingdom in compliance with
the scope of permission granted these companies by the FSA
without the necessity of additional licensing or authorization
in other European Union jurisdictions. This ability to operate
in other jurisdictions of the European Union on the basis of
home state authorization and supervision is sometimes referred
to as passporting. Insurers may operate outside
their home member state either on a services basis
or on an establishment basis. Operating on a
services basis means that the company conducts
permitted businesses in the host state without having a physical
presence there, while operating on an establishment
basis means the company has a branch or physical presence in the
host state. In both cases, a company remains subject to
regulation by its home regulator, and not by local regulatory
authorities, although the company nonetheless may have to comply
with certain local rules. In addition to European Union member
states, Norway, Iceland and Liechtenstein (members of the
broader European Economic Area) are jurisdictions in which this
passporting framework applies.
Australia
In Australia, four of our subsidiaries are companies with
Insurance Act 1973 authorizations. Three of these companies are
insurance companies authorized to conduct run-off business and
one is a non-operating holding company. In addition, we have
four Australian registered companies not authorized to conduct
insurance business, but which provide services to the authorized
entities.
Regulators. The non-operating holding company
and the authorized insurers are regulated and are subject to
prudential supervision by the Australian Prudential
Regulation Authority, or APRA. APRA is the primary
regulatory body responsible for regulating compliance with the
Insurance Act 1973, or the 1973 Act. In addition, all companies,
including the non-authorized entities, must comply with the
Corporations Act 2001 and its primary regulator the Australian
Securities and Investments Commission, or ASIC.
APRA was established in 1998 as an independent body to supervise
banks, credit unions, building societies, general insurance and
reinsurance companies, life insurance, friendly societies, and
most members of the superannuation industry. APRAs
supervisory role over these institutions includes licensing,
conducting
on-site
operational reviews, assessing risk, responding to queries and
collecting data. In addition, APRA enforces and administers the
1973 Act and promulgates Prudential Standards to regulate the
industries it supervises.
ASIC is Australias corporate, markets and financial
services regulator. In 2001, the Financial Services Reform Act
2001 amended Chapter 7 of the Corporations Act 2001 and the
reforms came into force, after a transitional
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period, in March 2004. These reforms, as they relate to
insurance and insurers, are intended to promote: confident and
informed decision making by consumers of insurance products and
services while facilitating efficiency, flexibility and
innovation in the provision of those products and services;
fairness, honesty and professionalism by those who provide
insurance services; and fair, orderly and transparent markets
for insurance products.
APRA and ASIC entered into a Memorandum of Understanding in June
2004. The objective of the Memorandum was to set out the
framework for co-operation between the two agencies in areas of
common interest and to set out the responsibilities of each
entity. The Memorandum outlined APRAs responsibilities as
the prudential supervisor of the financial services industry and
ASICs responsibilities as the body that would be
monitoring, regulating and enforcing the Corporations Act and
the Financial Services Reform Act and promoting market integrity.
APRAs powers. The 1973 Act prescribes
APRAs powers in respect of the authorization and
prudential supervision of general insurers. The 1973 Act aims to
protect the interests of policy holders and prospective policy
holders under insurance policies in ways that are consistent
with the continued development of a viable, competitive and
innovative insurance industry.
APRAs enforcement and disciplinary powers under the 1973
Act include powers to: (a) revoke the authorization of a
general insurer or authorized non-operating holding company;
(b) remove a director or senior manager of a general
insurer, authorized non-operating holding company or corporate
agent; (c) determine prudential standards; (d) monitor
prudential matters; (e) collect information from auditors
and actuaries; (f) remove auditors and actuaries;
(g) investigate general insurers and unauthorized insurance
matters; (h) apply to have a general insurer wound up;
(i) determine insolvent insurers liabilities in
respect of early claims; (j) direct Lloyds
underwriters to not issue or renew policies; and (k) make
directions in certain circumstances.
Conducting Insurance Business in
Australia. The 1973 Act only permits APRA
authorized bodies corporate and Lloyds underwriters to
carry on general insurance business in Australia. Those entities
authorized to conduct insurance business in Australia are
classified into the following categories:
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Category A insurer an insurer incorporated
in Australia that does not fall within any of the other
categories of insurer;
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Category B insurer an insurer incorporated
in Australia that is also a subsidiary of a local or foreign
insurance group;
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Category C insurer a foreign general
insurer, which is a foreign insurer operating as a foreign
branch in Australia;
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Category D insurer an insurer incorporated
in Australia that is owned by an industry or a professional
association, or by the members of the industry or professional
association or a combination of both; and only underwrites
business risk of the members of the association or those who are
eligible to become members. Medical indemnity insurers are not
included in this definition; or
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Category E insurer an insurer incorporated
in Australia that is a corporate captive or a partnership
captive. Category E insurers are often referred to as
sole parent captives.
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Foreign-owned subsidiaries and foreign general insurers must be
authorized by APRA to conduct business in Australia and are
subject to similar legislative and prudential requirements as
Australian owned and incorporated insurers.
Ownership and control. The Financial Sector
(Shareholdings) Act 1998 governs the ownership of insurers in
Australia. The interest of an individual shareholder or a group
of associated shareholders in an insurer is generally limited to
15% of the insurers voting shares. A higher percentage
limit may be approved by the Treasurer of the Commonwealth of
Australia on national interest grounds.
The Insurance Acquisitions and Takeovers Act 1991 governs the
control of and compulsory notification of proposals relating to
both the acquisition and lease of Australian-registered
insurance companies. All acquisition or lease proposals must be
notified to the Minister for Revenue, with authority delegated
to APRA, who has the discretion to make a permanent
restraining order or go ahead decision
regarding the proposal.
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Compliance and Governance. Section 32 of
the 1973 Act authorizes APRA to determine, vary and revoke
prudential standards that impose different requirements to be
complied with by different classes of general insurers,
authorized non-operating holding companies and their respective
subsidiaries. Presently APRA has issued prudential standards
that apply to general insurers in relation to capital adequacy,
the holding of assets in Australia, risk management, business
continuity management, reinsurance management, outsourcing,
audit and actuarial reporting and valuation, the transfer and
amalgamation of insurance businesses, governance, and the fit
and proper assessment of the insurers responsible persons.
Capital Adequacy. APRAs prudential
standards require that all insurers maintain and meet prescribed
capital adequacy requirements to enable its insurance
obligations to be met under a wide range of circumstances. This
requires authorized insurers to hold eligible capital in excess
of the minimum capital requirement. This amount may be
determined using the prescribed method or an internal model
based method. APRA has determined that two tiers of capital may
be deemed eligible capital and may be used to determine an
insurers capital base. Tier 1 capital comprises the
highest quality capital components and Tier 2 capital
includes other components that fall short of the quality of
Tier 1 capital but still contribute to the overall strength
of the insurer. As part of the determination of the proper
capital adequacy using the prescribed method, insurers must
determine and consider whether or not they must apply
prudentially required investment risk charges, insurance risk
capital charges and concentration risk capital charges to their
capital amount for the purposes of determining the applicable
minimum capital requirements.
Capital Releases. An insurer must obtain
APRAs written consent prior to making any planned
reductions in its capital.
A reduction in an insurers capital includes, but is not
limited to:
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a share buyback;
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the redemption, repurchase or early repayment of any qualifying
Tier 1 and Tier 2 capital instruments issued by the
insurer or a special purpose vehicle;
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trading in the insurers own shares or capital instruments
outside of any arrangement agreed upon with APRA;
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payment of dividends on ordinary shares that exceeds an
insurers after-tax earnings, after including payments on
more senior capital instruments, in the financial year to which
they relate; and
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dividend or interest payments (whether whole or partial) on
specific types of Tier 2 and Tier 1 capital that
exceed an insurers after-tax earnings, including any
payments made on more senior capital instruments, calculated
before any such payments are applied in the financial year to
which they relate.
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An Australian insurer in run-off must provide APRA a valuation
prepared by the appointed actuary that demonstrates that the
tangible assets of the insurer, after the proposed capital
reduction, are sufficient to cover its insurance liabilities to
a 99.5% level of sufficiency of capital before APRA will consent
to a capital release.
Assets in Australia. The 1973 Act and APRA
require that all insurers are required to maintain assets in
Australia at least equal to their liabilities in Australia and
foreign insurers are required to maintain assets in Australia
that exceed their liabilities in Australia by an amount that is
greater than their minimum capital requirements.
Audit and Actuarial Reporting
Requirements. APRA requires insurers to submit
data in accordance with the reporting standards under the
Financial Sector (Collection of Data) Act 1988. Insurers must
provide quarterly returns and annual audited returns to APRA.
Insurers in run-off must provide a run-off plan annually.
Insurance contract transactions are accounted for on a
prospective accounting basis, which results in all
premium revenue, acquisition costs and reinsurance expenses
being recorded directly into profit and loss.
APRA requires all insurers, except for small insurers (those
insurers with less than $20 million of gross insurance
liabilities and no material long-tail insurance liabilities) to
appoint an actuary. These insurers must obtain an annual
insurance liability valuation report, or ILVR, and financial
condition report from the appointed actuary. Although an
appointed actuary for an insurer in run-off need not provide a
financial condition report, he or she must provide a report
setting out his or her review of the insurers required
run-off plan.
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The ILVR must be peer reviewed by another actuary. Insurance
liabilities are to be determined as central estimates on a
discounted basis plus a risk margin assessed at a 75% level of
sufficiency.
APRA requires all insurers to appoint an auditor. The auditor
must prepare a certificate in relation to the insurers
annual APRA reporting requirements and prepare a report annually
about the systems, procedures and controls within the insurer.
Section 334 of the Corporations Act 2001 provides that the
Australian Accounting Standards Board may make accounting
standards for the purposes of the Corporations Act. The relevant
standards are Accounting Standards AASB 4 (Insurance) and AASB
1023 (General Insurance Contracts).
Outsourcing. APRA requires that all
outsourcing arrangements of material business activities must be
documented in the form of written contracts except for some
intra-group arrangements. An insurer must consult with APRA
prior to entering into outsourcing arrangements where the
service and the entity providing the service are located outside
of Australia. Insurers are also required to maintain a policy
relating to outsourcing that ensures there is sufficient
monitoring of the outsourced activities.
SOARS and PAIRS. APRA maintains two risk
assessment, supervisory and response tools to assist APRA with
its risk-based approach to supervision. The Probability and
Impact Ratings System, or PAIRS, is APRAs risk assessment
model and is divided into two dimensions, the probability and
impact of the failure of an APRA regulated insurer. The PAIRS
risk assessment involves an assessment of the following
categories: board, management, risk governance, strategy and
planning; liquidity risk; operational risk; credit risk; market
and investment risk; insurance risk; capital coverage/surplus
risk; earnings; and access to additional capital. The assessment
of these categories involves consideration of four key factors:
inherent risk, management and control, net risk and capital
support. APRA does not publish insurers PAIRS ratings, but
does make them available to the insurer.
The Supervisory Oversight and Response System, or SOARS, is used
to determine the regulatory response based on the PAIRS risk
assessment. An insurer may have a SOARS supervision stance of
normal, oversight, mandated improvement or restructure. APRA
does not publish insurers SOARS ratings, but does make
them available to the insurer.
Australian Prudential Framework and Australian Accounting
Standards Board. APRA maintains a prudential
framework that requires the maintenance and collection of
certain financial information. In certain circumstances the
collection of this information is categorized differently that
the manner prescribed by the Australian Accounting Standards
Board, or AASB, in the Accounting Standards. AASBs
standards are based on the matching concept whereas the APRA
prudential framework is based on perspective accounting. While
there are differences between the two methods, those differences
do not apply to our Australian subsidiaries for a variety of
reasons, such as going concern issues and the current assets
held by those entities.
United
States
As of December 31, 2008, we own or control three property
and casualty insurance companies domiciled in the U.S., our U.S.
Insurers, all of which are in run off.
General. In common with other insurers, our
U.S. Insurers are subject to extensive governmental
regulation and supervision in the various states and
jurisdictions in which they are domiciled and licensed
and/or
approved to conduct business. The laws and regulations of the
state of domicile have the most significant impact on
operations. This regulation and supervision is designed to
protect policyholders rather than investors. Generally,
regulatory authorities have broad regulatory powers over such
matters as licenses, standards of solvency, premium rates,
policy forms, marketing practices, claims practices,
investments, security deposits, methods of accounting, form and
content of financial statements, reserves and provisions for
unearned premiums, unpaid losses and loss adjustment expenses,
reinsurance, minimum capital and surplus requirements, dividends
and other distributions to shareholders, periodic examinations
and annual and other report filings. In addition, transactions
among affiliates, including reinsurance agreements or
arrangements, as well as certain third-party transactions,
require prior regulatory approval from, or prior notice to, the
applicable regulator under certain circumstances. Regulatory
authorities also conduct periodic financial, claims and market
conduct examinations. Finally, our U.S. Insurers are also
subject to
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the general laws of the jurisdictions in which they do business.
Certain insurance regulatory requirements are highlighted below.
Insurance Holding Company Systems Acts. State
insurance holding company system statutes and related
regulations provide a regulatory apparatus that is designed to
protect the financial condition of domestic insurers operating
within a holding company system. All insurance holding company
statutes and regulations require disclosure and, in some
instances, prior approval or non-disapproval of material
transactions involving the domestic insurer and an affiliate.
These transactions typically include sales, purchases,
exchanges, loans and extensions of credit, reinsurance
agreements, service agreements, guarantees and investments
between an insurance company and its affiliates, involving in
the aggregate specified percentages of an insurance
companys admitted assets or policyholders surplus, or
dividends that exceed specified percentages of an insurance
companys surplus or income.
The state insurance holding company system statutes and
regulations may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of us, any of
the other direct or indirect parents of any of our
U.S. Insurers, or any of our U.S. Insurers, including
through transactions, and in particular unsolicited
transactions, that we or our shareholders might consider to be
desirable.
Before a person can acquire control of a domestic insurer or
reinsurer or any person controlling such insurer or reinsurer,
prior written approval must be obtained from the insurance
commissioner of the state in which the domestic insurer is
domiciled. Prior to granting approval of an application to
acquire control of a domestic insurer or person controlling the
domestic insurer, the state insurance commissioner of the
jurisdiction in which the insurer is domiciled will consider
such factors as the financial strength of the applicant, the
integrity and management of the applicants board of
directors and executive officers, the acquirors plans for
the future operations of the domestic insurer and any
anti-competitive results that may arise from the closing of the
acquisition of control. Generally, state statutes and
regulations provide that control over a domestic
insurer or person controlling a domestic insurer is presumed to
exist if any person, directly or indirectly, owns, controls,
holds with the power to vote, or holds proxies representing, 10%
or more of the voting securities or securities convertible into
voting securities of the domestic insurer or of a person who
controls a domestic insurer. Florida statutes create a
presumption of control when any person, directly or indirectly,
owns, controls, holds with the power to vote, or holds proxies
representing, 5% or more of the voting securities or securities
convertible into voting securities of the domestic insurer or
person controlling a domestic insurer.
Because a person acquiring 5% or more of our ordinary shares
would be presumed to acquire control of Capital Assurance, which
is domiciled in Florida, and because a person acquiring 10% or
more of our ordinary shares would be presumed to acquire control
of the other U.S. Insurers, the U.S. insurance change
of control laws will likely apply to such transactions.
Typically, the holding company statutes and regulations will
also require each of our U.S. Insurers periodically to file
information with state insurance regulatory authorities,
including information concerning capital structure, ownership,
financial condition and general business operations.
Regulation of Dividends and other Payments from Insurance
Subsidiaries. The ability of a U.S. insurer
to pay dividends or make other distributions is subject to
insurance regulatory limitations of the insurance companys
state of domicile. Generally, these laws require prior
regulatory approval before an insurer may pay a dividend or make
a distribution above a specified level. In many
U.S. jurisdictions, dividends may only be paid out of
earned surplus and may not exceed specified levels. In addition,
the laws of many U.S. jurisdictions require an insurer to
report for informational purposes to the insurance commissioner
of its state of domicile all declarations and proposed payments
of dividends and other distributions to security holders. Any
return of capital from a U.S. insurance company would
require prior approval of the domestic regulators.
The dividend limitations imposed by state insurance laws are
based on statutory financial results, determined by using
statutory accounting practices that differ in certain respects
from accounting principles used in financial statements prepared
in conformity with U.S. GAAP. The significant differences
relate to treatment of deferred acquisition costs, deferred
income taxes, required investment reserves, reserve calculation
assumptions and surplus notes. In connection with the
acquisition of a U.S. insurer, insurance regulators in the
United States often impose, as
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a condition to the approval of the acquisition, additional
restrictions on the ability of the U.S. insurer to pay
dividends or make other distributions for specified periods of
time.
Accreditation. The National Association of
Insurance Commissioners, or the NAIC, has instituted its
Financial Regulatory Standards and Accreditation Program, or
FRSAP, in response to federal initiatives to regulate the
business of insurance. FRSAP provides a set of standards
designed to establish effective state regulation of the
financial condition of insurance companies. Under FRSAP, a state
must adopt certain laws and regulations, institute required
regulatory practices and procedures, and have adequate personnel
to enforce these laws and regulations in order to become an
accredited state. Accredited states are not able to
accept certain financial examination reports of insurers
prepared solely by the regulatory agency in an unaccredited
state. The respective states in which our U.S. Insurers are
domiciled, except New York, are accredited states. Because the
New York Insurance Department is not accredited, no other state
should be required to accept its examinations, although states
have generally agreed to accept the New York Insurance
Departments examinations. Still, there can be no assurance
they will do so in the future if the New York Insurance
Department remains unaccredited.
Insurance Regulatory Information System
Ratios. The NAIC Insurance Regulatory Information
System, or IRIS, was developed by a committee of state insurance
regulators and is intended primarily to assist state insurance
departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their
respective states. IRIS identifies 11 industry ratios and
specifies usual values for each ratio. Departure
from the usual values of the ratios can lead to inquiries from
individual state insurance commissioners regarding different
aspects of an insurers business. Insurers that report four
or more unusual values are generally targeted for regulatory
review. For 2008, certain of our U.S. Insurers generated
IRIS ratios that were outside of the usual ranges. Only
Stonewall and Seaton have been subject to any increased
regulatory review, but there is no assurance that our other
U.S. Insurer will not be subject to increased scrutiny in
the future.
Risk-Based Capital Requirements. In order to
enhance the regulation of insurer solvency, the NAIC adopted in
December 1993 a formula and model law to implement risk-based
capital requirements for property and casualty insurance
companies. These risk-based capital requirements change from
time to time and are designed to assess capital adequacy and to
raise the level of protection that statutory surplus provides
for policyholder obligations. The risk-based capital model for
property and casualty insurance companies measures three major
areas of risk facing property and casualty insurers:
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underwriting, which encompasses the risk of adverse loss
developments and inadequate pricing;
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declines in asset values arising from credit risk; and
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declines in asset values arising from investment risks.
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Insurers having less statutory surplus than required by the
risk-based capital calculation will be subject to varying
degrees of regulatory action, depending on the level of capital
inadequacy.
Under the approved formula, an insurers statutory surplus
is compared to its risk-based capital requirement. If this ratio
is above a minimum threshold, no company or regulatory action is
necessary. Below this threshold are four distinct action levels
at which a regulator can intervene with increasing degrees of
authority over an insurer as the ratio of surplus to risk-based
capital requirement decreases. The four action levels include:
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insurer is required to submit a plan for corrective action;
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insurer is subject to examination, analysis and specific
corrective action;
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regulators may place insurer under regulatory control; and
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regulators are required to place insurer under regulatory
control.
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Some of our U.S. Insurers have risk-based capital levels
that are below required levels and are subject to increased
regulatory scrutiny and control by their domestic insurance
regulator.
Guaranty Funds and Assigned Risk Plans. Most
states require all admitted insurance companies to participate
in their respective guaranty funds that cover various claims
against insolvent insurers. Solvent insurers licensed in these
states are required to cover the losses paid on behalf of
insolvent insurers by the guaranty funds and
38
are generally subject to annual assessments in the state by its
guaranty fund to cover these losses. Some states also require
admitted insurance companies to participate in assigned risk
plans, which provide coverage for automobile insurance and other
lines for insureds that, for various reasons, cannot otherwise
obtain insurance in the open market. This participation may take
the form of reinsuring a portion of a pool of policies or the
direct issuance of policies to insureds. The calculation of an
insurers participation in these plans is usually based on
the amount of premium for that type of coverage that was written
by the insurer on a voluntary basis in a prior year.
Participation in assigned risk pools tends to produce losses
which result in assessments to insurers writing the same lines
on a voluntary basis. Our U.S. Insurers may be subject to
guaranty fund assessments and may participate in assigned risk
plans.
Credit for Reinsurance. Licensed reinsurers in
the United States are subject to insurance regulation and
supervision that is similar to the regulation of licensed
primary insurers. However, the terms and conditions of
reinsurance agreements generally are not subject to regulation
by any governmental authority with respect to rates or policy
terms. This contrasts with primary insurance policies and
agreements, the rates and terms of which generally are regulated
by state insurance regulators. As a practical matter, however,
the rates charged by primary insurers do have an effect on the
rates that can be charged by reinsurers. A primary insurer
ordinarily will enter into a reinsurance agreement only if it
can obtain credit for the reinsurance ceded on its statutory
financial statements. In general, credit for reinsurance is
allowed in the following circumstances:
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if the reinsurer is licensed in the state in which the primary
insurer is domiciled or, in some instances, in certain states in
which the primary insurer is licensed;
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if the reinsurer is an accredited or otherwise
approved reinsurer in the state in which the primary insurer is
domiciled or, in some instances, in certain states in which the
primary insurer is licensed;
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in some instances, if the reinsurer (1) is domiciled in a
state that is deemed to have substantially similar credit for
reinsurance standards as the state in which the primary insurer
is domiciled and (2) meets financial requirements; or
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if none of the above apply, to the extent that the reinsurance
obligations of the reinsurer are secured appropriately,
typically through the posting of a letter of credit for the
benefit of the primary insurer or the deposit of assets into a
trust fund established for the benefit of the primary insurer.
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As a result of the requirements relating to the provision of
credit for reinsurance, our U.S. Insurers and our insurers
domiciled outside the U.S., when reinsuring risks from cedents
domiciled or licensed in U.S. jurisdictions in which our
reinsurers are not domiciled or admitted, may be indirectly
subject to some regulatory requirements imposed by jurisdictions
in which ceding companies are licensed. Because our
non-U.S. insurers
are not licensed, accredited or otherwise approved by or
domiciled in any state in the U.S., and because our
U.S. Insurers are not admitted in all
U.S. jurisdictions, primary insurers are only willing to
cede business to such insurers if we provide adequate security
to allow the primary insurer to take credit on its balance sheet
for the reinsurance it purchased. Such security may be provided
by various means, including the posting of a letter of credit or
deposit of assets into a trust fund for the benefit of the
primary insurer.
Statutory Accounting Principles. Statutory
accounting principles, or SAP, are a basis of accounting
developed to assist insurance regulators in monitoring and
regulating the solvency of insurance companies. It is primarily
concerned with measuring an insurers surplus to
policyholders. Accordingly, statutory accounting focuses on
valuing assets and liabilities of insurers at financial
reporting dates in accordance with appropriate insurance law and
regulatory provisions applicable in each insurers
domiciliary state.
U.S. GAAP is concerned with a companys solvency, but
it is also concerned with other financial measurements, such as
income and cash flows. Accordingly, U.S. GAAP gives more
consideration to appropriate matching of revenue and expenses
and accounting for managements stewardship of assets than
does SAP. As a result, different assets and liabilities and
different amounts of assets and liabilities will be reflected in
financial statements prepared in accordance with U.S. GAAP
as opposed to SAP.
39
Statutory accounting practices established by the NAIC and
adopted, in part, by state insurance departments, will
determine, among other things, the amount of statutory surplus
and statutory net income of our U.S. Insurers, which will
affect, in part, the amount of funds they have available to pay
dividends to us.
Federal Regulation. We are subject to numerous
federal regulations, including the Securities Act of 1933, the
Securities Exchange Act of 1934, or the Exchange Act, and other
federal securities laws. As we continue with our business,
including the run-off of our insurance companies, we must
monitor our compliance with these laws, including our
maintenance of any available exemptions from registration as an
investment company under the Investment Company Act of 1940. Any
failure to comply with these laws or maintain our exemption
could have a material adverse effect on our operations and on
the market price of our ordinary shares.
Although state regulation is the dominant form of
U.S. regulation for insurance and reinsurance business,
from time to time Congress has shown concern over the adequacy
and efficiency of the state regulation. It is not possible to
predict the future impact of any potential federal regulations
or other possible laws or regulations on our
U.S. subsidiaries capital and operations, and such
laws or regulations could materially adversely affect their
business.
Other
In addition to Bermuda, the United Kingdom, Australia and the
United States, we have subsidiaries in various other countries,
including Belgium and Switzerland, and in the future could
acquire new subsidiaries in other countries. Our subsidiaries in
these other jurisdictions are also regulated. Typically, such
regulation is for the protection of policyholders and ceding
insurance companies rather than shareholders. While the degree
and type of regulation to which we are subject in each country
may differ, regulatory authorities generally have broad
supervisory and administrative powers over such matters as
licenses, standards of solvency, investments, reporting
requirements relating to capital structure, ownership, financial
condition and general business operations, special reporting and
prior approval requirements with respect to certain transactions
among affiliates, methods of accounting, form and content of the
consolidated financial statements, reserves for unpaid loss and
LAE, reinsurance, minimum capital and surplus requirements,
dividends and other distributions to shareholders, periodic
examinations and annual and other report filings.
Competition
We compete in international markets with domestic and
international reinsurance companies to acquire and manage
reinsurance companies in run-off. The acquisition and management
of reinsurance companies in run-off is highly competitive. Some
of these competitors have greater financial resources than we
do, have been operating for longer than we have and have
established long-term and continuing business relationships
throughout the reinsurance industry, which can be a significant
competitive advantage. As a result, we may not be able to
compete successfully in the future for suitable acquisition
candidates or run-off portfolio management engagements.
Employees
As of December 31, 2008, we had approximately
292 employees, 5 of whom were executive officers. All
non-Bermudian employees who operate out of our Bermuda office
are subject to approval of any required work permits. None of
our employees are covered by collective bargaining agreements,
and our management believes that our relationship with our
employees is excellent.
Available
Information
We maintain a website with the address
http://www.enstargroup.com. The information contained on
our website is not included as a part of, or incorporated by
reference into, this filing. We make available free of charge
(other than an investors own Internet access charges) on
or through our website our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to these reports, as soon as
40
reasonably practicable after the material is electronically
filed with or otherwise furnished to the SEC. Our annual reports
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports are also available on the
U.S. Securities and Exchange Commissions website at
http://www.sec.gov.
In addition, copies of our corporate governance guidelines,
codes of business conduct and ethics and the governing charters
for the audit and compensation committees of our Board of
Directors are available free of charge on our website. The
public may read and copy any materials we file with the SEC at
the SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
41
You should carefully consider these risks along with the
other information included in this document, including the
matters addressed under Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Cautionary Note Regarding Forward-Looking
Statements, as well as risks included elsewhere in our
documents filed with the SEC, before investing in any of our
securities. We may amend, supplement or add to the risk factors
described below from time to time in future reports filed with
the SEC.
Risks
Relating to Our Business
Difficult
conditions in the economy generally may materially adversely
affect our business and results of operations, and these
conditions may not improve in the near future.
Current market conditions and the instability in the global
credit markets present additional risks and uncertainties for
our business. In particular, continued deterioration in the
public debt and equity markets could lead to additional
investment losses. The severe downturn in the public debt and
equity markets, reflecting uncertainties associated with the
mortgage crisis, worsening economic conditions, widening of
credit spreads, bankruptcies and government intervention in
large financial institutions, has resulted in significant
unrealized losses in our investment portfolio. Depending on
market conditions going forward, we could incur substantial
realized and additional unrealized losses in future periods,
which could have an adverse impact on our results of operations
and financial condition. The current market volatility may also
make it more difficult to value certain of our securities if
trading becomes less frequent. As a result, valuations may
include assumptions or estimates that may have significant
period-to-period
changes that could have a material adverse effect on our results
of operations or financial condition. Disruptions, uncertainty
and volatility in the global credit markets may also impact our
ability to obtain financing for future acquisitions. If
financing is available, it may only be available at an
unattractive cost of capital, which would decrease our
profitability. There can be no assurance that current market
conditions will improve in the near future.
If we
are unable to implement our business strategies, our business
and financial condition may be adversely affected.
Our future results of operations will depend in significant part
on the extent to which we can implement our business strategies
successfully, including our ability to realize the anticipated
growth opportunities, expanded market visibility and increased
access to capital. Our business strategies include continuing to
operate our portfolio of run-off insurance and reinsurance
companies and related management engagements, as well as
pursuing additional acquisitions and management engagements in
the run-off segment of the insurance and reinsurance market. We
may not be able to implement our strategies fully or realize the
anticipated results of our strategies as a result of significant
business, economic and competitive uncertainties, many of which
are beyond our control.
The effects of emerging claims and coverage issues may result in
increased provisions for loss reserves and reduced profitability
in our insurance and reinsurance subsidiaries. Such adverse
business issues may also reduce the level of incentive-based
fees generated by our consulting operations. Adverse global
economic conditions, such as rising interest rates and volatile
foreign exchange rates, may cause widespread failure of our
insurance and reinsurance subsidiaries reinsurers to
satisfy their obligations, as well as failure of companies to
meet their obligations under debt instruments held by our
subsidiaries. If the run-off industry becomes more attractive to
investors, competition for runoff acquisitions and management
and consultancy engagements may increase and, therefore, reduce
our ability to continue to make profitable acquisitions or
expand our consultancy operations. If we are unable to
successfully implement our business strategies, we may not be
able to achieve future growth in our earnings and our financial
condition may suffer and, as a result, holders of our ordinary
shares may receive lower returns.
Our
inability to successfully manage our portfolio of insurance and
reinsurance companies in run-off may adversely impact our
ability to grow our business and may result in
losses.
We were founded to acquire and manage companies and portfolios
of insurance and reinsurance in run-off. Our run-off business
differs from the business of traditional insurance and
reinsurance underwriting in that our insurance
42
and reinsurance companies in run-off no longer underwrite new
policies and are subject to the risk that their stated
provisions for losses and loss adjustment expense, or LAE, will
not be sufficient to cover future losses and the cost of
run-off. Because our companies in run-off no longer collect
underwriting premiums, our sources of capital to cover losses
are limited to our stated reserves, reinsurance coverage and
retained earnings. As of December 31, 2008, our gross
reserves for losses and loss adjustment expense totaled
$2.80 billion, and our reinsurance receivables totaled
$672.7 million.
In order for us to achieve positive operating results, we must
first price acquisitions on favorable terms relative to the
risks posed by the acquired businesses and then successfully
manage the acquired businesses. Our inability to price
acquisitions on favorable terms, efficiently manage claims,
collect from reinsurers and control run-off expenses could
result in us having to cover losses sustained under assumed
policies with retained earnings, which would materially and
adversely impact our ability to grow our business and may result
in material losses.
If our
insurance and reinsurance subsidiaries loss reserves are
inadequate to cover their actual losses, our insurance and
reinsurance subsidiaries net income and capital and
surplus would be reduced.
Our insurance and reinsurance subsidiaries are required to
maintain reserves to cover their estimated ultimate liability
for losses and loss adjustment expenses for both reported and
unreported incurred claims. These reserves are only estimates of
what our subsidiaries think the settlement and administration of
claims will cost based on facts and circumstances known to the
subsidiaries. Our commutation activity and claims settlement and
development in recent years has resulted in net reductions in
provisions for loss and loss adjustment expenses of
$242.1 million, $24.5 million and $31.9 million
for the years ended December 31, 2008, December 31,
2007 and December 31, 2006, respectively. Although this
recent experience indicates that our loss reserves have been
more than adequate to meet our liabilities, because of the
uncertainties that surround estimating loss reserves and loss
adjustment expenses, our insurance and reinsurance subsidiaries
cannot be certain that ultimate losses will not exceed these
estimates of losses and loss adjustment expenses. If our
subsidiaries reserves are insufficient to cover their
actual losses and loss adjustment expenses, our subsidiaries
would have to augment their reserves and incur a charge to their
earnings. These charges could be material and would reduce our
net income and capital and surplus.
The difficulty in estimating the subsidiaries reserves is
increased because our subsidiaries loss reserves include
reserves for potential asbestos and environmental, or A&E,
liabilities. At December 31, 2008, our insurance and
reinsurance companies had recorded gross A&E loss reserves
of $944.0 million, or 35.5% of the total gross loss
reserves. Net A&E loss reserves at December 31, 2008
amounted to $846.4 million, or 35.2% of total net loss
reserves. A&E liabilities are especially hard to estimate
for many reasons, including the long waiting periods between
exposure and manifestation of any bodily injury or property
damage, the difficulty in identifying the source of the asbestos
or environmental contamination, long reporting delays and the
difficulty in properly allocating liability for the asbestos or
environmental damage. Developed case law and adequate claim
history do not always exist for such claims, especially because
significant uncertainty exists about the outcome of coverage
litigation and whether past claim experience will be
representative of future claim experience. In view of the
changes in the legal and tort environment that affect the
development of such claims, the uncertainties inherent in
valuing A&E claims are not likely to be resolved in the
near future. Ultimate values for such claims cannot be estimated
using traditional reserving techniques and there are significant
uncertainties in estimating the amount of our subsidiaries
potential losses for these claims. Our subsidiaries have not
made any changes in reserve estimates that might arise as a
result of any proposed U.S. federal legislation related to
asbestos. To further understand this risk, see
Business Reserves for Unpaid Losses and Loss
Adjustment Expense on page 10.
Our
insurance and reinsurance subsidiaries reinsurers may not
satisfy their obligations to our insurance and reinsurance
subsidiaries.
Our insurance and reinsurance subsidiaries are subject to credit
risk with respect to their reinsurers because the transfer of
risk to a reinsurer does not relieve our subsidiaries of their
liability to the insured. In addition, reinsurers may be
unwilling to pay our subsidiaries even though they are able to
do so. As of December 31, 2008, the balances receivable
from reinsurers amounted to $672.7 million, of which
$254.2 million was associated with two reinsurers with
Standard & Poors credit ratings of AA-. In
addition, many reinsurance companies have been negatively
impacted by the deteriorating financial and economic conditions,
including unprecedented financial market
43
disruption. A number of these companies, including some of those
with which we conduct business, have been downgraded
and/or have
been placed on negative outlook by various rating agencies. The
failure of one or more of our subsidiaries reinsurers to
honor their obligations in a timely fashion may affect our cash
flows, reduce our net income or cause us to incur a significant
loss. Disputes with our reinsurers may also result in unforeseen
expenses relating to litigation or arbitration proceedings.
The
value of our insurance and reinsurance subsidiaries
investment portfolios and the investment income that our
insurance and reinsurance subsidiaries receive from these
portfolios may decline as a result of market fluctuations and
economic conditions.
We derive a significant portion of our income from our invested
assets. The net investment income that our subsidiaries realize
from investments in fixed-income securities will generally
increase or decrease with interest rates. The fair market value
of our subsidiaries fixed-income securities generally
increases or decreases in an inverse relationship with
fluctuations in interest rates and can also decrease as a result
of any downturn in the business cycle that causes the credit
quality of those securities to deteriorate. The fair market
value of our subsidiaries fixed-income securities
classified as trading or
available-for-sale
in our subsidiaries investment portfolios amounted to
$627.4 million at December 31, 2008. The changes in
the market value of our subsidiaries securities that are
classified as trading or
available-for-sale
are reflected in our financial statements. Permanent impairments
in the value of our subsidiaries fixed-income securities
are also reflected in our financial statements. As a result, a
decline in the value of the securities in our subsidiaries
investment portfolios may reduce our net income or cause us to
incur a loss.
In addition to fixed-income securities, we have invested, and
may from time to time continue to invest, in limited
partnerships, limited liability companies and equity funds.
These and other similar investments may be illiquid. As of
December 31, 2008, we had an aggregate of
$60.2 million of such investments. In 2008, we wrote down
the fair value of our private equity investments by
$84.1 million primarily due to mark-to-market adjustments
in the fair value of their underlying assets, which are
primarily investments in financial institutions, arising as a
result of the current global credit and liquidity crisis. For
more information, see Business Investment
Portfolio on page 23.
Fluctuations
in currency exchange rates may cause us to experience
losses.
We maintain a portion of our investments, insurance liabilities
and insurance assets denominated in currencies other than
U.S. dollars. Consequently, we and our subsidiaries may
experience foreign exchange losses. We publish our consolidated
financial statements in U.S. dollars. Therefore,
fluctuations in exchange rates used to convert other currencies,
particularly Australian dollars, Euros, British pounds and other
European currencies, into U.S. dollars will impact our
reported consolidated financial condition, results of operations
and cash flows from year to year. For the year ended
December 31, 2008, we recorded foreign exchange losses of
$15.0 million due in part to our holding surplus British
pounds relating to cash collateral required to support British
pound denominated letters of credit. We also recorded cumulative
translation adjustment losses of $51.0 million primarily
due to the Gordian acquisition and the effect of the decrease in
Australian to U.S. dollar foreign exchange rates upon
conversion of Gordians net Australian dollar assets
to U.S. dollars. As of the date of the acquisition, we
concluded that Gordians functional currency was Australian
dollars.
We
have made, and expect to continue to make, strategic
acquisitions of insurance and reinsurance companies in run-off,
and these activities may not be financially beneficial to us or
our shareholders.
We have pursued and, as part of our strategy, we will continue
to pursue growth through acquisitions
and/or
strategic investments in insurance and reinsurance companies in
run-off. We have made several acquisitions and investments and
we expect to continue to make such acquisitions and investments.
We cannot be certain that any of these acquisitions or
investments will be financially advantageous for us or our
shareholders.
The negotiation of potential acquisitions or strategic
investments, as well as the integration of an acquired business
or portfolio, could result in a substantial diversion of
management resources. Acquisitions could involve numerous
additional risks such as potential losses from unanticipated
litigation or levels of claims, an inability to
44
generate sufficient revenue to offset acquisition costs and
financial exposures in the event that the sellers of the
entities we acquire are unable or unwilling to meet their
indemnification, reinsurance and other obligations to us.
Our ability to manage our growth through acquisitions or
strategic investments will depend, in part, on our success in
addressing these risks. Any failure by us to effectively
implement our acquisition or strategic investment strategies
could have a material adverse effect on our business, financial
condition or results of operations.
Our
past and future acquisitions may expose us to operational risks
such as cash flow shortages, challenges to recruit appropriate
levels of personnel, financial exposures to foreign currencies,
additional integration costs and management time and
effort.
We have made several acquisitions and may in the future make
additional strategic acquisitions, either of other companies or
selected portfolios of insurance or reinsurance in run-off.
These acquisitions may expose us to operational challenges and
risks, including:
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funding cash flow shortages that may occur if anticipated
revenues are not realized or are delayed, whether by general
economic or market conditions or unforeseen internal
difficulties;
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funding cash flow shortages that may occur if expenses are
greater than anticipated;
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the value of assets being lower than expected or diminishing
because of credit defaults or changes in interest rates, or
liabilities assumed being greater than expected;
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integrating financial and operational reporting systems,
including assurance of compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and our Exchange Act reporting
requirements;
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establishing satisfactory budgetary and other financial controls;
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funding increased capital needs and overhead expenses;
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obtaining management personnel required for expanded
operations; and
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the assets and liabilities we may acquire may be subject to
foreign currency exchange rate fluctuation.
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Our failure to manage successfully these operational challenges
and risks could have a material adverse effect on our business,
financial condition or results of operations.
Fluctuations
in the reinsurance industry may cause our operating results to
fluctuate.
The reinsurance industry historically has been subject to
significant fluctuations and uncertainties. Factors that affect
the industry in general may also cause our operating results to
fluctuate. The industrys profitability may be affected
significantly by:
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fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested capital and may affect the ultimate payout of loss
amounts and the costs of administering books of reinsurance
business;
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volatile and unpredictable developments, such as those that have
occurred recently in the world-wide financial and credit
markets, which may adversely affect the recoverability of
reinsurance from our reinsurers;
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changes in reserves resulting from different types of claims
that may arise and the development of judicial interpretations
relating to the scope of insurers liability; and
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the overall level of economic activity and the competitive
environment in the industry.
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The
effects of emerging claim and coverage issues on our business
are uncertain.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect the adequacy of our provision for losses
and loss adjustment expenses by either extending coverage beyond
the intent of insurance
45
policies and reinsurance contracts envisioned at the time they
were written, or by increasing the number or size of claims. In
some instances, these changes may not become apparent until some
time after we have acquired companies or portfolios of insurance
or reinsurance contracts that are affected by the changes. As a
result, the full extent of liability under these insurance or
reinsurance contracts may not be known for many years after a
contract has been issued. To further understand this risk, see
Business Reserves for Unpaid Losses and Loss
Adjustment Expense on page 10.
Insurance
laws and regulations restrict our ability to operate, and any
failure to comply with these laws and regulations, or any
investigations by government authorities, may have a material
adverse effect on our business.
We are subject to extensive regulation under insurance laws of a
number of jurisdictions, and compliance with legal and
regulatory requirements is expensive. These laws limit the
amount of dividends that can be paid to us by our insurance and
reinsurance subsidiaries, prescribe solvency standards that they
must meet and maintain, impose restrictions on the amount and
type of investments that they can hold to meet solvency
requirements and require them to maintain reserves. Failure to
comply with these laws may subject our subsidiaries to fines and
penalties and restrict them from conducting business. The
application of these laws may affect our liquidity and ability
to pay dividends on our ordinary shares and may restrict our
ability to expand our business operations through acquisitions.
At December 31, 2008, the required statutory capital and
surplus of our insurance and reinsurance companies amounted to
$411.7 million compared to the actual statutory capital and
surplus of $985.4 million. As of December 31, 2008,
$357.2 million of our total investments of
$1.28 billion were not admissible for statutory solvency
purposes. Of the $357.2 million of investments not
admissible for statutory solvency purposes, $122.6 million
was attributable to Unionamerica related proceeds on settlement
of a commutation prior to our acquisition of Unionamerica, which
were deposited in a trust account that had counter-party
lawsuits. Subsequent to year-end, those funds were moved and are
now fully admissible for statutory solvency purposes.
The insurance industry has experienced substantial volatility as
a result of current investigations, litigation and regulatory
activity by various insurance, governmental and enforcement
authorities, including the U.S. Securities and Exchange
Commission, or the SEC, concerning certain practices within the
insurance industry. These practices include the sale and
purchase of finite reinsurance or other non-traditional or loss
mitigation insurance products and the accounting treatment for
those products. Insurance and reinsurance companies that we have
acquired, or may acquire in the future, may have been or may
become involved in these investigations and have lawsuits filed
against them. Our involvement in any investigations and related
lawsuits would cause us to incur legal costs and, if we were
found to have violated any laws, we could be required to pay
fines and damages, perhaps in material amounts.
If we
fail to comply with applicable insurance laws and regulations,
we may be subject to disciplinary action, damages, penalties or
restrictions that may have a material adverse effect on our
business.
Our subsidiaries may not have maintained or be able to maintain
all required licenses and approvals or that their businesses
fully comply with the laws and regulations to which they are
subject, or the relevant insurance regulatory authoritys
interpretation of those laws and regulations. In addition, some
regulatory authorities have relatively broad discretion to
grant, renew or revoke licenses and approvals. If our
subsidiaries do not have the requisite licenses and approvals or
do not comply with applicable regulatory requirements, the
insurance regulatory authorities may preclude or suspend our
subsidiaries from carrying on some or all of their activities,
place one of more of them into rehabilitation or liquidation
proceedings, or impose monetary penalties on them. These types
of actions may have a material adverse effect on our business
and may preclude us from making future acquisitions or obtaining
future engagements to manage companies and portfolios in run-off.
Exit
and finality opportunities provided by solvent schemes of
arrangement may not continue to be available, which may result
in the diversion of our resources to settle policyholder claims
for a substantially longer run-off period and increase the
associated costs of run-off of our insurance and reinsurance
subsidiaries.
With respect to our U.K., Bermudian and Australian insurance and
reinsurance subsidiaries, we are able to pursue strategies to
achieve complete finality and conclude the run-off of a company
by promoting solvent schemes
46
of arrangement. Solvent schemes of arrangement have been a
popular means of achieving financial certainty and finality for
insurance and reinsurance companies incorporated or managed in
the U.K., Bermuda and Australia, by making a one-time full and
final settlement of an insurance and reinsurance companys
liabilities to policyholders. A solvent scheme of arrangement is
an arrangement between a company and its creditors or any class
of them. For a solvent scheme of arrangement to become binding
on the creditors, a meeting of each class of creditors must be
called, with the permission of the local court, to consider and,
if thought fit, approve the solvent scheme arrangement. The
requisite statutory majority of creditors of not less than 75%
in value and 50% in number of those creditors actually attending
the meeting, either in person or by proxy, must vote in favor of
a solvent scheme of arrangement. Once the solvent scheme of
arrangement has been approved by the statutory majority of
voting creditors of the company it requires the sanction of the
local court at a hearing at which creditors may appear. The
court must be satisfied that the scheme is fair.
In July 2005, the case of British Aviation Insurance Company, or
BAIC, was the first solvent scheme of arrangement to fail to be
sanctioned by the English High Court, following opposition by
certain creditors. The primary reason for the failure of the
BAIC arrangement was the failure to adequately provide for
different classes of creditors to vote separately on the
arrangement. It was thought at the time that the BAIC judgment
might signal the decline of solvent schemes of arrangement.
However, since BAIC, approximately 30 solvent schemes of
arrangement have been sanctioned, such that the prevailing view
is that the BAIC judgment was very fact-specific to the case in
question, and solvent schemes generally should continue to be
promoted and sanctioned as a viable means for achieving finality
for our insurance and reinsurance subsidiaries. Following the
BAIC judgment, insurance and reinsurance companies must now take
more care in drafting a solvent scheme of arrangement to fit the
circumstances of the company including the determination of the
appropriate classes of creditors. Should a solvent scheme of
arrangement promoted by any of our insurance or reinsurance
subsidiaries fail to receive the requisite approval by creditors
or sanction by the court, we will have to run off these
liabilities until expiry, which may result in the diversion of
our resources to settle policyholder claims for a substantially
longer run-off period and increase the associated costs of
run-off, resulting potentially in a material adverse effect on
our financial condition and results of operations.
We are
dependent on our executive officers, directors and other key
personnel and the loss of any of these individuals could
adversely affect our business.
Our success substantially depends on our ability to attract and
retain qualified employees and upon the ability of our senior
management and other key employees to implement our business
strategy. We believe that there are only a limited number of
available qualified personnel in the business in which we
compete. We rely substantially upon the services of Dominic F.
Silvester, our Chief Executive Officer, Paul J. OShea and
Nicholas A. Packer, our Executive Vice Presidents and Joint
Chief Operating Officers, Richard J. Harris, our Chief Financial
Officer, John J. Oros, our Executive Chairman, and our
subsidiaries executive officers and directors to identify
and consummate the acquisition of insurance and reinsurance
companies and portfolios in run-off on favorable terms and to
implement our run-off strategy. Each of Messrs. Silvester,
OShea, Packer, Oros and Harris has an employment agreement
with us. In addition to serving as our Executive Chairman,
Mr. Oros is a managing director of J.C. Flowers &
Co. LLC, an investment firm specializing in privately negotiated
equity and equity related investments in the financial services
industry. Mr. Oros splits his time commitment between us
and J.C. Flowers & Co. LLC, with the expectation that
Mr. Oros will spend approximately 50% of his working time
with us; however, there is no minimum work commitment set forth
in our employment agreement with Mr. Oros. J. Christopher
Flowers, one of our directors and one of our largest
shareholders, is a Managing Director of J.C. Flowers &
Co. LLC. We believe that our relationships with Mr. Oros
and Mr. Flowers and their affiliates provide us with access
to additional acquisition and investment opportunities, as well
as sources of co-investment for acquisition opportunities that
we do not have the resources to consummate on our own. The loss
of the services of any of our management or other key personnel,
or the loss of the services of or our relationships with any of
our directors, including in particular Mr. Oros and
Mr. Flowers, or their affiliates, could have a material
adverse effect on our business.
Further, if we were to lose any of our key employees in Bermuda,
we would likely hire non-Bermudians to replace them. Under
Bermuda law, non-Bermudians (other than spouses of Bermudians,
holders of permanent
47
residents certificates or holders of a working
residents certificate) may not engage in any gainful
occupation in Bermuda without an appropriate governmental work
permit. Work permits may be granted or extended by the Bermuda
government upon showing that, after proper public advertisement
in most cases, no Bermudian (or spouse of a Bermudian, holder of
a permanent residents certificate or holders of a working
residents certificate) is available who meets the minimum
standard requirements for the advertised position. The Bermuda
governments policy limits the duration of work permits to
six years, with certain exemptions for key employees and job
categories where there is a worldwide shortage of qualified
employees.
Conflicts
of interest might prevent us from pursuing desirable investment
and business opportunities.
Our directors and executive officers may have ownership
interests or other involvement with entities that could compete
against us, either in the pursuit of acquisition targets or in
general business operations. On occasion, we have also
participated in transactions in which one or more of our
directors or executive officers had an interest. In particular,
we have invested, and expect to continue to invest, in or with
entities that are affiliates of or otherwise related to
Mr. Oros
and/or
Mr. Flowers. The interests of our directors and executive
officers in such transactions or such entities may result in a
conflict of interest for those directors and officers. The
independent members of our board of directors review any
material transactions involving a conflict of interest, and the
board of directors will take other actions as may be deemed
appropriate by them in particular circumstances, such as forming
a special committee of independent directors or engaging
third-party financial advisers to evaluate such transactions. We
may not be able to pursue all advantageous transactions that we
would otherwise pursue in the absence of a conflict should our
board of directors be unable to determine that any such
transaction is on terms as favorable as we could otherwise
obtain in the absence of a conflict.
Our
inability to successfully manage the companies and portfolios
for which we have been engaged as a third-party manager may
adversely impact our financial results and our ability to win
future management engagements.
In addition to acquiring insurance and reinsurance companies in
run-off, we have entered into several management agreements with
third parties to manage their companies or portfolios of
business in run-off. The terms of these management engagements
typically include incentive payments to us based on our ability
to successfully manage the run-off of these companies or
portfolios. We may not be able to accomplish our objectives for
these engagements as a result of unforeseen circumstances such
as the length of time for claims to develop, the extent to which
losses may exceed reserves, changes in the law that may require
coverage of additional claims and losses, our ability to commute
reinsurance policies on favorable terms and our ability to
manage run-off expenses. If we are not successful in meeting our
objectives for these management engagements, we may not receive
incentive payments under our management agreements, which could
adversely impact our financial results, and we may not win
future engagements to provide these management services, which
could slow the growth of our business. Consulting fees generated
from management agreements amounted to $25.2 million,
$31.9 million and $33.9 million for the years ended
December 31, 2008, December 31, 2007 and
December 31, 2006, respectively.
Our
consulting business generates a significant amount of our total
income, and the failure to develop new consulting relationships
could materially adversely affect our results of operations and
financial condition.
A significant amount of our existing consulting business is
dependent on a relatively small number of our clients. While our
senior management team has industry relationships that we
believe will allow us to successfully identify and enter into
agreements with new clients for our consulting business, we
cannot assure you that we will be successful in entering into
such agreements. A material reduction in consulting fees paid by
one or more of our clients or the failure to identify new
clients for our consulting services could have a material
adverse effect on our business, financial condition and results
of operations.
48
We may
require additional capital in the future that may not be
available or may only be available on unfavorable
terms.
Our future capital requirements depend on many factors,
including our ability to manage the run-off of our assumed
policies and to establish reserves at levels sufficient to cover
losses. We may need to raise additional funds through financings
in the future. Any equity or debt financing, if available at
all, may be on terms that are not favorable to us. In the case
of equity financings, dilution to our shareholders could result,
and, in any case, such securities may have rights, preferences
and privileges that are senior to those of our already
outstanding securities. If we cannot obtain adequate capital,
our business, results of operations and financial condition
could be adversely affected.
We are
a holding company, and we are dependent on the ability of our
subsidiaries to distribute funds to us.
We are a holding company and conduct substantially all of our
operations through subsidiaries. Our only significant assets are
the capital stock of our subsidiaries. As a holding company, we
are dependent on distributions of funds from our subsidiaries to
pay dividends, fund acquisitions or fulfill financial
obligations in the normal course of our business. Our
subsidiaries may not generate sufficient cash from operations to
enable us to make dividend payments, acquire additional
companies or insurance or reinsurance portfolios or fulfill
other financial obligations. The ability of our insurance and
reinsurance subsidiaries to make distributions to us is limited
by applicable insurance laws and regulations, and the ability of
all of our subsidiaries to make distributions to us may be
restricted by, among other things, other applicable laws and
regulations.
Risks
Relating to Ownership of Our Ordinary Shares
Our
stock price may experience volatility, thereby causing a
potential loss of value to our investors.
The market price for our ordinary shares may fluctuate
substantially due to, among other things, the following factors:
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announcements with respect to an acquisition or investment;
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changes in the value of our assets;
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our quarterly operating results;
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sales, or the possibility or perception of future sales, by our
existing shareholders;
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changes in general conditions in the economy and the insurance
industry;
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the financial markets; and
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adverse press or news announcements.
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A few
significant shareholders may influence or control the direction
of our business. If the ownership of our ordinary shares
continues to be highly concentrated, it may limit your ability
and the ability of other shareholders to influence significant
corporate decisions.
The interests of Messrs. Flowers, Silvester, Packer and
OShea, Trident II, L.P. and its affiliates, or Trident,
and Beck Mack & Oliver LLC, or Beck Mack, may not be
fully aligned with your interests, and this may lead to a
strategy that is not in your best interest. As of
February 26, 2009, Messrs. Flowers, Silvester, Packer
and OShea, Trident and Beck Mack beneficially owned
approximately 11.36%, 16.83%, 5.36%, 5.47%, 9.99% and 7.58%,
respectively, of our outstanding ordinary shares. Although they
do not act as a group, Trident, Beck Mack and each of
Messrs. Flowers, Silvester, Packer and OShea exercise
significant influence over matters requiring shareholder
approval, and their concentrated holdings may delay or deter
possible changes in control of Enstar, which may reduce the
market price of our ordinary shares. For further information on
aspects of our bye-laws that may discourage changes of control
of Enstar, see Some aspects of our corporate
structure may discourage third-party takeovers and other
transactions or prevent the removal of our board of directors
and management below.
49
Some
aspects of our corporate structure may discourage third-party
takeovers and other transactions or prevent the removal of our
board of directors and management.
Some provisions of our bye-laws have the effect of making more
difficult or discouraging unsolicited takeover bids from third
parties or preventing the removal of our current board of
directors and management. In particular, our bye-laws make it
difficult for any U.S. shareholder or Direct Foreign
Shareholder Group (a shareholder or group of commonly controlled
shareholders of Enstar that are not U.S. persons) to own or
control ordinary shares that constitute 9.5% or more of the
voting power of all of our ordinary shares. The votes conferred
by such shares will be reduced by whatever amount is necessary
so that after any such reduction the votes conferred by such
shares will constitute 9.5% of the total voting power of all
ordinary shares entitled to vote generally. The primary purpose
of this restriction is to reduce the likelihood that we will be
deemed a controlled foreign corporation within the
meaning of Internal Revenue Code of 1986, as amended, or the
Code, for U.S. federal tax purposes. However, this limit
may also have the effect of deterring purchases of large blocks
of our ordinary shares or proposals to acquire us, even if some
or a majority of our shareholders might deem these purchases or
acquisition proposals to be in their best interests. In
addition, our bye-laws provide for a classified board, whose
members may be removed by our shareholders only for cause by a
majority vote, and contain restrictions on the ability of
shareholders to nominate persons to serve as directors, submit
resolutions to a shareholder vote and request special general
meetings.
These bye-law provisions make it more difficult to acquire
control of us by means of a tender offer, open market purchase,
proxy contest or otherwise. These provisions may encourage
persons seeking to acquire control of us to negotiate with our
directors, which we believe would generally best serve the
interests of our shareholders. However, these provisions may
have the effect of discouraging a prospective acquirer from
making a tender offer or otherwise attempting to obtain control
of us. In addition, these bye-law provisions may prevent the
removal of our current board of directors and management. To the
extent these provisions discourage takeover attempts, they may
deprive shareholders of opportunities to realize takeover
premiums for their shares or may depress the market price of the
shares.
The
market value of our ordinary shares may decline if large numbers
of shares are sold, including pursuant to existing registration
rights.
We have entered into a registration rights agreement with
Trident, Mr. Flowers and Mr. Silvester and certain
other of our shareholders. This agreement provides that Trident,
Mr. Flowers and Mr. Silvester may request that we
effect a registration statement under the Securities Act of
certain of their ordinary shares. In addition, they and the
other shareholders party to the agreement have
piggyback registration rights, which may result in
their participation in an offering initiated by us. As of the
date of this filing, an aggregate of 4,793,873 ordinary
shares held by Trident, Mr. Flowers and Mr. Silvester
are subject to the agreement. By exercising their registration
rights, these holders could cause a large number of ordinary
shares to be registered and generally become freely tradable
without restrictions under the Securities Act immediately upon
the effectiveness of the registration. Our ordinary shares have
in the past been, and may from time to time continue to be,
thinly traded, and significant sales, pursuant to the existing
registration rights or otherwise, could adversely affect the
market price for our ordinary shares and impair our ability to
raise capital through offerings of our equity securities.
Because
we are incorporated in Bermuda, it may be difficult for
shareholders to serve process or enforce judgments against us or
our directors and officers.
We are a Bermuda company. In addition, certain of our officers
and directors reside in countries outside the United States. All
or a substantial portion of our assets and the assets of these
officers and directors are or may be located outside the United
States. Investors may have difficulty effecting service of
process within the United States on our directors and officers
who reside outside the United States or recovering against us or
these directors and officers on judgments of U.S. courts
based on civil liabilities provisions of the U.S. federal
securities laws even though we have appointed an agent in the
United States to receive service of process.
Further, no claim may be brought in Bermuda against us or our
directors and officers for violation of U.S. federal
securities laws, as such laws do not have force of law in
Bermuda. A Bermuda court may, however,
50
impose civil liability, including the possibility of monetary
damages, on us or our directors and officers if the facts
alleged in a complaint constitute or give rise to a cause of
action under Bermuda law.
We believe that there is doubt as to whether the courts of
Bermuda would enforce judgments of U.S. courts obtained in
actions against us or our directors and officers, as well as our
independent auditors, predicated upon the civil liability
provisions of the U.S. federal securities laws or original
actions brought in Bermuda against us or these persons
predicated solely upon U.S. federal securities laws.
Further, there is no treaty in effect between the
United States and Bermuda providing for the enforcement of
judgments of U.S. courts, and there are grounds upon which
Bermuda courts may not enforce judgments of U.S. courts.
Some remedies available under the laws of
U.S. jurisdictions, including some remedies available under
the U.S. federal securities laws, may not be allowed in
Bermuda courts as contrary to that jurisdictions public
policy. Because judgments of U.S. courts are not
automatically enforceable in Bermuda, it may be difficult for
you to recover against us based upon such judgments.
Shareholders
who own our ordinary shares may have more difficulty in
protecting their interests than shareholders of a U.S.
corporation.
The Bermuda Companies Act, or the Companies Act, which applies
to us, differs in certain material respects from laws generally
applicable to U.S. corporations and their shareholders. As
a result of these differences, shareholders who own our shares
may have more difficulty protecting their interests than
shareholders who own shares of a U.S. corporation. For
example, class actions and derivative actions are generally not
available to shareholders under Bermuda law. Under Bermuda law,
only shareholders holding 5% or more of our outstanding ordinary
shares or numbering 100 or more are entitled to propose a
resolution at our general meeting.
We do
not intend to pay cash dividends on our ordinary
shares.
We do not intend to pay a cash dividend on our ordinary shares.
Rather, we intend to use any retained earnings to fund the
development and growth of our business. From time to time, our
board of directors will review our alternatives with respect to
our earnings and seek to maximize value for our shareholders. In
the future, we may decide to commence a dividend program for the
benefit of our shareholders. Any future determination to pay
dividends will be at the discretion of our board of directors
and will be limited by our position as a holding company that
lacks direct operations, the results of operations of our
subsidiaries, our financial condition, cash requirements and
prospects and other factors that our board of directors deems
relevant. In addition, there are significant regulatory and
other constraints that could prevent us from paying dividends in
any event. As a result, capital appreciation, if any, on our
ordinary shares may be your sole source of gain for the
foreseeable future.
Our
board of directors may decline to register a transfer of our
ordinary shares under certain circumstances.
Our board of directors may decline to register a transfer of
ordinary shares under certain circumstances, including if it has
reason to believe that any non-de minimis adverse tax,
regulatory or legal consequences to us, any of our subsidiaries
or any of our shareholders may occur as a result of such
transfer. Further, our bye-laws provide us with the option to
repurchase, or to assign to a third party the right to purchase,
the minimum number of shares necessary to eliminate any such
non-de minimis adverse tax, regulatory or legal consequence. In
addition, our board of directors may decline to approve or
register a transfer of shares unless all applicable consents,
authorizations, permissions or approvals of any governmental
body or agency in Bermuda, the United States or any other
applicable jurisdiction required to be obtained prior to such
transfer shall have been obtained. The proposed transferor of
any shares will be deemed to own those shares for dividend,
voting and reporting purposes until a transfer of such shares
has been registered on our shareholders register.
It is our understanding that while the precise form of the
restrictions on transfer contained in our bye-laws is untested,
as a matter of general principle, restrictions on transfers are
enforceable under Bermuda law and are not uncommon. These
restrictions on transfer may also have the effect of delaying,
deferring or preventing a change in control.
51
Risks
Relating to Taxation
We
might incur unexpected U.S., U.K. or Australia tax liabilities
if companies in our group that are incorporated outside of those
jurisdictions are determined to be carrying on a trade or
business there.
We and a number of our subsidiaries are companies formed under
the laws of Bermuda or other jurisdictions that do not impose
income taxes; it is our contemplation that these companies will
not incur substantial income tax liabilities from their
operations. Because the operations of these companies generally
involve, or relate to, the insurance or reinsurance of risks
that arise in higher tax jurisdictions, such as the United
States, United Kingdom and Australia, it is possible that the
taxing authorities in those jurisdictions may assert that the
activities of one or more of these companies creates a
sufficient nexus in that jurisdiction to subject the company to
income tax there. There are uncertainties in how the relevant
rules apply to insurance businesses, and in our eligibility for
favorable treatment under applicable tax treaties. Accordingly,
it is possible that we could incur substantial unexpected tax
liabilities.
U.S.
persons who own our ordinary shares might become subject to
adverse U.S. tax consequences as a result of related
person insurance income, or RPII, if any, of our
non-U.S.
insurance company subsidiaries.
If the RPII rules of the Code were to apply to us, a
U.S. person who owns our ordinary shares directly or
indirectly through foreign entities on the last day of the
taxable year would be required to include in income for
U.S. federal income tax purposes the shareholders pro
rata share of our
non-U.S. subsidiaries
RPII for the entire taxable year, determined as if that RPII
were distributed proportionately to the U.S. shareholders
at that date regardless whether any actual distribution is made.
In addition, any RPII that is includible in the income of a
U.S. tax-exempt organization would generally be treated as
unrelated business taxable income. Although we and our
subsidiaries intend to generally operate in a manner so as to
qualify for certain exceptions to the RPII rules, there can be
no assurance that these exceptions will be available.
Accordingly, there can be no assurance that U.S. Persons
who own our ordinary shares will not be required to recognize
gross income inclusions attributable to RPII.
In addition, the RPII rules provide that if a shareholder who is
a U.S. person disposes of shares in a foreign insurance
company that has RPII and in which U.S. persons
collectively own 25% or more of the shares, any gain from the
disposition will generally be treated as dividend income to the
extent of the shareholders share of the corporations
undistributed earnings and profits that were accumulated during
the period that the shareholder owned the shares (whether or not
those earnings and profits are attributable to RPII). Such a
shareholder would also be required to comply with certain
reporting requirements, regardless of the amount of shares owned
by the shareholder. These rules should not apply to dispositions
of our ordinary shares because we will not be directly engaged
in the insurance business. The RPII rules, however, have not
been interpreted by the courts or the U.S. Internal Revenue
Service, or the IRS, and regulations interpreting the RPII rules
exist only in proposed form. Accordingly, there is no assurance
that our views as to the inapplicability of these rules to a
disposition of our ordinary shares will be accepted by the IRS
or a court.
U.S.
persons who own our ordinary shares would be subject to adverse
tax consequences if we or one or more of our
non-U.S.
subsidiaries were considered a passive foreign investment
company, or PFIC, for U.S. federal income tax
purposes.
We believe that we and our
non-U.S. subsidiaries
will not be PFICs for U.S. federal income purposes for the
current year. Moreover, we do not expect to conduct our
activities in a manner that will cause us or any of our
non-U.S. subsidiaries
to become a PFIC in the future. However, there can be no
assurance that the IRS will not challenge this position or that
a court will not sustain such challenge. Accordingly, it is
possible that we or one or more of our
non-U.S. subsidiaries
might be deemed a PFIC by the IRS or a court for the current
year or any future year. If we or one or more of our
non-U.S. subsidiaries
were a PFIC, it could have material adverse tax consequences for
an investor that is subject to U.S. federal income
taxation, including subjecting the investor to a substantial
acceleration
and/or
increase in tax liability. There are currently no regulations
regarding the application of the PFIC provisions of the Code to
an insurance company, so the application of those provisions to
insurance companies remains unclear in certain respects.
52
We may
become subject to taxes in Bermuda after March 28,
2016.
The Bermuda Minister of Finance, under the Exempted Undertakings
Tax Protection Act 1966, as amended, of Bermuda, has given us
and each of our Bermuda subsidiaries an assurance that if any
legislation is enacted in Bermuda that would impose tax computed
on profits or income, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax will not be
applicable to us or our Bermuda subsidiaries or any of our or
their respective operations, shares, debentures or other
obligations until March 28, 2016. Given the limited
duration of the Minister of Finances assurance, we cannot
be certain that we will not be subject to any Bermuda tax after
March 28, 2016. In the event that we become subject to any
Bermuda tax after such date, it could have a material adverse
effect on our financial condition and results of operations.
Changes
in U.S. federal income tax law could materially affect
us.
Legislation has been introduced in the U.S. Congress
intended to eliminate some perceived tax advantages of companies
(including insurance companies) that have legal domiciles
outside the United States but have certain
U.S. connections. For example, legislation has been
introduced in Congress to limit the deductibility of reinsurance
premiums paid by U.S. companies to
non-U.S. affiliates.
It is possible that this or similar legislation could be
introduced in and enacted by the current Congress or future
Congresses and could have an adverse impact on us.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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Not applicable
We lease office space in the locations set forth below. We
believe that this office space is sufficient for us to conduct
our operations for the foreseeable future.
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Square
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Lease
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Entity
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Location
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Feet
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Expiration
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Enstar Limited
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Hamilton, Bermuda
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8,250
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August 7, 2009
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Enstar (EU) Limited
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Guildford, England
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22,712
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August 21, 2011
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Enstar (EU) Limited
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London, England
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3,391
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March 24, 2015
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River Thames Insurance Company
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London, England
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6,329
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March 24, 2015
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Enstar Australia Limited
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Sydney, Australia
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8,094
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April 30, 2013
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Shelbourne Group Limited
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London, England
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600
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March 31, 2009
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Marlon Management Services Limited
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London, England
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2,192
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March 24, 2011
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Enstar (US) Inc.
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Tampa, FL
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8,859
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October 31, 2011
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Enstar (US) Inc.
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Warwick, RI
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3,000
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May 31, 2011
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Enstar USA, Inc.
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Montgomery, AL
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2,500
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December 31, 2012
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We also own, through various of our subsidiaries, the following
properties: 1) two apartments in Guildford, England;
2) a building in Norwich, U.K. and 3) an apartment in
New York, NY.
See Note 18 to our consolidated financial statements for further
discussion of our lease commitments for real property.
53
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ITEM 3.
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LEGAL
PROCEEDINGS
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We are, from time to time, involved in various legal proceedings
in the ordinary course of business, including litigation
regarding claims. We do not believe that the resolution of any
currently pending legal proceedings, either individually or
taken as a whole, will have a material adverse effect on our
business, results of operations or financial condition.
Nevertheless, we cannot assure you that lawsuits, arbitrations
or other litigation will not have a material adverse effect on
our business, financial condition or results of operations. We
anticipate that, similar to the rest of the insurance and
reinsurance industry, we will continue to be subject to
litigation and arbitration proceedings in the ordinary course of
business, including litigation generally related to the scope of
coverage with respect to asbestos and environmental claims.
There can be no assurance that any such future litigation will
not have a material adverse effect on our business, financial
condition or results of operations.
In April 2008, we, Enstar US, Inc., or Enstar US, Dukes Place
Limited and certain affiliates of Dukes Place, or, collectively,
Dukes Place, were named as defendants in a lawsuit filed in the
United States District Court for the Southern District of New
York by National Indemnity Company, or NICO, an indirect
subsidiary of Berkshire Hathaway. The complaint alleges, among
other things, that Dukes Place, we and Enstar US:
(i) interfered with the rights of NICO as reinsurer under
reinsurance agreements entered into between NICO and each of
Stonewall and Seaton, two Rhode Island domiciled insurers that
are indirect subsidiaries of Dukes Place, and (ii) breached
certain duties owed to NICO under management agreements between
Enstar US and each of Stonewall and Seaton. The suit was filed
shortly after Virginia Holdings Ltd., our indirect subsidiary,
or Virginia, completed a hearing before the Rhode Island
Department of Business Regulation as part of Virginias
application to buy a 44.4% interest in the insurers from Dukes
Place. Virginia completed that acquisition on June 13,
2008. The suit does not seek a stated amount of damages. Our
management and our U.S. legal counsel believe the claims in the
suit are without merit and will not have a material impact on us
or our subsidiaries. On July 23, 2008, we and Enstar US
filed a motion to dismiss Count I (relating to breach of
fiduciary duty), Count III (relating to breach of contract)
and Count V (relating to inducing breach of contract), in each
case for failure to state a claim upon which relief can be
granted. Subsequently, the parties entered into a Stipulation
and Order filed with the Court on October 7, 2008, by which
(i) NICO agreed to dismiss Count V of its Complaint with
prejudice, (ii) the defendants agreed to withdraw their
motion to dismiss Counts I and III without prejudice,
reserving all of their rights and defenses to challenge these
claims on the merits, and (iii) NICO agreed to extend the
defendants time to file an answer and counterclaim. On
November 5, 2008, we, Enstar US and Dukes Place filed an
answer to NICOs complaint and Dukes Place asserted certain
counterclaims against NICO. On January 12, 2009, NICO filed
a motion to dismiss certain of the counterclaims, along with a
motion for summary judgment addressed to the counterclaims. We,
Enstar US and Dukes Place filed papers in opposition to
NICOs motion on February 23, 2009. The Court has
advised that it will decide these motions on submission without
hearing any oral arguments. Our management intends to vigorously
defend both us and Enstar US against the claims.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
Not applicable
54
PART II
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
On January 31, 2007, we completed the merger, or the
Merger, of CWMS Subsidiary Corp., a Georgia corporation and our
wholly-owned subsidiary, with and into The Enstar Group Inc., a
Georgia corporation, or EGI. As a result of the Merger, EGI,
renamed Enstar USA, Inc., is now our wholly-owned subsidiary.
Our ordinary shares trade on the Nasdaq Global Select Market
under the ticker symbol ESGR. Prior to the completion of the
Merger, EGIs common stock traded on the Nasdaq Global
Select Market under the ticker symbol ESGR.
Because our ordinary shares did not commence trading until after
the Merger, the following table reflects the range of high and
low selling prices by quarter of Enstars shares for the
period February 1, 2007 to December 31, 2008 and of
EGIs shares for the month of January 2007, as reported on
NASDAQ:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
121.98
|
|
|
$
|
90.00
|
|
|
$
|
110.00
|
|
|
$
|
95.00
|
|
Second Quarter
|
|
$
|
123.17
|
|
|
$
|
82.95
|
|
|
$
|
123.99
|
|
|
$
|
97.60
|
|
Third Quarter
|
|
$
|
135.02
|
|
|
$
|
87.50
|
|
|
$
|
134.28
|
|
|
$
|
101.05
|
|
Fourth Quarter
|
|
$
|
101.50
|
|
|
$
|
41.20
|
|
|
$
|
146.81
|
|
|
$
|
103.25
|
|
On March 4, 2009 the number of holders of record of our
ordinary shares was 2,397. This figure does not represent the
actual number of beneficial owners of our ordinary shares
because shares are frequently held in street name by
securities dealers and others for the benefit of beneficial
owners who may vote the shares.
We are a holding company and have no direct operations. Our
ability to pay dividends or distributions depends almost
exclusively on the ability of our subsidiaries to pay dividends
to us. Under applicable law, our subsidiaries may not declare or
pay a dividend if there are reasonable grounds for believing
that they are, or would after the payment be, unable to pay
their liabilities as they become due, or the realizable value of
their assets would thereby be less than the aggregate of their
liabilities and their issued share capital and share premium
accounts. Additional restrictions apply to our insurance and
reinsurance subsidiaries. We do not intend to pay a dividend on
our ordinary shares. Rather, we intend to reinvest any earnings
back into the company. For a further description of the
restrictions on the ability of our subsidiaries to pay
dividends, see Risk Factors Risks Relating to
Ownership of Our Ordinary Shares We do not intend to
pay cash dividends on our ordinary shares and
Business Regulation beginning on
pages 51 and 26, respectively.
On January 30, 2007, EGI paid a one-time $3.00 per share
cash dividend to the holders of its common stock.
Because our ordinary shares did not commence trading until after
the Merger, the graph below reflects the cumulative shareholder
return on the common stock of EGI, our predecessor, compared to
the cumulative shareholder return of the NASDAQ Composite Index
(the Nasdaq index for U.S. companies used in prior years
was discontinued in 2006), the Nasdaq Insurance Index, and a
peer group index historically used by EGI, or the Peer Group
Index, through January 31, 2007. Thereafter, the graph
below reflects the same comparison for Enstar. The graph
reflects the investment of $100 on December 31, 2003
(assuming the reinvestment of dividends) in EGI common stock,
the NASDAQ Composite Index, the Nasdaq Insurance Index, and the
Peer Group Index.
The Peer Group Index used in the graph below consists of Annuity
and Life Re Holdings, Berkshire Hathaway Inc. (Class A),
ESG Re Ltd., Everest Re Group Ltd., IPC Holdings Ltd., Max
Capital Group Ltd., Odyssey Re Holdings Corp., Argo Group
International Holdings Ltd. (fka PXRE Group Ltd.), RenaissanceRe
Holdings Ltd. and Transatlantic Holdings, Inc. We have decided
to move away from the Peer Group Index because we believe that a
broader-based index of exchange-traded companies within our
industry is a more appropriate basis for comparison. Therefore,
going forward, we have selected the Nasdaq Insurance Index,
which is a published industry index, to replace the Peer Group
Index, as we believe it provides a better reference point for
investors when evaluating our stock performance. We are one of
52 companies currently included in the Nasdaq Insurance
Index.
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-03
|
|
|
Dec-04
|
|
|
Dec-05
|
|
|
Dec-06
|
|
|
Dec-07
|
|
|
Dec-08
|
The Enstar Group, Inc./Enstar Group Limited
|
|
|
$
|
100
|
|
|
|
$
|
133
|
|
|
|
$
|
141
|
|
|
|
$
|
204
|
|
|
|
$
|
268
|
|
|
|
$
|
129
|
|
NASDAQ Composite
|
|
|
$
|
100
|
|
|
|
$
|
110
|
|
|
|
$
|
113
|
|
|
|
$
|
127
|
|
|
|
$
|
138
|
|
|
|
$
|
81
|
|
NASDAQ Insurance
|
|
|
$
|
100
|
|
|
|
$
|
119
|
|
|
|
$
|
130
|
|
|
|
$
|
144
|
|
|
|
$
|
140
|
|
|
|
$
|
117
|
|
Old Peer Group Index (10 stocks)
|
|
|
$
|
100
|
|
|
|
$
|
104
|
|
|
|
$
|
105
|
|
|
|
$
|
128
|
|
|
|
$
|
160
|
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following selected historical financial information for each
of the past five fiscal years has been derived from our audited
historical financial statements. This information is only a
summary and should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited
consolidated financial statements and notes thereto included
elsewhere in this annual report. The results of operations for
past accounting periods are not necessarily indicative of the
results to be expected for any future accounting period.
Since our inception, we have made several acquisitions which
impact the comparability between periods of the information
reflected below. See Business Recent
Transactions, beginning on page 5 for information
about our acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Summary Consolidated Statements of Earnings Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
25,151
|
|
|
$
|
31,918
|
|
|
$
|
33,908
|
|
|
$
|
22,006
|
|
|
$
|
23,703
|
|
Net investment income and net realized losses/gains
|
|
|
24,946
|
|
|
|
64,336
|
|
|
|
48,001
|
|
|
|
29,504
|
|
|
|
10,502
|
|
Net reduction in loss and loss adjustment expenses liabilities
|
|
|
242,104
|
|
|
|
24,482
|
|
|
|
31,927
|
|
|
|
96,007
|
|
|
|
13,706
|
|
Total other expenses
|
|
|
(194,837
|
)
|
|
|
(67,904
|
)
|
|
|
(49,838
|
)
|
|
|
(57,299
|
)
|
|
|
(35,160
|
)
|
Minority interest
|
|
|
(50,808
|
)
|
|
|
(6,730
|
)
|
|
|
(13,208
|
)
|
|
|
(9,700
|
)
|
|
|
(3,097
|
)
|
Share of income of partly-owned companies
|
|
|
(201
|
)
|
|
|
|
|
|
|
518
|
|
|
|
192
|
|
|
|
6,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
|
|
46,355
|
|
|
|
46,102
|
|
|
|
51,308
|
|
|
|
80,710
|
|
|
|
16,535
|
|
Extraordinary gain - Negative goodwill (net of minority interest)
|
|
|
35,196
|
|
|
|
15,683
|
|
|
|
31,038
|
|
|
|
0
|
|
|
|
21,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
81,551
|
|
|
$
|
61,785
|
|
|
$
|
82,346
|
|
|
$
|
80,710
|
|
|
$
|
38,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
$
|
3.67
|
|
|
$
|
3.93
|
|
|
$
|
5.21
|
|
|
$
|
8.29
|
|
|
$
|
1.72
|
|
Extraordinary gain per share basic
|
|
|
2.78
|
|
|
|
1.34
|
|
|
|
3.15
|
|
|
|
|
|
|
|
2.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
$
|
6.45
|
|
|
$
|
5.27
|
|
|
$
|
8.36
|
|
|
$
|
8.29
|
|
|
$
|
3.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
$
|
3.59
|
|
|
$
|
3.84
|
|
|
$
|
5.15
|
|
|
$
|
8.14
|
|
|
$
|
1.71
|
|
Extraordinary gain per share diluted
|
|
|
2.72
|
|
|
|
1.31
|
|
|
|
3.11
|
|
|
|
|
|
|
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted
|
|
$
|
6.31
|
|
|
$
|
5.15
|
|
|
$
|
8.26
|
|
|
$
|
8.14
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
|
12,638,333
|
|
|
|
11,731,908
|
|
|
|
9,857,914
|
|
|
|
9,739,560
|
|
|
|
9,618,905
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
|
12,921,475
|
|
|
|
12,009,683
|
|
|
|
9,966,960
|
|
|
|
9,918,823
|
|
|
|
9,694,528
|
|
Cash dividends paid per share
|
|
|
|
|
|
|
|
|
|
$
|
2.92
|
|
|
|
|
|
|
$
|
0.81
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Summary Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,278,055
|
|
|
$
|
637,196
|
|
|
$
|
747,529
|
|
|
$
|
539,568
|
|
|
$
|
591,635
|
|
Cash and cash equivalents
|
|
|
2,209,873
|
|
|
|
1,163,333
|
|
|
|
513,563
|
|
|
|
345,329
|
|
|
|
350,456
|
|
Reinsurance balances receivable
|
|
|
672,696
|
|
|
|
465,277
|
|
|
|
408,142
|
|
|
|
250,229
|
|
|
|
341,627
|
|
Total assets
|
|
|
4,358,151
|
|
|
|
2,417,143
|
|
|
|
1,774,252
|
|
|
|
1,199,963
|
|
|
|
1,347,853
|
|
Loss and loss adjustment expense liabilities
|
|
|
2,798,287
|
|
|
|
1,591,449
|
|
|
|
1,214,419
|
|
|
|
806,559
|
|
|
|
1,047,313
|
|
Loans payable
|
|
|
391,534
|
|
|
|
60,227
|
|
|
|
62,148
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
615,209
|
|
|
|
450,599
|
|
|
|
318,610
|
|
|
|
260,906
|
|
|
|
177,338
|
|
Book Value per Share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
46.14
|
|
|
$
|
37.80
|
|
|
$
|
32.15
|
|
|
$
|
26.79
|
|
|
$
|
18.44
|
|
Diluted
|
|
$
|
45.18
|
|
|
$
|
36.92
|
|
|
$
|
31.85
|
|
|
$
|
26.30
|
|
|
$
|
18.29
|
|
|
|
|
(1) |
|
Earnings per share is a measure based on net earnings divided by
weighted average ordinary shares outstanding. Basic earnings per
share is defined as net earnings available to ordinary
shareholders divided by the weighted average number of ordinary
shares outstanding for the period, giving no effect to dilutive
securities. Diluted earnings per share is defined as net
earnings available to ordinary shareholders divided by the
weighted average number of shares and share equivalents
outstanding calculated using the treasury stock method for all
potentially dilutive securities. When the effect of dilutive
securities would be anti-dilutive, these securities are excluded
from the calculation of diluted earnings per share. |
|
(2) |
|
The weighted average ordinary shares outstanding shown for the
years ended December 31, 2007, 2006, 2005 and 2004 reflect
the conversion of Class A, B, C and D shares to ordinary
shares on January 31, 2007, as part of the recapitalization
completed in connection with the Merger, as if the conversion
occurred on January 1, 2007, 2006, 2005 and 2004. As a
result, both the book value per share and the earnings per share
calculations for 2004, 2005 and 2006, previously reported, have
been amended to reflect this change. |
|
(3) |
|
Basic book value per share is defined as total
shareholders equity available to ordinary shareholders
divided by the number of ordinary shares outstanding as at the
end of the period, giving no effect to dilutive securities.
Diluted book value per share is defined as total
shareholders equity available to ordinary shareholders
divided by the number of ordinary shares and ordinary share
equivalents outstanding at the end of the period, calculated
using the treasury stock method for all potentially dilutive
securities. When the effect of dilutive securities would be
anti-dilutive, these securities are excluded from the
calculation of diluted book value per share. |
58
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Cautionary
Statement Regarding Forward-Looking Statements
This annual report and the documents incorporated by reference
contain statements that constitute forward-looking
statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, with respect to our financial condition, results of
operations, business strategies, operating efficiencies,
competitive positions, growth opportunities, plans and
objectives of our management, as well as the markets for our
ordinary shares and the insurance and reinsurance sectors in
general. Statements that include words such as
estimate, project, plan,
intend, expect, anticipate,
believe, would, should,
could, seek, and similar statements of a
future or forward-looking nature identify forward-looking
statements for purposes of the federal securities laws or
otherwise. All forward-looking statements are necessarily
estimates or expectations, and not statements of historical
fact, reflecting the best judgment of our management and involve
a number of risks and uncertainties that could cause actual
results to differ materially from those suggested by the
forward-looking statements. These forward-looking statements
should, therefore, be considered in light of various important
factors, including those set forth in and incorporated by
reference in this annual report.
Factors that could cause actual results to differ materially
from those suggested by the forward-looking statements include:
|
|
|
|
|
risks associated with implementing our business strategies and
initiatives;
|
|
|
|
the adequacy of our loss reserves and the need to adjust such
reserves as claims develop over time;
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risks relating to the availability and collectability of our
reinsurance;
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changes in economic conditions, including interest rates,
inflation, currency exchange rates, equity markets and credit
conditions including current market conditions and the
instability in the global credit markets, which could affect our
investment portfolio, our ability to finance future acquisitions
and our profitability;
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losses due to foreign currency exchange rate fluctuations;
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tax, regulatory or legal restrictions or limitations applicable
to us or the insurance and reinsurance business generally;
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increased competitive pressures, including the consolidation and
increased globalization of reinsurance providers;
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emerging claim and coverage issues;
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lengthy and unpredictable litigation affecting assessment of
losses
and/or
coverage issues;
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loss of key personnel;
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changes in our plans, strategies, objectives, expectations or
intentions, which may happen at any time at managements
discretion;
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operational risks, including system or human failures;
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risks that we may require additional capital in the future which
may not be available or may be available only on unfavorable
terms;
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the risk that ongoing or future industry regulatory developments
will disrupt our business, or mandate changes in industry
practices in ways that increase our costs, decrease our revenues
or require us to alter aspects of the way we do business;
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changes in Bermuda law or regulation or the political stability
of Bermuda;
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59
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changes in tax laws or regulations applicable to us or our
subsidiaries, or the risk that we or one of our
non-U.S. subsidiaries
become subject to significant, or significantly increased,
income taxes in the United States or elsewhere; and
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changes in accounting policies or practices.
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The factors listed above should not be construed as
exhaustive. Certain of these factors are described in more
detail in Item 1A. Risk Factors above. We
undertake no obligation to release publicly the results of any
future revisions we may make to forward-looking statements to
reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
consolidated financial statements and the related notes included
elsewhere in this annual report. Some of the information
contained in this discussion and analysis or included elsewhere
in this annual report, including information with respect to our
plans and strategy for its business, includes forward-looking
statements that involve risks, uncertainties and assumptions.
Our actual results and the timing of events could differ
materially from those anticipated by these forward-looking
statements as a result of many factors, including those
discussed under Risk Factors, Forward-Looking
Statements and elsewhere in this annual report.
Business
Overview
We were formed in August 2001 under the laws of Bermuda to
acquire and manage insurance and reinsurance companies in
run-off, and to provide management, consulting and other
services to the insurance and reinsurance industry.
On January 31, 2007, we completed the merger, or the
Merger, of CWMS Subsidiary Corp, a Georgia corporation and our
wholly-owned subsidiary, with and into The Enstar Group, Inc., a
Georgia corporation. As a result of the Merger, The Enstar
Group, Inc., renamed Enstar USA, Inc., is now our wholly-owned
subsidiary. The Enstar Group, Inc. owned an approximate 32%
economic and a 50% voting interest in us prior to the Merger.
Since our formation, we, through our subsidiaries, have
completed several acquisitions of insurance and reinsurance
companies and are now administering those businesses in run-off.
In 2006, we completed 3 acquisitions of companies having
combined total net assets of $222.9 million. In 2007, we
completed 5 acquisitions of companies having combined total net
assets of $625.3 million. In 2008, we completed 6
acquisitions of companies having combined total net assets of
$1.02 billion. In addition we completed the following
during 2008: 1) on June 13, 2008 we completed the
acquisition of 44.4% of the outstanding capital stock of
Stonewall Acquisition Corporation, the parent of two Rhode
Island-domiciled insurers, Stonewall and Seaton; and 2) on
October 27, 2008 we acquired the 49.9% of the shares of
Hillcot Re Ltd. that we did not previously own. We derive our
net earnings from the ownership and management of these
companies primarily by settling insurance and reinsurance claims
below the recorded loss reserves and from returns on the
portfolio of investments retained to pay future claims. In
addition, we provide management and consultancy services, claims
inspection services and reinsurance collection services to our
affiliates and third-party clients for both fixed and
success-based fees.
In the primary (or direct) insurance business, the insurer
assumes risk of loss from persons or organizations that are
directly subject to the given risks. Such risks may relate to
property, casualty, life, accident, health, financial or other
perils that may arise from an insurable event. In the
reinsurance business, the reinsurer agrees to indemnify an
insurance or reinsurance company, referred to as the ceding
company, against all or a portion of the insurance risks arising
under the policies the ceding company has written or reinsured.
When an insurer or reinsurer stops writing new insurance
business, either entirely or with respect to a particular line
of business, the insurer, reinsurer, or the line of discontinued
business is in run-off.
In recent years, the insurance industry has experienced
significant consolidation. As a result of this consolidation and
other factors, the remaining participants in the industry often
have portfolios of business that are either inconsistent with
their core competency or provide excessive exposure to a
particular risk or segment of the market (i.e.,
property/casualty, asbestos, environmental, director and officer
liability, etc.). These non-core
and/or
discontinued portfolios are often associated with potentially
large exposures and lengthy time periods before resolution of
the last remaining insured claims resulting in significant
uncertainty to the insurer or reinsurer
60
covering those risks. These factors can distract management,
drive up the cost of capital and surplus for the insurer or
reinsurer, and negatively impact the insurers or
reinsurers credit rating, which makes the disposal of the
unwanted company or portfolio an attractive option.
Alternatively, the insurer may wish to maintain the business on
its balance sheet, yet not divert significant management
attention to the run-off of the portfolio. The insurer or
reinsurer, in either case, is likely to engage a third party,
such as us, that specializes in run-off management to purchase
the company or portfolio of the company, or to manage the
company or portfolio in run-off.
In the sale of a run-off company, a purchaser, such as us,
typically pays a discount to the book value of the company based
on the risks assumed and the relative value to the seller of no
longer having to manage the company in run-off. Such a
transaction can be beneficial to the seller because it receives
an up-front payment for the company, eliminates the need for its
management to devote any attention to the disposed company and
removes the risk that the established reserves related to the
run-off business may prove to be inadequate. The seller is also
able to redeploy its management and financial resources to its
core businesses.
Alternatively, if the insurer or reinsurer hires a third party,
such as us, to manage its run-off business, the insurer or
reinsurer will, unlike in a sale of the business, receive little
or no cash up front. Instead, the management arrangement may
provide that the insurer or reinsurer will retain the profits,
if any, derived from the run-off with certain incentive payments
allocated to the run-off manager. By hiring a run-off manager,
the insurer or reinsurer can outsource the management of the
run-off business to experienced and capable individuals, while
allowing its own management team to focus on the insurers
or reinsurers core businesses. Our desired approach to
managing run-off business is to align our interests with the
interests of the owners through both fixed management fees and
certain incentive payments. Under certain management
arrangements to which we are a party, however, we receive only a
fixed management fee and do not receive any incentive payments.
Following the purchase of a run-off company or the engagement to
manage a run-off company or portfolio of business, it is
incumbent on the new owner or manager to conduct the run-off in
a disciplined and professional manner in order to efficiently
discharge liabilities associated with the business while
preserving and maximizing its assets. Our approach to managing
our acquired companies in run-off as well as run-off companies
or portfolios of businesses on behalf of third-party clients
includes negotiating with third-party insureds and reinsureds to
commute their insurance or reinsurance agreement (sometimes
called policy buy-backs) for an agreed upon up-front payment by
us, or the third-party client, and to more efficiently manage
payment of insurance and reinsurance claims. We attempt to
commute policies with direct insureds or reinsureds in order to
eliminate uncertainty over the amount of future claims. We also
attempt, where appropriate, to negotiate favorable commutations
with reinsurers by securing the receipt of a lump-sum settlement
from the reinsurer in complete satisfaction of the
reinsurers liability in respect of any future claims. We,
or our third-party client, are then fully responsible for any
claims in the future. We typically invest proceeds from
reinsurance commutations with the expectation that such
investments will produce income, which, together with the
principal, will be sufficient to satisfy future obligations with
respect to the acquired company or portfolio.
With respect to our U.K., Bermuda and Australian insurance and
reinsurance subsidiaries, we are able to pursue strategies to
achieve complete finality and conclude the run-off of a company
by promoting solvent schemes of arrangement. Solvent schemes of
arrangement, or a Solvent Scheme, have been a popular means of
achieving financial certainty and finality, for insurance and
reinsurance companies incorporated or managed in the U.K. and
Bermuda by making a one-time full and final settlement of an
insurance and reinsurance companys liabilities to
policyholders. Such a Solvent Scheme is an arrangement between a
company and its creditors or any class of them. For a Solvent
Scheme to become binding on the creditors, a meeting of each
class of creditors must be called, with the permission of the
local court, to consider and, if thought fit, approve the
Solvent Scheme. The requisite statutory majority of creditors of
not less than 75% in value and 50% in number of those creditors
actually attending the meeting, either in person or by proxy,
must vote in favor of a Solvent Scheme. Once a Solvent Scheme
has been approved by the statutory majority of voting creditors
of the company it requires the sanction of the local court.
While a Solvent Scheme provides an alternative exit strategy for
run-off companies it is not our strategy to make such
acquisitions with this strategy solely in mind. Our preferred
approach is to generate earnings from the disciplined and
professional management of acquired run-off companies and then
consider exit strategies, including a Solvent Scheme, when the
majority of the run-off is complete. To understand risks
associated with this strategy, see Risk
Factors Risks Relating to Our
Business Exit and finality opportunities provided by
solvent schemes
61
of arrangement may not continue to be available, which may
result in the diversion of our resources to settle policyholder
claims for a substantially longer run-off period and increase
the associated costs of run-off of our insurance and reinsurance
subsidiaries.
We manage our business through two operating segments:
reinsurance and consulting.
Our reinsurance segment comprises the operations and financial
results of our insurance and reinsurance subsidiaries. The
financial results of this segment primarily consist of
investment income less net reductions in loss and loss
adjustment expense liabilities, direct expenses (including
certain premises costs and professional fees) and management
fees paid to our consulting segment.
Our consulting segment comprises the operations and financial
results of those subsidiaries that provide management and
consulting services, forensic claims inspections services and
reinsurance collection services to third-party clients. This
segment also provides management services to the reinsurance
segment in return for management fees. The financial results of
this segment primarily consist of fee income less overhead
expenses comprised of staff costs, information technology costs,
certain premises costs, travel costs and certain professional
fees.
For a further discussion of our segments, see Note 19 to our
consolidated financial statements for the year ended
December 31, 2008 included in Item 8 of this annual
report.
As of December 31, 2008 we had $4.36 billion of total
assets and $615.2 million of shareholders equity. We
operate our business internationally through our insurance and
reinsurance subsidiaries and our consulting subsidiaries in
Bermuda, the United Kingdom, the United States, Europe and
Australia.
Financial
Statement Overview
Consulting
Fee Income
We generate consulting fees based on a combination of fixed and
success-based fee arrangements. Consulting income will vary from
period to period depending on the timing of completion of
success-based fee arrangements. Success-based fees are recorded
when targets related to overall project completion or
profitability goals are achieved. Our consulting segment, in
addition to providing services to third parties, also provides
management services to the reinsurance segment based on agreed
terms set out in management agreements between the parties. The
fees charged by the consulting segment to the reinsurance
segment are eliminated against the cost incurred by the
reinsurance segment on consolidation.
Net
Investment Income and Net Realized Gains/(Losses)
Our net investment income is principally derived from interest
earned primarily on cash and investments offset by investment
management fees paid. Our investment portfolio currently
consists of the following: (1) bond portfolios that are
classified as both available-for-sale and held-to-maturity and
carried at fair value and amortized cost, respectively;
(2) cash and cash equivalents; (3) other investments
that are accounted for on the equity basis; and (4) fixed
and short-term investments that are classified as trading and
are carried at fair value.
Our current investment strategy seeks to preserve principal and
maintain liquidity while trying to maximize investment return
through a high-quality, diversified portfolio. The volatility of
claims and the effect they have on the amount of cash and
investment balances, as well as the level of interest rates and
other market factors, affect the return we are able to generate
on our investment portfolio. Investments held as
available-for-sale, excluding short-term investments with an
original maturity of three months or less, primarily relate to
the restructuring of newly acquired investment portfolios
whereby those acquired securities with either a maturity date
beyond the anticipated expiration of the run-off or with credit
quality concerns are designated available-for-sale. Trading
securities relate to one of our reinsurance entities which has
retrocessional arrangements providing for full reinsurance of
all risks assumed. The investment portfolio supporting such
liabilities is required by the retrocessionaire to be a trading
portfolio whereby any related gains or losses are credited or
debited to the retrocessionaire. When we make a new acquisition
we will often restructure the acquired investment portfolio,
which may generate one-time realized gains or losses.
The majority of cash and investment balances are held within our
reinsurance segment.
62
Net
Reduction in Loss and Loss Adjustment Expense
Liabilities
Our insurance-related earnings are primarily comprised of
reductions, or potential increases, of net loss and loss
adjustment expense liabilities. These liabilities are comprised
of:
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|
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outstanding loss or case reserves, or OLR, which represent
managements best estimate of the likely settlement amount
for known claims, less the portion that can be recovered from
reinsurers;
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|
|
reserves for losses incurred but not reported, or IBNR reserves,
which are reserves established by us for claims that are not yet
reported but can reasonably be expected to have occurred based
on industry information, managements experience and
actuarial evaluation, less the portion that can be recovered
from reinsurers; and
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reserves for future loss adjustment expense liabilities which
represent managements best estimate of the future costs of
managing the run-off of claims liabilities.
|
Net loss and loss adjustment expense liabilities are reviewed by
our management each quarter and by independent actuaries
annually as of year end. Reserves reflect managements best
estimate of the remaining unpaid portion of these liabilities.
Prior period estimates of net loss and loss adjustment expense
liabilities may change as our management considers the combined
impact of commutations, policy buy-backs, settlement of losses
on carried reserves and the trend of incurred loss development
compared to prior forecasts.
Commutations provide an opportunity for us to exit exposures to
entire policies with insureds and reinsureds at a discount to
the previously estimated ultimate liability. Our internal and
external actuaries eliminate all prior historical loss
development that relates to commuted exposures and apply their
actuarial methodologies to the remaining aggregate exposures and
revised historical loss development information to reassess
estimates of ultimate liabilities.
Policy buy-backs provide an opportunity for us to settle
individual policies and losses usually at a discount to carried
advised loss reserves. As part of our routine claims settlement
operations, claims will settle at either below or above the
carried advised loss reserve. The impact of policy buy-backs and
the routine settlement of claims updates historical loss
development information to which actuarial methodologies are
applied, often resulting in revised estimates of ultimate
liabilities. Our actuarial methodologies include industry
benchmarking which, under certain methodologies (discussed
further under Critical Accounting
Policies below), compares the trend of our loss
development to that of the industry. To the extent that the
trend of our loss development compared to the industry changes
in any period, it is likely to have an impact on the estimate of
ultimate liabilities. Additionally, consolidated net reductions,
or potential increases, in loss and loss adjustment expense
liabilities include reductions, or potential increases, in the
provisions for future losses and loss adjustment expenses
related to the current periods run-off activity. Net
reductions in net loss and loss adjustment expense liabilities
are reported as negative expenses by us in our reinsurance
segment. The unallocated loss adjustment expenses paid by the
reinsurance segment comprise management fees paid to the
consulting segment and are eliminated on consolidation. The
consulting segment costs in providing run-off services are
classified as salaries and general and administrative expenses.
For more information on how the reserves are calculated, see
Critical Accounting Policies Loss
and Loss Adjustment Expenses below.
As our reinsurance subsidiaries are in run-off, our premium
income is insignificant, consisting primarily of adjustment
premiums triggered by loss payments.
Salaries
and Benefits
We are a service-based company and, as such, employee salaries
and benefits are our largest expense. We have experienced
significant increases in our salaries and benefits expenses as
we have grown our operations, and we expect that trend to
continue if we are able to successfully expand our operations.
On September 15, 2006, our board of directors and
shareholders adopted the Enstar Group Limited 2006 Equity
Incentive Plan, or the Equity Incentive Plan, and the Enstar
Group Limited
2006-2010
Annual Incentive Compensation Plan, or the Annual Incentive
Plan, which are administered by the Compensation Committee of
our board of directors.
63
The Annual Incentive Plan provides for the annual grant of bonus
compensation to our officers and employees, including our senior
executive officers. Bonus awards for each calendar year from
2006 through 2008 were determined, and for each calendar year
from 2009 through 2010 will be determined, based on our
consolidated net after-tax profits. The Compensation Committee
determines the amount of bonus awards in any calendar year,
based on a percentage of our consolidated net after-tax profits.
The percentage is 15% unless the Compensation Committee
exercises its discretion to change the percentage no later than
30 days after our year-end. For the years ended
December 31, 2008, 2007 and 2006 the percentage was left
unchanged by the Compensation Committee. The Compensation
Committee determines, in its sole discretion, the amount of
bonus awards payable to each participant.
Bonus awards are payable in cash, ordinary shares or a
combination of both. Ordinary shares issued in connection with a
bonus award will be issued pursuant to the terms and subject to
the conditions of the Equity Incentive Plan.
For information on the awards made under both the Annual and
Equity Incentive plans for the years ended December 31,
2008, 2007 and December 31, 2006, see Note 12 to our
consolidated financial statements for the year ended
December 31, 2008, included in Item 8 to this annual
report.
General
and Administrative Expenses
General and administrative expenses include rent and
rent-related costs, professional fees (legal, investment, audit
and actuarial) and travel expenses. We have operations in
multiple jurisdictions and our employees travel frequently in
connection with the search for acquisition opportunities and in
the general management of the business. While certain general
and administrative expenses, such as rent and related costs and
professional fees, are incurred directly by the reinsurance
segment, the remaining general and administrative expenses are
incurred by the consulting segment. To the extent that such
costs incurred by the consulting segment relate to the
management of the reinsurance segment, they are recovered by the
consulting segment through the management fees charged to the
reinsurance segment.
Foreign
Exchange Gain/(Loss)
Our reporting currency is U.S. dollars. Our functional
currency is U.S. dollars for all of our subsidiaries with
the exception of Gordian and EPIC, whose functional currencies
are Australian dollars and British pounds, respectively. Through
our subsidiaries whose functional currency is the
U.S. dollar, we hold a variety of foreign
(non-U.S.)
currency assets and liabilities, the principal exposures being
Euros and British pounds. At each balance sheet date, recorded
balances that are denominated in a currency other than
U.S. dollars are adjusted to reflect the current exchange
rate. Revenue and expense items are translated into
U.S. dollars at average rates of exchange for the period.
The resulting exchange gains or losses are included in our net
income.
For Gordian and EPIC, whose functional currencies are
non-U.S. dollars,
at each reporting period the balance sheet and income statement
are translated at period end and average rates of exchange,
respectively, with any foreign exchange gains or losses on
translation recorded as a component of our accumulated other
comprehensive income in the shareholders equity section of
our balance sheet.
We seek to manage our exposure to foreign currency exchange,
where possible, by broadly matching our foreign currency assets
against our foreign currency liabilities. Subject to regulatory
constraints, the net assets of our subsidiaries are maintained
in U.S. dollars.
Income
Tax/(Recovery)
Under current Bermuda law, we and our Bermuda-based subsidiaries
are not required to pay taxes in Bermuda on either income or
capital gains. These companies have received an undertaking from
the Bermuda government that, in the event of income or capital
gains taxes being imposed, they will be exempted from such taxes
until the year 2016. Our non-Bermuda subsidiaries record income
taxes based on their graduated statutory rates, net of tax
benefits arising from tax loss carryforwards. On January 1,
2007 we adopted the provisions of the U.S. Financial
Accounting Standards Board, or the FASB, Interpretation
No. 48. Accounting for Uncertainty in Income
Taxes, or
64
FIN 48. As a result of the implementation of FIN 48,
we recognized a $4.9 million increase to the
January 1, 2007 balance of retained earnings.
Minority
Interest
The acquisitions of Hillcot Re Limited (formerly Toa-Re
Insurance Company (UK) Limited) in March 2003 and of Brampton
Insurance Company Limited (formerly Aioi Insurance Company of
Europe Limited) in March 2006 were effected through Hillcot
Holdings Limited, or Hillcot, a Bermuda-based company in which
we have had a 50.1% economic interest. The results of operations
of Hillcot have been included in our consolidated statements of
operations with the remaining 49.9% economic interest in the
results of Hillcot reflected as a minority interest. On
October 27, 2008 we acquired the 49.9% interest in Hillcot
Re Limited that we previously did not own. As a result, the
minority interest in the earnings of Hillcot Re Limited has been
recorded to September 30, 2008 only.
During 2008, we completed the following acquisitions having a
minority interest: 1) Guildhall, a U.K.-based insurance and
reinsurance company in run-off; 2) Gordian, AMP
Limiteds Australian-based closed reinsurance and insurance
operations; 3) EPIC, a Bermuda-based reinsurance company;
4) Goshawk, which owns Rosemont Reinsurance Limited, a
Bermuda-based reinsurer in run-off; and 5) Unionamerica, a
U.K.-based insurance and reinsurance company in run-off. We have
a 70% economic interest in all of the above listed acquired
subsidiaries with the exception of Goshawk in which we have a
75% economic interest. The results of the operations of the
acquired subsidiaries are included in our consolidated
statements of earnings with the remaining minority interests
percent share of the economic interest of the respective
subsidiaries reflected as a minority interest.
We own 50.1% of Shelbourne, which in turn owns 100% of
Shelbourne Syndicate Services Limited, the Managing Agency for
Lloyds Syndicate 2008, a syndicate approved by
Lloyds of London on December 16, 2007. We have
committed to provide approximately 65% of the capital required
by Lloyds Syndicate 2008, which is authorized to undertake
Reinsurance to Close Transactions, or RITC transactions (the
transferring of the liabilities from one Lloyds Syndicate
to another), of Lloyds Syndicates in Run-off.
Negative
Goodwill
Negative goodwill represents the excess of the fair value of
businesses acquired by us over the cost of such businesses. In
accordance with the Statements of Financial Standards issued by
FASB No. 141 Business Combinations, or
FAS 141, this amount is recognized upon the acquisition of
the businesses as an extraordinary gain. The fair values of the
reinsurance assets and liabilities acquired are derived from
probability-weighted ranges of the associated projected cash
flows, based on actuarially prepared information and our
managements run-off strategy. Any amendment to the fair
values resulting from changes in such information or strategy
will be recognized when they occur. For more information on how
the goodwill is determined, see Critical
Accounting Policies Goodwill below.
Critical
Accounting Policies
Certain amounts in our consolidated financial statements require
the use of best estimates and assumptions to determine reported
values. These amounts could ultimately be materially different
than what has been provided for in our consolidated financial
statements. We consider the assessment of loss reserves and
reinsurance recoverable to be the values requiring the most
inherently subjective and complex estimates. In addition, the
fair value measurement of our investments and the assessment of
the possible impairment of goodwill involves certain estimates
and assumptions. As such, the accounting policies for these
amounts are of critical importance to our consolidated financial
statements.
65
Loss and
Loss Adjustment Expenses
The following table provides a breakdown of gross loss and loss
adjustment expense reserves by type of exposure as of
December 31, 2008 and 2007:
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|
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|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
OLR
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|
|
IBNR
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|
|
Total
|
|
|
OLR
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|
|
IBNR
|
|
|
Total
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Asbestos
|
|
$
|
249,000
|
|
|
$
|
582,783
|
|
|
$
|
831,783
|
|
|
$
|
180,068
|
|
|
$
|
402,289
|
|
|
$
|
582,357
|
|
Environmental
|
|
|
52,028
|
|
|
|
60,159
|
|
|
|
112,187
|
|
|
|
39,708
|
|
|
|
55,544
|
|
|
|
95,252
|
|
All other
|
|
|
1,051,927
|
|
|
|
663,738
|
|
|
|
1,715,665
|
|
|
|
382,040
|
|
|
|
464,789
|
|
|
|
846,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
|
|
$
|
1,352,955
|
|
|
$
|
1,306,680
|
|
|
$
|
2,659,635
|
|
|
$
|
601,816
|
|
|
$
|
922,622
|
|
|
$
|
1,524,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated loss adjustment expenses
|
|
|
|
|
|
|
|
|
|
|
138,652
|
|
|
|
|
|
|
|
|
|
|
|
67,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
2,798,287
|
|
|
|
|
|
|
|
|
|
|
$
|
1,591,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a breakdown of loss and loss
adjustment expense reserves (net of reinsurance balances
recoverable) by type of exposure as of December 31, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Total
|
|
|
% of Total
|
|
|
Total
|
|
|
% of Total
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Asbestos
|
|
$
|
748,496
|
|
|
|
31.1
|
%
|
|
$
|
355,213
|
|
|
|
30.5
|
%
|
Environmental
|
|
|
97,925
|
|
|
|
4.1
|
|
|
|
64,764
|
|
|
|
5.6
|
|
All other
|
|
|
1,418,639
|
|
|
|
59.0
|
|
|
|
676,497
|
|
|
|
58.1
|
|
Unallocated loss adjustment expenses
|
|
|
138,652
|
|
|
|
5.8
|
|
|
|
67,011
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,403,712
|
|
|
|
100
|
%
|
|
$
|
1,163,485
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our All other exposure category consists of a mix of
general casualty (approximately 45% of All other net
reserves), professional liability (approximately 15% of
All other net reserves), workers
compensation/personal accident (approximately 10% of All
other net reserves) and other miscellaneous exposures,
which are generally long-tailed in nature.
As of December 31, 2008, the IBNR reserves (net of
reinsurance balances receivable) accounted for
$1,207.4 million, or 50.2%, of our total net loss reserves.
The reserve for IBNR (net of reinsurance balance receivable)
accounted for $570.7 million, or 49.1%, of our total net
loss reserves at December 31, 2007.
Annual
Loss and Loss Adjustment Reviews
Because a significant amount of time can lapse between the
assumption of risk, the occurrence of a loss event, the
reporting of the event to an insurance or reinsurance company
and the ultimate payment of the claim on the loss event, the
liability for unpaid losses and loss adjustment expenses is
based largely upon estimates. Our management must use
considerable judgment in the process of developing these
estimates. The liability for unpaid losses and loss adjustment
expenses for property and casualty business includes amounts
determined from loss reports on individual cases and amounts for
IBNR reserves. Such reserves are estimated by management based
upon loss reports received from ceding companies, supplemented
by our own estimates of losses for which no ceding company loss
reports have yet been received.
In establishing reserves, management also considers independent
actuarial estimates of ultimate losses. Our independent
actuaries employ generally accepted actuarial methodologies to
estimate ultimate losses and loss adjustment expenses. A loss
reserve study prepared by an independent actuary provides the
basis of our reserves for losses and loss adjustment expenses.
66
As of December 31, 2008, 2007 was the most recent year in
which policies were underwritten by any of our insurance and
reinsurance subsidiaries. As a result, all of our unpaid claims
liabilities are considered to have a longtail claims payout.
Gross loss reserves relate primarily to casualty exposures,
including latent claims, of which approximately 35.5% relate to
A&E exposures.
Within the annual loss reserve studies produced by our external
actuaries, exposures for each subsidiary are separated into
homogeneous reserving categories for the purpose of estimating
IBNR. Each reserving category contains either direct insurance
or assumed reinsurance reserves and groups relatively similar
types of risks and exposures (for example, asbestos,
environmental, casualty, property) and lines of business written
(for example, marine, aviation, non-marine). Based on the
exposure characteristics and the nature of available data for
each individual reserving category, a number of methodologies
are applied. Recorded reserves for each category are selected
from the indications produced by the various methodologies after
consideration of exposure characteristics, data limitations and
strengths and weaknesses of each method applied. This approach
to estimating IBNR has been consistently adopted in the annual
loss reserve studies for each period presented.
The ranges of gross loss and loss adjustment expense reserves
implied by the various methodologies used by each of our
insurance subsidiaries as of December 31, 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
Selected
|
|
|
High
|
|
|
Asbestos
|
|
$
|
735,981
|
|
|
$
|
831,783
|
|
|
$
|
860,733
|
|
Environmental
|
|
|
100,296
|
|
|
|
112,187
|
|
|
|
118,075
|
|
All other
|
|
|
1,425,740
|
|
|
|
1,715,665
|
|
|
|
1,741,217
|
|
Unallocated loss adjustment expenses
|
|
|
138,652
|
|
|
|
138,652
|
|
|
|
138,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,400,669
|
|
|
$
|
2,798,287
|
|
|
$
|
2,858,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latent
Claims
Our loss reserves are related largely to casualty exposures
including latent exposures relating primarily to A&E. In
establishing the reserves for unpaid claims, management
considers facts currently known and the current state of the law
and coverage litigation. Liabilities are recognized for known
claims (including the cost of related litigation) when
sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can
reasonably estimate its liability. In addition, reserves are
established to cover loss development related to both known and
unasserted claims.
The estimation of unpaid claim liabilities is subject to a high
degree of uncertainty for a number of reasons. First, unpaid
claim liabilities for property and casualty exposures in general
are impacted by changes in the legal environment, jury awards,
medical cost trends and general inflation. Moreover, for latent
exposures in particular, developed case law and adequate claim
history do not exist. There is significant coverage litigation
related to these exposures, which creates further uncertainty in
the estimation of the liabilities. As a result, for these types
of exposures, it is especially unclear whether past claim
experience will be representative of future claim experience.
Ultimate values for such claims cannot be estimated using
reserving techniques that extrapolate losses to an ultimate
basis using loss development factors, and the uncertainties
surrounding the estimation of unpaid claim liabilities are not
likely to be resolved in the near future. There can be no
assurance that the reserves established by us will be adequate
or will not be adversely affected by the development of other
latent exposures.
Our asbestos claims are primarily products liability claims
submitted by a variety of insureds who operated in different
parts of the asbestos distribution chain. While most such claims
arise from asbestos mining and primary asbestos manufacturers,
we have also been receiving claims from tertiary defendants such
as smaller manufacturers, and the industry has seen an emerging
trend of non-products claims arising from premises exposures.
Unlike products claims, primary policies generally do not
contain aggregate policy limits for premises claims, which,
accordingly, remain at the primary layer and, thus, rarely
impact excess insurance policies. As the vast majority of our
policies are excess policies, this trend has had only a marginal
effect on our asbestos exposures thus far.
Asbestos reform efforts have been underway at both the federal
and state level to address the cost and scope of asbestos claims
to the American economy. While congressional efforts to create a
federal trust fund that would
67
replace the tort system for asbestos claims failed, several
states, including Texas and Florida, have passed reforms based
on medical criteria requiring certain levels of
medically documented injury before a lawsuit can be filed,
resulting in a drop of
year-on-year
case filings in those states adopting this reform measure.
Asbestos claims primarily fall into two general categories:
impaired and unimpaired bodily injury claims. Property damage
claims represent only a small fraction of asbestos claims.
Impaired claims primarily include individuals suffering from
mesothelioma or a cancer such as lung cancer. Unimpaired claims
include asbestosis and those whose lung regions contain pleural
plaques.
Unlike traditional property and casualty insurers that either
have large numbers of individual claims arising from personal
lines such as auto, or small numbers of high value claims as in
medical malpractice insurance lines, our primary exposures arise
from A&E claims that do not follow a consistent pattern.
For instance, we may encounter a small insured with one large
environmental claim due to significant groundwater
contamination, while a Fortune 500 company may submit
numerous claims for relatively small values. Moreover, there is
no set pattern for the life of an environmental or asbestos
claim. Some of these claims may resolve within two years whereas
others have remained unresolved for nearly two decades.
Therefore, our open and closed claims data do not follow any
identifiable or discernible pattern.
Furthermore, because of the reinsurance nature of the claims we
manage, we focus on the activities at the (re)insured level
rather than at the individual claims level. The counterparties
with whom we typically interact are generally insurers or large
industrial concerns and not individual claimants. Claims do not
follow any consistent pattern. They arise from many insureds or
locations and in a broad range of circumstances. An insured may
present one large claim or hundreds or thousands of small
claims. Plaintiffs counsel frequently aggregate thousands
of claims within one lawsuit. The deductibles to which claims
are subject vary from policy to policy and year to year. Often
claims data is only available to reinsurers, such as us, on an
aggregated basis. Accordingly, we have not found claim count
information or average reserve amounts to be reliable indicators
of exposure for our reserve estimation process or for management
of our liabilities. We have found data accumulation and claims
management more effective and meaningful at the (re)insured
level rather than at the underlying claim level. As a result, we
have designed our reserving methodologies to be independent of
claim count information. As the level of exposures to a
(re)insured can vary substantially, we focus on the aggregate
exposures and pursue commutations and policy
buy-backs
with the larger (re)insureds.
We employ approximately 31 full time equivalent employees,
including a U.S. attorney, actuaries, and experienced
claims-handlers to directly administer our A&E liabilities.
We have established a provision for future expenses of
$49.2 million, which reflects the total anticipated costs
to administer these claims to expiration.
Our future asbestos loss development may be influenced by many
factors including:
|
|
|
|
|
Onset of future asbestos-related illness in individuals exposed
to asbestos over the past 50 or more years.
|
|
|
|
Future viability of the practice of resolving asbestos liability
for defendant companies through bankruptcy.
|
|
|
|
Enactment of tort reforms establishing stricter medical criteria
for asbestos awards.
|
|
|
|
Attempts to resolve all
U.S.-related
asbestos litigation through federal legislation.
|
The influence of each of these factors is not easily
quantifiable and our historical asbestos loss development is of
limited value in determining future asbestos loss development
using traditional actuarial reserving techniques.
Significant trends affecting insurer liabilities and reserves in
recent years had little effect on environmental claims, except
for claims arising out of damages to natural resources. New
Jersey has pioneered the use of natural resources damages to
advance further pursuit of funds from potentially responsible
parties, or PRPs who may have been contributors to the source
contamination. A successful action in 2006 against Exxon Mobil
has increased the likelihood that the use of natural resource
damages will expand within New Jersey and perhaps other states.
These actions target primary policies and will likely have less
effect on excess carriers because damages, when awarded, are
typically spread across many PRPs and across many policy years.
As a result, claims do not generally reach excess insurance
layers.
68
Our future environmental loss development may also be influenced
by other factors including:
|
|
|
|
|
Existence of currently undiscovered polluted sites eligible for
clean-up
under the Comprehensive Environmental Response, Compensation,
and Liability Act (CERCLA) and related legislation.
|
|
|
|
Costs imposed due to joint and several liability if not all PRPs
are capable of paying their share.
|
|
|
|
Success of legal challenges to certain policy terms such as the
absolute pollution exclusion.
|
|
|
|
Potential future reforms and amendments to CERCLA, particularly
as the resources of Superfund the funding vehicle,
established as part of CERCLA, to provide financing for cleanup
of polluted sites where no PRP can be identified
become exhausted.
|
The influence of each of these factors is not easily
quantifiable and, as with asbestos-related exposures, our
historical environmental loss development is of limited value in
determining future environmental loss development using
traditional actuarial reserving techniques.
There have recently been developments concerning lead paint
liability, which had previously been viewed as an emerging trend
in latent claim activity with the potential to adversely affect
reserves. After a series of successful defense efforts by
defendant lead pigment manufacturers in lead paint litigation,
in 2005, a Rhode Island court ruled in favor of the government
in a nuisance claim against the defendant manufacturers. Since
the Rhode Island decision, other government entities have
employed the same theory for recovery against these
manufacturers. In 2008, the Rhode Island Supreme Court reversed
the sole legal liability loss experienced by lead pigment
manufacturers in lead paint litigation. The court rejected
public nuisance as a viable theory of liability for use by the
government against the defendants and thus invalidated the
entire claim against the lead pigment manufacturers. Subsequent
to the Rhode Island Supreme Court decision at least one other
government entity, an Ohio municipality, voluntarily dropped its
lead paint suit.
We believe that lead paint claims now pose a lower risk to
adverse reserve adjustment than previously thought, as the only
trial court decision against lead pigment manufacturers to date
was reversed on the basis that public nuisance is an improper
liability theory by which a plaintiff may seek recovery against
the lead pigment manufacturers. Even if adverse rulings under
alternative theories succeed or if other states ultimately
permit recovery under a public nuisance theory, it is
questionable whether insureds have coverage under their policies
under which they seek indemnity. Insureds have yet to meet
policy terms and conditions to establish coverage for lead paint
public nuisance claims, as opposed to traditional bodily injury
and property damage claims. Still, there is the potential for
significant impact to excess insurers should plaintiffs prevail
in successive nuisance claims pending in other jurisdictions and
coverage is established.
Our independent, external actuaries use industry benchmarking
methodologies to estimate appropriate IBNR reserves for our
A&E exposures. These methods are based on comparisons of
our loss experience on A&E exposures relative to industry
loss experience on A&E exposures. Estimates of IBNR are
derived separately for each of our relevant subsidiaries and,
for some subsidiaries, separately for distinct portfolios of
exposure. The discussion that follows describes, in greater
detail, the primary actuarial methodologies used by our
independent actuaries to estimate IBNR for A&E exposures.
In addition to the specific considerations for each method
described below, many general factors are considered in the
application of the methods and the interpretation of results for
each portfolio of exposures. These factors include the mix of
product types (e.g., primary insurance versus reinsurance of
primary versus reinsurance of reinsurance), the average
attachment point of coverages (e.g., first-dollar primary versus
umbrella over primary versus high-excess), payment and reporting
lags related to our international domicile subsidiaries, payment
and reporting pattern acceleration due to large
wholesale settlements (e.g., policy buy-backs and
commutations) pursued by us, lists of individual risks remaining
and general trends within the legal and tort environments.
1. Paid Survival Ratio Method. In this
method, our expected annual average payment amount is multiplied
by an expected future number of payment years to get an
indicated reserve. Our historical calendar year payments are
examined to determine an expected future annual average payment
amount. This amount is multiplied by an expected number of
future payment years to estimate a reserve. Trends in calendar
year payment activity are
69
considered when selecting an expected future annual average
payment amount. Accepted industry benchmarks are used in
determining an expected number of future payment years. Each
year, annual payments data is updated, trends in payments are
re-evaluated and changes to benchmark future payment years are
reviewed. This method has advantages of ease of application and
simplicity of assumptions. A potential disadvantage of the
method is that results could be misleading for portfolios of
high excess exposures where significant payment activity has not
yet begun.
2. Paid Market Share Method. In this
method, our estimated market share is applied to the industry
estimated unpaid losses. The ratio of our historical calendar
year payments to industry historical calendar year payments is
examined to estimate our market share. This ratio is then
applied to the estimate of industry unpaid losses. Each year,
calendar year payment data is updated (for both us and
industry), estimates of industry unpaid losses are reviewed and
the selection of our estimated market share is revisited. This
method has the advantage that trends in calendar year market
share can be incorporated into the selection of company share of
remaining market payments. A potential disadvantage of this
method is that it is particularly sensitive to assumptions
regarding the time-lag between industry payments and our
payments.
3. Reserve-to-Paid Method. In this method, the ratio
of estimated industry reserves to industry paid-to-date losses
is multiplied by our paid-to-date losses to estimate our
reserves. Specific considerations in the application of this
method include the completeness of our paid-to-date loss
information, the potential acceleration or deceleration in our
payments (relative to the industry) due to our claims handling
practices, and the impact of large individual settlements. Each
year, paid-to-date loss information is updated (for both us and
the industry) and updates to industry estimated reserves are
reviewed. This method has the advantage of relying purely on
paid loss data and so is not influenced by subjectivity of case
reserve loss estimates. A potential disadvantage is that the
application to our portfolios which do not have complete
inception-to-date paid loss history could produce misleading
results. To address this potential disadvantage, a variation of
the method is also considered by multiplying the ratio of
estimated industry reserves to industry losses paid during a
recent period of time (e.g., 5 years) times our paid losses
during that period.
4. IBNR:Case Ratio Method. In this
method, the ratio of estimated industry IBNR reserves to
industry case reserves is multiplied by our case reserves to
estimate our IBNR reserves. Specific considerations in the
application of this method include the presence of policies
reserved at policy limits, changes in overall industry case
reserve adequacy and recent loss reporting history for us. Each
year, our case reserves are updated, industry reserves are
updated and the applicability of the industry IBNR:case ratio is
reviewed. This method has the advantage that it incorporates the
most recent estimates of amounts needed to settle open cases
included in current case reserves. A potential disadvantage is
that results could be misleading where our case reserve adequacy
differs significantly from overall industry case reserve
adequacy.
5. Ultimate-to-Incurred Method. In this
method, the ratio of estimated industry ultimate losses to
industry incurred-to-date losses is applied to our
incurred-to-date losses to estimate our IBNR reserves. Specific
considerations in the application of this method include the
completeness of our incurred-to-date loss information, the
potential acceleration or deceleration in our incurred losses
(relative to the industry) due to our claims handling practices
and the impact of large individual settlements. Each year
incurred-to-date loss information is updated (for both us and
the industry) and updates to industry estimated ultimate losses
are reviewed. This method has the advantage that it incorporates
both paid and case reserve information in projecting ultimate
losses. A potential disadvantage is that results could be
misleading where cumulative paid loss data is incomplete or
where our case reserve adequacy differs significantly from
overall industry case reserve adequacy.
Under the Paid Survival Ratio Method, the Paid Market Share
Method and the Reserve-to-Paid Method, we first determine the
estimated total reserve and then deduct the reported outstanding
case reserves to arrive at an estimated IBNR reserve. The
IBNR:Case Ratio Method first determines an estimated IBNR
reserve which is then added to the advised outstanding case
reserves to arrive at an estimated total loss reserve. The
Ultimate-to-Incurred Method first determines an estimate of the
ultimate losses to be paid and then deducts paid-to-date losses
to arrive at an estimated total loss reserve and then deducts
outstanding case reserves to arrive at the estimated IBNR
reserve.
Within the annual loss reserve studies produced by our external
actuaries, exposures for each subsidiary are separated into
homogeneous reserving categories for the purpose of estimating
IBNR. Each reserving category
70
contains either direct insurance or assumed reinsurance reserves
and groups relatively similar types of risks and exposures
(e.g., asbestos, environmental, casualty and property) and lines
of business written (e.g., marine, aviation and non-marine).
Based on the exposure characteristics and the nature of
available data for each individual reserving category, a number
of methodologies are applied. Recorded reserves for each
category are selected from the indications produced by the
various methodologies after consideration of exposure
characteristics, data limitations, and strengths and weaknesses
of each method applied. This approach to estimating IBNR has
been consistently adopted in the annual loss reserve studies for
each period presented.
As of December 31, 2008, we had 24 separate insurance
and/or
reinsurance subsidiaries whose reserves are categorized into
approximately 195 reserve categories in total, including 26
distinct asbestos reserving categories and 19 distinct
environmental reserving categories.
The five methodologies described above are applied for each of
the 26 asbestos reserving categories and each of the 19
environmental reserving categories. As is common in actuarial
practice, no one methodology is exclusively or consistently
relied upon when selecting a recorded reserve. Consistent
reliance on a single methodology to select a recorded reserve
would be inappropriate in light of the dynamic nature of both
the A&E liabilities in general, and our actual exposure
portfolios in particular.
In selecting a recorded reserve, management considers the range
of results produced by the methods, and the strengths and
weaknesses of the methods in relation to the data available and
the specific characteristics of the portfolio under
consideration. Trends in both our data and industry data are
also considered in the reserve selection process. Recent trends
or changes in the relevant tort and legal environments are also
considered when assessing methodology results and selecting an
appropriate recorded reserve amount for each portfolio.
The following key assumptions were used to estimate A&E
reserves at December 31, 2008:
1. $65 Billion Ultimate Industry Asbestos
Losses This level of industry-wide losses and
its comparison to industry-wide paid, incurred and outstanding
case reserves is the base benchmarking assumption applied to
Paid Market Share, Reserve-to-Paid, IBNR:Case Ratio and the
Ultimate-to-Incurred asbestos reserving methodologies.
2. $35 Billion Ultimate Industry Environmental
Losses This level of industry-wide losses and its
comparison to industry-wide paid, incurred and outstanding case
reserves is the base benchmarking assumption applied to Paid
Market Share, Reserve-to-Paid, IBNR:Case Ratio and the
Ultimate-to-Incurred environmental reserving methodologies.
3. Loss Reporting Lag Our subsidiaries
assumed a mix of insurance and reinsurance exposures generally
through the London market. As the available industry benchmark
loss information, as supplied by our independent consulting
actuaries, is compiled largely from U.S. direct insurance
company experience, our loss reporting is expected to lag
relative to available industry benchmark information. This
time-lag used by each of our insurance subsidiaries varies from
2 to 5 years depending on the relative mix of domicile,
percentages of product mix of insurance, reinsurance and
retrocessional reinsurance, primary insurance, excess insurance,
reinsurance of direct, and reinsurance of reinsurance within any
given exposure category. Exposure portfolios written from a
non-U.S. domicile
are assumed to have a greater time-lag than portfolios written
from a U.S. domicile. Portfolios with a larger proportion
of reinsurance exposures are assumed to have a greater time-lag
than portfolios with a larger proportion of insurance exposures.
The assumptions above as to Ultimate Industry Asbestos and
Environmental losses have not changed from the immediately
preceding period. For our company as a whole, the average
selected lag for asbestos has increased slightly from
2.8 years to 2.9 years and the average selected lag
for environmental has remained unchanged at 2.6 years. The
changes to the asbestos selected lag arose largely as a result
of the acquisition of new portfolios of A&E exposures.
The following tables provide a summary of the impact of changes
in industry ultimate losses, from the selected $65 billion
for asbestos and $35 billion for environmental, and changes
in the time-lag, from the selected averages of 2.9 years
for asbestos and 2.6 years for environmental, for us behind
industry development that it is assumed relates to our insurance
and reinsurance companies. Please note that the table below
demonstrates sensitivity to
71
changes to key assumptions using methodologies selected for
determining loss and allocated loss adjustment expenses, or
ALAE, at December 31, 2008 and differs from the table on
page 67, which demonstrates the range of outcomes produced
by the various methodologies.
|
|
|
|
|
|
|
Asbestos
|
|
Sensitivity to Industry Asbestos Ultimate Loss Assumption
|
|
Loss Reserves
|
|
|
Asbestos $65 billion (selected)
|
|
$
|
831,783
|
|
Asbestos $60 billion
|
|
|
719,289
|
|
|
|
|
|
|
|
|
Environmental
|
|
Sensitivity to Industry Environmental Ultimate Loss
Assumption
|
|
Loss Reserves
|
|
|
Environmental $35 billion (selected)
|
|
$
|
112,187
|
|
Environmental $40 billion
|
|
|
158,317
|
|
Environmental $30 billion
|
|
|
66,058
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
Environmental
|
|
Sensitivity to Time-Lag Assumption*
|
|
Loss Reserves
|
|
|
Loss Reserves
|
|
|
Selected average of 2.9 years asbestos, 2.6 years
environmental
|
|
$
|
831,783
|
|
|
$
|
112,187
|
|
Increase all portfolio lags by six months
|
|
|
917,607
|
|
|
|
115,920
|
|
Decrease all portfolio lags by six months
|
|
|
731,366
|
|
|
|
108,436
|
|
|
|
|
* |
|
using $65 billion/$35 billion Asbestos/Environmental
Industry Ultimate Loss assumptions |
Industry publications indicate that the range of ultimate
industry asbestos losses is estimated to be between
$55 billion and $65 billion. Based on
managements experience of substantial loss development on
our asbestos exposure portfolios, we have selected the upper end
of the range as the basis for our asbestos loss reserving.
Although the industry publications suggest a low end of the
range of industry ultimate losses of $55 billion, we
consider that unlikely and believe that it is more reasonable to
assume that the lower end of this range of ultimate losses could
be $60 billion.
Guidance from industry publications is more varied in respect of
estimates of ultimate industry environmental losses. Consistent
with an industry published estimate, we believe the reasonable
range for ultimate industry environmental losses is between
$30 billion and $40 billion. We have selected the
midpoint of this range as the basis for our environmental loss
reserving based on advice supplied by our independent consulting
actuaries. Another industry publication, released prior to the
one relied upon by us, indicates that ultimate industry
environmental losses could be $56 billion. However, based
on our own loss experience, including successful settlement
activity by us, the decline in new claims notified in recent
years and improvements in environmental
clean-up
technology, we do not believe that the $56 billion estimate
is a reasonable basis for our reserving for environmental losses.
Managements current estimate of the time lag that relates
to our insurance and reinsurance subsidiaries compared to the
industry is considered reasonable given the analysis performed
by our internal and external actuaries to date.
Over time, additional information regarding such exposure
characteristics may be developed for any given portfolio. This
additional information could cause a shift in the lag assumed.
Non-Latent
Claims
Non-latent claims are less significant to us, both in terms of
reserves held and in terms of risk of significant reserve
deficiency. For non-latent loss exposure, a range of traditional
loss development extrapolation techniques is applied.
Incremental paid and incurred loss development methodologies are
the most commonly used methods. Traditional cumulative paid and
incurred loss development methods are used where
inception-to-date, cumulative paid and reported incurred loss
development history is available.
These methods assume that cohorts, or groups, of losses from
similar exposures will increase over time in a predictable
manner. Historical paid and incurred loss development experience
is examined for earlier accident years to make inferences about
how later accident years losses will develop. Where
company-specific loss information is
72
not available or not reliable, industry loss development
information published by industry sources such as the
Reinsurance Association of America is considered. These methods
calculate an estimate of ultimate losses and then deduct
paid-to-date losses to arrive at an estimated total loss
reserve. Outstanding losses are then deducted from estimated
total loss reserves to calculate the estimated IBNR reserve.
Management does not expect changes in underlying reserving
assumptions to have a material impact on net loss and loss
adjustment expense reserves as they are primarily sensitive to
changes due to loss development.
Quarterly
Reserve Reviews
In addition to an in-depth annual review, we also perform
quarterly reserve reviews. This is done by examining quarterly
paid and incurred loss development to determine whether it is
consistent with reserves established during the preceding annual
reserve review and with expected development. Loss development
is reviewed separately for each major exposure type (e.g.,
asbestos, environmental, etc.), for each of our relevant
subsidiaries, and for large wholesale commutation
settlements versus routine paid and advised losses.
This process is undertaken to determine whether loss development
experience during a quarter warrants any change to held reserves.
Loss development is examined separately by exposure type because
different exposures develop differently over time. For example,
the expected reporting and payout of losses for a given amount
of asbestos reserves can be expected to take place over a
different time frame and in a different quarterly pattern from
the same amount of environmental reserves.
In addition, loss development is examined separately for each of
our relevant subsidiaries. Companies can differ in their
exposure profile due to the mix of insurance versus reinsurance,
the mix of primary versus excess insurance, the underwriting
years of participation and other criteria. These differing
profiles lead to different expectations for quarterly and annual
loss development by company.
Our quarterly paid and incurred loss development is often driven
by large, wholesale settlements such as
commutations and policy buy-backs which settle many
individual claims in a single transaction. This allows for
monitoring of the potential profitability of large settlements
which, in turn, can provide information about the adequacy of
reserves on remaining exposures which have not yet been settled.
For example, if it were found that large settlements were
consistently leading to large negative, or favorable, incurred
losses upon settlement, it might be an indication that reserves
on remaining exposures are redundant. Conversely, if it were
found that large settlements were consistently leading to large
positive, or adverse, incurred losses upon settlement, it might
be an indication particularly if the size of the
losses were increasing that certain loss reserves on
remaining exposures are deficient. Moreover, removing the loss
development resulting from large settlements allows for a review
of loss development related only to those contracts which remain
exposed to losses. Were this not done, it is possible that
savings on large wholesale settlements could mask significant
underlying development on remaining exposures.
Once the data has been analyzed as described above, an in-depth
review is performed on classes of exposure with significant loss
development. Discussions are held with appropriate personnel,
including individual company managers, claims handlers and
attorneys, to better understand the causes. If it were
determined that development differs significantly from
expectations, reserves would be adjusted.
Quarterly loss development is expected to be fairly erratic for
the types of exposure insured and reinsured by us. Several
quarters of low incurred loss development can be followed by
spikes of relatively large incurred losses. This is
characteristic of latent claims and other insurance losses which
are reported and settled many years after the inception of the
policy. Given the high degree of statistical uncertainty, and
potential volatility, it would be unusual to adjust reserves on
the basis of one, or even several, quarters of loss development
activity. As a result, unless the incurred loss activity in any
one quarter is of such significance that management is able to
quantify the impact on the ultimate liability for loss and loss
adjustment expenses, reductions or increases in loss and loss
adjustment expense liabilities are carried out in the fourth
quarter based on the annual reserve review described above.
As described above, our management regularly reviews and updates
reserve estimates using the most current information available
and employing various actuarial methods. Adjustments resulting
from changes in our estimates are recorded in the period when
such adjustments are determined. The ultimate liability for loss
and loss
73
adjustment expenses is likely to differ from the original
estimate due to a number of factors, primarily consisting of the
overall claims activity occurring during any period, including
the completion of commutations of assumed liabilities and ceded
reinsurance receivables, policy buy-backs and general incurred
claims activity.
Reinsurance
Balances Receivable
Our acquired reinsurance subsidiaries, prior to acquisition by
us, used retrocessional agreements to reduce their exposure to
the risk of insurance and reinsurance they assumed. Loss
reserves represent total gross losses, and reinsurance
receivables represent anticipated recoveries of a portion of
those unpaid losses as well as amounts receivable from
reinsurers with respect to claims that have already been paid.
While reinsurance arrangements are designed to limit losses and
to permit recovery of a portion of direct unpaid losses,
reinsurance does not relieve us of our liabilities to our
insureds or reinsureds. Therefore, we evaluate and monitor
concentration of credit risk among our reinsurers, including
companies that are insolvent, in run-off or facing financial
difficulties. Provisions are made for amounts considered
potentially uncollectible.
Fair
Value Measurements
On January 1, 2008, we adopted FAS 157, Fair
Value Measurements, or FAS 157, which defines fair value
as the price that would be received to sell an asset or paid to
transfer a liability (i.e. the exit price) in an
orderly transaction between market participants at the
measurement date. See Note 2 of our consolidated financial
statements for a further discussion of this new standard.
The following is a summary of valuation techniques or models we
use to measure fair value by asset and liability classes, which
have not changed significantly since December 31, 2007.
Fixed
Maturity Investments
Our fixed maturity portfolio is managed by our outside
investment advisors. Through these third parties, we use
nationally recognized pricing services, including pricing
vendors, index providers and broker-dealers to estimate fair
value measurements for all of our fixed maturity investments.
These pricing services include Barclays Capital Aggregate Index
(formerly Lehman Index), Reuters Pricing Service, FT Interactive
Data and others.
The pricing service uses market quotations for securities (e.g.,
public common and preferred securities) that have quoted prices
in active markets. When quoted market prices are unavailable,
the pricing service prepares estimates of fair value
measurements for these securities using its proprietary pricing
applications which include available relevant market
information, benchmark curves, benchmarking of like securities,
sector groupings, and matrix pricing.
With the exception of one security held within our trading
portfolio, the fair value estimates of our fixed maturity
investments are based on observable market data. We have
therefore included these as Level 2 investments within the
fair value hierarchy. The one security in our trading portfolio
that does not have observable inputs has been included as a
Level 3 investment within the fair value hierarchy.
To validate the techniques or models used by the pricing
services, we compare the fair value estimates to our knowledge
of the current market and will challenge any prices deemed not
to be representative of fair value.
As of December 31, 2008 there were no material differences
between the prices obtained from the pricing services and the
fair value estimates developed by us.
Further, on a quarterly basis, we evaluate whether the fair
value of a fixed maturity security is other-than-temporarily
impaired when its fair value is below amortized cost. To make
this assessment we consider several factors including
(i) the time period during which there has been a decline
below cost, (ii) the extent of the decline below cost,
(iii) our intent and ability to hold the security,
(iv) the potential for the security to recover in value,
(v) an analysis of the financial condition of the issuer,
and (vi) an analysis of the collateral structure and credit
support of the security, if applicable. If we conclude a
security is other-than-temporarily impaired, we write down the
amortized cost of the security to fair value, with a charge to
net realized investment gains (losses) in the consolidated
74
statement of earnings. During the year ended December 31,
2008, we did not consider any fixed maturity investments to be
other-than-temporarily impaired.
Equity
Securities
Our equity securities are managed by an external advisor.
Through this third party, we use nationally recognized pricing
services, including pricing vendors, index providers and
broker-dealers to estimate fair value measurements for all of
our equity securities. These pricing services include FT
Interactive Data and others.
We have categorized all of our equity securities as Level 1
investments as they are based on quoted prices in active markets
for identical assets or liabilities.
Other
Investments
For our investments in limited partnerships, limited liability
companies and equity funds, we measure fair value by obtaining
the most recently published net asset value as advised by the
external fund manager or third-party administrator. The
financial statements of each fund generally are audited
annually, using fair value measurement for the underlying
investments. For all public companies within the funds we have
valued the investments based on the latest share price. The
value of Affirmative Investment LLC (in which we own a
non-voting 7% membership interest) is based on the market value
of the shares of Affirmative Insurance Holdings, Inc.
All of our investments in limited partnerships and limited
liability companies are subject to restrictions on redemptions
and sales which are determined by the governing documents and
limit our ability to liquidate those investments in the short
term. We have classified our other investments as Level 3
investments as they reflect our own judgment about assumptions
that market participants might use.
For the year ended December 31, 2008, we incurred a $84.1
million loss in fair value on our other investments. Any
unrealized losses or gains on our other investments are included
as part of our net investment income.
The following table summarizes all of our financial assets and
liabilities measured at fair value at December 31, 2008, by
FAS 157 hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total Fair
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity investments
|
|
$
|
|
|
|
$
|
627,003
|
|
|
$
|
352
|
|
|
$
|
627,355
|
|
Equity securities
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
3,747
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
60,237
|
|
|
|
60,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,747
|
|
|
$
|
627,003
|
|
|
$
|
60,589
|
|
|
$
|
691,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total assets
|
|
|
0.1
|
%
|
|
|
14.4
|
%
|
|
|
1.4
|
%
|
|
|
15.9
|
%
|
Goodwill
We follow FAS No. 142 Goodwill and Other
Intangible Assets which requires that recorded goodwill be
assessed for impairment on at least an annual basis. In
determining goodwill, we must determine the fair value of the
assets of an acquired company. The determination of fair value
necessarily involves many assumptions. Fair values of
reinsurance assets and liabilities acquired are derived from
probability-weighted ranges of the associated projected cash
flows, based on actuarially prepared information and our
management run-off strategy. Fair value adjustments are based on
the estimated timing of loss and loss adjustment expense
payments and an assumed interest rate, and are amortized over
the estimated payout period, as adjusted for accelerations on
commutation settlements, using the constant yield method option.
Interest rates used to determine the fair value of gross loss
reserves are based upon risk free rates applicable to the
average duration of the loss reserves. Interest rates used to
determine the fair value of reinsurance receivables are
increased to reflect the credit risk associated with the
reinsurers from who the receivables are, or will become, due. If
the assumptions made in initially valuing the assets
75
change significantly in the future, we may be required to record
impairment charges which could have a material impact on our
financial condition and results of operations.
FAS No. 141 Business Combinations also
requires that negative goodwill be recorded in earnings. During
2004, 2006, 2007 and 2008, we took negative goodwill into
earnings upon the completion of the acquisition of certain
companies and presented it as an extraordinary gain.
In December 2007, the FASB issued FAS No. 141(R)
Business Combinations (FAS 141(R)).
FAS 141(R) replaces FAS No. 141 Business
Combinations (FAS 141) but retains the
fundamental requirements in FAS No. 141 that the
acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each
business combination. FAS 141(R) requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. FAS 141(R)
also requires acquisition-related costs to be recognized
separately from the acquisition, recognize assets acquired and
liabilities assumed arising from contractual contingencies at
their acquisition-date fair values and recognize goodwill as the
excess of the consideration transferred plus the fair value of
any noncontrolling interest in the acquiree at the acquisition
date over the fair values of the identifiable net assets
acquired. FAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008 (January 1, 2009 for calendar
year-end companies).
New
Accounting Pronouncements
In March 2008, the FASB issued FAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133, or FAS 161. FAS 161 expands the
disclosure requirements of FAS 133 and requires the
reporting entity to provide enhanced disclosures about the
objectives and strategies for using derivative instruments,
quantitative disclosures about fair values and amounts of gains
and losses on derivative contracts, and credit-risk related
contingent features in derivative agreements. FAS 161 will
be effective for fiscal years beginning after November 15,
2008 (January 1, 2009, for calendar year-end companies),
and interim periods within those fiscal years. We are currently
evaluating the provisions of FAS 161 and its potential
impact on future financial statements.
In May 2008, the FASB issued FAS No. 163,
Accounting for Financial Guarantee Insurance
Contracts, or FAS 163. This new standard clarifies
how FAS No. 60, Accounting and Reporting by
Insurance Enterprises, applies to financial guarantee
insurance contracts issued by insurance enterprises, including
the recognition and measurement of premium revenue and claim
liabilities. It also requires expanded disclosures about
financial guarantee insurance contracts. FAS 163 is
effective for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years, except
for disclosures about the insurance enterprises
risk-management activities, which are effective the first period
(including interim periods) beginning after the date of
issuance. Except for the required disclosures, earlier
application is not permitted. We have determined that the
adoption of FAS 163 has no impact on our total
shareholders equity or net earnings as of
December 31, 2008 and no additional disclosures are
required as of December 31, 2008.
76
Results
of Operations
Results
of Operations
The following table sets forth our selected consolidated
statements of earnings data for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
25,151
|
|
|
$
|
31,918
|
|
|
$
|
33,908
|
|
Net investment income
|
|
|
26,601
|
|
|
|
64,087
|
|
|
|
48,099
|
|
Net realized (losses) gains
|
|
|
(1,655
|
)
|
|
|
249
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,097
|
|
|
|
96,254
|
|
|
|
81,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss adjustment expense liabilities
|
|
|
(242,104
|
)
|
|
|
(24,482
|
)
|
|
|
(31,927
|
)
|
Salaries and benefits
|
|
|
56,270
|
|
|
|
46,977
|
|
|
|
40,121
|
|
General and administrative expenses
|
|
|
53,357
|
|
|
|
31,413
|
|
|
|
18,878
|
|
Interest expense
|
|
|
23,370
|
|
|
|
4,876
|
|
|
|
1,989
|
|
Net foreign exchange loss (gain)
|
|
|
14,986
|
|
|
|
(7,921
|
)
|
|
|
(10,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,121
|
)
|
|
|
50,863
|
|
|
|
18,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes, minority interest and share of net
(loss)/earnings of partly owned companies
|
|
|
144,218
|
|
|
|
45,391
|
|
|
|
63,680
|
|
Income taxes
|
|
|
(46,854
|
)
|
|
|
7,441
|
|
|
|
318
|
|
Minority interest
|
|
|
(50,808
|
)
|
|
|
(6,730
|
)
|
|
|
(13,208
|
)
|
Share of net (loss) earnings of partly owned company
|
|
|
(201
|
)
|
|
|
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gain
|
|
|
46,355
|
|
|
|
46,102
|
|
|
|
51,308
|
|
Extraordinary gain Negative goodwill (net of
minority interest of $15,084, $nil, and $4,329, respectively)
|
|
|
35,196
|
|
|
|
15,683
|
|
|
|
31,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
81,551
|
|
|
$
|
61,785
|
|
|
$
|
82,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Year Ended December 31, 2008 and 2007
We reported consolidated net earnings of approximately
$81.6 million for the year ended December 31, 2008
compared to consolidated net earnings of approximately
$61.8 million for 2007. The increase in earnings of
approximately $19.8 million was primarily a result of the
following:
(i) increased reduction in loss and loss adjustment expense
liabilities of $217.6 million primarily as a result of
favorable loss development and larger commutations of assumed
liabilities; and
(ii) an increase in negative goodwill of $19.5 million
(net of minority interest of $15.1 million in 2008)
relating to the acquisition of Gordian in March 2008; partially
offset by
(iii) a decrease in investment income (net of realized
(losses)/gains) of $39.4 million, primarily due to
writedowns of approximately $84.1 million in the fair
values of our private equity investments classified as other
investments, partially offset by additional investment income
earned in the year as a result of increased cash and investments
balances relating to acquisitions completed in 2008;
(iv) movement in foreign exchange from a gain of
$7.9 million for the year ended December 31, 2007 to a
loss of $15.0 million for the year ended 2008 a
total reduction of $22.9 million which arose as
a result of holding surplus net foreign currency assets,
primarily British pounds, at a time when the U.S. dollar
was appreciating against the majority of currencies;
77
(v) an increase in income tax expense of $54.3 million
relating primarily to the increased tax liability on the results
of our Australian subsidiary;
(vi) an increase in general and administrative expenses of
$21.9 million due primarily to the additional directs costs
incurred by the companies acquired during 2008;
(vii) an increase in minority interests share of net
earnings of $44.1 million as a result of higher earnings in
those subsidiaries with minority shareholders; and
(viii) increased interest expense of $18.5 million
attributable to an increase in bank borrowings used in the
funding of the acquisitions completed in 2008.
Consulting
Fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
54,158
|
|
|
$
|
59,465
|
|
|
$
|
(5,307
|
)
|
Reinsurance
|
|
|
(29,007
|
)
|
|
|
(27,547
|
)
|
|
|
(1,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,151
|
|
|
$
|
31,918
|
|
|
$
|
(6,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We earned consulting fees of approximately $25.2 million
and $31.9 million for the years ended December 31,
2008 and 2007, respectively. The decrease in consulting fees was
due primarily to a reduction in 2008 in incentive-based fees
earned by our Bermuda management company.
Internal management fees of $29.0 million and
$27.5 million were paid in the year ended December 31,
2008 and 2007, respectively, by our reinsurance companies to our
consulting companies. The increase in fees paid by the
reinsurance segment was due primarily to the fees paid by
reinsurance companies that were acquired in 2008.
Net
Investment Income and Net Realized (Losses) Gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Net Realized
|
|
|
|
Net Investment Income
|
|
|
(Losses) Gains
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
(20,248
|
)
|
|
$
|
228
|
|
|
$
|
(20,476
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Reinsurance
|
|
|
46,849
|
|
|
|
63,859
|
|
|
|
(17,010
|
)
|
|
|
(1,655
|
)
|
|
|
249
|
|
|
|
(1,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,601
|
|
|
$
|
64,087
|
|
|
$
|
(37,486
|
)
|
|
$
|
(1,655
|
)
|
|
$
|
249
|
|
|
$
|
(1,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income for the year ended December 31, 2008
decreased by $37.5 million to $26.6 million, as
compared to $64.1 million for the year ended
December 31, 2007. The decrease in net investment income
was primarily attributable to cumulative writedowns of
approximately $84.1 million in the fair value of our
private equity investments held by us as other investments. The
writedowns in our private equity investments were primarily
related to mark-to-market adjustments in the fair value of their
underlying assets, which are primarily investments in financial
institutions, arising as a result of the current global credit
and liquidity crises. The writedowns were partially offset by
the increased net investment income earned by the companies we
acquired during 2008.
The average return on the cash and fixed maturities investments
(excluding writedowns related to our other investments) for the
year ended December 31, 2008 was 4.62%, as compared to the
average return of 4.57% for the year ended December 31,
2007. The slight increase in yield was the result of increased
returns on fixed income investments from subsidiaries acquired
in 2008, substantially offset by reduced yields on cash balances
as a result of decreasing U.S. interest rates
the U.S. Federal Funds Rate decreased from an average of
5.05% in 2007 to 2.09% in 2008. The average Standard &
Poors credit rating of our fixed income investments at
December 31, 2008 was AAA.
78
Net realized (losses) gains for the year ended December 31,
2008 and 2007 were $(1.7) million and $0.2 million,
respectively. The increase in net realized losses arose
primarily as a result of mark-to-market adjustments in our
equity portfolio held as trading. Based on our current
investment strategy, we do not expect net realized gains and
losses to be significant in the foreseeable future.
Net
Reduction in Loss and Loss Adjustment Expense
Liabilities:
The following table shows the components of the movement in net
reduction in loss and loss adjustment expense liabilities for
the years ended December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Net Losses Paid
|
|
$
|
(174,013
|
)
|
|
$
|
(20,422
|
)
|
Net Change in Case and LAE Reserves
|
|
|
183,712
|
|
|
|
17,660
|
|
Net Change in IBNR
|
|
|
232,405
|
|
|
|
27,244
|
|
|
|
|
|
|
|
|
|
|
Net Reduction in Loss and Loss Adjustment
|
|
|
|
|
|
|
|
|
Expense Liabilities
|
|
$
|
242,104
|
|
|
$
|
24,482
|
|
|
|
|
|
|
|
|
|
|
Net reduction in case and LAE reserves comprises the movement
during the year in specific case reserve liabilities as a result
of claims settlements or changes advised to us by our
policyholders and attorneys, less changes in case reserves
recoverable advised by us to our reinsurers as a result of the
settlement or movement of assumed claims. Net reduction in IBNR
represents the change in our actuarial estimates of losses
incurred but not reported.
The net reduction in loss and loss adjustment expense
liabilities for 2008 of $242.1 million was attributable to
a reduction in estimates of net ultimate losses of
$161.4 million, a reduction in aggregate provisions for bad
debt of $36.1 million (excluding $3.1 million relating to
one of our entities that benefited from substantial stop loss
reinsurance protection discussed below) and a reduction in
estimates of loss adjustment expense liabilities of
$69.1 million, relating to 2008 run-off activity, partially
offset by the amortization, over the estimated payout period, of
fair value adjustments relating to companies acquired amounting
to $24.5 million.
The reduction in estimates of net ultimate losses of
$161.4 million comprised the following:
(i) A reduction in estimates of net ultimate losses of
$21.7 million in one of our insurance entities that
benefited from substantial stop loss reinsurance protection. Net
adverse incurred loss development relating to this entity of
$21.6 million was offset by reductions in IBNR reserves of
$94.8 million and reductions in provisions for bad debt of
$3.1 million, resulting in a net reduction in estimates of
ultimate losses of $76.3 million. The entity in question
benefited, until December 18, 2008, from substantial stop
loss reinsurance protection whereby $54.6 million of the
net reduction in ultimate losses of $76.3 million was ceded
to a single AA- rated reinsurer such that we retained a
reduction in estimates of net ultimate losses relating to this
entity of $21.7 million. On December 18, 2008, we commuted
the stop loss reinsurance protection with the reinsurer for the
receipt of $190.0 million payable by the reinsurer to us
over four years together with interest compounded at 3.5% per
annum. The commutation resulted in no significant financial
impact to us. The net adverse incurred loss development relating
to this entity of $21.6 million, whereby advised net case
reserves of $25.0 million were settled for net paid losses
of $46.6 million, primarily related to six commutations of
assumed and ceded liabilities completed during 2008. Actuarial
analysis of the remaining unsettled loss liabilities resulted in
a decrease in the estimate of IBNR loss reserves of $94.8
million after consideration of the $21.6 million adverse
incurred loss development during the year, and the application
of the actuarial methodologies to loss data pertaining to the
remaining non-commuted exposures. Of the six commutations
completed for this entity, of which the three largest were
completed during the three months ended December 31, 2008,
one was among its top ten cedant exposures. The remaining five
were of a smaller size, consistent with our approach of
targeting significant numbers of cedant and reinsurer
relationships as well as targeting significant individual cedant
and reinsurer relationships.
(ii) A reduction in estimates of net ultimate losses of
$139.7 million in our remaining insurance and reinsurance
entities comprised net favorable incurred loss development of
$24.1 million and reductions in IBNR
79
reserves of $115.6 million. The net favorable incurred loss
development in our remaining insurance and reinsurance entities
of $24.1 million, whereby net advised case and LAE reserves of
$123.5 million were settled for net paid loss recoveries of
$99.4 million, arose from the settlement of non-commuted
losses in the year below carried reserves and approximately 59
commutations of assumed and ceded exposures at less than case
and LAE reserves. Approximately 82% of savings generated from
commutations related to commutations completed during the three
months ended December 31, 2008. We adopt a disciplined
approach to the review and settlement of non-commuted claims
through claims adjusting and the inspection of underlying
policyholder records such that settlements of assumed exposures
may often be achieved below the level of the originally advised
loss, and settlements of ceded receivables may often be achieved
at levels above carried balances. The net reduction in the
estimate of IBNR loss and loss adjustment expense liabilities
relating to our remaining insurance and reinsurance companies
amounted to $115.6 million and results from the application
of our reserving methodologies to (a) the reduced
historical incurred loss development information relating to
remaining exposures after the 59 commutations, and
(b) reduced case and LAE reserves in the aggregate. Of the
59 commutations completed during 2008 for our remaining
reinsurance and insurance companies, two (both of which were
completed during the three months ended December 31, 2008),
were among our top ten cedant
and/or
reinsurance exposures. The remaining 57 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships, as well as targeting
significant individual cedant and reinsurer relationships.
Another of our reinsurance companies has retrocessional
arrangements providing for full reinsurance of all risks
assumed. During the year, this entity commuted its largest
assumed liability and related retrocessional protection whereby
the subsidiary paid net losses of $222.0 million and
reduced net IBNR by the same amount, resulting in no gain
or loss to us.
The reduction in aggregate provisions for bad debt of
$36.1 million (excluding $3.1 million relating to one
of our entities that benefited from substantial stop loss
reinsurance protection discussed above) resulted from the
collection, primarily during the three months ended
December 31, 2008, of certain reinsurance receivables
against which bad debt provisions had been provided in earlier
periods, together with revised estimations of bad debt
provisions based on additional information obtained during the
three months ended December 31, 2008.
80
The table below provides a reconciliation of the beginning and
ending reserves for losses and loss adjustment expenses for the
years ended December 31, 2008 and 2007. Losses incurred and
paid are reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands of
|
|
|
|
U.S. dollars)
|
|
|
Balance as of January 1
|
|
$
|
1,591,449
|
|
|
$
|
1,214,419
|
|
Less: Reinsurance Recoverables
|
|
|
427,964
|
|
|
|
342,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,163,485
|
|
|
|
872,259
|
|
Incurred Related to Prior Years
|
|
|
(242,104
|
)
|
|
|
(24,482
|
)
|
Paids Related to Prior Years
|
|
|
(174,013
|
)
|
|
|
(20,422
|
)
|
Effect of Exchange Rate Movement
|
|
|
(124,989
|
)
|
|
|
18,625
|
|
Retroactive Reinsurance Contracts Assumed
|
|
|
373,287
|
|
|
|
|
|
Acquired on Acquisition of Subsidiaries
|
|
|
1,408,046
|
|
|
|
317,505
|
|
|
|
|
|
|
|
|
|
|
Net Balance as of December 31
|
|
$
|
2,403,712
|
|
|
$
|
1,163,485
|
|
Plus: Reinsurance Recoverables
|
|
|
394,575
|
|
|
|
427,964
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
2,798,287
|
|
|
$
|
1,591,449
|
|
|
|
|
|
|
|
|
|
|
Salaries
and Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
33,196
|
|
|
$
|
36,222
|
|
|
$
|
3,026
|
|
Reinsurance
|
|
|
23,074
|
|
|
|
10,755
|
|
|
|
(12,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,270
|
|
|
$
|
46,977
|
|
|
$
|
(9,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits, which include expenses relating to our
incentive bonus and employee share plans, were
$56.3 million and $47.0 million for the years ended
December 31, 2008 and 2007, respectively. The increase of
$12.3 million relating to the reinsurance segment, for the
year ended December 31, 2008, was primarily attributable to
an increase of $3.6 million in the accrual related to our
incentive bonus plan as well as $8.5 million of additional
salary costs of staff directly employed by reinsurance companies
that were newly acquired in 2008. In total, we have 292 staff
members as of December 31, 2008 as compared to 221 as of
December 31, 2007.
We expect that staff costs will increase in 2009 due primarily
to the approximately 37 new employees that were retained or
hired on December 30, 2008 as a result of the completion of
the Unionamerica acquisition. Bonus accrual expenses related to
our discretionary bonus plan will be variable and dependent on
our overall profitability.
General
and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
17,289
|
|
|
$
|
21,844
|
|
|
$
|
4,555
|
|
Reinsurance
|
|
|
36,068
|
|
|
|
9,569
|
|
|
|
(26,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,357
|
|
|
$
|
31,413
|
|
|
$
|
(21,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses attributable to the
consulting segment decreased by $4.6 million during the
year ended December 31, 2008, as compared to the year ended
December 31, 2007. The decrease was due primarily to the
following: 1) decrease in professional fees of
$3.1 million relating to lower legal and accounting
81
costs incurred by the consulting segment; 2) decrease of
$1.4 million in respect of reduced value added tax
liabilities; and 3) reduction in cumulative net other
general and administrative expenses of $0.1 million.
General and administrative expenses attributable to the
reinsurance segment increased by $26.5 million during the
year ended December 31, 2008 as compared to the year ended
December 31, 2007. The increased costs for the year
primarily related to additional general and administrative
expenses of $28.1 million incurred in relation to companies
that we acquired during 2008 partially offset by reductions in
general and administrative expenses of $1.6 million for
companies that were acquired prior to 2008 relating primarily to
reduced third-party management fees and computer related costs.
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
23,370
|
|
|
|
4,876
|
|
|
|
(18,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,370
|
|
|
$
|
4,876
|
|
|
$
|
(18,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense of $23.4 million and $4.9 million was
recorded for the years ended December 31, 2008 and 2007,
respectively. The increase in interest expense was attributable
to an increase in bank borrowings used in the funding of the
acquisitions in 2008, primarily in relation to the Gordian,
EPIC, Goshawk and Guildhall acquisitions.
Foreign
Exchange (Loss)/Gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
(1,167
|
)
|
|
$
|
(192
|
)
|
|
$
|
(975
|
)
|
Reinsurance
|
|
|
(13,819
|
)
|
|
|
8,113
|
|
|
|
(21,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(14,986
|
)
|
|
$
|
7,921
|
|
|
$
|
(22,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a foreign exchange loss of $15.0 million for
the year ended December 31, 2008, as compared to a foreign
exchange gain of $7.9 million for the same period in 2007.
For the year ended December 31, 2008, the foreign exchange
loss arose primarily as a result of the following:
1) approximately $36.6 million, before minority
interest, of foreign exchange gains due to Gordians
holding of surplus U.S. dollar denominated assets at a time
when the U.S. dollar has strengthened significantly against
the Australian dollar in the period from the date of
acquisition, March 5, 2008, to December 31, 2008 (as
at December 31, 2008, Gordian continued to hold surplus
U.S. dollar denominated assets, whereas the functional
currency of Gordian is Australian dollars) offset by
2) approximately $51.6 million of other foreign
exchange losses within the company which were primarily the
result of our holding surplus British pounds relating to cash
collateral required to support British pound denominated letters
of credit required by U.K. regulators at a time when the British
pound exchange rate to the U.S. dollar had decreased from
approximately £1 = 1.993 as at January 1,
2008 to £1 = 1.4593 as at December 31, 2008. Since
letters of credit are in excess of the British pound liabilities
held by our subsidiaries, the subsidiary companies were unable
to match the surplus assets against liabilities during the year,
resulting in the foreign exchange loss. As at December 31,
2008, we continue to hold surplus British pounds relating to
cash collateral required to support our British pound
denominated letters of credit.
In addition to the foreign exchange losses recorded in our
consolidated statement of earnings for the year ended
December 31, 2008, we recorded in our consolidated
statement of comprehensive income cumulative translation
adjustment losses for the year ended December 31, 2008 of
$51.0 million, as compared to gains of $1.5 million
for the year ended December 31, 2007.
For the year ended December 31, 2008, these losses arose
primarily as a result of cumulative translation adjustments of
$42.8 million, net of minority interest of
$18.4 million, relating to Gordian. We have concluded that
82
under FAS No. 52, Foreign Currency
Translation (FAS 52), the functional
currency of Gordian is Australian dollars. As a result, upon
conversion of the net Australian dollar assets of Gordian
to U.S. dollars, we recorded $42.8 million, net of
minority interest of $18.4 million, of U.S. dollar
cumulative translation adjustment losses through accumulated
other comprehensive income. This loss was due primarily to the
decrease in the Australian to U.S. dollar foreign exchange
rate from AU$1 = 0.9185 at the acquisition date, March 5,
2008, to AU$1 = 0.7026 at December 31, 2008.
As our functional currency is the U.S. dollar, we seek to
manage our exposure to foreign currency exchange by broadly
matching foreign currency assets against foreign currency
liabilities, subject to regulatory constraints.
The net impact on shareholders equity of foreign exchange
losses relating to Gordian in 2008 is summarized in the table
below:
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Foreign exchange gains recorded through earnings (related
primarily to the holding of surplus U.S. dollar denominated
short-term investments) (net of minority interest of
$11.0 million)
|
|
$
|
25,598
|
|
Foreign exchange losses recorded through accumulated other
comprehensive income (net of minority interest of
$18.4 million)
|
|
|
(42,793
|
)
|
|
|
|
|
|
Combined decrease in shareholders equity
|
|
$
|
(17,195
|
)
|
|
|
|
|
|
Income
Tax (Expense)/Recovery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
511
|
|
|
$
|
(597
|
)
|
|
$
|
1,108
|
|
Reinsurance
|
|
|
(47,365
|
)
|
|
|
8,038
|
|
|
|
(55,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(46,854
|
)
|
|
$
|
7,441
|
|
|
$
|
(54,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded an income tax (expense)/recovery of
$(46.9) million and $7.4 million for the years ended
December 31, 2008 and 2007, respectively.
The increase in income tax expense of $54.3 million was
related primarily to cumulative tax expense on pre-tax earnings
of $105.6 million recorded by Gordian and Guildhall, which
we acquired in 2008.
Minority
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
(50,808
|
)
|
|
|
(6,730
|
)
|
|
|
(44,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(50,808
|
)
|
|
$
|
(6,730
|
)
|
|
$
|
(44,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a minority interest in earnings of
$50.8 million and $6.7 million for the years ended
December 31, 2008 and 2007, respectively. The total for the
year ended December 31, 2008 relates to the minority
economic interest held by third parties in the earnings of:
1) Gordian, Guildhall, Shelbourne, Goshawk, Royston and
EPIC all 2008 acquisitions; and 2) Hillcot. For
the same period in 2007, the minority interest related was in
respect of Hillcot and Shelbourne only.
83
Negative
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
35,196
|
|
|
|
15,683
|
|
|
|
19,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,196
|
|
|
$
|
15,683
|
|
|
$
|
19,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Negative goodwill of $35.2 million (net of minority
interest of $15.1 million) and $15.7 million, was
recorded for the years ended December 31, 2008 and 2007,
respectively. For the year ended December 31, 2008, the
negative goodwill of $35.2 million was earned in connection
with our acquisition of Gordian and represents the excess of the
cumulative fair value of net assets acquired of
$455.7 million over the cost of $405.4 million. This
excess has, in accordance with SFAS 141 Business
Combinations, been recognized as an extraordinary gain in
2008. The negative goodwill arose primarily as a result of the
income earned by Gordian between the date of the balance sheet
on which the agreed purchase price was based, September 30,
2007, and the date the acquisition closed, March 5, 2008.
For the year ended December 31, 2007 the negative goodwill
of $15.7 million was earned in connection with our
acquisition of Inter-Ocean and represents the excess of the
cumulative fair value of net assets acquired of
$73.2 million over the cost of $57.5 million. The
negative goodwill arose primarily as a result of the strategic
desire of the vendors to achieve an exit from such operations
and therefore to dispose of the companies at a discount to fair
value.
Comparison
of Year Ended December 31, 2007 and 2006
We reported consolidated net earnings of approximately
$61.8 million for the year ended December 31, 2007
compared to approximately $82.3 million in 2006. Included
as part of net earnings for 2007 and 2006 are extraordinary
gains of $15.7 million and $31.0 million,
respectively, relating to negative goodwill, net of minority
interest. Net earnings before extraordinary gain for 2007 were
approximately $46.1 compared to $51.3 million in 2006. The
decrease was primarily a result of a lower net reduction in loss
and loss adjustment expense liabilities, higher general and
administrative expenses and lower consulting fee income, offset
by higher investment income and income tax recoveries along with
a lower charge in respect of minority interest.
Consulting
Fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
59,465
|
|
|
$
|
54,546
|
|
|
$
|
4,919
|
|
Reinsurance
|
|
|
(27,547
|
)
|
|
|
(20,638
|
)
|
|
|
(6,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,918
|
|
|
$
|
33,908
|
|
|
$
|
(1,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We earned consulting fees of approximately $31.9 million
and $33.9 million for the years ended December 31,
2007 and 2006, respectively. The decrease in consulting fees was
due primarily to the acquisition of B.H. Acquisition Ltd., or
B.H. Acquisition, which now forms part of the reinsurance
segment and whose fee income is now eliminated. In 2006, we had
recorded $1.3 million of fee income in respect of B.H.
Acquisition.
Internal management fees of $27.5 million and
$20.6 million were paid in 2007 and 2006, respectively, by
our reinsurance companies to our consulting companies. The
increase in fees paid by the reinsurance segment was due
primarily to the fees paid by reinsurance companies that were
acquired in 2007 along with those companies acquired during 2006.
84
Net
Investment Income and Net Realized Gains (Losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Net Investment Income
|
|
|
Net Realized Gains (Losses)
|
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
228
|
|
|
$
|
1,225
|
|
|
$
|
(997
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
63,859
|
|
|
|
46,874
|
|
|
|
16,985
|
|
|
|
249
|
|
|
|
(98
|
)
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
64,087
|
|
|
$
|
48,099
|
|
|
$
|
15,988
|
|
|
$
|
249
|
|
|
$
|
(98
|
)
|
|
$
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income for the year ended December 31, 2007
increased by $16.0 million to $64.1 million, compared
to $48.1 million for the year ended December 31, 2006.
The increase was primarily attributable to our increase in
average cash and investment balances from $1,093.2 million
to $1,401.2 million for the years ended December 31,
2006 and 2007, respectively, as a result of cash and investment
portfolios of reinsurance companies acquired in the year.
The average return on the cash and investments for the year
ended December 31, 2007 was 4.57%, as compared to the
average return of 4.40% for the year ended December 31,
2006. The increase in yield was primarily the result of
increasing U.S. interest rates the average
U.S. federal funds rate has increased from 4.96% in 2006 to
5.05% in 2007. The average Standard & Poors
credit rating of our fixed income investments at
December 31, 2007 was AAA.
Net realized gains (losses) for the year ended December 31,
2007 and 2006 were $0.2 million and $(0.1) million,
respectively.
Net
Reduction in Loss and Loss Adjustment Expense
Liabilities:
Net reduction in loss and loss adjustment expense liabilities
for the year ended December 31, 2007 was
$24.5 million, excluding the impacts of adverse foreign
exchange rate movements of $18.6 million and including both
net reduction in loss and loss adjustment expense liabilities of
$9.0 million relating to companies acquired during the year
and premium and commission adjustments triggered by incurred
losses of $0.3 million.
The net reduction in loss and loss adjustment expense
liabilities for 2007 of $24.5 million was attributable to a
reduction in estimates of net ultimate losses of
$30.7 million and a reduction in estimates of loss
adjustment expense liabilities of $22.0 million, relating
to 2007 run-off activity, partially offset by an increase in
aggregate provisions for bad debt of $1.7 million,
primarily relating to companies acquired in 2006, and the
amortization, over the estimated payout period, of fair value
adjustments relating to companies acquired amounting to
$26.5 million.
The reduction in estimates of net ultimate losses of
$30.7 million comprised net adverse incurred loss
development of $1.0 million offset by reductions in
estimates of IBNR reserves of $31.7 million. An increase in
estimates of ultimate losses of $2.1 million relating to
one of our insurance entities was offset by reductions in
estimates of net ultimate losses of $32.8 million in our
remaining insurance and reinsurance entities.
The net adverse incurred loss development of $1.0 million
and reductions in IBNR reserves of $31.7 million,
respectively, comprised the following:
(i) Net adverse incurred loss development in one of our
reinsurance entities of $36.6 million, whereby advised case
reserves of $16.9 million were settled for net paid losses
of $53.5 million. This adverse incurred loss development
resulted from the settlement of case and LAE reserves above
carried levels and from new loss advices, partially offset by
approximately 12 commutations of assumed and ceded exposures
below carried reserve levels. Actuarial analysis of the
remaining unsettled loss liabilities resulted in a decrease in
the estimate of IBNR loss reserves of $13.1 million after
consideration of the $36.6 million adverse incurred loss
development during the year, and the application of the
actuarial methodologies to loss data pertaining to the remaining
non-commuted exposures. Of the 12 commutations completed for
this entity, 3 were among its top 10 cedant exposures. The
remaining 9 were of a smaller size, consistent with our approach
of targeting significant numbers of cedant and reinsurer
relationships as well as targeting significant individual cedant
and reinsurer relationships. The entity in question also
benefits from substantial stop loss reinsurance protection
85
whereby the ultimate adverse loss development of
$23.4 million was largely offset by a recoverable from a
single AA rated reinsurer such that a net ultimate loss of
$2.1 million was retained by us.
(ii) Net favorable incurred loss development of
$29.0 million, comprising net paid loss recoveries,
relating to another one of our reinsurance companies, offset by
increases in net IBNR loss reserves of $29.0 million,
resulting in no ultimate gain or loss. This reinsurance company
has retrocessional arrangements providing for full reinsurance
of all risks assumed.
(iii) Net favorable incurred loss development of
$6.6 million in our remaining insurance and reinsurance
entities together with reductions in IBNR reserves of
$26.3 million. The net favorable incurred loss development
in our remaining insurance and reinsurance entities of
$6.6 million, whereby net advised case and LAE reserves of
$2.6 million were settled for net paid loss recoveries of
$4.0 million, arose from the settlement of non-commuted
losses in the year below carried reserves and approximately 57
commutations of assumed and ceded exposures at less than case
and LAE reserves. We adopt a disciplined approach to the review
and settlement of non-commuted claims through claims adjusting
and the inspection of underlying policyholder records such that
settlements of assumed exposures may often be achieved below the
level of the originally advised loss and settlements of ceded
receivables may often be achieved at levels above carried
balances. The net reduction in the estimate of IBNR loss and
loss adjustment expense liabilities relating to our remaining
insurance and reinsurance companies amounted to
$26.3 million and results from the application of our
reserving methodologies to (i) the reduced historical
incurred loss development information relating to remaining
exposures after the 57 commutations, and (ii) reduced case
and LAE reserves in the aggregate. Of the 57 commutations
completed during 2007 for our remaining reinsurance and
insurance companies, 5 were among their top 10 cedant
and/or
reinsurance exposures. The remaining 52 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships, as well as targeting
significant individual cedant and reinsurer relationships.
The following table shows the components of the movement in net
reduction in loss and loss adjustment expense liabilities for
the years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Net Losses Paid
|
|
$
|
(20,422
|
)
|
|
$
|
(75,293
|
)
|
Net Reduction in Case and LAE Reserves
|
|
|
17,660
|
|
|
|
43,645
|
|
Net Reduction in IBNR
|
|
|
27,244
|
|
|
|
63,575
|
|
|
|
|
|
|
|
|
|
|
Net Reduction in Loss and Loss Adjustment Expenses
|
|
$
|
24,482
|
|
|
$
|
31,927
|
|
|
|
|
|
|
|
|
|
|
Net reduction in case and LAE reserves comprises the movement
during the year in specific case reserve liabilities as a result
of claims settlements or changes advised to us by our
policyholders and attorneys, less changes in case reserves
recoverable advised by us to our reinsurers as a result of the
settlement or movement of assumed claims. Net reduction in IBNR
represents the change in our actuarial estimates of losses
incurred but not reported.
86
The table below provides a reconciliation of the beginning and
ending reserves for losses and loss adjustment expenses for the
years ended December 31, 2007 and 2006. Losses incurred and
paid are reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Balance as of January 1
|
|
$
|
1,214,419
|
|
|
$
|
806,559
|
|
Less: Reinsurance recoverables
|
|
|
342,160
|
|
|
|
213,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
872,259
|
|
|
|
593,160
|
|
Incurred related to prior years
|
|
|
(24,482
|
)
|
|
|
(31,927
|
)
|
Paids related to prior years
|
|
|
(20,422
|
)
|
|
|
(75,293
|
)
|
Effect of exchange rate movement
|
|
|
18,625
|
|
|
|
24,856
|
|
Acquired on acquisition of subsidiaries
|
|
|
317,505
|
|
|
|
361,463
|
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31
|
|
$
|
1,163,485
|
|
|
$
|
872,259
|
|
Plus: Reinsurance recoverables
|
|
|
427,964
|
|
|
|
342,160
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
1,591,449
|
|
|
$
|
1,214,419
|
|
|
|
|
|
|
|
|
|
|
Salaries
and Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
36,222
|
|
|
$
|
28,255
|
|
|
$
|
(7,967
|
)
|
Reinsurance
|
|
|
10,755
|
|
|
|
11,866
|
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,977
|
|
|
$
|
40,121
|
|
|
$
|
(6,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits, which include expenses relating to our
incentive bonus and employee share plans, were
$47.0 million and $40.1 million for the years ended
December 31, 2007 and 2006, respectively. The increase in
salaries and benefits for the consulting segment was due to the
following factors: 1) The growth in staff numbers from 195,
as of December 31, 2006, to 221, as of December 31,
2007; 2) On May 23, 2006 we entered into an agreement
and plan of merger and a recapitalization agreement which
resulted in the existing annual incentive compensation plan
being cancelled and the modification of the accounting treatment
for share-based awards from a book value plan to a fair value
plan. The net effect of these changes was to reduce the total
salaries and benefits by $2.0 million; and 3) In March
2007, payment of a special bonus to John J. Oros and Nimrod T.
Frazer, totaling $2.0 million, in recognition of their
contributions to the successful completion of the Merger.
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Variance
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
21,844
|
|
|
$
|
12,751
|
|
|
$
|
(9,093
|
)
|
Reinsurance
|
|
|
9,569
|
|
|
|
6,127
|
|
|
|
(3,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,413
|
|
|
$
|
18,878
|
|
|
$
|
(12,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|