ESGR 10-Q Quarterly Report Sept. 30, 2018 | Alphaminr
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ESGR 10-Q Quarter ended Sept. 30, 2018

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10-Q 1 a2018q3-esgr10xq.htm 10-Q Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
Commission File Number 001-33289

enlogo2016a11.gif
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.)

Windsor Place, 3rd Floor, 22 Queen Street, Hamilton HM JX, Bermuda
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (441) 292-3645

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No þ
As at November 5, 2018 , the registrant had outstanding 17,951,076 voting ordinary shares and 3,509,682 non-voting convertible ordinary shares, each par value $1.00 per share.



Enstar Group Limited
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2018

Table of Contents


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Page


1

ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2018 (unaudited) and December 31, 2017
September 30,
2018
December 31,
2017
(expressed in thousands of U.S. dollars, except share data)
ASSETS
Short-term investments, trading, at fair value
$
231,950

$
180,211

Fixed maturities, trading, at fair value
6,313,330

5,696,073

Fixed maturities, available-for-sale, at fair value (amortized cost: 2018 — $163,696; 2017 — $208,097)
163,144

210,285

Equities, trading, at fair value
130,314

106,603

Other investments, at fair value
2,036,430

913,392

Other investments, at cost
—

125,621

Total investments (Note 5 and Note 7 )
8,875,168

7,232,185

Cash and cash equivalents
553,419

955,150

Restricted cash and cash equivalents
474,590

257,686

Funds held - directly managed (Note 6)
1,217,182

1,179,940

Premiums receivable
574,419

425,702

Deferred tax assets (Note 19)
13,782

13,001

Prepaid reinsurance premiums
191,669

245,101

Reinsurance balances recoverable (Note 9)
1,183,003

1,478,806

Reinsurance balances recoverable, at fair value (Note 7 and Note 9)
792,553

542,224

Funds held by reinsured companies
254,029

175,383

Deferred acquisition costs
125,132

64,984

Goodwill and intangible assets (Note 13)
219,295

180,589

Other assets
646,987

831,320

Assets held for sale (Note 4)
—

24,351

TOTAL ASSETS
$
15,121,228

$
13,606,422

LIABILITIES
Losses and loss adjustment expenses (Note 10)
$
5,516,012

$
5,603,419

Losses and loss adjustment expenses, at fair value (Note 7 and Note 10)
3,019,721

1,794,669

Policy benefits for life and annuity contracts (Note 11)
107,466

117,207

Unearned premiums
743,024

583,197

Insurance and reinsurance balances payable
381,114

236,697

Deferred tax liabilities (Note 19)
14,942

15,262

Debt obligations (Note 14)
394,470

646,689

Other liabilities
570,474

972,457

Liabilities held for sale (Note 4)
—

11,271

TOTAL LIABILITIES
10,747,223

9,980,868

COMMITMENTS AND CONTINGENCIES (Note 21)


REDEEMABLE NONCONTROLLING INTEREST (Note 15)
458,328

479,606

SHAREHOLDERS’ EQUITY (Note 16)
Ordinary shares (par value $1 each, issued and outstanding 2018: 21,443,789; 2017: 19,406,722):


Voting Ordinary shares (issued and outstanding 2018: 17,934,107; 2017: 16,402,279)
17,934

16,402

Non-voting convertible ordinary Series C Shares (issued and outstanding 2018 and 2017: 2,599,672)
2,600

2,600

Non-voting convertible ordinary Series E Shares (issued and outstanding 2018: 910,010; 2017: 404,771)
910

405

Preferred Shares:
Series C Preferred Shares (issued and held in treasury 2018 and 2017: 388,571)
389

389

Series D Preferred Shares (issued and outstanding 2018: 16,000)
400,000

—

Treasury shares, at cost (Series C Preferred shares 2018 and 2017: 388,571)
(421,559
)
(421,559
)
Additional paid-in capital
1,812,727

1,395,067

Accumulated other comprehensive income
9,170

10,468

Retained earnings
2,083,193

2,132,912

Total Enstar Group Limited Shareholders’ Equity
3,905,364

3,136,684

Noncontrolling interest
10,313

9,264

TOTAL SHAREHOLDERS’ EQUITY
3,915,677

3,145,948

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
15,121,228

$
13,606,422


See accompanying notes to the unaudited condensed consolidated financial statements

2

ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three and Nine Months Ended September 30, 2018 and 2017
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
(expressed in thousands of U.S. dollars,
except share and per share data)
INCOME
Net premiums earned
$
264,597

$
148,025

$
663,628

$
452,494

Fees and commission income
6,950

15,895

23,633

46,476

Net investment income
69,430

52,028

202,218

150,184

Net realized and unrealized gains (losses)
(57,223
)
29,301

(254,671
)
139,697

Other income (expenses)
11,543

(3,848
)
34,477

19,206

295,297

241,401

669,285

808,057

EXPENSES
Net incurred losses and loss adjustment expenses
153,974

75,712

266,327

163,224

Life and annuity policy benefits
423

1,060

217

5,048

Acquisition costs
54,242

24,281

137,684

75,457

General and administrative expenses
102,553

100,325

300,425

309,283

Interest expense
4,640

6,410

21,573

20,851

Net foreign exchange losses
1,040

4,775

1,389

15,612

Loss on sale of subsidiary
—

6,740

—

16,349

316,872

219,303

727,615

605,824

EARNINGS (LOSS) BEFORE INCOME TAXES
(21,575
)
22,098

(58,330
)
202,233

INCOME TAXES
(746
)
(1,432
)
(4,564
)
(3,234
)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
(22,321
)
20,666

(62,894
)
198,999

NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

3,495

—

(1,005
)
NET EARNINGS (LOSS)
(22,321
)
24,161

(62,894
)
197,994

Net loss (earnings) attributable to noncontrolling interest
11,489

14,832

19,096

(14,135
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
(10,832
)
38,993

(43,798
)
183,859

Dividends on preferred shares
(5,133
)
—

(5,133
)
—

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(15,965
)
$
38,993

$
(48,931
)
$
183,859

Earnings (Loss) per ordinary share attributable to Enstar Group Limited:
Basic:
Net earnings (loss) from continuing operations
$
(0.74
)
$
1.83

$
(2.39
)
$
9.54

Net earnings (loss) from discontinued operations
—

0.18

—

(0.05
)
Net earnings (loss) per ordinary share
$
(0.74
)
$
2.01

$
(2.39
)
$
9.49

Diluted:
Net earnings (loss) from continuing operations
$
(0.74
)
$
1.81

$
(2.39
)
$
9.47

Net earnings (loss) from discontinued operations
—

0.18

—

(0.05
)
Net earnings (loss) per ordinary share
$
(0.74
)
$
1.99

$
(2.39
)
$
9.42

Weighted average ordinary shares outstanding:
Basic
21,440,914

19,392,120

20,444,634

19,384,897

Diluted
21,665,356

19,559,168

20,653,544

19,515,987

See accompanying notes to the unaudited condensed consolidated financial statements

3

ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2018 and 2017
Three Months Ended
September 30,
Nine Months Ended
September 30,
2018
2017
2018
2017
(expressed in thousands of U.S. dollars)
NET EARNINGS (LOSS)
$
(22,321
)
$
24,161

$
(62,894
)
$
197,994

Other comprehensive income, net of tax:
Unrealized holding gains (losses) on fixed income available-for-sale investments arising during the period
(1,310
)
2,219

(3,007
)
4,598

Reclassification adjustment for net realized gains (losses) included in net earnings
2

(3
)
53

(254
)
Unrealized gains (losses) arising during the period, net of reclassification adjustments
(1,308
)
2,216

(2,954
)
4,344

Change in currency translation adjustment
(143
)
4,194

1,258

8,451

Reclassification to earnings on disposal of subsidiary
—

7,440

—

7,440

Total currency translation adjustment
(143
)
11,634

1,258

15,891

Total other comprehensive income (loss)
(1,451
)
13,850

(1,696
)
20,235

Comprehensive income (loss)
(23,772
)
38,011

(64,590
)
218,229

Comprehensive (income) loss attributable to noncontrolling interest
11,505

14,432

19,494

(15,983
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
(12,267
)
$
52,443

$
(45,096
)
$
202,246

See accompanying notes to the unaudited condensed consolidated financial statements


4

ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2018 and 2017
Nine Months Ended September 30,
2018
2017
(expressed in thousands of U.S. dollars)
Share Capital — Voting Ordinary Shares
Balance, beginning of period
$
16,402

$
16,175

Issue of shares
1,532

24

Conversion of Series C Non-Voting Convertible Ordinary Shares
—

192

Balance, end of period
$
17,934

$
16,391

Share Capital — Series C Non-Voting Convertible Ordinary Shares
Balance, beginning of period
$
2,600

$
2,792

Conversion to Ordinary Shares
—

(192
)
Balance, end of period
$
2,600

$
2,600

Share Capital — Series E Non-Voting Convertible Ordinary Shares
Balance, beginning of period
$
405

$
405

Issue of shares
505

—

Balance, end of period
$
910

$
405

Share Capital — Series C Convertible Participating Non-Voting Perpetual Preferred Shares
Balance, beginning and end of period
$
389

$
389

Share Capital — Series D Perpetual Noncumulative Preferred Shares
Balance, beginning of period
$
—

$
—

Issue of shares
400,000

—

Balance, end of period
$
400,000

$
—

Treasury Shares (Series C Preferred shares)
Balance, beginning and end of period
$
(421,559
)
$
(421,559
)
Additional Paid-in Capital
Balance, beginning of period
$
1,395,067

$
1,380,109

Issue of voting ordinary shares
413,679

647

Issuance costs of Series D preferred shares
(10,781
)
—

Amortization of share-based compensation
14,762

10,473

Balance, end of period
$
1,812,727

$
1,391,229

Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period
$
10,468

$
(23,549
)
Currency translation adjustment
Balance, beginning of period
11,171

(18,993
)
Change in currency translation adjustment
1,270

8,440

Reclassification to earnings on disposal of subsidiary
—

7,440

Balance, end of period
12,441

(3,113
)
Defined benefit pension liability
Balance, beginning and end of period
(3,143
)
(4,644
)
Unrealized gains (losses) on available-for-sale investments
Balance, beginning of period
2,440

88

Change in unrealized gains (losses) on available-for-sale investments
(2,568
)
2,508

Balance, end of period
(128
)
2,596

Balance, end of period
$
9,170

$
(5,161
)
Retained Earnings
Balance, beginning of period
$
2,132,912

$
1,847,550

Net earnings (losses) attributable to Enstar Group Limited
(62,894
)
197,994

Net loss (earnings) attributable to noncontrolling interest
19,096

(14,135
)
Dividends on preferred shares
(5,133
)
—

Change in redemption of redeemable noncontrolling interests
785

760

Cumulative effect of change in accounting principle
(1,573
)
4,882

Balance, end of period
$
2,083,193

$
2,037,051

Noncontrolling Interest (excludes Redeemable Noncontrolling Interest)
Balance, beginning of period
$
9,264

$
8,520

Contribution of capital
49

22

Net earnings attributable to noncontrolling interest
1,000

1,945

Balance, end of period
$
10,313

$
10,487

See accompanying notes to the unaudited condensed consolidated financial statements

5

ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2018 and 2017
Nine Months Ended
September 30,
2018
2017
(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
Net earnings (loss)
$
(62,894
)
$
197,994

Net loss from discontinued operations
—

1,005

Adjustments to reconcile net earnings (losses) to cash flows used in operating activities:
Realized losses (gains) on sale of investments
15,794

(5,012
)
Unrealized losses (gains) on investments
190,598

(108,011
)
Depreciation and other amortization
25,276

28,925

Net change in trading securities held on behalf of policyholders
—

25,597

Sales and maturities of trading securities
3,380,333

4,111,406

Purchases of trading securities
(4,081,938
)
(5,611,677
)
Net loss on sale of subsidiary
—

16,349

Other non-cash items
12,978

10,544

Changes in:
Reinsurance balances recoverable
(305,434
)
(628,654
)
Funds held by reinsured companies
(115,888
)
(206,985
)
Losses and loss adjustment expenses
1,103,802

1,590,764

Policy benefits for life and annuity contracts
(5,928
)
170

Insurance and reinsurance balances payable
144,805

(140,356
)
Unearned premiums
159,827

20,330

Other operating assets and liabilities
(370,376
)
215,365

Net cash flows provided by (used in) operating activities
90,955

(482,246
)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired
2,317

(670
)
Sale of subsidiary, net of cash sold
—

19,690

Sales and maturities of available-for-sale securities
48,889

60,202

Purchase of available-for-sale securities
(10,385
)
(2,565
)
Purchase of other investments
(784,316
)
(98,203
)
Redemption of other investments
340,298

202,581

Other investing activities
(8,155
)
(16,831
)
Net cash flows provided by (used in) investing activities
(411,352
)
164,204

FINANCING ACTIVITIES:
Issuance of preferred shares, net of issuance costs
389,219

—

Dividends on preferred shares
(5,133
)
—

Contribution by noncontrolling interest
49

22

Dividends paid to noncontrolling interest
—

(27,458
)
Receipt of loans
441,022

534,100

Repayment of loans
(689,819
)
(564,203
)
Net cash flows provided by (used in) financing activities
135,338

(57,539
)
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
232

6,292

NET DECREASE IN CASH AND CASH EQUIVALENTS
(184,827
)
(369,289
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,212,836

1,318,645

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,028,009

$
949,356

Supplemental Cash Flow Information:
Income taxes paid, net of refunds
$
16,268

$
11,107

Interest paid
$
24,618

$
18,043

Reconciliation to Consolidated Balance Sheets:
Cash and cash equivalents
553,419

624,451

Restricted cash and cash equivalents
474,590

324,905

Cash, cash equivalents and restricted cash
$
1,028,009

$
949,356


See accompanying notes to the unaudited condensed consolidated financial statements

6

ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018 and December 31, 2017
(Tabular information expressed in thousands of U.S. dollars except share and per share data)

1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. 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 items considered necessary for a fair presentation under U.S. GAAP. The results of operations for any interim period are not necessarily indicative of results of the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017 . All significant inter-company transactions and balances have been eliminated. In these notes, the terms "we," "us," "our," or "the Company" refer to Enstar Group Limited and its consolidated subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results may differ materially from these estimates. Results of changes in estimates are reflected in earnings in the period in which the change is made. Accounting policies that we believe are most dependent on assumptions and estimates are considered to be our critical accounting policies and are related to the determination of:
•
liability for losses and loss adjustment expenses ("LAE");
•
liability for policy benefits for life contracts;
•
reinsurance balances recoverable;
•
gross and net premiums written and net premiums earned;
•
impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale, and impairments on goodwill, intangible assets and deferred charges;
•
fair value measurements of investments;
•
fair value estimates associated with accounting for acquisitions;
•
fair value estimates associated with loss portfolio transfer reinsurance agreements for which we have elected the fair value option; and
•
redeemable noncontrolling interests.
New Accounting Standards Adopted in 2018
Accounting Standards Update ("ASU") 2017-09, Stock Compensation - Scope of Modification Accounting
In May 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification ("ASC") 718 - Compensation - Stock Compensation . Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of

7
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




the awards are the same immediately before and after the modification. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.

ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU 2017-07, which amends the requirements in ASC 715 - Compensation - Retirement Benefits , related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The ASU requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the statement of earnings, and (2) present the other components elsewhere in the statement of earnings and outside of income from operations if such a subtotal is presented. The ASU also requires entities to disclose the captions within the statement of earnings that contain the other components if they are not presented on appropriately described separate lines. In addition, only the service-cost component of the net benefit cost is eligible for capitalization, which is a change from prior practice, under which entities capitalize the aggregate net benefit cost when applicable. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
In February 2017, the FASB issued ASU 2017-05, which clarifies the scope of the Board’s guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The ASU clarifies that ASC 610-20 applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. The ASU also requires an entity to derecognize the nonfinancial asset or in-substance nonfinancial asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary pursuant to ASC 810, and (2) control of the asset is transferred in accordance with ASC 606. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, which requires immediate recognition of the tax consequences of many intercompany asset transfers other than inventory. The adoption of this guidance did not have a material impact on our consolidated financial statements and disclosures.
ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15, which amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. The adoption of this guidance did not have any impact on our consolidated financial statements and disclosures.
ASU 2016-01, Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued ASU 2016-01, which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many of the current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.
In February 2018, the FASB also issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities , which clarifies that entities should use a prospective transition approach only for equity securities they elect to measure using the new measurement alternative. The amendments also clarify that an entity that voluntarily discontinues using the measurement alternative for an equity security without a readily determinable fair value must measure that security and all identical or similar investments of the same issuer at fair value. Under this guidance, this election is irrevocable and will apply to all future purchases of identical or similar investments of the same issuer. The amendments also clarify other aspects of ASU 2016-01 on how to apply the measurement alternative and the presentation requirements for financial liabilities measured under the fair value option. The adoption of this guidance is contingent on the adoption of ASU 2016-01.

8
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




We adopted ASU 2016-01 on January 1, 2018 using the modified retrospective approach and recorded a cumulative-effect adjustment of $1.6 million to reduce opening retained earnings for certain of our other investments that were previously classified as available-for-sale securities and for which changes in fair value were previously included in accumulated other comprehensive income. We also adopted ASU 2018-03 following our adoption of ASU 2016-01 and this adoption did not have any impact on our consolidated financial statements and related disclosures.
ASUs 2014-09, 2016-08, 2016-10, 2016-12, Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other FASB topics, primarily our premium revenues which are covered by ASC 944 - Financial Services - Insurance , and revenues from our investment portfolios which are covered by other FASB topics. While contracts within the scope of ASC 944 are excluded from the scope of the ASU, certain insurance-related contracts are within the scope of the ASU, for example contracts under which service providers charge their customers fixed fees in exchange for an agreement to provide services for an uncertain future event. Certain of the ASU’s provisions also apply to transfers of non-financial assets and include guidance on recognition and measurement.
In March 2016, the FASB also issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations , which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB then issued ASU 2016-10, Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing , which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB further issued ASU 2016-12, Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients , which clarifies the following aspects in ASU 2014-09 - (1a) collectability, (2) presentation of sales taxes and other similar taxes collected from customers, (3) non-cash considerations, (4) contract modifications at transition, (5) completed contracts at transition, and (6) technical correction.
We adopted ASU 2014-09 and the related amendments, as codified in ASC 606 - Revenue from Contracts with Customers , on January 1, 2018 using the modified retrospective method with prior periods not being restated. Premium revenues and those related to our investment portfolios, which collectively comprise most of our total revenues, are within the scope of other FASB topics and therefore are excluded from the scope of the revenue recognition standard. For other revenue types, which are within the scope of the new guidance, we evaluated individual contracts against the provisions of the new guidance to identify any contracts where the timing and measurement of those revenues may differ based upon the new guidance. The adoption did not have a material impact on our consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 describes accounting pronouncements that were not adopted as of December 31, 2017 . Those pronouncements are not yet adopted unless discussed above in "New Accounting Standards Adopted in 2018." In addition, the following relevant pronouncements were issued during the nine months ended September 30, 2018 or thereafter and are yet to be adopted.
ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued ASU 2018-17, which clarifies that when determining whether a decision-making fee is a variable interest, a reporting entity should consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety, as currently required in GAAP. This amendment will, (1) likely result in more decision makers not having a variable interest through their decision-making arrangements, and (2) create alignment between determining whether a decision-making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a variable interest entity ("VIE"). The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. All entities are required to apply this guidance retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. While some of our subsidiaries are involved in certain decision-making arrangements for which they earn fees that are considered variable interests, they do not meet the primary beneficiary definition under the VIE guidance with respect to these arrangements.

9
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Therefore, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and the related disclosures.
ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance in ASC 820 - Fair Value Measurement , by removing and modifying certain existing disclosure requirements, while also adding new disclosure requirements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted, with the amendments being applied either prospectively or retrospectively, as specified in the ASU. In addition, an entity may elect to early adopt the removal or modification of disclosures immediately and delay the adoption of the new disclosure requirements until the effective date. We are currently assessing the impact of adopting this guidance however we do not expect the new or modified disclosures to have a material impact on the disclosures in our consolidated financial statements.
ASU 2018-12, Targeted Improvements to the Accounting for Certain Long-Duration Insurance Contracts
In August 2018, the FASB issued ASU 2018-12, which amends the accounting and disclosure model for certain long-duration insurance contracts under U.S GAAP. The goal of the ASU's amendments is to improve the following aspects of financial reporting related to long-duration insurance contracts: (1) measurement of the liability for future policy benefits related to non-participating traditional and limited-payment contracts, (2) measurement and presentation of market risk benefits, (3) amortization of deferred acquisition costs, and (4) presentation and disclosures. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020, although early adoption is permitted. Once the transfer of our remaining life insurance policies from our subsidiary Alpha Insurance SA to Monument Insurance Group Limited is completed, as discussed in Note 11 - "Policy Benefits for Life Contracts", we will not have any residual exposures relating to long duration insurance contracts. Therefore, the adoption of this guidance is not expected to have a material impact on our consolidated financial statements and related disclosures.
ASU 2018-11, Targeted Improvements to ASC 842 - Leases and ASU 2018-10, Codification Improvements to ASC 842 - Leases
In July 2018, the FASB issued ASU 2018-11, which adds a transition option for all entities and a practical expedient only for lessors to the ASU 2016-02 - Leases guidance initially issued by the FASB in February 2016 and codified in ASC 842. The transition option which we will elect, allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can opt to continue to apply the legacy guidance in ASC 840 - Leases , including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. This means that entities that elect this option will only provide annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components.
In July 2018, the FASB also issued ASU 2018-10, which clarifies how to apply certain aspects of ASC 842. The amendments in the ASU address a number of issues in the new leases guidance, including (a) the rate implicit in the lease, (b) impairment of the net investment in the lease, (c) lessee reassessment of lease classification, (d) lessor reassessment of lease term and purchase options, (e) variable payments that depend on an index or rate, and (f) certain transition adjustments.

The amendments arising from both ASU 2018-11 and ASU 2018-10 have the same effective date and transition requirements as ASC 842, which we expect to adopt on January 1, 2019, when it becomes effective. Being a financial services company, the majority of our operating leases cover office space and facilities required to conduct our operations. Therefore on adoption of the leases guidance, we do not expect the right-of-use asset and the corresponding lease liability to be recorded relating to these operating lease arrangements, to be material as a proportion of our total assets and liabilities. In addition, the leases guidance is not expected to have a significant impact on the net lease expense that we will recognize in our consolidated statements of earnings as a result of our operating lease arrangements.

10
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





ASU 2018-09, Codification Improvements
In July 2018, the FASB issued ASU 2018-09, which affects a wide variety of Topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The amendments in the ASU represent changes that clarify, correct errors in, or make minor improvements to the Codification. Ultimately, the amendments make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. Some of the amendments in this ASU do not require transition guidance and are effective upon issuance of the ASU, while many of the amendments have transition guidance with effective dates for annual periods beginning after December 15, 2018. The adoption of the amendments in this ASU are not expected to have a material impact on our consolidated financial statements and related disclosures.
2. ACQUISITIONS
Maiden Re North America
On August 31, 2018 , we entered into a definitive agreement to acquire Maiden Reinsurance North America, Inc. (“Maiden Re North America”) from a subsidiary of Maiden Holdings, Ltd.  Maiden Re North America is a diversified insurance company domiciled in Missouri that provides property and casualty treaty reinsurance, casualty facultative reinsurance and accident and health treaty reinsurance.  As part of the transaction, we will novate and assume certain reinsurance agreements from Maiden Re North America's Bermuda reinsurer, including certain reinsurance agreements with Maiden Re North America.
The net consideration payable in the transaction is $307.5 million , subject to certain closing adjustments. We will assume approximately $1.3 billion of net loss and loss adjustment expense reserves and unearned premium reserves upon closing.
We will operate the business in run-off, and we expect to finance the purchase price through a combination of cash on hand and borrowings under our revolving credit facility. Completion of the transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close in the fourth quarter of 2018.
KaylaRe
Overview
On May 14, 2018 , we completed the previously announced transaction to acquire all of the outstanding shares and warrants of KaylaRe Holdings, Ltd. ("KaylaRe"). In consideration for the acquired shares and warrants of KaylaRe, we issued an aggregate of 2,007,017 ordinary shares to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares. Effective May 14, 2018 , we consolidated KaylaRe into our consolidated financial statements, and any balances between KaylaRe and Enstar are now eliminated upon consolidation.
The completion of the KaylaRe transaction enhanced our group capital position and enabled the Company to assume full ownership of another platform from which we can provide non-life run-off solutions to our clients.
Refer to Note 20 - "Related Party Transactions" for additional information relating to KaylaRe.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)





Purchase Price
The components of the consideration paid to acquire all of the outstanding shares and warrants of KaylaRe were as follows:
Fair value of Enstar ordinary shares issued
$
414,750

Fair value of previously held equity method investment
336,137

Adjustment for the fair value of preexisting relationships
37,169

Total purchase price
$
788,056

Net assets acquired at fair value (excluding preexisting relationships)
$
746,320

Excess of purchase price over fair value of net assets acquired
$
41,736

The purchase price was allocated to the acquired assets and liabilities of KaylaRe based on their estimated fair values at the acquisition date. We recognized goodwill of $41.7 million on the transaction, primarily attributable to (i) the capital synergies from integrating KaylaRe into our group capital structure, (ii) investment management capabilities on a total return basis, and (iii) the incremental acquired capital to be utilized for future non-life run-off transactions.
Fair Value of Enstar Ordinary Shares Issued
The fair value of the Enstar ordinary shares issued was based on the closing price of $206.65 as at May 14, 2018 , the date the transaction closed.
Number of Enstar Ordinary shares issued
2,007,017
Closing price of Enstar Ordinary shares as of May 14, 2018
$
206.65

Fair value of Enstar Ordinary shares issued to shareholders of KaylaRe
$
414,750

Fair Value of Previously Held Equity Method Investment
Prior to the close of the transaction, Enstar held a 48.2% interest in KaylaRe, which was accounted for as an equity method investment in accordance with ASC 323 - Investments - Equity Method and Joint Ventures . The acquisition of the remaining 51.8% equity interest in KaylaRe was considered a step acquisition, whereby we remeasured the previously held equity method investment to fair value. We considered multiple factors in determining the fair value of the previously held equity method investment, including, (i) the price negotiated with the selling shareholders for the 51.8% equity interest in KaylaRe, (ii) recent market transactions for similar companies, and (iii) current trading multiples for comparable companies. Based on this analysis, a valuation multiple of 1.05 to KaylaRe's carrying book value was determined to be appropriate to remeasure the previously held equity method investment at fair value. This resulted in the recognition of a gain of $16.0 million on completion of the step acquisition of KaylaRe, which was recorded in other income (loss) during the three months ended June 30, 2018.
Carrying value of previously held equity method investment prior to the close of the transaction
$
320,130

Price-to-book multiple
1.05
Fair value of previously held equity method investment prior to the close of the transaction
$
336,137

Gain recognized on remeasurement of previously held equity method investment to fair value
$
16,007

Adjustment for the Fair Value of Preexisting Relationships
Enstar had contractual preexisting relationships with KaylaRe, which were deemed to be effectively settled at fair value on the acquisition date. The differences between the carrying value and the fair value of the preexisting relationships was included as part of the purchase price in accordance with ASC 805 - Business Combinations . The fair value of the balances relating to preexisting reinsurance relationships with KaylaRe was determined using a discounted cash flow approach and, where applicable, consideration was given to stated contractual settlement provisions, when determining the loss to be recorded on the deemed settlement of these preexisting relationships. The fair values of the balances arising from the non-reinsurance preexisting relationships with KaylaRe were deemed

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




to equal their carrying values given their short-term nature and the expectation that they would all be settled within the next twelve months.
As a result of effectively settling all the contractual preexisting relationships with KaylaRe, the Company recognized a loss of $15.6 million which was recorded in other income (loss) in the three months ended June 30, 2018, as summarized below:
ASSETS
Carrying value
Fair value
Loss on deemed settlement
Funds held by reinsured companies
$
386,793

$
386,793

$
—

Deferred acquisition costs/Value of business acquired
33,549

40,268

6,719

TOTAL ASSETS
420,342

427,061

6,719

LIABILITIES
Losses and LAE
339,747

333,205

(6,542
)
Unearned premiums
105,602

105,602

—

Insurance and reinsurance balances payable
25,897

23,559

(2,338
)
Other liabilities
1,864

1,864

—

TOTAL LIABILITIES
473,110

464,230

(8,880
)
NET ASSETS (LIABILITIES)
$
(52,768
)
$
(37,169
)
$
15,599

Fair Value of Net Assets Acquired and Liabilities Assumed
The following table summarizes the fair values of the assets acquired and liabilities assumed (excluding preexisting relationships) in the KaylaRe transaction at the acquisition date, which have all been allocated to the Non-life Run-off segment.
ASSETS
Fixed maturities, trading, at fair value
$
126,393

Other investments, at fair value
626,476

Total investments
752,869

Cash and cash equivalents
5,657

Premiums receivable
10,965

Deferred acquisition costs
275

Other assets
614

TOTAL ASSETS
$
770,380

LIABILITIES
Losses and LAE
$
4,059

Unearned premiums
10,984

Insurance and reinsurance balances payable
13

Other liabilities
9,004

TOTAL LIABILITIES
24,060

NET ASSETS ACQUIRED AT FAIR VALUE
$
746,320


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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The table below summarizes the results of the KaylaRe operations which are included in our condensed consolidated statement of earnings from the acquisition date to September 30, 2018 :
Premiums earned
$
10,188

Incurred losses and LAE
(9,190
)
Acquisition costs
(332
)
Underwriting income
666

Net investment income
1,972

Net unrealized gains
(6,621
)
General and administrative expenses
(573
)
Net loss
$
(4,556
)

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




3. SIGNIFICANT NEW BUSINESS
Coca-Cola
On August 1, 2018 , we entered into a reinsurance transaction with The Coca-Cola Company and its subsidiaries ("Coca-Cola"), pursuant to which we reinsured certain of Coca-Cola's retention and deductible risks under its subsidiaries' U.S. workers' compensation, auto liability, general liability and product liability insurance coverage. We assumed total gross reserves of $120.8 million for cash consideration of $103.6 million and recorded a deferred charge of $17.2 million , included in other assets. We transferred the cash consideration received of $103.6 million into a trust to support our obligations under the reinsurance agreement.
Zurich Australia
On February 23, 2018 , we entered into a reinsurance agreement with Zurich Australian Insurance Limited, a subsidiary of Zurich Insurance Group ("Zurich") to reinsure its New South Wales Vehicle Compulsory Third Party ("CTP") insurance business. Under the agreement, which was effective as of January 1, 2018 , we assumed gross loss reserves of AUD$359.4 million ( $280.8 million ) in exchange for a reinsurance premium consideration of AUD$343.9 million ( $268.7 million ). We elected the fair value option for this reinsurance contract and recorded an initial fair value adjustment of AUD$15.5 million ( $12.1 million ) on the assumed gross loss reserves. Refer to Note 7 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business, we and Zurich are pursuing a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's Insurance Act 1973 (Cth), which will provide legal finality for Zurich's obligations. The transfer is subject to court, regulatory and other approvals.
Neon RITC Transaction
On February 16, 2018 , we completed a reinsurance-to-close (“RITC”) transaction with Neon Underwriting Limited ("Neon"), under which we reinsured to close the 2015 and prior underwriting years of account (comprising underwriting years 2008 to 2015) of Neon's Syndicate 2468, with effect from January 1, 2018. We assumed gross loss reserves of £403.9 million ( $546.3 million ) and net loss reserves of £342.1 million ( $462.6 million ) relating to the portfolio in exchange for a reinsurance premium consideration of £329.1 million ( $445.1 million ). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $20.6 million and $17.5 million on the gross and net loss reserves assumed, respectively. Refer to Note 7 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the closing of the transaction, we have taken responsibility for claims handling and provided complete finality to Neon's obligations.
Novae RITC Transaction
On January 29, 2018 , we entered into an RITC transaction with AXIS Managing Agency Limited, under which we reinsured to close the 2015 and prior underwriting years of account of Novae Syndicate 2007 ("Novae"), with effect from January 1, 2018. We assumed gross loss reserves of £860.1 million ( $1,163.2 million ) and net loss reserves of £630.7 million ( $853.0 million ) relating to the portfolio in exchange for a reinsurance premium consideration of £594.1 million ( $803.5 million ). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $67.5 million and $49.5 million on the gross and net loss reserves assumed, respectively. Refer to Note 7 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the closing of the transaction, we have taken responsibility for claims handling and provided complete finality to Novae's obligations.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




4. DIVESTITURES, HELD-FOR-SALE BUSINESSES AND DISCONTINUED OPERATIONS
Pavonia
On December 29, 2017, we completed the previously announced sale of our subsidiary, Pavonia Holdings (US) Inc. ("Pavonia"), to Southland National Holdings, Inc. ("Southland"), a Delaware corporation and a subsidiary of Global Bankers Insurance Group, LLC. The aggregate purchase price was $120.0 million . We used the proceeds to make repayments under its revolving credit facility.
Pavonia owns Pavonia Life Insurance Company of Michigan (“PLIC MI”) and Enstar Life (US), Inc. Pursuant to the amended stock purchase agreement between us and Southland, which partially restructured the transaction, Southland has agreed to acquire Pavonia Life Insurance Company of New York ("PLIC NY") for $13.1 million in a second closing that is subject to regulatory approval. In the event that the second closing has not occurred by December 29, 2018 (unless further extended by the parties), we will evaluate strategic alternatives for PLIC NY, which may include the pursuit of an alternative sale transaction or a plan to retain the business. The additional purchase price represents the cash consideration we paid to PLIC MI when we acquired PLIC NY from PLIC MI as a result of the restructuring of the first closing of the transaction.
Pavonia was a substantial portion of our previously reported Life and Annuities segment. We classified the assets and liabilities of the businesses to be sold as held-for-sale. The following table summarizes the components of assets and liabilities held-for-sale on our consolidated balance sheet as at December 31, 2017 :
December 31,
2017
Assets:
Fixed maturities, trading, at fair value
$
20,770

Equities, trading, at fair value
765

Cash and cash equivalents
6,314

Restricted cash and cash equivalents
13

Reinsurance balances recoverable
1,728

Other assets
269

Assets of businesses held for sale
29,859

Less: Accrual of loss on sale
(5,508
)
Total assets held for sale
$
24,351

Liabilities:
Policy benefits for life and annuity contracts
$
10,666

Other liabilities
605

Total liabilities held-for-sale
$
11,271

As at December 31, 2017 , included in the table above were restricted investments of $1.4 million .
As at September 30, 2018 , included within Other assets and Other liabilities on our consolidated balance sheet were amounts of $23.3 million and $10.3 million , respectively, relating to PLIC NY.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The Pavonia business qualified as a discontinued operation during the three and nine months ended September 30, 2017. The following table summarizes the components of net earnings from discontinued operations on the unaudited condensed consolidated statements of earnings for the three and nine months ended September 30, 2017 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2017
2017
INCOME
Net premiums earned
$
14,082

$
42,012

Net investment income
10,077

30,383

Net realized and unrealized gains (losses)
(233
)
2,543

Other income
384

1,139

24,310

76,077

EXPENSES
Life and annuity policy benefits
15,320

60,102

Acquisition costs
2,412

6,728

General and administrative expenses
2,809

9,584

Other expenses
4

(12
)
20,545

76,402

EARNINGS (LOSSES) BEFORE INCOME TAXES
3,765

(325
)
INCOME TAXES
(270
)
(680
)
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS
$
3,495

$
(1,005
)
The following table presents the cash flows of Pavonia for the nine months ended September 30, 2017 :
Nine Months Ended
September 30,
2017
Operating activities
$
42,558

Investing activities
8,129

Change in cash of businesses held-for-sale
$
50,687

Laguna
On August 29, 2017, we completed a transaction to sell Laguna Life DAC (“Laguna”) for total consideration of €25.6 million (approximately $30.8 million ) to a subsidiary of Monument Re Limited ("Monument"). We have an investment in Monument, as described further in Note 20 - "Related Party Transactions" . Laguna was classified as held-for-sale during 2017 prior to its sale.
The net losses relating to Laguna for the three and nine months ended September 30, 2017 were $0.9 million and $1.1 million , respectively. These amounts were not significant to our consolidated operations and therefore we did not classify Laguna as a discontinued operation for prior periods. Following the closing of the sale of Laguna, we recorded a loss on sale of subsidiary of $6.7 million and $16.3 million for the three and nine months ended September 30, 2017 , respectively, which was included in earnings from continuing operations before income taxes in our consolidated statement of earnings. The total loss recorded on the sale of Laguna of $16.3 million included a cumulative currency translation adjustment balance of $6.3 million , which upon completion of the sale during the third quarter of 2017 was reclassified from accumulated other comprehensive income and included in earnings as a component of the loss on sale of Laguna.


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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




5. INVESTMENTS
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair value; (ii) available-for-sale portfolios of fixed maturity carried at fair value; and (iii) other investments carried at either fair value or cost.
Trading
The fair values of our fixed maturity investments, short-term investments and equities classified as trading were as follows:
September 30,
2018
December 31,
2017
U.S. government and agency
$
493,080

$
554,036

Non-U.S. government
1,018,212

607,132

Corporate
3,703,029

3,363,060

Municipal
76,599

100,221

Residential mortgage-backed
275,485

288,713

Commercial mortgage-backed
411,575

421,548

Asset-backed
567,300

541,574

Total fixed maturity and short-term investments
6,545,280

5,876,284

Equities — U.S.
72,765

106,363

Equities — International
57,549

240

$
6,675,594

$
5,982,887

Included within residential and commercial mortgage-backed securities as at September 30, 2018 were securities issued by U.S. governmental agencies with a fair value of $147.3 million (as at December 31, 2017 : $152.4 million ). Included within corporate securities as at September 30, 2018 were senior secured loans of $24.3 million (as at December 31, 2017 : $68.9 million ).
The contractual maturities of our fixed maturity and short-term investments classified as trading are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call o r prepayment penalties.
As at September 30, 2018
Amortized
Cost
Fair Value
% of Total Fair Value
One year or less
$
428,656

$
424,195

6.5
%
More than one year through two years
544,754

531,717

8.1
%
More than two years through five years
1,641,037

1,601,237

24.4
%
More than five years through ten years
1,506,829

1,464,185

22.4
%
More than ten years
1,301,979

1,269,586

19.4
%
Residential mortgage-backed
274,833

275,485

4.2
%
Commercial mortgage-backed
423,471

411,575

6.3
%
Asset-backed
567,538

567,300

8.7
%
$
6,689,097

$
6,545,280

100.0
%

18
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Available-for-sale
The amortized cost and fair values of our fixed maturity investments classified as available-for-sale were as follows:
As at September 30, 2018
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses (Non-OTTI)
Fair Value
U.S. government and agency
$
703

$
—

$
(5
)
$
698

Non-U.S. government
75,741

851

(1,036
)
75,556

Corporate
83,836

1,085

(1,413
)
83,508

Municipal
3,401

—

(34
)
3,367

Residential mortgage-backed
15

—

—

15

$
163,696

$
1,936

$
(2,488
)
$
163,144

As at December 31, 2017
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses (Non-OTTI)
Fair Value
U.S. government and agency
$
4,210

$
—

$
(23
)
$
4,187

Non-U.S. government
84,776

1,249

(588
)
85,437

Corporate
113,561

2,436

(876
)
115,121

Municipal
5,146

8

(18
)
5,136

Residential mortgage-backed
31

—

—

31

Asset-backed
373

—

—

373

$
208,097

$
3,693

$
(1,505
)
$
210,285

The contractual maturities of our fixed maturity investments classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As at September 30, 2018
Amortized
Cost
Fair
Value
% of Total
Fair
Value
One year or less
$
18,265

$
17,641

10.8
%
More than one year through two years
26,556

26,332

16.2
%
More than two years through five years
31,604

31,634

19.4
%
More than five years through ten years
55,804

55,818

34.2
%
More than ten years
31,452

31,704

19.4
%
Residential mortgage-backed
15

15

—
%
$
163,696

$
163,144

100.0
%


19
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Gross Unrealized Losses
The following tables summarize our fixed maturity investments classified as available-for-sale that are in a gross unrealized loss position:
12 Months or Greater
Less Than 12 Months
Total
As at September 30, 2018
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
Fixed maturity investments, at fair value
U.S. government and agency
$
698

$
(5
)
$
—

$
—

$
698

$
(5
)
Non-U.S. government
4,233

(406
)
21,719

(630
)
25,952

(1,036
)
Corporate
8,562

(917
)
33,808

(496
)
42,370

(1,413
)
Municipal
617

(12
)
2,750

(22
)
3,367

(34
)
Total fixed maturity investments
$
14,110

$
(1,340
)
$
58,277

$
(1,148
)
$
72,387

$
(2,488
)
12 Months or Greater
Less Than 12 Months
Total
As at December 31, 2017
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
Fixed maturity investments, at fair value
U.S. government and agency
$
2,344

$
(16
)
$
1,842

$
(7
)
$
4,186

$
(23
)
Non-U.S. government
11,101

(373
)
20,965

(215
)
32,066

(588
)
Corporate
9,177

(807
)
24,200

(69
)
33,377

(876
)
Municipal
369

(5
)
3,605

(13
)
3,974

(18
)
Total fixed maturity investments
$
22,991

$
(1,201
)
$
50,612

$
(304
)
$
73,603

$
(1,505
)
As at September 30, 2018 and December 31, 2017 , the number of securities classified as available-for-sale in an unrealized loss position was 103 and 96 , respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 33 and 37 , respectively.

Other-Than-Temporary Impairment
For the nine months ended September 30, 2018 and 2017 , we did no t recognize any other-than-temporary impairment losses on our available-for-sale securities. We determined that no credit losses existed as at September 30, 2018 or December 31, 2017 . A description of our other-than-temporary impairment process is included in Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 . There were no changes to our process during the nine months ended September 30, 2018 .


20
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Credit Ratings
The following table sets forth the credit ratings of our fixed maturity (including both trading and available-for-sale investments) and short-term investments as at September 30, 2018 :
Amortized
Cost
Fair Value
% of Total
Investments
AAA Rated
AA Rated
A Rated
BBB
Rated
Non-
Investment
Grade
Not Rated
Fixed maturity and short-term investments
U.S. government and agency
$
502,168

$
493,778

7.4
%
$
489,939

$
3,839

$
—

$
—

$
—

$
—

Non-U.S. government
1,109,697

1,093,768

16.3
%
340,583

541,087

65,286

121,197

25,615

—

Corporate
3,893,368

3,786,537

56.4
%
154,961

445,858

1,986,880

1,016,401

180,730

1,707

Municipal
81,703

79,966

1.2
%
8,739

53,094

14,277

3,856

—

—

Residential mortgage-backed
274,848

275,500

4.1
%
163,190

2,526

11,331

1,540

92,180

4,733

Commercial mortgage-backed
423,471

411,575

6.1
%
210,902

47,118

70,164

60,296

9,936

13,159

Asset-backed
567,538

567,300

8.5
%
237,239

46,971

115,349

73,415

93,918

408

Total
$
6,852,793

$
6,708,424

100.0
%
$
1,605,553

$
1,140,493

$
2,263,287

$
1,276,705

$
402,379

$
20,007

% of total fair value
23.9
%
17.0
%
33.8
%
19.0
%
6.0
%
0.3
%

Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
September 30,
2018
December 31,
2017
Private equities and private equity funds
$
256,618

$
289,556

Fixed income funds
383,328

229,999

Hedge funds
879,571

63,773

Equity funds
381,983

249,475

CLO equities
48,368

56,765

CLO equity fund
41,501

12,840

Private credit funds
39,751

10,156

Call options on equity
4,590

—

Other
720

828

$
2,036,430

$
913,392

The valuation of our other investments is described in Note 7 - "Fair Value Measurements" . Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three -month lag. We regularly review and discuss fund performance with the fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments. The following is a description of the nature of each of these investment categories:
•
Private equities and private equity funds invest primarily in the financial services industry. All of our investments in private equities and private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates of our initial investments.
•
Fixed income funds comprise a number of positions in diversified fixed income funds that are managed by third-party managers. Underlying investments vary from high-grade corporate bonds to non-investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices. One of our funds has a lock-up period of up to two years and is eligible for quarterly redemptions thereafter with 65 days notice. All other funds have liquidity terms that vary from daily up to 45 day's notice. Investments of $0.3 million in fixed income funds were subject to gates or side-pockets, where

21
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




redemptions are subject to the sale of underlying investments. A gate is the ability to deny or delay a redemption request, whereas a side-pocket is a designated account for which the investor loses its redemption rights.
•
Hedge funds may invest in a wide range of instruments, including debt and equity securities, and utilize various sophisticated strategies to achieve their objectives. We invest in a mixture of fixed income, equity and multi-strategy hedge funds. Our hedge funds have various lock-up periods of up to three years and redemption terms, predominantly 60 and 90 days. Certain of our hedge funds which are past their lock up periods are currently eligible for redemption while others are still in the lock-up period.
•
Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities. The funds have liquidity terms that vary from daily up to quarterly.
•
CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by us in these securities.
•
CLO equity fund invests primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. The fund has a fair value of $41.5 million and is eligible for redemption.
•
Private credit funds invest in direct senior or collateralized loans. The investments are subject to restrictions on redemption and sales that are determined by the governing documents and limit our ability to liquidate our positions in the funds.
•
Call options on equities comprise directly held options to purchase the common equity of publicly traded corporations.
•
Other primarily comprises a fund that provides loans to educational institutions throughout the United States and its territories.
The increase in our other investments carried at fair value between December 31, 2017 and September 30, 2018 was primarily attributable to $626.5 million of other investments acquired as part of the KaylaRe acquisition and net additional subscriptions of $538.1 million .
As at September 30, 2018 , we had unfunded commitments to private equity funds of $200.0 million .

Other Investments, at cost
During the three months ended June 30, 2018, we sold our investments in life settlement contracts, which were carried at cost. During the nine months ended September 30, 2018 and 2017 , net investment income included $6.5 million and $10.6 million , respectively, related to investments in life settlements. There were impairment charges of $6.6 million and $7.5 million recognized in net realized and unrealized gains/losses during the nine months ended September 30, 2018 and 2017 , respectively, related to investments in life settlements.

22
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Net Investment Income
Major categories of net investment income for the three and nine months ended September 30, 2018 and 2017 are summarized as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Fixed maturity investments
$
48,062

$
37,931

$
140,097

$
102,002

Short-term investments and cash and cash equivalents
3,247

2,048

8,425

7,489

Funds held
1,502

247

8,651

597

Funds held - directly managed
9,776

8,516

27,990

24,121

Investment income from fixed maturities and cash and cash equivalents
62,587

48,742

185,163

134,209

Equity securities
946

1,344

3,788

3,207

Other investments
8,324

3,120

14,600

10,016

Life settlements and other
—

1,443

6,509

11,026

Investment income from equities and other investments
9,270

5,907

24,897

24,249

Gross investment income
71,857

54,649

210,060

158,458

Investment expenses
(2,427
)
(2,621
)
(7,842
)
(8,274
)
Net investment income
$
69,430

$
52,028

$
202,218

$
150,184

Net Realized and Unrealized Gains and Losses
Components of net realized and unrealized gains and losses for the three and nine months ended September 30, 2018 and 2017 were as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Net realized gains (losses) on sale:
Gross realized gains on fixed maturity securities, available-for-sale
$
—

$
8

$
27

$
345

Gross realized losses on fixed maturity securities, available-for-sale
(2
)
(5
)
(80
)
(91
)
Net realized gains (losses) on fixed maturity securities, trading
(8,797
)
4,595

(19,310
)
3,608

Net realized gains on equity securities, trading
666

340

3,569

1,150

Net realized gains (losses) on funds held - directly managed
(1,904
)
422

(2,849
)
(3,720
)
Total net realized gains (losses) on sale
$
(10,037
)
$
5,360

$
(18,643
)
$
1,292

Net unrealized gains (losses):
Fixed maturity securities, trading
$
(13,423
)
$
(10,747
)
$
(159,691
)
$
23,795

Equity securities, trading
1,830

2,652

6,152

13,209

Other Investments
(35,188
)
27,802

(37,059
)
71,007

Change in fair value of embedded derivative on funds held – directly managed
(182
)
3,967

(41,107
)
28,807

Change in value of fair value option on funds held - directly managed
(223
)
267

(4,323
)
1,587

Total net unrealized gains (losses)
(47,186
)
23,941

(236,028
)
138,405

Net realized and unrealized gains (losses)
$
(57,223
)
$
29,301

$
(254,671
)
$
139,697

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $0.4 million and $5.9 million for the three months ended September 30, 2018 and 2017 , respectively, and $10.9 million and $27.5 million for the nine months ended September 30, 2018 and 2017 , respectively.


23
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Restricted Assets
We are required to maintain investments and cash and cash equivalents on deposit to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. We also utilize trust accounts to collateralize business with our insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of our restricted assets, including restricted cash of $474.6 million and $257.7 million , as at September 30, 2018 and December 31, 2017 , respectively, was as follows:
September 30,
2018
December 31,
2017
Collateral in trust for third party agreements
$
3,354,994

$
3,118,892

Assets on deposit with regulatory authorities
563,139

599,829

Collateral for secured letter of credit facilities
134,286

151,467

Funds at Lloyd's (1)
422,657

234,833

$
4,475,076

$
4,105,021

(1) Our underwriting businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has a loss that cannot be funded from other sources. On February 8, 2018, we amended and restated our unsecured letter of credit agreement for Funds at Lloyd's purposes ("FAL Facility") to issue up to $325.0 million letters of credit, with a provision to increase the facility up to $400.0 million , subject to lenders approval. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2022. As at September 30, 2018 , our combined Funds at Lloyd's were comprised of cash and investments of $422.7 million and unsecured letters of credit of $295.0 million .
The increase in the collateral in trust for third-party agreements and Funds at Lloyd's was primarily due to the loss portfolio transfer reinsurance transactions as described in Note 3 - "Significant New Business" .

6. FUNDS HELD - DIRECTLY MANAGED
Funds held - directly managed is comprised of the following:
•
The funds held balance in relation to the Allianz transaction, described in Note 4 - "Significant New Business" in our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017 . This receives a variable return reflecting the economics of the investment portfolio underlying the funds held asset and qualifies as an embedded derivative. We have recorded the aggregate of the funds held, typically held at cost, and the embedded derivative as a single amount in our consolidated balance sheet. As at September 30, 2018 and December 31, 2017 , the funds held at cost had a carrying value of $1,074.1 million and $994.8 million , respectively, and the embedded derivative had a fair value of $(36.3) million and $4.7 million , respectively, the aggregate of which was $1,037.8 million and $999.5 million , respectively, as included in the table below.
•
The funds held balance in relation to the QBE reinsurance transaction described in Note 4 - "Significant New Business" in our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017 , for which we elected the fair value option.


24
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The following table presents the fair values of assets and liabilities underlying the funds held - directly managed account as at September 30, 2018 and December 31, 2017 :
September 30,
2018
December 31,
2017
Fixed maturity investments:
U.S. government and agency
$
98,928

$
69,850

Non-U.S. government
22,610

2,926

Corporate
641,460

695,490

Municipal
53,679

58,930

Residential mortgage-backed
70,196

29,439

Commercial mortgage-backed
220,077

211,186

Asset-backed
95,743

97,565

Total fixed maturity investments
$
1,202,693

$
1,165,386

Other assets
14,489

14,554

$
1,217,182

$
1,179,940

The contractual maturities of the fixed maturity investments underlying the funds held - directly managed account are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As at September 30, 2018
Amortized Cost
Fair Value
% of Total Fair Value
One year or less
$
33,247

$
33,105

2.8
%
More than one year through two years
69,423

68,667

5.7
%
More than two years through five years
206,922

202,077

16.8
%
More than five years through ten years
287,706

277,396

23.1
%
More than ten years
246,045

235,432

19.6
%
Residential mortgage-backed
71,876

70,196

5.8
%
Commercial mortgage-backed
231,443

220,077

18.3
%
Asset-backed
95,877

95,743

7.9
%
$
1,242,539

$
1,202,693

100.0
%
Credit Ratings
The following table sets forth the credit ratings of the fixed maturity investments underlying the funds held - directly managed account as at September 30, 2018 :
Amortized
Cost
Fair Value
% of Total
Investments
AAA
Rated
AA Rated
A Rated
BBB
Rated
Non-
Investment
Grade
U.S. government and agency
$
100,764

$
98,928

8.2
%
$
98,928

$
—

$
—

$
—

$
—

Non-U.S. government
22,537

22,610

1.9
%
—

3,827

12,088

6,695

—

Corporate
665,043

641,460

53.3
%
7,701

25,792

285,188

321,285

1,494

Municipal
54,999

53,679

4.5
%
—

16,555

29,960

7,164

—

Residential mortgage-backed
71,876

70,196

5.8
%
60,792

—

—

—

9,404

Commercial mortgage-backed
231,443

220,077

18.3
%
211,747

6,367

1,963

—

—

Asset-backed
95,877

95,743

8.0
%
75,417

16,289

4,037

—

—

Total
$
1,242,539

$
1,202,693

100.0
%
$
454,585

$
68,830

$
333,236

$
335,144

$
10,898

% of total fair value
37.8
%
5.7
%
27.7
%
27.9
%
0.9
%


25
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Net Investment Income
Major categories of net investment income underlying the funds held - directly managed for the three and nine months ended September 30, 2018 and 2017 are summarized as follows:
Three Months Ended
Nine Months Ended
September 30
September 30
2018
2017
2018
2017
Fixed maturity investments
$
10,014

$
8,702

$
28,649

$
25,004

Short-term investments and cash and cash equivalents
42

89

179

216

Gross investment income
10,056

8,791

28,828

25,220

Investment expenses
(280
)
(275
)
(838
)
(1,099
)
Investment income on funds held - directly managed
$
9,776

$
8,516

$
27,990

$
24,121


Net Realized Gains (Losses) and Change in Fair Value due to Embedded Derivative and Fair Value Option
Net realized gains (losses) and change in fair value for the three and nine months ended September 30, 2018 and 2017 are summarized as follows:
Three Months Ended
Nine Months Ended
September 30
September 30
2018
2017
2018
2017
Net realized gains (losses) on fixed maturity securities
$
(1,904
)
$
422

$
(2,849
)
$
(3,720
)
Change in fair value of embedded derivative
(182
)
3,967

(41,107
)
28,807

Change in value of fair value option on funds held - directly managed
(223
)
267

(4,323
)
1,587

Net realized gains (losses) and change in fair value of funds held - directly managed
$
(2,309
)
$
4,656

$
(48,279
)
$
26,674


7. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
•
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
•
Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted third party pricin g sources or management's assumptions and internal valuation models may be used to determine the fair values.
In addition, certain of our other investments are measured at fair value using net asset value ("NAV") per share (or its equivalent) as a practical expedient and have not been classified within the fair value hierarchy above. We have categorized our investments that are recorded at fair value on a recurring basis among levels based on the observability of inputs, or at fair value using NAV per share (or its equivalent) as follows:

26
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




September 30, 2018
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value Based on NAV as Practical Expedient
Total Fair
Value
Investments:
Fixed maturity investments:
U.S. government and agency
$
—

$
493,778

$
—

$
—

$
493,778

Non-U.S. government
—

1,093,768

—

—

1,093,768

Corporate
—

3,763,158

23,379

—

3,786,537

Municipal
—

79,966

—

—

79,966

Residential mortgage-backed
—

273,705

1,795

—

275,500

Commercial mortgage-backed
—

402,192

9,383

—

411,575

Asset-backed
—

535,578

31,722

—

567,300

$
—

$
6,642,145

$
66,279

$
—

$
6,708,424

Equities:
Equities — U.S.
$
70,720

$
29

$
2,016

$
—

$
72,765

Equities — International
53,541

2,296

1,712

—

57,549

$
124,261

$
2,325

$
3,728

$
—

$
130,314

Other investments:
Private equities and private equity funds
$
—

$
—

$
—

$
256,618

$
256,618

Fixed income funds
—

327,375

—

55,953

383,328

Hedge funds
—

—

—

879,571

879,571

Equity funds
—

117,337

—

264,646

381,983

CLO equities
—

—

48,368

—

48,368

CLO equity fund
—

—

—

41,501

41,501

Private credit funds
—

—

—

39,751

39,751

Call options on equities
—

4,590

—

—

4,590

Other
—

—

313

407

720

$
—

$
449,302

$
48,681

$
1,538,447

$
2,036,430

Total Investments
$
124,261

$
7,093,772

$
118,688

$
1,538,447

$
8,875,168

Funds Held - Directly Managed:
U.S. government and agency
$
—

$
98,928

$
—

$
—

$
98,928

Non-U.S. government
—

22,610

—

—

22,610

Corporate
—

641,460

—

—

641,460

Municipal
—

53,679

—

—

53,679

Residential mortgage-backed
—

70,196

—

—

70,196

Commercial mortgage-backed
—

220,077

—

—

220,077

Asset-backed
—

95,743

—

—

95,743

Other assets
—

14,489

—

—

14,489

$
—

$
1,217,182

$
—

$
—

$
1,217,182

Reinsurance balances recoverable:
$
—

$
—

$
792,553

$
—

$
792,553

Other Assets:
Derivative Instruments
$
—

$
1,197

$
—

$
—

$
1,197

$
—

$
1,197

$
—

$
—

$
1,197

Losses and LAE:
$
—

$
—

$
3,019,721

$
—

$
3,019,721

Other Liabilities:
Derivative Instruments
$
—

$
5,775

$
—

$
—

$
5,775

$
—

$
5,775

$
—

$
—

$
5,775



27
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




December 31, 2017
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value Based on NAV as Practical Expedient
Total Fair
Value
Investments:
Fixed maturity investments:
U.S. government and agency
$
—

$
558,223

$
—

$
—

$
558,223

Non-U.S. government
—

692,569

—

—

692,569

Corporate
—

3,411,003

67,178

—

3,478,181

Municipal
—

105,357

—

—

105,357

Residential mortgage-backed
—

285,664

3,080

—

288,744

Commercial mortgage-backed
—

400,054

21,494

—

421,548

Asset-backed
—

514,055

27,892

—

541,947

$
—

$
5,966,925

$
119,644

$
—

$
6,086,569

Equities:
Equities — U.S.
$
103,652

$
2,711

$
—

$
—

$
106,363

Equities — International
—

240

—

—

240

$
103,652

$
2,951

$
—

$
—

$
106,603

Other investments:
Private equities and private equity funds
$
—

$
—

$
—

$
289,556

$
289,556

Fixed income funds
—

202,570

—

27,429

229,999

Hedge funds
—

—

—

63,773

63,773

Equity funds
—

121,046

—

128,429

249,475

CLO equities
—

—

56,765

—

56,765

CLO equity funds
—

—

—

12,840

12,840

Private credit funds
—

—

—

10,156

10,156

Other
—

—

314

514

828

$
—

$
323,616

$
57,079

$
532,697

$
913,392

Total Investments
$
103,652

$
6,293,492

$
176,723

$
532,697

$
7,106,564

Funds Held - Directly Managed:
U.S. government and agency
$
—

$
69,850

$
—

$
—

$
69,850

Non-U.S. government
—

2,926

—

—

2,926

Corporate
—

695,490

—

—

695,490

Municipal
—

58,930

—

—

58,930

Residential mortgage-backed
—

29,439

—

—

29,439

Commercial mortgage-backed
—

211,186

—

—

211,186

Asset-backed
—

97,565

—

—

97,565

Other assets
—

14,554

—

—

14,554

$
—

$
1,179,940

$
—

$
—

$
1,179,940

Reinsurance balances recoverable:
$
—

$
—

$
542,224

$
—

$
542,224

Other Assets:
Derivative Instruments
$
—

$
319

$
—

$
—

$
319

$
—

$
319

$
—

$
—

$
319

Losses and LAE:
$
—

$
—

$
1,794,669

$
—

$
1,794,669

Other Liabilities:
Derivative Instruments
$
—

$
7,246

$
—

$
—

$
7,246

$
—

$
7,246

$
—

$
—

$
7,246



28
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Valuation Methodologies of Financial Instruments Measured at Fair Value
Fixed Maturity Investments and Funds Held - Directly Managed
The fair values for all securities in the fixed maturity investments and funds held - directly managed portfolios are independently provided by the investment accounting service providers, investment managers and investment custodians, each of which utilize internationally recognized independent pricing services. We record the unadjusted price provided by the investment accounting service providers, investment managers or investment custodians and validate this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to our knowledge of the current investment market. Our internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
The independent pricing services used by the investment accounting service providers, investment managers and investment custodians obtain actual transaction prices for securities that have quoted prices in active markets. Where we utilize single unadjusted broker-dealer quotes, they are generally provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. For determining the fair value of securities that are not actively traded, in general, pricing services use "matrix pricing" in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.
The following describes the techniques generally used to determine the fair value of our fixed maturity investments by asset class, including the investments underlying the funds held - directly managed.
•
U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified as Level 2.
•
Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified as Level 2. Where pricing is unavailable from pricing services, such as in periods of low trading activity or when transactions are not orderly, we obtain non-binding quotes from broker-dealers. Where significant inputs are unable to be corroborated with market observable information, we classify the securities as Level 3.
•
Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair values of these securities are classified as Level 2.
•
Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, prepayment speeds and default rates. The fair values of these securities are classified as Level 2 if the significant inputs are

29
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




market observable. Where significant inputs are unable to be corroborated with market observable information, we classify the securities as Level 3.
Equities
Our investments in equities are predominantly traded on the major exchanges and are primarily managed by our external advisors. We use an internationally recognized pricing service to estimate the fair value of our equities. Our equities are widely diversified and there is no significant concentration in any specific industry.
We have categorized our publicly quoted equity securities as Level 1 within the fair value hierarchy because their fair values are based on unadjusted quoted prices for identical securities in active markets. Other equity securities have been categorized as either Level 2 if their fair values are based on observable market data or Level 3 if their fair values are based on unobservable inputs where there is minimal or no market activity .
Other investments, at fair value
We have ongoing due diligence processes with respect to the other investments carried at fair value in which we invest and their managers. These processes are designed to assist us in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, we obtain the audited financial statements for funds annually, and regularly review and discuss the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values ("NAV").
The use of NAV as an estimate of the fair value for investments in certain entities that calculate NAV is a permitted practical expedient. Due to the time lag in the NAV reported by certain fund managers we adjust the valuation for capital calls and distributions. Other investments measured at fair value using NAV as a practical expedient have not been classified in the fair value hierarchy. Other investments for which we do not use NAV as a practical expedient have been valued using prices from independent pricing services, investment managers and broker-dealers.
The following describes the techniques generally used to determine the fair value of our other investments.
•
For our investments in private equities and private equity funds, we measure fair value by obtaining the most recently available NAV from the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
Our investments in fixed income funds and equity funds are valued based on a combination of prices from independent pricing services, external fund managers or third-party administrators. For the publicly available prices we have classified the investments as Level 2. For the non-publicly available prices we are using NAV as a practical expedient and therefore these have not been categorized within the fair value hierarchy.
•
For our investments in hedge funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
We measure the fair value of our direct investment in CLO equities based on valuations provided by our external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is valued based on valuations provided by the broker or lead underwriter of the investment (the "broker"). Our CLO equity investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of relevant trades in secondary markets.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase or decrease in either of these significant inputs in isolation would result in lower or higher fair value estimates for direct investments in CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less subjective inputs because they are based on the historical average of actual spreads and the weighted-average life of the current underlying portfolios, respectively. A significant increase or decrease in either of these significant inputs in isolation would

30
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




result in higher or lower fair value estimates for direct investments in CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, we receive the valuation from the external CLO manager and brokers and then review the underlying cash flows and key assumptions used by them. We review and update the significant unobservable inputs based on information obtained from secondary markets. These inputs are our responsibility and we assess the reasonableness of the inputs (and if necessary, update the inputs) through communicating with industry participants, monitoring of the transactions in which we participate (for example, to evaluate default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends that may impact future cash flows.
If valuations from the external CLO equity manager or brokers are not available, we use an income approach based on certain observable and unobservable inputs to value these investments. An income approach is also used to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income approach is followed, the valuation is based on available trade information, such as expected cash flows and market assumptions on default and loss severity rates. Other inputs used in the valuation process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates.
•
For our investments in CLO equity funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
For our investments in private credit funds, we measure fair value by obtaining the most recently available NAV from the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
For our investments in call options on publicly traded equities, we measure fair value by obtaining the latest option price as of our reporting date. These are classified as Level 2.
Insurance Contracts - Fair Value Option
The Company uses an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and reinsurance balances recoverable asset for certain retroactive reinsurance contracts where we have elected the fair value option in our Non-life Run-off segment. The fair value was calculated as the aggregate of discounted cash flows plus a risk margin. The discounted cash flow approach uses (i) estimated nominal cash flows based upon an appropriate payment pattern developed in accordance with standard actuarial techniques and (ii) a discount rate based upon a high quality rated corporate bond plus a credit spread for non-performance risk. The model uses corporate bond rates across the yield curve depending on the estimated timing of the future cash flows and specific to the currency of the risk. The risk margin was calculated using the present value of the cost of capital. The cost of capital approach uses (i) projected capital requirements, (ii) multiplied by the risk cost of capital representing the return required for non-hedgeable risk based upon the weighted average cost of capital less investment income, and (iii) discounted using the weighted average cost of capital.
Derivative Instruments
The fair values of our foreign currency exchange contracts, as described in Note 8 - "Derivative and Hedging Instruments" are classified as Level 2. The fair values are based upon prices in active markets for identical contracts.
Level 3 Measurements and Changes in Leveling
Transfers into or out of levels are recorded at their fair values as of the end of the reporting period, consistent with the date of determination of fair value.


31
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Investments
The following tables present 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 and nine months ended September 30, 2018 and 2017 :
Three Months Ended September 30, 2018
Corporate
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Equities
Other Investments
Total
Beginning fair value
$
27,823

$
—

$
15,326

$
46,608

$
2,016

$
54,154

$
145,927

Purchases
205

—

1,599

16,376

—

—

18,180

Sales
(3,731
)
—

(3,271
)
(28,182
)
—

—

(35,184
)
Total realized and unrealized gains (losses)
92

1

(726
)
(346
)
—

(5,473
)
(6,452
)
Transfer into Level 3 from Level 2
292

1,794

—

(1
)
1,712

—

3,797

Transfer out of Level 3 into Level 2
(1,302
)
—

(3,545
)
(2,733
)
—

—

(7,580
)
Ending fair value
$
23,379

$
1,795

$
9,383

$
31,722

$
3,728

$
48,681

$
118,688

Three Months Ended September 30, 2017
Corporate
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Equities
Other Investments
Total
Beginning fair value
$
54,356

$
693

$
22,865

$
40,433

$
—

$
57,119

$
175,466

Purchases
2,510

—

11,274

4,350

—

143

18,277

Sales
(3,350
)
(33
)
(602
)
(1,184
)
—

—

(5,169
)
Total realized and unrealized gains (losses)
(834
)
3

(398
)
(384
)
—

(1,538
)
(3,151
)
Transfer into Level 3 from Level 2
5,670

—

616

4,002

—

—

10,288

Transfer out of Level 3 into Level 2
(5,193
)
(663
)
(1,619
)
(10,528
)
—

—

(18,003
)
Ending fair value
$
53,159

$
—

$
32,136

$
36,689

$
—

$
55,724

$
177,708

Nine Months Ended September 30, 2018
Corporate
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Equities
Other Investments
Total
Beginning fair value
$
67,178

$
3,080

$
21,494

$
27,892

$
—

$
57,079

$
176,723

Purchases
12,008

—

3,402

45,967

2,000

752

64,129

Sales
(64,641
)
(1,184
)
(4,998
)
(31,994
)
—

(600
)
(103,417
)
Total realized and unrealized gains (losses)
29

(32
)
(674
)
(417
)
16

(8,550
)
(9,628
)
Transfer into Level 3 from Level 2
15,551

1,794

4,897

2,078

1,712

—

26,032

Transfer out of Level 3 into Level 2
(6,746
)
(1,863
)
(14,738
)
(11,804
)
—

—

(35,151
)
Ending fair value
$
23,379

$
1,795

$
9,383

$
31,722

$
3,728

$
48,681

$
118,688


32
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Nine Months Ended September 30, 2017
Corporate
Residential mortgage-backed
Commercial mortgage-backed
Asset-backed
Equities
Other Investments
Total
Beginning fair value
$
74,534

$
—

$
12,213

$
14,692

$
—

$
76,878

$
178,317

Purchases
18,078

711

21,621

5,730

—

435

46,575

Sales
(28,467
)
(38
)
(1,336
)
(8,545
)
—

—

(38,386
)
Total realized and unrealized losses
(184
)
(10
)
(67
)
(175
)
—

(9,239
)
(9,675
)
Transfer into Level 3 from Level 2
10,615

—

18,532

53,338

—

—

82,485

Transfer out of Level 3 into Level 2
(21,417
)
(663
)
(18,827
)
(28,351
)
—

(12,350
)
(81,608
)
Ending fair value
$
53,159

$
—

$
32,136

$
36,689

$
—

$
55,724

$
177,708

Net realized and unrealized gains related to Level 3 assets in the tables above are included in net realized and unrealized gains (losses) in our unaudited condensed consolidated statements of earnings.
The securities transferred from Level 2 to Level 3 were transferred due to insufficient market observable inputs for the valuation of the specific assets. The transfers from Level 3 to Level 2 were based upon us obtaining market observable information regarding the valuations of the specific assets.
Insurance Contracts - Fair Value Option
The following tables present a reconciliation of the beginning and ending balances for all insurance contracts measured at fair value on a recurring basis using Level 3 inputs during the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
September 30, 2018
September 30, 2017
Liability for losses and LAE
Reinsurance balances recoverable
Liability for losses and LAE
Reinsurance balances recoverable
Beginning fair value
$
3,221,366

$
837,373

$
1,892,297

$
554,759

Assumed business
—

—

—

—

Changes in nominal amounts:
Net incurred losses and LAE
(19,973
)
1,085

(22,711
)
(3,181
)
Paid losses
(149,132
)
(41,819
)
(36,466
)
(9,453
)
Changes in fair value:
Discounted cash flows
(2,811
)
483

(6,826
)
730

Risk margin
(7,762
)
(1,949
)
(3,845
)
(897
)
Effect of exchange rate movements
(21,967
)
(2,620
)
32,803

3,790

Ending fair value
$
3,019,721

$
792,553

$
1,855,252

$
545,748


33
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Nine Months Ended
September 30, 2018
September 30, 2017
Liability for losses and LAE
Reinsurance balances recoverable
Liability for losses and LAE
Reinsurance balances recoverable
Beginning fair value
$
1,794,669

$
542,224

$
—

$
—

Assumed business
1,890,061

372,780

1,966,843

565,824

Changes in nominal amounts:
Net incurred losses and LAE
(75,169
)
3,469

(55,356
)
(5,276
)
Paid losses
(453,180
)
(95,354
)
(136,519
)
(30,947
)
Changes in fair value:
Discounted cash flows
(23,674
)
(13,399
)
10,187

9,143

Risk margin
(26,508
)
(4,668
)
(12,897
)
(2,599
)
Effect of exchange rate movements
(86,478
)
(12,499
)
82,994

9,603

Ending fair value
$
3,019,721

$
792,553

$
1,855,252

$
545,748

Changes in fair value related to Level 3 assets and liabilities in the tables above are included in net incurred losses and LAE in our unaudited condensed consolidated statements of earnings.
Below is a summary of the quantitative information regarding the significant observable and unobservable inputs used in the internal model to determine fair value on a recurring basis as at September 30, 2018 and December 31, 2017 :
September 30, 2018
December 31, 2017
Valuation Technique
Unobservable (U) and Observable (O) Inputs
Weighted Average
Internal model
Corporate bond yield (O)
A rated
A rated
Internal model
Credit spread for non-performance risk (U)
0.2%
0.2%
Internal model
Risk cost of capital (U)
5.0%
5.0%
Internal model
Weighted average cost of capital (U)
8.5%
8.5%
Internal model
Duration - liability (U)
8.05 years
11.41 years
Internal model
Duration - reinsurance balances recoverable (U)
9.03 years
11.66 years

The fair value of the liability for losses and LAE and reinsurance balances recoverable may increase or decrease due to changes in the corporate bond rate, the credit spread for non-performance risk, the risk cost of capital, the weighted average cost of capital and the estimated payment pattern as described below:

•
An increase in the corporate bond rate or credit spread for non-performance risk would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a decrease in the corporate bond rate or credit spread for non-performance risk would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
•
An increase in the weighted average cost of capital would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a decrease in the weighted average cost of capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
•
An increase in the risk cost of capital would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a decrease in the risk cost of capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
•
An acceleration of the estimated payment pattern would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a deceleration of the estimated payment pattern would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.

34
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




In addition, the estimate of the capital required to support the liabilities is based upon current industry standards for capital adequacy. If the required capital per unit of risk increases then the fair value of the liability for losses and LAE and reinsurance balances recoverable would increase. Conversely, a decrease in required capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
Disclosure of Fair Values for Financial Instruments Carried at Cost
During the three months ended June 30, 2018, we sold our investments in life settlement contracts, which were carried at cost. As at December 31, 2017 , investments in life settlement contracts were carried at cost of $125.6 million , and their fair values were $131.9 million .
The fair value of investments in life settlement contracts was determined using a discounted cash flow methodology that utilizes unobservable inputs. Due to the individual nature of each investment in life settlement contracts and the illiquidity of the existing market, significant inputs to the fair value included our estimates of premiums necessary to keep the policies in-force, and our assumptions for mortality and discount rates. Our mortality assumptions were based on a combination of medical underwriting information obtained from a third-party underwriter for each referenced life and internal proprietary mortality studies of older aged U.S. insured lives. These assumptions were used to develop an estimate of future net cash flows that, after discounting, was intended to be reflective of the asset's value in the life settlement market.
As at September 30, 2018 , our 4.5% Senior Notes due 2022 were carried at amortized cost of $348.0 million while the fair value based on observable market pricing from a third party pricing service was $351.5 million . The Senior Notes are classified as Level 2.
Disclosure of fair value of amounts relating to insurance contracts is not required, except those for which we elected the fair value option, as described above. Our remaining assets and liabilities were generally carried at cost or amortized cost, which due to their short-term nature approximates fair value as of September 30, 2018 and December 31, 2017 .

8. DERIVATIVE AND HEDGING INSTRUMENTS
Foreign Currency Hedging of Net Investments in Foreign Operations
We use foreign currency forward exchange rate contracts in qualifying hedging relationships to hedge the foreign currency exchange rate risk associated with certain of our net investments in foreign operations. At September 30, 2018 and December 31, 2017 , we had forward currency contracts in place, which we had designated as hedges of our net investments in foreign operations.
The following table presents the gross notional amounts and estimated fair values recorded within other assets and liabilities related to our qualifying foreign currency forward exchange rate contracts as at September 30, 2018 and December 31, 2017 .
September 30, 2018
December 31, 2017
Fair Value
Fair Value
Gross Notional Amount
Assets
Liabilities
Gross Notional Amount
Assets
Liabilities
Foreign exchange forward - AUD
$
43,410

$
237

$
—

$
32,810

$
—

$
965

Foreign exchange forward - EUR
69,800

175

—

—

—

—

Foreign exchange forward - CAD
—

—

—

27,141

11

512

Total qualifying hedges
$
113,210

$
412

$
—

$
59,951

$
11

$
1,477

The Canadian Dollar ("CAD") foreign currency contract that we had in place to hedge the net investment in our CAD denominated operations was discontinued effective December 31, 2017 following the disposal of those operations.

35
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The following table presents the amounts of the net gains and losses deferred in the currency translation adjustment ("CTA") account, which is a component of accumulated other comprehensive income (loss) ("AOCI"), in shareholders' equity, relating to our foreign currency forward exchange rate contracts for the three and nine months ended September 30, 2018 and 2017 .
Amount of Gains (Losses) Deferred in AOCI
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Foreign exchange forward - AUD
$
678

$
(1,243
)
$
2,286

$
(1,805
)
Foreign exchange forward - EUR
52

—

52

—

Foreign exchange forward - CAD
—

(1,038
)
—

(1,154
)
Net gains (losses) on qualifying derivative hedges
$
730

$
(2,281
)
$
2,338

$
(2,959
)

Non-derivative Hedging Instruments of Net Investments in Foreign Operations
As at September 30, 2018 and December 31, 2017 , there were borrowings of €nil and €50.0 million ( $60.1 million ), respectively, under our revolving credit facilities in effect as of such dates that were designated as non-derivative hedges of our net investment in certain subsidiaries whose functional currency is denominated in Euros. Our borrowings under our previous revolving credit facility that we had designated as non-derivative hedges of our net investment in certain subsidiaries whose functional currency is denominated in Euros were repaid in full during the three months ended September 30, 2018 and replaced by a Euro-denominated foreign currency forward exchange rate contract in a qualifying hedging arrangement. The following table presents the amounts of the net gains and losses deferred in the CTA account in AOCI relating to these qualifying Euro-loan non-derivative hedging instruments for the three and nine months ended September 30, 2018 and 2017 .
Amount of Gains (Losses) Deferred in AOCI
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Net gains (losses) on qualifying non-derivative hedges
$
696

$
(1,785
)
$
3,144

$
(8,280
)

Derivatives Not Designated or Not Qualifying as Hedging Instruments
From time to time, we may also utilize foreign currency forward contracts as part of our overall foreign currency risk management strategy or to obtain exposure to a particular financial market, as well as for yield enhancement in non-qualifying hedging relationships. We may also utilize equity call option instruments either to obtain exposure to a particular equity instrument or for yield enhancement in non-qualifying hedging relationships.

36
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Foreign Currency Forward Contracts
The following table presents the gross notional amounts and the estimated fair values recorded within other assets and liabilities related to our non-qualifying foreign currency forward exchange rate hedging relationships as at September 30, 2018 and December 31, 2017 .
September 30, 2018
December 31, 2017
Fair Value
Fair Value
Gross Notional Amount
Assets
Liabilities
Gross Notional Amount
Assets
Liabilities
Foreign exchange forward - AUD
$
35,090

$
236

$
—

$
57,028

$
—

$
1,002

Foreign exchange forward - CAD
91,577

42

—

—

—

—

Foreign exchange forward - EUR
29,035

71

500

19,235

46

455

Foreign exchange forward - GBP
251,059

436

5,275

207,323

262

4,312

Total non-qualifying hedges
$
406,761

$
785

$
5,775

$
283,586

$
308

$
5,769

The following table presents the amounts of the net gains (losses) included in earnings related to our non-qualifying foreign currency forward exchange rate contracts during the three and nine months ended September 30, 2018 and 2017 .
Gains (Losses) on non-qualifying-hedges included in net earnings
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Foreign exchange forward - AUD
$
957

$
—

$
3,453

$
—

Foreign exchange forward - CAD
(1,782
)
—

5,465

—

Foreign exchange forward - EUR
458

—

1,815

(562
)
Foreign exchange forward - GBP
4,154

(3,831
)
8,389

$
(4,701
)
Net gains (losses) on non-qualifying hedges
$
3,787

$
(3,831
)
$
19,122

$
(5,263
)

Investments in Call Options on Equities
We use equity call option instruments either to obtain exposure to a particular equity instrument or for yield enhancement, in non-qualifying hedging relationships.
During the nine months ended September 30, 2018 , we purchased call options on equities at a cost of $10.0 million and recorded unrealized losses in net earnings of $0.4 million and $5.4 million on the call options for the three and nine months ended September 30, 2018 , respectively. We did not have any equity derivative instruments during the nine months ended September 30, 2017 or as at December 31, 2017 .


37
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




9. REINSURANCE BALANCES RECOVERABLE
The following tables provide the total reinsurance balances recoverable as at September 30, 2018 and December 31, 2017 :
September 30, 2018
Non-life
Run-off
Atrium
StarStone
Total
Recoverable from reinsurers on unpaid:
Outstanding losses
$
932,142

$
13,051

$
214,963

$
1,160,156

IBNR
664,873

31,445

175,302

871,620

Fair value adjustments
(14,489
)
886

(1,550
)
(15,153
)
Fair value adjustments - fair value option
(170,436
)
—

—

(170,436
)
Total reinsurance reserves recoverable
1,412,090

45,382

388,715

1,846,187

Paid losses recoverable
108,218

(1,808
)
22,959

129,369

$
1,520,308

$
43,574

$
411,674

$
1,975,556

Reconciliation to Consolidated Balance Sheet:
Reinsurance balances recoverable
$
727,755

$
43,574

$
411,674

$
1,183,003

Reinsurance balances recoverable - fair value option
792,553

—

—

792,553

Total
$
1,520,308

$
43,574

$
411,674

$
1,975,556

December 31, 2017
Non-life
Run-off
Atrium
StarStone
Other
Total
Recoverable from reinsurers on unpaid:
Outstanding losses
$
932,284

$
7,472

$
211,650

$
16

$
1,151,422

IBNR
590,154

31,476

242,620

—

864,250

Fair value adjustments
(12,970
)
1,583

(2,253
)
—

(13,640
)
Fair value adjustments - fair value option
(131,983
)
—

—

—

(131,983
)
Total reinsurance reserves recoverable
1,377,485

40,531

452,017

16

1,870,049

Paid losses recoverable
128,253

(451
)
23,179

—

150,981

$
1,505,738

$
40,080

$
475,196

$
16

$
2,021,030

Reconciliation to Consolidated Balance Sheet:
Reinsurance balances recoverable
$
963,514

$
40,080

$
475,196

$
16

$
1,478,806

Reinsurance balances recoverable - fair value option
542,224

—

—

—

542,224

Total
$
1,505,738

$
40,080

$
475,196

$
16

$
2,021,030

Our insurance and reinsurance run-off subsidiaries and assumed portfolios, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. On an annual basis, both Atrium and StarStone purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s and StarStone's third-party reinsurance cover is with highly rated reinsurers or is collateralized by pledged assets or letters of credit.
The fair value adjustments, determined on acquisition of insurance and reinsurance subsidiaries, are based on the estimated timing of loss and LAE recoveries and an assumed interest rate equivalent to a risk free rate for securities with similar duration to the acquired reinsurance balances recoverables plus a spread for credit risk, and are amortized over the estimated recovery period, as adjusted for accelerations in timing of payments as a result of commutation settlements. The determination of the fair value adjustments on the retroactive reinsurance contracts for which we have elected the fair value option is described in Note 7 - "Fair Value Measurements" .
As at September 30, 2018 and December 31, 2017 , we had reinsurance balances recoverable of $1,975.6 million and $2,021.0 million , respectively. The decrease of $45.5 million in reinsurance balances recoverable was primarily a result of KaylaRe becoming a wholly-owned subsidiary and reserve reductions in our Non-life Run-off segment and cash collections and commutations made during the nine months ended September 30, 2018 , partially offset by the Neon and Novae reinsurance transactions, which closed during the first quarter of 2018, as well as reserve increases in StarStone.

38
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Top Ten Reinsurers
September 30, 2018
Non-life
Run-off
Atrium
StarStone
Total
% of
Total
Top ten reinsurers
$
1,167,500

$
28,669

$
239,686

$
1,435,855

72.7
%
Other reinsurers > $1 million
335,939

14,232

168,194

518,365

26.2
%
Other reinsurers < $1 million
16,869

673

3,794

21,336

1.1
%
Total
$
1,520,308

$
43,574

$
411,674

$
1,975,556

100.0
%
December 31, 2017
Non-life
Run-off
Atrium
StarStone
Other
Total
% of
Total
Top ten reinsurers
$
1,166,057

$
22,422

$
328,257

$
—

$
1,516,736

75.0
%
Other reinsurers > $1 million
322,722

16,631

144,336

—

483,689

24.0
%
Other reinsurers < $1 million
16,959

1,027

2,603

16

20,605

1.0
%
Total
$
1,505,738

$
40,080

$
475,196

$
16

$
2,021,030

100.0
%
September 30, 2018

December 31, 2017

Information regarding top ten reinsurers:
Number of top 10 reinsurers rated A- or better
7

6

Number of top 10 non-rated reinsurers (1)
3

4

Top 10 rated A- or better reinsurers recoverables
$
1,116,423

$
829,164

Top 10 collaterized non-rated reinsurers recoverables (1)
$
319,432

$
687,572

$
1,435,855

$
1,516,736

Single reinsurers that represent 10% or more of total reinsurance balance recoverables as at September 30, 2018:
Hannover Ruck SE (2)
$
327,287

$
320,047

Lloyd's Syndicates (3)
$
303,598

$
193,838

(1) For the three non-rated reinsurers at as September 30, 2018 and four non-rated reinsurers as at December 31, 2017 , we hold security in the form of pledged assets in trust or letters of credit issued to us in the full amount of the recoverable.
(2) Hannover Ruck SE is rated AA- by Standard & Poor’s and A+ by A.M. Best.
(3) Lloyd's Syndicates are rated A+ by Standard & Poor's and A by A.M. Best.

Provisions for Uncollectible Reinsurance Balances Recoverable
We evaluate and monitor concentration of credit risk among our reinsurers, and provisions are made for amounts considered potentially uncollectible.

39
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The following table shows our reinsurance balances recoverable by rating of reinsurer and our provisions for uncollectible reinsurance balances recoverable ("provisions for bad debt") as at September 30, 2018 and December 31, 2017 . The provisions for bad debt all relate to the Non-life Run-off segment.
September 30, 2018
December 31, 2017
Gross
Provisions for Bad Debt
Net
Provisions as a
% of Gross
Gross
Provisions for Bad Debt
Net
Provisions as a
% of Gross
Reinsurers rated A- or above
$
1,600,220

$
54,960

$
1,545,260

3.4
%
$
1,252,887

$
51,115

$
1,201,772

4.1
%
Reinsurers rated below A-, secured
397,775

—

397,775

—
%
771,097

—

771,097

—
%
Reinsurers rated below A-, unsecured
135,987

103,466

32,521

76.1
%
162,259

114,098

48,161

70.3
%
Total
$
2,133,982

$
158,426

$
1,975,556

7.4
%
$
2,186,243

$
165,213

$
2,021,030

7.6
%

10. LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses ("LAE"), also referred to as loss reserves, represents our gross estimates before reinsurance for unpaid reported losses and includes losses that have been incurred but not reported ("IBNR") for our Non-life Run-off, Atrium and StarStone segments using a variety of actuarial methods. We recognize an asset for the portion of the liability that we expect to recover from reinsurers. LAE reserves include allocated loss adjustment expenses ("ALAE"), and unallocated loss adjustment expenses ("ULAE"). ALAE are linked to the settlement of an individual claim or loss, whereas ULAE are based on our estimates of future costs to administer the claims. IBNR represents reserves for loss and LAE that have been incurred but not yet reported to us. This includes amounts for unreported claims, development on known claims and reopened claims. Our loss reserves cover multiple lines of business, which include workers' compensation, general casualty, asbestos and environmental, marine, aviation and transit, construction defects and other non-life lines of business. Refer to Note 11 - "Losses and Loss Adjustment Expenses" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 for more information on establishing the liability for losses and LAE.


40
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The following table summarizes the liability for losses and LAE by segment as at September 30, 2018 and December 31, 2017 :
September 30, 2018
Non-life
Run-off
Atrium
StarStone
Total
Outstanding losses
$
3,998,430

$
83,138

$
714,231

$
4,795,799

IBNR
3,072,291

152,462

723,987

3,948,740

Fair value adjustments
(120,916
)
4,749

(381
)
(116,548
)
Fair value adjustments - fair value option
(457,215
)
—

—

(457,215
)
ULAE
340,165

2,418

22,374

364,957

Total
$
6,832,755

$
242,767

$
1,460,211

$
8,535,733

Reconciliation to Consolidated Balance Sheet:
Loss and loss adjustment expenses
$
3,813,034

$
242,767

$
1,460,211

$
5,516,012

Loss and loss adjustment expenses, at fair value
3,019,721

—

—

3,019,721

Total
$
6,832,755

$
242,767

$
1,460,211

$
8,535,733

December 31, 2017
Non-life
Run-off
Atrium
StarStone
Total
Outstanding losses
$
3,185,703

$
78,363

$
590,977

$
3,855,043

IBNR
2,903,927

150,508

599,221

3,653,656

Fair value adjustments
(125,998
)
9,547

(555
)
(117,006
)
Fair value adjustments - fair value option
(314,748
)
—

—

(314,748
)
ULAE
300,588

2,455

18,100

321,143

Total
$
5,949,472

$
240,873

$
1,207,743

$
7,398,088

Reconciliation to Consolidated Balance Sheet:
Loss and loss adjustment expenses
$
4,154,803

$
240,873

$
1,207,743

$
5,603,419

Loss and loss adjustment expenses, at fair value
$
1,794,669

$
—

$
—

$
1,794,669

Total
$
5,949,472

$
240,873

$
1,207,743

$
7,398,088


The overall increase in the liability for losses and LAE between December 31, 2017 and September 30, 2018 was primarily attributable to the assumed reinsurance agreements with Zurich Australia, Neon, Novae and Coca-Cola in our Non-life Run-off segment , as described in Note 3 - "Significant New Business" , and the acquisition of KaylaRe, as described in Note 2 - "Acquisitions" .

41
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Balance as at beginning of period
$
8,608,387

$
7,641,384

$
7,398,088

$
5,987,867

Less: reinsurance reserves recoverable
1,866,969

1,923,962

1,870,033

1,388,193

Less: deferred charges on retroactive reinsurance
71,393

88,475

80,192

94,551

Net balance as at beginning of period
6,670,025

5,628,947

5,447,863

4,505,123

Net incurred losses and LAE:
Current period
219,050

147,846

468,064

314,791

Prior periods
(65,076
)
(72,134)

(201,737
)
(151,567
)
Total net incurred losses and LAE
153,974

75,712

266,327

163,224

Net paid losses:
Current period
(24,266
)
(15,928)

(62,843
)
(40,820
)
Prior periods
(296,709
)
(215,173)

(937,846
)
(670,117
)
Total net paid losses
(320,975
)
(231,101)

(1,000,689
)
(710,937
)
Effect of exchange rate movement
(26,825
)
55,712

(108,659
)
139,448

Acquired on purchase of subsidiaries
22,713

3,282

366,519

3,282

Assumed business
103,615

—

1,631,166

1,432,412

Net balance as at September 30
6,602,527

5,532,552

6,602,527

5,532,552

Plus: reinsurance reserves recoverable
1,846,187

1,998,001

1,846,187

1,998,001

Plus: deferred charges on retroactive reinsurance
87,019

85,164

87,019

85,164

Balance as at September 30
$
8,535,733

$
7,615,717

$
8,535,733

$
7,615,717


The tables below provide the net incurred losses and LAE by segment for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
Three Months Ended
September 30, 2018
September 30, 2017
Non-life Run-off
Atrium
StarStone
Total
Non-life
Run-off
Atrium
StarStone
Total
Net losses paid
$
195,770

$
16,310

$
108,895

$
320,975

$
136,014

$
14,131

$
80,956

$
231,101

Net change in case and LAE reserves
(128,662
)
(546
)
17,549

(111,659
)
(66,392
)
239

(934
)
(67,087
)
Net change in IBNR reserves
(102,148
)
2,818

71,160

(28,170
)
(120,766
)
22,525

30,173

(68,068
)
Increase (reduction) in estimates of net ultimate losses
(35,040
)
18,582

197,604

181,146

(51,144
)
36,895

110,195

95,946

Increase in provisions for bad debt
—

—

—

—

—

242

—

242

Increase (reduction) in provisions for unallocated LAE
(24,460
)
(2
)
1,582

(22,880
)
(16,038
)
64

1,247

(14,727
)
Amortization of deferred charges
1,582

—

—

1,582

3,311

—

—

3,311

Amortization of fair value adjustments
4,247

(727
)
(287
)
3,233

3,493

(1,928
)
(121
)
1,444

Changes in fair value - fair value option
(9,107
)
—

—

(9,107
)
(10,504
)
—

—

(10,504
)
Net incurred losses and LAE
$
(62,778
)
$
17,853

$
198,899

$
153,974

$
(70,882
)
$
35,273

$
111,321

$
75,712



42
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Nine Months Ended
Nine Months Ended
September 30, 2018
September 30, 2017
Non-life Run-off
Atrium
StarStone
Total
Non-life
Run-off
Atrium
StarStone
Total
Net losses paid
$
644,665

$
53,187

$
302,837

$
1,000,689

$
436,998

$
40,625

$
233,314

$
710,937

Net change in case and LAE reserves
(376,512
)
(98
)
38,915

(337,695
)
(276,935
)
(288
)
(2,148
)
(279,371
)
Net change in IBNR reserves
(413,898
)
2,964

75,031

(335,903
)
(261,724
)
17,179

13,371

(231,174
)
Increase (reduction) in estimates of net ultimate losses
(145,745
)
56,053

416,783

327,091

(101,661
)
57,516

244,537

200,392

Increase (reduction) in provisions for bad debt
—

—

—

—

(735
)
242

—

(493
)
Increase (reduction) in provisions for unallocated LAE
(48,723
)
—

4,012

(44,711
)
(41,296
)
—

1,533

(39,763
)
Amortization of deferred charges
10,381

—

—

10,381

9,387

—

—

9,387

Amortization of fair value adjustments
10,312

(4,102
)
(529
)
5,681

5,518

(1,808
)
(755
)
2,955

Changes in fair value - fair value option
(32,115
)
—

—

(32,115
)
(9,254
)
—

—

(9,254
)
Net incurred losses and LAE
$
(205,890
)
$
51,951

$
420,266

$
266,327

$
(138,041
)
$
55,950

$
245,315

$
163,224


Non-Life Run-off Segment
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the three and nine months ended September 30, 2018 and 2017 for the Non-life Run-off segment:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Balance as at beginning of period
$
7,025,750

$
6,317,279

$
5,949,472

$
4,716,363

Less: reinsurance reserves recoverable
1,462,139

1,500,557

1,377,485

1,000,953

Less: deferred charges on retroactive insurance
71,393

88,475

80,192

94,551

Net balance as at beginning of period
5,492,218

4,728,247

4,491,795

3,620,859

Net incurred losses and LAE:
Current period
10,017

30

15,476

1,205

Prior periods
(72,795)

(70,912
)
(221,366
)
(139,246
)
Total net incurred losses and LAE
(62,778)

(70,882
)
(205,890
)
(138,041
)
Net paid losses:
Current period
(2,713)

(33
)
(3,304
)
(404
)
Prior periods
(193,057)

(135,981
)
(641,361
)
(436,594
)
Total net paid losses
(195,770)

(136,014
)
(644,665
)
(436,998
)
Effect of exchange rate movement
(26,352
)
46,080

(102,030)

120,592

Acquired on purchase of subsidiaries
22,713

3,282

173,538

3,282

Assumed business
103,615

—

1,620,898

1,401,019

Net balance as at September 30
5,333,646

4,570,713

5,333,646

4,570,713

Plus: reinsurance reserves recoverable
1,412,090

1,475,855

1,412,090

1,475,855

Plus: deferred charges on retroactive reinsurance
87,019

85,164

87,019

85,164

Balance as at September 30
$
6,832,755

$
6,131,732

$
6,832,755

$
6,131,732



43
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Net incurred losses and LAE in the Non-life Run-off segment for the three months ended September 30, 2018 and 2017 were as follows:
Three Months Ended September 30,
2018
2017
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
Net losses paid
$
193,057

$
2,713

$
195,770

$
135,981

$
33

$
136,014

Net change in case and LAE reserves
(128,827
)
165

(128,662
)
(66,376
)
(16
)
(66,392
)
Net change in IBNR reserves
(109,287
)
7,139

(102,148
)
(120,614
)
(152
)
(120,766
)
Increase (reduction) in estimates of net ultimate losses
(45,057
)
10,017

(35,040
)
(51,009
)
(135
)
(51,144
)
Increase (reduction) in provisions for unallocated LAE
(24,460
)
—

(24,460
)
(16,203
)
165

(16,038
)
Amortization of deferred charges
1,582

—

1,582

3,311

—

3,311

Amortization of fair value adjustments
4,247

—

4,247

3,493

—

3,493

Changes in fair value - fair value option
(9,107
)
—

(9,107
)
(10,504
)
—

(10,504
)
Net incurred losses and LAE
$
(72,795
)
$
10,017

$
(62,778
)
$
(70,912
)
$
30

$
(70,882
)
Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
Three Months Ended September 30, 2018
The reduction in net incurred losses and LAE for the three months ended September 30, 2018 of $62.8 million included net incurred losses a nd LAE of $10.0 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $10.0 million , the reduction in net incurred losses and LAE liabilities relating to prior periods was $72.8 million , which was attributable to a reduction in estimates of net ultimate losses of $45.1 million , a reduction in provisions for unallocated LAE of $24.5 million relating to 2018 run-off activity and a reduction in the fair value of liabilities of $9.1 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired of $4.2 million and the amortization of the deferred charges of $1.6 million . The reduction in estimates of net ultimate losses of $45.1 million for the three months ended September 30, 2018 included a net reduction in case and IBNR reserves of $238.1 million , partially offset by net losses paid of $193.1 million .
Three Months Ended September 30, 2017
The reduction in net incurred losses and LAE for the three months ended September 30, 2017 of $70.9 million included net incurred losses and LAE of $30 thousand related to current period net earned premium, primarily for the run-off business acquired with Sussex. Excluding current period net incurred losses and LAE of $30 thousand , the reduction in net incurred losses and LAE liabilities relating to prior periods was $70.9 million , which was attributable to a reduction in estimates of net ultimate losses of $51.0 million , and a reduction in provisions for unallocated LAE of $16.2 million , relating to 2017 run-off activity and a reduction in the fair value of liabilities of $10.5 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $3.5 million and the amortization of the deferred charges of $3.3 million . The reduction in estimates of net ultimate losses of $51.0 million for the three months ended September 30, 2017 included a net change in case and IBNR reserves of $187.0 million , partially offset by net losses paid of $136.0 million .

44
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Net incurred losses and LAE in the Non-life Run-off segment for the nine months ended September 30, 2018 and 2017 were as follows:
Nine Months Ended September 30,
2018
2017
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
Net losses paid
$
641,361

$
3,304

$
644,665

$
436,594

$
404

$
436,998

Net change in case and LAE reserves
(377,735
)
1,223

(376,512
)
(276,903
)
(32
)
(276,935
)
Net change in IBNR reserves
(424,847
)
10,949

(413,898
)
(262,296
)
572

(261,724
)
Increase (reduction) in estimates of net ultimate losses
(161,221
)
15,476

(145,745
)
(102,605
)
944

(101,661
)
Reduction in provisions for bad debt
—

—

—

(735
)
—

(735
)
Increase (reduction) in provisions for unallocated LAE
(48,723
)
—

(48,723
)
(41,557
)
261

(41,296
)
Amortization of deferred charges
10,381

—

10,381

9,387

—

9,387

Amortization of fair value adjustments
10,312

—

10,312

5,518

—

5,518

Changes in fair value - fair value option
(32,115
)
—

(32,115
)
(9,254
)
—

(9,254
)
Net incurred losses and LAE
$
(221,366
)
$
15,476

$
(205,890
)
$
(139,246
)
$
1,205

$
(138,041
)

Nine Months Ended September 30, 2018
The reduction in net incurred losses and LAE for the nine months ended September 30, 2018 of $205.9 million included net incurred losses a nd LAE of $15.5 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $15.5 million , net incurred losses and LAE liabilities relating to prior periods were reduced by $221.4 million , which was attributable to a reduction in estimates of net ultimate losses of $161.2 million , a reduction in provisions for unallocated LAE of $48.7 million and a reduction in the fair value of liabilities of $32.1 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by amortization of the deferred charges of $10.4 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired of $10.3 million . The reduction in estimates of net ultimate losses of $161.2 million for the nine months ended September 30, 2018 included a net change in case and IBNR reserves of $802.6 million , partially offset by net losses paid of $641.4 million .
Nine Months Ended September 30, 2017
The reduction in net incurred losses and LAE for the nine months ended September 30, 2017 of $138.0 million included net incurred losses and LAE of $1.2 million related to current period net earned premium, related to the run-off business acquired with Sussex. Excluding current period net incurred losses and LAE of $1.2 million , net incurred losses and LAE liabilities relating to prior periods were reduced by $139.2 million , which was attributable to a reduction in estimates of net ultimate losses of $102.6 million , a reduction in provisions for unallocated LAE of $41.6 million , a reduction in the fair value of liabilities of $9.3 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option and a reduction in provisions for bad debt of $0.7 million , partially offset by amortization of the deferred charges of $9.4 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $5.5 million . The reduction in estimates of net ultimate losses of $102.6 million for the nine months ended September 30, 2017 included a net change in case and IBNR reserves of $539.2 million , partially offset by net losses paid of $436.6 million .


45
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Atrium
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the three and nine months ended September 30, 2018 and 2017 for the Atrium segment:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Balance as at beginning of period
$
234,232

$
208,646

$
240,873

$
212,122

Less: reinsurance reserves recoverable
38,253

29,749

40,531

30,009

Net balance as at beginning of period
195,979

178,897

200,342

182,113

Net incurred losses and LAE:
Current period
20,033

37,284

56,514

66,563

Prior periods
(2,180
)
(2,011
)
(4,563
)
(10,613
)
Total net incurred losses and LAE
17,853

35,273

51,951

55,950

Net paid losses:
Current period
(8,080
)
(5,139
)
(25,699
)
(14,799
)
Prior periods
(8,230
)
(8,992
)
(27,488
)
(25,826
)
Total net paid losses
(16,310
)
(14,131
)
(53,187
)
(40,625
)
Effect of exchange rate movement
(137
)
1,474

(1,721
)
4,075

Net balance as at September 30
197,385

201,513

197,385

201,513

Plus: reinsurance reserves recoverable
45,382

44,207

45,382

44,207

Balance as at September 30
$
242,767

$
245,720

$
242,767

$
245,720

Net incurred losses and LAE in the Atrium segment for the three and nine months ended September 30, 2018 and 2017 were as follows:
Three Months Ended September 30,
2018
2017
Prior
Period
Current
Period
Total
Prior
Period
Current
Period
Total
Net losses paid
8,230

8,080

16,310

8,992

5,139

14,131

Net change in case and LAE reserves
(4,142
)
3,596

(546
)
(2,781
)
3,020

239

Net change in IBNR reserves
(5,539
)
8,357

2,818

(6,273
)
28,798

22,525

Increase (reduction) in estimates of net ultimate losses
(1,451
)
20,033

18,582

(62
)
36,957

36,895

Increase (reduction) in provisions for bad debt
—

—

—

(96
)
338

242

Increase (reduction) in provisions for unallocated LAE
(2
)
—

(2
)
75

(11
)
64

Amortization of fair value adjustments
(727
)
—

(727
)
(1,928
)
—

(1,928
)
Net incurred losses and LAE
(2,180
)
20,033

17,853

(2,011
)
37,284

35,273

Nine Months Ended September 30,
2018
2017
Prior Period
Current Period
Total
Prior Period
Current Period
Total
Net losses paid
$
27,488

$
25,699

$
53,187

$
25,826

$
14,799

$
40,625

Net change in case and LAE reserves
(9,695
)
9,597

(98
)
(7,904
)
7,616

(288
)
Net change in IBNR reserves
(18,254
)
21,218

2,964

(26,631
)
43,810

17,179

Increase (reduction) in estimates of net ultimate losses
(461
)
56,514

56,053

(8,709
)
66,225

57,516

Increase (reduction) in provisions for bad debt
—

—

—

(96
)
338

242

Amortization of fair value adjustments
(4,102
)
—

(4,102
)
(1,808
)
—

(1,808
)
Net incurred losses and LAE
$
(4,563
)
$
56,514

$
51,951

$
(10,613
)
$
66,563

$
55,950


46
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




StarStone
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the three and nine months ended September 30, 2018 and 2017 for our StarStone segment:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Balance as at beginning of period
$
1,348,405

$
1,115,459

$
1,207,743

$
1,059,382

Less: reinsurance reserves recoverable
366,577

393,656

452,017

357,231

Net balance as at beginning of period
981,828

721,803

755,726

702,151

Net incurred losses and LAE:
Current period
189,000

110,532

396,074

247,023

Prior periods
9,899

789

24,192

(1,708
)
Total net incurred losses and LAE
198,899

111,321

420,266

245,315

Net paid losses:
Current period
(13,473)

(10,756
)
(33,840
)
(25,617
)
Prior periods
(95,422)

(70,200
)
(268,997
)
(207,697
)
Total net paid losses
(108,895)

(80,956
)
(302,837
)
(233,314
)
Effect of exchange rate movement
(336)

8,158

(4,908
)
14,781

Acquired on purchase of subsidiaries
—

—

192,981

—

Assumed business
—

—

10,268

31,393

Net balance as at September 30
1,071,496

760,326

1,071,496

760,326

Plus: reinsurance reserves recoverable
388,715

477,939

388,715

477,939

Balance as at September 30
$
1,460,211

$
1,238,265

$
1,460,211

$
1,238,265


Net incurred losses and LAE in the StarStone segment for the three and nine months ended September 30, 2018 and 2017 were as follows:
Three Months Ended September 30,
2018
2017
Prior Period
Current Period
Total
Prior Period
Current Period
Total
Net losses paid
$
95,422

$
13,473

$
108,895

$
70,200

$
10,756

$
80,956

Net change in case and LAE reserves
(19,919
)
37,468

17,549

(14,037
)
13,103

(934
)
Net change in IBNR reserves
(63,294
)
134,454

71,160

(54,400
)
84,573

30,173

Increase in estimates of net ultimate losses
12,209

185,395

197,604

1,763

108,432

110,195

Increase (reduction) in provisions for unallocated LAE
(2,023
)
3,605

1,582

(853
)
2,100

1,247

Amortization of fair value adjustments
(287
)
—

(287
)
(121
)
—

(121
)
Net incurred losses and LAE
$
9,899

$
189,000

$
198,899

$
789

$
110,532

$
111,321



47
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Nine Months Ended September 30,
2018
2017
Prior Period
Current Period
Total
Prior Period
Current Period
Total
Net losses paid
$
268,997

$
33,840

$
302,837

$
207,697

$
25,617

$
233,314

Net change in case and LAE reserves
(55,541
)
94,456

38,915

(55,501
)
53,353

(2,148
)
Net change in IBNR reserves
(183,422
)
258,453

75,031

(149,165
)
162,536

13,371

Increase in estimates of net ultimate losses
30,034

386,749

416,783

3,031

241,506

244,537

Increase (reduction) in provisions for unallocated LAE
(5,313
)
9,325

4,012

(3,984
)
5,517

1,533

Amortization of fair value adjustments
(529
)
—

(529
)
(755
)
—

(755
)
Net incurred losses and LAE
$
24,192

$
396,074

$
420,266

$
(1,708
)
$
247,023

$
245,315


11. POLICY BENEFITS FOR LIFE CONTRACTS
We have acquired long duration contracts that subject us to mortality, longevity and morbidity risks and which are accounted for as life and annuity premiums earned. Life benefit reserves are established using assumptions for investment yields, mortality, morbidity, lapse and expenses, including a provision for adverse deviation. We establish and review our life reserves regularly based upon cash flow projections. We establish and maintain our life reinsurance reserves at a level that we estimate will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third-party servicing obligations as they become payable. Policy benefits for life contracts as at September 30, 2018 and December 31, 2017 were $107.5 million and $117.2 million , respectively. Refer to Note 2 - "Significant Accounting Policies" - (d) Policy Benefits for Life and Annuity Contracts" of the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 for a description of the assumptions used and the process for establishing our assumptions and estimates.

On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary Alpha Insurance SA and a subsidiary of Monument Insurance Group Limited ("Monument"). This agreement will transfer our remaining life assurance policies to Monument, via a Portfolio Transfer, subject to regulatory approval. The transaction is expected to close in the first half of 2019. Our policy benefits operations do not qualify for inclusion in our reportable segments and are therefore included within other activities. The related assets, as well as the results from these operations, were not significant to our consolidated operations and therefore they have not been classified as a discontinued operation. In addition, our proposed transfer of these life assurance polices to Monument was not classified as a held-for-sale business transaction since the underlying contracts do not meet the definition of a business.

48
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




12. PREMIUMS WRITTEN AND EARNED
The following table provides a summary of net premiums written and earned in our Non-life Run-off, Atrium and StarStone segments and Other activities for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
Non-life Run-off
Gross
$
9,912

$
17,746

$
11,751

$
9,345

$
16,354

$
54,044

$
13,956

$
15,353

Ceded
(5,134
)
(7,304
)
(284
)
(2,930
)
(13,137
)
(26,815
)
(503
)
(5,497
)
Net
$
4,778

$
10,442

$
11,467

$
6,415

$
3,217

$
27,229

$
13,453

$
9,856

Atrium
Gross
$
39,995

$
42,505

$
36,377

$
39,591

$
130,997

$
121,974

$
117,355

$
111,633

Ceded
(2,854
)
(5,528
)
(10,388
)
(6,818
)
(17,779
)
(15,252
)
(18,120
)
(14,260
)
Net
$
37,141

$
36,977

$
25,989

$
32,773

$
113,218

$
106,722

$
99,235

$
97,373

StarStone
Gross
$
282,525

$
281,467

$
200,007

$
217,833

$
888,867

$
761,694

$
651,107

$
636,137

Ceded
(62,799
)
(65,112
)
(102,958
)
(110,183
)
(269,339
)
(234,892
)
(319,658
)
(294,528
)
Net
$
219,726

$
216,355

$
97,049

$
107,650

$
619,528

$
526,802

$
331,449

$
341,609

Other
Gross
$
846

$
848

$
2,424

$
1,444

$
2,858

$
2,878

$
4,506

$
4,658

Ceded
(24
)
(25
)
(753
)
(257
)
13

(3
)
(860
)
(1,002
)
Net
$
822

$
823

$
1,671

$
1,187

$
2,871

$
2,875

$
3,646

$
3,656

Total
Gross
$
333,278

$
342,566

$
250,559

$
268,213

$
1,039,076

$
940,590

$
786,924

$
767,781

Ceded
(70,811
)
(77,969
)
(114,383
)
(120,188
)
(300,242
)
(276,962
)
(339,141
)
(315,287
)
Total
$
262,467

$
264,597

$
136,176

$
148,025

$
738,834

$
663,628

$
447,783

$
452,494


13. GOODWILL AND INTANGIBLE ASSETS
The following table presents a reconciliation of the beginning and ending goodwill, intangible assets and the deferred charges during the nine months ended September 30, 2018 :
Goodwill
Intangible
assets with
a definite life - Other
Intangible
assets with
an indefinite life
Total
Intangible
assets with
a definite life - FVA
Other assets - Deferred Charges
Balance as at January 1, 2018
$
73,071

$
20,487

$
87,031

$
180,589

$
140,393

$
80,192

Acquired during the period
41,736

—

—

41,736

3,976

17,208

Amortization
—

(3,030
)
—

(3,030
)
(6,138
)
(10,381
)
Balance as at September 30, 2018
$
114,807

$
17,457

$
87,031

$
219,295

$
138,231

$
87,019

Refer to Note 2 - "Acquisitions" for further details on the goodwill acquired during the period. Refer to Note 3 - "Significant New Business" for further details on the new deferred charges recorded during the period. Refer to Note 14 - "Goodwill, Intangible assets and Deferred Charges" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 for more information on goodwill, intangible assets and the deferred charges.

49
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The following table provides a summary of the amortization recorded on the intangible assets for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Intangible asset amortization
$
3,922

$
3,105

$
9,168

$
5,353

The gross carrying value, accumulated amortization and net carrying value of intangible assets by type and the deferred charges as at September 30, 2018 and December 31, 2017 were as follows:
September 30, 2018
December 31, 2017
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Value
Intangible assets with a definite life:
Fair value adjustments:
Losses and LAE liabilities
$
467,944

$
(351,396
)
$
116,548

$
462,455

$
(345,449
)
$
117,006

Reinsurance balances recoverable
(180,732
)
165,579

(15,153
)
(179,219
)
165,579

(13,640
)
Other Assets
(48,840
)
838

(48,002
)
(48,840
)
440

(48,400
)
Other Liabilities
85,845

(1,007
)
84,838

85,845

(418
)
85,427

Total
$
324,217

$
(185,986
)
$
138,231

$
320,241

$
(179,848
)
$
140,393

Other:
Distribution channel
$
20,000

$
(6,443
)
$
13,557

$
20,000

$
(5,444
)
$
14,556

Technology
15,000

(14,716
)
284

15,000

(13,210
)
1,790

Brand
7,000

(3,384
)
3,616

7,000

(2,859
)
4,141

Total
$
42,000

$
(24,543
)
$
17,457

$
42,000

$
(21,513
)
$
20,487

Intangible assets with an indefinite life:
Lloyd’s syndicate capacity
$
37,031

$
—

$
37,031

$
37,031

$
—

$
37,031

Licenses
19,900

—

19,900

19,900

—

19,900

Management contract
30,100

—

30,100

30,100

—

30,100

Total
$
87,031

$
—

$
87,031

$
87,031

$
—

$
87,031

Deferred charges on retroactive reinsurance
$
295,851

$
(208,832
)
$
87,019

$278,643
$
(198,451
)
$80,192


50
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




14. DEBT OBLIGATIONS
We utilize debt arrangements primarily for acquisitions and, from time to time, for general corporate purposes. Debt obligations as at September 30, 2018 and December 31, 2017 were as follows:
Facility
Origination Date
Term
September 30,
2018
December 31,
2017
Senior Notes
March 10, 2017
5 years
$
350,000

$
350,000

Less: Unamortized debt issuance costs
(2,030
)
(2,484
)
Total Senior Notes
347,970

347,516

EGL Revolving Credit Facility
August 16, 2018
5 years
46,500

—

Previous EGL Revolving Credit Facility
September 16, 2014
5 years
—

225,110

EGL Term Loan Facility
November 18, 2016
3 years
—

74,063

Total debt obligations
$
394,470

$
646,689

The table below provides a summary of the total interest expense for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Interest expense on debt obligations
$
4,552

$
6,219

$
20,822

$
18,576

Funds withheld balances and other
88

191

751

2,275

Total interest expense
$
4,640

$
6,410

$
21,573

$
20,851

Senior Notes
On March 10, 2017, we issued Senior Notes (the "Notes") for an aggregate principal amount of $350.0 million . The Notes pay 4.5% interest semi-annually and mature on March 10, 2022. The Notes are unsecured and unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated obligations, senior to any future obligations that are expressly subordinated to the Notes, effectively subordinate to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally subordinate to all liabilities of our subsidiaries.
The Notes are redeemable at our option on a make whole basis at any time prior to the date that is one month prior to the maturity of the Notes. On or after the date that is one month prior to the maturity of the Notes, the Notes are redeemable at a redemption price equal to 100% of the principal amount of the Notes to be redeemed.
We incurred costs of $2.9 million in issuing the Notes. These costs included underwriters’ fees, legal and accounting fees, and other fees, and are capitalized and presented as a direct deduction from the principal amount of debt obligations in the consolidated balance sheets. These costs are amortized over the term of the Notes and are included in interest expense in our unaudited condensed consolidated statements of earnings.
EGL Revolving Credit Facility
On August 16, 2018, we and certain of our subsidiaries, as borrowers and guarantors, entered into a new five -year unsecured $600.0 million revolving credit agreement. The credit agreement expires in August 2023 and we have the option to increase the commitments under the facility by up to an aggregate of $400.0 million . Borrowings under the facility will bear interest at a rate based on the Company's long term senior unsecured debt ratings. In connection with our entry into the credit agreement described above, we terminated and fully repaid our previous revolving credit agreement, which was originated on September 16, 2014 and was most recently amended on July 17, 2018 .
As at September 30, 2018 , we were permitted to borrow up to an aggregate of $600.0 million under the facility. As at September 30, 2018 , there was $553.5 million of available unutilized capacity under the facility. Subsequent to September 30, 2018 , we repaid $10.0 million , bringing the unutilized capacity under this facility to $563.5 million .

51
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Financial and business covenants imposed on us, in relation to the new revolving credit facility, include certain limitations on mergers and consolidations, acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets, and limitations on liens. Generally, the financial covenants require us to maintain a gearing ratio of consolidated indebtedness to total capitalization of not greater than 0.35 to 1.0 and to maintain a consolidated net worth of not less than the aggregate of (i) $2.3 billion , (ii) 50% of the net income available for distribution to the Company’s ordinary shareholders at any time after June 30, 2018, and (iii) 50% of the proceeds of any common stock issuance by the Company. In addition, we must maintain eligible capital in excess of the enhanced capital requirement imposed on us by the Bermuda Monetary Authority pursuant to the Insurance (Group Supervision) Rules 2011 of Bermuda. We are in compliance with the covenants of the EGL Revolving Credit Facility.
As at September 30, 2018 and December 31, 2017 , there were borrowings of €nil and €50.0 million ( $60.1 million ), respectively, under our revolving credit facilities in effect as of such dates that were designated as non-derivative hedges of our net investment in certain subsidiaries whose functional currency is denominated in Euros . These borrowings were repaid in full during the three months ended September 30, 2018 and the non-derivative hedge was replaced by a Euro-denominated foreign currency forward exchange rate contract in a qualifying hedging arrangement. Refer to Note 8 - "Derivative and Hedging Instruments" for more information on our derivative and non-derivative hedging instruments.
EGL Term Loan Facility
On November 18, 2016 , we entered into and fully utilized a three -year $75.0 million unsecured term loan (the "EGL Term Loan Facility"). A portion of the proceeds from the issuance of our Series D Preferred Shares was used to fully repay this facility and the facility was terminated in the three months ended June 30, 2018.
Refer to Note 15 - "Debt Obligations" of the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 for further information on the terms of the above facilities.

15. NONCONTROLLING INTERESTS
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest ("RNCI") as at September 30, 2018 and December 31, 2017 comprises the ownership interests held by the Trident V Funds ("Trident") ( 39.3% ) and Dowling Capital Partners, L.P. ("Dowling") ( 1.7% ) in our subsidiary North Bay Holdings Limited ("North Bay"). North Bay owns our investments in StarStone and Atrium.
The following is a reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI as at September 30, 2018 and December 31, 2017 :
Nine Months Ended
For The Year Ended
September 30, 2018
December 31, 2017
Balance at beginning of period
$
479,606

$
454,522

Dividends paid
—

(27,458
)
Net earnings (losses) attributable to RNCI
(20,097
)
19,619

Accumulated other comprehensive earnings (losses) attributable to RNCI
(396
)
1,945

Change in redemption value of RNCI
(785
)
30,978

Balance at end of period
$
458,328

$
479,606

We carried the RNCI at its estimated redemption value, which is fair value, as of September 30, 2018 . The decrease was primarily attributable to a decrease in the net assets due to net losses relating to StarStone during the nine months ended September 30, 2018 .
Refer to Note 20 - "Related Party Transactions" and Note 21 - "Commitments and Contingencies" for additional information regarding RNCI.

52
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Noncontrolling Interest
As at September 30, 2018 and December 31, 2017 , we had $10.3 million and $9.3 million , respectively, of noncontrolling interest ("NCI") related to external interests in two of our non-life run-off subsidiaries.
16. SHARE CAPITAL
Issue of Voting ordinary shares and Series E non-voting ordinary shares
On May 14, 2018 , an aggregate of 2,007,017 of our ordinary shares were issued to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares. The shares were consideration for the acquisition of KaylaRe Holdings Ltd, as described in Note 2 - "Acquisitions" .
Issue of Series D Preferred Shares
On June 28, 2018 , the Company raised $400.0 million through the public offering of 16,000 shares of its 7.00% non-cumulative fixed-to-floating rate Series D perpetual preferred shares ("Series D Preferred Shares") (equivalent to 16,000,000 depositary shares, each of which represents a 1/1,000th interest in a Series D Preferred Share), $1.00 par value and $25,000 liquidation preference (the "Liquidation Preference") per share (equivalent to $25.00 per Depositary Share). After underwriting discounts and other expenses, the Company received net proceeds of $389.2 million which was used to repay a portion of amounts outstanding under the EGL Revolving Credit Facility and repaid in full the EGL Term Loan Facility.
The Series D Preferred Shares are not redeemable prior to September 1, 2028 , except in specified circumstances relating to certain tax, corporate, capital or rating agency events as described in the prospectus supplement relating to the offering. On and after September 1, 2028 , the Series D Preferred Shares, represented by the depositary shares, will be redeemable at the Company’s option, in whole or from time to time in part, at a redemption price equal to $25,000 per Series D Preferred Share (equivalent to $25.00 per depositary share), plus any declared and unpaid dividends.
Holders of Series D Preferred Shares will be entitled to receive, only when, as and if declared, non-cumulative cash dividends, paid quarterly in arrears on the 1st day of March, June, September and December of each year, commencing on September 1, 2018, in an amount per share equal to 7.00% of the Liquidation Preference per annum (equivalent to $1,750.00 per Series D Preferred Share and $1.75 per depositary share per annum) up to but excluding September 1, 2028 . Commencing on September 1, 2028 , which is the commencement date of the floating rate period, quarterly dividends on the Series D Preferred Shares will be payable, on a non-cumulative basis, when, as and if declared, at a floating rate equal to three-month LIBOR plus 4.015% of the Liquidation Preference per annum. Dividends that are not declared will not accumulate and will not be payable.
On July 31, 2018, our Board of Directors declared a cash dividend of $320.83 per Series D Preferred share (equivalent to $0.32083 per depositary share), paid on September 1, 2018 to shareholders of record on August 15, 2018. On November 6, 2018 our Board of Directors declared a cash dividend of $437.50 per Series D Preferred share (equivalent to $0.43750 per depositary share), which is payable on December 1, 2018 to shareholders of record on November 15, 2018.

Refer to Note 17 - "Share Capital" of the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information on our share capital.


53
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per ordinary share for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Numerator:
Earnings (losses) attributable to Enstar Group Limited ordinary shareholders:
Net earnings (loss) from continuing operations
$
(15,965
)
$
35,498

$
(48,931
)
$
184,864

Net earnings (loss) from discontinued operations
—

3,495

—

(1,005
)
Net earnings (loss) attributable to Enstar Group Limited attributable to Enstar Group Limited ordinary shareholders
(15,965
)
38,993

(48,931
)
183,859

Denominator:
Weighted average ordinary shares outstanding — basic
21,440,914

19,392,120

20,444,634

19,384,897

Effect of dilutive securities:
Share-based compensation plans
143,833

90,118

129,313

58,239

Warrants
80,609

76,930

79,597

72,851

Weighted average ordinary shares outstanding — diluted
21,665,356

19,559,168

20,653,544

19,515,987

Earnings (losses) per ordinary share attributable to Enstar Group Limited:
Basic:
Net earnings (loss) from continuing operations
$
(0.74
)
$
1.83

$
(2.39
)
$
9.54

Net earnings (loss) from discontinued operations
—

0.18

$
—

$
(0.05
)
Net earnings (loss) per ordinary share
$
(0.74
)
$
2.01

$
(2.39
)
$
9.49

Diluted (1) :
Net earnings (loss) from continuing operations
$
(0.74
)
$
1.81

$
(2.39
)
$
9.47

Net earnings (loss) from discontinued operations
—

0.18

$
—

$
(0.05
)
Net earnings (loss) per ordinary share
$
(0.74
)
$
1.99

$
(2.39
)
$
9.42

(1) During a period of loss, the basic weighted average ordinary shares outstanding is used in the denominator of the diluted loss per ordinary share computation as the effect of including potentially dilutive securities would be anti-dilutive.

18. SHARE-BASED COMPENSATION AND PENSIONS
We provide various employee benefits including share-based compensation, an employee share purchase plan, an annual incentive compensation program, and pension plans. These are described in Note 19 - "Share-Based Compensation and Pensions" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 .
The table below provides the expenses related to the share-based compensation plans, employee share purchase plan, and pension plans for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Share-based Compensation Expense
$
3,865

$
9,234

$
14,384

$
19,213

Employee Share Purchase Plan
$
115

$
86

$
325

$
252

Pension Expense
$
2,818

$
3,998

$
8,640

$
9,483



54
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




19. TAXATION
Interim Tax Calculation Method
We use the estimated annual effective tax rate method for computing our interim tax provision. This method applies our best estimate of the effective tax rate expected for the full year to our year-to-date earnings before income taxes. We provide for income tax expense or benefit based upon our pre-tax earnings and the provisions of currently enacted tax laws. Certain items deemed to be unusual, infrequent or not reliably estimated are excluded from the estimated annual effective tax rate. In the event such items are identified, the actual tax expense or benefit is reported in the same period as the related item. Certain other items are not included in the estimated annual effective tax rate, such as changes in the assessment of valuation allowance on deferred tax assets and uncertain tax positions, if any.
Interim Tax Expense
The effective tax rates on income for the three and nine months ended September 30, 2018 were (3.5)% and (7.8)% , respectively, as compared to 6.5% and 1.6% , respectively for the comparative periods in 2017 . The effective tax rate on income differs from the statutory rate of 0% due to tax on foreign operations, primarily the United States and the United Kingdom. We have foreign operating subsidiaries and branch operations principally located in the United States, United Kingdom, Continental Europe and Australia that are subject to federal, foreign, state and local taxes in those jurisdictions. Deferred income tax lia bilities have not been accrued with respect to the undistributed earnings of our foreign subsidiaries. If the earnings were to be distributed, as dividends or other distributions, withholding taxes may be imposed by the jurisdiction of the paying subsidiary. For our U.S. subsidiaries, we have not currently accrued any withholding taxes with respect to un-remitted earnings as management has no current intention of remitting these earnings. For our United Kingdom subsidiaries, there are no withholding taxes imposed. For our other foreign subsidiaries, it would not be practicable to compute such amounts due to a variety of factors, including the amount, timing, and manner of any repatriation. Because we operate in many jurisdictions, our net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which we operate.
Assessment of Valuation Allowance on Deferred Tax Asset
We have estimated the future taxable income of our foreign subsidiaries and have provided a valuation allowance in respect of loss carryforwards where we do not expect to realize a benefit. We have considered all available evidence using a "more than likely than not" standard in determining the amount of the valuation allowance. During the three and nine months ended September 30, 2018 , we had no change in our assessment of our valuation allowance on deferred tax assets.
Accounting for Uncertainty in Income Taxes
There were no unrecognized tax benefits relating to uncertain tax positions as at September 30, 2018 and December 31, 2017 .
Tax Examinations
Our operating subsidiaries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, our major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2012.

20. RELATED PARTY TRANSACTIONS
Stone Point Capital LLC
Through several private transactions occurring from May 2012 to July 2012 and an additional private transaction that closed in May 2018, investment funds managed by Stone Point have acquired an aggregate of 1,635,986 of our Voting Ordinary Shares (which now constitutes approximately 9.1% of our outstanding Voting Ordinary Shares). On November 6, 2013, we appointed James D. Carey to our Board of Directors. Mr. Carey is the sole member of an entity that is one of four general partners of the entities serving as general partners for Trident, is a member of the investment

55
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




committees of such general partners, and is a member and senior principal of Stone Point Capital LLC ("Stone Point"), the manager of the Trident funds.
In addition, we have entered into certain agreements with Trident with respect to Trident’s co-investments in the Atrium, Arden, and StarStone acquisitions. These include investors’ agreements and shareholders’ agreements, which provide for, among other things: (i) our right to redeem Trident’s equity interest in the Atrium/Arden and StarStone transactions in cash at fair market value within the 90 days following September 6, 2018 and April 1, 2019, respectively, and at any time following September 6, 2020 and April 1, 2021, respectively; and (ii) Trident’s right to have its equity co-investment interests in the Atrium/Arden and StarStone transactions redeemed by us at fair market value (which we may satisfy in either cash or our ordinary shares) following September 6, 2020 and April 1, 2021, respectively. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the boards of the holding companies established in connection with the Atrium/Arden and StarStone co-investment transactions. Trident also has a second representative on these boards who is a Stone Point employee. As at September 30, 2018 and December 31, 2017 , the RNCI on our balance sheet relating to these Trident co-investment transactions was as follows:
September 30, 2018
December 31, 2017
Redeemable Noncontrolling Interest
439,255

459,649

As at September 30, 2018 , we had the following relationships with Stone Point and its affiliates:
•
Investments in funds (carried within other investments) managed by Stone Point, with respect to which we recognized unrealized gains and interest income;
•
Investments in registered investment companies affiliated with entities owned by Trident or otherwise affiliated with Stone Point, with respect to which we recognized unrealized gains and interest income;
•
Separate accounts managed by Eagle Point Credit Management and PRIMA Capital Advisors, which are affiliates of entities owned by Trident, with respect to which we incurred management fees;
•
Investments in funds (carried within other investments) managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as a director, with respect to which we recognized net unrealized gains;
•
Sound Point Capital has acted as collateral manager for certain of our direct investments in CLO equity securities, with respect to which we recognized net unrealized gains (losses) and interest income; and
•
A separate account managed by Sound Point Capital, with respect to which we incurred management fees.
The following table presents the amounts included in our consolidated balance sheet related to our related party transactions with Stone Point and its affiliated entities:
September 30, 2018
December 31, 2017
Investments in funds managed by Stone Point
$
375,406

$
255,905

Investments in registered investment companies affiliated with entities owned by Trident or Stone Point
34,682

22,060

Investments managed by Eagle Point Credit Management and PRIMA Capital Advisors
252,017

183,448

Investments in funds managed by Sound Point Capital
37,254

27,429

Investments in CLO equity securities with Sound Point Capital as collateral manager
16,206

17,760

Separate account managed by Sound Point Capital
5,231

63,572

Total investments
$
720,796

$
570,174


56
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The following table presents the amounts included in net earnings related to our related party transactions with Stone Point and its affiliated entities:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Net unrealized gains on funds managed by Stone Point
$
9,598

$
6,137

$
11,850

$
17,787

Net unrealized gains (losses) on registered investment companies affiliated with entities owned by Trident or Stone Point
(283
)
86

6,267

5,123

Interest income on registered investment companies affiliated with entities owned by Trident
707

1,138

2,617

2,412

Management fees on investments managed by Eagle Point Credit Management and PRIMA Capital Advisors
(242
)
(160
)
(696
)
(451
)
Net unrealized gains on investments in funds managed by Sound Point Capital
394

576

156

1,370

Net unrealized losses on investments in CLO equity securities with Sound Point Capital as collateral manager
(931
)
(1,090
)
(1,554
)
(3,584
)
Interest income on investments in CLO equity securities with Sound Point Capital as collateral manager
1,106

1,118

3,595

3,598

Management fees on separate account managed by Sound Point Capital
(6
)
(71
)
(167
)
(224
)
Total investment earnings
$
10,343

$
7,734

$
22,068

$
26,031

CPPIB
Canada Pension Plan Investment Board ("CPPIB") owns approximately 8.4% of our voting ordinary shares and additional non-voting shares that, together with its voting ordinary shares held indirectly, represented an economic interest of approximately 17.9% as of September 30, 2018 . Poul Winslow, of CPPIB, was appointed to our Board on September 29, 2015 in connection with CPPIB's shareholder rights agreement with us. Approximately 4.1% of our voting ordinary shares are held indirectly by CPPIB through CPPIB Epsilon Ontario Limited Partnership ("CPPIB LP") . CPPIB is the sole limited partner of CPPIB LP. CPPIB Epsilon Ontario Trust ("CPPIB Trust") is the general partner of CPPIB LP, and Mr. Winslow is a trustee of CPPIB Trust. By virtue of his role as a trustee of CPPIB Trust, in its capacity as general partner of CPPIB LP, Mr. Winslow has shared voting and shared dispositive power over the shares, but has no pecuniary interest in the shares.
We also have a pre-existing reinsurance balances recoverable based on normal commercial terms from Continental Assurance Company, a company acquired by Wilton Re Ltd. ("Wilton Re"). CPPIB, together with management of Wilton Re, owns 100% of the common stock of Wilton Re. The reinsurance balances recoverable on our consolidated balance sheet as at September 30, 2018 and December 31, 2017 was as follows:
September 30, 2018
December 31, 2017
Reinsurance balances recoverable
$
6,884

$
7,003

Hillhouse
Gaoling Fund, L.P., YHG Investment, L.P. and Hillhouse Fund III L.P., investment funds managed by Hillhouse Capital, collectively own approximately 9.7% of Enstar’s voting ordinary shares. These funds also own non-voting ordinary shares and warrants to purchase additional non-voting ordinary shares, which together with their voting ordinary shares, represent an approximate 17.1% economic interest in Enstar. In February 2017, Jie Liu, a Managing Director of Hillhouse Capital, was appointed to our Board. In connection with Hillhouse Capital's investment in KaylaRe, Mr.

57
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Liu also served as a director of KaylaRe until resigning from that board in connection with the transaction described above.
As at December 31, 2017 , KaylaRe had investments in a fund managed by Hillhouse. On May 14, 2018 , KaylaRe was acquired (refer to Note 2 - "Acquisitions" for further details), at which point KaylaRe was consolidated and KaylaRe's investment in Hillhouse InRe Fund, L.P. was recorded within other investments on our consolidated balance sheet.
As at September 30, 2018 , we had investments in each of Gaoling Fund, L.P., China Value Fund, L.P. and Hillhouse InRe Fund, L.P., which are funds managed by Hillhouse, with respect to which we recognized unrealized losses.
Our consolidated balance sheet as at September 30, 2018 and December 31, 2017 included the following balances related to transactions between us and Hillhouse and its affiliated entities:
September 30, 2018
December 31, 2017
Investments in funds managed by Hillhouse, held by equity method investments
$
—

$
456,660

Investment in funds managed by Hillhouse
$
903,568

$
—

The increase in the investment in funds managed by Hillhouse was primarily due to consolidation of the Hillhouse InRe Fund, L.P. which was previously held by KaylaRe, our equity method investee, and additional subscriptions of $445.5 million .
We incurred fees of approximately $8.5 million for the nine months ended September 30, 2018 to Hillhouse and its affiliated entities in relation to the management of the funds described above.
Citco
In June 2018, our subsidiary made a $50.0 million indirect investment in the shares of Citco III Limited ("Citco"), a fund administrator with global operations. Pursuant to an investment agreement and in consideration for participation therein, a related party of Hillhouse Capital provides investment support to our subsidiary. In a private transaction that preceded our co-investment opportunity, certain Citco shareholders, including Trident, agreed to sell all or a portion of their interests in Citco. As of September 30, 2018 , Trident owned an approximate 3.4% interest in Citco. Mr. Carey currently serves as an observer to the board of directors of Citco in connection with Trident's investment therein.
September 30, 2018
December 31, 2017
Investment in Citco
$
49,606

$
—


Monument
Monument was established in October 2016 and Enstar has invested a total of $26.6 million in the common and preferred shares of Monument. We have approximately a 26.6% interest in Monument. I n connection with our investment in Monument, we entered into a Shareholders Agreement with the other shareholders. We recorded the investment in Monument using the equity method basis of accounting, as we concluded that we are not required to consolidate based on the guidance in ASC 810 - Consolidation .
On August 29, 2017, we sold our wholly-owned subsidiary Laguna to a subsidiary of Monument, for a total consideration of €25.6 million (approximately $30.8 million ). The total loss recorded on the sale of Laguna, for the year ended December 31, 2017 was $16.3 million , which included a cumulative currency translation adjustment balance of $6.3 million , which upon completion of the sale during the third quarter of 2017 was reclassified from accumulated other comprehensive income and included in earnings as a component of the loss on sale of Laguna.
On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary Alpha Insurance SA and a subsidiary of Monument. This agreement will transfer our remaining life assurance policies to Monument, via a Portfolio Transfer, subject to regulatory approval. The transaction is expected to close in the first half of 2019.

58
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Our investment in the common and preferred shares of Monument, carried in other assets on our consolidated balance sheet, as at September 30, 2018 and December 31, 2017 was as follows:
September 30, 2018
December 31, 2017
Investment in Monument
$
35,587

$
15,960

Clear Spring (formerly SeaBright)
Effective January 1, 2017, we sold SeaBright Insurance Company (“SeaBright Insurance”) and its licenses to Delaware Life Insurance Company ("Delaware Life"), a subsidiary of Guggenheim Partners, LLC. Following the sale, SeaBright Insurance was renamed Clear Spring Property and Casualty Company (“Clear Spring”). Clear Spring was subsequently capitalized with $56.0 million of equity, with Enstar retaining a 20% indirect equity interest in Clear Spring.
We have recorded the investment in Clear Spring using the equity method basis of accounting, pursuant to the conclusion that we are not required to consolidate following an analysis based on the guidance in ASC 810 - Consolidation . Our investment in the common shares of Clear Spring, carried in other assets on our consolidated balance sheet, as at September 30, 2018 and December 31, 2017 was as follows:
September 30, 2018
December 31, 2017
Investment in Clear Spring
$
10,565

$
10,596

Effective January 1, 2017, StarStone National Insurance Company (“StarStone National”) entered into a quota share treaty with Clear Spring pursuant to which Clear Spring reinsures 33.3% of core workers compensation business written by StarStone National.
Effective January 1, 2017, Cavello Bay Reinsurance Limited ("Cavello Bay") entered into a quota share treaty with Clear Spring pursuant to which Cavello Bay reinsures 25% of all workers compensation business written by Clear Spring.

Our consolidated balance sheet as at September 30, 2018 and December 31, 2017 included the following balances related to transactions between us and Clear Spring:
September 30, 2018
December 31, 2017
Balances under StarStone quota share:
Reinsurance balances recoverable
$
19,192

$
9,053

Prepaid insurance premiums
12,215

13,747

Ceded payable
15,275

13,964

Ceded acquisition costs
2,920

3,186

Balances under Cavello Bay quota share:
Losses and LAE
4,682

2,231

Unearned reinsurance premiums
3,054

3,437

Funds held
8,744

5,095


59
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Our consolidated statement of earnings for the three and nine months ended September 30, 2018 and September 30, 2017 included the following amounts related to transactions between us and Clear Spring:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
Transactions under StarStone quota share:
Ceded premium earned
$
(6,926
)
$
(8,393
)
$
(21,564
)
$
(8,393
)
Ceded incurred losses and LAE
3,823

2,068

12,429

2,068

Ceded acquisition costs
981

5,540

4,892

5,540

Transactions under Cavello Bay quota share:
Premium earned
3,482

2,098

5,391

2,098

Net incurred losses and LAE
(2,346
)
(1,385
)
(3,107
)
(1,385
)
Acquisition costs
(721
)
(1,198
)
(1,275
)
(1,198
)
Net income statement amounts
$
(1,707
)
$
(1,270
)
$
(3,234
)
$
(1,270
)
AmTrust
Effective July 23, 2018 the Company entered into a Subscription Agreement with Evergreen Parent L.P. ("Evergreen"), K-Z Evergreen, LLC and Trident Pine Acquisition LP ("Trident Pine"). Evergreen is an entity formed by private equity funds managed by Stone Point and the Karfunkel-Zyskind family that intends to acquire approximately 45% of the issued and outstanding shares of common stock of AmTrust Financial Services, Inc. ("AmTrust") that the Karfunkel-Zyskind Family and certain of its affiliates and related parties do not presently own or control. The transaction was approved by AmTrust’s stockholders on June 21, 2018, and is expected to close during the fourth quarter of 2018, subject to the satisfaction of customary closing conditions, including approval by regulatory authorities.
Pursuant to the Subscription Agreement, and subject to the conditions therein, we agreed to purchase equity in Evergreen in the aggregate amount of $200.0 million . The equity interest will be in the form of three separate classes of equity securities issued at the same price and in the same proportion as the equity interest to be purchased by Trident Pine. Following the closing of the transaction, Enstar is expected to own approximately 7.4% of the capital units of Evergreen. Among other conditions, the closing under the Subscription Agreement is contingent on the closing of Evergreen’s transaction with respect to AmTrust.
KaylaRe
On May 14, 2018 , the Company completed the previously announced transaction to acquire all of the outstanding shares and warrants of KaylaRe, following the receipt of all required regulatory approvals. In consideration for the acquired shares and warrants of KaylaRe, the Company issued an aggregate of 2,007,017 ordinary shares, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares to the shareholders of KaylaRe as follows: (i) 1,204,353 voting ordinary shares and 505,239 Series E Shares to a fund managed by Hillhouse Capital; (ii) 285,986 voting ordinary shares to Trident; and (iii) 11,439 voting ordinary shares to the minority shareholder . In addition, the Shareholders Agreement between Enstar and the other KaylaRe shareholders was effectively terminated. Effective May 14, 2018 we consolidated KaylaRe into our consolidated financial statements and any balances between KaylaRe and Enstar are now eliminated upon consolidation. Refer to Note 2 - "Acquisitions" for additional information.
On December 15, 2016, KaylaRe completed an initial capital raise of $620.0 million . We originally owned approximately 48.2% of KaylaRe's common shares and recorded our investment in KaylaRe using the equity method basis of accounting, pursuant to the conclusion that we were not required to consolidate following an analysis based on the guidance in ASC 810 - Consolidation. Our investment in the common shares and warrants of KaylaRe was carried at $320.1 million and $309.8 million in other assets on our consolidated balance sheet as at May 14, 2018 and December 31, 2017 , respectively.

60
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Our subsidiary, Enstar Limited, acts as insurance and reinsurance manager to KaylaRe's subsidiary, KaylaRe Ltd., for which it received fee income. Affiliates of Enstar have also entered into various reinsurance agreements with KaylaRe Ltd. We provide administrative services to KaylaRe and KaylaRe Ltd.
Through a Quota Share Agreement dated December 15, 2016 (the "KaylaRe-StarStone QS"), several of our StarStone affiliates have entered into a Quota Share Treaty with KaylaRe Ltd. pursuant to which KaylaRe Ltd. reinsures 35% of all business written by these StarStone affiliates for risks attaching from January 1, 2016, net of the StarStone affiliates’ external reinsurance programs. As of January 1, 2018, the reinsurance of StarStone's U.S. entities was non-renewed.
In addition, Fitzwilliam Insurance Limited ("Fitzwilliam"), one of our non-life run-off subsidiaries, ceded $177.2 million of loss reserves to KaylaRe Ltd. in 2016. Under the terms of this reinsurance agreement, Fitzwilliam is entitled to receive a profit commission calculated with reference to reserve savings made during the currency of this agreement. Our Non-life Run-off subsidiaries did not cede any additional business to KaylaRe Ltd. during three and nine months ended September 30, 2018 and 2017 .
Our consolidated balance sheet as at December 31, 2017 included the following balances related to transactions between us and KaylaRe and KaylaRe Ltd.:
December 31, 2017
Reinsurance balances recoverable
$
357,355

Prepaid reinsurance premiums
116,356

Funds held
174,181

Insurance and reinsurance balances payable
232,884

Ceded acquisition costs
36,070


Our consolidated statement of earnings for the nine months ended September 30, 2018 (prior to consolidation) and September 30, 2017 included the following amounts related to transactions between us and KaylaRe and KaylaRe Ltd.:
Nine Months Ended
September 30,
2018
2017
Management fee income
$
1,453

$
6,059

Transactions under KaylaRe-StarStone QS:
Ceded premium earned
(52,651
)
(170,552
)
Net incurred losses
31,654

127,578

Acquisition costs
18,774

67,375

Transactions under Fitzwilliam reinsurance agreement:
Profit Commission
—

11,525

Net incurred losses
—

(12,791
)
Net income statement gain (loss) amounts
$
(770
)
$
29,194


21. COMMITMENTS AND CONTINGENCIES
Concentrations of Credit Risk

61
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




We believe that there are no significant concentrations of credit risk associated with our cash and cash equivalents, fixed maturity investments, or other investments. Cash, cash equivalents and fixed maturity investments are managed pursuant to guidelines that follow prudent standards of diversification and limit the allowable holdings of a single issue and issuers. Other investments are managed pursuant to guidelines that emphasize diversification and liquidity. Pursuant to these guidelines, we manage and monitor risk across a variety of investment funds and vehicles, markets and counterparties. We are also subject to custodial credit risk on our investments, which we manage by diversifying our holdings amongst large financial institutions that are highly regulated.
We have exposure to credit risk on certain of our assets pledged to ceding companies under insurance contracts. In addition, we are potentially exposed should any insurance intermediaries be unable to fulfill their contractual obligations with respect to payments of balances owed to and by us.
Credit risk exists in relation to reinsurance balances recoverable. We remain liable to the extent that retrocessionaires do not meet their contractual obligations and, therefore, we evaluate and monitor concentration of credit risk among our reinsurers. These amounts are discussed in Note 9 - "Reinsurance Balances Recoverable" .
We are also subject to credit risk in relation to funds held by reinsured companies. Under funds held arrangements, the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable are deducted. We are subject to credit risk if the reinsured company is unable to honor the value of the funds held balances, such as in the event of insolvency. However, we generally have the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by us to the reinsured for losses payable and other amounts contractually due. We routinely monitor the creditworthiness of reinsured companies with whom we have funds held arrangements. We have a significant concentration of $1,037.6 million to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's.
We limit the amount of credit exposure to any one counterparty, and none of our counterparty credit exposures, excluding U.S. government instruments and the funds held counterparty noted above, exceeded 10% of shareholders’ equity as at September 30, 2018 . Our credit exposure to the U.S. government was $787.9 million as at September 30, 2018 .

Legal Proceedings
We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation and arbitration regarding claims. Estimated losses relating to claims arising in the ordinary course of business, including the anticipated outcome of any pending arbitration or litigation, are included in the liability for losses and LAE in our consolidated balance sheets. In addition to claims litigation, we may be subject to other lawsuits and regulatory actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or omissions, employment claims or regulatory activity. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on our business, results of operations or financial condition. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental and other claims.
Unfunded Investment Commitments
As at September 30, 2018 , we had total unfunded investment commitments to private equity funds of $200.0 million and commitments of $200.0 million related to our investment in AmTrust as discussed in Note 20 - "Related Party Transactions" .
Guarantees
As at September 30, 2018 and December 31, 2017 , parental guarantees and capital instruments supporting subsidiaries' policyholder obligations were $620.0 million and $630.7 million , respectively.
On February 8, 2018, we amended and restated the FAL Facility to issue up to $325.0 million of letters of credit, with a provision to increase the facility up to $400.0 million . The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and expires in 2022. As at September 30, 2018 , there were $295.0 million in letters of credit issued under this facility which have a parental guarantee.

62
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Asbestos Personal Injury Liabilities
We acquired Dana Companies, LLC ("Dana") on December 30, 2016, as described in Note 3 - "Acquisitions" of our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 . Dana continues to process asbestos personal injury claims in the normal course of business and is separately managed.
Other liabilities included $187.9 million and $205.7 million for indemnity and defense costs for pending and future claims at September 30, 2018 and December 31, 2017 , respectively, determined using standard actuarial techniques for asbestos-related exposures. Other liabilities also included $2.1 million and $2.2 million for environmental liabilities associated with Dana properties at September 30, 2018 and December 31, 2017 , respectively.

Other assets included $114.8 million and $122.3 million at September 30, 2018 and December 31, 2017 , respectively, for estimated insurance recoveries relating to these liabilities. The recorded asset represents our assessment of the capacity of the insurance agreements to provide for the payment of anticipated defense and indemnity costs for pending claims and projected future demands. The recognition of these recoveries is based on an assessment of the right to recover under the respective contracts and on the financial strength of the insurers. The recorded asset does not represent the limits of our insurance coverage, but rather the amount we would expect to recover if the accrued indemnity and defense costs were paid in full.

Redeemable Noncontrolling Interest

We have the right to purchase the RNCI interests from the RNCI holders at certain times in the future (each such right, a "call right"), and the RNCI holders have the right to sell their RNCI interests to us at certain times in the future (each such right, a "put right"). The RNCI rights held by Trident are described in Note 20 - "Related Party Transactions" . Dowling has a right to participate if Trident exercises its put right.

22. SEGMENT INFORMATION
In the second half of 2017, following the completion of the sale of our Laguna and Pavonia businesses, which significantly reduced the size of our life and annuities business, we undertook a review of our reportable segments. Following this review we determined that we have three reportable segments of business that are each managed, operated and reported on separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. Our other activities, which do not qualify as a reportable segment, include our corporate expenses, debt servicing costs, holding company income and expenses, foreign exchange, our remaining life business and other miscellaneous items. The change in reportable segments had no impact on our previously reported historical consolidated financial positions, results of operations or cash flows. These segments are described in Note 1 - "Description of Business" and Note 24 - "Segment Information" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 .

63
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




The following tables set forth selected and unaudited condensed consolidated statement of earnings results by segment for the three and nine months ended September 30, 2018 and 2017 :

Three Months Ended September 30, 2018
Non-Life
Run-Off
Atrium
StarStone
Other
Total
Gross premiums written
$
9,912

$
39,995

$
282,525

$
846

$
333,278

Net premiums written
$
4,778

$
37,141

$
219,726

$
822

$
262,467

Net premiums earned
$
10,442

$
36,977

$
216,355

$
823

$
264,597

Net incurred losses and LAE
62,778

(17,853
)
(198,899
)
—

(153,974
)
Life and Annuity Policy Benefits
—

—

—

(423
)
(423
)
Acquisition costs
160

(13,215
)
(41,079
)
(108
)
(54,242
)
Operating expenses
(37,473
)
(3,952
)
(38,000
)
—

(79,425
)
Underwriting income (loss)
35,907

1,957

(61,623
)
292

(23,467
)
Net investment income
59,247

1,597

9,504

(918
)
69,430

Net realized and unrealized gains (losses)
(58,506
)
194

989

100

(57,223
)
Fees and commission income
3,708

3,242

—

—

6,950

Other income (expense)
11,423

7

117

(4
)
11,543

Corporate expenses
(11,433
)
(2,770
)
—

(8,925
)
(23,128
)
Interest income (expense)
(5,951
)
—

—

1,311

(4,640
)
Net foreign exchange gains (losses)
17

(262
)
(585
)
(210
)
(1,040
)
EARNINGS (LOSS) BEFORE INCOME TAXES
34,412

3,965

(51,598
)
(8,354
)
(21,575
)
INCOME (TAXES) BENEFIT
(125
)
(737
)
118

(2
)
(746
)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
34,287

3,228

(51,480
)
(8,356
)
(22,321
)
Net loss (earnings) attributable to noncontrolling interest
(1,659
)
(1,266
)
14,414

—

11,489

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
32,628

1,962

(37,066
)
(8,356
)
(10,832
)
Dividends on preferred shares
—

—

—

(5,133
)
(5,133
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
32,628

$
1,962

$
(37,066
)
$
(13,489
)
$
(15,965
)
Underwriting ratios (1) :
Loss ratio
48.3
%
91.9
%
Acquisition expense ratio
35.7
%
19.0
%
Operating expense ratio
10.7
%
17.6
%
Combined ratio
94.7
%
128.5
%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.

64
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Nine Months Ended September 30, 2018
Non-Life
Run-Off
Atrium
StarStone
Other
Total
Gross premiums written
$
16,354

$
130,997

$
888,867

$
2,858

$
1,039,076

Net premiums written
$
3,217

$
113,218

$
619,528

$
2,871

$
738,834

Net premiums earned
$
27,229

$
106,722

$
526,802

$
2,875

$
663,628

Net incurred losses and LAE
205,890

(51,951
)
(420,266
)
—

(266,327
)
Life and Annuity Policy Benefits
—

—

—

(217
)
(217
)
Acquisition costs
(4,524
)
(37,996
)
(94,775
)
(389
)
(137,684
)
Operating expenses
(114,254
)
(12,259
)
(106,699
)
—

(233,212
)
Underwriting income (loss)
114,341

4,516

(94,938
)
2,269

26,188

Net investment income
168,189

4,067

25,950

4,012

202,218

Net realized and unrealized losses
(230,829
)
(1,889
)
(15,150
)
(6,803
)
(254,671
)
Fees and commission income
13,093

10,540

—

—

23,633

Other income (expense)
34,989

127

(432
)
(207
)
34,477

Corporate expenses
(33,453
)
(5,083
)
—

(28,677
)
(67,213
)
Interest income (expense)
(24,562
)
—

(547
)
3,536

(21,573
)
Net foreign exchange gains (losses)
(202
)
(1,262
)
(1,063
)
1,138

(1,389
)
EARNINGS (LOSS) BEFORE INCOME TAXES
41,566

11,016

(86,180
)
(24,732
)
(58,330
)
INCOME TAXES
(227
)
(1,756
)
(2,568
)
(13
)
(4,564
)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
41,339

9,260

(88,748
)
(24,745
)
(62,894
)
Net loss (earnings) attributable to noncontrolling interest
(4,182
)
(3,798
)
27,076

—

19,096

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
37,157

5,462

(61,672
)
(24,745
)
(43,798
)
Dividends on preferred shares
—

—

—

(5,133
)
(5,133
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
37,157

$
5,462

$
(61,672
)
$
(29,878
)
$
(48,931
)
Underwriting ratios (1) :
Loss ratio
48.7
%
79.8
%
Acquisition expense ratio
35.6
%
18.0
%
Operating expense ratio
11.5
%
20.2
%
Combined ratio
95.8
%
118.0
%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.

65
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Three Months Ended September 30, 2017
Non-Life
Run-Off
Atrium
StarStone
Other
Total
Gross premiums written
$
11,751

$
36,377

$
200,007

$
2,424

$
250,559

Net premiums written
$
11,467

$
25,989

$
97,049

$
1,671

$
136,176

Net premiums earned
$
6,415

$
32,773

$
107,650

$
1,187

$
148,025

Net incurred losses and LAE
70,882

(35,273
)
(111,321
)
—

(75,712
)
Life and Annuity Policy Benefits
—

—

—

(1,060
)
(1,060
)
Acquisition costs
(1,001
)
(11,818
)
(11,313
)
(149
)
(24,281
)
Operating expenses
(35,657
)
(2,507
)
(32,605
)
—

(70,769
)
Underwriting income (loss)
40,639

(16,825
)
(47,589
)
(22
)
(23,797
)
Net investment income
42,829

847

7,592

760

52,028

Net realized and unrealized gains (losses)
25,016

285

5,045

(1,045
)
29,301

Fees and commission income (expense)
10,762

5,911

—

(778
)
15,895

Other income (expense)
(4,018
)
69

91

10

(3,848
)
Corporate expenses
(20,326
)
37

—

(9,267
)
(29,556
)
Interest income (expense)
(6,664
)
(23
)
(382
)
659

(6,410
)
Net foreign exchange gains (losses)
(3,772
)
(43
)
1,145

(2,105
)
(4,775
)
Loss on sale of subsidiary
—

—

—

(6,740
)
(6,740
)
EARNINGS (LOSS) BEFORE INCOME TAXES
84,466

(9,742
)
(34,098
)
(18,528
)
22,098

INCOME (TAXES) BENEFIT
(970
)
(554
)
78

14

(1,432
)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
83,496

(10,296
)
(34,020
)
(18,514
)
20,666

NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE
—

—

—

3,495

3,495

NET EARNINGS (LOSS)
83,496

(10,296
)
(34,020
)
(15,019
)
24,161

Net loss (earnings) attributable to noncontrolling interest
(3,314
)
4,223

13,923

—

14,832

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
80,182

$
(6,073
)
$
(20,097
)
$
(15,019
)
$
38,993

Underwriting ratios (1) :
Loss ratio
107.6
%
103.4
%
Acquisition expense ratio
36.1
%
10.5
%
Operating expense ratio
7.6
%
30.3
%
Combined ratio
151.3
%
144.2
%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.

66
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Nine Months Ended September 30, 2017
Non-Life
Run-Off
Atrium
StarStone
Other
Total
Gross premiums written
$
13,956

$
117,355

$
651,107

$
4,506

$
786,924

Net premiums written
$
13,453

$
99,235

$
331,449

$
3,646

$
447,783

Net premiums earned
$
9,856

$
97,373

$
341,609

$
3,656

$
452,494

Net incurred losses and LAE
138,041

(55,950
)
(245,315
)
—

(163,224
)
Life and Annuity Policy Benefits
—

—

—

(5,048
)
(5,048
)
Acquisition costs
(455
)
(34,647
)
(39,625
)
(730
)
(75,457
)
Operating expenses
(96,767
)
(12,227
)
(99,576
)
—

(208,570
)
Underwriting income (loss)
50,675

(5,451
)
(42,907
)
(2,122
)
195

Net investment income
118,130

2,832

20,230

8,992

150,184

Net realized and unrealized gains (losses)
127,130

1,177

18,953

(7,563
)
139,697

Fees and commission income (expense)
30,302

17,353

1,166

(2,345
)
46,476

Other income
18,679

188

170

169

19,206

Corporate expenses
(66,468
)
(7,404
)
—

(26,841
)
(100,713
)
Interest income (expense)
(20,991
)
(559
)
(1,648
)
2,347

(20,851
)
Net foreign exchange losses
(6,709
)
(4,355
)
(1,563
)
(2,985
)
(15,612
)
Loss on sale of subsidiary
—

—

—

(16,349
)
(16,349
)
EARNINGS (LOSS) BEFORE INCOME TAXES
250,748

3,781

(5,599
)
(46,697
)
202,233

INCOME (TAXES) BENEFIT
(5,609
)
(1,278
)
3,648

5

(3,234
)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
245,139

2,503

(1,951
)
(46,692
)
198,999

NET LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE
—

—

—

(1,005
)
(1,005
)
NET EARNINGS (LOSS)
245,139

2,503

(1,951
)
(47,697
)
197,994

Net loss (earnings) attributable to noncontrolling interest
(13,944
)
(1,027
)
836

—

(14,135
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
231,195

$
1,476

$
(1,115
)
$
(47,697
)
$
183,859

Underwriting ratios (1) :
Loss ratio
57.5
%
71.8
%
Acquisition expense ratio
35.6
%
11.6
%
Operating expense ratio
12.5
%
29.2
%
Combined ratio
105.6
%
112.6
%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.

67
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)




Assets by Segment
Invested assets are managed on a subsidiary-by-subsidiary basis, and investment income and realized and unrealized gains (losses) on investments are recognized in each segment as earned. Our total assets as at September 30, 2018 and December 31, 2017 by segment were as follows:
September 30,
December 31,
2018
2017
Assets by Segment:
Non-life Run-off
$
11,907,196

$
10,368,105

Atrium
598,072

556,637

StarStone
3,199,238

3,128,725

Other
(583,278
)
(447,045
)
Total assets
$
15,121,228

$
13,606,422


68

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition as at September 30, 2018 and our results of operations for the three and nine months ended September 30, 2018 and 2017 should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2017 . Some of the information contained in this discussion and analysis or included elsewhere in this quarterly report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 .
Table of Contents
Section
Page

69

Business Overview
We are a multi-faceted insurance group that offers innovative capital release solutions and specialty underwriting capabilities through our network of group companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations.
Our core focus is acquiring and managing insurance and reinsurance business in run-off. Since formation, we have completed the acquisition of over 85 insurance and reinsurance companies and portfolios of business .
We also manage specialty active underwriting businesses:
•
Atrium Underwriting Group Limited and its subsidiaries ("Atrium"), which manage and underwrite specialist insurance and reinsurance business for Lloyd’s Syndicate 609; and
•
StarStone Insurance Bermuda Limited and its subsidiaries ("StarStone"), which is an A.M. Best A- rated global specialty insurance group with multiple underwriting platforms.
We partnered with the Trident V funds ("Trident") (managed by Stone Point Capital LLC) in the acquisitions of the active underwriting businesses. Stone Point Capital is a financial services-focused private equity firm that has significant experience investing in insurance and reinsurance companies and other insurance-related businesses, which we believe is valuable in our active underwriting joint ventures. In each of the Atrium and StarStone transactions, Enstar has a 59.0% interest, Trident has a 39.3% interest, and Dowling Capital Partners, L.P. ("Dowling") has a 1.7% interest.
We have three reportable segments of business that are each managed, operated and reported upon separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. For additional information relating to our segments, see "Item 1. Business - Operating Segments" in our Annual Report on Form 10-K for the year ended December 31, 2017 .

Our business strategies are discussed in "Item 1. Business - Company Overview", "- Business Strategy", and "- Recent Acquisitions and Significant New Business" in our Annual Report on Form 10-K for the year ended December 31, 2017 .
Key Pe rformance Indicator
Our primary corporate objective is to grow our fully diluted book value per ordinary share. This is driven primarily by growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions, effectively managing companies and portfolios of business that we have acquired, and executing our active underwriting strategies. The drivers of our book value growth are discussed in "Item 1. Business - Business Strategy" in our Annual Report on Form 10-K for the year ended December 31, 2017 .
During the nine months ended September 30, 2018 , our book value per ordinary share on a fully diluted basis increase d by 1.2% to $161.10 per ordinary share. The increase was primarily due to the issuance of equity related to the acquisition of the portion of KaylaRe that we did not already own, partially offset by the net losses for the nine months ended September 30, 2018 .

70

The table below summarizes the calculation of our fully diluted book value per ordinary share:
September 30,
2018
December 31,
2017
Change
Numerator:
Total Enstar Group Limited Shareholder's Equity
$
3,905,364

$
3,136,684

$
768,680

Less: Series D Preferred Shares
400,000

—

400,000

Total Enstar Group Limited Ordinary Shareholders' Equity (A)
3,505,364

3,136,684

368,680

Proceeds from assumed conversion of warrants 1
20,229

20,229

—

Numerator for fully diluted book value per ordinary share calculations (B)
$
3,525,593

$
3,156,913

$
368,680

Denominator:
Ordinary shares outstanding (C)
21,443,789

19,406,722

2,037,067

Effect of dilutive securities:
Share-based compensation plans
265,269

248,144

17,125

Warrants (1)
175,901

175,901

—

Fully diluted ordinary shares outstanding (D)
21,884,959

19,830,767

2,054,192

Book value per ordinary share
Basic book value per ordinary share = (A) / (C)
$
163.47

$
161.63

$
1.84

Fully diluted book value per ordinary share = (B) / (D)
$
161.10

$
159.19

$
1.91

(1)
There are warrants outstanding to acquire 175,901 Series C Non-Voting Ordinary Shares for an exercise price of $115.00 per share, subject to certain adjustments (the "Warrants"). The Warrants were issued in April 2011 and expire in April 2021. The Warrant holder may, at its election, satisfy the exercise price of the Warrants on a cashless basis by surrender of shares otherwise issuable upon exercise of the Warrants in accordance with a formula set forth in the Warrants.
Current Outlook
Run-off
Our business strategy includes generating growth through acquisitions and reinsurance transactions, particularly in our Non-life Run-off segment, and during the first nine months of 2018 we have completed four significant reinsurance transactions with Zurich Insurance Group ("Zurich"), Neon Underwriting Limited ("Neon"), Novae Syndicate 2007 ("Novae") and The Coca-Cola Company ("Coca-Cola"), in which we assumed aggregate gross and net reserves, including fair value adjustments, of $2,010.9 million and $1,638.1 million , respectively. As at September 30, 2018 , our non-life run-off gross and net reserves were $6.8 billion and $5.3 billion , respectively, and we continue to evaluate opportunities for future growth.
In the third quarter of 2018, we also announced the purchase of Maiden Reinsurance North America, Inc. (“Maiden Re North America”), which we expect to close in the fourth quarter of 2018. As part of the Maiden transaction we expect to pay $307.5 million , subject to certain closing adjustments, as the purchase price and a ssume approximately $1.3 billion of net loss and loss adjustment expense reserves and unearned premium reserves.
On September 30, 2018, we completed the acquisition of Yosemite Insurance Company, which is now domiciled in Oklahoma. Although the acquired balances were not material, the transaction is notable for its strategic value. The State of Oklahoma has enacted Insurance Business Transfer legislation, which became effective November 1, 2018. The legislation will allow us to acquire U.S. loss reserves from insurers and reinsurers domiciled in any U.S. state via a court-approved statutory novation process.
We manage claims in a professional and disciplined manner, drawing on our global team of in-house claims management experts as we aim to proactively manage risks and claims efficiently. We employ an opportunistic commutation strategy in which we negotiate with policyholders and claimants with a goal of commuting or settling existing insurance and reinsurance liabilities at a discount to the ultimate liability and also to avoid unnecessary legal and other associated run-off fees and expense.

71

As a result of the number of transactions we have completed over the years, our organizational structure consists of licensed entities across many jurisdictions. In managing our group, we continue to look for opportunities to simplify our legal structure by way of company amalgamations and mergers, reinsurance, or other transactions to improve capital efficiency and decrease ongoing compliance and operational costs over time. In addition, we seek to pool risk in areas where we maintain the expertise to manage such risk to achieve operational efficiencies, which allows us to most efficiently manage our assets to achieve capital diversification benefits.
Underwriting
Our underwriting results can be affected by changes in premium rates, significant losses, development of prior year loss reserves and current year underwriting margins. Underwriting margins, premium rates, and terms of conditions continue to be under pressure in certain business lines. We continue to see overcapacity in many markets, which can impact premium rates and/or terms and conditions. If general economic conditions worsen, a decrease in the level of economic activity may impact insurable risks and our ability to write premium that is acceptable to us. We may adjust our level of reinsurance to maintain an amount of net exposure that is aligned with our risk tolerance.
Our industry continues to experience challenging underwriting market conditions, and o ur strategy is to continue to focus on a disciplined underwriting approach and strong risk management practices. As previously disclosed, we have affirmed our continued ownership of our active underwriting businesses, Atrium and StarStone.
At StarStone, we recently appointed new Executive leadership. We expect to position the underwriting portfolio in 2019 to reflect market opportunities and achieve a mix of business for improved underwriting profitability. We partnered with the Trident V funds (managed by Stone Point) in the initial acquisition of StarStone, and together we plan to contribute $100.0 million of additional capital to StarStone during the fourth quarter of 2018.
Investments
Markets are inherently uncertain and investment performance may be impacted by changes in market volatility. We expect to maintain our investment strategy, which is to seek superior risk adjusted returns while preserving liquidity and capital and maintaining a prudent diversification of assets. We will continue allocating a portion of our portfolio to non-investment grade securities or alternative investments, in accordance with our investment guidelines, which provide diversification against our fixed income investments and an opportunity for improved risk-adjusted returns.
Our total investment results are a significant component of earnings and are comprised of:
•
Net investment income . In a rising interest rate environment, our net investment income would improve as maturities are reinvested at higher rates. Conversely, in a declining interest rate environment, our net investment income would decline as maturities are reinvested at lower rates. All else being equal, we would also expect our net investment income to grow as total investable assets increases as we acquire more business, partially offset by reductions in the investment portfolio for paid claims.
•
Net realized and unrealized gains or losses. These arise from investments in fixed maturities, funds held, equity securities and other investments. Given the nature of our investments in fixed maturities and the average duration of our fixed maturity securities, the return of our fixed maturities investments will be impacted by changes in interest rates. In a rising rate environment, securities may experience unrealized losses prior to maturity. During the first nine months of 2018, we recognized net unrealized losses on our investments of $236.0 million , of which $159.7 million and $45.4 million related to our investments in fixed maturities, trading and funds withheld - directly managed, respectively, primarily due to rising sovereign yields and widening credit spreads. We generally account for our fixed maturity securities as "trading", whereas other companies in our industry may utilize "available-for-sale" accounting. The difference is that unrealized changes on investments classified as trading are recorded through earnings, whereas unrealized changes on investments classified as available-for-sale are recorded directly to shareholders' equity. We may experience further unrealized losses on our fixed maturity investments, depending on investment conditions and general economic conditions. Unrealized amounts would only become realized in the event of a sale of the specific securities prior to maturity or a credit default. For further information on the sensitivity of our portfolio to changes in interest rates, refer to the Interest Rate Risk section within Item 3. "Quantitative and Qualitative Disclosures About Market Risk", included within this Quarterly Report on Form 10-Q. For further discussion of our investments, see "Investable Assets" below.

72

U.S. Taxation Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), as described in "Item 1A. Risk Factors - Risk Relating to Taxation" in our Annual Report on Form 10-K for the year ended December 31, 2017. The Tax Act makes broad changes to the U.S. tax code, some of which were applicable in 2017, while others are effective for tax years ending after December 31, 2017. The impact of the Tax Act to Enstar in 2017 was described in "Consolidated Results of Operations - Consolidated Overview" in our Annual Report on Form 10-K for the year ended December 31, 2017.
In response to the introduction of the Tax Act, as of January 1, 2018 we non-renewed certain of our active underwriting affiliate reinsurance transactions ceded from our U.S. operating entities to our non-U.S. affiliates. We will continue to assess the impact of the Tax Act on our business as the regulations develop. Our subsidiaries' reinsurance strategies may be different than in the past, which may result in more risk being retained in our U.S. insurance companies, which would have the effect of requiring more capital in those companies and potentially increase our overall group effective tax rate over time.
Brexit
There has been volatility in the financial and foreign exchange markets following the Brexit referendum on June 23, 2016, and this is expected to continue. On March 29, 2017, Article 50 of the Lisbon Treaty was triggered, which allows two years for the United Kingdom and the 27 remaining European Union members to reach an agreement with regard to the terms on which the United Kingdom will leave the European Union, subject to an extension of the two year deadline beyond March 29, 2019 being agreed between the United Kingdom and the remaining European Union members. For companies based in the United Kingdom, including certain of our active underwriting and run-off companies, there continues to be heightened uncertainty regarding trading relationships with countries in the European Union after Brexit, pending the conclusion of the Brexit negotiations between the United Kingdom and the European Union. Both our StarStone and Atrium operations have well-diversified sources of premium, which may mitigate the potential impact of Brexit. The majority of business written in StarStone and Atrium is in U.S. dollars, so the impact of currency volatility on those segments has not been significant. In addition, StarStone already has established operations within the European Economic Area. On May 23, 2018, Lloyd's announced that it had received license approval from the Belgian insurance regulator for Lloyd's Insurance Company SA, which will be able to write non-life risks from the European Economic Area. In the near-term, access to markets is unaffected, and all contracts entered into up until Brexit are expected to remain valid into the post-Brexit period. With specific reference to our run-off business, we are expanding upon our existing run-off capabilities within the European Union for the purpose of receiving transfers of new run-off business. We have also investigated the post-Brexit additional requirements in each applicable state for the continued payment of policyholders’ claims in respect of the existing run-off business of our United Kingdom Non-life Run-off companies.
Recent Developments
Our transactions take the form of either acquisitions of companies or loss portfolio transfers, where a reinsurance contract transfers a portfolio of loss and loss adjustment expenses ("LAE") liabilities from a (re)insurance counterparty to an Enstar-owned reinsurer.
Acquisitions and Significant New Business
Maiden Re North America
On August 31, 2018 , we entered into a definitive agreement to acquire Maiden Reinsurance North America, Inc. (“Maiden Re North America”) from a subsidiary of Maiden Holdings, Ltd.  Maiden Re North America is a diversified insurance company domiciled in Missouri that provides property and casualty treaty reinsurance, casualty facultative reinsurance and accident and health treaty reinsurance.  As part of the transaction, an Enstar subsidiary will novate and assume certain reinsurance agreements from Maiden Re North America’s Bermuda reinsurer, including certain reinsurance agreements with Maiden Re North America.
The net consideration payable in the transactions is $307.5 million , subject to certain closing adjustments. We will assume approximately $1.3 billion of net loss and loss adjustment expense reserves and unearned premium reserves upon closing.
We will operate the business in run-off, and we expect to finance the purchase price through a combination of cash on hand and borrowings under our revolving credit facility. Completion of the transaction is conditioned on, among

73

other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close in the fourth quarter of 2018.
Coca-Cola
On August 1, 2018 , we entered into a reinsurance transaction with The Coca-Cola Company and its subsidiaries ("Coca-Cola"), pursuant to which we reinsured certain of Coca-Cola's retention and deductible risks under its subsidiaries' U.S. workers' compensation, auto liability, general liability and product liability insurance coverage. We assumed total gross reserves of $120.8 million for cash consideration of $103.6 million and recorded a deferred charge of $17.2 million , included in other assets. We transferred the cash consideration of $103.6 million into a trust to support our obligations under the reinsurance agreement.
KaylaRe
On May 14, 2018 , we acquired all of the outstanding shares and warrants of KaylaRe, following the receipt of all required regulatory approvals. In consideration for the acquired shares and warrants of KaylaRe, we issued an aggregate of 2,007,017 of our ordinary shares to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares. As a result of this transaction, we recognized goodwill of $41.7 million and net income of $0.4 million due to the remeasurement of the previously held equity method investment to its fair value, partially offset by the settlement of preexisting relationships. For a detailed discussion of various transactions related to KaylaRe and its other shareholders, refer to Note 2 - "Acquisitions" and Note 20 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Zurich Australia
On February 23, 2018 , we entered into a reinsurance agreement with Zurich Australian Insurance Limited, a subsidiary of Zurich to reinsure its New South Wales Vehicle Compulsory Third Party ("CTP") insurance business. Under the agreement, which was effective as of January 1, 2018 , we assumed gross loss reserves of AUD$359.4 million ( $280.8 million ) in exchange for a reinsurance premium consideration of AUD$343.9 million ( $268.7 million ). We elected the fair value option for this reinsurance contract and recorded an initial fair value adjustment of AUD$15.5 million ( $12.1 million ) on the assumed gross loss reserves.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business, we and Zurich are pursuing a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's Insurance Act 1973 (Cth), which will provide legal finality for Zurich's obligations. The transfer is subject to court, regulatory and other approvals.
Neon RITC Transaction
On February 16, 2018 , we closed the reinsurance-to-close ("RITC") transaction with Neon, under which we reinsured to close the 2015 and prior underwriting years of account (comprising underwriting years 2008 to 2015) of Neon's Syndicate 2468 with effect from January 1, 2018. We assumed gross loss reserves of £403.9 million ( $546.3 million ) and net loss reserves of £342.1 million ( $462.6 million ) relating to the portfolio in exchange for a reinsurance premium consideration £329.1 million ( $445.1 million ). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $20.6 million and $17.5 million on the gross and net loss reserves assumed, respectively.
Following the closing of the transaction, we have taken responsibility for claims handling and provided complete finality to Neon's obligations.
Novae RITC Transaction
On January 29, 2018 , we entered into an RITC transaction with AXIS Managing Agency Limited, under which we reinsured to close the 2015 and prior underwriting years of account of Novae with effect from January 1, 2018. We assumed gross loss reserves of £860.1 million ( $1,163.2 million ) and net loss reserves of £630.7 million ( $853.0 million ) relating to the portfolio for a reinsurance premium consideration of £594.1 million ( $803.5 million ). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $67.5 million and $49.5 million on the gross and net loss reserves assumed, respectively.
Following the closing of the transaction, we have taken responsibility for claims handling and have provided complete finality to Novae's obligations.

74

Businesses Sold, Held for Sale and Assets Sold
Alpha
On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary Alpha Insurance SA and a subsidiary of Monument Insurance Group Limited ("Monument"). This agreement will transfer our remaining life assurance policies to Monument, via a Portfolio Transfer, subject to regulatory approval. The transaction is expected to close in the first half of 2019. We have an investment in Monument, as described further in Note 20 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. Our policy benefits operations do not qualify for inclusion in our reportable segments and are therefore included within other activities. The related assets, as well as the results from these operations, were not significant to our consolidated operations and therefore they have not been classified as a discontinued operation. In addition, our proposed transfer of these life assurance polices to Monument was not classified as a held-for-sale business transaction since the underlying contracts do not meet the definition of a business.
Life Settlements
During the three months ended June 30, 2018, we sold our investments in life settlement contracts, which were carried at cost. Our life settlement investments do not qualify for inclusion in our reportable segments and therefore were included within other activities. The related assets, as well as the results from these operations, were not significant to our consolidated operations and therefore they have not been classified as a discontinued operation. In addition, our sale of these investments was not classified as a held-for-sale business transaction since the underlying contracts do not meet the definition of a business.
Pavonia
On December 29, 2017, we completed the previously announced sale of Pavonia Holdings (US), Inc. (“Pavonia”) to Southland National Holdings, Inc. (“Southland”), a Delaware corporation and a subsidiary of Global Bankers Insurance Group, LLC. The aggregate purchase price was $120.0 million. The proceeds were used to make repayments under our revolving credit facility.
Pavonia owns Pavonia Life Insurance Company of Michigan (“PLIC MI”) and Enstar Life (US), Inc. Southland has agreed to acquire Pavonia Life Insurance Company of New York ("PLIC NY") for $13.1 million in a second closing that is subject to regulatory approval. In the event that the second closing has not occurred by December 29, 2018 (unless further extended by the parties), we will evaluate strategic alternatives for PLIC NY, which may include the pursuit of an alternative sale transaction or a plan to retain the business. The additional purchase price represents the cash consideration paid to PLIC MI when we acquired PLIC NY from PLIC MI as a result of the restructuring of the first closing of the transaction.
Laguna
On August 29, 2017, we completed a transaction to sell Laguna Life DAC (“Laguna”) for total consideration of €25.6 million (approximately $30.8 million ) to a subsidiary of Monument. We have an investment in Monument, as described further in Note 20 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. Laguna was classified as held-for-sale during 2017 prior to its sale.
Issuance of Series D Preferred Shares
On June 27, 2018, we effected a public offering of $400.0 million of our 7.00% fixed-to-floating rate non-cumulative Series D perpetual preferred shares ("Series D Preferred Shares") (16,000 shares, represented by 16,000,000 depositary shares, each of which represents a 1/1,000th interest in a Series D Preferred Share), $1.00 par value and $25,000 liquidation preference per share (equivalent to $25 per depositary share). For a detailed discussion of the Series D Preferred Shares issuance, refer to Note 16 - "Share Capital" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
The net proceeds of $389.2 million from this offering were used to repay a portion of amounts outstanding under our revolving credit facility and to fully repay our term loan facility.

75

Non-GAAP Financial Measures
In addition to presenting net earnings (losses) attributable to Enstar Group Limited ordinary shareholders and diluted earnings (losses) per ordinary share determined in accordance with U.S. GAAP, we believe that presenting non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders and fully diluted non-GAAP operating income (loss) per ordinary share, non-GAAP financial measures as defined in Item 10(e) of Regulation S-K, provides investors with valuable measures of our performance.
Non-GAAP operating income (loss) excludes: (i) net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed, (ii) change in fair value of insurance contracts for which we have elected the fair value option, (iii) gain (loss) on sale of subsidiaries, (iv) net earnings (loss) from discontinued operations, (v) tax effect of these adjustments where applicable, and (vi) attribution of share of adjustments to noncontrolling interest where applicable. We eliminate the impact of net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed and change in fair value of insurance contracts for which we have elected the fair value option because these items are subject to significant fluctuations in fair value from period to period, driven primarily by market conditions and general economic conditions, and therefore their impact on our earnings is not reflective of the performance of our core operations.  We eliminate the impact of gain (loss) on sale of subsidiaries and net earnings (loss) from discontinued operations as these are non-recurring rather than being reflective of the performance of our core operations.
Further, these non-GAAP measures enable readers of the consolidated financial statements to more easily analyze our results in a manner more aligned with the manner in which management analyzes our underlying performance. We believe that presenting these non-GAAP financial measures, which may be defined and calculated differently by other companies, improves the understanding of our consolidated results of operations. These measures should not be viewed as a substitute for those calculated in accordance with U.S. GAAP.

76

Non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders is calculated by the addition or subtraction of certain items from within our consolidated statements of earnings to or from net earnings (loss) attributable to Enstar Group Limited ordinary shareholders, the most directly comparable GAAP financial measure, as illustrated in the table below:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
2018
2017
(expressed in thousands of U.S. dollars, except share and per share data)
Net earnings (loss) attributable to Enstar Group Limited ordinary shareholders
$
(15,965
)
$
38,993

$
(48,931
)
$
183,859

Adjustments:
Net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed (1)
24,531

1,493

227,333

(54,331
)
Change in fair value of insurance contracts for which we have elected the fair value option
(9,107
)
(10,504
)
(32,115
)
(9,254
)
Loss on sale of subsidiary
—

6,740

—

16,349

Net (earnings) loss from discontinued operations
—

(3,765
)
—

325

Tax effects of adjustments (2)
(1,207
)
752

(17,167
)
4,170

Adjustments attributable to noncontrolling interest (3)
(799
)
1,083

(9,089
)
6,056

Non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders (4)
$
(2,547
)
$
34,792

$
120,031

$
147,174

Diluted net earnings (loss) per ordinary share
$
(0.74
)
$
1.99

$
(2.39
)
$
9.42

Adjustments:
Net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed (1)
1.14

0.08

11.02

(2.79
)
Change in fair value of insurance contracts, net
(0.42
)
(0.54
)
(1.55
)
(0.47
)
Loss on sale of subsidiary
—

0.34

—

0.84

Net (earnings) loss from discontinued operations
—

(0.19
)
—

0.02

Tax effects of adjustments (2)
(0.06
)
0.04

(0.83
)
0.21

Adjustments attributable to noncontrolling interest (3)
(0.04
)
0.06

(0.44
)
0.31

Diluted non-GAAP operating income (loss) per ordinary share (4)
$
(0.12
)
$
1.78

$
5.81

$
7.54

Weighted average ordinary shares outstanding - diluted
21,665,356

19,559,168

20,653,544

19,515,987

(1) Represents the net realized and unrealized gains and losses related to fixed maturity securities. Our fixed maturity securities are held directly on our balance sheet and also within the "Funds held - directly managed" balance. The changes in the value of these managed funds held balances are described in our financial statement notes as: (i) funds held - directly managed, (ii) embedded derivative on funds held - directly managed, and (iii) the fair value option on funds held - directly managed. Refer to Note 5 - "Investments" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q for further details on our net realized and unrealized gains and losses.
(2) Represents an aggregation of the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates, calculated at the applicable jurisdictional tax rate.
(3) Represents the impact of the adjustments on the net earnings (loss) attributable to noncontrolling interest associated with the specific subsidiaries to which the adjustments relate.
(4) Non-GAAP financial measure.

77

Underwriting Ratios
In presenting our results for the Atrium and StarStone segments, we discuss the loss ratio, acquisition cost ratio, operating expense ratio, and the combined ratio of our active underwriting operations within these segments. Management believes that these ratios provide the most meaningful measure for understanding our underwriting profitability. These measures are calculated using GAAP amounts presented on the unaudited condensed consolidated statements of earnings for both Atrium and StarStone.
The loss ratio is calculated by dividing net incurred losses and LAE by net premiums earned. The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned. The operating expense ratio is calculated by dividing operating expenses by net premiums earned. The combined ratio is the sum of the loss ratio, the acquisition cost ratio and the operating expense ratio.
The Atrium segment also includes corporate expenses that are not directly attributable to the underwriting results in the segment. The corporate expenses include general and administrative expenses related to amortization of the definite-lived intangible assets in the holding company, and expenses relating to Atrium Underwriters Limited ("AUL") employee salaries, benefits, bonuses and current year share grant costs. The AUL general and administrative expenses are incurred in managing the syndicate. These are principally funded by the profit commission fees earned from Syndicate 609, which is a revenue item not included in the insurance ratios.


78

Consolidated Results of Operations - For the Three and Nine Months Ended September 30, 2018 and 2017
The following table sets forth our unaudited condensed consolidated statements of earnings for each of the periods indicated. For a discussion of the critical accounting policies that affect the results of operations, see "Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2017 , and within this Quarterly Report on Form 10-Q.
Three Months Ended
Nine Months Ended
September 30
September 30
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
INCOME
Net premiums earned
$
264,597

$
148,025

$
116,572

$
663,628

$
452,494

$
211,134

Fees and commission income
6,950

15,895

(8,945
)
23,633

46,476

(22,843
)
Net investment income
69,430

52,028

17,402

202,218

150,184

52,034

Net realized and unrealized gains (losses)
(57,223
)
29,301

(86,524
)
(254,671
)
139,697

(394,368
)
Other income (expenses)
11,543

(3,848
)
15,391

34,477

19,206

15,271

295,297

241,401

53,896

669,285

808,057

(138,772
)
EXPENSES
Net incurred losses and LAE
153,974

75,712

78,262

266,327

163,224

103,103

Life and annuity policy benefits
423

1,060

(637
)
217

5,048

(4,831
)
Acquisition costs
54,242

24,281

29,961

137,684

75,457

62,227

General and administrative expenses
102,553

100,325

2,228

300,425

309,283

(8,858
)
Interest expense
4,640

6,410

(1,770
)
21,573

20,851

722

Net foreign exchange losses
1,040

4,775

(3,735
)
1,389

15,612

(14,223
)
Loss on sale of subsidiary
—

6,740

(6,740
)
—

16,349

(16,349
)
316,872

219,303

97,569

727,615

605,824

121,791

EARNINGS (LOSS) BEFORE INCOME TAXES
(21,575
)
22,098

(43,673
)
(58,330
)
202,233

(260,563
)
INCOME TAXES
(746
)
(1,432
)
686

(4,564
)
(3,234
)
(1,330
)
NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
(22,321
)
20,666

(42,987
)
(62,894
)
198,999

(261,893
)
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

3,495

(3,495
)
—

(1,005
)
1,005

NET EARNINGS (LOSS)
(22,321
)
24,161

(46,482
)
(62,894
)
197,994

(260,888
)
Net loss (earnings) attributable to noncontrolling interest
11,489

14,832

(3,343
)
19,096

(14,135
)
33,231

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
(10,832
)
38,993

(49,825
)
(43,798
)
183,859

(227,657
)
Dividend on preferred shares
(5,133
)
—

(5,133
)
(5,133
)
—

(5,133
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(15,965
)
$
38,993

$
(54,958
)
$
(48,931
)
$
183,859

$
(232,790
)
Highlights
Consolidated Results of Operations for the Three Months Ended September 30, 2018 :
•
Consolidated net losses of $16.0 million and basic and diluted net losses per ordinary share of $0.74
•
Non-GAAP operating loss 1 of $2.5 million and diluted non-GAAP operating loss per ordinary share 1 of $0.12
•
Net earnings from Non-life Run-off segment of $32.6 million , including investment results
•
Net investment income of $69.4 million and net realized and unrealized losses of $57.2 million , comprised $10.0 million of net realized losses and $47.2 million of net unrealized losses
•
Net premiums earned of $264.6 million , including $37.0 million and $216.4 million in our Atrium and StarStone segments, respectively
•
Combined ratios of 94.7% and 128.5% for the active underwriting operations within our Atrium and StarStone segments, respectively

79

Consolidated Results of Operations for the Nine Months Ended September 30, 2018 :
•
Consolidated net losses of $48.9 million and basic and diluted net losses per ordinary share of $2.39
•
Non-GAAP operating income 1 of $120.0 million and diluted non-GAAP operating income per ordinary share 1 of $5.81
•
Net earnings from Non-life Run-off segment of $37.2 million , including investment results
•
Net investment income of $202.2 million and net realized and unrealized losses of $254.7 million , comprised of $18.6 million of net realized losses and $236.0 million of net unrealized losses
•
Net premiums earned of $663.6 million , including $106.7 million and $526.8 million in our Atrium and StarStone segments, respectively
•
Combined ratios of 95.8% and 118.0% for the active underwriting operations within our Atrium and StarStone segments, respectively
1 Non-GAAP Financial Measure. For a reconciliation of non-GAAP operating income (loss) to net earnings (loss) calculated in accordance with GAAP, see "Non-GAAP Financial Measures" below.
Consolidated Financial Condition as at September 30, 2018 :
•
Total investments, cash and funds held of $11,374.4 million
•
Total reinsurance balances recoverable of $1,975.6 million
•
Total assets of $15,121.2 million
•
Total shareholders' equity, including preferred shares, of $3,905.4 million and redeemable noncontrolling interest of $458.3 million . Shareholders' equity includes $400.0 million of preferred shares issued in June 2018
•
Total gross reserves for losses and LAE of $8,535.7 million , with $2,010.9 million of gross reserves assumed in our Non-life Run-off operations during the nine months ended September 30, 2018
•
Diluted book value per ordinary share of $161.10 , a year-to-date increase of 1.2%
Consolidated Overview - For the Three Months Ended September 30, 2018 and 2017
We reported consolidated net losses attributable to Enstar Group Limited shareholders of $16.0 million for the three months ended September 30, 2018 , a decrease in net earnings of $55.0 million from net earnings of $39.0 million for the three months ended September 30, 2017 . Our third quarter results were impacted by unrealized losses on other investments and fixed maturity securities which are accounted for on a trading basis through net earnings. In addition, comparability between periods is impacted by the loss portfolio transfer reinsurance transactions that we completed in 2018 with Coca-Cola, Zurich, Neon and Novae, and during 2017 with RSA and QBE. The most significant drivers of our consolidated financial performance during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 included:
•
Non-life Run-off - Net earnings attributable to the Non-life Run-off segment were $32.6 million for the three months ended September 30, 2018 compared to $80.2 million for the three months ended September 30, 2017 . The decrease in net earnings of $47.6 million was primarily due to net realized and unrealized losses of $58.5 million on our investment portfolio in the current period, partially offset by higher net investment income and higher other income;
•
Atrium - Net earnings were $2.0 million for the three months ended September 30, 2018 compared to net losses of $6.1 million for the three months ended September 30, 2017 . Net losses in the comparative period were primarily due to the large losses in the third quarter of 2017, namely those attributable to hurricanes Harvey, Irma and Maria, as well as the Mexico earthquake;

•
StarStone - Net losses were $37.1 million for the three months ended September 30, 2018 compared to net losses of $20.1 million for the three months ended September 30, 2017 . The increase in net losses was primarily attributable to higher net incurred losses and LAE and higher acquisition costs. The segment results also include the consolidation of StarStone Group's reinsurance to KaylaRe following Enstar's acquisition;


80

•
Net Realized and Unrealized Losses - Net realized and unrealized losses were $57.2 million for the three months ended September 30, 2018 compared to net realized and unrealized gains of $29.3 million for the three months ended September 30, 2017 . Net unrealized losses for the three months ended September 30, 2018 included net unrealized losses of $35.2 million on other investments and $13.4 million on fixed maturities investments, which are accounted for on a trading basis through net earnings. The net unrealized losses on our other investments were primarily driven by unrealized losses in our equity and hedge funds. The unrealized losses on fixed maturities were primarily driven by increased sovereign yields and widening corporate credit spreads in the current quarter. Many insurance companies use available-for-sale accounting where unrealized amounts are recorded directly to shareholders’ equity and therefore do not impact earnings. Unrealized amounts would only become realized in the event of a sale of the specific securities prior to maturity or a credit default;

•
Net Investment Income - Net investment income was $69.4 million and $52.0 million for the three months ended September 30, 2018 and 2017 , respectively. The increase was primarily due to an increase in average investable assets in our Non-Life Run-off segment due to the transactions noted above, higher reinvestment rates, an increase in duration, and portfolio rebalancing;

•
Noncontrolling Interest - The net losses attributable to noncontrolling interest are directly related to the results from those subsidiary companies in which there are either noncontrolling interests or redeemable noncontrolling interests. The net losses attributable to noncontrolling interest were $11.5 million and $14.8 million for the three months ended September 30, 2018 and 2017 , respectively. The decrease was driven by higher net losses in the Atrium segment in the third quarter of 2017 compared to 2018, primarily due to the large losses in the third quarter of 2017, namely those attributable to hurricanes Harvey, Irma and Maria, as well as the Mexico earthquake, which did not reoccur in 2018; and

•
Our non-GAAP operating loss, which excludes the impact of unrealized losses on fixed maturity securities and other items, was $2.5 million for the three months ended September 30, 2018 , a decrease of $37.3 million from non-GAAP operating income of $34.8 million for the three months ended September 30, 2017 . For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance with GAAP, see "Non-GAAP Financial Measures" below.

Consolidated Overview - For the Nine Months Ended September 30, 2018 and 2017
We reported consolidated net losses attributable to Enstar Group Limited shareholders of $48.9 million for the nine months ended September 30, 2018 , a decrease in net earnings of $232.8 million from net earnings of $183.9 million for the nine months ended September 30, 2017 . Our results for the nine months ended September 30, 2018 were impacted by unrealized losses on fixed maturity securities, which are accounted for on a trading basis through earnings. Our comparative results were also impacted by our acquisition and disposition activity and completed loss portfolio transfer reinsurance transactions noted above.
The most significant drivers of our consolidated financial performance during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 included:
•
Non-life Run-off - Net earnings attributable to the Non-life Run-off segment were $37.2 million and $231.2 million for the nine months ended September 30, 2018 and 2017 , respectively. The decrease in net earnings of $194.0 million was primarily due net realized and unrealized losses on our investment portfolio in the current period, partially offset by lower net incurred losses and LAE and higher net investment income;
•
Net Investment Income - Net investment income was $202.2 million and $150.2 million for the nine months ended September 30, 2018 and 2017 , respectively. The increase of $52.0 million was primarily attributable to an increase in average investable assets due to the transactions noted above, higher reinvestment rates, an increase in duration, and portfolio rebalancing;
•
Net Realized and Unrealized Losses - Net realized and unrealized losses were $254.7 million for the nine months ended September 30, 2018 compared to net realized and unrealized gains of $139.7 million for the nine months ended September 30, 2017 . Net unrealized losses for the nine months ended September 30, 2018 included net unrealized losses of $159.7 million on fixed maturities investments, which are accounted for on a trading basis through net earnings and $37.1 million on other investments. The unrealized losses on fixed maturities were primarily driven by increased sovereign yields and widening corporate credit spreads in the current quarter. Many insurance companies use available-for-sale accounting where unrealized

81

amounts are recorded directly to shareholders’ equity and therefore do not impact earnings. Unrealized amounts would only become realized in the event of a sale of the specific securities prior to maturity or a credit default. The net unrealized losses on our other investments were primarily driven by unrealized losses in our equity and hedge funds;
•
Atrium - Net earnings for the nine months ended September 30, 2018 and 2017 were $5.5 million and $1.5 million , respectively. The increase was primarily attributable to a lower loss ratio in the current period;
•
StarStone - Net losses were $61.7 million and $1.1 million for the nine months ended September 30, 2018 and 2017 , respectively. The increase in net losses was primarily attributable to the increase in net incurred losses and LAE, higher acquisition costs and net realized and unrealized losses on our investment portfolio, partially offset by higher net earned premiums;

•
Other Activities - Net losses were $29.9 million and $47.7 million for the nine months ended September 30, 2018 and 2017 , respectively, with the decrease in net losses primarily attributable to the loss on sale of Laguna in the comparative period;

•
Noncontrolling Interest - The net (earnings) losses attributable to the noncontrolling interest are directly related to the results from those subsidiary companies in which there are either noncontrolling interests or redeemable noncontrolling interests. For the nine months ended September 30, 2018 and 2017 , the net losses attributable to noncontrolling interest were $19.1 million and the net earnings attributable to noncontrolling interest were $14.1 million , respectively, primarily reflecting losses from the Atrium and StarStone segments, as discussed above; and

•
Our non-GAAP operating income, which excludes the impact of unrealized losses on fixed maturity securities and other items, was $120.0 million for the nine months ended September 30, 2018 , a decrease of $27.1 million from non-GAAP operating income of $147.2 million for the nine months ended September 30, 2017 . For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance with GAAP, see "Non-GAAP Financial Measures" below.

Results of Operations by Segment - For the Three and Nine Months Ended September 30, 2018 and 2017
We have three segments of business that are each managed, operated and reported on separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. Other activities, which do not qualify as a reportable segment, are included in "Other Activities" and discussed in Note 21 - "Segment Information" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. For a description of our segments, see "Item 1. Business - Operating Segments" in our Annual Report on Form 10-K for the year ended December 31, 2017 .
The below table provides a split by operating segment of the net earnings (loss) attributable to Enstar Group Limited:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Segment split of net earnings (loss) attributable to Enstar Group Limited:
Non-life Run-off
$
32,628

$
80,182

$
(47,554
)
$
37,157

$
231,195

$
(194,038
)
Atrium
1,962

(6,073
)
8,035

5,462

1,476

3,986

StarStone
(37,066
)
(20,097
)
(16,969
)
(61,672
)
(1,115
)
(60,557
)
Other
(13,489
)
(15,019
)
1,530

(29,878
)
(47,697
)
17,819

Net earnings (loss) attributable to Enstar Group Limited ordinary shareholders
$
(15,965
)
$
38,993

$
(54,958
)
$
(48,931
)
$
183,859

$
(232,790
)
The following is a discussion of our results of operations by segment.

82

Non-life Run-off Segment
Our Non-life Run-off segment comprises the operations of our subsidiaries that are running off their property and casualty and other non-life lines of business, including the run-off business of Arden Reinsurance Company Ltd., acquired in the Atrium transaction, and StarStone's run-off business. It also includes our smaller management business, which manages the run-off portfolios of third parties through our service companies. The following is a discussion and analysis of the results of operations for our Non-life Run-off segment for the three and nine months ended September 30, 2018 and 2017 .
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Gross premiums written
$
9,912

$
11,751

$
(1,839
)
$
16,354

$
13,956

$
2,398

Net premiums written
$
4,778

$
11,467

$
(6,689
)
$
3,217

$
13,453

$
(10,236
)
Net premiums earned
$
10,442

$
6,415

$
4,027

$
27,229

$
9,856

$
17,373

Net incurred losses and LAE
62,778

70,882

(8,104
)
205,890

138,041

67,849

Acquisition costs
160

(1,001
)
1,161

(4,524
)
(455
)
(4,069
)
Operating expenses
(37,473
)
(35,657
)
(1,816
)
(114,254
)
(96,767
)
(17,487
)
Underwriting income
35,907

40,639

(4,732
)
114,341

50,675

63,666

Net investment income
59,247

42,829

16,418

168,189

118,130

50,059

Net realized and unrealized gains (losses)
(58,506
)
25,016

(83,522
)
(230,829
)
127,130

(357,959
)
Fees and commission income
3,708

10,762

(7,054
)
13,093

30,302

(17,209
)
Other income (expenses)
11,423

(4,018
)
15,441

34,989

18,679

16,310

Corporate expenses
(11,433
)
(20,326
)
8,893

(33,453
)
(66,468
)
33,015

Interest expense
(5,951
)
(6,664
)
713

(24,562
)
(20,991
)
(3,571
)
Net foreign exchange gains (losses)
17

(3,772
)
3,789

(202
)
(6,709
)
6,507

EARNINGS BEFORE INCOME TAXES
34,412

84,466

(50,054
)
41,566

250,748

(209,182
)
INCOME TAXES
(125
)
(970
)
845

(227
)
(5,609
)
5,382

NET EARNINGS FROM CONTINUING OPERATIONS
34,287

83,496

(49,209
)
41,339

245,139

(203,800
)
Net earnings attributable to noncontrolling interest
(1,659
)
(3,314
)
1,655

(4,182
)
(13,944
)
9,762

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
32,628

$
80,182

$
(47,554
)
$
37,157

$
231,195

$
(194,038
)

83


Overall Results
Three Months Ended September 30 : Net earnings were $32.6 million for the three months ended September 30, 2018 compared to $80.2 million for the three months ended September 30, 2017 , a decrease of $47.6 million . The decrease was primarily attributable to an increase of $83.5 million in net realized and unrealized losses on our investment portfolio primarily due to unrealized losses on our equity and hedges funds and increased sovereign yields and widening corporate credit spreads on our fixed income securities, partially offset by an increase in net investment income of $16.4 million , an increase in other income of $15.4 million and a decrease in corporate expenses of $8.9 million .
Nine Months Ended September 30 : Net earnings were $37.2 million and $231.2 million for the nine months ended September 30, 2018 and 2017 , respectively, a decrease of $194.0 million . This decrease was primarily attributable to an increase of $358.0 million in net realized and unrealized losses on our investment portfolio primarily due to increased sovereign yields and widening corporate credit spreads and losses on our equity and hedge funds, an increase in operating expenses of $17.5 million and a decrease in fees and commission income of $17.2 million , partially offset by an increase in favorable loss reserve development of $67.8 million , an increase of $50.1 million in net investment income, a decrease in corporate expenses of $33.0 million , an increase in net earned premium of $17.4 million and an increase in other income of $16.3 million .
The major components of earnings are discussed below, except for investment results, which are separately discussed below in "Investable Assets."
Net Premiums Earned:
The following table shows the gross and net premiums written and earned for the Non-life Run-off segment for the three months ended September 30, 2018 and 2017 :
Three Months Ended
Nine Months Ended
September 30
September 30
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Gross premiums written
$
9,912

$
11,751

$
(1,839
)
$
16,354

$
13,956

$
2,398

Ceded reinsurance premiums written
(5,134
)
(284
)
(4,850
)
(13,137
)
(503
)
(12,634
)
Net premiums written
$
4,778

$
11,467

$
(6,689
)
$
3,217

$
13,453

$
(10,236
)
Gross premiums earned
$
17,746

$
9,345

$
8,401

$
54,044

$
15,353

$
38,691

Ceded reinsurance premiums earned
(7,304
)
(2,930
)
(4,374
)
(26,815
)
(5,497
)
(21,318
)
Net premiums earned
$
10,442

$
6,415

$
4,027

$
27,229

$
9,856

$
17,373

Because business in this segment is in run-off, our general expectation is for premiums associated with legacy business to decline in future periods. However, the actual amount in any particular year will be impacted by new acquisitions during the year and the run-off of premiums from acquisitions completed in recent years. Premiums earned in this segment are generally offset by net incurred losses and LAE related to the premiums. Premiums earned may be higher than premiums written as we may assume unearned premium without writing the premium ourselves.
Three and Nine Months Ended September 30 : Premiums written and earned in the three and nine months ended September 30, 2018 were primarily related to the run-off business assumed as a result of the RITC transaction with Novae . Premiums written and earned in the three and nine months ended September 30, 2017 were primarily related to the run-off business of Sussex Insurance Company ("Sussex") and Alpha Insurance SA ("Alpha").


84

Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment for the three months ended September 30, 2018 and 2017 :
Three Months Ended September 30,
2018
2017
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$
193,057

$
2,713

$
195,770

$
135,981

$
33

$
136,014

Net change in case and LAE reserves (1)
(128,827
)
165

(128,662
)
(66,376
)
(16
)
(66,392
)
Net change in IBNR reserves (2)
(109,287
)
7,139

(102,148
)
(120,614
)
(152
)
(120,766
)
Increase (reduction) in estimates of net ultimate losses
(45,057
)
10,017

(35,040
)
(51,009
)
(135
)
(51,144
)
Increase (reduction) in provisions for unallocated LAE
(24,460
)
—

(24,460
)
(16,203
)
165

(16,038
)
Amortization of deferred charges
1,582

—

1,582

3,311

—

3,311

Amortization of fair value adjustments
4,247

—

4,247

3,493

—

3,493

Changes in fair value - fair value option
(9,107
)
—

(9,107
)
(10,504
)
—

(10,504
)
Net incurred losses and LAE

$
(72,795
)
$
10,017

$
(62,778
)
$
(70,912
)
$
30

$
(70,882
)
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Three Months Ended September 30 : The reduction in net incurred losses and LAE for the three months ended September 30, 2018 of $62.8 million included net incurred losses and LAE of $10.0 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $10.0 million , the reduction in net incurred losses and LAE for the three months ended September 30, 2018 relating to prior periods was $72.8 million , which was attributable to a reduction in estimates of net ultimate losses of $45.1 million , a reduction in provisions for unallocated LAE of $24.5 million , relating to 2018 run-off activity, a reduction in the fair value of liabilities of $9.1 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired of $4.2 million and the amortization of deferred charges of $1.6 million . The reduction in estimates of net ultimate losses of $45.1 million for the three months ended September 30, 2018 included a net reduction in case and IBNR reserves of $238.1 million , partially offset by net losses paid of $193.1 million .
The reduction in net incurred losses and LAE for the three months ended September 30, 2017 of $70.9 million included net incurred losses and LAE of $30 thousand related to current period net earned premium, primarily for the run-off business acquired with Sussex. Excluding current period net incurred losses and LAE of $30 thousand , the reduction in net incurred losses and LAE for the three months ended September 30, 2017 relating to prior periods was $70.9 million , which was primarily attributable to a reduction in estimates of net ultimate losses of $51.0 million , a reduction in provisions for unallocated LAE of $16.2 million , relating to 2017 run-off activity, and a reduction in the fair value of liabilities of $10.5 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired of $3.5 million and the amortization of deferred charges of $3.3 million . The reduction in estimates of net ultimate losses of $51.0 million for the three months ended September 30, 2017 included a net change in case and IBNR reserves of $187.0 million , partially offset by net losses paid of $136.0 million .

85

The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment for the nine months ended September 30, 2018 and 2017 :
Nine Months Ended September 30,
2018
2017
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$
641,361

$
3,304

$
644,665

$
436,594

$
404

$
436,998

Net change in case and LAE reserves (1)
(377,735
)
1,223

(376,512
)
(276,903
)
(32
)
(276,935
)
Net change in IBNR reserves (2)
(424,847
)
10,949

(413,898
)
(262,296
)
572

(261,724
)
Increase (reduction) in estimates of net ultimate losses
(161,221
)
15,476

(145,745
)
(102,605
)
944

(101,661
)
Reduction in provisions for bad debt
—

—

—

(735
)
—

(735
)
Increase (reduction) in provisions for unallocated LAE
(48,723
)
—

(48,723
)
(41,557
)
261

(41,296
)
Amortization of deferred charges
10,381

—

10,381

9,387

—

9,387

Amortization of fair value adjustments
10,312

—

10,312

5,518

—

5,518

Changes in fair value - fair value option
(32,115
)
—

(32,115
)
(9,254
)
—

(9,254
)
Net incurred losses and LAE
$
(221,366
)
$
15,476

$
(205,890
)
$
(139,246
)
$
1,205

$
(138,041
)
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Nine Months Ended September 30 : The reduction in net incurred losses and LAE for the nine months ended September 30, 2018 of $205.9 million included net incurred losses a nd LAE of $15.5 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $15.5 million , net incurred losses and LAE liabilities relating to prior periods decreased by $221.4 million , which was attributable to a reduction in estimates of net ultimate losses of $161.2 million , a reduction in provisions for unallocated LAE of $48.7 million relating to 2018 run-off activity, and a reduction in the fair value of liabilities of $32.1 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by amortization of deferred charges of $10.4 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired of $10.3 million . The reduction in estimates of net ultimate losses of $161.2 million for the nine months ended September 30, 2018 included a net change in case and IBNR reserves of $802.6 million , partially offset by net losses paid of $641.4 million .
The reduction in net incurred losses and LAE for the nine months ended September 30, 2017 of $138.0 million included net incurred losses a nd LAE of $1.2 million related to current period net earned premium primarily for the run-off business acquired with Sussex. Excluding current period net incurred losses and LAE of $1.2 million , net incurred losses and LAE liabilities relating to prior periods were reduced by $139.2 million , which was attributable to a reduction in estimates of net ultimate losses of $102.6 million , a reduction in provisions for unallocated LAE of $41.6 million relating to 2017 run-off activity, a reduction in the fair value liabilities of $9.3 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option and a reduction in provisions for bad debt of $0.7 million , partially offset by amortization of deferred charges of $9.4 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $5.5 million . The reduction in estimates of net ultimate losses of $102.6 million for the nine months ended September 30, 2017 included a net change in case and IBNR reserves of $539.2 million , partially offset by net losses paid of $436.6 million .

Acquisition Costs:
Three and Nine Months Ended September 30 : Acquisition costs were $(0.2) million and $1.0 million for the three months ended September 30, 2018 and 2017 , respectively, and $4.5 million and $0.5 million for the nine months ended September 30, 2018 and 2017 , respectively. The increase in acquisition costs for the nine months ended September 30, 2018 primarily related to a profit commission adjustment on an assumed retroactive reinsurance agreement.

86

Fees and Commission Income:
Three and Nine Months Ended September 30 : Our management companies in the Non-life Run-off segment earned fees and commission income of $3.7 million and $10.8 million for the three months ended September 30, 2018 and 2017 , respectively, a decrease of $7.1 million , which is primarily attributable to $3.7 million of profit commission relating to the performance of the business ceded and $2.3 million of management fee income earned in 2017 from KaylaRe. Management fee income subsequent to our acquisition of Kayla Re has been eliminated on consolidation. Fees and commission income was $13.1 million and $30.3 million for the nine months ended September 30, 2018 and 2017 , respectively, a decrease of $17.2 million, which is primarily attributable to $11.5 million of profit commission relating to the performance of the business ceded and $6.1 million of management fee income earned in 2017 from KaylaRe. While our consulting subsidiaries continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, the core focus of these subsidiaries is providing in-house services to companies within the Enstar group.
Other Income:
Three Months Ended September 30 : For the three months ended September 30, 2018 , we recorded other income of $11.4 million compared to other loss of $4.0 million for the three months ended September 30, 2017 , an increase of $15.4 million , which is primarily attributable to higher net earnings from our equity method investees in 2018 compared to 2017. Following our acquisition of KaylaRe, we fully consolidate this business and no longer reflect our proportionate share of earnings within other income.
Nine Months Ended September 30 : Other income was $18.7 million for the nine months ended September 30, 2018 and $35.0 million for the nine months ended September 30, 2017 , an increase of $16.3 million , which primarily related to our share of the net earnings of our equity method investees and an increase in recoveries of other assets. Refer to Note 20 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 1 of the Quarterly Report on Form 10-Q.
General and Administrative Expenses:
General and administrative expenses consist of operating expenses and corporate expenses.
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Operating expenses
$
37,473

$
35,657

$
1,816

$
114,254

$
96,767

$
17,487

Corporate expenses
11,433

20,326

(8,893
)
33,453

66,468

(33,015
)
General and administrative expenses
$
48,906

$
55,983

$
(7,077
)
$
147,707

$
163,235

$
(15,528
)
Three and Nine Months Ended September 30 : General and administrative expenses were $48.9 million and $56.0 million for the three months ended September 30, 2018 and 2017 , respectively. The decrease of $7.1 million was primarily attributable to lower performance-based salary and benefits for the three months ended September 30, 2018 as a result of lower net earnings in 2018 compared to 2017. For the nine months ended September 30, 2018 and 2017 , general and administrative expenses were $147.7 million and $163.2 million , respectively, a decrease of $15.5 million , which was primarily attributable to lower performance-based salary and benefits for the nine months ended September 30, 2018 as a result of lower net earnings in 2018 compared to 2017.
Interest Expense:
Three and Nine Months Ended September 30 : Interest expense was $6.0 million and $6.7 million for the three months ended September 30, 2018 and 2017 , respectively. The decrease in interest expense was primarily due to the repayment of a portion of amounts outstanding under the EGL Revolving Credit Facility and the repayment in full of the EGL Term Loan Facility using the proceeds of the issue of Series D Preferred Shares on June 28, 2018. Interest expense was $24.6 million and $21.0 million for the nine months ended September 30, 2018 and 2017 , respectively. The increase in interest expense was primarily due to interest on the Senior Notes that were issued during the first quarter of 2017.

87

Net Foreign Exchange Gains (Losses):
Three and Nine Months Ended September 30 : Net foreign exchange gains were $17 thousand compared to net foreign exchange losses of $3.8 million for the three months ended September 30, 2018 and 2017 , respectively. Net foreign exchange losses were $0.2 million and $6.7 million for the nine months ended September 30, 2018 and 2017 , respectively.
Income Taxes
Three Months Ended September 30 : For the three months ended September 30, 2018 and 2017 , income taxes were $0.1 million and $1.0 million , respectively, a decrease of $0.8 million , which primarily resulted from lower earnings before income taxes.
Nine months ended September 30 : For the nine months ended September 30, 2018 and 2017 , income taxes were $0.2 million and $5.6 million , respectively, a decrease of $5.4 million which primarily resulted from lower earnings before income taxes.
Noncontrolling Interest:
Three and Nine Months Ended September 30 : The net earnings attributable to the noncontrolling interest of our Non-life Run-off segment were $1.7 million and $3.3 million for the three months ended September 30, 2018 and 2017 , respectively, and $4.2 million and $13.9 million for the nine months ended September 30, 2018 and 2017 , respectively. The decrease of $1.7 million for the three months ended September 30, 2018 and the decrease of $9.8 million for the nine months ended September 30, 2018 were primarily attributable to a decrease in earnings for those companies where there is a noncontrolling interest. The number of subsidiaries in this segment with a noncontrolling interest remained unchanged at two as at September 30, 2018 and September 30, 2017 .

88

Atrium Segment
The Atrium segment includes Atrium 5 Ltd. ("Atrium 5"), Atrium Underwriters Limited ("AUL") and Northshore Holdings Limited. Atrium 5 results represent its proportionate share of the results of Syndicate 609 for which it provides 25% of the underwriting capacity and capital. AUL results largely represent fees charged to Syndicate 609 and a 20% profit commission on the results of the syndicate less salaries and general and administrative expenses incurred in managing the syndicate. AUL also includes other Atrium Group non-syndicate fee income and associated expenses. Northshore Holdings Limited results include the amortization of intangible assets that were fair valued upon acquisition.
The following is a discussion and analysis of the results of operations for our Atrium segment for the three and nine months ended September 30, 2018 and 2017 , which are summarized below.
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Gross premiums written
$
39,995

$
36,377

$
3,618

$
130,997

$
117,355

$
13,642

Net premiums written
$
37,141

$
25,989

$
11,152

$
113,218

$
99,235

$
13,983

Net premiums earned
$
36,977

$
32,773

$
4,204

$
106,722

$
97,373

$
9,349

Net incurred losses and LAE
(17,853
)
(35,273
)
17,420

(51,951
)
(55,950
)
3,999

Acquisition costs
(13,215
)
(11,818
)
(1,397
)
(37,996
)
(34,647
)
(3,349
)
Operating expenses
(3,952
)
(2,507
)
(1,445
)
(12,259
)
(12,227
)
(32
)
Underwriting income (losses)
1,957

(16,825
)
18,782

4,516

(5,451
)
9,967

Net investment income
1,597

847

750

4,067

2,832

1,235

Net realized and unrealized gains (losses)
194

285

(91
)
(1,889
)
1,177

(3,066
)
Fees and commission income
3,242

5,911

(2,669
)
10,540

17,353

(6,813
)
Other income
7

69

(62
)
127

188

(61
)
Corporate expenses
(2,770
)
37

(2,807
)
(5,083
)
(7,404
)
2,321

Interest expense
—

(23
)
23

—

(559
)
559

Net foreign exchange gains
(262
)
(43
)
(219
)
(1,262
)
(4,355
)
3,093

EARNINGS (LOSS) BEFORE INCOME TAXES
3,965

(9,742
)
13,707

11,016

3,781

7,235

INCOME TAXES
(737
)
(554
)
(183
)
(1,756
)
(1,278
)
(478
)
NET EARNINGS (LOSS)
3,228

(10,296
)
13,524

9,260

2,503

6,757

Net loss (earnings) attributable to noncontrolling interest
(1,266
)
4,223

(5,489
)
(3,798
)
(1,027
)
(2,771
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
1,962

$
(6,073
)
$
8,035

$
5,462

$
1,476

$
3,986

Underwriting ratios (1) :
Loss ratio
48.3
%
107.6
%
(59.3
)%
48.7
%
57.5
%
(8.8
)%
Acquisition cost ratio
35.7
%
36.1
%
(0.4
)%
35.6
%
35.6
%
—
%
Operating expense ratio
10.7
%
7.6
%
3.1
%
11.5
%
12.5
%
(1.0
)%
Combined ratio
94.7
%
151.3
%
(56.6
)%
95.8
%
105.6
%
(9.8
)%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Overall Results
Three months ended September 30 : Net earnings were $2.0 million for the three months ended September 30, 2018 compared to net losses of $6.1 million for the three months ended September 30, 2017 , an increase of $8.0 million . The increase in net earnings was primarily due to the large losses in the third quarter of 2017, namely those attributable to hurricanes Harvey, Irma and Maria, as well as the Mexico earthquake, that did not reoccur in 2018. The combined ratio decrease d to 94.7% for the three months ended September 30, 2018 as compared to 151.3% for the three months ended September 30, 2017 . The decrease in the combined ratio was primarily due to the decrease in the loss ratio.


89

Nine months ended September 30 : Net earnings were $5.5 million for the nine months ended September 30, 2018 compared to $1.5 million for the nine months ended September 30, 2017 , an increase of $4.0 million . The increase in net earnings was primarily due to lower net incurred losses and LAE partially offset by lower fees and commission income. The combined ratio decrease d to 95.8% for the nine months ended September 30, 2018 as compared to 105.6% for the nine months ended September 30, 2017 . The decrease in the combined ratio was primarily due to the decrease in the loss ratio.

Investment results are separately discussed below in "Investable Assets."

Gross Premiums Written:

The following table provides gross premiums written by line of business for the Atrium segment for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Marine, Aviation and Transit (1)
$
8,696

$
6,993

$
1,703

$
30,823

$
27,504

$
3,319

Binding Authorities (2)
18,396

17,694

702

53,744

48,658

5,086

Reinsurance
3,375

3,937

(562
)
16,150

17,316

(1,166
)
Accident and Health
4,551

3,481

1,070

16,069

12,206

3,863

Non-Marine Direct and Facultative
4,977

4,272

705

14,211

11,671

2,540

Total
$
39,995

$
36,377

$
3,618

$
130,997

$
117,355

$
13,642

(1) The Marine, Aviation and Transit line of business includes marine, upstream energy, aviation and terrorism lines previously disclosed as separate lines of business.
(2) The Binding Authorities line of business includes Liability and Property & Casualty Binding Authorities lines previously disclosed as separate lines of business.
See below for a discussion of the drivers of the change in net premiums earned for the three and nine months ended September 30, 2018 and 2017 , which also explains the increase in gross premiums written for the same periods.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the Atrium segment for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Marine, Aviation and Transit (1)
$
7,045

$
6,828

$
217

$
22,105

$
20,952

$
1,153

Binding Authorities (2)
17,675

15,518

2,157

50,056

44,454

5,602

Reinsurance
3,837

3,752

85

9,637

11,397

(1,760
)
Accident and Health
4,452

3,893

559

14,276

11,587

2,689

Non-Marine Direct and Facultative
3,968

2,782

1,186

10,648

8,983

1,665

Total
$
36,977

$
32,773

$
4,204

$
106,722

$
97,373

$
9,349

(1) The Marine, Aviation and Transit line of business includes marine, upstream energy, aviation and terrorism lines previously disclosed as separate lines of business.
(2) The Binding Authorities line of business includes Liability and Property & Casualty Binding Authorities lines previously disclosed as separate lines of business.
Three and Nine Months Ended September 30 : Net premiums earned for the Atrium segment were $37.0 million and $32.8 million for the three months ended September 30, 2018 and 2017 , respectively, and $106.7 million and $97.4 million for the nine months ended September 30, 2018 and 2017 , respectively. The increase in net premiums

90

written and earned was primarily due to new accounts and modest rate rises being achieved across our binding authorities and accident and health lines of business.

Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the Atrium segment for the three months ended September 30, 2018 and 2017 :
Three Months Ended September 30,
2018
2017
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$
8,230

$
8,080

$
16,310

$
8,992

$
5,139

$
14,131

Net change in case and LAE reserves (1)
(4,142
)
3,596

(546
)
(2,781
)
3,020

239

Net change in IBNR reserves (2)
(5,539
)
8,357

2,818

(6,273
)
28,798

22,525

Increase (reduction) in estimates of net ultimate losses
(1,451
)
20,033

18,582

(62
)
36,957

36,895

Reduction in provisions for bad debt
—

—

—

(96
)
338

242

Increase (reduction) in provisions for unallocated LAE
(2
)
—

(2
)
75

(11
)
64

Amortization of fair value adjustments
(727
)
—

(727
)
(1,928
)
—

(1,928
)
Net incurred losses and LAE
$
(2,180
)
$
20,033

$
17,853

$
(2,011
)
$
37,284

$
35,273

(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Three Months Ended September 30 : Net incurred losses and LAE for the three months ended September 30, 2018 and 2017 were $17.9 million and $35.3 million , respectively. Net favorable prior year loss development was $2.2 million and $2.0 million for the three months ended September 30, 2018 and 2017 , respectively. Net favorable prior year loss development in the three months ended September 30, 2018 and 2017 was spread across most lines of business. Excluding prior year loss development, net incurred losses and LAE for the three months ended September 30, 2018 and 2017 were $20.0 million and $37.3 million , respectively. The decrease in net incurred losses and LAE for the three months ended September 30, 2018 compared with 2017 , excluding prior year loss development, was primarily due to the large losses in the third quarter of 2017, namely those attributable to hurricanes Harvey, Irma and Maria, as well as the Mexico earthquake, compared to loss frequency more in line with expectations in the three months ended September 30, 2018 .

91

The following table shows the components of net incurred losses and LAE for the Atrium segment for the nine months ended September 30, 2018 and 2017 :
Nine Months Ended September 30,
2018
2017
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$
27,488

$
25,699

$
53,187

$
25,826

$
14,799

$
40,625

Net change in case and LAE reserves (1)
(9,695
)
9,597

(98
)
(7,904
)
7,616

(288
)
Net change in IBNR reserves (2)
(18,254
)
21,218

2,964

(26,631
)
43,810

17,179

Increase (reduction) in estimates of net ultimate losses
(461
)
56,514

56,053

(8,709
)
66,225

57,516

Reduction in provisions for bad debt
—

—

—

(96
)
338

242

Amortization of fair value adjustments
(4,102
)
—

(4,102
)
(1,808
)
—

(1,808
)
Net incurred losses and LAE
$
(4,563
)
$
56,514

$
51,951

$
(10,613
)
$
66,563

$
55,950

(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.

Nine Months Ended September 30 : Net incurred losses and LAE for the nine months ended September 30, 2018 and 2017 were $52.0 million and $56.0 million , respectively. Net favorable prior year loss development was $4.6 million and $10.6 million for the nine months ended September 30, 2018 and 2017 , respectively. Net favorable prior year loss development in the nine months ended September 30, 2018 and 2017 was spread across most lines of business. Excluding prior year loss development, net incurred losses and LAE for the nine months ended September 30, 2018 and 2017 were $56.5 million and $66.6 million , respectively. The decrease in net incurred losses and LAE for the nine months ended September 30, 2018 compared with 2017 , excluding prior year loss development, was primarily due to the large losses in the third quarter of 2017, namely those attributable to hurricanes Harvey, Irma and Maria, as well as the Mexico earthquake, compared to loss frequency more in line with expectations in the nine months ended September 30, 2018 .

Acquisition Costs:
Three and Nine Months Ended September 30 : Acquisition costs were $13.2 million and $11.8 million for the three months ended September 30, 2018 and 2017 , respectively, and $38.0 million and $34.6 million for the nine months ended September 30, 2018 and 2017 , respectively. The Atrium acquisition cost ratios were relatively consistent at 35.7% and 36.1% for the three months ended September 30, 2018 and 2017 , respectively, and 35.6% for each of the nine months September 30, 2018 and 2017 .
Operating Expenses:
Three and Nine Months Ended September 30 : General and administrative expenses for the Atrium segment were $4.0 million and $2.5 million for the three months ended September 30, 2018 and 2017 , respectively, and $12.3 million and $12.2 million for the nine months ended September 30, 2018 and 2017 , respectively.
Fees and Commission Income:
Three and Nine Months Ended September 30 : Fees and commission income was $3.2 million and $5.9 million for the three months ended September 30, 2018 and 2017 , respectively, and $10.5 million and $17.4 million for the nine months ended September 30, 2018 and 2017 , respectively. The fees primarily represent profit commission fees earned by us in relation to AUL’s management of Syndicate 609 and other underwriting consortiums. The decrease was primarily due to the impact of the large losses in the third quarter of 2017 on net earnings and the resulting profit commission in 2018.

92

Corporate Expenses:
Three and Nine Months Ended September 30 : Corporate expenses for the Atrium segment were $2.8 million and $37 thousand for the three months ended September 30, 2018 and 2017 , respectively, and $5.1 million and $7.4 million for the nine months ended September 30, 2018 and 2017 , respectively. The decrease in corporate expenses for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily due to lower variable compensation costs in the nine months ended September 30, 2018 .
Net Foreign Exchange Losses:
Three and Nine Months Ended September 30 : Net foreign exchange losses for the Atrium segment were $0.3 million for the three months ended September 30, 2018 compared to losses of $43 thousand for the three months ended September 30, 2017 . For the nine months ended September 30, 2018 and 2017 , net foreign exchange losses were $1.3 million and $4.4 million , respectively. The losses in the comparative periods were primarily due to the impact of translating non-functional currency liabilities, which is substantially offset by foreign exchange on available-for sale investments recorded in accumulated other comprehensive income.
Income Taxes:
Three and Nine Months Ended September 30 : Income taxes for the Atrium segment of $0.7 million for the three months ended September 30, 2018 were broadly consistent with income taxes of $0.6 million for the three months ended September 30, 2017 . For the nine months ended September 30, 2018 and 2017 , income taxes were $1.8 million and $1.3 million , respectively.
Noncontrolling Interest:
Three and Nine Months Ended September 30 : The net earnings attributable to the noncontrolling interest in the Atrium segment were $1.3 million for the three months ended September 30, 2018 , compared net losses attributable of $4.2 million for the three months ended September 30, 2017 . The increase in the net earnings attributable to the noncontrolling interest was due to higher earnings in the Atrium segment compared to the comparative period, as discussed above. The net earnings attributable to the noncontrolling interest in the Atrium segment were $3.8 million and $1.0 million for the nine months ended September 30, 2018 and 2017 , respectively. The increase in the net earnings attributable to the noncontrolling interest for nine months ended September 30, 2018 was primarily due to higher earnings, as discussed above. As at September 30, 2018 and 2017 , Trident and Dowling had a combined 41.0% noncontrolling interest in the Atrium segment.

93

StarStone Segment
The results of our StarStone segment include the results of StarStone and StarStone Specialty Holdings Limited ("StarStone Group"). Our StarStone segment also includes the results of KaylaRe's reinsurance of the StarStone Group from the date that Enstar completed the acquisition of KaylaRe.
The following is a discussion and analysis of the results of operations for our StarStone segment for the three and nine months ended September 30, 2018 and 2017 , which are summarized below.
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Gross premiums written
$
282,525

$
200,007

$
82,518

$
888,867

$
651,107

$
237,760

Net premiums written
$
219,726

$
97,049

$
122,677

$
619,528

$
331,449

$
288,079

Net premiums earned
$
216,355

$
107,650

$
108,705

$
526,802

$
341,609

$
185,193

Net incurred losses and LAE
(198,899
)
(111,321
)
(87,578
)
(420,266
)
(245,315
)
(174,951
)
Acquisition costs
(41,079
)
(11,313
)
(29,766
)
(94,775
)
(39,625
)
(55,150
)
Operating expenses
(38,000
)
(32,605
)
(5,395
)
(106,699
)
(99,576
)
(7,123
)
Underwriting income
(61,623
)
(47,589
)
(14,034
)
(94,938
)
(42,907
)
(52,031
)
Net investment income
9,504

7,592

1,912

25,950

20,230

5,720

Net realized and unrealized gains (losses)
989

5,045

(4,056
)
(15,150
)
18,953

(34,103
)
Fees and commission income
—

—

—

—

1,166

(1,166
)
Other income (expenses)
117

91

26

(432
)
170

(602
)
Interest expense
—

(382
)
382

(547
)
(1,648
)
1,101

Net foreign exchange gains (losses)
(585
)
1,145

(1,730
)
(1,063
)
(1,563
)
500

LOSS BEFORE INCOME TAXES
(51,598
)
(34,098
)
(17,500
)
(86,180
)
(5,599
)
(80,581
)
INCOME BENEFIT (TAXES)
118

78

40

(2,568
)
3,648

(6,216
)
NET LOSS
(51,480
)
(34,020
)
(17,460
)
(88,748
)
(1,951
)
(86,797
)
Net loss attributable to noncontrolling interest
14,414

13,923

491

27,076

836

26,240

NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(37,066
)
$
(20,097
)
$
(16,969
)
$
(61,672
)
$
(1,115
)
$
(60,557
)
Underwriting ratios (1) :
Loss ratio
91.9
%
103.4
%
(11.5
)%
79.8
%
71.8
%
8.0
%
Acquisition cost ratio
19.0
%
10.5
%
8.5
%
18.0
%
11.6
%
6.4
%
Operating expense ratio
17.6
%
30.3
%
(12.7
)%
20.2
%
29.2
%
(9.0
)%
Combined ratio
128.5
%
144.2
%
(15.7
)%
118.0
%
112.6
%
5.4
%
(1)
Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Effective May 14, 2018, Enstar completed the acquisition of KaylaRe Holdings Ltd. ("KaylaRe"), and our transactions between our StarStone segment and KaylaRe are now eliminated upon consolidation. As a result, our StarStone segment results have changed significantly and the following tables summarize the inclusion of the KaylaRe acquisition in our StarStone segment for the three and nine months ended September 30, 2018 :

94

Three Months Ended
Nine Months Ended
September 30, 2018
September 30, 2018
StarStone Group
KaylaRe's reinsurance of StarStone
StarStone Segment
StarStone Group
KaylaRe's reinsurance of StarStone
StarStone Segment
(in thousands of U.S. dollars)
Net premiums earned
$
161,459

$
54,896

$
216,355

$
416,395

$
110,407

$
526,802

Net incurred losses and LAE
(148,911
)
(49,988
)
(198,899
)
(329,537
)
(90,729
)
(420,266
)
Acquisition costs
(20,773
)
(20,306
)
(41,079
)
(54,630
)
(40,145
)
(94,775
)
Operating expenses
(36,952
)
(1,048
)
(38,000
)
(104,561
)
(2,138
)
(106,699
)
Underwriting loss
(45,177
)
(16,446
)
(61,623
)
(72,333
)
(22,605
)
(94,938
)
Net investment income
9,504

—

9,504

25,950

—

25,950

Net realized and unrealized gains (losses)
989

—

989

(15,150
)
—

(15,150
)
Other income (expenses)
117

—

117

(432
)
—

(432
)
Interest income (expenses)
(573
)
573

—

(1,592
)
1,045

(547
)
Net foreign exchange loss (gain)
(120
)
(465
)
(585
)
137

(1,200
)
(1,063
)
LOSS BEFORE INCOME TAXES
(35,260
)
(16,338
)
(51,598
)
(63,420
)
(22,760
)
(86,180
)
INCOME BENEFIT (TAXES)
118

—

118

(2,568
)
—

(2,568
)
NET LOSS
(35,142
)
(16,338
)
(51,480
)
(65,988
)
(22,760
)
(88,748
)
Net loss attributable to noncontrolling interest
14,414

—

14,414

27,076

—

27,076

NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(20,728
)
$
(16,338
)
$
(37,066
)
$
(38,912
)
$
(22,760
)
$
(61,672
)
Underwriting ratios:
Loss ratio (1)
92.2
%
91.1
%
91.9
%
79.1
%
82.2
%
79.8
%
Acquisition cost ratio (1)
12.9
%
37.0
%
19.0
%
13.1
%
36.4
%
18.0
%
Operating expense ratio (1)
22.9
%
1.9
%
17.6
%
25.2
%
1.9
%
20.2
%
Combined ratio (1)
128.0
%
130.0
%
128.5
%
117.4
%
120.5
%
118.0
%
(1)
Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Overall Results
Three Months Ended September 30 : Net losses were $37.1 million for the three months ended September 30, 2018 compared to $20.1 million for the three months ended September 30, 2017 , an increase in net losses of $17.0 million . The decrease in net earnings was primarily due to lower underwriting income of $14.0 million and lower net realized and unrealized gains on our investment portfolio of $4.1 million , partially offset by higher net investment income of $1.9 million . The combined ratio was 128.5% for the three months ended September 30, 2018 as compared to 144.2% for the three months ended September 30, 2017 . The loss ratio decreased by 11.5 percentage points and the acquisition cost ratio increased by 8.5 percentage points . In addition, the operating expense ratio decreased by 12.7 percentage points for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 .
The loss ratio for the StarStone Group decreased by 11.2 percentage points , the acquisition cost ratio increased by 2.4 percentage points and the operating expense ratio decreased by 7.4 percentage points . The decrease in the loss ratio is due to the large losses in the third quarter of 2017, namely those attributable to hurricanes Harvey, Irma and Maria, partially offset by the 35% whole account quota share reinsurance agreement with KaylaRe, which did not reoccur in the current period. The three month period ended September 30, 2018 has also experienced increased loss activity on the direct and facultative property, marine cargo and marine hull and war lines of business. The acquisition cost ratio is consistent with the comparative period. The decrease in the operating expense ratio is primarily due to higher net premiums earned.
Nine Months Ended September 30 : Net losses were $61.7 million compared to net losses of $1.1 million for the nine months ended September 30, 2018 and 2017 , respectively, a decrease of $60.6 million . The decrease in net earnings was primarily due to lower underwriting income of $52.0 million and net realized and unrealized losses on our investment portfolio of $34.1 million compared to net unrealized gains in the comparative period, partially offset by higher losses attributable to noncontrolling interest of $26.2 million . The loss ratio increase d by 8.0 percentage points , the acquisition cost ratio increase d by 6.4 percentage points and the operating expense ratio decrease d by

95

9.0 percentage points for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 . Our results for the nine months ended September 30, 2018 include the impact of t he Ituango Dam loss, a construction risk underwritten in 2011, for which we recorded a net incurred loss of $9.3 million and ceded reinstatement premiums of $3.5 million, for a total loss of $12.8 million. Our results for the nine months ended September 30, 2018 also include increased loss activity in the direct and facultative property, marine cargo and marine hull and war lines of business and net incurred losses due to hurricane Florence.

The loss ratio for the StarStone Group increased by 7.3 percentage points , the acquisition cost ratio increased by 1.5 percentage points and the operating expense ratio decreased by 4.0 percentage points for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 . The increase in the loss ratio was primarily the result of the net incurred losses and the Ituango Dam loss, as discussed above. The acquisition cost ratio is generally consistent with the comparative period . The decrease in the operating expense ratio is primarily due to higher net premiums earned .

Investment results are separately discussed below in "Investments."

Gross Premiums Written:

The following table provides gross premiums written by line of business for the StarStone segment for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Casualty
$
86,497

$
70,264

$
16,233

$
254,920

$
208,331

$
46,589

Marine
57,388

42,148

15,240

231,695

167,793

63,902

Property
93,498

58,725

34,773

254,734

158,479

96,255

Aerospace
20,486

15,821

4,665

48,375

42,727

5,648

Workers' Compensation
24,656

13,049

11,607

99,143

73,777

25,366

Total
$
282,525

$
200,007

$
82,518

$
888,867

$
651,107

$
237,760

Three Months Ended September 30 : Gross premiums written were $282.5 million and $200.0 million for the three months ended September 30, 2018 and 2017 , respectively, an increase of $82.5 million . The property, casualty and marine lines of business increased by $34.8 million , $16.2 million and $15.2 million , respectively. The increase in the property line of business was primarily due to new opportunities through our U.S. platform. The increase in the casualty line of business was primarily due to new business opportunities through our European and Bermuda platforms. The increase in the marine line of business was primarily due to new business underwritten by teams hired in 2017 and early 2018.
Nine Months Ended September 30 : Gross premiums written were $888.9 million and $651.1 million for the nine months ended September 30, 2018 and 2017 , respectively, an increase of $237.8 million , which is primarily attributable to the additional property, marine and casualty lines of business written in the U.S., Bermuda and Europe.

96

Net Premiums Earned:
The following table provides net premiums earned by line of business for the StarStone segment for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Casualty
$
69,122

$
38,403

$
30,719

$
178,746

$
118,239

$
60,507

Marine
62,905

28,686

34,219

150,663

89,269

61,394

Property
49,009

23,988

25,021

114,093

73,354

40,739

Aerospace
19,904

8,914

10,990

44,594

27,234

17,360

Workers' Compensation
15,415

7,659

7,756

38,706

33,513

5,193

Total
$
216,355

$
107,650

$
108,705

$
526,802

$
341,609

$
185,193

Three Months Ended September 30 : Net premiums earned for the StarStone segment were $216.4 million and $107.7 million for the three months ended September 30, 2018 and 2017 , respectively, an increase of $108.7 million . Net premiums earned for the StarStone Group for the three months ended September 30, 2018 were $161.5 million , an increase of $53.8 million compared to the three months ended September 30, 2017 . The increase was primarily driven by the casualty, property and marine lines of business due to increased premiums written, as discussed above.
Nine Months Ended September 30 : Net premiums earned for the StarStone segment were $526.8 million and $341.6 million for the nine months ended September 30, 2018 and 2017 , respectively, an increase of $185.2 million . Net premiums earned for the StarStone Group for the nine months were $416.4 million , an increase of $74.8 million compared to the nine months ended September 30, 2017 .

Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the StarStone segment for the three months ended September 30, 2018 and 2017 :
Three Months Ended
September 30,
2018
2017
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$
95,422

$
13,473

$
108,895

$
70,200

$
10,756

$
80,956

Net change in case and LAE reserves (1)
(19,919
)
37,468

17,549

(14,037
)
13,103

(934
)
Net change in IBNR reserves (2)
(63,294
)
134,454

71,160

(54,400
)
84,573

30,173

Increase in estimates of net ultimate losses
12,209

185,395

197,604

1,763

108,432

110,195

Increase (reduction) in provisions for unallocated LAE
(2,023
)
3,605

1,582

(853
)
2,100

1,247

Amortization of fair value adjustments
(287
)
—

(287
)
(121
)
—

(121
)
Net incurred losses and LAE
$
9,899

$
189,000

$
198,899

$
789

$
110,532

$
111,321

(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Three Months Ended September 30 : Net incurred losses and LAE for the three months ended September 30, 2018 and 2017 were $198.9 million and $111.3 million , respectively. Net adverse prior year loss development was

97

$9.9 million for the three months ended September 30, 2018 compared to net adverse prior year loss development of $0.8 million for the three months ended September 30, 2017 . Excluding prior year loss development, net incurred losses and LAE for the three months ended September 30, 2018 and 2017 were $189.0 million and $110.5 million , respectively.
Net incurred losses and LAE for the StarStone Group for the three months ended September 30, 2018 and 2017 were $148.9 million and $111.3 million , respectively. The increase in net incurred losses was primarily due to higher net earned premium and current period large loss activity on our marine cargo, marine hull and war and direct and facultative property lines of business including the impact of Hurricane Florence.
The following table shows the components of net incurred losses and LAE for the StarStone segment for the nine months ended September 30, 2018 and 2017 :

Nine Months Ended
September 30,
2018
2017
Prior
Periods
Current
Period
Total
Prior
Periods
Current
Period
Total
(in thousands of U.S. dollars)
Net losses paid
$
268,997

$
33,840

$
302,837

$
207,697

$
25,617

$
233,314

Net change in case and LAE reserves (1)
(55,541
)
94,456

38,915

(55,501
)
53,353

(2,148
)
Net change in IBNR reserves (2)
(183,422
)
258,453

75,031

(149,165
)
162,536

13,371

Increase in estimates of net ultimate losses
30,034

386,749

416,783

3,031

241,506

244,537

Increase (reduction) in provisions for unallocated LAE
(5,313
)
9,325

4,012

(3,984
)
5,517

1,533

Amortization of fair value adjustments
(529
)
—

(529
)
(755
)
—

(755
)
Net incurred losses and LAE
$
24,192

$
396,074

$
420,266

$
(1,708
)
$
247,023

$
245,315

(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Nine Months Ended September 30 : Net incurred losses and LAE for the nine months ended September 30, 2018 and 2017 were $420.3 million and $245.3 million , respectively. Net adverse prior year loss development was $24.2 million for the nine months ended September 30, 2018 compared to net favorable prior year loss development of $1.7 million for the nine months ended September 30, 2017 . Excluding prior year loss development, net incurred losses and LAE for the nine months ended September 30, 2018 and 2017 were $396.1 million and $247.0 million , respectively.
Net incurred losses and LAE for the StarStone Group for the nine months ended September 30, 2018 and 2017 were $329.5 million and $245.3 million , respectively, an increase of $84.2 million , primarily due to current period large loss activity on our marine cargo, marine hull and war and direct and facultative property lines of business including the impact of the Ituango Dam loss and hurricane Florence.

Acquisition Costs:
Three Months Ended September 30 : Acquisition costs were $41.1 million and $11.3 million for the three months ended September 30, 2018 and 2017 , respectively, an increase of $29.8 million . The acquisition cost ratios for the three months ended September 30, 2018 and 2017 were 19.0% and 10.5% , respectively, an increase of 8.5 percentage points .
Acquisition costs for the StarStone Group were $20.8 million and $11.3 million for the three months ended September 30, 2018 and 2017 , respectively, an increase of $9.5 million . The acquisition cost ratios for the three months ended September 30, 2018 and 2017 were 12.9% and 10.5% , respectively, an increase of 2.4 percentage points primarily due to higher net premiums earned.

98

Nine Months Ended September 30 : Acquisition costs were $94.8 million and $39.6 million for the nine months ended September 30, 2018 and 2017 , respectively, an increase of $55.2 million . The acquisition cost ratios for the nine months ended September 30, 2018 and 2017 were 18.0% and 11.6% , respectively, an increase of 6.4 percentage points .
Acquisition costs for the StarStone Group were $54.6 million and $39.6 million for the nine months ended September 30, 2018 and 2017 , respectively, an increase of $15.0 million . The acquisition cost ratios for the nine months ended September 30, 2018 and 2017 were 13.1% and 11.6% , respectively, an increase of 1.5 percentage points .
Operating Expenses:
Three and Nine Months Ended September 30 : Operating expenses for the three months ended September 30, 2018 and 2017 were $38.0 million and $32.6 million , respectively, and $106.7 million and $99.6 million for the nine months ended September 30, 2018 and 2017 , respectively. The operating expense ratios for the three months ended September 30, 2018 and 2017 were 17.6% and 30.3% , respectively, a decrease of 12.7 percentage points . The operating expense ratios for the nine months ended September 30, 2018 and 2017 were 20.2% and 29.2% , respectively, a decrease of 9.0 percentage points .
The operating expense ratios for the StarStone Group for the three months ended September 30, 2018 and 2017 were 22.9% and 30.3% , respectively, a decrease of 7.4 percentage points . The operating expense ratios for the nine months ended September 30, 2018 and 2017 were 25.2% and 29.2% , respectively, a decrease of 4.0 percentage points . Expenses were generally consistent with comparative periods, while net premiums earned was higher.
Income Taxes:
Three and Nine Months Ended September 30 : Income tax benefit for each of the three months ended September 30, 2018 and September 30, 2017 was $0.1 million . For the nine months ended September 30, 2018 , income tax expense was $2.6 million compared to an income tax benefit of $3.6 million for the nine months ended September 30, 2017 . The income tax expense (benefit) is generally driven by the geographical distribution of pre-tax earnings (loss) between taxable and non-taxable jurisdictions.
Noncontrolling Interest:
Three Months Ended September 30 : The net losses attributable to the noncontrolling interest in the StarStone segment were $14.4 million for the three months ended September 30, 2018 , compared to net losses attributable to the noncontrolling interest of $13.9 million for the three months ended September 30, 2017 . The net losses attributable to the noncontrolling interest for the three months ended September 30, 2018 were due to the net losses in the StarStone Group for the three months ended September 30, 2018 .
Nine Months Ended September 30 : The net losses attributable to the noncontrolling interest in the StarStone segment were $27.1 million for the nine months ended September 30, 2018 , compared to net losses attributable to the noncontrolling interest of $0.8 million for the nine months ended September 30, 2017 . The net losses attributable to the noncontrolling interest for the nine months ended September 30, 2018 were due to the net losses in the StarStone Group for the nine months ended September 30, 2018 .
As at September 30, 2018 and 2017 , Trident and Dowling had a combined 41.0% noncontrolling interest in the StarStone Group.

99

Other
Our other activities, which do not qualify as a reportable segment, include our corporate expenses, debt servicing costs, holding company income and expenses, foreign exchange, our remaining investments in life settlement contracts and other miscellaneous items. The presentation of the results of our other activities reflect the classification of Pavonia as discontinued operations and held-for-sale. Following the sale of Pavonia and Laguna, we no longer have any annuity products and we have also entered into an agreement to dispose of our remaining life business which comprises the term life products in Alpha.
The following is a discussion and analysis of our results of operations for our other activities for the three and nine months ended September 30, 2018 and 2017 , which are summarized below:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Net premiums earned
$
823

$
1,187

$
(364
)
$
2,875

$
3,656

$
(781
)
Life and Annuity Policy Benefits
(423
)
(1,060
)
637

(217
)
(5,048
)
4,831

Acquisition costs
(108
)
(149
)
41

(389
)
(730
)
341

Underwriting income (loss)
292

(22
)
314

2,269

(2,122
)
4,391

Net investment income
(918
)
760

(1,678
)
4,012

8,992

(4,980
)
Net realized and unrealized gains (losses)
100

(1,045
)
1,145

(6,803
)
(7,563
)
760

Fees and commission expense
—

(778
)
778

—

(2,345
)
2,345

Other income (expenses)
(4
)
10

(14
)
(207
)
169

(376
)
Corporate expenses
(8,925
)
(9,267
)
342

(28,677
)
(26,841
)
(1,836
)
Interest Income
1,311

659

652

3,536

2,347

1,189

Net foreign exchange gains (losses)
(210
)
(2,105
)
1,895

1,138

(2,985
)
4,123

Loss on sale of subsidiary
—

(6,740
)
6,740

—

(16,349
)
16,349

LOSS BEFORE INCOME TAXES
(8,354
)
(18,528
)
10,174

(24,732
)
(46,697
)
21,965

INCOME BENEFIT (TAXES)
(2
)
14

(16
)
(13
)
5

(18
)
NET LOSS FROM CONTINUING OPERATIONS
(8,356
)
(18,514
)
10,158

(24,745
)
(46,692
)
21,947

NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
—

3,495

(3,495
)
—

(1,005
)
1,005

NET LOSS
(8,356
)
(15,019
)
6,663

(24,745
)
(47,697
)
22,952

Dividend on preferred shares
(5,133
)
—

(5,133
)
(5,133
)
—

(5,133
)
NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(13,489
)
$
(15,019
)
$
1,530

$
(29,878
)
$
(47,697
)
$
17,819

Overall Results:
Net losses were $13.5 million for the three months ended September 30, 2018 compared to $15.0 million for the three months ended September 30, 2017 , a decrease in net losses of $1.5 million , which primarily resulted from a loss on sale of subsidiary of $6.7 million in the comparative period, which did not reoccur in the current period.
Net losses were $29.9 million for the nine months ended September 30, 2018 compared to $47.7 million for the nine months ended September 30, 2017 , a decrease in net losses of $17.8 million , which primarily resulted from a loss on sale of subsidiary of $16.3 million in the comparative period which did not reoccur in the current period and a $4.8 million higher expense for life and annuity policy benefits in the comparative period.
F or the three months ended September 30, 2018 and 2017 , the contribution to net losses from our Pavonia life and annuities business, classified as discontinued operations, was $nil and earnings of $3.5 million , respectively. F or the nine months ended September 30, 2018 and 2017 , the contribution to net losses from our Pavonia life and annuities business, classified as discontinued operations, was $nil and a loss of $1.0 million , respectively. For further information refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations" in the Consolidated Financial Statements within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017.
Investment results are separately discussed below in "Investable Assets."

100

Underwriting Income:
Three Months Ended September 30 : Underwriting income was $0.3 million for the three months ended September 30, 2018 , compared to underwriting loss of $22 thousand for the three months ended September 30, 2017 , an increase of $0.3 million , primarily attributable to lower life and annuities policy benefits expense in the current period.

Nine Months Ended September 30 : Underwriting income was $2.3 million for nine months ended September 30, 2018 , compared to an underwriting loss of $2.1 million in September 30, 2017 , an increase of $4.4 million , primarily attributable to lower life and annuities policy benefits expense in the current period.

Corporate Expenses:
Three Months Ended September 30 : Corporate expenses were $8.9 million for the three months ended September 30, 2018 , broadly consistent with corporate expenses of $9.3 million in the three months ended September 30, 2017 .

Nine Months Ended September 30 : Corporate expenses were $28.7 million in the nine months ended September 30, 2018 , broadly consistent with corporate expenses of $26.8 million in the nine months ended September 30, 2017 .


Dividend on Preferred Shares:
Three and Nine Months Ended September 30 : The dividend on preferred shares was $5.1 million and $nil for the three months ended September 30, 2018 and 2017 , respectively, and $5.1 million and $nil for the nine months ended September 30, 2018 and 2017 , respectively. The 16,000 Series D Preferred Shares were issued on June 28, 2018, with the first dividend of $320.83 per Preferred Share declared on July 31, 2018 and paid on September 1, 2018.

Investable Assets
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and cash equivalents, funds held by reinsured companies and funds held - directly managed. Investments consist primarily of investment grade, liquid, fixed maturity securities of short-to-medium duration, equities, and other investments. Cash and cash equivalents and restricted cash and cash equivalents are comprised mainly of cash, fixed deposits, and other highly liquid instruments such as commercial paper with maturities of less than three months at the time of acquisition and money market funds. Funds held primarily consist of investment grade, liquid, fixed maturity securities of short-to-medium duration. Assets held-for-sale are excluded from our definition of investable assets.
Investable assets were $11.4 billion as at September 30, 2018 as compared to $9.8 billion as at December 31, 2017 , an increase of 16.1% . The increase was primarily due to the investments and funds held balance acquired in connection with the Coca-Cola, KaylaRe , Zurich, Neon and Novae transactions.
A description of our investment strategies is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Investments" in our Annual Report on Form 10-K for the year ended December 31, 2017 . In addition, during recent periods, we have been implementing strategies to selectively increase the duration in certain investment portfolios.


101

Composition of Investable Assets By Segment
Across all of our segments, we strive to structure our investments in a manner that recognizes our liquidity needs for future liabilities. We consider the duration characteristics of our liabilities in determining the extent to which we invest in assets of comparable duration depending on our other investment strategies and to the extent practicable. If our liquidity needs or general liability profile change unexpectedly, we may adjust the structure of our investment portfolio to meet our revised expectations. The following tables summarize the composition of total invested assets by segment as at September 30, 2018 and December 31, 2017 :
September 30, 2018
Non-life
Run-off
Atrium
StarStone
Other
Total
(in thousands of U.S. dollars)
Short-term investments, trading, at fair value
$
206,578

$
2,135

$
23,237

$
—

$
231,950

Fixed maturities, trading, at fair value
5,031,077

137,350

1,144,903

—

6,313,330

Fixed maturities, available-for-sale, at fair value
—

37,421

—

125,723

163,144

Equities, trading, at fair value
97,669

3,163

29,482

—

130,314

Other investments, at fair value
1,910,959

6,931

104,331

14,209

2,036,430

Total investments
7,246,283

187,000

1,301,953

139,932

8,875,168

Cash and cash equivalents (including restricted cash and cash equivalents)
606,354

65,418

334,037

22,200

1,028,009

Funds held - directly managed
1,217,182

—

—

—

1,217,182

Funds held by reinsured companies
199,320

25,411

29,298

—

254,029

Total investable assets
$
9,269,139

$
277,829

$
1,665,288

$
162,132

$
11,374,388

Duration (in years)
5.44

1.63

2.45

5.83

4.84

Average Credit Rating (1)
A+

AA-

A+

AA-

A+


(1) Included in the calculation are the credit ratings of cash and cash equivalents, short-term investments, fixed maturities and funds held - directly managed at September 30, 2018 and December 31, 2017 .

December 31, 2017
Non-life
Run-off
Atrium
StarStone
Other
Total
(in thousands of U.S. dollars)
Short-term investments, trading, at fair value
$
165,388

$
2,452

$
12,371

$
—

$
180,211

Fixed maturities, trading, at fair value
4,407,094

107,083

1,181,896

—

5,696,073

Fixed maturities, available-for-sale, at fair value
44

79,246

—

130,995

210,285

Equities, trading, at fair value
97,187

2,671

6,745

—

106,603

Other investments, at fair value
732,482

6,523

159,239

15,148

913,392

Other investments, at cost
—

—

—

125,621

125,621

Total investments
5,402,195

197,975

1,360,251

271,764

7,232,185

Cash and cash equivalents (including restricted cash and cash equivalents)
868,243

51,500

264,664

28,429

1,212,836

Funds held - directly managed
1,179,940

—

—

—

1,179,940

Funds held by reinsured companies
133,731

26,646

15,006

—

175,383

Total investable assets
$
7,584,109

$
276,121

$
1,639,921

$
300,193

$
9,800,344

Duration (in years)
5.67

1.86

2.33

5.52

4.98

Average Credit Rating (1)
A+

AA-

A+

AA-

A+

(1) Included in the calculation are the credit ratings of cash and cash equivalents, short-term investments, fixed maturities and funds held - directly managed at September 30, 2018 and December 31, 2017 .

102

As at September 30, 2018 and December 31, 2017 , our investment portfolio, including funds held - directly managed, had an average credit quality rating of A+ . As at September 30, 2018 and December 31, 2017 , our fixed maturity investments rated lower than BBB- comprised 4.5% and 5.4% of our total investment portfolio, respectively. A detailed schedule of average credit ratings by asset class as at September 30, 2018 is included in Note 5 - "Investments" and Note 6 - "Funds Held - Directly Managed" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Schedules of maturities by asset class are included in Note 5 - "Investments" and Note 6 - "Funds Held - Directly Managed" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.

Composition of Investment Portfolio By Asset Class
The following tables summarize the fair value and composition of our investment portfolio by asset class as at September 30, 2018 and December 31, 2017 :
September 30, 2018
Fair Value
AAA Rated
AA Rated
A Rated
BBB Rated
Non-investment Grade
Not Rated
Total
%
(in thousands of U.S. dollars, except percentages)
Fixed maturity and short-term investments, trading and available-for-sale
U.S. government & agency
$
489,939

$
3,839

$
—

$
—

$
—

$
—

$
493,778

5.6
%
Non-U.S. government
340,583

541,087

65,286

121,197

25,615

—

1,093,768

12.3
%
Corporate
154,961

445,858

1,986,880

1,016,401

180,730

1,707

3,786,537

42.7
%
Municipal
8,739

53,094

14,277

3,856

—

—

79,966

0.9
%
Residential mortgage-backed
163,190

2,526

11,331

1,540

92,180

4,733

275,500

3.1
%
Commercial mortgage-backed
210,902

47,118

70,164

60,296

9,936

13,159

411,575

4.7
%
Asset-backed
237,239

46,971

115,349

73,415

93,918

408

567,300

6.4
%
Total
1,605,553

1,140,493

2,263,287

1,276,705

402,379

20,007

6,708,424

75.7
%
Equities
U.S.
72,765

0.8
%
International
57,549

0.6
%
Total
130,314

1.4
%
Other investments
Private equity funds
256,618

2.9
%
Fixed income funds
383,328

4.3
%
Hedge funds
879,571

9.9
%
Equity funds
381,983

4.3
%
CLO equities
48,368

0.5
%
CLO equity funds
41,501

0.5
%
Private credit funds
39,751

0.4
%
Call options on equity
4,590

0.1
%
Other
720

—
%
Total
2,036,430

22.9
%
Total investments
$
1,605,553

$
1,140,493

$
2,263,287

$
1,276,705

$
402,379

$
20,007

$
8,875,168

100.0
%

103

December 31, 2017
Fair Value
AAA Rated
AA Rated
A Rated
BBB Rated
Non-investment Grade
Not Rated
Total
%
(in thousands of U.S. dollars, except percentages)
Fixed maturity and short-term investments, trading and available-for-sale
U.S. government & agency
$
556,859

$
1,364

$
—

$
—

$
—

$
—

$
558,223

7.7
%
Non-U.S. government
134,619

409,315

79,030

62,964

6,641

—

692,569

9.6
%
Corporate
123,059

375,252

1,854,503

932,238

188,237

4,892

3,478,181

48.1
%
Municipal
26,313

62,605

12,864

3,575

—

—

105,357

1.5
%
Residential mortgage-backed
166,386

7,425

14,204

678

98,997

1,054

288,744

4.0
%
Commercial mortgage-backed
222,656

38,176

77,811

59,358

9,555

13,992

421,548

5.8
%
Asset-backed
272,784

43,539

68,489

69,116

88,019

—

541,947

7.4
%
Total
1,502,676

937,676

2,106,901

1,127,929

391,449

19,938

6,086,569

84.1
%
Equities
U.S.
106,363

1.5
%
International
240

—
%
Total
106,603

1.5
%
Other investments
Private equity funds
289,556

4.0
%
Fixed income funds
229,999

3.2
%
Hedge funds
63,773

0.9
%
Equity funds
249,475

3.4
%
CLO equities
56,765

0.8
%
CLO equity funds
12,840

0.2
%
Private credit funds
10,156

0.1
%
Other
828

—
%
Total
913,392

12.6
%
Other investments
Life settlements
131,896

1.8
%
Total investments
$
1,502,676

$
937,676

$
2,106,901

$
1,127,929

$
391,449

$
19,938

$
7,238,460

100.0
%
A description of our investment valuation processes is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2017 and Note 7 - "Fair Value Measurements" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.

104

The following table summarizes the composition of our top ten corporate issuers included within our fixed maturity and short-term investments as at September 30, 2018 :
Fair Value
Average Credit Rating
(in thousands of U.S. dollars)
Apple Inc
$
82,076

AA+
General Electric Co
77,958

A
JPMorgan Chase & Co
68,481

A-
Wells Fargo & Co
67,703

A
Lloyds Banking Group PLC
60,000

A
Bank of America Corp
58,039

A-
Morgan Stanley
56,800

A-
Citigroup
54,179

A+
Anheuser-Busch InBev SA/NV
49,992

A-
HSBC Holdings PLC
46,694

A
$
621,922


Composition of Funds Held - Directly Managed by Asset Class
The following tables summarize the fair value and composition of our funds held - directly managed portfolio by asset class as at September 30, 2018 and December 31, 2017 :
September 30, 2018
Fair Value
AAA Rated
AA Rated
A Rated
BBB Rated
Non-investment Grade
Total
%
(in thousands of U.S. dollars, except percentages)
Fixed maturity investments:
U.S. government & agency
$
98,928

$
—

$
—

$
—

$
—

$
98,928

8.1
%
Non-U.S. government
—

3,827

12,088

6,695

—

22,610

1.9
%
Corporate
7,701

25,792

285,188

321,285

1,494

641,460

52.7
%
Municipal
—

16,555

29,960

7,164

—

53,679

4.4
%
Residential mortgage-backed
60,792

—

—

—

9,404

70,196

5.8
%
Commercial mortgage-backed
211,747

6,367

1,963

—

—

220,077

18.1
%
Asset-backed
75,417

16,289

4,037

—

—

95,743

7.8
%
Total
454,585

68,830

333,236

335,144

10,898

1,202,693

98.8
%
Other assets
—

—

—

—

14,489

1.2
%
Total funds held - directly managed
$
454,585

$
68,830

$
333,236

$
335,144

$
10,898

$
1,217,182

100.0
%

105

December 31, 2017
Fair Value
AAA Rated
AA Rated
A Rated
BBB Rated
Total
%
(in thousands of U.S. dollars, except percentages)
Fixed maturity investments:
U.S. government & agency
$
69,850

$
—

$
—

$
—

$
69,850

5.9
%
Non-U.S. government
—

—

2,926

—

2,926

0.2
%
Corporate
7,754

25,418

315,385

346,933

695,490

59.0
%
Municipal
—

20,921

30,449

7,560

58,930

5.0
%
Residential mortgage-backed
29,439

—

—

—

29,439

2.5
%
Commercial mortgage-backed
202,608

6,576

2,002

—

211,186

17.9
%
Asset-backed
93,849

3,716

—

—

97,565

8.3
%
Total
403,500

56,631

350,762

354,493

1,165,386

98.8
%
Other assets
—

—

—

—

14,554

1.2
%
Total funds held - directly managed
$
403,500

$
56,631

$
350,762

$
354,493

$
1,179,940

100.0
%
The following table summarizes the composition of our top ten corporate issuers included within our funds held - directly managed as at September 30, 2018 :
Fair Value
Average Credit Rating
(in thousands of U.S. dollars)
Credit Suisse Group AG
$
11,676

BBB+
HSBC Holdings PLC
11,644

A
Wells Fargo & Co
11,488

A
Citigroup Inc
11,341

BBB+
Verizon Communications Inc
11,212

BBB+
UBS Group AG
11,173

A-
Morgan Stanley
11,128

A-
Comcast Corp
10,019

A-
Barclays PLC
9,978

BBB
Bank of America Corp
9,746

A-
$
109,405

Eurozone Exposure
As at September 30, 2018 and December 31, 2017 , we owned $70.2 million and $26.9 million , respectively, of investments in fixed maturity securities issued by the sovereign governments of Italy, Ireland and Spain.

106

Investment Results - Consolidated
The followi ng table summarizes our investment results for the three and nine months ended September 30, 2018 and 2017 :
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
Net investment income:
(in thousands of U.S. dollars, except percentages)
Fixed maturity investments
$
48,062

$
37,931

$
10,131

$
140,097

$
102,002

$
38,095

Short-term investments and cash and cash equivalents
3,247

2,048

1,199

8,425

7,489

936

Funds held
1,502

247

1,255

8,651

597

8,054

Funds held – directly managed
9,776

8,516

1,260

27,990

24,121

3,869

Investment income from fixed maturities and cash and cash equivalents
62,587

48,742

13,845

185,163

134,209

50,954

Equity securities
946

1,344

(398
)
3,788

3,207

581

Other investments
8,324

3,120

5,204

14,600

10,016

4,584

Life settlements and other
—

1,443

(1,443
)
6,509

11,026

(4,517
)
Investment income from equities and other investments
9,270

5,907

3,363

24,897

24,249

648

Gross investment income
71,857

54,649

17,208

210,060

158,458

51,602

Investment expenses
(2,427
)
(2,621
)
194

(7,842
)
(8,274
)
432

Net investment income
$
69,430

$
52,028

$
17,402

$
202,218

$
150,184

$
52,034

Net realized gains (losses) on sale:
Net realized gains (losses) on fixed maturity securities
$
(8,799
)
$
4,598

$
(13,397
)
$
(19,363
)
$
3,862

$
(23,225
)
Net realized investment gains on equity securities, trading
666

340

326

3,569

1,150

2,419

Net realized investment gains (losses) on funds held - directly managed
(1,904
)
422

(2,326
)
(2,849
)
(3,720
)
871

Total net realized gains (losses) on sale
(10,037
)
5,360

(15,397
)
(18,643
)
1,292

(19,935
)
Net unrealized gains (losses):
Fixed maturity securities, trading
(13,423
)
(10,747
)
(2,676
)
(159,691
)
23,795

(183,486
)
Equity securities, trading
1,830

2,652

(822
)
6,152

13,209

(7,057
)
Other investments
(35,188
)
27,802

(62,990
)
(37,059
)
71,007

(108,066
)
Change in fair value of embedded derivative on funds held – directly managed
(182
)
3,967

(4,149
)
(41,107
)
28,807

(69,914
)
Change in value of fair value option on funds held - directly managed
(223
)
267

(490
)
(4,323
)
1,587

(5,910
)
Total net unrealized gains (losses) on sale
(47,186
)
23,941

(71,127
)
(236,028
)
138,405

(374,433
)
Net realized and unrealized gains (losses)
$
(57,223
)
$
29,301

$
(86,524
)
$
(254,671
)
$
139,697

$
(394,368
)
Annualized Investment Book Yield
Income from cash and fixed maturities
$
250,348

$
194,968

$
55,380

$
246,884

$
178,945

$
67,939

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
$9,511,947
$8,490,522
$1,021,425
$9,562,821
$8,314,957
$1,247,864
Investment book yield
2.63
%
2.30
%
0.33
%
2.58
%
2.15
%
0.43
%
Financial Statement Portfolio Return
Total financial statement return (2)
$
12,207

$
81,329

$
(69,122
)
$
(52,453
)
$
289,881

$
(342,334
)
Average aggregate invested assets, at fair value (1)
$11,374,468
$9,694,224
$1,680,244
$11,151,922
$9,481,369
$1,670,553
Financial statement portfolio return
0.11
%
0.84
%
(0.73
)%
(0.47
)%
3.06
%
(3.53
)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
(2) This is the sum of net investment income and net realized and unrealized gains (losses) from our U.S. GAAP consolidated financial statements.

107

Net Investment Income:
Three Months Ended September 30 : Net investment income increased by $17.4 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 , primarily due to a $13.8 million increase in net investment income from fixed maturities and cash and cash equivalents, principally due to an increase of $1.0 billion in our average aggregate fixed maturities and cash and cash equivalents. The increase in our average aggregate fixed maturities and cash and cash equivalents was primarily due to the Coca-Cola, KaylaRe, Zurich, Neon and Novae transactions. The book yield increased by 33 basis points primarily due to higher reinvestment rates as a result of broad increases in effective yields.
Net Realized and Unrealized Gains (Losses):
Three Months Ended September 30 : Net realized and unrealized losses were $57.2 million for the three months ended September 30, 2018 compared to net realized and unrealized gains of $29.3 million for the three months ended September 30, 2017 , a decrease of $86.5 million . Included in net realized and unrealized losses are the following items:
•
net realized losses on sale of investments of $10.0 million for the three months ended September 30, 2018 , compared to net realized gains on sale of investments of $5.4 million for the three months ended September 30, 2017 , an increase in net realized losses on sale of investments of $15.4 million ;
•
net unrealized losses on fixed maturity securities, trading, of $13.4 million for the three months ended September 30, 2018 , compared to $10.7 million for the three months ended September 30, 2017 , an increase in net unrealized losses of $2.7 million , primarily driven by lower valuations due to increased sovereign yields in the current period;
•
net unrealized gains on equity securities, trading, of $1.8 million for the three months ended September 30, 2018 , compared to $2.7 million for the three months ended September 30, 2017 , a decrease of $0.8 million , primarily driven by a less favorable movement in international equity markets in 2018;
•
decrease in fair value of other investments of $35.2 million for the three months ended September 30, 2018 , compared to an increase of $27.8 million for the three months ended September 30, 2017 , representing a decrease of $63.0 million . The decrease for the three months ended September 30, 2018 was primarily comprised of unrealized losses in our hedge funds and equity funds, partially offset by unrealized gains in our bond funds, private equities, CLO equities and private credit funds. The increase for the three months ended September 30, 2017 was primarily comprised of unrealized gains in our equity funds, fixed income funds, hedge funds, private equities and CLO equities; and
•
decrease in fair value of embedded derivative on funds held and decrease in fair value option on funds held of $0.4 million for the three months ended September 30, 2018 , compared to an increase of $4.2 million for the three months ended September 30, 2017 , representing a decrease of $4.6 million , primarily driven by lower valuations due to increased sovereign yields.
Net Investment Income:
Nine Months Ended September 30 : Net investment income increased by $52.0 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 , primarily due to a $51.0 million increase in net investment income from fixed maturities and cash and cash equivalents, principally driven by an increase of $1.2 billion in our average aggregate fixed maturities and cash and cash equivalents. The increase in our average aggregate fixed maturities and cash and cash equivalents was primarily due to the Coca-Cola, KaylaRe, Zurich, Neon and Novae transactions. The book yield increased by 43 basis points primarily due to higher reinvestment rates as a result of broad increases in effective yields.
Net Realized and Unrealized Gains (Losses):
Nine Months Ended September 30 : Net realized and unrealized losses were $254.7 million for the nine months ended September 30, 2018 compared to net realized and unrealized gains of $139.7 million for the nine months ended September 30, 2017 , a decrease of $394.4 million . Included in net realized and unrealized losses are the following items:
•
net realized losses on sale of investments of $18.6 million for the nine months ended September 30, 2018 , compared to net realized gains of $1.3 million for the nine months ended September 30, 2017 , an increase of $19.9 million ;

108

•
net unrealized losses on fixed maturity securities, trading of $159.7 million for the nine months ended September 30, 2018 , compared to net unrealized gains of $23.8 million for the nine months ended September 30, 2017 , a decrease of $183.5 million , primarily driven by lower valuations due to increased sovereign yields and widening of investment-grade corporate credit spreads in the current period;
•
net unrealized gains on equity securities, trading of $6.2 million for the nine months ended September 30, 2018 , compared to $13.2 million for the nine months ended September 30, 2017 , a decrease of $7.1 million , primarily driven by a less favorable movement in equity markets in 2018;
•
decrease in fair value of other investments of $37.1 million for the nine months ended September 30, 2018 , compared to an increase in fair value of other investments of $71.0 million for the nine months ended September 30, 2017 , a decrease of $108.1 million . The decrease for the nine months ended September 30, 2018 was primarily comprised of unrealized losses in our equity funds and hedge funds, offset by unrealized gains in our fixed income funds, CLO equities, private equities and private credit funds. The increase for the nine months ended September 30, 2017 was primarily comprised of unrealized gains in our equity funds, fixed income funds, hedge funds, private equities and CLO equities; and
•
decrease in fair value of embedded derivative on funds held and decrease in fair value option on funds held of $45.4 million for the nine months ended September 30, 2018 , compared to an increase of $30.4 million for the nine months ended September 30, 2017 , representing a decrease of $75.8 million , primarily driven by lower valuations due to increased sovereign yields and widening of investment-grade corporate credit spreads in the current period.
Investment Results - By Segment
The following tables summarize our investment results by segment for the three and nine months ended September 30, 2018 and 2017 . These tables have been prepared on a basis consistent with the consolidated table above.

109

Non-life Run-off
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
Net investment income:
(in thousands of U.S. dollars, except percentages)
Fixed maturity investments
$
38,592

$
29,596

$
8,996

$
112,821

$
79,057

$
33,764

Short-term investments and cash and cash equivalents
2,147

1,659

488

6,096

6,119

(23
)
Funds held
1,233

247

986

8,234

597

7,637

Funds held – directly managed
9,776

8,516

1,260

27,990

24,121

3,869

Investment income from fixed maturities and cash and cash equivalents
51,748

40,018

11,730

155,141

109,894

45,247

Equity securities
459

1,325

(866
)
2,719

3,128

(409
)
Other investments
8,284

3,054

5,230

14,348

9,857

4,491

Other
478

333

145

1,379

1,444

(65
)
Investment income from equities and other investments
9,221

4,712

4,509

18,446

14,429

4,017

Gross investment income
60,969

44,730

16,239

173,587

124,323

49,264

Investment expenses
(1,722
)
(1,901
)
179

(5,398
)
(6,193
)
795

Net investment income
$
59,247

$
42,829

$
16,418

$
168,189

$
118,130

$
50,059

Net realized gains (losses) on sale:
Net realized gains (losses) on fixed maturity securities
$
(7,464
)
$
4,448

$
(11,912
)
$
(15,336
)
$
5,985

$
(21,321
)
Net realized investment gains on equity securities, trading
418

315

103

2,813

1,067

1,746

Net realized investment gains (losses) on funds held - directly managed
(1,904
)
422

(2,326
)
(2,849
)
(3,720
)
871

Total net realized gains (losses) on sale
(8,950
)
5,185

(14,135
)
(15,372
)
3,332

(18,704
)
Net unrealized gains (losses):
Fixed maturity securities, trading
(13,094
)
(12,873
)
(221
)
(140,957
)
12,812

(153,769
)
Equity securities, trading
1,721

2,420

(699
)
1,502

12,449

(10,947
)
Other investments
(37,778
)
26,050

(63,828
)
(30,572
)
68,143

(98,715
)
Change in fair value of embedded derivative on funds held – directly managed
(182
)
3,967

(4,149
)
(41,107
)
28,807

(69,914
)
Change in value of fair value option on funds held - directly managed
(223
)
267

(490
)
(4,323
)
1,587

(5,910
)
Total net unrealized gains (losses)
(49,556
)
19,831

(69,387
)
(215,457
)
123,798

(339,255
)
Net realized and unrealized gains (losses)
$
(58,506
)
$
25,016

$
(83,522
)
$
(230,829
)
$
127,130

$
(357,959
)
Annualized Investment Book Yield
Income from cash and fixed maturities
$
206,992

$
160,072

$
46,920

$
206,855

$
146,525

$
60,330

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
$
7,548,860

$
6,587,901

$
960,959

$
7,625,029

$
6,397,769

$
1,227,260

Investment book yield
2.74
%
2.43
%
0.31
%
2.71
%
2.29
%
0.42
%
Financial Statement Portfolio Return
Total financial statement return (2)
$
741

$
67,845

$
(67,104
)
$
(62,640
)
$
245,260

$
(307,900
)
Average aggregate invested assets, at fair value (1)
$
9,274,048

$
7,464,317

$
1,809,731

$
8,988,208

$
7,252,052

$
1,736,156

Financial statement portfolio return
0.01
%
0.91
%
(0.90
)%
(0.70
)%
3.38
%
(4.08
)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
(2) This is the sum of net investment income and net realized and unrealized gains (losses) from our U.S. GAAP consolidated financial statements.

110

Net Investment Income:
Three Months Ended September 30 : Net investment income increased by $16.4 million during 2018 , primarily due to a $11.7 million increase in net investment income from fixed maturities and cash and cash equivalents, principally driven by an increase of $1.0 billion in our average aggregate fixed maturities and cash and cash equivalents. The increase in our average aggregate fixed maturities and cash and cash equivalents was primarily due to the transactions with Coca-Cola, KaylaRe, Zurich, Neon and Novae . The book yield increased by 31 basis points primarily due to higher reinvestment rates as a result of broad increases in effective yields.
Net Realized and Unrealized Gains (Losses):
Three Months Ended September 30 : The decrease of $83.5 million in net realized and unrealized gains (losses) was comprised of:
•
net realized losses on sale of investments of $9.0 million in 2018 , compared to net realized gains of $5.2 million in 2017 , a decrease of $14.1 million ;
•
net unrealized losses on fixed maturity securities, trading, of $13.1 million in 2018 , compared to $12.9 million in 2017 , an increase in net unrealized losses of $0.2 million , primarily driven by lower valuations due to increased sovereign yields in the current period;
•
net unrealized gains on equity securities, trading, of $1.7 million in 2018 , compared to net unrealized gains of $2.4 million in 2017 , a decrease in unrealized gains of $0.7 million , primarily driven by a less favorable movement in international equity markets in 2018;
•
decrease in fair value of other investments of $37.8 million in 2018 , compared to an increase of $26.1 million in 2017 , representing a decrease of $63.8 million . The decrease for the three months ended September 30, 2018 was primarily comprised of unrealized losses in our equity funds and hedge funds, partially offset by unrealized gains in our private equities, fixed income funds, CLO equities and private credit funds. The increase for the three months ended September 30, 2017 was primarily comprised of unrealized gains in our equity funds, fixed income funds, hedge funds, private equities and CLO equities; and
•
decrease in fair value of embedded derivative on funds held and decrease in fair value option on funds held of $0.4 million in 2018 , compared to an increase of $4.2 million in 2017 , representing a decrease of $4.6 million , primarily driven by lower valuations due to increased sovereign yields.
Net Investment Income:
Nine Months Ended September 30 : Net investment income increased by $50.1 million during 2018, primarily due to a $45.2 million increase in net investment income from fixed maturities and cash and cash equivalents, principally driven by an increase of $1.2 billion in our average fixed maturities and cash and cash equivalents. The increase in average aggregate fixed maturities and cash and cash equivalents was primarily due to the transactions with Coca-Cola, KaylaRe, Zurich, Neon and Novae. The book yield increased by 42 basis points primarily due to higher reinvestment rates as a result of broad increases in effective yields.
Net Realized and Unrealized Gains (Losses):
Nine Months Ended September 30 : Net realized and unrealized losses were $230.8 million in 2018 compared to $127.1 million net realized and unrealized gains in 2017 , a decrease of $358.0 million . Included in net realized and unrealized gains are the following items:
•
net realized losses of $15.4 million in 2018 , compared to net realized gains of $3.3 million in 2017 , an increase in net realized losses of $18.7 million ;
•
net unrealized losses on fixed maturity securities, trading, of $141.0 million in 2018 , compared to net unrealized gains of $12.8 million in 2017 , a decrease of $153.8 million , primarily driven by lower valuations due to increased sovereign yields and widening of investment-grade corporate credit spreads in the current period;
•
net unrealized gains on equity securities, trading of $1.5 million in 2018 , compared to $12.4 million in 2017 , a decrease of $10.9 million , primarily driven by a less favorable movement in international equity markets in 2018;
•
decrease in fair value of other investments of $30.6 million in 2018 , compared to an increase in fair value of other investments of $68.1 million in 2017 , representing a decrease of $98.7 million . The decrease for the

111

nine months ended September 30, 2018 was primarily comprised of unrealized losses in our hedge funds and equity funds, offset by unrealized gains in our fixed income funds, CLO equities and private equities. The increase for the nine months ended September 30, 2017 was primarily comprised of unrealized gains in our equity funds, fixed income funds, hedge funds, private equities and CLO equities; and
•
decrease in fair value of embedded derivative on funds held and decrease in fair value option on funds held of $45.4 million in 2018 , compared to an increase of $30.4 million in 2017 , representing a decrease of $75.8 million , primarily driven by lower valuations due to increased sovereign yields and widening of investment-grade corporate credit spreads in the current period.

112

Atrium
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
Net investment income:
(in thousands of U.S. dollars, except percentages)
Fixed maturity investments
$
1,017

$
750

$
267

$
2,937

$
2,080

$
857

Short-term investments and cash and cash equivalents
171

74

97

397

278

119

Funds held
269

—

269

417

—

417

Investment income from fixed maturities and cash and cash equivalents
1,457

824

633

3,751

2,358

1,393

Equity securities
6

5

1

36

16

20

Other
196

82

114

477

653

(176
)
Investment income from equities and other investments
202

87

115

513

669

(156
)
Gross investment income
1,659

911

748

4,264

3,027

1,237

Investment expenses
(62
)
(64
)
2

(197
)
(195
)
(2
)
Net investment income
$
1,597

$
847

$
750

$
4,067

$
2,832

$
1,235

Net realized gains (losses) on sale:
Net realized investment gains (losses) on fixed maturity securities
$
(4
)
$
21

$
(25
)
$
(252
)
$
40

$
(292
)
Net realized investment gains on equity securities, trading
52

10

42

195

26

169

Total net realized gains (losses) on sale
48

31

17

(57
)
66

(123
)
Net unrealized gains (losses):
Fixed maturity securities, trading
(6
)
(92
)
86

(1,714
)
166

(1,880
)
Equity securities, trading
60

65

(5
)
(38
)
169

(207
)
Other investments
92

281

(189
)
(80
)
776

(856
)
Total net unrealized gains (losses)
146

254

(108
)
(1,832
)
1,111

(2,943
)
Net realized and unrealized gains (losses)
$
194

$
285

$
(91
)
$
(1,889
)
$
1,177

$
(3,066
)
Annualized Investment Book Yield
Income from cash and fixed maturities
$
5,828

$
3,296

$
2,532

$
5,001

$
3,144

$
1,857

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
$
267,750

$
251,531

$
16,219

$
265,920

$
264,070

$
1,850

Investment book yield
2.18
%
1.31
%
0.87
%
1.88
%
1.19
%
0.69
%
Financial Statement Portfolio Return
Total financial statement return (2)
$
1,791

$
1,132

$
659

$
2,178

$
4,009

$
(1,831
)
Average aggregate invested assets, at fair value (1)
$
274,200

$
260,853

$
13,347

$
273,349

$
268,889

$
4,460

Financial statement portfolio return
0.65
%
0.43
%
0.22
%
0.80
%
1.49
%
(0.69
)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
(2) This is the sum of net investment income and net realized and unrealized gains (losses) from our U.S. GAAP consolidated financial statements.
Three and Nine Months Ended September 30 : Atrium's net investment income was relatively consistent for the three and nine months ended September 30, 2018 and September 30, 2017 . Investment results improved slightly due to higher reinvestment rates as a result of broad increases in effective yields. Net realized and unrealized gains (losses) decreased by $3.1 million in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 , primarily driven by lower valuations due to the impact of increased sovereign yields and widening of investment-grade corporate credit spreads in the current period.

113

StarStone
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
Net investment income:
(in thousands of U.S. dollars, except percentages)
Fixed maturity investments
$
8,132

$
7,160

$
972

$
23,322

$
19,572

$
3,750

Short-term investments and cash and cash equivalents
885

293

592

1,831

973

858

Investment income from fixed maturities and cash and cash equivalents
9,017

7,453

1,564

25,153

20,545

4,608

Equity securities
480

14

466

1,033

63

970

Other investments
—

58

(58
)
—

93

(93
)
Other
636

634

2

1,887

1,229

658

Investment income from equities and other investments
1,116

706

410

2,920

1,385

1,535

Gross investment income
10,133

8,159

1,974

28,073

21,930

6,143

Investment expenses
(629
)
(567
)
(62
)
(2,123
)
(1,700
)
(423
)
Net investment income
$
9,504

$
7,592

$
1,912

$
25,950

$
20,230

$
5,720

Net realized gains (losses) on sale:
Net realized investment gains (losses) on fixed maturity securities
$
(1,331
)
$
130

$
(1,461
)
$
(3,781
)
$
(2,252
)
$
(1,529
)
Net realized investment gains on equity securities, trading
196

15

181

561

57

504

Total net realized gains (losses) on sale
(1,135
)
145

(1,280
)
(3,220
)
(2,195
)
(1,025
)
Net unrealized gains (losses):




Fixed maturity securities, trading
(324
)
1,976

(2,300
)
(17,020
)
10,933

(27,953
)
Equity securities, trading
49

167

(118
)
4,688

591

4,097

Other investments
2,399

2,757

(358
)
402

9,624

(9,222
)
Total net unrealized gains (losses)
2,124

4,900

(2,776
)
(11,930
)
21,148

(33,078
)
Net realized and unrealized gains (losses)
$
989

$
5,045

$
(4,056
)
$
(15,150
)
$
18,953

$
(34,103
)
Annualized Investment Book Yield
Income from cash and fixed maturities
$
36,068

$
29,812

$
6,256

$
33,537


$
27,393

$
6,144

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
$
1,528,574

$
1,492,581

$
35,993

$
1,508,229

$
1,483,225

$
25,004

Investment book yield
2.36
%
2.00
%
0.36
%
2.22
%
1.85
%
0.37
%
Financial Statement Portfolio Return
Total financial statement return (2)
$
10,493

$
12,637

$
(2,144
)
$
10,800

$
39,183

$
(28,383
)
Average aggregate invested assets, at fair value (1)
$
1,643,839

$
1,665,618

$
(21,779
)
$
1,648,170

$
1,649,138

$
(968
)
Financial statement portfolio return
0.64
%
0.76
%
(0.12
)%
0.66
%
2.38
%
(1.72
)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
2) This is the sum of net investment income and net realized and unrealized gains (losses) from our U.S. GAAP consolidated financial statements.
Net Investment Income:
Three Months Ended September 30 : Net investment income increased by $1.9 million during 2018 , primarily due to a $1.6 million increase in net investment income from fixed maturities and cash and cash equivalents. The book yield increased by 36 basis points primarily due to higher reinvestment rates as a result of broad increases in effective yields .
Net Realized and Unrealized Gains (Losses):
Three Months Ended September 30 : The decrease in net realized and unrealized gains (losses) of $4.1 million was primarily comprised of:

114

•
net realized losses on sale of investments of $1.1 million in 2018 , compared to net realized gains of $0.1 million in 2017 , a decrease of $1.3 million ;
•
net unrealized losses on fixed maturities, trading, of $0.3 million in 2018 , compared to net unrealized gains of $2.0 million in 2017, a decrease of $2.3 million , driven by lower valuations due to increased sovereign yields in the current period; and
•
increase in fair value of other investments of $2.4 million in 2018 , compared to an increase of $2.8 million in 2017, representing a decrease of $0.4 million . The increase in fair value of other investments for the three months ended September 30, 2018 and September 30, 2017 was primarily comprised of unrealized gains in our private equities, fixed income funds and equity funds.
Net Investment Income:
Nine Months Ended September 30 : Net investment income increased by $5.7 million during 2018 , primarily due to a $4.6 million increase in net investment income from fixed maturities and cash and cash equivalents. The book yield increased by 37 basis points primarily due to higher reinvestment rates as a result of broad increases in effective yields .
Net Realized and Unrealized Gains (Losses):
Nine Months Ended September 30 : The decrease in net realized and unrealized gains (losses) of $34.1 million was primarily comprised of:
•
net unrealized losses on fixed maturities, trading, of $17.0 million in 2018 , compared to net unrealized gains of $10.9 million in 2017, a decrease of $28.0 million , driven by lower valuations due to increased sovereign yields and widening of investment-grade corporate credit spreads in the current period;
•
net unrealized gains on equities, trading, of $4.7 million in 2018, compared to net unrealized gains of $0.6 million in 2017, an increase of $4.1 million , primarily driven by a more favorable movement in an equity security in 2018; and
•
increase in fair value of other investments of $0.4 million in 2018 , compared to an increase of $9.6 million in 2017, a decrease of $9.2 million . The increase for the nine months ended September 30, 2018 was primarily comprised of unrealized gains in our fixed income funds and CLO equities, offset by unrealized losses in our equity funds and private equities. The increase for the nine months ended September 30, 2017 was primarily comprised of unrealized gains in our fixed income funds, equity funds and private equities.
Other Activities
Three Months Ended
Nine Months Ended
September 30,
September 30,
2018
2017
Change
2018
2017
Change
(in thousands of U.S. dollars)
Net investment income (loss)
$
(918
)
$
760

$
(1,678
)
$
4,012

$
8,992

$
(4,980
)
Net realized and unrealized gains (losses)
100

(1,045
)
1,145

(6,803
)
(7,563
)
760

Financial Statement Portfolio Return
Total financial statement return (1)
(818
)
(285
)
(533
)
(2,791
)
1,429

(4,220
)
Average aggregate invested assets, at fair value (2)
182,381

303,436

(121,055
)
242,195

311,290

(69,095
)
Financial statement portfolio return
(0.45
)%
(0.09
)%
(0.36
)%
(1.15
)%
0.46
%
(1.61
)%
(1) This is the sum of net investment income and net realized and unrealized gains (losses) from our U.S. GAAP consolidated financial statements.
(2) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
Three and Nine Months Ended September 30 : Net investment income decreased by $1.7 million and $5.0 million during the three and nine months ended September 30, 2018 , respectively, due to a decrease in earnings from life settlements. Net realized and unrealized losses decreased by $1.1 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017, primarily due to lower impairment charges of $4.4 million on our life settlements portfolio in 2018 and were relatively consistent during the nine months ended September 30, 2018.

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Liquidity and Capital Resources
Overview
Enstar aims to generate cash flows from our insurance operations and investments, preserve sufficient capital for future acquisitions, and develop relationships with lenders who provide borrowing capacity at competitive rates.
Our capital resources as at September 30, 2018 included total shareholders' equity of $3.9 billion , redeemable noncontrolling interest of $458.3 million classified as temporary equity, and debt obligations of $394.5 million . The redeemable noncontrolling i nterest may be settled in the future in cash or Enstar ordinary shares, at our option. Based on our current loss reserves position, our portfolios of in-force insurance and reinsurance business, and our investment positions, we believe we are well capitalized.
The following table details our capital position as at September 30, 2018 and December 31, 2017 :
September 30,
2018
December 31,
2017
Change
(in thousands of U.S. dollars)
Ordinary shareholders' equity
$
3,505,364

$
3,136,684

$
368,680

Series D Preferred Shares
400,000

—

400,000

Total Enstar Group Limited Shareholders' Equity (A)
3,905,364

3,136,684

768,680

Noncontrolling interest
10,313

9,264

1,049

Total Shareholders' Equity (B)
3,915,677

3,145,948

769,729

Senior Notes
347,970

347,516

454

Revolving credit facility
46,500

225,110

(178,610
)
Term loan facility
—

74,063

(74,063
)
Total debt (C)
394,470

646,689

(252,219
)
Redeemable noncontrolling interest (D)
458,328

479,606

(21,278
)
Total capitalization = (B) + (C) + (D)
$
4,768,475

$
4,272,243

$
496,232

Total capitalization attributable to Enstar = (A) + (C)
$
4,299,834

$
3,783,373

$
516,461

Debt to total capitalization
8.3
%
15.1
%
(6.8
)%
Debt and Series D Preferred Shares to total capitalization
16.7
%
15.1
%
1.6
%
Debt to total capitalization attributable to Enstar
9.2
%
17.1
%
(7.9
)%
Debt and Series D Preferred Shares to total capitalization available to Enstar
18.5
%
17.1
%
1.4
%
As at September 30, 2018 , we had $553.4 million of cash and cash equivalents, excluding restricted cash that supports insurance operations, and included in this amount was $486.9 million held by foreign subsidiaries outside of Bermuda. Based on our group's current corporate structure with a Bermuda domiciled parent company and the jurisdictions in which we operate, if the cash and cash equivalents held by our foreign subsidiaries were to be distributed to us, as dividends or otherwise, such amounts would not be subject to incremental income taxes, however in certain circumstances withholding taxes may be imposed by some jurisdictions, including the United States. Based on existing tax laws, regulations and our current intentions, there was no accrual as at September 30, 2018 for any material withholding taxes on dividends or other distributions, as described in Note 19 - "Taxation" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.


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Dividends
Enstar has not historically declared a dividend on its ordinary shares. We retain earnings and utilize distributions from our subsidiaries to invest in our business strategies. We do not currently expect to pay any dividends on our ordinary shares.
On June 28, 2018, we issued 16,000 Series D Preferred Shares with an aggregate liquidation value of $400.0 million . The dividends on the Series D Preferred Shares are non-cumulative and may be paid quarterly in arrears on the first day of March, June, September and December of each year, only when, as and if declared. Any payment of dividends must be approved by our Board of Directors. Our ability to pay dividends is subject to certain restrictions, as described in Note 22 - "Dividend Restrictions and Statutory Financial Information" in the notes to our consolidated financial statements included within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017 .
On July 31, 2018, our Board of Directors declared a cash dividend of $320.83 per Series D Preferred Share (equivalent to $0.32083 per depositary share), which was paid on September 1, 2018 to shareholders of record on August 15, 2018.
On November 6, 2018, our Board of Directors declared a cash dividend of $437.50 per Series D Preferred Share (equivalent to $0.43750 per depositary share), which is payable on December 1, 2018 to shareholders of record on November 15, 2018.
Sources and Uses of Cash
Holding Company Liquidity
The potential sources of cash flows to Enstar as a holding company consist of cash flows from our subsidiaries including dividends, advances and loans, and interest income on loans to our subsidiaries. We also borrow under our credit facilities, and during 2017 and 2018, we issued senior notes and preferred shares as described below.
We use cash to fund new acquisitions of companies and significant new business. We also utilize cash for our operating expenses associated with being a public company and to pay interest and principal on loans from subsidiaries and debt obligations, including loans under our credit facilities and our Senior Notes.
We may, from time to time, raise capital from the issuance of equity, debt or other securities as we continuously evaluate our strategic opportunities. W e filed an automatic shelf registration statement on October 10, 2017 with the U.S. Securities and Exchange Commission ("SEC") to allow us to conduct future offerings of certain securities, if desired, including debt, equity and other securities.
On March 10, 2017, we issued Senior Notes (the "Notes") for an aggregate principal amount of $350.0 million . The Notes pay 4.5% interest semi-annually and mature on March 10, 2022. For more information regarding our senior notes and other debt obligations, refer to "Debt Obligations" below.
On June 28, 2018, we issued 16,000 Series D Preferred Shares with an aggregate liquidation value of $400.0 million . The net proceeds from the Series D Preferred Shares were used to repay a portion of amounts outstanding under our revolving credit facility, and fully repay our term loan facility.
As we are a holding company and have no substantial operations of our own, our assets consist primarily of investments in subsidiaries and our loans and advances to subsidiaries. Dividends from our insurance subsidiaries are restricted by insurance regulation, as described below.
Operating Company Liquidity
The ability to pay dividends and make other distributions is limited by the applicable laws and regulations of the jurisdictions in which our insurance and reinsurance subsidiaries operate, including Bermuda, the United Kingdom, the United States, Australia and Continental Europe, which subject these subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, certain of our insurance and reinsurance subsidiaries to maintain minimum capital resources requirements and limit the amount of dividends and other payments that these subsidiaries can pay to us, which in turn may limit our ability to pay dividends and make other payments. For more information on these laws and regulations, see "Item 1. Business - Regulation" in our Annual Report on Form 10-K for the year ended December 31, 2017 . As of September 30, 2018 , all of our insurance and reinsurance subsidiaries’ capital resources levels were in excess of the minimum levels required. The ability of our subsidiaries to pay dividends is subject to certain restrictions, as described in Note 22 - "Dividend Restrictions and Statutory Financial Information" in the notes to our consolidated financial statements included within Item 8 of our Annual Report on Form

117

10-K for the year ended December 31, 2017. Variability in ultimate loss payments may also result in increased liquidity requirements for our subsidiaries.
In the Non-life Run-off segment, sources of funds primarily consist of cash and investment portfolios acquired on the completion of acquisitions and loss portfolio transfer reinsurance agreements. Cash balances acquired upon our purchase of insurance or reinsurance companies are classified as cash provided by investing activities. Cash acquired from loss portfolio transfer reinsurance agreements is classified as cash provided by operating activities. We expect to use funds acquired from cash and investment portfolios, collected premiums, collections from reinsurance debtors, fees and commission income, investment income and proceeds from sales and redemptions of investments to meet expected claims payments and operational expenses, with the remainder used for acquisitions and additional investments. In the Non-life Run-off segment, we generally expect negative operating cash flows to be met by positive investing cash flows.
In the Atrium and StarStone segments, we expect a net provision of cash from operations as investment income earned and collected premiums should generally be in excess of total net claim payments, losses incurred on earned premiums and operating expenses. However, we expect operating cash flow in these segments will be impacted by large losses such as those related to hurricanes Harvey, Irma and Maria that we experienced in the year ended December 31, 2017.
Overall, we expect our cash flows, together with our existing capital base and cash and investments acquired on the acquisition of insurance and reinsurance subsidiaries, to be sufficient to meet cash requirements and to operate our business.
Cash Flows
The following table summarizes our consolidated cash flows provided by (used in) operating, investing and financing activities for the nine months ended September 30, 2018 and 2017 :
Nine Months Ended September 30,
2018
2017
Change
(in thousands of U.S. dollars)
Cash provided by (used in):
Operating activities
$
90,955

$
(482,246
)
$
573,201

Investing activities
(411,352
)
164,204

(575,556
)
Financing activities
135,338

(57,539
)
192,877

Effect of exchange rate changes on cash
232

6,292

(6,060
)
Net decrease in cash and cash equivalents
(184,827
)
(369,289
)
184,462

Cash and cash equivalents, beginning of period
1,212,836

1,318,645

(105,809
)
Cash and cash equivalents, end of period
$
1,028,009

$
949,356

$
78,653

Details of our consolidated cash flows are included in "Item 1. Financial Statements - Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 ."
2018 versus 2017 : Cash and cash equivalents decreased by $184.8 million during the nine months ended September 30, 2018 compared with a decrease of $369.3 million during the nine months ended September 30, 2017 .
For the nine months ended September 30, 2018 , cash and cash equivalents decreased by $184.8 million , as cash used in investing activities of $411.4 million , was partially offset by cash provided by operating activities of $91.0 million and cash provided by financing activities of $135.3 million . Cash provided by operations is largely a result of the timing of loss payments across all of our segments. Cash used in investing activities for the nine months ended September 30, 2018 primarily related to the net subscriptions of other investments of $444.0 million . In addition, we are continuously seeking to deploy surplus operating cash into our investing activities. Cash provided by financing activities for the nine months ended September 30, 2018 was primarily attributable to the net proceeds from the issuance of the Series D Preferred Shares of $389.2 million , partially offset by net repayment of loans of $248.8 million .

For the nine months ended September 30, 2017 , cash and cash equivalents decreased by $369.3 million , as cash used in operating and financing activities of $482.2 million and $57.5 million , respectively, was partially offset by cash provided by investing activities of $164.2 million . Cash used in operations is largely a result of the timing of loss

118

payments across all of our segments. Cash used in financing activities for the nine months ended September 30, 2017 related primarily to the repayment of the remaining principal on the Sussex term loan ("Sussex Facility"). Dividends of $27.5 million were also paid to redeemable noncontrolling interests during the nine months ended September 30, 2017 . In addition, during the nine months ended September 30, 2017 , we raised $347.1 million of proceeds, net of issuance costs, from the public offering of Senior Notes, and those proceeds were used to repay a portion of our revolving credit facility and to repay a portion of the Sussex Facility. Cash provided by investing activities for the nine months ended September 30, 2017 primarily related to the net redemptions of other investments of $104.4 million .
Investments and Cash and Cash Equivalents
As at September 30, 2018 and December 31, 2017 , we had total cash and cash equivalents, restricted cash and cash equivalents and investments of $9.9 billion and $8.4 billion , respectively. The increase is primarily related to the Coca-Cola, KaylaRe, Zurich, Neon and Novae transactions.
For information regarding our investments strategy, portfolio and results, refer to "Investable Assets " above.
Reinsurance Balances Recoverable
As at September 30, 2018 and December 31, 2017 , we had reinsurance balances recoverable of $1,975.6 million and $2,021.0 million , respectively.

Our insurance and reinsurance run-off subsidiaries and portfolios, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. On an annual basis, both Atrium and StarStone purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s and StarStone's third-party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.
We remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, we evaluate and monitor concentration of credit risk among our reinsurers. Provisions are made for amounts considered potentially uncollectible.
For furt her information regarding our reinsurance balances recoverable, refer to Note 9 - "Reinsurance Balances Recoverable" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Funds Held
As at each of September 30, 2018 and December 31, 2017 , we had funds held - directly managed of $1.2 billion . For furt her information regarding our funds held - directly managed, refer to Note 6 - "Funds Held - Directly Managed" in the notes to our condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
In addition, as at September 30, 2018 and December 31, 2017 , we had funds held by reinsured companies of $254.0 million and $175.4 million , respectively, which are carried at cost and receive a fixed crediting rate.

For information regarding credit risk, refer to "Item 3. Quantitative and Qualitative Disclosures About Market Risk - Credit Risk - Funds Held" of this Quarterly Report on Form 10-Q.

Debt Obligations
We utilize debt financing and loan facilities primarily for acquisitions, significant new business and, from time to time, for general corporate purposes. For information regarding our debt arrangements, including our loan covenants, refer to Note 14 - "Debt Obligations" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. Our debt obligations as at September 30, 2018 and December 31, 2017 were $394.5 million and $646.7 million , respectively.
On March 10, 2017, we issued Senior Notes (the "Notes") for an aggregate principal amount of $350.0 million . The Notes pay 4.5% interest semi-annually and mature on March 10, 2022. The Notes are unsecured and unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated obligations, senior to any future obligations that are expressly subordinated to the Notes, effectively subordinated to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally subordinated to all liabilities of our subsidiaries.

119

On August 16, 2018, we and certain of our subsidiaries, as borrowers and guarantors, entered into a new five -year unsecured $600.0 million revolving credit agreement. The credit agreement expires in August 2023 and we have the option to increase the commitments under the facility by up to an aggregate of $400.0 million . Borrowings under the facility will bear interest at a rate based on the Company's long term senior unsecured debt ratings. In connection with our entry into the credit agreement described above, we terminated and fully repaid our previous revolving credit agreement, which was originated on September 16, 2014 and most recently amended on July 17, 2018 .
As at September 30, 2018 , we were permitted to borrow up to an aggregate of $600.0 million under the facility. As at September 30, 2018 , there was $553.5 million of available unutilized capacity under this facility. We are in compl iance with the covenants of the facility. Subsequent to September 30, 2018 , we repaid $10.0 million , bringing the unutilized capacity under this facility to $563.5 million .
As at September 30, 2018 and December 31, 2017 , there were borrowings of €nil and €50.0 million ( $60.1 million ), respectively, under our revolving credit facilities in effect as of such dates that were designated as non-derivative hedges of our net investment in certain subsidiaries whose functional currency is denominated in Euros. Refer to Note 8 - "Derivative and Hedging Instruments" for more information on these non-derivative hedges.
We also had a three-year unsecured term loan that was originated on November 18, 2016. As at December 31, 2017 , the outstanding principal under this facility was $74.1 million . Following the issuance of the Series D Preferred Shares in the second quarter of 2018, a portion of the proceeds was used to fully repay this facility and the facility was subsequently terminated.
In June 2017, we repaid the outstanding principal on a four-year term loan we had entered into in connection with our acquisition of Sussex, and the facility was terminated.

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Contractual Obligations
The following table summarizes, as at September 30, 2018 , our future payments under contractual obligations and estimated payments for losses and LAE and policy benefits by expected payment date and updates the table on page 86 of our Annual Report on Form 10-K for the year ended December 31, 2017 . The table excludes short-term liabilities and includes only obligations that are expected to be settled in cash.
Total
Less than
1 Year
1 - 3
years
3 - 5
years
6 - 10
years
More than
10 Years
(in millions of U.S. dollars)
Operating Activities
Estimated gross reserves for losses and LAE (1)
Asbestos
$
1,712.5

$
94.2

$
181.4

$
170.7

$
308.7

$
957.5

Environmental
207.4

29.5

50.8

39.0

46.5

41.6

General Casualty
832.3

175.1

227.6

134.2

133.8

161.6

Workers' compensation/personal accident
2,173.2

228.4

363.0

275.9

391.8

914.1

Marine, aviation and transit
392.1

78.7

108.9

61.5

71.9

71.1

Construction defect
141.7

26.3

43.4

32.4

29.6

10.0

Professional indemnity/ Directors & Officers
904.1

196.7

274.7

157.6

153.7

121.4

Other
1,047.6

253.9

286.3

145.7

139.6

222.1

Total Non-Life Run-off
7,410.9

1,082.8

1,536.1

1,017.0

1,275.6

2,499.4

Atrium
238.0

74.6

100.9

39.1

19.4

4.0

StarStone
1,460.6

551.3

552.3

212.2

137.6

7.2

Estimated gross reserves for losses and LAE (1)
9,109.5

1,708.7

2,189.3

1,268.3

1,432.6

2,510.6

Policy benefits for life and annuity contracts (2)
124.4

5.7

12.1

11.6

29.4

65.6

Operating lease obligations
55.0

10.6

16.6

10.9

14.8

2.1

Acquisition of Maiden Re North America
307.5

307.5

—

—

—

—

Investing Activities
Investment commitments to private equity funds
200.0

91.7

88.0

20.3

—

—

Investment commitments to equity and equity method investments
200.0

200.0

—

—

—

—

Financing Activities
Loan repayments (including estimated interest payments)
470.1

19.7

39.2

411.2

—

—

Total
$
10,466.5

$
2,343.9

$
2,345.2

$
1,722.3

$
1,476.8

$
2,578.3

(1)
The reserves for losses and LAE represent management’s estimate of the ultimate cost of settling losses. The estimation of losses is based on various complex and subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our financial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may be significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different from the amounts disclosed above. The amounts in the above table represent our estimates of known liabilities as of September 30, 2018 and do not take into account corresponding reinsurance balance recoverable amounts that would be due to us. Furthermore, certain of the reserves included in the audited consolidated financial statements as of September 30, 2018 were acquired by us and initially recorded at fair value with subsequent amortization, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect the fair value adjustment in the amount payable.
(2)
Policy benefits for life and annuity contracts recorded in our unaudited consolidated balance sheet as at September 30, 2018 of $107.5 million are computed on a discounted basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect a discount of the amount payable.

121

In addition to the contractual obligations in the table above, we also have the right to purchase the redeemable noncontrolling interests ("RNCI") from the RNCI holders at certain times in the future (each such right, a "call right") and the RNCI holders have the right to sell their RNCI to us at certain times in the future (each such right, a "put right"). The RNCI rights are described in Note 21 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017 .
For additional information relating to our commitments and contingencies, see Note 21 - "Commitments and Contingencies" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Included in the above table are commitments related to the acquisition of Maiden Re North America and an equity investment in AmTrust. Refer to Note 3 - "Acquisitions" and Note 20 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Form 10-Q.
Off-Balance Sheet Arrangements
At September 30, 2018 , we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies
Our critical accounting policies 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, 2017 and have not materially changed.
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report and the documents incorporated by reference contain statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our ordinary shares and the insurance and reinsurance sectors in general. Statements that include words such as "estimate," "project," "plan," "intend," "expect," "anticipate," "believe," "would," "should," "could," "seek," "may" and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not statements of historical fact, reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward looking statements should, therefore, be considered in light of various important factors, including those set forth in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2017 . These factors include:
•
risks associated with implementing our business strategies and initiatives;
•
the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;
•
risks relating to our acquisitions, including our ability to continue to grow, successfully price acquisitions, evaluate opportunities, address operational challenges, support our planned growth and assimilate acquired companies into our internal control system in order to maintain effective internal controls, provide reliable financial reports and prevent fraud;
•
risks relating to our active underwriting businesses, including unpredictability and severity of catastrophic and other major loss events, failure of risk management and loss limitation methods, the risk of a ratings downgrade or withdrawal, cyclicality of demand and pricing in the insurance and reinsurance markets;
•
risks relating to the performance of our investment portfolio and our ability to structure our investments in a manner that recognizes our liquidity needs;
•
changes and uncertainty in economic conditions, including interest rates, inflation, currency exchange rates, equity markets and credit conditions, which could affect our investment portfolio, our ability to finance future acquisitions and our profitability;
•
the risk that ongoing or future industry regulatory developments will disrupt our business, affect the ability of our subsidiaries to operate in the ordinary course or to make distributions to us, or mandate changes in

122

industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;
•
risks that we may require additional capital in the future, which may not be available or may be available only on unfavorable terms;
•
risks relating to the availability and collectability of our reinsurance;
•
losses due to foreign currency exchange rate fluctuations;
•
increased competitive pressures, including the consolidation and increased globalization of reinsurance providers;
•
emerging claim and coverage issues;
•
lengthy and unpredictable litigation affecting assessment of losses and/or coverage issues;
•
loss of key personnel;
•
the ability of our subsidiaries to distribute funds to us and the resulting impact on our liquidity;
•
our ability to comply with covenants in our debt agreements;
•
changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at management’s discretion;
•
operational risks, including system, data security or human failures and external hazards;
•
risks relating to our ability to obtain regulatory approvals, including the timing, terms and conditions of any such approvals, and to satisfy other closing conditions in connection with our acquisition agreements, which could affect our ability to complete acquisitions;
•
our ability to implement our strategies relating to our active underwriting businesses;
•
risks relating to our investments in life settlements contracts, including that actual experience may differ from our assumptions regarding longevity, cost projections, and risk of non-payment from the insurance carrier;
•
risks relating to our subsidiaries with liabilities arising from legacy manufacturing operations;
•
tax, regulatory or legal restrictions or limitations applicable to us or the insurance and reinsurance business generally;
•
changes in tax laws or regulations applicable to us or our subsidiaries, or the risk that we or one of our non-U.S. subsidiaries become subject to significant, or significantly increased, income taxes in the United States or elsewhere;
•
changes in Bermuda law or regulation or the political stability of Bermuda; and
•
changes in accounting policies or practices.
The factors listed above should be not construed as exhaustive and should be read in conjunction with the other cautionary statements and Risk Factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2017 . We undertake no obligation to publicly update or review any forward looking statement, whether to reflect any change in our expectations with regard thereto, or as a result of new information, future developments or otherwise, except as required by law.

123

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following risk management discussion and the estimated amounts generated from sensitivity analysis presented are forward-looking statements of market risk assuming certain market conditions occur. Future results may differ materially from these estimated results due to, among other things, actual developments in the global financial markets, changes in the composition of our investment portfolio, or changes in our business strategies. The results of analysis we use to assess and mitigate risk are not projections of future events or losses. See "Cautionary Statement Regarding Forward-Looking Statements" for additional information regarding our forward-looking statements.
We are principally exposed to four types of market risk: interest rate risk, credit risk, equity price risk and foreign currency risk. Our policies to address these risks in 2018 are not materially different than those used in 2017 , other than as described herein, and, based on our current knowledge and expectations, we do not currently anticipate significant changes in our market risk exposures or in how we will manage those exposures in future reporting periods.
Interest Rate Risk
Interest rate risk is the price sensitivity of a security to changes in interest rates. Our investment portfolio and funds held - directly managed include fixed maturity and short-term investments, whose fair values will fluctuate with changes in interest rates. We attempt to maintain adequate liquidity in our fixed maturity investments portfolio with a strategy designed to emphasize the preservation of our invested assets and provide sufficient liquidity for the prompt payment of claims and contract liabilities, as well as for settlement of commutation payments. We also monitor the duration and structure of our investment portfolio.
The following table summarizes the aggregate hypothetical change in fair value from an immediate parallel shift in the treasury yield curve, assuming credit spreads remain constant, in our fixed maturity and short-term investments portfolio classified as t rading and available-for-sale as at September 30, 2018 and December 31, 2017 :
Interest Rate Shift in Basis Points
As at September 30, 2018
-100
-50
—
+50
+100
(in millions of U.S. dollars)
Total Market Value
$
7,051

$
6,874

$
6,708

$
6,530

$
6,368

Market Value Change from Base
5.1
%
2.5
%
—

(2.7
)%
(5.1
)%
Change in Unrealized Value
$
343

$
166

$
—

$
(178
)
$
(340
)
As at December 31, 2017
-100
-50
—
+50
+100
Total Market Value
$
6,438

$
6,261

$
6,087

$
5,919

$
5,760

Market Value Change from Base
5.8
%
2.9
%
—

(2.8
)%
(5.4
)%
Change in Unrealized Value
$
351

$
174

$
—

$
(168
)
$
(327
)
The following table summarizes the aggregate hypothetical change in fair value from an immediate parallel shift in the treasury yield curve, assuming credit spreads remain constant, in our funds held - directly managed portfolio as at September 30, 2018 and December 31, 2017 :
Interest Rate Shift in Basis Points
As at September 30, 2018
-100
-50
—
+50
+100
(in millions of U.S. dollars)
Total Market Value
$
1,283

$
1,242

$
1,203

$
1,166

$
1,132

Market Value Change from Base
6.7
%
3.2
%
—

(3.1
)%
(5.9
)%
Change in Unrealized Value
$
80

$
39

$
—

$
(37
)
$
(71
)
As at December 31, 2017
-100
-50
—
+50
+100
Total Market Value
$
1,247

$
1,205

$
1,165

$
1,128

$
1,092

Market Value Change from Base
7.0
%
3.4
%
—

(3.2
)%
(6.3
)%
Change in Unrealized Value
$
82

$
40

$
—

$
(37
)
$
(73
)

124

Actual shifts in interest rates may not change by the same magnitude across the maturity spectrum or on an individual security and, as a result, the impact on the fair value of our fixed maturity securities, short-term investments and funds held - directly managed may be materially different from the resulting change in value indicated in the tables above.
Credit Risk
Credit risk relates to the uncertainty of a counterparty’s ability to make timely payments in accordance with contractual terms of the instrument or contract. We are exposed to direct credit risk primarily within our portfolios of fixed maturity and short-term investments, and through customers, brokers and reinsurers in the form of premiums receivable, reinsurance balances recoverables, and funds held by reinsured companies, as discussed below.
Fixed Maturity and Short-Term Investments
As a holder of $6.7 billion of fixed maturity and short-term investments, we also have exposure to credit risk as a result of investment ratings downgrades or issuer defaults. In an effort to mitigate this risk, our investment portfolio consists primarily of investment grade-rated, liquid, fixed maturity investments of short-to-medium duration and mutual funds. A table of credit ratings for our fixed maturity and short-term investments is in Note 5 - "Investments" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. In addition, we manage our portfolio pursuant to guidelines that follow what we believe are prudent standards of diversification. The guidelines limit the allowable holdings of a single issue and issuers and, as a result, we do not believe we have significant concentrations of credit risk. A summary of our fixed maturity and short-term investments by credit rating as at September 30, 2018 and December 31, 2017 is as follows:
Credit rating
As at September 30, 2018
As at December 31, 2017
Change
AAA
23.9
%
24.7
%
(0.8
)%
AA
17.0
%
15.4
%
1.6
%
A
33.8
%
34.6
%
(0.8
)%
BBB
19.0
%
18.6
%
0.4
%
Non-investment grade
6.0
%
6.4
%
(0.4
)%
Not rated
0.3
%
0.3
%
—
%
Total
100.0
%
100.0
%

Average credit rating
A+

A+

Reinsurance Balances Recoverable
We have exposure to credit risk as it relates to our reinsurance balances recoverable. Our insurance subsidiaries remain liable to the extent that retrocessionaires do not meet their contractual obligations and, therefore, we evaluate and monitor concentration of credit risk among our reinsurers. A discussion of our reinsurance balances recoverable is in Note 9 - "Reinsurance Balances Recoverable" in the notes to our consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Funds Held

Under funds held arrangements, the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable are deducted. We are subject to credit risk if the reinsured company is unable to honor the value of the funds held balances, such as in the event of insolvency. However, we generally have the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by us to the reinsured for losses payable and other amounts contractually due. Our funds held are shown under two categories on the consolidated balance sheets, where funds held upon which we receive the underlying portfolio economics are shown as "Funds held - directly managed", and funds held where we receive a fixed crediting rate are shown as "Funds held by reinsured companies". Both types of funds held are subject to credit risk. We routinely monitor the creditworthiness of reinsured companies with whom we have funds held arrangements. As at September 30, 2018 , we have a significant concentration of $1,037.6 million to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's.

125


Equity Price Risk
Our portfolio of equity investments, including the equity funds and call options on equities included in other investments and other assets (collectively, "equities at risk"), has exposure to equity price risk, which is the risk of potential loss in fair value resulting from adverse changes in stock prices. Our global equity portfolio is correlated with a blend of the S&P 500 and MSCI World indices, and changes in this blend of indices would approximate the impact on our portfolio. The fair value of our equities at risk at September 30, 2018 was approximately $773.5 million ( December 31, 2017 : $645.7 million ). At September 30, 2018 , the impact of a 10% decline in the overall market prices of our equities at risk would be approximately $77.4 million ( December 31, 2017 : $64.6 million ), on a pre-tax basis.
September 30,
2018
December 31,
2017
Change
(in millions of U.S. dollars)
Equities — U.S.
$
72.8

$
106.4

$
(33.6
)
Equities — International
57.5

0.2

57.3

Private equities funds
256.6

289.6

(33.0
)
Equity Funds
382.0

249.5

132.5

Call options on equity
4.6

—

4.6

Fair value of equities at risk
$
773.5

$
645.7

$
127.8


Impact of 10% decline in fair value
$
77.4

$
64.6

$
12.8

In addition to the above, at September 30, 2018 we also have investments of $879.6 million ( December 31, 2017 : $63.8 million ) in hedge funds, included within our other investments, at fair value, that have exposure, amongst other items, to equity price risk.
Foreign Currency Risk
Our foreign currency policy is to broadly manage, where possible, our foreign currency risk by seeking to match our liabilities under insurance and reinsurance policies that are payable in foreign currencies with assets that are denominated in such currencies, subject to regulatory constraints. In addition, we may selectively utilize foreign currency forward contracts to mitigate foreign currency risk. To the extent our foreign currency exposure is not matched or hedged, we may experience foreign exchange losses or gains, which would be reflected in our results of operations and financial condition.
Through our subsidiaries located in various jurisdictions, we conduct our insurance and reinsurance operations in a variety of non-U.S. currencies. The functional currency for the majority of our subsidiaries is the U.S. dollar. Fluctuations in foreign currency exchange rates relative to a subsidiary's functional currency will have a direct impact on the valuation of our assets and liabilities denominated in other currencies. All changes in foreign exchange rates, with the exception of non-U.S. dollar denominated investments classified as available-for-sale, are recognized in foreign exchange gains (losses) in our unaudited condensed consolidated statements of earnings. Changes in foreign exchange rates relating to non-U.S. dollar denominated investments classified as available-for-sale are recorded in unrealized gains (losses) on investments, which is a component of accumulated other comprehensive income (loss) in shareholders’ equity.
We have exposure to foreign currency risk through our ownership of European, British and Australian subsidiaries whose functional currencies are the Euro, British pound and Australian dollar, respectively. The foreign exchange gain or loss resulting from the translation of their financial statements from functional currency into U.S. dollars is recorded in the currency translation adjustment account, which is a component of accumulated other comprehensive income (loss) in shareholders’ equity. During the three months ended September 30, 2018, we fully repaid our borrowing of Euros under the EGL Revolving Credit Facility, which was hedging the foreign currency exposure on our net investment in certain of our subsidiaries whose functional currency is denominated in Euros, and replaced the hedge with a Euro-denominated foreign currency forward exchange rate contract. During the nine months ended September 30, 2018 , we utilized forward exchange contracts to hedge the foreign currency exposure on our net investment in certain of our subsidiaries whose functional currencies are denominated in Australian dollars. The loan and the forward contracts are discussed in Note 14 - "Debt Obligations" and Note 8 - "Derivative and Hedging Instruments" , respectively, in the

126

notes to our consolidated financial statements included within Item 1 of this Quarterly Report. We utilized hedge accounting to record the foreign exchange gain or loss on these instruments in the currency translation account.
In addition, we also have exposure to foreign currency risk through our investment and run-off portfolios and from time to time, we may utilize foreign currency forward contracts to hedge these foreign currency exposures in British pounds, Canadian dollars and Euros, which were not designated for hedge accounting.
The table below summarizes our net exposures to foreign currencies as at September 30, 2018 and December 31, 2017 :
As at September 30, 2018
AUD
CAD
EUR
GBP
Other
Total
(in millions of U.S. dollars)
Total net foreign currency exposure
$
(2.2
)
$
4.3

$
3.4

$
4.0

$
2.8

$
12.2

Pre-tax impact of a 10% movement of the U.S. dollar (1)
$
(0.2
)
$
0.4

$
0.3

$
0.4

$
0.3

$
1.2

As at December 31, 2017
AUD
CAD
EUR
GBP
Other
Total
(in millions of U.S. dollars)
Total net foreign currency exposure
$
(2.1
)
$
(3.4
)
$
11.0

$
7.0

$
3.7

$
16.2

Pre-tax impact of a 10% movement of the U.S. dollar (1)
$
(0.2
)
$
(0.3
)
$
1.1

$
0.7

$
0.4

$
1.6

(1)
Assumes 10% change in the U.S. dollar relative to other currencies
Effects of Inflation
We do not believe that inflation has had or will have a material effect on our consolidated results of operations; however, the actual effects of inflation on our results cannot be accurately known until claims are ultimately resolved. Inflation may affect the value of our assets, as well as our liabilities including losses and LAE by causing the cost of claims to rise in the future. Although loss reserves are established to reflect likely loss settlements at the date payment is made, we would be subject to the risk that inflation could cause these costs to increase above established reserves.

127

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as at September 30, 2018 . Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that we maintained effective disclosure controls and procedures to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and timely reported as specified in the rules and forms of the U.S. Securities and Exchange Commission and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

128

PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 21 - "Commitments and Contingencies" in the notes to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
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, 2017 . The risk factors identified therein have not materially changed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about ordinary shares acquired by the Company during t he three months ended September 30, 2018 , which were shares withheld from employees in order to facilitate the payment of withholding taxes on restricted shares. The Company does not have a share repurchase program.
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Program
July 1, 2018 - July 31, 2018
—

$
—

—

—

August 1, 2018 - August 31, 2018
318

$
209.10

—

—

September 1, 2018 - September 30, 2018
—

$
—

—

—

Total
318

—

—

(1)
Consists of shares withheld from employees in order to facilitate the payment of withholding taxes on restricted shares granted pursuant to our equity incentive plan. The price for the shares is their fair market value, as determined by reference to the closing price of our ordinary shares on the vesting date.

129

ITEM 6. EXHIBITS
Exhibit
No.
Description
2.1 †
Master Transaction Agreement, dated as of August 31, 2018, by and among Enstar Group Limited, Enstar Holdings (US) LLC and Maiden Holdings North America, Ltd. (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed on September 9, 2018).
Memorandum of Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-K/A filed on May 2, 2011).
Fourth Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit 3.2(b) of the Company’s Form 10-Q filed on August 11, 2014).
Certificate of Designations of Series C Participating Non-Voting Perpetual Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on June 17, 2016).
Certificate of Designations of 7.00% fixed-to-floating rate perpetual non-cumulative preference shares, Series D (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on June 27, 2018).
Revolving Credit Agreement, dated as of August 16, 2018, among Enstar Group Limited and certain of its subsidiaries, National Australia Bank Limited, Barclays Bank PLC, Wells Fargo Securities, LLC, Wells Fargo Bank, National Association and each of the lenders party thereto (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed on August 21, 2018).
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
Interactive Data Files.
________________________________
*     filed herewith
** furnished herewith
† Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby agrees to supplementally furnish to the SEC upon request any omitted schedule or exhibit.



130

SIGNATURES
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 November 7, 2018 .
ENSTAR GROUP LIMITED
By:
/ S / GUY BOWKER
Guy Bowker
Chief Financial Officer, Authorized Signatory, Principal Financial Officer and Principal Accounting Officer



131
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 2 - "significant Accounting Policies"Note 20 - "related Party Transactions"Note 7 - "fair Value Measurements"Note 3 - "significant New Business"Note 4 - "significant New Business"Note 8 - "derivative and Hedging Instruments"Note 11 - "losses and Loss Adjustment Expenses"Note 2 - "acquisitions"Note 14 - "goodwill, Intangible Assets and Deferred Charges"Note 15 - "debt Obligations"Note 21 - "commitments and Contingencies"Note 17 - "share Capital"Note 19 - "share-based Compensation and Pensions"Note 9 - "reinsurance Balances Recoverable"Note 3 - "acquisitions"Note 1 - "description Of Business"Note 24 - "segment Information"Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsNote 5 - "investments"Note 5 - "divestitures, Held-for-sale Businesses and Discontinuing Operations"Note 6 - "funds Held - Directly Managed"Note 19 - "taxation"Note 22 - "dividend Restrictions and Statutory Financial Information"Note 14 - "debt Obligations"Note 21 - "related Party Transactions"Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits

Exhibits

2.1 Master Transaction Agreement, dated as of August 31, 2018, by and among Enstar Group Limited, Enstar Holdings (US) LLC and Maiden Holdings North America, Ltd. (incorporated by reference to Exhibit 2.1 of the Companys Form 8-K filed on September 9, 2018). 3.1 Memorandum of Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 of the Companys Form 10-K/A filed on May 2, 2011). 3.2 Fourth Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit 3.2(b) of the Companys Form 10-Q filed on August 11, 2014). 3.3 Certificate of Designations of Series C Participating Non-Voting Perpetual Preferred Stock (incorporated by reference to Exhibit 3.1 of the Companys Form 8-K filed on June 17, 2016). 3.4 Certificate of Designations of 7.00% fixed-to-floating rate perpetual non-cumulative preference shares, Series D (incorporated by reference to Exhibit 4.1 of the Companys Form 8-K filed on June 27, 2018). 10.1 Revolving Credit Agreement, dated as of August 16, 2018, among Enstar Group Limited and certain of its subsidiaries, National Australia Bank Limited, Barclays Bank PLC, Wells Fargo Securities, LLC, Wells Fargo Bank, National Association and each of the lenders party thereto (incorporated by reference to Exhibit 2.1 of the Companys Form 8-K filed on August 21, 2018). 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.