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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2012
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
001-33289
Commission File Number
ENSTAR GROUP LIMITED
(Exact name of registrant as specified in its charter)
| Bermuda | N/A | |
|
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
P.O. Box HM 2267
Windsor Place, 3rd Floor
18 Queen Street
Hamilton HM JX
Bermuda
(Address of principal executive office, including zip code)
(441) 292-3645
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
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 þ No ¨
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.
|
Large accelerated filer þ |
Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of July 31, 2012, the registrant had outstanding 13,857,378 voting ordinary shares and 2,725,637 non-voting convertible ordinary shares, each par value $1.00 per share.
| Page | ||||||
| PART I — FINANCIAL INFORMATION | ||||||
| Item 1. | ||||||
|
Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (Unaudited) |
1 | |||||
| 2 | ||||||
| 3 | ||||||
| 4 | ||||||
| 5 | ||||||
|
Notes to the Condensed Consolidated Financial Statements (Unaudited) |
6 | |||||
| 31 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
32 | ||||
| Item 3. | 50 | |||||
| Item 4. | 50 | |||||
| PART II — OTHER INFORMATION | ||||||
| Item 1. | 51 | |||||
| Item 1A. | 51 | |||||
| Item 6. | 51 | |||||
| Signature | 52 | |||||
PART I — FINANCIAL INFORMATION
| Item 1. | FINANCIAL STATEMENTS |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2012 and December 31, 2011
|
June 30,
2012 |
December 31,
2011 |
|||||||
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(expressed in thousands of U.S.
dollars, except share data) |
||||||||
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ASSETS |
||||||||
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Short-term investments, trading, at fair value |
$ | 405,090 | $ | 410,269 | ||||
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Fixed maturities, available-for-sale, at fair value (amortized cost: 2012 — $411,168; 2011 — $590,588) |
421,809 | 607,316 | ||||||
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Fixed maturities, trading, at fair value |
2,216,611 | 2,035,369 | ||||||
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Equities, trading, at fair value |
97,779 | 89,981 | ||||||
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Other investments, at fair value |
324,635 | 192,264 | ||||||
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Total investments |
3,465,924 | 3,335,199 | ||||||
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Cash and cash equivalents |
672,883 | 850,474 | ||||||
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Restricted cash and cash equivalents |
283,416 | 373,191 | ||||||
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Accrued interest receivable |
26,116 | 26,924 | ||||||
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Accounts receivable |
31,814 | 50,258 | ||||||
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Income taxes recoverable |
12,254 | 10,559 | ||||||
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Reinsurance balances recoverable |
1,407,013 | 1,789,582 | ||||||
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Funds held by reinsured companies |
90,612 | 107,748 | ||||||
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Goodwill |
21,222 | 21,222 | ||||||
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Other assets |
19,687 | 40,981 | ||||||
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TOTAL ASSETS |
$ | 6,030,941 | $ | 6,606,138 | ||||
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LIABILITIES |
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Losses and loss adjustment expenses |
$ | 3,810,331 | $ | 4,282,916 | ||||
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Reinsurance balances payable |
162,838 | 208,540 | ||||||
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Accounts payable and accrued liabilities |
121,913 | 75,983 | ||||||
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Income taxes payable |
9,645 | 16,985 | ||||||
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Loans payable |
126,312 | 242,710 | ||||||
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Other liabilities |
112,826 | 95,593 | ||||||
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TOTAL LIABILITIES |
4,343,865 | 4,922,727 | ||||||
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS’ EQUITY |
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Share capital |
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Authorized, issued and fully paid, par value $1 each (authorized 2012: 156,000,000; 2011: 156,000,000) |
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Ordinary shares (issued and outstanding 2012: 13,711,656; 2011: 13,665,051) |
13,712 | 13,665 | ||||||
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Non-voting convertible ordinary shares: |
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Series A (issued 2012: 2,972,892; 2011: 2,972,892) |
2,973 | 2,973 | ||||||
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Series B, C and D (issued and outstanding 2012: 2,725,637; 2011: 2,725,637) |
2,726 | 2,726 | ||||||
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Treasury shares at cost (Series A non-voting convertible ordinary shares 2012: 2,972,892; 2011: 2,972,892) |
(421,559 | ) | (421,559 | ) | ||||
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Additional paid-in capital |
958,351 | 956,329 | ||||||
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Accumulated other comprehensive income |
26,380 | 27,096 | ||||||
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Retained earnings |
855,230 | 804,836 | ||||||
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Total Enstar Group Limited Shareholders’ Equity |
1,437,813 | 1,386,066 | ||||||
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Noncontrolling interest |
249,263 | 297,345 | ||||||
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TOTAL SHAREHOLDERS’ EQUITY |
1,687,076 | 1,683,411 | ||||||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 6,030,941 | $ | 6,606,138 | ||||
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See accompanying notes to the unaudited condensed consolidated financial statements
1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three and Six Month Periods Ended June 30, 2012 and 2011
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
|
(expressed in thousands of U.S. dollars, except share and per share data) |
||||||||||||||||
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INCOME |
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Consulting fees |
$ | 1,775 | $ | 2,045 | $ | 3,969 | $ | 6,081 | ||||||||
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Net investment income |
23,393 | 22,928 | 46,176 | 41,470 | ||||||||||||
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Net realized and unrealized (losses) gains |
(808 | ) | 5,264 | 22,234 | 8,632 | |||||||||||
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Gain on bargain purchase |
— | — | — | 13,105 | ||||||||||||
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| 24,360 | 30,237 | 72,379 | 69,288 | |||||||||||||
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EXPENSES |
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Net reduction in ultimate loss and loss adjustment expense liabilities: |
||||||||||||||||
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Reduction in estimates of net ultimate losses |
(58,417 | ) | (27,829 | ) | (61,715 | ) | (30,441 | ) | ||||||||
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Reduction in provisions for bad debt |
(527 | ) | (1,672 | ) | (2,782 | ) | (1,672 | ) | ||||||||
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Reduction in provisions for unallocated loss adjustment expense liabilities |
(11,661 | ) | (11,783 | ) | (24,513 | ) | (23,320 | ) | ||||||||
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Amortization of fair value adjustments |
2,240 | 6,969 | 9,827 | 17,046 | ||||||||||||
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| (68,365 | ) | (34,315 | ) | (79,183 | ) | (38,387 | ) | |||||||||
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Salaries and benefits |
24,379 | 16,723 | 44,830 | 27,105 | ||||||||||||
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General and administrative expenses |
14,156 | 28,211 | 29,014 | 45,961 | ||||||||||||
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Interest expense |
2,062 | 1,697 | 4,173 | 3,663 | ||||||||||||
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Net foreign exchange (gains) losses |
(627 | ) | 1,932 | 1,642 | 9,266 | |||||||||||
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| (28,395 | ) | 14,248 | 476 | 47,608 | ||||||||||||
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EARNINGS BEFORE INCOME TAXES |
52,755 | 15,989 | 71,903 | 21,680 | ||||||||||||
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INCOME TAXES |
(11,905 | ) | (975 | ) | (15,647 | ) | (1,592 | ) | ||||||||
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NET EARNINGS |
40,850 | 15,014 | 56,256 | 20,088 | ||||||||||||
|
Less: Net earnings attributable to noncontrolling interest |
(129 | ) | (5,639 | ) | (5,862 | ) | (7,210 | ) | ||||||||
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NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED |
$ | 40,721 | $ | 9,375 | $ | 50,394 | $ | 12,878 | ||||||||
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EARNINGS PER SHARE — BASIC: |
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Net earnings per ordinary share attributable to Enstar Group Limited shareholders |
$ | 2.48 | $ | 0.67 | $ | 3.07 | $ | 0.96 | ||||||||
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EARNINGS PER SHARE — DILUTED |
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Net earnings per ordinary share attributable to Enstar Group Limited shareholders |
$ | 2.44 | $ | 0.66 | $ | 3.02 | $ | 0.94 | ||||||||
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Weighted average ordinary shares outstanding — basic |
16,436,401 | 13,999,179 | 16,432,001 | 13,475,418 | ||||||||||||
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Weighted average ordinary shares outstanding — diluted |
16,674,792 | 14,285,685 | 16,673,250 | 13,755,623 | ||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Six Month Periods Ended June 30, 2012 and 2011
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (expressed in thousands of U.S. dollars) | ||||||||||||||||
|
NET EARNINGS |
$ | 40,850 | $ | 15,014 | $ | 56,256 | $ | 20,088 | ||||||||
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Other comprehensive income, net of tax: |
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Unrealized holding (losses) gains on investments arising during the period |
(2,182 | ) | 5,839 | 22,833 | 14,575 | |||||||||||
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Reclassification adjustment for net realized and unrealized losses (gains) included in net earnings |
808 | (5,264 | ) | (22,234 | ) | (8,632 | ) | |||||||||
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Decrease in defined benefit pension liability |
— | — | — | 272 | ||||||||||||
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Currency translation adjustment |
(3,892 | ) | 10,049 | (908 | ) | 12,255 | ||||||||||
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Total other comprehensive (loss) income |
(5,266 | ) | 10,624 | (309 | ) | 18,470 | ||||||||||
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Comprehensive income |
35,584 | 25,638 | 55,947 | 38,558 | ||||||||||||
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Less comprehensive loss (income) attributable to noncontrolling interest |
643 | (7,846 | ) | (6,269 | ) | (10,361 | ) | |||||||||
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COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED |
$ | 36,227 | $ | 17,792 | $ | 49,678 | $ | 28,197 | ||||||||
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See accompanying notes to the unaudited condensed consolidated financial statements
3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
For the Six Month Periods Ended June 30, 2012 and 2011
|
Six Months Ended
June 30, |
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| 2012 | 2011 | |||||||
| (expressed in thousands | ||||||||
| of U.S. dollars) | ||||||||
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Share Capital — Ordinary Shares |
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Balance, beginning of period |
$ | 13,665 | $ | 12,940 | ||||
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Issue of shares |
3 | 538 | ||||||
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Share awards granted/vested |
44 | 42 | ||||||
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Balance, end of period |
$ | 13,712 | $ | 13,520 | ||||
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Share Capital — Series A Non-Voting Convertible Ordinary Shares |
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Balance, beginning and end of period |
$ | 2,973 | $ | 2,973 | ||||
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Share Capital — Series B, C and D Non-Voting Convertible Ordinary Shares |
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Balance, beginning of period |
$ | 2,726 | $ | — | ||||
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Preferred shares converted |
— | 750 | ||||||
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Balance, end of period |
$ | 2,726 | $ | 750 | ||||
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Share Capital — Preference Shares |
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Balance, beginning of period |
$ | — | $ | — | ||||
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Issue of shares |
— | 750 | ||||||
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Shares converted |
— | (750 | ) | |||||
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Balance, end of period |
$ | — | $ | — | ||||
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Treasury Shares |
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Balance, beginning and end of period |
$ | (421,559 | ) | $ | (421,559 | ) | ||
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Additional Paid-in Capital |
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Balance, beginning of period |
$ | 956,329 | $ | 667,907 | ||||
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Share awards granted/vested |
381 | 168 | ||||||
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Issue of shares and warrants, net |
280 | 105,310 | ||||||
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Amortization of share awards |
1,361 | 1,252 | ||||||
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Balance, end of period |
$ | 958,351 | $ | 774,637 | ||||
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Accumulated Other Comprehensive Income Attributable to Enstar Group Limited |
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Balance, beginning of period |
$ | 27,096 | $ | 35,017 | ||||
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Foreign currency translation adjustments |
(1,487 | ) | 9,152 | |||||
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Net movement in unrealized holding gains on investments |
771 | 5,895 | ||||||
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Decrease in defined benefit pension liability |
— | 272 | ||||||
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Balance, end of period |
$ | 26,380 | $ | 50,336 | ||||
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Retained Earnings |
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Balance, beginning of period |
$ | 804,836 | $ | 651,143 | ||||
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Net earnings attributable to Enstar Group Limited |
50,394 | 12,878 | ||||||
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Balance, end of period |
$ | 855,230 | $ | 664,021 | ||||
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Noncontrolling Interest |
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Balance, beginning of period |
$ | 297,345 | $ | 267,400 | ||||
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Return of capital |
(35,366 | ) | (16,200 | ) | ||||
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Dividends paid |
(18,985 | ) | — | |||||
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Net earnings attributable to noncontrolling interest |
5,862 | 7,210 | ||||||
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Foreign currency translation adjustments |
579 | 3,103 | ||||||
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Net movement in unrealized holding (losses) gains on investments |
(172 | ) | 48 | |||||
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Balance, end of period |
$ | 249,263 | $ | 261,561 | ||||
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See accompanying notes to the unaudited condensed consolidated financial statements
4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended June 30, 2012 and 2011
| Six Months Ended June 30, | ||||||||
| 2012 | 2011 | |||||||
|
(expressed in thousands of
U.S. dollars) |
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OPERATING ACTIVITIES: |
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Net earnings |
$ | 56,256 | $ | 20,088 | ||||
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Adjustments to reconcile net earnings to cash flows used in operating activities: |
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Gain on bargain purchase |
— | (13,105 | ) | |||||
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Net realized and unrealized investment gains |
(22,234 | ) | (8,632 | ) | ||||
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Net gain from other investments |
(4,839 | ) | (6,863 | ) | ||||
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Other items |
1,754 | 2,494 | ||||||
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Depreciation and amortization |
631 | 771 | ||||||
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Amortization of premiums and discounts |
16,426 | 9,007 | ||||||
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Net movement of trading securities held on behalf of policyholders |
11,317 | 448 | ||||||
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Sales and maturities of trading securities |
1,125,863 | 630,961 | ||||||
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Purchases of trading securities |
(1,319,669 | ) | (980,455 | ) | ||||
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Changes in assets and liabilities: |
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Reinsurance balances recoverable |
382,569 | (40,238 | ) | |||||
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Other assets |
56,350 | 60,005 | ||||||
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Losses and loss adjustment expenses |
(472,676 | ) | (41,924 | ) | ||||
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Reinsurance balances payable |
(45,702 | ) | (7,412 | ) | ||||
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Accounts payable and accrued liabilities |
17,670 | (52,667 | ) | |||||
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Other liabilities |
9,729 | (44,937 | ) | |||||
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Net cash flows used in operating activities |
(186,555 | ) | (472,741 | ) | ||||
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INVESTING ACTIVITIES: |
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Acquisitions, net of cash acquired |
— | (7,949 | ) | |||||
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Sales and maturities of available-for-sale securities |
183,609 | 261,977 | ||||||
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Movement in restricted cash and cash equivalents |
89,775 | 143,408 | ||||||
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Funding of other investments |
(126,130 | ) | (23,581 | ) | ||||
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Redemption of bond funds |
103 | 12,535 | ||||||
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Other investing activities |
(454 | ) | (297 | ) | ||||
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Net cash flows provided by investing activities |
146,903 | 386,093 | ||||||
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FINANCING ACTIVITIES: |
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Net proceeds from issuance of shares |
— | 105,703 | ||||||
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Distribution of capital to noncontrolling interest |
(7,236 | ) | (16,200 | ) | ||||
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Dividends paid to noncontrolling interest |
(18,985 | ) | — | |||||
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Receipt of loans |
— | 167,650 | ||||||
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Repayment of loans |
(115,875 | ) | (207,016 | ) | ||||
|
|
|
|
|
|||||
|
Net cash flows (used in) provided by financing activities |
(142,096 | ) | 50,137 | |||||
|
|
|
|
|
|||||
|
TRANSLATION ADJUSTMENT |
4,157 | (2,919 | ) | |||||
|
|
|
|
|
|||||
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(177,591 | ) | (39,430 | ) | ||||
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
850,474 | 799,154 | ||||||
|
|
|
|
|
|||||
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 672,883 | $ | 759,724 | ||||
|
|
|
|
|
|||||
|
Supplemental Cash Flow Information |
||||||||
|
Net income taxes paid |
$ | 15,367 | $ | 55,927 | ||||
|
Interest paid |
$ | 4,689 | $ | 3,848 | ||||
See accompanying notes to the unaudited condensed consolidated financial statements
5
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012 and December 31, 2011
(Tabular information expressed in thousands of U.S. dollars except share and per share data)
(unaudited)
| 1. | BASIS OF PREPARATION AND CONSOLIDATION |
The Company’s condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. The results of operations for any interim period are not necessarily indicative of the results for a full year. Inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Adoption of New Accounting Standards
In May 2011, the U.S. Financial Accounting Standards Board (“FASB”) issued amendments to disclosure requirements for common fair value measurement. These amendments result in a common definition of fair value and common requirements for measurement of and disclosure requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). Consequently, the amendments change some fair value measurement principles and disclosure requirements. The Company adopted this amended accounting guidance effective January 1, 2012. The adoption of the amended guidance did not have a material impact on the consolidated financial statements.
In June 2011, FASB issued amendments to disclosure requirements for presentation of comprehensive income. This guidance requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this amended accounting guidance effective January 1, 2012. The adoption of the amended guidance had no impact on the consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In December 2011, FASB issued new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivatives. The new disclosures are designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under IFRS. The new disclosure requirements are effective retrospectively for annual and interim reporting periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of adopting these revised disclosure requirements on the consolidated financial statements.
| 2. | SIGNIFICANT NEW BUSINESS |
Zurich Danish Portfolio
On June 30, 2012, the Company, through the Danish branch of its wholly-owned subsidiary, Marlon Insurance Company Limited (“Marlon”), acquired, by way of loss portfolio transfer under Danish law, a portfolio of reinsurance and professional disability business from the Danish branch of Zurich Insurance Company (“Zurich”). Marlon received total assets and assumed total net insurance and reinsurance liabilities of approximately $58.7 million. The total assets and assumed total net insurance and reinsurance liabilities may be adjusted in the third quarter of 2012 based on final balances reported by Zurich.
6
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 2. | SIGNIFICANT NEW BUSINESS — (cont’d) |
Reciprocal of America
On July 6, 2012 the Company, through its wholly-owned subsidiary, Providence Washington Insurance Company, entered into a definitive loss portfolio reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business. The estimated total assets and liabilities to be assumed are approximately $174.0 million. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close in the fourth quarter of 2012.
| 3. | INVESTMENTS |
Available-for-sale
The amortized cost and estimated fair values of the Company’s fixed maturity securities classified as available-for-sale were as follows:
|
Amortized
Cost |
Gross
Unrealized Holding Gains |
Gross
Unrealized Holding Losses Non-OTTI |
Fair
Value |
|||||||||||||
|
As at June 30, 2012 |
||||||||||||||||
|
U.S. government and agency |
$ | 5,662 | $ | 508 | $ | — | $ | 6,170 | ||||||||
|
Non-U.S. government |
133,354 | 4,918 | (727 | ) | 137,545 | |||||||||||
|
Corporate |
234,699 | 4,434 | (445 | ) | 238,688 | |||||||||||
|
Residential mortgage-backed |
12,071 | 266 | (88 | ) | 12,249 | |||||||||||
|
Commercial mortgage-backed |
10,519 | 1,894 | — | 12,413 | ||||||||||||
|
Asset-backed |
14,863 | 26 | (145 | ) | 14,744 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 411,168 | $ | 12,046 | $ | (1,405 | ) | $ | 421,809 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Amortized
Cost |
Gross
Unrealized Holding Gains |
Gross
Unrealized Holding Losses Non-OTTI |
Fair
Value |
|||||||||||||
|
As at December 31, 2011 |
||||||||||||||||
|
U.S. government and agency |
$ | 17,816 | $ | 546 | $ | (433 | ) | $ | 17,929 | |||||||
|
Non-U.S. government |
160,128 | 9,227 | (828 | ) | 168,527 | |||||||||||
|
Corporate |
366,954 | 7,937 | (2,578 | ) | 372,313 | |||||||||||
|
Residential mortgage-backed |
13,544 | 276 | (108 | ) | 13,712 | |||||||||||
|
Commercial mortgage-backed |
12,680 | 3,044 | (7 | ) | 15,717 | |||||||||||
|
Asset-backed |
19,466 | 65 | (413 | ) | 19,118 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 590,588 | $ | 21,095 | $ | (4,367 | ) | $ | 607,316 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Included within residential and commercial mortgage-backed securities are securities issued by U.S. agencies with a fair value of $4,080 and $nil, respectively (2011 — $4,624 and $nil, respectively).
7
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
The following tables summarize the Company’s fixed maturity securities 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 | ||||||||||||||||||||||
|
As at June 30, 2012 |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
||||||||||||||||||
|
U.S. government and agency |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Non-U.S. government |
— | — | 15,215 | (727 | ) | 15,215 | (727 | ) | ||||||||||||||||
|
Corporate |
13,859 | (205 | ) | 28,203 | (240 | ) | 42,062 | (445 | ) | |||||||||||||||
|
Residential mortgage-backed |
1,146 | (85 | ) | 38 | (3 | ) | 1,184 | (88 | ) | |||||||||||||||
|
Commercial mortgage-backed |
— | — | 49 | — | 49 | — | ||||||||||||||||||
|
Asset-backed |
8,887 | (142 | ) | 892 | (3 | ) | 9,779 | (145 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 23,892 | $ | (432 | ) | $ | 44,397 | $ | (973 | ) | $ | 68,289 | $ | (1,405 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 12 Months or Greater | Less Than 12 Months | Total | ||||||||||||||||||||||
|
As at December 31, 2011 |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||
|
U.S. government and agency |
$ | — | $ | — | $ | 8,318 | $ | (433 | ) | $ | 8,318 | $ | (433 | ) | ||||||||||
|
Non-U.S. government |
14,982 | (466 | ) | 16,305 | (362 | ) | 31,287 | (828 | ) | |||||||||||||||
|
Corporate |
47,197 | (1,367 | ) | 54,106 | (1,211 | ) | 101,303 | (2,578 | ) | |||||||||||||||
|
Residential mortgage-backed |
1,299 | (105 | ) | 36 | (3 | ) | 1,335 | (108 | ) | |||||||||||||||
|
Commercial mortgage-backed |
— | — | 215 | (7 | ) | 215 | (7 | ) | ||||||||||||||||
|
Asset-backed |
7,577 | (187 | ) | 6,491 | (226 | ) | 14,068 | (413 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 71,055 | $ | (2,125 | ) | $ | 85,471 | $ | (2,242 | ) | $ | 156,526 | $ | (4,367 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
As at June 30, 2012 and December 31, 2011, the number of securities classified as available-for-sale in an unrealized loss position was 57 and 107, respectively, with a fair value of $68.3 million and $156.5 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 20 and 59, respectively. As of June 30, 2012, none of these securities were considered to be other than temporarily impaired.
8
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
The contractual maturities of the Company’s fixed maturity securities 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.
|
As at June 30, 2012 |
Amortized
Cost |
Fair
Value |
% of Total
Fair Value |
|||||||||
|
Due in one year or less |
$ | 264,812 | $ | 267,322 | 63.4 | % | ||||||
|
Due after one year through five years |
104,539 | 110,427 | 26.2 | % | ||||||||
|
Due after five years through ten years |
1,325 | 1,589 | 0.4 | % | ||||||||
|
Due after ten years |
3,039 | 3,065 | 0.7 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| 373,715 | 382,403 | 90.7 | % | |||||||||
|
Residential mortgage-backed |
12,071 | 12,249 | 2.9 | % | ||||||||
|
Commercial mortgage-backed |
10,519 | 12,413 | 2.9 | % | ||||||||
|
Asset-backed |
14,863 | 14,744 | 3.5 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| $ | 411,168 | $ | 421,809 | 100.0 | % | |||||||
|
|
|
|
|
|
|
|||||||
|
As at December 31, 2011 |
Amortized
Cost |
Fair
Value |
% of Total
Fair Value |
|||||||||
|
Due in one year or less |
$ | 230,550 | $ | 230,377 | 37.9 | % | ||||||
|
Due after one year through five years |
308,062 | 322,131 | 53.0 | % | ||||||||
|
Due after five years through ten years |
3,296 | 3,367 | 0.6 | % | ||||||||
|
Due after ten years |
2,990 | 2,894 | 0.5 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| 544,898 | 558,769 | 92.0 | % | |||||||||
|
Residential mortgage-backed |
13,544 | 13,712 | 2.3 | % | ||||||||
|
Commercial mortgage-backed |
12,680 | 15,717 | 2.6 | % | ||||||||
|
Asset-backed |
19,466 | 19,118 | 3.1 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| $ | 590,588 | $ | 607,316 | 100.0 | % | |||||||
|
|
|
|
|
|
|
|||||||
The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity securities classified as available-for-sale:
|
As at June 30, 2012 |
Amortized
Cost |
Fair
Value |
% of Total
Fair Value |
|||||||||
|
AAA |
$ | 124,570 | $ | 128,914 | 30.6 | % | ||||||
|
AA |
123,134 | 125,282 | 29.7 | % | ||||||||
|
A |
141,446 | 145,376 | 34.5 | % | ||||||||
|
BBB or lower |
21,720 | 21,614 | 5.1 | % | ||||||||
|
Not Rated |
298 | 623 | 0.1 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| $ | 411,168 | $ | 421,809 | 100.0 | % | |||||||
|
|
|
|
|
|
|
|||||||
9
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
|
As at December 31, 2011 |
Amortized
Cost |
Fair
Value |
% of Total
Fair Value |
|||||||||
|
AAA |
$ | 204,967 | $ | 214,873 | 35.4 | % | ||||||
|
AA |
131,092 | 132,971 | 21.9 | % | ||||||||
|
A |
210,040 | 215,225 | 35.4 | % | ||||||||
|
BBB or lower |
44,100 | 43,526 | 7.2 | % | ||||||||
|
Not Rated |
389 | 721 | 0.1 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| $ | 590,588 | $ | 607,316 | 100.0 | % | |||||||
|
|
|
|
|
|
|
|||||||
Trading
The estimated fair values of the Company’s investments in fixed maturity securities, short-term investments and equities classified as trading securities were as follows:
|
June 30,
2012 |
December 31,
2011 |
|||||||
|
U.S. government and agency |
$ | 303,626 | $ | 400,908 | ||||
|
Non-U.S. government |
244,909 | 212,251 | ||||||
|
Corporate |
1,817,874 | 1,595,930 | ||||||
|
Municipal |
21,308 | 25,416 | ||||||
|
Residential mortgage-backed |
86,279 | 97,073 | ||||||
|
Commercial mortgage-backed |
110,994 | 70,977 | ||||||
|
Asset-backed |
36,711 | 43,083 | ||||||
|
Equities |
97,779 | 89,981 | ||||||
|
|
|
|
|
|||||
| $ | 2,719,480 | $ | 2,535,619 | |||||
|
|
|
|
|
|||||
The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity securities and short-term investments classified as trading:
|
As at June 30, 2012 |
Fair
Value |
% of Total
Fair Value |
||||||
|
AAA |
$ | 400,222 | 15.3 | % | ||||
|
AA |
905,921 | 34.5 | % | |||||
|
A |
948,003 | 36.2 | % | |||||
|
BBB or lower |
351,471 | 13.4 | % | |||||
|
Not Rated |
16,084 | 0.6 | % | |||||
|
|
|
|
|
|||||
| $ | 2,621,701 | 100.0 | % | |||||
|
|
|
|
|
|||||
|
As at December 31, 2011 |
Fair
Value |
% of Total
Fair Value |
||||||
|
AAA |
$ | 881,951 | 36.0 | % | ||||
|
AA |
400,394 | 16.4 | % | |||||
|
A |
796,608 | 32.6 | % | |||||
|
BBB or lower |
341,307 | 14.0 | % | |||||
|
Not Rated |
25,378 | 1.0 | % | |||||
|
|
|
|
|
|||||
| $ | 2,445,638 | 100.0 | % | |||||
|
|
|
|
|
|||||
10
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
Other Investments
The estimated fair values of the Company’s other investments were as follows:
|
June 30,
2012 |
December 31,
2011 |
|||||||
|
Private equity funds |
$ | 112,142 | $ | 107,388 | ||||
|
Bond funds |
106,484 | 54,537 | ||||||
|
Fixed income hedge funds |
48,950 | 24,395 | ||||||
|
Equity fund |
36,411 | — | ||||||
|
Real estate debt fund |
15,474 | — | ||||||
|
Other |
5,174 | 5,944 | ||||||
|
|
|
|
|
|||||
| $ | 324,635 | $ | 192,264 | |||||
|
|
|
|
|
|||||
Private equity funds
This class is comprised of several private equity funds that invest primarily in the financial services industry. All of the Company’s investments in private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate those investments. These restrictions have been in place since the dates the initial investments were made by the Company.
As of June 30, 2012 and December 31, 2011, the Company had $112.1 million and $107.4 million, respectively, of other investments recorded in private equity funds, which represented 2.5% and 2.4% of total investments, cash and cash equivalents, and restricted cash and cash equivalents, at June 30, 2012 and December 31, 2011. 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.
Bond funds
This class is comprised of a number of positions in diversified bond mutual funds managed by third-party managers.
Fixed income hedge funds
This class is comprised of hedge funds that invest in a diversified portfolio of debt securities. The advisor of the funds 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 funds focus on investments that the advisor believes to be fundamentally undervalued with current market prices that are believed to be compelling relative to intrinsic value. The hedge funds are not currently eligible for redemption due to imposed lock-up periods of three years from the time of the Company’s initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice. The first investment in the fund will be eligible for redemption in March 2014.
Equity fund
This class is comprised of an equity fund that invests in a diversified portfolio of international publicly traded equity securities. The manager of the fund seeks to maximize the intrinsic value of the portfolio by focusing on price and quality.
11
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
Real estate debt fund
This class is comprised of a real estate debt fund that invests primarily in U.S. commercial real estate. A redemption request for this fund can be made 10 days after the date of any monthly valuation; the fund states that it will make commercially reasonable efforts to redeem the investment within the next monthly period.
Other
Other is comprised primarily of the College and University Facility Loan Trust (“Loan Trust”). The Loan Trust provides loans to educational institutions throughout the U.S. and its territories. The Company holds Class B certificates of the Loan Trust and accordingly receives semi-annual distributions. The Company’s investment in the Loan Trust has no redemption rights.
Level 3 Other Investments
The following table presents the fair value, unfunded commitments, and redemption frequency for all other investments classified as Level 3 within the fair value hierarchy and are valued at net asset value as at June 30, 2012:
|
Total Fair
Value |
Unfunded
Commitments |
Redemption Frequency | ||||||||
|
Private equity funds |
$ | 112,142 | $ | 65,029 | Not eligible | |||||
|
Fixed income hedge funds |
48,950 | — | Quarterly after lock-up periods expire | |||||||
|
Real estate debt fund |
15,474 | — | 10 days’ notice after monthly valuation | |||||||
|
Other |
5,174 | 696 | Not eligible | |||||||
|
|
|
|
|
|||||||
| $ | 181,740 | $ | 65,725 | |||||||
|
|
|
|
|
|||||||
Information regarding other investments the Company has with related parties is described in “Note 11 — Related Party Transactions.”
Other-Than-Temporary Impairment Process
The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale represent impairments that are other-than-temporary and whether a credit loss exists in accordance with its accounting policies. The Company had no planned sales of its fixed maturity investments classified as available-for-sale as at June 30, 2012. 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 six months ended June 30, 2012, the Company did not recognize any other-than-temporary impairments due to required sales. The Company determined that, as at June 30, 2012, no credit losses existed.
Fair Value of Financial Instruments
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. The Company uses a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
| • |
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. |
12
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
| • |
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 Company’s own judgment about assumptions that market participants might use. |
The following is a summary of valuation techniques or models the Company uses to measure fair value by asset and liability classes.
Fixed Maturity Investments
The Company’s fixed maturity portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors with oversight from the Company’s Investment Committee. Fair value prices for all securities in the fixed maturities portfolio are independently provided by the investment custodian, investment accounting service provider and investment managers, each of which utilize internationally recognized independent pricing services. Interactive Data Corporation is, however, the main pricing service utilized to estimate the fair value measurements for the Company’s fixed maturity investments. The Company records the unadjusted price provided by the investment custodian or the investment accounting service provider and validates this price through a process that includes, but is not limited to: (i) comparison of prices between two independent sources, with significant differences requiring additional price sources; (ii) quantitative analysis (e.g., comparing the quarterly return for each managed portfolio to its target benchmark, with significant differences identified and investigated); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to the Company’s knowledge of the current investment market. The Company’s internal price verification procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
The independent pricing services used by the investment custodian, investment accounting service provider and investment managers obtain actual transaction prices for securities that have quoted prices in active markets. For determining the fair value of securities that are not actively traded, in general, pricing services use “matrix pricing” in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker/dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.
The following describes the techniques generally used to determine the fair value of the Company’s 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. |
13
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
| • |
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 June 30, 2012, 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 include 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 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 June 30, 2012, the Company had no residential or commercial mortgage-backed securities classified as Level 3. |
Equity Securities
The Company’s equity securities are traded on the major exchanges and are managed by two external advisors. The Company uses Interactive Data Corporation, an internationally recognized pricing service, to estimate the fair value measurements for all of its equity securities. The Company’s equity securities are widely diversified and there is no significant concentration in any specific industry.
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. Because their fair value estimates are based on observable market data, the Company has categorized its investments in preferred stock as Level 2, with the exception of one preferred stock investment that was categorized as Level 3.
14
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
Other Investments
The Company has ongoing due diligence processes with respect to funds in which it invests and their managers. These processes are designed to assist the Company in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements for every fund annually, and regularly reviews and discusses the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, the Company may incorporate adjustments to the reported net asset value and not use the permitted practical expedient on an investment by investment basis. These adjustments may involve significant management judgment.
For its investments in private equity funds, 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 funds calculate net asset value on a fair value basis. 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. For all publicly traded companies within the funds, the Company adjusts the net asset value based on the latest share price. The Company has classified private equity funds as Level 3 investments because they reflect the Company’s own judgment about the assumptions that market participants might use.
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 because the bond funds provide daily liquidity.
For its investments in fixed income hedge funds, 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 investments in the funds are classified as Level 3 in the fair value hierarchy.
For its investment in the equity fund, the Company measures fair value by obtaining the most recently published net asset value. The investment in the fund is classified as Level 2 because the fair value is provided daily by the administrator and the underlying investments of the fund are publicly traded equities.
For its investment in the real estate debt 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 investment in the fund is classified as Level 3 in the fair value hierarchy.
For its investment in the Loan Trust, the Company measures fair value by obtaining the most recently published financial statements of the Loan Trust. The financial statements of the Loan Trust are audited annually in accordance with U.S. GAAP. In addition to the annual audited financial statements issued by the Loan Trust, it also provides unaudited statements on a semi-annual basis. The investment in the Loan Trust is classified as Level 3 in the fair value hierarchy.
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets and liabilities. Reclassifications between Level 1, 2 and 3 of the fair value hierarchy are reported as transfers in and/or out as of the beginning of the quarter in which the reclassifications occur.
15
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
Fair Value Measurements
In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification (“ASC”) 820, the Company has categorized its investments that are recorded at fair value among levels as follows:
| June 30, 2012 | ||||||||||||||||
|
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total Fair
Value |
|||||||||||||
|
U.S. government and agency |
$ | — | $ | 309,796 | $ | — | $ | 309,796 | ||||||||
|
Non-U.S. government |
— | 382,454 | — | 382,454 | ||||||||||||
|
Corporate |
— | 2,056,000 | 562 | 2,056,562 | ||||||||||||
|
Municipal |
— | 21,308 | — | 21,308 | ||||||||||||
|
Residential mortgage-backed |
— | 98,528 | — | 98,528 | ||||||||||||
|
Commercial mortgage-backed |
— | 123,407 | — | 123,407 | ||||||||||||
|
Asset-backed |
— | 51,455 | — | 51,455 | ||||||||||||
|
Equities |
89,765 | 4,704 | 3,310 | 97,779 | ||||||||||||
|
Other investments |
— | 142,895 | 181,740 | 324,635 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total investments |
$ | 89,765 | $ | 3,190,547 | $ | 185,612 | $ | 3,465,924 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2011 | ||||||||||||||||
|
Quoted Prices in
Active Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total Fair
Value |
|||||||||||||
|
U.S. government and agency |
$ | — | $ | 418,837 | $ | — | $ | 418,837 | ||||||||
|
Non-U.S. government |
— | 380,778 | — | 380,778 | ||||||||||||
|
Corporate |
— | 1,967,724 | 519 | 1,968,243 | ||||||||||||
|
Municipal |
— | 25,416 | — | 25,416 | ||||||||||||
|
Residential mortgage-backed |
— | 110,785 | — | 110,785 | ||||||||||||
|
Commercial mortgage-backed |
— | 86,694 | — | 86,694 | ||||||||||||
|
Asset-backed |
— | 62,201 | — | 62,201 | ||||||||||||
|
Equities |
82,381 | 4,625 | 2,975 | 89,981 | ||||||||||||
|
Other investments |
— | 54,537 | 137,727 | 192,264 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total investments |
$ | 82,381 | $ | 3,111,597 | $ | 141,221 | $ | 3,335,199 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
During 2012 and 2011, the Company had no transfers between Levels 1 and 2.
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended June 30, 2012:
|
Fixed
Maturity Investments |
Other
Investments |
Equity
Securities |
Total | |||||||||||||
|
Level 3 investments as of April 1, 2012 |
$ | 540 | $ | 177,354 | $ | 3,350 | $ | 181,244 | ||||||||
|
Purchases |
— | 11,999 | — | 11,999 | ||||||||||||
|
Sales |
— | (12,021 | ) | — | (12,021 | ) | ||||||||||
|
Total realized and unrealized gains through earnings |
22 | 4,408 | (40 | ) | 4,390 | |||||||||||
|
Net transfers into and/or (out of) Level 3 |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Level 3 investments as of June 30, 2012 |
$ | 562 | $ | 181,740 | $ | 3,310 | $ | 185,612 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
16
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
The amount of net gains/(losses) for the three months ended June 30, 2012 included in earnings attributable to the fair value of changes in assets still held at June 30, 2012 was $5.3 million. Of this amount, $2.1 million was included in net realized and unrealized gains and $3.2 million was included in net investment income.
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended June 30, 2011:
|
Fixed
Maturity Investments |
Other
Investments |
Equity
Securities |
Total | |||||||||||||
|
Level 3 investments as of April 1, 2011 |
$ | 1,513 | $ | 139,962 | $ | 3,975 | $ | 145,450 | ||||||||
|
Purchases |
— | 6,407 | — | 6,407 | ||||||||||||
|
Sales |
(1,043 | ) | (1,617 | ) | — | (2,660 | ) | |||||||||
|
Total realized and unrealized gains through earnings |
82 | 4,088 | 456 | 4,626 | ||||||||||||
|
Net transfers into and/or (out of) Level 3 |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Level 3 investments as of June 30, 2011 |
$ | 552 | $ | 148,840 | $ | 4,431 | $ | 153,823 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The amount of net gains/(losses) for the three months ended June 30, 2011 included in earnings attributable to the fair value of changes in assets still held at June 30, 2011 was $3.9 million. Of this amount, $0.5 million was included in net realized and unrealized gains and $3.4 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 six months ended June 30, 2012:
|
Fixed
Maturity Investments |
Other
Investments |
Equity
Securities |
Total | |||||||||||||
|
Level 3 investments as of January 1, 2012 |
$ | 519 | $ | 137,727 | $ | 2,975 | $ | 141,221 | ||||||||
|
Purchases |
— | 50,162 | — | 50,162 | ||||||||||||
|
Sales |
— | (13,164 | ) | — | (13,164 | ) | ||||||||||
|
Total realized and unrealized gains through earnings |
43 | 7,015 | 335 | 7,393 | ||||||||||||
|
Net transfers into and/or (out of) Level 3 |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Level 3 investments as of June 30, 2012 |
$ | 562 | $ | 181,740 | $ | 3,310 | $ | 185,612 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The amount of net gains/(losses) for the six months ended June 30, 2012 included in earnings attributable to the fair value of changes in assets still held at June 30, 2012 was $7.8 million. Of this amount, $2.5 million was included in net realized and unrealized gains and $5.3 million was included in net investment income.
17
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
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 six months ended June 30, 2011:
|
Fixed
Maturity Investments |
Other
Investments |
Equity
Securities |
Total | |||||||||||||
|
Level 3 investments as of January 1, 2011 |
$ | 1,444 | $ | 132,435 | $ | 3,575 | $ | 137,454 | ||||||||
|
Purchases |
— | 10,564 | — | 10,564 | ||||||||||||
|
Sales |
(1,043 | ) | (1,666 | ) | — | (2,709 | ) | |||||||||
|
Total realized and unrealized gains through earnings |
151 | 7,507 | 856 | 8,514 | ||||||||||||
|
Net transfers into and/or (out of) Level 3 |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Level 3 investments as of June 30, 2011 |
$ | 552 | $ | 148,840 | $ | 4,431 | $ | 153,823 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The amount of net gains/(losses) for the six months ended June 30, 2011 included in earnings attributable to the fair value of changes in assets still held at June 30, 2011 was $6.4 million. Of this amount, $1.0 million was included in net realized and unrealized gains and $5.4 million was included in net investment income.
Components of net realized and unrealized gains/(losses) are as follows:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
|
Gross realized gains on available-for-sale securities |
$ | 1,044 | $ | 346 | $ | 1,474 | $ | 568 | ||||||||
|
Gross realized losses on available-for-sale securities |
— | (24 | ) | (423 | ) | (310 | ) | |||||||||
|
Net realized gains on trading securities |
4,765 | 1,783 | 8,860 | 3,146 | ||||||||||||
|
Net unrealized (losses) gains on trading securities |
(6,617 | ) | 3,159 | 12,323 | 5,228 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net realized and unrealized gains |
$ | (808 | ) | $ | 5,264 | $ | 22,234 | $ | 8,632 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Proceeds from sales and maturities of available-for-sale securities |
$ | 93,333 | $ | 160,868 | $ | 183,609 | $ | 261,977 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Major categories of net investment income are summarized as follows:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
|
Interest from fixed maturities |
$ | 21,499 | $ | 17,298 | $ | 41,992 | $ | 31,706 | ||||||||
|
Amortization of premiums and discounts |
(7,720 | ) | (5,335 | ) | (16,426 | ) | (9,007 | ) | ||||||||
|
Dividends from equities |
690 | 440 | 1,311 | 704 | ||||||||||||
|
Other investments |
2,499 | 3,870 | 4,839 | 6,863 | ||||||||||||
|
Interest from cash and cash equivalents and short-term investments |
2,788 | 3,493 | 7,159 | 5,749 | ||||||||||||
|
Interest on other receivables |
4,005 | 2,369 | 5,215 | 4,100 | ||||||||||||
|
Other income |
566 | 733 | 3,358 | 1,345 | ||||||||||||
|
Interest on deposits held with clients |
314 | 438 | 611 | 696 | ||||||||||||
|
Investment expenses |
(1,248 | ) | (378 | ) | (1,883 | ) | (686 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 23,393 | $ | 22,928 | $ | 46,176 | $ | 41,470 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
18
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 3. | INVESTMENTS — (cont’d) |
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 trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted investments as of June 30, 2012 and December 31, 2011 was as follows:
|
June 30,
2012 |
December 31,
2011 |
|||||||
|
Assets used for collateral in trust for third-party agreements |
$ | 513,007 | $ | 571,041 | ||||
|
Deposits with regulatory authorities |
195,204 | 200,136 | ||||||
|
Others |
54,133 | 59,763 | ||||||
|
|
|
|
|
|||||
| $ | 762,344 | $ | 830,940 | |||||
|
|
|
|
|
|||||
| 4. | RESTRICTED CASH AND CASH EQUIVALENTS |
Restricted cash and cash equivalents were $283.4 million and $373.2 million as of June 30, 2012 and December 31, 2011, respectively. The restricted cash and cash equivalents are used as collateral against letters of credit and as guarantees 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.
| 5. | DERIVATIVE INSTRUMENTS |
The Company uses foreign currency forward exchange contracts as part of its overall foreign currency risk management strategy or to obtain exposure to a particular financial market and for yield enhancement. These derivatives were not designated as hedging investments.
The following table sets out the foreign exchange forward contracts outstanding as at June 30, 2012 and the estimated fair value of derivative instruments recorded on the balance sheet:
|
Foreign exchange forward contract |
Contract Date | Settlement Date | Contract Amount |
Settlement
Amount |
Fair Value as at
June 30, 2012 |
|||||||||||||||
|
Australian dollar |
February 8, 2012 | December 19, 2012 | AU$25.0 million | $26,165 | $538 | |||||||||||||||
|
Australian dollar |
February 8, 2012 | May 10, 2013 | AU$35.0 million | 36,099 | 221 | |||||||||||||||
|
British pound |
March 6, 2012 | March 6, 2013 | UKP 17.0 million | 26,611 | (55 | ) | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| $88,875 | $704 | |||||||||||||||||||
|
|
|
|
|
|||||||||||||||||
The Company recognized in net earnings for the three and six months ended June 30, 2012, a foreign exchange gain of $0.7 million and $0.6 million, respectively, on the foreign currency forward exchange contracts.
In October 2010, the Company entered into a foreign currency forward exchange contract pursuant to which it sold AU$45.0 million for $42.5 million with a contract settlement date of June 30, 2011. The Company recognized in net earnings for the three and six months ended June 30, 2011 a foreign exchange loss of $1.5 million and $1.9 million, respectively, on the foreign currency forward exchange contract.
19
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 6. | REINSURANCE BALANCES RECOVERABLE |
|
June 30,
2012 |
December 31,
2011 |
|||||||
|
Recoverable from reinsurers on: |
||||||||
|
Outstanding losses |
$ | 615,697 | $ | 837,693 | ||||
|
Losses incurred but not reported |
553,221 | 678,437 | ||||||
|
Fair value adjustments |
(104,064 | ) | (133,127 | ) | ||||
|
|
|
|
|
|||||
|
Total reinsurance reserves recoverable |
1,064,854 | 1,383,003 | ||||||
|
Paid losses recoverable |
342,159 | 406,579 | ||||||
|
|
|
|
|
|||||
| $ | 1,407,013 | $ | 1,789,582 | |||||
|
|
|
|
|
|||||
The Company’s acquired reinsurance subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. The Company’s reinsurance subsidiaries remain 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.
As of June 30, 2012 and December 31, 2011 total reinsurance balances recoverable were $1.41 billion and $1.79 billion, respectively. The decrease of $382.6 million in total reinsurance balances recoverable was primarily as a result of commutations and cash collections made during the six months ended June 30, 2012. At June 30, 2012 and December 31, 2011, the provision for uncollectible reinsurance recoverable relating to total reinsurance balances recoverable was $347.5 million and $341.1 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance balances recoverable 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 incurred but not reported (“IBNR”) reserves are allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of June 30, 2012, increased to 19.8% as compared to 16.0% as of December 31, 2011, primarily as a result of commutations and the collection of reinsurance balances recoverable against which there were minimal provisions for uncollectible reinsurance recoverable.
The fair value adjustment, determined on acquisition of reinsurance subsidiaries, was initially 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 recoverables acquired plus a spread to reflect credit risk, and is amortized over the estimated recovery period using the constant yield method, as adjusted for accelerations in timing of payments as a result of commutation settlements.
20
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 6. | REINSURANCE BALANCES RECOVERABLE — (cont’d) |
At June 30, 2012, the Company’s top ten reinsurers accounted for 70.4% (December 31, 2011: 70.0%) of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) and included $391.3 million of IBNR reserves recoverable (December 31, 2011: $451.3 million). With the exception of one BBB+ rated reinsurer from which $52.3 million was recoverable, the other top ten reinsurers, as at June 30, 2012, were all rated A+ or better. As at December 31, 2011, with the exception of one BBB+ rated reinsurer from which $55.2 million was recoverable, the other top ten reinsurers were all rated A+ or better. Reinsurance recoverables by reinsurer were as follows:
| June 30, 2012 | December 31, 2011 | |||||||||||||||
|
Reinsurance
Recoverable |
% of
Total |
Reinsurance
Recoverable |
% of
Total |
|||||||||||||
|
Top ten reinsurers |
$ | 990,767 | 70.4 | % | $ | 1,252,929 | 70.0 | % | ||||||||
|
Other reinsurers’ balances > $1 million |
411,695 | 29.3 | % | 532,303 | 29.7 | % | ||||||||||
|
Other reinsurers’ balances < $1 million |
4,551 | 0.3 | % | 4,350 | 0.3 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 1,407,013 | 100.0 | % | $ | 1,789,582 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As at June 30, 2012 and December 31, 2011, reinsurance balances recoverable with a carrying value of $214.4 million and $235.8 million, respectively, were associated with one reinsurer, which represented 10% or more of total reinsurance balances recoverable. Of the $214.4 million recoverable from the reinsurer as at June 30, 2012, $151.7 million is secured by a trust fund held for the benefit of the Company’s reinsurance subsidiaries. As at June 30, 2012, the reinsurer had a credit rating of A+, as provided by a major rating agency. In the event that all or any of the reinsuring companies that have not secured their obligations are unable to meet their obligations under existing reinsurance agreements, the Company’s reinsurance subsidiaries will be liable for such defaulted amounts.
| 7. | LOSSES AND LOSS ADJUSTMENT EXPENSES |
|
June 30,
2012 |
December 31,
2011 |
|||||||
|
Outstanding |
$ | 2,187,478 | $ | 2,549,648 | ||||
|
Incurred but not reported |
1,956,471 | 2,110,299 | ||||||
|
Fair value adjustment |
(333,618 | ) | (377,031 | ) | ||||
|
|
|
|
|
|||||
| $ | 3,810,331 | $ | 4,282,916 | |||||
|
|
|
|
|
|||||
Refer to Note 10 of Item 8 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for more information on establishing reserves.
Loss and loss adjustment expenses decreased by $472.6 million in the six months ended June 30, 2012 primarily as a result of claim settlements and commutations partially offset by loss reserves acquired of $61.1 million. The largest reduction in loss and loss adjustment expense liabilities was a decrease of approximately $340.9 million in workers compensation loss reserves.
21
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 7. | LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d) |
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended June 30, 2012 and 2011. Losses incurred and paid are reflected net of reinsurance recoverables.
|
Three Months Ended
June 30, |
||||||||
| 2012 | 2011 | |||||||
|
Balance as at April 1 |
$ | 4,138,623 | $ | 3,394,988 | ||||
|
Less: total reinsurance reserves recoverable |
1,294,606 | 583,478 | ||||||
|
|
|
|
|
|||||
| 2,844,017 | 2,811,510 | |||||||
|
Effect of exchange rate movement |
(17,134 | ) | (1,020 | ) | ||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities |
(68,365 | ) | (34,315 | ) | ||||
|
Net losses paid |
(71,762 | ) | (65,208 | ) | ||||
|
Reserves acquired from loss portfolio transfers |
58,721 | — | ||||||
|
|
|
|
|
|||||
|
Net balance as at June 30 |
2,745,477 | 2,710,967 | ||||||
|
Plus: total reinsurance reserves recoverable |
1,064,854 | 556,374 | ||||||
|
|
|
|
|
|||||
|
Balance as at June 30 |
$ | 3,810,331 | $ | 3,267,341 | ||||
|
|
|
|
|
|||||
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended June 30, 2012 and 2011 was due to the following:
|
Three Months Ended
June 30, |
||||||||
| 2012 | 2011 | |||||||
|
Net losses paid |
$ | (71,762 | ) | $ | (65,208 | ) | ||
|
Net change in case and LAE reserves |
107,820 | 65,074 | ||||||
|
Net change in IBNR |
22,359 | 27,963 | ||||||
|
|
|
|
|
|||||
|
Reduction in estimates of net ultimate losses |
58,417 | 27,829 | ||||||
|
Reduction in provisions for bad debt |
527 | 1,672 | ||||||
|
Reduction in provisions for unallocated loss adjustment expense liabilities |
11,661 | 11,783 | ||||||
|
Amortization of fair value adjustments |
(2,240 | ) | (6,969 | ) | ||||
|
|
|
|
|
|||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities |
$ | 68,365 | $ | 34,315 | ||||
|
|
|
|
|
|||||
Net change in case and loss adjustment expense reserves (“LAE reserves”) comprises the movement during the quarter in specific case reserve liabilities as a result of claims settlements or changes advised to the Company by its policyholders and attorneys, less changes in case reserves recoverable advised by the Company to its reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR reserves represents the change in the Company’s actuarial estimates of losses incurred but not reported.
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended June 30, 2012 of $68.4 million was attributable to a reduction in estimates of net ultimate losses of $58.4 million, a reduction in provisions for bad debt of $0.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $11.7 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $2.2 million.
22
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 7. | LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d) |
The reduction in estimates of net ultimate losses of $58.4 million for the three months ended June 30, 2012, comprised of net favorable incurred loss development of $36.0 million and reductions in IBNR reserves of $22.4 million, primarily related to the completion of six commutations of assumed reinsurance liabilities, including one of the Company’s largest ten policyholder exposures as at January 1, 2012, and two commutations of ceded reinsurance recoverables, one of which was among the Company’s largest ten reinsurance recoverables balances as at January 1, 2012.
The reduction in provisions for bad debt of $0.5 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended June 30, 2011 of $34.3 million was attributable to a reduction in estimates of net ultimate losses of $27.8 million, a reduction in provisions for bad debt of $1.7 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $11.8 million, relating to 2011 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $7.0 million.
The reduction in estimates of net ultimate losses of $27.8 million for the three months ended June 30, 2011, comprised of net incurred loss development of $0.1 million and reductions in IBNR reserves of $28.0 million, primarily related to the completion of two commutations that were among the Company’s largest ten policyholder exposures.
The reduction in provisions for bad debt of $1.7 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the six months ended June 30, 2012 and 2011. Losses incurred and paid are reflected net of reinsurance recoverables.
|
Six Months
Ended
June 30, |
||||||||
| 2012 | 2011 | |||||||
|
Balance as at January 1 |
$ | 4,282,916 | $ | 3,291,275 | ||||
|
Less: total reinsurance reserves recoverable |
1,383,003 | 525,440 | ||||||
|
|
|
|
|
|||||
| 2,899,913 | 2,765,835 | |||||||
|
Effect of exchange rate movement |
(2,881 | ) | 33,352 | |||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities |
(79,183 | ) | (38,387 | ) | ||||
|
Net losses paid |
(133,493 | ) | (153,339 | ) | ||||
|
Acquired on purchase of subsidiaries |
— | 10,439 | ||||||
|
Reserves acquired from loss portfolio transfers |
58,721 | — | ||||||
|
Retroactive reinsurance contracts assumed |
2,400 | 93,067 | ||||||
|
|
|
|
|
|||||
|
Net balance as at June 30 |
2,745,477 | 2,710,967 | ||||||
|
Plus: total reinsurance reserves recoverable |
1,064,854 | 556,374 | ||||||
|
|
|
|
|
|||||
|
Balance as at June 30 |
$ | 3,810,331 | $ | 3,267,341 | ||||
|
|
|
|
|
|||||
23
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 7. | LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d) |
The net reduction in ultimate loss and loss adjustment expense liabilities for the six months ended June 30, 2012 and 2011 was due to the following:
|
Six Months Ended
June 30, |
||||||||
| 2012 | 2011 | |||||||
|
Net losses paid |
$ | (133,493 | ) | $ | (153,339 | ) | ||
|
Net change in case and LAE reserves |
167,956 | 148,504 | ||||||
|
Net change in IBNR |
27,252 | 35,276 | ||||||
|
|
|
|
|
|||||
|
Reduction in estimates of net ultimate losses |
61,715 | 30,441 | ||||||
|
Reduction in provisions for bad debt |
2,782 | 1,672 | ||||||
|
Reduction in provisions for unallocated loss adjustment expense liabilities |
24,513 | 23,320 | ||||||
|
Amortization of fair value adjustments |
(9,827 | ) | (17,046 | ) | ||||
|
|
|
|
|
|||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities |
$ | 79,183 | $ | 38,387 | ||||
|
|
|
|
|
|||||
The net reduction in ultimate loss and loss adjustment expense liabilities for the six months ended June 30, 2012 of $79.2 million was attributable to a reduction in estimates of net ultimate losses of $61.7 million, a reduction in provisions for bad debt of $2.8 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $24.5 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $9.8 million.
The reduction in estimates of net ultimate losses of $61.7 million for the six months ended June 30, 2012, comprised of net favorable incurred loss development of $34.4 million and reductions in IBNR reserves of $27.3 million, primarily related to the completion of six commutations of assumed reinsurance liabilities, including one of the Company’s largest ten policyholder exposures as at January 1, 2012, and two commutations of ceded reinsurance recoverables, one of which was among the Company’s largest ten reinsurance recoverables balances as at January 1, 2012.
The reduction in provisions for bad debt of $2.8 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.
The net reduction in ultimate loss and loss adjustment expense liabilities for the six months ended June 30, 2011 of $38.4 million was attributable to a reduction in estimates of net ultimate losses of $30.4 million, a reduction in provisions for bad debt of $1.7 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $23.3 million, relating to 2011 run-off activity, partially offset the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $17.0 million.
The reduction in estimates of net ultimate losses of $30.4 million for the six months ended June 30, 2011, comprised of net incurred loss development of $4.8 million and reductions in IBNR reserves of $35.3 million, primarily related to the completion of two commutations that were among the Company’s largest ten policyholder exposures.
The reduction in provisions for bad debt of $1.7 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.
| 8. | LOANS PAYABLE |
The Company’s long-term debt consists of loan facilities used to partially finance certain of the Company’s acquisitions or significant new business transactions along with loans 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’s two outstanding credit facilities (its Revolving
24
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 8. | LOANS PAYABLE — (cont’d) |
Credit Facility and its term facility related to the Company’s 2011 acquisition of Clarendon National Insurance Company (the “Clarendon Facility”)), as well as the Repurchase Agreements, are described in Note 11 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
On June 29, 2012, the Company fully repaid the outstanding principal and accrued interest of $118.0 million on its Revolving Credit Facility with National Australia Bank Limited and Barclays Corporate (the “EGL Revolving Credit Facility”). As of June 30, 2012, the unused portion of the EGL Revolving Credit Facility was $250.0 million.
As of June 30, 2012, all of the covenants relating to the two credit facilities were met.
Total amounts of loans payable outstanding, including accrued interest, as of June 30, 2012 and December 31, 2011 totaled $126.3 million and $242.7 million, respectively, and were comprised as follows:
|
Facility |
Date of Facility |
June 30,
2012 |
December 31,
2011 |
|||||||||
|
EGL Revolving Credit Facility |
June 30, 2011 | $ | — | $ | 115,881 | |||||||
|
Clarendon Facility |
July 12, 2011 | 107,281 | 108,123 | |||||||||
|
|
|
|
|
|||||||||
|
Total long-term bank debt |
107,281 | 224,004 | ||||||||||
|
Repurchase Agreements |
October 1, 2010 | 19,031 | 18,706 | |||||||||
|
|
|
|
|
|||||||||
|
Total loans payable |
$ | 126,312 | $ | 242,710 | ||||||||
|
|
|
|
|
|||||||||
| 9. | EMPLOYEE BENEFITS |
The Company’s share-based compensation plans provide for the grant of various awards to its employees and to members of the Board of Directors. These are described in Note 14 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The information below includes both the employee and director components of the Company’s share-based compensation.
(a) Employee share plans
Employee share awards for the six months ended June 30, 2012 are summarized as follows:
|
Number of
Shares |
Weighted
Average Fair Value of the Award |
|||||||
|
Nonvested — January 1 |
203,930 | $ | 20,026 | |||||
|
Granted |
2,931 | 243 | ||||||
|
Vested |
(46,217 | ) | (4,508 | ) | ||||
|
|
|
|||||||
|
Nonvested — June 30 |
160,644 | $ | 15,894 | |||||
|
|
|
|||||||
25
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 9. | EMPLOYEE BENEFITS — (cont’d) |
| (i) | 2006-2010 Annual Incentive Compensation Program, 2011-2015 Annual Incentive Compensation Program and 2006 Equity Incentive Plan |
For the six months ended June 30, 2012 and 2011, 191 and 16,328 shares, respectively, were awarded to directors, officers and employees under the 2006 Equity Incentive Plan. The total value of the awards for the six months ended June 30, 2012 was less than $0.1 million and was charged against the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program (“2011 Program”) accrual established for the year ended December 31, 2011. The total value of the awards for the six months ended June 30, 2011 was $1.5 million and was charged against the 2006-2010 Annual Incentive Compensation Program (“2006 Program”) accrual established for the year ended December 31, 2010. The 2006 Program ended effective December 31, 2010. On February 23, 2011, the Company adopted the 2011 Program.
In addition, for the six months ended June 30, 2011, 50,000 restricted shares were awarded under the 2006 Equity Incentive Plan. The total unrecognized compensation cost related to the Company’s non-vested share awards as at June 30, 2012 and 2011 was $9.7 million and $11.8 million, respectively. This cost is expected to be recognized evenly over the next 3.5 years. Compensation costs of $0.7 million and $1.4 million relating to these share awards were recognized in the Company’s statement of earnings for the three and six months ended June 30, 2012, respectively, as compared to $0.7 million and $1.2 million, respectively, for the three and six months ended June 30, 2011.
The expense relating to the 2011 Program for the three and six months ended June 30, 2012 was $7.2 million and $8.9 million, respectively as compared to $1.7 million and $1.8 million, respectively, for three and six months ended June 30, 2011 relating to the 2006 Program.
| (ii) | Enstar Group Limited Employee Share Purchase Plan |
Compensation costs of less than $0.1 million and $0.2 million, respectively, relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan have been recognized in the Company’s statement of earnings for the three and six months ended June 30, 2012 and June 30, 2011, respectively. For the six months ended June 30, 2012 and 2011, 2,740 and 2,675 shares, respectively, were issued to employees.
(b) Options
|
Number of
Shares |
Weighted
Average Exercise Price |
Intrinsic
Value of Shares |
||||||||||
|
Outstanding — January 1, 2012 |
98,075 | $ | 40.78 | $ | 5,631 | |||||||
|
Exercised |
— | — | — | |||||||||
|
|
|
|||||||||||
|
Outstanding — June 30, 2012 |
98,075 | $ | 40.78 | $ | 5,704 | |||||||
|
|
|
|||||||||||
Stock options outstanding and exercisable as of June 30, 2012 were as follows:
|
Exercise Price |
Number of
Options |
Weighted
Average Exercise Price |
Weighted Average
Remaining Contractual Life |
|||||||||
|
$40.78 |
98,075 | $ | 40.78 | 1.1 | ||||||||
26
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 9. | EMPLOYEE BENEFITS — (cont’d) |
(c) Deferred Compensation and Stock Plan for Non-Employee Directors
For the six months ended June 30, 2012 and 2011, 1,540 and 2,407 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.
(d) Pension plan
The Company provides pension benefits to eligible employees through various plans sponsored by the Company. All pension plans are structured as defined contribution plans, except for the PWAC Plan discussed below. Pension expense for the three and six months ended June 30, 2012 was $1.0 million and $2.9 million, respectively, as compared to $1.0 million and $2.1 million, respectively, for three and six months ended June 30, 2011.
The Company acquired, as part of the acquisition of PW Acquisition Company (“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 June 30, 2012 and December 31, 2011, PWAC had an accrued liability of $10.2 million and $10.5 million, respectively, for the unfunded PWAC Plan liability.
The Company recorded pension expense relating to the PWAC Plan, for the three and six months ended June 30, 2012, of $0.2 million and $0.4 million, respectively, as compared to $0.2 million and $0.3 million, respectively, for the three and six months ended June 30, 2011.
| 10. | EARNINGS PER SHARE |
The following table sets forth the comparison of basic and diluted earnings per share for the three and six month periods ended June 30, 2012 and 2011:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
|
Basic earnings per ordinary share: |
||||||||||||||||
|
Net earnings attributable to Enstar Group Limited |
$ | 40,721 | $ | 9,375 | $ | 50,394 | $ | 12,878 | ||||||||
|
Weighted average ordinary shares outstanding — basic |
16,436,401 | 13,999,179 | 16,432,001 | 13,475,418 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net earnings per ordinary share attributable to Enstar Group Limited — basic |
$ | 2.48 | $ | 0.67 | $ | 3.07 | $ | 0.96 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Diluted earnings per ordinary share: |
||||||||||||||||
|
Net earnings attributable to Enstar Group Limited |
$ | 40,721 | $ | 9,375 | $ | 50,394 | $ | 12,878 | ||||||||
|
Weighted average ordinary shares outstanding — basic |
16,436,401 | 13,999,179 | 16,432,001 | 13,475,418 | ||||||||||||
|
Share equivalents: |
||||||||||||||||
|
Nonvested shares |
160,644 | 203,930 | 164,284 | 189,289 | ||||||||||||
|
Restricted share units |
14,226 | 17,106 | 13,867 | 17,297 | ||||||||||||
|
Options |
63,521 | 65,470 | 63,098 | 73,619 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Weighted average ordinary shares outstanding — diluted |
16,674,792 | 14,285,685 | 16,673,250 | 13,755,623 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net earnings per ordinary share attributable to Enstar Group Limited — diluted |
$ | 2.44 | $ | 0.66 | $ | 3.02 | $ | 0.94 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
27
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 11. | RELATED PARTY TRANSACTIONS |
The Company has entered into certain transactions with companies and partnerships that are affiliated with J. Christopher Flowers. Mr. Flowers was one of the Company’s largest shareholders until May 2012, and until May 6, 2011 was a member of the Company’s Board of Directors.
As at June 30, 2012, investments associated with Mr. Flowers accounted for 92.2% of the total unfunded capital commitments of the Company and 47.9% of the total amount of investments classified as other investments by the Company. The below table summarizes the related party investments with affiliates of Mr. Flowers.
|
June 30, 2012
Unfunded Commitment |
December 31, 2011
Unfunded Commitment |
June 30, 2012
Fair Value |
December 31, 2011
Fair Value |
|||||||||||||
|
J.C. Flowers II L.P. |
$ | 2,220 | $ | 2,220 | $ | 23,448 | $ | 22,458 | ||||||||
|
J.C. Flowers III L.P. |
58,410 | 69,247 | 41,491 | 35,780 | ||||||||||||
|
JCF III Co-invest I L.P. |
— | — | 23,037 | 23,334 | ||||||||||||
|
New NIB Partners L.P. |
— | — | 18,422 | 20,521 | ||||||||||||
|
Varadero International Ltd |
— | — | 48,950 | 24,395 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 60,630 | $ | 71,467 | $ | 155,348 | $ | 126,488 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As of June 30, 2012 and December 31, 2011, the Company included $216.2 million and $221.8 million, respectively, as part of noncontrolling interest on its balance sheet relating to five companies acquired in 2008 in which J.C. Flowers II L.P. co-invested.
On January 1, 2012, Lloyd’s Syndicate 2008 (“S2008”) transferred the assets and liabilities relating to its 2009 and prior underwriting years of account into its 2010 underwriting year of account by means of a reinsurance to close transaction (“RITC”). Following the transfer, the existing noncontrolling interest held by JCF FPK I L.P. and J.C. Flowers II L.P. ceased, resulting in the Company now providing 100% of the investment in S2008. As at June 30, 2012, $28.1 million payable by the Company in respect of noncontrolling interest related to this RITC transaction has been included in the Company’s balance sheet as part of accounts payable and accrued liabilities.
| 12. | TAXATION |
Earnings before income taxes include the following components:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
|
Domestic (Bermuda) |
$ | 35,515 | $ | (14,616 | ) | $ | 17,780 | $ | (16,451 | ) | ||||||
|
Foreign |
17,240 | 30,605 | 54,123 | 38,131 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 52,755 | $ | 15,989 | $ | 71,903 | $ | 21,680 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
28
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 12. | TAXATION — (cont’d) |
Tax expense (benefit) for income taxes is comprised of:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
|
Current: |
||||||||||||||||
|
Domestic (Bermuda) |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Foreign |
6,587 | 6,657 | 9,445 | 4,023 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 6,587 | 6,657 | 9,445 | 4,023 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Deferred: |
||||||||||||||||
|
Domestic (Bermuda) |
— | — | — | — | ||||||||||||
|
Foreign |
5,318 | (5,682 | ) | 6,202 | (2,431 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 5,318 | (5,682 | ) | 6,202 | (2,431 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total tax expense |
$ | 11,905 | $ | 975 | $ | 15,647 | $ | 1,592 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Under current Bermuda law, the Company and its Bermuda subsidiaries are exempted from paying any taxes in Bermuda on their income or capital gains until March 2035.
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 jurisdiction’s applicable statutory tax rate.
The actual income tax rate differed from the amount computed by applying the effective rate of 0% under Bermuda law to earnings before income taxes as shown in the following reconciliation:
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
|
Earnings before income tax |
$ | 52,755 | $ | 15,989 | $ | 71,903 | $ | 21,680 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Expected tax rate |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
|
Foreign taxes at local expected rates |
21.0 | % | 45.9 | % | 22.7 | % | 43.5 | % | ||||||||
|
Change in uncertain tax positions |
0.1 | % | 0.3 | % | 0.1 | % | 0.5 | % | ||||||||
|
Change in valuation allowance |
1.4 | % | (41.1 | %) | (1.3 | %) | (32.7 | %) | ||||||||
|
Impact of Australian tax consolidation |
0.0 | % | 0.0 | % | 0.0 | % | (4.1 | %) | ||||||||
|
Other |
0.1 | % | 1.0 | % | 0.3 | % | 0.1 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Effective tax rate |
22.6 | % | 6.1 | % | 21.8 | % | 7.3 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company has estimated future taxable income of its 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.
29
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 12. | TAXATION — (cont’d) |
The Company had unrecognized tax benefits of $5.7 million and $5.6 million relating to uncertain tax positions as of June 30, 2012 and December 31, 2011, respectively.
The Company’s 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 Company’s 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 Company’s financial condition and results of operations.
| 13. | COMMITMENTS AND CONTINGENCIES |
On March 14, 2012, the Company eliminated a certain guarantee of its obligation to its wholly-owned subsidiary, Fitzwilliam Insurance Limited (“Fitzwilliam”), in respect of a letter of credit issued on its behalf by a London-based bank in the amount of £7.5 million (approximately $11.7 million) relating to Fitzwilliam’s insurance contract requirements.
On June 26, 2012, the Company provided a limited parental guarantee supporting Fitzwilliam’s obligation in respect of an amendment to an existing letter of credit issued on its behalf by a London-based bank in the amount of approximately $11.2 million relating to Fitzwilliam’s insurance contract requirements.
As at June 30, 2012 and December 31, 2011, the Company had, in total, parental guarantees supporting Fitzwilliam’s obligations in the amount of $217.1 million and $219.9 million, respectively.
During the six months ended June 30, 2012, the Company funded $0.8 million of its $5.0 million commitment to Dowling Capital Partners I, L.P.
On July 6, 2012 the Company, through its wholly-owned subsidiary, Providence Washington Insurance Company, entered into a definitive loss portfolio reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business. The estimated total assets and liabilities to be assumed are approximately $174.0 million. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close in the fourth quarter of 2012.
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on its business, results of operations or financial condition. Nevertheless, there can be no assurance that such pending legal proceedings will not have a material effect on the Company’s business, financial condition or results of operations. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it 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 effect on the Company’s business, financial condition or results of operations.
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Enstar Group Limited
We have reviewed the condensed consolidated balance sheet of Enstar Group Limited and subsidiaries as of June 30, 2012, the related condensed consolidated statements of earnings and comprehensive income for the three-month and six-month periods ended June 30, 2012, and the related condensed consolidated statements of changes in shareholders’ equity and cash flows for the six-month period ended June 30, 2012. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
The consolidated financial statements of the Company as of and for the year ended December 31, 2011, were audited by other accountants whose report dated February 24, 2012, expressed an unqualified opinion on those consolidated financial statements. Such consolidated financial statements were not audited by us and, accordingly, we do not express an opinion or any form of assurance on the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011. Additionally, the condensed consolidated statements of earnings and comprehensive income for the three-month and six-month periods ended June 30, 2011, and the related statements of changes in shareholders’ equity and cash flows for the six-month period ended June 30, 2011, were not reviewed or audited by us, and accordingly, we do not express an opinion or any form of assurance on them.
/s/ KPMG
Hamilton, Bermuda
August 1, 2012
31
| Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is a discussion and analysis of our results of operations for the three and six months ended June 30, 2012 and 2011. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Business Overview
Enstar Group Limited, or Enstar, was formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry.
Since our formation, we have, as of June 30, 2012, completed the acquisition of 35 insurance and reinsurance companies and 18 portfolios of insurance and reinsurance business and are now administering those businesses in run-off. Of the 18 portfolios of insurance and reinsurance business, 10 were Reinsurance to Close, or “RITC” transactions, with Lloyd’s of London insurance and reinsurance syndicates in run-off, whereby the portfolio of run-off liabilities is transferred from one Lloyd’s syndicate to another. 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 driven in large part by successfully completing new acquisitions and effectively managing companies and portfolios of business that we previously acquired.
Significant New Business
Zurich Danish Portfolio
On June 30, 2012, we, through the Danish branch of our wholly-owned subsidiary, Marlon Insurance Company Limited, or Marlon, acquired, by way of loss portfolio transfer under Danish law, a portfolio of reinsurance and professional disability business from the Danish branch of Zurich Insurance Company, or Zurich. Marlon received total assets and assumed total net insurance and reinsurance liabilities of approximately $58.7 million. The total assets and assumed total net insurance and reinsurance liabilities may be adjusted in the third quarter of 2012 to the final balances reported by Zurich.
Reciprocal of America
On July 6, 2012 we, through our wholly-owned subsidiary Providence Washington Insurance Company, entered into a definitive loss portfolio reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business. The estimated total assets and liabilities to be assumed are approximately $174.0 million. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close in the fourth quarter of 2012.
32
Results of Operations
The following table sets forth our selected consolidated statement of operations data for each of the periods indicated.
|
Three Months Ended
June 30, |
Six Months Ended
June 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||
|
INCOME |
||||||||||||||||
|
Consulting fees |
$ | 1,775 | $ | 2,045 | $ | 3,969 | $ | 6,081 | ||||||||
|
Net investment income |
23,393 | 22,928 | 46,176 | 41,470 | ||||||||||||
|
Net realized and unrealized (losses) gains |
(808 | ) | 5,264 | 22,234 | 8,632 | |||||||||||
|
Gain on bargain purchase |
— | — | — | 13,105 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 24,360 | 30,237 | 72,379 | 69,288 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
EXPENSES |
||||||||||||||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities: |
||||||||||||||||
|
Reduction in estimates of net ultimate losses |
(58,417 | ) | (27,829 | ) | (61,715 | ) | (30,441 | ) | ||||||||
|
Reduction in provisions for bad debt |
(527 | ) | (1,672 | ) | (2,782 | ) | (1,672 | ) | ||||||||
|
Reduction in provisions for unallocated loss adjustment expense liabilities |
(11,661 | ) | (11,783 | ) | (24,513 | ) | (23,320 | ) | ||||||||
|
Amortization of fair value adjustments |
2,240 | 6,969 | 9,827 | 17,046 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (68,365 | ) | (34,315 | ) | (79,183 | ) | (38,387 | ) | |||||||||
|
Salaries and benefits |
24,379 | 16,723 | 44,830 | 27,105 | ||||||||||||
|
General and administrative expenses |
14,156 | 28,211 | 29,014 | 45,961 | ||||||||||||
|
Interest expense |
2,062 | 1,697 | 4,173 | 3,663 | ||||||||||||
|
Net foreign exchange (gains) losses |
(627 | ) | 1,932 | 1,642 | 9,266 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (28,395 | ) | 14,248 | 476 | 47,608 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Earnings before income taxes |
52,755 | 15,989 | 71,903 | 21,680 | ||||||||||||
|
Income taxes |
(11,905 | ) | (975 | ) | (15,647 | ) | (1,592 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
NET EARNINGS |
40,850 | 15,014 | 56,256 | 20,088 | ||||||||||||
|
Less: Net earnings attributable to noncontrolling interest |
(129 | ) | (5,639 | ) | (5,862 | ) | (7,210 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED |
$ | 40,721 | $ | 9,375 | $ | 50,394 | $ | 12,878 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Comparison of the Three Months Ended June 30, 2012 and 2011
We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $40.9 million and $15.0 million for the three months ended June 30, 2012 and 2011, respectively. The increase in earnings of approximately $25.9 million was attributable primarily to the following:
| (i) | an increase in net reduction in ultimate loss and loss adjustment expense liabilities of $34.0 million; |
| (ii) | a decrease in general and administrative expenses of $14.0 million due primarily to decreased professional fees, principally related to decreased legal fees and settlement costs related to certain litigation, along with decreased arrangement and agency fees related to our revolving credit facility; and |
| (iii) | an increase in net foreign exchange gains of $2.6 million; partially offset by |
33
| (iv) | an increase in salaries and benefits costs of $7.7 million due primarily to our increased overall average headcount from 348 at June 30, 2011 to 406 at June 30, 2012 combined with an increase in the bonus accrual of $5.5 million for the three months ended June 30, 2012 as compared to 2011; |
| (v) | a decrease in net realized and unrealized gains of $6.1 million due to mark-to-market changes in the market value of our equity securities, along with a decrease in net realized and unrealized gains on our fixed maturity investments classified as trading; and |
| (vi) | an increase in income tax expense of $10.9 million due to higher net earnings within our taxable subsidiaries. |
Noncontrolling interest in earnings decreased by $5.5 million to $0.1 million for the three months ended June 30, 2012 as a result of lower earnings in those companies in which there are noncontrolling interests. Net earnings attributable to Enstar Group Limited increased from $9.4 million for the three months ended June 30, 2011 to $40.7 million for the three months ended June 30, 2012.
Consulting Fees:
| Three Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 1,775 | $ | 2,045 | $ | (270 | ) | |||||
|
|
|
|
|
|
|
|||||||
Our consulting companies earned fees of approximately $1.8 million and $2.0 million for the three months ended June 30, 2012 and 2011, respectively. Consulting fee income as a percentage of net earnings has declined in recent periods, and we would expect it to remain at or around current levels in future periods, excluding the impact of any one-time incentive-based fees that we might receive. While we intend to continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, our core focus continues to be acquiring and managing insurance and reinsurance companies and portfolios of business in run-off.
Net Investment Income and Net Realized and Unrealized (Losses) Gains:
| Three Months Ended June 30, | ||||||||||||||||||||||||
| Net Investment Income |
Net Realized and Unrealized
(Losses) Gains |
|||||||||||||||||||||||
| 2012 | 2011 | Variance | 2012 | 2011 | Variance | |||||||||||||||||||
| (in thousands of U.S. dollars) | (in thousands of U.S. dollars) | |||||||||||||||||||||||
|
Total |
$ | 23,393 | $ | 22,928 | $ | 465 | $ | (808 | ) | $ | 5,264 | $ | (6,072 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net investment income (inclusive of net realized and unrealized (losses) gains) for the three months ended June 30, 2012 reduced by $5.6 million to $22.6 million, as compared to $28.2 million for the three months ended June 30, 2011.
During the three months ended June 30, 2012 our average cash and investments (excluding equities and other investments) were $4.08 billion as compared to $3.49 billion for the three months ended June 30, 2011. The average annualized return on our cash and investments (inclusive of net realized and unrealized (losses) gains, but excluding net investment income and net realized and unrealized (losses) gains related to our other investments and equities) for the three months ended June 30, 2012 was 1.88% as compared to the average annualized return of 2.33% for the three months ended June 30, 2011. The additional investment income from the increase in average cash and investments for the three months ended June 30, 2012 was offset by a decrease in investment yields for the same period resulting in a decrease in investment returns.
The average annualized return on our other investments and equities (inclusive of net realized and unrealized (losses) gains) for the three months ended June 30, 2012 was 1.74% as compared to the average annualized return of 7.29% for the three months ended June 30, 2011. The decrease in the returns was principally attributable to net realized and unrealized mark-to-market losses on our equity securities.
34
The average credit rating of our fixed maturity investments at June 30, 2012 was AA-. During 2011, the rating agency Standard & Poors downgraded the U.S. sovereign debt from AAA to AA+. This, combined with the assets we acquired upon the acquisition of Clarendon (which had a lower proportion of investments with AAA credit ratings), resulted in us having a lower percentage of AAA-rated investments than we had as at June 30, 2011.
Net Reduction in Ultimate Loss and Loss Adjustment Expense Liabilities:
The following table shows the components of the movement in the net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended June 30, 2012 and 2011:
|
Three Months Ended
June 30, |
||||||||
| 2012 | 2011 | |||||||
|
(in thousands of U.S. dollars) |
||||||||
|
Net losses paid |
$ | (71,762 | ) | $ | (65,208 | ) | ||
|
Net change in case and LAE reserves |
107,820 | 65,074 | ||||||
|
Net change in IBNR |
22,359 | 27,963 | ||||||
|
|
|
|
|
|||||
|
Reduction in estimates of net ultimate losses |
58,417 | 27,829 | ||||||
|
Reduction in provisions for bad debt |
527 | 1,672 | ||||||
|
Reduction in provisions for unallocated loss adjustment expense liabilities |
11,661 | 11,783 | ||||||
|
Amortization of fair value adjustments |
(2,240 | ) | (6,969 | ) | ||||
|
|
|
|
|
|||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities |
$ | 68,365 | $ | 34,315 | ||||
|
|
|
|
|
|||||
Net change in case and loss adjustment expense reserves, or LAE reserves, comprises the movement during the quarter in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in incurred but not reported, or IBNR, reserves represents the change in our actuarial estimates of losses incurred but not reported.
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended June 30, 2012 of $68.4 million was attributable to a reduction in estimates of net ultimate losses of $58.4 million, a reduction in provisions for bad debt of $0.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $11.7 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $2.2 million.
The reduction in estimates of net ultimate losses of $58.4 million for the three months ended June 30, 2012, comprised of net favorable incurred loss development of $36.0 million and reductions in IBNR reserves of $22.4 million, primarily related to the completion of six commutations of assumed reinsurance liabilities, including one of our largest ten policyholder exposures as at January 1, 2012, and two commutations of ceded reinsurance recoverables, one of which were among our largest ten reinsurance recoverables balances as at January 1, 2012.
The reductions in provisions for bad debt of $0.5 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended June 30, 2011 of $34.3 million was attributable to a reduction in estimates of net ultimate losses of $27.8 million, a reduction in provisions for bad debt of $1.7 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $11.8 million, relating to 2011 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $7.0 million.
The reduction in estimates of net ultimate losses of $27.8 million for the three months ended June 30, 2011, comprised of net incurred loss development of $0.1 million and reductions in IBNR reserves of $28.0 million,
35
which were primarily related to the completion of two commutations that were among our largest ten policyholder exposures.
The reductions in provisions for bad debt of $1.7 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended June 30, 2012 and 2011. Losses incurred and paid are reflected net of reinsurance recoverables.
| Three Months Ended June 30, | ||||||||
| 2012 | 2011 | |||||||
| (in thousands of U.S. dollars) | ||||||||
|
Balance as at April 1 |
$ | 4,138,623 | $ | 3,394,988 | ||||
|
Less: total reinsurance reserves recoverable |
1,294,606 | 583,478 | ||||||
|
|
|
|
|
|||||
| 2,844,017 | 2,811,510 | |||||||
|
Effect of exchange rate movement |
(17,134 | ) | (1,020 | ) | ||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities |
(68,365 | ) | (34,315 | ) | ||||
|
Net losses paid |
(71,762 | ) | (65,208 | ) | ||||
|
Reserves acquired from loss portfolio transfers |
58,721 | — | ||||||
|
|
|
|
|
|||||
|
Net balance as at June 30 |
2,745,477 | 2,710,967 | ||||||
|
Plus: total reinsurance reserves recoverable |
1,064,854 | 556,374 | ||||||
|
|
|
|
|
|||||
|
Balance as at June 30 |
$ | 3,810,331 | $ | 3,267,341 | ||||
|
|
|
|
|
|||||
Refer to “—Significant New Business—Zurich Danish Portfolio” for information regarding reserves acquired from loss portfolio transfers during the three months ended June 30, 2012.
Salaries and Benefits:
| Three Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 24,379 | $ | 16,723 | $ | (7,656 | ) | |||||
|
|
|
|
|
|
|
|||||||
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $24.4 million and $16.7 million for the three months ended June 30, 2012 and 2011, respectively.
The principal changes in salaries and benefits were:
| (i) | increased staff costs due to an increase in staff numbers from 348 at June 30, 2011 to 406 at June 30, 2012, primarily related to the expansion of our U.S. operations; and |
| (ii) | an increase in the bonus accrual of approximately $6.3 million for the three months ended June 30, 2012 as compared to 2011 (expenses relating to our discretionary bonus plan will be variable and are dependent on our overall profitability); partially offset by |
| (iii) | a decrease in U.S. dollar costs of our U.K.-based staff following a decrease in the average British pound exchange rate from approximately 1.6173 for the three months ended June 30, 2011 to 1.5770 for the three months ended June 30, 2012. Of our total headcount for the three months ended June 30, 2012 and 2011, approximately 54% and 63% of salaries, respectively, were paid in British pounds. |
General and Administrative Expenses:
| Three Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 14,156 | $ | 28,211 | $ | 14,055 | ||||||
|
|
|
|
|
|
|
|||||||
36
General and administrative expenses decreased by $14.0 million during the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The decrease in expenses for 2012 related primarily to:
| (i) | a decrease in bank costs of $4.3 million associated primarily with the arrangement and agency fees paid in connection with establishing our revolving credit facility in 2011; |
| (ii) | a decrease in professional fees of approximately $5.6 million due primarily to decreased legal fees and settlement costs associated with certain litigation that was settled in 2011, along with a reduction in audit and audit related fees in 2012 of approximately $0.9 million; and |
| (iii) | a decrease in actuarial consulting fees of approximately $1.4 million related to costs associated with due diligence projects. |
Net Foreign Exchange (Gains) Losses:
| Three Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | (627 | ) | $ | 1,932 | $ | 2,559 | |||||
|
|
|
|
|
|
|
|||||||
We recorded net foreign exchange gains of $0.6 million and losses of $1.9 million for the three months ended June 30, 2012 and 2011, respectively. The net foreign exchange gains for the three months ended June 30, 2012 arose primarily as a result of the increase in the fair value of our Australian dollar forward exchange contracts. On February 8, 2012, we entered into two foreign currency forward exchange contracts pursuant to which we sold AU$25.0 million for $26.2 million and AU$35.0 million for $36.1 million. The contracts have settlement dates of December 19, 2012 and May 10, 2013, respectively. In addition, we entered into a British pound forward exchange contract pursuant to which we sold 17.0 million British pounds for $26.6 million. The contract has a settlement date of March 6, 2013.
The net foreign exchange losses for the three months ended June 30, 2011 arose primarily as a result of a decrease in the fair value of an Australian dollar forward exchange contract, which expired on June 30, 2011, resulting in $1.5 million being recorded as part of net foreign exchange losses.
In addition to the net foreign exchange losses recorded in our consolidated statement of earnings for the three months ended June 30, 2012, we recorded in our condensed consolidated statement of comprehensive income currency translation adjustment losses, net of noncontrolling interest, of $3.9 million as compared to gains, net of noncontrolling interest, of $10.0 million for the same period in 2011. For the three months ended June 30, 2012, the currency translation adjustments related primarily to our Australian-based and Ireland-based subsidiaries. As the functional currency of these subsidiaries is Australian dollars and Euros, respectively, we are required to record any U.S. dollar gains or losses on the translation of their net Australian dollar or Euro assets through accumulated other comprehensive income.
Income Tax Expense:
| Three Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 11,905 | $ | 975 | $ | (10,930 | ) | |||||
|
|
|
|
|
|
|
|||||||
We recorded income tax expense of $11.9 million and $1.0 million for the three months ended June 30, 2012 and 2011, respectively. The increase in taxes for the three months ended June 30, 2012 was due to higher overall net earnings in our taxable subsidiaries as compared to those earned in the same period in 2011.
37
Noncontrolling Interest:
| Three Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 129 | $ | 5,639 | $ | (5,510 | ) | |||||
|
|
|
|
|
|
|
|||||||
We recorded a noncontrolling interest in earnings of $0.1 million and $5.6 million for the three months ended June 30, 2012 and 2011, respectively. The decrease for the three months ended June 30, 2012 in noncontrolling interest was due primarily to a decrease in earnings for those companies where there exists a noncontrolling interest. In addition, on January 1, 2012, Lloyd’s Syndicate 2008, or S2008, transferred the assets and liabilities relating to its 2009 and prior underwriting years of account into its 2010 underwriting year of account by means of an RITC transaction. Following the transfer, the existing noncontrolling interest held by JCF FPK I L.P. and J.C. Flowers II L.P. ceased, resulting in us now providing 100% of the investment in S2008.
Comparison of the Six Months Ended June 30, 2012 and 2011
We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $56.3 million and $20.1 million for the six months ended June 30, 2012 and 2011, respectively. The increase in earnings of approximately $36.2 million was primarily attributable to the following:
| (i) | an increase in net reduction in ultimate loss and loss adjustment expense liabilities of $40.8 million; |
| (ii) | a decrease in general and administrative expenses of $17.0 million due primarily to a decrease in professional fees, principally related to decreased legal fees and settlement costs related to certain litigation settled in 2011, along with decreased arrangement and agency fees related to our revolving credit facility; |
| (iii) | an increase in net investment income of $4.7 million; |
| (iv) | an increase in net realized and unrealized gains of $13.6 million due to mark-to-market changes in the market value of our equity securities, along with an increase in net realized and unrealized gains on our fixed maturity investments classified as trading; and |
| (v) | a decrease in net foreign exchange losses of $7.6 million; partially offset by |
| (vi) | an increase in salaries and benefits costs of $17.7 million due primarily to our increased overall average headcount from 348 at June 30, 2011 to 406 at June 30, 2012 combined with an increase in the bonus accrual of $9.6 million for the six months ended June 30, 2012 as compared to 2011; |
| (vii) | a gain on bargain purchase of $13.1 million in 2011, which arose in relation to our acquisition of Laguna Life Limited, or Laguna (as compared to no gain on bargain purchase in 2012); |
| (viii) | a decrease in consulting fee income of $2.1 due to lower fees earned from third-party incentive-based engagements; and |
| (ix) | an increase in income tax expense of $14.0 million due in large part to higher net earnings within our taxable subsidiaries. |
Noncontrolling interest in earnings reduced by $1.3 million to $5.9 million for the six months ended June 30, 2012 as a result of lower earnings in those companies in which there are noncontrolling interests. Net earnings attributable to Enstar Group Limited increased from $12.9 million for the six months ended June 30, 2011 to $50.4 million for the six months ended June 30, 2012.
Consulting Fees:
| Six Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 3,969 | $ | 6,081 | $ | (2,112 | ) | |||||
|
|
|
|
|
|
|
|||||||
38
Our consulting companies earned fees of approximately $4.0 million and $6.1 million for the six months ended June 30, 2012 and 2011, respectively. The decrease in consulting fees of $2.1 million related primarily to the decrease in management fees earned from incentive-based third-party engagements.
Net Investment Income and Net Realized and Unrealized Gains:
| Six Months Ended June 30, | ||||||||||||||||||||||||
| Net Investment Income | Net Realized and Unrealized Gains | |||||||||||||||||||||||
| 2012 | 2011 | Variance | 2012 | 2011 | Variance | |||||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||||||
|
Total |
$ | 46,176 | $ | 41,470 | $ | 4,706 | $ | 22,234 | $ | 8,632 | $ | 13,602 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net investment income (inclusive of net realized and unrealized gains) for the six months ended June 30, 2012 increased by $18.3 million to $68.4 million, as compared to $50.1 million for the six months ended June 30, 2011.
During the six months ended June 30, 2012 our average cash and investments (excluding equities and other investments) were $4.15 billion as compared to $3.50 billion for the six months ended June 30, 2011. The average annualized return on our cash and investments (inclusive of net realized and unrealized (losses) gains, but excluding net investment income and net realized and unrealized (losses) gains related to our other investments and equities) for the six months ended June 30, 2012 was 2.37% as compared to the average annualized return of 1.96% for the six months ended June 30, 2011. The additional investment income from the increase in average cash and investments for the six months ended June 30, 2012 combined with an increase in investment yields for the same period resulted in an increase in investment returns.
The average annualized return on our other investments and equities (inclusive of net realized and unrealized (losses) gains) for the six months ended June 30, 2012 was 8.00% as compared to the average annualized return of 7.51% for the six months ended June 30, 2011. The increase in the returns was principally attributable to net realized and unrealized mark-to-market gains on our equity securities.
The average credit rating of our fixed maturity investments at June 30, 2012 was AA-. During 2011, the rating agency Standard & Poors downgraded the U.S. sovereign debt from AAA to AA+. This, combined with the assets we acquired upon the acquisition of Clarendon (which had a lower proportion of investments with AAA credit ratings), resulted in us having a lower percentage of AAA-rated investments than we had as at June 30, 2011.
Gain on Bargain Purchase:
| Six Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | — | $ | 13,105 | $ | (13,105 | ) | |||||
|
|
|
|
|
|
|
|||||||
Gain on bargain purchase of $13.1 million was recorded for the six months ended June 30, 2011. The gain on bargain purchase was earned in connection with our acquisition of Laguna and represents the excess of the aggregate fair value of net assets acquired of $34.3 million over the cost of $21.2 million. This excess was, in accordance with the provisions of the Business Combinations topic of the FASB Accounting Standards Codification 805, recognized as income for the six months ended June 30, 2011. The gain on bargain purchase arose mainly as a result of our reassessment, upon acquisition, of the total required estimated costs to manage the business to expiry. Our assessment of costs was lower than the acquired costs recorded by the vendor in the financial statements of Laguna.
39
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 six months ended June 30, 2012 and 2011:
|
Six Months
Ended
June 30, |
||||||||
| 2012 | 2011 | |||||||
| (in thousands of U.S. dollars) | ||||||||
|
Net losses paid |
$ | (133,493 | ) | $ | (153,339 | ) | ||
|
Net change in case and LAE reserves |
167,956 | 148,504 | ||||||
|
Net change in IBNR |
27,252 | 35,276 | ||||||
|
|
|
|
|
|||||
|
Reduction in estimates of net ultimate losses |
61,715 | 30,441 | ||||||
|
Reduction in provisions for bad debt |
2,782 | 1,672 | ||||||
|
Reduction in provisions for unallocated loss adjustment expense liabilities |
24,513 | 23,320 | ||||||
|
Amortization of fair value adjustments |
(9,827 | ) | (17,046 | ) | ||||
|
|
|
|
|
|||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities |
$ | 79,183 | $ | 38,387 | ||||
|
|
|
|
|
|||||
The net reduction in ultimate loss and loss adjustment expense liabilities for the six months ended June 30, 2012 of $79.2 million was attributable to a reduction in estimates of net ultimate losses of $61.7 million, a reduction in provisions for bad debt of $2.8 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $24.5 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $9.8 million.
The reduction in estimates of net ultimate losses of $61.7 million for the six months ended June 30, 2012, comprised of net favorable incurred loss development of $34.4 million and reductions in IBNR reserves of $27.3 million, primarily related to the completion of six commutations of assumed reinsurance liabilities, including one of our largest ten policyholder exposures as at January 1, 2012, and two commutations of ceded reinsurance recoverables, one of which were among our largest ten reinsurance recoverables balances as at January 1, 2012.
The reductions in provisions for bad debt of $2.8 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.
The net reduction in ultimate loss and loss adjustment expense liabilities for the six months ended June 30, 2011 of $38.4 million was attributable to a reduction in estimates of net ultimate losses of $30.4 million, a reduction in provisions for bad debt of $1.7 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $23.3 million, relating to 2011 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $17.0 million.
The reduction in estimates of net ultimate losses of $30.4 million for the six months ended June 20, 2011, comprised of net incurred loss development of $4.8 million and reductions in IBNR reserves of $35.3 million, primarily related to the completion of two commutations that were among our largest ten policyholder exposures.
The reductions in provisions for bad debt of $1.7 million resulted from the collection of recoverables against which bad debt provisions had been provided for in earlier periods.
40
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the six months ended June 30, 2012 and 2011. Losses incurred and paid are reflected net of reinsurance recoverables.
|
Six Months
Ended
June 30, |
||||||||
| 2012 | 2011 | |||||||
| (in thousands of U.S. dollars) | ||||||||
|
Balance as at January 1 |
$ | 4,282,916 | $ | 3,291,275 | ||||
|
Less: total reinsurance reserves recoverable |
1,383,003 | 525,440 | ||||||
|
|
|
|
|
|||||
| 2,899,913 | 2,765,835 | |||||||
|
Effect of exchange rate movement |
(2,881 | ) | 33,352 | |||||
|
Net reduction in ultimate loss and loss adjustment expense liabilities |
(79,183 | ) | (38,387 | ) | ||||
|
Net losses paid |
(133,493 | ) | (153,339 | ) | ||||
|
Acquired on purchase of subsidiaries |
— | 10,439 | ||||||
|
Reserves acquired from loss portfolio transfers |
58,721 | — | ||||||
|
Retroactive reinsurance contracts assumed |
2,400 | 93,067 | ||||||
|
|
|
|
|
|||||
|
Net balance as at June 30 |
2,745,477 | 2,710,967 | ||||||
|
Plus: total reinsurance reserves recoverable |
1,064,854 | 556,374 | ||||||
|
|
|
|
|
|||||
|
Balance as at June 30 |
$ | 3,810,331 | $ | 3,267,341 | ||||
|
|
|
|
|
|||||
Salaries and Benefits:
| Six Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 44,830 | $ | 27,105 | $ | (17,725 | ) | |||||
|
|
|
|
|
|
|
|||||||
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $44.8 million and $27.1 million for the six months ended June 30, 2012 and 2011, respectively.
The principal changes in salaries and benefits were:
| (i) | increased staff costs due to an increase in average staff numbers from 344 for the six months ended June 30, 2011 to 406 for the six months ended June 30, 2012, primarily related to the expansion of our U.S. operations; and |
| (ii) | an increase in the bonus accrual for the six months ended June 30, 2012 as compared to 2011 of approximately $9.6 million (expenses relating to our discretionary bonus plan will be variable and are dependent on our overall profitability); partially offset by |
| (iii) | a decrease in U.S. dollar costs of our U.K.-based staff following a decrease in the average British pound exchange rate from approximately 1.6173 for the six months ended June 30, 2011 to 1.5770 for the six months ended June 30, 2012. Of our total headcount for the six months ended June 30, 2012 and 2011, approximately 54% and 65% of salaries, respectively, were paid in British pounds. |
41
General and Administrative Expenses:
| Six Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 29,014 | $ | 45,961 | $ | 16,947 | ||||||
|
|
|
|
|
|
|
|||||||
General and administrative expenses decreased by $17.0 million during the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The decrease was due principally to:
| (i) | a decrease in bank costs of $3.7 million primarily associated with the arrangement and agency fees paid in connection with establishing our revolving credit facility in 2011; |
| (ii) | a decrease in legal and other professional fees of approximately $8.7 million due primarily to decreased legal fees and settlement costs associated with certain litigation settled in 2011, along with legal fees associated with ongoing and completed due diligence projects; |
| (iii) | a decrease in third-party management fees paid of $1.7 million related to transition fees paid in respect of acquisitions completed in 2010; and |
| (iv) | decreased actuarial consulting fees of approximately $1.7 million due to costs associated with due diligence projects. |
Net Foreign Exchange Losses:
| Six Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 1,642 | $ | 9,266 | $ | 7,624 | ||||||
|
|
|
|
|
|
|
|||||||
We recorded net foreign exchange losses of $1.6 million and $9.3 million for the six months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012, the net foreign exchange losses arose primarily as a result of the translation of a U.S. dollar distribution in one of our subsidiaries whose functional currency is Australian dollars. The distribution was at a rate of approximately AU$1 = $1.08, which was in excess of the U.S. dollar foreign exchange rate at December 31, 2011 of approximately AU$1 = $1.025. This net foreign exchange loss was partially offset by the increase in the fair value of our Australian dollar forward exchange contracts discussed above in “— Comparison of the Three Months Ended June 30, 2012 and 2011 — Net Foreign Exchange (Gains) Losses.”
The net foreign exchange losses for the six months ended June 30, 2011 arose primarily as a result of: (i) holding surplus British pound liabilities at a time when the British pound was appreciating against the U.S. dollar; (ii) the currency mismatch that is created by the holding of foreign currency available-for-sale security assets whereby any net foreign currency translation gains or losses on those assets are reflected in the balance sheet as part of accumulated other comprehensive income, but the net foreign currency gains or losses on the corresponding liabilities impact the statement of earnings; (iii) net foreign exchange losses arising as a result of holding surplus U.S. dollar assets in one of our subsidiaries whose functional currency is Australian dollars at a time when the U.S. dollar was depreciating against the Australian dollar; and (iv) a decrease in the fair value of our Australian dollar foreign currency forward exchange contract, which was recognized as part of the net foreign exchange losses.
In addition to the net foreign exchange losses recorded in our consolidated statement of earnings for the six months ended June 30, 2012, we recorded in our condensed consolidated statement of comprehensive income currency translation adjustment losses, net of noncontrolling interest, of $1.5 million as compared to gains, net of noncontrolling interest, of $9.2 million for the same period in 2011. For the six months ended June 30, 2012 and 2011, the currency translation adjustments related primarily to our Australian-based and Ireland-based subsidiaries. As the functional currency of these subsidiaries is Australian dollars and Euros, respectively, we are required to record any U.S. dollar gains or losses on the translation of their net Australian dollar or Euro assets through accumulated other comprehensive income.
42
Income Tax Expense:
| Six Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 15,647 | $ | 1,592 | $ | (14,055 | ) | |||||
|
|
|
|
|
|
|
|||||||
We recorded income tax expense of $15.6 million and $1.6 million for the six months ended June 30, 2012 and 2011, respectively. The increase in taxes for the six months ended June 30, 2012 was due predominantly to higher overall net earnings in our taxable subsidiaries as compared to those earned in the same period in 2011.
Noncontrolling Interest:
| Six Months Ended June 30, | ||||||||||||
| 2012 | 2011 | Variance | ||||||||||
| (in thousands of U.S. dollars) | ||||||||||||
|
Total |
$ | 5,862 | $ | 7,210 | $ | 1,348 | ||||||
|
|
|
|
|
|
|
|||||||
We recorded a noncontrolling interest in earnings of $5.9 million and $7.2 million for the six months ended June 30, 2012 and 2011, respectively. The decrease for the six months ended June 30, 2012 in noncontrolling interest was due primarily to a decrease in earnings for those companies where there exists a noncontrolling interest. As discussed in “— Comparison of the Three Months Ended June 30, 2012 and 2011 — Noncontrolling Interest,” we now provide 100% of the investment in S2008.
Liquidity and Capital Resources
As of June 30, 2012, total cash, restricted cash and investments were $4.42 billion, compared to $4.56 billion at December 31, 2011.
Reinsurance Recoverables
As of June 30, 2012 and December 31, 2011, total reinsurance balances recoverable were $1.41 billion and $1.79 billion, respectively. The decrease of $382.6 million in total reinsurance balances recoverable was primarily as a result of commutations and cash collections made during the six months ended June 30, 2012. The ratio of the provision for uncollectible reinsurance recoverable to total reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of June 30, 2012, increased to 19.8% as compared to 16.0% as of December 31, 2011, primarily as a result of commutations and the collection of reinsurance balances recoverable against which there were minimal provisions for uncollectible reinsurance recoverable.
Source of Funds
The following table summarizes our consolidated cash flows from operating, investing and financing activities for the six months ended June 30, 2012 and 2011:
| Six Months Ended June 30, | ||||||||
|
Total cash (used in) provided by: |
2012 | 2011 | ||||||
| (in thousands of U.S. dollars) | ||||||||
|
Operating activities |
$ | (186,555 | ) | $ | (472,741 | ) | ||
|
Investing activities |
146,903 | 386,093 | ||||||
|
Financing activities |
(142,096 | ) | 50,137 | |||||
|
Effect of exchange rate changes on cash |
4,157 | (2,919 | ) | |||||
|
|
|
|
|
|||||
|
Decrease in cash and cash equivalents |
$ | (177,591 | ) | $ | (39,430 | ) | ||
|
|
|
|
|
|||||
Refer to “Item 1. Financial Statements — Unaudited Condensed Consolidated Statement of Cash Flows for the Six Month Periods Ended June 30, 2012 and 2011” for further information.
43
Operating
With respect to the six-month periods ended June 30, 2012 and 2011, net cash used in our operating activities was $186.6 million and $472.7 million, respectively. The decrease in cash used of $286.1 million was attributable primarily to:
| (i) | an increase of $494.9 million in the sales and maturities of trading securities between 2012 and 2011; |
| (ii) | an increase in the net changes in assets and liabilities of $68.7 million; partially offset by |
| (iii) | an increase of $339.2 million in the purchases of trading securities. |
Investing
Net cash provided by investing activities for the six-month periods ended June 30, 2012 and 2011 was $146.9 million and $386.1 million, respectively. The decrease in cash provided by investing activities of $239.2 million was attributable primarily to:
| (i) | a decrease of $78.4 million in the sales and maturities of available-for-sale securities between 2012 and 2011; |
| (ii) | an increase of $102.5 million in funding of other investments between 2012 and 2011 due to our increased investments in various bond, hedge and equity funds during 2012; and |
| (iii) | a decrease of $53.6 million in restricted cash and cash equivalents between 2012 and 2011. |
Financing
Net cash used in financing activities for the six-month period ended June 30, 2012 was $142.1 million as compared to $50.1 million of net cash provided by financing activities for the six month period ended June 30, 2011. The increase of $192.2 million in cash used in financing activities was attributable primarily to the following:
| (i) | a decrease of $105.7 million in net proceeds as a result of the completion, in April 2011, of a private placement of shares with affiliates of Goldman, Sachs & Co.; |
| (ii) | a decrease of $167.7 million in cash received attributable to bank loans between 2012 and 2011, partially offset by a decrease of $91.1 million in the repayment of bank loans between 2012 and 2011; and |
| (iii) | an increase of $19.0 million in dividends paid to noncontrolling interest in 2012, partially offset by a decrease of $9.0 million in net distributions of capital to noncontrolling interest. |
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 loans outstanding in relation to the share repurchase agreements, or the Repurchase Agreements, related to our ordinary shares 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 loans outstanding relating to the Repurchase Agreements of $4.2 million and $3.7 million for the six months ended June 30, 2012 and 2011, respectively.
On June 29, 2012, we fully repaid the outstanding principal and accrued interest of $118.0 million on our Revolving Credit Facility with National Australia Bank Limited and Barclays Corporate, or the EGL Revolving Credit Facility. As of June 30, 2012, the unused portion of the EGL Revolving Credit Facility was $250.0 million.
Total amounts of loans payable outstanding, including accrued interest, as of June 30, 2012 and December 31, 2011 totaled $126.3 million and $242.7 million, respectively.
44
As of June 30, 2012, all of the covenants relating to our two outstanding credit facilities (the EGL Revolving Credit Facility and the term facility agreement related to our acquisition of Clarendon) were met. Refer to Note 11 of Item 8 included in our Annual Report on Form 10-K for the year ended December 31, 2011 for a description of these credit facilities and the Repurchase Agreements.
Eurozone Exposure
At June 30, 2012, we did not own any investments in fixed maturity securities (which includes bonds that are classified as cash and cash equivalents) or bond funds issued by the sovereign governments of Portugal, Ireland, Greece or Spain. Our fixed maturity securities and bond funds exposures to Eurozone Governments (which includes regional and municipal governments including guaranteed agencies) by rating and maturity date are highlighted in the following tables:
| Rating | ||||||||||||||||||||
| AAA | AA | A |
BBB and
below |
Total | ||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||
|
Germany |
$ | 18,401 | $ | 2,835 | $ | — | $ | — | $ | 21,236 | ||||||||||
|
Supranationals(1) |
22,933 | 828 | — | — | 23,761 | |||||||||||||||
|
Denmark |
1,576 | — | — | — | 1,576 | |||||||||||||||
|
Netherlands |
13,710 | 2,529 | — | 499 | 16,738 | |||||||||||||||
|
Norway |
2,286 | — | — | 25,595 | 27,881 | |||||||||||||||
|
France |
3,750 | 14,409 | 5,334 | — | 23,493 | |||||||||||||||
|
Finland |
476 | — | — | — | 476 | |||||||||||||||
|
Sweden |
9,547 | 23,041 | 4,795 | — | 37,383 | |||||||||||||||
|
Austria |
— | 11,524 | — | — | 11,524 | |||||||||||||||
|
Italy |
— | — | 509 | — | 509 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 72,679 | 55,166 | 10,638 | 26,094 | 164,577 | ||||||||||||||||
|
Euro Region Government Funds |
— | 11,246 | — | — | 11,246 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 72,679 | $ | 66,412 | $ | 10,638 | $ | 26,094 | $ | 175,823 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Maturity Date(2) | ||||||||||||||||||||||||
|
3 months
or less |
3 to 6
months |
6 months
to 1 year |
1 to 2
years |
more than
2 years |
Total | |||||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||||||
|
Germany |
$ | 5,202 | $ | 801 | $ | 4,794 | $ | 3,898 | $ | 6,541 | $ | 21,236 | ||||||||||||
|
Supranationals(1) |
— | 797 | 7,084 | 11,058 | 4,822 | 23,761 | ||||||||||||||||||
|
Denmark |
— | — | — | 1,576 | — | 1,576 | ||||||||||||||||||
|
Netherlands |
1,019 | — | 4,987 | 6,417 | 4,315 | 16,738 | ||||||||||||||||||
|
Norway |
— | — | 18,062 | — | 9,819 | 27,881 | ||||||||||||||||||
|
France |
784 | 489 | 5,334 | 13,947 | 2,939 | 23,493 | ||||||||||||||||||
|
Finland |
— | — | — | — | 476 | 476 | ||||||||||||||||||
|
Sweden |
— | 9,547 | 1,379 | 3,416 | 23,041 | 37,383 | ||||||||||||||||||
|
Austria |
— | — | 10,131 | — | 1,393 | 11,524 | ||||||||||||||||||
|
Italy |
— | — | — | 509 | — | 509 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 7,005 | $ | 11,634 | $ | 51,771 | $ | 40,821 | $ | 53,346 | $ | 164,577 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| (1) | Supranationals are defined as international government or quasi-government organizations. |
| (2) | Our bond fund holdings have daily liquidity and are not included in the maturity date table. |
45
At June 30, 2012, we owned investments in corporate securities (which includes bonds that are classified as cash and cash equivalents) issued by entities whose ultimate parent companies were located within the Eurozone. This includes securities that were issued by subsidiaries whose location was outside of the Eurozone. Our exposures by country and listed by rating, sector and maturity date is highlighted in the following tables:
| Rating | ||||||||||||||||||||||||
| AAA | AA | A | BBB |
BB and
below |
Total | |||||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||||||
|
Germany |
$ | 6,312 | $ | 1,580 | $ | 18,668 | $ | 15,608 | $ | — | $ | 42,168 | ||||||||||||
|
Belgium |
— | — | 18,170 | — | — | 18,170 | ||||||||||||||||||
|
Portugal |
— | — | — | — | 20,038 | 20,038 | ||||||||||||||||||
|
Netherlands |
— | 22,146 | 21,125 | 3,119 | 6,316 | 52,706 | ||||||||||||||||||
|
Sweden |
— | 11,184 | 16,228 | 2,729 | — | 30,141 | ||||||||||||||||||
|
Norway |
18,546 | — | — | — | — | 18,546 | ||||||||||||||||||
|
France |
31,273 | 4,837 | 6,555 | 10,983 | — | 53,648 | ||||||||||||||||||
|
Ireland |
— | — | 3,129 | — | — | 3,129 | ||||||||||||||||||
|
Spain |
— | 2,860 | 4,842 | 41,848 | — | 49,550 | ||||||||||||||||||
|
Italy |
— | — | — | 8,767 | — | 8,767 | ||||||||||||||||||
|
Switzerland |
15,271 | 6,375 | 7,101 | — | — | 28,747 | ||||||||||||||||||
|
Czech Republic |
— | — | 748 | — | — | 748 | ||||||||||||||||||
|
Jersey Islands |
— | — | 10,792 | — | — | 10,792 | ||||||||||||||||||
|
Russian Federation |
— | — | — | 695 | — | 695 | ||||||||||||||||||
|
Luxembourg |
— | — | — | 103 | 2,248 | 2,351 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 71,402 | $ | 48,982 | $ | 107,358 | $ | 83,852 | $ | 28,602 | $ | 340,196 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Sector | ||||||||||||||||||||||||||||
| Financial | Energy | Industrial | Telecom | Utility | Food | Total | ||||||||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||||||||||
|
Germany |
$ | 13,588 | $ | — | $ | 3,187 | $ | 15,608 | $ | 9,785 | $ | — | $ | 42,168 | ||||||||||||||
|
Belgium |
5,921 | — | 12,249 | — | — | — | 18,170 | |||||||||||||||||||||
|
Portugal |
— | — | — | — | 20,038 | — | 20,038 | |||||||||||||||||||||
|
Netherlands |
43,880 | — | 5,707 | — | 3,119 | — | 52,706 | |||||||||||||||||||||
|
Sweden |
27,412 | — | 2,729 | — | — | — | 30,141 | |||||||||||||||||||||
|
Norway |
18,546 | — | — | — | — | — | 18,546 | |||||||||||||||||||||
|
France |
43,848 | — | 6,165 | — | 66 | 3,569 | 53,648 | |||||||||||||||||||||
|
Ireland |
3,129 | — | — | — | — | — | 3,129 | |||||||||||||||||||||
|
Spain |
12,433 | 8,364 | 20,640 | 2,305 | 5,808 | — | 49,550 | |||||||||||||||||||||
|
Italy |
433 | — | 6,255 | — | 2,079 | — | 8,767 | |||||||||||||||||||||
|
Switzerland |
19,693 | — | 9,054 | — | — | — | 28,747 | |||||||||||||||||||||
|
Czech Republic |
— | — | — | — | 748 | — | 748 | |||||||||||||||||||||
|
Jersey Islands |
10,792 | — | — | — | — | — | 10,792 | |||||||||||||||||||||
|
Russian Federation |
— | 695 | — | — | — | — | 695 | |||||||||||||||||||||
|
Luxembourg |
2,248 | — | 103 | — | — | — | 2,351 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| $ | 201,923 | $ | 9,059 | $ | 66,089 | $ | 17,913 | $ | 41,643 | $ | 3,569 | $ | 340,196 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
46
| Maturity Date | ||||||||||||||||||||||||
|
3 months
or less |
3 to 6
months |
6 months
to 1 year |
1 to 2
years |
more
than 2 years |
Total | |||||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||||||
|
Germany |
$ | 17,454 | $ | 2,552 | $ | 19,253 | $ | 545 | $ | 2,364 | $ | 42,168 | ||||||||||||
|
Belgium |
— | 2,786 | 8,929 | — | 6,455 | 18,170 | ||||||||||||||||||
|
Portugal |
— | 20,038 | — | — | — | 20,038 | ||||||||||||||||||
|
Netherlands |
13,035 | — | 4,145 | 6,981 | 28,545 | 52,706 | ||||||||||||||||||
|
Sweden |
3,797 | 11,446 | — | 2,669 | 12,229 | 30,141 | ||||||||||||||||||
|
Norway |
— | — | — | 18,546 | — | 18,546 | ||||||||||||||||||
|
France |
10,979 | 3,569 | 5,238 | 2,914 | 30,948 | 53,648 | ||||||||||||||||||
|
Ireland |
— | — | — | — | 3,129 | 3,129 | ||||||||||||||||||
|
Spain |
1,863 | — | 29,750 | 17,937 | — | 49,550 | ||||||||||||||||||
|
Italy |
— | — | 2,079 | 6,255 | 433 | 8,767 | ||||||||||||||||||
|
Switzerland |
398 | — | 3,975 | 5,528 | 18,846 | 28,747 | ||||||||||||||||||
|
Czech Republic |
— | — | — | — | 748 | 748 | ||||||||||||||||||
|
Jersey Islands |
— | — | 10,792 | — | — | 10,792 | ||||||||||||||||||
|
Russian Federation |
— | — | — | — | 695 | 695 | ||||||||||||||||||
|
Luxembourg |
— | — | 2,248 | — | 103 | 2,351 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| $ | 47,526 | $ | 40,391 | $ | 86,409 | $ | 61,375 | $ | 104,495 | $ | 340,196 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Investments we hold in the United Kingdom and Switzerland are not included in the tables above. None of the securities included in the tables above were considered impaired at June 30, 2012.
Aggregate Contractual Obligations
We have updated our contractual obligations previously provided on page 113 of our Annual Report on Form 10-K for the year ended December 31, 2011 to reflect the change in gross reserves along with loan repayments during the six months ended June 30, 2012.
| Payments Due by Period | ||||||||||||||||||||
| Total |
Less than
1 year |
1 - 3 years | 3 - 5 years |
More than
5 years |
||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||
|
Operating Activities |
||||||||||||||||||||
|
Estimated gross reserves for loss and loss adjustment expenses(1) |
$ | 3,810.3 | $ | 661.3 | $ | 1,203.9 | $ | 682.6 | $ | 1,262.5 | ||||||||||
|
Financing Activities |
||||||||||||||||||||
|
Loan repayments (including interest payments)(2) |
133.0 | 22.8 | 110.2 | — | — | |||||||||||||||
| (1) | Gross reserves for loss and loss adjustment expenses (net of fair value adjustments) decreased by $472.6 million in the six months ended June 30, 2012 primarily as a result of claim settlements and commutations. The amounts in the above table represent our best estimate of known liabilities as of June 30, 2012. Accordingly, the amounts paid out in the time periods shown may differ from those indicated above. |
| (2) | In June 2012, we fully repaid the outstanding principal and interest on our Revolving Credit Facility. |
There have been no other material changes in our Aggregate Contractual Obligations table since December 31, 2011. Refer to Item 7 included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more information.
Commitments and Contingencies
On March 14, 2012, we eliminated a certain guarantee of our obligation to our wholly-owned subsidiary, Fitzwilliam Insurance Limited, or Fitzwilliam, in respect of a letter of credit issued on its behalf by a London-based bank in the amount of £7.5 million (approximately $11.7 million) relating to Fitzwilliam’s insurance contract requirements.
47
On June 26, 2012, we provided a limited parental guarantee supporting Fitzwilliam’s obligation in respect of an amendment to an existing letter of credit issued on its behalf by a London-based bank in the amount of approximately $11.2 million relating to Fitzwilliam’s insurance contract requirements.
As at June 30, 2012 and December 31, 2011, we had, in total, parental guarantees supporting Fitzwilliam’s obligations in the amount of $217.1 million and $219.9 million, respectively.
During the six months ended June 30, 2012, we funded $0.8 million of our $5.0 million commitment to Dowling Capital Partners I, L.P.
On July 6, 2012 we, through our wholly-owned subsidiary Providence Washington Insurance Company, entered into a definitive loss portfolio reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business. The estimated total assets and liabilities to be assumed are approximately $174.0 million. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close in the fourth quarter of 2012.
There have been no other material changes in our commitments or contingencies since December 31, 2011. Refer to Item 7 included in our Annual Report on Form 10-K for the year ended December 31, 2011 for more information.
Critical Accounting Estimates
Our critical accounting estimates are discussed in Management’s Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2011.
Off-Balance Sheet and Special Purpose Entity Arrangements
At June 30, 2012, we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our ordinary shares and the insurance and reinsurance sectors in general. Statements that include words such as “estimate,” “project,” “plan,” “intend,” “expect,” “anticipate,” “believe,” “would,” “should,” “could,” “seek,” “may” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not statements of historical fact, reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward looking statements should, therefore, be considered in light of various important factors, including those set forth in this quarterly 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; |
48
| • |
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 management’s 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; |
| • |
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 be not construed as exhaustive and should be read in conjunction with the other cautionary statements and Risk Factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2011, as well as in the other materials filed and to be filed with the U.S. Securities and Exchange Commission. We undertake no obligation to publicly update or review any forward looking statement, whether as a result of new information, future developments or otherwise.
49
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
There have been no material changes in our market risk exposures since December 31, 2011. For more information refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2011.
| Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management 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 June 30, 2012. 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 that we are required to disclose 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 U.S. Securities and Exchange Commission and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
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 three months ended June 30, 2012. Based upon that evaluation there were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
50
| Item 1. | 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.
| Item 1A. | RISK FACTORS |
Our results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011. The risk factors identified therein have not materially changed.
| Item 6. | EXHIBITS |
The information required by this item is set forth on the exhibit index that follows the signature page of this report.
51
Pursuant to the requirements 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 August 1, 2012.
|
ENSTAR GROUP LIMITED |
||||||
| By: |
/s/ Richard J. Harris |
|||||
| Richard J. Harris | ||||||
|
Chief Financial Officer, Authorized Signatory and Principal Accounting and Financial Officer |
||||||
52
EXHIBIT INDEX
|
Exhibit No. |
Description |
|
| 2.1* ¿ | Stock Purchase Agreement among Clarendon Insurance Group, Inc., Hannover Finance, Inc. and Clarendon Holdings, Inc. and the Company, dated as of December 21, 2010. | |
| 3.1 | Memorandum of Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K/A filed on May 5, 2011). | |
| 3.2 |
Third Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit 3.1(b) of the Company’s Form 10-Q filed on August 5, 2011). |
|
| 3.3 | Certificate of Designations for the Series A Convertible Participating Non-Voting Perpetual Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 21, 2011). | |
| 10.1 | Amended and Restated Employment Agreement, effective May 1, 2007 and amended and restated June 4, 2007, by and between Enstar Group Limited and Dominic F. Silvester, as amended by Letter Agreement, effective January 1, 2011, and Letter Agreement, dated April 19, 2012 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed on May 4, 2012). | |
| 10.2 | Employment Agreement, effective May 1, 2007, by and between the Company and Paul J. O’Shea, as amended by Letter Agreement, effective January 1, 2011, and Letter Agreement, dated April 25, 2012 (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q filed on May 4, 2012). | |
| 10.3 | Employment Agreement, effective May 1, 2007, by and between Enstar Group Limited and Nicholas A. Packer, as amended by Letter Agreement, effective January 1, 2011, and Letter Agreement, dated April 25, 2012 (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q filed on May 4, 2012). | |
| 10.4 | Employment Agreement, effective May 1, 2007, by and between Enstar Group Limited and Richard J. Harris, as amended by Letter Agreement, effective January 1, 2011, and Letter Agreement, dated April 19, 2012 (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q filed on May 4, 2012). | |
| 15.1* | KPMG Awareness Letter Regarding Unaudited Interim Financial Information. | |
| 31.1* | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1** | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2** | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101** | Interactive Data Files. |
| * | Filed herewith |
| ** | Furnished herewith |
| ¿ | Certain of the schedules and similar attachments are not filed but Enstar Group Limited undertakes to furnish a copy of the schedules or similar attachments to the SEC upon request |
53
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
Customers
| Customer name | Ticker |
|---|---|
| C.H. Robinson Worldwide, Inc. | CHRW |
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|