2018
Enstar
Annual
Report
Annual CEO Letter
From Dominic Silvester,
Chief Executive Officer
April 26, 2019
Dear Fellow Shareholders,
2018 was a year of many challenges and
accomplishments for Enstar. We acquired record
levels of new legacy business, achieved strong
performance from our core run-off operations,
made strategic investments that we expect
will deliver long-term returns, and significantly
bolstered the StarStone executive team.
However, for the first time in Enstar’s history as
a publicly traded company, we reported a net
loss for the year, driven by unrealized investment
losses and underwriting losses at StarStone.
Despite the net reported loss, I am fully
confident that Enstar remains in excellent health
and is poised for continued profitable growth.
2018 FINANCIAL RESULTS
(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 (Loss) Attributable to Enstar
Adjustment:
Net Unrealized (Gains) Losses on Fixed Maturity
Investments and Funds Held – Directly Managed
$
$
2018
25.2
(158.6)
9.0
(38.0)
(162.4)
211.4
Net Earnings Attributable to Enstar excluding Unrealized
Investment Gains / Losses on Fixed Maturities (Non-GAAP)1
$
49.0
Fully Diluted Earnings (Loss) Per Ordinary Share2
Weighted Average Fully Diluted Shares Outstanding
Ordinary Shareholders’ Equity Attributable to Enstar
Return on Opening Shareholders’ Equity
Fully Diluted Book Value Per Share
Fully Diluted Shares Outstanding
Percent Change in Fully Diluted Book Value Per Share
(7.84)
20,904,176
3,392
(5.2)%
155.94
21,881,063
(2.0)%
There are three contributors to this result worth highlighting:
1) StarStone segment net loss ($158.6 million)
2) Unrealized losses on fixed maturities investments ($211.4 million)
3) Unrealized losses on equities and other investments ($173.8 million)
2017
343.8
2.8
5.4
(40.6)
311.5
(69.8)
241.7
15.95
2016
261.6
25.2
6.4
(28.5)
264.8
(8.0)
256.8
13.62
19,527,591
19,447,241
3,137
11.1%
159.19
19,830,767
10.8%
2,802
10.5%
143.68
19,645,309
10.8%
1 Net Earnings Attributable to Enstar Excluding Unrealized Investment Gains / Losses on Fixed Maturities is a Non-GAAP financial measure intended to illustrate the impact of unrealized investment results on our net earnings. The most directly comparable GAAP financial
measure is Net Earnings (Loss) Attributable to Enstar. The Non-GAAP measure is calculated by excluding unrealized gains (losses) on fixed maturity investments and funds held directly managed portfolios from Net Earnings (Loss) Attributable to Enstar as reflected by
the adjustment set forth in the table above. Our fixed maturity securities are held directly on our balance sheet and also within the “Funds held - directly managed” balance. Refer to Note 6 - “Investments” in the notes to our consolidated financial statements included
within Item 8 of our Annual Report on Form 10-K for further details on our net realized and unrealized gains and losses.
2 During a period of loss, the basic weighted average ordinary shares outstanding is used in the denominator of the diluted loss per ordinary share computation as the effect of including potentially dilutive securities would be anti-dilutive.
i
StarStone
Our StarStone segment reported a net loss
of $158.6 million, compared to net earnings
of $2.8 million in 2017, primarily due to
the higher-than-expected frequency and
severity of current-year large losses. These
occurred notably in the international property,
construction, marine cargo, and marine hull
and war classes.
We have had many successes over the years,
and we must be accountable and ensure
we take action where we have not been
successful. While significant effort has gone
into improving the StarStone platform, our
critical assessment of the decisions we made
since the time of acquiring the business is
that we should have bolstered the executive
management further through full time external
hires with industry leading expertise in change
management, leadership and strategy.
We have never held back on telling you how
successful we are and what great things we
have achieved. I believe that when we are not
successful, we need to acknowledge that also.
We have acknowledged it and I am pleased
that on a more positive note, we have now
rectified this, with great strength and depth
added to the executive leadership team of
StarStone.
In October, John Hendrickson was appointed
as StarStone’s CEO and also as Director of
Strategy for Enstar in February this year.
John has over 35 years of experience in
the specialty (re)insurance and investment
banking sectors and most recently served as
a Director of Strategy, Risk Management and
Corporate Development of Validus Group and
a member of the Validus Holdings Board of
Directors. Prior to that, he was the founder and
managing partner of SFRi LLC, an independent
investment and advisory firm specialising
in the insurance industry, and has also held
various senior positions at Swiss Re, where he
was a Member of the Executive Board. John’s
focus for the foreseeable future is very much on
StarStone. However, given John’s extensive
experience in the investment banking space,
he will consult with the Enstar executive
leadership team on strategic initiatives.
Chris Rash joined as Executive Chairman of
StarStone in August and has recently assumed
the position of Deputy Group CEO and CEO of
StarStone International. Chris was previously
the Group CFO for MS Amlin plc, Commercial
Director and CFO at NHBC (the UK’s leading
independent standard-setting body) and
Group Chief Accountant at RSA Group plc.
Further appointments recently announced
include:
• Dick Sanford joins as President of
StarStone Group, having most recently
served as Chairman and President and
Head of P&C North America at PartnerRe
US where he spent the last 18 years. Prior
to this he held various senior executive
positions with TIG Re/Odyssey America Re
and Cologne Re, having started his career
with AIG.
• Ed Noonan will join the board of StarStone
group as non-executive Chairman. Ed was
previously Chairman of the Board and Chief
Executive Officer of the Validus Group since
its formation in 2005 and has over 30 years’
experience in the (re)insurance industry.
John and his team have set a course of
remedial action which is underway. It has
been pleasing to see the impact of the
new team with so many within StarStone
stepping up to embrace change with renewed
underwriting discipline and ownership being
instilled. I am confident that we are now on a
solid path to a successful future for StarStone.
Unrealized Losses on Fixed
Maturities Investments
One of the main drivers of our result was the
impact of unrealized losses on fixed maturity
investments of $211.4 million, which comprise
77.5% of our $11.2 billion investment
portfolio. Most insurance companies follow
an available-for-sale accounting classification
for their fixed income investment assets,
which requires the recording of unrealized
losses in their shareholder’s equity outside of
reported earnings.
Enstar has long chosen to follow a “trading”
accounting classification for a significant
portion of our fixed income investment assets,
which requires us to carry the assets at fair
value, and report realized and unrealized
holding gains and losses in net earnings each
reporting period. Absent any credit loss or
voluntary sales, fixed investments will mature
at full value, and the unrealized loss reverses
over time. The election to classify these
assets as trading dates back to our origins as
a smaller company, and we have continued
applying it for operational simplicity, and
because US GAAP does not permit retroactive
changes to this classification.
If we did nothing differently in 2018 other
than account for all unrealized losses under
an “available-for-sale” method the way most
other insurance companies do, we would have
reported a net income of $49 million, rather
than net loss of $162.4 million.1 While we of
course strive to achieve results superior to that,
I feel it is important to make that point clear.
ii
Annual CEO LetterFrom Dominic Silvester, Chief Executive Officer Unrealized Losses on Equities
and Other Investments
Non-life Run Off
Our financial results were also impacted
by $173.8 million of net unrealized losses
in the fair value of our equities and other
investments. In 2018, we increased our
allocation to other investments and equity
method investments, which collectively
constituted 19.2% of our investment portfolio
as of year-end (2017: 15.8%), and increased
our allocation to equities to 3.2% (2017: 1.2%).
These allocations provide diversification
against our fixed income investments and an
opportunity for improved risk-adjusted return
over the long term, and therefore we accept
that the returns of these investments may be
more volatile in a particular reporting period.
Having discussed the areas that were loss
drivers in our reported financial result, I note
that the underlying performance of our core
business and Atrium was solid.
Enstar’s core business,
our non-life run-off
segment, continued
to deliver significant
reserve savings on
our growing portfolio
of loss reserves.
Enstar’s core business, our non-life run-off
segment, continued to deliver significant
reserve savings on our growing portfolio
of loss reserves, posting a reduction in net
claims reserves of $306.1 million, compared
to $190.7 million in 2017. This is testament
to our differentiated claims management
capabilities, and to the efficient management
and processing of ultimate insureds’ claims by
our international team of specialists. We paid
$838.8 million in claims to our policyholders,
thereby freeing up the associated capital in
our businesses.
Our growing portfolio is diversified across
key property and casualty lines of business,
as the chart on the right shows as of year-
end. Workers’ compensation comprised 29%
of our total loss reserves and asbestos and
environmental comprised 24%.
Due to our successful track record with many
acquisitions, we have enhanced capabilities
to assume some of the most challenging
exposures, including:
• Asbestos and Environmental
• Construction Defect
• Commercial Auto Liability
• Excess Workers’ Compensation
• Directors & Officers/ Financial Institutions
Enstar continually develops and refines skills
spanning from initial risk assessment and
transaction valuation to claims management
and resolution. We believe that the breadth
and depth of these proven capabilities
differentiate Enstar from our competitors.
Gross Non-Life Run-off Reserves
as of December 31, 2018
Gross Reserves
$7.5bn*
Workers’ Compensation
Asbestos and Environmental
Motor
General Casualty
Professional Indemnity/D&O
Construction Defect and Other
Marine, Aviation and Transit
29%
24%
11%
11%
11%
9%
5%
*The percentages shown here do not include
a fair value adjustment or unallocated loss
adjustment expenses. “Other” includes
Property and All Other.
iii
Annual CEO LetterFrom Dominic Silvester, Chief Executive Officer Overview
$16.6bn
Assets
$3.4bn
Ordinary
shareholders’
equity
$12.5bn
Total cash and
investments
$29.9bn
Total assets
acquired since
inception
Atrium
Transactions
Despite 2018 being a challenging year for
most underwriting businesses, our investment
in Atrium provided $9 million in net
segment earnings and an impressive 94.5%
combined ratio, even with above average
catastrophe losses and a series of large
losses. Atrium’s consistently upper quartile
Lloyd’s performance is due to disciplined
underwriting and a diverse portfolio of
specialty risks.
Atrium’s consistently
upper quartile Lloyd’s
performance is
due to disciplined
underwriting and
a diverse portfolio
of specialty risks.
Enstar acquired more new legacy business
in 2018 than during any previous year. We
completed eight deals totalling approximately
$4.5 billion in assets and $3.2 billion in loss
reserves. According to industry sources and
our estimates, Enstar assumed approximately
35% of the $9 billion estimated gross liabilities
publicly announced in the non-life run-off
market during 2018. Over the first quarter
of 2019, we announced the addition of $830
million in loss reserves through transactions
at Lloyd’s. These numbers speak for
themselves; we are one of the leaders in the
legacy market with a proven track record as a
top tier partner.
Opportunities for Enstar are driven by factors
including increased regulatory solvency
capital ratios for insurers, their desire to focus
on core strengths, and their need to optimize
their balance sheets through the release of
value trapped in old policies.
Competition within the specialist legacy
sector remains high. Enstar has always traded
on our analytical skill, our highly effective
operational capabilities, the trust partners
place in our ability to serve their clients
(sometimes for decades), and our financial
strength. In our view, all of this assists us
to forecast the value within a company or a
reinsurance portfolio more accurately than
the competition.
Enstar began 2018 by announcing a
reinsurance-to-close (RITC) of Novae
Syndicate’s 2015 and prior underwriting
liabilities. Enstar assumed gross reserves of
approximately $1.2 billion. The transaction is
one of the largest of its type in recent years.
In February 2018, Enstar completed another
RITC of Neon Syndicate’s 2015 and prior
underwriting years, which saw us assume
gross reserves of approximately $546.3 million.
More recently, we announced the completion
of four RITCs in February 2019 with AmTrust
syndicates for 2016 and prior years, totalling
over $830 million in loss reserves.
We have a solid track record of successful
completion of RITCs and we work hard to
ensure we continue to provide market leading
solutions both in terms of effective management
and settlement of these back years as well
as competitive pricing. We anticipate further
opportunities in the Lloyd’s market and we are
well placed to participate successfully.
We anticipate further
opportunities in the
Lloyd’s market and
we are well placed to
participate successfully.
iv
Annual CEO LetterFrom Dominic Silvester, Chief Executive Officer Enhanzed Re
Looking Ahead
I am heartened by the confidence our various
stakeholders – particularly shareholders,
partners, and clients – have shown in Enstar.
This is due to the skills, experience and
dedication of the Enstar team. We continue
to invest in our people, to ensure we are
able to offer the highest levels of service
and commitment to our partners, and to the
ultimate customers who place their trust in us.
We have the confidence of the global
market, as shown by the many deals we
have completed to date, and the strong and
significant pipeline we are currently assessing.
We have no intention of slowing down,
so expect continued growth and renewed
success from Enstar.
I thank you for your support, and look forward
to a prosperous 2019.
Sincerely,
Dominic Silvester
April 26, 2019
In December we entered into a new joint
venture with established partners Allianz SE,
the major global insurer, and Hillhouse Capital
Management, an existing investor in Enstar.
Together we have launched a new Bermuda-
based reinsurer, Enhanzed Reinsurance Ltd.
The new entity reinsures legacy life portfolios,
non-life run-off, and prospective property/
casualty insurance business, sourced from
Allianz and Enstar. Total committed capital
is $550 million, with equity ownership split
Enstar 47.4%, Allianz 24.9%, and Hillhouse
27.7%. Enstar acts as (re)insurance manager,
and Hillhouse as the primary investment
manager. This dual licensed entity will benefit
from the capital diversification between life
and non-life business. Additionally, it has
the optionality to partner with Enstar on
future large and complex transactions. This
enhances the suite of solutions we are able to
offer to our business partners.
Capital and capacity for future transactions
During 2018, we successfully executed two
public offerings of preferred shares (totalling
$510 million in aggregate capital raised) and
a restructure of our debt and credit facilities
to optimize our financial flexibility. The
proceeds were used for general corporate
purposes including to fund acquisitions, and
to repay outstanding loans. The strength
of our balance sheet continues to drive
our investment grade credit ratings, which
received an upgrade in 2018.
In July 2018, we announced a $200 million
commitment to invest in AmTrust’s going-private
transaction alongside funds managed by Stone
Point Capital and others, which completed in
November. Enstar owns approximately 7.5%
of Evergreen Parent L.P., which owns 100% of
AmTrust Financial Services.
Maiden Holdings Limited is a Bermuda-based
group which, through its subsidiary Maiden Re
Limited, provides significant quota share
reinsurance to AmTrust. It previously owned
Maiden Reinsurance North America, Inc.
(MRNA), a Missouri-domiciled company that
wrote diversified reinsurance business, which
we acquired in December 2018. Enstar
assumed MRNA’s $1.0 billion in gross loss
reserves upon acquisition.
In March 2019, we agreed to provide adverse
development cover to Maiden Re Limited
of $675 million excess of $2.44 billion for
losses incurred on or prior to December 31,
2018 in respect of its quota share treaties
with AmTrust. We expect to complete this
transaction during the first half of 2019.
Our acquisition pipeline is very active, and
we expect further transaction activity into the
foreseeable future.
According to industry
sources and our
estimates, Enstar
assumed approximately
35% of the $9 billion
estimated gross
liabilities publicly
announced in the
non-life run-off
market during 2018.
v
Annual CEO LetterFrom Dominic Silvester, Chief Executive Officer 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, 2018
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
Ordinary shares, par value $1.00 per share
Depositary Shares, Each Representing a 1/1,000th Interest in a 7.00%
Fixed-to-Floating Rate Perpetual Non-Cumulative Preferred Share,
Series D, Par Value $1.00 Per Share
Depositary Shares, Each Representing a 1/1,000th Interest in a 7.00%
Perpetual Non-Cumulative Preferred Share, Series E, Par Value $1.00
Per Share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
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 every Interactive Data File required to be submitted 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 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
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2018 was
approximately $2.22 billion based on the closing price of $207.30 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 28, 2019, the registrant had outstanding 17,964,779 voting ordinary shares and 3,509,682 non-voting convertible ordinary
shares, each par value $1.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
relating to its 2019 annual general meeting of shareholders are incorporated by reference in Part III of this Form 10-K.
Enstar Group Limited
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2018
Table of Contents
PART I
Item 1.
Item 1A. Risk Factors
Business
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
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 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Page
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Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report and the documents incorporated by reference herein 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 securities 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 herein, which could cause actual results
to differ materially from those suggested by the forward-looking statements. These factors include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
risks associated with implementing our business strategies and initiatives;
the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;
risks relating to our acquisitions, including our ability to evaluate opportunities, successfully price acquisitions,
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, and 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 relating to the variability of statutory capital requirements and the risk 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;
Table of Contents
•
•
•
•
•
•
•
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 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.
Table of Contents
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 90 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.
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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 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 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
Maiden
On March 1, 2019, we entered into a Master Agreement with Maiden Holdings, Ltd. ("Maiden Holdings") and
Maiden Reinsurance Ltd. (“Maiden Re Bermuda”). Under the Master Agreement, Enstar and Maiden Re Bermuda
agreed to enter into an Adverse Development Cover Reinsurance Agreement (“ADC Agreement”) pursuant to which
Maiden Re Bermuda will cede and Enstar will reinsure 100% of the liability of Maiden Re Bermuda, as reinsurer, under
Maiden Re Bermuda’s two existing quota share agreements with certain insurance companies owned directly or
indirectly by AmTrust Financial Services, Inc. (“AmTrust”) for losses incurred on or prior to December 31, 2018 in
excess of a $2.44 billion retention, as such figure may be adjusted based upon Maiden’s final year end reserves for
the underlying business, up to a $675 million limit. The premium payable by Maiden Re Bermuda to Enstar under the
ADC Agreement is $500.0 million. Completion of the transaction is subject to, among other things, regulatory approvals
and satisfaction of various closing conditions. The Master Agreement contains customary representations, warranties,
covenants and other closing conditions. The transaction is expected to close in the first half of 2019.
Effective immediately upon the signing of the Master Agreement, the parties terminated and released each other
from their respective obligations under the previously disclosed Master Agreement, entered into on November 9, 2018.
The previous agreement provided for the parties to enter into a retrocession agreement pursuant to which Maiden Re
Bermuda would cede and Enstar would reinsure 100% of the liability of Maiden Re Bermuda, as reinsurer, under
Maiden Re Bermuda’s two existing AmTrust quota share agreements for losses incurred on or prior to June 30, 2018,
for a premium payable by Maiden Re Bermuda to Enstar of $2.675 billion.
Amerisure
On February 15, 2019, we entered into a loss portfolio transfer reinsurance agreement with Amerisure Mutual
Insurance Company ("Amerisure") and Allianz Risk Transfer (Bermuda) Limited (“ART Bermuda”). In the transaction,
Amerisure has agreed to cede, and each of Enstar and ART Bermuda has agreed to severally assume, a 50% quota
share of the construction defect losses incurred by Amerisure and certain of its subsidiaries on or before December
31, 2012. At closing, Amerisure would pay Enstar and ART Bermuda an aggregate premium of $125.0 million, which
would be adjusted for a broker commission and paid claims and recoveries from April 1, 2018. Enstar's subsidiary
would assume $60.0 million of net reserves in the transaction. Completion of the transaction, which is expected to
occur in the first quarter of 2019, is subject to, among other things, regulatory approvals and satisfaction of various
other customary closing conditions.
AmTrust RITC Transactions
On February 14, 2019, we entered into four RITC transactions with Syndicates 1206, 1861, 2526 and 5820,
managed by AmTrust Syndicates Limited, under which we reinsured to close the 2016 and prior underwriting years
for each syndicate. We assumed aggregate net reinsurance reserves of approximately £650.0 million (approximately
$830.0 million) for cash consideration approximately equal to the net amount of reserves assumed.
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Allianz
Effective December 31, 2018, we and Allianz SE amended the January 1, 2016 reinsurance agreement between
our subsidiary and Allianz SE, which related to our reinsurance of certain U.S. workers' compensation, construction
defect, and asbestos, pollution and toxic tort business originally held by Fireman's Fund Insurance Company. The
amendment increased the original sub-limit related to asbestos & environmental (“A&E”) liabilities in exchange for a
premium of $70.0 million. This additional business is also covered by the consulting agreement that we entered into
with San Francisco Reinsurance Company, an affiliate of Allianz, in connection with our 2017 transaction with Allianz
discussed below.
Maiden Re North America
On December 27, 2018, we completed the acquisition of Maiden Reinsurance North America, Inc. (“Maiden Re
North America”) from a subsidiary of Maiden Holdings. Maiden Re North America is a diversified insurance company
domiciled in Missouri that provides property and casualty treaty reinsurance, casualty facultative reinsurance and
accident and health treaty reinsurance. The net consideration payable in the transactions was $286.4 million, and we
assumed $1.0 billion of gross loss and loss adjustment expense reserves upon closing. The renewal rights were not
included in the transaction.
On December 27, 2018, as part of the acquisition of Maiden Re North America, we also novated and assumed
certain reinsurance agreements from Maiden Re Bermuda, including certain affiliate reinsurance agreements
with Maiden Re North America. We assumed total gross unaffiliated reserves of $72.1 million for total assets of $70.4
million on a funds held basis and recorded a deferred charge asset of $1.7 million, included in other assets.
Coca-Cola
On August 1, 2018, 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 $120.8 million for cash consideration of $103.6 million and recorded a deferred charge
asset of $17.2 million, included in other assets. We transferred the cash consideration of $103.6 million into a trust to
support our obligations under the reinsurance agreement.
KaylaRe
On May 14, 2018, we acquired all of the outstanding shares and warrants of KaylaRe. In consideration for the
acquired shares and warrants of KaylaRe, we issued an aggregate of 2,007,017 of our ordinary shares to the
shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary
shares. As a result of this transaction, we recognized goodwill of $41.7 million and net income of $0.4 million due to
the remeasurement of the previously held equity method investment to its fair value, partially offset by the settlement
of preexisting relationships. For a detailed discussion of various transactions related to KaylaRe and its other
shareholders, refer to Note 3 - "Acquisitions" and 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.
Zurich Australia
On February 23, 2018, we entered into a reinsurance agreement with Zurich Australian Insurance Limited, a
subsidiary of Zurich Insurance Group ("Zurich"), to reinsure its New South Wales Vehicle Compulsory Third Party
("CTP") insurance business. Under the agreement, which was effective January 1, 2018, we assumed gross loss
reserves of AUD$359.4 million ($280.8 million) in exchange for consideration of AUD$343.9 million ($268.7 million).
We elected the fair value option for this reinsurance contract and recorded an initial fair value adjustment of AUD$15.5
million ($12.1 million) on the assumed gross loss reserves.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business,
we and Zurich also completed a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's
Insurance Act 1973 (Cth), effective December 31, 2018, which provided legal finality for Zurich's obligations.
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Neon RITC Transaction
On February 16, 2018, we completed a reinsurance-to-close (“RITC”) transaction with Neon Underwriting Limited
("Neon"), under which we reinsured to close the 2015 and prior underwriting years of account (comprising underwriting
years 2008 to 2015) of Neon's Syndicate 2468, with effect from January 1, 2018. We assumed gross loss reserves of
£403.9 million ($546.3 million) and net loss reserves of £342.1 million ($462.6 million) relating to the portfolio in
exchange for consideration of £329.1 million ($445.1 million). We elected the fair value option for this reinsurance
contract and recorded initial fair value adjustments of $20.6 million and $17.5 million on the gross and net loss reserves
assumed, respectively.
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 ("Novae"), with
effect from January 1, 2018. We assumed gross loss reserves of £860.1 million ($1,163.2 million) and net loss reserves
of £630.7 million ($853.0 million) relating to the portfolio in exchange for consideration of £594.1 million ($803.5 million)
and recorded initial fair value adjustments of $67.5 million and $49.5 million on the gross and net loss reserves assumed,
respectively.
Acquisitions and Significant New Business since January 1, 2018
The table below sets forth a summary of acquisitions and significant new business in excess of $50.0 million in
acquired assets that we have signed or completed since January 1, 2018, including those announced in 2019 prior to
issuing this Annual Report on Form 10-K. For a more detailed explanation of these transactions, as well as transactions
completed in 2017 and 2016, 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.
Significant New Business (January 1, 2018 - Present)
Transaction
Amerisure
Purchase
Price
N/A
Assets
Acquired/
Assumed
$63 million
Total
Liabilities
Acquired/
Assumed
$60 million
AmTrust RITCs
N/A
$830 million
$830 million
Allianz SE
N/A
$70 million
$70 million
Maiden Re North America
$297 million
$1,466 million
$1,170 million
Maiden Re Bermuda
Coca-Cola
N/A
N/A
$70 million
$72 million
$104 million
$121 million
KaylaRe
$788 million
$770 million
$24 million
Zurich Australia
Neon Underwriting Limited
RITC
AXIS Managing Agency
Limited (Novae Syndicate
2007) RITC
N/A
N/A
$269 million
$269 million
$526 million
$526 million
N/A
$1,096 million
$1,096 million
Segment
Non-life
Run-off
Primary Nature of
Business
U.S. construction defect
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Non-life
Run-off
Property, professional, marine,
non-marine, affinity annual,
extended warranty and political
Asbestos and environmental
Diversified property and casualty
U.S. workers' compensation and
motor
U.S. workers' compensation,
auto liability, general and product
liability
Diversified property and casualty
Australian motor
Medical malpractice, general
liability, professional indemnity
and marine
Financial, casualty, marine and
energy, professional indemnity,
aviation, motor and property
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Inception to Date Acquisition Loss Development
The table below sets forth a summary of acquired and assumed net reserves and the resulting development for the 10 most recent acquisition years for our
Non-life Run-off segment:
Acquired
and
Assumed
Net
Reserves
Acquisition
Year
Net Paid
Losses
Net Loss
Development
Net Losses
recognized
on
Acquired
Unearned
Premium
Amortization
of Deferred
Charge
Assets
Change in
provisions
for bad
debt
Change in
provisions
for ULAE
Amortization
of Fair Value
Adjustments
Change
in Fair
Value -
FVO
Total Net
Incurred
losses and
LAE
Retro-
cession
of
reserves
Effect of
Exchange
Rate
Movement
Closing
Net
Reserves
(in thousands of U.S. dollars)
Total Net Incurred Losses and LAE
$
171,225
$
(51,279) $
(78,337) $
— $
— $
(3,237) $
(9,892) $
8,259
$
— $ (83,207) $
— $
(6,608) $
30,131
1,245,093
(657,671)
712,867
422,476
657,982
465,395
(49,086)
(223,672)
(504,779)
(350,090)
(305,679)
(296,498)
(75,820)
—
—
—
(100,267)
110,285
(14,150)
1,491,256
(681,605)
(451,713)
1,350,463
(344,925)
13,700
1,504,561
(251,036)
(173,404)
2,873,675
(353,094)
(36,326)
62,404
53,465
—
—
—
—
—
—
—
—
207,534
3,157
—
1,541
(29,003)
(31,096)
(242)
(127)
1,752
56
(542)
125
—
(47,834)
(49,091)
(6,900)
(5,218)
6,485
(69,281)
(6,274)
(27,899)
(25,222)
20,774
(25,455)
(9,132)
(30,474)
(42,745)
14,400
—
89
—
—
—
—
—
—
—
(361,742)
(8,274)
(29,092)
(402,140)
(90,104)
(3,644)
(92,094)
—
(26,169)
(25,801)
(28,391)
13,746
—
(5,101)
(2,733)
(245,539)
(50,466)
(12,605)
188,314
167,893
80,541
93,910
126,318
501,041
10,041
19,125
(181,964)
(3,261)
17,795
(45,473)
—
—
—
8,618
1,024,197
23,380
1,094,941
(49,124)
2,425,984
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$10,894,993
$(3,467,237) $ (1,518,494) $
226,154
$
212,232
$
(62,314) $ (241,126) $
(67,545) $ 36,920
$(1,414,173) $(177,235) $ (103,078) $ 5,733,270
2008 and prior
Total Net Non-life Run-off Liability for Losses and LAE
354,684
$ 6,087,954
The above table presents the assumed and acquired net reserves in the year they were assumed or acquired in our Non-life Run-off segment, including the
impact of any fair value adjustments due to business combinations or electing the fair value option, deferred charge assets and unallocated LAE. The table also
presents the cumulative roll forward of those acquired and assumed net reserves from the year of acquisition to December 31, 2018. As such, each acquisition year
includes a different number of years and therefore impacts the comparability between acquisition years. We generally do not experience significant favourable or
adverse development on acquired or assumed net reserves in the year of acquisition. After the first year, and following detailed reviews of all open claims, we primarily
earn our total return from disciplined claims management and/or commuting the liabilities and maximizing reinsurance recoveries, in addition to maximizing investment
returns on the investment portfolio.
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Other Transactions
Enhanzed Re
Enhanzed Reinsurance Ltd. ("Enhanzed Re") is a joint venture between Enstar, Allianz SE and Hillhouse Capital
Management, Ltd. ("Hillhouse Capital") that was entered into in December 2018. Enhanzed Re is a Bermuda-based
Class 4 and Class E reinsurer and will reinsure life, non-life run-off, and property and casualty insurance business.
Enstar, Allianz and an affiliate of Hillhouse Capital have made equity investment commitments in the aggregate of
$470.0 million to Enhanzed Re. Enstar owns 47.4% of the entity, with Allianz owning 24.9%, and an affiliate of Hillhouse
owning 27.7%. As of December 31, 2018, Enstar had contributed $94.8 million of its equity commitment to Enhanzed
Re, and its uncalled commitment was $128.0 million.
Enstar acts as the (re)insurance manager for Enhanzed Re, Hillhouse is the primary investment manager and
an affiliate of Allianz SE also provides investment management services. Enhanzed Re intends to write business
sourced from Allianz SE and Enstar, and it will seek to underwrite other business to maximize diversification by risk
and geography.
AmTrust
In November 2018, we purchased equity in Evergreen Parent, L.P. ("Evergreen") in the aggregate amount of
$200.0 million. Evergreen is an entity formed by private equity funds managed by Stone Point and the Karfunkel-
Zyskind family that acquired the approximately 45% of the issued and outstanding shares of common stock of AmTrust
Financial Services, Inc. ("AmTrust") that the Karfunkel-Zyskind Family and certain of its affiliates and related parties
did not already own or control. The equity interest was in the form of three separate classes of equity securities issued
at the same price and in the same proportion as the equity interest purchased by Trident Pine Acquisition L.P. ("Trident
Pine"). Following the closing of the transaction, Enstar owns approximately 7.5% of the equity interest in Evergreen
and Trident Pine owns approximately 21.8%. Evergreen owns all of the equity interest in AmTrust.
Sale of Life and Annuities
The following sections describe the sale of various life and annuities businesses and assets, certain of which
are still underway. Each of these was an opportunistic sale, allowing us to release capital and liquidity. The proceeds
will be used to repay our credit facilities and for Non-life Run-off transactions. We will still consider life and annuities
business opportunities, either for our own balance sheet, or via one of our affiliates, Monument Re or Enhanzed Re.
Alpha
On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary
Alpha Insurance SA ("Alpha") and a subsidiary of Monument Insurance Group Limited ("Monument"). This agreement
will transfer our remaining life assurance policies to Monument, via a portfolio transfer, subject to regulatory approval.
The transaction is expected to close during 2019. We have an equity method investment in Monument, as described
further 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. Our remaining life operations do not qualify for inclusion in our reportable
segments and are therefore included within other activities. The related assets, as well as the results from these
operations, were not significant to our consolidated operations and therefore they have not been classified as a
discontinued operation. In addition, our proposed transfer of these life assurance polices to Monument was not classified
as a held-for-sale business transaction since the underlying contracts do not meet the definition of a business.
Life Settlements
During 2018, we sold our investments in life settlement contracts. Our life settlement investments do not qualify
for inclusion in our reportable segments and therefore were included within other activities. The related assets, as well
as the results from these operations, were not significant to our consolidated operations and therefore they were not
been classified as a discontinued operation. In addition, our sale of these investments was not classified as a held-
for-sale business transaction since the underlying contracts did not meet the definition of a business.
Pavonia
On December 29, 2017, we completed the 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. We used the proceeds to make repayments under our revolving credit
facility. A sale of one subsidiary, Pavonia Life Insurance Company of New York ("PLIC NY") has not yet completed.
We classified the assets and liabilities of the business to be sold as held-for-sale.
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Operating Segments
We have three reportable segments of business that are each managed, operated and separately reported:
(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. 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.
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.
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. 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.
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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 loss adjustment expenses ("LAE"). We have implemented claims handling guidelines along with claims
reporting and control procedures in all of our claims units. All claims matters are reviewed regularly, with all material
claims matters being circulated to and authorized by management prior to any action being taken. Our claims
management processes also include leveraging our extensive relationships and developed protocols to more efficiently
manage outside counsel and other third parties to reduce expenses. With respect to certain lines of business, we have
agreements with third-party administrators to manage and pay claims on our subsidiaries’ behalf and advise with
respect to case reserves. These agreements generally set forth the duties of the third-party administrators, limits of
authority, indemnification language designed for our protection and various procedures relating to compliance with
laws and regulations. These arrangements are also subject to review by our relevant claims departments, and we
monitor these administrators on an ongoing basis.
We provide consultancy services to third parties in the insurance and reinsurance industry primarily through our
subsidiaries, the Cranmore companies, Enstar Limited, Enstar (US), Inc., Paladin Managed Care Services, Inc.
("Paladin") and Kinsale Brokers Limited. In addition to third-party engagements, our consultancy companies also
perform these services in-house for our Enstar companies, using their expertise to assist in managing our run-off
portfolios and performing certain due diligence matters relating to acquired businesses. The services range from full-
service incentive-based or fixed fee run-off management to bespoke solutions such as claims inspection, claims
validation, reinsurance asset collection and IT consulting services. Paladin provides medical bill review, utilization
review, physician case management and related services in the workers’ compensation area.
Following the acquisition of a company or the assumption of a portfolio of business through a reinsurance
transaction, 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.
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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.
As a result of the number of transactions we have completed over the years, our organizational structure consists
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 allows us to
most efficiently manage our assets to achieve capital diversification benefits.
In early 2019, we have completed or signed agreements for six portfolios of non-life run-off business. We continue
to see a strong pipeline of opportunities and we expect further significant transaction activity in the future.
Atrium
Our Atrium segment is comprised of the active underwriting operations and financial results of Northshore
Holdings Ltd. ("Northshore"), a holding company that owns Atrium and its subsidiaries and Arden. Enstar acquired
Atrium on November 25, 2013.
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 43% of the business it underwrites.
Lloyd’s is a surplus lines insurer and an accredited reinsurer in all U.S. states and territories, and a licensed (or
admitted) insurer in Illinois, Kentucky and the U.S. Virgin Islands.
A description of each of Atrium's lines of business follows:
Marine, 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.
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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 broker Marsh Inc. accounted for 11%
of Atrium’s gross premiums written in 2018. Other brokers (each individually less than 10%) accounted for the remaining
89% of gross premiums written.
Atrium’s proprietary online platform, AUGold, provides end-to-end processing, quote and policy production for
managing general agents across a range of classes of business. The platform provides agents with efficient and cost
effective access to Lloyd’s binding authorities and is designed to enable Atrium to compete more effectively with North
American excess and surplus lines carriers.
Managing Agency Services
Atrium receives a managing agency fee of 0.7% of Syndicate 609 capacity and a 20% profit commission based
on the net earnings of Syndicate 609, pursuant to its management contract. Atrium also receives management fees
and profit commission from the management of underwriting consortiums. These fees and profit commission are
included within fees and commission income in our consolidated statement of earnings.
Claims Management
Claims in respect of business written by Syndicate 609 are primarily notified by various central market bureaus.
Where a syndicate is a "leading" syndicate on a Lloyd’s policy, its underwriters and claims adjusters work directly with
the broker or insured on behalf of itself and the following market for any particular claim. This may involve appointing
attorneys or loss adjusters. The claims bureaus and the leading syndicate advise movement in loss reserves to all
syndicates participating on the risk. If necessary, Atrium's claims department may adjust the case reserves it records
from those advised by the bureaus.
Reinsurance Ceded
On an annual basis Atrium purchases a tailored outwards reinsurance program designed to manage its risk
profile. The majority of Atrium’s third-party reinsurance cover is with Lloyd’s Syndicates or other highly rated reinsurers.
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StarStone
Our StarStone segment is comprised of the active underwriting operations and financial results of StarStone
and StarStone Specialty Holdings Limited ("StarStone Group"), a holding company that owns StarStone and its
subsidiaries. Our StarStone segment also includes the results of KaylaRe's reinsurance of StarStone Group from the
date that Enstar completed the acquisition of KaylaRe and other intra-group cessions.
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’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.
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.
Property. This line includes all of our property insurance products. The construction portfolio focuses on large,
complex, infrastructure and contractor cover across all risk areas. Property also includes our onshore, power, and
upstream and offshore products written through our Lloyd's and London platforms. Most lines are written on a full
value, primary, excess of loss or quota share basis.
Aerospace. We serve a diverse client base within the aerospace sector including airlines, aircraft manufacturers
and airport service providers. Our products are split between short-tail and long-tail risks and by aircraft type into three
areas: airlines, aviation products and liability, and general aviation.
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.
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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., Willis Group Holdings Ltd. and Aon Benfield Group Ltd. accounted
for 15%, 6% and 4%, respectively, of StarStone’s gross premiums written for the year ended December 31, 2018 (25%
collectively). Other brokers and managing general agents (each individually less than 4%) accounted for the remaining
75% 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 previously had entered into a Quota Share Treaty with KaylaRe Ltd. pursuant
to which KaylaRe Ltd. reinsured 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, and the remainder was not renewed in 2019. On May 14, 2018,
we acquired all of the outstanding shares and warrants of KaylaRe, and the results of KaylaRe were included within
our consolidated financial statements from that date. The impact of this acquisition and resultant consolidation has
made comparability between periods challenging, as discussed in "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations - StarStone Segment."
In addition, effective October 1, 2018, StarStone entered into a loss portfolio transfer with an affiliate of Enstar,
whereby the Non-life Run-off subsidiary reinsured certain of StarStone's discontinued and discontinuing lines of
business. Capital for the loss portfolio transfer was provided by Enstar, Trident and Dowling on a pro-rata basis.
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. Following the sale of our life settlements investments during 2018 and the transfer of our remaining life assurance
policies from Alpha to Monument, which is expected to close during 2019, we will have de minimis residual life business
in our consolidated operations.
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.
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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. A large portion of our loss reserves are 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 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, 2018 and 2017 were $105.1 million and $117.2 million, respectively.
Following the transfer of our remaining life assurance policies from Alpha to Monument, which is expected to close
during 2019, we will have de minimis residual life business in our consolidated operations.
See "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Policy
Benefits for Life Contracts" for a discussion of these reserves.
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."
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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, Standard and Poor’s ("S&P"), and Fitch Ratings Ltd.’s ("Fitch") 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.
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, 2018, we had 1,366 employees, as compared to 1,341 as of December 31, 2017. 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.
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.
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An effective enterprise risk management ("ERM") framework contributes to the strength of our overall group (the
"Group"). The value of having effective risk management can positively impact 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, management and (re)insurance practices across a diverse portfolio
of loss reserves;
via active underwriting segments, take on underwriting risks 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.
We embed our risk strategy in our organization by promoting a culture of high risk awareness. This is achieved
in the demonstration of our day-to-day approach in how we manage our business and in how we manage and assess
challenges and opportunities.
Risk Appetite
The primary objective of our risk appetite framework is to monitor and protect the Group from an unacceptable
level of loss, compliance failures and adverse reputational impact. It considers material risks in the business relating
to: strategy, capital adequacy, insurance, investment/market, reinsurance counterparty/credit, regulatory, tax and
operational risk. Risk appetite and tolerance is set by our Board and reviewed annually. It represents the amount of
risk that we are willing to accept as a Group 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 assigned to individual corporate
executives and monitored and maintained by the Risk Management function. Risk tolerance levels are monitored and
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. A review is undertaken annually to confirm
the subsidiary risk appetite does not in the aggregate exceed Group risk appetite.
Risk metrics levels are set and monitored regularly by an appointed owner and reported to management
committees and to our Board and Risk Committee on at least a quarterly basis. Stress and scenario tests are key tools
within our risk appetite framework, used as risk indicators across risk categories and to support a forward looking
assessment of risk. As part of monitoring and aggregating risk exposures across the Group, capital impact assessments
are performed for risks that are deemed material.
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.
The purpose of our ERM framework is to appropriately assess and manage risk as we continue to take opportunities
to meet our business objectives. Senior executives are ultimately accountable for key defined risks and are responsible
for providing regular reporting to the Group Executive Team (our "executives"), Management Risk Committee ("MRC"),
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.
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Board of Directors
Our Board and its committees (and subsidiary boards of directors) receive management information from our
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 and internal control environment, receiving
regular reports via the annual internal and external audit process. 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. On an annual basis, the Compensation Committee undertakes a
risk assessment of our compensation programs to ensure they are properly aligned with Company performance and
do not provide incentives for our employees to take inappropriate or excessive risks. Our Nominating and Governance
Committee considers risk relating to management succession planning and other corporate governance matters.
Executive and Risk Management Organization
In addition to the director oversight provided by our Risk Committee, our ERM governance structure is supported
by our Management Risk Committee ("MRC") comprising executives and members of 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 regularly. 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,
monitoring risk assumption and risk mitigation activities and their consistency with the Risk Appetite Framework while
promoting and sponsoring risk culture and awareness throughout the Group.
Risk Ownership, Accountability and Assurance
We have adopted the "three lines of defense" model. Our first line consists of our executives and members of
senior management and their function as leaders and risk owners. They are responsible for executing the risk
management strategy and appropriately managing the activities and conduct of the business functions, as well as
promoting staff understanding of strategy, risk mitigating policies and procedures.
Our second line comprises our various risk, control and compliance oversight functions. Our Risk Management
function reports to our executives, 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, etc.) 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.
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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 executives serve as members of the Atrium and StarStone boards of directors and certain committees.
The Group and each regulated insurance entity have a unique risk register documenting its risk landscape, with
risk, key risk metric, and control owners assigned, which is maintained through a risk management software system.
Specific functions, such as IT, maintain risk registers with more detailed and specific risks and controls. The risk and
control assessment process is carried out on a quarterly basis 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 executives and Board. Our annual business plan is reviewed and overseen by our
executives and Board, 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 (due to external events) we review and monitor
our liquidity and available financing. We rely on our processes to help us to anticipate potential adverse changes and,
where possible, avoid or mitigate them.
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. Capital adequacy and its ability on an ongoing basis to support the business under adverse
circumstances is assessed via stress and scenario testing. Specific scenarios are mandated under the various
regulatory regimes in which the Group and its subsidiaries operate. User-defined scenarios have also been developed
and are regularly tested and reported on.
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.
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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." Acquisition pricing risk can arise
from a potential loss in value following an acquisition due to an underestimation of liabilities, a failure to generate
assumed future cash flows that supported the pricing analysis (due to an underperformance of investments and/or
underestimation of expenses) or an unexpected increase in capital requirements necessary to support the transaction
due to unanticipated regulatory changes. We rely on due diligence to strategically select risks, and assume only select
portfolios when our due diligence supports our negotiated pricing. In aggregate, we have a high risk appetite to continue
to execute transactions, with no express restrictions on the size, geography or lines of business that we will review
and consider. However, we have a low aggregate risk appetite for transactions that could ultimately have a negative
impact on book value per share.
Reserving Risk. Reserving risk is the risk that a Company's reserves are not sufficient to cover its unpaid loss
and loss adjustment expense costs. 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."
Investment/Market Risk. Investment / Market risk is the risk of loss resulting from under-performing investment
returns, dilution of investment capital, or adverse financial market movements (such as interest rates or exchange
rates). Investment / Market risk can be broken down into the following sub-risks which may threaten our ability to
effectively manage the investment portfolio: interest rate risk, credit spread risk, public equity risk, alternative investment
risk and concentration risk. We manage Investment / 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 function, which is overseen by our Investment
Committee.
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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 an 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. Due to our acquisitive strategy, liquidity risk at the Group level also includes immediate cash
needs as a result of the purchase of (re)insurance portfolios and/or capital injections into a new or existing subsidiary
to support associated solvency requirements as a direct result of merger and acquisition activity or other significant
changes. We manage this risk through our capital management and 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 addition, we are exposed to credit
risk through our funds withheld arrangements if the reinsured company is unable to honor the value of the funds held
balances, such as in the event of insolvency. 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. For funds withheld arrangements, 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. 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 requirements are not adhered to accurately or in a timely manner resulting
in a 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
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, and the E.U. recognizes Bermuda's full equivalence
under Solvency II effective from January 1, 2016.
We are group supervised by the BMA. 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.
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.
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 and GAAP 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.
KaylaRe Ltd. and StarStone Insurance Bermuda Limited, both Class 4 insurers, 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.
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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, or from reducing by
25% of more its total statutory capital and surplus, 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.
Economic Substance Act
The Economic Substance Act 2018 (the “ESA”) was passed in Bermuda in December 2018 in response to the
decision of the European Union Code of Conduct Group (Business taxation) (the "EU Code Group") to place Bermuda,
as well as other offshore jurisdictions, on notice of being included in a list of non-cooperative jurisdictions for tax
purposes. Under the provisions of the ESA, any Bermuda-registered entity engaged in a “relevant activity” (which
includes insurance business and holding entity activities) must maintain a substantial economic presence in Bermuda.
To the extent that the ESA applies to our entities registered in Bermuda, we will be required to demonstrate compliance
with economic substance requirements by filing an annual economic substance declaration with the Registrar of
Companies in Bermuda.
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 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.
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Our Lloyd’s operations are subject to authorization and regulation by the U.K. Regulator and compliance with
the Lloyd’s Act(s) and Byelaws and regulations, as well as the applicable provisions of the FSMA. The Council of
Lloyd’s has wide discretionary powers to regulate members’ underwriting, and its exercise of these powers might affect
the return on an investment of the corporate member in a given underwriting year. This discretion includes the ability
to assess up to 3% of a member’s underwriting capacity in any one year as a Central Fund contribution.
The underwriting capacity of a corporate member of Lloyd’s must be supported by providing a deposit (referred
to as "Funds at Lloyd’s") in the form of cash, securities or letters of credit in satisfaction of its capital requirement. The
amount of the Funds at Lloyd’s is assessed annually and is determined by Lloyd’s in accordance with applicable capital
adequacy rules.
Business plans, including maximum underwriting capacity, for Lloyd’s syndicates requires annual approval by
the Lloyd’s Franchise Board, which may require changes to any business plan or additional capital to support
underwriting plans.
In order to achieve finality and to release their capital, Lloyd’s members are usually required to have transferred
their liabilities through an approved RITC, such as offered by Syndicate 2008. RITC is generally put in place after the
third year of a syndicate year of account. On successful conclusion of RITC, any profit from the syndicate for that year
of account can be fully remitted by the managing agent to the syndicate’s members.
The Lloyd’s market has applied the Solvency II internal model under Lloyd’s supervision, and our Lloyd’s
operations are required to meet Solvency II standards. The Society of Lloyd's has 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 and reinsurers domiciled
in Texas, New York, Delaware, Missouri, Oklahoma 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. Additionally, most states require the completion of an extensive
questionnaire, similar to that required by New York, in connection with such examinations. Other states are expected
to enact 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, 2018, all of our
U.S. insurers exceeded their required levels of risk-based capital.
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Applicable insurance laws also limit the amount of dividends or other distributions our U.S. insurers can pay to
us. The insurance regulatory limitations are generally based on statutory net income and/or certain levels of statutory
surplus as determined by the insurer’s state or states of domicile. Generally, prior regulatory approval must be obtained
before an insurer may pay a dividend or make a distribution above a specified level.
All states have enacted legislation regulating insurance holding company systems that requires each insurance
company in the system to register with the insurance department of its state of domicile and furnish information
concerning the operations of companies within the holding company system that may materially affect the operations,
management or financial condition of the insurers within the system. The NAIC has adopted amendments to the
Insurance Holding Company System Regulatory Act and associated regulations, which all states in which our U.S.
insurers are domiciled or commercially domiciled have adopted. The amendments provide the regulators with additional
tools to evaluate risks to an insurance company within the insurance holding company system. They impose more
extensive informational requirements on parents and other affiliates of licensed insurers with the purpose of protecting
them from enterprise risk, including requiring an annual enterprise risk report by the ultimate controlling person of the
insurers identifying the material risks within the insurance holding company system that could pose enterprise risk to
the insurers and requiring a person divesting its controlling interest to make a confidential advance notice filing.
The NAIC has also adopted the Risk Management and Own Risk and Solvency Assessment Model Act, which
requires insurers to maintain a risk management framework and establishes a legal requirement for insurers or their
insurance group to conduct an Own Risk and Solvency Assessment ("ORSA") in accordance with the NAIC’s ORSA
Guidance Manual. The ORSA Model Act has been adopted in all of the states in which our U.S. insurers are domiciled,
and our insurers in these states may 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.
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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
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 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. With effect from January 1,
2019, our Swiss insurance subsidiary redomesticated to Bermuda and is now regulated by the BMA. It continues to
have a UK branch.
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
We own a Non-life Run-off subsidiary in Hong Kong, and through StarStone participate in a joint venture there.
These operations are not material, but our companies 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,
Compensation, Nominating and Governance, Investment, and Risk Committees of our Board of Directors are available
free of charge on our website.
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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.
We have categorized our risk factors into the following areas:
• Risks Relating to our Insurance Businesses
• Risks Relating to our Acquisitions
• Risks Relating to Liquidity and Capital Resources
• Risks Relating to our Investments
• Risks Relating to Laws and Regulations
• Risks Relating to our Operations
• Risks Relating to Taxation
• Risks Relating to Ownership of our Shares
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 and investments. 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 and ability to access capital may suffer and, as a result, holders of our securities may receive
lower returns.
Inadequate loss reserves could reduce our net earnings and capital 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 our 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.
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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.
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 StarStone and Atrium 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:
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•
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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 and war or political unrest);
changing climate patterns and ocean temperature conditions that could increase the frequency and severity
of catastrophe events and natural disasters to which we have loss exposure;
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 the insurance and reinsurance industries, 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 StarStone
and Atrium 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.
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Cyclical market conditions also impact the availability and cost of reinsurance purchased by StarStone and
Atrium 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
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 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 investments in life insurance businesses, including certain of our equity method investments, are
subject to the risk that actual mortality, morbidity, policy persistency, and investment yield may be different
than our assumptions and could render the reserves established by these businesses inadequate, causing
a decline in our financial returns from these investments.
The performance of our investments in life businesses depends on the ability of these businesses to operate
effectively and efficiently. 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 the
reserves established by the businesses in which we invest is contingent on actual experience related to these key
assumptions. If actual experience differs from these assumptions, or the assumptions are changed based on new
information or experience, it could materially and adversely impact our financial returns on these investments.
The life insurance businesses in which we have invested 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, these businesses
may also 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 financial returns on these investments.
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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 or portfolios, 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 that we may not be able to identify during the due diligence process, such as potential
losses from unanticipated litigation, levels of claims or other liabilities and exposures, an inability to generate sufficient
revenue to offset acquisition costs and financial exposures in the event that the sellers of the entities we acquire are
unable or unwilling to meet their indemnification, reinsurance and other obligations to us.
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 equity.
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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the value of liabilities assumed being greater than expected;
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;
funding cash flow shortages that may occur if anticipated revenues are not realized or are delayed, or if
expenses are greater than anticipated;
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
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 cybersecurity risk;
obtaining and retaining management personnel required for expanded operations;
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fluctuating foreign currency exchange rates relating to the assets and liabilities we may acquire;
goodwill and intangible asset impairment charges; and
complying with applicable laws and regulations.
If we are unable to address some or all of these challenges, our acquisitions may underperform relative to our
expectations and our business may be materially and adversely affected.
We may not complete future acquisitions within the time frame we anticipate or at all, which could have
a negative effect on our business, financial condition or results of operations.
Once we have signed a definitive agreement to acquire a business or portfolio, conditions to closing, such as
obtaining regulatory approvals or shareholder approvals, must be met before the acquisition can be consummated.
These and other closing conditions may not be satisfied at all, or may cause a material delay in the anticipated timing
of closing. In addition, our ability to complete the acquisition on the originally anticipated terms, or at all, could be
jeopardized if a seller receives competing proposals, if litigation is brought challenging the transaction or certain of its
terms, or if regulators impose unexpected terms and conditions on the transaction. Failure to consummate an acquisition
on the originally anticipated terms, or a significant delay in the closing, could result in significant expense, diversion
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
The amount of statutory capital that we must hold to maintain our financial strength and credit ratings
and meet certain regulatory requirements can vary significantly from time to time and is sensitive to a number
of factors.
Statutory capital and reserve requirements for our insurance subsidiaries are prescribed by the applicable
insurance regulators in the jurisdictions in which we operate, including Bermuda, the United States, the United Kingdom
and the European Union. Insurance regulators have established risk-based capital adequacy measures, such as the
BSCR in Bermuda and the Solvency II regime in the European Union and United Kingdom, which provide minimum
solvency and liquidity requirements for insurance companies. The amount of capital that we and/or our insurance
subsidiaries are required to hold may increase or decrease depending on a variety of factors including the amount of
statutory income or losses generated by our insurance subsidiaries (which itself is sensitive to equity market and credit
market conditions), the amount of additional capital our non-life run-off and live underwriting insurance subsidiaries
must hold to support future growth, changes in the value of investments, changes in interest rates and foreign currency
exchange rates, as well as changes to the relevant regulatory capital adequacy measures. Many of these factors are
outside of our control, and our overall liquidity and credit ratings are significantly influenced by our insurance subsidiaries’
statutory capital amounts. If statutory capital requirements increase or if our insurance subsidiaries' solvency decreases,
our subsidiaries would be required to hold more capital, and our ability to obtain distributions from these subsidiaries
could be limited. If we fail to maintain adequate statutory capital, the regulators may restrict our activities and prohibit
us and our subsidiaries from completing acquisitions without raising additional capital.
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 addition, we may not achieve the desired
regulatory capital treatment for any potential issuance of debt or equity securities. 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.
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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
on terms that are not favorable to us, 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 StarStone and Atrium may negate the
intended risk-reducing impact of our reinsurance purchasing programs.
Exposure to reinsurers who from time to time represent meaningful percentages of our total reinsurance balances
recoverable on paid and unpaid losses may increase the risks described above. For information on reinsurance
balances recoverable on paid and unpaid losses, see "Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - reinsurance balances recoverable on paid
and unpaid losses."
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, including payments
on our outstanding Senior Notes, and pay dividends to our shareholders, including holders of our preferred shares
and, in turn, the related depositary shares. 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.
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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."
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.
The Financial Conduct Authority of the United Kingdom plans to phase out the London Interbank Offered Rate
("LIBOR") by the end of 2021. A significant portion of our investments in fixed maturities is in LIBOR-based instruments.
There is currently no definitive replacement rate for LIBOR. Therefore, we are unable to determine the potential effect
of the change on our investment results.
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."
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Our investments in alternative investments and our investments in joint ventures and/or entities
accounted for using the equity method 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 hedge funds, fixed income funds, equity funds, private equity funds and co-investments,
collateralized loan obligation ("CLO") equities, CLO equity funds and other alternative investments. 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.
We have also invested, and from time to time may continue to make investments in joint ventures and in other
entities that we do not control. In these investments, many of which are accounted for using the equity method, we
may lack complete management and operational control over the entities in which we are invested, which may limit
our ability to take actions that could protect or increase the value of our investment. In addition, these investments
may be illiquid due to contractual provisions, and our lack of operational control may prevent us from obtaining liquidity
from these investments in a timely manner or on favorable terms.
Alternative or "other" investments may not meet regulatory admissibility requirements or may result in increased
regulatory capital charges to our insurance subsidiaries that hold these investments, which could limit those 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
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.
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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.
Risks Relating to Laws and Regulations
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 or preferred 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,
statutory capital adequacy, 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.
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In many of the jurisdictions in which we operate, including Bermuda, there are increased regulations 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
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”). The United Kingdom is scheduled to leave the European Union on March 29, 2019,
and negotiations to determine the terms of the United Kingdom's withdrawal from the European Union are ongoing.
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.
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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
in which one or more of our directors or executive officers or their affiliates had an interest, and we may do so in the
future. The interests of our directors and executive officers in such transactions or such entities may result in a conflict
of interest for those directors and officers.
The Audit Committee of our Board of Directors, which is comprised entirely of independent directors, reviews
any material transactions involving a conflict of interest and may take actions as it deems appropriate in the particular
circumstances. We may not be able to pursue all advantageous transactions that we would otherwise pursue in the
absence of a conflict, in particular if our Audit Committee is unable to determine that any such transaction is on terms
as favorable as we could otherwise obtain in the absence of a conflict.
Cybersecurity events or other difficulties with our information 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 and accurately 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.
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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") creates 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 have to comply (regardless of whether such data handling involves E.U.-based
operations). We are also 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.
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 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.
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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 “United States shareholder” for CFC purposes to include U.S. persons who own, directly
or constructively, 10% or more of the value of a non-U.S. corporation’s shares, rather than looking only 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 “United States shareholder” of
the CFC is required to include in taxable income each year the shareholder’s proportionate 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
which we operate, will utilize the data collected in our Bermuda filing. These initiatives could increase the burden and
costs of compliance.
In December 2017, the EU Code Group included Bermuda on a list of jurisdictions that it was putting on notice
of being considered to be non-cooperative for tax purposes. To avoid such consideration, Bermuda passed The
Economic Substance Act 2018 (the “ESA”) in December 2018, which came into effect on January 1, 2019 and requires
compliance by pre-existing entities on July 1, 2019. The legislation requires Bermuda companies engaging in a “relevant
activity” (which includes insurance business and holding entity activities) to be locally managed and directed, to carry
on core income generating activities in Bermuda, to maintain adequate physical presence in Bermuda, and to have
an adequate level of local full time qualified employees and incur adequate operating expenditure in Bermuda. The
guidance as to how Bermuda authorities will interpret and enforce the ESA is pending, and we therefore cannot predict
their potential impact on our results of operations and financial condition. In the event that we are required to maintain
additional staff or operations in Bermuda, we may incur increased operating expenditures that could negatively impact
our results of operations.
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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, the 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.
Risks Relating to Ownership of our Shares
The market price for our ordinary shares and the depositary shares representing our preferred shares
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 financial condition, performance and prospects, including 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;
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•
economic, financial, geopolitical, regulatory or judicial events that affect us or the financial markets generally;
and
•
adverse press or news announcements.
The market price for our depositary shares representing our preferred shares may fluctuate substantially and
could cause investments losses due to, among other things and in addition to the factors listed above, the following:
• whether dividends have been declared and are likely to be declared on the preferred shares from time to
time;
• whether the ratings on the depositary shares representing our preferred shares provided by any ratings
agency have changed;
•
•
•
•
•
changes in our credit ratings or the ratings of our insurance subsidiaries’ financial strength and claims paying
ability published by major credit ratings agencies;
the amount of total indebtedness we have outstanding;
the level, direction and volatility of market interest rates generally;
the market for similar securities; and
economic, financial, geopolitical, regulatory or judicial events that affect us or the financial markets generally.
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 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 those of other
shareholders, and this may lead to a strategy that is not in other shareholders’ best interest. As of December 31, 2018,
CPPIB, funds managed by Hillhouse Capital its affiliates, Trident, Beck Mack & Oliver ("Beck Mack"), and two of
Enstar's executive officer co-founders (collectively) beneficially owned approximately 12.5%, 9.7%, 9.1%, 3.9% and
3.8%, respectively, of our outstanding voting ordinary shares. CPPIB owns additional non-voting ordinary shares that,
together with its voting shares, represented an economic interest of approximately 17.9% as of December 31, 2018.
Hillhouse owns additional non-voting shares and warrants that, together with its voting shares, represented an economic
interest of approximately 17.1% as of December 31, 2018.
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.
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”).
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.
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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 the vote or value 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.
Pursuant to our contractual obligations, on October 10, 2017, we filed a resale registration statement covering
approximately 9.8 million ordinary shares (including voting ordinary shares issuable upon conversion of outstanding
non-voting ordinary shares) primarily held by CPPIB, Hillhouse Capital and Trident. Upon effectiveness of the resale
registration statement on December 13, 2018, a large number of ordinary shares became freely tradable without
restrictions under the Securities Act. 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.
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 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 groups of shareholders numbering 100 or more are entitled to propose a resolution at our general meeting.
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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 ordinary shareholders. In the future, we may decide
to commence a dividend program for the benefit of our ordinary shareholders. Any future determination to pay dividends
on our ordinary shares 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.
Dividends on our preferred shares are non-cumulative.
Dividends on our preferred shares are non-cumulative and payable only out of available funds under Bermuda
law. If our board of directors (or a duly authorized committee of the board) does not authorize and declare a dividend
for any dividend period, holders of our preferred shares and, in turn, the depositary shares representing preferred
shares, would not be entitled to receive any such dividend, and such unpaid dividend will not accrue and will not be
payable. We will have no obligation to pay dividends for a dividend period on or after the dividend payment date for
such period if our board of directors (or a duly authorized committee of the board) has not declared such dividend
before the related dividend payment date, whether or not dividends are declared for any subsequent dividend period
with respect to any outstanding preferred shares and/or our ordinary shares.
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 and other applicable
jurisdictions 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 shareholder register.
It is our understanding that while the precise form of the restrictions on transfer contained in our bye-laws is
untested, as a matter of general principle, restrictions on transfers are enforceable under Bermuda law and are not
uncommon. These restrictions on transfer may also have the effect of delaying, deferring or preventing a change in
control.
Certain regulatory and other constraints may limit our ability to pay dividends on our securities.
We are subject to Bermuda regulatory constraints that affect our ability to pay dividends and make other
distributions on our ordinary and preferred shares. Under the Companies Act, we may declare or pay a dividend or
distribution out of contributed surplus only if we have reasonable grounds to believe that we are, and would after the
payment be, able to meet our liabilities as they become due or is the realizable value of our assets would thereby not
be less than our liabilities.
Our ordinary and preferred shares are subordinate to our existing and future indebtedness.
Our preferred shares are equity interests and do not constitute indebtedness. As such, the preferred shares, in
addition to our ordinary shares, will rank junior to all of our indebtedness and other non-equity claims with respect to
assets available to satisfy our claims, including in our liquidation. The preferred shares are also contractually
subordinated in right of payment to all obligations of our subsidiaries including all existing and future policyholder
obligations of our subsidiaries. Additionally, neither our ordinary shares nor our preferred shares represent an interest
in any of our subsidiaries, and accordingly, are structurally subordinated to all obligations of our subsidiaries.
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There is no limitation on our issuance of securities that rank equally with or senior to the preferred
shares.
We may issue, without limitation, (1) additional depositary shares representing additional preferred shares that
would form part of one of the series of depositary shares representing our outstanding preferred shares, and
(2) additional series of securities that rank equally with or senior to the outstanding preferred shares. The issuance of
additional preferred shares on par with or senior to the outstanding preferred shares would dilute the interests of the
holders of our preferred shares, and any issuance of preferred shares senior to our outstanding preferred shares or
of additional indebtedness could affect our ability to pay dividends on, redeem or pay the liquidation preference on our
preferred shares, or to make payments to holders of our ordinary shares from remaining assets of the Company, in
the event of a liquidation, dissolution or winding-up of Enstar.
Our ordinary shares rank junior to our outstanding preferred shares in the event of a liquidation, winding
up or dissolution of the Company.
In the event of a liquidation, winding up or dissolution of the Company, our ordinary shares rank junior to our
outstanding preferred shares. In such an event, there may not be sufficient assets remaining after payments to holders
of our outstanding preferred shares to ensure payments to holders of ordinary shares.
Under certain limited circumstances, the terms of the preferred shares may change without the holders’
consent or approval.
Under the terms of our outstanding preferred shares, at any time following specified tax or capital disqualification
events, we may, without the consent of any holders of the preferred shares, vary the terms of the preferred shares
such that they remain securities, or exchange the preferred shares for new securities, which (i) in the case of a tax
event, would eliminate the substantial probability that we or any successor company would be required to pay any
additional amounts with respect to such preferred shares as a result of a change in tax law or (ii) in the case of a capital
disqualification event, for purposes of determining the solvency margin, capital adequacy ratios or any other comparable
ratios, regulatory capital resource or level of Enstar Group or any member thereof, where subdivided into tiers, qualify
as Tier 2 capital securities under then-applicable capital adequacy regulations imposed upon us by the BMA (or any
successor agency or then-applicable regulatory authority) which would include, without limitation, the ECR. However,
our exercise of this right is subject to certain conditions, including that the terms considered in the aggregate cannot
be less favorable to the holders of the applicable preferred shares than the terms of such securities prior to being
varied or exchanged.
The voting rights of holders of our preferred shares and, in turn, the depositary shares representing the
preferred shares are limited, and there are provisions in our bye-laws that may further reduce such voting
rights.
Holders of our outstanding preferred shares and, in turn, the depositary shares representing the preferred shares
have no voting rights with respect to matters that generally require the approval of voting shareholders. In addition, if
dividends on any of our outstanding preferred shares have not been declared or paid for the equivalent of six dividend
payments, whether or not for consecutive dividend periods, holders of the outstanding preferred shares and, in turn,
the depositary shares, will, subject to the terms and conditions contained in the certificates of designation governing
the preferred shares, be entitled to vote for the election of two additional directors to our board of directors. The holders
shall be divested of the foregoing voting rights if and when dividends for at least four dividend periods, whether or not
consecutive, following a nonpayment event have been paid in full (or declared and a sum sufficient for such payment
shall have been set aside). Furthermore, pursuant to our bye-laws, the voting rights exercisable by holders of the
preferred shares may be limited so that certain persons or groups are not deemed to hold 9.5% or more of the voting
power conferred by our issued shares. Under these provisions, some shareholders may have their voting rights limited
to less than one vote per share. In addition, our board of directors may limit a shareholder’s exercise of voting rights
where it deems it necessary to do so to avoid adverse tax, legal or regulatory consequences. We also have the authority
under our bye-laws to reasonably request information from any shareholder for the purpose of determining whether
a shareholder’s voting rights are to be limited pursuant to the bye-laws. If a shareholder fails to respond to our request
for information or submits incomplete or inaccurate information in response to a request by us, we may, in our reasonable
discretion, eliminate the shareholder’s voting rights. In addition, holders of the depositary shares must act through the
depositary to exercise any voting rights in respect of the preferred shares. Although each depositary share is entitled
to 1/1,000th of a vote, the depositary can vote only whole preferred shares. While the depositary will vote the maximum
number of whole preferred shares in accordance with the instructions it receives, any remaining votes of holders of
the depositary shares will not be voted.
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Our preferred shares ratings may be downgraded.
Our preferred shares are rated. However, if any ratings assigned to our preferred shares are subsequently
lowered or withdrawn, or if it we issue other rated securities and they are rated lower than market expectations, it could
adversely affect the market for or the market value of the outstanding depositary shares representing our preferred
shares. A rating is not a recommendation to purchase, sell or hold any particular security, including our preferred shares
and, in turn, the depositary shares. Ratings do not reflect market prices or suitability of a security for a particular investor
and any rating of our preferred shares may not reflect all risks related to us and our business, or the structure or market
value of the preferred shares or the depositary shares. Ratings only reflect the views of the rating agency or agencies
issuing the ratings and such ratings could be revised downward or withdrawn entirely at the discretion of the issuing
rating agency if in its judgment circumstances so warrant. Any such downward revision or withdrawal of a rating could
have an adverse effect on the market price of the depositary shares.
Market interest rates may adversely affect the value of the depositary shares representing our preferred
shares.
One of the factors that will influence the price of the depositary shares representing our preferred shares will be
the current dividend yield on the relevant series of preferred shares (as a percentage of the price of the depositary
shares representing such preferred shares, as applicable) relative to market interest rates. An increase in market
interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our
depositary shares representing the preferred shares to seek a higher dividend yield, which could cause the market
price of our depositary shares representing the preferred shares to decrease. Higher interest rates would also likely
increase our borrowing costs and potentially decrease funds available to pay dividends on the preferred shares, which
may also cause the market price of our depositary shares representing the preferred shares to decrease.
In addition, during the floating rate period of our outstanding series D preferred shares, the interest rate on such
preferred shares is determined with reference to three-month LIBOR. To the extent that the three-month LIBOR rate
is discontinued or is no longer quoted, the applicable base rate used to calculate the dividend rate on such preferred
shares beginning on September 1, 2028 (when the floating rate period begins) will be determined using the alternative
methods described in the certificate of designations relating to such preferred shares. Any of these alternative methods
may result in dividend rates that are lower than or that do not otherwise correlate over time with the dividend rates that
would have been applicable if the three-month LIBOR rate was available in its current form. Such alternative methods
may include determinations and adjustments made by the calculation agent in consultation with us. Our interests and
the interests of any calculation agent appointed by us and making the foregoing determinations or adjustments may
be adverse to your interests as a holder of depositary shares representing preferred shares, and any of the foregoing
determinations, adjustments or actions by such calculation agent could result in adverse consequences to the applicable
dividend rate on such preferred shares, which could have adverse effects on the returns on, value of and market for
such preferred shares and the depositary shares representing such preferred shares. If the calculation agent determines
that LIBOR has been discontinued, in certain circumstances, such preferred shares would bear a fixed dividend rate
and could decline in value because the premium, if any, over market dividend rates will decline.
We have no obligation to maintain any listing of the depositary shares representing our outstanding
preferred shares.
Although the depositary shares representing our outstanding preferred shares are listed on NASDAQ, such
listings may not provide significant liquidity, and transaction costs in any secondary market could be high. The difference
between bid and ask prices in any secondary market could be substantial. As a result, holders of depositary shares
representing our preferred shares (which do not have a maturity date) may be required to bear the financial risks of
an investment in the depositary shares representing preferred shares for an indefinite period of time. We do not expect
that there will be any separate public trading market for the preferred shares except as represented by the depositary
shares. In addition, we undertake no obligation, and expressly disclaim any obligation, to maintain the listing of the
depositary shares representing our preferred shares on NASDAQ or any other stock exchange. If we elect to discontinue
the listing at any time or the depositary shares representing the preferred shares otherwise are not listed on an applicable
stock exchange, the dividends paid after the delisting would not constitute qualified dividend income for U.S. federal
income tax purposes. This is because dividends paid by a Bermuda corporation are qualified dividend income only if
the stock with respect to which the dividends are paid is readily tradeable on an established securities market in the
United States.
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A classification of the depositary shares representing our preferred shares by the National Association
of Insurance Commissioners may impact U.S. insurance companies that purchase our preferred shares.
The National Association of Insurance Commissioners (the “NAIC”) may from time to time, in its discretion,
classify securities in U.S. insurers’ portfolios as debt, preferred equity or common equity instruments. The NAIC’s
written guidelines for classifying securities as debt, preferred equity or common equity include subjective factors that
require the relevant NAIC examiner to exercise substantial judgment in making a classification. There is therefore a
risk that the depositary shares representing our preferred shares may be classified by the NAIC as common equity
instead of preferred equity. The NAIC classification determines the amount of risk-based capital (“RBC”) charges
incurred by insurance companies in connection with an investment in a security. Securities classified as common equity
by the NAIC carry RBC charges that can be significantly higher than the RBC requirement for debt or preferred equity.
Therefore, any classification of the depositary shares representing our preferred shares as common equity may
adversely affect U.S. insurance companies that hold depositary shares representing our preferred shares. In addition,
a determination by the NAIC to classify the depositary shares representing our preferred shares as common equity
may adversely impact the trading of the depositary shares representing our preferred shares in the secondary market.
Our preferred shares are subject to our rights of redemption.
Our preferred shares are redeemable pursuant to the terms set forth in the certificate of designations governing
such series. Whenever we redeem preferred shares held by the depositary, the depositary will, as of the same
redemption date, redeem the number of depositary shares representing preferred shares so redeemed. We have no
obligation to redeem or repurchase the preferred shares under any circumstances. If the preferred shares are redeemed
by us, you may not be able to reinvest the redemption proceeds in a comparable security at a similar return on your
investment.
The regulatory capital treatment of the preferred shares may not be what we anticipate.
Our outstanding preferred shares are intended to constitute Tier 2 capital in accordance with the Insurance
(Group Supervision) Rules 2011. In order for the preferred shares to continue to qualify as Tier 2 capital, the terms of
the preferred shares should reflect the criteria contained in the Insurance (Group Supervision) Rules 2011 and any
amendments thereto. No assurance can be made that the BMA will in the future deem that the preferred shares
constitute Tier 2 capital under the Insurance (Group Supervision) Rules 2011.
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.
In connection with the acquisition of DCo, LLC ("DCo") 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.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Number of Holders
Our ordinary voting shares are listed on the NASDAQ Global Select Market under the symbol "ESGR." There
is no established trading market for our non-voting ordinary shares. On February 28, 2019, there were 1,557
shareholders of record of our voting ordinary shares and four shareholders of record of our non-voting ordinary shares.
This is not the number of beneficial owners of our voting ordinary shares as some shares are held in “street name” by
brokers and others on behalf of individual owners.
Dividend Information
We have not historically declared a dividend on our ordinary shares. 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.
Issuer Purchases of Equity Securities
The following table provides information about ordinary shares acquired by the Company during the three months
ended December 31, 2018, 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, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
Total Number of
Shares
Purchased(1)
Average Price
Paid per Share
423
630
$
$
— $
1,053
189.49
178.80
—
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.
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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, 2013 and ended on December 31, 2018. The performance graph shows the value as of December 31
of each calendar year of $100 invested on December 31, 2013 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,
2013
2014
2015
2016
2017
2018
Enstar Group Limited
NASDAQ Composite Index
NASDAQ Insurance Index
100.00
100.00
100.00
110.06
114.62
106.26
108.01
122.81
110.19
142.32
133.19
139.95
144.52
172.11
152.28
120.63
165.84
136.05
*$100 invested on December 31, 2013 in stock or index, including reinvestment of dividends.
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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 2018 Maiden Re, Maiden Re
North America, Coca-Cola, Kayla Re, Zurich Australia, Neon and Novae transactions, our 2017 QBE and RSA
transactions, our 2016 acquisition of DCo, our 2015 acquisitions of Alpha, the life settlement companies of Wilton Re
and Sussex Insurance Company ("Sussex"), and our 2014 acquisition of StarStone 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 were included in discontinued operations until the closing on
December 29, 2017. 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
Earnings (losses) from equity method investments
Net earnings (loss) from continuing operations
Net earnings (loss) from discontinuing operations
Net earnings (loss)
Net earnings (loss) attributable to noncontrolling interest
Net earnings (loss) attributable to Enstar Group Limited
Dividends on preferred shares
Net earnings (loss) attributable to Enstar Group Limited
Ordinary Shareholders
Years Ended December 31,
2018
2017
2016
2015
2014
(in thousands of U.S. dollars, except share and per share data)
$
895,575
$
613,121
$
823,514
$
753,744
$
542,991
35,088
270,671
(412,884)
(454,025)
(192,790)
(396,054)
42,147
(212,272)
—
(212,272)
62,051
(150,221)
(12,133)
66,103
208,789
190,334
(193,551)
(96,906)
(472,988)
5,904
320,806
10,993
331,799
(20,341)
311,458
—
39,364
185,463
77,818
(174,099)
(186,569)
(467,641)
(5,400)
292,450
11,963
304,413
(39,606)
264,807
—
39,347
122,564
(41,523)
(104,333)
(163,716)
(393,711)
—
212,372
(2,031)
210,341
9,950
220,291
—
34,919
66,024
51,991
(9,146)
(117,542)
(347,540)
—
221,697
5,539
227,236
(13,487)
213,749
—
$
(162,354) $
311,458
$
264,807
$
220,291
$
213,749
Per Ordinary Share Data:(1)
Earnings per ordinary share attributable to Enstar Group
Limited:
Basic:
Net earnings (loss) from continuing operations
Net earnings (loss) from discontinuing operations
Net earnings (loss) per ordinary share
Diluted:
Net earnings (loss) from continuing operations
Net earnings (loss) from discontinuing operations
Net earnings (loss) per ordinary share
Weighted average ordinary shares outstanding:
$
$
$
$
(7.84) $
15.50
$
13.10
$
11.55
$
—
0.56
0.62
(0.11)
(7.84) $
16.06
$
13.72
$
11.44
$
(7.84) $
15.39
$
13.00
$
11.46
$
—
0.56
0.62
(0.11)
(7.84) $
15.95
$
13.62
$
11.35
$
11.31
0.30
11.61
11.15
0.29
11.44
Basic
Diluted
20,698,310
19,388,621
19,299,426
19,252,072
18,409,069
20,904,176
19,527,591
19,447,241
19,407,756
18,678,130
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(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.
Losses and loss adjustment expense liabilities
9,409,504
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 on paid
and unpaid losses
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
2018
2017
2016
2015
2014
(in thousands of U.S. dollars, except share and per share data)
December 31,
$
11,242,061
$
8,755,130
$
7,332,425
$
6,340,781
$
4,844,352
982,584
1,212,836
1,318,645
1,295,169
1,429,622
2,029,663
2,021,030
1,460,743
1,451,921
16,556,270
13,606,422
12,865,744
11,772,534
105,080
861,539
117,207
646,689
112,095
673,603
126,321
599,750
1,305,515
9,936,885
4,509,421
8,940
320,041
3,901,933
3,136,684
2,802,312
2,516,872
2,304,850
$
$
158.06
155.94
$
$
161.63
159.19
$
$
144.66
143.68
$
$
130.65
129.65
$
$
120.04
119.22
21,459,997
21,881,063
19,406,722
19,830,767
19,372,178
19,645,309
19,263,742
19,714,810
19,201,017
19,332,864
(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.
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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.
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Section
Business Overview
Key Performance Indicator
Current Outlook
Underwriting Ratios
Table of Contents
Page
Consolidated Results of Operations — for the Years Ended December 31, 2018, 2017, and 2016
Results of Operations by Segment — for the Years Ended December 31, 2018, 2017, and 2016
Non-life Run-off Segment
Atrium Segment
StarStone Segment
Other Activities
Investable Assets
Composition of Investable Assets by Segment
Composition of Investment Portfolio by Asset Class
Investment Results - Consolidated
Investment Results - By Segment
Liquidity and Capital Resources
Overview
Dividends
Sources and Uses of Cash
Investable Assets
Reinsurance Balances Recoverable on Paid and Unpaid Losses
Debt Obligations
Contractual Obligations
Off-Balance Sheet Arrangements
Critical Accounting Policies
Losses and Loss Adjustment Expenses — Non-life Run-off
Losses and Loss Adjustment Expenses — Atrium and StarStone Segments
Policy Benefits for Life and Annuity Contracts
Reinsurance Balances Recoverable on Paid and Unpaid Losses
Valuation Allowances on Reinsurance Balances Recoverable and Deferred Tax Assets
Goodwill
Intangible Assets
Deferred Charge Assets
Premium Revenue Recognition
Investments
Accounting for Business Combinations — Fair Value Measurement
Fair Value Option - Insurance Contracts
Redeemable Noncontrolling Interest
Non-GAAP Financial Measures
50
51
51
53
55
56
59
60
68
72
78
80
81
82
86
88
92
92
93
94
96
97
97
99
100
100
101
111
114
114
115
115
115
116
116
116
120
121
123
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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 90 acquisitions or portfolio transfers.
The substantial majority of our 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.
While our core focus remains acquiring and managing non-life run-off business, we expanded our business to
include active underwriting through our acquisitions of Atrium and StarStone in 2013 and 2014, respectively. 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 in 2013
to include closed life and annuities, primarily through our acquisition of Pavonia. However, we disposed of Pavonia,
which made up the majority of our life and annuities business, in 2017.
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 2018, our book value per share on a fully diluted basis decreased by 2.0% to $155.94 per share. The
decrease was primarily attributable to net losses of $162.4 million, which were primarily driven by unrealized losses
on investments and by adverse development in the reserves for our StarStone segment. 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.
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The table below summarizes the calculation of our fully diluted book value per ordinary share as of December 31,
2018 and 2017:
2018
2017
Change
(in thousands of U.S. Dollars)
Numerator:
Total Enstar Group Limited Shareholder's Equity
Less: Series D and E Preferred Shares
Total Enstar Group Limited Ordinary Shareholders' Equity (A)
Proceeds from assumed conversion of warrants (1)
Numerator for fully diluted book value per ordinary share
calculations (B)
$
3,901,933 $
3,136,684 $
510,000
3,391,933
20,229
—
3,136,684
20,229
765,249
510,000
255,249
—
$
3,412,162 $
3,156,913 $
255,249
Denominator:
Ordinary shares outstanding (C)
Effect of dilutive securities:
Share-based compensation plans
Warrants(1)
21,459,997
19,406,722
2,053,275
245,165
175,901
248,144
175,901
(2,979)
—
Fully diluted ordinary shares outstanding (D)
21,881,063
19,830,767
2,050,296
Book value per ordinary share
Basic book value per ordinary share = (A) / (C)
Fully diluted book value per ordinary share = (B) / (D)
$
$
158.06 $
155.94 $
161.63 $
159.19 $
(3.57)
(3.25)
(1) There are 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.
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Current Outlook
Run-off
Our business strategy includes generating growth through acquisitions and reinsurance transactions, particularly
in our Non-life Run-off segment, and during 2018 we completed six significant reinsurance transactions with Zurich
Insurance Group ("Zurich"), Neon Underwriting Limited ("Neon"), Novae Syndicate 2007 ("Novae"), The Coca-Cola
Company ("Coca-Cola"), Allianz SE ("Allianz") and Maiden Reinsurance Ltd. ("Maiden Re") in which we assumed
aggregate gross and net reserves, including fair value adjustments, of $2,153.1 million and $1,780.3 million,
respectively. In 2018, we also completed the acquisition of Maiden Reinsurance North America, Inc. (“Maiden Re North
America”), in which we assumed gross reserves of $1,027.4 million.
As of December 31, 2018, our non-life run-off gross and net reserves were $7.5 billion and $6.1 billion,
respectively, and we continue to evaluate opportunities for future growth.
On September 30, 2018, we completed the acquisition of Yosemite Insurance Company, which is now domiciled
in Oklahoma. Although the acquired balances were not material, the transaction is notable for its strategic value. The
State of Oklahoma has enacted Insurance Business Transfer legislation, which became effective November 1, 2018.
The legislation will allow us to acquire U.S. loss reserves from insurers and reinsurers domiciled in any U.S. state via
a court-approved statutory novation process.
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.
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. Underwriting margins, premium rates, and terms of conditions
continue to be under pressure in certain business lines. 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.
Our industry continues to experience challenging underwriting market conditions, and our strategy is to continue
to focus on a disciplined underwriting approach and strong risk management practices. As previously disclosed, we
have affirmed our continued ownership of our active underwriting businesses, Atrium and StarStone.
At StarStone, we recently appointed new executive leadership. We expect to position the underwriting portfolio
in 2019 to reflect market opportunities and achieve a mix of business for improved underwriting profitability. We have
taken steps to exit unprofitable business lines and locations and we expect to write less gross premiums in 2019
compared to 2018. We, in partnership with StarStone's other shareholders, completed a transaction to provide capital
support to StarStone in the form of a contribution to its contributed surplus account and a loss portfolio transfer and
adverse development cover, effective October 1, 2018, provided through one of our subsidiaries. To fund the transaction,
the shareholders contributed an aggregate amount of $135.0 million in proportion to their ownership interests. The
quota share between StarStone and KaylaRe was not renewed effective January 1, 2019, however losses in the earlier
calendar years will continue to fall due under the previous quota share agreement. We cannot be certain that we will
not incur adverse development in the future, and we may also incur significant costs as we exit business lines, which
may impact StarStone's return to profitability.
Investments
Markets are inherently uncertain and investment performance may be impacted by 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 will continue allocating a portion of our portfolio to
non-investment grade securities or alternative investments, in accordance with our investment guidelines, which provide
diversification against our fixed income investments and an opportunity for improved risk-adjusted returns.
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Our total investment results are a significant component of earnings and are comprised of:
• Net investment income. In a rising interest rate environment, our net investment income would improve as
maturities are reinvested at higher rates. Conversely, in a declining interest rate environment, our net investment
income would decline as maturities are reinvested at lower rates. All else being equal, we would also expect
our net investment income to grow as total investable assets increases as we acquire more business, which
would be partially offset by reductions in the investment portfolio for paid claims.
• Net realized and unrealized gains or losses. These arise from investments in fixed maturities, funds held,
equity investments and other investments. Given the nature of our investments in fixed maturities and the
average duration of our fixed maturity securities, the return of our fixed maturities investments will be impacted
by changes in interest rates. In a rising rate environment, securities may experience unrealized losses prior
to maturity. During 2018, we recognized net unrealized losses on our investments of $385.3 million, of which
$211.4 million related to our investments in fixed maturities and funds withheld - directly managed, primarily
due to rising sovereign yields and widening credit spreads and $164.0 million related to other investments.
We generally account for our fixed maturity securities as "trading", whereas other companies in our industry
may utilize "available-for-sale" accounting. The difference is that unrealized changes on investments classified
as trading are recorded through earnings, whereas unrealized changes on investments classified as available-
for-sale are recorded directly to shareholders' equity. We may experience further unrealized losses on our
fixed maturity investments, depending on investment conditions and general economic conditions. Unrealized
amounts would only become realized in the event of a sale of the specific securities prior to maturity or a credit
default. For further information on the sensitivity of our portfolio to changes in interest rates, refer to the Interest
Rate Risk section within Item 7A. "Quantitative and Qualitative Disclosures About Market Risk", included within
this Annual Report on Form 10-K. For further discussion of our investments, see "Investable Assets" below.
U.S. Tax 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”). 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 29, 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 continues to be heightened uncertainty regarding trading relationships with countries in the European
Union after Brexit, pending the conclusion of the Brexit negotiations between the United Kingdom and 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. On May 23, 2018, Lloyd's announced that it had received license approval from
the Belgian insurance regulator for Lloyd's Insurance Company SA, which will be able to write non-life risks from the
European Economic Area. 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
expanding upon our existing run-off capabilities within the European Union for the purpose of receiving transfers of
new run-off business. We have also investigated 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 United Kingdom Non-
life Run-off companies.
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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 premiums earned. The combined ratio is the sum of the loss ratio, the acquisition
cost ratio and the operating expense ratio.
The Atrium segment also includes corporate expenses that 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.
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Consolidated Results of Operations - For the Years Ended December 31, 2018, 2017 and 2016
The following table sets forth our consolidated statements of earnings for the years ended December 31, 2018,
2017 and 2016. For a discussion of the critical accounting policies that affect the results of operations, see "Critical
Accounting Policies" below.
INCOME
Net premiums earned
Fees and commission income
Net investment income
Net realized and unrealized gains (losses)
Other income
EXPENSES
Net incurred losses and LAE
Life and annuity policy benefits
Acquisition costs
General and administrative expenses
Interest expense
Net foreign exchange losses
Loss on sale of subsidiary
EARNINGS (LOSS) BEFORE INCOME TAXES
Income tax benefit (expense)
Earnings from equity method investments
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS
Net earnings from discontinued operations, net of
income taxes
2018
2017
Change
2016
Change
(in thousands of U.S. dollars)
$ 895,575 $ 613,121 $ 282,454 $ 823,514 $ (210,393)
35,088
270,671
(412,884)
35,085
66,103
208,789
190,334
22,605
(31,015)
39,364
61,882
185,463
(603,218)
12,480
77,818
10,236
26,739
23,326
112,516
12,369
823,535
1,100,952
(277,417) 1,136,395
(35,443)
454,025
1,003
192,790
407,375
26,217
2,668
—
1,084,078
(260,543)
6,124
42,147
193,551
4,015
96,906
435,985
28,102
17,537
16,349
792,445
308,507
6,395
5,904
260,474
(3,012)
95,884
(28,610)
(1,885)
(14,869)
(16,349)
174,099
(2,038)
186,569
423,734
20,642
665
—
291,633
(569,050)
803,671
332,724
(271)
(34,874)
36,243
(5,400)
19,452
6,053
(89,663)
12,251
7,460
16,872
16,349
(11,226)
(24,217)
41,269
11,304
(212,272)
320,806
(533,078)
292,450
28,356
—
10,993
(10,993)
11,963
(970)
NET EARNINGS (LOSS)
(212,272)
331,799
(544,071)
304,413
27,386
Net loss (earnings) attributable to noncontrolling
interest
NET EARNINGS (LOSS) ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
62,051
(20,341)
82,392
(39,606)
19,265
(150,221)
311,458
(461,679)
264,807
46,651
Dividends on preferred shares
(12,133)
—
(12,133)
—
—
NET EARNINGS (LOSS) ATTRIBUTABLE TO
ENSTAR GROUP LIMITED ORDINARY
SHAREHOLDERS
Highlights
Consolidated Results of Operations for 2018
$ (162,354) $ 311,458 $ (473,812) $ 264,807 $
46,651
• Consolidated net losses of $162.4 million and basic and diluted losses per share of $7.84
• Non-GAAP operating income1 of $61.6 million and diluted non-GAAP operating income per ordinary share1
of $2.95
• Net earnings from Non-life Run-off segment of $25.2 million
• Net premiums earned of $895.6 million, including $146.3 million and $715.0 million in our Atrium and
StarStone segments, respectively
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• Combined ratios of 94.5% and 135.1% for the active underwriting operations within our Atrium and StarStone
segments, respectively
• Net investment income of $270.7 million and net realized and unrealized losses of $412.9 million
1 Non-GAAP Financial Measure. For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance
with GAAP and diluted non-GAAP operating income per ordinary share to diluted net earnings (loss) per ordinary share calculated
in accordance with GAAP, see "Non-GAAP Financial Measures" below.
Consolidated Financial Condition as at December 31, 2018
• Total investments, cash and funds held of $12,545.9 million
• Total reinsurance balances recoverable on paid and unpaid losses of $2,029.7 million
• Total assets of $16,556.3 million
• Total gross reserves for losses and LAE of $9,409.5 million, with $1,111.8 million and $1,761.8 million of net
reserves acquired and assumed, respectively, in our Non-life Run-off operations during 2018
• Total shareholders' equity, including preferred shares, of $3,901.9 million and redeemable noncontrolling
interest of $458.5 million. Shareholders' equity includes $510.0 million of preferred shares issued in 2018
• Diluted book value per ordinary share of $155.94
Consolidated Overview
2018 versus 2017: We reported consolidated net losses attributable to Enstar Group Limited ordinary
shareholders of $162.4 million in 2018, a decrease of $473.8 million from net earnings of $311.5 million in 2017. The
comparability of our results across different periods was impacted by the acquisitions and loss portfolio transfer
reinsurance transactions we completed during 2018 with Maiden Re, Maiden Re North America, KaylaRe, Neon,
Novae, Zurich , Coca-Cola and Allianz, and during 2017 with RSA and QBE. The most significant drivers of the change
in our financial performance during 2018 as compared to 2017 included:
• 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 results in 2018, contributing $306.1
million of income to our consolidated results. Although this was an increase of $115.4 million from 2017, net
earnings provided by the Non-life Run-off segment decreased by $318.6 million in 2018 compared to 2017
primarily due to net realized and unrealized losses, lower fee and commission income and higher operating
expenses partially offset by lower corporate expenses and higher net investment income;
• Higher Net Investment Income - Total net investment income increased by $61.9 million in 2018, compared
to 2017. 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 KaylaRe, Neon, Novae and Zurich Australia transactions, which were completed in 2018. The increase
in the book yield was primarily due to an increase in the yield curve;
• Atrium - Net earnings attributable to the Atrium segment were $9.0 million in 2018, compared to $5.4 million
in 2017. The combined ratio in 2018 was 94.5%, compared to 99.9% in 2017, and the decrease was primarily
driven by a lower loss ratio. The underwriting performance in 2017 was impacted by the large catastrophe
losses, primarily hurricanes Harvey, Irma and Maria, compared to a relatively lower catastrophe year in
2018;
• StarStone - Net losses attributable to the StarStone segment were $158.6 million in 2018, compared to net
earnings of $2.8 million in 2017. The decrease in earnings was primarily due to large current year loss
activity, prior year adverse development and net realized and unrealized losses, partially offset by higher
net investment income. The combined ratio was 135.1% in 2018 compared to 108.5% in 2017. The
underwriting performance was impacted by large current year loss activity, prior year adverse development
and the impact of intra-group cessions;
• Other Activities - Net losses attributable to our other activities were $38.0 million in 2018, compared to $40.6
million in 2017. This decrease was primarily driven by the loss on a sale of a subsidiary in 2017 which did
not reoccur in 2018, partially offset by the dividends on the preferred shares that were issued in 2018 and
the income from discontinued operations in 2017 which did not reoccur in 2018;
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• Net Realized and Unrealized Gains (Losses) - In 2018, net realized and unrealized losses were $412.9
million, compared to gains of $190.3 million in 2017. The net realized and unrealized losses in 2018 were
primarily attributable to an decrease in the valuation of our fixed maturity investments due to rising interest
rates and losses on our other investments due to poor performance in the equity markets. Many insurance
companies predominantly use available-for-sale accounting where unrealized amounts are recorded directly
to shareholders’ equity and therefore do not impact earnings. Unrealized amounts would only become
realizable in the event of a sale of the specific securities prior to maturity or a credit default;
• Noncontrolling Interest - Net (earnings) losses attributable to noncontrolling interest is the share of results
from those subsidiary companies in which there are either noncontrolling interests or redeemable
noncontrolling interests. In 2018, the net loss attributable to noncontrolling interest was $62.1 million,
compared to net earnings attributable to noncontrolling interest of $20.3 million in 2017. The reduction was
primarily due to lower earnings in StarStone, as discussed above;
•
Income Taxes - We recorded an income tax benefit of $6.1 million in 2018, compared to an income tax
benefit of $6.4 million in 2017, a change of $0.3 million. Our effective tax rate was 2.8% in 2018 compared
with (2.0)% in 2017, primarily relating to the geographic distribution of our pre-tax net earnings (losses)
between our taxable and non-taxable jurisdictions in 2018, compared to changes relating to U.S. Tax Reform,
which resulted in a tax benefit of $5.7 million in 2017; and
• Our non-GAAP operating income1, which excludes the impact of unrealized losses on fixed maturity securities
and other items, was $61.6 million for the year ended December 31, 2018, a decrease of $221.7 million
from non-GAAP operating income of $283.3 million for the year ended December 31, 2017.
1 Non-GAAP Financial Measure. For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance
with GAAP, see "Non-GAAP Financial Measures" below.
2017 versus 2016: We reported consolidated net earnings attributable to Enstar Group Limited ordinary
shareholders of $311.5 million in 2017, compared to $264.8 million in 2016, an increase of $46.7 million. 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:
• Non-life Run-off Segment - Net reduction in the liability for net incurred losses and LAE within our Non-life
Run-off segment was 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 transactions that were completed in 2017. The increase in the book yield was primarily due to our asset
allocation strategies and 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, a decrease of $1.0 million. 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 ratio 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, a decrease of $22.4 million. 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;
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• Other activities - Net losses attributable to our other activities were $40.6 million in 2017, compared to $28.5
million in 2016.The higher net losses in 2017 were primarily driven by higher corporate expenses and a loss
on the sale of Laguna, our Irish life insurance company;
• 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 held - directly managed and unrealized gains on our other
investments;
• Noncontrolling Interest - Net (earnings) losses attributable to noncontrolling interest is the share of results
from those subsidiary companies in which there are either noncontrolling interests or redeemable
noncontrolling interests. In 2017, the net earnings attributable to noncontrolling interest were $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;
•
Income Taxes - We recorded an income tax benefit of $6.4 million in 2017, compared to 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 to
10.7% in 2016, with the change primarily due to the significant decreases in the valuation allowance on our
deferred tax assets in the U.S. in 2017 compared to 2016, including changes relating to the U.S. Tax Reform
which results 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.
• Our non-GAAP operating income1, which excludes the impact of unrealized losses on fixed maturity securities
and other items, was $283.3 million for the year ended December 31, 2017, an increase of $15.6 million
from non-GAAP operating income of $267.8 million for the year ended December 31, 2016.
1 Non-GAAP Financial Measure. For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance
with GAAP, see "Non-GAAP Financial Measures" below.
Results of Operations by Segment - For the Years Ended December 31, 2018, 2017 and 2016
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
ordinary shareholders for the years ended December 31, 2018, 2017 and 2016:
Segment split of net earnings (loss) attributable
to Enstar Group Limited:
Non-life Run-off
Atrium
StarStone
Other
2018
2017
2016
Change
(in thousands of U.S. dollars)
Change
$
25,222 $ 343,800 $ (318,578) $ 261,644 $
82,156
8,997
(158,580)
5,423
2,826
3,574
(161,406)
6,416
25,217
(37,993)
(40,591)
2,598
(28,470)
(993)
(22,391)
(12,121)
Net earnings (loss) attributable to Enstar Group
Limited ordinary shareholders
$ (162,354) $ 311,458 $ (473,812) $ 264,807 $
46,651
The following is a discussion of our results of operations by segment.
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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, 2018, 2017 and 2016, which are summarized below:
2018
2017
Change
2016
Change
(3,214)
(2,720)
(2,593)
(95,207)
3,870
19,081
(74,849)
21,441
101,860
26,402
13,260
(40,009)
(6,702)
(9,031)
32,372
35,567
11,304
79,243
2,913
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)
(in thousands of U.S. dollars)
$
$
$
(8,910) $
14,102
(9,217) $
6,482
9,427
$
14,162
$
$
$
(23,012) $
17,316
(15,699) $
9,202
(4,735) $
16,755
$
$
$
306,067
190,674
115,393
285,881
(4,006)
(328)
(3,678)
(4,198)
(158,731)
(132,235)
(26,496)
(151,316)
152,757
226,287
(381,712)
16,466
35,978
(39,093)
(30,616)
2,534
72,273
166,678
179,545
43,849
21,157
(101,592)
(28,970)
(7,347)
80,484
59,609
(561,257)
(27,383)
14,821
62,499
(1,646)
9,881
147,122
145,237
77,685
17,447
7,897
(61,583)
(22,268)
1,684
EARNINGS (LOSS) BEFORE INCOME TAXES
(17,399)
345,593
(362,992)
313,221
Income tax benefit (expense)
Earnings (losses) from equity method investments
NET EARNINGS FROM CONTINUING
OPERATIONS
Net earnings attributable to noncontrolling interest
NET EARNINGS ATTRIBUTABLE TO ENSTAR
GROUP LIMITED ORDINARY SHAREHOLDERS
Overall Results
3,581
42,147
28,329
(3,107)
6,990
5,904
(3,409)
36,243
(28,577)
(5,400)
358,487
(330,158)
279,244
(14,687)
11,580
(17,600)
$
25,222
$
343,800
$ (318,578) $
261,644
$
82,156
2018 versus 2017: Net earnings were $25.2 million in 2018, compared to $343.8 million in 2017, a decrease
of $318.6 million. This decrease was primarily attributable to a decrease of $561.3 million in earnings from net realized
and unrealized gains (losses), an increase of $26.5 million in operating expenses and a decrease of $27.4 million in
fees and commission income, partially offset by a higher reduction in net incurred losses and LAE of $115.4 million,
a decrease in corporate expenses of $62.5 million, an increase in net investment income of $59.6 million and an
increase in earnings from equity method investments of $36.2 million.
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, an increase of $26.4 million in fees and commission income, an increase of $13.3 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.
Investment results are separately discussed below in "Investments."
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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, 2018, 2017 and 2016:
2018
2017
Change
2016
Change
Gross premiums written
$
Ceded reinsurance premiums written
Net premiums written
Gross premiums earned
Ceded reinsurance premiums earned
(8,910) $
(307)
(9,217)
25,230
(15,803)
(in thousands of U.S. dollars)
14,102 $
(23,012) $
17,316 $
(7,620)
6,482
23,950
(9,788)
7,313
(15,699)
1,280
(6,015)
(8,114)
9,202
25,989
(9,234)
(3,214)
494
(2,720)
(2,039)
(554)
Net premiums earned
$
9,427 $
14,162 $
(4,735) $
16,755 $
(2,593)
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.
2018 versus 2017: Net premiums written in 2018 of $(9.2) million primarily related to reductions in net written
premium on legacy business for which corresponding unearned premium was also released. Net premiums earned of
$9.4 million and $14.2 million in 2018 and 2017, respectively, primarily related to the legacy run-off business assumed.
2017 versus 2016: Premiums written and earned in 2017 and 2016 primarily related to the legacy run-off business
assumed.
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, 2018, 2017 and 2016:
2018
2017
2016
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$ 838,812
$
5
$ 838,817
$ 578,888
$
2,835
$ 581,723
$ 529,937
$
3,869
$ 533,806
Net change in case and
LAE reserves (1)
Net change in IBNR
reserves (2)
Increase (reduction) in
estimates of net ultimate
losses
Reduction in provisions for
bad debt
Increase (reduction) in
provisions for unallocated
LAE
Amortization of deferred
charge assets
Amortization of fair value
adjustments
Changes in fair value - fair
value option
Net incurred losses and
LAE
(552,124)
4,704
(547,420)
(381,450)
397
(381,053)
(608,168)
(617)
(608,785)
(573,127)
7,742
(565,385)
(393,100)
2,373
(390,727)
(349,726)
2,342
(347,384)
(286,439)
12,451
(273,988)
(195,662)
5,605
(190,057)
(427,957)
5,594
(422,363)
—
(65,401)
13,781
12,877
6,664
—
—
—
—
—
—
(1,536)
(1,536)
(13,822)
—
(13,822)
(65,401)
(54,071)
261
(53,810)
(44,190)
235
(43,955)
13,781
14,359
12,877
10,114
6,664
30,256
—
—
—
14,359
168,827
10,114
25,432
30,256
—
—
—
—
168,827
25,432
—
$(318,518) $ 12,451
$(306,067) $(196,540) $
5,866
$(190,674) $(291,710) $
5,829
$(285,881)
(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.
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2018: The reduction in net incurred losses and LAE for the year ended December 31, 2018 of $306.1 million
included net incurred losses and LAE of $12.5 million related to current period net earned premium. Excluding current
period net incurred losses and LAE of $12.5 million, the reduction in net incurred losses and LAE liabilities relating to
prior periods was $318.5 million, which was attributable to a reduction in estimates of net ultimate losses of $286.4
million, a reduction in provisions for unallocated LAE of $65.4 million relating to 2018 run-off activity, partially offset by
the amortization of deferred charge assets of $13.8 million, amortization of fair value adjustments of $12.9 million and
an increase in the fair value of liabilities of $6.7 million related to our assumed retroactive reinsurance agreements for
which we have elected the fair value option.
The reduction in estimates of prior period net ultimate losses of $286.4 million for the year ended December 31,
2018 included a net reduction in case and IBNR reserves of $1,125.3 million, partially offset by net losses paid of
$838.8 million.
The significant drivers of the 2018 results are explained below.
Workers' Compensation
A $154.6 million reduction in estimates of net ultimate losses in our workers' compensation line of business
arose across multiple portfolios, where reported loss development was generally significantly less than expected. For
certain of our portfolios, the lower than expected actual development was driven by significant pro-active settlement
activity on individual claimants where we were able to close open claims earlier than was indicated by the original
payout pattern, and, in other portfolios, based on the review of recent loss development activity we revised our actuarial
development "tail factor" assumption, which led to a reduction in net ultimate losses. For example, in one portfolio we
observed favorable incurred loss development, primarily relating to accident years 1995 through 2005 where we paid
$22.7 million in loss payments to release a corresponding $37.0 million of associated case reserves for $14.3 million
in favorable incurred loss development.
When actual development is less than expected for a sustained period of time across a significant volume of
exposures, an updated actuarial analysis tends to indicate reductions in IBNR reserves. Updates to actuarial analysis,
factoring in the less-than-expected reported incurred loss development for the year, is the primary driver of the $154.6
million reduction to workers' compensation net ultimate loss estimates.
For recently acquired portfolios of workers' compensation business, we have utilized our subsidiary, Paladin
Managed Care Services ("Paladin"), to assist us in reviewing claims. Paladin generally produces savings related to
medical expense liabilities over and above savings achieved by prior vendors of such services, and the savings lead
to actual development that is less than expected, thereby driving reductions to the estimates of net ultimate losses. In
one particular program, our claims personnel pursued a pro-active strategy of settling with numerous workers'
compensation claimants whose injuries arose in recent accident years. For this portfolio, the claims team reduced the
open inventory of claims by 78% during 2018. This reduction in exposure, when incorporated into an updated actuarial
analysis, led to a reduction in our estimate of ultimate net losses of $30.2 million, primarily relating to accident years
2010 through 2014.
We also continue to actively seek to commute policies when possible, and where the commutation of the policy
is settled at a level below the carried value of the loss reserves, we record a reduction in our estimates of net ultimate
losses. During the year ended December 31, 2018, we completed 11 commutations across several portfolios that
contributed to the reduction in estimates of net ultimate losses.
Asbestos
A $64.9 million reduction in estimates of net ultimate losses in our asbestos line of business arose primarily due
to one asbestos portfolio where lower than expected volume of claims reported and a lower than expected severity
on claims settled in the period, when projected to net ultimate losses through actuarial methodologies, resulted in a
significant reduction in estimates of net ultimate losses. The volume of claims reported was 3% less than expected
and the average cost per claim was 5% less than expected. Across our other asbestos portfolios we had a combination
of commutations, detailed actuarial studies and lower than expected incurred loss development, which all resulted in
reductions in estimates of net ultimate losses.
Other
All other line of business changes in estimates of net ultimate losses were primarily due to the application of our
reserving methodologies, favorable actual versus expected loss development, pro-active claim management and
commutations.
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The reduction of $65.4 million in provisions for unallocated LAE was due to a reduction in our estimate of the
total future costs to administer the claims.
The amortization of deferred charge assets of $13.8 million was associated with retroactive reinsurance contracts
where, at the inception of the contract, the estimated ultimate losses payable were in excess of premium received.
Deferred charge assets are amortized over the estimated claim payment period of the related contract and are adjusted
periodically to reflect new estimates of the amount and timing of the remaining loss payments.
The amortization of fair value adjustments of $12.9 million was related to the fair value adjustments associated
with the acquisition of companies. On acquisition, we are required to fair value the net assets acquired, including the
reinsurance balances recoverable and the liability for losses and LAE. The resulting fair value adjustments are then
amortized over the expected life of the reinsurance balances recoverable and the liability for losses and LAE.
The increase in the fair value of liabilities for which we have elected the fair value option of $6.7 million was
primarily due to changes in the discount rate and the application of the discount rate to the updated expected cash
flow patterns.
2017: The reduction in net 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 from previously
acquired businesses that renewed certain policies while being run-off. Excluding current period net incurred losses
and LAE of $5.9 million, the reduction in net incurred losses and LAE liabilities relating to prior periods was $196.5
million, which was attributable to a reduction in estimates of net ultimate losses of $195.7 million, and a reduction in
provisions for unallocated LAE of $54.1 million, relating to 2017 run-off activity, partially offset by an increase in the
fair value of liabilities of $30.3 million related to our assumed retroactive reinsurance agreements for which we have
elected the fair value option, the amortization of the deferred charge assets of $14.4 million and the amortization of
fair value adjustments over the estimated payout period relating to companies acquired amounting to $10.1 million.
The reduction in estimates of prior period net ultimate losses of $195.7 million for the year ended December 31,
2017 included a net reduction in case and IBNR reserves of $774.6 million, partially offset by net losses paid of $578.9
million.
The significant drivers of the 2017 results are explained below.
Workers' Compensation
A $155.0 million reduction in estimates of net ultimate losses in our workers' compensation line of business
arose primarily in five separate portfolios. Across these five portfolios, the reported incurred loss development was
generally significantly lower than expected. When actual development is less than expected for a sustained period of
time, across a significant volume of exposures, an updated actuarial analysis tends to indicate reductions in IBNR
reserves. In addition, we continue to pro-actively manage and settle claims where possible, commute policies if
appropriate and, through Paladin, we are able to achieve significant savings on medical costs through active claims
management strategies over the life of the reported claims. All of these items reduce the estimates of net ultimate
losses.
Construction Defect
A $33.0 million reduction in estimates of net ultimate losses in our construction defect line of business arose
primarily due to lower than expected actual incurred development in one portfolio. The active claims management
approach that our claims team adopted for the assumed exposures within this portfolio led to a significant reduction
loss in the inventory of the assumed open claims of 73% during 2017. This reduction in exposure, when incorporated
into our updated actuarial analysis, resulted in a reduction in estimates of net ultimate losses for this line of business.
Asbestos
A $27.0 million increase in estimates of net ultimate losses in our asbestos line of business resulted from a
ground-up study performed by a consulting actuarial firm on one of our portfolios. This study resulted in the recording
of additional reserves of $60.5 million due to a small number of accounts that experienced an increase in the notification
of claims which are expected to attach to the excess policies that we reinsure. This increase was partially offset by
favorable development of $33.5 million in our other portfolios of asbestos exposures arising primarily from lower than
expected claim notifications.
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Other
All other line of business changes in estimates of net ultimate losses were primarily due to the application of our
reserving methodologies, favorable actual versus expected loss development, pro-active claim management and
commutations.
The reduction in provisions for bad debt of $1.5 million was a result of the favorable recoveries from reinsurers,
the reduction in bad debt provisions for insolvent reinsurers as a result of distributions received and the reduction of
specific provisions held for certain reinsurers.
The reduction of $54.1 million in provisions for unallocated LAE was due to a reduction in our estimate of the
total future costs to administer the claims.
The amortization of deferred charge assets of $14.4 million was associated with retroactive reinsurance contracts
where, at the inception of the contract, the estimated ultimate losses payable were in excess of premium received.
Deferred charge assets are amortized over the estimated claim payment period of the related contract and are adjusted
periodically to reflect new estimates of the amount and timing of the remaining loss payments.
The amortization of fair value adjustment of $10.1 million was related to the fair value adjustments associated
with the acquisition of companies. On acquisition, we are required to fair value the net assets acquired, including the
reinsurance balances recoverable and the liability for losses and LAE. The resulting fair value adjustments are then
amortized over the expected life of the reinsurance balances recoverable and the liability for losses and LAE.
The increase in the fair value of liabilities for which we have elected the fair value option of $30.3 million was
primarily due to changes in the discount rate and the application of the discount rate to the updated expected cash
flow patterns.
2016: The reduction in net incurred losses and LAE for the year ended December 31, 2016 of $285.9 million
included net incurred losses and LAE of $5.8 million related to current period net earned premium, primarily for the
run-off business acquired with Sussex. Excluding current period net incurred losses and LAE of $5.8 million, the
reduction in net incurred losses and LAE liabilities relating to prior periods was $291.7 million, which was attributable
to a reduction in estimates of net ultimate losses of $428.0 million, a reduction in provisions for unallocated LAE of
$44.2 million, relating to 2016 run-off activity, and a reduction in the provision for bad debt of $13.8 million, partially
offset by the amortization of the deferred charge assets of $168.8 million and the amortization of fair value adjustments
over the estimated payout period relating to companies acquired amounting to $25.4 million.
The reduction in estimates of prior period net ultimate losses of $428.0 million for the year ended December 31,
2016 included a net reduction in case and IBNR reserves of $957.9 million, partially offset by net losses paid of $529.9
million.
The significant drivers of the 2016 results are explained below.
Workers' Compensation
A $323.1 million reduction in estimates of net ultimate losses in our workers' compensation line of business
arose primarily in three separate portfolios. Across these three portfolios, the reported incurred loss development was
generally significantly lower than expected. When actual development is lower than expected for a sustained period
of time across a significant volume of exposures, an updated actuarial analysis tends to indicate reductions in IBNR
reserves. In one specific portfolio, having observed a general trend of lower than expected actual development over
a sustained period of time, we revised the medical inflation assumption used to estimate case and LAE reserves for
long term disability claimants. This change to an actuarial assumption, driven by observed actual development, resulted
in a significant reduction in our estimates of net ultimate losses of $234.5 million, primarily across accident years 1991
through 2001. This was partially offset by a significant reduction in the related deferred charge asset as described
below.
Asbestos
A $25.3 million reduction in estimates of net ultimate losses in our asbestos line of business arose primarily due
to six commutations, which resulted in a $13.1 million reduction in net ultimate losses. The remainder of the reduction
arose due to lower than expected actual loss development.
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Other
All other line of business changes in estimates of net ultimate losses were primarily due to the application of our
reserving methodologies, generally favorable actual versus expected loss development, pro-active claim management
and commutations.
The reduction in provisions for bad debt of $13.8 million was a result of the favorable recoveries from reinsurers,
and the reduction in bad debt provisions for insolvent reinsurers as a result of distributions received, partially offset by
additional provisions for certain reinsurers.
The reduction of $44.2 million in provisions for unallocated LAE was due to a reduction in our estimate of the
total future costs to administer the claims.
The amortization of deferred charge assets of $168.8 million was associated with retroactive reinsurance
contracts where, at the inception of the contract, the estimated ultimate losses payable were in excess of premium
received. Deferred charge assets are amortized over the estimated claim payment period of the related contract and
are adjusted periodically to reflect new estimates of the amount and timing of the remaining loss payments. In the year
ended December 31, 2016, the amortization of the deferred charge asset included an impairment of $38.6 million,
which was offset in earnings by favorable loss reserve development.
The amortization of fair value adjustment of $25.4 million was related to the the fair value adjustments associated
with the acquisition of companies. On acquisition, we are required to fair value the net assets acquired, including the
reinsurance balances recoverable and the liability for losses and LAE. The resulting fair value adjustments are then
amortized over the expected life of the reinsurance balances recoverable and the liability for losses and LAE.
Acquisition Costs:
2018 versus 2017: Acquisition costs for the Non-life Run-off segment were $4.0 million in 2018, compared to
$0.3 million in 2017, an increase of $3.7 million primarily related to net premiums earned on legacy run-off business
assumed.
2017 versus 2016: Acquisition costs for the Non-life Run-off segment were $0.3 million in 2017, compared to
$4.2 million for 2016, a decrease of $3.9 million. Acquisition costs in 2017 and 2016 primarily related to net premiums
earned on legacy run-off business assumed.
Fees and Commission Income:
2018 versus 2017: Our management companies in the Non-life Run-off segment earned fees and commission
income of $16.5 million and $43.8 million in 2018 and 2017, respectively, a decrease of $27.4 million. This decrease
primarily resulted from a decrease in the profit commission and fee income earned from KaylaRe as a result of the
acquisition and subsequent consolidation and elimination of transactions with 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. 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.
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-
party run-off management engagement. The remaining increase is derived from additional fees earned from existing
third-party clients.
Other Income:
2018 versus 2017: Other income was $36.0 million in 2018, compared to $21.2 million in 2017, an increase of
$14.8 million. The increase of $14.8 million is primarily due to a reduction in net liabilities relating to direct asbestos
and environmental exposures carried by our subsidiary DCo LLC.
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2017 versus 2016: Other income was $21.2 million in 2017, compared to $7.9 million in 2016. The increase of
$13.3 million is primarily attributable to an increase in recoveries of other assets.
General and Administrative Expenses:
General and administrative expenses consist of operating expenses and corporate expenses.
2018
Operating expenses
Corporate expenses
General and administrative expenses
$
$
158,731 $
39,093
197,824 $
2017
2016
Change
(in thousands of U.S. dollars)
132,235 $
101,592
233,827 $
26,496 $ 151,316 $
(62,499)
(36,003) $ 212,899 $
61,583
Change
(19,081)
40,009
20,928
2018 versus 2017: General and administrative expenses for the Non-life Run-off segment decreased by $36.0
million, from $233.8 million in 2017 to $197.8 million in 2018. The decrease in expenses in 2018 related primarily to
a decrease in performance-based salary and benefits including stock compensation expense due to lower net earnings
of the Non-life Run-off segment in 2018 compared to 2017.
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 primarily related 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 certain credit facilities, and an
increase in professional fees relating to significant new business transactions and projects.
Interest Expense:
2018 versus 2017: Interest expense was $30.6 million in 2018, which is broadly consistent with the interest
expense of $29.0 million in 2017.
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.
Net Foreign Exchange Gains (Losses):
2018 versus 2017: Net foreign exchange gains for the Non-life Run-off segment were $2.5 million in 2018
compared to net foreign exchange losses of $7.3 million in 2017. The change of $9.9 million in net foreign exchange
gains (losses) arose primarily as a result of changes in exchange rates in 2017 and the resulting impact on our foreign
currency denominated investments and subsidiaries, which was partially offset by the change in currency translation
adjustment in the consolidated statement of comprehensive income.
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
gains (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 was partially offset by the change in currency translation
adjustment in the consolidated statement of comprehensive income.
Income Tax (Expense) Benefit:
2018 versus 2017: We recorded an income tax benefit of $3.6 million for our Non-life Run-off segment in 2018,
compared to an income tax benefit of $7.0 million in 2017, a change of $3.4 million. The effective tax rate was (14.5)%
in 2018 compared with (2.0)% in 2017. Our tax rate was impacted by having proportionately lower net income in our
tax paying subsidiaries in 2018 than in 2017. In addition, our tax rate was impacted by U.S. Tax Reform, resulting in
a tax benefit of $0.6 million in 2018 and a tax benefit of $5.7 million in 2017. Income tax expense is primarily generated
through our foreign operations outside of Bermuda, principally in the United States, the United Kingdom, Continental
Europe and Australia. The effective tax rate, which is calculated as income tax expense or benefit divided by income
before tax, is driven primarily by the geographic distribution of pre-tax net income between jurisdictions with
comparatively higher tax rates and those with comparatively lower income tax rates and as a result may fluctuate
significantly from period to period.
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2017 versus 2016: We recorded an income tax benefit of $7.0 million 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)% for 2017, compared to
9.3% in 2016. The deferred tax 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, 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.
Earnings from Equity Method Investments:
2018 versus 2017: We recorded earnings from equity method investments of $42.1 million for our Non-life Run-
off segment in 2018, compared to earnings of $5.9 million in 2017, a change of $36.2 million. The income in 2018 was
primarily due to (i) our investment in KaylaRe, which was an equity method investment until May 2018 when we
purchased the remainder of the equity interests that we did not already own and (ii) earnings from our investment in
Monument.
2017 versus 2016: We recorded earnings from equity method investments of $5.9 million for our Non-life Run-
off segment in 2017, compared to losses of $5.4 million in 2016, a change of $11.3 million. The earnings in 2017 were
primarily due to our investment in KaylaRe.
Noncontrolling Interest:
2018 versus 2017: Net earnings attributable to noncontrolling interest in our Non-life Run-off segment were
$3.1 million in 2018, compared to $14.7 million in 2017, a decrease of $11.6 million. The decrease of $11.6 million in
2018 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,
2018 and December 31, 2017.
2017 versus 2016: Net earnings attributable to noncontrolling interest in our Non-life Run-off segment was $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 primarily due 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 2016.
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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, 2018, 2017 and 2016, which are summarized below.
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 losses
EARNINGS BEFORE INCOME TAXES
Income tax expense
NET EARNINGS FROM CONTINUING OPERATIONS
Net earnings attributable to noncontrolling interest
NET EARNINGS ATTRIBUTABLE TO ENSTAR
GROUP LIMITED ORDINARY SHAREHOLDERS
Underwriting ratios:
Loss ratio (1)
Acquisition cost ratio (1)
Operating expense ratio (1)
Combined ratio (1)
2018
2017
Change
2016
Change
(in thousands of U.S. dollars)
$ 171,494
$ 153,472
$ 18,022
$ 143,170
$ 10,302
$ 153,488
$ 134,214
$ 19,274
$ 140,437
$ (6,223)
$ 146,315
$ 134,747
$ 11,568
$ 124,416
$ 10,331
(69,810)
(50,646)
(17,777)
8,082
5,686
(3,251)
18,622
162
(69,419)
(47,688)
(17,444)
196
4,218
1,117
22,788
230
(6,921)
(12,142)
—
(3,394)
18,986
(3,732)
15,254
(6,257)
(559)
(5,060)
10,788
(1,593)
9,195
(3,772)
(391)
(2,958)
(333)
7,886
1,468
(4,368)
(4,166)
(68)
5,221
559
1,666
8,198
(2,139)
6,059
(2,485)
(58,387)
(44,670)
(14,233)
7,126
2,940
(601)
18,189
206
(10,899)
(198)
(3,310)
13,453
(2,573)
10,880
(4,464)
(11,032)
(3,018)
(3,211)
(6,930)
1,278
1,718
4,599
24
(1,243)
(361)
(1,750)
(2,665)
980
(1,685)
692
$
8,997
$
5,423
$
3,574
$
6,416
$
(993)
47.7%
34.6%
12.2%
94.5%
51.5%
35.4%
13.0%
99.9%
(3.8)%
(0.8)%
(0.8)%
(5.4)%
46.9%
35.9%
11.5%
94.3%
4.6 %
(0.5)%
1.5 %
5.6 %
(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.
The lower combined ratio in 2018 is primarily due to a decrease in the net loss ratio. The decrease in the net
loss ratio is primarily attributable to the large losses in 2017, namely those attributable to hurricanes Harvey, Irma and
Maria.
Investment results are separately discussed below in "Investments."
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Table of Contents
Gross Premiums Written:
The following table provides gross premiums written by line of business for the Atrium segment for the years
ended December 31, 2018, 2017 and 2016:
2018
2017
Change
2016
Change
Marine, Aviation and Transit
Binding Authorities
Reinsurance
Accident and Health
Non-Marine Direct and Facultative
Total
$
40,227 $
76,389
17,763
18,836
18,279
(in thousands of U.S. dollars)
35,105 $
5,122
$
38,920 $
65,990
19,730
17,364
15,283
10,399
(1,967)
1,472
2,996
60,238
14,223
14,371
15,418
(3,815)
5,752
5,507
2,993
(135)
$ 171,494 $ 153,472 $
18,022
$ 143,170 $
10,302
See below for a discussion of the drivers of the increase in net premiums earned for 2018 as compared with
2017, which also explain the increase in gross premiums 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, 2018, 2017 and 2016:
2018
2017
Change
2016
Change
Marine, Aviation and Transit
Binding Authorities
Reinsurance
Accident and Health
Non-Marine Direct and Facultative
Total
$
31,738 $
67,423
14,029
17,689
15,436
(in thousands of U.S. dollars)
29,234 $
2,504 $
33,657 $
60,293
16,173
15,777
13,270
7,130
(2,144)
1,912
2,166
54,048
11,443
12,196
13,072
(4,423)
6,245
4,730
3,581
198
$ 146,315 $ 134,747 $
11,568 $ 124,416 $
10,331
2018 versus 2017: Net premiums earned for the Atrium segment were $146.3 million in 2018, compared to
$134.7 million in 2017, an increase of $11.6 million. The increase was seen across all lines of business in 2018, except
reinsurance. The net premiums earned related to the binding authorities line of business increased due to the continued
growth of the 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. Marine, aviation and transit net
premiums earned increased due to opportunities arising following the exit of certain Lloyd's syndicates. Non-marine
direct and facultative net premiums earned increased due to new opportunities following losses from the large
catastrophe losses in 2017 and targeted premium growth. Offsetting these increases was a reduction in net premiums
earned for the reinsurance line of business due to lower renewals in 2018 due to risk selection and maintaining pricing
standards.
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 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 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.
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Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the Atrium segment for the years
ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$ 28,969
$ 35,537
$ 64,506
$ 31,107
$ 24,571
$ 55,678
$ 24,416
$ 23,582
$ 47,998
Net change in case and LAE
reserves (1)
Net change in IBNR reserves (2)
Increase (reduction) in estimates
of net ultimate losses
Increase in provisions for bad debt
Increase (reduction) in provisions
for unallocated LAE
Amortization of fair value
adjustments
(10,161)
(27,507)
16,492
31,598
6,331
4,091
(13,324)
(35,650)
21,662
43,329
8,338
7,679
(13,115)
(20,543)
12,967
34,243
(148)
13,700
(8,699)
83,627
74,928
(17,867)
89,562
71,695
(9,242)
70,792
61,550
—
—
(5,118)
—
—
—
—
—
89
(442)
70
727
159
285
—
—
(421)
566
—
145
(5,118)
(2,720)
—
(2,720)
(3,308)
—
(3,308)
Net incurred losses and LAE
$ (13,817) $ 83,627
$ 69,810
$ (20,940) $ 90,359
$ 69,419
$ (12,971) $ 71,358
$ 58,387
(1) Net change in case and LAE reserves comprises the movement during the period 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 reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
2018 versus 2017: Net incurred losses and LAE were $69.8 million in 2018, compared to $69.4 million in 2017,
an increase of $0.4 million. Net favorable prior period loss development in 2018 and 2017 was $13.8 million and $20.9
million, respectively, and was experienced across most lines of business. Excluding prior year loss development, net
incurred losses and LAE in 2018 and 2017 were $83.6 million and $90.4 million, respectively. There was a lower level
of catastrophe losses in 2018 when compared with 2017. The losses in 2018 included $6.7 million in respect of the
California wildfires and Hurricane Matthew, compared to $18.5 million incurred in 2017 in respect of the large catastrophe
events that occurred in the third quarter of 2017, primarily hurricanes Harvey, Irma and Maria. Excluding these large
catastrophe events, the current year losses were $76.9 million in 2018, compared to $71.9 million in 2017. The
catastrophe events in 2018 predominantly impacted the binding authorities line of business.
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 prior period loss development in 2017 and 2016 was $20.9 million and
$13.0 million, respectively, and 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 these 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.
Acquisition Costs:
2018 versus 2017: Acquisition costs were $50.6 million in 2018, compared to $47.7 million in 2017, an increase
of $3.0 million. The Atrium acquisition cost ratios for 2018 and 2017 were 34.6% and 35.4%, respectively, a decrease
of 0.8%. The decrease in the ratio was primarily due to changes in the business mix.
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 acquisition cost ratios in 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.
Operating Expenses:
2018 versus 2017: Operating expenses for the Atrium segment were $17.8 million in 2018, which was broadly
consistent with $17.4 million in 2017.
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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 was greater in 2017 compared to 2016.
Fees and Commission Income:
2018 versus 2017: Fees and commission income was $18.6 million in 2018, compared to $22.8 million in 2017,
a decrease of $4.2 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 decrease of $4.2 million in 2018 was
primarily due to profit commission on lower syndicate profits arising on the prior year underwriting profits in 2018 as
compared with 2017.
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 increase of $4.6 million in 2017 was primarily due to profit commission on higher
syndicate profits arising on the prior year underwriting profits in 2017 as compared with 2016.
Corporate Expenses:
2018 versus 2017: Corporate expenses for the Atrium segment were $6.9 million in 2018, compared to $12.1
million in 2017, a decrease of $5.2 million. This decrease was primarily related to lower variable expenses relating to
the Atrium employee share incentive plan.
2017 versus 2016: Corporate expenses for the Atrium segment were $12.1 million in 2017, compared to $10.9
million in 2016, an increase of $1.2 million.
Net Foreign Exchange Losses
2018 versus 2017: Net foreign exchange losses for the Atrium segment were $3.4 million in 2018 compared to
$5.1 million in 2017. The net foreign exchange losses in 2018 resulted primarily from recognizing realized losses on
the foreign currency available for sale investment portfolio, which were mostly reclassified from accumulated other
comprehensive income.
2017 versus 2016: Net foreign exchange losses for the Atrium segment were $5.1 million in 2017 compared to
$3.3 million in 2016. Net foreign exchange losses in 2017 resulted primarily from recognizing realized losses on the
foreign currency available for sale investment portfolio, which were mostly reclassified from accumulated other
comprehensive income.
Income Tax Expense:
2018 versus 2017: We recorded income tax expense of $3.7 million in 2018, compared to $1.6 million in 2017,
an increase of $2.1 million, primarily due to higher 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 2018
and 2017 were 19.7% and 14.8%, respectively.
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. The effective tax rates for the Atrium
segment in 2017 and 2016 were 14.8% and 19.1%, respectively.
Noncontrolling Interest:
2018 versus 2017: Net earnings attributable to noncontrolling interest in our Atrium segment were $6.3 million
in 2018, compared to $3.8 million in 2017, a change of $2.5 million, which was primarily due to higher earnings in the
Atrium segment. As of December 31, 2018, Trident and Dowling had a combined 41.0% noncontrolling interest in the
Atrium segment.
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, which was 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.
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Table of Contents
StarStone Segment
The results of our StarStone segment include the results of StarStone and StarStone Specialty Holdings Limited
("StarStone Group"). Our StarStone segment also includes the results of KaylaRe's reinsurance of StarStone Group
from the date that Enstar completed the acquisition of KaylaRe and other intra-group cessions.
The following is a discussion and analysis of the results of operations for the StarStone segment for the years
ended December 31, 2018, 2017 and 2016, which are summarized below.
Gross premiums written
Net premiums written
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 (losses)
Interest expense
Net foreign exchange gains (losses)
EARNINGS (LOSS) BEFORE INCOME TAXES
Income tax benefit (expense)
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS
Net loss (earnings) attributable to noncontrolling
interest
NET EARNINGS (LOSS) ATTRIBUTABLE TO
ENSTAR GROUP LIMITED ORDINARY
SHAREHOLDERS
Underwriting ratios:
Loss ratio (1)
Acquisition cost ratio (1)
Operating expense ratio (1)
Combined ratio (1)
2018
2017
Change
2016
Change
(in thousands of U.S. dollars)
$ 1,121,135
$ 895,160
$ 225,975
$ 854,699
$ 40,461
$
$
805,562
$ 464,901
$ 340,661
$ 648,036
$(183,135)
714,959
$ 459,403
$ 255,556
$ 676,608
$(217,205)
(673,383)
(314,806)
(358,577)
(135,452)
(48,012)
(156,726)
(135,558)
(87,440)
(21,168)
(250,602)
(38,973)
(211,629)
35,973
(17,672)
—
(541)
(624)
(2,856)
(236,322)
6,327
27,706
16,613
632
570
(1,902)
(926)
8,267
(34,285)
(632)
(1,111)
1,278
(1,930)
3,720
(240,042)
988
5,339
(401,593)
(138,822)
(124,239)
11,954
22,221
5,728
5,102
740
(47)
754
46,452
(3,693)
86,787
90,810
(11,319)
(50,927)
5,485
10,885
(4,470)
(170)
(1,855)
(1,680)
(42,732)
4,681
(229,995)
4,708
(234,703)
42,759
(38,051)
71,415
(1,882)
73,297
(17,542)
15,660
$ (158,580)
$
2,826
$(161,406)
$
25,217
$ (22,391)
94.2%
18.9%
22.0%
68.5%
10.5%
29.5%
135.1%
108.5%
25.7 %
8.4 %
(7.5)%
26.6 %
59.4%
20.5%
18.3%
98.2%
9.1 %
(10.0)%
11.2 %
10.3 %
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
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Table of Contents
Effective May 14, 2018, Enstar completed the acquisition of KaylaRe. In addition, effective October 1, 2018 the
StarStone Group transferred certain reserves relating to discontinued lines of business and entered via an intra-group
reinsurance agreement with another Enstar group subsidiary. The transactions between StarStone Group and other
group entities, including KaylaRe (the "StarStone Intra-Group Cessions") are eliminated upon consolidation. As a
result, our StarStone segment results have changed significantly and the following table summarizes the impact of
these StarStone Intra-Group Cessions which are included in the StarStone segment for the year ended December 31,
2018:
2018
StarStone
Intra-Group
Cessions
StarStone
Segment
StarStone
Group
(in thousands of U.S. dollars)
Net premiums written
Net premiums earned
Net incurred losses and LAE
Acquisition costs
Operating expenses
Underwriting loss
Net investment income
Net realized and unrealized losses
Other expenses
Interest income (expenses)
Net foreign exchange gain
$
$
$
$
670,912
560,670
(472,564)
(75,952)
(153,733)
(141,579)
35,973
(17,672)
(541)
(2,500)
(1,208)
$
$
134,650
154,289
(200,819)
(59,500)
(2,993)
(109,023)
—
—
—
1,876
(1,648)
LOSS BEFORE INCOME TAXES
(127,527)
(108,795)
Income tax benefit
NET LOSS
Net loss attributable to noncontrolling interest
NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
ORDINARY SHAREHOLDERS
Underwriting ratios:
Loss ratio (1)
Acquisition cost ratio (1)
Operating expense ratio (1)
Combined ratio (1)
6,327
(121,200)
49,877
—
(108,795)
21,538
$
(71,323)
$
(87,257)
$
(158,580)
84.3%
13.5%
27.5%
125.3%
130.2%
38.6%
1.9%
170.7%
94.2%
18.9%
22.0%
135.1%
805,562
714,959
(673,383)
(135,452)
(156,726)
(250,602)
35,973
(17,672)
(541)
(624)
(2,856)
(236,322)
6,327
(229,995)
71,415
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Overall Results
The StarStone segment recorded net losses of $158.6 million in 2018, compared to net earnings of $2.8 million
in 2017, a decrease of $161.4 million. The combined ratio increased to 135.1% in 2018, compared to 108.5% in 2017.
The unfavorable results were primarily attributable to current year large loss activity in the international property,
construction, marine cargo and marine hull and war lines of business, and prior year adverse development on our U.S.
healthcare, excess casualty, marine, aviation and construction lines of business in 2018. The increase in net premiums
written and earned was primarily due to growth in gross premiums written and the impact of consolidating KaylaRe
after its acquisition, which eliminated the impact of the cession to KaylaRe on a total segment basis resulting in higher
retained premium and higher net premiums earned. The increase of 8.4 points in the acquisition cost ratio is driven
by the elimination of the ceding commission earned on the cession to KaylaRe as described below. The decrease of
7.5 percentage points in the operating expense ratio is a result of net premiums earned increasing by more than the
increase in expenses.
During late 2018, we appointed new executive leadership at StarStone and undertook a strategic review, which
has resulted in StarStone exiting certain business lines and greater focus on lines of business delivering underwriting
profitability. As such, we expect gross premiums written in 2019 to be less than 2018 and we may incur additional
expenses as we continue this strategic review.
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Table of Contents
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, 2018, 2017 and 2016:
Casualty
Marine
Property
Aerospace
Workers' Compensation
Total
2018
2017
Change
2016
Change
$
332,042 $
289,274 $
42,768 $
267,352 $
(in thousands of U.S. dollars)
272,714
304,939
73,534
137,906
213,754
217,680
65,804
108,648
58,960
87,259
7,730
29,258
202,672
203,336
68,104
113,235
$
1,121,135 $
895,160 $
225,975 $
854,699 $
21,922
11,082
14,344
(2,300)
(4,587)
40,461
2018 versus 2017: Gross premiums written increased by $226.0 million during 2018 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 and new business opportunities through our European and Bermuda platforms. Marine
includes diversified lines, with most of the growth in gross premiums written occurring due to the impact of new business
underwritten by teams hired in 2017 and 2018. Our property line experienced the most growth due to new opportunities
within our US platforms.
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 growth due to international property business. 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.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the StarStone segment for the years
ended December 31, 2018, 2017 and 2016:
Casualty
Marine
Property
Aerospace
Workers' Compensation
Total
2018
2017
Change
2016
Change
$
253,065 $
188,556
156,695
57,776
58,867
(in thousands of U.S. dollars)
172,209 $
80,856 $
226,330 $
117,864
96,757
30,148
42,425
70,692
59,938
27,628
16,442
162,333
132,927
66,937
88,081
(54,121)
(44,469)
(36,170)
(36,789)
(45,656)
$
714,959 $
459,403 $
255,556 $
676,608 $
(217,205)
2018 versus 2017: Net premiums earned for the StarStone segment were $715.0 million in 2018, compared to
$459.4 million in 2017, an increase of $255.6 million. This increase was primarily attributable to the impact of
consolidating KaylaRe after its acquisition, which eliminated the impact of the cession to KaylaRe on a total segment
basis and increased net premiums earned and gross premiums written. Net premiums earned for the StarStone Group
were $560.7 million in 2018, an increase of $101.2 million from 2017. This increase was driven by the casualty, marine,
and property lines of business due to increased premiums written, as discussed above.
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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 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. This 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.
Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the StarStone segment for the
years ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$326,352
$150,778
$477,130
$252,926
$ 54,867
$307,793
199,125
52,128
251,253
Net change in case and LAE
reserves (1)
Net change in IBNR reserves (2)
Increase (reduction) in estimates
of net ultimate losses
Increase (reduction) in provisions
for unallocated LAE
Amortization of fair value
adjustments
(81,491)
157,378
75,887
(63,785)
95,470
31,685
(51,309)
124,358
(144,212)
258,091
113,879
(208,244)
184,704
(23,540)
(156,546)
232,189
73,049
75,643
100,649
566,247
666,896
(19,103)
335,041
315,938
(8,730)
408,675
399,945
(5,892)
12,645
6,753
(6,774)
6,587
(187)
(3,611)
7,154
3,543
(266)
—
(266)
(945)
—
(945)
(1,895)
—
(1,895)
Net incurred losses and LAE
$ 94,491
$578,892
$673,383
$ (26,822) $341,628
$314,806
(14,236)
415,829
401,593
(1) Net change in case and LAE reserves comprises the movement during the period 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 reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
2018 versus 2017: Net incurred losses and LAE were $673.4 million in 2018, compared to $314.8 million in
2017, an increase of $358.6 million. The loss ratio for 2018 was 94.2%, compared to a loss ratio of 68.5% in 2017.
Excluding net prior year loss development, net incurred losses and LAE were $578.9 million in 2018, compared to
$341.6 million in 2017.
Current year loss activity was $578.9 million in 2018, driven by higher frequency and severity of large losses in
the current year compared to prior year, which impacted our international property, construction, marine cargo and
marine hull and war lines of business. Net adverse prior year loss development in 2018 was $94.5 million, compared
to favorable prior year loss development of $26.8 million in 2017. Net adverse prior year loss development in 2018
was primarily related to U.S. healthcare, excess casualty, marine, aviation and construction lines of business. Net
favorable prior year loss development in 2017 was primarily related to U.S. excess casualty and workers' compensation.
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 in 2017 were $341.6 million, 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.
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Acquisition Costs:
2018 versus 2017: Acquisition costs of the StarStone segment were $135.5 million in 2018, compared to $48.0
million in 2017, an increase of $87.4 million. The acquisition cost ratios for 2018 and 2017 were 18.9% and 10.5%,
respectively, with the increase primarily attributable to the impact of consolidating KaylaRe into the segment after its
acquisition, which eliminated the favorable impact of ceding acquisition costs to KaylaRe in 2018, compared to the
$99.5 million of acquisition costs ceded in 2017. Acquisition costs for the StarStone Group were $76.0 million in 2018,
compared to $48.0 million in 2017, an increase of $27.9 million. The acquisition cost ratios for the StarStone Group
in 2018 and 2017 were 13.5% and 10.5%, respectively, an increase of 3.0 percentage points, primarily due to changing
business mix.
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 was primarily due to the impact of ceding $99.5 million of
acquisition costs in 2017 on the KaylaRe quota share reinsurance contract. The acquisition cost ratio was 10.5% in
2017, compared to 20.5% in 2016, a decrease of 10.0%. The decrease was primarily due to the KaylaRe cession.
Excluding the impact of the KaylaRe cession, the acquisition cost ratio was 21.2%, which is a slight increase on the
prior year ratio of 20.5%.
Operating Expenses:
2018 versus 2017: Operating expenses were $156.7 million in 2018, compared to $135.6 million in 2017, an
increase of $21.2 million. The increase was partly due to an increase in non-recurring compensation and other costs
in respect of our strategic review of certain lines of business as described above, and IT project costs due to
enhancements in underwriting and claims systems.
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 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.
Fees and Commission Income:
2018 versus 2017: Fees and commission income was $nil in 2018, compared to $0.6 million in 2017, a decrease
of $0.6 million.
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 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.
Interest Expense:
2018 versus 2017: Interest expense was $0.6 million in 2018, compared to $1.9 million in 2017, a decrease of
$1.3 million. The decrease was due to interest charged by KaylaRe in respect of the whole account quota share, which
is on a funds-withheld basis and now eliminates on a total segment basis after the consolidation of KaylaRe.
2017 versus 2016: Interest expense was $1.9 million in 2017, compared to $nil in 2016, an increase of $1.9
million. The increase was due to interest charged by KaylaRe in respect of the whole account quota share, which is
on a funds-withheld basis.
Net Foreign Exchange Gains (Losses):
2018 versus 2017: Net foreign exchange losses of $2.9 million in 2018, compared to net foreign exchange
losses of $0.9 million in 2017, a change of $1.9 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.
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 in 2017 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.
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Income Tax (Expense) Benefit:
2018 versus 2017: We recorded an income tax benefit of $6.3 million in 2018, compared to an income tax
benefit of $1.0 million in 2017, a change of $5.3 million. The income tax benefit in 2018 was primarily due to the net
losses in the StarStone Group, as discussed above. 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.
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 was 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.
Noncontrolling Interest:
2018 versus 2017: Net losses attributable to noncontrolling interest were $71.4 million in 2018, compared to
net earnings attributable to noncontrolling interest of $1.9 million in 2017, a change of $73.3 million, primarily due to
the net losses in the StarStone Group, as discussed above. As of December 31, 2018, Trident and Dowling had a
combined 41.0% noncontrolling interest in the StarStone Group.
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 2016. As of
December 31, 2017, Trident and Dowling had a combined 41.0% noncontrolling interest in the StarStone Group.
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Table of Contents
Other
Our other activities, which do not qualify as a reportable segment, include our corporate expenses, financing
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 in 2017, the sale of our life settlements
investments during 2018 and the transfer of our remaining life assurance policies from Alpha to Monument, which is
expected to close during 2019, we will have de minimis residual life business in our consolidated operations.
The following is a discussion and analysis of our results of operations for our other activities for the years ended
December 31, 2018, 2017 and 2016, which are summarized below.
Net premiums earned
Net incurred losses and LAE
Life and annuity policy benefits
Acquisition costs
Underwriting income (loss)
Net investment income
Net realized and unrealized losses
Fees and commission expense
Other income (losses)
Corporate expenses
Interest expense
Net foreign exchange gains (losses)
Loss on sale of subsidiary
LOSS BEFORE INCOME TAXES
Income tax benefit (expense)
2018
2017
Change
2016
Change
(in thousands of U.S. dollars)
$
24,874
$
4,809
$
20,065
$
5,735
$
(926)
(16,899)
—
(16,899)
(1,003)
(2,686)
4,286
2,725
(10,249)
—
(514)
(4,015)
(878)
(84)
10,187
(6,941)
(1,166)
648
(28,127)
(37,014)
5,023
1,048
—
(25,808)
(52)
3,329
(4,204)
(16,349)
(51,594)
10
3,012
(1,808)
4,370
(7,462)
(3,308)
1,166
(1,162)
8,887
1,694
5,252
16,349
25,786
(62)
—
2,038
1,121
8,894
15,065
(4,994)
(1,374)
1,393
(61,464)
1,871
207
—
(40,402)
(31)
—
(6,053)
(1,999)
(8,978)
(4,878)
(1,947)
208
(745)
24,450
1,458
(4,411)
(16,349)
(11,192)
41
NET LOSS FROM CONTINUING OPERATIONS
(25,860)
(51,584)
25,724
(40,433)
(11,151)
Net earnings from discontinued operations, net of
income taxes
NET LOSS ATTRIBUTABLE TO ENSTAR GROUP
LIMITED
Dividends on preferred shares
NET LOSS ATTRIBUTABLE TO ENSTAR GROUP
LIMITED ORDINARY SHAREHOLDERS
Overall Results:
—
10,993
(10,993)
11,963
(970)
(25,860)
(12,133)
(40,591)
—
14,731
(12,133)
(28,470)
(12,121)
—
—
$
(37,993) $
(40,591) $
2,598
$
(28,470) $
(12,121)
Net losses were $38.0 million for 2018 and $40.6 million for 2017, a decrease in net losses of $2.6 million, which
primarily resulted from a loss on sale of our Laguna subsidiary of $16.3 million in 2017, a $8.9 million decrease in
corporate expenses, a $5.3 million increase in foreign exchange gains and a $4.4 million increase in underwriting
income, partially offset by a $12.1 million increase in dividends on preferred shares, an $11.0 million decrease in
income from discontinued operations and a $7.5 million decrease in net investment income.
Net losses were $40.6 million in 2017, compared to net losses of $28.5 million in 2016, an increase in net losses
of $12.1 million, primarily due to a loss on sale of subsidiary of $16.3 million in 2017, 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.
For 2018, 2017 and 2016, the contribution to net earnings from our Pavonia life and annuities business, classified
as discontinuing operations, was $nil, $11.0 million and $12.0 million, respectively. For further information refer to Note
5 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" in the notes to our consolidated financial
statements included within Item 8 of this Annual Report on Form 10-K.
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Investment results are separately discussed below in "Investments."
Underwriting Income:
2018 versus 2017: Underwriting income was $4.3 million in 2018, compared to an underwriting loss of $0.1
million in 2017, an increase of $4.4 million. Our other activities includes our remaining life business and other active
underwriting.
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.
Corporate Expenses:
2018 versus 2017: Corporate expenses were $28.1 million in 2018, compared to $37.0 million in 2017, a
decrease of $8.9 million, primarily due to a decrease in performance-based salary and benefits including stock
compensation expense.
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 was 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 caused by an increase in the share
price.
Interest Expense:
2018 versus 2017: Interest income was $5.0 million in 2018, reflected on the interest expense line, compared
to $3.3 million in 2017, a decrease of $1.7 million. This represents the elimination of interest expense between our
reportable segments.
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.
Net Foreign Exchange Gains (Losses):
2018 versus 2017: Net foreign exchange gains were $1.0 million in 2018, compared to net losses of $4.2 million
in 2017, a change of $5.3 million, which primarily resulted from foreign exchange losses in 2017 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.
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 in 2017 as described above.
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 2018, 2017 and 2016, the contribution to net earnings from our Pavonia life and annuities business, classified as
discontinued operations, was $nil, $11.0 million and $12.0 million, respectively.
For further information refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations"
in the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
Dividends on Preferred shares
In 2018, we issued $400.0 million of Series D Preferred Shares and $110.0 million of Series E Preferred Shares,
which have a 7% dividend. In 2018, we paid $12.1 million of dividends on our Series D Preferred Shares. No dividends
were paid on our Series E Preferred Shares during 2018.
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Table of Contents
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 $12.5 billion as at December 31, 2018 as compared to $10.1 billion as at December 31,
2017, an increase of 23.5%. The increase was primarily due to the investments and funds held balance acquired in
relation to the Maiden Re North America, Neon, Novae, Zurich Australia and Kayla Re transactions.
Schedules of maturities for our fixed maturity securities are included in Note 6 - "Investments" of our consolidated
financial statements included within Item 8 of this Annual Report on Form 10-K.
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 generally seek to maintain investment portfolios
that are shorter or of equivalent duration to 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, hedge funds, equity funds, CLO equities, CLO equity funds, real estate debt fund 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.
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."
In 2018, we increased our allocation to other investments and equity method investments, which collectively
constituted 17.2% of our investable assets as of December 31, 2018 (2017: 13.6%), and 55.2% of our total shareholders'
equity as of December 31, 2018 (2017: 43.9%). We believe our other investments and equity method investments
portfolio provides diversification against our fixed income investments and an opportunity for improved risk-adjusted
return, however, the returns of these investments may be more volatile and we may experience significant unrealized
gains or losses in a particular quarter or year.
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Table of Contents
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
and in order to meet our obligation to pay losses. Our remaining life business 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 change unexpectedly, 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 of December 31, 2018 and 2017:
2018
Non-life
Run-off
Atrium
StarStone
Other
Total
(in thousands of U.S. dollars)
Short-term investments, trading, at fair value
$
106,375
$
541
$
7,200
$
— $
114,116
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value
Funds held - directly managed
Equities, at fair value
Other investments, at fair value
Equity method investments
Total investments
Cash and cash equivalents (including restricted cash)
Funds held by reinsured companies
Total investable assets
Duration (in years) (1)
Average credit rating (2)
5,790,219
—
1,198,154
335,632
1,825,307
204,507
9,460,194
585,956
263,713
139,121
29,975
—
3,193
7,166
—
1,319,453
—
7,248,793
—
—
28,300
113,024
—
121,634
—
—
151,609
1,198,154
367,125
12,260
1,957,757
—
204,507
179,996
1,467,977
133,894
11,242,061
54,679
26,489
318,811
20,823
23,138
10,242
982,584
321,267
$ 10,309,863
$
261,164
$
1,807,611
$
167,274
$
12,545,912
5.41
A+
1.70
AA-
2.66
A+
5.70
AA-
4.86
A+
Short-term investments, trading, at fair value
$
165,388
$
2,452
$
12,371
$
— $
180,211
2017
Non-life
Run-off
Atrium
StarStone
Other
Total
(in thousands of U.S. dollars)
1,181,896
—
5,696,073
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value
Funds held - directly managed
Equities, at fair value
Other investments, at fair value
Other investments, at cost
Equity method investments
Total investments
Cash and cash equivalents (including restricted cash)
Funds held by reinsured companies
4,407,094
44
1,179,940
97,187
732,482
—
343,005
6,925,140
868,243
133,731
107,083
79,246
—
2,671
6,523
—
—
—
—
6,745
159,239
—
—
197,975
1,360,251
51,500
26,646
264,664
15,006
130,995
—
—
15,148
125,621
—
271,764
28,429
—
210,285
1,179,940
106,603
913,392
125,621
343,005
8,755,130
1,212,836
175,383
Total investable assets
Duration (in years) (1)
Average credit rating (2)
$
7,927,114
$
276,121
$
1,639,921
$
300,193
$
10,143,349
5.67
A+
1.86
AA-
2.33
A+
5.52
AA-
4.98
A+
(1) The duration calculation includes cash and cash equivalents, short-term investments, fixed maturities and the fixed maturities within our funds
held - directly managed portfolios at December 31, 2018 and 2017.
(2) The average credit ratings calculation includes cash and cash equivalents, short-term investments, fixed maturities and and the fixed maturities
within our funds held - directly managed portfolios at December 31, 2018 and 2017.
81
U.K. government
Other government
Corporate
Municipal
Residential mortgage-
backed
Commercial mortgage-
backed
Asset-backed
Total
Table of Contents
As at both December 31, 2018 and 2017, our investment portfolio, including funds held - directly managed had
an average credit quality rating of A+. As at December 31, 2018 and 2017, our fixed maturity investments (classified
as trading and available-for-sale and our fixed maturity investments included within funds held - directly managed)
that were non-investment grade (i.e. rated lower than BBB- and non-rated securities) comprised 3.8% and 5.6% of
our total fixed maturity investment portfolio, respectively. A detailed schedule of average credit ratings by asset class
as at December 31, 2018 is included in Note 6 - "Investments" 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, 2018 and 2017:
AAA
Rated
AA Rated
A Rated
2018
Fair Value
BBB
Rated
Non-
investment
Grade
Not Rated
Total
%
Fixed maturity and short-term investments, trading and available-for-sale and funds held - directly managed
(in thousands of U.S. dollars, except percentages)
U.S. government & agency
$ 502,819
$
7,426
$
— $
— $
510,245
— $
—
— $
—
69,601
154,800
2,144
322,606
129,059
298,487
213,639
470,571
2,306,532
1,731,398
7,934
69,270
41,666
11,395
—
32,592
197,822
—
4.5%
2.7%
7.1%
—
572
300,631
793,810
4,458
4,839,840
43.1%
—
130,265
1.2%
644,418
51,729
8,658
10,495
54,727
3,530
773,557
6.9%
487,054
358,574
70,620
68,174
77,538
125,644
60,879
66,136
7,297
17,573
9,675
380
713,063
636,481
6.3%
5.7%
2,454,608
1,249,916
2,629,639
2,035,103
310,011
18,615
8,697,892
77.5%
Other assets included within funds held - directly managed
14,780
0.1%
Equities
Publicly traded equities
Privately held equities
Total
Other investments
Hedge funds
Equity funds
Fixed income funds
Private equity funds
CLO equities
CLO equity funds
Private credit funds
Other
Total
Equity method investments
138,415
228,710
367,125
852,584
333,681
403,858
248,628
39,052
37,260
33,381
9,313
1.2%
2.0%
3.2%
7.6%
3.0%
3.6%
2.2%
0.3%
0.3%
0.3%
0.1%
1,957,757
17.4%
204,507
1.8%
Total investments
$ 2,454,608
$ 1,249,916
$ 2,629,639
$ 2,035,103
$
310,011
$
18,615
$11,242,061
100.0%
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AAA
Rated
AA Rated
A Rated
2017
Fair Value
BBB
Rated
Non-
investment
Grade
Not Rated
Total
%
Fixed maturity and short-term investments, trading and available-for-sale and funds held - directly managed
(in thousands of U.S. dollars, except percentages)
U.S. government & agency
$ 626,709
$
1,364
$
1,009
309,876
— $
—
— $
—
— $
— $ 628,073
—
6,641
—
—
310,885
384,610
7.2%
3.6%
4.4%
99,439
81,956
62,964
U.K. government
Other government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-
backed
Asset-backed
Total
133,610
130,813
26,313
195,825
425,264
366,633
400,670
2,169,888
1,279,171
188,237
4,892
4,173,671
47.6%
83,526
7,425
44,752
47,255
43,313
14,204
79,813
68,489
11,135
678
59,358
69,116
—
98,997
9,555
88,019
—
1,054
13,992
—
164,287
318,183
632,734
639,512
1.9%
3.6%
7.2%
7.3%
1,906,176
994,307
2,457,663
1,482,422
391,449
19,938
7,251,955
82.8%
Other assets included within funds held - directly managed
14,554
0.2%
Equities
Publicly traded equities
Privately held equities
Total
Other investments
Private equity funds
Equity funds
Fixed income funds
Hedge funds
CLO equities
CLO equity funds
Private credit funds
Other
Total
Other investments
Life settlements
Equity method investments
106,603
—
106,603
289,556
249,475
229,999
63,773
56,765
12,840
10,156
828
1.2%
—%
1.2%
3.3%
2.9%
2.6%
0.7%
0.7%
0.1%
0.1%
—%
913,392
10.4%
131,896
343,005
1.5%
3.9%
Total investments
$1,906,176
$ 994,307
$ 2,457,663
$ 1,482,422
$
391,449
$
19,938
$ 8,761,405
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 11 - "Fair Value
Measurements" of our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
83
Fair
Value
510,245
300,631
793,810
(7,644)
(26,065)
(191,373)
4,839,840
(3,157)
(4,746)
(18,782)
(7,169)
130,265
773,557
713,063
636,481
Fair
Value
628,073
310,885
384,610
(137)
(2,305)
(16,907)
4,173,671
(501)
(2,479)
(12,786)
(556)
164,287
318,183
632,734
639,512
Table of Contents
The following tables summarize the amortized cost, gross unrealized gains and losses and the fair value of our
short-term investments and fixed maturity investments, classified as trading and available-for-sale, and the fixed
maturity investments included within our funds held - directly managed as of December 31, 2018 and 2017:
U.S. government and agency
$
512,360
$
1,904
$
(4,019) $
Amortized
Cost
Gross
Unrealized
Gains
2018
Gross
Unrealized
Losses
Non-OTTI
U.K. government
Other government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
301,749
814,614
5,019,018
132,928
772,457
729,232
642,618
6,526
5,261
12,195
494
5,846
2,613
1,032
$
8,924,976
$
35,871
$
(262,955) $
8,697,892
U.S. government and agency
$
631,237
$
772
$
(3,936) $
Amortized
Cost
Gross
Unrealized
Gains
2017
Gross
Unrealized
Losses
Non-OTTI
U.K. government
Other government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
288,949
379,084
4,101,783
159,821
314,887
643,072
632,426
22,073
7,831
88,795
4,967
5,775
2,448
7,642
$
7,151,259
$
140,303
$
(39,607) $
7,251,955
We generally account for our fixed maturity securities as "trading", whereas other companies in our industry may
utilize "available-for-sale" accounting. The difference is that unrealized changes on investments classified as trading
are recorded through earnings, whereas unrealized changes on investments classified as available-for-sale are
recorded directly to shareholders' equity. We may experience further unrealized losses on our fixed maturity
investments, depending on investment conditions and general economic conditions. Unrealized amounts would only
become realized in the event of a sale of the specific securities prior to maturity or a credit default. For further information
on the sensitivity of our portfolio to changes in interest rates, refer to the Interest Rate Risk section within "Item 7A.
Quantitative and Qualitative Disclosures About Market Risk", included within this Annual Report on Form 10-K. For
further discussion of our investments, see "Investable Assets" below.
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Table of Contents
The following table summarizes the composition of our top ten corporate issuers included within our short-term
investments and fixed maturity investments, classified as trading and available-for-sale and the fixed maturity
investments included within our funds held - directly managed balance as at December 31, 2018:
JPMorgan Chase & Co
Apple Inc
Citigroup Inc
General Electric Co
Morgan Stanley
Wells Fargo & Co
Bank of America Corp
HSBC Holdings PLC
Anheuser-Busch InBev SA/NV
Comcast Corp
Eurozone Exposure
Fair Value
(in thousands of U.S.
dollars)
$
108,973
97,702
82,585
76,811
76,345
73,372
72,133
62,765
59,512
52,870
$
763,068
Average Credit
Rating
A
AA+
A-
BBB+
A-
A
A-
A
BBB+
A-
As at December 31, 2018 and 2017, we owned $68.3 million and $26.9 million, respectively, of investments in
fixed maturity securities issued by the sovereign governments of Italy, Ireland and Spain.
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Table of Contents
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.
The following table summarizes our consolidated investment results for the years ended December 31, 2018,
2017 and 2016.
Fixed maturity investments
$
189,000
$ 144,367
$
44,633
$ 114,885
$
29,482
2018
2017
Change
2016
Change
(in thousands of U.S. dollars, except percentages)
Short-term investments and cash and cash
equivalents
Funds held
Funds held – directly managed
12,117
10,041
37,623
9,314
601
32,479
Investment income from fixed maturities and
cash and cash equivalents
248,781
186,761
Equity investments
Other investments
Life settlements and other
Investment income from equities and other
investments
Gross investment income
Investment expenses
Net investment income
Net realized gains (losses) on fixed maturity
securities
Net realized investment losses on fixed maturity
securities in funds held - directly managed
portfolios
Net realized investment gains on equity
investments, trading
Total net realized gains (losses) on sale
Fixed maturity securities, trading
Fixed maturity securities in funds held - directly
managed portfolios
Equity investments, trading
Other investments
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
$
$
$
$
5,397
19,703
6,511
31,611
280,392
(9,721)
270,671
4,355
14,337
14,370
33,062
219,823
(11,034)
$ 208,789
$
2,803
9,440
5,144
62,020
1,042
5,366
(7,859)
(1,451)
60,569
1,313
61,882
4,491
22,583
5,769
147,728
4,874
22,515
18,191
45,580
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
2,954
$
$
(27,709)
$
5,186
$ (32,895)
$
2,232
(3,940)
(4,219)
279
(14,616)
10,397
4,016
(27,633)
(165,187)
(46,257)
(9,831)
(163,976)
(385,251)
(412,884)
701
1,668
35,878
3,315
(29,301)
(201,065)
5,348
(7,036)
36,314
33,902
(80,159)
(28,317)
16,498
102,388
188,666
$ 190,334
(26,329)
(266,364)
(573,917)
$ (603,218)
6,561
70,296
84,854
77,818
$
248,781
$ 186,761
$
62,020
$ 147,728
(4,647)
8,704
(436)
62,219
9,937
32,092
103,812
112,516
39,033
$
$
$ 9,498,578
$ 8,362,062
$1,136,516
$ 7,358,424
$ 1,003,638
2.62 %
2.23%
0.39 %
2.01%
0.22%
Financial Statement Portfolio Return
(142,213)
Total financial statement return
Average aggregate invested assets, at fair value (1) $11,206,825
Financial statement portfolio return
$
(1.27)%
$ 399,123
$ (541,336)
$ 263,281
$
135,842
$ 9,545,415
$1,661,410
$ 8,524,264
$ 1,021,151
4.18%
(5.45)%
3.09%
1.09%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
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Table of Contents
2018 versus 2017: Net investment income increased by $61.9 million during 2018, primarily due to a $62.0
million increase in net investment income from fixed maturities and cash and cash equivalents, principally driven by
an increase of $1.1 billion in our average balance of fixed maturities and cash and cash equivalents. The increase in
average balance of fixed maturities and cash and cash equivalents was primarily due to the transactions with Coca-
Cola, KaylaRe, Zurich, Neon and Novae. The book yield increased by 39 basis points primarily due to higher
reinvestment rates as a result of broad increases in effective yields.
Net realized and unrealized losses were $412.9 million in 2018, compared to net realized and unrealized gains
of $190.3 million in 2017, a decrease of $603.2 million. Included in net realized and unrealized gains (losses) are the
following items:
•
•
•
•
•
net realized losses on sale of investments of $27.6 million in 2018, compared to net realized gains of $1.7
million in 2017, a decrease of $29.3 million;
net unrealized losses on fixed maturity securities, trading of $165.2 million in 2018, compared to net unrealized
gains of $35.9 million in 2017, a decrease of $201.1 million, primarily driven by lower valuations due to increased
sovereign yields and widening of corporate credit spreads in the current period;
net unrealized losses on fixed maturities securities in funds held - directly managed portfolios of $46.3 million
in 2018, compared to net unrealized gains of $33.9 million in 2017, a decrease of $80.2 million, primarily driven
by lower valuations due to increased sovereign yields and widening of corporate credit spreads in the current
period.
net unrealized losses on equity investments, trading of $9.8 million in 2018, compared to net unrealized gains
of $16.5 million in 2017, a decrease of $26.3 million, primarily driven by unfavorable volatility in equity markets
in 2018; and
net unrealized losses on other investments of $164.0 million in 2018, compared to net unrealized gains of
$102.4 million in 2017, a decrease of $266.4 million. The decrease for 2018 primarily comprised unrealized
losses in our equity funds and hedge funds, principally driven by unfavorable volatility in the equity markets
in 2018. The unrealized gains in 2017 primarily comprised unrealized gains in our equity funds, fixed income
funds, hedge funds, private equities and CLO equities.
2017 versus 2016: Net investment income increased by $23.3 million during 2017, primarily due to a $39.0
million increase in net investment income from fixed maturities and cash and cash equivalents, principally driven by
an increase of $1.0 billion in our average balance of fixed maturities and cash and cash equivalents. The increase in
average balance of 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. Net investment
income from equities and other investments decreased by $12.5 million primarily due to a decrease in the income
received from CLO equities and private equity investments.
Net realized and unrealized gains were $190.3 million in 2017, compared to $77.8 million of net realized and
unrealized gains in 2016, an increase of $112.5 million. Included in net realized and unrealized gains and losses are
the following items:
•
•
•
•
•
net realized gains on sale of investments 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 2017,
offset by tightening credit spreads;
net unrealized gains on fixed maturities securities in funds held - directly managed portfolios of $33.9 million
in 2017, compared to an unrealized losses of $28.3 million in 2016, an increase of $62.2 million, primarily
driven by the impact of tightening credit spreads.
net unrealized gains on equity investments, 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; and
net unrealized gains on other investments of $102.4 million in 2017, compared to net unrealized gains on
other investments of $70.3 million in 2016, an increase of $32.1 million, primarily driven by higher returns in
87
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private equity and private equity funds, offset by lower returns on CLO equities, CLO equity funds, bond funds
and hedge funds.
Investment Results - By Segment
The following tables summarize our investment results by segment for the years ended December 31, 2018,
2017 and 2016. These tables have been prepared on a basis consistent with the consolidated table above.
Non-Life Run-off
Fixed maturity investments
$ 151,771
$ 113,206
$
38,565
$
88,580
$
24,626
2018
2017
Change
2016
Change
(in thousands of U.S. dollars, except percentages)
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 investments
Other investments
Other
Investment income from equities and other
investments
Gross investment income
Investment expenses
Net investment income
Net realized gains (losses) on fixed maturity
securities
Net realized investment losses on fixed maturity
securities in funds held - directly managed
portfolios
Net realized investment gains on equity
investments, trading
Total net realized gains (losses) on sale
Fixed maturity securities, trading
Fixed maturity securities in funds held - directly
managed portfolios
Equity investments, trading
Other investments
Total net unrealized gains (losses)
8,574
9,422
37,623
7,516
601
32,479
1,058
8,821
5,144
2,973
22,583
5,769
207,390
153,802
53,588
119,905
3,831
19,186
2,452
25,469
232,859
(6,572)
4,234
13,914
3,093
21,241
175,043
(8,365)
(403)
5,272
(641)
4,228
57,816
1,793
4,705
22,159
3,897
30,761
150,666
(5,429)
4,543
(21,982)
26,710
33,897
(471)
(8,245)
(804)
(9,520)
24,377
(2,936)
$ 226,287
$ 166,678
$
59,609
$ 145,237
$
21,441
$
(22,905)
$
7,631
$ (30,536)
$
(13)
$
7,644
(3,940)
(4,219)
279
(14,616)
10,397
3,272
(23,573)
(149,340)
(46,257)
(11,655)
(150,887)
(358,139)
659
4,071
2,613
(27,644)
28,857
(178,197)
33,902
15,171
97,544
175,474
(80,159)
(26,826)
(248,431)
(533,613)
4,871
(9,758)
36,599
(28,317)
6,063
73,098
87,443
(4,212)
13,829
(7,742)
62,219
9,108
24,446
88,031
Net realized and unrealized gains (losses)
$ (381,712)
$ 179,545
$ (561,257)
$
77,685
$
101,860
Investment Book Yield
Income from cash and fixed maturities
$ 207,390
$ 153,802
$
53,588
$ 119,905
$
33,897
Average aggregate fixed maturities and cash and
cash equivalents, at cost (1)
Investment book yield
$7,537,621
$ 6,449,143
$1,088,478
$ 5,370,302
$ 1,078,841
2.75 %
2.38%
0.37 %
2.23%
0.15%
Financial Statement Portfolio Return
$ (155,425)
Total financial statement return
Average aggregate invested assets, at fair value (1) $9,041,377
Financial statement portfolio return
(1.72)%
$ 346,223
$ (501,648)
$ 222,922
$
123,301
$ 7,315,153
$1,726,224
$ 6,279,130
$ 1,036,023
4.73%
(6.45)%
3.55%
1.18%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
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2018 versus 2017: Net investment income increased by $59.6 million during 2018, primarily due to a $53.6
million increase in net investment income from fixed maturities and cash and cash equivalents, principally driven by
an increase of $1.1 billion in our average balance of fixed maturities and cash and cash equivalents. The increase in
our average balance of fixed maturities and cash and cash equivalents was primarily due to the transactions with
Coca-Cola, KaylaRe, Zurich, Neon and Novae. The book yield increased by 37 basis points primarily due to higher
reinvestment rates as a result of broad increases in effective yields.
Net realized and unrealized losses were $381.7 million in 2018, compared to net realized and unrealized gains
of $179.5 million in 2017, a decrease of $561.3 million. Included in net realized and unrealized gains (losses) are the
following items:
•
•
•
•
•
net realized losses on sale of investments of $23.6 million in 2018, compared to net realized gains of $4.1
million in 2017, a decrease of $27.6 million;
net unrealized losses on fixed maturity securities, trading of $149.3 million in 2018, compared to net unrealized
gains of $28.9 million in 2017, a decrease of $178.2 million, primarily driven by lower valuations due to increased
sovereign yields and widening of corporate credit spreads in the current period;
net unrealized losses on fixed maturities securities in funds held - directly managed portfolios of $46.3 million
in 2018, compared to unrealized gains of $33.9 million in 2017, representing a decrease of $80.2 million,
primarily driven by lower valuations due to increased sovereign yields and widening of corporate credit spreads
in the current period.
net unrealized losses on equity investments, trading of $11.7 million in 2018, compared to net unrealized gains
of $15.2 million in 2017, a decrease of $26.8 million, primarily driven by unfavorable volatility in the equity
markets in 2018; and
net unrealized losses on other investments of $150.9 million in 2018, compared to net unrealized gains of
$97.5 million in 2017, a decrease of $248.4 million. The decrease for 2018 was primarily comprised of unrealized
losses in our equity funds and hedge funds, principally due to the poor performance of the equity markets in
2018 The unrealized gains in 2017 primarily comprised unrealized gains in our equity funds, fixed income
funds, hedge funds, private equities and CLO equities.
2017 versus 2016: Net investment income increased by $21.4 million during 2017, primarily due to a $33.9
million increase in net investment income from fixed maturities and cash and cash equivalents, principally driven by
an increase of $1.1 billion in our average balance of fixed maturities and cash and cash equivalents. The increase in
our average balance of fixed maturities and cash and cash equivalents was primarily due to the transactions with QBE
and RSA. The book yield increased by 15 basis points due to higher reinvestment rates. 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.
Net realized and unrealized gains were $179.5 million in 2017, compared to net realized and unrealized gains
of $77.7 million in 2016, an increase of $101.9 million. Included in net realized and unrealized gains (losses) are the
following:
•
•
•
•
•
net realized gains on sale of investments of $4.1 million in 2017, compared to net realized losses of $9.8 million
in 2016, a change 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 driven by increased treasury yields in 2017,
offset by tightening credit spreads;
net unrealized gains on fixed maturities securities in funds held - directly managed portfolios of $33.9 million
in 2017, compared to net unrealized losses of $28.3 million in 2016, representing an increase of $62.2 million,
primarily driven by the impact of tighter credit spreads.
net unrealized gains on equity investments, 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; and
net unrealized gains on other investments of $97.5 million in 2017, compared to net unrealized gains of $73.1
million in 2016, an increase of $24.4 million, primarily driven by higher returns in the private equity funds offset
by lower returns on CLO equities, CLO equity funds, bond funds and hedge funds.
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Table of Contents
Atrium
Fixed maturity investments
$
4,052
$
2,901
$
1,151
$
2,645
$
256
2018
2017
Change
2016
Change
(in thousands of U.S. dollars, except percentages)
Short-term investments and cash and cash
equivalents
Funds held
Investment income from fixed maturities and
cash and cash equivalents
Equity investments
Other
Investment income from equities and other
investments
Gross investment income
Investment expenses
Net investment income
Net realized gains (losses) on fixed maturity
securities
Net realized investment gains on equity
investments, trading
Total net realized gains (losses) on sale
Fixed maturity securities, trading
Equity investments, trading
Other investments
Total net unrealized gains (losses)
$
$
550
619
5,221
55
684
739
5,960
(274)
394
—
3,295
27
1,155
1,182
4,477
(259)
156
619
1,926
28
(471)
(443)
1,483
(15)
652
—
3,297
—
(171)
(171)
3,126
(186)
(258)
—
(2)
27
1,326
1,353
1,351
(73)
5,686
$
4,218
$
1,468
$
2,940
$
1,278
(485)
$
(118)
$
(367)
$
131
$
(249)
226
(259)
(2,029)
(380)
(583)
(2,992)
17
(101)
(90)
317
991
1,218
1,117
209
(158)
(1,939)
(697)
(1,574)
(4,210)
—
131
(732)
—
—
(732)
$
(4,368)
$
(601)
$
17
(232)
642
317
991
1,950
1,718
Net realized and unrealized gains (losses)
$
(3,251)
$
Investment Book Yield
Income from cash and fixed maturities
$
5,221
$
3,295
Average aggregate fixed maturities and cash and
cash equivalents, at cost (1)
Investment book yield
$ 265,238
$ 263,275
1.97%
1.25%
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value(1)
$
2,435
$
5,335
$ 272,386
$ 269,225
$
$
$
$
1,926
$
3,297
1,963
$ 308,235
0.72 %
1.07%
(2,900)
$
2,339
3,161
$ 304,561
$
$
$
$
(2)
(44,960)
0.18%
2,996
(35,336)
Financial statement portfolio return
0.89%
1.98%
(1.09)%
0.77%
1.21%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2018 versus 2017: Net investment income increased by $1.5 million during 2018, primarily due to a $1.9 million
increase in net investment income from fixed maturities and cash and cash equivalents. The book yield increased by
72 basis points, primarily due to higher reinvestment rates as a result of broad increases in effective yields and also
asset allocation strategies. Net realized and unrealized gains (losses) decreased by $4.4 million, primarily driven by
lower valuations due to increased sovereign yields and widening of corporate credit spreads in the current period and
lower returns in other investments and equities.
2017 versus 2016: Net investment income increased by $1.3 million during 2017. The book yield increased by
18 basis points, primarily driven by higher reinvestments and an increase in duration. Net realized and unrealized
gains (losses) increased by $1.7 million driven by the impact of tightening credit spreads and increased returns in
other investments and equities.
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StarStone
2018
2017
Change
2016
Change
(in thousands of U.S. dollars, except percentages)
Fixed maturity investments
$
31,780
$
26,640
$
5,140
$
21,790
$
4,850
Short-term investments and cash and cash
equivalents
Investment income from fixed maturities and
cash and cash equivalents
Equity investments
Other
Investment income from equities and other
investments
Gross investment income
Investment expenses
Net investment income
2,839
1,280
34,619
1,511
2,522
4,033
38,652
(2,679)
27,920
94
1,865
1,959
29,879
(2,173)
1,559
6,699
1,417
657
2,074
8,773
(506)
689
591
22,479
169
1,528
1,697
24,176
(1,955)
5,441
(75)
337
262
5,703
(218)
$
35,973
$
27,706
$
8,267
$
22,221
$
5,485
Net realized gains (losses) on fixed maturity
securities
Net realized investment gains on equity
investments, trading
Total net realized gains (losses) on sale
Fixed maturity securities, trading
Equity investments, trading
Other investments
Total net unrealized gains (losses)
$
(4,325)
$
(2,687)
$
(1,638)
$
1,409
$
(4,096)
518
(3,807)
(13,818)
2,204
(2,251)
(13,865)
24
(2,663)
7,227
1,010
11,039
19,276
494
(1,144)
(21,045)
1,194
(13,290)
(33,141)
477
1,886
835
498
2,509
3,842
5,728
Net realized and unrealized gains (losses)
$ (17,672)
$
16,613
$ (34,285)
$
Investment Book Yield
Income from cash and fixed maturities
$
34,619
$
27,920
Average aggregate fixed maturities and cash and
cash equivalents, at cost (1)
$1,535,360
$ 1,482,437
$
$
6,699
$
22,479
52,923
$ 1,484,121
Investment book yield
2.25%
1.88%
0.37 %
1.51%
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value(1)
$
18,301
$
44,319
$ (26,018)
$
27,949
$1,670,240
$ 1,650,429
$
19,811
$ 1,609,747
(453)
(4,549)
6,392
512
8,530
15,434
$
10,885
$
$
$
$
5,441
(1,684)
0.37%
16,370
40,682
Financial statement portfolio return
1.10%
2.69%
(1.59)%
1.74%
0.95%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2018 versus 2017: Net investment income increased by $8.3 million during 2018, primarily due to a $6.7 million
increase in net investment income from fixed maturities and cash and cash equivalents, principally driven by $52.9
million increase in our average balance of fixed maturities and cash and cash equivalents. The book yield increased
by 37 basis points due to higher reinvestment rates as a result of broad increases in effective yields.
The decrease in net realized and unrealized gains (losses) of $34.3 million primarily comprised:
•
•
net realized losses on sale of investments of $3.8 million in 2018, compared to net realized losses of $2.7
million in 2017, an increase of $1.1 million;
net unrealized losses on fixed maturity securities, trading of $13.8 million in 2018 compared to net unrealized
gains of $7.2 million in 2017, a decrease of $21.0 million, primarily driven by lower valuations due to increased
sovereign yields and widening of corporate credit spreads in the current period;
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•
net unrealized losses on other investments of $2.3 million in 2018, compared to net unrealized gains of $11.0
million, a decrease of $13.3 million. The decrease was due to lower returns on private equities, equity fund
and hedge funds, partially offset by higher returns on bond funds.
2017 versus 2016: Net investment income increased by $5.5 million during 2017, primarily due to a $5.4 million
increase in net investment income from fixed maturities and cash and cash equivalents. The book yield increased by
37 basis points primarily due to higher reinvestment rates and increase in duration. Net realized and unrealized gains
increased by $10.9 million primarily due 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 on
fixed maturity investments was primarily due to the tightening credit spreads, partially offset by an increase in yields.
The increase in net unrealized gains on other investments was primarily due to higher returns on private equity and
bond funds.
Other Activities
2018
2017
Change
2016
Change
(in thousands of U.S. dollars, except percentages)
Net investment income
Net realized and unrealized losses
$
2,725
$ (10,249)
$
$
10,187
(6,941)
$
$
(7,462)
(3,308)
$
$
15,065
(4,994)
Financial Statement Portfolio Return
Total financial statement return
Average aggregate invested assets, at fair value (1)
$
(7,524)
$
3,246
$ (10,770)
$
10,071
$ 222,822
$ 310,608
$ (87,786)
$ 330,826
$
$
$
$
(4,878)
(1,947)
(6,825)
(20,218)
Financial statement portfolio return
(3.38)%
1.05%
(4.43)%
3.04%
(1.99)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2018 versus 2017: Net investment income decreased by $7.5 million during 2018 primarily due to a decrease
in the income from life settlements. Net realized and unrealized losses increased by $3.3 million, primarily due to higher
impairments on the life settlement portfolio in 2018 compared to 2017.
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 losses increased by $1.9 million, primarily due to higher
impairments on the life settlement portfolio in 2017 compared to 2016.
Liquidity and Capital Resources
Overview
We aim 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, 2018 included ordinary shareholders' equity of $3.4 billion, preferred
equity of $510.0 million, redeemable noncontrolling interest of $458.5 million classified as temporary equity, and debt
obligations of $861.5 million. The redeemable noncontrolling interest may be settled in the future in cash or our 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.
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The following table details our capital position as at December 31, 2018 and 2017:
Ordinary shareholders' equity
Series D and E Preferred Shares
Total Enstar Group Limited Shareholders' Equity (A)
Noncontrolling interest
Total Shareholders' Equity (B)
Senior Notes
Revolving credit facility
2018 EGL Term Loan Facility
2016 EGL Term Loan Facility
Total debt (C)
2018
2017
Change
(in thousands of U.S. dollars)
$
3,391,933
$
3,136,684
$
510,000
3,901,933
12,056
3,913,989
348,054
15,000
498,485
—
861,539
—
3,136,684
9,264
3,145,948
347,516
225,110
—
74,063
646,689
255,249
510,000
765,249
2,792
768,041
538
(210,110)
498,485
(74,063)
214,850
Redeemable noncontrolling interest (D)
458,543
479,606
(21,063)
Total capitalization = (B) + (C) + (D)
Total capitalization attributable to Enstar = (A) + (C)
$
$
5,234,071
4,763,472
$
$
4,272,243
3,783,373
$
$
961,828
980,099
Debt to total capitalization
Debt and Series D and E Preferred Shares to total
capitalization
Debt to total capitalization attributable to Enstar
Debt and Series D and E Preferred Shares to total
capitalization attributable to Enstar
16.5%
26.2%
18.1%
28.8%
15.1%
15.1%
17.1%
17.1%
1.4%
11.1%
1.0%
11.7%
As of December 31, 2018, we had $602.1 million of cash and cash equivalents, excluding restricted cash that
supports insurance operations, and included in this amount was $445.5 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, 2018 for any
material withholding taxes on dividends or other distributions, as described in Note 20 - "Income 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 on our ordinary shares. 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.
On June 28, 2018, we issued 16,000 Series D Preferred Shares with an aggregate liquidation value of $400.0
million. On November 21, 2018, we issued 4,400 Series E Preferred Shares with an aggregate liquidation value of
$110.0 million. The dividends on the Series D and E Preferred Shares are non-cumulative and may be paid quarterly
in arrears on the first day of March, June, September and December of each year, only when, as and if declared.
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The following table details the dividends that have been declared and paid on our Series D and E Preferred
Shares from January 1, 2018 to March 1, 2019:
Preferred
Share Series Date Declared Record Date Date Payable
Dividend per:
Preferred
Share
Depositary
Share
(in U.S. dollars)
Total Dividends
Paid in 2018
(in thousands of
U.S. dollars)
Series D
Series D
Series D
Series E
July 31,
2018
November 6,
2018
February 21,
2019
February 21,
2019
August 15,
2018
September 1,
2018
November 15,
2018
December 1,
2018
February 15,
2019
February 15,
2019
March 1,
2019
March 1,
2019
$
$
$
$
320.83 $ 0.32083 $
437.50 $ 0.43750
437.50 $ 0.43750
486.11 $ 0.48611
5,133
7,000
—
—
$
12,133
Any payment of common or preferred dividends must be approved by our Board of Directors. Our ability to pay
common and preferred 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
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 2018, we entered into a new unsecured term loan facility 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 debt obligations including 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, 2018, 2017 and 2016" 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
U.S. Securities and Exchange Commission ("SEC") to allow us to conduct future offerings of debt, equity and other
securities, if desired.
On June 28, 2018, we issued 16,000 Series D Preferred Shares with an aggregate liquidation value of $400.0
million. The net proceeds from the Series D Preferred Shares were used to repay a portion of amounts outstanding
under our revolving credit facility, and fully repay our previous term loan facility. On November 21, 2018, we issued
4,400 Series E Preferred Shares with an aggregate liquidation value of $110.0 million. The net proceeds from the
Series E Preferred Shares were used to fund our new business in Non-life Run-off operations.
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.
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Operating Company Liquidity
The ability of our insurance and reinsurance subsidiaries 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, 2018, 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 2018, 2017 and 2016, our regulated subsidiaries paid aggregate capital distributions and
dividends of $243.0 million, $580.3 million and $517.1 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.
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.
Cash Flows
The following table summarizes our consolidated cash flows, including those related to restricted cash, from
operating, investing and financing activities for the years ended December 31, 2018, 2017 and 2016:
Cash provided by (used in):
2018
2017
Change
(in thousands of U.S. dollars)
2016
Change
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash
equivalents
$ (160,072) $ (343,107) $
183,035
$ (202,689) $ (140,418)
(825,754)
293,262
(1,119,016)
156,709
136,553
752,986
(65,476)
818,462
83,441
(148,917)
2,588
9,512
(6,924)
(13,985)
23,497
(230,252)
(105,809)
(124,443)
23,476
(129,285)
Cash and cash equivalents, beginning of year
1,212,836
1,318,645
(105,809)
1,295,169
23,476
Cash and cash equivalents, end of year
$
982,584
$ 1,212,836
$ (230,252) $ 1,318,645
$ (105,809)
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, 2018, 2017 and 2016."
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2018 versus 2017: Cash used in operating activities was $160.1 million for the year ended December 31, 2018
compared to $343.1 million for the year ended December 31, 2017. 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, 2018 and 2017 of
$838.8 million and $581.7 million, respectively; partially offset by (ii) cash and restricted cash acquired in Non-life Run-
off reinsurance transactions for the years ended December 31, 2018 and 2017 of $652.0 million and $428.6 million,
respectively. In addition, we are also continuously seeking to deploy surplus operating cash into our investing activities.
Cash used in investing activities for 2018 primarily related to net purchases of other investments of $464.7 million
and cash and total acquisitions net of cash acquired of $245.2 million, principally related to the Maiden Re North
America transaction. In 2017, cash provided by investing activities was primarily due to $126.6 million from the sale
of a subsidiary and net redemptions of other investments of $122.9 million.
Cash provided by financing activities for 2018 of $753.0 million primarily related to the net proceeds of $495.4
million from the issuance of the Series D and E Preferred Shares, net inflows of $218.2 million from our credit facilities,
which were principally used to fund new business and acquisitions, and $55.4 million of inflows in respect of contributions
by noncontrolling interests. Cash used in financing activities for 2017 of $65.5 million primarily related to net repayments
of $38.0 million from our credit facilities, consisting of the repayment of the Sussex Facility in full and 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.
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 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 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 of $293.3 million primarily related to net cash provided by sale of
subsidiaries of $126.6 million and net cash used in acquisitions of $4.2 million, compared to net cash used in acquisitions
of $18.5 million in 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 repayments of $38.0 million from our credit
facilities, consisting of the repayment of the Sussex Facility in full and 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 borowings of $77.8 million from our credit facilities
primarily utilized to finance acquisitions and significant new business.
Investable Assets
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and
cash equivalents and funds held. Investable assets were $12.5 billion as at December 31, 2018 as compared to $10.1
billion as at December 31, 2017, an increase of 23.5%. The increase was primarily due to the investments and funds
held balance acquired in relation to the Maiden Re North America, Neon, Novae, Zurich Australia and Kayla Re
transactions.
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".
Included within our investable assets we had funds held - directly managed as of December 31, 2018 and 2017,
of $1,198.2 million and $1,179.9 million, respectively. Our funds held - directly managed is carried on our consolidated
balance sheets at fair value. For further information regarding our funds held - directly managed, refer to Note 6 -
"Investments" 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, 2018 and 2017, we had funds held by ceding companies of $321.3 million and
$175.4 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.
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Reinsurance Balances Recoverable on Paid and Unpaid Losses
As at December 31, 2018 and 2017, we had reinsurance balances recoverable on paid and unpaid losses of
$2,029.7 million and $2,021.0 million, respectively. The increase is primarily related to the transactions with Maiden
Re North America, Novae and Neon, partially offset by the acquisition of KaylaRe.
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 on paid and unpaid losses, refer to Note
8 - "Reinsurance Balances Recoverable on Paid and Unpaid Losses" in the notes to our consolidated financial
statements included within Item 8 of this Annual Report on Form 10-K.
Debt Obligations
We utilize debt financing and loan facilities primarily for acquisitions and significant new business, and, from
time to time, for general corporate purposes. For information regarding our debt arrangements, including our loan
covenants, refer to Note 15 - "Debt Obligations and Credit Facilities" in the notes to our consolidated financial statements
included within Item 8 of this Annual Report on Form 10-K. Our debt obligations as of December 31, 2018 and 2017
were $861.5 million and $646.7 million, respectively, as detailed in the below table:
Facility
Senior Notes
EGL Revolving Credit Facility
Origination Date
March 10, 2017
August 16, 2018
Previous EGL Revolving Credit Facility
September 16, 2014
2018 EGL Term Loan Facility
2016 EGL Term Loan Facility
Total debt obligations
December 27, 2018
November 18, 2016
Term
5 years
5 years
5 years
3 years
3 years
2018
2017
$
348,054 $
347,516
15,000
—
498,485
—
$
861,539 $
—
225,110
—
74,063
646,689
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 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.
On August 16, 2018, we and certain of our subsidiaries, as borrowers and guarantors, entered into a new five-
year unsecured $600.0 million revolving credit agreement. The credit agreement expires in August 2023 and we have
the option to increase the commitments under the facility by up to an aggregate of $400.0 million, subject to the terms
of the agreement. Borrowings under the facility will bear interest at a rate based on the Company's long term senior
unsecured debt ratings. In connection with our entry into the credit agreement described above, we terminated and
fully repaid our previous revolving credit agreement.
As at December 31, 2018, we were permitted to borrow up to an aggregate of $600.0 million under the facility.
As at December 31, 2018, there was $585.0 million of available unutilized capacity under this facility. We are in
compliance with the covenants of the facility. Subsequent to December 31, 2018, we utilized $173.0 million and repaid
$46.0 million, bringing the unutilized capacity under this facility to $458.0 million.
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On December 27, 2018, we entered into and fully utilized a three-year $500.0 million unsecured term loan (the
"2018 EGL Term Loan Facility"). Interest is payable at least every three months at the London Interbank Offered Rate
("LIBOR") or the alternate base rate ("ABR") plus a margin set forth in the agreement. In the event of default, the
interest rate may increase and the agent may, and at the request of the required lenders shall, cancel lender
commitments and demand early repayment. The proceeds were partially used to fund the acquisition of Maiden Re
North America. We also previously had an unsecured term loan (the "2016 EGL Term Loan Facility") with outstanding
principal of $74.1 million as of December 31, 2017. This previous facility was fully repaid and terminated during 2018.
Financial and business covenants imposed on us, in relation to our revolving credit facility and our term loan
credit facility 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 net worth of not less than the aggregate of (i) $2.3 billion, (ii) 50% of net income available
for distribution to the Company's ordinary shareholders at any time after August 16, 2018, and (iii) 50% of the proceeds
of any common stock issuance made after August 16, 2018. In addition, we must maintain eligible capital in excess
of the enhanced capital requirement imposed on us by the Bermuda Monetary Authority pursuant to the Insurance
(Group Supervision) Rules 2011 of Bermuda. We are in compliance with these covenants.
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Contractual Obligations
The following table summarizes, as of December 31, 2018, 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.
Total
Less than
1 Year
1 - 3
years
3 - 5
years
6 - 10
years
More than
10 Years
(in millions of U.S. dollars)
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
Motor
Property
Other
$ 1,617.0 $
222.7
879.5
2,286.8
374.7
120.0
820.5
886.3
205.9
386.1
97.8 $
180.4 $
168.1 $
300.5 $
870.2
20.4
201.4
257.3
106.7
26.4
190.9
314.5
97.1
101.1
37.8
254.8
370.2
115.1
40.9
258.1
258.7
59.6
102.3
33.4
143.9
283.0
49.8
24.9
147.0
102.2
21.6
53.8
52.8
135.0
411.0
51.6
18.8
131.3
83.1
15.5
58.5
78.3
144.4
965.3
51.5
9.0
93.2
127.8
12.1
70.4
Total Non-Life Run-off
7,799.5
1,413.6
1,677.9
1,027.7
1,258.1
2,422.2
Atrium
StarStone
Other
ULAE
235.4
1,584.1
18.9
360.9
96.7
567.7
3.0
65.1
85.0
567.3
7.5
80.9
32.5
228.3
3.6
49.0
17.8
158.7
3.2
58.6
3.4
62.1
1.6
107.3
Estimated gross reserves for losses and
LAE (1)
9,998.8
2,146.1
2,418.6
1,341.1
1,496.4
2,596.6
121.0
65.4
6.0
9.5
11.5
20.5
11.8
14.1
28.7
19.2
63.0
2.1
Policy benefits for life and annuity
contracts (2)
Operating lease obligations
Investing Activities
Investment commitments to private
equity funds
Investment commitments to equity
method investments
Financing Activities
228.2
107.4
103.9
16.9
167.2
167.2
—
—
—
—
—
—
—
—
Loan repayments (including estimated
interest payments)
996.3
40.0
579.6
376.7
Total
$11,576.9 $ 2,476.2 $ 3,134.1 $ 1,760.6 $ 1,544.3 $ 2,661.7
(1) 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, 2018 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, 2018 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.
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(2) Policy benefits for life and annuity contracts recorded in our audited consolidated balance sheet as at December 31, 2018 of $105.1 million are
computed on a discounted basis, whereas the expected payments by period in the table above are the estimated payments at a future time and
do not reflect a discount of the amount payable.
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, 2018, 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.
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Losses and Loss Adjustment Expenses - Non-Life Run-off
The following tables provides a breakdown of gross and net losses and LAE reserves, consisting of Outstanding
Loss Reserve ("OLR") and IBNR by line of business and adjustments for fair value resulting from business combinations,
adjustments for where we elected the fair value option, deferred charge assets and ULAE, as of December 31, 2018
and 2017:
Workers' compensation/personal accident
1,454,178
832,615
2,286,793
1,115,116
Asbestos
Environmental
General casualty
Marine, aviation and transit
Construction defect
Professional indemnity/Directors & Officers
Motor
Property
Other
Fair value adjustments
Fair value adjustments - fair value option
Deferred charge assets on retroactive
reinsurance
ULAE
Total
OLR
Gross
IBNR
2018
Total
OLR
(in thousands of U.S. dollars)
Net
IBNR
Total
$
341,544
$ 1,275,476
$ 1,617,020
$
321,356
$ 1,171,754
$ 1,493,110
96,665
500,033
126,035
379,484
222,700
879,517
93,095
416,097
301,783
20,712
603,665
564,307
168,267
220,615
72,888
99,288
216,839
321,992
37,631
165,519
374,671
120,000
820,504
886,299
205,898
386,134
227,994
19,310
426,020
414,847
160,873
175,289
117,384
298,612
537,782
78,023
94,736
166,898
304,874
36,817
111,453
210,479
714,709
1,652,898
306,017
114,046
592,918
719,721
197,690
286,742
$
4,271,769
$ 3,527,767
$ 7,799,536
$ 3,369,997
$ 2,918,333
$ 6,288,330
(217,527)
(374,752)
—
333,405
$ 7,540,662
2017
OLR
Gross
IBNR
Total
OLR
(in thousands of U.S. dollars)
(203,183)
(244,013)
(86,585)
333,405
$ 6,087,954
Net
IBNR
Total
$ 1,337,467
93,345
$ 1,678,822
184,394
$
366,446
95,801
344,425
1,458,430
109,102
28,701
214,803
242,213
65,445
260,337
$
3,185,703
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Professional indemnity/Directors & Officers
Motor
Property
Other
Fair value adjustments
Fair value adjustments - fair value option
Deferred charge assets on retroactive
reinsurance
ULAE
Total
$ 1,434,598
95,259
$ 1,801,044
191,060
$
266,526
748,949
56,284
135,608
40,265
30,734
9,706
85,998
$ 2,903,927
610,951
2,207,379
165,386
164,309
255,068
272,947
75,151
346,335
$ 6,089,630
(125,998)
(314,748)
—
300,588
$ 5,949,472
341,355
91,049
276,791
889,265
90,101
27,406
181,027
98,866
52,236
194,747
371,161
51,904
122,307
39,591
19,321
8,554
205,322
$ 2,253,418
75,376
$ 2,313,773
471,538
1,260,426
142,005
149,713
220,618
118,187
60,790
280,698
$ 4,567,191
(113,028)
(182,764)
(80,192)
300,588
$ 4,491,795
As of December 31, 2018 and 2017, the IBNR reserves (net of reinsurance balances receivable) accounted for
$2,918.3 million, or 46.4%, and $2,313.8 million, or 50.7%, respectively, of our total Non-life Run-off net losses and
LAE, excluding the fair value adjustments, deferred charge assets and ULAE.
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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 acquired value, resulting in reductions in ultimate losses and
LAE liabilities. There can be no assurance, however, that we will successfully implement our strategy.
Commutations of blocks of policies, along with disciplined claims management, have the potential to produce
favorable claims development compared to established reserves. For each newly-acquired company, we determine
a commutation strategy that broadly identifies commutation targets using the following criteria:
•
•
•
•
•
previous commutations completed by existing portfolio companies with policyholders of the newly-acquired
company;
nature of liabilities;
size of incurred loss reserves;
recent loss development history; and
targets for claims audits.
Once commutation targets are identified, they are prioritized into target years of completion. At the beginning of
each year, the approach to commutation negotiations is determined by the commutation team, including claims and
exposure analysis and broker account reconciliations. On completion of this analysis, settlement parameters are set
around incurred liabilities. Commutation discussions can take many months or even years to come to fruition.
Commutation targets not completed in a particular year are re-prioritized for the following year.
Every commutation, irrespective of value, requires the approval of our senior management. The impact of the
commutation activity on the IBNR reserve is reflected as part of our annual actuarial reviews of reserves. However, if
a significant commutation is completed during the year, loss reserves will be adjusted in the corresponding quarter to
reflect management’s then best estimate of the impact on remaining IBNR reserves.
Commutations provide an opportunity for us to exit exposures to entire policies with insureds and reinsureds for
an agreed upon payment, or payments, often at a discount to the previously estimated ultimate liability. As a result of
exiting all exposures to such policies, all advised case reserves and IBNR reserves relating to the insured or reinsured
are eliminated. A commutation is recognized upon the execution of a commutation release agreement. Following
completion of a commutation, all the related balances, including insurance and reinsurance balances payable and/or
receivable, funds held by ceding companies, and losses and LAE (including fair value adjustments and estimated
IBNR), are written off with corresponding gain or loss recorded in the net reduction of ultimate losses. A commutation
may result in a net gain irrespective of whether the settlement exceeds the advised case reserves. Advised case
reserves are those reserve estimates for a specific loss or losses reported by either the broker or insured or reinsured.
IBNR reserves are established at a class of business level. A commutation settlement is a negotiated settlement
of both the advised case reserves and an estimate of the IBNR reserves that relate to the policies being commuted.
For latent exposures with a long reporting tail, the estimated level of IBNR reserves may be significantly higher
than the advised case reserves. In such an instance, the commutation settlement of a block of such policies may be
greater than the advised case reserves but less than the aggregate of the advised case reserves plus the estimated
related IBNR reserves, resulting in a total saving 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.
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To the extent that commuted policies are protected by reinsurance, then we will, on completion of a commutation
with an insured or reinsured, negotiate with the reinsurers to contribute their share of the commutation settlement. Any
amounts received from such reinsurers will be recorded in net losses paid and the impact of any savings or loss on
reinsurance recoverable on unpaid losses will be included in the actuarial reassessment of net ultimate liabilities.
Annual Losses and Loss Adjustment Reviews
Because a significant amount of time can lapse between the assumption of risk, the occurrence of a loss event,
the reporting of the event to an insurance or reinsurance company and the ultimate payment of the claim on the loss
event, the liability for unpaid losses and LAE is based largely upon estimates. On a quarterly basis, our management
must use considerable judgment in the process of developing these estimates. Management reviews the actual loss
development in the quarter and receives input from the actuarial, claims and legal staff on the drivers of any favorable
or unfavorable loss emergence. The liability for unpaid losses and LAE for property and casualty business includes
amounts determined from loss reports on individual cases and amounts for IBNR reserves.
Loss advices or reports from ceding companies are generally provided via the placing broker and comprise
treaty statements, individual claims files, electronic messages and large loss advices or cash calls.
•
Large loss advices and cash calls are provided to us as soon as practicable after an individual loss or claim
is made or settled by the insured.
• The remaining broker advices are issued monthly, quarterly or annually depending on the provisions of the
individual policies or the ceding company’s practice.
• For certain direct insurance policies where the claims are managed by Third Party Administrators (TPAs) and
Managing General Agents (MGAs), loss bordereaux are received either monthly or quarterly depending on
the arrangement with the TPA and MGA. Loss advices for direct insurance policies may be received from the
broker, agent or directly from the insured.
Where we provide reinsurance or retrocession reinsurance protection, the process of claims advice from the
direct insurer to the reinsurers and/or retrocessionaires naturally involves more levels of communication, which
inevitably creates delays or lags in the receipt of loss advice by the reinsurers/retrocessionaires relative to the date of
first advice to the direct insurer. Certain types of exposure, typically latent health exposures such as asbestos-related
claims, have inherently long reporting delays, in some cases many years, from the date a loss occurred to the
manifestation and reporting of a claim and ultimately until the final settlement of the claim.
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.
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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. Net loss reserves,
excluding the fair value adjustments, deferred charge assets and ULAE, for our non-life run-off subsidiaries relate
primarily to casualty exposures, including latent claims, of which 27.1% in 2018 (2017: 40.8%) 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.
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.
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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, 2018.
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, 2018 and December 31, 2017 is presented in the following table
("Range of Outcomes"):
Asbestos
Environmental
General casualty
2018
2017
Low
Selected
High
Low
Selected
High
(in thousands of U.S. dollars)
$ 1,384,890
$ 1,617,020
$ 1,931,409
$ 1,554,713
$ 1,801,044
$ 2,043,180
184,749
803,851
222,700
879,517
267,159
976,457
170,461
539,506
191,060
610,951
217,643
680,562
Workers' compensation/personal accident
2,063,005
2,286,793
2,577,116
1,973,167
2,207,379
2,434,441
Marine, aviation and transit
Construction defect
Professional indemnity/Directors &
Officers
Motor
Property
Other
338,318
107,126
758,021
806,731
192,869
346,674
374,671
120,000
820,504
886,299
205,898
386,134
419,911
139,129
910,718
951,734
225,013
428,904
140,610
148,939
230,967
242,691
66,697
300,281
165,386
164,309
255,068
272,947
75,151
346,335
185,772
181,609
280,755
299,937
83,403
385,967
6,986,234
7,799,536
8,827,550
5,368,032
6,089,630
6,793,269
Fair value adjustments
(198,969)
(217,527)
(239,227)
(108,145)
(125,998)
(141,880)
Fair value adjustments - fair value option
(329,874)
(374,752)
(420,609)
(273,680)
(314,748)
(349,607)
ULAE
Total
296,704
333,405
373,360
263,433
300,588
333,735
$ 6,754,095
$ 7,540,662
$ 8,541,074
$ 5,249,640
$ 5,949,472
$ 6,635,517
Quarterly Reserve Reviews
In addition to an in-depth annual review, we also perform quarterly reserve reviews. This is done by examining
quarterly paid and incurred loss development to determine whether it is consistent with reserves established during
the preceding annual reserve review and with expected development. Loss development is reviewed separately for
each major exposure type (e.g., asbestos, environmental, etc.), for each of our relevant subsidiaries, and for large
"wholesale" commutation settlements versus "routine" paid and advised losses. This process is undertaken to determine
whether loss development experience during a quarter warrants any change to held reserves.
Loss development is examined separately by exposure type because different exposures develop differently
over time. For example, the expected reporting and payout of losses for a given amount of asbestos reserves can be
expected to take place over a different time frame and in a different quarterly pattern from the same amount of
environmental reserves.
In addition, loss development is examined separately for each of our relevant subsidiaries. Companies can differ
in their exposure profile due to the mix of insurance versus reinsurance, the mix of primary versus excess insurance,
the underwriting years of participation and other criteria. These differing profiles lead to different expectations for
quarterly and annual loss development by company.
Our quarterly paid and incurred loss development is often driven by large, wholesale settlements - such as
commutations and policy buy-backs - which settle many individual claims in a single transaction. This allows for
monitoring of the potential profitability of large settlements, which, in turn, can provide information about the adequacy
of reserves on remaining exposures 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.
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• 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.
Loss Reserving (All Classes, except Latent Claims)
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.
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2. Incremental Reported and Paid Loss Development Methods. Incremental incurred and paid analyses are
performed in cases where cumulative data is not available. The concept of the incremental loss development methods
is similar to the cumulative loss development methods described above, in that the pattern of historical paid or incurred
losses is used to project the remaining future development. The difference between the cumulative and incremental
methods is that the incremental methods rely on only incremental incurred or paid loss data from a given point in time
forward, and do not require full loss history. These incremental loss development methods are therefore helpful when
data limitations apply. While this versatility in the incremental methods is a strength, the methods are sensitive to
fluctuations in loss development, so care must be taken in applying them.
3. IBNR-to-Case Outstanding Method. This method requires the estimation of consistent cumulative paid and
reported (case) incurred loss development patterns and age-to-ultimate LDFs, either from data that is specific to the
segment being analyzed or from applicable benchmark or industry data. These patterns imply a specific expected
relationship between IBNR, including both development on known claims (bulk reserve) and losses on true late reported
claims, and reported case incurred losses. The IBNR-to-Case Outstanding method can be used in a variety of situations.
It is appropriate for loss development experience that is mature and possesses a very high ratio of paid losses to
reported case incurred losses. The method also permits an evaluation of the difference in maturity between the business
being reviewed and benchmark development patterns. Depending on the relationship of paid to incurred losses, an
estimate of the relative maturity of the business being reviewed can be made and a subsequent estimate of ultimate
losses driven by the implied IBNR to case outstanding ratio at the appropriate maturity can be made. This method is
also useful where loss development data is incomplete and only the case outstanding amounts are determined to be
reliable. This method is less reliable in situations where relative case reserve adequacy has been changing over time.
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.
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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.
Loss Reserving (Latent Claims)
Asbestos Claims
Asbestos continues to be the most significant and difficult mass tort for the insurance industry in terms of claims
volume, legal expense and indemnity payments. In the United States, asbestos-related lawsuits emerged in the early
1970s, accelerated through the 1980s and continue today, nearly fifty years after the first significant lawsuit against
an asbestos manufacturer. A unique feature of U.S. asbestos litigation is that a plaintiff will identify numerous defendants,
often over 50, in a lawsuit, creating additional expense to defend the suit. Asbestos lawsuits have led to many of the
traditional defendants filing for bankruptcy. We believe the insurance industry has been adversely affected by judicial
interpretations that have had the effect of maximizing insurance recoveries from both a coverage and liability
perspective.
A number of our subsidiaries, and counterparties who wrote portfolios we assumed, have exposure to bodily
injury claims from alleged exposure to asbestos. The United States asbestos exposure arises mainly from general
liability insurance policies underwritten prior to 1986, which our subsidiaries or counterparties either wrote directly, on
a primary or excess basis, or as reinsurance. Our United Kingdom asbestos exposures emanates from Employers
Liability insurance policies. Asbestos bodily injury claims differ from other bodily injury claims due to the long latency
period for asbestos, which often triggers a policyholder’s coverage over multiple policy periods. The long latency period,
combined with the lack of clear judicial precedent with respect to coverage interpretations and expanded theories of
liability, increase the uncertainty of the asbestos claim reserve estimates.
The following table provides a reconciliation of our gross and net loss and ALAE reserves from asbestos
exposures and the movement in gross and net reserves for the years ended December 31, 2018, 2017 and 2016:
2018
2017
2016
(in thousands of U.S. dollars)
Balance as at January 1
$
1,801,044 $
849,901 $
Less: reinsurance reserves recoverable
Net balance as at January 1
Total net incurred losses and LAE
Total net paid losses
Effect of exchange rate movement
Acquired on purchase of subsidiaries
Assumed business
Net balance as at December 31
Plus: reinsurance reserves recoverable
122,222
1,678,822
(64,949)
(108,248)
(70,084)
7,569
50,000
1,493,110
123,910
34,135
815,766
27,029
(105,731)
79,515
—
862,243
1,678,822
122,222
Balance as at December 31
$
1,617,020 $
1,801,044 $
403,307
31,915
371,392
(25,295)
(33,334)
(2,846)
6,977
498,872
815,766
34,135
849,901
The liability for unpaid losses and ALAE for asbestos reserves reflects our best estimate for future amounts
needed to pay losses and related ALAE as of each of the balance sheet dates reflected in the financial statements
herein in accordance with U.S. GAAP. As of December 31, 2018 and 2017, the net loss reserves for asbestos-related
claims comprised 23.7% and 36.8%, respectively, of total non-life run-off net reserves for losses and LAE liabilities
excluding the fair value adjustments, deferred charge assets and ULAE. In addition, we also have direct asbestos
liabilities in other liabilities on our consolidated balance sheets, as described in 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.
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Environmental Claims
Environmental pollution claims represent another exposure where we believe the insurance industry has been
adversely affected by various legislative changes and judicial interpretations. Unlike asbestos claims which are
generated primarily from injured individuals, environmental claims generally result from state or federal government
activities initiated against a commercial enterprise. The most well-known legislation, passed in 1980, is the
Comprehensive Environmental Restoration, Compensation and Liability Act (“CERCLA”, also known as Superfund).
CERCLA imposed strict and retroactive liability on potentially responsible parties (“PRP”), which expanded in the court
system to be interpreted as joint and several liability.
Our subsidiaries and counterparties who wrote portfolios we assumed have exposure to environmental claims
from general liability insurance policies written prior to the mid-1980s, that were not specifically written to cover damage
to the environment from gradual releases of pollutants. Similar to asbestos, there is additional uncertainty with respect
to environmental reserves as compared to other general liability exposures. This added uncertainty is due to the
multiple policy periods and allocation of claims to policy years, number of solvent PRPs at any site, ultimate cost of
the remediation, the number of ultimate sites and changes to judicial precedence.
The following table provides a reconciliation of our gross and net loss and ALAE reserves from environmental
exposures and the movement in gross and net reserves for the years ended December 31, 2018, 2017 and 2016:
2018
2017
2016
(in thousands of U.S. dollars)
Balance as at January 1
Less: reinsurance reserves recoverable
$
191,060 $
6,666
Net balance as at January 1
Total net incurred losses and LAE
Total net paid losses
Effect of exchange rate movement
Acquired on purchase of subsidiaries
Assumed business
Net balance as at December 31
Plus: reinsurance reserves recoverable
184,394
14,153
(21,273)
(320)
13,525
20,000
210,479
12,221
171,850 $
7,799
164,051
9,356
(26,542)
267
—
37,262
184,394
6,666
Balance as at December 31
$
222,700 $
191,060 $
73,201
9,912
63,289
(5,583)
(12,233)
(490)
—
119,068
164,051
7,799
171,850
The liability for unpaid losses and ALAE, for environmental reserves, reflects our best estimate for future amounts
needed to pay losses and related ALAE as of each of the balance sheet dates reflected in the financial statements
herein in accordance with U.S. GAAP. As of December 31, 2018 and 2017, the net loss reserves for environmental
pollution-related claims comprised 3.3% and 4.0%, respectively, of total non-life run-off net reserves for losses and
LAE excluding the fair value adjustments, deferred charge assets and ULAE.
Asbestos and Environmental Reserving
The ultimate losses from asbestos and environmental claims cannot be estimated using traditional actuarial
reserving techniques that extrapolate losses to an ultimate basis using loss development. Claims are spread across
multiple policy years based on the still evolving case law in each jurisdiction, making historical development patterns
unreliable to forecast the future claim payments. There can be no assurance that the reserves we establish will be
adequate or not be adversely affected by the development of other latent exposures.
We use a variety of methodologies to estimate the appropriate IBNR reserves required for our asbestos and
environmental exposures. We estimate the IBNR reserves separately for each of our subsidiaries in order to apply the
appropriate methodologies and assumptions to match the distinct portfolios of exposure. For example, where we have
policy and claim data at the defendant or claimant level, we will use a ground-up frequency/severity method (described
later in this section). For our subsidiaries that primarily have reinsurance portfolios, we generally use industry
benchmarking methodologies to estimate appropriate IBNR reserves. These methods are based on comparisons of
our loss experience on A&E exposures relative to industry loss experience on similar exposures. The discussion that
follows describes, in greater detail, the primary actuarial methodologies used by us to estimate IBNR for A&E exposures.
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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, excess insurance, reinsurance of primary, excess of loss
reinsurance, retrocession)
the average attachment point and limit 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 as well as the difference
in lags between primary, excess and reinsurance policies
payment and reporting pattern acceleration due to large "wholesale" settlements (e.g., policy buy-backs and
commutations) pursued by us, and
•
lists of individual risks remaining and general trends within the legal and tort environments.
1. Paid Survival Ratio Method. In this method, our expected annual average payment amount is multiplied by
an expected future number of payment years to develop 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., 3 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.
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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 policy and claim data at the defendant or claimant level. 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 claim
filing rates, claim dismissal rates, current pending claims and epidemiological forecasts of asbestos disease incident
for future claim filings. 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.
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 tables provide a breakdown of the gross and net losses and LAE by line of business and the fair
value adjustments resulting from business combinations and ULAE as of December 31, 2018 and 2017 for the Atrium
segment:
OLR
Gross
IBNR
2018
Total
OLR
(in thousands of U.S. dollars)
Net
IBNR
Total
Marine, Aviation and
Transit
Binding Authorities
Reinsurance
Accident and Health
Non-Marine Direct and
Facultative
$
32,999 $
28,512
18,547
4,972
36,011 $
59,302
69,010 $
87,814
27,653
6,348
46,200
11,320
21,460 $
24,207 $
26,601
15,180
4,225
57,016
24,823
5,837
45,667
83,617
40,003
10,062
9,855
11,207
21,062
8,529
9,389
17,918
Total
$
94,885 $
140,521 $
75,995 $
121,272 $
197,267
2,847
2,402
$
202,516
235,406 $
3,476
2,402
$
241,284
2017
Fair value adjustments
ULAE
Total
OLR
Gross
IBNR
Total
OLR
(in thousands of U.S. dollars)
Net
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
20,177 $
28,551 $
24,158
13,815
3,296
49,486
26,336
4,994
48,728
73,644
40,151
8,290
9,570
12,467
22,037
9,444
9,665
19,109
Total
$
78,363 $
150,508 $
228,871 $
9,547
2,455
70,890 $
119,032 $
189,922
7,965
2,455
$
200,342
Fair value adjustments
ULAE
Total
$
240,873
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The following tables provide a breakdown of the gross and net losses and LAE reserves by line of business and
the fair value adjustments resulting from business combinations and ULAE as of December 31, 2018 and 2017 for the
StarStone segment:
OLR
Gross
IBNR
2018
Total
OLR
(in thousands of U.S. dollars)
Net
IBNR
Total
$
177,432 $
185,084
331,432 $
182,453
508,864 $
137,828 $
282,026 $
419,854
Casualty
Marine
Property
Aerospace
Workers' Compensation
317,102
67,203
49,373
Total
$
796,194 $
Fair value adjustments
ULAE
Total
123,511
40,416
367,537
440,613
107,619
110,082
787,894 $ 1,584,088 $
159,455
(467)
25,076
$ 1,608,697
2017
163,889
151,774
45,879
33,759
133,426
65,522
36,167
68,969
297,315
217,296
82,046
102,728
533,129 $
586,110 $ 1,119,239
1,432
25,076
$ 1,145,747
OLR
Gross
IBNR
Total
OLR
(in thousands of U.S. dollars)
Net
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 $
98,070 $
188,518 $
286,588
249,337
298,740
89,990
130,142
94,115
115,148
40,781
31,213
69,828
39,280
17,055
41,920
163,943
154,428
57,836
73,133
Total
$
590,977 $
599,221 $ 1,190,198 $
379,327 $
356,601 $
735,928
Fair value adjustments
ULAE
Total
(555)
18,100
$ 1,207,743
1,698
18,100
$
755,726
Quarterly Reserve Reviews
The reserve for losses and loss expenses is reviewed on a quarterly basis. Each quarter, paid and incurred loss
development is reviewed to determine whether it is consistent with expected development. Loss development is
examined separately by class of business, and large individual losses or loss events are examined separately from
regular attritional development. Discussions are held with appropriate personnel including underwriters, claims
adjusters, actuaries, accountants and attorneys to fully understand quarterly loss development and implications for
the quarter-end reserve balances. Based on analysis of the loss development data and the associated discussions,
management determines whether any adjustment is necessary to quarter-end reserve balances.
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Policy Benefits for Life Contracts
Policy benefits for life contracts as at December 31, 2018 and 2017 were as follows:
Policy benefits for life contracts
2018
2017
(in thousands of U.S. dollars)
$
105,080 $
117,207
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 on Paid and Unpaid Losses
Reinsurance balances recoverable on paid and unpaid losses as at December 31, 2018 and 2017 were as
follows:
Reinsurance balances recoverable on paid and unpaid losses
Reinsurance balances recoverable on paid and unpaid losses, fair value
Total reinsurance balances recoverable on paid and unpaid losses
2018
2017
(in thousands of U.S. dollars)
$
$
1,290,072
$
1,478,806
739,591
542,224
2,029,663
$
2,021,030
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.
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Valuation Allowances on Reinsurance Balances Recoverable and Deferred Tax Assets
Valuation Allowances on Reinsurance Balances Recoverable
To estimate the provision for uncollectible reinsurance balances recoverable on paid and unpaid losses, the
reinsurance balances recoverable on paid and unpaid losses 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 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.
Valuation Allowances on Deferred Tax Assets
Certain of our subsidiaries and branches operate in jurisdictions where they are subject to taxation. Current and
deferred tax expense or benefit is charged or credited to net earnings (loss), or, in certain cases, to other comprehensive
income (loss), based upon enacted tax laws and rates applicable in the relevant jurisdiction in the period in which the
tax becomes accruable or realizable. Deferred taxes are provided for 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 all or some portion of deferred tax assets will not be realized, a valuation allowance is
recorded against the deferred tax assets to reduce the assets to the amount more likely than not to be realized.
We recognize the benefit relating to tax positions only where the position is more likely than not to be sustained
assuming examination by tax authorities. A recognized tax benefit is measured as the largest amount that is greater
than 50 percent likely of being realized. A liability or other adjustment 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.
Goodwill
Goodwill as at December 31, 2018 and 2017 was as follows:
Goodwill
2018
2017
(in thousands of U.S. dollars)
$
114,807
$
73,071
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 as of December 31, 2018 and 2017 were as follows:
Intangible assets with a definite life
Intangible assets with an indefinite life
Total intangible assets
2018
2017
(in thousands of U.S. dollars)
$
$
16,887
$
87,031
20,487
87,031
103,918
$
107,518
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Intangible assets represent the 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.
Deferred Charge Assets
Deferred charge assets as of December 31, 2018 and 2017 were as follows:
Deferred charge asset
2018
2017
(in thousands of U.S. dollars)
$
86,585
$
80,192
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. The premium consideration that we charge the ceding companies may be lower
than the undiscounted estimated ultimate losses payable due to the "time value of money". After receiving the premium
consideration in full from our cedents at the inception of the contract, we invest the premium received over an extended
period of time thereby generating investment income. We expect to generate profits from these retroactive reinsurance
policies when taking into account the premium received and expected investment income, less contractual obligations
and expenses. Deferred charge assets, recorded in other assets, are amortized over the estimated claim payment
period of the related contract with the periodic amortization reflected in earnings as a component of losses and LAE.
Deferred charge assets 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 charge assets and the amount of periodic amortization.
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.
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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).
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 at December 31, 2018 and 2017 were as follows:
Short-term investments, trading, at fair value
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value
Fixed maturity investments within funds held - directly managed
Total fixed maturity investments
2018
2017
(in thousands of U.S. dollars)
$
$
114,116
$
7,248,793
151,609
1,183,374
8,697,892
$
180,211
5,696,073
210,285
1,165,386
7,251,955
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.
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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, 2018, 2017 and 2016, 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.
Equities
Equity investments, trading as of December 31, 2018 and 2017 were as follows:
Publicly traded equity investments in common and preferred stocks
Privately held equity investments in common and preferred stocks
Total equity investments
2018
2017
(in thousands of U.S. dollars)
$
$
138,415
$
106,603
228,710
—
367,125
$
106,603
Our publicly traded equity investments in common and preferred stocks predominantly trade on the major
exchanges and are managed by our external advisors. Our publicly traded equity investments are widely diversified
and there is no significant concentration in any specific industry. We have categorized all of publicly traded equity
investments 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.
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Our privately held equity investments in common and preferred stocks are direct investments in companies that
we believe offer attractive risk adjusted returns and/or offer other strategic advantages. Privately held equity investments
are another method by which we can invest in the run off or active underwriting markets. Each investment may have
its own unique terms and conditions and there may be restrictions on disposals. The market for these investments is
illiquid and there is no active market. We have categorized all of our privately held equity investments as Level 3
investments because the market for these investments is illiquid and there is no active market. The Company uses a
combination of internal models, reported values from co-investors/managers and observable inputs, such as capital
raises and capital transactions between new and existing shareholders, to calculate the fair value of the privately held
equity investments.
Other Investments, at fair value
Other investments as of December 31, 2018 and 2017 were as follows:
Hedge funds
Fixed income funds
Equity funds
Private equity funds
CLO equities
CLO equity funds
Private credit funds
Other
Total other investments
2018
2017
$
$
852,584 $
403,858
333,681
248,628
39,052
37,260
33,381
9,313
1,957,757 $
63,773
229,999
249,475
289,556
56,765
12,840
10,156
828
913,392
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 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.
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In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the
significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create
the most sensitivity. A significant increase or decrease in either of these significant inputs in isolation would result in
lower or higher fair value estimates for direct investments in CLO equities and, in general, a change in default rate
assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads
and estimated maturity dates are less subjective inputs because they are based on the historical average of actual
spreads and the weighted-average life of the current underlying portfolios, respectively. A significant increase or
decrease in either of these significant inputs in isolation would result in higher or lower fair value estimates for direct
investments in CLO equities. In general, these inputs have no significant interrelationship with each other or with default
and loss severity rates.
On a quarterly basis, we receive the valuation from the external CLO manager and brokers and then review the
underlying cash flows and key assumptions used by them. We review and update the significant unobservable inputs
based on information obtained from secondary markets. These inputs are our responsibility and we assess the
reasonableness of the inputs (and if necessary, update the inputs) through communicating with industry participants,
monitoring of the transactions in which we participate (for example, to evaluate default and loss severity rate trends),
and reviewing market conditions, historical results, and emerging trends that may impact future cash flows.
If valuations from the external CLO equity manager or brokers are not available, we use an income approach
based on certain observable and unobservable inputs to value these investments. An income approach is also used
to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income
approach is followed, the valuation is based on available trade information, such as expected cash flows and market
assumptions on default and loss severity rates. Other inputs used in the valuation process include asset spreads, loan
prepayment speeds, collateral spreads and estimated maturity dates.
For our investments in CLO equity funds, we measure fair value by obtaining the most recently available NAV
as advised by the external fund manager or third party administrator. The fair values of these investments 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, 2018, we had $71.5 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.
Accounting for Business Combinations - 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 on paid and unpaid losses 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.
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We account for business combinations 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,
the estimates of ULAE are based on running off the liabilities and assets over the actuarially 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.
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.
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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 of December 31, 2018 and 2017. Changes in the fair value of the
liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses are included in net incurred
losses and LAE in our consolidated statement of operations. The carrying value of our reinsurance recoverable and
liability for losses and LAE for which we elected the fair value option as of December 31, 2018 and 2017 was as follows:
Gross Losses and loss adjustment expenses, fair value
Reinsurance balances recoverable on paid and unpaid losses, fair value
Net losses and LAE, fair value
2018
2017
(in thousands of U.S. dollars)
$
$
$
2,874,055
739,591
2,134,464
$
$
$
1,794,669
542,224
1,252,445
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 11 - "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 on paid and unpaid losses
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 on paid and unpaid
losses. 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
on paid and unpaid losses.
• 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 on paid and unpaid losses. 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 on paid and unpaid losses.
• 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 on paid and unpaid losses. 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 on paid and unpaid losses.
• 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 on paid and unpaid losses. 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 on paid and unpaid losses.
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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 on paid and unpaid losses 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 on paid and unpaid losses.
Redeemable Noncontrolling Interest
The redeemable noncontrolling interest as of December 31, 2018 and 2017 was as follows:
Redeemable noncontrolling interest
2018
2017
(in thousands of U.S. dollars)
$
458,543
$
479,606
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.
Non-GAAP Financial Measures
In addition to presenting net earnings (losses) attributable to Enstar Group Limited ordinary shareholders and
diluted earnings (losses) per ordinary share determined in accordance with U.S. GAAP, we believe that presenting
non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders and diluted non-GAAP
operating income (loss) per ordinary share, non-GAAP financial measures as defined in Item 10(e) of Regulation S-
K, provides investors with valuable measures of our performance.
Non-GAAP operating income (loss) excludes: (i) net realized and unrealized (gains) losses on fixed maturity
investments and funds held - directly managed, (ii) change in fair value of insurance contracts for which we have
elected the fair value option, (iii) gain (loss) on sale of subsidiaries, (vi) net earnings (loss) from discontinued operations,
(v) tax effect of these adjustments where applicable, and (vi) attribution of share of adjustments to noncontrolling
interest where applicable. We eliminate the impact of net realized and unrealized (gains) losses on fixed maturity
investments and funds held - directly managed and change in fair value of insurance contracts for which we have
elected the fair value option because these items are subject to significant fluctuations in fair value from period to
period, driven primarily by market conditions and general economic conditions, and therefore their impact on our
earnings is not reflective of the performance of our core operations. We eliminate the impact of gain (loss) on sale of
subsidiaries and net earnings (loss) on discontinued operations as these are not reflective of the performance of our
core operations.
Further, these non-GAAP measures enable readers of the consolidated financial statements to more easily
analyze our results in a manner more aligned with the manner in which our management analyzes our underlying
performance. We believe that presenting these non-GAAP financial measures, which may be defined and calculated
differently by other companies, improves the understanding of our consolidated results of operations. These measures
should not be viewed as a substitute for those calculated in accordance with U.S. GAAP.
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Non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders is calculated by
the addition or subtraction of certain items from within our consolidated statements of earnings to or from net earnings
(loss) attributable to Enstar Group Limited ordinary shareholders, the most directly comparable GAAP financial
measure, as illustrated in the table below, for the years ending December 31, 2018, 2017 and 2016:
2018
2017
2016
(in thousands of U.S. dollars, except
per share data)
Net earnings (loss) attributable to Enstar Group Limited ordinary
shareholders
$ (162,354) $
311,458 $
264,807
Adjustments:
Net realized and unrealized (gains) losses on fixed maturity
investments and funds held - directly managed (1)
Change in fair value of insurance contracts for which we have
elected the fair value option
Loss on sale of subsidiary
Net loss from discontinued operations
Tax effects of adjustments (2)
Adjustments attributable to noncontrolling interest (3)
Non-GAAP operating income attributable to Enstar Group Limited
ordinary shareholders (4)
Diluted net earnings (loss) per ordinary share (5)
Adjustments:
Net realized and unrealized (gains) losses on fixed maturity
investments and funds held - directly managed (1)
Change in fair value of insurance contracts for which we have
elected the fair value option
Loss on sale of subsidiary
Net loss from discontinued operations
Tax effects of adjustments (2)
Adjustments attributable to noncontrolling interest (3)
Diluted non-GAAP operating income per ordinary share (4)
243,093
(70,747)
4,387
6,664
—
—
(16,588)
(9,166)
30,256
16,349
—
—
(14,183)
(12,359)
5,364
4,840
4,956
5,990
$
$
61,649 $
283,337 $
267,781
(7.84) $
15.95 $
13.62
11.70
0.32
—
—
(0.79)
(0.44)
(3.62)
1.55
0.84
(0.73)
0.27
0.25
0.23
—
—
(0.64)
0.25
0.31
$
2.95 $
14.51 $
13.77
Weighted average ordinary shares outstanding - diluted
20,904,176
19,527,591
19,447,241
(1) Represents the net realized and unrealized gains and losses related to fixed maturity securities. Our fixed maturity securities are held directly on
our balance sheet and also within the "Funds held - directly managed" balance. Refer to Note 6 - "Investments" in the notes to our consolidated
financial statements included within Item 8 of this Annual Report on Form 10-K for further details on our net realized and unrealized gains and
losses.
(2) Represents an aggregation of the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates, calculated
at the applicable jurisdictional tax rate.
(3) Represents the impact of the adjustments on the net earnings (loss) attributable to noncontrolling interest associated with the specific subsidiaries
to which the adjustments relate.
(4) Non-GAAP financial measure.
(5) During a period of loss, the basic weighted average ordinary shares outstanding is used in the denominator of the diluted loss per ordinary share
computation as the effect of including potentially dilutive securities would be anti-dilutive.
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
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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 2018 were not materially different than those used in 2017 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 and Credit Spread Risk
Interest rate risk is the price sensitivity of a security to changes in interest rates. Credit spread risk is the price
sensitivity of a security to changes in credit spreads. Our investment portfolio and funds held - directly managed include
fixed maturity and short-term investments, whose fair values will fluctuate with changes in interest rates and credit
spreads. 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 and our funds held directly managed portfolio as at December 31,
2018 and 2017:
As of December 31, 2018
-100
Total Market Value
Market Value Change from Base
Change in Unrealized Value
As of December 31, 2017
Total Market Value
Market Value Change from Base
Change in Unrealized Value
$
$
$
$
9,147
5.2%
449
-100
7,685
6.0%
433
$
$
$
$
Interest Rate Shift in Basis Points
—
+50
-50
(in millions of U.S. dollars)
8,920
8,698 $
$
8,484
2.6%
222
-50
7,466
3.0%
214
$
$
$
—
(2.5)%
— $
(214)
—
7,252 $
+50
7,047
—
(2.8)%
— $
(205)
+100
$
$
$
$
8,279
(4.8)%
(419)
+100
6,852
(5.5)%
(400)
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.
The following table summarizes the aggregate hypothetical change in fair value from an immediate parallel shift
in credit spreads assuming interest rates remain fixed, in our fixed maturity and short-term investments portfolio
classified as trading and available-for-sale and our funds held directly managed portfolio as at December 31, 2018
and 2017:
As at December 31, 2018
Total Market Value
Market Value Change from Base
Change in Unrealized Value
As at December 31, 2017
Total Market Value
Market Value Change from Base
Change in Unrealized Value
$
$
$
$
—
—
125
8,698 $
—
— $
7,252 $
—
— $
Credit Spread Shift in Basis Points
+50
+100
(in millions of U.S. dollars)
$
8,502
+50
(2.3)%
(196)
7,055
(2.7)%
(197)
$
$
$
+100
8,314
(4.4)%
(384)
6,865
(5.3)%
(387)
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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 recoverable on paid and unpaid losses, respectively, as discussed below.
Fixed Maturity and Short-Term Investments
As a holder of $8.7 billion of fixed maturity and short-term investments, 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, 2018, 42.6% of our fixed maturity and short-term investment portfolio was rated AA or higher by a major
rating agency (December 31, 2017: 40.0%) with 3.6% rated lower than BBB- (December 31, 2017: 5.4%). 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, 2018 (December 31, 2017: A+). 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.
A summary of our fixed maturity and short-term investments by credit rating as of December 31, 2018 and
December 31, 2017 is as follows:
Credit rating
AAA
AA
A
BBB
Non-investment grade
Not rated
Total
Average credit rating
2018
2017
Change
28.2%
14.4%
30.2%
23.4%
3.6%
0.2%
100.0%
A+
1.9 %
0.7 %
(3.7)%
3.0 %
(1.8)%
(0.1)%
26.3%
13.7%
33.9%
20.4%
5.4%
0.3%
100.0%
A+
Reinsurance Balances Recoverable on Paid and Unpaid Losses
We have exposure to credit risk as it relates to our reinsurance balances recoverable on paid and unpaid losses.
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 on paid and unpaid losses is in Note 8 - "Reinsurance Balances Recoverable on
Paid and Unpaid Losses" in the notes to our consolidated financial statements included within Item 8 of this Annual
Report on Form 10-K.
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 of December 31, 2018 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.
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Equity Price Risk
Our portfolio of equity investments, including the equity funds and equity call options 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 publicly traded 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. A
summary of our equity investments as at December 31, 2018 and 2017 is as follows:
Publicly traded equity investments in common and
preferred stocks
Privately held equity investments in common and
preferred stocks
Private equities funds
Equity funds
Fair value of equities at risk
Impact of 10% decline in fair value
2018
2017
Change
(in millions of U.S. dollars)
$
$
$
138.4
$
106.6
$
31.8
228.7
248.6
333.7
949.4
94.9
$
$
—
289.6
249.5
645.7
64.6
$
$
228.7
(41.0)
84.2
303.7
30.3
In addition to the above, as of December 31, 2018, we had investments of $852.6 million (December 31, 2017:
$63.8 million) in hedge funds, included within our other investments, at fair value, that have exposure, among other
items, to equity price risk.
Foreign Currency Risk
Our foreign currency policy is to broadly manage, where possible, our foreign currency risk by seeking to match
our liabilities under insurance and reinsurance policies that are payable in foreign currencies with assets that are
denominated in such currencies, subject to regulatory constraints. In addition, we may selectively utilize foreign currency
forward contracts to mitigate foreign currency risk. To the extent our foreign currency exposure is not matched or
hedged, we may experience foreign exchange losses or gains, which would be reflected in our results of operations
and financial condition.
Through our subsidiaries located in various jurisdictions, we conduct our insurance and reinsurance operations
in a variety of non-U.S. currencies. The functional currency for the majority of our subsidiaries is the U.S. dollar.
Fluctuations in foreign currency exchange rates relative to a subsidiary's functional currency will have a direct impact
on the valuation of our assets and liabilities denominated in other currencies. All changes in foreign exchange rates,
with the exception of non-U.S. dollar denominated investments classified as available-for-sale, are recognized in foreign
exchange gains (losses) in our consolidated statements of earnings. Changes in foreign exchange rates relating to
non-U.S. dollar denominated investments classified as available-for-sale are recorded in unrealized gains (losses) on
investments, which is a component of accumulated other comprehensive income (loss) in shareholders’ equity.
We have exposure to foreign currency risk through our ownership of European, British, 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 Discontinued 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 cumulative
translation adjustment account, which is a component of accumulated other comprehensive income (loss) in
shareholders’ equity. During the three months ended September 30, 2018, we fully repaid our borrowing of Euros
under the EGL Revolving Credit Facility, which was hedging the foreign currency exposure on our net investment in
certain of our subsidiaries whose functional currency is denominated in Euros, and replaced the hedge with a Euro-
denominated foreign currency forward exchange rate contract. During the year ended December 31, 2018, we utilized
forward exchange contracts to hedge the foreign currency exposure on our net investment in certain of our subsidiaries
whose functional currencies are denominated in Australian dollars. We utilize hedge accounting to record the foreign
exchange gain or loss on these instruments in the cumulative translation account. The loan and the forward contracts
are discussed in Note 15 - "Debt Obligations and Credit Facilities" and Note 7 - "Derivatives and Hedging Instruments",
respectively, in the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form
10-K.
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In addition, from time to time, we may also utilize foreign currency forward contracts to hedge certain foreign
currency exposures in British pounds, Canadian dollars, Euros and Australian dollars which were not designated for
hedge accounting.
The table below summarizes our net exposures as at December 31, 2018 and 2017 to foreign currencies:
2018
AUD
CAD
EUR
GBP
Other
Total
Total net foreign currency exposure
$
17.5 $ 20.2 $ 17.2 $ (35.8) $
1.7 $
20.7
Pre-tax impact of a 10% movement of the U.S.
dollar(1)
$
1.8 $
2.0 $
1.7 $
(3.6) $
0.2 $
2.1
2017
AUD
CAD
EUR
GBP
Other
Total
(in millions of U.S. dollars)
Total net foreign currency exposure
Pre-tax impact of a 10% movement of the U.S.
dollar(1)
$
$
(1) Assumes 10% change in U.S. dollar relative to other currencies.
Effects of Inflation
(in millions of U.S. dollars)
(2.1) $
(3.4) $ 11.0 $
7.0 $
3.7 $
16.2
(0.2) $
(0.3) $
1.1 $
0.7 $
0.4 $
1.6
Inflation may have a material effect on our consolidated results of operations by its effect on our assets and our
liabilities. Inflation could lead to higher interest rates, resulting in a decrease in the market value of our fixed maturity
portfolio. We may choose to hold our fixed maturity investments to maturity, which would result in the unrealized gains
or losses accreting back over time. Inflation may also affect the value of certain of our liabilities, primarily our estimate
for losses and LAE, such as our cost of claims which includes medical treatments, litigation costs and judicial awards.
Although our estimate for losses and LAE is established to reflect the likely payments in the future, we would be subject
to the risk that inflation could cause these amounts to be greater than the current estimate for losses and LAE. We
seek to take this into account when setting reserves and pricing new business.
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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, 2018 and 2017
Consolidated Statements of Earnings for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and
2016
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018,
2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
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 Discontinued Operations
Note 6 - Investments
Note 7 - Derivatives and Hedging Instruments
Note 8 - Reinsurance Balances Recoverable on Paid and Unpaid Losses
Note 9 - Deferred Charge Assets
Note 10 - Losses and Loss Adjustment Expenses
Note 11 - Fair Value Measurements
Note 12 - Policy Benefits for Life Contracts
Note 13 - Premiums Written and Earned
Note 14 - Goodwill and Intangible Assets
Note 15 - Debt Obligations and Credit Facilities
Note 16 - Noncontrolling Interest
Note 17 - Share Capital
Note 18 - Earnings per Share
Note 19 - Share-Based Compensation and Pensions
Note 20 - Income 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
130
131
132
133
134
136
137
137
138
151
158
162
164
173
175
177
178
230
239
239
240
242
244
245
248
249
252
256
263
267
269
274
275
276
279
280
281
282
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.
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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, 2018 and 2017, 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, 2018 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, 2018 and 2017, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2018, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, 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 March 1, 2019 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
March 1, 2019
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ENSTAR GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
As of December 31, 2018 and 2017
ASSETS
Short-term investments, trading, at fair value
Fixed maturities, trading, at fair value
Fixed maturities, available-for-sale, at fair value (amortized cost: 2018 — $151,433; 2017 — $208,097)
Funds held - directly managed
Equities, at fair value
Other investments, at fair value
Other investments, at cost
Equity method investments
Total investments (Note 6 and Note 11)
Cash and cash equivalents
Restricted cash and cash equivalents
Premiums receivable
Deferred tax assets (Note 20)
Prepaid reinsurance premiums
2018
2017
(expressed in thousands of U.S.
dollars, except share data)
$
114,116
$
180,211
7,248,793
151,609
1,198,154
367,125
1,957,757
—
204,507
5,696,073
210,285
1,179,940
106,603
913,392
125,621
343,005
11,242,061
8,755,130
602,096
380,488
787,468
10,124
198,990
955,150
257,686
425,702
13,001
245,101
Reinsurance balances recoverable on paid and unpaid losses (Note 8)
1,290,072
1,478,806
Reinsurance balances recoverable on paid and unpaid losses, fair value (Note 8 and Note 11)
Funds held by reinsured companies
Deferred acquisition costs
Goodwill and intangible assets (Note 14)
Other assets
TOTAL ASSETS
LIABILITIES
Losses and loss adjustment expenses (Note 10)
Losses and loss adjustment expenses, fair value (Note 10 and Note 11)
Policy benefits for life and annuity contracts (Note 12)
Unearned premiums
Insurance and reinsurance balances payable
Deferred tax liabilities (Note 20)
Debt obligations (Note 15)
Other liabilities
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 23)
REDEEMABLE NONCONTROLLING INTEREST (Note 16)
SHAREHOLDERS’ EQUITY (Note 17)
Ordinary shares (par value $1 each, issued and outstanding 2018: 21,459,997; 2017: 19,406,722):
Voting Ordinary Shares (issued and outstanding 2018: 17,950,315; 2017: 16,402,279)
Non-voting convertible ordinary Series C Shares (issued and outstanding 2018 and 2017: 2,599,672)
Non-voting convertible ordinary Series E Shares (issued and outstanding 2018: 910,010; 2017: 404,771)
Preferred Shares:
Series C Preferred Shares (issued and held in treasury 2018 and 2017: 388,571)
Series D Preferred Shares (issued and outstanding 2018: 16,000)
Series E Preferred Shares (issued and outstanding 2018: 4,400)
Treasury shares, at cost (Series C Preferred Shares 2018 and 2017: 388,571)
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total Enstar Group Limited Shareholders’ Equity
Noncontrolling interest
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
See accompanying notes to the consolidated financial statements
131
739,591
321,267
121,101
218,725
644,287
542,224
175,383
64,984
180,589
512,666
$
16,556,270
$
13,606,422
$
6,535,449
$
5,603,419
2,874,055
1,794,669
105,080
842,618
388,086
10,542
861,539
566,369
117,207
583,197
236,697
15,262
646,689
983,728
12,183,738
9,980,868
458,543
479,606
17,950
2,600
910
389
400,000
110,000
(421,559)
1,804,664
10,440
1,976,539
3,901,933
12,056
16,402
2,600
405
389
—
—
(421,559)
1,395,067
10,468
2,132,912
3,136,684
9,264
$
3,913,989
$
3,145,948
16,556,270
13,606,422
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ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 2018, 2017 and 2016
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 (LOSS) BEFORE INCOME TAXES
Income tax benefit (expense)
Earnings (losses) from equity method investments
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
Net earnings from discontinued operations, net of income taxes
NET EARNINGS (LOSS)
Net loss (earnings) attributable to noncontrolling interest
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
Dividends on preferred shares
2018
2017
2016
(expressed in thousands of U.S.
dollars, except share and per share data)
$
895,575
$
613,121
$
823,514
35,088
270,671
(412,884)
35,085
823,535
454,025
1,003
192,790
407,375
26,217
2,668
—
1,084,078
(260,543)
6,124
42,147
(212,272)
—
(212,272)
62,051
(150,221)
(12,133)
66,103
208,789
190,334
22,605
39,364
185,463
77,818
10,236
1,100,952
1,136,395
193,551
4,015
96,906
435,985
28,102
17,537
16,349
792,445
308,507
6,395
5,904
320,806
10,993
331,799
(20,341)
311,458
—
174,099
(2,038)
186,569
423,734
20,642
665
—
803,671
332,724
(34,874)
(5,400)
292,450
11,963
304,413
(39,606)
264,807
—
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
ORDINARY SHAREHOLDERS
$
(162,354) $
311,458
$
264,807
Earnings per ordinary share attributable to Enstar Group Limited:
Basic:
Net earnings (loss) from continuing operations
Net earnings from discontinued operations, net of income taxes
Net earnings (loss) per ordinary share
Diluted:
Net earnings (loss) from continuing operations
Net earnings from discontinued operations, net of income taxes
Net earnings (loss) per ordinary share
Weighted average ordinary shares outstanding:
Basic
Diluted
$
$
$
$
(7.84) $
15.50
$
—
0.56
(7.84) $
16.06
$
(7.84) $
15.39
$
—
0.56
(7.84) $
15.95
$
13.10
0.62
13.72
13.00
0.62
13.62
20,698,310
19,388,621
19,299,426
20,904,176
19,527,591
19,447,241
See accompanying notes to the consolidated financial statements
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ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2018, 2017 and 2016
NET EARNINGS (LOSS)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on fixed income investments
arising during the year
Reclassification adjustment for net realized gains (losses) included
in net earnings
Unrealized gains (losses) arising during the year, net of
reclassification adjustment
Change in currency translation adjustment
Reclassification to earnings on disposal of subsidiary
Total cumulative translation adjustment
Decrease in defined benefit pension liability
Total other comprehensive gain (loss)
2018
2017
2016
(expressed in thousands of U.S. dollars)
$
(212,272) $
331,799 $
304,413
(2,284)
4,776
4,776
63
(491)
(384)
(2,221)
(202)
—
(202)
2,156
(267)
4,285
9,423
20,751
30,174
1,501
35,960
4,392
4,793
—
4,793
3,079
12,264
Comprehensive income (loss)
(212,539)
367,759
316,677
Comprehensive loss (income) attributable to noncontrolling
interest
62,291
(22,285)
(40,257)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
$
(150,248) $
345,474 $
276,420
See accompanying notes to the consolidated financial statements
133
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ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2018, 2017 and 2016
Share Capital — Voting Ordinary Shares
Balance, beginning of year
Issue of shares
Conversion of Series C Non-Voting Convertible Ordinary Shares
Balance, end of year
Share Capital — Non-Voting Convertible Ordinary Series A Shares
Balance, beginning of year
Shares converted to Series C Convertible Participating Non-Voting Preferred Shares
Balance, end of year
Share Capital — Non-Voting Convertible Ordinary Series C Shares
Balance, beginning of year
Warrants exercised
Conversion to Voting Ordinary Shares
Balance, end of year
Share Capital — Non-Voting Convertible Ordinary Series E Shares
Balance, beginning of year
Issue of shares
Balance, end of year
Share Capital - Series C Convertible Participating Non-Voting Preferred Shares
Balance, beginning of year
Conversion of Non-Voting Convertible Ordinary Series A Shares
Balance, end of year
Share Capital - Series D Preferred Shares
Balance, beginning of year
Issue of shares
Balance, end of year
Share Capital - Series E Preferred Shares
Balance, beginning of year
Issue of shares
Balance, end of year
Treasury Shares (Series C Preferred Shares)
Balance, beginning and end of year
Additional Paid-in Capital
Balance, beginning of year
Issue of voting ordinary shares and warrants
Issuance costs of preferred shares
Conversion of Series A Non-Voting Convertible Ordinary Stock
Amortization of share-based compensation
Balance, end of year
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of year
Cumulative translation adjustment
Balance, beginning of year
Change in currency translation adjustment
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 on investments
Balance, beginning of year
Change in unrealized gains (losses) on investments
Balance, end of year
134
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
2017
2016
(expressed in thousands of U.S. dollars)
16,402
$
16,175
$
16,133
1,548
—
35
192
42
—
17,950
$
16,402
$
16,175
— $
—
— $
— $
—
— $
2,973
(2,973)
—
2,600
$
2,792
$
2,726
—
—
2,600
405
505
910
389
—
389
$
$
$
$
$
— $
400,000
400,000
$
— $
110,000
110,000
$
—
(192)
2,600
405
—
405
389
—
389
$
$
$
$
$
— $
—
— $
— $
—
— $
66
—
2,792
405
—
405
—
389
389
—
—
—
—
—
—
(421,559)
$
(421,559)
$
(421,559)
1,395,067
$
1,380,109
$
1,373,044
413,141
(14,643)
—
11,099
1,804,664
10,468
$
$
450
—
—
14,508
529
—
2,584
3,952
1,395,067
$
1,380,109
(23,549)
$
(35,162)
11,171
(18,993)
(23,790)
(185)
—
10,986
(3,143)
2,156
(987)
2,440
(1,999)
441
9,413
20,751
11,171
(4,644)
1,501
(3,143)
88
2,352
2,440
4,797
—
(18,993)
(7,723)
3,079
(4,644)
(3,649)
3,737
88
Table of Contents
Balance, end of year
Retained Earnings
Balance, beginning of year
Net earnings (loss) attributable to Enstar Group Limited ordinary shareholders
Net loss (earnings) attributable to noncontrolling interest
Dividends on preferred shares
Change in redemption value of redeemable noncontrolling interests
Cumulative effect of change in accounting principle
Balance, end of year
Noncontrolling Interest (excludes redeemable noncontrolling interests)
Balance, beginning of year
Contribution of capital
Net earnings (loss) attributable to noncontrolling interest
Balance, end of year
$
$
$
$
$
$
$
$
$
10,440
2,132,912
(212,272)
62,051
(12,133)
7,554
(1,573)
1,976,539
9,264
49
2,743
$
$
$
$
10,468
1,847,550
331,799
(20,341)
—
(30,978)
4,882
2,132,912
8,520
22
722
12,056
$
9,264
$
(23,549)
1,578,312
304,413
(39,606)
—
4,431
—
1,847,550
3,911
5,643
(1,034)
8,520
See accompanying notes to the consolidated financial statements
135
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ENSTAR GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018, 2017 and 2016
OPERATING ACTIVITIES:
Net earnings (loss)
Net earnings from discontinued operations, net of income taxes
Adjustments to reconcile net earnings to cash flows used in operating activities:
2018
2017
2016
(expressed in thousands of U.S. dollars)
$
(212,272) $
—
331,799
(10,993)
$
304,413
(11,963)
Realized losses (gains) on sale of investments
Unrealized losses (gains) on investments
Depreciation and other amortization
Net change in trading securities held on behalf of policyholders
Earnings from equity method investments
Sales and maturities of trading securities
Purchases of trading securities
Net loss on sale of subsidiary
Other non-cash items
Changes in:
Reinsurance balances recoverable on paid and unpaid losses
Funds held by reinsured companies
Losses and loss adjustment expenses
Policy benefits for life and annuity contracts
Insurance and reinsurance balances payable
Unearned premiums
Premiums receivable
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
Purchase of equity method investments
Other investing activities
Net cash flows provided by (used in) investing activities
FINANCING ACTIVITIES:
Net proceeds from the issuance of preferred shares
Dividends on preferred shares
Contribution by noncontrolling interest
Contribution by redeemable noncontrolling interest
Dividends paid to 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
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
Supplemental Cash Flow Information:
Income taxes paid, net of refunds
Interest paid
Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents
Restricted cash and cash equivalents
Cash, cash equivalents and restricted cash
27,633
385,251
33,295
—
(42,147)
4,802,224
(5,592,311)
—
11,857
(268,039)
(126,897)
960,199
(6,776)
151,918
173,725
(212,423)
(245,309)
(160,072)
(1,668)
(188,666)
36,115
25,597
(5,904)
6,111,607
(7,544,649)
16,349
15,490
(530,857)
(93,310)
1,363,032
(3,314)
(157,741)
34,854
(19,026)
278,178
(343,107)
$
(245,151) $
(4,185) $
—
58,219
(10,386)
(901,071)
436,396
(155,440)
(8,321)
(825,754)
495,357
(12,133)
49
55,377
(3,852)
1,132,507
(914,319)
752,986
126,611
86,359
(14,848)
(109,885)
232,827
—
(23,617)
293,262
$
— $
—
22
—
(27,458)
874,100
(912,140)
(65,476)
7,036
(84,854)
34,938
(1,284)
5,400
3,406,788
(3,100,515)
—
8,566
(21,866)
(967,379)
259,339
(11,037)
120,515
5,682
(25,264)
(131,204)
(202,689)
(18,454)
—
81,596
(52,568)
(91,093)
245,069
—
(7,841)
156,709
—
—
5,643
—
—
571,048
(493,250)
83,441
2,588
9,512
(13,985)
(230,252)
1,212,836
982,584
(105,809)
1,318,645
$ 1,212,836
23,476
1,295,169
$ 1,318,645
17,610
25,240
$
$
13,192
21,487
$
$
22,216
19,451
602,096
380,488
982,584
$
955,150
257,686
$ 1,212,836
$
954,871
363,774
$ 1,318,645
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements
136
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ENSTAR GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
(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.
137
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America ("U.S. GAAP"). The consolidated financial statements include our assets,
liabilities and results of operations as of December 31, 2018 and 2017 and for the years ended December 31, 2018,
2017 and 2016. Results of operations for acquired subsidiaries are included from the date of acquisition. All significant
intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified
to conform to the current period presentation. These reclassifications had no impact on net earnings.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Our actual results could differ materially from our estimates. Accounting policies that we believe are most
dependent on assumptions and estimates are considered to be our critical accounting policies and are related to the
determination of:
•
•
•
•
•
•
•
•
•
liability for losses and loss adjustment expenses ("LAE");
liability for policy benefits for life and annuity contracts;
reinsurance balances recoverable on paid and unpaid losses;
valuation allowances on reinsurance balances recoverable and deferred tax assets;
impairment charges, including other-than-temporary impairments on investment securities classified as
available-for-sale, and impairments on goodwill, intangible assets and deferred charge assets;
gross and net premiums written and net premiums earned;
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.
138
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
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 applied 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.
139
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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.
Components of Net Incurred Losses and LAE
Included within the total net incurred losses and LAE on our consolidated statement of earnings are the following
items:
• Net losses paid: paid losses and LAE, net of related reinsurance recoveries.
• Net change in case and LAE reserves: the change in case reserves and associated LAE, net of related
reinsurance recoveries.
• Net change in IBNR reserves: the change in IBNR reserves, net of related reinsurance recoveries.
•
Increase (reduction) in estimates of net ultimate losses: the total of net loses paid, net change in case and
LAE reserves and the net change in IBNR.
•
Increase (reduction) in provisions for unallocated LAE: the net change in our provision for unallocated LAE.
• Amortization of deferred charge assets: the amortization of the deferred charge assets associated with the
retroactive reinsurance contracts which we assumed, where the estimated ultimate losses at inception were
greater than the premiums received.
• Amortization of fair value adjustments: the amortization of the fair value adjustments associated with the
acquisitions of companies, where the acquired reserves and recoveries were fair valued upon acquisition.
• Changes in fair value - fair value option: the changes in the fair value for reinsurance agreements where we
have elected the fair value option. The change in fair value component includes the changes in the discounted
cash flows and risk margin. The underlying net losses paid, net change in case and LAE reserves and the net
change in IBNR reserves relating to these reinsurance agreements for which we have elected the fair value
option is included in the appropriate line item described above.
• Net incurred losses and LAE: the total of increase (reduction) in estimates of net ultimate losses, increase
(reduction) in provisions for unallocated LAE, amortization of deferred charge assets, amortization of fair value
adjustments and changes in fair value - fair value option.
(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.
140
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Since the development of the policy benefits is based upon projections of future cash flows, we are required to
make assumptions for mortality, longevity and morbidity rates, lapse rates, expenses and investment income. The
assumptions used to determine policy benefits are determined at the inception of the contracts, reviewed and adjusted
at the point of acquisition, as required, and are locked-in throughout the life of the contract unless a premium deficiency
develops. These locked-in assumptions are based on a best estimate view of experience at the time they are established
and may include a provision for adverse deviation. Assumptions are established based upon a combination of historical
and industry experience, when available, and management judgment. Actual results could differ from these estimates.
Policy benefit liabilities are reviewed periodically to determine whether a premium deficiency exists. Management
reviews emerging experience and updates best estimate assumptions where appropriate. If existing policy benefit
reserves, reduced by unamortized acquisition costs, together with the present value of future gross premiums using
current best estimate assumptions, are insufficient in covering the present value of future benefits, settlement, and
maintenance costs using current best estimate assumptions, a premium deficiency is deemed to exist. To remediate,
unamortized acquisition costs are reduced until the premium deficiency has been eliminated. If unamortized acquisition
costs have been entirely written off and a premium deficiency still exists, locked-in assumptions are revised and a
charge for policy benefits is recognized.
Because of the many assumptions and estimates used in establishing policy benefits and the long-term nature
of the contracts, the reserving process, while based on actuarial techniques, is inherently uncertain.
(e) Reinsurance Balances Recoverable on Paid and Unpaid Losses
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 on paid and unpaid losses 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 on paid and unpaid losses related to IBNR reserves is recognized on a basis consistent with the underlying
IBNR reserves.
Our reinsurance balances recoverable on paid and unpaid losses 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 (loss) ("AOCI"). 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.
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Other-Than-Temporary Impairments
Fixed maturity investments classified as available-for-sale are reviewed quarterly to determine if they have
sustained an impairment of value that is, based on our judgment, considered to be other than temporary. The process
includes reviewing each fixed maturity investment that is below cost and: (1) determining if we have the intent to sell
the fixed maturity investment; (2) determining if it is more likely than not that we will be required to sell the fixed maturity
investment before its anticipated recovery; and (3) assessing whether a credit loss exists, that is, whether we expect
that the present value of the cash flows expected to be collected from the fixed maturity investment is less than the
amortized cost basis of the investment.
In assessing whether it is more likely than not that we will be required to sell a fixed maturity investment before
its anticipated recovery, we consider various factors including our future cash flow requirements, legal and regulatory
requirements, the level of our cash, cash equivalents, short-term investments and fixed maturity investments available-
for-sale in an unrealized gain position, and other relevant factors.
In evaluating credit losses, we consider a variety of factors in the assessment of a fixed maturity investment
including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline
below cost and par; (3) the potential for the investment to recover in value; (4) an analysis of the financial condition of
the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the investment to make scheduled interest or
principal payments.
If we conclude 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
We have investments in publicly traded equities, which are classified as trading, and we also have investments
in privately held equities. Our equity investments 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
During 2018, we sold our investments in life settlement contracts, which were recorded as other investments,
at cost and accounted for under the investment method whereby we recognized 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 recognized income on
individual investments in life settlements when the insured died, at an amount equal to the excess of the investment
proceeds over the carrying amount of the investment at that time.
The investments were subject to quarterly impairment review on a contract-by-contract basis. An investment in
life settlements was considered impaired if the undiscounted cash flows resulting from the expected proceeds from
the investment in life settlements were 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 were written down to their estimated fair value, which was 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).
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Equity method investments
Investments in which the Company has significant influence over the operating and financial policies of the
investee are classified as equity method investments and are accounted for using the equity method of accounting. In
applying the equity method of accounting, investments are initially recorded at cost and are subsequently adjusted
based on the Company's proportionate share of net income or loss of the investee. Adjustments are based on the most
recently available financial information from the investee. Changes in the carrying value of such investments are
recorded in our consolidated statements of earnings as earnings (losses) from equity method investments. Any decline
in the value of our equity method investments considered by management to be other-than-temporary is reflected in
our consolidated statements of earnings in the period in which it is determined.
Cash and cash equivalents
Cash equivalents includes money market funds, fixed interest deposits and all highly liquid debt instruments
purchased with an original maturity of three months or less.
(g) Funds Held
Under funds held arrangements, the reinsured company has retained funds that would otherwise have been
remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable
are deducted. Funds held are shown under two categories on the consolidated balance sheets, where funds held upon
which we receive the underlying portfolio economics are shown as "Funds held - directly managed", and funds held
where we receive a fixed crediting rate are shown as "Funds held by reinsured companies". Funds held by reinsured
companies are carried at cost. Funds held - directly managed, carried at fair value, represents the aggregate of funds
held at cost and the value of an embedded derivative. The embedded derivative relates to our contractual right to
receive the return on the underlying investment portfolio economics. The investment returns on both categories of
funds held are recognized in net investment income and net realized and unrealized gains (losses). The revaluation
of the embedded derivative is included in net unrealized gains (losses).
(h) Fees and Commission Income
Fees and commission income primarily includes profit commissions earned from managed Lloyd's syndicates
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.
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(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 cumulative translation adjustment ("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, which are carried
at fair value. In addition, we also hold equity call options as part of our investment strategy.
(l) Income Taxes
Certain of our subsidiaries and branches operate in jurisdictions where they are subject to taxation. Current and
deferred tax expense or benefit is charged or credited to net earnings (loss), or, in certain cases, to other comprehensive
income (loss), based upon enacted tax laws and rates applicable in the relevant jurisdiction in the period in which the
tax becomes accruable or realizable. Deferred taxes are provided for 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 all or some portion of deferred tax assets will not be realized, a valuation allowance is
recorded against the deferred tax assets to reduce the assets to the amount more likely than not to be realized.
We recognize the benefit relating to tax positions only where the position is more likely than not to be sustained
assuming examination by tax authorities. A recognized tax benefit is measured as the largest amount that is greater
than 50 percent likely of being realized. A liability or other adjustment 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.
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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 on paid and unpaid losses 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
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.
In our Non-life Run-off and StarStone segments we have ceded business to KaylaRe Ltd., a wholly-owned
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.
Deferred Charge Assets
If, at the inception of a Non-life Run-off retroactive reinsurance contract, the estimated undiscounted ultimate
losses payable are in excess of the premiums received, a deferred charge asset is recorded for the excess. The
premium consideration that we charge the ceding companies may be lower than the undiscounted estimated ultimate
losses payable due to the time value of money. After receiving the premium consideration in full from our cedents at
the inception of the contract, we invest the premium received over an extended period of time, thereby generating
investment income. We expect to generate profits from these retroactive reinsurance policies when taking into account
the premium received and expected investment income, less contractual obligations and expenses. Deferred charge
assets, recorded in other assets, are amortized over the estimated claim payment period of the related contract with
the periodic amortization reflected in earnings as a component of losses and LAE. Deferred charge assets 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 charge assets and the amount of periodic amortization. Deferred charge assets 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.
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 on paid and unpaid losses, 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 on paid and unpaid losses asset. Note 11 - "Fair Value Measurements" describes
the internal model, including the observable and unobservable inputs used in the model.
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(p) Redeemable Noncontrolling Interest
In connection with the acquisitions of Arden, Atrium and StarStone, certain subsidiaries issued shares to
noncontrolling interests. These shares provide certain redemption rights to the holders, which may be settled in our
own shares or cash 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.
(q) Internal-use Software
Direct internal and external costs to acquire or develop internal-use software have been capitalized. We only
capitalize costs incurred after the preliminary project stage has been completed, and when management has authorized
and committed to funding the project and it is probable that the project will be completed and the software will be used
to perform the functions intended. Capitalized costs related to internal-use software are amortized on a straight-line
basis over the estimated useful lives of the assets. These capitalized costs are also assessed for impairment when
impairment indicators exist.
(r) Held-for-sale Business and Discontinued Operations
We report a business as held-for-sale when certain criteria are met, which include (1) management either
approved the sale or is in the process of obtaining 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, and (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 for periods prior to its sale.
New Accounting Standards Adopted in 2018
Accounting Standards Update ("ASU") 2017-09, Stock Compensation - Scope of Modification Accounting
In May 2017, the Financial Accounting Standards Board (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 Accounting Standards Codification ("ASC") 718 - Compensation - Stock Compensation.
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 adoption of this guidance did not have
any 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 - Compensation -
Retirement Benefits, 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 also requires that only the
service-cost component of the net benefit cost is eligible for capitalization, which is a change from prior practice, under
which entities capitalized the aggregate net benefit cost when applicable. The adoption of this guidance did not have
any impact on our consolidated financial statements and disclosures.
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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 the derecognition
of nonfinancial assets (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms
the derecognition of nonfinancial assets with the model for transactions in the revenue standard, ASC 606. 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 adoption of this guidance did not have any
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 adoption of this guidance did not have any 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 adoption of this guidance did not have any impact on our
consolidated financial statements and disclosures.
ASUs 2016-01 and 2018-03, Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued ASU 2016-01, which amends the guidance on the classification and
measurement of financial instruments. Although the ASU retains many of the current requirements, it significantly
revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities,
and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also
amends certain disclosure requirements associated with the fair value of financial instruments.
In February 2018, the FASB also issued ASU 2018-03, which clarifies that entities should use a prospective
transition approach only for equity securities they elect to measure using the new measurement alternative. The
amendments also clarify that an entity that voluntarily discontinues using the measurement alternative for an equity
security without a readily determinable fair value must measure that security and all identical or similar investments of
the same issuer at fair value. Under this guidance, this election is irrevocable and will apply to all future purchases of
identical or similar investments of the same issuer. The amendments also clarify other aspects of ASU 2016-01 regarding
how to apply the measurement alternative and the presentation requirements for financial liabilities measured under
the fair value option. The adoption of this guidance was contingent on the adoption of ASU 2016-01.
We adopted ASU 2016-01 as amended by ASU 2018-03 on January 1, 2018 using the modified retrospective
approach and recorded a cumulative-effect adjustment of $1.6 million to reduce opening retained earnings for certain
of our other investments that were previously classified as available-for-sale securities and for which changes in fair
value were previously included in accumulated other comprehensive income.
ASUs 2014-09, 2016-08, 2016-10 and 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 within the FASB's codification, including ASC 944 - Financial Services - Insurance,
ASC 320 - Investments - Debt Securities, ASC 321 - Investments - Equity Securities, ASC 323 - Investments - Equity
Method and Joint Ventures and ASC 825 - Financial Instruments. However, while contracts within the scope of ASC
944 are excluded from the scope of the ASU, certain insurance-related contracts are in scope, 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. Subsequently, the FASB issued ASUs 2016-08, 2016-10 and 2016-12 that
either made targeted amendments to or clarified the implementation of ASU 2014-09.
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We adopted ASU 2014-09 and the related amendments on January 1, 2018 using the modified retrospective
method with prior periods not being restated. The adoption of this guidance and the related amendments did not have
a material impact on our consolidated financial statements and related disclosures, since substantially all of our revenues
are from sources that are within the scope of other FASB topics, primarily ASC 944, ASC 320, ASC 321, ASC 323 and
ASC 825, and therefore are excluded from the scope of the revenue recognition standard.
Recently Issued Accounting Pronouncements Not Yet Adopted
ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued ASU 2018-17, which clarifies that when determining whether a decision-
making fee is a variable interest, a reporting entity should consider indirect interests held through related parties under
common control on a proportional basis rather than as the equivalent of a direct interest in its entirety, as currently
required in U.S. GAAP. This amendment will (1) likely result in more decision makers not having a variable interest
through their decision-making arrangements and (2) create alignment between determining whether a decision-making
fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary
of a variable interest entity ("VIE"). The ASU is effective for interim and annual reporting periods beginning after
December 15, 2019, although early adoption is permitted. All entities are required to apply this guidance retrospectively
with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. While some
of our subsidiaries are involved in certain decision-making arrangements for which they earn fees that are considered
variable interests, they do not meet the primary beneficiary definition under the VIE guidance with respect to these
arrangements. Therefore, we do not expect the adoption of this guidance to have a material impact on our consolidated
financial statements and the related disclosures.
ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance in ASC
820 - Fair Value Measurement, by removing and modifying certain existing disclosure requirements, while also adding
new disclosure requirements. The ASU is effective for interim and annual reporting periods beginning after December
15, 2019, although early adoption is permitted, with the amendments being applied either prospectively or
retrospectively, as specified in the ASU. In addition, an entity may elect to early adopt the removal or modification of
disclosures immediately and delay the adoption of the new disclosure requirements until the effective date. We are
currently assessing the impact of adopting this guidance however we do not expect the new or modified disclosures
to have a material impact on our consolidated financial statements.
ASU 2018-12, Targeted Improvements to the Accounting for Certain Long-Duration Insurance Contracts
In August 2018, the FASB issued ASU 2018-12, which amends the accounting and disclosure model for certain
long-duration insurance contracts under U.S GAAP. The goal of the amendments in this ASU is to improve the following
aspects of financial reporting related to long-duration insurance contracts: (1) measurement of the liability for future
policy benefits related to non-participating traditional and limited-payment contracts, (2) measurement and presentation
of market risk benefits, (3) amortization of deferred acquisition costs, and (4) presentation and disclosures. The ASU
is effective for interim and annual reporting periods beginning after December 15, 2020, although early adoption is
permitted. Once the transfer of our remaining life insurance policies from our subsidiary Alpha Insurance SA ("Alpha")
to Monument Insurance Group Limited ("Monument") is completed, as discussed in Note 12 - "Policy Benefits for Life
Contracts", we will only have de minimis exposures relating to long duration insurance contracts in our consolidated
subsidiaries. Therefore, the adoption of this guidance is not expected to have a material impact on our consolidated
financial statements and related disclosures.
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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 (the "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)
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
related disclosures.
ASUs 2016-13 and 2018-19, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial
Instruments
In June 2016, the FASB issued ASU 2016-13, which is codified in ASC 326, amending the guidance on the
impairment of financial instruments and significantly changing how entities measure credit losses for most financial
assets and certain other financial instruments including reinsurance balances recoverable on paid and unpaid losses
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. In November 2018, the FASB also issued
ASU 2018-19 covering targeted improvements to ASU 2016-13, which clarifies that receivables arising from operating
leases are not within the scope of ASC 326-20 and that instead, the impairment of such receivables should be accounted
for in accordance with ASC 842 - Leases.
We expect to adopt ASU 2016-13 and the related amendments on January 1, 2020 using the modified
retrospective approach required by the standard. Upon adoption of the standard, 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 on paid and unpaid losses,
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 on paid
and unpaid losses that we have currently recorded, based on the “incurred loss” approach under existing guidance.
We are continuing to review all of our financial instruments as well as assets that are subject to credit risk,
primarily our reinsurance balances recoverable 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 given the objective of the new guidance, the magnitude of any increase will depend
largely on the composition of our investment portfolio and the reinsurance balances recoverable, in addition to the
prevailing economic conditions and forecasts at the time of our adoption of the ASU.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
ASUs 2016-02, 2018-10 and 2018-11, Leases
In February 2016, the FASB issued ASU 2016-02, which is codified in ASC 842, amending 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 an offsetting lease liability on the balance sheet and to disclose qualitative and
quantitative information about leasing arrangements. Subsequently, in July 2018, the FASB issued ASU 2018-10, which
clarifies how to apply certain aspects of ASC 842. The amendments in the ASU address a number of issues in the new
leases guidance, including (1) the rate implicit in the lease, (2) impairment of the net investment in the lease, (3) lessee
reassessment of lease classification, (4) lessor reassessment of lease term and purchase options, (5) variable payments
that depend on an index or rate, and (6) certain transition adjustments.
In July 2018, the FASB also issued ASU 2018-11, which adds a transition option for all entities and a practical
expedient only for lessors to ASU 2016-02. The transition option, which we elected on adoption of the guidance, allows
entities to choose not to apply the new leases standard in the comparative periods they present in their financial
statements in the year of adoption. Under the transition option, entities can instead opt to continue to apply the legacy
guidance in ASC 840 - Leases, including its disclosure requirements, in the comparative periods presented in the year
they adopt the new leases standard. This means that entities that elect this option will only provide annual disclosures
for the comparative periods because ASC 840 does not require interim disclosures. Entities that elect this transition
option will still be required to adopt the new leases standard using the modified retrospective transition method required
by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in
the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an
option to not separate the non-lease components from the associated lease components when certain criteria are met
and requires them to account for the combined component in accordance with the revenue recognition standard in
ASC 606 if the associated non-lease components are the predominant components.
We adopted the new leasing standard and the related amendments on January 1, 2019 using the modified
retrospective transition method as required by the standard, and based on the detailed analysis of our operating lease
arrangements, we will recognize a right-of-use asset and an offsetting lease liability of approximately $65.0 million on
our consolidated balance sheet, relating primarily to office space and facilities that we have leased to conduct our
business operations.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
3. ACQUISITIONS
2018
Maiden Re North America
Overview
On December 27, 2018, we completed the acquisition of Maiden Reinsurance North America, Inc. (“Maiden Re
North America”) from a subsidiary of Maiden Holdings, Ltd. ("Maiden Holdings"). Maiden Re North America is a
diversified insurance company domiciled in Missouri that provides property and casualty treaty reinsurance, casualty
facultative reinsurance and accident and health treaty reinsurance. As part of the transaction, we also novated and
assumed certain reinsurance agreements from Maiden Holdings' Bermuda reinsurer, including certain reinsurance
agreements with Maiden Re North America. Refer to Note 4 - "Significant New Business" for additional information
relating to these reinsurance agreements. We will operate the business in run-off. The renewal rights were not included
in the transaction.
Purchase Price
The total cash paid in the transaction was $286.4 million, subject to certain post-closing adjustments. The
components of the consideration paid to acquire all of the outstanding shares of Maiden Re North America were as
follows:
Cash paid
Adjustment for the fair value of preexisting relationships
Total purchase price
Net assets acquired at fair value (excluding preexisting relationships)
Excess of purchase price over fair value of net assets acquired
$
$
$
$
286,375
10,273
296,648
296,648
—
The purchase price was allocated to the acquired assets and liabilities of Maiden Re North America based on
their estimated fair values at the acquisition date.
Adjustment for the Fair Value of Preexisting Relationships
Enstar had contractual preexisting relationships with Maiden Re North America, which were deemed to be
effectively settled at fair value on the acquisition date. The differences between the carrying value and the fair value
of the preexisting relationships was included as part of the purchase price in accordance with ASC 805 - Business
Combinations. The fair value of the balances relating to preexisting reinsurance relationships with Maiden Re North
America were deemed to equal their carrying values given their short-term nature and the expectation that they would
all be settled within the next twelve months.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Fair Value of Net Assets Acquired and Liabilities Assumed
The following table summarizes the fair values of the assets acquired and liabilities assumed (excluding
preexisting relationships and net of the intercompany cession assumed as part of the transaction) in the Maiden Re
North America transaction at the acquisition date, which have all been allocated to the Non-life Run-off segment.
ASSETS
Fixed maturities, trading, at fair value
Short-term investments, trading, at fair value
Total investments
Cash and cash equivalents
Restricted cash and cash equivalents
Premiums receivable
Prepaid reinsurance premiums
Reinsurance balances recoverable
Other assets
TOTAL ASSETS
LIABILITIES
Losses and LAE
Unearned premiums
Other liabilities
TOTAL LIABILITIES
NET ASSETS ACQUIRED AT FAIR VALUE
$1,098,593
3,508
1,102,101
12,035
26,871
138,378
3,257
87,018
96,669
$1,466,329
$1,027,367
85,696
56,618
1,169,681
$ 296,648
Maiden Re North America's Results Included in Condensed Consolidated Statement of Earnings
The table below summarizes the results of the Maiden Re North America operations, which are included in
our condensed consolidated statement of earnings from the acquisition date to December 31, 2018:
Net investment income
Net unrealized gains
General and administrative expenses
Net earnings
KaylaRe
Overview
$
$
675
3,749
(435)
3,989
On May 14, 2018, the Company acquired all of the outstanding shares and warrants of KaylaRe Holdings, Ltd.
("KaylaRe"). In consideration for the acquired shares and warrants of KaylaRe, the Company issued an aggregate of
2,007,017 ordinary shares to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239
Series E non-voting ordinary shares. Effective May 14, 2018, we consolidated KaylaRe into our consolidated financial
statements, and any balances between KaylaRe and Enstar are now eliminated upon consolidation.
Refer to Note 20 - "Related Party Transactions" for additional information relating to KaylaRe.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Purchase Price
The components of the consideration paid to acquire all of the outstanding shares and warrants of KaylaRe
were as follows:
Fair value of Enstar ordinary shares issued
Fair value of previously held equity method investment
Adjustment for the fair value of preexisting relationships
Total purchase price
Net assets acquired at fair value (excluding preexisting relationships)
Excess of purchase price over fair value of net assets acquired
$
$
$
$
414,750
336,137
37,169
788,056
746,320
41,736
The purchase price was allocated to the acquired assets and liabilities of KaylaRe based on their estimated fair
values at the acquisition date. We recognized goodwill of $41.7 million on the transaction, primarily attributable to (i)
the capital synergies from integrating KaylaRe into our group capital structure, (ii) investment management capabilities
on a total return basis, and (iii) the incremental acquired capital to be utilized for future non-life run-off transactions.
Fair Value of Enstar Ordinary Shares Issued
The fair value of the Enstar ordinary shares issued was based on the closing price of Enstar's voting ordinary
shares of $206.65 as at May 14, 2018, the date the transaction closed. Enstar's non-voting ordinary shares are
economically equivalent to Enstar's voting ordinary shares.
Number of Enstar ordinary shares issued
Closing price of Enstar voting ordinary shares as of May 14, 2018
Fair value of Enstar ordinary shares issued to shareholders of KaylaRe
2,007,017
206.65
414,750
$
$
Fair Value of Previously Held Equity Method Investment
Prior to the close of the transaction, Enstar held a 48.2% interest in KaylaRe, which was accounted for as an
equity method investment in accordance with ASC 323 - Investments - Equity Method and Joint Ventures. The acquisition
of the remaining 51.8% equity interest in KaylaRe was considered a step acquisition, whereby the Company remeasured
the previously held equity method investment to fair value. The Company considered multiple factors in determining
the fair value of the previously held equity method investment, including (i) the price negotiated with the selling
shareholders for the 51.8% equity interest in KaylaRe, (ii) recent market transactions for similar companies, and (iii)
current trading multiples for comparable companies. Based on this analysis, a valuation multiple of 1.05 to KaylaRe's
carrying book value was determined to be appropriate to remeasure the previously held equity method investment at
fair value. This resulted in the recognition of a gain of $16.0 million on completion of the step acquisition of KaylaRe,
which was recorded in other income (loss) for the three and six months ended June 30, 2018.
Carrying value of previously held equity method investment prior to the close of the transaction
Price-to-book multiple
Fair value of previously held equity method investment prior to the close of the transaction
Gain recognized on remeasurement of previously held equity method investment to fair value
$
$
$
320,130
1.05
336,137
16,007
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Adjustment for the Fair Value of Preexisting Relationships
Enstar had contractual preexisting relationships with KaylaRe, which were deemed to be effectively settled at
fair value on the acquisition date. The differences between the carrying value and the fair value of the preexisting
relationships was included as part of the purchase price in accordance with ASC 805 - Business Combinations. The
fair value of the balances relating to preexisting reinsurance relationships with KaylaRe was determined using a
discounted cash flow approach and, where applicable, consideration was given to stated contractual settlement
provisions, when determining the loss to be recorded on the deemed settlement of these preexisting relationships.
The fair values of the balances arising from the non-reinsurance preexisting relationships with KaylaRe were deemed
to equal their carrying values given their short-term nature and the expectation that they would all be settled within the
next twelve months.
As a result of effectively settling all the contractual preexisting relationships with KaylaRe, the Company
recognized a loss of $15.6 million, which was recorded in other income (loss) in the three and six months ended June
30, 2018, as summarized below:
ASSETS
Funds held by reinsured companies
Carrying value
$
386,793 $
Deferred acquisition costs/Value of business acquired
TOTAL ASSETS
LIABILITIES
Losses and LAE
Unearned premiums
Insurance and reinsurance balances payable
Other liabilities
TOTAL LIABILITIES
33,549
420,342
339,747
105,602
25,897
1,864
473,110
Fair value
386,793 $
40,268
427,061
333,205
105,602
23,559
1,864
464,230
NET ASSETS (LIABILITIES)
$
(52,768) $
(37,169) $
Loss on
deemed
settlement
—
6,719
6,719
(6,542)
—
(2,338)
—
(8,880)
15,599
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Fair Value of Net Assets Acquired and Liabilities Assumed
The following table summarizes the fair values of the assets acquired and liabilities assumed (excluding
preexisting relationships) in the KaylaRe transaction at the acquisition date, which have all been allocated to the Non-
life Run-off segment.
ASSETS
Fixed maturities, trading, at fair value
Other investments, at fair value
Total investments
Cash and cash equivalents
Premiums receivable
Deferred acquisition costs
Other assets
TOTAL ASSETS
LIABILITIES
Losses and LAE
Unearned premiums
Insurance and reinsurance balances payable
Other liabilities
TOTAL LIABILITIES
$ 126,393
626,476
752,869
5,657
10,965
275
614
$ 770,380
$
4,059
10,984
13
9,004
24,060
NET ASSETS ACQUIRED AT FAIR VALUE
$ 746,320
KaylaRe's Results Included in Consolidated Statement of Earnings
The table below summarizes the results of the KaylaRe operations, which are included in our consolidated
statement of earnings from the acquisition date to December 31, 2018:
Premiums earned
Incurred losses and LAE
Acquisition costs
Underwriting income
Net investment income
Net unrealized gains
Net loss
$
10,188
(9,190)
(332)
666
1,972
(6,621)
(4,556)
$
Supplemental Pro Forma Financial Information (Unaudited)
The following unaudited pro forma condensed combined statement of earnings for the years ended December
31, 2018 and 2017 combines our historical consolidated statements of earnings with those of Maiden Re North America
and KaylaRe, giving effect to the business combinations and related transactions as if they had occurred on January
1, 2018 and 2017, respectively. For the year ended December 31, 2018, the operating results of Maiden Re North
America and KaylaRe 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 Maiden
Re North America and KaylaRe and related transactions had taken place at the beginning of each period presented,
nor is it indicative of future results.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
2018
Total income
Total expenses
Total noncontrolling interest
Net earnings (loss)
$
$
Enstar Group
Limited
Maiden Re
North
America
KaylaRe
Pro forma
Adjustments
Unaudited
Enstar Group
Limited - Pro
forma
1,528,830
865,682 $
596,860 $
(20,554) $
86,842 $
(1,077,954)
(618,719)
(57,607)
62,051
—
—
2,208
—
(1,752,072)
62,051
(150,221) $
(21,859) $
(78,161) $
89,050 $
(161,191)
Summary of the Pro Forma Adjustments to the Pro Forma Condensed Consolidated Statement of Earnings
for the Twelve Months Ended December 31, 2018 (Unaudited):
Income
(a) Share of net earnings related to KaylaRe as an equity method investee through to May
14, 2018, the date of acquisition
(b) Loss on settlement of pre-existing relationships on acquisition of KaylaRe
(c) Revaluation gain on previously held equity method investment in KaylaRe as of the
acquisition date
(d) Total income for the period subsequent to the acquisition of KaylaRe already included
within Enstar's full year results
Expenses
(a) Total expenses for the period subsequent to the acquisition of KaylaRe already included
within Enstar's full year results
$
$
$
(10,503)
15,598
(16,007)
97,754
86,842
2,208
2017
Total income
Total expenses
Total noncontrolling interest
Enstar Group
Limited
Maiden Re
North
America
KaylaRe
Pro forma
Adjustments
Unaudited
$
1,106,856 $
498,233 $
85,528 $
(16,203) $
(786,050)
(20,341)
(498,679)
(51,932)
—
(446) $
—
Enstar Group
Limited - Pro
forma
1,674,414
—
—
(1,336,661)
(20,341)
Net earnings (loss)
$
300,465 $
33,596 $
(16,203) $
317,412
Summary of the Pro Forma Adjustments to the Pro Forma Condensed Consolidated Statement of Earnings
for the Twelve Months Ended December 31, 2017 (Unaudited)
Income
(a) Share of net earnings related to KaylaRe as an equity method investee for the full year
to December 31, 2017
(16,203)
2016
DCo
On December 30, 2016, we completed the acquisition of DCo LLC ("DCo"). DCo holds liabilities associated with
personal injury asbestos claims and environmental claims arising from its legacy manufacturing operations. DCo’s
assets include, amongst others, insurance rights related to coverage against these liabilities and marketable securities.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 DCo.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
4. SIGNIFICANT NEW BUSINESS
2019
Maiden
On March 1, 2019, we entered into a Master Agreement with Maiden Holdings, Ltd. ("Maiden Holdings") and
Maiden Reinsurance Ltd. (“Maiden Re Bermuda”). Under the Master Agreement, Enstar and Maiden Re Bermuda
agreed to enter into an Adverse Development Cover Reinsurance Agreement (“ADC Agreement”) pursuant to which
Maiden Re Bermuda will cede and Enstar will reinsure 100% of the liability of Maiden Re Bermuda, as reinsurer, under
Maiden Re Bermuda’s two existing quota share agreements with certain insurance companies owned directly or
indirectly by AmTrust Financial Services, Inc. (“AmTrust”) for losses incurred on or prior to December 31, 2018 in
excess of a $2.44 billion retention, as such figure may be adjusted based upon Maiden’s final year end reserves for
the underlying business, up to a $675 million limit. The premium payable by Maiden Re Bermuda to Enstar under the
ADC Agreement is $500 million. Completion of the transaction is subject to, among other things, regulatory approvals
and satisfaction of various closing conditions. The Master Agreement contains customary representations, warranties,
covenants and other closing conditions. The transaction is expected to close in the first half of 2019.
Effective immediately upon the signing of the Master Agreement, the parties terminated and released each other
from their respective obligations under the previously disclosed Master Agreement, entered into on November 9, 2018.
The previous agreement provided for the parties to enter into a retrocession agreement pursuant to which Maiden Re
Bermuda would cede and Enstar would reinsure 100% of the liability of Maiden Re Bermuda, as reinsurer, under
Maiden Re Bermuda’s two existing AmTrust quota share agreements for losses incurred on or prior to June 30, 2018,
for a premium payable by Maiden Re Bermuda to Enstar of $2.675 billion.
Amerisure
On February 15, 2019, we entered into a loss portfolio transfer reinsurance agreement with Amerisure Mutual
Insurance Company ("Amerisure") and Allianz Risk Transfer (Bermuda) Limited (“ART Bermuda”). In the transaction,
Amerisure has agreed to cede, and each of Enstar and ART Bermuda has agreed to severally assume, a 50% quota
share of the construction defect losses incurred by Amerisure and certain of its subsidiaries on or before December
31, 2012. At closing, Amerisure would pay Enstar and ART Bermuda an aggregate premium of $125.0 million, which
would be adjusted for a broker commission and paid claims and recoveries from April 1, 2018. Enstar's subsidiary
would assume $60.0 million of net reserves in the transaction. Completion of the transaction, which is expected to
occur in the first quarter of 2019, is subject to, among other things, regulatory approvals and satisfaction of various
other customary closing conditions.
AmTrust RITC Transactions
On February 14, 2019, we entered into four RITC transactions with Syndicates 1206, 1861, 2526 and 5820,
managed by AmTrust Syndicates Limited, under which we reinsured to close the 2016 and prior underwriting years.
We assumed net reinsurance reserves of approximately £650.0 million (approximately $830.0 million) for cash
consideration approximately equal to the net amount of reserves assumed. We have an investment in AmTrust, as
described further in Note 21 - "Related Party Transactions".
2018
Allianz
Effective December 31, 2018, we and Allianz SE amended the January 1, 2016 reinsurance agreement between
our subsidiary and Allianz SE, which related to our reinsurance of certain U.S. workers' compensation, construction
defect, and asbestos, pollution and toxic tort business originally held by Fireman's Fund Insurance Company. The
amendment increased the original sub-limit related to asbestos & environmental (“A&E”) liabilities in exchange for a
premium of $70.0 million. This additional business is also covered by the consulting agreement that we entered into
with San Francisco Reinsurance Company, an affiliate of Allianz, in connection with our 2016 transaction with Allianz
discussed below.
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Maiden LPT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
On December 27, 2018, as part of the acquisition of Maiden Re North America as discussed in Note 3 -
"Acquisitions", we also novated and assumed certain reinsurance agreements from Maiden Re Bermuda, including
certain affiliate reinsurance agreements with Maiden Re North America. We assumed total gross unaffiliated reserves
of $72.1 million for total assets of $70.4 million on a funds held basis and recorded a deferred charge asset of $1.7
million, included in other assets.
Coca-Cola
On August 1, 2018, 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 $120.8 million for cash consideration of $103.6 million and recorded a deferred charge
of $17.2 million, included in other assets. We transferred the cash consideration received of $103.6 million into a trust
to support our obligations under the reinsurance agreement.
Zurich Australia
On February 23, 2018, we entered into a reinsurance agreement with Zurich Australian Insurance Limited, a
subsidiary of Zurich Insurance Group ("Zurich"), to reinsure its New South Wales Vehicle Compulsory Third Party
("CTP") insurance business. Under the agreement, which was effective as of January 1, 2018, we assumed gross loss
reserves of AUD$359.4 million ($280.8 million) in exchange for consideration of AUD$343.9 million ($268.7 million).
We elected the fair value option for this reinsurance contract and recorded an initial fair value adjustment of AUD$15.5
million ($12.1 million) on the assumed gross loss reserves. Refer to Note 11 - "Fair Value Measurements" for a description
of the fair value process and the assumptions made.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business,
we and Zurich also completed a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's
Insurance Act 1973 (Cth), effective December 31, 2018, which provided legal finality for Zurich's obligations.
Neon RITC Transaction
On February 16, 2018, we completed a reinsurance-to-close (“RITC”) transaction with Neon Underwriting Limited
("Neon"), under which we reinsured to close the 2015 and prior underwriting years of account (comprising underwriting
years 2008 to 2015) of Neon's Syndicate 2468, with effect from January 1, 2018. We assumed gross loss reserves of
£403.9 million ($546.3 million) and net loss reserves of £342.1 million ($462.6 million) relating to the portfolio in exchange
for consideration of £329.1 million ($445.1 million). We elected the fair value option for this reinsurance contract and
recorded initial fair value adjustments of $20.6 million and $17.5 million on the gross and net loss reserves assumed,
respectively. Refer to Note 11 - "Fair Value Measurements" for a description of the fair value process and the assumptions
made.
Novae RITC Transaction
On January 29, 2018, we completed an RITC transaction with AXIS Managing Agency Limited, under which we
reinsured to close the 2015 and prior underwriting years of account of Novae Syndicate 2007 ("Novae"), with effect
from January 1, 2018. We assumed gross loss reserves of £860.1 million ($1,163.2 million) and net loss reserves of
£630.7 million ($853.0 million) relating to the portfolio in exchange for consideration of £594.1 million ($803.5 million)
and recorded initial fair value adjustments of $67.5 million and $49.5 million on the gross and net loss reserves assumed,
respectively. Refer to Note 11 - "Fair Value Measurements" for a description of the fair value process and the assumptions
made.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Table of Contents
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
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 11 - "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.
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 11 - "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.
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Allianz
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 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.
Neon 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
5. DIVESTITURES, HELD-FOR-SALE BUSINESSES AND DISCONTINUED OPERATIONS
Pavonia
On December 29, 2017, we completed the sale of our 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. We used the proceeds to make repayments under our
revolving credit facility. Pavonia was a substantial portion of our previously reported Life and Annuities segment. We
classified the assets and liabilities of the business to be sold as held-for-sale.
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 and 2016:
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
2017
2016
55,906 $
41,117
577
1,564
69,089
38,140
4,263
1,912
99,164 $
113,404
84,029
9,025
12,813
(26)
105,841 $
(6,677)
(3,190)
76,594
9,836
14,416
199
101,045
12,359
(396)
(9,867) $
11,963
120,000
86,961
12,179
20,860 $
—
—
—
—
10,993 $
11,963
$
$
$
$
$
$
$
The following table presents the cash flows of Pavonia whilst under our ownership for the years ended
December 31, 2017 and 2016:
Operating activities
Investing activities
Change in cash of businesses held for sale
2017
2016
$
$
75,714 $
42,542
118,256 $
(71,521)
56,646
(14,875)
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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,
the date of disposal, were $135.1 million.
A sale of one subsidiary, Pavonia Life Insurance Company of New York ("PLIC NY"), has not yet completed. As
of both December 31, 2018 and 2017, included within other assets and other liabilities on our consolidated balance
sheet were amounts of $24.0 million and $11.3 million, respectively, relating to PLIC NY.
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 equity method 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 and
2016 were $(1.2) million and $1.0 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
6. INVESTMENTS
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair
value; (ii) available-for-sale portfolios of fixed maturity, carried at fair value; (iii) other investments carried at either fair
value or cost; (iv) equity method investments; and (v) funds held - directly managed.
Fixed Maturity Investments
Asset Types
The fair values of the underlying asset types of our short-term investments and fixed maturity investments,
classified as trading and available-for-sale, and the fixed maturity investments included within our funds held - directly
managed balance were as follows as at December 31, 2018 and 2017:
U.S. government and agency
U.K. government
Other government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturity and short-
term investments
U.S. government and agency
U.K. government
Other government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Total fixed maturity and short-
term investments
Short-term
Investments
$
45,885 $
2,275
19,064
44,900
—
—
—
1,992
2018
Trading
Available-for-
sale
Funds Held -
Directly
Managed
389,735 $
298,356
679,525
4,081,793
73,856
682,962
488,598
553,968
$
573
—
73,185
75,359
2,480
12
—
—
74,052 $
—
22,036
637,788
53,929
90,583
224,465
80,521
Total
510,245
300,631
793,810
4,839,840
130,265
773,557
713,063
636,481
$
114,116 $
7,248,793 $
151,609
$
1,183,374 $
8,697,892
Short-term
Investments
$
25,083 $
6,528
532
147,766
201
—
101
—
2017
Trading
Available-for-
sale
Funds Held -
Directly
Managed
528,953 $
304,357
295,715
3,215,294
100,020
288,713
421,447
541,574
$
4,187
—
85,437
115,121
5,136
31
—
373
69,850 $
—
2,926
695,490
58,930
29,439
211,186
97,565
Total
628,073
310,885
384,610
4,173,671
164,287
318,183
632,734
639,512
$
180,211 $
5,696,073 $
210,285
$
1,165,386 $
7,251,955
Included within residential and commercial mortgage-backed securities as at December 31, 2018 were securities
issued by U.S. governmental agencies with a fair value of $656.6 million (as at December 31, 2017: $181.8 million).
Included within corporate securities as at December 31, 2018 were senior secured loans of $20.4 million (as at
December 31, 2017: $68.9 million).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Contractual Maturities
The contractual maturities of our short-term investments and fixed maturity investments, classified as trading
and available-for-sale, and the fixed maturity investments included within our funds held - directly managed balance
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 of December 31, 2018
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
$
338,175
$
333,037
646,924
630,858
2,037,268
1,991,016
2,225,632
2,163,507
1,532,670
1,456,373
772,457
729,232
642,618
773,557
713,063
636,481
% of Total
Fair
Value
3.8%
7.3%
22.9%
24.9%
16.7%
8.9%
8.2%
7.3%
$ 8,924,976
$ 8,697,892
100.0%
The following table sets forth the credit ratings of our short-term investments and fixed maturity investments,
classified as trading and available-for-sale, and the fixed maturity investments included within our funds held - directly
managed balance as at December 31, 2018:
Amortized
Cost
Fair Value
% of Total
AAA
Rated
AA Rated
A Rated
BBB
Rated
Non-
Investment
Grade
Not Rated
$
512,360
$ 510,245
5.9% $ 502,819
$
7,426
$
— $
— $
— $
301,749
300,631
3.5%
2,144
298,487
—
—
—
—
—
814,614
793,810
9.1%
322,606
213,639
69,601
154,800
32,592
572
5,019,018
4,839,840
55.6%
129,059
470,571
2,306,532
1,731,398
197,822
4,458
132,928
772,457
130,265
773,557
1.5%
8.9%
7,934
644,418
69,270
51,729
41,666
8,658
11,395
10,495
—
54,727
—
3,530
729,232
713,063
8.2%
487,054
70,620
77,538
60,879
7,297
9,675
U.S.
government and
agency
U.K.
government
Other
government
Corporate
Municipal
Residential
mortgage-
backed
Commercial
mortgage-
backed
Asset-backed
642,618
636,481
7.3%
358,574
68,174
125,644
66,136
17,573
380
Total
$ 8,924,976
$8,697,892
100.0% $2,454,608
$1,249,916
$2,629,639
$2,035,103
$ 310,011
$ 18,615
% of total fair
value
28.2%
14.4%
30.2%
23.4%
3.6%
0.2%
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Unrealized Gains and Losses on Available-for-sale Fixed Maturity Investments
The amortized cost and fair values of our fixed maturity investments classified as available-for-sale were as
follows as at December 31, 2018 and 2017:
2018
U.S. government and agency
Other government
Corporate
Municipal
Residential mortgage-backed
2017
U.S. government and agency
Other government
Corporate
Municipal
Residential mortgage-backed
Asset-backed
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Non-OTTI
$
576
$
— $
(3) $
72,811
75,535
2,499
12
1,219
1,006
—
—
(845)
(1,182)
(19)
—
Fair
Value
573
73,185
75,359
2,480
12
$
151,433
$
2,225
$
(2,049) $
151,609
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
Gross Unrealized Losses on Available-for-sale Fixed Maturity Investments
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, 2018 and 2017:
2018
Fixed maturity 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
$
573
$
(3) $
— $
— $
573
$
Other government
Corporate
Municipal
Residential mortgage-backed
7,351
11,888
1,783
12
(345)
(629)
(18)
—
11,000
25,227
283
—
(500)
(553)
(1)
—
18,351
37,115
2,066
12
(3)
(845)
(1,182)
(19)
—
Total fixed maturity investments
$
21,607
$
(995) $
36,510
$
(1,054) $
58,117
$
(2,049)
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
2017
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
$
2,344
$
(16) $
1,842
$
(7) $
4,186
$
Other government
Corporate
Municipal
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, 2018 and 2017, the number of securities classified as available-for-sale in an unrealized
loss position was 88 and 96, respectively. Of these securities, the number of securities that had been in an unrealized
loss position for twelve months or longer was 42 and 37, respectively.
Other-Than-Temporary Impairment on Available-for-sale Fixed Maturity Investments
For the years ended December 31, 2018, 2017 and 2016, 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,
2018 and 2017. 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, 2018 and 2017.
Equity Investments
The following table summarizes our equity investments classified as trading as at December 31, 2018 and 2017:
Publicly traded equity investments in common and preferred stocks
Privately held equity investments in common and preferred stocks
2018
2017
$
$
138,415 $
228,710
367,125 $
106,603
—
106,603
Our publicly traded equity investments in common and preferred stocks predominantly trade on the major
exchanges and are managed by our external advisors. Our publicly traded equity investments are widely diversified
and there is no significant concentration in any specific industry.
Our privately held equity investments in common and preferred stocks are direct investments in companies that
we believe offer attractive risk adjusted returns and/or offer other strategic advantages. Each investment may have its
own unique terms and conditions and there may be restrictions on disposals. The market for these investments is
illiquid and there is no active market. Included within the above balance as at December 31, 2018 is an indirect
investment in AmTrust, with a fair value of $200.0 million. Refer to Note 21 - "Related Party Transactions" for further
information.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Other Investments, at fair value
The following table summarizes our other investments carried at fair value as of December 31, 2018 and
2017:
Hedge funds
Fixed income funds
Equity funds
Private equity funds
CLO equities
CLO equity fund
Private credit funds
Others
2018
2017
$
$
852,584 $
403,858
333,681
248,628
39,052
37,260
33,381
9,313
1,957,757 $
63,773
229,999
249,475
289,556
56,765
12,840
10,156
828
913,392
The valuation of our other investments is described in Note 11 - "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:
• Hedge funds may invest in a wide range of instruments, including debt and equity securities, and utilize various
sophisticated strategies to achieve their objectives. We invest in a mixture of fixed income, equity and multi-
strategy hedge funds. The hedge funds in which we invest have various imposed lock-up periods of up to three
years and redemption terms, predominantly 60 and 90 days. Certain of the hedge funds in which we invest
that are past their lock up periods are currently eligible for redemption, while others, with a market value of
$766.1 million, are still in the lock-up period. Investments of $71.5 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.
• 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. One of the funds, with a market value of $44.2 million in which we invest has a lock-
up period of up to two years and is eligible for quarterly redemptions thereafter with 65 days' notice. Another
fund, with a market value of $68.8 million, is not currently eligible for redemption. All other funds have liquidity
terms that vary from daily up to 30 days' notice.
• 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 quarterly.
• Private equity funds invest primarily in the financial services industry. All of our investments in 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.
• CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools
of corporate bank loans.
• CLO equity fund invests primarily in the equity tranches of term-financed securitizations of diversified pools of
corporate bank loans. This fund has a fair value of $37.3 million and approximately 28% of the fund is eligible
for redemption.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• 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.
• Others comprise of various investments including a real estate debt fund that invests primarily in European
commercial real estate equity, call options on equities and a fund that provides loans to educational institutions
throughout the United States and its territories.
The increase in our other investments carried at fair value between December 31, 2018 and December 31, 2017
was primarily attributable to $626.5 million of other investments acquired as part of the KaylaRe acquisition and net
additional subscriptions of $583.7 million to hedge funds, equity funds and fixed income funds.
As at December 31, 2018, we had unfunded commitments of $228.2 million to private equity funds.
Other Investments, at cost
During 2018, we sold our investments in life settlement contracts, which were carried at cost. During the years
ended December 31, 2018, 2017 and 2016, net investment income included $6.5 million, $13.8 million and $18.0
million, respectively, related to investments in life settlements. During the years ended December 31, 2018, 2017 and
2016, there were impairment charges of $6.6 million, $7.2 million and $5.3 million, respectively, recognized in net
realized and unrealized gains/losses.
Equity Method Investments
The table below shows our equity method investments as of December 31, 2018 and 2017:
Enhanzed Re
Citco
Monument
Clear Spring
Other
KaylaRe
Investment
94,800
$
50,000
26,600
11,210
15,250
—
197,860
$
2018
Ownership
%
Carrying
Value
47.4% $
31.9%
26.6%
20.0% $
~30%
—%
Investment
—
—
15,960
11,210
15,250
94,800 $
50,812
42,193
10,070
6,632
—
299,026
2017
Ownership
%
Carrying
Value
—% $
—%
26.6%
20.0%
~30%
48.2%
—
—
15,960
10,596
6,633
309,816
$
204,507 $
341,446
$
343,005
Refer to Note 21 - "Related Party Transactions" for further information regarding our investments in Clear Spring,
Citco, Monument, KaylaRe and Enhanzed Re.
As at December 31, 2018, we had unfunded commitments of $167.2 million related to equity method investments.
Funds Held
Under funds held arrangements, the reinsured company has retained funds that would otherwise have been
remitted to our reinsurance subsidiaries. We either have (i) funds held by reinsured companies, which are carried at
amortized cost and on which we receive a fixed crediting rate, or (ii) funds held - directly managed, which are carried
at fair value and on which we receive the underlying return on the portfolio. The investment returns on both categories
of funds held are recognized in net investment income and net realized and unrealized gains (losses). The funds held
balance is credited with investment income and losses payable are deducted.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Funds Held - Directly Managed
Funds held - directly managed, where we receive the underlying return on the investment portfolio, are carried
at fair value, either because we elected the fair value option at the inception of the reinsurance contract, or because
it represents the aggregate of funds held at amortized cost and the fair value of an embedded derivative. The embedded
derivative relates to our contractual right to receive the return on the underlying investment portfolio supporting the
reinsurance contract. We include the estimated fair value of these embedded derivatives in the consolidated balance
sheets with the host contract in order to reflect the expected settlement of these features with the host contract. The
change in the fair value of the embedded derivative is included in net unrealized gains (losses). The following table
summarizes the components of the funds held - directly managed as of December 31, 2018 and 2017:
Fixed maturity investments, trading
Other assets
2018
1,183,374 $
14,780
1,198,154 $
2017
1,165,386
14,554
1,179,940
$
$
The following table summarizes the fixed maturity investment components of funds held - directly managed as
of December 31, 2018 and 2017:
Funds held
- Directly
Managed -
Fair Value
Option
2018
Funds held
- Directly
Managed -
Variable
Return
Funds held
- Directly
Managed -
Fair Value
Option
2017
Funds held
- Directly
Managed -
Variable
Return
Total
Total
$
179,670
$ 1,044,377
$ 1,224,047
$
174,227
$
985,486
$ 1,159,713
(2,733)
—
(2,733)
—
(37,940)
(37,940)
973
—
—
973
4,700
4,700
$
176,937
$ 1,006,437
$ 1,183,374
$
175,200
$
990,186
$ 1,165,386
Fixed maturity investments, at
amortized cost
Net unrealized gains (losses):
Change in fair value - fair value
option accounting
Change in fair value - embedded
derivative accounting
Fixed maturity investments within
funds held - directly managed, at fair
value
Refer to the sections above for details of the fixed maturity investments within our funds held - directly managed
portfolios.
Funds Held by Reinsured Companies
Funds held by reinsured companies, where we received a fixed crediting rate, are carried at cost on our
consolidated balance sheets. As of December 31, 2018 and 2017, we had funds held by reinsured companies of $321.3
million and $175.4 million, respectively.
170
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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, 2018, 2017 and 2016 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 investments
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)
2018
189,000 $
2017
144,367 $
2016
114,885
$
12,117
10,041
37,623
9,314
601
32,479
4,491
22,583
5,769
248,781
186,761
147,728
5,397
19,703
6,511
31,611
280,392
(9,721)
4,355
14,337
14,370
33,062
219,823
(11,034)
4,874
22,515
18,191
45,580
193,308
(7,845)
$
270,671 $
208,789 $
185,463
Components of net realized and unrealized gains (losses) for the years ended December 31, 2018, 2017 and
2016 were as follows:
Net realized gains (losses) on sale:
Gross realized gains on fixed maturity securities, available-for-sale
securities (1)
Gross realized losses on fixed maturity securities, available-for-sale
securities (1)
Net realized gains (losses) on fixed maturity securities, trading
Net realized losses on fixed maturity securities in funds held - directly
managed portfolios
Net realized gains on equity investments, trading
Total net realized gains (losses) on sale
Net unrealized gains (losses):
Fixed maturity securities, trading
Fixed maturity securities in funds held - directly managed portfolios
Equity investments, trading
Other investments
Total net unrealized gains (losses)
Net realized and unrealized gains (losses)
2018
2017
2016
$
27
$
616
$
405
(90)
(27,646)
(3,940)
4,016
(27,633)
(165,187)
(46,257)
(9,831)
(163,976)
(385,251)
(125)
4,695
(4,219)
701
1,668
35,878
33,902
16,498
102,388
188,666
$
(412,884) $
190,334
$
(21)
1,848
(14,616)
5,348
(7,036)
36,314
(28,317)
6,561
70,296
84,854
77,818
(1)The gross realized gains and losses on available-for-sale investments included in the table above resulted from sales of $11.4 million, $40.8 million
and $41.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.
171
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Restricted Assets
We utilize trust accounts to collateralize business with our insurance and reinsurance counterparties. We are
also required to maintain investments and cash and cash equivalents on deposit with regulatory authorities and Lloyd's
to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are
available to settle insurance and reinsurance liabilities. Collateral generally takes the form of assets held in trust, letters
of credit or funds held. The assets used as collateral are primarily highly rated fixed maturity securities. The carrying
value of our restricted assets, including restricted cash of $380.5 million and $257.7 million, as of December 31, 2018
and 2017, 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)
2018
4,336,752 $
2017
3,118,892
$
579,048
127,841
354,589
599,829
151,467
234,833
$
5,398,230 $
4,105,021
(1) Our 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. We also utilize unsecured letters of credit for Funds at Lloyd's, as described in Note 15 - "Debt Obligations and Credit
Facilities".
The increase in the collateral held in trust for third-party agreements and Funds at Lloyd's was primarily due to
the transactions with Neon, Novae, Zurich and Maiden Re North America described in Note 3 - "Acquisitions" and
Note 4 - "Significant New Business".
172
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
7. DERIVATIVES AND HEDGING INSTRUMENTS
Foreign Currency Hedging of Net Investments in Foreign Operations
We use foreign currency forward exchange rate contracts in qualifying hedging relationships to hedge the foreign
currency exchange rate risk associated with certain of our net investments in foreign operations. At December 31,
2018 and 2017, we had forward foreign 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,
2018 and 2017:
2018
Fair Value
2017
Fair Value
Gross Notional
Amount
Assets
Liabilities
Gross Notional
Amount
Assets
Liabilities
Foreign exchange forward - AUD
$
42,258
$
1,377
$
— $
32,810
$
— $
Foreign exchange forward - EUR
Foreign exchange forward - CAD
66,422
—
238
—
300
—
—
27,141
Total qualifying hedges
$
108,680
$
1,615
$
300
$
59,951
$
—
11
11
965
—
512
$
1,477
The Canadian Dollar ("CAD") foreign currency contract that we had in place to hedge the net investment in our
CAD denominated operations was discontinued effective December 31, 2017 following the disposal of those operations.
The following table presents the amounts of the net gains and losses deferred in the 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, 2018, 2017 and 2016:
Foreign exchange forward - AUD
Foreign exchange forward - EUR
Foreign exchange forward - CAD
Total qualifying hedges
Amount of Gains (Losses) Deferred in AOCI
2018
2017
2016
$
$
3,438
$
1,000
—
4,438
$
(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 from CTA
to earnings, the cumulative losses of $1.1 million related to the CAD foreign currency forward contract which hedged
our CAD denominated net investment in Pavonia.
Non-derivative Hedging Instruments of Net Investments in Foreign Operations
As at December 31, 2018 and 2017, there were borrowings of €nil
and €50.0 million ($60.1 million), respectively,
under our revolving credit facilities that were designated as non-derivative hedges of our net investment in certain
subsidiaries whose functional currency is denominated in Euros. These Euro-denominated borrowings were repaid in
full and replaced by a Euro-denominated foreign currency forward exchange rate contract in a qualifying hedging
arrangement during the year ended December 31, 2018.
The following table presents the amounts of the net gains and losses deferred in the CTA account in AOCI relating
to these qualifying Euro-loan non-derivative hedging instruments for the years ended December 31, 2018, 2017 and
2016:
Net gains (losses) on qualifying non-derivative hedges
$
3,144 $
(9,375) $
6,000
Amount of Gains (Losses) Deferred in AOCI
2018
2017
2016
173
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 and the estimated fair values recorded within other
assets and liabilities as at December 31, 2018 and 2017 and the gains and losses during the years ended December 31,
2018 and 2017, related to our non-qualifying foreign currency forward exchange rate hedging relationships:
December 31, 2018
Fair Value
2018
Gross Notional
Amount
Assets
Liabilities
Gains (losses) on non-
qualifying hedges charged to
earnings
Foreign exchange forward - AUD
$
45,427
$
1,952
$
310
$
Foreign exchange forward - CAD
Foreign exchange forward - EUR
Foreign exchange forward - GBP
55,050
54,282
256,959
1,441
139
1,554
—
301
72
Total non-qualifying hedges
$
411,718
$
5,086
$
683
$
4,958
9,311
2,296
15,078
31,643
December 31, 2017
Fair Value
2017
Gross Notional
Amount
Assets
Liabilities
Gains (losses) on non-
qualifying hedges charged to
earnings
Foreign exchange forward - AUD
$
57,028
$
— $
1,002
$
Foreign exchange forward - EUR
Foreign exchange forward - GBP
19,235
207,323
Total non-qualifying hedges
$
283,586
$
46
262
308
455
4,312
$
5,769
$
(1,002)
(971)
(6,367)
(8,340)
There were no such non-qualifying foreign currency forward contracts utilized during the year ended
December 31, 2016.
Investments in Call Options on Equities
During the year ended December 31, 2018, we purchased call options on equities at a cost of $10.0 million and
recorded unrealized losses in net earnings of $9.4 million on the instruments for the year ended December 31, 2018.
We did not have any equity call option instruments as of or during the year ended December 31, 2017. 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.
174
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
8. REINSURANCE BALANCES RECOVERABLE ON PAID AND UNPAID LOSSES
The following table provides the total reinsurance balances recoverable on paid and unpaid losses as of
December 31, 2018 and 2017:
Recoverable from reinsurers on unpaid:
Outstanding losses
IBNR
Fair value adjustments - acquired companies
Fair value adjustments - fair value option
Total reinsurance reserves recoverable
Paid losses recoverable
Non-life
Run-off
Atrium
StarStone
Other
Total
2018
$
901,772
$
18,891
$
263,065
$
— $ 1,183,728
609,434
(14,344)
(130,739)
1,366,123
138,265
19,247
201,784
630
—
38,768
(256)
(1,899)
—
462,950
23,813
—
—
—
830,465
(15,613)
(130,739)
— 1,867,841
—
161,822
$ 1,504,388
$
38,512
$
486,763
$
— $ 2,029,663
Reinsurance balances recoverable on paid and
unpaid losses
Reinsurance balances recoverable on paid and
unpaid losses - fair value option
Total
$
764,797
$
38,512
$
486,763
$
— $ 1,290,072
739,591
—
—
—
739,591
$ 1,504,388
$
38,512
$
486,763
$
— $ 2,029,663
Recoverable from reinsurers on unpaid:
Outstanding losses
IBNR
Fair value adjustments - acquired companies
Fair value adjustments - fair value option
Total reinsurance reserves recoverable
Paid losses recoverable
Reconciliation to Consolidated Balance Sheet:
Reinsurance balances recoverable on paid and
unpaid losses
Reinsurance balances recoverable on paid and
unpaid losses - fair value option
Total
Non-life
Run-off
Atrium
StarStone
Other
Total
2017
$
932,284
$
7,472
$
211,650
$
— $ 1,151,406
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
$
—
—
—
—
16
16
864,250
(13,640)
(131,983)
1,870,033
150,997
$ 2,021,030
$
963,514
$
40,080
$
475,196
$
16
$ 1,478,806
542,224
—
—
$ 1,505,738
$
40,080
$
475,196
$
—
16
542,224
$ 2,021,030
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 on paid and unpaid losses 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 11 - "Fair Value
Measurements".
175
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
As of December 31, 2018 and 2017, we had reinsurance balances recoverable on paid and unpaid losses of
approximately $2,029.7 million and $2,021.0 million, respectively. The increase of $8.6 million in reinsurance balances
recoverable on paid and unpaid losses was primarily related/due to the Maiden Re North America, Neon and Novae
transactions, partially offset by the KaylaRe transaction and by reserve reductions, commutations and cash collections
made during the year ended December 31, 2018 in our Non-life Run-off segment.
Top Ten Reinsurers
December 31, 2018
December 31, 2017
Top ten reinsurers
Other reinsurers > $1
million
Other reinsurers < $1
million
Total
Non-life
Run-off
Atrium
StarStone
Other
Total
% of
Total
Non-life
Run-off
Atrium
StarStone
Other
Total
% of
Total
$1,124,079
$
25,239
$ 263,192
$
— $1,412,510
69.6% $ 1,166,057
$
22,422
$
328,257
$
— $1,516,736
75.0%
364,098
12,091
220,123
16,211
1,182
3,448
—
—
596,312
29.4%
322,722
16,631
144,336
20,841
1.0%
16,959
1,027
2,603
—
16
483,689
24.0%
20,605
1.0%
$1,504,388
$
38,512
$ 486,763
$
— $2,029,663
100.0% $ 1,505,738
$
40,080
$
475,196
$
16
$2,021,030
100.0%
Information regarding top ten reinsurers:
Number of top 10 reinsurers rated A- or better
Number of top 10 non-rated reinsurers (1)
Top 10 rated A- or better reinsurers recoverables
Top 10 collaterized non-rated reinsurers recoverables (1)
Single reinsurers that represent 10% or more of total reinsurance
balance recoverables as at September 30, 2018:
Hannover Ruck SE (2)
Lloyd's Syndicates (3)
December 31, 2018 December 31, 2017
7
3
1,096,272 $
316,238
1,412,510 $
6
4
829,164
687,572
1,516,736
279,723 $
334,509 $
320,047
193,838
$
$
$
$
(1) For the three non-rated reinsurers at as December 31, 2018 and four non-rated reinsurers as at December 31, 2017, we hold security in the form
of pledged assets in trust or letters of credit issued to us in the full amount of the recoverable.
(2) Hannover Ruck SE is rated AA- by Standard & Poor’s and A+ by A.M. Best.
(3) Lloyd's Syndicates are rated A+ by Standard & Poor's and A by A.M. Best.
Provisions for Uncollectible Reinsurance Balances Recoverable on Paid and Unpaid Losses
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 on paid and unpaid losses by rating of reinsurer
and our provisions for uncollectible reinsurance balances recoverable on paid and unpaid losses ("provisions for bad
debt") as of December 31, 2018 and 2017. The provisions for bad debt all relate to the Non-life Run-off segment.
2018
2017
Gross
Provisions
for Bad
Debt
Provisions
as a
% of Gross
Net
Gross
Provisions
for Bad
Debt
Provisions
as a
% of Gross
Net
Reinsurers rated A- or above
$ 1,612,464
$
51,519
$ 1,560,945
3.2% $ 1,252,887
$
51,115
$ 1,201,772
Reinsurers rated below A-,
secured
Reinsurers rated below A-,
unsecured
Total
430,852
—
430,852
—%
771,097
—
771,097
143,079
105,213
37,866
73.5%
162,259
114,098
48,161
$ 2,186,395
$
156,732
$ 2,029,663
7.2% $ 2,186,243
$
165,213
$ 2,021,030
4.1%
—%
70.3%
7.6%
176
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
9. DEFERRED CHARGE ASSETS
Deferred charge assets relate to retroactive reinsurance policies providing indemnification of losses and LAE
with respect to past loss events in the Non-life Run-off segment. 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 initial measurement. The premium consideration that we charge the
ceding companies may be lower than the undiscounted estimated ultimate losses payable due to the time value of
money. After receiving the premium consideration in full from our cedents at the inception of the contract, we invest
the premium received over an extended period of time thereby generating investment income. We expect to generate
profits from these retroactive reinsurance policies when taking into account the premium received and expected
investment income, less contractual obligations and expenses. Further information on deferred charge assets recorded
during the years ended December 31, 2018, 2017 and 2016 is included in Note 4 - "Significant New Business".
Deferred charge assets are included in other assets on our consolidated balance sheets. The following table
presents a reconciliation of the deferred charge assets for the years ended December 31, 2018, 2017 and 2016:
Beginning carrying value
Recorded during the year
Amortization
Impairment
Ending carrying value
2018
2017
2016
80,192 $
20,174
(13,781)
—
86,585 $
94,551 $
—
(14,359)
—
80,192 $
255,911
7,467
(130,194)
(38,633)
94,551
$
$
Deferred charge assets are amortized over the estimated claim payment period of the related contract with the
periodic amortization reflected in earnings as a component of losses and LAE. Deferred charge assets 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 charge assets and the amount of periodic amortization. Deferred charge assets 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. The impairment recognized in the year ended December 31, 2016 was offset in
earnings by favorable loss reserve development. For the year ended December 31, 2018, we completed our assessment
for impairment of deferred charge assets and concluded that there had been no impairment of our carried deferred
charge assets amount.
177
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
10. LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses ("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 using a variety of actuarial methods. We recognize an asset for the
portion of the liability that we expect to recover from reinsurers. LAE reserves include allocated loss adjustment expenses
("ALAE"), and unallocated loss adjustment expenses ("ULAE"). ALAE are linked to the settlement of an individual claim or
loss, whereas ULAE are based on our estimates of future costs to administer the claims. IBNR represents reserves for
loss and LAE that have been incurred but not yet reported to us. This includes amounts for unreported claims, development
on known claims and reopened claims.
The following table summarizes the liability for losses and LAE by segment and for our other activities as of
December 31, 2018 and 2017:
Non-life
Run-off
Atrium
StarStone
Other
Total
2018
Outstanding losses
IBNR
Fair value adjustments
Fair value adjustments - fair value option
ULAE
Total
$
$
94,885 $ 796,194 $
4,271,769 $
3,527,767
(217,527)
(374,752)
333,405
6,052 $ 5,168,900
4,468,991
(214,518)
(374,752)
360,883
7,540,662 $ 241,284 $ 1,608,697 $ 18,861 $ 9,409,504
787,894
(467)
—
25,076
140,521
3,476
—
2,402
12,809
—
—
—
Reconciliation to Consolidated Balance Sheet:
Losses and loss adjustment expenses
Losses and loss adjustment expenses, at fair
value
Total
$
$
4,666,607 $ 241,284 $ 1,608,697 $ 18,861 $ 6,535,449
2,874,055
— 2,874,055
7,540,662 $ 241,284 $ 1,608,697 $ 18,861 $ 9,409,504
—
—
Outstanding losses
IBNR
Fair value adjustments
Fair value adjustments - fair value option
ULAE
Total
2017
Non-life
Run-off
Atrium
StarStone
Other
Total
$
3,185,703 $
78,363 $ 590,977 $
— $ 3,855,043
2,903,927
150,508
599,221
— 3,653,656
(125,998)
(314,748)
300,588
9,547
—
2,455
(555)
—
18,100
—
—
—
(117,006)
(314,748)
321,143
$
5,949,472 $ 240,873 $ 1,207,743 $
— $ 7,398,088
Reconciliation to Consolidated Balance Sheet:
Losses and loss adjustment expenses
$
4,154,803 $ 240,873 $ 1,207,743 $
— $ 5,603,419
Losses and loss adjustment expenses, at fair
value
Total
1,794,669
—
—
— 1,794,669
$
5,949,472 $ 240,873 $ 1,207,743 $
— $ 7,398,088
The overall increase in the liability for losses and LAE between December 31, 2017 and December 31, 2018
was primarily attributable to the assumed reinsurance agreements with Neon, Novae and Zurich for which we have
elected the fair value option, as described in Note 4 - "Significant New Business", and the acquisition of Maiden Re
North America, as described in Note 3 - "Acquisitions", in our Non-life Run-off segment.
178
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The table below provides a consolidated reconciliation of the beginning and ending liability for losses and LAE
for the years ended December 31, 2018, 2017 and 2016:
Balance as at January 1
Less: reinsurance reserves recoverable
Less: deferred charge assets on retroactive reinsurance
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
Plus: deferred charge assets on retroactive reinsurance
2018
2017
2016
$
7,398,088
$
5,987,867
$
1,870,033
80,192
5,447,863
689,782
(235,757)
454,025
(189,560)
(1,194,985)
(1,384,545)
(145,243)
1,310,874
1,772,104
—
7,455,078
1,867,841
86,585
1,388,193
94,551
4,505,123
437,853
(244,302)
193,551
(82,273)
(862,921)
(945,194)
158,429
10,251
1,525,703
—
5,447,863
1,870,033
80,192
5,720,149
1,360,382
255,911
4,103,856
493,016
(318,917)
174,099
(79,579)
(753,478)
(833,057)
(46,903)
10,019
1,340,444
(243,335)
4,505,123
1,388,193
94,551
Balance as at December 31
$
9,409,504
$
7,398,088
$
5,987,867
The tables below provide the components of net incurred losses and LAE by segment and for our other activities
for the years ended December 31, 2018, 2017 and 2016:
Net losses paid
Net change in case and LAE reserves
Net change in IBNR reserves
Increase (reduction) in estimates of net ultimate losses
Increase (reduction) in provisions for unallocated LAE
Amortization of deferred charge assets
Amortization of fair value adjustments
Changes in fair value - fair value option
Net incurred losses and LAE
2018
Non-life
Run-off
Atrium
StarStone
Other
Total
$ 838,817
$
64,506
$ 477,130
$
4,092
$ 1,384,545
(547,420)
(565,385)
(273,988)
(65,401)
13,781
12,877
6,664
6,331
4,091
74,928
—
—
(5,118)
—
75,887
113,879
666,896
6,753
—
(266)
—
4,808
7,999
(460,394)
(439,416)
16,899
484,735
—
—
—
—
(58,648)
13,781
7,493
6,664
$ (306,067) $
69,810
$ 673,383
$
16,899
$ 454,025
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 bad debt
Increase (reduction) in provisions for unallocated
LAE
Amortization of deferred charge assets
Amortization of fair value adjustments
Changes in fair value - fair value option
2017
Non-life
Run-off
Atrium
StarStone
Total
$
581,723
$
55,678
$
307,793
$
945,194
(381,053)
(390,727)
(190,057)
(1,536)
(53,810)
14,359
10,114
30,256
8,338
7,679
31,685
(23,540)
(341,030)
(406,588)
71,695
315,938
197,576
159
285
—
(2,720)
—
—
(1,377)
(187)
—
(945)
—
(53,712)
14,359
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
Increase (reduction) in estimates of net ultimate
losses
Reduction in provisions for bad debt
Increase (reduction) in provisions for unallocated
LAE
Amortization of deferred charge assets
Amortization of fair value adjustments
Changes in fair value - fair value option
2016
Non-life
Run-off
Atrium
StarStone
Total
$
533,806
$
47,998
$
251,253
$
833,057
(608,785)
(347,384)
(422,363)
(13,822)
(43,955)
168,827
25,432
—
(148)
13,700
73,049
75,643
(535,884)
(258,041)
61,550
399,945
—
145
—
(3,308)
—
—
3,543
—
(1,895)
—
39,132
(13,822)
(40,267)
168,827
20,229
—
Net incurred losses and LAE
$
(285,881) $
58,387
$
401,593
$
174,099
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Asbestos and Environmental
In establishing the reserves for losses and LAE related to asbestos and environmental claims, management
considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for
known claims (including the cost of related litigation) when sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, reserves
have been established to cover additional exposures on both known and unreported claims. Estimates of the reserves
are reviewed and updated continually. Developed case law and claim histories are still evolving for such claims,
especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim
experience will be representative of future claim experience. In view of the changes in the legal and tort environment
that affect the development of such claims, the uncertainties inherent in valuing asbestos and environmental claims
are not likely to be resolved in the near future. Ultimate values for such claims cannot be estimated using traditional
reserving techniques and there are significant uncertainties in estimating the amount of our potential losses for these
claims. There can be no assurance that the reserves established by us will be adequate or will not be adversely affected
by the development of other latent exposures. The net liability for unpaid losses and LAE as of December 31, 2018
and 2017 included $1,703.6 million and $1,863.2 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, 2018 and 2017
was $1,839.7 million and $1,992.1 million, respectively. For the years ended December 31, 2018 and 2017, our reserves
for asbestos and environmental liabilities decreased by $152.4 million and increased by $970.4 million on a gross
basis, respectively, and decreased by $159.6 million and increased by $883.4 million on a net basis, respectively. The
increase in 2017 was primarily due to acquisition activity and the decrease in 2018 was primarily due to net paid losses,
foreign exchange and net favourable development, partially offset by acquisition activity.
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, 2018, net of reinsurance, as well as the cumulative number of reported claims,
IBNR balances, and other supplementary information.
The loss development tables disclosed below are presented as follows:
• Non-Life Run-off - Presented by acquisition year, if significant, and further disaggregated, if significant, by
line of business within that acquisition year. The lines of business disclosed include Asbestos, Environmental,
General Casualty, Workers’ Compensation, Professional Indemnity/Directors & Officers, Motor and Property.
• 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.
• Atrium - The loss development disclosures for our Atrium segment have not been disaggregated further by
line of business as the segment comprised approximately only 3% of our total consolidated liability for losses
and LAE as at December 31, 2018 and was, therefore, not considered material for further disaggregation.
For each acquisition year and/or line of business for which loss development tables have been provided below,
the disclosure approach and format adopted reflects the following:
• The incurred loss development tables include both reported case reserves and IBNR liabilities, as well as
cumulative paid losses;
• Both the incurred and cumulative paid loss development tables include allocated LAE (i.e. claims handling
costs allocated to specific individual claims) but exclude unallocated LAE (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);
• The fair value adjustments related to business acquisitions are excluded from the loss development tables,
however the undiscounted incurred losses, cumulative paid losses and allocated LAE related to business
acquisitions are included in the loss development tables;
• The fair value adjustments related to retroactive reinsurance agreements for which we have elected the fair
value option are excluded from the loss development tables, however the undiscounted incurred losses,
cumulative paid losses and allocated LAE related to retroactive reinsurance agreements for which we have
elected the fair value option are included in the loss development tables;
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• The amounts relating to the amortization of deferred charge assets are excluded from the loss development
tables;
• The amounts relating to the increase (reduction) in provisions for unallocated LAE are excluded from the loss
development tables;
• The amounts included within the loss development tables for the years ended December 31, 2009 through to
December 31, 2017 (April 1, 2014 through to December 31, 2017 in the case of StarStone since its date of
acquisition), as well as the historical average annual percentage payout ratios as of December 31, 2018, are
presented as supplementary information and are therefore unaudited;
• All data presented within the loss development tables is net of reinsurance recoveries, excluding provisions
for uncollectible reinsurance recoverables;
• The IBNR reserves included within each incurred loss development table by accident year, reflect the net IBNR
recorded as of December 31, 2018, including expected development on reported losses;
• For the Non-life Run-off segment loss development tables, all information for both acquisitions and retroactive
reinsurance agreements is presented prospectively. As the reserves are effectively re-underwritten at the date
the reserves are acquired or assumed, we believe that the historical loss development prior to being acquired
is not relevant to our own experience managing these reserves. In addition, the information required to prepare
the loss development disclosures on a retrospective basis is not always available to us and a mixed approach
would result in loss development tables that are not entirely reflective of the actual loss development;
• For the StarStone segment loss development tables, all information has 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; and
• For the Atrium segment loss development tables, all information has been presented on a retrospective basis.
The historical 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 development tables, 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, 2018.
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. The change in net incurred losses
shown within the loss development tables 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.
Establishing an estimate for loss reserves involves various assumptions and judgments, therefore, the information
contained within the loss development disclosures 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 Non-life Run-off
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 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 loss development tables,
which include IBNR losses, and to losses in the paid loss development tables, 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.
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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, 2018, 2017 and 2016 for the Non-life Run-off segment:
2018
2017
2016
Balance as at January 1
$
5,949,472
$
4,716,363
$
Less: reinsurance reserves recoverable
Less: deferred charge assets on retroactive reinsurance
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
Plus: deferred charge assets on retroactive reinsurance
1,377,485
80,192
4,491,795
12,451
(318,518)
(306,067)
(5)
(838,812)
(838,817)
(132,632)
1,111,839
1,761,836
—
6,087,954
1,366,123
86,585
1,000,953
94,551
3,620,859
5,866
(196,540)
(190,674)
(2,835)
(578,888)
(581,723)
138,772
10,251
1,494,310
—
4,491,795
1,377,485
80,192
Balance as at December 31
$
7,540,662
$
5,949,472
$
4,585,454
1,034,747
255,911
3,294,796
5,829
(291,710)
(285,881)
(3,869)
(529,937)
(533,806)
(27,478)
10,019
1,340,444
(177,235)
3,620,859
1,000,953
94,551
4,716,363
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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, 2018, 2017 and
2016 were as follows:
2018
2017
2016
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
$ 838,812
$
5
$ 838,817
$ 578,888
$
2,835
$ 581,723
$ 529,937
$
3,869
$ 533,806
(552,124)
4,704
(547,420)
(381,450)
397
(381,053)
(608,168)
(617)
(608,785)
(573,127)
7,742
(565,385)
(393,100)
2,373
(390,727)
(349,726)
(286,439)
12,451
(273,988)
(195,662)
5,605
(190,057)
(427,957)
Net losses paid
Net change in case and LAE
reserves
Net change in IBNR reserves
Increase (reduction) in estimates of
net ultimate losses
Reduction in provisions for bad debt
—
Increase (reduction) in provisions
for unallocated LAE
Amortization of deferred charge
assets
Amortization of fair value
adjustments
Changes in fair value - fair value
option
(65,401)
13,781
12,877
6,664
—
—
—
—
—
—
(1,536)
(1,536)
(13,822)
(65,401)
(54,071)
261
(53,810)
(44,190)
13,781
14,359
12,877
10,114
6,664
30,256
—
—
—
14,359
168,827
10,114
25,432
30,256
—
2,342
5,594
(347,384)
(422,363)
—
235
(13,822)
(43,955)
—
—
—
168,827
25,432
—
Net incurred losses and LAE
$ (318,518) $ 12,451
$ (306,067) $ (196,540) $
5,866
$ (190,674) $ (291,710) $
5,829
$ (285,881)
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, 2018
The reduction in net incurred losses and LAE for the year ended December 31, 2018 of $306.1 million included
net incurred losses and LAE of $12.5 million related to current period net earned premium from previously acquired
businesses that renewed certain policies while being run-off. Excluding current period net incurred losses and LAE of
$12.5 million, the reduction in net incurred losses and LAE liabilities relating to prior periods was $318.5 million, which
was attributable to a reduction in estimates of net ultimate losses of $286.4 million, a reduction in provisions for
unallocated LAE of $65.4 million relating to 2018 run-off activity, partially offset by the amortization of the deferred
charge assets of $13.8 million, amortization of fair value adjustments of $12.9 million and an increase in the fair value
of liabilities of $6.7 million related to our assumed retroactive reinsurance agreements for which we have elected the
fair value option.
The reduction in estimates of prior period net ultimate losses of $286.4 million for the year ended December 31,
2018 included a net reduction in case and IBNR reserves of $1,125.3 million, partially offset by net losses paid of
$838.8 million. For the year ended December 31, 2018, the overall change in our estimates of net ultimate losses
related to prior periods by line of business within our Non-life Run-off was as presented in the table below:
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Net change in case
and LAE reserves
Net change in
IBNR reserves
Increase (reduction) in
estimates of net
ultimate losses
Net losses paid
$
108,248 $
Asbestos
Environmental
General Casualty
Workers' Compensation
Marine, aviation and
transit
Construction defect
Professional indemnity/
Directors & Officers
Motor
Property
All Other
Total
21,273
141,624
139,226
67,831
22,182
161,797
104,182
22,178
50,271
(21,535) $
(151,662) $
479
(115,240)
(178,138)
(44,200)
(7,257)
(11,159)
(109,962)
(24,271)
(40,841)
(7,599)
(60,828)
(115,648)
(21,188)
(33,146)
(130,957)
(34,215)
(11,497)
(6,387)
(64,949)
14,153
(34,444)
(154,560)
2,443
(18,221)
19,681
(39,995)
(13,590)
3,043
(286,439)
$
838,812 $
(552,124) $
(573,127) $
The significant drivers of the results in the table above are explained below.
Workers' Compensation
A $154.6 million reduction in estimates of net ultimate losses in our workers' compensation line of business in
2018 arose across multiple portfolios, where reported incurred loss development was generally significantly less than
expected. When actual development is less than expected for a sustained period of time across a significant volume
of exposures, an updated actuarial analysis tends to indicate reductions in IBNR reserves. Updates to actuarial analysis,
factoring in the less-than-expected reported incurred loss development for the year, is the primary driver of the $154.6
million reduction to Workers' Compensation net ultimate loss estimates.
For certain of our portfolios, the lower than expected actual development was driven by significant pro-active
settlement activity on individual claimants where we were able to close open claims earlier than was indicated by the
original payout pattern, and in other portfolios, based on the review of recent loss development activity we revised our
actuarial development "tail factor" assumption, which led to a reduction in net ultimate losses. For example, in one
portfolio we observed favorable incurred loss development, primarily relating to accident years 1995 through 2005
where we paid $22.7 million in loss payments to release a corresponding $37.0 million of associated case reserves
for $14.3 million in favorable incurred loss development.
For recently acquired portfolios of workers' compensation business, we have utilized our subsidiary, Paladin
Managed Care Services ("Paladin"), to assist us in reviewing claims. Paladin generally produces savings related to
medical expense liabilities over and above savings achieved by prior vendors of such services, and the savings lead
to actual development that is less than expected, thereby driving reductions to the estimates of net ultimate losses. In
one particular program, our claims personnel pursued a pro-active strategy of settling with numerous workers'
compensation claimants whose injuries arose in recent accident years. For this portfolio, the claims team reduced the
open inventory of claims by 78% during 2018. This reduction in exposure, when incorporated into an updated actuarial
analysis, led to a reduction in our estimate of ultimate net losses of $30.2 million, primarily relating to accident years
2010 through 2014.
We also continue to actively seek to commute policies when possible, and where the commutation of the policy
is settled at a level below the carried value of the loss reserves, we record a reduction in our estimates of net ultimate
losses. During the year ended December 31, 2018, we completed 11 commutations across several portfolios that
contributed to the reduction in estimates of net ultimate losses.
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Asbestos
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The $64.9 million reduction in estimates of net ultimate losses in our asbestos line of business arose primarily
due to one asbestos portfolio where lower than expected volume of claims reported and a lower than expected severity
on claims settled in the period, when projected to net ultimate losses through actuarial methodologies, resulted in a
significant reduction in estimates of net ultimate losses. The volume of claims reported was 3% less than expected
and the average cost per claim was 5% less than expected. Across our other asbestos portfolios we had a combination
of commutations, detailed actuarial studies and lower than expected incurred loss development, which all resulted in
reductions in estimates of net ultimate losses.
Other
All other line of business changes in estimates of net ultimate losses were primarily due to the application of our
reserving methodologies, favorable actual versus expected loss development, pro-active claim management and
commutations.
The reduction of $65.4 million in provisions for unallocated LAE was due to a reduction in our estimate of the
total future costs to administer the claims.
The amortization of deferred charge assets of $13.8 million was associated with retroactive reinsurance contracts
where, at the inception of the contract, the estimated ultimate losses payable were in excess of premium received.
Deferred charge assets are amortized over the estimated claim payment period of the related contract and are adjusted
periodically to reflect new estimates of the amount and timing of the remaining loss payments.
The amortization of fair value adjustments of $12.9 million was related to the fair value adjustments associated
with the acquisition of companies. On acquisition, we are required to fair value the net assets acquired, including the
reinsurance balances recoverable and the liability for losses and LAE. The resulting fair value adjustments are then
amortized over the expected life of the reinsurance balances recoverable and the liability for losses and LAE.
The increase in the fair value of liabilities for which we have elected the fair value option of $6.7 million was
primarily due to decreases in the estimated duration of the net liabilities, partially offset by changes in the corporate
bond yield.
Year Ended December 31, 2017
The reduction in net 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 from previously acquired
businesses that renewed certain policies while being run-off. Excluding current period net incurred losses and LAE of
$5.9 million, the reduction in net incurred losses and LAE liabilities relating to prior periods was $196.5 million, which
was attributable to a reduction in estimates of net ultimate losses of $195.7 million, and a reduction in provisions for
unallocated LAE of $54.1 million, relating to 2017 run-off activity, partially offset by an increase in the fair value of
liabilities of $30.3 million related to our assumed retroactive reinsurance agreements for which we have elected the
fair value option, the amortization of the deferred charge assets of $14.4 million and the amortization of fair value
adjustments over the estimated payout period relating to companies acquired amounting to $10.1 million.
188
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The reduction in estimates of prior period net ultimate losses of $195.7 million for the year ended December 31,
2017 included a net reduction in case and IBNR reserves of $774.6 million, partially offset by net losses paid of $578.9
million. For the year ended December 31, 2017, the overall change in our estimates of net ultimate losses related to
prior periods by line of business within our Non-life Run-off was as presented in the table below:
Net change in case
and LAE reserves
Net change in
IBNR reserves
Increase (reduction) in
estimates of net
ultimate losses
Net losses paid
$
105,731 $
Asbestos
Environmental
General Casualty
Workers' Compensation
Marine, aviation and
transit
Construction defect
Professional indemnity/
Directors & Officers
Motor
Property
All Other
Total
26,542
94,526
187,712
18,272
33,802
33,402
24,391
13,440
41,070
(1,865) $
(76,837) $
(9,438)
(54,292)
(190,924)
(9,322)
(24,023)
(19,054)
(15,990)
(11,196)
(45,346)
(7,748)
(49,025)
(151,797)
(11,517)
(42,804)
(24,559)
(8,513)
(5,162)
(15,138)
27,029
9,356
(8,791)
(155,009)
(2,567)
(33,025)
(10,211)
(112)
(2,918)
(19,414)
(195,662)
$
578,888 $
(381,450) $
(393,100) $
The significant drivers of the results in the table above are explained below.
Workers' Compensation
The $155.0 million reduction in estimates of net ultimate losses in our workers' compensation line of business
arose primarily in five separate portfolios. Across these five portfolios, the reported incurred loss development was
generally significantly lower than expected. When actual development is less than expected for a sustained period of
time, across a significant volume of exposures, an updated actuarial analysis tends to indicate reductions in IBNR
reserves. In addition, we continue to pro-actively manage and settle claims where possible, commute policies if
appropriate and, through Paladin, we are able to achieve significant savings on medical costs through active claims
management strategies over the life of the reported claims. All of these items reduce the estimates of net ultimate
losses.
Construction Defect
The $33.0 million reduction in estimates of net ultimate losses in our construction defect line of business arose
primarily due to lower than expected actual incurred development in one portfolio. The active claims management
approach that our claims team adopted for the assumed exposures within this portfolio led to a significant reduction
loss in the inventory of the assumed open claims of 73% during 2017. This reduction in exposure, when incorporated
into our updated actuarial analysis, resulted in a reduction in estimates of net ultimate losses for this line of business.
Asbestos
The $27.0 million increase in estimates of net ultimate losses in our asbestos line of business resulted from a
ground-up study performed by a consulting actuarial firm on one of our portfolios. This study resulted in the recording
of additional reserves of $60.5 million due to a small number of accounts that experienced an increase in the notification
of claims which are expected to attach to the excess policies that we reinsure. This increase was partially offset by
favorable development of $33.5 million in our other portfolios of asbestos exposures arising primarily from lower than
expected claim notifications.
Other
All other line of business changes in estimates of net ultimate losses were primarily due to the application of our
reserving methodologies, favorable actual versus expected loss development, pro-active claim management and
commutations.
189
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The reduction in provisions for bad debt of $1.5 million was a result of the favorable recoveries from reinsurers,
the reduction in bad debt provisions for insolvent reinsurers as a result of distributions received and the reduction of
specific provisions held for certain reinsurers.
The reduction of $54.1 million in provisions for unallocated LAE was due to a reduction in our estimate of the
total future costs to administer the claims.
The amortization of deferred charge assets of $14.4 million was associated with retroactive reinsurance contracts
where, at the inception of the contract, the estimated ultimate losses payable were in excess of premium received.
Deferred charge assets are amortized over the estimated claim payment period of the related contract and are adjusted
periodically to reflect new estimates of the amount and timing of the remaining loss payments.
The amortization of fair value adjustment of $10.1 million was related to the fair value adjustments associated
with the acquisition of companies. On acquisition, we are required to fair value the net assets acquired, including the
reinsurance balances recoverable and the liability for losses and LAE. The resulting fair value adjustments are then
amortized over the expected life of the reinsurance balances recoverable and the liability for losses and LAE.
The increase in the fair value of liabilities for which we have elected the fair value option of $30.3 million was
primarily due to decreases in the estimated duration of the net liabilities, partially offset by changes in the corporate
bond yield.
Year Ended December 31, 2016
The reduction in net incurred losses and LAE for the year ended December 31, 2016 of $285.9 million included
net incurred losses and LAE of $5.8 million related to current period net earned premium, primarily for the run-off
business acquired with Sussex. Excluding current period net incurred losses and LAE of $5.8 million, the reduction in
net incurred losses and LAE liabilities relating to prior periods was $291.7 million, which was attributable to a reduction
in estimates of net ultimate losses of $428.0 million, a reduction in provisions for unallocated LAE of $44.2 million,
relating to 2016 run-off activity, and a reduction in the provision for bad debt of $13.8 million, partially offset by the
amortization of the deferred charge assets of $168.8 million and the amortization of fair value adjustments over the
estimated payout period relating to companies acquired amounting to $25.4 million.
The reduction in estimates of prior period net ultimate losses of $428.0 million for the year ended December 31,
2016 included a net reduction in case and IBNR reserves of $957.9 million, partially offset by net losses paid of $529.9
million. For the year ended December 31, 2016, the overall change in our estimates of net ultimate losses related to
prior periods by line of business within our Non-life Run-off was as presented in the table below:
Net change in case
and LAE reserves
Net change in
IBNR reserves
Increase (reduction) in
estimates of net
ultimate losses
Net losses paid
$
33,334 $
Asbestos
Environmental
General Casualty
Workers' Compensation
Marine, aviation and
transit
Construction defect
Professional indemnity/
Directors & Officers
Motor
Property
All Other
Total
12,233
83,821
255,886
15,885
39,915
32,397
11,788
29,203
15,475
544 $
(59,173) $
7,922
(51,885)
(405,102)
(15,738)
(19,491)
(45,530)
(24,832)
(34,543)
(19,513)
(25,738)
(47,209)
(173,846)
(7,773)
(10,014)
616
(4,103)
(13,137)
(9,349)
(25,295)
(5,583)
(15,273)
(323,062)
(7,626)
10,410
(12,517)
(17,147)
(18,477)
(13,387)
(427,957)
$
529,937 $
(608,168) $
(349,726) $
The significant drivers of the results in the table above are explained below.
190
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Workers' Compensation
The $323.1 million reduction in estimates of net ultimate losses in our workers' compensation line of business
arose primarily in three separate portfolios. Across these three portfolios, the reported incurred loss development was
generally significantly lower than expected. When actual development is lower than expected for a sustained period
of time across a significant volume of exposures, an updated actuarial analysis tends to indicate reductions in IBNR
reserves. In one specific portfolio, having observed a general trend of lower than expected actual development over
a sustained period of time, we revised the medical inflation assumption used to estimate case and LAE reserves for
long term disability claimants. This change to an actuarial assumption, driven by observed actual development, resulted
in a significant reduction in our estimates of net ultimate losses of $234.5 million, primarily across accident years 1991
through 2001. This was partially offset by a significant reduction in the related deferred charge asset as described
below.
Asbestos
The $25.3 million reduction in estimates of net ultimate losses in our asbestos line of business arose primarily
due to six commutations, which resulted in a $13.1 million reduction in net ultimate losses. The remainder of the
reduction arose due to lower than expected actual loss development.
Other
All other line of business changes in estimates of net ultimate losses were primarily due to the application of our
reserving methodologies, generally favorable actual versus expected loss development, pro-active claim management
and commutations.
The reduction in provisions for bad debt of $13.8 million was a result of the favorable recoveries from reinsurers,
and the reduction in bad debt provisions for insolvent reinsurers as a result of distributions received, partially offset by
additional provisions for certain reinsurers.
The reduction of $44.2 million in provisions for unallocated LAE was due to a reduction in our estimate of the
total future costs to administer the claims.
The amortization of deferred charge assets of $168.8 million was associated with retroactive reinsurance
contracts where, at the inception of the contract, the estimated ultimate losses payable were in excess of premium
received. Deferred charge assets are amortized over the estimated claim payment period of the related contract and
are adjusted periodically to reflect new estimates of the amount and timing of the remaining loss payments. In the year
ended December 31, 2016, the amortization of the deferred charge asset included an impairment of $38.6 million,
which was offset in earnings by favorable loss reserve development.
The amortization of fair value adjustment of $25.4 million was related to the fair value adjustments associated
with the acquisition of companies. On acquisition, we are required to fair value the net assets acquired, including the
reinsurance balances recoverable and the liability for losses and LAE. The resulting fair value adjustments are then
amortized over the expected life of the reinsurance balances recoverable and the liability for losses and LAE.
191
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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 tables provides a breakdown of gross and net losses and LAE reserves, consisting of Outstanding
Loss Reserve ("OLR") and IBNR by line of business and adjustments for fair value resulting from business combinations,
adjustments for where we elected the fair value option, deferred charge assets and ULAE, as of December 31, 2018
and 2017:
OLR
Gross
IBNR
2018
Total
OLR
(in thousands of U.S. dollars)
Net
IBNR
Total
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Professional indemnity/Directors & Officers
Motor
Property
Other
Fair value adjustments
Fair value adjustments - fair value option
Deferred charge on retroactive reinsurance
ULAE
Total
$
341,544
96,665
500,033
1,454,178
301,783
20,712
603,665
564,307
168,267
220,615
$
4,271,769
$ 1,275,476
126,035
$ 1,617,020
222,700
$
321,356
93,095
$ 1,171,754
117,384
$ 1,493,110
210,479
379,484
832,615
72,888
99,288
216,839
321,992
37,631
165,519
$ 3,527,767
879,517
2,286,793
416,097
1,115,116
298,612
537,782
78,023
94,736
166,898
304,874
36,817
227,994
19,310
426,020
414,847
160,873
175,289
$ 3,369,997
111,453
$ 2,918,333
374,671
120,000
820,504
886,299
205,898
386,134
$ 7,799,536
(217,527)
(374,752)
—
333,405
$ 7,540,662
714,709
1,652,898
306,017
114,046
592,918
719,721
197,690
286,742
$ 6,288,330
(203,183)
(244,013)
(86,585)
333,405
$ 6,087,954
OLR
Gross
IBNR
2017
Total
OLR
(in thousands of U.S. dollars)
Net
IBNR
Total
$ 1,337,467
93,345
$ 1,678,822
184,394
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Professional indemnity/Directors & Officers
Motor
Property
Other
Fair value adjustments
Fair value adjustments - fair value option
Deferred charge on retroactive reinsurance
ULAE
Total
$
366,446
95,801
344,425
1,458,430
109,102
28,701
214,803
242,213
65,445
260,337
$
3,185,703
$ 1,434,598
95,259
$ 1,801,044
191,060
$
266,526
748,949
56,284
135,608
40,265
30,734
9,706
85,998
$ 2,903,927
610,951
2,207,379
165,386
164,309
255,068
272,947
75,151
346,335
$ 6,089,630
(125,998)
(314,748)
—
300,588
$ 5,949,472
341,355
91,049
276,791
889,265
90,101
27,406
181,027
98,866
52,236
194,747
371,161
51,904
122,307
39,591
19,321
8,554
205,322
$ 2,253,418
75,376
$ 2,313,773
471,538
1,260,426
142,005
149,713
220,618
118,187
60,790
280,698
$ 4,567,191
(113,028)
(182,764)
(80,192)
300,588
$ 4,491,795
In addition to the breakdown of our non-life run-off reserves by line of business we also monitor our reserves by
acquisition year. The acquisition year is the year in which the net reserves were acquired via a business acquisition or
assumed via a retroactive reinsurance agreement. By analyzing the loss development tables by acquisition year on a
prospective basis, the impact of the take-on positions from year to year does not distort the loss development tables.
192
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table provides a summary of our net loss reserves, prior to provisions for bad debt, fair value adjustments,
deferred charge assets and ULAE as of December 31, 2018, by year of acquisition and by significant line of business:
2008
and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Asbestos
$ 205,298 $
3,936 $ 43,316 $
17 $
653 $ 11,860 $
Environmental
35,045
1,331
8,847
87
—
—
— $
—
931 $ 440,388 $ 709,758 $
50,139 $ 1,466,296
—
97,424
32,007
29,238
203,979
Acquisition Year
General
casualty
Workers'
compensation/
personal
accident
Marine,
aviation and
transit
Construction
defect
Professional
indemnity/
Directors &
Officers
Motor
Property
All Other
Total
69,876
3,759
15,743
29,110
13,715
15,300
35,645
46,730
5,610
99,801
372,058
707,347
4,444
218
66,030
177,572
2,524
77,629
—
426,225
315,788
80,525
498,872
1,649,827
4,127
7,519
4,132
10,739
—
—
230
413
—
—
—
—
13,968
2,126
—
75,303
186,721
304,635
—
55,727
29,569
28,102
—
114,041
6,778
24,407
4,099
19,773
5,278
1,560
1,553
3,560
5,622
6,097
5,108
10,040
36,836
209
672
1,290
9,352
8,291
—
617
—
3,663
36,252
332
14,268
16,453
—
20,820
6,112
16,044
90,260
1,050
—
—
401,029
592,095
7,201
2,633
653,103
716,686
151,939
195,736
26,474
135,951
35,709
283,135
16,083
1,134
$ 373,847 $ 28,714 $ 171,208 $ 229,993 $ 72,661 $ 109,069 $ 116,918 $ 574,715 $ 1,006,563 $ 1,171,281 $ 2,378,808 $ 6,233,777
The table below reconciles the net loss reserves, prior to provisions for bad debt, fair value adjustments, deferred
charge assets and ULAE as of December 31, 2018, by significant line of business to the line of business table presented
above:
Asbestos
Environmental
General casualty
Workers' compensation/personal accident
Marine, aviation and transit
Construction defect
Professional indemnity/Directors & Officers
Motor
Property
All Other
Total
2018
Total Net
Reserves per all
Acquisition
Years
Provision for
Bad Debt
Total Net
Reserves
$
1,466,296
$
26,814
$
1,493,110
203,979
707,347
1,649,827
304,635
114,041
592,095
716,686
195,736
283,135
6,500
7,362
3,071
1,382
5
823
3,035
1,954
3,607
210,479
714,709
1,652,898
306,017
114,046
592,918
719,721
197,690
286,742
$
6,233,777
$
54,553
$
6,288,330
Loss development tables have been provided for acquisition years 2009 through 2018. In addition, the workers'
compensation line of business in the 2015 acquisition year; the asbestos, environmental and workers' compensation lines
of business in the 2016 acquisition year; the asbestos and general casualty lines of business in the 2017 acquisition year;
and the general casualty, workers' compensation, marine, aviation & transit, professional indemnity/directors & officers,
motor and property lines of business in the 2018 acquisition year, are significant and we have provided additional loss
development tables for those lines of business within those acquisition years.
193
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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.
Accordingly, it would not be appropriate to extrapolate redundancies or deficiencies into the future from the loss development
tables provided below. Acquired and assumed reserves arising from business acquisitions and retroactive reinsurance
agreements are presented on a full prospective basis.
The following tables set forth information about incurred and paid loss development, total IBNR reserves and
cumulative loss frequency related to our 2009 through 2018 acquisition years within the Non-Life Run-off segment as at
December 31, 2018. In addition, we have also presented loss development tables for the significant lines of business within
certain acquisition years. The information related to incurred and paid loss development for the years ended December
31, 2009 through 2017 is presented as supplementary information and is therefore unaudited.
Business Acquired and Contracts Incepting in the Year Ended December 31, 2009
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December
31, 2018
Accident
Year
2008 and
Prior
Total Net
Reserves
Acquired
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR
$ 131,793 $96,548 $91,326 $83,838 $81,452 $75,169 $68,177 $63,682 $63,950 $66,807 $63,986
$ 9,519
$ 131,793
$63,986
$ 9,519
Cumulative
Number of
Claims
35,356
35,356
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
For the Years Ended December 31,
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
685 $ 5,630 $12,385 $13,836 $19,409 $23,324 $25,377 $30,210 $32,498 $35,272
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$35,272
$28,714
Business Acquired and Contracts Incepting in the Year Ended December 31, 2010
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December
31, 2018
Accident
Year
Total Net
Reserves
Acquired
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative
Number of
Claims
2008
and Prior $ 1,096,347 $854,415 $849,383 $883,938 $864,842 $796,083 $794,240 $733,381 $737,257 $742,236
$48,175
162,496
$ 1,096,347
$742,236
$48,175
162,496
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008
and Prior
For The Years Ended December 31,
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$101,867 $218,628 $377,473 $456,666 $483,460 $510,815 $527,521 $555,686 $571,028
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$571,028
$171,208
194
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2011
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31,
2018
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total Net
Reserves
Acquired
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative
Number of
Claims
$ 584,503 $619,722 $584,875 $489,467 $422,779 $369,809 $314,713 $269,695 $256,086
$ 41,675
112,695
794
285
—
—
—
—
—
—
—
—
651
412
102
605
450
36
122
360
140
45
11
23
365
140
54
10
43
1
362
140
61
10
15
3
—
360
139
71
10
15
3
(2)
2
485
142
79
17
15
3
(2)
484
142
86
18
15
18
32
(139)
(111)
—
21
7
—
—
—
—
—
—
5
11
6
9
—
26
19
7
16
14
—
—
2
1
$ 585,582
$256,798
$ 41,706
112,780
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$ 59,722 $ 96,783 $ 91,615 $ 21,241 $ 14,849 $ 23,759 $ 15,936 $ 26,176
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
164
91
27
326
115
36
6
336
140
46
10
6
357
139
54
10
11
1
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
359
140
61
10
15
3
(1)
359
139
71
10
15
3
(2)
2
484
142
79
17
15
3
(2)
484
142
86
17
15
4
2
(153)
(125)
—
3
1
$ 26,805
$229,993
195
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2012
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31,
2018
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total Net
Reserves
Acquired
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR
$ 264,599 $ 258,299 $ 239,637 $ 228,316 $ 211,171 $ 203,818 $ 197,435 $ 190,413
$
14,730
50,431
50,351
852
1,001
61
848
1,388
52
—
—
—
—
—
—
58,008
2,710
989
46
626
63,730
2,602
984
254
112
2,492
68,503
2,378
972
257
334
2,792
545
66,344
2,474
971
329
342
1,423
1,125
61
66,507
1,404
65,567
1,268
969
329
342
1,221
690
1,196
71
964
156
127
1,116
690
1,039
156
—
4,183
97
—
—
—
63
—
193
23
—
Cumulative
Number of
Claims
39,243
8,402
6
5
6
5
7
5
3
4
—
$ 317,318
$ 261,496
$
19,289
47,686
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
2,688 $
44,936 $
72,959 $
95,345 $ 113,135 $ 120,239 $ 130,651
22,143
34,680
42,632
48,856
51,911
54,517
124
171
112
28
472
463
46
102
631
693
46
112
63
699
809
48
127
209
105
727
866
156
127
429
109
2
764
924
156
127
630
690
52
12
792
964
156
127
807
690
91
40
—
$ 188,835
$
72,661
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
196
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2013
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31,
2018
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total Net
Reserves
Acquired
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative
Number of
Claims
$
141,479 $
154,707 $
161,367 $
149,397 $
140,275 $
163,936 $
117,398
$
20,406
73,355
79,859
84,556
110,815
118,740
113,479
94,482
99,857
99,107
131,066
127,271
121,328
91,634
4,514
13,062
90,739
—
—
—
—
—
83,495
133,045
100,243
118,085
88,920
3,714
265
85,782
77,425
75,458
135,120
124,905
122,412
95,848
87,913
86,554
114,772
110,045
107,853
85,791
3,425
280
103
81,732
16,800
982
71
30
80,036
16,225
329
70
13
22
2,249
4,000
2,203
2,654
2,202
124
136
4
—
4
35,539
10,798
10,968
9,063
3,503
5,676
175
2
—
—
—
$
564,259
$
606,370
$
33,982
75,724
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
24,794 $
42,185 $
56,732 $
67,472 $
64,574 $
23,624
24,617
30,323
33,361
17,022
41,720
48,579
52,455
59,095
37,653
993
52,664
75,114
63,952
74,663
52,638
1,747
43
60,486
92,540
70,498
86,916
62,876
2,256
102
34
59,810
98,098
75,055
92,445
68,866
15,804
112
64
9
66,269
65,201
104,253
77,096
96,780
71,487
15,959
165
65
13
13
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$
$
497,301
109,069
197
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2014
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31,
2018
Accident Year
Total Net
Reserves
Acquired
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative
Number of
Claims
2008 and Prior $
6,408 $
4,008 $
12,807 $
10,342 $
10,890 $
10,005
$
(82)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
16,653
88,445
71,579
111,052
86,920
—
—
—
—
—
16,660
85,176
127,132
116,752
75,991
14,448
11,135
100,646
153,758
177,374
93,508
9,917
33,543
11,188
133,824
133,072
185,033
82,007
8,740
20,004
393
12,142
119,628
135,430
178,528
86,415
7,394
20,738
1,038
5,071
11,799
115,867
141,102
165,648
85,571
6,154
18,736
4,728
4,087
6
1,010
6,740
12,270
8,088
13,620
4,328
1,873
87
998
4
3,102
3,250
6,416
6,667
5,076
3,162
1,113
184
37
32
13
$
381,057
$
563,703
$
48,936
29,052
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
— $
6,195 $
7,509 $
8,097 $
6,244
29,403
83,733
47,291
21,624
1,455
5,956
69,303
109,089
89,180
39,847
2,479
1,740
8,140
86,997
109,761
119,165
47,052
3,260
4,282
20
8,256
101,876
107,670
127,955
55,262
3,954
11,466
556
537
8,079
8,525
101,494
121,972
125,635
60,093
5,902
12,956
571
1,553
5
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$
$
446,785
116,918
198
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2015
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident Year
Total Net Reserves
Acquired
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative Number
of Claims
For the Years Ended December 31,
As of December 31, 2018
2008 and Prior
$
937,917 $
851,896 $
558,013 $
518,739 $
467,433
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
15,534
49,125
124,473
178,981
229,274
143,795
22,811
—
—
—
21,850
53,990
137,175
187,333
189,521
142,596
69,337
24,324
52,966
131,062
197,756
196,290
137,196
68,322
14,329
22,490
55,899
129,445
200,809
199,681
142,468
65,446
12,646
4,065
25,519
51,485
127,203
192,957
188,635
136,522
63,986
12,900
4,502
2,979
87,408
5,050
10,976
27,098
33,953
28,841
12,854
4,703
1,039
325
2,164
$
1,701,910
$ 1,274,121
$
214,411
10,507
968
2,284
5,109
4,504
5,143
10,664
20,998
3,311
855
242
64,585
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident Year
2008 and Prior
For The Years Ended December 31,
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
17,038 $
58,929 $
89,533 $
112,037
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2,336
9,191
33,826
52,728
46,761
30,747
20,653
5,400
15,304
55,084
94,781
89,882
64,381
38,309
5,386
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
10,340
19,675
70,985
119,413
120,448
90,801
46,202
7,112
2,312
13,953
25,640
86,339
142,208
145,688
109,217
51,467
8,385
3,912
560
$
$
699,406
574,715
199
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2015 - Workers' Compensation
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident Year
Total Net Reserves
Acquired
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative
Number of Claims
For the Years Ended December 31,
As of December 31, 2018
2008 and Prior
$
919,158 $
822,252 $
526,222 $
485,189 $
435,607
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
8,741
31,919
76,789
120,298
146,237
82,141
4,089
—
—
—
12,207
34,360
73,723
110,007
124,726
86,852
18,647
12,350
31,402
69,009
108,251
122,238
82,038
12,623
873
11,559
30,407
68,013
106,625
121,010
83,095
13,488
955
358
12,069
27,360
66,216
99,446
112,590
77,884
12,071
583
61
—
80,160
1,941
4,003
6,325
10,793
13,657
6,223
793
138
48
—
7,963
171
468
1,235
1,800
2,369
3,665
2,895
38
10
1
$
1,389,372
$
843,887
$
124,081
20,615
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
15,493 $
53,889 $
79,228 $
1,061
4,352
16,032
25,103
27,737
17,824
3,034
2,952
8,446
30,462
52,851
55,675
38,051
5,672
134
5,854
11,906
39,635
66,092
75,065
53,308
7,917
363
2
97,797
7,171
16,141
50,470
79,367
91,559
65,561
9,169
417
10
—
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$
$
417,662
426,225
200
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2016
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident Year
Total Net Reserves
Acquired
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative Number
of Claims
2008 and Prior $
1,253,129 $
1,264,108 $
1,289,089 $
1,270,673
$
441,087
21,229
For the Years Ended December 31,
As of December 31, 2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
29,081
15,312
17,291
13,717
373
391
—
—
—
—
28,961
15,312
17,291
13,717
373
391
—
—
31,299
16,599
19,920
17,020
1,312
1,380
—
—
—
28,023
14,282
19,754
14,765
1,237
1,056
—
—
—
—
9,296
4,542
3,673
4,663
946
765
—
—
—
—
739
613
747
748
96
43
—
—
—
—
$
1,329,294
$
1,349,790
$
464,972
24,215
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Years Ended December 31,
Accident Year
2008 and Prior
2016
(unaudited)
2017
(unaudited)
$
94,972 $
208,671 $
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2,832
2,068
2,758
2,734
145
178
—
—
7,946
4,137
6,647
5,206
191
207
—
—
—
2018
311,721
10,360
5,905
8,218
6,461
278
284
—
—
—
—
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$
$
343,227
1,006,563
201
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2016 - Asbestos
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2018
Accident Year
2008 and Prior
Total Net
Reserves
Acquired
$
$
506,930 $
506,930
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative Number
of Claims
505,241 $
565,448 $
$
563,630
563,630
$
$
325,953
325,953
1,397
1,397
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident Year
2008 and Prior
For the Years Ended December 31,
2016
(unaudited)
2017
(unaudited)
2018
$
20,256 $
70,443 $
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$
123,242
123,242
440,388
Business Acquired and Contracts Incepting in the Year Ended December 31, 2016 - Environmental
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2018
Accident Year
Total Net Reserves
Acquired
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative Number
of Claims
2008 and Prior $
118,691 $
118,691 $
129,591 $
$
118,691
$
136,557
136,557
$
$
41,424
41,424
947
947
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident Year
2008 and Prior
For the Years Ended December 31,
2016
(unaudited)
2017
(unaudited)
2018
$
8,330 $
25,633 $
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$
39,133
39,133
97,424
202
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2016 - Workers' Compensation
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident Year
Total Net Reserves
Acquired
2016
(unaudited)
2017
(unaudited)
2018
IBNR
Cumulative Number
of Claims
For the Years Ended December 31,
As of December 31, 2018
2008 and Prior $
408,373 $
406,992 $
369,993 $
362,829
$
27,133
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
20,892
8,191
15,376
13,074
—
—
—
—
—
—
20,772
8,191
15,376
13,074
—
—
—
—
21,474
9,767
16,399
15,465
—
—
—
—
—
18,476
8,572
16,501
13,276
—
—
—
—
—
—
5,637
2,655
1,566
3,518
—
—
—
—
—
—
8,416
191
268
473
607
—
—
—
—
—
—
$
465,906
$
419,654
$
40,509
9,955
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident Year
2008 and Prior
For the Years Ended December 31,
2016
(unaudited)
2017
(unaudited)
2018
$
32,768 $
58,133 $
81,166
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1,482
1,219
2,631
2,638
—
—
—
—
4,439
2,565
5,871
5,028
—
—
—
—
—
5,918
3,230
7,305
6,247
—
—
—
—
—
—
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$
$
103,866
315,788
203
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2017
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2018
Accident Year
Total Net Reserves
Acquired
2017
(unaudited)
2018
IBNR
2008 and Prior
$
1,364,332 $
1,297,232 $
1,233,017
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
36,488
33,609
40,742
43,647
35,667
32,858
8,808
362
—
—
35,015
28,417
29,226
34,946
30,029
20,315
6,494
(4)
174
32,763
18,901
25,389
31,230
28,134
16,984
7,002
126
—
—
786,519
12,799
6,633
8,388
8,237
5,623
3,306
982
58
—
—
Cumulative Number
of Claims
9,003
20
36
7
11
10
19
8
3
1
—
$
1,596,513
$
1,393,546
$
832,545
9,118
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Years Ended December 31,
2017
(unaudited)
2018
$
71,708 $
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and LAE, net of
reinsurance
150,472
11,288
7,393
9,257
15,371
15,712
8,986
3,720
66
—
—
222,265
1,171,281
7,088
4,286
4,125
10,348
9,509
6,482
1,361
(56)
4
$
$
204
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2017 - Asbestos
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31,
As of December 31, 2018
Accident Year
Total Net Reserves
Acquired
2017
(unaudited)
2018
IBNR
Cumulative Number
of Claims
2008 and Prior
$
888,394 $
847,036 $
766,788
$
613,475
4,477
2009
2010
2011
2012
2013
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
888,394
$
766,788
$
613,475
4,477
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Years Ended December 31,
2017
(unaudited)
2018
$
19,733 $
57,030
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and LAE, net of
reinsurance
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
57,030
709,758
205
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2017 - General Casualty
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident Year
Total Net Reserves
Acquired
2017
(unaudited)
2018
IBNR
Cumulative Number of
Claims
2008 and Prior
$
98,580 $
90,256 $
79,420
$
17,112
2,371
For the Years Ended December 31,
As of December 31, 2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
17,641
14,642
17,902
16,756
16,870
12,730
3,112
(72)
—
—
18,897
10,985
11,459
15,861
17,720
6,651
3,464
(77)
—
16,904
7,321
11,418
17,398
17,358
6,526
4,424
(21)
—
—
5,638
1,883
4,529
4,796
3,159
1,590
818
56
—
—
$
198,161
$
160,748
$
39,581
1
1
1
1
1
1
1
1
1
—
2,380
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For the Years Ended December 31,
2017
(unaudited)
2018
$
10,363 $
3,341
1,958
753
6,850
5,927
1,581
469
—
—
Total outstanding liabilities for unpaid losses and LAE, net of
reinsurance
$
22,697
6,237
3,659
3,724
10,050
9,667
2,426
2,487
—
—
—
60,947
99,801
206
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2018
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Year Ended
December 31,
As of December 31, 2018
Accident Year
Total Net Reserves Acquired
2018
IBNR
2008 and Prior
$
486,710 $
322,299
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
68,375
88,753
156,555
220,662
261,673
405,168
348,524
169,194
206,944
318,474
60,850
109,592
145,051
215,610
265,032
448,775
467,058
171,134
207,082
318,474
Cumulative Number of
Claims
199,629
9,862
13,724
13,995
14,245
15,928
19,020
23,632
2,095
4,238
5,032
108,367
4,586
33,728
26,322
47,105
70,607
136,884
155,456
84,128
130,071
222,772
$
2,731,032 $
2,730,957
$
1,020,026
321,400
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and
LAE, net of reinsurance
$
$
$
For the Year Ended
December 31,
2018
26,326
15,338
11,010
26,671
31,391
41,824
93,171
100,091
6,275
52
—
352,149
2,378,808
207
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2018 - General Casualty
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Year Ended
December 31,
As of December 31, 2018
Accident Year
Total Net Reserves Acquired
2018
IBNR
2008 and Prior
$
84,065 $
40,977
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
9,157
28,863
16,394
33,326
38,708
54,487
74,380
27,306
36,246
35,770
7,123
22,098
14,709
30,385
53,146
73,680
87,639
27,306
36,246
35,770
Cumulative Number of
Claims
44,790
1,006
1,856
1,392
1,549
1,563
2,149
3,296
252
232
186
9,892
1,437
4,240
2,302
7,501
16,166
22,038
32,230
15,306
24,289
23,606
$
438,702 $
429,079
$
159,007
58,271
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and
LAE, net of reinsurance
$
$
$
For the Year Ended
December 31,
2018
3,181
850
5,981
2,480
1,819
10,855
14,645
17,210
—
—
—
57,021
372,058
208
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2018 - Workers' Compensation
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Year Ended
December 31,
As of December 31, 2018
Accident Year
Total Net Reserves Acquired
2018
IBNR
2008 and Prior
$
83,867 $
84,667
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
22,548
24,914
30,399
29,438
38,737
69,212
39,430
49,476
57,899
68,486
17,287
25,231
25,693
29,880
39,263
70,525
39,794
49,476
57,899
68,486
20,321
6,039
11,209
13,686
15,481
21,095
37,658
23,340
32,657
43,036
59,043
$
514,406 $
508,201
$
283,565
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
Cumulative Number of
Claims
1,483
259
362
419
484
888
1,380
1,408
886
993
885
9,447
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and
LAE, net of reinsurance
$
$
$
For the Year Ended
December 31,
2018
—
3,788
316
(1,402)
520
1,527
3,238
1,342
—
—
—
9,329
498,872
209
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2018 - Marine, Aviation & Transit
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Year Ended
December 31,
As of December 31, 2018
Accident Year
Total Net Reserves Acquired
2018
IBNR
2008 and Prior
$
38,020 $
25,608
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
8,569
3,402
8,795
16,038
44,550
64,292
32,534
29
134
1,399
5,091
3,700
10,053
12,198
36,642
84,106
69,590
29
134
1,399
$
217,762 $
248,550
$
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
Cumulative Number of
Claims
54,343
2,649
3,248
3,962
4,265
5,699
5,838
6,516
79
71
66
86,736
(6,123)
(3,636)
5,905
646
(1,141)
4,640
13,641
10,864
24
120
1,386
26,326
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and
LAE, net of reinsurance
$
$
$
For the Year Ended
December 31,
2018
859
2,410
(3,887)
5,094
1,323
6,093
25,299
24,638
—
—
—
61,829
186,721
210
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2018 - Professional Indemnity/
Directors & Officers.
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Year Ended
December 31,
As of December 31, 2018
Accident Year
Total Net Reserves Acquired
2018
IBNR
2008 and Prior
$
140,108 $
72,453
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
30,592
35,237
39,028
53,094
52,894
83,767
48,715
—
—
—
21,317
39,743
49,320
66,622
59,615
104,639
96,152
—
—
—
Cumulative Number of
Claims
48,133
4,246
4,251
3,736
3,249
3,186
3,518
3,804
—
—
—
8,451
(9,645)
8,473
10,443
13,273
16,106
36,447
48,769
—
—
—
$
483,435 $
509,861
$
132,317
74,123
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and
LAE, net of reinsurance
$
$
$
For the Year Ended
December 31,
2018
20,413
6,891
3,969
12,927
16,105
10,992
23,424
14,111
—
—
—
108,832
401,029
211
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2018 - Motor
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Year Ended
December 31,
As of December 31, 2018
Accident Year
Total Net Reserves Acquired
2018
IBNR
2008 and Prior
$
115,064 $
11,687
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
8,370
23,614
41,740
50,413
50,493
76,186
87,977
79,459
90,289
$
150,684
774,289 $
3,922
13,761
36,047
53,766
66,587
98,361
125,513
86,144
90,479
150,684
736,951
$
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
Cumulative Number of
Claims
265
86
920
1,219
1,611
667
1,203
1,371
701
2,766
3,726
14,535
3,708
986
(206)
1,539
4,875
15,539
28,650
30,960
36,147
59,706
112,294
294,198
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and
LAE, net of reinsurance
$
$
$
For the Year Ended
December 31,
2018
1,518
887
4,578
6,158
12,600
10,703
21,007
20,070
6,275
52
—
83,848
653,103
212
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Business Acquired and Contracts Incepting in the Year Ended December 31, 2018 - Property
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the Year Ended
December 31,
As of December 31, 2018
Accident Year
Total Net Reserves Acquired
2018
IBNR
2008 and Prior
$
3,441 $
8,012
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
623
3,095
2,655
4,571
7,640
14,663
44,595
8,152
22,267
61,894
579
2,186
2,915
3,276
8,771
14,249
46,448
8,152
22,267
61,894
$
173,596 $
178,749
$
Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
Cumulative Number of
Claims
49,684
1,387
2,776
2,965
2,770
3,657
4,389
6,649
174
174
166
74,791
(393)
(266)
2
1,043
(15)
305
873
456
(34)
2,860
26,202
31,033
Accident Year
2008 and Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total outstanding liabilities for unpaid losses and
LAE, net of reinsurance
$
$
$
For the Year Ended
December 31,
2018
257
39
119
273
(236)
1,640
3,958
20,760
—
—
—
26,810
151,939
213
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Annual Historical Duration of Claims
The following is unaudited supplementary information, which presents the annual percentage payout since the
year of acquisition, by year of acquisition and significant line of business within each acquisition year:
Annual Percentage Payout of Incurred Losses since Year of Acquisition, Net of Reinsurance
Year of Acquisition
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
2009 - All lines of business
1.07%
7.73% 10.56 % 2.27 % 8.71 %
6.12% 3.21 %
2010 - All lines of business
13.72% 15.73% 21.40 % 10.67 % 3.61 %
3.69% 2.25 %
2011 - All lines of business
23.37% 14.51% (1.99)% (27.39)% (2.48)%
3.47% (3.05)%
2012 - All lines of business
1.19% 24.87% 15.69 % 11.77 % 9.34 %
4.24% 5.10 %
4.34%
3.57%
2.07%
7.55%
3.79%
4.01%
2013 - All lines of business
25.35% 21.26% 15.65 % 10.82 % 5.22 %
3.70%
2014 - All lines of business
33.66% 23.78% 11.07 % 7.00 % 3.75 %
2015 - All lines of business
16.74% 16.81% 11.72 % 9.62 %
2015 - Workers' compensation
13.11% 16.29% 10.81 % 9.28 %
2016 - All lines of business
2016 - Asbestos
2016 - Environment
7.83%
3.59%
9.43% 8.17 %
8.90% 9.37 %
6.10% 12.67% 9.89 %
2016 - Workers' Compensation
2017 - All lines of business
2017 - Asbestos
9.71%
8.24%
2.57%
8.41% 6.63 %
7.71%
4.86%
2017 - General Casualty
19.44% 18.48%
2018 - All lines of business
2018 - General Casualty
2018 - Workers' Compensation
12.89%
13.29%
1.84%
2018 - Marine, Aviation & Transit
24.88%
2018 - Professional Indemnity/
Directors & Officers
2018 - Motor
2018 - Property
21.35%
11.38%
15.00%
Atrium
214
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years
ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Balance as at January 1
$
240,873 $
212,122 $
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
40,531
200,342
83,627
(13,817)
69,810
(35,537)
(28,969)
(64,506)
(3,130)
202,516
38,768
30,009
182,113
90,359
(20,940)
69,419
(24,571)
(31,107)
(55,678)
4,488
200,342
40,531
Balance as at December 31
$
241,284 $
240,873 $
201,017
25,852
175,165
71,358
(12,971)
58,387
(23,582)
(24,416)
(47,998)
(3,441)
182,113
30,009
212,122
Net incurred losses and LAE in the Atrium segment for the years ended December 31, 2018, 2017 and 2016
were as follows:
Prior
Period
2018
Current
Period
Total
Prior
Period
2017
Current
Period
Total
Prior
Period
2016
Current
Period
Total
Net losses paid
$ 28,969
$ 35,537
$ 64,506
$ 31,107
$ 24,571
$ 55,678
$ 24,416
$ 23,582
$ 47,998
Net change in case and LAE
reserves
Net change in IBNR reserves
Increase (reduction) in
estimates of net ultimate losses
Increase in provisions for bad
debt
Increase (reduction) in
provisions for unallocated LAE
Amortization of fair value
adjustments
(10,161)
(27,507)
16,492
31,598
6,331
4,091
(13,324)
(35,650)
21,662
43,329
8,338
7,679
(13,115)
(20,543)
12,967
34,243
(148)
13,700
(8,699)
83,627
74,928
(17,867)
89,562
71,695
(9,242)
70,792
61,550
—
—
(5,118)
—
—
—
—
—
89
(442)
70
727
159
285
—
(421)
—
566
—
145
(5,118)
(2,720)
—
(2,720)
(3,308)
—
(3,308)
Net incurred losses and LAE
$ (13,817) $ 83,627
$ 69,810
$ (20,940) $ 90,359
$ 69,419
$ (12,971) $ 71,358
$ 58,387
215
Table of Contents
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 tables provide a breakdown of the gross and net losses and LAE by line of business and the fair
value adjustments resulting from business acquisitions and ULAE as of December 31, 2018 and 2017 for the Atrium
segment:
OLR
Gross
IBNR
2018
Total
OLR
(in thousands of U.S. dollars)
Net
IBNR
Total
Marine, Aviation and
Transit
Binding Authorities
Reinsurance
Accident and Health
Non-Marine Direct and
Facultative
$
32,999 $
28,512
18,547
4,972
36,011 $
59,302
69,010 $
87,814
27,653
6,348
46,200
11,320
21,460 $
24,207 $
26,601
15,180
4,225
57,016
24,823
5,837
45,667
83,617
40,003
10,062
9,855
11,207
21,062
8,529
9,389
17,918
Total
$
94,885 $
140,521 $
75,995 $
121,272 $
197,267
2,847
2,402
$
202,516
235,406 $
3,476
2,402
$
241,284
2017
Fair value adjustments
ULAE
Total
OLR
Gross
IBNR
Total
OLR
(in thousands of U.S. dollars)
Net
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
20,177 $
28,551 $
24,158
13,815
3,296
49,486
26,336
4,994
48,728
73,644
40,151
8,290
9,570
12,467
22,037
9,444
9,665
19,109
Total
$
78,363 $
150,508 $
228,871 $
9,547
2,455
$
240,873
70,890 $
119,032 $
189,922
7,965
2,455
$
200,342
Fair value adjustments
ULAE
Total
The Atrium segment comprises only 3% of the total consolidated gross liability for losses and LAE as at
December 31, 2018 and therefore has not been disaggregated further for purposes of presenting the accident year
disclosures below.
216
Table of Contents
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, 2018. The information related to incurred and paid loss development for the years ended
December 31, 2009 through 2017 is presented as supplementary information and is therefore unaudited. Information
about total IBNR reserves and cumulative loss frequency as at December 31, 2018, 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, 2018
Accident
Year
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR(1)
Cumulative
Number of
Claims
2008
and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
500,211
503,236
549,063
538,463
521,835
519,162
515,066
512,187
510,687
499,948
27,570
40,073
56,949
51,804
48,592
47,663
45,919
45,197
44,947
54,509
26,676
64,641
57,524
51,433
47,309
45,776
45,293
44,049
43,501
5,514
1,112
863
85,641
84,006
72,297
70,524
68,799
67,505
66,773
66,317
1,487
70,040
57,094
55,745
53,582
51,800
50,880
50,399
58,144
63,518
57,599
54,288
51,534
51,894
68,975
69,230
65,812
60,255
57,384
69,347
71,112
63,198
59,906
989
2,405
5,237
9,190
72,753
74,799
69,704
14,229
89,814
94,485
27,401
84,612
52,845
1,439
216
280
378
517
829
1,290
2,183
3,856
6,287
5,590
(1) Total of IBNR plus expected development on reported losses.
Total $ 1,132,659
$ 121,272
22,865
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
For The Years Ended December 31,
Accident
Year
2009
(unaudited)
2010
(unaudited)
2011
(unaudited)
2012
(unaudited)
2013
(unaudited)
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
2008
and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$438,313 $461,160 $472,617 $480,751 $488,939 $492,516 $496,718 $498,426 $499,533 $ 497,063
11,910
27,487
34,408
37,887
39,882
41,069
41,741
42,023
42,278
43,212
11,425
25,006
32,075
36,349
38,815
39,829
40,416
40,989
41,151
16,991
39,667
51,975
58,114
62,012
63,351
64,631
64,102
11,211
31,366
37,869
42,026
44,308
45,194
46,757
14,552
31,972
40,314
43,375
45,249
45,963
17,524
34,232
41,425
46,663
48,298
11,993
29,562
38,806
44,324
13,665
34,408
43,992
14,312
47,500
13,030
Total $ 935,392
Total outstanding liabilities for unpaid losses and LAE, net of reinsurance
$ 197,267
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, 2018 is set forth below:
217
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
$
$
2018
197,267
38,139
235,406
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
22.47% 32.32%
14.77%
8.28%
4.37%
1.93%
1.90%
0.35%
0.42%
1.71%
StarStone
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years
ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Balance as at January 1
$
1,207,743 $
1,059,382 $
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
452,017
755,726
578,892
94,491
673,383
(150,778)
(326,352)
(477,130)
(9,481)
192,981
10,268
—
1,145,747
462,950
357,231
702,151
341,628
(26,822)
314,806
(54,867)
(252,926)
(307,793)
15,169
—
31,393
—
755,726
452,017
933,678
299,783
633,895
415,829
(14,236)
401,593
(52,128)
(199,125)
(251,253)
(15,984)
—
—
(66,100)
702,151
357,231
Balance as at December 31
$
1,608,697 $
1,207,743 $
1,059,382
218
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Net incurred losses and LAE in the StarStone segment for the years ended December 31, 2018, 2017 and 2016
were as follows:
Prior
Period
2018
Current
Period
Total
Prior
Period
2017
Current
Period
Total
Prior
Period
2016
Current
Period
Total
Net losses paid
$ 326,352
$ 150,778
$ 477,130
$ 252,926
$ 54,867
$ 307,793
$ 199,125
$ 52,128
$ 251,253
Net change in case and
LAE reserves
Net change in IBNR
reserves
Increase (reduction) in
estimates of net ultimate
losses
Increase (reduction) in
provisions for unallocated
LAE
Amortization of fair value
adjustments
Net incurred losses and
LAE
(81,491)
157,378
75,887
(63,785)
95,470
31,685
(51,309)
124,358
73,049
(144,212)
258,091
113,879
(208,244)
184,704
(23,540)
(156,546)
232,189
75,643
100,649
566,247
666,896
(19,103)
335,041
315,938
(8,730)
408,675
399,945
(5,892)
12,645
6,753
(6,774)
6,587
(187)
(3,611)
7,154
3,543
(266)
—
(266)
(945)
—
(945)
(1,895)
—
(1,895)
$ 94,491
$ 578,892
$ 673,383
$ (26,822) $ 341,628
$ 314,806
$ (14,236) $ 415,829
$ 401,593
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 tables provide a breakdown of the gross and net losses and LAE reserves by line of business and
the fair value adjustments resulting from business acquisitions and ULAE as of December 31, 2018 and 2017:
OLR
Gross
IBNR
2018
Total
OLR
(in thousands of U.S. dollars)
Net
IBNR
Total
$
177,432 $
185,084
331,432 $
182,453
508,864 $
137,828 $
282,026 $
419,854
Casualty
Marine
Property
Aerospace
Workers' Compensation
317,102
67,203
49,373
Total
$
796,194 $
Fair value adjustments
ULAE
Total
163,889
151,774
45,879
33,759
133,426
65,522
36,167
68,969
297,315
217,296
82,046
102,728
533,129 $
586,110 $ 1,119,239
1,432
25,076
$ 1,145,747
123,511
40,416
367,537
440,613
107,619
110,082
787,894 $ 1,584,088 $
159,455
(467)
25,076
$ 1,608,697
219
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
OLR
Gross
IBNR
2017
Total
OLR
(in thousands of U.S. dollars)
Net
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 $
98,070 $
188,518 $
286,588
249,337
298,740
89,990
130,142
94,115
115,148
40,781
31,213
69,828
39,280
17,055
41,920
163,943
154,428
57,836
73,133
Total
$
590,977 $
599,221 $ 1,190,198 $
379,327 $
356,601 $
735,928
Fair value adjustments
ULAE
Total
(555)
18,100
$ 1,207,743
1,698
18,100
$
755,726
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,
2018. The information related to incurred and paid loss development for the years ended December 31, 2014 through
2017 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.
220
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Casualty
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Incurred Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
As of December 31, 2018
2014
(Unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR(1)
Cumulative
Number of
Claims
$
60,044 $
20,026
16,173
20,969
56,901
72,918
91,491
60,046 $
20,085
17,320
25,275
48,179
66,628
92,600
104,603
60,119 $
20,085
17,406
25,633
43,901
77,630
92,857
111,262
125,456
60,041 $
60,077 $
20,089
18,085
24,861
40,082
76,072
90,459
110,453
129,264
137,600
20,261
18,103
25,301
39,468
78,777
90,685
123,529
140,765
162,707
159,331
—
3
171
816
978
6,811
12,504
27,687
41,362
72,210
119,484
2,080
463
728
2,034
3,121
4,974
5,694
4,698
4,363
4,613
2,982
Total $
919,004 $
282,026
35,750
(1) Total of IBNR plus expected development on reported losses.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2014
(Unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
60,044 $
20,026
15,113
15,605
18,348
23,056
5,737
60,046 $
20,085
17,320
20,945
29,436
30,400
21,884
8,121
60,119 $
20,085
17,406
23,612
32,625
50,018
37,575
27,389
4,659
60,041 $
20,089
18,085
24,176
33,873
54,570
50,740
49,136
42,999
9,992
60,077
20,261
18,103
24,806
36,082
60,273
64,658
68,363
75,019
50,704
20,804
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
$
419,854
Total $
499,150
221
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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, 2018 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
$
$
2018
419,854
89,010
508,864
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
Casualty
7.1%
21.4%
16.7%
20.8%
12.6%
8.3%
1.7%
1.6%
— %
0.5%
222
Table of Contents
Marine
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
As of December 31, 2018
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR(1)
Cumulative
Number of
Claims
$
16,526 $
10,420
22,356
29,616
48,187
62,952
50,259
16,557 $
10,321
19,282
27,854
51,686
55,068
53,650
71,122
16,600 $
10,294
19,123
27,430
51,341
52,846
48,624
70,134
82,859
16,620 $
16,644 $
10,307
19,185
27,469
50,073
53,780
55,074
79,611
83,670
131,200
10,308
19,054
27,809
50,877
57,059
50,713
81,159
87,791
159,664
168,750
—
—
265
392
421
99
601
2,640
14,330
50,006
64,672
1,361
629
1,026
1,953
2,414
2,210
3,931
5,605
6,679
7,799
6,302
Total $
729,829 $
133,426
39,909
(1) Total of IBNR plus expected development on reported losses.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
16,518 $
10,298
16,307
24,366
38,547
29,186
10,930
16,557 $
10,309
18,337
25,419
42,684
38,324
24,933
10,883
16,600 $
10,291
18,415
26,392
44,509
42,405
32,463
30,685
12,200
16,620 $
10,298
18,386
26,639
45,294
44,863
36,908
50,222
42,041
25,417
16,644
10,308
18,450
26,748
45,742
46,921
42,560
56,305
57,764
69,437
41,635
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
$
297,315
Total $
432,514
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, 2018 is set forth below:
223
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
$
$
2018
297,315
70,222
367,537
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
17.9%
28.4%
18.2%
7.9%
5.7%
4.8%
0.5%
0.1%
0.2%
0.1%
224
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Property
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
As of December 31, 2018
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR(1)
Cumulative
Number of
Claims
$
84,812 $
28,360
74,412
90,707
65,516
77,944
58,855
84,652 $
27,824
72,959
89,271
61,422
64,848
43,619
78,721
84,265 $
28,297
71,600
89,305
60,420
64,509
42,917
76,362
87,266
84,500 $
82,172 $
28,550
71,661
88,991
61,350
63,673
43,308
70,132
94,995
155,053
31,831
71,679
88,919
58,443
61,930
41,258
70,018
94,530
171,510
164,155
Total $
936,445 $
—
—
—
—
—
—
846
2,064
4,690
19,966
37,956
65,522
1,835
1,060
1,561
1,612
1,495
1,956
2,077
5,580
6,710
7,766
4,383
36,035
(1) Total of IBNR plus expected development on reported losses.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance
Accident
Year
2008 and
Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
$
84,362 $
27,693
68,605
86,986
47,879
30,763
5,470
84,594 $
27,731
71,491
88,197
51,935
46,146
18,727
10,410
84,265 $
28,088
71,600
88,697
54,072
50,932
31,426
28,582
26,741
84,278 $
28,325
71,661
88,944
55,027
52,982
34,347
55,204
57,761
37,369
80,906
31,607
71,679
88,919
55,222
59,070
35,868
63,718
74,938
98,107
59,115
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
$
217,296
Total $
719,149
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, 2018 is set forth below:
225
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
$
$
2018
217,296
223,317
440,613
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
22.8%
31.6%
28.0%
8.5%
3.0%
4.0%
0.2%
0.2%
0.3%
0.2%
226
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Aerospace
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
As of December 31, 2018
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR(1)
Cumulative
Number of
Claims
— $
—
— $
—
— $
—
— $
—
— $
—
18,516
58,771
55,720
72,065
65,227
18,144
57,244
55,418
70,148
53,549
66,347
18,454
57,668
56,261
70,475
53,563
69,500
37,728
18,956
58,102
56,214
74,847
52,342
72,503
44,912
31,257
19,032
59,637
57,506
77,341
54,412
73,175
48,093
35,050
59,448
—
—
78
215
356
801
1,149
1,874
6,853
1,585
23,256
36,167
—
—
572
2,188
2,410
2,549
2,830
2,922
2,783
2,809
1,682
20,745
(1) Total of IBNR plus expected development on reported losses
Total $
483,694 $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
— $
—
— $
—
— $
—
— $
—
15,471
53,812
45,950
50,856
17,307
16,615
55,170
49,381
59,845
31,165
32,375
17,218
55,850
52,191
63,417
38,439
52,180
11,803
18,274
56,427
53,668
68,735
40,686
60,813
31,798
10,389
—
—
18,558
57,020
54,859
72,721
43,805
63,986
36,963
28,200
25,536
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
$
82,046
Total $
401,648
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, 2018 is set forth below:
227
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
$
$
2018
82,046
25,573
107,619
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
34.6%
31.4%
11.9%
4.8%
4.9%
3.7%
2.1%
3.3%
1.5%
—%
228
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Workers' Compensation
Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
As of December 31, 2018
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
IBNR(1)
Cumulative
Number of
Claims
— $
—
—
—
—
—
— $
—
—
—
—
—
15,607
17,199
54,977
— $
—
—
—
—
—
18,290
55,505
62,942
— $
— $
—
—
—
—
—
15,662
50,103
54,121
43,366
—
—
—
—
—
15,202
47,338
54,793
39,089
44,615
Total $
201,037 $
—
—
—
—
—
—
1,755
6,620
12,404
17,876
30,314
68,969
—
—
—
—
—
—
1,062
2,518
2,489
2,079
2,303
10,451
(1) Total of IBNR plus expected development on reported losses.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Accident
Year
2008 and
Prior
$
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
For The Years Ended December 31,
2014
(unaudited)
2015
(unaudited)
2016
(unaudited)
2017
(unaudited)
2018
— $
—
—
—
—
—
1,491
— $
—
—
—
—
—
6,079
6,361
— $
—
—
—
—
—
— $
—
—
—
—
—
9,279
20,194
7,953
11,431
30,439
23,428
5,477
—
—
—
—
—
—
12,242
35,311
32,739
13,509
4,508
Total outstanding liabilities for unpaid
losses and LAE, net of reinsurance
$
102,728
Total $
98,309
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, 2018 is set forth below:
229
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
$
$
2018
102,728
56,727
159,455
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
12.4% 27.0% 19.9% 12.2%
5.3%
—%
—%
—%
—%
—%
11. 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.
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 assets and liabilities 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:
230
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
December 31, 2018
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
$
— $
510,245
$
— $
— $
U.K. government
Other government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Other assets included within funds held
- directly managed
Equities:
Publicly traded equity investments
Privately held equity investments
Other investments:
Hedge funds
Fixed income funds
Equity funds
Private equity funds
CLO equities
CLO equity fund
Private credit funds
Others
Total Investments
Cash and cash equivalents
Reinsurance balances recoverable
on paid and unpaid losses:
Other Assets:
Derivative Instruments
Losses and LAE:
Other Liabilities:
Derivative Instruments
$
$
$
$
$
$
$
$
$
$
$
$
$
—
—
—
—
—
—
—
300,631
793,810
4,802,454
130,265
773,557
705,674
627,360
—
—
37,386
—
—
7,389
9,121
—
—
—
—
—
—
—
510,245
300,631
793,810
4,839,840
130,265
773,557
713,063
636,481
— $
8,643,996
$
53,896
$
— $
8,697,892
—
14,780
—
—
14,780
102,102
—
102,102
$
$
36,313
—
36,313
$
$
— $
228,710
228,710
$
— $
—
— $
138,415
228,710
367,125
— $
— $
— $
852,584
$
—
—
—
—
—
—
—
— $
290,864
100,440
—
—
—
—
578
391,882
102,102
$
9,086,971
—
—
—
39,052
—
—
315
112,994
233,241
248,628
—
37,260
33,381
8,420
852,584
403,858
333,681
248,628
39,052
37,260
33,381
9,313
$
$
39,367
321,973
$
$
1,526,508
1,526,508
$
$
1,957,757
11,037,554
243,839
$
21,146
$
— $
— $
264,985
— $
— $
739,591
$
— $
739,591
— $
— $
— $
— $
— $
6,701
6,701
$
$
— $
— $
— $
— $
6,701
6,701
— $
2,874,055
$
— $
2,874,055
983
983
$
$
— $
— $
— $
— $
983
983
231
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
U.K government
Other government
Corporate
Municipal
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Other assets included within funds held
- directly managed
Equities:
Publicly traded equity investments
Privately held equity investments
Other investments:
Private equities and private equity
funds
Equity funds
Fixed income funds
Hedge funds
CLO equities
CLO equity funds
Private credit funds
Other
Total Investments
Cash and cash equivalents
Reinsurance recoverable:
Other Assets:
Derivative Instruments
Losses and LAE:
Other Liabilities:
Derivative Instruments
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
628,073
$
— $
— $
—
—
—
—
—
—
—
310,885
384,610
4,106,493
164,287
315,103
611,240
611,620
—
—
67,178
—
3,080
21,494
27,892
—
—
—
—
—
—
—
628,073
310,885
384,610
4,173,671
164,287
318,183
632,734
639,512
— $
7,132,311
— $
14,554
$
$
119,644
$
— $
7,251,955
— $
— $
14,554
103,652
$
2,951
$
—
103,652
$
2,951
$
— $
—
— $
— $
106,603
—
—
— $
106,603
— $
— $
— $
289,556
$
—
—
—
—
—
—
—
121,046
202,570
—
—
—
—
—
—
—
—
56,765
—
—
314
128,429
27,429
63,773
—
12,840
10,156
514
289,556
249,475
229,999
63,773
56,765
12,840
10,156
828
— $
323,616
103,652
$
7,473,432
$
$
57,079
176,723
$
$
532,697
532,697
$
$
913,392
8,286,504
107,156
$
48,051
$
— $
— $
155,207
— $
— $
542,224
$
— $
542,224
319
319
$
$
— $
— $
— $
— $
319
319
— $
1,794,669
$
— $
1,794,669
7,246
7,246
$
$
— $
— $
— $
— $
7,246
7,246
— $
— $
— $
— $
— $
232
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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 for 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.
233
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety
of underlying collateral. Residential and commercial mortgage-backed securities include both agency and
non-agency originated securities. Where pricing is unavailable from pricing services, we obtain non-binding
quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and
current transactions are not orderly. The significant inputs used to determine the fair value of these securities
include the spread above the risk-free yield curve, reported trades, benchmark yields, prepayment speeds
and default rates. The fair values of these securities are classified as Level 2 if the significant inputs are
market observable. Where significant inputs are unable to be corroborated with market observable
information, we classify the securities as Level 3.
Equities
Our investments in equities consist of a combination of publicly and privately traded investments. Our publicly
traded equity investments in common and preferred stocks predominantly trade on the major exchanges and are
managed by our external advisors. Our publicly traded equities are widely diversified and there is no significant
concentration in any specific industry. We use an internationally recognized pricing service to estimate the fair value
of our publicly traded equities. We have categorized the majority of our publicly traded equity investments 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. One equity security is trading in an inactive market and, as a result has
been classified as Level 2. The fair value estimates of our investments in publicly traded preferred stock are based on
observable market data and, as a result, have been categorized as Level 2.
Our privately held equity investments in common and preferred stocks are direct investments in companies that
we believe offer attractive risk adjusted returns and/or offer other strategic advantages. Each investment may have its
own unique terms and conditions and there may be restrictions on disposals. The market for these investments is
illiquid and there is no active market. The Company uses a combination of cost, internal models, reported values from
co-investors/managers and observable inputs, such as capital raises and capital transactions between new and existing
shareholders to calculate the fair value of the privately held equity investments. The fair value estimates of our
investments in privately held equities are based on unobservable market data and, as a result, have been categorized
as Level 3. As of December 31, 2018, we have used cost as our estimate of for value for the majority of our privately
held equity investments, given that only a short period of time has passed since the investments were made.
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 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.
234
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
• For our investments in 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.
•
Included within others is our investments in the real estate debt fund which we measure fair value by obtaining
the most recently available NAV from the external fund manager or third-party administrator. The fair value of
this investment is measured using the NAV as a practical expedient and therefore has not been categorized
within the fair value hierarchy.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the
significant unobservable market inputs used, the default and loss severity rates involve the most judgment
and create the most sensitivity. A significant increase or decrease in either of these significant inputs in isolation
would result in lower or higher fair value estimates for direct investments in CLO equities and, in general, a
change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate
assumptions. Collateral spreads and estimated maturity dates are less subjective inputs because they are
based on the historical average of actual spreads and the weighted-average life of the current underlying
portfolios, respectively. A significant increase or decrease in either of these significant inputs in isolation would
result in higher or lower fair value estimates for direct investments in CLO equities. In general, these inputs
have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, we receive the valuation from the external CLO manager and brokers and then review
the underlying cash flows and key assumptions used by them. We review and update the significant
unobservable inputs based on information obtained from secondary markets. These inputs are our responsibility
and we assess the reasonableness of the inputs (and if necessary, update the inputs) through communicating
with industry participants, monitoring of the transactions in which we participate (for example, to evaluate
default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends
that may impact future cash flows.
If valuations from the external CLO equity manager or brokers are not available, we use an income approach
based on certain observable and unobservable inputs to value these investments. An income approach is also
used to corroborate the reasonableness of the valuations provided by the external manager and brokers.
Where an income approach is followed, the valuation is based on available trade information, such as expected
cash flows and market assumptions on default and loss severity rates. Other inputs used in the valuation
process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates.
• For our investments in the CLO equity fund, we measure fair value by obtaining the most recently available
NAV as advised by the external fund manager or third party administrator. The fair value of this investment is
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.
235
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 on paid and unpaid losses 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 7 - "Derivatives and Hedging
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.
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, 2018 and 2017:
Corporate
Residential
mortgage-
backed
Commercial
mortgage-
backed
2018
Asset-
backed
Privately-
held
Equities
Other
Investments
Total
Beginning fair value
$
67,178
$
3,080
$
21,494
$
27,892
$
— $
57,079
$ 176,723
Purchases
Sales
Total realized and unrealized
losses
Transfer into Level 3 from Level 2
Transfer out of Level 3 into Level 2
14,391
(65,700)
(57)
28,339
(6,765)
—
(1,184)
(28)
1,795
(3,663)
3,749
(5,781)
(645)
46,074
(49,020)
(1,843)
227,000
13,173
304,387
—
(2)
(12,091)
(133,776)
(18,794)
(21,369)
4,897
9,890
(16,325)
(23,872)
1,712
—
—
—
46,633
(50,625)
Ending fair value
$
37,386
$
— $
7,389
$
9,121
$
228,710
$
39,367
$ 321,973
Corporate
Residential
mortgage-
backed
Commercial
mortgage-
backed
2017
Asset-
backed
Privately-
held
Equities
Other
Investments
Total
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
61,073
(12,350)
(71,547)
(7,884)
(7,880)
—
—
102,564
(85,804)
Ending fair value
$
67,178
$
3,080
$
21,494
$
27,892
$
— $
57,079
$ 176,723
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.
236
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 obtaining market
observable information regarding the valuations of the specific assets.
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 years ended December 31, 2018 and 2017:
2018
Reinsurance
balances
recoverable
on paid and
unpaid
losses
Liability for
losses and
LAE
2017
Reinsurance
balances
recoverable
on paid and
unpaid
losses
Net
Liability for
losses and
LAE
Net
$
1,794,669
$
542,224
$
1,252,445
$
— $
— $
—
1,890,061
372,780
1,517,281
1,966,843
565,824
1,401,019
(108,429)
(20,656)
27,845
(101,240)
(576,949)
(132,486)
(30,041)
—
21,181
(8,860)
(148,175)
(18,378)
(78,388)
(20,656)
6,664
(92,380)
(428,774)
(114,108)
(100,494)
(22,303)
54,007
(68,790)
(197,102)
93,718
(1,848)
—
23,751
21,903
(56,256)
10,753
(98,646)
(22,303)
30,256
(90,693)
(140,846)
82,965
Beginning fair value
Assumed business
Incurred losses and LAE:
Reduction in estimates of ultimate
losses
Reduction in unallocated LAE
Change in fair value
Total incurred losses and LAE
Paid losses
Effect of exchange rate movements
Ending fair value
$
2,874,055
$
739,591
$
2,134,464
$
1,794,669
$
542,224
$
1,252,445
Changes in fair value in the table above are included in net incurred losses and LAE in our consolidated statements
of earnings.
The following table presents the components of the net change in fair value for the years ended December 31,
2018 and 2017:
Changes in fair value due to changes in:
Duration
Corporate bond yield
Risk cost of capital
Change in fair value
2018
2017
$
$
74,011 $
(71,031)
3,684
6,664 $
41,332
(11,076)
—
30,256
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, 2018 and 2017:
Valuation
Technique
Internal model
Unobservable (U) and Observable (O) Inputs
Corporate bond yield (O)
Internal model
Credit spread for non-performance risk (U)
Internal model
Risk cost of capital
Internal model
Weighted average cost of capital (U)
Internal model
Duration - liability (U)
Internal model
Duration - reinsurance balances recoverable on paid
and unpaid losses (U)
2018
Weighted
Average
A rated
0.2%
5.0%
8.5%
2017
Weighted
Average
A rated
0.2%
5.0%
8.5%
7.33 years
7.98 years
11.41 years
11.66 years
237
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses
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 on paid and unpaid
losses. 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
on paid and unpaid losses.
• 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 on paid and unpaid losses. 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 on paid and unpaid losses.
• 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 on paid and unpaid losses. 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 on paid and unpaid losses.
• The duration of the liability and recoverable is adjusted every period to reflect actual net payments during the
period and expected future payments. An acceleration of the estimated payment pattern, a decrease in duration,
would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances
recoverable on paid and unpaid losses. Conversely, a deceleration of the estimated payment pattern, an
increase in duration, would result in a decrease in the fair value of the liability for losses and LAE and reinsurance
balances recoverable on paid and unpaid losses.
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 on paid and unpaid losses 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 on paid and unpaid losses.
Disclosure of Fair Values for Financial Instruments Carried at Cost
Life Settlement Contracts
During 2018, we sold our investments in life settlement contracts, which were carried at cost. As of December 31,
2017, investments in life settlement contracts were carried at cost of $125.6 million and their fair values were $131.9
million.
Senior Notes
As of December 31, 2018, our 4.5% Senior Notes due 2022 had a carrying value of $348.1 million, while the fair
value based on observable market pricing from a third party service was $352.2 million. The fair value is classified as
Level 2.
Insurance Contracts
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.
Remaining Assets and Liabilities
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, 2018 and 2017.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
12. POLICY BENEFITS FOR LIFE CONTRACTS
We have acquired long duration contracts that subject us to mortality, longevity and morbidity risks and which
are accounted for as life and annuity premiums earned. Life benefit reserves are established using assumptions for
investment yields, mortality, morbidity, lapse and expenses, including a provision for adverse deviation. We establish
and review our life reserves regularly based upon cash flow projections. We establish and maintain our life reinsurance
reserves at a level that we estimate will, when taken together with future premium payments and investment income
expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and
third-party servicing obligations as they become payable. Refer to Note 2 - "Significant Accounting Policies" - (d) Policy
Benefits for Life and Annuity Contracts" for a description of the assumptions used and the process for establishing our
assumptions and estimates. Policy benefits for life contracts as at December 31, 2018 and 2017 were $105.1 million
and $117.2 million, respectively.
On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary
Alpha and a subsidiary of Monument. This agreement will transfer our remaining life assurance policies written by
Alpha to Monument, via a Portfolio Transfer, subject to regulatory approval. The transaction is expected to close during
2019. Our life and annuities operations do not qualify for inclusion in our reportable segments and are therefore included
within other activities. The related assets, as well as the results from these operations, were not significant to our
consolidated operations and therefore they have not been classified as a discontinued operation. In addition, our
proposed transfer of these life assurance polices to Monument was not classified as a held-for-sale business transaction
since the underlying contracts do not meet the definition of a business. We have an investment in Monument, as
described further in Note 21 - "Related Party Transactions".
13. PREMIUMS WRITTEN AND EARNED
The following tables provide a summary of net premiums written and earned for the years ended December 31,
2018, 2017 and 2016:
Non-life Run-off
Gross
Ceded
Net
Atrium
Gross
Ceded
Net
StarStone
Gross
Ceded
Net
Other
Gross
Ceded
Net
Total
Gross
Ceded
Net
2018
2017
2016
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
$
$
$
$
(8,910) $
(307)
(9,217) $
25,230 $
(15,803)
9,427 $
14,102 $
(7,620)
6,482 $
23,950 $
(9,788)
14,162 $
17,316 $
(8,114)
9,202 $
25,989
(9,234)
16,755
171,494 $
(18,006)
153,488 $
164,428 $
(18,113)
146,315 $
153,472 $
(19,258)
134,214 $
152,278 $
(17,531)
134,747 $
143,170 $
(2,733)
140,437 $
140,438
(16,022)
124,416
$ 1,121,135 $ 1,010,816 $
(315,573)
805,562 $
(295,857)
714,959 $
895,160 $
(430,259)
464,901 $
865,159 $
(405,756)
459,403 $
854,699 $
(206,663)
648,036 $
830,186
(153,578)
676,608
32,378 $
(311)
32,067 $
25,237 $
(363)
24,874 $
5,719 $
(926)
4,793 $
5,900 $
(1,091)
4,809 $
7,157 $
(896)
6,261 $
7,220
(1,485)
5,735
$ 1,316,097 $ 1,225,711 $ 1,068,453 $ 1,047,287 $ 1,022,342 $ 1,003,833
(180,319)
(434,166)
(218,406)
(458,063)
(334,197)
981,900 $
(330,136)
895,575 $
610,390 $
613,121 $
803,936 $
823,514
$
$
$
$
239
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
14. GOODWILL AND INTANGIBLE ASSETS
The following table presents a reconciliation of the beginning and ending goodwill and intangible assets for the
years ended December 31, 2018 and 2017:
Goodwill
Intangible
assets with
a definite life
Intangible assets
Intangible
assets with
an indefinite
life
Total
Total
Balance as at December 31, 2016
Acquired during the year
Amortization
Balance as at December 31, 2017
Acquired during the year
Amortization
Balance as at December 31, 2018
$
$
$
73,071
$
24,753
$
87,031
$
111,784
$
184,855
—
—
—
(4,266)
—
—
—
(4,266)
—
(4,266)
73,071
$
20,487
$
87,031
$
107,518
$
180,589
41,736
—
—
(3,600)
—
—
—
(3,600)
41,736
(3,600)
114,807
$
16,887
$
87,031
$
103,918
$
218,725
Goodwill
Goodwill as of December 31, 2018 and 2017, related to our Non-life Run-off, Atrium and StarStone segments,
was as follows:
Non-life Run-Off
Atrium
StarStone
2018
2017
$
$
62,959 $
38,848
13,000
114,807 $
21,223
38,848
13,000
73,071
The increase in the goodwill balance in the Non-life Run-off segment was due to the acquisition of KaylaRe as
discussed in Note 3 - "Acquisitions", which resulted in the recognition of goodwill of $41.7 million, none of which is
amortizable for tax purposes. For the year ended December 31, 2018, we completed our assessment for impairment
of goodwill and concluded that there had been no impairment of our carried goodwill amount.
Intangible Assets
Intangible assets with a definite life includes the distribution channel, 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. The following table provides a summary of the amortization recorded on the intangible assets for
the years ended December 31, 2018, 2017 and 2016:
Intangible asset amortization
$
3,600 $
4,266 $
6,449
2018
2017
2016
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.
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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 as of
December 31, 2018 and 2017 was as follows:
Intangible assets with a definite life:
Distribution channel
Technology
Brand
Total
Intangible assets with an indefinite
life:
Lloyd’s syndicate capacity
Licenses
Management contract
Total
$
$
$
$
Gross
Carrying
Value
2018
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
2017
Accumulated
Amortization
Net
Carrying
Value
20,000
$
(6,776) $
13,224
$
20,000
$
(5,444) $
14,556
15,000
7,000
(14,778)
(3,559)
222
3,441
15,000
7,000
(13,210)
(2,859)
1,790
4,141
42,000
$
(25,113) $
16,887
$
42,000
$
(21,513) $
20,487
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
The net carrying value of intangible assets by segment and by type as of December 31, 2018 and 2017 was as
follows:
Intangible assets with a definite life:
Distribution channel
Technology
Brand
Total
Intangible assets with an indefinite
life:
Lloyd’s syndicate capacity
Licenses
Management contract
Total
Total intangible assets
$
$
$
$
$
2018
2017
Atrium
StarStone
Total
Atrium
StarStone
Total
13,224
$
— $
13,224
$
14,556
$
— $
14,556
—
3,441
222
—
222
3,441
—
4,141
1,790
—
1,790
4,141
16,665
$
222
$
16,887
$
18,697
$
1,790
$
20,487
33,031
$
4,000
$
37,031
$
33,031
$
4,000
$
—
30,100
19,900
—
19,900
30,100
—
30,100
19,900
—
63,131
$
23,900
$
87,031
$
63,131
$
23,900
$
37,031
19,900
30,100
87,031
79,796
$
24,122
$
103,918
$
81,828
$
25,690
$
107,518
The estimated future amortization expense related to our intangible assets with a definite life is as follows:
Year
2019
2020
2021
2022
2023
2024 and thereafter
Total amortization
Atrium
StarStone
Total
2,033
2,033
2,033
2,033
1,975
6,558
$
222
$
—
—
—
—
—
2,255
2,033
2,033
2,033
1,975
6,558
16,665
$
222
$
16,887
$
$
241
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
15. DEBT OBLIGATIONS AND CREDIT FACILITIES
We primarily utilize debt facilities for acquisitions and significant new business and, from time to time, for general
corporate purposes. Under these facilities, debt obligations as of December 31, 2018 and 2017 were as follows:
Facility
Senior Notes
EGL Revolving Credit Facility
Origination Date
March 10, 2017
August 16, 2018
Previous EGL Revolving Credit Facility
September 16, 2014
2018 EGL Term Loan Facility
2016 EGL Term Loan Facility
Total debt obligations
December 27, 2018
November 18, 2016
Term
5 years
5 years
5 years
3 years
3 years
2018
2017
$
348,054 $
347,516
15,000
—
498,485
—
$
861,539 $
—
225,110
—
74,063
646,689
During the year ended December 31, 2018, we utilized $1,132.5 million and repaid $914.3 million under our
facilities. The facilities were primarily utilized for funding acquisitions as described in Note 3 - "Acquisitions", significant
new business as described in Note 4 - "Significant New Business", and investing activities.
The table below provides a summary of the total interest expense for the years ended December 31, 2018, 2017
and 2016:
Interest expense on debt obligations
Funds withheld balances and other
Total interest expense
Senior Notes
2018
2017
2016
$
$
25,742 $
26,035 $
475
2,067
26,217 $
28,102 $
20,349
293
20,642
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. The unamortized costs as of December 31,
2018 and 2017 were $1.9 million and $2.5 million, respectively.
EGL Revolving Credit Facility
On August 16, 2018, we and certain of our subsidiaries, as borrowers and guarantors, entered into a new five-
year unsecured $600.0 million revolving credit agreement. The revolving credit agreement expires in August 2023 and
we have the option to increase the commitments under the facility by up to an aggregate amount of $400.0 million
from the existing lenders, or through the addition of new lenders subject to the terms of the agreement. Borrowings
under the facility will bear interest at a rate based on the Company's long term senior unsecured debt ratings. In
connection with our entry into this revolving credit agreement, we terminated and fully repaid our previous revolving
credit agreement, which was originated on September 16, 2014 and was most recently amended on July 17, 2018.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
As at December 31, 2018, we were permitted to borrow up to an aggregate of $600.0 million under the facility.
As at December 31, 2018, there was $585.0 million of available unutilized capacity under the facility. Subsequent to
December 31, 2018, we drew down $173.0 million and repaid $46.0 million, bringing the unutilized capacity under this
facility to $458.0 million.
Interest is payable at least every three months at either the alternate base rate ("ABR") or LIBOR plus a margin
as set forth in the revolving credit agreement. The margin could vary based upon any change in our long term senior
unsecured debt rating assigned by S&P or Fitch. We also pay a commitment fee based on the average daily unutilized
portion of the facility. During the existence of an event of default, the interest rate may increase and the agent may,
and at the request of the required lenders shall, cancel lender commitments and demand early repayment.
Financial and business covenants imposed on us in relation to the new revolving credit facility 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 net
worth of not less than the aggregate of (i) $2.3 billion, (ii) 50% of net income available for distribution to our ordinary
shareholders at any time after August 16, 2018, and (iii) 50% of the proceeds of any common stock issuance made
after August 16, 2018. In addition, we must maintain eligible capital in excess of the enhanced capital requirement
imposed on us by the Bermuda Monetary Authority pursuant to the Insurance (Group Supervision) Rules 2011 of
Bermuda. We are in compliance with the covenants of the EGL Revolving Credit Facility.
As at December 31, 2018 and December 31, 2017, there were borrowings of €nil
($nil) and €50.0 million
(approximately $60.1 million), respectively, under our revolving credit facilities in effect as of such dates that were
designated as non-derivative hedges of our net investment in certain subsidiaries whose functional currency is
denominated in Euros. These borrowings were repaid in full during the three months ended September 30, 2018 and
the non-derivative hedge was replaced by a Euro-denominated foreign currency forward exchange rate contract in a
qualifying hedging arrangement. Refer to Note 7 - "Derivatives and Hedging Instruments" for more information on our
derivative and non-derivative hedging instruments.
2018 EGL Term Loan Facility
On December 27, 2018, we entered into and fully utilized a three-year $500.0 million unsecured term loan (the
"2018 EGL Term Loan Facility"). The proceeds were partially used to fund the acquisition of Maiden Re North America.
We have the option to increase the principal amount of the term loan credit facility up to an aggregate amount of $150
million from the existing lenders or through the addition of new lenders, subject to the terms of the term loan credit
agreement.
Interest is payable at least every three months at either ABR or LIBOR plus a margin set forth in the term loan
credit agreement. The margin could vary based upon any change in our long term senior unsecured debt rating assigned
by S&P or Fitch. During the existence of an event of default, the interest rate may increase and the agent may, and at
the request of the required lenders shall, demand early repayment.
Financial and business covenants imposed on us, in relation to the new term loan credit facility, include certain
limitations on mergers, consolidations, acquisitions, indebtedness and guarantees, restrictions on dividends, 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 net worth of not less than the
aggregate of (i) $2.3 billion, (ii) 50% of net income available for distribution to our ordinary shareholders at any time
after August 16, 2018, and (iii) 50% of the proceeds of any common stock issuance made after August 16, 2018. In
addition, we must maintain eligible capital in excess of the enhanced capital requirement imposed on us by the Bermuda
Monetary Authority pursuant to the Insurance (Group Supervision) Rules 2011 of Bermuda. We are in compliance with
the covenants of the 2018 EGL Term Loan Facility.
We incurred costs of $1.5 million associated with closing the 2018 EGL Term Loan Facility. These costs included
bank, 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 facility and are included in interest expense in our consolidated statements of earnings. The unamortized costs as
of December 31, 2018 were $1.5 million.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
2016 EGL Term Loan Facility
On November 18, 2016, we entered into and fully utilized a three-year $75.0 million unsecured term loan (the
"2016 EGL Term Loan Facility"). We fully repaid this facility in the second quarter of 2018 and subsequently terminated
it.
Unsecured Letters of Credit
We also utilize unsecured letters of credit for Funds at Lloyd's. On February 8, 2018, we amended and restated
our unsecured letter of credit agreement for Funds at Lloyd's ("FAL Facility") to issue up to $325.0 million of letters of
credit, with provision to increase the facility up to $400.0 million, subject to lenders approval. Subsequent to year end,
on February 12, 2019, we increased the facility up to $375.0 million and maintained the provision to increase the facility
to $400.0 million. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2022. As at
December 31, 2018, our combined Funds at Lloyd's were comprised of cash and investments of $354.6 million and
unsecured letters of credit of $295.0 million.
16. NONCONTROLLING INTEREST
We have both redeemable noncontrolling interest and noncontrolling interest on our consolidated balance sheets.
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 redemption value, which is fair value. The change
in fair value is recognized through retained earnings as if the balance sheet date were also the redemption date. In
addition, we also have noncontrolling interest, which does not have redemption features and is classified within equity
in the consolidated balance sheets.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest ("RNCI") as of December 31, 2018 and 2017 comprises the ownership
interests held by Trident V Funds ("Trident") (39.3%) and Dowling Capital Partners, L.P. ("Dowling") (1.7%) in our
subsidiary North Bay Holdings Limited ("North Bay"). North Bay owns our investments in Atrium and StarStone.
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, 2018 and 2017:
Balance at beginning of year
Capital contributions
Dividends paid
Net earnings attributable to RNCI
Accumulated other comprehensive income (loss) attributable to RNCI
Change in redemption value of RNCI
Balance at end of year
2018
479,606 $
2017
454,522
$
55,377
(3,852)
(64,794)
(240)
(7,554)
—
(27,458)
19,619
1,945
30,978
$
458,543 $
479,606
We carried the RNCI at its estimated redemption value, which is fair value, as of December 31, 2018. The fair
value is based on tangible book value and a valuation multiple derived from a combination of comparable company
market valuations, recent comparable transaction multiples and discounted cash flow models. The decrease in the fair
value of the RNCI during 2018 was primarily attributable to a decrease in tangible net assets due to net losses relating
to StarStone during 2018 and the distribution of Atrium dividends during the year ended December 31, 2018, which
were partially offset by a capital contribution to StarStone and net earnings from Atrium. The valuation multiples did
not change significantly.
Refer to Note 2 - "Significant Accounting Policies", Note 21 - "Related Party Transactions" and Note 23 -
"Commitments and Contingencies" for additional information regarding RNCI.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Noncontrolling Interest
As of December 31, 2018 and 2017, we had $12.1 million and $9.3 million, respectively, of noncontrolling interest
("NCI") primarily related to an external interest in two 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, 2018 and 2017, 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 preferred shares of par value $1.00 per share.
Voting Ordinary Shares
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. On May 14, 2018, 1,501,778 Voting Ordinary Shares
were issued as consideration for the acquisition of KaylaRe Holdings Ltd, as described in Note 3 - "Acquisitions".
Non-Voting Ordinary Shares
The Non-Voting Ordinary Shares are comprised of several different series as of December 31, 2018:
•
•
•
•
the Series A 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.
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 910,010 Series E shares issued and outstanding as of December 31, 2018. 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 by their registered holders constituting a widely dispersed offering. On May 14,
2018, 505,239 Series E non-voting shares were issued as consideration for the acquisition of KaylaRe
Holdings Ltd, as described in Note 3 - "Acquisitions". 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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Series C Preferred Shares
As of December 31, 2018, 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.
Series D Preferred Shares
On June 28, 2018, the Company raised $400.0 million of gross proceeds through the public offering of 16,000
shares of its 7.00% non-cumulative fixed-to-floating rate Series D perpetual preferred shares ("Series D Preferred
Shares") (equivalent to 16,000,000 depositary shares, each of which represents a 1/1,000th interest in a Series D
Preferred Share), $1.00 par value and $25,000 liquidation preference (the "Liquidation Preference") per share
(equivalent to $25.00 per depositary share). After underwriting discounts and other expenses, the Company received
net proceeds of $389.2 million which was used to repay a portion of amounts outstanding under the EGL Revolving
Credit Facility and repay in full the EGL Term Loan Facility. The depositary shares are listed and trade on the NASDAQ
Global Select Market.
The Series D Preferred Shares are not redeemable prior to September 1, 2028, except in specified circumstances
relating to certain tax, corporate, capital or rating agency events as described in the prospectus supplement relating
to the offering. On and after September 1, 2028, the Series D Preferred Shares, represented by the depositary shares,
will be redeemable at the Company’s option, in whole or from time to time in part, at a redemption price equal to $25,000
per Series D Preferred Share (equivalent to $25.00 per depositary share), plus any declared and unpaid dividends.
Series E Preferred Shares
On November 21, 2018, the Company raised $110.0 million of gross proceeds through the public offering of
4,400 shares of its 7.00% fixed rate non-cumulative Series E perpetual preferred shares ("Series E Preferred Shares")
(equivalent to 4,400,000 depositary shares, each of which represents a 1/1,000th interest in a Series E Preferred
Share), $1.00 par value and $25,000 liquidation preference (the "Series E Liquidation Preference") per share (equivalent
to $25.00 per depositary share). After underwriting discounts and other expenses, the Company received net proceeds
of $106.1 million which was used to fund operations within our Non-life Run-off segment. The depositary shares are
listed and trade on the NASDAQ Global Select Market.
The Series E Preferred Shares are not redeemable prior to March 1, 2024, except in specified circumstances
relating to certain tax, corporate, capital or rating agency events as described in the prospectus supplement relating
to the offering. On and after March 1, 2024, the Series D Preferred Shares, represented by the depositary shares, will
be redeemable at the Company’s option, in whole or from time to time in part, at a redemption price equal to $25,000
per Series D Preferred Share (equivalent to $25.00 per depositary share), plus any declared and unpaid dividends.
Warrants
As of December 31, 2018, 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.
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Dividends
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
There were no dividends declared or paid on our ordinary shares during the year ended December 31, 2018,
2017 or 2016.
Holders of Series D and Series E Preferred Shares are entitled to receive, only when, as and if declared, non-
cumulative cash dividends, paid quarterly in arrears on the 1st day of March, June, September and December of each
year, commencing on September 1, 2018 for the Series D Preferred Shares and March 1, 2019 for the Series E
Preferred Shares, of 7.00% per annum. Commencing on September 1, 2028, the Series D Preferred Shares will convert
to a floating rate basis and dividends will be payable on a non-cumulative basis, when, as and if declared, at three-
month LIBOR plus 4.015% per annum. Dividends that are not declared will not accumulate and will not be payable.
The following table presents the dividends that have been declared and payable on our Series D and E Preferred
Shares from January 1, 2018 to March 1, 2019:
Preferred Share
Series
Date
Declared
Series D
Series D
Series D
Series E
July 31,
2018
November 6,
2018
February 21,
2019
February 21,
2019
Record Date
August 15,
2018
Date Payable
September 1,
2018
November 15,
2018
December 1,
2018
February 15,
2019
February 15,
2019
March 1,
2019
March 1,
2019
$
$
$
$
Dividend per:
Preferred
Share
Depositary
Share
320.83 $
0.32083 $
Total
Dividends
Paid in 2018
5,133
437.50 $
0.43750
7,000
437.50 $
0.43750
486.11 $
0.48611
—
—
$
12,133
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".
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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, 2018, 2017 and 2016:
Numerator:
Net earnings (loss) from continuing operations
Net earnings from discontinued operations, net of income taxes
Net earnings (loss) 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 (loss) from continuing operations
Net earnings from discontinued operations, net of income taxes
Net earnings (loss) per ordinary share
Diluted(1):
Net earnings (loss) from continuing operations
Net earnings from discontinued operations, net of income taxes
Net earnings (loss) per ordinary share
$
$
$
$
$
$
2018
2017
2016
(162,354) $
300,465 $
—
10,993
(162,354) $
311,458 $
252,844
11,963
264,807
20,698,310
19,388,621
19,299,426
129,746
76,120
20,904,176
62,732
76,238
19,527,591
48,428
99,387
19,447,241
(7.84) $
—
(7.84) $
(7.84) $
—
(7.84) $
15.50 $
0.56
16.06 $
15.39 $
0.56
15.95 $
13.10
0.62
13.72
13.00
0.62
13.62
(1) During a period of loss, the basic weighted average ordinary shares outstanding is used in the denominator of the diluted loss per ordinary share
computation as the effect of including potentially dilutive securities would be anti-dilutive.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
19. SHARE-BASED COMPENSATION AND PENSIONS
Share-based compensation
Employee share awards have been granted under the 2016 and 2006 Equity Incentive Plans. The table below
provides a summary of the compensation costs for share-based compensation plans for the years ended December 31,
2018, 2017 and 2016:
Restricted shares and restricted share units
Performance share units
Cash-settled stock appreciation rights
Total share-based compensation costs
$
$
7,641 $
1,968
(3,316)
6,293 $
7,302 $
5,832
8,875
22,009 $
2,950
—
35,626
38,576
2018
2017
2016
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 2018:
Nonvested — January 1
Granted
Vested
Forfeited
Nonvested — December 31
Number of
Shares
Weighted-Average Share
Price of Award
99,305 $
3,991
(42,000)
(1,360)
59,936
187.84
214.37
184.38
194.16
191.89
The unrecognized compensation cost related to our non-vested share awards as at December 31, 2018 was
$4.7 million. This cost is expected to be recognized over the next 1.32 years, which is the weighted average contractual
life of the awards.
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
PSUs Granted
at Target
As of December 31,
2018
Threshold
Target
Maximum
Nonvested Units
Change in FDBVPS (3 - year)
2017
2017
2018
36,321
91,875
39,682
167,878
34,878
91,875
32,415
159,168
20.00%
30.30%
25.00%
30.00%
35.70%
32.50%
40.00%
41.00%
40.00%
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. For expense purposes we assume a Target vesting at the initial
time of award. As of December 31, 2018, we revised the expected vesting level to Threshold on all PSU awards.
249
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table summarizes the activity related to PSUs during 2018:
Nonvested — January 1
Granted
Vested
Forfeited
Nonvested — December 31
Number of
Shares
Weighted-Average
Share Price of Award
126,753 $
39,682
(407)
(6,860)
159,168
188.06
200.87
199.70
198.55
190.77
The unrecognized compensation cost related to our non-vested share awards as at December 31, 2018 was
$7.7 million. This cost is expected to be recognized over the next 1.64 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 2018:
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)
310,867
$
(201,786)
109,081
141.30
140.72
142.37
2.88
$
3,244
(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 $167.57 on December 31, 2018.
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. The unrecognized compensation
cost related to our SARs as at December 31, 2018 was less than $0.1 million.
The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black-
Scholes option valuation model as of December 31, 2018, 2017 and 2016:
Weighted-average fair value per SAR
Weighted-average volatility
Weighted-average risk-free interest rate
Dividend yield
2018
2017
2016
$
45.85
$
75.38
$
62.39
18.94%
2.72%
0.00%
19.44%
1.65%
0.00%
19.82%
1.12%
0.00%
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Other share-based compensation plans
Northshore Incentive Plan
Our subsidiary, Northshore, has long-term incentive plans that award time-based restricted shares of Northshore
to certain Atrium employees. Shares generally vest over two to three years. These share awards have been classified
as liability awards. The unrecognized compensation cost related to the Northshore incentive plan at December 31,
2018 was $4.1 million. This cost is expected to be recognized over the next 0.87 years, which is the weighted average
contractual life of the awards.
Compensation costs
$
2,792 $
3,156 $
2,827
2018
2017
2016
Deferred Compensation and Ordinary Share Plan for Non-Employee Directors
The following table summarizes the expenses related to restricted share units and the number of units outstanding
for the years ended December 31, 2018, 2017 and 2016 under the Enstar Group Limited Deferred Compensation and
Ordinary Share Plan for Non-Employee Directors (the "Deferred Compensation Plan"):
Restricted share units expense
$
823 $
758 $
2018
2017
2016
Restricted share units credited to the
accounts of non-employee directors
Employee Share Purchase Plan
3,975
3,852
696
4,298
The following table summarizes the expenses related to the Employee Share Purchase Plan and the number
of shares issued to employees for the years ended December 31, 2018, 2017 and 2016:
Compensation costs
$
430 $
403 $
Number of units issued to employees
14,183
12,401
306
12,234
2018
2017
2016
Pension Plans
We provide retirement benefits to eligible employees through various plans that we sponsor. Pension expense
can be affected by changes in our employee headcount. The table below summarizes the pension expenses related
to our Defined Contribution Plans and our Defined Benefit Plan for the years ended December 31, 2018, 2017 and
2016.
Defined contribution plans
Defined benefit plan
Total pension expense
Defined Benefit Plan
2018
2017
2016
$
$
11,434 $
2,243
13,677 $
12,247 $
1,988
14,235 $
10,810
2,273
13,083
During 2018, an actuarial review was performed on the defined benefit plan, which determined that the plan’s
unfunded liability, as of December 31, 2018 and 2017 was $8.4 million and $9.4 million, respectively. As of December 31,
2018 and 2017, we had an accrued liability of $8.4 million and $9.4 million, respectively, for this plan.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
20. INCOME 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 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 indefinitely reinvested 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 taxes by jurisdiction from continuing operations, including earnings
(loss) from equity method investments, for the years ended December 31, 2018, 2017 and 2016:
Domestic (Bermuda)
Foreign
Total earnings (loss) before income tax on continuing operations
2018
(232,743) $
2017
167,263 $
14,347
147,148
2016
191,647
135,677
(218,396) $
314,411 $
327,324
$
$
The following table presents our current and deferred income tax expense (benefit) from continuing operations
by jurisdiction for the years ended December 31, 2018, 2017 and 2016:
2018
2017
2016
Current:
Domestic (Bermuda)
Foreign
Deferred:
Domestic (Bermuda)
Foreign
$
— $
— $
(3,632)
(3,632)
—
(2,492)
(2,492)
10,299
10,299
—
(16,694)
(16,694)
Total income tax expense (benefit) on continuing operations
$
(6,124) $
(6,395) $
—
21,485
21,485
—
13,389
13,389
34,874
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The actual income tax rate differs from the amount computed by applying the statutory rate of 0% under Bermuda
law to earnings from continuing operations before income taxes, including earnings (loss) from equity method
investments for the years ended December 31, 2018, 2017 and 2016 as shown in the following reconciliation:
Earnings (loss) 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
U.S. base erosion and anti-abuse tax
Other
Effective tax rate
2018
$ (218,396)
2017
$ 314,411
2016
$ 327,324
0.0 %
0.7 %
(0.3)%
— %
(0.6)%
3.0 %
2.8 %
0.0 %
13.1 %
(34.9)%
20.3 %
— %
(0.5)%
(2.0)%
0.0 %
8.8 %
(0.1)%
— %
— %
2.0 %
10.7 %
Our effective tax rate is generally driven by the geographical distribution of our pre-tax net earnings between
our taxable and non-taxable jurisdictions.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities reflect the tax effect of the differences between the financial reporting and
income tax bases of assets and liabilities. Significant components of the deferred tax assets and deferred tax liabilities
related to our continuing operations as of December 31, 2018 and 2017 were as follows:
Deferred tax assets:
Net operating loss carryforwards
Insurance reserves
Unearned premiums
Lloyd's underwriting losses taxable in future periods
Provisions for bad debt
Unrealized losses on investments
Other deferred tax assets
Gross deferred tax assets
Valuation allowance
Deferred tax assets
Deferred tax liabilities:
Unrealized gains on investments
Other deferred tax liabilities
Deferred tax liabilities
Net deferred tax liability
2018
2017
$
183,633 $
177,695
18,677
11,314
6,201
2,594
5,160
183
9,082
1,690
9,131
6,371
—
1,944
227,762
205,913
(212,113)
(188,300)
15,649
17,613
—
(16,067)
(16,067)
$
(418) $
(3,798)
(16,076)
(19,874)
(2,261)
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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,
2018
Net Deferred Tax
Liability
2017
Net Deferred Tax
Liability
$
$
5,151 $
(8,377)
2,808
(418) $
4,947
(5,150)
(2,058)
(2,261)
As of December 31, 2018, 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
Loss
Carryforwards
Tax effect
Expiration
$
522,116 $
15,160
248,448
96,418
109,644
3,191
47,205
23,593
2030-2038
2021-2023
None
None
The U.S. net operating loss carryforwards are also subject to certain utilization limitations based upon their nature
and the specific legal entity that holds them.
Impact of U.S. Tax 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”). 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 recorded a $63.8 million reduction
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 of December 31, 2018, we completed our accounting for the tax effects of the enactment of the Tax Cuts
Jobs Act; however, the United States Treasury may continue to issue regulations that could have a material financial
statement impact on our effective tax rate in future periods.
Assessment of Valuation Allowance on Deferred Tax Assets
As of December 31, 2018 and 2017, we had deferred tax asset valuation allowances of $212.1 million and $188.3
million, respectively, related to foreign subsidiaries. We recorded an increase of $23.8 million in our deferred tax
valuation allowance for continuing operations during 2018. The deferred tax asset valuation allowances increased
primarily due to deferred tax assets acquired during the year.
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. The amount of the deferred tax asset considered realizable, however,
could be revised in the future if estimates of future taxable income change. 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. We considered 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, in making our determination. The assumptions used in determining future taxable
income require significant judgment and any changes in these assumptions could have an impact on earnings.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Uncertainty in Income Taxes
During the years ended December 31, 2018, 2017 and 2016, 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,
2018, 2017 and 2016.
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, 2018:
Major Tax Jurisdiction
United States
United Kingdom
Australia
Open Tax Years
2015-2018
2015-2018
2013-2018
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
21. RELATED PARTY TRANSACTIONS
Stone Point Capital LLC
Through several private transactions occurring from May 2012 to July 2012 and an additional private transaction
that closed in May 2018, investment funds managed by Stone Point Capital LLC ("Stone Point") have acquired an
aggregate of 1,635,986 of our Voting Ordinary Shares (which now constitutes approximately 9.1% 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, 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 6, 2018 and April 1, 2019, respectively,
and at any time following September 6, 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 6, 2020 and April 1, 2021, respectively. We
did not exercise our right to redeem Trident's equity interest in Atrium/Arden during the 90 days following September
6, 2018. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the
boards of the holding companies, including North Bay Holdings Limited ("North Bay"), 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.
On December 26, 2018, the shareholders of North Bay completed a transaction to provide capital support to
StarStone in the form of a contribution to its contributed surplus account and a loss portfolio transfer of certain
discontinued and discontinuing lines of business. To fund the transaction, the North Bay shareholders contributed an
aggregate amount of $135.0 million to North Bay in proportion to their ownership interests. Trident’s proportionate
contribution of $53.1 million was temporarily funded by North Bay and is expected to be reimbursed in the first quarter
of 2019, subject to the terms and conditions of the reimbursement agreement executed by the parties.
As at December 31, 2018 and December 31, 2017, the RNCI on our balance sheet relating to these Trident co-
investment transactions was as follows:
Redeemable Noncontrolling Interest
$
439,428 $
459,613
2018
2017
As of December 31, 2018, we had the following additional relationships with Stone Point and its affiliates:
•
•
Investments in funds (carried within other investments) managed by Stone Point, with respect to which we
recognized unrealized gains and interest income;
Investments in registered investment companies affiliated with entities owned by Trident or otherwise affiliated
with Stone Point, with respect to which we recognized unrealized gains and interest income;
• Separate accounts managed by Eagle Point Credit Management and PRIMA Capital Advisors, which are
affiliates of entities owned by Trident, with respect to which we incurred management fees;
•
Investments in 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 a director, with respect to which we
recognized net unrealized gains;
• Sound Point Capital has acted as collateral manager for certain of our direct investments in CLO equity
securities, with respect to which we recognized net unrealized gains (losses) and interest income; and
• A separate account managed by Sound Point Capital, with respect to which we incurred management fees.
In the fourth quarter of 2018, we invested $25.0 million in Mitchell International, a claims software provider for
workers' compensation and auto insurance business, as a co-investor alongside Stone Point.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
The following table presents the amounts included in our consolidated balance sheet as of December 31, 2018
and 2017, related to our related party transactions with Stone Point and its affiliated entities:
Investments in funds managed by Stone Point
$
422,771 $
255,905
2018
2017
Investments in registered investment companies affiliated with
entities owned by Trident
Investments managed by Eagle Point Credit Management and
PRIMA Capital Advisors
Investments in funds managed by Sound Point Capital
Investments in CLO equity securities with Sound Point Capital as
collateral manager
Separate account managed by Sound Point Capital
32,302
176,624
29,922
13,449
1,079
22,060
183,448
27,429
17,760
63,572
The following table presents the amounts included in net earnings for the years ended December 31, 2018, 2017
and 2016, related to our related party transactions with Stone Point and its affiliated entities:
Net unrealized gains on funds managed by Stone Point
$
1,074 $
22,259
17,271
2018
2017
2016
Net unrealized gains on registered investment companies affiliated with
entities owned by Trident or Stone Point
Interest income on registered investment companies affiliated with
entities owned by Trident
Management fees on investments managed by Eagle Point Credit
Management and PRIMA Capital Advisors
Net unrealized gains (losses) on investments in funds managed by
Sound Point Capital
Net unrealized losses on investments in CLO equity securities with
Sound Point Capital as collateral manager
Interest income on investments in CLO equity securities with Sound
Point Capital as collateral manager
Management fees on separate account managed by Sound Point
Capital
Total net earnings
KaylaRe
3,886
3,273
(486)
(442)
2,878
2,478
377
3,099
(480)
(469)
2,043
1,901
(4,311)
(2,496)
2,086
4,811
4,292
6,739
(174)
(300)
(275)
$
7,631 $
30,674 $
30,729
On May 14, 2018, the Company completed a transaction to acquire all of the outstanding shares and warrants
of KaylaRe, following the receipt of all required regulatory approvals. In consideration for the acquired shares and
warrants of KaylaRe, the Company issued an aggregate of 2,007,017 ordinary shares, comprising 1,501,778 voting
ordinary shares and 505,239 Series E non-voting ordinary shares to the shareholders of KaylaRe as follows: (i)
1,204,353 voting ordinary shares and 505,239 Series E Shares to a fund managed by Hillhouse Capital Management,
Ltd. (together with its affiliates, “Hillhouse Capital”); (ii) 285,986 voting ordinary shares to Trident; and (iii) 11,439 voting
ordinary shares to the minority shareholder. In addition, the Shareholders Agreement between Enstar and the other
KaylaRe shareholders was effectively terminated. Effective May 14, 2018 we consolidated KaylaRe into our
consolidated financial statements and any balances between KaylaRe and Enstar are now eliminated upon
consolidation. Refer to Note 2 - "Acquisitions" for additional information.
On December 15, 2016, KaylaRe completed an initial capital raise of $620.0 million. We originally owned
approximately 48.2% of KaylaRe's common shares and recorded our investment in KaylaRe using the equity method
basis of accounting, pursuant to the conclusion that we were not required to consolidate following an analysis based
on the guidance in ASC 810 - Consolidation. Our investment in the common shares and warrants of KaylaRe was
carried at $320.1 million and $309.8 million in other assets on our consolidated balance sheet as at May 14, 2018 and
December 31, 2017, respectively.
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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 receives fee income. Affiliates of Enstar have also entered into various reinsurance agreements with
KaylaRe Ltd. We provide administrative services to KaylaRe and KaylaRe Ltd.
Through a Quota Share Agreement dated December 15, 2016 (the "KaylaRe-StarStone QS"), several of our
StarStone affiliates 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’ external reinsurance programs. The reinsurance of StarStone's U.S. and U.K. affiliates was non-renewed as
of January 1, 2018 and January 1, 2019, respectively.
In addition, Fitzwilliam Insurance Limited ("Fitzwilliam"), one of our non-life run-off subsidiaries, ceded $177.2
million of loss reserves to KaylaRe Ltd. in 2016, 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 term
of this agreement. Our Non-life Run-off subsidiaries did not cede any new business to KaylaRe Ltd. during years ended
December 31, 2018 and 2017.
Our consolidated balance sheets as of December 31, 2017 included the following balances related to transactions
between us and KaylaRe and KaylaRe Ltd.:
Reinsurance balances recoverable on paid and unpaid losses
$
Prepaid reinsurance premiums
Funds held
Insurance and reinsurance balances payable
Ceded acquisition costs
2017
357,355
116,356
174,181
232,884
36,070
Our consolidated statement of earnings for the years ended December 31, 2018, 2017 and 2016 included the
following balances related to transactions between us and KaylaRe and KaylaRe Ltd. up until May 14, 2018, the date
of acquisition:
Fee income due to Enstar Limited
Transactions under KaylaRe-StarStone QS:
Ceded premium earned
Net incurred losses
Acquisition costs
2018
2017
2016
$
1,453 $
2,679 $
6,799
(52,651)
(234,079)
(117,561)
31,654
18,774
155,433
99,500
75,659
42,516
Transactions under Fitzwilliam reinsurance agreement:
Profit Commission
—
18,843
7,055
Total net earnings (loss)
$
(770) $
42,376 $
14,468
Hillhouse
Investment funds managed by Hillhouse Capital collectively own approximately 9.7% 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 17.1% economic interest in Enstar.
In February 2017, Jie Liu, a Partner of Hillhouse Capital, was appointed to our Board.
As of December 31, 2017, KaylaRe had investments in a fund managed by Hillhouse Capital. On May 14, 2018
KaylaRe was acquired (refer to Note 3 - "Acquisitions" for further details), at which point KaylaRe was consolidated
and KaylaRe's investment in Hillhouse InRe Fund, L.P. ("InRe Fund") was recorded within other investments on our
consolidated balance sheet. As of December 31, 2018, Enhanzed Re had investments in a fund managed by Hillhouse
Capital, as described below.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
As of December 31, 2018, our carrying value of the InRe Fund was $678.4 million and the fund was invested in
approximately 35% in fixed income securities, 15% in North American equities, 55% in international equities and (5)%
in financing, derivatives and other items.
Our consolidated balance sheet as of December 31, 2018 and 2017 included the following balances related to
transactions between us and Hillhouse and its affiliated entities:
Investments in funds managed by Hillhouse Capital, held by equity
method investees
Our ownership of equity method investments
Our indirect investment in funds managed by Hillhouse Capital
Investment in funds managed by Hillhouse Capital:
InRe Fund
Other funds
2018
2017
$
$
$
$
75,192
47.4%
35,641
678,420
166,646
845,066
$
$
$
$
456,660
48.2%
220,247
—
—
—
The increase in the investment in funds managed by Hillhouse was primarily due to consolidation of the InRe
Fund, which was previously held by KaylaRe, our equity method investment, and additional subscriptions of $445.5
million, partially offset by net unrealized losses on the investments.
We incurred fees of approximately $8.2 million, included within net unrealized gains (losses), for the year ended
December 31, 2018 to Hillhouse and its affiliated entities in relation to the management of the funds described above.
Monument
Monument was established in October 2016 and Enstar has invested a total of $26.6 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.
On August 29, 2017, we sold our wholly-owned subsidiary, Laguna, to a subsidiary of Monument for a total
consideration of €25.6 million (approximately $30.8 million). The total loss recorded on the sale of Laguna, for the year
ended December 31, 2017 was $16.3 million, which has been included in earnings from continuing operations before
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.
On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary
Alpha and a subsidiary of Monument. This agreement will transfer life assurance policies written by Alpha to Monument
via a Portfolio Transfer, which is subject to regulatory approval. The transaction is expected to close during 2019.
Our investment in the common and preferred shares of Monument, carried in equity method investments on our
consolidated balance sheet, as of December 31, 2018 and 2017 was as follows:
Investment in Monument
2018
2017
$
42,193 $
15,960
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Clear Spring (formerly SeaBright)
On January 1, 2017 we sold SeaBright Insurance Company (“SeaBright Insurance”) and its licenses to Delaware
Life Insurance Company ("Delaware Life"). Following the sale, 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 a 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, carried in equity method investments on our
consolidated balance sheet, as of December 31, 2018 and 2017 was as follows:
Investment in Clear Spring
2018
2017
$
10,070 $
10,596
Effective January 1, 2017, StarStone National Insurance Company (“StarStone National”) entered into a ceding
quota share treaty with Clear Spring pursuant to which Clear Spring reinsures 33.3% of core workers' compensation
business written by StarStone National. This agreement was terminated as of December 31, 2018.
Effective January 1, 2017, we also entered into an assuming quota share treaty with Clear Spring pursuant to
which an Enstar subsidiary reinsures 25% of all workers' compensation business written by Clear Spring. This is
recorded as other activities.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Our consolidated balance sheet as at December 31, 2018 and 2017 included the following balances between
us and Clear Spring:
2018
2017
Balances under StarStone ceding quota share:
Reinsurance balances recoverable on paid and unpaid losses
$
23,718 $
Prepaid insurance premiums
Ceded payable
Ceded acquisition costs
Balances under assuming quota share:
Losses and LAE
Unearned reinsurance premiums
Funds held
13,821
14,153
3,233
5,778
3,455
10,242
9,053
13,747
13,964
3,186
2,231
3,437
5,095
Our consolidated statement of earnings for the years ended December 31, 2018 and 2017 included the following
amounts between us and Clear Spring:
Amounts under StarStone ceding quota share:
Ceded premium earned
Net incurred losses and LAE
Acquisition costs
Amounts under assuming quota share:
Premium earned
Net incurred losses and LAE
Acquisition costs
2018
2017
$
(29,520) $
(14,256)
18,143
7,035
7,380
(4,536)
(1,836)
9,533
6,718
3,564
(1,181)
(1,753)
Total net earnings (loss)
$
(3,334) $
2,625
AmTrust
In November 2018, pursuant to a Subscription Agreement with Evergreen Parent L.P. ("Evergreen"), K-Z
Evergreen, LLC and Trident Pine Acquisition LP ("Trident Pine"), we purchased equity in Evergreen in the aggregate
amount of $200.0 million. Evergreen is an entity formed by private equity funds managed by Stone Point and the
Karfunkel-Zyskind family that acquired the approximately 45% of the issued and outstanding shares of common stock
of AmTrust Financial Services, Inc. ("AmTrust") that the Karfunkel-Zyskind Family and certain of its affiliates and related
parties did not already own or control. The equity interest was in the form of three separate classes of equity securities
issued at the same price and in the same proportion as the equity interest purchased by Trident Pine. Following the
closing of the transaction, Enstar owns approximately 7.5% of the equity interest in Evergreen and Trident Pine owns
approximately 21.8%. Evergreen owns all of the equity interest in AmTrust. In addition, upon the successful closing of
the transaction we received a fee of $3.5 million, half of which was payable upon closing and the other on the first
anniversary of the closing. The fee has been recorded in full in other income within our consolidated statements of
earnings for the year ended December 31, 2018.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Our indirect investment in the shares of AmTrust, carried in equities on our consolidated balance sheet, as of
December 31, 2018 was as follows:
Investment in AmTrust
2018
$
200,000
During the year ended December 31, 2018 we recorded net investment income of $0.3 million related to our
indirect equity investment in AmTrust.
Citco
In June 2018, our subsidiary made a $50.0 million indirect investment in the shares of Citco III Limited ("Citco"),
a fund administrator with global operations. Pursuant to an investment agreement and in consideration for participation
therein, a related party of Hillhouse Capital provided investment support to our subsidiary. In a private transaction that
preceded our co-investment opportunity, certain Citco shareholders, including Trident, agreed to sell all or a portion of
their interests in Citco. As of December 31, 2018, Trident owned an approximate 3.4% interest in Citco. Mr. Carey
currently serves as an observer to the board of directors of Citco in connection with Trident's investment therein.
Our indirect investment in the shares of Citco, carried in equity method investments on our consolidated balance
sheet, as of December 31, 2018 was as follows:
Investment in Citco
Enhanzed Re
2018
50,812
Enhanzed Reinsurance Ltd. ("Enhanzed Re") is a joint venture between Enstar, Allianz SE and Hillhouse Capital
that was capitalized in December 2018. Enhanzed Re is a Bermuda-based Class 4 and Class E reinsurer and will
reinsure life, non-life run-off, and property and casualty insurance business, initially sourced from Allianz SE and Enstar.
Enstar, Allianz and Hillhouse Capital affiliates have made equity investment commitments in aggregate of $470.0
million to Enhanzed Re. Enstar owns 47.4% of the entity, Allianz owns 24.9%, and an affiliate of Hillhouse Capital
owns 27.7%. As of December 31, 2018, Enstar contributed $94.8 million of its total capital commitment to Enhanzed
Re and an uncalled amount of $128.0 million.
Enstar acts as the (re)insurance manager for Enhanzed Re, Hillhouse Capital acts as primary investment
manager, and an affiliate of Allianz SE provides investment management services. Enhanzed Re intends to write
business from affiliates of its operating sponsors, Allianz SE and Enstar. It will seek to underwrite business to maximize
diversification by risk and geography.
Our investment in the common shares of Enhanzed Re, carried in equity method investments on our consolidated
balance sheet, as of December 31, 2018 was as follows:
Investment in EnhanzedRe
2018
$
94,800
There were no transactions between us and Enhanzed Re in the year ended December 31, 2018.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
22. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
Parent Company Dividend Restrictions
There were no significant restrictions on the Parent Company's ability to pay dividends from retained earnings
as at December 31, 2018. 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. We have not historically declared a dividend on our ordinary shares. The
issuance of our Series D and E Preferred Shares have resulted in the declaration of dividends. Holders of Series D
and Series E Preferred Shares are entitled to receive, only when, as and if declared, non-cumulative cash dividends,
paid quarterly in arrears on the 1st day of March, June, September and December of each year of 7.0% per annum.
Refer to Note 17 - "Share Capital" for details regarding dividends on preferred shares.
The Bermuda Monetary Authority ("BMA") acts as group supervisor to Enstar. On an annual basis, we are
required to file group statutory financial statements, a group statutory financial return, a group capital and solvency
return, audited group financial statements and a Group Solvency Self-Assessment ("GSSA") with the BMA. The GSSA
is designed to document our perspective on the capital resources necessary to achieve our business strategies and
remain solvent, and to provide the BMA with insights on our risk management, governance procedures and
documentation related to this process. We are required to maintain available group statutory capital and surplus in an
amount that is at least equal to the group enhanced capital requirement ("Group ECR"). The BMA has also established
a group target capital level equal to 120% of the Group ECR. We are in compliance with these requirements.
Our ability to pay dividends to our shareholders is dependent upon the ability of our insurance and reinsurance
subsidiaries to distribute capital and pay dividends to us. Our insurance and reinsurance subsidiaries are subject to
certain regulatory restrictions on the distribution of capital and payment of dividends in the jurisdictions in which they
operate, as described below. The restrictions are generally based on net income or levels of capital and surplus as
determined in accordance with the relevant statutory accounting practices. Failure of these subsidiaries to meet their
applicable regulatory requirements could result in restrictions on any distributions of capital or retained earnings or
stricter regulatory oversight of the subsidiaries.
Our ability to pay dividends and make other forms of distributions may also be limited by repayment obligations
and financial covenants in our outstanding loan facility agreements.
Subsidiary Statutory Financial Information and Dividend Restrictions
Our insurance and reinsurance subsidiaries prepare their statutory financial statements in accordance with
statutory accounting practices prescribed or permitted by local regulators. Statutory accounting differs from U.S. GAAP,
including in the treatment of investments, acquisition costs and deferred income taxes, amongst other items.
The statutory capital and surplus amounts for the years ended December 31, 2018 and 2017 and statutory net
income amounts for the years ended December 31, 2018, 2017 and 2016 for our insurance and reinsurance subsidiaries
based in Bermuda, the United Kingdom, Australia, the United States and Continental Europe are summarized in the
table below which includes information relating to acquisitions from the year of acquisition:
Statutory Capital and Surplus
Required
Actual
Statutory Income
2018
2017
2018
2017
2018
2017
2016
$ 1,591,991 $ 1,556,644 $ 3,701,825 $ 2,802,653 $
654,721
392,394
239,582
22,535
453,160
195,855
253,981
12,521
715,448
660,470
431,863
26,882
699,798
589,029
444,870
27,672
29,486 $ 390,752 $ 339,548
131,619
77,900
(52,936)
(1,439)
(5,065)
(75,005)
31,075
(4,245)
(17,611)
701
(874)
1,761
Bermuda
U.K.
U.S.
Europe
Australia
As at December 31, 2018, the total amount of net assets of our consolidated subsidiaries that were restricted
was $2.9 billion.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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 their 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 manage portfolios in run-
off are required to seek regulatory approval for any dividends or distributions.
As of December 31, 2018 and 2017, 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 $2.1 billion as of December 31, 2018 (2017:
$1.2 billion) and were in compliance with their liquidity requirements.
United Kingdom
U.K. Insurance Companies (non-Lloyd's)
Our U.K. based insurance subsidiaries are regulated by the U.K. Prudential Regulatory Authority (the "PRA")
and the Financial Conduct Authority (the "FCA", together with the PRA, the "U.K. Regulator").
Our U.K.-based insurance subsidiaries are required to maintain adequate financial resources in accordance with
the requirements of the U.K. Regulator. 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 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, 2018 and 2017, 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 $60.7 million
and $246.6 million as of December 31, 2018 and 2017, respectively.
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.
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Lloyd’s
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
As of December 31, 2018, 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 2018 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. Lloyd's has the approval of 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.
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 ("RBC") requirements and licensing rules as
specified by the National Association of Insurance Commissioners ("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. 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 NAIC.
As of December 31, 2018, 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, 2018 by $359.6 million (December 31, 2017: $385.4
million).
Europe
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 was granted full Solvency II equivalence by the European Commission. As of December 31, 2018 and
2017, this subsidiary exceeded the SST requirements by $58.0 million (2017: $44.0 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. With effect from
January 1, 2019, Harper Insurance Limited redomesticated to Bermuda and is now regulated by the BMA.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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, 2018, this subsidiary
exceeded the Solvency II requirements by $133.9 million (2017: $146.8 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.
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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 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 on paid and unpaid losses.
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 8 - "Reinsurance Balances Recoverable on Paid and Unpaid Losses".
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 funds held concentration
of $1.0 billion to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from
S&P.
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 counterparty noted above, exceeded 10% of shareholders’ equity as
of December 31, 2018. Our credit exposure to the U.S. government was $1,136.6 million as at December 31, 2018.
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, 2018:
2019
2020
2021
2022
2023
2024 and beyond
$
$
9,510
10,754
9,772
7,500
6,592
21,276
65,404
Rent expense for the years ended December 31, 2018, 2017 and 2016 was $11.3 million, $9.5 million and $9.7
million, respectively.
267
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Legal Proceedings
We are, from time to time, involved in various legal proceedings in the ordinary course of business, including
litigation and arbitration regarding claims. Estimated losses relating to claims arising in the ordinary course of business,
including the anticipated outcome of any pending arbitration or litigation are included in the liability for losses and LAE
in our consolidated balance sheets. In addition to claims litigation, we may be subject to other lawsuits and regulatory
actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or
omissions, employment claims or regulatory activity. We do not believe that the resolution of any currently pending
legal proceedings, either individually or taken as a whole, will have a material effect on our business, results of operations
or financial condition. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue
to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally
related to the scope of coverage with respect to asbestos and environmental and other claims.
Unfunded Investment Commitments
As at December 31, 2018, we had unfunded commitments of $228.2 million and $167.2 million to private equity
funds and equity method investments, respectively.
Guarantees
As at December 31, 2018 and 2017, parental guarantees and capital instruments supporting subsidiaries'
insurance obligations were $614.5 million and $630.7 million, respectively. We also have a FAL facility, which subsequent
to year end, on February 12, 2019, we increased to issue up to $375.0 million of letters of credit, and maintained the
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. As at December 31, 2018 there were $295.0 million letters of credit issued under
this facility which have a parental guarantee.
Significant New Business
We have entered into transaction agreements that are expected to become effective subsequent to December
31, 2018. Refer to Note 4 - "Significant New Business" New Business above.
Asbestos Personal Injury Liabilities
We acquired DCo on December 30, 2016, as described in Note 3 - "Acquisitions". DCo continues to process
asbestos personal injury claims in the normal course of business and is separately managed.
Other liabilities on our consolidated balance sheets include amounts for indemnity and defense costs for pending
and future claims, determined using standard actuarial techniques for asbestos-related exposures. Other liabilities
also include amounts for environmental liabilities associated with DCo's properties.
Other assets on our consolidated balance sheets include 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.
268
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
Included within other assets and other liabilities are the fair value adjustments that were initially recognized when
DCo was acquired. These fair value adjustments continue to be amortized in proportion to the original expected payout
patterns for the future claims and recoveries. The carrying value of the asbestos and environmental liabilities, insurance
recoveries, future estimated expenses and the fair value adjustments related to DCo, as of December 31, 2018 and
2017 was as follows:
Other liabilities:
Direct asbestos liabilities
Direct environmental liabilities
Estimated future expenses
Fair value adjustments
Other assets:
Insurance recoveries related to direct asbestos and environmental liabilities
Fair value adjustments
2018
2017
$
265,975 $
282,369
2,152
19,843
(84,650)
203,320
183,676
(47,868)
135,808
2,379
19,843
(85,427)
219,164
170,726
(48,400)
122,326
Net liabilities relating to direct asbestos and environmental exposures
$
67,512 $
96,838
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
We have three reportable segments of business that are each managed, operated and separately reported:
(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. 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.
269
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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, 2018, 2017, 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 (loss)
Net investment income
Net realized and unrealized losses
Fees and commission income
Other income (losses)
Corporate expenses
Interest income (expense)
Net foreign exchange gains (losses)
EARNINGS (LOSS) BEFORE INCOME TAXES
Income tax benefit (expense)
Earnings from equity method investments
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS
Net loss (earnings) attributable to noncontrolling
interest
NET EARNINGS (LOSS) ATTRIBUTABLE TO
ENSTAR GROUP LIMITED
Dividends on preferred shares
NET EARNINGS (LOSS) ATTRIBUTABLE TO
ENSTAR GROUP LIMITED ORDINARY
SHAREHOLDERS
Underwriting ratios:
Loss ratio (1)
Acquisition expense ratio (1)
Operating expense ratio (1)
Combined ratio (1)
2018
Non-Life
Run-Off
Atrium
StarStone
Other
Total
$
$
$
(8,910)
$ 171,494
$1,121,135
(9,217)
$ 153,488
$ 805,562
9,427
$ 146,315
$ 714,959
$
$
$
32,378
$1,316,097
32,067
$ 981,900
24,874
$ 895,575
306,067
(69,810)
(673,383)
(16,899)
(454,025)
—
(4,006)
(158,731)
152,757
226,287
(381,712)
16,466
35,978
(39,093)
(30,616)
2,534
(17,399)
3,581
42,147
—
(50,646)
(17,777)
8,082
5,686
(3,251)
18,622
162
(6,921)
—
(3,394)
18,986
(3,732)
—
—
(135,452)
(156,726)
(250,602)
35,973
(17,672)
—
(541)
—
(624)
(2,856)
(1,003)
(2,686)
—
4,286
2,725
(1,003)
(192,790)
(333,234)
(85,477)
270,671
(10,249)
(412,884)
—
(514)
(28,127)
5,023
1,048
35,088
35,085
(74,141)
(26,217)
(2,668)
(236,322)
(25,808)
(260,543)
6,327
—
(52)
—
6,124
42,147
28,329
15,254
(229,995)
(25,860)
(212,272)
(3,107)
(6,257)
71,415
—
62,051
25,222
—
8,997
(158,580)
—
—
(25,860)
(12,133)
(150,221)
(12,133)
$
25,222
$
8,997
$ (158,580)
$
(37,993)
$ (162,354)
47.7%
34.6%
12.2%
94.5%
94.2%
18.9%
22.0%
135.1%
(1)Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
270
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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
Income tax benefit (expense)
Earnings from equity method investments
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS
Net earnings from discontinued operations, net
of income taxes
NET EARNINGS (LOSS)
Net earnings attributable to noncontrolling
interest
NET EARNINGS (LOSS) ATTRIBUTABLE TO
ENSTAR GROUP LIMITED ORDINARY
SHAREHOLDERS
Underwriting ratios:
Loss ratio (1)
Acquisition expense ratio (1)
Operating expense ratio (1)
Combined ratio (1)
$
$
$
Non-Life
Run-Off
14,102
6,482
14,162
190,674
—
(328)
(132,235)
72,273
166,678
179,545
43,849
21,157
(28,970)
(7,347)
—
6,990
5,904
358,487
—
358,487
2017
Atrium
StarStone
Other
Total
$
$
$
$
$
$
153,472
134,214
134,747
(69,419)
—
(47,688)
(17,444)
196
4,218
1,117
22,788
230
(559)
(5,060)
—
10,788
(1,593)
—
9,195
—
9,195
$
$
$
895,160
464,901
459,403
(314,806)
—
(48,012)
(135,558)
(38,973)
27,706
16,613
632
570
—
(1,902)
(926)
—
3,720
988
—
5,719
$ 1,068,453
4,793
4,809
—
(4,015)
(878)
—
(84)
10,187
(6,941)
(1,166)
648
$
$
610,390
613,121
(193,551)
(4,015)
(96,906)
(285,237)
33,412
208,789
190,334
66,103
22,605
(37,014)
(150,748)
3,329
(4,204)
(16,349)
(51,594)
10
—
(28,102)
(17,537)
(16,349)
308,507
6,395
5,904
4,708
(51,584)
320,806
—
4,708
10,993
(40,591)
10,993
331,799
(101,592)
(12,142)
(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%
EARNINGS (LOSS) BEFORE INCOME TAXES
345,593
(1)Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
271
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
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)
$
$
$
$
$
$
Non-Life
Run-Off
17,316
9,202
16,755
285,881
—
(4,198)
(151,316)
147,122
145,237
77,685
17,447
7,897
(61,583)
(22,268)
1,684
EARNINGS (LOSS) BEFORE INCOME TAXES
313,221
(28,577)
(5,400)
2016
Atrium
StarStone
Other
Total
$
$
$
143,170
140,437
124,416
(58,387)
—
(44,670)
(14,233)
7,126
2,940
(601)
18,189
206
(10,899)
(198)
(3,310)
13,453
(2,573)
—
$
$
$
854,699
648,036
676,608
(401,593)
—
(138,822)
(124,239)
11,954
22,221
5,728
5,102
740
—
(47)
754
46,452
(3,693)
—
7,157
$ 1,022,342
6,261
5,735
—
2,038
1,121
—
8,894
15,065
(4,994)
(1,374)
1,393
$
$
803,936
823,514
(174,099)
2,038
(186,569)
(289,788)
175,096
185,463
77,818
39,364
10,236
(61,464)
(133,946)
1,871
207
(40,402)
(31)
—
(20,642)
(665)
332,724
(34,874)
(5,400)
Income tax expense
Losses from equity method investments
NET EARNINGS (LOSS) FROM CONTINUING
OPERATIONS
Net earnings from discontinued operations, net
of income taxes
NET EARNINGS (LOSS)
Net earnings attributable to noncontrolling
interest
NET EARNINGS (LOSS) ATTRIBUTABLE TO
ENSTAR GROUP LIMITED ORDINARY
SHAREHOLDERS
Underwriting ratios:
Loss ratio (1)
Acquisition expense ratio (1)
Operating expense ratio (1)
Combined ratio (1)
279,244
10,880
42,759
(40,433)
292,450
—
279,244
—
10,880
—
42,759
11,963
(28,470)
11,963
304,413
(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%
(1)Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
272
Table of Contents
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, 2018 by geographic
area. Geographic distribution in future 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
$ (1,819)
20.4 % $ 95,152
55.5% $ 708,763
63.2% $ 28,506
88.0% $ 830,602
1,134
(12.7)%
10,905
(8,225)
92.3 %
11,661
—
—
— %
— %
5,113
48,663
6.4%
6.8%
3.0%
28.3%
54,057
4.8%
—
—%
66,096
192,156
17.1%
3,872
12.0%
199,464
67,229
98,930
6.0%
8.8%
—
—
—%
—%
72,342
147,593
63.1%
5.0%
15.2%
5.5%
11.2%
$ (8,910)
100.0 % $171,494
100.0% $1,121,135
99.9% $ 32,378
100.0% $1,316,097
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 of December 31, 2018
and 2017 by segment were as follows:
Assets by Segment:
Non-life Run-off
Atrium
StarStone
Other
Total assets
2018
2017
$ 13,362,749 $ 10,368,105
591,722
3,416,132
556,637
3,128,725
(814,333)
(447,045)
$ 16,556,270 $ 13,606,422
273
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ENSTAR GROUP LIMITED
25. UNAUDITED CONDENSED QUARTERLY FINANCIAL DATA
December 31,
September 30,
June 30,
March 31,
2018
2017
2018
2017
2018
2017
2018
2017
$ 231,947
$160,627
$264,597
$148,025
$228,812
$155,571
$170,219
$ 148,898
11,455
68,453
(158,213)
34,267
19,627
58,605
50,637
13,763
6,950
69,430
(57,223)
8,226
15,895
52,028
29,301
1,734
8,352
66,469
18,667
49,417
8,331
66,319
(54,418)
51,877
(143,030)
(9,351)
(5,090)
1,943
11,914
48,739
58,519
12,198
187,909
303,259
291,980
246,983
239,864
270,442
103,782
280,268
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
Life and annuity policy benefits
786
(1,033)
423
1,060
(160)
187,698
30,327
153,974
75,712
92,819
9,620
4,289
19,534
77,892
(46)
(301)
Acquisition costs
55,106
21,449
54,242
24,281
53,334
30,355
General and administrative expenses
106,950
126,702
102,553
100,325
102,612
106,490
Interest expense
Net foreign exchange losses (gains)
Loss on sale of subsidiary
4,644
1,279
—
7,251
1,925
—
4,640
1,040
—
6,410
4,775
6,740
8,922
(5,519)
—
7,573
7,122
9,609
30,108
95,260
8,011
5,868
20,821
102,468
6,868
3,715
—
EARNINGS (LOSS) BEFORE INCOME
TAXES
(168,554)
116,638
(24,892)
27,680
(12,144)
95,384
(54,953)
68,805
Income tax benefit (expense)
10,688
9,629
(746)
(1,432)
(3,646)
(4,731)
(172)
2,929
356,463
186,621
316,872
219,303
252,008
175,058
158,735
211,463
Earnings (losses) from equity method
investments
NET EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
Net earnings (loss) from discontinued
operations, net of income taxes
8,488
(4,460)
3,317
(5,582)
15,645
15,946
14,697
—
(149,378)
121,807
(22,321)
20,666
(145)
106,599
(40,428)
71,734
—
11,998
—
3,495
—
(4,871)
—
371
NET EARNINGS (LOSS)
(149,378)
133,805
(22,321)
24,161
(145)
101,728
(40,428)
72,105
Net loss (earnings) attributable to
noncontrolling interest
NET EARNINGS (LOSS) ATTRIBUTABLE
TO ENSTAR GROUP LIMITED
42,955
(6,206)
11,489
14,832
8,389
(11,542)
(782)
(17,425)
(106,423)
127,599
(10,832)
38,993
8,244
90,186
(41,210)
54,680
Dividends on preferred shares
(7,000)
—
(5,133)
—
—
—
—
—
NET EARNINGS (LOSS) ATTRIBUTABLE
TO ENSTAR GROUP LIMITED ORDINARY
SHAREHOLDERS
$ (113,423) $127,599
$ (15,965) $ 38,993
$ 8,244
$ 90,186
$ (41,210) $ 54,680
Earnings per ordinary share attributable to
Enstar Group Limited:
Basic:
Net earnings (loss) from continuing
operations
Net earnings (loss) from discontinued
operations, net of income taxes
Net earnings (loss) per ordinary share
Diluted(1):
Net earnings (loss) from continuing
operations
Net earnings (loss) from discontinued
operations, net of income taxes
Net earnings (loss) per ordinary share
$
$
$
$
(5.29) $
5.96
$
(0.74) $
1.83
$
0.40
$
4.90
$
(2.12) $
2.80
—
(5.29) $
0.62
6.58
—
$
(0.74) $
0.18
2.01
—
(0.25)
—
$
0.40
$
4.65
$
(2.12) $
0.02
2.82
(5.29) $
5.90
$
(0.74) $
1.81
$
0.40
$
4.87
$
(2.12) $
2.78
—
(5.29) $
0.61
6.51
—
$
(0.74) $
0.18
1.99
—
(0.25)
—
$
0.40
$
4.62
$
(2.12) $
0.02
2.80
(1) During a period of loss, the basic weighted average ordinary shares outstanding is used in the denominator of the diluted loss per ordinary share
computation as the effect of including potentially dilutive securities would be anti-dilutive.
274
ENSTAR GROUP LIMITED
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 2018
(Expressed in thousands of U.S. Dollars)
SCHEDULE I
Type of investment
Cost (1)
Fair Value
Fixed maturity securities and short-term investments — Trading and fixed
maturity investments within funds held - directly managed:
Amount at which
shown in the
balance sheet(2)
U.S. government and agency
$
511,784
$
509,672
$
U.K. government
Other 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
Other government
Corporate
Municipal
Residential mortgage-backed
Total
Equities(3)
Other investments, at fair value(4)
Total
301,749
741,803
4,943,483
130,429
772,445
729,232
642,618
300,631
720,625
4,764,481
127,785
773,545
713,063
636,481
509,672
300,631
720,625
4,764,481
127,785
773,545
713,063
636,481
8,773,543
8,546,283
8,546,283
576
72,811
75,535
2,499
12
151,433
108,070
659,995
573
73,185
75,359
2,480
12
151,609
109,823
659,995
573
73,185
75,359
2,480
12
151,609
109,823
659,995
$
9,693,041
$
9,467,710
$
9,467,710
(1) Original cost of fixed maturity securities is reduced by repayments and adjusted for amortization of premiums or accretion of discounts.
(2) The table above excludes businesses held for sale. Refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" of
the notes to the consolidated financial statements.
(3) 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
$32.3 million as of December 31, 2018 for our investment in a registered investment company affiliated with entities owned by Trident, $25.0
million as a co-investor alongside Stone Point and a $200.0 million investment in AmTrust. Refer to Note 21 - "Related Party Transactions" of the
notes to the consolidated financial statements.
(4) 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 $1,297.8 million as of December 31, 2018 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.
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ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Balance Sheets - Parent Company Only
As of December 31, 2018 and 2017
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
2018
2017
(in thousands of U.S.
dollars, except share data)
$
$
$
15,213
$
25,091
2,458
23,635
4,843,913
3,917,830
$
$
8,596
4,892,813
861,539
120,397
8,944
990,880
2,877
3,946,800
646,689
148,410
15,017
810,116
Ordinary shares (par value $1 each, issued and outstanding 2018: 21,459,997; 2017:
19,406,722):
Voting Ordinary Shares (issued and outstanding 2018: 17,950,315; 2017: 16,402,279)
17,950
16,402
Non-voting convertible ordinary Series C Shares (issued and outstanding 2018 and 2017:
2,599,672)
2,600
2,600
Non-voting convertible ordinary Series E Shares (issued and outstanding 2018: 910,010; 2017:
404,771)
Preferred Shares:
Series C Preferred Shares (issued and held in treasury 2018 and 2017: 388,571)
Series D Preferred Shares (issued and outstanding 2018: 16,000)
Series E Preferred Shares (issued and outstanding 2018: 4,400)
Treasury shares, at cost (Series C Preferred Shares 2018 and 2017: 388,571)
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total Enstar Group Limited Shareholders’ Equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
910
389
400,000
110,000
(421,559)
1,804,664
10,440
1,976,539
3,901,933
405
389
—
—
(421,559)
1,395,067
10,468
2,132,912
3,136,684
$
4,892,813
$
3,946,800
See accompanying notes to the Condensed Financial Information of Registrant
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ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
Statements of Earnings - Parent Company Only
For the Years Ended December 31, 2018, 2017 and 2016
SCHEDULE II
2018
2017
(in thousands of U.S. dollars)
2016
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 -
discontinued operations
NET EARNINGS
Dividends on preferred shares
$
142 $
80 $
—
—
142
68,977
27,353
7,655
1,050
249,055
250,185
87,596
23,138
6,135
103,985
116,869
44
—
361,675
361,719
59,755
10,109
(318)
69,546
(103,843)
133,316
292,173
(46,378)
167,149
(39,329)
—
(150,221)
(12,133)
10,993
311,458
—
11,963
264,807
—
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP
LIMITED ORDINARY SHAREHOLDERS
$
(162,354) $
311,458 $
264,807
See accompanying notes to the Condensed Financial Information of Registrant
Statements of Comprehensive Income - Parent Company Only
For the Years Ended December 31, 2018, 2017 and 2016
2018
2017
(in thousands of U.S. dollars)
2016
NET EARNINGS
$
(150,221) $
311,458 $
264,807
OTHER COMPREHENSIVE INCOME (LOSS) RELATING TO
SUBSIDIARIES, NET OF TAX
COMPREHENSIVE INCOME
(27)
34,016
11,613
$
(150,248) $
345,474 $
276,420
See accompanying notes to the Condensed Financial Information of Registrant
277
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ENSTAR GROUP LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
Statements of Cash Flows - Parent Company Only
For the Years Ended December 31, 2018, 2017 and 2016
SCHEDULE II
OPERATING ACTIVITIES:
Net cash flows provided by (used in) operating activities
$
(128,382) $
97,898 $
39,185
2018
2017
(in thousands of U.S. dollars)
2016
INVESTING ACTIVITIES:
Dividends and return of capital from subsidiaries
Contributions to subsidiaries
Net cash flows used in investing activities
FINANCING ACTIVITIES:
Net proceeds from the issuance of preferred shares
Dividends on preferred shares
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
101,000
(660,339)
(559,339)
495,357
(12,133)
217,450
(465,650)
(248,200)
250,117
(295,268)
(45,151)
—
—
—
—
(898,633)
(696,640)
(426,750)
1,115,885
700,476
844,516
147,876
433,048
6,298
12,755
2,458
(2,426)
4,884
332
4,552
4,884
CASH AND CASH EQUIVALENTS, END OF YEAR
$
15,213 $
2,458 $
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, 2018, 2017, and 2016, interest paid
was $25.1 million, $17.6 million, and $15.0 million, respectively. During the years ended December 31, 2018, 2017,
and 2016, non-cash investing activities included $nil, $31.6 million, and $111.6 million, respectively, for dividends and
return of capital from subsidiaries and $414.8 million, $148.1 million, and $452.1 million, respectively, for contributions
to subsidiaries. In 2018, these transactions represented the contribution of the acquired outstanding shares and
warrants of KaylaRe Holdings, Ltd to another subsidiary company. In 2017 and 2016, these transactions were to settle
intercompany balances, resulting in a net reduction in balances due from subsidiaries and an increase in investments
in subsidiaries.
As of December 31, 2018, parental guarantees and capital support instruments supporting subsidiaries'
insurance obligations were $614.5 million. In addition, as of December 31, 2018 there were $295.0 million of unsecured
letters of credit for Funds at Lloyd's which have a parental guarantee.
As of December 31, 2018 and 2017, retained earnings were $1,976.5 million and $2,132.9 million, respectively,
a decrease of $156.4 million. This decrease was primarily attributable to the net loss of $162.4 million.
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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
Policy
Benefits for
Life and
Annuity
Contracts
Unearned
Premiums
Net
Premiums
Earned
Net
Investment
Income
Losses
and Loss
Expenses
and
Policy
Benefits
Amortization
of Deferred
Acquisition
Costs
Other
Operating
Expenses
Net
Premiums
Written
2018
Non-life run-off
$
4,378
$
7,540,662
$
136,023
$
— $
9,427
$
226,287
$
(306,067) $
4,006
$
197,824
$
(9,217)
Atrium
StarStone
Other
Total
2017
Non-life run-off
Atrium
StarStone
Other
Total
2016
Non-life run-off
Atrium
StarStone
Other
Total
$
$
$
$
20,355
96,004
364
121,101
655
18,385
45,944
—
64,984
1,081
16,964
40,069
—
$
$
$
$
241,284
1,608,697
18,861
9,409,504
5,949,472
240,873
1,207,743
—
7,398,088
4,716,363
212,122
$
$
$
$
70,429
619,164
17,002
842,618
14,275
64,877
504,045
—
583,197
15,107
61,862
$
$
$
$
1,059,382
471,374
—
—
105,080
146,315
714,959
24,874
105,080
$
895,575
— $
—
—
117,207
14,162
134,747
459,403
4,809
117,207
$
613,121
— $
—
—
16,755
124,416
676,608
5,735
$
$
$
$
5,686
35,973
2,725
270,671
166,678
4,218
27,706
10,187
208,789
145,237
2,940
22,221
15,065
$
$
$
$
69,810
673,383
17,902
50,646
135,452
2,686
455,028
$
192,790
(190,674) $
69,419
314,806
4,015
328
47,688
48,012
878
197,566
$
96,906
(285,881) $
58,387
401,593
(2,038)
4,198
44,670
138,822
(1,121)
$
$
$
$
24,698
156,726
28,127
407,375
233,827
29,586
135,558
37,014
435,985
212,899
25,132
124,239
61,464
$
$
$
$
153,488
805,562
32,067
981,900
6,482
134,214
464,901
4,793
610,390
9,202
140,437
648,036
6,261
—
—
112,095
$
58,114
$
5,987,867
$
548,343
$
112,095
$
823,514
$
185,463
$
172,061
$
186,569
$
423,734
$
803,936
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Table of Contents
2018
Life insurance in force
Premiums earned:
Property and casualty
Life and annuities
Total premiums earned
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
ENSTAR GROUP LIMITED
REINSURANCE
For the Years Ended December 31, 2018, 2017 and 2016
(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
$
855,366 $
(84,603) $
— $
770,763
—%
985,637
(330,110)
236,182
(26)
—
891,709
3,866
26.5%
—%
(330,136) $
236,182 $
895,575
3,892
989,529 $
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%
—%
7,220
811,361 $
$
(180,319) $
192,472 $
823,514
280
Table of Contents
ENSTAR GROUP LIMITED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2018, 2017 and 2016
(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, 2018
Reinsurance balances recoverable
on paid and unpaid losses:
Provisions for bad debt
165,213
—
(1,837)
(6,644)
156,732
Valuation allowance for deferred tax
assets
December 31, 2017
Reinsurance balances recoverable
on paid and unpaid losses:
188,300
(2,492)
18,000
8,305
212,113
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
on paid and unpaid losses:
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
291,280
13,389
—
(13,808)
290,861
(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.
Valuation allowance for deferred tax asset charged to other accounts is related to acquisitions in 2018.
(2) Credited to the related asset account.
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Table of Contents
SCHEDULE VI
ENSTAR GROUP LIMITED
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
As of and for the years ended December 31, 2018, 2017 and 2016
(Expressed in thousands of U.S. Dollars)
As of December 31,
Reserves for
Unpaid
Losses and
Loss
Adjustment
Expenses
Deferred
Acquisition
Costs
Year ended December 31,
Unearned
Premiums
Net
Premiums
Earned
Net
Investment
Income
Current Year
Prior Year
Net Losses and Loss
Expenses Incurred
Net Paid
Losses and
Loss
Expenses
Amortization
of Deferred
Acquisition
Costs
Net
Premiums
Written
$
121,101
$
9,409,504
$
842,618
$
891,708
$
269,093
$
689,782
$
(235,757) $
(1,384,545) $
192,790
$
64,984
58,114
7,398,088
5,987,867
583,197
548,343
608,312
817,779
198,602
170,398
437,853
493,016
(244,302)
(318,917)
(945,194)
(833,057)
96,028
187,690
978,037
605,597
797,675
Affiliation with Registrant
Consolidated Subsidiaries
2018
2017
2016
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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, 2018. 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,
2018, 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, 2018.
Management excluded Maiden Reinsurance North America, acquired on December 27, 2018, from its evaluation
of internal controls over financial reporting as permitted under Securities and Exchange Commission guidance. The
results of Maiden Re North America since the acquisition date are included in our consolidated financial statements
and constituted approximately 8.9%, 6.8% and 0.5% of total assets, net assets and total income, respectively, as of
and for the year ended, December 31, 2018. See Note 3 - "Acquisitions" in the notes to our consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K for a discussion of this acquisition. We are in the
process of incorporating our controls and procedures into this acquisition.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months
ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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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 and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2018, 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, 2018, 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) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the
related consolidated statements of earnings, comprehensive loss, changes in shareholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2018, and related notes and financial statement
schedules I to VI (collectively, the consolidated financial statements), and our report dated March 1, 2019 expressed
an unqualified opinion on those consolidated financial statements.
The Company acquired Maiden Re North America on December 27, 2018, and management excluded from its
assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018,
Maiden Reinsurance North America’s internal control over financial reporting associated with total assets, net assets
and total income acquired of 8.7%, 6.8% and 0.5% of total assets, net assets and total income, respectively, as of
December 31, 2018. Our audit of internal control over financial reporting of the Company also excluded an evaluation
of the internal control over financial reporting of Maiden Reinsurance North America.
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 as “Management’s Annual Report on Internal Control Over Financial Reporting” 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.
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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
March 1, 2019
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ITEM 9B. OTHER INFORMATION
On March 1, 2019, we entered into a Master Agreement with Maiden Holdings and Maiden Re Bermuda. Under
the Master Agreement, Enstar and Maiden Re Bermuda agreed to enter into an Adverse Development Cover
Reinsurance Agreement (“ADC Agreement”) pursuant to which Maiden Re Bermuda will cede and Enstar will reinsure
100% of the liability of Maiden Re Bermuda, as reinsurer, under Maiden Re Bermuda’s two existing quota share
agreements with certain insurance companies owned directly or indirectly by AmTrust for losses incurred on or prior
to December 31, 2018 in excess of a $2.44 billion retention , as such figure may be adjusted based upon Maiden’s
final year end reserves for the underlying business, up to a $675 million limit. The premium payable by Maiden Re
Bermuda to Enstar under the ADC Agreement is $500 million. Completion of the transaction is subject to, among other
things, regulatory approvals and satisfaction of various closing conditions. The Master Agreement contains customary
representations, warranties, covenants and other closing conditions. The transaction is expected to close in the first
half of 2019.
Effective immediately upon signing of the Master Agreement, the parties terminated and released each other
from their respective obligations under the previously disclosed Master Agreement, entered into on November 9, 2018.
The previous agreement provided for the parties to enter into a retrocession agreement pursuant to which Maiden Re
Bermuda would cede and Enstar would reinsure 100% of the liability of Maiden Re Bermuda, as reinsurer, under
Maiden Re Bermuda’s two existing AmTrust quota share agreements for losses incurred on or prior to June 30, 2018,
for a premium payable by Maiden Re Bermuda to Enstar of $2.675 billion.
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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 2019 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, 2018 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.
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 precedes the signature page of this report.
ITEM 16. FORM 10-K SUMMARY
Omitted at Company's option.
287
Table of Contents
Exhibit Index
Exhibit
No.
2.1
2.2
2.3
2.4
2.5
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
10.1
10.2
Description
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).
Amendment No. 3 to Stock Purchase Agreement, dated December 15, 2017, by and between Southland
National Holdings, Inc. and Laguna Life Holdings SARL (incorporated by reference to Exhibit 2.14 to the
Company’s Form 10-K filed on February 28, 2018).
Master Transaction Agreement, dated as of August 31, 2018, by and among Enstar Group Limited, Enstar
Holdings (US) LLC and Maiden Holdings North America, Ltd. (incorporated by reference to Exhibit 2.1 to
the Company’s Form 8-K filed on September 4, 2018).
Memorandum of Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 to the
Company’s Form 10-K/A filed on May 2, 2011).
Fourth Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit
3.2(b) of the Company’s Form 10-Q filed on August 11, 2014).
Certificate of Designations for the Series B Convertible Participating Non-Voting Perpetual Preferred Stock
(incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on July 9, 2013).
Certificate of Designations of Series C Participating Non-Voting Perpetual Preferred Stock of Enstar Group
Limited, dated as of June 13, 2016 (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K
filed on June 17, 2016).
Certificate of Designations of Series D Perpetual Non-Cumulative Preferred Shares of Enstar Group
Limited, dated as of June 27, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K
filed on June 27, 2018).
Certificate of Designations of Series E Perpetual Non-Cumulative Preferred Shares of Enstar Group
Limited, dated as of November 21, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Form
8-K filed on November 21, 2018).
Senior Indenture, dated as of March 10, 2017, between Enstar Group Limited 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 Enstar Group Limited 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).
Deposit Agreement, dated as of June 27, 2018, between Enstar Group Limited and American Stock
Transfer (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-K filed on June 27, 2018).
Deposit Agreement, dated as of November 21, 2018, between Enstar Group Limited and American Stock
Transfer (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-K filed on November 21,
2018).
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 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).
288
Table of Contents
10.3
10.4
10.5
10.6
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
10.17+
10.18+
10.19+
10.20+
10.21+
10.22+
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).
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.
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).
Amended and Restated Employment Agreement, dated as of April 12, 2017 and effective April 17, 2017,
by and between Enstar Group Limited 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 Enstar
Group Limited 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 Enstar Group
Limited 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 Enstar Group Limited 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).
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).
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).
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).
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).
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).
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).
289
Table of Contents
10.23+
10.24+
10.25+
10.26+
10.27+
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).
10.28+
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).
10.29*+
Amended and Restated Enstar Group Limited 2016-2018 Annual Incentive Program.
10.30*+
Amended and Restated Enstar Group Limited 2019-2021 Annual Incentive Program.
10.31
10.32
10.33
10.34
10.35
10.36*
10.37
10.38*
10.39
21.1*
23.1*
31.1*
31.2*
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).
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).
Exchange Agreement, dated as of February 2, 2018, by and among Enstar Group Limited, KaylaRe
Holdings, Ltd., HH KaylaRe Holdings, Ltd., Hillhouse Fund III, L.P., Trident V, L.P., Trident V Parallel Fund,
L.P, Trident V Professionals Fund, L.P., Souris Partners and Cavello Bay Reinsurance Limited
(incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on February 8, 2018).
Master Agreement, dated as of November 9, 2018, by and among Maiden Holdings, Ltd., Maiden
Reinsurance Ltd. and Enstar Group Limited (incorporated by reference to Exhibit 10.1 of the Company’s
Form 8-K filed on November 13, 2018).
Subscription Agreement, dated as of December 11, 2018, by and between Cavello Bay Reinsurance
Limited and Enhanzed Reinsurance Limited.
Revolving Credit Agreement, dated as of August 16, 2018, by and among Enstar Group Limited and certain
of its subsidiaries, National Australia Bank Limited, Barclays Bank PLC, Wells Fargo Securities, LLC Wells
Fargo Bank, National Association and each of the lenders party thereto (incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K filed on August 21, 2018).
First Amendment to Revolving Credit Agreement, dated as of December 19, 2018, by and among Enstar
Group Limited and certain of its subsidiaries, National Australia Bank Limited, Barclays Bank PLC, Wells
Fargo Securities, LLC Wells Fargo Bank, National Association and each of the lenders party thereto.
Term Loan Credit Agreement, dated as of December 27, 2018, by and among Enstar Group Limited and
certain of its subsidiaries, Wells Fargo Bank, National Association and each of the lenders party thereto
(incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on January 2, 2019).
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.
290
Table of Contents
32.1**
32.2**
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.
101*
Interactive Data Files.
_______________________________
* filed herewith
** furnished herewith
+ denotes management contract or compensatory arrangement
certain of the schedules and similar attachments are not filed but Enstar Group Limited undertakes to furnish
a copy of the schedules or similar attachments to the SEC upon request
291
Table of Contents
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 March 1, 2019.
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 March 1, 2019.
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
292
EXECUTIVE OFFICERS
Dominic F. Silvester
Chief Executive Officer
Paul J. O’Shea
President
Orla M. Gregory
Chief Operating Officer
Guy Bowker
Chief Financial Officer
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
Non-Executive Director
RTGS/CHAPS Board, Bank of England
James D. Carey
Senior Principal
Stone Point Capital LLC
Hans-Peter Gerhardt
Chief Executive Officer (former)
CEO of AXA Re, PARIS Re and Asia Capital Reinsurance
Jie Liu
Partner
Hillhouse Capital Management, Ltd.
Paul J. O’Shea
President
Enstar Group Limited
Hitesh R. Patel
Non-Executive Director
Poul A. Winslow
Senior Managing Director,
Global Head of Capital Markets & Factor Investing
Canada Pension Plan Investment Board
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