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 June 30, 2017
Commission File Number 001-33289

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11729590&doc=12
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 of August 2, 2017, the registrant had outstanding 16,421,611 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 June 30, 2017

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


Table of Contents


PART I — FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2017 and December 31, 2016
 
June 30,
2017
 
December 31,
2016
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
327,595

 
$
222,918

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

 
268

Fixed maturities, trading, at fair value
5,644,098

 
4,388,242

Fixed maturities, available-for-sale, at fair value (amortized cost: 2017 — $228,762; 2016 — $269,577)
228,771

 
267,499

Equities, trading, at fair value
106,240

 
95,047

Other investments, at fair value
890,943

 
937,047

Other investments, at cost
128,296

 
131,651

Total investments
7,325,943

 
6,042,672

Cash and cash equivalents
681,068

 
954,871

Restricted cash and cash equivalents
423,683

 
363,774

Funds held - directly managed
1,205,592

 
994,665

Premiums receivable
443,201

 
406,676

Deferred tax assets
13,988

 
11,374

Prepaid reinsurance premiums
247,901

 
219,115

Reinsurance balances recoverable
1,477,433

 
1,460,743

Reinsurance balances recoverable, at fair value
554,759

 

Funds held by reinsured companies
84,073

 
82,073

Deferred acquisition costs
76,643

 
58,114

Goodwill and intangible assets
182,504

 
184,855

Other assets
851,227

 
842,356

Assets held for sale
1,262,756

 
1,244,456

TOTAL ASSETS
$
14,830,771

 
$
12,865,744

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses
$
5,749,087

 
$
5,987,867

Losses and loss adjustment expenses, at fair value
1,892,297

 

Policy benefits for life and annuity contracts
114,727

 
112,095

Unearned premiums
588,082

 
548,343

Insurance and reinsurance balances payable
470,055

 
394,021

Deferred tax liabilities
22,393

 
28,356

Debt obligations
640,787

 
673,603

Other liabilities
781,494

 
705,318

Liabilities held for sale
1,142,560

 
1,150,787

TOTAL LIABILITIES
11,401,482

 
9,600,390

 
 
 
 
COMMITMENTS AND CONTINGENCIES

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST
457,646

 
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: 16,385,570; 2016: 16,175,250)
16,386

 
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
1,386,332

 
1,380,109

Accumulated other comprehensive loss
(18,611
)
 
(23,549
)
Retained earnings
1,996,283

 
1,847,550

Total Enstar Group Limited Shareholders’ Equity
2,962,225

 
2,802,312

Noncontrolling interest
9,418

 
8,520

TOTAL SHAREHOLDERS’ EQUITY
2,971,643

 
2,810,832

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
14,830,771

 
$
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 Six Months Ended June 30, 2017 and 2016
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(expressed in thousands of U.S. dollars,
except share and per share data)
INCOME
 
 
 
 
 
 
 
Net premiums earned
$
155,571

 
$
208,709

 
$
304,469

 
$
401,596

Fees and commission income
18,667

 
10,487

 
30,581

 
16,911

Net investment income
49,417

 
44,932

 
98,156

 
95,212

Net realized and unrealized gains
51,877

 
34,503

 
110,396

 
72,780

Other income
10,856

 
3,289

 
23,054

 
5,699

 
286,388

 
301,920

 
566,656

 
592,198

EXPENSES
 
 
 
 
 
 
 
Net incurred losses and loss adjustment expenses
9,620

 
96,462

 
87,512

 
179,680

Life and annuity policy benefits
4,289

 
(1,613
)
 
3,988

 
(1,455
)
Acquisition costs
30,355

 
43,847

 
51,176

 
88,876

General and administrative expenses
106,490

 
104,206

 
208,958

 
197,140

Interest expense
7,573

 
5,421

 
14,441

 
10,819

Net foreign exchange losses (gains)
7,122

 
(1,856
)
 
10,837

 
(84
)
Loss on sale of subsidiary
9,609

 

 
9,609

 

 
175,058

 
246,467

 
386,521

 
474,976

EARNINGS BEFORE INCOME TAXES
111,330

 
55,453

 
180,135

 
117,222

INCOME TAXES
(4,731
)
 
(8,050
)
 
(1,802
)
 
(15,419
)
NET EARNINGS FROM CONTINUING OPERATIONS
106,599

 
47,403

 
178,333

 
101,803

NET EARNINGS (LOSSES) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE
(4,871
)
 
2,378

 
(4,500
)
 
2,583

NET EARNINGS
101,728

 
49,781

 
173,833

 
104,386

Less: Net earnings attributable to noncontrolling interest
(11,542
)
 
(9,187
)
 
(28,967
)
 
(18,272
)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
90,186

 
$
40,594

 
$
144,866

 
$
86,114

 
 
 
 
 
 
 
 
Earnings per ordinary share attributable to Enstar Group Limited:
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
4.90

 
$
1.98

 
$
7.71

 
$
4.33

Net earnings (losses) from discontinued operations
(0.25
)
 
0.12

 
(0.23
)
 
0.13

Net earnings per ordinary share
$
4.65

 
$
2.10

 
$
7.48

 
$
4.46

Diluted:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
4.87

 
$
1.97

 
$
7.66

 
$
4.30

Net earnings (losses) from discontinued operations
(0.25
)
 
0.12

 
(0.23
)
 
0.13

Net earnings per ordinary share
$
4.62

 
$
2.09

 
$
7.43

 
$
4.43

Weighted average ordinary shares outstanding:
 
 
 
 
 
 
 
Basic
19,387,650

 
19,295,280

 
19,381,225

 
19,289,119

Diluted
19,511,429

 
19,430,464

 
19,506,077

 
19,420,541

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 Six Months Ended June 30, 2017 and 2016
 
    
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(expressed in thousands of U.S. dollars)
NET EARNINGS
$
101,728

 
$
49,781

 
$
173,833

 
$
104,386

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized holding gains on fixed income investments arising during the period
1,693

 
2,400

 
2,379

 
9,364

Reclassification adjustment for net realized gains included in net earnings
(102
)
 
(113
)
 
(251
)
 
(135
)
Unrealized gains arising during the period, net of reclassification adjustment
1,591

 
2,287

 
2,128

 
9,229

Currency translation adjustment
2,315

 
(4,542
)
 
4,257

 
6,053

Total other comprehensive income (loss)
3,906

 
(2,255
)
 
6,385

 
15,282

Comprehensive income
105,634

 
47,526

 
180,218

 
119,668

Less: Comprehensive income attributable to noncontrolling interest
(12,333
)
 
(9,353
)
 
(30,415
)
 
(19,919
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
93,301

 
$
38,173

 
$
149,803

 
$
99,749


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 Six Months Ended June 30, 2017 and 2016
 
Six Months Ended
June 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
19

 
34

Conversion of Series C Non-Voting Convertible Ordinary Shares
192

 

Balance, end of period
$
16,386

 
$
16,167

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
66

 
360

Conversion of Series A Non-Voting Convertible Ordinary Stock

 
2,584

Amortization of equity incentive plan
6,157

 
602

Balance, end of period
$
1,386,332

 
$
1,376,590

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
4,253

 
6,053

Balance, end of period
(14,740
)
 
(17,737
)
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
685

 
7,582

Balance, end of period
773

 
3,933

Balance, end of period
$
(18,611
)
 
$
(21,527
)
Retained Earnings
 
 
 
Balance, beginning of period
$
1,847,550

 
$
1,578,312

Net earnings attributable to Enstar Group Limited
144,866

 
86,114

Accretion of redeemable noncontrolling interests to redemption value
(1,015
)
 
(1,803
)
Cumulative effect of change in accounting principle
4,882

 

Balance, end of period
$
1,996,283

 
$
1,662,623

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

 
$
3,911

Net earnings attributable to noncontrolling interest
898

 
(270
)
Balance, end of period
$
9,418

 
$
3,641

 
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 Six Months Ended June 30, 2017 and 2016
 
Six Months Ended
June 30,
 
2017
 
2016
 
(expressed in thousands
 of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings
$
173,833

 
$
104,386

Net losses (earnings) from discontinued operations
4,500

 
(2,583
)
Adjustments to reconcile net earnings to cash flows used in operating activities:
 
 
 
Net realized (gains) losses on sale of investments
(74
)
 
(747
)
Net unrealized (gains) on investments
(88,304
)
 
(72,033
)
Other non-cash items
5,352

 
3,811

Depreciation and other amortization
18,797

 
18,833

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

 
(996
)
Sales and maturities of trading securities
2,225,349

 
1,633,179

Purchases of trading securities
(3,616,862
)
 
(1,546,895
)
Net loss on sale of subsidiary
9,609

 

Changes in:
 
 
 
Reinsurance balances recoverable
(570,731
)
 
131,841

Funds held by reinsured companies
(212,927
)
 
(1,081,542
)
Losses and loss adjustment expenses
1,646,721

 
701,414

Policy benefits for life and annuity contracts
64

 
(6,534
)
Insurance and reinsurance balances payable
75,890

 
42,715

Unearned premiums
39,739

 
34,200

Other operating assets and liabilities
898

 
(143,086
)
Net cash flows used in operating activities
(262,549
)
 
(184,037
)
INVESTING ACTIVITIES:
 
 
 
Acquisitions, net of cash acquired

 
9,924

Sales and maturities of available-for-sale securities
45,932

 
55,443

Purchase of available-for-sale securities
(162
)
 
(47,798
)
Purchase of other investments
(67,516
)
 
(18,230
)
Redemption of other investments
152,650

 
77,971

Other investing activities
(9,708
)
 
(1,597
)
Net cash flows provided by investing activities
121,196

 
75,713

FINANCING ACTIVITIES:
 
 
 
Dividends paid to noncontrolling interest
(27,458
)
 

Receipt of loans
489,100

 
154,048

Repayment of loans
(528,500
)
 
(140,500
)
Net cash flows provided by (used in) financing activities
(66,858
)
 
13,548

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
636

 
451

NET DECREASE IN CASH AND CASH EQUIVALENTS
(207,575
)
 
(94,325
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
1,318,645

 
1,295,169

CHANGE IN CASH OF BUSINESSES HELD FOR SALE
(6,319
)
 

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,104,751

 
$
1,200,844

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
6,538

 
$
15,830

Interest paid
$
8,959

 
$
10,578

 
 
 
 
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
681,068

 
759,584

Restricted cash and cash equivalents
423,683

 
441,260

Cash, cash equivalents and restricted cash
$
1,104,751

 
$
1,200,844

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
June 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 six months ended June 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") 2017-08, Premium Amortization on Purchased Callable Debt Securities

In March 2017, the Financial Accounting Standards Board ("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 six months ended June 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 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.


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




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 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.

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




3. HELD-FOR-SALE BUSINESSES
On May 12, 2017, we entered into a definitive agreement to sell Laguna Life DAC (“Laguna”) for total consideration of €25.6 million (approximately $29.2 million) to a subsidiary of Monument Re Limited. The transaction is expected to close in the third quarter of 2017. The closing of the transaction is subject to customary closing conditions, including regulatory approvals. The proceeds of the sale are expected to be used for general corporate purposes.
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 transaction is expected to close in the third or fourth quarter of 2017. 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 and Laguna comprise 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. Laguna was classified as held-for-sale as at June 30, 2017 with the prior balance sheet not being reclassified as Laguna did not qualify as a discontinued operation. The following table summarizes the components of assets and liabilities held-for-sale on our consolidated balance sheet as at June 30, 2017 and December 31, 2016 for Pavonia and as at June 30, 2017 for Laguna:
 
June 30, 2017
 
December 31,
2016
 
Pavonia
 
Laguna
 
Total
 
Pavonia
Assets:
 
 
 
 
 
 
 
Short-term investments, trading, at fair value
$

 
$
4,153

 
$
4,153

 
$

Fixed maturities, trading, at fair value
298,574

 
35,380

 
333,954

 
326,382

Fixed maturities, held-to-maturity, at amortized cost
755,381

 

 
755,381

 
765,554

Equities, trading, at fair value
4,833

 

 
4,833

 
4,428

Other investments, at fair value
15,385

 

 
15,385

 
15,114

Cash and cash equivalents
17,322

 
6,319

 
23,641

 
18,018

Restricted cash and cash equivalents
34,682

 

 
34,682

 
5,202

Deferred tax assets
31,500

 

 
31,500

 
31,500

Reinsurance balances recoverable
17,650

 
55

 
17,705

 
18,029

Other assets
50,406

 
725

 
51,131

 
60,229

Assets of businesses held for sale
1,225,733

 
46,632

 
1,272,365

 
1,244,456

Less: Accrual of loss on sale

 
(9,609
)
 
(9,609
)
 

Total assets held for sale
$
1,225,733

 
$
37,023

 
$
1,262,756

 
$
1,244,456

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Policy benefits for life and annuity contracts
$
1,129,888

 
$
6,639

 
$
1,136,527

 
$
1,144,850

Other liabilities
4,867

 
1,166

 
6,033

 
5,937

Total liabilities held for sale
$
1,134,755

 
$
7,805

 
$
1,142,560

 
$
1,150,787

As of June 30, 2017 and December 31, 2016, included in the table above were restricted investments of $768.1 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 $(13.5) million and $(14.8) million as at June 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 six months ended June 30, 2017 and 2016:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
INCOME
 
 
 
 
 
 
 
Net premiums earned
$
13,605

 
$
18,219

 
$
27,930

 
$
34,741

Net investment income
10,277

 
9,088

 
20,306

 
18,697

Net realized and unrealized gains
1,154

 
3,484

 
2,776

 
3,171

Other income
395

 
759

 
755

 
762

 
25,431

 
31,550

 
51,767

 
57,371

EXPENSES
 
 
 
 
 
 
 
Life and annuity policy benefits
24,112

 
21,391

 
44,782

 
42,213

Acquisition costs
2,280

 
2,642

 
4,316

 
4,878

General and administrative expenses
3,718

 
4,713

 
6,775

 
7,128

Other expenses

 
3

 
(16
)
 
6

 
30,110

 
28,749

 
55,857

 
54,225

EARNINGS (LOSSES) BEFORE INCOME TAXES
(4,679
)
 
2,801

 
(4,090
)
 
3,146

INCOME TAXES
(192
)
 
(423
)
 
(410
)
 
(563
)
NET EARNINGS (LOSSES) FROM DISCONTINUED OPERATIONS
$
(4,871
)
 
$
2,378

 
$
(4,500
)
 
$
2,583


The net losses relating to Laguna for the three and six months ended June 30, 2017 were $0.9 million and $1.1 million, respectively. The net earnings relating to Laguna for the three and six months ended June 30, 2016 were $0.4 million and $0.5 million, respectively. These amounts were not significant to our consolidated operations and therefore we have not classified Laguna as a discontinued operation for current or prior periods. As at June 30, 2017 we have recorded a loss on the sale of Laguna of $9.6 million, which has been included in earnings from continuing operations before income taxes in our consolidated statement of earnings. The CTA balance for Laguna was a loss of $8.3 million as at June 30, 2017. Upon completion of the sale of Laguna, the CTA will be reclassified out of AOCI and included in earnings as a component of the loss on sale of Laguna.
The following table presents the cash flows of Pavonia for the six months ended June 30, 2017, and 2016:
 
Six Months Ended
June 30,
 
2017
 
2016
Operating activities
$
23,540

 
$
(32,295
)
Investing activities
5,244

 
40,495

Change in cash and cash equivalents
$
28,784

 
$
8,200


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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:
 
June 30,
2017
 
December 31,
2016
U.S. government and agency
$
692,454

 
$
840,274

Non-U.S. government
832,839

 
267,363

Corporate
3,139,580

 
2,387,322

Municipal
88,722

 
47,181

Residential mortgage-backed
365,179

 
373,528

Commercial mortgage-backed
303,087

 
217,212

Asset-backed
549,832

 
478,280

Total fixed maturity and short-term investments
5,971,693

 
4,611,160

Equities — U.S.
106,240

 
95,047

 
$
6,077,933

 
$
4,706,207

Included within residential and commercial mortgage-backed securities as at June 30, 2017 were securities issued by U.S. governmental agencies with a fair value of $248.3 million (as at December 31, 2016: $362.9 million). Included within corporate securities as at June 30, 2017 were senior secured loans of $57.0 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 June 30, 2017
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair
Value
One year or less
 
$
838,980

 
$
840,532

 
14.1
%
More than one year through two years
 
632,842

 
636,638

 
10.6
%
More than two years through five years
 
1,315,420

 
1,323,779

 
22.2
%
More than five years through ten years
 
1,121,737

 
1,139,373

 
19.1
%
More than ten years
 
781,744

 
813,273

 
13.6
%
Residential mortgage-backed
 
365,226

 
365,179

 
6.1
%
Commercial mortgage-backed
 
305,330

 
303,087

 
5.1
%
Asset-backed
 
541,584

 
549,832

 
9.2
%
 
 
$
5,902,863

 
$
5,971,693

 
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 June 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
4,208

 
$

 
$
(19
)
 
$
4,189

Non-U.S. government
 
82,458

 
894

 
(1,057
)
 
82,295

Corporate
 
132,314

 
1,632

 
(1,445
)
 
132,501

Municipal
 
5,944

 
14

 
(11
)
 
5,947

Residential mortgage-backed
 
41

 

 

 
41

Asset-backed
 
3,797

 
1

 

 
3,798

 
 
$
228,762

 
$
2,541

 
$
(2,532
)
 
$
228,771

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 June 30, 2017
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair
Value
One year or less
 
$
60,862

 
$
60,383

 
26.4
%
More than one year through two years
 
30,313

 
29,616

 
12.9
%
More than two years through five years
 
54,675

 
54,677

 
23.9
%
More than five years through ten years
 
42,760

 
43,669

 
19.1
%
More than ten years
 
36,314

 
36,587

 
16.0
%
Residential mortgage-backed
 
41

 
41

 
%
Asset-backed
 
3,797

 
3,798

 
1.7
%
 
 
$
228,762

 
$
228,771

 
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 June 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
 
$

 
$

 
$
4,190

 
$
(19
)
 
$
4,190

 
$
(19
)
Non-U.S. government
 
6,330

 
(727
)
 
24,596

 
(330
)
 
30,926

 
(1,057
)
Corporate
 
7,856

 
(1,168
)
 
36,979

 
(277
)
 
44,835

 
(1,445
)
Municipal
 

 

 
2,711

 
(11
)
 
2,711

 
(11
)
Total fixed maturity and short-term investments
 
$
14,186

 
$
(1,895
)
 
$
68,476

 
$
(637
)
 
$
82,662

 
$
(2,532
)
  
 
 
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 June 30, 2017 and December 31, 2016, the number of securities classified as available-for-sale in an unrealized loss position was 105 and 156, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 35 and 41, respectively.
Other-Than-Temporary Impairment
For the six months ended June 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 June 30, 2017 and 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 six months ended June 30, 2017.

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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 and short-term investments as of June 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
 
$
696,264

 
$
696,643

 
11.2
%
 
$
694,993

 
$
1,650

 
$

 
$

 
$

 
$

Non-U.S. government
 
889,325

 
915,134

 
14.8
%
 
103,509

 
721,105

 
68,785

 
20,825

 

 
910

Corporate
 
3,236,766

 
3,272,081

 
52.8
%
 
181,948

 
430,591

 
1,628,525

 
916,671

 
113,010

 
1,336

Municipal
 
93,292

 
94,669

 
1.5
%
 
27,067

 
52,969

 
13,175

 
1,458

 

 

Residential mortgage-backed
 
365,267

 
365,220

 
5.9
%
 
257,904

 
20,365

 
6,948

 

 
78,503

 
1,500

Commercial mortgage-backed
 
305,330

 
303,087

 
4.9
%
 
103,087

 
42,854

 
83,588

 
54,538

 
3,323

 
15,697

Asset-backed
 
545,381

 
553,630

 
8.9
%
 
274,401

 
51,935

 
87,377

 
55,302

 
82,602

 
2,013

Total
 
$
6,131,625

 
$
6,200,464

 
100.0
%
 
$
1,642,909

 
$
1,321,469

 
$
1,888,398

 
$
1,048,794

 
$
277,438

 
$
21,456

% of total fair value
 
 
 
 
 
 
 
26.5
%
 
21.3
%
 
30.5
%
 
16.9
%
 
4.5
%
 
0.3
%
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
June 30,
2017
 
December 31,
2016
Private equities and private equity funds
 
$
269,016

 
$
300,529

Fixed income funds
 
249,573

 
249,023

Fixed income hedge funds
 
70,900

 
85,976

Equity funds
 
230,720

 
223,571

CLO equities
 
56,805

 
61,565

CLO equity funds
 
13,050

 
15,440

Other
 
879

 
943

 
 
$
890,943

 
$
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.
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.

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




Equity funds invest in a diversified portfolio of 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 $1.4 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 $11.6 million and is eligible for redemption in 2018.
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 June 30, 2017, we had unfunded commitments to private equity funds of $183.7 million.
Other Investments, at cost
Our other investments carried at cost of $128.3 million as of June 30, 2017 consist of life settlement contracts. During the six months ended June 30, 2017 and 2016, net investment income included $9.3 million and $10.0 million, respectively, related to investments in life settlements. There were impairment charges of $6.3 million and $2.9 million recognized in net realized and unrealized gains/losses during the six months ended June 30, 2017 and 2016, respectively, related to investments in life settlements. The following table presents further information regarding our investments in life settlements as of June 30, 2017 and December 31, 2016.
 
 
June 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
 
2

 
$
467

 
$
700

 
2

 
$
461

 
$
700

1 – 2 years
 
8

 
12,025

 
20,075

 
7

 
11,396

 
18,337

2 – 3 years
 
11

 
17,655

 
36,718

 
11

 
15,338

 
29,715

3 – 4 years
 
17

 
13,369

 
24,507

 
17

 
17,013

 
32,189

4 – 5 years
 
10

 
12,778

 
29,110

 
16

 
10,377

 
23,302

Thereafter
 
173

 
72,002

 
409,239

 
181

 
77,066

 
431,034

Total
 
221

 
$
128,296

 
$
520,349

 
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 of 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 June 30, 2017, our best estimate of the life insurance premiums required to keep the policies in force, payable in the 12 months ending June 30, 2018 and the four succeeding years ending June 30, 2022 is $17.9 million, $17.8 million, $17.7 million, $16.3 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 six months ended June 30, 2017 and 2016 were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017

2016
 
2017
 
2016
Net realized gains (losses) on sale:
 
 
 
 
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
$
177

 
$
114

 
$
337

 
$
379

Gross realized losses on fixed maturity securities, available-for-sale
 
(75
)
 
(1
)
 
(86
)
 
(244
)
Net realized gains (losses) on fixed maturity securities, trading
 
65

 
1,490

 
(987
)
 
(416
)
Net realized gains on equity securities, trading
 
236

 
555

 
810

 
1,028

Net realized investment losses on funds held - directly managed
 
(289
)
 

 
(4,142
)
 

Total net realized gains (losses) on sale
 
$
114

 
$
2,158

 
$
(4,068
)
 
$
747

Net unrealized gains:
 


 
 
 
 
 
 
Fixed maturity securities, trading
 
$
11,226

 
$
37,871

 
$
34,542

 
$
81,067

Equity securities, trading
 
1,871

 
405

 
10,557

 
2,129

Change in fair value of other investments
 
19,696

 
(5,931
)
 
43,205

 
(11,163
)
Change in fair value of embedded derivative on funds held - directly managed
 
17,912

 

 
24,840

 

Change in value of fair value option on funds held - directly managed
 
1,058

 

 
1,320

 

Total net unrealized gains
 
51,763

 
32,345

 
114,464

 
72,033

Net realized and unrealized gains
 
$
51,877

 
$
34,503

 
$
110,396

 
$
72,780

The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $12.3 million and $21.6 million for the three and six months ended June 30, 2017, respectively, and $18.2 million and $33.6 million for the three and six months ended June 30, 2016, respectively.
Net Investment Income
Major categories of net investment income for the three and six months ended June 30, 2017 and 2016 are summarized as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Fixed maturity investments
 
$
33,741

 
$
30,888

 
$
64,071

 
$
58,086

Short-term investments and cash and cash equivalents
 
2,801

 
854

 
5,441

 
2,012

Equity securities
 
1,137

 
1,325

 
1,863

 
2,385

Other investments
 
3,387

 
5,693

 
6,896

 
11,727

Funds held
 
311

 
7,633

 
350

 
15,237

Funds held - directly managed
 
8,603

 

 
15,605

 

Life settlements and other
 
2,687

 
1,718

 
9,583

 
10,161

Gross investment income
 
52,667

 
48,111

 
103,809

 
99,608

Investment expenses
 
(3,250
)
 
(3,179
)
 
(5,653
)
 
(4,396
)
Net investment income
 
$
49,417

 
$
44,932

 
$
98,156

 
$
95,212


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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 $423.7 million and $363.8 million, as of June 30, 2017 and December 31, 2016, respectively, was as follows: 
 
 
June 30,
2017
 
December 31,
2016
Collateral in trust for third party agreements
 
$
3,357,930

 
$
1,975,022

Assets on deposit with regulatory authorities
 
765,581

 
882,400

Collateral for secured letter of credit facilities
 
175,355

 
177,263

Funds at Lloyd's (1)
 
224,364

 
220,328

 
 
$
4,523,230

 
$
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 June 30, 2017, our combined Funds at Lloyd's were comprised of cash and investments of $224.4 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".

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




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 June 30, 2017 and December 31, 2016, the funds held at cost had a carrying value of $1,030.2 million and $1,023.0 million, respectively, and the embedded derivative had a fair value of $(3.5) million and $(28.3) million, respectively, the aggregate of which was $1,026.7 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 June 30, 2017, the funds held had an amortized cost of $177.5 million and fair value of $178.9 million.
The following table presents the fair values of assets and liabilities underlying the funds held - directly managed account as at June 30, 2017 and December 31, 2016:
 
June 30,
2017
 
December 31,
2016
Fixed maturity investments:
 
 
 
U.S. government and agency
$
52,548

 
$
47,885

Non-U.S. government
6,074

 
5,961

Corporate
778,757

 
663,556

Municipal
55,268

 
38,927

Commercial mortgage-backed
200,502

 
151,395

Asset-backed
96,395

 
79,806

Total fixed maturity investments
$
1,189,544

 
$
987,530

Other assets
16,048

 
7,135

 
$
1,205,592

 
$
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 June 30, 2017
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair Value
One year or less
 
$
31,307

 
$
31,294

 
2.6
%
More than one year through two years
 
30,705

 
30,741

 
2.6
%
More than two years through five years
 
301,223

 
301,915

 
25.4
%
More than five years through ten years
 
274,655

 
273,612

 
23.0
%
More than ten years
 
252,411

 
255,085

 
21.4
%
Commercial mortgage-backed
 
205,173

 
200,502

 
16.9
%
Asset-backed
 
96,229

 
96,395

 
8.1
%
 
 
$
1,191,703

 
$
1,189,544

 
100.0
%


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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 investments underlying the funds held - directly managed account as of June 30, 2017.
 
 
Amortized
Cost
 
Fair Value
 
% of Total
Investments
 
AAA
Rated
 
AA Rated
 
A Rated
 
BBB
Rated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
52,516

 
$
52,548

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