e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
September 30,
2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period From
to
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001-33289
Commission File Number
ENSTAR GROUP LIMITED
(Exact name of registrant as
specified in its charter)
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Bermuda
(State or other
jurisdiction
of incorporation or organization)
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N/A
(I.R.S. Employer
Identification No.)
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P.O. Box HM
2267
Windsor Place,
3rd
Floor
18 Queen Street
Hamilton HM JX
Bermuda
(Address of principal executive
office, including zip code)
(441) 292-3645
(Registrants 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):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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.
PART I
FINANCIAL INFORMATION
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Item 1.
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FINANCIAL
STATEMENTS
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September 30,
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December 31,
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2010
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2009
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(expressed in thousands of U.S. dollars, except share
data)
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ASSETS
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Short-term investments, available-for-sale, at fair value
(amortized cost: 2010 $23,596; 2009
$45,046)
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$
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23,583
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$
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45,206
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Short-term investments, held-to-maturity, at amortized cost
(fair value: 2010 nil; 2009 $159,333)
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159,210
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Short-term investments, trading, at fair value (amortized cost:
2010 $539,969; 2009 $nil)
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539,985
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Fixed maturities, available-for-sale, at fair value (amortized
cost: 2010 $1,342,419; 2009 $69,976)
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1,361,336
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69,892
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Fixed maturities, held-to-maturity, at amortized cost (fair
value: 2010 $nil; 2009 $1,169,934)
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1,152,330
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Fixed maturities, trading, at fair value (amortized cost:
2010 $392,120; 2009 $85,775)
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400,498
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88,050
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Equities, trading, at fair value (cost: 2010
$66,783; 2009 $21,257)
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71,613
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24,503
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Other investments, at fair value (cost: 2010
$274,246; 2009 $165,872)
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200,700
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81,801
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Total investments
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2,597,715
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1,620,992
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Cash and cash equivalents
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823,777
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1,266,445
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Restricted cash and cash equivalents
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395,821
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433,660
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Accrued interest receivable
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25,854
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16,108
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Accounts receivable, net
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12,756
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17,657
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Income taxes recoverable
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7,274
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3,277
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Reinsurance balances receivable
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914,441
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638,262
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Investment in partly owned company
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20,850
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Goodwill
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21,222
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21,222
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Other assets
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214,069
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132,369
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TOTAL ASSETS
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$
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5,012,929
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$
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4,170,842
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LIABILITIES
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Losses and loss adjustment expenses
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$
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3,233,699
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$
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2,479,136
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Reinsurance balances payable
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235,017
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162,576
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Accounts payable and accrued liabilities
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54,275
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60,878
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Income taxes payable
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26,339
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51,854
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Loans payable
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207,177
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254,961
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Other liabilities
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83,603
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85,285
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TOTAL LIABILITIES
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3,840,110
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3,094,690
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COMMITMENTS AND CONTINGENCIES
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SHAREHOLDERS EQUITY
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Share capital
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Authorized issued and fully paid, par value $1 each (authorized
2010:
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156,000,000; 2009: 156,000,000)
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Ordinary shares (issued and outstanding 2010: 13,707,014; 2009:
13,580,793)
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13,707
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13,581
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Non-voting convertible ordinary shares (issued 2010: 2,972,892;
2009: 2,972,892)
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2,973
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2,973
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Treasury stock at cost (non-voting convertible ordinary shares
2010: 2,972,892; 2009: 2,972,892)
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(421,559
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)
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(421,559
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)
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Additional paid-in capital
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727,506
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721,120
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Accumulated other comprehensive income
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33,743
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8,709
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Retained earnings
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526,851
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477,057
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Total Enstar Group Limited Shareholders Equity
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883,221
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801,881
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Noncontrolling interest
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289,598
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274,271
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TOTAL SHAREHOLDERS EQUITY
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1,172,819
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1,076,152
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
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$
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5,012,929
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$
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4,170,842
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See accompanying notes to the unaudited condensed consolidated
financial statements
1
ENSTAR
GROUP LIMITED
For the Three and Nine Month Periods Ended
September 30, 2010 and 2009
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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(expressed in thousands of U.S. dollars, except share and
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per share data)
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INCOME
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Consulting fees
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$
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2,119
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$
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4,112
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$
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19,747
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$
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11,627
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Net investment income
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20,165
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24,640
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69,284
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60,442
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Net realized gains
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10,635
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2,912
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8,610
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1,982
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32,919
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31,664
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97,641
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74,051
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EXPENSES
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Net reduction in ultimate loss and loss adjustment expense
liabilities:
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Reduction in estimates of net ultimate losses
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(20,890
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)
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(44,736
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)
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(57,936
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)
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(92,302
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)
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Reduction in provisions for bad debt
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(1,304
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)
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(14,411
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)
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(9,714
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)
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Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
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(10,171
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)
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(9,830
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)
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(30,832
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)
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(29,370
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)
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Amortization of fair value adjustments
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6,250
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12,008
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25,102
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44,756
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|
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(26,115
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)
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(42,558
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)
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(78,077
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)
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(86,630
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)
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Salaries and benefits
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18,012
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16,997
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47,456
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41,328
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General and administrative expenses
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13,185
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|
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12,195
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39,473
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35,487
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Interest expense
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2,961
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4,262
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8,160
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13,902
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Net foreign exchange (gain) loss
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(586
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)
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(7,164
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)
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1,387
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|
|
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(7,177
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)
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7,457
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(16,268
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)
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18,399
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(3,090
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)
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EARNINGS BEFORE INCOME TAXES AND SHARE OF NET EARNINGS OF PARTLY
OWNED COMPANY
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25,462
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47,932
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79,242
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77,141
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INCOME TAXES
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(979
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)
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(2,660
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)
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(23,016
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)
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(2,019
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)
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SHARE OF NET EARNINGS OF PARTLY OWNED COMPANY
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1,351
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|
196
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10,704
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|
465
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|
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NET EARNINGS
|
|
|
25,834
|
|
|
|
45,468
|
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|
66,930
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75,587
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Less: Net earnings attributable to noncontrolling interest
|
|
|
(4,391
|
)
|
|
|
(10,481
|
)
|
|
|
(17,136
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)
|
|
|
(20,318
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)
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|
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|
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NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
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$
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21,443
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|
|
$
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34,987
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$
|
49,794
|
|
|
$
|
55,269
|
|
|
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EARNINGS PER SHARE BASIC:
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Net earnings attributable to Enstar Group Limited ordinary
shareholders
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$
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1.56
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|
|
$
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2.58
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|
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$
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3.64
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|
$
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4.10
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EARNINGS PER SHARE DILUTED:
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Net earnings attributable to Enstar Group Limited ordinary
shareholders
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$
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1.53
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|
|
$
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2.53
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|
|
$
|
3.57
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|
|
$
|
4.03
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|
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Weighted average shares outstanding basic
|
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13,704,832
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|
13,578,555
|
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13,676,113
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13,492,044
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Weighted average shares outstanding diluted
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|
14,019,768
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|
|
|
13,814,651
|
|
|
|
13,956,948
|
|
|
|
13,729,387
|
|
See accompanying notes to the unaudited condensed consolidated
financial statements
2
ENSTAR
GROUP LIMITED
For the Three and Nine Month Periods Ended
September 30, 2010 and 2009
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
Three Months Ended
|
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Nine Months Ended
|
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|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
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|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
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|
(expressed in thousands of U.S. dollars)
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|
|
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
3
|
|
|
|
|
|
|
|
|
|
|
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
4
ENSTAR
GROUP LIMITED
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
5
ENSTAR
GROUP LIMITED
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 Companys 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 Companys 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 Companys 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 entitys 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 entitys
purpose and design and the reporting entitys ability to
direct the activities of the other entity that most
significantly impact the other entitys 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 entitys 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 FASBs guidance and the SECs filing
requirements. This guidance was effective immediately upon
issuance. The adoption of this guidance had no impact on the
Companys results of operations or financial condition.
While the Companys consolidated financial statements no
longer disclose the date through
6
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
BASIS OF
PREPARATION AND
CONSOLIDATION (contd)
|
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.
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 managements 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.
7
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
ACQUISITIONS (contd)
|
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
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
ACQUISITIONS (contd)
|
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.
9
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
ACQUISITIONS (contd)
|
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 Companys 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.
10
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 Lloyds syndicate to another) with Lloyds 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 Lloyds Syndicate 2008, a syndicate approved by
Lloyds of London on December 16, 2007 to undertake
RITC transactions with Lloyds syndicates in run-off.
In February 2010, Lloyds Syndicate 2008 entered into RITC
agreements with two Lloyds syndicates with total gross
insurance reserves of approximately $170.3 million. The
capital commitment to Lloyds 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 Companys board of directors and one of the
Companys largest shareholders, is the Chairman and Chief
Executive Officer of J.C. Flowers & Co. LLC. John J.
Oros who was the Companys Executive Chairman and a member
of the Companys 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 Companys 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.
11
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Available-for-sale
The amortized cost and estimated fair value of the
Companys 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 Companys 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
The following tables set forth certain information regarding the
credit ratings (provided by major rating agencies) of the
Companys 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 Companys 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
subsidiarys 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 Companys 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
Companys 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.
14
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
The amortized cost and estimated fair value of the
Companys 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 Companys 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.
15
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
Trading
The estimated fair value of the Companys 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
16
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
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 Companys
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
Companys 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 Companys
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.
|
17
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
|
|
|
|
|
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 Companys
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 Companys fixed maturity portfolio is managed by the
Companys 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 Companys
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 Companys 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
18
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
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 Companys 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 Companys 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 Companys 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
20
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
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
21
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
INVESTMENTS (contd)
|
trust as collateral are primarily highly rated fixed maturity
securities. The carrying value of the Companys 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 Companys 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 Companys
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.
22
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
Companys 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.
23
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
LOSSES
AND LOSS ADJUSTMENT
EXPENSES (contd)
|
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 Companys 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 Companys insurance
entities whereby previously advised net case and LAE reserves of
$18.6 million were settled without payment. The application
of the Companys 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 Companys 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 Companys 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.
|
24
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
LOSSES
AND LOSS ADJUSTMENT
EXPENSES (contd)
|
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
25
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
LOSSES
AND LOSS ADJUSTMENT
EXPENSES (contd)
|
and/or
reinsured exposures in three of the Companys 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
Companys 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
Companys 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
Companys 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 Companys 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 subsidiarys IBNR loss and loss adjustment
expense liabilities of $10.4 million was the result of the
application of the Companys reserving methodologies to the
reduced case and LAE reserves following the subsidiarys
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 Companys insurance
entities whereby previously advised net case and LAE reserves of
$18.6 million were settled without payment. The application
of the Companys 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 Companys 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.
|
26
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Holdings 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
Companys Annual Report on
Form 10-K
for the year ended December 31, 2009.
The Companys share-based compensation plans provide for
the grant of various awards to the Companys employees and
to members of the board of directors. These are described in
Note 13 to the Consolidated Financial Statements contained
in the Companys 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
Companys share-based compensation.
27
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
EMPLOYEE
BENEFITS (contd)
|
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
Companys 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 Companys
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
EMPLOYEE
BENEFITS (contd)
|
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
Companys Deferred Compensation and Ordinary Share Plan for
Non-Employee Directors.
The following table sets forth the comparison of basic and
diluted earnings per share of amounts attributable to the
Companys 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 Companys board of
29
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
RELATED
PARTY TRANSACTIONS (contd)
|
directors and is one of the Companys largest shareholders.
Mr. Oros served as an executive officer and member of the
Companys 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 Companys 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 Companys 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. OShea (the
Companys 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 Companys 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, OShea 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.
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 jurisdictions
applicable statutory tax rate.
30
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Companys 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 companys 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 Companys 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 Companys 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.
The determination of reportable segments is based on how senior
management monitors the Companys operations. The Company
measures the results of its operations under two major business
categories: reinsurance and consulting.
The Companys 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 Companys 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
31
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
SEGMENT
INFORMATION (contd)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
SEGMENT
INFORMATION (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
SEGMENT
INFORMATION (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
ENSTAR
GROUP LIMITED
NOTES TO
THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
SEGMENT
INFORMATION (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
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
Companys 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
36
|
|
Item 2.
|
MANAGEMENTS
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. OShea (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, OShea 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
37
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.
38
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 Lloyds Syndicate to
another) with Lloyds 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 Lloyds Syndicate 2008, a
syndicate approved by Lloyds of London on
December 16, 2007 to undertake RITC transactions with
Lloyds syndicates in run-off.
In February 2010, Lloyds Syndicate 2008 entered into RITC
agreements with two Lloyds syndicates with total gross
insurance reserves of approximately $170.3 million. The
capital commitment to Lloyds 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.
39
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
40
$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 &
Poors 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.
41
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
42
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.
|
43
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.
44
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
45
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 SACs
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;
|
46
|
|
|
|
(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
47
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 & Poors 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
48
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
subsidiarys 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 subsidiarys 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
|
|
|
|
|
|
|
|
|
|
|
49
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
Lloyds 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.
50