2016
Enstar
Annual Report
Annual CEO Letter
From Dominic Silvester,
Chief Executive Officer
April 28, 2017
Dear Fellow Shareholders,
2016 was a year of notable success for Enstar.
We achieved strong financial results; we grew
through significant acquisitions and selective
underwriting; we successfully launched
KaylaRe, a new Bermuda-based reinsurer
offering a diversified range of specialty
solutions to the global insurance market; and
we invested in our operational infrastructure
and our innovative capabilities to ensure we
keep creating long-term value.
As with all in our industry, Enstar faces
challenges: pricing pressures, low interest
rates, stringent capital requirements, and
increasing regulation. Throughout our history,
Enstar has consistently turned challenge into
opportunity. It is our entrepreneurial spirit,
creative thinking, flexibility, and analytical
approach that endures.
Enstar’s ongoing success is the achievement
of a significant team effort by our 1,300
employees around the world. It is with pride
that I take you through our accomplishments
for 2016.
RESULTS
Enstar delivered net earnings of $264.8 million
in 2016. Our strong financial performance
reflects the evolution of our business model,
and our ability to create long-term value for
our shareholders. The headline number is
up more than 20% from 2015, and marks
our highest earnings to date. We achieved
this thanks to the continued success of our
expanding run-off portfolio, solid underwriting
results in our live businesses, and increased
returns despite the global struggle for
investment yield.
We delivered an increase of 10.8% in fully
diluted book value per share to reach $143.68
(2015: 8.7%). Since 2006, the compound
annual growth rate of Enstar’s fully diluted
book value per share is 16.3%. These results
are the product of excellence in all areas of
our business model, including risk selection,
appropriate pricing, careful internal capital
allocation, prudent investing, and strong
operational performance.
Throughout our history,
Enstar has consistently
turned challenge into
opportunity. It is our
entrepreneurial spirit,
creative thinking,
flexibility, and analytical
approach that endures.
FINANCIAL HIGHLIGHTS, DECEMBER 31, 2016 (EXPRESSED IN MILLIONS OF US DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Net Segment Contribution:
Non-life Run-off
StarStone
Atrium
Life and Annuities
Net Earnings Attributable to Enstar
Percent Change in Net Earnings Attributable to Enstar
Fully Diluted Earnings Per Share
$
$
2016
206.7
25.2
6.4
26.5
264.8
20.1%
13.62
2015
173.2
13.7
16.6
16.9
220.4
3.1%
11.35
2014
203.3
-10.6
10.4
10.6
213.7
2.5%
11.44
Weighted Average Fully Diluted Shares Outstanding
19,447,241
19,407,756
18,678,130
Shareholders’ Equity Attributable to Enstar
Return on Opening Shareholders’ Equity
Book Value Per Share
Fully Diluted Shares Outstanding
Percent Change in Book Value Per Share
2,802
10.5%
143.68
19,645,309
10.8%
2,517
9.2%
129.65
2,305
12.2%
119.22
19,714,810
19,332,864
8.7%
13.3%
i
Annual CEO Letter From Dominic Silvester, Chief Executive Officer
The Atrium segment, comprising one of the
most successful, progressive, and respected
managing agencies at Lloyd’s, delivered
solid performance under the leadership
of Chief Executive Officer Richard Harries.
Atrium continued its strategy of maintaining
a balanced and diversified portfolio through
disciplined underwriting, operational
excellence, and the development of new
products and distribution channels. This
approach has successfully led Atrium through
a range of market cycles, and 2016 saw the
syndicate achieve a strong combined ratio
of 94.0%. Net earnings of Atrium were $10.9
million, of which $6.4 million is attributable
to Enstar.
Enstar’s life and annuities business performed
well during the year, contributing $26.5
million to net earnings. The efforts of the team
at Pavonia, the subsidiary that comprised
the majority of Enstar’s long-duration risk
portfolio, significantly enhanced its value
since we acquired it in 2013. In early 2017,
we decided to sell Pavonia, following an
attractive offer. The transaction, expected to
close later this year, came at an opportune
time for us to realise the value we created
within Pavonia by releasing capital for
deployment in other attractive deals.
Legacy risk remains Enstar’s main source
of value creation. In 2016 we realised net
earnings of $206.7 million in our non-life run-
off segment from the careful management
of liabilities assumed or reinsured and
investment results. Our approach to the
effective and efficient run-off of historical
insurance risk portfolios differentiates us.
In managing claims, we are detail-oriented,
solutions-focused, and well-informed. The
expertise of our teams, coupled with our
ability to develop and evolve our strategy
and approach across risk classes, is a core
component of our success.
The Group’s live underwriting operations
delivered strong net earnings despite
increasingly difficult conditions in global
specialty insurance markets, driven
largely by high levels of competition and
overcapitalisation. International re/insurance
has traditionally been a highly cyclical
market, one in which prices tend to slide
considerably over years, until loss events force
the withdrawal of companies and a return to
higher prices. At present, the industry expects
we are at or near the bottom of the cycle.
Despite these conditions, global specialty
insurer StarStone had a good year, as its
results continued to improve. StarStone
achieved a combined ratio of 98.6%, while
its total net earnings increased by $19.6
million to reach $42.8 million, of which $25.2
million is attributable to Enstar. Paul O’Shea,
Enstar President, provides Group oversight
of StarStone as its Executive Chairman, and
we were pleased to promote Demian Smith
to Chief Executive Officer of StarStone in
December 2016.
16.3%
Book Value
Per Share
2006-2016 CAGR
$264.8m
Net Earnings
2016
$1.0bn
Gross Written
Premium
2016
ii
We consider our
strategic investors,
like our clients, as
true partners in our
business. These
invaluable partnerships
with world-class
firms are a powerful
endorsement of our
approach.
Annual CEO Letter From Dominic Silvester, Chief Executive Officer
DEVELOPMENTS
ACQUISITIONS
Strategic achievements in 2016 included
our development of new revenue streams
through the launch of KaylaRe. Launched
with start-up capital of $620 million provided
by Enstar, leading global investment manager
Hillhouse Capital, and our long-term private
equity partner Stone Point Capital, KaylaRe
sources reinsurance business from within
the Group, and opportunistically in the open
market when our analysis shows it will yield
benefit. Nick Packer, who co-founded Enstar
with Paul O’Shea and me over two decades
ago, brings tremendous experience to
KaylaRe as its Chief Executive Officer.
Hillhouse made a major investment in Enstar in
2016 by acquiring shares that Goldman Sachs
bought almost six years ago, and Canada Pension
Plan Investment Board (CPPIB) increased its
Enstar stake by acquiring many of the remaining
Goldman shares. We consider our strategic
investors, like our clients, as true partners in our
business. These invaluable partnerships with
world-class firms such as Hillhouse, CPPIB, and
Stone Point Capital are a powerful endorsement
of our approach. They provide us with the
opportunity to constantly exchange ideas, and
the ability to leverage extensive expertise and
networks as we work to achieve our objectives.
We further improved our operating platform
by investing in people, processes, and
technology throughout 2016. To continue to
create long-term value, Enstar needs scalability
and the agility to accept new challenges, the
skill to seamlessly integrate new businesses,
and the entrepreneurial spirit to outperform
expectations. Our people are key to our
success and we have focused on ensuring
our talented teams have the processes and
technologies they need as we grow.
Emerging technology is changing the insurance
industry. We innovate in all we do and
increasingly we are accessing technological
advances and preparing for the impact
they will have on our industry, and us all.
The Insurtech arena -- robotics, artificial
intelligence and big data analytics -- is making
significant strides and growing in influence.
We see opportunities for Enstar to improve the
way we collect and analyse data and to drive
greater efficiencies across our businesses, and
we are increasingly well-positioned to take
advantage of a technology-driven future.
Enstar has executed some of the industry’s
most complex transactions in run-off. Growth
through acquisition remains our cornerstone.
We completed the significant transaction
with Allianz early in 2016, involving the
reinsurance of 50% of workers’ compensation,
APH and construction defect legacy reserves
amounting to $1.1 billion of gross reserves,
and providing consulting services to assist
with the run-off management of the entire
portfolio of $2.2 billion.
We moved beyond traditional insurance
when we acquired the Dana Companies in
2016 for $88.5 million. Dana holds liabilities
associated with its legacy automotive thermal-
management manufacturing operations. The
deal extends our core legacy capabilities to
the manufacturing sector.
Another significant legacy deal, completed
in 2017, is our reinsurance of a multi-line
property and casualty portfolio for QBE
Insurance Group. The deal involved the
transfer of gross reserves of approximately
$919.0 million against risks that comprise
primarily workers’ compensation,
construction defect, and general liability.
Most recently, in 2017, we entered into an
agreement to reinsure the pre-2006 UK
employers’ liability business of RSA Insurance
Group, and Enstar assumed gross insurance
reserves of approximately $1.2 billion. The
recent changes to the UK’s ‘Ogden’ discount
rate create additional uncertainty for the
industry, but we believe we are well-placed to
manage the impact.
We see long-term financial and reputational
value in the Allianz, QBE and RSA transactions.
That these large, internationally respected
insurers have turned to Enstar, and trust us to
deliver value for them over decades, is further
endorsement of our Group’s strength and talent.
iii
Enstar continues to
sharpen its focus as
a multifaceted global
insurance group with a
long-term perspective,
significant staying-
power, and recognised
strength in leadership.
Annual CEO Letter From Dominic Silvester, Chief Executive Officer
BALANCE SHEET & CAPITAL MANAGEMENT
INVESTMENTS
Enstar reported year-end total assets of $12.9
billion (2015: $11.8 billion) and shareholders’
equity of $2.8 billion (2015: $2.5 billion). Our
strong financial position demonstrates our
ability to execute on our growth strategy.
In our approach to capital management, we
seek to avoid, minimise, or mitigate risk, while
identifying methods to improve returns within
our risk appetite. We place strong emphasis
on ensuring our risk management framework
is sufficiently robust to identify, measure,
manage, report, and monitor risks that may
affect the delivery of our strategic, operational,
and financial objectives. The launch of
KaylaRe has added an important capital
management tool to Enstar’s capabilities by
allowing us to optimise our net retention of
risk and use of capital in our live underwriting
entities, while skilfully deploying capital.
We continue to prove that our business model
is successful through our focus on careful
growth and diversification of income, and
the evolution of our capital management
approach. Supported by our increased
organisational agility, we remain able to
acquire increasingly significant blocks of
business while delivering innovation and
security to our global client base.
TOTAL ASSETS ($bn)
9.94
8.62
6.61
5.88
12.87
11.77
Enstar held total cash and investments of
$8.4 billion at year-end 2016. Total non-
cash investments were $7.1 billion, of which
invested reserves were $6.1 billion (including
$1.6 billion acquired and assumed through
non-life legacy operations during the year).
Our investment focus for reserves is on
high-quality fixed income securities, with an
emphasis on the preservation of capital while
earning superior, diversified risk-adjusted
returns. One important goal, as always, is to
provide sufficient liquidity to pay claims and
other liabilities as they mature.
Our portfolio at year-end comprised 83% of
fixed income securities, of which the majority
are corporate and government debt issues.
Alternatives including private equity and fixed
income funds accounted for another 13%,
with the 4% balance held in equities and life
settlements. Together these investments
carried a book yield of 2.27%. In total over the
year, we registered net investment income
(including unrealised gains) of $263.3 million,
a material increase over the $81.0 million
achieved in 2015.
As this number shows, net investment income
is a significant component of our earnings,
but we – like the industry at large – remain in
a period of considerable market uncertainty.
We see fully-priced asset valuations across
many asset classes compared to historical
averages and a potential for increased market
volatility. In this environment, our cautious
philosophy and key investment objectives
remain unchanged.
2011
2012
2013
2014
2015
2016
SHAREHOLDERS’ EQUITY ($m)
1,386
1,554
1,756
2,517
2,305
2,802
2011
2012
2013
2014
2015
2016
iv
Annual CEO Letter From Dominic Silvester, Chief Executive Officer
ENSTAR’S EVOLUTION
MARKET OUTLOOK
We at Enstar have always had a strong
understanding of who and where we are,
and where we are aiming to go next. Over the
course of 2016 we distilled this into a vision
statement:
“To build global capacity in providing
market-leading insurance solutions in both
live underwriting and run-off; to create
long-term value for our shareholders; and
to be regarded as an employer of choice for
outstanding individuals.”
The year ahead promises more uncertainty,
and with that comes more opportunity.
We continue to monitor the impact of the
changing political environment in the US and
UK. We will maintain our resolve to step up to
complex problems and will tirelessly exercise
our skills in risk and liability analysis to do so
successfully and profitably.
It could be said that a company is a reflection
of its employees, its shareholders, and its
Board. I am proud of this reflection and
excited for our capabilities in the future.
Our strategy to deliver this vision is anchored
to four key values:
Finally, thank you for your ongoing support.
Sincerely,
Dominic Silvester
April 28, 2017
•
Innovative Risk Solutions
• Disciplined Underwriting
• Operational Excellence
• Financial Precision
This work is indicative of the evolution under
way at Enstar, as we sharpen our focus as a
multifaceted global insurance group with a
long-term perspective, significant staying-
power, and recognised strength in leadership.
We have built a fundamentally strong and
continuously improving long-term risk and
liability platform supported by world-leading
talent to provide innovative solutions to our
global client base.
v
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission File Number 001-33289
ENSTAR GROUP LIMITED
(Exact name of Registrant as specified in its charter)
BERMUDA
(State or other jurisdiction of incorporation or organization)
N/A
(I.R.S. Employer Identification No.)
Windsor Place, 3rd Floor, 22 Queen Street, Hamilton HM JX, Bermuda
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (441) 292-3645
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Ordinary shares, par value $1.00 per share
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates as of June 30, 2016 was
approximately $1.59 billion based on the closing price of $161.99 per ordinary share on the NASDAQ Stock Market on that date. Shares held by
officers and directors of the registrant and their affiliated entities have been excluded from this computation. Such exclusion is not intended, nor
shall it be deemed, to be an admission that such persons are affiliates of the registrant.
As of February 23, 2017, the registrant had outstanding 16,419,889 voting ordinary shares and 3,004,443 non-voting convertible ordinary
shares, each par value $1.00 per share.
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
relating to its 2017 annual general meeting of shareholders are incorporated by reference in Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Enstar Group Limited
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2016
Table of Contents
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . .
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . .
Item 9.
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report and the documents incorporated by reference contain statements that constitute "forward-
looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies,
competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our
ordinary shares and the insurance and reinsurance sectors in general. Statements that include words such as
"estimate," "project," "plan," "intend," "expect," "anticipate," "believe," "would," "should," "could," "seek," "may" and
similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal
securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not
statements of historical fact, reflecting the best judgment of our management and involve a number of risks and
uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.
These forward looking statements should, therefore, be considered in light of various important factors, including those
set forth in this annual report and the documents incorporated by reference, which could cause actual results to differ
materially from those suggested by the forward looking statements. These factors include:
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risks associated with implementing our business strategies and initiatives;
risks that we may require additional capital in the future, which may not be available or may be available
only on unfavorable terms;
the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;
risks relating to the availability and collectability of our reinsurance;
changes and uncertainty in economic conditions, including interest rates, inflation, currency exchange rates,
equity markets and credit conditions, which could affect our investment portfolio, our ability to finance future
acquisitions and our profitability;
the risk that ongoing or future industry regulatory developments will disrupt our business, affect the ability
of our subsidiaries to operate in the ordinary course or to make distributions to us, or mandate changes in
industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of
the way we do business;
losses due to foreign currency exchange rate fluctuations;
increased competitive pressures, including the consolidation and increased globalization of reinsurance
providers;
emerging claim and coverage issues;
lengthy and unpredictable litigation affecting assessment of losses and/or coverage issues;
loss of key personnel;
the ability of our subsidiaries to distribute funds to us and the resulting impact on our liquidity;
our ability to comply with covenants in our debt agreements;
changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at
management’s discretion;
operational risks, including system, data security or human failures and external hazards;
risks relating to our acquisitions, including our ability to continue to grow, successfully price acquisitions,
evaluate opportunities, address operational challenges, support our planned growth and assimilate acquired
companies into our internal control system in order to maintain effective internal controls, provide reliable
financial reports and prevent fraud;
risks relating to our ability to obtain regulatory approvals, including the timing, terms and conditions of any
such approvals, and to satisfy other closing conditions in connection with our acquisition agreements, which
could affect our ability to complete acquisitions;
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risks relating to our active underwriting businesses, including unpredictability and severity of catastrophic
and other major loss events, failure of risk management and loss limitation methods, the risk of a ratings
downgrade or withdrawal, cyclicality of demand and pricing in the insurance and reinsurance markets;
our ability to implement our strategies relating to our active underwriting businesses;
risks relating to our life and annuities business, including mortality and morbidity rates, lapse rates, the
performance of assets to support the insured liabilities, and the risk of catastrophic events;
risks relating to our investments in life settlements contracts, including that actual experience may differ
from our assumptions regarding longevity, cost projections, and risk of non-payment from the insurance
carrier;
risks relating to our subsidiaries with liabilities arising from legacy manufacturing operations;
risks relating to the performance of our investment portfolio and our ability to structure our investments in a
manner that recognizes our liquidity needs;
tax, regulatory or legal restrictions or limitations applicable to us or the insurance and reinsurance business
generally;
changes in tax laws or regulations applicable to us or our subsidiaries, or the risk that we or one of our non-
U.S. subsidiaries become subject to significant, or significantly increased, income taxes in the United States
or elsewhere;
changes in Bermuda law or regulation or the political stability of Bermuda; and
changes in accounting policies or practices.
The factors listed above should be not construed as exhaustive and should be read in conjunction with the Risk
Factors that are included in Item 1A below. We undertake no obligation to publicly update or review any forward looking
statement, whether to reflect any change in our expectations with regard thereto, or as a result of new information,
future developments or otherwise, except as required by law.
ITEM 1. BUSINESS
Company Overview
PART I
Enstar Group Limited ("Enstar") is a Bermuda-based holding company, formed in 2001. Enstar is a multi-faceted
insurance group that offers innovative capital release solutions and specialty underwriting capabilities through its
network of group companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and
other international locations. Enstar is listed on the NASDAQ Global Select Market under the ticker symbol "ESGR".
In this report, the terms "Enstar," "the Company," "us," and "we" are used interchangeably to describe Enstar and our
subsidiary companies.
Our fundamental corporate objective is growing our net book value per share. We strive to achieve this primarily
through growth in net earnings from both organic and accretive sources, including the completion of new acquisitions,
the effective management of companies and portfolios of business acquired, and the execution of active underwriting
strategies.
Enstar acquires and manages insurance and reinsurance companies and portfolios of insurance and reinsurance
business in run-off. Since formation, we have completed the acquisition of over 75 insurance and reinsurance companies
and portfolios of business.
Enstar also manages specialty active underwriting businesses:
• Atrium Underwriting Group Limited and its subsidiaries ("Atrium"), which manage and underwrite specialist
insurance and reinsurance business for Lloyd’s Syndicate 609; and
• StarStone Insurance Bermuda Limited and its subsidiaries ("StarStone"), which is an A.M. Best A- rated
global specialty insurance group with multiple underwriting platforms.
Business Strategy
Enstar aims to maximize growth in net book value per share by employing the following strategies:
We Leverage Management’s Experience and Industry Relationships to Solidify Enstar’s Position in the Run-Off
Market. Enstar leverages the extensive experience and relationships of our senior management team to solidify our
position as a leading run-off acquirer and generate future growth opportunities.
We Engage in Highly Disciplined Acquisition, Management and Reinsurance Practices across a Diverse Portfolio
of Loss Reserves. Enstar employs a disciplined approach when assessing and acquiring portfolios of risk, which we
believe minimizes risk and increases the probability of delivering positive operating results from the companies and
portfolios acquired. Enstar is highly selective in reviewing potential acquisition targets. When considering any acquisition
we carefully analyze the target’s risk exposures, claims practices and reserve requirements.
We Aim to Profitably Underwrite Selected Specialty Lines to Enhance Future Growth Opportunities. Through
our Atrium and StarStone segments, Enstar selectively underwrites in chosen specialty lines, with a focus on balancing
risk exposures. Through Atrium and StarStone, the group’s underwriting activity grows organically; and when Enstar
acquires run-off businesses, the group’s active underwriting companies are well-positioned to capture profitable active
business in specialty lines previously identified as attractive.
We Manage Claims Professionally, Expeditiously, and Cost-Effectively. Enstar aims to manage claims made
against group companies and portfolios in a professional and disciplined manner, drawing on in-house expertise to
dispose of claims efficiently. Enstar strives to pay valid claims on a timely basis, while relying on well-documented
policy terms and exclusions where applicable, and litigation when necessary, to defend against paying invalid claims.
We Seek to Commute Assumed Liabilities and Insurance and Reinsurance Assets at a Discount to the Ultimate
Liability. Using detailed claims analysis and actuarial projections, Enstar seeks to negotiate with policyholders in the
non-life run-off insurance and reinsurance companies or portfolios that we own with a goal of commuting existing
insurance and reinsurance liabilities at a discount to the ultimate liability.
We Prudently Manage Investments and Capital. In managing investments and deploying group capital, Enstar
strives to achieve superior risk-adjusted returns, while growing profitability and generating long-term growth in
shareholder value.
1
Strategic Growth
Enstar transactions typically take the form of either acquisitions or portfolio transfers. In an acquisition, we acquire
an insurance or reinsurance company and manage the run-off or continued underwriting of risk in its business lines.
In a portfolio transfer, a reinsurance contract transfers risk from the initial insurance or reinsurance company to a
company in the Enstar group. Enstar also enters into reinsurance to close ("RITC") transactions with Lloyd's of London
("Lloyd's") insurance and reinsurance syndicates in run-off, whereby a portfolio of run-off liabilities is transferred from
one Lloyd’s syndicate to another.
The substantial majority of Enstar’s acquisitions have been in the non-life run-off business, which generally
includes property and casualty, workers’ compensation, asbestos and environmental, construction defect, marine,
aviation and transit, and other closed business. Enstar also owns closed life and annuities businesses.
Enstar evolved from a stand-alone run-off consolidator to a more diversified insurance group with active
underwriting capabilities following our acquisitions of Atrium and StarStone, in 2013 and 2014, respectively. We had
several rationales for acquiring Atrium and StarStone:
• Atrium’s and StarStone’s underwriting businesses provide Enstar with a more diversified earnings stream,
which reduces the impact of volatility in earnings from non-life run-off businesses, while concurrently offering
the group new growth avenues.
• We believe that having active underwriting businesses enhances the group’s overall ability to compete for
new acquisition targets because the addition of active underwriting capabilities allows the group to acquire
renewal rights or provide loss portfolio reinsurance in connection with such acquisitions. These capabilities
can attract certain vendors, and may provide Enstar with additional flexibility in structuring proposed
transactions.
• Having both run-off and active underwriting businesses within our group allows Enstar to evaluate an
acquisition target not only for its fundamental run-off potential, but also for the ongoing value of its profitable
business lines.
We partnered with the Trident V funds ("Trident") (managed by Stone Point Capital LLC) in the acquisitions of
the active underwriting businesses. Stone Point Capital is a financial services-focused private equity firm that has
significant experience investing in insurance and reinsurance companies and other insurance-related businesses,
which Enstar believes is valuable in our active underwriting joint ventures.
In each of the Atrium and StarStone transactions, Enstar has a 59.0% equity interest, Trident has a 39.3% equity
interest, and Dowling Capital Partners, L.P. ("Dowling") has a 1.7% equity interest.
Recent Acquisitions and Significant New Business
RSA
On February 7, 2017, we entered into an agreement to reinsure U.K. employers' liability legacy business of RSA
Insurance Group PLC ("RSA"). Pursuant to the transaction, our subsidiary will assume gross insurance reserves of
approximately £957 million (approximately $1.2 billion), relating to 2005 and prior year business. Net insurance reserves
are approximately £834 million (approximately $1.0 billion) and the reinsurance premium payable to Enstar’s subsidiary
is £799 million (approximately $1.0 billion). The transaction is subject to finalizing and effecting certain security
arrangements.
Following the initial reinsurance transaction, which will transfer the economics of the portfolio up to the policy's
limits, we and RSA will pursue a portfolio transfer of the business under Part VII of the Financial Services and Markets
Act 2000, which would provide legal finality for RSA's obligations. The transfer is subject to court, regulatory and other
approvals.
QBE
On January 11, 2017, we announced the closing of a transaction to reinsure multi-line property and casualty
business of QBE Insurance Group Limited ("QBE"). Our subsidiary assumed gross reinsurance reserves of
approximately $919 million (net reserves of $444 million) relating to the portfolio, which primarily includes workers'
compensation, construction defect, and general liability discontinued lines of business. In addition our subsidiary has
pledged a portion of the premium as collateral to a subsidiary of QBE, and we have provided additional collateral and
a limited parental guarantee.
2
Dana Companies
On December 30, 2016, we acquired Dana Companies, LLC ("Dana Companies") from Dana Incorporated for
a total purchase price of $88.5 million. Dana Companies holds liabilities associated with personal injury asbestos
claims and environmental claims arising from its legacy automotive thermal-management manufacturing
operations. Dana Companies' assets include, among others, insurance rights related to coverage against these
liabilities and marketable securities. We financed the transaction through a draw on our revolving credit facility.
Shelbourne RITC Transaction
On November 15, 2016, we entered into a RITC transaction of the 2007 and prior underwriting years of account
of a Lloyd’s syndicate managed by Neon Underwriting Limited (formerly Marketform), under which we assumed total
net insurance reserves of £121.5 million ($158.0 million) for cash consideration of an equal amount.
Coca-Cola
On August 5, 2016, we entered into a reinsurance transaction with The Coca-Cola Company and its subsidiaries
(“Coca-Cola”) pursuant to which we reinsured certain of Coca-Cola’s retention and deductible risks under its
subsidiaries’ U.S. workers’ compensation, auto liability, general liability, and product liability insurance coverage. We
assumed total gross reserves of $108.8 million, received total assets of $101.3 million and recorded a deferred charge
of $7.5 million, included in other assets. We have transferred $108.8 million into a trust to support our obligations under
the reinsurance agreements. We provided a limited parental guarantee, subject to an overall maximum of $27.0 million.
Allianz SE
On March 31, 2016, we completed a transaction with Allianz SE ("Allianz") to reinsure portfolios of Allianz's run-
off business. Pursuant to the reinsurance agreement, our subsidiary has reinsured 50% of certain portfolios of workers'
compensation, construction defect, and asbestos, pollution, and toxic tort business originally held by Fireman's Fund
Insurance Company, and in the process assumed net reinsurance reserves of $1.1 billion. Affiliates of Allianz retained
$1.1 billion of reinsurance premium as funds withheld collateral for the obligations of our subsidiary under the
reinsurance agreement and we transferred $110.0 million to a reinsurance trust to further support our subsidiary's
obligations. We have also provided a limited parental guarantee, which is subject to a maximum cap. The combined
monetary total of the initial support offered by us through the trust and parental guarantee is capped at $270.0 million.
In addition to the reinsurance transaction described above, we have entered into a consulting agreement with
San Francisco Reinsurance Company, an affiliate of Allianz, with respect to the entire $2.2 billion portfolio, including
the 50% share retained by affiliates of Allianz.
The tables below set forth summaries of acquisitions and significant new business in excess of $50 million in
acquired assets that we have signed or completed since January 1, 2016. For a more detailed explanation of these
transactions, as well as transactions completed in 2015 and 2014, refer to "Note 3 - Acquisitions" and "Note 4 -
Significant New Business" in the notes to our consolidated financial statements included within Item 8 of this Annual
Report on Form 10-K.
Company Name
Purchase Price
Assets
Acquired
Liabilities
Acquired
Goodwill
Segment
Dana Companies, LLC
$88.5 million
$329.3 million
$240.8 million
Nil
Non-life
Run-off
Acquisitions (January 1, 2016 - Present)
Primary Nature of
Business
Liabilities associated with
personal injury asbestos
claims and
environmental claims
arising from legacy
manufacturing
operations
3
Company Name
Purchase Price
RSA Insurance Group
PLC
QBE Insurance Group
Limited
Neon (formerly
Marketform)
The Coca-Cola
Company
N/A
N/A
N/A
N/A
Significant New Business (January 1, 2016 - Present)
Deferred
Charge
Segment
Assets
Acquired
$1.2 billion
Liabilities
Acquired
$1.2 billion
$0.9 billion
$0.9 billion
$158.0 million
$158.0 million
Nil
Nil
Nil
$101.3 million
$108.8 million
$7.5 million
Allianz SE
N/A
$1.1 billion
$1.1 billion
Nil
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Primary Nature of
Business
U.K. employers' liability
U.S. workers'
compensation,
construction defect, and
general liability
Italian medical
malpractice
U.S. workers'
compensation, auto
liability, general liability,
and product liability
U.S. workers'
compensation,
construction defect,
asbestos, pollution and
toxic tort
Business Held for Sale
Pavonia
On February 17, 2017, we entered into a definitive agreement to sell Pavonia Holdings (US) Inc. and its
subsidiaries (“Pavonia”) for total consideration of $120.0 million. The closing of the transaction is subject to certain
conditions, including obtaining regulatory approvals or non-disapprovals and other customary closing conditions. The
proceeds are expected to be used to pay down our revolving credit facility. Pavonia represents a substantial portion
of the Life and Annuities segment. We have classified Pavonia as discontinuing operations and held-for-sale. For
further information, refer to "Note 5 - Held-for-sale Business" in the notes to our consolidated financial statements
included within Item 8 of this Annual Report on Form 10-K.
Other Transactions
KaylaRe
On December 15, 2016, we announced the launch of KaylaRe Ltd., a Bermuda-based Class 4 reinsurer offering
a diversified range of specialty reinsurance to the global insurance market. in connection with the launch, KaylaRe
Holdings Ltd., the parent company of KaylaRe Ltd. completed an initial capital raise of $620 million. Through our
subsidiary, Cavello Bay Reinsurance Limited (“Cavello”), we have invested $300 million in common shares of KaylaRe.
We also received a warrant to purchase up to 900,000 common shares of KaylaRe, which is exercisable upon an initial
public offering or listing of KaylaRe’s common shares, with an exercise price of $20.00 per share. We use the equity
method to account for our interest in KaylaRe.
Our subsidiary acts as insurance and reinsurance manager to KaylaRe Ltd., and certain of our affiliates have
entered into various reinsurance agreements with KaylaRe Ltd. KaylaRe Ltd. will also have the opportunity to participate
in future Enstar legacy transactions. For a detailed discussion of the transactions between us and KaylaRe, refer to
"Note 21 - Related Party Transactions" in the notes to our consolidated financial statements included within Item 8 of
this Annual Report on Form 10-K.
ClearSpring
On January 1, 2017, we sold SeaBright Insurance Company ("SeaBright Insurance") to an affiliate of Delaware
Life Insurance Company ("Delaware Life"), a subsidiary of Guggenheim Partners, LLC. Following the sale, SeaBright
Insurance will be renamed ClearSpring Property and Casualty Insurance Company ("ClearSpring") and will focus on
underwriting workers' compensation and property business in the U.S. Prior to the sale, SeaBright Insurance had
reinsured all of its run-off liabilities into another Enstar entity and at the time of the sale, ClearSpring contained only
insurance licenses. We have retained a 20% indirect equity interest in ClearSpring and have agreed to reinsure (on a
funds withheld basis) 25% of its new business underwritten. We provide underwriting and claims expertise to
ClearSpring through fronting, underwriting and service agreements.
4
Operating Segments
We have four segments of business that are each managed, operated and reported on separately: (i) Non-life
Run-off; (ii) Atrium; (iii) StarStone; and (iv) Life and Annuities. For additional information and financial data relating to
our segments, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations by Segment," "Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Investments" and "Note 24 - Segment Information" in the notes to our consolidated financial statements
included within Item 8 of this Annual Report on Form 10-K.
Non-life Run-off
Our Non-life Run-off segment comprises the operations of our subsidiaries that are running off their property
and casualty and other non-life lines of business, including the run-off businesses of StarStone and Arden.
In the primary (or direct) insurance business, the insurer assumes risk of loss from persons or organizations that
are directly subject to the given risks. In the reinsurance business, the reinsurer agrees to indemnify an insurance or
reinsurance company, referred to as the ceding company, against all or a portion of the insurance risks arising under
the policies the ceding company has written or reinsured. When an insurer or reinsurer stops writing new insurance
business, either entirely or with respect to a particular line of business, the insurer, reinsurer, or the line of discontinued
business is in run-off.
Participants in the industry often have portfolios of business that are either inconsistent with their core competency
or provide excessive exposure to a particular risk or segment of the market (i.e., workers' compensation, property/
casualty, asbestos, environmental, director and officer liability, etc.). These non-core and/or discontinued portfolios are
often associated with potentially large exposures and lengthy time periods before resolution of the last remaining
insured claims, resulting in significant uncertainty to the insurer or reinsurer covering those risks. These factors can
distract management, drive up the cost of capital and surplus for the insurer or reinsurer, and negatively impact the
insurer’s or reinsurer’s credit rating, which makes the disposal of the unwanted company or portfolio an attractive
option. The insurer or reinsurer may engage with a third party that specializes in run-off management, such as Enstar,
to purchase the company or assume the portfolio in run-off.
In the sale of a company in run-off, a purchaser, such as Enstar, may pay a discount to the book value of the
company based on the risks assumed and the relative value to the seller of no longer having to manage the company
in run-off. Such a transaction can be beneficial to the seller because it receives an up-front payment for the company,
eliminates the need for its management to devote any attention to the disposed company and removes the risk that
the established reserves related to the run-off business may prove to be inadequate. The seller is also able to redeploy
its management and financial resources to its core businesses.
In some situations, an insurer or reinsurer may wish to divest itself of a portfolio of non-core legacy business
that may have been underwritten alongside other ongoing core business that the insurer or reinsurer does not want
to dispose of. In such instances, we are able to provide economic finality for the insurer or reinsurer by providing a
loss portfolio reinsurance contract to protect the insurer or reinsurer against deterioration of the non-core portfolio of
loss reserves.
Overall, the focus of our Non-life Run-off segment is to acquire companies or portfolios in run-off and to effectively
manage that business in ways that further our primary corporate objective of growing Enstar's net book value per
share.
Acquisition Process
We evaluate each acquisition and loss portfolio transfer opportunity presented by carefully reviewing the portfolio’s
risk exposures, claim practices, reserve requirements and outstanding claims, and will seek an appropriate discount
to reflect the uncertainty contained in the portfolio’s reserves. Based on this initial analysis, we can determine if a
company or portfolio of business would add value to our current portfolio of run-off businesses. If we determine to
pursue the purchase of a company in run-off, we then proceed to price the acquisition in a manner we believe will
result in positive operating results based on certain assumptions including, without limitation, our ability to favorably
resolve claims, negotiate with direct insureds and reinsurers, and otherwise manage the nature of the risks posed by
the business.
At the time we acquire a company in run-off, we estimate the fair value of assets and liabilities acquired based
on actuarial advice and our views of the exposures assumed. While we earn most of our total return on an acquisition
from disciplined claims management and/or commuting the liabilities that we have assumed, we also try to maximize
5
reinsurance recoveries on the assumed portfolio of business and investment returns from the acquired investment
portfolios.
Run-off Management
Following the acquisition of a company or portfolio of business in run-off, we strive to conduct the run-off in a
disciplined and professional manner to efficiently discharge the liabilities associated with the business while preserving
and maximizing its assets. Our approach to managing our companies and portfolios of business in run-off includes,
where possible, negotiating with third-party insureds and reinsureds to commute their insurance or reinsurance
agreement (sometimes called policy buy-backs) for an agreed upon up-front payment by us and to more efficiently
manage payment of insurance and reinsurance claims. We attempt to commute policies with direct insureds or
reinsureds to eliminate uncertainty over the amount of future claims. Commutations and policy buy-backs provide an
opportunity for the company to exit exposures to certain policies and insureds generally at a discount to the ultimate
liability and provide the ability to eliminate exposure to further losses. Commutations can also reduce the duration,
administrative burden and ultimately the future cost of the run-off.
In certain lines of business, such as direct workers’ compensation insurance, commutations and policy buy-back
opportunities are not typically available, and our strategy with respect to these businesses is to derive value through
efficient and effective management of claims.
Integral to our success is our ability to analyze, administer, and settle claims while managing related expenses,
such as loss adjustment expenses ("LAE"). We have implemented claims handling guidelines along with claims
reporting and control procedures in all of our claims units. All claims matters are reviewed regularly, with all material
claims matters being circulated to and authorized by management prior to any action being taken. Our claims
management processes also include leveraging our extensive relationships and developed protocols to more efficiently
manage outside counsel and other third parties to reduce expenses. With respect to certain lines of business, we have
arrangements with third-party administrators to manage and pay claims on our subsidiaries’ behalf and advise with
respect to case reserves. These agreements generally set forth the duties of the third-party administrators, limits of
authority, indemnification language designed for our protection and various procedures relating to compliance with
laws and regulations. These arrangements are also subject to review by our relevant claims departments, and we
monitor these administrators on an ongoing basis.
We provide consultancy services to third parties in the insurance and reinsurance industry primarily through our
subsidiaries, the Cranmore companies, Enstar Limited, Enstar (US), Inc., Paladin Managed Care Services, Inc.
("Paladin") and Kinsale Brokers Limited. In addition to third-party engagements, our consultancy companies also
perform these services in-house for our Enstar companies, using their expertise to assist in managing our run-off
portfolios and performing certain due diligence matters relating to acquired businesses. The services range from full-
service incentive-based or fixed fee run-off management to bespoke solutions such as claims inspection, claims
validation, reinsurance asset collection and IT consulting services. Paladin provides medical bill review, utilization
review, physician case management and related services in the workers’ compensation area.
Following the acquisition of a company or portfolio of business in run-off, we analyze the acquired exposures
and reinsurance receivables on a policyholder-by-policyholder basis to identify those we wish to approach to discuss
commutation. In addition, policyholders and reinsurers often approach us requesting commutation. We then carry out
a full analysis of the underlying exposures in order to determine the attractiveness of a proposed commutation. From
the initial analysis of the underlying exposures, it may take several months, or even years, before a commutation is
completed. In certain cases, if we and the policyholder or reinsurer are unable to reach a commercially acceptable
settlement, the commutation may not be achievable, in which case we will continue to settle valid claims from the
policyholder, or collect reinsurance receivables from the reinsurer, as they arise or become due.
Certain insureds and reinsureds are often willing to commute with us, subject to receiving an acceptable
settlement, as this provides certainty of recovery of what otherwise may be claims that are disputed in the future, and
often provides a meaningful up-front cash receipt that, with the associated investment income, can provide funds to
meet future claim payments or even commutation of their underlying exposure. Therefore, subject to negotiating an
acceptable settlement, many of our insurance and reinsurance liabilities and reinsurance receivables are able to be
either commuted or settled by way of policy buy-back over time. Properly priced commutations may reduce the expense
of adjusting direct claims and pursuing collection of reinsurance, realize savings, remove the potential future volatility
of claims and reduce required regulatory capital.
We manage cash flow with regard to reinsurance recoverables by working with reinsurers, brokers and
professional advisors to achieve fair and prompt payment of reinsured claims, and we take appropriate legal action to
6
secure receivables when necessary. We also attempt where appropriate to negotiate favorable commutations with our
reinsurers by securing a lump sum settlement from reinsurers in complete satisfaction of the reinsurer’s past, present
and future liability in respect of such claims.
Atrium
Our Atrium segment is comprised of the active underwriting operations and financial results of Northshore, a
holding company that owns Atrium and its subsidiaries and Arden. Enstar acquired Atrium on November 25, 2013.
Atrium was regarded as an attractive expansion opportunity by Enstar management primarily because of its skilled
underwriting and management teams and its strong historical performance at Lloyd’s.
Atrium’s wholly-owned subsidiary, Atrium Underwriters Ltd, manages Syndicate 609 which underwrites specialist
insurance and reinsurance business at Lloyd’s. Atrium’s wholly-owned subsidiary, Atrium 5 Ltd., provides 25% of the
underwriting capacity and capital to Syndicate 609, with the balance provided by traditional Lloyd’s Names. Atrium
has offices in London, the United States, Canada, and Singapore. Generally speaking, Atrium continues to operate in
accordance with the underwriting and other business strategies established pre-acquisition, although we and Trident
continually review these strategies and business goals and continue to develop synergies with our existing business
operations.
Arden is a Bermuda-based reinsurance company that provides reinsurance to Atrium (through a 65% quota
share reinsurance arrangement with Atrium 5 Ltd., which is eliminated upon consolidation) and is currently in the
process of running off certain other discontinued business. Results related to Arden’s discontinued business are
included within our Non-life Run-off segment.
Business Lines
Syndicate 609 provides insurance and reinsurance on a worldwide basis including the United States, Europe,
the Far East and Australasia. Atrium specializes in a wide range of industry classes, including accident and health,
aviation, marine, property and casualty binding authorities, non marine direct and facultative, liability, reinsurance,
upstream energy and terrorism. Lloyd’s business is often underwritten on a subscription basis across the insurance
market. Atrium is the lead underwriter in approximately 35% of the business it underwrites.
Lloyd’s is a surplus lines insurer and an accredited reinsurer in all U.S. states and territories, and a licensed (or
admitted) insurer in Illinois, Kentucky and the U.S. Virgin Islands.
A description of each of Atrium's lines of business follows:
Marine. The Marine line of business is a worldwide portfolio writing marine hull, marine war, cargo, fine art and
specie, marine and energy liability and total loss only business. This includes hull all risks, hull total loss interests,
yachts, fishing vessels, ship construction, ports, cable construction and cable operating risks, tows, mortgages interests,
port property, war risks and a number of other specialist areas of marine insurance. Atrium leads a number of the major
marine war contracts in London. Cargo, fine art and specie includes exporters, museums, auction houses, jewelers,
banks and security houses. Business is written on a direct, reinsurance, proportional and excess of loss basis.
Property and Casualty Binding Authorities. The property and casualty binding authority portfolio includes a broad
range of small and medium business entity insurance products offered across the United States and Canada. Typical
property risks include commercial, vacant and hard-to-place residential dwellings. Typical casualty risks include owners,
landlords and tenants, business owners, artisan, special events and various niche products. Business is written through
both traditional binding authorities as well as online binding authorities through AUGold, Atrium’s proprietary online
system that is used by brokers.
Upstream Energy. The upstream energy line of business is split into two main categories of assureds: operators
(private and publicly quoted companies, national oil companies and Oil Insurance Limited members) and contractors
(for drilling, service and construction entities). The principal coverage is physical damage/business interruption, control
of well and associated pollution, construction and Gulf of Mexico windstorm and other natural catastrophe perils. Nearly
all of the upstream energy line of business is sourced through Lloyd’s brokers, with the significant majority written on
a facultative basis and a smaller amount written on a treaty basis.
Reinsurance. The reinsurance line is a worldwide portfolio and includes aviation reinsurance, casualty
reinsurance, property reinsurance, and marine reinsurance. Business is mainly written on a risk excess of loss,
catastrophe excess of loss or retrocessional basis. Aviation reinsurance is written through an underwriting consortium
managed by Atrium.
7
Accident and Health. The accident and health line is a global account that encompasses a wide range of classes,
including group and individual disability, personal accident, travel insurance, medical expenses, aviation personal
accident, war risks, kidnap and ransom insurance, and sports accident insurance. The line includes both insurance
and reinsurance business, written as facultative placements and under delegated underwriting facilities and both
proportional and non-proportional treaties.
Non-Marine Direct and Facultative. The non-marine direct and facultative portfolio includes a diverse mix of
property business offered in both the international and U.S. markets, comprised of physical loss or damage, business
interruption, extra expense, construction, contingency and pecuniary loss risks in respect of onshore property and
onshore engineered risks. The majority of this line of business is written through Lloyd’s brokers and under delegated
underwriting facilities.
Liability. The liability line of business includes a professional liability North American portfolio of products covering
a diverse range of classes including architects, consultants and lawyers and also a miscellaneous range encompassing
many different professions. Included within this line of business is international liability, which is a book of primary
coverholder business covering the security, leisure and hotel industries. The majority of business is produced through
delegated binding authority contracts.
Aviation. The aviation portfolio includes all aspects of aviation insurance, with Atrium specializing in rotor wing
and non-major airlines. The majority of the account is sourced through London brokers as direct or facultative
reinsurance of a local reinsurer. This line of business also includes aviation war, covering hull war and other perils
commonly excluded from hull and liability all risk policies, and a space account, which covers launch as well as in-
orbit risks and is written through an underwriting consortium managed by Atrium.
Terrorism. The Terrorism portfolio includes political violence business, in which Atrium focuses on writing with
security consultants engaged to provide risk or country surveys.
Distribution
All of the business in the Atrium segment is placed through insurance and reinsurance brokers, and a key
distribution channel for Syndicate 609 is the managing general agent binding authorities. Atrium seeks to develop
relationships with insurance and reinsurance brokers, insurance and reinsurance companies, large global corporations
and financial intermediaries to develop and underwrite business. Independent brokers Marsh Inc., Willis Group Holdings
Ltd., RK Harrison Group Ltd and Morice, Tozer & Beck (Aviation) Ltd. accounted for 11%, 9%, 6% and 6%, respectively
of Atrium’s gross premiums written for the year ended December 31, 2016 (32% collectively). Other brokers (each
individually less than 6%) accounted for 68% of gross premiums written.
Atrium’s proprietary online platform, AUGold, provides end-to-end processing, quote and policy production for
managing general agents across a range of classes of business. The platform provides agents with efficient and cost
effective access to Lloyd’s binding authorities and is designed to enable Atrium to compete more effectively with North
American excess and surplus lines carriers.
Managing Agency Services
Atrium receives a managing agency fee of 0.7% of Syndicate 609 capacity and a 20% profit commission based
on the net earnings of Syndicate 609, pursuant to its management contract. Atrium also receives management fees
and profit commission from the management of underwriting consortiums. These fees and profit commission are
included within fees and commission income in our consolidated statement of earnings.
Claims Management
Claims in respect of business written by Syndicate 609 are primarily notified by various central market bureaus.
Where a syndicate is a "leading" syndicate on a Lloyd’s policy, its underwriters and claims adjusters work directly with
the broker or insured on behalf of itself and the following market for any particular claim. This may involve appointing
attorneys or loss adjusters. The claims bureaus and the leading syndicate advise movement in loss reserves to all
syndicates participating on the risk. If necessary, Atrium's claims department may adjust the case reserves it records
from those advised by the bureaus.
Reinsurance Ceded
On an annual basis Atrium purchases a tailored outwards reinsurance program designed to manage its risk
profile. The majority of Atrium’s third-party reinsurance cover is with Lloyd’s Syndicates or other highly rated reinsurers.
8
StarStone
Our StarStone segment is comprised of the active underwriting operations and financial results of StarStone
Holdings (formerly known as Bayshore), a holding company that owns StarStone and its subsidiaries. Results relating
to StarStone’s run-off lines of business are included within our Non-life Run-off segment.
We acquired StarStone (formerly known as Torus) on April 1, 2014 in partnership with Trident (managed by
Stone Point Capital). Dowling also has a minority investment. StarStone rebranded during 2015. Under our ownership,
and with a strengthened management team and operating structure, StarStone’s strategy emphasizes underwriting
discipline and focuses on profitable lines and improvement of operational effectiveness and efficiency.
StarStone is a global specialty insurer operating worldwide from key underwriting hubs in the Lloyd's and London
markets, Bermuda, Continental Europe, and the United States. StarStone has six wholly-owned insurance platforms
and licenses to serve a global client base. Through Syndicate 1301, we offer a variety of specialty products at Lloyd’s.
Syndicate 1301 is managed by StarStone's wholly-owned Lloyd’s managing agency.
Business Lines
StarStone offers a broad range of property, casualty and specialty insurance products to both large multi-national
and small and middle-market clients around the world. A description of StarStone's business lines is as follows:
Casualty. Casualty is StarStone's largest product group, including StarStone’s U.S. excess casualty, global
management and professional liability, global healthcare, and accident and health products. The U.S. excess casualty
product includes umbrella, excess and retained limit products across a wide range of market segments focused on
small to mid-market businesses. The global management and professional liability product specializes in directors and
officers and professional liability protection for both traditional and emerging professions. Our healthcare product
provides insurance for acute care centers, nursing homes, small hospitals, physician groups, senior living facilities,
and others. The accident and health product provides protection for a broad range of groups and individuals such as
air crew personal accident and loss of license, accidental death and permanent and temporary disability for individuals
including athletes and high net worth individuals.
Marine. We provide a broad range of marine and specialty products including hull and machinery, marine and
energy liabilities, cargo, war, transport, specie and fine art, and terrorism. These products are written through Lloyd's
Syndicate 1301, our European branch network and by some of our U.S.-based teams. We also provide high excess
casualty coverage placed in the London wholesale market which is focused on high excess layers for Fortune 500
companies.
Property. This line includes all of our property insurance products. The construction portfolio focuses on large,
complex, infrastructure and contractor cover across all risk areas. Property also includes our onshore, power, and
upstream and offshore products written through our Lloyd's and London platforms. Most lines are written on a full
value, primary, excess of loss or quota share basis.
Aerospace. We serve a diverse client base within the aerospace sector including airlines, aircraft manufacturers
and airport service providers. Our products are split between short-tail and long-tail risks and by aircraft type into three
areas: airlines, aviation products and liability, and general aviation. We previously wrote a space product, which we
no longer offer.
Workers' compensation. This line provides workers' compensation solutions for a range of industries, including
energy and maritime businesses to high-hazard operations. We also cover cross-state, multi-jurisdictional exposures
in single policies. Business is written directly with clients and through partnerships with independent agents, managing
general underwriters, and select wholesale brokers throughout the United States.
Distribution
StarStone's distribution strategy is to focus on proximity to clients and brokers, using its Lloyd’s platform, European
branch distribution network, its U.S. wholesale distribution strategy, as well as its relationships with insurance and
reinsurance brokers and risk carriers, corporations and financial intermediaries.
Syndicate 1301 can conduct business in over 200 countries and territories worldwide. In addition to underwriting
business directly at Lloyd’s in London, it provides local access to Lloyd’s in Continental Europe and the United States.
In the United States, products are written locally through our admitted and excess and surplus lines carriers.
Our U.S. strategy also utilizes our online e-commerce broker portal, ESCAPE, which offers immediate wholesale
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distribution to all 50 states. StarStone also harnesses the technology behind ESCAPE for its managing general agent
partners across Europe.
Business in the StarStone segment is generally placed through insurance and reinsurance brokers and managing
general agents. Independent brokers Marsh Inc., Aon Benfield Group Ltd. and Willis Group Holdings Ltd. accounted
for 8%, 7% and 6%, respectively, of StarStone’s gross premiums written for the year ended December 31, 2016 (21%
collectively). Other brokers and managing general agents (each individually less than 10%) accounted for the remaining
79% of gross premiums written.
Claims Management
Claims in respect of business written by Syndicate 1301, as well as in respect of StarStone’s other London
market business, are primarily notified by various central market bureaus whereby the leading syndicate or company
advise all participants of movement in loss reserves. StarStone’s claims department adjusts bureau claims in respect
of coverages where StarStone is the lead underwriter and may choose to adjust the case reserves it records from
those advised by the bureaus.
Claims in respect of non-bureau business are handled by StarStone’s experienced claims professionals.
StarStone uses claims handling guidelines along with a global claims management system to review, report and
administer claims. With respect to certain lines of business, StarStone may use third-party administrators to manage
and pay claims on its behalf and advise with respect to case reserves. StarStone also utilizes Enstar’s experience in
claims management.
Reinsurance Ceded
StarStone purchases an annual tailored outwards reinsurance program designed to manage its risk profile. The
majority of StarStone’s third party reinsurance cover is with highly rated reinsurers or is collateralized by letters of
credit. Several of the StarStone affiliates have entered into a Quota Share Treaty with KaylaRe Ltd. pursuant to which
KaylaRe Ltd. reinsures 35% of all business written by these StarStone affiliates for risks attaching from January 1,
2016, net of the StarStone affiliates’ reinsurance programs.
Life and Annuities
Our Life and Annuities segment consists of the operations of our subsidiaries managing our closed-block of life
and annuity business and our life settlements business. The segment includes the companies we acquired in the
Pavonia acquisition in 2013, which operate primarily out of our New Jersey office, which are now held for sale as
described above. The segment also includes Laguna Life Limited, a small Irish-based closed-life company, a portfolio
of life settlements business, and Belgian insurer, Alpha, a European insurance company that wrote credit and life
insurance and is now in run-off. Alpha also wrote non-life business, which is reported in our Non-life Run-off segment.
Similar to our Non-life Run-off segment, our life and annuities companies are no longer writing new policies,
however, unlike that segment, these companies continue to generate premiums with respect to their in-force policies.
Our strategy in the Life and Annuities segment differs from our non-life business, in particular because we have
limited ability to shorten the duration of the liabilities of these businesses through either early claims settlement,
commutations or policy buy-backs. Instead, we hold the policies to their natural maturity or lapse, while aiming to
efficiently manage our invested assets in those businesses to match the duration and cash flows of the liability profile,
and will pay claims as they come due.
Life Business
Our life run-off business consists of: (i) Pavonia's credit life and disability insurance, term life insurance, corporate
owned life insurance, assumed reinsurance of term ordinary life and accidental death and dismemberment products
sold in the United States and Canada; (ii) Laguna Life Limited's term life insurance primarily sold in the U.K. and
Europe; and (iii) Alpha's credit and life insurance sold in Europe. The life companies continue to generate premiums,
and accordingly, the reserves remain sensitive to lapse rates as well as mortality rates. As described above under
"Business Held for Sale," we have entered into a definitive agreement to sell Pavonia, and we have therefore classified
Pavonia's assets and liabilities as held-for-sale.
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Annuities
Our annuities run-off business relates solely to business assumed by one of the Pavonia companies of a closed
block of structured settlement, lottery, and other immediate annuities (the "PPA business"), which is part of the Pavonia
transaction described above under "Business Held for Sale." Reserves relating to the PPA business constitute 80%
of the aggregate reserves of the Pavonia companies as at December 31, 2016.
Life Settlements
Our life settlements business relates to interests in U.S. life insurance policies acquired in the secondary and
tertiary markets and through collateralized lending transactions. We pay premiums on these policies and other costs
to keep the policy in force, and we recognize income upon a policy maturity event. The investments in collateralized
lending transactions were transferred to the Non-life Run-off segment during 2015.
Liability for Losses and Loss Adjustment Expenses
The liability for losses and LAE, also referred to as loss reserves, represents our gross estimates before
reinsurance for unpaid reported losses and losses that have been incurred but not reported ("IBNR") for our Non-life
Run-off, Atrium and StarStone segments. We recognize an asset for the portion of the liability that we expect to recover
from reinsurers. LAE reserves include allocated loss adjustment expenses ("ALAE"), and unallocated loss adjustment
expenses ("ULAE"). ALAE are linked to the settlement of an individual claim or loss, whereas ULAE are based on our
estimates of future costs to administer the claims. IBNR represents reserves for loss and LAE that have been incurred
but not yet reported to us. This includes amounts for unreported claims, development on known claims and reopened
claims.
We establish reserves for individual claims incurred and reported, as well as IBNR claims. We use considerable
judgment in estimating losses for reported claims on an individual claim basis based upon our knowledge of the
circumstances surrounding the claim, the severity of the injury or damage, the jurisdiction of the occurrence, the
potential for ultimate exposure, the type of loss, and our experience with the line of business and policy provisions
relating to the particular type of claim. We also use considerable judgment to establish reserves for IBNR claims using
a variety of generally accepted actuarial methodologies and procedures to estimate the ultimate cost of settling IBNR
claims. See "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical
Accounting Policies - Losses and Loss Adjustment Expenses" for a description of our loss reserving process.
The estimation of unpaid claim liabilities at any given point in time is subject to a high degree of uncertainty for
a number of reasons. A significant amount of time can lapse between the assumption of risk, the occurrence of a loss
event, the reporting of the event to an insurance or reinsurance company and the ultimate payment of the claim on
the loss event. Our actuarial methodologies include industry benchmarking which, under certain methodologies,
compares the trend of our loss development to that of the industry. To the extent that the trend of our loss development
compared to the industry changes in any period, it is likely to have an impact on the estimate of ultimate liabilities.
Unpaid claim liabilities for property and casualty exposures in general are impacted by changes in the legal environment,
jury awards, medical cost trends and general inflation. Certain estimates for unpaid claim liabilities involve considerable
uncertainty due to significant coverage litigation, and it can be unclear whether past claim experience will be
representative of future claim experience. Ultimate values for such claims cannot be estimated using reserving
techniques that extrapolate losses to an ultimate basis using loss development factors, and the uncertainties
surrounding the estimation of unpaid claim liabilities are not likely to be resolved in the near future. In addition, reserves
are established to cover loss development related to both known and unasserted claims. Consequently, our subsequent
estimates of ultimate losses and LAE, and our liability for losses and LAE, may differ materially from our initial estimates.
In our Non-life Run-off segment, policy buy-backs and commutations provide an opportunity for us to exit and
settle exposures to policies with insureds and reinsureds, often at a discount to the previously estimated ultimate
liability. Commutations are beneficial to us as they extinguish liabilities, reduce the potential for future adverse loss
development, and reduce future claims handling costs. Our estimates of ultimate claim liabilities, including IBNR
reserves, are based upon actuarial methodologies applied to the remaining non-commuted aggregate exposures and
revised historical loss development information, after adjusting for the elimination of historical loss development relating
to commuted and bought-back exposures. In addition, the routine settlement of claims, at either below or above the
carried advised loss reserve, updates historical loss development information to which actuarial methodologies are
applied often, resulting in revised estimates of ultimate liabilities. Our loss reserves are largely related to workers
compensation and casualty exposures, which include latent exposures primarily relating to asbestos and environmental
damage. In establishing reserves, we consider facts currently known and the current state of the law and coverage
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litigation. Case reserves are recognized for known claims (including the cost of related litigation) when sufficient
information has been developed to indicate the involvement of a specific insurance policy.
Further information regarding the liability for net losses and LAE, including loss development tables and a
reconciliation of activity, is included in the notes to our consolidated financial statements included within Item 8 of this
Annual Report on Form 10-K.
Further information regarding net incurred losses and LAE is included in "Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Results of Operations by Segment."
Life Benefits and Claims Reserves
We estimate our life benefit and claim reserves on a present value basis using standard actuarial techniques
and cash flow models. We establish and maintain our life reserves at a level that we estimate will, when taken together
with future premium payments and investment income expected to be earned on associated premiums, be sufficient
to support future cash flow benefit obligations and third-party servicing obligations as they become payable.
Our policy benefits for life contracts as at December 31, 2016 and 2015 were $112.1 million and $126.3 million,
respectively. Amounts related to Pavonia are excluded as these are classified as liabilities held-for-sale, as described
in "Note 5 - Held-For-Sale Business" in the notes to our consolidated financial statements included within Item 8 of
this Annual Report on Form 10-K.
See "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Policy
Benefits for Life Contracts" for a discussion of our reserves in this segment.
Investments
For information regarding our investment strategy, portfolio and results, refer to "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Investments."
Ratings
In our active underwriting businesses, financial strength ratings are an important factor in establishing competitive
position and in product marketing. Financial strength ratings by third-party organizations provide an opinion of an
insurer’s or reinsurer’s financial strength and ability to meet ongoing obligations to its policyholders. These ratings
reflect A.M. Best’s, S&P’s, and Fitch’s opinions of capitalization, performance and management, and are not a
recommendation to buy, sell or hold securities. These ratings may be changed, suspended or withdrawn at the discretion
of the agencies. Rating agencies charge fees for their services.
Our Lloyd’s Syndicates 609 (Atrium) and 1301 (StarStone) are part of a group rating for the Lloyd's overall
market. Lloyd’s is rated "A" (Excellent) by A.M. Best, "A+" (Strong) by Standard and Poor’s (or S&P) and "AA-" (Very
Strong) by Fitch Ratings.
StarStone’s operating insurance entities have been assigned a financial strength rating of "A-" (Excellent) by
A.M. Best. The A.M. Best rating for StarStone of "A-" (Excellent) by A.M. Best is the fourth highest of 16 rating levels.
Refer to "Item 1A. Risk Factors - Downgrades of financial strength ratings at StarStone or Lloyd’s could materially
and negatively impact our active underwriting business and our company," for more information regarding the
importance of financial strength ratings.
Competition
Our Non-life Run-off and Life and Annuities segments compete in international markets with domestic and
international reinsurance companies to acquire and manage insurance and reinsurance companies in run-off and
portfolios of insurance and reinsurance business in run-off. The acquisition and management of companies and
portfolios in run-off is highly competitive, and driven by a number of factors, including proposed acquisition price,
reputation, and financial resources. Some of these competitors have greater financial resources than we do, have
been operating for longer than we have and have established long-term and continuing business relationships
throughout the insurance and reinsurance industries, which can be a significant competitive advantage. As a result,
we may not be able to compete successfully in the future for suitable acquisition candidates or run-off portfolio
management engagements.
Our Atrium and StarStone active underwriting segments operate in the highly competitive insurance and
reinsurance markets, where companies compete on the basis of premium rates, reputation and perceived financial
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strength, the terms and conditions of the products offered, ratings assigned by independent rating agencies, speed of
claims payments and quality of administrative services, relationships with insurance and reinsurance companies and
insurance intermediaries, capacity and coverage offered, experience in the particular risk to be underwritten, and
various other factors.
Atrium and StarStone compete in the international insurance and reinsurance markets directly with numerous
other parties, including established global insurance and reinsurance companies, start-up insurance and reinsurance
entities, other Lloyd’s syndicates, as well as capital markets and securitization structures aimed at managing risk.
Many of these competitors have significant operating histories, underwriting expertise and capacity, extensive capital
resources, and longstanding customer relationships. Any of these factors can be a significant competitive advantage
and may make it difficult for us to write business effectively and profitably. Because few barriers exist to prevent insurers
and reinsurers from entering the non-life active underwriting business, market conditions and capital capacity influence
the degree of competition at any given time. For a detailed discussion of competition and the cyclical pattern of the
insurance and reinsurance market, refer to "Item 1A. Risk Factors - Risks Relating to our Insurance Businesses." The
cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which Atrium
and StarStone compete.
Employees
As of December 31, 2016, we had 1,278 employees, as compared to 1,327 as of December 31, 2015. Although
our employee count was not significantly changed from last year, we generally do not expect it to be consistent from
period to period due to our business strategies, which include anticipated ongoing acquisition and integration activities.
As of December 31, 2016, the percentage of our total employees in each segment was as follows: Non-life Run-off,
51%; StarStone, 33%; Atrium, 12%; and Life and Annuities, 4%.
Financial Information About Geographic Areas
For financial information about geographic areas, see "Note 24 - Segment Information" in the notes to our
consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
Enterprise Risk Management
Risk assumption is inherent in our business and appropriately setting risk appetite and executing our business
strategies in accordance therewith is key to our performance. Effective risk oversight is an important priority for our
Boards of Directors (both at the Company level and at a subsidiary level), and we place strong emphasis on ensuring
we have a robust risk management framework to identify, measure, manage, report and monitor risks that affect the
achievement of our strategic, operational and financial objectives.
The overall objective of our enterprise risk management ("ERM") framework is to support good risk governance,
support the achievement of business objectives, and provide overall benefits to us by adding value to the control
environment and contributing to an effective business strategy, efficiency in operations and processes, strong financial
performance, reliable financial reporting, regulatory compliance, a good reputation with key stakeholders, business
continuity planning, and capital planning.
Risk Governance and Risk Management Organization
Our ERM framework consists of numerous processes and controls that have been designed by our senior
management (including our risk management team), with oversight by our Board of Directors and its committees,
management by our executive leaders, and implementation by employees across our organization. Accountability for
the implementation and oversight of risk appetite and processes is aligned with individual corporate executives. Risk
committees and boards receive regular risk management information to support risk governance at the group and
subsidiary levels.
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Board of Directors
The Board of Directors and its committees have risk oversight responsibility and play an active role in overseeing
management of the risks we face. Our Underwriting and Risk Committee has responsibility for the oversight of
underwriting strategy and ERM, reviews our overall risk appetite with input from management, reviews our ERM
methodologies and oversees management’s execution of our ERM objectives. Among its other responsibilities, the
Underwriting and Risk Committee also reviews and approves our annual Group Solvency Self-Assessment ("GSSA")
report. Our Audit Committee, comprised entirely of independent directors, oversees our accounting and financial
reporting-related risks. Our Investment Committee is responsible for overseeing investment-related risk, including
those related to our cash and investment portfolio and investment strategy. Our Compensation Committee oversees
compensation-related risks; and our Nominating and Governance Committee is responsible for overseeing corporate
governance-related risks.
Executive and Risk Management Organization
Our Global ERM Committee ("GERMC"), a group of senior management personnel charged with assessing all
significant risk issues on a global basis, reviews and evaluates the current and emerging risks to which the Group is
exposed, and monitors and oversees the guidelines and policies that govern the processes by which the Group
identifies, assesses and manages its exposure to risk. The GERMC is chaired by the Chief Risk Officer ("CRO"). Its
membership includes our Chief Financial Officer ("CFO"), Chief Operating Officer ("COO") and senior management
from across our corporate functions and business units. Our CRO reports periodically on behalf of the GERMC to both
the Underwriting and Risk Committee and the Audit Committee of the Board of Directors.
In addition to executive officer and director oversight, our ERM governance structure is directed by local
jurisdictional and subsidiary risk committees, which include senior management and members of the global senior
management team. The committees provide oversight and governance of our ERM initiatives, oversee the operation
of our internal controls, monitor the identified risks compared to our risk appetite, and provide analysis to management
in order to appropriately manage and govern the business and the associated risks on a day-to-day basis.
Our Risk Management department focuses primarily on implementing and overseeing the administration of the
Underwriting and Risk Committee and GERMC directives and facilitating an efficient, effective and consistent approach
to ERM across our Group. Our Internal Audit department independently reviews the effectiveness of our ERM
framework. The results of audits are monitored by the Audit Committee. Our risk governance structure is further
complemented by our compliance function which seeks to mitigate legal and regulatory compliance risks. This includes
ensuring that significant legal and regulatory developments are observed and that we react appropriately to impending
legislative and regulatory changes and applicable court rulings. Our executive management committees have oversight
of specific risk management processes, including, for example, those relating to underwriting, investments and reserving
matters.
Entity Level Management
At the operating subsidiary level, risks attendant to our individual insurance and reinsurance subsidiaries are
also overseen by the subsidiary boards of directors, subsidiary risk committees and other committees, and management
teams, consistent with applicable regulatory requirements and our ERM framework.
Certain risks related to our Atrium and StarStone segments are distinct from our Non-life Run-off and Life and
Annuities segments, and these businesses include external stakeholders that also differ from our other businesses,
including our joint venture partners, rating agencies, and, with respect to Atrium, third-party Lloyd’s names who provide
75% of the underwriting capacity to Syndicate 609. Accordingly, in addition to the Group oversight of risks relating to
our active underwriting businesses, Atrium and StarStone each maintain dedicated risk governance and management
frameworks to manage risk, return and capital in their individual businesses, which fit into and form part of our Group
ERM framework. These include oversight at the Atrium and StarStone holding company boards of directors, as well
as executive risk committees and other committees that manage and monitor risks relevant to specified functional
areas. Individualized risk policies and risk appetites are established and tailored to the specific needs of Atrium and
StarStone, respectively. Enstar senior executives serve as members of the Atrium and StarStone boards of directors
and certain committees and formal risk reporting for Atrium and StarStone forms part of the regular ERM reporting to
the GERMC and Underwriting and Risk Committee.
Each regulated insurance and reinsurance subsidiary has its own risk register documenting its risk landscape
with risk and control owners assigned, which is maintained through a risk management software system. The Group
information technology department maintains risk registers with more detailed IT and information security-specific
risks. We recognize the importance of information technology and management of data in supporting our businesses,
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and we utilize a number of technology platforms to assist in our ERM, underwriting, investments, financial and regulatory
reporting processes and procedures across our organization. We review and seek to enhance our technology platforms
on an ongoing basis.
We conduct the risk assessment process for the Group and for each of our regulated insurance and reinsurance
subsidiaries on a quarterly basis. The assessment process utilizes a risk management software system. The risk
management department reviews and consolidates these risk assessments and aggregates the assessment at a
jurisdictional and Group level to facilitate discussion and challenge and to assess the overall risk categories.
Risk Appetite
Our risk appetite considers material risks relating to, among other things, strategic risk, insurance risk, market
risk, liquidity risk, credit/counterparty risk, operational risk, and regulatory/reputational risk. Our risk appetite is
established at the Group level and represents the amount of risk that we are willing to accept compared to risk metrics
based on our shareholders equity, capital resources, potential financial loss, and other risk-specific measures. Risk
levels are monitored and any deviations from pre-established levels are reported in order to facilitate responsive action.
Our non-life run-off and life and annuities subsidiaries set individual risk appetites and risk level monitoring
consistent with the Group-wide risk management framework.
Atrium and StarStone establish individual risk appetites unique to each business, aligned to their business plan
and strategy and consistent with the Group-wide risk management framework. Their risk appetites are set in conjunction
with annual business planning and include, among other things, risk tolerances with respect to risk categories and
underwriting limits by individual lines of business. We consider and review our active underwriting subsidiaries' risk
appetites and group risk aggregation across our active underwriting businesses as part of our annual business planning
process.
Risk Categories
We manage our ERM process based on the major categories of risk within our business discussed below. Our
ERM is a dynamic process, with updates continually being made as a result of changes in our business, industry and
the economic environment. This process and our controls cannot provide absolute assurance that our risk management
objectives will be met or that all risks will be appropriately identified and managed, and accordingly, the possibility of
material adverse effects on our company remains. See "Item 1A. Risk Factors" for important information on the risks
we face.
Strategic Risk. Strategic risk is the risk of unintended adverse impact on the business plan objectives arising
from business decisions, improper implementation of those decisions, inability to adapt to changes in the external
environment, or circumstances that are beyond our control. We manage strategic risk by utilizing a strategic business
planning process involving our executive management and Board of Directors. Our annual business plan is reviewed
and overseen by our executive management and Board of Directors, and actual performance, trends, and uncertainties
are monitored in comparison to the plan throughout the year. We specifically evaluate acquisition opportunities pursuant
to a detailed and proprietary process that takes into account, among other things, the risk of the transaction and
potential returns, the portfolio’s risk exposures, claims management practices, reserve requirements and outstanding
claims, as well as risks specifically related to our ability to integrate the acquired business. Our governance process,
led by our Board of Directors, reviews newly proposed transaction opportunities, capital-raising matters, and other
significant business initiatives.
Insurance Risk. Insurance risk refers to the risks spanning many aspects of our insurance operations, including
underwriting risk, risk assumed upon acquisitions/portfolio transfers, risk associated with our reserving assumptions,
and life and annuities portfolio risk.
Underwriting risk in our active underwriting businesses relates to the inherent uncertainty as to the occurrence,
amount and timing of insurance liabilities we assume through our underwriting process. We manage exposure levels
across risk categories to maintain them within the approved risk appetite. Underwriting risk management strategies
may differ depending on the line of business involved and the type of account being insured or reinsured.
We strive to mitigate underwriting risk through our controls and strategies, including our underwriting risk selection,
diversification of our underwriting portfolios by class and geography, purchasing reinsurance, establishing a business
plan and associated parameters, underwriting peer review, authority limits, underwriting guidelines that provide detailed
underwriting criteria and a framework for pricing, along with the use of specialized underwriting teams supported by
actuarial, catastrophe modeling, claims, risk management, legal, finance, and other technical personnel.
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We utilize internally developed pricing models to evaluate individual underwriting decisions within the context of
business plans and risk appetites. We also use internally developed capital models, which provide information on key
risks and facilitate an understanding of the interaction among the risks and related exposures, as a comprehensive
tool for business and capital planning.
In some business lines we are exposed to multiple insured losses arising out of a single peril, such as a natural
catastrophe event (for example, a hurricane, windstorm, tornado, flood or earthquake) or a man-made event (for
example, war, terrorism, airplane crashes and other transportation-related accidents, or building fires). We model and
manage our individual and aggregate exposures to these events and other material correlated exposures in accordance
with our risk appetite. Our modeling process utilizes a major commercial vendor model to measure certain of these
exposures. The incidence, timing and severity of catastrophes and other event types are inherently unpredictable, and
it is difficult to estimate the amount of loss any given occurrence will generate. Accordingly, there is material uncertainty
around our ability to measure exposures, which can cause actual exposures and losses to deviate from our estimates.
To monitor catastrophe risk, we review exceedance probability curves aggregated across Atrium and StarStone
together with aggregated realistic disaster scenarios. We consider occurrence exceedance probability and aggregate
exceedance probability, which reflect losses resulting from single or multiple events, from individual perils and in the
aggregate. We manage our underwriting exposure through a combination of reporting zonal aggregations, realistic
disaster scenarios and stochastic modeling. StarStone also manages its underwriting exposure through monitoring
realistic disaster scenarios for man-made events and certain natural catastrophe risks, and applying absolute maximum
limits by line of business.
We manage acquisition risks through our acquisition evaluation process, and reserving practices discussed
above in "Liability for Losses and Loss Adjustment Expenses - Loss Reserving."
Reserving Risk. Reserving risk is the risk related to our carried reserves for losses and loss expenses. The
estimation of reserves is subject to uncertainty because the ultimate cost of settling claims is dependent upon future
events and loss development trends that can vary with the impact of economic, social, and legal and regulatory matters.
We manage reserving risk through our reserving practices discussed above in "Liability for Losses and Loss Adjustment
Expenses - Loss Reserving," as well as as well as through our commutation and policy buy-back strategy and claims
management practices. We also have a Reserving Committee that is responsible for managing reserving risk and
making recommendations to our Chief Financial Officer on the appropriate level of reserves to include in our consolidated
financial statements. For additional information relating to our loss reserves by segment, see "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies."
Market Risk. We are principally exposed to four types of market risk: interest rate risk, credit risk, equity price
risk and foreign currency risk. We manage market risk in a number of ways, including use of investment guidelines;
regular reviews of investment opportunities; market conditions; portfolio duration; oversight of the selection and
performance of external asset managers; regular stress testing of the portfolio against known and hypothetical
scenarios; established tolerance levels; and, where possible, foreign currency asset/liability matching. Investments
are primarily managed by our Investment Department, which is overseen by our Investment Committee.
Liquidity Risk. Liquidity risk is the risk that we are unable to realize investments and other assets in order to
settle financial obligations when they fall due or that we would have to incur excessive cost to do so. We manage this
risk generally by following a conservative investment strategy designed to emphasize the preservation of our invested
assets and provide sufficient liquidity for the prompt payment of claims and contract liabilities, as well as for settlement
of commutation payments. Liquidity risk also includes the risk of our dependence of our future cash flows upon the
availability of dividends or other statutorily permissible payments from our subsidiaries, which is limited by applicable
laws and regulations. We manage this risk through our capital planning processes, which include reviews of minimum
capital resources requirements at our regulated subsidiaries and anticipated distributions, as well as anticipated capital
needs.
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Credit / Counterparty Risk. Credit risk relates to the uncertainty of a counterparty’s ability to make timely
payments in accordance with contractual terms of the instrument or contract. We are exposed to direct credit risk
primarily within our portfolios of fixed maturity and short-term investments, and through customers, brokers and
reinsurers in the form of premiums receivable and reinsurance recoverables. In our run-off businesses, we manage
credit risk with respect to our reinsurance recoverables by ongoing monitoring of counterparty ratings and working to
achieve prompt payment of reinsured claims, as well as through our commutation strategy. In our active underwriting
businesses, we firstly mitigate credit risk through our reinsurance purchasing process, where reinsurers are subject
to financial security and rating requirements prior to approval and by limiting exposure to individual reinsurers. Thereafter
we manage credit risk by the regular monitoring of reinsurance recoveries and premium due directly or via brokers
and other intermediaries. In our fixed maturity and short-term investment portfolios, we attempt to mitigate credit risk
through diversification and issuer exposure limitation.
Operational Risk. Operational risk is the risk of a loss arising from inadequate or failed internal processes, or
from external events, personnel, systems or third parties. Due to our acquisitive strategy, operational risk also includes
risks and challenges associated with integrating new companies into the Group. We seek to mitigate operational risks
through the application of our policies and procedures and internal control and compliance processes throughout the
Group and a focus on acquisition integration and assimilation of new companies into our internal control systems,
including but not limited to business continuity planning, information security procedures, financial reporting controls
and a review process for material third-party vendor usage.
Regulatory / Reputational Risk. Regulatory and reputational risk is the risk that an act or omission by us or
any of our employees could result in damage to our reputation or loss of trust among our stakeholders. We manage
reputational risk through a focus on compliance with laws and regulations, adherence to our policies and procedures
(including our Code of Conduct) and our internal controls, an established corporate governance framework and
practices, and communication and engagement with external stakeholders.
Regulation
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of
regulation varies significantly from one jurisdiction to another. Our material operations are in Bermuda, the United
Kingdom, the United States, Australia and several European countries. We are subject to extensive regulation under
the applicable statutes in these countries and any others in which we operate. In addition, the Bermuda Monetary
Authority ("BMA") acts as group supervisor of our insurance and reinsurance companies (our "Group"). A summary
of the material regulations governing us in these countries is set forth below.
We may become subject in the future to regulation in new jurisdictions or additional regulations in existing
jurisdictions depending on the location and nature of any companies acquired and the volume and location of business
being transacted by our existing companies.
Bermuda
Operating Subsidiaries
The Insurance Act 1978 of Bermuda and related regulations, as amended (together, the "Insurance Act"), regulate
the insurance and reinsurance business of our operating subsidiaries in Bermuda. The Insurance Act imposes certain
solvency and liquidity standards and auditing and reporting requirements and grants the BMA powers to supervise,
investigate, require information and the production of documents and intervene in the affairs of insurance companies.
Significant requirements pertaining to our regulated Bermuda subsidiaries vary depending on the class in which
our company is registered, but generally include the appointment of a principal representative in Bermuda, the
appointment of an independent auditor, the appointment of an approved loss reserve specialist, the filing of annual
statutory financial statements, the filing of statutory financial returns, compliance with group solvency and supervision
rules (if applicable), and compliance with the Insurance Code of Conduct (relating to corporate governance, risk
management and internal controls).
Our regulated Bermuda subsidiaries must also comply with a minimum liquidity ratio and minimum solvency
margin. The minimum liquidity ratio requires that the value of relevant assets must not be less than 75% of the amount
of relevant liabilities. The minimum solvency margin, which varies depending on the class of the insurer, is determined
as a percentage of either net reserves for losses and LAE or premiums or pursuant to a risk-based capital measure.
StarStone Insurance Bermuda Limited, a Class 4 insurer, and Cavello Bay Reinsurance Limited, a Class 3A insurer,
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both domiciled in Bermuda, are subject to an enhanced capital requirement ("ECR") determined pursuant to a risk-
based capital measure and are both required to file a Commercial Insurer’s Solvency Self-Assessment (“CISSA”), and
a financial condition report with the BMA.
Each of our regulated Bermuda subsidiaries would be prohibited from declaring or paying any dividends if it were
in breach of its minimum solvency margin or liquidity ratio or if the declaration or payment of such dividends would
cause it to fail to meet such margin or ratio. In addition, each of our regulated Bermuda subsidiaries is prohibited,
without the prior approval of the BMA, from reducing by 15% or more its total statutory capital as set out in its previous
year’s statutory financial statements. Our Bermuda insurance companies that are in run-off are required to seek BMA
approval for any dividends or distributions.
Group Supervision
The BMA’s group supervision objective is to provide a coordinated approach to the regulation of an insurance
group and its supervisory and capital requirements. Bermuda has been recognized by the U.S. National Association
of Insurance Commissioners ("NAIC") as a qualified jurisdiction. Furthermore, the E.U. recognizes Bermuda's full
equivalence under Solvency II effective from January 1, 2016.
As our Group supervisor, the BMA performs a number of functions including: (i) coordinating the gathering and
dissemination of information for other regulatory authorities; (ii) carrying out a supervisory review and assessment of
our Group; (iii) carrying out an assessment of our Group's compliance with the rules on solvency, risk concentration,
intra-group transactions and good governance procedures; (iv) planning and coordinating, through regular meetings
with other authorities, supervisory activities in respect of our Group; (v) coordinating any enforcement action that may
need to be taken against our Group or any Group members; and (vi) coordinating meetings of colleges of supervisors
in order to facilitate the carrying out of these functions. StarStone Insurance Bermuda Limited has been named as
our Group’s Designated Insurer. As Designated Insurer, StarStone Insurance Bermuda Limited is required to facilitate
compliance by our Group with the insurance solvency and supervision rules.
On an annual basis, the Group is required to file Group statutory financial statements, a Group statutory financial
return, a Group capital and solvency return, audited Group financial statements, a Group Solvency Self-Assessment
("GSSA"), and a financial condition report with the BMA. The GSSA is designed to document our perspective on the
capital resources necessary to achieve our business strategies and remain solvent, and to provide the BMA with
insights on our risk management, governance procedures and documentation related to this process. In addition,
SIBL and the Group are required to file a quarterly financial return with the BMA.
We are required to maintain available Group statutory capital and surplus in an amount that is at least equal to
the group enhanced capital requirement ("Group ECR"). The BMA has also established a group target capital level
equal to 120% of the Group ECR.
The BMA also maintains supervision over the controllers of all Bermuda registered insurers, and accordingly,
any person who, directly or indirectly, becomes a holder of at least 10%, 20%, 33% or 50% of our ordinary shares
must notify the BMA in writing within 45 days of becoming such a holder (or ceasing to be such a holder). The BMA
may object to such a person and require the holder to reduce its holding of ordinary shares and direct, among other
things, that voting rights attaching to the ordinary shares shall not be exercisable.
United Kingdom and Lloyd’s
United Kingdom
Our U.K.-based insurance subsidiaries consist primarily of run-off companies and StarStone Insurance SE.
These subsidiaries are authorized by the U.K. Prudential Regulation Authority (the "PRA"), and are also regulated by
the Financial Conduct Authority (the "FCA", together with the PRA, the "U.K. Regulator"). Our U.K. run-off subsidiaries
may not underwrite new business without the approval of the U.K. Regulator. E.U. directives also allow certain of our
regulated U.K. subsidiaries to conduct business in E.U. states other than the U.K. within the scope of permission
granted by the U.K. Regulator without the necessity of additional licensing or authorization in E.U. countries.
Our U.K.-based insurance subsidiaries are required to maintain adequate financial resources in accordance with
the requirements of the U.K. Regulator. The calculation of the minimum capital resources requirements in any particular
case depends on, among other things, the type and amount of insurance business written and claims paid by the
insurance company.
The Solvency II framework directive, which took effect on January 1, 2016, sets out new E.U.-wide requirements
on capital adequacy and risk management for insurers with the aim of further increasing policyholder protection, instilling
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greater risk awareness and improving the international competitiveness of E.U. insurers. Insurers must now comply
with a Solvency Capital Requirement ("SCR"), which is calculated using either the Solvency II standard formula or a
bespoke internal model. Our non-Lloyd's U.K. companies use the standard formula.
The U.K. Regulator’s rules require our U.K. insurance subsidiaries to obtain regulatory approval for any proposed
or actual payment of a dividend. The U.K. Regulator uses the SCR, among other tests, when assessing requests to
make distributions.
In an advisory referendum held on June 23, 2016, the U.K. voted to leave the E.U. (commonly referred to as
“Brexit”). For a discussion of the potential impact of Brexit on our operations, refer to "Item 1A. Risk Factors - Risks
Relating to Laws and Regulation."
Under the Financial Services and Markets Act of 2000 ("FSMA"), any company or individual (together with its
or his concert parties) proposing to directly or indirectly acquire "control" over a U.K. authorized insurance company
(which is generally defined as acquiring 10% or more of the shares or voting power in a U.K. authorized insurance
company or its parent company) must seek prior approval of the U.K. Regulator of his intention to do so. A person who
is already deemed to have "control" will require prior regulatory approval if the person increases the level of "control"
beyond 20%, 30% and 50%.
Lloyd’s
We participate in the Lloyd’s market through our interests in: (i) Atrium’s Syndicate 609, which is managed by
Atrium Underwriters Limited, a Lloyd's managing agent; (ii) StarStone’s Syndicate 1301, which is managed by StarStone
Underwriting Limited ("SUL"), a Lloyd’s managing agent; and (iii) Syndicate 2008, a wholly aligned syndicate that has
permission to underwrite RITC business and other run-off or discontinued business type transactions with other Lloyd’s
syndicates. SUL serves as managing agent for Syndicate 2008. All of the Group’s underwriting by these syndicates is
supported by one or more internal corporate members.
Our Lloyd’s operations are subject to authorization and regulation by the U.K. Regulator and compliance with
the Lloyd’s Act(s) and Byelaws and regulations, as well as the applicable provisions of the FSMA. The Council of
Lloyd’s has wide discretionary powers to regulate members’ underwriting, and its exercise of these powers might affect
the return on an investment of the corporate member in a given underwriting year. This discretion includes the ability
to assess up to 3% of a member’s underwriting capacity in any one year as a Central Fund contribution.
The underwriting capacity of a corporate member of Lloyd’s must be supported by providing a deposit (referred
to as "Funds at Lloyd’s") in the form of cash, securities or letters of credit in satisfaction of its capital requirement. The
amount of the Funds at Lloyd’s is assessed annually and is determined by Lloyd’s in accordance with applicable capital
adequacy rules.
Business plans, including maximum underwriting capacity, for Lloyd’s syndicates requires annual approval by
the Lloyd’s Franchise Board, which may require changes to any business plan or additional capital to support
underwriting plans.
In order to achieve finality and to release their capital, Lloyd’s members are usually required to have transferred
their liabilities through an approved RITC, such as offered by Syndicate 2008. RITC is generally put in place after the
third year of a syndicate year of account. On successful conclusion of RITC, any profit from the syndicate for that year
of account can be fully remitted by the managing agent to the syndicate’s members.
The Lloyd’s market has applied the Solvency II internal model under Lloyd’s supervision, and our Lloyd’s
operations are required to meet Solvency II standards. Effective January 1, 2016, the Society of Lloyd's received
approval from the PRA to use its internal model under the Solvency II regime.
Lloyd’s approval is required before any person can acquire control of a Lloyd’s managing agent or Lloyd’s
corporate member.
United States
Our insurance and reinsurance companies domiciled in the United States consist of property and casualty
companies and life and annuities companies in run-off, as well as StarStone Specialty Insurance Company (a U.S.
excess and surplus lines insurer) and StarStone National Insurance Company (a U.S. admitted insurer that is licensed
in all 50 states and the District of Columbia). Our U.S. insurers are subject to extensive governmental regulation and
supervision by the states in which they are domiciled, licensed and/or eligible to conduct business. The insurance laws
and regulations of the state of domicile have the most significant impact on operations. We currently have U.S. insurers
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domiciled in Illinois, Michigan, New York, Delaware and Rhode Island, with two of these insurers also commercially
domiciled in California.
Generally, regulatory authorities have broad regulatory powers over such matters as licenses, standards of
solvency, premium rates, policy forms, marketing practices, claims practices, investments, security deposits, restrictions
on size of risks that may be insured under a single policy, methods of accounting, form and content of financial
statements, certain aspects of governance, enterprise risk management, reserves and provisions for unearned
premiums, unpaid losses and LAE, reinsurance, minimum capital and surplus requirements, dividends and other
distributions to shareholders, periodic examinations, annual and other report filings, and transactions among affiliates.
U.S. insurers are also required to maintain minimum levels of solvency and liquidity as determined by law, and
to comply with risk-based capital requirements and licensing rules. Insurers having less statutory surplus than required
by the risk-based capital calculation will be subject to varying degrees of regulatory action. If any of our U.S. insurers
were to have risk-based capital levels that are below required levels, they would be subject to increased regulatory
scrutiny and control by their domestic and possibly other insurance regulators. As of December 31, 2016, all of our
U.S. insurers exceeded their required levels of risk-based capital.
Applicable insurance laws also limit the amount of dividends or other distributions our U.S. insurers can pay to
us. The insurance regulatory limitations are generally based on statutory net income and/or certain levels of statutory
surplus as determined by the insurer’s state or states of domicile. Generally, prior regulatory approval must be obtained
before an insurer may pay a dividend or make a distribution above a specified level.
All states have enacted legislation regulating insurance holding company systems that requires each insurance
company in the system to register with the insurance department of its state of domicile and furnish information
concerning the operations of companies within the holding company system that may materially affect the operations,
management or financial condition of the insurers within the system. The NAIC has adopted amendments to the
Insurance Holding Company System Regulatory Act and associated regulations, which all states in which our U.S.
insurers are domiciled or commercially domiciled have adopted. The amendments provide the regulators with additional
tools to evaluate risks to an insurance company within the insurance holding company system. They impose more
extensive informational requirements on parents and other affiliates of licensed insurers with the purpose of protecting
them from enterprise risk, including requiring an annual enterprise risk report by the ultimate controlling person of the
insurers identifying the material risks within the insurance holding company system that could pose enterprise risk to
the insurers and requiring a person divesting its controlling interest to make a confidential advance notice filing.
The NAIC has also adopted the Risk Management and Own Risk and Solvency Assessment Model Act, which
requires insurers to maintain a risk management framework and establishes a legal requirement for insurers or their
insurance group to conduct an Own Risk and Solvency Assessment ("ORSA") in accordance with the NAIC’s ORSA
Guidance Manual. The ORSA Model Act has been adopted in all of the states in which our U.S. insurers are domiciled,
and our insurers in these states may become subject to ORSA requirements beginning in 2016 if certain premium
thresholds are exceeded. Where applicable, we must regularly conduct an ORSA consistent with the ORSA Model
Act, including undertaking an internal risk management review no less often than annually and preparing a summary
report assessing the adequacy of risk management and capital in light of our insurers’ current and future business
plans.
The Dodd Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), represents a
comprehensive overhaul of the financial services industry within the United States and, among other things, established
the Financial Services Oversight Council and created within the United States Department of the Treasury a Federal
Insurance Office. These bodies are authorized to study, monitor and report to Congress on the U.S. insurance industry
and the significance of global reinsurance to the U.S. insurance market. The Dodd-Frank Act also authorizes the federal
preemption of certain state insurance laws and streamlines the regulation of reinsurance and surplus lines/non-admitted
insurance. Many provisions of the Dodd-Frank Act continue to become effective over time, and certain provisions of
the Dodd-Frank Act require the implementation of regulations that have not yet been adopted. These regulations may
affect our industry and our business.
Before a person can acquire control of a domestic insurer (including a reinsurer) or any person controlling such
insurer (including acquiring control of Enstar Group Limited), prior written approval must be obtained from the insurance
commissioner of the state in which the domestic insurer is domiciled and, under certain circumstances, from insurance
commissioners in other jurisdictions. Generally, state statutes and regulations provide that "control" over a domestic
insurer or person controlling a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls,
holds with the power to vote, or holds proxies representing, 10% or more of the voting securities or securities convertible
into voting securities of the domestic insurer or of a person who controls the domestic insurer.
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One of our Pavonia companies has a Canadian branch operation, which is subject to regulation by the Office
of Superintendent of Financial Institutions in Canada. Canadian regulations require compliance with risk-based capital
measures and also place certain restrictions on dividends.
Australia
Our Australian regulated insurance entities (which include our insurance subsidiary and our non-operating holding
company) are subject to prudential supervision by the Australian Prudential Regulation Authority ("APRA"). APRA is
the primary regulatory body responsible for regulating compliance with the Insurance Act 1973. APRA has issued
prudential standards that apply to general insurers in relation to capital adequacy, the holding of assets in Australia,
risk management, business continuity management, reinsurance management, outsourcing, audit and actuarial
reporting and valuation, the transfer and amalgamation of insurance businesses, governance, and the fit and proper
assessment of the insurer’s responsible persons.
APRA’s prudential standards require that all insurers maintain and meet prescribed capital adequacy
requirements to enable their insurance obligations to be met under a wide range of circumstances.
APRA also prescribes prudential standards on risk management and governance. These requirements include
the need for regulated insurance entities to have a risk management framework that is consistent and integrated with
its risk profile and capital strength, supported by a risk management function and subject to comprehensive review.
APRA’s proposed risk management enhancements include the requirement that regulated insurance entities have a
board risk committee that provides the Board with objective non-executive oversight of the implementation and on-
going operation of its risk management framework, and the requirement that regulated insurance entities designate a
chief risk officer who is involved in, and provides effective challenge to, activities and decisions that may materially
affect the regulated insurance entities’ risk profile. Our Australian regulated insurance entities are compliant with these
standards.
An insurer must obtain APRA’s written consent prior to making any capital releases, including any payment of
dividends in excess of current year earnings. Our insurance subsidiary must provide APRA a valuation prepared by
an appointed actuary that demonstrates that the tangible assets of the insurer, after the proposed capital reduction,
are sufficient to cover its insurance liabilities to a 99.5% level of sufficiency of capital before APRA will consent to a
capital release or dividend.
Under the Financial Sector (Shareholdings) Act 1998, the interest of an individual shareholder or a group of
associated shareholders in an insurer is generally limited to a 15% "stake" of the insurer. A person’s stake is the
aggregate of the person’s voting power and the voting power of the person’s associates. A higher percentage limit may
be approved by the Treasurer of the Commonwealth of Australia on national interest grounds. Any shareholder of
Enstar Group Limited with a "stake" greater than 15% has received approval to hold that stake from the Treasurer of
the Commonwealth of Australia.
Europe
In addition to Bermuda, the United Kingdom, Australia and the United States, we have subsidiaries in Switzerland,
Ireland and Belgium, as well as StarStone Insurance Europe AG, a Liechtenstein-based company that continues to
underwrite new business. Certain of our U.K. entities also have branches in European jurisdictions.
Our Swiss insurance subsidiary is regulated by the Swiss Financial Market Supervisory Authority ("FINMA")
pursuant to the Insurance Supervisory Act 2004. This subsidiary is obligated to maintain a minimum solvency margin
based on the Swiss Solvency Test regulations as stipulated by the Insurance Supervisory Act. From January 1, 2016,
Switzerland was granted full Solvency II equivalence by the European Commission.
Our subsidiaries and branches in European jurisdictions such as Ireland, Belgium and Liechtenstein are regulated
in their respective home countries. Typically, such regulation is for the protection of policyholders and ceding insurance
companies rather than shareholders. Regulatory authorities generally have broad supervisory and administrative
powers over such matters as licenses, standards of solvency, investments, reporting requirements relating to capital
structure, ownership, financial condition and general business operations, special reporting and prior approval
requirements with respect to certain transactions among affiliates, reserves for unpaid losses and LAE, reinsurance,
minimum capital and surplus requirements, dividends and other distributions to shareholders, periodic examinations
and annual and other report filings. The application of the Solvency II framework across such European jurisdictions
from January 1, 2016 may result in a more uniform approach to regulation.
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Other
Through StarStone, we participate in joint ventures in Singapore and Dubai. We also own two run-off entities in
Hong Kong. These operations are not material, but our companies in these countries are subject to applicable
regulations.
Available Information
We maintain a website with the address http://www.enstargroup.com. The information contained on our website
is not included as a part of, or incorporated by reference into, this filing. We make available free of charge through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to these reports, as soon as reasonably practicable after the material is electronically filed with or otherwise
furnished to the U.S. Securities and Exchange Commission, (the "SEC"). Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are also available on the SEC’s
website at http://www.sec.gov. In addition, copies of our Code of Conduct and the governing charters for the Audit,
Investment, Nominating and Governance, Compensation, and Underwriting and Risk Committees of our Board of
Directors are available free of charge on our website. The public may read and copy any materials we file with the
SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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ITEM 1A. RISK FACTORS
Any of the following risk factors could cause our actual results to differ materially from historical or anticipated
results. These risks and uncertainties are not the only ones we face. There may be additional risks that we currently
consider not to be material or of which we are not currently aware, and any of these risks could cause our actual results
to differ materially from historical or anticipated results.
You should carefully consider these risks along with the other information included in this document, including
the matters addressed above under "Cautionary Note Regarding Forward-Looking Statements" before investing in
any of our securities. We may amend, supplement or add to the risk factors described below from time to time in future
reports filed with the SEC.
Risks Relating to our Insurance Businesses
If we are unable to implement our business strategies successfully, our business, results of operations
and financial condition may be materially and adversely affected.
Our future results of operations will depend in significant part on the extent to which we can implement our
business strategies successfully, including with respect to our active underwriting segments, which we have less
experience operating. Our ability to develop and execute our business strategies in our run-off and active business is
essential to our success, future growth opportunities, expanded market visibility and increased access to capital.
Our business strategies are described in "Item 1. Business - Business Strategy." We may not be able to implement
these strategies or any future strategies fully or realize the anticipated results of our strategies as a result of significant
business, economic, regulatory and competitive uncertainties, many of which are beyond our control. If we are unable
to successfully implement our business strategies, we may not be able to achieve future growth in our earnings and
our financial condition may suffer and, as a result, holders of our ordinary shares may receive lower returns.
Inadequate loss reserves could reduce our net earnings and capital and surplus, which could have a
materially adverse impact on our results of operations and financial condition.
Our success is dependent upon our ability to assess accurately the risks associated with the business we have
insured and reinsured. We are required to maintain reserves to cover the estimated ultimate liability for losses and
LAE for both reported and unreported incurred claims. These reserves are only estimates for what we consider the
settlement and administration of claims will cost based on facts and circumstances known to us, as well as actuarial
methodologies, historical industry loss ratio experience, loss development patterns, estimates of future trends and
developments and other variable factors such as inflation. Ultimate losses may exceed our estimates of losses and
LAE because of the uncertainties that surround the estimation process (which are discussed above in "Item 1. Business
- Liability for Losses and Loss Adjustment Expense"). As a result, actual losses and LAE paid will deviate, perhaps
substantially, from the reserve estimates reflected in our financial statements. If our reserves are insufficient to cover
the actual losses and LAE, we would have to augment our reserves and incur a charge to our earnings. Such a charge
could be material and would reduce our net earnings and capital and surplus.
In our non-life run-off businesses, loss reserves include potential asbestos and environmental ("A&E") liabilities
and liabilities associated with personal injury A&E claims from newly acquired companies with legacy manufacturing
businesses. Ultimate values for A&E claims cannot be estimated using traditional reserving techniques and there are
significant uncertainties in estimating potential losses for these claims. Factors contributing to the uncertainty include
long waiting periods, reporting delays and difficulties identifying contamination sources and allocating damage liability.
Developed case law and adequate claim history do not always exist for A&E claims, and changes in the legal and tort
environment affect the development of such claims. To further understand this risk, see "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Losses and
Loss Adjustment Expenses - Non-Life Run-off - Latent Claims."
In our active underwriting businesses, U.S. GAAP does not permit insurers and reinsurers to reserve for
catastrophes until they occur, which means that claims from these events could cause substantial volatility in our
financial results for any fiscal quarter or year and could have a material adverse effect on our financial condition and
results of operations, as well as our financial strength ratings.
Our active underwriting businesses present inherent risks and uncertainties which could have a material
adverse effect on our business, financial condition and results of operations.
Underwriting is inherently a matter of judgment, involving assumptions about matters that are unpredictable and
beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance.
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Our Atrium and StarStone active underwriting businesses expose us to significant risks that could result in under
performance of the active underwriting businesses compared to our expectations, which could have a material adverse
effect on our business, financial condition and results of operations. Those risks include, but are not limited to:
•
•
•
•
•
exposure to claims arising out of unpredictable natural and man-made catastrophic events (including
hurricanes, windstorms, tsunamis, severe weather, earthquakes, floods, fires, droughts, explosions,
environmental contamination, acts of terrorism, war or political unrest) and changing climate patterns and
ocean temperature conditions;
failure of our risk management and loss limitation methods (described in "Item 1. Business - Enterprise Risk
Management") to adequately manage our loss exposure or provide sufficient protection against losses;
the intense competition for business in this industry, including competition from major global insurance and
reinsurance companies and underwriting syndicates that may have greater experience and resources than
our companies or that may be more highly rated than our companies, or competition resulting from industry
consolidation;
dependence on a limited number of brokers, managing general agents and other third parties to support our
business, both in terms of the volume of business we rely on them to place and the credit risk we assume
from them; and
susceptibility to the effects of inflation due to premiums being established before the ultimate amounts of
losses and LAE are known.
The cyclical nature of the insurance and reinsurance industries may make it more difficult for Atrium
and StarStone to generate profits consistently, which could negatively impact our ability to execute our
active underwriting strategies successfully.
The insurance and reinsurance industry has historically been characterized by periods of intense price
competition due to excess underwriting capacity, as well as periods of more favorable pricing due to limited underwriting
capacity. Periods of favorable pricing tend to attract additional underwriting capacity (by new entrants, market
instruments and structures, and additional commitments by existing insurers) that ultimately cause prices to decrease.
Changes in the frequency and severity of losses suffered by insureds and insurers also impact industry cycles,
and we may not be able to accurately predict whether market conditions will improve, remain constant or deteriorate.
Unfavorable market conditions could lead to a significant reduction in premium rates, impair our ability to underwrite
at appropriate rates, result in less favorable policy terms and drive fewer submissions for our active underwriting
services. These factors could decrease our earnings and cause our results of operations to fluctuate significantly from
period to period.
Cyclical market conditions also impact the availability and cost of reinsurance purchased by Atrium and StarStone
as part of our risk management strategy. Market conditions may limit or prevent our active underwriting companies
from obtaining adequate reinsurance protection for our business needs. If our active underwriting companies are unable
to purchase reinsurance, or if reinsurance is available only on unfavorable terms or with less creditworthy reinsurers,
we may retain a higher proportion of risks than we would otherwise prefer, incur additional expense, or purchase
reinsurance from companies with higher credit risk, or we may underwrite fewer or smaller contracts. Any of these
factors could negatively impact our financial performance.
Downgrades of financial strength ratings at StarStone or Lloyd’s could materially and negatively impact
our active underwriting business and our company.
Financial strength ratings are an important factor in establishing the competitive position of insurance and
reinsurance companies. The StarStone operating insurance entities are currently assigned a financial strength rating
of "A-" (Excellent) by A.M. Best with a stable outlook. A ratings downgrade, outlook change or withdrawal could negatively
impact StarStone’s competitive position in the industry, and severely limit or prevent StarStone from writing new
insurance and reinsurance contracts if policyholders move their business to other more highly-rated companies. Such
a change could also inhibit our ability to implement our business and growth strategies successfully. Additionally, many
of StarStone's reinsurance contracts permit the ceding companies to cancel the contract if StarStone's financial strength
rating is downgraded. Whether a ceding company would cancel a reinsurance contract after a ratings downgrade
would depend on a number of factors (including the reason for and extent of the downgrade, and the pricing and
availability of replacement reinsurance) and, accordingly, we cannot predict the extent to which these cancellation
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rights would be exercised or what effect any such cancellations would have on our financial condition or results of
operations.
Lloyd’s ratings apply to business written through Syndicate 609 (Atrium) and Syndicate 1301 (StarStone). Lloyd’s
is rated "A" (Excellent) by A.M. Best, "A+" (Strong) by Standard and Poor’s ( "S&P") and "AA-" (Very Strong) by Fitch
Ratings. Financial strength ratings downgrades at Lloyd’s could adversely affect our Lloyd’s syndicates’ ability to trade
in certain classes of business at current levels.
Emerging claim and coverage issues could adversely affect our business.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and
unintended issues related to claims and coverage may emerge. These issues may adversely affect the adequacy of
our provision for losses and LAE by either extending coverage beyond the envisioned scope of insurance policies and
reinsurance contracts, or by increasing the number or size of claims. Our exposure to these uncertainties could be
exacerbated by an increase in insurance and reinsurance contract disputes, arbitration and litigation. The full effects
of these and other unforeseen emerging claim and coverage issues are extremely hard to predict. In some instances,
these changes may not become apparent until long after we have acquired or issued the affected contracts. As a result,
the full extent of liability under these insurance or reinsurance contracts may not be known for many years after a
contract has been issued.
Our life and annuities business is subject to the risk that actual mortality, morbidity, policy persistency,
and investment yield may be different than our assumptions and could render our reserves inadequate or
cause our results of operations in this business to suffer materially.
The performance of our life and annuities business depends on our ability to manage the run-off successfully
and operate the business effectively and efficiently. Our reserves for life and annuity policy benefits are based on
certain assumptions, including mortality, morbidity, lapse rates, expenses, and discount rates based on expected yields
at acquisition. The adequacy of our reserves is contingent on actual experience related to these key assumptions,
which were established at acquisition. Under U.S. GAAP, these assumptions are locked in throughout the life of the
contract unless a premium deficiency develops, which means the impact of the difference between assumptions and
actual experience is reflected in results of operations in the current reporting period. This involves reducing any asset
for Value of Business Acquired ("VOBA") that remains from acquisition until a premium deficiency no longer exists. If
a premium deficiency still exists after VOBA has been eliminated, we are required to unlock our reserve assumptions
and reset to management’s best estimate to remove the deficiency. These revised assumptions are then locked in
and used as the basis for reserve calculations going forward. This could materially and adversely impact our results
of operations and financial condition.
Our life insurance subsidiaries have exposure to the risk of catastrophic mortality, such as a pandemic or other
event that causes a large number of deaths. In an economic downturn, our life subsidiaries may experience an elevated
incidence of lapses of life insurance policies due to increased risk that policyholders may choose to cease paying
insurance premiums (resulting in a non-diversified pool of policyholders). Any of these events could adversely affect
our results of operations and financial condition.
Risks Relating to Our Acquisitions
There can be no assurance that we will continue to be able to grow our business through acquisitions.
We have pursued and, as part of our strategy, will continue to pursue growth through acquisitions. Since our
formation in August 2001, we have acquired over 75 insurance and reinsurance companies and portfolios of insurance
and reinsurance business, primarily in our run-off segments, and we expect to continue to make such acquisitions in
the future. However, the acquisition and management of companies and portfolios in run-off is highly competitive, and
driven by a number of factors, including proposed acquisition price, reputation, and financial resources. Some of our
competitors have greater financial resources than we do, have been operating for longer than we have and have
established long-term and continuing business relationships throughout the insurance and reinsurance industries,
which can be a significant competitive advantage. As a result, we may not be able to compete successfully in the future
for suitable acquisition candidates, and if we do not continue to acquire companies, we may not be able to achieve
our strategic goals.
There can be no assurance that our acquisitions will be financially beneficial to us or our shareholders.
The evaluation and negotiation of potential acquisitions, as well as the integration of an acquired business or
portfolio, could result in a substantial diversion of management resources. Acquisitions could involve numerous
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additional risks such as potential losses from unanticipated litigation, levels of claims or other liabilities and exposures,
an inability to generate sufficient revenue to offset acquisition costs and financial exposures in the event that the sellers
of the entities we acquire are unable or unwilling to meet their indemnification, reinsurance and other obligations to us
(if any such obligations are in place).
Our run-off business entails acquiring and managing insurance and reinsurance companies, portfolios of
insurance and reinsurance, and companies with liabilities related to legacy manufacturing operations. Unlike traditional
insurers and reinsurers, our companies and portfolios in run-off no longer underwrite new policies and are subject to
the risk that their stated provisions for losses and LAE, may not be sufficient to cover future losses and the cost of run-
off. Because our non-life companies and portfolios in run-off generally no longer collect underwriting premiums, our
sources of capital to cover losses are limited to our stated reserves, reinsurance coverage and retained earnings.
To achieve positive operating results from an acquisition, we must first price transactions on favorable terms
relative to the risks posed by the acquired businesses and then successfully manage the acquired businesses by
efficiently managing claims, collecting from insurers or reinsurers and controlling expenses. Failure to do these things
successfully could result in us having to cover losses sustained with retained earnings, which would materially and
adversely impact our ability to grow our business and may result in material losses.
We may not be able to realize the anticipated benefits of acquisitions, which may result in
underperformance relative to our expectations and a material adverse effect on our business, financial
condition or results of operations.
The acquisitions we have made and expect to make in the future may pose operational challenges that divert
management’s time and energy and expose us to risks relating to:
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funding cash flow shortages that may occur if anticipated revenues are not realized or are delayed, or if
expenses are greater than anticipated;
the value of assets being lower than expected or diminishing because of credit defaults or changes in interest
rates, or liabilities assumed being greater than expected;
integrating financial and operational reporting systems and internal controls, including assurance of
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and our reporting requirements under the
Securities Exchange Act of 1934, as amended (the "Exchange Act");
leveraging our existing capabilities and expertise into the business acquired and establishing synergies
within our organization;
funding increased capital needs and overhead expenses;
integrating technology platforms and managing any increased cyber security risk;
obtaining and retaining management personnel required for expanded operations;
fluctuating foreign currency exchange rates relating to the assets and liabilities we may acquire;
goodwill and intangible asset impairment charges; and
complying with applicable laws and regulations.
If we are unable to address some or all of these challenges, our acquisitions may underperform relative to our
expectations and our business may be materially and adversely affected.
We may not complete future acquisitions within the time frame we anticipate or at all, which could have
a negative effect on our business, financial condition or results of operations.
Once we have signed a definitive agreement to acquire a business or portfolio, conditions to closing, such as
obtaining regulatory approvals or shareholder approvals, must be met before the acquisition can be consummated.
These and other closing conditions may not be satisfied at all, or may cause a material delay in the anticipated timing
of closing. In addition, our ability to complete the acquisition on the originally anticipated terms, or at all, could be
jeopardized if a seller receives competing proposals, if litigation is brought challenging the transaction or certain of its
terms, or if regulators impose unexpected terms and conditions on the transaction. Failure to consummate an acquisition
on the originally anticipated terms, or a significant delay in the closing, could result in significant expense, diversion
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of time and resources, reputational damage, litigation and a failure to realize the anticipated benefits of the acquisition,
all of which could materially adversely impact our business, financial condition and results of operations.
Risks Relating to Liquidity and Capital Resources
We may require additional capital and credit in the future that may not be available or may only be
available on unfavorable terms.
Our future capital requirements depend on many factors, including acquisition activity, our ability to manage the
run-off of our assumed policies, our ability to establish reserves at levels sufficient to cover losses, our underwriting
plans, and our obligations to satisfy statutory capital requirements. We may need to raise additional funds through
equity or debt financings in the future. Our ability to secure this financing may be affected by a number of factors,
including volatility in the worldwide financial markets and the strength of our capital position and operating results. Any
equity or debt financing, if available at all, may be on terms that are not favorable to us. In the case of equity financings,
dilution to our existing shareholders could result, and any securities that are part of an equity financing may have rights,
preferences and privileges that are senior to those of our already outstanding securities. If we cannot obtain adequate
capital or credit, our business, results of operations and financial condition could be adversely affected by, among
other things, our inability to finance future acquisitions.
Uncertain conditions in the global economy generally may materially adversely affect our business,
results of operations and financial condition.
In the event of financial turmoil affecting the global banking system and global financial markets (including the
sovereign debt markets), additional consolidation of the financial services industry, or significant financial service
institution failures, there could be a new or incremental tightening in the credit markets, low liquidity, and extreme
volatility in fixed maturity, credit, currency, and equity markets. This could have a number of effects on our business,
including our ability to obtain financing for future acquisitions. Even if financing is available, it may only be available
at an unattractive cost of capital, which would decrease our profitability.
Global and local economic conditions could also affect demand for and claims made under our products, our
counter-party credit risk, and the ability of our customers and other counterparties to establish or maintain their
relationships with us.
Net investment income and net realized and unrealized gains or losses also could vary materially from
expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment
charges resulting from revaluations of debt and equity securities and other investments; interest rates; cash balances;
and changes in the fair value of financial and derivative instruments. Increased volatility in the financial markets and
overall economic uncertainty would increase the risk that the actual amounts realized in the future on our financial
instruments could differ significantly from the fair values currently assigned to them.
Reinsurers may not satisfy their obligations to our insurance and reinsurance subsidiaries, which could
result in significant losses or liquidity issues for us.
Our insurance and reinsurance subsidiaries are subject to credit risk with respect to their reinsurers because
the transfer of risk to a reinsurer does not relieve our subsidiaries of their liability to the insured. Reinsurance companies
may be negatively impacted or downgraded during difficult financial and economic conditions in the worldwide capital
markets and economies. In addition, reinsurers may be unwilling to pay our subsidiaries even though they are able to
do so, or disputes may arise regarding payment obligations. The failure of one or more of our subsidiaries’ reinsurers
to honor their obligations in a timely fashion may affect our cash flows, reduce our net earnings or cause us to incur
a significant loss. Disputes with our reinsurers may also result in unforeseen expenses relating to litigation or arbitration
proceedings. A reinsurer’s inability or unwillingness to honor its obligations to Atrium or StarStone may negate the
intended risk-reducing impact of our reinsurance purchasing programs.
Exposure to reinsurers who from time to time represent meaningful percentages of our total reinsurance balances
recoverable may increase the risks described above. For information on reinsurance balances recoverable, see "Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Reinsurance Balances Recoverable."
We are a holding company, and we are dependent on the ability of our subsidiaries to distribute funds
to us.
We are a holding company and conduct substantially all of our operations through subsidiaries. Our only significant
assets are the capital stock of our subsidiaries. As a holding company, we are dependent on distributions of funds from
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our subsidiaries to fund acquisitions, fulfill financial obligations in the normal course of our business, and pay dividends
(in the event we sought to do so). Our subsidiaries may not generate sufficient cash from operations to enable us to
make future acquisitions, fulfill other financial obligations or pay dividends.
In addition, the ability of our insurance and reinsurance subsidiaries to make distributions to us is limited by
various business considerations and applicable insurance laws and regulations (which are described in "Item 1.
Business - Regulation"). These laws and regulations and the determinations by the regulators implementing them may
significantly restrict distributions, and, as a result, our overall liquidity. The ability of all of our subsidiaries to make
distributions to us may also be restricted by, among other things, other applicable laws and regulations and the terms
of our bank loans and our subsidiaries’ bank loans.
Fluctuations in currency exchange rates may cause us to experience losses.
We maintain a portion of our investments, insurance liabilities and insurance assets denominated in currencies
other than U.S. dollars. Consequently, we and our subsidiaries may experience foreign exchange losses, which could
adversely affect our results of operations. We publish our consolidated financial statements in U.S. dollars. Therefore,
fluctuations in exchange rates used to convert other currencies, particularly Australian dollars, Canadian dollars, British
pounds and Euros, into U.S. dollars will impact our reported financial condition, results of operations and cash flows
from year to year.
Our failure to comply with covenants contained in our credit facilities could trigger prepayment
obligations, which could adversely affect our results of operations and financial condition.
We and our subsidiaries currently have several outstanding credit facilities. We depend on access to funds from
our credit facilities in operating our business. These credit facilities contain various business and financial covenants
that impose restrictions on us and certain of our subsidiaries with respect to, among other things, limitations on mergers
and consolidations, acquisitions, indebtedness and guarantees, restrictions as to certain dispositions of stock and
dividends and stock repurchases, investment constraints and limitations on liens on stock. We may also enter into
future credit facilities or other debt arrangements containing similar or different restrictive covenants. Our failure to
comply with these covenants could result in an event of default under the credit facilities, which could result in us being
required to repay the amounts outstanding under these facilities prior to maturity. These prepayment obligations could
have an adverse effect on our results of operations and financial condition.
In addition, complying with these covenants could limit our financial and operational flexibility. Our credit facilities
are described in more detail in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Loan Facilities."
Risks Relating to Our Investments
The value of our insurance and reinsurance subsidiaries’ investment portfolios and the investment
income that our insurance and reinsurance subsidiaries receive from these portfolios may decline materially
as a result of market fluctuations and economic conditions, including those related to interest rates and
credit spreads.
We derive a significant portion of our income from our invested assets, which consist primarily of investments
in fixed maturity securities. The net investment income that our subsidiaries obtain from investments in fixed maturity
securities will generally increase or decrease with changes in interest rates. Interest rates are highly sensitive to many
factors, including governmental monetary policies, domestic and international economic and political conditions and
other factors beyond our control. A rise in interest rates would increase net unrealized losses, which would decline
over time as the security approaches maturity. Conversely, a decline in interest rates would increase net unrealized
gains, which would decline over time as the security approaches maturity. The fair market value can also decrease as
a result of a deterioration of the credit quality of those securities. Any perceived decrease in credit quality may cause
credit spreads to widen and this would result in an increase in net unrealized losses. A deterioration of credit ratings
on our fixed maturity security investments may result in a preference to liquidate these securities in the financial markets.
If we liquidate these securities during a period of tightening credit, we may realize a significant loss.
In addition, some of our fixed maturity securities, such as mortgage-backed and other asset-backed securities,
carry prepayment risk, or the risk that principal will be returned more rapidly or slowly than expected, as a result of
interest rate fluctuations. When interest rates decline, consumers will generally make prepayments on their mortgages,
causing us to be repaid more quickly than we might have originally anticipated, meaning that our opportunities to
reinvest these proceeds back into the investment markets may be at reduced interest rates (with the converse being
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true in a rising interest rate environment). Mortgage-backed and other asset-backed securities are also subject to
default risk on the underlying securitized mortgages, which would decrease the value of our investments.
The changes in the market value of our securities that are classified as trading or available-for-sale are reflected
in our financial statements. Other-than-temporary impairment losses in the value of our fixed maturity securities are
also reflected in our financial statements. As a result, a decline in the value of the securities in our investment portfolios
may materially reduce our net income and shareholders’ equity, and may cause us to incur a significant loss. For more
information on our investment portfolios, see "Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Investable Assets."
Our investments in alternative investments may be illiquid and volatile in terms of value and returns,
which could negatively affect our investment income and liquidity.
In addition to fixed maturity securities, we have invested, and may from time to time continue to invest, in
alternative investments such as private equity funds, fixed income funds, fixed income and multi-strategy hedge funds,
equity funds, real estate debt funds and CLO equity funds, as well as direct investments in CLO equities. These and
other similar investments may be illiquid due to restrictions on sales, transfers and redemptions, may have different,
more significant risk characteristics than our investments in fixed maturity securities and may also have more volatile
values and returns, all of which could negatively affect our investment income and liquidity.
Alternative or "other" investments may not meet regulatory admissibility requirements, which may limit our
subsidiaries’ ability to make capital distributions to us and, consequently, negatively impact our liquidity. For more
information on our alternative investments, see "Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Investable Assets."
The valuation of our investments may include methodologies, estimations and assumptions that are
subject to differing interpretations and could result in changes to investment valuations that may materially
adversely affect our financial condition or results of operations.
Fixed maturity and alternative investments, such as private equity funds, fixed income funds, fixed income and
multi-strategy hedge funds, equity funds, real estate debt funds and CLO equity funds, as well as direct investments
in CLO equities, represent the majority of our total cash and invested assets. These investments are reported at fair
value on our consolidated balance sheet. Fair value prices for all trading and available-for-sale securities in the fixed
maturities portfolio are independently provided by our investment accounting service providers, investment managers
and investment custodians, each of which utilize internationally recognized independent pricing services. We record
the unadjusted price provided by our accounting service providers, managers or custodians, after we perform an
internal validation process. Fair value for our alternative investments is estimated based primarily on the most recently
reported net asset values reported by the fund manager, which we may adjust following our internal review.
These valuation procedures involve estimates and judgments, and during periods of market disruptions (such
as periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity), it may be difficult
to value certain of our securities if trading becomes less frequent or market data becomes less observable. In addition,
there may be certain asset classes that are now in active markets with significant observable data that become illiquid
due to changes in the financial environment. In these cases, the valuation of a greater number of securities in our
investment portfolio may require more subjectivity and management judgment. As a result, valuations may include
inputs and assumptions that are less observable or require greater estimation as well as valuation methods that are
more sophisticated or require greater estimation, which may result in valuations greater than the value at which the
investments could ultimately be sold. Further, rapidly changing and unpredictable credit and equity market conditions
could materially affect the valuation of securities carried at fair value as reported within our consolidated financial
statements and the period-to-period changes in value could vary significantly. Decreases in value could have a material
adverse effect on our financial condition and results of operations.
The nature of our business liquidity demands and the structure of our entities’ investment portfolios
may adversely affect the performance of our investment portfolio and financial results and our investing
flexibility.
We strive to structure our investments in a manner that recognizes our liquidity needs for future liabilities. Because
of the unpredictable nature of losses that may arise under the insurance and reinsurance policies issued by certain of
our subsidiaries and as a result of our opportunistic commutation strategy, our liquidity needs can be substantial and
may arise at any time. In that regard, we attempt to correlate the maturity and duration of our investment portfolio to
our general liability profile. If we are unsuccessful in managing our investment portfolio within the context of this strategy,
we may be forced to liquidate our investments at times and at prices that are not optimal, and we may have difficulty
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liquidating some of our alternative investments due to restrictions on sales, transfers and redemptions. This could have
a material adverse effect on our business and the performance of our investment portfolio.
We maintain each acquired company and portfolio of insurance and reinsurance business in separate stand-
alone entities, and therefore, we have many individual portfolios of cash and investments. Each investment portfolio
has its own regulatory admissibility requirements, and each run-off entity is likely to have negative operating and
financing cash flows due to commutation activity, claims settlements and capital distributions. These factors reduce
our overall investing flexibility.
Our investments in life settlements contracts are subject to the risk that actual experience could differ
substantially from our assumptions related to their estimated value, which may impair their value and
adversely impact our results of operations.
In 2015, we acquired companies that own interests in life insurance policies acquired in the secondary and
tertiary markets and through collateralized lending transactions. We recognize our initial investment in these life
settlements contracts at the transaction price plus all initial direct external costs. The transaction price was established
based on certain assumptions, including the life expectancy of the insured person, the projected premium payments
on the contract (including projections of possible rate increases from the related insurance carrier), the projected costs
of administration relating to the contract, and the projected risk of non-payment, including the financial health of the
related insurance carrier, the possibility of legal challenges from such insurance carrier or others and the possibility of
regulatory changes that may affect payment. The estimated value of a contract is also affected by the discounted value
of future cash flows from death benefits and the discounted value of future premiums due on the contract.
The actual value of any life settlement contract cannot be determined until the policy matures (i.e., the insured
has died and the insurance carrier has paid out the death benefit to the holder). We pay continuing costs to keep the
policies in force, primarily life insurance premiums, which increases the carrying amount of the investment. Because
we recognize income on individual investments at an amount equal to the excess of the investment proceeds over the
carrying amount of the investment at the time the insured dies, the profitability of our life settlements investments is
contingent on actual experience relative to the key assumptions we made when the life settlement investment was
acquired. If actual experience differs from these assumptions, our carrying value of these investments may increase.
The investments are subject to a quarterly impairment review on a contract-by-contract basis. A significant negative
difference between the carrying cost of contracts and death benefits expected to be received at maturity of contracts
could adversely affect our net investment income and our results of operations.
Risks Relating to Laws and Regulation
Insurance laws and regulations restrict our ability to operate, and any failure to comply with these laws
and regulations, or any investigations, inquiries or demands by government authorities, may have a material
adverse effect on our business.
We are subject to the insurance laws and regulations of a number of jurisdictions worldwide. Existing laws and
regulations, among other things, limit the amount of dividends that can be paid to us by our insurance and reinsurance
subsidiaries, prescribe solvency and capital adequacy standards, impose restrictions on the amount and type of
investments that can be held to meet solvency and capital adequacy requirements, require the maintenance of reserve
liabilities, and require pre-approval of acquisitions and certain affiliate transactions. Failure to comply with these laws
and regulations or to maintain appropriate authorizations, licenses, and/or exemptions under applicable laws and
regulations may cause governmental authorities to preclude or suspend our insurance or reinsurance subsidiaries
from carrying on some or all of their activities, place one or more of them into rehabilitation or liquidation proceedings,
impose monetary penalties or other sanctions on them or our affiliates, or commence insurance company delinquency
proceedings against our insurance or reinsurance subsidiaries. The application of these laws and regulations by various
governmental authorities, including authorities outside the United States, may affect our liquidity and restrict our ability
to expand our business operations through acquisitions or to pay dividends on our ordinary shares. Furthermore,
compliance with legal and regulatory requirements may result in significant expenses, which could have a negative
impact on our profitability. To further understand these risks, see "Item 1. Business - Regulation."
In addition to legal and regulatory requirements, the insurance and reinsurance industry has experienced
substantial volatility as a result of investigations, litigation and regulatory activity by various insurance, governmental
and enforcement authorities, including the SEC, concerning certain practices within the insurance and reinsurance
industry. Insurance and reinsurance companies that we have acquired, or may acquire in the future, may have been
or may become involved in these or other investigations, litigation or regulatory activity and may have lawsuits filed or
other regulatory actions taken against them. Our involvement in any investigations, litigations or regulatory activity,
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including any related lawsuits, would cause us to incur legal costs and, if we or any of our insurance or reinsurance
subsidiaries were found to have violated any laws or regulations, we could be required to pay fines and damages and
incur other sanctions, perhaps in material amounts, which could have a material negative impact on our profitability.
Political, regulatory and industry initiatives could materially adversely affect our business by increasing
the amount of regulation we face or changing the nature of the regulations that apply to us in operating our
insurance businesses or acquiring new insurance businesses.
Increasingly, governmental authorities have taken interest in the potential systemic risks posed by the insurance
and reinsurance industry as a whole. The insurance regulatory environment has become subject to increased scrutiny
across a number of jurisdictions, and authorities regularly consider enhanced or new regulatory requirements and seek
to exercise their supervisory authority in new and more extensive ways. Regulators are generally concerned with the
protection of policyholders above other constituencies, including our shareholders. Additional laws and regulations
have been and may continue to be enacted in the wake of the recent or future financial and credit crises that may have
adverse effects on our operations, financial condition and liquidity. We cannot predict the exact nature, timing or scope
of these initiatives; however, we believe it is likely there will be increased regulatory intervention in our industry in the
future, and these initiatives could adversely affect our business.
For example, the implementation of Solvency II, an E.U.-wide directive covering the capital adequacy, risk
management and regulatory reporting for insurers, requires significant resources to ensure compliance by our E.U.
companies. Additionally, if our non-E.U. subsidiaries engage in E.U. insurance or reinsurance business, additional
capital requirements may be imposed for such companies to continue to insure or reinsure E.U.-domiciled risk or
cedants if their regulatory regime is not deemed to have Solvency II equivalence.
In the United States, the Dodd-Frank Act addresses the entire financial services industry and includes initiatives
such as the creation of a Federal Insurance Office and other federal oversight agencies, the requiring of more
transparency, accountability and focus in protecting investors and businesses, the input of shareholders regarding
executive compensation, and the enhanced empowerment of regulators to punish fraud and unethical business
practices. Continued compliance with these laws and regulations is likely to result in additional regulation and additional
costs for us.
In many of the jurisdictions in which we operate, including Bermuda, there are increased initiatives relating to
group supervision though cooperation and coordination among insurance regulators regardless of an individual
company’s domiciliary jurisdiction. As of January 1, 2016, the BMA acts as our group supervisor, as described in "Item
1. Business - Regulation," which has led to increased regulatory reporting and oversight.
In addition, increased scrutiny by insurance regulators of investments in or acquisitions of insurers or insurance
holding companies by private equity firms or hedge funds may result in imposition of additional regulatory requirements
and restrictions. We have in the past partnered with private equity firms in making acquisitions and may do so in the
future. This increased scrutiny may make it difficult to complete U.S. acquisitions with private equity or hedge funds
should we seek to do so. In addition, private equity firms have invested in Enstar and may seek to do so in the future.
This increased scrutiny may materially adversely impact our ability to raise capital through transactions with these
types of investors.
The United Kingdom’s referendum vote to leave the European Union could adversely affect our business.
In an advisory referendum held on June 23, 2016, the United Kingdom ("U.K.") voted to leave the European
Union ("E.U.") (commonly referred to as “Brexit”). The timing and nature of the U.K.’s withdrawal from the E.U. is yet
to be determined, and the form of the U.K.’s future relationship with the E.U. may not be clear for some time. We have
significant operations and employees in the United Kingdom, including our Lloyd’s businesses. Brexit’s impact on our
U.K. businesses will depend on the U.K. and Lloyd’s abilities to retain access to the E.U. markets, and our U.K.
businesses could be adversely affected if adequate access to these markets is not obtained. Brexit may also lead to
legal uncertainty and differences in national laws and regulations as the U.K. determines which E.U. laws to replace
or replicate, and these issues could impact our structure and operations. The Brexit vote had an immediate adverse
effect on global financial and foreign exchange markets, and instability and uncertainty in the European economy and
in global financial markets may continue for some time. Any of these effects of Brexit, and others we cannot anticipate,
could adversely affect our business, results of operations, and financial condition.
Changes in accounting principles and financial reporting requirements could impact our reported
financial results and our reported financial condition.
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Our financial statements are prepared in accordance with U.S. GAAP, which is periodically revised by the Financial
Accounting Standards Board ("FASB"), and they are subject to the accounting-related rules and interpretations of the
SEC. We are required to adopt new and revised accounting standards implemented by the FASB.
Unanticipated developments in accounting practices, for example a convergence of U.S. GAAP with International
Financial Reporting Standards ("IFRS"), may require us to incur considerable additional expenses to comply with such
developments, particularly if we are required to prepare information relating to prior periods for comparative purposes
or to apply the new requirements retroactively. The impact of changes in accounting standards, particularly those that
apply to insurance companies, cannot be predicted but may affect the calculation of net earnings, shareholders’ equity
and other relevant financial statement line items. In addition, such changes may cause additional volatility in reported
earnings, decrease the understandability of our financial results and affect the comparability of our reported results
with the results of others.
Risks Relating to our Operations
We are dependent on our executive officers, directors and other key personnel and the loss of any of
these individuals could adversely affect our business.
Our success substantially depends on our ability to attract and retain qualified employees and upon the ability
of our senior management and other key employees to implement our business strategy. We believe that there are
only a limited number of available qualified personnel in the businesses in which we compete, and the pool of highly
skilled employees available to fill key positions at our companies may fluctuate based on market conditions. We rely
substantially upon the services of our executive officers and our subsidiaries’ executive officers and directors, as well
as our local management teams, to implement our business strategies. The loss of the services of any of our
management or other key personnel, or the loss of the services of or our relationships with any of our directors, could
have a material adverse effect on our business. Higher demand for employees having desired talents could lead to
increased compensation expectations for existing and prospective personnel across our organization, which could
also make it difficult to maintain labor expenses at desired levels.
Our directors and executive officers may have ownership interests or other involvement with entities
that could compete against us, and conflicts of interest might prevent us from pursuing desirable
acquisitions, investments and other business opportunities.
Our directors and executive officers may have ownership interests or other involvement with entities that could
compete against us or otherwise have interests that could, at times, be considered potentially adverse to us, either in
the pursuit of acquisition targets, investments or in our business operations. We have also participated in transactions
in which one or more of our directors or executive officers or their affiliates had an interest, and we may do so in the
future. The interests of our directors and executive officers in such transactions or such entities may result in a conflict
of interest for those directors and officers.
The Audit Committee of our Board of Directors, which is comprised entirely of independent directors, reviews
any material transactions involving a conflict of interest and may take actions as it deems appropriate in the particular
circumstances. We may not be able to pursue all advantageous transactions that we would otherwise pursue in the
absence of a conflict, in particular if our Audit Committee is unable to determine that any such transaction is on terms
as favorable as we could otherwise obtain in the absence of a conflict.
Cybersecurity events or other difficulties with our information security assets could disrupt business
operations, result in the loss of critical and confidential information, and adversely impact our reputation
and results of operations.
We rely heavily on the successful, uninterrupted functioning of our information technology assets and
telecommunications systems, as well as those of any third-party service providers we use. We depend on information
technology systems to perform functions critical to our business such as paying claims, performing actuarial and other
modeling functions, pricing, quoting and processing policies, cash and investment management, acquisition work,
financial reporting and other necessary support functions. A failure of our information technology assets or
telecommunications systems could materially impact our ability to perform these functions, affect the confidentiality,
availability or integrity of our proprietary information and expose us to litigation and increase our administrative
expenses.
Computer viruses, cyber-attacks, and other external hazards, as well as any internal process or employee
failures, could expose our information technology assets to security breaches that may cause critical data to be corrupted
or confidential or proprietary information to be exposed, or cause system disruptions or shut-downs. In addition to our
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own information, we receive and may be responsible for protecting confidential information from clients and other third
parties, which could also be compromised in the event of a security breach. Our active underwriting companies rely
on broker portals to bind certain business, and, therefore, a service interruption would negatively impact our ability to
write business.
Where we rely on third parties for outsourced functions and other services, our information may be exposed to
the risk of a data breach or cyber-security incident through their systems. Although we utilize numerous controls,
protections and risk management strategies to attempt to mitigate these risks, and management is not aware of a
material cybersecurity incident to date, the sophistication and volume of these security threats continues to increase.
The potential consequences of a data breach or cyber-security incident could include claims against us, significant
reputational damage to our company, damage to our business as a result of disclosure of proprietary information, and
regulatory action against us. Such an incident could cause us to lose business and commit resources, management
time and money to remediate these breaches, any of which in turn could have an adverse impact on our business.
If outsourced providers such as third-party administrators, managing general agents, investment
managers or other service providers were to breach obligations owed to us, our business and results of
operations could be adversely affected.
We outsource certain business functions to third-party providers, and these providers may not perform as
anticipated or may fail to adhere to their obligations to us. For example, certain of our subsidiaries rely on relationships
with a number of third-party administrators under contracts pursuant to which these third-party administrators manage
and pay claims on our subsidiaries’ behalf and advise with respect to case reserves. In these relationships, we rely
on controls incorporated in the provisions of the administration agreement, as well as on the administrator’s internal
controls, to manage the claims process within our prescribed parameters. Our StarStone and Atrium subsidiaries use
managing general agents, general agents and other producers to write and administer business on their behalf within
underwriting authorities prescribed by StarStone and Atrium. We also rely on external investment managers to provide
services pursuant to the terms of our investment management agreements, including following established investment
guidelines. Although we monitor these administrators, agents and producers, and managers on an ongoing basis, our
monitoring efforts may not be adequate or our service providers could exceed their authorities or otherwise breach
obligations owed to us, which, if material, could adversely affect our business and results of operations.
With respect to certain of our subsidiaries’ life insurance products, our subsidiaries depend upon the counterparty
to an administrative services agreement in order to collect policy premiums and maintain necessary customer data.
There is a risk that the counterparty may fail to perform its obligations under the agreement to provide accurate and
timely premiums and data, or that we or the counterparty could experience difficulties with the operation of the supporting
technology systems. Any of these risks could result in underperformance of our life and annuities business compared
to our expectations, and could also have a material adverse effect on our business, financial condition and results of
operations.
Risks Relating to Ownership of Our Ordinary Shares
Our stock price may experience volatility, thereby causing a potential loss of value to our investors.
The market price for our ordinary shares may fluctuate substantially and could cause investment losses due to,
among other things, the following factors:
•
•
•
•
•
•
•
announcements with respect to an acquisition or investment;
changes in the value of our assets;
our quarterly and annual operating results;
sales, or the possibility or perception of future sales, by our existing shareholders;
changes in general conditions in the economy and the insurance industry;
the financial markets; and
adverse press or news announcements.
A few significant shareholders may influence or control the direction of our business. If the ownership
of our ordinary shares continues to be highly concentrated, it may limit your ability and the ability of other
shareholders to influence significant corporate decisions.
33
We have a number of shareholders with large interests, including several that may be affiliated with members
of our Board of Directors. The interests of certain significant shareholders may not be fully aligned with your interests,
and this may lead to a strategy that is not in your best interest. As of December 31, 2016, CPPIB, Akre Capital
Management ("Akre Capital"), Trident, Beck Mack & Oliver ("Beck Mack"), and Enstar's three individual co-founders
(collectively) beneficially owned approximately 13.8%, 8.9%, 8.3%, 4.99%, and 6.1%, respectively, of our outstanding
voting ordinary shares. CPPIB owns additional non-voting ordinary shares that, together with its voting shares,
represented an economic interest of approximately 17.7% as of December 31, 2016. Funds managed by Hillhouse
Capital Management (collectively, "Hillhouse") own approximately 2.1% of our outstanding voting ordinary shares that,
together with their non-voting shares and warrants, represented an economic interest of approximately 9.8% as of
December 31, 2016.
Although they do not act as a group, these shareholders may exercise significant influence over matters requiring
shareholder approval, and their concentrated holdings may delay or deter possible changes in control of Enstar, which
may reduce the market price of our ordinary shares.
Some aspects of our corporate structure may discourage third-party takeovers and other transactions,
limit voting rights of certain shareholders to 9.5% or prevent the removal of our board of directors and
management.
Some provisions of our bye-laws have the effect of making more difficult or discouraging unsolicited takeover
bids from third parties or preventing the removal of our current board of directors and management. In particular, our
bye-laws make it difficult for any U.S. shareholder or Direct Foreign Shareholder Group (a shareholder or group of
commonly controlled shareholders of Enstar that are not U.S. persons) to own or control ordinary shares that constitute
9.5% or more of the voting power of all of our ordinary shares. The votes conferred by such shares will be reduced by
whatever amount is necessary so that after any such reduction the votes conferred by such shares will constitute 9.5%
of the total voting power of all ordinary shares entitled to vote generally. The primary purpose of this restriction is to
reduce the likelihood that we or any of our non-U.S. subsidiaries will be deemed a "controlled foreign corporation"
within the meaning of Internal Revenue Code of 1986, as amended (the "Code") for U.S. federal tax purposes. However,
this limit may also have the effect of deterring purchases of large blocks of our ordinary shares or proposals to acquire
us, even if some or a majority of our shareholders might deem these purchases or acquisition proposals to be in their
best interests. In addition, our bye-laws provide for a classified board, whose members may be removed by our
shareholders only for cause by a majority vote, and contain restrictions on the ability of shareholders to nominate
persons to serve as directors, submit resolutions to a shareholder vote and request special general meetings.
These bye-law provisions make it more difficult to acquire control of us by means of a tender offer, open market
purchase, proxy contest or otherwise. These provisions may encourage persons seeking to acquire control of us to
negotiate with our directors, which we believe would generally best serve the interests of our shareholders. However,
these provisions may have the effect of discouraging a prospective acquirer from making a tender offer or otherwise
attempting to obtain control of us. In addition, these bye-law provisions may prevent the removal of our current board
of directors and management. To the extent these provisions discourage takeover attempts, they may deprive
shareholders of opportunities to realize takeover premiums for their shares or may depress the market price of the
shares.
There are regulatory limitations on the ownership and transfer of our ordinary shares.
Insurance laws and regulations in the jurisdictions in which our insurance and reinsurance subsidiaries operate
require prior notices or regulatory approval of changes in control of an insurer or its holding company. Different
jurisdictions define changes in control differently, and generally any purchaser of 10% or more of our ordinary shares
could become subject to regulation and be required to file certain notices and reports with the applicable insurance
authorities. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change in
control of us, including transactions that some shareholders might consider to be desirable.
34
The market value of our ordinary shares may decline if large numbers of shares are sold, including
pursuant to existing registration rights.
We have several registration rights agreements in place pursuant to which, either as parties thereto or by virtue
of assignment, certain of our shareholders hold registration rights. These primarily include CPPIB, Trident, Hillhouse
and Corsair Capital. These agreements include demand registration rights pursuant to which these shareholders may
require that we register certain of their ordinary shares under the Securities Act of 1933, as amended (the "Securities
Act"), on up to an aggregate of eight occasions. All of these investors also have "piggyback" registration rights with
respect to our registration of voting ordinary shares for our own account or for the account of one or more of our
shareholders. As of December 31, 2016, an aggregate of approximately 8.0 million ordinary shares (approximately
3.1 million of which are non-voting ordinary shares) are subject to these registration rights agreements.
By exercising their registration rights, these holders could cause a large number of ordinary shares to be registered
and generally become freely tradable without restrictions under the Securities Act immediately upon the effectiveness
of the registration. Our ordinary shares have in the past been, and may from time to time continue to be, thinly traded,
and significant sales, pursuant to the existing registration rights or otherwise, could adversely affect the market price
for our ordinary shares and impair our ability to raise capital through offerings of our equity securities.
Because we are incorporated in Bermuda, it may be difficult for shareholders to serve process or enforce
judgments against us or our directors and officers.
We are a Bermuda company. In addition, certain of our officers and directors reside in countries outside the
United States. All or a substantial portion of our assets and the assets of these officers and directors are or may be
located outside the United States. Investors may have difficulty effecting service of process within the United States
on our directors and officers who reside outside the United States or recovering against us or these directors and
officers on judgments of U.S. courts based on civil liabilities provisions of the U.S. federal securities laws even though
we have appointed an agent in the United States to receive service of process. Further, no claim may be brought in
Bermuda against us or our directors and officers for violation of U.S. federal securities laws, as such laws do not have
force of law in Bermuda. A Bermuda court may, however, impose civil liability, including the possibility of monetary
damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of
action under Bermuda law.
We believe that there is doubt as to whether the courts of Bermuda would enforce judgments of U.S. courts
obtained in actions against us or our directors and officers, as well as our independent auditors, predicated upon the
civil liability provisions of the U.S. federal securities laws or original actions brought in Bermuda against us or these
persons predicated solely upon U.S. federal securities laws. Further, there is no treaty in effect between the United
States and Bermuda providing for the enforcement of judgments of U.S. courts, and there are grounds upon which
Bermuda courts may not enforce judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions,
including some remedies available under the U.S. federal securities laws, may not be allowed in Bermuda courts as
contrary to that jurisdiction’s public policy. Because judgments of U.S. courts are not automatically enforceable in
Bermuda, it may be difficult for you to recover against us based upon such judgments.
Shareholders who own our ordinary shares may have more difficulty in protecting their interests than
shareholders of a U.S. corporation.
The Bermuda Companies Act (the "Companies Act"), which applies to us, differs in certain material respects
from laws generally applicable to U.S. corporations and their shareholders. As a result of these differences, shareholders
who own our shares may have more difficulty protecting their interests than shareholders who own shares of a U.S.
corporation. For example, class actions and derivative actions are generally not available to shareholders under
Bermuda law. Under Bermuda law, only shareholders holding collectively 5% or more of our outstanding ordinary
shares or numbering 100 or more are entitled to propose a resolution at our general meeting.
We do not intend to pay cash dividends on our ordinary shares.
We do not intend to pay a cash dividend on our ordinary shares. Rather, we intend to use any retained earnings
to fund the development and growth of our business. From time to time, our board of directors will review our alternatives
with respect to our earnings and seek to maximize value for our shareholders. In the future, we may decide to commence
a dividend program for the benefit of our shareholders. Any future determination to pay dividends will be at the discretion
of our board of directors and will be limited by our position as a holding company that lacks direct operations, the
results of operations of our subsidiaries, our financial condition, cash requirements and prospects and other factors
that our board of directors deems relevant. In addition, there are significant regulatory and other constraints that could
35
prevent us from paying dividends in any event. As a result, capital appreciation, if any, on our ordinary shares may be
your sole source of gain for the foreseeable future.
Our board of directors may decline to register a transfer of our ordinary shares under certain
circumstances.
Our board of directors may decline to register a transfer of ordinary shares under certain circumstances, including
if it has reason to believe that any non-de minimis adverse tax, regulatory or legal consequences to us, any of our
subsidiaries or any of our shareholders may occur as a result of such transfer. Further, our bye-laws provide us with
the option to repurchase, or to assign to a third party the right to purchase, the minimum number of shares necessary
to eliminate any such non-de minimis adverse tax, regulatory or legal consequence. In addition, our board of directors
may decline to approve or register a transfer of shares unless all applicable consents, authorizations, permissions or
approvals of any governmental body or agency in Bermuda, the United States, the United Kingdom or any other
applicable jurisdiction required to be obtained prior to such transfer shall have been obtained. The proposed transferor
of any shares will be deemed to own those shares for dividend, voting and reporting purposes until a transfer of such
shares has been registered on our shareholders register.
It is our understanding that while the precise form of the restrictions on transfer contained in our bye-laws is
untested, as a matter of general principle, restrictions on transfers are enforceable under Bermuda law and are not
uncommon. These restrictions on transfer may also have the effect of delaying, deferring or preventing a change in
control.
Risks Relating to Taxation
We might incur unexpected U.S., U.K., Australia, or other tax liabilities if companies in our group that
are incorporated outside those jurisdictions are determined to be carrying on a trade or business in such
jurisdictions.
We and a number of our subsidiaries are companies formed under the laws of Bermuda or other jurisdictions
that do not impose income taxes; it is our contemplation that these companies will not incur substantial income tax
liabilities from their operations. Because the operations of these companies generally involve, or relate to, the insurance
or reinsurance of risks that arise in higher tax jurisdictions, such as the United States, United Kingdom and Australia,
it is possible that the taxing authorities in those jurisdictions may assert that the activities of one or more of these
companies creates a sufficient nexus in that jurisdiction to subject the company to income tax there. There are
uncertainties in how the relevant rules apply to insurance businesses, and in our eligibility for favorable treatment under
applicable tax treaties. Accordingly, it is possible that we could incur substantial unexpected tax liabilities.
U.S. persons who own our ordinary shares might become subject to adverse U.S. tax consequences as
a result of "related person insurance income," if any, of our non-U.S. insurance company subsidiaries.
For any of our wholly-owned non-U.S. insurance company subsidiaries, if (1) U.S. persons are treated as owning
25% or more of our shares, (2) the related person insurance income ("RPII") of that subsidiary were to equal or exceed
20% of its gross insurance income in any taxable year, and (3) direct or indirect insureds of that subsidiary (and persons
related to such insureds) own (or are treated as owning) 20% or more of the voting power or value of our shares, then
a U.S. person who owns our shares directly, or indirectly through non-U.S. entities, on the last day of the taxable year
would be required to include in income for U.S. federal income tax purposes that person's pro rata share of the RPII
of such a non-U.S. insurance company for the entire taxable year, whether or not any such amounts are actually
distributed. (In the case of any of our partially-owned non-U.S. insurance company subsidiaries, the RPII provisions
apply similarly, except that the percentage share ownership thresholds described in the preceding sentence are
measured in terms of indirect ownership of the subsidiary’s shares rather than in terms of ownership of our shares.)
Moreover, if the RPII rules of the Code were to apply to any of our non-U.S. insurance company subsidiaries,
any RPII that is includible in the income of a U.S. tax-exempt organization would generally be treated as unrelated
business taxable income. Although we and our subsidiaries intend to operate generally in a manner so as to avoid
exceeding the foregoing thresholds for application of the RPII rules, there can be no assurance that this will always
be the case. Accordingly, there can be no assurance that U.S. persons who own our ordinary shares will not be required
to recognize gross income inclusions attributable to RPII.
In addition, the RPII rules provide that if a shareholder who is a U.S. person disposes of shares in a foreign
insurance company that has RPII and in which U.S. persons collectively own 25% or more of the total combined voting
power of all classes of stock entitled to vote, or the total value of the stock, any gain from the disposition will generally
be treated as dividend income to the extent of the shareholder’s share of the corporation’s undistributed earnings and
36
profits that were accumulated during the period that the shareholder owned the shares (whether or not those earnings
and profits are attributable to RPII). Such a shareholder would also be required to comply with certain reporting
requirements, regardless of the amount of shares owned by the shareholder. These rules should not apply to dispositions
of our ordinary shares because we will not be directly engaged in the insurance business. The RPII rules have not
been interpreted by the courts or the U.S. Internal Revenue Service (the "IRS") and regulations interpreting the RPII
rules exist only in proposed form. Accordingly, there is no assurance that our views as to the inapplicability of these
rules to a disposition of our ordinary shares will be accepted by the IRS or a court.
U.S. persons who own our ordinary shares would be subject to adverse tax consequences if we were
considered a "passive foreign investment company" ("PFIC") for U.S. federal income tax purposes.
We believe that we will not be a PFIC for U.S. federal income purposes for the current year. In particular, we
believe that the income of our non-U.S. subsidiaries that are insurance companies is derived in the "active conduct of
an insurance business" by corporations that are predominately engaged in such business, and that this is also the
case for us when the operations of our subsidiaries are considered as a whole, under the look-through rules applicable
to foreign holding companies. Moreover, we do not expect to conduct our activities in a manner that will cause us to
become a PFIC in the future. However, there can be no assurance that the IRS will not challenge this position or that
a court will not sustain such challenge. Accordingly, it is possible that we might be deemed a PFIC by the IRS or a
court for the current year or any future year. If we were a PFIC, it could have material adverse tax consequences for
an investor that is subject to U.S. federal income taxation, including subjecting the investor to a substantial acceleration
and/or increase in tax liability.
There are currently no final regulations regarding the application of the PFIC provisions of the Code to an
insurance company, so the application of those provisions to insurance companies remains unclear in certain respects.
The IRS issued proposed regulations on this subject in April 2015, which, if finalized as proposed, might be construed
to cause us to be treated as a PFIC. In response to the proposed regulations, comments have been submitted to the
IRS on behalf of Bermuda-based insurance holding companies and others, requesting changes and clarifications to
the proposed regulations so that a holding company with our structure will not be considered a PFIC. There is no
assurance that the regulations will be finalized in a manner that clearly accommodates our existing structure.
U.S. persons who own 10 percent or more of our shares may be subject to taxation under the "controlled
foreign corporation" ("CFC") rules.
A U.S. person that is a "10% U.S. Shareholder" of a non-U.S. corporation (i.e., a U.S. person who owns or is
treated as owning at least 10% of the total combined voting power of all classes of stock entitled to vote of the non-
U.S. corporation) that is a CFC for an uninterrupted period of 30 days or more during a taxable year, that owns shares
in the CFC directly or indirectly through non-U.S. entities on the last day of the CFC’s taxable year, must include in
gross income for U.S. federal income tax purposes the person’s pro rata share of the CFC’s "subpart F income," even
if the subpart F income is not distributed. "Subpart F income" of a non-U.S. insurance corporation typically includes
foreign personal holding company income (such as interest, dividends and other types of passive income), as well as
insurance and reinsurance income (including underwriting and investment income) other than, under certain
circumstances, income from insuring non-U.S. risks.
A non-U.S. corporation is considered a CFC if "10% U.S. Shareholders" own (directly, indirectly through non-
U.S. entities, or by attribution by application of the constructive ownership rules of section 958(b) of the Code (i.e.,
"constructively")) more than 50% of the total combined voting power of all classes of stock of that foreign corporation,
or the total value of all stock of that foreign corporation. For purposes of taking into account insurance income, a CFC
also may include a non-U.S. insurance company that has more than 25% of the total combined voting power of all
classes of stock (or more than 25% of the total value of the stock) owned directly, indirectly through non-U.S. entities,
or constructively by 10% U.S. Shareholders on any day during the corporation’s taxable year.
We believe that because of the dispersion of our share ownership, and provisions in our organizational documents
that limit voting power, no U.S. person (including our subsidiary Enstar USA, Inc., which owns certain of our Series C
Preferred Shares) should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% or
more of the total combined voting power of all classes of our shares. However, the IRS could challenge the effectiveness
of these provisions in our organizational documents. Accordingly, no assurance can be given that a U.S. person who
owns our shares will not be characterized as a 10% U.S. Shareholder.
Changes in U.S. federal tax law and other tax laws could materially affect us or our shareholders.
Legislation has been proposed on various occasions to eliminate perceived tax advantages of insurance
companies that have legal domiciles outside the United States but have certain U.S. connections. For example,
37
legislation has been proposed to disallow the deduction of reinsurance premiums paid by U.S. companies to certain
non-U.S. affiliates, although no such provision has been enacted to date. It is possible that such legislation could be
enacted or similar legislation could be introduced in and enacted by the current Congress or future Congresses and
enactment of some version of such legislation, or other changes in U.S. tax laws, regulations or interpretations thereof,
could have an adverse impact on us or our shareholders.
The Organization for Economic Co-operation and Development (the "OECD") is a global governing organization,
which analyzes and compares multi-national entities’ tax status using various metrics and reporting facts and figures.
Created by the OECD under the initiative known as the “Base Erosion and Profit Shifting Project (“BEPS”), “Country-
by-Country Reporting” (Action 13) aims to ensure that multi-national businesses provide appropriate and accurate
information to each respective member and non-member region based on various metrics. These metrics are directed
at counteracting the effects of global preferential tax regimes and increasing tax transparency. As a result of this
initiative, we expect that countries, including those in which we operate, may change their tax laws and enhance
reporting requirements. Such changes could increase the burden and costs of compliance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We lease office space in Hamilton, Bermuda, where our principal executive office is located. We also lease office
space in a number of U.S. states, the United Kingdom, Australia, Ireland, Switzerland, Canada, India, Singapore and
several Continental European countries.
We renew and enter into new leases in the ordinary course of our business. We believe that this office space is
sufficient for us to conduct our current operations for the foreseeable future, although in connection with future
acquisitions from time to time, we may expand to different locations or increase space to support any such growth.
In connection with the acquisition of Dana Companies in December 2016, we acquired properties in the United
States. The acquired properties have no present value and are not used to run our operations.
ITEM 3. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see "Note 23 - Commitments and Contingencies" in the notes to our
consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, which is incorporated herein
by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
38
PART II
ITEM 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
Our ordinary shares trade on the NASDAQ Global Select Market under the ticker symbol "ESGR".
Market and Dividend Information
On February 23, 2017, the last reported sale price for our shares was $193.55 per share. The price range per
ordinary share presented below represents the highest and lowest sale prices for our ordinary shares on the NASDAQ
Global Select Market during the quarterly periods indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
2015
High
Low
High
Low
$
$
$
$
164.69 $
164.91 $
171.66 $
209.35 $
142.35 $
148.91 $
157.32 $
161.01 $
152.91 $
161.24 $
166.40 $
161.97 $
133.35
139.36
143.63
145.73
Enstar has not historically declared a dividend. Our strategy is to retain earnings and invest distributions from
our subsidiaries back into the company. We do not currently expect to pay any dividends on our ordinary shares. Any
payment of dividends must be approved by our Board of Directors. Our ability to pay dividends is subject to certain
restrictions, as described in "Note 22 - Dividend Restrictions and Statutory Requirements" in the notes to our
consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, which is incorporated herein
by reference.
Holders
On February 23, 2017 there were 1,789 shareholders of record of our voting ordinary shares and 3 shareholders
of record of our non-voting ordinary shares. The number of shareholders of record of our voting ordinary shares does
not represent the actual number of beneficial owners of our voting ordinary shares because shares are frequently held
in “street name” by securities dealers and others for the benefit of beneficial owners who may vote the shares.
Issuer Purchases of Equity Securities
The following table provides information about ordinary shares acquired by the Company during the three months
ended December 31, 2016, which are related to shares withheld from employees in order to facilitate the payment of
withholding taxes on restricted shares. The Company does not have a share repurchase program.
Period
October 1, 2016 - October 31, 2016
November 1, 2016 - November 30, 2016
December 1, 2016 - December 31, 2016
Total
Total Number
of Shares
Purchased(1)
Average Price
Paid per
Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
be Purchased Under
the Program
— $
— $
689
$
200.00
$
— $
689
— $
$
— $
— $
— $
— $
—
—
—
—
(1)
Includes shares withheld from employees in order to facilitate the payment of withholding taxes on restricted shares granted pursuant to our
equity incentive plan. The shares are calculated at their fair market value, as determined by reference to the closing price of our ordinary shares
on the vesting date.
39
Performance Graph
The following performance graph compares the cumulative total return on our ordinary shares with the cumulative
total return on the NASDAQ Composite Index and the NASDAQ Insurance Index for the period that commenced
December 31, 2011 and ended on December 31, 2016. The performance graph shows the value as of December 31
of each calendar year of $100 invested on December 31, 2011 in our ordinary shares, the NASDAQ Composite Index,
and the NASDAQ Insurance Index assuming the reinvestment of dividends. Returns have been weighted to reflect
relative market capitalization. This information is not necessarily indicative of future returns.
Indexed Returns* for Years Ended December 31,
2011
2012
2013
2014
2015
2016
Enstar Group Limited
NASDAQ Composite Index
NASDAQ Insurance Index
100.00
100.00
100.00
114.03
116.41
110.26
141.46
165.47
148.88
155.69
188.69
162.67
152.79
200.32
177.32
201.32
216.54
206.99
*$100 invested on December 31, 2011 in stock or index, including reinvestment of dividends.
40
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information for each of the past five fiscal years has been derived from
our audited historical financial statements. This information is only a summary and should be read in conjunction with
"Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto included in Item 8 of this Annual Report on Form 10-K. The results of operations
for historical accounting periods are not necessarily indicative of the results to be expected for any future accounting
period.
Since our inception, we have made numerous acquisitions of companies and portfolios of business that impact
the comparability between periods of the information reflected below. In particular, our 2016 acquisition of Dana
Companies, our 2015 acquisitions of Alpha, the life settlement companies of Wilton Re, and Sussex, our 2014 acquisition
of StarStone and our 2013 acquisitions of SeaBright, Pavonia, Arden and Atrium impact comparability to other periods,
including with respect to net premiums earned. In addition, we have now classified our Pavonia operations as held-
for-sale, and its results of operations are included in discontinued operations. Our acquisitions and significant new
business are described in "Item 1. Business - Recent Acquisitions and Significant New Business” and Notes 3 and 4
of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Statements of Earnings Data:
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains (losses)
Net incurred losses and LAE
Acquisition costs
Total other expenses, net
Net earnings from continuing operations
Net earnings (losses) from discontinuing
operations
Net earnings
Less: Net loss (earnings) attributable to
noncontrolling interests
Net earnings attributable to Enstar Group
Limited
Per Ordinary Share Data: (1)
Earnings per ordinary share attributable to
Enstar Group Limited:
Basic:
Net earnings from continuing operations
Net earnings (loss) from discontinuing
operations
Net earnings per ordinary share
Diluted:
Net earnings from continuing operations
Net earnings (loss) from discontinuing
operations
Net earnings per ordinary share
Years Ended December 31,
2016
2015
2014
2013
2012
(in thousands of U.S. dollars, except share and per share data)
$
823,514
$
753,744
$
542,991
$
147,613
$
39,364
185,463
77,818
(174,099)
(186,569)
(473,041)
292,450
11,963
304,413
39,347
122,564
(41,523)
(104,333)
(163,716)
(393,711)
212,372
(2,031)
210,341
34,919
66,024
51,991
(9,146)
(117,542)
(347,540)
221,697
5,539
227,236
12,817
62,117
78,394
163,672
(14,436)
(230,056)
220,121
3,701
223,822
3,511
8,570
68,864
73,612
237,953
—
(200,991)
191,519
—
191,519
(39,606)
9,950
(13,487)
(15,218)
(23,502)
$
264,807
$
220,291
$
213,749
$
208,604
$
168,017
$
$
$
$
$
$
13.10
0.62
13.72
13.00
0.62
13.62
$
$
$
$
$
$
11.55
$
(0.11) $
11.44
$
11.46
$
(0.11) $
11.35
$
11.31
0.30
11.61
11.15
0.29
11.44
$
$
$
$
$
$
12.40
0.22
12.62
12.27
0.22
12.49
$
$
$
$
$
$
10.22
—
10.22
10.10
—
10.10
Weighted average ordinary shares outstanding:
Basic
Diluted
19,299,426
19,447,241
19,252,072
19,407,756
18,409,069
18,678,130
16,523,369
16,703,442
16,441,461
16,638,021
(1) Earnings per share is a measure based on net earnings divided by weighted average ordinary shares outstanding. Basic earnings per share is
defined as net earnings available to ordinary shareholders divided by the weighted average number of ordinary shares outstanding for the period,
giving no effect to dilutive securities. Diluted earnings per share is defined as net earnings available to ordinary shareholders divided by the weighted
average number of shares and share equivalents outstanding calculated using the treasury stock method for all potentially dilutive securities. When
the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted earnings per share.
41
2016
2015
2014
2013
2012
(in thousands of U.S. dollars, except share and per share data)
December 31,
Balance Sheet Data:
Total investments
Total cash and cash equivalents
(inclusive of restricted)
Reinsurance balances recoverable
Total assets
Losses and loss adjustment expense
liabilities
Policy benefits for life and annuity
contracts
Loans payable
Total Enstar Group Limited
shareholders’ equity
Book Value per Share:(1)
Basic
Diluted
Shares Outstanding:
Basic
Diluted
$ 6,042,672 $ 6,340,781 $ 4,844,352 $ 4,279,542 $ 3,352,875
1,318,645
1,460,743
12,865,744
1,295,169
1,451,921
11,772,534
1,429,622
1,305,515
8,622,147
958,999
1,331,892
7,236,289
954,855
1,122,919
5,878,261
5,987,867
5,720,149
4,509,421
4,219,905
3,650,127
112,095
673,603
126,321
599,750
8,940
320,041
9,779
452,446
11,027
107,430
2,802,312
2,516,872
2,304,850
1,755,523
1,553,755
$
$
144.66 $
143.68 $
130.65 $
129.65 $
120.04 $
119.22 $
106.21 $
105.20 $
94.29
93.30
19,372,178
19,645,309
19,263,742
19,714,810
19,201,017
19,332,864
16,528,343
16,707,115
16,477,809
16,653,120
(1) Basic book value per share is calculated as total Enstar Group Limited shareholders’ equity available to ordinary shareholders divided by the
number of ordinary shares outstanding as at the end of the period, giving no effect to dilutive securities. Diluted book value per share is calculated
as total Enstar Group Limited shareholders’ equity available to ordinary shareholders plus the assumed proceeds from the exercise of outstanding
warrants divided by the sum of the number of ordinary shares and ordinary share equivalents and warrants outstanding at the end of the period.
42
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report.
Some of the information contained in this discussion and analysis or included elsewhere in this annual report, including
information with respect to our plans and strategy for our business, includes forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those
anticipated by these forward-looking statements as a result of many factors, including those discussed under
"Cautionary Statement Regarding Forward-Looking Statements", "Item 1A. Risk Factors" and elsewhere in this Annual
Report on Form 10-K.
Table of Contents
Section
Business Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Performance Indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP Financial Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Results of Operations — for the Years Ended December 31, 2016, 2015, and 2014 . . .
Results of Operations by Segment — for the Years Ended December 31, 2016, 2015, and 2014 . . . .
Non-life Run-off Segment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atrium Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
StarStone Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life and Annuities Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investable Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
44
44
45
46
47
50
50
56
60
65
66
72
77
43
Business Overview
We are a multi-faceted insurance group that offers innovative capital release solutions and specialty underwriting
capabilities through our network of group companies in Bermuda, the United States, the United Kingdom, Continental
Europe, Australia, and other international locations. Our core focus is acquiring and managing insurance and
reinsurance companies and portfolios of insurance and reinsurance business in run-off. Since the formation of our
Bermuda-based holding company in 2001, we have completed over 75 acquisitions or portfolio transfers.
Until 2013, all but one of our acquisitions had been in the non-life run-off business, which for us generally includes
property and casualty, workers’ compensation, asbestos and environmental, construction defect, marine, aviation and
transit, and other closed business.
While our core focus remains acquiring and managing non-life run-off business, in recent years, we expanded
our business to include active underwriting through our acquisitions of Atrium and StarStone. We partnered with Trident
in the Atrium and StarStone acquisitions, with Enstar owning a 59.0% interest, Trident owning a 39.3% interest, and
Dowling owning a 1.7% interest. We also expanded our portfolio of run-off businesses to include closed life and
annuities, primarily through our acquisition of Pavonia from HSBC Holdings plc on March 31, 2013, although we have
recently entered into an agreement to sell Pavonia.
Our businesses strategies are discussed in "Item 1. Business - Company Overview", "- Business Strategy", "-
Strategic Growth" and "- Recent Acquisitions and Significant New Business."
Key Performance Indicator
Our primary corporate objective is growing our fully diluted book value per share. This is driven primarily by
growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions, effectively
managing companies and portfolios of business that we have acquired, and executing on our active underwriting
strategies. The drivers of our book value growth are discussed in "Item 1. Business - Business Strategy."
During the year ended December 31, 2016, we increased our book value per share on a fully diluted basis by
10.8% to $143.68 per share. The increase was primarily attributable to net earnings of $264.8 million. See "Item 6.
Selected Financial Data" herein for the computation of fully diluted book value per share. The growth of our fully diluted
book value per share since becoming a public company is shown in the table below.
44
Current Outlook
Run-off
Our business strategy includes generating growth through acquisitions and reinsurance transactions, particularly
in our Non-life Run-off segment. Our non-life run-off reserves were $4.7 billion as at December 31, 2016, including
$1.4 billion of reserves acquired or assumed in new transactions during 2016, and we continue to evaluate opportunities
for future growth. Most recently, in January and February 2017, we entered into separate agreements to assume net
reserves of approximately $1.4 billion from RSA and QBE. We recently agreed to sell Pavonia from our life and annuities
segment, which we expect to close during 2017. We will continue to employ a disciplined approach when assessing,
acquiring or managing portfolios of risk.
We manage claims in a professional and disciplined manner, drawing on our global team of in-house claims
management experts as we aim to proactively manage risks and claims efficiently. We employ an opportunistic
commutation strategy in which we negotiate with policyholders and claimants with a goal of commuting or settling
existing insurance and reinsurance liabilities at a discount to the ultimate liability and also to avoid unnecessary or
expensive legal and other associated run-off fees and expense.
As a result of the number of transactions we have completed over the years, we have a complex organizational
structure consisting of numerous licensed entities across many jurisdictions. In managing our group, we continue to
look for opportunities to simplify our legal structure by way of company amalgamations and mergers, reinsurance, or
other transactions in order to improve capital efficiency and decrease ongoing compliance and operational costs over
time. In addition, we seek to pool risk in areas where we maintain the expertise to manage such risk to achieve
operational efficiencies, which will allow us to most efficiently manage our assets and to achieve capital diversification
benefits.
Underwriting
Our underwriting results can be affected by changes in premium rates, significant losses, development of prior
year loss reserves and current year underwriting margins. In general, our expectation for 2017 is that underwriting
margins will be flat or lower than in 2016, with premium rates expected to be impacted by both market and general
economic conditions. We continue to see overcapacity in many markets for insurable risks, resulting in continued
pressure on premium rates and terms and conditions. If general economic conditions worsen, a decrease in the level
of economic activity may impact insurable risks and our ability to write premium that is acceptable to us. We may adjust
our level of reinsurance to maintain an amount of net exposure that is aligned with our risk tolerance.
Our strategy is to maintain our disciplined underwriting approach and strong risk management practices, which
may result in us writing less premium in certain lines of business than we wrote in 2016. However, we will seek to
mitigate these challenging conditions through our diversified book of business, established distribution channels and
geographic reach. We will continue to seek growth in certain areas where we have identified opportunities for expansion
and the opportunity for increases in premium rates. In addition, our underwriting operations are well-positioned to
capture profitable active business from our run-off transactions, where such business is in attractive specialty lines.
In both our Atrium and StarStone segments we will maintain our focus on underwriting for profitability. In our StarStone
segment we aim to continue reducing our expense base and generating operational efficiencies through ongoing
integration into Enstar's operations.
Investments
We expect to maintain our investment strategy, which emphasizes the preservation of our assets, credit quality,
and diversification. We will continue to seek superior risk-adjusted returns, by allocating a portion of our portfolio to
non-investment grade securities or alternative investments in accordance with our investment guidelines.
Net investment income is a significant component of our earnings. We are in a period of considerable market
uncertainty in which we see fully priced asset valuations across many asset classes compared to historical averages
and deteriorating underlying company fundamentals in certain classes. If investment conditions or general economic
conditions change during 2017, we may experience further pressure on our investment yields and realized or unrealized
losses on investments could materialize. For further discussion of our investments, see "Investable Assets" below.
45
Non-GAAP Financial Measures
In presenting our results for the Atrium and StarStone segments, we discuss the loss ratio, acquisition cost
ratio, other operating expense ratio, and the combined ratio of our active underwriting operations within these segments.
While we consider these measures to be non-GAAP, management believes that these ratios provide the most
meaningful measure for understanding our underwriting profitability. These non-GAAP measures may be defined or
calculated differently by other companies. There are no comparable GAAP measures to our insurance ratios.
The loss ratio is calculated by dividing net incurred losses and LAE by net premiums earned. The acquisition
cost ratio is calculated by dividing acquisition costs by net premiums earned. The other operating expense ratio is
calculated by dividing other operating expenses by net earned premiums. The combined ratio is the sum of the loss
ratio, the acquisition cost ratio and the other operating expense ratio. The ratios exclude expenses related to the
holding companies, which we believe is the most meaningful presentation because these expenses are not incremental
and/or directly related to the individual underwriting operations.
In the loss ratio, the excluded net premiums earned and net incurred losses and LAE of the holding companies
relate to the amortization of our fair value adjustments associated with the liabilities for unearned premiums and losses
and LAE acquired on acquisition date. Fair value purchase accounting adjustments established at date of acquisition
are recorded by the holding companies.
In Atrium’s other operating expense ratio, the excluded general and administrative expenses relate to
amortization of the definite-lived intangible assets in the holding company, and expenses relating to AUL managing
agency employee salaries, benefits, bonuses and current year share grant costs. The excluded AUL general and
administrative expenses relate to expenses incurred in managing the syndicate, and eliminated items represent Atrium
5’s share of the fees and commissions paid to AUL. We believe it is a more meaningful presentation to exclude the
costs in managing the syndicate because they are principally funded by the profit commission fees earned from
Syndicate 609, which is a revenue item not included in the insurance ratios.
In StarStone’s other operating expense ratio for 2016, the excluded general and administrative expenses
relate to the amortization of the definite-lived intangible assets, recorded at the holding company level. For 2015, the
excluded general and administrative expenses relate to the amortization of the definite-lived intangible assets and
acquisition-related expenses, in each case as recorded at the holding company level. For 2014, the excluded general
and administrative expenses relate to management fee expenses charged by our Non-life Run-off segment primarily
related to our costs incurred in managing StarStone, the amortization of the definite-lived intangible assets, and
acquisition-related expenses, in each case recorded at the holding company level.
46
Consolidated Results of Operations - For the Years Ended December 31, 2016, 2015 and 2014
The following table sets forth our consolidated statements of earnings for each of the periods indicated. For a
discussion of the critical accounting policies that affect the results of operations, see "Critical Accounting Policies"
below.
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains (losses)
Other income
EXPENSES
Net incurred losses and LAE
Life and annuity policy benefits
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS FROM CONTINUING OPERATIONS
NET EARNINGS (LOSS) FROM DISCONTINUING OPERATIONS,
NET OF INCOME TAX EXPENSE
NET EARNINGS
Less: Net loss (earnings) attributable to noncontrolling interest
Years Ended December 31,
2016
2015
2014
(in thousands of U.S. dollars)
$
823,514 $
753,744 $
542,991
39,364
185,463
77,818
4,836
1,130,995
174,099
(2,038)
186,569
423,734
20,642
665
803,671
327,324
(34,874)
292,450
11,963
304,413
(39,606)
39,347
122,564
(41,523)
30,328
904,460
104,333
(546)
163,716
389,159
19,403
3,373
679,438
225,022
(12,650)
212,372
(2,031)
210,341
9,950
34,919
66,024
51,991
14,149
710,074
9,146
84
117,542
337,120
12,922
5,962
482,776
227,298
(5,601)
221,697
5,539
227,236
(13,487)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
264,807 $
220,291 $
213,749
Highlights
Consolidated Results of Operations for the Year Ended December 31, 2016
• Consolidated net earnings of $264.8 million and basic and diluted earnings per share of $13.72 and $13.62,
respectively
• Net earnings from Non-life Run-off and Life and Annuities segments of $206.7 million and $26.5 million,
respectively
• Net premiums earned of $823.5 million, including $676.6 million and $124.4 million in our StarStone and
Atrium segments
• Combined ratios of 98.6% and 94.0% for the active underwriting operations within our StarStone and Atrium
segments, respectively (refer to "Non-GAAP Financial Measures" above)
• Net investment income of $185.5 million and net realized and unrealized gains of $77.8 million
47
Consolidated Financial Condition as at December 31, 2016
• Total investments, cash and funds held of $8,438.1 million
• Total reinsurance balances recoverable of $1,460.7 million
• Total assets of $12,865.7 million
• Shareholders' equity of $2,802.3 million and redeemable noncontrolling interest of $454.5 million
• Total gross reserves for losses and LAE of $5,987.9 million, with $1,350.5 million of reserves acquired and
assumed in our Non-life Run-off operations during 2016
• Diluted book value per ordinary share of $143.68
Consolidated Overview
2016 versus 2015: We reported consolidated net earnings attributable to Enstar Group Limited shareholders
of $264.8 million for the year ended December 31, 2016, an increase of $44.5 million from $220.3 million for the year
ended December 31, 2015. Our results were impacted by the loss portfolio transfer reinsurance transactions we
completed during 2016 with Allianz, Coca-Cola and Neon. Our results were also impacted by our acquisition activity
during 2015, when we acquired Sussex, Wilton Re’s life settlements business, and Alpha, and completed loss portfolio
transfer reinsurance transactions with Reciprocal of America, Voya, and Sun Life. The most significant drivers of the
change in our financial performance during 2016 as compared to 2015 included:
• Net Incurred Losses and LAE in our Non-life Run-off Segment - Net reduction in the liability for net incurred
losses and LAE within our Non-life Run-off segment continued to be the predominant driver of our
consolidated earnings for the year ended December 31, 2016, improving by $15.1 million from 2015. Net
earnings provided by the Non-life Run-off segment increased by $33.5 million in 2016 compared to 2015
primarily due to improved investment results, partially offset by higher expenses and other items;
• Higher Net Investment Income - Total net investment income increased by $62.9 million for the year ended
December 31, 2016 compared to 2015. The increase was attributable to an average increase of 53 basis
points in the book yield we obtained on our assets, due to our asset allocation and a broad increase in
treasury yields;
• StarStone - Net earnings attributable to the StarStone segment were $25.2 million for the year ended
December 31, 2016, as compared to $13.7 million in 2015. The combined ratio of 98.6% was the same as
last year as challenging underwriting conditions resulted in higher loss and acquisition ratios, which was
fully offset by improvement in the other operating expense ratio attributable to the continued execution of
expense management initiatives;
• Atrium - Net earnings attributable to the Atrium segment were $6.4 million, for the year ended December
31, 2016 as compared to $16.6 million for the year ended December 31, 2015. Atrium continued to deliver
solid underwriting performance with a combined ratio of 94.0%. The 2016 results included a lower level of
favorable prior period loss development and some large losses in 2016 compared to a lower level of losses
in 2015;
•
Life Settlements Business - The life settlements business contributed $11.0 million to earnings in 2016
compared to $16.5 million in 2015;
• Change in Net Realized and Unrealized Gains (Losses) - For the year ended December 31, 2016, net
realized and unrealized gains amounted to $77.8 million, as compared to net realized and unrealized losses
of $41.5 million for 2015. The net realized and unrealized gains in 2016 were primarily attributable to an
increase in the valuation of our other investments, as well as tighter credit spreads in fixed income markets;
and
• Noncontrolling Interest - Noncontrolling interest in losses (earnings) is directly attributable to the results from
those subsidiary companies in which there are either noncontrolling interests or redeemable noncontrolling
interests. For the year ended December 31, 2016, the noncontrolling interest in earnings was $39.6 million
as compared to the noncontrolling interest in losses of $10.0 million in 2015.
48
2015 versus 2014: We reported consolidated net earnings attributable to Enstar Group Limited shareholders
of $220.3 million for the year ended December 31, 2015, an increase of $6.6 million from $213.7 million for the year
ended December 31, 2014. During 2014, our primary acquisition was StarStone. The most significant drivers of the
change in our financial performance during 2015 as compared to 2014 included:
• Net Incurred Losses and LAE in our Non-life Run-off Segment - Net reduction in the liability for net incurred
losses and LAE within our Non-life Run-off segment continued to be the predominant driver of our
consolidated earnings for the year ended December 31, 2015, improving by $6.1 million from 2014. Net
earnings provided by the Non-life Run-off segment were lower by $30.1 million in 2015 compared to 2014
primarily due to net realized and unrealized losses in 2015 as compared to net realized and unrealized gains
in 2014. Excluding net investment income and net realized and unrealized gains (losses), net earnings in
the Non-life Run-off segment increased from $97.4 million in 2014 to $120.2 million in 2015;
• Higher Net Investment Income - Total net investment income increased by $56.5 million for the year ended
December 31, 2015 compared to 2014. The increase was attributable to an increase of $1.3 billion in our
average invested assets (due to our 2015 acquisitions and significant new business transactions) and an
average increase of 57 basis points in the book yield we obtained on those assets, due to our asset allocation
and a broad increase in treasury yields;
• StarStone - Net earnings attributable to the StarStone segment were $13.7 million for the year ended
December 31, 2015, as compared to a net loss of $10.6 million for the nine months we owned StarStone in
2014. We saw improvement in the underwriting profitability of StarStone, as well as a decrease in other
operating expenses attributable to the continued execution of expense management initiatives;
• Atrium - Net earnings attributable to the Atrium segment increased by $6.1 million for the year ended
December 31, 2015 compared to 2014, as the Atrium active underwriting operations continued their strong
underwriting performance despite challenging underwriting conditions;
•
Life Settlements Business - The life settlements business contributed $16.5 million to earnings;
• Change in Net Realized and Unrealized Gains (Losses) - For the year ended December 31, 2015, net
realized and unrealized losses amounted to $41.5 million, as compared to net realized and unrealized gains
of $52.0 million for 2014. The net realized and unrealized losses in 2015 were primarily attributable to an
increase in treasury yields on our fixed maturity securities, widening corporate credit spreads and a decrease
in liquidity in fixed income markets; and
• Noncontrolling Interest - Noncontrolling interest in losses (earnings) is directly attributable to the results from
those subsidiary companies in which there are either noncontrolling interests or redeemable noncontrolling
interests. For the year ended December 31, 2015, the noncontrolling interest in losses was $10.0 million
as compared to the noncontrolling interest in earnings of $13.5 million in 2014.
49
Results of Operations by Segment - For the Years Ended December 31, 2016, 2015 and 2014
We have four segments of business that are each managed, operated and reported on separately: (i) Non-life
Run-off; (ii) Atrium; (iii) StarStone; and (iv) Life and Annuities. For a description of our segments, see "Item 1. Business
- Operating Segments." The following is a discussion of our results of operations by segment.
The below table provides a split by operating segment of the net earnings attributable to Enstar Group Limited:
Segment split of net earnings attributable to Enstar Group Limited:
Non-life Run-off
Atrium
StarStone
Life and Annuities
Years Ended December 31,
2016
2015
2014
(in thousands of U.S. dollars)
$
206,676 $
173,216 $
203,282
6,416
25,217
26,498
16,558
13,664
16,853
10,431
(10,553)
10,589
Net earnings attributable to Enstar Group Limited
$
264,807 $
220,291 $
213,749
The following is a discussion of our results of operations by segment.
Non-life Run-off Segment
The following is a discussion and analysis of the results of operations for our Non-life Run-off segment for the
years ended December 31, 2016, 2015 and 2014, which are summarized below:
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains
(losses)
Other income
EXPENSES
Net incurred losses and LAE
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses (gains)
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS
Less: Net loss (earnings) attributable to
noncontrolling interest
NET EARNINGS ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
2016
2015
Increase
(decrease)
2014
Increase
(decrease)
(in thousands of U.S. dollars)
$
16,755 $
25,324
143,783
77,689
4,003
267,554
(285,881)
4,198
275,199
22,863
(1,678)
14,701
252,853
(28,577)
224,276
44,369 $
(27,614) $
31,168 $
13,201
21,366
84,185
(31,193)
29,293
148,020
3,958
59,598
108,882
(25,290)
119,534
19,342
57,899
48,030
13,310
169,749
(270,830)
(15,051)
(264,711)
8,860
238,989
14,565
4,372
(4,044)
152,064
(12,570)
139,494
(4,662)
36,210
8,298
(6,050)
18,745
100,789
(16,007)
84,782
8,393
198,063
7,493
8,015
(42,747)
212,496
622
213,118
2,024
26,286
(79,223)
15,983
(21,729)
(6,119)
467
40,926
7,072
(3,643)
38,703
(60,432)
(13,192)
(73,624)
(17,600)
33,722
(51,322)
(9,836)
43,558
$
206,676 $
173,216 $
33,460 $
203,282 $
(30,066)
50
Overall Results
2016 versus 2015: The increase in net earnings for the year ended December 31, 2016 as compared with the
year ended December 31, 2015 was primarily attributable to an increase in net realized and unrealized gains in 2016
compared to net realized and unrealized losses in 2015, an increase in net investment income and a decrease in net
incurred losses and LAE, partially offset by a reduction in net premiums earned, an increase in general and administrative
expenses and an increase in income taxes.
2015 versus 2014: The decrease in net earnings for the year ended December 31, 2015 as compared with the
year ended December 31, 2014 was primarily attributable to the change in net realized and unrealized losses and the
increases in general and administrative expenses, partially offset by an increase in net investment income and a change
in net loss (earnings) attributable to noncontrolling interest.
Investment results are separately discussed below in "Investments."
Net Premiums Earned:
Years Ended December 31,
2016
2015
Increase
(decrease)
2014
Increase
(decrease)
Gross premiums written
Ceded reinsurance premiums written
Net premiums written
Gross premiums earned
Ceded reinsurance premiums earned
Net premiums earned
$
$
17,316 $
(8,114)
9,202
25,989
(9,234)
16,755 $
(in thousands of U.S. dollars)
38,704 $
(16,110)
(21,388) $
7,996
12,818 $
(2,546)
22,594
116,494
(72,125)
(13,392)
(90,505)
62,891
10,272
45,684
25,886
(13,564)
12,322
70,810
(14,516)
(57,609)
44,369 $
(27,614) $
31,168 $
13,201
Because business in this segment is in run-off, our general expectation is for premiums associated with legacy
business to decline in future periods. However, the actual amount in any particular year will be impacted by new
acquisitions during the year, and the run-off of premiums from acquisitions completed in recent years.
2016 versus 2015: Premiums written and earned in 2016 and 2015 related primarily to Sussex's run-off business.
2015 versus 2014: Premiums written and earned in 2015 related primarily to Sussex's run-off business whereas
premiums written and earned in 2014 related to StarStone's run-off business.
Fees and Commission Income:
2016 versus 2015: Our management companies in the Non-life Run-off segment earned fees and commission
income of $25.3 million and $21.4 million for the years ended December 31, 2016 and 2015, respectively. The increase
in fees is primarily related to services provided to KaylaRe, as described in Note 21 - "Related Party Transactions" in
the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K. These
internal fees are predominantly eliminated upon consolidation of our results of operations. While our consulting
subsidiaries continue to provide management and consultancy services, claims inspection services and reinsurance
collection services to third-party clients in limited circumstances, the core focus of these subsidiaries is providing in-
house services to companies within the Enstar group.
2015 versus 2014: Our management companies in the Non-life Run-off segment earned fees and commission
income of $21.4 million and $19.3 million for the years ended December 31, 2015 and 2014, respectively. The decrease
in fees and commission income related primarily to management fees charged to our StarStone segment.
51
Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment for
the years ended December 31, 2016, 2015 and 2014:
2016
2015
2014
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
$ 529,937
$ 3,869
$ 533,806
$ 501,246
$ 16,049
$ 517,295
$ 312,415
$ 87,681
$ 400,096
(608,168)
(617)
(608,785)
(366,262)
10,927
(355,335)
(285,814)
(24,600)
(310,414)
(349,726)
2,342
(347,384)
(377,722)
12,948
(364,774)
(262,384)
(39,400)
(301,784)
168,827
—
168,827
15,265
—
15,265
—
—
—
(259,130)
5,594
(253,536)
(227,473)
39,924
(187,549)
(235,783)
23,681
(212,102)
(13,822)
—
(13,822)
(25,271)
(44,190)
235
(43,955)
(62,653)
25,432
—
25,432
4,643
—
—
—
(25,271)
(7,700)
—
(7,700)
(62,653)
(49,445)
554
(48,891)
4,643
3,982
—
3,982
Net losses paid
Net change in case and LAE
reserves (1)
Net change in IBNR reserves (1)
Amortization of deferred
charges
Increase (reduction) in
estimates of net ultimate losses
Increase (reduction) in
provisions for bad debt
Increase (reduction) in
provisions for unallocated LAE
Amortization of fair value
adjustments
Net incurred losses and LAE
$ (291,710) $ 5,829
$(285,881) $(310,754) $ 39,924
$(270,830) $(288,946) $ 24,235
$(264,711)
(1) Net change in case and LAE reserves comprises the movement during the year in specific case reserve liabilities as a result of claims
settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our
reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the gross change in our actuarial
estimates of IBNR, less amounts recoverable.
2016 versus 2015: The net reduction in incurred losses and LAE for the year ended December 31, 2016 of
$285.9 million included net incurred losses and LAE of $5.8 million related to current period net earned premium of
$7.1 million (primarily for the portion of the run-off business acquired with Sussex). Excluding current period net incurred
losses and LAE of $5.8 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $291.7
million, which was attributable to a reduction in estimates of net ultimate losses of $259.1 million, a reduction in provisions
for bad debt of $13.8 million and a reduction in provisions for unallocated LAE of $44.2 million, relating to 2016 run-
off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to
companies acquired amounting to $25.4 million.
The reduction in estimates of net ultimate losses relating to prior periods of $259.1 million comprised reductions
in IBNR reserves of $349.7 million partially offset by net incurred loss development of $90.6 million, which includes
amortization of deferred charges of $168.8 million. The decrease in the estimate of net IBNR reserves of $349.7 million
(compared to $377.7 million during the year ended December 31, 2015), was comprised of an increase of $39.4 million
relating to asbestos liabilities (compared to a decrease of $32.0 million in 2015), an increase of $35.5 million relating
to environmental liabilities (compared to a decrease of $1.6 million in 2015), a decrease of $0.8 million relating to
general casualty liabilities (compared to a decrease of $3.0 million in 2015), a decrease of $333.2 million relating to
workers' compensation liabilities (compared to a decrease of $243.4 million in 2015) and a decrease of $90.6 million
relating to all other remaining liabilities (compared to a decrease of $97.7 million in 2015).
The reduction in net IBNR reserves of $349.7 million relating to prior periods was a result of the application, on
a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical
loss development data, following 56 commutations and policy buy-backs, to estimate loss reserves required to cover
liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR
reserves was reduced as a result of the combined impact on all classes of business of loss development activity during
2016, including commutations and the favorable trend of loss development related to non-commuted policies compared
to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves
of $608.2 million for net paid losses of $529.9 million related to the settlement of non-commuted losses in the year
and 56 commutations and policy buy-backs of assumed and ceded exposures. Net advised case and LAE reserves
settled by way of commutation and policy buyback during the year ended December 31, 2016 amounted to $14.7
million (comprising $24.4 million of ceded incurred reinsurance recoverable case reserves partially offset by $39.1
million of assumed case reserves and LAE reserves).
52
The reduction in provisions for bad debt of $13.8 million was a result of the favorable resolution of contractual
disputes with reinsurers, the reduction in bad debt provisions for insolvent reinsurers as a result of dividends received
and the reduction of specific provisions held for potential disputes with reinsurers.
2015 versus 2014: The net reduction in incurred losses and LAE for the year ended December 31, 2015 of
$270.8 million included current period net incurred losses and LAE of $39.9 million related to current period net earned
premium of $43.3 million (primarily for the portion of the run-off business acquired with Sussex). Excluding current
period net losses and LAE of $39.9 million, net incurred losses and LAE liabilities relating to prior periods were reduced
by $310.8 million, which was attributable to a reduction in estimates of net ultimate losses of $227.5 million, a reduction
in provisions for bad debts of $25.3 million and a reduction in provision for unallocated LAE of $62.7 million, relating
to 2015 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating
to companies acquired amounting to $4.6 million.
The reduction in estimates of net ultimate losses relating to prior periods of $227.5 million comprised reductions
in IBNR reserves of $377.7 million partially offset by net incurred loss development of $150.2 million, which includes
amortization of deferred charges of $15.3 million. The decrease in the estimate of net IBNR reserves of $377.7 million
(compared to $262.4 million during the year ended December 31, 2014) was comprised of $32.0 million relating to
asbestos liabilities (compared to $59.4 million in 2014), $1.6 million relating to environmental liabilities (compared to
$6.2 million in 2014), $3.0 million relating to general casualty liabilities (compared to $62.5 million in 2014), $243.4
million relating to workers' compensation liabilities (compared to $63.6 million in 2014) and $97.7 million relating to all
other remaining liabilities (compared to $70.7 million in 2014).
The reduction in net IBNR reserves of $377.7 million relating to prior periods was a result of the application, on
a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical
loss development data, following 79 commutations and policy buy-backs, to estimate loss reserves required to cover
liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR
reserves was reduced as a result of the combined impact on all classes of business of loss development activity during
2015, including commutations and the favorable trend of loss development related to non-commuted policies compared
to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves
of $366.3 million for net paid losses of $501.2 million related to the settlement of non-commuted losses in the year
and 79 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of two of
our top ten assumed exposures and one of our top ten ceded recoverables). Net advised case and LAE reserves
settled by way of commutation and policy buy-back during the year ended December 31, 2015 amounted to $56.6
million (comprising $140.3 million of assumed case reserves and LAE reserves partially offset by $83.7 million of ceded
incurred reinsurance recoverable case reserves).
The reduction in provisions for bad debt of $25.3 million was a result of the collection of certain reinsurance
recoverables against which bad debt provisions had been provided in earlier periods, and the reduction in bad debt
provisions for insolvent reinsurers as a result of dividends received, partially offset by additional provisions for contractual
disputes with reinsurers.
Acquisition Costs:
Acquisition costs for the Non-life Run-off segment were $4.2 million for the year ended December 31, 2016,
compared to $8.9 million for 2015. Acquisition costs for the years ended December 31, 2016 and 2015 primarily related
to net premiums earned on the portion of Sussex business that was placed into run-off. The $8.4 million in acquisition
costs in 2014 primarily related to StarStone.
General and Administrative Expenses:
2016 versus 2015: General and administrative expenses for the Non-life Run-off segment increased by $36.2
million, from $239.0 million in the year ended December 31, 2015 to $275.2 million in the year ended December 31,
2016. The increase in expenses in 2016 related primarily to:
•
•
•
an increase of $32.5 million related principally to an increase in salaries and benefits, partially offset by a
decrease in discretionary bonus accruals of $8.3 million. The increase in salaries and benefits was primarily
attributable to an increase of $21.0 million in the valuation of stock appreciation right awards outstanding in
2016 as a result of the increase in the share price;
an increase in professional fees of $9.2 million related to new acquisitions and projects during the year; and
an increase in bank charges of $3.2 million due to the write-off of loan facility fees in 2016.
53
2015 versus 2014: General and administrative expenses for the Non-life Run-off segment increased by $40.9
million, from $198.1 million in the year ended December 31, 2014 to $239.0 million in the year ended December 31,
2015. The increase in expenses in 2015 related primarily to:
•
•
•
•
an increase of $21.2 million related principally to an increase in professional fees of $12.1 million (primarily
due to acquisitions and projects), information technology costs of $6.8 million (due to our growth), and an
increase in office expenses and travel costs of $2.3 million;
an increase in salaries and benefits of $17.5 million primarily attributable to an increase in headcount
associated with acquisitions including Sussex; and
an increase in stock compensation costs of $3.3 million due to new equity-based awards made during the
year to our employees; partially offset by
a decrease in rent and related expenses of $1.5 million due largely to non-recurring fees associated with
the termination of various U.K. lease agreements in 2014.
Interest Expense:
2016 versus 2015: Interest expense was $22.9 million and $14.6 million for the years ended December 31,
2016 and 2015, respectively. The increase in interest expense was a result of an increase in loans outstanding as a
result of acquisitions and significant new business.
2015 versus 2014: Interest expense was $14.6 million and $7.5 million for the years ended December 31, 2015
and 2014, respectively. The increase in interest expense was primarily a result of the increase in loans outstanding as
a result of acquisitions and general corporate purposes.
Net Foreign Exchange Losses (Gains)
2016 versus 2015: We recorded net foreign exchange gains of $1.7 million for the Non-life Run-off segment for
the year ended December 31, 2016 as compared to net foreign exchange losses of $4.4 million for the year ended
December 31, 2015. The net foreign exchange gains for the year ended December 31, 2016 arose primarily as a result
of holding less British pound assets than British pound liabilities at a time when the pound depreciated against the
U.S. dollar. The Non-life Run-off segment also recorded net foreign exchange (losses) of ($1.6) million and ($5.9)
million in currency translation adjustment in the consolidated statement of comprehensive income, net of noncontrolling
interest, for the years ended December 31, 2016 and 2015, respectively. For the years ended December 31, 2016 and
2015, the currency translation adjustments related primarily to our U.K and Australian based subsidiaries whose
functional currency is the British Pound and Australian dollar. During the year ended December 31, 2016, we entered
into forward exchange contracts to hedge the foreign currency exposure on our net investment in certain of our
subsidiaries in the Non-life Run-off segment whose functional currency is the Australian dollar.
2015 versus 2014: We recorded net foreign exchange losses of $4.4 million and $8.0 million for the Non-life
Run-off segment for the years ended December 31, 2015 and 2014, respectively. The net foreign exchange losses for
the years ended December 31, 2015 and 2014 arose primarily as a result of the holding of surplus Euro and British
pound assets at a time when the U.S. dollar appreciated against these currencies. The Non-life Run-off segment also
recorded net foreign exchange gains (losses) of ($5.9) million and ($6.4) million in currency translation adjustment in
the consolidated statement of comprehensive income, net of noncontrolling interest, for the years ended December 31,
2015 and 2014, respectively. For the years ended December 31, 2015 and 2014, the currency translation adjustments
related primarily to our Australian-based subsidiaries whose functional currency is the Australian dollar.
Income Taxes:
2016 versus 2015: We recorded income tax expenses for our Non-life Run-off segment of $28.6 million and
$12.6 million for the years ended December 31, 2016 and 2015, respectively. The effective tax rate was 11.3% for the
year ended December 31, 2016 compared with 8.3% for the year ended December 31, 2015 due to having
proportionately higher net income in our tax paying subsidiaries in 2016 than in 2015 as well as an increase in the
valuation allowance on our deferred tax assets in the U.S. Income tax expense is primarily generated through our
foreign operations outside of Bermuda, principally in the United States, the United Kingdom, Continental Europe and
Australia. The effective tax rate, which is calculated as income tax expense or benefit divided by income before tax,
is driven primarily by the geographic distribution of pre-tax net income between jurisdictions with comparatively higher
tax rates and those with comparatively lower income tax rates and as a result may fluctuate significantly from period
to period.
54
2015 versus 2014: We recorded income tax expense (benefit) for our Non-life Run-off segment of $12.6 million
and $(0.6) million for the years ended December 31, 2015 and 2014, respectively. The increase in income taxes of
$13.2 million was due principally to a higher effective tax rate due to increased pre-tax net income recorded in our U.S.
and U.K. based subsidiaries as compared to the prior year along with a decrease in the valuation allowance on our
deferred tax assets. The effective tax rate was 8.3% for the year ended December 31, 2015 compared with (0.3)% for
the year ended December 31, 2014.
Noncontrolling Interest:
2016 versus 2015: We recorded a noncontrolling interest in losses (earnings) of our Non-life Run-off segment
of $(17.6) million and $33.7 million for the years ended December 31, 2016 and 2015, respectively. The increase for
the year ended December 31, 2016 was due primarily to the increase in earnings for those companies where there is
a noncontrolling interest. The number of subsidiaries in this segment with a noncontrolling interest remained unchanged
at 2 as at December 31, 2016 and December 31, 2015.
2015 versus 2014: We recorded a noncontrolling interest in losses (earnings) of our Non-life Run-off segment
of $33.7 million and $(9.8) million for the years ended December 31, 2015 and 2014, respectively. The increase in
losses associated with the noncontrolling interests for the year ended December 31, 2015 was due primarily to the
decrease in earnings for those companies where there is a noncontrolling interest. The number of subsidiaries in this
segment with a noncontrolling interest decreased from 7 as at December 31, 2014 to 2 as at December 31, 2015.
55
Atrium Segment
The Atrium segment includes Atrium 5 Ltd. ("Atrium 5"), Atrium Underwriters ("AUL"), Northshore Holdings Limited
("Holding Company"), and an allocation of financing costs ("Enstar Specific Expenses"). Atrium 5 results represent its
proportionate share of the results of Syndicate 609 for which it provides 25% of the underwriting capacity and capital.
AUL results largely represent fees charged to Syndicate 609 and a 20% profit commission on the results of the syndicate
less salaries and general and administrative expenses incurred in managing the syndicate. AUL also includes other
Atrium Group non-syndicate fee income and associated expenses. The Holding Company results include the
amortization of intangible assets that were fair valued upon acquisition and Enstar Specific Expenses represent our
acquisition financing costs.
The following is a discussion and analysis of the results of operations for our Atrium segment for the years ended
December 31, 2016, 2015 and 2014, which are summarized below.
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains
(losses)
Other income
EXPENSES
Net incurred losses and LAE
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses (gains)
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS
Less: Net earnings attributable to
noncontrolling interest
NET EARNINGS ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
Overall Results
2016
2015
Increase
(decrease)
2014
Increase
(decrease)
(in thousands of U.S. dollars)
$
124,416 $
134,675 $
18,189
2,940
(601)
206
145,150
58,387
44,670
25,132
198
3,310
131,697
13,453
(2,573)
10,880
28,352
2,225
252
359
165,863
47,479
45,509
31,610
4,264
213
129,075
36,788
(5,968)
30,820
(10,259) $
(10,163)
715
(853)
(153)
(20,713)
10,908
(839)
(6,478)
(4,066)
3,097
2,622
(23,335)
3,395
(19,940)
135,945 $
26,176
1,748
41
223
164,133
55,428
43,417
34,921
5,429
(1,559)
137,636
26,497
(5,092)
21,405
(1,270)
2,176
477
211
136
1,730
(7,949)
2,092
(3,311)
(1,165)
1,772
(8,561)
10,291
(876)
9,415
(4,464)
(14,262)
9,798
(10,974)
(3,288)
$
6,416 $
16,558 $
(10,142) $
10,431 $
6,127
An analysis of the components of the segment's net earnings is shown below, after the attribution of net earnings
to noncontrolling interest.
Atrium 5
AUL
Atrium Total
Holding Company
Enstar Specific Expenses
NET EARNINGS ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
Years Ended December 31,
2016
2015
Increase
(decrease)
2014
Increase
(decrease)
(in thousands of U.S. dollars)
$
4,838 $
2,812
7,650
(1,234)
—
15,265 $
8,120
23,385
(2,563)
(4,264)
(10,427) $
(5,308)
(15,735)
1,329
4,264
14,566 $
3,196
17,762
(1,902)
(5,429)
699
4,924
5,623
(661)
1,165
$
6,416 $
16,558 $
(10,142) $
10,431 $
6,127
56
In evaluating the underwriting performance of the Atrium segment, we consider the insurance ratios of Atrium
5, which is the active underwriting component of the segment and excludes AUL and the Holding Company. Atrium
5's insurance ratios are shown below.
Loss ratio (1)
Acquisition cost ratio (1)
Other operating expense ratio (1)
Combined ratio (1)
Years Ended December 31,
2016
2015
(Favorable)
Unfavorable
2014
(Favorable)
Unfavorable
46.7%
35.9%
11.4%
94.0%
(in thousands of U.S. dollars)
33.4%
34.4%
13.7%
81.5%
13.3 %
1.5 %
(2.3)%
12.5 %
40.3%
31.9%
12.9%
85.1%
(6.9)%
2.5 %
0.8 %
(3.6)%
(1) Refer to "Non-GAAP Financial Measures" for a description of how these ratios are calculated. The ratios are based upon the following
amounts for Atrium 5, which exclude amounts for AUL and the Holding Company, for the years ended December 31, 2016 and 2015,
respectively: net premiums earned of $124,416 and $134,675, net incurred losses and LAE of $58,024 and $45,016, acquisition costs of
$44,671 and $46,351, and other operating expenses of $14,233 and $18,499.
The higher combined ratio for Atrium 5 in 2016 is due to increases in the net loss and acquisition cost ratios,
partially offset by a lower expense ratio. This was primarily attributable to lower favorable prior year loss development
in 2016 as compared to 2015 and a series of large losses in 2016. The 2016 large losses included earthquakes in
Taiwan, Ecuador and Japan, flooding in Europe, wildfires in Canada and hailstorms in the USA.
The decrease in the AUL result from $8.1 million in 2015 to $2.8 million in 2016 reflects decreased profit
commission earned from the results of Syndicate 609.
Holding Company and Enstar Specific Expenses are discussed below under General and Administrative
Expenses and Interest Expenses, respectively.
Investment results are separately discussed below in "Investments."
Gross Premiums Written:
The following table provides gross premiums written by line of business for the Atrium segment for the years
ended December 31, 2016, 2015 and 2014:
Years Ended December 31,
2016
2015
Increase
(decrease)
2014
Increase
(decrease)
Marine
Property and Casualty Binding Authorities
Upstream Energy
Reinsurance
Accident and Health
Non-Marine Direct and Facultative
Liability
Aviation
Terrorism (1)
Total
(in thousands of U.S. dollars)
$ 19,498 $ 21,863 $ (2,365) $ 26,880 $ (5,017)
3,609
(7,490)
2,879
(918)
(882)
1,656
908
89
$ 143,170 $ 149,082 $ (5,912) $ 154,248 $ (5,166)
5,677
(4,609)
(1,366)
(548)
(904)
1,641
(3,251)
(187)
29,355
19,162
12,710
15,837
17,204
18,300
11,347
3,453
32,964
11,672
15,589
14,919
16,322
19,956
12,255
3,542
38,641
7,063
14,223
14,371
15,418
21,597
9,004
3,355
(1) Terrorism previously included war-related premiums which have been reclassified to marine and aviation lines. For the twelve months
ended December 31, 2015, gross premiums written of $2.1 million and $5.3 million were reclassified to the marine and aviation lines, respectively.
See below for a discussion of the drivers of the decrease in net premiums earned for the year ended December
31, 2016 as compared with the year ended December 31, 2015, which also explain the decrease in gross premium
written for the same periods.
57
Net Premiums Earned:
The following table provides net premiums earned by line of business for the Atrium segment for the years ended
December 31, 2016, 2015 and 2014:
Years Ended December 31,
2016
2015
Increase
(decrease)
2014
Increase
(decrease)
Marine
Property and Casualty Binding Authorities
Upstream Energy
Reinsurance
Accident and Health
Non-Marine Direct and Facultative
Liability
Aviation
Terrorism (1)
Total
(in thousands of U.S. dollars)
$ 18,378 $ 20,771 $ (2,393) $ 24,622 $ (3,851)
4,945
(5,535)
3,009
(1,122)
(630)
3,155
(1,021)
(220)
$ 124,416 $ 134,675 $ (10,259) $ 135,945 $ (1,270)
5,301
(6,369)
(3,032)
(407)
(1,060)
(425)
(1,767)
(107)
25,350
18,365
11,466
13,725
14,762
15,722
8,790
3,143
30,295
12,830
14,475
12,603
14,132
18,877
7,769
2,923
35,596
6,461
11,443
12,196
13,072
18,452
6,002
2,816
(1) Terrorism previously included war-related premiums which have been reclassified to marine and aviation lines. For the twelve months
ended December 31, 2015, net premiums earned of $2.0 million and $2.3 million were reclassified to the marine and aviation lines, respectively.
2016 versus 2015: Net premiums earned for the Atrium segment were $124.4 million and $134.7 million for the
years ended December 31, 2016 and 2015, respectively. The decrease in net premiums earned was due to underwriting
discipline to non-renew certain business that no longer met our underwriting standards, particularly in the marine,
reinsurance and upstream energy lines. We are seeing continued pressure on premium rates and terms and conditions
due to overcapacity in many markets for insurable risks. We continue to focus on risk selection and underwriting for
profitability. These premium decreases were partially offset by the increase in the property and casualty binding
authority line, which reflects the continued success of AU Gold, our proprietary online underwriting platform.
2015 versus 2014: Net premiums earned for the Atrium segment were $134.7 million and 135.9 million for the
years ended December 31, 2015 and 2014, respectively. Net premiums earned for the 2015 year reflect the execution
of Atrium’s underwriting strategies combined with the impact of softened market conditions across the industry. Market
conditions particularly impacted the upstream energy line, although this was partially offset by the increase in the
property and casualty binding authorities line. The syndicate commenced writing marine excess-of-loss business during
2015.
Fees and Commission Income:
2016 versus 2015: Fees and commission income was $18.2 million and $28.4 million for the years ended
December 31, 2016 and 2015, respectively. The fees represent management and profit commission fees earned by
us in relation to AUL’s management of Syndicate 609 and other underwriting consortiums. The decrease was due
primarily to profit commission on lower syndicate profits in 2016 as compared with 2015.
2015 versus 2014: Fees and commission income was $28.4 million and $26.2 million for the years ended
December 31, 2015 and 2014, respectively. The fees represent management and profit commission fees earned by
us in relation to AUL’s management of Syndicate 609 and other underwriting consortiums. The increase was due
primarily to profit commission on higher syndicate profits in 2015 as compared with 2014.
Net Incurred Losses and LAE:
2016 versus 2015: Net incurred losses and LAE for the years ended December 31, 2016 and 2015 were $58.4
million and $47.5 million, respectively. Net favorable loss development for the years ended December 31, 2016 and
2015 was $13.0 million and $21.9 million, respectively. Net favorable loss development in 2016 was spread across
most lines of business. Net favorable prior year loss development in 2015 primarily related to the professional indemnity,
aviation, marine and upstream energy lines of business. Excluding prior year loss development, net incurred losses
and LAE for the years ended December 31, 2016 and 2015 were $71.4 million and $69.4 million, respectively. The
increase in net incurred losses and LAE, excluding prior year loss development, was due to the large losses in 2016
as described above, and other notable 2016 losses in the terrorism and aviation lines, compared to a lower level of
losses in 2015.
58
2015 versus 2014: Net incurred losses and LAE for the years ended December 31, 2015 and 2014 were $47.5
million and $55.4 million, respectively. Net favorable loss development for the years ended December 31, 2015 and
2014 was $21.9 million and $18.7 million, respectively. Net favorable loss development in 2015 primarily related to
marine, upstream energy, reinsurance and war and terrorism lines of business. Net favorable loss development in
2014 primarily related to non-marine direct and facultative and upstream energy lines of business. Excluding net
favorable prior year loss development, net incurred losses and LAE for the years ended December 31, 2015 and 2014
were $69.4 million and $74.1 million, respectively.
Acquisition Costs:
2016 versus 2015: Acquisition costs were $44.7 million and $45.5 million for the years ended December 31,
2016 and 2015, respectively. The Atrium 5 acquisition cost ratios for the years ended December 31, 2016 and 2015
were 35.9% and 34.4%, an increase of 1.5%. The increase in the ratio was primarily due to less premium written in
lines of business with lower acquisition ratios.
2015 versus 2014: Acquisition costs were $45.5 million and $43.4 million for the years ended December 31,
2015 and 2014, respectively. The Atrium 5 acquisition cost ratios for the years ended December 31, 2015 and 2014
were 34.4% and 31.9%, respectively, an increase of 2.5%. The increase was due to higher profit commissions on
underlying business, which was more profitable in 2015 than in 2014.
General and Administrative Expenses:
2016 versus 2015: General and administrative expenses for the Atrium segment were $25.1 million and $31.6
million for the years ended December 31, 2016 and 2015, respectively. The decrease of $6.5 million primarily relates
to lower bonus accruals resulting from lower net earnings in 2016 compared to 2015 as well as the impact of the
stronger U.S. dollar in 2016 compared with 2015.
2015 versus 2014: General and administrative expenses for the Atrium segment were $31.6 million and $34.9
million for the years ended December 31, 2015 and 2014, respectively. The decrease of $3.3 million was primarily due
to more compensation costs being retained in Syndicate 609 versus AUL.
Interest Expense:
2016 versus 2015: Interest expense was $0.2 million and $4.3 million for the years ended December 31, 2016
and 2015, respectively. The 2015 interest expense was in respect of borrowings under the Enstar revolving credit
facility, which is an Enstar Specific Expense, as compared to no interest relating to this facility in 2016.
2015 versus 2014: Interest expense was $4.3 million and $5.4 million for the years ended December 31, 2015
and 2014, respectively. The interest expense was in respect of borrowings under the Enstar revolving credit facility,
which is an Enstar Specific Expense.
Noncontrolling Interest:
2016 versus 2015: Noncontrolling interest in earnings of the Atrium segment was $4.5 million and $14.3 million
for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, Trident and Dowling had
a combined 40.39% noncontrolling interest in the Atrium segment, although their share of net earnings was higher in
2015 due primarily to the interest expense recorded in the segment, which was an Enstar Specific Expense.
2015 versus 2014: Noncontrolling interest in earnings of the Atrium segment was $14.3 million and $11.0 million
for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, Trident and Dowling had
a combined 40.39% noncontrolling interest in the Atrium segment, although their share of net earnings was higher due
primarily to the interest expense recorded in the segment, which is an Enstar Specific Expense.
Income Taxes:
2016 versus 2015: Income tax expense was $2.6 million and $6.0 million for the years ended December 31,
2016 and 2015, respectively. Income tax expense is associated with the operations of Atrium 5 and AUL in the United
Kingdom. The effective tax rates for the Atrium segment for the years ended December 31, 2016 and 2015 were 19.1%
and 16.2%, respectively.
2015 versus 2014: Income tax expense was $6.0 million and $5.1 million for the years ended December 31,
2015 and 2014, respectively. Income tax expense is associated with the operations of Atrium 5 and AUL in the United
Kingdom. The effective tax rates for the Atrium segment for the years ended December 31, 2015 and 2014 were 16.2%
and 19.2%, respectively.
59
StarStone Segment
The results of our StarStone segment include the results of StarStone Insurance Bermuda Limited and its
subsidiaries ("StarStone") and StarStone Specialty Holdings Limited ("Holding Company"), which was formerly known
as Bayshore Holdings Limited. StarStone results represent the active underwriting operations. The Holding Company's
results include the amortization of fair value adjustments such as for intangible assets that were fair valued upon
acquisition, and other expenses incurred.
The following is a discussion and analysis of the results of operations for the StarStone segment for the year
ended December 31, 2016, 2015 and for the nine-month period from the date of acquisition of StarStone to December
31, 2014, which are summarized below.
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains
(losses)
Other income
EXPENSES
Net incurred losses and LAE
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses (gains)
EARNINGS (LOSS) BEFORE INCOME
TAXES
INCOME TAXES
NET EARNINGS (LOSS)
Less: Net loss (earnings) attributable to
noncontrolling interest
NET EARNINGS (LOSS) ATTRIBUTABLE
TO ENSTAR GROUP LIMITED
2016
2015
Increase
(decrease)(1)
2014(1)
Increase
(decrease)(1)
(in thousands of U.S. dollars)
$
676,608 $
5,102
22,221
5,728
1,780
573,146 $
—
15,937
(9,784)
676
103,462 $
5,102
6,284
15,512
1,104
373,633 $
—
5,321
2,136
616
199,513
—
10,616
(11,920)
60
711,439
579,975
126,362
381,706
198,269
401,593
138,822
125,279
47
(754)
664,987
46,452
(3,693)
42,759
327,684
109,347
126,132
6
(480)
73,909
29,475
(853)
41
(274)
218,429
65,734
113,344
—
945
109,255
43,613
12,788
6
(1,425)
562,689
102,298
398,452
164,237
17,286
5,888
23,174
29,166
(9,581)
19,585
(16,746)
(1,130)
(17,876)
34,032
7,018
41,050
(17,542)
(9,510)
(8,032)
7,323
(16,833)
$
25,217 $
13,664 $
11,553 $
(10,553) $
24,217
(1) The 2014 results were not a full year: StarStone was acquired on April 1, 2014.
60
Overall Results
An analysis of the components of the segment's net earnings is shown below, after the attribution of net earnings
to noncontrolling interest.
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Increase
(decrease)
(in thousands of U.S. dollars)
Period from
April 1, 2014
to December
31, 2014
Increase
(decrease)
StarStone
$
24,097 $
12,200 $
11,897 $
1,542 $
1,120
1,464
(344)
(12,095)
10,658
13,559
Holding Company
NET EARNINGS (LOSS)
ATTRIBUTABLE TO ENSTAR
GROUP LIMITED
$
25,217 $
13,664 $
11,553 $
(10,553) $
24,217
In evaluating the underwriting performance of the StarStone segment, we consider the insurance ratios of
StarStone, which is the active underwriting component of the segment and excludes the Holding Company. StarStone's
insurance ratios are shown below.
Loss ratio (1)
Acquisition cost ratio (1)
Other operating expense
ratio (1)
Combined ratio (1)
Year Ended
December 31,
2016
Year Ended
December 31,
2015
(Favorable)
Unfavorable
Period from
April 1, 2014
to December
31, 2014
(Favorable)
Unfavorable
59.7%
20.5%
18.4%
98.6%
(in thousands of U.S. dollars)
57.4%
18.9%
22.3%
98.6%
2.3 %
1.6 %
(3.9)%
— %
58.2%
17.3%
25.3%
100.8%
(0.8)%
1.6 %
(3)%
(2.2)%
(1) Refer to "Non-GAAP Financial Measures" for a description of how these ratios are calculated. The ratios are based upon the following
amounts for StarStone, which exclude Holding Company amounts, for the years ended December 31, 2016 and 2015, respectively: net
premiums earned of $676,244 and $577,071, net incurred losses and LAE of $403,488 and $331,219, acquisition costs of $138,822
and $109,347, and other operating expenses of $124,239 and $128,544.
The combined ratio remained flat between 2016 and 2015, primarily due to a reduction in the other operating
expense ratio, which was driven by an increase in net premiums earned whilst maintaining a relatively stable expense
base. This was partially offset by an increase in the loss ratio, primarily due to an increase in workers compensation
premiums written which has a higher loss ratio and lower acquisition cost ratio than most other lines of business. The
acquisition cost ratio increased partly as a result of business mix and partly as a result of increasing market rates in
some lines of business.
The Holding Company result in 2016 and 2015 was impacted by general and administrative expenses relating
to our management of StarStone and the amortization of definite-lived intangible assets.
Investment results are separately discussed below in "Investments."
61
Gross Premiums Written:
The following table provides gross premiums written by line of business for the StarStone segment for the year
ended December 31, 2016 and 2015:
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Increase
(decrease)
Period from
April 1, 2014
to December
31, 2014
Increase
(decrease)
(in thousands of U.S. dollars)
$
$
267,352 $
202,672
203,336
68,104
113,235
854,699 $
246,956 $
150,828
236,670
87,703
102,557
824,714 $
20,396 $
185,026 $
61,930
51,844
(33,334)
(19,599)
10,678
70,826
118,479
86,446
51,442
80,002
118,191
1,257
51,115
29,985 $
512,219 $
312,495
Casualty
Marine
Property
Aerospace
Workers' Compensation
Total
2016 versus 2015: Premiums written in our marine and casualty lines increased during 2016 as a result of
selective growth in new business, including new business written by underwriters hired late in 2015 and during 2016.
We continued to expand our geographic reach and range of products in our workers' compensation line. Premiums
written in both our property and aerospace business decreased. Premiums written in the property line were higher in
2015 due to an initial assumption of in-force unearned premium of $31.0 million under quota share agreements with
Sussex, following the acquisition by Enstar. Aerospace premiums written were lower following our decision in 2015
to discontinue our space product and certain airlines business that no longer met our pricing standards.
2015 versus 2014: Premiums written in our property line increased during 2015 largely due to business
underwritten by a new team of construction underwriters. The workers' compensation line of business continued to
grow, as we expanded our geographic reach and range of products. Premiums written in our aerospace business
decreased on an annualized basis following our decision to discontinue our space product and certain airlines business
that no longer met our pricing standards. Gross premiums written for the 2014 comparative period only include the
nine months beginning April 1, 2014.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the StarStone segment for the year
ended December 31, 2016 and 2015:
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Increase
(decrease)
Period from
April 1, 2014
to December
31, 2014
Increase
(decrease)
(in thousands of U.S. dollars)
$
226,330 $
162,333
187,984 $
116,127
132,927
114,589
66,937
88,081
—
75,515
78,931
—
38,346 $
139,715 $
46,206
18,338
(8,578)
9,150
—
68,767
80,650
54,510
17,996
11,995
48,269
47,360
33,939
21,005
60,935
(11,995)
$
676,608 $
573,146 $
103,462 $
373,633 $
199,513
Casualty
Marine
Property
Aerospace
Workers' Compensation
Other
Total
2016 versus 2015: Net premiums earned for the StarStone segment for the year ended December 31, 2016
increased from 2015 by $103.5 million to $676.6 million. The lines of business driving the increase were marine,
casualty, property and workers' compensation.
2015 versus 2014: Net premiums earned for the StarStone segment for the year ended December 31, 2015
increased from 2014 by $199.5 million to $573.1 million. The lines of business driving the increase were workers'
compensation, casualty and marine. Net premiums earned for 2014 were for nine months only.
62
Fees and Commission Income:
2016 versus 2015: Fees and commission income was $5.1 million and $nil for the years ended
December 31, 2016 and 2015, respectively. The fees for the year ended December 31, 2016 represent services
provided to KaylaRe, as described in Note 21 - "Related Party Transactions" in the notes to our consolidated
financial statements included within Item 8 of this Annual Report on Form 10-K.
Net Incurred Losses and LAE:
2016 versus 2015: Net incurred losses and LAE for the year ended December 31, 2016 were $401.6 million
as compared with $327.7 million for the year ended December 31, 2015. Net favorable prior year loss development
for the year ended December 31, 2016 was $14.2 million compared to net favorable prior year loss development of
$39.4 million for the year ended December 31, 2015. Net favorable prior year loss development in 2016 primarily
related to marine liability, offshore and terrorism. Net favorable prior year loss development in 2015 related to
construction, general property and terrorism. Excluding net prior year loss development, net incurred losses and LAE
for the year ended December 31, 2016 were $415.8 million compared to $367.0 million for the year ended December 31,
2015.
2015 versus 2014: Net incurred losses and LAE for the year ended December 31, 2015 were $327.7 million
as compared with $218.4 million for the nine-month period ended December 31, 2014. Net favorable prior year loss
development for the year ended December 31, 2015 was $39.4 million compared to net favorable prior year loss
development of $11.1 million for the nine-month period ended December 31, 2014. Net favorable prior year loss
development in 2015 primarily related to construction, excess casualty and terrorism. Net favorable prior year loss
development in 2014 related to general property and terrorism. Excluding net prior year loss development, incurred
losses and LAE for the year ended December 31, 2015 were $367.0 million compared to $229.5 million for the nine-
month period ended December 31, 2014.
Acquisition Costs:
2016 versus 2015: Acquisition costs of the StarStone segment increased to $138.8 million for the year ended
December 31, 2016 from $109.3 million for the year ended December 31, 2015, primarily due to an increase in net
premiums earned. The acquisition cost ratios for the year ended December 31, 2016 and 2015 were 20.5% and
18.9%, respectively. The ratio increased by 1.6% in the year ended December 31, 2016 as compared with the year
ended December 31, 2015 primarily due to higher gross premiums written in property and marine, which have higher
acquisition cost ratios, partially offset by writing less aerospace, which has lower acquisition cost ratios.
2015 versus 2014: Acquisition costs of the StarStone segment increased to $109.3 million for the year ended
December 31, 2015 from $65.7 million for the nine-month period ended December 31, 2014, primarily due to owning
StarStone for a full year in 2015 and an increase in net premiums earned. The acquisition cost ratios for the year and
nine-month period ended December 31, 2015 and 2014 were 18.9% and 17.3%, respectively. The ratio increased by
1.6% in the year ended December 31, 2015 as compared with 2014. The increase was primarily due to mix of business
where higher gross premium written in marine and casualty, which have higher acquisition cost ratios, was partially
offset by writing less property and aerospace, which have lower acquisition cost ratios.
General and Administrative Expenses:
2016 versus 2015: General and administrative expenses for the year ended December 31, 2016 and 2015 were
$125.3 million and $126.1 million, respectively. The expense base has been kept at a relatively consistent level with
prior year. The 2016 amount includes the realization of savings from favorable foreign exchange rates arising from
our expenses in the United Kingdom and Continental Europe translating into fewer United States dollars than the prior
year, offset by an increase in valuation of stock appreciation right awards outstanding in 2016 as a result of the increase
in the share price.
2015 versus 2014: General and administrative expenses for the year and nine-month period ended
December 31, 2015 and 2014 were $126.1 million and $113.3 million, respectively. The 2014 period only included nine
months compared to a full year in 2015. The 2015 amount reflects the realization of savings from our ongoing expense
management initiatives, partially offset by non-recurring costs incurred to close our operations in India, along with
restructuring costs in the United Kingdom and Europe. Our expense management initiatives contributing to a decrease
in general and administrative expenses included reducing the number of employees and contractors.
63
Income Taxes:
2016 versus 2015: We recorded a tax expense of $3.7 million in the year ended December 31, 2016 as compared
with a tax benefit of $5.9 million for 2015. The 2016 tax expense related to our U.S. insurance entities offset by group
relief with the Atrium segment in the United Kingdom, while the tax benefit in 2015 related to a reduction in the valuation
allowance against our deferred tax asset largely related to the utilization of net operating losses carried forward.
2015 versus 2014: We recorded a tax benefit of $5.9 million in the year ended December 31, 2015 as compared
with a tax expense of $1.1 million for the nine months ended December 31, 2014. The tax benefit related to a reduction
in the valuation allowance against our deferred tax asset largely related to the utilization of net operating losses carried
forward.
64
Life and Annuities Segment
For our Life and Annuities segment, although we no longer write new business, our companies continue to
generate premiums with respect to in-force policies. We hold the policies associated with the life business to their
natural maturity or lapse and to pay claims as they fall due, while aiming to efficiently manage our invested assets in
these businesses. The presentation of the results in this segment reflect the classification of Pavonia as discontinuing
operations and held-for-sale. Following the sale of Pavonia, we will no longer have any annuity products and our
continuing life business will comprise of term life products in Alpha and Laguna, and the life settlements business.
The following is a discussion and analysis of our results of operations for our Life and Annuities segment for the
years ended December 31, 2016, 2015 and 2014, which are summarized below.
2016
2015
Increase
(decrease)
2014
Increase
(decrease)
(in thousands of U.S. dollars)
INCOME
Net premiums earned
$
5,735 $
1,554 $
Net investment income
Net realized and unrealized gains (losses)
Other income
EXPENSES
Life and annuity policy benefits
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses (gains)
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS FROM CONTINUING
OPERATIONS
NET EARNINGS FROM DISCONTINUING
OPERATIONS, NET OF INCOME TAX
EXPENSE
NET EARNINGS ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
$
$
$
Overall Results:
20,043
(4,998)
353
21,133
(2,038)
612
7,148
1,058
(213)
6,567
14,566
(31)
21,137
(798)
— $
21,893
(546)
—
2,799
1,488
(732)
3,009
18,884
—
4,181 $
(1,094)
(4,200)
353
(760)
2,245 $
1,056
1,784
32
5,117
(1,492)
612
4,349
(430)
519
3,558
(4,318)
(31)
84
(2)
1,423
—
(1,439)
66
5,051
(1)
(691)
20,081
(2,582)
(32)
16,776
(630)
2
1,376
1,488
707
2,943
13,833
1
14,535 $
18,884 $
(4,349) $
5,050 $
13,834
11,963 $
(2,031) $
13,994 $
5,539
(7,570)
26,498 $
16,853 $
9,645 $
10,589 $
6,264
Net earnings were $26.5 million and $16.9 million for the years ended December 31, 2016 and 2015, respectively,
an increase of $9.6 million. Net earnings were $16.9 million and $10.6 million for the years ended December 31, 2015
and 2014, respectively, an increase of $6.3 million.
The main driver of earnings from continuing operations in this segment was our life settlements business. For
the years ended December 31, 2016, 2015 and 2014, the contribution to earnings from our life settlements business
was $11.0 million, $16.5 million and $nil, respectively. Net earnings of $11.0 million in the year ended December 31,
2016 was comprised of net investment income of $13.0 million from policy maturity events, offset by expenses of $2.0
million. Net earnings of $16.5 million in the year ended December 31, 2015 was comprised of net investment income
of $20.1 million from policy maturity events, offset by expenses of $3.6 million.
We acquired Alpha on November 13, 2015 which contributed $2.5 million to our 2016 results, compared to $nil
in 2015 and 2014 because the transaction closed later in the year during 2015. This transaction resulted in higher
amounts across all components of earnings from continuing operations in 2016 compared to 2015.
The components of Pavonia's net earnings of $12.0 million, classified as discontinuing operations, are included
in Note 5 - "Held-For-Sale Business" in the Consolidated Financial Statements within Item 8 of this Form10-K.
65
Investable Assets
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and
cash equivalents and funds held. Investments consist primarily of investment grade, liquid, fixed maturity securities of
short-to-medium duration, equities and other investments. Cash and cash equivalents and restricted cash and cash
equivalents is comprised mainly of cash, high-grade fixed deposits, and other highly liquid instruments such as
commercial paper with maturities of less than three months at the time of acquisition and money market funds. Funds
held primarily consists of investment grade, liquid, fixed maturity securities of short-to-medium duration.
Investable assets were $8.4 billion as at December 31, 2016 as compared to $7.7 billion as at December 31,
2015, an increase of 8.4%. The increase was primarily due to the funds held balance acquired in relation to the Allianz
transaction.
Investment Strategies
Our key investment objectives are as follows:
• To follow an investment strategy designed to emphasize the security and growth of our invested assets that
also meet our credit quality and diversification objectives.
• To provide sufficient liquidity for the prompt payment of claims and contract liabilities.
• To seek superior risk-adjusted returns, by allocating a portion of our portfolio to non-investment grade
securities in accordance with our investment guidelines.
• To consider the duration characteristics of our liabilities in determining the extent to which we correlate with
assets of comparable duration depending on our other investment strategies and to the extent practicable.
In the Non-life Run-off, Atrium and StarStone segments, we maintain a relatively short-duration investment
portfolio in order to provide liquidity for the settlement of losses and, where possible, to avoid having to liquidate longer-
dated investments. In the Non-life Run-off segment, the commutations of liabilities also have the potential to accelerate
the natural payout of losses, which requires liquidity. Our fixed maturity securities include U.S. government and agency
investments, highly rated sovereign and supranational investments, high-grade corporate investments, and mortgage-
backed and asset-backed investments. We allocate a portion of our investment portfolio to other investments, including
private equity funds, fixed income funds, fixed income hedge funds, equity funds, CLO equities and CLO equity funds.
In the Life and Annuities segment we have limited ability to shorten the duration of the liabilities, and therefore
we maintain a longer duration investment portfolio of highly rated fixed maturity investments, primarily corporate bonds,
that attempts to match the cash flows and duration of our liability profile. As at December 31, 2016, the duration of our
fixed maturity investment portfolio associated with our life business was shorter than the liabilities due to limited
investment options to match cash flows for longer duration liabilities.
We utilize and pay fees to various companies to provide investment advisory and/or management services.
These fees, which are predominantly based upon the amount of assets under management, are included in net
investment income. The total fees we paid to our investment managers for the year ended December 31, 2016 were
$6.0 million, including $1.1 million to our largest single investment manager.
Our investment performance is subject to a variety of risks, including risks related to general economic conditions,
market volatility, interest rate fluctuations, foreign exchange risk, liquidity risk and credit and default risk. Interest rates
are highly sensitive to many factors, including governmental monetary policies, domestic and international economic
and political conditions and other factors beyond our control. An increase in interest rates could result in significant
losses, realized or unrealized, in the value of our investment portfolio. A portion of our non-investment grade securities
consists of alternative investments that subject us to restrictions on redemption, which may limit our ability to withdraw
funds for some period of time after the initial investment. The values of, and returns on, such investments may also
be more volatile. For more information on these risks, refer to "Item 1A. Risk Factors - Risks Relating to Our Investments"
and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
66
Composition of Investment Portfolio By Asset Class
The following table summarizes the fair value and composition of our investment portfolio by asset class as at
December 31, 2016 and 2015:
2016
Fair Value
2015
Fair Value
Investment
Grade (1)
Non-
Investment
Grade (2)
Total
%
Investment
Grade (1)
Non-
Investment
Grade (2)
Total
%
Fixed maturity and short-term
investments, trading and available-
for-sale
U.S. government & agency
$
852,984 $
— $
852,984
14.1% $
767,759 $
— $
767,759
12.1%
Non-U.S. government
352,786
—
352,786
5.8%
395,163
28,791
423,954
6.7%
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total
Equities
U.S.
International
Total
Other investments
Private equity funds
Fixed income funds
Fixed income hedge funds
Equity funds
Multi-strategy hedge fund
Real estate debt fund
CLO equities
CLO equity funds
Other
Total
Other investments
Life settlements
Total investments
2,385,295
160,682
2,545,977
42.2%
2,606,246
138,756
2,745,002
43.3%
53,757
373,957
199,827
409,671
—
98
17,385
72,485
53,757
374,055
217,212
482,156
0.9%
6.2%
3.6%
8.0%
28,174
382,059
210,261
470,282
—
229
22,586
65,620
28,174
382,288
232,847
535,902
0.4%
6.0%
3.7%
8.5%
4,628,277
250,650
4,878,927
80.8%
4,859,944
255,982
5,115,926
80.7%
95,047
—
95,047
300,529
249,023
85,976
223,571
—
—
61,565
15,440
943
1.6%
—%
1.6%
5.0%
4.1%
1.4%
3.7%
—%
—%
1.0%
0.3%
—%
108,793
2,702
111,495
232,372
280,749
89,154
147,390
99,020
54,829
61,702
13,928
1,145
1.7%
—%
1.7%
3.7%
4.4%
1.4%
2.3%
1.6%
0.9%
1.0%
0.2%
—%
937,047
15.5%
980,289
15.5%
$ 4,628,277 $
250,650 $ 6,040,495
100.0% $ 4,859,944 $
255,982 $ 6,337,978
100.0%
129,474
2.1%
130,268
2.1%
(1)
Investment Grade are securities with a rating of BBB- or higher.
(2) Non-Investment Grade includes non-rated securities with a fair value of $28.1 million and $23.7 million as at December 31, 2016 and 2015,
respectively.
A description of our investment valuation processes is included in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Critical Accounting Policies - Investments" and "Note 8 - Fair Value
Measurements" of our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
67
Composition of Funds Held - Directly Managed By Asset Class
The following table summarizes the fair value and composition of our funds held - directly managed portfolio by
asset class as at December 31, 2016:
Fixed maturity investments:
U.S. government & agency
Non-U.S. government
Corporate
Municipal
Commercial mortgage-backed
Asset-backed
Total
Other assets
December 31, 2016
Fair Value
Investment
Grade (1)
Non-Investment
Grade
Total
%
$
47,885 $
— $
5,961
663,556
38,927
151,395
79,806
987,530
—
—
—
—
—
—
—
—
47,885
5,961
663,556
38,927
151,395
79,806
987,530
7,135
4.8%
0.6%
66.8%
3.9%
15.2%
8.0%
99.3%
0.7%
Total funds held - directly managed
$
987,530 $
— $
994,665
100.0%
(1)
Investment Grade are securities with a rating of BBB- or higher.
Composition of Investable Assets By Segment
Across all of our segments, we strive to structure our investments in a manner that recognizes our liquidity needs
for future liabilities. In that regard, we consider the duration characteristics of our liabilities in determining the extent
to which we correlate with assets of comparable duration depending on our other investment strategies and to the
extent practicable. If our liquidity needs or general liability profile unexpectedly change, we may adjust the structure
of our investment portfolio to meet our revised expectations. The following tables summarize the composition of total
investable assets by segment as at December 31, 2016 and 2015:
December 31, 2016
Short-term investments, trading, at fair value
$
201,188
$
7,938
$
6,160
$
7,632
$
222,918
Non-life
Run-off
Atrium
StarStone
Life and
Annuities
Total
Short-term investments, available-for-sale, at fair value
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value
Equities, trading, at fair value
Other investments, at fair value
Other investments, at cost
Total investments
Cash and cash equivalents
Funds held - directly managed
Funds held by reinsured companies
Total investable assets
Duration
Average Credit Rating
—
3,144,811
3,108
88,481
783,857
—
4,221,445
916,900
994,665
48,525
268
13,320
142,562
—
—
—
164,088
83,548
—
22,883
—
1,199,460
—
6,566
153,190
—
1,365,376
295,341
—
10,665
—
30,651
121,829
—
—
131,651
291,763
22,856
—
—
268
4,388,242
267,499
95,047
937,047
131,651
6,042,672
1,318,645
994,665
82,073
$
6,181,535
$
270,519
$
1,671,382
$
314,619
$
8,438,055
2.68
A+
1.2
AA-
2.31
AA-
2.67
A+
2.56
A+
68
December 31, 2015
Short-term investments, trading, at fair value
$
72,163
$
— $
12,941
$
— $
Non-life
Run-off
Atrium
StarStone
Life and
Annuities
Total
—
3,444,752
6,464
102,412
856,554
—
4,482,345
1,007,889
60,015
1,848
37,000
181,027
—
—
—
—
1,204,376
—
9,083
123,735
—
219,875
1,350,135
52,735
21,279
199,597
11,504
6,774
42,393
106,188
—
—
133,071
288,426
34,948
—
85,104
8,622
4,728,521
293,679
111,495
980,289
133,071
6,340,781
1,295,169
92,798
$
5,550,249
$
293,889
$
1,561,236
$
323,374
$
7,728,748
1.69
A+
1.80
AA-
2.09
AA-
2.63
AA-
1.81
A+
Short-term investments, available-for-sale, at fair value
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value
Equities, trading, at fair value
Other investments, at fair value
Other investments, at cost
Total investments
Cash and cash equivalents
Funds held by reinsured companies
Total investable assets
Duration
Average Credit Rating
Credit Quality and Maturity Profiles
As at December 31, 2016 and 2015, our investment portfolio had an average credit quality rating of A+. At
December 31, 2016 and 2015, our fixed maturity investments rated lower than BBB- comprised 3.7% of our total
investment portfolio. A detailed schedule of average credit ratings by asset class as at December 31, 2016 is included
in Note 6 - "Investments - Credit Ratings" and Note 7 - "Funds Held - Directly Managed - Credit Ratings" of our
consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
Schedules of maturities for our fixed maturity securities are included in Note 6 - "Investments" and Note 7 -
"Funds Held - Directly Managed" of our consolidated financial statements included within Item 8 of this Annual Report
on Form 10-K.
Eurozone Exposure
As at December 31, 2016 and 2015, we owned $15.0 million and $17.3 million, respectively, of investments in
fixed maturity securities issued by the sovereign governments of Italy, Ireland and Spain.
Investment Results - Consolidated
Comparability between periods is impacted by our acquisitions and significant new business as described in
"Item 1. Business - Recent Acquisitions and Significant New Business" and Notes 3 and 4 of our consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K.
The following table summarizes our investment results for the years ended December 31, 2016, 2015 and 2014.
Net investment income
Net realized and unrealized gains (losses)
Investment Book Yield
Net investment income
Average aggregate invested assets, at cost (1)
Investment book yield
Financial Statement Portfolio Return (2)
Total financial statement return
Average aggregate invested assets, at fair value (1)
Financial statement portfolio return
2016
$ 185,463
77,818
2015
$ 122,564
(41,523)
Increase
(decrease)
62,899
119,341
$
$
2014
66,024
51,991
Increase
(decrease)
56,540
(93,514)
$
185,463
8,537,807
122,564
7,481,593
62,899
1,056,214
66,024
6,165,984
56,540
1,315,609
2.17%
1.64%
0.53%
1.07%
0.57 %
263,281
8,521,528
81,041
7,451,537
182,240
1,069,991
118,015
6,230,146
(36,974)
1,221,391
3.09%
1.09%
2.00%
1.89%
(0.80)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
(2) This is a sum of net investment income and net realized and unrealized gains (losses) from our U.S. GAAP consolidated financial statements.
69
2016 versus 2015: Net investment income increased by $62.9 million during 2016 due to an increase of $1.1
billion in our average investable assets and an increase of 53 basis points in the book yield we obtained on those
assets. The increase in yield was primarily due to the changing mix in asset allocation as we executed on our investment
strategies. The increase of $119.3 million in net realized and unrealized gains (losses) was comprised of net unrealized
gains of $84.8 million in 2016 compared to net unrealized losses of $57.4 million in 2015, offset by a decrease in
realized gains of $22.9 million. The net unrealized gains in 2016 were primarily due to the increase in the valuation of
our other investments, including our investments in private equity funds, equity funds and CLO equities. In addition,
fixed maturity securities contributed to the unrealized gain in 2016 as the impact of tighter credit spreads were partially
offset by the impact of increased treasury yields.
2015 versus 2014: Net investment income increased by $56.5 million during 2015 due to an increase of $1.3
billion in our average investable assets and an increase of 57 basis points in the book yield we obtained on those
assets. The increase in yield was due to our asset allocation and a broad increase in treasury yields across the curve.
The decrease of $93.5 million in net realized and unrealized gains (losses) was comprised of a decrease in realized
gains of $6.3 million, and net unrealized losses of $57.4 million in 2015 compared to net unrealized gains of $29.8
million in 2014. The net unrealized losses in 2015 were primarily due to fixed maturity securities and reflected increased
treasury yields, widening corporate credit spreads and a decrease in liquidity in fixed income markets.
Investment Results - By Segment
The following tables summarize our investment results by segment for the years ended December 31, 2016,
2015 and 2014. These tables have been prepared on a basis consistent with the consolidated table above.
Non-Life Run-off
Net investment income
Net realized and unrealized gains (losses)
Investment Book Yield
Net investment income
Average aggregate invested assets, at cost
Investment book yield
Non-life Run-off
2016
$ 143,783
77,689
$
2015
84,185
(31,193)
Increase
(decrease)
59,598
$
108,882
$
2014
57,899
48,030
Increase
(decrease)
26,286
$
(79,223)
143,783
6,321,143
84,185
5,566,751
59,598
754,392
57,899
4,763,458
26,286
803,293
2.27%
1.51%
0.76%
1.22%
0.29 %
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value
Financial statement portfolio return
221,472
6,316,343
52,992
5,550,471
168,480
765,872
105,929
4,824,326
(52,937)
726,145
3.51%
0.95%
2.56%
2.20%
(1.25)%
2016 versus 2015: Net investment income increased by $59.6 million during 2016 due to an increase of $754.4
million in our average investable assets and an increase of 76 basis points in the book yield we obtained on those
assets. The increase in yield was primarily due to the changing mix in asset allocation as we executed on our investment
strategies. The increase of $108.9 million in net realized and unrealized gains (losses) was comprised of net unrealized
gains of $87.4 million in 2016 compared to net unrealized losses of $42.5 million in 2015, offset by a decrease in
realized gains of $21.0 million. The net unrealized gains in 2016 were primarily due to the increase in the valuation of
our other investments, including our investments in private equity funds, equity funds and CLO equities. In addition,
our fixed maturity securities contributed to the unrealized gain in 2016 as the impact of tighter credit spreads were
partially offset by the impact of increased treasury yields.
2015 versus 2014: Net investment income increased by $26.3 million during 2015 due to an increase of $803.3
million in our average investable assets and an increase of 29 basis points in the book yield we obtained on those
assets. The increase in yield was due to our asset allocation and a broad increase in treasury yields across the curve.
Net realized and unrealized gains (losses) decreased by $79.2 million, primarily due to fixed maturity securities, and
reflected increased treasury yields, widening corporate credit spreads and a decrease in liquidity in fixed income
markets.
70
Atrium
Net investment income
Net realized and unrealized gains (losses)
Investment Book Yield
Net investment income
Average aggregate invested assets, at cost
Investment book yield
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value
Financial statement portfolio return
2016
2015
$
$
2,940
(601)
2,225
252
Atrium
Increase
(decrease)
$
715
(853)
$
2014
1,748
41
Increase
(decrease)
477
$
211
2,940
286,898
2,225
301,297
715
(14,399)
1,748
338,793
477
(37,496)
1.02%
0.74%
0.28 %
0.52%
0.22%
2,339
283,224
2,477
295,222
(138)
(11,998)
1,789
338,109
688
(42,887)
0.83%
0.84%
(0.01)%
0.53%
0.31%
2016 versus 2015: Net investment income increased by $0.7 million during 2016 due to an increase of 28 basis
points in the book yield we obtained on our investable assets, partially offset by the decrease in our average invested
assets of $14.4 million. The increase in yield was primarily due to the changing mix in asset allocation as we executed
on our investment strategies. Net realized and unrealized gains (losses) decreased by $0.9 million driven by the impact
of increased treasury yields.
2015 versus 2014: Net investment income increased by $0.5 million during 2015 due to an increase of 22 basis
points in the book yield we obtained on our investable assets, partially offset by the decrease in average investable
assets of $37.5 million. The increase in yield was due to a broad increase in treasury yields across the curve. Net
realized and unrealized gains (losses) increased by $0.2 million.
StarStone
Net investment income
Net realized and unrealized gains (losses)
Investment Book Yield
Net investment income
Average aggregate invested assets, at cost
Investment book yield
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value
Financial statement portfolio return
2016
$
22,221
5,728
$
2015
15,937
(9,784)
StarStone
Increase
(decrease)
6,284
$
15,512
$
2014
5,321
2,136
Increase
(decrease)
$ 10,616
(11,920)
22,221
1,607,916
15,937
1,504,087
6,284
103,829
5,321
1,014,587
10,616
489,500
1.38%
1.06%
0.32%
0.52%
0.54%
27,949
1,598,423
6,153
1,499,342
21,796
99,081
7,457
1,015,494
(1,304)
483,848
1.75%
0.41%
1.34%
0.73%
(0.32)%
2016 versus 2015: Net investment income increased by $6.3 million during 2016 due to an increase of $103.8
million in our average investable assets and an increase of 32 basis points in the book yield we obtained on those
assets. The increase in yield was primarily due to the changing mix in asset allocation as we executed on our investment
strategies. The increase in net realized and unrealized gains (losses) of $15.5 million was comprised of net unrealized
gains of $3.8 million in 2016 compared to net unrealized losses of $14.1 million in 2015, offset by a decrease in realized
gains of $2.4 million. The unrealized gains in 2016 were primarily due to increases in the valuations of our other
investments.
71
2015 versus 2014: Net investment income increased by $10.6 million during 2015 due to an increase of $489.5
million in our average investable assets and an increase of 54 basis points in the book yield we obtained on those
assets. The increase in yield was due to our asset allocation and a broad increase in treasury yields across the curve.
Net realized and unrealized gains (losses) decreased by $11.9 million, primarily due to fixed maturity securities and
reflected increased treasury yields, widening corporate credit spreads and a decrease in liquidity in fixed income
markets.
Life and Annuities
Net investment income
Net realized and unrealized gains (losses)
Investment Book Yield
Net investment income
Average aggregate invested assets, at cost
Investment book yield
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value
Financial statement portfolio return
Life and Annuities
$
2016
20,043
(4,998)
$
2015
21,137
(798)
Increase
(decrease)
(1,094)
$
(4,200)
$
2014
1,056
1,784
Increase
(decrease)
20,081
$
(2,582)
20,043
321,850
21,137
150,617
(1,094)
171,233
1,056
49,146
20,081
101,471
6.23%
14.03%
(7.80)%
2.15%
11.88%
15,045
323,538
20,339
147,652
(5,294)
175,886
2,840
52,217
17,499
95,435
4.65%
13.77%
(9.12)%
5.44%
8.33%
2016 versus 2015: Net investment income decreased by $1.1 million during 2016 primarily due to a decrease
in the income from life settlements of $2.1 million. Net realized and unrealized gains (losses) decreased by $4.2 million,
primarily due to impairments of $5.3 million in the life settlement portfolio.
2015 versus 2014: Net investment income increased by $20.1 million during 2015 primarily due to the income
from life settlements of $20.1 million during 2015. Net realized and unrealized gains (losses) decreased by $2.6 million,
primarily due to fixed maturity securities and reflect increased treasury yields, widening corporate credit spreads and
a decrease in liquidity in fixed income markets.
Liquidity and Capital Resources
Overview
Enstar aims to generate cash flows from our insurance operations and investments, preserve sufficient capital
for future acquisitions, and develop relationships with lenders who provide borrowing capacity at competitive rates.
Our capital resources as at December 31, 2016 included shareholders' equity of $2.8 billion, redeemable
noncontrolling interest of $0.5 billion classified as temporary equity, and loans payable of $0.7 billion. The redeemable
noncontrolling interest may be settled in the future in cash or Enstar ordinary shares, at our option. Based on our
current loss reserves position, our portfolios of in-force insurance and reinsurance business, and our investment
positions, we believe we are well capitalized.
As of December 31, 2016, we had $954.9 million million of cash and cash equivalents, excluding restricted cash
that supports insurance operations, and included in this amount was $487.2 million held by our foreign subsidiaries
outside of Bermuda. Based on our group's current corporate structure with a Bermuda domiciled parent company and
the jurisdictions in which we operate, if the cash and cash equivalents held by our foreign subsidiaries were to be
distributed to us, as dividends or otherwise, such amount would not be subject to incremental income taxes, however
in certain circumstances withholding taxes may be imposed by some jurisdictions, including by the United States.
Based on existing tax laws, regulations and our current intentions, there were no accruals as of December 31, 2016
for any material withholding taxes on dividends or other distributions, as described in "Note 20 - Taxation" in the notes
to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
72
Dividends
Enstar has not historically declared a dividend. Our strategy is to retain earnings and invest distributions from
our subsidiaries back into the company. We do not currently expect to pay any dividends on our ordinary shares. Any
payment of dividends must be approved by our Board of Directors. Our ability to pay dividends is subject to certain
restrictions, as described in "Note 22 - Dividend Restrictions and Statutory Requirements" in the notes to our
consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
Sources and Uses of Cash
Holding Company Liquidity
The potential sources of cash flows to Enstar as a holding company consist of cash flows from our subsidiaries
including dividends, advances and loans, and investment income on loans to our subsidiaries. We also borrow from
our credit facilities as described below.
We use cash to fund new acquisitions of companies and significant new business. We also utilize cash for our
operating expenses associated with being a public company, and to pay interest and principal on loans from subsidiaries
and loans under our credit facilities.
Our holding company cash flows are summarized in "Item 8. Financial Statements and Supplementary Data -
Schedule II - Condensed Financial Information of Registrant - Statements of Cash Flows - Parent Company Only for
the years ended December 31, 2016, 2015 and 2014" and the notes thereto.
We may, from time to time, raise capital from the issuance of equity, debt or other securities as we continuously
evaluate our strategic opportunities. On September 12, 2014, we filed an automatic shelf registration statement with
the SEC to allow us to conduct future offerings of debt securities, if desired.
As we are a holding company and have no substantial operations of our own, our assets consist primarily of
investments in subsidiaries and our loans and advances to subsidiaries. Dividends from our insurance subsidiaries
are restricted by insurance regulation.
Operating Company Liquidity
The ability to pay dividends and make other distributions is limited by the applicable laws and regulations of the
jurisdictions in which our insurance and reinsurance subsidiaries operate, including Bermuda, the United Kingdom,
the United States, Australia and Continental Europe, which subject these subsidiaries to significant regulatory
restrictions. These laws and regulations require, among other things, certain of our insurance and reinsurance
subsidiaries to maintain minimum capital resources requirements and limit the amount of dividends and other payments
that these subsidiaries can pay to us, which in turn may limit our ability to pay dividends and make other payments.
For more information on these laws and regulations, see "Item 1. Business - Regulation." As of December 31, 2016,
all of our insurance and reinsurance subsidiaries’ capital resources levels were in excess of the minimum levels
required. The ability of our subsidiaries to pay dividends is subject to certain restrictions, as described in "Note 22 -
Dividend Restrictions and Statutory Requirements" in the notes to our consolidated financial statements included within
Item 8 of this Annual Report on Form 10-K. Our subsidiaries’ ability to pay dividends and make other forms of distributions
may also be limited by our repayment obligations under certain of our outstanding loan facility agreements. Variability
in ultimate loss payments may also result in increased liquidity requirements for our subsidiaries. During the years
ended December 31, 2016, 2015 and 2014, our regulated subsidiaries paid aggregate capital distributions and dividends
of $517.1 million, $723.1 million and $367.4 million, respectively.
In the Non-life Run-off and Life and Annuities segments, our subsidiaries, sources of funds primarily consist of
cash and investment portfolios acquired on the completion of acquisitions and loss portfolio transfer reinsurance
agreements. Cash balances acquired upon our purchase of insurance or reinsurance companies are classified as
cash provided by investing activities. Cash acquired from loss portfolio transfer reinsurance agreements is classified
as cash provided by operating companies. We expect to use funds acquired from cash and investment portfolios,
collected premiums, collections from reinsurance debtors, fees and commission income, investment income and
proceeds from sales and redemptions of investments to meet expected claims payments and operational expenses
with the remainder used for acquisitions and additional investments. In these segments, we generally expect negative
operating cash flows to be met by positive investing cash flows.
In the Atrium and StarStone segments we expect a net provision of cash from operations as investment income
earned and collected premiums should generally be in excess of total net claim payments, losses incurred on earned
premiums and operating expenses.
73
We expect our cash flows, together with our existing capital base and cash and investments acquired on the
acquisition of insurance and reinsurance subsidiaries, to be sufficient to meet cash requirements and to operate our
business.
Cash Flows
The following table summarizes our consolidated cash flows, including those related to restricted cash, from
operating, investing and financing activities in the last three years:
Years Ended December 31,
Cash provided by (used in):
2016
2015
Increase
(decrease)
2014
Increase
(decrease)
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents, beginning of year
(in thousands of U.S. dollars)
$ (202,689) $ (265,152) $
62,463 $ 544,005 $ (809,157)
156,709
83,441
19,885
129,347
136,824
(45,906)
(187,422)
131,586
(13,985)
(18,533)
4,548
(17,546)
207,307
(2,239)
(987)
23,476
(134,453)
157,929
1,295,169
1,429,622
(134,453)
470,623
958,999
(605,076)
470,623
Cash and cash equivalents, end of year
$1,318,645 $1,295,169 $
23,476 $1,429,622 $ (134,453)
Details of our consolidated cash flows are included in "Item 8. Financial Statements and Supplementary Data -
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014."
2016 versus 2015: Cash used in operating activities included net sales and maturities of trading securities of
$306.2 million in 2016 as compared with net purchases of trading securities of $400.8 million in 2015. Excluding the
activity on trading securities, cash (used in) provided by operating activities was ($509.0) million and $135.6 million
in the years ended December 31, 2016 and 2015, respectively. Cash used in operating activities was largely a result
of the amount and timing of loss payments in our Non-life Run-off segment, offset by cash and restricted cash acquired
in Non-life Run-off reinsurance transactions. Cash and restricted cash acquired in Non-life Run-off reinsurance
transactions for the years ended December 31, 2016 and 2015 was $174.5 million and $468.3 million, respectively.
Cash provided by investing activities for 2016 primarily related to net redemptions of other investments of $154.0
million. Cash provided by investing activities for 2015 primarily related to net purchases of other investments of $149.9
million and purchases of available for sale securities of $102.2 million, offset by acquisitions net of cash acquired of
$130.7 million and sales and maturities of available for sale securities of $142.8 million.
Cash provided by financing activities for 2016 primarily related to net inflows of $77.8 million from our credit
facilities, including the drawdown of a new three-year term loan of $75.0 million as discussed below, which was primarily
utilized to finance acquisitions and significant new business. During 2015, we had net inflows of $280.2 million from
our credit facilities primarily utilized to finance acquisitions and significant new business, offset by an outflow of $150.4
million relating to the purchase of noncontrolling interests.
2015 versus 2014: Cash from operating activities included net purchases of trading securities of $400.8 million
in 2015 as compared with net sales and maturities of trading securities of $850.5 million in 2014. Excluding the activity
on trading securities, cash provided by (used in) operating activities was $135.6 million and ($306.5) million in the
years ended December 31, 2015 and 2014, respectively. The years ended December 31, 2015 and 2014 included
$468.3 million and $28.1 million, respectively, of cash and restricted cash acquired in non-life run-off reinsurance
transactions.
Cash provided by investing activities for 2015 primarily related to the net purchases of other investments of
$149.9 million and purchases of available for sale securities of $102.2 million, offset by acquisition net of cash acquired
of $130.7 million and sales and maturities of available for sale securities of $142.8 million. Cash used in investing
activities for 2014 primarily related to the net purchases of other investments of $241.6 million.
Cash provided by financing activities was relatively consistent during 2015 and 2014. During 2015, we had net
inflows of $280.2 million from our credit facilities primarily utilized to finance acquisitions and significant new business,
offset by an outflow of $150.4 million relating to the purchase of noncontrolling interests. During 2014, we had an inflow
74
from a contribution by redeemable noncontrolling interest of $273.0 million, offset by net outflows of $129.2 million in
repayment of our credit facilities (primarily attributable to the repayment of the SeaBright and Clarendon facilities).
Investments and Cash and Cash Equivalents
As at December 31, 2016 and 2015, we had total cash and cash equivalents, restricted cash and cash equivalents
and investments of $7.4 billion and $7.6 billion, respectively.
For information regarding our investment strategy, portfolio and results, refer to "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Investments."
Reinsurance Balances Recoverable
As at December 31, 2016 and 2015, we had reinsurance balances recoverable of $1.46 billion and $1.45 billion,
respectively.
Our insurance and reinsurance run-off subsidiaries, prior to acquisition, used retrocessional agreements to
reduce their exposure to the risk of insurance and reinsurance assumed. On an annual basis, both Atrium and StarStone
purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s and
StarStone's third-party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.
We remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and
therefore, we evaluate and monitor concentration of credit risk among our reinsurers. Provisions are made for amounts
considered potentially uncollectible.
For further information regarding our reinsurance balances recoverable, refer to "Note 10 - Reinsurance Balances
Recoverable" in the notes to our consolidated financial statements included within Item 8 of this Annual Report on
Form 10-K.
Funds Held
As at December 31, 2016 and 2015, we had funds held - directly managed of $994.7 million and $nil, respectively.
The increase was due to the completion on March 31, 2016 of our transaction with Allianz to reinsure portfolios of
Allianz's run-off business. In accordance with this transaction, we received a fixed rate of investment income for the
nine months ended September 30, 2016 and thereafter we received a return based upon an underlying portfolio of
investments. These funds are carried at an aggregate fair value which includes an embedded derivative for the variable
investment return. For further information regarding our funds held - directly managed, refer to "Note 7 - Funds Held
- Directly Managed" in the notes to our consolidated financial statements included within Item 8 of this Annual Report
on Form 10-K.
In addition, as at December 31, 2016 and December 31, 2015, we had funds held by ceding companies of $82.1
million and $92.8 million, respectively, which are carried at cost with a fixed crediting rate.
For information regarding credit risk, refer to "Item 7A. Quantitative and Qualitative Disclosures About Market
Risk - Credit Risk - Funds Held" of this Annual Report on Form 10-K.
Loan Facilities
We utilize loan facilities primarily for acquisitions and, from time to time, for general corporate purposes. For
information regarding our loan facilities, including our loan covenants, refer to "Note 15 - Loans Payable" in the notes
to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K. Under our facilities,
loans payable as of December 31, 2016 and 2015 were $673.6 million and $599.8 million, respectively.
Our main facility is the Enstar Group Limited ("EGL") Revolving Credit Facility, originated on September 16,
2014 for a 5-year term, and most recently amended on August 5, 2016. This facility is among the Company and certain
of its subsidiaries, as borrowers and as guarantors, and various financial institutions. We are permitted to borrow up
to an aggregate of $665.0 million and we have an option to obtain additional commitments of up to $166.25 million.
The individual outstanding loans under the facility are unsecured short-term floating rate loans with an interest rate of
LIBOR plus a margin and utilization fee as set forth in the credit facility agreement. As at December 31, 2016 there
was $129.9 million of available unutilized capacity under the EGL Revolving Credit Facility. Subsequent to December 31,
2016, we utilized $90.0 million and repaid $34.0 million bringing the available unutilized capacity under this facility to
$73.9 million.
75
We also have the following term loan facilities:
• A four-year term loan (the "Sussex Facility", formerly called the Companion Facility) that was originated on
December 24, 2014 with two financial institutions. As at December 31, 2016, the outstanding principal under
this facility was $63.5 million, and there was no unutilized capacity.
• A three-year unsecured term loan (the "EGL Term Loan Facility") that was originated on November 18, 2016.
As at December 31, 2016, the outstanding principal under this facility was $75.0 million, and there was no
unutilized capacity.
Contractual Obligations
The following table summarizes, as of December 31, 2016, our future payments under contractual obligations
and estimated payments for losses and LAE and policy benefits by expected payment date. The table excludes short-
term liabilities and includes only obligations that are expected to be settled in cash.
Operating Activities
Estimated gross reserves for losses
and LAE (1)
Policy benefits for life and annuity
contracts (2)
Operating lease obligations
Investing Activities
Investment commitments
Financing Activities
Loan repayments (including
estimated interest payments)
Total
(1)
Total
Less than
1 Year
1 - 3
years
3 - 5
years
More than
5 Years
(in millions of U.S. dollars)
$
6,111.6 $
1,224.3 $
1,999.1 $
928.1 $
1,960.1
298.7
45.8
144.0
18.6
10.0
57.8
37.5
17.3
55.5
35.7
10.3
30.7
206.9
8.2
—
748.7
7,432.7 $
28.9
1,423.5 $
719.8
2,829.2 $
—
1,004.8 $
—
2,175.2
$
The reserves for losses and LAE represent management’s estimate of the ultimate cost of settling losses. The estimation of losses is based
on various complex and subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in
our financial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may be significant changes in actual
payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment
experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments,
there is a risk that the amounts paid in any such period can be significantly different from the amounts disclosed above. The amounts in
the above table represent our estimates of known liabilities as of December 31, 2016 and do not take into account corresponding reinsurance
recoverable amounts that would be due to us. Furthermore, certain of the reserves included in the audited consolidated financial statements
as of December 31, 2016 were acquired by us and initially recorded at fair value with subsequent amortization, whereas the expected
payments by period in the table above are the estimated payments at a future time and do not reflect the fair value adjustment in the amount
payable.
(2) Policy benefits for life and annuity contracts recorded in our audited consolidated balance sheet as at December 31, 2016 of $112.1 million
are computed on a discounted basis, whereas the expected payments by period in the table above are the estimated payments at a future
time and do not reflect a discount of the amount payable. Amounts related to Pavonia are excluded as these are classified as liabilities
held for sale, as described in "Note 5 - Held-For-Sale Business" in the notes to our consolidated financial statements included within Item
8 of this Annual Report on Form 10-K.
For additional information relating to our commitments and contingencies, see "Note 23 - Commitments and
Contingencies" in the notes to our consolidated financial statements included within Item 8 of this Annual Report on
Form 10-K.
Off-Balance Sheet Arrangements
At December 31, 2016, we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of
Regulation S-K.
76
Critical Accounting Policies
We believe the following accounting policies affect the more significant judgment and estimates used in the
preparation of our financial statements.
Accounting for Acquisitions - Fair Value Measurement
The most significant liabilities and assets of an acquired company are typically the liability for losses and LAE,
and the assets related to cash, investments and any reinsurance balances recoverable that may be contractually due
to the acquired entity. The market for acquisition of run-off companies is not always sufficiently active and transparent
to enable us to identify reliable, market exit values for acquired assets and liabilities. Accordingly, consistent with
provisions of U.S. GAAP, we have developed internal models that we believe allow us to determine fair values that
are reasonable proxies for market exit values. We are familiar with the major participants in the acquisition run-off
market and believe that the key assumptions we make in valuing acquired assets and liabilities are consistent with
the kinds of assumptions made by such market participants. Furthermore, in our negotiation of purchase prices with
sellers, it is frequently clear to us that other bidders in the market are using models and assumptions similar in nature
to ours during the competitive bid process. The majority of acquisitions are completed following a public tender process
whereby the seller invites market participants to provide bids for the target acquisition.
We account 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 each of the insurance and reinsurance
assets and liabilities acquired are derived from probability-weighted ranges of the associated projected cash flows,
based on actuarially prepared information and management’s run-off strategy. Our run-off strategy, as well as that of
other run-off market participants, is expected to be different from the seller’s as generally sellers are not specialized
in running off insurance and reinsurance liabilities whereas we and other market participants do specialize in such
run-offs.
The key assumptions used by us and, we believe, by other run-off market participants in the fair valuation of
acquired companies are (i) the projected payout, timing and amounts of claims liabilities; (ii) the related projected
timing and amount of reinsurance collections; (iii) an appropriate discount rate, which is applied to determine the
present value of the future cash flows; (iv) the estimated ULAE to be incurred over the life of the run-off; (v) the impact
that any accelerated run-off strategy may have on the adequacy of acquired bad debt provisions; and (vi) an appropriate
risk margin.
The probability-weighted projected cash flows of the acquired company are based on projected claims payouts
provided by the seller predominantly in the form of the seller’s most recent independent actuarial reserve report. In
the absence of the seller’s actuarial reserve report, our actuaries will determine the estimated claims payout. In certain
jurisdictions, the local legislation provides for the possibility of pursuing strategies to achieve complete finality and
conclude the run-off of a company, such as solvent schemes of arrangement. If appropriate we may estimate the
probability of being able to complete a solvent scheme of arrangement and factor that into the claims payout projections.
On acquisition, we make a provision for ULAE liabilities. This provision considers the adequacy of the provision
maintained and recorded by the seller in light of our run-off strategy and estimated ULAE to be incurred over the life
of the acquired run-off as projected by the seller’s actuaries or, in their absence, our actuaries. To the extent that our
estimate of the total ULAE provision is different from the seller’s, an adjustment will be made. While our objective is
to accelerate the run-off by completing commutations of assumed and ceded business (which would have the effect
of shortening the life, and therefore the cost, of the run-off), the success of this strategy is far from certain. Therefore,
the estimates of ULAE are based on running off the liabilities and assets over the actuarially projected life of the run-
off. In those domiciles where solvent schemes of arrangement are available, management’s estimates of the total
ULAE are probability-weighted in accordance with the estimated time that a solvent scheme of arrangement could be
completed, which has the effect of reducing the period of the run-off and the related ULAE. For those acquisitions in
domiciles where solvent schemes of arrangement are not available, the ULAE are estimated over the projected life of
the run-off.
We believe that providing for ULAE based on our run-off strategy is appropriate in determining the fair value of
the assets and liabilities acquired in an acquisition of a run-off company. We believe that other participants in the run-
off acquisition marketplace factor into the price to pay for an acquisition the estimated cost of running off the acquired
company based on how that participant expects to manage the assets and liabilities.
77
The difference between the carrying value of reserves acquired at the date of acquisition and the fair value is
the Fair Value Adjustment, or FVA. The FVA is amortized over the estimated payout period and adjusted for accelerations
on commutation settlements or any other new information or subsequent change in circumstances after the date of
acquisition. To the extent the actual payout experience after the acquisition is materially faster or slower than anticipated
at the time of the acquisition, there is an adjustment to the estimated ultimate loss reserves, or there are changes in
bad debt provisions or in estimates of future run-off costs following accelerated payouts, then the amortization of the
FVA is accelerated or decelerated, as the case may be, to reflect such changes.
Losses and Loss Adjustment Expenses - Non-Life Run-off
The following table provides a breakdown of gross losses and LAE reserves by type of exposure as of
December 31, 2016 and 2015.
OLR
2016
IBNR
Total
OLR
(in thousands of U.S. dollars)
2015
IBNR
Total
$
240,863 $
548,180 $
789,043 $
121,404 $
209,410 $
330,814
94,432
427,733
67,646
316,227
162,078
743,960
29,986
478,246
29,972
438,807
59,958
917,053
1,360,743
693,585
2,054,328
1,502,615
822,758
2,325,373
45,240
39,622
407,490
34,873
120,459
80,113
160,081
51,790
17,327
8,484
14,339
60,274
31,666
610,975
$ 2,616,123 $ 1,881,904 $ 4,498,027 $ 2,661,947 $ 1,674,166 $ 4,336,113
249,341
218,336
508,424
150,396
460,579
100,934
$ 4,716,363
$ 4,585,454
Asbestos
Environmental
General casualty
Workers'
compensation/
personal accident
Marine, aviation and
transit
Construction defect
Other
Total
ULAE
Total
The following table provides a breakdown of losses and LAE reserves (net of reinsurance balances recoverable
and deferred charges) by type of exposure as of December 31, 2016 and 2015:
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Other
ULAE
Total
2016
2015
Total
% of
Total
Total
% of
Total
(in thousands of U.S. dollars)
$
764,344
21.1% $
304,443
156,869
491,752
1,372,823
74,494
121,096
421,145
218,336
$ 3,620,859
4.3%
13.6%
37.9%
52,187
600,364
1,507,505
2.1%
3.3%
11.6%
6.1%
53,036
20,855
507,065
249,341
100.0% $ 3,294,796
9.2%
1.6%
18.2%
45.8%
1.6%
0.6%
15.4%
7.6%
100.0%
As of December 31, 2016, the IBNR reserves (net of reinsurance balances receivable) accounted for $1,464.8
million, or 40.5%, of our total net losses and LAE. The reserve for IBNR (net of reinsurance balance receivable)
accounted for $1,146.9 million, or 34.8%, of our total net loss reserves at December 31, 2015.
78
Our primary objective in running off the operations of acquired companies and portfolios of insurance and
reinsurance business in run-off is to increase book value by settling loss reserves below their acquired fair value. The
earnings created in each acquired company or portfolio of insurance and reinsurance business, together with the
related decrease in loss reserves, lead to a reduction in the capital required for each company, thereby providing the
ability to distribute both earnings and excess capital to the parent company.
To the extent that the nature of the acquired loss reserves are conducive to commutation, our aim is to settle
the majority of the acquired loss reserves within a timeframe of approximately five to seven years from the date of
acquisition. To the extent that acquired reserves are not conducive to commutation, we will instead adopt a disciplined
claims management approach to pay only valid claims on a timely basis and endeavor to reduce the level of acquired
LAE provisions by withdrawing, where appropriate, from existing litigation and otherwise streamlining claims handling
procedures.
By adopting either of the above run-off strategies, we would expect that over the targeted life of the run-off,
acquired ultimate loss reserves would settle below their recorded fair value, resulting in reductions in ultimate losses
and LAE liabilities. There can be no assurance, however, that we will successfully implement our strategy.
Commutations of blocks of policies, along with disciplined claims management, have the potential to produce
favorable claims development compared to established reserves. For each newly-acquired company, we determine
a commutation strategy that broadly identifies commutation targets using the following criteria:
• Previous commutations completed by existing portfolio companies with policyholders of the newly-acquired
company;
• Nature of liabilities;
• Size of incurred loss reserves;
• Recent loss development history; and
• Targets for claims audits.
Once commutation targets are identified, they are prioritized into target years of completion. At the beginning of
each year, the approach to commutation negotiations is determined by the commutation team, including claims and
exposure analysis and broker account reconciliations. On completion of this analysis, settlement parameters are set
around incurred liabilities. Commutation discussions can take many months or even years to come to fruition.
Commutation targets not completed in a particular year are re-prioritized for the following year.
Every commutation, irrespective of value, requires the approval of our senior management. The impact of the
commutation activity on the IBNR reserve is reflected as part of our annual actuarial reviews of reserves. However, if
a significant commutation is completed during the year, loss reserves will be adjusted in the corresponding quarter to
reflect management’s then best estimate of the impact on remaining IBNR reserves.
Commutations provide an opportunity for us to exit exposures to entire policies with insureds and reinsureds for
an agreed upon payment, or payments, often at a discount to the previously estimated ultimate liability. As a result of
exiting all exposures to such policies, all advised case reserves and IBNR reserves relating to the insured or reinsured
are eliminated. A commutation is recognized upon the execution of a commutation release agreement. Following
completion of a commutation, all the related balances, including insurance and reinsurance balances payable and/or
receivable, funds held by ceding companies, and losses and LAE (including fair value adjustments and estimated
IBNR), are written off with corresponding gain or loss recorded in the net reduction of ultimate losses. A commutation
may result in a net gain irrespective of whether the settlement exceeds the advised case reserves. Advised case
reserves are those reserve estimates for a specific loss or losses reported by either the broker or insured or reinsured.
IBNR reserves are established at a class of business level. A commutation settlement is a negotiated settlement of
both the advised case reserves and an estimate of the IBNR reserves that relate to the policies being commuted. For
latent exposures with a long reporting tail, the estimated level of IBNR reserves may be significantly higher than the
advised case reserves. In such an instance, the commutation settlement of a block of such policies may be greater
than the advised case reserves but less than the aggregate of the advised case reserves plus the estimated related
IBNR reserves, resulting in a total saving to the remaining liability.
79
On an annual basis, all prior historical loss development that relates to commuted exposures is eliminated to
produce revised historical loss development for the remaining non-commuted exposures. Our estimates of IBNR
reserves are determined at the aggregate class of business or exposure level. Our actuaries apply actuarial
methodologies to the remaining aggregate exposures and revised historical loss development information to reassess
their estimates of gross and net ultimate liabilities and required gross and net IBNR reserves. On a quarterly basis,
we adjust our estimates of ultimate loss and LAE liabilities in the quarter that the commutation was concluded. The
agreed commutation settlement is recorded in net losses paid.
To the extent that commuted policies are protected by reinsurance, then we will, on completion of a commutation
with an insured or reinsured, negotiate with the reinsurers to contribute their share of the commutation settlement. Any
amounts received from such reinsurers will be recorded in net losses paid and the impact of any savings or loss on
reinsurance recoverable on unpaid losses will be included in the actuarial reassessment of net ultimate liabilities.
Annual Losses and Loss Adjustment Reviews
Because a significant amount of time can lapse between the assumption of risk, the occurrence of a loss event,
the reporting of the event to an insurance or reinsurance company and the ultimate payment of the claim on the loss
event, the liability for unpaid losses and LAE is based largely upon estimates. On a quarterly basis, our management
must use considerable judgment in the process of developing these estimates. Management reviews the actual loss
development in the quarter and receives input from the actuarial, claims and legal staff on the drivers of any favorable
or unfavorable loss emergence. The liability for unpaid losses and LAE for property and casualty business includes
amounts determined from loss reports on individual cases and amounts for IBNR reserves.
Loss advices or reports from ceding companies are generally provided via the placing broker and comprise
treaty statements, individual claims files, electronic messages and large loss advices or cash calls. Large loss advices
and cash calls are provided to us as soon as practicable after an individual loss or claim is made or settled by the
insured. The remaining broker advices are issued monthly, quarterly or annually depending on the provisions of the
individual policies or the ceding company’s practice. For certain direct insurance policies where the claims are managed
by Third Party Administrators (TPAs) and Managing General Agents (MGAs), loss bordereaux are received either
monthly or quarterly depending on the arrangement with the TPA and MGA. Loss advices for direct insurance policies
may be received from the broker, agent or directly from the insured.
Where we provide reinsurance or retrocession reinsurance protection, the process of claims advice from the
direct insurer to the reinsurers and/or retrocessionaires naturally involves more levels of communication, which
inevitably creates delays or lags in the receipt of loss advice by the reinsurers/retrocessionaires relative to the date of
first advice to the direct insurer. Certain types of exposure, typically latent health exposures such as asbestos-related
claims, have inherently long reporting delays, in some cases many years, from the date a loss occurred to the
manifestation and reporting of a claim and ultimately until the final settlement of the claim. For asbestos and
environmental exposures, our actuaries apply explicit time lag assumptions in their reserving methodologies. This time
lag varies by portfolio from one to five years depending on the relative mix of domicile, percentages of product mix of
insurance, reinsurance and retrocessional reinsurance, primary insurance, excess reinsurance, reinsurance of direct
and reinsurance of reinsurance within any given exposure category. Exposure portfolios written from a non-U.S. domicile
are assumed to have a greater time lag than portfolios written from a U.S.-domicile. Portfolios with a larger proportion
of reinsurance exposures are assumed to have a greater time-lag than portfolios with a larger proportion of direct
insurance exposures.
An industry-wide weakness in cedant reporting affects the adequacy and accuracy of reserving for advised
claims. We attempt to mitigate this inherent weakness as follows:
• We closely monitor cedant loss reporting and, for those cedants identified as providing inadequate, untimely
or unusual reporting of losses, we conduct, in accordance with the provisions of the insurance and reinsurance
contracts, detailed claims audits at the insured’s or reinsured’s premises. Such claims audits have the benefit
of validating advised claims, determining whether the cedant’s loss reserving practices and reporting are
adequate and identifying potential loss reserving issues of which our actuaries need to be made aware. Any
required adjustments to advised claims reserves reported by cedants identified during the claims audits will
be recorded as an adjustment to the advised case reserve.
• Onsite claims audits are often supplemented by further reviews by our internal and external legal advisors
to determine the reasonableness of advised case reserves and, if considered necessary, an adjustment to
the reported case reserve will be recorded.
80
• Our actuaries project expected paid and incurred loss development for each class of business, which is
monitored on a quarterly basis. Should actual paid and incurred development differ significantly from the
expected paid and incurred development, we will investigate the cause and, in conjunction with our actuaries,
consider whether any adjustment to total loss reserves is required.
• Our actuaries consider the quality of ceding company data as part of their ongoing evaluation of the liability
for ultimate losses and LAE, and the methodologies they select for estimating ultimate losses inherently
compensate for potential weaknesses in this data, including weaknesses in loss reports provided by cedants.
We strive to apply the highest standards of discipline and professionalism to our claims adjusting, processing
and settlement, and disputes with cedants are rare. However, we are from time to time involved in various disputes
and legal proceedings in the ordinary course of our claims adjusting process. We are often involved in disputes
commenced by other co-insurers who act in unison with any litigation or dispute resolution controlled by the lead
underwriter. Coverage disputes arise when the insured/reinsured and insurer/reinsurer cannot reach agreement as to
the interpretation of the policy and/or application of the policy to a claim. Most insurance and reinsurance policies
contain dispute resolution clauses requiring arbitration or mediation. In the absence of a contractual dispute resolution
process, civil litigation would be commenced. We aim to reach a commercially acceptable resolution to any dispute,
using arbitration or litigation as a last resort. We regularly monitor and provide internal reports on disputes involving
arbitration and litigation and engage external legal counsel to provide professional advice and assist with case
management.
In establishing reserves, management includes amounts for IBNR reserves using information from the actuarial
estimates of ultimate losses. We use generally accepted actuarial methodologies to estimate ultimate losses and LAE
and those estimates are reviewed by our management. On an annual basis, independent actuarial firms are retained
by management to provide their estimates of ultimate losses and to review the estimates developed by our actuaries.
Nearly all of our unpaid claims liabilities are considered to have a long claims payout tail. Gross loss reserves
for our non-life run-off subsidiaries relate primarily to casualty exposures, including latent claims, of which 20.2% (2015:
8.5%) relate to asbestos and environmental ("A&E") exposures.
Within the annual loss reserve studies produced by either our actuaries or independent actuaries, exposures
for each subsidiary are separated into homogeneous reserving categories for the purpose of estimating IBNR. Each
reserving category contains either direct insurance or assumed reinsurance reserves and groups relatively similar
types of risks and exposures (for example, asbestos, environmental, casualty, property) and lines of business written
(for example, marine, aviation, non-marine). Based on the exposure characteristics and the nature of available data
for each individual reserving category, a number of methodologies are applied. Recorded reserves for each category
are selected from the actuarial indications produced by the various methodologies after consideration of exposure
characteristics, data limitations and strengths and weaknesses of each method applied. This approach to estimating
IBNR has been consistently adopted in the annual loss reserve studies for each period presented.
For the reports prepared by the external actuaries, we review them for consistency and appropriateness of
actuarial methodologies and assumptions, including assumptions of industry benchmarks, and discuss any concerns
or changes with them.
Our management, through the loss reserving committees, considers the reasonableness of loss reserves
recommended by our actuaries, including actual loss development during the year, using the following reports produced
internally on a quarterly basis for each of our insurance and reinsurance subsidiaries:
• Gross, ceded and net incurred loss report - This report provides, for each reporting period, the total (including
commuted policies) gross, ceded and net incurred loss development for each company and a commentary
on each company’s loss development prepared by our Chief Reserving Actuary. The report highlights the
causes of any unusual or significant loss development activity (including commutations) and includes
commentary on quality and reliability of underlying data.
• Actual versus expected gross incurred loss development report - This report provides a summary, and
commentary thereon, of each company’s (excluding companies or portfolios of business acquired in the
current year) non-commuted incurred gross losses compared to the estimate of the development of non-
commuted incurred gross losses provided by our actuaries at the beginning of the year as part of the prior
year’s reserving process.
81
• Commutations summary schedule - This schedule summarizes all commutations completed during the year
for all companies, and identifies the policyholder with which we commuted, the incurred losses settled by
the commutation (comprising outstanding unpaid losses and case reserves) and the amount of the
commutation settlement.
• Analysis of paid, incurred and ultimate losses - This analysis for each company, and in the aggregate,
provides a summary of the gross, ceded and net paid and incurred losses and the impact of applying our
actuaries’ recommended loss reserves. This report, reviewed in conjunction with the previous reports,
provides an analytical tool to review each company’s incurred loss or gain and reduction in IBNR reserves
to assess whether the ultimate reduction in loss reserves appears reasonable in light of known developments
within each company.
The above reports provide management with the relevant information to determine whether loss development
(including commutations) during the year has, for each company, been sufficiently meaningful so as to warrant an
adjustment to the reserves recommended by our actuaries in the most recent actuarial study. It is not possible to
quantify how much of any reserve release specifically relates to commutations or favorable development of non-
commuted claims as the revised historical loss development used by the actuaries to estimate required reserves is a
combination of both the elimination of historical loss development relating to commuted policies and non-commuted
loss development.
When establishing loss reserves we have an expectation that, in the absence of commutations and significant
favorable or unfavorable non-commuted loss development compared to expectations, loss reserves will not exceed
the high, or be less than the low, end of the following ranges of gross losses and LAE reserves implied by the various
methodologies used by each of our insurance subsidiaries as of December 31, 2016.
The range of gross loss and LAE reserves implied by the various methodologies used by each of our insurance
and reinsurance subsidiaries as of December 31, 2016 and 2015 is presented in the following table ("Range of
Outcomes"):
Low
2016
Selected
High
Low
2015
Selected
High
Asbestos
Environmental
General casualty
Workers' compensation/personal
accident
Marine, aviation and transit
Construction defect
Other
ULAE
Total
Latent Claims
(in thousands of U.S. dollars)
$ 746,719 $ 789,043 $ 1,045,844 $ 294,233 $ 330,814 $ 372,952
67,349
162,078
154,685
217,113
59,958
53,739
652,057
743,960
842,368
809,424
917,053
1,042,652
1,840,895
71,293
147,737
451,161
2,054,328
80,113
160,081
508,424
2,450,898
2,048,319
2,325,373
2,628,883
93,966
203,720
584,098
53,294
28,177
60,274
31,666
67,806
35,355
542,086
610,975
688,841
218,336
249,341
$4,282,883 $ 4,716,363 $ 5,656,343 $ 4,078,613 $ 4,585,454 $ 5,153,179
249,341
218,336
218,336
249,341
A number of our subsidiaries wrote general liability policies and reinsurance (prior to their acquisition by us)
under which policyholders continue to present asbestos-related injury claims and claims alleging injury, damage or
clean-up costs arising from environmental pollution. These policies, and the associated claims, are referred to as "A&E"
exposures. The vast majority of these claims are presented under policies written many years ago.
There is a great deal of uncertainty surrounding A&E claims. This uncertainty impacts the ability of insurers and
reinsurers to estimate the remaining amount of unpaid claims and related LAE. The majority of these claims differ from
any other type of claim because there is inadequate loss development and significant uncertainty regarding what, if
any, coverage exists, to which, if any, policy years claims are attributable and which, if any, insurers/reinsurers may
be liable. These uncertainties are exacerbated by lack of clear judicial precedent and legislative interpretations of
coverage that may be inconsistent with the intent of the parties to the insurance contracts and expand theories of
liability. The insurance and reinsurance industry as a whole is engaged in extensive litigation over these coverage and
liability issues and is, thus, confronted with continuing uncertainty in its efforts to quantify A&E exposures.
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Given the intensive claim settlement process for these claims, which involves comprehensive fact gathering and
subject matter expertise, we operate centrally administered claims facilities to handle A&E claims on behalf of all of
our subsidiaries. Our A&E claims staff, working in conjunction with our in-house attorneys experienced in A&E liabilities,
proactively administers, on a cost-effective basis, the A&E claims submitted to our insurance and reinsurance
subsidiaries.
The liability for unpaid losses and LAE, inclusive of A&E reserves, reflects our best estimate for future amounts
needed to pay losses and related LAE as of each of the balance sheet dates reflected in the financial statements
herein in accordance with U.S. GAAP. As of December 31, 2016, we had net loss reserves of $764.3 million for
asbestos-related claims (or 21.1% of total non-life run-off net reserves for losses and LAE liabilities) and $156.9 million
for environmental pollution-related claims (or 4.3% of total non-life run-off net reserves for losses and LAE). As of
December 31, 2015, we had net loss reserves of $304.4 million for asbestos-related claims (or 9.2% of total non-life
run-off net reserves for losses and LAE liabilities) and $52.2 million for environmental pollution-related claims (or 1.6%
of total non-life run-off net reserves for losses and LAE). For the years ended December 31, 2016 and 2015, our
reserves for A&E liabilities increased (decreased) by $560.3 million and $(48.7) million on a gross basis, respectively,
and by $564.6 million and $(32.5) million on a net basis, respectively, due to acquisition activity in 2016 primarily related
to the Allianz transaction. The following table provides a reconciliation of our gross and net loss and ALAE reserves
from A&E exposures and the movement in gross and net reserves:
Years Ended December 31,
2016
2015
2014
Gross
Net
Gross
Net
Gross
Net
(in thousands of U.S. dollars)
Provisions for A&E claims and
ALAE at January 1
A&E losses and ALAE incurred
during the year
A&E losses and ALAE paid
during the year
Provision for A&E claims and
ALAE acquired during the year
Provision for A&E claims and
ALAE at December 31
$ 390,772 $ 356,629 $ 439,476 $ 389,110 $ 539,494 $ 480,865
3,760
(11,008)
(10,690)
(9,468)
(11,369)
(12,914)
(40,761)
(19,127)
(39,633)
(24,632)
(88,649)
(78,841)
597,350
594,719
1,619
1,619
—
—
$ 951,121 $ 921,213 $ 390,772 $ 356,629 $ 439,476 $ 389,110
Asbestos continues to be the most significant and difficult mass tort for the insurance industry in terms of claims
volume and expense. We believe that the insurance industry has been adversely affected by judicial interpretations
that have had the effect of maximizing insurance recoveries for asbestos claims, from both a coverage and liability
perspective. Generally, only policies underwritten prior to 1986 have potential asbestos exposure, since most policies
underwritten after this date contain an absolute asbestos exclusion.
Environmental pollution claims represent another significant exposure for us. Environmental pollution claims
have been developing as expected over the past few years as a result of stable claim trends. Claims against Fortune
500 companies are generally declining, and while insureds with single-site exposures are still active, in many cases
claims are being settled for less than initially anticipated due to improved site remediation technology and effective
policy buy-backs.
Despite the stability of recent trends, there remains significant uncertainty involved in estimating liabilities related
to these exposures. Unlike asbestos claims which are generated primarily from allegedly injured private individuals,
environmental claims generally result from governmentally initiated activities. First, the number of waste sites subject
to cleanup is unknown. Over 1,000 sites are included on the National Priorities List of the United States Environmental
Protection Agency. State authorities have separately identified many additional sites and, at times, aggressively
implement site cleanups. Second, the liabilities of the insureds themselves are difficult to estimate. At any given site,
the allocation of remediation cost among the potentially responsible parties varies greatly depending upon a variety
of factors. Third, as with asbestos liability and coverage issues, judicial precedent regarding liability and coverage
issues regarding pollution claims does not provide clear guidance. There is also uncertainty as to the U.S. federal
"Superfund" law itself and, at this time, we cannot predict what, if any, reforms to this law might be enacted by the
U.S. federal government, or the effect of any such changes on the insurance industry.
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Our future environmental loss development may be influenced by other factors including:
• The existence of currently undiscovered polluted sites eligible for clean-up under the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and related legislation.
• Costs imposed due to joint and several liability if not all potentially responsible parties ("PRPs") are capable
of paying their share.
• The outcomes of legal challenges to certain policy terms such as the "absolute" pollution exclusion.
• Potential future reforms and amendments to CERCLA, particularly as the resources of Superfund - the
funding vehicle, established as part of CERCLA, to provide financing for cleanup of polluted sites where no
PRP can be identified - become exhausted.
The influence of each of these factors is not easily quantifiable and, as with asbestos-related exposures, our
historical environmental loss development is of limited value in determining future environmental loss development
using traditional actuarial reserving techniques.
Our loss reserves are related largely to casualty exposures including latent exposures relating primarily to A&E.
In establishing the reserves for unpaid claims, management considers facts currently known and the current state of
the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when
sufficient information has been developed to indicate the involvement of a specific insurance policy and management
can reasonably estimate its liability. In addition, IBNR reserves are established to cover loss development related to
both known and unasserted claims.
The estimation of unpaid claim liabilities is subject to a high degree of uncertainty for a number of reasons. First,
unpaid claim liabilities for property and casualty exposures in general are impacted by changes in the legal environment,
jury awards, medical cost trends and general inflation. Moreover, for latent exposures in particular, developed case
law and claim history continues to evolve. There is significant coverage litigation related to these exposures, which
creates further uncertainty in the estimation of the liabilities. As a result, for these types of exposures, it is especially
unclear whether past claim experience will be representative of future claim experience. Ultimate values for such claims
cannot be estimated using reserving techniques that extrapolate losses to an ultimate basis using loss development
factors, and the uncertainties surrounding the estimation of unpaid claim liabilities are not likely to be resolved in the
near future. There can be no assurance that the reserves we establish will be adequate or will not be adversely affected
by the development of other latent exposures.
Our exposure to asbestos claims arises from the general liability and product liabilities policies written directly
or reinsured by our insurance and reinsurance companies. With the 2016 acquisition of the Dana Companies, we
also have direct personal injury asbestos claims recorded in other liabilities that arise from Dana Companies legacy
automotive manufacturing operations. While most of our asbestos exposures arise from asbestos mining and the
primary manufacturers of asbestos, we also receive claims from tertiary defendants which manufactured products that
included asbestos, as well as other defendants in the supply chain of these products. The industry continues to see
the Plaintiffs Bar attempt to transfer product-related exposure to a premises exposure under the primary general liability
policies. Unlike product liability, premises exposure generally does not contain features for aggregating multiple claims
into the reinsurance cover. Accordingly, excess liability reinsurance policies are less impacted. Although we may have
some exposure to premises claims, we generally believe that exposure will not be material as the companies and
portfolios we have acquired mainly wrote or reinsured excess policies which are not exposed to premises claims as
they generally remain with the primary insurance company.
Asbestos claims primarily fall into two general categories: impaired and unimpaired bodily injury claims. Property
damage claims represent only a small fraction of asbestos claims. Impaired claims primarily include individuals suffering
from mesothelioma or a cancer such as lung cancer. Unimpaired claims include asbestosis and those whose lung
regions contain pleural plaques.
Unlike traditional property and casualty insurers that either have large numbers of individual claims arising from
personal lines such as auto, or small numbers of high value claims as in medical malpractice insurance lines, our
primary exposures arise from A&E claims that do not follow a consistent pattern. For instance, we may encounter a
small insured with one large environmental claim due to significant groundwater contamination, while a Fortune
500 company may submit numerous claims for relatively small values. Moreover, there is no set pattern for the life of
an environmental or asbestos claim. Some of these claims may resolve within two years while others may remain
unresolved for nearly two decades. Therefore, our open and closed claims data do not follow any discernible pattern.
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The counterparties with whom we typically interact are generally insurers or large industrial concerns, and in
certain cases are individual claimants. The nature of our claims management may vary based on whether the claim
exposure to us is through reinsurance, insurance or a direct claimant. Claims do not follow any consistent pattern.
They arise from many insureds or locations and in a broad range of circumstances. An insured may present one large
claim or hundreds or thousands of small claims. Plaintiffs’ counsel frequently aggregate thousands of claims within
one lawsuit. The deductibles to which claims are subject vary from policy to policy and year to year. Often claims data
is only available to us on an aggregated basis. Accordingly, we have not found claim count information or average
reserve amounts to be reliable indicators of exposure for our reserve estimation process or for management of our
liabilities. We have found data accumulation and claims management more effective and meaningful at the reinsured
level rather than at the underlying claim level. As a result, we have designed our reserving methodologies to be
independent of claim count information. As the level of exposures to a reinsured can vary substantially, we focus on
the aggregate exposures and pursue commutations and policy buy-backs with the larger reinsureds.
We use industry benchmarking methodologies to estimate appropriate IBNR reserves for our A&E exposures.
These methods are based on comparisons of our loss experience on A&E exposures relative to industry loss experience
on A&E exposures. Estimates of IBNR are derived separately for each of our relevant subsidiaries and, for some
subsidiaries, separately for distinct portfolios of exposure. The discussion that follows describes, in greater detail, the
primary actuarial methodologies used by us to estimate IBNR for A&E exposures.
In addition to the specific considerations for each method described below, many general factors are considered
in the application of the methods and the interpretation of results for each portfolio of exposures. These factors include
the mix of product types (e.g., primary insurance versus reinsurance of primary versus reinsurance of reinsurance),
the average attachment point of coverages (e.g., first-dollar primary versus umbrella over primary versus high-excess),
payment and reporting lags related to the international domicile of our subsidiaries, payment and reporting pattern
acceleration due to large "wholesale" settlements (e.g., policy buy-backs and commutations) pursued by us, and lists
of individual risks remaining and general trends within the legal and tort environments.
1. Paid Survival Ratio Method. In this method, our expected annual average payment amount is multiplied by
an expected future number of payment years to get an indicated reserve. Our historical calendar year payments are
examined to determine an expected future annual average payment amount. This amount is multiplied by an expected
number of future payment years to estimate a reserve. Trends in calendar year payment activity are considered when
selecting an expected future annual average payment amount. Accepted industry benchmarks are used in determining
an expected number of future payment years. Each year, annual payments data is updated, trends in payments are
re-evaluated and changes to benchmark future payment years are reviewed. Advantages of this method are ease of
application and simplicity of assumptions. A potential disadvantage of the method is that results could be misleading
for portfolios of high excess exposures where significant payment activity has not yet begun.
2. Paid Market Share Method. In this method, our estimated market share is applied to the industry estimated
unpaid losses or estimate of industry ultimate losses. The ratio of our historical calendar year payments to industry
historical calendar year payments is examined to estimate our market share. This ratio is then applied to the estimate
of industry unpaid losses or estimate of industry ultimate losses. Each year, calendar year payment data is updated
(for both us and industry), estimates of industry unpaid losses are reviewed and the selection of our estimated market
share is revisited. This method has the advantage that trends in calendar year market share can be incorporated into
the selection of company share of remaining market payments. A potential disadvantage of this method is that it is
particularly sensitive to assumptions regarding the time-lag between industry payments and our payments.
3. Reserve-to-Paid Method. In this method, the ratio of estimated industry reserves to industry paid-to-date
losses is multiplied by our paid-to-date losses to estimate our reserves. Specific considerations in the application of
this method include the completeness of our paid-to-date loss information, the potential acceleration or deceleration
in our payments (relative to the industry) due to our claims handling practices, and the impact of large individual
settlements. Each year, paid-to-date loss information is updated (for both us and the industry) and updates to industry
estimated reserves are reviewed. This method has the advantage of relying purely on paid loss data and so is not
influenced by subjectivity of case reserve loss estimates. A potential disadvantage is that the application to our portfolios
that do not have complete inception-to-date paid loss history could produce misleading results. To address this potential
disadvantage, a variation of the method is also considered by multiplying the ratio of estimated industry reserves to
industry losses paid during a recent period of time (e.g., 5 years) times our paid losses during that period.
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4. IBNR:Case Ratio Method. In this method, the ratio of estimated industry IBNR reserves to industry case
reserves is multiplied by our case reserves to estimate our IBNR reserves. Specific considerations in the application
of this method include the presence of policies reserved at policy limits, changes in overall industry case reserve
adequacy and recent loss reporting history. Each year, our case reserves are updated, the estimate of industry reserves
is updated and the applicability of the industry IBNR:Case Ratio is reviewed. This method has the advantage that it
incorporates the most recent estimates of amounts needed to settle open cases included in current case reserves. A
potential disadvantage is that results could be misleading where our case reserve adequacy differs significantly from
overall industry case reserve adequacy. In these instances, the industry IBNR:Case Ratios were adjusted to reflect
our portfolio case reserve adequacy.
5. Ultimate-to-Incurred Method. In this method, the ratio of estimated industry ultimate losses to industry
incurred-to-date losses is applied to our incurred-to-date losses to estimate our IBNR reserves. Specific considerations
in the application of this method include the completeness of our incurred-to-date loss information, the potential
acceleration or deceleration in our incurred losses (relative to the industry) due to our claims handling practices and
the impact of large individual settlements. Each year incurred-to-date loss information is updated (for both us and the
industry) and updates to industry estimated ultimate losses are reviewed. This method has the advantage that it
incorporates both paid and case reserve information in projecting ultimate losses. A potential disadvantage is that
results could be misleading where cumulative paid loss data is incomplete or where our case reserve adequacy differs
significantly from overall industry case reserve adequacy. In these instances, the industry IBNR:Case Ratios were
adjusted to reflect our portfolio case reserve adequacy.
6. Decay Factor Method. In this method, a decay factor is directly applied to our payment data to estimate
future payments. The decay factors were selected based on a review of our own decays and industry decays. This
method is most useful where our data shows a decreasing pattern and is credible enough to be reliable.
Under the Paid Survival Ratio Method, the Paid Market Share Method and the Reserve-to-Paid Method, we first
determine the estimated total reserve and then deduct the reported outstanding case reserves to arrive at an estimated
IBNR reserve. The IBNR:Case Ratio Method first determines an estimated IBNR reserve which is then added to the
advised outstanding case reserves to arrive at an estimated total loss reserve. The Ultimate-to-Incurred Method first
determines an estimate of the ultimate losses to be paid and then deducts paid-to-date losses to arrive at an estimated
total loss reserve and then deducts outstanding case reserves to arrive at the estimated IBNR reserve. In the decay
factor method, an initial payment is selected and reserves are estimated directly from the projection of future payments.
As of December 31, 2016, we had 26 separate insurance and/or reinsurance subsidiaries in the non-life run-off
segment whose reserves are categorized into 298 reserve categories in total, including 29 distinct asbestos reserving
categories and 17 distinct environmental reserving categories.
To the extent that data availability allows, the six methodologies described above are applied for each of the
29 asbestos reserving categories and each of the 17 environmental reserving categories. As is common in actuarial
practice, no one methodology is exclusively or consistently relied upon when selecting a recorded reserve. Consistent
reliance on a single methodology to select a recorded reserve would be inappropriate due to the dynamic nature of
both the A&E liabilities in general, and our actual exposure portfolios in particular.
In selecting a recorded reserve, management considers the range of results produced by the methods, and the
strengths and weaknesses of the methods in relation to the data available and the specific characteristics of the portfolio
under consideration. Trends in both our data and industry data are also considered in the reserve selection process.
Recent trends or changes in the relevant tort and legal environments are also considered when assessing methodology
results and selecting an appropriate recorded reserve amount for each portfolio.
The following key assumptions were used to estimate A&E reserves at December 31, 2016:
•
•
$86.5 Billion Ultimate Industry Asbestos Losses - This level of industry-wide losses and its comparison to
industry-wide paid, incurred and outstanding case reserves is the base benchmarking assumption applied
to Paid Market Share, Reserve-to-Paid, IBNR:Case Ratio and the Ultimate-to-Incurred asbestos reserving
methodologies.
$40 Billion Ultimate Industry Environmental Losses - This level of industry-wide losses and its comparison
to industry-wide paid, incurred and outstanding case reserves is the base benchmarking assumption applied
to Paid Market Share, Reserve-to-Paid, IBNR:Case Ratio and the Ultimate-to-Incurred environmental
reserving methodologies.
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•
Loss Reporting Lag - Our subsidiaries assumed a mix of insurance and reinsurance exposures generally
through the London market. As the available industry benchmark loss information, as supplied by our
independent consulting actuaries, is compiled largely from U.S. direct insurance company experience, our
loss reporting is expected to lag relative to available industry benchmark information. This time-lag used by
each of our insurance subsidiaries varies from 1 to 5 years depending on the relative mix of domicile,
percentages of product mix of insurance, reinsurance and retrocessional reinsurance, primary insurance,
excess insurance, reinsurance of direct, and reinsurance of reinsurance within any given exposure category.
Exposure portfolios written from a non-U.S. domicile are assumed to have a greater time-lag than portfolios
written from a U.S. domicile. Portfolios with a larger proportion of reinsurance exposures are assumed to
have a greater time-lag than portfolios with a larger proportion of insurance exposures.
The following tables provide a summary of the impact of changes in industry ultimate losses, from the selected
$86.5 billion for asbestos and $40.0 billion for environmental, and changes in the time-lag, from the selected averages
of 1.2 years for asbestos and 0.8 years for environmental, for us behind industry development that it is assumed relates
to our insurance and reinsurance companies. Please note that the table below demonstrates sensitivity to changes to
key assumptions using methodologies selected for determining loss and ALAE, at December 31, 2016 and differs from
the Range of Outcomes table above, which demonstrates the ranges produced by the various methodologies.
Sensitivity to Industry Asbestos Ultimate Loss Assumption
Asbestos Loss Reserves
Asbestos — $91.5 billion
Asbestos — $86.5 billion (selected)
Asbestos — $81.5 billion
Sensitivity to Industry Environmental Ultimate Loss Assumption
Environmental — $42.5 billion
Environmental — $40.0 billion (selected)
Environmental — $37.5 billion
Sensitivity to Time-Lag Assumption*
Selected average of 1.2 years asbestos, 0.8 years environmental
Increase all portfolio lags by one year
Decrease all portfolio lags by one year
(in thousands of U.S. dollars)
907,400
$
789,043
670,687
Environmental Loss
Reserves
(in thousands of U.S. dollars)
210,702
$
162,078
113,455
Asbestos
Loss
Reserves
Environmental
Loss
Reserves
(in thousands of U.S. dollars)
$
789,043 $
828,496
749,592
162,078
175,045
149,112
* Using $86.5 billion/$40 billion Asbestos/Environmental Industry Ultimate Loss assumptions.
Due to the inability of our actuaries to review the data, methodologies and calculations supporting the industry
published estimates, we rely on our external actuarial consultants for their estimates of industry ultimate losses. For
the year ended December 31, 2016, our selected industry asbestos ultimate loss assumption increased to $86.5 billion,
from $80.0 billion as at December 31, 2015. Rising costs for medical treatment, increasing life expectancies, and
ongoing litigation contributed to the higher asbestos industry estimates from market studies, such as A.M. Best’s report.
There were no changes in the assumptions regarding industry environmental ultimate loss and loss reporting lag
described above.
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All Other (Non-latent) Reserves
For our "All Other" (non-latent) loss exposure, including workers compensation, our actuaries apply a range of
traditional loss development extrapolation techniques. These methods assume that cohorts, or groups, of losses from
similar exposures will increase over time in a predictable manner. Historical paid, incurred, and outstanding loss
development experience is examined for earlier years to make inferences about how later years’ losses will develop.
The application and consideration of multiple methods is consistent with the Actuarial Standards of Practice.
When determining which loss development extrapolation methods to apply to each company and each class of
exposure within each company, we consider the nature of the exposure for each specific subsidiary and reserving
segment and the available loss development data, as well as the limitations of that data. In cases where company-
specific loss development information is not available or reliable, we select methods that do not rely on historical data
(such as incremental or run-off methods) and consider industry loss development information published by industry
sources such as the Reinsurance Association of America. In determining which methods to apply, we also consider
cause of loss coding information when available.
A brief summary of the methods that are considered most frequently in analyzing non-latent exposures is provided
below. This summary discusses the strengths and weaknesses of each method, as well as the data requirements for
each method, all of which are considered when selecting which methods to apply for each reserve segment.
1. Cumulative Reported and Paid Loss Development Methods. The Cumulative Reported (Case Incurred)
Loss Development method relies on the assumption that, at any given state of maturity, ultimate losses can be predicted
by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor. The
validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the
consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective;
they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical "age-to-age" loss
development factors (or LDFs) are calculated to measure the relative development of an accident year from one
maturity point to the next. Age-to-age LDFs are then selected based on these historical factors. The selected age-to-
age LDFs are used to project the ultimate losses. The Cumulative Paid Loss Development Method is mechanically
identical to the Cumulative Reported Loss Development Method described above, but the paid method does not rely
on case reserves or claim reporting patterns in making projections. The validity of the results from using a cumulative
loss development approach can be affected by many conditions, such as internal claim department processing changes,
a shift between single and multiple payments per claim, legal changes, or variations in a company’s mix of business
from year to year. Typically, the most appropriate circumstances in which to apply a cumulative loss development
method are those in which the exposure is mature, full loss development data is available, and the historical observed
loss development is relatively stable.
2. Incremental Reported and Paid Loss Development Methods. Incremental incurred and paid analyses are
performed in cases where cumulative data is not available. The concept of the incremental loss development methods
is similar to the cumulative loss development methods described above, in that the pattern of historical paid or incurred
losses is used to project the remaining future development. The difference between the cumulative and incremental
methods is that the incremental methods rely on only incremental incurred or paid loss data from a given point in time
forward, and do not require full loss history. These incremental loss development methods are therefore helpful when
data limitations apply. While this versatility in the incremental methods is a strength, the methods are sensitive to
fluctuations in loss development, so care must be taken in applying them.
3. IBNR-to-Case Outstanding Method. This method requires the estimation of consistent cumulative paid and
reported (case) incurred loss development patterns and age-to-ultimate LDFs, either from data that is specific to the
segment being analyzed or from applicable benchmark or industry data. These patterns imply a specific expected
relationship between IBNR, including both development on known claims (bulk reserve) and losses on true late reported
claims, and reported case incurred losses. The IBNR-to-Case Outstanding method can be used in a variety of situations.
It is appropriate for loss development experience that is mature and possesses a very high ratio of paid losses to
reported case incurred losses. The method also permits an evaluation of the difference in maturity between the business
being reviewed and benchmark development patterns. Depending on the relationship of paid to incurred losses, an
estimate of the relative maturity of the business being reviewed can be made and a subsequent estimate of ultimate
losses driven by the implied IBNR to case outstanding ratio at the appropriate maturity can be made. This method is
also useful where loss development data is incomplete and only the case outstanding amounts are determined to be
reliable. This method is less reliable in situations where relative case reserve adequacy has been changing over time.
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4. Bornhuetter-Ferguson Expected Loss Projection Reported and Paid Methods. The Bornhuetter-Ferguson
Expected Loss Projection Method based on reported loss data relies on the assumption that remaining unreported
losses are a function of the total expected losses rather than a function of currently reported losses. The expected
losses used in this analysis are based on initial selected ultimate loss ratios by year. The expected losses are multiplied
by the unreported percentage to produce expected unreported losses. The unreported percentage is calculated as
one minus the reciprocal of the selected cumulative incurred LDFs. Finally, the expected unreported losses are added
to the current reported losses to produce ultimate losses. The calculations underlying the Bornhuetter-Ferguson
Expected Loss Projection Method based on paid loss data are similar to the Bornhuetter-Ferguson calculations based
on reported losses, with the exception that paid losses and unpaid percentages replace reported losses and unreported
percentages. The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature years.
For these immature years, the amounts reported or paid may be small and unstable and therefore not predictive of
future development. Therefore, future development is assumed to follow an expected pattern that is supported by more
stable historical data or by emerging trends. This method is also useful when changing reporting patterns or payment
patterns distort historical development of losses. Similar to the loss development methods, the Bornhuetter-Ferguson
method may be applied to loss and ALAE on a combined or separate basis. The Bornhuetter-Ferguson method may
not be appropriate in circumstances where the liabilities being analyzed are very mature, as it is not sensitive to the
remaining amount of case reserves outstanding, or the actual development to date.
5. Reserve Run-off Method. This method first projects the future values of case reserves for all underwriting
years to future ages of development. This is done by selecting a run-off pattern of case reserves. The selected case
run-off ratios are chosen based on the observed run-off ratios at each age of development. Once the ratios have been
selected, they are used to project the future values of case reserves. A paid on reserve factor is selected in a similar
way. The ratios of the observed amounts paid during each development period to the respective case reserves at the
beginning of the periods are used to estimate how much will be paid on the case reserves during each development
period. These paid on reserve factors are then applied to the case reserve amounts that were projected during the
first phase of this method. A summation of the resulting paid amounts yields an estimate of the liability. The Reserve
Run-off Method works well when the historical run-off patterns are reasonably stable and when case reserves ultimately
show a decreasing trend. Another strength of this method is that it only requires case reserves at a given point in time
and incremental paid and incurred losses after that point, meaning that it can be applied in cases where full loss history
is not available. In cases of volatile data where there is a persistent increasing trend in case reserves, this method will
fail to produce a reasonable estimate. In several cases, reliance upon this method was limited due to this weakness.
Our actuaries select the appropriate loss development extrapolation methods to apply to each company and
each class of exposure, and then apply these methods to calculate an estimate of ultimate losses. Our management,
which is responsible for the final estimate of ultimate losses, reviews the calculations of our actuaries, considers
whether the appropriate method was applied, and adjusts the estimate of ultimate losses as it deems necessary.
Historically, we have not deviated from the recommendations of our actuaries. Paid-to-date losses are then deducted
from the estimate of ultimate losses to arrive at an estimated total loss reserve, and reported outstanding case reserves
are then deducted from estimated total loss reserves to calculate the estimated IBNR reserve.
Quarterly Reserve Reviews
In addition to an in-depth annual review, we also perform quarterly reserve reviews. This is done by examining
quarterly paid and incurred loss development to determine whether it is consistent with reserves established during
the preceding annual reserve review and with expected development. Loss development is reviewed separately for
each major exposure type (e.g., asbestos, environmental, etc.), for each of our relevant subsidiaries, and for large
"wholesale" commutation settlements versus "routine" paid and advised losses. This process is undertaken to determine
whether loss development experience during a quarter warrants any change to held reserves.
Loss development is examined separately by exposure type because different exposures develop differently
over time. For example, the expected reporting and payout of losses for a given amount of asbestos reserves can be
expected to take place over a different time frame and in a different quarterly pattern from the same amount of
environmental reserves.
In addition, loss development is examined separately for each of our relevant subsidiaries. Companies can differ
in their exposure profile due to the mix of insurance versus reinsurance, the mix of primary versus excess insurance,
the underwriting years of participation and other criteria. These differing profiles lead to different expectations for
quarterly and annual loss development by company.
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Our quarterly paid and incurred loss development is often driven by large, wholesale settlements - such as
commutations and policy buy-backs - which settle many individual claims in a single transaction. This allows for
monitoring of the potential profitability of large settlements, which, in turn, can provide information about the adequacy
of reserves on remaining exposures that have not yet been settled. For example, if it were found that large settlements
were consistently leading to large negative, or favorable, incurred losses upon settlement, it might be an indication
that reserves on remaining exposures are redundant. Conversely, if it were found that large settlements were
consistently leading to large positive, or adverse, incurred losses upon settlement, it might be an indication—particularly
if the size of the losses were increasing—that certain loss reserves on remaining exposures are deficient. Moreover,
removing the loss development resulting from large settlements allows for a review of loss development related only
to those contracts that remain exposed to losses. Were this not done, it is possible that savings on large wholesale
settlements could mask significant underlying development on remaining exposures.
Once the data has been analyzed as described above, an in-depth review is performed on classes of exposure
with significant loss development. Discussions are held with appropriate personnel, including individual company
managers, claims handlers and attorneys, to better understand the causes. If it were determined that development
differs significantly from expectations, reserves would be adjusted.
As described above, our management regularly reviews and updates reserve estimates using the most current
information available and employing various actuarial methods. Adjustments resulting from changes in our estimates
are recorded in the period when such adjustments are determined. The ultimate liability for losses and LAE is likely
to differ from the original estimate due to a number of factors, primarily consisting of the overall claims activity occurring
during any period, including the completion of commutations of assumed liabilities and ceded reinsurance receivables,
policy buy-backs and general incurred claims activity.
Losses and Loss Adjustment Expenses - Atrium and StarStone
The reserve for losses and loss expenses includes reserves for unpaid reported losses and for IBNR reserves.
The reserves for unpaid reported losses and loss expenses are established by management based on reports from
brokers, ceding companies and insureds and represent the estimated ultimate cost of events or conditions that have
been reported to, or specifically identified by us. The reserve for incurred but not reported losses and loss expenses
is established by management based on actuarially determined estimates of ultimate losses and loss expenses.
Inherent in the estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and
other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may
differ materially from the amounts recorded in the consolidated financial statements. These estimates are reviewed
regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary.
Such adjustments, if any, will be recorded in earnings in the period in which they become known. Prior period
development arises from changes to loss estimates recognized in the current year that relate to loss reserves
established in previous calendar years.
The following table provides a breakdown of the liability for losses and LAE by type of exposure for the years
ended December 31, 2016 and 2015 for the Atrium segment:
OLR
2016
IBNR
Total
OLR
(in thousands of U.S. dollars)
2015
IBNR
Total
General casualty
$
12,449 $
24,040 $
36,489 $
11,170 $
18,413 $
29,583
Workers' compensation/
personal accident
Marine, aviation and
transit
Other
Total
ULAE
Total
5,660
10,931
16,591
6,021
9,926
15,947
21,236
32,299
41,010
62,375
62,246
94,674
20,761
37,187
34,222
61,301
54,983
98,488
$
71,644 $
138,356 $
210,000 $
75,139 $
123,862 $
199,001
2,122
$
212,122
2,016
$
201,017
90
The following table provides a breakdown of the liability for losses and LAE by type of exposure for the years
ended December 31, 2016 and 2015 for the StarStone segment:
OLR
2016
IBNR
Total
OLR
(in thousands of U.S. dollars)
2015
IBNR
Total
General casualty
$
91,586 $
190,489 $
282,075 $
84,614 $
162,679
247,293
Workers' compensation/
personal accident
Marine, aviation and
transit
Other
Total
ULAE
Total
54,395
89,939
144,334
32,636
50,950
83,586
155,857
199,861
501,699 $
96,067
164,363
540,858 $ 1,042,557 $
251,924
364,224
$
161,439
177,749
84,923
165,259
246,362
343,008
456,438 $
463,811 $
920,249
16,825
$ 1,059,382
13,429
$
933,678
Quarterly Reserve Reviews
The reserve for losses and loss expenses is reviewed on a quarterly basis. Each quarter, paid and incurred loss
development is reviewed to determine whether it is consistent with expected development. Loss development is
examined separately by class of business, and large individual losses or loss events are examined separately from
regular attritional development. Discussions are held with appropriate personnel including underwriters, claims
adjusters, actuaries, accountants and attorneys to fully understand quarterly loss development and implications for
the quarter-end reserve balances. Based on analysis of the loss development data and the associated discussions,
management determines whether any adjustment is necessary to quarter-end reserve balances.
Net Incurred Losses and LAE
Non-life Run-off, Atrium and StarStone
The change in our estimated total loss reserves for both latent and all other exposures compared to that of the
previous period, less net losses paid during the period, is recorded as net incurred losses and LAE on our statement
of earnings for the period. Our estimated total loss reserve at December 31, 2016 was determined by estimating the
ultimate losses and deducting paid-to-date losses. The estimated ultimate losses, for both latent and all other (non-
latent) liabilities, were determined by the amount of advised case reserves and the application of the actuarial
methodologies described above to estimate IBNR reserves. Future changes in our estimates of ultimate losses are
likely to have a significant impact on future operating results. Our operating objective is to commute our loss exposures
and manage non-commuted loss development in a disciplined manner such that future incurred loss development will
be less than expected. A combination of future commutations and better-than-expected incurred loss development of
non-commuted exposures could improve the trend of loss development and, after the application of actuarial
methodologies to the improved trend, reduce the December 31, 2016 estimates of ultimate losses with a positive
impact on our future results. However, it is not possible to project future commutation settlements or whether incurred
loss development will be better than expected, and it is possible that ultimate loss reserves could increase based on
the factors discussed herein.
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Policy Benefits for Life and Annuity Contracts
Policy benefits for life and annuity contracts as at December 31, 2016 and 2015 were as follows:
Life
Annuities
Fair value adjustments
December 31,
2016
2015
(in thousands of U.S. dollars)
$
112,095 $
126,321
—
—
112,095
126,321
—
—
$
112,095 $
126,321
Our policy benefits for life and annuity contracts (or policy benefits) are estimated using standard actuarial
techniques and cash flow models. We establish and maintain our policy benefits at a level that we estimate will, when
taken together with future premium payments and investment income expected to be earned on associated premiums,
be sufficient to support future cash flow benefit obligations and third-party servicing obligations as they become payable.
We review our policy benefits regularly and perform loss recognition testing based upon cash flow projections.
Since the development of the policy benefits is based upon cash flow projection models, we must make estimates
and assumptions based on experience and industry mortality tables, longevity and morbidity rates, lapse rates,
expenses and investment experience, including a provision for adverse deviation. The assumptions used to determine
policy benefits are determined at the inception of the contracts, reviewed and adjusted at the point of acquisition as
required, and are locked-in throughout the life of the contract unless a premium deficiency develops. The assumptions
are reviewed no less than annually and are unlocked if they would result in a material adverse reserve change. We
establish these estimates based upon transaction-specific historical experience, information provided by the ceding
company for the assumed business and industry experience. Actual results could differ materially from these estimates.
As the experience on the contracts emerges, the assumptions are reviewed by management. We determine whether
actual and anticipated experience indicates that existing policy benefits, together with the present value of future gross
premiums, are sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover
unamortized acquisition costs. If such a review indicates that policy benefits should be greater than those currently
held, then the locked-in assumptions are revised and a charge for policy benefits is recognized at that time.
During the years ended December 31, 2016, 2015 and 2014, there were no adjustments to the locked-in
assumptions for these policy benefits.
Reinsurance Balances Recoverable
Our acquired insurance and reinsurance subsidiaries in all four of our business segments, prior to acquisition
by us, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance they assumed.
Loss reserves represent total gross losses, and reinsurance receivables represent anticipated recoveries of a portion
of those unpaid losses as well as amounts receivable from reinsurers with respect to claims that have already been
paid. While reinsurance arrangements are designed to limit losses and to permit recovery of a portion of direct unpaid
losses, reinsurance does not relieve us of our liabilities to our insureds or reinsureds. Therefore, we evaluate and
monitor concentration of credit risk among our reinsurers, including companies that are insolvent, in run-off or facing
financial difficulties. Provisions are made for amounts considered potentially uncollectible.
In addition to the acquired retrocessional agreements, on an annual basis, our active underwriting subsidiaries
purchase tailored outwards reinsurance programs designed to manage their risk profiles. The majority of the total third-
party reinsurance cover for our active underwriting subsidiaries is with Lloyd’s Syndicates or other reinsurers rated A-
or better.
To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable is first allocated
to applicable reinsurers. As part of this process, ceded IBNR is allocated by reinsurer. We use a detailed analysis to
estimate uncollectible reinsurance. The primary components of the analysis are reinsurance recoverable balances by
reinsurer and bad debt provisions applied to these balances to determine the portion of a reinsurer’s balance deemed
to be uncollectible. These provisions require considerable judgment and are determined using the current rating, or
rating equivalent, of each reinsurer (in order to determine its ability to settle the reinsurance balances) as well as other
key considerations and assumptions, such as claims and coverage issues.
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Premium Revenue Recognition
Non-life Run-off, Atrium and StarStone
Our premiums written are earned on a pro-rata basis over the coverage period. Our reinsurance premiums are
recorded at the inception of the policy, unless policy language stipulates otherwise, and are estimated based upon
information in underlying contracts and information provided by clients and/or brokers. A change in reinsurance premium
estimates is made when additional information regarding changes in underlying exposures is obtained. Such changes
in estimates are expected and may result in significant adjustments in future periods. We record any adjustments as
premiums written in the period they are determined.
With respect to retrospectively rated contracts (where additional premium would be due should losses exceed
pre-determined contractual thresholds), any additional premiums are based upon contractual terms, and management
judgment is involved in estimating the amount of losses that we expect to be ceded. We would recognize additional
premiums at the time loss thresholds specified in the contract are exceeded and are earned over the coverage period,
or are earned immediately if the period of risk coverage has passed. Changes in estimates of losses recorded on
contracts with additional premium features would result in changes in additional premiums recognized.
Life and Annuities
We generally recognize premiums from term life insurance, credit life and disability insurance and assumed life
reinsurance as revenue when due from policyholders. Term life insurance, assumed life reinsurance and credit life
and disability insurance policies include those contracts with fixed and guaranteed premiums and benefits. We match
benefits and expenses with revenue to result in the recognition of profit over the life of the contracts.
Investments
Valuation of Investments
Our non-life run-off, active underwriting and life and annuity businesses invest in trading portfolios of fixed maturity
and short-term investments and equities, and an available-for-sale portfolio of fixed maturity investments. We record
both the trading and available-for-sale portfolios at fair value on our balance sheet. For our trading portfolios, the
unrealized gain or loss associated with the difference between the fair value and the amortized cost of the investments
is recorded in net earnings. For our available-for-sale portfolios, the unrealized gain or loss (other than credit losses)
is excluded from net earnings and reported as a separate component of accumulated other comprehensive income.
Our other investments comprise investments in various private equities and private equity funds, fixed income
funds, fixed income and multi-strategy hedge funds, equity funds, real estate debt funds and CLO equity funds, as
well as direct investments in CLO equities. All of these other investments are recorded at fair value.
We measure fair value in accordance with ASC 820, Fair Value Measurements. The guidance dictates a
framework for measuring fair value and a fair value hierarchy based on the quality of inputs used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of
the fair value hierarchy are described below:
•
•
•
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities
that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1
instruments.
Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices
for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest
rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by
observable market data
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted
third party pricing sources or management's assumptions and internal valuation models may be used to
determine the fair values.
When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the
fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement
in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 and 2) and
unobservable (Level 3).
93
The use of valuation techniques may require a significant amount of judgment. During periods of market
disruption, including periods of rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our
securities if trading becomes less frequent or market data becomes less observable.
Fixed Maturity Investments
Fixed maturity investments are subject to fluctuations in fair value due to changes in interest rates, changes in
issuer-specific circumstances such as credit rating and changes in industry-specific circumstances such as movements
in credit spreads based on the market’s perception of industry risks. As a result of these potential fluctuations, it is
possible to have significant unrealized gains or losses on a security. At maturity, absent any credit loss, fixed maturity
investments’ amortized cost will equal their fair value and no realized gain or loss will be recognized in income. If, due
to an unforeseen change in loss payment patterns, we need to sell any available-for-sale investments before maturity,
we could realize significant gains or losses in any period, which could have a meaningful effect on reported net income
for such period.
We perform regular reviews of our available-for-sale fixed maturities portfolios and utilize a process that considers
numerous indicators in order to identify investments that are showing signs of potential other-than-temporary impairment
losses. These indicators include the length of time and extent of the unrealized loss, any specific adverse conditions,
historic and implied volatility of the security, failure of the issuer of the security to make scheduled interest payments,
significant rating changes and recoveries or additional declines in fair value subsequent to the balance sheet date.
The consideration of these indicators and the estimation of credit losses involve significant management judgment.
Any other-than-temporary impairment loss, or OTTI, related to a credit loss would be recognized in earnings,
and the amount of the OTTI related to other factors (e.g. interest rates, market conditions, etc.) is recorded as a
component of other comprehensive income. If no credit loss exists but either we have the intent to sell the fixed maturity
investment or it is more likely than not that we will be required to sell the fixed maturity investment before its anticipated
recovery, then the entire unrealized loss is recognized in earnings.
For the years ended December 31, 2016, 2015 and 2014, we did not recognize any other-than-temporary
impairment charges through earnings.
The fair values for all securities in the fixed maturity investments portfolio are independently provided by the
investment accounting service providers, investment managers and investment custodians, each of which utilize
internationally recognized independent pricing services. We record the unadjusted price provided by the investment
accounting service providers, investment managers or investment custodians and validate this price through a process
that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis
(e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies
used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the
price to our knowledge of the current investment market. Our internal price validation procedures and review of fair
value methodology documentation provided by independent pricing services have not historically resulted in adjustment
in the prices obtained from the pricing service.
The independent pricing services used by the investment accounting service providers, investment managers
and investment custodians obtain actual transaction prices for securities that have quoted prices in active markets.
Where we utilize single unadjusted broker-dealer quotes, they are generally provided by market makers or broker-
dealers who are recognized as market participants in the markets in which they are providing the quotes. For determining
the fair value of securities that are not actively traded, in general, pricing services use "matrix pricing" in which the
independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark
yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available
from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using
observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The
Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and
asset-backed securities.
Where pricing is unavailable from pricing services, such as in periods of low trading activity or when transactions
are not orderly, we obtain non-binding quotes from broker-dealers. Where significant inputs are unable to be
corroborated with market observable information, we classify the securities as Level 3.
94
Equities
Our investments in equities are predominantly traded on the major exchanges and are primarily managed by
our external advisors. We use an internationally recognized pricing service to estimate the fair value of our equities.
Our equities are widely diversified and there is no significant concentration in any specific industry.
We have categorized all of our investments in equities other than preferred stock as Level 1 investments because
the fair values of these investments are based on quoted prices in active markets for identical assets or liabilities. The
fair value estimates of our investments in preferred stock are based on observable market data and, as a result, have
been categorized as Level 2.
Other Investments, at fair value
We have ongoing due diligence processes with respect to the other investments carried at fair value in which
we invest and their managers. These processes are designed to assist us in assessing the quality of information
provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether
further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, we
obtain the audited financial statements for funds annually, and regularly review and discuss the fund performance with
the fund managers to corroborate the reasonableness of the reported net asset values ("NAV").
The use of NAV as an estimate of the fair value for investments in certain entities that calculate NAV is a permitted
practical expedient. Due to the time lag in the NAV reported by certain fund managers we adjust the valuation for
capital calls and distributions. Other investments measured at fair value using NAV as a practical expedient have not
been classified in the fair value hierarchy. Other investments for which we do not use NAV as a practical expedient
have been valued using prices from independent pricing services, investment managers and broker-dealers.
For our investments in private equities and private equity funds, we measure fair value by obtaining the most
recently available NAV from the external fund manager or third-party administrator. The fair values of these investments
are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value
hierarchy.
Our investments in fixed income funds and equity funds are valued based on a combination of prices from
independent pricing services, external fund managers or third-party administrators. For the publicly available prices
we have classified the investments as Level 2. For the non-publicly available prices we are using NAV as a practical
expedient and therefore these have not been categorized within the fair value hierarchy.
For our investments in fixed income and multi-strategy hedge funds, we measure fair value by obtaining the
most recently available NAV as advised by the external fund manager or third-party administrator. The fair values of
these investments are measured using the NAV as a practical expedient and therefore have not been categorized
within the fair value hierarchy. In December 2016, we sold our multi-strategy hedge fund investment.
Our investment in the real estate debt fund was valued based on the most recently available NAV from the
external fund manager. The fair value of this investment was measured using the NAV practical expedient and therefore
has not been categorized within the fair value hierarchy. As at March 31, 2016, this fund was fully redeemed.
We measure the fair value of our direct investment in CLO equities based on valuations provided by our external
CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment
is valued based on valuations provided by the broker or lead underwriter of the investment (the "broker"). Our CLO
equity investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the
limited number of relevant trades in secondary markets.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the
significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create
the most sensitivity. A significant increase or decrease in either of these significant inputs in isolation would result in
lower or higher fair value estimates for direct investments in CLO equities and, in general, a change in default rate
assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads
and estimated maturity dates are less subjective inputs because they are based on the historical average of actual
spreads and the weighted-average life of the current underlying portfolios, respectively. A significant increase or
decrease in either of these significant inputs in isolation would result in higher or lower fair value estimates for direct
investments in CLO equities. In general, these inputs have no significant interrelationship with each other or with default
and loss severity rates.
95
On a quarterly basis, we receive the valuation from the external CLO manager and brokers and then review the
underlying cash flows and key assumptions used by them. We review and update the significant unobservable inputs
based on information obtained from secondary markets. These inputs are our responsibility and we assess the
reasonableness of the inputs (and if necessary, update the inputs) through communicating with industry participants,
monitoring of the transactions in which we participate (for example, to evaluate default and loss severity rate trends),
and reviewing market conditions, historical results, and emerging trends that may impact future cash flows.
If valuations from the external CLO equity manager or brokers are not available, we use an income approach
based on certain observable and unobservable inputs to value these investments. An income approach is also used
to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income
approach is followed, the valuation is based on available trade information, such as expected cash flows and market
assumptions on default and loss severity rates. Other inputs used in the valuation process include asset spreads, loan
prepayment speeds, collateral spreads and estimated maturity dates.
For our investments in CLO equity funds, we measure fair value by obtaining the most recently available NAV
as advised by the external fund manager or third party administrator. The fair values of these investments are measured
using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
For our investments in call options on publicly traded equities, we measure fair value by obtaining the latest
option price as of our reporting date. These are classified as Level 2. As at December 31, 2016, the call option had
been exercised.
Certain funds are subject to gates or side-pockets, where redemptions are subject to the sale of underlying
investments. A gate is the ability to deny or delay a redemption request, whereas a side-pocket is a designated account
for which the investor loses its redemption rights. As at December 31, 2016, we had $0.5 million of fixed income hedge
funds subject to gates or side-pockets.
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability
of valuation inputs may result in a reclassification for certain financial assets and liabilities. Reclassifications impacting
Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the end of the quarter
in which the reclassifications occur.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. We perform
an initial valuation of our goodwill assets and assess goodwill for impairment on an annual basis. If, as a result of the
assessment, we determine the value of our goodwill asset is impaired, goodwill is written down in the period in which
the determination is made.
Intangible Assets
Intangible assets represent the fair value adjustments related to unpaid losses and loss expenses, unearned
premium, reinsurance balances recoverable and policy benefits for life and annuity contracts along with the fair values
of Lloyd’s syndicate capacity, customer relationships, management contract and brand arising from the acquisition of
Atrium and the syndicate capacity, U.S. insurance licenses, technology and brand arising from the acquisition of
StarStone. Definite-lived intangible assets are amortized over their estimated useful lives. We recognize the
amortization of all intangible assets in our consolidated statement of earnings. Indefinite-lived intangible assets are
not subject to amortization. The carrying values of intangible assets are reviewed for indicators of impairment on at
least an annual basis or sooner whenever events or changes in circumstances indicate that the assets may be impaired.
Impairment is recognized if the carrying values of the intangible assets are not recoverable from their undiscounted
cash flows and is measured as the difference between the carrying value and the fair value.
Redeemable Noncontrolling Interest
In connection with the acquisitions of Arden, Atrium and StarStone, certain subsidiaries have issued shares to
a noncontrolling interest. These shares provide certain redemption rights to the holder, which may be settled in Enstar’s
own shares or cash, at our option. We classify redeemable noncontrolling interests with redemption features that are
not solely within our control within temporary equity in our consolidated balance sheets and carry them at the redemption
value, which is fair value. We recognize changes in the fair value that exceed the carrying value of redeemable
noncontrolling interest through retained earnings as if the balance sheet date were also the redemption date.
96
Deferred Charges
Retroactive reinsurance policies provide indemnification of losses and LAE with respect to past loss events. At
the inception of a contract, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses
payable over the premiums received. Deferred charges, recorded in other assets, are amortized over the estimated
claim payment period of the related contract with the periodic amortization reflected in earnings as a component of
losses and LAE. Deferred charges amortization is adjusted periodically to reflect new estimates of the amount and
timing of remaining loss payments. Changes in the estimated amount and the timing of payments of unpaid losses
may have an effect on the unamortized deferred charges and the amount of periodic amortization.
97
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following risk management discussion and the estimated amounts generated from sensitivity analysis
presented are forward-looking statements of market risk assuming certain market conditions occur. Future results may
differ materially from these estimated results due to, among other things, actual developments in the global financial
markets, changes in the composition of our investment portfolio, or changes in our business strategies. The results of
analysis we use to assess and mitigate risk are not projections of future events or losses. See "Cautionary Statement
Regarding Forward-Looking Statements" for additional information regarding our forward-looking statements.
We are principally exposed to four types of market risk: interest rate risk; credit risk; equity price risk and foreign
currency risk. Our policies to address these risks in 2016 were not materially different than those used in 2015 other
than as described herein, and, based on our current knowledge and expectations, we do not currently anticipate
significant changes in our market risk exposures or in how we will manage those exposures in future reporting periods.
Interest Rate Risk
Interest rate risk is the price sensitivity of a security to changes in interest rates. Our investment portfolio includes
fixed maturity and short-term investments, whose fair values will fluctuate with changes in interest rates. We attempt
to maintain adequate liquidity in our fixed maturity investments portfolio with a strategy designed to emphasize the
preservation of our invested assets and provide sufficient liquidity for the prompt payment of claims and contract
liabilities, as well as for settlement of commutation payments. We also monitor the duration and structure of our
investment portfolio.
The following table summarizes the aggregate hypothetical change in fair value from an immediate parallel shift
in the treasury yield curve, assuming credit spreads remain constant, in our fixed maturity and short-term investments
portfolio classified as trading and available-for-sale as at December 31, 2016 and 2015 :
As at December 31, 2016
Total Market Value
Market Value Change from Base
Change in Unrealized Value
As at December 31, 2015
Total Market Value
Market Value Change from Base
Change in Unrealized Value
-100
5,040
3.3%
161
-100
5,279
3.2%
163
$
$
$
$
$
$
$
$
-50
Interest Rate Shift in Basis Points
—
(in millions of U.S. dollars)
+50
4,969
1.8%
90
-50
5,213
1.9%
97
$
$
$
$
4,879 $
—
— $
4,830
(1.0)%
(49)
—
5,116 $
—
— $
+50
5,086
(0.6)%
(30)
$
$
$
$
+100
4,762
(2.4)%
(117)
+100
5,027
(1.7)%
(89)
Actual shifts in interest rates may not change by the same magnitude across the maturity spectrum or on an
individual security and, as a result, the impact on the fair value of our fixed maturity securities and short-term investments
portfolio may be materially different from the resulting change in realized value indicated in the table above.
Credit Risk
Credit risk relates to the uncertainty of a counterparty’s ability to make timely payments in accordance with
contractual terms of the instrument or contract. We are exposed to direct credit risk primarily within our portfolios of
fixed maturity and short-term investments, and through customers, brokers and reinsurers in the form of premiums
receivable and reinsurance recoverables, respectively, as discussed below.
Fixed Maturity and Short-Term Investments
As a holder of fixed maturity and short-term investments and mutual funds, we also have exposure to credit risk
as a result of investment ratings downgrades or issuer defaults. In an effort to mitigate this risk, our investment portfolio
consists primarily of investment grade-rated, liquid, fixed maturity investments of short-to-medium duration and mutual
funds. A table of credit ratings for our fixed maturity and short-term investments is in "Note 6 - Investments" in the
notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K. At
December 31, 2016, 52.2% of our fixed maturity and short-term investment portfolio was rated AA or higher by a major
rating agency (December 31, 2015: 49.6%) with 4.6% rated lower than BBB- (December 31, 2015: 5.0%). The portfolio
as a whole had an average credit quality rating of A+ as at December 31, 2016 (December 31, 2015: A+). In addition,
we manage our portfolio pursuant to guidelines that follow what we believe are prudent standards of diversification.
98
The guidelines limit the allowable holdings of a single issue and issuers and, as a result, we do not believe we have
significant concentrations of credit risk.
Reinsurance
We have exposure to credit risk as it relates to our reinsurance balances recoverable. Our insurance subsidiaries
remain liable to the extent that retrocessionaires do not meet their contractual obligations and, therefore, we evaluate
and monitor concentration of credit risk among our reinsurers. A discussion of our reinsurance balances recoverable
is in "Note 10 - Reinsurance Balances Recoverable" in the notes to our consolidated financial statements included
within Item 8 of this Annual Report.
As at December 31, 2016, our reinsurance balances recoverable included $242.1 million from a related party
and equity method investee, KaylaRe Ltd., amongst other balances, as discussed in "Note 21 - Related Party
Transactions" in the notes to our consolidated financial statements included within Item 8 of this Annual Report.
Funds Held
Under funds held arrangements, the reinsured company has retained funds that would otherwise have been
remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable
are deducted. We are subject to credit risk if the reinsured company is unable to honor the value of the funds held
balances, such as in the event of insolvency. However, we generally have the contractual ability to offset any shortfall
in the payment of the funds held balances with amounts owed by us to the reinsured for losses payable and other
amounts contractually due. Our funds held are shown under two categories on the consolidated balance sheets, where
funds held upon which we receive the underlying portfolio economics are shown as "Funds held - directly managed",
and funds held where we receive a fixed crediting rate are shown as "Funds held by reinsured companies". Both types
of funds held are subject to credit risk. We routinely monitor the creditworthiness of reinsured companies with whom
we have funds held arrangements. We have a significant concentration of $1.0 billion with one reinsured company,
which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's.
Equity Price Risk
Our portfolio of equity investments, including the equity funds included in other investments (collectively, "equities
at risk"), has exposure to equity price risk, which is the risk of potential loss in fair value resulting from adverse changes
in stock prices. Our global equity portfolio is correlated with a blend of the S&P 500 and MSCI World indices and
changes in this blend of indices would approximate the impact on our portfolio. The fair value of our equities at risk at
December 31, 2016 was $318.6 million (December 31, 2015: $258.9 million). At December 31, 2016, the impact of a
10% decline in the overall market prices of our equities at risk would be $31.9 million (December 31, 2015: $25.9
million), on a pre-tax basis.
Foreign Currency Risk
Our foreign currency policy is to broadly manage, where possible, our foreign currency risk by seeking to match
our liabilities under insurance and reinsurance policies that are payable in foreign currencies with assets that are
denominated in such currencies, subject to regulatory constraints. In addition, we may selectively utilize foreign currency
forward contracts to mitigate foreign currency risk. To the extent our foreign currency exposure is not matched or
hedged, we may experience foreign exchange losses or gains, which would be reflected in our results of operations
and financial condition.
Through our subsidiaries located in various jurisdictions, we conduct our insurance and reinsurance operations
in a variety of non-U.S. currencies. The functional currency for the majority of our subsidiaries is the U.S. dollar.
Fluctuations in foreign currency exchange rates relative to a subsidiary's functional currency will have a direct impact
on the valuation of our assets and liabilities denominated in other currencies. All changes in foreign exchange rates,
with the exception of non-U.S. dollar denominated investments classified as available-for-sale, are recognized in foreign
exchange gains (losses) in our consolidated statements of earnings. Changes in foreign exchange rates relating to
non-U.S. dollar denominated investments classified as available-for-sale are recorded in unrealized gains (losses) on
investments, which is a component of accumulated other comprehensive income (loss) in shareholders’ equity.
We have exposure to foreign currency risk through our ownership of European, British, Canadian, and Australian
subsidiaries whose functional currencies are the Euro, British pound, Canadian dollar, and Australian dollar,
respectively. The foreign exchange gain or loss resulting from the translation of their financial statements from functional
currency into U.S. dollars is recorded in the currency translation adjustment account, which is a component of
accumulated other comprehensive income (loss) in shareholders’ equity. During the year ended December 31, 2016,
99
we borrowed Euros under the EGL Revolving Credit Facility to hedge the foreign currency exposure on our net
investment in certain of our subsidiaries whose functional currency is denominated in Euros. During the year ended
December 31, 2016, we entered into forward exchange contracts to hedge the foreign currency exposure on our net
investment in certain of our subsidiaries whose functional currencies are denominated in Canadian and Australian
dollars. The loan and the forward contracts are discussed in "Note 15 - Loans Payable" and "Note 9 - Derivative
Instruments", respectively, in the notes to our consolidated financial statements included within Item 8 of this Annual
Report. We utilize hedge accounting to record the foreign exchange gain or loss on these instruments in the currency
translation account.
The table below summarizes our net exposures as at December 31, 2016 and 2015 to foreign currencies:
2016
GBP
Euro
AUD
CDN
Other
Total
Total net foreign currency exposure
Pre-tax impact of a 10% movement of
the U.S. dollar(1)
2015
Total net foreign currency exposure
Pre-tax impact of a 10% movement of
the U.S. dollar(1)
$
$
$
$
(in millions of U.S. dollars)
20.6 $
17.9 $
12.2 $
26.6 $
5.2 $
82.5
2.1 $
1.8 $
1.2 $
2.7 $
0.5 $
8.3
GBP
Euro
AUD
CDN
Other
Total
(in millions of U.S. dollars)
77.2 $
108.2 $
175.9 $
55.2 $
9.1 $
425.6
7.7 $
10.8 $
17.6 $
5.5 $
0.9 $
42.5
(1) Assumes 10% change in U.S. dollar relative to other currencies
Effects of Inflation
We do not believe that inflation has had or will have a material effect on our consolidated results of operations,
however, the actual effects of inflation on our results cannot be accurately known until claims are ultimately resolved.
Inflation may affect the value of our assets, as well as our liabilities including losses and LAE (by causing the cost of
claims to rise in the future). Although loss reserves are established to reflect likely loss settlements at the date payment
is made, we would be subject to the risk that inflation could cause these costs to increase above established reserves.
100
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Earnings for the years ended December 31, 2016, 2015 and 2014. . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015
and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016,
2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2016 . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENT SCHEDULES
I. Summary of Investments Other than Investments in Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . .
II. Condensed Financial Information of Registrant
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
III. Supplementary Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IV. Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
V. Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VI. Supplementary Information Concerning Property/Casualty Insurance Operations . . . . . . . . . . . . . . .
Page
102
103
104
105
106
108
109
197
198
201
202
203
204
Schedules other than those listed above are omitted as they are not applicable or the information has been
included in the consolidated financial statements, notes thereto, or elsewhere herein.
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Enstar Group Limited:
We have audited the accompanying consolidated balance sheets of Enstar Group Limited and subsidiaries as
of December 31, 2016 and 2015, and the related consolidated statements of earnings, comprehensive income, changes
in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. In
connection with our audits of the consolidated financial statements, we also have audited financial statement Schedules
I, II, III, IV, V and VI as of December 31, 2016 and 2015, and for each of the years in the three-year period ended
December 31, 2016. These consolidated financial statements and financial statement Schedules are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
and financial statement Schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Enstar Group Limited and subsidiaries as of December 31, 2016 and 2015, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial
statement Schedules, when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Enstar Group Limited’s internal control over financial reporting as of December 31, 2016, based on
the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February 27, 2017 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG Audit Limited
Hamilton, Bermuda
February 27, 2017
102
ENSTAR GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and 2015
ASSETS
Short-term investments, trading, at fair value
Short-term investments, available-for-sale, at fair value (amortized cost: 2016 — $287; 2015 — $8,630)
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value (amortized cost: 2016 — $269,577; 2015 — $300,160)
Equities, trading, at fair value
Other investments, at fair value
Other investments, at cost
Total investments
Cash and cash equivalents
Restricted cash and cash equivalents
Funds held - directly managed
Premiums receivable
Deferred tax assets
Prepaid reinsurance premiums
Reinsurance balances recoverable
Funds held by reinsured companies
Deferred acquisition costs
Goodwill and intangible assets
Other assets
Assets held for sale
TOTAL ASSETS
LIABILITIES
Losses and loss adjustment expenses
Policy benefits for life and annuity contracts
Unearned premiums
Insurance and reinsurance balances payable
Deferred tax liabilities
Loans payable
Other liabilities
Liabilities held for sale
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
2016
2015
(expressed in thousands of U.S.
dollars, except share data)
$
222,918
$
268
85,104
8,622
4,388,242
4,728,521
267,499
95,047
937,047
131,651
293,679
111,495
980,289
133,071
6,042,672
6,340,781
954,871
363,774
994,665
406,676
11,374
219,115
795,245
499,924
—
381,412
29,906
121,427
1,460,743
1,451,921
82,073
58,114
184,855
842,356
92,798
89,123
191,304
509,110
1,244,456
1,269,583
$
12,865,744
$
11,772,534
$
5,987,867
$
5,720,149
112,095
548,343
394,021
28,356
673,603
705,318
1,150,787
9,600,390
126,321
542,771
271,801
32,990
599,750
350,752
1,189,554
8,834,088
REDEEMABLE NONCONTROLLING INTEREST
454,522
417,663
SHAREHOLDERS’ EQUITY
Share capital authorized, issued and fully paid, par value $1 each (authorized 2016 and 2015: 156,000,000):
Ordinary shares (issued and outstanding 2016: 16,175,250; 2015: 16,133,334)
16,175
16,133
Non-voting convertible ordinary shares:
Series A (issued 2016: nil; 2015: 2,972,892)
Series C (issued and outstanding 2016: 2,792,157; 2015: 2,725,637)
Series E (issued and outstanding 2016: 404,771; 2015: 404,771)
Series C Preferred Shares (issued and outstanding 2016: 388,571; 2015: nil)
Treasury shares at cost (Preferred shares 2016: 388,571; Series A non-voting convertible ordinary shares 2015: 2,972,892)
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Enstar Group Limited Shareholders’ Equity
Noncontrolling interest
TOTAL SHAREHOLDERS’ EQUITY
—
2,792
405
389
(421,559)
1,380,109
(23,549)
1,847,550
2,802,312
8,520
2,973
2,726
405
—
(421,559)
1,373,044
(35,162)
1,578,312
2,516,872
3,911
2,810,832
2,520,783
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
12,865,744
$
11,772,534
See accompanying notes to the consolidated financial statements
103
ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 2016, 2015 and 2014
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains (losses)
Other income
EXPENSES
Net incurred losses and loss adjustment expenses
Life and annuity policy benefits
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS FROM CONTINUING OPERATIONS
NET EARNINGS (LOSS) FROM DISCONTINUING OPERATIONS,
NET OF INCOME TAX EXPENSE
NET EARNINGS
Less: Net loss (earnings) attributable to noncontrolling interest
2016
2015
2014
(expressed in thousands of U.S.
dollars, except share and per share data)
$
823,514 $
753,744 $
542,991
39,364
185,463
77,818
4,836
1,130,995
174,099
(2,038)
186,569
423,734
20,642
665
803,671
327,324
(34,874)
292,450
11,963
304,413
(39,606)
39,347
122,564
(41,523)
30,328
904,460
104,333
(546)
163,716
389,159
19,403
3,373
679,438
225,022
(12,650)
212,372
(2,031)
210,341
9,950
34,919
66,024
51,991
14,149
710,074
9,146
84
117,542
337,120
12,922
5,962
482,776
227,298
(5,601)
221,697
5,539
227,236
(13,487)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
264,807 $
220,291 $
213,749
Earnings per ordinary share attributable to Enstar Group Limited:
Basic:
Net earnings from continuing operations
Net earnings (loss) from discontinuing operations
Net earnings per ordinary share
Diluted:
Net earnings from continuing operations
Net earnings (loss) from discontinuing operations
Net earnings per ordinary share
Weighted average ordinary shares outstanding:
Basic
Diluted
$
$
$
$
13.10 $
0.62
13.72 $
13.00 $
0.62
13.62 $
11.55 $
(0.11)
11.44 $
11.46 $
(0.11)
11.35 $
11.31
0.30
11.61
11.15
0.29
11.44
19,299,426
19,447,241
19,252,072
19,407,756
18,409,069
18,678,130
See accompanying notes to the consolidated financial statements
104
ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2016, 2015 and 2014
NET EARNINGS
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on fixed income investments
arising during the year
Reclassification adjustment for net realized gains included in net
earnings
Unrealized gains (losses) arising during the year, net of
reclassification adjustment
Decrease (increase) in defined benefit pension liability
Currency translation adjustment
Total other comprehensive gain (loss)
Comprehensive income
Less comprehensive (income) loss attributable to noncontrolling
interest
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR
GROUP LIMITED
2016
2015
2014
(expressed in thousands of U.S. dollars)
$
304,413 $
210,341 $
227,236
4,776
(3,219)
(6,297)
(384)
(266)
(58)
4,392
3,079
4,793
12,264
316,677
(3,485)
3
(24,694)
(28,176)
182,165
(6,355)
(5,477)
(19,421)
(31,253)
195,983
(40,257)
15,650
(8,898)
$
276,420 $
197,815 $
187,085
See accompanying notes to the consolidated financial statements
105
ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2016, 2015 and 2014
Share Capital — Ordinary Shares
Balance, beginning of year
Issue of shares
Conversion of Series E Non-Voting Convertible Ordinary Shares
Balance, end of year
Share Capital — Series A Non-Voting Convertible Ordinary Shares
Balance, beginning and end of year
Shares converted to Series C Convertible Participating Non-Voting Perpetual Preferred Stock
Balance, end of period
Share Capital — Series C Non-Voting Convertible Ordinary Shares
Balance, beginning and end of year
Warrants exercised
Balance, end of period
Share Capital — Series E Non-Voting Convertible Ordinary Shares
Balance, beginning of year
(Conversion to Ordinary Shares) / Conversion of Series B Preferred Stock
Balance, end of year
Share Capital — Series B Convertible Participating Non-Voting Perpetual Preferred Stock
Balance, beginning of year
Issue of shares
Shares converted to Series E Non-Voting Convertible Ordinary Shares
Balance, end of year
Share Capital — Series C Convertible Participating Non-Voting Perpetual Preferred Stock
Balance, beginning of period
Conversion of Series A Non-Voting Convertible Ordinary Stock
Balance, end of period
Treasury Shares
Balance, beginning and end of year
Additional Paid-in Capital
Balance, beginning of year
Issue of shares and warrants
Conversion of Series A Non-Voting Convertible Ordinary Stock
Amortization of share-based compensation
Equity attributable to purchase of noncontrolling shareholders’ interest in subsidiaries
Balance, end of year
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of year
Currency translation adjustment
Balance, beginning of year
Change in currency translation adjustment
Purchase of noncontrolling shareholders' interest in subsidiaries
Balance, end of year
Defined benefit pension liability
Balance, beginning of year
Change in defined benefit pension liability
Balance, end of year
Unrealized gains (losses) on investments
Balance, beginning of year
Change in unrealized losses on investments
Purchase of noncontrolling shareholders’ interest in subsidiaries
Balance, end of year
Balance, end of year
Retained Earnings
Balance, beginning of year
Net earnings attributable to Enstar Group Limited
Change in redemption of redeemable noncontrolling interests
Balance, end of year
Noncontrolling Interest (excludes redeemable noncontrolling interests)
Balance, beginning of year
Sale of noncontrolling shareholders' interest in subsidiaries
Return of capital
Dividends paid
Contribution of capital
106
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
2014
2015
(expressed in thousands of U.S. dollars)
16,133
42
—
16,175
2,973
(2,973)
$
$
$
— $
2,726
66
2,792
405
—
405
$
$
$
$
— $
—
—
— $
— $
389
389
$
15,761
63
309
16,133
2,973
—
2,973
2,726
—
2,726
714
(309)
405
$
$
$
$
$
$
$
$
— $
—
—
— $
— $
—
— $
13,803
1,958
—
15,761
2,973
—
2,973
2,726
—
2,726
—
714
714
—
714
(714)
—
—
—
—
(421,559) $
(421,559) $
(421,559)
$
1,373,044
529
2,584
3,952
— $
$
1,380,109
1,321,715
1,765
—
7,867
41,697
1,373,044
$
$
$
962,145
354,622
—
4,948
—
1,321,715
(35,162) $
(12,686) $
13,978
(23,790)
4,797
—
(18,993)
(7,723)
3,079
(4,644)
(3,649)
3,737
—
88
(23,549) $
$
$
$
1,578,312
264,807
4,431
1,847,550
3,911
—
—
—
5,643
(2,779)
(23,948)
2,937
(23,790)
(7,726)
3
(7,723)
(2,181)
(1,780)
312
(3,649)
(35,162) $
$
$
$
1,395,206
220,291
(37,185)
1,578,312
217,970
(195,347)
—
(733)
680
14,264
(17,043)
—
(2,779)
(2,249)
(5,477)
(7,726)
1,963
(4,144)
—
(2,181)
(12,686)
1,181,457
213,749
—
1,395,206
222,000
—
(11,864)
(18,108)
18,081
Reallocation from (to) redeemable noncontrolling interest
Net earnings (loss) attributable to noncontrolling interest
Foreign currency translation adjustments
Net movement in unrealized holding losses on investments
Balance, end of year
—
(1,034)
—
—
8,520
$
(15,801)
(1,153)
(1,558)
(147)
3,911
$
1,028
9,429
(2,181)
(415)
217,970
$
See accompanying notes to the consolidated financial statements
107
ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2016, 2015 and 2014
OPERATING ACTIVITIES:
Net earnings
Net (earnings) loss from discontinued operations
Adjustments to reconcile net earnings to cash flows provided by (used in) operating activities:
Realized losses (gains) on sale of investments
Unrealized losses (gains) on investments
Other non-cash items
Depreciation and other amortization
Net change in trading securities held on behalf of policyholders
Sales and maturities of trading securities
Purchases of trading securities
Changes in:
Reinsurance balances recoverable
Funds held by reinsured companies
Losses and loss adjustment expenses
Policy benefits for life and annuity contracts
Insurance and reinsurance balances payable
Unearned premiums
Other operating assets and liabilities
Net cash flows provided by (used in) operating activities
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired
Sales and maturities of available-for-sale securities
Purchase of available-for-sale securities
Purchase of other investments
Redemption of other investments
Other investing activities
Net cash flows provided by (used in) investing activities
FINANCING ACTIVITIES:
Distribution of capital to noncontrolling interest
Contribution by noncontrolling interest
Contribution by redeemable noncontrolling interest
Dividends paid to noncontrolling interest
Purchase of noncontrolling interest
Receipt of loans
Repayment of loans
Net cash flows provided by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH, CASH
EQUIVALENTS AND RESTRICTED CASH
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
Supplemental Cash Flow Information:
Income taxes paid, net of refunds
Interest paid
Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents
Restricted cash and cash equivalents
Cash, cash equivalents and restricted cash
2016
2015
2014
(expressed in thousands of U.S. dollars)
$
304,413
(11,963)
$
210,341
2,031
$
227,236
(5,539)
7,036
(84,854)
8,566
34,938
(1,284)
3,406,788
(3,100,515)
(15,859)
57,380
3,984
40,922
(7,241)
3,651,680
(4,052,430)
(22,169)
(29,810)
(1,268)
43,870
4,256
2,836,921
(1,986,441)
(21,866)
(967,379)
259,339
(11,037)
120,515
5,682
(151,068)
(202,689)
$
(18,454) $
81,596
(52,568)
(91,093)
245,069
(7,841)
156,709
391,182
32,435
(276,711)
9,110
(20,635)
(19,355)
(271,986)
(265,152)
130,667
142,824
(102,214)
(315,583)
165,711
(1,520)
19,885
$
$
— $
— $
5,643
—
—
—
571,048
(493,250)
83,441
680
15,728
(16,861)
(150,400)
657,700
(377,500)
129,347
428,718
114,348
(967,263)
(839)
(190,464)
8,000
84,449
544,005
60,319
109,994
(116,738)
(346,313)
104,684
632
(187,422)
(11,864)
17,768
273,035
(18,108)
—
70,000
(199,245)
131,586
(13,985)
(18,533)
(17,546)
23,476
1,295,169
$ 1,318,645
(134,453)
1,429,622
$ 1,295,169
470,623
958,999
$ 1,429,622
$
$
22,216
19,451
$
$
33,305
19,395
$
$
41,830
16,130
$
954,871
363,774
$ 1,318,645
$
795,245
499,924
$ 1,295,169
$
897,674
531,948
$ 1,429,622
See accompanying notes to the consolidated financial statements
108
ENSTAR GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 2015 and 2014
(Tabular information expressed in thousands of U.S. dollars except share and per share data)
1. DESCRIPTION OF BUSINESS
Enstar Group Limited ("Enstar") is a multi-faceted insurance group that offers innovative capital release solutions
and specialty underwriting capabilities through its network of group companies in Bermuda, the United States, the
United Kingdom, Continental Europe, Australia, and other international locations. Our ordinary shares are listed on the
NASDAQ Global Select Market under the ticker symbol "ESGR". Unless the context indicates otherwise, the terms
"Enstar," "we," "us" or "our" mean Enstar Group Limited and its consolidated subsidiaries and the term "Parent Company"
means Enstar Group Limited and not any of its consolidated subsidiaries.
Our business is organized into four segments:
(i) Non-life Run-off - This segment is comprised of the operations of our subsidiaries that are running off their
property and casualty and other non-life business. It also includes our management business, which manages
the run-off portfolios of third parties through our service companies.
(ii) Atrium - Atrium Underwriters Ltd. is a managing general agent at Lloyd’s of London ("Lloyd's"), which manages
Syndicate 609. Through a corporate capital vehicle, Atrium 5 Ltd., we provide 25% of the syndicate’s
underwriting capacity and capital (with the balance provided by traditional Lloyd’s Names). Atrium underwrites
specialist marine, energy, aerospace, non-marine and liability classes.
(iii) StarStone - StarStone is a global specialty insurer that underwrites a diverse range of property, casualty and
specialty insurance through its operations in Bermuda, the United States, the United Kingdom, and
Continental Europe. Certain run-off business of StarStone is recorded in our Non-life Run-off segment.
(iv) Life and Annuities - This segment comprises our subsidiaries managing our closed-blocks of life and annuity
business and our life settlements business.
109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America ("U.S. GAAP"). The consolidated financial statements include our assets,
liabilities and results of operations as of December 31, 2016 and 2015 and for the years ended December 31, 2016,
2015 and 2014. Results of operations for acquired subsidiaries are included from the date of acquisition. All significant
intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified
to conform to the current period presentation. These reclassifications had no impact on net earnings.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Our actual results could differ materially from our estimates. Accounting policies that we believe are most
dependent on assumptions and estimates are considered to be our critical accounting policies and are related to the
determination of:
•
•
•
•
•
•
•
•
liability for losses and loss adjustment expenses ("LAE");
liability for policy benefits for life and annuity contracts;
reinsurance balances recoverable;
gross and net premiums written and net premiums earned;
impairment charges, including other-than-temporary impairments on investment securities classified as
available-for-sale, and impairments on goodwill, intangible assets and deferred charges;
fair value measurements of investments;
fair value estimates associated with accounting for acquisitions; and
redeemable noncontrolling interests.
Significant Accounting Policies
(a) Premiums
Non-Life
Non-life premiums written are earned on a pro-rata basis over the period the coverage is provided. Reinsurance
premiums are recorded at the inception of the policy, are based upon contractual terms and, for certain business, are
estimated based on underlying contracts or from information provided by insureds and/or brokers. Changes in
reinsurance premium estimates are expected and may result in adjustments in future periods. Any subsequent
differences arising on such estimates are recorded as premiums written in the period in which they are determined.
Certain non-life contracts are retrospectively rated and provide for a final adjustment to the premium based on
the final settlement of all losses. Premiums on such contracts are adjusted based upon contractual terms, and
management judgment is involved with respect to the estimate of the amount of losses that we expect to incur. Additional
premiums are recognized at the time loss thresholds specified in the contract are exceeded and are earned over the
coverage period, or are earned immediately if the period of risk coverage has passed.
Life and Annuities
Prior to going into run-off, our life and annuities subsidiaries wrote life insurance, including credit life and disability
insurance, term life insurance, assumed life reinsurance and annuities. We will continue to recognize premiums on
term life insurance, assumed life reinsurance and credit life and disability insurance. These premiums are generally
recognized as revenue when due from policyholders. The policies include contracts with fixed and guaranteed premiums
and benefits. Benefits and expenses are matched with such revenue to result in the recognition of profit over the life
of the contracts.
110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Premiums receivable
Premiums receivable represent amounts currently due and amounts not yet due on insurance and reinsurance
policies. Premiums for insurance policies are generally due at inception. Premiums for reinsurance policies generally
become due over the period of coverage based on the policy terms. We monitor the credit risk associated with premiums
receivable, taking into consideration the impact of our contractual right to offset loss obligations or unearned premiums
against premiums receivable. Amounts deemed uncollectible are charged to net earnings in the period they are
determined. Changes in the estimates of premiums written will result in an adjustment to premiums receivable in the
period they are determined.
Unearned premiums and prepaid reinsurance premiums
Unearned premiums represent the portion of premiums written that relate to the unexpired terms of policies in
force. Premiums ceded are similarly pro-rated over the period the coverage is provided with the unearned portion being
deferred as prepaid reinsurance premiums.
(b) Acquisition Costs
Acquisition costs, consisting principally of commissions and brokerage expenses and certain premium taxes and
fees incurred at the time a contract or policy is issued and that vary with and are directly related to the successful
efforts of acquiring new insurance contracts or renewing existing insurance contracts, are deferred and amortized over
the period in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable
value by line of business based on the related unearned premiums, anticipated claims and claim expenses and
anticipated investment income.
(c) Losses and LAE
Non-life Run-off
The liability for losses and LAE in the Non-life Run-off segment includes an amount determined from reported
claims and an amount, based on historical loss experience and industry statistics, for losses incurred but not reported
("IBNR") determined using a variety of actuarial methods. These estimates are continually reviewed and are necessarily
subject to the impact of future changes in factors such as claim severity and frequency, changes in economic conditions
including the impact of inflation, legal and judicial developments, and medical cost trends. While we believe that the
amount is adequate, the ultimate liability may be in excess of, or less than, the amounts provided. Adjustments will be
reflected as part of net increase or reduction in losses and LAE liabilities in the periods in which they become known.
Premium and commission adjustments may be triggered by incurred losses, and any amounts are recorded in the
same period that the related incurred loss is recognized.
Commutations of acquired companies’ exposures have the effect of accelerating the payout of claims compared
to the probability-weighted ranges of actuarially projected cash flows that we apply when estimating the fair values of
assets and liabilities at the time of acquisition. Any material acceleration of payout together with the impact of any
material loss reserve savings in any period will also accelerate the amortization of fair value adjustments in that period.
Gains or losses on settlement of losses and LAE liabilities by way of commutation or policy buy-back are recognized
upon execution of a commutation or policy buyback with the insured or reinsured.
Our insurance and reinsurance subsidiaries also establish provisions for LAE relating to run-off costs for the
estimated duration of the run-off, which are included in losses and LAE. These provisions are assessed at each reporting
date, and provisions relating to future periods are adjusted to reflect any changes in estimates of the periodic run-off
costs or the duration of the run-off, including the impact of any acceleration of the run-off period that may be caused
by commutations. Provisions relating to the current period together with any adjustment to future run-off provisions are
included in net incurred losses and LAE in the consolidated statements of earnings.
Atrium and StarStone
The reserves for losses and LAE in the Atrium and StarStone segments include reserves for unpaid reported
losses and for IBNR loss reserves. The reserves for unpaid reported losses and loss expenses are established by
management based on reports from brokers, ceding companies and insureds and represent the estimated ultimate
cost of events or conditions that have been reported to or specifically identified by us. The reserve for IBNR losses is
established by us based on actuarially determined estimates of ultimate losses and loss expenses. Inherent in the
estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and other factors
111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
which may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ from the
amounts recorded in the consolidated financial statements. These estimates are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, will
be recorded in earnings in the period in which they become known. Prior period development arises from changes to
loss estimates recognized in the current year that relate to loss reserves established in previous calendar years.
(d) Policy Benefits for Life and Annuity Contracts
Policy benefits for life and annuity contracts (“policy benefits”) are calculated using the net level premium method
and are derived using locked-in assumptions. Policy benefits are established and maintained at a level that we estimate
will, when taken together with future premium payments and investment income expected to be earned on associated
premiums, be sufficient to support all future cash flow benefit obligations and third-party servicing obligations as they
become payable. We review policy benefits regularly and perform loss recognition testing based upon cash flow
projections.
Since the development of the policy benefits is based upon projections of future cash flows, we are required to
make assumptions for mortality, longevity and morbidity rates, lapse rates, expenses and investment income. The
assumptions used to determine policy benefits are determined at the inception of the contracts, reviewed and adjusted
at the point of acquisition, as required, and are locked-in throughout the life of the contract unless a premium deficiency
develops. These locked-in assumptions are based on a best estimate view of experience at the time they are established
and may include a provision for adverse deviation. Assumptions are established based upon a combination of historical
and industry experience, when available, and management judgment. Actual results could differ from these estimates.
Policy benefit liabilities are reviewed periodically to determine whether a premium deficiency exists. Management
reviews emerging experience and updates best estimate assumptions where appropriate. If existing policy benefit
reserves, reduced by unamortized acquisition costs, together with the present value of future gross premiums using
current best estimate assumptions, are insufficient in covering the present value of future benefits, settlement, and
maintenance costs using current best estimate assumptions, a premium deficiency is deemed to exist. To remediate,
unamortized acquisition costs are reduced until the premium deficiency has been eliminated. If unamortized acquisition
costs have been entirely written off and a premium deficiency still exists, locked-in assumptions are revised and a
charge for policy benefits is recognized.
Because of the many assumptions and estimates used in establishing policy benefits and the long-term nature
of the contracts, the reserving process, while based on actuarial techniques, is inherently uncertain.
(e) Reinsurance Recoverable
Amounts billed to, and due from, reinsurers resulting from paid movements in the underlying business are
calculated in accordance with the terms of the individual reinsurance contracts. Similarly, reinsurance balances
recoverable related to our case reserves are calculated by applying the terms of any applicable reinsurance coverage
to movements in the underlying case reserves. Our estimate of reinsurance balances recoverable related to IBNR
reserves is recognized on a basis consistent with the underlying IBNR reserves.
Our reinsurance balances recoverable are presented net of a provision for uncollectible amounts, reflecting the
amount deemed not collectible due to credit quality, collection problems due to the location of the reinsurer, contractual
disputes with reinsurers over individual contentious claims, contract language or coverage issues.
(f) Investments, Cash and Cash Equivalents
Short-term investments and fixed maturity investments
Short-term investments comprise investments with a maturity greater than three months up to one year from the
date of purchase. Fixed maturities comprise investments with a maturity of greater than one year from the date of
purchase.
Short-term and fixed maturity investments classified as trading are carried at fair value, with realized and
unrealized holding gains and losses included in net earnings and reported as net realized and unrealized gains and
losses.
Short-term and fixed maturity investments classified as available-for-sale are carried at fair value, with unrealized
gains and losses excluded from net earnings and reported as a separate component of accumulated other
112
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
comprehensive income. Realized gains and losses on sales of investments classified as available-for-sale are
recognized in the consolidated statements of earnings.
The costs of short-term and fixed maturity investments are adjusted for amortization of premiums and accretion
of discounts, recognized using the effective yield method and included in net investment income. For mortgage-backed
and asset-backed investments, and any other holdings for which there is a prepayment risk, prepayment assumptions
are evaluated and reviewed on a regular basis.
Investment purchases and sales are recorded on a trade-date basis. Realized gains and losses on the sale of
investments are based upon specific identification of the cost of investments.
Other-Than-Temporary Impairments
Fixed maturity investments classified as available-for-sale are reviewed quarterly to determine if they have
sustained an impairment of value that is, based on our judgment, considered to be other than temporary. The process
includes reviewing each fixed maturity investment that is below cost and: (1) determining if we have the intent to sell
the fixed maturity investment; (2) determining if it is more likely than not that we will be required to sell the fixed maturity
investment before its anticipated recovery; and (3) assessing whether a credit loss exists, that is, whether we expect
that the present value of the cash flows expected to be collected from the fixed maturity investment is less than the
amortized cost basis of the investment.
In assessing whether it is more likely than not that we will be required to sell a fixed maturity investment before
its anticipated recovery, we consider various factors including our future cash flow requirements, legal and regulatory
requirements, the level of our cash, cash equivalents, short-term investments and fixed maturity investments available-
for-sale in an unrealized gain position, and other relevant factors.
In evaluating credit losses, we consider 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 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 investment to make scheduled interest or
principal payments.
If we conclude an investment is other-than-temporarily impaired ("OTTI"), then the difference between the fair
value and the amortized cost of the investment is presented as an OTTI charge in the consolidated statements of
earnings, with an offset for any non-credit related loss component of the OTTI charge to be recognized in other
comprehensive income. Accordingly, only the credit loss component of the OTTI amount would have an impact on our
earnings.
Equities
Equities are classified as trading and are carried at fair value with realized and unrealized holding gains and
losses included in net earnings and reported as net realized and unrealized gains and losses.
Other investments, at fair value
Other investments include investments in limited partnerships and limited liability companies (collectively "private
equities") and fixed income funds, hedge funds, equity funds, real estate debt funds and collateralized loan obligation
("CLO") equity funds that carry their investments at fair value, as well as direct investments in CLO equities. These
other investments are stated at fair value, which ordinarily will be the most recently reported net asset value as advised
by the fund manager or administrator. Many of our fund investments publish net asset values on a daily basis and
provide daily liquidity; others report on a monthly basis. Private equities typically report quarterly. The change in fair
value is included in net realized and unrealized gains and losses on investments and recognized in net earnings.
Other investments, at cost
Investments in life settlements are recorded as other investments, at cost, and are accounted for under the
investment method whereby we recognize our initial investment in the life settlement contracts at the transaction price
plus all initial direct external costs. Continuing costs to keep the policy in force, primarily life insurance premiums,
increase the carrying amount of the investment. We recognize income on individual investments in life settlements
when the insured dies, at an amount equal to the excess of the investment proceeds over the carrying amount of the
investment at that time.
113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The investments are subject to quarterly impairment review on a contract-by-contract basis. An investment in
life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds from the
investment in life settlements are not sufficient to recover the current carrying amount for the investment in life
settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired
contracts are written down to their estimated fair value, which is determined on a discounted cash flow basis using
current market longevity assumptions and market yields, with any impairment charges included within net realized and
unrealized gains (losses).
Cash and cash equivalents
Cash equivalents includes all highly liquid debt instruments purchased with an original maturity of three months
or less.
(g) Funds Held
Under funds held arrangements, the reinsured company has retained funds that would otherwise have been
remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable
are deducted. Funds held are shown under two categories on the consolidated balance sheets, where funds held upon
which we receive the underlying portfolio economics are shown as "Funds held - directly managed", and funds held
where we receive a fixed crediting rate are shown as "Funds held by reinsured companies". Funds held by reinsured
companies are carried at cost. Funds held - directly managed, carried at fair value, represents the aggregate of funds
held at cost and the value of an embedded derivative. The embedded derivative relates to our contractual right to
receive the return on the underlying investment portfolio economics. The investment returns on both categories of
funds held are recognized in net investment income and net realized and unrealized gains (losses). The revaluation
of the embedded derivative is included in net unrealized gains (losses).
(h) Fees and Commission Income
Fees and commission income primarily includes profit commissions earned from managed Lloyd's syndicates,
recorded on an accrual basis.
(i) Foreign Exchange
Our reporting currency is the U.S. dollar. Assets and liabilities of entities whose functional currency is not the
U.S. dollar are translated at period end exchange rates. Revenues and expenses of such foreign entities are translated
at average exchange rates during the year. The effect of the currency translation adjustments for these foreign entities
is included in accumulated other comprehensive income (loss).
Other foreign currency assets and liabilities that are considered monetary items are translated at exchange rates
in effect at the balance sheet date. Foreign currency revenues and expenses are translated at transaction date exchange
rates. These exchange gains and losses are recognized in net earnings.
(j) Share-based Compensation
We have primarily used three types of share-based compensation: restricted shares and restricted share units,
cash-settled stock appreciation rights ("SARs") and shares issued under our employee share purchase plans. With
the exception of SARs and the incentive plan awards issued to certain employees of Atrium, our share-based
compensation awards qualify for equity classification. The fair value of the compensation cost is measured at the grant
date and is expensed over the service period of the award. The SARs and the Atrium incentive plan awards are classified
as liability awards. Liability classified awards are recorded at fair value within other liabilities in the consolidated balance
sheet with changes in fair value relating to the vested portion of the award recorded within general and administrative
expenses in the consolidated statements of earnings.
(k) Derivative Instruments
We recognize all derivatives as either assets or liabilities in the consolidated balance sheets and carry them at
the fair value of the instrument. We utilize derivative instruments in our foreign currency risk management strategy.
Changes in fair value and realized gains or losses on derivative instruments are recognized in net earnings if we have
not designated a hedge or the criteria for a designated hedge has not been met or is not effective, or in accumulated
other comprehensive income (loss) if a designated hedge has been effective. Certain of our funds held contain
embedded derivatives as described above.
114
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
(l) Income Taxes
Certain of our subsidiaries and branches operate in jurisdictions where they are subject to taxation. Current and
deferred income taxes are charged or credited to net income, or, in certain cases, to accumulated other comprehensive
income, based upon enacted tax laws and rates applicable in the relevant jurisdiction in the period in which the tax
becomes accruable or realizable. Deferred income taxes are provided for all temporary differences between the bases
of assets and liabilities used in the financial statements and those used in the various jurisdictional tax returns. When
our assessment indicates that it is more likely than not that all or some portion of deferred income tax assets will not
be realized, a valuation allowance is recorded against the deferred tax assets.
We recognize a tax benefit relating to uncertain tax positions only where the position is more likely than not to
be sustained assuming examination by tax authorities. A liability is recognized for any tax benefit (along with any interest
and penalty, if applicable) claimed in a tax return in excess of the amount allowed to be recognized in the financial
statements under U.S. GAAP. Any changes in amounts recognized are recorded in the period in which they are
determined.
(m) Earnings Per Share
Basic earnings per share is based on the weighted average number of ordinary shares outstanding and excludes
potentially dilutive securities such as restricted shares, restricted share units, warrants, options and convertible
securities. Diluted earnings per share is based on the weighted average number of ordinary and ordinary share
equivalents outstanding calculated using the treasury stock method for all potentially dilutive securities. When the effect
of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted earnings per
share.
(n) Acquisitions, Goodwill and Intangible Assets
The purchase method is used to account for acquisitions. This method requires that we record the acquired
assets and liabilities at their estimated fair value. The fair values of each of the acquired reinsurance assets and
liabilities are derived from probability-weighted ranges of the associated projected cash flows, based on actuarially
prepared information and management’s run-off strategy. Our run-off strategy, as well as that of other run-off market
participants, is expected to be different from the seller's as generally sellers are not specialized in running off insurance
and reinsurance liabilities whereas we and other market participants do specialize in such run-offs.
The key assumptions used by us and, we believe, by other run-off market participants in the fair valuation of
acquired companies are (i) the projected payout, timing and amount of claims liabilities; (ii) the related projected timing
and amount of reinsurance collections; (iii) an appropriate discount rate, which is applied to determine the present
value of the future cash flows; (iv) the estimated unallocated LAE to be incurred over the life of the run-off; (v) the
impact of any accelerated run-off strategy; and (vi) an appropriate risk margin.
The difference between the original carrying value of reinsurance liabilities and reinsurance assets acquired at
the date of acquisition and their fair value is recorded as an intangible asset or other liability, which we refer to as the
fair value adjustment ("FVA"). The FVA is amortized over the estimated payout period of outstanding losses and loss
expenses acquired. To the extent the actual payout experience after the acquisition is materially faster or slower than
anticipated at the time of the acquisition, there is an adjustment to the estimated ultimate loss reserves, or there are
changes in bad debt provisions or in estimates of future run-off costs following accelerated payouts, then the amortization
of the FVA is adjusted to reflect such changes.
The difference between the fair value of net assets acquired and purchase price is recorded as a goodwill asset
or as a gain on bargain purchase in the consolidated statements of earnings. Goodwill is established initially upon
acquisition and assessed at least annually for impairment. If the goodwill asset is determined to be impaired it is written
down in the period in which the determination is made.
Intangible assets represent the fair value adjustments related to unpaid losses and LAE, reinsurance balances
recoverable and policy benefits for life and annuity contracts along with the intangible assets arising from the acquisitions
of Atrium and StarStone. Definite-lived intangible assets are amortized over their useful lives. Amortization of intangible
assets is recognized in the consolidated statement of earnings. Indefinite-lived intangible assets are not subject to
amortization. The carrying values of intangible assets are reviewed for indicators of impairment at least annually.
Impairment is recognized if the carrying values of the intangible assets are not recoverable from their undiscounted
cash flows and are measured as the difference between the carrying value and the fair value.
115
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
(o) Retroactive Reinsurance and Deferred Charges
Retroactive reinsurance policies provide indemnification of losses and LAE with respect to past loss events.
In our Non-life Run-off segment we use the balance sheet accounting approach for assumed loss portfolio
transfers, whereby at the inception of the contract there are no premiums or losses recorded in earnings. At the inception
of a contract, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over
the premiums received. Deferred charges, recorded in other assets, are amortized over the estimated claim payment
period of the related contract with the periodic amortization reflected in earnings as a component of losses and LAE.
Deferred charges amortization is adjusted at each reporting period to reflect new estimates of the amount and timing
of remaining loss payments. Changes in the estimated amount and the timing of payments of unpaid losses may have
an effect on the unamortized deferred charges and the amount of periodic amortization. Deferred charges are assessed
at each reporting period for impairment. If the asset is determined to be impaired, it is written down in the period in
which the determination is made.
In our Non-life Run-off and StarStone segments we have ceded business to KaylaRe Ltd., an affiliated reinsurer,
as described in Note 21 - "Related Party Transactions". The reinsurance ceded by StarStone to KaylaRe Ltd. during
the year ended December 31, 2016 was mostly recognized as retroactive reinsurance, except for the unearned ceded
premium as at December 31, 2016 which is recognized as prospective reinsurance. The reinsurance ceded by StarStone
to KaylaRe Ltd. from January 1, 2017 will be recognized as prospective reinsurance.
(p) Redeemable Noncontrolling Interest
In connection with the acquisitions of Arden, Atrium and StarStone, certain subsidiaries issued shares to
noncontrolling interests. These shares provide certain redemption rights to the holders, which may be settled in our
own shares or cash, at our option. Redeemable noncontrolling interest with redemption features that are not solely
within our control are classified within temporary equity in the consolidated balance sheets and carried at the redemption
value, which is fair value. Change in the fair value is recognized through retained earnings as if the balance sheet date
were also the redemption date.
(q) Internal-use Software
Direct internal and external costs to acquire or develop internal-use software have been capitalized. We only
capitalize costs incurred after the preliminary project stage has been completed, and when management has authorized
and committed to funding the project and it is probable that the project will be completed and the software will be used
to perform the functions intended. Capitalized costs related to internal-use software are amortized on a straight-line
basis over the estimated useful lives of the assets. These capitalized costs are also assessed for impairment when
impairment indicators exist.
(r) Held-for-sale Business and Discontinued Operations
We report a business as held-for-sale when management has approved the sale or received approval to sell
the business and is committed to a formal plan, the business is available for immediate sale, the business is being
actively marketed, the sale is anticipated to occur during the next 12 months and certain other specified criteria are
met. A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less
costs of selling. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Assets
and liabilities related to the businesses classified as held-for-sale are separately reported in our Consolidated
Balance Sheets beginning in the period in which the business is classified as held-for-sale. Refer to Note 5 for
further information regarding our held-for-sale business. This business was also classified as discontinued
operations whose results were aggregated and presented in one line in the consolidated statements of earnings.
116
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
New Accounting Standards Adopted in 2016
Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows - Restricted Cash
In November 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-18, which requires
that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We have early adopted
this guidance and applied it retrospectively to all periods presented on our consolidated financial statements.
ASU 2016-17, Consolidation - Interests Held through Related Parties that are under Common Control
In October 2016, the FASB issued ASU 2016-17, which amends the consolidation guidance on how a reporting
entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity
held through related parties that are under common control with the reporting entity when determining whether it is the
primary beneficiary of that VIE. The adoption of this guidance did not have a material impact on our consolidated
financial statements and disclosures.
ASU 2015-16, Business Combinations, Simplifying the Accounting for Measurement-Period Adjustment
In September 2015, the FASB issued ASU 2015-16, which eliminates the requirement for an acquirer to
retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a
business combination is consummated. Under the new guidance, an acquirer must recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustment amounts
are determined. The adoption of this guidance did not have a material impact on our consolidated financial statements
and disclosures.
ASU 2015-09, Disclosures about Short-Duration Contracts
In May 2015, the FASB issued ASU 2015-09, which makes targeted improvements to disclosure requirements
for insurance companies that issue short-duration contracts. The ASU requires enhanced disclosures, on an annual
basis, related to the reserve for losses and loss expenses which include (1) net incurred and paid claims development
information by accident year, (2) a reconciliation of incurred and paid claims development information to the aggregate
carrying amount of the reserve for losses and LAE, (3) for each accident year presented of incurred claims development,
information about claim frequency (unless impracticable), and the amounts of IBNR liabilities, including expected
development on reported claims, included in the reserve for losses and LAE, (4) a description of, and any significant
changes to the methods for determining both IBNR and expected development on reported claims, and (5) for each
accident year presented of incurred claims development, quantitative information about claims frequency, as well as
a description of methodologies used for determining claim frequency information. The ASU is effective for annual
periods beginning after December 15, 2015. While the adoption of this guidance impacted our disclosures, it did not
have an impact on our consolidated financial statements.
ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value or its Equivalent
In May 2015, the FASB issued ASU 2015-07, which eliminates the requirement to categorize investments in the
fair value hierarchy if their fair value is measured at the net asset value ("NAV") per share (or its equivalent) using the
practical expedient in the FASB’s fair value measurement guidance. Instead, an entity is required to include those
investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent
with the amount on the balance sheet. In addition, the scope of current disclosure requirements for investments eligible
to be measured at NAV is limited to investments for which the practical expedient is applied. While the adoption of this
guidance impacted our disclosures, it did not have an impact on our consolidated financial statements.
ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, which changes the presentation of debt issuance costs in financial
statements. Under the guidance, an entity would present such costs in the balance sheet as a direct deduction from
the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The adoption
of this guidance did not have an impact on our consolidated financial statements and disclosures.
117
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
ASU 2015-02, Amendments to the Consolidation Analysis
In February 2015, the FASB issued ASU 2015-02, which requires entities to evaluate whether they should
consolidate certain legal entities. The new consolidation guidance changes the way entities evaluate whether (1) they
should consolidate limited partnerships and similar entities; (2) fees paid to a decision maker or service provider are
variable interests in a VIE, and (3) variable interests in a VIE held by related parties of a registrant require the registrant
to consolidate the VIE. The new guidance also eliminates the VIE consolidation model based on majority exposure to
variability that applied to certain investment companies and similar entities. The ASU also significantly changes how
to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is
a VIE, which may affect entities for which decision making rights are conveyed through a contractual arrangement.
The adoption of this guidance did not have a material impact on our consolidated financial statements and disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
ASU 2017-04, Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, which simplifies the accounting for goodwill impairments by
eliminating Step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill
allocated to that reporting unit. The ASU is effective for any interim and annual impairment tests for periods beginning
after December 15, 2019. Early adoption is permitted for any interim and annual impairment tests occurring after
January 1, 2017. We intend to adopt this new guidance for our annual impairment tests occurring after January 1, 2017
and do not expect the adoption to have a material impact on our consolidated financial statements.
ASU 2017-01, Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business in Accounting Standards
Codification (“ASC”) 805 Business Combinations with the intent of making the application of the guidance more
consistent and cost-efficient. This clarification is expected to result in fewer acquired sets of assets and liabilities being
identified as businesses. The adoption of this guidance is not expected to have a material impact on our consolidated
financial statements.
ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, which requires immediate recognition of the tax consequences
of many intercompany asset transfers other than inventory. The ASU is effective for interim and annual reporting periods
beginning after December 15, 2017, however early adoption is permitted. The adoption of this guidance is not expected
to have a material impact on our consolidated financial statements and disclosures.
ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15, which amends the guidance on the classification of certain cash
receipts and payments in the statement of cash flows. The ASU is effective for interim and annual reporting periods
beginning after December 15, 2017, however early adoption is permitted. The adoption of this guidance is not expected
to have a material impact on our consolidated financial statements and disclosures.
ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, which amends the guidance on impairment of financial instruments
and significantly changes how entities will measure credit losses for most financial assets and certain other instruments
that are not measured at fair value through net income. The ASU will replace the existing “incurred loss” approach,
with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances
for available-for-sale debt securities rather than reduce the carrying amount under the existing other-than-temporary-
impairment model. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and
loans. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019.
118
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
We expect to adopt the new guidance on January 1, 2020 and upon adoption the OTTI approach we currently
use for our available for sale securities whereby any credit losses are presented as write-downs on individual securities
will be replaced by an approach whereby any credit losses are instead presented as an allowance against each security.
This revised approach records the full effect of reversals of any credit losses in current period earnings, compared to
current U.S. GAAP which amortizes the reversal of credit losses over the lifetime of the security. The length of time an
available for sale security has been in an unrealized loss position will no longer be considered in determining whether
to record a credit loss. In addition, the historical and implied volatility of the fair value of an available for sale security
and recoveries or declines in fair value after the balance sheet date will no longer be considered when making a
determination of whether a credit loss exists. The adoption of this guidance is not expected to have a material impact
on our consolidated financial statements and disclosures.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee
share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding
requirements, as well as classification in the statement of cash flows. The ASU is effective for interim and annual
reporting periods beginning after December 15, 2016. The adoption of this guidance is not expected to have a material
impact on our consolidated financial statements and disclosures.
ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued ASU 2016-07, which simplifies the equity method of accounting by eliminating
the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such
accounting as a result of an increase in the level of ownership interest or degree of influence. Entities are therefore
required to apply the guidance prospectively to increases in the level of ownership interest or degree of influence
occurring after the ASU’s effective date. The ASU further requires that unrealized holding gains or losses in accumulated
other comprehensive income related to an available-for-sale security that becomes eligible for the equity method be
recognized in earnings as of the date on which the investment qualifies for the equity method. The ASU is effective for
interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption
of this guidance is not expected to have a material impact on our consolidated financial statements and disclosures.
ASU 2016-02, Leases
In February 2016, the FASB issued ASU 2016-02, which amends the guidance on the classification, measurement
and disclosure of leases for both lessors and lessees. The ASU requires lessees to recognize a right-of-use asset and
a lease liability on the balance sheet and to disclose qualitative and quantitative information about leasing arrangements.
The ASU is effective for interim and annual reporting periods beginning after December 15, 2018.
We expect to adopt the new standard on January 1, 2019 and will recognize and measure our leasing
arrangements at the beginning of the earliest period presented using the modified retrospective approach permitted
by the ASU. The modified retrospective approach includes a number of specific optional practical expedients which
we intend to elect on adoption of the ASU, relating to, (1) the identification and classification of leases that commenced
before the effective date, (2) initial direct costs for leases that commenced before the effective date, and (3) the ability
to use hindsight in evaluating lessee options to extend or terminate a lease. The election of these practical expedients
will allow us to in effect, continue to account for leases that commence before the effective date in accordance with
the previous GAAP unless the lease is modified. The only exception would be that we will be required to recognize a
right-of-use asset and a lease liability for all our existing operating leases at each reporting date based on the present
value of the remaining minimum lease rental payments that we are disclosing under current U.S. GAAP. We are
continuing to review all our operating lease arrangements to quantify the right-of-use asset and the offsetting lease
liability to be recorded on our Consolidated Balance Sheet upon adoption of this guidance.
119
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
ASU 2016-01, Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued ASU 2016-01, which amends the guidance on the classification and
measurement of financial instruments. Although the ASU retains many of the current requirements, it significantly
revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities,
and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also
amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective
for interim and annual reporting periods beginning after December 15, 2017. The adoption of this guidance may have
an impact, possibly material, on our consolidated financial statements at the date of adoption in relation to any financial
liabilities for which we may elect the fair value option.
ASU's 2014-09, 2016-08, 2016-10, 2016-12, Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, which outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are
within the scope of other topics in the FASB ASC including ASC 944, Insurance. However, while contracts within the
scope of ASC 944 are excluded from the scope of the ASU, certain insurance-related contracts should be accounted
for under the ASU, for example contracts under which service providers charge their customers fixed fees in exchange
for an agreement to provide services for an uncertain future event. Certain of the ASU’s provisions also apply to transfers
of non-financial assets and include guidance on recognition and measurement.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent
Considerations, which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers - Identifying Performance
Obligations and Licensing, which amends the guidance in ASU 2014-09 related to identifying performance obligations
and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12, Revenue from
Contracts with Customers - Narrow-Scope Improvements and Practical Expedients, which clarifies the following aspects
in ASU 2014-09 - (1) collectability, (2) presentation of sales taxes and other similar taxes collected from customers,
(3) noncash considerations, (4) contract modifications at transition, (5) completed contracts at transition, and (6)
technical correction.
We are required to adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 together with ASU 2014-09, which is
effective for interim and annual reporting periods beginning after December 15, 2017.We expect to adopt this guidance
on January 1, 2018. The two permitted transition methods under the new revenue standard are the full retrospective
method, in which case the guidance would be applied to each prior reporting period presented, or the modified
retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of
initial adoption. We expect to adopt the guidance using the modified retrospective method. While we are still in the
process of completing our analysis of the impact this guidance will have on our consolidated financial statements and
related disclosures, we do not expect the impact to be material, as the majority of our revenues are within the scope
of other FASB topics, primarily ASC 944, Insurance.
120
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
3. ACQUISITIONS
2016
Dana Companies
On December 30, 2016, we completed the acquisition of Dana Companies, LLC ("Dana Companies") from Dana
Incorporated ("Dana"). Dana Companies holds liabilities associated with personal injury asbestos claims and
environmental claims arising from its legacy manufacturing operations. Dana Companies’ assets include, amongst
others, insurance rights related to coverage against these liabilities and marketable securities.
The total consideration for the transaction was $88.5 million.
Purchase price
Net assets acquired at fair value
Excess of purchase price over fair value of net assets acquired
$
$
$
88,500
88,500
—
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition
date, recorded in our Non-life Run-off segment.
ASSETS
Short-term investments, trading, at fair value
Fixed maturities, trading, at fair value
Other investments, at fair value
Total investments
Cash and cash equivalents
Restricted cash and cash equivalents
Other assets - Insurance balances recoverable
Other assets
TOTAL ASSETS
LIABILITIES
Other liabilities - Asbestos related
Other liabilities
TOTAL LIABILITIES
NET ASSETS ACQUIRED AT FAIR VALUE
Total
22,747
61,389
46,589
130,725
58,430
1,692
133,032
5,383
329,262
220,496
20,266
240,762
88,500
$
$
From the date of acquisition to December 31, 2016, we did not record any earnings from Dana Companies.
2015
Nationale Suisse Assurance S.A.
On November 13, 2015, we completed the acquisition of Nationale Suisse Assurance S.A. ("NSA"). We changed
the name of NSA to Alpha Insurance SA ("Alpha") at closing and placed the company into run-off. Alpha is a Belgium-
based composite insurance company that wrote both non-life and life insurance that we are now operating as part of
our non-life run-off and life and annuities businesses, respectively.
The total consideration for the transaction was €32.8 million (or $35.2 million).
Purchase price
Net assets acquired at fair value
Excess of purchase price over fair value of net assets acquired
121
$
$
$
35,225
35,225
—
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table summarizes the fair values of the assets acquired and liabilities assumed in the Alpha
transaction at the acquisition date, allocated by segment.
ASSETS
Short-term investments, trading, at fair value
$
— $
8,644 $
Life and
Annuities
Segment
Non-life
Run-off
Segment
Short-term investments, available-for-sale, at fair value
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value
Other investments, at fair value
Total investments
Cash and cash equivalents
Reinsurance balances recoverable — reserves
Reinsurance balances recoverable — paids
Prepaid reinsurance premiums
Other assets
TOTAL ASSETS
LIABILITIES
Losses and LAE
Funds withheld
Insurance and reinsurance balances payable
Unearned premium
Other liabilities
TOTAL LIABILITIES
6,687
—
96,656
—
103,343
25,258
302
1,320
—
2,298
—
31,350
—
1,339
41,333
39,451
4,041
10,831
3,213
3,097
Total
8,644
6,687
31,350
96,656
1,339
144,676
64,709
4,343
12,151
3,213
5,395
132,521
101,966
234,487
117,188
56,021
173,209
—
779
—
2,875
120,842
473
6,212
5,969
9,745
78,420
473
6,991
5,969
12,620
199,262
NET ASSETS ACQUIRED AT FAIR VALUE
$
11,679 $
23,546 $
35,225
From the date of acquisition to December 31, 2015, we earned premiums of $nil, recorded net incurred losses
and LAE of $nil on those earned premiums, and recorded $0.1 million in net losses attributable to Enstar Group Limited
related to Alpha’s business.
Wilton Re
On May 5, 2015, we completed the acquisition of certain subsidiaries from Wilton Re Limited ("Wilton Re"), which
hold interests in life insurance policies. These interests were acquired by Wilton Re in the secondary and tertiary
markets and through collateralized lending transactions.
The total consideration for the transaction was $173.1 million, paid in two installments. The first installment of
$89.1 million was paid on closing. The second installment of $83.9 million was paid on the first anniversary of closing.
The companies are operating as part of the Life and Annuities segment.
Purchase price
Net assets acquired at fair value
Excess of purchase price over fair value of net assets acquired
$
$
$
173,058
173,058
—
The purchase price was allocated to the acquired assets and liabilities of the two companies acquired based on
estimated fair values at the acquisition date. The following table summarizes the fair values of the assets acquired and
liabilities assumed at the acquisition date.
122
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
ASSETS
Other investments
Cash and cash equivalents
Other assets
TOTAL ASSETS
TOTAL LIABILITIES
NET ASSETS ACQUIRED AT FAIR VALUE
$
142,182
5,043
26,376
173,601
543
173,058
$
$
From the date of acquisition to December 31, 2015, we recorded $16.5 million in net earnings attributable to
Enstar Group Limited related to the life settlement contract business.
Canada Pension Plan Investment Board ("CPPIB"), together with management of Wilton Re, owns 100% of the
common stock of Wilton Re. Subsequent to the closing of our transaction with Wilton Re, CPPIB separately acquired
certain of our voting and non-voting ordinary shares in several third party transactions during 2015 and 2016, as
described in "Note 21 - Related Party Transactions."
Sussex Insurance Company (formerly known as Companion)
On January 27, 2015, we completed the acquisition of Companion Property and Casualty Insurance Company
("Companion") from Blue Cross and Blue Shield of South Carolina, an independent licensee of the Blue Cross Blue
Shield Association. Companion is a South Carolina based insurance group with property, casualty, specialty and
workers' compensation business, and has also provided fronting and third-party administrative services. We changed
the name of Companion to Sussex Insurance Company ("Sussex") following the acquisition, and the company is
operating as part of the Non-life Run-off segment. In addition, StarStone is renewing certain business from Sussex.
The total consideration for the transaction was $218.0 million, which was financed 50% through borrowings
under a Term Facility Agreement with two financial institutions (the "Sussex Facility") and 50% from cash on hand.
Purchase price
Net assets acquired at fair value
Excess of purchase price over fair value of net assets acquired
$
$
$
218,000
218,000
—
The purchase price was allocated to the acquired assets and liabilities of Sussex based on estimated fair values
at the acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed
at the acquisition date.
123
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
ASSETS
Short-term investments, trading, at fair value
$
85,309
Fixed maturities, trading, at fair value
Equities, trading, at fair value
Total investments
Cash and cash equivalents
Restricted cash and cash equivalents
Accrued interest receivable
Premiums receivable
Reinsurance balances recoverable
Prepaid reinsurance premiums
Other assets
TOTAL ASSETS
LIABILITIES
Losses and LAE
Insurance and reinsurance balances payable
Unearned premium
Funds withheld
Other liabilities
TOTAL LIABILITIES
NET ASSETS ACQUIRED AT FAIR VALUE
523,227
31,439
639,975
358,458
15,279
3,984
37,190
483,816
28,751
43,939
1,611,392
1,257,205
3,030
79,293
42,090
11,774
1,393,392
$
218,000
The net unearned premiums acquired included a decrease of $34.6 million to adjust net unearned premiums to
fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. As at
December 31, 2016, $16.1 million has been amortized to acquisition costs and $15.7 million has been amortized to
net premiums earned in the consolidated statements of earnings and comprehensive income. As at December 31,
2016, the remaining balance of the fair value adjustment was $2.7 million, which will be amortized to net premiums
earned over the remaining terms of the underlying policies.
From the date of acquisition to December 31, 2015, we earned premiums of $43.2 million, recorded net incurred
losses and LAE of $44.4 million on those earned premiums, and recorded $42.4 million in net losses attributable to
Enstar Group Limited related to Sussex’s non-life run-off business.
Supplemental Pro Forma Financial Information (Unaudited)
The following unaudited pro forma condensed combined statement of earnings for the years ended December 31,
2015 and 2014 combines our historical consolidated statements of earnings with those of Sussex, Alpha and Wilton
Re, giving effect to the business combinations and related transactions as if they had occurred on January 1, 2014
and 2015. For the year ended December 31, 2015, the operating results of Sussex, Alpha and Wilton Re have been
included in the consolidated financial statements from each of their respective dates of acquisition. The unaudited pro
forma financial information presented below is for informational purposes only and is not necessarily indicative of the
results of operations that would have been achieved if the acquisitions of Sussex, Alpha and Wilton Re and related
transactions had taken place at the beginning of each period presented, nor is it indicative of future results.
2015
Total income
Total expenses
Total noncontrolling interest
Net earnings (loss)
Enstar Group
Limited
Sussex
Alpha
Wilton Re
Pro forma
Adjustments
Enstar
Group Limited -
Pro forma
$
$
904,460
$
29,990
$
31,884
$
5,793
$
9,494
$
981,621
(694,119)
(39,860)
(47,026)
9,950
—
—
(3,628)
—
5,894
—
(778,739)
9,950
220,291
$
(9,870) $
(15,142) $
2,165
$
15,388
$
212,832
Unaudited
124
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Summary of the Pro Forma Adjustments to the Pro Forma Condensed Consolidated Statement of
Earnings for the Twelve Months Ended December 31, 2015 (Unaudited):
Income:
(a) Reversal of amortization of fair value adjustments related to unearned premium included in
Enstar Group results but reflected in 2014 pro formas
(b) Adjustment to recognize amortization of fair value adjustments related to unearned premium
Expenses:
(a) Adjustment to interest expense to reflect financing costs of the acquisition for the period
(b) Adjustment to recognize amortization of fair value adjustments related to acquired losses and
LAE liabilities and reinsurance balances recoverable
(c) Reversal of amortization of fair value adjustments related to acquisition costs included in Enstar
Group results but reflected in 2014 pro formas
(d) Adjustment to income taxes for pro forma adjustments
13,344
(3,850)
9,494
(1,098)
(451)
16,173
(8,730)
5,894
2014
Total income
Total expenses
Total noncontrolling interest
Net earnings (loss)
Enstar Group
Limited
Sussex
Alpha
Wilton Re
Pro forma
Adjustments
Enstar
Group Limited -
Pro forma
$
$
710,074
$
267,939
$
44,910
$
17,378
$
(14,557) $
1,025,744
(482,838)
(13,487)
(360,018)
(52,103)
(10,884)
—
—
—
(3,026)
—
(908,869)
(13,487)
213,749
$
(92,079) $
(7,193) $
6,494
$
(17,583) $
103,388
Unaudited
Summary of the Pro Forma Adjustments to the Pro Forma Condensed Consolidated Statement of
Earnings for the Twelve Months Ended December 31, 2014 (Unaudited):
Income:
(a) Adjustment to recognize amortization of fair value adjustments related to unearned premium
Expenses:
(a) Adjustment to interest expense to reflect financing costs of the acquisition for the period
(b) Adjustment to recognize amortization of fair value adjustments related to acquired losses and
LAE liabilities, deferred acquisition costs and reinsurance balances recoverable
(c) Adjustment to income taxes for pro forma adjustments
(14,557)
(5,744)
(5,417)
8,135
(3,026)
2014
StarStone Insurance Bermuda Limited (formerly named Torus Insurance Holdings Limited)
On April 1, 2014, we, together with Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund,
L.P., which are managed by Stone Point Capital LLC (collectively, "Trident"), completed the acquisition of Torus
Insurance Holdings Limited, which we later renamed as StarStone Insurance Bermuda Limited ("StarStone"). StarStone
is an A- rated global specialty insurer with six wholly-owned insurance vehicles, including Lloyd’s Syndicate 1301. At
closing, StarStone became directly owned by Bayshore Holdings Ltd. ("Bayshore"), which was 60% owned by Kenmare
Holdings Ltd., our wholly-owned subsidiary, and 40% owned by Trident. We subsequently renamed Bayshore as
StarStone Specialty Holdings Limited ("StarStone Holdings").
The purchase price for StarStone was established in the amended and restated amalgamation agreement as
$646.0 million, which was paid partly in cash and partly in our ordinary shares. The number of our shares to be issued
125
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
was fixed at the signing of the amalgamation agreement on July 8, 2013 and was determined by reference to an agreed-
upon value per share of $132.448, which was the average closing price of our voting ordinary shares, par value $1.00
per share (the "Voting Ordinary Shares"), over the 20 trading days prior to such signing date. On the day before closing
of the amalgamation, the Voting Ordinary Shares had a closing price of $136.31 per share. At closing, we contributed
cash of $41.6 million towards the purchase price and $3.6 million towards related transaction expenses, as well as
1,898,326 Voting Ordinary Shares and 714,015 shares of our Series B Convertible Participating Non-Voting Perpetual
Preferred Stock (the "Non-Voting Preferred Shares"). Based on a price of $136.31 per share, our contribution of cash
and shares to the purchase price totaled $397.7 million in the aggregate. Trident contributed cash of $258.4 million
towards the purchase price and $2.4 million towards related transaction expenses. Based on a price of $136.31 per
share, the aggregate purchase price paid by us and Trident was $656.1 million.
As a shareholder of StarStone, FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle
L.P. and FR Torus Co-Investment, L.P. (collectively, "First Reserve") received 1,501,211 Voting Ordinary Shares,
714,015 Non-Voting Preferred Shares and cash consideration in the transaction. Following the approval of our
shareholders of an amendment to our bye-laws on June 10, 2014, First Reserve’s Non-Voting Preferred Shares
converted on a share-for-share basis into 714,015 shares of newly created Series E Non-Voting Convertible Common
Shares (the "Series E Non-Voting Ordinary Shares"). Corsair Specialty Investors, L.P. ("Corsair") received 397,115
Voting Ordinary Shares and cash consideration in the transaction. The remaining StarStone shareholders received all
cash.
Upon the closing of the transaction, StarStone Holdings, Kenmare and Trident entered into a Shareholders’
Agreement (the "StarStone Holdings Shareholders’ Agreement"), which was subsequently amended, as described in
"Changes in Ownership Interests relating to Holding Companies for our Active Underwriting Businesses" below.
Purchase price
Net assets acquired at fair value
Excess of purchase price over fair value of net assets acquired
$
$
$
656,088
643,088
13,000
The purchase price was allocated to the acquired assets and liabilities of StarStone based on estimated fair
values at the acquisition date. We recognized goodwill of $13.0 million, primarily attributable to StarStone’s assembled
workforce. We also recognized indefinite lived intangible assets of $23.9 million and other definite lived intangible
assets of $20.0 million.
Prior to acquisition, StarStone ceased underwriting certain lines of business in order to focus on core property,
casualty and specialty lines. The results of the discontinued lines of business that were placed into run-off are included
within our Non-life Run-off segment.
126
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table summarizes the fair values of the assets acquired and liabilities assumed in the StarStone
transaction at the acquisition date, allocated by segment.
ASSETS
Short-term investments, trading, at fair value
Fixed maturities, trading, at fair value
Other investments
Total investments
Cash and cash equivalents
Restricted cash and cash equivalents
Premiums receivable
Reinsurance balances recoverable — reserves
Reinsurance balances recoverable — paids
Prepaid reinsurance premiums
Intangible assets
Other assets
TOTAL ASSETS
LIABILITIES
Losses and LAE
Insurance and reinsurance balances payable
Unearned premium
Other liabilities
TOTAL LIABILITIES
NET ASSETS ACQUIRED AT FAIR VALUE
Goodwill
ACQUISITION DATE FAIR VALUE
StarStone
Segment
Non-life
Run-off
Segment
Total
$
73,425 $
25,888 $
99,313
736,765
2,068
812,258
211,718
22,779
321,350
210,742
21,122
144,221
43,900
37,621
329,235
1,066,000
—
355,123
127,890
—
—
152,057
20,100
25,221
—
—
2,068
1,167,381
339,608
22,779
321,350
362,799
41,222
169,442
43,900
37,621
1,825,711
680,391
2,506,102
675,424
140,997
343,840
22,362
588,822
1,264,246
42,447
49,122
—
183,444
392,962
22,362
1,182,623
680,391
1,863,014
643,088
13,000
—
—
643,088
13,000
$
656,088 $
— $
656,088
The net unearned premiums acquired included a decrease of $11.1 million to adjust net unearned premiums to
fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. As at
December 31, 2016, the full amount of $11.1 million had been amortized in the consolidated statements of earnings
and comprehensive income.
The following table summarizes the intangible assets recorded in connection with the acquisition:
Syndicate capacity
U.S. insurance licenses
Technology
Brand
Intangible assets as of the acquisition date
Amount
Economic
Useful Life
$
$
4,000
19,900
15,000
5,000
43,900
Indefinite
Indefinite
4 Years
6 Years
The fair value of the Lloyd’s syndicate capacity was estimated using the multi-period excess-earnings method,
a form of the income approach. Lloyd’s syndicate capacity represents StarStone’s authorized premium income limit
to write insurance business in the Lloyd’s market. The capacity is renewed annually at no cost to us but may be freely
purchased or sold, subject to Lloyd’s approval. The ability to write insurance business within the syndicate capacity is
indefinite, with the premium income limit being set annually by StarStone, subject to Lloyd’s approval.
127
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
U.S. insurance licenses represent the intangible asset related to StarStone’s licenses and have been valued
based on recent market transactions.
Technology represents the intangible asset related to StarStone’s capitalized software and has been valued on
a replacement cost basis.
Brand represents the intangible asset related to the Torus name and was valued using the income approach.
This was subsequently written off during 2015 when Torus was renamed as StarStone.
Supplemental Pro Forma Financial Information (Unaudited)
The operating results for StarStone have been included in the consolidated financial statements from the date
of acquisition. The following pro forma condensed combined statement of earnings for the years ended December 31,
2014 combines our historical consolidated statements of earnings with the historical consolidated statements of
earnings of StarStone, giving effect to the business combinations and related transactions as if they had occurred on
January 1, 2014. The unaudited pro forma financial information presented below is for informational purposes only
and is not necessarily indicative of the results of operations that would have been achieved if the acquisition of StarStone
and related transactions had taken place at the beginning of each period presented, nor is it indicative of future results.
2014
Total income
Total expenses
Total noncontrolling interest
Net earnings
Unaudited
Enstar Group
Limited
StarStone
Proforma
Adjustments
Enstar Group
Limited -
Proforma
$ 710,074 $
147,193 $
(1,846) $
855,421
(482,838)
(145,479)
(13,487)
—
3,670
(1,451)
(624,647)
(14,938)
$ 213,749 $
1,714 $
373 $
215,836
Summary of the Pro Forma Adjustments to the Pro Forma Condensed Consolidated Statement of
Earnings for the Twelve Months Ended December 31, 2014 (Unaudited):
Income:
(a) Adjustment to recognize amortization of fair value adjustments related to unearned premium
Expenses:
(a) Adjustment to recognize amortization of definite-lived intangible assets
(b) Adjustment to recognize amortization of fair value adjustments related to acquired losses and loss
adjustment expense liabilities and reinsurance balances recoverable
(c) Adjustment to noncontrolling interest for pro forma condensed consolidated statement of earnings
(1,846)
(1,146)
4,816
3,670
(1,451)
Changes in Ownership Interests relating to Holding Companies for our Active Underwriting Businesses
Corporate Holding Company Reorganization during 2015
On December 23, 2015, we completed a corporate reorganization of certain of our subsidiary holding companies.
Following the reorganization, StarStone Holdings and Northshore are owned by a common parent, North Bay Holdings
Limited ("North Bay"), as described in Note 16 - "Noncontrolling Interests".
Dowling Co-investments during 2014
On May 8, 2014, Dowling Capital Partners I, L.P. ("Dowling") purchased common shares of both StarStone
Holdings and Northshore from Kenmare and Trident (on a pro rata basis in accordance with their respective interests)
for an aggregate amount of $15.4 million.
128
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Prior to the sale of shares to Dowling, Kenmare and Trident owned 60% and 40% of StarStone Holdings and
Northshore, respectively. Following the sale Kenmare, Trident and Dowling owned 59.0%, 39.3% and 1.7%,
respectively, of StarStone Holdings and Northshore.
The shareholders’ agreements governing North Bay, StarStone Holdings and Northshore, among other things,
provide that Kenmare has the right to appoint three members to the StarStone Holdings board of directors and Trident
has the right to appoint two members. The shareholders’ agreements also include redemption rights and obligations
which are described in Note 23 - "Commitments and Contingencies."
129
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
4. SIGNIFICANT NEW BUSINESS
2017
RSA
On February 7, 2017, we entered into an agreement to reinsure U.K. employers' liability legacy business of RSA
Insurance Group PLC ("RSA"). Pursuant to the transaction, our subsidiary will assume gross insurance reserves of
approximately £957 million (approximately $1.2 billion), relating to 2005 and prior year business. Net insurance reserves
are approximately £834 million (approximately $1.0 billion) and the reinsurance premium payable to Enstar’s subsidiary
is £799 million (approximately $1.0 billion). The transaction is subject to finalizing and effecting certain security
arrangements.
Following the initial reinsurance transaction, which will transfer the economics of the portfolio up to the policy's
limits, we and RSA will pursue a portfolio transfer of the business under Part VII of the Financial Services and Markets
Act 2000, which would provide legal finality for RSA's obligations. The transfer is subject to court, regulatory and other
approvals.
QBE
On January 11, 2017, we announced the closing of a transaction to reinsure multi-line property and casualty
business of QBE Insurance Group Limited ("QBE"). Our subsidiary assumed gross reinsurance reserves of
approximately $919.0 million (net reserves of $444.0 million) relating to the portfolio, which primarily includes workers'
compensation, construction defect, and general liability discontinued lines of business. In addition our subsidiary has
pledged a portion of the premium as collateral to a subsidiary of QBE, and we have provided additional collateral and
a limited parental guarantee.
2016
Coca-Cola
On August 5, 2016, we entered into a reinsurance transaction with The Coca-Cola Company and its subsidiaries
(“Coca-Cola”) pursuant to which we reinsured certain of Coca-Cola’s retention and deductible risks under its
subsidiaries’ U.S. workers’ compensation, auto liability, general liability, and product liability insurance coverage. We
assumed total gross reserves of $108.8 million, received total assets of $101.3 million and recorded a deferred charge
of $7.5 million, included in other assets. We have transferred $108.8 million into a trust to support our obligations under
the reinsurance agreements. We provided a limited parental guarantee, subject to an overall maximum of $27.0 million.
Allianz
On February 17, 2016, we entered into a reinsurance agreement with Allianz SE ("Allianz") to reinsure portfolios
of Allianz's run-off business. Pursuant to the reinsurance agreement, our subsidiary reinsured 50% of certain portfolios
of workers' compensation, construction defect, and asbestos, pollution, and toxic tort business originally held by
Fireman's Fund Insurance Company, and in the process assumed net reinsurance reserves of $1.1 billion. Affiliates
of Allianz retained $1.1 billion of reinsurance premium as funds withheld collateral for the obligations of our subsidiary
under the reinsurance agreement and we transferred $110.0 million to a reinsurance trust to further support our
subsidiary's obligations. We have also provided a limited parental guarantee, which is subject to a maximum cap. The
combined monetary total of the support offered by us through the trust and parental guarantee was initially be capped
at $270.0 million.
In addition to the reinsurance transaction described above, we have entered into a consulting agreement with
San Francisco Reinsurance Company, an affiliate of Allianz, with respect to the entire $2.2 billion portfolio, including
the 50% share retained by affiliates of Allianz.
Shelbourne RITC Transaction
On November 15, 2016, we entered into a RITC transaction of the 2007 and prior underwriting years of account
of a Lloyd’s syndicate managed by Neon (formerly Marketform), under which we assumed total net insurance reserves
of £121.5 million ($158.0 million) for cash consideration of an equal amount.
130
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
2015
Doctors
On November 30, 2015, we completed the assignment and assumption of a portfolio of primarily workers'
compensation business from The Doctors Company and its affiliates. Total assets and liabilities assumed were $29.5
million.
Sun Life
On September 30, 2015, we entered into two 100% reinsurance agreements and a related administration services
agreement with Sun Life pursuant to which we reinsured all of the run-off workers' compensation carve-out and
occupational accident business of Sun Life. We assumed reinsurance reserves of $128.3 million, received total assets
of $122.5 million and recorded a deferred charge of $5.8 million, included in other assets. We transferred $30.6 million
of additional funds into trust to further support our obligations under the reinsurance agreements. We provided limited
parental guarantees, subject to an overall maximum of $36.8 million.
Voya Financial
On May 27, 2015, we entered into two 100% reinsurance agreements and related administration services
agreements with a subsidiary of Voya, pursuant to which we reinsured all of the run-off workers' compensation and
occupational accident assumed reinsurance business of the Voya subsidiary and that of its Canadian branch. Pursuant
to the transaction, the Voya subsidiary transferred assets into two reinsurance collateral trusts securing our obligations
under the reinsurance agreements. We assumed reinsurance reserves of $572.4 million, received total assets of $307.0
million and recorded a deferred charge of $265.4 million, included in other assets. We transferred $67.2 million of
additional funds to the trusts to further support our obligations under the reinsurance agreements. We provided a limited
parental guarantee, subject to a maximum cap with respect to the reinsurance liabilities. As of December 31, 2016,
the amount of the parental guarantee was $58.0 million.
Reciprocal of America
On January 15, 2015, we completed a loss portfolio transfer reinsurance transaction with Reciprocal of America
(in Receivership) and its Deputy Receiver relating to a portfolio of workers' compensation business that has been in
run-off since 2003. The total insurance reserves assumed were $162.1 million with an equivalent amount of cash and
investments received as consideration.
2014
Shelbourne RITC Transaction
On January 1, 2014, we entered into a RITC of the 2011 and prior underwriting years of account of a Lloyd’s
syndicate, under which we assumed total net insurance reserves of £17.0 million ($28.1 million) for cash consideration
of an equal amount.
131
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
5. HELD-FOR-SALE BUSINESS
On February 17, 2017, we entered into a definitive agreement to sell Pavonia Holdings (US) Inc. and its
subsidiaries (“Pavonia”) for total consideration of $120.0 million to Southland National Holdings, Inc. The transaction
is expected to close in the third or fourth quarter of 2017. The closing of the transaction is subject to customary closing
conditions, including regulatory approvals. The proceeds of the sale are expected to be used to pay down our revolving
credit facility following closing.
Pavonia is a substantial portion of the Life and Annuities segment. We have classified the assets and liabilities
of the businesses to be sold as held-for-sale. The following table summarizes the components of assets and liabilities
held-for-sale on our consolidated balance sheet as at December 31, 2016 and 2015:
December 31,
2016
December 31,
2015
Assets:
Short-term investments, trading, at fair value
$
— $
Fixed maturities, trading, at fair value
Fixed maturities, held-to-maturity, at amortized cost
Equities, trading, at fair value
Other investments, at fair value
Cash and cash equivalents
Restricted cash and cash equivalents
Deferred tax assets
Reinsurance balances recoverable
Other assets
Total assets held for sale
Liabilities:
Policy benefits for life and annuity contracts
Other liabilities
Total liabilities held for sale
326,382
765,554
4,428
15,114
18,018
5,202
31,500
18,029
60,229
2,246
262,273
790,866
4,446
53,743
26,680
11,415
31,531
22,083
64,300
$
$
$
1,244,456 $
1,269,583
1,144,850 $
1,178,376
5,937
11,083
1,150,787 $
1,189,459
As of December 31, 2016 and 2015, included in the table above were restricted investments of $786.0 million
and $804.2 million, respectively.
The cumulative currency translation adjustment ("CTA") balance in accumulated other comprehensive
income (loss), a component of shareholders’ equity, included $(14.8) million as at December 31, 2016 related to
Pavonia. Upon completion of the sale, the CTA will be included in earnings as a reduction of the gain on sale.
The Pavonia business qualifies as a discontinued operation. The following table summarizes the
components of net earnings (losses) from discontinued operations on the consolidated statements of earnings for
the years ended December 31, 2016, 2015 and 2014:
132
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
INCOME
Net premiums earned
Net investment income
Net realized and unrealized gains (losses)
Other income
EXPENSES
Life and annuity policy benefits
Acquisition costs
General and administrative expenses
Other expenses
EARNINGS (LOSS) BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS FROM DISCONTINUED
OPERATIONS
December 31,
2016
December 31,
2015
December 31,
2014
$
$
$
$
69,089 $
85,327 $
103,459
38,140
4,263
1,912
35,404
271
7,690
36,599
10,628
1,813
113,404 $
128,692 $
152,499
76,594
9,836
14,416
199
97,472
13,712
13,886
486
107,962
15,031
17,206
1,220
101,045 $
125,556 $
141,419
12,359
(396) $
3,136
(5,167)
11,080
(5,541)
11,963 $
(2,031) $
5,539
The following table presents the cash flows of Pavonia for the years ended December 31, 2016, 2015 and 2014:
Operating activities
Investing activities
Financing Activities
Change in cash of businesses held for sale
December 31,
2016
December 31,
2015
December 31,
2014
$
$
(71,521) $
(5,893) $
56,646
—
(24,766)
—
(46,386)
32,641
—
(14,875) $
(30,659) $
(13,745)
133
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
6. INVESTMENTS
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair
value; (ii) available-for-sale portfolios of fixed maturity and short-term investments carried at fair value; and (iii) other
investments carried at either fair value or cost.
Trading
The fair values of our fixed maturity investments, short-term investments and equities classified as trading were
as follows:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturity and short-term investments
Equities — U.S.
Equities — International
$
December 31,
2016
840,274 $
267,363
2,387,322
47,181
373,528
217,212
478,280
4,611,160
95,047
—
December 31,
2015
742,918
338,170
2,564,618
22,247
381,573
232,847
531,252
4,813,625
108,793
2,702
$ 4,706,207 $ 4,925,120
Included within residential and commercial mortgage-backed securities as at December 31, 2016 were securities
issued by U.S. governmental agencies with a fair value of $362.9 million (as at December 31, 2015: $355.4 million).
Included within corporate securities as at December 31, 2016 were senior secured loans of $90.7 million (as at
December 31, 2015: $94.4 million).
The contractual maturities of our fixed maturity and short-term investments classified as trading are shown below.
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
As at December 31, 2016
One year or less
More than one year through two years
More than two years through five years
More than five years through ten years
More than ten years
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Amortized
Cost
Fair Value
$
748,634
$
739,820
713,175
708,739
1,270,909
1,259,564
651,539
186,066
378,516
220,727
476,595
648,156
185,861
373,528
217,212
478,280
$ 4,646,161
$ 4,611,160
% of Total
Fair
Value
16.0%
15.4%
27.3%
14.1%
4.0%
8.1%
4.7%
10.4%
100.0%
134
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Available-for-sale
The amortized cost and fair values of our fixed maturity and short-term investments classified as available-for-
sale were as follows:
As at December 31, 2016
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Asset-backed
As at December 31, 2015
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Asset-backed
Amortized
Cost
12,784 $
86,897
159,243
6,585
488
3,867
269,864 $
Amortized
Cost
25,102 $
89,631
182,773
5,959
665
4,660
308,790 $
$
$
$
$
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Non-OTTI
32 $
1,303
2,040
12
39
9
3,435 $
(106) $
(2,777)
(2,628)
(21)
—
—
(5,532) $
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Non-OTTI
80 $
42
1,040
4
51
—
1,217 $
(341) $
(3,889)
(3,429)
(36)
(1)
(10)
(7,706) $
Fair
Value
12,710
85,423
158,655
6,576
527
3,876
267,767
Fair
Value
24,841
85,784
180,384
5,927
715
4,650
302,301
The contractual maturities of our fixed maturity and short-term investments classified as available-for-sale are
shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
As at December 31, 2016
One year or less
More than one year through two years
More than two years through five years
More than five years through ten years
More than ten years
Residential mortgage-backed
Asset-backed
Amortized
Cost
Fair
Value
% of Total
Fair
Value
$
48,561 $
62,855
72,008
43,889
38,196
488
3,867
46,955
61,395
70,404
45,173
39,437
527
3,876
17.5%
22.9%
26.3%
16.9%
14.7%
0.2%
1.5%
$
269,864 $
267,767
100.0%
135
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Gross Unrealized Losses
The following tables summarize our fixed maturity and short-term investments in a gross unrealized loss position:
As at December 31, 2016
Fixed maturity and short-term investments, at fair value
12 Months or Greater
Less Than 12 Months
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
U.S. government and agency
Non-U.S. government
Corporate
Municipal
$
— $
— $
10,743
$
(106) $
10,743
$
(106)
8,316
8,003
—
(1,794)
(1,800)
—
30,086
42,304
3,132
(983)
(828)
(21)
38,402
50,307
3,132
(2,777)
(2,628)
(21)
Total fixed maturity and short-term investments
$
16,319
$
(3,594) $
86,265
$
(1,938) $
102,584
$
(5,532)
As at December 31, 2015
Fixed maturity and short-term investments, at fair value
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Asset-backed
12 Months or Greater
Less Than 12 Months
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
523
$
(2) $
21,694
$
(339) $
22,217
$
(341)
18,995
54,295
—
71
4,649
(2,633)
(2,394)
—
(1)
(10)
50,080
81,047
4,609
—
—
(1,256)
69,075
(1,035)
135,342
(36)
—
—
4,609
71
4,649
(3,889)
(3,429)
(36)
(1)
(10)
Total fixed maturity and short-term investments
$
78,533
$
(5,040) $
157,430
$
(2,666) $
235,963
$
(7,706)
As at December 31, 2016 and December 31, 2015, the number of securities classified as available-for-sale in
an unrealized loss position was 156 and 332, respectively. Of these securities, the number of securities that had been
in an unrealized loss position for twelve months or longer was 41 and 124, respectively.
Other-Than-Temporary Impairment
For the years ended December 31, 2016, and 2015, we did not recognize any other-than-temporary impairment
losses on our available-for-sale securities. We determined that no credit losses existed as at December 31, 2016 and
2015. A description of our other-than-temporary impairment process is included in Note 2 - "Significant Accounting
Policies." There were no changes to our process in the years ended December 31, 2016, and 2015.
136
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Credit Ratings
The following table sets forth the credit ratings of our fixed maturity and short-term investments as of December 31,
:
2016
Amortized
Cost
Fair Value
% of Total
Investments
AAA
Rated
AA Rated
A Rated
BBB
Rated
Non-
Investment
Grade
Not Rated
$
857,530
$ 852,984
17.5% $ 846,698
$
6,286
$
— $
— $
— $
362,797
352,786
7.2%
140,357
150,569
43,771
18,089
—
—
—
2,561,305
2,545,977
52.2%
105,081
465,224
1,199,452
615,538
149,898
10,784
54,200
53,757
379,004
374,055
1.1%
7.7%
25,566
370,067
25,834
403
2,357
3,487
—
—
220,727
217,212
4.4%
100,065
41,542
41,837
16,383
U.S. government
and agency
Non-U.S.
government
Corporate
Municipal
Residential
mortgage-backed
Commercial
mortgage-backed
—
97
77
72,485
222,557
—
1
17,308
—
28,093
Asset-backed
480,462
482,156
9.9%
213,312
58,322
114,503
23,534
Total
$ 4,916,025
4,878,927
100.0% 1,801,146
748,180
1,405,407
673,544
% of total fair value
36.9%
15.3%
28.8%
13.8%
4.6%
0.6%
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
Private equities and private equity funds
Fixed income funds
Fixed income hedge funds
Equity funds
Multi-strategy hedge fund
Real estate debt fund
CLO equities
CLO equity funds
Other
December 31,
2016
300,529 $
249,023
85,976
223,571
—
—
61,565
15,440
943
937,047 $
December 31,
2015
232,372
280,749
89,154
147,390
99,020
54,829
61,702
13,928
1,145
980,289
$
$
The valuation of our other investments is described in Note 8 - "Fair Value Measurements." Due to a lag in the
valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month
lag. We regularly review and discuss fund performance with the fund managers to corroborate the reasonableness of
the reported net asset values and to assess whether any events have occurred within the lag period that would affect
the valuation of the investments. The following is a description of the nature of each of these investment categories:
• Private equities and private equity funds invest primarily in the financial services industry. All of our investments
in private equities and private equity funds are subject to restrictions on redemptions and sales that are
determined by the governing documents and limit our ability to liquidate those investments. These restrictions
have been in place since the dates of our initial investments.
• Fixed income funds comprise a number of positions in diversified fixed income funds that are managed by
third-party managers. Underlying investments vary from high-grade corporate bonds to non-investment grade
senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have
regularly published prices. The funds have liquidity terms that vary from daily up to quarterly.
• Fixed income hedge funds invest in a diversified portfolio of debt securities. The hedge funds have imposed
lock-up periods of up to three years from the time of initial investment. Once eligible, redemptions will be
permitted quarterly with 90 days’ notice.
137
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• Equity funds invest in a diversified portfolio of international publicly traded equity securities. The funds have
liquidity terms that vary from daily to bi-monthly.
• Multi-strategy hedge fund was an investment in a hedge fund that invested in a variety of asset classes including
funds, fixed income, equity securities and other investments. The fund was sold in December 2016. The
proceeds of sale were contributed to our investment in the start-up reinsurer KaylaRe Holdings, which is
recorded as an equity-method investment in other assets on our consolidated balance sheet.
• Real estate debt fund invests primarily in U.S. commercial real estate loans and securities. A redemption
request for this fund can be made 10 days after the date of any monthly valuation. The fund was fully redeemed
during the year ended December 31, 2016.
• CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools
of corporate bank loans. CLO equities denote direct investments by us in these securities.
• CLO equity funds comprise two funds that invest primarily in the equity tranches of term-financed securitizations
of diversified pools of corporate bank loans. One of the funds has a fair value of $4.1 million, part of a self-
liquidating structure which is expected to pay out over one to five years. The other fund has a fair value of
$11.3 million and is eligible for redemption in 2018.
• Other primarily comprises a fund that provides loans to educational institutions throughout the United States
and its territories.
Investments of $0.5 million in fixed income hedge funds were subject to gates or side-pockets, where redemptions
are subject to the sale of underlying investments. A gate is the ability to deny or delay a redemption request, whereas
a side-pocket is a designated account for which the investor loses its redemption rights.
As at December 31, 2016, we had unfunded commitments to private equity funds of $144.0 million.
Other Investments, at cost
Our other investments carried at cost of $131.7 million as of December 31, 2016 consist of life settlement contracts
acquired during 2015. Refer to Note 3 - "Acquisitions" for information about this transaction, and Note 2 - "Significant
Accounting Policies" for a description of our accounting policies. During the years ended December 31, 2016 and 2015,
net investment income included $18.0 million and $20.1 million respectively, related to investments in life settlements.
During the years ended December 31, 2016 and 2015, there were impairment charges of $5.3 million and nil
respectively, recognized in net realized and unrealized gains/losses. The following table presents further information
regarding our investments in life settlements as of December 31, 2016 and 2015.
Remaining Life Expectancy of Insureds:
0 – 1 year
1 – 2 years
2 – 3 years
3 – 4 years
4 – 5 years
Thereafter
Total
December 31, 2016
December 31, 2015
Number of
Contracts
Carrying
Value
Face Value
(Death
Benefits)
Number of
Contracts
Carrying
Value
Face Value
(Death
Benefits)
2
7
11
17
16
181
234
$
461
$
700
11,396
15,338
17,013
10,377
77,066
18,337
29,715
32,189
23,302
431,034
$ 131,651
$ 535,277
2
4
19
14
16
221
276
$
417
$
3,032
24,072
9,695
9,025
700
5,000
39,123
20,932
22,457
86,830
491,499
$ 133,071
$ 579,711
Remaining life expectancy for year 0-1 in the table above references policies whose current life expectancy is
less than 12 months as of the reporting date. Remaining life expectancy is not an indication of expected maturity. Actual
maturity in any category above may vary significantly (either earlier or later) from the remaining life expectancies
reported.
At December 31, 2016, our best estimate of the life insurance premiums required to keep the policies in force,
payable in the 12 months ending December 31, 2017 and the four succeeding years ending December 31, 2021 is
$17.8 million, $17.5 million, $17.7 million, $16.9 million, and $15.6 million, respectively.
138
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Net Realized and Unrealized Gains (Losses)
Components of net realized and unrealized gains (losses) for the years ended December 31, 2016, 2015 and
2014 were as follows:
Net realized gains (losses) on sale:
2016
2015
2014
Gross realized gains on fixed maturity securities, available-for-sale
$
405
$
396
$
Gross realized (losses) on fixed maturity securities, available-for-sale securities
Net realized investment gains (losses) on fixed maturity securities, trading
Net realized investment gains on equity securities, trading
Net realized investment losses on funds held - directly managed
Total net realized gains (losses) on sale
Net unrealized gains (losses):
Fixed maturity securities, trading
Equity securities, trading
Other investments
Change in fair value of embedded derivative on funds held – directly managed
Total net unrealized gains (losses)
Net realized and unrealized gains (losses)
(21)
1,848
5,348
(14,616)
(7,036)
36,314
6,561
70,296
(28,317)
84,854
(130)
(4,291)
19,884
—
15,859
(52,918)
(21,875)
17,411
—
(57,382)
$
77,818
$
(41,523) $
196
(138)
3,372
18,738
—
22,168
9,890
(8,665)
28,598
—
29,823
51,991
The gross realized gains and losses on available-for-sale securities included in the table above resulted from
sales of $41.3 million, $95.1 million and $90.7 million for the years ended December 31, 2016, 2015 and 2014,
respectively.
Net Investment Income
Major categories of net investment income for the years ended December 31, 2016, 2015 and 2014 are
summarized as follows:
Fixed maturity investments
Short-term investments and cash and cash equivalents
Equity securities
Other investments
Funds held
Funds held – directly managed
Life settlements and other
Gross investment income
Investment expenses
Net investment income
2016
2015
2014
$
114,885 $
87,512 $
58,815
4,491
4,874
22,515
22,583
5,769
18,191
193,308
(7,845)
5,993
5,580
11,712
234
—
20,871
131,902
(9,338)
6,209
5,671
1,335
1,376
—
593
73,999
(7,975)
$
185,463 $
122,564 $
66,024
139
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Restricted Assets
We are required to maintain investments and cash and cash equivalents on deposit to support our insurance and
reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance
and reinsurance liabilities. We also utilize trust accounts to collateralize business with our insurance and reinsurance
counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as
collateral are primarily highly rated fixed maturity securities. The carrying value of our restricted assets, including
restricted cash of $363.8 million and $499.9 million, as of December 31, 2016 and 2015, respectively, was as follows:
Collateral in trust for third party agreements
Assets on deposit with regulatory authorities
Collateral for secured letter of credit facilities
Funds at Lloyd's (1)
December 31,
2016
1,975,022 $
882,400
177,263
220,328
3,255,013 $
December 31,
2015
1,993,065
906,973
212,544
382,624
3,495,206
$
$
(1)
Our underwriting businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual
business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has
a loss that cannot be funded from other sources. In November 2016, we entered into an unsecured letter of credit agreement for Funds at
Lloyd’s purposes ("FAL Facility") to issue up to $140.0 million of letters of credit, with a provision to increase the facility up to $200.0
million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and replaces certain restricted assets and letter of credit
arrangements. The FAL Facility expires in 2021. As at December 31, 2016, our combined Funds at Lloyd's were comprised of cash and
investments of $220.3 million and unsecured letters of credit of $122.0 million.
140
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
7. FUNDS HELD - DIRECTLY MANAGED
On October 1, 2016, the funds held balance in relation to the Allianz transaction, described in Note 4 - "Significant
New Business", moved from a fixed crediting rate to a variable rate of return on the underlying investments. This
variable return reflects the economics of the investment portfolio underlying the funds held asset and qualifies as an
embedded derivative. We have recorded the aggregate of the funds held, typically held at cost, and the embedded
derivative as a single amount in our consolidated balance sheet. As at December 31, 2016, the funds held at cost had
a carrying value of $1,023.0 million and the embedded derivative had a fair value of ($28.3) million, the aggregate of
which was $994.7 million, as reflected in the table below.
The carrying values of assets and liabilities underlying the funds held - directly managed account as at
December 31, 2016 were as follows:
Fixed maturity investments:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Commercial mortgage-backed
Asset-backed
Total fixed maturity investments
Other assets
December 31,
2016
$
$
$
$
47,885
5,961
663,556
38,927
151,395
79,806
987,530
7,135
994,665
The contractual maturities of our fixed maturity investments underlying the funds held - directly managed account
are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
As at December 31, 2016
One year or less
More than one year through two years
More than two years through five years
More than five years through ten years
More than ten years
Commercial mortgage-backed
Asset-backed
Amortized
Cost
Fair Value
% of Total
Fair Value
$
5,027
$
5,026
20,641
301,119
253,811
197,236
158,129
79,885
20,613
296,685
244,967
189,038
151,395
79,806
0.5%
2.1%
30.0%
24.9%
19.1%
15.3%
8.1%
$ 1,015,848
$
987,530
100.0%
141
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Credit Ratings
The following table sets forth the credit ratings of our fixed maturity investments underlying the funds held -
directly managed account as of December 31, 2016.
Amortized
Cost
Fair Value
% of Total
Investment
s
AAA
Rated
AA Rated
A Rated
BBB
Rated
U.S. government and agency
$
50,257
$
47,885
4.9% $
47,885
$
— $
— $
—
Non-U.S. government
Corporate
Municipal
Commercial mortgage-backed
Asset-backed
Total
% of total fair value
6,020
681,484
40,073
158,129
79,885
5,961
663,556
38,927
151,395
79,806
$ 1,015,848
$
987,530
0.6%
67.2%
3.9%
15.3%
8.1%
—
5,549
—
146,429
76,130
100.0% $ 275,993
—
63,809
12,839
3,015
3,676
2,913
234,975
26,088
1,951
—
3,048
359,223
—
—
—
$
83,339
$ 265,927
$ 362,271
28.0%
8.4%
26.9%
36.7%
Net Realized Gains (Losses) and Change in Fair Value of Embedded Derivative
Net realized and unrealized gains (losses) and change in fair value of embedded derivative for the year ended
December 31, 2016 are summarized as follows:
Net realized gains (losses) on fixed maturity securities
Change in fair value of embedded derivative
Net realized gains (losses) and change in fair value of embedded derivative
Net Investment Income
2016
(14,616)
(28,317)
(42,933)
$
$
Major categories of net investment income underlying the funds held - directly managed for the year ended
December 31, 2016 are summarized as follows:
Fixed maturity investments
Short-term investments and cash and cash equivalents
Investment income on funds held - directly managed
8. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
2016
5,705
64
5,769
$
$
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the "exit price") in an orderly
transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices
in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
•
•
•
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities
that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1
instruments.
Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices
for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest
rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by
observable market data.
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted third
party pricing sources or management's assumptions and internal valuation models may be used to determine
the fair values.
142
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
We have categorized our investments that are recorded at fair value on a recurring basis among levels based
on the observability of inputs as follows:
December 31, 2016
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
Investments:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Equities — U.S.
Other investments
Funds Held - Directly Managed:
U.S. government and agency
Non-U.S. government
Corporate
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Other assets
Other Assets:
Derivative Instruments
Other Liabilities:
Derivative Instruments
$
$
$
$
$
$
$
$
— $
—
—
—
—
—
—
91,287
—
91,287 $
— $
—
—
—
—
—
—
— $
— $
— $
— $
— $
852,984 $
352,786
2,471,444
53,757
374,055
204,999
467,463
3,760
357,438
5,138,686 $
47,885 $
5,961
663,556
38,927
151,395
79,806
7,135
994,665 $
2,930 $
2,930 $
74 $
74 $
— $
—
74,534
—
—
12,213
14,692
—
76,878
178,317 $
— $
—
—
—
—
—
—
— $
— $
— $
— $
— $
852,984
352,786
2,545,978
53,757
374,055
217,212
482,155
95,047
434,316
5,408,290
47,885
5,961
663,556
38,927
151,395
79,806
7,135
994,665
2,930
2,930
74
74
Investments:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Equities — U.S.
Equities — International
Other investments
Total investments
December 31, 2015
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair
Value
$
— $
—
—
—
—
—
—
99,467
2,702
—
$
102,169 $
143
767,759 $
423,954
2,745,002
28,174
382,288
206,143
415,462
9,326
—
321,076
5,299,184 $
— $
—
—
—
—
26,704
120,440
—
—
77,016
224,160 $
767,759
423,954
2,745,002
28,174
382,288
232,847
535,902
108,793
2,702
398,092
5,625,513
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Certain of our other investments are measured at fair value using NAV per share (or its equivalent) as a practical
expedient and have not been classified within the fair value hierarchy above. The following table reconciles our other
investments in the tables above with the amounts presented on our consolidated balance sheets:
Other investments:
Other investments measured at fair value
Other investments measured at NAV as practical expedient
Total other investments shown on balance sheets
December 31, 2016
December 31, 2015
$
$
434,316 $
502,731
937,047 $
398,092
582,197
980,289
Valuation Methodologies of Financial Instruments Measured at Fair Value
Fixed Maturity Investments
The fair values for all securities in the fixed maturity investments and funds held - directly managed portfolios
are independently provided by the investment accounting service providers, investment managers and investment
custodians, each of which utilize internationally recognized independent pricing services. We record the unadjusted
price provided by the investment accounting service providers, investment managers or investment custodians and
validate this price through a process that includes, but is not limited to: (i) comparison of prices against alternative
pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target
benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the
inputs used for pricing; and (iv) comparing the price to our knowledge of the current investment market. Our internal
price validation procedures and review of fair value methodology documentation provided by independent pricing
services have not historically resulted in adjustment in the prices obtained from the pricing service.
The independent pricing services used by the investment accounting service providers, investment managers
and investment custodians obtain actual transaction prices for securities that have quoted prices in active markets.
Where we utilize single unadjusted broker-dealer quotes, they are generally provided by market makers or broker-
dealers who are recognized as market participants in the markets in which they are providing the quotes. For determining
the fair value of securities that are not actively traded, in general, pricing services use "matrix pricing" in which the
independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark
yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available
from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using
observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The
Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and
asset-backed securities.
The following describes the techniques generally used to determine the fair value of our fixed maturity investments
by asset class, including the investments underlying the funds held - directly managed.
• U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass-
through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation and other agencies. Non-U.S. government securities consist of bonds issued by non-U.S.
governments and agencies along with supranational organizations. The significant inputs used to determine
the fair value of these securities include the spread above the risk-free yield curve, reported trades and
broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values
of these securities are classified as Level 2.
• Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and
industries. The fair values of these securities are determined using the spread above the risk-free yield curve,
reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are
considered observable market inputs and, therefore, the fair values of these securities are classified as Level
2. Where pricing is unavailable from pricing services, such as in periods of low trading activity or when
transactions are not orderly, we obtain non-binding quotes from broker-dealers. Where significant inputs are
unable to be corroborated with market observable information, we classify the securities as Level 3.
• Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The
fair values of these securities are determined using the spread above the risk-free yield curve, reported
144
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and,
therefore, the fair values of these securities are classified as Level 2.
• Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety
of underlying collateral. Residential and commercial mortgage-backed securities include both agency and
non-agency originated securities. Where pricing is unavailable from pricing services, we obtain non-binding
quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and
current transactions are not orderly. The significant inputs used to determine the fair value of these securities
include the spread above the risk-free yield curve, reported trades, benchmark yields, prepayment speeds
and default rates. The fair values of these securities are classified as Level 2 if the significant inputs are
market observable. Where significant inputs are unable to be corroborated with market observable
information, we classify the securities as Level 3.
Equities
Our investments in equities are predominantly traded on the major exchanges and are primarily managed by
our external advisors. We use an internationally recognized pricing service to estimate the fair value of our equities.
Our equities are widely diversified and there is no significant concentration in any specific industry.
We have categorized all of our investments in equities other than preferred stock as Level 1 investments because
the fair values of these investments are based on unadjusted quoted prices in active markets for identical assets or
liabilities. The fair value estimates of our investments in preferred stock are based on observable market data and, as
a result, have been categorized as Level 2.
Other investments, at fair value
We have ongoing due diligence processes with respect to the other investments carried at fair value in which
we invest and their managers. These processes are designed to assist us in assessing the quality of information
provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether
further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, we
obtain the audited financial statements for funds annually, and regularly review and discuss the fund performance with
the fund managers to corroborate the reasonableness of the reported net asset values ("NAV").
The use of NAV as an estimate of the fair value for investments in certain entities that calculate NAV is a permitted
practical expedient. Due to the time lag in the NAV reported by certain fund managers we adjust the valuation for capital
calls and distributions. Other investments measured at fair value using NAV as a practical expedient have not been
classified in the fair value hierarchy. Other investments for which we do not use NAV as a practical expedient have
been valued using prices from independent pricing services, investment managers and broker-dealers.
The following describes the techniques generally used to determine the fair value of our other investments.
• For our investments in private equities and private equity funds, we measure fair value by obtaining the most
recently available NAV from the external fund manager or third-party administrator. The fair values of these
investments are measured using the NAV as a practical expedient and therefore have not been categorized
within the fair value hierarchy.
• Our investments in fixed income funds and equity funds are valued based on a combination of prices from
independent pricing services, external fund managers or third-party administrators. For the publicly available
prices we have classified the investments as Level 2. For the non-publicly available prices we are using NAV
as a practical expedient and therefore these have not been categorized within the fair value hierarchy.
• For our investments in fixed income and multi-strategy hedge funds, we measure fair value by obtaining the
most recently available NAV as advised by the external fund manager or third-party administrator. The fair
values of these investments are measured using the NAV as a practical expedient and therefore have not
been categorized within the fair value hierarchy. In December 2016, we sold the multi-strategy hedge fund.
• Our investment in the real estate debt fund was valued based on the most recently available NAV from the
external fund manager. The fair value of this investment was measured using the NAV practical expedient and
therefore has not been categorized within the fair value hierarchy. This fund was fully redeemed during the
year ended December 31, 2016.
145
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• We measure the fair value of our direct investment in CLO equities based on valuations provided by our external
CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the
investment is based on valuations provided by the broker or lead underwriter of the investment (the "broker").
Our CLO equity investments have been classified as Level 3 due to the use of unobservable inputs in the
valuation and the limited number of relevant trades in secondary markets.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the
significant unobservable market inputs used, the default and loss severity rates involve the most judgment
and create the most sensitivity. A significant increase or decrease in either of these significant inputs in isolation
would result in lower or higher fair value estimates for direct investments in CLO equities and, in general, a
change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate
assumptions. Collateral spreads and estimated maturity dates are less subjective inputs because they are
based on the historical average of actual spreads and the weighted-average life of the current underlying
portfolios, respectively. A significant increase or decrease in either of these significant inputs in isolation would
result in higher or lower fair value estimates for direct investments in CLO equities. In general, these inputs
have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, we receive the valuation from the external CLO manager and brokers and then review
the underlying cash flows and key assumptions used by them. We review and update the significant
unobservable inputs based on information obtained from secondary markets. These inputs are our responsibility
and we assess the reasonableness of the inputs (and if necessary, update the inputs) through communicating
with industry participants, monitoring of the transactions in which we participate (for example, to evaluate
default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends
that may impact future cash flows.
If valuations from the external CLO equity manager or brokers are not available, we use an income approach
based on certain observable and unobservable inputs to value these investments. An income approach is also
used to corroborate the reasonableness of the valuations provided by the external manager and brokers.
Where an income approach is followed, the valuation is based on available trade information, such as expected
cash flows and market assumptions on default and loss severity rates. Other inputs used in the valuation
process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates.
• For our investments in CLO equity funds, we measure fair value by obtaining the most recently available NAV
as advised by the external fund manager or third party administrator. The fair values of these investments were
measured using the NAV as a practical expedient and therefore have not been categorized within the fair value
hierarchy.
• For our investments in call options on publicly traded equities, we measure fair value by obtaining the latest
option price as of our reporting date. These were classified as Level 2. As at December 31, 2016, the call
option had been sold.
Derivative Instruments
The fair values of our foreign currency exchange contracts, as described in Note 9 - "Derivative Instruments"
are classified as Level 2. The fair values are based upon prices in active markets for identical contracts.
Changes in Leveling of Financial Instruments
Transfers into or out of levels are recorded at their fair values as of the end of the reporting period, consistent
with the date of determination of fair value. During the year ended December 31, 2016, we transferred $64.1 million
of corporate securities, $2.8 million of residential mortgage-backed securities, $23.6 million of commercial mortgage-
backed securities and $31.8 million of asset-backed securities from Level 2 to Level 3. These securities were transferred
from Level 2 to Level 3 due to insufficient market observable inputs for the valuation of the specific assets. During the
year ended December 31, 2016, we transferred $2.3 million of corporate securities, $0.6 million of residential mortgage-
backed securities, $37.8 million of commercial mortgage-backed securities and $129.8 million of asset-backed
securities from Level 3 to Level 2. The transfers from Level 3 to Level 2 were based upon us obtaining market observable
information regarding the valuations of the specific assets. There were no transfers between Levels 1 and 2.
146
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 years ended December 31, 2016 and 2015:
2016
2015
Fixed
Maturity
Investments
Other
Investments
Equity
Securities
Total
Fixed
Maturity
Investments
Other
Investments
Equity
Securities
Total
$
147,144
$
77,016
$
— $
224,160
$
600
$
42,267
$
4,850
$
47,717
58,552
6,885
(52,841)
(12,933)
(3,222)
5,910
(48,194)
—
—
—
—
—
65,437
(65,774)
—
106,433
—
106,433
(600)
(46,084)
(5,000)
(51,684)
2,688
—
(25,600)
(48,194)
147,144
—
150
—
(25,450)
147,144
$
101,439
$
76,878
$
— $
178,317
$
147,144
$
77,016
$
— $
224,160
Beginning fair value
Purchases
Sales
Total realized and unrealized
gains (losses)
Net transfers into (out of)
Level 3
Ending fair value
Net realized and unrealized gains related to Level 3 assets in the table above are included in net realized and
unrealized (losses) gains in our consolidated statements of earnings.
Disclosure of Fair Values for Financial Instruments Carried at Cost
As of December 31, 2016 and 2015, investments in life settlement contracts were carried at cost of $131.7 million
and $133.1 million, respectively, and their fair values were $129.5 million and $130.3 million, respectively.
The fair value of investments in life settlement contracts is determined using a discounted cash flow methodology
that utilizes unobservable inputs. Due to the individual nature of each investment in life settlement contracts and the
illiquidity of the existing market, significant inputs to the fair value include our estimates of premiums necessary to keep
the policies in-force, and our assumptions for mortality and discount rates. Our mortality assumptions are based on a
combination of medical underwriting information obtained from a third-party underwriter for each referenced life and
internal proprietary mortality studies of older aged U.S. insured lives. These assumptions are used to develop an
estimate of future net cash flows that, after discounting, are intended to be reflective of the asset's value in the life
settlement market.
Disclosure of fair value of amounts relating to insurance contracts is not required. Our remaining assets and
liabilities were generally carried at cost or amortized cost, which due to their short-term nature approximates fair value
as of December 31, 2016 and 2015.
147
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
9. DERIVATIVE INSTRUMENTS
Foreign Currency Hedging of Net Investments in Foreign Operations
We use foreign currency forward exchange rate contracts in qualifying hedging relationships to hedge the foreign
currency exchange rate risk associated with certain of our net investments in foreign operations. At December 31,
2016, we had two forward currency contracts in place for notional amounts of AU$63.0 million (approximately $45.5
million) and CA$50.0 million (approximately $37.2 million), which we had designated as hedges of the net investments
in our Australian and Canadian operations.
The following table presents the gross notional amounts, estimated fair values recorded within other assets and
liabilities and the amounts of the net gains deferred in the currency translation adjustment account which is a component
of accumulated other comprehensive income (loss) ("AOCI"), in shareholders' equity, related to our foreign currency
forward exchange rate contracts as at December 31, 2016.
December 31, 2016
Fair Value
Amount of Gains
Deferred in AOCI
(Effective Portion)
Gross Notional Amount
Assets
Liabilities
Year Ended December 31, 2016
Foreign exchange forward - AUD
Foreign exchange forward - CAD
Total qualifying hedges
$
$
45,467
$
37,175
82,642
$
2,753
$
177
2,930
$
74
—
74
$
$
2,568
1,186
3,754
We did not have any forward currency contract hedges of our net investments in foreign operations as at
December 31, 2015 or during the years ended December 31, 2015 and 2014.
We also borrowed €75.0 million during 2016 that was designated as a non-derivative hedge of our net investment
in certain subsidiaries whose functional currency is denominated in Euros as described in Note 15 - "Loans Payable".
From time to time, we may also utilize foreign currency forward contracts as part of our overall foreign currency
risk management strategy or to obtain exposure to a particular financial market, as well as for yield enhancement which
are not designated as hedging investments. There were no such contracts utilized during the years ended December 31,
2016, 2015 and 2014.
Investments in Call Options on Equities
We use equity call option instruments either to obtain exposure to a particular equity instrument or for yield
enhancement, in non-qualifying hedging relationships.
During the year ended December 31, 2016 we purchased call options on equities at a cost of $5.5 million and
sold these for a realized gain of $5.4 million. We did not have any equity derivative instruments during the years ended
December 31, 2015 and 2014.
148
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
10. REINSURANCE BALANCES RECOVERABLE
The following table provides the total reinsurance balances recoverable as at December 31, 2016 and, 2015:
Recoverable from reinsurers on unpaid:
Outstanding losses
IBNR
Fair value adjustments
Total reinsurance reserves recoverable
Paid losses recoverable
Recoverable from reinsurers on unpaid:
Outstanding losses
IBNR
Fair value adjustments
Total reinsurance reserves recoverable
Paid losses recoverable
Non-life
Run-off
Atrium
StarStone
Life and
Annuities
Total
2016
$
621,288
$
6,438
$
182,478
$
190
$
810,394
393,550
(13,885)
1,000,953
47,160
21,753
1,818
30,009
(1,081)
178,259
(3,506)
357,231
25,512
$ 1,048,113
$
28,928
$
382,743
$
—
—
190
769
959
593,562
(15,573)
1,388,383
72,360
$ 1,460,743
Non-life
Run-off
Atrium
StarStone
Life and
Annuities
Total
2015
$
587,164
$
6,772
$
182,076
$
1,544
$
777,556
465,211
(17,628)
1,034,747
72,213
16,581
2,499
25,852
430
123,732
(6,025)
299,783
16,568
—
—
605,524
(21,154)
1,544
1,361,926
784
89,995
$ 1,106,960
$
26,282
$
316,351
$
2,328
$ 1,451,921
Our insurance and reinsurance run-off subsidiaries, prior to acquisition, used retrocessional agreements to reduce
their exposure to the risk of insurance and reinsurance assumed. On an annual basis, both Atrium and StarStone purchase
a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s and StarStone's
third-party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.
The fair value adjustments, determined on acquisition of insurance and reinsurance subsidiaries, are based on the
estimated timing of loss and LAE recoveries and an assumed discount rate equivalent to an interest rate for securities with
similar duration to the reinsurance recoverables acquired including a spread to reflect credit risk, and are amortized over the
estimated recovery period, as adjusted for accelerations in timing of payments as a result of commutation settlements.
As of December 31, 2016 and 2015, we had reinsurance balances recoverable of approximately $1.46 billion and
$1.45 billion, respectively. The increase of $8.8 million in reinsurance balances recoverable was primarily a result of the
additional coverage provided by KaylaRe Ltd., offset by commutations and cash collections made during the year ended
December 31, 2016 in our Non-life Run-off and StarStone segments.
Top Ten Reinsurers
December 31, 2016
December 31, 2015
Non-life
Run-off
Atrium
StarStone
Life and
Annuities
Total
% of
Total
Non-life
Run-off
Atrium
StarStone
Life and
Annuities
Total
% of
Total
$
737,074
$ 23,245
$ 226,283
$
— $ 986,602
67.6% $
713,743
$ 21,394
$ 155,171
$
— $ 890,308
61.4%
301,856
4,827
152,341
—
459,024
31.4%
383,898
4,253
158,417
—
546,568
37.6%
9,183
856
4,119
959
15,117
1.0%
9,319
635
2,763
2,328
15,045
1.0%
$ 1,048,113
$ 28,928
$ 382,743
$
959
$1,460,743
100.0% $ 1,106,960
$ 26,282
$ 316,351
$
2,328
$1,451,921
100.0%
Top ten reinsurers
Other reinsurers > $1
million
Other reinsurers < $1
million
Total
The top ten external reinsurers, as at December 31, 2016 and 2015, were all rated A- or better, with the exception of
four non-rated reinsurers from which $512.2 million was recoverable (December 31, 2015: $337.6 million recoverable from
three non-rated reinsurers). For the four non-rated reinsurers, we hold security in the form of pledged assets in trust, letters
of credit issued to us, or funds withheld in the full amount of the recoverable. As at December 31, 2016, reinsurance balances
149
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
recoverable of $241.7 million and $154.7 million, respectively, related to KaylaRe Ltd. and Lloyd’s syndicates, both of which
represent 10% or more of total reinsurance balances recoverable. Lloyd’s is rated ‘A+’ by Standard & Poor’s and ‘A’ by A.M.
Best. KaylaRe Ltd. is not rated but is an affiliated company partly owned by Enstar, as described in Note 21 - "Related Party
Transactions", and security is provided in the form of funds withheld. As at December 31, 2015, reinsurance balances
recoverable with a carrying value of $165.6 million related to Lloyd's syndicates and represented 10% or more of total
reinsurance balances recoverable.
Provisions for Uncollectible Reinsurance Recoverables
We remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and
therefore, we evaluate and monitor concentration of credit risk among our reinsurers. Provisions are made for amounts
considered potentially uncollectible.
The following table shows our reinsurance balances recoverable by rating of reinsurer and our provisions for
uncollectible reinsurance balances recoverable ("provisions for bad debt") as at December 31, 2016 and 2015. The provisions
for bad debt all relate to the Non-life Run-off segment.
2016
2015
Provisions
for Bad
Debt
Net
Provisions
as a
% of Gross
Provisions
for Bad
Debt
Net
Provisions
as a
% of Gross
Gross
Gross
Reinsurers rated A- or above
$
892,776
$
35,184
$
857,592
3.9% $ 1,029,844
$
46,969
$
982,875
Reinsurers rated below A-, secured
Reinsurers rated below A-, unsecured
544,894
197,589
—
544,894
—%
388,399
—
388,399
139,332
58,257
70.5%
244,005
163,358
80,647
Total
$ 1,635,259
$
174,516
$ 1,460,743
10.7% $ 1,662,248
$
210,327
$ 1,451,921
4.6%
—%
66.9%
12.7%
150
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
11. LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and LAE, also referred to as loss reserves, represents our gross estimates before
reinsurance for unpaid reported losses and losses that have been incurred but not reported ("IBNR") for our Non-life
Run-off, Atrium and StarStone segments. We recognize an asset for the portion of the liability that we expect to recover
from reinsurers. LAE reserves include allocated loss adjustment expenses ("ALAE"), and unallocated loss adjustment
expenses ("ULAE"). ALAE are linked to the settlement of an individual claim or loss, whereas ULAE are based on our
estimates of future costs to administer the claims. IBNR represents reserves for loss and LAE that have been incurred
but not yet reported to us. This includes amounts for unreported claims, development on known claims and reopened
claims.
The following table summarizes the liability for losses and LAE by segment as at December 31, 2016 and 2015:
2016
2015
Non-life
Run-off
Atrium
StarStone
Total
Non-life
Run-off
Atrium
StarStone
Total
Outstanding losses
$2,697,737
$
67,379
$
502,115
$3,267,231
$2,757,774
$
68,913
$ 457,175
$3,283,862
IBNR
2,153,994
132,240
558,130
2,844,364
1,991,009
115,613
477,990
2,584,612
Fair value adjustments
(135,368)
12,503
(863)
(123,728)
(163,329)
16,491
(1,487)
(148,325)
Total
$4,716,363
$ 212,122
$ 1,059,382
$5,987,867
$4,585,454
$ 201,017
$ 933,678
$5,720,149
The table below provides a consolidated reconciliation of the beginning and ending liability for losses and LAE
for the years ended December 31, 2016, 2015 and 2014:
2016
2015
2014
Balance as at January 1
$ 5,720,149
$ 4,509,421
$ 4,219,905
Less: reinsurance reserves
recoverable
1,360,382
1,154,196
1,146,588
Less: deferred charge on retroactive
reinsurance
255,911
—
Net balance as at January 1
4,103,856
3,355,225
—
3,073,317
Net incurred losses and LAE:
Current period
Prior periods
493,016
476,364
327,817
(318,917)
(372,031)
(318,671)
Total net incurred losses and LAE
174,099
104,333
9,146
Net paid losses:
Current period
Prior periods
(79,579)
(99,933)
(166,796)
(753,478)
(681,956)
(420,715)
Total net paid losses
(833,057)
(781,889)
(587,511)
Effect of exchange rate movement
(46,903)
(65,069)
(69,804)
Acquired on purchase of subsidiaries
10,019
Assumed business
Ceded business
1,340,444
(243,335)
878,815
612,441
—
901,447
28,630
—
Net balance as at December 31
4,505,123
4,103,856
3,355,225
Plus: reinsurance reserves
recoverable
Plus: deferred charge on retroactive
reinsurance
1,388,193
1,360,382
1,154,196
94,551
$
255,911
—
Balance as at December 31
$ 5,987,867
$ 5,720,149
$ 4,509,421
151
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The tables below provide the components of net incurred losses and LAE by segment for the years ended
December 31, 2016, 2015 and 2014:
Increase (reduction) in estimates of net ultimate losses
(187,549)
54,170
327,682
Net losses paid
Net change in case and LAE reserves
Net change in IBNR reserves
Amortization of deferred charges
Increase (reduction) in estimates of net ultimate losses
Reduction in provisions for bad debt
Increase (reduction) in provisions for unallocated LAE
Amortization of fair value adjustments
Net incurred losses and LAE
Net losses paid
Net change in case and LAE reserves
Net change in IBNR reserves
Amortization of deferred charges
Reduction in provisions for bad debt
Increase (reduction) in provisions for unallocated LAE
Amortization of fair value adjustments
Net incurred losses and LAE
Net losses paid
Net change in case and LAE reserves
Net change in IBNR reserves
Amortization of deferred charges
Year Ended December 31, 2016
Non-life
Run-off
Atrium
StarStone
Total
$
533,806
$
47,998
$
251,253
$
833,057
(608,785)
(347,384)
168,827
(253,536)
(13,822)
(43,955)
25,432
(148)
13,700
—
73,049
75,643
—
61,550
399,945
—
145
(3,308)
—
3,543
(1,895)
(535,884)
(258,041)
168,827
207,959
(13,822)
(40,267)
20,229
$ (285,881) $
58,387
$
401,593
$
174,099
Year Ended December 31, 2015
Non-life
Run-off
Atrium
StarStone
Total
$
517,295
$
52,035
$
212,559
$
781,889
(355,335)
(364,774)
15,265
(709)
2,844
—
77,219
37,904
—
(25,271)
(62,653)
4,643
—
(83)
(6,608)
—
3,537
(3,535)
(278,825)
(324,026)
15,265
194,303
(25,271)
(59,199)
(5,500)
$ (270,830) $
47,479
$
327,684
$
104,333
Year Ended December 31, 2014
Non-life
Run-off
Atrium
StarStone
Total
$
400,096
$
57,611
$
129,804
$
587,511
(310,414)
(301,784)
—
(2,684)
11,557
—
37,604
58,870
—
(275,494)
(231,357)
—
80,660
(7,700)
(53,970)
(9,844)
Increase (reduction) in estimates of net ultimate losses
(212,102)
66,484
226,278
Increase in provisions for bad debt
Reduction in provisions for unallocated LAE
(7,700)
(48,891)
—
9
Amortization of fair value adjustments
3,982
(11,065)
—
(5,088)
(2,761)
Net incurred losses and LAE
$ (264,711) $
55,428
$
218,429
$
9,146
152
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Methodology for Establishing Reserves
The liability for losses and LAE includes an amount determined from reported claims and an amount based on
historical loss experience and industry statistics for IBNR using a variety of actuarial methods. Our loss reserves cover
multiple lines of business, which include workers' compensation, general casualty, asbestos and environmental, marine,
aviation and transit, construction defects and other non-life lines of business. Our management, through our loss
reserving committees, considers the reasonableness of loss reserves recommended by our actuaries, including actual
loss development during the year.
Case reserves are recognized for known claims (including the cost of related litigation) when sufficient information
has been developed to indicate the involvement of a specific insurance policy. We use considerable judgment in
estimating losses for reported claims on an individual claim basis based upon our knowledge of the circumstances
surrounding the claim, the severity of the injury or damage, the jurisdiction of the occurrence, the potential for ultimate
exposure, the type of loss, and our experience with the line of business and policy provisions relating to the particular
type of claim. The reserves for unpaid reported losses and LAE are established by management based on reports
from brokers, ceding companies and insureds and represent the estimated ultimate cost of events or conditions that
have been reported to, or specifically identified, by us. We also consider facts currently known and the current state
of the law and coverage litigation.
IBNR reserves are established by management based on actuarially determined estimates of ultimate losses
and loss expenses. We use generally accepted actuarial methodologies to estimate ultimate losses and LAE and those
estimates are reviewed by our management. In addition, the routine settlement of claims, at either below or above
the carried advised loss reserve, updates historical loss development information to which actuarial methodologies
are applied often, resulting in revised estimates of ultimate liabilities. On an annual basis, independent actuarial firms
are retained by management to provide their estimates of ultimate losses and to review the estimates developed by
our actuaries.
Within the annual loss reserve studies produced by either our actuaries or independent actuaries, exposures
for each subsidiary are separated into homogeneous reserving categories for the purpose of estimating IBNR. Each
reserving category contains either direct insurance or assumed reinsurance reserves and groups relatively similar
types of risks and exposures (for example, asbestos, environmental, casualty, property) and lines of business written
(for example, marine, aviation, non-marine). Based on the exposure characteristics and the nature of available data
for each individual reserving category, a number of methodologies are applied. Recorded reserves for each category
are selected from the actuarial indications produced by the various methodologies after consideration of exposure
characteristics, data limitations and strengths and weaknesses of each method applied. This approach to estimating
IBNR has been consistently adopted in the annual loss reserve studies for each period presented.
The estimation of unpaid claim liabilities at any given point in time is subject to a high degree of uncertainty for
a number of reasons. A significant amount of time can lapse between the assumption of risk, the occurrence of a loss
event, the reporting of the event to an insurance or reinsurance company and the ultimate payment of the claim on
the loss event. Our actuarial methodologies include industry benchmarking which, under certain methodologies,
compares the trend of our loss development to that of the industry. To the extent that the trend of our loss development
compared to the industry changes in any period, it is likely to have an impact on the estimate of ultimate liabilities.
Unpaid claim liabilities for property and casualty exposures in general are impacted by changes in the legal environment,
jury awards, medical cost trends and general inflation. Certain estimates for unpaid claim liabilities involve considerable
uncertainty due to significant coverage litigation, and it can be unclear whether past claim experience will be
representative of future claim experience. Ultimate values for such claims cannot be estimated using reserving
techniques that extrapolate losses to an ultimate basis using loss development factors, and the uncertainties
surrounding the estimation of unpaid claim liabilities are not likely to be resolved in the near future. In addition, reserves
are established to cover loss development related to both known and unasserted claims. Consequently, our subsequent
estimates of ultimate losses and LAE, and our liability for losses and LAE, may differ materially from the amounts
recorded in the consolidated financial statements.
These estimates are reviewed regularly and, as experience develops and new information becomes known, the
reserves are adjusted as necessary. Such adjustments, if any, will be recorded in earnings in the period in which they
become known. Prior period development arises from changes to loss estimates recognized in the current year that
relate to loss reserves established in previous calendar years.
153
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Non-Life Run-off Segment
The table below provides a reconciliation of the beginning and ending reserves for losses and LAE for the
years ended December 31, 2016, 2015 and 2014 for the Non-life Run-off segment:
Balance as at January 1
$ 4,585,454
$ 3,435,010
$ 4,004,513
Less: reinsurance reserves recoverable
1,034,747
800,709
1,121,533
Less: deferred charge on retroactive reinsurance
255,911
—
—
2016
2015
2014
Net balance as at January 1
Net incurred losses and LAE:
Current period
Prior periods
3,294,796
2,634,301
2,882,980
5,829
39,924
24,235
(291,710)
(310,754)
(288,946)
Total net incurred losses and LAE
(285,881)
(270,830)
(264,711)
Net paid losses:
Current period
Prior periods
Total net paid losses
Effect of exchange rate movement
Acquired on purchase of subsidiaries
Assumed business
Ceded business
(3,869)
(16,049)
(87,681)
(529,937)
(501,246)
(312,415)
(533,806)
(517,295)
(400,096)
(27,478)
10,019
1,340,444
(177,235)
(42,636)
(49,267)
878,815
612,441
—
436,765
28,630
—
Net balance as at December 31
3,620,859
3,294,796
2,634,301
Plus: reinsurance reserves recoverable
1,000,953
1,034,747
800,709
Plus: deferred charge on retroactive reinsurance
94,551
255,911
—
Balance as at December 31
$ 4,716,363
$ 4,585,454
$ 3,435,010
Net incurred losses and LAE in the Non-life Run-off segment for the years ended December 31, 2016, 2015
and 2014 were as follows:
Net losses paid
Net change in case and LAE
reserves
Net change in IBNR reserves
Amortization of deferred charges
Increase (reduction) in estimates of
net ultimate losses
Increase (reduction) in provisions
for bad debt
Increase (reduction) in provisions
for unallocated LAE
Amortization of fair value
adjustments
Net incurred losses and LAE
2016
2015
2014
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
$ 529,937
$
3,869
$ 533,806
$ 501,246
$ 16,049
$ 517,295
$ 312,415
$ 87,681
$ 400,096
(608,168)
(617)
(608,785)
(366,262)
10,927
(355,335)
(285,814)
(24,600)
(310,414)
(349,726)
2,342
(347,384)
(377,722)
12,948
(364,774)
(262,384)
(39,400)
(301,784)
168,827
—
168,827
15,265
—
15,265
—
—
—
(259,130)
5,594
(253,536)
(227,473)
39,924
(187,549)
(235,783)
23,681
(212,102)
(13,822)
—
(13,822)
(25,271)
(44,190)
235
(43,955)
(62,653)
25,432
—
25,432
4,643
—
—
—
(25,271)
(7,700)
—
(7,700)
(62,653)
(49,445)
554
(48,891)
4,643
3,982
—
3,982
$(291,710) $
5,829
$ (285,881) $(310,754) $ 39,924
$ (270,830) $(288,946) $ 24,235
$ (264,711)
Net change in case and LAE reserves comprises the movement during the year in specific case reserve
liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes
in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed
claims. Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
154
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Year Ended December 31, 2016
The net reduction in incurred losses and LAE for the year ended December 31, 2016 of $285.9 million included
net incurred losses and LAE of $5.8 million related to current period net earned premium of $7.1 million (primarily for
the portion of the run-off business acquired with Sussex). Excluding current period net incurred losses and LAE of $5.8
million, net incurred losses and LAE liabilities relating to prior periods were reduced by $291.7 million, which was
attributable to a reduction in estimates of net ultimate losses of $259.1 million, a reduction in provisions for bad debt
of $13.8 million and a reduction in provisions for unallocated LAE of $44.2 million, relating to 2016 run-off activity,
partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired
amounting to $25.4 million.
The reduction in estimates of net ultimate losses relating to prior periods of $259.1 million comprised reductions
in IBNR reserves of $349.7 million partially offset by net incurred loss development of $90.6 million, which includes
amortization of deferred charges of $168.8 million. The decrease in the estimate of net IBNR reserves of $349.7 million
(compared to $377.7 million during the year ended December 31, 2015), was comprised of an increase of $39.4 million
relating to asbestos liabilities (compared to a decrease of $32.0 million in 2015), an increase of $35.5 million relating
to environmental liabilities (compared to a decrease $1.6 million in 2015), a decrease of $0.8 million relating to general
casualty liabilities (compared to $3.0 million in 2015), a decrease of $333.2 million relating to workers' compensation
liabilities (compared to $243.4 million in 2015) and a decrease of $90.6 million relating to all other remaining liabilities
(compared to $97.7 million in 2015).
The reduction in net IBNR reserves of $349.7 million relating to prior periods was a result of the application, on
a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical
loss development data, following 56 commutations and policy buy-backs, to estimate loss reserves required to cover
liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR
reserves was reduced as a result of the combined impact on all classes of business of loss development activity during
2016, including commutations and the favorable trend of loss development related to non-commuted policies compared
to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves
of $608.2 million for net paid losses of $529.9 million related to the settlement of non-commuted losses in the year
and 56 commutations and policy buy-backs of assumed and ceded exposures. Net advised case and LAE reserves
settled by way of commutation and policy buyback during the year ended December 31, 2016 amounted to $14.7
million (comprising $39.1 million of assumed case reserves and LAE reserves, partially offset by $24.4 million of ceded
incurred reinsurance recoverable case reserves).
The reduction in provisions for bad debt of $13.8 million was a result of the favorable resolution of contractual
disputes with reinsurers, the reduction in bad debt provisions for insolvent reinsurers as a result of dividends received
and the reduction of specific provisions held for potential disputes with reinsurers.
Year Ended December 31, 2015
The net reduction in incurred losses and LAE for the year ended December 31, 2015 of $270.8 million included
current period net incurred losses and LAE of $39.9 million related to current period net earned premium of $43.3
million (primarily for the portion of the run-off business acquired with StarStone). Excluding current period net losses
and LAE of $39.9 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $310.8 million,
which was attributable to a reduction in estimates of net ultimate losses of $227.5 million, reduction in provisions for
bad debts of $25.3 million and a reduction in provision for unallocated LAE of $62.7 million, relating to 2015 run-off
activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies
acquired amounting to $4.6 million.
The reduction in estimates of net ultimate losses relating to prior periods of $227.5 million comprised reductions
in IBNR reserves of $377.7 million partially offset by net incurred loss development of $150.2 million, which includes
amortization of deferred charges of $15.3 million. The decrease in the estimate of net IBNR reserves of $377.7 million
(compared to $262.4 million during the year ended December 31, 2014) was comprised of $32.0 million relating to
asbestos liabilities (compared to $59.4 million in 2014), $1.6 million relating to environmental liabilities (compared to
$6.2 million in 2014), $3.0 million relating to general casualty liabilities (compared to $62.5 million in 2014), $243.4
million relating to workers' compensation liabilities (compared to $63.6 million in 2014) and $97.7 million relating to all
other remaining liabilities (compared to $70.7 million in 2014). The reduction in net IBNR reserves of $377.7 million
relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior
period, of our actuarial methodologies to revised historical loss development data, following 79 commutations and
155
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-
commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact
on all classes of business of loss development activity during 2015, including commutations and the favorable trend
of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development
resulting from settlement of net advised case and LAE reserves of $366.3 million for net paid losses of $501.2 million
related to the settlement of non-commuted losses in the year and 79 commutations and policy buy-backs of assumed
and ceded exposures (including the commutation of two of our top ten assumed exposures and one of our top ten
ceded recoverables as at January 1, 2014). Net advised case and LAE reserves settled by way of commutation and
policy buy-back during the year ended December 31, 2015 amounted to $56.6 million (comprising $140.3 million of
assumed case reserves and LAE reserves partially offset by $83.7 million of ceded incurred reinsurance recoverable
case reserves).
The reduction in provisions for bad debt of $25.3 million was a result of the collection of certain reinsurance
recoverables against which bad debt provisions had been provided in earlier periods, and the reduction in bad debt
provisions for insolvent reinsurers as a result of dividends received, partially offset by additional provisions for contractual
disputes with reinsurers.
Year Ended December 31, 2014
The net reduction in incurred losses and LAE for the year ended December 31, 2014 of $264.7 million included
current period incurred losses of $24.2 million related to SeaBright. Excluding SeaBright's current period net incurred
losses and LAE of $24.2 million net incurred losses and LAE relating to prior periods were reduced by $288.9 million
which was attributable to a reduction in estimates of net ultimate losses of $235.8 million and a reduction in provisions
for unallocated LAE of $49.4 million, relating to 2014 run-off activity, partially offset by an increase in provisions for
bad debt of $7.7 million and the amortization of fair value adjustments over the estimated payout period relating to
companies acquired amounting to $4.0 million.
The reduction in estimates of net ultimate losses relating to prior periods of $235.8 million comprised reductions
in net IBNR reserves of $262.4 million partially offset by net incurred loss development of $26.6 million. The decrease
in the estimate of net IBNR reserves of $262.4 million (compared to $265.2 million during the year ended December 31,
2013) was comprised of $59.4 million relating to asbestos liabilities (compared to $69.8 million in 2013), $6.2 million
relating to environmental liabilities (compared to $4.9 million in 2013), $62.5 million relating to general casualty liabilities
(compared to $42.6 million in 2013), $63.6 million relating to workers' compensation liabilities (compared to $42.1
million in 2013) and $70.7 million relating to all other remaining liabilities (compared to $105.8 million in 2013).
The reduction in net IBNR reserves of $262.4 million relating to prior periods was a result of the application, on
a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical
loss development data, following 98 commutations and policy buy-backs, to estimate loss reserves required to cover
liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR
reserves was reduced as a result of the combined impact on all classes of business of loss development activity during
2014, including commutations and the favorable trend of loss development related to non-commuted policies compared
to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves
of $285.8 million for net paid losses of $312.4 million related to the settlement of non-commuted losses in the year
and 98 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of one of
our top ten assumed exposures and one of our top ten ceded recoverables as at January 1, 2013). Net advised case
and LAE reserves settled by way of commutation and policy buy-back during the year ended December 31, 2014
amounted to $29.1 million (comprising $99.5 million of assumed case reserves and LAE reserves partially offset by
$70.4 million of ceded incurred reinsurance recoverable case reserves).
The increase in provisions for bad debt of $7.7 million was a result of additional provisions being allowed for
contractual disputes with reinsurers, offset by cash collections and commutations on certain reinsurance recoverables
against which bad debt provisions had been provided in earlier periods.
156
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Asbestos and Environmental
In establishing the reserves for losses and LAE related to asbestos and environmental claims, management
considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for
known claims (including the cost of related litigation) when sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, reserves
have been established to cover additional exposures on both known and unreported claims. Estimates of the reserves
are reviewed and updated continually. Developed case law and claim histories are still evolving for such claims,
especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim
experience will be representative of future claim experience. In view of the changes in the legal and tort environment
that affect the development of such claims, the uncertainties inherent in valuing asbestos and environmental claims
are not likely to be resolved in the near future. Ultimate values for such claims cannot be estimated using traditional
reserving techniques and there are significant uncertainties in estimating the amount of our potential losses for these
claims. There can be no assurance that the reserves established by us will be adequate or will not be adversely affected
by the development of other latent exposures. The liability for unpaid losses and LAE as of December 31, 2016 and
2015 included $921.2 million and $356.6 million, respectively, which represented an estimate of the net ultimate liability
for asbestos and environmental claims. The gross liability for such claims as at December 31, 2016 and 2015 was
$951.1 million and $390.8 million, respectively.
Disclosures of Incurred and Paid Loss Development, IBNR, Claims Counts and Payout Percentages
The following table provides a breakdown of the gross and net losses and LAE reserves by major category as
at December 31, 2016:
2016
Gross
IBNR
$
548,180
67,646
316,227
693,585
34,873
120,459
100,934
$ 1,881,904
$
OLR
240,863
94,432
427,733
1,360,743
45,240
39,622
407,490
$
2,616,123
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Other
Total
ULAE
Total
Total
OLR
(in thousands of U.S. dollars)
2016
Net
IBNR
$
789,043
$
230,983
91,362
301,699
915,704
39,816
32,449
$
533,361
$
65,507
190,053
457,119
34,678
88,647
Total
764,344
156,869
491,752
1,372,823
74,494
121,096
325,734
$ 1,937,747
95,411
$ 1,464,776
421,145
$ 3,402,523
218,336
$ 3,620,859
162,078
743,960
2,054,328
80,113
160,081
508,424
$ 4,498,027
218,336
$ 4,716,363
As noted in the table above, the significant categories within this segment include asbestos, general casualty
and workers’ compensation, which collectively comprised approximately 80% and 77% of the total gross and net
reserves as at December 31, 2016. Separate claims development tables have been provided for the workers’
compensation and general casualty categories as set forth below. The asbestos category is wholly comprised of
losses with accident years before 2007 and therefore accident year claims development tables are excluded from
these disclosures. The exposures included in the other category includes losses with several different development
patterns that are not individually sufficiently significant to be disclosed in separate claims development tables.
Our non-life run-off segment is unique within the insurance industry. Legacy reserves are continuously being
acquired into this segment through company acquisition or through loss portfolio transfer reinsurance. The loss
development tables in this segment include actual loss development as well as the effects of assimilating newly acquired
reserves. Accordingly, it would not be appropriate to extrapolate redundancies or deficiencies into the future or to infer
actual historical accident year development information from the tables provided below. Acquired reserves for company
acquisitions are shown on a full retrospective basis. Assumed reserves for loss portfolio reinsurance transactions are
shown as follows: (i) unpaid reported claims are shown on a full retrospective basis and (ii) assumed IBNR is shown
on a prospective basis as historical IBNR is generally not available to us in these transactions. For further information,
we have disclosed additional development tables for reported claims, for IBNR, and for IBNR acquired in loss portfolio
reinsurance transactions.
157
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
General Casualty
The following tables set forth information about incurred and paid loss development information related to our
general casualty category within the Non-life Run-off segment as at December 31, 2016. The information related to
incurred and paid loss development for the years ended December 31, 2007 through 2015 is presented as
supplementary information and is unaudited.
Unpaid Reported Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2007
$
22,745 $
26,555 $
13,847 $
10,053 $
15,084 $
8,757 $
7,411 $
6,302 $
1,929 $
2008
2009
2010
2011
2012
2013
2014
2015
2016
43,164
55,854
19,205
36,785
37,028
41,785
29,183
45,685
92,211
19,805
21,275
34,708
81,789
48,609
44,029
16,296
22,834
59,566
33,465
56,594
20,677
11,239
15,044
42,088
32,499
53,386
23,432
10,489
9,138
14,562
35,806
25,227
37,651
22,681
12,537
3,294
—
2,679
7,890
11,333
23,460
19,945
34,804
16,995
10,022
4,356
248
Total $
131,732
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
IBNR Losses and Loss Expenses, Net of Reinsurance
For the Years Ended December 31,
2007
$
8,983 $
8,409 $
6,108 $
6,339 $
7,485 $
2,986 $
3,996 $
3,356 $
1,049 $
2008
2009
2010
2011
2012
2013
2014
2015
2016
16,731
4,956
14,131
15,134
16,784
22,364
12,253
15,393
25,904
33,180
5,605
8,240
16,032
23,948
61,807
7,528
12,272
28,064
34,767
64,756
70,755
6,491
9,170
19,770
25,659
45,872
58,446
32,309
8,450
5,363
13,513
18,042
19,383
17,200
12,839
7,697
1,579
4,682
5,247
18,026
20,683
21,224
16,534
9,894
7,573
2,226
The table below provides a summary of IBNR acquired in assumed loss portfolio transfer reinsurance transactions
which is reflected on a prospective basis in the table above from the year in which the transaction occurred:
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
For the Years Ended December 31,
$
— $
10,740 $
— $
3,633 $
— $
25,703 $
— $
5,263 $
3,685 $
36,501
Accident
Year
Take-On
IBNR for
Assumed
Business
Total $
107,668
158
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
50,012 $
69,095 $
77,504 $
81,587 $
92,460 $
86,583 $
89,022 $
87,929 $
86,364 $
88,081
78,187
114,684
137,678
145,526
147,317
152,589
155,177
158,178
155,909
47,683
95,064
82,340
128,373
146,500
164,233
168,363
173,304
173,855
169,525
200,723
229,345
235,009
260,599
270,864
73,694
134,667
166,450
177,382
186,384
191,245
147,850
225,566
257,655
255,667
280,266
117,545
135,171
113,574
122,148
48,808
39,072
12,949
42,370
16,292
2,690
Total $1,343,720
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
18,284 $
34,131 $
57,548 $
65,195 $
69,892 $
74,840 $
77,614 $
78,271 $
83,386 $
83,823
18,292
53,874
14,347
85,759
41,253
18,191
104,090
120,437
128,766
137,448
140,589
143,337
67,294
51,410
20,709
103,552
129,127
144,148
153,379
157,275
102,903
141,715
173,150
211,280
229,377
62,110
42,014
98,218
119,224
143,116
150,616
104,216
158,397
198,634
224,238
26,112
53,293
6,010
73,693
13,696
1,958
88,618
22,454
4,364
216
Total $1,104,318
All outstanding liabilities for unpaid losses and LAE prior to 2007, net of reinsurance
266,163
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance $ 505,565
The reconciliation of incurred and paid loss development to the liability for unpaid losses and LAE as presented
in the tables above for the year ended December 31, 2016 is set forth below:
December 31, 2016
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Fair value adjustments
Gross liability for unpaid losses and LAE before unallocated loss
adjustment expenses
Unallocated loss adjustment expenses
Total gross liability for unpaid losses and LAE
$
$
505,565
254,017
(15,622)
743,960
36,112
780,072
159
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Information about total IBNR liabilities and cumulative loss frequency as at December 31, 2016, including
expected development on reported claims included within the net incurred losses and allocated LAE amounts for the
Non-life Run-off segment for the general casualty category, are set forth in the table below:
As at December 31, 2016
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Incurred Losses and
ALAE, Net of
Reinsurance
$
88,081 $
155,909
173,855
270,864
191,245
280,266
122,148
42,370
16,292
2,690
Total of IBNR plus
Expected
Development on
Reported Losses
Cumulative Number
of Reported Claims
1,579
4,682
5,247
18,026
20,683
21,224
16,534
9,894
7,573
2,226
15,904
10,363
10,378
12,439
10,247
22,667
15,136
3,421
871
111
The following is unaudited supplementary information for average annual historical duration of claims:
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
General
casualty
12.9%
18.6%
19.6%
13.3%
10.6%
7.5%
5.2%
1.7%
3.8%
0.5%
Workers' Compensation
The following tables set forth information about incurred and paid loss development information related to our
workers' compensation category within the Non-life Run-off segment as at December 31, 2016. The information related
to incurred and paid loss development for the years ended December 31, 2007 through 2015 is presented as
supplementary information and is unaudited.
Unpaid Reported Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2007
$
106,913 $
85,044 $
72,373 $
68,929 $
59,768 $
47,688 $
51,970 $
57,819 $
31,975 $
22,457
2008
2009
2010
2011
2012
2013
2014
2015
2016
103,568
93,156
83,064
86,070
96,353
68,516
75,756
104,493
111,772
84,408
48,864
49,318
75,569
80,618
66,109
42,524
39,846
56,334
55,414
65,078
35,976
36,483
34,033
44,754
63,975
79,952
63,372
14,179
28,878
34,730
42,383
48,552
62,339
56,882
25,152
6,017
22,378
26,589
34,640
31,324
40,728
37,299
20,144
4,104
209
Total $
239,872
160
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
IBNR Losses and Loss Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2007
$
87,248 $
38,830 $
23,382 $
9,993 $
8,498 $
7,006 $
8,794 $
7,450 $
4,180 $
8,488
2008
2009
2010
2011
2012
2013
2014
2015
2016
78,862
43,067
77,265
18,966
35,477
67,115
15,087
19,247
16,597
69,544
11,065
16,686
14,819
24,162
86,194
12,420
11,426
17,772
15,610
45,307
10,624
9,391
28,348
54,890
95,026
43,419
110,706
51,216
6,449
11,165
26,945
46,320
71,755
75,839
45,657
9,596
11,586
16,294
24,435
34,572
48,173
48,022
24,705
2,846
530
Total $
219,651
The table below provides a summary of IBNR acquired in assumed loss portfolio transfer reinsurance transactions
which is reflected on a prospective basis in the table above from the year in which the transaction occurred:
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
For the Years Ended December 31,
$
— $
— $
5,323 $
5,954 $
— $
— $
— $
— $
— $
100,000
Accident
Year
Take-On
IBNR for
Assumed
Business
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
267,160 $
275,598 $
293,677 $
308,723 $
323,278 $
326,776 $
345,358 $
358,015 $
335,568 $ 336,989
265,651
300,657
325,463
341,690
342,397
354,645
361,369
357,863
361,402
236,306
278,324
294,062
303,106
310,848
320,485
329,178
335,481
256,618
291,192
308,810
326,412
337,002
344,185
347,575
197,858
212,973
222,037
251,058
254,815
249,040
189,571
198,054
230,513
225,014
221,803
97,190
131,198
113,792
104,521
73,154
82,487
19,151
77,180
13,129
873
Total $2,047,993
161
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
72,998 $
151,725 $
197,923 $
229,800 $
255,011 $
272,082 $
284,594 $
292,746 $
299,413 $ 306,044
83,221
164,433
220,427
258,086
282,468
299,701
314,261
322,537
327,438
75,977
146,494
199,059
237,103
259,577
277,061
283,283
292,598
85,009
162,822
218,422
252,306
263,900
274,857
288,499
43,906
108,193
151,012
132,194
159,942
183,144
37,267
87,669
17,795
55,534
90,921
132,902
(42,879)
(18,929)
19,200
7,760
11,678
32,332
3,538
6,178
134
Total $1,588,469
All outstanding liabilities for unpaid losses and LAE prior to 2007, net of reinsurance
1,042,179
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance $1,501,703
The reconciliation of incurred and paid loss development to the liability for unpaid losses and LAE as presented
in the tables above for the year ended December 31, 2016 is set forth below:
December 31, 2016
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Fair value adjustments
Gross liability for unpaid losses and LAE before unallocated loss
adjustment expenses
Unallocated loss adjustment expenses
Total gross liability for unpaid losses and LAE
$
$
1,501,703
592,394
(39,769)
2,054,328
99,718
2,154,046
Information about total IBNR liabilities and cumulative loss frequency as at December 31, 2016, including
expected development on reported claims included within the net incurred losses and allocated LAE amounts for the
Non-life Run-off segment for workers' compensation, are set forth in the table below:
As at December 31, 2016
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Incurred Losses and
ALAE, Net of
Reinsurance
$
336,989 $
Total of IBNR plus
Expected
Development on
Reported Losses
Cumulative Number
of Reported Claims
8,488
11,586
16,294
24,435
34,572
48,173
48,022
24,705
2,846
530
44,305
40,849
41,127
48,360
46,975
42,712
22,189
10,857
2,869
33
361,402
335,481
347,575
249,040
221,803
104,521
77,180
13,129
873
162
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following is unaudited supplementary information for average annual historical duration of claims:
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
19.6%
20.4%
17.5%
10.2%
7.0%
5.0%
3.2%
2.5%
1.7%
2.0%
Workers'
compensation
Atrium
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years
ended December 31, 2016, 2015 and 2014:
Balance as at January 1
$
201,017
$
212,611
$
215,392
2016
2015
2014
Less: reinsurance reserves
recoverable
Net balance as at January 1
Net incurred losses and LAE:
Current period
Prior periods
Total net incurred losses and LAE
Net paid losses:
Current period
Prior periods
Total net paid losses
Effect of exchange rate movement
Acquired on purchase of subsidiaries
25,852
175,165
28,278
184,333
25,055
190,337
71,358
(12,971)
58,387
(23,582)
(24,416)
(47,998)
(3,441)
—
69,400
(21,921)
47,479
(21,145)
(30,890)
(52,035)
(4,612)
—
74,094
(18,666)
55,428
(29,626)
(27,985)
(57,611)
(3,821)
—
Net balance as at December 31
182,113
175,165
184,333
Plus: reinsurance reserves
recoverable
Balance as at December 31
30,009
25,852
28,278
$
212,122
$
201,017
$
212,611
Net incurred losses and LAE in the Atrium segment for the years ended December 31, 2016, 2015 and 2014
were as follows:
2016
2015
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
Prior
Period
2014
Current
Period
Total
Net losses paid
$ 24,416
$23,582
$47,998
$ 30,890
$21,145
$ 52,035
$ 27,985
$
29,626
$ 57,611
Net change in case and LAE
reserves
Net change in IBNR reserves
Increase (reduction) in estimates of
net ultimate losses
Increase (reduction) in provisions for
unallocated LAE
Amortization of fair value
adjustments
Net incurred losses and LAE
(13,115)
12,967
(148)
(18,213)
17,504
(709)
(16,986)
(20,543)
34,243
13,700
(27,382)
30,226
2,844
(18,114)
14,302
29,671
(2,684)
11,557
(9,242)
70,792
61,550
(14,705)
68,875
54,170
(7,115)
73,599
66,484
(421)
566
145
(608)
525
(83)
(486)
495
9
(3,308)
—
(3,308)
(6,608)
—
(6,608)
(11,065)
—
(11,065)
$(12,971) $71,358
$58,387
$(21,921) $69,400
$ 47,479
$ (18,666) $
74,094
$ 55,428
163
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Disclosures of Incurred and Paid Loss Development, IBNR, Claims Counts and Payout Percentages
ENSTAR GROUP LIMITED
The Atrium segment comprises only 3.5% of the consolidated liability for losses and LAE as at December 31,
2016 and therefore has not been disaggregated further for the purposes of presenting the accident year disclosures
below.
The following tables set forth information about incurred and paid loss development information for the Atrium
segment as at December 31, 2016. The information related to incurred and paid loss development for the years ended
December 31, 2007 through 2015 is presented as supplementary information and is unaudited.
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
39,003 $
68,768 $
62,305 $
68,567 $
68,842 $
61,858 $
60,418 $
61,660 $
60,162 $
60,302
58,537
74,652
55,579
75,261
67,728
76,056
71,965
58,778
70,280
92,093
69,378
53,799
57,182
86,086
71,370
62,490
50,169
51,139
72,671
58,991
57,318
62,217
46,927
50,202
71,744
56,729
64,243
62,613
62,969
45,693
45,960
69,533
55,091
59,150
65,737
63,954
61,473
45,060
45,416
67,924
52,929
55,288
63,592
67,927
67,933
Total $ 587,844
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2007
(unaudited)
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
13,878 $
35,836 $
41,837 $
46,467 $
48,544 $
50,028 $
54,298 $
54,611 $
55,857 $
56,806
15,060
36,785
11,719
47,151
27,103
11,243
51,838
33,910
24,678
16,777
54,750
37,337
31,653
39,167
11,059
56,563
39,280
35,859
51,288
31,041
14,398
57,760
40,443
38,293
57,332
37,532
31,669
17,359
58,320
41,102
39,294
61,197
41,677
39,904
33,830
11,874
57,891
41,375
39,868
62,515
43,929
42,942
40,907
29,235
13,513
Total $ 428,981
All outstanding liabilities for unpaid losses and LAE prior to 2007, net of reinsurance
10,443
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance $ 169,306
164
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The reconciliation of incurred and paid loss development to the liability for unpaid losses and LAE as presented
in the tables above for the Atrium segment for the year ended December 31, 2016 is set forth below:
December 31, 2016
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Unallocated loss adjustment expenses
Fair value adjustments
Total gross liability for unpaid losses and LAE
$
$
$
$
$
169,306
28,191
2,122
12,503
212,122
Information about total IBNR liabilities and cumulative loss frequency as at December 31, 2016, including
expected development on reported claims included within the net incurred losses and allocated LAE amounts for the
Atrium segment, are set forth in the table below:
As at December 31, 2016
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Incurred Losses and
ALAE, Net of
Reinsurance
$
60,302 $
61,473
45,060
45,416
67,924
52,929
55,288
63,592
67,927
67,933
Total of IBNR plus
Expected
Development on
Reported Losses
Cumulative Number
of Reported Claims
1,610
2,403
1,822
3,141
3,926
4,821
7,694
14,309
23,553
39,742
282
345
377
515
765
1,028
1,582
2,563
3,936
3,881
The following is unaudited supplementary information for average annual historical duration of claims in the
Atrium segment:
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Atrium
23.5%
32.1%
14.2%
7.8%
4.6%
2.4%
2.9%
0.7%
2.1%
1.6%
165
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
StarStone
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years
ended December 31, 2016 , 2015 and 2014:
Balance as at January 1
$
933,678
$
861,800
$
2016
2015
2014
Less: reinsurance reserves
recoverable
Net balance as at January 1
Net incurred losses and LAE:
Current period
Prior periods
Total net incurred losses and LAE
Net paid losses:
Current period
Prior periods
299,783
633,895
325,209
536,591
—
—
—
415,829
(14,236)
401,593
367,040
(39,356)
327,684
229,488
(11,059)
218,429
(52,128)
(62,739)
(199,125)
(149,820)
(49,489)
(80,315)
Total net paid losses
(251,253)
(212,559)
(129,804)
Effect of exchange rate movement
Acquired on purchase of subsidiaries
Assumed business
Ceded business
(15,984)
—
—
(66,100)
(17,821)
—
—
—
(16,716)
464,682
—
—
Net balance as at December 31
702,151
633,895
536,591
Plus: reinsurance reserves
recoverable
Balance as at December 31
357,231
299,783
$ 1,059,382
$
933,678
325,209
861,800
Net incurred losses and LAE for the years ended December 31, 2016 and 2015 were as follows:
Prior
Period
2016
Current
Period
Total
Prior
Period
2015
Current
Period
Total
Net losses paid
Net change in case and LAE reserves
Net change in IBNR reserves
Increase (reduction) in estimates of net
ultimate losses
Increase (reduction) in provisions for
unallocated LAE
Amortization of fair value adjustments
$199,125 $ 52,128 $ 251,253 $149,820 $ 62,739 $ 212,559
77,219
124,358
15,772
61,447
73,049
232,189
75,643
(200,730)
238,634
37,904
(51,309)
(156,546)
(8,730)
408,675
399,945
(35,138)
362,820
327,682
(3,611)
(1,895)
7,154
3,543
(683)
4,220
—
(1,895)
(3,535)
—
3,537
(3,535)
Net incurred losses and LAE
$ (14,236) $415,829 $ 401,593 $ (39,356) $367,040 $ 327,684
166
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Disclosures of Incurred and Paid Loss Development, IBNR, Claims Counts and Payout Percentages
ENSTAR GROUP LIMITED
The StarStone segment comprises 18% of the consolidated liability for losses and LAE as at December 31,
2016 and therefore has not been disaggregated further for the purposes of presenting the accident year disclosures
below.
The following tables set forth information about incurred and paid loss development information for the
StarStone segment as at December 31, 2016. The information related to incurred and paid loss development for the
years ended December 31, 2014 through 2015 is presented as supplementary information and is unaudited. This
business was acquired on April 1, 2014, as described in Note 3 - "Acquisitions". The information in the incurred and
paid loss development tables below is presented on a prospective basis from the date of our acquisition of
StarStone; as providing pre-acquisition incurred losses by accident year for years prior to 2014 was determined to
be impracticable.
Incurred Losses and Allocated Loss
Adjustment Expenses, Net of
Reinsurance
For the Years Ended December 31,
Accident
Year
2014
(unaudited)
2015
(unaudited)
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
18,453 $
17,532 $
19,513
50,984
45,340
174,838
324,625
365,135
342,406
248,702
48,558
39,411
158,845
308,384
347,626
308,840
292,595
365,426
48,609
46,277
160,093
322,684
329,426
297,213
279,432
372,016
271,950
Total $
2,147,213
Cumulative Paid Losses and
Allocated Loss Adjustment
Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2014
(unaudited)
2015
(unaudited)
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
18,955 $
18,986 $
18,807
48,991
46,183
145,427
284,252
224,506
141,467
42,486
49,170
46,328
155,431
307,799
260,323
188,397
113,340
66,593
48,734
46,146
154,101
310,686
278,308
221,989
163,515
165,701
57,753
Total $
1,465,740
All outstanding liabilities for unpaid losses
and LAE prior to 2007, net of reinsurance
1,210
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance $
682,683
167
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The reconciliation of incurred and paid loss development to the liability for unpaid losses and LAE as presented
in the tables above for the StarStone segment for the year ended December 31, 2016 is set forth below:
December 31, 2016
Liabilities for unpaid losses and allocated LAE, net of reinsurance
$
Reinsurance recoverable on unpaid losses
Unallocated loss adjustment expenses
Fair value adjustments
682,683
360,737
16,825
(863)
Total gross liability for unpaid losses and LAE
$
1,059,382
Information about total IBNR liabilities and cumulative loss frequency as at December 31, 2016, including
expected development on reported claims included within the net incurred losses and allocated LAE amounts for the
StarStone segment, are set forth in the table below:
As at December 31, 2016
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Incurred Losses and
ALAE, Net of
Reinsurance
$
19,513 $
48,609
46,277
160,093
322,684
329,426
297,213
279,432
372,016
271,950
Total of IBNR plus
Expected
Development on
Reported Losses
Cumulative Number
of Reported Claims
—
—
309
763
5,067
18,372
30,226
55,291
96,665
136,314
1,254
1,715
2,253
4,247
8,997
11,098
12,414
15,057
21,721
17,074
The following is unaudited supplementary information for average annual historical duration of claims in the
StarStone segment:
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
StarStone
18.7%
34.7%
21.5%
9.2%
4.4%
2.4%
—%
—%
—%
—%
168
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
12. POLICY BENEFITS FOR LIFE CONTRACTS
We have acquired long duration contracts that subject us to mortality, longevity and morbidity risks and which
are accounted for as life and annuity premiums earned. Life benefit reserves are established using assumptions for
investment yields, mortality, morbidity, lapse and expenses, including a provision for adverse deviation. We establish
and review our life reserves regularly based upon cash flow projections. We establish and maintain our life reinsurance
reserves at a level that we estimate will, when taken together with future premium payments and investment income
expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and
third-party servicing obligations as they become payable. Refer to Note 2 - "Significant Accounting Policies - (d) Policy
Benefits for Life and Annuity Contracts" for a description of the assumptions used and the process for establishing our
assumptions and estimates. Policy benefits for life contracts as at December 31, 2016 and 2015 were $112.1 million
and $126.3 million, respectively. The annuity amounts presented in previous financial statements are now classified
as held-for-sale liabilities.
13. PREMIUMS WRITTEN AND EARNED
The following tables provide a summary of net premiums written and earned in our Non-life Run-off, Atrium,
StarStone and Life and Annuities segments for the years ended December 31, 2016, 2015 and 2014:
Non-life Run-off
Gross
Ceded
Net
Atrium
Gross
Ceded
Net
StarStone
Gross
Ceded
Net
Life and Annuities
Life
Total
2016
2015
2014
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
$
$
$
$
$
$
$
$
17,316
$
25,989
$
38,704
$
116,494
$
12,818
$
45,684
(8,114)
(9,234)
(16,110)
(72,125)
(2,546)
(14,516)
9,202
$
16,755
$
22,594
$
44,369
$
10,272
$
31,168
143,170
$
140,438
$
149,082
$
149,310
$
154,248
$
153,816
(2,733)
(16,022)
(14,502)
(14,635)
(17,973)
(17,871)
140,437
$
124,416
$
134,580
$
134,675
$
136,275
$
135,945
854,699
$
830,186
$
824,714
$
769,875
$
512,219
$
528,135
(206,663)
(153,578)
(196,287)
(196,729)
(113,045)
(154,502)
648,036
$
676,608
$
628,427
$
573,146
$
399,174
$
373,633
6,261
803,936
$
$
5,735
823,514
$
$
1,553
787,154
$
$
1,554
753,744
$
$
2,235
547,956
$
$
2,245
542,991
169
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
14. GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGES
The following tables present a reconciliation of the beginning and ending goodwill, intangible assets and deferred
charges for the years ended December 31, 2016 and 2015:
2016
Balance as at January 1, 2016
Acquired during the year
Amortization
Balance as at December 31, 2016
Intangible
assets with
a definite life
- Other
Intangible
assets with
an indefinite
life
Total
Intangible
assets with
a definite life
- FVA
Other assets
- Deferred
Charges
Goodwill
$
73,071
$
31,202
$
87,031
$
191,304
$
127,170
$
255,911
—
—
—
(6,449)
—
—
—
37,005
7,467
(6,449)
(19,017)
(168,827)
$
73,071
$
24,753
$
87,031
$
184,855
$
145,158
$
94,551
2015
Balance as at January 1, 2015
Acquired during the year
Amortization
Balance as at December 31, 2015
$
$
Intangible
assets with
a definite life
- Other
Intangible
assets with
an indefinite
life
Total
Intangible
assets with
a definite life
- FVA
Other assets
- Deferred
Charges
Goodwill
73,071
$
41,048
$
87,031
$
201,150
$
97,623
$
—
—
—
—
(9,846)
—
—
—
(9,846)
23,968
5,579
271,176
(15,265)
73,071
$
31,202
$
87,031
$
191,304
$
127,170
$
255,911
Goodwill as at December 31, 2016 and 2015, related to Non-life Run-off, Atrium and StarStone, was $21.2 million,
$38.9 million and $13.0 million, respectively. For the year ended December 31, 2016, we completed our assessment
for impairment of goodwill and concluded that there had been no impairment of our carried goodwill amount.
Intangible assets with a definite life - Other includes the distribution channel, Lloyd’s capacity, technology and
brand related to our acquisitions of Atrium and StarStone. These assets are amortized on a straight-line basis over a
period ranging from four to fifteen years. Intangible asset amortization for the years ended December 31, 2016, 2015
and 2014 was $6.4 million, $9.8 million and $6.0 million, respectively. Amortization for the year ended December 31,
2015 included an impairment charge of $4.0 million for the Torus brand in relation to the StarStone rebranding exercise.
Intangible assets with an indefinite life includes assets associated with the Lloyd’s syndicate capacity for StarStone
and Atrium, StarStone's U.S. insurance licenses, and Atrium’s management contract with Syndicate 609 in relation to
underwriting, actuarial and support services it provides.
Intangible assets with a definite life - fair value adjustments ("FVA") relates to outstanding losses and LAE,
unearned premiums, other liabilities, reinsurance recoverables and other assets. These are included as a component
of each balance sheet item. FVA are amortized in proportion to the recovery period for outstanding losses and LAE
and reinsurance recoverables and as the unearned premiums expire for business in-force as of the acquisition date.
Intangible asset amortization (accretion) of fair value adjustments for the years ended December 31, 2016, 2015 and
2014 was $19.0 million, $(5.6) million and $(9.8) million, respectively. The FVA acquired during the year ended December
31, 2016 related to other assets and other liabilities in our acquisition of Dana, as described in Note 3 - “Acquisitions”
and Note 23 - “Commitments and Contingencies”.
Other assets - deferred charges relate to retroactive reinsurance policies providing indemnification of losses and
LAE with respect to past loss events. At the inception of a contract, a deferred charge asset is recorded for the excess,
if any, of the estimated ultimate losses payable over the premiums received. These amounts relate to the transactions
with Voya Financial, Sun Life and Coca-Cola, described in Note 4 - "Significant New Business". Amortization of the
deferred charges included $130.2 million and $15.3 million related to a reduction in the liability for losses and LAE for
the years ended December 31, 2016 and December 31, 2015, respectively, and $38.6 million primarily related to a
change in the expected return on the underlying assets for the year ended December 31, 2016.
170
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The gross carrying value, accumulated amortization and net carrying value of intangible assets by type and
deferred charge at December 31, 2016 and 2015 were as follows:
2016
2015
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Intangible assets with a definite life:
Fair value adjustments:
Losses and LAE liabilities
$
458,202
$
(334,475) $
123,727
$
456,110
$
(307,785) $
148,325
Reinsurance balances recoverable
(175,924)
160,350
(15,574)
(175,774)
154,619
(21,155)
Other Assets
Other Liabilities
Total
Other:
Distribution channel
Technology
Brand
Total
Intangible assets with an indefinite life:
Lloyd’s syndicate capacity
Licenses
Management contract
Total
Deferred charges on retroactive
reinsurance
$
$
$
$
$
$
(48,840) $
85,845
319,283
$
$
—
—
(48,840) $
85,845
$
$
— $
— $
— $
— $
—
—
280,336
$
(153,166) $
127,170
(174,125) $
145,158
20,000
$
(4,111) $
15,889
$
20,000
$
(2,777) $
17,223
15,000
7,000
(10,978)
(2,158)
4,022
4,842
15,000
12,000
(6,561)
(6,460)
8,439
5,540
42,000
$
(17,247) $
24,753
$
47,000
$
(15,798) $
31,202
37,031
$
— $
37,031
$
37,031
$
— $
19,900
30,100
—
—
19,900
30,100
19,900
30,100
—
—
87,031
$
— $
87,031
$
87,031
$
— $
37,031
19,900
30,100
87,031
278,643
$
(184,092) $
94,551
271,176
(15,265)
255,911
The table above excludes fair value adjustments of $46.5 million and $53.6 million as at December 31, 2016
and 2015, respectively, relating to policy benefits for life and annuity contracts relating to our Pavonia operations which
are classified as held-for-sale. Amortization of fair value adjustments relating to Pavonia was $7.0 million and $7.9
million during the years ended December 31, 2016 and 2015, respectively.
The estimated amortization expense for each of the five succeeding fiscal years related to our intangible assets
with a definite life is as follows:
Year
2017
2018
2019
2020
2021
Non-life
Run-off
Atrium
StarStone
Total
$
$
$
$
$
9,274
9,524
10,178
10,294
9,682
$
$
$
$
$
(504)
469
1,056
1,346
1,620
$
$
$
$
$
2,761
315
(380)
(231)
(140)
$
$
$
$
$
11,531
10,308
10,854
11,409
11,162
171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
15. LOANS PAYABLE
We utilize debt facilities primarily for acquisitions and, from time to time, for general corporate purposes. Under
these facilities, loans payable as of December 31, 2016 and 2015 were as follows:
Facility
EGL Revolving Credit Facility
Sussex Facility
EGL Term Loan Facility
Total loans payable
Origination Date
Term
2016
2015
September 16, 2014
5 years
$
535,103
$
December 24, 2014
November 18, 2016
4 years
3 years
63,500
75,000
505,750
94,000
—
$
673,603
$
599,750
During the year ended December 31, 2016, we utilized $571.0 million and repaid $493.3 million under our
facilities. The facilities were primarily utilized for funding acquisitions and significant new business as described in
Note 3 - "Acquisitions" and Note 4 - "Significant New Business," respectively.
For the years ended December 31, 2016, 2015 and 2014, interest expense was $20.6 million, $19.4 million and
$12.9 million, respectively, on our loan facilities.
EGL Revolving Credit Facility
This 5-year revolving credit facility, originated on September 16, 2014, and most recently amended on August
5, 2016, is among the Parent Company and certain of its subsidiaries, as borrowers and as guarantors, and various
financial institutions. We are permitted to borrow up to an aggregate of $665.0 million and we have an option to obtain
additional commitments of up to $166.25 million. The individual outstanding loans under this facility are short-term
loans, and the fair values of these loans approximate their book values. As of December 31, 2016, there was $129.9
million of available unutilized capacity under this facility. Subsequent to December 31, 2016, we utilized $90.0 million
and repaid $34.0 million bringing the available unutilized capacity under this facility to $73.9 million.
Interest is payable at least every six months at a LIBOR rate plus a margin and utilization fee as set forth in the
credit facility agreement. The margin could vary based upon any change in our long term senior unsecured debt rating
assigned by Standard & Poor’s Ratings Services or Fitch Ratings Ltd. We also pay a commitment fee for any unutilized
portion of the facility. In the event of default, the interest rate may increase and the agent may cancel lender commitments
and may demand early repayment.
Financial and business covenants imposed on us include certain limitations on mergers and consolidations,
acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets, and limitations on liens.
Generally, the financial covenants require us to maintain a gearing ratio of consolidated indebtedness to total
capitalization of not greater than 0.35 to 1.0 and to maintain a consolidated tangible net worth of not less than the
aggregate of (i) $1.5 billion, (ii) 50% of positive net income since June 30, 2014, and (iii) 75% of the proceeds of any
common stock issuance. In addition, the weighted-average credit rating of our cash and fixed maturity investments
must be "BBB" or greater at all times. We are in compliance with the covenants of the EGL Revolving Credit Facility.
We borrowed €75.0 million under the facility during 2016 that was designated as a non-derivative hedge of our
net investment in certain subsidiaries whose functional currency is denominated in Euros. The foreign exchange effect
of revaluing these Euro borrowings resulted in a gain of $6.0 million recognized in the currency translation adjustment
within accumulated other comprehensive income (loss) for the year ended December 31, 2016, respectively. These
amounts were offset against equivalent amounts recognized upon the translation of those subsidiaries' financial
statements from functional currency into U.S. dollars. There were no ineffective portions of the net investment hedge
during the year ended December 31, 2016, which would have required reclassification from accumulated other
comprehensive income (loss) into earnings.
Sussex Facility
On December 24, 2014, we entered into a four-year term loan (the "Sussex Facility", formerly called the
Companion Facility) with two financial institutions. This facility was fully utilized to borrow $109.0 million to fund 50%
of the consideration payable for the acquisition of Sussex, which was completed on January 27, 2015. During the years
ended December 31, 2016 and 2015, we repaid $30.5 million and $15.0 million of the outstanding principal under this
facility.
172
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Interest is payable at least every six months at a LIBOR rate plus a margin as set forth in the loan agreement.
In the event of default, the interest rate may increase and early repayment may be demanded, or the lender could
proceed against the security. This facility is secured by a first priority interest in all of the assets and stock of Sussex.
Financial and business covenants imposed on Sussex include limitations on mergers and consolidations,
acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets (except for certain
permitted dispositions), restrictions on dividends, and limitations on liens. Generally, the financial covenants require
Sussex to (i) maintain statutory surplus of at least 1.1 times the authorized control level under the NAIC's risk-based
capital calculation and at least 2 times the outstanding loan balance; and (ii) maintain certain characteristics of its
investment portfolio relating to average credit quality and concentration. We are in compliance with the covenants of
the Sussex Facility.
EGL Term Loan Facility
On November 18, 2016, we entered into and fully utilized a three-year $75.0 million unsecured term loan (the
"EGL Term Loan Facility").
Interest is payable at least every three months at either (i) a base rate plus a margin or (ii) a LIBOR rate plus a
margin as set forth in the loan agreement. In the event of default, an interest rate increase and early repayment may
be demanded.
Financial and business covenants imposed on us include certain limitations on mergers, consolidations,
acquisitions, indebtedness and guarantees, restrictions on dividends, and limitations on liens. We are also required to
maintain an average credit quality in our fixed income investment portfolio of BBB or its equivalent, and certain of our
subsidiaries are restricted from engaging in certain derivative transactions without lender consent. The covenants
require our regulated insurance subsidiaries to maintain capital resources of at least 1.1 times the amount required to
meet solvency requirements.
173
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
16. NONCONTROLLING INTERESTS
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest ("RNCI") as of December 31, 2016 comprises the ownership interest held
by Trident (39.32%) and Dowling (1.71%) in North Bay Holdings Limited ("North Bay"). On December 23, 2015, we
completed a corporate reorganization of certain of our subsidiary holding companies. Following the reorganization,
StarStone Holdings and Northshore are owned by a common parent, North Bay. Northshore owns 100% of Atrium and
Arden. StarStone Holdings owns 100% of StarStone and all of the interests in a segregated cell of one of our non-life
run-off subsidiaries that reinsured all of StarStone’s non-life run-off reserves with effect from January 1, 2014.
The following is a reconciliation of the beginning and ending carrying amount of the equity attributable to the
RNCI for the years ended December 31, 2016 and 2015:
Balance at beginning of year
Capital contributions
Dividends paid
Net earnings (loss) attributable to RNCI
Accumulated other comprehensive income (loss) attributable to RNCI
Transfer from noncontrolling interest
Change in redemption value of RNCI
Balance at end of year
2016
2015
$
417,663 $
374,619
—
—
40,639
651
—
(4,431)
15,728
(16,128)
(8,797)
(745)
15,801
37,185
$
454,522 $
417,663
We have carried the RNCI at its estimated redemption value, which is fair value, as of December 31, 2016. The
decrease was primarily attributable to a decrease in comparable company market valuations.
On June 30, 2015, Trident contributed $15.7 million to StarStone Holdings. The transfer from noncontrolling
interest in 2015 related to Dowling's interest. It was transferred to RNCI on December 31, 2015 following the corporate
reorganization.
Refer to Note 2 - "Significant Accounting Policies," Note 3 - "Acquisitions," Note 21 - "Related Party Transactions"
and Note 23 - "Commitments and Contingencies" for additional information regarding RNCI.
Noncontrolling Interest
As of December 31, 2016, we had $8.5 million of noncontrolling interest ("NCI") primarily related to an external
interest in one of our non-life run-off subsidiaries. A reconciliation of the beginning and ending carrying amount of the
equity attributable to NCI is included in the Consolidated Statement of Changes in Shareholders Equity.
During 2015, we made the following repurchases of NCI:
• On June 30, 2015, we entered into a Sale and Purchase Agreement with J.C. Flowers II L.P., J.C. Flowers
II-A L.P., J.C. Flowers II-B, L.P. and Financial Service Opportunities L.P. (collectively, the "JCF II Funds"),
pursuant to which we purchased all of the non-voting preference shares of Cumberland Holdings Ltd. and
Courtenay Holdings Ltd., which represent all of the NCI owned directly by the JCF II Funds in our subsidiaries,
for an aggregate price of $140.0 million. Immediately prior to the repurchase, the book value of the JCF II
Funds’ NCI was $182.8 million. The transaction closed on September 30, 2015.
• On September 3, 2015, we entered into a Sale and Purchase Agreement with Shinsei Bank, Limited
("Shinsei"), pursuant to which we purchased all of the Class B shares of Comox Holdings Ltd., which
represents all of the NCI owned directly by Shinsei in our subsidiaries, for an aggregate price of $10.4 million.
Immediately prior to the repurchase, the book value of Shinsei’s NCI was $12.5 million. The transaction
closed on September 8, 2015.
The difference between the price we paid and the book value of the NCI immediately prior to repurchase has
been reflected as an increase to additional paid-in capital.
174
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
17. SHARE CAPITAL
As at December 31, 2016 and 2015, the authorized share capital was 111,000,000 ordinary shares ("Voting
Ordinary Shares") and non-voting convertible ordinary shares ("Non-Voting Ordinary Shares"), each of par value $1.00
per share, and 45,000,000 preference shares of par value $1.00 per share.
The Voting Ordinary Shares are listed and trade on the NASDAQ Global Select Market. Each Voting Ordinary
Share entitles the holder thereof to one vote. In accordance with the bye-laws, any U.S. shareholder or direct foreign
shareholder group whose shares constitute 9.5% or more of the voting power of the Voting Ordinary Shares is entitled
to less than one vote for each Voting Ordinary Share held by it.
The Non-Voting Ordinary Shares are comprised of several different series as of December 31, 2016:
• The Series A shares were issued and held in treasury, but were not outstanding. These shares were canceled
in June 2016 in an internal reorganization as described below.
• The Series C shares were originally issued in connection with investment transactions in April and December
of 2011. The Series C shares: (i) have all of the economic rights (including dividend rights) attaching to Voting
Ordinary Shares but are non-voting except in certain limited circumstances; (ii) will automatically convert at
a one-for-one exchange ratio (subject to adjustment for share splits, dividends, recapitalizations,
consolidations or similar transactions) into Voting Ordinary Shares if the registered holder transfers them in
a widely dispersed offering; (iii) may only vote on certain limited matters that would constitute a variation of
class rights and as required under Bermuda law, provided that the aggregate voting power of the Series C
shares with respect to any merger, consolidation or amalgamation will not exceed 0.01% of the aggregate
voting power of our issued share capital; and (iv) require the registered holders’ written consent in order to
vary the rights of the shares in a significant and adverse manner.
• The Series B and Series D shares were created in connection with the 2011 investment transactions, but
no shares in these series are issued and outstanding. Holders of the Series C shares have the right to convert
such shares, on a share-for-share basis, subject to certain adjustments, into Series D shares at their option.
There is no economic difference in Series B, C or D shares, but there are slight differences in the conversion
rights and the limited voting rights of each series.
• There were 404,771 Series E shares issued and outstanding as of December 31, 2016. There were 714,015
Series E shares originally issued and outstanding in connection with the acquisition of StarStone. During
2015, 309,244 of the previously issued and outstanding Series E shares were converted into Voting Ordinary
Shares upon market sales constituting a widely dispersed offering. The Series E shares have substantially
the same rights as the Series C shares, except that (i) they are convertible only into Voting Ordinary Shares
and (ii) they may only vote as required under Bermuda law. The Series E shares include all other Non-
Voting Ordinary Shares authorized under our bye-laws but not classified as Series A, B, C or D Non-Voting
Ordinary Shares.
As of December 31, 2016, there were warrants outstanding to acquire 175,901 Series C Non-Voting Ordinary
Shares for an exercise price of $115.00 per share, subject to certain adjustments (the "Warrants"). The Warrants were
issued in April 2011 and expire in April 2021. The Warrant holder may, at its election, satisfy the exercise price of the
Warrants on a cashless basis by surrender of shares otherwise issuable upon exercise of the Warrants in accordance
with a formula set forth in the Warrants. During December 2016, 164,919 Warrants were exercised on a cashless basis,
resulting in the issuance of 66,520 Series C Non-Voting Ordinary Shares. In a series of transactions that took place
subsequent to December 31, 2016, 192,485 Series C Non-Voting Ordinary Shares converted into Voting Ordinary
Shares in a widely dispersed offering by their registered holders.
As of December 31, 2016, there were 388,571 Series C Participating Non-Voting Perpetual Preferred Stock
("Series C Preferred Shares") issued and held by one of our wholly-owned subsidiaries. The Series C Preferred Shares
were issued in June 2016 in an internal reorganization transaction that resulted in the cancellation of all of the Series
A Shares, which had an equivalent value and were also previously held by our wholly-owned subsidiary. The Series
C Preferred Shares (i) upon liquidation, dissolution or winding up of the Company, entitle their holders to a preference
over holders of our ordinary voting and non-voting shares of an amount equal to $0.001 per share with respect to
surplus assets and (ii) are non-voting except in certain limited circumstances. The Series C Preferred shares have
dividend rights equal to those of the ordinary voting shares, subject to certain limitations and in an amount determined
by a "participation rate" that is generally reflective of the reduction in the number of Series C Preferred Shares issued
175
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
in exchange for the previously outstanding Series A Shares. The Series C Preferred Shares otherwise rank on parity
with the ordinary voting and non-voting shares, and they rank senior to each other class or series of share capital,
unless the terms of any such class or series shall expressly provide otherwise.
There were 714,015 Series B Convertible Participating Non-Voting Perpetual Preferred Stock, par value 1.00
per share (the “Non-Voting Preferred Shares”) issued and converted into Series E shares during 2014 in connection
with our acquisition of StarStone.
18. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the years ended
December 31, 2016, 2015 and 2014:
Numerator:
Net earnings from continuing operations
Net earnings (losses) from discontinuing operations
Net earnings attributable to Enstar Group Limited
Denominator:
Weighted-average ordinary shares outstanding — basic
Effect of dilutive securities:
Restricted shares
Restricted share units
Warrants
Preferred shares
Weighted-average ordinary shares outstanding — diluted
Earnings per share attributable to Enstar Group Limited:
Basic:
Net earnings from continuing operations
Net earnings (loss) from discontinuing operations
Net earnings per ordinary share
Diluted:
Net earnings from continuing operations
Net earnings (loss) from discontinuing operations
Net earnings per ordinary share
2016
2015
2014
$
$
252,844 $
11,963
264,807 $
222,322 $
(2,031)
220,291 $
208,210
5,539
213,749
19,299,426
19,252,072
18,409,069
31,434
16,994
99,387
—
19,447,241
63,900
12,901
78,883
—
19,407,756
57,184
15,986
58,957
136,934
18,678,130
$
$
$
$
13.10 $
0.62
13.72 $
13.00 $
0.62
13.62 $
11.55 $
(0.11)
11.44 $
11.46 $
(0.11)
11.35 $
11.31
0.30
11.61
11.15
0.29
11.44
176
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
19. SHARE-BASED COMPENSATION AND PENSIONS
Share-based compensation
Employee share awards have been granted under the 2016 and 2006 Equity Incentive Plans.
Restricted Shares and Restricted Share Units
Restricted shares and restricted share units are service awards that typically vest over three to four years. These
awards are share-settled and are recorded in additional paid-in capital on the consolidated balance sheets. The fair
value of these awards is measured at the grant date and expensed over the service period. The following table
summarizes the activity related to restricted shares and restricted share awards during 2016:
Number of
Shares
Weighted-
Average
Share Price of
Award
Nonvested — January 1
96,055 $
Granted
Vested
Forfeited
Nonvested — December 31
44,165
(44,925)
(16,303)
78,992
150.04
182.98
101.48
141.09
165.94
Compensation costs of $3.0 million, $6.1 million and $3.9 million relating to these share awards were recognized
in our statement of earnings for the years ended December 31, 2016, 2015 and 2014, respectively. The unrecognized
compensation cost related to our non-vested share awards as at December 31, 2016 was $8.4 million. This cost is
expected to be recognized over the next 2.0 years, which is the weighted average contractual life of the awards.
Cash-Settled Stock Appreciation Rights
Cash-settled stock appreciation right awards ("SARs") give the holder the right, upon exercise, to receive in
cash the difference between the market price per share of our ordinary shares at the time of exercise and the exercise
price of the SARs. The exercise price of each SAR is equal to the market price of our ordinary shares on the date of
the grant. Vested SARs are exercisable for periods not to exceed either 4 years or 10 years from the date of grant.
The following table summarizes the activity related to SARs during 2016:
Number of
SARs
Weighted-
Average
Exercise
Price of SARs
Weighted
Average
Expected Term
(in years)
Aggregate
Intrinsic Value
(1)
Balance, beginning of year
Exercised
Forfeited
Balance, end of year
1,160,828 $
(92,458)
(127,202)
941,168
140.51
139.88
139.58
140.70
1.94 $
53,644
(1) The aggregate intrinsic value is calculated as the pre-tax difference between the exercise price of the underlying share awards and the
closing price per share of our ordinary shares of $197.70 on December 31, 2016.
Compensation expense for SARs is based on the estimated fair value on the date of grant using the Black-
Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility,
expected term, expected dividend yield and risk-free interest rate. SARs are liability-classified awards for which
compensation expense and the liability are re-measured using the then-current Black Scholes assumptions at each
interim reporting date based upon the portion of the requisite service period rendered. Compensation costs of $35.6
million and $8.9 million relating to these share awards were recognized in our statement of earnings for the years
ended December 31, 2016 and 2015, respectively. The unrecognized compensation cost related to our SARs as at
December 31, 2016 was $10.1 million. This cost is expected to be recognized over the next 0.53 years, which is the
weighted-average remaining vesting term of the awards.
177
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black-
Scholes option valuation model as at December 31, 2016 and 2015:
Weighted-average fair value per SAR
Weighted-average volatility
Weighted-average risk-free interest rate
Dividend yield
Performance Share Units ("PSUs")
2016
2015
2014
$
62.39
$
29.02
$
37.63
19.82%
1.12%
0.00%
22.08%
1.29%
0.00%
21.24%
0.81%
0.00%
Subsequent to December 31, 2016, we granted 34,775 PSU's with a grant date fair value of $6.9 million. The
PSU's are share-settled and vest on the third anniversary of the grant date. The number of shares to vest will be
determined by a performance adjustment based on the change in fully diluted book value per share ("FDBVPS") over
three years. An increase of 30% to 40% or more in FDBVPS results in a settlement of 100% to a maximum of 150%
of the units granted, respectively. An increase of 20% to 30% in FDBVPS results in a settlement of 50% to 100% of
the units granted, respectively. Straight-line interpolation applies within these ranges and no settlement occurs if the
increase in FDBVPS is less than 20%.
Other share-based compensation plans
Northshore Incentive Plan
Our subsidiary, Northshore, has long-term incentive plans that award time-based restricted shares of Northshore
to certain Atrium employees. Shares generally vest over two to three years. These share awards have been classified
as liability awards. For the years ended December 31, 2016, 2015, and 2014, compensation costs of $2.8 million, $3.9
million and $5.2 million relating to the long-term incentive plans were recorded in our consolidated statement of earnings.
The unrecognized compensation cost related to the Northshore incentive plan at December 31, 2016 was $3.7 million.
This cost is expected to be recognized over the next 1.76 years, which is the weighted average contractual life of the
awards.
Deferred Compensation and Ordinary Share Plan for Non-Employee Directors
For the years ended December 31, 2016, 2015 and 2014, 4,298, 5,174 and 3,716 restricted share units,
respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred
Compensation and Ordinary Share Plan for Non-Employee Directors (the "Deferred Compensation Plan"). Expense
related to the restricted share units for the years ended December 31, 2016, 2015 and 2014, was $0.7 million, $1.0
million and $0.5 million, respectively.
During the years ended December 31, 2015 and 2014, 2,393 and 11,749 restricted share units, respectively,
previously credited to the accounts of two directors under the Deferred Compensation Plan were converted into ordinary
shares following their resignations. Also during 2014, 14,922 restricted share units previously credited to one of the
retiring director's account under a previous deferred compensation plan were converted into the same number of our
ordinary shares.
Employee Share Purchase Plan
For the years ended December 31, 2016, 2015 and 2014, compensation costs relating to the shares issued
under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan ("Share Plan") of $0.3 million,
$0.3 million and $0.1 million, respectively, were recorded as salaries and benefits in our consolidated statement of
earnings. For the years ended December 31, 2016, 2015 and 2014, 12,234, 11,998 and 6,031 shares, respectively,
were issued to employees under the Share Plan.
178
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Pension Plans
We provide retirement benefits to eligible employees through various plans that we sponsor.
Defined Contribution Plans
Pension expense relating to defined contribution plans for the years ended December 31, 2016, 2015 and 2014
was $10.8 million, $10.3 million and $9.2 million, respectively. Pension expense can be affected by changes in our
employee headcount as a result of our acquisitions described in Note 3 - "Acquisitions."
Defined Benefit Plan
We have a noncontributory defined benefit pension plan that was acquired in the Providence Washington
transaction in 2010. Pension expense relating to this defined benefit plan was $2.3 million, $0.6 million and $0.5 million
for the years ended December 31, 2016, 2015 and 2014, respectively. The increase in pension expense during 2016
was due to the completion of a lump sum buyout offering during 2016 and was offset by a reduction in accumulated
other comprehensive loss in shareholders' equity. During 2016, an actuarial review was performed, which determined
that the plan’s unfunded liability, as at December 31, 2016, was $10.3 million as compared to $12.1 million as at
December 31, 2015. As at December 31, 2016 and 2015, we had an accrued liability of $10.3 million and $12.1 million,
respectively, for this plan.
179
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
20. TAXATION
Enstar Group Limited's Parent Company is incorporated under the laws of Bermuda and under Bermuda law is
not required to pay taxes in Bermuda based upon income or capital gains. The Company, under the Exempted
Undertakings Tax Protection Act of 1966, is protected against any legislation that may be enacted in Bermuda which
would impose any tax on profits, income, or gain until March 31, 2035.
We have foreign operating subsidiaries and branch operations principally located in the United States, United
Kingdom, Continental Europe and Australia that are subject to federal, foreign, state and local taxes in those jurisdictions.
Deferred income tax liabilities have not been accrued with respect to the undistributed earnings of our foreign
subsidiaries. If the earnings were to be distributed, as dividends or other distributions, withholding taxes may be imposed
by the jurisdiction of the paying subsidiary. For our U.S. subsidiaries, we have not currently accrued any withholding
taxes with respect to un-remitted earnings as management has no current intention of remitting these earnings. For
our United Kingdom subsidiaries, there are no withholding taxes imposed. For our other foreign subsidiaries, it would
not be practicable to compute such amounts due to a variety of factors, including the amount, timing, and manner of
any repatriation. Because we operate in many jurisdictions, our net earnings are subject to risk due to changing tax
laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood
of substantial changes to tax laws in the jurisdictions in which we operate.
The following table presents earnings before income taxes by jurisdiction from continuing operations:
Domestic (Bermuda)
Foreign
Total earnings before income tax on continuing operations
2016
2015
2014
$
$
191,647 $
61,695 $
154,453
135,677
163,327
72,845
327,324 $
225,022 $
227,298
The following table presents our current and deferred income tax expense (benefit) from continuing operations
by jurisdiction:
Current:
Domestic (Bermuda)
Foreign
Deferred:
Domestic (Bermuda)
Foreign
2016
2015
2014
$
— $
— $
21,485
21,485
—
13,389
13,389
30,028
30,028
—
(17,378)
(17,378)
—
38,814
38,814
—
(33,213)
(33,213)
Total tax expense on continuing operations
$
34,874 $
12,650 $
5,601
180
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The actual income tax rate differs from the amount computed by applying the effective rate of 0% under Bermuda
law to earnings from continuing operations before income taxes as shown in the following reconciliation:
Earnings before income tax
Bermuda income taxes at statutory rate
Foreign income tax rate differential
Change in unrecognized tax benefits
Benefit of loss carryovers
Change in valuation allowance
Investment write-off
Foreign currency translation
Other
Effective tax rate
2016
2015
2014
$ 327,324
$ 225,022
$ 227,298
0.0 %
8.8 %
— %
— %
(0.1)%
— %
— %
2.0 %
10.7 %
0.0 %
17.6 %
— %
— %
0.0 %
11.3 %
(1.0)%
(1.3)%
(10.5)%
(13.2)%
— %
(0.3)%
(1.2)%
5.6 %
1.9 %
0.8 %
4.0 %
2.5 %
Our effective tax rate is driven by the geographical distribution of our pre-tax net earnings between our taxable
and non-taxable jurisdictions.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities reflect the tax effect of the differences between the financial reporting and
income tax bases of assets and liabilities. Significant components of the deferred tax assets and deferred tax liabilities
related to our continuing operations were as follows:
As of December 31,
2016
2015
$
262,271 $
259,851
7,487
19,265
8,760
6,581
16,018
7,946
6,354
29,682
6,821
17,768
17,694
3,532
328,328
341,702
(290,861)
(291,280)
37,467
50,422
(12,804)
(20,615)
(21,030)
(54,449)
$
(16,982) $
(10,567)
(20,895)
(22,044)
(53,506)
(3,084)
Deferred tax assets:
Net operating loss carryforwards
Tax credits and other carryforwards
Insurance reserves
Unearned premiums
Lloyd's underwriting losses taxable in future periods
Provisions for bad debt
Other deferred tax assets
Gross deferred tax assets
Valuation allowance
Deferred tax assets
Deferred tax liabilities:
Unrealized gains on investments
Intangible assets
Other deferred tax liabilities
Deferred tax liabilities
Net deferred tax liability
181
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
As of December 31, 2016, we had net operating loss carryforwards that could be available to offset future taxable
income, as follows:
Tax Jurisdiction
Loss Carryforwards
Tax effect
Expiration
Operating and Capital Loss Carryforwards:
United States - Net operating loss
United States - Capital loss
United Kingdom
Other
Tax Credits:
United States alternative minimum tax
$
571,235 $
11,820
280,707
30,098
193,670
4,905
57,381
6,152
$
7,374
2021-2033
2021-2026
None
None
None
Assessment of Valuation Allowance on Deferred Tax Assets
As of December 31, 2016 and 2015, we had deferred tax asset valuation allowances of $290.9 million and $291.3
million, respectively, related to foreign subsidiaries.
The realization of deferred tax assets is dependent on generating sufficient taxable income in future periods in
which the tax benefits are deductible or creditable. Taxes are determined and assessed jurisdictionally by legal entity
or by filing group. Certain jurisdictions require or allow combined or consolidated tax filings. We have estimated future
taxable income of our foreign subsidiaries and provided a valuation allowance in respect of those assets where we do
not expect to realize a benefit. We have considered all available evidence using a “more likely than not” standard in
determining the amount of the valuation allowance. Our assessment weighs both positive and negative evidence and
considers the extent to which the evidence can be objectively verified. When negative evidence outweighs positive
evidence then it can be difficult to support a conclusion that a valuation allowance is not needed. We consider the
following evidence: (i) net earnings or losses in recent years; (ii) the future sustainability and likelihood of positive net
earnings of our subsidiaries; (iii) the carryforward periods of tax losses including the effect of reversing temporary
differences; and (iv) tax planning strategies.
The decrease of $0.4 million in our continuing operations for 2016 related to the utilization of deferred tax assets
for which we previously carried a valuation allowance, offset by additional valuation allowance for deferred tax assets
management assessed as unable to meet the more-likely-than-not standard for utilization.
Uncertainty in Income Taxes
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
Balance, beginning of year
Gross increases — tax positions related to prior years
Gross decreases — tax positions related to prior years
Lapse of statute of limitations
Balance, end of year
2016
2015
2014
— $
— $
2,249
—
—
—
—
—
—
— $
— $
—
—
(2,249)
—
$
$
During the years ended December 31, 2016, 2015 and 2014, we recognized a benefit for the reversal of interest
and penalties related to unrecognized tax benefits due to the expiration of the statute of limitations in the amount of
$nil, $nil and $2.2 million, respectively. There were no accruals for the payment of interest and penalties related to
unrecognized tax benefits at each of December 31, 2016, 2015 and 2014.
Our operating subsidiaries may be subject to audit by various tax authorities and may have different statutes of
limitations expiration dates. Tax authorities may propose adjustments to our income taxes. Listed below are the tax
years that remain subject to examination by a major tax jurisdiction as of December 31, 2016:
182
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Major Tax Jurisdiction
United States
United Kingdom
Australia
21. RELATED PARTY TRANSACTIONS
Stone Point Capital LLC
Open Tax Years
2013-2015
2013-2015
2011-2015
Through several private transactions occurring from May 2012 to July 2012, Trident acquired 1,350,000 of our
Voting Ordinary Shares (which now constitutes approximately 8.3% of our outstanding Voting Ordinary Shares). On
November 6, 2013, we appointed James D. Carey to our Board of Directors. Mr. Carey is the sole member of an entity
that is one of four general partners of the entities serving as general partners for Trident, is a member of the investment
committees of such general partners, and is a member and senior principal of Stone Point Capital LLC ("Stone Point"),
the manager of the Trident funds.
In addition, we have entered into certain agreements with Trident with respect to Trident’s co-investments in the
Atrium, Arden, and StarStone acquisitions. These include investors’ agreements and shareholders’ agreements, which
provide for, among other things: (i) our right to redeem Trident’s equity interest in the Atrium/Arden and StarStone
transactions in cash at fair market value within the 90 days following the fifth anniversary of the Arden and StarStone
closings, respectively, and at any time following the seventh anniversary of the Arden and StarStone closings,
respectively; and (ii) Trident’s right to have its equity co-investment interests in the Atrium/Arden and StarStone
transactions redeemed by us at fair market value (which we may satisfy in either cash or our ordinary shares) following
the seventh anniversaries of the Arden closing and StarStone closing, respectively. As of December 31, 2016, we have
included $454.5 million (December 31, 2015: $417.7 million) as RNCI on our balance sheet relating to these Trident
co-investment transactions. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident
representative on the boards of the holding companies established in connection with the Atrium/Arden and StarStone
co-investment transactions. Trident also has a second representative on these boards who is a Stone Point employee.
As at December 31, 2016, we had investments in funds (carried within other investments) and a registered
investment company affiliated with entities owned by Trident or otherwise affiliated with Stone Point. The fair value of
the investments in the funds was $232.1 million and $237.9 million as of December 31, 2016 and December 31, 2015,
respectively, while the fair value of our investment in the registered investment company was $20.9 million and $21.0
million as at December 31, 2016 and December 31, 2015, respectively. For the years ended December 31, 2016 and
2015, we recognized net realized and unrealized gains of $17.2 million and net realized and unrealized losses of $0.1
million respectively, in respect of the fund investments, and net realized and unrealized losses of $0.4 million and $4.7
million, respectively, in respect of the registered investment company investment. For the years ended December 31,
2016 and 2015, we recognized interest income of $3.1 million and $2.8 million in respect of the registered investment
company.
We also have separate accounts, with a balance of $215.0 million and $157.8 million as at December 31, 2016
and 2015, respectively, managed by Eagle Point Credit Management and PRIMA Capital Advisors, which are affiliates
of entities owned by Trident, with respect to which we incurred approximately $0.5 million and $0.4 million in management
fees for the years ended December 31, 2016 and 2015, respectively.
In addition, we are invested in two funds (carried within other investments) managed by Sound Point Capital,
an entity in which Mr. Carey has an indirect minority ownership interest and serves as director. The fair value of our
investments in Sound Point Capital funds was $25.4 million and $34.5 million as of December 31, 2016 and
December 31, 2015, respectively; the decrease was primarily due to a partial sale of fund investment during the year
ended December 31, 2016. For the years ended December 31, 2016 and 2015, we have recognized net realized and
unrealized gains of $1.9 million and $0.6 million, respectively, in respect of investments managed by Sound Point
Capital.
Sound Point Capital has acted as collateral manager for certain of our direct investments in CLO equity securities.
The fair value of these investments was $20.3 million and $18.2 million as at December 31, 2016 and December 31,
2015, respectively. For the years ended December 31, 2016 and 2015, we recognized net realized and unrealized
gains of $2.1 million and net realized unrealized losses of $3.6 million, respectively. For the years ended December
183
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
31, 2016 and 2015, we recognized interest income of $6.7 million and $3.4 million, respectively, in respect of these
investments.
We have a separate account managed by Sound Point Capital, with a balance of $61.2 million and $53.5 million
as at December 31, 2016 and December 31, 2015, respectively, with respect to which we incurred approximately $0.3
million and $0.1 million in management fees for the years ended December 31, 2016 and 2015, respectively.
Goldman Sachs & Co.
Affiliates of Goldman, Sachs & Co. ("Goldman Sachs") previously owned approximately 4.1% of our Voting
Ordinary Shares and 100% of our Series C Non-Voting Ordinary Shares ("Series C Shares"), which constituted an
aggregate economic interest of approximately 17.5% (excluding the impact of Goldman Sachs' warrants to acquire
additional Series C Non-Voting Ordinary Shares). During September 2016, Goldman Sachs affiliates: (i) sold a portion
of their Voting Ordinary Shares, Series C Non-Voting Ordinary Shares, and warrants, following which they held an
aggregate economic interest of approximately 8.5% and (ii) sold Series C Shares to Canada Pension Plan Investment
Board ("CPPIB") that resulted in Goldman Sachs holding an aggregate economic interest of approximately 2.3%. In
December 2016, we filed a registration statement at Goldman Sachs' expense, pursuant to which Goldman Sachs
affiliates were permitted to offer their remaining Voting Ordinary Shares and Series C Shares for resale from time to
time. In addition, Goldman Sachs affiliates completed a cashless exercise of their remaining warrants, which were
exchanged for Series C Non-Voting Ordinary Shares and included under the registration statement. Sumit Rajpal, a
managing director of Goldman Sachs, was appointed to our Board of Directors in connection with Goldman Sachs’
investment in Enstar; he resigned on September 16, 2016.
As of December 31, 2016 and December 31, 2015, we had investments in funds (carried within other investments)
affiliated with entities owned by Goldman Sachs, which had a fair value of $19.3 million and $39.6 million, respectively.
The decrease was primarily due to a sale of one of the fund investments during the year ended December 31, 2016.
As of December 31, 2016 and December 31, 2015, we had an indirect investment in non-voting interests of two
companies affiliated with Hastings Insurance Group Limited which had a fair value of $49.9 million and $44.6 million,
respectively. Goldman Sachs affiliates have an approximately 38% interest in the Hastings companies, and Mr. Rajpal
serves as a director of the entities in which we have invested. For the years ended December 31, 2016 and 2015, we
recognized net realized and unrealized gains of $20.6 million and $24.1 million and interest income of $1.7 million and
$nil, respectively, in respect of the Goldman Sachs-affiliated investments.
A Goldman Sachs affiliate provides investment management services to one of our subsidiaries. Our interests
are held in accounts managed by affiliates of Goldman Sachs, with a balance of $748.0 million and $758.9 million as
at December 31, 2016 and December 31, 2015 respectively, with respect to which we incurred approximately $0.8
million and $0.6 million in management fees for the years ended December 31, 2016 and 2015, respectively.
CPPIB
CPPIB, together with management of Wilton Re, own 100% of the common stock of Wilton Re. Subsequent to
the closing of our transaction with Wilton Re on June 3, 2015, CPPIB purchased voting and non-voting shares in Enstar
from FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII-A Parallel Vehicle L.P. and FR Torus Co-Investment,
L.P. On September 29, 2015, CPPIB exercised its acquired right to appoint a representative, Poul Winslow, to our
Board of Directors. During November 2016, CPPIB acquired additional non-voting shares in Enstar from Goldman
Sachs affiliates in a private transaction. Following this transaction, CPPIB's shares constitute an approximate 9.3%
voting interest and an approximate 16% aggregate economic interest in Enstar.
In addition, approximately 4.6% of our voting shares (constituting an aggregate economic interest of
approximately 3.8%) are held indirectly by CPPIB through CPPIB Epsilon Ontario Limited Partnership ("CPPIB LP").
CPPIB is the sole limited partner of CPPIB LP, and CPPIB Epsilon Ontario Trust ("CPPIB Trust") is the general partner.
CPPIB's director representative is a trustee of CPPIB Trust.
We also have a pre-existing reinsurance recoverable from a company later acquired by Wilton Re, which was
carried on our balance sheet at $9.4 million as of December 31, 2016.
KaylaRe
On December 15, 2016, our equity method investee, KaylaRe Holdings Ltd. ("KaylaRe") completed an initial
capital raise of $620.0 million. We own approximately 48.4% of KaylaRe's common shares. We also have a warrant
184
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
to purchase up to 900,000 common shares of KaylaRe, exercisable upon an initial public offering or listing of KaylaRe’s
common shares at an exercise price of $20.00 per share. We have recorded the investment in KaylaRe using the
equity method basis of accounting, pursuant to the conclusion that we are not required to consolidate following an
analysis based on the guidance in ASC 810 - Consolidation. Our investment in the common shares and warrants of
KaylaRe was carried at $294.6 million in other assets on our consolidated balance sheet as at December 31, 2016.
In connection with our investment in KaylaRe, we entered into a Shareholders Agreement with the other
shareholders in KaylaRe, including the Trident funds and HH KaylaRe Holdings, Ltd., an affiliate of Hillhouse Capital
Management (“Hillhouse”). The Shareholders Agreement (i) provides us with the right to appoint one member to the
KaylaRe Board of Directors until the date that we own less than 1,250,000 common shares, (ii) includes a five year
lock-up period on common shares of KaylaRe (unless KaylaRe completes an initial public offering before the expiry
of this five year lock-up period), (iii) provides customary tag-along rights and rights of first refusal in the case of certain
proposed transfers by any other shareholder and customary preemptive rights in the event of a proposed new issuance
of equity securities by KaylaRe. In the event that KaylaRe has not consummated an initial public offering by March 31,
2021, the Trident funds have the right to require us and Hillhouse to purchase on a pro rata basis all of their common
shares in KaylaRe at the then-current fair market value.
Our subsidiary, Enstar Limited, acts as insurance and reinsurance manager to KaylaRe's subsidiary, KaylaRe
Ltd. Affiliates of Enstar have also entered into various reinsurance agreements with KaylaRe Ltd., and KaylaRe Ltd.
will also have the opportunity to participate in future Enstar legacy transactions. We also provide administrative services
to KaylaRe and KaylaRe Ltd.
Through a Quota Share Agreement dated December 15, 2016, (the "KaylaRe-StarStone QS") several of our
StarStone affiliates have entered into a Quota Share Treaty with KaylaRe Ltd. pursuant to which KaylaRe Ltd. reinsures
35% of all business written by these StarStone affiliates for risks attaching from January 1, 2016, net of the StarStone
affiliates’ reinsurance programs. During the year ended December 31, 2016, StarStone ceded $117.6 million of premium
earned, $75.7 million of net incurred losses and LAE and $42.5 million of acquisition costs to KaylaRe Ltd under the
KaylaRe-StarStone QS. These amounts were recorded in the aggregate as net incurred losses and LAE of $1.4 million
in our consolidated statement of earnings for the year ended December 31, 2016 in accordance with retroactive
reinsurance accounting. In addition, certain of our non-life run-off subsidiaries ceded $177.2 million of loss reserves
to KaylaRe Ltd. during the year ended December 31, 2016, on a funds held basis.
Our consolidated balance sheet as at December 31, 2016 included the following balances related to transactions
between us and KaylaRe and KaylaRe Ltd.: reinsurance recoverable of $242.1 million, prepaid reinsurance premiums
of $109.0 million, funds held of $182.3 million recorded in other liabilities, insurance and reinsurance balances payable
of $132.6 million, and ceded acquisition costs of $41.2 million recorded as a reduction of deferred acquisition costs.
Hillhouse
Investment funds managed by Hillhouse collectively own approximately 2.1% of Enstar’s voting ordinary shares.
These funds also own non-voting ordinary shares and warrants to purchase additional non-voting ordinary shares,
which together with their voting ordinary shares, represent an approximate 9.8% economic interest in Enstar.
As of December 31, 2016, our equity method investee, KaylaRe, had investments in a fund managed by Hillhouse
with a fair value of $350.0 million.
185
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
22. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
Parent Company Dividend Restrictions
There were no significant restrictions on the Parent Company's ability to pay dividends from retained earnings
as at December 31, 2016. Bermuda law permits the payment of dividends if (i) we are not, or would not be after payment,
unable to pay our liabilities as the become due and (ii) the realizable value of our assets is in excess of our liabilities
after taking such payment into account. Enstar has not historically declared a dividend. Our strategy is to retain earnings
and invest distributions from our subsidiaries back into the company. We do not currently expect to pay any dividends
on our ordinary shares.
The Bermuda Monetary Authority ("BMA") acts as group supervisor to Enstar. On an annual basis, we are
required to file group statutory financial statements, a group statutory financial return, a group capital and solvency
return, audited group financial statements and a Group Solvency Self-Assessment ("GSSA") with the BMA. The GSSA
is designed to document our perspective on the capital resources necessary to achieve our business strategies and
remain solvent, and to provide the BMA with insights on our risk management, governance procedures and
documentation related to this process. We are required to maintain available group statutory capital and surplus in an
amount that is at least equal to the group enhanced capital requirement ("Group ECR"). The BMA has also established
a group target capital level equal to 120% of the Group ECR. We are in compliance with these requirements.
Our ability to pay dividends to our shareholders is dependent upon the ability of our insurance and reinsurance
subsidiaries to distribute capital and pay dividends to us. Our insurance and reinsurance subsidiaries are subject to
certain regulatory restrictions on the distribution of capital and payment of dividends in the jurisdictions in which they
operate, as described below. The restrictions are generally based on net income or levels of capital and surplus as
determined in accordance with the relevant statutory accounting practices. Failure of these subsidiaries to meet their
applicable regulatory requirements could result in restrictions on any distributions of capital or retained earnings or
stricter regulatory oversight of the subsidiaries.
Our ability to pay dividends and make other forms of distributions may also be limited by repayment obligations
and financial covenants in our outstanding loan facility agreements.
Subsidiary Statutory Financial Information and Dividend Restrictions
Our insurance and reinsurance subsidiaries prepare their statutory financial statements in accordance with
statutory accounting practices prescribed or permitted by local regulators. Statutory accounting differs from U.S. GAAP,
including in the treatment of investments, acquisition costs and deferred income taxes, amongst other items.
The statutory capital and surplus amounts for the years ended December 31, 2016 and 2015 and statutory net
income amounts for the years ended December 31, 2016, 2015 and 2014 for our insurance and reinsurance subsidiaries
based in Bermuda, the United Kingdom, Australia, the United States and Continental Europe were as follows:
Statutory Capital and Surplus
Bermuda
U.K.
U.S.
Europe
Required
2016
Actual
Statutory Income
2016
2015
$ 622,183 $ 510,773 $ 2,131,308 $ 1,767,172 $ 339,548 $ 147,883 $
$ 532,132 $
$ 209,283 $ 147,538 $ 662,942 $ 756,543 $
$ 240,107 $
44,126 $ 286,039 $ 211,458 $
2014
41,750
61,819 $ 805,170 $ 629,208 $ 131,619 $ 113,296 $ 107,030
91,576
11,959
(1,439) $
31,075 $
14,964 $
1,856 $
2016
2015
2015
As at December 31, 2016, the total amount of net assets of our consolidated subsidiaries that were restricted
was $1.6 billion.
Certain material aspects of these laws and regulations as they relate to solvency, dividends and capital and
surplus are summarized below.
186
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Bermuda
Our Bermuda-based insurance and reinsurance subsidiaries are registered under the Insurance Act 1978 of
Bermuda and related regulations, as amended (the "Insurance Act"). The Insurance Act imposes certain solvency and
liquidity standards and auditing and reporting requirements and grants the BMA powers to supervise, investigate,
require information and the production of documents and intervene in the affairs of insurance companies.
The Insurance Act requires that our Bermuda-based insurance and reinsurance subsidiaries maintain certain
solvency and liquidity standards. The minimum liquidity ratio requires that the value of relevant assets must not be
less than 75% of the amount of relevant liabilities. The minimum solvency margin, which varies depending on the class
of the insurer, is determined as a percentage of either net reserves for losses and LAE or premiums or pursuant to a
risk-based capital measure. Our Bermuda subsidiaries with commercial insurance licenses are required to maintain a
minimum statutory capital and surplus (Enhanced Capital Requirement or "ECR") at least equal to the greater of a
minimum solvency margin or the Bermuda Solvency Capital Requirement ("BSCR"). The BSCR is calculated based
on a standardized risk-based capital model.
Each of our regulated Bermuda insurance and reinsurance subsidiaries would be prohibited from declaring or
paying any dividends if it were in breach of its minimum solvency margin (which is a function of outstanding losses)
or liquidity ratio (which is a function of relevant assets) or if the declaration or payment of such dividends would cause
it to fail to meet such margin or ratio. In addition, each of our regulated Bermuda insurance and reinsurance subsidiaries
is prohibited, without the prior approval of the BMA, from reducing by 15% or more its total statutory capital as set out
in its previous year’s statutory financial statements. Our Bermuda insurance companies that are in run-off are required
to seek regulatory approval for any dividends or distributions.
As of December 31, 2016 and 2015, each of our Bermuda-based insurance and reinsurance subsidiaries
exceeded their respective minimum solvency and liquidity requirements. The Bermuda insurance and reinsurance
subsidiaries in aggregate exceeded minimum solvency requirements by $1.5 billion as of December 31, 2016 (2015:
$1.26 billion) and were in compliance with their liquidity requirements.
United Kingdom
U.K. Insurance Companies (non-Lloyd's)
Our U.K. based insurance subsidiaries are regulated by the U.K. Prudential Regulatory Authority (the "PRA")
and the Financial Conduct Authority (the "FCA", together with the PRA, the "U.K. Regulator").
Our U.K.-based insurance subsidiaries are required to maintain adequate financial resources in accordance with
the requirements of the U.K. Regulator. The calculation of the minimum capital resources requirements in any particular
case depends on, among other things, the type and amount of insurance business written and claims paid by the
insurance company. As at December 31, 2016 and 2015, all of our U.K. insurance subsidiaries maintained capital in
excess of the minimum capital resources requirements and complied with the relevant U.K. Regulator requirements.
The U.K.-based insurance subsidiaries, in aggregate, maintained capital in excess of the minimum capital resources
requirements by $273.0 million and $567.4 million as of December 31, 2016 and 2015, respectively.
The Solvency II framework directive took effect on January 1, 2016. Solvency II sets out E.U.-wide requirements
on capital adequacy and risk management for insurers with the aim of further increasing policyholder protection, instilling
greater risk awareness and improving the international competitiveness of E.U. insurers. Insurers must comply with a
Solvency Capital Requirement ("SCR"), which is calculated using either the Solvency II standard formula or a bespoke
internal model. Our non-Lloyd's U.K. companies use the standard formula.
The U.K. Regulator’s rules require our U.K. insurance subsidiaries to obtain regulatory approval for any proposed
or actual payment of a dividend. From January 1, 2016, the U.K. Regulator has used the SCR, among other tests,
when assessing requests to make distributions.
Lloyd’s
As of December 31, 2016, we participated in the Lloyd’s market through our interests in: (i) Atrium’s Syndicate
609, which is managed by Atrium Underwriters Limited, a Lloyd's managing agent, and the Atrium corporate member;
(ii) StarStone’s Syndicate 1301, which is managed by StarStone Underwriting Limited ("SUL"), a Lloyd’s managing
agent, and the StarStone corporate member; and (iii) Syndicate 2008, a wholly aligned syndicate that has permission
to underwrite RITC business and other run-off or discontinued business type transactions with other Lloyd’s syndicates,
187
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
and its corporate member. During 2015, SUL assumed the role of managing agent for Syndicate 2008 in place of
Shelbourne Syndicate Services Limited as we streamlined our organizational structure and combined Shelbourne and
StarStone resources into one agency. For the 2017 underwriting year, participation in all three syndicates will be through
a common corporate member.
The underwriting capacity of a member of Lloyd’s is supported by providing Funds at Lloyd’s, as described in
Note 5 - "Investments." Business plans, including maximum underwriting capacity, for Lloyd’s syndicates requires
annual approval by the Lloyd’s Franchise Board, which may require changes to any business plan or additional capital
to support underwriting plans.
The Lloyd’s market has applied the Solvency II internal model under Lloyd’s supervision, and our Lloyd’s
operations are required to meet Solvency II standards. Effective January 1, 2016, Lloyd's received approval from the
PRA to use its internal model under the Solvency II regime.
United States
Our U.S. non-life run-off and active underwriting insurance and reinsurance subsidiaries are subject to the
insurance laws and regulations of the states in which they are domiciled, licensed and/or eligible to conduct business.
These laws restrict the amount of dividends the subsidiaries can pay to us. The restrictions are generally based on
statutory net income and/or certain levels of statutory surplus as determined in accordance with the relevant statutory
accounting requirements of the individual domiciliary states or states in which any of the insurance or reinsurance
subsidiaries are domiciled. Generally, prior regulatory approval must be obtained before an insurer may pay a dividend
or make a distribution above a specified level.
For all of our U.S. insurance and reinsurance subsidiaries, with the exception of one subsidiary which has a
permitted accounting practice to treat an adverse development cover reinsurance agreement as prospective
reinsurance, there are no prescribed or permitted statutory accounting practices that differ significantly from the statutory
accounting principles established by the National Association of Insurance Commissioners ("NAIC"). The U.S. insurance
and reinsurance subsidiaries are also required to maintain minimum levels of solvency and liquidity as determined by
law, and to comply with risk-based capital requirements and licensing rules.
As of December 31, 2016, all of our U.S. non-life insurance and reinsurance subsidiaries exceeded their required
levels of risk-based capital. On an aggregate basis, our U.S. non-life insurance and reinsurance subsidiaries exceeded
their minimum levels of risk-based capital as of December 31, 2016 by $402.0 million (December 31, 2015: $528.3
million).
Our life and annuities subsidiaries file financial statements with state insurance regulatory authorities and the
NAIC in the United States and the Office of Superintendent of Financial Institutions ("OSFI") in Canada (as a result of
one of our subsidiaries having a Canadian branch operation). Our life and annuity companies are subject to certain
Risk-Based Capital ("RBC") requirements as specified by the NAIC and OSFI. RBC is used to evaluate the adequacy
of capital and surplus maintained by our life and annuities companies in relation to risks associated with: (i) asset risk;
(ii) insurance risk; (iii) interest rate risk and (iv) business risk. As of December 31, 2016 and 2015, our life and annuities
subsidiaries exceeded their minimum RBC requirements by $51.6 million (2015: $80.8 million). These subsidiaries are
restricted by state laws and regulations as to the amount of dividends they may pay. Any dividends in excess of limits
are deemed "extraordinary" and require approval. As of December 31, 2016 and 2015, the maximum dividend payout
which may be made without prior approval is $nil (2015: $0.5 million).
Europe
Our Swiss insurance subsidiary, Harper Insurance Limited, is regulated by the Swiss Financial Market Supervisory
Authority ("FINMA") pursuant to the Insurance Supervisory Act 2004. This subsidiary is obligated to maintain a minimum
solvency margin based on the Solvency I and Swiss Solvency Test regulations ("SST") as stipulated by the Insurance
Supervisory Act. From January 1, 2016, Switzerland has been granted full Solvency II equivalence by the European
Commission. As of December 31, 2016 and 2015, this subsidiary exceeded the SST requirements by $6.1 million
(2015: $94.8 million). The amount of dividends that this subsidiary is permitted to distribute is restricted to freely
distributable reserves, which consist of retained earnings, the current year profit and legal reserves. Any dividend
exceeding the current year profit requires FINMA’s approval. The solvency and capital requirements must continue to
be met following any distribution.
188
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Our Liechtenstein insurance subsidiary (StarStone Insurance Europe AG) is regulated by the Liechtenstein
Financial Market Authority ("FMA") pursuant to the Liechtenstein Insurance Supervisory Act. This subsidiary is obligated
to maintain a minimum solvency margin based on the Solvency I regulations. As of December 31, 2016, this subsidiary
exceeded the Solvency I requirements by $12.8 million (2015: $20.4 million). The amount of dividends that this
subsidiary is permitted to distribute is restricted to freely distributable reserves, which consist of retained earnings, the
current year profit and legal reserves. Any dividend exceeding the current year profit requires the FMA’s approval.
Solvency and capital requirements for this subsidiary are based on the Solvency II framework and must continue to
be met following any distribution.
Our Irish and Belgian life insurance subsidiaries file financial statements and returns with the Central Bank of
Ireland and the National Bank of Belgium, respectively. These subsidiaries were in compliance with their solvency and
capital requirements under Solvency II, and must continue to be met following any distribution.
189
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
23. COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
We believe that there are no significant concentrations of credit risk associated with our cash and cash equivalents,
fixed maturity investments, or other investments. Cash, cash equivalents and fixed maturity investments are managed
pursuant to guidelines that follow prudent standards of diversification and limit the allowable holdings of a single issue
and issuers. Other investments are managed pursuant to guidelines that emphasize diversification and liquidity.
Pursuant to these guidelines, we manage and monitor risk across a variety of investment funds and vehicles, markets
and counterparties. We are also subject to custodial credit risk on our fixed maturity and equity investments, which we
manage by diversifying our holdings amongst large financial institutions that are highly regulated.
We have exposure to credit risk on certain of our assets pledged to ceding companies under insurance contracts.
In addition, we are potentially exposed should any insurance intermediaries be unable to fulfill their contractual
obligations with respect to payments of balances owed to and by us.
Credit risk exists in relation to our insurance and reinsurance balances recoverable. We remain liable to the
extent that counterparties do not meet their contractual obligations and, therefore, we evaluate and monitor
concentration of credit risk among our insurers and reinsurers. Amounts recoverable from reinsurers are described
Note 10 - "Reinsurance Balances Recoverable."
We are also subject to credit risk in relation to funds held by reinsured companies. Under funds held arrangements,
the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries.
The funds balance is credited with investment income and losses payable are deducted. We are subject to credit risk
if the reinsured company is unable to honor the value of the funds held balances, such as in the event of insolvency.
However, we generally have the contractual ability to offset any shortfall in the payment of the funds held balances
with amounts owed by us to the reinsured for losses payable and other amounts contractually due. We routinely monitor
the creditworthiness of reinsured companies with whom we have funds held arrangements. We have a significant
concentration of $1.0 billion to one reinsured company which has financial strength credit ratings of A+ from A.M. Best
and AA from Standard & Poor's, as well as to KaylaRe as described in Note 21 - "Related Party Transactions".
We limit the amount of credit exposure to any one counterparty and none of our counterparty credit
exposures, excluding U.S. Government instruments and the counterparties noted above, exceeded 10% of
shareholders’ equity as of December 31, 2016.
Operating Leases
We lease office space under operating leases expiring in various years through 2026. The leases are renewable
at our option under certain circumstances. The following is a schedule of future minimum rental payments on non-
cancelable leases as of December 31, 2016:
2017
2018
2019
2020
2021
2022 and beyond
$
10,022
9,510
7,752
6,183
4,147
8,170
$
45,784
Rent expense for the years ended December 31, 2016, 2015 and 2014 was $9.7 million, $11.1 million and $10.2
million, respectively.
190
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Legal Proceedings
We are, from time to time, involved in various legal proceedings in the ordinary course of business, including
litigation and arbitration regarding claims. Estimated losses relating to claims arising in the ordinary course of business,
including the anticipated outcome of any pending arbitration or litigation are included in the liability for losses and LAE
in our consolidated balance sheets. In addition to claims litigation, we may be subject to other lawsuits and regulatory
actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or
omissions, employment claims or regulatory activity. We do not believe that the resolution of any currently pending
legal proceedings, either individually or taken as a whole, will have a material effect on our business, results of operations
or financial condition. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue
to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally
related to the scope of coverage with respect to asbestos and environmental and other claims.
Unfunded Investment Commitments
As at December 31, 2016, we had unfunded commitments to investment funds of $144.0 million.
Guarantees
As at December 31, 2016 and 2015, parental guarantees supporting subsidiaries' insurance obligations were
$625.7 million and $334.2 million, respectively. The increase relates to new transactions during 2016 as described in
Note 3 - "Acquisitions" and Note 4 - "Significant New Business", and includes $122.0 million for letters of credit issued
under a Funds at Lloyd's facility as described in Note 6 - "Investments."
Significant New Business
On January 11, 2017 we entered into a reinsurance agreement with QBE. On February 6, 2017, we entered into
a reinsurance agreement with RSA. These agreements are described in Note 4 - "Significant New Business."
Asbestos Personal Injury Liabilities
We acquired Dana Companies, LLC ("Dana") on December 30, 2016, as described in Note 3 - "Acquisitions".
Dana continues to process asbestos personal injury claims in the normal course of business and is separately managed.
Other liabilities included $220.5 million for indemnity and defense costs for pending and future claims at December
31, 2016, determined using standard actuarial techniques for asbestos-related exposures. Other liabilities also included
$2.3 million for environmental liabilities associated with Dana properties.
Other assets included $133.0 million at December 31, 2016 for estimated insurance recoveries relating to these
liabilities. The recorded asset represents our assessment of the capacity of the insurance agreements to provide for
the payment of anticipated defense and indemnity costs for pending claims and projected future demands. The
recognition of these recoveries is based on an assessment of the right to recover under the respective contracts and
on the financial strength of the insurers. The recorded asset does not represent the limits of our insurance coverage,
but rather the amount we would expect to recover if the accrued indemnity and defense costs were paid in full.
Redeemable Noncontrolling Interest
We have the right to purchase the RNCI interests from the RNCI holders at certain times in the future (each such
right, a "call right") and the RNCI holders have the right to sell their RNCI interests to us at certain times in the future
(each such right, a "put right"). The RNCI rights held by Trident are described in Note 21 - "Related Party Transactions."
Dowling has a right to participate if Trident exercises its put right.
191
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
24. SEGMENT INFORMATION
We monitor and report our results of operations in four segments: Non-life Run-off, Atrium, StarStone and Life
and Annuities. These segments are described in Note 1 - "Description of Business."
Atrium and StarStone, our active underwriting operations, are reported as separate segments because they are
managed and operated in separate and distinct manners. Atrium’s senior management runs its day-to-day operations
with limited involvement of our senior management, whereas our senior management and employees are involved in
StarStone’s day-to-day operations. Atrium employees are not involved in the management or strategy of StarStone,
nor are StarStone employees involved in the management or strategy of Atrium. Atrium and StarStone are monitored
and reported upon separately and distinctly and their strategies and business plans are determined independently of
each other.
The presentation of the results in our Life and Annuities segment reflect the classification of Pavonia as
discontinuing operations and held-for-sale. Following the sale of Pavonia, we will no longer have any annuity products
and our continuing life business comprises term life products in Alpha and Laguna, and the life settlements business.
The following tables set forth selected and consolidated statement of earnings results by segment for the years
ended December 31, 2016, 2015, 2014:
Non-life
Run-off
Atrium
StarStone
2016
Life and
Annuities
Eliminations
Consolidated
INCOME
Net premiums earned
$
16,755
$
124,416
$
676,608
$
5,735
$
— $
823,514
Fees and commission income
Net investment income
Net realized and unrealized gains
(losses)
Other income
EXPENSES
25,324
143,783
77,689
4,003
18,189
2,940
(601)
206
5,102
22,221
5,728
1,780
267,554
145,150
711,439
Net incurred losses and LAE
(285,881)
58,387
401,593
Life and annuity policy benefits
Acquisition costs
General and administrative
expenses
Interest expense
Net foreign exchange losses
(gains)
EARNINGS BEFORE INCOME
TAXES
INCOME TAXES
NET EARNINGS FROM
CONTINUING OPERATIONS
NET EARNINGS FROM
DISCONTINUING OPERATIONS,
NET OF INCOME TAX EXPENSE
Less: Net earnings attributable to
noncontrolling interest
NET EARNINGS ATTRIBUTABLE
TO ENSTAR GROUP LIMITED
—
4,198
—
—
44,670
138,822
275,199
22,863
(1,678)
14,701
252,853
(28,577)
25,132
198
3,310
131,697
13,453
(2,573)
125,279
47
(754)
664,987
46,452
(3,693)
224,276
10,880
42,759
14,535
—
—
—
11,963
(17,600)
(4,464)
(17,542)
—
—
20,043
(4,998)
353
21,133
—
(2,038)
612
7,148
1,058
(213)
6,567
14,566
(31)
(9,251)
(3,524)
—
(1,506)
39,364
185,463
77,818
4,836
(14,281)
1,130,995
—
—
174,099
(2,038)
(1,733)
186,569
(9,024)
(3,524)
423,734
20,642
—
665
(14,281)
803,671
—
—
—
—
—
327,324
(34,874)
292,450
11,963
(39,606)
$
206,676
$
6,416
$
25,217
$
26,498
$
— $
264,807
192
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains
(losses)
Other income
EXPENSES
Net incurred losses and LAE
Life and annuity policy benefits
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses (gains)
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS FROM CONTINUING
OPERATIONS
NET LOSS FROM DISCONTINUING
OPERATIONS, NET OF INCOME TAX
EXPENSE
Less: Net losses (earnings) attributable
to noncontrolling interest
NET EARNINGS ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
Non-life
Run-off
Atrium
StarStone
2015
Life and
Annuities
Eliminations
Consolidated
$
44,369
$ 134,675
$ 573,146
$
1,554
$
— $
753,744
21,366
84,185
(31,193)
29,293
28,352
2,225
—
—
(10,371)
15,937
21,137
(920)
252
359
(9,784)
676
(798)
—
—
—
148,020
165,863
579,975
21,893
(11,291)
(270,830)
47,479
327,684
—
8,860
238,989
14,565
4,372
—
45,509
31,610
4,264
213
—
109,347
126,132
6
(480)
(4,044)
129,075
562,689
152,064
36,788
(12,570)
(5,968)
17,286
5,888
—
(546)
—
2,799
1,488
(732)
3,009
18,884
—
139,494
30,820
23,174
18,884
—
—
—
(2,031)
33,722
(14,262)
(9,510)
—
—
—
—
(10,371)
(920)
—
(11,291)
—
—
—
—
—
39,347
122,564
(41,523)
30,328
904,460
104,333
(546)
163,716
389,159
19,403
3,373
679,438
225,022
(12,650)
212,372
(2,031)
9,950
$
173,216
$
16,558
$ 13,664
$
16,853
$
— $
220,291
193
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Non-life
Run-off
Atrium
StarStone
2014
Life and
Annuities
Eliminations
Consolidated
$
31,168
$
135,945
$
373,633
$
2,245
$
— $
542,991
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains
Other income
EXPENSES
19,342
57,899
48,030
13,310
26,176
1,748
41
223
—
5,321
2,136
616
169,749
164,133
381,706
Net incurred losses and LAE
Life and annuity policy benefits
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses (gains)
(264,711)
55,428
218,429
—
8,393
198,063
7,493
8,015
—
43,417
34,921
5,429
(1,559)
—
65,734
113,344
—
945
32
1,056
1,784
—
5,117
—
84
(2)
1,423
—
(1,439)
(10,631)
—
—
—
34,919
66,024
51,991
14,149
(10,631)
710,074
—
—
—
(10,631)
—
—
9,146
84
117,542
337,120
12,922
5,962
EARNINGS (LOSS) BEFORE
INCOME TAXES
INCOME TAXES
NET EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
NET EARNINGS FROM
DISCONTINUING OPERATIONS, NET
OF INCOME TAX EXPENSE
Less: Net losses (earnings) attributable
to noncontrolling interest
NET EARNINGS (LOSS)
ATTRIBUTABLE TO ENSTAR GROUP
LIMITED
(42,747)
137,636
398,452
66
(10,631)
482,776
212,496
622
26,497
(5,092)
(16,746)
(1,130)
5,051
(1)
213,118
21,405
(17,876)
5,050
—
—
—
5,539
(9,836)
(10,974)
7,323
—
—
—
—
—
—
227,298
(5,601)
221,697
5,539
(13,487)
$
203,282
$
10,431
$
(10,553) $
10,589
$
— $
213,749
194
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Gross Premiums Written by Geographical Area
The following table summarizes our gross premiums written for the year ended December 31, 2016 by each of
our operating segments by geographic area. Geographic distribution in subsequent years is subject to variation based
upon market conditions and business strategies.
Non-life Run-off
Atrium
StarStone
Life and Annuities
Total
Total
%
Total
%
Total
%
Total
%
Total
%
(In thousands of U.S. dollars, except percentages)
United States
United Kingdom
Europe
Asia
Rest of World
Total
$ 17,316
100.0% $ 79,433
55.5% $ 520,045
60.8% $
—
—
—
—
—%
—%
—%
—%
9,200
8,797
6,766
6.4%
98,067
6.1% 135,971
4.7%
43,200
38,974
27.3%
57,416
11.5%
15.9%
5.1%
6.7%
—
899
6,256
—
—
—% $ 616,794
12.6%
87.4%
—%
—%
108,166
151,024
49,966
96,390
60.3%
10.6%
14.8%
4.9%
9.4%
$ 17,316
100.0% $ 143,170
100.0% $ 854,699
100.0% $
7,155
100.0% $ 1,022,340
100.0%
Assets by Segment
Invested assets are managed on a subsidiary by subsidiary basis, and investment income and realized and
unrealized gains on investments are recognized in each segment as earned. Our total assets as at December 31, 2016
and 2015 by segment were as follows (the elimination items include the elimination of intersegment assets):
Total assets:
Non-life Run-off
Atrium
StarStone
Life and annuities
Less:
Eliminations
2016
2015
$
8,297,103
$
7,602,594
563,754
2,968,316
1,644,013
559,377
2,780,462
1,695,994
(607,442)
(865,893)
$
12,865,744
$
11,772,534
195
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
25. UNAUDITED CONDENSED QUARTERLY FINANCIAL DATA
INCOME
Net premiums earned
Fees and commission income
Net investment income
Other income
EXPENSES
Net realized and unrealized gains (losses)
(61,570)
(56,705)
December 31,
September 30,
June 30,
March 31,
2016
2015
2016
2015
2016
2015
2016
2015
$ 216,188
$178,009
$205,730
$209,971
$208,709
$189,344
$192,887
$ 176,420
13,266
42,229
7,450
44,265
9,187
48,022
66,608
9,708
31,640
(15,835)
10,487
44,932
34,503
10,125
25,265
(8,296)
(1,277)
12,648
414
2,370
3,289
11,833
6,424
50,280
38,277
2,410
12,064
21,394
39,313
3,477
208,836
185,667
329,961
237,854
301,920
228,271
290,278
252,668
Net incurred losses and loss adjustment
expenses
1,321
(64,062)
(6,902)
32,359
96,462
65,900
83,218
70,136
Life and annuity policy benefits
(2,265)
(1,808)
1,682
401
(1,613)
Acquisition costs
47,619
53,666
50,074
44,445
43,847
General and administrative expenses
123,497
106,754
103,097
96,818
104,206
Interest expense
Net foreign exchange losses (gains)
4,796
(1,527)
5,368
7,004
5,027
2,276
5,156
5,421
(841)
(1,856)
407
33,781
90,837
4,876
2,297
158
45,029
92,934
5,398
1,772
454
31,824
94,750
4,003
(5,087)
EARNINGS BEFORE INCOME TAXES
35,395
78,745
174,707
59,516
55,453
30,173
61,769
56,588
INCOME TAXES
(11,228)
15,794
(8,227)
(12,684)
(8,050)
(8,087)
(7,369)
(7,673)
173,441
106,922
155,254
178,338
246,467
198,098
228,509
196,080
24,167
94,539
166,480
46,832
47,403
22,086
54,400
48,915
NET EARNINGS FROM CONTINUING
OPERATIONS
NET EARNINGS (LOSS) FROM
DISCONTINUING OPERATIONS, NET OF
INCOME TAX EXPENSE
5,483
(1,898)
3,897
(831)
2,378
(3,879)
205
4,577
53,492
NET EARNINGS
29,650
92,641
170,377
46,001
49,781
18,207
54,605
Less: Net losses (earnings) attributable to
noncontrolling interest
NET EARNINGS ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
EARNINGS PER SHARE —BASIC:
(7,005)
19,216
(14,329)
3,041
(9,187)
(3,662)
(9,085)
(8,645)
$ 22,645
$111,857
$156,048
$ 49,042
$ 40,594
$ 14,545
$ 45,520
$ 44,847
Net earnings from continuing operations
Net earnings (loss) from discontinuing
operations
$
$
0.91
0.26
Net earnings per ordinary share attributable
to Enstar Group Limited shareholders $
1.17
EARNINGS PER SHARE — DILUTED:
Net earnings from continuing operations
Net earnings (loss) from discontinuing
operations
$
$
Net earnings per ordinary share attributable
to Enstar Group Limited shareholders $
0.90
0.26
1.16
$
$
$
$
$
$
5.91
$
7.86
(0.11) $
0.23
5.80
$
8.09
5.86
$
7.79
(0.11) $
0.23
5.75
$
8.02
$
$
$
$
$
$
2.57
$
1.99
(0.02) $
0.11
2.55
$
2.10
2.55
$
1.98
(0.02) $
0.11
2.53
$
2.09
$
$
$
$
$
$
0.99
$
2.34
(0.23) $
0.02
0.76
$
2.36
0.98
$
2.33
(0.23) $
0.02
0.75
$
2.35
$
$
$
$
$
$
2.04
0.29
2.33
2.03
0.29
2.32
196
ENSTAR GROUP LIMITED
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 2016
(Expressed in thousands of U.S. Dollars)
SCHEDULE I
Type of investment
Fixed maturity securities and short-term investments — Trading:
Cost (1)
Fair Value
Amount at
which
shown in the
balance
sheet(4)
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total
Fixed maturity securities and short-term investments — Available-
for-sale
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Asset-backed
Total
Equities(2)
Other investments, at fair value(3)
Other investments, at cost
Total
$
844,746 $
840,274 $
840,274
275,900
267,363
267,363
2,402,062
2,387,322
2,387,322
47,615
378,516
220,727
476,595
47,181
373,528
217,212
478,280
47,181
373,528
217,212
478,280
4,646,161
4,611,160
4,611,160
12,784
86,897
12,710
85,423
12,710
85,423
159,243
158,655
158,655
6,585
488
3,867
269,864
67,516
590,048
131,651
6,576
527
3,876
267,767
74,149
590,048
129,474
6,576
527
3,876
267,767
74,149
590,048
131,651
$ 5,705,240 $ 5,672,598 $ 5,674,775
(1) Original cost of fixed maturity securities is reduced by repayments and adjusted for amortization of premiums or accretion of discounts.
(2)
(3)
(4)
The difference in the amount of equities shown at fair value and the equities shown in our consolidated balance sheet relates to the fair
value of $20.9 million as of December 31, 2016 for our investment in a registered investment company affiliated with entities owned by
Trident. Refer to Note 21 of the notes to the consolidated financial statements.
The difference in the amount of other investments shown at fair value and the other investments shown in our consolidated balance sheet
relates to the fair value of $347.0 million as of December 31, 2016 for our other investments in funds or companies owned by or affiliated
with certain related parties. Refer to Note 21 of the notes to the consolidated financial statements.
The table above excludes businesses held for sale. Refer to Note 5 of the notes to the consolidated financial statements.
197
ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Balance Sheets - Parent Company Only
As of December 31, 2016 and 2015
SCHEDULE II
2016
2015
(in thousands of U.S.
dollars, except share data)
ASSETS
Cash and cash equivalents
Balances due from subsidiaries
Investments in subsidiaries
Other assets
TOTAL ASSETS
LIABILITIES
Loans payable
Balances due to subsidiaries
Other liabilities
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Share capital authorized, issued and fully paid, par value $1 each (authorized 2016
and 2015: 156,000,000):
Ordinary shares (issued and outstanding 2016: 16,175,250; 2015: 16,133,334)
Non-voting convertible ordinary shares:
Series A (issued 2016: nil; 2015: 2,972,892)
Series C (issued and outstanding 2016: 2,792,157; 2015: 2,725,637)
Series E (issued and outstanding 2016: 404,771; 2015: 404,771)
Series C Preferred Shares (issued and outstanding 2016: 388,571; 2015: nil)
Treasury shares at cost (Preferred shares 2016: 388,571; Series A non-voting
convertible ordinary shares 2015: 2,972,892)
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Enstar Group Limited Shareholders’ Equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
4,884 $
4,552
489,873
2,674,084
7,812
$ 3,449,381 $ 3,176,321
35,563
3,400,401
8,533
$
488,103 $
153,843
5,123
647,069
485,750
160,854
12,845
659,449
16,175
16,133
—
2,792
405
389
2,973
2,726
405
—
(421,559)
1,380,109
(23,549)
1,847,550
2,802,312
(421,559)
1,373,044
(35,162)
1,578,312
2,516,872
$ 3,449,381 $ 3,176,321
See accompanying notes to the Condensed Financial Information of Registrant
198
ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
Statements of Earnings - Parent Company Only
For the Years Ended December 31, 2016, 2015 and 2014
SCHEDULE II
INCOME
Net investment income
Dividend income from subsidiaries
EXPENSES
General and administrative expenses
Interest expense
Net foreign exchange (gains) losses
2016
2015
2014
(in thousands of U.S. dollars)
$
44 $
14,965 $
361,675
361,719
59,755
10,109
(318)
69,546
1,000
15,965
50,349
8,693
213
59,255
11,865
21,952
33,817
43,241
8,201
379
51,821
EARNINGS (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES -
CONTINUING OPERATIONS
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES -
DISCONTINUING OPERATIONS
NET EARNINGS
292,173
(43,290)
(18,004)
(39,329)
265,612
226,214
11,963
(2,031)
5,539
$
264,807 $
220,291 $
213,749
Statements of Comprehensive Income - Parent Company Only
For the Years Ended December 31, 2016, 2015 and 2014
NET EARNINGS
OTHER COMPREHENSIVE INCOME (LOSS) RELATING TO
SUBSIDIARIES, NET OF TAX
COMPREHENSIVE INCOME
2016
2015
2014
(in thousands of U.S. dollars)
264,807 $
220,291 $
213,749
11,613
276,420 $
(22,476)
197,815 $
(26,664)
187,085
$
$
See accompanying notes to the Condensed Financial Information of Registrant
199
ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
Statements of Cash Flows - Parent Company Only
For the Years Ended December 31, 2016, 2015 and 2014
SCHEDULE II
OPERATING ACTIVITIES:
Net cash flows provided by (used in) operating activities
$
39,185 $
(81,384) $
(88,970)
2016
2015
2014
(in thousands of U.S. dollars)
INVESTING ACTIVITIES:
Dividends and return of capital from subsidiaries
Contributions to subsidiaries
Net cash flows provided by (used in) investing activities
FINANCING ACTIVITIES:
Repayment of loans
Receipt of loans
Net cash flows provided by financing activities
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
250,117
(295,268)
(45,151)
1,000
(218,935)
(217,935)
(426,750)
(223,500)
433,048
6,298
332
4,552
505,700
282,200
(17,119)
21,671
CASH AND CASH EQUIVALENTS, END OF YEAR
$
4,884 $
4,552 $
21,952
(50)
21,902
(9,250)
70,000
60,750
(6,318)
27,989
21,671
See accompanying notes to the Condensed Financial Information of Registrant
Notes to the Condensed Financial Information of Registrant
The Condensed Financial Information of Registrant should be read in conjunction with our consolidated financial
statements and the accompanying notes thereto included in Part II - Item 8 of this Annual Report on Form 10-K. Certain
prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had
no impact on net earnings.
Our wholly owned and majority owned subsidiaries are recorded based upon our proportionate share of our
subsidiaries' net assets (similar to presenting them on the equity method).
Investing activities in the Condensed Statements of Cash Flows primarily represents the flow of funds to and
from subsidiaries to provide cash on hand to fund acquisitions and significant new business. Net investment income
relates to interest on loans to subsidiaries. For the years ended December 31, 2016, 2015, and 2014, interest paid
was $15.0 million, $13.0 million, and $6.6 million, respectively. During the year ended December 31, 2016, non-cash
investing activities included $111.6 million for dividends and return of capital from subsidiaries and $452.1 million for
contributions to subsidiaries. These transactions were to settle intercompany balances, resulting in a net reduction in
balances due from subsidiaries and an increase in investments in subsidiaries. There were no non-cash investing
activities for the years ended December 31, 2015 and 2014.
As at December 31, 2016 and 2015, parental guarantees supporting subsidiaries' insurance obligations were
$625.7 million and $334.2 million, respectively.
As at December 31, 2016 and 2015, retained earnings was $1,847.6 million and $1,578.3 million, an increase
of $269.2 million. The increase in retained earnings was primarily attributable to net earnings of $264.8 million.
200
ENSTAR GROUP LIMITED
SUPPLEMENTARY INSURANCE INFORMATION
(Expressed in thousands of U.S. Dollars)
SCHEDULE III
Deferred
Acquisition
Costs
Reserves
for Losses
and Loss
Adjustment
Expenses
Unearned
Premiums
Policy
Benefits
for Life
and
Annuity
Contracts
Net
Premiums
Earned
Net
Investment
Income
Losses
and Loss
Expenses
and
Policy
Benefits
Amortization
of Deferred
Acquisition
Costs
Other
Operating
Expenses
Net
Premiums
Written
2016
Non-life run-off
$
1,081
$
4,716,363
$
15,107
$
— $
16,755
$
143,783
$ (285,881) $
4,198
$
296,384
$
9,202
Atrium
StarStone
Life and
annuities
Eliminations
Total
2015
Non-life run-off
Atrium
StarStone
Life and
annuities
Eliminations
Total
2014
Non-life run-off
Atrium
StarStone
Life and
annuities
Eliminations
Total
16,964
40,069
212,122
61,862
1,059,382
471,374
—
—
124,416
676,608
—
—
—
—
—
—
112,095
—
5,735
—
2,940
22,221
20,043
(3,524)
58,386
401,593
(2,038)
—
44,670
28,641
138,822
124,572
140,437
648,036
612
7,993
(1,733)
(12,548)
6,261
—
58,114
$
5,987,867
$
548,343
$ 112,095
$
823,514
$
185,463
$
172,060
$
186,569
$
445,042
$
803,936
1,788
$
4,585,454
$
27,792
$
— $
44,369
$
84,185
$ (270,830) $
8,860
$
257,926
$
22,594
16,326
71,009
201,017
933,678
59,808
455,171
—
—
134,675
573,146
—
—
—
—
—
—
126,321
—
1,554
—
2,225
15,937
21,137
(920)
47,479
327,684
45,509
36,087
109,347
125,658
134,580
628,427
(546)
—
—
—
3,555
(11,291)
1,553
—
89,123
$
5,720,149
$
542,771
$ 126,321
$
753,744
$
122,564
$
103,787
$
163,716
$
411,935
$
787,154
— $
3,435,010
$
197
$
— $
31,168
$
57,899
$ (264,711) $
8,393
$
213,571
$
10,272
$
$
$
$
16,520
45,186
212,611
861,800
61,030
406,706
—
—
—
—
—
—
—
—
8,940
—
135,945
373,633
2,245
—
1,748
5,321
1,056
—
55,428
218,429
84
—
43,417
65,734
15,029
38,791
114,289
136,275
399,174
(16)
—
(10,631)
2,235
—
$
61,706
$
4,509,421
$
467,933
$
8,940
$
542,991
$
66,024
$
9,230
$
132,573
$
356,004
$
547,956
201
ENSTAR GROUP LIMITED
REINSURANCE
For the Years Ended December 31, 2016, 2015 and 2014
(Expressed in thousands of U.S. Dollars)
SCHEDULE IV
Ceded to
Other
Companies
Assumed
from
Other
Companies
Gross
Percentage
of Amount
Assumed
to Net
Net Amount
$ 2,317,567 $
(585,575) $
— $ 1,731,992
—%
Total premiums earned
$
804,141
7,221
811,362 $
(178,834)
(1,486)
192,472
—
817,779
5,735
(180,320) $
192,472 $
823,514
23.5%
—%
2016
Life insurance in force
Premiums earned:
Property and casualty
Life and annuities
2015
Life insurance in force
Premiums earned:
Property and casualty
Life and annuities
Total premiums earned
2014
Life insurance in force
Premiums earned:
Property and casualty
Life and annuities
Total premiums earned
$ 2,978,466 $
(777,759) $
— $ 2,200,707
—%
$
$
$
854,856
(283,489)
180,823
(1,330)
—
752,190
1,554
24.0%
—%
(284,819) $
180,823 $
753,744
2,884
857,740 $
901,639 $
(808,142) $
— $
93,497
—%
703,281
(217,383)
54,848
(1,644)
—
540,746
2,245
10.1%
—%
3,889
707,170 $
(219,027) $
54,848 $
542,991
202
ENSTAR GROUP LIMITED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2016, 2015 and 2014
(Expressed in thousands of U.S. Dollars)
SCHEDULE V
Balance at
Beginning of
Year
Charged to
costs and
expenses
Charged to
other
accounts (1)
Deductions (2)
Balance at
End of Year
December 31, 2016:
Reinsurance balances recoverable:
Provisions for bad debt
210,327
(13,822)
(19,255)
(2,734)
174,516
Valuation allowance for deferred tax
assets
December 31, 2015:
Reinsurance balances recoverable:
291,280
13,389
—
(13,808)
290,861
Provisions for bad debt
289,909
(25,271)
(45,234)
(9,077)
210,327
Valuation allowance for deferred tax
assets
December 31, 2014:
Reinsurance balances recoverable:
333,617
(17,379)
—
(24,958)
291,280
Provisions for bad debt
338,614
(7,700)
(28,665)
(12,340)
289,909
Valuation allowance for deferred tax
assets
255,126
(33,213)
—
111,704
333,617
(1) These amounts are credited to net incurred losses and there is an offsetting debit within the same line, resulting in no impact on net earnings.
(2) Credited to the related asset account.
203
SCHEDULE VI
ENSTAR GROUP LIMITED
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
As of and for the years ended December 31, 2016, 2015 and 2014
(Expressed in thousands of U.S. Dollars)
Reserves
for Unpaid
Losses
and Loss
Adjustment
Expenses
Deferred
Acquisition
Costs
Unearned
Premiums
Net
Premiums
Earned
Net
Investment
Income
Net Losses and
Loss Expenses
Incurred
Current
Year
Prior Year
Net Paid
Losses
and Loss
Expenses
Amortization
of Deferred
Acquisition
Costs
Net
Premiums
Written
$
58,114
$
5,987,867
$
548,343
$
817,779
$
168,944
$ 493,016
$ (318,917) $ (833,057) $
187,690
$ 797,675
89,123
61,706
5,720,149
4,509,421
542,771
467,933
752,190
540,746
102,347
476,364
(372,031)
(781,889)
163,716
785,601
64,968
327,817
(318,671)
(587,511)
117,544
545,721
Affiliation with
Registrant
Consolidated
Subsidiaries
2016
2015
2014
204
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive Officer and our
Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2016. Based on that evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that we maintained effective disclosure controls and procedures
to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and timely reported as specified in the SEC's rules and forms,
and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. GAAP.
Management does not expect that its internal control over financial reporting will prevent all error and fraud. A
control system, no matter how well conceived and operated, has inherent limitations, and accordingly no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
As a result, even those internal control systems determined to be effective can provide only reasonable assurance
with respect to financial reporting and the preparation of financial statements.
Under the supervision and with the participation of management, including our Chief Executive Officer and our
Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31,
2016, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control - Integrated Framework (2013). Based on that evaluation, we have concluded that we maintained
effective internal control over financial reporting as of December 31, 2016.
Management excluded Dana Companies, acquired on December 30, 2016, from its evaluation of internal controls
over financial reporting as permitted under Securities and Exchange Commission guidance. The results of Dana
Companies since the acquisition dates are included in our consolidated financial statements and constituted
approximately 2.6% and 3.2% of total assets and net assets, respectively, as of December 31, 2016, and did not
contribute to revenue for the year then ended. See Note 3 - "Acquisitions" in the notes to our consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K for a discussion of this acquisition. We are in the
process of incorporating our controls and procedures into this acquisition.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months
ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
205
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Enstar Group Limited:
We have audited Enstar Group Limited’s internal control over financial reporting as of December 31, 2016, based
on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Enstar Group Limited’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Form 10-K under Item 9A, “Controls and Procedures”.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, Enstar Group Limited maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As described in Management’s Report on Internal Control over Financial Reporting, management has
excluded Dana Companies acquired on December 30, 2016 from its assessment of internal control over financial
reporting as of December 31, 2016. We have also excluded these acquired companies from our audit of internal
control over financial reporting of Enstar Group Limited which represented 2.6% of the Company’s total assets and
2.5% of the Company’s total liabilities as of December 31, 2016.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Enstar Group Limited and subsidiaries as of December 31, 2016
and 2015, and the related consolidated statements of earnings, comprehensive income, changes in shareholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2016. In connection with
our audits of the consolidated financial statements, we have also audited financial statement Schedules I, II, III, IV, V
and VI as of December 31, 2016 and 2015, and for each of the years in the three-year period ended December 31,
2016. Our report dated February 27, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG Audit Limited
Hamilton, Bermuda
February 27, 2017
206
ITEM 9B. OTHER INFORMATION
Not applicable.
207
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
All information required by Items 10, 11, 12, 13 and 14 of this Form 10-K is incorporated by reference from the
definitive proxy statement for our 2017 Annual General Meeting of Shareholders that will be filed with the SEC not
later than 120 days after the close of the fiscal year ended December 31, 2016 pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
See Item 10 herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
See Item 10 herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See Item 10 herein.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
See Item 10 herein.
208
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Financial Statements and Financial Statement Schedules: see Item 8 in Part II of this report.
(b) Exhibits: see accompanying exhibit index that follows the signature page of this report.
ITEM 16. FORM 10-K SUMMARY
Omitted at Company's option.
209
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 27, 2017.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on February 27, 2017.
ENSTAR GROUP LIMITED
By:
/S/ DOMINIC F. SILVESTER
Dominic F. Silvester
Chief Executive Officer
Signature
/s/ ROBERT J. CAMPBELL
Robert J. Campbell
/s/ DOMINIC F. SILVESTER
Dominic F. Silvester
/s/ MARK SMITH
Mark Smith
/s/ GUY BOWKER
Guy Bowker
/s/ PAUL J. O’SHEA
Paul J. O’Shea
/s/ B. Frederick BECKER
B. Frederick Becker
/s/ SANDRA L. BOSS
Sandra L. Boss
/s/ JAMES D. CAREY
James D. Carey
/s/ HANS-PETER GERHARDT
Hans-Peter Gerhardt
/s/ HITESH PATEL
Hitesh Patel
/s/ POUL A. WINSLOW
Poul A. Winslow
Title
Chairman and Director
Chief Executive Officer and Director
Chief Financial Officer (signing in his capacity as
principal financial officer)
Chief Accounting Officer (signing in his capacity as
principal accounting officer)
President and Director
Director
Director
Director
Director
Director
Director
210
Exhibit Index
Exhibit
No.
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
3.1
3.2
3.3
3.4
10.1
Description
Agreement and Plan of Merger, dated as of May 23, 2006, as amended on November 21, 2006, by and
among Castlewood Holdings Limited, CWMS Subsidiary Corp. and The Enstar Group, Inc. (incorporated
by reference to Annex A to the proxy statement/prospectus that forms a part of the Company’s Form S-4
declared effective December 15, 2006).
Recapitalization Agreement, dated as of May 23, 2006, among Castlewood Holdings Limited, The Enstar
Group, Inc. and the other parties signatory thereto (incorporated by reference to Annex C to the proxy
statement/prospectus that forms a part of the Company’s Form S-4 declared effective December 15,
2006).
Agreement and Plan of Merger, dated as of August 27, 2012, among Enstar Group Limited, AML Acquisition,
Corp. and SeaBright Holdings, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K
filed on August 28, 2012).
Stock Purchase Agreement, dated September 6, 2012, among Household Insurance Group Holding
Company, Pavonia Holdings (US), Inc. and Enstar Group Limited (incorporated by reference to Exhibit
2.2 of the Company’s Form 10-Q filed on November 8, 2012).
Share Purchase Agreement, dated June 5, 2013, by and among Arden Holdings Limited, Alopuc Limited
and Kenmare Holdings Ltd. for the sale and purchase of the entire issued share capital of Atrium
Underwriting Group Limited (incorporated by reference to Exhibit 2.1 of the Company’s Form 10-Q filed
on August 9, 2013).
Deed of Variation, dated October 3, 2013, to the Share Purchase Agreement, dated June 5, 2013, by and
among Arden Holdings Limited, Alopuc Limited and Kenmare Holdings Ltd. for the sale and purchase of
the entire issued share capital of Atrium Underwriting Group Limited (incorporated by reference to Exhibit
2.2 of the Company’s Form 10-Q filed on November 7, 2013).
Deed of Variation, dated November 21, 2013, to the Share Purchase Agreement, dated June 5, 2013, by
and among Arden Holdings Limited, Alopuc Limited and Kenmare Holdings Ltd. for the sale and purchase
of the entire issued share capital of Atrium Underwriting Group Limited (incorporated by reference to
Exhibit 2.7 of the Company’s Form 10-K filed on March 3, 2013).
Share Purchase Agreement, dated June 5, 2013, by and among Arden Holdings Limited, Northshore
Holdings Limited and Kenmare Holdings Ltd. for the sale and purchase of the entire issued share capital
of Arden Reinsurance Company Limited (incorporated by reference to Exhibit 2.2 of the Company’s Form
10-Q filed on August 9, 2013).
Amended and Restated Agreement and Plan of Amalgamation, dated March 11, 2014, by and among
Enstar Group Limited, Veranda Holdings Ltd., Hudson Security holders Representative LLC, and Torus
Insurance Holdings Limited (incorporated by reference to Exhibit 2.1 to the Company’s Form S-3ASR filed
on April 29, 2014).
Stock Purchase Agreement, dated August 26, 2014, by and among Enstar Group Limited, Sussex Holdings,
Inc. and Blue Cross and Blue Shield of South Carolina (incorporated by reference to Exhibit 2.1 to the
Company’s Form 8-K filed on September 2, 2014).
Memorandum of Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 to the
Company’s Form 10-K/A filed on May 2, 2011).
Fourth Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit
3.2(b) of the Company’s Form 10-Q filed on August 11, 2014).
Certificate of Designations for the Series B Convertible Participating Non-Voting Perpetual Preferred Stock
(incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on July 9, 2013).
Certificate of Designations of Series C Participating Non-Voting Perpetual Preferred Stock of Enstar Group
Limited, dated as of June 13, 2016 (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K
filed on June 17, 2016).
Registration Rights Agreement, dated as of January 31, 2007, by and among Castlewood Holdings Limited,
Trident II, L.P., Marsh & McLennan Capital Professionals Fund, L.P., Marsh & McLennan Employees’
Securities Company, L.P., Dominic F. Silvester, J. Christopher Flowers, and other parties thereto set forth
on the Schedule of Shareholders attached thereto (incorporated by reference to Exhibit 10.1 of the
Company’s Form 8-K12B filed on January 31, 2007) (file no. 001-33289).
10.2+
Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.1 of the Company’s
Form S-3 (No. 333-151461) initially filed on June 5, 2008) (file no. 333-151461).
211
10.3+
10.4+
10.5+
10.6*+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
10.17+
10.18+
10.19+
10.20+
10.21+
10.22+
10.23+
Amended and Restated Employment Agreement, effective May 1, 2007 and amended and restated June 4,
2007, by and between Enstar Group Limited and Dominic F. Silvester, as amended by Letter Agreement
(effective January 1, 2011), Letter Agreement (dated April 19, 2012), and Letter Agreement (dated
August 11, 2014) (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on
November 10, 2014).
Employment Agreement, effective May 1, 2007, by and between the Company and Paul J. O’Shea, as
amended by Letter Agreement (effective January 1, 2011), Letter Agreement (dated April 25, 2012), and
Letter Agreement (dated August 12, 2014) (incorporated by reference to Exhibit 10.4 of the Company’s
Form 10-Q filed on November 10, 2014).
Employment Agreement, effective May 1, 2007, by and between Enstar Group Limited and Nicholas A.
Packer, as amended by Letter Agreement (effective January 1, 2011), Letter Agreement (dated April 25,
2012), and Letter Agreement (dated August 11, 2014) (incorporated by reference to Exhibit 10.5 of the
Company’s Form 10-Q filed on November 10, 2014).
Separation Agreement, dated as of December 16, 2016, by and between Enstar Group Limited and
Nicholas A. Packer.
Employment Agreement, dated May 11, 2015, effective August 15, 2015, by and between the Company
and Mark Smith (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on August
7, 2015).
Employment Agreement, dated August 18, 2015, by and between the Company and Orla M. Gregory
(incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on November 9, 2015).
Employment Agreement, effective May 1, 2007, by and between Enstar Group Limited and Richard J.
Harris, as amended by Letter Agreement (effective January 1, 2011), Letter Agreement (dated April 19,
2012), and Letter Agreement (dated August 11, 2014) (incorporated by reference to Exhibit 10.6 of the
Company’s Form 10-Q filed on November 10, 2014).
Amendment to Employment Agreement, dated May 12, 2015, by and between the Company and
Richard J. Harris (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q filed on
August 7, 2015).
Amendment No. 2 to Employment Agreement, dated March 24, 2016, amending Amendment to
Employment Agreement, dated May 12, 2015, by and between the Company and Richard J. Harris
(incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on May 6, 2016).
Castlewood Holdings Limited 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 to
the proxy statement/prospectus that forms a part of the Company’s Form S-4 declared effective December
15, 2006) (file no. 333-135699).
First Amendment to Castlewood Holdings Limited 2006 Equity Incentive Plan (incorporated by reference
to Exhibit 10.2 of the Company’s Form 8-K filed on April 6, 2007) (file no. 001-33289).
Form of Award Agreement under the Castlewood Holdings Limited 2006 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on April 6, 2007) (file no.
001-33289).
Form of Stock Appreciation Right Award Agreement pursuant to the 2006 Equity Incentive Plan
(incorporated by reference to Exhibit 10.5 of the Company’s Form 10-Q filed on August 11, 2014).
Form of Restricted Stock Award Agreement pursuant to the 2006 Equity Incentive Plan (incorporated by
reference to Exhibit 10.6 of the Company’s Form 10-Q filed on August 11, 2014).
Enstar Group Limited 2016 Equity Incentive Plan (incorporated by reference to Exhibit 3.1 of the Company's
Form 8-K filed on June 17, 2016).
Form of Restricted Stock Award Agreement under the Enstar Group Limited 2016 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q filed on August 5, 2016).
Form of Stock Appreciation Right Award Agreement under the Enstar Group Limited 2016 Equity Incentive
Plan (incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q filed on August 5, 2016).
Form of Restricted Stock Unit Award Agreement under the Enstar Group Limited 2016 Equity Incentive
Plan (incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q filed on November 8, 2016).
Form of Performance Stock Unit Award Agreement under the Enstar Group Limited 2016 Equity Incentive
Plan (incorporated by reference to Exhibit 10.3 of the Company's Form 10-Q filed on November 8, 2016).
Enstar Group Limited Amended and Restated Employee Share Purchase Plan (incorporated by reference
to Exhibit 10.4 of the Company’s Form 10-Q filed on November 8, 2016).
Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors,
effective as of June 5, 2007 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed
on June 11, 2007) (file no. 001-33289).
212
10.24+
10.25+
10.26+
10.27+
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Amended and Restated Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-
Employee Directors, effective as of January 1, 2015 (incorporated by reference to Exhibit 10.13 of the
Company’s Form 10-K filed on March 2, 2015).
Form of Non-Employee Director Restricted Stock Award Agreement (incorporated by reference to
Exhibit 10.32 of the Company’s Form 10-K filed on March 2, 2015).
Enstar Group Limited 2011-2015 Annual Incentive Compensation Program (incorporated by reference to
Exhibit 10.25 to the Company’s Form 10-K filed on March 7, 2011).
Enstar Group Limited 2016-2018 Annual Incentive Program (incorporated by reference to Exhibit 10.1 of
the Company’s Form 10-Q filed on May 6, 2016).
Investment Agreement, dated as of April 20, 2011, by and among Enstar Group Limited, GSCP VI AIV
Navi, Ltd., GSCP VI Offshore Navi, Ltd., GSCP VI Parallel AIV Navi, Ltd., GSCP VI Employee Navi, Ltd.,
and GSCP VI GmbH Navi, L.P. (incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K
filed on April 21, 2011).
Form of Warrant (incorporated by reference to Exhibit 99.2 of the Company’s Form 8-K filed on April 21,
2011).
Registration Rights Agreement, dated as of April 20, 2011, by and among Enstar Group Limited, GSCP
VI AIV Navi, Ltd., GSCP VI Offshore Navi, Ltd., GSCP VI Parallel AIV Navi, Ltd., GSCP VI Employee Navi,
Ltd., and GSCP VI GmbH Navi, L.P. (incorporated by reference to Exhibit 99.3 of the Company’s Form 8-
K filed on April 21, 2011).
Northshore Investors Agreement, dated July 3, 2013, by and among Kenmare Holdings Ltd. and Trident
V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P. (incorporated by reference to
Exhibit 10.2 of the Company’s Form 10-Q filed on August 9, 2013).
Subscription Letter Agreement, dated July 3, 2013, from Kenmare Holdings Ltd. to Northshore Holdings
Limited (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on August 9, 2013).
Subscription Letter Agreement, dated July 3, 2013, from Trident V, L.P., Trident V Parallel Fund, L.P. and
Trident V Professionals Fund, L.P. to Northshore Holdings Limited (incorporated by reference to Exhibit
10.4 of the Company’s Form 10-Q filed on August 9, 2013).
Northshore Shareholders’ Agreement, dated September 6, 2013, among Northshore Holdings Limited,
Kenmare Holdings Ltd., Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund,
L.P. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on September 11, 2013).
Amended and Restated Northshore Shareholders’ Agreement, dated May 8, 2014, among Northshore
Holdings Limited, Kenmare Holdings Ltd., Trident V, L.P., Trident V Parallel Fund, L.P., Trident V
Professionals Fund, L.P., and Dowling Capital Partners I, L.P. (incorporated by reference to Exhibit 10.4
of the Company’s Form 10-Q filed on August 11, 2014).
Amended and Restated Northshore Shareholders’ Agreement, dated as of March 5, 2015, among
Northshore Holdings Limited, Kenmare Holdings Ltd, Enstar Group Limited, Trident V, L.P., Trident V
Parallel Fund, L.P., Trident V Professionals Fund, L.P., Dowling Capital Partners I, L.P., and Atrium
Nominees Limited (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on May
11, 2015).
Bayshore Investors Agreement, dated July 8, 2013, by and among Enstar Group Limited, Kenmare
Holdings Ltd., and Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P.
(incorporated by reference to Exhibit 10.5 of the Company’s Form 10-Q filed on August 9, 2013).
Subscription Letter Agreement, dated July 8, 2013, from Kenmare Holdings Ltd. to Bayshore Holdings
Limited (incorporated by reference to Exhibit 10.6 of the Company’s Form 10-Q filed on August 9, 2013).
Subscription Letter Agreement, dated July 8, 2013, from Trident V, L.P., Trident V Parallel Fund, L.P. and
Trident V Professionals Fund, L.P. to Bayshore Holdings Limited (incorporated by reference to Exhibit
10.7 of the Company’s Form 10-Q filed on August 9, 2013).
Bayshore Shareholders’ Agreement, dated April 1, 2014, among Bayshore Holdings Limited, Kenmare
Holdings Ltd., Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P.
(incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on April 4, 2014).
Amended and Restated Bayshore Shareholders’ Agreement, dated May 8, 2014, among Bayshore
Holdings Limited, Kenmare Holdings Ltd., Trident V, L.P., Trident V Parallel Fund, L.P., Trident V
Professionals Fund, L.P., and Dowling Capital Partners I, L.P. (incorporated by reference to Exhibit 10.3
of the Company’s Form 10-Q filed on August 11, 2014).
Registration Rights Agreement, dated April 1, 2014, among Enstar Group Limited, FR XI Offshore AIV,
L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle L.P., FR Torus Co-Investment, L.P. and Corsair
Specialty Investors, L.P. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on
April 4, 2014).
213
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53*
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
101*
Shareholder Rights Agreement, dated April 1, 2014, among Enstar Group Limited, FR XI Offshore AIV,
L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle L.P., FR Torus Co-Investment, L.P. and Corsair
Specialty Investors, L.P. (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on
April 4, 2014).
Termination and Waiver Agreement, dated June 3, 2015, by and among First Reserve Fund XII, L.P., FR
XII-A Parallel Vehicle, L.P., FR XI Offshore AIV, L.P., FR Torus Co-Investment, L.P. and Enstar Group
Limited (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q filed on August 7, 2015).
Shareholder Rights Agreement, dated June 3, 2015, between Enstar Group Limited and Canada Pension
Plan Investment Board (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on
June 3, 2015.
Voting and Shareholders’ Agreement, dated as of December 23, 2015, among North Bay Holdings Limited,
Kenmare Holdings Ltd., Trident V, L.P., Trident V Parallel Fund, L.P., Trident V Professionals Fund, L.P.,
Dowling Capital Partners I, L.P., Atrium Nominees Limited, Bayshore Holdings Limited, Northshore
Holdings Limited and Enstar Group Limited (incorporated by reference to Exhibit 10.1 of the Company’s
Form 8-K filed on December 30, 2015).
Second Amended and Restated Shareholders’ Agreement, dated as of December 23, 2015, among
Northshore Holdings Limited, North Bay Holdings Limited and Atrium Nominees Limited (incorporated by
reference to Exhibit 10.2 of the Company’s Form 8-K filed on December 30, 2015).
Revolving Credit Facility Agreement, dated September 16, 2014, among Enstar Group Limited and certain
of its subsidiaries, National Australia Bank Limited, Barclays Bank PLC and Royal Bank of Canada as
Mandated Lead Arrangers, and National Australia Bank Limited as Agent (incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K filed on September 16, 2014).
Restatement Agreement for Revolving Credit Facility Agreement, dated February 27, 2015, among Enstar
Group Limited and certain of its Subsidiaries, National Australia Bank Limited, Barclays Bank PLC, Royal
Bank of Canada, and Lloyds Bank plc as Mandated Lead Arrangers, and National Australia Bank Limited
as Agent (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed on May 11, 2015).
Amendment Letter, dated February 15, 2016, to Revolving Credit Facility Agreement, dated February 27,
2015, among Enstar Group Limited and certain of its Subsidiaries, National Australia Bank Limited,
Barclays Bank PLC, Royal Bank of Canada, and Lloyds Bank plc as Mandated Lead Arrangers, and
National Australia Bank Limited as Agent (incorporated by reference to Exhibit 10.41 of the Company's
Form 10-K filed on February 29, 2016).
Restatement Agreement for Revolving Credit Facility Agreement, dated August 5, 2016, among Enstar
Group Limited and certain of its subsidiaries, National Australia Bank Limited, Barclays Bank PLC, Lloyds
Bank plc, SunTrust Bank and SunTrust Robinson Humphrey, Inc. (incorporated by reference to Exhibit
10.1 of the Company’s Form 8-K filed on August 11, 2016).
Term Facility Agreement, dated December 24, 2014, among Sussex Holdings, Inc., National Australia
Bank Limited and Barclays Bank PLC as Mandated Lead Arrangers, and National Australia Bank Limited
as Agent (incorporated by reference to Exhibit 10.31 of the Company’s Form 10-K filed on March 2, 2015).
Subscription Agreement, dated as of December 14, 2016, by and between Cavello Bay Reinsurance
Limited and KaylaRe Holdings Ltd.
List of Subsidiaries.
Consent of KPMG Audit Limited.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Interactive Data Files.
_______________________________
* filed herewith
** furnished herewith
+ denotes management contract or compensatory arrangement
certain of the schedules and similar attachments are not filed but Enstar Group Limited undertakes to furnish
a copy of the schedules or similar attachments to the SEC upon request
214
DIRECTORS
Robert J. Campbell
Chairman of the Board
Enstar Group Limited
Partner
Beck Mack & Oliver, LLC
Dominic F. Silvester
Chief Executive Officer
Enstar Group Limited
B. Frederick (Rick) Becker
Chairman
Clarity Group, Inc.
Sandra L. Boss
External Member
Prudential Regulation Committee,
Bank of England
Paul J. O’Shea
President
Enstar Group Limited
Hitesh R. Patel
Partner (retired)
KPMG LLP
Poul A. Winslow
Managing Director
Canada Pension Plan
Investment Board
James D. Carey
Senior Principal
Stone Point Capital LLC
Hans-Peter Gerhardt
Chief Executive Officer
Asia Capital Reinsurance Group
Jie Liu
Managing Director
Hillhouse Capital
Management, Ltd.
EXECUTIVE OFFICERS
Dominic F. Silvester
Chief Executive Officer
Orla M. Gregory
Chief Operating Officer
Paul J. O’Shea
President
Mark W. Smith
Chief Financial Officer
Company Headquarters
P.O. Box HM 2267 | Windsor Place,
3rd Floor | 22 Queen Street | Hamilton
HM JX | Bermuda
Transfer Agent
American Stock Transfer & Trust
Company | 6201 15th Avenue |
Brooklyn, NY 11219 | (800) 937-5449
www.enstargroup.com