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, 2017
Commission File Number 001-33289

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11880406&doc=15
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 8, 2017, the registrant had outstanding 16,423,896 voting ordinary shares and 3,004,443
non-voting convertible ordinary shares, each par value $1.00 per share.
 


Table of Contents



Enstar Group Limited
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2017

Table of Contents
 
 
 
Page
PART I
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.


Table of Contents


PART I — FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2017 and December 31, 2016
 
September 30,
2017
 
December 31,
2016
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
254,251

 
$
222,918

Short-term investments, available-for-sale, at fair value (amortized cost: 2017 — $nil; 2016 — $287)

 
268

Fixed maturities, trading, at fair value
5,814,991

 
4,388,242

Fixed maturities, available-for-sale, at fair value (amortized cost: 2017 — $220,249; 2016 — $269,577)
222,085

 
267,499

Equities, trading, at fair value
109,650

 
95,047

Other investments, at fair value
902,864

 
937,047

Other investments, at cost
127,562

 
131,651

Total investments
7,431,403

 
6,042,672

Cash and cash equivalents
624,451

 
954,871

Restricted cash and cash equivalents
324,905

 
363,774

Funds held - directly managed
1,191,923

 
994,665

Premiums receivable
413,300

 
406,676

Deferred tax assets
14,189

 
11,374

Prepaid reinsurance premiums
243,470

 
219,115

Reinsurance balances recoverable
1,569,757

 
1,460,743

Reinsurance balances recoverable, at fair value
545,748

 

Funds held by reinsured companies
91,800

 
82,073

Deferred acquisition costs
75,117

 
58,114

Goodwill and intangible assets
181,831

 
184,855

Other assets
829,230

 
842,356

Assets held for sale
1,222,306

 
1,244,456

TOTAL ASSETS
$
14,759,430

 
$
12,865,744

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses
$
5,760,465

 
$
5,987,867

Losses and loss adjustment expenses, at fair value
1,855,252

 

Policy benefits for life and annuity contracts
118,615

 
112,095

Unearned premiums
568,673

 
548,343

Insurance and reinsurance balances payable
254,041

 
394,021

Deferred tax liabilities
22,339

 
28,356

Debt obligations
653,454

 
673,603

Other liabilities
928,147

 
705,318

Liabilities held for sale
1,126,270

 
1,150,787

TOTAL LIABILITIES
11,287,256

 
9,600,390

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST
440,342

 
454,522

 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Share capital authorized, issued and fully paid, par value $1 each (authorized 2017 and 2016: 156,000,000):

 

Ordinary shares (issued and outstanding 2017: 16,390,681; 2016: 16,175,250)
16,391

 
16,175

Non-voting convertible ordinary shares:
 
 
 
Series C (issued and outstanding 2017: 2,599,672; 2016: 2,792,157)
2,600

 
2,792

Series E (issued and outstanding 2017: 404,771; 2016: 404,771)
405

 
405

Series C Preferred Shares (issued 2017: 388,571; 2016: 388,571)
389

 
389

Treasury shares at cost (Preferred shares 2017: 388,571; 2016: 388,571)
(421,559
)
 
(421,559
)
Additional paid-in capital
1,391,229

 
1,380,109

Accumulated other comprehensive loss
(5,161
)
 
(23,549
)
Retained earnings
2,037,051

 
1,847,550

Total Enstar Group Limited Shareholders’ Equity
3,021,345

 
2,802,312

Noncontrolling interest
10,487

 
8,520

TOTAL SHAREHOLDERS’ EQUITY
3,031,832

 
2,810,832

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
14,759,430

 
$
12,865,744


See accompanying notes to the unaudited condensed consolidated financial statements

1

Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three and Nine Months Ended September 30, 2017 and 2016
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(expressed in thousands of U.S. dollars,
except share and per share data)
INCOME
 
 
 
 
 
 
 
Net premiums earned
$
148,025

 
$
205,730

 
$
452,494

 
$
607,326

Fees and commission income
15,895

 
9,187

 
46,476

 
26,098

Net investment income
52,028

 
48,022

 
150,184

 
143,234

Net realized and unrealized gains
29,301

 
66,608

 
139,697

 
139,388

Other income (loss)
(3,848
)
 
414

 
19,206

 
6,113

 
241,401

 
329,961

 
808,057

 
922,159

EXPENSES
 
 
 
 
 
 
 
Net incurred losses and loss adjustment expenses
75,712

 
(6,902
)
 
163,224

 
172,778

Life and annuity policy benefits
1,060

 
1,682

 
5,048

 
227

Acquisition costs
24,281

 
50,074

 
75,457

 
138,950

General and administrative expenses
100,325

 
103,097

 
309,283

 
300,237

Interest expense
6,410

 
5,027

 
20,851

 
15,846

Net foreign exchange losses
4,775

 
2,276

 
15,612

 
2,192

Loss on sale of subsidiary
6,740

 

 
16,349

 

 
219,303

 
155,254

 
605,824

 
630,230

EARNINGS BEFORE INCOME TAXES
22,098

 
174,707

 
202,233

 
291,929

INCOME TAXES
(1,432
)
 
(8,227
)
 
(3,234
)
 
(23,646
)
NET EARNINGS FROM CONTINUING OPERATIONS
20,666

 
166,480

 
198,999

 
268,283

NET EARNINGS (LOSSES) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE
3,495

 
3,897

 
(1,005
)
 
6,480

NET EARNINGS
24,161

 
170,377

 
197,994

 
274,763

Less: Net (earnings) losses attributable to noncontrolling interest
14,832

 
(14,329
)
 
(14,135
)
 
(32,601
)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
38,993

 
$
156,048

 
$
183,859

 
$
242,162

 
 
 
 
 
 
 
 
Earnings per ordinary share attributable to Enstar Group Limited:
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
1.83

 
$
7.89

 
$
9.54

 
$
12.21

Net earnings (losses) from discontinued operations
0.18

 
0.20

 
(0.05
)
 
0.34

Net earnings per ordinary share
$
2.01

 
$
8.09

 
$
9.49

 
$
12.55

Diluted:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
1.81

 
$
7.82

 
$
9.47

 
$
12.13

Net earnings (losses) from discontinued operations
0.18

 
0.20

 
(0.05
)
 
0.33

Net earnings per ordinary share
$
1.99

 
$
8.02

 
$
9.42

 
$
12.46

Weighted average ordinary shares outstanding:
 
 
 
 
 
 
 
Basic
19,392,120

 
19,299,038

 
19,384,897

 
19,292,450

Diluted
19,559,168

 
19,449,430

 
19,515,987

 
19,432,658

See accompanying notes to the unaudited condensed consolidated financial statements

2

Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2017 and 2016
 
    
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(expressed in thousands of U.S. dollars)
NET EARNINGS
$
24,161

 
$
170,377

 
$
197,994

 
$
274,763

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized holding gains on fixed income investments arising during the period
2,219

 
1,398

 
4,598

 
10,762

Reclassification adjustment for net realized gains included in net earnings
(3
)
 
(12
)
 
(254
)
 
(147
)
Unrealized gains arising during the period, net of reclassification adjustment
2,216

 
1,386

 
4,344

 
10,615

Currency translation adjustment
11,634

 
2,803

 
15,891

 
8,856

Total other comprehensive income (loss)
13,850

 
4,189

 
20,235

 
19,471

Comprehensive income
38,011

 
174,566

 
218,229

 
294,234

Less: Comprehensive income attributable to noncontrolling interest
14,432

 
(14,321
)
 
(15,983
)
 
(34,240
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
52,443

 
$
160,245

 
$
202,246

 
$
259,994


See accompanying notes to the unaudited condensed consolidated financial statements


3

Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2017 and 2016
 
Nine Months Ended
September 30,
 
2017
 
2016
 
(expressed in thousands of U.S. dollars)
Share Capital — Ordinary Shares
 
 
 
Balance, beginning of period
$
16,175

 
$
16,133

Issue of shares
24

 
38

Conversion of Series C Non-Voting Convertible Ordinary Shares
192

 

Balance, end of period
$
16,391

 
$
16,171

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

 
$
2,973

Shares converted to Series C Convertible Participating Non-Voting Perpetual Preferred Stock

 
(2,973
)
Balance, end of period
$

 
$

Share Capital — Series C Non-Voting Convertible Ordinary Shares
 
 
 
Balance, beginning of period
$
2,792

 
$
2,726

Conversion to Ordinary Shares
(192
)
 

Balance, end of period
$
2,600

 
$
2,726

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

 
$
405

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

 
$

Conversion of Series A Non-Voting Convertible Ordinary Stock

 
389

Balance, beginning and end of period
$
389

 
$
389

Treasury Shares
 
 
 
Balance, beginning and end of period
$
(421,559
)
 
$
(421,559
)
Additional Paid-in Capital
 
 
 
Balance, beginning of period
$
1,380,109

 
$
1,373,044

Issue of shares and warrants
647

 
1,023

Conversion of Series A Non-Voting Convertible Ordinary Stock

 
2,584

Amortization of equity incentive plan
10,473

 
2,738

Balance, end of period
$
1,391,229

 
$
1,379,389

Accumulated Other Comprehensive Loss
 
 
 
Balance, beginning of period
$
(23,549
)
 
$
(35,162
)
Currency translation adjustment
 
 
 
Balance, beginning of period
(18,993
)
 
(23,790
)
Change in currency translation adjustment
8,440

 
8,852

Reclassification to earnings on disposal of subsidiary
7,440

 

Balance, end of period
(3,113
)
 
(14,938
)
Defined benefit pension liability
 
 
 
Balance, beginning and end of period
(4,644
)
 
(7,723
)
Unrealized gains (losses) on investments
 
 
 
Balance, beginning of period
88

 
(3,649
)
Change in unrealized gains (losses) on investments
2,508

 
8,977

Balance, end of period
2,596

 
5,328

Balance, end of period
$
(5,161
)
 
$
(17,333
)
Retained Earnings
 
 
 
Balance, beginning of period
$
1,847,550

 
$
1,578,312

Net earnings attributable to Enstar Group Limited
183,859

 
242,162

Accretion of redeemable noncontrolling interests to redemption value
760

 
(3,208
)
Cumulative effect of change in accounting principle
4,882

 

Balance, end of period
$
2,037,051

 
$
1,817,266

Noncontrolling Interest (excludes Redeemable Noncontrolling Interest)
 
 
 
Balance, beginning of period
$
8,520

 
$
3,911

Contribution of capital
22

 

Net earnings attributable to noncontrolling interest
1,945

 
(434
)
Balance, end of period
$
10,487

 
$
3,477

 
See accompanying notes to the unaudited condensed consolidated financial statements

4

Table of Contents


ENSTAR GROUP LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2017 and 2016
 
Nine Months Ended
September 30,
 
2017
 
2016
 
(expressed in thousands
 of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings
$
197,994

 
$
274,763

Net losses (earnings) from discontinued operations
1,005

 
(6,480
)
Adjustments to reconcile net earnings to cash flows used in operating activities:
 
 
 
Net realized gains on sale of investments
(5,012
)
 
(5,661
)
Net unrealized gains on investments
(108,011
)
 
(133,727
)
Other non-cash items
10,544

 
5,207

Depreciation and other amortization
28,925

 
27,511

Net change in trading securities held on behalf of policyholders
25,597

 
(1,276
)
Sales and maturities of trading securities
4,111,406

 
2,223,274

Purchases of trading securities
(5,611,677
)
 
(2,155,120
)
Net loss on sale of subsidiary
16,349

 

Changes in:
 
 
 
Reinsurance balances recoverable
(628,654
)
 
197,261

Funds held by reinsured companies
(206,985
)
 
(1,031,338
)
Losses and loss adjustment expenses
1,590,764

 
411,006

Policy benefits for life and annuity contracts
170

 
(7,098
)
Insurance and reinsurance balances payable
(140,356
)
 
(2,331
)
Unearned premiums
20,330

 
6,782

Other operating assets and liabilities
215,365

 
101,780

Net cash flows used in operating activities
(482,246
)
 
(95,447
)
INVESTING ACTIVITIES:
 
 
 
Acquisitions, net of cash acquired
(670
)
 
9,924

Sale of subsidiary, net of cash sold
19,690

 

Sales and maturities of available-for-sale securities
60,202

 
64,865

Purchase of available-for-sale securities
(2,565
)
 
(52,865
)
Purchase of other investments
(98,203
)
 
(47,361
)
Redemption of other investments
202,581

 
92,403

Other investing activities
(16,831
)
 
(2,693
)
Net cash flows provided by investing activities
164,204

 
64,273

FINANCING ACTIVITIES:
 
 
 
Contribution by noncontrolling interest
22

 

Dividends paid to noncontrolling interest
(27,458
)
 

Receipt of loans
534,100

 
154,048

Repayment of loans
(564,203
)
 
(186,250
)
Net cash flows used in financing activities
(57,539
)
 
(32,202
)
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
6,292

 
(3,488
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(369,289
)
 
(66,864
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,318,645

 
1,295,169

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
949,356

 
$
1,228,305

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
11,107

 
$
17,518

Interest paid
$
18,043

 
$
14,335

 
 
 
 
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
624,451

 
730,345

Restricted cash and cash equivalents
324,905

 
497,960

Cash, cash equivalents and restricted cash
$
949,356

 
$
1,228,305

See accompanying notes to the unaudited condensed consolidated financial statements

5

Table of Contents


ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017 and December 31, 2016

(Tabular information expressed in thousands of U.S. dollars except share and per share data)
 
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation and Consolidation
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, 2016. All significant inter-company transactions and balances have been eliminated. Results of operations for acquired subsidiaries are included from the date of acquisition. 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.
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. Results of changes in estimates are reflected in earnings in the period in which the change is made. Our principal estimates include, but are not limited to:
liability for losses and loss adjustment expenses ("LAE");
liability for policy benefits for life and annuity contracts;
reinsurance balances recoverable;
gross and net premiums written and net premiums earned;
impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale or held-to-maturity, and impairments on goodwill, intangible assets and deferred charges;
fair value measurements of investments;
fair value estimates associated with accounting for acquisitions;
fair value estimates associated with loss portfolio transfer reinsurance agreements for which we have elected the fair value option; and
redeemable noncontrolling interests.
Significant New Accounting Policies
As a result of electing the fair value option in relation to the two new transactions described in Note 2 - "Significant New Business", we adopted a significant new accounting policy during the nine months ended September 30, 2017. Other than the policy described below, there have been no material changes to the Company’s significant accounting policies from those described 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, 2016.

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




Retroactive Reinsurance - Fair Value Option
In our Non-life Run-off segment we have elected to apply the fair value option for certain loss portfolio transfer reinsurance transactions. This is an irrevocable election that applies to all balances under the insurance contract, including funds held assets, reinsurance recoverable, and the liability for losses and loss adjustment expenses.
The Company uses an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and reinsurance recoverable asset. Note 6 - "Fair Value Measurements" describes the internal model, including the observable and unobservable inputs used in the model.
New Accounting Standards Adopted in 2017
Accounting Standards Update (“ASU”) 2017-12, Targeted Improvements to Accounting for Hedging Activities

In August 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification (“ASC”) 815 - Derivatives and Hedging. FASB’s objectives in issuing the guidance are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities, and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. We have adopted this guidance early and that adoption did not have an impact on our consolidated financial statements and disclosures.

ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued ASU 2017-08, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The adoption of this guidance did not have a material impact on our consolidated financial statements.

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The impact of adopting this guidance on our consolidated financial statements was a cumulative-effect adjustment of $4.9 million to opening retained earnings for the excess tax benefit not previously recognized.

ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting

In March 2016, the FASB issued ASU 2016-07, which simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. Entities are therefore required to apply the guidance prospectively to increases in the level of ownership interest or degree of influence occurring after the ASU’s effective date. The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The adoption of this guidance did not have any impact our consolidated financial statements.
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, 2016 describes accounting pronouncements that were not adopted as of December 31, 2016. Those pronouncements are not yet adopted unless discussed above in "New Accounting Standards Adopted in 2017". In addition, the following pronouncements were issued during the nine months ended September 30, 2017 and are not yet adopted.
ASU 2017-09, Stock Compensation - Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting

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




Standards Codification (“ASC”) 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU’s amendments are effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued ASU 2017-07, which amends the requirements in ASC 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The ASU requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the statement of earnings, and (2) present the other components elsewhere in the statement of earnings and outside of income from operations if such a subtotal is presented. The ASU also requires entities to disclose the captions within the statement of earnings that contain the other components if they are not presented on appropriately described separate lines. In addition, only the service-cost component of the net benefit cost is eligible for capitalization, which is a change from current practice, under which entities capitalize the aggregate net benefit cost when applicable. The ASU’s amendments are effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets    

In February 2017, the FASB issued ASU 2017-05 to clarify the scope of the Board’s guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The ASU clarifies that ASC 610-20 applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. The ASU also requires an entity to derecognize the nonfinancial asset or in-substance nonfinancial asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary pursuant to ASC 810, and (2) control of the asset is transferred in accordance with ASC 606. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017. We expect to adopt this guidance on January 1, 2018 using the modified retrospective approach. We do not expect this adoption to have a material impact on our consolidated financial statements.
2. SIGNIFICANT NEW BUSINESS
RSA
On February 7, 2017, we entered into an agreement to reinsure U.K. employers' liability legacy business of RSA Insurance Group PLC ("RSA"). Pursuant to the transaction, our subsidiary assumed gross insurance reserves of £1,046.4 million ($1,301.8 million), relating to 2005 and prior year business. Net insurance reserves assumed were £927.5 million ($1,153.9 million) and the reinsurance premium paid to Enstar’s subsidiary was £801.6 million ($997.2 million). We elected the fair value option for this reinsurance contract. The initial fair value adjustment on the gross reserves was $174.1 million, and on the net reserves was $156.7 million. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and assumptions.
Following the initial reinsurance transaction, which transferred the economics of the portfolio up to the policy's limits, we and RSA are pursuing a portfolio transfer of the business under Part VII of the Financial Services and Markets Act 2000, which would provide legal finality for RSA's obligations.  The transfer is subject to court, regulatory and other approvals.
QBE
On January 11, 2017, we closed a transaction to reinsure multi-line property and casualty business of QBE Insurance Group Limited ("QBE"). Our subsidiary assumed gross reinsurance reserves of approximately $1,019.0 million (net reserves of $447.0 million) relating to the portfolio, which primarily includes workers' compensation, construction defect, and general liability discontinued lines of business. We elected the fair value option for this

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




reinsurance contract. The initial fair value adjustment on the gross reserves was $180.0 million, and on the net reserves was $43.2 million. Refer to Note 6 - "Fair Value Measurements" for a description of the fair value process and assumptions.
In addition our subsidiary has pledged a portion of the premium as collateral to a subsidiary of QBE, and we have provided additional collateral and a limited parental guarantee.
3. HELD-FOR-SALE BUSINESSES AND DIVESTITURES
Pavonia
On February 17, 2017, we entered into a definitive agreement to sell Pavonia Holdings (US) Inc. and its subsidiaries (“Pavonia”) for total consideration of $120.0 million to Southland National Holdings, Inc. The closing of the transaction is subject to customary closing conditions, including regulatory approvals. The proceeds of the sale are expected to be used to pay down our revolving credit facility following closing.
Pavonia comprises a substantial portion of the Life and Annuities segment. We have 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 September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31,
2016
Assets:
 
 
 
Fixed maturities, trading, at fair value
$
280,358

 
$
326,382

Fixed maturities, held-to-maturity, at amortized cost
752,419

 
765,554

Equities, trading, at fair value
4,889

 
4,428

Other investments, at fair value
13,080

 
15,114

Cash and cash equivalents
39,325

 
18,018

Restricted cash and cash equivalents
34,582

 
5,202

Deferred tax assets
31,500

 
31,500

Reinsurance balances recoverable
16,609

 
18,029

Other assets
49,544

 
60,229

Total assets held for sale
$
1,222,306

 
$
1,244,456

 
 
 
 
Liabilities:
 
 
 
Policy benefits for life and annuity contracts
$
1,120,139

 
$
1,144,850

Other liabilities
6,131

 
5,937

Total liabilities held for sale
$
1,126,270

 
$
1,150,787

As at September 30, 2017 and December 31, 2016, included in the table above were restricted investments of $766.4 million and $786.0 million, respectively.
The cumulative currency translation adjustments ("CTA") balance in accumulated other comprehensive income (loss) ("AOCI"), a component of shareholders' equity, included $(12.0) million and $(14.8) million as at September 30, 2017 and December 31, 2016, respectively, related to Pavonia. Upon completion of the sale, the CTA will be included in earnings as a reduction of the gain on sale.

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




The Pavonia business qualifies as a discontinued operation. The following table summarizes the components of net earnings (losses) from discontinued operations on the consolidated statements of earnings for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
INCOME
 
 
 
 
 
 
 
Net premiums earned
$
14,082

 
$
17,664

 
$
42,012

 
$
52,405

Net investment income
10,077

 
9,609

 
30,383

 
28,306

Net realized and unrealized gains (losses)
(233
)
 
3,814

 
2,543

 
6,985

Other income
384

 
195

 
1,139

 
957

 
24,310

 
31,282

 
76,077

 
88,653

EXPENSES
 
 
 
 
 
 
 
Life and annuity policy benefits
15,320

 
20,071

 
60,102

 
62,284

Acquisition costs
2,412

 
2,469

 
6,728

 
7,347

General and administrative expenses
2,809

 
4,178

 
9,584

 
11,306

Other expenses
4

 
37

 
(12
)
 
43

 
20,545

 
26,755

 
76,402

 
80,980

EARNINGS (LOSSES) BEFORE INCOME TAXES
3,765

 
4,527

 
(325
)
 
7,673

INCOME TAXES
(270
)
 
(630
)
 
(680
)
 
(1,193
)
NET EARNINGS (LOSSES) FROM DISCONTINUED OPERATIONS
$
3,495

 
$
3,897

 
$
(1,005
)
 
$
6,480


The following table presents the cash flows of Pavonia for the nine months ended September 30, 2017, and 2016:
 
Nine Months Ended
September 30,
 
2017
 
2016
Operating activities
$
42,558

 
$
(41,415
)
Investing activities
8,129

 
61,925

Change in cash and cash equivalents
$
50,687

 
$
20,510


Laguna
On August 29, 2017, we closed the previously-announced sale of our wholly-owned subsidiary Laguna Life DAC (“Laguna”) to a subsidiary of Monument Re Limited, for a total consideration of €25.6 million (approximately $30.8 million).
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 has been included in earnings from continuing operations before income taxes in our consolidated statement of earnings. This loss includes a CTA balance of $(6.3) million, which has been reclassified out of AOCI and included in earnings as a component of the loss on sale of Laguna during the three months ended September 30, 2017, following the closing of the sale.

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




4. INVESTMENTS
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair value; (ii) available-for-sale portfolios of fixed maturity and short-term investments carried at fair value; and (iii) other investments carried at either fair value or cost.
Trading
The fair values of our fixed maturity investments, short-term investments and equities classified as trading were as follows:
 
September 30,
2017
 
December 31,
2016
U.S. government and agency
$
951,391

 
$
840,274

Non-U.S. government
552,474

 
267,363

Corporate
3,207,222

 
2,387,322

Municipal
88,811

 
47,181

Residential mortgage-backed
363,867

 
373,528

Commercial mortgage-backed
382,365

 
217,212

Asset-backed
523,112

 
478,280

Total fixed maturity and short-term investments
6,069,242

 
4,611,160

Equities — U.S.
109,412

 
95,047

Equities — International
238

 

 
$
6,178,892

 
$
4,706,207

Included within residential and commercial mortgage-backed securities as at September 30, 2017 were securities issued by U.S. governmental agencies with a fair value of $228.2 million (as at December 31, 2016: $362.9 million). Included within corporate securities as at September 30, 2017 were senior secured loans of $59.3 million (as at December 31, 2016: $90.7 million).
The contractual maturities of our fixed maturity and short-term investments classified as trading are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
As at September 30, 2017
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair
Value
One year or less
 
$
539,562

 
$
539,882

 
8.9
%
More than one year through two years
 
604,417

 
604,681

 
10.0
%
More than two years through five years
 
1,215,367

 
1,224,161

 
20.2
%
More than five years through ten years
 
1,238,728

 
1,250,614

 
20.6
%
More than ten years
 
1,141,727

 
1,180,560

 
19.4
%
Residential mortgage-backed
 
360,851

 
363,867

 
6.0
%
Commercial mortgage-backed
 
386,220

 
382,365

 
6.3
%
Asset-backed
 
514,529

 
523,112

 
8.6
%
 
 
$
6,001,401

 
$
6,069,242

 
100.0
%



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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 and short-term investments classified as available-for-sale were as follows:
As at September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
4,210

 
$

 
$
(17
)
 
$
4,193

Non-U.S. government
 
80,026

 
1,295

 
(719
)
 
80,602

Corporate
 
129,776

 
2,368

 
(1,097
)
 
131,047

Municipal
 
5,827

 
17

 
(11
)
 
5,833

Residential mortgage-backed
 
34

 

 

 
34

Asset-backed
 
376

 

 

 
376

 
 
$
220,249

 
$
3,680

 
$
(1,844
)
 
$
222,085

As at December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
12,784

 
$
32

 
$
(106
)
 
$
12,710

Non-U.S. government
 
86,897

 
1,303

 
(2,777
)
 
85,423

Corporate
 
159,243

 
2,040

 
(2,628
)
 
158,655

Municipal
 
6,585

 
12

 
(21
)
 
6,576

Residential mortgage-backed
 
488

 
39

 

 
527

Asset-backed
 
3,867

 
9

 

 
3,876

 
 
$
269,864

 
$
3,435

 
$
(5,532
)
 
$
267,767

 The contractual maturities of our fixed maturity and short-term investments classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As at September 30, 2017
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair
Value
One year or less
 
$
56,455

 
$
56,302

 
25.4
%
More than one year through two years
 
27,146

 
26,773

 
12.1
%
More than two years through five years
 
58,187

 
58,789

 
26.5
%
More than five years through ten years
 
40,660

 
41,808

 
18.8
%
More than ten years
 
37,391

 
38,003

 
17.1
%
Residential mortgage-backed
 
34

 
34

 
%
Asset-backed
 
376

 
376

 
0.1
%
 
 
$
220,249

 
$
222,085

 
100.0
%

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




Gross Unrealized Losses
The following tables summarize our fixed maturity and short-term investments in a gross unrealized loss position:
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at September 30, 2017
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity and short-term investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$

 
$

 
$
4,192

 
$
(17
)
 
$
4,192

 
$
(17
)
Non-U.S. government
 
11,092

 
(557
)
 
69,511

 
(162
)
 
80,603

 
(719
)
Corporate
 
9,895

 
(1,001
)
 
121,154

 
(96
)
 
131,049

 
(1,097
)
Municipal
 

 

 
5,832

 
(11
)
 
5,832

 
(11
)
Total fixed maturity and short-term investments
 
$
20,987

 
$
(1,558
)
 
$
200,689

 
$
(286
)
 
$
221,676

 
$
(1,844
)
  
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As at December 31, 2016
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity and short-term investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$

 
$

 
$
10,743

 
$
(106
)
 
$
10,743

 
$
(106
)
Non-U.S. government
 
8,316

 
(1,794
)
 
30,086

 
(983
)
 
38,402

 
(2,777
)
Corporate
 
8,003

 
(1,800
)
 
42,304

 
(828
)
 
50,307

 
(2,628
)
Municipal
 

 

 
3,132

 
(21
)
 
3,132

 
(21
)
Total fixed maturity and short-term investments
 
$
16,319

 
$
(3,594
)
 
$
86,265

 
$
(1,938
)
 
$
102,584

 
$
(5,532
)
As at September 30, 2017 and December 31, 2016, the number of securities classified as available-for-sale in an unrealized loss position was 80 and 156, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 33 and 41, respectively.
Other-Than-Temporary Impairment
For the nine months ended September 30, 2017 and 2016, we did not recognize any other-than-temporary impairment losses on our available-for-sale securities. We determined that no credit losses existed as at September 30, 2017 or 2016. A description of our other-than-temporary impairment process is included in Note 2 to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016. There were no changes to our process during the nine months ended September 30, 2017.

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




Credit Ratings
The following table sets forth the credit ratings of our fixed maturity and short-term investments as at September 30, 2017:
 
 
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, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
958,459

 
$
955,584

 
15.2
%
 
$
954,138

 
$
1,446

 
$

 
$

 
$

 
$

Non-U.S. government
 
616,642

 
633,076

 
10.1
%
 
152,390

 
378,958

 
80,329

 
17,333

 
4,066

 

Corporate
 
3,291,514

 
3,338,269

 
53.0
%
 
194,084

 
451,532

 
1,732,147

 
781,363

 
178,253

 
890

Municipal
 
93,025

 
94,644

 
1.5
%
 
27,137

 
52,749

 
13,308

 
1,450

 

 

Residential mortgage-backed
 
360,885

 
363,901

 
5.8
%
 
239,450

 
21,431

 
13,431

 

 
88,248

 
1,341

Commercial mortgage-backed
 
386,220

 
382,365

 
6.1
%
 
184,200

 
33,859

 
79,627

 
60,837

 
9,909

 
13,933

Asset-backed
 
514,905

 
523,488

 
8.3
%
 
271,817

 
41,854

 
72,490

 
53,511

 
81,961

 
1,855

Total
 
$
6,221,650

 
$
6,291,327

 
100.0
%
 
$
2,023,216

 
$
981,829

 
$
1,991,332

 
$
914,494

 
$
362,437

 
$
18,019

% of total fair value
 
 
 
 
 
 
 
32.2
%
 
15.6
%
 
31.7
%
 
14.5
%
 
5.8
%
 
0.2
%
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
September 30,
2017
 
December 31,
2016
Private equities and private equity funds
 
$
284,164

 
$
300,529

Fixed income funds
 
227,917

 
249,023

Fixed income hedge funds
 
70,047

 
85,976

Equity funds
 
241,598

 
223,571

CLO equities
 
55,411

 
61,565

CLO equity funds
 
13,042

 
15,440

Private credit funds
 
9,832

 

Other
 
853

 
943

 
 
$
902,864

 
$
937,047

The valuation of our other investments is described in Note 6 - "Fair Value Measurements." Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month lag. We regularly review and discuss fund performance with the fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments. The following is a description of the nature of each of these investment categories:
Private equities and private equity funds invest primarily in the financial services industry. All of our investments in private equities and private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates of our initial investments.
Fixed income funds comprise a number of positions in diversified fixed income funds that are managed by third-party managers. Underlying investments vary from high-grade corporate bonds to non-investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices. The funds have liquidity terms that vary from daily up to quarterly.

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Fixed income hedge funds invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of up to three years from the time of initial investment. Once eligible, redemptions are permitted quarterly with 90 days’ notice.
Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities. The funds have liquidity terms that vary from daily to every two weeks.
CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by us in these securities.
CLO equity funds comprise two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. One of the funds has a fair value of $1.5 million, part of a self-liquidating structure that is expected to pay out over one to five years. The other fund has a fair value of $11.5 million and is eligible for redemption in 2018.
Private credit funds invest in direct senior or collateralized loans. The investments are subject to restrictions on redemption and sales that are determined by the governing documents and limit our ability to liquidate our positions in the funds.
Other primarily comprises a fund that provides loans to educational institutions throughout the United States and its territories.
Investments of $0.4 million in fixed income hedge funds were subject to gates or side-pockets, where redemptions are subject to the sale of underlying investments. A gate is the ability to deny or delay a redemption request, whereas a side-pocket is a designated account for which the investor loses its redemption rights.
As at September 30, 2017, we had unfunded commitments to private equity funds of $167.6 million.
Other Investments, at cost
Our other investments carried at cost of $127.6 million as at September 30, 2017 consist of life settlement contracts. During the nine months ended September 30, 2017 and 2016, net investment income included $10.6 million and $16.8 million, respectively, related to investments in life settlements. There were impairment charges of $7.5 million and $3.6 million recognized in net realized and unrealized gains/losses during the nine months ended September 30, 2017 and 2016, respectively, related to investments in life settlements. The following table presents further information regarding our investments in life settlements as at September 30, 2017 and December 31, 2016.
 
 
September 30, 2017
 
December 31, 2016

 
Number of Contracts
 
Carrying
Value
 
Face Value (Death Benefits)
 
Number of Contracts
 
Carrying
Value
 
Face Value (Death Benefits)
Remaining Life Expectancy of Insureds:
 
 
 
 
 
 
 
 
 
 
 
 
0 – 1 year
 
1

 
$
332

 
$
500

 
2

 
$
461

 
$
700

1 – 2 years
 
11

 
18,087

 
28,492

 
7

 
11,396

 
18,337

2 – 3 years
 
11

 
10,853

 
27,328

 
11

 
15,338

 
29,715

3 – 4 years
 
16

 
13,853

 
27,807

 
17

 
17,013

 
32,189

4 – 5 years
 
13

 
14,212

 
34,199

 
16

 
10,377

 
23,302

Thereafter
 
167

 
70,225

 
396,926

 
181

 
77,066

 
431,034

Total
 
219

 
$
127,562

 
$
515,252

 
234

 
$
131,651

 
$
535,277

Remaining life expectancy for year 0-1 in the table above references policies whose current life expectancy is less than 12 months as at the reporting date. Remaining life expectancy is not an indication of expected maturity. Actual maturity in any category above may vary significantly (either earlier or later) from the remaining life expectancies reported.
At September 30, 2017, our best estimate of the life insurance premiums required to keep the policies in force, payable in the 12 months ending September 30, 2018 and the four succeeding years ending September 30, 2022 is $18.1 million, $18.0 million, $17.3 million, $16.0 million and $15.7 million, respectively.

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




Net Realized and Unrealized Gains
Components of net realized and unrealized gains for the three and nine months ended September 30, 2017 and 2016 were as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017

2016
 
2017
 
2016
Net realized gains (losses) on sale:
 
 
 
 
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
$
8

 
$
12

 
$
345

 
$
391

Gross realized losses on fixed maturity securities, available-for-sale
 
(5
)
 

 
(91
)
 
(244
)
Net realized gains on fixed maturity securities, trading
 
4,595

 
3,508

 
3,608

 
3,093

Net realized gains on equity securities, trading
 
340

 
1,393

 
1,150

 
2,421

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

 

 
(3,720
)
 

Total net realized gains on sale
 
$
5,360

 
$
4,913

 
$
1,292

 
$
5,661

Net unrealized gains (losses):
 


 
 
 
 
 
 
Fixed maturity securities, trading
 
$
(10,747
)
 
$
12,158

 
$
23,795

 
$
93,225

Equity securities, trading
 
2,652

 
2,801

 
13,209

 
4,930

Change in fair value of other investments
 
27,802

 
46,736

 
71,007

 
35,572

Change in fair value of embedded derivative on funds held - directly managed
 
3,967

 

 
28,807

 

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

 

 
1,587

 

Total net unrealized gains
 
23,941

 
61,695

 
138,405

 
133,727

Net realized and unrealized gains
 
$
29,301

 
$
66,608

 
$
139,697

 
$
139,388

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $5.9 million and $27.5 million for the three and nine months ended September 30, 2017, respectively, and $2.4 million and $36.0 million for the three and nine months ended September 30, 2016, respectively.
Net Investment Income
Major categories of net investment income for the three and nine months ended September 30, 2017 and 2016 are summarized as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Fixed maturity investments
 
$
37,931

 
$
28,131

 
$
102,002

 
$
86,216

Short-term investments and cash and cash equivalents
 
2,048

 
891

 
7,489

 
2,903

Equity securities
 
1,344

 
960

 
3,207

 
3,345

Other investments
 
3,120

 
4,997

 
10,016

 
16,724

Funds held
 
247

 
7,333

 
597

 
22,570

Funds held - directly managed
 
8,516

 

 
24,121

 

Life settlements and other
 
1,443

 
7,043

 
11,026

 
17,204

Gross investment income
 
54,649

 
49,355

 
158,458

 
148,962

Investment expenses
 
(2,621
)
 
(1,333
)
 
(8,274
)
 
(5,728
)
Net investment income
 
$
52,028

 
$
48,022

 
$
150,184

 
$
143,234


16

Table of Contents
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 $324.9 million and $363.8 million, as at September 30, 2017 and December 31, 2016, respectively, was as follows: 
 
 
September 30,
2017
 
December 31,
2016
Collateral in trust for third party agreements
 
$
3,308,768

 
$
1,975,022

Assets on deposit with regulatory authorities
 
586,861

 
882,400

Collateral for secured letter of credit facilities
 
172,838

 
177,263

Funds at Lloyd's (1)
 
235,171

 
220,328

 
 
$
4,303,638

 
$
3,255,013

(1) Our underwriting businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has a loss that cannot be funded from other sources. We have an unsecured letter of credit agreement for Funds at Lloyd’s purposes ("FAL Facility") to issue up to $140.0 million of letters of credit, with a provision to increase the facility up to $200.0 million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and expires in 2021. As at September 30, 2017, our combined Funds at Lloyd's were comprised of cash and investments of $235.2 million and unsecured letters of credit of $122.0 million.
The increase in the collateral in trust for third-party agreements was primarily due to the loss portfolio transfer reinsurance transactions with RSA and QBE described in Note 2 - "Significant New Business".
5. 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 Form 10-K for the year ended December 31, 2016, moved from a fixed crediting rate to a variable rate of return on the underlying investments on October 1, 2016. This variable return reflects the economics of the investment portfolio underlying the funds held asset and qualifies as an embedded derivative. We have recorded the aggregate of the funds held, typically held at cost, and the embedded derivative as a single amount in our consolidated balance sheet. As at September 30, 2017 and December 31, 2016, the funds held at cost had a carrying value of $1,011.4 million and $1,023.0 million, respectively, and the embedded derivative had a fair value of $0.5 million and $(28.3) million, respectively, the aggregate of which was $1,011.9 million and $994.7 million, respectively, as included in the table below.
The fair value option was elected for the QBE reinsurance transaction described in Note 2 - "Significant New Business". As at September 30, 2017, the funds held had an amortized cost of $178.5 million and fair value of $180.0 million.








17

Table of Contents
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, 2017 and December 31, 2016:
 
September 30,
2017
 
December 31,
2016
Fixed maturity investments:
 
 
 
U.S. government and agency
$
64,712

 
$
47,885

Non-U.S. government
2,960

 
5,961

Corporate
721,313

 
663,556

Municipal
57,964

 
38,927

Residential mortgage-backed
30,346

 

Commercial mortgage-backed
207,851

 
151,395

Asset-backed
92,281

 
79,806

Total fixed maturity investments
$
1,177,427

 
$
987,530

Other assets
14,496

 
7,135

 
$
1,191,923

 
$
994,665

The contractual maturities of our fixed maturity investments underlying the funds held - directly managed account are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As at September 30, 2017
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair Value
One year or less
 
$
37,524

 
$
37,513

 
3.2
%
More than one year through two years
 
53,453

 
53,475

 
4.5
%
More than two years through five years
 
254,029

 
255,357

 
21.7
%
More than five years through ten years
 
248,673

 
249,121

 
21.2
%
More than ten years
 
247,452

 
251,483

 
21.3
%
Residential mortgage-backed
 
30,378

 
30,346

 
2.6
%
Commercial mortgage-backed
 
211,887

 
207,851

 
17.7
%
Asset-backed
 
91,956

 
92,281

 
7.8
%
 
 
$
1,175,352

 
$
1,177,427

 
100.0
%
Credit Ratings
The following table sets forth the credit ratings of our fixed maturity investments underlying the funds held - directly managed account as at September 30, 2017:
 
 
Amortized
Cost
 
Fair Value
 
% of Total
Investments
 
AAA
Rated
 
AA Rated
 
A Rated
 
BBB
Rated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
64,775

 
$
64,712

 
5.5
%
 
$
64,712

 
$

 
$

 
$

Non-U.S. government
 
2,976

 
2,960

 
0.3
%
 

 

 
2,960

 

Corporate
 
716,625

 
721,313

 
61.2
%
 
7,462

 
40,000

 
296,548

 
377,303

Municipal
 
56,755

 
57,964

 
4.9
%
 

 
20,640

 
29,960

 
7,364

Residential mortgage-backed
 
30,378

 
30,346

 
2.6