e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-33289
ENSTAR GROUP LIMITED
(Exact name of registrant as
specified in its charter)
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BERMUDA
(State or other jurisdiction
of
incorporation or organization)
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N/A
(I.R.S. Employer
Identification No.)
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P.O. Box HM 2267
Windsor Place, 3rd Floor, 18 Queen Street
Hamilton HM JX
Bermuda
(Address of principal executive
offices, including zip code)
Registrants telephone number, including area code:
(441) 292-3645
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Ordinary shares, par value $1.00 per share
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The NASDAQ Stock Market LLC
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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 o No þ
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 o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark 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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates, computed by reference to the
closing price as of the last business day of the
registrants most recently completed second fiscal quarter,
June 30, 2010, was approximately $455,419,690.
As of March 1, 2011, the registrant had outstanding
13,073,210 ordinary shares, $1.00 par value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A relating to its 2011 annual general meeting
of shareholders are incorporated by reference in Part III
of this
Form 10-K.
PART I
Company
Overview
Enstar Group Limited, or Enstar, was formed in August 2001 under
the laws of Bermuda to acquire and manage insurance and
reinsurance companies in run-off and portfolios of insurance and
reinsurance business in run-off, and to provide management,
consulting and other services to the insurance and reinsurance
industry. Since our formation, we have acquired
30 insurance and reinsurance companies and
15 portfolios of insurance and reinsurance business and are
now administering those businesses in run-off. Insurance and
reinsurance companies and portfolios of insurance and
reinsurance business we acquire that are in run-off no longer
underwrite new policies. We derive our net earnings from the
ownership and management of these companies and portfolios of
business in run-off primarily by settling insurance and
reinsurance claims below the acquired value of loss reserves and
from returns on the portfolio of investments retained to pay
future claims. In addition, we provide management and
consultancy services, claims inspection services and reinsurance
collection services to our affiliates and third-party clients
for both fixed and success-based fees.
Our primary corporate objective is to grow our net book value
per share. We believe growth in our net book value is driven
primarily by growth in our net earnings, which is in turn
partially driven by successfully completing new acquisitions.
We evaluate each acquisition opportunity presented by carefully
reviewing the portfolios risk exposures, claim practices,
reserve requirements and outstanding claims, and may seek an
appropriate discount
and/or
seller indemnification to reflect the uncertainty contained in
the portfolios reserves. Based on this initial analysis,
we can determine if a company or portfolio of business would add
value to our current portfolio of run-off business. If we
determine to pursue the purchase of a company in run-off, we
then proceed to price the acquisition in a manner we believe
will result in positive operating results based on certain
assumptions including, without limitation, our ability to
favorably resolve claims, negotiate with direct insureds and
reinsurers, and otherwise manage the nature of the risks posed
by the business.
Initially, at the time we acquire a company in run-off, we
estimate the fair value of liabilities acquired based on
external actuarial advice, as well as our own views of the
exposures assumed. While we earn a larger share of our total
return on an acquisition from commuting the liabilities that we
have assumed, we also try to maximize reinsurance recoveries on
the assumed portfolio.
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. Such risks may relate to
property, casualty, life, accident, health, financial or other
perils that may arise from an insurable event. 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.
In recent years, the insurance industry has experienced
significant consolidation. As a result of this consolidation and
other factors, the remaining participants in the industry often
have portfolios of business that are either inconsistent with
their core competency or provide excessive exposure to a
particular risk or segment of the market (i.e.
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 insurers or reinsurers credit rating,
which makes the disposal of the unwanted company or portfolio an
attractive option. Alternatively, the insurer may wish to
maintain the business on its balance sheet, yet not divert
significant management attention to the run-off of the
portfolio. The insurer or reinsurer, in either case, is likely
to engage a third party, such as us, that specializes in run-off
management to purchase the company or portfolio, or to manage
the company or portfolio in run-off.
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In the sale of a run-off company, a purchaser, such as us, 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 and so cannot
sell the non-core business. In such instances we are able to
provide economic finality for the insurer or reinsurer by
providing a retroactive loss portfolio reinsurance contract to
protect the insurer or reinsurer against deterioration of the
subject portfolio of loss reserves. During 2010, we entered into
eight loss portfolio reinsurance contracts.
We have entered into ten Reinsurance to Close, or
RITC transactions, with Lloyds of London
insurance and reinsurance syndicates in run-off, whereby the
portfolio of run-off liabilities is transferred from one
Lloyds syndicate to another.
Alternatively, if the insurer or reinsurer hires a third party,
such as us, to manage its run-off business, the insurer or
reinsurer will, unlike in a sale of the business, receive little
or no cash up front. Instead, the management arrangement may
provide that the insurer or reinsurer will retain the profits,
if any, derived from the run-off with certain incentive payments
allocated to the run-off manager. By hiring a run-off manager,
the insurer or reinsurer can outsource the management of the
run-off business to experienced and capable individuals, while
allowing its own management team to focus on the insurers
or reinsurers core businesses. Our desired approach to
managing run-off business is to align our interests with the
interests of the owners through both fixed management fees and
certain incentive payments. Under certain management
arrangements to which we are a party, however, we receive only a
fixed management fee and do not receive any incentive payments.
Following the purchase of a run-off company, or acquisition of a
portfolio of business in run-off, or the engagement to manage a
run-off company or portfolio of business, it is incumbent on the
new owner or manager to conduct the run-off in a disciplined and
professional manner in order to efficiently discharge the
liabilities associated with the business while preserving and
maximizing its assets. Our approach to managing our acquired
companies in run-off, as well as run-off companies or portfolios
of businesses on behalf of third-party clients, includes
negotiating with third-party insureds and reinsureds to commute
their insurance or reinsurance agreement (sometimes called
policy buy-backs) for an agreed upon up-front payment by us, or
the third-party client, and to more efficiently manage payment
of insurance and reinsurance claims. We attempt to commute
policies with direct insureds or reinsureds in order 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. Such a
strategy also contributes to the reduction in the length of time
and future cost of the run-off.
Following the acquisition of a company in run-off, or
acquisition of a portfolio of business in run-off, or new
consulting engagement, we will spend time analyzing the acquired
exposures and reinsurance receivables on a
policyholder-by-policyholder
basis. This analysis enables us to identify those policyholders
and reinsurers we wish to approach to discuss commutation or
policy buy-back. Furthermore, following the acquisition of a
company or portfolio of business in run-off, or new consulting
engagement, we will often be approached by policyholders or
reinsurers requesting commutation or policy buy-back. In these
instances we will also carry out a full analysis of the
underlying exposures in order to determine the viability of a
proposed commutation or policy buy-back. From the initial
analysis of the underlying exposures it may take several months,
or even years, before a commutation or policy buy-back is
completed. In a number of cases, if we and the policyholder or
reinsurer are unable to reach a commercially acceptable
settlement, the commutation or policy buy-back 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 become due.
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
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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, all
of our insurance and reinsurance liabilities and reinsurance
receivables are able to be either commuted or settled by way of
policy buy-back over time. Many sellers of companies that we
acquire have secure claims paying ratings and ongoing
underwriting relationships with insureds and reinsureds, which
often hinders their ability to commute the underlying insurance
or reinsurance policies. Our lack of claims paying rating and
our lack of potential conflicts with insureds and reinsureds of
companies we acquire provides a greater ability to commute the
newly acquired policies than that of the sellers.
We also attempt, where appropriate, to negotiate favorable
commutations with reinsurers by securing the receipt of a
lump-sum settlement from the reinsurer in complete satisfaction
of the reinsurers liability in respect of any future
claims. We, or the third-party client, are then fully
responsible for any claims in the future. We typically invest
proceeds from reinsurance commutations with the expectation that
such investments will produce income, which, together with the
principal, will be sufficient to satisfy future obligations with
respect to the acquired company or portfolio.
Strategy
We aim to maximize our growth in net book value per share by
using the following strategies:
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Solidify Our Leadership Position in the Run-Off Market by
Leveraging Managements Experience and
Relationships. We continue to utilize the
extensive experience and significant relationships of our senior
management team to solidify our position as a leader in the
run-off segment of the insurance and reinsurance market. The
experience and reputation of our management team is expected to
generate opportunities for us to acquire or manage companies and
portfolios in run-off, and to price effectively the acquisition
or management of such businesses. Most importantly, we believe
the experience of our management team will continue to allow us
to manage the run-off of such businesses efficiently and
profitably.
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Professionally Manage Claims. We are
professional and disciplined in managing claims against
companies and portfolios we own or manage. Our management
understands the need to dispose of certain risks expeditiously
and cost-effectively by constantly analyzing changes in the
market and efficiently settling claims with the assistance of
our experienced claims adjusters and in-house and external legal
counsel. When we acquire or begin managing a company or
portfolio, we initially determine which claims are valid through
the use of experienced in-house adjusters and claims experts. We
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 under existing policies and reinsurance agreements.
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Commute Assumed Liabilities and Ceded Reinsurance
Assets. Using detailed analysis and actuarial
projections, we negotiate with the policyholders of the
insurance and reinsurance companies or portfolios we own or
manage with a goal of commuting insurance and reinsurance
liabilities for one or more agreed upon payments at a discount
to the ultimate liability. Such commutations can take the form
of policy buy-backs and structured settlements over fixed
periods of time. By acquiring companies that are direct
insurers, reinsurers or both, we are able to negotiate favorable
entity-wide commutations with reinsurers that would not be
possible if our subsidiaries had remained independent entities.
We also negotiate with reinsurers to commute their reinsurance
agreements providing coverage to our subsidiaries on terms that
we believe to be favorable based on then-current market
knowledge. We invest the proceeds from reinsurance commutations
with the expectation that such investments will produce income,
which, together with the principal, will be sufficient to
satisfy future obligations with respect to the acquired company
or portfolio.
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Continue to Commit to Highly Disciplined Acquisition,
Management and Reinsurance Practices. We utilize
a disciplined approach to minimize risk and increase the
probability of positive operating results from companies and
portfolios we acquire or manage. We carefully review acquisition
candidates and management engagements for consistency with
accomplishing our long-term objective of producing positive
operating results. We focus our investigation on risk exposures,
claims practices and reserve requirements. In particular, we
carefully review all outstanding claims and case reserves, and
follow a highly disciplined
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approach to managing allocated loss adjustment expenses, such as
the cost of defense counsel, expert witnesses and related fees
and expenses.
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Prudent Management of Investments and
Capital. We strive to structure our investments
in a manner that recognizes our liquidity needs for future
liabilities. In that regard, we attempt to correlate the
maturity and duration of our investment portfolio to our general
liability profile. If our liquidity needs or general liability
profile unexpectedly change, we may not continue to structure
our investment portfolio in its current manner and would adjust
as necessary to meet new business needs. We pursue prudent
capital management relative to our risk exposure and liquidity
requirements to maximize profitability and long-term growth in
shareholder value. Our capital management strategy is to deploy
capital efficiently to acquisitions and to establish, and
re-establish when necessary, adequate loss reserves to protect
against future adverse developments.
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Recent
Transactions
Claremont
On December 31, 2010, we, through our wholly-owned
subsidiary, CLIC Holdings, Inc., completed the acquisition of
Claremont Liability Insurance Company, or Claremont, for an
aggregate purchase price of $13.9 million. Claremont is a
California-domiciled insurer that is in run-off. The acquisition
was funded from available cash on hand.
CIGNA
Reinsurance
On December 31, 2010, we, through our wholly-owned
subsidiary, Fitzwilliam Insurance Limited, or Fitzwilliam,
entered into a 100% reinsurance agreement, administrative
services agreement, and related transaction documents with three
affiliates of CIGNA Corporation, or CIGNA affiliates, pursuant
to which Fitzwilliam reinsured all of the run-off workers
compensation and personal accident reinsurance business of those
CIGNA affiliates. Pursuant to the transaction documents, the
CIGNA affiliates have transferred assets into three reinsurance
collateral trusts securing the obligations of Fitzwilliam under
the reinsurance agreement and administrative services agreement.
Fitzwilliam received total assets and assumed total net
reinsurance reserves of approximately $190.5 million.
Fitzwilliam transferred approximately $50 million of
additional funds to the trusts to further support these
obligations. We funded the contribution to the trusts through a
draw on a new $115 million credit facility entered into
with Barclays Bank PLC on December 29, 2010.
In addition to the trusts, we have provided a limited parental
guarantee supporting certain obligations of Fitzwilliam in the
amount of $79.7 million. The amount of the guarantee will
increase or decrease over time under certain circumstances, but
will always be subject to an overall maximum cap with respect to
reinsurance liabilities.
Clarendon
On December 22, 2010, we, through our wholly-owned
subsidiary, Clarendon Holdings, Inc., entered into a definitive
agreement for the purchase of Clarendon National Insurance
Company, or Clarendon, from Clarendon Insurance Group, Inc., an
affiliate of Hannover Re. Clarendon is a New Jersey-domiciled
insurer that is in run-off. The purchase price is approximately
$200 million and will be financed in part by a bank loan
facility provided by a London-based bank entered into on
March 4, 2011 and in part from available cash on hand.
Completion of the transaction is conditioned on, among other
things, regulatory approval and satisfaction of various
customary closing conditions. The transaction is expected to
close in the second quarter of 2011.
Inter-Hannover
Reinsurance
On December 3, 2010, we, through our wholly-owned
subsidiary, Fitzwilliam, entered into a 100% quota share
reinsurance agreement with International Insurance Company of
Hannover, or IICH, with respect to a specific portfolio of
run-off business. Fitzwilliam received total assets and assumed
total net reinsurance reserves of approximately
$137.1 million. In addition, we provided a parental
guarantee supporting the IICH obligations of Fitzwilliam in the
amount of approximately £76.0 million (approximately
$118.7 million). The amount of the guarantee will decrease
over time in line with relevant independent actuarial
assessments.
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New
Castle
On December 3, 2010, we, through our wholly-owned
subsidiary, Kenmare Holdings Ltd., or Kenmare, completed the
acquisition of New Castle Reinsurance Company Ltd., or New
Castle, for an aggregate purchase price of $22.0 million.
New Castle is a Bermuda-domiciled insurer that is in run-off.
The acquisition was funded from available cash on hand.
CitiLife
On November 8, 2010, we, through our wholly-owned
subsidiary, Kenmare, entered into a definitive agreement for the
purchase of CitiLife Financial Limited from Citigroup Insurance
Holding Corporation, an affiliate of Citigroup Inc. CitiLife
Financial Limited is a Dublin, Ireland-based life insurer that
is in run-off. The purchase price is 30 million
(approximately $40.2 million) and is expected to be
financed from available cash on hand. Completion of the
transaction is conditioned on, among other things, regulatory
approval and satisfaction of various customary closing
conditions. The transaction is expected to close in the first
quarter of 2011.
Brampton
(formerly Aioi Europe)
In March 2006, we and Shinsei Bank, Ltd., or Shinsei, through
Hillcot Holdings Ltd., or Hillcot, completed the acquisition of
Brampton Insurance Company of Europe Limited, or Brampton, a
London-based subsidiary of Aioi Insurance Company Limited.
Brampton underwrote general insurance and reinsurance business
in Europe for its own account from 1982 until 2002 when it
generally ceased underwriting and placed its general insurance
and reinsurance business into run-off. The aggregate purchase
price paid for Brampton was £62.0 million
(approximately $108.9 million), with
£50.0 million in cash paid upon the closing of the
transaction and £12.0 million in the form of a
promissory note, payable twelve months from the date of the
closing. In April 2006, Hillcot borrowed approximately
$44.0 million from a London-based bank to partially assist
with the financing of the Brampton acquisition. Following a
repurchase by Brampton of its shares valued at
£40.0 million in May 2006, Hillcot repaid the
promissory note and reduced the bank borrowing to
$19.2 million, which was repaid in May 2008.
On November 2, 2010, we acquired the 49.9% of the shares of
Hillcot from Shinsei that we did not previously own for a
purchase price of $38.0 million, resulting in us owning
100% of Hillcot. At the time of acquisition, Hillcot owned 100%
of the shares of Brampton. The fair value of the assets acquired
that we did not previously own was $34.9 million. The
excess of the purchase price over the fair value of assets
acquired in the amount of $3.1 million was recorded as a
charge to additional paid-in capital in accordance with the
applicable guidance of accounting principles generally accepted
in the United States of America, or U.S. GAAP. J. Christopher
Flowers, a member of our board of directors and one of our
largest shareholders, is a director and the largest shareholder
of Shinsei.
Sale
of Interest in Stonewall and Acquisition of Seaton
On June 13, 2008, our indirect subsidiary, Virginia
Holdings Ltd., or Virginia, completed the acquisition from Dukes
Place Holdings, L.P. (a portfolio company of GSC European
Mezzanine Fund II, L.P.) of 44.4% of the outstanding
capital stock of Stonewall Acquisition Corporation, or SAC,
which at that time was the parent of two Rhode Island-domiciled
insurers in run-off, Stonewall Insurance Company and Seaton
Insurance Company, or Seaton. The total purchase price,
including acquisition costs, was $21.4 million and was
funded from available cash on hand. SAC entered into a
definitive agreement on December 3, 2009 for the sale of
its shares in Stonewall Insurance Company to Columbia Insurance
Company, an affiliate of National Indemnity Company (an indirect
subsidiary of Berkshire Hathaway, Inc.), for a sale price of
$56.0 million, subject to certain post-closing purchase
price adjustments that brought the total consideration received
to $60.4 million. The transaction received the required
regulatory approval on March 31, 2010 and subsequently
closed on April 7, 2010. The proceeds received by SAC and
certain other assets were distributed between Dukes Place
Holdings, L.P. and Virginia. The proceeds received by Virginia
included the shares of Seaton distributed on August 3,
2010, resulting in Virginia owning 100% of Seaton following the
distribution (prior to the distribution, Virginia had indirectly
owned 44.4% of Seaton through its holdings in SAC).
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Providence
Washington
On July 20, 2010, we, through our wholly-owned subsidiary
PWAC Holdings, Inc., completed the acquisition of PW Acquisition
Company, or PWAC, for a purchase price of $25.0 million.
PWAC owns the entire share capital of Providence Washington
Insurance Company. Providence Washington Insurance Company and
its two subsidiaries are Rhode Island-domiciled insurers that
are in run-off. The purchase price was financed by a term
facility provided by a London-based bank, or the EGL Facility,
which was fully repaid in September 2010.
Torus
Reinsurance
In July 2010, following the acquisition of the entire issued
share capital of Glacier Insurance AG by Torus Insurance
(Bermuda) Limited, or Torus, Fitzwilliam entered into two quota
share reinsurance agreements with Torus protecting the prior
year reserve development of two portfolios of business reinsured
by them: a 79% quota share of Torus 95% quota share
reinsurance of Glacier Insurance AG, and a 75% quota share of
Torus 100% quota share reinsurance of Glacier Reinsurance
AG. Fitzwilliam received total assets and assumed total gross
reinsurance reserves of approximately $105.0 million.
Bosworth
In May 2010, a specific portfolio of business in run-off
underwritten by Mitsui Sumitomo Insurance Co., Ltd. of Japan, or
Mitsui, was transferred to our 50.1% owned subsidiary, Bosworth
Run-off Limited, or Bosworth. This transfer, which occurred
under Part VII of the U.K. Financial Services and Markets
Act 2000, was approved by the U.K. Court and took effect on
May 31, 2010. As a result of the transfer, Bosworth
received total assets and assumed net reinsurance reserves of
approximately $117.5 million. Shinsei owns the remaining
49.9% of Bosworth.
Assuransinvest
On March 30, 2010, we, through our wholly-owned subsidiary,
Nordic Run-Off Limited, completed the acquisition of
Forsakringsaktiebolaget Assuransinvest MF, or Assuransinvest,
for a purchase price of SEK 78.8 million
(approximately $11.0 million). Assuransinvest is a
Swedish-domiciled reinsurer that is in run-off. The acquisition
was funded from available cash on hand.
Knapton
Insurance (formerly British Engine)
On March 2, 2010, we, through our wholly-owned subsidiary,
Knapton Holdings Limited, or Knapton Holdings, completed the
acquisition of Knapton Insurance Limited, formerly British
Engine Insurance Limited, or Knapton, from RSA Insurance Group
plc for a total purchase price of £28.8 million
(approximately $44.0 million). Knapton is a U.K.-domiciled
reinsurer that is in run-off. The acquisition was funded from
available cash on hand.
In April 2010, Knapton Holdings entered into a term facility
agreement with a London-based bank, or the Knapton Facility. On
April 20, 2010, Knapton Holdings drew down
$21.4 million from the Knapton Facility.
Allianz
Reinsurance
In February 2010, we, through our wholly-owned subsidiary,
Fitzwilliam, entered into a 100% quota share reinsurance
agreement with Allianz Global Corporate & Specialty AG
(UK) Branch, or Allianz, with respect to a specific portfolio of
run-off business of Allianz. Fitzwilliam received total assets
and assumed total gross reinsurance reserves of approximately
$112.6 million.
Shelbourne
RITC Transactions
In December 2007, we, in conjunction with JCF FPK I L.P., or JCF
FPK, and a newly-hired executive management team, formed
U.K.-based Shelbourne Group Limited, or Shelbourne, to invest in
RITC transactions (the transferring of liabilities from one
Lloyds syndicate to another) with Lloyds of London
insurance and reinsurance syndicates in run-off. We own
approximately 56.8% of Shelbourne, which in turn owns 100% of
Shelbourne Syndicate Services Limited, the Managing Agency for
Lloyds Syndicate 2008, a syndicate approved by
Lloyds of London on December 16, 2007 to undertake
RITC transactions with Lloyds syndicates in run-off.
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JCF FPK is a joint investment program between J.C.
Flowers II L.P., or the Flowers Fund, and Fox-Pitt Kelton
Cochran Caronia & Waller (USA) LLC, or FPK. The
Flowers Fund is a private investment fund advised by J.C.
Flowers & Co. LLC. J. Christopher Flowers, a member of
our board of directors and one of our largest shareholders, is
the Chairman and Chief Executive Officer of J.C.
Flowers & Co. LLC. John J. Oros, who served as our
Executive Chairman and a member of our board of directors until
his resignation on August 20, 2010, is a Managing Director
of J.C. Flowers & Co. LLC. In addition, an affiliate
of the Flowers Fund controlled approximately 41% of FPK until
its sale of FPK in December 2009.
Lloyds Syndicate 2008 has, to date, entered into ten RITC
agreements with Lloyds syndicates, inclusive of two
agreements entered into in February 2011. In February 2008,
Lloyds Syndicate 2008 entered into RITC agreements with
four Lloyds syndicates with total gross insurance reserves
of approximately $471.2 million. In February 2009,
Lloyds Syndicate 2008 entered into a RITC agreement with a
Lloyds syndicate with total gross insurance reserves of
approximately $67.0 million. During 2010, Lloyds
Syndicate 2008 entered into RITC agreements with three
Lloyds syndicates with total gross insurance reserves of
approximately $192.6 million. In February 2011,
Lloyds Syndicate 2008 entered into RITC agreements with
two Lloyds syndicates with total gross insurance reserves
of approximately $129.6 million.
The capital commitment to Lloyds Syndicate 2008, at
February 28, 2011, amounted to £80.1 million
(approximately $125.1 million) and was financed by
approximately £47.4 million (approximately
$74.0 million) from available cash on hand;
£19.0 million (approximately $29.7 million) from a
letter of credit issued by a London-based bank that has been
secured by a parental guarantee from us; approximately
£5.2 million (approximately $8.1 million) from
the Flowers Fund (acting in its own capacity and not through JCF
FPK) by way of non-voting equity participation; and
approximately £8.5 million (approximately
$13.3 million) from JCF FPK.
Copenhagen
Re
On October 15, 2009, we, through our wholly-owned
subsidiary, Marlon Insurance Company Limited, completed the
acquisition of Copenhagen Reinsurance Company Ltd., or
Copenhagen Re, from Alm. Brand Forsikring A/S for a total
purchase price, including acquisition costs, of
DKK149.2 million (approximately $29.9 million).
Copenhagen Re is a Danish-domiciled reinsurer that is in
run-off. The acquisition was funded from available cash on hand.
Constellation
On January 31, 2009, we, through our indirect subsidiary,
Sun Gulf Holdings Inc., completed the acquisition of all of the
outstanding capital stock of Constellation Reinsurance Company
Limited, or Constellation, for a total purchase price of
approximately $2.5 million. Constellation is a New
York-domiciled reinsurer that is in run-off. The acquisition was
funded from available cash on hand.
Unionamerica
On December 30, 2008, our indirect subsidiary Royston
Run-Off Limited, or Royston, completed the acquisition of all of
the outstanding capital stock of Unionamerica Holdings Limited,
or Unionamerica, from St. Paul Fire and Marine Insurance
Company, an affiliate of The Travelers Companies, Inc., or
Travelers. Unionamerica is comprised of the discontinued
operations of Travelers U.K.-based London Market business,
which were placed into run-off between 1992 and 2003. The total
purchase price, including acquisition costs, of
$343.4 million was financed by approximately
$184.6 million from a credit facility provided by a
London-based bank; approximately $49.8 million from the
Flowers Fund by way of its non-voting equity interest in Royston
Holdings Ltd., the direct parent company of Royston; and the
remainder from available cash on hand. In December 2010,
approximately $114.0 million of the credit facility was
repaid and, on March 3, 2011, another $40.5 million of the
credit facility was repaid.
Hillcot
Re
On October 27, 2008, our wholly-owned subsidiary Kenmare,
purchased the entire issued share capital of Hillcot Re Ltd., or
Hillcot Re, the wholly-owned subsidiary of Hillcot for a total
purchase price, including acquisition costs, of
$54.7 million. Prior to the completion of the transaction,
we owned 50.1% of the outstanding share capital of Hillcot
9
and Shinsei owned the remaining 49.9%. Upon completion of the
transaction, Hillcot paid a distribution to Shinsei of
approximately $27.1 million representing its 49.9% share of
the consideration. The total purchase price of
$54.7 million was funded from available cash on hand.
Hillcot Re is a U.K.-based reinsurer that is in run-off.
Capital
Assurance
On August 18, 2008, we completed the acquisition of all of
the outstanding capital stock of Capital Assurance Company Inc.
and Capital Assurance Services, Inc. for a total purchase price,
including acquisition costs, of approximately $5.6 million.
Capital Assurance Company, Inc. is a Florida-domiciled insurer
that is in run-off. The acquisition was funded from available
cash on hand.
EPIC
On August 14, 2008, we completed the acquisition of all of
the outstanding capital stock of Electricity Producers Insurance
Company (Bermuda) Limited, or EPIC, from its parent British
Nuclear Fuels plc. The total purchase price, including
acquisition costs, of £36.8 million (approximately
$69.0 million) was financed by approximately
$32.8 million from a credit facility provided by a
London-based bank; approximately $10.2 million from the
Flowers Fund by way of non-voting equity participation; and the
remainder from available cash on hand. In October 2008, we fully
repaid the outstanding principal and accrued interest on the
credit facility.
Goshawk
On June 20, 2008 we, through our wholly-owned subsidiary
Enstar Acquisitions Limited, or EAL, announced a cash offer to
all of the shareholders of Goshawk Insurance Holdings Plc, or
Goshawk, at 5.2 pence (approximately $0.103) for each share, or
the Offer, conditioned on, among other things, receiving
acceptance from shareholders owning 90% of the shares of
Goshawk. Goshawk owns Rosemont Reinsurance Limited, a
Bermuda-based reinsurer that wrote primarily property and marine
business, which was placed into run-off in October 2005. The
Offer valued Goshawk at approximately £45.7 million in
the aggregate.
On July 17, 2008, after acquiring more than 30% of the
shares of Goshawk through market purchases, EAL was obligated to
remove all of the conditions of the Offer except for the receipt
of acceptances from shareholders owning 50% of the shares of
Goshawk. On July 25, 2008, the acceptance condition was met
and the Offer became unconditional. On August 19, 2008, the
Offer closed with shareholders representing approximately 89.44%
of Goshawk accepting the Offer for total consideration of
£40.9 million (approximately $80.9 million).
The total purchase price, including acquisition costs, of
approximately $82.0 million was financed by a drawdown of
$36.1 million from a credit facility provided by a
London-based bank, a contribution of $11.7 million of the
acquisition price from the Flowers Fund, by way of non-voting
equity participation, and the remainder from available cash on
hand.
In connection with the acquisition, Goshawks existing bank
loan of $16.3 million was refinanced by the drawdown of
$12.2 million (net of fees) from a credit facility provided
by a London-based bank and $4.1 million from the Flowers
Fund. In December 2009, we fully repaid the outstanding
principal and interest on the credit facility.
On November 26, 2009, we acquired an additional 10.01% of
the outstanding shares that we did not previously own for a
purchase price of approximately $4.7 million. We now own
99.45% of the outstanding shares of Goshawk.
Gordian
On March 5, 2008, we completed the acquisition of AMP
Limiteds, or AMPs, Australian-based closed
reinsurance and insurance operations, or Gordian. The purchase
price, including acquisition expenses, of approximately
AU$436.9 million (approximately $405.4 million) was
financed by approximately AU$301.0 million (approximately
$276.5 million), including an arrangement fee of
AU$4.5 million (approximately $4.2 million), from bank
financing provided jointly by a London-based bank and a German
bank (the Flowers Fund is a significant shareholder of the
German bank); approximately AU$41.6 million (approximately
$39.5 million) from the Flowers Fund, by way of non-voting
equity participation; and approximately AU$98.7 million
(approximately $93.6 million) from available cash on hand.
In September 2010, the remaining balance of the outstanding
facility was repaid in full.
10
Guildhall
On February 29, 2008, we completed the acquisition of
Guildhall Insurance Company Limited, or Guildhall, a U.K.-based
reinsurance company that has been in run-off since 1986. The
purchase price, including acquisition expenses, of approximately
£33.4 million (approximately $65.9 million) was
financed by the drawdown of approximately
£16.5 million (approximately $32.5 million) from
a U.S. dollar facility loan agreement with a London-based
bank; approximately £5.0 million (approximately
$10.0 million) from the Flowers Fund, by way of non-voting
equity participation; and approximately £11.9 million
(approximately $23.5 million) from available cash on hand.
In September 2008, the facility loan was repaid in full.
Marlon
On August 28, 2007, we completed the acquisition of Marlon
Insurance Company Limited, a reinsurance company in run-off, and
Marlon Management Services Limited for a total purchase price,
including acquisition costs, of approximately
$31.2 million, which was funded by $15.3 million
borrowed under a facility loan agreement with a London-based
bank and available cash on hand. Marlon Insurance Company
Limited and Marlon Management Services Limited are both
U.K.-based companies. In February 2008, the facility loan was
repaid in full.
Tate &
Lyle
On June 12, 2007, we completed the acquisition of
Tate & Lyle Reinsurance Ltd., or Tate &
Lyle, for a total purchase price, including acquisition costs,
of approximately $5.9 million funded from available cash on
hand. Tate & Lyle is a Bermuda-based reinsurance
company in run-off.
Inter-Ocean
On February 23, 2007, we, through our wholly-owned
subsidiary Oceania Holdings Ltd, or Oceania, completed the
acquisition of Inter-Ocean Holdings Ltd., or Inter-Ocean. The
total purchase price, including acquisition costs, was
approximately $57.5 million, which was funded by
$26.8 million borrowed under a facility loan agreement with
a London-based bank and available cash on hand. Inter-Ocean owns
two reinsurers, one based in Bermuda and one based in Ireland.
Both of these companies wrote international reinsurance and had
in place retrocessional policies providing for the full
reinsurance of all of the risks they assumed. In October 2007,
Oceania repaid its bank debt in full.
The
Enstar Group, Inc.
On January 31, 2007, we completed the merger, or the
Merger, of CWMS Subsidiary Corp. with and into The Enstar Group,
Inc., or EGI, and, as a result, EGI, renamed Enstar USA, Inc.,
is now our wholly-owned subsidiary. Prior to the Merger, EGI
owned approximately 32% economic and 50% voting interests in us.
As a result of the completion of the Merger, B.H. Acquisition
Ltd. is now our wholly-owned subsidiary.
Unione
In November 2006, we, through our wholly-owned subsidiary
Virginia, purchased Unione Italiana (U.K.) Reinsurance Company
Limited, or Unione, a U.K. company, for approximately
$17.4 million. Unione underwrote business from the
1940s though to 1995. Prior to acquisition, Unione closed
the majority of its portfolio by way of a solvent scheme of
arrangement in the U.K. Uniones remaining business is a
portfolio of international insurance and reinsurance which has
been in run-off since 1971.
Cavell
In October 2006, we, through our wholly-owned subsidiary
Virginia, purchased Cavell Holdings Limited (U.K.), or Cavell,
for approximately £31.8 million (approximately
$60.9 million). Cavell owns a U.K. reinsurance company and
a Norwegian reinsurer, both of which wrote portfolios of
international reinsurance business and went into run-off in 1993
and 1992, respectively. The purchase price was funded by
$24.5 million borrowed under a
11
facility loan agreement with a London-based bank and available
cash on hand. In February 2008, Virginia repaid its bank debt in
full.
Share
Repurchase
On October 1, 2010, we entered into share repurchase
agreements, or the Repurchase Agreements, with three of our
executives and certain trusts and a corporation affiliated with
the executives to repurchase an aggregate of 800,000 of our
ordinary shares at a price of $70.00 per share. We repurchased
an aggregate of 600,000 ordinary shares from Dominic F.
Silvester (our Chief Executive Officer and Chairman of the Board
of Directors) and a trust of which he and his immediate family
are the sole beneficiaries, 100,000 ordinary shares from a trust
of which Paul J. OShea (our Joint Chief Operating Officer,
Executive Vice President and a member of our Board of Directors)
and his immediate family are the sole beneficiaries and 100,000
ordinary shares from a corporation owned by a trust of which
Nicholas A. Packer (our Joint Chief Operating Officer and
Executive Vice President) and his immediate family are the sole
beneficiaries. The repurchase transactions closed on
October 14, 2010. The aggregate purchase price of
$56.0 million is payable by us through promissory notes to
the selling shareholders. The annual interest rate for the notes
is fixed at 3.5%, and the notes are repayable in three equal
installments on December 31, 2010, December 1, 2011
and December 1, 2012. In connection with the Repurchase
Agreements, we entered into
lock-up
agreements with each of Messrs. Silvester, OShea and
Packer, and their respective family trusts and corporation. The
lock-up
agreements prohibit future sales and transfers of shares now
owned or subsequently acquired for two years from the date of
the Repurchase Agreements.
Share
Offering
In July 2008, we completed the sale to the public of 1,372,028
newly-issued ordinary shares, inclusive of the
underwriters over-allotment, or the Offering. The shares
were priced at $87.50 per share and we received net proceeds of
approximately $116.8 million, after underwriting fees and
other expenses of approximately $3.3 million. FPK served as
lead managing underwriter in the Offering. The Flowers Fund and
certain of its affiliated investment partnerships purchased
285,714 ordinary shares with a value of approximately
$25.0 million in the Offering at the public offering price.
An affiliate of the Flowers Fund controlled approximately 41% of
FPK until its sale of FPK in December 2009.
Management
of Run-Off Portfolios
We are a party to several management engagements pursuant to
which we have agreed to manage the run-off portfolios of third
parties with gross loss reserves, as of December 31, 2010,
of approximately $658.4 million. Such arrangements are
advantageous for third-party insurers because they allow a
third-party insurer to focus their management efforts on their
core competency while allowing them to maintain the portfolio of
business on their balance sheet. In addition, our expertise in
managing portfolios in run-off allows the third-party insurer
the opportunity to potentially realize positive operating
results if we achieve our objectives in management of the
run-off portfolio. We specialize in the collection of
reinsurance receivables through our subsidiary Kinsale Brokers
Limited. Through our subsidiaries, Enstar (US) Inc. and Cranmore
Adjusters Limited, we also specialize in providing claims
inspection services whereby we are engaged by third-party
insurance and reinsurance providers to review certain of their
existing insurance and reinsurance exposures, relationships,
policies
and/or
claims history.
Our primary objective in structuring our management arrangements
is to align the third-party insurers interests with our
interests. Consequently, management agreements typically are
structured so that we receive fixed fees in connection with the
management of the run-off portfolio and also typically receive
certain incentive payments based on a portfolios positive
operating results. These agreements do not include the recurring
engagements managed by our claims inspection and reinsurance
collection subsidiaries, Cranmore Adjusters Limited, Enstar
(US), Inc. and Kinsale Brokers Limited, respectively.
Claims
Management and Administration
An integral factor to our success is our ability to analyze,
administer, manage and settle claims and related expenses, such
as loss adjustment expenses. Our claims teams are located in
different offices within our
12
organization and provide global claims support. We have
implemented effective claims handling guidelines along with
claims reporting and control procedures in all of our claims
units. To ensure that claims are appropriately handled and
reported in accordance with these guidelines, all claims matters
are reviewed regularly, with all material claims matters being
circulated to and authorized by management prior to any action
being taken.
When we receive notice of a claim, regardless of size and
regardless of whether it is a paid claim request or a reserve
advice, it is reviewed and recorded within the claims system,
reserving our rights where appropriate. Claims reserve movements
and payments are reviewed daily, with any material movements
being reported to management for review. This enables
flash reporting of significant events and potential
insurance or reinsurance losses to be communicated to senior
management worldwide on a timely basis irrespective from which
geographical location or business unit location the exposure
arises.
We are also able to efficiently manage claims and obtain savings
through our extensive relationships with defense counsel (both
in-house and external), third-party claims administrators and
other professional advisors and experts. We have developed
relationships and protocols to reduce the number of outside
counsel by consolidating claims of similar types and complexity
with experienced law firms specializing in the particular type
of claim. This approach has enabled us to more efficiently
manage outside counsel and other third parties, thereby reducing
expenses, and to establish closer relationships with ceding
companies.
When appropriate, we negotiate with direct insureds to buy back
policies either on favorable terms or to mitigate against
existing
and/or
potential future indemnity exposures and legal costs in an
uncertain and constantly evolving legal environment. We also
pursue commutations on favorable terms with ceding companies of
reinsurance business in order to realize savings or to mitigate
against potential future indemnity exposures and legal costs.
Such buy-backs and commutations typically eliminate all past,
present and future liability to direct insureds and reinsureds
in return for a lump sum payment.
With regard to reinsurance receivables, we manage cash flow by
working with reinsurers, brokers and professional advisors to
achieve fair and prompt payment of reinsured claims, taking
appropriate legal action to secure receivables where 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
reinsurers past, present and future liability in respect
of such claims. Properly priced commutations reduce the expense
of adjusting direct claims and pursuing collection of
reinsurance receivables (both of which may often involve
extensive legal expense), realize savings, remove the potential
future volatility of claims and reduce required regulatory
capital.
Reserves
for Unpaid Losses and Loss Adjustment Expense
Applicable insurance laws and generally accepted accounting
practices require us to maintain reserves to cover our estimated
losses under insurance policies that we have assumed and for
loss adjustment expense, or LAE, relating to the investigation,
administration and settlement of policy claims. Our LAE reserves
consist of both reserves for allocated loss adjustment expenses,
or ALAE, and for unallocated loss adjustment expenses, or ULAE.
ALAE are linked to the settlement of an individual claim or
loss, whereas ULAE reserve is based on our estimates of future
costs to administer the claims.
We and our subsidiaries establish losses and LAE reserves for
individual claims by evaluating reported claims on the basis of:
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our knowledge of the circumstances surrounding the claim;
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the severity of the injury or damage;
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the jurisdiction of the occurrence;
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the potential for ultimate exposure;
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the type of loss; and
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our experience with the line of business and policy provisions
relating to the particular type of claim.
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13
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. Our management must use considerable judgment in the
process of developing these estimates. The liability for unpaid
losses and LAE for property and casualty business includes
amounts determined from loss reports on individual cases and
amounts for losses incurred but not reported, or IBNR. Such
reserves, including IBNR reserves, are estimated by management
based upon loss reports received from ceding companies,
supplemented by our own estimates of losses for which no ceding
company loss reports have yet been received.
In establishing reserves, management also considers actuarial
estimates of ultimate losses. Our independent actuaries employ
generally accepted actuarial methodologies and procedures to
estimate ultimate losses and loss adjustment expenses. Our loss
reserves are largely related to casualty exposures including
latent exposures primarily relating to asbestos and
environmental, or A&E, as discussed below. In establishing
the reserves for unpaid claims, management considers facts
currently known and the current state of the law and coverage
litigation. Liabilities are recognized for known claims
(including the cost of related litigation) when sufficient
information has been developed to indicate the involvement of a
specific insurance policy, and management can reasonably
estimate its liability. In addition, reserves are established to
cover loss development related to both known and unasserted
claims.
The estimation of unpaid claim liabilities is subject to a high
degree of uncertainty for a number of reasons. Unpaid claim
liabilities for property and casualty exposures in general are
impacted by changes in the legal environment, jury awards,
medical cost trends and general inflation. Moreover, for latent
exposures in particular, developed case law and adequate claims
history do not exist. There is significant coverage litigation
involved with these exposures which creates further uncertainty
in the estimation of the liabilities. Therefore, for these types
of exposures, it is especially unclear whether past claim
experience will be representative of future claim experience.
Ultimate values for such claims cannot be estimated using
reserving techniques that extrapolate losses to an ultimate
basis using loss development factors, and the uncertainties
surrounding the estimation of unpaid claim liabilities are not
likely to be resolved in the near future. There can be no
assurance that the reserves established by us will be adequate
or will not be adversely affected by the development of other
latent exposures. The actuarial methods used to estimate
ultimate loss and ALAE for our latent exposures are discussed
below.
For the non-latent loss exposures, a range of traditional loss
development extrapolation techniques is applied. Incremental
paid and incurred loss development methodologies are the most
commonly used methods. Traditional cumulative paid and incurred
loss development methods are used where
inception-to-date,
cumulative paid and reported incurred loss development history
is available. These methods assume that groups of losses from
similar exposures will increase over time in a predictable
manner. Historical paid and incurred loss development experience
is examined for earlier underwriting years to make inferences
about how later underwriting years losses will develop.
Where company-specific loss information is not available or not
reliable, industry loss development information published by
reliable industry sources such as the Reinsurance Association of
America is considered.
The reserving process is intended to reflect the impact of
inflation and other factors affecting loss payments by taking
into account changes in historical payment patterns and
perceived trends. However, there is no precise method for the
subsequent evaluation of the adequacy of the consideration given
to inflation, or to any other specific factor, or to the way one
factor may affect another.
The loss development tables below show changes in our gross and
net loss reserves in subsequent years from the prior loss
estimates based on experience as of the end of each succeeding
year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of losses for
individual years. A redundancy means the original estimate was
higher than the current estimate; a deficiency means that the
current estimate is higher than the original estimate. The
Reserve redundancy line represents, as of the date
indicated, the difference between the latest re-estimated
liability and the reserves as originally estimated.
14
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Gross Loss and Loss
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Adjustment Expense
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Year Ended December 31,
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Reserves
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2001
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2002
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2003
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2004
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2005
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2006
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2007
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2008
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2009
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2010
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(in thousands of U.S. dollars)
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Reserves assumed
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$
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419,717
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$
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284,409
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$
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381,531
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$
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1,047,313
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$
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806,559
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$
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1,214,419
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$
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1,591,449
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$
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2,798,287
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$
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2,479,136
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$
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3,291,275
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1 year later
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348,279
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302,986
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365,913
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900,274
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909,984
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1,227,427
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1,436,051
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2,661,011
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2,237,124
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2 years later
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360,558
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299,281
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284,583
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1,002,773
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916,480
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1,084,852
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1,358,900
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2,422,291
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3 years later
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359,771
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278,020
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272,537
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1,012,483
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853,139
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1,020,755
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1,284,304
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4 years later
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332,904
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264,040
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243,692
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953,834
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778,216
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949,595
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5 years later
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316,257
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242,278
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216,875
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879,504
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733,151
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6 years later
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294,945
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238,315
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204,875
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835,488
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7 years later
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290,926
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229,784
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195,795
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8 years later
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282,066
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216,969
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|
|
|
|
|
|
|
|
|
|
|
|
|
9 years later
|
|
|
269,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve redundancy
|
|
$
|
150,195
|
|
|
$
|
67,440
|
|
|
$
|
185,736
|
|
|
$
|
211,825
|
|
|
$
|
73,408
|
|
|
$
|
264,824
|
|
|
$
|
307,145
|
|
|
$
|
375,996
|
|
|
$
|
242,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Gross Paid Losses
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
|
(in thousands of U.S. dollars)
|
|
1 year later
|
|
$
|
97,036
|
|
|
$
|
43,721
|
|
|
$
|
19,260
|
|
|
$
|
110,193
|
|
|
$
|
117,666
|
|
|
$
|
90,185
|
|
|
$
|
407,692
|
|
|
$
|
364,440
|
|
|
$
|
377,159
|
|
|
|
|
|
2 years later
|
|
|
123,844
|
|
|
|
64,900
|
|
|
|
43,082
|
|
|
|
226,225
|
|
|
|
198,407
|
|
|
|
197,751
|
|
|
|
575,522
|
|
|
|
727,205
|
|
|
|
|
|
|
|
|
|
3 years later
|
|
|
142,282
|
|
|
|
84,895
|
|
|
|
61,715
|
|
|
|
305,913
|
|
|
|
268,541
|
|
|
|
353,032
|
|
|
|
688,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later
|
|
|
160,193
|
|
|
|
101,414
|
|
|
|
75,609
|
|
|
|
375,762
|
|
|
|
402,134
|
|
|
|
423,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later
|
|
|
174,476
|
|
|
|
110,155
|
|
|
|
87,274
|
|
|
|
509,319
|
|
|
|
442,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later
|
|
|
181,800
|
|
|
|
121,000
|
|
|
|
101,958
|
|
|
|
549,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later
|
|
|
189,023
|
|
|
|
135,426
|
|
|
|
108,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 years later
|
|
|
200,454
|
|
|
|
140,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years later
|
|
|
204,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expense
|
|
Year Ended December 31,
|
Reserves
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
|
(in thousands of U.S. dollars)
|
|
Reserves assumed
|
|
$
|
224,507
|
|
|
$
|
184,518
|
|
|
$
|
230,155
|
|
|
$
|
736,660
|
|
|
$
|
593,160
|
|
|
$
|
872,259
|
|
|
$
|
1,163,485
|
|
|
$
|
2,403,712
|
|
|
$
|
2,131,408
|
|
|
$
|
2,765,835
|
|
1 year later
|
|
|
190,768
|
|
|
|
176,444
|
|
|
|
220,712
|
|
|
|
653,039
|
|
|
|
590,153
|
|
|
|
875,636
|
|
|
|
1,034,588
|
|
|
|
2,216,928
|
|
|
|
1,851,268
|
|
|
|
|
|
2 years later
|
|
|
176,118
|
|
|
|
178,088
|
|
|
|
164,319
|
|
|
|
652,195
|
|
|
|
586,059
|
|
|
|
753,551
|
|
|
|
950,739
|
|
|
|
1,940,472
|
|
|
|
|
|
|
|
|
|
3 years later
|
|
|
180,635
|
|
|
|
138,251
|
|
|
|
149,980
|
|
|
|
649,355
|
|
|
|
532,804
|
|
|
|
684,999
|
|
|
|
874,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later
|
|
|
135,219
|
|
|
|
129,923
|
|
|
|
136,611
|
|
|
|
600,939
|
|
|
|
454,933
|
|
|
|
611,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later
|
|
|
124,221
|
|
|
|
119,521
|
|
|
|
108,666
|
|
|
|
531,666
|
|
|
|
408,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later
|
|
|
114,375
|
|
|
|
112,100
|
|
|
|
104,127
|
|
|
|
485,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later
|
|
|
106,920
|
|
|
|
108,447
|
|
|
|
92,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 years later
|
|
|
103,311
|
|
|
|
93,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years later
|
|
|
88,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve redundancy
|
|
$
|
136,162
|
|
|
$
|
91,330
|
|
|
$
|
137,183
|
|
|
$
|
251,268
|
|
|
$
|
184,890
|
|
|
$
|
261,077
|
|
|
$
|
288,524
|
|
|
$
|
463,240
|
|
|
$
|
280,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Net Paid Losses
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
|
(in thousands of U.S. dollars)
|
|
1 year later
|
|
$
|
38,634
|
|
|
$
|
10,557
|
|
|
$
|
11,354
|
|
|
$
|
78,488
|
|
|
$
|
79,398
|
|
|
$
|
43,896
|
|
|
$
|
112,321
|
|
|
$
|
247,823
|
|
|
$
|
250,635
|
|
|
|
|
|
2 years later
|
|
|
32,291
|
|
|
|
24,978
|
|
|
|
6,312
|
|
|
|
161,178
|
|
|
|
125,272
|
|
|
|
(70,430
|
)
|
|
|
243,146
|
|
|
|
480,102
|
|
|
|
|
|
|
|
|
|
3 years later
|
|
|
44,153
|
|
|
|
17,304
|
|
|
|
9,161
|
|
|
|
206,351
|
|
|
|
(14,150
|
)
|
|
|
58,228
|
|
|
|
324,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later
|
|
|
34,483
|
|
|
|
24,287
|
|
|
|
(1,803
|
)
|
|
|
67,191
|
|
|
|
102,776
|
|
|
|
108,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later
|
|
|
39,232
|
|
|
|
9,686
|
|
|
|
2,515
|
|
|
|
184,150
|
|
|
|
132,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later
|
|
|
23,309
|
|
|
|
14,141
|
|
|
|
11,348
|
|
|
|
212,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later
|
|
|
24,176
|
|
|
|
22,966
|
|
|
|
11,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 years later
|
|
|
30,551
|
|
|
|
21,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years later
|
|
|
28,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The following table provides a reconciliation of the liability
for losses and LAE, net of reinsurance ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Net reserves for loss and loss adjustment expenses, beginning of
period
|
|
$
|
2,131,408
|
|
|
$
|
2,403,712
|
|
|
$
|
1,163,485
|
|
|
$
|
872,259
|
|
|
$
|
593,160
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities
|
|
|
(311,834
|
)
|
|
|
(259,627
|
)
|
|
|
(242,104
|
)
|
|
|
(24,482
|
)
|
|
|
(31,927
|
)
|
Net losses paid
|
|
|
(294,996
|
)
|
|
|
(257,414
|
)
|
|
|
(174,013
|
)
|
|
|
(20,422
|
)
|
|
|
(75,293
|
)
|
Effect of exchange rate movement
|
|
|
(3,836
|
)
|
|
|
73,512
|
|
|
|
(124,989
|
)
|
|
|
18,625
|
|
|
|
24,856
|
|
Retroactive reinsurance contracts assumed
|
|
|
785,731
|
|
|
|
56,630
|
|
|
|
373,287
|
|
|
|
|
|
|
|
|
|
Acquired on purchase of subsidiaries
|
|
|
459,362
|
|
|
|
114,595
|
|
|
|
1,408,046
|
|
|
|
317,505
|
|
|
|
361,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expenses, end of period
|
|
$
|
2,765,835
|
|
|
$
|
2,131,408
|
|
|
$
|
2,403,712
|
|
|
$
|
1,163,485
|
|
|
$
|
872,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the table above, net reduction in ultimate loss and loss
adjustment expense liabilities represents changes in estimates
of prior period net loss and loss adjustment expense liabilities
comprising net incurred loss movements during a period and
changes in estimates of net IBNR liabilities. Net incurred loss
movements during a period comprise increases or reductions in
specific case reserves advised during the period to us by our
policyholders and attorneys, or by us to our reinsurers, less
claims settlements made during the period by us to our
policyholders, plus claim receipts made to us by our reinsurers.
Prior period estimates of net IBNR liabilities may change as our
management considers the combined impact of commutations, policy
buy-backs, settlement of losses on carried reserves and the
trend of incurred loss development compared to prior forecasts.
The trend of incurred loss development in any period comprises
the movement in net case reserves less net claims settled during
the period. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
Loss and Loss Adjustment Expenses on page 72 for an
explanation of how the loss reserving methodologies are applied
to the movement, or development, of net incurred losses during a
period to estimate IBNR liabilities.
Commutations provide an opportunity for us to exit exposures to
entire policies with insureds and reinsureds at a discount to
the previously estimated ultimate liability. To the extent
possible, our internal and external actuaries eliminate all
prior historical loss development that relates to commuted
exposures and apply their actuarial methodologies to the
remaining aggregate exposures and revised historical loss
development information to reassess estimates of ultimate
liabilities.
Policy buy-backs provide an opportunity for us to settle
individual policies and losses usually at a discount to carried
advised loss reserves. As part of our routine claims settlement
operations, claims will settle at either below or above the
carried advised loss reserve. The impact of policy buy-backs and
the routine settlement of claims updates historical loss
development information to which actuarial methodologies are
applied often resulting in revised estimates of ultimate
liabilities. Our actuarial methodologies include industry
benchmarking which, under certain methodologies (discussed
further under Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies on
page 72, 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.
Year
Ended December 31, 2010
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2010 was
$311.8 million, excluding the impact of foreign exchange
rate movements of $3.8 million and including both net
reduction in ultimate loss and loss adjustment expense
liabilities of $19.0 million relating to companies and
portfolios acquired during the year and premium and commission
adjustments triggered by incurred losses of $16.5 million.
16
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2010 of
$311.8 million was attributable to a reduction in estimates
of net ultimate losses of $278.1 million, a reduction in
aggregate provisions for bad debts of $49.6 million and a
reduction in estimates of unallocated loss adjustment expense
liabilities of $39.7 million, relating to 2010 run-off
activity, partially offset by the amortization, over the
estimated payout period, of fair value adjustments relating to
companies acquired amounting to $55.4 million.
The reduction in estimates of net ultimate losses of
$278.1 million comprised net incurred favorable loss
development of $41.1 million and reductions in IBNR
reserves of $236.9 million. The decrease in the estimate of
IBNR loss reserves of $236.9 million was comprised of
$67.8 million relating to asbestos liabilities,
$4.2 million relating to environmental liabilities and
$164.9 million relating to all other remaining liabilities.
The reduction in IBNR was a result of the application, on a
basis consistent with the assumptions applied in the prior
period, of our actuarial methodologies to loss data to estimate
loss reserves required to cover liabilities for unpaid losses
and loss adjustment expenses. The prior period estimate of net
IBNR liabilities was reduced as a result of the combined impact
of loss development activity during 2010, including commutations
and the favorable trend of loss development related to
non-commuted policies compared to prior forecasts. The net
incurred favorable loss development of $41.1 million,
resulting from settlement of net advised case and LAE reserves
of $336.1 million for net paid losses of
$295.0 million, related to the settlement of non-commuted
losses in the year and approximately 90 commutations of assumed
and ceded exposures. Commutations provide an opportunity for us
to exit exposures to entire policies with insureds and
reinsureds at a discount to the previous estimated ultimate
liability. As a result of exiting all exposures to such
policies, all advised case reserves and IBNR liabilities
relating to that insured or reinsured are eliminated. This often
results in a net gain irrespective of whether the settlement
exceeds the advised case reserves. We adopt a disciplined
approach to the review and settlement of non-commuted claims
through claims adjusting and the inspection of underlying
policyholder records such that settlements of assumed exposures
may often be achieved below the level of the originally advised
loss, and settlements of ceded receivables may often be achieved
at levels above carried balances. Of the 90 commutations
completed during 2010, three related to our top ten insured
and/or
reinsured exposures, including one commutation completed shortly
after December 31, 2009 whereby the related reduction in
IBNR reserves was recorded in the reduction in net ultimate
losses for the year ended December 31, 2009, and one
related to the commutation of one of our largest ceded
reinsurance assets. The remaining 86 commutations, of which
approximately 43% were completed during the three months ended
December 31, 2010, were of a smaller size, consistent with
our approach of targeting significant numbers of cedant and
reinsurer relationships, as well as targeting significant
individual cedant and reinsurer relationships. The combination
of the claims settlement activity in 2010, including
commutations (but excluding the impact of the commutation that
was completed subsequent to the year ended December 31,
2009) and the actuarial estimation of IBNR reserves
required for the remaining non-commuted exposures (which took
into account the favorable trend of loss development in 2010
related to such exposures compared to prior forecasts), resulted
in our management concluding that the loss development activity
that occurred subsequent to the prior reporting period provided
sufficient new information to warrant a reduction in IBNR
reserves of $236.9 million in 2010.
The reduction in aggregate provisions for bad debt of
$49.6 million was a result of the collection, primarily
during the three months ended December 31, 2010, of certain
reinsurance receivables against which bad debt provisions had
been provided in earlier periods.
Year
Ended December 31, 2009
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2009 was
$259.6 million, excluding the impact of adverse foreign
exchange rate movements of $73.5 million and including both
net reduction in ultimate loss and loss adjustment expense
liabilities of $4.8 million relating to companies acquired
during the year and premium and commission adjustments of
$5.5 million triggered by incurred losses.
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2009 of
$259.6 million was attributable to a reduction in estimates
of net ultimate losses of $274.8 million, a reduction in
aggregate provisions for bad debts of $11.7 million and a
reduction in estimates of loss adjustment expense liabilities of
$50.4 million, relating to 2009 run-off activity, partially
offset by the amortization, over the estimated payout period, of
fair value adjustments relating to companies acquired amounting
to $77.3 million.
17
The reduction in estimates of net ultimate losses of
$274.8 million comprised net incurred loss development of
$43.3 million and reductions in IBNR reserves of
$318.2 million. The decrease in the estimate of IBNR loss
reserves of $318.2 million was comprised of
$158.4 million relating to asbestos liabilities,
$17.0 million relating to environmental liabilities and
$142.8 million relating to all other remaining liabilities.
The reduction in IBNR is a result of the application, on a basis
consistent with the assumptions applied in the prior period, of
our actuarial methodologies to loss data to estimate loss
reserves required to cover liabilities for unpaid losses and
loss adjustment expenses. The prior period estimate of net IBNR
liabilities was reduced as a result of the combined impact of
loss development activity during 2009, including commutations
and the favorable trend of loss development related to
non-commuted policies compared to prior forecasts. The net
incurred loss development of $43.3 million resulting from
settlement of net advised case and LAE reserves of
$214.1 million for net paid losses of $257.4 million,
related to the settlement of non-commuted losses in the year and
approximately 79 commutations of assumed and ceded exposures. Of
the 79 commutations completed during 2009, two related to our
top ten insured
and/or
reinsured exposures. The remaining 77 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships, as well as targeting
significant individual cedant and reinsurer relationships.
Approximately 76% of commutations completed in 2009 related to
commutations completed during the three months ended
December 31, 2009. Subsequent to the year end, one of our
insurance entities completed a commutation of another of one of
our top ten reinsured exposures. The combination of the claims
settlement activity in 2009, including commutations, and the
actuarial estimation of IBNR reserves required for the remaining
non-commuted exposures (which took into account the favorable
trend of loss development in 2009 related to such exposures
compared to prior forecasts as well as the impact of the
commutation that was completed subsequent to the year end),
resulted in our management concluding that the loss development
activity that occurred subsequent to the prior reporting period
provided sufficient new information to warrant a reduction in
IBNR reserves of $318.2 million in 2009.
The reduction in aggregate provisions for bad debt of
$11.7 million was a result of the collection, primarily
during the three months ended March 31, 2009, of certain
reinsurance receivables against which bad debt provisions had
been provided in earlier periods.
Year
Ended December 31, 2008
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2008 was
$242.1 million, excluding the impacts of favorable foreign
exchange rate movements of $36.1 million (relating to
companies acquired in 2007 and earlier) and including both net
reduction in ultimate loss and loss adjustment expense
liabilities of $149.4 million relating to companies
acquired during the year and premium and commission adjustments
of $0.1 million triggered by incurred losses.
The net reduction in ultimate loss and loss adjustment expense
liabilities for 2008 of $242.1 million was attributable to
a reduction in estimates of net ultimate losses of
$161.4 million, a reduction in aggregate provisions for bad
debt of $36.1 million (excluding $3.1 million relating
to one of our entities that benefited from substantial stop loss
reinsurance protection discussed below) and a reduction in
estimates of loss adjustment expense liabilities of
$69.1 million, relating to 2008 run-off activity, partially
offset by the amortization, over the estimated payout period, of
fair value adjustments relating to companies acquired amounting
to $24.5 million.
The reduction in estimates of net ultimate losses of
$161.4 million comprised the following:
(i) A reduction in estimates of net ultimate losses of
$21.7 million in one of our insurance entities that
benefited from substantial stop loss reinsurance protection. Net
incurred loss development relating to this entity of
$21.6 million was offset by reductions in IBNR reserves of
$94.8 million and reductions in provisions for bad debt of
$3.1 million, resulting in a net reduction in estimates of
ultimate losses of $76.3 million. The entity in question
benefited, until December 18, 2008, from substantial stop
loss reinsurance protection whereby $54.6 million of the
net reduction in ultimate losses of $76.3 million was ceded
to a single AA- rated reinsurer such that we retained a
reduction in estimates of net ultimate losses relating to this
entity of $21.7 million. On December 18, 2008, we
commuted the stop loss reinsurance protection with the reinsurer
for the receipt of $190.0 million payable by the reinsurer
to us over four years together with interest compounded at 3.5%
per annum. The commutation resulted in no significant financial
impact to us. The decrease in the estimate of IBNR loss reserves
of $94.8 million for this one
18
insurance entity was comprised of $77.7 million relating to
asbestos liabilities, $9.0 million relating to
environmental liabilities and $8.1 million relating to all
other remaining liabilities. The reduction in IBNR is a result
of the application, on a basis consistent with the assumptions
applied in the prior period, of our actuarial methodologies to
loss data to estimate loss reserves required to cover
liabilities for unpaid losses and loss adjustment expenses. The
prior period estimate of net IBNR liabilities was reduced as a
result of the combined impact of loss development activity
during 2008, which was comprised of the settlement of certain
advised case reserves below their prior period carried amounts,
commutations completed and the trend of loss development
relating to non-commuted policies compared to prior forecasts.
The net incurred loss development relating to this entity of
$21.6 million, whereby advised net case reserves of
$25.0 million were settled for net paid losses of
$46.6 million, primarily related to six commutations of
assumed and ceded liabilities completed during 2008. As a result
of exiting all exposures to such policies, all advised case
reserves and IBNR liabilities relating to that insured or
reinsured were eliminated. This often results in a net gain
irrespective of whether the settlement exceeds the advised case
reserves. Of the six commutations completed for this entity, of
which the three largest were completed during the three months
ended December 31, 2008, one was among its top ten assumed
exposures. The remaining five commutations were of a smaller
size, consistent with our approach of targeting significant
numbers of cedant and reinsurer relationships as well as
targeting significant individual cedant and reinsurer
relationships. The combination of the claims settlement activity
in 2008, including commutations, combined with the actuarial
estimation of IBNR reserves required for the remaining
non-commuted exposures (which took into account the favorable
trend of loss development in 2008 related to such exposures
compared to prior forecasts), resulted in our management
concluding that the loss development activity that occurred
subsequent to the prior reporting period provided sufficient new
information to warrant a reduction in IBNR reserves of
$94.8 million for this one insurance entity in 2008.
(ii) A reduction in estimates of net ultimate losses of
$139.7 million in our other insurance and reinsurance
entities comprised net favorable incurred loss development of
$24.1 million and reductions in IBNR reserves of
$115.6 million. The decrease in the estimate of IBNR loss
reserves of $115.6 million was comprised of
$23.8 million relating to asbestos liabilities,
$1.8 million relating to environmental liabilities and
$90.0 million relating to all other remaining liabilities.
The reduction in IBNR is a result of the application, on a basis
consistent with the assumptions applied in the prior period, of
our actuarial methodologies to loss data to estimate loss
reserves required to cover liabilities for unpaid losses and
loss adjustment expenses. The prior period estimate of net IBNR
liabilities was reduced as a result of the combined impact of
favorable loss development activity during 2008, which was
comprised of the settlement of advised case reserves below their
prior period carried amounts, commutations completed and the
favorable trend of loss development related to non-commuted
policies compared to prior forecasts. The net favorable incurred
loss development in our remaining insurance and reinsurance
entities of $24.1 million, whereby net advised case and LAE
reserves of $123.5 million were settled for net paid losses
of $99.4 million, primarily related to the settlement of
non-commuted losses in the year below carried reserves and
approximately 59 commutations of assumed and ceded exposures at
less than case and LAE reserves. Of the 59 commutations
completed during 2008 for our other reinsurance and insurance
companies, two (both of which were completed during the three
months ended December 31, 2008) were among our top ten
insured
and/or
reinsured exposures. The remaining 57 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships, as well as targeting
significant individual cedant and reinsurer relationships.
Approximately 82% of commutations completed in 2008 related to
commutations completed during the three months ended
December 31, 2008. The combination of the claims settlement
activity in 2008, including commutations, with the actuarial
estimation of IBNR reserves required for the remaining
noncommuted exposures (which took into account the favorable
trend of loss development in 2008 related to such exposures
compared to prior forecasts), resulted in our management
concluding that the loss development activity that occurred
subsequent to the prior reporting period provided sufficient new
information to warrant a reduction in IBNR reserves of
$115.6 million for our remaining insurance and reinsurance
entities in 2008.
One of our reinsurance companies had retrocessional arrangements
providing for full reinsurance of all risks assumed. During the
year, this entity commuted its largest assumed liability and
related retrocessional protection whereby the subsidiary paid
net losses of $222.0 million and reduced net IBNR by the
same amount, resulting in no gain or loss to us.
19
The reduction in aggregate provisions for bad debt of
$36.1 million (excluding $3.1 million relating to one
of our entities that benefited from substantial stop loss
reinsurance protection discussed above) was comprised of:
(1) $13.7 million as a result of the collection,
primarily during the three months ended December 31, 2008,
of certain reinsurance receivables against which bad debt
provisions had been provided in earlier periods,
(2) $8.5 million as a result of the revision of
estimates of bad debt provisions following the receipt of new
information during the three months ended December 31, 2008
and (3) $13.9 million as a result of reduced exposures
to reinsurers with bad debt provisions following the commutation
of assumed liabilities.
Year
Ended December 31, 2007
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2007 was
$24.5 million, excluding the impacts of adverse foreign
exchange rate movements of $18.6 million and including both
net reduction in ultimate loss and loss adjustment expense
liabilities of $9.0 million relating to companies acquired
during the year and premium and commission adjustments triggered
by incurred losses of $0.3 million.
The net reduction in ultimate loss and loss adjustment expense
liabilities for 2007 of $24.5 million was attributable to a
reduction in estimates of net ultimate losses of
$30.7 million and a reduction in estimates of loss
adjustment expense liabilities of $22.0 million, relating
to 2007 run-off activity, partially offset by an increase in
aggregate provisions for bad debt of $1.7 million,
primarily relating to companies acquired in 2006, and the
amortization, over the estimated payout period, of fair value
adjustments relating to companies acquired amounting to
$26.5 million.
The reduction in estimates of net ultimate losses of
$30.7 million comprised the following:
(i) An increase in estimates of net ultimate losses of
$2.1 million in one of our insurance entities that
benefited from substantial stop loss reinsurance protection.
This entity increased ultimate net losses by $23.5 million
which was largely offset by a recoverable from a single AA-
rated reinsurer such that a net ultimate loss of
$2.1 million was retained by us. The increase in ultimate
net losses of $23.5 million, before the recoverable from
the stop loss reinsurer, comprised net incurred loss development
of $36.6 million, partially offset by a decrease in the
estimate of IBNR loss reserves of $13.1 million. The
decrease in the estimate of IBNR loss reserves of
$13.1 million was comprised of $2.9 million relating
to asbestos liabilities, $6.2 million relating to
environmental liabilities and $4.0 million relating to all
other remaining liabilities. The reduction in IBNR is a result
of the application, on a basis consistent with the assumptions
applied in the prior period, of our actuarial methodologies to
loss data to estimate loss reserves required to cover
liabilities for unpaid losses and loss adjustment expenses. The
prior period estimate of net IBNR liabilities was reduced as a
result of the combined impact of favorable loss development
activity during 2007, which was comprised of the settlement of
certain advised case reserves below their prior period carried
amounts, commutations completed and the favorable trend of loss
development relating to non-commuted policies compared to prior
forecasts. The net incurred loss development relating to this
entity of $36.6 million, whereby advised net case reserves
of $16.9 million were settled for net paid losses of
$53.5 million, resulted from the settlement of case and LAE
reserves above carried levels and from new loss advices,
partially offset by approximately 12 commutations of assumed and
ceded exposures below carried reserve levels. As a result of
exiting all exposures to such policies, all advised case
reserves and IBNR liabilities relating to that insured or
reinsured were eliminated. This often results in a net gain
irrespective of whether the settlement exceeds advised case
reserves. Of the 12 commutations completed for this entity,
three were among our top ten cedant exposures. The remaining
nine were of a smaller size, consistent with our approach of
targeting significant numbers of cedant and reinsurer
relationships as well as targeting significant individual cedant
and reinsurer relationships. The combination of the claims
settlement activity in 2007, including commutations, with the
actuarial estimation of IBNR reserves required for the remaining
non-commuted exposures (which took into account the favorable
trend of loss development in 2007 related to such exposures
compared to prior forecasts), resulted in our management
concluding that the favorable loss development activity that
occurred subsequent to the prior reporting period provided
sufficient new information to warrant a reduction in IBNR
reserves of $13.1 million for this one insurance entity in
2007.
20
(ii) Net favorable incurred loss development of
$29.0 million, comprising net paid loss recoveries,
relating to another one of our reinsurance companies, offset by
increases in net IBNR loss reserves of $29.0 million,
resulting in no ultimate gain or loss. This reinsurance company
has retrocessional arrangements providing for full reinsurance
of all risks assumed.
(iii) A reduction in estimates of net ultimate losses of
$32.8 million in our remaining insurance and reinsurance
entities, which was comprised of net favorable incurred loss
development of $6.5 million and reductions in IBNR reserves
of $26.3 million. The decrease in the estimate of IBNR loss
reserves of $26.3 million was comprised of
$20.1 million relating to asbestos liabilities and
$7.7 million relating to all other remaining liabilities,
partially offset by an increase of $1.5 million relating to
environmental liabilities. The reduction in IBNR is a result of
the application, on a basis consistent with the assumptions
applied in the prior period, of our actuarial methodologies to
loss data to estimate loss reserves required to cover
liabilities for unpaid losses and loss adjustment expenses. The
prior period estimate of net IBNR liabilities was reduced as a
result of the combined impact of favorable loss development
activity during 2007, which was comprised of the settlement of
certain advised case reserves below their prior period carried
amounts, commutations completed and the trend of loss
development related to non-commuted policies compared to prior
forecasts. The net favorable incurred loss development in our
remaining insurance and reinsurance entities of
$6.5 million, whereby net advised case and LAE reserves of
$2.5 million were settled for net paid loss recoveries of
$4.0 million, primarily related to the settlement of
non-commuted losses in the year below carried reserves and
approximately 57 commutations of assumed and ceded exposures at
less than case and LAE reserves. Of the 57 commutations
completed during 2007 for our remaining reinsurance and
insurance companies, five were among our top ten cedant
and/or
reinsured exposures. The remaining 52 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships, as well as targeting
significant individual cedant and reinsurer relationships. The
combination of the claims settlement activity in 2007, including
commutations, with the actuarial estimation of IBNR reserves
required for the remaining non-commuted exposures (which took
into account the favorable trend of loss development in 2007
related to such exposures compared to prior forecasts), resulted
in our management concluding that the loss development activity
that occurred subsequent to the prior reporting period provided
sufficient new information to warrant a reduction in IBNR
reserves of $26.3 million for our remaining insurance and
reinsurance entities in 2007.
Year
Ended December 31, 2006
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2006 was
$31.9 million, excluding the impacts of adverse foreign
exchange rate movements of $24.9 million and including both
net reduction in ultimate loss and loss adjustment expense
liabilities of $2.7 million relating to companies acquired
during the year and premium and commission adjustments triggered
by incurred losses of $1.3 million.
The net reduction in ultimate loss and loss adjustment expense
liabilities for 2006 of $31.9 million was attributable to a
reduction in estimates of net ultimate losses of
$21.4 million, a reduction in estimates of loss adjustment
expense liabilities of $15.1 million relating to 2006
run-off activity, a reduction in aggregate provisions for bad
debt of $6.3 million, resulting from the collection of
certain reinsurance receivables against which bad debt
provisions had been provided in earlier periods, partially
offset by the amortization, over the estimated payout period, of
fair value adjustments relating to companies acquired amounting
to $10.9 million.
The reduction in estimates of net ultimate losses of
$21.4 million comprised net incurred loss development of
$37.9 million offset by reductions in estimates of IBNR
reserves of $59.3 million. An increase in estimates of
ultimate losses of $3.4 million relating to one of our
insurance entities was offset by reductions in estimates of net
ultimate losses of $24.8 million in our remaining insurance
and reinsurance entities.
The incurred loss development of $37.9 million, whereby
advised case and LAE reserves of $37.4 million were settled
for net paid losses of $75.3 million, comprised incurred
loss development of $59.2 million relating to one of our
insurance companies partially offset by favorable incurred loss
development of $21.3 million relating to our remaining
insurance and reinsurance companies.
21
The incurred loss development of $59.2 million relating to
one of our insurance companies was comprised of net paid loss
settlements of $81.3 million less reductions in case and
LAE reserves of $22.1 million and resulted from the
settlement of case and LAE reserves above carried levels and
from new loss advices, partially offset by approximately ten
commutations of assumed and ceded exposures below carried
reserves levels. Actuarial analysis of the remaining unsettled
loss liabilities resulted in an increase in the estimate of IBNR
loss reserves of $35.0 million after consideration of the
$59.2 million adverse incurred loss development during the
year, and the application of the actuarial methodologies to loss
data pertaining to the remaining non-commuted exposures. Factors
contributing to the increase include the establishment of a
reserve to cover potential exposure to lead paint claims, a
significant increase in asbestos reserves related to the
entitys single largest cedant (following a detailed review
of the underlying exposures), and a change in the assumed
A&E loss reporting time-lag as discussed further below. Of
the ten commutations completed for this entity, two were among
our top ten cedant
and/or
reinsurance exposures. The remaining eight were of a smaller
size, consistent with our approach of targeting significant
numbers of cedant and reinsurer relationships as well as
targeting significant individual cedant and reinsurer
relationships. This entity also benefited from substantial stop
loss reinsurance protection whereby the loss development of
$59.2 million was largely offset by a recoverable from a
single AA- rated reinsurer. The increase in estimated net
ultimate losses of $3.4 million was retained by us.
The net favorable incurred loss development of
$21.3 million, relating to our remaining insurance and
reinsurance companies, whereby net advised case reserves of
$15.3 million were settled for net paid loss recoveries of
$6.0 million, arose from approximately 35 commutations of
assumed and ceded exposures at less than case and LAE reserves,
where receipts from ceded commutations exceeded settlements of
assumed exposures, and the settlement of non-commuted losses in
the year below carried reserves.
The net reduction in the estimate of IBNR loss and loss
adjustment expense liabilities relating to our remaining
insurance and reinsurance companies (i.e., excluding the net
$55.8 million reduction in IBNR reserves relating to the
entity referred to above) amounted to $3.5 million. This
net reduction was comprised of an increase of $19.8 million
resulting from (i) a change in assumptions as to the
appropriate loss reporting time lag for asbestos related
exposures from two to three years and for environmental
exposures from two to two and one-half years, which resulted in
an increase in net IBNR reserves of $6.4 million, and
(ii) a reduction in ceded IBNR recoverables of
$13.4 million resulting from the commutation of ceded
reinsurance protections. The increase in IBNR of
$19.8 million is offset by a reduction of
$23.3 million resulting from the application of our
reserving methodologies to (i) the reduced historical
incurred loss development information relating to remaining
exposures after the 35 commutations, and (ii) reduced
case and LAE reserves in the aggregate. Of the 35 commutations
completed during 2006 for the remaining of our reinsurance and
insurance companies, ten were among our top ten cedant
and/or
reinsurance exposures. The remaining 25 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships as well as targeting
significant individual cedant and reinsurer relationships.
Asbestos
and Environmental (A&E) Exposure
General
A&E Exposures
A number of our subsidiaries wrote general liability policies
and reinsurance prior to our acquisition of them under which
policyholders continue to present asbestos-related injury claims
and claims alleging injury, damage or
clean-up
costs arising from environmental pollution. These policies, and
the associated claims, are referred to as A&E exposures.
The vast majority of these claims are presented under policies
written many years ago.
There is a great deal of uncertainty surrounding A&E
claims. This uncertainty impacts the ability of insurers and
reinsurers to estimate the ultimate amount of unpaid claims and
related LAE. The majority of these claims differ from any other
type of claim because there is inadequate loss development and
there is significant uncertainty regarding what, if any,
coverage exists, to which, if any, policy years claims are
attributable and which, if any, insurers/reinsurers may be
liable. These uncertainties are exacerbated by lack of clear
judicial precedent and legislative interpretations of coverage
that may be inconsistent with the intent of the parties to the
insurance contracts and expand theories of liability. The
insurance and reinsurance industry as a whole is engaged in
extensive
22
litigation over these coverage and liability issues and is,
thus, confronted with continuing uncertainty in its efforts to
quantify A&E exposures.
Our A&E exposure is administered out of our offices in the
United Kingdom and Rhode Island and centrally administered from
the United Kingdom. In light of the intensive claim settlement
process for these claims, which involves comprehensive fact
gathering and subject matter expertise, our management believes
that it is prudent to have a centrally administered claim
facility to handle A&E claims on behalf of all of our
subsidiaries. Our A&E claims staff, working in conjunction
with two
U.S.-qualified
attorneys experienced in A&E liabilities, proactively
administers, on a cost-effective basis, the A&E claims
submitted to our insurance and reinsurance subsidiaries.
We use industry benchmarking methodologies to estimate
appropriate IBNR reserves for our A&E exposures. These
methods are based on comparisons of our loss experience on
A&E exposures relative to industry loss experience on
A&E exposures. Estimates of IBNR are derived separately for
each relevant subsidiary of ours and, for some subsidiaries,
separately for distinct portfolios of exposure. The discussion
that follows describes, in greater detail, the primary actuarial
methodologies used by our independent actuaries to estimate IBNR
for A&E exposures.
In addition to the specific considerations for each method
described below, many general factors are considered in the
application of the methods and the interpretation of results for
each portfolio of exposures. These factors include the mix of
product types (e.g. primary insurance versus reinsurance of
primary versus reinsurance of reinsurance), the average
attachment point of coverages (e.g. first-dollar primary versus
umbrella over primary versus high-excess), payment and reporting
lags related to the international domicile of our subsidiaries,
payment and reporting pattern acceleration due to large
wholesale settlements (e.g. policy buy-backs and
commutations) pursued by us, lists of individual risks remaining
and general trends within the legal and tort environments.
1. Paid Survival Ratio Method. In this
method, our expected annual average payment amount is multiplied
by an expected future number of payment years to get an
indicated reserve. Our historical calendar year payments are
examined to determine an expected future annual average payment
amount. This amount is multiplied by an expected number of
future payment years to estimate a reserve. Trends in calendar
year payment activity are considered when selecting an expected
future annual average payment amount. Accepted industry
benchmarks are used in determining an expected number of future
payment years. Each year, annual payments data is updated,
trends in payments are re-evaluated and changes to benchmark
future payment years are reviewed. This method has advantages of
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. 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. 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
which 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, which multiplies the ratio of
23
estimated industry reserves to industry losses paid during a
recent period of time (e.g. 5 years) times our paid losses
during that period.
4. IBNR:Case Ratio Method. In this
method, the ratio of estimated industry IBNR reserves to
industry case reserves is multiplied by our case reserves to
estimate our IBNR reserves. Specific considerations in the
application of this method include the presence of policies
reserved at policy limits, changes in overall industry case
reserve adequacy and recent loss reporting history for us. Each
year, our case reserves are updated, industry reserves are
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.
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.
Under the Paid Survival Ratio Method, the Paid Market Share
Method and the
Reserve-to-Paid
Method, we first determine the estimated total reserve and then
deduct the reported outstanding case reserves to arrive at an
estimated IBNR reserve. The IBNR:Case Ratio Method first
determines an estimated IBNR reserve which is then added to the
advised outstanding case reserves to arrive at an estimated
total loss reserve. The
Ultimate-to-Incurred
Method first determines an estimate of the ultimate losses to be
paid and then deducts
paid-to-date
losses to arrive at an estimated total loss reserve and then
deducts outstanding case reserves to arrive at the estimated
IBNR reserve.
Within the annual loss reserve studies produced by our external
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 (e.g. asbestos, environmental,
casualty and property) and lines of business written (e.g.
marine, aviation and 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 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.
As of December 31, 2010, we had 35 separate insurance
and/or
reinsurance subsidiaries whose reserves are categorized into
approximately 276 reserve categories in total, including
40 distinct asbestos reserving categories and
27 distinct environmental reserving categories.
To the extent data availability allows, the five methodologies
described above are applied for each of the 40 asbestos
reserving categories and each of the 27 environmental
reserving categories. As is common in actuarial practice, no one
methodology is exclusively or consistently relied upon when
selecting a recorded reserve. Consistent reliance on a single
methodology to select a recorded reserve would be inappropriate
in light of the dynamic nature of both the A&E liabilities
in general, and our actual exposure portfolios in particular.
In selecting a recorded reserve, our management considers the
range of results produced by the methods, and the strengths and
weaknesses of the methods in relation to the data available and
the specific characteristics of the portfolio under
consideration. Trends in both our data and industry data are
also considered in the reserve selection process. Recent trends
or changes in the relevant tort and legal environments are also
considered when assessing methodology results and selecting an
appropriate recorded reserve amount for each portfolio.
24
The liability for unpaid losses and LAE, inclusive of A&E
reserves, reflects our best estimate for future amounts needed
to pay losses and related LAE as of each of the balance sheet
dates reflected in the financial statements herein in accordance
with U.S. GAAP. As of December 31, 2010, we had net loss
reserves of $640.1 million for asbestos-related claims and
$96.1 million for environmental pollution-related claims.
The following table provides a reconciliation of our gross and
net loss and ALAE reserves from A&E exposures and the
movement in gross and net reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Provisions for A&E claims and ALAE at January 1
|
|
$
|
750,972
|
|
|
$
|
667,632
|
|
|
$
|
943,970
|
|
|
$
|
846,421
|
|
|
$
|
677,610
|
|
|
$
|
419,977
|
|
A&E losses and ALAE incurred during the year
|
|
|
(71,302
|
)
|
|
|
(78,801
|
)
|
|
|
(51,612
|
)
|
|
|
(78,756
|
)
|
|
|
(54,337
|
)
|
|
|
(14,448
|
)
|
A&E losses and ALAE paid during the year
|
|
|
(101,917
|
)
|
|
|
(67,756
|
)
|
|
|
(158,391
|
)
|
|
|
(115,479
|
)
|
|
|
(58,916
|
)
|
|
|
108,583
|
|
Provision for A&E claims and ALAE acquired during the year
|
|
|
247,459
|
|
|
|
215,097
|
|
|
|
17,005
|
|
|
|
15,446
|
|
|
|
379,613
|
|
|
|
332,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for A&E claims and ALAE at December 31
|
|
$
|
825,212
|
|
|
$
|
736,172
|
|
|
$
|
750,972
|
|
|
$
|
667,632
|
|
|
$
|
943,970
|
|
|
$
|
846,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010 and 2009, excluding the impact of loss reserves
acquired during the year, our reserves for A&E liabilities
decreased by $173.2 million and $210.0 million on a
gross basis and by $146.6 million and $194.2 million
on a net basis, respectively. The reductions in gross reserves
arose from paid claims, successful commutations, policy
buy-backs, generally favorable claim settlements during the year
and reductions in IBNR resulting from actuarial analysis of
remaining liabilities.
During 2008, excluding the impact of loss reserves acquired
during the year, our reserves for A&E liabilities decreased
by $113.3 million on a gross basis and increased by
$94.1 million on a net basis. The reduction in gross
reserves arose from paid claims, successful commutations, policy
buy-backs, generally favorable claim settlements during the year
and a reduction in IBNR resulting from actuarial analysis of
remaining liabilities. The increase in net reserves arose as a
result of (i) the commutation of a substantial stop loss
protection in one of our reinsurance entities which had the
effect of reducing ceded A&E IBNR recoverable by
$163.4 million; partially offset by (ii) a reduction
in net reserves of $69.3 million which arose from
successful commutations, policy buy-backs, generally favorable
claims settlements and a reduction in IBNR resulting from
actuarial analysis of remaining net liabilities. This
commutation, which settled for a total amount receivable of
$190.0 million (including $163.4 million related to
A&E IBNR recoverable), resulted in net A&E losses and
ALAE recovered during the year of $108.6 million.
Asbestos continues to be the most significant and difficult mass
tort for the insurance industry in terms of claims volume and
expense. We believe that the insurance industry has been
adversely affected by judicial interpretations that have had the
effect of maximizing insurance recoveries for asbestos claims,
from both a coverage and liability perspective. Generally, only
policies underwritten prior to 1986 have potential asbestos
exposure, since most policies underwritten after this date
contain an absolute asbestos exclusion.
From 2001 through 2003 the industry experienced increasing
numbers of asbestos claims, including claims from individuals
who did not appear to be impaired by asbestos exposure. Since
2003, however, new claim filings have been fairly stable. It is
possible that the increases observed in the early part of the
decade were triggered by various state tort reforms (discussed
immediately below). At this point, we cannot predict whether
claim filings will return to pre-2004 levels, remain stable, or
begin to decrease.
25
Since 2001, several U.S. states have proposed, and in many
cases enacted, tort reform statutes that impact asbestos
litigation by, for example, making it more difficult for a
diverse group of plaintiffs to jointly file a single case,
reducing forum-shopping by requiring that a
potential plaintiff must have been exposed to asbestos in the
state in which
he/she files
a lawsuit, or permitting consolidation of discovery. These
statutes typically apply to suits filed after a stated date.
When a statute is proposed or enacted, asbestos defendants often
experience a marked increase in new lawsuits, as
plaintiffs attorneys seek to file suit before the
effective date of the legislation. Some of this increased claim
volume likely represents an acceleration of valid claims that
would have been brought in the future, while some claims will
likely prove to have little or no merit. As many of these claims
are still pending, we cannot predict what portion of the
increased number of claims represent valid claims. Also, the
acceleration of claims increases the uncertainty surrounding
projections of future claims in the affected jurisdictions.
During the same timeframe as tort reform, the U.S. federal
and various U.S. state governments sought comprehensive
asbestos reform to manage the growing court docket and costs
surrounding asbestos litigation, in addition to the increasing
number of corporate bankruptcies resulting from overwhelming
asbestos liabilities. Whereas the federal government has failed
to establish a national asbestos trust fund to address the
asbestos problem, several states, including Texas and Florida,
have implemented a medical criteria reform approach that only
permits litigation to proceed when a plaintiff can establish and
demonstrate actual physical impairment.
Much like tort reform, asbestos litigation reform has also
spurred a significant increase in the number of lawsuits filed
in advance of the laws enactment. We cannot predict
whether the drop off in the number of filed claims is due to the
accelerated number of filings or an actual trend decline in
alleged asbestos injuries.
Environmental
Pollution Exposures
Environmental pollution claims represent another significant
exposure for us. However, environmental pollution claims have
been developing as expected over the past few years as a result
of stable claim trends. Claims against Fortune
500 companies are generally declining, and while insureds
with single-site exposures are still active, in many cases
claims are being settled for less than initially anticipated due
to improved site remediation technology and effective policy
buy-backs.
Despite the stability of recent trends, there remains
significant uncertainty involved in estimating liabilities
related to these exposures. Unlike asbestos claims which are
generated primarily from allegedly injured private individuals,
environmental claims generally result from governmentally
initiated activities. First, the number of waste sites subject
to cleanup is unknown. Approximately 1,282 sites are included on
the National Priorities List (NPL) of the United States
Environmental Protection Agency as of the most recent rulemaking
dated September 30, 2010, an increase of 12 sites from the
prior year. State authorities have separately identified many
additional sites and, at times, aggressively implement site
cleanups. Second, the liabilities of the insureds themselves are
difficult to estimate. At any given site, the allocation of
remediation cost among the potentially responsible parties
varies greatly depending upon a variety of factors. Third, as
with asbestos liability and coverage issues, judicial precedent
regarding liability and coverage issues regarding pollution
claims does not provide clear guidance. There is also
uncertainty as to the U.S. federal Superfund
law itself and, at this time, we cannot predict what, if any,
reforms to this law might be enacted by the U.S. federal
government, or the effect of any such changes on the insurance
industry.
Other
Latent Exposures
While we do not view health hazard exposures such as silica and
tobacco as becoming a material concern, recent developments in
lead litigation have caused us to watch these matters closely.
Recently, municipal and state governments have had success,
using a public nuisance theory, pursuing the former makers of
lead pigment for the abatement of lead paint in certain home
dwellings. As lead paint was used almost exclusively into the
early 1970s, large numbers of old housing stock contain
lead paint that can prove hazardous to people and, particularly,
children. Although governmental success has been limited thus
far, we continue to monitor developments carefully due to the
size of the potential awards sought by plaintiffs. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies Latent Claims on
page 73 for a further discussion of recent lead paint
developments.
26
Investments
Investment
Strategy and Guidelines
We derive a significant portion of our income from our invested
assets. As a result, our operating results depend in part on the
performance of our investment portfolio. Because of the
unpredictable nature of losses that may arise under our
insurance and reinsurance subsidiaries insurance or
reinsurance policies and as a result of our opportunistic
commutation strategy, our liquidity needs can be substantial and
may arise at any time. Except for that portion of our portfolio
that is invested in non-investment grade securities, we
generally follow a conservative investment strategy designed to
emphasize the preservation of our invested assets and provide
sufficient liquidity for the prompt payment of claims and
settlement of commutation payments.
As of December 31, 2010, we had cash and cash equivalents
of $1.46 billion. Our cash and cash equivalent portfolio is
comprised mainly of high-grade fixed deposits, commercial paper
with maturities of less than three months and money market funds.
Our investment portfolio consists primarily of investment
grade-rated, liquid, fixed-maturity securities of
short-to-medium
term duration along with mutual funds 87.6% of our
total investment portfolio as of December 31, 2010
consisted of investment grade securities, as compared to 92.4%
as of December 31, 2009. In addition, our non-investment
grade securities, excluding bond funds included as part of other
investments, comprised 8.2% and 7.6% of our total investment
portfolio, as at December 31, 2010 and 2009, respectively,
and consisted of exposures to equities, limited partnerships and
limited liability companies, collectively private equities,
fixed maturity securities and bond and hedge funds. Assuming the
commitments to the other investments were fully funded as of
December 31, 2010 out of cash balances on hand at that
time, the percentage of investments held in other than
investment grade securities would increase to 11.0%. As of
December 31, 2009, the increase would have been to 13.0%.
We strive to structure our investments in a manner that
recognizes our liquidity needs for future liabilities. In that
regard, we attempt to correlate the maturity and duration of our
investment portfolio to our general liability profile. If our
liquidity needs or general liability profile unexpectedly
change, we may not continue to structure our investment
portfolio in its current manner and would adjust as necessary to
meet new business needs.
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. A
significant increase in interest rates could result in
significant losses, realized or unrealized, in the value of our
investment portfolio. A significant 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.
Investment
Committee and Investment Manager
The investment committee of our board of directors supervises
our investment activity. The investment committee regularly
monitors our overall investment results, which it ultimately
reports to the board of directors. Our investment committee is
comprised of Robert J. Campbell, a member of our board of
directors and the chairman of the committee, Richard J. Harris,
our Chief Financial Officer, and, as of August 4, 2010, J.
Christopher Flowers and Charles T. Akre, Jr., both members of
our board of directors. John J. Oros served on the investment
committee until his resignation as our Executive Chairman and a
member of our board of directors on August 20, 2010. The
investment committee met five times during the year ended
December 31, 2010 in conjunction with our regularly
scheduled board of directors meetings. The committee made the
following major decisions during the year: (i) approved
increased allocations to equities and structured credit
securities; (ii) approved increased allocation from cash
into short duration securities, predominantly corporate and
non-U.S. government
securities; and (iii) ensured that the investment portfolio
of each entity we acquired during the year met our investment
criteria in regards to duration and ratings.
27
As stated in Investment Strategy and
Guidelines above, we generally follow a conservative
investment strategy designed to emphasize the preservation of
our invested assets and provide sufficient liquidity for the
prompt payment of claims and settlement of commutation payments.
Our investment portfolio consists primarily of investment
grade-rated, liquid, fixed-maturity securities of
short-to-medium
duration and mutual funds. As of December 31, 2010, only
5.7% of our total investment portfolio was classified as
Level 3 as defined in the Fair Value Measurements and
Disclosure topic of the Financial Accounting Standards Board
Accounting Standards Codification, or FASB ASC. Given our
investment objectives, the composition of our current investment
portfolio, and our business strategy to acquire insurance and
reinsurance companies in run-off, our investment
committees efforts tend to be focused on the structural
issues surrounding acquired portfolios. While the investment
committee does review the ongoing performance of our investment
portfolio, we have not experienced significant widespread
liquidity or pricing issues with our portfolio that would
require meaningful review by the committee.
We utilize various companies to provide investment advisory
and/or
management services. We have agreed to pay investment management
fees to the managers. These fees, which vary depending on the
amount of assets under management, are included in net
investment income. The total fees we paid to our investment
managers for the year ended December 31, 2010 were
$1.7 million, including approximately $0.4 million to
our largest single investment manager. We have investment
management agreements with all of our managers, however, none of
them are material to us.
Investment
Portfolio
Accounting
Treatment
Our investments primarily consist of fixed maturity securities.
Our fixed maturity investments are comprised of
available-for-sale
and trading investments as defined in the Investment
Debt and Equity Securities topic of FASB ASC.
Available-for-sale
and trading investments are carried at their fair value on the
balance sheet date. Unrealized holdings gains and losses on
trading investments, which represent the difference between the
amortized cost and the fair market value of securities, are
included in our net earnings and are reported as net realized
and unrealized gains and losses. Unrealized gains and losses on
available-for-sale
securities are recognized as part of other comprehensive income.
Composition
as of December 31, 2010 and 2009
As of December 31, 2010 and 2009, the fair value of our
aggregate invested assets totaled approximately
$3.88 billion and $3.34 billion, respectively.
Aggregate invested assets included cash and cash equivalents,
restricted cash and cash equivalents, fixed maturity securities,
equities, short-term investments and other investments.
28
The following table shows the types of securities in our
portfolio, including cash equivalents, and their fair market
values as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Fair Value
|
|
|
% of Total Fair Value
|
|
|
Fair Value
|
|
|
% of Total Fair Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Cash and cash equivalents (1)
|
|
$
|
1,455,354
|
|
|
|
37.5
|
%
|
|
$
|
1,700,105
|
|
|
|
50.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
|
|
227,803
|
|
|
|
5.9
|
%
|
|
|
242,395
|
|
|
|
7.3
|
%
|
Non-U.S.
government
|
|
|
386,866
|
|
|
|
10.0
|
%
|
|
|
316,630
|
|
|
|
9.5
|
%
|
Corporate
|
|
|
1,347,384
|
|
|
|
34.7
|
%
|
|
|
881,692
|
|
|
|
26.4
|
%
|
Municipal
|
|
|
2,297
|
|
|
|
0.1
|
%
|
|
|
9,654
|
|
|
|
0.3
|
%
|
Residential mortgage-backed
|
|
|
102,506
|
|
|
|
2.6
|
%
|
|
|
17,644
|
|
|
|
0.5
|
%
|
Commercial mortgage-backed
|
|
|
38,841
|
|
|
|
1.0
|
%
|
|
|
30,409
|
|
|
|
0.9
|
%
|
Asset backed
|
|
|
28,613
|
|
|
|
0.7
|
%
|
|
|
33,991
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
2,134,310
|
|
|
|
55.0
|
%
|
|
|
1,532,415
|
|
|
|
45.9
|
%
|
Other investments
|
|
|
234,714
|
|
|
|
6.0
|
%
|
|
|
81,801
|
|
|
|
2.5
|
%
|
Equities
|
|
|
60,082
|
|
|
|
1.5
|
%
|
|
|
24,503
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
2,429,106
|
|
|
|
62.5
|
%
|
|
|
1,638,719
|
|
|
|
49.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
$
|
3,884,460
|
|
|
|
100.0
|
%
|
|
$
|
3,338,824
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes restricted cash and cash equivalents of
$656.2 million and $433.7 million as of
December 31, 2010 and 2009, respectively. |
U.S.
Government and Agency Securities
U.S. government and agency securities are comprised
primarily of bonds issued by the U.S. Treasury, the Federal
Home Loan Bank, the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association.
Non-U.S.
Government Securities
Non-U.S. government
securities represent the fixed maturity obligations of
non-U.S. governmental
entities. These are comprised primarily of bonds issued by the
Australian, United Kingdom, French, Canadian and German
governments.
Corporate
Securities
Corporate securities are comprised of bonds issued by
corporations that are diversified across a wide range of issuers
and industries. The largest single issuer of corporate
securities in our portfolio as of December 31, 2010 was
National Australia Bank, which represented 5.3% of our total
cash and investments and had a credit rating of AA.
Other
Investments
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Private equities
|
|
$
|
104,109
|
|
|
$
|
77,359
|
|
Bond funds
|
|
|
102,279
|
|
|
|
|
|
Hedge fund
|
|
|
22,037
|
|
|
|
|
|
Other
|
|
|
6,289
|
|
|
|
4,442
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
234,714
|
|
|
$
|
81,801
|
|
|
|
|
|
|
|
|
|
|
29
In December 2005, we invested in New NIB, a Province of Alberta
limited partnership, in exchange for an approximately 1.6%
limited partnership interest. New NIB was formed for the purpose
of purchasing, together with certain affiliated entities, 100%
of the outstanding share capital of NIBC. J. Christopher
Flowers, a member of our board of directors and one of our
largest shareholders, is a director of New NIB. Certain
affiliates of J.C. Flowers I L.P., which is a private investment
fund formed and managed by J.C. Flowers & Co. LLC, of
which Mr. Flowers is its Chairman and Chief Executive
Officer, and Mr. Oros, who was our Executive Chairman and a
member of our board of directors until his resignation on
August 20, 2010, is a managing director, also participated
in the acquisition of NIBC. Certain of our officers and
directors made personal investments in New NIB.
We own a non-voting 7.0% membership interest in Affirmative
Investment LLC, or Affirmative. J.C. Flowers I L.P. owns the
remaining 93.0% interest in Affirmative. Affirmative and its
affiliates own approximately 51.0% of the outstanding stock of
Affirmative Insurance Holdings, a publicly traded company.
We have a capital commitment of up to $10.0 million in the
GSC European Mezzanine Fund II, LP, or GSC. GSC invests in
mezzanine securities of middle and large market companies
throughout Western Europe. As of December 31, 2010, the
capital contributed to GSC was $9.9 million, with the
remaining commitment being $0.1 million.
In 2006, we committed to invest up to $100.0 million in the
Flowers Fund. As of December 31, 2010, the capital
contributed to the Flowers Fund was $97.1 million, with the
remaining commitment being approximately $2.9 million.
During 2010, we received $0.3 million in advisory service
fees from the Flowers Fund. Certain of our officers and
directors made personal investments in the Flowers Fund.
During 2008, we committed to invest up to $100.0 million in
J.C. Flowers III L.P., or Fund III. As of
December 31, 2010, the capital contributed to Fund III
was $18.3 million, with the remaining commitment being
$81.7 million. Fund III is a private investment fund
advised by J.C. Flowers & Co. LLC.
On January 28, 2009, we invested approximately
$8.7 million in JCF III Co-invest I L.P., an entity
affiliated with J.C. Flowers & Co. LLC and
Messrs. Flowers and Oros, in connection with its investment
in certain of the operations, assets and liabilities of OneWest
Bank FSB (formerly known as IndyMac Bank, F.S.B).
We had, as of December 31, 2010 and 2009, excluding our
investment in Varadero International Ltd., or Varadero,
investments in entities affiliated with Messers. Flowers and
Oros with a total value of $96.1 million and
$76.1 million, respectively, and outstanding commitments to
entities managed by Messers. Flowers and Oros, for the same
periods, of $84.6 million and $98.1 million,
respectively. Our outstanding commitments may be drawn down over
approximately the next five years. As at December 31, 2010,
our related party investments associated with
Messrs. Flowers and Oros accounted for 99.9% of our total
unfunded capital commitments and 50.3% of our total amount of
investments classified as other investments.
In March 2010, we committed to invest $20.0 million in
Varadero, a hedge fund. The investment manager of Varadero is
Varadero Capital, L.P., of which Varadero GP, LLC is the general
partner. As at December 31, 2010, we had funded 100% of our
capital commitment. Both the investment manager and general
partner are partially owned by an entity affiliated with us and
Messrs. Flowers and Oros.
During 2010, we made investments of approximately
$85.4 million in various bond funds.
Equities
During 2007, we funded two equity portfolios that invest in both
small and large market capitalization publicly traded
U.S. companies. In 2009, we increased funding to those
portfolios along with adding a third equity portfolio. In 2010,
we further increased the funding of these equity portfolios. The
equity portfolios are actively managed by two third-party
managers.
30
Ratings
as of December 31, 2010 and 2009
The investment ratings (provided by major rating agencies) for
our fixed maturity securities held as of December 31, 2010
and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Fair Value
|
|
|
% of Total Fair Value
|
|
|
Fair Value
|
|
|
% of Total Fair Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
AAA
|
|
$
|
812,407
|
|
|
|
38.1
|
%
|
|
$
|
719,622
|
|
|
|
47.0
|
%
|
AA
|
|
|
450,802
|
|
|
|
21.1
|
%
|
|
|
283,418
|
|
|
|
18.5
|
%
|
A
|
|
|
741,761
|
|
|
|
34.8
|
%
|
|
|
424,841
|
|
|
|
27.7
|
%
|
BBB or lower
|
|
|
122,257
|
|
|
|
5.7
|
%
|
|
|
85,696
|
|
|
|
5.6
|
%
|
Not Rated
|
|
|
7,083
|
|
|
|
0.3
|
%
|
|
|
18,838
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,134,310
|
|
|
|
100.0
|
%
|
|
$
|
1,532,415
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
Distribution as of December 31, 2010 and 2009
The maturity distribution for our fixed maturity securities held
as of December 31, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Due in one year or less
|
|
$
|
966,319
|
|
|
|
45.3
|
%
|
|
$
|
639,191
|
|
|
|
41.7
|
%
|
Due after one year through five years
|
|
|
940,017
|
|
|
|
44.0
|
%
|
|
|
680,630
|
|
|
|
44.4
|
%
|
Due after five years through ten years
|
|
|
47,627
|
|
|
|
2.2
|
%
|
|
|
101,868
|
|
|
|
6.6
|
%
|
Due after ten years
|
|
|
10,387
|
|
|
|
0.5
|
%
|
|
|
28,682
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,964,350
|
|
|
|
92.0
|
%
|
|
|
1,450,371
|
|
|
|
94.6
|
%
|
Residential mortgage-backed
|
|
|
102,506
|
|
|
|
4.8
|
%
|
|
|
17,644
|
|
|
|
1.2
|
%
|
Commercial mortgage-backed
|
|
|
38,841
|
|
|
|
1.8
|
%
|
|
|
30,409
|
|
|
|
2.0
|
%
|
Asset backed
|
|
|
28,613
|
|
|
|
1.4
|
%
|
|
|
33,991
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,134,310
|
|
|
|
100.0
|
%
|
|
$
|
1,532,415
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Losses as of December 31, 2010 and 2009
The unrealized losses for our fixed maturity
available-for-sale
securities held as of December 31, 2010 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
% of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
% of
|
|
|
|
Value
|
|
|
Losses
|
|
|
Total Fair Value
|
|
|
Value
|
|
|
Losses
|
|
|
Total Fair Value
|
|
|
U.S. government and agency
|
|
$
|
23,777
|
|
|
$
|
(92
|
)
|
|
|
10.9%
|
|
|
$
|
782
|
|
|
$
|
(13
|
)
|
|
|
4.5%
|
|
Non-U.S.
government
|
|
|
38,838
|
|
|
|
(314
|
)
|
|
|
17.8%
|
|
|
|
|
|
|
|
|
|
|
|
0.0%
|
|
Corporate
|
|
|
129,774
|
|
|
|
(1,615
|
)
|
|
|
59.3%
|
|
|
|
16,242
|
|
|
|
(867
|
)
|
|
|
93.4%
|
|
Residential mortgage-backed
|
|
|
13,642
|
|
|
|
(234
|
)
|
|
|
6.2%
|
|
|
|
369
|
|
|
|
(160
|
)
|
|
|
2.1%
|
|
Commercial mortgage-backed
|
|
|
2,046
|
|
|
|
(11
|
)
|
|
|
0.9%
|
|
|
|
|
|
|
|
|
|
|
|
0.0%
|
|
Asset backed
|
|
|
10,641
|
|
|
|
(346
|
)
|
|
|
4.9%
|
|
|
|
|
|
|
|
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
investments
|
|
$
|
218,718
|
|
|
|
(2,612
|
)
|
|
|
100.0%
|
|
|
$
|
17,393
|
|
|
$
|
(1,040
|
)
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Investment
Returns for the Years ended December 31, 2010 and
2009
Our investment returns for the years ended December 31,
2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Net investment income
|
|
$
|
99,906
|
|
|
$
|
81,371
|
|
Net realized and unrealized gains (losses)
|
|
|
13,137
|
|
|
|
4,237
|
|
|
|
|
|
|
|
|
|
|
Net investment income and net realized and unrealized gains
(losses)
|
|
$
|
113,043
|
|
|
$
|
85,608
|
|
|
|
|
|
|
|
|
|
|
Effective annualized yield (1)
|
|
|
2.38
|
%
|
|
|
2.13
|
%
|
|
|
|
(1) |
|
Effective annualized yield is calculated by dividing net
investment income, excluding writedowns and income on other
investments, by the average balance of aggregate cash and cash
equivalents, equities and fixed maturity securities on a
carrying value basis. Trading securities where the investment
return is for the benefit of insureds and reinsurers are
excluded from the calculation. |
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. We have a
significant presence in Bermuda, the United Kingdom, Australia
and the United States and are subject to extensive regulation
under the applicable statutes in these countries. A summary of
the regulations governing us in these countries is set forth
below.
Bermuda
As a holding company, we are not subject to Bermuda insurance
regulations. However, the Insurance Act 1978 of Bermuda and
related regulations, as amended, or, together, the Insurance
Act, regulate the insurance business of our operating
subsidiaries in Bermuda and provide that no person may carry on
any insurance business in or from within Bermuda unless
registered as an insurer by the Bermuda Monetary Authority, or
BMA, under the Insurance Act. Insurance as well as reinsurance
is regulated under the Insurance Act.
The Insurance Act also imposes on Bermuda insurance companies
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. Certain
significant aspects of the Bermuda insurance regulatory
framework are set forth below.
Classification of Insurers. The Insurance Act
distinguishes between insurers carrying on long-term business
and insurers carrying on general business. There are six
classifications of insurers carrying on general business, with
Class 4 insurers subject to the strictest regulation. Our
regulated Bermuda subsidiaries, which are incorporated to carry
on general insurance and reinsurance business, are registered as
Class 2 or 3A insurers in Bermuda and are regulated as such
under the Insurance Act. These regulated Bermuda subsidiaries
are not licensed to carry on long-term business. Long-term
business broadly includes life insurance and disability
insurance with terms in excess of five years. General business
broadly includes all types of insurance that are not long-term
business.
Principal Representative. An insurer is
required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For
the purpose of the Insurance Act, each of our regulated Bermuda
subsidiaries principal offices is at Windsor Place,
3rd Floor, 18 Queen Street, in Hamilton, Bermuda, and each
of their principal representatives is Enstar Limited. Without a
reason acceptable to the BMA, an insurer may not terminate the
appointment of its principal representative, and the principal
representative may not cease to act in that capacity, unless
30 days notice in writing is given to the BMA. It is
the duty of the principal representative, forthwith on reaching
the view that there is a likelihood that the insurer will become
insolvent or that a reportable event has, to the
principal representatives knowledge, occurred or is
believed to have occurred, to notify the BMA and, within
14 days of such notification, to make a report in writing
to the BMA setting forth all the particulars
32.1
of the case that are available to the principal representative.
For example, any failure by the insurer to comply substantially
with a condition imposed upon the insurer by the BMA relating to
a solvency margin or a liquidity or other ratio would be a
reportable event.
Independent Approved Auditor. Every registered
insurer must appoint an independent auditor who will audit and
report annually on the statutory financial statements and the
statutory financial return of the insurer, both of which, in the
case of our regulated Bermuda subsidiaries, are required to be
filed annually with the BMA. The independent auditor must be
approved by the BMA and may be the same person or firm that
audits our consolidated financial statements and reports for
presentation to our shareholders. Our regulated Bermuda
subsidiaries independent auditor is Deloitte &
Touche, who also audits our consolidated financial statements.
Loss Reserve Specialist. As a registered
Class 2 or 3A insurer, each of our regulated Bermuda
insurance and reinsurance subsidiaries is required, every year,
to submit an opinion of its approved loss reserve specialist
with its statutory financial return in respect of its losses and
loss expenses provisions. The loss reserve specialist, who will
normally be a qualified casualty actuary, must be approved by
the BMA.
Statutory Financial Statements. Each of our
regulated Bermuda subsidiaries must prepare annual statutory
financial statements. The Insurance Act prescribes rules for the
preparation and substance of the statutory financial statements,
which include, in statutory form, a balance sheet, an income
statement, a statement of capital and surplus and notes thereto.
Each of our regulated Bermuda subsidiaries is required to give
detailed information and analyses regarding premiums, claims,
reinsurance and investments. The statutory financial statements
are not prepared in accordance with U.S. GAAP and are
distinct from the financial statements prepared for presentation
to an insurers shareholders under the Companies Act. As a
general business insurer, each of our regulated Bermuda
subsidiaries is required to submit to the BMA the annual
statutory financial statements as part of the annual statutory
financial return. The statutory financial statements and the
statutory financial return do not form part of the public
records maintained by the BMA.
Annual Statutory Financial Return. Each of our
regulated insurance and reinsurance subsidiaries is required to
file with the BMA a statutory financial return no later than six
months, in the case of a Class 2, or four months in the
case of a Class 3A, after its fiscal year end unless
specifically extended upon application to the BMA. The statutory
financial return for an insurer includes, among other matters, a
report of the approved independent auditor on the statutory
financial statements of the insurer, solvency certificates,
declaration of statutory ratios, the statutory financial
statements, and the opinion of the loss reserve specialist. The
solvency certificates must be signed by the principal
representative and at least two directors of the insurer
certifying that the minimum solvency margin has been met and
whether the insurer has complied with the conditions attached to
its certificate of registration. The independent approved
auditor is required to state whether, in its opinion, it was
reasonable for the directors to make these certifications. If an
insurers accounts have been audited for any purpose other
than compliance with the Insurance Act, a statement to that
effect must be filed with the statutory financial return.
Further, every Class 2 insurer must submit a Loss Reserve
Specialist Opinion on a triennial basis, while Class 3A
insurers must submit annually. Additionally, all Class 3A
insurers are required to submit a Schedule of Ceded Reinsurance
pursuant to the Insurance Act.
Minimum Liquidity Ratio. The Insurance Act
provides a minimum liquidity ratio for general business
insurers, like our regulated Bermuda insurance and reinsurance
subsidiaries. An insurer engaged in general business is required
to maintain the value of its relevant assets at not less than
75% of the amount of its relevant liabilities. Relevant assets
include, but are not limited to, cash and time deposits, quoted
investments, unquoted bonds and debentures, first liens on real
estate, investment income due and accrued, accounts and premiums
receivable and reinsurance balances receivable. There are some
categories of assets that unless specifically permitted by the
BMA, do not automatically qualify as relevant assets, such as
unquoted equity securities, investments in and advances to
affiliates and real estate and collateral loans. Relevant
liabilities are total general business insurance reserves and
total other liabilities less deferred income tax and sundry
liabilities (i.e., liabilities that are not otherwise
specifically defined).
Minimum Solvency Margin, Enhanced Capital Requirement and
Restrictions on Dividends and
Distributions. Under the Insurance Act, the value
of the general business assets of a Class 2 or 3A insurer,
such as our regulated Bermuda subsidiaries, must exceed the
amount of its general business liabilities by an amount greater
than the
33
prescribed minimum solvency margin. Each of our regulated
Bermuda subsidiaries is required, with respect to its general
business, to maintain a minimum solvency margin equal to the
greatest of:
For Class 2 insurers:
|
|
|
|
|
$250,000;
|
|
|
|
20% of net premiums written (being gross premiums written less
any premiums ceded by the insurer) if net premiums do not exceed
$6,000,000 or $1,200,000 plus 10% of net premiums written in
excess of $6,000,000; and
|
|
|
|
10% of net losses and loss expense reserves.
|
For Class 3A insurers:
|
|
|
|
|
$1,000,000;
|
|
|
|
20% of net premiums written (being gross premiums written less
any premiums ceded by the insurer) if net premiums do not exceed
$6,000,000 or $1,200,000 plus 15% of net premiums written in
excess of $6,000,000; and
|
|
|
|
15% of net losses and loss expense reserves.
|
After the year ended December 31, 2011, Class 3A
insurers will be required to maintain available statutory
capital and surplus in an amount that is equal to or exceeds the
target capital levels based on Enhanced Capital Requirements, or
ECR, calculated using the Bermuda Solvency Capital Requirement,
or BSCR, model. The BSCR model is a risk based capital model
introduced by the BMA that measures risk and determines enhanced
capital requirements and a target capital level (defined as 120%
of the enhanced capital requirement) based on the
subsidiarys statutory financial statements. Each of our
regulated Bermuda insurance and reinsurance subsidiaries is
prohibited from declaring or paying any dividends during any
fiscal year if it is in breach of its minimum solvency margin or
minimum liquidity ratio or if the declaration or payment of such
dividends would cause it to fail to meet such margin or ratio.
If the subsidiary has failed to meet its minimum solvency margin
or minimum liquidity ratio on the last day of any fiscal year,
each of our regulated Bermuda subsidiaries will be prohibited,
without the approval of the BMA, from declaring or paying any
dividends during the next fiscal year. In addition, once a
Class 3A insurer is required to meet the ECR, if it is in
breach of its ECR, it will be prohibited from declaring or
paying dividends until it rectifies that breach.
Each of our regulated Bermuda insurance and reinsurance
subsidiaries is prohibited, without the approval of the BMA,
from reducing by 15% or more its total statutory capital as set
out in its previous years financial statements.
Additionally, under the Companies Act, we and each of our
regulated Bermuda subsidiaries may declare or pay a dividend, or
make a distribution from contributed surplus, only if we have no
reasonable grounds for believing that the subsidiary is, or will
be after the payment, unable to pay its liabilities as they
become due, or that the realizable value of its assets will
thereby be less than the aggregate of its liabilities and its
issued share capital and share premium accounts.
Supervision, Investigation and
Intervention. The BMA may appoint an inspector
with extensive powers to investigate the affairs of our
regulated Bermuda insurance and reinsurance subsidiaries if the
BMA believes that such an investigation is in the best interests
of its policyholders or persons who may become policyholders. In
order to verify or supplement information otherwise provided to
the BMA, the BMA may direct our regulated Bermuda insurance and
reinsurance subsidiaries to produce documents or information
relating to matters connected with its business. In addition,
the BMA has the power to require the production of documents
from any person who appears to be in possession of those
documents. Further, the BMA has the power, in respect of a
person registered under the Insurance Act, to appoint a
professional person to prepare a report on any aspect of any
matter about which the BMA has required or could require
information. If it appears to the BMA to be desirable in the
interests of the clients of a person registered under the
Insurance Act, the BMA may also exercise the foregoing powers in
relation to any company that is, or has at any relevant time
been, (1) a parent company, subsidiary company or related
company of that registered person, (2) a subsidiary company
of a parent company of that registered person, (3) a parent
company
34
of a subsidiary company of that registered person or (4) a
controlling shareholder of that registered person, which is a
person who either alone or with any associate or associates,
holds 50% or more of the shares of that registered person or is
entitled to exercise, or control the exercise of, more than 50%
of the voting power at a general meeting of shareholders of that
registered person. If it appears to the BMA that there is a risk
of a regulated Bermuda insurance and reinsurance subsidiary
becoming insolvent, or that a regulated Bermuda insurance and
reinsurance subsidiary is in breach of the Insurance Act or any
conditions imposed upon its registration, the BMA may, among
other things, direct such subsidiary (1) not to take on any
new insurance business, (2) not to vary any insurance
contract if the effect would be to increase its liabilities,
(3) not to make certain investments, (4) to liquidate
certain investments, (5) to maintain in, or transfer to the
custody of a specified bank, certain assets, (6) not to
declare or pay any dividends or other distributions or to
restrict the making of such payments
and/or
(7) to limit such subsidiarys premium income.
Disclosure of Information. In addition to
powers under the Insurance Act to investigate the affairs of an
insurer, the BMA may require insurers and other persons to
furnish information to the BMA. Further, the BMA has been given
powers to assist other regulatory authorities, including foreign
insurance regulatory authorities, with their investigations
involving insurance and reinsurance companies in Bermuda. Such
powers are subject to restrictions. For example, the BMA must be
satisfied that the assistance being requested is in connection
with the discharge of regulatory responsibilities of the foreign
regulatory authority. Further, the BMA must consider whether
cooperation is in the public interest. The grounds for
disclosure are limited and the Insurance Act provides sanctions
for breach of the statutory duty of confidentiality. Under the
Companies Act, the Minister of Finance has been given powers to
assist a foreign regulatory authority that has requested
assistance in connection with inquiries being carried out by it
in the performance of its regulatory functions. The
Ministers powers include requiring a person to furnish him
or her with information, to produce documents to him or her, to
attend and answer questions and to give assistance in connection
with inquiries. The Minister must be satisfied that the
assistance requested by the foreign regulatory authority is for
the purpose of its regulatory functions and that the request is
in relation to information in Bermuda that a person has in his
possession or under his control. The Minister must consider,
among other things, whether it is in the public interest to give
the information sought.
Notification by Shareholder Controller of New or Increased
Control. 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.. The BMA may, by written
notice, object to such a person if it appears to the BMA that
the person is not fit and proper to be such a holder. The BMA
may require the holder to reduce their holding of ordinary
shares and direct, among other things, that voting rights
attaching to the ordinary shares shall not be exercisable. A
person that does not comply with such a notice or direction from
the BMA will be guilty of an offense.
Objection to Existing Shareholder
Controller. For so long as we have as a
subsidiary an insurer registered under the Insurance Act, the
BMA may at any time, by written notice, object to a person
holding 10% or more of the ordinary shares if it appears to the
BMA that the person is not, or is no longer fit and proper to
be, such a holder. In such a case, the BMA may require the
shareholder to reduce its holding of ordinary shares and direct,
among other things, that such shareholders voting rights
attaching to ordinary shares shall not be exercisable. A person
who does not comply with such a notice or direction from the BMA
will be guilty of an offense.
Certain Other Bermuda Law
Considerations. Although we are incorporated in
Bermuda, we are classified as a non-resident of Bermuda for
exchange control purposes by the BMA. Pursuant to our
non-resident status, we may engage in transactions in currencies
other than Bermuda dollars and there are no restrictions on our
ability to transfer funds (other than funds denominated in
Bermuda dollars) in and out of Bermuda or to pay dividends to
U.S. residents who are holders of our ordinary shares.
Under Bermuda law, exempted companies are companies formed for
the purpose of conducting business outside Bermuda from a
principal place of business in Bermuda. As exempted
companies, neither we nor any of our regulated Bermuda
subsidiaries may, without the express authorization of the
Bermuda legislature or under a license or consent granted by the
Minister of Finance, participate in certain business
transactions, including: (1) the acquisition or holding of
land in Bermuda (except that held by way of lease or tenancy
agreement that is required for our business and held for a term
not exceeding 50 years, or that is used to provide
accommodation or recreational
35
facilities for our officers and employees and held with the
consent of the Bermuda Minister of Finance, for a term not
exceeding 21 years), (2) the taking of mortgages on
land in Bermuda to secure an amount in excess of $50,000, or
(3) the carrying on of business of any kind for which we
are not licensed in Bermuda, except in limited circumstances
such as doing business with another exempted undertaking in
furtherance of our business carried on outside Bermuda. Each of
our regulated Bermuda subsidiaries is a licensed insurer in
Bermuda, and, as such, may carry on activities from Bermuda that
are related to and in support of its insurance business.
Ordinary shares may be offered or sold in Bermuda only in
compliance with the provisions of the Investment Business Act
2003 of Bermuda, which regulates the sale of securities in
Bermuda. In addition, the BMA must approve all issues and
transfers of securities of a Bermuda exempted company. Where any
equity securities (meaning shares that entitle the holder to
vote for or appoint one or more directors or securities that by
their terms are convertible into shares that entitle the holder
to vote for or appoint one or more directors) of a Bermuda
company are listed on an appointed stock exchange (which
includes Nasdaq), the BMA has given general permission for the
issue and subsequent transfer of any securities of the company
from and/or
to a non-resident for so long as any such equity securities of
the company remain so listed.
The Bermuda government actively encourages foreign investment in
exempted entities like us and our regulated Bermuda
subsidiaries that are based in Bermuda, but which do not operate
in competition with local businesses. We and our regulated
Bermuda subsidiaries are not currently subject to taxes computed
on profits or income or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or
inheritance tax or to any foreign exchange controls in Bermuda.
Under Bermuda law, non-Bermudians (other than spouses of
Bermudians, holders of a permanent residents certificate
or holders of a working residents certificate) may not
engage in any gainful occupation in Bermuda without an
appropriate governmental work permit. Work permits may be
granted or extended by the Bermuda government upon showing that,
after proper public advertisement in most cases, no Bermudian
(or spouse of a Bermudian, holder of a permanent residents
certificate or holder of a working residents certificate)
is available who meets the minimum standard requirements for the
advertised position. In 2004, the Bermuda government announced a
new immigration policy limiting the duration of work permits to
six years, with specified exemptions for key
employees. The categories of key employees include
senior executives (chief executive officers, presidents through
vice presidents), managers with global responsibility, senior
financial posts (treasurers, chief financial officers through
controllers, specialized qualified accountants, quantitative
modeling analysts), certain legal professionals (general
counsels, specialist attorneys, qualified legal librarians and
knowledge managers), senior insurance professionals (senior
underwriters, senior claims adjusters), experienced/specialized
brokers, actuaries, specialist investment traders/analysts and
senior information technology engineers/managers. All of our
executive officers who work in our Bermuda office have obtained
work permits.
United
Kingdom
General. On December 1, 2001, the U.K.
Financial Services Authority, or the FSA, assumed its full
powers and responsibilities as the single statutory regulator
responsible for regulating the financial services industry in
respect of the carrying on of regulated activities
(including deposit taking, insurance, investment management and
most other financial services business by way of business in the
U.K.), with the purpose of maintaining confidence in the U.K.
financial system, providing public understanding of the system,
securing the proper degree of protection for consumers and
helping to reduce financial crime. It is a criminal offense for
any person to carry on a regulated activity in the U.K. unless
that person is authorized by the FSA and has been granted
permission to carry on that regulated activity or falls under an
exemption.
Insurance business (which includes reinsurance business) is
authorized and supervised by the FSA. Insurance business in the
United Kingdom is divided between two main categories: long-term
insurance (which is primarily investment-related) and general
insurance. Aside from certain insurers with historical
exemptions, it is not possible for an insurance company to be
authorized in both long-term and general insurance business.
These two categories are both divided into classes
(for example: permanent health and pension fund management are
two classes of long-term insurance; damage to property and motor
vehicle liability are two classes of general insurance). Under
the Financial Services and Markets Act 2000, or the FSMA,
effecting or carrying out contracts of insurance, within
36
a class of general or long-term insurance, by way of business in
the United Kingdom, constitutes a regulated activity requiring
individual authorization. An authorized insurance company must
have permission for each class of insurance business it intends
to write.
Certain of our regulated U.K. subsidiaries, as authorized
insurers, would be able to operate throughout the European
Union, subject to certain regulatory requirements of the FSA and
in some cases, certain local regulatory requirements. An
insurance company with FSA authorization to write insurance
business in the United Kingdom can seek consent from the FSA to
allow it to provide cross-border services in other member states
of the E.U. As an alternative, FSA consent may be obtained to
establish a branch office within another member state. Although
in run-off, our regulated U.K. subsidiaries remain regulated by
the FSA, but may not underwrite new business.
As FSA authorized insurers, the insurance and reinsurance
businesses of our regulated U.K. subsidiaries are subject to
close supervision by the FSA. The FSA has implemented specific
requirements for senior management arrangements, systems and
controls of insurance and reinsurance companies under its
jurisdiction, which place a strong emphasis on risk
identification and management in relation to the prudential
regulation of insurance and reinsurance business in the United
Kingdom.
Supervision. The FSA carries out the
prudential supervision of insurance companies through a variety
of methods, including the collection of information from
statistical returns, review of accountants reports, visits
to insurance companies and regular formal interviews.
The FSA has adopted a risk-based approach to the supervision of
insurance companies. Under this approach the FSA performs a
formal risk assessment of insurance companies or groups carrying
on business in the U.K. periodically. The periods between U.K.
assessments vary in length according to the risk profile of the
insurer. The FSA performs the risk assessment by analyzing
information which it receives during the normal course of its
supervision, such as regular prudential returns on the financial
position of the insurance company, or which it acquires through
a series of meetings with senior management of the insurance
company. After each risk assessment, the FSA will inform the
insurer of its views on the insurers risk profile. This
will include details of any remedial action that the FSA
requires and the likely consequences if this action is not taken.
Solvency Requirements. The Integrated
Prudential Sourcebook requires that insurance companies maintain
a required solvency margin at all times in respect of any
general insurance undertaken by the insurance company. The
calculation of the required margin in any particular case
depends on the type and amount of insurance business a company
writes. The method of calculation of the required solvency
margin is set out in the Integrated Prudential Sourcebook, and
for these purposes, all insurers assets and liabilities
are subject to specific valuation rules which are set out in the
Integrated Prudential Sourcebook. Failure to maintain the
required solvency margin is one of the grounds on which wide
powers of intervention conferred upon the FSA may be exercised.
For fiscal years ending on or after January 1, 2004, the
calculation of the required solvency margin has been amended as
a result of the implementation of the EU Solvency I Directives.
In respect of liability business accepted, 150% of the actual
premiums written and claims incurred must be included in the
calculation, which has had the effect of increasing the required
solvency margin of our regulated U.K. subsidiaries. We
continuously monitor the solvency capital position of the U.K.
subsidiaries and maintain capital in excess of the required
solvency margin.
Insurers are required to calculate an Enhanced Capital
Requirement, or ECR, in addition to their required solvency
margin. This represents a more risk-sensitive calculation than
the previous required solvency margin requirements and is used
by the FSA as its benchmark in assessing its Individual Capital
Adequacy Standards. Insurers must maintain financial resources
which are adequate, both as to amount and quality, to ensure
that there is no significant risk that its liabilities cannot be
met as they come due. In order to carry out the assessment as to
the necessary financial resources that are required, insurers
are required to identify the major sources of risk to its
ability to meet its liabilities as they come due, and to carry
out stress and scenario tests to identify an appropriate range
of realistic adverse scenarios in which the risk crystallizes
and to estimate the financial resources needed in each of the
circumstances and events identified. In addition, the FSA gives
Individual Capital Guidance, or ICG, regularly to insurers and
reinsurers following receipt of individual capital assessments,
prepared by firms themselves. The FSAs guidance may be
that a company should hold more or less than its then current
level of regulatory capital, or that the companys
regulatory capital should remain unaltered. We calculated the
ECR for our regulated U.K. subsidiaries for the period ended
December 31, 2009 and submitted those calculations in March
37
2010 to the FSA as part of their statutory filings. The ECR
calculations for its regulated U.K. subsidiaries for the year
ended December 31, 2010 will be submitted by no later than
March 31, 2011.
In addition, an insurer (other than a pure reinsurer) that is
part of a group is required to perform and submit to the FSA an
audited Group Capital Adequacy Return, or GCAR. The GCAR is a
solvency margin calculation return in respect of its ultimate
parent undertaking, in accordance with the FSAs rules.
This return is not part of an insurers own solvency return
and hence will not be publicly available. Although there is no
requirement for the parent undertaking solvency calculation to
show a positive result, the FSA may take action where it
considers that the solvency of the insurance company is or may
be jeopardized due to the group solvency position. Further, an
insurer is required to report in its annual returns to the FSA
all material related party transactions (e.g., intra-group
reinsurance, whose value is more than 5% of the insurers
general insurance business amount).
Solvency II. In April 2009, the European
Parliament approved the Solvency II framework directive,
due to come into force on December 31, 2012.
Solvency II will set out new, strengthened EU-wide
requirements on capital adequacy and risk management for
insurers with the aim of increasing policyholder protection,
instilling greater risk awareness and improving the
international competitiveness of EU insurers.
Restrictions on Dividend Payments. U.K.
company law prohibits our regulated U.K. subsidiaries from
declaring a dividend to their shareholders unless they have
profits available for distribution. The
determination of whether a company has profits available for
distribution is based on its accumulated realized profits less
its accumulated realized losses. While the United Kingdom
insurance regulatory laws impose no statutory restrictions on a
general insurers ability to declare a dividend, the FSA
strictly controls the maintenance of each insurance
companys required solvency margin within its jurisdiction.
The FSAs rules require our regulated U.K. subsidiaries to
obtain FSA approval for any proposed or actual payment of a
dividend.
Reporting Requirements. U.K. insurance
companies must prepare their financial statements under the
Companies Act 2006, which requires the filing with Companies
House of audited financial statements and related reports. In
addition, U.K. insurance companies are required to file with the
FSA regulatory returns, which include a revenue account, a
profit and loss account and a balance sheet in prescribed forms.
Under the Interim Prudential Sourcebook for Insurers, audited
regulatory returns must be filed with the FSA within two months
and 15 days (or three months where the delivery of the
return is made electronically) of the companys year end.
Our regulated U.K. insurance subsidiaries are also required to
submit abridged quarterly information to the FSA.
Supervision of Management. The FSA closely
supervises the management of insurance companies through the
approved persons regime, by which any appointment of persons to
perform certain specified controlled functions
within a regulated entity, must be approved by the FSA.
Change of Control. FSMA regulates the
acquisition of control of any U.K. insurance company
authorized under FSMA. Any company or individual that (together
with its or his associates) directly or indirectly acquires 20%
or more of the shares in a U.K. authorized insurance company or
its parent company, or is entitled to exercise or control the
exercise of 20% or more of the voting power in such authorized
insurance company or its parent company, would be considered to
have acquired control for the purposes of the
relevant legislation, as would a person who had significant
influence over the management of such authorized insurance
company or its parent company by virtue of his shareholding or
voting power in either. A purchaser of 20% or more of our
ordinary shares would therefore be considered to have acquired
control of our regulated U.K. subsidiaries.
Under FSMA, any person proposing to acquire control
over a U.K. authorized insurance company must give prior
notification to the FSA of his intention to do so. The FSA would
then have up to 60 working days (without taking into account any
interruption period) to consider that persons application
to acquire control. In considering whether to
approve such application, the FSA must be satisfied that both
the acquirer is a fit and proper person to have such
control and that the interests of consumers would
not be threatened by such acquisition of control.
Failure to make the relevant prior application could result in
action being taken against us by the FSA.
Intervention and Enforcement. The FSA has
extensive powers to intervene in the affairs of an authorized
person, culminating in the ultimate sanction of the removal of
authorization to carry on a regulated activity. FSMA imposes on
the FSA statutory obligations to monitor compliance with the
requirements imposed by FSMA, and to enforce the provisions of
FSMA-related rules made by the FSA. The FSA has power, among
other things, to enforce
38
and take disciplinary measures in respect of breaches of both
the Interim Prudential Sourcebook for Insurers and breaches of
the conduct of business rules generally applicable to authorized
persons.
The FSA also has the power to prosecute criminal offenses
arising under FSMA, and to prosecute insider dealing under
Part V of the Criminal Justice Act of 1993, and breaches of
money laundering regulations. The FSAs stated policy is to
pursue criminal prosecution in all appropriate cases.
Passporting. European Union directives allow
our regulated U.K. subsidiaries to conduct business in European
Union states other than the United Kingdom in compliance with
the scope of permission granted these companies by the FSA
without the necessity of additional licensing or authorization
in other European Union jurisdictions. This ability to operate
in other jurisdictions of the European Union on the basis of
home state authorization and supervision is sometimes referred
to as passporting. Insurers may operate outside
their home member state either on a services basis
or on an establishment basis. Operating on a
services basis means that the company conducts
permitted businesses in the host state without having a physical
presence there, while operating on an establishment
basis means the company has a branch or physical presence in the
host state. In both cases, a company remains subject to
regulation by its home regulator, and not by local regulatory
authorities, although the company nonetheless may have to comply
with certain local rules. In addition to European Union member
states, Norway, Iceland and Liechtenstein (members of the
broader European Economic Area) are jurisdictions in which this
passporting framework applies.
Australia
In Australia, four of our subsidiaries are companies with
Insurance Act 1973 authorizations. Three of these companies are
insurance companies authorized to conduct run-off business and
one is an authorized non-operating holding company, or NOHC. In
addition, we have five Australian registered companies not
authorized to conduct insurance business, but which provide
services to the authorized entities.
Regulators. The authorized non-operating
holding company and the authorized insurers are regulated and
are subject to prudential supervision by the Australian
Prudential Regulation Authority, or APRA. APRA is the
primary regulatory body responsible for regulating compliance
with the Insurance Act 1973, or the 1973 Act. In addition, all
companies, including the non-authorized entities, must comply
with the Corporations Act 2001 and its primary regulator the
Australian Securities and Investments Commission, or ASIC.
APRA was established in 1998 as an independent body to supervise
banks, credit unions, building societies, general insurance and
reinsurance companies, life insurance, friendly societies, and
most members of the superannuation industry. APRAs
supervisory role over these institutions includes licensing,
conducting
on-site
operational reviews, assessing risk, responding to queries and
collecting data. In addition, APRA enforces and administers the
1973 Act and promulgates Prudential Standards to regulate the
industries it supervises.
ASIC is Australias corporate, markets and financial
services regulator. In 2001, the Financial Services Reform Act
2001 amended Chapter 7 of the Corporations Act 2001 and the
reforms came into force, after a transitional period, in March
2004. These reforms, as they relate to insurance and insurers,
are intended to promote: confident and informed decision making
by consumers of insurance products and services while
facilitating efficiency, flexibility and innovation in the
provision of those products and services; fairness, honesty and
professionalism by those who provide insurance services; and
fair, orderly and transparent markets for insurance products. In
2010, ASIC took on responsibility for regulation of
Australias domestic financial markets and their
participants. Through its responsibility for the regulation of
financial services, ASIC regulates the giving of advice and
making of disclosures in relation to insurance products.
APRA and ASIC entered into a Memorandum of Understanding in June
2004. The objective of the Memorandum was to set out the
framework for cooperation between the two agencies in areas of
common interest and to set out the responsibilities of each
entity. The Memorandum outlined APRAs responsibilities as
the prudential supervisor of the financial services industry and
ASICs responsibilities as the body that would be
monitoring, regulating and enforcing the Corporations Act and
the Financial Services Reform Act and promoting market integrity.
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APRAs Powers. The 1973 Act prescribes
APRAs powers in respect of the authorization and
prudential supervision of general insurers. The 1973 Act aims to
protect the interests of policy holders and prospective policy
holders under insurance policies in ways that are consistent
with the continued development of a viable, competitive and
innovative insurance industry.
APRAs enforcement and disciplinary powers under the 1973
Act include powers to: (a) revoke the authorization of a
general insurer or authorized non-operating holding company;
(b) remove a director or senior manager of a general
insurer, authorized non-operating holding company or corporate
agent; (c) determine prudential standards; (d) monitor
prudential matters; (e) collect information from auditors
and actuaries; (f) remove auditors and actuaries;
(g) investigate general insurers and unauthorized insurance
matters; (h) apply to have a general insurer wound up;
(i) determine insolvent insurers liabilities in
respect of early claims; (j) direct Lloyds
underwriters to not issue or renew policies; and (k) make
directions in certain circumstances.
Conducting Insurance Business in
Australia. The 1973 Act only permits APRA
authorized bodies corporate and Lloyds underwriters to
carry on general insurance business in Australia. Those entities
authorized to conduct insurance business in Australia are
classified into the following categories:
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Category A insurer an insurer incorporated in
Australia that does not fall within any of the other categories
of insurer;
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Category B insurer an insurer incorporated in
Australia that is also a subsidiary of a local or foreign
insurance group;
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Category C insurer a foreign general
insurer, which is a foreign insurer operating as a foreign
branch in Australia;
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Category D insurer an insurer incorporated in
Australia that is owned by an industry or a professional
association, or by the members of the industry or professional
association or a combination of both; and only underwrites
business risk of the members of the association or those who are
eligible to become members. Medical indemnity insurers are not
included in this definition; or
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Category E insurer an insurer incorporated in
Australia that is a corporate captive or a partnership captive.
Category E insurers are often referred to as sole parent
captives.
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Foreign-owned subsidiaries and foreign general insurers must be
authorized by APRA to conduct business in Australia and are
subject to similar legislative and prudential requirements as
Australian owned and incorporated insurers.
Ownership and Control. The Financial Sector
(Shareholdings) Act 1998 governs the ownership of insurers in
Australia. The interest of an individual shareholder or a group
of associated shareholders in an insurer is generally limited to
15% of the insurers voting shares. A higher percentage
limit may be approved by the Treasurer of the Commonwealth of
Australia on national interest grounds.
The Insurance Acquisitions and Takeovers Act 1991 governs the
control of and compulsory notification of proposals relating to
both the acquisition and lease of Australian-registered
insurance companies. All acquisition or lease proposals must be
notified to the Minister for Revenue, with authority delegated
to APRA, who has the discretion to make a permanent
restraining order or go ahead decision
regarding the proposal.
Compliance and Governance. Section 32 of
the 1973 Act authorizes APRA to determine, vary and revoke
prudential standards that impose different requirements to be
complied with by different classes of general insurers,
authorized non-operating holding companies and their respective
subsidiaries. Presently 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 insurers responsible persons.
In November 2009, APRA released a new prudential standard
entitled GPS 510-Governance with an effective commencement date
of April 1, 2010. GPS 510-Governance updated the previous
version of GPS 510-Governance by imposing new remuneration
obligations on general insurers. GPS 510-Governance mandates
that the Board of a
40
general insurer (or the group Board if part of a corporate
group) must have a remuneration policy that aligns remuneration
and risk management. Furthermore, it requires that a Board
remuneration committee must be established for each regulated
entity (or each group if the regulated entity is part of a
corporate group).
Capital Adequacy. APRAs prudential
standards require that all insurers maintain and meet prescribed
capital adequacy requirements to enable its insurance
obligations to be met under a wide range of circumstances. This
requires authorized insurers to hold eligible capital in excess
of the minimum capital requirement. This amount may be
determined using the prescribed method or an internal model
based method. APRA has determined that two tiers of capital may
be deemed eligible capital and may be used to determine an
insurers capital base. Tier 1 capital comprises the
highest quality capital components and Tier 2 capital
includes other components that fall short of the quality of
Tier 1 capital but still contribute to the overall strength
of the insurer. As part of the determination of the proper
capital adequacy using the prescribed method, insurers must
determine and consider whether or not they must apply
prudentially required investment risk charges, insurance risk
capital charges and concentration risk capital charges to their
capital amount for the purposes of determining the applicable
minimum capital requirements.
In addition to the foregoing capital adequacy regulation, APRA
has determined that capital adequacy must also be regulated at
the group level, see Group Supervision and Reporting
below.
Group Supervision and Reporting. APRA
introduced a new regime for group supervision and reporting in
2009. The Level 2 insurance group supervision and reporting
framework applies to a Level 2 insurance group and
introduced additional prudential standards, known as
Level 2 prudential standards, that are to be read in
conjunction with the existing prudential framework, now known as
the Level 1 prudential standards. The definition of a
Level 2 insurance group includes a NOHC and its controlled
insurers and entities, subject to the exemption of certain
non-regulated companies from the insurance group.
The foundation of APRAs approach to the supervision of
Level 2 insurance groups is that the group as a whole
should meet essentially the same minimum capital requirements as
apply to individual general insurers. APRA deemed this approach
essential to ensure that the acts of an individual insurer in a
group do not alter the risk profile of other insurers in the
group through financial and operational inter-relationships with
other group members or through decisions taken at the group
level.
For the purposes of the new group supervision and reporting
prudential standards, our Australian authorized NOHC is deemed
the parent entity of a Level 2 insurance group. The new
prudential standards for insurance group supervision became
effective on March 31, 2009 and new reporting standards
apply to all Level 2 insurance groups for reporting periods
commencing on or after June 30, 2009.
Capital Releases. An insurer must obtain
APRAs written consent prior to making any planned
reductions in its capital.
A reduction in an insurers capital includes, but is not
limited to:
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a share buyback;
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the redemption, repurchase or early repayment of any qualifying
Tier 1 and Tier 2 capital instruments issued by the
insurer or a special purpose vehicle;
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trading in the insurers own shares or capital instruments
outside of any arrangement agreed upon with APRA;
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payment of dividends on ordinary shares that exceeds an
insurers after-tax earnings, after including payments on
more senior capital instruments, in the financial year to which
they relate; and
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dividend or interest payments (whether whole or partial) on
specific types of Tier 2 and Tier 1 capital that
exceed an insurers after-tax earnings, including any
payments made on more senior capital instruments, calculated
before any such payments are applied in the financial year to
which they relate.
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An Australian insurer in run-off must provide APRA a valuation
prepared by the 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.
Assets in Australia. The 1973 Act and APRA
require that all insurers are required to maintain assets in
Australia at least equal to their liabilities in Australia and
foreign insurers are required to maintain assets in Australia
that exceed their liabilities in Australia by an amount that is
greater than their minimum capital requirements.
Audit and Actuarial Reporting
Requirements. APRA requires insurers to submit
data in accordance with the reporting standards under the
Financial Sector (Collection of Data) Act 1988. Insurers must
provide quarterly returns and annual audited returns to APRA.
Insurers in run-off must provide a run-off plan annually.
Insurance contract transactions are accounted for on a
prospective accounting basis, which results in all
premium revenue, acquisition costs and reinsurance expenses
being recorded directly into profit and loss. Australian
Prudential Standard GPS 310 was updated effective July 1,
2010 to simplify prudential reporting obligations for general
insurers.
APRA requires all insurers, except for small insurers (those
insurers with less than $20 million of gross insurance
liabilities and no material long-tail insurance liabilities) to
appoint an actuary. These insurers must obtain an annual
insurance liability valuation report, or ILVR, and financial
condition report from the appointed actuary. Although an
appointed actuary for an insurer in run-off need not provide a
financial condition report, he or she must provide a report
setting out his or her review of the insurers required
run-off plan.
The ILVR must be peer reviewed by another actuary. Insurance
liabilities are to be determined as central estimates on a
discounted basis plus a risk margin assessed at a 75% level of
sufficiency.
APRA requires all insurers to appoint an auditor. The auditor
must prepare a certificate in relation to the insurers
annual APRA reporting requirements and prepare a report annually
about the systems, procedures and controls within the insurer.
Section 334 of the Corporations Act 2001 provides that the
Australian Accounting Standards Board may make accounting
standards for the purposes of the Corporations Act. The relevant
standards are Accounting Standards AASB 4 (Insurance) and AASB
1023 (General Insurance Contracts).
Outsourcing. APRA requires that all
outsourcing arrangements of material business activities must be
documented in the form of written contracts except for some
intra-group arrangements. An insurer must consult with APRA
prior to entering into outsourcing arrangements where the
service and the entity providing the service are located outside
of Australia. Insurers are also required to maintain a policy
relating to outsourcing that ensures there is sufficient
monitoring of the outsourced activities.
SOARS and PAIRS. APRA maintains two risk
assessment, supervisory and response tools to assist APRA with
its risk-based approach to supervision. The Probability and
Impact Ratings System, or PAIRS, is APRAs risk assessment
model and is divided into two dimensions, the probability and
impact of the failure of an APRA regulated insurer. The PAIRS
risk assessment involves an assessment of the following
categories: board, management, risk governance, strategy and
planning; liquidity risk; operational risk; credit risk; market
and investment risk; insurance risk; capital coverage/surplus
risk; earnings; and access to additional capital. The assessment
of these categories involves consideration of four key factors:
inherent risk, management and control, net risk and capital
support. APRA does not publish insurers PAIRS ratings, but
does make them available to the insurer.
The Supervisory Oversight and Response System, or SOARS, is used
to determine the regulatory response based on the PAIRS risk
assessment. An insurer may have a SOARS supervision stance of
normal, oversight, mandated improvement or restructure. APRA
does not publish insurers SOARS ratings, but does make
them available to the insurer.
Australian Prudential Framework and Australian Accounting
Standards Board. APRA maintains a prudential
framework that requires the maintenance and collection of
certain financial information. In certain circumstances the
collection of this information is categorized differently that
the manner prescribed by the Australian Accounting Standards
Board, or AASB, in the Accounting Standards. AASBs
standards are based on
42
the matching concept whereas the APRA prudential framework is
based on perspective accounting. While there are differences
between the two methods, those differences do not apply to our
Australian subsidiaries for a variety of reasons, such as going
concern issues and the current assets held by those entities.
United
States
As of December 31, 2010, we own seven property and casualty
insurance companies domiciled in the U.S., our
U.S. Insurers, all of which are in run-off.
General. In common with other insurers, our
U.S. Insurers are subject to extensive governmental
regulation and supervision in the various states and
jurisdictions in which they are domiciled and licensed
and/or
approved to conduct business. The laws and regulations of the
state of domicile have the most significant impact on
operations. This regulation and supervision is designed to
protect policyholders rather than investors. Generally,
regulatory authorities have broad regulatory powers over such
matters as licenses, standards of solvency, premium rates,
policy forms, marketing practices, claims practices,
investments, security deposits, methods of accounting, form and
content of financial statements, reserves and provisions for
unearned premiums, unpaid losses and loss adjustment expenses,
reinsurance, minimum capital and surplus requirements, dividends
and other distributions to shareholders, periodic examinations
and annual and other report filings. In addition, transactions
among affiliates, including certain reinsurance agreements or
arrangements, as well as certain third-party transactions,
require prior approval or non-disapproval from, or prior notice
to, the applicable regulator under certain circumstances.
Regulatory authorities also conduct periodic financial, claims
and other types of examinations. Finally, our U.S. Insurers
are also subject to the general laws of the jurisdictions in
which they do business. Certain insurance regulatory
requirements are highlighted below.
Insurance Holding Company Systems Acts. State
insurance holding company system statutes and related
regulations provide a regulatory apparatus that is designed to
protect the financial condition of domestic insurers operating
within a holding company system. All insurance holding company
statutes and regulations require disclosure and, in some
instances, prior approval or non-disapproval of certain
transactions involving the domestic insurer and an affiliate.
These transactions typically include sales, purchases,
exchanges, loans and extensions of credit, reinsurance
agreements, service agreements, guarantees, investments and
other material transactions between an insurance company and its
affiliates, involving in the aggregate specified percentages of
an insurance companys admitted assets or policyholders
surplus, or dividends that exceed specified percentages of an
insurance companys surplus or income.
The state insurance holding company system statutes and
regulations may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of us, any of
the other direct or indirect parents of any of our
U.S. Insurers, or any of our U.S. Insurers, including
through transactions, and in particular unsolicited
transactions, that we or our shareholders might consider to be
desirable.
Before a person can acquire control of a domestic insurer
(including a reinsurer) or any person controlling such insurer
or reinsurer, 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. Prior to
granting approval of an application to acquire control of a
domestic insurer or person controlling the domestic insurer, the
state insurance commissioner of the jurisdiction in which the
insurer is domiciled will consider such factors as the financial
strength of the applicant, the integrity and management of the
applicants board of directors and executive officers, the
acquirors plans for the future operations of the domestic
insurer and any anti-competitive results that may arise from the
closing of the acquisition of control. 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 a domestic insurer. Florida statutes create a
presumption of control when any person, directly or indirectly,
owns, controls, holds with the power to vote, or holds proxies
representing, 5% or more of the voting securities or securities
convertible into voting securities of the domestic insurer or
person controlling a domestic insurer.
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Because a person acquiring 5% or more of our ordinary shares
would be presumed to acquire control of Capital Assurance, which
is domiciled in Florida, and because a person acquiring 10% or
more of our ordinary shares would be presumed to acquire control
of the other U.S. Insurers, the U.S. insurance change
of control laws will likely apply to such transactions.
Typically, the holding company statutes and regulations will
also require each of our U.S. Insurers periodically to file
information with state insurance regulatory authorities,
including information concerning capital structure, ownership,
financial condition and general business operations.
Regulation of Dividends and other Payments from Insurance
Subsidiaries. The ability of a U.S. insurer
to pay dividends or make other distributions is generally
subject to insurance regulatory limitations of the insurance
companys state of domicile. Generally, these laws require
prior regulatory approval before an insurer may pay a dividend
or make a distribution above a specified level. In many
U.S. jurisdictions, dividends may only be paid out of
earned surplus. In addition, the laws of many
U.S. jurisdictions require an insurer to report for
informational purposes to the insurance commissioner of its
state of domicile all declarations and proposed payments of
dividends and other distributions to security holders. Any
return of capital from a U.S. insurance company generally
would require prior approval of the domestic regulators.
The dividend limitations imposed by state insurance laws are
based on statutory financial results, determined by using
statutory accounting practices that differ in certain respects
from accounting principles used in financial statements prepared
in conformity with U.S. GAAP. The significant differences
include treatment of deferred acquisition costs, deferred income
taxes, required investment reserves, reserve calculation
assumptions and surplus notes. In connection with the
acquisition of a U.S. insurer, insurance regulators in the
United States often impose, as a condition to the approval of
the acquisition, additional restrictions on the ability of the
U.S. insurer to pay dividends or make other distributions
for specified periods of time.
Accreditation. The National Association of
Insurance Commissioners, or the NAIC, has instituted its
Financial Regulations Standards and Accreditation Program, or
FRSAP, in response to federal initiatives to regulate the
business of insurance. FRSAP provides a set of standards
designed to establish effective state regulation of the
financial condition of insurance companies. Under FRSAP, a state
must adopt certain laws and regulations, institute required
regulatory practices and procedures, and have adequate personnel
to enforce these laws and regulations in order to become an
accredited state. Accredited states are not able to
accept certain financial examination reports of insurers
prepared solely by the regulatory agency in an unaccredited
state. The respective states in which our U.S. Insurers are
domiciled are accredited states.
Insurance Regulatory Information System
Ratios. The NAIC Insurance Regulatory Information
System, or IRIS, was developed by a committee of state insurance
regulators and is intended primarily to assist state insurance
departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their
respective states. IRIS identifies 13 industry ratios and
specifies usual values for each ratio. Departure
from the usual values of the ratios can lead to inquiries from
individual state insurance commissioners regarding different
aspects of an insurers business. Insurers that report four
or more unusual values are generally targeted for regulatory
review. For 2010, certain of our U.S. Insurers generated
IRIS ratios that were outside of the usual ranges. Only Seaton
has been subject to any increased regulatory review, but there
is no assurance that our other U.S. Insurers will not be
subject to increased scrutiny in the future.
Risk-Based Capital Requirements. In order to
enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement risk-based capital
requirements for property and casualty insurance companies.
These risk-based capital requirements change from time to time
and are designed to assess capital adequacy and to raise the
level of protection that statutory surplus provides for
policyholder obligations. The risk-based capital model for
property and casualty insurance companies measures three major
areas of risk facing property and casualty insurers:
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underwriting, which encompasses the risk of adverse loss
developments and inadequate pricing;
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declines in asset values arising from credit risk; and
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declines in asset values arising from investment risks.
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Insurers having less statutory surplus than required by the
risk-based capital calculation will be subject to varying
degrees of regulatory action, depending on the level of capital
inadequacy.
Under the approved formula, an insurers statutory surplus
is compared to its risk-based capital requirement. If this ratio
is above a minimum threshold, no company or regulatory action is
necessary. Below this threshold are four distinct action levels
at which a regulator can intervene with increasing degrees of
authority over an insurer as the ratio of surplus to risk-based
capital requirement decreases. The four action levels include:
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insurer is required to submit a plan for corrective action;
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insurer is subject to examination, analysis and specific
corrective action;
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regulators may place insurer under regulatory control; and
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regulators are required to place insurer under regulatory
control.
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Some of our U.S. Insurers, from time to time, may have
risk-based capital levels that are below required levels and be
subject to increased regulatory scrutiny and control by their
domestic insurance regulator. As of December 31, 2010, one
of our U.S. insurance companies was not in compliance with
its applicable risk-based capital level. We do not believe this
companys non-compliance presents material risk to our
operations or our financial condition. With the exception of the
above, all of our consolidated U.S. Insurers were in
compliance with minimum risk-based capital levels as of
December 31, 2010.
Guaranty Funds and Assigned Risk Plans. Most
states require all admitted insurance companies to participate
in their respective guaranty funds that cover various claims
against insolvent insurers. Solvent insurers licensed in these
states are required to cover the losses paid on behalf of
insolvent insurers by the guaranty funds and are generally
subject to annual assessments in the state by its guaranty fund
to cover these losses. Some states also require admitted
insurance companies to participate in assigned risk plans, which
provide coverage for automobile insurance and other lines for
insureds that, for various reasons, cannot otherwise obtain
insurance in the open market. This participation may take the
form of reinsuring a portion of a pool of policies or the direct
issuance of policies to insureds. The calculation of an
insurers participation in these plans is usually based on
the amount of premium for that type of coverage that was written
by the insurer on a voluntary basis in a prior year.
Participation in assigned risk pools tends to produce losses
which result in assessments to insurers writing the same lines
on a voluntary basis. Our U.S. Insurers may be subject to
guaranty fund assessments and may participate in assigned risk
plans.
Credit for Reinsurance. Licensed reinsurers in
the United States are subject to insurance regulation and
supervision that is similar to the regulation of licensed
primary insurers. However, the terms and conditions of
reinsurance agreements generally are not subject to regulation
by any governmental authority with respect to rates or policy
terms. This contrasts with primary insurance policies and
agreements, the rates and terms of which sometimes are regulated
by state insurance regulators. As a practical matter, however,
the rates charged by primary insurers do have an effect on the
rates that can be charged by reinsurers. A primary insurer
ordinarily will enter into a reinsurance agreement only if it
can obtain credit for the reinsurance ceded on its statutory
financial statements. In general, credit for reinsurance is
allowed in the following circumstances:
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if the reinsurer is licensed in the state in which the primary
insurer is domiciled or, in some instances, in certain states in
which the primary insurer is licensed;
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if the reinsurer is an accredited or otherwise
approved reinsurer in the state in which the primary insurer is
domiciled or, in some instances, in certain states in which the
primary insurer is licensed;
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in some instances, if the reinsurer (1) is domiciled in a
state that is deemed to have substantially similar credit for
reinsurance standards as the state in which the primary insurer
is domiciled and (2) meets financial requirements; or
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if none of the above apply, to the extent that the reinsurance
obligations of the reinsurer are secured appropriately,
typically through the posting of a letter of credit for the
benefit of the primary insurer or the deposit of assets into a
trust fund established for the benefit of the primary insurer.
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As a result of the requirements relating to the provision of
credit for reinsurance, our U.S. Insurers and our insurers
domiciled outside the U.S., when reinsuring risks from cedants
domiciled or licensed in U.S. jurisdictions in which our
reinsurers are not domiciled or admitted, may be indirectly
subject to some regulatory requirements imposed by jurisdictions
in which ceding companies are licensed. Because our
non-U.S. insurers
are not licensed, accredited or otherwise approved by or
domiciled in any state in the U.S., and because our
U.S. Insurers are not admitted in all
U.S. jurisdictions, primary insurers are only willing to
cede business to such insurers if we provide adequate security
to allow the primary insurer to take credit on its balance sheet
for the reinsurance it purchased. Such security may be provided
by various means, including the posting of a letter of credit or
deposit of assets into a trust fund for the benefit of the
primary insurer. There can be no assurance that we will be able
to continue to post letters of credit or provide other forms of
security on favorable terms.
Statutory Accounting Principles. Statutory
accounting principles, or SAP, are a basis of accounting
developed to assist insurance regulators in monitoring and
regulating the solvency of insurance companies. It is primarily
concerned with measuring an insurers surplus to
policyholders and ensuring solvency. Accordingly, statutory
accounting focuses on valuing assets and liabilities of insurers
at financial reporting dates in accordance with appropriate
insurance law and regulatory provisions applicable in each
insurers domiciliary state.
U.S. GAAP is concerned with a companys solvency, but
it is also concerned with other financial measurements, such as
income and cash flows. Accordingly, U.S. GAAP gives more
consideration to appropriate matching of revenue and expenses
and accounting for managements stewardship of assets than
does SAP. As a result, different assets and liabilities and
different amounts of assets and liabilities will be reflected in
financial statements prepared in accordance with U.S. GAAP
as opposed to SAP.
Statutory accounting practices established by the NAIC and
adopted, in part, by state insurance departments, will
determine, among other things, the amount of statutory surplus
and statutory net income of our U.S. Insurers, which will
affect, in part, the amount of funds they have available to pay
dividends to us.
Federal Regulation. We are subject to numerous
federal regulations, including the Securities Act of 1933, or
the Securities Act, the Securities Exchange Act of 1934, or the
Exchange Act, and other federal securities laws. As we continue
with our business, including the run-off of our insurance
companies, we must monitor our compliance with these laws,
including our maintenance of any available exemptions from
registration as an investment company under the Investment
Company Act of 1940. Any failure to comply with these laws or
maintain our exemption could have a material adverse effect on
our operations and on the market price of our ordinary shares.
Although state regulation is the dominant form of
U.S. regulation for insurance and reinsurance business,
from time to time Congress has shown concern over the adequacy
and efficiency of the state regulation. It is not possible to
predict the future impact of any potential federal regulations
or other possible laws or regulations on our
U.S. subsidiaries capital and operations, and such
laws or regulations could materially adversely affect their
business.
Other
In addition to Bermuda, the United Kingdom, Australia and the
United States, we have subsidiaries in various other countries,
including Belgium, Denmark, Ireland, Sweden and Switzerland, and
in the future could acquire new subsidiaries in other countries.
Our subsidiaries in these other jurisdictions are also
regulated. Typically, such regulation is for the protection of
policyholders and ceding insurance companies rather than
shareholders. While the degree and type of regulation to which
we are subject in each country may differ, 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, methods
of accounting, form and content of the consolidated financial
statements, reserves for unpaid loss and LAE, reinsurance,
minimum capital and surplus requirements, dividends and other
distributions to shareholders, periodic examinations and annual
and other report filings.
46
Competition
We compete in international markets with domestic and
international reinsurance companies to acquire and manage
reinsurance companies in run-off. The acquisition and management
of reinsurance companies in run-off is highly competitive. Some
of these competitors have greater financial resources than we
do, have been operating for longer than we have and have
established long-term and continuing business relationships
throughout the reinsurance industry, 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.
Employees
As of December 31, 2010, we had 335 employees, 4 of
whom were executive officers. All non-Bermudian employees who
operate out of our Bermuda office are subject to approval of any
required work permits. None of our employees are covered by
collective bargaining agreements, and our management believes
that our relationship with our employees is excellent.
Operating
Segments and Geographic Areas
See Note 21 to our consolidated financial statements for
the year ended December 31, 2010 included in Item 8 of
this annual report for a discussion of segment reporting and
geographic areas.
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 (other than an investors own
Internet access charges) on or 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, or 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
SECs website at
http://www.sec.gov.
In addition, copies of our corporate governance guidelines,
codes of business conduct and ethics and the governing charters
for the audit and compensation committees of our board of
directors are available free of charge on our website. The
public may read and copy any materials we file with the SEC at
the SECs Public Reference Room at 100 F Street,
NE, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
47
You should carefully consider these risks along with the
other information included in this document, including the
matters addressed under Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Cautionary Note Regarding Forward-Looking
Statements, as well as risks included elsewhere in our
documents filed with the SEC, before investing in any of our
securities. We may amend, supplement or add to the risk factors
described below from time to time in future reports filed with
the SEC.
Risks
Relating to Our Business
If we
are unable to implement our business strategies, our business
and financial condition may be 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 our ability to realize the anticipated
growth opportunities, expanded market visibility and increased
access to capital. Our business strategies include continuing to
operate our portfolio of run-off insurance and reinsurance
companies and related management engagements, as well as
pursuing additional acquisitions and management engagements in
the run-off segment of the insurance and reinsurance market. We
may not be able to implement our strategies fully or realize the
anticipated results of our strategies as a result of significant
business, economic and competitive uncertainties, many of which
are beyond our control.
The effects of emerging claims and coverage issues may result in
increased provisions for loss reserves and reduced profitability
in our insurance and reinsurance subsidiaries. Such adverse
business issues may also reduce the level of incentive-based
fees generated by our consulting operations. Adverse global
economic conditions, such as rising interest rates and volatile
foreign exchange rates, may cause widespread failure of our
insurance and reinsurance subsidiaries reinsurers to
satisfy their obligations, as well as failure of companies to
meet their obligations under debt instruments held by our
subsidiaries. If the run-off industry becomes more attractive to
investors, competition for runoff acquisitions and management
and consultancy engagements may increase and, therefore, reduce
our ability to continue to make profitable acquisitions or
expand our consultancy operations. If we are unable to
successfully implement our business strategies, we may not be
able to achieve future growth in our earnings and our financial
condition may suffer and, as a result, holders of our ordinary
shares may receive lower returns.
We may
require additional capital 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 our ability to manage the run-off of our assumed
policies and to establish reserves at levels sufficient to cover
losses. We may need to raise additional funds through financings
in the future. Any equity or debt financing, if available at
all, may be on terms that are not favorable to us. In the case
of equity financings, dilution to our shareholders could result,
and, in any case, such securities may have rights, preferences
and privileges that are senior to those of our already
outstanding securities. If we cannot obtain adequate capital,
our business, results of operations and financial condition
could be adversely affected by, among other things, our
inability to finance future acquisitions.
Our
inability to successfully manage our portfolio of insurance and
reinsurance companies in run-off may adversely impact our
ability to grow our business and may result in
losses.
We were founded to acquire and manage companies and portfolios
of insurance and reinsurance in run-off. Our run-off business
differs from the business of traditional insurance and
reinsurance underwriting in that our insurance and reinsurance
companies in run-off no longer underwrite new policies and are
subject to the risk that their stated provisions for losses and
loss adjustment expense, or LAE, will not be sufficient to cover
future losses and the cost of run-off. Because our companies in
run-off no longer collect underwriting premiums, our sources of
capital to cover losses are limited to our stated reserves,
reinsurance coverage and retained earnings. As of
December 31, 2010, our gross reserves for losses and loss
adjustment expense totaled $3.29 billion, and our
reinsurance receivables totaled $961.4 million.
48
In order for us to achieve positive operating results, we must
first price acquisitions on favorable terms relative to the
risks posed by the acquired businesses and then successfully
manage the acquired businesses. Our inability to price
acquisitions on favorable terms, efficiently manage claims,
collect from reinsurers and control run-off expenses could
result in us having to cover losses sustained under assumed
policies with retained earnings, which would materially and
adversely impact our ability to grow our business and may result
in material losses.
If our
insurance and reinsurance subsidiaries loss reserves are
inadequate to cover their actual losses, our insurance and
reinsurance subsidiaries net income and capital and
surplus would be reduced.
Our insurance and reinsurance subsidiaries are required to
maintain reserves to cover their estimated ultimate liability
for losses and loss adjustment expenses for both reported and
unreported incurred claims. These reserves are only estimates of
what our subsidiaries think the settlement and administration of
claims will cost based on facts and circumstances known to the
subsidiaries. Our commutation activity and claims settlement and
development in recent years has resulted in net reductions in
provisions for loss and loss adjustment expenses of
$311.8 million, $259.6 million and $242.1 million
for the years ended December 31, 2010, 2009 and 2008,
respectively. Although this recent experience indicates that our
loss reserves have been more than adequate to meet our
liabilities, because of the uncertainties that surround
estimating loss reserves and loss adjustment expenses, our
insurance and reinsurance subsidiaries cannot be certain that
ultimate losses will not exceed these estimates of losses and
loss adjustment expenses. If our subsidiaries reserves are
insufficient to cover their actual losses and loss adjustment
expenses, our subsidiaries would have to augment their reserves
and incur a charge to their earnings. These charges could be
material and would reduce our net income and capital and surplus.
The difficulty in estimating the subsidiaries reserves is
increased because our subsidiaries loss reserves include
reserves for potential asbestos and environmental, or A&E,
liabilities. At December 31, 2010, our insurance and
reinsurance companies had recorded gross A&E loss reserves
of $825.2 million, or 25.1% of the total gross loss
reserves. Net A&E loss reserves at December 31, 2010
amounted to $736.2 million, or 26.6% of total net loss
reserves. A&E liabilities are especially hard to estimate
for many reasons, including the long waiting periods between
exposure and manifestation of any bodily injury or property
damage, the difficulty in identifying the source of the asbestos
or environmental contamination, long reporting delays and the
difficulty in properly allocating liability for the asbestos or
environmental damage. Developed case law and adequate claim
history do not always exist 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 A&E 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 subsidiaries
potential losses for these claims. Our subsidiaries have not
made any changes in reserve estimates that might arise as a
result of any proposed U.S. federal legislation related to
asbestos. To further understand this risk, see
Business Reserves for Unpaid Losses and Loss
Adjustment Expense on page 13.
Our
insurance and reinsurance subsidiaries reinsurers may not
satisfy their obligations to our insurance and reinsurance
subsidiaries.
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. In addition, reinsurers may be
unwilling to pay our subsidiaries even though they are able to
do so. As of December 31, 2010, the balances receivable
from reinsurers amounted to $961.4 million, of which
$398.8 million were associated with two reinsurers which
each represented 10% or more of total reinsurance balances
receivable. The two reinsurers had credit ratings, as provided
by a major rating agency, of AA- or higher. In addition, many
reinsurance companies have been negatively impacted by the
deteriorating financial and economic conditions, including
unprecedented financial market disruption. A number of these
companies, including some of those with which we conduct
business, have been downgraded
and/or have
been placed on negative outlook by various rating agencies. 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 income or cause us to incur a significant
loss. Disputes with our reinsurers may also result in unforeseen
expenses relating to litigation or arbitration proceedings.
49
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 as a result of market fluctuations and
economic conditions.
We derive a significant portion of our income from our invested
assets. The net investment income that our subsidiaries realize
from investments in fixed maturity securities will generally
increase or decrease with interest rates. The fair market value
of our subsidiaries fixed maturity securities generally
increases or decreases in an inverse relationship with
fluctuations in interest rates and can also decrease as a result
of any downturn in the business cycle that causes the credit
quality of those securities to deteriorate. The fair market
value of our subsidiaries fixed maturity securities
classified as trading or
available-for-sale
in our subsidiaries investment portfolios amounted to
$2.13 billion at December 31, 2010. The changes in the
market value of our subsidiaries securities that are
classified as trading or
available-for-sale
are reflected in our financial statements. Permanent impairments
in the value of our subsidiaries fixed maturity securities
are also reflected in our financial statements. As a result, a
decline in the value of the securities in our subsidiaries
investment portfolios may reduce our net income or cause us to
incur a loss.
In addition to fixed maturity securities, we have invested, and
may from time to time continue to invest, in private equities,
equities and bond and hedge funds. These and other similar
investments may be illiquid and have different risk
characteristics than our investments in fixed maturity
securities. As of December 31, 2010, we had an aggregate of
$294.8 million of such investments. In 2010, the fair value
of our private equity investments increased by
$12.5 million due primarily to
mark-to-market
adjustments in the fair value of their underlying assets, which
are primarily investments in financial institutions. For more
information, see Business Investment
Portfolio on page 28.
Uncertain
conditions in the economy generally may materially adversely
affect our business and results of operations.
The recent severe downturn in the public debt and equity
markets, reflecting uncertainties associated with the mortgage
crisis, worsening economic conditions, widening of credit
spreads, bankruptcies and government intervention in large
financial institutions, resulted in significant unrealized
losses in our investment portfolio. While many governments,
including the U.S. federal government, have taken
substantial steps to stabilize economic conditions in an effort
to increase liquidity and capital availability, there continues
to be significant uncertainty regarding the timeline for global
economic recovery. Depending on market conditions going forward,
we could incur substantial realized and additional unrealized
losses in future periods, which could have an adverse impact on
our results of operations and financial condition. Disruptions,
uncertainty and volatility in the global credit markets may also
impact our ability to obtain financing for future acquisitions.
If financing is available, it may only be available at an
unattractive cost of capital, which would decrease our
profitability.
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. We publish our consolidated
financial statements in U.S. dollars. Therefore,
fluctuations in exchange rates used to convert other currencies,
particularly Australian dollars, Euros, British pounds and other
European currencies, into U.S. dollars will impact our
reported consolidated financial condition, results of operations
and cash flows from year to year. We recorded, for the year
ended December 31, 2010, foreign currency translation
adjustment gains of $22.4 million, net of noncontrolling
interest of $9.6 million, upon conversion of Gordians
net Australian dollar assets to U.S. dollars due primarily
to the increase in the Australian to U.S. dollar foreign
exchange rate.
We have made, and expect to continue to make, strategic
acquisitions of insurance and reinsurance companies in run-off,
and these activities may not be financially beneficial to us or
our shareholders.
We have pursued and, as part of our strategy, we will continue
to pursue growth through acquisitions
and/or
strategic investments in insurance and reinsurance companies in
run-off. We have made 30 acquisitions and several investments
and we expect to continue to make such acquisitions and
investments. We cannot be certain that any of these acquisitions
or investments will be financially advantageous for us or our
shareholders.
50
The negotiation of potential acquisitions or strategic
investments, as well as the integration of an acquired business
or portfolio, could result in a substantial diversion of
management resources. Acquisitions could involve numerous
additional risks such as potential losses from unanticipated
litigation or levels of claims, 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 ability to manage our growth through acquisitions or
strategic investments will depend, in part, on our success in
addressing these risks. Any failure by us to effectively
implement our acquisition or strategic investment strategies
could have a material adverse effect on our business, financial
condition or results of operations.
Our
past and future acquisitions may expose us to operational risks
such as cash flow shortages, challenges to recruit appropriate
levels of personnel, financial exposures to foreign currencies,
additional integration costs and management time and
effort.
We have made 30 acquisitions of insurance and reinsurance
businesses in run-off and entered into 15 acquisitions of
portfolios of insurance and reinsurance businesses in run-off,
and we may in the future make additional strategic acquisitions.
These acquisitions may expose us to operational challenges and
risks, including:
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funding cash flow shortages that may occur if anticipated
revenues are not realized or are delayed, whether by general
economic or market conditions or unforeseen internal
difficulties;
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funding cash flow shortages that may occur if expenses are
greater than anticipated;
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the value of assets being lower than expected or diminishing
because of credit defaults or changes in interest rates, or
liabilities assumed being greater than expected;
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integrating financial and operational reporting systems,
including assurance of compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and our Exchange Act reporting
requirements;
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establishing satisfactory budgetary and other financial controls;
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funding increased capital needs and overhead expenses;
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obtaining management personnel required for expanded
operations; and
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the assets and liabilities we may acquire may be subject to
foreign currency exchange rate fluctuation.
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Our failure to manage successfully these operational challenges
and risks could have a material adverse effect on our business,
financial condition or results of operations.
Fluctuations
in the reinsurance industry may cause our operating results to
fluctuate.
The reinsurance industry historically has been subject to
significant fluctuations and uncertainties. Factors that affect
the industry in general may also cause our operating results to
fluctuate. The industrys profitability may be affected
significantly by:
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fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested capital and may affect the ultimate payout of loss
amounts and the costs of administering books of reinsurance
business;
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volatile and unpredictable developments, such as those that have
occurred recently in the world-wide financial and credit
markets, which may adversely affect the recoverability of
reinsurance from our reinsurers;
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changes in reserves resulting from different types of claims
that may arise and the development of judicial interpretations
relating to the scope of insurers liability; and
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the overall level of economic activity and the competitive
environment in the industry.
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51
The
effects of emerging claim and coverage issues on our business
are uncertain.
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 loss adjustment expenses by either extending coverage beyond
the intent of insurance policies and reinsurance contracts
envisioned at the time they were written, or by increasing the
number or size of claims. In some instances, these changes may
not become apparent until some time after we have acquired
companies or portfolios of insurance or reinsurance contracts
that are affected by the changes. 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. To
further understand this risk, see Business
Reserves for Unpaid Losses and Loss Adjustment Expense on
page 13.
Insurance
laws and regulations restrict our ability to operate, and any
failure to comply with these laws and regulations, or any
investigations by government authorities, may have a material
adverse effect on our business.
We are subject to extensive regulation under insurance laws of a
number of jurisdictions, and compliance with legal and
regulatory requirements is expensive. These laws limit the
amount of dividends that can be paid to us by our insurance and
reinsurance subsidiaries, prescribe solvency standards that they
must meet and maintain, impose restrictions on the amount and
type of investments that they can hold to meet solvency
requirements and require them to maintain reserves. Failure to
comply with these laws may subject our subsidiaries to fines and
penalties and restrict them from conducting business. The
application of these laws may affect our liquidity and ability
to pay dividends on our ordinary shares and may restrict our
ability to expand our business operations through acquisitions.
At December 31, 2010, the required statutory capital and
surplus of our insurance and reinsurance companies amounted to
$377.0 million compared to the actual statutory capital and
surplus of $2.01 billion. As of December 31, 2010,
$85.3 million of our total investments of
$2.43 billion were not admissible for statutory solvency
purposes. To further understand this risk, see
Business Regulation beginning on
page 32.
The insurance industry has experienced substantial volatility as
a result of current investigations, litigation and regulatory
activity by various insurance, governmental and enforcement
authorities, including the SEC concerning certain practices
within the insurance industry. These practices include the sale
and purchase of finite reinsurance or other non-traditional or
loss mitigation insurance products and the accounting treatment
for those products. Insurance and reinsurance companies that we
have acquired, or may acquire in the future, may have been or
may become involved in these investigations and have lawsuits
filed against them. Our involvement in any investigations and
related lawsuits would cause us to incur legal costs and, if we
were found to have violated any laws, we could be required to
pay fines and damages, perhaps in material amounts.
If we
fail to comply with applicable insurance laws and regulations,
we may be subject to disciplinary action, damages, penalties or
restrictions that may have a material adverse effect on our
business.
Our subsidiaries may not have maintained or be able to maintain
all required licenses and approvals or that their businesses
fully comply with the laws and regulations to which they are
subject, or the relevant insurance regulatory authoritys
interpretation of those laws and regulations. In addition, some
regulatory authorities have relatively broad discretion to
grant, renew or revoke licenses and approvals. If our
subsidiaries do not have the requisite licenses and approvals or
do not comply with applicable regulatory requirements, the
insurance regulatory authorities may preclude or suspend our
subsidiaries from carrying on some or all of their activities,
place one of more of them into rehabilitation or liquidation
proceedings, or impose monetary penalties on them. These types
of actions may have a material adverse effect on our business
and may preclude us from making future acquisitions or obtaining
future engagements to manage companies and portfolios in run-off.
52
Exit
and finality opportunities provided by solvent schemes of
arrangement may not continue to be available, which may result
in the diversion of our resources to settle policyholder claims
for a substantially longer run-off period and increase the
associated costs of run-off of our insurance and reinsurance
subsidiaries.
With respect to our U.K., Bermudian and Australian insurance and
reinsurance subsidiaries, we are able to pursue strategies to
achieve complete finality and conclude the run-off of a company
by promoting solvent schemes of arrangement. Solvent schemes of
arrangement have been a popular means of achieving financial
certainty and finality for insurance and reinsurance companies
incorporated or managed in the U.K., Bermuda and Australia, by
making a one-time full and final settlement of an insurance and
reinsurance companys liabilities to policyholders. A
solvent scheme of arrangement is an arrangement between a
company and its creditors or any class of them. For a solvent
scheme of arrangement to become binding on the creditors, a
meeting of each class of creditors must be called, with the
permission of the local court, to consider and, if thought fit,
approve the solvent scheme of arrangement. The requisite
statutory majority of creditors of not less than 75% in value
and 50% in number of those creditors actually attending the
meeting, either in person or by proxy, must vote in favor of a
solvent scheme of arrangement. Once the solvent scheme of
arrangement has been approved by the statutory majority of
voting creditors of the company, it requires the sanction of the
local court at a hearing at which creditors may appear. The
court must be satisfied that the scheme is fair.
In July 2005, the case of British Aviation Insurance Company, or
BAIC, was the first solvent scheme of arrangement to fail to be
sanctioned by the English High Court, following opposition by
certain creditors. The primary reason for the failure of the
BAIC arrangement was the failure to adequately provide for
different classes of creditors to vote separately on the
arrangement. However, since BAIC, approximately 42 solvent
schemes of arrangement have been sanctioned, including one
relating to one of our subsidiaries, such that the prevailing
view is that the BAIC judgment was very fact-specific to the
case in question, and solvent schemes generally should continue
to be promoted and sanctioned as a viable means for achieving
finality for our insurance and reinsurance subsidiaries
Following the BAIC judgment, insurance and reinsurance companies
must take more care in drafting a solvent scheme of arrangement
to fit the circumstances of the company including the
determination of the appropriate classes of creditors. This
remains so after the January 2010 decision of the Inner House of
the Scottish Court of Session in the Scottish Lion case to the
effect that solvent schemes are to be considered on their
individual merits following a full consideration of the relevant
evidence, and that the existence of opposition to a scheme is
not, without a full hearing of the evidence, fatal to an
application for sanction. Should a solvent scheme of arrangement
promoted by any of our insurance or reinsurance subsidiaries
fail to receive the requisite approval by creditors or sanction
by the court, we will have to run off these liabilities until
expiry, which may result in the diversion of our resources to
settle policyholder claims for a substantially longer run-off
period and increase the associated costs of run-off, resulting
potentially in a material adverse effect on our financial
condition and results of operations.
We are
dependent on our executive officers, directors and other key
personnel and the loss of any of these individuals could
adversely affect our business.
Our success substantially depends on our ability to attract and
retain qualified employees and upon the ability of our senior
management and other key employees to implement our business
strategy. We believe that there are only a limited number of
available qualified personnel in the business in which we
compete. We rely substantially upon the services of Dominic F.
Silvester, our Chairman and Chief Executive Officer, Paul J.
OShea and Nicholas A. Packer, our Executive Vice
Presidents and Joint Chief Operating Officers, Richard J.
Harris, our Chief Financial Officer, and our subsidiaries
executive officers and directors to identify and consummate the
acquisition of insurance and reinsurance companies and
portfolios in run-off on favorable terms and to implement our
run-off strategy. Each of Messrs. Silvester, OShea,
Packer and Harris has an employment agreement with us. 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.
Under Bermuda law, non-Bermudians (other than spouses of
Bermudians, holders of permanent residents certificates or
holders of a working residents certificate) may not engage
in any gainful occupation in Bermuda without an appropriate
governmental work permit. Work permits may be granted or
extended by the Bermuda government upon showing that, after
proper public advertisement in most cases, no Bermudian (or
spouse of a
53
Bermudian, holder of a permanent residents certificate or
holders of a working residents certificate) is available
who meets the minimum standard requirements for the advertised
position. The Bermuda governments policy limits the
duration of work permits to six years, with certain exemptions
for key employees and job categories where there is a worldwide
shortage of qualified employees. As a result, if we were to lose
any of our key employees the work permit laws and policies may
hinder our ability to replace them.
Conflicts
of interest might prevent us from pursuing desirable investment
and business opportunities.
Our directors and executive officers may have ownership
interests or other involvement with entities that could compete
against us, either in the pursuit of acquisition targets or in
general business operations. On occasion, we have also
participated in transactions in which one or more of our
directors or executive officers had an interest. In particular,
we have invested, and expect to continue to invest, in or with
entities that are affiliates of or otherwise related to
Mr. Flowers. 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
independent members of our board of directors review any
material transactions involving a conflict of interest and may
take appropriate actions as may be deemed appropriate by them 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 should our board of directors be unable to
determine that any such transaction is on terms as favorable as
we could otherwise obtain in the absence of a conflict.
Our
inability to successfully manage the companies and portfolios
for which we have been engaged as a third-party manager may
adversely impact our financial results and our ability to win
future management engagements.
In addition to acquiring insurance and reinsurance companies in
run-off, we have entered into several management agreements with
third parties to manage their companies or portfolios of
business in run-off. The terms of these management engagements
typically include incentive payments to us based on our ability
to successfully manage the run-off of these companies or
portfolios. We may not be able to accomplish our objectives for
these engagements as a result of unforeseen circumstances such
as the length of time for claims to develop, the extent to which
losses may exceed reserves, changes in the law that may require
coverage of additional claims and losses, our ability to commute
reinsurance policies on favorable terms and our ability to
manage run-off expenses. If we are not successful in meeting our
objectives for these management engagements, we may not receive
incentive payments under our management agreements, which could
adversely impact our financial results, and we may not win
future engagements to provide these management services, which
could slow the growth of our business. Consulting fees generated
from management agreements amounted to $23.0 million,
$16.1 million and $25.2 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
We are
a holding company, and we are dependent on the ability of our
subsidiaries to distribute funds to us.
We are a holding company and conduct substantially all of our
operations through subsidiaries. Our only significant assets are
the capital stock of our subsidiaries. As a holding company, we
are dependent on distributions of funds from our subsidiaries to
pay dividends, fund acquisitions or fulfill financial
obligations in the normal course of our business. Our
subsidiaries may not generate sufficient cash from operations to
enable us to make dividend payments, acquire additional
companies or insurance or reinsurance portfolios or fulfill
other financial obligations. The ability of our insurance and
reinsurance subsidiaries to make distributions to us is limited
by applicable insurance laws and regulations, and the ability of
all of our subsidiaries to make distributions to us may be
restricted by, among other things, other applicable laws and
regulations and the terms of our subsidiaries bank loans.
54
Risks
Relating to Ownership of Our Ordinary Shares
Our
stock price may experience volatility, thereby causing a
potential loss of value to our investors.
The market price for our ordinary shares may fluctuate
substantially due to, among other things, the following factors:
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announcements with respect to an acquisition or investment;
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changes in the value of our assets;
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our quarterly and annual operating results;
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sales, or the possibility or perception of future sales, by our
existing shareholders;
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changes in general conditions in the economy and the insurance
industry;
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the financial markets; and
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adverse press or news announcements.
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A few
significant shareholders may influence or control the direction
of our business. If the ownership of our ordinary shares
continues to be highly concentrated, it may limit your ability
and the ability of other shareholders to influence significant
corporate decisions.
The interests of Messrs. Flowers, Silvester, Packer and
OShea, Advisory Research, Inc., or Advisory, and Beck
Mack & Oliver LLC, or Beck Mack, may not be fully
aligned with your interests, and this may lead to a strategy
that is not in your best interest. As of December 31, 2010,
Messrs. Flowers, Silvester, Packer and OShea,
Advisory and Beck Mack beneficially owned approximately 11.3%,
11.9%, 3.6%, 3.9%, 6.9% and 9.0%, respectively, of our
outstanding ordinary shares. Although they do not act as a
group, Advisory, Beck Mack and each of Messrs. Flowers,
Silvester, Packer and OShea 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. For further information on aspects of our
bye-laws that may discourage changes of control of Enstar, see
Some aspects of our corporate structure may
discourage third-party takeovers and other transactions or
prevent the removal of our board of directors and
management below.
Some
aspects of our corporate structure may discourage third-party
takeovers and other transactions or prevent the removal of our
board of directors and management.
Some provisions of our bye-laws have the effect of making more
difficult or discouraging unsolicited takeover bids from third
parties or preventing the removal of our current board of
directors and management. In particular, our bye-laws make it
difficult for any U.S. shareholder or Direct Foreign
Shareholder Group (a shareholder or group of commonly controlled
shareholders of Enstar that are not U.S. persons) to own or
control ordinary shares that constitute 9.5% or more of the
voting power of all of our ordinary shares. The votes conferred
by such shares will be reduced by whatever amount is necessary
so that after any such reduction the votes conferred by such
shares will constitute 9.5% of the total voting power of all
ordinary shares entitled to vote generally. The primary purpose
of this restriction is to reduce the likelihood that we will be
deemed a controlled foreign corporation within the
meaning of Internal Revenue Code of 1986, as amended, or the
Code, for U.S. federal tax purposes. However, this limit
may also have the effect of deterring purchases of large blocks
of our ordinary shares or proposals to acquire us, even if some
or a majority of our shareholders might deem these purchases or
acquisition proposals to be in their best interests. In
addition, our bye-laws provide for a classified board, whose
members may be removed by our shareholders only for cause by a
majority vote, and contain restrictions on the ability of
shareholders to nominate persons to serve as directors, submit
resolutions to a shareholder vote and request special general
meetings.
These bye-law provisions make it more difficult to acquire
control of us by means of a tender offer, open market purchase,
proxy contest or otherwise. These provisions may encourage
persons seeking to acquire control of us to negotiate with our
directors, which we believe would generally best serve the
interests of our shareholders. However, these provisions may
have the effect of discouraging a prospective acquirer from
making a tender offer or otherwise attempting to obtain control
of us. In addition, these bye-law provisions may prevent the
removal of our
55
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.
The
market value of our ordinary shares may decline if large numbers
of shares are sold, including pursuant to existing registration
rights.
We have entered into a registration rights agreement with
Mr. Flowers and Mr. Silvester and certain other of our
shareholders. This agreement provides that Mr. Flowers and
Mr. Silvester may request that we effect a registration
under the Securities Act of certain of their ordinary shares. In
addition, they and the other shareholders party to the agreement
have piggyback registration rights, which may result
in their participation in an offering initiated by us. As of
December 31, 2010, an aggregate of approximately
3.0 million ordinary shares held by Mr. Flowers and
Mr. Silvester are subject to the agreement. By exercising
their registration rights, these holders could cause a large
number of ordinary shares to be registered and generally become
freely tradable without restrictions under the Securities Act
immediately upon the effectiveness of the registration. Our
ordinary shares have in the past been, and may from time to time
continue to be, thinly traded, and significant sales, pursuant
to the existing registration rights or otherwise, could
adversely affect the market price for our ordinary shares and
impair our ability to raise capital through offerings of our
equity securities.
Because
we are incorporated in Bermuda, it may be difficult for
shareholders to serve process or enforce judgments against us or
our directors and officers.
We are a Bermuda company. In addition, certain of our officers
and directors reside in countries outside the United States. All
or a substantial portion of our assets and the assets of these
officers and directors are or may be located outside the United
States. Investors may have difficulty effecting service of
process within the United States on our directors and officers
who reside outside the United States or recovering against us or
these directors and officers on judgments of U.S. courts
based on civil liabilities provisions of the U.S. federal
securities laws even though we have appointed an agent in the
United States to receive service of process.
Further, no claim may be brought in Bermuda against us or our
directors and officers for violation of U.S. federal
securities laws, as such laws do not have force of law in
Bermuda. A Bermuda court may, however, impose civil liability,
including the possibility of monetary damages, on us or our
directors and officers if the facts alleged in a complaint
constitute or give rise to a cause of action under Bermuda law.
We believe that there is doubt as to whether the courts of
Bermuda would enforce judgments of U.S. courts obtained in
actions against us or our directors and officers, as well as our
independent auditors, predicated upon the civil liability
provisions of the U.S. federal securities laws or original
actions brought in Bermuda against us or these persons
predicated solely upon U.S. federal securities laws.
Further, there is no treaty in effect between the United States
and Bermuda providing for the enforcement of judgments of
U.S. courts, and there are grounds upon which Bermuda
courts may not enforce judgments of U.S. courts.
Some remedies available under the laws of
U.S. jurisdictions, including some remedies available under
the U.S. federal securities laws, may not be allowed in
Bermuda courts as contrary to that jurisdictions public
policy. Because judgments of U.S. courts are not
automatically enforceable in Bermuda, it may be difficult for
you to recover against us based upon such judgments.
Shareholders
who own our ordinary shares may have more difficulty in
protecting their interests than shareholders of a U.S.
corporation.
The Bermuda Companies Act, or 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 5% or more of our outstanding ordinary
shares or 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 shareholders. In
the future, we may decide to commence a dividend program for the
benefit of our shareholders. Any future determination to pay
dividends will be at the discretion of our board of directors
and will be limited by our position as a holding company that
lacks direct operations, the results of operations of our
subsidiaries, our financial condition, cash requirements and
prospects and other factors that our board of directors deems
relevant. In addition, there are significant regulatory and
other constraints that could prevent us from paying dividends in
any event. As a result, capital appreciation, if any, on our
ordinary shares may be your sole source of gain for the
foreseeable future.
Our
board of directors may decline to register a transfer of our
ordinary shares under certain circumstances.
Our board of directors may decline to register a transfer of
ordinary shares under certain circumstances, including if it has
reason to believe that any non-de minimis adverse tax,
regulatory or legal consequences to us, any of our subsidiaries
or any of our shareholders may occur as a result of such
transfer. Further, our bye-laws provide us with the option to
repurchase, or to assign to a third party the right to purchase,
the minimum number of shares necessary to eliminate any such
non-de minimis adverse tax, regulatory or legal consequence. In
addition, our board of directors may decline to approve or
register a transfer of shares unless all applicable consents,
authorizations, permissions or approvals of any governmental
body or agency in Bermuda, the United States or any other
applicable jurisdiction required to be obtained prior to such
transfer shall have been obtained. The proposed transferor of
any shares will be deemed to own those shares for dividend,
voting and reporting purposes until a transfer of such shares
has been registered on our shareholders register.
It is our understanding that while the precise form of the
restrictions on transfer contained in our bye-laws is untested,
as a matter of general principle, restrictions on transfers are
enforceable under Bermuda law and are not uncommon. These
restrictions on transfer may also have the effect of delaying,
deferring or preventing a change in control.
Risks
Relating to Taxation
We
might incur unexpected U.S., U.K. or Australia tax liabilities
if companies in our group that are incorporated outside those
jurisdictions are determined to be carrying on a trade or
business there.
We and a number of our subsidiaries are companies formed under
the laws of Bermuda or other jurisdictions that do not impose
income taxes; it is our contemplation that these companies will
not incur substantial income tax liabilities from their
operations. Because the operations of these companies generally
involve, or relate to, the insurance or reinsurance of risks
that arise in higher tax jurisdictions, such as the United
States, United Kingdom and Australia, it is possible that the
taxing authorities in those jurisdictions may assert that the
activities of one or more of these companies creates a
sufficient nexus in that jurisdiction to subject the company to
income tax there. There are uncertainties in how the relevant
rules apply to insurance businesses, and in our eligibility for
favorable treatment under applicable tax treaties. Accordingly,
it is possible that we could incur substantial unexpected tax
liabilities.
U.S.
persons who own our ordinary shares might become subject to
adverse U.S. tax consequences as a result of related
person insurance income, or RPII, if any, of our
non-U.S.
insurance company subsidiaries.
If the RPII rules of the Code were to apply to us, a
U.S. person who owns our ordinary shares directly or
indirectly through foreign entities on the last day of the
taxable year would be required to include in income for
U.S. federal income tax purposes the shareholders pro
rata share of our
non-U.S. subsidiaries
RPII for the entire taxable year, determined as if that RPII
were distributed proportionately to the U.S. shareholders
at that date regardless whether any actual distribution is made.
In addition, 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
57
our subsidiaries intend to generally operate in a manner so as
to qualify for certain exceptions to the RPII rules, there can
be no assurance that these exceptions will be available.
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 shares, any gain from the
disposition will generally be treated as dividend income to the
extent of the shareholders share of the corporations
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, however, have not
been interpreted by the courts or the U.S. Internal Revenue
Service, 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.
U.S.
persons who own our ordinary shares would be subject to adverse
tax consequences if we or one or more of our
non-U.S.
subsidiaries were considered a passive foreign investment
company, or PFIC, for U.S. federal income tax
purposes.
We believe that we and our
non-U.S. subsidiaries
will not be PFICs for U.S. federal income purposes for the
current year. Moreover, we do not expect to conduct our
activities in a manner that will cause us or any of our
non-U.S. subsidiaries
to become a PFIC in the future. However, there can be no
assurance that the IRS will not challenge this position or that
a court will not sustain such challenge. Accordingly, it is
possible that we or one or more of our
non-U.S. subsidiaries
might be deemed a PFIC by the IRS or a court for the current
year or any future year. If we or one or more of our
non-U.S. subsidiaries
were a PFIC, it could have material adverse tax consequences for
an investor that is subject to U.S. federal income
taxation, including subjecting the investor to a substantial
acceleration
and/or
increase in tax liability. There are currently no 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.
We may
become subject to taxes in Bermuda after March 28,
2016.
The Bermuda Minister of Finance, under the Exempted Undertakings
Tax Protection Act 1966, as amended, of Bermuda, has given us
and each of our Bermuda subsidiaries an assurance that if any
legislation is enacted in Bermuda that would impose tax computed
on profits or income, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax will not be
applicable to us or our Bermuda subsidiaries or any of our or
their respective operations, shares, debentures or other
obligations until March 28, 2016. Given the limited
duration of the Minister of Finances assurance, we cannot
be certain that we will not be subject to any Bermuda tax after
March 28, 2016. In the event that we become subject to any
Bermuda tax after such date, it could have a material adverse
effect on our financial condition and results of operations. The
Bermuda Minister of Finance announced, in November 2010, that
the assurance will be extended to 2035, however, the required
legislation for this has not yet been brought before the Bermuda
legislature.
U.S.
persons who own 10 percent or more of our shares may be
subject to taxation under the controlled foreign
corporation, or CFC, rules.
A U.S. person that is a 10%
U.S. Shareholder of a
non-U.S. corporation
(i.e., a U.S. person who owns or is treated as owning at
least 10% of the total combined voting power of all classes of
stock entitled to vote of the
non-U.S. corporation)
that is a CFC for an uninterrupted period of 30 days or
more during a taxable year, that owns shares in the CFC directly
or indirectly through
non-U.S. entities
on the last day of the CFCs taxable year, must include in
its gross income for U.S. federal income tax purposes its
pro rata share of the CFCs subpart F income,
even if the subpart F income is not distributed. Subpart F
income of a
non-U.S. insurance
corporation typically includes foreign personal holding company
income (such as interest, dividends and other types of passive
income), as well as insurance and reinsurance income (including
underwriting and investment income).
58
A
non-U.S. corporation
is considered a CFC if 10% U.S. Shareholders
own (directly, indirectly through
non-U.S. entities
or by attribution by application of the constructive ownership
rules of section 958(b) of the Code (i.e.,
constructively)) more than 50% of the total combined
voting power of all classes of stock of that foreign
corporation, or the total value of all stock of that foreign
corporation. For purposes of taking into account insurance
income, a CFC also includes a
non-U.S. insurance
company in which more than 25% of the total combined voting
power of all classes of stock (or more than 25% of the total
value of the stock) is owned directly, indirectly through
non-U.S. entities
or constructively by 10% U.S. Shareholders on any day
during the taxable year of such corporation, if the gross amount
of premiums or other consideration for the reinsurance or the
issuing of insurance (other than certain insurance or
reinsurance related to same country risks written by certain
insurance companies not applicable here) exceeds 75% of the
gross amount of all premiums or other consideration in respect
of all risks.
We believe that because of the dispersion of our share
ownership, and provisions in our organizational documents that
limit voting power, no U.S. Person (including our
subsidiary Enstar USA, Inc., which owns certain of our
non-voting shares) should be treated as owning (directly,
indirectly through
non-U.S. entities
or constructively) 10% or more of the total voting power of all
classes of our shares. However, the IRS could successfully
challenge the effectiveness of these provisions in our
organizational documents. Accordingly, no assurance can be given
that a U.S. person who owns our shares will not be
characterized as a 10% U.S. Shareholder.
Changes
in U.S. federal income tax law could materially affect us or our
shareholders.
Legislation has been proposed on various occasions to eliminate
perceived tax advantages of insurance companies that have legal
domiciles outside the United States but have certain
U.S. connections. For example, proposed legislation was
introduced in Congress in 2010 to limit the deductibility of
reinsurance premiums paid by U.S. companies to
non-U.S. affiliates,
although no such provision was enacted. It is possible that
similar legislation could be introduced in and enacted by the
current Congress or future Congresses and enactment of some
version of such legislation, or other changes in U.S. tax
laws, regulations or interpretations thereof, could have an
adverse impact on us or our shareholders.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not applicable
59
We lease office space in the locations set forth below. We
believe that this office space is sufficient for us to conduct
our current operations for the foreseeable future.
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
Lease
|
Entity
|
|
Location
|
|
Feet
|
|
|
Expiration
|
|
Enstar Limited
|
|
Hamilton, Bermuda
|
|
|
8,250
|
|
|
August 7, 2014
|
Enstar (EU) Limited
|
|
Guildford, England
|
|
|
22,712
|
|
|
August 15, 2016
|
Enstar (EU) Limited
|
|
London, England
|
|
|
12,453
|
|
|
March 24, 2016
|
Enstar (EU) Limited
|
|
London, England
|
|
|
2,192
|
|
|
March 24, 2011
|
Enstar (EU) Limited
|
|
London, England
|
|
|
3,822
|
|
|
September 26, 2015
|
River Thames Insurance Company
|
|
London, England
|
|
|
6,329
|
|
|
March 24, 2015
|
Enstar Australia Limited
|
|
Sydney, Australia
|
|
|
8,094
|
|
|
April 30, 2013
|
Enstar (US) Inc.
|
|
Tampa, FL
|
|
|
8,859
|
|
|
October 31, 2011
|
Enstar (US) Inc.
|
|
E Providence, RI
|
|
|
13,628
|
|
|
September 30, 2012
|
Enstar (US) Inc.
|
|
Warwick, RI
|
|
|
3,000
|
|
|
May 31, 2011
|
Enstar USA, Inc.
|
|
Montgomery, AL
|
|
|
2,500
|
|
|
December 31, 2012
|
We also own, through various of our subsidiaries, the following
properties: 1) two apartments in Guildford, England;
2) a building in Norwich, England and 3) an apartment
in New York, NY. In addition, we also lease two residential
apartments in Bermuda with leases expiring in April 2011 and
April 2012.
See Note 20 to our consolidated financial statements for
further discussion of our lease commitments for real property.
60
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are, from time to time, involved in various legal proceedings
in the ordinary course of business, including litigation
regarding claims. We do not believe that the resolution of any
currently pending legal proceedings, either individually or
taken as a whole, will have a material adverse effect on our
business, results of operations or financial condition.
Nevertheless, we cannot assure you that lawsuits, arbitrations
or other litigation will not have a material adverse effect on
our business, financial condition or results of operations. 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 claims.
There can be no assurance that any such future litigation will
not have a material adverse effect on our business, financial
condition or results of operations.
61
PART II
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
for the Registrants Common Equity
Our ordinary shares trade on the Nasdaq Global Select Market
under the ticker symbol ESGR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
74.87
|
|
|
$
|
61.03
|
|
|
$
|
76.63
|
|
|
$
|
41.41
|
|
Second Quarter
|
|
$
|
69.74
|
|
|
$
|
54.03
|
|
|
$
|
75.20
|
|
|
$
|
50.11
|
|
Third Quarter
|
|
$
|
76.29
|
|
|
$
|
65.01
|
|
|
$
|
64.41
|
|
|
$
|
55.10
|
|
Fourth Quarter
|
|
$
|
89.92
|
|
|
$
|
70.26
|
|
|
$
|
75.00
|
|
|
$
|
58.03
|
|
On March 1, 2011 the number of holders of record of our
ordinary shares was 2,266. This figure does not represent the
actual number of beneficial owners of our ordinary shares
because shares are frequently held in street name by
securities dealers and others for the benefit of beneficial
owners who may vote the shares.
We are a holding company and have no direct operations. Our
ability to pay dividends or distributions depends almost
exclusively on the ability of our subsidiaries to pay dividends
to us. Under applicable law, our subsidiaries may not declare or
pay a dividend if there are reasonable grounds for believing
that they are, or would after the payment be, unable to pay
their liabilities as they become due, or the realizable value of
their assets would thereby be less than the aggregate of their
liabilities and their issued share capital and share premium
accounts. Additional restrictions apply to our insurance and
reinsurance subsidiaries. We do not intend to pay a dividend on
our ordinary shares. Rather, we intend to reinvest any earnings
back into the company. For a further description of the
restrictions on the ability of our subsidiaries to pay
dividends, see Risk Factors Risks Relating to
Ownership of Our Ordinary Shares We do not intend to
pay cash dividends on our ordinary shares and
Business Regulation beginning on
pages 57 and 32, respectively. We did not pay any dividends
on our ordinary shares in 2010 or 2009.
On January 31, 2007, we completed the merger, or the
Merger, of CWMS Subsidiary Corp., a Georgia corporation and our
wholly-owned subsidiary, with and into The Enstar Group Inc., a
Georgia corporation, or EGI. As a result of the Merger, EGI,
renamed Enstar USA, Inc., is now our wholly-owned subsidiary.
Prior to the completion of the Merger, EGIs common stock
traded on the Nasdaq Global Select Market under the ticker
symbol ESGR. Because our ordinary shares did not commence
trading until after the Merger, the graph below reflects the
cumulative shareholder return on the common stock of EGI, our
predecessor, compared to the cumulative shareholder return of
the NASDAQ Composite Index (the Nasdaq index for
U.S. companies used in prior years was discontinued in
2006) and the Nasdaq Insurance Index, through
January 31, 2007. Thereafter, the graph below reflects the
same comparison for Enstar. The graph reflects the investment of
$100.00 on December 31, 2005 (assuming the reinvestment of
dividends) in EGI common stock, the NASDAQ Composite Index, and
the Nasdaq Insurance Index).
62
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
Enstar Group Limited, the NASDAQ Composite Index
and the NASDAQ Insurance Index
Source: Research Data Group, Inc.
|
|
|
* |
|
$100 invested on 12/31/05 in stock or index, including
reinvestment of dividends. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/05
|
|
|
|
12/06
|
|
|
|
12/07
|
|
|
|
12/08
|
|
|
|
12/09
|
|
|
|
12/10
|
|
Enstar Group Limited
|
|
|
|
100.00
|
|
|
|
|
144.75
|
|
|
|
|
189.93
|
|
|
|
|
91.75
|
|
|
|
|
113.29
|
|
|
|
|
131.22
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
111.74
|
|
|
|
|
124.67
|
|
|
|
|
73.77
|
|
|
|
|
107.12
|
|
|
|
|
125.93
|
|
NASDAQ Insurance
|
|
|
|
100.00
|
|
|
|
|
110.09
|
|
|
|
|
108.18
|
|
|
|
|
87.79
|
|
|
|
|
91.16
|
|
|
|
|
107.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
Purchases of Equity Securities
The table below lists our repurchases of ordinary shares during
the fourth quarter of 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value) of Shares
|
|
|
|
|
|
|
|
|
|
part of Publicly
|
|
|
that May Yet Be
|
|
|
|
Total Number of
|
|
|
Average Price Paid
|
|
|
Announced Plans or
|
|
|
Purchased Under the
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Programs
|
|
|
Plans or Programs
|
|
|
October 1 October 31, 2010
|
|
|
800,000
|
(1)
|
|
$
|
70.00
|
|
|
|
|
|
|
|
|
|
November 1 November 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
800,000
|
|
|
$
|
70.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On October 1, 2010, we entered into the Repurchase
Agreements with three of our executives and certain trusts and a
corporation affiliated with the executives to repurchase an
aggregate of 800,000 of our ordinary shares at a price of $70.00
per share. The repurchase transactions closed on
October 14, 2010. |
63
|
|
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
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited
consolidated financial statements and notes thereto included
elsewhere in this annual report. The results of operations for
past accounting periods are not necessarily indicative of the
results to be expected for any future accounting period.
Since our inception, we have made several acquisitions which
impact the comparability between periods of the information
reflected below. See Business Recent
Transactions, beginning on page 6 for information
about our acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands of U.S. dollars, except share and per share
data)
|
|
|
Summary Consolidated Statements of Earnings Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
23,015
|
|
|
$
|
16,104
|
|
|
$
|
25,151
|
|
|
$
|
31,918
|
|
|
$
|
33,908
|
|
Net investment income and net realized and unrealized gains
(losses)
|
|
|
113,043
|
|
|
|
85,608
|
|
|
|
24,946
|
|
|
|
64,336
|
|
|
|
48,001
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities
|
|
|
311,834
|
|
|
|
259,627
|
|
|
|
242,104
|
|
|
|
24,482
|
|
|
|
31,927
|
|
Total other expenses
|
|
|
(242,865
|
)
|
|
|
(184,331
|
)
|
|
|
(194,837
|
)
|
|
|
(67,904
|
)
|
|
|
(49,838
|
)
|
Share of earnings (loss) of partly owned companies
|
|
|
10,704
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
|
|
215,731
|
|
|
|
177,008
|
|
|
|
97,163
|
|
|
|
52,832
|
|
|
|
64,516
|
|
Extraordinary gain -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Negative goodwill
|
|
|
|
|
|
|
|
|
|
|
50,280
|
|
|
|
15,683
|
|
|
|
35,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
215,731
|
|
|
$
|
177,008
|
|
|
$
|
147,443
|
|
|
$
|
68,515
|
|
|
$
|
99,883
|
|
Less: Net earnings attributable to noncontrolling interests
(including share of extraordinary gain of $nil, $nil, $15,084,
$nil and $4,329)
|
|
|
(41,645
|
)
|
|
|
(41,798
|
)
|
|
|
(65,892
|
)
|
|
|
(6,730
|
)
|
|
|
(17,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited
|
|
$
|
174,086
|
|
|
$
|
135,210
|
|
|
$
|
81,551
|
|
|
$
|
61,785
|
|
|
$
|
82,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before extraordinary gain attributable to
Enstar Group Limited ordinary shareholders basic
|
|
$
|
12.91
|
|
|
$
|
10.01
|
|
|
$
|
3.67
|
|
|
$
|
3.93
|
|
|
$
|
5.21
|
|
Extraordinary gain per share attributable to Enstar Group
Limited ordinary shareholders basic
|
|
|
|
|
|
|
|
|
|
|
2.78
|
|
|
|
1.34
|
|
|
|
3.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to Enstar Group Limited
ordinary shareholders basic
|
|
$
|
12.91
|
|
|
$
|
10.01
|
|
|
$
|
6.45
|
|
|
$
|
5.27
|
|
|
$
|
8.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before extraordinary gain attributable to
Enstar Group Limited ordinary shareholders diluted
|
|
$
|
12.66
|
|
|
$
|
9.84
|
|
|
$
|
3.59
|
|
|
$
|
3.84
|
|
|
$
|
5.15
|
|
Extraordinary gain per share attributable to Enstar Group
Limited ordinary shareholders diluted
|
|
|
|
|
|
|
|
|
|
|
2.72
|
|
|
|
1.31
|
|
|
|
3.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to Enstar Group Limited
ordinary shareholders diluted
|
|
$
|
12.66
|
|
|
$
|
9.84
|
|
|
$
|
6.31
|
|
|
$
|
5.15
|
|
|
$
|
8.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
13,489,221
|
|
|
|
13,514,207
|
|
|
|
12,638,333
|
|
|
|
11,731,908
|
|
|
|
9,857,914
|
|
Weighted average shares outstanding diluted
|
|
|
13,751,256
|
|
|
|
13,744,661
|
|
|
|
12,921,475
|
|
|
|
12,009,683
|
|
|
|
9,966,960
|
|
Cash dividends paid per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.92
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in thousands of U.S. dollars, except per share data)
|
|
Summary Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
2,429,106
|
|
|
$
|
1,620,992
|
|
|
$
|
1,278,055
|
|
|
$
|
637,196
|
|
|
$
|
747,529
|
|
Cash and cash equivalents
|
|
|
1,455,354
|
|
|
|
1,700,105
|
|
|
|
2,209,873
|
|
|
|
1,163,333
|
|
|
|
513,563
|
|
Reinsurance balances receivable
|
|
|
961,442
|
|
|
|
638,262
|
|
|
|
672,696
|
|
|
|
465,277
|
|
|
|
408,142
|
|
Total assets
|
|
|
5,235,904
|
|
|
|
4,170,842
|
|
|
|
4,358,151
|
|
|
|
2,417,143
|
|
|
|
1,774,252
|
|
Loss and loss adjustment expense liabilities
|
|
|
3,291,275
|
|
|
|
2,479,136
|
|
|
|
2,798,287
|
|
|
|
1,591,449
|
|
|
|
1,214,419
|
|
Loans payable
|
|
|
245,278
|
|
|
|
254,961
|
|
|
|
391,534
|
|
|
|
60,227
|
|
|
|
62,148
|
|
Total Enstar Group Limited shareholders equity
|
|
|
948,421
|
|
|
|
801,881
|
|
|
|
615,209
|
|
|
|
450,599
|
|
|
|
318,610
|
|
Book Value per Share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
73.29
|
|
|
$
|
59.05
|
|
|
$
|
46.14
|
|
|
$
|
37.80
|
|
|
$
|
32.15
|
|
Diluted
|
|
$
|
71.68
|
|
|
$
|
58.06
|
|
|
$
|
45.18
|
|
|
$
|
36.92
|
|
|
$
|
31.85
|
|
|
|
|
(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. |
|
(2) |
|
The weighted average ordinary shares outstanding shown for the
years ended December 31, 2007 and 2006 reflect the
conversion of Class A, B, C and D shares to ordinary shares
on January 31, 2007, as part of the recapitalization
completed in connection with the Merger, as if the conversion
occurred on January 1, 2007 and 2006. As a result, both the
book value per share and the earnings per share calculations for
2006, previously reported, have been amended to reflect this
change. |
|
(3) |
|
Basic book value per share is defined 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 defined as
total shareholders equity available to ordinary
shareholders divided by the number of ordinary shares and
ordinary share equivalents outstanding at the end of the period,
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 book value per share. |
65
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
Cautionary
Statement Regarding Forward-Looking Statements
This annual report and the documents incorporated by reference
contain statements that constitute forward-looking
statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, with respect to our financial condition, results of
operations, business strategies, operating efficiencies,
competitive positions, growth opportunities, plans and
objectives of our management, as well as the markets for our
ordinary shares and the insurance and reinsurance sectors in
general. Statements that include words such as
estimate, project, plan,
intend, expect, anticipate,
believe, would, should,
could, seek, 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 and incorporated by
reference in this annual report.
Factors that could cause actual results to differ materially
from those suggested by the forward-looking statements 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 the availability and collectability of our
reinsurance;
|
|
|
|
risks that we may require additional capital in the future,
which may not be available or may be available only on
unfavorable terms;
|
|
|
|
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;
|
|
|
|
losses due to foreign currency exchange rate fluctuations;
|
|
|
|
tax, regulatory or legal restrictions or limitations applicable
to us or the insurance and reinsurance business generally;
|
|
|
|
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;
|
|
|
|
changes in our plans, strategies, objectives, expectations or
intentions, which may happen at any time at managements
discretion;
|
|
|
|
operational risks, including system or human failures;
|
|
|
|
the risk that ongoing or future industry regulatory developments
will disrupt our business, 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;
|
|
|
|
changes in Bermuda law or regulation or the political stability
of Bermuda;
|
66
|
|
|
|
|
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; and
|
|
|
|
changes in accounting policies or practices.
|
The factors listed above should not be construed as
exhaustive. Certain of these factors are described in more
detail in Item 1A. Risk Factors above. We
undertake no obligation to release publicly the results of any
future revisions we may make to forward-looking statements to
reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
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 its 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 Risk Factors, Forward-Looking
Statements and elsewhere in this annual report.
Business
Overview
We were formed in August 2001 under the laws of Bermuda to
acquire and manage insurance and reinsurance companies in
run-off and portfolios of insurance and reinsurance business in
run-off, and to provide management, consulting and other
services to the insurance and reinsurance industry.
On January 31, 2007, we completed the merger, or the
Merger, of CWMS Subsidiary Corp, a Georgia corporation and our
wholly-owned subsidiary, with and into The Enstar Group, Inc., a
Georgia corporation. As a result of the Merger, The Enstar
Group, Inc., renamed Enstar USA, Inc., is now our wholly-owned
subsidiary. The Enstar Group, Inc. owned an approximate 32%
economic and a 50% voting interest in us prior to the Merger.
Since our formation, we, through our subsidiaries, have
completed 30 acquisitions of insurance and reinsurance companies
and 15 acquisitions of portfolios of insurance and reinsurance
business and are now administering those businesses in run-off.
We operate our business internationally through our insurance
and reinsurance subsidiaries and our consulting subsidiaries in
Bermuda, the United Kingdom, the United States, Europe and
Australia. We had a total of 335 employees as at
December 31, 2010.
2010
summary:
|
|
|
|
|
We completed the acquisitions of six companies and eight
portfolios of insurance and reinsurance business;
|
|
|
|
We repaid or paid down a number of our existing loan facilities
and entered into two new bank loan facilities that remained
outstanding as at December 31, 2010; and
|
|
|
|
On October 1, 2010, we repurchased 800,000 shares at a
price of $70.00 per share from three of our executives and
certain trusts and a corporation affiliated with the executives.
We issued promissory notes for the aggregate purchase price of
$56.0 million, of which $37.3 million was outstanding
at December 31, 2010, and is payable over approximately two
years.
|
2010
results of operations:
|
|
|
|
|
Net earnings attributable to Enstar Group Limited amounted to
$174.1 million, or $12.91 per basic share and $12.66 per
diluted share;
|
|
|
|
Net investment income and net realized gains amounted to
$113.0 million; and
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities amounted to $311.8 million.
|
67
2010
financial condition:
|
|
|
|
|
Total cash and investments of $3.88 billion;
|
|
|
|
Total assets of $5.24 billion;
|
|
|
|
Reserves for losses and loss adjustment expenses of
$3.29 billion and reinsurance recoverables of
$961.4 million; and
|
|
|
|
Total shareholders equity attributable to Enstar Group
Limited of $948.4 million; net book value per basic share
of $73.29 and per diluted share of $71.68.
|
Outlook
for 2011:
|
|
|
|
|
In February 2011, we entered into RITC agreements with two
Lloyds syndicates with total gross insurance reserves of
approximately $129.6 million;
|
|
|
|
During 2010, we signed definitive agreements for the
acquisitions of both Clarendon and Citilife Financial Limited
for a total purchase price of approximately $240.2 million.
These acquisitions are expected to close in the second and first
quarter of 2011, respectively;
|
|
|
|
On March 4, 2011, we, through our
wholly-owned
subsidiary, Clarendon Holdings, Inc., entered into a
$106.5 million term facility agreement, or the Clarendon
Facility, with a London-based bank, which will be available to
be drawn to fund up to 50% of the purchase price of Clarendon;
|
|
|
|
We expect our employee head count to increase by approximately
40 due primarily to the acquisition of Clarendon along with
continued growth of our operations;
|
|
|
|
We will continue to work with our regulators to facilitate the
release of surplus capital from our regulated
subsidiaries; and
|
|
|
|
We will continue to source and complete, where appropriate, the
acquisition of companies and portfolios of insurance and
reinsurance business in run-off.
|
Financial
Statement Overview
Consulting
Fee Income
We generate consulting fees based on a combination of fixed and
success-based fee arrangements. Consulting income will vary from
period to period depending on the timing of completion of
success-based fee arrangements. Success-based fees are recorded
when targets related to overall project completion or
profitability goals are achieved. Our consulting segment, in
addition to providing services to third parties, also provides
management services to the reinsurance segment based on agreed
terms set out in management agreements between the parties. The
fees charged by the consulting segment to the reinsurance
segment are eliminated against the cost incurred by the
reinsurance segment on consolidation.
Net
Investment Income and Net Realized and Unrealized
Gains/(Losses)
Our net investment income is principally derived from interest
earned primarily on cash and investments offset by investment
management fees paid. Our investment portfolio currently
consists of the following: (1) fixed maturity investments
that are classified as both
available-for-sale
and trading and are carried at fair value; (2) short-term
investments that are classified as both
available-for-sale
and trading and are carried at fair value; (3) equities
that are carried at fair value; and (4) other investments
that are accounted for at estimated fair values determined by
our proportionate share of the net asset value of the investee
reduced by any impairment charges.
Our current investment strategy seeks to preserve principal and
maintain liquidity while trying to maximize investment return
through a high-quality, diversified portfolio. The volatility of
claims and the effect they have on the amount of cash and
investment balances, as well as the level of interest rates and
other market factors, affect the return we are able to generate
on our investment portfolio. When we make a new acquisition we
will often restructure the acquired investment portfolio, which
may generate one-time realized gains or losses.
68
Net
Reduction in Ultimate Loss and Loss Adjustment Expense
Liabilities
Our insurance-related earnings are comprised primarily of
reductions, or potential increases, of net ultimate loss and
loss adjustment expense liabilities. These liabilities are
comprised of:
|
|
|
|
|
outstanding loss or case reserves, or OLR, which represent
managements best estimate of the likely settlement amount
for known claims, less the portion that can be recovered from
reinsurers;
|
|
|
|
reserves for losses incurred but not reported, or IBNR reserves,
which are reserves established by us for claims that are not yet
reported but can reasonably be expected to have occurred based
on industry information, managements experience and
actuarial evaluation, less the portion that can be recovered
from reinsurers; and
|
|
|
|
reserves for unallocated loss adjustment expenses, which
represent managements best estimate of the future costs to
be incurred by us in managing the run-off of claims liabilities
not specific, or allocated, to individual claims or policies.
|
Net ultimate loss and loss adjustment expense liabilities are
reviewed by our management each quarter and by independent
actuaries annually as of year end. Reserves reflect
managements best estimate of the remaining unpaid portion
of these liabilities. Prior period estimates of net ultimate
loss and loss adjustment expense liabilities may change as our
management considers the combined impact of commutations, policy
buy-backs, settlement of losses on carried reserves and the
trend of incurred loss development compared to prior forecasts.
Commutations provide an opportunity for us to exit exposures to
entire policies with insureds and reinsureds at a discount to
the previously estimated ultimate liability. To the extent
possible, our internal and external actuaries eliminate all
prior historical loss development that relates to commuted
exposures and apply their actuarial methodologies to the
remaining aggregate exposures and revised historical loss
development information to reassess estimates of ultimate
liabilities.
Policy buy-backs provide an opportunity for us to settle
individual policies and losses usually at a discount to carried
advised loss reserves. As part of our routine claims settlement
operations, claims will settle at either below or above the
carried advised loss reserve. The impact of policy buy-backs and
the routine settlement of claims updates historical loss
development information to which actuarial methodologies are
applied, often resulting in revised estimates of ultimate
liabilities. Our actuarial methodologies include industry
benchmarking, which, under certain methodologies (discussed
further under Critical Accounting
Policies below), 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. Additionally, consolidated net reductions,
or potential increases, in net ultimate loss and loss adjustment
expense liabilities include reductions, or potential increases,
in the provisions for future losses and loss adjustment expenses
related to the current periods run-off activity. Net
reductions in net ultimate loss and loss adjustment expense
liabilities are reported as negative expenses by us in our
reinsurance segment. The unallocated loss adjustment expenses
paid by the reinsurance segment comprise management fees paid to
the consulting segment and are eliminated on consolidation. The
consulting segment costs in providing run-off services are
classified as salaries and general and administrative expenses.
For more information on how the reserves are calculated, see
Critical Accounting Policies Loss
and Loss Adjustment Expenses on page 72.
As our reinsurance subsidiaries are in run-off, our premium
income is insignificant, consisting primarily of adjustment
premiums triggered by loss payments.
Salaries
and Benefits
We are a service-based company and, as such, employee salaries
and benefits are our largest expense. We have experienced
significant increases in our salaries and benefits expenses as
we have grown our operations, and we expect that trend to
continue if we are able to expand our operations successfully.
The Enstar Group Limited 2006 Equity Incentive Plan, or the
Equity Incentive Plan, and the Enstar Group Limited
2006-2010
Annual Incentive Compensation Plan, or the Annual Incentive
Plan, which are administered by the Compensation Committee of
our board of directors, provide for the annual grant of bonus
compensation to our
69
officers and employees, including our senior executive officers.
In February 2011, we adopted the Enstar Group Limited
2011-2015 Annual Incentive Compensation Program. Bonus awards
for each calendar year from 2006 through 2010 were determined,
and for calendar year 2011 will be determined, based on our
consolidated net after-tax profits. The Compensation Committee
determines the amount of bonus awards in any calendar year,
based on a percentage of our consolidated net after-tax profits.
The percentage is 15% unless the Compensation Committee
exercises its discretion to change the percentage no later than
30 days after our year end. For the years ended
December 31, 2010, 2009 and 2008 the percentage was left
unchanged by the Compensation Committee. The Compensation
Committee determines, in its sole discretion, the amount of
bonus awards payable to each participant.
Bonus awards are payable in cash, ordinary shares or a
combination of both. Ordinary shares issued in connection with a
bonus award will be issued pursuant to the terms and subject to
the conditions of the Equity Incentive Plan.
For information on the awards made under both the Annual and
Equity Incentive plans for the years ended December 31,
2010, 2009 and 2008, see Note 14 to our consolidated
financial statements for the year ended December 31, 2010,
included in Item 8 of this annual report.
General
and Administrative Expenses
General and administrative expenses include rent and
rent-related costs, professional fees (legal, investment, audit
and actuarial) and travel expenses. We have operations in
multiple jurisdictions and our employees travel frequently in
connection with the search for acquisition opportunities and in
the general management of the business. While certain general
and administrative expenses, such as professional fees, are
incurred directly by the reinsurance segment, the remaining
general and administrative expenses are incurred by the
consulting segment. To the extent that such costs incurred by
the consulting segment relate to the management of the
reinsurance segment, they are recovered by the consulting
segment through the management fees charged to the reinsurance
segment.
Foreign
Exchange Gain/(Loss)
Our reporting currency is U.S. dollars. Our functional
currency is U.S. dollars for all of our subsidiaries with
the exception of Gordian, whose functional currency is
Australian dollars. Through our subsidiaries whose functional
currency is the U.S. dollar, we hold a variety of foreign
(non-U.S.)
currency assets and liabilities, the principal exposures being
Euros, British pounds and Australian dollars. At each balance
sheet date, recorded balances that are denominated in a currency
other than U.S. dollars are adjusted to reflect the current
exchange rate. Revenue and expense items are translated into
U.S. dollars at average rates of exchange for the
applicable period. The resulting exchange gains or losses are
included in our net income.
For Gordian, whose functional currency is Australian dollars, at
each reporting period the balance sheet and income statement are
translated at period end and average rates of exchange,
respectively, with any foreign exchange gains or losses on
translation recorded as a component of our accumulated other
comprehensive income in the shareholders equity section of
our balance sheet.
We seek to manage our exposure to foreign currency exchange,
where possible, by broadly matching our foreign currency assets
against our foreign currency liabilities and to selectively use
foreign currency exchange contracts. Subject to regulatory
constraints, the net assets of our subsidiaries are maintained
in U.S. dollars.
Income
Tax/(Recovery)
Under current Bermuda law, we and our Bermuda subsidiaries are
not required to pay taxes in Bermuda on either income or capital
gains. These companies have received an undertaking from the
Bermuda government that, in the event of income or capital gains
taxes being imposed, they will be exempted from such taxes until
the year 2016.
Income taxes have been provided, in accordance with the
provisions of the Income Taxes topic of FASB ASC, on our
operations in other jurisdictions which are subject to income
tax. The calculation of our tax liabilities
70
involves dealing with uncertainties in the application of
complex tax laws and regulations in a multitude of jurisdictions
across our global operations.
Deferred income taxes arise from temporary differences between
the tax and financial statement recognition of revenue and
expense. Such temporary differences are due primarily to the tax
basis discount on unpaid losses and loss expenses, net operating
loss carryforwards, and certain investments. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. A valuation allowance against deferred tax assets is
recorded if it is more likely than not that all, or some
portion, of the benefits related to deferred tax assets will not
be realized.
At each balance sheet date, we assess the need to establish a
valuation allowance that reduces the net deferred tax asset when
it is more likely than not that all, or some portion, of the
deferred tax assets will not be realized. The valuation
allowance is based on all available information including
projections of future U.S. GAAP taxable income from each
tax-paying component in each tax jurisdiction. Projections of
future U.S. GAAP taxable income incorporate several assumptions
of future business and operations that are likely to differ from
actual experience. We also, in accordance with the Income Taxes
topic of FASB ASC, record tax liabilities for unrecognized tax
benefits related to uncertain tax positions.
Noncontrolling
Interest
The acquisitions of Hillcot Re (formerly Toa-Re Insurance
Company (UK) Limited) in March 2003 and of Brampton (formerly
Aioi Insurance Company of Europe Limited) in March 2006 were
effected through Hillcot, a Bermuda-based company in which we
had a 50.1% economic interest until October 27, 2008. The
results of operations of Hillcot were included in our
consolidated statements of operations with the remaining 49.9%
economic interest in the results of Hillcot reflected as a
noncontrolling interest until October 27, 2008 when we
acquired the 49.9% interest in Hillcot Re that we previously did
not own. As a result, the noncontrolling interest in the
earnings of Hillcot Re was recorded only through
September 30, 2008. On November 2, 2010, we acquired
the 49.9% of the shares of Hillcot that we did not previously
own. At the time of acquisition, Hillcot owned 100% of the
shares of Brampton. As a result, the noncontrolling interest in
the earnings of Hillcot was recorded only through
September 30, 2010.
During 2008, we completed the following acquisitions having a
noncontrolling interest: 1) Guildhall, a U.K.-based
insurance and reinsurance company in run-off; 2) Gordian,
AMP Limiteds Australian-based closed reinsurance and
insurance operations; 3) EPIC, a Bermuda-based reinsurance
company; 4) Goshawk, which owns Rosemont Reinsurance
Limited, a Bermuda-based reinsurer in run-off; and
5) Unionamerica, a U.K.-based insurance and reinsurance
company in run-off. We have a 70% economic interest in all of
the above listed acquired subsidiaries with the exception of
Goshawk, in which we have a 75% economic interest. The results
of the operations of the acquired subsidiaries are included in
our consolidated statements of earnings with the remaining
noncontrolling interests share of the economic interest of
the respective subsidiaries reflected as a noncontrolling
interest.
We own approximately 56.8% of Shelbourne, which in turn owns
100% of Shelbourne Syndicate Services Limited, the Managing
Agency for Lloyds Syndicate 2008, a syndicate approved by
Lloyds of London on December 16, 2007. We have
committed to provide approximately 83.0% of the capital required
by Lloyds Syndicate 2008, which is authorized to undertake
RITC transactions with Lloyds syndicates in run-off.
During 2010, we completed the transfer of a specific portfolio
of run-off business underwritten by Mitsui to our 50.1% owned
subsidiary, Bosworth. The results of operations of Bosworth are
included in our consolidated statements of earnings with the
remaining noncontrolling interests share of the economic
interest of Bosworth reflected as a noncontrolling interest.
Negative
Goodwill
Negative goodwill represents the excess of the fair value of
businesses acquired by us over the cost of such businesses. In
accordance with the Business Combinations topic of FASB ASC, or
ASC 805, this amount is recognized upon the acquisition of
the businesses as an extraordinary gain. The fair values of the
reinsurance assets
71
and liabilities acquired are derived from probability-weighted
ranges of the associated projected cash flows, based on
actuarially prepared information and our managements
run-off strategy. Any amendment to the fair values resulting
from changes in such information or strategy will be recognized
when they occur. For more information on how the goodwill is
determined, see Critical Accounting
Policies Goodwill on page 83.
Critical
Accounting Policies
Certain amounts in our consolidated financial statements require
the use of best estimates and assumptions to determine reported
values. These amounts could ultimately be materially different
than what has been provided for in our consolidated financial
statements. We consider the assessment of loss reserves and
reinsurance recoverable to be the values requiring the most
inherently subjective and complex estimates. In addition, the
fair value measurement of our investments and the assessment of
the possible impairment of goodwill involves certain estimates
and assumptions. As such, the accounting policies for these
amounts are of critical importance to our consolidated financial
statements.
Loss and
Loss Adjustment Expenses
The following table provides a breakdown of gross loss and loss
adjustment expense reserves by type of exposure as of
December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
OLR
|
|
|
IBNR
|
|
|
Total
|
|
|
OLR
|
|
|
IBNR
|
|
|
Total
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Asbestos
|
|
$
|
221,567
|
|
|
$
|
492,772
|
|
|
$
|
714,339
|
|
|
$
|
191,238
|
|
|
$
|
470,113
|
|
|
$
|
661,351
|
|
Environmental
|
|
|
62,592
|
|
|
|
48,281
|
|
|
|
110,873
|
|
|
|
46,252
|
|
|
|
43,369
|
|
|
|
89,621
|
|
All other
|
|
|
1,567,454
|
|
|
|
720,360
|
|
|
|
2,287,814
|
|
|
|
1,065,160
|
|
|
|
530,444
|
|
|
|
1,595,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,851,613
|
|
|
$
|
1,261,413
|
|
|
$
|
3,113,026
|
|
|
$
|
1,302,650
|
|
|
$
|
1,043,926
|
|
|
$
|
2,346,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated loss adjustment expenses
|
|
|
|
|
|
|
|
|
|
|
178,249
|
|
|
|
|
|
|
|
|
|
|
|
132,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
3,291,275
|
|
|
|
|
|
|
|
|
|
|
$
|
2,479,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a breakdown of loss and loss
adjustment expense reserves (net of reinsurance balances
recoverable) by type of exposure as of December 31, 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Total
|
|
|
% of Total
|
|
|
Total
|
|
|
% of Total
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Asbestos
|
|
$
|
640,063
|
|
|
|
23.2
|
%
|
|
$
|
588,411
|
|
|
|
27.6
|
%
|
Environmental
|
|
|
96,109
|
|
|
|
3.5
|
|
|
|
79,221
|
|
|
|
3.7
|
|
All other
|
|
|
1,851,414
|
|
|
|
66.9
|
|
|
|
1,331,216
|
|
|
|
62.5
|
|
Unallocated loss adjustment expenses
|
|
|
178,249
|
|
|
|
6.4
|
|
|
|
132,560
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,765,835
|
|
|
|
100
|
%
|
|
$
|
2,131,408
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our All other exposure category consists of a mix of
general casualty (approximately 40% of All other net
reserves), marine and aviation (approximately 11% of All
other net reserves), workers compensation/personal
accident (approximately 16% of All other net
reserves) and other miscellaneous exposures, which are generally
long-tailed in nature.
As of December 31, 2010, the IBNR reserves (net of
reinsurance balances receivable) accounted for
$1,119.9 million, or 40.5%, of our total net loss reserves.
The reserve for IBNR (net of reinsurance balance receivable)
accounted for $953.1 million, or 44.7%, of our total net
loss reserves at December 31, 2009.
72
Annual
Loss 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 loss adjustment expenses is
based largely upon estimates. Our management must use
considerable judgment in the process of developing these
estimates. The liability for unpaid losses and loss adjustment
expenses for property and casualty business includes amounts
determined from loss reports on individual cases and amounts for
IBNR reserves. Such reserves, including IBNR reserves, are
estimated by management based upon loss reports received from
ceding companies, supplemented by our own estimates of losses
for which no ceding company loss reports have yet been received.
In establishing reserves, management also considers independent
actuarial estimates of ultimate losses. Our independent
actuaries employ generally accepted actuarial methodologies to
estimate ultimate losses and loss adjustment expenses. A loss
reserve study prepared by an independent actuary provides the
basis of our reserves for losses and loss adjustment expenses.
Nearly all of our unpaid claims liabilities are considered to
have a longtail claims payout. Gross loss reserves relate
primarily to casualty exposures, including latent claims, of
which approximately 25.1% relate to asbestos and environmental,
or A&E, exposures.
Within the annual loss reserve studies produced by our external
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 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 ranges of gross loss and loss adjustment expense reserves
implied by the various methodologies used by each of our
insurance subsidiaries as of December 31, 2010 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
Selected
|
|
|
High
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Asbestos
|
|
$
|
612,272
|
|
|
$
|
714,339
|
|
|
$
|
784,486
|
|
Environmental
|
|
|
97,139
|
|
|
|
110,873
|
|
|
|
123,848
|
|
All other
|
|
|
2,087,565
|
|
|
|
2,287,814
|
|
|
|
2,578,426
|
|
Unallocated loss adjustment expenses
|
|
|
178,249
|
|
|
|
178,249
|
|
|
|
178,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,975,225
|
|
|
$
|
3,291,275
|
|
|
$
|
3,665,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latent
Claims
Our loss reserves are related largely to casualty exposures
including latent exposures relating primarily to A&E. In
establishing the reserves for unpaid claims, management
considers facts currently known and the current state of the law
and coverage litigation. Liabilities are recognized for known
claims (including the cost of related litigation) when
sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can
reasonably estimate its liability. In addition, reserves are
established to cover loss development related to both known and
unasserted claims.
The estimation of unpaid claim liabilities is subject to a high
degree of uncertainty for a number of reasons. First, unpaid
claim liabilities for property and casualty exposures in general
are impacted by changes in the legal environment, jury awards,
medical cost trends and general inflation. Moreover, for latent
exposures in particular, developed case law and adequate claim
history do not exist. There is significant coverage litigation
related to these exposures, which creates further uncertainty in
the estimation of the liabilities. As a result, for these types
of exposures, it is especially unclear whether past claim
experience will be representative of future claim experience.
73
Ultimate values for such claims cannot be estimated using
reserving techniques that extrapolate losses to an ultimate
basis using loss development factors, and the uncertainties
surrounding the estimation of unpaid claim liabilities are not
likely to be resolved in the near future. There can be no
assurance that the reserves established by us will be adequate
or will not be adversely affected by the development of other
latent exposures.
Our asbestos claims are primarily products liability claims
submitted by a variety of insureds who operated in different
parts of the asbestos distribution chain. While most such claims
arise from asbestos mining and primary asbestos manufacturers,
we have also been receiving claims from tertiary defendants such
as smaller manufacturers, and the industry has seen an emerging
trend of non-products claims arising from premises exposures.
Unlike products claims, primary policies generally do not
contain aggregate policy limits for premises claims, which,
accordingly, remain at the primary layer and, thus, rarely
impact excess insurance policies. As the vast majority of our
policies are excess policies, this trend has had only a marginal
effect on our asbestos exposures thus far.
Asbestos reform efforts have been underway at both the federal
and state level to address the cost and scope of asbestos claims
to the American economy. While congressional efforts to create a
federal trust fund that would replace the tort system for
asbestos claims failed, several states, including Texas and
Florida, have passed reforms based on medical
criteria requiring certain levels of medically documented
injury before a lawsuit can be filed, generally resulting in a
drop of case filings in those states adopting this reform
measure.
Asbestos claims primarily fall into two general categories:
impaired and unimpaired bodily injury claims. Property damage
claims represent only a small fraction of asbestos claims.
Impaired claims primarily include individuals suffering from
mesothelioma or a cancer such as lung cancer. Unimpaired claims
include asbestosis and those whose lung regions contain pleural
plaques.
Unlike traditional property and casualty insurers that either
have large numbers of individual claims arising from personal
lines such as auto, or small numbers of high value claims as in
medical malpractice insurance lines, our primary exposures arise
from A&E claims that do not follow a consistent pattern.
For instance, we may encounter a small insured with one large
environmental claim due to significant groundwater
contamination, while a Fortune 500 company may submit
numerous claims for relatively small values. Moreover, there is
no set pattern for the life of an environmental or asbestos
claim. Some of these claims may resolve within two years whereas
others have remained unresolved for nearly two decades.
Therefore, our open and closed claims data do not follow any
identifiable or discernible pattern.
Furthermore, because of the reinsurance nature of the claims we
manage, we focus on the activities at the reinsured level rather
than at the individual claims level. The counterparties with
whom we typically interact are generally insurers or large
industrial concerns and not individual claimants. Claims do not
follow any consistent pattern. They arise from many insureds or
locations and in a broad range of circumstances. An insured may
present one large claim or hundreds or thousands of small
claims. Plaintiffs counsel frequently aggregate thousands
of claims within one lawsuit. The deductibles to which claims
are subject vary from policy to policy and year to year. Often
claims data is only available to reinsurers, such as us, on an
aggregated basis. Accordingly, we have not found claim count
information or average reserve amounts to be reliable indicators
of exposure for our reserve estimation process or for management
of our liabilities. We have found data accumulation and claims
management more effective and meaningful at the reinsured level
rather than at the underlying claim level. As a result, we have
designed our reserving methodologies to be independent of claim
count information. As the level of exposures to a reinsured can
vary substantially, we focus on the aggregate exposures and
pursue commutations and policy buy-backs with the larger
reinsureds.
We employ approximately 27 full time equivalent employees,
including a U.S. attorney, actuaries, and experienced
claims-handlers, to directly administer our A&E
liabilities. We have established a provision for future expenses
of $47.3 million, which reflects the total anticipated
costs to administer these claims to expiration.
Our future environmental loss development may be influenced by
other factors including:
|
|
|
|
|
Existence of currently undiscovered polluted sites eligible for
clean-up
under the Comprehensive Environmental Response, Compensation,
and Liability Act (CERCLA) and related legislation.
|
74
|
|
|
|
|
Costs imposed due to joint and several liability if not all
potentially reliable parties (PRPs) are capable of paying their
share.
|
|
|
|
Success of legal challenges to certain policy terms such as the
absolute pollution exclusion.
|
|
|
|
Potential future reforms and amendments to CERCLA, particularly
as the resources of Superfund the funding vehicle,
established as part of CERCLA, to provide financing for cleanup
of polluted sites where no PRP can be identified
become exhausted.
|
The influence of each of these factors is not easily
quantifiable and, as with asbestos-related exposures, our
historical environmental loss development is of limited value in
determining future environmental loss development using
traditional actuarial reserving techniques.
There have been recent positive developments concerning lead
paint liability, an area previously viewed as an emerging trend
in latent claim activity with the potential to adversely affect
reserves. After a series of successful defense efforts by
defendant lead pigment manufacturers in lead paint litigation,
in 2005, a Rhode Island trial court ruled in favor of the
government in a nuisance claim against the defendant
manufacturers. Since the Rhode Island decision, other government
entities have employed the same theory for recovery against
these manufacturers. In 2008, the Rhode Island Supreme Court
reversed the sole legal liability loss experienced by lead
pigment manufacturers in lead paint litigation. The court
rejected public nuisance as a viable theory of liability for use
by the government against the defendants and thus invalidated
the entire claim against the lead pigment manufacturers.
Subsequent to the Rhode Island Supreme Court decision at least
one other government entity, an Ohio municipality, voluntarily
dropped its lead paint suit. Thereafter, the State of Ohio,
voluntarily dismissed its pending action against lead pigment
manufacturers. Other state supreme courts equally rejected the
public nuisance theory of liability, whereas no highest state
court has ever adopted this theory as an acceptable cause of
action.
We believe that lead paint claims now pose a lower risk to
adverse reserve adjustment than previously thought, as the only
trial court decision against lead pigment manufacturers to date
was reversed on the basis that public nuisance is an improper
liability theory by which a plaintiff may seek recovery against
the lead pigment manufacturers. Even if adverse rulings under
alternative theories succeed or if other states ultimately
permit recovery under a public nuisance theory, it is
questionable whether insureds have coverage under their policies
under which they seek indemnity. Insureds have yet to meet
policy terms and conditions to establish coverage for lead paint
public nuisance claims, as opposed to traditional bodily injury
and property damage claims. Still, there is the potential for
significant impact to excess insurers should plaintiffs prevail
in successive nuisance claims pending in other jurisdictions and
coverage is established.
Our independent, external actuaries use industry benchmarking
methodologies to estimate appropriate IBNR reserves for our
A&E exposures. These methods are based on comparisons of
our loss experience on A&E exposures relative to industry
loss experience on A&E exposures. Estimates of IBNR are
derived separately for each of our relevant subsidiaries and,
for some subsidiaries, separately for distinct portfolios of
exposure. The discussion that follows describes, in greater
detail, the primary actuarial methodologies used by our
independent actuaries to estimate IBNR for A&E exposures.
In addition to the specific considerations for each method
described below, many general factors are considered in the
application of the methods and the interpretation of results for
each portfolio of exposures. These factors include the mix of
product types (e.g., primary insurance versus reinsurance of
primary versus reinsurance of reinsurance), the average
attachment point of coverages (e.g., first-dollar primary versus
umbrella over primary versus high-excess), payment and reporting
lags related to the international domicile of our subsidiaries,
payment and reporting pattern acceleration due to large
wholesale settlements (e.g., policy buy-backs and
commutations) pursued by us, lists of individual risks remaining
and general trends within the legal and tort environments.
1. Paid Survival Ratio Method. In this
method, our expected annual average payment amount is multiplied
by an expected future number of payment years to get an
indicated reserve. Our historical calendar year payments are
examined to determine an expected future annual average payment
amount. This amount is multiplied by an expected number of
future payment years to estimate a reserve. Trends in calendar
year payment activity are considered when selecting an expected
future annual average payment amount. Accepted industry
benchmarks are
75
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. This method has advantages of 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. 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. 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
which do not have complete
inception-to-date
paid loss history could produce misleading results. To address
this potential disadvantage, a variation of the method is also
considered by multiplying the ratio of estimated industry
reserves to industry losses paid during a recent period of time
(e.g., 5 years) times our paid losses during that period.
4. IBNR:Case Ratio Method. In this
method, the ratio of estimated industry IBNR reserves to
industry case reserves is multiplied by our case reserves to
estimate our IBNR reserves. Specific considerations in the
application of this method include the presence of policies
reserved at policy limits, changes in overall industry case
reserve adequacy and recent loss reporting history for us. Each
year, our case reserves are updated, industry reserves are
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.
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.
Under the Paid Survival Ratio Method, the Paid Market Share
Method and the
Reserve-to-Paid
Method, we first determine the estimated total reserve and then
deduct the reported outstanding case reserves to arrive at an
estimated IBNR reserve. The IBNR:Case Ratio Method first
determines an estimated IBNR reserve which is then added to the
advised outstanding case reserves to arrive at an estimated
total loss reserve. The
Ultimate-to-Incurred
Method first determines an estimate of the ultimate losses to be
paid and then deducts
paid-to-date
losses to arrive at an estimated total loss reserve and then
deducts outstanding case reserves to arrive at the estimated
IBNR reserve.
Within the annual loss reserve studies produced by our external
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
76
exposures (e.g., asbestos, environmental, casualty and property)
and lines of business written (e.g., marine, aviation and
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 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.
As of December 31, 2010, we had 35 separate insurance
and/or
reinsurance subsidiaries whose reserves are categorized into
approximately 276 reserve categories in total, including 40
distinct asbestos reserving categories and 27 distinct
environmental reserving categories.
To the extent that data availability allows, the five
methodologies described above are applied for each of the 40
asbestos reserving categories and each of the 27 environmental
reserving categories. As is common in actuarial practice, no one
methodology is exclusively or consistently relied upon when
selecting a recorded reserve. Consistent reliance on a single
methodology to select a recorded reserve would be inappropriate
in light of the dynamic nature of both the A&E liabilities
in general, and our actual exposure portfolios in particular.
In selecting a recorded reserve, management considers the range
of results produced by the methods, and the strengths and
weaknesses of the methods in relation to the data available and
the specific characteristics of the portfolio under
consideration. Trends in both our data and industry data are
also considered in the reserve selection process. Recent trends
or changes in the relevant tort and legal environments are also
considered when assessing methodology results and selecting an
appropriate recorded reserve amount for each portfolio.
The following key assumptions were used to estimate A&E
reserves at December 31, 2010:
1. $65 Billion Ultimate Industry Asbestos
Losses This level of industry-wide losses
and its comparison to industry-wide paid, incurred and
outstanding case reserves is the base benchmarking assumption
applied to Paid Market Share,
Reserve-to-Paid,
IBNR:Case Ratio and the
Ultimate-to-Incurred
asbestos reserving methodologies.
2. $35 Billion Ultimate Industry Environmental
Losses This level of industry-wide losses
and its comparison to industry-wide paid, incurred and
outstanding case reserves is the base benchmarking assumption
applied to Paid Market Share,
Reserve-to-Paid,
IBNR:Case Ratio and the
Ultimate-to-Incurred
environmental reserving methodologies.
3. Loss Reporting Lag Our
subsidiaries assumed a mix of insurance and reinsurance
exposures generally through the London market. As the available
industry benchmark loss information, as supplied by our
independent consulting actuaries, is compiled largely from
U.S. direct insurance company experience, our loss
reporting is expected to lag relative to available industry
benchmark information. This time-lag used by each of our
insurance subsidiaries varies from 1 to 5 years depending
on the relative mix of domicile, percentages of product mix of
insurance, reinsurance and retrocessional reinsurance, primary
insurance, excess insurance, reinsurance of direct, and
reinsurance of reinsurance within any given exposure category.
Exposure portfolios written from a
non-U.S. domicile
are assumed to have a greater time-lag than portfolios written
from a U.S. domicile. Portfolios with a larger proportion
of reinsurance exposures are assumed to have a greater time-lag
than portfolios with a larger proportion of insurance exposures.
The assumptions above as to Ultimate Industry Asbestos and
Environmental losses have not changed from the immediately
preceding period. For our company as a whole, the average
selected lag for asbestos has increased slightly from
2.8 years to 2.9 years and the average selected lag
for environmental has decreased slightly from 2.5 years to
2.4 years. The changes to the selected lags arose largely
as a result of the acquisition of new portfolios of A&E
exposures.
77
The following tables provide a summary of the impact of changes
in industry ultimate losses, from the selected $65 billion
for asbestos and $35 billion for environmental, and changes
in the time-lag, from the selected averages of 2.9 years
for asbestos and 2.4 years for environmental, for us behind
industry development that it is assumed relates to our insurance
and reinsurance companies. Please note that the table below
demonstrates sensitivity to changes to key assumptions using
methodologies selected for determining loss and allocated loss
adjustment expenses, or ALAE, at December 31, 2010 and
differs from the table on page 73, which demonstrates the
range of outcomes produced by the various methodologies.
|
|
|
|
|
|
|
Asbestos
|
Sensitivity to Industry Asbestos Ultimate Loss Assumption
|
|
Loss Reserves
|
|
|
(in thousands
|
|
|
of U.S. dollars)
|
|
Asbestos $70 billion
|
|
$
|
830,228
|
|
Asbestos $65 billion (selected)
|
|
|
714,339
|
|
Asbestos $60 billion
|
|
|
598,450
|
|
|
|
|
|
|
|
|
Environmental
|
Sensitivity to Industry Environmental Ultimate Loss
Assumption
|
|
Loss Reserves
|
|
|
(in thousands
|
|
|
of U.S. dollars)
|
|
Environmental $40 billion
|
|
$
|
170,227
|
|
Environmental $35 billion (selected)
|
|
|
110,873
|
|
Environmental $30 billion
|
|
|
51,519
|
|
|
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
Environmental
|
Sensitivity to Time-Lag Assumption*
|
|
Loss Reserves
|
|
Loss Reserves
|
|
|
(in thousands
|
|
|
of U.S. dollars)
|
|
Selected average of 2.9 years asbestos, 2.4 years environmental
|
|
$
|
714,339
|
|
|
$
|
110,873
|
|
Increase all portfolio lags by six months
|
|
|
787,964
|
|
|
|
114,922
|
|
Decrease all portfolio lags by six months
|
|
|
630,826
|
|
|
|
106,046
|
|
|
|
|
* |
|
Using $65 billion/$35 billion Asbestos/Environmental
Industry Ultimate Loss assumptions. |
Industry publications have, since 2001, indicated that the range
of ultimate industry losses is estimated to be between
approximately $55 billion and $65 billion for asbestos
losses. One commonly-referenced benchmark estimate has recently
increased its estimate of ultimate industry asbestos losses from
$65 billion to $75 billion. One of the reasons cited
for the increase in estimated industry ultimate asbestos losses
is a shift of losses away from products liability claims to
non-products claims. In considering the impact of this issue, it
is important to understand how asbestos claims attach to
policies issued by the insurance industry in general and the
policies issued by the companies owned by us in particular.
Historically, asbestos claims have been presented as
products liability claims brought against
manufacturers and distributors of asbestos-containing products.
For a given manufacturer, distributor, or other entity involved
in asbestos litigation, multiple claims are filed by numerous
individuals. There is typically an allocation of the settlement
costs for asbestos claims over time based on exposure to
asbestos by the injured claimants. Many asbestos claims will
aggregate within each individual policy period to exhaust the
annual aggregate policy limits which exist within policies sold
to cover products liability claims.
Beginning in the mid-1990s, a trend began to emerge
whereby certain policyholders began to assert that their
asbestos claims should not fall within the products
liability section of their policies and, therefore, should
not be subject to the aggregate limits of products liability
claims. Instead, the policyholder would assert that each
individual bodily injury claim should be treated as a separate
occurrence under the premises/operations section of
their policies. Under such presentation, individual claim or
occurrence limits apply separately to each claim and there is no
aggregate limit for the amount of premises or
non-products claims within a particular policy.
78
Our exposure to asbestos losses arises largely from direct
excess policies and assumed reinsurance policies written through
the London market. With respect to direct excess policies, our
companies typically participated on policies whereby liability
would only attach in excess of primary and umbrella policy
limits. As non-products asbestos losses are not aggregated and
are generally confined to the limits of the primary and other
lower layer insurance policies, we believe we have very little
exposure to non-products asbestos losses through direct
insurance policies issued by our owned subsidiary companies. To
date, we have seen no material reporting of non-products
asbestos claims on direct insurance policies. The trend of
asbestos losses shifting from products to non-products is not a
new phenomenon. As our insurance entities have not received any
material reporting of non-products claims to date and their
direct insurance exposures are generally in excess of the layers
of insurance impacted by non-products asbestos losses, we do not
expect any material future liability in respect of non-products
asbestos claims.
Losses with respect to assumed reinsurance exposures to
non-products asbestos claims are unlikely to be aggregated and
are generally confined to the limits of the primary and other
lower layer insurance policies. There is limited ability for
such claims to exceed retained levels. Our assumed reinsurance
portfolio with respect to asbestos exposures is largely excess
of loss in nature and, therefore, not especially subject to
non-products asbestos liabilities. To date, we have seen no
material reporting of non-products asbestos claims on assumed
reinsurance policies.
As stated above, the trend of asbestos losses shifting from
products to non-products is not a new phenomenon. As our assumed
reinsurance entities have not received any material reporting of
non-products claims to date and their assumed reinsurance
exposures generally cover layers of insurance not impacted by
non-products asbestos losses, management does not expect any
material future liability in respect of non-products asbestos
claims.
Other reasons cited for the increase in estimated industry
ultimate asbestos losses include the ongoing uncertainty
surrounding insurance coverage of asbestos claims and the
ongoing reporting of significant numbers and values of malignant
mesothelioma claims. As we do not view these issues as new
information any impact has already been factored into our
actuarial reserving methodologies with no need for any change in
assumptions.
Furthermore, in recent years, the overall asbestos loss
development trend within our portfolio has been favorable. Our
asbestos exposures are reviewed by independent actuaries on an
annual basis as part of the overall annual loss reserve review.
Actual loss reporting for asbestos claims in recent years has
been below actuarial estimated expectations.
Having considered the recent increase in one commonly-referenced
benchmark estimate of ultimate net asbestos losses in the
context of our portfolio of loss exposures and actual asbestos
loss reporting in recent years for us in particular, as well as
for the insurance industry generally, we believe there is no
need to increase the $65 billion asbestos ultimate industry
loss assumption.
Guidance from industry publications is more varied in respect of
estimates of ultimate industry environmental losses. Consistent
with an industry published estimate, we believe the reasonable
range for ultimate industry environmental losses is between
$30 billion and $40 billion. We have selected the
midpoint of this range as the basis for our environmental loss
reserving based on advice supplied by our independent consulting
actuaries. Another industry publication has recently reduced its
estimate of ultimate industry environmental losses from
$56 billion to $42 billion. Based on our own loss
experience, including successful settlement activity by us, the
decline in new claims notified in recent years, improvements in
environmental
clean-up
technology and the reduced industry estimate, we believe that
$35 billion remains a reasonable basis for inclusion in our
methodologies for reserving for environmental losses.
Our current estimate of the time lag that relates to our
insurance and reinsurance subsidiaries compared to the industry
is considered reasonable given the analysis performed by our
internal and external actuaries to date.
Over time, additional information regarding such exposure
characteristics may be developed for any given portfolio. This
additional information could cause a shift in the lag assumed.
79
Non-Latent
Claims
For non-latent loss exposure, a range of traditional loss
development extrapolation techniques is applied. Incremental
paid and incurred loss development methodologies are the most
commonly used methods. Traditional cumulative paid and incurred
loss development methods are used where
inception-to-date,
cumulative paid and reported incurred loss development history
is available.
These methods assume that cohorts, or groups, of losses from
similar exposures will increase over time in a predictable
manner. Historical paid and incurred loss development experience
is examined for earlier accident years to make inferences about
how later accident years losses will develop. Where
company-specific loss information is not available or not
reliable, industry loss development information published by
industry sources such as the Reinsurance Association of America
is considered. These methods calculate an estimate of ultimate
losses and then deduct
paid-to-date
losses to arrive at an estimated total loss reserve. Outstanding
losses are then deducted from estimated total loss reserves to
calculate the estimated IBNR reserve. Management does not expect
changes in underlying reserving assumptions to have a material
impact on net loss and loss adjustment expense reserves as they
are primarily sensitive to changes due to loss development.
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 which have not yet been settled.
For example, if it were found that large settlements were
consistently leading to large negative, or favorable, incurred
losses upon settlement, it might be an indication that reserves
on remaining exposures are redundant. Conversely, if it were
found that large settlements were consistently leading to large
positive, or adverse, incurred losses upon settlement, it might
be an indication particularly if the size of the
losses were increasing that certain loss reserves on
remaining exposures are deficient. Moreover, removing the loss
development resulting from large settlements allows for a review
of loss development related only to those contracts which 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.
Quarterly loss development is expected to be fairly erratic for
the types of exposure insured and reinsured by us. Several
quarters of low incurred loss development can be followed by
spikes of relatively large incurred losses. This is
characteristic of latent claims and other insurance losses which
are reported and settled many years after the
80
inception of the policy. Given the high degree of statistical
uncertainty, and potential volatility, it would be unusual to
adjust reserves on the basis of one, or even several, quarters
of loss development activity. As a result, unless the incurred
loss activity in any one quarter is of such significance that
management is able to quantify the impact on the ultimate
liability for loss and loss adjustment expenses, reductions or
increases in loss and loss adjustment expense liabilities are
carried out in the fourth quarter based on the annual reserve
review described above.
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 loss
and loss adjustment expenses 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.
Reinsurance
Balances Receivable
Our acquired reinsurance subsidiaries, prior to acquisition by
us, used retrocessional agreements to reduce their exposure to
the risk of insurance and reinsurance they assumed. Loss
reserves represent total gross losses, and reinsurance
receivables represent anticipated recoveries of a portion of
those unpaid losses as well as amounts receivable from
reinsurers with respect to claims that have already been paid.
While reinsurance arrangements are designed to limit losses and
to permit recovery of a portion of direct unpaid losses,
reinsurance does not relieve us of our liabilities to our
insureds or reinsureds. Therefore, we evaluate and monitor
concentration of credit risk among our reinsurers, including
companies that are insolvent, in run-off or facing financial
difficulties. Provisions are made for amounts considered
potentially uncollectible.
At December 31, 2010 and 2009, the provision for
uncollectible reinsurance relating to losses recoverable was
$381.4 million and $397.6 million, respectively. To
estimate the provision for uncollectible reinsurance
recoverable, the reinsurance recoverable is first allocated to
applicable reinsurers. This determination is based on a detailed
process rather than an estimate, although an element of judgment
is applied. As part of this process, ceded IBNR is allocated by
reinsurer.
We use a detailed analysis to estimate uncollectible
reinsurance. The primary components of the analysis are
reinsurance recoverable balances by reinsurer and bad debt
provisions applied to these balances to determine the portion of
a reinsurers 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.
See Note 8 to our consolidated financial statements for an
analysis of reinsurance recoverables.
Provisions
for Unallocated Loss Adjustment Expense Liabilities
Provisions for unallocated loss adjustment expense liabilities
are estimated by management by determining the future annual
costs to be incurred by us, comprising staff costs, consultancy
and professional fees and overheads, in managing the run-off of
claims liabilities for each of our insurance and reinsurance
entities. The provision is reviewed quarterly and reduced in
accordance with the related costs incurred each period.
Fair
Value Measurements
The following is a summary of valuation techniques or models we
use to measure fair value by asset and liability classes, which
have not changed significantly since December 31, 2009.
Fixed
Maturity Investments
Our fixed maturity portfolio is managed by our Chief Investment
Officer and our outside investment advisors. We use inputs from
nationally recognized pricing services, including pricing
vendors, index providers and broker-dealers to estimate fair
value measurements for all of our fixed maturity investments.
These pricing services include FT Interactive Data, Barclays
Capital Aggregate Index (formerly Lehman Index), Reuters Pricing
Service and others.
81
In general, the independent pricing services use observable
market inputs including, but not limited to, investment yields,
credit risks and spreads, benchmark curves, benchmarking of like
securities, non-binding broker-dealer quotes, reported trades
and sector groupings to determine the fair value. In addition,
pricing services use valuation models, 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.
With the exception of two securities held within our trading
portfolio, the fair value estimates of our fixed maturity
investments are based on observable market data. We have
therefore included these as Level 2 investments within the
fair value hierarchy. The two securities in our trading
portfolio that do not have observable inputs have been included
as Level 3 investments within the fair value hierarchy.
To validate the techniques or models used by the pricing
services, we compare the fair value estimates to our knowledge
of the current market and will challenge any prices deemed not
to be representative of fair value.
As of December 31, 2010, there were no material differences
between the prices obtained from the pricing services and the
fair value estimates developed by us.
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 fixed
maturity investment to recover in value; (4) an analysis of
the financial condition of the issuer; (5) the rating of
the issuer; and (6) failure of the issuer of the fixed
maturity investment to make scheduled interest or principal
payments.
Based on the factors described above, we determined that, as of
December 31, 2010, no credit losses existed.
Equity
Securities
Our equity securities are managed by two external advisors.
Through these third parties, we use nationally recognized
pricing services, including pricing vendors, index providers and
broker-dealers to estimate fair value measurements for all of
our equity securities. These pricing services include FT
Interactive Data and others.
We have categorized all of our investments in common stock as
Level 1 investments because the fair values of these
securities are based on quoted prices in active markets for
identical assets or liabilities. We have categorized all of our
investments in preferred stock as Level 2 (except one which
was categorized as Level 3) because their fair value
estimates are based on observable market data.
Other
Investments
For our investments in private equities, we measure fair value
by obtaining the most recently published net asset value as
advised by the external fund manager or third-party
administrator. The use of net asset value as an estimate of the
fair value for investments in certain entities that calculate
net asset value is a permitted practical expedient. Our private
equity investments are mainly in the financial services
industry. The fund advisors continue to evaluate the overall
market environment, as well as specific areas in the financial
services sector, in order to identify segments that they believe
will offer the most attractive investment opportunities. The
financial statements of each fund generally are audited annually
under U.S. GAAP, using fair value measurement for the
underlying investments. For all publicly-traded companies within
the funds, we have valued those investments based on the latest
share price. The value of Affirmative Investment LLC (in which
we own a non-voting 7% membership interest) is based on the
market value of the shares of Affirmative Insurance Holdings,
Inc., a publicly-traded company.
All of our investments in private equities are subject to
restrictions on redemptions and sales that are determined by the
governing documents and limit our ability to liquidate those
investments in the short term. The capital commitments are
discussed in detail in Note 20 to the consolidated
financial statements.
We have classified our private equities as Level 3
investments because they reflect our own judgment about the
assumptions that market participants might use.
82
For our investment in the hedge fund, we measure fair value by
obtaining the most recently published net asset value as advised
by the external fund manager or third-party administrator. The
use of net asset value as an estimate of the fair value for
investments in certain entities that calculate net asset value
is a permitted practical expedient. The adviser of the fund
intends to seek attractive risk-adjusted total returns for the
funds investors by acquiring, originating, and actively
managing a diversified portfolio of debt securities, with a
focus on various forms of asset-backed securities and loans. The
fund will focus on investments that the adviser believes to be
fundamentally undervalued with current market prices that are
believed to be compelling relative to intrinsic value. The units
of account that are valued by us are our interests in the fund
and not the underlying holdings of the fund. Thus, the inputs
used to value our investments in the fund may differ from the
inputs used to value the underlying holdings of the fund. The
hedge fund is not currently eligible for redemption due to
imposed
lock-up
periods of three years from the time of the initial investment.
Once eligible, redemptions will be permitted quarterly with
90 days notice. There are no unfunded capital commitments
in relation to the hedge fund. The investment in the fund is
classified as Level 3 in the fair value hierarchy.
The bond funds have been classified as Level 2 investments
because their fair value is estimated using the net asset value
reported by Bloomberg and they have daily liquidity.
For the year ended December 31, 2010, the share of net
earnings on our other investments was $21.4 million as
compared to $5.2 million for the year-ended
December 31, 2009. Any unrealized losses or gains on our
other investments are included as part of our net investment
income.
The following table summarizes all of our financial assets and
liabilities recorded at fair value at December 31, 2010, by
hierarchy established by the Fair Value Measurement and
Disclosure topic of FASB ASC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total Fair
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
U.S. government and agency
|
|
$
|
|
|
|
$
|
227,803
|
|
|
$
|
|
|
|
$
|
227,803
|
|
Non-U.S.
government
|
|
|
|
|
|
|
386,866
|
|
|
|
|
|
|
|
386,866
|
|
Corporate
|
|
|
|
|
|
|
1,346,854
|
|
|
|
530
|
|
|
|
1,347,384
|
|
Municipal
|
|
|
|
|
|
|
2,297
|
|
|
|
|
|
|
|
2,297
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
102,506
|
|
|
|
|
|
|
|
102,506
|
|
Commercial mortgage-backed
|
|
|
|
|
|
|
37,927
|
|
|
|
914
|
|
|
|
38,841
|
|
Asset backed
|
|
|
|
|
|
|
28,613
|
|
|
|
|
|
|
|
28,613
|
|
Equities
|
|
|
56,369
|
|
|
|
138
|
|
|
|
3,575
|
|
|
|
60,082
|
|
Other investments
|
|
|
|
|
|
|
102,279
|
|
|
|
132,435
|
|
|
|
234,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
56,369
|
|
|
$
|
2,235,283
|
|
|
$
|
137,454
|
|
|
$
|
2,429,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total assets
|
|
|
1.1
|
%
|
|
|
42.7
|
%
|
|
|
2.6
|
%
|
|
|
46.4
|
%
|
Goodwill
We follow the provisions of the Intangibles Goodwill
and Other topic of FASB ASC, which requires that recorded
goodwill be assessed for impairment on at least an annual basis.
In determining goodwill, we must determine the fair value of the
assets of an acquired company. The determination of fair value
necessarily involves many assumptions. Fair values of
reinsurance assets and liabilities acquired are derived from
probability-weighted ranges of the associated projected cash
flows, based on actuarially prepared information and our
management run-off strategy. Fair value adjustments are based on
the estimated timing of loss and loss adjustment expense
payments and an assumed interest rate, and are amortized over
the estimated payout period, as adjusted for accelerations on
commutation settlements, using the constant yield method option.
Interest rates used to determine the fair value of gross loss
reserves are based upon risk free rates applicable to the
average duration of the loss reserves. Interest rates used to
determine the fair value of reinsurance receivables are
increased to reflect the credit risk associated with the
83
reinsurers from which the receivables are, or will become, due.
If the assumptions made in initially valuing the assets change
significantly in the future, we may be required to record
impairment charges which could have a material impact on our
financial condition and results of operations.
ASC 805 also requires that negative goodwill be recorded in
earnings. During 2008, we took negative goodwill into earnings
upon the completion of the acquisition of certain companies and
presented it as an extraordinary gain.
ASC 805 requires an acquirer to recognize the assets acquired,
the liabilities assumed and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values
as of that date. ASC 805 also requires the acquirer to
recognize acquisition-related costs separately from the
acquisition, recognize assets acquired and liabilities assumed
arising from contractual contingencies at their acquisition-date
fair values and recognize goodwill as the excess of the
consideration transferred plus the fair value of any
noncontrolling interest in the acquiree at the acquisition date
over the fair values of the identifiable net assets acquired.
ASC 805 applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after
December 15, 2008 (January 1, 2009 for calendar
year-end companies).
Recent
Accounting Pronouncements
See Note 2 to our consolidated financial statements for a
discussion of new accounting standards we have adopted as well
as standards not yet adopted.
84
Results
of Operations
The following table sets forth our selected consolidated
statements of earnings data for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
23,015
|
|
|
$
|
16,104
|
|
|
$
|
25,151
|
|
Net investment income
|
|
|
99,906
|
|
|
|
81,371
|
|
|
|
26,601
|
|
Net realized and unrealized gains (losses)
|
|
|
13,137
|
|
|
|
4,237
|
|
|
|
(1,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,058
|
|
|
|
101,712
|
|
|
|
50,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
(278,065
|
)
|
|
|
(274,825
|
)
|
|
|
(161,437
|
)
|
Reduction in provisions for bad debt
|
|
|
(49,556
|
)
|
|
|
(11,718
|
)
|
|
|
(36,136
|
)
|
Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
|
|
|
(39,651
|
)
|
|
|
(50,412
|
)
|
|
|
(69,056
|
)
|
Amortization of fair value adjustments
|
|
|
55,438
|
|
|
|
77,328
|
|
|
|
24,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311,834
|
)
|
|
|
(259,627
|
)
|
|
|
(242,104
|
)
|
Salaries and benefits
|
|
|
86,677
|
|
|
|
68,454
|
|
|
|
56,270
|
|
General and administrative expenses
|
|
|
59,201
|
|
|
|
46,902
|
|
|
|
53,357
|
|
Interest expense
|
|
|
10,253
|
|
|
|
17,583
|
|
|
|
23,370
|
|
Net foreign exchange (gain) loss
|
|
|
(398
|
)
|
|
|
23,787
|
|
|
|
14,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156,101
|
)
|
|
|
(102,901
|
)
|
|
|
(94,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and share of net earnings (loss) of
partly owned company
|
|
|
292,159
|
|
|
|
204,613
|
|
|
|
144,218
|
|
Income taxes
|
|
|
(87,132
|
)
|
|
|
(27,605
|
)
|
|
|
(46,854
|
)
|
Share of net earnings (loss) of partly owned company
|
|
|
10,704
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gain
|
|
|
215,731
|
|
|
|
177,008
|
|
|
|
97,163
|
|
Extraordinary gain negative goodwill
|
|
|
|
|
|
|
|
|
|
|
50,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
|
215,731
|
|
|
|
177,008
|
|
|
|
147,443
|
|
Less: Net earnings attributable to noncontrolling interest
(including share of extraordinary gain of $nil, $nil and $15,084)
|
|
|
(41,645
|
)
|
|
|
(41,798
|
)
|
|
|
(65,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
|
|
$
|
174,086
|
|
|
$
|
135,210
|
|
|
$
|
81,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended December 31, 2010 and 2009
We reported consolidated net earnings, before extraordinary item
and net earnings attributable to noncontrolling interest, of
approximately $215.7 million and $177.0 million for
the years ended December 31, 2010 and 2009, respectively.
The increase in earnings of approximately $38.7 million was
attributable primarily to the following:
|
|
|
|
(i)
|
an increase in net investment income of $18.5 million
primarily as a result of an increase, in 2010, in the fair value
of our private equity portfolio classified as other investments
of $8.6 million along with an increase in net investment
income due to an increase in cash and investment balances held
during 2010;
|
85
|
|
|
|
(ii)
|
an increase in net realized and unrealized gains of
$8.9 million due primarily to
mark-to-market
changes in the market value of our equity investments along with
realized gains on the sale of our fixed maturity securities;
|
|
|
(iii)
|
a larger net reduction in ultimate loss and loss adjustment
expense liabilities of $52.2 million;
|
|
|
(iv)
|
an increase in consulting fee income of $6.9 million;
|
|
|
(v)
|
reduced interest expense of $7.3 million due primarily to
an overall reduction in loan facility balances outstanding
during 2010;
|
|
|
(vi)
|
an increase of $10.7 million in income earned from our
investment in partly owned company; and
|
|
|
(vii)
|
a decrease in net foreign exchange losses of $24.2 million
due primarily to eliminating our excess U.S. dollar
exposure that we held in 2009 within one of our subsidiaries
whose functional currency is Australian dollars; partially
offset by
|
|
|
(viii)
|
an increase in general and administrative expenses of
$12.3 million due primarily to an increase in loan
structure fees and letter of credit fees that were paid in 2010
along with an overall increase in other professional fees;
|
|
|
(ix)
|
an increase in income taxes of $59.5 million due to
increased tax liabilities recorded on the results of our taxable
subsidiaries along with an additional tax liability arising in
our Australian subsidiary from the formation of an Australian
tax consolidated group; and
|
|
|
(x)
|
an increase in salaries and benefits costs of $18.2 million
due primarily to our increased overall headcount from 287 at
December 31, 2009 to 335 at December 31, 2010 along
with increased salary costs related to our discretionary bonus
plan as a result of increased net earnings in the year.
|
We recorded noncontrolling interest in earnings of
$41.6 million and $41.8 million for the years ended
December 31, 2010 and 2009, respectively. Net earnings
attributable to Enstar Group Limited increased from
$135.2 million for the year ended December 31, 2009 to
$174.1 million for the year ended December 31, 2010.
Consulting
Fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
84,054
|
|
|
$
|
49,617
|
|
|
$
|
34,437
|
|
Reinsurance
|
|
|
(61,039
|
)
|
|
|
(33,513
|
)
|
|
|
(27,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,015
|
|
|
$
|
16,104
|
|
|
$
|
6,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our consulting companies earned fees of approximately
$84.1 million and $49.6 million for the years ended
December 31, 2010 and 2009, respectively. The increase in
consulting fees related primarily to the combination of
additional fees received from our reinsurance segment and
increased incentive fees earned from third-party agreements.
Internal management fees of $61.0 million and
$33.5 million were paid for the years ended
December 31, 2010 and 2009, respectively, by our
reinsurance companies to our consulting companies. The increase
in internal fees paid to the consulting segment was due
primarily to additional fees paid by reinsurance companies
relating to allocated charges for increases in salary and
general and administrative expenses.
86
Net
Investment Income and Net Realized and Unrealized
Gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Net Investment Income
|
|
|
Net Realized and Unrealized Gains
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
461
|
|
|
$
|
1,894
|
|
|
$
|
(1,433
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
99,445
|
|
|
|
79,477
|
|
|
|
19,968
|
|
|
|
13,137
|
|
|
|
4,237
|
|
|
|
8,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,906
|
|
|
$
|
81,371
|
|
|
$
|
18,535
|
|
|
$
|
13,137
|
|
|
$
|
4,237
|
|
|
$
|
8,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income for the year ended December 31, 2010
increased by $18.5 million to $99.9 million, as
compared to $81.4 million for the year ended
December 31, 2009. The increase was attributable primarily
to the combination of the following items:
|
|
|
|
(i)
|
an increase of $8.6 million, for the year ended
December 31, 2010, in the fair value of our private equity
investments classified as other investments over that recorded
for the year ended December 31, 2009; and
|
|
|
|
|
(ii)
|
higher investment income from our fixed maturities and cash and
cash equivalents, reflecting the increase in the amount of cash
and investment balances held by us in 2010 as compared to 2009.
The increased cash and investments arose primarily as a result
of the completion of the purchase of six companies along with
the acquisition of eight portfolios of business in run-off
during the year ended December 31, 2010.
|
The average return on the cash and fixed maturities investments
(excluding any writedowns or appreciation related to our other
investments) for the year ended December 31, 2010 was 2.38%
as compared to the average return of 2.13% for the year ended
December 31, 2009. The average credit rating of our fixed
maturity investments at December 31, 2010 was AA-.
Net realized and unrealized gains for the year ended
December 31, 2010 and 2009 were $13.1 million and
$4.2 million, respectively. The increase was due primarily
to
mark-to-market
gains earned on our equity securities.
Fair
Value Measurements
In accordance with the provisions of the Fair Value Measurement
and Disclosure topic of the Codification, we have categorized
our investments that are recorded at fair value among levels as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Total Fair
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
U.S. government and agency
|
|
$
|
|
|
|
$
|
227,803
|
|
|
$
|
|
|
|
$
|
227,803
|
|
Non-U.S.
government
|
|
|
|
|
|
|
386,866
|
|
|
|
|
|
|
|
386,866
|
|
Corporate
|
|
|
|
|
|
|
1,346,854
|
|
|
|
530
|
|
|
|
1,347,384
|
|
Municipal
|
|
|
|
|
|
|
2,297
|
|
|
|
|
|
|
|
2,297
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
102,506
|
|
|
|
|
|
|
|
102,506
|
|
Commercial mortgage-backed
|
|
|
|
|
|
|
37,927
|
|
|
|
914
|
|
|
|
38,841
|
|
Asset backed
|
|
|
|
|
|
|
28,613
|
|
|
|
|
|
|
|
28,613
|
|
Equities
|
|
|
56,369
|
|
|
|
138
|
|
|
|
3,575
|
|
|
|
60,082
|
|
Other investments
|
|
|
|
|
|
|
102,279
|
|
|
|
132,435
|
|
|
|
234,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
56,369
|
|
|
$
|
2,235,283
|
|
|
$
|
137,454
|
|
|
$
|
2,429,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Total Fair
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
U.S. government and agency
|
|
$
|
|
|
|
$
|
76,226
|
|
|
$
|
|
|
|
$
|
76,226
|
|
Non-U.S.
government
|
|
|
|
|
|
|
37,186
|
|
|
|
|
|
|
|
37,186
|
|
Corporate
|
|
|
|
|
|
|
87,083
|
|
|
|
|
|
|
|
87,083
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
2,012
|
|
|
|
|
|
|
|
2,012
|
|
Commercial mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
641
|
|
Equities
|
|
|
21,203
|
|
|
|
|
|
|
|
3,300
|
|
|
|
24,503
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
81,801
|
|
|
|
81,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
21,203
|
|
|
$
|
202,507
|
|
|
$
|
85,742
|
|
|
$
|
309,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Reduction in Ultimate Loss and Loss Adjustment Expense
Liabilities:
The following table shows the components of the movement in the
net reduction in ultimate loss and loss adjustment expense
liabilities for the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Net losses paid
|
|
$
|
(294,996
|
)
|
|
$
|
(257,414
|
)
|
Net change in case and LAE reserves
|
|
|
336,141
|
|
|
|
214,079
|
|
Net change in IBNR
|
|
|
236,920
|
|
|
|
318,160
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
278,065
|
|
|
|
274,825
|
|
Reduction in provisions for bad debt
|
|
|
49,556
|
|
|
|
11,718
|
|
Reduction in provisions for unallocated loss adjustment expense
liabilities
|
|
|
39,651
|
|
|
|
50,412
|
|
Amortization of fair value adjustments
|
|
|
(55,438
|
)
|
|
|
(77,328
|
)
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities
|
|
$
|
311,834
|
|
|
$
|
259,627
|
|
|
|
|
|
|
|
|
|
|
Net reduction 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 reduction in IBNR
represents the change in our actuarial estimates of losses
incurred but not reported.
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2010 of
$311.8 million was attributable to a reduction in estimates
of net ultimate losses of $278.1 million, a reduction in
aggregate provisions for bad debts of $49.6 million and a
reduction in estimates of unallocated loss adjustment expense
liabilities of $39.7 million, relating to 2010 run-off
activity, partially offset by the amortization, over the
estimated payout period, of fair value adjustments relating to
companies acquired amounting to $55.4 million.
The reduction in estimates of net ultimate losses of
$278.1 million comprised net incurred favorable loss
development of $41.1 million and reductions in IBNR
reserves of $236.9 million. The decrease in the estimate of
IBNR loss reserves of $236.9 million was comprised of
$67.8 million relating to asbestos liabilities,
$4.2 million relating to environmental liabilities and
$164.9 million relating to all other remaining liabilities.
The reduction in IBNR was a result of the application, on a
basis consistent with the assumptions applied in the prior
period, of our actuarial methodologies to loss data to estimate
loss reserves required to cover liabilities for unpaid losses
and loss adjustment expenses. The prior period estimate of net
IBNR liabilities was reduced as a result of the combined impact
of loss development activity during 2010, including commutations
and the favorable trend of loss development related to
non-commuted policies compared to prior forecasts. The net
incurred favorable loss development of $41.1 million,
resulting from settlement of net advised case and LAE reserves
of $336.1 million for net paid losses of
$295.0 million, related to the settlement of non-commuted
losses in the year and approximately 90 commutations of assumed
and ceded exposures.
88
Commutations provide an opportunity for us to exit exposures to
entire policies with insureds and reinsureds at a discount to
the previous estimated ultimate liability. As a result of
exiting all exposures to such policies, all advised case
reserves and IBNR liabilities relating to that insured or
reinsured are eliminated. This often results in a net gain
irrespective of whether the settlement exceeds the advised case
reserves. We adopt a disciplined approach to the review and
settlement of non-commuted claims through claims adjusting and
the inspection of underlying policyholder records such that
settlements of assumed exposures may often be achieved below the
level of the originally advised loss, and settlements of ceded
receivables may often be achieved at levels above carried
balances. Of the 90 commutations completed during 2010, three
related to our top ten insured
and/or
reinsured exposures, including one commutation completed shortly
after December 31, 2009 whereby the related reduction in
IBNR reserves was recorded in the reduction in net ultimate
losses for the year ended December 31, 2009, and one
related to the commutation of one of our largest ceded
reinsurance assets. The remaining 86 commutations, of which
approximately 43% were completed during the three months ended
December 31, 2010, were of a smaller size, consistent with
our approach of targeting significant numbers of cedant and
reinsurer relationships, as well as targeting significant
individual cedant and reinsurer relationships. The combination
of the claims settlement activity in 2010, including
commutations (but excluding the impact of the commutation that
was completed subsequent to the year ended December 31,
2009) and the actuarial estimation of IBNR reserves
required for the remaining non-commuted exposures (which took
into account the favorable trend of loss development in 2010
related to such exposures compared to prior forecasts), resulted
in our management concluding that the loss development activity
that occurred subsequent to the prior reporting period provided
sufficient new information to warrant a reduction in IBNR
reserves of $236.9 million in 2010.
The reduction in aggregate provisions for bad debt of
$49.6 million was a result of the collection, primarily
during the three months ended December 31, 2010, of certain
reinsurance receivables against which bad debt provisions had
been provided in earlier periods.
The table below provides a reconciliation of the beginning and
ending reserves for losses and loss adjustment expenses for the
years ended December 31, 2010 and 2009. Losses incurred and
paid are reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Balance as of January 1
|
|
$
|
2,479,136
|
|
|
$
|
2,798,287
|
|
Less: total reinsurance reserves recoverable
|
|
|
347,728
|
|
|
|
394,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,131,408
|
|
|
|
2,403,712
|
|
Effect of exchange rate movement
|
|
|
(3,836
|
)
|
|
|
73,512
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities
|
|
|
(311,854
|
)
|
|
|
(259,627
|
)
|
Net losses paid
|
|
|
(294,996
|
)
|
|
|
(257,414
|
)
|
Acquired on purchase of subsidiaries
|
|
|
459,362
|
|
|
|
114,595
|
|
Retroactive reinsurance contracts assumed
|
|
|
785,731
|
|
|
|
56,630
|
|
|
|
|
|
|
|
|
|
|
Net balance as at December 31
|
|
|
2,765,835
|
|
|
|
2,131,408
|
|
Plus: total reinsurance reserves recoverable
|
|
|
525,440
|
|
|
|
347,728
|
|
|
|
|
|
|
|
|
|
|
Balance as at December 31
|
|
$
|
3,291,275
|
|
|
$
|
2,479,136
|
|
|
|
|
|
|
|
|
|
|
Salaries
and Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
50,684
|
|
|
$
|
37,283
|
|
|
$
|
(13,401
|
)
|
Reinsurance
|
|
|
35,993
|
|
|
|
31,171
|
|
|
|
(4,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,677
|
|
|
$
|
68,454
|
|
|
$
|
(18,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
Salaries and benefits, which include expenses relating to our
discretionary bonus and employee share plans, were
$86.7 million and $68.5 million for the years ended
December 31, 2010 and 2009, respectively.
The increase in salaries and benefits was attributable primarily
to:
|
|
|
|
(i)
|
an increase in the discretionary bonus expense for the year
ended December 31, 2010 of $6.8 million. Expenses
relating to our discretionary bonus plan will be variable and
are dependent on our overall profitability;
|
|
|
(ii)
|
increased staff costs due to an increase in average staff
numbers from 287 for the year ended December 31, 2009 to 335 for
the year ended December 31, 2010;
|
|
|
(iii)
|
a payment of $1.25 million to our former Executive
Chairman, John J. Oros, in accordance with the terms of his
separation agreement; and
|
|
|
(iv)
|
amortization of unrecognized compensation costs of
$1.5 million relating to the restricted shares that were
awarded to certain employees in 2010 under the 2006 Equity
Incentive Plan.
|
General
and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
28,288
|
|
|
$
|
19,870
|
|
|
$
|
(8,418
|
)
|
Reinsurance
|
|
|
30,913
|
|
|
|
27,032
|
|
|
|
(3,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,201
|
|
|
$
|
46,902
|
|
|
$
|
(12,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses attributable to the
consulting segment increased by $8.4 million during the
year ended December 31, 2010, as compared to the year ended
December 31, 2009. The increased expenses in 2010 related
primarily to: (i) increased loan structure fees incurred
primarily related to the Enstar Facility; (ii) increased
legal fees relating to ongoing litigation costs; and
(iii) increased audit and actuarial tax fees due primarily
to growth of the group and increased tax fees relating to the
work done in connection with our Australian tax consolidation.
General and administrative expenses attributable to the
reinsurance segment increased by $3.9 million during the
year ended December 31, 2010, as compared to the year ended
December 31, 2009. The increased expenses in 2010 related
primarily to increased costs associated with new companies of
approximately $3.0 million and additional letters of credit
costs associated with portfolios of run-off business acquired
during 2010.
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
10,253
|
|
|
|
17,583
|
|
|
|
7,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,253
|
|
|
$
|
17,583
|
|
|
$
|
7,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense of $10.3 million and $17.6 million
was recorded for the years ended December 31, 2010 and
2009, respectively. The decrease in interest expense was
attributable primarily to the reduction and then elimination of
the principal balance of the Cumberland Facility partially
offset by interest expense incurred on both the Knapton Facility
and the loan associated with the Repurchase Agreements.
90
Net
Foreign Exchange Gain/(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
(420
|
)
|
|
$
|
920
|
|
|
$
|
(1,340
|
)
|
Reinsurance
|
|
|
818
|
|
|
|
(24,707
|
)
|
|
|
25,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
398
|
|
|
$
|
(23,787
|
)
|
|
$
|
24,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a foreign exchange gain of $0.4 million for the
year ended December 31, 2010, as compared to a foreign
exchange loss of $23.8 million for the year ended
December 31, 2009.
In October 2010, we entered into a foreign currency forward
exchange contract as part of our overall foreign currency risk
management strategy. The terms of the contract are that on the
value date, June 30, 2011, we will sell AU$45 million
and receive $42.5 million. The contract exchange rate is
AU$1 for $0.9439. As at December 31, 2010, the fair value
of the contract was $(3.6) million, the effect of which we
have recognized as a foreign exchange loss included as part of
our net earnings. This loss was offset by foreign exchange gains
of approximately $4.0 million arising primarily from our
holdings of surplus British pounds and Australian dollars at a
time when these currencies were appreciating against the
U.S. dollar.
For the year ended December 31, 2009, $35.6 million
(including noncontrolling interests share of
$10.7 million) of the foreign exchange loss arose primarily
as a result of holding surplus U.S. dollar denominated
assets by Gordian, our Australian subsidiary, at a time when the
U.S. dollar had weakened significantly against the
Australian dollar.
Excluding the foreign exchange loss in Gordian of
$35.6 million, exchange gains of $11.8 million were
generated during the year ended December 31, 2009 primarily
as a result of our holding surplus British pounds relating to
cash collateral required to support British pound denominated
letters of credit required by U.K. regulators at a time when the
British pound exchange rate to the U.S. dollar had
increased from approximately £1 = $1.4593 as at
January 1, 2009 to £1 = $1.6170 as at
December 31, 2009. Since letters of credit were in excess
of the British pound liabilities held by our subsidiaries, the
subsidiary companies were unable to match the surplus assets
against liabilities during the year, resulting in the foreign
exchange gain.
In addition to the foreign exchange gain we recorded in our
consolidated statement of earnings for the year ended
December 31, 2010, we recorded in our consolidated
statement of comprehensive income foreign currency translation
adjustment gains for the year ended December 31, 2010 of
approximately $22.5 million, as compared to gains of
approximately $48.9 million for the year ended
December 31, 2009. We have concluded that under the Foreign
Currency Matters topic of the FASB ASC the functional currency
of Gordian is Australian dollars. As a result, upon conversion
of the net Australian dollar assets of Gordian to
U.S. dollars, we recorded $22.4 million, net of
noncontrolling interest of $9.6 million, of
U.S. dollar foreign currency translation adjustment gains
through accumulated other comprehensive income. This gain was
due primarily to the appreciation in the Australian to
U.S. dollar foreign exchange rate from AU$1 = $0.8977 as at
December 31, 2009, to AU$1 = $1.0233 at December 31,
2010.
As our functional currency is the U.S. dollar, we seek to
manage our exposure to foreign currency exchange by broadly
matching foreign currency assets against foreign currency
liabilities, subject to regulatory constraints.
The net impact on shareholders equity of foreign exchange
movements relating specifically to Gordian are summarized in the
table below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Foreign exchange gains (losses) recorded through earnings (net
of noncontrolling interest of $(0.4) million and
$10.7 million)
|
|
$
|
1,035
|
|
|
$
|
(24,888
|
)
|
Foreign exchange loss recorded through earnings related to the
forward foreign exchange contract (net of noncontrolling
interest of $1.1 million)
|
|
|
(2,501
|
)
|
|
|
|
|
Foreign exchange gains recorded through accumulated other
comprehensive income (net of noncontrolling interest of
$(9.6) million and $(20.9) million, respectively)
|
|
|
22,403
|
|
|
|
48,753
|
|
|
|
|
|
|
|
|
|
|
Combined increase in shareholders equity
|
|
$
|
20,937
|
|
|
$
|
23,865
|
|
|
|
|
|
|
|
|
|
|
91
Income
Tax (Expense)/Recovery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
33
|
|
|
$
|
(2,402
|
)
|
|
$
|
2,435
|
|
Reinsurance
|
|
|
(87,165
|
)
|
|
|
(25,203
|
)
|
|
|
(61,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(87,132
|
)
|
|
$
|
(27,605
|
)
|
|
$
|
(59,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded income tax expense of $87.1 million and
$27.6 million for the years ended December 31, 2010
and 2009, respectively.
Income tax expense of $87.2 million and $25.2 million
were recorded in the reinsurance segment for the years ended
December 31, 2010 and 2009, respectively. The increase in
tax arose due primarily to increased income from our U.K.
subsidiaries and our Australian subsidiaries, which recorded
increased taxes in 2010 of $27.2 million and
$12.4 million, respectively.
In addition, during the three months ended December 31,
2010, in order to mitigate the tax impacts of inter-group
transactions, the boards of our Australian group of companies
elected to form a consolidated tax group. The impact of this tax
consolidation resulted in resetting the cost base of certain
assets, which is estimated to result in an additional tax
liability of approximately $30.3 million.
Noncontrolling
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
41,645
|
|
|
|
41,798
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,645
|
|
|
$
|
41,798
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a noncontrolling interest in earnings of
$41.6 million and $41.8 million for the years ended
December 31, 2010 and 2009, respectively. The increase for
the year ended December 31, 2010 related to the increase in
earnings for those entities that have noncontrolling interests.
Comparison
of Years Ended December 31, 2009 and 2008
We reported consolidated net earnings, before extraordinary item
and net earnings attributable to noncontrolling interest, of
approximately $177.0 million and $97.2 million for the
years ended December 31, 2009 and 2008, respectively. The
increase in earnings of approximately $79.8 million was
attributable primarily to the following:
(i) an increase in investment income (net of realized and
unrealized gains/(losses)) of $60.7 million primarily as a
result of an increase, in 2009, in the fair value of our private
equity portfolio classified as other investments of
$5.2 million as compared to a writedown in 2008 of
$84.1 million, partially offset by lower investment income
reflecting the impact of lower global short-term and
intermediate interest rates;
(ii) a larger net reduction in ultimate loss and loss
adjustment expense liabilities of $17.5 million;
(iii) reduced interest expense of $5.8 million due
primarily to an overall reduction in loan facility balances
outstanding as at December 31, 2009 along with lower
interest rates on outstanding term loan facility agreements;
(iv) a reduction in general and administrative expenses of
$6.5 million primarily due to elimination of loan structure
fees that were paid in 2008, partially offset by increased
professional fees; and
(v) a reduction in income taxes of $19.2 million due
to lower tax liabilities recorded on the results of our taxable
subsidiaries; partially offset by
92
(vi) an increase in net foreign exchange losses of
$8.8 million primarily due to our holding of surplus
U.S. dollars in one of our subsidiaries whose functional
currency is Australian dollars at a time when the
U.S. dollar has weakened against the Australian
dollar; and
(vii) an increase in salary and benefits costs of
$12.2 million due primarily to increased salary costs
related to our discretionary bonus plan as a result of increased
net earnings in the year.
We recorded noncontrolling interest in earnings of
$41.8 million and $65.9 million for the years ended
December 31, 2009 and 2008, respectively. Included within
the December 31, 2008 noncontrolling interest balance of
$65.9 million was $15.1 million of noncontrolling
interest relating to the extraordinary gain of
$50.3 million. Net earnings attributable to Enstar Group
Limited increased from $81.6 million for the year ended
December 31, 2008 to $135.2 million for the year ended
December 31, 2009.
Consulting
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
49,617
|
|
|
$
|
54,158
|
|
|
$
|
(4,541
|
)
|
Reinsurance
|
|
|
(33,513
|
)
|
|
|
(29,007
|
)
|
|
|
(4,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,104
|
|
|
$
|
25,151
|
|
|
$
|
(9,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our consulting companies earned consulting fees of approximately
$49.6 million and $54.2 million for the years ended
December 31, 2009 and 2008, respectively. The decrease in
consulting fees related primarily to decreased management and
incentive fees earned from third-party agreements.
Internal management fees of $33.5 million and
$29.0 million were paid for the years ended
December 31, 2009 and 2008, respectively, by our
reinsurance companies to our consulting companies. The increase
in internal management fees was due to increased management fees
received from reinsurance companies we acquired during 2008.
Net
Investment Income and Net Realized and Unrealized
Gains/(Losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Net Realized and Unrealized
|
|
|
|
Net Investment Income
|
|
|
Gains/(Losses)
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
|
|
|
Consulting
|
|
$
|
1,894
|
|
|
$
|
(20,248
|
)
|
|
$
|
22,142
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
79,477
|
|
|
|
46,849
|
|
|
|
32,628
|
|
|
|
4,237
|
|
|
|
(1,655
|
)
|
|
|
5,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,371
|
|
|
$
|
26,601
|
|
|
$
|
54,770
|
|
|
$
|
4,237
|
|
|
$
|
(1,655
|
)
|
|
$
|
5,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income for the year ended December 31, 2009
increased by $54.8 million to $81.4 million, as
compared to $26.6 million for the year ended
December 31, 2008. The increase was primarily attributable
the combination of the following items:
(i) an increase of $5.2 million, for the year ended
December 31 2009, in the fair value of our private equity
investments classified as other investments as compared to a
writedown of $84.1 million for the year ended December 31
2008; partially offset by
(ii) lower investment income from fixed maturities and cash
and cash equivalents, reflecting the impact of lower global
short-term and intermediate interest rates the
average U.S. Federal Funds Rate decreased from 2.09% for
the year ended December 31, 2008 to 0.25% for the year
ended December 31, 2009.
The average return on the cash, equities and fixed maturities
investments (excluding any writedowns or appreciation related to
our other investments) for the year ended December 31, 2009
was 2.13%, as compared to the average return of 4.62% for the
year ended December 31, 2008. The average credit rating of
Enstars fixed maturity investments at December 31,
2009 was AA.
93
Net realized and unrealized gains (losses) for the year ended
December 31, 2009 and 2008 were $4.2 million and
$(1.7) million, respectively. The increase was due
primarily to
mark-to-market
gains earned during 2009 on our equity portfolios.
Fair
Value Measurements
In accordance with the provisions of the Fair Value Measurement
and Disclosure topic of the Codification, we have categorized
our investments recorded at fair value among levels as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total Fair
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
U.S. government and agency
|
|
$
|
|
|
|
$
|
76,226
|
|
|
$
|
|
|
|
$
|
76,226
|
|
Non-U.S.
government
|
|
|
|
|
|
|
37,186
|
|
|
|
|
|
|
|
37,186
|
|
Corporate
|
|
|
|
|
|
|
87,083
|
|
|
|
|
|
|
|
87,083
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
2,012
|
|
|
|
|
|
|
|
2,012
|
|
Commercial mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
641
|
|
Equities
|
|
|
21,203
|
|
|
|
|
|
|
|
3,300
|
|
|
|
24,503
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
81,801
|
|
|
|
81,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
21,203
|
|
|
$
|
202,507
|
|
|
$
|
85,742
|
|
|
$
|
309,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total Fair
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
U.S. government and agency
|
|
$
|
|
|
|
$
|
326,404
|
|
|
$
|
|
|
|
$
|
326,404
|
|
Non-U.S.
government
|
|
|
|
|
|
|
25,479
|
|
|
|
|
|
|
|
25,479
|
|
Corporate
|
|
|
|
|
|
|
259,299
|
|
|
|
|
|
|
|
259,299
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
2,349
|
|
|
|
|
|
|
|
2,349
|
|
Commercial mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
352
|
|
|
|
352
|
|
Asset backed
|
|
|
|
|
|
|
13,472
|
|
|
|
|
|
|
|
13,472
|
|
Equities
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
3,747
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
60,237
|
|
|
|
60,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
3,747
|
|
|
$
|
627,003
|
|
|
$
|
60,589
|
|
|
$
|
691,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
Net
Reduction in Ultimate Loss and Loss Adjustment Expense
Liabilities:
The following table shows the components of the movement in the
net reduction in ultimate loss and loss adjustment expense
liabilities for the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Net losses paid
|
|
$
|
(257,414
|
)
|
|
$
|
(174,013
|
)
|
Net change in case and LAE reserves
|
|
|
214,079
|
|
|
|
147,576
|
|
Net change in IBNR
|
|
|
318,160
|
|
|
|
187,874
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
274,825
|
|
|
|
161,437
|
|
Reduction in provisions for bad debt
|
|
|
11,718
|
|
|
|
36,136
|
|
Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
|
|
|
50,412
|
|
|
|
69,056
|
|
Amortization of fair value adjustments
|
|
|
(77,328
|
)
|
|
|
(24,525
|
)
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities
|
|
$
|
259,627
|
|
|
$
|
242,104
|
|
|
|
|
|
|
|
|
|
|
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2009 of
$259.6 million was attributable to a reduction in estimates
of net ultimate losses of $274.8 million, a reduction in
aggregate provisions for bad debts of $11.7 million and a
reduction in estimates of loss and loss adjustment expense
liabilities of $50.4 million, relating to 2009 run-off
activity, partially offset by the amortization, over the
estimated payout period, of fair value adjustments relating to
companies acquired amounting to $77.3 million.
The reduction in estimates of net ultimate losses of
$274.8 million comprised net incurred loss development of
$43.3 million and reductions in IBNR reserves of
$318.2 million. The decrease in the estimate of IBNR loss
reserves of $318.2 million was comprised of
$158.4 million relating to asbestos liabilities,
$17.0 million relating to environmental liabilities and
$142.8 million relating to all other remaining liabilities.
The reduction in IBNR is a result of the application, on a basis
consistent with the assumptions applied in the prior period, of
our actuarial methodologies to loss data to estimate loss
reserves required to cover liabilities for unpaid losses and
loss adjustment expenses. The prior period estimate of net IBNR
liabilities was reduced as a result of the combined impact of
loss development activity during 2009, including commutations
and the favorable trend of loss development related to
non-commuted policies compared to prior forecasts. The net
incurred loss development of $43.3 million resulting from
settlement of net advised case and LAE reserves of
$214.1 million for net paid losses of $257.4 million,
related to the settlement of non-commuted losses in the year and
approximately 79 commutations of assumed and ceded exposures. Of
the 79 commutations completed during 2009, two related to our
top ten insured
and/or
reinsured exposures. The remaining 77 were of a smaller size,
consistent with our approach of targeting significant numbers of
cedant and reinsurer relationships, as well as targeting
significant individual cedant and reinsurer relationships.
Approximately 76% of commutations completed in 2009 related to
commutations completed during the three months ended
December 31, 2009. Subsequent to the year end, one of our
insurance entities completed a commutation of another of one of
our top ten reinsured exposures. The combination of the claims
settlement activity in 2009, including commutations, and the
actuarial estimation of IBNR reserves required for the remaining
non-commuted exposures (which took into account the favorable
trend of loss development in 2009 related to such exposures
compared to prior forecasts as well as the impact of the
commutation that was completed subsequent to the year end),
resulted in our management concluding that the loss development
activity that occurred subsequent to the prior reporting period
provided sufficient new information to warrant a reduction in
IBNR reserves of $318.2 million in 2009.
The reduction in aggregate provisions for bad debt of
$11.7 million was as a result of the collection, primarily
during the three months ended March 31, 2009, of certain
reinsurance receivables against which bad debt provisions had
been provided in earlier periods.
95
The table below provides a reconciliation of the beginning and
ending reserves for losses and loss adjustment expenses for the
years ended December 31, 2009 and 2008. Losses incurred and
paid are reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Balance as of January 1
|
|
$
|
2,798,287
|
|
|
$
|
1,591,449
|
|
Less: total reinsurance reserves recoverable
|
|
|
394,575
|
|
|
|
427,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,403,712
|
|
|
|
1,163,485
|
|
Effect of exchange rate movement
|
|
|
73,512
|
|
|
|
(124,989
|
)
|
Net reduction in ultimate loss and loss adjustment expense
liabilities
|
|
|
(259,627
|
)
|
|
|
(242,104
|
)
|
Net losses paid
|
|
|
(257,414
|
)
|
|
|
(174,013
|
)
|
Acquired on purchase of subsidiaries
|
|
|
114,595
|
|
|
|
1,408,046
|
|
Retroactive reinsurance contracts assumed
|
|
|
56,630
|
|
|
|
373,287
|
|
|
|
|
|
|
|
|
|
|
Net balance as at December 31
|
|
|
2,131,408
|
|
|
|
2,403,712
|
|
Plus: total reinsurance reserves recoverable
|
|
|
347,728
|
|
|
|
394,575
|
|
|
|
|
|
|
|
|
|
|
Balance as at December 31
|
|
$
|
2,479,136
|
|
|
$
|
2,798,287
|
|
|
|
|
|
|
|
|
|
|
Salaries
and Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
37,281
|
|
|
$
|
33,196
|
|
|
$
|
(4,085
|
)
|
Reinsurance
|
|
|
31,173
|
|
|
|
23,074
|
|
|
|
(8,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68,454
|
|
|
$
|
56,270
|
|
|
$
|
(12,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits, which include expenses relating to our
discretionary bonus and employee share plans, were
$68.5 million and $56.3 million for the years ended
December 31, 2009 and 2008, respectively.
The increase in salaries and benefits was primarily attributable
to:
(i) an increase in the discretionary bonus expense in our
reinsurance segment for the year ended December 31, 2009 of
$9.5 million. Expenses relating to our discretionary bonus
plan will be variable and are dependent on our overall
profitability; and
(ii) increased staff costs due to an increase in average
staff numbers from 248 for the year ended December 31, 2008
to 287 for the year ended December 31, 2009; partially
offset by
(iii) lower U.S. dollar costs of our U.K.-based staff
following a reduction in the average British pound exchange rate
from approximately 1.8524 to 1.5670 for the years ended
December 31, 2008 and 2009, respectively. Of our total
headcount as at December 31, 2009 and December 31,
2008, approximately 67% and 65%, respectively, were paid in
British pounds.
General
and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
19,870
|
|
|
$
|
17,289
|
|
|
$
|
(2,581
|
)
|
Reinsurance
|
|
|
27,032
|
|
|
|
36,068
|
|
|
|
9,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,902
|
|
|
$
|
53,357
|
|
|
$
|
6,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
General and administrative expenses attributable to the
reinsurance segment decreased by $9.0 million during the
year ended December 31, 2009, as compared to the year ended
December 31, 2008. For the year ended December 31,
2008, we incurred approximately $13.0 million of bank loan
structure fees in respect of acquisitions we completed during
2008. For the year ended December 31, 2009 we did not incur
any such fees. The reduced expenses in 2009 relating to lower
bank loan structure fees were partially offset by increased
costs associated with new companies acquired during 2008 along
with increased professional fees due in part to legal fees
incurred in respect of a lawsuit that was settled pursuant to a
Mutual Release Agreement dated as of April 7, 2010.
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
17,583
|
|
|
|
23,370
|
|
|
|
5,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,583
|
|
|
$
|
23,370
|
|
|
$
|
5,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense of $17.6 million and $23.4 million
was recorded for the year ended December 31, 2009 and 2008,
respectively. The decrease in interest expense was primarily
attributable to the combination of:
(i) a reduction in the principal balance on the loan
facilities of our subsidiary, Cumberland Holdings Limited,
relating to the Gordian acquisition, or the Cumberland Loan
Facilities. During 2009, we repaid approximately
$148.3 million of the outstanding principal on the
Cumberland Loan Facilities reducing the outstanding principal
balance from approximately $222.6 million as at
December 31, 2008 to $74.3 million as of
December 31, 2009;
(ii) a reduction in the average Australian LIBOR interest
rate on the Cumberland Loan Facilities between the years ended
December 31, 2008 and December 31, 2009; and
(iii) a reduction in the average Australian dollar exchange
rate from approximately 0.8521 to 0.7934 between the years ended
December 31, 2008 and December 31, 2009; partially
offset by
(iv) an increase in interest costs associated with the loan
facilities of our subsidiary, Royston, relating to the
Unionamerica acquisition, which we entered into on
December 30, 2008.
Net
Foreign Exchange (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
920
|
|
|
$
|
(1,167
|
)
|
|
$
|
2,087
|
|
Reinsurance
|
|
|
(24,707
|
)
|
|
|
(13,819
|
)
|
|
|
(10,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(23,787
|
)
|
|
$
|
(14,986
|
)
|
|
$
|
(8,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a foreign exchange loss of $23.8 million for
the year ended December 31, 2009, as compared to a foreign
exchange loss of $15.0 million for the year ended
December 31, 2008. For the year ended December 31,
2009, $35.6 million (including noncontrolling
interests share of $10.7 million) of the foreign
exchange loss arose primarily due to Gordians holdings of
surplus U.S. dollar denominated assets at a time when the
U.S. dollar had weakened significantly against the
Australian dollar.
Excluding the foreign exchange loss in Gordian of
$35.6 million, exchange gains of $11.8 million were
generated during the year primarily as a result of our holding
surplus British pounds relating to cash collateral required to
support British pound denominated letters of credit required by
U.K. regulators at a time when the British pound exchange rate
to the U.S. dollar had increased from approximately £1
= $1.4593 as at January 1, 2009 to £1 = $1.6170 as at
December 31, 2009. Since letters of credit are in excess of
the British pound liabilities held by
97
our subsidiaries, the subsidiary companies were unable to match
the surplus assets against liabilities during the year,
resulting in the foreign exchange gain.
In addition to the foreign exchange losses recorded in our
consolidated statement of earnings for the year ended
December 31, 2009, we recorded in our consolidated
statement of comprehensive income foreign currency translation
adjustment gains for the year ended December 31, 2009 of
$48.9 million, as compared to losses of $51.0 million
for the year ended December 31, 2008. For the year ended
December 31, 2009, these gains arose primarily as a result
of foreign currency translation adjustments of
$48.8 million, net of noncontrolling interest of
$20.9 million, relating to Gordian. We have concluded that
under the Foreign Currency Matters topic of FASB ASC, or
ASC 830, the functional currency of Gordian is Australian
dollars. As a result, upon conversion of the net Australian
dollar assets of Gordian to U.S. dollars, we recorded
$48.8 million, net of noncontrolling interest of
$20.9 million, of U.S. dollar foreign currency
translation adjustment gains through accumulated other
comprehensive income. This gain was due primarily to the
appreciation in the Australian to U.S. dollar foreign
exchange rate from AU$1 = $0.7026 as at December 31, 2008,
to AU$1 = $0.8977 at December 31, 2009.
As our functional currency is the U.S. dollar, we seek to
manage our exposure to foreign currency exchange by broadly
matching foreign currency assets against foreign currency
liabilities, subject to regulatory constraints.
The net impact on shareholders equity of foreign exchange
movements relating to Gordian in 2009 is summarized in the table
below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Foreign exchange (losses) gains recorded through earnings
(related primarily to the holding of surplus U.S. dollar
denominated short-term investments) (net of noncontrolling
interest of $10.7 million and $11.0 million,
respectively)
|
|
$
|
(24,888
|
)
|
|
$
|
25,598
|
|
Foreign exchange gains (losses) recorded through accumulated
other comprehensive income (net of noncontrolling interest of
$20.9 million and $18.4 million, respectively)
|
|
|
48,753
|
|
|
|
(42,793
|
)
|
|
|
|
|
|
|
|
|
|
Combined increase (decrease) in shareholders equity
|
|
$
|
23,865
|
|
|
$
|
(17,195
|
)
|
|
|
|
|
|
|
|
|
|
Income
Tax (Expense)/Recovery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
(2,402
|
)
|
|
$
|
511
|
|
|
$
|
(2,913
|
)
|
Reinsurance
|
|
|
(25,203
|
)
|
|
|
(47,365
|
)
|
|
|
22,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(27,605
|
)
|
|
$
|
(46,854
|
)
|
|
$
|
19,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded income tax expense of $27.6 million and
$46.9 million for the years ended December 31, 2009
and 2008, respectively.
Income tax expense of $25.2 million and $47.4 million
were recorded in the reinsurance segment for the years ended
December 31, 2009 and 2008, respectively. The decrease
arose due primarily to a reduction in tax expense for the
Cumberland group, which owns our Australian subsidiary, Gordian,
from $46.3 million in 2008 down to $7.9 million in
2009, due primarily to a reduction in income earned in 2009 as
compared to 2008. Reduced income at the local Gordian level for
the year ended December 31, 2009 was attributable primarily
to foreign exchange losses on surplus U.S. dollars. The
reduction in tax expense attributable to Gordian for the year
ended December 31, 2009 was partially offset by tax expense
recorded by Unionamerica of approximately $20.4 million.
98
Negative
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
|
|
|
|
50,280
|
|
|
|
(50,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
50,280
|
|
|
$
|
(50,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Negative goodwill of $nil and $50.3 million, was recorded
for the years ended December 31, 2009 and 2008,
respectively. For the year ended December 31, 2008, the
negative goodwill of $50.3 million was earned in connection
with our acquisition of Gordian and represents the excess of the
cumulative fair value of net assets acquired of
$455.7 million over the cost of $405.4 million. This
excess was, in accordance with ASC 805, recognized as an
extraordinary gain in 2008. The negative goodwill arose
primarily as a result of the income earned by Gordian between
the date of the balance sheet on which the agreed purchase price
was based, September 30, 2007, and the date the acquisition
closed, March 5, 2008.
Noncontrolling
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Consulting
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Reinsurance
|
|
|
41,798
|
|
|
|
50,808
|
|
|
|
9,010
|
|
Reinsurance extraordinary gain
|
|
|
|
|
|
|
15,084
|
|
|
|
15,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,798
|
|
|
$
|
65,892
|
|
|
$
|
24,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded a noncontrolling interest in earnings of
$41.8 million and $65.9 million (including
$15.1 million of an extraordinary gain related to negative
goodwill) for the years ended December 31, 2009 and 2008,
respectively. The decrease for the year ended December 31,
2009, excluding the noncontrolling interest in negative goodwill
of $15.1 million relating to the Gordian acquisition,
related to the decrease in earnings for those entities that have
noncontrolling interests.
Liquidity
and Capital Resources
As we are a holding company and have no substantial operations
of our own, our assets consist primarily of investments in
subsidiaries. The potential sources of the cash flows to the
holding company consist of dividends, advances and loans from
our subsidiary companies.
Our future cash flows depend upon the availability of dividends
or other statutorily permissible payments from our subsidiaries.
The ability to pay dividends and make other distributions is
limited by the applicable laws and regulations of the
jurisdictions in which our insurance and reinsurance
subsidiaries operate, including Bermuda, the United Kingdom,
United States, Australia and 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
solvency 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. As of December 31, 2010 and 2009, one of our U.S.
insurance companies was not in compliance with its applicable
risk-based capital level. We do not believe this companys
non-compliance will have a material impact on our ability to
meet our cash obligations. With the exception of the above, all
of our insurance and reinsurance subsidiaries solvency and
liquidity were in excess of the minimum levels required as of
December 31, 2010 and 2009. Retained earnings of our
insurance and reinsurance subsidiaries are not currently
restricted as minimum capital solvency margins are covered by
share capital and additional
paid-in-capital.
Our capital management strategy is to preserve sufficient
capital to enable us to make future acquisitions while
maintaining a conservative investment strategy. We believe that
restrictions on liquidity resulting from restrictions
99
on the payments of dividends by our subsidiary companies will
not have a material impact on our ability to meet our cash
obligations.
Our sources of funds primarily consist of the cash and
investment portfolios acquired on the completion of the
acquisition of an insurance or reinsurance company in run-off.
These acquired cash and investment balances are classified as
cash provided by investing activities. We expect to use these
funds acquired, together with collections from reinsurance
debtors, consulting income, investment income and proceeds from
sales and redemption of investments, to pay losses and loss
expenses, salaries and benefits and general and administrative
expenses, with the remainder used for acquisitions and
additional investments. We expect that our reinsurance segment
will have a net use of cash from operations as total net claim
settlements and operating expenses will generally be in excess
of investment income earned. We expect that our consulting
segment operating cash flows will generally be breakeven. We
expect our operating cash flows, together with our existing
capital base and cash and investments acquired on the
acquisition of our insurance and reinsurance subsidiaries, to be
sufficient to meet cash requirements and to operate our
business. We currently do not intend to pay cash dividends on
our ordinary shares.
We maintain a short duration conservative investment strategy
whereby, as of December 31, 2010, 45.2% of our fixed
maturity portfolio classified as
available-for-sale
or trading was held with a maturity of less than one year and
89.3% had maturities of less than five years. Excluding the
impact of commutations and any schemes of arrangement, should
they be completed, we expect approximately 16.3% of the gross
reserves to be settled within one year and approximately 64.1%
of the reserves to be settled within five years. However, our
strategy of commuting our liabilities has the potential to
accelerate the natural payout of losses to less than five years.
Therefore, the relatively short-duration investment portfolio is
maintained in order to provide liquidity for commutation
opportunities and preclude us from having to liquidate longer
dated securities. As a result, we do not anticipate having to
sell longer dated investments in order to meet future
policyholder liabilities.
At December 31, 2010, total cash and investments were
$3.88 billion, compared to $3.32 billion at
December 31, 2009.
Reinsurance
Recoverables
Our acquired reinsurance subsidiaries, prior to acquisition by
us, used retrocessional agreements to reduce their exposure to
the risk of reinsurance assumed. 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. Provisions are made for amounts considered
potentially uncollectible. The allowance for uncollectible
reinsurance recoverable was $381.4 million and
$397.6 million at December 31, 2010 and 2009,
respectively.
As of December 31, 2010 and 2009, we had total reinsurance
recoverables of $961.4 million and $638.3 million,
respectively, of which $398.8 million and
$409.6 million, respectively, were associated with two and
three reinsurers rated AA- or higher by a major rating agency,
respectively, which each represented 10% or more of total
reinsurance balances receivable. In the event that all or any of
the reinsuring companies are unable to meet their obligations
under existing reinsurance agreements, we will be liable for
such defaulted amounts. One major AA- rated reinsurer was
included in the 2009 figure for reinsurers each representing 10%
or more of total reinsurance balances receivable but, for the
year ended December 31, 2010, is now excluded as its
balance receivable is now less than 10% of the total reinsurance
balance receivable.
During 2010 and 2009, we completed six and two acquisitions,
respectively, of insurance companies in run-off and entered into
eight and one acquisitions of portfolios of insurance and
reinsurance businesses in run-off, respectively. These
transactions included the acquisition of additional reinsurance
balances receivable together with the related provisions for
uncollectible reinsurance. The aggregate provision for
uncollectible reinsurance recoverable at December 31, 2010
amounted to approximately 28.4% of the total reinsurance
recoverables balance, before provisions for uncollectible
reinsurance, compared to approximately 38.4% at
December 31, 2009.
The overall bad debt provision percentage on the reinsurance
asset has decreased as new acquisitions during 2010 have lower
bad debt provisions than that established as at
December 31, 2009.
100
Source
of Funds
We primarily generate our cash from the acquisitions we
complete. These acquired cash and investment balances are
classified as cash provided by investing activities.
We expect that for the reinsurance segment there will be a net
use of cash from operations due to total claim settlements and
operating expenses being in excess of investment income earned
and that for the consulting segment operating cash flows will be
breakeven. As a result, the net operating cash flows for us, to
expiry, are expected to be negative as we pay out cash in claims
settlements and expenses in excess of cash generated via
investment income and consulting fees.
The following table summarizes our consolidated cash flows from
operating, investing and financing activities in the last three
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Total cash (used in) provided by:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Operating activities
|
|
$
|
(609,211
|
)
|
|
$
|
(198,055
|
)
|
|
$
|
157,187
|
|
Investing activities
|
|
|
253,461
|
|
|
|
(259,814
|
)
|
|
|
245,062
|
|
Financing activities
|
|
|
(124,697
|
)
|
|
|
(199,684
|
)
|
|
|
624,584
|
|
Effect of exchange rate changes on cash
|
|
|
13,156
|
|
|
|
57,452
|
|
|
|
(155,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
$
|
(467,291
|
)
|
|
$
|
(600,101
|
)
|
|
$
|
871,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Item 8. Financial Statements and Supplementary
Data Consolidated Statements of Cash Flows for the
years ended December 31, 2010, 2009 and 2008 for
further information.
Operating
Net cash used in our operating activities for the year ended
December 31, 2010 was $609.2 million compared to
$198.1 million for the year ended December 31, 2009.
This $411.1 million increase in cash used in operating
activities was due primarily to the following:
1) an increase of $838.5 million in the net purchases
of trading securities between 2010 and 2009 due to the decision
of our investment committee to increase the allocation of our
investment portfolio to trading securities;
2) an increase of $206.0 million in funds withheld by
clients on our behalf between 2010 and 2009 due primarily to us
entering into quota share reinsurance agreements with Allianz
and IICH with respect to specific portfolios of run-off
business; partially offset by
3) an increase of $654.4 million in losses and loss
adjustment expenses between 2010 and 2009.
Net cash (used in) provided by our operating activities for the
year ended December 31, 2009 was $(198.1) million
compared to $157.2 million for the year ended
December 31, 2008. This $355.3 million increase in
cash used in operating activities was due primarily to the
following:
1) a reduction of $179.1 million in the net sales of
trading securities on behalf of policyholders between 2008 and
2009 due primarily to the funding of the 2008 commutation
settlement relating to one such policyholder;
2) a reduction of $90.3 million in net losses from
other investments between 2009 and 2008; and
3) a reduction of $236.1 million in losses and loss
adjustment expenses between 2009 and 2008 partially offset by
$91.7 million of associated changes in net reinsurance
balances payable and receivable.
Investing
Investing cash flows consist primarily of cash acquired net of
acquisitions along with net proceeds on the sale and purchase of
investments. Net cash provided by (used in) investing activities
was $253.5 million during the year
101
ended December 31, 2010 compared to $(259.8) million
during the year ended December 31, 2009. The increase of
$513.3 million in investing cash flows between 2010 and
2009 was due primarily to the following:
1) a decrease of $315.7 million in the purchases of
available-for-sale
and
held-to-maturity
securities between 2010 and 2009 due to the decision of our
investment committee to increase the allocation of our
investment portfolio to trading securities;
2) an increase of $259.6 million in the sales and
maturity of
available-for-sale
and
held-to-maturity
securities between 2010 and 2009 due to the decision of our
investment committee to increase the allocation of our
investment portfolio to trading securities; and
3) an increase of $98.9 million in the funding of
other investments between 2010 and 2009 due to the increased
investment in our private equity investments; partially offset by
4) $31.6 million received on the sale of a partly
owned company.
Net cash (used in) provided by investing activities was
$(259.8) million during the year ended December 31,
2009 compared to $245.1 million during the year ended
December 31, 2008. The decrease of $504.9 million in
the investing cash flows between 2009 and 2008 was due primarily
to the following:
1) a reduction in the number of acquisitions in 2009 as
compared to 2008, which resulted in a net reduction of cash
flows related to acquisitions of $186.8 million; and
2) an increase of $409.6 million in the net purchases
of
available-for-sale
and
held-to-maturity
securities between 2009 and 2008 due to the decision of our
investment committee to increase the allocation to
short-duration securities from available cash balances.
Financing
Net cash used in financing activities was $124.7 million
during the year ended December 31, 2010 compared to
$199.7 million during the year ended December 31,
2009. The decrease of $75.0 million in cash used in
financing activities was primarily attributable to the following:
1) an increase of $161.4 million in cash received
attributable to bank loans between 2010 and 2009, offset
partially by an increase of $62.7 million in the repayment
of bank loans; and
2) an increase of $49.2 million in dividends paid to
noncontrolling interest in 2010, offset partially by
contributions of $28.7 million to surplus of subsidiary by
noncontrolling interest.
Net cash (used in) provided by financing activities was
$(199.7) million during the year ended December 31,
2009 compared to $624.6 million during the year ended
December 31, 2008. The increase of $824.3 million in
cash used in financing activities was attributable primarily to
the following:
1) a reduction in cash received attributable to bank loans
from $572.8 million in 2008 to $nil in 2009 due to the
significant reduction in the number and size of acquisitions
completed in 2009. All of the 2009 acquisitions that were
completed were funded from available cash on hand;
2) a reduction in cash contributions received from
noncontrolling interests from $163.8 million in 2008 to
$nil in 2009 due to none of the acquisitions completed in 2009
having a third-party participation; and
3) a reduction of $112.6 million in proceeds from
issuance of ordinary shares from 2008 to 2009.
102
Investments
The maturity distribution for our fixed maturity securities held
as of December 31, 2010 and December 31, 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Fair Value
|
|
|
% of Total
|
|
|
Fair Value
|
|
|
% of Total
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Due in one year or less
|
|
$
|
966,319
|
|
|
|
45.3
|
%
|
|
$
|
639,191
|
|
|
|
41.7
|
%
|
Due after one year through five years
|
|
|
940,017
|
|
|
|
44.0
|
%
|
|
|
680,630
|
|
|
|
44.4
|
%
|
Due after five years through ten years
|
|
|
47,627
|
|
|
|
2.2
|
%
|
|
|
101,868
|
|
|
|
6.6
|
%
|
Due after ten years
|
|
|
10,387
|
|
|
|
0.5
|
%
|
|
|
28,682
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,964,350
|
|
|
|
92.0
|
%
|
|
|
1,450,371
|
|
|
|
94.6
|
%
|
Residential mortgage-backed
|
|
|
102,506
|
|
|
|
4.8
|
%
|
|
|
17,644
|
|
|
|
1.2
|
%
|
Commercial mortgage-backed
|
|
|
38,841
|
|
|
|
1.8
|
%
|
|
|
30,409
|
|
|
|
2.0
|
%
|
Asset backed
|
|
|
28,613
|
|
|
|
1.4
|
%
|
|
|
33,991
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,134,310
|
|
|
|
100.0
|
%
|
|
$
|
1,532,415
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
Our long-term debt consists of loan facilities used to partially
finance certain of our acquisitions or significant new business
transactions along with a loan outstanding in relation to the
Repurchase Agreements entered into with three of our executives
and certain trusts and a corporation affiliated with the
executives. We draw down on the loan facilities at the time of
the acquisition or significant new business transaction,
although in some circumstances we have made additional
draw-downs to refinance existing debt of the acquired company.
We incurred interest expense on our loan facilities and loan
outstanding relating to the Repurchase Agreements of
$10.3 million and $17.6 million for the years ended
December 31, 2010 and 2009, respectively.
Total amounts of loans payable outstanding as of
December 31, 2010 and 2009 totaled $245.3 million and
$255.0 million, respectively, and were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
Date of Facility
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Cumberland Facility B
|
|
March 4, 2008
|
|
$
|
|
|
|
$
|
67,071
|
|
Unionamerica Facility A
|
|
December 30, 2008
|
|
|
71,259
|
|
|
|
155,268
|
|
Unionamerica Facility B
|
|
December 30, 2008
|
|
|
154
|
|
|
|
32,622
|
|
Knapton
|
|
April 20, 2010
|
|
|
21,532
|
|
|
|
|
|
Enstar Group Facility A
|
|
December 29, 2010
|
|
|
52,100
|
|
|
|
|
|
Enstar Group Facility B
|
|
December 29, 2010
|
|
|
62,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term bank debt
|
|
|
|
|
207,945
|
|
|
|
254,961
|
|
Repurchase Agreements
|
|
October 1, 2010
|
|
|
37,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans payable
|
|
|
|
$
|
245,278
|
|
|
$
|
254,961
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumberland
In February 2008, our wholly-owned subsidiary, Cumberland
Holdings Limited, or Cumberland, entered into a term facility
agreement jointly with a London-based bank and a German bank, or
the Cumberland Facility. On March 4, 2008, Cumberland drew
down AU$215.0 million (approximately $197.5 million)
from the Facility A commitment, or Cumberland Facility A, and
AU$86.0 million (approximately $79.0 million) from the
Facility B commitment, or Cumberland Facility B, to partially
fund the Gordian acquisition.
Cumberland had fully repaid Cumberland Facility A as of
December 31, 2009.
103
The interest rate on Cumberland Facility B was LIBOR plus 2.75%.
The outstanding Cumberland Facility B loan balance as of
December 31, 2009 was AU$74.7 million (approximately
$67.1 million). On September 10, 2010, Cumberland
fully repaid the remaining outstanding principal and accrued
interest on Cumberland Facility B of AU$76.4 million
($70.8 million).
Unionamerica
On December 30, 2008, in connection with the Unionamerica
Holdings Limited acquisition, Royston Run-off Limited, or
Royston, borrowed the full amount of $184.6 million
available under a term facilities agreement, or the Unionamerica
Facilities Agreement, with National Australia Bank Limited, or
NABL. Of that amount, Royston borrowed $152.6 million under
Facility A, or Unionamerica Facility A, and $32.0 million
under Facility B, or Unionamerica Facility B. Unionamerica
Facility A was partially repaid in December 2010 and, as of
December 31, 2010, the remaining outstanding loan balance
was $71.3 million compared to $155.3 million as of
December 31, 2009. Unionamerica Facility B was fully
repaid in December 2010 and, as of December 31, 2010, the
remaining outstanding balance of $0.2 million related to
accrued interest outstanding. As of December 31, 2009, the
outstanding Unionamerica Facility B loan balance was
$32.6 million.
The loans are secured by a lien covering all of the assets of
Royston. Unionamerica Facility A is repayable within three years
from October 3, 2008, the date of the Unionamerica
Facilities Agreement. Unionamerica Facility B was repayable
within four years from October 3, 2008. On August 4,
2009, Royston entered into an amendment and restatement of the
Unionamerica Facilities Agreement pursuant to which:
(1) NABLs participation in the original
$184.6 million facility was reduced from 100% to 50%, with
Barclays Bank PLC providing the remaining 50%; (2) the
guarantee provided by us of all of the obligations of Royston
under the Unionamerica Facilities Agreement was terminated; and
(3) the interest rate on the Facility A portion was reduced
from LIBOR plus 3.50% to LIBOR plus 2.75% and the interest rate
on the Facility B portion was reduced from LIBOR plus 4.00% to
LIBOR plus 3.25%.
During the existence of a payment default, the interest rates
will be increased by 1.00%. During the existence of any event of
default (as specified in the Unionamerica Facilities Agreement),
the lenders may declare that all amounts outstanding under the
Unionamerica Facilities Agreement are immediately due and
payable, declare that all borrowed amounts be paid upon demand,
or proceed against the security. Amounts outstanding under the
Unionamerica Facilities Agreement are also subject to
acceleration by the lenders in the event of a change of control
of Royston, successful application by Royston or certain of its
affiliates (other than us) for listing on a stock exchange, or
total amounts outstanding under the facilities decreasing below
$10.0 million. The Unionamerica Facilities Agreement
contains various financial and business covenants for
Unionamerica Facilities A and B. As of December 31, 2010,
all of the financial covenants relating to the Unionamerica
facilities were met. The Flowers Fund has a 30% non-voting
equity interest in Royston Holdings Ltd., the direct parent
company of Royston.
In January 2011, the accrued interest outstanding of
$0.2 million relating to Unionamerica Facility B was
settled. In addition, on March 3, 2011, we repaid an
additional $40.5 million of the outstanding loan balance of
Unionamerica Facility A. As of March 3, 2011, the
remaining outstanding loan balance of Unionamerica
Facility A, inclusive of accrued interest, was
$30.6 million.
Knapton
In April 2010, Knapton Holdings entered into the Knapton
Facility, a term facility agreement with a London-based bank. On
April 20, 2010, Knapton Holdings drew down
$21.4 million from the Knapton Facility to partially fund
the acquisition of Knapton. The interest rate on the Knapton
Facility is LIBOR plus 2.75%. The Knapton Facility is repayable
in three years and is secured by a first charge over Knapton
Holdings shares in Knapton. The Knapton Facility contains
various financial and business covenants, including limitations
on mergers and consolidations involving Knapton Holdings and its
subsidiaries. As of December 31, 2010, all of the covenants
relating to the Knapton Facility were met and the outstanding
loan balance, inclusive of accrued interest, was
$21.5 million.
104
EGL
Facility
On July 16, 2010, we entered into the EGL Facility, an
unsecured term facility agreement with a London-based bank. On
July 19, 2010, we drew down $25.0 million from the EGL
Facility to fund the acquisition of PWAC. The EGL Facility
accrued interest at an interest rate of LIBOR plus 2.75% and was
repayable in three months. It contained various financial and
business undertakings. On September 13, 2010, we fully
repaid the EGL Facility.
Enstar
Group Facility
On December 29, 2010, we, as borrower, and certain of our
subsidiaries, as guarantors, borrowed the full amount of
$115.0 million available under a term facilities agreement,
or the Enstar Facilities Agreement, with Barclays Corporate, as
mandated lead arranger, and Barclays Bank PLC, as lender, agent
and security agent. Of that amount, we borrowed
$52.1 million under Facility A, or Enstar Facility A, and
$62.9 million under Facility B, or Enstar Facility B. The
drawdown of Enstar Facility B was used to partially fund the
obligations of one of our subsidiaries under the CIGNA
reinsurance transaction, with the remainder being used for
general corporate purposes. The drawdown of Enstar Facility A
was used to repay internal group loans. As of December 31,
2010, the remaining outstanding loan balances, inclusive of
accrued interest, related to Enstar Facilities A and B were
$52.1 million and $62.9 million, respectively.
The loans are secured by a pledge of the shares of certain of
our subsidiaries. Both Enstar Facilities A and B must be repaid
in three equal annual installments on the anniversary date of
the Enstar Facilities Agreement. Interest is payable quarterly
and the interest rate on both Enstar Facilities A and B is LIBOR
plus 3.00%. The Enstar Facilities Agreement terminates on
December 29, 2013.
During the existence of a payment default, the interest rates
will be increased by 1.00%. During the existence of any event of
default (as specified in the Enstar Facilities Agreement), the
lenders may declare that all or a portion of amounts outstanding
under the Enstar Facilities Agreement are immediately due and
payable, declare that all or a portion of borrowed amounts be
paid upon demand, or proceed against the security. The Enstar
Facilities Agreement contains various financial and business
covenants for Enstar Facilities A and B. As of December 31,
2010, all of the financial covenants relating to the Enstar
Facilities A and B were met.
Clarendon
Facility
On March 4, 2011, we, through Clarendon Holdings, Inc.,
entered into a $106.5 million term facility agreement, or
the Clarendon Facility, with a London-based bank. The Clarendon
Facility provides for a four-year term loan facility, which will
be available to be drawn to fund up to 50% of the purchase price
of Clarendon. As of March 4, 2011, Clarendon Holdings, Inc.
has not borrowed any of the amount available under the Clarendon
Facility.
The Clarendon Facility will be secured by a security interest in
all of the assets of Clarendon Holdings, Inc., as well as a
first priority lien on the stock of both Clarendon Holdings,
Inc. and Clarendon. Interest is payable at the end of each
interest period chosen by Clarendon Holdings, Inc. or, at the
latest, each six months. The interest rate is LIBOR plus 2.75%.
The Clarendon Facility is subject to various financial and
business covenants, including limitations on mergers and
consolidations, restrictions as to disposition of stock and
limitations of liens on the stock.
During the existence of any payment default, the interest rate
is increased by 1.0%. During the existence of any event of
default (as specified in the term facility agreement), the
lenders may declare all or a portion of outstanding amounts
immediately due and payable, declare all or a portion of
borrowed amounts payable upon demand, or proceed against the
security. The Clarendon Facility terminates and all amounts
borrowed must be repaid on the fourth anniversary of the date
the term loan is made.
Share
repurchase agreements
On October 1, 2010, we entered into the Repurchase
Agreements with three of our executives and certain trusts and a
corporation affiliated with the executives to repurchase an
aggregate of 800,000 of our ordinary shares at a price of $70.00
per share. We repurchased, in aggregate, 600,000 ordinary
shares from Dominic F. Silvester (our Chief Executive Officer
and Chairman of the Board of Directors) and a trust of which he
and his immediate family
105
are the sole beneficiaries, 100,000 ordinary shares from a trust
of which Paul J. OShea (our Joint Chief Operating Officer,
Executive Vice President and a member of our Board of Directors)
and his immediate family are the sole beneficiaries and 100,000
ordinary shares from a corporation owned by a trust of which
Nicholas A. Packer (our Joint Chief Operating Officer and
Executive Vice President) and his immediate family are the sole
beneficiaries. The repurchase transactions closed on
October 14, 2010. The aggregate purchase price of
$56.0 million is payable by us through promissory notes to
the selling shareholders. The annual interest rate for the notes
is fixed at 3.5%, and the notes are repayable in three equal
installments on December 31, 2010, December 1, 2011
and December 1, 2012. In connection with the Repurchase
Agreements, we entered into
lock-up
agreements with each of Messrs. Silvester, OShea and
Packer, and their respective family trusts and corporation. The
lock-up
agreements prohibit future sales and transfers of shares now
owned or subsequently acquired for two years from the date of
the Repurchase Agreements. On December 31, 2010, we repaid
$18.7 million of the promissory notes and $0.4 million
of accrued interest.
Aggregate
Contractual Obligations
The following table shows our aggregate contractual obligations
and commitments by time period remaining to due date as at
December 31, 2010. The table does not reflect certain
acquisition-related payments potentially due in the future.
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|
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|
|
|
|
|
|
Payment Due by Period
|
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|
|
|
|
|
|
|
|
Less than
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|
|
|
|
|
|
|
More than
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|
|
|
|
|
|
Total
|
|
|
1 year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
5 years
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
|
|
|
|
|
Operating Activities
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated gross reserves for loss and loss adjustment expenses(1)
|
|
$
|
3,291.3
|
|
|
$
|
610.0
|
|
|
$
|
1,053.2
|
|
|
$
|
572.0
|
|
|
$
|
1,056.1
|
|
|
|
|
|
Operating lease obligations(2)
|
|
|
10.3
|
|
|
|
3.2
|
|
|
|
4.6
|
|
|
|
2.3
|
|
|
|
0.2
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commitments(3)
|
|
|
84.7
|
|
|
|
26.0
|
|
|
|
34.1
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan repayments (including interest payments)(4)
|
|
|
256.9
|
|
|
|
156.8
|
|
|
|
100.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,643.2
|
|
|
$
|
796.0
|
|
|
$
|
1,192.0
|
|
|
$
|
598.9
|
|
|
$
|
1,056.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We are obligated to pay claims for specified loss events covered
by the insurance and reinsurance contracts we have. Such loss
payments represent our most significant future payment
obligation. In contrast to our other contractual obligations,
our cash payments are not determinable from the terms specified
within the underlying contracts. The total amount in the table
above reflects our best estimate of our reserve for losses and
loss expenses. However, the actual amounts and timing may differ
materially. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
Loss and Loss Adjustment Expenses beginning on
page 72 for further information. We have not taken into
account corresponding reinsurance recoverable amounts that would
be due to us. |
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|
(2) |
|
We lease office space in a number of locations, with such leases
expiring at varying dates. We renew and enter into new leases in
the ordinary course of business, as required. |
|
(3) |
|
For further details on the terms of our investment commitments,
refer to Note 20 to our consolidated financial statements. |
|
(4) |
|
For further details on the terms of on our loan repayments,
refer to Note 11 to our consolidated financial statements. |
We have an accrued liability of approximately $5.6 million
for unrecognized tax benefits as of December 31, 2010. We
are uncertain as to if or when such amounts may be settled with
any tax authorities. Therefore the liability for unrecognized
tax benefits is not included in the table above.
106
Commitments
and Contingencies
In 2006, we committed to invest up to $100.0 million in the
Flowers Fund. As of December 31, 2010, the capital
contributed to the Flowers Fund was $97.1 million, with the
remaining commitment being approximately $2.9 million.
As at December 31, 2010, we guaranteed the obligations of
two of our subsidiaries in respect of letters of credit issued
on their behalf by London-based banks in the amount of
£19.5 million (approximately $30.4 million) in
respect of capital commitments to Lloyds Syndicate 2008
and insurance contract requirements of one of the subsidiaries.
The guarantees will be triggered should losses incurred by the
subsidiaries exceed available cash on hand resulting in the
letters of credit being drawn. As at December 31, 2010, we
had not recorded any liabilities associated with the guarantees.
As of February 28, 2011, our total guarantee has increased
to £26.5 million (approximately $41.4 million) in
respect of our increased capital commitment to Lloyds
Syndicate 2008.
As at December 31, 2010, we provided guarantees supporting
the obligations of one of our subsidiaries in respect of the
acquisition, by the subsidiary, of two portfolios of insurance
and reinsurance businesses in run-off. The total guarantees
provided are approximately $198.4 million and will increase
or decrease over time in line with relevant independent
actuarial assessments, but will always be subject to an overall
maximum cap with respect to reinsurance liabilities.
On September 10, 2008, we made a commitment to invest an
aggregate of $100.0 million in J.C. Flowers Fund III
L.P., or Fund III. Our commitment may be drawn down by
Fund III over approximately the next five years. As of
December 31, 2010, the capital contributed to the fund was
$18.3 million with the remaining outstanding commitment
being $81.7 million. Fund III is a private investment
fund advised by J.C. Flowers & Co. LLC. J. Christopher
Flowers, a member of our board of directors and one of our
largest shareholders, is the Chairman and Chief Executive
Officer of J.C. Flowers & Co. LLC. John J. Oros, who
served as our Executive Chairman and a member of our board of
directors until his resignation on August 20, 2010, is a
Managing Director of J.C. Flowers & Co. LLC.
We have made a capital commitment of up to $10.0 million in
the GSC European Mezzanine Fund II, LP, or GSC. GSC invests
in mezzanine securities of middle and large market companies
throughout Western Europe. As of December 31, 2010, the
capital contributed to GSC was $9.9 million, with the
remaining commitment being $0.1 million.
On November 8, 2010, we, through our wholly-owned
subsidiary, Kenmare, entered into a definitive agreement for the
purchase of CitiLife Financial Limited from Citigroup Insurance
Holding Corporation, an affiliate of Citigroup Inc. The purchase
price is 30 million (approximately
$40.2 million) and is expected to be financed from
available cash on hand. Completion of the transaction is
conditioned on, among other things, regulatory approval and
satisfaction of various customary closing conditions. The
transaction is expected to close in the first quarter of 2011.
On December 22, 2010, we, through our wholly-owned
subsidiary, Clarendon Holdings, Inc., entered into a definitive
agreement for the purchase of Clarendon for a purchase price of
approximately $200 million. The purchase price will be
financed in part by a bank loan facility provided by a
London-based bank entered into on March 4, 2011 and in part
from available cash on hand. Completion of the transaction is
conditioned on, among other things, regulatory approval and
satisfaction of various customary closing conditions. The
transaction is expected to close in the second quarter of 2011.
In February 2011, Lloyds Syndicate 2008 entered into RITC
agreements with two Lloyds syndicates with total gross
insurance reserves of approximately $129.6 million. Our
capital commitment to Lloyds Syndicate 2008 with respect
to these two RITC agreements amounted to £21.3 million
(approximately $33.3 million).
Off-Balance
Sheet and Special Purpose Entity Arrangements
At December 31, 2010, we do not have any off-balance sheet
arrangements, as defined by Item 303(a)(4) of
Regulation S-K.
107
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE INFORMATION ABOUT MARKET RISK
|
Interest
Rate Risk
Our balance sheets include a substantial amount of assets and,
to a lesser extent, liabilities whose fair values are subject to
market risks. Market risk represents the potential for an
economic loss due to adverse changes in the fair value of a
financial instrument. Our most significant market risks are
associated primarily with changes in interest rates and foreign
currency exchange rates. The following provides an analysis of
the potential effects that these market risk exposures could
have on our future earnings.
We have calculated the effect that an immediate parallel shift
in the U.S. interest rate yield curve would have on our
cash and investments at December 31, 2010. The modeling of
this effect was performed on our investments classified as
trading and
available-for-sale.
The results of this analysis are summarized in the table below.
Interest
Rate Movement Analysis on Market Value
of Investments Classified as Trading and
Available-for-Sale
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|
|
|
|
|
|
|
|
|
|
Interest Rate Shift in Basis Points
|
|
|
−50
|
|
−25
|
|
0
|
|
+25
|
|
+50
|
|
|
(in thousands of U.S. dollars)
|
|
Total Market Value
|
|
$
|
2,151,944
|
|
|
$
|
2,143,127
|
|
|
$
|
2,134,310
|
|
|
$
|
2,125,493
|
|
|
$
|
2,116,676
|
|
Market Value Change from Base
|
|
|
0.8
|
%
|
|
|
0.4
|
%
|
|
|
0
|
%
|
|
|
(0.4
|
)%
|
|
|
(0.8
|
)%
|
Change in Unrealized Value
|
|
$
|
17,634
|
|
|
$
|
8,817
|
|
|
$
|
0
|
|
|
$
|
8,817
|
|
|
$
|
17,634
|
|
As a holder of fixed maturity securities and mutual funds, we
also have exposure to credit risk. At December 31, 2010,
approximately 59.2% of our fixed maturity investment portfolio
was rated AA or higher by a major rating agency.
At December 31, 2010, reinsurance receivables of
$398.8 million were associated with two reinsurers and
represented 41.5% of reinsurance balances receivable. These
reinsurers are rated AA- or higher by a major rating agency. In
the event that all or any of the reinsuring companies are unable
to meet their obligations under existing reinsurance agreements,
we will be liable for such defaulted amounts.
Effects
of Inflation
We do not believe that inflation has had a material effect on
our consolidated results of operations. Loss reserves are
established to recognize likely loss settlements at the date
payment is made. Those reserves inherently recognize the
anticipated effects of inflation. The actual effects of
inflation on our results cannot be accurately known, however,
until claims are ultimately resolved.
Foreign
Currency Risk
Through our subsidiaries located in various foreign countries,
we conduct our insurance and reinsurance operations in a variety
of
non-U.S. currencies.
As the functional currency for the majority of our subsidiaries
is the U.S. dollar, fluctuations in foreign currency
exchange rates related to these subsidiaries will have a direct
impact on the valuation of our assets and liabilities
denominated in local currencies. All changes in foreign exchange
rates, with the exception of
non-U.S. dollar
denominated investments classified as
available-for-sale,
are recognized currently in foreign exchange gains (losses) in
our consolidated statements of earnings.
Certain of our subsidiaries have the Australian dollar as their
functional currency. Fluctuations in foreign currency exchange
rates related to these subsidiaries have a direct impact on the
valuation of their assets and liabilities denominated in local
currencies. All changes in foreign exchange rates, with the
exception of our U.S. dollar denominated investments
classified as
available-for-sale
held by our Australian subsidiaries, are recognized currently in
foreign exchange gains (losses) in our consolidated statements
of earnings.
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
108
are denominated in such currencies, subject to regulatory
constraints, and to selectively use foreign currency exchange
contracts. The matching process is carried out quarterly in
arrears and therefore any mismatches occurring in the period may
give rise to foreign exchange gains and losses, which could
adversely affect our operating results. We are, however,
required to maintain assets in
non-U.S. dollars
to meet certain local country branch and regulatory
requirements, which restricts our ability to manage these
exposures through the matching of our assets and liabilities. In
October 2010, we also entered into a foreign currency forward
exchange contract pursuant to which we will sell
AU$45.0 million for $42.5 million on June 30,
2011.
Regarding our investments, we are currently exposed to currency
fluctuations through our investments in respect of:
1) non-U.S. dollar
fixed maturities held by our subsidiaries whose functional
currency is U.S. dollars; and 2) non-Australian dollar
fixed maturities held by our subsidiaries whose functional
currency is Australian dollars. The unrealized foreign exchange
gains (losses) arising from non-Australian fixed maturities
classified as
available-for-sale
are recorded in accumulated other comprehensive income in our
shareholders equity.
The tables below summarize our gross and net exposure as of
December 31, 2010 and 2009 to foreign currencies for our
subsidiaries whose functional currency is U.S. dollars:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
GBP
|
|
|
Euro
|
|
|
AUD
|
|
|
CDN
|
|
|
Other
|
|
|
Total
|
|
|
|
(in millions of U.S. dollars)
|
|
|
Total assets
|
|
$
|
751.1
|
|
|
$
|
270.9
|
|
|
$
|
57.6
|
|
|
$
|
58.7
|
|
|
$
|
48.7
|
|
|
$
|
1,187.0
|
|
Total liabilities
|
|
|
795.7
|
|
|
|
267.7
|
|
|
|
82.7
|
|
|
|
41.5
|
|
|
|
31.6
|
|
|
|
1,219.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency exposure
|
|
$
|
(44.6
|
)
|
|
$
|
3.2
|
|
|
$
|
(25.1
|
)
|
|
$
|
17.2
|
|
|
$
|
17.1
|
|
|
$
|
(32.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax impact of a 10% movement of the U.S.
dollar(1)
|
|
$
|
(4.4
|
)
|
|
$
|
0.3
|
|
|
$
|
(2.5
|
)
|
|
$
|
1.7
|
|
|
$
|
1.7
|
|
|
$
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Assumes 10% change in U.S. dollar
relative to other currencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
GBP
|
|
|
Euro
|
|
|
AUD
|
|
|
CDN
|
|
|
Other
|
|
|
Total
|
|
|
|
(in millions of U.S. dollars)
|
|
|
Total assets
|
|
$
|
572.0
|
|
|
$
|
225.3
|
|
|
$
|
57.4
|
|
|
$
|
64.2
|
|
|
$
|
23.1
|
|
|
$
|
942.0
|
|
Total liabilities
|
|
|
536.1
|
|
|
|
181.8
|
|
|
|
40.9
|
|
|
|
41.4
|
|
|
|
20.8
|
|
|
|
821.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency exposure
|
|
$
|
35.9
|
|
|
$
|
43.5
|
|
|
$
|
16.5
|
|
|
$
|
22.8
|
|
|
$
|
2.3
|
|
|
$
|
121.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax impact of a 10% movement of the U.S.
dollar(1)
|
|
$
|
3.6
|
|
|
$
|
4.4
|
|
|
$
|
1.6
|
|
|
$
|
2.3
|
|
|
$
|
0.2
|
|
|
$
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Assumes 10% change in U.S. dollar
relative to other currencies
|
The tables below summarize our gross and net exposure as of
December 31, 2010 and 2009 to foreign currencies for our
subsidiaries whose functional currency is Australian dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
GBP
|
|
|
Euro
|
|
|
USD
|
|
|
CDN
|
|
|
Other
|
|
|
Total
|
|
|
|
(in millions of U.S. dollars)
|
|
|
Total assets
|
|
$
|
5.3
|
|
|
$
|
5.1
|
|
|
$
|
128.9
|
|
|
$
|
0.1
|
|
|
$
|
2.4
|
|
|
$
|
141.8
|
|
Total liabilities
|
|
|
8.2
|
|
|
|
7.0
|
|
|
|
73.2
|
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
89.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency exposure
|
|
$
|
(2.9
|
)
|
|
$
|
(1.9
|
)
|
|
$
|
55.7
|
|
|
$
|
(0.7
|
)
|
|
$
|
2.3
|
|
|
$
|
52.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax impact of a 10% movement of the Australian
dollar(1)
|
|
$
|
(0.3
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
5.6
|
|
|
$
|
|
|
|
$
|
0.2
|
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Assumes 10% change in Australian
dollar relative to other currencies
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
GBP
|
|
|
Euro
|
|
|
USD
|
|
|
CDN
|
|
|
Other
|
|
|
Total
|
|
|
|
(in millions of U.S. dollars)
|
|
|
Total assets
|
|
$
|
16.0
|
|
|
$
|
5.3
|
|
|
$
|
204.5
|
|
|
$
|
(0.1
|
)
|
|
$
|
2.3
|
|
|
$
|
228.0
|
|
Total liabilities
|
|
|
11.2
|
|
|
|
12.4
|
|
|
|
115.3
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
139.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency exposure
|
|
$
|
4.8
|
|
|
$
|
(7.1
|
)
|
|
$
|
89.2
|
|
|
$
|
(0.3
|
)
|
|
$
|
2.0
|
|
|
$
|
88.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax impact of a 10% movement of the Australian
dollar(1)
|
|
$
|
0.5
|
|
|
$
|
(0.7
|
)
|
|
$
|
8.9
|
|
|
$
|
|
|
|
$
|
0.2
|
|
|
$
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Assumes 10% change in Australian
dollar relative to other currencies
|
110
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
FINANCIAL STATEMENTS AND SCHEDULES
|
|
|
|
|
|
|
Page
|
|
December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
112
|
|
|
|
|
113
|
|
|
|
|
114
|
|
|
|
|
115
|
|
|
|
|
116
|
|
|
|
|
117
|
|
|
|
|
118
|
|
|
|
|
174
|
|
|
|
|
180
|
|
111
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Enstar Group Limited
We have audited the accompanying consolidated balance sheets of
Enstar Group Limited and subsidiaries (the Company)
as of December 31, 2010 and 2009, and the related
consolidated statements of earnings, comprehensive income,
changes in shareholders equity and cash flows for the
years ended December 31, 2010, 2009 and 2008. Our audits
also included the financial statement schedule listed in the
Index at Item 15. These consolidated financial statements
and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Enstar Group Limited and subsidiaries as of December 31,
2010 and 2009, and the results of their operations and their
cash flows for the years ended December 31, 2010, 2009 and
2008 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
As described in Note 2 to the consolidated financial statements,
effective January 1, 2009, the Company adopted the new
guidance issued by the United States Financial Accounting
Standards Board on the accounting for noncontrolling interests.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2010, based on Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 4, 2011 expressed an unqualified opinion on the
Companys internal control over financial reporting.
/s/ Deloitte & Touche
Hamilton, Bermuda
March 4, 2011
112
ENSTAR
GROUP LIMITED
CONSOLIDATED
BALANCE SHEETS
As of December 31, 2010 and
2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(expressed in thousands of U.S. dollars, except
|
|
|
|
share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Short-term investments, available-for-sale, at fair value
(amortized cost: 2010 $7,209; 2009
$45,046)
|
|
$
|
7,263
|
|
|
$
|
45,206
|
|
Short-term investments, held-to-maturity, at amortized cost
(fair value: 2010 $nil; 2009 $159,333)
|
|
|
|
|
|
|
159,210
|
|
Short-term investments, trading, at fair value
|
|
|
507,978
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value (amortized
cost: 2010 $1,068,540; 2009 $69,976)
|
|
|
1,094,947
|
|
|
|
69,892
|
|
Fixed maturities, held-to-maturity, at amortized cost (fair
value: 2010 $nil; 2009 $1,169,934)
|
|
|
|
|
|
|
1,152,330
|
|
Fixed maturities, trading, at fair value
|
|
|
524,122
|
|
|
|
88,050
|
|
Equities, trading, at fair value
|
|
|
60,082
|
|
|
|
24,503
|
|
Other investments, at fair value
|
|
|
234,714
|
|
|
|
81,801
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
2,429,106
|
|
|
|
1,620,992
|
|
Cash and cash equivalents
|
|
|
799,154
|
|
|
|
1,266,445
|
|
Restricted cash and cash equivalents
|
|
|
656,200
|
|
|
|
433,660
|
|
Accrued interest receivable
|
|
|
19,980
|
|
|
|
16,108
|
|
Accounts receivable
|
|
|
24,790
|
|
|
|
17,657
|
|
Income taxes recoverable
|
|
|
7,968
|
|
|
|
3,277
|
|
Reinsurance balances receivable
|
|
|
961,442
|
|
|
|
638,262
|
|
Funds held by reinsured companies
|
|
|
274,699
|
|
|
|
68,660
|
|
Investment in partly owned company
|
|
|
|
|
|
|
20,850
|
|
Goodwill
|
|
|
21,222
|
|
|
|
21,222
|
|
Other assets
|
|
|
41,343
|
|
|
|
63,709
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
5,235,904
|
|
|
$
|
4,170,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
$
|
3,291,275
|
|
|
$
|
2,479,136
|
|
Reinsurance balances payable
|
|
|
231,435
|
|
|
|
162,576
|
|
Accounts payable and accrued liabilities
|
|
|
94,390
|
|
|
|
60,878
|
|
Income taxes payable
|
|
|
50,075
|
|
|
|
51,854
|
|
Loans payable
|
|
|
245,278
|
|
|
|
254,961
|
|
Other liabilities
|
|
|
107,630
|
|
|
|
85,285
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
4,020,083
|
|
|
|
3,094,690
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
|
|
|
|
|
|
Authorized issued and fully paid, par value $1 each (authorized
2010: 156,000,000; 2009: 156,000,000)
|
|
|
|
|
|
|
|
|
Ordinary shares (issued and outstanding 2010: 12,940,021; 2009:
13,580,793)
|
|
|
12,940
|
|
|
|
13,581
|
|
Non-voting convertible ordinary shares (issued 2010: 2,972,892;
2009: 2,972,892)
|
|
|
2,973
|
|
|
|
2,973
|
|
Treasury shares at cost (non-voting convertible ordinary shares
2010: 2,972,892; 2009: 2,972,892)
|
|
|
(421,559
|
)
|
|
|
(421,559
|
)
|
Additional paid-in capital
|
|
|
667,907
|
|
|
|
721,120
|
|
Accumulated other comprehensive income
|
|
|
35,017
|
|
|
|
8,709
|
|
Retained earnings
|
|
|
651,143
|
|
|
|
477,057
|
|
|
|
|
|
|
|
|
|
|
Total Enstar Group Limited Shareholders Equity
|
|
|
948,421
|
|
|
|
801,881
|
|
Noncontrolling interest
|
|
|
267,400
|
|
|
|
274,271
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
1,215,821
|
|
|
|
1,076,152
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
5,235,904
|
|
|
$
|
4,170,842
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
113
ENSTAR
GROUP LIMITED
CONSOLIDATED
STATEMENTS OF EARNINGS
For the Years Ended December 31,
2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(expressed in thousands of U.S.
|
|
|
|
dollars, except share and per share data)
|
|
|
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
23,015
|
|
|
$
|
16,104
|
|
|
$
|
25,151
|
|
Net investment income
|
|
|
99,906
|
|
|
|
81,371
|
|
|
|
26,601
|
|
Net realized and unrealized gains (losses)
|
|
|
13,137
|
|
|
|
4,237
|
|
|
|
(1,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,058
|
|
|
|
101,712
|
|
|
|
50,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
(278,065
|
)
|
|
|
(274,825
|
)
|
|
|
(161,437
|
)
|
Reduction in provisions for bad debt
|
|
|
(49,556
|
)
|
|
|
(11,718
|
)
|
|
|
(36,136
|
)
|
Reduction in provisions for unallocated loss adjustment expense
liabilities
|
|
|
(39,651
|
)
|
|
|
(50,412
|
)
|
|
|
(69,056
|
)
|
Amortization of fair value adjustments
|
|
|
55,438
|
|
|
|
77,328
|
|
|
|
24,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311,834
|
)
|
|
|
(259,627
|
)
|
|
|
(242,104
|
)
|
Salaries and benefits
|
|
|
86,677
|
|
|
|
68,454
|
|
|
|
56,270
|
|
General and administrative expenses
|
|
|
59,201
|
|
|
|
46,902
|
|
|
|
53,357
|
|
Interest expense
|
|
|
10,253
|
|
|
|
17,583
|
|
|
|
23,370
|
|
Net foreign exchange (gain) loss
|
|
|
(398
|
)
|
|
|
23,787
|
|
|
|
14,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156,101
|
)
|
|
|
(102,901
|
)
|
|
|
(94,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES AND SHARE OF NET EARNINGS (LOSS) OF
PARTLY OWNED COMPANY
|
|
|
292,159
|
|
|
|
204,613
|
|
|
|
144,218
|
|
INCOME TAXES
|
|
|
(87,132
|
)
|
|
|
(27,605
|
)
|
|
|
(46,854
|
)
|
SHARE OF NET EARNINGS (LOSS) OF PARTLY OWNED COMPANY
|
|
|
10,704
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE EXTRAORDINARY GAIN
|
|
|
215,731
|
|
|
|
177,008
|
|
|
|
97,163
|
|
Extraordinary gain Negative goodwill
|
|
|
|
|
|
|
|
|
|
|
50,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
|
215,731
|
|
|
|
177,008
|
|
|
|
147,443
|
|
Less: Net earnings attributable to noncontrolling interest
(including share of extraordinary gain of $nil, $nil and
$15,084, respectively)
|
|
|
(41,645
|
)
|
|
|
(41,798
|
)
|
|
|
(65,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
|
|
$
|
174,086
|
|
|
$
|
135,210
|
|
|
$
|
81,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE BASIC:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gain attributable to Enstar Group
Limited ordinary shareholders
|
|
$
|
12.91
|
|
|
$
|
10.01
|
|
|
$
|
3.67
|
|
Extraordinary gain attributable to Enstar Group Limited ordinary
shareholders
|
|
|
|
|
|
|
|
|
|
|
2.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited ordinary
shareholders
|
|
$
|
12.91
|
|
|
$
|
10.01
|
|
|
$
|
6.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gain attributable to Enstar Group
Limited ordinary shareholders
|
|
$
|
12.66
|
|
|
$
|
9.84
|
|
|
$
|
3.59
|
|
Extraordinary gain attributable to Enstar Group Limited ordinary
shareholders
|
|
|
|
|
|
|
|
|
|
|
2.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited ordinary
shareholders
|
|
$
|
12.66
|
|
|
$
|
9.84
|
|
|
$
|
6.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding basic
|
|
|
13,489,221
|
|
|
|
13,514,207
|
|
|
|
12,638,333
|
|
Weighted average ordinary shares outstanding diluted
|
|
|
13,751,256
|
|
|
|
13,744,661
|
|
|
|
12,921,475
|
|
AMOUNTS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY
SHAREHOLDERS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before extraordinary gain
|
|
$
|
174,086
|
|
|
$
|
135,210
|
|
|
$
|
46,355
|
|
Extraordinary gain Negative goodwill
|
|
|
|
|
|
|
|
|
|
|
35,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
174,086
|
|
|
$
|
135,210
|
|
|
$
|
81,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
114
ENSTAR
GROUP LIMITED
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,
2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(expressed in thousands of
|
|
|
|
U.S. dollars)
|
|
|
NET EARNINGS
|
|
$
|
215,731
|
|
|
$
|
177,008
|
|
|
$
|
147,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on investments arising during
the period
|
|
|
19,722
|
|
|
|
(3,332
|
)
|
|
|
8,525
|
|
Reclassification adjustment for net realized and unrealized
(gains) losses included in net earnings
|
|
|
(13,137
|
)
|
|
|
(4,237
|
)
|
|
|
1,655
|
|
Increase in defined benefit pension liability
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
32,077
|
|
|
|
69,833
|
|
|
|
(66,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
37,662
|
|
|
|
62,264
|
|
|
|
(56,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
253,393
|
|
|
|
239,272
|
|
|
|
91,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less comprehensive income attributable to noncontrolling interest
|
|
|
(53,000
|
)
|
|
|
(64,483
|
)
|
|
|
(46,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED
|
|
$
|
200,393
|
|
|
$
|
174,789
|
|
|
$
|
44,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
115
ENSTAR
GROUP LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Years Ended December 31,
2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(expressed in thousands of U.S. dollars)
|
|
|
Share Capital Ordinary Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
13,581
|
|
|
$
|
13,334
|
|
|
$
|
11,920
|
|
Issue of shares
|
|
|
80
|
|
|
|
170
|
|
|
|
1,375
|
|
Shares repurchased
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
Share awards granted/vested
|
|
|
79
|
|
|
|
77
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
12,940
|
|
|
$
|
13,581
|
|
|
$
|
13,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Capital Non-Voting Convertible Ordinary
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning and end of year
|
|
$
|
2,973
|
|
|
$
|
2,973
|
|
|
$
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning and end of year
|
|
$
|
(421,559
|
)
|
|
$
|
(421,559
|
)
|
|
$
|
(421,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
721,120
|
|
|
$
|
709,485
|
|
|
$
|
590,934
|
|
Equity attributable to Enstar Group Limited on acquisition of
noncontrolling shareholders interest in subsidiary
|
|
|
(3,229
|
)
|
|
|
2,716
|
|
|
|
|
|
Issue of shares
|
|
|
514
|
|
|
|
5,352
|
|
|
|
115,392
|
|
Shares repurchased
|
|
|
(55,200
|
)
|
|
|
|
|
|
|
|
|
Share awards granted/vested
|
|
|
3,202
|
|
|
|
3,567
|
|
|
|
2,551
|
|
Amortization of share awards
|
|
|
1,500
|
|
|
|
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
667,907
|
|
|
$
|
721,120
|
|
|
$
|
709,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) Attributable to
Enstar Group Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
8,709
|
|
|
$
|
(30,871
|
)
|
|
$
|
6,035
|
|
Foreign currency translation adjustments
|
|
|
22,476
|
|
|
|
48,939
|
|
|
|
(47,086
|
)
|
Increase in defined benefit pension liability
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
Net movement in unrealized holding gains (losses) on investments
|
|
|
4,832
|
|
|
|
(9,359
|
)
|
|
|
10,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
35,017
|
|
|
$
|
8,709
|
|
|
$
|
(30,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
477,057
|
|
|
$
|
341,847
|
|
|
$
|
260,296
|
|
Net earnings attributable to Enstar Group Limited
|
|
|
174,086
|
|
|
|
135,210
|
|
|
|
81,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
651,143
|
|
|
$
|
477,057
|
|
|
$
|
341,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
274,271
|
|
|
$
|
256,022
|
|
|
$
|
63,437
|
|
Return of capital
|
|
|
(39,381
|
)
|
|
|
(38,010
|
)
|
|
|
|
|
Contribution of capital
|
|
|
28,742
|
|
|
|
|
|
|
|
161,409
|
|
Equity attributable to noncontrolling interest on acquisition of
noncontrolling shareholders interest in subsidiary
|
|
|
|
|
|
|
(7,244
|
)
|
|
|
|
|
Dividends paid
|
|
|
(49,232
|
)
|
|
|
(980
|
)
|
|
|
(15,392
|
)
|
Net earnings attributable to noncontrolling interest
|
|
|
41,645
|
|
|
|
41,798
|
|
|
|
65,892
|
|
Foreign currency translation adjustments
|
|
|
9,602
|
|
|
|
20,894
|
|
|
|
(19,324
|
)
|
Net movement in unrealized holding gains on investments
|
|
|
1,753
|
|
|
|
1,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
267,400
|
|
|
$
|
274,271
|
|
|
$
|
256,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
116
ENSTAR
GROUP LIMITED
For the
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(expressed in thousands of
|
|
|
|
U.S. dollars)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
215,731
|
|
|
$
|
177,008
|
|
|
$
|
147,443
|
|
Adjustments to reconcile net earnings to cash flows provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Negative goodwill
|
|
|
|
|
|
|
|
|
|
|
(50,280
|
)
|
Share of undistributed net (earnings) loss of partly owned
company
|
|
|
(10,704
|
)
|
|
|
|
|
|
|
201
|
|
Net realized and unrealized investment (gain) loss
|
|
|
(13,137
|
)
|
|
|
(4,237
|
)
|
|
|
1,655
|
|
Share of net (gain) loss from other investments
|
|
|
(18,645
|
)
|
|
|
(5,157
|
)
|
|
|
85,157
|
|
Share-based compensation expense
|
|
|
1,562
|
|
|
|
|
|
|
|
608
|
|
Other items
|
|
|
(550
|
)
|
|
|
6,765
|
|
|
|
7,656
|
|
Depreciation and amortization
|
|
|
1,516
|
|
|
|
1,138
|
|
|
|
808
|
|
Amortization of bond premiums and discounts
|
|
|
10,275
|
|
|
|
5,926
|
|
|
|
(1,278
|
)
|
Net movement of trading securities held on behalf of
policyholders
|
|
|
44,766
|
|
|
|
28,054
|
|
|
|
207,132
|
|
Sales and maturities of trading securities
|
|
|
563,729
|
|
|
|
13,289
|
|
|
|
|
|
Purchases of trading securities
|
|
|
(1,406,547
|
)
|
|
|
(17,598
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance balances receivable
|
|
|
(13,899
|
)
|
|
|
70,166
|
|
|
|
24,270
|
|
Other assets
|
|
|
(186,247
|
)
|
|
|
(877
|
)
|
|
|
45,301
|
|
Losses and loss adjustment expenses
|
|
|
150,009
|
|
|
|
(504,378
|
)
|
|
|
(268,333
|
)
|
Reinsurance balances payable
|
|
|
19,175
|
|
|
|
(28,268
|
)
|
|
|
(74,042
|
)
|
Accounts payable and accrued liabilities
|
|
|
18,557
|
|
|
|
11,428
|
|
|
|
(11,349
|
)
|
Other liabilities
|
|
|
15,198
|
|
|
|
48,686
|
|
|
|
42,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by operating activities
|
|
|
(609,211
|
)
|
|
|
(198,055
|
)
|
|
|
157,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
$
|
173,740
|
|
|
$
|
67,804
|
|
|
$
|
254,613
|
|
Purchase of
available-for-sale
securities
|
|
|
|
|
|
|
(222,891
|
)
|
|
|
(212,342
|
)
|
Sales and maturities of
available-for-sale
securities
|
|
|
347,214
|
|
|
|
688,180
|
|
|
|
263,299
|
|
Purchase of
held-to-maturity
securities
|
|
|
(780,889
|
)
|
|
|
(873,679
|
)
|
|
|
|
|
Sales and maturity of
held-to-maturity
securities
|
|
|
786,651
|
|
|
|
186,092
|
|
|
|
136,305
|
|
Movement in restricted cash and cash equivalents
|
|
|
(187,025
|
)
|
|
|
(85,005
|
)
|
|
|
(141,475
|
)
|
Funding of other investments
|
|
|
(116,720
|
)
|
|
|
(17,863
|
)
|
|
|
(33,488
|
)
|
Purchase of investment in partly owned company
|
|
|
|
|
|
|
|
|
|
|
(21,387
|
)
|
Sale of investment in partly owned company
|
|
|
31,554
|
|
|
|
|
|
|
|
|
|
Other investing activities
|
|
|
(1,064
|
)
|
|
|
(2,452
|
)
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) investing activities
|
|
|
253,461
|
|
|
|
(259,814
|
)
|
|
|
245,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution of capital to noncontrolling interest
|
|
$
|
(39,381
|
)
|
|
$
|
(38,990
|
)
|
|
$
|
(27,146
|
)
|
Contribution to surplus of subsidiary by noncontrolling interest
|
|
|
28,742
|
|
|
|
|
|
|
|
163,848
|
|
Dividends paid to noncontrolling interest
|
|
|
(49,231
|
)
|
|
|
|
|
|
|
|
|
Receipt of loans
|
|
|
161,400
|
|
|
|
|
|
|
|
572,791
|
|
Repayment of loans
|
|
|
(226,227
|
)
|
|
|
(163,490
|
)
|
|
|
(200,301
|
)
|
Proceeds from issuance of ordinary shares
|
|
|
|
|
|
|
2,796
|
|
|
|
115,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by financing activities
|
|
|
(124,697
|
)
|
|
|
(199,684
|
)
|
|
|
624,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRANSLATION ADJUSTMENT
|
|
|
13,156
|
|
|
|
57,452
|
|
|
|
(155,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(467,291
|
)
|
|
|
(600,101
|
)
|
|
|
871,309
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
1,266,445
|
|
|
|
1,866,546
|
|
|
|
995,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
799,154
|
|
|
$
|
1,266,445
|
|
|
$
|
1,866,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income taxes paid
|
|
$
|
73,368
|
|
|
$
|
20,143
|
|
|
$
|
6,195
|
|
Interest paid
|
|
$
|
10,404
|
|
|
$
|
11,846
|
|
|
$
|
14,853
|
|
See accompanying notes to the consolidated financial statements
117
|
|
1.
|
DESCRIPTION
OF BUSINESS
|
Enstar Group Limited (Enstar or the
Company) was formed in August 2001 under the laws of
Bermuda to acquire and manage insurance and reinsurance
companies in run-off and portfolios of insurance and reinsurance
business in run-off, and to provide management, consulting and
other services to the insurance and reinsurance industry.
|
|
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 preparation of
financial statements in conformity with generally accepted
accounting principles 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. Actual
results could differ from those estimates. The major estimates
reflected in the Companys financial statements include,
but are not limited to, the reserves for losses and loss
adjustment expenses and reinsurance balances receivable.
Basis of consolidation The consolidated
financial statements include the assets, liabilities and results
of operations of the Company as of December 31, 2010 and
2009 and for the years ended December 31, 2010, 2009 and
2008. Results of operations for subsidiaries acquired are
included from the dates of their acquisition by the Company.
Intercompany transactions are eliminated on consolidation.
Cash and cash equivalents The Company
considers all highly liquid debt instruments purchased with an
initial maturity of ninety-two days or less to be cash and cash
equivalents.
Investments
a) Short-term investments: Short-term
investments comprise securities with a maturity greater than
ninety-two days but less than one year from the date of
purchase. Short-term 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. Short-term
investments classified as held-to-maturity are carried at
purchase cost adjusted for amortization of premiums and
discounts. Short-term 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. Amortization expenses
derive from the difference between the nominal value and
purchase cost and they are spread over the time to maturity of
the debt securities using an effective yield method. Realized
gains and losses on the sale of investments are based upon
specific identification of the cost of investments. For
mortgage-backed and asset-backed securities, and any other
holdings for which there is a prepayment risk, prepayment
assumptions are evaluated and revised on a regular basis.
b) Fixed maturities: Debt securities
classified as
held-to-maturity
investments are carried at purchase cost adjusted for
amortization of premiums and discounts. Debt investments
classified as trading securities 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. Debt securities 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. Amortization expenses
derive from the difference between the nominal value and
purchase cost and they are spread over the time to maturity of
the debt securities using an effective yield method. Realized
gains and losses on the sale of investments are based upon
specific identification of the cost of investments. For
mortgage-backed and asset backed securities, and any other
holdings for which there is a prepayment risk, prepayment
assumptions are evaluated and revised on a regular basis.
118
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
c) Equity securities: Equity investments
are classified as trading securities and are carried at fair
value with realized and unrealized holding gains and losses
included in net earnings and reported as net realized and
unrealized gains and losses.
d) Other investments: Other investments
include investments in limited partnerships and limited
liability companies (collectively private equities),
bond and hedge funds which value their investments at fair
value. The Company has no significant influence and does not
participate in the management of these investments. Other
investments are accounted for at estimated fair values,
determined by the Companys proportionate share of the net
asset value of the investee reduced by any impairment charges.
The Company records movement in the value of its other
investments through earnings. Significant estimates are involved
in the valuation of other investments. Because of the inherent
uncertainty of valuation, the estimates of fair value may differ
significantly from the values that would have been used had a
ready market for the other investments existed. The differences
could be significant.
Investments classified as held-to-maturity and
available-for-sale
are reviewed quarterly to determine if they have sustained an
impairment of value that is considered to be other than
temporary. The process includes reviewing each fixed maturity
investment that is impaired and: (1) determining if the
Company has the intent to sell the fixed maturity investment;
(2) determining if it is more likely than not that the
Company will be required to sell the fixed maturity investment
before its anticipated recovery; and (3) assessing whether
a credit loss exists, that is, where the Company expects that
the present value of the cash flows expected to be collected
from the fixed maturity investment are less than the amortized
cost basis of the investment. In evaluating credit losses, the
Company considers a variety of factors in the assessment of a
fixed maturity investment including: (1) the time period
during which there has been a significant decline below cost;
(2) the extent of the decline below cost and par;
(3) the potential for the fixed maturity investment to
recover in value; (4) an analysis of the financial
condition of the issuer; (5) the rating of the issuer; and
(6) failure of the issuer of the fixed maturity investment
to make scheduled interest or principal payments. If management
concludes a security is
other-than-temporarily
impaired (OTTI) then the difference between the fair
value and the amortized cost of the security is presented as an
OTTI charge in the consolidated statements of earnings, with an
offset for any noncredit-related loss component of the OTTI
charge to be recognized in other comprehensive income.
Accordingly, only the credit loss component of the OTTI amount
will have an impact on the Companys earnings. Realized
gains and loss on sales of investments classified as
available-for-sale
and trading securities are recognized in the consolidated
statements of earnings. Investment purchases and sales are
recorded on a trade-date basis.
Derivative instruments The Company may enter
into derivative instruments such as futures, options, interest
rate swaps and foreign currency forward contracts as part of its
overall foreign currency risk management strategy or to obtain
exposure to a particular financial market and for yield
enhancement. All derivative instruments are measured at fair
value and recognized as either assets or liabilities in the
consolidated balance sheets. Change in fair value and realized
gains or losses on derivative instruments are recorded in the
consolidated statements of earnings.
Investment in partly owned company An
investment in a partly owned company, in which the Company has
significant influence, is carried on the equity basis whereby
the investment is initially recorded at cost and adjusted to
reflect the Companys share of after-tax earnings or losses
and unrealized investment gains and losses and reduced by
dividends.
Loss and loss adjustment expenses The
liability for loss and loss adjustment expenses includes an
amount determined from loss reports and individual cases and an
amount, based on historical loss experience and industry
statistics, for losses incurred but not reported. These
estimates are continually reviewed and are necessarily subject
to the impact of future changes in such factors as claim
severity and frequency. While management believes that the
amount is adequate, the ultimate liability may be significantly
in excess of, or less than, the amounts provided. Adjustments
will be reflected as part of net increase or reduction in loss
and loss adjustment expense liabilities in the periods in which
they become known. Premium and commission adjustments may be
triggered by incurred
119
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
losses and any amounts are reflected in net loss and loss
adjustment expense liabilities at the same time the related
incurred loss is recognized.
The Companys insurance and reinsurance subsidiaries
establish provisions for loss adjustment expenses relating to
run-off costs for the estimated duration of the run-off. 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. Provisions relating to the current period together
with any adjustments to future run-off provisions are included
in loss and loss adjustment expenses in the consolidated
statements of earnings.
Reinsurance balances receivable Amounts
receivable from reinsurers are estimated in a manner consistent
with the loss reserve associated with the underlying policy.
Retroactive reinsurance contracts Premiums on
ceded retroactive contracts are earned upon inception of the
contract with corresponding reinsurance recoverable established
for the amount of reserves ceded. The initial gain, if
applicable, is deferred and amortized into income over an
actuarially determined expected payout period.
Consulting fee income Fixed fee income is
recognized in accordance with the term of the agreements. Fees
based on hourly charge rates are recognized as services are
provided. Performance fees are recognized when all of the
contractual requirements specified in the agreement are met.
Foreign currencies At each balance sheet
date, recorded balances that are denominated in a currency other
than the functional currency of the Company are adjusted to
reflect the current exchange rate. Revenue and expense items are
translated into U.S. dollars at average rates of exchange
for the applicable year. The resulting exchange gains or losses
are included in net earnings.
Assets and liabilities of subsidiaries are translated into
U.S. dollars at the year-end rates of exchange. Revenues
and expenses of subsidiaries are translated into
U.S. dollars at the average rates of exchange for the
applicable year.
The resultant translation adjustment for self-sustaining
subsidiaries is classified as a separate component of other
comprehensive income and for integrated operations is included
in net earnings.
Earnings per share 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 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.
Acquisitions Goodwill represents the excess
of the purchase price over the fair value of the net assets
received related to the acquisition of Enstar Limited (formerly
Castlewood Limited) by Enstar in 2001. The Company
performed an initial valuation of its goodwill assets and
updates this analysis on an annual basis. If, as a result of the
assessment, the Company determines the value of its goodwill
asset is impaired, goodwill is written down in the period in
which the determination is made. An annual impairment valuation
has concluded that there is no impairment to the value of the
Companys goodwill asset. Negative goodwill arises where
the fair value of net assets acquired exceeds the purchase price
of those acquired assets and has been recognized as an
extraordinary gain.
Stock based compensation Compensation costs
related to share-based payment transactions are recognized in
the financial statements based on the grant date fair value of
the award. On May 23, 2006, Enstar entered into an
agreement and plan of merger and a recapitalization agreement.
As a result of the execution of these agreements, the accounting
treatment for share-based awards issued under Enstars
employee share plan changed from book value to fair value.
120
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Adoption
of New Accounting Standards
In June 2009, the United States Financial Accounting Standards
Board (FASB) established the Accounting Standards
Codification (the Codification) as the source of
authoritative U.S. GAAP for non-governmental entities, in
addition to guidance issued by the U.S. Securities and
Exchange Commission (SEC). The Codification
supersedes all then-existing, non-SEC accounting and reporting
standards and reorganizes existing U.S. GAAP into
authoritative accounting topics and
sub-topics.
The Company adopted the Codification as of September 30,
2009, and it impacted the Companys disclosures by
eliminating all references to pre-Codification standards.
The Company adopted the new guidance issued by FASB on the
accounting for noncontrolling interests, effective
January 1, 2009. The new guidance clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
that should be reported as equity in the consolidated financial
statements. The new guidance requires consolidated net income to
be reported at the amounts that include the amounts attributable
to both the parent and the noncontrolling interest. The new
guidance also establishes a method of accounting for changes in
a parents ownership interest in a subsidiary that results
in deconsolidation. The presentation and disclosure of the new
guidance have been applied retrospectively for all periods
presented.
In January 2010, the Company adopted the revised guidance issued
by FASB for the consolidation of variable interest entities. The
revised guidance requires an entity to perform an analysis to
determine whether the entitys variable interest or
interests give it a controlling financial interest in a variable
interest entity. It prescribes the determination of whether a
reporting entity is required to consolidate another entity based
on, among other things, the other entitys purpose and
design and the reporting entitys ability to direct the
activities of the other entity that most significantly impact
the other entitys economic performance. The adoption of
the revised guidance did not have any impact on the consolidated
financial statements.
The Company adopted the revised guidance issued by FASB for the
accounting for transfers of financial assets in January 2010.
The revised guidance eliminates the concept of a
qualifying special-purpose entity; changes the
requirements for derecognizing financial assets; and enhances
information reported to financial statement users by increasing
the transparency of disclosures about transfers of financial
assets and an entitys continuing involvement with
transferred financial assets. The adoption of the revised
guidance did not have any impact on the consolidated financial
statements.
In January 2010, the Company adopted the revised guidance issued
by FASB for the disclosures about fair value measurements. The
revised guidance requires additional disclosures about transfers
into and out of Levels 1 and 2 and separate disclosures
about purchases, sales, issuances and settlements relating to
Level 3 measurements. The revised guidance also clarifies
existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to
measure fair value. The revised guidance is effective for the
first reporting period (including interim periods) beginning
after December 15, 2009, except for the requirement to
provide the Level 3 activity of purchases, sales, issuances
and settlements on a gross basis, which will be effective for
fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The adoption of the
revised guidance did not have a material impact on the
consolidated financial statements.
In February, 2010, FASB amended its guidance on subsequent
events in order to alleviate potential conflicts between
FASBs guidance and the SECs filing requirements.
Companies filing periodic reports with the SEC are no longer
required to disclose the date through which subsequent events
have been evaluated in originally issued and revised financial
statements. This guidance was effective immediately upon
issuance. The adoption of this guidance had no impact on the
Companys results of operations or financial condition.
While the Companys consolidated financial statements no
longer disclose the date through which it has evaluated
subsequent events, the Company continues to be required to
evaluate subsequent events through the date when its financial
statements are issued.
121
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recently
Issued Accounting Standards Not Yet Adopted
In December 2010, FASB provided additional guidance for
performing Step 1 of the test for goodwill impairment when
an entity has reporting units with zero or negative carrying
values. Under the new guidance, Step 2 of the goodwill
impairment test must be performed when adverse qualitative
factors indicate that goodwill is more likely than not impaired.
This guidance will be effective for fiscal years beginning after
December 15, 2010, and for interim periods within those
fiscal years. The adoption of the revised guidance will not have
a material impact on the consolidated financial statements.
In December 2010, FASB issued new guidance specifying that if a
public entity presents comparative financial statements, the
entity should disclose, in its supplementary pro-forma
information, revenue and earnings of the combined entity as
though the business combination that occurred during the current
year had occurred as of the beginning of the comparable prior
annual reporting period only. The new guidance is effective
prospectively for business combinations that are consummated in
fiscal years beginning on or after December 15, 2010, with
earlier application permitted. The adoption of the revised
guidance will not have a material impact on the consolidated
financial statements.
On October 1, 2010, the Company adopted new guidance issued
by FASB requiring disclosures about the nature of credit risk in
financing receivables and how that risk is analyzed in
determining the related allowance for credit losses, as well as
details on changes in the allowance for credit losses during the
reporting period. Additional disclosures with respect to this
guidance have been provided in Note 8.
The Company has determined that all other recently issued
accounting pronouncements will not have a material impact on its
consolidated financial statements, or do not apply to its
operations.
The Company accounts for acquisitions using the purchase method
of accounting, which requires that the acquirer record the
assets and liabilities acquired at their estimated fair value.
The fair values of reinsurance assets and liabilities acquired
are derived from probability weighted ranges of the associated
projected cash flows, based on actuarially prepared information
and managements run-off strategy. Any amendment to the
fair values resulting from changes in such information or
strategy will be recognized when the changes occur.
2008
Guildhall
On February 29, 2008, the Company completed the acquisition
of Guildhall Insurance Company Limited (Guildhall),
a U.K.-based reinsurance company that has been in run-off since
1986, for total purchase price of approximately
£33.4 million (approximately $65.9 million). The
purchase price was financed by the drawdown of approximately
£16.5 million (approximately $32.5 million) from
a facility loan agreement with a London-based bank;
approximately £5.0 million (approximately
$10.0 million) from J.C. Flowers II, L.P. (the
Flowers Fund), by way of non-voting equity
participation; and the balance of approximately
£11.9 million (approximately $23.5 million) from
available cash on hand. In September 2008, the facility loan was
repaid in full.
The purchase price and fair value of the assets acquired in the
Guildhall acquisition were as follows:
|
|
|
|
|
Purchase price
|
|
$
|
65,571
|
|
Direct costs of acquisition
|
|
|
303
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
65,874
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
65,874
|
|
|
|
|
|
|
122
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of acquisition:
|
|
|
|
|
Cash
|
|
$
|
104,888
|
|
Restricted cash
|
|
|
4,106
|
|
Accounts receivable and accrued interest
|
|
|
4,631
|
|
Reinsurance balances receivable
|
|
|
33,298
|
|
Losses and loss adjustment expenses
|
|
|
(79,107
|
)
|
Accounts payable
|
|
|
(1,942
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
65,874
|
|
|
|
|
|
|
Gordian
On March 5, 2008, the Company completed the acquisition of
AMP Limiteds Australian-based closed reinsurance and
insurance operations (Gordian). The total purchase
price was approximately AU$436.9 million (approximately
$405.4 million) and was financed by approximately
AU$301.0 million (approximately $276.5 million),
including an arrangement fee of AU$4.5 million
(approximately $4.2 million), from bank financing provided
jointly by a London-based bank and a German bank (the Flowers
Fund is a significant shareholder of the German bank);
approximately AU$41.6 million (approximately
$39.5 million) from the Flowers Fund, by way of non-voting
equity participation; and approximately AU$98.7 million
(approximately $93.6 million) from available cash on hand.
In September 2010, the facility was repaid in full.
The purchase price and fair value of the assets acquired in the
Gordian acquisition were as follows:
|
|
|
|
|
Purchase price
|
|
$
|
401,086
|
|
Direct costs of acquisition
|
|
|
4,326
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
405,412
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
455,692
|
|
|
|
|
|
|
Excess of net assets over purchase price (negative goodwill)
|
|
$
|
50,280
|
|
Less noncontrolling interests share of negative goodwill
|
|
|
(15,084
|
)
|
|
|
|
|
|
Negative goodwill attributable to the Company
|
|
$
|
35,196
|
|
|
|
|
|
|
The negative goodwill arose primarily as a result of income
earned by Gordian between the date of the balance sheet on which
the agreed purchase price was based, June 30, 2007, and the
date the acquisition closed, March 5, 2008, and the desire
of the vendors to achieve a substantial reduction in regulatory
capital requirements and therefore to dispose of Gordian at a
discount to fair value.
123
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
341,879
|
|
Restricted cash
|
|
|
28,237
|
|
Investments:
|
|
|
|
|
Short-term investments,
available-for-sale
|
|
|
50,930
|
|
Fixed maturities,
available-for-sale
|
|
|
416,355
|
|
Other investments
|
|
|
35,354
|
|
|
|
|
|
|
Total investments
|
|
|
502,639
|
|
Accounts receivable and accrued interest
|
|
|
31,253
|
|
Reinsurance balances receivable
|
|
|
99,645
|
|
Losses and loss adjustment expenses
|
|
|
(509,638
|
)
|
Insurance and reinsurance balances payable
|
|
|
(22,660
|
)
|
Accounts payable
|
|
|
(15,663
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
455,692
|
|
|
|
|
|
|
Seaton
and Stonewall
On June 13, 2008, the Companys indirect subsidiary,
Virginia Holdings Ltd. (Virginia), completed the
acquisition of 44.4% of the outstanding capital stock of
Stonewall Acquisition Corporation (Stonewall) from
Dukes Place Holdings, L.P., a portfolio company of GSC European
Mezzanine Fund II, L.P. At that time, Stonewall Acquisition
Corporation was the parent of two Rhode Island-domiciled
insurers, Stonewall Insurance Company and Seaton Insurance
Company, both of which are in run-off. The total purchase price
of $21.4 million was funded from available cash on hand.
The purchase price of the Companys 44.4% share of
Stonewall and the fair value of the assets acquired were as
follows:
|
|
|
|
|
Purchase price
|
|
$
|
20,444
|
|
Direct costs of acquisition
|
|
|
987
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
21,431
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
21,431
|
|
|
|
|
|
|
124
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the Companys 44.4% share of the
estimated fair values of the assets acquired and the liabilities
assumed as of the date of acquisition:
|
|
|
|
|
Cash
|
|
$
|
17,873
|
|
Investments:
|
|
|
|
|
Short-term investments,
available-for-sale
|
|
|
1,302
|
|
Fixed maturities,
available-for-sale
|
|
|
37,917
|
|
Equities
|
|
|
425
|
|
Other investments
|
|
|
604
|
|
|
|
|
|
|
Total investments
|
|
|
40,248
|
|
Reinsurance balances receivable
|
|
|
187,964
|
|
Losses and loss adjustment expenses
|
|
|
(217,044
|
)
|
Insurance and reinsurance balances payable
|
|
|
(3,049
|
)
|
Accounts payable
|
|
|
(4,561
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
21,431
|
|
|
|
|
|
|
Stonewall entered into a definitive agreement on
December 3, 2009 for the sale of its shares in Stonewall
Insurance Company to Columbia Insurance Company, an affiliate of
National Indemnity Company (an indirect subsidiary of Berkshire
Hathaway, Inc.), for a sale price of $56.0 million, subject
to certain post-closing purchase price adjustments that brought
the total consideration received to $60.4 million. The
transaction received the required regulatory approval on
March 31, 2010 and subsequently closed on April 7,
2010. The proceeds received by Stonewall and certain other
assets were later distributed between Dukes Place Holdings, L.P.
and Virginia.
Goshawk
On June 20, 2008, the Company, through its wholly-owned
subsidiary, Enstar Acquisitions Limited (EAL),
announced a cash offer to all of the shareholders of Goshawk
Insurance Holdings Plc (Goshawk), at 5.2 pence
(approximately $0.103) for each share (the Offer),
conditioned on, among other things, receiving acceptance from
shareholders owning 90% of the shares of Goshawk. Goshawk owns
Rosemont Reinsurance Limited, a Bermuda-based reinsurer that
wrote primarily property and marine business, which was placed
into run-off in October 2005. The Offer valued Goshawk at
approximately £45.7 million in the aggregate.
On July 17, 2008, after acquiring more than 30% of the
shares of Goshawk through market purchases, EAL was obligated to
remove all of the conditions of the Offer except for receipt of
acceptances from shareholders owning 50% of the shares of
Goshawk. On July 25, 2008, the acceptance condition was met
and the Offer became unconditional. On August 19, 2008, the
Offer closed with shareholders representing approximately 89.44%
of Goshawk accepting the Offer for total consideration of
£40.9 million (approximately $80.9 million).
The total purchase price of approximately $82.0 million was
financed by a drawdown of $36.1 million from a credit
facility provided by a London-based bank, a contribution of
$11.7 million of the acquisition price from the Flowers
Fund, by way of non-voting equity participation, and the
remainder from available cash on hand.
In connection with the acquisition, Goshawks existing bank
loan of $16.3 million was refinanced by the drawdown of
$12.2 million (net of fees) from a credit facility provided
by a London-based bank and $4.1 million from the Flowers
Fund. On December 22, 2009, the outstanding principal and
interest on the Goshawk facility was fully repaid.
125
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price of the Companys 89.44% share of Goshawk
and the fair value of the assets acquired were as follows:
|
|
|
|
|
Purchase price
|
|
$
|
80,861
|
|
Direct costs of acquisition
|
|
|
1,106
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
81,967
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
81,967
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
159,301
|
|
Reinsurance balances receivable
|
|
|
32,532
|
|
Other assets
|
|
|
15,703
|
|
Losses and loss adjustment expenses
|
|
|
(80,051
|
)
|
Insurance and reinsurance balances payable
|
|
|
(20,634
|
)
|
Accounts payable
|
|
|
(24,884
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
81,967
|
|
|
|
|
|
|
On November 26, 2009, the Company acquired an additional
10.01% of the outstanding shares of Goshawk that it did not
previously own, for a purchase price of approximately
$4.7 million. The Company has accounted for the acquisition
of the shares in accordance with the provisions of the
Consolidation topic of the Codification. The Company now owns
99.45% of Goshawks outstanding shares.
EPIC
On August 14, 2008, the Company completed the purchase of
all of the outstanding capital stock of Electricity Producers
Insurance Company (Bermuda) Limited (EPIC) for a
total purchase price of approximately £36.8 million
(approximately $69.0 million). The purchase price was
financed by approximately $32.8 million from a credit
facility provided by a London-based bank; approximately
$10.2 million from the Flowers Fund, by way of non-voting
equity participation; and the remainder from available cash on
hand. On October 6, 2008, the Company fully repaid the
outstanding principal and accrued interest on the facility.
The purchase price and fair value of the assets acquired in the
EPIC acquisition were as follows:
|
|
|
|
|
Purchase price
|
|
$
|
68,792
|
|
Direct costs of acquisition
|
|
|
173
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
68,965
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
68,965
|
|
|
|
|
|
|
126
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
169,401
|
|
Restricted cash
|
|
|
15,929
|
|
Fixed maturity investments,
available-for-sale
|
|
|
771
|
|
Other assets
|
|
|
733
|
|
Losses and loss adjustment expenses
|
|
|
(108,616
|
)
|
Insurance and reinsurance balances payable
|
|
|
(312
|
)
|
Accounts payable
|
|
|
(8,941
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
68,965
|
|
|
|
|
|
|
Capital
Assurance
On August 18, 2008, the Company completed the acquisition
of all of the outstanding capital stock of Capital Assurance
Company Inc. and Capital Assurance Services, Inc. (collectively
Capital Assurance) for a total purchase price of
approximately $5.6 million. Capital Assurance Company, Inc.
is a Florida-domiciled insurer that is in run-off. The
acquisition was funded from available cash on hand.
The purchase price and fair value of the assets acquired in the
Capital Assurance acquisition were as follows:
|
|
|
|
|
Purchase price
|
|
$
|
5,338
|
|
Direct costs of acquisition
|
|
|
282
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
5,620
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
5,620
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
1,162
|
|
Investments:
|
|
|
|
|
Short-term investments,
available-for-sale
|
|
|
28,220
|
|
Fixed maturities,
available-for-sale
|
|
|
1,686
|
|
|
|
|
|
|
Total investments
|
|
|
29,906
|
|
Reinsurance balances receivable
|
|
|
332
|
|
Other assets
|
|
|
1,244
|
|
Losses and loss adjustment expenses
|
|
|
(26,265
|
)
|
Insurance and reinsurance balances payable
|
|
|
(30
|
)
|
Accounts payable
|
|
|
(729
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
5,620
|
|
|
|
|
|
|
Hillcot
Re
On October 27, 2008, Kenmare Holdings Ltd.
(Kenmare), a wholly-owned subsidiary of the Company,
completed the purchase of the entire share capital of Hillcot Re
Ltd. (Hillcot Re), the wholly-owned subsidiary of
Hillcot Holdings Ltd. (Hillcot), for a total
purchase price of $54.7 million. Hillcot Re is a U.K.-based
reinsurer that is in run-off. Prior to this transaction, the
Company owned 50.1% of the outstanding share capital of Hillcot
and
127
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shinsei Bank, Ltd. (Shinsei) owned the remaining
49.9%. Upon completion of the transaction, Hillcot paid a
distribution to Shinsei of approximately $27.1 million
representing its 49.9% share of the consideration received by
Hillcot. J. Christopher Flowers, a member of the Companys
board of directors and one of its largest shareholders, is a
director and the largest shareholder of Shinsei. The total
purchase price of $54.7 million was funded from available
cash on hand.
The purchase price and the fair value of the assets acquired of
Hillcot Re was as follows:
|
|
|
|
|
Purchase price
|
|
$
|
54,400
|
|
Direct costs of acquisition
|
|
|
272
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
54,672
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
54,672
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
77,611
|
|
Restricted cash
|
|
|
630
|
|
Reinsurance balances receivable
|
|
|
7,114
|
|
Other assets
|
|
|
1,336
|
|
Losses and loss adjustment expenses
|
|
|
(28,531
|
)
|
Insurance and reinsurance balances payable
|
|
|
(630
|
)
|
Accounts payable
|
|
|
(2,858
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
54,672
|
|
|
|
|
|
|
Unionamerica
On December 30, 2008, Royston Run-Off Limited
(Royston), the Companys indirect subsidiary,
completed the purchase of all of the outstanding capital stock
of Unionamerica Holdings Limited (Unionamerica) for
total purchase price of approximately $343.4 million.
Unionamerica is comprised of the discontinued operations of St.
Paul Fire and Marine Insurance Companys
U.K.-based
London Market business, which were placed into run-off between
1992 and 2003. The purchase price was financed by approximately
$184.6 million from a credit facility provided by a
London-based bank; approximately $49.8 million from the
Flowers Fund, by way of its non-voting equity interest in
Royston Holdings Ltd., the direct parent company of Royston, and
the remainder from available cash on hand. Under the facilities
agreement for the bank loan, which was amended and restated on
August 4, 2009, the Company borrowed $152.6 million
under Facility A and $32.0 million under Facility B. In
December 2010, the Company repaid $114.0 million of the credit
facility and, in March 2011, repaid another $40.5 million
of the credit facility.
The purchase price and fair value of the assets acquired in the
Unionamerica acquisition were as follows:
|
|
|
|
|
Purchase price
|
|
$
|
341,266
|
|
Direct costs of acquisition
|
|
|
2,160
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
343,426
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
343,426
|
|
|
|
|
|
|
128
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
404,411
|
|
Restricted cash
|
|
|
7,298
|
|
Investments:
|
|
|
|
|
Fixed maturities,
available-for-sale
|
|
|
388,008
|
|
Fixed maturities,
held-to-maturity
|
|
|
229,925
|
|
Other investments
|
|
|
2,007
|
|
|
|
|
|
|
Total investments
|
|
|
619,940
|
|
Reinsurance balances receivable
|
|
|
128,615
|
|
Other assets
|
|
|
35,735
|
|
Losses and loss adjustment expenses
|
|
|
(828,338
|
)
|
Insurance and reinsurance balances payable
|
|
|
(22,681
|
)
|
Accounts payable
|
|
|
(1,554
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
343,426
|
|
|
|
|
|
|
2009
Constellation
Reinsurance
On January 31, 2009, the Company, through its indirect
subsidiary, Sun Gulf Holdings Inc., completed the acquisition of
all of the outstanding capital stock of Constellation
Reinsurance Company Limited (Constellation) for a
total purchase price of approximately $2.5 million.
Constellation is a New York-domiciled reinsurer that is in
run-off. The acquisition was funded from available cash on hand.
The purchase price and fair value of the assets acquired in the
Constellation acquisition were as follows:
|
|
|
|
|
Total purchase price
|
|
$
|
2,500
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
2,500
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
11,004
|
|
Fixed maturity investments,
available-for-sale
|
|
|
250
|
|
Reinsurance balances receivable
|
|
|
3,374
|
|
Losses and loss adjustment expenses
|
|
|
(12,128
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
2,500
|
|
|
|
|
|
|
Copenhagen
Re
On October 15, 2009, the Company, through its wholly-owned
subsidiary, Marlon Insurance Company Limited, completed the
acquisition of Copenhagen Reinsurance Company Ltd.
(Copenhagen Re) from Alm. Brand Forsikring A/S for a
total purchase price of DKK149.2 million (approximately
$29.9 million). Copenhagen Re is a Danish-domiciled
reinsurer that is in run-off. The acquisition was funded from
available cash on hand.
129
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price and fair value of the assets acquired in the
Copenhagen Re acquisition were as follows:
|
|
|
|
|
Total purchase price
|
|
$
|
29,884
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
29,884
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
93,710
|
|
Restricted cash
|
|
|
5,327
|
|
Fixed maturity investments,
available-for-sale
|
|
|
39,848
|
|
Accounts receivable and accrued interest
|
|
|
747
|
|
Reinsurance balances receivable
|
|
|
23,905
|
|
Other assets
|
|
|
5,365
|
|
Losses and loss adjustment expenses
|
|
|
(115,286
|
)
|
Insurance and reinsurance balances payable
|
|
|
(8,089
|
)
|
Accounts payable
|
|
|
(15,643
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
29,884
|
|
|
|
|
|
|
2010
Knapton
Insurance (formerly British Engine)
On March 2, 2010, the Company, through its wholly-owned
subsidiary, Knapton Holdings Limited
(Knapton Holdings), completed the acquisition
of Knapton Insurance Limited, formerly British Engine Insurance
Limited (Knapton), from RSA Insurance Group plc for
a total purchase price of approximately £28.8 million
(approximately $44.0 million). Knapton is a U.K.-domiciled
reinsurer that is in run-off. The acquisition was funded from
available cash on hand.
The purchase price and fair value of the assets acquired in the
Knapton acquisition were as follows:
|
|
|
|
|
Total purchase price
|
|
$
|
44,031
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
44,031
|
|
|
|
|
|
|
130
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
153,286
|
|
Restricted cash
|
|
|
35,515
|
|
Investments:
|
|
|
|
|
Short-term investments, trading
|
|
|
5,990
|
|
Fixed maturity investments, trading
|
|
|
27,923
|
|
|
|
|
|
|
Total investments
|
|
|
33,913
|
|
Reinsurance balances receivable
|
|
|
50,942
|
|
Other assets
|
|
|
5,840
|
|
Losses and loss adjustment expenses
|
|
|
(216,871
|
)
|
Insurance and reinsurance balances payable
|
|
|
(12,347
|
)
|
Accounts payable
|
|
|
(6,247
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
44,031
|
|
|
|
|
|
|
From March 2, 2010, the date of acquisition, to
December 31, 2010, the Company has recorded in its
consolidated statement of earnings, revenues and net earnings
related to Knapton of $2.4 million and $11.9 million,
respectively.
In April 2010, Knapton Holdings entered into a term facility
agreement with a London-based bank (the Knapton
Facility). On April 20, 2010, Knapton Holdings drew
down $21.4 million from the Knapton Facility.
Assuransinvest
On March 30, 2010, the Company, through its wholly-owned
subsidiary, Nordic Run-Off Limited, completed the acquisition of
Forsakringsaktiebolaget Assuransinvest MF
(Assuransinvest) for a purchase price of
SEK 78.8 million (approximately $11.0 million).
Assuransinvest is a Swedish-domiciled reinsurer that is in
run-off. The purchase price was funded from available cash on
hand.
The purchase price and fair value of the assets acquired in the
Assuransinvest acquisition were as follows:
|
|
|
|
|
Total purchase price
|
|
$
|
11,042
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
11,042
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
58,971
|
|
Fixed maturity investments, trading
|
|
|
579
|
|
Other assets
|
|
|
5
|
|
Losses and loss adjustment expenses
|
|
|
(45,021
|
)
|
Insurance and reinsurance balances payable
|
|
|
(3,130
|
)
|
Accounts payable
|
|
|
(362
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
11,042
|
|
|
|
|
|
|
From March 30, 2010, the date of acquisition, to
December 31, 2010, the Company has recorded in its
consolidated statement of earnings, revenues and net losses
related to Assuransinvest of $0.1 million and
$(0.8) million, respectively.
131
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Providence
Washington
On July 20, 2010, the Company, through its wholly-owned
subsidiary, PWAC Holdings, Inc., completed the acquisition of PW
Acquisition Company (PWAC) for a purchase price of
$25.0 million. PWAC owns the entire share capital of
Providence Washington Insurance Company. Providence Washington
Insurance Company and its two subsidiaries are Rhode
Island-domiciled insurers that are in run-off. The purchase
price was financed by a term facility provided by a London-based
bank (the EGL Facility), which was fully repaid on
September 13, 2010.
The purchase price and fair value of the assets acquired in the
PWAC acquisition were as follows:
|
|
|
|
|
Total purchase price
|
|
$
|
25,000
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
25,000
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
19,278
|
|
Investments:
|
|
|
|
|
Short-term investments, trading
|
|
|
4,181
|
|
Fixed maturity investments, trading
|
|
|
97,756
|
|
Equities
|
|
|
37
|
|
Other investments
|
|
|
4,985
|
|
|
|
|
|
|
Total investments
|
|
|
106,959
|
|
Accounts receivable and accrued interest
|
|
|
813
|
|
Reinsurance balances receivable
|
|
|
31,718
|
|
Other assets
|
|
|
1,276
|
|
Losses and loss adjustment expenses
|
|
|
(120,745
|
)
|
Insurance and reinsurance balances payable
|
|
|
(3,597
|
)
|
Accounts payable
|
|
|
(10,702
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
25,000
|
|
|
|
|
|
|
From July 20, 2010, the date of acquisition, to
December 31, 2010, the Company has recorded in its
consolidated statement of earnings, revenues and net losses
related to PWAC of $1.5 million and $(1.5) million,
respectively.
Seaton
Insurance
On August 3, 2010, the Company, through its wholly-owned
subsidiary, Virginia, acquired 55.6% of the shares of Seaton
Insurance Company (Seaton) that it previously did
not own for a $nil purchase price, resulting in Virginia owning
100% of Seaton. Seaton is a Rhode Island-domiciled insurer that
is in run-off. The acquisition of the Seaton shares was a result
of the distribution by Stonewall to Virginia of proceeds and
certain other assets following its sale of Stonewall Insurance
Company to Columbia Insurance Company, an affiliate of National
Indemnity Company (an indirect subsidiary of Berkshire Hathaway,
Inc.). Prior to the distribution, Virginia had indirectly owned
44.4% of Seaton through its holding in Stonewall. The fair value
of the assets acquired in the Seaton acquisition was $nil.
132
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the estimated fair values of 100% of
the assets acquired and the liabilities assumed at the date of
the acquisition:
|
|
|
|
|
Cash
|
|
$
|
3,949
|
|
Fixed maturity investments, trading
|
|
|
22,745
|
|
Accounts receivable and accrued interest
|
|
|
270
|
|
Reinsurance balances receivable
|
|
|
170,344
|
|
Other assets
|
|
|
3,759
|
|
Losses and loss adjustment expenses
|
|
|
(171,010
|
)
|
Insurance and reinsurance balances payable
|
|
|
(28,670
|
)
|
Accounts payable
|
|
|
(1,387
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
|
|
|
|
|
|
|
From August 3, 2010, the date of acquisition, to
December 31, 2010, the Company has recorded in its
consolidated statement of earnings, revenues and net losses
related to Seaton of $0.2 million and $(5.3) million,
respectively.
Brampton
On November 2, 2010, the Company acquired the 49.9% of the
shares of Hillcot from Shinsei that it did not previously own
for a purchase price of $38.0 million, resulting in the
Company owning 100% of Hillcot. At the time of acquisition,
Hillcot owned 100% of the shares of Brampton. The fair value of
the assets acquired that the Company did not previously own was
$34.9 million. The excess of the purchase price over the
fair value of assets acquired in the amount of $3.1 million
was recorded as a charge to additional paid-in capital in
accordance with the applicable U.S. GAAP guidance.
CitiLife
On November 8, 2010, the Company, through its wholly-owned
subsidiary, Kenmare, entered into a definitive agreement for the
purchase of CitiLife Financial Limited from Citigroup Insurance
Holding Corporation, an affiliate of Citigroup Inc. CitiLife
Financial Limited is a Dublin, Ireland-based life insurer that
is in run-off. The purchase price is 30 million
(approximately $40.2 million) and is expected to be
financed from available cash on hand. Completion of the
transaction is conditioned on, among other things, regulatory
approval and satisfaction of various customary closing
conditions. The transaction is expected to close in the first
quarter of 2011.
New
Castle
On December 3, 2010, the Company, through its wholly-owned
subsidiary, Kenmare, completed the acquisition of New Castle
Reinsurance Company Ltd. (New Castle), for an
aggregate purchase price of $22.0 million. New Castle is a
Bermuda-domiciled insurer that is in run-off. The acquisition
was funded from available cash on hand.
The purchase price and fair value of the assets acquired in the
New Castle acquisition were as follows:
|
|
|
|
|
Total purchase price
|
|
$
|
21,950
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
21,950
|
|
|
|
|
|
|
133
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
57,026
|
|
Reinsurance balances receivable
|
|
|
4,818
|
|
Other assets
|
|
|
99
|
|
Losses and loss adjustment expenses
|
|
|
(38,603
|
)
|
Insurance and reinsurance balances payable
|
|
|
(1,316
|
)
|
Accounts payable
|
|
|
(74
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
21,950
|
|
|
|
|
|
|
From December 3, 2010, the date of acquisition, to
December 31, 2010, the Company has recorded in its
consolidated statement of earnings, revenues and net losses
related to New Castle of $nil and $(0.1) million,
respectively.
Clarendon
On December 22, 2010, the Company, through its wholly-owned
subsidiary, Clarendon Holdings, Inc., entered into a definitive
agreement for the purchase of Clarendon National Insurance
Company (Clarendon) from Clarendon Insurance Group,
Inc., an affiliate of Hannover Re. Clarendon is a New
Jersey-domiciled insurer that is in run-off. The purchase price
is approximately $200 million and will be financed in part
by a bank loan facility provided by a London-based bank entered
into on March 4, 2011 and in part from available cash on
hand. Completion of the transaction is conditioned on, among
other things, regulatory approval and satisfaction of various
customary closing conditions. The transaction is expected to
close in the second quarter of 2011.
Claremont
On December 31, 2010, the Company, through its wholly-owned
subsidiary, CLIC Holdings, Inc., completed the acquisition of
Claremont Liability Insurance Company (Claremont),
for an aggregate purchase price of $13.9 million. Claremont
is a California-domiciled insurer that is in run-off. The
acquisition was funded from available cash on hand.
The purchase price and fair value of the assets acquired in the
Claremont acquisition were as follows:
|
|
|
|
|
Total purchase price
|
|
$
|
13,936
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
13,936
|
|
|
|
|
|
|
134
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash
|
|
$
|
394
|
|
Investments:
|
|
|
|
|
Fixed maturity investments, trading
|
|
|
15,990
|
|
Equities
|
|
|
138
|
|
|
|
|
|
|
Total investments
|
|
|
16,128
|
|
Accounts receivable and accrued interest
|
|
|
196
|
|
Reinsurance balances receivable
|
|
|
44,966
|
|
Other assets
|
|
|
19
|
|
Losses and loss adjustment expenses
|
|
|
(47,516
|
)
|
Accounts payable
|
|
|
(251
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
13,936
|
|
|
|
|
|
|
No revenues or net earnings related to Claremont were recorded
in the Companys consolidated statement of earnings for the
year ended December 31, 2010.
|
|
4.
|
SIGNIFICANT
NEW BUSINESS
|
Shelbourne
RITC Transactions
In December 2007, the Company, in conjunction with JCF FPK I
L.P. (JCF FPK) and a newly-hired executive
management team, formed U.K.-based Shelbourne Group Limited
(Shelbourne) to invest in Reinsurance to Close or
RITC transactions (the transferring of liabilities
from one Lloyds syndicate to another) with Lloyds of
London insurance and reinsurance syndicates in run-off. The
Company owns approximately 56.8% of Shelbourne, which in turn
owns 100% of Shelbourne Syndicate Services Limited, the Managing
Agency for Lloyds Syndicate 2008, a syndicate approved by
Lloyds of London on December 16, 2007 to undertake
RITC transactions with Lloyds syndicates in run-off.
JCF FPK is a joint investment program between Fox-Pitt, Kelton,
Cochran, Caronia & Waller (USA) LLC (FPK)
and the Flowers Fund. The Flowers Fund is a private investment
fund advised by J.C. Flowers & Co. LLC. J. Christopher
Flowers, a member of the Companys board of directors and
one of the Companys largest shareholders, is the Chairman
and Chief Executive Officer of J.C. Flowers & Co. LLC.
John J. Oros who was the Companys Executive
Chairman and a member of the Companys board of directors
until his resignation on August 20, 2010, is a Managing
Director of J.C. Flowers & Co. LLC. In addition, an
affiliate of the Flowers Fund controlled approximately 41% of
FPK until its sale of FPK in December 2009.
In February 2008, Lloyds Syndicate 2008 entered into RITC
agreements with four Lloyds syndicates with total gross
insurance reserves of approximately $471.2 million. In
February 2009, Lloyds Syndicate 2008 entered into a RITC
agreement with a Lloyds syndicate with total gross
insurance reserves of approximately $67.0 million.
During 2010, Lloyds Syndicate 2008 entered into RITC
agreements with three Lloyds syndicates with total gross
insurance reserves of approximately $192.6 million. The
capital commitment to Lloyds Syndicate 2008, as at
February 28, 2011, with respect to these three RITC
agreements amounted to approximately £24.3 million
(approximately $37.9 million), which was fully funded by
the Company from available cash on hand.
In February 2011, Lloyds Syndicate 2008 entered into RITC
agreements with two Lloyds syndicates with total gross
insurance reserves of approximately $129.6 million. The
capital commitment to Lloyds Syndicate 2008, as at
February 28, 2011, with respect to these two RITC
agreements amounted to £21.3 million (approximately
$33.3 million).
135
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fitzwilliam
In February 2010, the Company, through its wholly-owned
subsidiary Fitzwilliam Insurance Limited
(Fitzwilliam), entered into a 100% quota share
reinsurance agreement with Allianz Global Corporate &
Specialty AG (UK) Branch (Allianz) with respect to a
specific portfolio of run-off business of Allianz. Fitzwilliam
received total assets and assumed total gross reinsurance
reserves of approximately $112.6 million.
In July 2010, following the acquisition of the entire issued
share capital of Glacier Insurance AG by Torus Insurance
(Bermuda) Limited (Torus), Fitzwilliam entered into
two quota share reinsurance agreements with Torus protecting the
prior year reserve development of two portfolios of business
reinsured by them: a 79% quota share of Torus 95% quota
share reinsurance of Glacier Insurance AG, and a 75% quota share
of Torus 100% quota share reinsurance of Glacier
Reinsurance AG. Fitzwilliam received total assets and assumed
total gross reinsurance reserves of approximately
$105.0 million.
On December 3, 2010, Fitzwilliam entered into a 100% quota
share reinsurance agreement with International Insurance Company
of Hannover (IICH) with respect to a specific
portfolio of run-off business. Fitzwilliam received total assets
and assumed total net reinsurance reserves of approximately
$137.1 million. In addition, the Company has provided a
parental guarantee supporting the IICH obligations of
Fitzwilliam in the amount of approximately
£76.0 million (approximately $118.7 million). The
amount of the guarantee will decrease over time in line with
relevant independent actuarial assessments.
On December 31, 2010, Fitzwilliam entered into a 100%
reinsurance agreement, administrative services agreement, and
related transaction documents with three affiliates of CIGNA
Corporation (CIGNA affiliates) pursuant to which
Fitzwilliam has reinsured all of the run-off workers
compensation and personal accident reinsurance business of those
CIGNA affiliates. Pursuant to the transaction documents, the
CIGNA affiliates have transferred assets into three reinsurance
collateral trusts securing the obligations of Fitzwilliam under
the reinsurance agreement and administrative services agreement.
Fitzwilliam received total assets and assumed total net
reinsurance reserves of approximately $190.5 million.
Fitzwilliam transferred approximately $50 million of
additional funds to the trusts to further support these
obligations. The Company funded the contribution to the trusts
through a draw on a new $115 million credit facility
entered into with Barclays Bank PLC on December 29, 2010
(the Enstar Facility).
In addition to the trusts, the Company has provided a limited
parental guarantee supporting certain obligations of Fitzwilliam
in the amount of $79.7 million. The amount of the guarantee
will increase or decrease over time under certain circumstances,
but will always be subject to an overall maximum cap with
respect to reinsurance liabilities.
Bosworth
In May 2010, a specific portfolio of run-off business
underwritten by Mitsui Sumitomo Insurance Co., Ltd. of Japan was
transferred to the Companys 50.1% owned subsidiary,
Bosworth Run-off Limited (Bosworth). This transfer,
which occurred under Part VII of the U.K. Financial
Services and Markets Act 2000, was approved by the U.K. Court
and took effect on May 31, 2010. As a result of the
transfer, Bosworth received total assets and assumed net
reinsurance reserves of approximately $117.5 million.
Shinsei owns the remaining 49.9% of Bosworth.
|
|
5.
|
RESTRICTED
CASH AND CASH EQUIVALENTS
|
Restricted cash and cash equivalents were $656.2 million
and $433.7 million as of December 31, 2010 and 2009,
respectively. The restricted cash and cash equivalents are used
as collateral against letters of credit and as guarantee under
trust agreements. Letters of credit are issued to ceding
insurers as security for the obligations of insurance
subsidiaries under reinsurance agreements with those ceding
insurers.
136
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Available-for-sale
The amortized cost and estimated fair value of the
Companys fixed maturity securities and short-term
investments classified as
available-for-sale
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Holding
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Losses
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Non-OTTI
|
|
|
Value
|
|
|
As at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
|
$
|
65,115
|
|
|
$
|
766
|
|
|
$
|
(92
|
)
|
|
$
|
65,789
|
|
Non-U.S.
government
|
|
|
248,487
|
|
|
|
8,832
|
|
|
|
(314
|
)
|
|
|
257,005
|
|
Corporate
|
|
|
695,372
|
|
|
|
16,513
|
|
|
|
(1,615
|
)
|
|
|
710,270
|
|
Residential mortgage-backed
|
|
|
20,036
|
|
|
|
305
|
|
|
|
(234
|
)
|
|
|
20,107
|
|
Commercial mortgage-backed
|
|
|
19,667
|
|
|
|
2,083
|
|
|
|
(11
|
)
|
|
|
21,739
|
|
Asset backed
|
|
|
27,072
|
|
|
|
574
|
|
|
|
(346
|
)
|
|
|
27,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,075,749
|
|
|
$
|
29,073
|
|
|
$
|
(2,612
|
)
|
|
$
|
1,102,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Holding
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Losses
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Non-OTTI
|
|
|
Value
|
|
|
As at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
|
$
|
14,079
|
|
|
$
|
227
|
|
|
$
|
|
|
|
$
|
14,306
|
|
Non-U.S.
government
|
|
|
37,166
|
|
|
|
33
|
|
|
|
(13
|
)
|
|
|
37,186
|
|
Corporate
|
|
|
62,092
|
|
|
|
825
|
|
|
|
(867
|
)
|
|
|
62,050
|
|
Residential mortgage-backed
|
|
|
1,685
|
|
|
|
31
|
|
|
|
(160
|
)
|
|
|
1,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,022
|
|
|
$
|
1,116
|
|
|
$
|
(1,040
|
)
|
|
$
|
115,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the Companys fixed maturity
securities and short-term investments classified as
available-for-sale
in an unrealized loss position as well as the aggregate fair
value and gross unrealized loss by length of time the security
has continuously been in an unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months or Greater
|
|
|
Less Than 12 Months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
As at December 31, 2010
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. government and agency
|
|
$
|
801
|
|
|
$
|
|
|
|
$
|
22,976
|
|
|
$
|
(92
|
)
|
|
$
|
23,777
|
|
|
$
|
(92
|
)
|
Non-U.S.
government
|
|
|
7,710
|
|
|
|
(32
|
)
|
|
|
31,128
|
|
|
|
(282
|
)
|
|
|
38,838
|
|
|
|
(314
|
)
|
Corporate
|
|
|
22,039
|
|
|
|
(318
|
)
|
|
|
107,735
|
|
|
|
(1,297
|
)
|
|
|
129,774
|
|
|
|
(1,615
|
)
|
Residential mortgage-backed
|
|
|
2,368
|
|
|
|
(168
|
)
|
|
|
11,274
|
|
|
|
(66
|
)
|
|
|
13,642
|
|
|
|
(234
|
)
|
Commercial mortgage-backed
|
|
|
530
|
|
|
|
(10
|
)
|
|
|
1,516
|
|
|
|
(1
|
)
|
|
|
2,046
|
|
|
|
(11
|
)
|
Asset backed
|
|
|
10,554
|
|
|
|
(346
|
)
|
|
|
87
|
|
|
|
|
|
|
|
10,641
|
|
|
|
(346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,002
|
|
|
$
|
(874
|
)
|
|
$
|
174,716
|
|
|
$
|
(1,738
|
)
|
|
$
|
218,718
|
|
|
$
|
(2,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months or Greater
|
|
|
Less Than 12 Months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
As at December 31, 2009
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Non-U.S.
government
|
|
$
|
|
|
|
$
|
|
|
|
$
|
782
|
|
|
$
|
(13
|
)
|
|
$
|
782
|
|
|
$
|
(13
|
)
|
Corporate
|
|
|
10,894
|
|
|
|
(786
|
)
|
|
|
5,348
|
|
|
|
(81
|
)
|
|
|
16,242
|
|
|
|
(867
|
)
|
Residential mortgage-backed
|
|
|
369
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
369
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,263
|
|
|
$
|
(946
|
)
|
|
$
|
6,130
|
|
|
$
|
(94
|
)
|
|
$
|
17,393
|
|
|
$
|
(1,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2010 and December 31, 2009, the
number of securities classified as
available-for-sale
in an unrealized loss position was 136 and 20, respectively,
with a fair value of $218.7 million and $17.3 million,
respectively. Of these securities, the number of securities that
had been in an unrealized loss position for twelve months or
longer was 32 and 11, respectively.
The contractual maturities of the Companys fixed maturity
securities and short-term investments, classified as
available-for-sale,
are shown below. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
As at December 31, 2010
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
373,683
|
|
|
$
|
379,203
|
|
|
|
|
|
|
|
34.4
|
%
|
Due after one year through five years
|
|
|
625,463
|
|
|
|
643,252
|
|
|
|
|
|
|
|
58.3
|
%
|
Due after five years through ten years
|
|
|
5,307
|
|
|
|
5,539
|
|
|
|
|
|
|
|
0.5
|
%
|
Due after ten years
|
|
|
4,521
|
|
|
|
5,070
|
|
|
|
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,008,974
|
|
|
|
1,033,064
|
|
|
|
|
|
|
|
93.7
|
%
|
Residential mortgage-backed
|
|
|
20,036
|
|
|
|
20,107
|
|
|
|
|
|
|
|
1.8
|
%
|
Commercial mortgage-backed
|
|
|
19,667
|
|
|
|
21,739
|
|
|
|
|
|
|
|
2.0
|
%
|
Asset backed
|
|
|
27,072
|
|
|
|
27,300
|
|
|
|
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,075,749
|
|
|
$
|
1,102,210
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
As at December 31, 2009
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
64,202
|
|
|
$
|
64,606
|
|
|
|
|
|
|
|
56.1
|
%
|
Due after one year through five years
|
|
|
39,951
|
|
|
|
40,305
|
|
|
|
|
|
|
|
35.0
|
%
|
Due after five years through ten years
|
|
|
5,811
|
|
|
|
5,783
|
|
|
|
|
|
|
|
5.0
|
%
|
Due after ten years
|
|
|
3,373
|
|
|
|
2,848
|
|
|
|
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,337
|
|
|
|
113,542
|
|
|
|
|
|
|
|
98.6
|
%
|
Residential mortgage-backed
|
|
|
1,685
|
|
|
|
1,556
|
|
|
|
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,022
|
|
|
$
|
115,098
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables set forth certain information regarding the
credit ratings (provided by major rating agencies) of the
Companys fixed maturity securities and short-term
investments classified as
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
As at December 31, 2010
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
AAA
|
|
$
|
405,682
|
|
|
$
|
416,526
|
|
|
|
|
|
|
|
37.8
|
%
|
AA
|
|
|
267,917
|
|
|
|
273,500
|
|
|
|
|
|
|
|
24.8
|
%
|
A
|
|
|
332,401
|
|
|
|
341,447
|
|
|
|
|
|
|
|
31.0
|
%
|
BBB or lower
|
|
|
69,359
|
|
|
|
70,274
|
|
|
|
|
|
|
|
6.4
|
%
|
Not Rated
|
|
|
390
|
|
|
|
463
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,075,749
|
|
|
$
|
1,102,210
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
% of Total
|
|
As at December 31, 2009
|
|
Cost
|
|
|
Value
|
|
|
Fair Value
|
|
|
AAA
|
|
$
|
54,157
|
|
|
$
|
54,229
|
|
|
|
47.1
|
%
|
AA
|
|
|
|
|
|
|
|
|
|
|
|
%
|
A
|
|
|
32,764
|
|
|
|
32,886
|
|
|
|
28.6
|
%
|
BBB or lower
|
|
|
13,848
|
|
|
|
13,596
|
|
|
|
11.8
|
%
|
Not Rated
|
|
|
14,253
|
|
|
|
14,387
|
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,022
|
|
|
$
|
115,098
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
As of September 30, 2010, the Company redesignated
$1.33 billion in investment securities from the
held-to-maturity
category to the
available-for-sale
category, following the disposition of certain
held-to-maturity
securities in one of the Companys Australian insurance
subsidiaries. The speed of settlement of the liabilities in this
subsidiary had been notably greater than was originally
anticipated, prompting the Company to apply to the
subsidiarys regulator for a reduction in required capital
levels. Upon the approval, on September 1, 2010, of the
capital reduction in the amount of $148.2 million, the
Company evaluated the funding alternatives relating to the
capital distribution and, as a result, reconsidered its intent
to hold certain securities to maturity and sold securities with
a carrying value of $33.4 million that had previously been
designated
held-to-maturity.
The proceeds from these sales were $36.5 million, resulting
in a realized gain of $3.1 million.
During September 2010, requests were made to regulators, that
are pending approval, for capital releases, in certain of the
Companys other insurance subsidiaries, for amounts that
are also greater than was originally anticipated. Further to
both approved and pending requests for capital releases greater
than originally anticipated in certain of the Companys
insurance subsidiaries, the Company reevaluated its intent with
respect to its remaining
held-to-maturity
securities. The Company concluded that, as of September 30,
2010, it no longer had the positive intent to hold its
held-to-maturity
securities to maturity. The Company does not plan to designate
securities as
held-to-maturity
for at least two years and believes that maintaining its
securities in the
available-for-sale
category provides greater flexibility in the management of the
overall investment portfolio.
As a result of redesignation, the
held-to-maturity
securities with amortized cost of $1.15 billion as of
September 30, 2010, were transferred to the
available-for-sale
category at the fair value of $1.33 billion, with
unrealized gains of $18.0 million recorded in accumulated
other comprehensive income.
139
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and estimated fair value of the
Companys fixed maturity securities and short-term
investments classified as
held-to-maturity
as at December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Holding
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Losses
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Non-OTTI
|
|
|
Value
|
|
|
U.S. government and agency
|
|
$
|
164,706
|
|
|
$
|
1,659
|
|
|
$
|
(196
|
)
|
|
$
|
166,169
|
|
Non-U.S.
government
|
|
|
276,506
|
|
|
|
3,069
|
|
|
|
(131
|
)
|
|
|
279,444
|
|
Corporate
|
|
|
780,099
|
|
|
|
15,794
|
|
|
|
(1,284
|
)
|
|
|
794,609
|
|
Municipal
|
|
|
9,649
|
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
9,654
|
|
Residential mortgage-backed
|
|
|
15,894
|
|
|
|
165
|
|
|
|
(427
|
)
|
|
|
15,632
|
|
Commercial mortgage-backed
|
|
|
30,608
|
|
|
|
1,130
|
|
|
|
(1,970
|
)
|
|
|
29,768
|
|
Asset backed
|
|
|
34,078
|
|
|
|
477
|
|
|
|
(564
|
)
|
|
|
33,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,311,540
|
|
|
$
|
22,300
|
|
|
$
|
(4,573
|
)
|
|
$
|
1,329,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys fixed maturity
securities and short-term investments classified as
held-to-maturity
in an unrealized loss position as at December 31, 2009 and
the aggregate fair value and gross unrealized loss by length of
time the security has continuously been in an unrealized loss
position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months or Greater
|
|
|
Less Than 12 Months
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. government and agency
|
|
$
|
|
|
|
$
|
|
|
|
$
|
53,674
|
|
|
$
|
(196
|
)
|
|
$
|
53,674
|
|
|
$
|
(196
|
)
|
Non-U.S.
government
|
|
|
|
|
|
|
|
|
|
|
44,477
|
|
|
|
(131
|
)
|
|
|
44,477
|
|
|
|
(131
|
)
|
Corporate
|
|
|
3,892
|
|
|
|
(249
|
)
|
|
|
153,220
|
|
|
|
(1,034
|
)
|
|
|
157,112
|
|
|
|
(1,283
|
)
|
Municipal
|
|
|
|
|
|
|
|
|
|
|
8,641
|
|
|
|
(1
|
)
|
|
|
8,641
|
|
|
|
(1
|
)
|
Residential mortgage-backed
|
|
|
2,109
|
|
|
|
(277
|
)
|
|
|
6,494
|
|
|
|
(151
|
)
|
|
|
8,603
|
|
|
|
(428
|
)
|
Commercial mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
11,931
|
|
|
|
(1,970
|
)
|
|
|
11,931
|
|
|
|
(1,970
|
)
|
Asset backed
|
|
|
889
|
|
|
|
(86
|
)
|
|
|
21,817
|
|
|
|
(478
|
)
|
|
|
22,706
|
|
|
|
(564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,890
|
|
|
$
|
(612
|
)
|
|
$
|
300,254
|
|
|
$
|
(3,961
|
)
|
|
$
|
307,144
|
|
|
$
|
(4,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2009, the number of fixed maturity
securities classified as
held-to-maturity
in an unrealized loss position was 135, with a fair value of
$307.1 million. Of these securities, the number of
securities that had been in an unrealized loss position for
12 months or longer was 19.
140
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Trading
The estimated fair value of investments in fixed maturity
securities, short-term investments and equities classified as
trading securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
U.S. government and agency
|
|
$
|
162,014
|
|
|
$
|
61,920
|
|
Non-U.S.
government
|
|
|
129,861
|
|
|
|
|
|
Corporate
|
|
|
637,114
|
|
|
|
25,033
|
|
Municipal
|
|
|
2,297
|
|
|
|
|
|
Residential mortgage-backed
|
|
|
82,399
|
|
|
|
456
|
|
Commercial mortgage-backed
|
|
|
17,102
|
|
|
|
641
|
|
Asset backed
|
|
|
1,313
|
|
|
|
|
|
Equities
|
|
|
60,082
|
|
|
|
24,503
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,092,182
|
|
|
$
|
112,553
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth certain information regarding the
credit ratings (provided by major rating agencies) of the
Companys fixed maturity securities and short-term
investments classified as trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
As at December 31, 2010
|
|
Fair Value
|
|
|
Fair Value
|
|
|
AAA
|
|
$
|
395,881
|
|
|
|
|
|
|
|
38.4
|
%
|
AA
|
|
|
177,302
|
|
|
|
|
|
|
|
17.2
|
%
|
A
|
|
|
400,314
|
|
|
|
|
|
|
|
38.8
|
%
|
BBB or lower
|
|
|
51,983
|
|
|
|
|
|
|
|
5.0
|
%
|
Not Rated
|
|
|
6,620
|
|
|
|
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,032,100
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Investments
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Private equities
|
|
$
|
104,109
|
|
|
$
|
77,359
|
|
Bond funds
|
|
|
102,279
|
|
|
|
|
|
Hedge fund
|
|
|
22,037
|
|
|
|
|
|
Other
|
|
|
6,289
|
|
|
|
4,442
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
234,714
|
|
|
$
|
81,801
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, the Company had
$104.1 million and $77.4 million, respectively, of
other investments recorded in private equities which represented
2.4% and 2.3% of total investments and cash and cash equivalents
as of December 31, 2010 and 2009, respectively. All of the
Companys investments in private equities are subject to
restrictions on redemptions and sales that are determined by the
governing documents and limit the Companys ability to
liquidate these investments in the short term. Due to a lag in
the valuations reported by the managers, the Company records
changes in the investment value with up to a three-month lag.
These investments are accounted for at estimated fair value,
determined by the Companys proportionate share of the net
asset value of the investee reduced by any impairment charges.
As of December 31, 2010 and 2009, the Company had unfunded
141
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
capital commitments relating to its other investments of
$84.7 million and $101.1 million, respectively. See
Note 16 for details of other investments with related
parties.
Our bond fund holdings comprise a number of positions in
diversified bond mutual funds managed by
third-party
managers.
Other-Than-Temporary
Impairment Process
The Company assesses whether declines in the fair value of its
fixed maturity investments, both
available-for-sale
and
held-to-maturity,
represent impairments that are
other-than-temporary
by reviewing each fixed maturity investment that is impaired
and: (1) determining if the Company has the intent to sell
the fixed maturity investment or (2) determining if it is
more likely than not that the Company will be required to sell
the fixed maturity investment before its anticipated recovery;
and (3) assessing whether a credit loss exists, that is,
where the Company expects that the present value of the cash
flows expected to be collected from the fixed maturity
investment are less than the amortized cost basis of the
investment.
The Company had no planned sales of its fixed maturity
investments classified as
available-for-sale
as at December 31, 2010 and 2009. In assessing whether it
is more likely than not that the Company will be required to
sell a fixed maturity investment before its anticipated
recovery, the Company considers various factors including its
future cash flow requirements, legal and regulatory
requirements, the level of its cash, cash equivalents, short
term investments and fixed maturity investments available for
sale in an unrealized gain position, and other relevant factors.
For the year ended December 31, 2010 and 2009, the Company
did not recognize any
other-than-temporary
impairments due to required sales.
In evaluating credit losses, the Company considers a variety of
factors in the assessment of a fixed maturity investment
including: (1) the time period during which there has been
a significant decline below cost; (2) the extent of the
decline below cost and par; (3) the potential for the fixed
maturity investment to recover in value; (4) an analysis of
the financial condition of the issuer; (5) the rating of
the issuer; and (6) failure of the issuer of the fixed
maturity investment to make scheduled interest or principal
payments.
Based on the factors described above, the Company determined
that, as at December 31, 2010, no credit losses existed. As
at December 31, 2009, a credit loss existed for two fixed
maturity investments. The impairment of $0.9 million was
included as part of the Companys net earnings.
Fair
Value of Financial Instruments
Fair value is defined as the price at which to sell an asset or
transfer a liability (i.e. the exit price) in an
orderly transaction between market participants. The Company
uses a fair value hierarchy that gives the highest priority to
quoted prices in active markets and the lowest priority to
unobservable data. The hierarchy is broken down into three
levels as follows:
|
|
|
|
|
Level 1 Valuations based on unadjusted quoted
prices in active markets for identical assets or liabilities
that the Company has the ability to access. Valuation
adjustments and block discounts are not applied to Level 1
instruments.
|
|
|
|
Level 2 Valuations based on quoted prices in
active markets for similar assets or liabilities, quoted prices
for identical assets or liabilities in inactive markets, or for
which significant inputs are observable (e.g. interest rates,
yield curves, prepayment speeds, default rates, loss severities,
etc.) or can be corroborated by observable market data.
|
|
|
|
Level 3 Valuations based on inputs that are
unobservable and significant to the overall fair value
measurement. The unobservable inputs reflect the Companys
own judgment about assumptions that market participants might
use.
|
142
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of valuation techniques or models the
Company uses to measure fair value by asset and liability
classes.
Fixed
Maturity Investments
The Companys fixed maturity portfolio is managed by the
Companys Chief Investment Officer and outside investment
advisors. The Company uses inputs from nationally recognized
pricing services, including pricing vendors, index providers and
broker-dealers to estimate fair value measurements for all of
its fixed maturity investments. These pricing services include
FT Interactive Data, Barclays Capital Aggregate Index
(formerly Lehman Index), Reuters Pricing Service and others.
In general, the independent pricing services use observable
market inputs including, but not limited to, investment yields,
credit risks and spreads, benchmark curves, benchmarking of like
securities, non-binding broker-dealer quotes, reported trades
and sector groupings to determine the fair value. In addition,
pricing services use valuation models, 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 the Companys fixed maturities
by asset class.
|
|
|
|
|
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. The
significant inputs 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 within
Level 2.
|
|
|
|
Non-U.S. government
securities consist of bonds issued by
non-U.S. governments
and agencies along with supranational organizations. The
significant inputs 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 within
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 within
Level 2. Where pricing is unavailable from pricing
services, the Company obtains 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. In this event, securities are classified within
Level 3. As at December 31, 2010, the Company had one
corporate security classified 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 within Level 2.
|
|
|
|
Asset-backed securities consist primarily of investment-grade
bonds backed by pools of loans with a variety of underlying
collateral. The significant inputs used to determine the fair
value of these securities includes the spread above the
risk-free yield curve, reported trades, benchmark yields,
broker-dealer quotes, prepayment speeds, and default rates.
These are considered observable market inputs and, therefore,
the fair values of these securities are classified within
Level 2.
|
|
|
|
Residential and commercial mortgage-backed securities include
both agency and non-agency originated securities. The
significant inputs used to determine the fair value of these
securities include the spread above
|
143
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
the risk-free yield curve, reported trades, benchmark yields,
broker-dealer quotes, prepayment speeds, and default rates.
These are considered observable market inputs and, therefore,
the fair values of these securities are classified within
Level 2. Where pricing is unavailable from pricing
services, the Company obtains 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. In this event, securities are classified within
Level 3. As at December 31, 2010, the Company had one
commercial mortgage-backed security classified as Level 3.
|
To validate the techniques or models used by the pricing
services, the Company compares the fair value estimates to its
knowledge of the current market and will challenge any prices
deemed not to be representative of fair value.
As of December 31, 2010, there were no material differences
between the prices obtained from the pricing services and the
fair value estimates developed by the Company.
Equity
Securities
The Companys equity securities are managed by two external
advisors. Through these third parties, the Company uses
nationally recognized pricing services, including pricing
vendors, index providers and broker-dealers to estimate fair
value measurements for all of its equity securities. These
pricing services include FT Interactive Data and others.
The Company has categorized all of its investments in common
stock as Level 1 investments because the fair values of
these securities are based on quoted prices in active markets
for identical assets or liabilities. The Company has categorized
all of its investments in preferred stock as Level 2
(except one which was categorized as Level 3) because
their fair value estimates are based on observable market data.
Other
Investments
For its investments in private equities, the Company measures
fair value by obtaining the most recently published net asset
value as advised by the external fund manager or third-party
administrator. The use of net asset value as an estimate of the
fair value for investments in certain entities that calculate
net asset value is a permitted practical expedient. The
Companys private equity investments are mainly in the
financial services industry. The fund advisors continue to
evaluate the overall market environment, as well as specific
areas in the financial services sector, in order to identify
segments they believe will offer the most attractive investment
opportunities. The financial statements of each fund generally
are audited annually under U.S. GAAP, using fair value
measurement for the underlying investments. For all
publicly-traded companies within the funds, the Company has
valued those investments based on the latest share price. The
value of Affirmative Investment LLC (in which the Company owns a
non-voting 7% membership interest) is based on the market value
of the shares of Affirmative Insurance Holdings, Inc., a
publicly-traded company.
All of the Companys investments in private equities are
subject to restrictions on redemptions and sales that are
determined by the governing documents and limit the
Companys ability to liquidate those investments in the
short term. These restrictions have been in place since the
initial investment. The capital commitments are discussed in
detail in Note 20 to the consolidated financial statements.
The Company has classified private equities as Level 3
investments because they reflect the Companys own judgment
about the assumptions that market participants might use.
For its investment in the hedge fund, the Company measures fair
value by obtaining the most recently published net asset value
as advised by the external fund manager or third-party
administrator. The use of net asset value as an estimate of the
fair value for investments in certain entities that calculate
net asset value is a permitted practical expedient. The adviser
of the fund intends to seek attractive risk-adjusted total
returns for the funds investors by acquiring, originating,
and actively managing a diversified portfolio of debt
securities, with a focus on
144
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
various forms of asset-backed securities and loans. The fund
will focus on investments that the adviser believes to be
fundamentally undervalued with current market prices that are
believed to be compelling relative to intrinsic value. The units
of account that are valued by the Company are its interests in
the fund and not the underlying holdings of such fund. Thus, the
inputs used by the Company to value its investment in the fund
may differ from the inputs used to value the underlying holdings
of such fund. The hedge fund is not currently eligible for
redemption due to imposed
lock-up
periods of three years from the time of the initial investment.
Once eligible, redemptions will be permitted quarterly with
90 days notice. There are no unfunded capital commitments
in relation to the hedge fund. The investment in the fund is
classified as Level 3 in the fair value hierarchy.
The bond funds in which the company invests have been classified
as Level 2 investments because their fair value is
estimated using the net asset value reported by Bloomberg and
they have daily liquidity.
Fair
Value Measurements
In accordance with the provisions of the Fair Value Measurement
and Disclosure topic of the Codification, the Company has
categorized its investments that are recorded at fair value
among levels as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Total Fair
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
U.S. government and agency
|
|
$
|
|
|
|
$
|
227,803
|
|
|
$
|
|
|
|
$
|
227,803
|
|
Non-U.S.
government
|
|
|
|
|
|
|
386,866
|
|
|
|
|
|
|
|
386,866
|
|
Corporate
|
|
|
|
|
|
|
1,346,854
|
|
|
|
530
|
|
|
|
1,347,384
|
|
Municipal
|
|
|
|
|
|
|
2,297
|
|
|
|
|
|
|
|
2,297
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
102,506
|
|
|
|
|
|
|
|
102,506
|
|
Commercial mortgage-backed
|
|
|
|
|
|
|
37,927
|
|
|
|
914
|
|
|
|
38,841
|
|
Asset backed
|
|
|
|
|
|
|
28,613
|
|
|
|
|
|
|
|
28,613
|
|
Equities
|
|
|
56,369
|
|
|
|
138
|
|
|
|
3,575
|
|
|
|
60,082
|
|
Other investments
|
|
|
|
|
|
|
102,279
|
|
|
|
132,435
|
|
|
|
234,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
56,369
|
|
|
$
|
2,235,283
|
|
|
$
|
137,454
|
|
|
$
|
2,429,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
Total Fair
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Value
|
|
|
U.S. government and agency
|
|
$
|
|
|
|
$
|
76,226
|
|
|
$
|
|
|
|
$
|
76,226
|
|
Non-U.S.
government
|
|
|
|
|
|
|
37,186
|
|
|
|
|
|
|
|
37,186
|
|
Corporate
|
|
|
|
|
|
|
87,083
|
|
|
|
|
|
|
|
87,083
|
|
Residential mortgage-backed
|
|
|
|
|
|
|
2,012
|
|
|
|
|
|
|
|
2,012
|
|
Commercial mortgage-backed
|
|
|
|
|
|
|
|
|
|
|
641
|
|
|
|
641
|
|
Equities
|
|
|
21,203
|
|
|
|
|
|
|
|
3,300
|
|
|
|
24,503
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
81,801
|
|
|
|
81,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
21,203
|
|
|
$
|
202,507
|
|
|
$
|
85,742
|
|
|
$
|
309,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 year
ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
Other
|
|
|
Equity
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Securities
|
|
|
Total
|
|
|
Level 3 investments as of January 1, 2010
|
|
$
|
641
|
|
|
$
|
81,801
|
|
|
$
|
3,300
|
|
|
$
|
85,742
|
|
Net purchases (sales and distributions)
|
|
|
579
|
|
|
|
36,052
|
|
|
|
|
|
|
|
36,631
|
|
Total realized and unrealized losses
|
|
|
224
|
|
|
|
14,582
|
|
|
|
275
|
|
|
|
15,081
|
|
Net transfers in and/or (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 investments as of December 31, 2010
|
|
$
|
1,444
|
|
|
$
|
132,435
|
|
|
$
|
3,575
|
|
|
$
|
137,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of net gains/(losses) for the year included in
earnings attributable to the fair value of changes in assets
still held at December 31, 2010 was $16.3 million. Of
this amount, $0.5 million was included in net realized and
unrealized gains/(losses) and $15.8 million was included in
net investment income.
The following table presents a reconciliation of the beginning
and ending balances for all investments measured at fair value
on a recurring basis using Level 3 inputs during the year
ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
Other
|
|
|
Equity
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Securities
|
|
|
Total
|
|
|
Level 3 investments as of January 1, 2009
|
|
$
|
352
|
|
|
$
|
60,237
|
|
|
$
|
|
|
|
$
|
60,589
|
|
Net purchases (sales and distributions)
|
|
|
|
|
|
|
15,967
|
|
|
|
2,006
|
|
|
|
17,973
|
|
Total realized and unrealized losses
|
|
|
289
|
|
|
|
5,597
|
|
|
|
1,294
|
|
|
|
7,180
|
|
Net transfers in and/or (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 investments as of December 31, 2009
|
|
$
|
641
|
|
|
$
|
81,801
|
|
|
$
|
3,300
|
|
|
$
|
85,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of net gains/(losses) for the year included in
earnings attributable to the fair value of changes in assets
still held at December 31, 2009 was $6.5 million. Of
this amount, $1.6 million was included in net realized and
unrealized gains/(losses) and $4.9 million was included in
net investment income.
During the years ended December 31, 2010, 2009 and 2008,
proceeds from sales and maturities of
available-for-sale
securities were $347.2 million, $688.2 million and
$263.3 million, respectively. Gross realized gains on sale
of
available-for-sale
securities were $1.6 million, $0.8 million and
$0.3 million, respectively, and gross realized losses on
sale of
available-for-sale
securities were $nil, $1.6 million and $0.1 million,
respectively. Unrealized gains on trading securities were
$5.3 million and $4.9 million for the years ended
December 31, 2010 and 2009, respectively.
Major categories of net investment income are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Interest from cash and cash equivalents and short-term
investments
|
|
$
|
15,951
|
|
|
$
|
27,938
|
|
|
$
|
71,342
|
|
Interest from fixed maturities
|
|
|
59,187
|
|
|
|
42,842
|
|
|
|
26,549
|
|
Other
|
|
|
14,277
|
|
|
|
12,935
|
|
|
|
13,217
|
|
Amortization of bond premiums and discounts
|
|
|
(9,304
|
)
|
|
|
(5,716
|
)
|
|
|
1,278
|
|
Other investments
|
|
|
21,470
|
|
|
|
5,201
|
|
|
|
(84,117
|
)
|
Investment expenses
|
|
|
(1,675
|
)
|
|
|
(1,829
|
)
|
|
|
(1,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
99,906
|
|
|
$
|
81,371
|
|
|
$
|
26,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Investments
The Company is required to maintain investments on deposit with
various regulatory authorities to support its insurance and
reinsurance operations. The investments on deposit are available
to settle insurance and reinsurance liabilities. The Company
also utilizes trust accounts to collateralize business with its
insurance and reinsurance counterparties. These trust accounts
generally take the place of letter of credit requirements. The
investments in trust as collateral are primarily highly rated
fixed maturity securities. The carrying value of the
Companys restricted investments as of December 31,
2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets used for collateral in trust for third-party agreements
|
|
$
|
371,834
|
|
|
$
|
214,149
|
|
Deposits with regulatory authorities
|
|
|
33,970
|
|
|
|
12,998
|
|
Others
|
|
|
62,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
468,241
|
|
|
$
|
227,147
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
DERIVATIVE
INSTRUMENTS
|
In October 2010, the Company entered into a foreign currency
forward exchange contract as part of its overall foreign
currency risk management strategy. On the value date,
June 30, 2011, the Company will sell AU$45.0 million
for $42.5 million. The contract exchange rate is
AU$1 for $0.9439. As at December 31, 2010, the fair
value of the contract was $(3.6) million, the effect of
which the Company has recognized as a foreign exchange loss
included as part of its net earnings.
|
|
8.
|
REINSURANCE
BALANCES RECEIVABLE
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Recoverable from reinsurers on:
|
|
|
|
|
|
|
|
|
Outstanding losses
|
|
$
|
425,336
|
|
|
$
|
263,545
|
|
Losses incurred but not reported
|
|
|
141,118
|
|
|
|
102,220
|
|
Fair value adjustments
|
|
|
(41,014
|
)
|
|
|
(18,037
|
)
|
|
|
|
|
|
|
|
|
|
Total reinsurance reserves recoverable
|
|
|
525,440
|
|
|
|
347,728
|
|
Paid losses
|
|
|
436,002
|
|
|
|
290,534
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
961,442
|
|
|
$
|
638,262
|
|
|
|
|
|
|
|
|
|
|
The fair value adjustment, determined on acquisition of
reinsurance subsidiaries, was based on the estimated timing of
loss and loss adjustment expense recoveries and an assumed
interest rate equivalent to a risk free rate for securities with
similar duration to the reinsurance receivables acquired plus a
spread to reflect credit risk, and is amortized over the
estimated recovery period, as adjusted for accelerations on
commutation settlements, using the constant yield method.
The Companys acquired reinsurance subsidiaries, prior to
acquisition, used retrocessional agreements to reduce their
exposure to the risk of insurance and reinsurance assumed. The
Company remains liable to the extent that retrocessionaires do
not meet their obligations under these agreements, and
therefore, the Company evaluates and monitors concentration of
credit risk among its reinsurers. Provisions are made for
amounts considered potentially uncollectible.
147
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2010, the Companys top 10 reinsurers
accounted for 75.5% of reinsurance recoverables (which includes
loss reserves recoverable and recoverables on paid losses) and
included $99.6 million of IBNR recoverable
(December 31, 2009: $87.1 million). Reinsurance
recoverables by reinsurer were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Reinsurance
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
Recoverable
|
|
|
% of Total
|
|
|
Recoverable
|
|
|
% of Total
|
|
|
Top 10 reinsurers
|
|
$
|
726,201
|
|
|
|
75.5
|
%
|
|
$
|
529,743
|
|
|
|
83.0
|
%
|
Other reinsurers balances > $1 million
|
|
|
36,504
|
|
|
|
3.8
|
%
|
|
|
16,408
|
|
|
|
2.6
|
%
|
Other reinsurers balances < $1 million
|
|
|
198,737
|
|
|
|
20.7
|
%
|
|
|
92,111
|
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
961,442
|
|
|
|
100.0
|
%
|
|
$
|
638,262
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, the provision for
uncollectible reinsurance relating to losses recoverable was
$381.4 million and $397.6 million, respectively. To
estimate the provision for uncollectible reinsurance
recoverables, the reinsurance recoverables are first allocated
to applicable reinsurers. This determination is based on a
detailed process rather than an estimate, although an element of
judgment is applied. As part of this process, ceded IBNR is
allocated by reinsurer.
The Company uses 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 reinsurers 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 their ability to settle the
reinsurance balances) as well as other key considerations and
assumptions, such as claims and coverage issues.
As at December 31, 2010 and 2009, reinsurance receivables
with a carrying value of $398.8 million and
$409.6 million, respectively, were associated with two and
three reinsurers, respectively, which each represented 10% or
more of total reinsurance balances receivable. As at
December 31, 2010, the two reinsurers had credit ratings of
AA- or higher. In the event that all or any of the reinsuring
companies are unable to meet their obligations under existing
reinsurance agreements, the Company will be liable for such
defaulted amounts.
|
|
9.
|
INVESTMENT
IN PARTLY OWNED COMPANY
|
On June 13, 2008, the Companys indirect subsidiary
Virginia completed the acquisition from Dukes Place Holdings,
L.P. (a portfolio company of GSC European Mezzanine
Fund II, L.P.) of 44.4% of the outstanding capital stock of
Stonewall, which at that time was the parent of two Rhode
Island-domiciled insurers in run-off, Stonewall Insurance
Company and Seaton. The total purchase price, including
acquisition costs, was $21.4 million and was funded from
available cash on hand. Stonewall entered into a definitive
agreement on December 3, 2009 for the sale of its shares in
Stonewall Insurance Company to Columbia Insurance Company, an
affiliate of National Indemnity Company (an indirect subsidiary
of Berkshire Hathaway, Inc.), for a sale price of
$56.0 million, subject to certain post-closing purchase
price adjustments that brought the total consideration received
to $60.4 million. The transaction received the required
regulatory approval on March 31, 2010 and subsequently
closed on April 7, 2010. The proceeds received by Stonewall
were later distributed between Dukes Place Holdings, L.P. and
Virginia. The investment was carried on the equity basis until
the distribution. When the Company carries an investment on the
equity basis, the investment is initially recorded at cost and
adjusted to reflect the Companys share of after-tax
earnings or losses and unrealized investment gains and losses
and reduced by dividends.
As discussed in Note 3 above, on August 3, 2010,
Virginia acquired 55.6% of the shares of Seaton that it
previously did not own for $nil consideration, resulting in
Virginia owning 100% of Seaton. The acquisition of the Seaton
shares was a result of the distribution by Stonewall of proceeds
and certain other assets following its sale of Stonewall
Insurance Company. Virginia received 100% of the final
$1.4 million distribution from Stonewall.
148
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The balance of the investment in partly owned company was $nil
and $20.9 million at December 31, 2010 and 2009,
respectively.
|
|
10.
|
LOSSES
AND LOSS ADJUSTMENT EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Outstanding
|
|
$
|
2,122,168
|
|
|
$
|
1,555,112
|
|
Incurred but not reported
|
|
|
1,467,239
|
|
|
|
1,221,463
|
|
Fair value adjustment
|
|
|
(298,132
|
)
|
|
|
(297,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,291,275
|
|
|
$
|
2,479,136
|
|
|
|
|
|
|
|
|
|
|
The fair value adjustment, or FVA, represents the difference
between the carrying value of reserves of acquired companies at
the date of acquisition and the fair value of the reserves. The
fair value of reserves is based on the estimated timing of
reserve settlements discounted at a risk free rate and a risk
margin determined by management. The FVA is amortized over the
estimated payout period, as adjusted for accelerations on
commutation settlements, using the constant yield method.
In establishing the reserves for losses and loss adjustment
expenses 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
unasserted claims. Estimates of the reserves are reviewed and
updated continually. Developed case law and adequate claim
history do not exist 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 the Companys potential losses for these
claims.
There can be no assurance that the reserves established by the
Company will be adequate or will not be adversely affected by
the development of other latent exposures. The Companys
liability for unpaid losses and loss adjustment expenses as of
December 31, 2010 and 2009 included $736.2 million and
$667.6 million, respectively, that represented an estimate
of its net ultimate liability for asbestos and environmental
claims. The gross liability for such claims as at
December 31, 2010 and 2009 was $825.2 million and
$751.0 million, respectively.
149
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below provides a reconciliation of the beginning and
ending reserves for losses and loss adjustment expenses for the
years ended December 31, 2010, 2009 and 2008. Losses
incurred and paid are reflected net of reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance as at January 1
|
|
$
|
2,479,136
|
|
|
$
|
2,798,287
|
|
|
$
|
1,591,449
|
|
Less: total reinsurance reserves recoverable
|
|
|
347,728
|
|
|
|
394,575
|
|
|
|
427,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,131,408
|
|
|
|
2,403,712
|
|
|
|
1,163,485
|
|
Effect of exchange rate movement
|
|
|
(3,836
|
)
|
|
|
73,512
|
|
|
|
(124,989
|
)
|
Net reduction in ultimate losses and loss adjustment expense
liabilities
|
|
|
(311,834
|
)
|
|
|
(259,627
|
)
|
|
|
(242,104
|
)
|
Net losses paid
|
|
|
(294,996
|
)
|
|
|
(257,414
|
)
|
|
|
(174,013
|
)
|
Acquired on purchase of subsidiaries
|
|
|
459,362
|
|
|
|
114,595
|
|
|
|
1,408,046
|
|
Retroactive reinsurance contracts assumed
|
|
|
785,731
|
|
|
|
56,630
|
|
|
|
373,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as at December 31
|
|
|
2,765,835
|
|
|
|
2,131,408
|
|
|
|
2,403,712
|
|
Plus: total reinsurance reserves recoverable
|
|
|
525,440
|
|
|
|
347,728
|
|
|
|
394,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at December 31
|
|
$
|
3,291,275
|
|
|
$
|
2,479,136
|
|
|
$
|
2,798,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net reduction in ultimate loss and loss adjustment expense
liabilities for the years ended December 31, 2010, 2009 and
2008 was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net losses paid
|
|
$
|
(294,996
|
)
|
|
$
|
(257,414
|
)
|
|
$
|
(174,013
|
)
|
Net change in case and LAE reserves
|
|
|
336,141
|
|
|
|
214,079
|
|
|
|
147,576
|
|
Net change in IBNR
|
|
|
236,920
|
|
|
|
318,160
|
|
|
|
187,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
278,065
|
|
|
|
274,825
|
|
|
|
161,437
|
|
Reduction in provisions for bad debt
|
|
|
49,556
|
|
|
|
11,718
|
|
|
|
36,136
|
|
Reduction in provisions for unallocated loss adjustment expense
liabilities
|
|
|
39,651
|
|
|
|
50,412
|
|
|
|
69,056
|
|
Amortization of fair value adjustments
|
|
|
(55,438
|
)
|
|
|
(77,328
|
)
|
|
|
(24,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities
|
|
$
|
311,834
|
|
|
$
|
259,627
|
|
|
$
|
242,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in case and loss adjustment expense reserves, or
LAE reserves, comprises the movement during the year in specific
case reserve liabilities as a result of claims settlements or
changes advised to the Company by its policyholders and
attorneys, less changes in case reserves recoverable advised by
the Company to its reinsurers as a result of the settlement or
movement of assumed claims. Net reduction in incurred but not
reported, or IBNR, represents the change in the Companys
actuarial estimates of losses incurred but not reported.
Year
Ended December 31, 2010
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2010 was
$311.8 million, excluding the impact of foreign exchange
rate movements of $3.8 million and including both net
reduction in ultimate loss and loss adjustment expense
liabilities of $19.0 million relating to companies and
portfolios acquired during the year and premium and commission
adjustments triggered by incurred losses of $16.5 million.
150
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2010 of
$311.8 million was attributable to a reduction in estimates
of net ultimate losses of $278.1 million, a reduction in
aggregate provisions for bad debts of $49.6 million and a
reduction in estimates of unallocated loss adjustment expense
liabilities of $39.7 million, relating to 2010 run-off
activity, partially offset by the amortization, over the
estimated payout period, of fair value adjustments relating to
companies acquired amounting to $55.4 million.
The reduction in estimates of net ultimate losses of
$278.1 million comprised net incurred favorable loss
development of $41.1 million and reductions in IBNR
reserves of $236.9 million. The decrease in the estimate of
IBNR loss reserves of $236.9 million was comprised of
$67.8 million relating to asbestos liabilities,
$4.2 million relating to environmental liabilities and
$164.9 million relating to all other remaining liabilities.
The reduction in IBNR was a result of the application, on a
basis consistent with the assumptions applied in the prior
period, of the Companys actuarial methodologies to loss
data to estimate loss reserves required to cover liabilities for
unpaid losses and loss adjustment expenses. The prior period
estimate of net IBNR liabilities was reduced as a result of the
combined impact of loss development activity during 2010,
including commutations and the favorable trend of loss
development related to non-commuted policies compared to prior
forecasts. The net incurred favorable loss development of
$41.1 million, resulting from settlement of net advised
case and LAE reserves of $336.1 million for net paid losses
of $295.0 million, related to the settlement of
non-commuted losses in the year and approximately 90
commutations of assumed and ceded exposures. Commutations
provide an opportunity for the Company to exit exposures to
entire policies with insureds and reinsureds at a discount to
the previous estimated ultimate liability. As a result of
exiting all exposures to such policies, all advised case
reserves and IBNR liabilities relating to that insured or
reinsured are eliminated. This often results in a net gain
irrespective of whether the settlement exceeds the advised case
reserves. The Company adopts a disciplined approach to the
review and settlement of non-commuted claims through claims
adjusting and the inspection of underlying policyholder records
such that settlements of assumed exposures may often be achieved
below the level of the originally advised loss, and settlements
of ceded receivables may often be achieved at levels above
carried balances. Of the 90 commutations completed during 2010,
three related to the Companys top ten insured
and/or
reinsured exposures, including one commutation completed shortly
after December 31, 2009 whereby the related reduction in
IBNR reserves was recorded in the reduction in net ultimate
losses for the year ended December 31, 2009, and one
related to the commutation of one of the Companys largest
ceded reinsurance assets. The remaining 86 commutations, of
which approximately 43% were completed during the three months
ended December 31, 2010, were of a smaller size, consistent
with the Companys approach of targeting significant
numbers of cedant and reinsurer relationships, as well as
targeting significant individual cedant and reinsurer
relationships. The combination of the claims settlement activity
in 2010, including commutations (but excluding the impact of the
commutation that was completed subsequent to the year ended
December 31, 2009) and the actuarial estimation of
IBNR reserves required for the remaining non-commuted exposures
(which took into account the favorable trend of loss development
in 2010 related to such exposures compared to prior forecasts),
resulted in the Companys management concluding that the
loss development activity that occurred subsequent to the prior
reporting period provided sufficient new information to warrant
a reduction in IBNR reserves of $236.9 million in 2010.
The reduction in aggregate provisions for bad debt of
$49.6 million was a result of the collection, primarily
during the three months ended December 31, 2010, of certain
reinsurance receivables against which bad debt provisions had
been provided in earlier periods.
Year
Ended December 31, 2009
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2009 was
$259.6 million, excluding the impact of adverse foreign
exchange rate movements of $73.5 million and including both
net reduction in ultimate loss and loss adjustment expense
liabilities of $4.8 million relating to companies acquired
during the year and premium and commission adjustments of
$5.5 million triggered by incurred losses.
151
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2009 of
$259.6 million was attributable to a reduction in estimates
of net ultimate losses of $274.8 million, a reduction in
aggregate provisions for bad debts of $11.7 million and a
reduction in estimates of loss adjustment expense liabilities of
$50.4 million, relating to 2009 run-off activity, partially
offset by the amortization, over the estimated payout period, of
fair value adjustments relating to companies acquired amounting
to $77.3 million.
The reduction in estimates of net ultimate losses of
$274.8 million comprised net incurred loss development of
$43.3 million and reductions in IBNR reserves of
$318.2 million. The decrease in the estimate of IBNR loss
reserves of $318.2 million was comprised of
$158.4 million relating to asbestos liabilities,
$17.0 million relating to environmental liabilities and
$142.8 million relating to all other remaining liabilities.
The reduction in IBNR is a result of the application, on a basis
consistent with the assumptions applied in the prior period, of
the Companys actuarial methodologies to loss data to
estimate loss reserves required to cover liabilities for unpaid
losses and loss adjustment expenses. The prior period estimate
of net IBNR liabilities was reduced as a result of the combined
impact of loss development activity during 2009, including
commutations and the favorable trend of loss development related
to non-commuted policies compared to prior forecasts. The net
incurred loss development of $43.3 million resulting from
settlement of net advised case and LAE reserves of
$214.1 million for net paid losses of $257.4 million,
related to the settlement of non-commuted losses in the year and
approximately 79 commutations of assumed and ceded exposures. Of
the 79 commutations completed during 2009, two related to the
Companys top ten insured
and/or
reinsured exposures. The remaining 77 were of a smaller size,
consistent with the Companys approach of targeting
significant numbers of cedant and reinsurer relationships, as
well as targeting significant individual cedant and reinsurer
relationships. Approximately 76% of commutations completed in
2009 related to commutations completed during the three months
ended December 31, 2009. Subsequent to the year end, one of
the Companys insurance entities completed a commutation of
another of one of its top ten reinsured exposures. The
combination of the claims settlement activity in 2009, including
commutations, and the actuarial estimation of IBNR reserves
required for the remaining non-commuted exposures (which took
into account the favorable trend of loss development in 2009
related to such exposures compared to prior forecasts, as well
as the impact of the commutation that was completed subsequent
to the year end), resulted in the Companys management
concluding that the loss development activity that occurred
subsequent to the prior reporting period provided sufficient new
information to warrant a reduction in IBNR reserves of
$318.2 million in 2009.
The reduction in aggregate provisions for bad debt of
$11.7 million was a result of the collection, primarily
during the three months ended March 31, 2009, of certain
reinsurance receivables against which bad debt provisions had
been provided in earlier periods.
Year
Ended December 31, 2008
The net reduction in ultimate loss and loss adjustment expense
liabilities for the year ended December 31, 2008 was
$242.1 million, excluding the impacts of favorable foreign
exchange rate movements of $36.1 million (relating to
companies acquired in 2007 and earlier) and including both net
reduction in ultimate loss and loss adjustment expense
liabilities of $149.4 million relating to companies
acquired during the year and premium and commission adjustments
of $0.1 million triggered by incurred losses.
The net reduction in ultimate loss and loss adjustment expense
liabilities for 2008 of $242.1 million was attributable to
a reduction in estimates of net ultimate losses of
$161.4 million, a reduction in aggregate provisions for bad
debt of $36.1 million (excluding $3.1 million relating
to one of the Companys entities that benefited from
substantial stop loss reinsurance protection discussed below)
and a reduction in estimates of loss adjustment expense
liabilities of $69.1 million, relating to 2008 run-off
activity, partially offset by the amortization, over the
estimated payout period, of fair value adjustments relating to
companies acquired amounting to $24.5 million.
152
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reduction in estimates of net ultimate losses of
$161.4 million comprised the following:
(i) A reduction in estimates of net ultimate losses of
$21.7 million in one of the Companys insurance
entities that benefited from substantial stop loss reinsurance
protection. Net incurred loss development relating to this
entity of $21.6 million was offset by reductions in IBNR
reserves of $94.8 million and reductions in provisions for
bad debt of $3.1 million, resulting in a net reduction in
estimates of ultimate losses of $76.3 million. The entity
in question benefited, until December 18, 2008, from
substantial stop loss reinsurance protection whereby
$54.6 million of the net reduction in ultimate losses of
$76.3 million was ceded to a single AA- rated reinsurer
such that the Company retained a reduction in estimates of net
ultimate losses relating to this entity of $21.7 million.
On December 18, 2008, the Company commuted the stop loss
reinsurance protection with the reinsurer for the receipt of
$190.0 million payable by the reinsurer to it over four
years together with interest compounded at 3.5% per annum. The
commutation resulted in no significant financial impact to the
Company. The decrease in the estimate of IBNR loss reserves of
$94.8 million for this one insurance entity was comprised
of $77.7 million relating to asbestos liabilities,
$9.0 million relating to environmental liabilities and
$8.1 million relating to all other remaining liabilities.
The reduction in IBNR is a result of the application, on a basis
consistent with the assumptions applied in the prior period, of
the Companys actuarial methodologies to loss data to
estimate loss reserves required to cover liabilities for unpaid
losses and loss adjustment expenses. The prior period estimate
of net IBNR liabilities was reduced as a result of the combined
impact of loss development activity during 2008, which was
comprised of the settlement of certain advised case reserves
below their prior period carried amounts, commutations completed
and the trend of loss development relating to non-commuted
policies compared to prior forecasts. The net incurred loss
development relating to this entity of $21.6 million,
whereby advised net case reserves of $25.0 million were
settled for net paid losses of $46.6 million, primarily
related to six commutations of assumed and ceded liabilities
completed during 2008. As a result of exiting all exposures to
such policies, all advised case reserves and IBNR liabilities
relating to that insured or reinsured were eliminated. This
often results in a net gain irrespective of whether the
settlement exceeds the advised case reserves. Of the six
commutations completed for this entity, of which the three
largest were completed during the three months ended
December 31, 2008, one was among its top ten assumed
exposures. The remaining five commutations were of a smaller
size, consistent with the Companys approach of targeting
significant numbers of cedant and reinsurer relationships, as
well as targeting significant individual cedant and reinsurer
relationships. The combination of the claims settlement activity
in 2008, including commutations, combined with the actuarial
estimation of IBNR reserves required for the remaining
non-commuted exposures (which took into account the favorable
trend of loss development in 2008 related to such exposures
compared to prior forecasts), resulted in the Companys
management concluding that the loss development activity that
occurred subsequent to the prior reporting period provided
sufficient new information to warrant a reduction in IBNR
reserves of $94.8 million for this one insurance entity in
2008.
(ii) A reduction in estimates of net ultimate losses of
$139.7 million in the Companys other insurance and
reinsurance entities comprised net favorable incurred loss
development of $24.1 million and reductions in IBNR
reserves of $115.6 million. The decrease in the estimate of
IBNR loss reserves of $115.6 million was comprised of
$23.8 million relating to asbestos liabilities,
$1.8 million relating to environmental liabilities and
$90.0 million relating to all other remaining liabilities.
The reduction in IBNR is a result of the application, on a basis
consistent with the assumptions applied in the prior period, of
the Companys actuarial methodologies to loss data to
estimate loss reserves required to cover liabilities for unpaid
losses and loss adjustment expenses. The prior period estimate
of net IBNR liabilities was reduced as a result of the combined
impact of favorable loss development activity during 2008, which
was comprised of the settlement of advised case reserves below
their prior period carried amounts, commutations completed and
the favorable trend of loss development related to non-commuted
policies compared to prior forecasts. The net favorable incurred
loss development in the Companys remaining insurance and
reinsurance entities of $24.1 million, whereby net advised
case and LAE reserves of $123.5 million were settled for
net paid losses of $99.4 million, primarily
153
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related to the settlement of non-commuted losses in the year
below carried reserves and approximately 59 commutations of
assumed and ceded exposures at less than case and LAE reserves.
Of the 59 commutations completed during 2008 for the
Companys other reinsurance and insurance companies, two
(both of which were completed during the three months ended
December 31, 2008) were among its top ten insured
and/or
reinsured exposures. The remaining 57 were of a smaller size,
consistent with the Companys approach of targeting
significant numbers of cedant and reinsurer relationships, as
well as targeting significant individual cedant and reinsurer
relationships.
Approximately 82% of commutations completed in 2008 related to
commutations completed during the three months ended
December 31, 2008. The combination of the claims settlement
activity in 2008, including commutations, with the actuarial
estimation of IBNR reserves required for the remaining
noncommuted exposures (which took into account the favorable
trend of loss development in 2008 related to such exposures
compared to prior forecasts), resulted in the Companys
management concluding that the loss development activity that
occurred subsequent to the prior reporting period provided
sufficient new information to warrant a reduction in IBNR
reserves of $115.6 million for the Companys remaining
insurance and reinsurance entities in 2008.
One of the Companys reinsurance companies had
retrocessional arrangements providing for full reinsurance of
all risks assumed. During the year, this entity commuted its
largest assumed liability and related retrocessional protection
whereby the subsidiary paid net losses of $222.0 million
and reduced net IBNR by the same amount, resulting in no gain or
loss to the Company.
The reduction in aggregate provisions for bad debt of
$36.1 million (excluding $3.1 million relating to one
of the Companys entities that benefited from substantial
stop loss reinsurance protection discussed above) was comprised
of: (1) $13.7 million as a result of the collection,
primarily during the three months ended December 31, 2008,
of certain reinsurance receivables against which bad debt
provisions had been provided in earlier periods,
(2) $8.5 million as a result of the revision of
estimates of bad debt provisions following the receipt of new
information during the three months ended December 31, 2008
and (3) $13.9 million as a result of reduced exposures
to reinsurers with bad debt provisions following the commutation
of assumed liabilities.
The Companys long-term debt consists of loan facilities
used to partially finance certain of the Companys
acquisitions or significant new business transactions along with
a loan outstanding in relation to the share repurchase
agreements (the Repurchase Agreements) entered into
with three of its executives and certain trusts and a
corporation affiliated with the executives. The Company draws
down on the loan facilities at the time of the acquisition or
significant new business transaction, although in some
circumstances the Company has made additional draw-downs to
refinance existing debt of the acquired company. The Company
incurred interest expense on its loan facilities and loan
outstanding relating to the Repurchase Agreements of
$10.3 million and $17.6 million for the years ended
December 31, 2010 and 2009, respectively.
154
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total amounts of loans payable outstanding as of
December 31, 2010 and 2009 totaled $245.3 million and
$255.0 million, respectively, and were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Facility
|
|
Date of Facility
|
|
|
2010
|
|
|
2009
|
|
|
Cumberland Facility B
|
|
|
March 4, 2008
|
|
|
$
|
|
|
|
$
|
67,071
|
|
Unionamerica Facility A
|
|
|
December 30, 2008
|
|
|
|
71,259
|
|
|
|
155,268
|
|
Unionamerica Facility B
|
|
|
December 30, 2008
|
|
|
|
154
|
|
|
|
32,622
|
|
Knapton
|
|
|
April 20, 2010
|
|
|
|
21,532
|
|
|
|
|
|
Enstar Group Facility A
|
|
|
December 29, 2010
|
|
|
|
52,100
|
|
|
|
|
|
Enstar Group Facility B
|
|
|
December 29, 2010
|
|
|
|
62,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term bank debt
|
|
|
|
|
|
|
207,945
|
|
|
|
254,961
|
|
Repurchase Agreements
|
|
|
October 1, 2010
|
|
|
|
37,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans payable
|
|
|
|
|
|
$
|
245,278
|
|
|
$
|
254,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumberland
In February 2008, the Companys wholly-owned subsidiary,
Cumberland Holdings Limited (Cumberland) entered
into a term facility agreement jointly with a London-based bank
and a German bank (the Cumberland Facility). On
March 4, 2008, Cumberland drew down AU$215.0 million
(approximately $197.5 million) from the Facility A
commitment (Cumberland Facility A) and
AU$86.0 million (approximately $79.0 million) from the
Facility B commitment (Cumberland Facility B) to
partially fund the Gordian acquisition.
The interest rate on Cumberland Facility A was LIBOR plus 2.00%
and was repayable in five years. Cumberland had fully repaid
Cumberland Facility A as of December 31, 2009.
The interest rate on Cumberland Facility B was LIBOR plus 2.75%
and was repayable in six years. The outstanding Cumberland
Facility B loan balance as of December 31, 2009 was
approximately AU$74.7 million (approximately
$67.1 million). Cumberland had fully repaid Cumberland
Facility B as of December 31, 2010.
Unionamerica
On December 30, 2008, in connection with the Unionamerica
Holdings Limited acquisition, Royston borrowed the full amount
of $184.6 million available under a term facilities
agreement (the Unionamerica Facilities Agreement)
with National Australia Bank Limited (NABL). Of that
amount, Royston borrowed $152.6 million under Facility A
(Unionamerica Facility A) and $32.0 million
under Facility B (Unionamerica Facility B).
Unionamerica Facility A was partially repaid in December 2010,
and as of December 31, 2010, the remaining outstanding loan
balance, inclusive of accrued interest, was $71.3 million
compared to $155.3 million as of December 31, 2009.
Unionamerica Facility B was fully repaid in December 2010, and
as of December 31, 2010, the remaining outstanding balance
of $0.2 million related to accrued interest outstanding. As
of December 31, 2009, the outstanding Unionamerica Facility
B loan balance, inclusive of accrued interest, was
$32.6 million.
The loans are secured by a lien covering all of the assets of
Royston. Unionamerica Facility A is repayable within three years
from October 3, 2008, the date of the Unionamerica
Facilities Agreement. Unionamerica Facility B was repayable
within four years from October 3, 2008. On August 4,
2009, Royston entered into an amendment and restatement of the
Unionamerica Facilities Agreement pursuant to which:
(1) NABLs participation in the original
$184.6 million facility was reduced from 100% to 50%, with
Barclays Bank PLC providing the remaining 50%; (2) the
guarantee provided by the Company of all of the obligations of
Royston under the Unionamerica Facilities Agreement was
terminated; and (3) the interest rate on the Facility A
portion was reduced from LIBOR
155
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
plus 3.50% to LIBOR plus 2.75% and the interest rate on the
Facility B portion was reduced from LIBOR plus 4.00% to LIBOR
plus 3.25%.
During the existence of a payment default, the interest rates
will be increased by 1.00%. During the existence of any event of
default (as specified in the Unionamerica Facilities Agreement),
the lenders may declare that all amounts outstanding under the
Unionamerica Facilities Agreement are immediately due and
payable, declare that all borrowed amounts be paid upon demand,
or proceed against the security. Amounts outstanding under the
Unionamerica Facilities Agreement are also subject to
acceleration by the lenders in the event of a change of control
of Royston, successful application by Royston or certain of its
affiliates (other than the Company) for listing on a stock
exchange, or total amounts outstanding under the facilities
decreasing below $10.0 million. The Unionamerica Facilities
Agreement contains various financial and business covenants for
Unionamerica Facilities A and B. As of December 31, 2010,
all of the financial covenants relating to the Unionamerica
facilities were met. The Flowers Fund has a 30% non-voting
equity interest in Royston Holdings Ltd., the direct parent
company of Royston.
In January 2011, the accrued interest outstanding of
$0.2 million relating to Unionamerica Facility B was
settled. In addition, on March 3, 2011, the Company repaid
an additional $40.5 million of the outstanding loan balance
of Unionamerica Facility A. As of March 3, 2011, the
remaining outstanding loan balance of Unionamerica
Facility A, inclusive of accrued interest, was
$30.6 million.
Knapton
In April 2010, Knapton Holdings entered into the Knapton
Facility, a term facility agreement with a London-based bank. On
April 20, 2010, Knapton Holdings drew down
$21.4 million from the Knapton Facility to partially
refinance the acquisition of Knapton. The interest rate on the
Knapton Facility is LIBOR plus 2.75%. The Knapton Facility is
repayable in three years and is secured by a first charge over
Knapton Holdings shares in Knapton. The Knapton Facility
contains various financial and business covenants, including
limitations on mergers and consolidations involving Knapton
Holdings and its subsidiaries. As of December 31, 2010, all
of the covenants relating to the Knapton Facility were met and
the outstanding loan balance, inclusive of accrued interest, was
$21.5 million.
EGL
Facility
On July 16, 2010, the Company entered into the EGL
Facility, an unsecured term facility agreement with a
London-based bank. On July 19, 2010, the Company drew down
$25.0 million from the EGL Facility to fund the acquisition
of PWAC. The interest rate on the EGL Facility was LIBOR plus
2.75% and was repayable in three months. The EGL Facility
contained various financial and business undertakings. On
September 13, 2010, the Company fully repaid the EGL
Facility.
Enstar
Group
On December 29, 2010, the Company, as borrower, and certain
of its subsidiaries, as guarantors, entered into a term facility
agreement with a London-based bank (the Enstar Facilities
Agreement). On December 30, 2010, the Company drew
down $52.1 million from the Facility A commitment
(Enstar Facility A) and $62.9 million from the
Facility B commitment (Enstar Facility B). The
drawdown of Enstar Facility B was used to partially fund the
obligations of one of the Companys subsidiaries under the
CIGNA reinsurance transaction with the remainder being used for
general corporate purposes. The drawdown of Enstar Facility A
was used to repay internal group loans. As of December 31,
2010, the outstanding loan balances, inclusive of accrued
interest, related to Enstar Facilities A and B were
$52.1 million and $62.9 million, respectively.
The loans are secured by a pledge of the shares of certain of
the Companys subsidiaries. Both Enstar Facilities A
and B must be repaid in three equal annual installments on the
anniversary date of the Enstar Facilities Agreement. Interest is
payable quarterly and the interest rate on both Enstar
Facilities A and B is LIBOR plus 3.00%. The Enstar
Facilities Agreement terminates on December 29, 2013.
156
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the existence of a payment default, the interest rates
will be increased by 1.00%. During the existence of any event of
default (as specified in the Enstar Facilities Agreement), the
lenders may declare that all or a portion of amounts outstanding
under the Enstar Facilities Agreement are immediately due and
payable, declare that all or a portion of borrowed amounts be
paid upon demand, or proceed against the security. The Enstar
Facilities Agreement contains various financial and business
covenants for Enstar Facilities A and B. As of
December 31, 2010, all of the financial covenants relating
to the Enstar Facilities A and B were met.
Clarendon
On March 4, 2011, the Company, through Clarendon Holdings,
Inc., entered into a $106.5 million term facility agreement
(the Clarendon Facility) with a London-based bank.
The Clarendon Facility provides for a four-year term loan
facility, which will be available to be drawn to fund up to 50%
of the purchase price of Clarendon. As of March 4, 2011,
Clarendon Holdings, Inc. has not borrowed any of the amount
available under the Clarendon Facility.
The Clarendon Facility will be secured by a security interest in
all of the assets of Clarendon Holdings, Inc., as well as a
first priority lien on the stock of both Clarendon Holdings,
Inc. and Clarendon. Interest is payable at the end of each
interest period chosen by Clarendon Holdings, Inc. or, at the
latest, each six months. The interest rate is LIBOR plus 2.75%.
The Clarendon Facility is subject to various financial and
business covenants, including limitations on mergers and
consolidations, restrictions as to disposition of stock and
limitations of liens on the stock.
During the existence of any payment default, the interest rate
is increased by 1.0%. During the existence of any event of
default (as specified in the term facility agreement), the
lenders may declare all or a portion of outstanding amounts
immediately due and payable, declare all or a portion of
borrowed amounts payable upon demand, or proceed against the
security. The Clarendon Facility terminates and all amounts
borrowed must be repaid on the fourth anniversary of the date
the term loan is made.
The fair values of the Companys floating rate loans
approximate their book value.
Share
repurchase agreements
On October 1, 2010, the Company entered into the Repurchase
Agreements with three of its executives and certain trusts and a
corporation affiliated with the executives to repurchase an
aggregate of 800,000 ordinary shares of the Company at a price
of $70.00 per share. The Company repurchased an aggregate of
600,000 ordinary shares from Dominic F. Silvester (the
Companys Chief Executive Officer and Chairman of the Board
of Directors) and a trust of which he and his immediate family
are the sole beneficiaries, 100,000 ordinary shares from a trust
of which Paul J. OShea (the Companys Joint Chief
Operating Officer, Executive Vice President and a member of its
Board of Directors) and his immediate family are the sole
beneficiaries and 100,000 ordinary shares from a corporation
owned by a trust of which Nicholas A. Packer (the Companys
Joint Chief Operating Officer and Executive Vice President) and
his immediate family are the sole beneficiaries. The repurchase
transactions closed on October 14, 2010. The aggregate
purchase price of $56.0 million is payable by the Company
through promissory notes to the selling shareholders. The annual
interest rate for the notes is fixed at 3.5%, and the notes are
repayable in three equal installments on December 31, 2010,
December 1, 2011 and December 1, 2012. In connection
with the Repurchase Agreements, the Company entered into
lock-up
agreements with each of Messrs. Silvester, OShea and
Packer, and their respective family trusts and corporation. The
lock-up
agreements prohibit future sales and transfers of shares now
owned or subsequently acquired for two years from the date of
the Repurchase Agreements. On December 31, 2010, the
Company repaid $18.7 million of the promissory notes and
$0.4 million of accrued interest.
157
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As at December 31, 2010 and 2009, the authorized share
capital was 156,000,000 ordinary shares, par value $1.00 per
share. The following table is a summary of changes in ordinary
shares issued and outstanding:
Issued and fully paid ordinary shares of par value $1.00
each
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of year
|
|
$
|
13,581
|
|
|
$
|
13,334
|
|
Issue of shares
|
|
|
80
|
|
|
|
170
|
|
Shares repurchased
|
|
|
(800
|
)
|
|
|
|
|
Share awards granted/vested
|
|
|
79
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
12,940
|
|
|
$
|
13,581
|
|
|
|
|
|
|
|
|
|
|
Issued and fully paid non-voting convertible ordinary shares of
par value $1.00 each
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning and end of year
|
|
$
|
2,973
|
|
|
$
|
2,973
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME
|
Accumulated other comprehensive income as of December 31,
2010 and 2009 was comprised of foreign currency translation
adjustments and unrealized holding gains on investments arising
during the year.
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Foreign currency translation adjustments
|
|
$
|
26,588
|
|
|
$
|
4,112
|
|
Defined benefit pension liability
|
|
|
(1,000
|
)
|
|
|
|
|
Unrealized holding gains on investments
|
|
|
9,429
|
|
|
|
4,597
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,017
|
|
|
$
|
8,709
|
|
|
|
|
|
|
|
|
|
|
a) Summary
Components of salaries and benefits are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Salaries and benefits
|
|
$
|
50,978
|
|
|
$
|
41,534
|
|
|
$
|
38,675
|
|
Defined contribution pension plan expense
|
|
|
3,477
|
|
|
|
3,060
|
|
|
|
2,596
|
|
2004-2005 employee
share plan
|
|
|
|
|
|
|
|
|
|
|
608
|
|
2006 equity plan
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
Annual incentive plan
|
|
|
30,722
|
|
|
|
23,860
|
|
|
|
14,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and benefits
|
|
$
|
86,677
|
|
|
$
|
68,454
|
|
|
$
|
56,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b) Pension plan
The Company provides pension benefits to eligible employees
through various plans sponsored by the Company. All pension
plans, except as disclosed below, are structured as defined
contribution plans. Pension expense for the years ended
December 31, 2010, 2009 and 2008 was $3.5 million,
$3.1 million and $2.6 million, respectively.
158
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company acquired, as part of the acquisition of PWAC, a
noncontributory defined benefit pension plan (the PWAC
Plan) that covers substantially all PWAC employees hired
before April 1, 2003 and provides pension and certain death
benefits. Effective April 1, 2004, PWAC froze the PWAC
Plan. As at the date of acquisition of PWAC by the Company, the
PWAC Plan had an unfunded liability of $6.7 million that
had been accrued by PWAC. Subsequent to acquisition, an
actuarial review was performed of the PWAC Plan which determined
that the PWAC Plans unfunded liability, as at
December 31, 2010, was $7.9 million. As at
December 31, 2010, PWAC had an accrued liability of
$7.9 million for the unfunded PWAC Plan liability.
The Company recorded pension expense relating to the PWAC Plan,
for the period from the date of acquisition to December 31,
2010, of $0.6 million.
c) Employee share plans
Employee stock awards for 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Fair
|
|
|
|
Number of
|
|
|
Value of
|
|
|
|
Shares
|
|
|
the Award
|
|
|
Nonvested January 1
|
|
|
1,636
|
|
|
$
|
102
|
|
Granted
|
|
|
238,465
|
|
|
|
16,214
|
|
Vested
|
|
|
(86,171
|
)
|
|
|
(5,829
|
)
|
|
|
|
|
|
|
|
|
|
Nonvested December 31
|
|
|
153,930
|
|
|
$
|
13,019
|
|
|
|
|
|
|
|
|
|
|
i) 2006-2010
Annual Incentive Plan, 2011-2015 Annual Incentive Compensation
Program and 2006 Equity Incentive Plan
For the years ended December 31, 2010, 2009 and 2008,
78,664, 64,378 and 27,140 shares were awarded to directors,
officers and employees under the 2006 Equity Incentive Plan. The
total value of the awards for the years ended December 31,
2010, 2009 and 2008 was $5.4 million, $3.3 million and
$2.6 million, respectively, and was charged against the
2006-2010
Annual Incentive Plan accrual established for the years ended
December 31, 2010, 2009 and 2008, respectively. On
February 23, 2011, the Company adopted The Enstar Group
Limited 2011-2015 Annual Incentive Compensation Program.
In addition, during the year ended December 31, 2010,
153,930 restricted shares were awarded to certain employees
under the 2006 Equity Incentive Plan. The total unrecognized
compensation cost related to the non-vested share awards as at
December 31, 2010 was $9.0 million. These costs are
expected to be recognized evenly over the next 4.9 years.
Compensation costs of $1.5 million relating to the share
awards were recognized in the Companys statement of
earnings for the year ended December 31, 2010.
The accrued expense relating to the
2006-2010
Annual Incentive Plan for the years ended December 31,
2010, 2009 and 2008 was $30.7 million, $23.9 million
and $14.4 million, respectively.
ii) Enstar Group Limited Employee Share Purchase Plan
On February 26, 2008, the Companys board of directors
approved the Amended and Restated Enstar Group Limited Employee
Share Purchase Plan (the Purchase Plan), and
subsequently, on June 11, 2008, the Companys
shareholders approved the Purchase Plan at the Annual General
Meeting.
Compensation costs of less than $0.1 million relating to
the shares issued have been recognized in the Companys
statement of earnings for each of the years ended
December 31, 2010, 2009 and 2008. As at December 31,
2010, 2009 and 2008, 5,871, 5,588 and 2,695 shares,
respectively, have been issued to employees under the Purchase
Plan.
159
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(d) Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Value of
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Outstanding January 1, 2010
|
|
|
327,586
|
|
|
$
|
29.49
|
|
|
$
|
14,261
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(175,571
|
)
|
|
|
25.11
|
|
|
|
(7,604
|
)
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
152,015
|
|
|
$
|
34.55
|
|
|
$
|
7,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding and exercisable as of
December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Number of
|
|
Weighted Average
|
|
Remaining
|
Ranges of Exercise Prices
|
|
Options
|
|
Exercise Price
|
|
Contractual Life
|
|
$10 $20
|
|
|
49,037
|
|
|
$
|
19.63
|
|
|
|
0.7 years
|
|
$40 $60
|
|
|
102,978
|
|
|
|
41.65
|
|
|
|
2.7 years
|
|
(e) Deferred Compensation and Stock Plan for Non-Employee
Directors
For the years ended December 31 2010, 2009 and 2008, 6,463,
7,147 and 4,631 restricted share units, respectively, were
credited to the accounts of Non-Employee Directors under the
Enstar Group Limited Deferred Compensation and Ordinary Share
Plan for Non-Employee Directors (the Deferred Compensation
Plan).
Following Gregory Curls resignation from the board of
directors, 1,606 restricted share units previously credited to
his account under the Deferred Compensation Plan were converted
into the same number of the Companys ordinary shares on
September 10, 2010 with fractional shares paid in cash.
Also on September 10, 2010, 1,383 restricted stock units
previously credited to Mr. Curls account under a
deferred compensation plan assumed in the Companys merger
with Enstar USA, Inc., now a wholly owned subsidiary of the
Company, were converted into the same number of the
Companys ordinary shares.
Following T. Wayne Davis resignation from the board of
directors in 2009, 1,576 restricted share units previously
credited to his account under the Deferred Compensation Plan
were converted into the same number of the Companys
ordinary shares on April 1, 2009, with fractional shares
paid in cash. Also on April 1, 2009, 14,146 restricted
stock units previously credited to Mr. Davis account
under a deferred compensation plan assumed in the Companys
merger with Enstar USA, Inc., now a wholly owned subsidiary of
the Company, were converted into the same number of the
Companys ordinary shares.
160
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the comparison of basic and
diluted earnings per share for the years ended December 31,
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited
|
|
$
|
174,086
|
|
|
$
|
135,210
|
|
|
$
|
81,551
|
|
Weighted average shares outstanding basic
|
|
|
13,489,221
|
|
|
|
13,514,207
|
|
|
|
12,638,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Enstar Group
Limited basic
|
|
$
|
12.91
|
|
|
$
|
10.01
|
|
|
$
|
6.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited
|
|
$
|
174,086
|
|
|
$
|
135,210
|
|
|
$
|
81,551
|
|
Weighted average shares outstanding basic
|
|
|
13,489,221
|
|
|
|
13,514,207
|
|
|
|
12,638,333
|
|
Share equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares
|
|
|
125,733
|
|
|
|
4,822
|
|
|
|
16,959
|
|
Restricted share units
|
|
|
16,423
|
|
|
|
8,988
|
|
|
|
3,889
|
|
Options
|
|
|
119,879
|
|
|
|
216,644
|
|
|
|
262,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
13,751,256
|
|
|
|
13,744,661
|
|
|
|
12,921,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Enstar Group
Limited diluted
|
|
$
|
12.66
|
|
|
$
|
9.84
|
|
|
$
|
6.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
RELATED
PARTY TRANSACTIONS
|
The Company has entered into certain transactions with companies
and partnerships that are affiliated with J. Christopher Flowers
and John J. Oros. Mr. Flowers is a member of the
Companys board of directors and one of the largest
shareholders of the Company. Mr. Oros was the
Companys Executive Chairman and a member of the
Companys board of directors until his resignation on
August 20, 2010.
|
|
|
|
|
The Company earned management fees for advisory services
provided to the Flowers Fund, a private investment fund, for the
years ended December 31, 2010, 2009 and 2008 of
$0.3 million, $0.7 million and $0.9 million,
respectively.
|
|
|
|
The Company had, as of December 31, 2010, 2009 and 2008,
excluding its investment in Varadero International Ltd.
(Varadero) investments in entities affiliated with
Messers. Flowers and Oros with a total value of
$96.1 million, $76.1 million and $54.5 million,
respectively, and outstanding commitments to entities managed by
Messers. Flowers and Oros, for the same periods, of
$84.6 million, $98.1 million and $104.0 million,
respectively. The Companys outstanding commitments may be
drawn down over approximately the next five years. As at
December 31, 2010, the related party investments associated
with Messrs. Flowers and Oros accounted for 99.9% of the
total unfunded capital commitments of the Company and 50.3% of
the total amount of investments classified as other investments
by the Company.
|
|
|
|
On October 1, 2010, the Company entered into the Repurchase
Agreements with three of its executives and certain trusts and a
corporation affiliated with the executives to repurchase an
aggregate of 800,000 of the Companys ordinary shares at a
price of $70.00 per share. The Company repurchased an aggregate
of 600,000 ordinary shares from Dominic F. Silvester (the
Companys Chief Executive Officer and Chairman of the Board
of Directors) and a trust of which he and his immediate family
are the sole beneficiaries, 100,000 ordinary shares from a trust
of which Paul J. OShea (the Companys Joint Chief
Operating Officer, Executive Vice President and a member of its
Board of Directors) and his immediate family are the sole
|
161
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
beneficiaries and 100,000 ordinary shares from a corporation
owned by a trust of which Nicholas A. Packer (the Companys
Joint Chief Operating Officer and Executive Vice President) and
his immediate family are the sole beneficiaries. The repurchase
transactions closed on October 14, 2010. The aggregate
purchase price of $56.0 million is payable by the Company
through promissory notes to the selling shareholders. The annual
interest rate for the notes is fixed at 3.5%, and the notes are
repayable in three equal installments on December 31, 2010,
December 1, 2011 and December 1, 2012. In connection
with the Repurchase Agreements, the Company entered into
lock-up
agreements with each of Messrs. Silvester, OShea and
Packer, and their respective family trusts and corporation. The
lock-up
agreements prohibit future sales and transfers of shares now
owned or subsequently acquired for two years from the date of
the Repurchase Agreements.
|
|
|
|
|
|
On August 9, 2010, the Company entered into a participation
agreement for $1 million with Flowers National Bank, an entity
owned by Mr. Flowers. Flowers National Bank purchased a
pool of mortgage loans from the Federal Deposit Insurance
Corporation.
|
|
|
|
In March 2010, the Company committed to invest
$20.0 million in Varadero, a hedge fund. The investment
manager of Varadero is Varadero Capital, L.P., of which Varadero
GP, LLC is the general partner. Both the investment manager and
general partner are partially owned by an entity affiliated with
Messrs. Flowers and Oros. As of December 31, 2010, the
Company had funded 100% of its commitment to Varadero.
|
|
|
|
On November 12, 2009, the Company invested approximately
$4.0 million in Flowers Sego-Carrus Holdings, LLC
(FSC), a joint venture between the Company, an
unaffiliated third party and Flowers National Bank, an entity
owned by Mr. Flowers. FSC purchased two mortgage loans from
the Federal Deposit Insurance Corporation.
|
|
|
|
On January 28, 2009, the Company invested approximately
$8.7 million in JCF III Co-invest I L.P., an entity
affiliated with J.C. Flowers & Co. LLC, in connection with
its investment in certain of the operations, assets and
liabilities of OneWest Bank FSB (formerly known as IndyMac Bank,
F.S.B.).
|
|
|
|
In July 2008, FPK acted as lead managing underwriter in the
Companys sale to the public of 1,372,028 ordinary shares,
inclusive of the underwriters over-allotment, at a public
offering price of $87.50 per share (the Offering).
The underwriters purchased the shares at a 2% discount to the
public offering price. The Company received net proceeds of
approximately $116.8 million in the Offering. An affiliate
of the Flowers Fund controlled approximately 41% of FPK until
its sale of FPK in December 2009. In addition, the Flowers Fund
and certain of its affiliated investment partnerships purchased
285,714 ordinary shares with a value of approximately
$25.0 million in the Offering at the public offering price.
|
|
|
|
In March 2006, Enstar and Shinsei Bank Limited
(Shinsei), completed the acquisition of Brampton
(formerly Aioi Insurance Company of Europe Limited). The
acquisition was effected through Hillcot, in which Enstar held
at that date a 50.1% economic interest and Shinsei held at that
date the remaining 49.9%. Enstar and Shinsei made capital
contributions to Hillcot to fund the acquisition in proportion
to their economic interests. Mr. Flowers is a director and
the largest shareholder of Shinsei. On October 27, 2008,
the company distributed to Shinsei $27.1 million
representing its 49.9% share of the consideration received on
the sale of Hillcot Re.
|
|
|
|
During 2008, the Flowers Fund funded approximately
$145.0 million for its share of the economic interest in
the acquisitions of Gordian, Guildhall, Shelbourne, Goshawk,
EPIC and Unionamerica.
|
|
|
|
In February 2008, the Company entered into an
AU$301.0 million (approximately $285.0 million) joint
loan facility with an Australian and a German bank. The Flowers
Fund is a significant shareholder of the German bank.
|
162
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In November 2008, Enstar (US) Inc. entered into a lease
agreement for use of office space with one of its directors
running to 2011. For the years ended December 31, 2010,
2009 and 2008, Enstar (US) Inc. incurred rent expense of
$0.2 million, $0.2 million and $0.1 million,
respectively.
The Company, in common with the insurance and reinsurance
industry in general, is subject to litigation and arbitration in
the normal course of its business operations. While the outcome
of the litigation cannot be predicted with certainty, the
Company is disputing and will continue to dispute all
allegations that management believes are without merit. As of
December 31, 2010, the Company was not a party to any
material litigation or arbitration outside its normal course of
business operations.
Income tax expense for the years ended December 31, 2010,
2009 and 2008 was $87.1 million, $27.6 million, and
$46.9 million, respectively.
Under current Bermuda law, the Company and its Bermuda
subsidiaries are not required to pay any taxes in Bermuda on
their income or capital gains. The Company has received an
undertaking from the Minister of Finance in Bermuda that, in the
event of any taxes being imposed, the Company and its Bermuda
subsidiaries will be exempt from taxation in Bermuda until March
2016.
The Company has operating subsidiaries and branch operations in
the United Kingdom, Australia, the United States and Europe and
is subject to federal, foreign, state and local taxes in those
jurisdictions. In addition, certain distributions from some
foreign sources may be subject to withholding taxes.
The expected income tax provision for the foreign operations
computed on pre-tax income at the weighted-average tax rate has
been calculated as the sum of the pre-tax income in each
jurisdiction multiplied by that jurisdictions applicable
statutory tax rate.
The actual income tax rate for the years ended December 31,
2010, 2009 and 2008 differed from the amount computed by
applying the effective rate of 0% under the Bermuda law to
earnings before income taxes as shown in the following
reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Earnings before income tax
|
|
$
|
261,218
|
|
|
$
|
162,815
|
|
|
$
|
128,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Foreign taxes at local expected rates
|
|
|
28.7
|
%
|
|
|
52.1
|
%
|
|
|
44.8
|
%
|
Benefit of loss carryovers
|
|
|
(1.5
|
)%
|
|
|
|
|
|
|
(1.0
|
)%
|
Change in uncertain tax positions
|
|
|
(0.1
|
)%
|
|
|
(0.8
|
)%
|
|
|
(2.6
|
)%
|
Change in valuation allowance
|
|
|
(5.1
|
)%
|
|
|
(28.4
|
)%
|
|
|
(4.7
|
)%
|
Impact of Australian tax consolidation
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.2
|
)%
|
|
|
(5.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
33.4
|
%
|
|
|
17.0
|
%
|
|
|
36.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended December 31, 2010, in order
to mitigate the tax impacts of inter-group transactions, the
board of directors of the Companys Australian subsidiaries
elected to form a consolidated tax group. The impact of this tax
consolidation resulted in the resetting of the cost base of
certain assets of our Australian subsidiaries which is estimated
to result in an additional tax liability of approximately
$30.3 million.
163
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes arise from the recognition of temporary
differences between income determined for financial reporting
purposes and income tax purposes. The tax effects of temporary
differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are presented
in the table below:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Benefit of losses, deductions, and other carryforwards
|
|
$
|
143,680
|
|
|
$
|
71,407
|
|
Claims reserves, principally due to discounting for tax
|
|
|
10,082
|
|
|
|
11,111
|
|
Allowance for doubtful accounts receivable
|
|
|
|
|
|
|
7,006
|
|
Investments
|
|
|
|
|
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,762
|
|
|
|
91,483
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Investments
|
|
|
(15,745
|
)
|
|
|
|
|
Other
|
|
|
(1,355
|
)
|
|
|
(2,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,100
|
)
|
|
|
(2,672
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
136,662
|
|
|
|
88,811
|
|
Valuation allowance
|
|
|
(133,506
|
)
|
|
|
(57,574
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
3,156
|
|
|
$
|
31,237
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, U.K. insurance
subsidiaries and branch operations had tax loss carryforwards,
which do not expire, and deductions available for tax purposes
of approximately $404.0 million and $212.7 million,
respectively. Certain of the Companys U.K. insurance and
reinsurance subsidiaries have tax loss carryforwards that arose
prior to acquisition. Under U.K. tax law, these tax loss
carryforwards are available to offset future taxable income
generated by the acquired company without time limit.
As of December 31, 2010 and 2009, U.S. subsidiaries
had deductible losses for tax purposes of approximately
$27.0 million and $21.0 million, respectively. Under
U.S. tax law, these tax losses can be carried forward and
could be available to offset future taxable income of the
companies that experienced the losses.
The Company has made estimates of future taxable income of
foreign subsidiaries and has provided a valuation allowance in
respect of those loss carryforwards where it does not expect to
realize a benefit. The Company has considered all available
evidence using a more likely than not standard in
determining the amount of the valuation allowance.
The Company has unrecognized tax benefits of $5.6 million,
$5.7 million and $8.1 million relating to uncertain
tax positions as of December 31, 2010, 2009 and 2008,
respectively.
During the years ended December 31, 2010, 2009 and 2008,
there were certain reductions to unrecognized tax benefits due
to the expiration of statutes of limitations of
$0.3 million, $3.5 million and $3.5 million,
respectively, which were included in net earnings.
164
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance, beginning of year
|
|
$
|
5,727
|
|
|
$
|
8,056
|
|
|
$
|
13,115
|
|
Gross increases tax positions related to the current
year
|
|
|
|
|
|
|
835
|
|
|
|
2,204
|
|
Gross increases tax positions related to prior years
|
|
|
113
|
|
|
|
413
|
|
|
|
644
|
|
Gross decreases tax positions related to the current
year
|
|
|
|
|
|
|
|
|
|
|
(557
|
)
|
Gross decreases tax positions related to prior years
|
|
|
|
|
|
|
|
|
|
|
(3,297
|
)
|
Lapse of statute of limitations
|
|
|
(274
|
)
|
|
|
(3,577
|
)
|
|
|
(4,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
5,566
|
|
|
$
|
5,727
|
|
|
$
|
8,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the balances at December 31, 2010, 2009 and
2008 were $4.4 million, $5.1 million and
$4.2 million, respectively, of tax positions for which the
ultimate deductibility is highly certain but for which there is
uncertainty about the timing of such deductibility. Because of
the impact of deferred tax accounting, other than interest and
penalties, the disallowance of the shorter deductibility period
would not affect the annual effective tax rate but would
accelerate the payment of cash to the taxing authority to an
earlier period.
It is reasonably possible that the amount of unrecognized tax
benefits with respect to certain of the unrecognized tax
positions could decrease by up to approximately $70,000 within
the next 12 months if the statute of limitations expires on
certain tax periods.
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a part of income tax expense.
During the years ended December 31, 2010, 2009, and 2008
the Company recognized a benefit for the reversal of interest
and penalties related to unrecognized tax benefits due to the
expiration of the statute of limitations in the amount of $0.1
million, $0.5 million and $0.8 million, respectively.
The Company had approximately $1.0 million,
$0.9 million and $1.2 million accrued for the payment
of interest and penalties related to unrecognized tax benefits
at December 31, 2010, 2009 and 2008, respectively.
The Companys operating subsidiaries in specific countries
may be subject to audit by various tax authorities and may have
different statutes of limitations expiration dates. With limited
exceptions, the Companys major subsidiaries that operate
in the United States, United Kingdom and Australia are no longer
subject to tax examinations for years before 2005, 2008 and
2005, respectively.
Because the Company operates in many jurisdictions, its 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 it operates. The
Company cannot predict what, if any, legislation, will actually
be proposed or enacted, or what the effect of any such
legislation might be on the Companys financial condition
and results of operations.
|
|
19.
|
STATUTORY
REQUIREMENTS (Unaudited)
|
The Companys insurance and reinsurance operations are
subject to insurance laws and regulations in the jurisdictions
in which they operate, including Bermuda, Australia, the United
States, Europe and the United
165
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Kingdom. Statutory capital and surplus as reported to the
relevant regulatory authorities for the insurance and
reinsurance subsidiaries of the Company as of December 31,
2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bermuda
|
|
U.K.
|
|
Australia
|
|
U.S.
|
|
Europe
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Minimum required statutory capital and surplus
|
|
$
|
112,593
|
|
|
$
|
54,022
|
|
|
$
|
66,445
|
|
|
$
|
54,777
|
|
|
$
|
128,576
|
|
|
$
|
186,107
|
|
|
$
|
42,476
|
|
|
$
|
9,205
|
|
|
$
|
25,785
|
|
|
$
|
52,523
|
|
Actual statutory capital and surplus
|
|
$
|
613,867
|
|
|
$
|
428,624
|
|
|
$
|
945,451
|
|
|
$
|
604,390
|
|
|
$
|
224,256
|
|
|
$
|
337,962
|
|
|
$
|
94,543
|
|
|
$
|
16,791
|
|
|
$
|
126,392
|
|
|
$
|
130,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bermuda
|
|
UK
|
|
Australia
|
|
U.S.
|
|
Europe
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Statutory income
|
|
$
|
66,718
|
|
|
$
|
43,534
|
|
|
$
|
130,105
|
|
|
$
|
45,986
|
|
|
$
|
(1,934
|
)
|
|
$
|
30,614
|
|
|
$
|
4,940
|
|
|
$
|
5,609
|
|
|
$
|
62,440
|
|
|
$
|
134,517
|
|
Maximum available for dividends
|
|
$
|
422,043
|
|
|
$
|
272,686
|
|
|
$
|
441,794
|
|
|
$
|
80,652
|
|
|
$
|
95,681
|
|
|
$
|
151,793
|
|
|
$
|
3,902
|
|
|
$
|
|
|
|
$
|
8,361
|
|
|
$
|
6,052
|
|
The statutory capital and surplus required by the relevant
regulatory authorities in any jurisdiction may be significantly
in excess of the minimum required statutory capital and surplus
and, as a result, the maximum available for dividends may be
lower.
|
|
20.
|
COMMITMENTS
AND CONTINGENCIES
|
The Company leases office space under operating leases expiring
in various years through 2016. The leases are renewable at the
option of the lessee under certain circumstances. The following
is a schedule of future minimum rental payments on
non-cancellable leases as of December 31, 2010:
|
|
|
|
|
2011
|
|
$
|
3,205
|
|
2012
|
|
|
2,772
|
|
2013
|
|
|
1,819
|
|
2014
|
|
|
1,447
|
|
2015
|
|
|
852
|
|
2016
|
|
|
169
|
|
|
|
|
|
|
|
|
$
|
10,264
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2010, 2009
and 2008 was $2.9 million, $2.7 million and
$2.5 million, respectively.
In 2006, the Company committed to invest up to
$100.0 million in the Flowers Fund. As of December 31,
2010, the capital contributed to the Flowers Fund was
$97.1 million, with the remaining unfunded commitment being
approximately $2.9 million.
As at December 31, 2010, the Company has guaranteed the
obligations of two of its subsidiaries in respect of letters of
credit issued on their behalf by London-based banks in the
amount of £12.0 million (approximately
$18.7 million) in respect of capital commitments to
Lloyds Syndicate 2008 and £7.5 million
(approximately $11.7 million) in respect of insurance
contract requirements of one of the subsidiaries. As of
February 28, 2011, the Companys total guarantee has
increased to £19.0 million (approximately $29.7
million) in respect of its increased capital commitment to
Lloyds Syndicate 2008. The guarantees will be triggered
should losses incurred by the subsidiaries exceed available cash
on hand resulting in the letters of credit being drawn. As at
December 31, 2010, the Company had not recorded any
liabilities associated with the guarantees.
166
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As at December 31, 2010, the Company provided guarantees
supporting the obligations of one of its subsidiaries in respect
of the acquisition, by the subsidiary, of two portfolios of
insurance and reinsurance businesses in run-off. The total
guarantee provided is approximately $198.4 million and will
increase or decrease over time in line with relevant independent
actuarial assessments, but will always be subject to an overall
maximum cap with respect to reinsurance liabilities.
On September 10, 2008, the Company made a commitment to
invest in aggregate $100.0 million in J.C. Flowers
Fund III L.P. (Fund III). The
Companys commitment may be drawn down by Fund III
over approximately the next five years. As of December 31,
2010, the capital contributed to the fund was $18.3 million
with the remaining outstanding commitment being
$81.7 million. Fund III is a private investment fund
advised by J.C. Flowers & Co. LLC. J. Christopher
Flowers, a member of the Companys board of directors and
one of its largest shareholders, is the Chairman and Chief
Executive Officer of J.C. Flowers & Co. LLC. John J.
Oros, the Companys Executive Chairman and a member of its
board of directors until his resignation on August 20,
2010, is a Managing Director of J.C. Flowers & Co. LLC.
The Company has made a capital commitment of up to
$10.0 million in the GSC European Mezzanine Fund II,
LP (GSC). GSC invests in mezzanine securities of
middle and large market companies throughout Western Europe. As
of December 31, 2010, the capital contributed to GSC was
$9.9 million, with the remaining commitment being
$0.1 million.
On November 8, 2010, the Company, through its wholly-owned
subsidiary, Kenmare, entered into a definitive agreement for the
purchase of CitiLife Financial Limited from Citigroup Insurance
Holding Corporation, an affiliate of Citigroup Inc. The purchase
price is 30 million (approximately
$40.2 million) and is expected to be financed from
available cash on hand. Completion of the transaction is
conditioned on, among other things, regulatory approval and
satisfaction of various customary closing conditions. The
transaction is expected to close in the first quarter of 2011.
On December 22, 2010, the Company, through its wholly-owned
subsidiary, Clarendon Holdings, Inc., entered into a definitive
agreement for the purchase of Clarendon from Clarendon Insurance
Group, Inc., an affiliate of Hannover Re. The purchase price is
approximately $200 million and will be financed in part by
a bank loan facility provided by a London-based bank entered
into on March 4, 2011 and in part from available cash on
hand. Completion of the transaction is conditioned on, among
other things, regulatory approval and satisfaction of various
customary closing conditions. The transaction is expected to
close in the second quarter of 2011.
In February 2011, Lloyds Syndicate 2008 entered into RITC
agreements with two Lloyds syndicates with total gross
insurance reserves of approximately $129.6 million. The
capital commitment to Lloyds Syndicate 2008 with respect
to these two RITC agreements amounted to £21.3 million
(approximately $33.3 million).
The determination of reportable segments is based on how senior
management monitors the Companys operations. The Company
measures the results of its operations under two major business
categories: consulting and reinsurance.
The Companys consulting segment comprises the operations
and financial results of those subsidiaries that provide
management and consulting services, forensic claims inspections
services and reinsurance collection services to third-party
clients, as well as to the Companys reinsurance segment,
in return for management fees. The Company provides consulting
and management services through its subsidiaries located in the
United States, Bermuda and Europe to large multinational company
clients with insurance and reinsurance companies and portfolios
in run-off relating to risks spanning the globe. As a result,
extracting and quantifying revenues attributable to certain
geographic locations would be impracticable given the global
nature of the business.
167
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
All of the consulting fees for the reinsurance segment relate to
intercompany fees paid to the consulting segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
Reinsurance
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
84,054
|
|
|
$
|
(61,039
|
)
|
|
$
|
23,015
|
|
Net investment income
|
|
|
461
|
|
|
|
99,445
|
|
|
|
99,906
|
|
Net realized and unrealized gains
|
|
|
|
|
|
|
13,137
|
|
|
|
13,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,515
|
|
|
|
51,543
|
|
|
|
136,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
|
|
|
|
(278,065
|
)
|
|
|
(278,065
|
)
|
Reduction in provisions for bad debt
|
|
|
|
|
|
|
(49,556
|
)
|
|
|
(49,556
|
)
|
Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
|
|
|
|
|
|
|
(39,651
|
)
|
|
|
(39,651
|
)
|
Amortization of fair value adjustments
|
|
|
|
|
|
|
55,438
|
|
|
|
55,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311,834
|
)
|
|
|
(311,834
|
)
|
Salaries and benefits
|
|
|
50,684
|
|
|
|
35,993
|
|
|
|
86,677
|
|
General and administrative expenses
|
|
|
28,288
|
|
|
|
30,913
|
|
|
|
59,201
|
|
Interest expense
|
|
|
|
|
|
|
10,253
|
|
|
|
10,253
|
|
Net foreign exchange loss (gain)
|
|
|
420
|
|
|
|
(818
|
)
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,392
|
|
|
|
(235,493
|
)
|
|
|
(156,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and share of net earnings of party
owned company
|
|
|
5,123
|
|
|
|
287,036
|
|
|
|
292,159
|
|
Income taxes
|
|
|
33
|
|
|
|
(87,165
|
)
|
|
|
(87,132
|
)
|
Share of net earnings of partly owned company
|
|
|
|
|
|
|
10,704
|
|
|
|
10,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
5,156
|
|
|
|
210,575
|
|
|
|
215,731
|
|
Less: Net earnings attributable to noncontrolling interest
|
|
|
|
|
|
|
(41,645
|
)
|
|
|
(41,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited
|
|
$
|
5,156
|
|
|
$
|
168,930
|
|
|
$
|
174,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
Reinsurance
|
|
|
Total
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
49,617
|
|
|
$
|
(33,513
|
)
|
|
$
|
16,104
|
|
Net investment income
|
|
|
1,894
|
|
|
|
79,477
|
|
|
|
81,371
|
|
Net realized and unrealized gains
|
|
|
|
|
|
|
4,237
|
|
|
|
4,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,511
|
|
|
|
50,201
|
|
|
|
101,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
|
|
|
|
(274,825
|
)
|
|
|
(274,825
|
)
|
Reduction in provisions for bad debt
|
|
|
|
|
|
|
(11,718
|
)
|
|
|
(11,718
|
)
|
Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
|
|
|
|
|
|
|
(50,412
|
)
|
|
|
(50,412
|
)
|
Amortization of fair value adjustments
|
|
|
|
|
|
|
77,328
|
|
|
|
77,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259,627
|
)
|
|
|
(259,627
|
)
|
Salaries and benefits
|
|
|
37,281
|
|
|
|
31,173
|
|
|
|
68,454
|
|
General and administrative expenses
|
|
|
19,870
|
|
|
|
27,032
|
|
|
|
46,902
|
|
Interest expense
|
|
|
|
|
|
|
17,583
|
|
|
|
17,583
|
|
Net foreign exchange (gain) loss
|
|
|
(920
|
)
|
|
|
24,707
|
|
|
|
23,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,231
|
|
|
|
(159,132
|
)
|
|
|
(102,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes
|
|
|
(4,720
|
)
|
|
|
209,333
|
|
|
|
204,613
|
|
Income taxes
|
|
|
(2,402
|
)
|
|
|
(25,203
|
)
|
|
|
(27,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(7,122
|
)
|
|
|
184,130
|
|
|
|
177,008
|
|
Less: Net earnings attributable to noncontrolling interest
|
|
|
|
|
|
|
(41,798
|
)
|
|
|
(41,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings attributable to Enstar Group Limited
|
|
$
|
(7,122
|
)
|
|
$
|
142,332
|
|
|
$
|
135,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
|
|
|
Reinsurance
|
|
|
Total
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
54,158
|
|
|
$
|
(29,007
|
)
|
|
$
|
25,151
|
|
Net investment (loss) income
|
|
|
(20,248
|
)
|
|
|
46,849
|
|
|
|
26,601
|
|
Net realized and unrealized losses
|
|
|
|
|
|
|
(1,655
|
)
|
|
|
(1,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,910
|
|
|
|
16,187
|
|
|
|
50,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
|
|
|
|
(161,437
|
)
|
|
|
(161,437
|
)
|
Reduction in provisions for bad debt
|
|
|
|
|
|
|
(36,136
|
)
|
|
|
(36,136
|
)
|
Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
|
|
|
|
|
|
|
(69,056
|
)
|
|
|
(69,056
|
)
|
Amortization of fair value adjustments
|
|
|
|
|
|
|
24,525
|
|
|
|
24,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(242,104
|
)
|
|
|
(242,104
|
)
|
Salaries and benefits
|
|
|
33,196
|
|
|
|
23,074
|
|
|
|
56,270
|
|
General and administrative expenses
|
|
|
17,289
|
|
|
|
36,068
|
|
|
|
53,357
|
|
Interest expense
|
|
|
|
|
|
|
23,370
|
|
|
|
23,370
|
|
Net foreign exchange loss
|
|
|
1,167
|
|
|
|
13,819
|
|
|
|
14,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,652
|
|
|
|
(145,773
|
)
|
|
|
(94,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes and share of net loss of
partly owned company
|
|
|
(17,742
|
)
|
|
|
161,960
|
|
|
|
144,218
|
|
Income taxes
|
|
|
511
|
|
|
|
(47,365
|
)
|
|
|
(46,854
|
)
|
Share of net loss of partly owned company
|
|
|
|
|
|
|
(201
|
)
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before extraordinary gain
|
|
|
(17,231
|
)
|
|
|
114,394
|
|
|
|
97,163
|
|
Extraordinary gain Negative goodwill
|
|
|
|
|
|
|
50,280
|
|
|
|
50,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(17,231
|
)
|
|
|
164,674
|
|
|
|
147,443
|
|
Less: Net earnings attributable to noncontrolling interest
|
|
|
|
|
|
|
(65,892
|
)
|
|
|
(65,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings attributable to Enstar Group Limited
|
|
$
|
(17,231
|
)
|
|
$
|
98,782
|
|
|
$
|
81,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
22.
|
CONDENSED
UNAUDITED QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Consulting fees
|
|
$
|
3,268
|
|
|
$
|
2,119
|
|
|
$
|
3,500
|
|
|
$
|
14,128
|
|
Net investment income
|
|
|
30,622
|
|
|
|
20,165
|
|
|
|
22,998
|
|
|
|
26,121
|
|
Net realized and unrealized gains (losses)
|
|
|
4,527
|
|
|
|
10,635
|
|
|
|
(4,227
|
)
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,417
|
|
|
|
32,919
|
|
|
|
22,271
|
|
|
|
42,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
(220,129
|
)
|
|
|
(20,890
|
)
|
|
|
(35,104
|
)
|
|
|
(1,942
|
)
|
Reduction in provisions for bad debt
|
|
|
(35,145
|
)
|
|
|
(1,304
|
)
|
|
|
(7,768
|
)
|
|
|
(5,339
|
)
|
Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
|
|
|
(8,819
|
)
|
|
|
(10,171
|
)
|
|
|
(11,696
|
)
|
|
|
(8,965
|
)
|
Amortization of fair value adjustments
|
|
|
30,336
|
|
|
|
6,250
|
|
|
|
12,202
|
|
|
|
6,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233,757
|
)
|
|
|
(26,115
|
)
|
|
|
(42,366
|
)
|
|
|
(9,596
|
)
|
Salaries and benefits
|
|
|
39,221
|
|
|
|
18,012
|
|
|
|
14,254
|
|
|
|
15,190
|
|
General and administrative expenses
|
|
|
19,728
|
|
|
|
13,185
|
|
|
|
15,801
|
|
|
|
10,487
|
|
Interest expense
|
|
|
2,093
|
|
|
|
2,961
|
|
|
|
2,805
|
|
|
|
2,394
|
|
Net foreign exchange (gain) loss
|
|
|
(1,785
|
)
|
|
|
(586
|
)
|
|
|
(5,615
|
)
|
|
|
7,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(174,500
|
)
|
|
|
7,457
|
|
|
|
(15,121
|
)
|
|
|
26,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES AND SHARE OF NET EARNINGS OF PARTLY
OWNED COMPANY
|
|
|
212,917
|
|
|
|
25,462
|
|
|
|
37,392
|
|
|
|
16,388
|
|
Income taxes
|
|
|
(64,116
|
)
|
|
|
(979
|
)
|
|
|
(16,115
|
)
|
|
|
(5,922
|
)
|
Share of net earnings of partly owned company
|
|
|
|
|
|
|
1,351
|
|
|
|
2,203
|
|
|
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
|
148,801
|
|
|
|
25,834
|
|
|
|
23,480
|
|
|
|
17,616
|
|
Less: Net earnings attributable to noncontrolling interests
|
|
|
(24,509
|
)
|
|
|
(4,391
|
)
|
|
|
(11,050
|
)
|
|
|
(1,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
|
|
$
|
124,292
|
|
|
$
|
21,443
|
|
|
$
|
12,430
|
|
|
$
|
15,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited ordinary
shareholders
|
|
$
|
9.61
|
|
|
$
|
1.56
|
|
|
$
|
0.91
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited ordinary
shareholders
|
|
$
|
9.37
|
|
|
$
|
1.53
|
|
|
$
|
0.89
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Basic
|
|
|
12,934,638
|
|
|
|
13,704,832
|
|
|
|
13,702,832
|
|
|
|
13,619,741
|
|
Weighted average shares outstanding Diluted
|
|
|
13,258,299
|
|
|
|
14,019,768
|
|
|
|
14,019,489
|
|
|
|
13,831,697
|
|
171
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Consulting fees
|
|
$
|
4,477
|
|
|
$
|
4,112
|
|
|
$
|
4,179
|
|
|
$
|
3,336
|
|
Net investment income
|
|
|
20,929
|
|
|
|
24,640
|
|
|
|
18,493
|
|
|
|
17,309
|
|
Net realized and unrealized gains (losses)
|
|
|
2,255
|
|
|
|
2,912
|
|
|
|
5,080
|
|
|
|
(6,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,661
|
|
|
|
31,664
|
|
|
|
27,752
|
|
|
|
14,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in ultimate loss and loss adjustment expense
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in estimates of net ultimate losses
|
|
|
(182,523
|
)
|
|
|
(44,736
|
)
|
|
|
(17,742
|
)
|
|
|
(29,824
|
)
|
Reduction in provisions for bad debt
|
|
|
(2,004
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,714
|
)
|
Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
|
|
|
(21,042
|
)
|
|
|
(9,830
|
)
|
|
|
(9,422
|
)
|
|
|
(10,118
|
)
|
Amortization of fair value adjustments
|
|
|
32,572
|
|
|
|
12,008
|
|
|
|
9,771
|
|
|
|
22,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172,997
|
)
|
|
|
(42,558
|
)
|
|
|
(17,393
|
)
|
|
|
(26,679
|
)
|
Salaries and benefits
|
|
|
27,126
|
|
|
|
16,997
|
|
|
|
11,914
|
|
|
|
12,417
|
|
General and administrative expenses
|
|
|
11,415
|
|
|
|
12,195
|
|
|
|
10,910
|
|
|
|
12,382
|
|
Interest expense
|
|
|
3,681
|
|
|
|
4,262
|
|
|
|
4,675
|
|
|
|
4,965
|
|
Net foreign exchange loss (gain)
|
|
|
30,964
|
|
|
|
(7,164
|
)
|
|
|
(1,611
|
)
|
|
|
1,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,811
|
)
|
|
|
(16,268
|
)
|
|
|
8,495
|
|
|
|
4,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES AND SHARE OF NET (LOSS) EARNINGS OF
PARTLY OWNED COMPANY
|
|
|
127,472
|
|
|
|
47,932
|
|
|
|
19,257
|
|
|
|
9,952
|
|
Income taxes
|
|
|
(25,586
|
)
|
|
|
(2,660
|
)
|
|
|
23
|
|
|
|
618
|
|
Share of net (loss) earnings of partly owned company
|
|
|
(465
|
)
|
|
|
196
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
|
101,421
|
|
|
|
45,468
|
|
|
|
19,280
|
|
|
|
10,839
|
|
Less: Net (earnings) loss attributable to noncontrolling
interests
|
|
|
(21,480
|
)
|
|
|
(10,481
|
)
|
|
|
(10,529
|
)
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
|
|
$
|
79,941
|
|
|
$
|
34,987
|
|
|
$
|
8,751
|
|
|
$
|
11,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited ordinary
shareholders
|
|
$
|
5.89
|
|
|
$
|
2.58
|
|
|
$
|
0.65
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Enstar Group Limited ordinary
shareholders
|
|
$
|
5.79
|
|
|
$
|
2.53
|
|
|
$
|
0.63
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding Basic
|
|
|
13,579,971
|
|
|
|
13,578,555
|
|
|
|
13,532,608
|
|
|
|
13,363,507
|
|
Weighted average shares outstanding Diluted
|
|
|
13,811,176
|
|
|
|
13,814,651
|
|
|
|
13,787,553
|
|
|
|
13,699,419
|
|
172
ENSTAR
GROUP LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Consulting fees
|
|
$
|
8,108
|
|
|
$
|
7,410
|
|
|
$
|
3,578
|
|
|
$
|
6,055
|
|
Net investment income
|
|
|
(2,057
|
)
|
|
|
6,849
|
|
|
|
21,219
|
|
|
|
590
|
|
Net realized and unrealized (losses) gains
|
|
|
(1,393
|
)
|
|
|
(192
|
)
|
|
|
1,014
|
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,658
|
|
|
|
14,067
|
|
|
|
25,811
|
|
|
|
5,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (reduction) increase in ultimate loss and loss adjustment
expense liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction) increase in estimates of net ultimate losses
|
|
|
(134,467
|
)
|
|
|
(4,164
|
)
|
|
|
(24,091
|
)
|
|
|
1,285
|
|
(Reduction) increase in provisions for bad debt
|
|
|
(35,274
|
)
|
|
|
213
|
|
|
|
(1,075
|
)
|
|
|
|
|
Reduction in provisions for unallocated loss and loss adjustment
expense liabilities
|
|
|
(36,132
|
)
|
|
|
(13,672
|
)
|
|
|
(12,165
|
)
|
|
|
(7,087
|
)
|
Amortization of fair value adjustments
|
|
|
(7,964
|
)
|
|
|
14,154
|
|
|
|
11,848
|
|
|
|
6,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,837
|
)
|
|
|
(3,469
|
)
|
|
|
(25,483
|
)
|
|
|
685
|
|
Salaries and benefits
|
|
|
24,953
|
|
|
|
6,013
|
|
|
|
13,947
|
|
|
|
11,357
|
|
General and administrative expenses
|
|
|
17,353
|
|
|
|
10,121
|
|
|
|
13,972
|
|
|
|
11,911
|
|
Interest expense
|
|
|
4,493
|
|
|
|
7,919
|
|
|
|
7,643
|
|
|
|
3,315
|
|
Net foreign exchange (gain) loss
|
|
|
(3,800
|
)
|
|
|
25,056
|
|
|
|
(4,935
|
)
|
|
|
(1,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170,838
|
)
|
|
|
45,640
|
|
|
|
5,144
|
|
|
|
25,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE INCOME TAXES AND SHARE OF NET LOSS OF
PARTLY OWNED COMPANY
|
|
|
175,496
|
|
|
|
(31,573
|
)
|
|
|
20,667
|
|
|
|
(20,372
|
)
|
Income taxes
|
|
|
(33,466
|
)
|
|
|
(10,434
|
)
|
|
|
(3,193
|
)
|
|
|
239
|
|
Share of net loss of partly owned company
|
|
|
(201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) BEFORE EXTRAORDINARY GAIN
|
|
|
141,829
|
|
|
|
(42,007
|
)
|
|
|
17,474
|
|
|
|
(20,133
|
)
|
Extraordinary gain Negative goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,280
|
|
NET EARNINGS (LOSS)
|
|
|
141,829
|
|
|
|
(42,007
|
)
|
|
|
17,474
|
|
|
|
30,147
|
|
Less: Net (earnings) loss attributable to noncontrolling
interests (including share of extraordinary gain of $nil, $nil,
$nil, and 15,084, respectively)
|
|
|
(46,703
|
)
|
|
|
5,572
|
|
|
|
(6,301
|
)
|
|
|
(18,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
|
|
$
|
95,126
|
|
|
$
|
(36,435
|
)
|
|
$
|
11,173
|
|
|
$
|
11,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary gain attributable to Enstar
Group Limited ordinary shareholders
|
|
$
|
7.13
|
|
|
$
|
(2.74
|
)
|
|
$
|
0.93
|
|
|
$
|
(1.97
|
)
|
Extraordinary gain attributable to Enstar Group Limited ordinary
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Enstar Group Limited
ordinary shareholders
|
|
$
|
7.13
|
|
|
$
|
(2.74
|
)
|
|
$
|
0.93
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before extraordinary gain attributable to Enstar
Group Limited ordinary shareholders
|
|
$
|
7.13
|
|
|
$
|
(2.74
|
)
|
|
$
|
0.91
|
|
|
$
|
(1.97
|
)
|
Extraordinary gain attributable to Enstar Group Limited ordinary
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Enstar Group Limited
ordinary shareholders
|
|
$
|
7.13
|
|
|
$
|
(2.74
|
)
|
|
$
|
0.91
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
13,333,644
|
|
|
|
13,317,919
|
|
|
|
11,959,125
|
|
|
|
11,927,542
|
|
Weighted average shares outstanding diluted
|
|
|
13,334,944
|
|
|
|
13,317,919
|
|
|
|
12,238,356
|
|
|
|
11,927,542
|
|
173
SCHEDULE II
ENSTAR
GROUP LIMITED
CONDENSED
BALANCE SHEETS
As of
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands of U.S. dollars,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
25,498
|
|
|
$
|
12,911
|
|
Balances due from subsidiaries
|
|
|
129,509
|
|
|
|
159,688
|
|
Investments in subsidiaries
|
|
|
1,388,529
|
|
|
|
1,196,687
|
|
Goodwill
|
|
|
21,222
|
|
|
|
21,222
|
|
Accounts receivable and other assets
|
|
|
253
|
|
|
|
8,644
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,565,011
|
|
|
$
|
1,399,152
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accounts payable and accrued liabilities
|
|
$
|
10,009
|
|
|
$
|
4,510
|
|
Loans payable
|
|
|
152,333
|
|
|
|
|
|
Balances due to subsidiaries
|
|
|
186,848
|
|
|
|
318,490
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
349,190
|
|
|
|
323,000
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
|
|
|
|
|
|
Authorized issued and fully paid, par value $1 each (Authorized
2010: 156,000,000; 2009: 156,000,000)
|
|
|
|
|
|
|
|
|
Ordinary shares (Issued 2010: 12,940,021; 2009: 13,580,793)
|
|
|
12,940
|
|
|
|
13,581
|
|
Non-voting convertible ordinary shares (Issued 2010: 2,972,892;
2009: 2,972,892)
|
|
|
2,973
|
|
|
|
2,973
|
|
Treasury stock at cost (non-voting convertible ordinary shares
2010: 2,972,892; 2009: 2,972,892)
|
|
|
(421,559
|
)
|
|
|
(421,559
|
)
|
Additional paid-in capital
|
|
|
667,907
|
|
|
|
721,120
|
|
Accumulated other comprehensive income (loss)
|
|
|
35,017
|
|
|
|
8,709
|
|
Retained earnings
|
|
|
651,143
|
|
|
|
477,057
|
|
|
|
|
|
|
|
|
|
|
Total Enstar Group Limited Shareholders Equity
|
|
|
948,421
|
|
|
|
801,881
|
|
Noncontrolling interest
|
|
|
267,400
|
|
|
|
274,271
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
1,215,821
|
|
|
|
1,076,152
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
1,565,011
|
|
|
$
|
1,399,152
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
174
ENSTAR
GROUP LIMITED
CONDENSED
STATEMENTS OF EARNINGS
For the
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
3,528
|
|
|
$
|
1,122
|
|
|
$
|
1,423
|
|
Dividend income from subsidiaries
|
|
|
8,872
|
|
|
|
1,019
|
|
|
|
22,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,400
|
|
|
|
2,141
|
|
|
|
23,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
1,985
|
|
|
|
50
|
|
|
|
642
|
|
General and administrative expenses
|
|
|
11,028
|
|
|
|
6,780
|
|
|
|
3,708
|
|
Interest expense
|
|
|
8,182
|
|
|
|
15,977
|
|
|
|
16,022
|
|
Foreign exchange losses (gains)
|
|
|
17
|
|
|
|
(401
|
)
|
|
|
1,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,212
|
|
|
|
22,406
|
|
|
|
21,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) EARNINGS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES
|
|
|
(8,812
|
)
|
|
|
(20,265
|
)
|
|
|
2,442
|
|
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES
|
|
|
224,543
|
|
|
|
197,273
|
|
|
|
129,917
|
|
NONCONTROLLING INTEREST
|
|
|
(41,645
|
)
|
|
|
(41,798
|
)
|
|
|
(50,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
|
|
$
|
174,086
|
|
|
$
|
135,210
|
|
|
$
|
81,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
175
ENSTAR
GROUP LIMITED
CONDENSED
STATEMENTS OF CASH FLOWS
For the
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by operating activities
|
|
$
|
(92,038
|
)
|
|
$
|
(35,610
|
)
|
|
$
|
118,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Return (contribution) of capital, net
|
|
|
8,407
|
|
|
|
55,721
|
|
|
|
(245,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of loans
|
|
|
(19,206
|
)
|
|
|
(12,482
|
)
|
|
|
|
|
Receipt of loans
|
|
|
115,000
|
|
|
|
|
|
|
|
12,482
|
|
Proceeds from issuance of ordinary shares
|
|
|
424
|
|
|
|
2,796
|
|
|
|
115,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities
|
|
|
96,218
|
|
|
|
(9,686
|
)
|
|
|
127,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
12,587
|
|
|
|
10,425
|
|
|
|
132
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
12,911
|
|
|
|
2,486
|
|
|
|
2,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
25,498
|
|
|
$
|
12,911
|
|
|
$
|
2,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed financial statements.
176
ENSTAR
GROUP LIMITED
NOTES TO
THE CONDENSED FINANCIAL STATEMENTS
December 31,
2010, 2009 and 2008
|
|
1.
|
DESCRIPTION
OF BUSINESS
|
Enstar Group Limited (Enstar) was incorporated under
the laws of Bermuda on August 16, 2001 and with its
subsidiaries (collectively the Company) acquires and
manages insurance and reinsurance companies in run-off and
portfolios of insurance and reinsurance business in run-off, and
provides management, consultancy and other services to the
insurance and reinsurance industry.
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Basis of preparation The condensed financial
statements have been prepared in conformity with accounting
principles generally accepted in the United States of America.
The preparation of financial statements in conformity with
generally accepted accounting principles 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. Actual results could differ from those estimates.
The accompanying condensed financial statements have been
prepared using the equity method to account for the investments
in subsidiaries. Under the equity method, the investments in
consolidated subsidiaries are stated at cost plus the equity in
undistributed earnings of consolidated subsidiaries since the
date of acquisition. These condensed financial statements should
be read in conjunction with the Companys consolidated
financial statements.
177
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Our management has performed an evaluation, with the
participation of our Chief Executive Officer and Chief Financial
Officer, of 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, 2010. Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the
SEC and is accumulated and communicated to management, including
its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required
disclosure.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management was 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 management has performed an assessment,
with the participation of our Chief Executive Officer and our
Chief Financial Officer, of our internal control over financial
reporting as of December 31, 2010. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control-Integrated Framework. As allowed by SEC
guidance, management excluded from its assessment the 2010
acquisitions of PWAC, Seaton, New Castle and Claremont, whose
total assets, net assets, total revenues and net income on a
combined basis constituted approximately 9.1%, (0.7)%, 1.3% and
(4.0)%, respectively, of the consolidated financial statement
amounts as of and for the year ended December 31, 2010.
Based upon that assessment, our management believes that, as of
December 31, 2010, our internal control over financial
reporting is effective.
The effectiveness of our internal control over financial
reporting as of December 31, 2010 has been audited by our
independent registered public accounting firm as stated in its
report. This report appears on page 180.
All internal control systems, no matter how well designed, have
inherent limitations. 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.
Changes
in Internal Control Over Financial Reporting
Our management has performed an evaluation, with the
participation of our Chief Executive Officer and our Chief
Financial Officer, of changes in our internal control over
financial reporting that occurred during the year ended
December 31, 2010. Based upon that evaluation there were no
changes in our internal control over financial reporting that
occurred during the quarter ended December 31, 2010 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
On March 4, 2011, Clarendon Holdings, Inc., a wholly-owned
subsidiary of the Company, as borrower, entered into a Term
Facility Agreement with National Australia Bank Limited (the
Clarendon Facility). The Clarendon
178
Facility provides for a four-year term loan facility pursuant to
which Clarendon Holdings, Inc. is permitted to borrow up to an
aggregate of $106.5 million, which will be available to
fund up to 50% of the purchase price of Clarendon National
Insurance Company (Clarendon), an affiliate of
Hannover Re. As of March 4, 2011, Clarendon Holdings, Inc.
has not borrowed any of the amount available under the Clarendon
Facility.
The Clarendon Facility is secured by a security interest in all
of the assets of Clarendon Holdings, Inc., as well as a first
priority lien on the stock of both Clarendon Holdings, Inc. and
Clarendon. Interest is payable at the end of each interest
period chosen by Clarendon Holdings, Inc. or, at the latest,
each six months. The interest rate is LIBOR plus 2.75%. The
Clarendon Facility is subject to various financial and business
covenants, including limitations on mergers and consolidations,
restrictions as to disposition of stock and limitations of liens
on the stock.
During the existence of any payment default, the interest rate
is increased by 1.0%. During the existence of any event of
default (as specified in the Facility Agreement), the lenders
may declare all or a portion of outstanding amounts immediately
due and payable, declare all or a portion of borrowed amounts
payable upon demand, or proceed against the security. The
Facility Agreement terminates and all amounts borrowed must be
repaid on the fourth anniversary of the date the term loan is
made.
179
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Enstar Group Limited
We have audited the internal control over financial reporting of
Enstar Group Limited and subsidiaries (the Company)
as of December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. As described in Managements Report on Internal
Controls over Financial Reporting, management excluded from its
assessment the internal control over financial reporting at PW
Acquisition Company (PWAC), Seaton Insurance Company
(Seaton), New Castle Reinsurance Company Ltd. (New
Castle) and Claremont Liability Insurance Company
(Claremont), which were acquired on July 20,
2010, August 3, 2010, December 3, 2010 and
December 31, 2010, respectively. The financial statement
amounts of PWAC, Seaton, New Castle and Claremont constitute
approximately 9.1%, (0.7)%, 1.3% and (4.0)% of total assets, net
assets, total revenues and net income, respectively, of the
Companys consolidated financial statement amounts as of
and for the year ended December 31, 2010. Accordingly, our
audit did not include the internal control over financial
reporting at PWAC, Seaton, New Castle and Claremont. The
Companys 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
Managements Report on Internal Controls over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel 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 companys
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
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2010 of
the Company and our report dated March 4, 2011 expressed an
unqualified opinion on those consolidated financial statements
and financial statement schedule.
/s/ Deloitte & Touche
Hamilton, Bermuda
March 4, 2011
180
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
The information required by this item is incorporated by
reference from our definitive proxy statement for the 2011
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, 2010 pursuant to
Regulation 14A.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated by
reference from our definitive proxy statement for the 2011
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, 2010 pursuant to
Regulation 14A.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this item is incorporated by
reference from our definitive proxy statement for the 2011
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, 2010 pursuant to
Regulation 14A.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information required by this item is incorporated by
reference from our definitive proxy statement for the 2011
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, 2010 pursuant to
Regulation 14A.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item is incorporated by
reference from our definitive proxy statement for the 2011
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, 2010 pursuant to
Regulation 14A.
181
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
|
(a)
|
Financial
Statements, Financial Statement Schedules and
Exhibits.
|
1. Financial Statements
Included in Part II See Item 8 of this
report.
2. Financial Statement Schedules
Included in Part II See Item 8 of this
report.
3. Exhibits
The Exhibits listed below are filed as part of, or incorporated
by reference into, this report.
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
2
|
..1u
|
|
Agreement and Plan of Merger, dated as of May 23, 2006, as
amended on November 21, 2006, by and among Castlewood
Holdings Limited, CWMS Subsidiary Corp. and The Enstar Group,
Inc. (incorporated by reference to Exhibit 2.1 (and
Annex A) to the proxy statement/prospectus that forms
a part of the Companys Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006).
|
|
2
|
..2u
|
|
Recapitalization Agreement, dated as of May 23, 2006, among
Castlewood Holdings Limited, The Enstar Group, Inc. and the
other parties signatory thereto (incorporated by reference to
Exhibit 2.2 (and Annex C) to the proxy
statement/prospectus that forms a part of the Companys
Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006).
|
|
2
|
..3u
|
|
Agreement relating to the Sale and Purchase of the Entire Issued
Share Capital of Inter-Ocean Holdings Ltd. dated
December 29, 2006, as amended on January 29, 2007
(incorporated by reference to Exhibit 2.1 of the
Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
March 1, 2007).
|
|
2
|
..4u
|
|
Share Sale Agreement, dated December 10, 2007, by and
between Enstar Group Limited, Enstar Australia Holdings Pty
Limited, AMP Insurance Investment Holdings Pty Limited, AMP
Holdings Limited, AMP Group Services Limited, AMP Group Holdings
Limited and AMP Services Limited (incorporated by reference to
Exhibit 2.4 of the Companys Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
February 29, 2008).
|
|
2
|
..5u
|
|
Agreement for the Sale and Purchase of the Entire Issued Share
Capital of Unionamerica Holdings Limited, dated October 7,
2008, by and between St. Paul Fire and Marine Insurance Company,
Royston Run-off Limited and Kenmare Holdings Limited
(incorporated by reference to Exhibit 2.5 of the
Companys Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
March 5, 2009).
|
|
3
|
.1
|
|
Memorandum of Association of Castlewood Holdings Limited
(incorporated by reference to Exhibit 3.1 to the proxy
statement/prospectus that forms a part of the Companys
Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006).
|
|
3
|
.2
|
|
Second Amended and Restated Bye-Laws of Enstar Group Limited
(incorporated by reference to Exhibit 3.1 of the
Companys
Form 8-K12B,
as filed with the Securities and Exchange Commission on
January 31, 2007).
|
|
10
|
.1
|
|
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., J. Christopher Flowers, Dominic F. Silvester and
other parties thereto set forth on the Schedule of Shareholders
attached thereto (incorporated by reference to Exhibit 10.1
of the Companys
Form 8-K12B,
as filed with the Securities and Exchange Commission on
January 31, 2007).
|
182
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.2+
|
|
Form of Director Indemnification Agreement (incorporated by
reference to Exhibit 10.1 of the Companys
Registration Statement on
Form S-3
(No. 333-151461)
initially filed with the Securities and Exchange Commission on
June 5, 2008).
|
|
10
|
.3
|
|
Tax Indemnification Agreement, dated as of May 23, 2006,
among Castlewood Holdings Limited, The Enstar Group, Inc. and J.
Christopher Flowers (incorporated by reference to
Exhibit 10.3 to the proxy statement/prospectus that forms a
part of the Companys Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006).
|
|
10
|
.4+
|
|
Amended and Restated Employment Agreement, effective May 1,
2007 and amended and restated June 4, 2007, by and among
Enstar Group Limited and Dominic F. Silvester (incorporated by
reference to Exhibit 10.2 of the Companys Quarterly
Report on
Form 10-Q,
as filed with the Securities and Exchange Commission on
August 9, 2007).
|
|
10
|
.5+
|
|
Employment Agreement, effective May 1, 2007, by and among
Enstar Group Limited, Castlewood (US) Inc., and John J. Oros
(incorporated by reference to Exhibit 10.2 of the
Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
May 3, 2007).
|
|
10
|
.6+
|
|
Employment Agreement, effective May 1, 2007, by and among
the Company and Paul J. OShea (incorporated by reference
to Exhibit 10.3 of the Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
May 3, 2007).
|
|
10
|
.7+
|
|
Employment Agreement, effective May 1, 2007, by and among
Enstar Group Limited and Nicholas A. Packer (incorporated by
reference to Exhibit 10.4 of the Companys Current
Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
May 3, 2007).
|
|
10
|
.8+
|
|
Employment Agreement, effective May 1, 2007, by and among
Enstar Group Limited and Richard J. Harris (incorporated by
reference to Exhibit 10.5 of the Companys Current
Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
May 3, 2007).
|
|
10
|
.9+
|
|
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 Companys
Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006), as amended by the
First Amendment to Castlewood Holdings Limited 2006 Equity
Incentive Plan (incorporated by reference to Exhibit 10.2
of the Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
April 6, 2007).
|
|
10
|
.10+
|
|
Castlewood Holdings Limited
2006-2010
Annual Incentive Compensation Plan (incorporated by reference to
Exhibit 10.12 to the proxy statement/prospectus that forms
a part of the Companys Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006), as amended by the
First Amendment to Castlewood Holdings Limited
2006-2010
Annual Incentive Compensation Plan (incorporated by reference to
Exhibit 10.3 of the Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
April 6, 2007).
|
|
10
|
.11+
|
|
Form of Award Agreement under the Castlewood Holdings Limited
2006 Equity Incentive Plan (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
April 6, 2007).
|
|
10
|
.12+
|
|
Enstar Group Limited Amended and Restated Employee Share
Purchase Plan (incorporated by reference to Appendix A to
the Companys Definitive Proxy Statement, as filed with the
Securities and Exchange Commission on April 29, 2008).
|
|
10
|
.13+
|
|
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
Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
June 11, 2007).
|
|
10
|
.14+
|
|
The Enstar Group, Inc. 1997 Amended Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.1 to The Enstar
Group, Inc.s Quarterly Report on
Form 10-Q,
as filed with the Securities and Exchange Commission on
August 14, 2001), as amended by the Amendment to the 1997
Omnibus Inventive Plan (incorporated by reference to
Annex A to the Proxy Statement for the Annual Meeting of
Shareholders of The Enstar Group, Inc., as filed with the
Securities and Exchange Commission on April 22, 2003).
|
183
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.15+
|
|
The Enstar Group, Inc. 2001 Outside Directors Stock Option
Plan (incorporated by reference to Annex B to the Proxy
Statement for the Annual Meeting of Shareholders of The Enstar
Group, Inc., as filed with the Securities and Exchange
Commission on May 8, 2001).
|
|
10
|
.16
|
|
License Agreement, dated October 27, 2005, between
Castlewood (US) Inc. and J.C. Flowers & Co. LLC
(incorporated by reference to Exhibit 10.10 to the proxy
statement/prospectus that forms a part of the Registration
Statement on
Form S-4
of the Company, as filed with the Securities and Exchange
Commission and declared effective December 15, 2006).
|
|
10
|
.17
|
|
Term Facilities Agreement, dated October 3, 2008, by and
between Royston Run-off Limited and National Australia Bank
Limited (incorporated by reference to Exhibit 10.19 of the
Companys Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
March 5, 2009).
|
|
10
|
.18
|
|
Amended and Restated Term Facilities Agreement, dated as of
October 3, 2008, as amended and restated August 4,
2009, by and among Royston Run-off Limited, National Australia
Bank Limited and Barclays Bank PLC (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on From
10-Q, as
filed with the Securities and Exchange Commission on
November 6, 2009).
|
|
10
|
.19+
|
|
The Enstar Group, Inc. Deferred Compensation and Stock Plan for
Non-Employee Directors, as amended (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q,
as filed with the Securities and Exchange Commission on
May 8, 2009).
|
|
10
|
.20+
|
|
Share Repurchase Agreement, dated as of October 1, 2010, by and
among Enstar Group Limited, Dominic F. Silvester and R&H
Trust Co. (NZ) Limited, as trustee of the Left Trust
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, as filed with the Securities and
Exchange Commission on October 1, 2010).
|
|
10
|
.21+
|
|
Share Repurchase Agreement, dated as of October 1, 2010, by and
among Enstar Group Limited, Paul J. OShea and R&H
Trust Co. (BVI) Limited, as trustee of the Elbow Trust
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K, as filed with the Securities and
Exchange Commission on October 1, 2010).
|
|
10
|
.22+
|
|
Share Repurchase Agreement, dated as of October 1, 2010, by and
among Enstar Group Limited, Nicholas A. Packer and Hove
Investments Holding Limited (incorporated by reference to
Exhibit 10.3 to the Companys Current Report on Form 8-K,
as filed with the Securities and Exchange Commission on October
1, 2010).
|
|
10
|
.23+
|
|
Separation Agreement and General Release, dated as of August 20,
2010, by and among Enstar Group Limited, Enstar (US), Inc. and
John J. Oros (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q, as filed with the
Securities and Exchange Commission on November 5, 2010).
|
|
10
|
.24*
|
|
Facilities Agreement, dated as of December 29, 2010, by and
among Enstar Group Limited, certain of its subsidiaries,
Barclays Corporate and Barclays Bank PLC.
|
|
10
|
.25+*
|
|
Enstar Group Limited 2011-2015 Annual Incentive Compensation
Program.
|
|
21
|
.1*
|
|
List of Subsidiaries.
|
|
23
|
.1*
|
|
Consent of Deloitte & Touche
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities and Exchange Act of 1934 as adopted under
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities and Exchange Act of 1934 as adopted under
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1**
|
|
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.
|
|
32
|
.2**
|
|
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.
|
|
|
|
* |
|
filed herewith |
|
** |
|
furnished herewith |
|
+ |
|
denotes management contract or compensatory arrangement |
|
u |
|
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 Securities and Exchange
Commission upon request |
184
SIGNATURES
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 4, 2011.
ENSTAR GROUP LIMITED
|
|
|
|
By:
|
/s/ Dominic
F. Silvester
|
Dominic F. Silvester
Chairman and Chief Executive Officer
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 4, 2011.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Dominic
F. Silvester
Dominic
F. Silvester
|
|
Chairman, Chief Executive Officer and Director
|
|
|
|
/s/ Richard
J. Harris
Richard
J. Harris
|
|
Chief Financial Officer (signing in his capacity as both
principal financial officer and principal accounting officer).
|
|
|
|
/s/ Paul
J. OShea
Paul
J. OShea
|
|
Executive Vice President and Director
|
|
|
|
/s/ J.
Christopher Flowers
J.
Christopher Flowers
|
|
Director
|
|
|
|
/s/ T.
Whit Armstrong
T.
Whit Armstrong
|
|
Director
|
|
|
|
/s/ Charles
T. Akre, Jr.
Charles
T. Akre, Jr.
|
|
Director
|
|
|
|
/s/ Paul
J. Collins
Paul
J. Collins
|
|
Director
|
|
|
|
/s/ Robert
J. Campbell
Robert
J. Campbell
|
|
Director
|
185
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
2
|
..1u
|
|
Agreement and Plan of Merger, dated as of May 23, 2006, as
amended on November 21, 2006, by and among Castlewood
Holdings Limited, CWMS Subsidiary Corp. and The Enstar Group,
Inc. (incorporated by reference to Exhibit 2.1 (and
Annex A) to the proxy statement/prospectus that forms
a part of the Companys Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006).
|
|
2
|
..2u
|
|
Recapitalization Agreement, dated as of May 23, 2006, among
Castlewood Holdings Limited, The Enstar Group, Inc. and the
other parties signatory thereto (incorporated by reference to
Exhibit 2.2 (and Annex C) to the proxy
statement/prospectus that forms a part of the Companys
Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006).
|
|
2
|
..3u
|
|
Agreement relating to the Sale and Purchase of the Entire Issued
Share Capital of Inter-Ocean Holdings Ltd. dated
December 29, 2006, as amended on January 29, 2007
(incorporated by reference to Exhibit 2.1 of the
Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
March 1, 2007).
|
|
2
|
..4u
|
|
Share Sale Agreement, dated December 10, 2007, by and
between Enstar Group Limited, Enstar Australia Holdings Pty
Limited, AMP Insurance Investment Holdings Pty Limited, AMP
Holdings Limited, AMP Group Services Limited, AMP Group Holdings
Limited and AMP Services Limited (incorporated by reference to
Exhibit 2.4 of the Companys Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
February 29, 2008).
|
|
2
|
..5u
|
|
Agreement for the Sale and Purchase of the Entire Issued Share
Capital of Unionamerica Holdings Limited, dated October 7,
2008, by and between St. Paul Fire and Marine Insurance Company,
Royston Run-off Limited and Kenmare Holdings Limited
(incorporated by reference to Exhibit 2.5 of the
Companys Annual Report on
Form 10-K,
as filed with the Securities and Exchange on March 5, 2009).
|
|
3
|
.1
|
|
Memorandum of Association of Castlewood Holdings Limited
(incorporated by reference to Exhibit 3.1 to the proxy
statement/prospectus that forms a part of the Companys
Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006).
|
|
3
|
.2
|
|
Second Amended and Restated Bye-Laws of Enstar Group Limited
(incorporated by reference to Exhibit 3.1 of the
Companys
Form 8-K12B,
as filed with the Securities and Exchange Commission on
January 31, 2007).
|
|
10
|
.1
|
|
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., J. Christopher Flowers, Dominic F. Silvester and
other parties thereto set forth on the Schedule of Shareholders
attached thereto (incorporated by reference to Exhibit 10.1
of the Companys
Form 8-K12B,
as filed with the Securities and Exchange Commission on
January 31, 2007).
|
|
10
|
.2+
|
|
Form of Director Indemnification Agreement (incorporated by
reference to Exhibit 10.1 of the Companys
Registration Statement on
Form S-3
(No. 333-151461)
initially filed with the Securities and Exchange Commission on
June 5, 2008).
|
|
10
|
.3
|
|
Tax Indemnification Agreement, dated as of May 23, 2006,
among Castlewood Holdings Limited, The Enstar Group, Inc. and J.
Christopher Flowers (incorporated by reference to
Exhibit 10.3 to the proxy statement/prospectus that forms a
part of the Companys Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006).
|
|
10
|
.4+
|
|
Amended and Restated Employment Agreement, effective May 1,
2007 and amended and restated June 4, 2007, by and among
Enstar Group Limited and Dominic F. Silvester (incorporated by
reference to Exhibit 10.2 of the Companys Quarterly
Report on
Form 10-Q,
as filed with the Securities and Exchange Commission on
August 9, 2007).
|
186
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.5+
|
|
Employment Agreement, effective May 1, 2007, by and among
Enstar Group Limited, Castlewood (US) Inc., and John J.
Oros (incorporated by reference to Exhibit 10.2 of the
Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
May 3, 2007).
|
|
10
|
.6+
|
|
Employment Agreement, effective May 1, 2007, by and among
the Company and Paul J. OShea (incorporated by reference
to Exhibit 10.3 of the Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
May 3, 2007).
|
|
10
|
.7+
|
|
Employment Agreement, effective May 1, 2007, by and among
Enstar Group Limited and Nicholas A. Packer (incorporated
by reference to Exhibit 10.4 of the Companys Current
Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
May 3, 2007).
|
|
10
|
.8+
|
|
Employment Agreement, effective May 1, 2007, by and among
Enstar Group Limited and Richard J. Harris (incorporated by
reference to Exhibit 10.5 of the Companys Current
Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
May 3, 2007).
|
|
10
|
.9+
|
|
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 Companys
Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006), as amended by the
First Amendment to Castlewood Holdings Limited 2006 Equity
Incentive Plan (incorporated by reference to Exhibit 10.2
of the Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
April 6, 2007).
|
|
10
|
.10+
|
|
Castlewood Holdings Limited
2006-2010
Annual Incentive Compensation Plan (incorporated by reference to
Exhibit 10.12 to the proxy statement/prospectus that forms
a part of the Companys Registration Statement on
Form S-4,
as filed with the Securities and Exchange Commission and
declared effective December 15, 2006), as amended by the
First Amendment to Castlewood Holdings Limited
2006-2010
Annual Incentive Compensation Plan (incorporated by reference to
Exhibit 10.3 of the Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
April 6, 2007).
|
|
10
|
.11+
|
|
Form of Award Agreement under the Castlewood Holdings Limited
2006 Equity Incentive Plan (incorporated by reference to
Exhibit 10.1 of the Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
April 6, 2007).
|
|
10
|
.12+
|
|
Enstar Group Limited Amended and Restated Employee Share
Purchase Plan (incorporated by reference to Appendix A to
the Companys Definitive Proxy Statement, as filed with the
Securities and Exchange Commission on April 29, 2008).
|
|
10
|
.13+
|
|
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
Companys Current Report on
Form 8-K,
as filed with the Securities and Exchange Commission on
June 11, 2007).
|
|
10
|
.14+
|
|
The Enstar Group, Inc. 1997 Amended Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.1 to The Enstar
Group, Inc.s Quarterly Report on
Form 10-Q,
as filed with the Securities and Exchange Commission on
August 14, 2001), as amended by the Amendment to the 1997
Omnibus Inventive Plan (incorporated by reference to
Annex A to the Proxy Statement for the Annual Meeting of
Shareholders of The Enstar Group, Inc., as filed with the
Securities and Exchange Commission on April 22, 2003).
|
|
10
|
.15+
|
|
The Enstar Group, Inc. 2001 Outside Directors Stock Option
Plan (incorporated by reference to Annex B to the Proxy
Statement for the Annual Meeting of Shareholders of The Enstar
Group, Inc., as filed with the Securities and Exchange
Commission on May 8, 2001).
|
|
10
|
.16
|
|
License Agreement, dated October 27, 2005, between
Castlewood (US) Inc. and J.C. Flowers & Co. LLC
(incorporated by reference to Exhibit 10.10 to the proxy
statement/prospectus that forms a part of the Registration
Statement on
Form S-4
of the Company, as filed with the Securities and Exchange
Commission and declared effective December 15, 2006).
|
|
10
|
.17
|
|
Term Facilities Agreement, dated October 3, 2008, by and
between Royston Run-off Limited and National Australia Bank
Limited (incorporated by reference to Exhibit 10.19 of the
Companys Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
March 5, 2009).
|
187
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.18
|
|
Amended and Restated Term Facilities Agreement, dated as of
October 3, 2008, as amended and restated August 4,
2009, by and among Royston Run-off Limited, National Australia
Bank Limited and Barclays Bank PLC (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on From
10-Q, as
filed with the Securities and Exchange Commission on
November 6, 2009).
|
|
10
|
.19+
|
|
The Enstar Group, Inc. Deferred Compensation and Stock Plan for
Non-Employee Directors, as amended (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q,
as filed with the Securities and Exchange Commission on
May 8, 2009).
|
|
10
|
.20+
|
|
Share Repurchase Agreement, dated as of October 1, 2010, by and
among Enstar Group Limited, Dominic F. Silvester and R&H
Trust Co. (NZ) Limited, as trustee of the Left Trust
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K, as filed with the Securities and
Exchange Commission on October 1, 2010).
|
|
10
|
.21+
|
|
Share Repurchase Agreement, dated as of October 1, 2010, by and
among Enstar Group Limited, Paul J. OShea and R&H
Trust Co. (BVI) Limited, as trustee of the Elbow Trust
(incorporated by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K, as filed with the Securities and
Exchange Commission on October 1, 2010).
|
|
10
|
.22+
|
|
Share Repurchase Agreement, dated as of October 1, 2010, by and
among Enstar Group Limited, Nicholas A. Packer and Hove
Investments Holding Limited (incorporated by reference to
Exhibit 10.3 to the Companys Current Report on Form 8-K,
as filed with the Securities and Exchange Commission on October
1, 2010).
|
|
10
|
.23+
|
|
Separation Agreement and General Release, dated as of August 20,
2010, by and among Enstar Group Limited, Enstar (US), Inc. and
John J. Oros (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q, as filed with the
Securities and Exchange Commission on November 5, 2010).
|
|
10
|
.24*
|
|
Facilities Agreement, dated as of December 29, 2010, by and
among Enstar Group Limited, certain of its subsidiaries,
Barclays Corporate and Barclays Bank PLC.
|
|
10
|
.25+*
|
|
Enstar Group Limited 2011-2015 Annual Incentive Compensation
Program.
|
|
21
|
.1*
|
|
List of Subsidiaries.
|
|
23
|
.1*
|
|
Consent of Deloitte & Touche
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities and Exchange Act of 1934 as adopted under
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities and Exchange Act of 1934 as adopted under
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1**
|
|
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.
|
|
32
|
.2**
|
|
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.
|
|
|
|
* |
|
filed herewith |
|
** |
|
furnished herewith |
|
+ |
|
denotes management contract or compensatory arrangement |
|
u |
|
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 Securities and Exchange
Commission upon request |
188