e10vq
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Quarterly Period Ended September 30, 2010
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Transition Period From           to           
 
 
001-33289
Commission File Number
 
ENSTAR GROUP LIMITED
(Exact name of registrant as specified in its charter)
 
     
Bermuda
(State or other jurisdiction
of incorporation or organization)
  N/A
(I.R.S. Employer
Identification No.)
 
 
P.O. Box HM 2267
Windsor Place, 3rd Floor
18 Queen Street
Hamilton HM JX
Bermuda
(Address of principal executive office, including zip code)
 
(441) 292-3645
(Registrant’s telephone number, including area code)
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
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):
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of November 4, 2010, the registrant had outstanding 13,065,169 ordinary shares, par value $1.00 per share.
 


 

 
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PART II — OTHER INFORMATION
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 EX-10.1
 EX-15.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


Table of Contents

 
PART I — FINANCIAL INFORMATION
 
Item 1.   FINANCIAL STATEMENTS
 
ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2010 and December 31, 2009
 
                 
    September 30,
    December 31,
 
    2010     2009  
    (expressed in thousands of U.S. dollars, except share data)  
 
ASSETS
               
Short-term investments, available-for-sale, at fair value (amortized cost: 2010 — $23,596; 2009 — $45,046)
  $ 23,583     $ 45,206  
Short-term investments, held-to-maturity, at amortized cost (fair value: 2010 — nil; 2009 — $159,333)
          159,210  
Short-term investments, trading, at fair value (amortized cost: 2010 — $539,969; 2009 — $nil)
    539,985        
Fixed maturities, available-for-sale, at fair value (amortized cost: 2010 — $1,342,419; 2009 — $69,976)
    1,361,336       69,892  
Fixed maturities, held-to-maturity, at amortized cost (fair value: 2010 — $nil; 2009 — $1,169,934)
          1,152,330  
Fixed maturities, trading, at fair value (amortized cost: 2010 — $392,120; 2009 — $85,775)
    400,498       88,050  
Equities, trading, at fair value (cost: 2010 — $66,783; 2009 — $21,257)
    71,613       24,503  
Other investments, at fair value (cost: 2010 — $274,246; 2009 — $165,872)
    200,700       81,801  
                 
Total investments
    2,597,715       1,620,992  
Cash and cash equivalents
    823,777       1,266,445  
Restricted cash and cash equivalents
    395,821       433,660  
Accrued interest receivable
    25,854       16,108  
Accounts receivable, net
    12,756       17,657  
Income taxes recoverable
    7,274       3,277  
Reinsurance balances receivable
    914,441       638,262  
Investment in partly owned company
          20,850  
Goodwill
    21,222       21,222  
Other assets
    214,069       132,369  
                 
TOTAL ASSETS
  $ 5,012,929     $ 4,170,842  
                 
                 
LIABILITIES                
Losses and loss adjustment expenses
  $ 3,233,699     $ 2,479,136  
Reinsurance balances payable
    235,017       162,576  
Accounts payable and accrued liabilities
    54,275       60,878  
Income taxes payable
    26,339       51,854  
Loans payable
    207,177       254,961  
Other liabilities
    83,603       85,285  
                 
TOTAL LIABILITIES
    3,840,110       3,094,690  
                 
COMMITMENTS AND CONTINGENCIES
               
SHAREHOLDERS’ EQUITY
               
Share capital
               
Authorized issued and fully paid, par value $1 each (authorized 2010:
               
156,000,000; 2009: 156,000,000)
               
Ordinary shares (issued and outstanding 2010: 13,707,014; 2009: 13,580,793)
    13,707       13,581  
Non-voting convertible ordinary shares (issued 2010: 2,972,892; 2009: 2,972,892)
    2,973       2,973  
Treasury stock at cost (non-voting convertible ordinary shares 2010: 2,972,892; 2009: 2,972,892)
    (421,559 )     (421,559 )
Additional paid-in capital
    727,506       721,120  
Accumulated other comprehensive income
    33,743       8,709  
Retained earnings
    526,851       477,057  
                 
Total Enstar Group Limited Shareholders’ Equity
    883,221       801,881  
Noncontrolling interest
    289,598       274,271  
                 
TOTAL SHAREHOLDERS’ EQUITY
    1,172,819       1,076,152  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 5,012,929     $ 4,170,842  
                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


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Table of Contents

ENSTAR GROUP LIMITED
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three and Nine Month Periods Ended September 30, 2010 and 2009
 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    September 30,
    September 30,
 
    2010     2009     2010     2009  
    (expressed in thousands of U.S. dollars, except share and
 
    per share data)  
 
INCOME
                               
Consulting fees
  $ 2,119     $ 4,112     $ 19,747     $ 11,627  
Net investment income
    20,165       24,640       69,284       60,442  
Net realized gains
    10,635       2,912       8,610       1,982  
                                 
      32,919       31,664       97,641       74,051  
                                 
EXPENSES
                               
Net reduction in ultimate loss and loss adjustment expense liabilities:
                               
Reduction in estimates of net ultimate losses
    (20,890 )     (44,736 )     (57,936 )     (92,302 )
Reduction in provisions for bad debt
    (1,304 )           (14,411 )     (9,714 )
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    (10,171 )     (9,830 )     (30,832 )     (29,370 )
Amortization of fair value adjustments
    6,250       12,008       25,102       44,756  
                                 
      (26,115 )     (42,558 )     (78,077 )     (86,630 )
Salaries and benefits
    18,012       16,997       47,456       41,328  
General and administrative expenses
    13,185       12,195       39,473       35,487  
Interest expense
    2,961       4,262       8,160       13,902  
Net foreign exchange (gain) loss
    (586 )     (7,164 )     1,387       (7,177 )
                                 
      7,457       (16,268 )     18,399       (3,090 )
                                 
EARNINGS BEFORE INCOME TAXES AND SHARE OF NET EARNINGS OF PARTLY OWNED COMPANY
    25,462       47,932       79,242       77,141  
INCOME TAXES
    (979 )     (2,660 )     (23,016 )     (2,019 )
SHARE OF NET EARNINGS OF PARTLY OWNED COMPANY
    1,351       196       10,704       465  
                                 
NET EARNINGS
    25,834       45,468       66,930       75,587  
Less: Net earnings attributable to noncontrolling interest
    (4,391 )     (10,481 )     (17,136 )     (20,318 )
                                 
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
  $ 21,443     $ 34,987     $ 49,794     $ 55,269  
                                 
EARNINGS PER SHARE — BASIC:
                               
Net earnings attributable to Enstar Group Limited ordinary shareholders
  $ 1.56     $ 2.58     $ 3.64     $ 4.10  
                                 
EARNINGS PER SHARE — DILUTED:
                               
Net earnings attributable to Enstar Group Limited ordinary shareholders
  $ 1.53     $ 2.53     $ 3.57     $ 4.03  
                                 
Weighted average shares outstanding — basic
    13,704,832       13,578,555       13,676,113       13,492,044  
Weighted average shares outstanding — diluted
    14,019,768       13,814,651       13,956,948       13,729,387  
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Month Periods Ended September 30, 2010 and 2009
 
                                 
    Three Months Ended     Nine Months Ended  
    September 30,
    September 30,
    September 30,
    September 30,
 
    2010     2009     2010     2009  
    (expressed in thousands of U.S. dollars)  
 
NET EARNINGS
  $ 25,834     $ 45,468     $ 66,930     $ 75,587  
Other comprehensive income:
                               
Unrealized holding gains (losses) on investments arising during the period
    29,161       (13,028 )     23,509       (27,901 )
Reclassification adjustment for net realized gains included in net earnings
    (10,635 )     (2,912 )     (8,610 )     (1,982 )
Currency translation adjustment
    36,662       28,286       19,546       65,511  
                                 
Total other comprehensive income:
    55,188       12,346       34,445       35,628  
                                 
Comprehensive income
    81,022       57,814       101,375       111,215  
Less comprehensive income attributable to noncontrolling interest
    (19,422 )     (14,073 )     (26,547 )     (34,741 )
                                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED
  $ 61,600     $ 43,741     $ 74,828     $ 76,474  
                                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
For the Nine Month Periods Ended September 30, 2010 and 2009
 
                 
    2010     2009  
    (expressed in thousands of U.S. dollars)  
 
Share Capital — Ordinary Shares
               
Balance, beginning of period
  $ 13,581     $ 13,334  
Issue of shares
    47       168  
Share awards granted/vested
    79       77  
                 
Balance, end of period
  $ 13,707     $ 13,579  
                 
Share Capital — Non-Voting Convertible Ordinary Shares
               
Balance, beginning and end of period
  $ 2,973     $ 2,973  
                 
Treasury Shares
               
Balance, beginning and end of period
  $ (421,559 )   $ (421,559 )
                 
Additional Paid-in Capital
               
Balance, beginning of period
  $ 721,120     $ 709,485  
Issue of shares
    501       5,263  
Share awards granted/vested
    5,286       3,567  
Amortization of share awards
    599        
                 
Balance, end of period
  $ 727,506     $ 718,315  
                 
Accumulated Other Comprehensive Income (Loss) Attributable to Enstar Group Limited
               
Balance, beginning of period
  $ 8,709     $ (30,871 )
Cumulative translation adjustments
    13,726       46,020  
Net movement in unrealized holdings gains (losses) on investments
    11,308       (24,816 )
                 
Balance, end of period
  $ 33,743     $ (9,667 )
                 
Retained Earnings
               
Balance, beginning of period
  $ 477,057     $ 341,847  
Net earnings attributable to Enstar Group Limited
    49,794       55,269  
                 
Balance, end of period
  $ 526,851     $ 397,116  
                 
Noncontrolling Interest
               
Balance, beginning of period
  $ 274,271     $ 256,022  
Return of capital
    (32,963 )     (32,198 )
Contribution of capital
    28,742        
Dividends paid
    (7,000 )     (980 )
Net earnings attributable to noncontrolling interest
    17,136       20,318  
Cumulative translation adjustments
    5,821       19,492  
Net movement in unrealized holdings gains (losses) on investments
    3,591       (5,068 )
                 
Balance, end of period
  $ 289,598     $ 257,586  
                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended September 30, 2010 and 2009
 
                 
    2010     2009  
    (expressed in thousands of U.S. dollars)  
 
OPERATING ACTIVITIES:
               
Net earnings
  $ 66,930     $ 75,587  
Adjustments to reconcile net earnings to cash flows provided by
operating activities:
               
Share of undistributed net earnings of partly owned company
    (10,704 )     (465 )
Net realized and unrealized investment gains
    (8,610 )     (1,982 )
Share of net gain from other investments
    (11,225 )     (2,334 )
Other items
    (663 )     4,563  
Depreciation and amortization
    1,053       763  
Amortization of bond premiums and discounts
    6,540       5,660  
Net movement of trading securities held on behalf of policyholders
    22,772       18,878  
Sales of trading securities
    313,654        
Purchases of trading securities
    (1,072,799 )      
Changes in assets and liabilities:
               
Reinsurance balances receivable
    (18,743 )     23,508  
Other assets
    (80,229 )     6,885  
Losses and loss adjustment expenses
    184,212       (183,180 )
Reinsurance balances payable
    24,343       964  
Accounts payable and accrued liabilities
    (19,142 )     52,498  
Other liabilities
    (27,541 )     22,915  
                 
Net cash flows (used in) provided by operating activities
    (630,152 )     24,260  
                 
INVESTING ACTIVITIES:
               
Acquisitions, net of cash acquired
    155,435       8,504  
Purchase of available-for-sale securities
          (244,310 )
Sales and maturities of available-for-sale securities
    57,335       489,778  
Purchase of held-to-maturity securities
    (780,848 )     (697,146 )
Sales and maturity of held-to-maturity securities
    786,651       56,622  
Movement in restricted cash and cash equivalents
    73,354       (109,601 )
Funding of other investments
    (89,426 )     (24,255 )
Sale of investment in partly owned company
    31,554        
Other investing activities
    (467 )     (2,060 )
                 
Net cash flows provided by (used in) investing activities
    233,588       (522,468 )
                 
FINANCING ACTIVITIES:
               
Distribution of capital to noncontrolling interest
    (32,963 )     (33,178 )
Contribution to surplus of subsidiary by noncontrolling interest
    28,742        
Dividends paid to noncontrolling interest
    (7,000 )      
Receipt of loans
    46,400        
Repayment of loans
    (93,560 )     (97,845 )
Proceeds from exercise of stock options
          2,796  
                 
Net cash flows used in financing activities
    (58,381 )     (128,227 )
                 
TRANSLATION ADJUSTMENT
    12,277       59,974  
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (442,668 )     (566,461 )
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    1,266,445       1,866,546  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 823,777     $ 1,300,085  
                 
                 
                 
 
 
Supplemental Cash Flow Information
               
Income taxes paid
  $ 58,625     $ 12,867  
Interest paid
  $ 8,103     $ 10,697  
 
See accompanying notes to the unaudited condensed consolidated financial statements


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010 and December 31, 2009
(Tabular information expressed in thousands of U.S. dollars except share and per share data)
(unaudited)
 
1.   BASIS OF PREPARATION AND CONSOLIDATION
 
The Company’s condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
Adoption of New Accounting Standards
 
In January 2010, the Company adopted the revised guidance issued by the U.S. Financial Accounting Standards Board (“FASB”) for the consolidation of variable interest entities. The revised guidance requires an entity to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling financial interest in a variable interest entity. It prescribes the determination of whether a reporting entity is required to consolidate another entity based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The adoption of the revised guidance did not have any impact on the consolidated financial statements.
 
The Company adopted the revised guidance issued by FASB for the accounting for transfers of financial assets in January 2010. The revised guidance eliminates the concept of a “qualifying special-purpose entity”; changes the requirements for derecognizing financial assets; and enhances information reported to financial statement users by increasing the transparency of disclosures about transfers of financial assets and an entity’s continuing involvement with transferred financial assets. The adoption of the revised guidance did not have any impact on the consolidated financial statements.
 
Also in January 2010, the Company adopted the revised guidance issued by FASB for the disclosures about fair value measurements. The revised guidance requires additional disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The revised guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The revised guidance is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the revised guidance did not have a material impact on the consolidated financial statements.
 
On February 24, 2010, FASB amended its guidance on subsequent events to no longer require companies filing periodic reports with the U.S. Securities and Exchange Commission (“SEC”) to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements in order to alleviate potential conflicts between FASB’s guidance and the SEC’s filing requirements. This guidance was effective immediately upon issuance. The adoption of this guidance had no impact on the Company’s results of operations or financial condition. While the Company’s consolidated financial statements no longer disclose the date through


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
1.   BASIS OF PREPARATION AND CONSOLIDATION — (cont’d)
 
which it has evaluated subsequent events, the Company continues to be required to evaluate subsequent events through the date when its financial statements are issued.
 
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements, or do not apply to its operations.
 
2.   ACQUISITIONS
 
The Company accounts for acquisitions using the purchase method of accounting, which requires that the acquirer record the assets and liabilities acquired at their estimated fair value. The 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 management’s run-off strategy. Any amendment to the fair values resulting from changes in such information or strategy will be recognized when the changes occur.
 
Knapton Insurance (formerly British Engine)
 
On March 2, 2010, the Company, through its wholly-owned subsidiary, Knapton Holdings Limited (“Knapton Holdings”), completed the acquisition of Knapton Insurance Limited, formerly British Engine Insurance Limited (“Knapton”), from RSA Insurance Group plc for a total purchase price of approximately £28.8 million (approximately $44.0 million). Knapton is a U.K.-domiciled reinsurer that is in run-off. The acquisition was funded from available cash on hand.
 
The purchase price and fair value of the assets acquired in the Knapton acquisition were as follows:
 
         
Total purchase price
  $ 44,031  
         
Net assets acquired at fair value
  $ 44,031  
         
 
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition:
 
         
Cash
  $ 153,286  
Restricted cash
    35,515  
Investments:
       
Short-term investments, trading
    5,990  
Fixed maturity investments, trading
    27,923  
         
Total investments
    33,913  
Reinsurance balances receivable
    50,942  
Other assets
    5,840  
Losses and loss adjustment expenses
    (216,871 )
Insurance and reinsurance balances payable
    (12,347 )
Accounts payable
    (6,247 )
         
Net assets acquired at fair value
  $ 44,031  
         
 
From March 2, 2010, the date of acquisition, to September 30, 2010, the Company has recorded in its consolidated statement of earnings, revenues and net losses related to Knapton of $1.7 million and $(0.1) million, respectively.


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Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   ACQUISITIONS — (cont’d)
 
In April 2010, Knapton Holdings entered into a term facility agreement with a London-based bank (the “Knapton Facility”). On April 20, 2010, Knapton Holdings drew down $21.4 million from the Knapton Facility.
 
Assuransinvest
 
On March 30, 2010, the Company, through its wholly-owned subsidiary, Nordic Run-Off Limited, completed the acquisition of Forsakringsaktiebolaget Assuransinvest MF (“Assuransinvest”) for a purchase price of SEK 78.8 million (approximately $11.0 million). Assuransinvest is a Swedish-domiciled reinsurer that is in run-off. The purchase price was funded from available cash on hand.
 
The purchase price and fair value of the assets acquired in the Assuransinvest acquisition were as follows:
 
         
Total purchase price
  $ 11,042  
         
Net assets acquired at fair value
  $ 11,042  
         
 
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition:
 
         
Cash
  $ 58,971  
Fixed maturity investments, trading
    579  
Other assets
    5  
Losses and loss adjustment expenses
    (45,021 )
Insurance and reinsurance balances payable
    (3,130 )
Accounts payable
    (362 )
         
Net assets acquired at fair value
  $ 11,042  
         
 
From March 30, 2010, the date of acquisition, to September 30, 2010, the Company has recorded in its consolidated statement of earnings, revenues and net earnings related to Assuransinvest of $0.1 million and $0.1 million, respectively.
 
Providence Washington
 
On July 20, 2010, the Company, through its wholly-owned subsidiary, PWAC Holdings, Inc., completed the acquisition of PW Acquisition Company (“PWAC”) for a purchase price of $25.0 million. PWAC owns the entire share capital of Providence Washington Insurance Company. Providence Washington Insurance Company and its two subsidiaries are Rhode Island-domiciled insurers that are in run-off. The purchase price was financed by a term facility provided by a London-based bank (the “Enstar Facility”). The Enstar Facility was fully repaid during the three months ended September 30, 2010.
 
The purchase price and fair value of the assets acquired in the PWAC acquisition were as follows:
 
         
Total purchase price
  $ 25,000  
         
Net assets acquired at fair value
  $ 25,000  
         


8


Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   ACQUISITIONS — (cont’d)
 
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition:
 
         
Cash
  $ 19,278  
Investments:
       
Short-term investments, trading
    4,181  
Fixed maturity investments, trading
    97,756  
Equities
    37  
Other investments
    4,985  
         
Total investments
    106,959  
Accounts receivable and accrued interest
    813  
Reinsurance balances receivable
    31,718  
Other assets
    1,276  
Losses and loss adjustment expenses
    (120,745 )
Insurance and reinsurance balances payable
    (3,597 )
Accounts payable
    (10,702 )
         
Net assets acquired at fair value
  $ 25,000  
         
 
From July 20, 2010, the date of acquisition, to September 30, 2010, the Company has recorded in its consolidated statement of earnings, revenues and net losses related to PWAC of $1.0 million and $(0.1) million, respectively.
 
Seaton Insurance
 
On August 3, 2010, the Company, through its wholly-owned subsidiary, Virginia Holdings Ltd. (“Virginia”) acquired 55.6% of the shares of Seaton Insurance Company (“Seaton”) that it previously did not own for a $nil purchase price, resulting in Virginia owning 100% of Seaton. Seaton is a Rhode Island-domiciled insurer that is in run-off. The acquisition of the Seaton shares was a result of the distribution by Stonewall Acquisition Corporation (“SAC”) to Virginia of proceeds and certain other assets following its sale of Stonewall Insurance Company to Columbia Insurance Company, an affiliate of National Indemnity Company (an indirect subsidiary of Berkshire Hathaway, Inc.). Prior to the distribution, Virginia had indirectly owned 44.4% of Seaton through its holding in SAC. The purchase price and fair value of the assets acquired in the Seaton acquisition were both $nil.


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Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   ACQUISITIONS — (cont’d)
 
The following summarizes the estimated fair values of 100% of the assets acquired and the liabilities assumed at the date of the acquisition:
 
         
Cash
  $ 3,949  
Fixed maturity investments, trading
    22,745  
Accounts receivable and accrued interest
    270  
Reinsurance balances receivable
    170,344  
Other assets
    3,759  
Losses and loss adjustment expenses
    (171,010 )
Insurance and reinsurance balances payable
    (28,670 )
Accounts payable
    (1,387 )
         
Net assets acquired at fair value
  $  
         
 
From August 3, 2010, the date of acquisition, to September 30, 2010, the Company has recorded in its consolidated statement of earnings, revenues and net losses related to Seaton of $0.4 million and $(0.5) million, respectively.
 
Claremont
 
On September 7, 2010, the Company, through its wholly-owned subsidiary CLIC Holdings, Inc., entered into a definitive agreement for the acquisition of Claremont Liability Insurance Company, or Claremont, for an aggregate purchase price of $13.5 million and an additional amount based on a purchase price adjustment to be calculated at closing. The purchase price is expected to be financed from available cash on hand. Claremont is a California-domiciled insurer that is in run-off. Completion of the transaction is conditioned on, among other things, regulatory approval and satisfaction of various customary closing conditions. The transaction is expected to close in the fourth quarter of 2010.
 
New Castle
 
On September 22, 2010, the Company, through its wholly-owned subsidiary Kenmare Holdings Ltd., entered into a definitive agreement for the acquisition of New Castle Reinsurance Company Ltd., or New Castle, for an aggregate purchase price of $24.0 million, subject to potential purchase price adjustments at closing. The purchase price is expected to be financed from available cash on hand. New Castle is a Bermuda-domiciled insurer that is in run-off. Completion of the transaction is conditioned on, among other things, regulatory approval and satisfaction of various customary closing conditions. The transaction is expected to close in the fourth quarter of 2010.
 
Brampton
 
On November 2, 2010, the Company acquired the 49.9% of the shares of Hillcot Holdings Ltd. (“Hillcot”) that it did not previously own from Shinsei Bank, Ltd. (“Shinsei”) for a purchase price of $38.0 million, resulting in the Company owning 100% of Hillcot. At the time of acquisition, Hillcot owned 100% of the shares of Brampton Insurance Company Limited, a U.K.-domiciled reinsurer that is in run-off. J. Christopher Flowers, a member of the Company’s board of directors and one of its largest shareholders, is a director and the largest shareholder of Shinsei. The accounting for this business combination has not been completed at the time of issuance of these financial statements.


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Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
3.   SIGNIFICANT NEW BUSINESS
 
Shelbourne RITC Transactions
 
In December 2007, the Company, in conjunction with JCF FPK I L.P. (“JCF FPK”) and a newly-hired executive management team, formed U.K.-based Shelbourne Group Limited (“Shelbourne”) to invest in Reinsurance to Close or “RITC” transactions (the transferring of liabilities from one Lloyd’s syndicate to another) with Lloyd’s of London insurance and reinsurance syndicates in run-off. The Company owns approximately 56.8% of Shelbourne, which in turn owns 100% of Shelbourne Syndicate Services Limited, the Managing Agency for Lloyd’s Syndicate 2008, a syndicate approved by Lloyd’s of London on December 16, 2007 to undertake RITC transactions with Lloyd’s syndicates in run-off.
 
In February 2010, Lloyd’s Syndicate 2008 entered into RITC agreements with two Lloyd’s syndicates with total gross insurance reserves of approximately $170.3 million. The capital commitment to Lloyd’s Syndicate 2008 with respect to these two RITC agreements amounted to £25.0 million (approximately $37.5 million), which was fully funded by the Company from available cash on hand.
 
JCF FPK is a joint investment program between Fox-Pitt, Kelton, Cochran, Caronia & Waller (USA) LLC (“FPK”) and J.C. Flowers II, L.P. (the “Flowers Fund”). The Flowers Fund is a private investment fund advised by J.C. Flowers & Co. LLC. J. Christopher Flowers, a member of the Company’s board of directors and one of the Company’s largest shareholders, is the Chairman and Chief Executive Officer of J.C. Flowers & Co. LLC. John J. Oros who was the Company’s Executive Chairman and a member of the Company’s board of directors until his resignation on August 20, 2010, is a Managing Director of J.C. Flowers & Co. LLC. In addition, an affiliate of the Flowers Fund controlled approximately 41% of FPK until its sale of FPK in December 2009.
 
Fitzwilliam
 
In February 2010, the Company, through its wholly-owned subsidiary Fitzwilliam Insurance Limited (“Fitzwilliam”), entered into a 100% quota share reinsurance agreement with Allianz Global Corporate & Specialty AG (UK) Branch (“Allianz”) with respect to a specific portfolio of run-off business of Allianz. Fitzwilliam received total assets and assumed total gross reinsurance reserves of approximately $112.6 million.
 
In July 2010, following the acquisition of the entire issued share capital of Glacier Insurance AG by Torus Insurance (Bermuda) Limited (“Torus”), Fitzwilliam entered into two quota share reinsurance agreements with Torus protecting the prior year reserve development of two portfolios of business reinsured by them: a 79% quota share of Torus’ 95% quota share reinsurance of Glacier Insurance AG, and a 75% quota share of Torus’ 100% quota share reinsurance of Glacier Reinsurance AG. Fitzwilliam received total assets and assumed total gross reinsurance reserves of approximately $105.0 million.
 
Bosworth
 
In May 2010, a specific portfolio of run-off business underwritten by Mitsui Sumitomo Insurance Co., Ltd. of Japan (“Mitsui”) was transferred to the Company’s 50.1% owned subsidiary, Bosworth Run-off Limited (“Bosworth”). This transfer, which occurred under Part VII of the U.K. Financial Services and Markets Act 2000, was approved by the U.K. Court and took effect on May 31, 2010. As a result of the transfer, Bosworth received total assets and assumed net reinsurance reserves of approximately $117.5 million. Shinsei owns the remaining 49.9% of Bosworth.
 
4.   RESTRICTED CASH AND CASH EQUIVALENTS
 
Restricted cash and cash equivalents were $395.8 million and $433.7 million as of September 30, 2010 and December 31, 2009, respectively. The restricted cash and cash equivalents are used as collateral against letters of credit and as guarantee under trust agreements. Letters of credit are issued to ceding insurers as security for the obligations of insurance subsidiaries under reinsurance agreements with those ceding insurers.


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Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS
 
Available-for-sale
 
The amortized cost and estimated fair value of the Company’s fixed maturity securities and short-term investments classified as available-for-sale were as follows:
 
                                 
                Gross
       
          Gross
    Unrealized
       
          Unrealized
    Holding
       
    Amortized
    Holding
    Losses
    Fair
 
    Cost     Gain     Non-OTTI     Value  
 
As at September 30, 2010
                               
U.S. government and agency
  $ 108,202     $ 1,162     $ (110 )   $ 109,254  
Non-U.S. government
    291,278       4,204       (159 )     295,323  
Corporate
    888,730       16,950       (1,243 )     904,437  
Residential mortgage-backed
    24,071       292       (341 )     24,022  
Commercial mortgage-backed
    25,241       378       (2,828 )     22,791  
Asset backed
    28,493       1,017       (418 )     29,092  
                                 
    $ 1,366,015     $ 24,003     $ (5,099 )   $ 1,384,919  
                                 
 
                                 
                Gross
       
          Gross
    Unrealized
       
          Unrealized
    Holding
       
    Amortized
    Holding
    Losses
    Fair
 
    Cost     Gain     Non-OTTI     Value  
 
As at December 31, 2009
                               
U.S. government and agency
  $ 14,079     $ 227     $     $ 14,306  
Non-U.S. government
    37,166       33       (13 )     37,186  
Corporate
    62,092       825       (867 )     62,050  
Residential mortgage-backed
    1,685       31       (160 )     1,556  
                                 
    $ 115,022     $ 1,116     $ (1,040 )   $ 115,098  
                                 
 
The following tables summarize the Company’s fixed maturity securities and short-term investments classified as available-for-sale in an unrealized loss position as well as the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
                                                 
    12 Months or Greater     Less Than 12 Months     Total  
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Losses     Value     Losses     Value     Losses  
 
As at September 30, 2010
                                               
U.S. government and agency
  $     $     $ 39,789     $ (110 )   $ 39,789     $ (110 )
Non-U.S. government
                38,361       (159 )     38,361       (159 )
Corporate
    27,988       (684 )     129,757       (559 )     157,745       (1,243 )
Residential mortgage-backed
    1,743       (143 )     15,435       (198 )     17,178       (341 )
Commercial mortgage-backed
    6,607       (2,703 )     8,909       (125 )     15,516       (2,828 )
Asset backed
    5,425       (52 )     9,771       (366 )     15,196       (418 )
                                                 
    $ 41,763     $ (3,582 )   $ 242,022     $ (1,517 )   $ 283,785     $ (5,099 )
                                                 
 


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Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
                                                 
    12 Months or Greater     Less Than 12 Months     Total  
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Losses     Value     Losses     Value     Losses  
 
As at December 31, 2009
                                               
Non-U.S. government
  $     $     $ 782     $ (13 )   $ 782     $ (13 )
Corporate
    10,894       (786 )     5,348       (81 )     16,242       (867 )
Residential mortgage-backed
    369       (160 )                 369       (160 )
                                                 
    $ 11,263     $ (946 )   $ 6,130     $ (94 )   $ 17,393     $ (1,040 )
                                                 
 
As at September 30, 2010 and December 31, 2009, the number of securities classified as available-for-sale in an unrealized loss position was 148 and 20, respectively, with a fair value of $283.8 million and $17.4 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 27 and 11, respectively. As at September 30, 2010, none of these securities were considered to be other-than-temporarily impaired.
 
The contractual maturities of the Company’s fixed maturity securities and short-term investments classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
                         
    Amortized
    Fair
    % of Total
 
    Cost     Value     Fair Value  
 
As at September 30, 2010
                       
Due in one year or less
  $ 439,785     $ 442,126       31.9 %
Due after one year through five years
    837,937       855,973       61.8 %
Due after five years through ten years
    5,320       5,529       0.4 %
Due after ten years
    5,168       5,386       0.4 %
                         
      1,288,210       1,309,014       94.5 %
Residential mortgage-backed
    24,071       24,022       1.7 %
Commercial mortgage-backed
    25,241       22,791       1.7 %
Asset backed
    28,493       29,092       2.1 %
                         
    $ 1,366,015     $ 1,384,919       100 %
                         
 
                         
    Amortized
    Fair
    % of Total
 
    Cost     Value     Fair Value  
 
As at December 31, 2009
                       
Due in one year or less
  $ 64,202     $ 64,606       56.1 %
Due after one year through five years
    39,951       40,305       35.0 %
Due after five years through ten years
    5,811       5,783       5.0 %
Due after ten years
    3,373       2,848       2.5 %
                         
      113,337       113,542       98.6 %
Residential mortgage-backed
    1,685       1,556       1.4 %
                         
    $   115,022     $   115,098       100.0 %
                         

13


Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity securities and short-term investments classified as available-for-sale:
 
                         
    Amortized
    Fair
    % of Total
 
    Cost     Value     Fair Value  
 
As at September 30, 2010
                       
AAA
  $ 559,727     $ 563,892       40.7 %
AA
    343,163       348,843       25.2 %
A
    363,860       371,294       26.8 %
BBB or lower
    98,875       100,447       7.3 %
Not Rated
    390       443       0.0 %
                         
    $ 1,366,015     $ 1,384,919       100.0 %
                         
 
                         
    Amortized
    Fair
    % of Total
 
    Cost     Value     Fair Value  
 
As at December 31, 2009
                       
AAA
  $ 54,157     $ 54,229       47.1 %
A
    32,764       32,886       28.6 %
BBB or lower
    13,848       13,596       11.8 %
Not Rated
    14,253       14,387       12.5 %
                         
    $ 115,022     $ 115,098       100.0 %
                         
 
Held-to-maturity
 
As of September 30, 2010, the Company has redesignated $1.33 billion in investment securities from the held-to-maturity category to the available-for-sale category, following the disposition of certain held-to-maturity securities in one of the Company’s Australian insurance subsidiaries. The speed of settlement of the liabilities in this subsidiary has been notably greater than was originally anticipated, prompting the Company to apply to the subsidiary’s regulator for a reduction in required capital levels. Upon the approval, on September 1, 2010, of the capital reduction in the amount of $148.2 million, the Company evaluated the funding alternatives relating to the capital distribution and, as a result, reconsidered its intent to hold certain securities to maturity and sold securities with a carrying value of $33.4 million that had previously been designated held-to-maturity. The proceeds from these sales were $36.5 million, resulting in a realized gain of $3.1 million.
 
During September 2010, requests were made to regulators, that are pending approval, for capital releases, in certain of the Company’s other insurance subsidiaries, for amounts that are also greater than was originally anticipated. Further to both approved and pending requests for capital releases greater than originally anticipated in certain of the Company’s insurance subsidiaries, the Company reevaluated its intent with respect to its remaining held-to-maturity securities. The Company concluded that, as of September 30, 2010, it no longer had the positive intent to hold its held-to-maturity securities to maturity. The Company does not plan to designate securities as held-to-maturity for at least two years and believes that maintaining its securities in the available-for-sale category provides greater flexibility in the management of the overall investment portfolio.
 
As a result of redesignation, the held-to-maturity securities with an amortized cost of $1.15 billion have been transferred to the available-for-sale category at the fair value of $1.33 billion, with unrealized gains of $18.0 million recorded in accumulated other comprehensive income.


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Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
The amortized cost and estimated fair value of the Company’s fixed maturity securities and short-term investments classified as held-to-maturity as at December 31, 2009 were as follows:
 
                                 
                Gross
       
          Gross
    Unrealized
       
          Unrealized
    Holding
       
    Amortized
    Holding
    Losses
    Fair
 
    Cost     Gain     Non-OTTI     Value  
 
U.S. government and agency
  $ 164,706     $ 1,659     $ (196 )   $ 166,169  
Non-U.S. government
    276,506       3,069       (131 )     279,444  
Corporate
    780,099       15,794       (1,284 )     794,609  
Municipal
    9,649       6       (1 )     9,654  
Residential mortgage-backed
    15,894       165       (427 )     15,632  
Commercial mortgage-backed
    30,608       1,130       (1,970 )     29,768  
Asset backed
    34,078       477       (564 )     33,991  
                                 
    $ 1,311,540     $ 22,300     $ (4,573 )   $ 1,329,267  
                                 
 
The following table summarizes the Company’s fixed maturity securities and short-term investments classified as held-to-maturity in an unrealized loss position as at December 31, 2009 and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
                                                 
    12 Months or Greater     Less Than 12 Months     Total  
    Fair
    Unrealized
    Fair
    Unrealized
    Fair
    Unrealized
 
    Value     Losses     Value     Losses     Value     Losses  
 
U.S. government and agency
  $     $     $ 53,674     $ (196 )   $ 53,674     $ (196 )
Non-U.S. government
                44,477       (131 )     44,477       (131 )
Corporate
    3,892       (249 )     153,220       (1,034 )     157,112       (1,283 )
Municipal
                8,641       (1 )     8,641       (1 )
Residential mortgage-backed
    2,109       (277 )     6,494       (151 )     8,603       (428 )
Commercial mortgage-backed
                11,931       (1,970 )     11,931       (1,970 )
Asset backed
    889       (86 )     21,817       (478 )     22,706       (564 )
                                                 
    $ 6,890     $ (612 )   $ 300,254     $ (3,961 )   $ 307,144     $ (4,573 )
                                                 
 
As at December 31, 2009, the number of fixed maturity securities classified as held-to-maturity in an unrealized loss position was 135, with a fair value of $307.1 million. Of these securities, the number of securities that had been in an unrealized loss position for 12 months or longer was 19.


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Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
Trading
 
The estimated fair value of the Company’s investments in fixed maturity securities, short-term investments and equities classified as trading was as follows:
 
                                 
                Gross
       
          Gross
    Unrealized
       
          Unrealized
    Holding
       
    Amortized
    Holding
    Losses
    Fair
 
    Cost     Gain     Non-OTTI     Value  
 
As at September 30, 2010
                               
U.S. government and agency
  $ 117,991     $ 5,131     $     $ 123,122  
Non-U.S. government
    125,106       100       (35 )     125,171  
Corporate
    617,554       3,692       (190 )     621,056  
Municipal
    1,591       19       (5 )     1,605  
Residential mortgage-backed
    61,668       179       (342 )     61,505  
Commercial mortgage-backed
    7,818       71       (226 )     7,663  
Asset backed
    361                   361  
Equities
    66,783       6,351       (1,521 )     71,613  
                                 
    $ 998,872     $ 15,543     $ (2,319 )   $ 1,012,096  
                                 
 
                                 
                Gross
       
          Gross
    Unrealized
       
          Unrealized
    Holding
       
    Amortized
    Holding
    Losses
    Fair
 
    Cost     Gain     Non-OTTI     Value  
 
As at December 31, 2009
                               
U.S. government and agency
  $ 60,355     $ 1,696     $ (131 )   $ 61,920  
Corporate
    23,894       1,139             25,033  
Residential mortgage-backed
    474       4       (22 )     456  
Commercial mortgage-backed
    1,051             (410 )     641  
Equities
    21,258       3,854       (609 )     24,503  
                                 
    $ 107,032     $ 6,693     $ (1,172 )   $ 112,553  
                                 
 
Other Investments
 
                 
    September 30,
    December 31,
 
    2010     2009  
 
Private equity
  $ 86,383     $ 77,359  
Short-duration high yield bond fund
    51,879        
Hedge funds
    20,899        
Other
    41,539       4,442  
                 
    $ 200,700     $ 81,801  
                 
 
At September 30, 2010 and December 31, 2009, the Company had $86.4 million and $77.4 million, respectively, of private equity investments recorded in limited partnerships and limited liability companies. These


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
private equity investments represented 2.3% of total investments and cash and cash equivalents at both September 30, 2010 and December 31, 2009. All of the Company’s investments in limited partnerships and limited liability companies are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short term. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. These investments are accounted for at estimated fair value determined by the Company’s proportionate share of the net asset value of the investee reduced by any impairment charges. As at September 30, 2010 and December 31, 2009, the Company had unfunded capital commitments relating to its private equity investments of $97.9 and $101.1 million, respectively.
 
Other-Than-Temporary Impairment Process
 
Upon the adoption of the new guidance on investments in debt and equity securities, effective April 1, 2009, the Company changed its quarterly process for assessing whether declines in the fair value of its fixed maturity investments, both available-for-sale and held-to-maturity, represented impairments that are other-than-temporary. The process now includes reviewing each fixed maturity investment that is impaired and determining: (i) if the Company has the intent to sell the fixed maturity investment or (ii) if it is more likely than not that the Company will be required to sell the fixed maturity investment before its anticipated recovery; and (iii) assessing whether a credit loss exists, that is, where the Company expects that the present value of the cash flows expected to be collected from the fixed maturity investment are less than the amortized cost basis of the investment.
 
The Company had no planned sales of its fixed maturity investments classified as available-for-sale in an unrealized loss position as at September 30, 2010. In assessing whether it is more likely than not that the Company will be required to sell a fixed maturity investment before its anticipated recovery, the Company considers various factors including its future cash flow requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short-term investments and fixed maturity investments available for sale in an unrealized gain position, and other relevant factors. For the nine months ended September 30, 2010, the Company did not recognize any other-than-temporary impairments due to required sales.
 
In evaluating credit losses, the Company considers a variety of factors in the assessment of a fixed maturity investment including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline below cost and par; (3) the potential for the fixed maturity investment to recover in value; (4) an analysis of the financial condition of the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the fixed maturity investment to make scheduled interest or principal payments.
 
Based on the factors described above, the Company determined that, as at September 30, 2010, no credit losses existed.
 
Fair Value of Financial Instruments
 
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. The Company uses a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
 
  •  Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
 
  •  Level 2 — Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g.


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
  interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
 
  •  Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company’s own judgment about assumptions that market participants might use.
 
The following is a summary of valuation techniques or models the Company uses to measure fair value by asset and liability classes.
 
Fixed Maturity Investments
 
The Company’s fixed maturity portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors. The Company uses nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of its fixed maturity investments. These pricing services include Barclays Capital Aggregate Index (formerly Lehman Index), Reuters Pricing Service, FT Interactive Data and others.
 
The pricing services use 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 two securities within the Company’s trading portfolio, the fair value estimates of its fixed maturity investments are based on observable market data. The Company has therefore included these as Level 2 investments within the fair value hierarchy. The two securities in its trading portfolio that do not have observable inputs have been included as Level 3 investments within the fair value hierarchy.
 
To validate the techniques or models used by the pricing services, the Company compares the fair value estimates to its knowledge of the current market and will challenge any prices deemed not to be representative of fair value.
 
As of September 30, 2010 there were no material differences between the prices obtained from the pricing services and the fair value estimates developed by the Company.
 
Equity Securities
 
The Company’s equity securities are managed by two external advisors. Through these third parties, the Company uses nationally recognized pricing services, including pricing vendors, index providers and broker-dealers to estimate fair value measurements for all of its equity securities. These pricing services include FT Interactive Data and others.
 
The Company has categorized all of its investments in common stock as Level 1 investments because the fair values of these securities are based on quoted prices in active markets for identical assets or liabilities. The Company has categorized all of its investments in preferred stock as Level 2 (except one which was categorized as Level 3) because their fair value estimates are based on observable market data.
 
Other Investments
 
For its investments in hedge funds, limited partnerships and limited liability companies, the Company measures 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


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
fair value measurement for the underlying investments. For all publicly traded companies within the funds, the Company has valued those investments based on the latest share price. The value of Affirmative Investment LLC (in which the Company owns a non-voting 7% membership interest) is based on the market value of the shares of Affirmative Insurance Holdings, Inc., a publicly traded company.
 
All of the Company’s investments in limited partnerships and limited liability companies are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate those investments in the short term.
 
The Company has classified its hedge funds, limited partnerships and limited liability companies as Level 3 investments because they reflect the Company’s own judgment about the assumptions that market participants might use.
 
The short duration high yield fund and other bond funds have been classified as Level 2 investments because their fair value is estimated using the net asset value reported by Bloomberg and they have daily liquidity.
 
  Fair Value Measurements
 
In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification, the Company has categorized its investments that are recorded at fair value among levels as follows:
 
                                 
    September 30, 2010  
    Quoted Prices in
          Significant
       
    Active Markets
    Significant Other
    Unobservable
       
    for Identical Assets
    Observable Inputs
    Inputs
    Total Fair
 
    (Level 1)     (Level 2)     (Level 3)     Value  
 
U.S. government and agency
  $     $ 232,375     $     $ 232,375  
Non-U.S. government
          420,494             420,494  
Corporate
          1,524,987       504       1,525,491  
Municipal
          1,606             1,606  
Residential mortgage-backed
          85,528             85,528  
Commercial mortgage-backed
          29,582       872       30,454  
Asset backed
          29,454             29,454  
Equities
    53,105       15,033       3,475       71,613  
Other investments
          86,829       113,871       200,700  
                                 
Total investments
  $ 53,105     $ 2,425,888     $ 118,722     $ 2,597,715  
                                 
 


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
                                 
    December 31, 2009  
    Quoted Prices in
          Significant
       
    Active Markets
    Significant Other
    Unobservable
       
    for Identical Assets
    Observable Inputs
    Inputs
    Total Fair
 
    (Level 1)     (Level 2)     (Level 3)     Value  
 
U.S. government and agency
  $     $ 76,226     $     $ 76,226  
Non-U.S. government
          37,186             37,186  
Corporate
          87,083             87,083  
Residential mortgage-backed
          2,012             2,012  
Commercial mortgage-backed
                641       641  
Equities
    21,203             3,300       24,503  
Other investments
                81,801       81,801  
                                 
Total investments
  $ 21,203     $ 202,507     $ 85,742     $ 309,452  
                                 
 
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended September 30, 2010.
 
                                 
    Fixed
                   
    Maturity
    Other
    Equity
       
    Investments     Investments     Securities     Total  
 
Level 3 investments as of July 1, 2010
  $ 1,394     $ 104,079     $ 3,238     $ 108,711  
Net purchases (sales and distributions)
          7,832             7,832  
Total realized and unrealized (losses)/gains
    (18 )     1,960       237       2,179  
Net transfers in and/or (out) of Level 3
                       
                                 
Level 3 investments as of September 30, 2010
  $ 1,376     $ 113,871     $ 3,475     $ 118,722  
                                 
 
The amount of net gains/(losses) for the three months ended September 30, 2010 included in earnings attributable to the fair value of changes in assets still held at September 30, 2010 was $(0.3) million. Of this amount, $0.2 million was included in net realized gains/(losses) and $(0.5) million was included in net investment income.
 
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended September 30, 2009:
 
                                 
    Fixed
                   
    Maturity
    Other
    Equity
       
    Investments     Investments     Securities     Total  
 
Level 3 investments as of July 1, 2009
  $ 263     $ 71,039     $ 3,200     $ 74,502  
Net purchases (sales and distributions)
          517             517  
Total realized and unrealized gains
    315       4,807       150       5,272  
Net transfers in and/or (out) of Level 3
                       
                                 
Level 3 investments as of September 30, 2009
  $ 578     $ 76,363     $ 3,350     $ 80,291  
                                 
 
The amount of net gains for the three months ended September 30, 2009 included in earnings attributable to the fair value of changes in assets still held at September 30, 2009 was $4.3 million. Of this amount, $0.5 million was included in net realized gains and $3.8 million was included in net investment income.

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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using the Level 3 inputs during the nine months ended September 30, 2010:
 
                                 
    Fixed
                   
    Maturity
    Other
    Equity
       
    Investments     Investments     Securities     Total  
 
Level 3 investments as of January 1, 2010
  $ 641     $ 81,801     $ 3,300     $ 85,742  
Net purchases (sales and distributions)
    579       24,078             24,657  
Total realized and unrealized gains
    156       7,992       175       8,323  
Net transfers in and/or (out) of Level 3
                       
                                 
Level 3 investments as of September 30, 2010
  $ 1,376     $ 113,871     $ 3,475     $ 118,722  
                                 
 
The amount of net gains for the nine months ended September 30, 2010 included in earnings attributable to the fair value of changes in assets still held at September 30, 2010 was $9.1 million. Of this amount, $0.3 million was included in net realized gains and $8.8 million was included in net investment income.
 
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using the Level 3 inputs during the nine months ended September 30, 2009:
 
                                 
    Fixed
                   
    Maturity
    Other
    Equity
       
    Investments     Investments     Securities     Total  
 
Level 3 investments as of January 1, 2009
  $ 352     $ 60,237     $     $ 60,589  
Net purchases (sales and distributions)
          12,932       2,006       14,938  
Total realized and unrealized gains
    226       3,194       1,344       4,764  
Net transfers in and/or (out) of Level 3
                       
                                 
Level 3 investments as of September 30, 2009
  $ 578     $ 76,363     $ 3,350     $ 80,291  
                                 
 
The amount of net gains for the nine months ended September 30, 2009 included in earnings attributable to the fair value of changes in assets still held at September 30, 2009 was $3.7 million. Of this amount, $1.6 million was included in net realized gains and $2.1 million was included in net investment income.
 
During the nine months ended September 30, 2010 and 2009, proceeds from the sales and maturities of available-for sale securities were $57.3 million and $489.8 million, respectively. Gross realized gains on sales of available-for-sale securities were $0.1 million and $0.1 million, respectively, and gross unrealized losses on sales of available-for-sale securities were $nil and $0.6 million, respectively. Unrealized gains on trading securities were $3.9 million for both the nine months ended September 30, 2010 and 2009.
 
Restricted Investments
 
The Company is required to maintain investments on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The investments in


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.   INVESTMENTS — (cont’d)
 
trust as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted investments as of September 30, 2010 and December 31, 2009 was as follows:
 
                 
    September 30,
    December 31,
 
    2010     2009  
 
Assets used for collateral in trust for third-party agreements
  $ 354,521     $ 214,149  
Deposits with U.S. regulatory authorities
    33,281       12,998  
                 
    $ 387,802     $ 227,147  
                 
 
6.   INVESTMENT IN PARTLY OWNED COMPANIES
 
On June 13, 2008, the Company’s indirect subsidiary Virginia completed the acquisition from Dukes Place Holdings, L.P. (a portfolio company of GSC European Mezzanine Fund II, L.P.) of 44.4% of the outstanding capital stock of SAC, the parent of two Rhode Island-domiciled insurers in run-off, Stonewall Insurance Company and Seaton. The total purchase price, including acquisition costs, was $21.4 million and was funded from available cash on hand. SAC entered into a definitive agreement on December 3, 2009 for the sale of its shares in Stonewall Insurance Company to Columbia Insurance Company, an affiliate of National Indemnity Company (an indirect subsidiary of Berkshire Hathaway, Inc.), for a sale price of $56.0 million, subject to certain post-closing purchase price adjustments that brought the total consideration received to $60.4 million. The transaction received the required regulatory approval on March 31, 2010 and subsequently closed on April 7, 2010. The proceeds received by SAC were later distributed among Dukes Place Holdings, L.P. and Virginia. The investment was carried on the equity basis until the distribution. When the Company carries an investment on the equity basis, the investment is initially recorded at cost and adjusted to reflect the Company’s share of after-tax earnings or losses and unrealized investment gains and losses and reduced by dividends.
 
As discussed in Note 2 above, on August 3, 2010, Virginia acquired 55.6% of the shares of Seaton that it previously did not own for $nil consideration, resulting in Virginia owning 100% of Seaton. The acquisition of the Seaton shares was a result of the distribution by SAC of proceeds and certain other assets following its sale of Stonewall Insurance Company. Virginia received 100% of the final $1.4 million distribution from SAC.
 
The following summarized financial information for SAC is derived from its unaudited quarterly financial statements:
 
                                 
    Three Months
  Nine Months
    Ended
  Ended
    September 30,   September 30,
    2010   2009   2010   2009
 
Total revenues
  $ 3,008     $ 1,941     $ 8,757     $ 5,045  
Total expenses
    (1,657 )     (1,501 )     11,301       (3,998 )
Income from continuing operations
    1,351       440       20,058       1,047  
Net income
    1,351       440       20,058       1,047  
 
The balance of the investment in partly owned company was $nil and $20.9 million at September 30, 2010 and December 31, 2009, respectively.


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
7.   LOSSES AND LOSS ADJUSTMENT EXPENSES
 
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended September 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance reserves recoverable.
 
                 
    Three Months Ended September 30,  
    2010     2009  
 
Balance as at July 1,
  $ 2,894,353     $ 2,781,577  
Less: total reinsurance reserves recoverable
    421,864       375,431  
                 
      2,472,489       2,406,146  
Net reduction in ultimate losses and loss adjustment expense liabilities
    (26,115 )     (42,558 )
Net losses paid
    (80,501 )     (50,756 )
Effect of exchange rate movement
    80,839       15,867  
Retroactive reinsurance contracts assumed
    100,136        
Acquired on purchase of subsidiaries
    198,498        
                 
Net balance as at September 30
  $ 2,745,346     $ 2,328,699  
Plus: total reinsurance reserves recoverable
    488,353       357,253  
                 
Balance as at September 30
  $ 3,233,699     $ 2,685,952  
                 
 
The following table shows the components of the movement in the net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended September 30, 2010 and 2009:
 
                 
    Three Months Ended September 30,  
    2010     2009  
 
Net losses paid
  $ (80,501 )   $ (50,756 )
Net change in case and loss adjustment expense (LAE) reserves
    101,542       91,540  
Net change in incurred but not reported (IBNR) reserves
    (151 )     3,952  
                 
Reduction in estimates of net ultimate losses
    20,890       44,736  
Reduction in provisions for bad debt
    1,304        
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    10,171       9,830  
Amortization of fair value adjustments
    (6,250 )     (12,008 )
                 
Net reduction in ultimate loss and loss adjustment expense liabilities
  $ 26,115     $ 42,558  
                 
 
Net change in case and LAE reserves comprises the movement during the quarter in specific case reserve liabilities as a result of claims settlements or changes advised to the Company by its policyholders and attorneys, less changes in case reserves recoverable advised by the Company to its reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR reserves represents the change in the Company’s actuarial estimates of losses incurred but not reported.
 
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended September 30, 2010 of $26.1 million was attributable to a reduction in estimates of net ultimate losses of $20.9 million, a reduction in provisions for bad debt of $1.3 million and a reduction in provisions for unallocated loss and loss adjustment expense liabilities of $10.2 million, relating to 2010 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $6.3 million.


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
7.   LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d)
 
The reduction in estimates of net ultimate losses of $20.9 million for the three months ended September 30, 2010 comprised net favorable incurred loss development of $21.1 million and a modest increase in IBNR reserves of $0.2 million, primarily related to the following:
 
  (i)  A reduction in estimates of net ultimate losses of $10.8 million in one of the Company’s insurance entities following the commutations and policy buy-backs of five of its largest insurance and reinsurance exposures.
 
  (ii)  The Company concluded its review of historic case reserves for two of its insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 1,750 advised case reserves with an aggregate value of $11.8 million.
 
The reduction in provisions for bad debt of $1.3 million resulted from the collection of receivables against which bad debt provisions had been provided in earlier periods.
 
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended September 30, 2009 of $42.6 million was attributable to a reduction in estimates of net ultimate losses of $44.7 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $9.8 million, relating to 2009 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments of $12.0 million relating to companies acquired.
 
The reduction in estimates of net ultimate losses of $44.7 million during the three months ended September 30, 2009 related to the following:
 
  (i)  A reduction in estimates of net ultimate losses of $23.8 million in two of the Company’s insurance entities whereby previously advised net case and LAE reserves of $18.6 million were settled without payment. The application of the Company’s reserving methodologies to the reduced case and LAE reserves resulted in a reduction in net IBNR reserves of $5.2 million.
 
  (ii)  The Company concluded its review of historic case reserves for eight of the Company’s insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 4,000 advised case reserves with an aggregate value of $16.6 million.
 
  (iii)  A reduction in estimates of net ultimate losses of $5.4 million in another of the Company’s insurance entities that completed, during September 2009, a Solvent Scheme of Arrangement relating to its U.K. liabilities. A Solvent Scheme of Arrangement is an arrangement between a company and its creditors whereby the company, by making a one-time full and final settlement of its liabilities to policyholders, is able to achieve financial certainty and finality. The entity settled its remaining U.K. net case reserves of $1.5 million, net IBNR reserves of $3.1 million and net reinsurance reserves recoverable for the net receipt of $0.8 million.


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Table of Contents

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
7.   LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d)
 
 
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the nine months ended September 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance reserves recoverable.
 
                 
    Nine Months Ended September 30,  
    2010     2009  
 
Balance as of January 1
  $ 2,479,136     $ 2,798,287  
Less: total reinsurance reserves recoverable
    347,728       394,575  
                 
      2,131,408       2,403,712  
Net reduction in ultimate losses and loss adjustment expense liabilities
    (78,077 )     (86,630 )
Net losses paid
    (211,589 )     (130,577 )
Effect of exchange rate movement
    18,410       81,993  
Retroactive reinsurance contracts assumed
    464,654       48,818  
Acquired on purchase of subsidiaries
    420,540       11,383  
                 
Net balance as at September 30
  $ 2,745,346     $ 2,328,699  
Plus: total reinsurance reserves recoverable
    488,353       357,253  
                 
Balance as at September 30
  $ 3,233,699     $ 2,685,952  
                 
 
The following table shows the components of the movement in the net reduction in ultimate loss and loss adjustment expense liabilities for the nine months ended September 30, 2010 and 2009:
 
                 
    Nine Months Ended September 30,  
    2010     2009  
 
Net losses paid
  $ (211,589 )   $ (130,577 )
Net change in case and LAE reserves
    234,114       133,742  
Net change in IBNR reserves
    35,411       89,137  
                 
Reduction in estimates of net ultimate losses
    57,936       92,302  
Reduction in provisions for bad debt
    14,411       9,714  
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    30,832       29,370  
Amortization of fair value adjustments
    (25,102 )     (44,756 )
                 
Net reduction in ultimate loss and loss adjustment expense liabilities
  $ 78,077     $ 86,630  
                 
 
The net reduction in ultimate loss and loss adjustment expense liabilities for the nine months ended September 30, 2010 of $78.1 million was attributable to a reduction in estimates of net ultimate losses of $57.9 million, a reduction in provisions for bad debt of $14.4 million and a reduction in provisions for unallocated loss and loss adjustment expense liabilities of $30.8 million, relating to 2010 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $25.1 million.
 
The reduction in estimates of net ultimate losses of $57.9 million comprised net favorable incurred loss development of $22.5 million along with reductions in IBNR reserves of $35.4 million. The net favorable incurred loss development of $22.5 million, whereby net advised case and LAE reserves of $234.1 million were settled for net losses paid of $211.6 million, related to the settlement of non-commuted and commuted losses during the nine months ended September 30, 2010 including commutations and policy buy-backs of seven of the largest insured


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
7.   LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d)
 
and/or reinsured exposures in three of the Company’s insurance and reinsurance subsidiaries. These commutations and policy buy-backs were primarily responsible for the reduction in IBNR reserves of $35.4 million following the application of the Company’s reserving methodologies in determining the IBNR reserves related to the commuted exposures. The settlement of advised case and LAE reserves of $234.1 million included the redundancy of approximately 1,750 advised case reserves with an aggregate value of $11.8 million which resulted from the Company’s review of historic case reserves for two of its insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years.
 
The reductions in provisions for bad debt of $14.4 million resulted from the collection of receivables against which bad debt provisions had been provided in earlier periods.
 
The net reduction in ultimate loss and loss adjustment expense liabilities for the nine months ended September 30, 2009 of $86.6 million was attributable to a reduction in estimates of net ultimate losses of $92.3 million, a reduction in provisions for bad debts of $9.7 million and a reduction in provisions for unallocated loss and loss adjustment expense liabilities of $29.4 million, relating to 2009 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments of $44.8 million relating to companies acquired.
 
The reduction in estimates of net ultimate losses of $92.3 million for the nine months ended September 30, 2009 related primarily to the following:
 
  (i)  A reduction in estimates of net ultimate losses in one of the Company’s subsidiaries of $25.2 million following the commutation of one of its largest ten assumed and ceded exposures at less than case and LAE reserves.
 
  (ii)  A reduction in estimates of net ultimate losses of $13.0 million in one of the Company’s subsidiaries as a result of net favorable incurred loss development of $2.6 million and reductions in IBNR reserves of $10.4 million. The net favorable incurred loss development of $2.6 million, whereby net advised case and LAE reserves of $6.6 million were settled for net paid losses of $4.0 million, arose from the settlement of losses during the period below carried reserves. The net reduction in the estimate of the subsidiary’s IBNR loss and loss adjustment expense liabilities of $10.4 million was the result of the application of the Company’s reserving methodologies to the reduced case and LAE reserves following the subsidiary’s semi-annual actuarial review of reserves, which are required by local regulation.
 
  (iii)  A reduction in estimates of net ultimate losses of $23.8 million in two of the Company’s insurance entities whereby previously advised net case and LAE reserves of $18.6 million were settled without payment. The application of the Company’s reserving methodologies to the reduced case and LAE reserves resulted in a reduction in net IBNR reserves of $5.2 million.
 
  (iv)  The Company concluded its review of historic case reserves for eight of its insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 4,000 advised case reserves with an aggregate value of $16.6 million.
 
  (v)  A reduction in estimates of net ultimate losses of $14.1 million in another of the Company’s insurance entities that completed, during September 2009, a Solvent Scheme of Arrangement relating to its U.K. liabilities. During the nine months ended September 30, 2009, the entity settled its remaining U.K. net case and LAE reserves of $8.4 million, net IBNR reserves of $10.4 million and net reinsurance reserves recoverable for the net payment of $4.7 million.


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
8.   LOANS PAYABLE
 
Amounts of long-term debt outstanding as of September 30, 2010 and December 31, 2009 totaled $207.2 million and $255.0 million, respectively, and were comprised of the following:
 
                     
Facility
 
Date of Facility
  September 30, 2010     December 31, 2009  
 
Cumberland — Facility B
  March 4, 2008   $     $ 67,071  
Unionamerica — Facility A
  December 30, 2008     153,300       155,268  
Unionamerica — Facility B
  December 30, 2008     32,165       32,622  
Knapton
  April 20, 2010     21,712        
                     
        $ 207,177     $ 254,961  
                     
 
In April 2010, Knapton Holdings entered into the Knapton Facility, a term facility agreement with a London-based bank. On April 20, 2010, Knapton Holdings drew down $21.4 million from the Knapton Facility to partially fund the acquisition of Knapton. The interest rate on the Knapton Facility is LIBOR plus 2.75%. The Knapton Facility is repayable in three years and is secured by a first charge over Knapton Holding’s shares in Knapton. The Knapton Facility contains various financial and business covenants, including limitations on mergers and consolidations involving Knapton Holdings and its subsidiaries. As of September 30, 2010, all of the covenants relating to the Knapton Facility were met.
 
On July 16, 2010, the Company entered into the Enstar Facility, a term facility agreement with a London-based bank. On July 19, 2010, the Company drew down $25.0 million from the Enstar Facility to fund the acquisition of PWAC. The interest rate on the Enstar Facility was LIBOR plus 2.75%. The Enstar Facility was repayable in three months and was unsecured. The Enstar Facility contained various financial and business undertakings. On September 13, 2010, the Company fully repaid the Enstar Facility.
 
On September 10, 2010, the Company fully repaid the remaining outstanding principal and accrued interest on Cumberland Facility B of AU$76.4 million ($70.8 million). With this repayment, the Company fully repaid the AU$301 million ($276.5 million) it borrowed in March 2008 pursuant to the Cumberland term facility agreements, which partially funded the acquisition of its Australian subsidiaries.
 
The Unionamerica facilities are described in Note 10 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
 
9.   EMPLOYEE BENEFITS
 
The Company’s share-based compensation plans provide for the grant of various awards to the Company’s employees and to members of the board of directors. These are described in Note 13 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The information below includes both the employee and director components of the Company’s share-based compensation.


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
9.   EMPLOYEE BENEFITS — (cont’d)
 
(a)   Employee share plans
 
Employee stock awards for the nine months ended September 30, 2010 are summarized as follows:
 
                 
          Weighted
 
          Average Fair
 
    Number of
    Value of
 
    Shares     the Award  
 
Nonvested — January 1, 2010
    1,636     $ 102  
Granted
    237,238       16,128  
Vested
    (84,944 )     (5,743 )
                 
Nonvested — September 30, 2010
    153,930     $ 11,175  
                 
 
(i) 2006-2010 Annual Incentive Plan and 2006 Equity Incentive Plan
 
For the nine months ended September 30, 2010 and 2009, 78,664 and 64,378 shares were awarded to directors, officers and employees under the 2006 Equity Incentive Plan. The total value of the awards for the nine months ended September 30, 2010 and 2009 was $5.4 million and $3.3 million, respectively, and was charged against the 2006-2010 Annual Incentive Plan accrual established for the years ended December 31, 2009 and 2008, respectively.
 
In addition, for the nine months ended September 30, 2010, 153,930 restricted shares were awarded to certain employees under the 2006 Equity Incentive Plan. The total unrecognized compensation cost related to the non-vested share award as at September 30, 2010 was $9.4 million. These costs are expected to be recognized evenly over the next 5.2 years. Compensation costs of $0.4 million and $1.1 million relating to the share award were recognized in the Company’s statement of earnings for the three and nine months ended September 30, 2010, respectively.
 
The accrued expense relating to the 2006-2010 Annual Incentive Plan for the three and nine months ended September 30, 2010 was $3.8 million and $8.8 million, respectively, as compared to $6.2 million and $9.8 million for the three and nine months ended September 30, 2009, respectively.
 
(ii) Enstar Group Limited Employee Share Purchase Plan
 
Compensation costs of less than $0.1 million relating to the shares issued have been recognized in the Company’s statement of earnings for each of the three and nine months ended September 30, 2010 and 2009. As at September 30, 2010, 12,932 shares have been issued to employees under the Enstar Group Limited Employee Share Purchase Plan.
 
(b)   Options
 
                         
          Weighted
       
          Average
    Intrinsic
 
    Number of
    Exercise
    Value of
 
    Shares     Price     Shares  
 
Outstanding — January 1, 2010
    327,586     $ 29.49     $ 14,261  
Granted
                 
Exercised
    (106,920 )     28.29       (3,741 )
Forfeited
                 
                         
Outstanding — September 30, 2010
    220,666     $ 30.07     $ 9,385  
                         


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
9.   EMPLOYEE BENEFITS — (cont’d)
 
Stock options outstanding and exercisable as of September 30, 2010 were as follows:
 
                         
Ranges of
          Weighted Average
Exercise
  Number of
  Weighted Average
  Remaining
Prices
  Options   Exercise Price   Contractual Life
 
$10 — $20
    112,785     $ 19.03       0.8 years  
$40 — $60
    107,881       41.61       3.0 years  
 
(c)   Deferred Compensation and Stock Plan for Non-Employee Directors
 
For the nine months ended September 30, 2010 and 2009, 4,847 and 5,292 restricted share units, respectively, were credited to the accounts of non-employee directors under the Company’s Deferred Compensation and Ordinary Share Plan for Non-Employee Directors.
 
10.   EARNINGS PER SHARE
 
The following table sets forth the comparison of basic and diluted earnings per share of amounts attributable to the Company’s ordinary shareholders for the three and nine month periods ended September 30, 2010 and 2009.
 
                                 
    Three Months Ended
    Three Months Ended
    Nine Months Ended
    Nine Months Ended
 
    September 30, 2010     September 30, 2009     September 30, 2010     September 30, 2009  
 
Basic earnings per share:
                               
Net earnings attributable to Enstar Group Limited
  $ 21,443     $ 34,987     $ 49,794     $ 55,269  
Weighted average shares outstanding — basic
    13,704,832       13,578,555       13,676,113       13,492,044  
                                 
Earnings per share attributable to Enstar Group Limited — basic
  $ 1.56     $ 2.58     $ 3.64     $ 4.10  
                                 
Diluted earnings per share:
                               
Net earnings attributable to Enstar Group Limited
  $ 21,443     $ 34,987     $ 49,794     $ 55,269  
Weighted average shares outstanding — basic
    13,704,832       13,578,555       13,676,113       13,492,044  
Share equivalents:
                               
Unvested Shares
    155,616       1,636       116,214       5,896  
Restricted share units
    17,406       11,070       15,965       8,193  
Options
    141,914       223,390       148,656       223,254  
                                 
Weighted average shares outstanding — diluted
    14,019,768       13,814,651       13,956,948       13,729,387  
                                 
Earnings per share attributable to Enstar Group Limited — diluted
  $ 1.53     $ 2.53     $ 3.57     $ 4.03  
                                 
 
11.   RELATED PARTY TRANSACTIONS
 
The Company has entered into certain transactions with companies and partnerships that are affiliated with J. Christopher Flowers and John J. Oros, as set forth below. Mr. Flowers is a member of the Company’s board of


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
11.   RELATED PARTY TRANSACTIONS — (cont’d)
 
directors and is one of the Company’s largest shareholders. Mr. Oros served as an executive officer and member of the Company’s board of directors until his resignation on August 20, 2010.
 
  (i)  In March 2010, the Company committed to invest $20.0 million in Varadero International Ltd. (“Varadero”), a hedge fund. The investment manager of Varadero is Varadero Capital, L.P., of which Varadero GP, LLC is the general partner. Both the investment manager and general partner are partially owned by an entity affiliated with the Company and Messrs. Flowers and Oros.
 
  (ii)  During the nine months ended September 30, 2010, and excluding Varadero, the Company funded $0.3 million of its remaining outstanding capital commitment to entities affiliated with Messrs. Flowers and Oros. The Company had, as of September 30, 2010 and December 31, 2009, investments in entities affiliated with Messrs. Flowers and Oros (excluding Varadero) with a total value of $78.5 million and $76.1 million, respectively, and outstanding commitments to entities affiliated with Mr. Flowers (excluding Varadero), as of those same dates, of $97.8 million and $98.1 million, respectively. The Company’s outstanding commitments may be drawn down over approximately the next four years.
 
As at September 30, 2010, the related party investments associated with Messrs. Flowers and Oros accounted for 99.9% of the total unfunded capital commitments of the Company and 49.5% of the total amount of investments classified as other investments by the Company.
 
On October 1, 2010, the Company entered into share repurchase agreements (the “Repurchase Agreements”) with three of its executives and certain trusts and a corporation affiliated with the executives to repurchase an aggregate of 800,000 ordinary shares of the Company at a price of $70.00 per share. The repurchase transactions consisted of repurchases of an aggregate of 600,000 ordinary shares from Dominic F. Silvester (the Company’s Chief Executive Officer and Chairman of the Board of Directors) and a trust of which he and his immediate family are the sole beneficiaries, 100,000 ordinary shares from a trust of which Paul J. O’Shea (the Company’s Joint Chief Operating Officer, Executive Vice President and a member of its Board of Directors) and his immediate family are the sole beneficiaries and 100,000 ordinary shares from a corporation owned by a trust of which Nicholas A. Packer (the Company’s Joint Chief Operating Officer and Executive Vice President) and his immediate family are the sole beneficiaries. The repurchase transactions closed on October 14, 2010. The aggregate purchase price of $56.0 million is payable by the Company through promissory notes to the selling shareholders. The annual interest rate for the notes is fixed at 3.5%, and the notes are repayable in three equal installments on December 31, 2010, December 1, 2011 and December 1, 2012. In connection with the Repurchase Agreements, the Company entered into lock-up agreements with each of Messrs. Silvester, O’Shea and Packer, and their respective family trusts and corporation. The lock-up agreements prohibit future sales and transfers of shares now owned or subsequently acquired for two years from the date of the Repurchase Agreements.
 
12.   TAXATION
 
Under current Bermuda law, the Company and its Bermuda-based subsidiaries are not required to pay any taxes in Bermuda on their income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company and its Bermuda-based subsidiaries will be exempt from taxation in Bermuda until March 2016.
 
The Company has operating subsidiaries and branch operations in the United Kingdom, Australia, the United States and Europe and is subject to the relevant taxes in those jurisdictions. The weighted average expected tax provision for the foreign operations has been calculated using pre-tax accounting income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
12.   TAXATION — (cont’d)
 
The actual income tax rate for the three and nine months ended September 30, 2010 and 2009, differed from the amount computed by applying the effective rate of 0% under the Bermuda law to earnings before income taxes as a result of the following:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
 
Earnings before income tax
  $ 22,422     $ 37,647     $ 72,810     $ 57,288  
                                 
Expected tax rate
    0  %     0  %     0  %     0  %
Foreign taxes at local expected rates
    12.4  %     54.8  %     40.6  %     50.4  %
Benefit of loss carryovers
    (4.3 )%           (5.4 )%      
Change in uncertain tax positions
          (0.8 )%     0.2  %     (0.8 )%
Valuation allowance
    (3.5 )%     (40.9 )%     (3.9 )%     (40.1 )%
Other
    (0.2 )%     (6.0 )%     0.1  %     (6.0 )%
                                 
Effective tax rate
    4.4  %     7.1  %     31.6  %     3.5  %
                                 
 
The Company had net deferred tax assets of approximately $26.6 million and $31.2 million as of September 30, 2010 and December 31, 2009, respectively. Deferred income taxes arise from the recognition of temporary differences between income determined for financial reporting purposes and income tax purposes. The temporary differences that give rise to significant portions of the Company’s deferred tax assets are net operating loss carryforwards, claims reserves, principally due to the discounting for tax, and the allowance for doubtful accounts receivable. The Company evaluates its deferred income taxes quarterly to determine if valuation allowances are required. Based on consideration of all available evidence using a “more likely than not” standard, the Company determined that certain of the valuation allowances that had previously been established were no longer required. This resulted in a reduction of the valuation allowance in the nine month period ended September 30, 2010 of approximately $2.8 million.
 
The Company adopted the authoritative guidance related to the financial statement recognition, measurement and disclosure of uncertain tax positions in a company’s financial statements on January 1, 2007. The Company has unrecognized tax benefits relating to uncertain tax positions of approximately $5.6 million and $5.7 million as of September 30, 2010, and December 31, 2009, respectively.
 
The Company’s operating subsidiaries that are in specific countries may be subject to audit by various tax authorities and may be subject to different statutes of limitations expiration dates. With limited exceptions, the Company’s major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to audits for years before 2005, 2007, and 2003, respectively.
 
13.   SEGMENT INFORMATION
 
The determination of reportable segments is based on how senior management monitors the Company’s operations. The Company measures the results of its operations under two major business categories: reinsurance and consulting.
 
The Company’s 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, as well as to the Company’s reinsurance segment, in return for management fees. The Company provides consulting and management services through its subsidiaries located in the United States, Bermuda and Europe to large multinational company clients with insurance and reinsurance companies and


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
13.   SEGMENT INFORMATION — (cont’d)
 
portfolios in run-off relating to risks spanning the globe. As a result, extracting and quantifying revenues attributable to certain geographic locations would be impracticable given the global nature of the business.
 
All of the consulting fees for the reinsurance segment relate to intercompany fees paid to the consulting segment.
 
                         
    Three Months Ended September 30, 2010  
    Reinsurance     Consulting     Total  
 
Consulting fees
  $ (10,831 )   $ 12,950     $ 2,119  
Net investment income
    21,012       (847 )     20,165  
Net realized gains
    10,635             10,635  
                         
      20,816       12,103       32,919  
                         
Net reduction in ultimate loss and loss adjustment expense liabilities:
                       
Reduction in estimates of net ultimate losses
    (20,890 )           (20,890 )
Reduction in provisions for bad debt
    (1,304 )           (1,304 )
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    (10,171 )           (10,171 )
Amortization of fair value adjustments
    6,250             6,250  
                         
      (26,115 )           (26,115 )
Salaries and benefits
    5,378       12,634       18,012  
General and administrative expenses
    7,578       5,607       13,185  
Interest expense
    2,961             2,961  
Net foreign exchange gain
    (356 )     (230 )     (586 )
                         
      (10,554 )     18,011       7,457  
                         
Earnings (loss) before income taxes and share of net earnings of partly owned company
    31,370       (5,908 )     25,462  
Income taxes
    (2,806 )     1,827       (979 )
Share of net earnings of partly owned company
    1,351             1,351  
                         
Net earnings (loss)
    29,915       (4,081 )     25,834  
Less: Net earnings attributable to noncontrolling interest
    (4,391 )           (4,391 )
                         
Net earnings (loss) attributable to Enstar Group Limited
  $ 25,524     $ (4,081 )   $ 21,443  
                         
 


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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
13.   SEGMENT INFORMATION — (cont’d)
 
                         
    Three Months Ended September 30, 2009  
    Reinsurance     Consulting     Total  
 
Consulting fees
  $ (8,099 )   $ 12,211     $ 4,112  
Net investment income
    22,927       1,713       24,640  
Net realized gains
    2,912             2,912  
                         
      17,740       13,924       31,664  
                         
Net reduction in ultimate loss and loss adjustment expense liabilities:
                       
Reduction in estimates of net ultimate losses
    (44,736 )           (44,736 )
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    (9,830 )           (9,830 )
Amortization of fair value adjustments
    12,008             12,008  
                         
      (42,558 )           (42,558 )
Salaries and benefits
    7,577       9,420       16,997  
General and administrative expenses
    7,795       4,400       12,195  
Interest expense
    4,262             4,262  
Net foreign exchange (gain) loss
    (7,253 )     89       (7,164 )
                         
      (30,177 )     13,909       (16,268 )
                         
Earnings before income taxes and share of net earnings of partly owned company
    47,917       15       47,932  
Income taxes
    (1,449 )     (1,211 )     (2,660 )
Share of net earnings of partly owned company
    196             196  
                         
Net earnings (loss)
    46,664       (1,196 )     45,468  
Less: Net earnings attributable to noncontrolling interest
    (10,481 )           (10,481 )
                         
Net earnings (loss) attributable to Enstar Group Limited
  $ 36,183     $ (1,196 )   $ 34,987  
                         
 

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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
13.   SEGMENT INFORMATION — (cont’d)
 
                         
    Nine Months Ended September 30, 2010  
    Reinsurance     Consulting     Total  
 
Consulting fees
  $ (42,423 )   $ 62,170     $ 19,747  
Net investment income
    70,138       (854 )     69,284  
Net realized gains
    8,610             8,610  
                         
      36,325       61,316       97,641  
                         
Net reduction in ultimate loss and loss adjustment expense liabilities:
                       
Reduction in estimates of net ultimate losses
    (57,936 )           (57,936 )
Reduction in provisions for bad debt
    (14,411 )           (14,411 )
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    (30,832 )           (30,832 )
Amortization of fair value adjustments
    25,102             25,102  
                         
      (78,077 )           (78,077 )
Salaries and benefits
    11,513       35,943       47,456  
General and administrative expenses
    24,103       15,370       39,473  
Interest expense
    8,160             8,160  
Net foreign exchange loss
    965       422       1,387  
                         
      (33,336 )     51,735       18,399  
                         
Earnings before income taxes and share of net earnings of partly owned company
    69,661       9,581       79,242  
Income taxes
    (21,389 )     (1,627 )     (23,016 )
Share of net earnings of partly owned company
    10,704             10,704  
                         
Net earnings
    58,976       7,954       66,930  
Less: Net earnings attributable to noncontrolling interest
    (17,136 )           (17,136 )
                         
Net earnings attributable to Enstar Group Limited
  $ 41,840     $ 7,954     $ 49,794  
                         
 

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ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
13.   SEGMENT INFORMATION — (cont’d)
 
                         
    Nine Months Ended September 30, 2009  
    Reinsurance     Consulting     Total  
 
Consulting fees
  $ (24,343 )   $ 35,970     $ 11,627  
Net investment income
    57,617       2,825       60,442  
Net realized gains
    1,982             1,982  
                         
      35,256       38,795       74,051  
                         
Net reduction in ultimate loss and loss adjustment expense liabilities:
                       
Reduction in estimates of net ultimate losses
    (92,302 )           (92,302 )
Reduction in provisions for bad debt
    (9,714 )           (9,714 )
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    (29,370 )           (29,370 )
Amortization of fair value adjustments
    44,756             44,756  
                         
      (86,630 )           (86,630 )
Salaries and benefits
    14,004       27,324       41,328  
General and administrative expenses
    22,578       12,909       35,487  
Interest expense
    13,902             13,902  
Net foreign exchange gain
    (6,892 )     (285 )     (7,177 )
                         
      (43,038 )     39,948       (3,090 )
                         
Earnings (loss) before income taxes and share of net earnings of partly owned company
    78,294       (1,153 )     77,141  
Income taxes
    399       (2,418 )     (2,019 )
Share of net earnings of partly owned company
    465             465  
                         
Net earnings (loss)
    79,158       (3,571 )     75,587  
Less: Net earnings attributable to noncontrolling interest
    (20,318 )           (20,318 )
                         
Net earnings (loss) attributable to Enstar Group Limited
  $ 58,840     $ (3,571 )   $ 55,269  
                         

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders
of Enstar Group Limited
 
We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries (the “Company”) as of September 30, 2010, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended September 30, 2010 and 2009 and changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2009 and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended; and in our report dated March 3, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/ Deloitte & Touche
 
Hamilton, Bermuda
November 5, 2010


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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following is a discussion and analysis of our results of operations for the three and nine months ended September 30, 2010 and 2009. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
 
Business Overview
 
Enstar Group Limited, or Enstar, was formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry.
 
Since our formation, we have acquired a number of insurance and reinsurance companies and several portfolios of insurance and reinsurance business and are now administering those businesses in run-off. We derive our net earnings from the ownership and management of these companies and portfolios of business in run-off 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.
 
Recent Transactions
 
Brampton
 
On November 2, 2010, we acquired the 49.9% of the shares of Hillcot Holdings Ltd., or Hillcot, from Shinsei Bank, Ltd., or Shinsei, that we did not previously own for a purchase price of $38.0 million, resulting in us owning 100% of Hillcot. At the time of acquisition, Hillcot owned 100% of the shares of Brampton Insurance Company Limited, a U.K.-domiciled reinsurer that is in run-off. 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.
 
Share Repurchases
 
On October 1, 2010, we entered into share repurchase agreements with three of our executives and certain trusts and a corporation affiliated with the executives to repurchase an aggregate of 800,000 of our ordinary shares at a price of $70.00 per share. The repurchase transactions consisted of repurchases of an aggregate of 600,000 ordinary shares from Dominic F. Silvester (our Chief Executive Officer and Chairman of the Board of Directors) and a trust of which he and his immediate family are the sole beneficiaries, 100,000 ordinary shares from a trust of which Paul J. O’Shea (our Joint Chief Operating Officer, Executive Vice President and a member of our Board of Directors) and his immediate family are the sole beneficiaries and 100,000 ordinary shares from a corporation owned by a trust of which Nicholas A. Packer (our Joint Chief Operating Officer and Executive Vice President) and his immediate family are the sole beneficiaries. The repurchase transactions closed on October 14, 2010. The aggregate purchase price of $56.0 million is payable by us through promissory notes to the selling shareholders. The annual interest rate for the notes is fixed at 3.5%, and the notes are repayable in three equal installments on December 31, 2010, December 1, 2011 and December 1, 2012. In connection with the share repurchase agreements, we entered into lock-up agreements with each of Messrs. Silvester, O’Shea and Packer, and their respective family trusts and corporation. The lock-up agreements prohibit future sales and transfers of shares now owned or subsequently acquired for two years from the date of the share repurchase agreements.
 
New Castle
 
On September 22, 2010, we, through our wholly-owned subsidiary Kenmare Holdings Ltd., entered into a definitive agreement for the acquisition of New Castle Reinsurance Company Ltd., or New Castle, for an aggregate purchase price of $24.0 million, subject to potential purchase price adjustments at closing. The purchase price is


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expected to be funded from available cash on hand. New Castle is a Bermuda-domiciled insurer that is in run-off. Completion of the transactions is conditioned on, among other things, regulatory approval and satisfaction of various customary closing conditions. The transaction is expected to close in the fourth quarter of 2010.
 
Claremont
 
On September 7, 2010, we, through our wholly-owned subsidiary CLIC Holdings, Inc., entered into a definitive agreement for the acquisition of Claremont Liability Insurance Company, or Claremont, for an aggregate purchase price of $13.5 million and an additional amount based on a purchase price adjustment to be calculated at closing. The purchase price is expected to be funded from available cash on hand. Claremont is a California-domiciled insurer that is in run-off. Completion of the transactions is conditioned on, among other things, regulatory approval and satisfaction of various customary closing conditions. The transaction is expected to close in the fourth quarter of 2010.
 
Providence Washington
 
On July 20, 2010, we, through our wholly-owned subsidiary PWAC Holdings, Inc., completed the acquisition of PW Acquisition Company, or PWAC, for a purchase price of $25.0 million. PWAC owns the entire share capital of Providence Washington Insurance Company. Providence Washington Insurance Company and its two subsidiaries are Rhode Island-domiciled insurers that are in run-off. The purchase price was financed by a term facility provided by a London-based bank, which was fully repaid during the three months ended September 30, 2010.
 
Sale of Interest in Stonewall and Acquisition of Seaton
 
On June 13, 2008, our indirect subsidiary Virginia Holdings Ltd., or Virginia, completed the acquisition from Dukes Place Holdings, L.P. (a portfolio company of GSC European Mezzanine Fund II, L.P.) of 44.4% of the outstanding capital stock of Stonewall Acquisition Corporation, or SAC, the parent of two Rhode Island-domiciled insurers in run-off, Stonewall Insurance Company and Seaton Insurance Company, or Seaton. The total purchase price, including acquisition costs, was $21.4 million and was funded from available cash on hand. SAC entered into a definitive agreement on December 3, 2009 for the sale of its shares in Stonewall Insurance Company to Columbia Insurance Company, an affiliate of National Indemnity Company (an indirect subsidiary of Berkshire Hathaway, Inc.), for a sale price of $56.0 million, subject to certain post-closing purchase price adjustments that brought the total consideration received to $60.4 million. The transaction received the required regulatory approval on March 31, 2010 and subsequently closed on April 7, 2010. The proceeds received by SAC and certain other assets were distributed between Dukes Place Holdings, L.P. and Virginia. The proceeds received by Virginia included the shares of Seaton distributed on August 3, 2010, resulting in Virginia owning 100% of Seaton following the distribution (prior to the distribution, Virginia had indirectly owned 44.4% of Seaton through its holdings in SAC).
 
Knapton Insurance (formerly British Engine)
 
On March 2, 2010, we, through our wholly-owned subsidiary, Knapton Holdings Limited, or Knapton Holdings, completed the acquisition of Knapton Insurance Limited, formerly British Engine Insurance Limited, or Knapton, from RSA Insurance Group plc for a total purchase price of £28.8 million (approximately $44.0 million). Knapton is a U.K.-domiciled reinsurer that is in run-off. The acquisition was funded from available cash on hand.
 
In April 2010, Knapton Holdings entered into a term facility agreement with a London-based bank, or the Knapton Facility. On April 20, 2010, Knapton Holdings drew down $21.4 million from the Knapton Facility.
 
Assuransinvest
 
On March 30, 2010, we, through our wholly-owned subsidiary Nordic Run-Off Limited, completed the acquisition of Forsakringsaktiebolaget Assuransinvest MF, or Assuransinvest, for a purchase price of SEK 78.8 million (approximately $11.0 million). Assuransinvest is a Swedish-domiciled reinsurer that is in run-off. The acquisition was funded from available cash on hand.


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Significant New Business
 
Fitzwilliam
 
In February 2010, we, through our wholly-owned subsidiary, Fitzwilliam Insurance Limited, or Fitzwilliam, entered into a 100% quota share reinsurance agreement with Allianz Global Corporate & Specialty AG (UK) Branch, or Allianz, with respect to a specific portfolio of run-off business of Allianz. Fitzwilliam received total assets and assumed total gross reinsurance reserves of approximately $112.6 million.
 
In July 2010, following the acquisition of the entire issued share capital of Glacier Insurance AG by Torus Insurance (Bermuda) Limited, or Torus, Fitzwilliam entered into two quota share reinsurance agreements with Torus protecting the prior year reserve development of two portfolios of business reinsured by them: a 79% quota share of Torus’ 95% quota share reinsurance of Glacier Insurance AG, and a 75% quota share of Torus’ 100% quota share reinsurance of Glacier Reinsurance AG. Fitzwilliam received total assets and assumed total gross reinsurance reserves of approximately $105.0 million.
 
Bosworth
 
In May 2010, a specific portfolio of business in run-off underwritten by Mitsui Sumitomo Insurance Co., Ltd. of Japan, or Mitsui, was transferred to our 50.1% owned subsidiary, Bosworth Run-off Limited, or Bosworth. This transfer, which occurred under Part VII of the U.K. Financial Services and Markets Act 2000, was approved by the U.K. Court and took effect on May 31, 2010. As a result of the transfer, Bosworth received total assets and assumed net reinsurance reserves of approximately $117.5 million. Shinsei owns the remaining 49.9% of Bosworth.
 
Shelbourne RITC Transactions
 
In December 2007, we, in conjunction with JCF FPK I L.P., or JCF FPK, and a newly-hired executive management team, formed U.K.-based Shelbourne Group Limited, or Shelbourne, to invest in Reinsurance to Close or “RITC” transactions (the transferring of liabilities from one Lloyd’s Syndicate to another) with Lloyd’s of London insurance and reinsurance syndicates in run-off. We own approximately 56.8% of Shelbourne, which in turn owns 100% of Shelbourne Syndicate Services Limited, the Managing Agency for Lloyd’s Syndicate 2008, a syndicate approved by Lloyd’s of London on December 16, 2007 to undertake RITC transactions with Lloyd’s syndicates in run-off.
 
In February 2010, Lloyd’s Syndicate 2008 entered into RITC agreements with two Lloyd’s syndicates with total gross insurance reserves of approximately $170.3 million. The capital commitment to Lloyd’s Syndicate 2008 with respect to these two RITC agreements amounted to £25.0 million (approximately $37.5 million), which was fully funded from available cash on hand.
 
JCF FPK is a joint investment program between J.C. Flowers II L.P., or the Flowers Fund, and Fox-Pitt Kelton Cochran Caronia & Waller (USA) LLC, or FPK. 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 Chairman and Chief Executive Officer of J.C. Flowers & Co. LLC. John J. Oros, who served as our Executive Chairman and a member of our board of directors until August 20, 2010, is a Managing Director of J.C. Flowers & Co. LLC. In addition, an affiliate of the Flowers Fund controlled approximately 41% of FPK until its sale of FPK in December 2009.


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Results of Operations
 
The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30,     September 30,  
    2010     2009     2010     2009  
    (in thousands of U.S. dollars)  
 
INCOME
                               
Consulting fees
  $ 2,119     $ 4,112     $ 19,747     $ 11,627  
Net investment income
    20,165       24,640       69,284       60,442  
Net realized gains
    10,635       2,912       8,610       1,982  
                                 
      32,919       31,664       97,641       74,051  
                                 
EXPENSES
                               
Net reduction in ultimate loss and loss adjustment expense liabilities:
                               
Reduction in estimates of net ultimate losses
    (20,890 )     (44,736 )     (57,936 )     (92,302 )
Reduction in provisions for bad debt
    (1,304 )           (14,411 )     (9,714 )
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    (10,171 )     (9,830 )     (30,832 )     (29,370 )
Amortization of fair value adjustments
    6,250       12,008       25,102       44,756  
                                 
      (26,115 )     (42,558 )     (78,077 )     (86,630 )
Salaries and benefits
    18,012       16,997       47,456       41,328  
General and administrative expenses
    13,185       12,195       39,473       35,487  
Interest expense
    2,961       4,262       8,160       13,902  
Net foreign exchange (gain) loss
    (586 )     (7,164 )     1,387       (7,177 )
                                 
      7,457       (16,268 )     18,399       (3,090 )
                                 
Earnings before income taxes and share of net earnings of partly owned company
    25,462       47,932       79,242       77,141  
Income taxes
    (979 )     (2,660 )     (23,016 )     (2,019 )
Share of net earnings of partly owned company
    1,351       196       10,704       465  
                                 
NET EARNINGS
    25,834       45,468       66,930       75,587  
Less: Net earnings attributable to noncontrolling interest
    (4,391 )     (10,481 )     (17,136 )     (20,318 )
                                 
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
  $ 21,443     $ 34,987     $ 49,794     $ 55,269  
                                 
 
Comparison of the Three Months Ended September 30, 2010 and 2009
 
We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $25.8 million and $45.5 million for the three months ended September 30, 2010 and 2009, respectively. The decrease in earnings of approximately $19.7 million was primarily attributable to the following:
 
  (i)  a decrease in the net reduction in ultimate loss and loss adjustment expense liabilities of $16.4 million; and
 
  (ii)  a decrease in net foreign exchange gains of $6.6 million; partially offset by
 
  (iii)  an increase of $1.2 million in income earned from our investment in our partly owned company; and
 
  (iv)  a decrease in income tax expense of $1.7 million.
 
We recorded noncontrolling interest in earnings of $4.4 million and $10.5 million for the three months ended September 30, 2010 and 2009, respectively. Net earnings attributable to Enstar Group Limited decreased from


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$35.0 million for the three months ended September 30, 2009 to $21.4 million for the three months ended September 30, 2010.
 
Consulting Fees:
 
                         
    Three Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 12,950     $ 12,211     $ 739  
Reinsurance
    (10,831 )     (8,099 )     (2,732 )
                         
Total
  $ 2,119     $ 4,112     $ (1,993 )
                         
 
We earned consulting fees of approximately $13.0 million and $12.2 million for the three months ended September 30, 2010 and 2009, respectively. After elimination of consulting fees received from our reinsurance segment, our income from third party fees decreased by $2.0 million. The decrease was attributable to reduced third party engagements during the period.
 
Internal management fees of $10.8 million and $8.1 million were paid for the three months ended September 30, 2010 and 2009, respectively, by our reinsurance companies to our consulting companies. The increase in internal fees paid to the consulting segment was due primarily to fees earned from new acquisitions that were completed subsequent to September 30, 2009.
 
Net Investment Income and Net Realized Gains:
 
                                                 
    Three Months Ended September 30,  
    Net Investment Income     Net Realized Gains  
    2010     2009     Variance     2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ (847 )   $ 1,713     $ (2,560 )   $     $     $  
Reinsurance
    21,012       22,927       (1,915 )     10,635       2,912       7,723  
                                                 
Total
  $ 20,165     $ 24,640     $ (4,475 )   $ 10,635     $ 2,912     $ 7,723  
                                                 
 
Net investment income for the three months ended September 30, 2010 decreased by $4.5 million to $20.2 million, as compared to $24.6 million for the same period in 2009. The decrease was primarily attributable to the following:
 
  (i)  a decrease of $1.4 million in the fair value of our private equity investments for the three months ended September 30, 2010 compared to an increase of $3.8 million for the three months ended September 30, 2009; partially offset by
 
  (ii)  an increase in investment income from fixed maturities and cash and cash equivalents due primarily to an overall increase in the amount of investments held as at September 30, 2010 as compared to September 30, 2009 with a corresponding increased return as compared to the return available on cash and cash equivalents.
 
The average yield on our total cash and investments for the three months ended September 30, 2010 was 2.32%, as compared to the average yield of 2.35% for the three months ended September 30, 2009. The average Standard & Poor’s credit rating of our fixed income investments at September 30, 2010 was AA−.
 
Net realized gains for the three months ended September 30, 2010 and 2009 were $10.6 million and $2.9 million, respectively. The net realized gains relate primarily to mark-to-market changes in the market value of our equity investments.


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Fair Value Measurements
 
In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification, we have categorized our investments that are recorded at fair value among levels as follows:
 
                                 
    September 30, 2010  
    (in thousands of U.S. dollars)  
    Quoted Prices in
                   
    Active Markets
    Significant Other
    Significant
       
    for Identical Assets
    Observable Inputs
    Unobservable Inputs
    Total Fair
 
    (Level 1)     (Level 2)     (Level 3)     Value  
 
U.S. government and agency
  $     $ 232,375     $     $ 232,375  
Non-U.S. government
          420,494             420,494  
Corporate
          1,524,987       504       1,525,491  
Municipal
          1,606             1,606  
Residential mortgage-backed
          85,528             85,528  
Commercial mortgage- backed
          29,582       872       30,454  
Asset backed
          29,454             29,454  
Equities
    53,105       15,033       3,475       71,613  
Other investments
          86,829       113,871       200,700  
                                 
Total investments
  $ 53,105     $ 2,425,888     $ 118,722     $ 2,597,715  
                                 
 
Net Reduction in Ultimate Loss and Loss Adjustment Expense Liabilities:
 
The following table shows the components of the movement in the net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended September 30, 2010 and 2009:
 
                 
    Three Months Ended September 30,  
    2010     2009  
    (in thousands of U.S. dollars)  
 
Net losses paid
  $ (80,501 )   $ (50,756 )
Net change in case and LAE reserves
    101,542       91,540  
Net change in IBNR reserves
    (151 )     3,952  
                 
Reduction in estimates of net ultimate losses
    20,890       44,736  
Reduction in provisions for bad debt
    1,304        
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    10,171       9,830  
Amortization of fair value adjustments
    (6,250 )     (12,008 )
                 
Net reduction in ultimate loss and loss adjustment expense liabilities
  $ 26,115     $ 42,558  
                 
 
Net change in case and loss adjustment expense reserves, or LAE reserves, comprises the movement during the quarter 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 change in incurred but not reported reserves, or IBNR reserves, represents the change in our actuarial estimates of losses incurred but not reported.
 
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended September 30, 2010 of $26.1 million was attributable to a reduction in estimates of net ultimate losses of $20.9 million, a reduction in provisions for bad debt of $1.3 million and a reduction in provisions for unallocated loss and loss adjustment expense liabilities of $10.2 million, relating to 2010 run-off activity, partially offset by the


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amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $6.3 million.
 
The reduction in estimates of net ultimate losses of $20.9 million comprised net favorable incurred loss development of $21.1 million and a modest increase in IBNR reserves of $0.2 million, primarily related to the following:
 
  (i)  A reduction in estimates of net ultimate losses of $10.8 million in one of our insurance entities primarily following the commutations and policy buy-backs of five of its largest insurance and reinsurance exposures during the three months ended September 30, 2010.
 
  (ii)  We concluded our review of historic case reserves for two of our insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 1,750 advised case reserves with an aggregate value of $11.8 million.
 
The reduction in provisions for bad debt of $1.3 million resulted from the collection of receivables against which bad debt provisions had been provided in earlier periods.
 
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended September 30, 2009 of $42.6 million was attributable to a reduction in estimates of net ultimate losses of $44.7 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $9.8 million, relating to 2009 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments of $12.0 million relating to companies acquired.
 
The reduction in estimates of net ultimate losses of $44.7 million during the three months ended September 30, 2009 related to the following:
 
  (i)  A reduction in estimates of net ultimate losses of $23.8 million in two of our insurance entities whereby previously advised net case and LAE reserves of $18.6 million were settled without payment. The application of our reserving methodologies to the reduced case and LAE reserves resulted in a reduction in IBNR reserves of $5.2 million.
 
  (ii)  We concluded our review of historic case reserves for eight of our insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 4,000 advised case reserves with an aggregate value of $16.6 million.
 
  (iii)  A reduction in estimates of net ultimate losses of $5.4 million in another of our insurance entities that completed, during September 2009, a Solvent Scheme of Arrangement relating to its U.K. liabilities. A Solvent Scheme of Arrangement is an arrangement between a company and its creditors whereby the company, by making a one-time full and final settlement of its liabilities to policyholders, is able to achieve financial certainty and finality. The entity settled its remaining U.K. net case reserves of $1.5 million, net IBNR reserves of $3.1 million and net reinsurance reserves recoverable for the net receipt of $0.8 million.


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The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended September 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance reserves recoverable.
 
                 
    Three Months Ended September 30,  
    2010     2009  
    (in thousands of U.S. dollars)  
 
Balance as at July 1
  $ 2,894,353     $ 2,781,577  
Less: total reinsurance reserves recoverable
    421,864       375,431  
                 
      2,472,489       2,406,146  
Net reduction in ultimate loss and loss adjustment expense liabilities
    (26,115 )     (42,558 )
Net losses paid
    (80,501 )     (50,756 )
Effect of exchange rate movement
    80,839       15,867  
Retroactive reinsurance contracts assumed
    100,136        
Acquired on purchase of subsidiaries
    198,498        
                 
Net balance as at September 30
  $ 2,745,346     $ 2,328,699  
Plus: total reinsurance reserves recoverable
    488,353       357,253  
                 
Balance as at September 30
  $ 3,233,699     $ 2,685,952  
                 
 
Salaries and Benefits:
 
                         
    Three Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 12,634     $ 9,420     $ (3,214 )
Reinsurance
    5,378       7,577       2,199  
                         
Total
  $ 18,012     $ 16,997     $ (1,015 )
                         
 
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $18.0 million and $17.0 million for the three months ended September 30, 2010 and 2009, respectively.
 
The increase in salaries and benefits was primarily attributable to:
 
  (i)  increased staff costs due to an increase in average staff numbers from 287 for the three months ended September 30, 2009 to 322 for the three months ended September 30, 2010;
 
  (ii)  a payment of $1.25 million to our former Executive Chairman, John J. Oros, in accordance with the terms of his separation agreement; and
 
  (iii)  amortization of the unrecognized compensation costs of $0.5 million in respect of the restricted shares that were awarded to certain employees in 2010 under our 2006 Equity Incentive Plan; partially offset by
 
  (iv)  a decrease in the discretionary bonus expense for the three months ended September 30, 2010 of $2.4 million as a result of lower earnings.
 
Expenses relating to our discretionary bonus plan will be variable and dependent on our overall profitability.


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General and Administrative Expenses:
 
                         
    Three Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 5,607     $ 4,400     $ (1,207 )
Reinsurance
    7,578       7,795       217  
                         
Total
  $ 13,185     $ 12,195     $ (990 )
                         
 
General and administrative expenses attributable to the consulting segment increased by $1.2 million for the three months ended September 30, 2010. The increase related primarily to increased costs associated with companies acquired subsequent to September 30, 2009, and increased professional, legal and accounting fees associated with general corporate matters.
 
Interest Expense:
 
                         
    Three Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    2,961       4,262       1,301  
                         
Total
  $ 2,961     $ 4,262     $ 1,301  
                         
 
Interest expense of $3.0 million and $4.3 million was recorded for the three months ended September 30, 2010 and 2009, respectively. The decrease in interest expense was primarily attributable to the decrease in the principal remaining on outstanding bank borrowings as at September 30, 2010 compared to September 30, 2009, as well as lower interest rates. As at September 30, 2009, we had approximately $319.2 million of outstanding bank debt as compared to approximately $207.2 million as at September 30, 2010.
 
Foreign Exchange Gain/(Loss):
 
                         
    Three Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 230     $ (89 )   $ 319  
Reinsurance
    356       7,253       (6,897 )
                         
Total
  $ 586     $ 7,164     $ (6,578 )
                         
 
We recorded a foreign exchange gain of $0.6 million and $7.2 million for the three months ended September 30, 2010 and 2009, respectively.
 
For the three months ended September 30, 2009, the foreign exchange gain of $7.2 million arose primarily as a result of the matching of our non-U.S. dollar assets and liabilities at a time when the U.S. dollar had been depreciating against most major currencies, along with realized foreign exchange gains earned on the maturity of non-U.S. dollar available-for-sale securities. The gain was partially offset by foreign exchange losses arising as a result of the holding of surplus U.S. dollar assets in one of our subsidiaries whose functional currency is Australian dollars at a time when the Australian dollar had been depreciating against the U.S. dollar. Unrealized foreign exchange gains (losses) on our non-U.S. dollar available-for-sale securities as at September 30, 2010 and 2009 are recorded through accumulated other comprehensive income.
 
In addition to the foreign exchange gains recorded in our consolidated statement of earnings for the three months ended September 30, 2010, we recorded in our condensed consolidated statement of comprehensive income currency translation adjustment gains, net of noncontrolling interest, of $25.8 million as compared to $20.7 million for the same period in 2009. For the three months ended September 30, 2010 and 2009, the currency translation adjustments related primarily to an Australian subsidiary with Australian dollars as its functional currency. We are


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required to record any U.S. dollar gains or losses on the translation of the net Australian dollar assets through accumulated other comprehensive income.
 
Income Tax (Expense)/Recovery:
 
                         
    Three Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 1,827     $ (1,211 )   $ 3,038  
Reinsurance
    (2,806 )     (1,449 )     (1,357 )
                         
Total
  $ (979 )   $ (2,660 )   $ 1,681  
                         
 
We recorded income tax expense of $1.0 million and $2.7 million for the three months ended September 30, 2010 and 2009, respectively. The decrease in taxes in the consulting segment was attributable to our recording taxes recoverable for the three months ended September 30, 2010 of $1.8 million as compared to a tax expense of $1.2 million for the three months ended September 30, 2009. The tax recoverable for 2010 arose primarily as a result of a release of a valuation allowance of $1.2 million against an investment related loss. The increase in tax expense for the reinsurance segment was due primarily to an increase in earnings of some of our companies operating in tax paying jurisdictions.
 
Share of Net Earnings of Partly Owned Company:
 
                         
    Three Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    1,351       196       1,155  
                         
Total
  $ 1,351     $ 196     $ 1,155  
                         
 
For the three months ended September 30, 2010, we recorded $1.4 million for our share of net earnings of partly owned company as compared to $0.2 million for the three months ended September 30, 2009. The $1.4 million was our share of the final distribution by SAC of proceeds and certain other assets to our subsidiary, Virginia, following SAC’s sale of Stonewall Insurance Company, described above under “ — Recent Transactions — Sale of Interest in Stonewall and Acquisition of Seaton.”
 
Noncontrolling Interest:
 
                         
    Three Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $     $     $  
Reinsurance
    (4,391 )     (10,481 )     6,090  
                         
Total
  $ (4,391 )   $ (10,481 )   $ 6,090  
                         
 
We recorded noncontrolling interest in earnings of $4.4 million and $10.5 million for the three months ended September 30, 2010 and 2009, respectively. The costs associated with our noncontrolling interest are variable and wholly dependent on the results for the period of those subsidiaries for which there exists a noncontrolling interest.
 
Comparison of the Nine Months Ended September 30, 2010 and 2009
 
We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $66.9 million and $75.6 million for the nine months ended September 30, 2010 and 2009, respectively. The decrease in earnings of approximately $8.7 million was primarily attributable to the following:
 
  (i)  a decrease in the net reduction in ultimate loss and loss adjustment expense liabilities of $8.6 million;


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  (ii)  an increase in income taxes of $21.0 million due to higher tax liabilities recorded on the results of some of our taxable subsidiaries;
 
  (iii)  an increase in salaries and benefits costs of $6.1 million due to increased salary costs; and
 
  (iv)  an increase in net foreign exchange losses of $8.6 million from a gain of $7.2 million in 2009 to a loss of $1.4 million in 2010; partially offset by
 
  (v)  an increase in investment income including net realized gains of $15.5 million primarily as a result of: (a) an increase in 2010 in the fair value of our private equity portfolio classified as other investments of $7.9 million, compared to an increase in 2009 of $2.1 million; and (b) an increase in realized gains of $6.6 million;
 
  (vi)  an increase of $10.2 million in income earned from our investment in our partly owned company;
 
  (vii)  a reduction in interest expense of $5.7 million due primarily to an overall reduction in loan facility balances outstanding during the nine months ended September 30, 2010; and
 
  (viii)  an increase in consulting fee income of $8.1 million due to increased fees earned from incentive based engagements.
 
We recorded noncontrolling interest in earnings of $17.1 million and $20.3 million for the nine months ended September 30, 2010 and 2009, respectively. Net earnings attributable to Enstar Group Limited decreased from $55.3 million for the nine months ended September 30, 2009 to $49.8 million for the nine months ended September 30, 2010.
 
Consulting Fees:
 
                         
    Nine Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 62,170     $ 35,970     $ 26,200  
Reinsurance
    (42,423 )     (24,343 )     (18,080 )
                         
Total
  $ 19,747     $ 11,627     $ 8,120  
                         
 
We earned consulting fees of approximately $62.2 million and $36.0 million for the nine months ended September 30, 2010 and 2009, respectively. The increase in consulting fees related primarily to the combination of additional fees received from our reinsurance segment and increased incentive fees earned from third party agreements.
 
Internal management fees of $42.4 million and $24.3 million were paid for the nine months ended September 30, 2010 and 2009, respectively, by our reinsurance companies to our consulting companies. The increase in internal fees paid to the consulting segment was due primarily to additional fees paid by reinsurance companies relating to allocated charges for increases in salary and general and administrative expenses.
 
Net Investment Income and Net Realized Gains
 
                                                 
    Nine Months Ended September 30,  
    Net Investment Income           Net Realized Gains        
    2010     2009     Variance     2010     2009     Variance  
          (in thousands of U.S. dollars)  
 
Consulting
  $ (854 )   $ 2,825     $ (3,679 )   $     $     $  
Reinsurance
    70,138       57,617       12,521       8,610       1,982       6,628  
                                                 
Total
  $ 69,284     $ 60,442     $ 8,842     $ 8,610     $ 1,982     $ 6,628  
                                                 
 
Net investment income for the nine months ended September 30, 2010 increased by $8.9 million to $69.3 million, as compared to $60.4 million for the same period in 2009. The increase was primarily attributable to an increase in the fair value of our private equity investments of $5.8 million, from an increase of $2.1 million for


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the nine months ended September 30, 2009 to an increase of $7.9 million for the nine months ended September 30, 2010.
 
The average yield on our total cash and investments, excluding other investments, for the nine months ended September 30, 2010 was 1.98%, as compared to the average yield of 2.03% for the nine months ended September 30, 2009. The average Standard & Poor’s credit rating of our fixed income investments at September 30, 2010 was AA−.
 
Net realized gains for the nine months ended September 30, 2010 and 2009 were $8.6 million and $2.0 million, respectively. The net realized gains were a result of mark-to-market changes in the market value of our equity investments.
 
Net Reduction in Ultimate Loss and Loss Adjustment Expense Liabilities:
 
The following table shows the components of the movement in the net reduction in ultimate loss and loss adjustment expense liabilities for the nine months ended September 30, 2010 and 2009:
 
                 
    Nine Months Ended September 30,  
    2010     2009  
    (in thousands of U.S. dollars)  
 
Net losses paid
  $ (211,589 )   $ (130,577 )
Net change in case and LAE reserves
    234,114       133,742  
Net change in IBNR reserves
    35,411       89,137  
                 
Reduction in estimates of net ultimate losses
    57,936       92,302  
Reduction in provisions for bad debt
    14,411       9,714  
Reduction in provisions for unallocated loss and loss adjustment expense liabilities
    30,832       29,370  
Amortization of fair value adjustments
    (25,102 )     (44,756 )
                 
Net reduction in ultimate loss and loss adjustment expense liabilities
  $ 78,077     $ 86,630  
                 
 
The net reduction in ultimate loss and loss adjustment expense liabilities for the nine months ended September 30, 2010 of $78.1 million was attributable to a reduction in estimates of net ultimate losses of $57.9 million, a reduction in provisions for bad debt of $14.4 million and a reduction in provisions for unallocated loss and loss adjustment expense liabilities of $30.8 million, relating to 2010 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments relating to companies acquired amounting to $25.1 million.
 
The reduction in estimates of net ultimate losses of $57.9 million comprised net favorable incurred loss development of $22.5 million along with reductions in IBNR reserves of $35.4 million. The net favorable incurred loss development of $22.5 million, whereby net advised case and LAE reserves of $234.1 million were settled for net losses paid of $211.6 million, related to the settlement of non-commuted and commuted losses during the nine months ended September 30, 2010 including commutations and policy buy-backs of seven of the largest insured and/or reinsured exposures in three of our insurance and reinsurance subsidiaries. These commutations and policy buy-backs were primarily responsible for the reduction in IBNR reserves of $35.4 million following the application of our reserving methodologies in determining the IBNR reserves related to the commuted exposures. The settlement of advised case and LAE reserves of $234.1 million included the redundancy of approximately 1,750 advised case reserves with an aggregate value of $11.8 million which resulted from our review of historic case reserves for two of our insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years.
 
The reduction in provisions for bad debt of $14.4 million resulted from the collection of receivables against which bad debt provisions had been provided in earlier periods.
 
The net reduction in ultimate loss and loss adjustment expense liabilities for the nine months ended September 30, 2009 of $86.6 million was attributable to a reduction in estimates of net ultimate losses of $92.3 million, a reduction in provisions for bad debts of $9.7 million and a reduction in provisions for unallocated


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loss and loss adjustment expense liabilities of $29.4 million, relating to 2009 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments of $44.8 million relating to companies acquired.
 
The reduction in estimates of net ultimate losses of $92.3 million for the nine months ended September 30, 2009 related primarily to the following:
 
  (i)  A reduction in estimates of net ultimate losses in one of our subsidiaries of $25.2 million following the commutation of one of our largest ten assumed and ceded exposures at less than case and LAE reserves.
 
  (ii)  A reduction in estimates of net ultimate losses of $13.0 million in one of our subsidiaries as a result of net favorable incurred loss development of $2.6 million and reductions in IBNR reserves of $10.4 million. The net favorable incurred loss development of $2.6 million, whereby net advised case and LAE reserves of $6.6 million were settled for net paid losses of $4.0 million, arose from the settlement of losses during the period below carried reserves. The net reduction in the estimate of the subsidiary’s IBNR loss and loss adjustment expense liabilities of $10.4 million was the result of the application of our reserving methodologies to the reduced case and LAE reserves following the subsidiary’s semi-annual actuarial review of reserves, which are required by local regulation.
 
  (iii)  A reduction in estimates of net ultimate losses of $23.8 million in two of our insurance entities whereby previously advised net case and LAE reserves of $18.6 million were settled without payment. The application of our reserving methodologies to the reduced case and LAE reserves resulted in a reduction in net IBNR reserves of $5.2 million.
 
  (iv)  We concluded our review of historic case reserves for eight of our insurance and reinsurance subsidiaries for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 4,000 advised case reserves with an aggregate value of $16.6 million.
 
  (v)  A reduction in estimates of net ultimate losses of $14.1 million in another of our insurance entities that completed, during September 2009, a Solvent Scheme of Arrangement relating to its U.K. liabilities. During the nine months ended September 30, 2009, the entity settled its remaining U.K. net case and LAE reserves of $8.4 million, net IBNR reserves of $10.4 million and net reinsurance reserves recoverable for the net payment of $4.7 million.
 
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the nine months ended September 30, 2010 and 2009. Losses incurred and paid are reflected net of reinsurance reserves recoverable.
 
                 
    Nine Months Ended September 30,  
    2010     2009  
    (in thousands of U.S. dollars)  
 
Balance as at January 1
  $ 2,479,136     $ 2,798,287  
Less: total reinsurance reserves recoverable
    347,728       394,575  
                 
      2,131,408       2,403,712  
Net reduction in ultimate losses and loss adjustment expense liabilities
    (78,077 )     (86,630 )
Net losses paid
    (211,589 )     (130,577 )
Effect of exchange rate movement
    18,410       81,993  
Retroactive reinsurance contracts assumed
    464,654       48,818  
Acquired on purchase of subsidiaries
    420,540       11,383  
                 
Net balance as at September 30
  $ 2,745,346     $ 2,328,699  
Plus: total reinsurance reserves recoverable
    488,353       357,253  
                 
Balance as at September 30
  $ 3,233,699     $ 2,685,952  
                 


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Salaries and Benefits:
 
                         
    Nine Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 35,943     $ 27,324     $ (8,619 )
Reinsurance
    11,513       14,004       2,491  
                         
Total
  $ 47,456     $ 41,328     $ (6,128 )
                         
 
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $47.5 million and $41.3 million for the nine months ended September 30, 2010 and 2009, respectively.
 
The increase in salaries and benefits was primarily attributable to:
 
  (i)  increased staff costs due to an increase in average staff numbers from 287 for the nine months ended September 30, 2009 to 309 for the nine months ended September 30, 2010;
 
  (ii)  a payment of $1.25 million to our former Executive Chairman, John J. Oros, in accordance with the terms of his separation agreement; and
 
  (iii)  amortization of the unrecognized compensation costs of $1.1 million relating to the restricted shares that were awarded to certain employees in 2010 under the 2006 Equity Incentive Plan; partially offset by
 
  (iv)  a decrease in the discretionary bonus expense for the nine months ended September 30, 2010 of $1.0 million due to lower earnings.
 
Expenses relating to our discretionary bonus plan will be variable and are dependent on our overall profitability.
 
General and Administrative Expenses:
 
                         
    Nine Months Ended September 30,  
    2010     2009     Variance  
    (in thousands of U.S. dollars)  
 
Consulting
  $ 15,370     $ 12,909     $ (2,461 )
Reinsurance
    24,103       22,578       (1,525 )
                         
Total
  $ 39,473     $ 35,487     $ (3,986 )
                         
 
General and administrative expenses attributable to the reinsurance segment increased by $1.5 million during the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The increase of $1.5 million was primarily due to: (i) increased bank costs of $0.5 million primarily associated with the costs of establishing and maintaining our letters of credit along with structure fees paid in relation to the establishment of the Knapton Facility; and (ii) increased other general and administrative expenses of $1.7 million relating primarily to increased expenses associated with Shelbourne and Lloyd’s Syndicate 2008; partially offset by (iii) reduced rent expense of $0.7 million primarily relating to a reassessment of lease shortfall and dilapidation costs for office space we received upon the acquisition of Copenhagen Reinsurance Company Ltd.
 
General and administrative expenses attributable to the consulting segment increased by $2.5 million during the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009. The increase of $2.5 million was primarily due to: (i) increased professional fees of $1.5 million relating largely to ongoing litigation costs and (ii) increased rent expense of $0.4 million related to increased office space costs.


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Interest Expense: