ENSTAR
ANNUAL REPORT
2017
Annual CEO Letter
From Dominic Silvester,
Chief Executive Officer
April 26, 2018
Dear Fellow Shareholders,
Enstar continued to grow profitably in
2017, as we focused on our core strategy of
providing market-leading insurance solutions.
We achieved our highest annual earnings to
date, leveraged our industry relationships
to complete several large transactions, and
continued to develop our underwriting
segments, whilst managing the impact of
catastrophe events in the third quarter.
The challenges to our industry remain.
Interest rates stayed near historic lows
throughout the year. The industry’s hoped-
for dramatic shift in (re)insurance prices has
failed to materialise so far, although our
active underwriting businesses have achieved
incrementally improved rates following the
weather-related events of the third quarter.
Competition in the non-life run-off sector
persists, with further new entrants. Even so,
our strategy has evolved to provide prolonged
success in these challenging market conditions.
I remain optimistic about Enstar’s ability to
keep building upon our success.
RESULTS
Strong investment and
run-off performance
Enstar achieved consolidated net earnings
of $311.5 million for the year, a $46.7 million
increase from 2016. This 17.6% increase
was primarily due to the performance of our
investment portfolio and our non-life run-off
segment. Net earnings contributed to a 10.8%
increase in Enstar’s fully diluted book value
per share, which at year-end was $159.19,
compared to $143.68 the year before.
FINANCIAL HIGHLIGHTS, December 31, 2017 (Expressed in millions of U.S. Dollars, except Share and Per Share Data)
Net Segment Contribution:
Non-life Run-off
StarStone
Atrium
Other
Net Earnings Attributable to Enstar
Percent Change in Net Earnings Attributable to Enstar
Fully Diluted Earnings Per Share
$
$
2017
343.8
2.8
5.4
(40.6)
311.5
17.6%
15.95
2016
261.6
25.2
6.4
(28.5)
264.8
20.2%
13.62
2015
185.7
13.7
16.6
4.4
220.3
3.1%
11.35
Weighted Average Fully Diluted Shares Outstanding
19,527,591
19,447,241
19,407,756
Shareholders’ Equity Attributable to Enstar
Return on Opening Shareholders’ Equity
Fully Diluted Book Value Per Share
Fully Diluted Shares Outstanding
Percent Change in Book Value Per Share
3,137
11.1%
159.19
19,830,767
10.8%
2,802
10.5%
143.68
19,645,309
10.8%
2,517
9.6%
129.65
19,714,810
8.7%
i
Annual CEO Letter
From Dominic Silvester,
Chief Executive Officer
Non-life run-off business continued to be
Enstar’s primary source of value creation
in 2017. The segment contributed $343.8
million to 2017 earnings, up by 31.4% from
the prior year. This result is due to improved
investment returns, as well as our ongoing
success in managing claims and expenses.
Claims management has always been
our ‘front office.’ We are dedicated to our
proactive process, which is to reduce the
considerable expense load during claims
handling, use our expertise to determine
appropriate and fair settlement terms, and
settle claims expeditiously to achieve the
associated release of capital. This approach
continues to make us a leader in the industry
and drives our financial returns.
Despite the significant third quarter
catastrophe events impacting the industry,
Enstar’s active underwriting operations
achieved bottom-line net earnings in 2017.
Atrium is one of the most respected managing
agencies at Lloyd’s. Its sound business strategy
of cautious and selective underwriting was
again proven, as the Atrium segment yielded
net earnings attributable to Enstar of $5.4
million in 2017, compared to $6.4 million in
2016. This reflects a combined ratio of 99.9%,
compared to 94.3% in 2016, and also compares
very favourably to the overall Lloyd’s combined
ratio of 114.0%. Excluding the impact of the
catastrophe events in the third quarter of 2017,
Atrium’s combined ratio was an enviable 86.7%
for 2017.
We are dedicated to
our proactive process,
which is to reduce the
considerable expense load
during claims handling,
use our expertise to
determine appropriate and
fair settlement terms, and
settle claims expeditiously
to achieve the associated
release of capital.
Our global specialty insurer, StarStone,
earned $2.8 million in 2017, compared to
$25.2 million in 2016, reflecting a combined
ratio of 108.5%, compared to 98.2% in 2016.
The decline in earnings was due almost
entirely to catastrophe losses, which were
partially offset by improved investment
returns. Excluding those losses, StarStone’s
combined ratio was 96.7%. During the
year, StarStone continued making strides,
positioning itself as an employer of choice for
underwriting-driven leaders and a preferred
partner for (re)insurance buyers.
During 2017, we sold Enstar’s largest life
and annuities legacy company, Pavonia, for
proceeds of $120 million. The decision to
sell our life assets was based on our view of
the closed-life market at this time and our
assessment of the present value of future cash
flows. The Pavonia business was profitable for
us, and we were able to achieve an attractive
exit price. We remain interested in the life
run-off sector in cases where our pricing
expectations are in line with the value we feel
we can achieve.
U.S. tax reform resulted in a benefit of $5.7
million to Enstar in 2017, stemming mainly
from the expected recovery of Alternative
Minimum Tax credits. In connection with U.S.
tax reform, we have made several business
changes, including non-renewal of certain active
underwriting affiliate reinsurance transactions.
Moving forward, we expect to retain more risk
and capital in our U.S. insurance companies
due to these legislative changes.
ii
The legacy market
is large, and we have
proven ourselves,
through our ability
to handle all types of
complex transactions,
to be the preferred
partner of choice for
the insurance industry.
Annual CEO Letter
From Dominic Silvester,
Chief Executive Officer
ACQUISITIONS
Providing innovative insurance solutions
to the world’s leading insurers
Acquiring companies and legacy portfolios
is at the heart of our business. In 2017, we
acquired or reinsured $2.5 billion of new
run-off business, with a further $2.0 billion
through the first quarter of 2018. These
transactions were with some of the global
insurance industry’s largest players who
see the advantages in transferring legacy
reserves off their balance sheets to Enstar’s
proven, reliable and well-capitalized run-off
companies. We distinguish ourselves from other
run-off operators through our 25-year track
record, our ability to execute, and our highly
skilled professionals who develop tailored risk
solutions for our clients and partners.
Early in 2017, we completed the reinsurance
of a multi-line North American property and
casualty portfolio for QBE Insurance Group
that involved the transfer of gross reserves of
approximately $1 billion relating to workers’
compensation, construction defect and
general liability business. This was followed
by our agreement to reinsure the pre-2006
U.K. employers’ liability business of RSA
Insurance Group and assume gross insurance
reserves of approximately $1.3 billion.
In December, Enstar agreed with existing
partner Allianz SE to reinsure a legacy
portfolio of U.S. workers’ compensation and
asbestos, pollution and toxic tort business.
Enstar assumed net reinsurance reserves of
approximately $81.4 million to cover 50% of
Allianz’s subsidiary’s liabilities in these lines
as a follow-on to the $2.2 billion reinsurance
and consulting agreements we entered into
with Allianz in 2016.
In early 2018, we completed two reinsurance-
to-close (RITC) transactions at Lloyd’s.
In December, we agreed an RITC transaction
with the Lloyd’s managing agent, Neon
Underwriting Ltd., in which we assumed the
2008-2015 liabilities of Neon’s Syndicate 2468,
comprising gross reserves of approximately
$543 million at closing in February 2018.
This was a follow-on to the $158 million RITC
entered into with Neon in 2016.
In early 2018, Enstar finalized an RITC with
AXIS Managing Agency for the 2015 and
prior-year’s underwriting account of Novae
Syndicate 2007. Enstar assumed gross
reserves of approximately $1.1 billion, which
makes the deal one of the largest of its kind in
recent years and underlines our capability as
a leading RITC provider.
In February 2018, we grew our Australian
business through a deal with the Zurich
Insurance Group to reinsure approximately
$275 million in liabilities under motor vehicle
compulsory insurance policies. Our experience
in Australia has been very positive – namely
our success in managing the run-off of Gordian,
which we acquired a decade ago – and we are
excited to see our business there expand.
Enstar continues to see opportunities in the
market, both through traditional insurance
deals, as well as the non-traditional
transactions we continue to explore in the
manufacturing sector following the model
of our Dana Companies transaction in late
2016. The legacy market is large, and we
have proven ourselves, through our ability
to handle all types of complex transactions,
to be the preferred partner of choice for the
insurance industry.
iii
Annual CEO Letter
From Dominic Silvester,
Chief Executive Officer
DEVELOPMENTS
OVERVIEW
BALANCE SHEET & CAPITAL MANAGEMENT
Growing
book value
Enstar reported year-end total assets of $13.6
billion, from $12.9 billion at 2016 year end,
after our new transactions drove this metric
higher, partially offset by the run-off of our
previously acquired businesses. Shareholders’
equity rose to $3.1 billion, from $2.8 billion at
year-end 2016. Putting our balance sheet in
some historic perspective, since our inception
and through year-end 2017, we have acquired
$24 billion in total assets and $19 billion in
total gross loss reserves, of which $11.2 billion
have been successfully run off.
In our approach to capital management,
we seek to minimise risk, while identifying
methods to improve returns within our
risk appetite. Our strong risk management
framework supports us in the successful
delivery of our strategic, operational and
financial objectives.
Scalability to support
future growth
Last year, we reported Enstar’s successful
launch of KaylaRe, a new Bermuda Class 4
reinsurer, alongside funds managed by our
partners, Hillhouse Capital Management and
Stone Point Capital. Since then, KaylaRe has
exceeded our expectations, particularly in
terms of investment performance, and we
recently announced our pending acquisition
of 100% of the shares we do not already own.
In return, we will issue Enstar shares to our
valued partners, which will increase their
economic interest: Hillhouse’s interest
will increase to 17.1% (9.7% voting) and
Stone Point’s to 7.6% (9.1% voting). The
transaction is accretive to Enstar’s capital
position and allows the full benefit of
KaylaRe’s performance to flow to Enstar.
Furthermore, as a wholly-owned subsidiary,
KaylaRe represents another strong platform
from which we can provide capital release
solutions to our clients.
Enstar’s scalability is critical to the creation of
long-term value for you, our shareholders. Key
projects targeting business transformation
and operating model strengthening
continue, including ongoing investment
in IT infrastructure and improved internal
processes, all with the aim of pursuing
efficiencies to help us maintain an optimal
operating platform for the liabilities we
acquire. Supported by our increased
organizational agility, we continue to acquire
increasingly significant blocks of business
while delivering innovation and security to our
global client base.
We place strong emphasis on maintaining
solid regulatory relationships; consulting with
our regulators to ensure we are developing
and growing in line with regulatory
requirements and expectations, while at
the same time assisting regulators with
finding solutions for problem companies and
collaborating on legislative initiatives.
$13.6bn
Assets
$3.1bn
Shareholders’
equity
$9.8bn
Total cash and
investments
$24bn
Total assets
acquired since
inception
iv
Annual CEO Letter
From Dominic Silvester,
Chief Executive Officer
INVESTMENTS
A successful
multifaceted approach
Enstar made significant investment returns
in 2017, using a strategy that emphasizes:
preserving and growing invested assets,
maintaining liquidity sufficient for the prompt
payment of claims, achieving superior
risk-adjusted returns through allocation of
a portion of our portfolio to non-investment-
grade securities, and matching the portfolio to
the duration characteristics of our liabilities.
Our strategy yielded net investment income
of $208.8 million in 2017, and net realized and
unrealized gains of $190.3 million, for a total
of $399.1 million, compared to $263.3 million
(including unrealized gains) in 2016.
Enstar held total cash and investments of $9.8
billion at year-end 2017, an increase of $1.4
billion over the previous year, which reflects
acquisitions and income. Total non-cash
investments were $8.6 billion.
Our portfolio at year-end comprised 87%
fixed income securities, of which the majority
are corporate and government debt issues.
Alternatives including private equity and fixed
income funds accounted for another 10%,
with the 3% balance held in equities and life
settlements. Together these investments
carried a book yield of 2.17%.
Net investment income remains a significant
component of our earnings, but achieving
outsized returns remains a challenge for
Enstar, as it does for others in the insurance
sector. Market conditions are uncertain, with
many asset valuations across the classes
at historic highs, and a potential series of
international interest rate hikes (particularly
in the U.S. and U.K.), as well as political
developments around the world driving the
potential for increased market volatility. In this
environment, our cautious philosophy and
key investment objectives remain steadfast.
Recently, we have aimed to lengthen
fixed income duration and increase fixed
returns, which in turn, raises our exposure to
unrealized losses.
OUTLOOK
Building success
for the long term
Enstar remains a multifaceted global
insurance group with a long-term perspective,
significant staying power, and recognised
leadership in analysis, deal-making, and
management.
Our 1,300+ employees worldwide continue to
drive us ahead and work as a global team to
deliver excellence for all of our stakeholders.
We look to the year ahead with optimism and
with our sights on continuing opportunities.
We are determined to meet complex
problems head on, and to exercise our skills in
risk and liability analysis to the benefit of our
business partners and shareholders.
As always, thank you for your continued
support of Enstar.
Sincerely,
Dominic Silvester
April 26, 2018
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, 2017
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, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging
growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth 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, 2017 was
approximately $2.15 billion based on the closing price of $198.65 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 26, 2018, the registrant had outstanding 16,429,569 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 2018 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, 2017
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 4.
Item 3.
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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•
•
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•
•
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risks associated with implementing our business strategies and initiatives;
the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;
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 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;
risks relating to the performance of our investment portfolio and our ability to structure our investments in a
manner that recognizes our liquidity needs;
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;
risks that we may require additional capital in the future, which may not be available or may be available
only on unfavorable terms;
risks relating to the availability and collectability of our reinsurance;
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;
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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;
our ability to implement our strategies relating to our active underwriting businesses;
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;
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 80 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 Practices. Enstar is highly selective and disciplined when assessing
potential acquisition targets, carefully analyzing risk exposures, claims practices and reserve requirements as part of
a detailed due diligence process. We believe this decreases risk and increases the probability that we can deliver
positive operating results from the companies and portfolios acquired.
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 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 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 has closed life and annuities businesses; however, in
2017 we sold two subsidiaries, Pavonia and Laguna.
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
Zurich Australia
On February 22, 2018, we entered into an agreement with an Australian subsidiary of Zurich Insurance Group
("Zurich") to reinsure its New South Wales Vehicle Compulsory Third Party ("CTP") insurance business. Under the
agreement, which is effective as of January 1, 2018, we will assume gross reinsurance reserves of AUD$350 million
(approximately $275.0 million) for cash consideration equal to the reserves.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business,
we and Zurich are also pursuing a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's
Insurance Act 1973 (Cth), which will provide legal finality for Zurich's obligations. The transfer is subject to court,
regulatory and other approvals.
Neon RITC Transaction
On February 16, 2018, we closed the previously announced reinsurance-to-close transaction with Neon
Underwriting Limited ("Neon"), under which we will reinsure to close the 2015 and prior underwriting years of account
(comprising underwriting years 2008 to 2015) of Neon's Syndicate 2468. We have assumed gross reinsurance reserves
of £402.2 million (approximately $543.4 million) or net reserves of £337.8 million (approximately $456.4 million) for
cash consideration equal to the net amount of reserves assumed. Following the closing of the transaction, Enstar has
taken responsibility for claims handling and will provide complete finality to Neon's obligations.
2
Novae RITC Transaction
On January 29, 2018, we entered into an RITC transaction with AXIS Managing Agency Limited, under which
we will reinsure to close the 2015 and prior underwriting years of account of Novae Syndicate 2007. We will assume
gross reinsurance reserves of approximately £840.0 million (approximately $1,136.0 million) or net reinsurance
reserves of approximately £600.0 million (approximately $811.0 million) for cash consideration equal to the net amount
of reserves assumed.
Allianz SE
On December 28, 2017, we entered into a reinsurance agreement with Allianz SE (“Allianz”) to reinsure a portfolio
of Allianz’s run-off business, effective December 31, 2017. Pursuant to the reinsurance agreement, we reinsured 50%
of certain U.S. workers' compensation, asbestos, and toxic tort business originally held by San Francisco Reinsurance
Company, an affiliate of Allianz, and in the process assumed net reinsurance reserves of $81.4 million. Affiliates of
Allianz retained $81.4 million of reinsurance premium as funds withheld collateral for the obligations under the
reinsurance agreement and we transferred $8.1 million to a reinsurance trust to further support our obligations. We
will also provide ongoing consulting services with respect to the entire $162.8 million portfolio, including the 50% share
retained by affiliates of Allianz.
RSA
On February 7, 2017, we entered into an agreement to reinsure the U.K. employers' liability legacy business of
RSA. Pursuant to the transaction, we assumed gross insurance reserves of £1,046.4 million ($1,301.8 million) relating
to 2005 and prior year business. Net insurance reserves assumed were £927.5 million ($1,153.9 million), and the
reinsurance premium received was £801.6 million ($997.2 million). We elected the fair value option for this reinsurance
contract, which means changes in the fair value of the net reserves are included in net incurred losses and loss
adjustment expenses ("LAE"). The initial fair value adjustment was $174.1 million on the gross reserves and $156.7
million on the net reserves. Refer to Note 8 - "Fair Value Measurements" for a description of the fair value process
and assumptions.
Following the initial reinsurance transaction, which transferred the economics of the portfolio up to the policy's
limits, we and RSA are pursuing a portfolio transfer of the business under Part VII of the Financial Services and Markets
Act 2000, which will provide legal finality for RSA's obligations. The transfer is subject to court, regulatory and other
approvals.
QBE
On January 11, 2017, we closed a transaction to reinsure multi-line property and casualty business of QBE. We
assumed gross reinsurance reserves of approximately $1,019.0 million (net reserves of $447.0 million) relating to the
portfolio, which primarily includes workers' compensation, construction defect, and general liability discontinued lines
of business. We elected the fair value option for this reinsurance contract. The initial fair value adjustment was $180.0
million on the gross reserves and $43.2 million on the net reserves. Refer to Note 8 - "Fair Value Measurements" for
a description of the fair value process and assumptions. In addition, we pledged a portion of the premium as collateral
to a subsidiary of QBE, and we have provided additional collateral and a limited parental guarantee.
3
Summary of Significant New Business since 2017
The table below sets forth a summary of significant new business in excess of $50.0 million in acquired assets
that we have signed or completed since January 1, 2017, all of which were reinsurance transactions. For a more
detailed explanation of these transactions, as well as transactions completed in 2016 and 2015, 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
Deferred
Charge
Segment
Significant New Business (January 1, 2017 - Present)
Zurich Australia
AXIS Managing
Agency Limited
(Novae Syndicate
2007)
Neon Underwriting
Limited
Allianz SE
RSA Insurance Group
PLC
QBE Insurance Group
Limited
N/A
N/A
$275 million
$275 million
$1.1 billion
$1.1 billion
N/A
$543 million
$543 million
N/A
N/A
N/A
$81 million
$81 million
$1.3 billion
$1.3 billion
$1.0 billion
$1.0 billion
Nil
Nil
Nil
Nil
Nil
Nil
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Primary Nature of
Business
Australian motor
Financial, casualty,
marine and energy,
professional indemnity,
aviation, motor and
property
Medical malpractice,
general liability,
professional indemnity
and marine
U.S. workers'
compensation, asbestos,
pollution and toxic tort
U.K. employers' liability
U.S. workers'
compensation,
construction defect, and
general liability
Businesses Sold or Held for Sale
Pavonia
On December 29, 2017, we completed the previously announced sale of Pavonia Holdings (US), Inc. (“Pavonia”),
to Southland National Holdings, Inc. (“Southland”), a Delaware corporation and a subsidiary of Global Bankers
Insurance Group, LLC. The aggregate purchase price was $120.0 million. The proceeds were used to make repayments
under our revolving credit facility.
Pavonia owns Pavonia Life Insurance Company of Michigan (“PLIC MI”) and Enstar Life (US), Inc. Southland
will acquire Pavonia Life Insurance Company of New York ("PLIC NY") for $13.1 million in a second closing that is
expected to occur in the first or second quarter of 2018, subject to regulatory approval. The additional purchase price
represents the cash consideration paid to PLIC MI when we acquired PLIC NY from PLIC MI as a result of the
restructuring of the first closing of the transaction. PLIC NY was held for sale as at December 31, 2017.
Laguna
On August 29, 2017, we completed the sale of our wholly-owned subsidiary Laguna Life DAC ("Laguna") to a
subsidiary of Monument Insurance Group Limited, for a total consideration of €25.6 million (approximately $30.8
million). The proceeds of the sale were used to pay down our revolving credit facility. Refer to Note 21 - "Related Party
Transactions" for further information.
The results, assets, and liabilities of Pavonia and Laguna comprised a substantial portion of what we previously
reported as our Life and Annuities segment through the closing of their sale. Refer to Note 5 - "Divestitures, Held-for-
Sale Businesses and Discontinuing Operations" for further information.
4
Other Transactions
Clear Spring
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 was renamed Clear Spring Property and Casualty Company ("Clear Spring") and focuses on underwriting
workers' compensation and property business in the United States. 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, Clear Spring contained only insurance
licenses. We have retained a 20% indirect equity interest in Clear Spring and have agreed to reinsure (on a funds
withheld basis) 25% of its new business underwritten. We provide underwriting and claims expertise to Clear Spring
through fronting, underwriting and service agreements.
KaylaRe
On February 5, 2018, subsequent to year-end, we announced that we have entered into an agreement to
purchase the remaining 51.8% of KaylaRe Holdings Ltd. ("KaylaRe") from the existing shareholders in a transaction
valued at $398.3 million. In exchange for the remaining shares in KaylaRe, we will issue ordinary shares. The transaction
is subject to regulatory approval and is expected to close in the first quarter of 2018.
For a detailed discussion of various transactions related to KaylaRe and its other shareholders, 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.
Operating Segments
In the second half of 2017, following the completion of the Laguna and Pavonia transactions, which significantly
reduced the size of our life and annuities business, we undertook a review of our reportable segments. Following this
review we determined that we have three reportable segments of business that are each managed, operated and
reported on separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. Our other activities, which do not qualify as
a reportable segment, include our corporate expenses, debt servicing costs, holding company income and expenses,
foreign exchange, our remaining life business and other miscellaneous items. The change in reportable segments had
no impact on our previously reported historical consolidated financial positions, results of operations or cash flows.
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 Reinsurance
Company Ltd. ("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 become 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 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.
5
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 decide 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. We primarily earn our total return on an acquisition from
disciplined claims management and/or commuting the liabilities that we have assumed, maximizing 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 direct insurance) 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 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.
6
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 can 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
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, 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 marine, aviation and
transit, property and casualty binding authorities, reinsurance, accident and health and non-marine direct and
facultative. Lloyd’s business is often underwritten on a subscription basis across the insurance market. Atrium is the
lead underwriter in approximately 42% 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.
7
A description of each of Atrium's lines of business follows:
Marine, Aviation and Transit. 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. Atrium leads a number of the
major marine war contracts in London. Business is written on a direct, reinsurance, proportional and excess of loss
basis. 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. Included within the marine, aviation and transit lines of business are the upstream energy and terrorism
portfolios. The upstream energy portfolio is split into two main categories of assureds: operators (private and publicly
quoted companies, national oil companies and Oil Insurance Limited members) and contractors (drilling, service and
construction companies). 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. The terrorism portfolio includes political violence business, in
which Atrium focuses on writing with security consultants engaged to provide risk or country surveys.
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. 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.
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.
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.
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. and Willis Group
Holdings Ltd. accounted for 12% and 10%, respectively, of Atrium’s gross premiums written in 2017 (22% collectively).
Other brokers (each individually less than 10%) accounted for 78% 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.
8
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.
StarStone
Our StarStone segment is comprised of the active underwriting operations and financial results of StarStone
Holdings, 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 five wholly-owned insurance platforms
and licenses to serve a global client base. In December 2017, the London market and European business were merged
into a single European entity based in Liechtenstein. This was executed in order to improve operational efficiencies
and position the StarStone group for any potential post-Brexit issues. Through Syndicate 1301, StarStone offers a
variety of specialty products at Lloyd’s. Syndicate 1301 is managed by StarStone's wholly-owned Lloyd’s managing
agency. During 2017, StarStone commenced operations in Dubai and Australia.
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, 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.
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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. During 2017, StarStone commenced writing US mortgage
reinsurance, which is included within the property business line.
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.
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
distribution to all 50 states.
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, 2017 (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. The portion of this quota share agreement related to U.S.
business was not renewed in 2018.
Other activities
Our other activities, which do not qualify as a reportable segment, include our corporate expenses, debt servicing
costs, holding company income and expenses, foreign exchange, our remaining life business and other miscellaneous
items.
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As a result of the change in our operating segments, our remaining life business included within other activities
comprises:
Life Business
Following the sale of Pavonia and Laguna in 2017, our remaining life business consists of Alpha's credit and life
insurance sold in Europe prior to our acquisition. The life companies continue to generate premiums, and accordingly
the reserves remain sensitive to lapse rates as well as mortality rates.
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 policies in force, and we recognize income upon a policy maturity event.
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, 2017 and 2016 were $117.2 million and $112.1 million,
respectively. Amounts related to Pavonia are excluded as these are classified as liabilities held-for-sale, as described
in Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations" 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 segment competes 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 may have greater financial resources than we do, may have been operating for longer than
we have and may 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.
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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
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, 2017, we had 1,341 employees, as compared to 1,278 as of December 31, 2016. 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.
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
Effective risk oversight is an important priority for our management and 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, monitor and report on risks that affect the achievement of our strategic,
operational and financial objectives.
An effective enterprise risk management ("ERM") framework contributes to the strength of our overall group and
positively impacts many areas of the business such as setting and achieving business strategy and objectives, capital
management decision making, efficiency and effectiveness in operations and processes, financial performance and
reliable financial reporting, regulatory compliance, good reputation with key stakeholders and business continuity
planning.
Risk Management Strategy
Our risk management strategy is to:
•
•
engage in highly disciplined acquisition practices;
take on underwriting risks, via active underwriting segments, across a balanced range of select specialty
lines where the expected margins compensate for the risk and/or the costs of risk mitigation;
•
seek investment risk where it is adequately rewarded;
• maintain reserving risk at low to moderate levels; and
•
ensure capital, liquidity, credit, operational and regulatory risks remain low.
These strategies are pursued through the use of appropriate controls, governance structures and highly skilled
teams effectively working together.
Our risk strategy is embedded in our organization by promoting a culture of high risk awareness. This is achieved
through the demonstration of our day-to-day approach in how we manage our business and in how we manage and
assess challenges and opportunities.
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Risk Appetite
The primary objective of our risk appetite framework is to monitor and control activities in order to protect the
Group from an unacceptable level of loss, compliance failures and adverse reputational impact. Risk appetite and
tolerance is set by our Board and reviewed annually to ensure alignment with the business plan. Our risk appetite
framework considers material risks in the business relating to, among other things, strategic risk, insurance risk,
investment/market risk, liquidity risk, reinsurance credit/counterparty risk, operational risk, tax risk and regulatory risk.
Established at the Group level, it 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.
Accountability for the implementation, monitoring and oversight of risk appetite is aligned with individual corporate
executives and monitored and maintained by the Risk Management function. Risk tolerance levels are monitored and
any deviations from pre-established levels are reported in order to facilitate responsive action.
Our subsidiary companies’ risk appetite frameworks are aligned with the risk appetite framework of the Group,
while local company appetite and tolerances are set by the local boards. Subsidiary risk appetites are reviewed annually
to ensure they do not, in the aggregate, exceed Group risk appetite.
Risk Governance and Risk Management Organization
Our ERM framework consists of numerous processes and controls that have been designed by management,
with oversight by the Board of Directors and its committees, and implemented by employees across the organization.
Senior executives are ultimately accountable for key defined risks and are responsible for providing regular reporting
to the Group Executive Team, Management Risk Committee, Board Risk Committee and Board; and to facilitate the
same to subsidiary committees and boards to support decision making and strong risk governance. The collective
boards, management and employees are responsible for the effective implementation and/or operation of processes
and controls.
Board of Directors
Our Board and its committees (and subsidiary boards of directors) receive management information from the
Executives, Board Committees and Management Committees relating to performance against strategy and regularly
review information regarding, among other things, acquisitions, active underwriting, loss reserves, credit, liquidity and
investments, operations and information security and the risks associated with each.
Our Risk Committee has responsibility to assist the Board in overseeing the integrity and effectiveness of the
Company’s ERM framework, including by reviewing and evaluating the risks to which the Company is exposed, as
well as monitoring and overseeing the guidelines and policies that govern the processes by which the Company
identifies, assesses and manages its exposure to risk. Our Audit Committee, comprised entirely of independent
directors, oversees our accounting and financial reporting-related risks. Our Investment Committee is responsible for
overseeing the Company’s investment portfolio and investment-related risk, determining the Group’s investment
strategy and guidelines and approving investment transactions in accordance with these guidelines. 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
In addition to this director oversight, our ERM governance structure is supported by our Management Risk
Committee ("MRC") comprising members of executive and senior management who are responsible for the
management of key risks and representatives from assurance functions. At the operating subsidiary level, risks relating
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.
The MRC is chaired by the Chief Operating Officer and meets at least quarterly and as required during the year
to discharge specific responsibilities. The MRC discusses, challenges and debates the risks in the business and those
emerging and where required recommends changes to the course of activity in reacting to these risks. The MRC also
provides oversight and governance of ERM matters for the Group, ensuring that risk assumption and risk mitigation
activities are consistent with the Risk Appetite Framework (including with regard to business planning, major
transactions and significant projects) while promoting and sponsoring risk culture and awareness throughout the Group.
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Risk Ownership, Accountability and Assurance
We have adopted the "three lines of defense" model. Our first line consists of our senior corporate executives
and their function as leaders and risk owners. They are accountable for executing the risk management strategy. They
are responsible for the appropriate management of the activities and conduct of the business functions and for ensuring
that staff understand the business strategy, risk mitigating policies and procedures and have in place personal objectives
focused on achieving these.
Our second line comprises our various risk, control and compliance oversight functions. Our Risk Management
function reports to the Group Executive Team, the MRC and our Risk Committee and focuses primarily on implementing
and overseeing the administration of the MRC and Risk Committee directives and facilitating an efficient, effective and
consistent approach to risk management across the Group. Our management assurance is further complemented by
our compliance function which seeks to mitigate legal and regulatory compliance risks and ensures that appropriate,
effective and responsive compliance services are available to the business units across the Group. Other second line
functions include certain activities of our actuarial function and other group functions contributing to our management
assurance.
Our third line of defense comprises our internal audit function which independently reviews the effectiveness of
our ERM framework. The results of audits are monitored by the Audit Committee. Independent assurance from external
third parties (e.g. independent actuarial services) also sits within our third line of defense.
Entity Level Management
At the operating subsidiary level, risks relating 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 relating to the Group’s underwriting segments (Atrium and StarStone) are distinct from the Non-
life Run-off segment. These businesses include external stakeholders that also differ from our other businesses,
including joint venture partners, rating agencies, and, with respect to Atrium, third party Lloyd’s names who provide
approximately 75% of the underwriting capacity to Atrium’s Syndicate 609. Atrium and StarStone each maintain
dedicated ERM frameworks to manage risk, return and capital in the individual businesses, which align with and form
part of Group ERM. These include oversight at the Atrium and StarStone 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.
The Group and each regulated insurance entity has a unique risk register maintained through a risk management
software system that documents its risk landscape, with risk, key risk metric, and control owners assigned. The risk
and control assessment process is carried out on a quarterly basis. The assessment process is facilitated and recorded
using a risk management software system.
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. In order to effectively participate in future opportunities and manage downside risks
15
(due to external events) we ensure we have sufficient liquidity and available financing. We expect our processes to
allow us to anticipate potential adverse changes in our business and to have the foresight to make the necessary
changes to avoid unacceptable loss.
Capital Adequacy Risk. Capital adequacy risk is the risk that capital levels are or become insufficient to ensure
our insurance obligations will be met and policyholders are protected. We have a low appetite for capital adequacy
risk. As well as meeting our regulatory obligations, the ability to effectively participate in future opportunities is dependent
upon the Group and its subsidiaries continually meeting (and/or exceeding) solvency requirements. We endeavor to
manage our capital such that all of our regulated entities meet local regulatory capital requirements at all times and
maintain adequate capital to enable our insurance obligations to be met while taking into account the risks faced. We
aim to deploy capital efficiently and to establish adequate loss reserves that we believe will protect against future
adverse developments.
Insurance Risk. Insurance risk spans many aspects of our insurance operations, including underwriting risk,
risk assumed upon acquisitions/portfolio transfers and risk associated with our reserving assumptions.
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.
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 major commercial vendor models 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.
Acquisition Risk. We manage acquisition risks through our acquisition evaluation process and our reserving
practices discussed above in "Liability for Losses and Loss Adjustment Expenses."
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 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, "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies."
16
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 we manage foreign currency by asset/liability matching and use of
derivatives. 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.
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 operational incident management, business continuity planning, information security
procedures, financial reporting controls and a review process for material third-party vendor usage.
Regulatory Risk. Regulatory risk is the risk of legal or regulatory sanctions resulting in a financial loss, or loss
of reputation as a result of an insurer’s failure to comply with laws, regulations, rules, related self-regulatory organization
standards, and codes of conduct. We manage regulatory 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.
Tax Risk. Tax risk is the risk that tax reporting and/or compliance requirements are not completed accurately
or expediently or that tax expense is incurred unexpectedly resulting in financial loss. We proactively seek to identify,
evaluate, manage, monitor and mitigate tax risks. We are committed to complying with all tax laws, rules and regulations
applicable to the Group. In evaluating potential transactions we consider the overall commercial, financial and tax
aspects. Where there is uncertainty or complexity in relation to a tax risk, we may seek external advice and, where
appropriate, we may obtain tax clearances from relevant tax authorities.
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 Continental 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.
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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, 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, Cavello Bay Reinsurance Limited, a Class 3B insurer, and
Fitzwilliam Insurance Limited, a Class 3A insurer, all domiciled in Bermuda, are subject to an enhanced capital
requirement ("ECR") determined pursuant to a risk-based capital measure and are 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 ("SIBL") has been
named as our Group’s Designated Insurer. As Designated Insurer, SIBL 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, the
Group is required to file a quarterly financial return with the BMA.
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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 of wholly-owned run-off companies. 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 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.
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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 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 domiciled in Illinois, New
York, Delaware and Rhode Island, with one 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 and policy forms (except for excess and surplus lines insurers), 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, corporate 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.
As to periodic examinations, regulators have begun to look well beyond financial solvency and market conduct.
In 2017, for example, the New York Department of Financial Services (“NYDFS”) increased its focus on cybersecurity,
requiring financial institutions regulated by the NYDFS to establish a cybersecurity program. The NYDFS now also
requires the completion of an extensive questionnaire regarding each New York domestic insurer’s cybersecurity
program in connection with such examinations. Other states are expected to adopt similar laws based on the NAIC’s
Insurance Data Security Model Law, adopted in 2017.
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, 2017, 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.
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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 be subject to ORSA requirements 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.
In addition, the NAIC’s Corporate Governance Annual Disclosure (“CGAD”) Model Act and Regulation requires
the annual filing of a disclosure describing the insurance group’s corporate governance structure, policies, and practices.
The Model Act and Regulation have been adopted in some, though not all, of the states in which we have insurers
domiciled. There are no premium thresholds for CGAD.
The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), represented
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 ("FIO"). The FIO is 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.
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.
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 risk management requirements also include the need for regulated insurance entities to 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
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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 requirements.
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
and Belgium, as well as StarStone Insurance SE, a Liechtenstein-based company that continues to underwrite new
business through branches across Europe and is regulated by the Financial Markets Authority. StarStone Insurance
Europe AG was merged into StarStone Insurance SE in Liechtenstein effective from October 1, 2017, following the
relocation of StarStone Insurance SE’s principal office from the U.K. to Liechtenstein on May 8, 2017. Certain of our
U.K. entities also have branches in continental 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 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 generally results in a more uniform approach to regulation.
Other
Through StarStone, we participate in joint ventures in Hong Kong 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 of what we expect 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. We cannot be certain that ultimate losses will not 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. These charges could be material and would reduce our net earnings and capital and surplus.
In our non-life run-off businesses, loss reserves include asbestos and environmental ("A&E") liabilities and
liabilities associated with personal injury A&E claims from 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 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.
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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.
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, cyber events, 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. Any
of these factors 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, which
could decrease our earnings or adversely affect our financial condition.
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 ability to write new business or renew our existing business in our active underwriting segments.
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
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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
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 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 business depends on our ability to manage the run-off successfully and operate the
business effectively and efficiently. Our reserves for life 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
We may not be able to continue to grow our business through acquisitions.
We have pursued and, as part of our strategy, will continue to pursue growth through acquisitions of reinsurance
companies and portfolios of insurance and reinsurance business, primarily in our run-off segment. 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, can be complex and costly and may require substantial management resources. Our acquisitions could
involve numerous additional risks such as potential losses from unanticipated litigation, levels of claims or other liabilities
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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.
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 or our anticipated return on assets being lower than expected or diminishing because
of credit defaults, changes in interest rates, or delays in implementation of our intended investment strategies;
the value of 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.
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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
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. In
addition, an unfavorable change or downgrade of our issuer credit ratings could increase the interest rate charged
under our revolving credit facility and may make it more expensive for us to access capital markets. 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.
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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 therefore we are dependent on distributions of funds from our operating
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). The ability of our insurance and reinsurance subsidiaries to make distributions to
us may be limited by various business considerations and applicable insurance laws and regulations in jurisdictions
in which we operate (which are described in "Item 1. Business - Regulation"). The ability 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 debt obligations and our subsidiaries’ debt obligations. If our subsidiaries are restricted from making distributions
to us, we may be unable to maintain adequate liquidity to fund acquisitions or fulfill our financial obligations.
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 or in the indenture governing our
4.5% Senior Notes due 2022 ("Senior Notes") 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 and outstanding Senior Notes. We
depend on access to these funds in operating our business. The credit facilities and the indenture governing our Senior
Notes 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, amalgamations and sales
of substantially all assets, indebtedness and guarantees, restrictions as to certain dispositions of stock and dividends
and stock repurchases, investment constraints and limitations on liens on the capital stock of certain subsidiaries. We
may also enter into future 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 or the indenture governing our Senior
Notes, 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
and Senior Notes are described in more detail in "Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources - Debt Obligations."
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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.
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 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 and co-investments, fixed income funds, fixed income hedge
funds, equity funds, private credit funds and collateralized loan obligation ("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 redemption terms, 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 overall portfolio 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 and co-investments, fixed income funds,
fixed income hedge funds, equity funds, private credit 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
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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
liquidating some of our alternative investments due to restrictions on sales, transfers and redemption terms. This could
have a material adverse effect on the performance of our investment portfolio.
We have many individual portfolios of cash and investments from our acquired companies and portfolios. 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.
We own companies with 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
or decrease. 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.
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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 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
regulatory requirements, see "Item 1. Business - Regulation."
In addition, 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
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 such activity 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 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 continue to be increased regulatory intervention in our industry in the future, and these initiatives could adversely
affect our business.
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. The BMA acts as our Group supervisor, as described in "Item 1. Business -
Regulation" which has led to increased regulatory reporting and oversight.
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. Bermuda has gained Solvency II equivalence,
and our Bermuda reinsurers are subject to requirements in line with a Solvency II framework.
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
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practices. Continued compliance with these laws and regulations is likely to result in additional regulation and additional
costs for us.
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 and hedge funds 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 voted to leave the European Union
(commonly referred to as “Brexit”). Negotiations to determine the terms of the United Kingdom's withdrawal from the
European Union are ongoing, and the form of the United Kingdom's future relationship with the European Union remains
uncertain. 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 United Kingdom 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 United Kingdom
determines which E.U. laws to replace or replicate, and these issues could impact our structure and operations. 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.
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 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 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 with appropriate skills 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
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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.
Cyber-security events or other difficulties with our information technology systems could disrupt our
business, result in the loss of critical and confidential information, increased costs, and adversely impact
our reputation and results of operations.
We rely heavily on the successful, uninterrupted functioning of our information technology systems, as well as
those of any third-party service providers we use. We rely on these systems to securely process, store, and transmit
confidential and other data in connection with our critical operational functions such as paying claims, performing
actuarial and other modeling, pricing, quoting and processing policies, cash and investment management, acquisition
analysis, financial reporting and other necessary support functions. 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. A failure of our information technology
systems or those of our third-party service providers could materially impact our ability to perform the critical functions
described above, 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 systems 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 own information, we receive and may be responsible for protecting confidential or personal information
of clients, employees, and other third parties, which could also be compromised in the event of a security breach.
Although we utilize numerous controls, protections and risk management strategies to attempt to mitigate these
risks, and management is not aware of a material cyber-security incident to date, the sophistication and volume of
these security threats continues to increase. We may not have the technical expertise or resources to successfully
prevent every data breach or cyber-security incident. 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, which may include fines and penalties.
Such an incident could cause us to lose business and commit resources, management time and money to remediate
these breaches and notify aggrieved parties, any of which in turn could have an adverse impact on our business. We
may also experience increasing costs associated with implementing and maintaining adequate safeguards against
these types of incidents and attacks.
In addition, the information security and data privacy regulatory environment is increasingly demanding. We are
subject to numerous laws and regulations in jurisdictions within and without the United States governing the protection
of the personal and confidential information of our clients and/or employees, including in relation to medical records
and financial information. These laws and regulations are rapidly expanding, increasing in complexity and sometimes
conflict between jurisdictions. For example, the E.U. General Data Protection Regulation ("GDPR") is set to take effect
during 2018. The GDPR creates new rights for individuals to control their personal data and sets forth the requirements
with which companies handling the personal data of E.U.-based data subjects will have to comply (regardless of
whether such data handling involves E.U.-based operations). We will be subject to the GDPR through our handling of
the personal data of E.U.-based subjects in connection with our ordinary course operations. If any person, including
any of our employees or those with whom we share such information, negligently disregards or intentionally breaches
our established controls with respect to our client data, or otherwise mismanages or misappropriates that data, we
could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution
in one or more jurisdictions, including as a result of a violation of the GDPR.
33
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
prescribed underwriting authorities. 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.
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.
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, 2017, CPPIB, Akre Capital
Management ("Akre Capital"), Trident, Beck Mack & Oliver ("Beck Mack"), and two of Enstar's executive officer co-
founders (collectively) beneficially owned approximately 13.7%, 8.9%, 8.2%, 4.7% and 4.1%, 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 19.8% as of December 31, 2017. Funds managed by
Hillhouse Capital Management (collectively, "Hillhouse") own approximately 3.2% of our outstanding voting ordinary
shares that, together with their non-voting shares and warrants, represented an economic interest of approximately
9.98% as of December 31, 2017. Trident and Hillhouse have agreed to receive additional shares of Enstar pursuant
to a transaction in which we will acquire the remaining 51.8% of the shares of our equity method investee, KaylaRe.
The transaction is expected to close during the first quarter of 2018 and is discussed in detail 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.
Although they do not act as a group, the shareholders identified above 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.
34
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 was to
reduce the likelihood that we or any of our non-U.S. subsidiaries will be deemed a "controlled foreign corporation"
under prior U.S. federal tax law, which has subsequently changed (as described in “Risks Relating to Taxation” below).
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.
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, 2017, 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. On October
10, 2017, we filed a resale registration statement covering all of the shares held by these shareholders with registration
rights in exchange for their agreement to waive their right to have their shares included on our universal shelf registration
statement. Upon effectiveness of the resale registration statement, a large number of ordinary shares will become
freely tradable without restrictions under the Securities Act. In addition, we have agreed to issue additional shares in
connection with a transaction to acquire the remaining 51.8% of KaylaRe as discussed in detail 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, and we have agreed to include substantially all of these shares in the resale registration statement.
Our ordinary shares have in the past been, and may from time to time continue to be, thinly traded, and significant
sales could adversely affect the market price for our ordinary shares and impair our ability to raise capital through
offerings of our equity securities.
35
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
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.
36
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
Recently enacted U.S. tax reform legislation, various international tax transparency initiatives, and
possible future tax reform legislation and regulations could materially affect us and our shareholders.
On December 22, 2017, the US government enacted comprehensive tax legislation commonly referred to as
the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act is broad and contains many provisions that will have significant
implications on us, and potentially on our shareholders, including re-measurement of deferred taxes and surplus due
to the reduction in corporation income tax rate, and imposition of a new base-erosion anti-abuse tax (“BEAT”) on
affiliate transactions (including reinsurance arrangements between affiliated companies). In response to the introduction
of BEAT, we non-renewed (as of January 1, 2018) certain of our active underwriting affiliate reinsurance transactions
between our operating entities that are subject to U.S. taxation and our non-U.S. affiliates that are not. We continue
to assess the future impact of BEAT on our transaction structuring.
The Tax Act also includes modifications of the taxation of non-U.S. companies owned by U.S. shareholders.
Certain aspects of the Tax Act require clarification through future regulatory action and accordingly, we are unable to
definitively determine the impact to our shareholders. The Tax Act may increase the likelihood that we or our non-U.S.
subsidiaries or joint ventures managed by us will be deemed a “controlled foreign corporation” (CFC) within the meaning
of the Internal Revenue Code of 1986, as amended (the “Code”) for U.S. federal tax purposes. Specifically, the Tax
Act expands the definition of “10% U.S. shareholder” for CFC purposes to include U.S. persons who own 10% or more
of the value of a non-U.S. corporation’s shares, rather than only looking to voting power held. Accordingly, the “voting
cut-back” provisions included in our bye-laws that limit any U.S. shareholder from owning or controlling ordinary shares
that constitute 9.5% or more of the voting power of all of our ordinary shares will be ineffective in avoiding “U.S.
shareholder” status for U.S. persons who own 10% or more of the value of our shares. The Tax Act also expands
certain attribution rules for share ownership in a way that would cause non-U.S. subsidiaries to now be treated as
CFCs if owned in a group, such as Enstar, that has a non-U.S. parent company and also includes at least one U.S.
subsidiary. In the event a corporation is characterized as a CFC, any “U.S. shareholder” of the CFC is required to
include its pro rata share of certain insurance and related investment income for the taxable year, even if such income
is not distributed.
The Tax Act also contains modifications to certain provisions relating to passive foreign investment company
(“PFIC”) status that if applicable to us could result in adverse tax consequences to U.S. persons who own our ordinary
shares. While the Tax Act makes it more difficult to qualify for certain exceptions to PFIC status, we believe that we
will not be a PFIC for U.S. federal income purposes for the foreseeable future under the enacted provisions of the Tax
Act. 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 under
the provision of the Tax Act, 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. 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 U.S. Internal Revenue Service (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 can be no
assurance that the regulations will be finalized in a manner that clearly accommodates our existing structure.
The U.S. and other countries and governing bodies have also enacted reform legislation aimed at increasing
transparency on companies’ global tax footprint and profile. The Organization for Economic Co-operation and
Development (the "OECD") is an intergovernmental economic organization founded to stimulate economic progress
and trade. It develops economic policy recommendations to encourage policy reform in member countries. 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. Bermuda has adopted OECD compliant
Country-by-Country Reporting regulations for Bermuda headquartered companies which requires the Company to file
a report containing results of our global operations. It is uncertain how cooperating jurisdictions, including those in
37
which we operate, will utilize the data collected in our Bermuda filing. These initiatives could increase the burden and
costs of compliance.
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
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 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.
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.
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, 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.
38
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.
39
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our ordinary shares trade on the NASDAQ Global Select Market under the ticker symbol "ESGR".
Market and Dividend Information
On February 26, 2018, the last reported sale price for our shares was $198.65 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
2017
2016
High
Low
High
Low
$
$
$
$
207.30 $
204.30 $
224.60 $
237.30 $
181.50 $
180.50 $
193.10 $
183.85 $
164.69 $
164.91 $
171.66 $
209.35 $
142.35
148.91
157.32
161.01
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 Financial Information" 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 26, 2018 there were 1,677 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, 2017, 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, 2017 - October 31, 2017
November 1, 2017 - November 30, 2017
December 1, 2017 - December 31, 2017
Total Number of
Shares
Purchased(1)
Average Price
Paid per Share
$
$
$
0
689
0
689
—
219.85
—
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
— $
— $
— $
— $
—
—
—
—
(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.
40
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, 2012 and ended on December 31, 2017. The performance graph shows the value as of December 31
of each calendar year of $100 invested on December 31, 2012 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,
2012
2013
2014
2015
2016
2017
Enstar Group Limited
NASDAQ Composite Index
NASDAQ Insurance Index
100.00
100.00
100.00
124.05
141.63
142.75
136.53
162.09
155.66
133.99
173.33
163.93
176.55
187.19
195.08
179.27
242.29
211.22
*$100 invested on December 31, 2012 in stock or index, including reinvestment of dividends.
41
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 results to be expected for future accounting periods.
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 2017 QBE and RSA transactions,
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 classified our
Pavonia and Laguna operations as held-for-sale, and Pavonia's 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 Note 3 - "Acquisitions" and Note 4 - "Significant New Business" 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
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,
2017
2016
2015
2014
2013
(in thousands of U.S. dollars, except share and per share data)
$
613,121
$
823,514
$
753,744
$
542,991
$
147,613
66,103
208,789
190,334
(193,551)
(96,906)
(467,084)
320,806
10,993
331,799
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
(20,341)
(39,606)
9,950
(13,487)
(15,218)
$
311,458
$
264,807
$
220,291
$
213,749
$
208,604
$
$
$
$
$
$
15.50
0.56
16.06
15.39
0.56
15.95
$
$
$
$
$
$
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
Weighted average ordinary shares outstanding:
Basic
Diluted
19,388,621
19,527,591
19,299,426
19,447,241
19,252,072
19,407,756
18,409,069
18,678,130
16,523,369
16,703,442
(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.
42
Losses and loss adjustment expense liabilities
7,398,088
5,987,867
5,720,149
Balance Sheet Data:
Total investments
Total cash and cash equivalents (inclusive of
restricted)
Reinsurance balances recoverable
Total assets
Policy benefits for life and annuity contracts
Debt obligations
Total Enstar Group Limited shareholders’
equity
Book Value per Share:(1)
Basic
Diluted
Shares Outstanding:
Basic
Diluted
2017
2016
2015
2014
2013
(in thousands of U.S. dollars, except share and per share data)
December 31,
$
7,232,185
$
6,042,672
$
6,340,781
$
4,844,352
$
4,279,542
1,212,836
2,021,030
1,318,645
1,460,743
1,295,169
1,451,921
13,606,422
12,865,744
11,772,534
117,207
646,689
112,095
673,603
126,321
599,750
1,429,622
1,305,515
8,622,147
4,509,421
8,940
320,041
958,999
1,331,892
7,236,289
4,219,905
9,779
452,446
3,136,684
2,802,312
2,516,872
2,304,850
1,755,523
$
$
161.63
159.19
$
$
144.66
143.68
$
$
130.65
129.65
$
$
120.04
119.22
$
$
106.21
105.20
19,406,722
19,372,178
19,263,742
19,201,017
16,528,343
19,830,767
19,645,309
19,714,810
19,332,864
16,707,115
(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.
43
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.
Table of Contents
Section
Business Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Performance Indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Results of Operations — for the Years Ended December 31, 2017, 2016, and 2015 . . .
Results of Operations by Segment — for the Years Ended December 31, 2017, 2016, and 2015 . . . .
Non-life Run-off Segment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Atrium Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
StarStone Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investable Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
45
45
46
47
49
52
53
59
63
67
69
81
87
44
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 80 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 2013 and 2014, 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 in 2017
we disposed of Pavonia, which made up the majority of our life and annuities business.
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 2017, we increased our book value per share on a fully diluted basis by 10.8% to $159.19 per share.
The increase was primarily attributable to net earnings of $311.5 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.
45
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 gross reserves were $5.9 billion as at December 31, 2017, and
we continue to evaluate opportunities for future growth. In January and February 2018, we entered into separate
agreements to assume net reserves of approximately $811.0 million, $456.4 million and $275.0 million from Novae,
Neon and Zurich Australia, respectively. Additionally, in December 2017, we assumed net reserves of $81.4 million
from Allianz. We completed the sale of our Pavonia and Laguna businesses during 2017, which formerly comprised
the majority of our life and annuities segment. 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 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 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 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 2018 is that underwriting
margins will be slightly higher than in 2017, with premium rates expected to be impacted by both market and general
economic conditions. We continue to see overcapacity in many markets which can impact premium rates and/or 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.
For the year ended December 31, 2017 compared to 2016, total gross premiums written were relatively consistent
in our Atrium segment and marginally higher in our StarStone segment as we selectively grew in certain lines, which
included the development of additional underwriting capabilities. StarStone's net earned premium, net incurred losses
and acquisition costs decreased significantly as a result of the 35% quota share reinsurance agreement with our equity
method investee KaylaRe Holdings Ltd. ("KaylaRe"), which covers the 2016 and subsequent underwriting years.
The insurance and reinsurance industry was significantly impacted by large losses in the second half of 2017,
notably hurricanes Harvey, Irma and Maria, as well as the Mexico earthquake and the wildfires in California. Given
the nature and complexity of these events it may take some time before the full extent of the losses is known, and the
initial reported losses may develop favorably or adversely in the future. Additionally, the losses may have an impact
on capacity and pricing. However at this time we cannot estimate with any certainty whether any such impacts would
be significant.
Our industry continues to experience challenging underwriting market conditions, and 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 2017. 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.
46
Investments
Markets are inherently uncertain and investment performance may be impacted with changes in market volatility.
We expect to maintain our investment strategy, which is to seek superior risk adjusted returns while preserving liquidity
and capital and maintaining a prudent diversification of assets. We are implementing strategies to more closely align
the duration in certain investment portfolios to the duration of our reserves. We will continue allocating a portion of our
portfolio to non-investment grade securities or alternative investments, in accordance with our investment guidelines,
which carry significant diversification and return benefits.
Net investment income is a significant component of our earnings and we see fully priced asset valuations across
many asset classes compared to historical averages. If investment conditions or general economic conditions change
during 2018, 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.
U.S. Taxation Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as
the Tax Cuts and Jobs Act (the “Tax Act”), as described in "Item 1A. Risk Factors - Risk Relating to Taxation." The Tax
Act makes broad changes to the U.S. tax code, some of which were applicable in 2017 and others effective for tax
years ending after December 31, 2017. The impact of the Tax Act to Enstar in 2017 is described in "Consolidated
Results of Operations - Consolidated Overview" below.
In response to the introduction of the Tax Act, as of January 1, 2018 we non-renewed certain of our active
underwriting affiliate reinsurance transactions ceded from our U.S. operating entities to our non-U.S. affiliates. We
will continue to assess the impact of the Tax Act on our business as the regulations develop. Our subsidiaries'
reinsurance strategies may be different than in the past, which may result in more risk being retained in our U.S.
insurance companies, which would have the effect of requiring more capital in those companies and potentially increase
our overall group effective tax rate over time.
Brexit
There has been volatility in the financial and foreign exchange markets following the Brexit referendum on June
23, 2016, and this is expected to continue. On March 27, 2017, Article 50 of the Lisbon Treaty was triggered, which
allows two years for the United Kingdom and the 27 remaining European Union members to reach an agreement with
regard to the terms on which the United Kingdom will leave the European Union, subject to an extension of the two
year deadline beyond March 29, 2019 being agreed between the United Kingdom and the remaining European Union
members. For companies based in the United Kingdom, including certain of our active underwriting and run-off
companies, there is heightened uncertainty regarding trading relationships with countries in the European Union. Both
our StarStone and Atrium operations have well-diversified sources of premium, which may mitigate the potential impact
of Brexit. The majority of business written in StarStone and Atrium is in U.S. dollars, so the impact of currency volatility
on those segments has not been significant. In addition, StarStone already has established operations within the
European Economic Area. Lloyd's has lobbied the United Kingdom's government to include the retention of passporting
rights in its negotiations with the European Union, whilst also evaluating alternative models to access the markets. In
the near-term, access to markets is unaffected, and all contracts entered into up until Brexit are expected to remain
valid into the post-Brexit period. With specific reference to our run-off business, we are preparing to build and expand
on our existing run-off capabilities within the European Union for the purpose of receiving transfers of new run-off
business. We are also investigating the post-Brexit additional requirements in each applicable state for the continued
payment of policyholders’ claims in respect of the existing run-off business of our U.K. Non-life Run-off companies.
Underwriting Ratios
In presenting our results for the Atrium and StarStone segments, we discuss the loss ratio, acquisition cost ratio,
operating expense ratio, and the combined ratio of our active underwriting operations within these segments.
Management believes that these ratios provide the most meaningful measure for understanding our underwriting
profitability. These measures are calculated using GAAP amounts presented on the statements of earnings for both
Atrium and StarStone.
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 operating expense ratio is calculated
by dividing operating expenses by net earned premiums. The combined ratio is the sum of the loss ratio, the acquisition
cost ratio and the operating expense ratio.
47
The Atrium segment also includes corporate expenses which are not directly attributable to the underwriting
results in the segment. The corporate expenses include general and administrative expenses related to amortization
of the definite-lived intangible assets in the holding company, and expenses relating to Atrium Underwriters Limited
("AUL") employee salaries, benefits, bonuses and current year share grant costs. The AUL general and administrative
expenses are incurred in managing the syndicate. These are principally funded by the profit commission fees earned
from Syndicate 609, which is a revenue item not included in the insurance ratios.
48
Consolidated Results of Operations - For the Years Ended December 31, 2017, 2016 and 2015
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.
2017
Years Ended December 31,
2016
(in thousands of U.S. dollars)
2015
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
Loss on sale of subsidiary
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS FROM CONTINUING OPERATIONS
NET EARNINGS (LOSS) FROM DISCONTINUING OPERATIONS,
NET OF INCOME TAX EXPENSE
NET EARNINGS
Net loss (earnings) attributable to noncontrolling interest
$
613,121 $
823,514 $
753,744
66,103
208,789
190,334
28,509
39,364
185,463
77,818
4,836
1,106,856
1,130,995
193,551
4,015
96,906
435,985
28,102
17,537
16,349
792,445
314,411
6,395
320,806
10,993
331,799
(20,341)
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
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
311,458 $
264,807 $
220,291
Highlights
Consolidated Results of Operations for 2017
• Consolidated net earnings of $311.5 million and basic and diluted earnings per share of $16.06 and $15.95,
respectively
• Net earnings from Non-life Run-off segment of $343.8 million
• Net premiums earned of $613.1 million, including $134.7 million and $459.4 million in our Atrium and
StarStone segments, respectively
• Combined ratios of 99.9% and 108.5% for the active underwriting operations within our Atrium and StarStone
segments, respectively. Excluding the impact of hurricanes Harvey, Irma and Maria during 2017, the
combined ratios were 86.7% and 96.7% for Atrium and StarStone, respectively (refer to "Underwriting Ratios"
above)
• Net investment income of $208.8 million and net realized and unrealized gains of $190.3 million
49
Consolidated Financial Condition as at December 31, 2017
• Total investments, cash and funds held of $9,625.0 million
• Total reinsurance balances recoverable of $2,021.0 million
• Total assets of $13,606.4 million
• Shareholders' equity of $3,136.7 million and redeemable noncontrolling interest of $479.6 million
• Total gross reserves for losses and LAE of $7,398.1 million, with $2,450.8 million of gross reserves acquired
and assumed in our Non-life Run-off operations during 2017
• Diluted book value per ordinary share of $159.19
Consolidated Overview
2017 versus 2016: We reported consolidated net earnings attributable to Enstar Group Limited shareholders
of $311.5 million in 2017, an increase of $46.7 million from $264.8 million in 2016. Our results were impacted by the
loss portfolio transfer reinsurance transactions we completed during 2017 with RSA and QBE, and during 2016 with
Allianz, Coca-Cola and Neon. The most significant drivers of the change in our financial performance during 2017 as
compared to 2016 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 one of the predominant drivers of our
consolidated earnings in 2017, contributing $190.7 million to consolidated net earnings. Although this was
a decrease of $95.2 million from 2016, net earnings provided by the Non-life Run-off segment increased by
$82.2 million in 2017 compared to 2016 primarily due to improved investment results, increased fee income
and higher other income, partially offset by higher expenses and other items;
• Higher Net Investment Income - Total net investment income increased by $23.3 million in 2017, compared
to 2016. The increase was primarily attributable to an increase in average invested assets and an increase
in the book yield we obtained on our assets. The increase in average invested assets was primarily due to
the RSA and QBE transactions which were completed in 2017. The increase in the book yield was primarily
due to asset allocation strategies and in an increase in the duration of our fixed maturity portfolio;
• Atrium - Net earnings attributable to the Atrium segment were $5.4 million in 2017, compared to $6.4 million
in 2016. The combined ratio in 2017 was 99.9%, compared to 94.3% in 2016, and the increase was primarily
driven by a higher loss ratio. The underwriting performance was impacted by the large losses in the third
quarter of 2017, primarily hurricanes Harvey, Irma and Maria, partially offset by favorable prior year loss
reserve development. Excluding the impact of hurricanes Harvey, Irma and Maria, the combined ratios was
86.7% for 2017;
• StarStone - Net earnings attributable to the StarStone segment were $2.8 million in 2017, compared to $25.2
million in 2016. The decrease in earnings was primarily due to catastrophe loss events, partially offset by
improved investment returns. The combined ratio was 108.5% in 2017 compared to 98.2% in 2016. The
underwriting performance was impacted by the large losses in the third quarter of 2017, primarily hurricanes
Harvey, Irma and Maria. Excluding the impact of hurricanes Harvey, Irma and Maria, the combined ratio was
96.7% for 2017;
• Other Activities - The other activities were driven by higher corporate expenses and a loss on the sale of
Laguna, our Irish life insurance company;
• Change in Net Realized and Unrealized Gains (Losses) - In 2017, net realized and unrealized gains were
$190.3 million, compared to $77.8 million in 2016. The net realized and unrealized gains in 2017 were
primarily attributable to an increase in the valuation of our funds withheld - directly managed and unrealized
gains on our other investments;
• Noncontrolling Interest - Noncontrolling interest in earnings is the share of results from those subsidiary
companies in which there are either noncontrolling interests or redeemable noncontrolling interests. In 2017,
the noncontrolling interest in earnings was $20.3 million, compared to $39.6 million in 2016. The reduction
was primarily due to lower earnings in both Atrium and StarStone as a result of the large losses in the third
quarter of 2017, as discussed above; and
50
•
Income Taxes - We recorded an income tax benefit of $6.4 million in 2017, compared to an income tax
expense of $34.9 million in 2016, a change of $41.3 million. The effective tax rate was (2.0)% in 2017
compared with 10.7% in 2016, with the change primarily due to significant decreases in the valuation
allowance on our deferred tax assets in the U.S. in 2017 compared to 2016, including changes relating to
U.S. Tax Reform which resulted in a tax benefit of $5.7 million, as well as the geographic distribution of our
pre-tax net earnings between our taxable and non-taxable jurisdictions.
2016 versus 2015: We reported consolidated net earnings attributable to Enstar Group Limited shareholders
of $264.8 million in 2016, compared to $220.3 million in 2015, an increase of $44.5 million. Our results were impacted
by our acquisition activity 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 in 2016, contributing $285.9 million to consolidated net earnings which is an increase
of $15.1 million from 2015. Net earnings provided by the Non-life Run-off segment were higher by $76.0
million in 2016 compared to 2015, primarily due to improved investment results, partially offset by higher
earnings attributable to noncontrolling interest, lower other income and other items;
• Higher Net Investment Income - Total net investment income increased by $62.9 million in 2016, compared
to 2015. The increase was primarily attributable to an increase in average invested assets and an increase
in the book yield we obtained on our assets. The increase in average invested assets was primarily due to
the transactions that were completed in 2016. The increase in the book yield was primarily due to our asset
allocation and an increase in the treasury yields;
• Atrium - Net earnings attributable to the Atrium segment were $6.4 million in 2016, compared to $16.6 million
in 2015, a decrease of $10.1 million. Atrium delivered a solid underwriting performance with a combined
ratio of 94.3% for 2016. 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;
• StarStone - Net earnings attributable to the StarStone segment were $25.2 million in 2016, compared to
$13.7 million in 2015, an increase of $11.6 million. The decrease in the combined ratio from 98.7% in 2015
to 98.2% in 2016 was primarily due to lower expenses due to the continued execution of expense
management initiatives, partially offset by higher losses and acquisition expenses;
• Other activities - The other activities were primarily driven by higher corporate expenses and higher interest
expense, partially offset by higher fee and commission income and higher income from discontinuing
operations;
• Change in Net Realized and Unrealized Gains (Losses) - In 2016, net realized and unrealized gains were
$77.8 million, compared to net realized and unrealized losses of $41.5 million in 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 the fixed income markets, while the losses in 2015 were driven by
unrealized losses on our fixed maturity and equity portfolios;
• Noncontrolling Interest - Noncontrolling interest in earnings is the share of results from those subsidiary
companies in which there are either noncontrolling interests or redeemable noncontrolling interests. In 2016,
the noncontrolling interest in earnings was $39.6 million, compared to the noncontrolling interest in losses
of $10.0 million in 2015; and
•
Income Taxes - Income tax expense was $34.9 million in 2016, compared to $12.7 million in 2015, an
increase of $22.2 million. The effective tax rate was 10.7% in 2016, compared to 5.6% in 2015, with the
increase primarily due to the geographic distribution of our pre-tax net earnings between our taxable and
non-taxable jurisdictions.
51
Results of Operations by Segment - For the Years Ended December 31, 2017, 2016 and 2015
In the second half of 2017, following the completion of the sale of our Laguna and Pavonia businesses, which
significantly reduced the size of our life and annuities business, we undertook a review of our reportable segments.
Following this review we determined that we have three reportable segments of business that are each managed,
operated and reported on separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. In addition, our other activities
include our corporate expenses, debt servicing costs, holding company income and expenses, foreign exchange, our
remaining life business and other miscellaneous items. 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:
2017
Years Ended December 31,
2016
(in thousands of U.S. dollars)
2015
Segment split of net earnings attributable to Enstar Group Limited:
Non-life Run-off
Atrium
StarStone
Other
$
343,800 $
261,644 $
185,660
5,423
2,826
6,416
25,217
(40,591)
(28,470)
16,558
13,664
4,409
Net earnings attributable to Enstar Group Limited
$
311,458 $
264,807 $
220,291
The following is a discussion of our results of operations by segment.
52
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, 2017, 2016 and 2015, which are summarized below:
For Years Ended December 31,
Gross premiums written
Net premiums written
Net premiums earned
Net incurred losses and LAE
Acquisition costs
Operating expenses
Underwriting income
Net investment income
Net realized and unrealized gains
(losses)
Fees and commission income
Other income
Corporate expenses
Interest expense
Net foreign exchange gains (losses)
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS FROM CONTINUING
OPERATIONS
Net (earnings) loss attributable to
noncontrolling interest
NET EARNINGS ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
Overall Results
$
$
$
2017
14,102 $
2016
Change
(in thousands of U.S. dollars)
17,316 $
(3,214) $
2015
38,704 $
Change
(21,388)
6,482 $
9,202 $
(2,720) $
22,594 $
(13,392)
14,162 $
16,755 $
(2,593) $
44,369 $
190,674
(328)
(132,235)
72,273
166,678
179,545
43,849
27,061
(101,592)
(28,970)
(7,347)
351,497
6,990
285,881
(4,198)
(151,316)
147,122
145,237
77,685
17,447
2,497
(61,583)
(22,268)
1,684
307,821
(28,577)
(95,207)
3,870
19,081
(74,849)
21,441
101,860
26,402
24,564
(40,009)
(6,702)
(9,031)
43,676
35,567
270,830
(8,860)
(158,821)
147,518
88,999
(31,383)
22,264
29,294
(54,213)
(33,599)
(4,372)
164,508
(12,570)
(27,614)
15,051
4,662
7,505
(396)
56,238
109,068
(4,817)
(26,797)
(7,370)
11,331
6,056
143,313
(16,007)
358,487
279,244
79,243
151,938
127,306
(14,687)
(17,600)
2,913
33,722
(51,322)
$
343,800 $
261,644 $
82,156 $ 185,660 $
75,984
2017 versus 2016: Net earnings were $343.8 million in 2017, compared to $261.6 million in 2016, an increase
of $82.2 million. The increase of $82.2 million was primarily attributable to an increase of $101.9 million in net realized
and unrealized gains in 2017, an increase of $26.4 million in fees and commission income, an increase of $24.6 million
in other income, an increase in net investment income of $21.4 million, and a decrease in operating expenses of $19.1
million. These items were partially offset by a lower reduction in net incurred losses and LAE of $95.2 million and an
increase in corporate expenses of $40.0 million. Income taxes were a benefit of $7.0 million in 2017, compared to a
tax expense of $28.6 million in 2016, a change of $35.6 million.
2016 versus 2015: Net earnings were $261.6 million in 2016 compared to $185.7 million in 2015, an increase
of $76.0 million. The increase of $76.0 million was primarily attributable to an increase in net realized and unrealized
gains of $109.1 million, an increase in net investment income of $56.2 million, a higher reduction in net incurred losses
and LAE of $15.1 million, and a decrease in operating expenses of $7.5 million, partially offset by an increase in the
net earnings attributable to noncontrolling interest of $51.3 million, a decrease in net premiums earned of $27.6 million,
a decrease in other income of $26.8 million and an increase of $16.0 million in income taxes.
Investment results are separately discussed below in "Investments."
53
Net Premiums Earned:
The following table shows the gross and net premiums written and earned for the Non-life Run-off segment for
the years ended December 31, 2017, 2016 and 2015:
Years Ended December 31,
2017
2016
Change
2015
Change
Gross premiums written
Ceded reinsurance premiums written
Net premiums written
Gross premiums earned
Ceded reinsurance premiums earned
Net premiums earned
$
$
14,102 $
(7,620)
6,482
23,950
(9,788)
14,162 $
(in thousands of U.S. dollars)
17,316 $
(3,214) $
38,704 $
(8,114)
9,202
25,989
(9,234)
494
(16,110)
(2,720)
(2,039)
(554)
22,594
116,494
(72,125)
(21,388)
7,996
(13,392)
(90,505)
62,891
16,755 $
(2,593) $
44,369 $
(27,614)
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.
2017 versus 2016: Premiums written and earned in 2017 and 2016 related primarily to Sussex's run-off business.
2016 versus 2015: Premiums written and earned in 2016 and 2015 related primarily to Sussex's run-off business.
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, 2017, 2016 and 2015:
2017
2016
2015
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$ 578,888
$
2,835
$ 581,723
$ 529,937
$
3,869
$ 533,806
$ 501,246
$ 16,049
$ 517,295
Net change in case and
LAE reserves (1)
Net change in IBNR
reserves (2)
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
Changes in fair value - fair
value option
Net incurred losses and
LAE
(381,450)
397
(381,053)
(608,168)
(617)
(608,785)
(366,262)
10,927
(355,335)
(393,100)
2,373
(390,727)
(349,726)
2,342
(347,384)
(377,722)
12,948
(364,774)
14,359
—
14,359
168,827
—
168,827
15,265
—
15,265
(181,303)
5,605
(175,698)
(259,130)
5,594
(253,536)
(227,473)
39,924
(187,549)
(1,536)
—
(1,536)
(13,822)
—
(13,822)
(25,271)
—
(25,271)
(54,071)
261
(53,810)
(44,190)
235
(43,955)
(62,653)
10,114
30,256
—
—
10,114
25,432
30,256
—
—
—
25,432
4,643
—
—
—
—
—
(62,653)
4,643
—
$(196,540) $
5,866
$(190,674) $(291,710) $
5,829
$(285,881) $(310,754) $ 39,924
$(270,830)
(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.
(2) Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
54
2017 versus 2016: The net reduction in incurred losses and LAE for the year ended December 31, 2017 of
$190.7 million included net incurred losses and LAE of $5.9 million related to current period net earned premium,
primarily for the portion of the run-off business acquired with Sussex. Excluding current period net incurred losses and
LAE of $5.9 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $196.5 million,
which was attributable to a reduction in estimates of net ultimate losses of $181.3 million, a reduction in provisions for
bad debt of $1.5 million and a reduction in provisions for unallocated LAE of $54.1 million, relating to 2017 run-off
activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies
acquired amounting to $10.1 million and a change in fair value of $30.3 million related to our assumed retroactive
reinsurance agreements with RSA and QBE completed in 2017 and for which we have elected the fair value option.
The reduction of estimates in net ultimate losses for the year ended December 31, 2017 was reduced by amortization
of the deferred charge of $14.4 million. Overall, the reduction in net incurred losses and LAE was lower by $95.2 million
in 2017 compared with 2016, primarily due to experiencing approximately $82.0 million of adverse net loss reserve
development on certain asbestos reserves relating to increases in our estimates of ultimate losses as well as certain
claims judgments.
The reduction in estimates of net ultimate losses relating to prior periods of $181.3 million comprised reductions
in IBNR reserves of $393.1 million partially offset by net incurred loss development of $211.8 million, which includes
amortization of deferred charges of $14.4 million. The decrease in the estimate of net IBNR reserves of $393.1 million
(compared to $349.7 million during the year ended December 31, 2016), comprised a decrease of $70.0 million relating
to asbestos liabilities (compared to an increase of $39.4 million in 2016), an decrease of $7.5 million relating to
environmental liabilities (compared to an increase $35.5 million in 2016), a decrease of $7.2 million relating to general
casualty liabilities (compared to $0.8 million in 2016), a decrease of $156.2 million relating to workers' compensation
liabilities (compared to $333.2 million in 2016) and a decrease of $152.2 million relating to all other remaining liabilities
(compared to $90.6 million in 2016).
The reduction in net IBNR reserves of $393.1 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 59 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
2017, 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 $381.5 million for net paid losses of $578.9 million related to the settlement of non-commuted losses in the year
and 59 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, 2017 amounted to $7.4 million
(comprising $23.2 million of assumed case reserves and LAE reserves, partially offset by $15.8 million of ceded incurred
reinsurance recoverable case reserves).
The reduction in provisions for bad debt of $1.5 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 distributions received
and the reduction of specific provisions held for potential disputes with reinsurers.
2016 versus 2015: The net reduction in incurred losses and LAE in 2016 of $285.9 million included current
period 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 debts
of $13.8 million and a reduction in provision 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 in 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 $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 in $97.7 million in 2015).
55
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 (including the commutation of two of
our top six assumed exposures and one of our top six ceded recoverables). Net advised case and LAE reserves settled
by way of commutation and policy buy-back in 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 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 distributions received, partially offset by additional provisions for
contractual disputes with reinsurers.
Acquisition Costs:
2017 versus 2016: Acquisition costs for the Non-life Run-off segment were $0.3 million in 2017, compared to
$4.2 million in 2016, a decrease of $3.9 million. Acquisition costs in 2017 and 2016 primarily related to net premiums
earned on the Sussex run-off business.
2016 versus 2015: Acquisition costs for the Non-life Run-off segment were $4.2 million in 2016, compared to
$8.9 million for 2015, a decrease of $4.7 million. Acquisition costs in 2016 and 2015 primarily related to net premiums
earned on the portion of the Sussex run-off business.
General and Administrative Expenses:
General and administrative expenses consist of operating expenses and corporate expenses.
2017
Operating expenses
Corporate expenses
General and administrative expenses
$
$
132,235 $
101,592
233,827 $
For Years Ended December 31,
2015
Change
2016
(in thousands of U.S. dollars)
151,316 $
61,583
212,899 $
(19,081) $ 158,821 $
40,009
20,928 $ 213,034 $
54,213
Change
(7,505)
7,370
(135)
2017 versus 2016: General and administrative expenses for the Non-life Run-off segment increased by $20.9
million, from $212.9 million in 2016 to $233.8 million in 2017. The increase in expenses in 2017 related primarily to:
•
•
an increase in performance-based salary and benefits due to higher net earnings of the Non-life Run-off
segment in 2017 compared to 2016;
an increase in bank charges relating to the early repayment of the Sussex Facility and the FAL facility entered
into at the end of 2016; and
•
an increase in professional fees relating to significant new business transactions and projects.
2016 versus 2015: General and administrative expenses for the Non-life Run-off segment decreased by $0.1
million from $213.0 million in 2015 to $212.9 million in 2016.
Fees and Commission Income:
2017 versus 2016: Our management companies in the Non-life Run-off segment earned fees and commission
income of $43.8 million and $17.4 million in 2017 and 2016, respectively, an increase of $26.4 million. This increase
primarily resulted from a $13.6 million increase in profit commission and fee income earned from 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. We also earned an additional $2.6 million of fee income in 2017 from a new third-
56
party run-off management engagement. The remaining increase is derived from additional fees earned from existing
third-party clients. 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. These internal fees are
eliminated upon consolidation of our results of operations.
2016 versus 2015: Our management companies in the Non-life Run-off segment earned fees and commission
income of $17.4 million and $22.3 million in 2016 and 2015, respectively, this decrease being a result of lower fee
income earned from our third-party clients. 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. These internal fees are eliminated upon consolidation of our results of operations.
Other Income:
2017 versus 2016: Other income was $27.1 million in 2017, compared to $2.5 million in 2016. The increase of
$24.6 million is primarily attributable to an increase in our share of the net earnings of our equity method investees
and an increase in recoveries of other assets.
2016 versus 2015: Other income was $2.5 million in 2016, compared to $29.3 million in 2015. The decrease
of $26.8 million is primarily attributable to a reduction in recoveries of other assets in 2016.
Interest Expense:
2017 versus 2016: Interest expense was $29.0 million in 2017, compared to $22.3 million in 2016, an increase
of $6.7 million. The increase in interest expense was primarily due to the issuance of Senior Notes in the first quarter
of 2017.
2016 versus 2015: Interest expense was $22.3 million in 2016, compared to $33.6 million in 2015, a decrease
of $11.3 million, primarily attributable to a reduction in intra-group loan balances in 2016.
Net Foreign Exchange Losses
2017 versus 2016: Net foreign exchange losses for the Non-life Run-off segment were $7.3 million in 2017
compared to net foreign exchange gains of $1.7 million in 2016. The change of $9.0 million in net foreign exchange
losses in 2017 arose primarily as a result of changes in exchange rates and the resulting impact on our foreign currency
denominated investments and subsidiaries, which is partially offset by the change in currency translation adjustment
in the consolidated statement of comprehensive income.
2016 versus 2015: Net foreign exchange gains for the Non-life Run-off segment were $1.7 million in 2016,
compared to net foreign exchange losses of $4.4 million in 2015. The change of $6.1 million is primarily a result of
holding more 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, in 2016 and 2015, respectively. In 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. In
2016 and 2015, 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.
Income Taxes:
2017 versus 2016: We recorded an income tax benefit of $7.0 million for our Non-life Run-off segment in 2017,
compared to an income tax expense of $28.6 million in 2016, a change of $35.6 million. The effective tax rate was
(2.0)% in 2017 compared with 9.3% in 2016. The valuation allowance was decreased in relation to (i) the decrease of
the deferred tax asset due to the reduction in the U.S. income tax rate from 35% to 21%, (ii) the current year utilization
of deferred tax assets, partially offset by an increase relating to deferred tax assets for which we have deemed are
not likely to be realized. In addition our tax rate was impacted by U.S. Tax Reform resulting in a tax benefit of $5.7
million, as well as having proportionately lower net income in our tax paying subsidiaries in 2017 than in 2016. 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
57
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.
2016 versus 2015: Income tax expense for our Non-life Run-off segment was $28.6 million in 2016, compared
to $12.6 million in 2015, a change of $16.0 million. The effective tax rate was 9.3% for 2016, compared to 7.6% in
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 United States.
Noncontrolling Interest:
2017 versus 2016: Net earnings attributable to noncontrolling interest in our Non-life Run-off segment were
$14.7 million in 2017, compared to $17.6 million in 2016, a decrease of $2.9 million. The decrease of $2.9 million in
2017 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 remained unchanged at two as at December 31,
2017 and December 31, 2016.
2016 versus 2015: Net earnings attributable to noncontrolling interest in our Non-life Run-off segment was $17.6
million in 2016, compared to the net loss attributable to noncontrolling interest of $33.7 million in 2015. The change
of $51.3 million in net earnings attributable to noncontrolling interest in 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 two as at December 31, 2016 and 2015.
58
Atrium Segment
The Atrium segment includes Atrium 5 Ltd. ("Atrium 5"), Atrium Underwriters Limited ("AUL") and Northshore
Holdings Limited. 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.
Northshore Holdings Limited results include the amortization of intangible assets that were fair valued upon acquisition.
The following is a discussion and analysis of the results of operations for our Atrium segment for the years ended
December 31, 2017, 2016 and 2015, which are summarized below.
For Years Ended December 31,
2017
2016
Change
2015
Change
Gross premiums written
$ 153,472
(in thousands of U.S. dollars)
$ 10,302
$ 149,082
$ 143,170
$ (5,912)
Net premiums written
$ 134,214
$ 140,437
$ (6,223)
$ 134,580
$
5,857
Net premiums earned
Net incurred losses and LAE
Acquisition costs
Operating expenses
Underwriting income
Net investment income
Net realized and unrealized gains
(losses)
Fees and commission income
Other income
Corporate expenses
Interest expense
Net foreign exchange losses
EARNINGS BEFORE INCOME
TAXES
INCOME TAXES
NET EARNINGS FROM
CONTINUING OPERATIONS
Net earnings attributable to
noncontrolling interest
NET EARNINGS ATTRIBUTABLE
TO ENSTAR GROUP LIMITED
Underwriting ratios:
Loss ratio (1)
Acquisition cost ratio (1)
Operating expense ratio (1)
Combined ratio (1)
$ 134,747
(69,419)
(47,688)
(17,444)
196
4,218
1,117
22,788
230
(12,142)
(559)
(5,060)
10,788
(1,593)
$ 124,416
$ 10,331
$ 134,675
$ (10,259)
(58,387)
(44,670)
(14,233)
7,126
2,940
(601)
18,189
206
(10,899)
(198)
(3,310)
13,453
(2,573)
(11,032)
(3,018)
(3,211)
(6,930)
1,278
1,718
4,599
24
(1,243)
(361)
(1,750)
(2,665)
980
(47,479)
(45,509)
(18,499)
23,188
2,225
(10,908)
839
4,266
(16,062)
715
252
(853)
28,352
(10,163)
359
(13,111)
(4,264)
(153)
2,212
4,066
(213)
(3,097)
36,788
(5,968)
(23,335)
3,395
9,195
10,880
(1,685)
30,820
(19,940)
(3,772)
(4,464)
692
(14,262)
9,798
$
5,423
$
6,416
$
(993)
$ 16,558
$ (10,142)
51.5%
35.4%
13.0%
99.9%
46.9%
35.9%
11.5%
94.3%
4.6 %
(0.5)%
1.5 %
5.6 %
35.3%
33.8%
13.7%
82.8%
11.6 %
2.1 %
(2.2)%
11.5 %
(1)Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
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.
59
The higher combined ratio in 2017 is primarily due to increases in the net loss and operating expense ratios.
The increase in the net loss ratio is primarily attributable to the large losses in 2017, namely those attributable to
hurricanes Harvey, Irma and Maria, which have impacted the current year loss experience. The impact of these losses
on the net loss ratio has been reduced by higher favorable prior year loss development in 2017 as compared to 2016.
The increase in the operating expense ratio is primarily attributable to profit-related expenses arising on favorable prior
year loss development.
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, 2017, 2016 and 2015:
Marine, Aviation and Transit (1)
Binding Authorities (2)
Reinsurance
Accident and Health
Non-Marine Direct and Facultative
Total
Years Ended December 31,
2017
2016
Change
2015
Change
(in thousands of U.S. dollars)
$
35,105
$
38,920
$
(3,815) $
49,332
$
(10,412)
65,990
19,730
17,364
15,283
60,238
14,223
14,371
15,418
5,752
5,507
2,993
(135)
52,920
15,589
14,919
16,322
7,318
(1,366)
(548)
(904)
$
153,472
$
143,170
$
10,302
$
149,082
$
(5,912)
(1) The Marine, Aviation and Transit line of business includes marine, upstream energy, aviation and terrorism lines previously disclosed as
separate lines of business.
(2) The Binding Authorities line of business includes Liability and Property & Casualty Binding Authorities lines previously disclosed as
separate lines of business.
See below for a discussion of the drivers of the increase in net premiums earned for 2017 as compared with
2016, which also explain the increase in gross premium written for the same periods.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the Atrium segment for the years ended
December 31, 2017, 2016 and 2015:
Marine, Aviation and Transit (1)
Binding Authorities (2)
Reinsurance
Accident and Health
Non-Marine Direct and Facultative
Total
Years Ended December 31,
2017
2016
Change
2015
Change
(in thousands of U.S. dollars)
$
29,234
$
33,657
$
(4,423) $
44,293
$
(10,636)
60,293
16,173
15,777
13,270
54,048
11,443
12,196
13,072
6,245
4,730
3,581
198
49,172
14,475
12,603
14,132
4,876
(3,032)
(407)
(1,060)
$
134,747
$
124,416
$
10,331
$
134,675
$
(10,259)
(1) The Marine, Aviation and Transit line of business includes marine, upstream energy, aviation and terrorism lines previously disclosed as
separate lines of business.
(2) The Binding Authorities line of business includes Liability and Property & Casualty Binding Authorities lines previously disclosed as
separate lines of business.
2017 versus 2016: Net premiums earned for the Atrium segment were $134.7 million in 2017, compared to
$124.4 million in 2016, an increase of $10.3 million. The increase of $10.3 million was seen across all lines of business
in 2017 except marine, aviation and transit. The premium increase for the binding authorities line reflects the continued
growth of international professional liability business due to new underwriters hired in recent years, as well as the
continued success of AU Gold, Atrium's proprietary online underwriting platform. New business has been written by
60
property reinsurance underwriters who joined Atrium during 2016. Offsetting these increases was a reduction in
premium for the marine, aviation and transit class, where continued pressure on premium rates and terms and conditions
led to the non-renewal of certain business in order to maintain underwriting discipline.
2016 versus 2015: Net premiums earned for the Atrium segment were $124.4 million in 2016, compared to
$134.7 million in 2015, a decrease of $10.3 million. The decrease of $10.3 million in 2016 was primarily due to the
non-renewal of certain business that no longer met our underwriting standards, particularly in the marine, aviation and
transit and reinsurance lines. We saw continued pressure on premium rates and terms and conditions due to
overcapacity in many markets for insurable risks. We continued to focus on risk selection and underwriting for
profitability. These premium decreases were partially offset by the increase in the binding authorities lines, which
reflects the continued success of AU Gold, Atrium's proprietary online underwriting platform.
Net Incurred Losses and LAE:
2017 versus 2016: Net incurred losses and LAE were $69.4 million in 2017, compared to $58.4 million in 2016,
an increase of $11.0 million. Net favorable loss development in 2017 and 2016 was $20.9 million and $13.0 million,
respectively. Net favorable loss development in 2017 and 2016 was experienced across most lines of business.
Excluding prior year loss development, net incurred losses and LAE in 2017 and 2016 were $90.4 million and $71.4
million, respectively. The losses in 2017 included $18.5 million in respect of the large catastrophe events that occurred
in the third quarter of 2017, primarily hurricanes Harvey, Irma and Maria. Excluding the large catastrophe events the
current year losses were $71.9 million in 2017, broadly consistent with 2016. The large catastrophe events impacted
the binding authorities, non-marine direct and facultative and reinsurance lines of business.
2016 versus 2015: Net incurred losses and LAE were $58.4 million in 2016, compared to $47.5 million in 2015,
an increase of $10.9 million. Net favorable loss development in 2016 and 2015 was $13.0 million and $21.9 million,
respectively. Net favorable loss development in 2016 was experienced across most lines of business. Net favorable
loss development in 2015 primarily related to the professional indemnity, aviation, marine and upstream energy lines
of business. Excluding net favorable prior year loss development, net incurred losses and LAE in 2016 and 2015 were
$71.4 million and $69.4 million, respectively. The increase of $2.0 million in net incurred losses and LAE, excluding
prior year loss development, was primarily due to notable 2016 losses in the terrorism and aviation lines, compared
to a lower level of losses in 2015.
Acquisition Costs:
2017 versus 2016: Acquisition costs were $47.7 million in 2017, compared to $44.7 million in 2016, an increase
of $3.0 million. The Atrium acquisition cost ratios for 2017 and 2016 were 35.4% and 35.9%, respectively, a decrease
of 0.5%. The decrease in the ratio was primarily due to changes in the business mix.
2016 versus 2015: Acquisition costs were $44.7 million in 2016, compared to $45.5 million in 2015, a decrease
of $0.8 million. The acquisition cost ratios in 2016 and 2015 were 35.9% and 33.8%, respectively, an increase of 2.1%.
The increase of 2.1% in the ratio was primarily due to less premium written in lines of business with lower acquisition
ratios.
Operating Expenses:
2017 versus 2016: Operating expenses for the Atrium segment were $17.4 million in 2017, compared to $14.2
million in 2016, an increase of $3.2 million. The increase of $3.2 million in 2017 primarily relates to profit commission
payable to AUL and bonus costs which are based on the Lloyd’s year of account results. These results are being driven
by the favorable prior year loss development, which is greater in 2017 compared to 2016.
2016 versus 2015: Operating expenses for the Atrium segment were $14.2 million in 2016, compared to $18.5
million in 2015, a decrease of $4.3 million. The decrease of $4.3 million in 2016 primarily relates to lower bonus accruals
resulting from lower net earnings in 2016 compared to 2015 as well as the foreign exchange impact of the stronger
U.S. dollar in 2016 compared with 2015.
Fees and Commission Income:
2017 versus 2016: Fees and commission income was $22.8 million in 2017, compared to $18.2 million in 2016,
an increase of $4.6 million. 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 of $4.6 million in 2017 is
primarily due to profit commission on higher syndicate profits arising on the prior year underwriting profits in 2017 as
compared with 2016.
61
2016 versus 2015: Fees and commission income was $18.2 million in 2016, compared to $28.4 million in 2015,
a decrease of $10.2 million. The decrease of $10.2 million in 2016 was primarily due to 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.
Corporate Expenses:
2017 versus 2016: Corporate expenses for the Atrium segment were $12.1 million in 2017, a $1.2 million increase
over $10.9 million in 2016.
2016 versus 2015: Corporate expenses for the Atrium segment were $10.9 million in 2016, compared to $13.1
million in 2015, a decrease of $2.2 million. The decrease of $2.2 million in 2016 primarily relates to the Atrium employee
share schemes as well as reduced costs for legal and professional fees.
Interest Expense:
2017 versus 2016: Interest expense was $0.6 million in 2017, broadly consistent with $0.2 million in 2016.
2016 versus 2015: Interest expense was $0.2 million in 2016, compared to $4.3 million in 2015, a decrease of
$4.1 million. The $4.3 million in interest expense in 2015 was in respect of borrowings under the Enstar revolving credit
facility.
Net Foreign Exchange Losses
2017 versus 2016: Net foreign exchange losses for the Atrium segment were $5.1 million in 2017 compared to
$3.3 million in 2016. The net foreign exchange losses in 2017 resulted primarily from recognizing realized losses on
the foreign currency available for sale investment portfolio, that were mostly reclassified from accumulated other
comprehensive income.
2016 versus 2015: Net foreign exchange losses for the Atrium segment were $3.3 million in 2016 compared to
$0.2 million in 2015. Net foreign exchange losses in 2016 resulted primarily from recognizing realized losses on the
foreign currency available for sale investment portfolio, that were mostly reclassified from accumulated other
comprehensive income.
Income Taxes:
2017 versus 2016: We recorded income tax expense of $1.6 million in 2017, compared to $2.6 million in 2016,
a decrease of $1.0 million, primarily due to lower earnings in the Atrium segment. 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 in 2017
and 2016 were 14.8% and 19.1%, respectively.
2016 versus 2015: We recorded income tax expense of $2.6 million in 2016, compared to $6.0 million in 2015,
a decrease of $3.4 million, primarily due to lower earnings in the Atrium segment. The effective tax rates for the Atrium
segment in 2016 and 2015 were 19.1% and 16.2%, respectively.
Noncontrolling Interest:
2017 versus 2016: Net earnings attributable to noncontrolling interest in our Atrium segment were $3.8 million
in 2017, compared to $4.5 million in 2016, a change of $0.7 million, primarily due to lower earnings in the Atrium
segment. As of December 31, 2017, Trident and Dowling had a combined 41.0% noncontrolling interest in the Atrium
segment.
2016 versus 2015: Net earnings attributable to noncontrolling interest in our Atrium segment were $4.5 million
in 2016, compared to $14.3 million in 2015, a change of $9.8 million, primarily due to lower earnings in the Atrium
segment. As of December 31, 2016, Trident and Dowling had a combined 41.0% noncontrolling interest in the Atrium
segment, although their share of net earnings was higher due primarily to the interest expense recorded in the segment.
62
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. StarStone results represent the active
underwriting operations.
The following is a discussion and analysis of the results of operations for the StarStone segment for the years
ended December 31, 2017, 2016 and 2015, which are summarized below.
For Years Ended December 31,
2017
2016
Change
2015
Change
Gross premiums written
$ 895,160
(in thousands of U.S. dollars)
$ 40,461
$ 824,714
$ 854,699
$ 29,985
Net premiums written
$ 464,901
$ 648,036
$(183,135)
$ 628,427
$ 19,609
Net premiums earned
Net incurred losses and LAE
Acquisition costs
Operating expenses
Underwriting income (loss)
Net investment income
Net realized and unrealized gains
(losses)
Fees and commission income
Other income
Interest expense
Net foreign exchange gains (losses)
EARNINGS BEFORE INCOME
TAXES
INCOME TAXES
NET EARNINGS FROM
CONTINUING OPERATIONS
Net earnings attributable to
noncontrolling interest
NET EARNINGS ATTRIBUTABLE
TO ENSTAR GROUP LIMITED
Underwriting ratios:
Loss ratio (1)
Acquisition cost ratio (1)
Operating expense ratio (1)
Combined ratio (1)
$ 459,403
(314,806)
(48,012)
(135,558)
(38,973)
27,706
$ 676,608
(401,593)
(138,822)
(124,239)
11,954
22,221
$(217,205)
86,787
90,810
(11,319)
(50,927)
5,485
$ 573,146
(327,684)
(109,347)
(128,544)
7,571
15,937
$ 103,462
(73,909)
(29,475)
4,305
4,383
6,284
16,613
632
570
(1,902)
(926)
3,720
988
4,708
5,728
5,102
740
(47)
754
10,885
(4,470)
(170)
(1,855)
(1,680)
(9,784)
—
3,088
(6)
480
46,452
(3,693)
(42,732)
4,681
17,286
5,888
15,512
5,102
(2,348)
(41)
274
29,166
(9,581)
42,759
(38,051)
23,174
19,585
(1,882)
(17,542)
15,660
(9,510)
(8,032)
$
2,826
$ 25,217
$ (22,391)
$ 13,664
$ 11,553
68.5%
10.5%
29.5%
108.5%
59.4%
20.5%
18.3%
98.2%
9.1 %
(10.0)%
11.2 %
10.3 %
57.2%
19.1%
22.4%
98.7%
2.2 %
1.4 %
(4.1)%
(0.5)%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Overall Results
The StarStone segment recorded net earnings of $2.8 million in 2017 compared to $25.2 million in 2016, a
decrease of $22.4 million. The decrease was primarily attributable to the third quarter catastrophe losses of $53.4
million for hurricanes Harvey, Irma and Maria, partially offset by improved investment results. The combined ratio
increased to 108.5% in 2017, compared to 98.2% in 2016, primarily due to the hurricanes in the third quarter of 2017.
The catastrophe events contributed 11.7 points to the loss ratio and 11.8 points to the combined ratio. The decrease
in net premiums written and earned is primarily due to the 35% whole account quota share reinsurance arrangement
with KaylaRe, which covers all business written during underwriting years 2016 and 2017. The decrease of 10.0 points
in the acquisition cost ratio is driven by the ceding commission earned on the cession to KaylaRe as described below.
63
The increase of 11.2 percentage points in the operating expense ratio is a result of the combination of an increase in
operating expenses and lower net premiums earned after the reinsurance cession to KaylaRe.
Investment results are separately discussed below in "Investments."
Gross Premiums Written:
The following table provides gross premiums written by line of business for the StarStone segment for the years
ended December 31, 2017, 2016 and 2015:
Years Ended December 31,
2017
2016
Change
2015
Change
Casualty
Marine
Property
Aerospace
Workers' Compensation
Total
$
$
289,274 $
213,754
217,680
65,804
108,648
895,160 $
(in thousands of U.S. dollars)
267,352 $
202,672
21,922 $
11,082
246,956 $
150,828
203,336
68,104
113,235
854,699 $
14,344
(2,300)
(4,587)
236,670
87,703
102,557
40,461 $
824,714 $
20,396
51,844
(33,334)
(19,599)
10,678
29,985
2017 versus 2016: Gross premiums written increased by $40.5 million during 2017 as a result of new business
written in the U.S. and Europe for casualty, marine and property lines. Our largest line of business, casualty, experienced
growth in U.S. excess casualty, partially offset by a reduction in U.S. healthcare resulting from a change in underwriting
strategy. Marine includes diversified lines, with most of the growth in gross premiums written occurring in the marine
cargo line. Our property line experienced the most growth; this was a combination of growth in the international property
business and also includes a new line of business for mortgage reinsurance where we wrote $5.7 million in respect
of two quota share reinsurance treaties covering U.S. mortgages. The aerospace and workers' compensation lines of
business decreased, the latter due to the timing of contract renewals, and some opportunistic business written in 2016
that was not renewed in 2017.
2016 versus 2015: Gross 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. Gross premiums
written in both our property and aerospace business decreased. Gross 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.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the StarStone segment for the years
ended December 31, 2017, 2016 and 2015:
Years Ended December 31,
2017
2016
Change
2015
Change
Casualty
Marine
Property
Aerospace
Workers' Compensation
$
172,209 $
117,864
(in thousands of U.S. dollars)
226,330 $
162,333
(54,121) $
(44,469)
187,984 $
116,127
96,757
30,148
42,425
132,927
66,937
88,081
(36,170)
(36,789)
(45,656)
114,589
75,515
78,931
38,346
46,206
18,338
(8,578)
9,150
Total
$
459,403 $
676,608 $ (217,205) $
573,146 $
103,462
64
2017 versus 2016: Net premiums earned for the StarStone segment were $459.4 million in 2017, compared to
$676.6 million in 2016, a decrease of $217.2 million. The decrease of $217.2 million in 2017 was primarily attributable
to the 35% whole account quota share reinsurance cession to KaylaRe which covers all business written during
underwriting years 2016 and 2017. The amount ceded to KaylaRe was $233.9 million. Excluding the amount ceded
to KaylaRe, net premiums earned increased by $16.7 million. The increase was driven by casualty, marine and property,
while aerospace and workers' compensation decreased in line with decreases in current and prior year decreases in
gross premiums written.
2016 versus 2015: Net premiums earned for the StarStone segment were $676.6 million in 2016, compared to
$573.1 million in 2015, an increase of $103.5 million. The increase of $103.5 million in 2016 was primarily due to
growth in the marine, casualty, property and workers' compensation lines of business.
Net Incurred Losses and LAE:
2017 versus 2016: Net incurred losses and LAE were $314.8 million in 2017, compared to $401.6 million in
2016, a decrease of $86.8 million. The movement for 2017 includes $53.4 million of net incurred losses in respect of
the large catastrophe events that occurred in the third quarter of 2017, for hurricanes Harvey, Irma and Maria. Excluding
these large catastrophe events, the movement was a decrease of $139.8 million. The decrease is primarily due to
business ceded to KaylaRe under the 35% quota share cession for underwriting years 2016 and 2017. The loss ratio
for 2017 was 68.5% (or 56.8% excluding the impact of the catastrophe losses), compared to a loss ratio of 59.4% in
2016. Excluding net prior year loss development, net incurred losses and LAE were $341.6 million in 2017, compared
to $415.8 million in 2016.
Net favorable prior year loss development in 2017 was $26.8 million, compared to $14.2 million in 2016. Net
favorable prior year loss development in 2017 was primarily related to U.S. excess casualty and workers’ compensation.
Net favorable prior year loss development in 2016 was primarily related to marine liability, offshore and terrorism.
2016 versus 2015: Net incurred losses and LAE were $401.6 million in 2016, compared to $327.7 million in
2015, an increase of $73.9 million. Excluding net prior year loss development, net incurred losses and LAE in 2016
were $415.8 million, compared to $367.0 million in 2015.
Net favorable prior year loss development in 2016 was $14.2 million, compared to $39.4 million in 2015. Net
favorable prior year loss development in 2016 was primarily related to marine liability, offshore and terrorism. Net
favorable prior year loss development in 2015 was primarily related to construction, general property and terrorism.
Acquisition Costs:
2017 versus 2016: Acquisition costs of the StarStone segment were $48.0 million in 2017, compared to $138.8
million in 2016, a decrease of $90.8 million. The decrease of $90.8 million in 2017 was primarily due to the ceding
commission of $99.5 million earned on the KaylaRe quota share reinsurance contract. The acquisition cost ratios for
2017 and 2016 were 10.5% and 20.5%, respectively. The ratio decreased by 10.0% in 2017 compared to 2016, primarily
due to the ceding commission earned discussed above. Excluding the impact of the KaylaRe ceding commission, the
acquisition cost ratio was 21.2%, which is a slight increase on the prior year ratio of 20.5%.
2016 versus 2015: Acquisition costs of the StarStone segment were $138.8 million in 2016, compared to $109.3
million in 2015, an increase of $29.5 million. The increase of $29.5 million in 2016 was primarily due to an increase of
$103.5 million in net premiums earned. The acquisition cost ratio was 20.5% in 2016, compared to 19.1% in 2015,
an increase of 1.4%. The increase was 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 a lower acquisition cost ratio.
Operating Expenses:
2017 versus 2016: Operating expenses were $135.6 million in 2017, compared to $124.2 million in 2016, an
increase of $11.3 million. The increase of $11.3 million in 2017 was primarily due to an increase in compensation costs
in respect of additional headcount for our growth strategies in certain lines of business, and the prior year included
the impact of favorable foreign exchange rates.
2016 versus 2015: Operating expenses were $124.2 million in 2016, compared to $128.5 million in 2015, a
decrease of $4.3 million. The 2016 decrease in operating expenses was partially due to favorable foreign exchange
movement in the U.S. Dollar, resulting in a reduction in expenses in the United Kingdom and Continental Europe in
U.S. dollar terms, partially offset by an increase in valuation of stock appreciation right awards outstanding in 2016 as
a result of the increase in our share price.
65
Fees and Commission Income:
2017 versus 2016: Fees and commission income was $0.6 million in 2017, compared to $5.1 million in 2016,
a decrease of $4.5 million. Fees and commission income for the years ended December 31, 2017 and 2016 primarily
represents income related to the KaylaRe cession, 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.
2016 versus 2015: Fees and commission income was $5.1 million in 2016, compared to $nil in 2015, an increase
of $5.1 million. The increase of $5.1 million in 2016 was primarily due to the KaylaRe cession, 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.
Other Income:
2017 versus 2016: Other income was $0.6 million in 2017, broadly consistent with $0.7 million in 2016.
2016 versus 2015: Other income was $0.7 million in 2016, compared to $3.1 million in 2015, a decrease of $2.3
million, primarily due to higher amortization of acquisition-related fair value adjustments being incurred in 2015 after
the acquisition of StarStone by Enstar.
Interest Expense:
2017 versus 2016: Interest expense was $1.9 million in 2017, compared to $nil in 2016, an increase of $1.9
million. The increase of $1.9 million was due to interest charged by KaylaRe in respect of the whole account quota
share which is on a funds-withheld basis.
2016 versus 2015: Interest expense in 2016 was immaterial and broadly consistent with 2015.
Net Foreign Exchange Gains (Losses):
2017 versus 2016: Net foreign exchange losses of $0.9 million in 2017, compared to net foreign exchange gains
of $0.8 million in 2016, a change of $1.7 million. The net foreign exchange losses were primarily driven by movements
in the British Pound and Euro exchange rates against the U.S. Dollar, net of currency matching and hedging activities.
2016 versus 2015: Net foreign exchange gains of $0.8 million in 2016 were broadly consistent with net foreign
exchange gains of $0.5 million in 2015.
Income Taxes:
2017 versus 2016: We recorded an income tax benefit of $1.0 million in 2017, compared to an income tax
expense of $3.7 million in 2016, a change of $4.7 million. The income tax benefit in 2017 was primarily due to the
recognition of deferred tax assets in the U.S. resulting from changes to our U.S. reinsurance program following U.S.
tax reform. The income tax expense in 2016 primarily related to corporation tax in our U.S. entities, offset by lower
U.K corporation tax due to group relief with the Atrium segment.
2016 versus 2015: We recorded an income tax expense of $3.7 million in 2016, compared to an income tax
benefit of $5.9 million in 2015, a change of $9.6 million. The income tax expense in 2016 primarily related to corporation
tax in our U.S. entities, offset by lower U.K corporation tax due to group relief with the Atrium segment. The income
tax benefit in 2015 was attributable to a reduction in valuation allowances in the U.S and the result of tax loss offsets
in the UK.
Noncontrolling Interest:
2017 versus 2016: Net earnings attributable to noncontrolling interest were $1.9 million in 2017, compared to
$17.5 million in 2016, a change of $15.7 million, primarily due to the large catastrophe events in the third quarter of
2017, hurricanes Harvey, Irma, and Maria, which resulted in lower net earnings in 2017, compared to net earnings in
2016.
2016 versus 2015: Net earnings attributable to noncontrolling interest were $17.5 million in 2016, compared to
$9.5 million in 2015, a change of $8.0 million, primarily as a result of increased earnings in the StarStone entities in
2016 compared to 2015.
66
Other
Our other activities, which do not qualify as a reportable segment, include our corporate expenses, debt servicing
costs, holding company income and expenses, foreign exchange, our remaining life business and other miscellaneous
items. The presentation of the results of our other activities reflect the classification of Pavonia as discontinuing
operations and held-for-sale. Following the sale of Pavonia and Laguna, we no longer have any annuity products and
our continuing life business will comprise of term life products in Alpha Insurance SA and the life settlements business.
The following is a discussion and analysis of our results of operations for our other activities for the years ended
December 31, 2017, 2016 and 2015, which are summarized below.
For Years Ended December 31,
2017
2016
Change
2015
Change
4,809 $
(4,015)
(878)
(84)
10,187
(6,941)
(1,166)
648
(37,014)
3,329
(4,204)
(16,349)
(51,594)
10
(in thousands of U.S. dollars)
5,735 $
(926) $
1,554 $
2,038
1,121
8,894
15,065
(4,994)
(1,374)
1,393
(61,464)
1,871
207
—
(6,053)
(1,999)
(8,978)
(4,878)
(1,947)
208
(745)
24,450
1,458
(4,411)
(16,349)
(40,402)
(11,192)
(31)
41
546
—
2,100
15,403
(608)
(11,269)
(2,413)
(15,971)
18,466
732
—
6,440
—
4,181
1,492
1,121
6,794
(338)
(4,386)
9,895
3,806
(45,493)
(16,595)
(525)
—
(46,842)
(31)
(51,584)
(40,433)
(11,151)
6,440
(46,873)
10,993
11,963
(970)
(2,031)
13,994
$
(40,591) $
(28,470) $
(12,121) $
4,409 $
(32,879)
Net premiums earned
$
Life and Annuity Policy Benefits
Acquisition costs
Underwriting income (loss)
Net investment income
Net realized and unrealized losses
Fees and commission income (expense)
Other income (expense)
Corporate expenses
Interest expense
Net foreign exchange gains (losses)
Loss on sale of subsidiary
EARNINGS (LOSSES) BEFORE
INCOME TAXES
INCOME TAXES
NET EARNINGS (LOSSES) FROM
CONTINUING OPERATIONS
NET EARNINGS (LOSSES) FROM
DISCONTINUING OPERATIONS, NET
OF INCOME TAX EXPENSE
NET EARNINGS (LOSSES)
ATTRIBUTABLE TO ENSTAR GROUP
LIMITED
Overall Results:
Net losses were $40.6 million for 2017 and $28.5 million for 2016, an increase in net losses of $12.1 million which
primarily resulted from a loss on sale of our Laguna subsidiary of $16.3 million, a $9.0 million decrease in underwriting
income from our remaining Life business and a $4.9 million decrease in net investment income, partially offset by a
$15.8 million decrease in stock compensation expense which was higher in 2016 due to the valuation of stock
appreciation right awards due to an increase in the share price.
Net losses were $28.5 million in 2016 compared to net earnings of $4.4 million in 2015, a change in net losses
of $32.9 million, primarily due to an increase in stock compensation expense of $18.3 million as described above, and
$5.3 million of impairment charges on investments in life settlements in 2016 compared to $nil in 2015.
For 2017, 2016 and 2015, the contribution to net earnings from our Pavonia life and annuities business, classified
as discontinuing operations, was $11.0 million, $12.0 million and $(2.0) million, respectively. For further information
refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations" in the Consolidated Financial
Statements within Item 8 of this Annual Report on Form 10-K.
Investment results are separately discussed below in "Investments."
67
Underwriting Income:
2017 versus 2016: Underwriting loss was $0.1 million in 2017, compared to underwriting income of $8.9 million
in 2016, a decrease of $9.0 million which primarily results from a $7.2 million decrease in underwriting income in
respect of our life businesses, Alpha and Laguna.
2016 versus 2015: Underwriting income was $8.9 million in 2016, compared to $2.1 million in 2015, an increase
of $6.8 million which primarily results from a $5.1 million increase in underwriting income in respect of Alpha and
Laguna.
Fees and Commission Income:
2017 versus 2016: Fee and commission expense was $1.2 million in 2017, which is broadly consistent with an
expense of $1.4 million in 2016.
2016 versus 2015: Fee and commission expense was $1.4 million in 2016, compared to an expense of $11.3
million in 2015, a change of $9.9 million, primarily due to 2015 including the impact of the elimination of certain
transactions between reportable segments that did not reoccur in 2016.
Corporate Expenses:
2017 versus 2016: Corporate expenses were $37.0 million in 2017, compared to $61.5 million in 2016, a
decrease of $24.5 million. The decrease is primarily due to a $15.8 million decrease in stock compensation expense
which was higher in 2016 due to the valuation of stock appreciation right awards due to an increase in the share price.
2016 versus 2015: Corporate expenses were $61.5 million in 2016, compared to $16.0 million in 2015, an
increase of $45.5 million. The increase is primarily due to an increase in stock compensation expense of $18.3 million
in 2016 as described above, and other non-recurring corporate expenses.
Interest Expense:
2017 versus 2016: Interest income was $3.3 million in 2017, reflected on the interest expense line, compared
to $1.9 million in 2016, a decrease of $1.5 million. This represents the elimination of interest expense between our
reportable segments.
2016 versus 2015: Interest income was $1.9 million in 2016, compared to $18.5 million in 2015, a decrease of
$16.6 million. The decrease reflected lower intra-group loan balances following settlement activity.
Net Foreign Exchange Gains (Losses):
2017 versus 2016: Net foreign exchange losses were $4.2 million in 2017, compared to net gains of $0.2 million
in 2016, a change of $4.4 million which primarily resulted from foreign exchange losses realized by certain of our Life
subsidiaries whose functional currency is the Euro, and who were holding more U.S. dollar assets than U.S. dollar
liabilities and who consequently recognized a foreign exchange loss at a time when the U.S. dollar depreciated against
the Euro. We manage our foreign currency risk on a consolidated basis by seeking to match our liabilities that are
payable in foreign currencies with assets that are denominated in such currencies.
2016 versus 2015: Net foreign exchange gains were $0.2 million in 2016, broadly consistent with net gains of
$0.7 million in 2015.
Loss of Sale on Subsidiary and Net Earnings (Losses) from Discontinued Operations, Net of Tax:
During 2017 we sold our wholly-owned Irish life subsidiary Laguna and recorded a loss on sale of $16.3 million.
For 2017, 2016 and 2015, the contribution to net earnings from our Pavonia life and annuities business, classified
as discontinuing operations, was $11.0 million, $12.0 million and $(2.0) million, respectively.
For further information refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations"
in the Consolidated Financial Statements within Item 8 of this Annual Report on Form 10-K.
68
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. Assets held-
for-sale are excluded from our definition of investable assets.
Investable assets were $9.8 billion as at December 31, 2017 as compared to $8.4 billion as at December 31,
2016, an increase of 16.1%. The increase was primarily due to the investments and funds held balance acquired in
relation to the QBE and RSA transactions.
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 investment portfolios that are shorter
duration than the liabilities 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, CLO equity funds and private credit funds.
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 2017 were $7.5 million,
including $1.3 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."
69
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. Our remaining life subsidiary did not qualify as a reportable segment and is reflected as Other
below. 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, 2017 and 2016:
December 31, 2017
Non-life
Run-off
Atrium
StarStone
Other
Total
(in thousands of U.S. dollars)
Short-term investments, trading, at fair value
$
165,388
$
2,452
$
12,371
$
— $
180,211
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 (including restricted cash
and cash equivalents)
Funds held - directly managed
Funds held by reinsured companies
Total investable assets
Duration (in years)
Average credit rating (1)
1,181,896
—
5,696,073
4,407,094
44
97,187
732,482
—
107,083
79,246
2,671
6,523
—
—
6,745
159,239
—
5,402,195
197,975
1,360,251
868,243
1,179,940
133,731
51,500
—
26,646
264,664
—
15,006
130,995
—
15,148
125,621
271,764
28,429
—
—
210,285
106,603
913,392
125,621
7,232,185
1,212,836
1,179,940
175,383
$
7,584,109
$
276,121
$
1,639,921
$
300,193
$
9,800,344
5.67
A+
Non-life
Run-off
1.86
AA-
2.33
AA+
5.52
AA-
4.98
A+
Atrium
StarStone
Other
Total
December 31, 2016
(in thousands of U.S. dollars)
Short-term investments, trading, at fair value
$
201,188
$
7,938
$
6,160
$
7,632
$
222,918
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 (including restricted cash
and cash equivalents)
Funds held - directly managed
Funds held by reinsured companies
Total investable assets
Duration (in years)
Average credit rating (1)
—
3,144,811
3,108
88,481
783,857
—
268
13,320
142,562
—
—
—
—
1,199,460
—
6,566
153,190
—
4,221,445
164,088
1,365,376
—
30,651
121,829
—
—
131,651
291,763
268
4,388,242
267,499
95,047
937,047
131,651
6,042,672
912,016
994,665
48,525
83,548
—
22,883
295,341
—
10,665
27,740
1,318,645
—
—
994,665
82,073
$
6,176,651
$
270,519
$
1,671,382
$
319,503
$
8,438,055
2.68
AA-
1.20
AA
2.31
AA-
2.58
AA-
2.56
AA-
(1) Included in the calculation are the credit ratings of cash and cash equivalents, short-term investments, fixed maturities and funds held -
directly managed at December 31, 2017 and 2016.
As at December 31, 2017 and 2016, our investment portfolio, including funds held - directly managed had an
average credit quality rating of A+ and AA-respectively. As at December 31, 2017 and 2016, our fixed maturity
investments rated lower than BBB- comprised 5.4% and 3.7% of our total investment portfolio, respectively. A detailed
schedule of average credit ratings by asset class as at December 31, 2017 is 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.
70
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.
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, 2017 and 2016:
AAA
Rated
AA Rated
A Rated
December 31, 2017
Fair Value
BBB
Rated
Non-
investment
Grade
Not Rated
Total
%
(in thousands of U.S. dollars, except percentages)
7.7%
9.6%
Fixed maturity and short-
term investments, trading
and available-for-sale
U.S. government & agency
$ 556,859
$
1,364
$
— $
— $
— $
— $ 558,223
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-
backed
Asset-backed
134,619
123,059
26,313
166,386
222,656
272,784
409,315
79,030
62,964
6,641
—
692,569
375,252
1,854,503
932,238
188,237
4,892
3,478,181
48.1%
62,605
7,425
38,176
43,539
12,864
14,204
77,811
68,489
3,575
678
59,358
69,116
—
98,997
9,555
88,019
—
1,054
13,992
—
105,357
288,744
421,548
541,947
1.5%
4.0%
5.8%
7.4%
Total
Equities
U.S.
International
Total
Other investments
Private equity funds
Fixed income funds
Fixed income hedge funds
Equity funds
CLO equities
CLO equity funds
Private credit funds
Other
Total
Other investments
Life settlements
1,502,676
937,676
2,106,901
1,127,929
391,449
19,938
6,086,569
84.1%
106,363
240
106,603
289,556
229,999
63,773
249,475
56,765
12,840
10,156
828
1.5%
—%
1.5%
4.0%
3.2%
0.9%
3.4%
0.8%
0.2%
0.1%
—%
913,392
12.6%
131,896
1.8%
Total investments
$ 1,502,676
$ 937,676
$ 2,106,901
$ 1,127,929
$
391,449
$
19,938
$ 7,238,460
100.0%
71
AAA
Rated
AA Rated
A Rated
December 31, 2016
Fair Value
BBB
Rated
Non-
investment
Grade
Not Rated
Total
%
(in thousands of U.S. dollars, except percentages)
465,224
1,199,452
615,538
149,898
10,784
2,545,977
42.2%
Fixed maturity and short-
term investments, trading
and available-for-sale
U.S. government & agency
$ 846,698
$
6,286
$
— $
— $
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-
backed
Asset-backed
140,357
105,081
25,566
370,067
100,065
213,312
150,569
43,771
18,089
25,834
403
41,542
58,322
2,357
3,487
—
—
41,837
114,503
16,383
23,534
1,801,146
748,180
1,405,407
673,544
Total
Equities
U.S.
Total
Other investments
Private equity funds
Fixed income funds
Fixed income hedge funds
Equity funds
CLO equities
CLO equity funds
Other
Total
Other investments
Life settlements
— $
—
— $ 852,984
14.1%
—
352,786
5.8%
—
97
77
72,485
222,557
—
1
17,308
—
53,757
374,055
217,212
482,156
0.9%
6.2%
3.6%
8.0%
28,093
4,878,927
80.8%
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%
—%
937,047
15.5%
129,474
2.1%
Total investments
$ 1,801,146
$ 748,180
$ 1,405,407
$ 673,544
$
222,557
$
28,093
$ 6,040,495
100.0%
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.
72
The following table summarizes the composition of our top ten corporate issuers included within our fixed maturity
and short-term investments as at December 31, 2017:
General Electric Co
Lloyds Banking Group PLC
Apple Inc
Wells Fargo & Co
JPMorgan Chase & Co
Morgan Stanley
National Australia Bank Ltd
Anheuser-Busch InBev SA/NV
Pfizer Inc
Citigroup Inc
Average
Credit
Rating
Fair Value
(in thousands of
U.S. dollars)
$
96,016
94,008
84,879
74,889
65,225
55,675
51,053
46,942
44,787
44,717
A
A+
AA+
A
A-
A-
A+
A-
A+
A-
$
658,191
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, 2017 and 2016:
December 31, 2017
Fair Value
AAA Rated
AA Rated
A Rated
BBB Rated
Total
%
(in thousands of U.S. dollars, except percentages)
$
69,850
$
—
7,754
—
29,439
202,608
93,849
403,500
—
— $
—
25,418
20,921
—
6,576
3,716
— $
— $
69,850
2,926
315,385
30,449
—
2,002
—
—
346,933
7,560
—
—
—
2,926
695,490
58,930
29,439
211,186
97,565
56,631
350,762
354,493
1,165,386
—
—
—
14,554
5.9%
0.2%
59.0%
5.0%
2.5%
17.9%
8.3%
98.8%
1.2%
Fixed maturity investments:
U.S. government & agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total
Other assets
Total funds held - directly managed
$
403,500
$
56,631
$
350,762
$
354,493
$ 1,179,940
100.0%
73
December 31, 2016
Fair Value
AAA Rated
AA Rated
A Rated
BBB Rated
Total
%
(in thousands of U.S. dollars, except percentages)
$
47,885
$
—
5,549
—
146,429
76,130
275,993
—
— $
—
63,809
12,839
3,015
3,676
83,339
—
— $
— $
47,885
2,913
234,975
26,088
1,951
—
3,048
359,223
—
—
—
265,927
362,271
—
—
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%
Fixed maturity investments:
U.S. government & agency
Non-U.S. government
Corporate
Municipal
Commercial mortgage-backed
Asset-backed
Total
Other assets
Total funds held - directly managed
$
275,993
$
83,339
$
265,927
$
362,271
$
994,665
100.0%
The following table summarizes the composition of our top ten corporate issuers included within our funds held
- directly managed as at December 31, 2017:
Credit Suisse Group AG
Wells Fargo & Co
HSBC Holdings PLC
Citigroup Inc
UBS Group AG
Morgan Stanley
Verizon Communications Inc
JPMorgan Chase & Co
Oracle Corp
UnitedHealth Group Inc
Eurozone Exposure
Average
Credit
Rating
BBB+
A
A
BBB+
A-
A-
BBB+
A-
A+
A-
Fair Value
(in thousands of
U.S. dollars)
$
11,365
11,336
11,212
11,104
11,041
10,981
10,919
10,720
9,996
9,810
$
108,484
As at December 31, 2017 and 2016, we owned $26.9 million and $15.0 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 Note 3 - "Acquisitions" and Note 4 -
"Significant New Business" of our consolidated financial statements included in Item 8 of this Annual Report on Form
10-K.
74
The following table summarizes our consolidated investment results for the years ended December 31, 2017,
2016 and 2015.
2017
2016
Change
2015
Change
(in thousands of U.S. dollars, except percentages)
$ 144,367
$ 114,885
$
29,482
$
87,512
$
27,373
Net investment income:
Fixed maturity investments
Short-term investments and cash and cash
equivalents
Funds held
Funds held – directly managed
Investment income from fixed maturities and
cash and cash equivalents
Equity securities
Other investments
Life settlements and other
9,314
601
32,479
4,491
22,583
5,769
186,761
147,728
4,355
14,337
14,370
4,874
22,515
18,191
Investment income from equities and other
investments
Gross investment income
Investment expenses
Net investment income
33,062
45,580
219,823
(11,034)
$ 208,789
193,308
(7,845)
$ 185,463
$
4,823
(21,982)
26,710
39,033
(519)
(8,178)
(3,821)
(12,518)
26,515
(3,189)
23,326
5,993
234
—
93,739
5,580
11,712
20,871
38,163
131,902
(9,338)
$ 122,564
$
(1,502)
22,349
5,769
53,989
(706)
10,803
(2,680)
7,417
61,406
1,493
62,899
Net realized gains (losses) on sale:
Net realized gains (losses) on fixed maturity
securities
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
Change in value of fair value option on funds held
- directly managed
Total net unrealized gains (losses)
Net realized and unrealized gains (losses)
Investment Book Yield
Income from cash and fixed maturities
Average aggregate fixed maturities and cash and
cash equivalents, at cost (1)
Investment book yield
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value (1)
Financial statement portfolio return
$
5,186
$
2,232
$
2,954
$
(4,025)
$
6,257
701
5,348
(4,647)
19,884
(14,536)
(4,219)
1,668
(14,616)
(7,036)
35,878
16,498
102,388
36,314
6,561
70,296
10,397
8,704
(436)
9,937
32,092
32,928
(28,317)
61,245
974
188,666
$ 190,334
$
—
84,854
77,818
974
103,812
112,516
$
—
15,859
(52,918)
(21,875)
17,411
—
—
(14,616)
(22,895)
89,232
28,436
52,885
(28,317)
—
(57,382)
(41,523)
142,236
119,341
$
$
$ 186,761
$ 147,728
$
39,033
$
93,739
$
53,989
$8,362,062
$ 7,358,424
$ 1,003,638
$ 6,343,967
$ 1,014,457
2.23%
2.01%
0.22%
1.48%
0.53%
$ 399,123
$9,545,415
$ 263,281
$ 8,524,264
135,842
$
$ 1,021,151
81,041
$
$ 7,492,687
182,240
$
$ 1,031,577
4.18%
3.09%
1.09%
1.08%
2.01%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2017 versus 2016: Net investment income from fixed maturities and cash and cash equivalents increased by
$39.0 million during 2017 due to an increase of $1.0 billion in our average fixed maturities and cash and cash equivalents.
The increase in average fixed maturities and cash and cash equivalents was primarily due to the transactions with
RSA and QBE. The book yield increased by 22 basis points primarily due to higher reinvestment rates and an increase
75
in duration. Net investment income from equities and other investments decreased by $12.5 million primarily due to a
decrease in income received from CLO equities and private equity investments.
Net realized and unrealized gains were $190.3 million and $77.8 million in 2017 and 2016, respectively, an
increase of $112.5 million. Included in net realized and unrealized gains are the following items:
•
•
•
•
•
net realized gains of $1.7 million in 2017, compared to net realized losses of $7.0 million in 2016, an increase
of $8.7 million;
net unrealized gains on fixed maturity securities, trading, of $35.9 million in 2017, compared to net unrealized
gains of $36.3 million in 2016, a decrease of $0.4 million, primarily driven by increased treasury yields in the
current year, offset by tightening credit spreads;
net unrealized gains on equity securities, trading, of $16.5 million in 2017, compared to net unrealized gains
of $6.6 million in 2016, an increase of $9.9 million, primarily driven by strong returns in the equity markets in
2017;
change in fair value of other investments of $102.4 million in 2017, compared to change in fair value of other
investments of $70.3 million in 2016, an increase of $32.1 million, primarily driven by higher returns in private
equity and private equity funds, offset by lower returns on CLO equities, CLO equity funds, bond funds and
hedge funds; and
change in fair value of embedded derivative on funds held and change in fair value option on funds held of
$33.9 million in 2017, compared to unrealized losses of $28.3 million in 2016, an increase of $62.2 million,
primarily driven by the impact of tightening credit spreads.
2016 versus 2015: Net investment income from fixed maturities and cash and cash equivalents increased by
$54.0 million during 2016 due to an increase of $1.0 billion in our average fixed maturities and cash and cash equivalents
The book yield increased by 53 basis points due to the changing mix in asset allocation as we executed on our
investment strategies. Net investment income from equities and other investments increased by $7.4 million primarily
due to an increase in the income received from CLO equities and private equity investments.
Net realized and unrealized gains were $77.8 million in 2016 compared to $41.5 million of net realized and
unrealized losses in 2015, an increase of $119.3 million. Included in net realized and unrealized gains and losses are
the following items:
•
•
•
•
•
net realized losses of $7.0 million in 2016, compared to net realized gains of $15.9 million in 2015, a decrease
of $22.9 million;
net unrealized gains on fixed maturity securities, trading, of $36.3 million in 2016, compared to net unrealized
losses of $52.9 million in 2015, an increase of $89.2 million, primarily driven by the impact of tighter credit
spreads;
net unrealized gains on equity securities, trading, of $6.6 million in 2016, compared to net unrealized losses
of $21.9 million in 2015, an increase of $28.4 million, primarily driven by strong returns in the equity markets
in 2016;
change in fair value of other investments of $70.3 million in 2016, compared to change in fair value of other
investments of $17.4 million in 2015, an increase of $52.9 million, primarily driven by higher returns in private
equity funds, equity funds and CLO equities; and
change in fair value of embedded derivative on funds held of $(28.3) million in 2016, compared to $nil in 2015,
a decrease of $28.3 million, primarily driven by the Allianz transaction where we re-positioned the portfolio as
we moved from a fixed crediting rate to a variable rate of return on the underlying investments as at October
1, 2016.
Investment Results - By Segment
The following tables summarize our investment results by segment for the years ended December 31, 2017,
2016 and 2015. These tables have been prepared on a basis consistent with the consolidated table above.
76
Investment income from fixed maturities and
cash and cash equivalents
153,802
119,905
Non-Life Run-off
Net investment income:
Fixed maturity investments
Short-term investments and cash and cash
equivalents
Funds held
Funds held – directly managed
Equity securities
Other investments
Other
Investment income from equities and other
investments
Gross investment income
Investment expenses
Net investment income
Net realized gains (losses) on sale:
Net realized gains (losses) on fixed maturity
securities
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
Change in value of fair value option on funds
held - directly managed
Total net unrealized gains (losses)
2017
2016
Change
2015
Change
(in thousands of U.S. dollars, except percentages)
$ 113,206
$
88,580
$
24,626
$
68,303
$
20,277
7,516
601
32,479
2,973
22,583
5,769
4,234
13,914
3,093
21,241
175,043
4,705
22,159
3,897
30,761
150,666
(8,365)
(5,429)
4,543
(21,982)
26,710
33,897
(471)
(8,245)
(804)
(9,520)
24,377
(2,936)
5,032
234
—
73,569
5,238
10,508
7,093
22,839
96,408
(7,409)
(2,059)
22,349
5,769
46,336
(533)
11,651
(3,196)
7,922
54,258
1,980
$ 166,678
$ 145,237
$
21,441
$
88,999
$
56,238
$
7,631
$
(13)
$
7,644
$
(6,016)
$
6,003
659
4,871
(4,212)
17,298
(12,427)
(4,219)
4,071
(14,616)
(9,758)
28,857
15,171
97,544
36,599
6,063
73,098
10,397
13,829
(7,742)
9,108
24,446
32,928
(28,317)
61,245
974
—
175,474
87,443
974
88,031
—
11,282
(43,631)
(19,445)
20,411
—
—
(14,616)
(21,040)
80,230
25,508
52,687
(28,317)
—
(42,665)
130,108
Net realized and unrealized gains (losses)
$ 179,545
$
77,685
$ 101,860
$
(31,383)
$
109,068
Investment Book Yield
Income from cash and fixed maturities
$ 153,802
$ 119,905
$
33,897
$
73,569
Average aggregate fixed maturities and cash and
cash equivalents, at cost (1)
Investment book yield
$6,449,143
$ 5,370,302
$ 1,078,841
$ 4,694,572
2.38%
2.23%
0.15%
1.57%
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value (1)
Financial statement portfolio return
$ 346,223
$ 222,922
$ 123,301
$
57,616
$7,315,153
$ 6,279,130
$ 1,036,023
$ 5,505,610
4.73%
3.55%
1.18%
1.05%
2.50%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2017 versus 2016: Net investment income from fixed maturities and cash and cash equivalents increased by
$33.9 million during 2017 due to an increase of $1.1 billion in our average fixed maturities and cash and cash equivalents.
The book yield increased by 15 basis points primarily due to higher reinvestment rates and an increase in duration.
77
$
$
$
$
46,336
675,730
0.66%
165,306
773,520
Net investment income from equities and other investments decreased by $9.5 million primarily due to a decrease in
income received from CLO equities and private equity investments.
The increase of $101.9 million in net realized and unrealized gains (losses) was comprised of:
•
•
•
•
•
net realized gains of $4.1 million in 2017, compared to net realized losses of $9.8 million in 2016, an increase
of $13.8 million;
net unrealized gains on fixed maturity securities, trading, of $28.9 million in 2017, compared to net unrealized
gains of $36.6 million in 2016, a decrease of $7.7 million, primarily due to realizing gains on our asset allocation
strategies to extend duration;
net unrealized gains on equity securities, trading of $15.2 million in 2017, compared to net unrealized gains
of $6.1 million in 2016, an increase of $9.1 million, primarily driven by strong returns in the equity markets in
2017;
change in fair value of other investments of $97.5 million in 2017, compared to change in fair value of other
investments of $73.1 million in 2016, an increase of $24.4 million, primarily driven by higher returns in private
equity and private equity funds, offset by lower returns on CLO equities, CLO equity funds, bond funds and
hedge funds; and
change in fair value of embedded derivative on funds held and change in fair value option on funds held of
$33.9 million in 2017, compared to unrealized losses of $28.3 million in 2016, an increase of $62.2 million,
primarily driven by the impact of tightening credit spreads.
2016 versus 2015: Net investment income from fixed maturities and cash and cash equivalents increased by
$46.3 million during 2016 due to an increase of $0.7 billion in our average fixed maturities and cash and cash equivalents.
The book yield increased by 66 basis points due to the changing mix in asset allocation as we executed on our
investment strategies. Net investment income from equities and other investments increased by $7.9 million primarily
due to an increase in the income received from CLO equities and private equity investments.
Net realized and unrealized gains were $77.7 million in 2016 compared to $31.4 million unrealized losses in
2015, an increase of $109.1 million. Included in net realized and unrealized gains are the following items:
•
•
•
•
•
net realized losses of $9.8 million in 2016, compared to net realized gains of $11.3 million in 2015, a decrease
of $21.0 million;
net unrealized gains on fixed maturity securities, trading, of $36.6 million in 2016, compared to net unrealized
losses of $43.6 million in 2015, an increase of $80.2 million, primarily driven by the impact of tighter credit
spreads in the current year;
net unrealized gains on equity securities, trading of $6.1 million in 2016, compared to net unrealized losses
of $19.4 million in 2015, an increase of $25.5 million, primarily driven by strong returns in the equity markets
in 2016;
change in fair value of other investments of $73.1 million in 2016, compared to change in fair value of other
investments of $20.4 million in 2015, an increase of $52.7 million, primarily driven by higher returns in the
private equity funds, equity funds and CLO equities; and
change in fair value of embedded derivative on funds held and change in fair value option on funds held of
$(28.3) million in 2016, compared to $nil million in 2015, a decrease of $28.3 million, primarily driven by the
Allianz transaction where we re-positioned the portfolio as we moved from a fixed crediting rate to a variable
rate of return on the underlying investments as at October 1, 2016.
78
Atrium
2017
2016
Change
2015
Change
Net investment income:
Fixed maturity investments
(in thousands of U.S. dollars, except percentages)
$
2,901
$
2,645
$
256
$
2,163
$
Short-term investments and cash and cash
equivalents
Investment income from fixed maturities and
cash and cash equivalents
Equity securities
Other
Investment income from equities and other
investments
Gross investment income
Investment expenses
Net investment income
Net realized gains (losses) on sale:
Net realized gains (losses) on fixed maturity
securities
Net realized investment gains on equity securities,
trading
Total net realized gains (losses) on sale
Net unrealized gains (losses):
Fixed maturity securities, trading
Equity securities, trading
Other investments
Total net unrealized gains (losses)
Net realized and unrealized gains (losses)
$
394
3,295
27
1,155
1,182
4,477
(259)
652
(258)
3,297
—
(171)
(171)
3,126
(186)
(2)
27
1,326
1,353
1,351
(73)
45
2,208
—
220
220
2,428
(203)
$
4,218
$
2,940
$
1,278
$
2,225
$
482
607
1,089
—
(391)
(391)
698
17
715
$
(118)
$
131
$
(249)
$
252
$
(121)
17
(101)
(90)
317
991
1,218
1,117
—
131
(732)
—
—
(732)
$
(601)
$
17
(232)
642
317
991
1,950
1,718
—
252
—
—
—
—
$
252
$
—
(121)
(732)
—
—
(732)
(853)
Investment Book Yield
Income from cash and fixed maturities
$
3,295
$
3,297
Average aggregate fixed maturities and cash and
cash equivalents, at cost (1)
Investment book yield
$ 263,275
$ 308,235
1.25%
1.07%
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value(1)
$
5,335
$
2,339
$ 269,225
$ 304,561
$
$
$
$
(2)
$
2,208
(44,960)
$ 321,457
0.18%
0.69%
2,996
$
2,477
(35,336)
$ 315,382
$
$
$
$
1,089
(13,222)
0.38 %
(138)
(10,821)
Financial statement portfolio return
1.98%
0.77%
1.21%
0.79%
(0.02)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2017 versus 2016: Atrium's net investment income results were relatively consistent for the year ended
December 31, 2017 and 2016. The book yield increased by 18 basis points primarily due to higher reinvestment rates
and an increase in duration. Net realized and unrealized gains (losses) increased by $1.7 million, primarily driven by
the impact of tightening credit spreads and increased returns in other investments and equities.
2016 versus 2015: Net investment income from fixed maturities and cash and cash equivalents increased by
$1.1 million during 2016. The book yield increased by 38 basis points 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.
79
StarStone
Net investment income:
Fixed maturity investments
Short-term investments and cash and cash
equivalents
Investment income from fixed maturities and
cash and cash equivalents
Equity securities
Other
Investment income from equities and other
investments
Gross investment income
Investment expenses
Net investment income
Net realized gains (losses) on sale:
Net realized investment gains (losses) on fixed
maturity securities
Net realized investment gains on equity securities,
trading
Total net realized gains (losses) on sale
Net unrealized gains (losses):
Fixed maturity securities, trading
Equity securities, trading
Other investments
Total net unrealized gains (losses)
2017
2016
Change
2015
Change
(in thousands of U.S. dollars, except percentages)
$
26,640
$
21,790
$
4,850
$
15,427
$
6,363
1,280
689
591
839
27,920
94
1,865
1,959
29,879
(2,173)
22,479
169
1,528
1,697
24,176
(1,955)
5,441
(75)
337
262
5,703
(218)
16,266
342
1,245
1,587
17,853
(1,916)
(150)
6,213
(173)
283
110
6,323
(39)
$
27,706
$
22,221
$
5,485
$
15,937
$
6,284
$
(2,687)
$
1,409
$
(4,096)
$
1,730
$
(321)
24
(2,663)
7,227
1,010
11,039
19,276
477
1,886
835
498
2,509
3,842
5,728
(453)
(4,549)
6,392
512
8,530
2,586
4,316
(8,481)
(2,430)
(3,189)
(2,109)
(2,430)
9,316
2,928
5,698
15,434
(14,100)
17,942
$
10,885
$
(9,784)
$
15,512
Net realized and unrealized gains (losses)
$
16,613
$
Investment Book Yield
Income from cash and fixed maturities
$
27,920
$
22,479
Average aggregate fixed maturities and cash and
cash equivalents, at cost (1)
Investment book yield
$1,482,437
$ 1,484,121
1.88%
1.51%
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value(1)
$
44,319
$
27,949
$1,650,429
$ 1,609,747
$
$
$
$
5,441
$
16,266
(1,684)
$ 1,254,192
0.37%
1.30%
16,370
$
6,153
40,682
$ 1,514,178
$
$
$
$
6,213
229,929
0.21%
21,796
95,569
Financial statement portfolio return
2.69%
1.74%
0.95%
0.41%
1.33%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2017 versus 2016: Net investment income from fixed maturities and cash and cash equivalents increased by
$5.4 million during 2017. The book yield increased by 37 basis points primarily due to higher reinvestment rates and
an increase in duration. The increase in net realized and unrealized gains (losses) of $10.9 million was comprised of
net unrealized gains of $19.3 million in 2017 compared to net unrealized gains of $3.8 million in 2016, offset by a
decrease in realized gains of $4.5 million. The increase in net unrealized gains was due to the tightening credit spreads,
partially offset by an increase in yields. The change in fair value of other investments of $8.5 million was due to higher
returns on private equities and bond funds.
2016 versus 2015: Net investment income from fixed maturities and cash and cash equivalents increased by
$6.2 million during 2016 due to an increase of $229.9 million in our average investable assets. The book yield increased
by 21 basis points 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
80
of $2.4 million. The unrealized gains in 2016 were primarily due to increases in the valuations of our fixed maturities
and other investments.
Other Activities
Net investment income
Net realized and unrealized losses
$
$
10,187
(6,941)
$
$
15,065
(4,994)
$
$
(4,878)
(1,947)
$
$
15,403
(608)
$
$
(338)
(4,386)
2017
2016
Change
2015
Change
(in thousands of U.S. dollars, except percentages)
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value (1)
$
3,246
$
10,071
$
(6,825)
$
14,795
$
(4,724)
$ 310,608
$ 330,826
$ (20,218)
$ 157,517
$ 173,309
Financial statement portfolio return
1.05%
3.04%
(1.99)%
9.39%
(6.35)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2017 versus 2016: Net investment income decreased by $4.9 million during 2017 primarily due to a decrease
in the income from life settlements. Net realized and unrealized gains (losses) decreased by $1.9 million, primarily
due to higher impairments on the life settlement portfolio in 2017 compared to 2016.
2016 versus 2015: Net investment income remained relatively consistent with a decrease of $0.3 million for
2016 as compared with 2015. Net realized and unrealized losses decreased by $4.4 million, primarily due to impairments
of $5.3 million in the life settlement portfolio in 2016 compared to $nil in 2015.
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, 2017 included shareholders' equity of $3.1 billion, redeemable
noncontrolling interest of $0.5 billion classified as temporary equity, and debt obligations of $0.6 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, 2017, we had $955.2 million of cash and cash equivalents, excluding restricted cash that
supports insurance operations, and included in this amount was $502.9 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, 2017 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.
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 Financial Information" 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
81
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 interest income on loans to our subsidiaries. We also borrow from our
credit facilities and, during 2017, we issued senior notes 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, 2017, 2016 and 2015" 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. We filed an automatic shelf registration statement on October 10, 2017 with the
SEC to allow us to conduct future offerings of certain securities, if desired. This shelf registration statement allows us
to issue debt, equity and other securities, whereas our previous shelf registration statement, which expired on
September 12, 2017, registered only debt securities.
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, 2017,
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 Financial Information" 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 2017, 2016 and 2015, our regulated subsidiaries paid aggregate capital distributions and dividends of $580.3
million, $517.1 million and $723.1 million, respectively.
In the Non-life Run-off segment, 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 activities. 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 the Non-life Run-off segment, 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. However, we expect operating cash flow in these segments will be impacted by
large losses such as hurricanes Harvey, Irma and Maria.
Overall, 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.
82
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:
Cash provided by (used in):
2017
Years Ended December 31,
2016
2015
Change
(in thousands of U.S. dollars)
Change
Operating activities
Investing activities
Financing activities
$ (343,107) $ (202,689) $ (140,418) $ (265,152) $
62,463
293,262
156,709
136,553
19,885
136,824
(65,476)
83,441
(148,917)
129,347
(45,906)
Effect of exchange rate changes on cash
9,512
(13,985)
23,497
(18,533)
4,548
Net increase (decrease) in cash and cash
equivalents
(105,809)
23,476
(129,285)
(134,453)
157,929
Cash and cash equivalents, beginning of year
1,318,645
1,295,169
23,476
1,429,622
(134,453)
Cash and cash equivalents, end of year
$1,212,836 $1,318,645 $ (105,809) $1,295,169 $
23,476
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, 2017, 2016 and 2015."
2017 versus 2016: Cash used in operating activities was $343.1 million and $202.7 million for the years ended
December 31, 2017 and 2016, respectively. The negative operating cash flow was predominantly driven by: (i) net
paid losses in our Non-Life Run-off segment for the years ended December 31, 2017 and 2016 of $581.7 million and
$533.8 million, respectively; partially offset by (ii) cash and restricted cash acquired in Non-life Run-off reinsurance
transactions for the years ended December 31, 2017 and 2016 of $428.6 million and $174.5 million, respectively.
Cash provided by investing activities for 2017 primarily related to net cash provided by sale of subsidiaries of
$122.4 million, compared to net cash used in acquisitions of $18.5 million 2016. In addition, net redemptions of other
investments and net sales of available for sale securities provided cash of $122.9 million and $71.5 million, compared
to $154.0 million and $29.0 million, in 2017 and 2016, respectively.
Cash used in financing activities for 2017 primarily related to net outflows of $38.0 million from our credit facilities,
consisting of the repayment of the Sussex Facility in full, the repayment of a portion of the EGL Revolving Credit Facility,
partially offset by the issuance of our $350.0 million Senior Notes. In addition we paid $27.5 million in dividends to
noncontrolling interests. During 2016, we had net inflows of $77.8 million from our credit facilities primarily utilized to
finance acquisitions and significant new business.
2016 versus 2015: Cash used in operating activities was $202.7 million and $265.2 million for the years ended
December 31, 2016 and 2015, respectively. The negative operating cash flow was predominantly driven by: (i) net
paid losses in our Non-Life Run-off segment for the years ended December 31, 2016 and 2015 of $533.8 million and
$517.3 million, respectively, partially offset by (ii) cash and restricted cash acquired in Non-life Run-off reinsurance
transactions for the years ended December 31, 2016 and 2015 of $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.
Investments and Cash and Cash Equivalents
As at December 31, 2017 and 2016, we had total cash and cash equivalents, restricted cash and cash equivalents
and investments of $8.4 billion and $7.4 billion, respectively. The increase is primarily related to the transactions with
QBE and RSA.
83
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, 2017 and 2016, we had reinsurance balances recoverable of $2.0 billion and $1.5 billion,
respectively. The increase is primarily related to the transactions with QBE and RSA.
Our insurance and reinsurance run-off subsidiaries and portfolios, 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, 2017 and 2016, we had funds held - directly managed of $1.2 billion and $1.0 billion,
respectively. The increase was primarily due to the completion on January 11, 2017 of our transaction with QBE to
reinsure portfolios of QBE's run-off business, which was completed on a partial funds held basis. Our funds held -
directly managed is carried on our consolidated balance sheets at fair value due to a variable investment crediting
rate on the Allianz transaction, which was completed in 2016, and the election of the fair value option for the reinsurance
transaction with QBE. 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, 2017 and 2016, we had funds held by ceding companies of $175.4 million and
$82.1 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.
Debt Obligations
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 - "Debt Obligations" in the
notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K. Under our
facilities, debt obligations as of December 31, 2017 and 2016 were $646.7 million and $673.6 million, respectively.
On March 10, 2017, we issued Senior Notes (the "Notes") for an aggregate principal amount of $350.0 million.
The Notes pay 4.5% interest semi-annually and mature on March 10, 2022. The Notes are unsecured and
unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated, senior to any future
obligations that are expressly subordinated to the Notes, effectively subordinated to any of our secured indebtedness
to the extent of the value of the assets securing such indebtedness, and structurally subordinated to all liabilities of
our subsidiaries.
Our main facility is the Enstar Group Limited Revolving Credit Facility (the "EGL Revolving Credit Facility"),
originated on September 16, 2014 for a 5-year term, and most recently amended on March 20, 2017. This facility 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 $831.3 million. The individual outstanding loans under
the facility are short-term 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, 2017 and December 31, 2016, there were borrowings of €50.0 million
(approximately $60.1 million) and €75.0 million (approximately $88.5 million), respectively, under the facility that were
designated as non-derivative hedges of our net investment in certain subsidiaries whose functional currency is
denominated in Euros. During 2017, we repaid €25.0 million (approximately $29.5 million) of the non-derivative hedge
and reclassified the related foreign exchange losses of $1.1 million previously deferred in currency translation
84
adjustment within accumulated other comprehensive income (loss) into earnings. As at December 31, 2017 there was
$607.2 million of available unutilized capacity under the EGL Revolving Credit Facility. Subsequent to December 31,
2017, we utilized $307.4 million and repaid $132.0 million bringing the available unutilized capacity under this facility
to $431.8 million.
We also have a three-year unsecured term loan (the "EGL Term Loan Facility") that was originated on November
18, 2016. As at December 31, 2017 and 2016, the outstanding principal under this facility was $74.1 million and $75.0
million, respectively.
In June 2017, we repaid the outstanding principal on a four-year term loan we had entered into in connection
with our acquisition of Sussex, and the facility has been terminated. As at December 31, 2016 the outstanding principal
under this facility was $63.5 million.
85
Contractual Obligations
The following table summarizes, as of December 31, 2017, 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)
Asbestos
Environmental
General Casualty
Workers' compensation/personal
accident
Marine, aviation and transit
Construction defect
Professional indemnity/ Directors &
Officers
Other
Total Non-Life Run-off
Atrium
StarStone
ULAE
Estimated gross reserves for losses
and LAE (1)
Policy benefits for life and annuity
contracts (2)
Operating lease obligations
Investing Activities
Investment commitments to private
equity funds
Life settlements premium
Financing Activities
Loan repayments (including estimated
interest payments)
Total
(1)
Total
Less than
1 Year
1 - 3
years
3 - 5
years
6 - 10
years
More than
10 Years
(in millions of U.S. dollars)
$ 1,789.9 $
191.6
610.8
2,207.4
194.2
164.3
255.4
676.0
6,089.6
228.9
1,190.2
321.1
95.4 $
186.7 $
175.2 $
318.6 $ 1,014.0
26.4
132.5
229.3
37.8
30.7
77.3
136.3
765.7
71.7
449.2
45.4
45.5
161.3
366.3
48.1
51.1
88.5
152.1
1,099.5
97.0
450.1
62.2
35.1
92.0
280.6
23.3
36.8
40.6
85.4
769.0
37.6
172.9
41.0
42.5
92.4
398.6
41.3
32.9
33.0
97.2
42.2
132.6
932.5
43.7
12.8
16.1
204.9
1,056.5
2,399.0
18.7
112.1
65.4
3.9
5.9
107.2
7,829.8
1,332.1
1,708.7
1,020.4
1,252.7
2,516.0
134.0
62.8
164.7
221.2
6.3
11.0
69.8
17.8
12.1
18.5
68.9
34.3
12.3
12.8
26.0
30.9
30.5
18.1
—
67.9
72.8
2.3
—
70.3
748.3
—
$ 9,160.8 $ 1,473.6 $ 2,180.6 $ 1,476.0 $ 1,369.2 $ 2,661.4
338.1
373.6
36.6
—
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, 2017 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, 2017 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, 2017 of $117.2 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 Life Insurance Company of New York are excluded
as these are classified as liabilities held for sale, as described in Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing
Operations" in the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
86
In addition to the contractual obligations in the table above, we also have the right to purchase the redeemable
noncontrolling interests ("RNCI") 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 are 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.
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, 2017, we did not have any off-balance sheet arrangements, as defined by Item 303(a) (4) of
Regulation S-K.
Critical Accounting Policies
We believe the following accounting policies impact the most significant judgments 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 business acquisitions using the acquisition 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,
87
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.
The difference between the carrying value of reserves acquired at the date of acquisition and the fair value is
the Fair Value Adjustment, ("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, consisting of Outstanding Loss
Reserve ("OLR"), IBNR, fair value adjustments and ULAE, by type of exposure, as of December 31, 2017 and 2016.
Asbestos
Environmental
General casualty
Workers'
compensation/
personal accident
Marine, aviation and
transit
Construction defect
Professional
indemnity/Directors &
Officers
Other
Fair value
adjustments
Fair value
adjustments - fair
value option
ULAE
Total
OLR
2017
IBNR
Total
OLR
(in thousands of U.S. dollars)
2016
IBNR
Total
$
366,446 $ 1,434,598 $ 1,801,044 $
265,144 $
584,757 $
849,901
95,801
95,259
344,425
266,526
191,060
610,951
100,128
428,210
71,722
317,613
171,850
745,823
1,458,430
748,949
2,207,379
1,389,097
701,616
2,090,713
109,102
28,701
214,803
567,995
56,284
135,608
40,265
126,438
165,386
164,309
255,068
694,433
54,025
40,446
35,744
121,551
110,208
310,478
61,663
40,993
89,769
161,997
171,871
351,471
$ 3,185,703 $ 2,903,927 $ 6,089,630 $ 2,697,736 $ 1,935,659 $ 4,633,395
(125,998)
(135,368)
—
$ 4,498,027
218,336
$ 4,716,363
(314,748)
$ 5,648,884
300,588
$ 5,949,472
88
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, 2017 and 2016:
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Professional Indemnity/Directors and Officers
Other
Fair value adjustments
Fair value adjustments - fair value option
Deferred charges
ULAE
Total
2017
2016
Total
% of
Total
Total
% of
Total
(in thousands of U.S. dollars)
$ 1,678,822
37.4 % $
815,766
184,394
471,538
1,260,426
142,005
149,713
220,618
459,675
(113,028)
(182,764)
(80,192)
300,588
4.1 %
10.5 %
28.1 %
3.2 %
3.3 %
4.9 %
10.2 %
(2.5)%
(4.1)%
(1.8)%
6.7 %
164,051
496,043
1,492,391
84,076
124,568
153,342
288,320
(121,483)
—
(94,551)
218,336
22.5 %
4.5 %
13.7 %
41.4 %
2.3 %
3.4 %
4.2 %
8.0 %
(3.4)%
— %
(2.6)%
6.0 %
$ 4,491,795
100.0 % $ 3,620,859
100.0 %
As of December 31, 2017 and 2016, the IBNR reserves (net of reinsurance balances receivable) accounted for
$2,313.8 million, or 51.5% and $1,542.1 million, or 42.6%, respectively of our total Non-life Run-off net losses and
LAE.
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 time frame 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 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.
89
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 on the remaining liability.
On a quarterly basis, we adjust our estimates of ultimate loss and LAE liabilities in the quarter that any significant
commutation is 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.
90
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.
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.
• 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,
excluding fair value and ULAE, for our non-life run-off subsidiaries relate primarily to casualty exposures, including
latent claims, of which 32.7% in 2017 (2016: 22.1%) 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.
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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. The report highlights the causes of any unusual or significant loss
development activity (including commutations).
• Actual versus expected gross incurred loss development schedule - This schedule 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.
• 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.
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, 2017.
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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, 2017 and December 31, 2016 is presented in the following table
("Range of Outcomes"):
Low
2017
Selected
High
Low
2016
Selected
High
Asbestos
Environmental
General casualty
Workers' compensation/personal
accident
Marine, aviation and transit
Construction defect
Professional indemnity/Directors
& Officers
Other
Fair value adjustments
Fair value adjustments - fair
value option
ULAE
Total
Latent Claims
(in thousands of U.S. dollars)
$1,554,713 $1,801,044 $2,043,180 $ 804,312 $ 849,901 $1,126,508
230,202
170,461
171,850
191,060
164,010
217,643
539,506
610,951
680,562
653,690
745,823
844,477
1,973,167
2,207,379
2,434,441
1,873,501
2,090,713
2,494,309
140,610
148,939
230,967
609,669
5,368,032
(108,145)
165,386
164,309
255,068
694,433
185,772
181,609
280,755
769,306
79,885
149,504
89,769
161,997
150,199 $ 171,871
314,517
351,471
105,291
206,157
201,024
399,728
6,089,630
6,793,268
4,189,618
4,633,395
5,607,696
(125,998)
(141,880)
(125,073)
(135,368)
(169,690)
(273,680)
263,433
(314,748)
(349,607)
—
—
—
218,336
$5,249,640 $5,949,472 $6,635,516 $4,282,881 $4,716,363 $5,656,342
300,588
333,735
218,336
218,336
A number of our subsidiaries, and counterparties who wrote portfolios assumed by us, 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.
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, 2017, we had net loss reserves of $1,678.8 million for asbestos-related claims (or 36.8%
of total non-life run-off net reserves for losses and LAE liabilities) and $184.4 million for environmental pollution-
related claims (or 4.0% of total non-life run-off net reserves for losses and LAE).
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• As of December 31, 2016, we had net loss reserves of $815.8 million for asbestos-related claims (or 22.5%
of total non-life run-off net reserves for losses and LAE liabilities) and $164.1 million for environmental pollution-
related claims (or 4.5% of total non-life run-off net reserves for losses and LAE).
For the years ended December 31, 2017 and 2016, our reserves for A&E liabilities increased by $970.4 million
and $545.2 million on a gross basis, respectively, and by $883.4 million and $545.1 million on a net basis, respectively,
due to acquisition activity in 2017 primarily related to the RSA and QBE transactions. 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:
2017
Years Ended December 31,
2016
2015
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
$1,021,751 $ 979,817 $ 476,508 $ 434,681 $ 529,181 $ 470,993
71,397
82,042
(11,347)
(30,457)
(14,659)
(13,300)
(112,015)
(105,224)
(40,761)
(19,127)
(39,633)
(24,631)
1,010,971
906,581
597,351
594,720
1,619
1,619
$1,992,104 $1,863,216 $ 1,021,751 $ 979,817 $ 476,508 $ 434,681
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. The following factors contribute to the
uncertainty of estimating our environmental claims exposure:
• 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.
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.
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• 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, product liability and U.K. employer's liability
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.
We generally 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.
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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.
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.
7. Asbestos Ground-up Exposure Analysis Using Frequency-Severity Method. This method is used when we
have defendant level detail policy and claim data. In a frequency-severity method there are two components that need
to be estimated, namely, (1) the number of claims that will ultimately be settled with payment and (2) the severity of
these claims including legal costs. The estimate of future settled claims is based on the historical filings rates, claim
dismissal rates, current pending claims and epidemiological forecasts of asbestos disease incident and claim filings.
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The average severity is based on historical average settlement amounts trended for inflation to the expected year of
settlement for claims that close with an indemnity payment. Loss adjustment expenses are loaded on based on
historical expense to indemnity ratios. Multiplying the number of expected future claims settled with payments by the
average severity results in an estimate of the ground-up losses at the defendant level. At this point, the defendant’s
insurance coverage is considered to determine the allocation of the ground-up estimate to policy years and policy
within the insurance coverage as well as the amount retained by the defendant.
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 ('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
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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.
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,
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the underwriting years of participation and other criteria. These differing profiles lead to different expectations for
quarterly and annual loss development by company.
Our quarterly paid and incurred loss development is often driven by large, wholesale settlements - such as
commutations and policy buy-backs - which settle many individual claims in a single transaction. This allows for
monitoring of the potential profitability of large settlements, which, in turn, can provide information about the adequacy
of reserves on remaining exposures 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.
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The following table provides a breakdown of the liability for losses and LAE by type of exposure for the years
ended December 31, 2017 and 2016 for the Atrium segment:
OLR
2017
IBNR
Total
OLR
(in thousands of U.S. dollars)
2016
IBNR
Total
Marine, Aviation and
Transit
Binding Authorities
Reinsurance
Accident and Health
Non-Marine Direct and
Facultative
$
24,581 $
26,115
14,381
3,716
46,138 $
51,896
70,719 $
78,011
34,489
5,518
48,870
9,234
25,565 $
49,369 $
21,543
11,485
2,913
41,603
22,178
5,625
74,934
63,146
33,663
8,538
9,570
12,467
22,037
5,873
11,343
17,216
Total
$
78,363 $
150,508 $
228,871 $
9,547
2,455
$
240,873
67,379 $
130,118 $
197,497
12,503
2,122
$
212,122
Fair value adjustments
ULAE
Total
The following table provides a breakdown of the liability for losses and LAE by type of exposure for the years
ended December 31, 2017 and 2016 for the StarStone segment:
OLR
2017
IBNR
Total
OLR
(in thousands of U.S. dollars)
2016
IBNR
Total
Casualty
Marine
Property
Aerospace
Workers' Compensation
$
139,200 $
130,962
282,789 $
118,375
208,777
63,920
48,118
89,963
26,070
82,024
421,989 $
101,897 $
279,823 $
381,720
249,337
298,740
89,990
130,142
102,957
182,480
66,190
48,591
94,396
57,184
30,921
78,981
197,353
239,664
97,111
127,572
Total
$
590,977 $
599,221 $ 1,190,198 $
502,115 $
541,305 $ 1,043,420
Fair value adjustments
ULAE
Total
Quarterly Reserve Reviews
(555)
18,100
$ 1,207,743
(863)
16,825
$ 1,059,382
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, 2017 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
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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, 2017 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.
Policy Benefits for Life Contracts
Policy benefits for life contracts as at December 31, 2017 and 2016 were as follows:
Policy benefits for life contracts
December 31,
2017
2016
(in thousands of U.S. dollars)
$
117,207
$
112,095
Our policy benefits for life 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.
Reinsurance Balances Recoverable
Our acquired insurance and reinsurance subsidiaries in all three of our operating 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 balances recoverables represent anticipated recoveries
of a portion of those loss reserves, 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 loss reserves, 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 and reinsurers, while not rated, provide collateral in the form of letters of credit, trust funds or funds withheld.
To estimate the provision for uncollectible reinsurance balances recoverable, the reinsurance balances
recoverable is first allocated to applicable reinsurers. As part of this process, ceded IBNR is allocated by reinsurer.
We then 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
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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.
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.
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 and short-term 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 hedge funds, equity funds, private credit 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.
In addition, certain of our other investments are measured at fair value using net asset value ("NAV") per share
(or its equivalent) as a practical expedient and have not been classified within the fair value hierarchy above. 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).
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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, 2017, 2016 and 2015, we did not recognize any other-than-temporary
impairment charges through earnings.
The fair values for all fixed maturity securities in our trading and funds held - directly managed investment
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.
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.
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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 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.
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.
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,
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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 private credit 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
NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
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, 2017, 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 and software, technology 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 indefinite-lived 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
noncontrolling interests. These shares provide certain redemption rights to the holder, which may be settled in Enstar’s
own shares or cash or a combination of cash and shares, 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.
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
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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.
Fair Value Option - Insurance Contracts
In our Non-life Run-off segment we have elected to apply the fair value option for certain loss portfolio transfer
reinsurance transactions. This is an irrevocable election that applies to all balances under the insurance contract,
including funds held assets, reinsurance recoverable, and the liability for losses and loss adjustment expenses.
The fair value of the liability for losses and LAE and reinsurance recoverable under these contracts is presented
separately in our consolidated balance sheet as at December 31, 2017. Changes in the fair value of the liability for
losses and LAE and reinsurance balances recoverable are included in net incurred losses and LAE in our consolidated
statement of operations.
We use an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and
reinsurance recoverable asset for certain retroactive reinsurance contracts where we have elected the fair value option
in our Non-life Run-off segment.
The fair value was calculated as the aggregate of discounted cash flows plus a risk margin:
• The discounted cash flow approach uses (i) estimated nominal cash flows based upon an appropriate payment
pattern developed in accordance with standard actuarial techniques and (ii) a discount rate based upon a high
quality rated corporate bond plus a credit spread for non-performance risk. The model uses corporate bond
rates across the yield curve depending on the estimated timing of the future cash flows and specific to the
currency of the risk.
• The risk margin was calculated using the present value of the cost of capital. The cost of capital approach
uses (i) projected capital requirements, (ii) multiplied by the risk cost of capital representing the return required
for non-hedgeable risk based upon the weighted average cost of capital less investment income, and (iii)
discounted using the weighted average cost of capital.
The observable and unobservable inputs used in the model are described in Note 8 - "Fair Value Measurements"
in the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
The fair value of the liability for losses and LAE and reinsurance balances recoverable may increase or decrease
due to changes in the corporate bond rate, the credit spread for non-performance risk, the risk cost of capital, the
weighted average cost of capital and the estimated payment pattern:
• An increase in the corporate bond rate or credit spread for non-performance risk would result in a decrease
in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a decrease
in the corporate bond rate or credit spread for non-performance risk would result in an increase in the fair
value of the liability for losses and LAE and reinsurance balances recoverable.
• An increase in the weighted average cost of capital would result in an increase in the fair value of the liability
for losses and LAE and reinsurance balances recoverable. Conversely, a decrease in the weighted average
cost of capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance
balances recoverable.
• An increase in the risk cost of capital would result in an increase in the fair value of the liability for losses and
LAE and reinsurance balances recoverable. Conversely, a decrease in the risk cost of capital would result in
a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
• An acceleration of the estimated payment pattern would result in an increase in the fair value of the liability
for losses and LAE and reinsurance balances recoverable. Conversely, a deceleration of the estimated payment
pattern would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances
recoverable.
In addition, the estimate of the capital required to support the liabilities is based upon current industry standards
for capital adequacy. If the required capital per unit of risk increases then the fair value of the liability for losses and
LAE and reinsurance balances recoverable would increase. Conversely, a decrease in required capital would result
in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
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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 2017 were not materially different than those used in 2016 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, 2017 and 2016:
As at December 31, 2017
-100
Total Market Value
Market Value Change from Base
Change in Unrealized Value
As at December 31, 2016
Total Market Value
Market Value Change from Base
Change in Unrealized Value
$
$
$
$
6,438
5.8%
351
-100
5,040
3.3%
161
$
$
$
$
-50
Interest Rate Shift in Basis Points
—
(in millions of U.S. dollars)
6,261
5,919
+50
$
2.9%
174
-50
4,969
1.8%
90
$
$
$
6,087 $
—
— $
—
4,879 $
—
— $
(2.8)%
(168)
+50
4,830
(1.0)%
(49)
+100
5,760
(5.4)%
(327)
+100
4,762
(2.4)%
(117)
$
$
$
$
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 funds held - directly managed portfolio as
at December 31, 2017 and 2016:
As at December 31, 2017
-100
Total Market Value
Market Value Change from Base
Change in Unrealized Value
As at December 31, 2016
Total Market Value
Market Value Change from Base
Change in Unrealized Value
$
$
$
$
1,247
7.0%
82
-100
1,057
7.0%
69
$
$
$
$
-50
Interest Rate Shift in Basis Points
—
+50
(in millions of U.S. dollars)
1,205
1,128
$
3.4%
40
-50
1,022
3.4%
34
$
$
$
1,165 $
—
— $
(3.2)%
(37)
—
+50
988 $
—
— $
958
(3.0)%
(30)
+100
1,092
(6.3)%
(73)
+100
928
(6.1)%
(60)
$
$
$
$
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 tables above.
107
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 balances 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, 2017, 40.1% of our fixed maturity and short-term investment portfolio was rated AA or higher by a major
rating agency (December 31, 2016: 52.2%) with 6.4% rated lower than BBB- (December 31, 2016: 4.6%). The portfolio
as a whole, including cash, restricted cash, fixed maturity and short term investments and funds held - directly managed,
had an average credit quality rating of A+ as at December 31, 2017 (December 31, 2016: AA-). In addition, we manage
our portfolio pursuant to guidelines that follow what we believe are prudent standards of diversification. 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 Balances Recoverables
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 on Form 10-K.
As at December 31, 2017, our reinsurance balances recoverable included $357.4 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. As at December 31, 2017 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, 2017 was $645.6 million (December 31, 2016: $619.1 million). At December 31, 2017, the impact of a
10% decline in the overall market prices of our equities at risk would be $64.6 million (December 31, 2016: $61.9
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
108
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, and Australian subsidiaries
whose functional currencies are the Euro, British pound and Australian dollar, respectively. Following the closing of
the Pavonia sale, as discussed in Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations", we
no longer have subsidiaries with a functional currency of Canadian dollars. 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, 2017, we reduced our borrowings of Euros under the EGL
Revolving Credit Facility from €75.0 million to €50.0 million, to hedge the foreign currency exposure on our net
investment in certain of our subsidiaries whose functional currency is denominated in Euros. This reduction was in
relation to the sale of Laguna. During the year ended December 31, 2017, 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. We utilize hedge accounting to record the foreign exchange gain
or loss on these instruments in the currency translation account. The loan and the forward contracts are discussed in
Note 15 - "Debt Obligations" and "Note 9 - "Derivative Instruments", respectively, in the notes to our consolidated
financial statements included within Item 8 of this Annual Report on Form 10-K. In addition, from time to time, we may
also utilize foreign currency forward contracts to hedge certain foreign currency exposures in British pounds, Euros
and Australian dollars which were not designated for hedge accounting.
The table below summarizes our net exposures as at December 31, 2017 and 2016 to foreign currencies:
2017
GBP
EUR
AUD
CAD
Other
Total
Total net foreign currency exposure
Pre-tax impact of a 10% movement of
the U.S. dollar(1)
2016
Total net foreign currency exposure
Pre-tax impact of a 10% movement of
the U.S. dollar(1)
$
$
$
$
7.0 $
(in millions of U.S. dollars)
(3.4) $
(2.1) $
11.0 $
3.7 $
16.2
0.7 $
1.1 $
(0.2) $
(0.3) $
0.4 $
1.6
GBP
EUR
AUD
CAD
Other
Total
20.6 $
(in millions of U.S. dollars)
26.6 $
12.2 $
17.9 $
5.2 $
82.5
2.1 $
1.8 $
1.2 $
2.7 $
0.5 $
8.3
(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.
109
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, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Earnings for the years ended December 31, 2017, 2016 and 2015. . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017,
2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 . . . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 1 - Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 2 - Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 3 - Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 4 - Significant New Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 5 - Divestitures, Held-for-Sale Businesses and Discontinuing Operations . . . . . . . . . . . . . . . . . . . .
Note 6 - Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 7 - Funds Held - Directly Managed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 8 - Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 9 - Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10 - Reinsurance Balances Recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 11 - Losses and Loss Adjustment Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 12 - Policy Benefits for Life Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 13 - Premiums Written and Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 14 - Goodwill, Intangible assets and Deferred Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 15 - Debt Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 16 - Noncontrolling Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 17 - Share Capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 18 - Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 19 - Share-Based Compensation and Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 20 - Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 21 - Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 22 - Dividend Restrictions and Statutory Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 23 - Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 24 - Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 25 - Unaudited Condensed Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
111
112
113
114
115
117
118
118
118
129
134
137
140
146
148
157
159
160
193
194
194
197
198
199
201
201
204
207
210
214
215
221
222
223
226
227
228
229
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.
110
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Enstar Group Limited:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Enstar Group Limited and subsidiaries (the
“Company”) as of December 31, 2017 and 2016, 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, 2017 and the related notes and financial statement schedules I to VI (collectively, the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (the “PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion
on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG Audit Limited
We have served as the Company’s auditor since 2012.
Hamilton, Bermuda
February 28, 2018
111
ENSTAR GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and 2016
ASSETS
Short-term investments, trading, at fair value
Short-term investments, available-for-sale, at fair value (amortized cost: 2017 — $nil; 2016 — $287)
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value (amortized cost: 2017 — $208,097; 2016 — $269,577)
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
Reinsurance balances recoverable, fair value
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
Losses and loss adjustment expenses, fair value
Policy benefits for life and annuity contracts
Unearned premiums
Insurance and reinsurance balances payable
Deferred tax liabilities
Debt obligations
Other liabilities
Liabilities held for sale
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
2017
2016
(expressed in thousands of U.S.
dollars, except share data)
$
180,211
$
222,918
—
268
5,696,073
4,388,242
210,285
106,603
913,392
125,621
267,499
95,047
937,047
131,651
7,232,185
6,042,672
955,150
257,686
1,179,940
425,702
13,001
245,101
954,871
363,774
994,665
406,676
11,374
219,115
1,478,806
1,460,743
542,224
175,383
64,984
180,589
831,320
24,351
—
82,073
58,114
184,855
842,356
1,244,456
$
13,606,422
$
12,865,744
$
5,603,419
$
5,987,867
1,794,669
117,207
583,197
236,697
15,262
646,689
972,457
11,271
9,980,868
—
112,095
548,343
394,021
28,356
673,603
705,318
1,150,787
9,600,390
REDEEMABLE NONCONTROLLING INTEREST
479,606
454,522
SHAREHOLDERS’ EQUITY
Share capital authorized, issued and fully paid, par value $1 each (authorized 2017 and 2016: 156,000,000):
Ordinary shares (issued and outstanding 2017: 16,402,279; 2016: 16,175,250)
16,402
16,175
Non-voting convertible ordinary shares:
Series C (issued and outstanding 2017: 2,599,672; 2016: 2,792,157)
Series E (issued and outstanding 2017 and 2016: 404,771)
Series C Preferred Shares (issued and outstanding 2017 and 2016: 388,571)
Treasury shares at cost (Preferred shares 2017 and 2016: 388,571)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total Enstar Group Limited Shareholders’ Equity
Noncontrolling interest
TOTAL SHAREHOLDERS’ EQUITY
2,600
405
389
(421,559)
1,395,067
10,468
2,132,912
3,136,684
9,264
2,792
405
389
(421,559)
1,380,109
(23,549)
1,847,550
2,802,312
8,520
3,145,948
2,810,832
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
13,606,422
$
12,865,744
See accompanying notes to the consolidated financial statements
112
ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 2017, 2016 and 2015
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
Loss on sale of subsidiary
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS FROM CONTINUING OPERATIONS
NET EARNINGS (LOSS) FROM DISCONTINUING OPERATIONS,
NET OF INCOME TAX EXPENSE
NET EARNINGS
Net loss (earnings) attributable to noncontrolling interest
2017
2016
2015
(expressed in thousands of U.S.
dollars, except share and per share data)
$
613,121 $
823,514 $
753,744
66,103
208,789
190,334
28,509
39,364
185,463
77,818
4,836
1,106,856
1,130,995
193,551
4,015
96,906
435,985
28,102
17,537
16,349
792,445
314,411
6,395
320,806
10,993
331,799
(20,341)
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
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
311,458 $
264,807 $
220,291
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
$
$
$
$
15.50 $
13.10 $
0.56
0.62
16.06 $
13.72 $
15.39 $
13.00 $
0.56
0.62
15.95 $
13.62 $
11.55
(0.11)
11.44
11.46
(0.11)
11.35
19,388,621
19,299,426
19,252,072
19,527,591
19,447,241
19,407,756
See accompanying notes to the consolidated financial statements
113
ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2017, 2016 and 2015
NET EARNINGS
Other comprehensive income, 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 in defined benefit pension liability
Change in currency translation adjustment
Reclassification to earnings on disposal of subsidiary
Total currency translation adjustment
Total other comprehensive gain (loss)
Comprehensive income
2017
2016
2015
(expressed in thousands of U.S. dollars)
$
331,799 $
304,413 $
210,341
4,776
4,776
(3,219)
(491)
(384)
(266)
4,285
1,501
9,423
20,751
30,174
35,960
367,759
4,392
3,079
4,793
—
4,793
12,264
316,677
(3,485)
3
(24,694)
—
(24,694)
(28,176)
182,165
Comprehensive (income) loss attributable to noncontrolling
interest
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR
GROUP LIMITED
(22,285)
(40,257)
15,650
$
345,474 $
276,420 $
197,815
See accompanying notes to the consolidated financial statements
114
ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2017, 2016 and 2015
Share Capital — Ordinary Shares
Balance, beginning of year
Issue of shares
Conversion of Series C Non-Voting Convertible Ordinary 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 of year
Shares converted to Series C Convertible Participating Non-Voting Perpetual Preferred Stock
Balance, end of year
Share Capital — Series C Non-Voting Convertible Ordinary Shares
Balance, beginning of year
Warrants exercised
Conversion to Ordinary Shares
Balance, end of year
Share Capital — Series E Non-Voting Convertible Ordinary Shares
Balance, beginning of year
Conversion to Ordinary Shares
Balance, end of year
Share Capital — Series C Convertible Participating Non-Voting Perpetual Preferred Stock
Balance, beginning of year
Conversion of Series A Non-Voting Convertible Ordinary Stock
Balance, end of year
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
Reclassification to earnings on disposal of subsidiary
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 gains and 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
115
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
2016
2015
(expressed in thousands of U.S. dollars)
16,175
$
16,133
$
15,761
35
192
—
42
—
—
63
—
309
16,402
$
16,175
$
16,133
— $
—
— $
2,973
$
(2,973)
— $
2,973
—
2,973
2,792
$
2,726
$
2,726
—
(192)
66
—
—
—
2,600
$
2,792
$
2,726
405
$
405
$
—
—
405
$
405
$
389
$
—
389
$
— $
389
389
$
714
(309)
405
—
—
—
(421,559) $
(421,559) $
(421,559)
1,380,109
$
1,373,044
$
1,321,715
450
—
14,508
—
529
2,584
3,952
—
1,765
—
7,867
41,697
1,395,067
$
1,380,109
$
1,373,044
(23,549) $
(35,162) $
(12,686)
(18,993)
9,413
—
20,751
11,171
(4,644)
1,501
(3,143)
88
2,352
—
2,440
(23,790)
4,797
—
—
(2,779)
(23,948)
2,937
—
(18,993)
(23,790)
(7,723)
3,079
(4,644)
(3,649)
3,737
—
88
(7,726)
3
(7,723)
(2,181)
(1,780)
312
(3,649)
$
10,468
$
(23,549) $
(35,162)
1,847,550
$
1,578,312
$
1,395,206
311,458
(30,978)
264,807
4,431
220,291
(37,185)
Cumulative effect of change in accounting principle
Balance, end of year
Noncontrolling Interest (excludes redeemable noncontrolling interests)
Balance, beginning of year
Sale of noncontrolling shareholders' interest in subsidiaries
Dividends paid
Contribution of capital
Reallocation to redeemable noncontrolling interest
Net earnings (loss) attributable to noncontrolling interest
Foreign currency translation adjustments
Net movement in unrealized holding losses on investments
4,882
—
—
2,132,912
$
1,847,550
$
1,578,312
8,520
$
3,911
$
217,970
$
$
—
—
22
—
722
—
—
—
—
5,643
—
(1,034)
—
—
(195,347)
(733)
680
(15,801)
(1,153)
(1,558)
(147)
3,911
Balance, end of year
$
9,264
$
8,520
$
See accompanying notes to the consolidated financial statements
116
ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2017, 2016 and 2015
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
Net loss on sale of subsidiary
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 used in operating activities
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired
Sale of subsidiary, net of cash sold
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 investing activities
FINANCING ACTIVITIES:
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 (used in) financing activities
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH, CASH
EQUIVALENTS AND RESTRICTED CASH
2017
2016
2015
(expressed in thousands of U.S. dollars)
$
331,799
(10,993)
$
304,413
(11,963)
$
210,341
2,031
(5,887)
(154,763)
15,490
32,461
25,597
5,742,845
(7,024,062)
16,349
(530,857)
(278,585)
1,363,032
(3,314)
(157,741)
34,854
260,668
(343,107)
7,036
(84,854)
8,566
34,938
(1,284)
3,406,788
(3,100,515)
—
(21,866)
(967,379)
259,339
(11,037)
120,515
5,682
(151,068)
(202,689)
$
(4,185) $
126,611
86,359
(14,848)
(109,885)
232,827
(23,617)
293,262
22
—
(27,458)
—
874,100
(912,140)
(65,476)
$
$
(18,454) $
—
81,596
(52,568)
(91,093)
245,069
(7,841)
156,709
$
5,643
—
—
—
571,048
(493,250)
83,441
(15,859)
57,380
3,984
40,922
(7,241)
3,651,680
(4,052,430)
—
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
680
15,728
(16,861)
(150,400)
657,700
(377,500)
129,347
9,512
(13,985)
(18,533)
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
(105,809)
1,318,645
$ 1,212,836
23,476
1,295,169
$ 1,318,645
(134,453)
1,429,622
$ 1,295,169
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
$
$
13,192
21,487
$
$
22,216
19,451
$
$
33,305
19,395
$
955,150
257,686
$ 1,212,836
$
954,871
363,774
$ 1,318,645
$
795,245
499,924
$ 1,295,169
See accompanying notes to the consolidated financial statements
117
ENSTAR GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
(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 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. 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 three 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.
In addition to our three reportable segments, our other activities, which do not qualify as a reportable segment,
include our corporate expenses, debt servicing costs, holding company income and expenses, foreign exchange, our
remaining life business and other miscellaneous items.
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, 2017 and 2016 and for the years ended December 31, 2017,
2016 and 2015. Results of operations for acquired subsidiaries are included from the date of acquisition. All significant
intercompany transactions and balances have been eliminated.
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;
118
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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;
fair value estimates associated with loss portfolio transfer reinsurance agreements for which we have elected
the fair value option; 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.
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
119
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
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
120
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 Balances 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
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.
121
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 that 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, private credit 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.
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
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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
as well as fees earned under fronting and consulting arrangements with third- party clients, which are 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: (i) restricted shares, restricted share units
and performance share units, (ii) cash-settled stock appreciation rights ("SARs") and (iii) 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 utilize derivative instruments in our foreign currency risk management strategy and recognize all
derivatives as either assets or liabilities in the consolidated balance sheets and carry them at the fair value of the
specific instrument utilized. Changes in the fair value as well as realized gains or losses on derivative instruments
are recognized in net earnings if they are not designated as qualifying hedging instruments or if the criteria for
establishing a perfectly effective designated hedging relationship for our net investment hedges has not been met.
However, if a designated net investment hedge is deemed to be perfectly effective, then we recognize the changes
in the fair value of the underlying hedging instrument in accumulated other comprehensive income (loss) until the
application of hedge accounting is discontinued. Any cumulative gains or losses arising on designated net
investment hedges are deferred in accumulated other comprehensive income (loss) until the CTA from the
underlying hedged net investment is recognized in net earnings due to a disposal, deconsolidation or substantial
liquidation.
Certain of our funds held arrangements also contain embedded derivatives as described above and which are
carried at fair value.
(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.
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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 acquisition method is used to account for all business 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 the purchase price is recorded as a goodwill
asset or as a gain from 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 definite-lived intangible assets are not recoverable from their
undiscounted cash flows and are measured as the difference between the carrying value and the fair value.
(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.
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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 was recognized as prospective reinsurance. The reinsurance ceded by
StarStone to KaylaRe Ltd. from January 1, 2017 was recognized as prospective reinsurance.
(p) Retroactive Reinsurance - Fair Value Option
In our Non-life Run-off segment we have elected to apply the fair value option for certain loss portfolio transfer
reinsurance transactions. This is an irrevocable election that applies to all balances under the insurance contract,
including funds held assets, reinsurance balances recoverable, and the liability for losses and loss adjustment expenses.
We use an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and
the reinsurance balances recoverable asset. Note 8 - "Fair Value Measurements" describes the internal model, including
the observable and unobservable inputs used in the model.
(q) 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 or a combination of cash and shares, 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.
(r) 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.
(s) Held-for-sale Business and Discontinued Operations
We report a business as held-for-sale when certain criteria are met which include, (1) management either
approving the sale or receiving approval to sell the business and is committed to a formal plan to sell the business,
(2) the business is available for immediate sale in its present condition, (3) the business is being actively marketed for
sale at a price that is reasonable in relation to its current fair value, (4) the sale is anticipated to occur during the next
12 months, among other specified criteria. A business classified as held for sale is recorded at the lower of its carrying
amount or estimated fair value less costs to sell. 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. The Pavonia business was also classified as a
discontinued operation whose results were aggregated and presented within one line in the consolidated statements
of earnings.
New Accounting Standards Adopted in 2017
Accounting Standards Update (“ASU”) 2017-12, Targeted Improvements to Accounting for Hedging Activities
In August 2017, the Financial Accounting Standards Board (the "FASB") issued ASU 2017-12, which amends
the hedge accounting recognition and presentation requirements in Accounting Standards Codification (“ASC”) 815 -
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Derivatives and Hedging. The guidance (1) improves the transparency and understandability of information conveyed
to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting
for hedging relationships with those risk management activities, and (2) reduces the complexity of and simplify the
application of hedge accounting by preparers. We early adopted this guidance and that adoption did not have an impact
on our consolidated financial statements and disclosures.
ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08, which amends the amortization period for certain purchased
callable debt securities held at a premium, shortening such period to the earliest call date. The adoption of this guidance
did not have a material impact on our consolidated financial statements.
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. We early adopted this guidance and that adoption did not have an impact on our
consolidated financial statements and disclosures.
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 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. We
early adopted this guidance and that adoption did not have an 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 impact of adopting this guidance on our
consolidated financial statements was a cumulative-effect adjustment of $4.9 million to opening retained earnings for
the year ended December 31, 2017 for the excess tax benefit not previously recognized.
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 adoption of this
guidance did not have any impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, which gives entities the option to reclassify to retained earnings
tax effects related to items in accumulated other comprehensive income (“AOCI”) that are deemed stranded in AOCI
as a result of the Tax Cuts and Jobs Act ("Tax Act") enacted in the United States at the end of 2017. The amendments
in this guidance eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of
information reported to financial statement users. The ASU is effective for interim and annual reporting periods beginning
after December 15, 2018 but early adoption is permitted in any interim or annual period for which financial statements
have not yet been issued. Entities also have the option of applying the ASU either (1) in the period of adoption or (2)
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
retrospectively to each period in which the income tax effects of the Tax Act related to items in AOCI, are recognized.
The adoption of this guidance is not expected to have a material impact on our consolidated financial statements and
disclosures.
ASU 2017-09, Stock Compensation - Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-
based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-
based payment awards to which an entity would be required to apply modification accounting under ASC 718.
Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of
the awards are the same immediately before and after the modification. The ASU’s amendments are effective for interim
and annual reporting periods beginning after December 15, 2017, although 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 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost
In March 2017, the FASB issued ASU 2017-07, which amends the requirements in ASC 715 related to the income
statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension
and other postretirement plans. The ASU requires entities to (1) disaggregate the current-service-cost component from
the other components of net benefit cost (the “other components”) and present it with other current compensation costs
for related employees in the statement of earnings, and (2) present the other components elsewhere in the statement
of earnings and outside of income from operations if such a subtotal is presented. The ASU also requires entities to
disclose the captions within the statement of earnings that contain the other components if they are not presented on
appropriately described separate lines. In addition, only the service-cost component of the net benefit cost is eligible
for capitalization, which is a change from current practice, under which entities capitalize the aggregate net benefit
cost when applicable. The ASU’s amendments are effective for interim and annual reporting periods beginning after
December 15, 2017, although 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 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of
Nonfinancial Assets
In February 2017, the FASB issued ASU 2017-05 to clarify the scope of the Board’s guidance on nonfinancial
asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms
the derecognition on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as
amended). The ASU clarifies that ASC 610-20 applies to the derecognition of all nonfinancial assets and in-substance
nonfinancial assets. The ASU also requires an entity to derecognize the nonfinancial asset or in-substance nonfinancial
asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary
pursuant to ASC 810, and (2) control of the asset is transferred in accordance with ASC 606. The ASU is effective for
interim and annual reporting periods beginning after December 15, 2017. We expect to adopt this guidance on January
1, 2018 using the modified retrospective approach. We do not expect this adoption to have a material impact on our
consolidated financial statements and disclosures.
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.
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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 financial
instruments including reinsurance balances recoverable 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 OTTI 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.
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. For our reinsurance balances recoverable, the ASU will require us to
determine a provision for credit losses associated with our reinsurers based on an “expected loss” approach which
will likely differ from the provisions for uncollectible reinsurance balances recoverable that we have currently recorded,
based on the “incurred loss” approach under existing guidance. We are continuing to review all our financial instruments
as well as assets that are subject to credit risk, primarily our reinsurance balance recoverables and available-for-sale
debt securities to determine the provisions for credit losses on the instruments and to quantify the impact of adopting
the “expected loss” approach required by the ASU.
While we anticipate an increase in our allowances for credit losses for the financial instruments and assets that
are within the scope of the ASU in view of the objective of the new guidance, the magnitude of any increase will depend
largely on the composition of our investment portfolio at the date of adoption of the ASU as well as on the prevailing
economic conditions and forecasts at the time of adoption.
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 U.S. 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. We however,
do not anticipate that the adoption of the ASU will have a material impact on our consolidated financial statements and
related disclosures.
ASU 2016-01, Recognition and Measurement of Financial Instruments
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ENSTAR GROUP LIMITED
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.
Based on our current review, while the ASU will impact the financial liabilities that we have assumed through
loss portfolio transfer reinsurance agreements for which we have elected the fair value option, substantially all of our
assets are not within the scope of the new guidance. We expect to adopt this guidance on January 1, 2018 using the
modified retrospective approach, however we do not expect that adoption to have a material impact on our consolidated
financial statements and related disclosures.
ASUs 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 adopted 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.
The analysis of our current sources of revenues indicates that substantially all of our revenues are from sources
that are within the scope of other FASB topics, primarily ASC 944 - Insurance, and therefore are excluded from the
scope of the revenue recognition standard. For those revenue sources within the scope of the revenue recognition
standard such as fees earned under consulting arrangements with third- party clients, which are however not material,
there are no significant changes in the timing or measurement of those revenues based upon the provisions of the
new revenue recognition guidance. Therefore, since substantially all of our revenue sources are excluded from the
scope of the new revenue recognition standard, we do not anticipate the adoption of the new guidance to have a
material impact on our consolidated financial statements and related disclosures.
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.
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ENSTAR GROUP LIMITED
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
$
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
NET ASSETS ACQUIRED AT FAIR VALUE
$
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 segment and other activities, 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
$
$
$
35,225
35,225
—
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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 between our Non-life Run-off segment and our other activities.
ASSETS
Short-term investments, trading, at fair value
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 — paid
Prepaid reinsurance premiums
Other assets
TOTAL ASSETS
LIABILITIES
Losses and LAE
Funds withheld
Insurance and reinsurance balances payable
Unearned premium
Other liabilities
TOTAL LIABILITIES
Non-life
Run-off
Segment
Other
Total
$
8,644 $
— $
—
31,350
—
1,339
41,333
39,451
4,041
10,831
3,213
3,097
6,687
—
96,656
—
103,343
25,258
302
1,320
—
2,298
8,644
6,687
31,350
96,656
1,339
144,676
64,709
4,343
12,151
3,213
5,395
101,966
132,521
234,487
56,021
117,188
173,209
473
6,212
5,969
9,745
—
779
—
2,875
78,420
120,842
473
6,991
5,969
12,620
199,262
NET ASSETS ACQUIRED AT FAIR VALUE
$
23,546 $
11,679 $
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 our other activities.
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.
131
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.
132
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
ASSETS
Short-term investments, trading, at fair value
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
$
85,309
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, 2017, $16.1 million has been amortized to acquisition costs and $16.0 million has been amortized to
net premiums earned in the consolidated statements of earnings and comprehensive income. As at December 31,
2017, the remaining balance of the fair value adjustment was $2.5 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.
133
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Supplemental Pro Forma Financial Information (Unaudited)
The following unaudited pro forma condensed combined statement of earnings for the year ended December 31,
2015 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, 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
$
$
904,460 $
(694,119)
9,950
220,291 $
Unaudited
Sussex
Alpha
Wilton Re
Pro forma
Adjustments
Enstar
Group
Limited -
Pro forma
981,621
29,990 $
(39,860)
—
(9,870) $
31,884 $
5,793 $
(47,026)
—
(3,628)
—
9,494 $
5,894
—
(778,739)
9,950
(15,142) $
2,165 $
15,388 $
212,832
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
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 Interest".
4. SIGNIFICANT NEW BUSINESS
2018
Zurich Australia
On February 22, 2018, we entered into an agreement with an Australia subsidiary of Zurich Insurance Group
("Zurich") to reinsure its New South Wales Vehicle Compulsory Third Party ("CTP") insurance business. Under the
agreement, which is effective as of January 1, 2018, we will assume gross reinsurance reserves of approximately AUD
$350 million (approximately $275.0 million).
134
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business,
we and Zurich are pursuing a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's
Insurance Act 1973 (Cth), which will provide legal finality for Zurich's obligations. The transfer is subject to court,
regulatory and other approvals.
Neon RITC Transaction
On February 16, 2018, we closed the previously announced reinsurance-to-close transaction with Neon
Underwriting Limited ("Neon"), under which we will reinsure to close the 2015 and prior underwriting years of account
(comprising underwriting years 2008 to 2015) of Neon's Syndicate 2468. We have assumed gross reserves of £402.2
million (approximately $543.4 million) or net reinsurance reserves of £337.8 million (approximately $456.4 million)
relating to the portfolio for cash consideration equal to the net amount of reserves assumed. Following the closing of
the transaction, Enstar has taken responsibility for claims handling and will provide complete finality to Neon's
obligations.
Novae RITC Transaction
On January 29, 2018, we entered into an RITC transaction with AXIS Managing Agency Limited, under which
we will reinsure to close the 2015 and prior underwriting years of account of Novae Syndicate 2007. We will assume
gross reserves of approximately £840.0 million (approximately $1.1 billion) relating to the portfolio or net reinsurance
reserves of approximately £600.0 million (approximately $811.0 million) for cash consideration equal to the net amount
assumed.
2017
Allianz
On December 28, 2017, we entered into a reinsurance agreement with Allianz SE (“Allianz”) to reinsure a portfolio
of Allianz’s run-off business, effective December 31, 2017. Pursuant to the reinsurance agreement, we reinsured 50%
of certain U.S. workers' compensation, asbestos, and toxic tort business originally held by San Francisco Reinsurance
Company, an affiliate of Allianz, and in the process assumed net reinsurance reserves of $81.4 million. Affiliates of
Allianz retained $81.4 million of reinsurance premium as funds withheld collateral for the obligations under the
reinsurance agreement and we transferred $8.1 million to a reinsurance trust to further support our obligations. We
will also provide ongoing consulting services with respect to the entire $162.8 million portfolio, including the 50% share
retained by affiliates of Allianz.
RSA
On February 7, 2017, we entered into an agreement to reinsure the U.K. employers' liability legacy business of
RSA Insurance Group PLC ("RSA"). Pursuant to the transaction, our subsidiary assumed gross insurance reserves of
£1,046.4 million ($1,301.8 million), relating to 2005 and prior year business. Net insurance reserves assumed were
£927.5 million ($1,153.9 million) and the reinsurance premium received was £801.6 million ($997.2 million). We elected
the fair value option for this reinsurance contract. The initial fair value adjustment on the gross reserves was $174.1
million, and on the net reserves was $156.7 million. Refer to Note 8 - "Fair Value Measurements" for a description of
the fair value process and assumptions.
Following the initial reinsurance transaction, which transferred the economics of the portfolio up to the policy's
limits, we and RSA are pursuing 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.
135
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
QBE
On January 11, 2017, we closed a transaction to reinsure multi-line property and casualty business of QBE
Insurance Group Limited ("QBE"). We assumed gross reinsurance reserves of approximately $1,019.0 million (net
reserves of $447.0 million) relating to the portfolio, which primarily includes workers' compensation, construction defect,
and general liability discontinued lines of business. The reinsurance premium received was $403.8 million, comprised
of $227.6 million in restricted cash and $176.2 million in funds held. We elected the fair value option for this reinsurance
contract. The initial fair value adjustment was $180.0 million on the gross reserves and $43.2 million on the net reserves.
Refer to Note 8 - "Fair Value Measurements" for a description of the fair value process and assumptions. In addition,
we 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 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.
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.
136
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2017,
the amount of the parental guarantee was $129.1 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.
5. DIVESTITURES, HELD-FOR-SALE BUSINESSES AND DISCONTINUING OPERATIONS
Pavonia
On December 29, 2017, the Company completed the previously announced sale of its subsidiary, Pavonia
Holdings (US), Inc. (“Pavonia”), to Southland National Holdings, Inc. (“Southland”), a Delaware corporation and a
subsidiary of Global Bankers Insurance Group, LLC. The aggregate purchase price was $120.0 million. The Company
used the proceeds to make repayments under its revolving credit facility.
Pavonia owns Pavonia Life Insurance Company of Michigan (“PLIC MI”) and Enstar Life (US), Inc. Pursuant to
the amended stock purchase agreement between the Company and Southland, which partially restructured the
transaction, Southland will acquire Pavonia Life Insurance Company of New York ("PLIC NY") for $13.1 million in a
second closing that is expected to occur in the first or second quarter of 2018, subject to regulatory approval. The
additional purchase price represents the cash consideration we paid to PLIC MI when we acquired PLIC NY from PLIC
MI as a result of the restructuring of the first closing of the transaction.
137
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Pavonia was a substantial portion of our previously reported Life and Annuities segment. We have classified the
assets and liabilities of the remaining businesses to be sold in the second closing as held-for-sale as at December 31,
2017. The following table summarizes the components of assets and liabilities held-for-sale on our consolidated balance
sheet as at December 31, 2017 and 2016 in relation to Pavonia:
December 31,
2017
December 31,
2016
Assets:
Fixed maturities, trading, at fair value
$
20,770 $
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
Assets of businesses held for sale
Less: Accrual of loss on sale
Total assets held for sale
Liabilities:
Policy benefits for life and annuity contracts
Other liabilities
Total liabilities held for sale
—
765
—
6,314
13
—
1,728
269
29,859
(5,508)
326,382
765,554
4,428
15,114
18,018
5,202
31,500
18,029
60,229
1,244,456
—
$
$
$
24,351 $
1,244,456
10,666 $
1,144,850
605
5,937
11,271 $
1,150,787
As of December 31, 2017 and 2016, included in the table above were restricted investments of $1.4 million and
$786.0 million, respectively.
138
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The Pavonia business qualified 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, 2017, 2016 and 2015:
Operations:
INCOME
Net premiums earned
Net investment income
Net realized and unrealized gains
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 (LOSS) FROM DISCONTINUED
OPERATIONS BEFORE GAIN ON SALE
Disposal:
Consideration received
Less: Carrying value of subsidiary
Less: Cumulative currency translation adjustment
previously recorded in accumulated other
comprehensive income
Gain on sale of subsidiary
NET EARNINGS (LOSS) FROM DISCONTINUED
OPERATIONS
December 31,
2017
December 31,
2016
December 31,
2015
$
$
$
$
$
$
$
55,906 $
69,089 $
41,117
577
1,564
38,140
4,263
1,912
85,327
35,404
271
7,690
99,164 $
113,404 $
128,692
84,029
9,025
12,813
(26)
76,594
9,836
14,416
199
97,472
13,712
13,886
486
105,841 $
101,045 $
125,556
(6,677)
(3,190) $
12,359
(396)
3,136
(5,167)
(9,867) $
11,963 $
(2,031)
120,000
86,961
12,179
20,860 $
—
—
—
— $
—
—
—
—
10,993 $
11,963 $
(2,031)
The following table presents the cash flows of Pavonia whilst under our ownership for the years ended
December 31, 2017, 2016 and 2015:
Operating activities
Investing activities
Change in cash of businesses held for sale
December 31,
2017
December 31,
2016
December 31,
2015
$
$
75,714 $
(71,521) $
42,542
56,646
118,256 $
(14,875) $
(5,893)
(24,766)
(30,659)
139
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The cash, cash equivalents and restricted cash carried on the balance sheet of Pavonia on December 29, 2017 were
$135.1 million, as at the date of disposal.
Laguna
On August 29, 2017, we closed the previously-announced sale of our wholly-owned subsidiary Laguna Life DAC
(“Laguna”) to a subsidiary of Monument Insurance Group Limited ("Monument"), for a total consideration of €25.6
million (approximately $30.8 million). We have an investment in Monument, as described further in Note 21 - "Related
Party Transactions". Laguna was classified as held-for-sale during 2017 prior to its sale.
Following the closing of the sale of Laguna, we recorded a loss on sale of $16.3 million for the year ended
December 31, 2017, which has been included in earnings from continuing operations before income taxes in our
consolidated statement of earnings. This loss includes a cumulative currency translation adjustment balance of $(6.3)
million, which has been reclassified from accumulated other comprehensive income and included in earnings as a
component of the loss on sale of Laguna during the year ended December 31, 2017, following the closing of the sale.
Excluding the loss on sale, the net earnings (losses) relating to Laguna for the years ended December 31, 2017, 2016
and 2015 were $(1.2) million, $1.0 million and $1.8 million, respectively. These amounts were not significant to our
consolidated operations and therefore Laguna was not classified as a discontinued operation in current or prior periods.
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,
2017
December 31,
2016
$
554,036 $
607,132
3,363,060
100,221
288,713
421,548
541,574
5,876,284
106,363
240
$
5,982,887 $
840,274
267,363
2,387,322
47,181
373,528
217,212
478,280
4,611,160
95,047
—
4,706,207
Included within residential and commercial mortgage-backed securities as at December 31, 2017 were securities
issued by U.S. governmental agencies with a fair value of $152.4 million (as at December 31, 2016: $362.9 million).
Included within corporate securities as at December 31, 2017 were senior secured loans of $68.9 million (as at
December 31, 2016: $90.7 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.
140
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
As at December 31, 2017
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
Available-for-sale
Amortized
Cost
Fair Value
$
398,054
$
398,083
340,531
341,753
1,283,898
1,286,527
1,235,079
1,249,887
1,278,126
1,348,199
285,312
427,469
534,893
288,713
421,548
541,574
% of Total
Fair
Value
6.8%
5.8%
21.9%
21.3%
22.9%
4.9%
7.2%
9.2%
$ 5,783,362
$ 5,876,284
100.0%
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, 2017
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Asset-backed
As at December 31, 2016
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Asset-backed
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Non-OTTI
$
4,210
$
— $
(23) $
84,776
113,561
5,146
31
373
1,249
2,436
8
—
—
(588)
(876)
(18)
—
—
Fair
Value
4,187
85,437
115,121
5,136
31
373
$
208,097
$
3,693
$
(1,505) $
210,285
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Non-OTTI
$
12,784
$
32
$
(106) $
86,897
159,243
6,585
488
3,867
1,303
2,040
12
39
9
(2,777)
(2,628)
(21)
—
—
Fair
Value
12,710
85,423
158,655
6,576
527
3,876
$
269,864
$
3,435
$
(5,532) $
267,767
141
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2017
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
Gross Unrealized Losses
Amortized
Cost
Fair
Value
% of Total
Fair
Value
$
50,135
$
17,549
53,690
46,743
39,576
31
373
49,828
17,427
54,355
47,735
40,536
31
373
23.7%
8.3%
25.8%
22.7%
19.3%
—%
0.2%
$
208,097
$
210,285
100.0%
The following tables summarize our fixed maturity and short-term investments classified as available-for-sale in a
gross unrealized loss position:
As at December 31, 2017
Fixed maturity investments, at fair value
U.S. government and agency
Non-U.S. government
Corporate
Municipal
12 Months or Greater
Less Than 12 Months
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
2,344
$
(16) $
1,842
$
(7) $
4,186
$
11,101
9,177
369
(373)
(807)
(5)
20,965
24,200
3,605
(215)
(69)
(13)
32,066
33,377
3,974
(23)
(588)
(876)
(18)
Total fixed maturity investments
$
22,991
$
(1,201) $
50,612
$
(304) $
73,603
$
(1,505)
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
$
8,316
8,003
—
(1,794)
(1,800)
—
30,086
42,304
3,132
(983)
(828)
(21)
38,402
50,307
3,132
(106)
(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, 2017 and December 31, 2016, the number of securities classified as available-for-sale in
an unrealized loss position was 96 and 156, respectively. Of these securities, the number of securities that had been
in an unrealized loss position for twelve months or longer was 37 and 41, respectively.
Other-Than-Temporary Impairment
For the years ended December 31, 2017, 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,
2017 and 2016. 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, 2017 and 2016.
142
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, 2017:
Amortized
Cost
Fair Value
% of Total
Investments
AAA
Rated
AA Rated
A Rated
BBB
Rated
Non-
Investment
Grade
Not Rated
$
561,483
$
558,223
9.2% $
556,859
$
1,364
$
— $
— $
— $
665,056
692,569
11.4%
134,619
409,315
79,030
62,964
6,641
3,413,543
3,478,181
57.2%
123,059
375,252
1,854,503
932,238
188,237
103,299
285,343
105,357
288,744
1.7%
4.7%
26,313
166,386
62,605
7,425
12,864
14,204
3,575
678
—
98,997
—
—
4,892
—
1,054
427,469
421,548
6.9%
222,656
38,176
77,811
59,358
9,555
13,992
U.S. government
and agency
Non-U.S.
government
Corporate
Municipal
Residential
mortgage-backed
Commercial
mortgage-backed
Asset-backed
535,266
541,947
8.9%
272,784
43,539
68,489
69,116
Total
$ 5,991,459
6,086,569
100.0%
1,502,676
937,676
2,106,901
1,127,929
88,019
391,449
—
19,938
% of total fair value
24.7%
15.4%
34.6%
18.6%
6.4%
0.3%
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
CLO equities
CLO equity funds
Private credit funds
Other
December 31,
2017
December 31,
2016
$
$
289,556 $
229,999
63,773
249,475
56,765
12,840
10,156
828
913,392 $
300,529
249,023
85,976
223,571
61,565
15,440
—
943
937,047
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 45 days' notice.
• 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. Approximately half of our portfolio of fixed income hedge funds are
eligible for redemption.
143
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities. The
funds have liquidity terms that vary from daily up to 6 days' notice.
• 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 $1.1 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
$11.7 million and is eligible for redemption in 2018.
• Private credit funds invest in direct senior or collateralized loans. The investments are subject to restrictions
on redemption and sales that are determined by the governing documents and limit our ability to liquidate our
positions in the funds.
• 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, 2017, we had unfunded commitments to private equity funds of $164.7 million.
Other Investments, at cost
Our other investments carried at cost of $125.6 million as of December 31, 2017 consist of life settlement
contracts. During the years ended December 31, 2017 and 2016, net investment income included $13.8 million and
$18.0 million, respectively, related to investments in life settlements. During the years ended December 31, 2017 and
2016, there were impairment charges of $7.2 million and $5.3 million, 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, 2017 and 2016.
December 31, 2017
December 31, 2016
Number of
Contracts
Carrying
Value
Face Value
(Death
Benefits)
Number of
Contracts
Carrying
Value
Face Value
(Death
Benefits)
Remaining Life Expectancy of Insureds:
0 – 1 year
1 – 2 years
2 – 3 years
3 – 4 years
4 – 5 years
Thereafter
Total
— $
— $
—
11
10
20
13
162
17,655
7,524
16,119
13,960
70,363
29,471
19,906
32,411
32,730
2
7
11
17
16
$
461
$
700
11,396
15,338
17,013
10,377
77,066
18,337
29,715
32,189
23,302
431,034
216
$
125,621
$
505,361
234
$
131,651
$
535,277
390,843
181
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, 2017, our best estimate of the life insurance premiums required to keep the policies in force,
payable in the 12 months ending December 31, 2018 and the four succeeding years ending December 31, 2022 is
$17.8 million, $17.7 million, $16.6 million, $15.7 million, and $15.2 million, respectively.
144
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Net Investment Income
Major categories of net investment income for the years ended December 31, 2017, 2016 and 2015 are
summarized as follows:
Fixed maturity investments
Short-term investments and cash and cash equivalents
Funds held
Funds held – directly managed
Investment income from fixed maturities and cash and cash
equivalents
Equity securities
Other investments
Life settlements and other
Investment income from equities and other investments
Gross investment income
Investment expenses
Net investment income
Net Realized and Unrealized Gains (Losses)
2017
144,367 $
2016
114,885 $
$
9,314
601
32,479
4,491
22,583
5,769
186,761
147,728
4,355
14,337
14,370
33,062
219,823
(11,034)
4,874
22,515
18,191
45,580
193,308
(7,845)
2015
87,512
5,993
234
—
93,739
5,580
11,712
20,871
38,163
131,902
(9,338)
$
208,789 $
185,463 $
122,564
Components of net realized and unrealized gains (losses) for the years ended December 31, 2017, 2016 and
2015 were as follows:
Net realized gains (losses) on sale:
2017
2016
2015
Gross realized gains on fixed maturity securities, available-for-sale
$
616
$
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
Change in value of fair value option on funds held - directly managed
Total net unrealized gains (losses)
Net realized and unrealized gains (losses)
(125)
4,695
701
(4,219)
1,668
35,878
16,498
102,388
32,928
974
188,666
(21)
(130)
1,848
5,348
(14,616)
(7,036)
36,314
6,561
70,296
(28,317)
—
84,854
(4,291)
19,884
—
15,859
(52,918)
(21,875)
17,411
—
—
(57,382)
(41,523)
$
190,334
$
77,818
$
The gross realized gains and losses on available-for-sale securities included in the table above resulted from
sales of $40.8 million, $41.3 million and $95.1 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
145
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 $257.7 million and $363.8 million, as of December 31, 2017 and 2016, 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,
2017
3,118,892 $
599,829
151,467
234,833
4,105,021 $
December 31,
2016
1,975,022
882,400
177,263
220,328
3,255,013
$
(1)
Our underwriting businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual
business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has
a loss that cannot be funded from other sources. As at December 31, 2017, our combined Funds at Lloyd's were comprised of cash and
investments of $234.8 million and unsecured letters of credit of $165.0 million. At December 31, 2017, we had an unsecured letter of credit
agreement for Funds at Lloyd’s purposes ("FAL Facility") to issue up to $165.0 million of letters of credit, with a provision to increase the
facility up to $200.0 million. On February 8, 2018, we amended and restated the FAL Facility to issue up to $325.0 million of letters of credit,
with a provision to increase the facility up to $400.0 million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and
expires in 2022.
The increase in the collateral in trust for third-party agreements was primarily due to the loss portfolio transfer
reinsurance transactions with RSA and QBE described in Note 4 - "Significant New Business".
7. FUNDS HELD - DIRECTLY MANAGED
Funds held - directly managed consists of the following:
• 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 on October 1, 2016.
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, 2017
and 2016, the funds held at cost had a carrying value of $994.8 million and $1,023.0 million, respectively, and
the embedded derivative had a fair value of $4.7 million and ($28.3) million, respectively, the aggregate of
which was $999.5 million and $994.7 million, respectively, as included in the table below.
• The funds held balance in relation to the QBE reinsurance transaction described in Note 4 - "Significant New
Business", for which we elected the fair value option.
146
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table presents the fair values of assets and liabilities underlying the funds held - directly managed
account as at December 31, 2017 and 2016:
Fixed maturity investments:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturity investments
Other assets
December 31,
2017
December 31,
2016
$
69,850 $
2,926
695,490
58,930
29,439
211,186
97,565
$
$
1,165,386 $
14,554
1,179,940 $
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, 2017
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
Credit Ratings
Amortized
Cost
Fair Value
% of Total
Fair Value
$
49,093
$
49,007
54,447
230,872
248,525
234,556
29,544
54,204
230,256
248,675
245,054
29,439
215,603
211,186
97,160
97,565
4.2%
4.7%
19.8%
21.3%
21.0%
2.5%
18.1%
8.4%
$ 1,159,800
$ 1,165,386
100.0%
The following table sets forth the credit ratings of our fixed maturity investments underlying the funds held -
directly managed account as of December 31, 2017:
Amortized
Cost
Fair Value
% of Total
Investments
AAA
Rated
AA Rated
A Rated
U.S. government and agency
$
69,754
$
69,850
6.0% $
69,850
$
— $
— $
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total
% of total fair value
2,977
688,239
56,523
29,544
215,603
97,160
2,926
695,490
58,930
29,439
211,186
97,565
0.3%
59.6%
5.1%
2.5%
18.1%
8.4%
—
7,754
—
29,439
202,608
93,849
—
25,418
20,921
—
6,576
3,716
2,926
315,385
30,449
—
2,002
—
$
1,159,800
$
1,165,386
100.0% $
403,500
$
56,631
$
350,762
$
354,493
34.6%
4.9%
30.1%
30.4%
147
BBB
Rated
—
—
346,933
7,560
—
—
—
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Net Investment Income
Major categories of net investment income underlying the funds held - directly managed account for the year
ended December 31, 2017 and 2016 are summarized as follows:
Fixed maturity investments
Short-term investments and cash and cash equivalents
Gross investment income
Investment expenses
Investment income on funds held - directly managed
2017
2016
$
33,558 $
5,705
292
33,850
(1,371)
64
5,769
—
$
32,479 $
5,769
Net Realized Gains (Losses) and Change in Fair Value due to Embedded Derivative and Fair Value Option
Net realized gains (losses) and change in fair value for the year ended December 31, 2017 and 2016 are
summarized as follows:
Net realized losses on fixed maturity securities
Change in fair value of embedded derivative
Change in value of fair value option on funds held- directly managed
2017
$
(4,219) $
32,928
974
2016
(14,616)
(28,317)
—
Net realized gains (losses) and change in fair value of funds held- directly managed
$
29,683 $
(42,933)
8. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the "exit price") in an orderly
transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices
in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
•
•
•
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities
that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1
instruments.
Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices
for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest
rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by
observable market data.
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted third
party pricing sources or management's assumptions and internal valuation models may be used to determine
the fair values.
148
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
In addition, certain of our other investments are measured at fair value using net asset value ("NAV") per share
(or its equivalent) as a practical expedient and have not been classified within the fair value hierarchy above. We have
categorized our investments that are recorded at fair value on a recurring basis among levels based on the observability
of inputs, or at fair value using NAV per share (or its equivalent) as follows:
December 31, 2017
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Based on NAV
as Practical
Expedient
Total Fair
Value
Investments:
Fixed maturity investments:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Equities:
Equities — U.S.
Equities — International
Other investments:
Private equities and private equity funds
Fixed income funds
Fixed income hedge funds
Equity funds
CLO equities
CLO equity funds
Private credit funds
Other
Total Investments
Funds Held - Directly Managed:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Other assets
Reinsurance balances recoverable:
Other Assets:
$
$
$
$
$
$
$
$
$
$
— $
558,223
$
—
—
—
—
—
—
692,569
3,411,003
105,357
285,664
400,054
514,055
— $
—
67,178
—
3,080
21,494
27,892
— $
—
—
—
—
—
—
558,223
692,569
3,478,181
105,357
288,744
421,548
541,947
— $
5,966,925
$
119,644
$
— $
6,086,569
103,652
$
—
103,652
$
2,711
$
240
2,951
$
— $
—
— $
— $
106,363
—
240
— $
106,603
— $
— $
— $
289,556
$
—
—
—
—
—
—
—
202,570
—
121,046
—
—
—
—
—
—
—
56,765
—
—
314
27,429
63,773
128,429
—
12,840
10,156
514
289,556
229,999
63,773
249,475
56,765
12,840
10,156
828
— $
103,652
$
323,616
6,293,492
$
$
57,079
176,723
$
$
532,697
532,697
$
$
913,392
7,106,564
— $
69,850
$
— $
— $
—
—
—
—
—
—
—
2,926
695,490
58,930
29,439
211,186
97,565
14,554
—
—
—
—
—
—
—
—
—
—
—
—
—
—
69,850
2,926
695,490
58,930
29,439
211,186
97,565
14,554
— $
1,179,940
$
— $
— $
1,179,940
— $
— $
542,224
$
— $
542,224
149
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Derivative Instruments
Losses and LAE:
Other Liabilities:
Derivative Instruments
$
$
$
$
$
— $
— $
— $
— $
— $
319
319
$
$
— $
— $
— $
— $
319
319
— $
1,794,669
$
— $
1,794,669
7,246
7,246
$
$
— $
— $
— $
— $
7,246
7,246
150
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
December 31, 2016
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Based on NAV
as Practical
Expedient
Total Fair
Value
Investments:
Fixed maturity investments:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Equities:
Equities — U.S.
Other investments:
Private equities and private equity
funds
Fixed income funds
Fixed income hedge funds
Equity funds
CLO equities
CLO equity funds
Other
Total Investments
Funds Held - Directly Managed:
U.S. government and agency
Non-U.S. government
Corporate
Municipal
Commercial mortgage-backed
Asset-backed
Other assets
Other Assets:
Derivative Instruments
Other Liabilities:
Derivative Instruments
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
852,984
$
—
—
—
—
—
—
352,786
2,471,444
53,757
374,055
204,999
467,463
— $
—
74,534
—
—
12,213
14,692
— $
852,984
—
—
—
—
—
—
352,786
2,545,978
53,757
374,055
217,212
482,155
— $
4,777,488
$
101,439
$
— $
4,878,927
91,287
91,287
$
$
3,760
3,760
$
$
— $
— $
— $
— $
95,047
95,047
— $
— $
15,000
$
285,529
$
300,529
—
—
—
—
—
—
223,636
—
133,802
—
—
—
—
—
—
61,565
—
313
25,387
85,976
89,769
—
15,440
630
249,023
85,976
223,571
61,565
15,440
943
— $
357,438
91,287
$
5,138,686
$
$
76,878
178,317
$
$
502,731
502,731
$
$
937,047
5,911,021
— $
47,885
$
— $
— $
—
—
—
—
—
—
5,961
663,556
38,927
151,395
79,806
7,135
—
—
—
—
—
—
—
—
—
—
—
—
47,885
5,961
663,556
38,927
151,395
79,806
7,135
— $
994,665
$
— $
— $
994,665
— $
— $
— $
— $
2,930
2,930
74
74
$
$
$
$
— $
— $
— $
— $
— $
— $
2,930
2,930
— $
— $
74
74
151
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 other such 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
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
152
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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. 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 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.
• 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
153
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 private credit 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.
Insurance Contracts - Fair Value Option
The Company uses an internal model to calculate the fair value of the liability for losses and loss adjustment
expenses and reinsurance balances recoverable assets for certain retroactive reinsurance contracts where we have
elected the fair value option in our Non-life Run-off segment. The fair value was calculated as the aggregate of discounted
cash flows plus a risk margin. The discounted cash flow approach uses (i) estimated nominal cash flows based upon
an appropriate payment pattern developed in accordance with standard actuarial techniques and (ii) a discount rate
based upon a high quality rated corporate bond plus a credit spread for non-performance risk. The model uses corporate
bond rates across the yield curve depending on the estimated timing of the future cash flows and specific to the currency
of the risk. The risk margin was calculated using the present value of the cost of capital. The cost of capital approach
uses (i) projected capital requirements, (ii) multiplied by the risk cost of capital representing the return required for non-
hedgeable risk based upon the weighted average cost of capital less investment income and (iii) discounted using the
weighted average cost of capital.
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.
Level 3 Measurements and Changes in Leveling
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.
154
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Investments
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, 2017 and 2016:
Corporate
Residential
mortgage-
backed
Commercial
mortgage-
backed
Asset-
backed
Other
Investments
Total
2017
Beginning fair value
$
74,534
$
— $
12,213
$
14,692
$
76,878
$
178,317
Purchases
Sales
Total realized and unrealized gains
(losses)
Transfer into Level 3 from Level 2
Transfer out of Level 3 into Level 2
28,872
(37,941)
249
24,431
(22,967)
711
(37)
(16)
3,085
(663)
21,306
(424)
(434)
18,974
(30,141)
9,749
(20,795)
205
56,074
(32,033)
435
(12,350)
(7,884)
—
—
61,073
(71,547)
(7,880)
102,564
(85,804)
Ending fair value
$
67,178
$
3,080
$
21,494
$
27,892
$
57,079
$
176,723
Corporate
Residential
mortgage-
backed
Commercial
mortgage-
backed
Asset-
backed
Other
Investments
Total
2016
Beginning fair value
$
— $
— $
26,704
$
120,440
$
77,016
$
224,160
Purchases
Sales
Total realized and unrealized gains
(losses)
Transfer into Level 3 from Level 2
Transfer out of Level 3 into Level 2
24,586
(11,011)
(841)
64,134
(2,334)
—
(2,178)
(24)
2,781
(579)
14,216
(14,071)
(460)
23,628
(37,804)
19,750
(25,581)
(1,897)
31,778
(129,798)
6,885
(12,933)
5,910
65,437
(65,774)
2,688
—
—
122,321
(170,515)
Ending fair value
$
74,534
$
— $
12,213
$
14,692
$
76,878
$
178,317
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.
The securities transferred from Level 2 to Level 3 were transferred due to insufficient market observable inputs
for the valuation of the specific assets. The transfers from Level 3 to Level 2 were based upon us obtaining market
observable information regarding the valuations of the specific assets.
155
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Insurance Contracts - Fair Value Option
The following table presents a reconciliation of the beginning and ending balances for all insurance contracts
measured at fair value on a recurring basis using Level 3 inputs during the year ended December 31, 2017:
Year Ended December 31, 2017
Beginning fair value
Assumed business
Changes in nominal amounts:
Net incurred losses and LAE
Paid losses
Changes in fair value:
Discounted cash flows
Risk margin
Effect of exchange rate movements
Liability for losses
and LAE
$
— $
1,966,843
(122,797)
(197,102)
78,046
(24,039)
93,718
Ending fair value
$
1,794,669
$
Reinsurance
balances
recoverable
—
565,824
(1,848)
(56,256)
29,785
(6,034)
10,753
542,224
Changes in fair value related to Level 3 assets and liabilities in the table above are included in net incurred losses
and LAE in our consolidated statements of earnings.
Below is a summary of the quantitative information regarding the significant observable and unobservable inputs
used in the internal model to determine fair value on a recurring basis as at December 31, 2017:
Valuation Technique
Unobservable (U) and Observable (O) Inputs
Weighted Average
December 31, 2017
Internal model
Internal model
Internal model
Internal model
Internal model
Internal model
Corporate bond yield (O)
Credit spread for non-performance risk (U)
Risk cost of capital
Weighted average cost of capital (U)
Duration - liability (U)
Duration - reinsurance balances recoverable (U)
A rated
0.2%
5.0%
8.5%
11.41 years
11.66 years
The fair value of the liability for losses and LAE and reinsurance balances recoverable may increase or decrease
due to changes in the corporate bond rate, the credit spread for non-performance risk, the risk cost of capital, the
weighted average cost of capital and the estimated payment pattern as described below:
• An increase in the corporate bond rate or credit spread for non-performance risk would result in a decrease
in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a decrease
in the corporate bond rate or credit spread for non-performance risk would result in an increase in the fair value
of the liability for losses and LAE and reinsurance balances recoverable.
• An increase in the weighted average cost of capital would result in an increase in the fair value of the liability
for losses and LAE and reinsurance balances recoverable. Conversely, a decrease in the weighted average
cost of capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance
balances recoverable.
• An increase in the risk cost of capital would result in an increase in the fair value of the liability for losses and
LAE and reinsurance balances recoverable. Conversely, a decrease in the risk cost of capital would result in
a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
156
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• An acceleration of the estimated payment pattern would result in an increase in the fair value of the liability
for losses and LAE and reinsurance balances recoverable. Conversely, a deceleration of the estimated payment
pattern would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances
recoverable.
In addition, the estimate of the capital required to support the liabilities is based upon current industry standards
for capital adequacy. If the required capital per unit of risk increases, then the fair value of the liability for losses and
LAE and reinsurance balances recoverable would increase. Conversely, a decrease in required capital would result
in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
Disclosure of Fair Values for Financial Instruments Carried at Cost
As of December 31, 2017 and 2016, investments in life settlement contracts were carried at cost of $125.6 million
and $131.7 million, respectively, and their fair values were $131.9 million and $129.5 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.
As of December 31, 2017, our 4.5% Senior Notes due 2022 had a carrying value of $347.5 million while the fair
value based on observable market pricing from a third party service was $357.4 million. The fair value is classified as
Level 2.
Disclosure of fair value of amounts relating to insurance contracts is not required, except those for which we
elected the fair value option, as described above. 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, 2017 and 2016.
9. DERIVATIVE INSTRUMENTS
Foreign Currency Hedging of Net Investments
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,
2017 and 2016, we had forward currency contracts in place which we had designated as hedges of our net investments
in foreign operations.
The following table presents the gross notional amounts and the estimated fair values recorded within other
assets and liabilities related to our qualifying foreign currency forward exchange rate contracts as at December 31,
2017 and 2016:
December 31, 2017
December 31, 2016
Fair Value
Fair Value
Gross Notional
Amount
Assets
Liabilities
Gross Notional
Amount
Assets
Liabilities
Foreign exchange forward - AUD
Foreign exchange forward - CAD
Total qualifying hedges
$
$
32,810
$
— $
27,141
59,951
$
11
11
$
965
512
45,467
$
2,753
$
37,175
177
$
1,477
$
82,642
$
2,930
$
74
—
74
157
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table presents the amounts of the net gains and losses deferred in the currency translation
adjustment ("CTA") account, which is a component of AOCI, in shareholders' equity, related to our qualifying foreign
currency forward exchange rate contracts for the years ended December 31, 2017 and 2016:
Amount of Gains (Losses) Deferred in AOCI
2017
2016
Foreign exchange forward - AUD
Foreign exchange forward - CAD
Total qualifying hedges
$
$
(1,247) $
—
(1,247) $
2,568
1,186
3,754
Following the completion of the sale of Pavonia which closed on December 29, 2017, we reclassified into earnings,
the cumulative losses of $1.1 million related to the CAD foreign currency forward contract that we had set up to hedge
our CAD dominated net investment in Pavonia, and which had previously been deferred in the CTA.
We also borrowed €75.0 million (approximately $88.5 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 - "Debt Obligations". We repaid €25.0 million (approximately $29.5 million) of this outstanding loan balance
during the year ended December 31, 2017 and reclassified the related foreign exchange losses of $1.1 million previously
deferred in AOCI, into earnings.
Derivatives Not Designated or Not Qualifying as Hedging Instruments
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 in
non-qualifying hedging relationships. We may also utilize equity call option instruments either to obtain exposure to a
particular equity instrument or for yield enhancement in non-qualifying hedging relationships.
Foreign Currency Forward Contracts
The following table presents the gross notional amounts, estimated fair values recorded within other assets and
liabilities and the amounts included in net earnings related to our non-qualifying foreign currency forward exchange
rate hedging relationships as at December 31, 2017.
December 31, 2017
Fair Value
Gross Notional
Amount
Assets
Liabilities
2017
Losses on non-qualifying
hedges charged to earnings
Foreign exchange forward - AUD
$
57,028
$
— $
1,002
$
Foreign exchange forward - GBP
Foreign exchange forward - EUR
207,323
19,235
262
46
4,312
455
Total non-qualifying hedges
$
283,586
$
308
$
5,769
$
(1,002)
(6,367)
(971)
(8,340)
There were no such non-qualifying foreign currency forward contracts utilized as at December 31, 2016 or during
the years ended December 31, 2016 and 2015.
Investments in Call Options on Equities
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 as at or during the year
ended December 31, 2017.
158
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, 2017 and 2016:
Non-life
Run-off
Atrium
StarStone
Other
Total
2017
Recoverable from reinsurers on unpaid:
Outstanding losses
IBNR
Fair value adjustments
Fair value adjustments - fair value option
Total reinsurance reserves recoverable
Paid losses recoverable
$
932,284
$
7,472
$
211,650
$
590,154
(12,970)
(131,983)
1,377,485
128,253
31,476
1,583
—
40,531
(451)
242,620
(2,253)
—
452,017
23,179
$ 1,505,738
$
40,080
$
475,196
$
Reconciliation to Consolidated Balance Sheet:
Reinsurance balances recoverable
$
963,514
$
40,080
$
475,196
$
Reinsurance balances recoverable - fair value option
542,224
—
—
Total
$ 1,505,738
$
40,080
$
475,196
$
16
—
—
—
16
—
16
16
—
16
$ 1,151,422
864,250
(13,640)
(131,983)
1,870,049
150,981
$ 2,021,030
$ 1,478,806
542,224
$ 2,021,030
Recoverable from reinsurers on unpaid:
Outstanding losses
IBNR
Fair value adjustments
Total reinsurance reserves recoverable
Paid losses recoverable
Non-life
Run-off
Atrium
StarStone
Other
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
Our insurance and reinsurance run-off subsidiaries and assumed portfolios, 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 pledged assets
or 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 interest rate equivalent to a risk free rate for securities with
similar duration to the acquired reinsurance balances recoverable plus 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.
The determination of the fair value adjustments on the retroactive reinsurance contracts for which we have elected the fair
value option is described in Note 8 - "Fair Value Measurements".
As of December 31, 2017 and 2016, we had reinsurance balances recoverable of approximately $2.0 billion and $1.5
billion, respectively. The increase of $560.3 million in reinsurance balances recoverable was primarily a result of the QBE
and RSA reinsurance transactions, which closed in the first quarter of 2017, and the impact of the recent hurricane losses
on Atrium and StarStone, partially offset by reserve reductions, commutations and cash collections made during the year
ended December 31, 2017 in our Non-life Run-off segment.
159
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Top Ten Reinsurers
December 31, 2017
December 31, 2016
Non-life
Run-off
Atrium
StarStone
Other
Total
% of
Total
Non-life
Run-off
Atrium
StarStone
Other
Total
% of
Total
$ 1,166,057
$ 22,422
$ 328,257
$
— $1,516,736
75.0% $
737,074
$ 23,245
$ 226,283
$
— $ 986,602
67.6%
322,722
16,631
144,336
—
483,689
24.0%
301,856
4,827
152,341
—
459,024
31.4%
16,959
1,027
2,603
16
20,605
1.0%
9,183
856
4,119
959
15,117
1.0%
$ 1,505,738
$ 40,080
$ 475,196
$
16
$2,021,030
100.0% $ 1,048,113
$ 28,928
$ 382,743
$
959
$1,460,743
100.0%
Top ten reinsurers
Other reinsurers > $1
million
Other reinsurers < $1
million
Total
Six of the top ten external reinsurers, as at December 31, 2017 and 2016, were all rated A- or better. The remaining
four non-rated reinsurers, from which $687.6 million was recoverable as at December 31, 2017 (December 31, 2016: $512.2
million recoverable from four non-rated reinsurers), including KayleRe Ltd., have provided 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, 2017,
reinsurance balances recoverable of $357.4 million related to KaylaRe Ltd. (December 31, 2016: $242.1 million) and $320.0
million related to Hannover Ruck SE (December 31, 2016: $67.3 million), both of which represent 10% or more of total
reinsurance balances recoverable. 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. Hannover Ruck SE is rated
AA- by Standard & Poor's and A+ by A.M. Best.
Provisions for Uncollectible Reinsurance Recoverables
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, 2017 and 2016. The provisions
for bad debt all relate to the Non-life Run-off segment.
2017
2016
Gross
Provisions
for Bad
Debt
Net
Provisions
as a
% of Gross
Gross
Provisions
for Bad
Debt
Net
Provisions
as a
% of Gross
Reinsurers rated A- or above
$ 1,252,887
$
51,115
$ 1,201,772
4.1% $ 892,776
$
35,184
$
857,592
Reinsurers rated below A-,
secured
Reinsurers rated below A-,
unsecured
Total
771,097
—
771,097
—%
544,894
—
544,894
162,259
114,098
48,161
70.3%
197,589
139,332
58,257
$ 2,186,243
$
165,213
$ 2,021,030
7.6% $ 1,635,259
$ 174,516
$ 1,460,743
3.9%
—%
70.5%
10.7%
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.
160
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table summarizes the liability for losses and LAE by segment as at December 31, 2017 and 2016:
2017
2016
Non-life
Run-off
Atrium
StarStone
Total
Non-life
Run-off
Atrium
StarStone
Total
Outstanding losses
$3,185,703
$
78,363
$
590,977
$3,855,043
$2,697,736
$
67,379
$
502,115
$3,267,230
IBNR
2,903,927
150,508
599,221
3,653,656
1,935,659
130,118
541,305
2,607,082
Fair value adjustments
(125,998)
9,547
(555)
(117,006)
(135,368)
12,503
(863)
(123,728)
Fair value adjustments
- fair value option
ULAE
(314,748)
—
—
(314,748)
—
—
—
—
300,588
2,455
18,100
321,143
218,336
2,122
16,825
237,283
Total
$5,949,472
$
240,873
$
1,207,743
$7,398,088
$4,716,363
$ 212,122
$ 1,059,382
$5,987,867
Reconciliation to Consolidated Balance Sheet:
Losses and loss adjustment expenses
Losses and loss adjustment expenses, at fair value
Total
$5,603,419
1,794,669
$7,398,088
$5,987,867
—
$5,987,867
The overall increase in the liability for losses and LAE between December 31, 2016 and December 31, 2017 was
primarily attributable to the assumed reinsurance agreements with RSA and QBE in our Non-life Run-off segment, for
which we have elected the fair value option, as described in Note 4 - "Significant New Business".
The table below provides a consolidated reconciliation of the beginning and ending liability for losses and LAE for
the years ended December 31, 2017, 2016 and 2015:
2017
2016
2015
Balance as at January 1
$ 5,987,867
$ 5,720,149
$ 4,509,421
Less: reinsurance reserves recoverable
1,388,193
1,360,382
1,154,196
Less: deferred charges on retroactive
reinsurance
94,551
255,911
—
Net balance as at January 1
4,505,123
4,103,856
3,355,225
Net incurred losses and LAE:
Current period
Prior periods
437,853
493,016
476,364
(244,302)
(318,917)
(372,031)
Total net incurred losses and LAE
193,551
174,099
104,333
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
(82,273)
(862,921)
(945,194)
158,429
10,251
(79,579)
(99,933)
(753,478)
(681,956)
(833,057)
(781,889)
(46,903)
(65,069)
10,019
878,815
612,441
—
1,525,703
1,340,444
—
(243,335)
Net balance as at December 31
Plus: reinsurance reserves recoverable
Plus: deferred charges on retroactive
reinsurance
5,447,863
1,870,033
4,505,123
4,103,856
1,388,193
1,360,382
80,192
94,551
255,911
Balance as at December 31
$ 7,398,088
$ 5,987,867
$ 5,720,149
161
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, 2017, 2016 and 2015:
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
Changes in fair value - fair value option
Year Ended December 31, 2017
Non-life
Run-off
Atrium
StarStone
Total
$ 581,723
$
55,678
$ 307,793
$ 945,194
(381,053)
(390,727)
14,359
8,338
7,679
—
31,685
(341,030)
(23,540)
(406,588)
—
14,359
(175,698)
71,695
315,938
211,935
(1,536)
(53,810)
10,114
30,256
159
285
(2,720)
—
—
(1,377)
(187)
(945)
—
(53,712)
6,449
30,256
Net incurred losses and LAE
$ (190,674) $
69,419
$ 314,806
$ 193,551
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
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
(148)
13,700
—
73,049
75,643
(535,884)
(258,041)
—
168,827
(253,536)
61,550
399,945
207,959
(13,822)
—
—
(13,822)
(43,955)
25,432
145
(3,308)
3,543
(1,895)
(40,267)
20,229
Net incurred losses and LAE
$ (285,881) $
58,387
$ 401,593
$ 174,099
Net losses paid
Net change in case and LAE reserves
Net change in IBNR reserves
Amortization of deferred charges
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
(278,825)
(324,026)
—
15,265
Increase (reduction) in estimates of net ultimate
losses
(187,549)
54,170
327,682
194,303
Increase in provisions for bad debt
Reduction in provisions for unallocated LAE
(25,271)
(62,653)
—
(83)
Amortization of fair value adjustments
4,643
(6,608)
—
3,537
(3,535)
(25,271)
(59,199)
(5,500)
Net incurred losses and LAE
$ (270,830) $
47,479
$ 327,684
$ 104,333
162
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Loss Development Information
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 reported to us 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.
163
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Disclosures of Incurred and Paid Loss Development, IBNR, Claims Counts and Payout Percentages
The loss development tables disclosed below, sets forth our historic incurred and paid loss development by accident
year through December 31, 2017, net of reinsurance, as well as the cumulative number of reported claims, IBNR balances,
and other supplementary information.
With the exception of our Atrium segment, the loss development tables disclosed below are presented by line of
business for our Non-life Run-off and StarStone segments as follows:
• Non-Life Run-off - The lines of business included within the loss development disclosures below include General
Casualty, Workers’ Compensation and Professional Indemnity/Directors & Officers; and
• StarStone - All the lines of business related to the StarStone segment have been included within the loss
development disclosures below, namely, Casualty, Marine, Property, Aerospace and Workers’ Compensation.
The loss development disclosures for our Atrium segment have not been disaggregated further by line of business
as the segment comprised only 3% of our total consolidated liability for losses and LAE as at December 31, 2017 and was,
therefore, not considered material for further disaggregation.
Certain lines of business within our Non-Life Run-off segment were not included within the loss development
disclosures presented below due to the following reasons:
• The asbestos and environmental lines of business contain exposures which impact accident years older than those
presented within the loss development tables disclosed below and have, therefore, not been included within those
disclosures. These lines of business cumulatively comprised approximately 41% of our total net liabilities for losses
and LAE, before reconciling items, within our Non-life Run-off segment, as at December 31, 2017;
• The marine, aviation and transit and construction defect lines of business, which each comprised approximately
3% of our total net liabilities for losses and LAE, before reconciling items, within our Non-Life Run-off segment, as
at December 31, 2017 were each not considered material for separate disclosure; and
• The exposures included within the other category includes losses with several different development patterns that
are not individually significant for separate disclosure.
For each line of business for which loss development tables have been provided below, the disclosure approach
and format adopted reflects the following:
• The incurred loss triangle includes both reported case reserves and IBNR liabilities, as well as cumulative paid
losses;
• Both the incurred and cumulative paid loss triangles include allocated loss adjustment expense (i.e. claims handling
costs allocated to specific individual claims) but exclude unallocated loss adjustment expenses (i.e. the costs
associated with internal claims staff and third party administrators as well as consultants that cannot be allocated
to specific individual claims);
• Fair value adjustments arising from the business acquisitions that we have completed as well as the retroactive
reinsurance agreements for which we have elected the fair value option are excluded from the incurred loss
triangles;
• The amounts included within the loss triangles for the years ended December 31, 2008 through to December 31,
2016, (April 1, 2014 through to December 31, 2016 in the case of StarStone since its date of acquisition), as well
as the historical average annual percentage payout ratios as of December 31, 2017 are presented as supplementary
information and are therefore unaudited;
• All data presented within the loss triangles is net of reinsurance recoveries, excluding provisions for uncollectible
reinsurance recoverables; and
164
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• The IBNR reserves included within each incurred loss development table by accident year, reflect the net IBNR
recorded as of December 31, 2017, including expected development on reported losses.
The historical dollar amounts disclosed within the loss development tables for all lines of business presented below
are on a constant-currency basis, which is achieved by using constant foreign exchange rates between periods in the loss
triangles, and translating prior period amounts denominated in currencies other than the U.S. dollar, which is our reporting
currency, using the closing exchange rates as at December 31, 2017.
The impact of this exchange rate conversion is to show the change between periods exclusive of the effect of
exchange rate fluctuations, which would otherwise distort the change in incurred losses and the cash flow patterns
associated with those incurred losses shown within the loss development tables disclosed below. The change in incurred
losses shown within the loss development tables below will, however, differ from other U.S. GAAP disclosures of incurred
current and prior period reserve development amounts, which include the effect of exchange rate fluctuations.
The loss development tables disclosed below are presented retrospectively with respect to the acquisitions and
retroactive reinsurance agreements that we have completed, where it is practicable to do so. However, where it is not
practicable, a prospective approach has been adopted in the presentation of the loss development tables disclosed below
as follows:
• Acquisitions - The information included within the incurred and paid loss development tables for all the lines of
business related to the StarStone segment below have been presented on a prospective basis from the date of
our acquisition of StarStone, which was effective on April 1, 2014. Providing pre-acquisition incurred and paid
losses by accident year for years prior to 2014 was determined to be impracticable due to significant data limitations.
This prospective treatment was also adopted for the disclosures included within our Non-Life Run-off segment with
respect to StarStone’s run-off business whose exposures are included within the general casualty and professional
indemnity/Directors & Officers lines of business disclosed within our Non-Life Run-off loss development tables
below; and
• Retroactive reinsurance agreements - For those loss portfolio transfers that we assume through retroactive
reinsurance agreements for which we don’t have access to historical loss development information from the ceding
entities or where the data is not sufficiently reliable, these have been presented prospectively within the loss
development tables disclosed below, from the date that the reinsurance agreements became effective.
This prospective treatment, therefore, results in loss development trends within the calendar year that either the
business acquisition or retroactive reinsurance agreement is completed, that is not entirely reflective of the actual
performance of the acquired business or the retroactive reinsurance agreement.
Establishing an estimate for loss reserves requires the incorporation of various assumptions and judgment,
therefore, the information contained within the loss development disclosures below only allows readers or users of our
consolidated financial statements to understand, at the summary level presented in the development tables, the change
over time in our reported incurred loss estimates as well as the nature and patterns of the cash flows associated with those
estimates. We, therefore, believe that the information provided within the loss development tables disclosed below is of
limited use for independent analysis or application of standard actuarial estimations, and any results obtained from doing
so should be interpreted with caution. For a more detailed discussion on how our loss reserve estimates are established,
refer to the discussion on “Losses and Loss Adjustment Expenses” within our Critical Accounting Policies.
Cumulative Number of Reported Claims
Reported claim counts, on a cumulative basis, are provided as supplemental information to each incurred loss
development table by accident year. We measure claim frequency information on an individual claim count basis within
each of our segments as follows:
• Non-Life Run-off - The claim frequency information for the exposures included within our general casualty, workers’
compensation and professional indemnity lines of business includes direct and assumed open and closed claims
by accident year at the claimant level. Reported claims that are closed without a payment are included within our
cumulative number of reported claims because we typically incur claim adjustment expenses on them prior to their
closure. The claim count numbers exclude counts related to claims within policy deductibles where the insured is
165
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
responsible for the payment of losses within the deductible layer. Individual claim counts related to certain assumed
reinsurance contracts such as excess-of-loss and quota share treaties are not available to us, and the losses
arising from these treaties have been treated as single claims for the purposes of determining claim counts.
Therefore, each treaty year within the reinsurance contract is deemed a single claim because the detailed underlying
individual claim information is generally not reported to us by our cedents; and
• StarStone and Atrium - The claim frequency information is determined at the claimant level for the exposures
within the lines of business related to these segments. Our claims system assigns a unique claim identifier to each
reported claim we receive. Each unique claim identifier is deemed to be a single claim, irrespective of whether the
claim remains open or has been closed with or without payment. For certain insurance facilities and business
produced or managed by managing general agents, coverholders and third party administrators where the
underlying claims data is reported to us in an aggregated format, the information necessary to provide cumulative
claims frequency is not available. In such cases, we typically record a “block” claim in our system. This also applies
to a small amount of assumed reinsurance business that we write where, similarly, the underlying claims data is
reported to us in an aggregated format. In such instances, each assumed reinsurance contract is deemed a single
claim.
The cumulative number of reported claims for our Atrium segment includes all claim counts for Syndicate 609. Our
Atrium segment represents our 25% share of Syndicate 609's underwriting capacity and capital, however, the claims count
is the same whether viewed at the 100% Syndicate level or for our 25% share.
Our reported claim frequency information is subject to the following inherent limitations when analyzing our loss
experience and severity:
• Claim counts are presented only on a reported and not on an ultimate basis. Therefore, reported claim counts
include open claims which have outstanding reserves but exclude IBNR claims. As such the reported claims are
consistent with reported losses, which can be calculated by subtracting IBNR losses from incurred losses. However,
the reported claim counts are inconsistent with the losses in the incurred losses triangles, which include IBNR
losses, and to losses in the paid loss triangles, which exclude outstanding reserves;
• Reported claim counts have not been adjusted for ceded reinsurance, which may distort any measures of frequency
or severity;
• For lines of business that have a mix of primary and excess layer exposures, such as our general casualty and
workers’ compensation lines of business, the reported claim counts may fluctuate from period to period between
exposure layers, thereby distorting any measure of frequency and severity; and
• The use of our reported claim frequency information to project ultimate loss payouts by disaggregated disclosure
category or line of business may not be as meaningful as claim count information related to individual contracts
at a more granular level.
166
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, 2017, 2016 and 2015 for the Non-life Run-off segment:
2017
2016
2015
Balance as at January 1
$ 4,716,363
$ 4,585,454
$ 3,435,010
Less: reinsurance reserves recoverable
1,000,953
1,034,747
800,709
Less: deferred charges on retroactive
reinsurance
94,551
255,911
—
Net balance as at January 1
3,620,859
3,294,796
2,634,301
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
Assumed business
Ceded business
5,866
(196,540)
(190,674)
(2,835)
(578,888)
(581,723)
138,772
10,251
5,829
39,924
(291,710)
(310,754)
(285,881)
(270,830)
(3,869)
(16,049)
(529,937)
(501,246)
(533,806)
(517,295)
(27,478)
(42,636)
10,019
878,815
612,441
—
1,494,310
1,340,444
—
(177,235)
Net balance as at December 31
Plus: reinsurance reserves recoverable
Plus: deferred charges on retroactive
reinsurance
4,491,795
1,377,485
3,620,859
3,294,796
1,000,953
1,034,747
80,192
94,551
255,911
Balance as at December 31
$ 5,949,472
$ 4,716,363
$ 4,585,454
167
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Net incurred losses and LAE in the Non-life Run-off segment for the years ended December 31, 2017, 2016 and
2015 were as follows:
2017
2016
2015
Net losses paid
Net change in case and LAE
reserves
Net change in IBNR reserves
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
$ 578,888
$
2,835
$ 581,723
$ 529,937
$
3,869
$ 533,806
$ 501,246
$
16,049
$ 517,295
(381,450)
397
(381,053)
(608,168)
(617)
(608,785)
(366,262)
10,927
(355,335)
(393,100)
2,373
(390,727)
(349,726)
2,342
(347,384)
(377,722)
12,948
(364,774)
Amortization of deferred charges
14,359
—
14,359
168,827
—
168,827
15,265
—
15,265
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
Changes in fair value - fair value
option
(181,303)
5,605
(175,698)
(259,130)
5,594
(253,536)
(227,473)
39,924
(187,549)
(1,536)
(54,071)
10,114
30,256
—
261
—
—
(1,536)
(13,822)
(53,810)
(44,190)
10,114
25,432
30,256
—
—
235
—
—
(13,822)
(25,271)
(43,955)
(62,653)
25,432
4,643
—
—
—
—
—
—
(25,271)
(62,653)
4,643
—
Net incurred losses and LAE
$ (196,540) $
5,866
$ (190,674) $ (291,710) $
5,829
$ (285,881) $ (310,754) $
39,924
$ (270,830)
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.
Year Ended December 31, 2017
The net reduction in incurred losses and LAE for the year ended December 31, 2017 of $190.7 million included net
incurred losses and LAE of $5.9 million related to current period net earned premium, primarily for the portion of the run-
off business acquired with Sussex. Excluding current period net incurred losses and LAE of $5.9 million, net incurred losses
and LAE liabilities relating to prior periods were reduced by $196.5 million, which was attributable to a reduction in estimates
of net ultimate losses of $181.3 million, a reduction in provisions for bad debt of $1.5 million and a reduction in provisions
for unallocated LAE of $54.1 million, relating to 2017 run-off activity, partially offset by amortization of fair value adjustments
over the estimated payout period relating to companies acquired amounting to $10.1 million and a change in fair value of
$30.3 million related to our assumed retroactive reinsurance agreements with RSA and QBE completed during the period
and for which we have elected the fair value option. The reduction of estimates in net ultimate losses for the year ended
December 31, 2017 was reduced by amortization of the deferred charge of $14.4 million.
The reduction in estimates of net ultimate losses relating to prior periods of $181.3 million comprised reductions in
IBNR reserves of $393.1 million, partially offset by net incurred loss development of $211.8 million, which includes
amortization of deferred charges of $14.4 million. The decrease in the estimate of net IBNR reserves of $393.1 million
(compared to $349.7 million during the year ended December 31, 2016), was comprised of a decrease of $70.0 million
relating to asbestos liabilities (compared to an increase of $39.4 million in 2016), a decrease of $7.5 million relating to
environmental liabilities (compared to an increase $35.5 million in 2016), a decrease of $7.2 million relating to general
casualty liabilities (compared to $0.8 million in 2016), a decrease of $156.2 million relating to workers' compensation
liabilities (compared to $333.2 million in 2016) and a decrease of $152.2 million relating to all other remaining liabilities
(compared to $90.6 million in 2016).
The reduction in net IBNR reserves of $393.1 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 59 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 2017, 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 $381.5 million for
net paid losses of $578.9 million related to the settlement of non-commuted losses in the year and 59 commutations and
168
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2017 amounted to $7.4 million (comprising $23.2 million of
assumed case reserves and LAE reserves, partially offset by $15.8 million of ceded incurred reinsurance recoverable case
reserves).
The reduction in provisions for bad debt of $1.5 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 distributions received and the
reduction of specific provisions held for potential disputes with reinsurers.
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
current period 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 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, reduction in provisions for bad debt of $13.8
million and a reduction in provision 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 $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 buy-back 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 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 distributions 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 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 incurred losses and
LAE of $39.9 million, net incurred losses and LAE 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 provisions 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.
169
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 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 increase in provisions for bad debt of $25.3 million was a result of the collection of certain reinsurance recoverables
against which bad debts had been provided in earlier periods, and the reduction in bad debt provisions for insolvent
reinsurers as a result of distributions received, partially offset by additional provisions for contractual disputes with reinsurers.
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 net
liability for unpaid losses and LAE as of December 31, 2017 and 2016 included $1,863.2 million and $979.8 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, 2017 and 2016 was $1,992.1 million and $1,021.8 million, respectively. For the
years ended December 31, 2017 and 2016, our reserves for asbestos and environmental liabilities increased by $970.4
million and $545.2 million on a gross basis, respectively, and by $883.4 million and $545.1 million on a net basis, respectively,
due to acquisition activity in 2017 primarily related to the RSA and QBE transactions.
170
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Disclosures of Incurred and Paid Loss Development, IBNR, Claims Counts and Payout Percentages
ENSTAR GROUP LIMITED
The following tables provides a breakdown of the gross and net losses and LAE reserves by line of business as at
December 31, 2017 and 2016:
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Professional indemnity/Directors & Officers
Other
Fair value adjustments
Fair value adjustments - fair value option
Deferred charge on retroactive reinsurance
ULAE
Total
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Professional indemnity/Directors & Officers
Other
Fair value adjustments
Deferred charge on retroactive reinsurance
ULAE
Total
$
OLR
366,446
95,801
344,425
1,458,430
109,102
28,701
214,803
567,995
$
3,185,703
2017
Gross
IBNR
Total
OLR
(in thousands of U.S. dollars)
$ 1,434,598
95,259
$ 1,801,044
191,060
$
2017
Net
IBNR
Total
$ 1,337,467
93,345
$ 1,678,822
184,394
266,526
748,949
56,284
135,608
40,265
126,438
$ 2,903,927
610,951
2,207,379
165,386
164,309
255,068
694,433
$ 6,089,630
(125,998)
(314,748)
—
$ 5,648,884
300,588
$ 5,949,472
341,355
91,049
276,791
889,265
90,101
27,406
181,027
194,747
371,161
51,904
122,307
39,591
356,424
$ 2,253,418
103,251
$ 2,313,773
471,538
1,260,426
142,005
149,713
220,618
459,675
$ 4,567,191
(113,028)
(182,764)
(80,192)
$ 4,191,207
300,588
$ 4,491,795
OLR
$
265,144
$
Total
OLR
(in thousands of U.S. dollars)
$
849,901
$
2016
Gross
IBNR
584,757
71,722
317,613
701,616
35,744
121,551
61,663
40,993
$ 1,935,659
100,128
428,210
1,389,097
54,025
40,446
110,208
310,478
$
2,697,736
2016
Net
IBNR
$
569,736
$
69,740
195,393
484,863
35,607
90,977
60,626
Total
815,766
164,051
496,043
1,492,391
84,076
124,568
153,342
246,030
94,311
300,650
1,007,528
48,469
33,591
92,716
253,154
$ 2,076,449
35,166
$ 1,542,108
288,320
$ 3,618,557
(121,483)
(94,551)
$ 3,402,523
218,336
$ 3,620,859
171,850
745,823
2,090,713
89,769
161,997
171,871
351,471
$ 4,633,395
(135,368)
—
$ 4,498,027
218,336
$ 4,716,363
As noted in the tables above, the significant lines of business within this segment include asbestos, general casualty,
workers’ compensation and professional indemnity/Directors & Officers, which collectively comprised approximately 80%
and 80% of total gross and net reserves, respectively, as at December 31, 2017 and 83% and 82% of total gross and net
reserves, respectively, as at December 31, 2016. Separate loss development tables have been provided for the general
casualty, workers’ compensation and professional indemnity/Directors & Officers lines of business as set forth below. The
asbestos and the environmental lines of business are wholly comprised of losses with accident years before 2008 and
therefore no accident year disclosures have been included within the loss development tables presented below for these
lines of business. The exposures included within the marine, aviation and transit and construction defect lines of business,
which each comprised approximately 3% of total gross and net reserves, were each not considered material for separate
disclosure within the loss development tables presented below. Similarly, the exposures included within the other category
includes losses with several different development patterns that are not individually sufficiently significant to be disclosed
in separate loss development tables.
171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Our non-life run-off segment is unique within the insurance industry in that legacy reserves are continuously being
acquired and added to this segment through business acquisitions or through retroactive reinsurance agreements. The
loss development tables within this segment include actual loss development as well as the effects of integrating 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 loss development tables provided below. Acquired
reserves arising from business acquisitions are presented on a full retrospective basis. Assumed reserves arising from
retroactive reinsurance transactions are presented as follows: (i) unpaid reported losses 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. This presentation approach therefore distorts the loss development trends in the specific years in which these
retroactive reinsurance transactions are completed. We have however disclosed additional development tables as
appropriate to show the take-on IBNR reserves that we have assumed through the retroactive reinsurance agreements
that we have completed in each calendar year, for the lines of business presented below.
The following tables set forth information about incurred and paid loss development, total IBNR reserves and
cumulative loss frequency related to our general casualty, workers' compensation and professional indemnity/Directors &
Officers lines of business within the Non-Life Run-off segment as at December 31, 2017. The information related to incurred
and paid loss development for the years ended December 31, 2008 through 2016 is presented as supplementary information
and is therefore unaudited.
172
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
General Casualty
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December
31, 2017
Accident
Year
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
IBNR(1)
2008
$ 20,277 $ 24,456 $ 45,420 $ 51,927 $ 59,142 $ 63,437 $ 64,982 $ 69,784 $ 66,160 $
84,811
$ 10,162
2009
2010
2011
2012
2013
2014
2015
2016
2017
20,081
27,612
48,009
66,202
84,596
86,618
92,084
94,550
112,799
34,527
55,916
68,142
93,817
177,344
201,813
215,279
230,288
40,109
42,977
68,439
83,854
87,625
86,727
92,802
65,494
72,203
82,667
73,218
88,743
104,284
60,121
76,526
50,524
53,597
35,789
23,657
25,197
9,478
9,891
2,319
72,586
37,628
14,003
1,281
141
Total $ 750,623
10,570
20,143
16,825
16,766
13,387
7,883
5,500
868
115
Cumulative
Number of
Claims
3,543
3,497
5,365
3,864
3,929
2,529
1,447
516
103
26
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
2008
$ 5,752 $ 12,512 $ 20,372 $ 30,193 $ 40,909 $ 45,447 $ 52,416 $ 54,510 $ 57,625 $
62,930
2009
2010
2011
2012
2013
2014
2015
2016
2017
4,834
11,384
22,986
41,723
55,455
66,001
73,154
80,004
85,802
6,108
14,462
26,943
41,340
97,854
150,681
179,633
195,858
8,353
17,573
26,839
43,189
55,998
60,809
12,435
17,787
31,031
42,991
58,717
2,449
14,311
20,416
29,342
1,740
5,070
10,300
744
1,505
81
64,789
71,372
39,996
19,672
3,188
147
17
All outstanding liabilities for unpaid losses and LAE prior to 2008, net of
reinsurance
264,686
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$ 471,538
Total $ 543,771
(1) Total of IBNR plus expected development on reported losses.
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, 2017 is set forth below:
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment expenses
and fair value adjustments
December 31, 2017
471,538
$
139,413
$
610,951
173
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The table below provides a summary of IBNR reserves assumed through retroactive reinsurance transactions which
are presented on a prospective basis within the incurred losses table above from the year in which the transactions occurred:
Accident
Year
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
For the Years Ended December 31,
Take-On
IBNR for
Assumed
Business
$
10,740 $
— $
3,633 $
— $
25,703 $
— $
5,263 $
— $
36,501 $
79,495
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
6.64%
8.29%
10.25%
14.39%
15.49%
10.99%
7.85%
5.2%
4.41%
6.26%
174
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Workers' Compensation
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December
31, 2017
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
236,790
291,649
275,932
257,331
288,464
294,104
2013
(unaudited)
2016
(unaudited)
2009
(unaudited)
2015
(unaudited)
2014
(unaudited)
2011
(unaudited)
2010
(unaudited)
2012
(unaudited)
2008
IBNR(1)
(unaudited)
$265,540 $295,970 $315,753 $ 329,516 $ 327,727 $ 338,214 $ 344,977 $ 340,547 $ 344,352 $ 360,478 $ 13,587
16,599
301,191
25,476
26,894
41,832
35,061
18,062
2,895
652
2,307
201,011
107,511
116,744
191,946
309,258
215,605
322,864
354,173
316,540
231,740
253,525
200,200
344,619
251,575
232,410
337,680
223,991
326,852
257,374
224,479
250,915
104,942
348,008
133,563
308,837
312,309
227,214
82,084
87,181
18,038
23,973
81,227
99,594
18,465
75,905
1,055
2,915
981
2017
Cumulative
Number of
Claims
43,430
41,928
46,023
46,698
44,448
31,945
10,925
2,885
38
8
Total $ 1,719,076
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
2008
$ 83,344 $164,145 $219,202 $ 255,550 $ 278,088 $ 293,874 $ 306,607 $ 313,936 $ 317,946 $ 324,480
2009
2010
2011
2012
2013
2014
2015
2016
2017
76,071
146,631
198,214
233,516
254,348
270,693
275,620
283,407
85,367
163,231
218,846
252,732
264,329
275,286
288,933
44,931
110,189
153,192
134,487
162,444
185,650
37,848
89,004
57,070
92,588
134,993
18,305
(41,452)
(17,142)
21,187
8,385
13,896
35,025
4,602
8,944
184
275,573
299,285
199,292
156,579
45,909
49,884
11,432
420
159
All outstanding liabilities for unpaid losses and LAE prior to 2008, net of
reinsurance
904,363
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$ 1,260,426
Total $ 1,363,013
(1) Total of IBNR plus expected development on reported losses.
175
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 year ended December 31, 2017 is set forth below:
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment expenses
and fair value adjustments
December 31, 2017
1,260,426
$
946,953
$
2,207,379
The table below provides a summary of IBNR reserves assumed through retroactive reinsurance transactions which
are presented on a prospective basis within the incurred losses table above from the year in which the transactions occurred:
Accident
Year
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
For the Years Ended December 31,
Take-On
IBNR for
Assumed
Business
$
— $
5,323 $
5,954 $
— $
— $
— $
— $
— $ 100,000 $
62,192
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
Workers'
compensation
18.1%
23.1%
17.3%
12.3%
5.4%
4.2%
3.0%
2.5%
1.1%
1.8%
176
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Professional Indemnity/Directors & Officers
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December
31, 2017
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
—
—
2017
1,205
48,547
14,027
25,782
2009
(unaudited)
2011
(unaudited)
2016
(unaudited)
2013
(unaudited)
2015
(unaudited)
2014
(unaudited)
2010
(unaudited)
2012
(unaudited)
2008
IBNR(1)
(unaudited)
$ 4,149 $ 23,865 $ 53,480 $ 58,806 $ 80,673 $ 86,120 $ 83,578 $ 77,421 $ 128,985 $ 128,410 $ 3,666
2,238
54,345
(3)
1,500
3,254
8,724
2,417
2,216
—
—
57,983
40,602
57,076
43,180
69,319
39,854
62,705
58,429
59,123
62,259
59,906
65,893
61,785
41,508
67,098
47,164
8,789
4,925
4,903
7,374
5,496
3,760
454
793
198
463
485
42
58
—
—
—
—
—
—
—
—
—
Cumulative
Number of
Claims
—
—
520
2,003
2,281
1,922
439
26
1
2
(1) Total of IBNR plus expected development on reported losses.
$ 366,858
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
2008
$
179 $ 3,157 $ 11,350 $ 26,799 $ 33,932 $ 40,045 $ 44,913 $ 53,018 $ 107,854 $ 109,032
2009
2010
2011
2012
2013
2014
2015
2016
2017
88
2,604
7,784
17,040
26,023
33,246
37,708
41,053
46,209
—
—
—
—
—
—
—
—
—
—
462
28,221
33,687
18,678
430
463
32,366
44,410
31,063
717
29
456
35,061
51,396
35,219
1,075
198
—
490
36,236
54,208
44,337
1,127
1,821
—
37
All outstanding liabilities for unpaid losses and LAE prior to 2008, net of
reinsurance
147,257
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$ 220,618
Total $ 293,497
(1) Total of IBNR plus expected development on reported losses.
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, 2017 is set forth below:
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment expenses
and fair value adjustments
$
$
220,618
34,450
255,068
December 31,
177
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is unaudited supplementary information for average annual historical duration of claims:
ENSTAR GROUP LIMITED
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
Professional
indemnity/
Directors &
Officers
15.1%
4.1%
12.7%
10.5%
11.4%
5.7%
4.8%
6.4%
9.0%
0.9%
Losses and LAE reserves reported at fair value
The following table includes the carrying amount of the liability for unpaid losses and LAE, net of reinsurance
reported at fair value, the discount rates used to discount the liabilities and the related aggregate amount of the discount
as at December 31, 2017 and the interest accretion for the year ended December 31, 2017, recorded within net incurred
losses and LAE in our consolidated statements of earnings:
$
Line of business
Asbestos
Environmental
General casualty
Workers' compensation/personal
accident
Marine, aviation and transit
Construction defect
Other
ULAE
Total
As at December 31, 2017
Carrying value
Discount rate
Aggregate amount
of discount
For the Year Ended
December 31, 2017
Interest Accretion
712,890
1,003
120,480
69,266
71,138
38,819
145,013
93,836
2.3%
2.0%
2.8%
3.0%
2.0%
2.9%
2.0%
3.0%
$
222,138
$
18,637
122
28,233
19,497
9,520
5,513
18,827
25,953
10
3,751
4,142
799
1,171
1,716
3,621
$
1,252,445
$
329,803
$
33,847
178
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Atrium
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years ended
December 31, 2017, 2016 and 2015:
Balance as at January 1
$
212,122
$
201,017
$
212,611
2017
2016
2015
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
Net balance as at December 31
Plus: reinsurance reserves recoverable
30,009
182,113
25,852
175,165
28,278
184,333
90,359
(20,940)
69,419
(24,571)
(31,107)
(55,678)
4,488
200,342
40,531
71,358
69,400
(12,971)
(21,921)
58,387
47,479
(23,582)
(24,416)
(47,998)
(3,441)
182,113
30,009
(21,145)
(30,890)
(52,035)
(4,612)
175,165
25,852
Balance as at December 31
$
240,873
$
212,122
$
201,017
Net incurred losses and LAE in the Atrium segment for the years ended December 31, 2017, 2016 and 2015 were
as follows:
Prior
Period
2017
Current
Period
Total
Prior
Period
2016
Current
Period
Total
Prior
Period
2015
Current
Period
Total
Net losses paid
$ 31,107
$ 24,571
$ 55,678
$ 24,416
$ 23,582
$ 47,998
$ 30,890
$ 21,145
$ 52,035
Net change in case and LAE
reserves
Net change in IBNR reserves
Increase (reduction) in estimates of
net ultimate losses
Reduction (increase) in provisions
for bad debt
Increase (reduction) in provisions for
unallocated LAE
Amortization of fair value
adjustments
Net incurred losses and LAE
(13,324)
(35,650)
21,662
43,329
8,338
7,679
(13,115)
(20,543)
12,967
34,243
(148)
(18,213)
13,700
(27,382)
17,504
30,226
(709)
2,844
(17,867)
89,562
71,695
(9,242)
70,792
61,550
(14,705)
68,875
54,170
89
(442)
70
727
159
285
—
(421)
—
566
—
145
—
(608)
—
525
—
(83)
(2,720)
—
(2,720)
(3,308)
—
(3,308)
(6,608)
—
(6,608)
$ (20,940) $ 90,359
$ 69,419
$ (12,971) $ 71,358
$ 58,387
(21,921) $ 69,400
$ 47,479
179
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Disclosures of Incurred and Paid Loss Development, IBNR, Claims Counts and Payout Percentages
The following table provides a breakdown of the liability for losses and LAE by line of business for the years ended
December 31, 2017 and 2016 for the Atrium segment:
OLR
2017
IBNR
Total
OLR
(in thousands of U.S. dollars)
2016
IBNR
Total
Marine, Aviation and
Transit
Binding Authorities
Reinsurance
Accident and Health
Non-Marine Direct and
Facultative
Total
Fair value adjustments
ULAE
Total
$
24,581 $
26,115
14,381
3,716
46,138 $
51,896
34,489
5,518
70,719 $
25,565 $
49,369 $
78,011
48,870
9,234
21,543
11,485
2,913
41,603
22,178
5,625
9,570
12,467
22,037
5,873
11,343
$
78,363 $
150,508 $
228,871 $
67,379 $
130,118 $
9,547
2,455
$
240,873
74,934
63,146
33,663
8,538
17,216
197,497
12,503
2,122
$
212,122
The Atrium segment comprises only 3% of the total consolidated liability for losses and LAE as at December 31,
2017 and therefore has not been disaggregated further for purposes of presenting the accident year disclosures below.
180
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following tables set forth information about incurred and paid loss development information for the Atrium segment
as at December 31, 2017. The information related to incurred and paid loss development for the years ended December
31, 2008 through 2016 is presented as supplementary information and is therefore unaudited. Information about total IBNR
reserves and cumulative loss frequency as at December 31, 2017, including expected development on reported losses
included within the net incurred losses and allocated LAE amounts for the Atrium segment, are set forth in the table below.
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December
31, 2017
Accident
Year
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
IBNR(1)
2008
$ 46,002 $ 60,309 $ 60,742 $ 73,128 $ 68,943 $ 67,201 $ 66,701 $ 65,311 $ 63,552 $ 63,081
$
2,478
2009
2010
2011
2012
2013
2014
2015
2016
2017
28,071
40,847
57,959
52,744
51,888
50,246
47,715
46,929
46,542
27,139
65,704
58,465
55,666
50,078
47,871
47,128
45,478
87,325
85,580
78,981
75,384
72,380
70,537
69,341
70,930
64,633
60,804
57,126
54,416
52,995
69,241
71,302
62,166
57,415
53,632
70,008
70,275
66,825
61,211
1,705
1,900
2,642
3,536
3,985
8,570
70,336
72,234
64,178
15,047
74,001
76,208
25,036
91,129
56,376
Total $ 623,795
Cumulative
Number of
Claims
266
294
376
561
756
1,132
1,835
3,070
4,899
5,197
(1) Total of IBNR plus expected development on reported losses.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2008
(unaudited)
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
2008
$ 15,492 $ 37,939 $ 48,558 $ 53,307 $ 56,311 $ 58,193 $ 59,439 $ 60,018 $ 59,546 $ 59,738
2009
2010
2011
2012
2013
2014
2015
2016
2017
12,145
28,002
35,047
38,591
40,631
41,849
42,542
42,833
43,093
11,599
25,421
32,600
36,968
39,486
40,526
41,137
41,713
17,314
40,413
53,018
59,270
63,237
64,607
65,904
11,357
31,762
38,324
42,499
44,807
45,710
14,731
32,383
40,890
43,984
45,884
17,754
34,763
42,114
47,441
12,147
30,009
39,430
13,878
34,988
14,473
Total $ 438,374
All outstanding liabilities for unpaid losses and LAE prior to 2008, net of
reinsurance
3,369
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$ 188,790
(1) Total of IBNR plus expected development on reported losses.
181
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, 2017 is set forth below:
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment
expenses and fair value adjustments
$
$
188,790
40,081
228,871
December 31,
2017
The following is unaudited supplementary information for average annual historical duration of claims within 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
23.2% 37.09%
15.11%
8.02%
4.72%
2.31%
1.67%
0.94%
0.56%
0.3%
StarStone
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years ended
December 31, 2017, 2016 and 2015:
Balance as at January 1
$
1,059,382
$
933,678
$
861,800
2017
2016
2015
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
Assumed business
Ceded business
Net balance as at December 31
Plus: reinsurance reserves recoverable
357,231
702,151
341,628
(26,822)
314,806
(54,867)
(252,926)
(307,793)
15,169
—
31,393
—
755,726
452,017
299,783
633,895
325,209
536,591
415,829
(14,236)
401,593
(52,128)
(199,125)
(251,253)
(15,984)
—
—
(66,100)
702,151
357,231
367,040
(39,356)
327,684
(62,739)
(149,820)
(212,559)
(17,821)
—
—
—
633,895
299,783
Balance as at December 31
$
1,207,743
$
1,059,382
$
933,678
182
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Net incurred losses and LAE for the years ended December 31, 2017, 2016 and 2015 were as follows:
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
2017
2016
2015
Prior
Period
$ 252,926
Current
Period
$ 54,867
Total
$ 307,793
Prior
Period
$ 199,125
Current
Period
$ 52,128
Total
$ 251,253
Prior
Period
$ 149,820
Current
Period
$ 62,739
Total
$ 212,559
(63,785)
95,470
31,685
(51,309)
124,358
73,049
15,772
61,447
77,219
(208,244)
184,704
(23,540)
(156,546)
232,189
75,643
(200,730)
238,634
37,904
(19,103)
335,041
315,938
(8,730)
408,675
399,945
(35,138)
362,820
327,682
(6,774)
6,587
(187)
(3,611)
7,154
3,543
(683)
4,220
3,537
Amortization of fair value
adjustments
Net incurred losses and LAE $ (26,822) $ 341,628
(945)
—
(945)
(1,895)
—
(1,895)
(3,535)
—
(3,535)
$ 314,806
$ (14,236) $ 415,829
$ 401,593
$ (39,356) $ 367,040
$ 327,684
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.
Disclosures of Incurred and Paid Loss Development, IBNR, Claims Counts and Payout Percentages
The following table provides a breakdown of the liability for losses and LAE reserves by line of business as at
December 31, 2017 and 2016:
OLR
2017
IBNR
Total
OLR
(in thousands of U.S. dollars)
2016
IBNR
Total
Casualty
Marine
Property
Aerospace
Workers' Compensation
$
139,200 $
130,962
282,789 $
118,375
208,777
63,920
48,118
89,963
26,070
82,024
421,989 $
101,897 $
279,823 $
381,720
249,337
298,740
89,990
130,142
102,957
182,480
66,190
48,591
94,396
57,184
30,921
78,981
197,353
239,664
97,111
127,572
Total
$
590,977 $
599,221 $ 1,190,198 $
502,115 $
541,305 $ 1,043,420
Fair value adjustments
ULAE
Total
(555)
18,100
$ 1,207,743
(863)
16,825
$ 1,059,382
183
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following tables set forth information about incurred and paid loss development, total IBNR reserves and
cumulative loss frequency related to all the individual lines of business within the StarStone segment as at December 31,
2017. The information related to incurred and paid loss development for the years ended December 31, 2014 through 2016
is presented as supplementary information and is therefore unaudited. The information within the tables below is presented
on a prospective basis from the date of our acquisition of StarStone on April 1, 2014 since providing pre-acquisition incurred
and paid losses by accident year for years prior to 2014 was determined to be impracticable due to significant data limitations.
Casualty
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For The Years Ended December 31,
As of December 31, 2017
2014
(unaudited)
$
7,759 $
2015
(unaudited)
2016
(unaudited)
2017
IBNR(1)
Cumulative
Number of
Claims
7,734 $
7,740 $
7,733 $
21,096
15,972
20,964
57,413
74,312
92,236
21,158
18,026
23,948
48,530
69,537
93,687
108,762
21,158
18,113
24,665
44,003
79,689
93,325
112,430
103,057
Total $
21,162
18,974
25,211
39,388
78,573
90,663
111,582
100,301
96,294
589,881
—
—
178
713
2,381
7,002
18,892
36,723
49,588
73,042
491
496
734
2,043
3,100
4,952
5,336
3,950
3,722
3,594
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net
of Reinsurance
For The Years Ended December 31,
2014
(unaudited)
$
7,759 $
2015
(unaudited)
2016
(unaudited)
2017
7,734 $
7,740 $
21,096
15,809
15,850
18,514
23,210
5,803
21,158
18,026
21,200
29,613
30,675
22,041
8,779
21,158
18,113
23,930
32,805
50,427
37,793
28,230
4,856
Total $
7,733
21,162
18,796
24,497
34,074
54,989
51,012
50,072
34,214
6,761
303,310
18
All outstanding liabilities for unpaid
losses and LAE prior to 2008, net of
reinsurance
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
$
286,589
(1) Total of IBNR plus expected development on reported losses.
184
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 year ended December 31, 2017 is set forth below:
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment expenses
and fair value adjustments
$
$
286,589
135,400
421,989
The following is unaudited supplementary information for average annual historical duration of claims:
December 31,
2017
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
Casualty
6.6%
21.5%
15.5%
22.4%
11.9%
8.7%
1.0%
1.1%
0.1%
—%
185
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Marine
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For The Years Ended December 31,
As of December 31, 2017
2014
(unaudited)
$
7,114 $
2015
(unaudited)
2016
(unaudited)
2017
IBNR(1)
Cumulative
Number of
Claims
7,105 $
7,112 $
7,113 $
10,653
26,257
25,459
49,820
63,366
52,740
10,554
23,478
23,838
53,365
56,191
53,415
73,237
10,526
23,344
23,503
53,309
54,163
49,624
71,311
63,694
Total $
10,539
23,471
23,631
52,110
55,122
56,212
81,587
61,926
87,925
459,636
—
—
211
243
667
249
5,439
7,131
11,258
44,629
486
657
1,087
2,082
2,498
2,318
4,298
5,868
6,751
5,487
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net
of Reinsurance
For The Years Ended December 31,
2014
(unaudited)
$
7,081 $
2015
(unaudited)
2016
(unaudited)
2017
7,092 $
7,108 $
10,529
20,427
20,185
39,975
29,985
11,146
10,542
22,482
21,245
44,127
39,370
25,533
11,038
10,523
22,562
22,237
46,028
43,538
33,311
31,483
11,102
7,108
10,530
22,530
22,484
46,820
45,993
37,794
51,454
34,452
16,527
Total $
295,692
All outstanding liabilities for unpaid
losses and LAE prior to 2008, net of
reinsurance
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
—
$
163,944
(1) Total of IBNR plus expected development on reported losses.
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, 2017 is set forth below:
186
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
December 31,
2017
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment
expenses and fair value adjustments
$
$
163,944
85,393
249,337
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
Marine
16.8%
29.5%
18.4%
7.8%
4.2%
4.8%
0.5%
—%
0.1%
—%
187
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Property
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For The Years Ended December 31,
As of December 31, 2017
2014
(unaudited)
$
48,894 $
28,946
75,670
92,107
65,529
76,665
63,673
2015
(unaudited)
2016
(unaudited)
2017
IBNR(1)
Cumulative
Number of
Claims
49,135 $
28,417
74,491
90,708
62,398
66,079
44,317
79,339
49,163 $
28,826
73,332
90,646
61,594
65,885
44,955
77,695
74,134
Total $
49,158 $
29,070
73,395
90,364
62,332
65,146
45,382
71,391
80,379
105,672
672,289
—
—
—
—
284
868
1,927
1,717
3,698
30,785
740
1,100
1,698
1,688
1,574
1,946
2,114
5,563
6,525
6,036
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net
of Reinsurance
For The Years Ended December 31,
2014
(unaudited)
$
48,894 $
28,382
70,293
88,327
48,588
31,433
5,537
2015
(unaudited)
2016
(unaudited)
2017
49,135 $
28,420
73,213
89,561
52,705
46,983
18,998
10,467
49,163 $
28,829
73,332
90,103
55,061
51,915
33,199
29,060
23,386
Total $
49,158
29,070
73,395
90,364
56,079
54,040
36,213
55,956
49,730
24,715
518,720
All outstanding liabilities for unpaid
losses and LAE prior to 2008, net of
reinsurance
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
858
$
154,427
(1) Total of IBNR plus expected development on reported losses.
188
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 year ended December 31, 2017 is set forth below:
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment
expenses and fair value adjustments
December 31, 2017
154,427
$
144,313
$
298,740
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
Property
22.4%
29.5%
30.9%
6.9%
2.8%
2.1%
0.2%
0.7%
0.4%
—%
189
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Aerospace
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For The Years Ended December 31,
As of December 31, 2017
2014
(unaudited)
$
— $
—
18,269
58,954
56,144
72,762
65,526
2015
(unaudited)
2016
(unaudited)
2017
IBNR(1)
Cumulative
Number of
Claims
— $
—
18,430
57,436
55,765
70,535
54,077
66,078
— $
—
18,741
57,833
56,586
70,820
53,751
69,843
30,718
Total $
— $
—
19,258
58,268
56,552
75,228
52,593
73,125
35,540
19,036
389,600
—
—
66
192
172
348
1,087
2,642
4,141
8,407
—
—
569
2,173
2,393
2,324
2,380
2,252
1,725
882
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net
of Reinsurance
For The Years Ended December 31,
2014
(unaudited)
$
— $
—
15,743
53,956
46,219
51,098
17,375
2015
(unaudited)
2016
(unaudited)
2017
— $
—
16,890
55,321
49,665
60,118
31,309
32,415
— $
—
17,497
56,002
52,502
63,723
38,605
52,407
10,193
Total $
—
—
18,566
56,584
53,982
69,071
40,865
61,081
24,904
6,711
331,764
All outstanding liabilities for unpaid
losses and LAE prior to 2008, net of
reinsurance
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
—
$
57,836
(1) Total of IBNR plus expected development on reported losses
190
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 year ended December 31, 2017 is set forth below:
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment
expenses and fair value adjustments
December 31, 2017
57,836
$
32,154
$
89,990
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
Aerospace
36.1%
31.7%
12.6%
5.1%
4.8%
3.2%
1.4%
1.8%
—%
—%
191
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Workers' Compensation
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For The Years Ended December 31,
As of December 31, 2017
2014
(unaudited)
$
— $
—
—
—
—
—
15,607
2015
(unaudited)
2016
(unaudited)
2017
IBNR(1)
Cumulative
Number of
Claims
— $
—
—
—
—
—
17,199
54,978
— $
—
—
—
—
—
18,291
55,505
54,630
Total $
— $
—
—
—
—
—
15,662
50,102
46,866
27,261
139,891
—
—
—
—
—
—
2,129
9,583
12,550
17,659
—
—
—
—
—
—
1,061
2,510
2,468
1,783
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Accident
Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net
of Reinsurance
For The Years Ended December 31,
2015
(unaudited)
2016
(unaudited)
2017
2014
(unaudited)
$
— $
—
—
—
—
—
1,491
— $
—
—
—
—
—
6,079
6,361
— $
—
—
—
—
—
9,279
20,194
8,092
Total $
—
—
—
—
—
—
11,431
30,439
21,329
3,560
66,759
—
All outstanding liabilities for unpaid
losses and LAE prior to 2008, net of
reinsurance
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
$
73,132
(1) Total of IBNR plus expected development on reported losses.
192
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 year ended December 31, 2017 is set forth below:
Liabilities for unpaid losses and allocated LAE, net of reinsurance
Reinsurance recoverable on unpaid losses
Gross liability for unpaid losses and LAE before unallocated loss adjustment
expenses and fair value adjustments
December 31, 2017
73,132
$
57,010
$
130,142
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
Workers'
compensation
14.3%
28.4%
13.6%
4.6%
—%
—%
—%
—%
—%
—%
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, 2017 and 2016 were $117.2 million
and $112.1 million, respectively.
193
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
13. PREMIUMS WRITTEN AND EARNED
The following tables provide a summary of net premiums written and earned for the years ended December 31,
2017, 2016 and 2015:
Non-life Run-off
Gross
Ceded
Net
Atrium
Gross
Ceded
Net
StarStone
Gross
Ceded
Net
Other
Gross
Ceded
Net
Total
Gross
Ceded
Net
2017
2016
2015
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
$
$
$
$
$
$
$
$
14,102 $
(7,620)
6,482 $
23,950 $
(9,788)
14,162 $
17,316 $
(8,114)
9,202 $
25,989 $
(9,234)
16,755 $
38,704 $
(16,110)
22,594 $
116,494
(72,125)
44,369
153,472 $
(19,258)
134,214 $
152,278 $
(17,531)
134,747 $
143,170 $
(2,733)
140,437 $
140,438 $
(16,022)
124,416 $
149,082 $
(14,502)
134,580 $
149,310
(14,635)
134,675
895,160 $
(430,259)
464,901 $
865,159 $
(405,756)
459,403 $
854,699 $
(206,663)
648,036 $
830,186 $
(153,578)
676,608 $
824,714 $
(196,287)
628,427 $
769,875
(196,729)
573,146
5,719 $
(926)
4,793 $
5,900 $
(1,091)
4,809 $
7,157 $
(896)
6,261 $
7,220 $
(1,485)
5,735 $
2,883 $
(1,330)
1,553 $
2,884
(1,330)
1,554
$ 1,068,453 $ 1,047,287 $ 1,022,342 $ 1,003,833 $ 1,015,383 $ 1,038,563
(284,819)
(218,406)
(180,319)
(228,229)
(458,063)
610,390 $
(434,166)
613,121 $
$
803,936 $
823,514 $
787,154 $
753,744
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, 2017 and 2016:
2017
Balance as at January 1, 2017
Acquired during the year
Amortization
Balance as at December 31, 2017
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
$
24,753
$
87,031
$
184,855
$
145,158
$
94,551
—
—
—
(4,266)
—
—
—
958
—
(4,266)
(5,723)
(14,359)
$
73,071
$
20,487
$
87,031
$
180,589
$
140,393
$
80,192
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
194
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Goodwill as at December 31, 2017 and 2016, 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, 2017, 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, 2017, 2016
and 2015 was $4.3 million, $6.4 million and $9.8 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 from acquisitions of companies. 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, 2017, 2016 and 2015 was $5.7 million, $19.0 million and $(5.6) million, respectively. The FVA acquired
during the year ended December 31, 2017 related to the acquisition of some small U.S. companies.
Other assets - deferred charges relate to retroactive reinsurance policies providing indemnification of losses and
LAE with respect to past loss events. For insurance and reinsurance contracts for which we do not elect the fair value
option, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the
premiums received at the inception of the contract. 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
$14.4 million and $130.2 million related to a reduction in the liability for losses and LAE for the years ended December
31, 2017 and December 31, 2016, respectively, and $nil and $38.6 million primarily related to a change in the expected
return on the underlying assets for the years ended December 31, 2017 and 2016, respectively.
195
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, 2017 and 2016 were as follows:
Gross
Carrying
Value
2017
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
2016
Accumulated
Amortization
Net
Carrying
Value
Intangible assets with a definite life:
Fair value adjustments:
Losses and LAE liabilities
$
462,455
$
(345,449) $
117,006
$
458,202
$
(334,475) $
123,727
Reinsurance balances
recoverable
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
$
$
$
$
$
$
(179,219)
165,579
(48,840)
85,845
440
(418)
(13,640)
(48,400)
85,427
(175,924)
160,350
(48,840)
85,845
—
—
(15,574)
(48,840)
85,845
320,241
$
(179,848) $
140,393
$
319,283
$
(174,125) $
145,158
20,000
$
(5,444) $
14,556
$
20,000
$
(4,111) $
15,889
15,000
7,000
(13,210)
(2,859)
1,790
4,141
15,000
7,000
(10,978)
(2,158)
4,022
4,842
42,000
$
(21,513) $
20,487
$
42,000
$
(17,247) $
24,753
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
$
(198,451) $
80,192
$
278,643
$
(184,092) $
94,551
The table above excludes fair value adjustments of $2.7 million and $46.5 million as at December 31, 2017 and
2016, 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 were $6.1 million and $7.0 million
during the years ended December 31, 2017 and 2016, 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
2018
2019
2020
2021
2022
Non-life
Run-off
Atrium
StarStone
Total
$
$
$
$
$
8,082
7,927
7,634
7,169
6,559
$
$
$
$
$
(463)
(69)
760
1,254
1,506
$
$
$
$
$
255
(401)
(246)
(166)
(108)
$
$
$
$
$
7,874
7,457
8,148
8,257
7,957
196
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
15. DEBT OBLIGATIONS
We utilize debt facilities primarily for acquisitions and, from time to time, for general corporate purposes. Under
these facilities, debt obligations as of December 31, 2017 and 2016 were as follows:
Facility
Senior Notes
Unamortized debt issuance costs
Total Senior Notes
EGL Revolving Credit Facility
Sussex Facility
EGL Term Loan Facility
Total debt obligations
Origination Date
March 10, 2017
Term
5 years $
2017
2016
350,000 $
September 16, 2014
December 24, 2014
November 18, 2016
5 years
4 years
3 years
(2,484)
347,516
225,110
—
74,063
—
—
—
535,103
63,500
75,000
$
646,689 $
673,603
During the year ended December 31, 2017, we utilized $874.1 million and repaid $912.1 million under our
facilities. The facilities were primarily utilized for funding significant new business as described in Note 4 - "Significant
New Business".
For the years ended December 31, 2017, 2016 and 2015, interest expense was $26.0 million, $20.3 million and
$19.3 million, respectively, on our loan facilities.
Senior Notes
On March 10, 2017, we issued Senior Notes (the "Notes") for an aggregate principal amount of $350.0 million.
The Notes pay 4.5% interest semi-annually and mature on March 10, 2022. The Notes are unsecured and
unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated obligations, senior to
any future obligations that are expressly subordinated to the Notes, effectively subordinate to any of our secured
indebtedness to the extent of the value of the assets securing such indebtedness, and structurally subordinate to all
liabilities of our subsidiaries.
The Notes are rated BBB- and are redeemable at our option on a make whole basis at any time prior to the date
that is one month prior to the maturity of the Notes. On or after the date that is one month prior to the maturity of the
Notes, the Notes are redeemable at a redemption price equal to 100% of the principal amount of the Notes to be
redeemed.
We incurred costs of $2.9 million in issuing the Notes. These costs included underwriters’ fees, legal and
accounting fees, and other fees, and are capitalized and presented as a direct deduction from the principal amount of
debt obligations in the consolidated balance sheets. These costs are amortized over the term of the Notes and are
included in interest expense in our consolidated statements of earnings.
EGL Revolving Credit Facility
This 5-year revolving credit facility, originated on September 16, 2014, and most recently amended on March
20, 2017 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 $831.3 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, 2017, there was $607.2 million of available unutilized capacity under this facility. Subsequent to
December 31, 2017, we utilized $307.4 million and repaid $132.0 million bringing the available unutilized capacity
under this facility to $431.8 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.
197
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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.
As at December 31, 2017 and December 31, 2016, there were borrowings of €50.0 million (approximately $60.1
million) and €75.0 million (approximately $88.5 million), respectively, under the facility that were designated as non-
derivative hedges 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 loss of $9.4 million and a gain of $6.0
million recognized in the currency translation adjustment within accumulated other comprehensive income (loss) for
the years ended December 31, 2017 and 2016, respectively. These amounts were offset against equivalent amounts
recognized upon the translation of those subsidiaries' financial statements from their Euro-denominated functional
currency into U.S. dollars. There were no ineffective portions of the net investment hedge during the year ended
December 31, 2017 and 2016. During the year ended December 31, 2017, we repaid €25.0 million (approximately
$29.5 million) of the non-derivative hedge and reclassified the related foreign exchange losses of $1.1 million previously
deferred in CTA within 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. We repaid the
outstanding principal in June 2017 and terminated the 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"). During the year ended December 31, 2017, we repaid $0.9 million of the outstanding principal
under this 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.
16. NONCONTROLLING INTEREST
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest ("RNCI") as of December 31, 2017 comprises the ownership interest held
by Trident (39.3%) and Dowling (1.7%) 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, Northshore 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 are owned by a common
parent, North Bay. Northshore owns 100% of Atrium and Arden. StarStone Holdings owns 100% of StarStone.
198
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2017 and 2016:
Balance at beginning of year
Dividends paid
Net earnings attributable to RNCI
Accumulated other comprehensive income attributable to RNCI
Change in redemption value of RNCI
Balance at end of year
2017
454,522 $
2016
417,663
$
(27,458)
19,619
1,945
30,978
—
40,639
651
(4,431)
$
479,606 $
454,522
We carried the RNCI at its estimated redemption value, which is fair value, as of December 31, 2017. The
increase was primarily attributable to an increase in comparable company market valuations, an increase in the net
assets due to net earnings, partially offset by a reduction in net assets due to the distribution of dividends during the
year ended December 31, 2017.
Refer to Note 2 - "Significant Accounting Policies", Note 21 - "Related Party Transactions" and Note 23 -
"Commitments and Contingencies" for additional information regarding RNCI.
Noncontrolling Interest
As of December 31, 2017, we had $9.3 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.
17. SHARE CAPITAL
As at December 31, 2017 and 2016, 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, 2017:
•
•
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. In addition, there were 66,520 Series C Non-Voting Ordinary Shares issued in March 2017 in
connection with the exercise of warrants as described below. 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. During the three months ended March 31, 2017, 192,485 Series C Non-Voting Ordinary
Shares were converted into Voting Ordinary Shares in a widely dispersed offering by their registered holders.
•
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.
199
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2017. 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, 2017, 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.
As of December 31, 2017, 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
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.
200
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
18. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the years ended
December 31, 2017, 2016 and 2015:
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:
Share-based compensation plans
Warrants
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
19. SHARE-BASED COMPENSATION AND PENSIONS
Share-based compensation
2017
2016
2015
300,465 $
252,844 $
10,993
11,963
311,458 $
264,807 $
222,322
(2,031)
220,291
19,388,621
19,299,426
19,252,072
62,732
76,238
19,527,591
48,428
99,387
19,447,241
76,801
78,883
19,407,756
15.50 $
13.10 $
0.56
0.62
16.06 $
13.72 $
15.39 $
13.00 $
0.56
0.62
15.95 $
13.62 $
11.55
(0.11)
11.44
11.46
(0.11)
11.35
$
$
$
$
$
$
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 2017:
Nonvested — January 1
Granted
Vested
Forfeited
Nonvested — December 31
Number of
Shares
Weighted-
Average
Share Price of
Award
78,992
$
56,333
(31,199)
(4,821)
99,305
165.94
202.82
163.75
159.93
187.84
Compensation costs of $7.3 million, $3.0 million and $6.1 million relating to these share awards were recognized
in our statement of earnings for the years ended December 31, 2017, 2016 and 2015, respectively. The unrecognized
compensation cost related to our non-vested share awards as at December 31, 2017 was $11.7 million. This cost is
expected to be recognized over the next 1.75 years, which is the weighted average contractual life of the awards.
201
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Performance Share Units ("PSUs")
PSUs 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, based upon the following award terms:
Grant Year
PSU's Granted
at Target
Nonvested Units
Change in FDBVPS (3 - year)
at December 31, 2017
Threshold
Target
Maximum
2017
2017
36,321
91,875
128,196
34,878
91,875
126,753
20.00%
30.30%
30.00%
35.70%
40.00%
41.00%
An increase of Target to Maximum or more in FDBVPS results in a settlement of 100% to a maximum of 150%
of the units granted, respectively. An increase of Threshold to Target 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 the Threshold.
The following table summarizes the activity related to PSUs during 2017:
Nonvested — January 1
Granted
Forfeited
Nonvested — December 31
Number of
Shares
Weighted-
Average
Share Price of
Award
— $
128,196
(1,443)
126,753
—
188.15
196.11
188.06
Compensation costs of $5.8 million, $nil and $nil relating to these share awards were recognized in our statement
of earnings for the years ended December 31, 2017, 2016 and 2015, respectively. The unrecognized compensation
cost related to our non-vested share awards as at December 31, 2017 was $18.0 million. This cost is expected to be
recognized over the next 2.3 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 2017:
Balance, beginning of year
Exercised
Balance, end of year
Number of
SARs
Weighted-
Average
Exercise
Price of SARs
Weighted
Average
Expected Term
(in years)
Aggregate
Intrinsic Value(1)
941,168
$
(630,301)
310,867
140.70
140.39
141.30
1.58
$
18,471
(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 $200.75 on December 31, 2017.
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 $8.9
million, $35.6 million and $8.9 million relating to these share awards were recognized in our statement of earnings for
202
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
the years ended December 31, 2017, 2016 and 2015, respectively. The unrecognized compensation cost related to
our SARs as at December 31, 2017 was $0.2 million. This cost is expected to be recognized over the next 0.61 years,
which is the weighted-average remaining vesting term of the awards.
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, 2017, 2016 and 2015:
Weighted-average fair value per SAR
Weighted-average volatility
Weighted-average risk-free interest rate
Dividend yield
Other share-based compensation plans
Northshore Incentive Plan
2017
2016
2015
$
75.38
$
62.39
$
29.02
19.44%
1.65%
0.00%
19.82%
1.12%
0.00%
22.08%
1.29%
0.00%
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, 2017, 2016 and 2015, compensation costs of $3.2 million, $2.8
million and $3.9 million, respectively, 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,
2017 was $5.4 million. This cost is expected to be recognized over the next 1.87 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, 2017, 2016 and 2015, 3,852, 4,298 and 5,174 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, 2017, 2016 and 2015, was $0.8 million, $0.7
million and $1.0 million, respectively.
During the year ended December 31, 2015, 2,393 restricted share units previously credited to the accounts of
two directors under the Deferred Compensation Plan were converted into ordinary shares following their resignations.
Employee Share Purchase Plan
For the years ended December 31, 2017, 2016 and 2015, compensation costs relating to the shares issued
under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan ("Share Plan") of $0.4 million,
$0.3 million and $0.3 million, respectively, were recorded in our consolidated statement of earnings. For the years
ended December 31, 2017, 2016 and 2015, 12,401, 12,234 and 11,998 shares, respectively, were issued to employees
under the Share Plan.
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, 2017, 2016 and 2015
was $12.2 million, $10.8 million and $10.3 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 $1.9 million, $2.3 million and $0.6 million
for the years ended December 31, 2017, 2016 and 2015, 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
203
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
other comprehensive loss in shareholders' equity. During 2017, an actuarial review was performed, which determined
that the plan’s unfunded liability, as at December 31, 2017, was $9.4 million as compared to $10.3 million as at
December 31, 2016. As at December 31, 2017 and 2016, we had an accrued liability of $9.4 million and $10.3 million,
respectively, for this plan.
20. TAXATION
Enstar Group Limited 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 unremitted 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
2017
167,263 $
2016
191,647 $
147,148
135,677
2015
61,695
163,327
314,411 $
327,324 $
225,022
$
$
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
2017
2016
2015
$
— $
— $
10,299
10,299
—
(16,694)
(16,694)
21,485
21,485
—
13,389
13,389
—
30,028
30,028
—
(17,378)
(17,378)
Total tax expense (benefit) on continuing operations
$
(6,395) $
34,874 $
12,650
204
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 valuation allowance
Effect of change in foreign (U.S.) tax rate
Other
Effective tax rate
2017
$ 314,411
2016
$ 327,324
2015
$ 225,022
0.0 %
13.1 %
(34.9)%
20.3 %
(0.5)%
(2.0)%
0.0 %
8.8 %
(0.1)%
— %
2.0 %
10.7 %
0.0 %
17.6 %
(10.5)%
— %
(1.5)%
5.6 %
Our effective tax rate is generally driven by the geographical distribution of our pre-tax net earnings between
our taxable and non-taxable jurisdictions. We have recorded the effects of U.S. Tax Reform in 2017, primarily related
to our deferred tax asset and valuation allowance thereon, as described below.
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:
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
December 31,
2017
2016
$
177,695 $
262,271
—
9,082
1,690
9,131
6,371
1,944
7,487
19,265
8,760
6,581
16,018
7,946
205,913
328,328
(188,300)
(290,861)
17,613
37,467
(3,798)
—
(16,076)
(19,874)
$
(2,261) $
(12,804)
(20,615)
(21,030)
(54,449)
(16,982)
The change in the deferred tax liability during the year ended December 31, 2017 differs from deferred tax
expense for 2017 primarily due to reclassification of our deferred tax asset to other assets in relation to Alternative
Minimum Tax ("AMT") recoverable as described below in relation to U.S. Tax Reform, partially offset by the adoption
of ASU 2016-09 which resulted in a reduction of our deferred tax liability and an increase in retaining earnings on the
consolidated statement of changes in shareholders' equity.
205
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Net Deferred Tax Liability balance for continuing operations by major jurisdiction:
United States
United Kingdom
Other
Total
December 31,
2017
2016
Net Deferred Tax
Asset / (Liability)
Net Deferred Tax
Asset / (Liability)
$
$
4,947 $
(5,150)
(2,058)
(2,261) $
(513)
(12,297)
(4,172)
(16,982)
As of December 31, 2017, we had net operating loss carryforwards that could be available to offset future taxable
income, as follows:
Tax Jurisdiction
Operating and Capital Loss
Carryforwards:
United States - Net operating loss
United States - Capital loss
United Kingdom
Other
Impact of US Tax Reform
Loss
Carryforwards
Tax effect
Expiration
$
528,226 $
14,339
324,784
19,105
110,927
3,011
62,521
1,236
2030-2036
2021-2022
None
None
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as
the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act resulted in a reduction of the U.S. Federal Tax rate to 21% from
35%, effective for tax years beginning after December 31, 2017. Consequently, we have recorded a $63.8 million write
down of our U.S. deferred tax asset in 2017. The Tax Act also repealed the corporate AMT. Taxpayers with AMT credit
carryovers in excess of their tax liability may have the credits refunded over multiple years between 2018 and 2022.
As a result, we have recorded a reduction to our valuation allowance of $7.4 million and reclassified our AMT credit
carryforward to other assets on our consolidated balance sheet.
Assessment of Valuation Allowance on Deferred Tax Assets
As of December 31, 2017 and 2016, we had deferred tax asset valuation allowances of $188.3 million and $290.9
million, respectively, related to foreign subsidiaries. We recorded a reduction of $102.6 million in our deferred tax
valuation allowance for continuing operations during 2017. The valuation allowance was decreased in relation to (i)
the decrease of the deferred tax asset due to the reduction in the U.S. income tax rate from 35% to 21%, (ii) the current
year utilization of deferred tax assets, partially offset by an increase relating to deferred tax assets for which we have
deemed are not likely to be realized.
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Uncertainty in Income Taxes
During the years ended December 31, 2017, 2016 and 2015, there were no unrecognized tax benefits. There
were no accruals for the payment of interest and penalties related to unrecognized tax benefits as at December 31,
2017, 2016 and 2015.
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, 2017:
Major Tax Jurisdiction
United States
United Kingdom
Australia
21. RELATED PARTY TRANSACTIONS
Stone Point Capital LLC
Open Tax Years
2014-2016
2014-2016
2012-2016
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 8.2% 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 September 9, 2018 and April 1, 2019, respectively,
and at any time following September 9, 2020 and April 1, 2021, 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 September 9, 2020 and April 1, 2021. As of December 31,
2017, we have included $459.6 million (December 31, 2016: $435.6 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, 2017, 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 $255.9 million and $232.1 million as of December 31, 2017 and December 31, 2016,
respectively. The fair value of our investment in the registered investment company was $22.1 million and $20.9 million
as at December 31, 2017 and December 31, 2016, respectively. For the years ended December 31, 2017 and 2016,
we recognized net unrealized gains of $22.3 million and $17.2 million, respectively, in respect of the fund investments,
and net unrealized gains of $2.9 million and net realized and unrealized losses of $0.4 million, respectively, in respect
of the registered investment company investment. For the years ended December 31, 2017 and 2016, we recognized
interest income of $2.5 million and $3.1 million, respectively, in respect of the registered investment company.
We also have separate accounts, with a balance of $183.4 million and $215.0 million as at December 31, 2017
and 2016, 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 in management fees for each
of the years ended December 31, 2017 and 2016.
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 $27.4 million and $25.4 million as of December 31, 2017 and
December 31, 2016, respectively. For the years ended December 31, 2017 and 2016, we have recognized net
207
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
unrealized gains of $2.0 million and $1.9 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 $17.8 million and $20.3 million as at December 31, 2017 and December 31,
2016, respectively. For the years ended December 31, 2017 and 2016, we recognized net unrealized losses of $2.5
million and net unrealized gains of $2.1 million, respectively. For the years ended December 31, 2017 and 2016, we
recognized interest income of $4.3 million and $6.7 million, respectively, in respect of these investments.
We have a separate account managed by Sound Point Capital, with a balance of $63.6 million and $61.2 million
as at December 31, 2017 and 2016, respectively, with respect to which we incurred approximately $0.3 million in
management fees for each of the years ended December 31, 2017 and 2016.
CPPIB
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, as described in Note 3 - "Acquisitions", 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 9.1% voting interest and an approximate 16% aggregate economic interest in Enstar. In
addition, approximately 4.5% 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 $7.0 million and $9.4 million as of December 31, 2017 and December 31, 2016,
respectively.
KaylaRe
On December 15, 2016, our equity method investee, KaylaRe Holdings Ltd. ("KaylaRe") completed an initial
capital raise of $620.0 million. As of December 31, 2017, we have an approximate 48.2% ownership interest in KaylaRe.
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 KaylaRe was carried at $309.8 million and $294.6 million in other assets on our consolidated balance
sheet as at December 31, 2017 and December 31, 2016, respectively.
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) and (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.
Subsequent to December 31, 2017, we announced that we have entered into an agreement to purchase the
remaining 51.8% of KaylaRe from the existing shareholders. In exchange for the shareholdings in KaylaRe, we will
issue $398.3 million of ordinary shares. In the transaction, Hillhouse will increase its overall economic interest
in Enstar from 9.98% to 17.1% and its voting interest from 3.2% to 9.7%, and Stone Point will increase its economic
interest from 6.9% to 7.6% and its voting interest from 8.2% to 9.1%. In addition, the shareholders agreement described
above among Enstar and the other KaylaRe shareholders will be effectively terminated. The transaction is subject to
regulatory approval and is expected to close during the first quarter of 2018.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Our subsidiary, Enstar Limited, acts as insurance and reinsurance manager to KaylaRe's subsidiary, KaylaRe
Ltd., for which it received fee income of $8.7 million during the year ended December 31, 2017 (2016: $6.8 million).
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 31, 2017 (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, 2017, StarStone ceded $234.1 million (2016:
$117.6 million) of premium earned, $155.4 million (2016: $75.7 million) of net incurred losses and LAE and $99.5 million
(2016: $42.5 million) of acquisition costs to KaylaRe Ltd. under the KaylaRe-StarStone QS. The amounts in 2016 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, 2017 in accordance with retroactive reinsurance accounting. The amounts in 2017 were
recorded in their appropriate category on our consolidated statement of earnings in accordance with prospective
reinsurance accounting.
In addition, Fitzwilliam Insurance Limited ("Fitzwilliam"), one of our non-life run-off subsidiaries, ceded $nil (2016:
$177.2 million) of loss reserves to KaylaRe Ltd. during the year ended December 31, 2017, on a funds held basis.
Under the terms of this reinsurance agreement, Fitzwilliam is entitled to receive a profit commission calculated with
reference to reserve savings made during the currency of this agreement. During the year ended December 31, 2017,
Fitzwilliam recognized $18.8 million of profit commission (2016: $7.1 million), recorded as fees and commission income.
Our consolidated balance sheet as at December 31, 2017 included the following balances related to transactions
between us and KaylaRe and KaylaRe Ltd.: reinsurance recoverable of $357.4 million (2016: $242.1 million), prepaid
reinsurance premiums of $116.4 million (2016: $109.0 million), funds held of $174.2 million (2016: $182.3 million)
recorded in other liabilities, insurance and reinsurance balances payable of $232.9 million (2016: $132.6 million), and
ceded acquisition costs of $36.1 million (2016: $41.2 million) recorded as a reduction of deferred acquisition costs.
Hillhouse
Investment funds managed by Hillhouse collectively own approximately 3.2% 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 9.98% economic interest in Enstar.
As of December 31, 2017 and December 31, 2016, our equity method investee, KaylaRe, had investments in a
fund managed by Hillhouse with a fair value of $456.7 million and $350.0 million, respectively.
As of December 31, 2017, our wholly-owned subsidiary, Cavello Bay, had transferred funds to Hillhouse of $200.0
million, which were invested on January 2, 2018. A further $50.0 million will be invested by Cavello Bay in funds
managed by Hillhouse during the first quarter of 2018.
Monument
On August 29, 2017, we closed the previously announced sale of our wholly-owned subsidiary Laguna, to a
subsidiary of Monument Insurance Group Limited ("Monument"), for a total consideration of €25.6 million (approximately
$30.8 million).
Monument was established in October 2016 and we have invested a total of $16.0 million in the common and
preferred shares of Monument. We have approximately a 26.6% interest in Monument. In connection with our investment
in Monument, we entered into a Shareholders Agreement with the other shareholders.
We recorded the investment in Monument using the equity method basis of accounting, as we concluded that
we are not required to consolidate based on the guidance in ASC 810 - Consolidation. Our investment in Monument
was carried at $16.0 million and $0.2 million in other assets on our consolidated balance sheet as at December 31,
2017 and 2016, respectively.
Clear Spring (formerly SeaBright)
Effective January 1, 2017 we sold SeaBright Insurance Company (“SeaBright Insurance”) and its licenses to
Delaware Life Insurance Company ("Delaware Life"), a subsidiary of Guggenheim Partners, LLC. Following the sale,
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
SeaBright Insurance was renamed Clear Spring Property and Casualty Company (“Clear Spring”). Clear Spring was
subsequently capitalized with $56.0 million of equity, with Enstar retaining at 20% indirect equity interest in Clear Spring.
We have recorded the investment in Clear Spring 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 of Clear Spring was carried at $10.6 million on the balance sheet
as at December 31, 2017.
Effective January 1, 2017, StarStone National Insurance Company (“StarStone National”) entered into a Quota
Share Treaty with Clear Spring pursuant to which Clear Spring reinsures 33.3% of core Workers Compensation business
written by StarStone National. During the year ended December 31, 2017, StarStone National ceded $14.3 million of
premium earned, $9.5 million of net incurred losses and LAE and $6.7 million of acquisition costs to Clear Spring under
this quota share agreement.
Our consolidated balance sheet as at December 31, 2017 includes the following balances related to transactions
between StarStone National and Clear Spring; reinsurance recoverable of $9.1 million, prepaid reinsurance premiums
of $13.7 million, ceded payable of $14.0 million recorded in other liabilities, and ceded acquisition costs of $3.2 million
recorded as a reduction of deferred acquisition costs.
Effective January 1, 2017, Cavello Bay entered into a quota share treaty with Clear Spring pursuant to which
Cavello Bay reinsures 25.0% of all Workers Compensation business written by Clear Spring. During the year ended
December 31, 2017, Cavello Bay accepted $3.6 million of premium earned, $1.2 million of net incurred losses and
LAE and $1.7 million of acquisition costs from Clear Spring under this quota share agreement.
Our consolidated balance sheet as at December 31, 2017 includes the following balances related to transactions
between Cavello Bay and Clear Spring: losses and LAE of $2.2 million, unearned reinsurance premiums of $3.4 million
and funds held of $5.1 million.
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, 2017. Bermuda law permits the payment of dividends if (i) we are not, or would not be after payment,
unable to pay our liabilities as they 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2017 and 2016 and statutory net
income amounts for the years ended December 31, 2017, 2016 and 2015 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
Required
Actual
Statutory Income
Bermuda
U.K.
U.S.
Europe
2016
2017
2017
2016
$ 1,556,644 $ 792,652 $ 2,802,653 $ 2,131,308 $ 390,752 $ 339,548 $ 147,883
$ 453,160 $ 532,132 $ 699,798 $ 805,170 $
77,900 $ 131,619 $ 113,296
$ 195,855 $ 209,283 $ 589,029 $ 662,942 $
14,964
(5,065) $
$ 253,981 $ 240,107 $ 444,870 $ 286,039 $
1,856
(4,245) $
(1,439) $
31,075 $
2016
2017
2015
As at December 31, 2017, the total amount of net assets of our consolidated subsidiaries that were restricted
was $2.5 billion.
Certain material aspects of these laws and regulations as they relate to solvency, dividends and capital and
surplus are summarized below.
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 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, 2017 and 2016, 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 $1.2 billion as of December 31, 2017 (2016:
$1.3 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").
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2017 and 2016, 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 $246.6 million and $273.0 million as of December 31, 2017 and 2016, 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, 2017, 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,
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 has been
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 6 - "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, 2017, 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, 2017 by $385.4 million (December 31, 2016: $402.0
million).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Our remaining regulated life subsidiary files financial statements with state insurance regulatory authorities and
the NAIC in the United States. Our life company is subject to certain Risk-Based Capital ("RBC") requirements as
specified by the NAIC. RBC is used to evaluate the adequacy of capital and surplus maintained by our life company
in relation to risks associated with: (i) asset risk; (ii) insurance risk; (iii) interest rate risk and (iv) business risk. As of
December 31, 2017 and 2016, our life subsidiary exceeded their minimum RBC requirements by $7.8 million (2016:
$51.6 million). This subsidiary is 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, 2017 and
2016, the maximum dividend payout which may be made without prior approval is $nil (2016: $nil).
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 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, 2017 and 2016, this subsidiary exceeded the SST requirements by $44.0 million (2016: $6.1
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.
Our Liechtenstein insurance subsidiary (StarStone Insurance SE) 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 II regulations. As of December 31, 2017, this subsidiary
exceeded the Solvency II requirements by $146.8 million (2016: $12.8 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 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 Belgian life insurance subsidiary files financial statements and returns with the National Bank of Belgium.
This subsidiary was in compliance with its solvency and capital requirements under Solvency II.
213
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 may be placed into trust or subject to other security arrangements. 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, 2017. Our credit exposure to the U.S. government was $810.9 million as at December 31, 2017.
Operating Leases
We lease office space under operating leases expiring in various years through 2028. 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, 2017:
2018
2019
2020
2021
2022
2023 and beyond
$
11,023
9,217
9,310
7,137
5,647
20,461
62,795
$
Rent expense for the years ended December 31, 2017, 2016 and 2015 was $9.5 million, $9.7 million and $11.1
million, respectively.
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,
214
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2017, we had unfunded commitments to investment funds of $164.7 million.
Guarantees
As at December 31, 2017 and 2016, parental guarantees supporting subsidiaries' insurance obligations were
$795.7 million and $625.7 million, respectively. The increase relates to new transactions during 2017 as described in
Note 3 - "Acquisitions" and Note 4 - "Significant New Business", and includes $165.0 million for letters of credit issued
under a Funds at Lloyd's facility as described in Note 6 - "Investments". On February 8, 2018, we amended and restated
the FAL Facility to issue up to $325.0 million of letters of credit, with a provision to increase the facility up to $400.0
million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and expires in 2022.
Significant New Business
On December 20, 2017, we entered into a reinsurance-to-close transaction with Neon's Syndicate 2468. On
January 29, 2018, we entered into a reinsurance-to-close transaction with Novae's Syndicate 2007. On February 22,
2018, we entered into a reinsurance agreement with Zurich Insurance Group. 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 $205.7 million and $220.5 million for indemnity and defense costs for pending and future
claims at December 31, 2017 and 2016, respectively, determined using standard actuarial techniques for asbestos-
related exposures. Other liabilities also included $2.2 million and $2.3 million for environmental liabilities associated
with Dana properties at December 31, 2017 and 2016, respectively.
Other assets included $122.3 million and $133.0 million at December 31, 2017 and 2016, respectively, 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.
24. SEGMENT INFORMATION
In the second half of 2017, following the completion of the sale of our Laguna and Pavonia businesses, which
significantly reduced the size of our life and annuities business, we undertook a review of our reportable segments.
Following this review we determined that we have three reportable segments of business that are each managed,
operated and reported on separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. Our other activities, which do
not qualify as a reportable segment, include our corporate expenses, debt servicing costs, holding company income
215
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
and expenses, foreign exchange, our remaining life business and other miscellaneous items. The change in reportable
segments had no impact on our previously reported historical consolidated financial positions, results of operations or
cash flows. These segments are described in Note 1 - "Description of Business".
The Non-life Run-off segment comprises the operations and financial results of those insurance and reinsurance
companies and portfolios in run-off that have been acquired by us.
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.
216
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following tables set forth selected and consolidated statement of earnings results by segment for the years
ended December 31, 2017, 2016, 2015:
Gross premiums written
Net premiums written
Net premiums earned
$
$
$
Net incurred losses and LAE
Life and Annuity Policy Benefits
Acquisition costs
Operating expenses
Underwriting income (loss)
Net investment income
Net realized and unrealized gains
(losses)
Fees and commission income
(expense)
Other income
Corporate expenses
Interest income (expense)
Net foreign exchange losses
Loss on sale of subsidiary
EARNINGS (LOSS) BEFORE
INCOME TAXES
INCOME TAXES
NET EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
NET EARNINGS FROM
DISCONTINUING OPERATIONS,
NET OF INCOME TAX EXPENSE
Net earnings attributable to
noncontrolling interest
NET EARNINGS (LOSS)
ATTRIBUTABLE TO ENSTAR
GROUP LIMITED
Underwriting ratios:
Loss ratio (1)
Acquisition expense ratio (1)
Operating expense ratio (1)
Combined ratio (1)
Non-Life
Run-Off
Atrium
StarStone
Other
2017
$
$
$
14,102
6,482
14,162
190,674
—
(328)
(132,235)
72,273
166,678
179,545
43,849
27,061
(101,592)
(28,970)
(7,347)
—
351,497
6,990
153,472
134,214
134,747
(69,419)
—
(47,688)
(17,444)
196
4,218
1,117
22,788
230
(12,142)
(559)
(5,060)
—
10,788
(1,593)
358,487
9,195
$
$
$
$
$
$
895,160
464,901
459,403
(314,806)
—
(48,012)
(135,558)
(38,973)
27,706
$
$
$
5,719
4,793
4,809
—
(4,015)
(878)
—
(84)
10,187
Total
1,068,453
610,390
613,121
(193,551)
(4,015)
(96,906)
(285,237)
33,412
208,789
16,613
(6,941)
190,334
632
570
—
(1,902)
(926)
—
3,720
988
4,708
(1,166)
648
(37,014)
3,329
(4,204)
(16,349)
(51,594)
10
66,103
28,509
(150,748)
(28,102)
(17,537)
(16,349)
314,411
6,395
(51,584)
320,806
—
—
—
10,993
10,993
(14,687)
(3,772)
(1,882)
—
(20,341)
$
343,800
$
5,423
$
2,826
$
(40,591)
$
311,458
51.5%
35.4%
13.0%
99.9%
68.5%
10.5%
29.5%
108.5%
217
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Non-Life
Run-Off
Atrium
StarStone
Other
2016
Gross premiums written
Net premiums written
Net premiums earned
Net incurred losses and LAE
Life and Annuity Policy Benefits
$
$
$
Acquisition costs
Operating expenses
Underwriting income
Net investment income
Net realized and unrealized gains
(losses)
Fees and commission income
(expense)
Other income
Corporate expenses
Interest income (expense)
Net foreign exchange gains
(losses)
EARNINGS (LOSS) BEFORE
INCOME TAXES
INCOME TAXES
NET EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
NET EARNINGS FROM
DISCONTINUING OPERATIONS,
NET OF INCOME TAX EXPENSE
Net earnings attributable to
noncontrolling interest
NET EARNINGS (LOSS)
ATTRIBUTABLE TO ENSTAR
GROUP LIMITED
Underwriting ratios:
Loss ratio (1)
Acquisition expense ratio (1)
Operating expense ratio (1)
Combined ratio (1)
$
$
$
17,316
9,202
16,755
285,881
—
(4,198)
(151,316)
147,122
145,237
77,685
17,447
2,497
(61,583)
(22,268)
$
$
$
143,170
140,437
124,416
(58,387)
—
(44,670)
(14,233)
7,126
2,940
(601)
18,189
206
(10,899)
(198)
1,684
(3,310)
$
$
$
854,699
648,036
676,608
(401,593)
—
(138,822)
(124,239)
11,954
22,221
5,728
5,102
740
—
(47)
754
$
$
$
7,157
6,261
5,735
—
2,038
1,121
—
8,894
15,065
(4,994)
(1,374)
1,393
(61,464)
1,871
Total
1,022,342
803,936
823,514
(174,099)
2,038
(186,569)
(289,788)
175,096
185,463
77,818
39,364
4,836
(133,946)
(20,642)
207
(665)
307,821
(28,577)
13,453
(2,573)
46,452
(3,693)
(40,402)
(31)
327,324
(34,874)
279,244
10,880
42,759
(40,433)
292,450
—
—
—
11,963
11,963
(17,600)
(4,464)
(17,542)
—
(39,606)
$
261,644
$
6,416
$
25,217
$
(28,470)
$
264,807
46.9%
35.9%
11.5%
94.3%
59.4%
20.5%
18.3%
98.2%
218
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Non-Life
Run-Off
Atrium
StarStone
Other
2015
Gross premiums written
Net premiums written
Net premiums earned
Net incurred losses and LAE
Life and Annuity Policy Benefits
$
$
$
Acquisition costs
Operating expenses
Underwriting income
Net investment income
Net realized and unrealized gains
(losses)
Fees and commission income
(expense)
Other income (expense)
Corporate expenses
Interest income (expense)
Net foreign exchange gains
(losses)
EARNINGS BEFORE INCOME
TAXES
INCOME TAXES
NET EARNINGS FROM
CONTINUING OPERATIONS
NET LOSSES FROM
DISCONTINUING OPERATIONS,
NET OF INCOME TAX EXPENSE
Net (earnings) losses attributable
to noncontrolling interest
NET EARNINGS
ATTRIBUTABLE TO ENSTAR
GROUP LIMITED
Underwriting ratios:
Loss ratio (1)
Acquisition expense ratio (1)
Operating expense ratio (1)
Combined ratio (1)
38,704
22,594
44,369
270,830
—
(8,860)
(158,821)
147,518
88,999
(31,383)
22,264
29,294
(54,213)
(33,599)
$
$
$
$
$
$
149,082
134,580
134,675
(47,479)
—
(45,509)
(18,499)
23,188
2,225
$
$
$
824,714
628,427
573,146
(327,684)
—
(109,347)
(128,544)
7,571
15,937
$
$
$
2,883
1,553
1,554
—
546
—
—
2,100
15,403
Total
1,015,383
787,154
753,744
(104,333)
546
(163,716)
(305,864)
180,377
122,564
252
(9,784)
(608)
(41,523)
28,352
359
(13,111)
(4,264)
(4,372)
(213)
164,508
(12,570)
36,788
(5,968)
151,938
30,820
—
3,088
—
(6)
480
17,286
5,888
23,174
(11,269)
(2,413)
(15,971)
18,466
732
6,440
—
6,440
39,347
30,328
(83,295)
(19,403)
(3,373)
225,022
(12,650)
212,372
—
—
—
(2,031)
(2,031)
33,722
(14,262)
(9,510)
—
9,950
$
185,660
$
16,558
$
13,664
$
4,409
$
220,291
35.3%
33.8%
13.7%
82.8%
57.2%
19.1%
22.4%
98.7%
(1)Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
219
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, 2017 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
Other
Total
Total
%
Total
%
Total
%
Total
%
Total
%
(In thousands of U.S. dollars, except percentages)
United States
United Kingdom
Europe
Asia
Rest of World
Total
$
9,639
68.3% $ 81,438
53.1% $ 546,223
61.0% $
—
—% $ 637,300
4,271
192
—
—
30.3%
11,203
7.3%
97,745
1.4%
10,684
7.0% 151,106
—%
—%
4,739
45,408
3.1%
48,839
29.5%
51,247
10.9%
16.9%
5.5%
5.7%
1,346
4,373
—
—
23.5%
76.5%
—%
—%
114,565
166,355
53,578
96,655
59.6%
10.7%
15.6%
5.0%
9.1%
$ 14,102
100.0% $ 153,472
100.0% $ 895,160
100.0% $
5,719
100.0% $ 1,068,453
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, 2017
and 2016 by segment were as follows (the elimination items include the elimination of intersegment assets):
Assets by Segment:
Non-life Run-off
Atrium
StarStone
Other
Total assets
2017
2016
$ 10,368,105 $
8,233,450
556,637
3,128,725
(447,045)
563,754
2,968,316
1,100,224
$ 13,606,422 $ 12,865,744
220
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
25. UNAUDITED CONDENSED QUARTERLY FINANCIAL DATA
December 31,
September 30,
June 30,
March 31,
2017
2016
2017
2016
2017
2016
2017
2016
$ 160,627
$216,188
$148,025
$205,730
$155,571
$208,709
$148,898
$ 192,887
19,627
58,605
50,637
9,303
13,266
42,229
(61,570)
15,895
52,028
29,301
(1,277)
(3,848)
9,187
48,022
66,608
414
18,667
49,417
51,877
10,856
10,487
44,932
34,503
3,289
11,914
48,739
58,519
12,198
6,424
50,280
38,277
2,410
298,799
208,836
241,401
329,961
286,388
301,920
280,268
290,278
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains (losses)
Other income (losses)
EXPENSES
Net incurred losses and loss adjustment
expenses
9,620
4,289
30,327
1,321
75,712
(6,902)
96,462
77,892
83,218
Life and annuity policy benefits
(1,033)
(2,265)
1,060
1,682
(1,613)
(301)
Acquisition costs
21,449
47,619
24,281
50,074
30,355
43,847
20,821
General and administrative expenses
126,702
123,497
100,325
103,097
106,490
104,206
102,468
Interest expense
Net foreign exchange losses (gains)
Loss on sale of subsidiary
7,251
1,925
—
4,796
(1,527)
—
6,410
4,775
6,740
5,027
2,276
—
7,573
7,122
9,609
5,421
(1,856)
—
6,868
3,715
—
158
45,029
92,934
5,398
1,772
—
EARNINGS BEFORE INCOME TAXES
112,178
35,395
22,098
174,707
111,330
55,453
68,805
61,769
INCOME TAXES
9,629
(11,228)
(1,432)
(8,227)
(4,731)
(8,050)
2,929
(7,369)
186,621
173,441
219,303
155,254
175,058
246,467
211,463
228,509
NET EARNINGS FROM CONTINUING
OPERATIONS
NET EARNINGS (LOSS) FROM
DISCONTINUING OPERATIONS, NET OF
INCOME TAX EXPENSE
121,807
24,167
20,666
166,480
106,599
47,403
71,734
54,400
11,998
5,483
3,495
3,897
(4,871)
2,378
371
205
NET EARNINGS
133,805
29,650
24,161
170,377
101,728
49,781
72,105
54,605
Net losses (earnings) attributable to
noncontrolling interest
NET EARNINGS ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
EARNINGS PER SHARE — BASIC:
(6,206)
(7,005)
14,832
(14,329)
(11,542)
(9,187)
(17,425)
(9,085)
$ 127,599
$ 22,645
$ 38,993
$156,048
$ 90,186
$ 40,594
$ 54,680
$ 45,520
Net earnings from continuing operations
Net earnings (loss) from discontinuing
operations
$
$
5.96
0.62
Net earnings per ordinary share attributable
to Enstar Group Limited shareholders $
6.58
EARNINGS PER SHARE — DILUTED:
Net earnings from continuing operations
Net earnings (loss) from discontinuing
operations
$
$
5.90
0.61
Net earnings per ordinary share attributable
to Enstar Group Limited shareholders $
6.51
$
$
$
$
$
$
0.91
0.26
1.17
0.90
0.26
1.16
$
$
$
$
$
$
1.83
0.18
2.01
1.81
0.18
1.99
$
$
$
$
$
$
7.89
0.20
8.09
7.82
0.20
8.02
$
$
$
$
$
$
4.90
$
1.98
(0.25) $
0.12
4.65
$
2.10
4.87
$
1.97
(0.25) $
0.12
4.62
$
2.09
$
$
$
$
$
$
2.80
0.02
2.82
2.78
0.02
2.80
$
$
$
$
$
$
2.34
0.02
2.36
2.33
0.02
2.35
221
ENSTAR GROUP LIMITED
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 2017
(Expressed in thousands of U.S. Dollars)
SCHEDULE I
Type of investment
Fixed maturity securities and short-term investments — Trading:
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(3)
Other investments, at fair value(4)
Other investments, at cost
Total
Cost (1)
Fair Value
$
557,273
$
554,036
$
580,280
3,299,982
98,153
285,312
427,469
534,893
607,132
3,363,060
100,221
288,713
421,548
541,574
Amount at
which
shown in the
balance
sheet(2)
554,036
607,132
3,363,060
100,221
288,713
421,548
541,574
5,783,362
5,876,284
5,876,284
4,210
84,776
113,561
5,146
31
373
208,097
64,197
630,058
125,621
4,187
85,437
115,121
5,136
31
373
210,285
84,543
630,058
131,896
4,187
85,437
115,121
5,136
31
373
210,285
84,543
630,058
125,621
$
6,811,335
$
6,933,066
$
6,926,791
(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 table above excludes businesses held for sale. Refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations"
of the notes to the consolidated financial statements.
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 $22.1 million as of December 31, 2017 for our investment in a registered investment company affiliated with entities owned by
Trident. Refer to Note 21 - "Related Party Transactions" 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 $283.3 million as of December 31, 2017 for our other investments in funds or companies owned by or affiliated
with certain related parties. Refer to Note 21 - "Related Party Transactions" of the notes to the consolidated financial statements.
222
ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Balance Sheets - Parent Company Only
As of December 31, 2017 and 2016
SCHEDULE II
ASSETS
Cash and cash equivalents
Balances due from subsidiaries
Investments in subsidiaries
Other assets
TOTAL ASSETS
LIABILITIES
Debt obligations
Balances due to subsidiaries
Other liabilities
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
2017
2016
(in thousands of U.S.
dollars, except share data)
$
$
$
2,458
$
23,635
4,884
35,563
3,917,830
3,400,401
2,877
8,533
3,946,800
$
3,449,381
646,689
$
148,410
15,017
810,116
488,103
153,843
5,123
647,069
Share capital authorized, issued and fully paid, par value $1 each (authorized 2017 and
2016: 156,000,000):
Ordinary shares (issued and outstanding 2017: 16,402,279; 2016: 16,175,250)
16,402
16,175
Non-voting convertible ordinary shares:
Series C (issued and outstanding 2017: 2,599,672; 2016: 2,792,157)
Series E (issued and outstanding 2017 and 2016: 404,771)
Series C Preferred Shares (issued and outstanding 2017 and 2016: 388,571)
Treasury shares at cost (Preferred shares 2017 and 2016: 388,571)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total Enstar Group Limited Shareholders’ Equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
2,600
405
389
2,792
405
389
(421,559)
(421,559)
1,395,067
1,380,109
10,468
2,132,912
3,136,684
(23,549)
1,847,550
2,802,312
$
3,946,800
$
3,449,381
See accompanying notes to the Condensed Financial Information of Registrant
223
ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
Statements of Earnings - Parent Company Only
For the Years Ended December 31, 2017, 2016 and 2015
SCHEDULE II
2017
2016
(in thousands of U.S. dollars)
2015
INCOME
Net investment income
Other income
Dividend income from subsidiaries
EXPENSES
General and administrative expenses
Interest expense
Net foreign exchange losses (gains)
EARNINGS (LOSSES) BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES
EQUITY IN UNDISTRIBUTED EARNINGS (LOSSES) OF
SUBSIDIARIES - CONTINUING OPERATIONS
EQUITY IN UNDISTRIBUTED EARNINGS (LOSSES) OF
SUBSIDIARIES - DISCONTINUING OPERATIONS
NET EARNINGS
$
80 $
44 $
14,965
1,050
249,055
250,185
87,596
23,138
6,135
116,869
—
361,675
361,719
59,755
10,109
(318)
69,546
—
1,000
15,965
50,349
8,693
213
59,255
133,316
292,173
(43,290)
167,149
(39,329)
265,612
10,993
11,963
(2,031)
$
311,458 $
264,807 $
220,291
Statements of Comprehensive Income - Parent Company Only
For the Years Ended December 31, 2017, 2016 and 2015
2017
2016
(in thousands of U.S. dollars)
2015
NET EARNINGS
OTHER COMPREHENSIVE INCOME (LOSS) RELATING TO
SUBSIDIARIES, NET OF TAX
COMPREHENSIVE INCOME
$
$
311,458 $
264,807 $
220,291
34,016
11,613
(22,476)
345,474 $
276,420 $
197,815
See accompanying notes to the Condensed Financial Information of Registrant
224
ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
Statements of Cash Flows - Parent Company Only
For the Years Ended December 31, 2017, 2016 and 2015
SCHEDULE II
OPERATING ACTIVITIES:
Net cash flows provided by (used in) operating activities
$
97,898 $
39,185 $
(81,384)
2017
2016
(in thousands of U.S. dollars)
2015
INVESTING ACTIVITIES:
Dividends and return of capital from subsidiaries
Contributions to subsidiaries
Net cash flows 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
217,450
(465,650)
(248,200)
250,117
(295,268)
(45,151)
1,000
(218,935)
(217,935)
(696,640)
(426,750)
(223,500)
844,516
147,876
(2,426)
4,884
433,048
6,298
332
4,552
505,700
282,200
(17,119)
21,671
4,552
CASH AND CASH EQUIVALENTS, END OF YEAR
$
2,458 $
4,884 $
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.
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, 2017, 2016, and 2015, interest paid
was $17.6 million, $15.0 million, and $13.0 million, respectively. During the years ended December 31, 2017 and 2016,
non-cash investing activities included $31.6 million and $111.6 million, respectively, for dividends and return of capital
from subsidiaries and $148.1 million and $452.1 million, respectively, 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 year ended December
31, 2015.
As at December 31, 2017 and 2016, parental guarantees supporting subsidiaries' insurance obligations were
$795.7 million and $625.7 million, respectively.
As at December 31, 2017 and 2016, retained earnings was $2,132.9 million and $1,847.6 million, respectively,
an increase of $285.4 million. The increase in retained earnings was primarily attributable to net earnings of $311.5
million.
225
ENSTAR GROUP LIMITED
SUPPLEMENTARY INSURANCE INFORMATION
(Expressed in thousands of U.S. Dollars)
SCHEDULE III
As of December 31,
Year ended December 31,
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
2017
Non-life run-off
$
655
$
5,949,472
$
14,275
$
— $
14,162
$
166,678
$ (190,674) $
328
$
233,827
$
6,482
Atrium
StarStone
Other
Total
2016
Non-life run-off
Atrium
StarStone
Other
Total
2015
Non-life run-off
Atrium
StarStone
Other
Total
$
$
$
$
18,385
45,944
—
240,873
64,877
1,207,743
504,045
—
—
—
—
117,207
134,747
459,403
4,809
4,218
27,706
10,187
69,419
314,806
4,015
47,688
48,012
878
29,586
135,558
37,014
134,214
464,901
4,793
64,984
$
7,398,088
$
583,197
$ 117,207
$
613,121
$
208,789
$
197,566
$
96,906
$
435,985
$
610,390
1,081
$
4,716,363
$
15,107
$
— $
16,755
$
145,237
$ (285,881) $
4,198
$
212,899
$
9,202
16,964
40,069
—
212,122
61,862
1,059,382
471,374
—
—
—
—
112,095
124,416
676,608
5,735
2,940
22,221
15,065
58,387
401,593
44,670
25,132
138,822
124,239
(2,038)
(1,121)
61,464
140,437
648,036
6,261
58,114
$
5,987,867
$
548,343
$ 112,095
$
823,514
$
185,463
$
172,061
$
186,569
$
423,734
$
803,936
1,788
$
4,585,454
$
27,792
$
— $
44,369
$
88,999
$ (270,830) $
8,860
$
213,034
$
22,594
16,326
71,009
—
201,017
933,678
—
59,808
455,171
—
—
—
126,321
134,675
573,146
1,554
2,225
15,937
15,403
47,479
327,684
(546)
45,509
31,610
109,347
128,544
—
15,971
134,580
628,427
1,553
$
89,123
$
5,720,149
$
542,771
$ 126,321
$
753,744
$
122,564
$
103,787
$
163,716
$
389,159
$
787,154
226
2017
Life insurance in force
Premiums earned:
Property and casualty
Life and annuities
Total premiums earned
2016
Life insurance in force
Premiums earned:
Property and casualty
Life and annuities
Total premiums earned
2015
Life insurance in force
Premiums earned:
Property and casualty
Life and annuities
Total premiums earned
ENSTAR GROUP LIMITED
REINSURANCE
For the Years Ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. Dollars)
SCHEDULE IV
Ceded to
Other
Companies
Gross
Assumed
from
Other
Companies Net Amount
Percentage
of Amount
Assumed
to Net
$
979,291 $
(100,189) $
— $
879,102
—%
899,226
(433,075)
142,161
(1,091)
—
608,312
4,809
23.4%
—%
(434,166) $
142,161 $
613,121
5,900
905,126 $
$
$ 2,317,567 $
(585,575) $
— $ 1,731,992
—%
804,141
(178,834)
192,472
(1,485)
—
817,779
5,735
23.5%
—%
(180,319) $
192,472 $
823,514
7,220
811,361 $
$
$ 2,978,466 $
(777,759) $
— $ 2,200,707
—%
854,856
(283,489)
180,823
(1,330)
—
752,190
1,554
24.0%
—%
2,884
857,740 $
$
(284,819) $
180,823 $
753,744
227
ENSTAR GROUP LIMITED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2017, 2016 and 2015
(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, 2017
Reinsurance balances recoverable:
Provisions for bad debt
174,516
(1,536)
(4,191)
(3,576)
165,213
Valuation allowance for deferred tax
assets
December 31, 2016
Reinsurance balances recoverable:
290,861
(16,694)
—
(85,867)
188,300
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
333,617
(17,379)
—
(24,958)
291,280
(1)
These amounts are credited to net incurred losses and there is an offsetting debit within the same line, resulting in no impact on earnings.
(2) Credited to the related asset account.
228
SCHEDULE VI
ENSTAR GROUP LIMITED
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
As of and for the years ended December 31, 2017, 2016 and 2015
(Expressed in thousands of U.S. Dollars)
As of December 31,
Year ended December 31,
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
$
64,984
$
7,398,088
$
583,197
$
608,312
$
198,602
$ 437,853
$ (244,302) $ (945,194) $
96,028
$ 605,597
58,114
89,123
5,987,867
5,720,149
548,343
542,771
817,779
752,190
170,398
493,016
(318,917)
(833,057)
187,690
797,675
107,161
476,364
(372,031)
(781,889)
163,716
785,601
Affiliation with
Registrant
Consolidated
Subsidiaries
2017
2016
2015
229
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, 2017. 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,
2017, 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, 2017.
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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
230
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Enstar Group Limited:
Opinion on Internal Control over Financial Reporting
We have audited Enstar Group Limited’s and subsidiaries (the “Company”) internal control over financial reporting
as of December 31, 2017, based on the criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,
based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (the “PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and
2016 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, 2017 and the related notes and
financial statement schedules I to VI (collectively, the consolidated financial statements) and our report dated
February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
231
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.
/s/ KPMG Audit Limited
Hamilton, Bermuda
February 28, 2018
232
ITEM 9B. OTHER INFORMATION
Not applicable.
233
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
All information required by Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K is incorporated by
reference from the definitive proxy statement for our 2018 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, 2017 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.
234
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.
235
Exhibit Index
Exhibit
No.
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
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).
Stock Purchase Agreement, dated February 17, 2017, by and between Southland National Holdings, Inc.
and Laguna Life Holdings SARL (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K
filed on February 21, 2017).
Amendment No. 1 to Stock Purchase Agreement, dated June 1, 2017, by and between Southland National
Holdings, Inc. and Laguna Life Holdings SARL (incorporated by reference to Exhibit 2.1 to the Company’s
Form 10-Q filed on November 8, 2017).
Amendment No. 2 to Stock Purchase Agreement, dated July 31, 2017, by and between Southland National
Holdings, Inc. and Laguna Life Holdings SARL (incorporated by reference to Exhibit 2.2 to the Company’s
Form 10-Q filed on November 8, 2017).
2.14*
Amendment No. 3 to Stock Purchase Agreement, dated July 31, 2017, by and between Southland National
Holdings, Inc. and Laguna Life Holdings SARL.
3.1
3.2
3.3
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).
236
3.4
4.1
4.2
10.1
10.2+
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+
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).
Senior Indenture, dated as of March 10, 2017, between the Company and The Bank of New York Mellon,
as trustee (incorporated by reference to Exhibit 4.1 of the Company's Form 8-K filed on March 10, 2017).
First Supplemental Indenture, dated as of March 10, 2017, between the Company and The Bank of New
York Mellon, as trustee (incorporated by reference to Exhibit 4.2 of the Company's Form 8-K filed on March
10, 2017).
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).
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).
Amended and Restated Employment Agreement, dated as of April 12, 2017 and effective April 17, 2017,
by and between the Company and Dominic F. Silvester (incorporated by reference to Exhibit 10.2 of the
Company’s Form 10-Q filed on May 8, 2017).
Employment Agreement, dated as of March 28, 2017 and effective April 6, 2017, by and between the
Company and Paul J. O'Shea (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed
on May 22, 2017).
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).
Transition Agreement, dated May 19, 2017, by and between the Company and Mark W. Smith (incorporated
by reference to Exhibit 10.3 of the Company’s Form 8-K filed on May 22, 2017).
Employment Agreement, dated May 19, 2017, by and between Enstar Group Limited and Orla M. Gregory
(incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on May 22, 2017).
Employment Agreement, dated December 28, 2017, by and between Enstar Group Limited and Guy T.A.
Bowker (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on January 4, 2018).
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).
Form of Performance Stock Unit Award Agreement (2018) 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 November
8, 2017).
10.20+
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).
237
10.21+
10.22+
10.23+
10.24+
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
12.1*
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
101*
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).
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 2016-2018 Annual Incentive Program (incorporated by reference to Exhibit 10.1 of
the Company’s Form 10-Q filed on May 6, 2016).
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).
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).
Form of Waiver Agreement (incorporated herein by reference to Exhibit 4.7 of the Company's Form S-3
filed on October 10, 2017).
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 Northshore 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).
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).
Subscription Agreement, dated as of December 14, 2016, by and between Cavello Bay Reinsurance
Limited and KaylaRe Holdings Ltd. (incorporated by reference to Exhibit 10.53 of the Company’s Form
10-K filed on February 27, 2017).
Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends.
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
238
** 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
239
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 28, 2018.
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 28, 2018.
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/ 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/ JIE LIU
Jie Liu
/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 and principal accounting officer)
President and Director
Director
Director
Director
Director
Director
Director
Director
240
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
James D. Carey
Senior Principal
Stone Point Capital LLC
Hans-Peter Gerhardt
Chief Executive Officer (former)
CEO of AXA Re, PARIS Re and ACR
Hitesh R. Patel
Partner (retired)
KPMG LLP
Poul A. Winslow
Managing Director
Canada Pension Plan
Investment Board
Jie Liu
Managing Director
Hillhouse Capital
Management, Ltd.
EXECUTIVE OFFICERS
Dominic F. Silvester
Chief Executive Officer
Paul J. O’Shea
President
Orla M. Gregory
Chief Operating Officer
Guy Bowker
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