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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
 	þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the Quarterly Period Ended March 31, 2013
OR
 
 	¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the Transition Period From                 to                 
001-33289
Commission File Number
ENSTAR GROUP LIMITED
(Exact name of registrant as specified in its charter)

Bermuda	 	N/A	
(State or other jurisdiction
of incorporation or organization)	 	(I.R.S. Employer
Identification No.)	
P.O. Box HM 2267
Windsor Place, 3rd Floor
22 Queen Street
Hamilton HM JX
Bermuda
(Address of principal executive office, including zip code)
(441) 292-3645
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   þ         No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ         No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ	 	Accelerated filer ¨	  	Non-accelerated filer ¨	 	Smaller reporting company ¨	
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ
As of May 8, 2013, the registrant had outstanding 13,899,202 voting ordinary shares and 2,725,637 non-voting convertible ordinary shares, each par value $1.00 per share.

 

Table of Contents
TABLE OF CONTENTS

 	 	 	  	Page	 	
 	 	PART I — FINANCIAL INFORMATION	  	 	 	 	
Item 1.	 	Financial Statements:	  	 	 	 	
 	 	Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (Unaudited)	  	 	1	  	
 	 	Condensed Consolidated Statements of Earnings for the Three Month Periods Ended March  31, 2013 and 2012 (Unaudited)	  	 	2	  	
 	 	Condensed Consolidated Statements of Comprehensive Income for the Three Month Periods Ended March 31, 2013 and 2012 (Unaudited)	  	 	3	  	
 	 	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Month Periods Ended March 31, 2013 and 2012 (Unaudited)	  	 	4	  	
 	 	Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2013 and 2012 (Unaudited)	  	 	5	  	
 	 	Notes to the Condensed Consolidated Financial Statements (Unaudited)	  	 	6	  	
 	 	Report of Independent Registered Public Accounting Firm	  	 	36	  	
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	 	37	  	
Item 3.	 	Quantitative and Qualitative Disclosures about Market Risk	  	 	57	  	
Item 4.	 	Controls and Procedures	  	 	57	  	
 	 	 	
 	 	PART II — OTHER INFORMATION	  	 	 	 	
Item 1.	 	Legal Proceedings	  	 	58	  	
Item 1A.	 	Risk Factors	  	 	58	  	
Item 6.	 	Exhibits	  	 	58	  	
Signature	 	 	  	 	59	  	

Table of Contents
PART I — FINANCIAL INFORMATION
 
Item 1.	FINANCIAL STATEMENTS	
ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2013 and December 31, 2012

 	 	    March 31,    	 	 	    December 31,    	 	
 	 	2013	 	 	2012	 	
 	 	(expressed in thousands of U.S.
dollars, except share data)	 	
ASSETS	 	 	 	 	 	 	 	 	
Short-term investments, trading, at fair value	 	$	408,254	  	 	$	319,111	  	
Fixed maturities, available-for-sale, at fair value (amortized cost: 2013 — $185,778; 2012 — $245,396)	 	 	190,110	  	 	 	251,121	  	
Fixed maturities, trading, at fair value	 	 	4,091,509	  	 	 	2,253,210	  	
Equities, trading, at fair value	 	 	131,394	  	 	 	114,588	  	
Other investments, at fair value	 	 	432,034	  	 	 	414,845	  	
 	 	 	 	 	 	 	 	 	
Total investments	 	 	5,253,301	  	 	 	3,352,875	  	
Cash and cash equivalents	 	 	640,356	  	 	 	654,890	  	
Restricted cash and cash equivalents	 	 	346,719	  	 	 	299,965	  	
Accrued interest receivable	 	 	43,941	  	 	 	22,932	  	
Accounts receivable	 	 	35,430	  	 	 	15,399	  	
Premiums receivable	 	 	81,080	  	 	 	—	 	
Income taxes recoverable	 	 	4,388	  	 	 	11,302	  	
Reinsurance balances recoverable	 	 	1,190,531	  	 	 	1,122,919	  	
Funds held by reinsured companies	 	 	333,650	  	 	 	365,252	  	
Goodwill	 	 	21,222	  	 	 	21,222	  	
Other assets	 	 	93,308	  	 	 	15,487	  	
 	 	 	 	 	 	 	 	 	
TOTAL ASSETS	 	$	8,043,926	  	 	$	5,882,243	  	

LIABILITIES	 	 	 	 	 	 	 	 	
Losses and loss adjustment expenses	 	$	4,154,920	  	 	$	3,661,154	  	
Policy benefits for life and annuity contracts	 	 	1,255,632	  	 	 	—	 	
Unearned premium	 	 	81,935	  	 	 	—	 	
Insurance and reinsurance balances payable	 	 	183,790	  	 	 	143,123	  	
Accounts payable and accrued liabilities	 	 	83,562	  	 	 	73,258	  	
Income taxes payable	 	 	27,978	  	 	 	23,023	  	
Loans payable	 	 	346,970	  	 	 	107,430	  	
Other liabilities	 	 	124,644	  	 	 	99,022	  	
 	 	 	 	 	 	 	 	 	
TOTAL LIABILITIES	 	 	6,259,431	  	 	 	4,107,010	  	
 	 	 	 	 	 	 	 	 	
COMMITMENTS AND CONTINGENCIES	 	 	 	 	 	 	 	 	
SHAREHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
Share capital	 	 	 	 	 	 	 	 	
Authorized, issued and fully paid, par value $1 each (authorized 2013: 156,000,000; 2012: 156,000,000)	 	 	 	 	 	 	 	 	
Ordinary shares (issued and outstanding 2013: 13,798,965; 2012: 13,752,172)	 	 	13,799	  	 	 	13,752	  	
Non-voting convertible ordinary shares:	 	 	 	 	 	 	 	 	
Series A (issued 2013: 2,972,892; 2012: 2,972,892)	 	 	2,973	  	 	 	2,973	  	
Series B, C and D (issued and outstanding 2013: 2,725,637; 2012: 2,725,637)	 	 	2,726	  	 	 	2,726	  	
Treasury shares at cost (Series A non-voting convertible ordinary shares 2013:	 	 	 	 	 	 	 	 	
2,972,892; 2012: 2,972,892)	 	 	(421,559	) 	 	 	(421,559	) 	
Additional paid-in capital	 	 	959,503	  	 	 	958,571	  	
Accumulated other comprehensive income	 	 	21,678	  	 	 	24,439	  	
Retained earnings	 	 	984,812	  	 	 	972,853	  	
 	 	 	 	 	 	 	 	 	
Total Enstar Group Limited Shareholders’ Equity	 	 	1,563,932	  	 	 	1,553,755	  	
Noncontrolling interest	 	 	220,563	  	 	 	221,478	  	
 	 	 	 	 	 	 	 	 	
TOTAL SHAREHOLDERS’ EQUITY	 	 	1,784,495	  	 	 	1,775,233	  	
 	 	 	 	 	 	 	 	 	
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	 	$	8,043,926	  	 	$	5,882,243	  	
 	 	 	 	 	 	 	 	 	
See accompanying notes to the unaudited condensed consolidated financial statements
 
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ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Month Periods Ended March 31, 2013 and 2012

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
 	  	(expressed in thousands of U.S. dollars,
except share and per share data)	 	
INCOME	  	 	 	 	 	 	 	 	
Net premiums earned	  	$	30,920	  	 	$	—	 	
Consulting fees	  	 	2,447	  	 	 	2,194	  	
Net investment income	  	 	17,963	  	 	 	20,443	  	
Net realized and unrealized gains	  	 	30,120	  	 	 	25,382	  	
 	  	 	 	 	 	 	 	 	
 	  	 	81,450	  	 	 	48,019	  	
 	  	 	 	 	 	 	 	 	
EXPENSES	  	 	 	 	 	 	 	 	
Net increase (reduction) in ultimate loss and loss adjustment expense liabilities:	  	 	 	 	 	 	 	 	
Losses incurred on current period premiums earned	  	 	30,920	  	 	 	—	 	
Reduction in estimates of net ultimate losses	  	 	(5,062	) 	 	 	(3,298	) 	
Reduction in provisions for bad debt	  	 	—	  	 	 	(2,255	) 	
Reduction in provisions for unallocated loss adjustment expense liabilities	  	 	(16,403	) 	 	 	(12,852	) 	
Amortization of fair value adjustments	  	 	2,093	  	 	 	7,587	  	
 	  	 	 	 	 	 	 	 	
 	  	 	11,548	  	 	 	(10,818	) 	
Salaries and benefits	  	 	23,610	  	 	 	20,451	  	
General and administrative expenses	  	 	17,946	  	 	 	14,858	  	
Interest expense	  	 	2,435	  	 	 	2,111	  	
Net foreign exchange losses	  	 	5,082	  	 	 	2,268	  	
 	  	 	 	 	 	 	 	 	
 	  	 	60,621	  	 	 	28,870	  	
 	  	 	 	 	 	 	 	 	
EARNINGS BEFORE INCOME TAXES	  	 	20,829	  	 	 	19,149	  	
INCOME TAXES	  	 	(7,844	) 	 	 	(3,742	) 	
 	  	 	 	 	 	 	 	 	
NET EARNINGS	  	 	12,985	  	 	 	15,407	  	
Less: Net earnings attributable to noncontrolling interest	  	 	(1,026	) 	 	 	(5,733	) 	
 	  	 	 	 	 	 	 	 	
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	  	$	11,959	  	 	$	9,674	  	
 	  	 	 	 	 	 	 	 	
EARNINGS PER SHARE — BASIC	  	 	 	 	 	 	 	 	
Net earnings per ordinary share attributable to Enstar Group Limited shareholders	  	$	0.72	  	 	$	0.59	  	
 	  	 	 	 	 	 	 	 	
EARNINGS PER SHARE — DILUTED	  	 	 	 	 	 	 	 	
Net earnings per ordinary share attributable to Enstar Group Limited shareholders	  	$	0.72	  	 	$	0.58	  	
 	  	 	 	 	 	 	 	 	
Weighted average ordinary shares outstanding — basic	  	 	16,514,193	  	 	 	16,427,595	  	
Weighted average ordinary shares outstanding — diluted	  	 	16,676,056	  	 	 	16,671,710	  	
See accompanying notes to the unaudited condensed consolidated financial statements
 
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ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Month Periods Ended March 31, 2013 and 2012

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
 	  	(expressed in thousands
of U.S. dollars)	 	
NET EARNINGS	  	$	12,985	  	 	$	15,407	  	
 	  	 	 	 	 	 	 	 	
Other comprehensive income, net of tax:	  	 	 	 	 	 	 	 	
Unrealized holding gains on investments arising during the period	  	 	28,381	  	 	 	27,355	  	
Reclassification adjustment for net realized and unrealized gains included in net earnings	  	 	(30,120	) 	 	 	(25,382	) 	
 	  	 	 	 	 	 	 	 	
Unrealized (losses) gains arising during the period, net of reclassification adjustment	  	 	(1,739	) 	 	 	1,973	  	
Currency translation adjustment	  	 	(1,223	) 	 	 	2,985	  	
 	  	 	 	 	 	 	 	 	
Total other comprehensive (loss) income	  	 	(2,962	) 	 	 	4,958	  	
 	  	 	 	 	 	 	 	 	
Comprehensive income	  	 	10,023	  	 	 	20,365	  	
Less comprehensive income attributable to noncontrolling interest	  	 	(825	) 	 	 	(6,913	) 	
 	  	 	 	 	 	 	 	 	
COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR GROUP LIMITED	  	$	9,198	  	 	$	13,452	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to the unaudited condensed consolidated financial statements
 
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ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
For the Three Month Periods Ended March 31, 2013 and 2012

 	 	Three Months Ended
March  31,	 	
 	 	          2013           	 	 	          2012           	 	
 	 	(expressed in thousands
of U.S. dollars)	 	
 	 	 	 	
Share Capital — Ordinary Shares	 	 	 	 	 	 	 	 	
Balance, beginning of period	 	$	13,752	  	 	$	13,665	  	
Issue of shares	 	 	1	  	 	 	2	  	
Share awards granted/vested	 	 	46	 	 	 	43	  	
 	 	 	 	 	 	 	 	 	
Balance, end of period	 	$	13,799	  	 	$	13,710	  	
 	 	 	 	 	 	 	 	 	
Share Capital — Series A Non-Voting Convertible Ordinary Shares	 	 	 	 	 	 	 	 	
Balance, beginning and end of period	 	$	2,973	  	 	$	2,973	  	
 	 	 	 	 	 	 	 	 	
Share Capital — Series B, C and D Non-Voting Convertible Ordinary Shares	 	 	 	 	 	 	 	 	
Balance, beginning and end of period	 	$	2,726	  	 	$	2,726	  	
 	 	 	 	 	 	 	 	 	
Treasury Shares	 	 	 	 	 	 	 	 	
Balance, beginning and end of period	 	$	(421,559	) 	 	$	(421,559	) 	
 	 	 	 	 	 	 	 	 	
Additional Paid-in Capital	 	 	 	 	 	 	 	 	
Balance, beginning of period	 	$	958,571	  	 	$	956,329	  	
Share awards granted/vested	 	 	—	 	 	 	364	  	
Issue of shares, net	 	 	161	  	 	 	152	  	
Amortization of equity incentive plan	 	 	771	  	 	 	659	  	
 	 	 	 	 	 	 	 	 	
Balance, end of period	 	$	959,503	  	 	$	957,504	  	
 	 	 	 	 	 	 	 	 	
Accumulated Other Comprehensive Income Attributable to Enstar Group Limited	 	 	 	 	 	 	 	 	
Balance, beginning of period	 	$	24,439	  	 	$	27,096	  	
Foreign currency translation adjustments	 	 	(1,405	) 	 	 	1,837	  	
Net movement in unrealized holding (losses) gains on investments	 	 	(1,356	) 	 	 	1,942	  	
 	 	 	 	 	 	 	 	 	
Balance, end of period	 	$	21,678	  	 	$	30,875	  	
 	 	 	 	 	 	 	 	 	
Retained Earnings	 	 	 	 	 	 	 	 	
Balance, beginning of period	 	$	972,853	  	 	$	804,836	  	
Net earnings attributable to Enstar Group Limited	 	 	11,959	  	 	 	9,674	  	
 	 	 	 	 	 	 	 	 	
Balance, end of period	 	$	984,812	  	 	$	814,510	  	
 	 	 	 	 	 	 	 	 	
Noncontrolling Interest	 	 	 	 	 	 	 	 	
Balance, beginning of period	 	$	221,478	  	 	$	297,345	  	
Return of capital	 	 	—	 	 	 	(28,132	) 	
Dividends paid	 	 	(1,740	) 	 	 	(11,250	) 	
Net earnings attributable to noncontrolling interest	 	 	1,026	  	 	 	5,733	  	
Foreign currency translation adjustments	 	 	182	  	 	 	1,148	  	
Net movement in unrealized holding (losses) gains on investments	 	 	(383	) 	 	 	32	  	
 	 	 	 	 	 	 	 	 	
Balance, end of period	 	$	220,563	  	 	$	264,876	  	
 	 	 	 	 	 	 	 	 	
See accompanying notes to the unaudited condensed consolidated financial statements
 
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ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended March 31, 2013 and 2012

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
 	  	(expressed in thousands of
U.S. dollars)	 	
OPERATING ACTIVITIES:	  	 	 	 	 	 	 	 	
Net earnings	  	$	12,985	  	 	$	15,407	  	
Adjustments to reconcile net earnings to cash flows provided by (used in) operating activities:	  	 	 	 	 	 	 	 	
Net realized and unrealized investment gains	  	 	(11,189	) 	 	 	(23,042	) 	
Net realized and unrealized gains from other investments	  	 	(19,991	) 	 	 	(2,340	) 	
Other items	  	 	1,473	  	 	 	1,653	  	
Depreciation and amortization	  	 	254	  	 	 	317	  	
Net amortization of bond premiums and discounts	  	 	8,513	  	 	 	8,915	  	
Net movement of trading securities held on behalf of policyholders	  	 	1,646	  	 	 	5,261	  	
Sales and maturities of trading securities	  	 	793,980	  	 	 	555,018	  	
Purchases of trading securities	  	 	(790,179	) 	 	 	(607,978	) 	
Changes in assets and liabilities:	  	 	 	 	 	 	 	 	
Reinsurance balances recoverable	  	 	49,885	  	 	 	148,381	  	
Other assets	  	 	83,091	  	 	 	43,322	  	
Losses and loss adjustment expenses	  	 	(99,970	) 	 	 	(145,654	) 	
Insurance and reinsurance balances payable	  	 	(2,073	) 	 	 	(33,831	) 	
Accounts payable and accrued liabilities	  	 	(29,353	) 	 	 	(7,123	) 	
Other liabilities	  	 	11,520	  	 	 	27,647	  	
 	  	 	 	 	 	 	 	 	
Net cash flows provided by (used in) operating activities	  	 	10,592	  	 	 	(14,047	) 	
 	  	 	 	 	 	 	 	 	
INVESTING ACTIVITIES:	  	 	 	 	 	 	 	 	
Acquisitions, net of cash acquired	  	 	(283,960	) 	 	 	—	 	
Sales and maturities of available-for-sale securities	  	 	59,631	  	 	 	90,276	  	
Movement in restricted cash and cash equivalents	  	 	(46,754	) 	 	 	(72,856	) 	
Funding of other investments	  	 	288	  	 	 	(42,021	) 	
Other investing activities	  	 	120	  	 	 	(433	) 	
 	  	 	 	 	 	 	 	 	
Net cash flows used in investing activities	  	 	(270,675	) 	 	 	(25,034	) 	
 	  	 	 	 	 	 	 	 	
FINANCING ACTIVITIES:	  	 	 	 	 	 	 	 	
Dividends paid to noncontrolling interest	  	 	(1,740	) 	 	 	(11,250	) 	
Receipt of loans	  	 	227,000	  	 	 	—	 	
 	  	 	 	 	 	 	 	 	
Net cash flows provided by (used in) financing activities	  	 	225,260	  	 	 	(11,250	) 	
 	  	 	 	 	 	 	 	 	
EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS	  	 	20,289	  	 	 	(7,328	) 	
 	  	 	 	 	 	 	 	 	
NET DECREASE IN CASH AND CASH EQUIVALENTS	  	 	(14,534	) 	 	 	(57,659	) 	
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	  	 	654,890	  	 	 	850,474	  	
 	  	 	 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS, END OF PERIOD	  	$	640,356	  	 	$	792,815	  	
 	  	 	 	 	 	 	 	 	
Supplemental Cash Flow Information	  	 	 	 	 	 	 	 	
Net income taxes paid (recovered)	  	$	3,291	  	 	$	(159	) 	
Interest paid	  	$	1,608	  	 	$	1,717	  	
See accompanying notes to the unaudited condensed consolidated financial statements
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013 and December 31, 2012
(Tabular information expressed in thousands of U.S. dollars except share and per share data)
(unaudited)
 
1.	SIGNIFICANT ACCOUNTING POLICIES	
Basis of Preparation and Consolidation
The Company’s condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position and results of operations as at the end of and for the periods presented. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. The results of operations for any interim period are not necessarily indicative of the results for a full year. Inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. The following information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Certain reclassifications have been made to the prior period reported amounts of investment income and net realized and unrealized gains and losses to conform to the current period presentation. These reclassifications had no impact on income or net earnings previously reported.
Significant New Accounting Policies
As a result of the acquisitions of SeaBright Holdings, Inc. (“SeaBright”) and five companies from a subsidiary of HSBC Holdings plc (the “Pavonia companies”), each described in Note 2 – “Acquisitions”, the Company has adopted certain new significant accounting policies during the three months ended March 31, 2013. Other than the policies described below, there have been no material changes to the Company’s significant accounting policies from those described in Note 2 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
(a)    Premium revenue recognition
Property and Casualty
Premiums written are earned on a pro-rata basis over the period the coverage is provided. Reinsurance premiums are recorded at the inception of the policy and are estimated based upon information in underlying contracts and information provided by clients and/or brokers. Changes in reinsurance premium estimates are expected and may result in significant adjustments in future periods. These estimates change over time as additional information regarding changes in underlying exposures is obtained. Any subsequent differences arising on such estimates are recorded as premiums written in the period they are determined.
Unearned premiums represent the portion of premiums written that relate to the unexpired terms of policies in force. Premiums ceded are similarly pro-rated over the period the coverage is provided with the unearned portion being deferred as prepaid reinsurance premiums.
Certain contracts that the Company writes are retrospectively rated and additional premium would be due should losses exceed pre-determined, contractual thresholds. These required additional premiums are based upon contractual terms and management judgment is involved with respect to the estimate of the amount of losses that the Company expects to be ceded. Additional premiums are recognized at the time loss thresholds specified in the contract are exceeded and are earned over the coverage period, or are earned immediately if the period of risk coverage has passed. Changes in estimates of losses recorded on contracts with additional premium features will result in changes in additional premiums based on contractual terms.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
1.	SIGNIFICANT ACCOUNTING POLICIES — (cont’d)	
 
Life and annuity
The Pavonia companies, prior to going into run-off, wrote various U.S. and Canadian life insurance, including credit insurance, term life insurance, assumed life reinsurance, corporate owned life insurance and annuities. The Pavonia companies will continue to recognize premiums on term life and credit business.
Premiums from traditional life, credit and annuity policies with life contingencies are generally recognized as revenue when due from policyholders. Traditional life and credit policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with such revenue to result in the recognition of profit over the life of the contracts.
Premiums from annuity contracts without life contingencies are reported as annuity deposits. Policy benefits and claims that are charged to expenses include benefit claims incurred in the period in excess of related policyholders’ account balances. The Pavonia companies did not write any variable annuity reinsurance business.
(b)    Premiums Receivable
Property and Casualty
Premiums receivable represent amounts currently due and amounts not yet due on insurance and reinsurance policies. Premiums for insurance policies are generally due at inception. Premiums for reinsurance policies generally become due over the period of coverage based on the policy terms. The Company monitors the credit risk associated with premiums receivable, taking into consideration that credit risk is reduced by the Company’s contractual right to offset loss obligations or unearned premiums against premiums receivable. Amounts deemed uncollectible are charged to net income in the period they are determined. Changes in the estimate of premiums written will result in an adjustment to premiums receivable in the period they are determined. Certain contracts are retrospectively rated and provide for a final adjustment to the premium based on the final settlement of all losses. Premiums receivable on such contracts are adjusted based on the estimate of losses the Company expects to incur, and are not considered due until all losses are settled.
(c)    Life and annuity benefits
The Company’s life and annuity benefit and claim reserves are calculated using standard actuarial techniques and cash flow models in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 944, Financial Services - Insurance. The Company establishes and maintains its life and annuity reserves at a level that the Company estimates will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third party servicing obligations as they become payable. The Company reviews its life and annuity reserves regularly and performs loss recognition testing based upon cash flow projections.
Since the development of the life and annuity reserves is based upon cash flow projection models, the Company must make estimates and assumptions based on experience and industry mortality tables, longevity and morbidity rates, lapse rates, expenses and investment experience, including a provision for adverse deviation. The assumptions used to determine policy benefit reserves are determined at the inception of the contracts, reviewed and adjusted at the point of acquisition as required, and are locked-in throughout the life of the contract unless a premium deficiency develops. The assumptions are reviewed no less than annually and are unlocked if they result in a material adverse reserve change. The Company establishes these estimates based upon transaction-specific historical experience, information provided by the ceding company for the assumed business and industry experience. Actual results could differ materially from these estimates. As the experience on the
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
1.	SIGNIFICANT ACCOUNTING POLICIES — (cont’d)	
 
contracts emerges, the assumptions are reviewed by management. The Company determines whether actual and anticipated experience indicates that existing policy reserves, together with the present value of future gross premiums, are sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. If such a review indicates that reserves should be greater than those currently held, then the locked-in assumptions are revised and a charge for life and annuity benefits is recognized at that time.
Because of the many assumptions and estimates used in establishing reserves and the long-term nature of the contracts, the reserving process, while based on actuarial techniques, is inherently uncertain.
New Accounting Standards Adopted in 2013
ASU 2011-11, Disclosures About Offsetting Assets and Liabilities
In December 2011, the FASB issued new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new disclosures are designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards. The Company adopted the amended guidance effective January 1, 2013. The adoption of the guidance did not have a material impact on the consolidated financial statements.
ASU 2013-02, Presentation of Items Reclassified from Accumulated Other Comprehensive Income
In February 2013, the FASB issued new disclosure requirements for items reclassified from accumulated other comprehensive income. This guidance requires entities to disclose in a single location (either on the face of the financial statement that reports net earnings or in the notes) the effects of reclassification out of accumulated other comprehensive income. The Company adopted this guidance effective January 1, 2013. The adoption of the guidance did not have a material impact on the consolidated financial statements.
 
2.	ACQUISITIONS	
The Company accounts for acquisitions using the purchase method of accounting, which requires that the acquirer record the assets and liabilities acquired at their estimated fair value. The fair values of each of the reinsurance assets and liabilities acquired relating to our property and casualty acquisitions are derived from probability weighted estimates of the associated projected cash flows, based on actuarially prepared information and management’s run-off strategy. Refer to Note 2 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for more information on the accounting for acquisitions.
SeaBright
On February 7, 2013, the Company completed its acquisition of SeaBright, through the merger of its indirect, wholly-owned subsidiary, AML Acquisition, Corp. (“AML Acquisition”), with and into SeaBright (the “Merger”), with SeaBright surviving the Merger as the Company’s indirect, wholly-owned subsidiary. SeaBright owns SeaBright Insurance Company, an Illinois-domiciled insurer that is commercially domiciled in California, which wrote direct workers’ compensation business. The aggregate cash purchase price paid by the Company for all equity securities of SeaBright was approximately $252.1 million, which was funded in part with $111.0 million borrowed under a four-year term loan facility provided by National Australia Bank and Barclays Bank PLC.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.	ACQUISITIONS — (cont’d)	
 
Immediately following the acquisition, SeaBright was placed into run-off, and accordingly is no longer writing new insurance policies. SeaBright is, however, renewing expiring insurance policies when it is obligated to do so by state insurance regulations. The Company has received approvals from all but four states relieving SeaBright of its obligations to renew existing policies, and is continuing to work with the remaining four state regulators to obtain their approvals.
On April 17, 2013, A.M. Best Company (“A.M. Best”) downgraded the financial strength rating of SeaBright to “B++” (Good) from “A-” (Excellent). SeaBright’s business is particularly sensitive to its A.M. Best rating because of its focus on larger customers, which tend to give substantial weight to the A.M. Best rating, and A- is typically the lowest acceptable A.M. Best rating for many of these customers. As a result of SeaBright’s entry into run-off, the expected progress of its exit plans from the remaining states, and the A.M. Best downgrade, the Company expects further declines in written premiums.
The purchase price and fair value of the assets acquired in the SeaBright acquisition were as follows:

Purchase price	  	$	252,091	  	
 	  	 	 	 	
Net assets acquired at fair value	  	$	252,091	  	
 	  	 	 	 	
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition:

ASSETS	  	 	 	 	
Short-term investments, trading, at fair value	  	$	25,171	  	
Fixed maturities, trading, at fair value	  	 	683,780	  	
 	  	 	 	 	
Total investments	  	 	708,951	  	
Cash and cash equivalents	  	 	41,846	  	
Accrued interest receivable	  	 	6,344	  	
Premiums receivable	  	 	112,510	  	
Reinsurance balances recoverable	  	 	117,462	  	
Other assets	  	 	4,515	  	
 	  	 	 	 	
TOTAL ASSETS	  	$	991,628	  	
 	  	 	 	 	
LIABILITIES	  	 	 	 	
Losses and loss adjustment expenses	  	$	592,774	  	
Unearned premium	  	 	93,897	  	
Loans payable	  	 	12,000	  	
Insurance balances payable	  	 	3,243	  	
Other liabilities	  	 	37,623	  	
 	  	 	 	 	
TOTAL LIABILITIES	  	 	739,537	  	
 	  	 	 	 	
NET ASSETS ACQUIRED AT FAIR VALUE	  	$	252,091	  	
 	  	 	 	 	
From the date of acquisition to March 31, 2013, the Company had earned premium of $30.9 million, recorded incurred losses of $30.9 million on those earned premiums, and recorded $(0.3) million in net earnings related to SeaBright in its consolidated statement of earnings.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.	ACQUISITIONS — (cont’d)	
 
Pavonia
On March 31, 2013, the Company and its wholly-owned subsidiary, Pavonia Holdings (US), Inc. (“Pavonia”), completed the acquisition of all of the shares of Household Life Insurance Company of Delaware (“HLIC DE”) and HSBC Insurance Company of Delaware (“HSBC DE”) from Household Insurance Group Holding Company, a subsidiary of HSBC Holdings plc. HLIC DE and HSBC DE are both Delaware-domiciled insurers in run-off. HLIC DE owns three other insurers domiciled in Michigan, New York, and Arizona, which are also in run-off (collectively with HLIC DE and HSBC DE, the “Pavonia companies”). The aggregate cash purchase price was $155.6 million and was financed in part by a draw of $55.7 million under the Company’s revolving credit facility. The Pavonia companies wrote various U.S. and Canadian life insurance, including credit insurance, term life insurance, assumed reinsurance, corporate owned life insurance, and annuities.
The purchase price and fair value of the assets acquired in the Pavonia acquisition were as follows:

Purchase price	  	$	 155,564	  	
 	  	 	 	 	
Net assets acquired at fair value	  	$	155,564	  	
 	  	 	 	 	
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition:

ASSETS	  	 	 	 	
Short-term investments, trading, at fair value	  	$	50,671	  	
Fixed maturities, trading, at fair value	  	 	1,206,460	  	
 	  	 	 	 	
Total investments	  	 	1,257,131	  	
Cash and cash equivalents	  	 	81,849	  	
Accrued interest receivable	  	 	15,183	  	
Funds held by reinsured companies	  	 	47,761	  	
Other assets	  	 	59,002	  	
 	  	 	 	 	
TOTAL ASSETS	  	$	1,460,926	  	
 	  	 	 	 	
LIABILITIES	  	 	 	 	
Policy benefits for life and annuity contracts	  	$	1,255,632	  	
Reinsurance balances payable	  	 	39,477	  	
Unearned premium	  	 	5,618	  	
Other liabilities	  	 	4,635	  	
 	  	 	 	 	
TOTAL LIABILITIES	  	 	1,305,362	  	
 	  	 	 	 	
NET ASSETS ACQUIRED AT FAIR VALUE	  	$	155,564	  	
 	  	 	 	 	
The Company did not record any revenues or earnings in its consolidated statement of earnings for the three months ended March 31, 2013 with respect to the Pavonia companies because the companies were acquired on March 31, 2013.
As of March 31, 2013, the date of acquisition of the Pavonia companies, all of the companies were either in run-off or, immediately following the acquisition, were placed into run-off, and accordingly are no longer writing any new policies. The Pavonia companies will continue to collect premiums in relation to the unexpired policies assumed on acquisition.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.	ACQUISITIONS — (cont’d)	
 
The following pro forma condensed combined income statement for the three months ended March 31, 2013 and 2012 combines the historical consolidated statements of earnings of the Company with those of the Pavonia companies, giving effect to the business combinations and related transactions as if they had occurred on January 1, 2013 and 2012, respectively. The unaudited pro forma data does not necessarily represent results that would have occurred if the acquisition had taken place at the beginning of each period presented, nor is it necessarily indicative of future results.

Three Months Ended March 31,	  	2013	 	 	2012	 	
Total income	  	$	129,748	  	 	$	124,895	  	
Total expenses	  	 	(116,868	) 	 	 	(107,014	) 	
Noncontrolling interest	  	 	(1,026	) 	 	 	(5,733	) 	
 	  	 	 	 	 	 	 	 	
Net earnings	  	$	11,854	  	 	$	12,148	  	
 	  	 	 	 	 	 	 	 	
Net earnings per ordinary share – basic	  	$	0.72	  	 	$	0.74	  	
 	  	 	 	 	 	 	 	 	
Net earnings per ordinary share – diluted	  	$	0.71	  	 	$	0.73	  	

3.	SIGNIFICANT NEW BUSINESS	
Shelbourne
Effective January 1, 2013, Lloyd’s Syndicate 2008 (“S2008”), which is managed by the Company’s wholly-owned subsidiary and Lloyd’s managing agent, Shelbourne Syndicate Services Limited, entered into a reinsurance to close contract of the 2009 underwriting year of account of another Lloyd’s syndicate and a 100% quota share reinsurance agreement with a further Lloyd’s syndicate in respect of its 2010 underwriting year of account, under which S2008 assumed total gross insurance reserves of approximately £33.8 million (approximately $51.4 million) for consideration of an equal amount.
American Physicians
On April 26, 2013, the Company, through its wholly-owned subsidiary, Providence Washington Insurance Company (“PWIC”), completed the assignment and assumption of a portfolio of workers’ compensation business from American Physicians Assurance Corporation and APSpecialty Insurance Company. Total assets and liabilities assumed were approximately $35.3 million. Because this acquisition closed subsequent to March 31, 2013, it is not reflected in the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2013.
Reciprocal of America
On July 6, 2012, PWIC entered into a definitive loss portfolio transfer reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers’ compensation business. The estimated total liabilities to be assumed are approximately $174.0 million, with an equivalent amount of assets to be received as consideration. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close in the second quarter of 2013.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	INVESTMENTS	
Available-for-sale
The amortized cost and estimated fair values of the Company’s fixed maturity securities classified as available-for-sale were as follows:

 	  	Amortized
Cost	 	  	Gross
Unrealized
Holding
Gains	 	  	Gross
Unrealized
Holding
Losses
Non-OTTI	 	 	Fair
Value	 	
As at March 31, 2013	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
U.S. government and agency	  	$	4,203	  	  	$	419	  	  	$	—	 	 	$	4,622	  	
Non-U.S. government	  	 	89,617	  	  	 	2,587	  	  	 	(72	) 	 	 	92,132	  	
Corporate	  	 	87,609	  	  	 	1,864	  	  	 	(629	) 	 	 	88,844	  	
Residential mortgage-backed	  	 	4,052	  	  	 	210	  	  	 	(42	) 	 	 	4,220	  	
Commercial mortgage-backed	  	 	—	 	  	 	—	 	  	 	—	 	 	 	—	 	
Asset-backed	  	 	297	  	  	 	3	  	  	 	(8	) 	 	 	292	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
 	  	$	185,778	  	  	$	5,083	  	  	$	(751	) 	 	$	190,110	  	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	Amortized
Cost	 	  	Gross
Unrealized
Holding
Gains	 	  	Gross
Unrealized
Holding
Losses
Non-OTTI	 	 	Fair
Value	 	
As at December 31, 2012	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
U.S. government and agency	  	$	4,503	  	  	$	454	  	  	$	—	 	 	$	4,957	  	
Non-U.S. government	  	 	120,634	  	  	 	3,373	  	  	 	(151	) 	 	 	123,856	  	
Corporate	  	 	115,139	  	  	 	2,379	  	  	 	(524	) 	 	 	116,994	  	
Residential mortgage-backed	  	 	4,308	  	  	 	230	  	  	 	(40	) 	 	 	4,498	  	
Commercial mortgage-backed	  	 	474	  	  	 	7	  	  	 	—	 	 	 	481	  	
Asset-backed	  	 	338	  	  	 	9	  	  	 	(12	) 	 	 	335	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
 	  	$	245,396	  	  	$	6,452	  	  	$	(727	) 	 	$	251,121	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Included within residential and commercial mortgage-backed securities as at March 31, 2013 are securities issued by U.S. governmental agencies with a fair value of $3,264 (as at December 31, 2012: $3,500).
The following tables summarize the Company’s fixed maturity securities classified as available-for-sale in an unrealized loss position as well as the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:

 	  	12 Months or Greater	 	 	Less Than 12 Months	 	 	Total	 	
As at March 31, 2013	  	Fair
Value	 	  	Unrealized
Losses	 	 	Fair
Value	 	  	Unrealized
Losses	 	 	Fair Value	 	  	Unrealized
Losses	 	
Non-U.S. government	  	$	—	  	  	$	—	  	 	$	1,273	  	  	$	(72	) 	 	$	1,273	  	  	$	(72	) 	
Corporate	  	 	13,873	  	  	 	(53	) 	 	 	8,641	  	  	 	(576	) 	 	 	22,514	  	  	 	(629	) 	
Residential mortgage-backed	  	 	1,064	  	  	 	(41	) 	 	 	103	  	  	 	(1	) 	 	 	1,167	  	  	 	(42	) 	
Asset-backed	  	 	140	  	  	 	(8	) 	 	 	—	  	  	 	—	  	 	 	140	  	  	 	(8	) 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
 	  	$	15,077	  	  	$	(102	) 	 	$	10,017	  	  	$	(649	) 	 	$	25,094	  	  	$	(751	) 	

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	INVESTMENTS — (cont’d)	

 	  	12 Months or Greater	 	 	Less Than 12 Months	 	 	Total	 	
As at December 31, 2012	  	Fair
Value	 	  	Unrealized
Losses	 	 	Fair
Value	 	  	Unrealized
Losses	 	 	Fair
Value	 	  	Unrealized
Losses	 	
Non-U.S. government	  	$	2,646	  	  	$	(82	) 	 	$	2,399	  	  	$	(69	) 	 	$	5,045	  	  	$	(151	) 	
Corporate	  	 	13,936	  	  	 	(86	) 	 	 	8,689	  	  	 	(438	) 	 	 	22,625	  	  	 	(524	) 	
Residential mortgage-backed	  	 	1,124	  	  	 	(40	) 	 	 	—	 	  	 	—	 	 	 	1,124	  	  	 	(40	) 	
Asset-backed	  	 	174	  	  	 	(12	) 	 	 	—	 	  	 	—	 	 	 	174	  	  	 	(12	) 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
 	  	$	17,880	  	  	$	(220	) 	 	$	11,088	  	  	$	(507	) 	 	$	28,968	  	  	$	(727	) 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
As at March 31, 2013 and December 31, 2012, the number of securities classified as available-for-sale in an unrealized loss position was 21 and 30, respectively, with a fair value of $25.1 million and $29.0 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 12 and 23, respectively. As of March 31, 2013, none of these securities were considered to be other than temporarily impaired.
The contractual maturities of the Company’s fixed maturity securities classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

As at March 31, 2013	  	Amortized
Cost	 	  	Fair
Value	 	  	% of Total
Fair Value	 	
Due in one year or less	  	$	115,178	  	  	$	115,243	  	  	 	60.6	% 	
Due after one year through five years	  	 	63,166	  	  	 	66,742	  	  	 	35.1	% 	
Due after ten years	  	 	3,085	  	  	 	3,613	  	  	 	1.9	% 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	 	181,429	  	  	 	185,598	  	  	 	97.6	% 	
Residential mortgage-backed	  	 	4,052	  	  	 	4,220	  	  	 	2.2	% 	
Asset-backed	  	 	297	  	  	 	292	  	  	 	0.2	% 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	185,778	  	  	$	190,110	  	  	 	100.0	% 	

 	 	 	 	 	 	 	 	 	 	 	 	 	
As at December 31, 2012	  	Amortized
Cost	 	  	Fair
Value	 	  	% of Total
Fair Value	 	
Due in one year or less	  	$	173,113	  	  	$	173,949	  	  	 	69.3	% 	
Due after one year through five years	  	 	64,089	  	  	 	68,298	  	  	 	27.2	% 	
Due after ten years	  	 	3,074	  	  	 	3,560	  	  	 	1.4	% 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	 	240,276	  	  	 	245,807	  	  	 	97.9	% 	
Residential mortgage-backed	  	 	4,308	  	  	 	4,498	  	  	 	1.8	% 	
Commercial mortgage-backed	  	 	474	  	  	 	481	  	  	 	0.2	% 	
Asset-backed	  	 	338	  	  	 	335	  	  	 	0.1	% 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	245,396	  	  	$	251,121	  	  	 	100.0	% 	

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

4.	INVESTMENTS — (cont’d)	
 
The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity securities classified as available-for-sale:

As at March 31, 2013	  	Amortized
Cost	 	  	Fair
Value	 	  	% of Total
Fair Value	 	
AAA	  	$	83,082	  	  	$	85,584	  	  	 	45.0	% 	
AA	  	 	46,455	  	  	 	47,267	  	  	 	24.9	% 	
A	  	 	55,122	  	  	 	55,820	  	  	 	29.4	% 	
BBB or lower	  	 	962	  	  	 	940	  	  	 	0.5	% 	
Not Rated	  	 	157	  	  	 	499	  	  	 	0.2	% 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	185,778	  	  	$	190,110	  	  	 	100.0	% 	

 	 	 	 	 	 	 	 	 	 	 	 	 	
As at December 31, 2012	  	Amortized
Cost	 	  	Fair
Value	 	  	% of Total
Fair Value	 	
AAA	  	$	107,615	  	  	$	110,829	  	  	 	44.1	% 	
AA	  	 	59,535	  	  	 	60,742	  	  	 	24.2	% 	
A	  	 	72,773	  	  	 	73,935	  	  	 	29.4	% 	
BBB or lower	  	 	5,281	  	  	 	5,197	  	  	 	2.1	% 	
Not Rated	  	 	192	  	  	 	418	  	  	 	0.2	% 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	245,396	  	  	$	251,121	  	  	 	100.0	% 	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Other-Than-Temporary Impairment Process
The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale represent impairment losses that are other-than-temporary and whether a credit loss exists in accordance with its accounting policies. In assessing whether it is more likely than not that the Company will be required to sell a fixed maturity investment before its anticipated recovery, the Company considers various factors including its future cash flow requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short-term investments and fixed maturity investments available-for-sale in an unrealized gain position, and other relevant factors. For the three months ended March 31, 2013, the Company did not recognize any other-than-temporary impairment losses due to required sales. The Company determined that, as at March 31, 2013, no credit losses existed.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	INVESTMENTS — (cont’d)	
 
Trading
The estimated fair values of the Company’s investments in fixed maturity securities, short-term investments and equities classified as trading securities were as follows:

 	  	March 31,
2013	 	  	December 31,
2012	 	
U.S. government and agency	  	$	446,299	  	  	$	361,906	  	
Non-U.S. government	  	 	422,458	  	  	 	265,722	  	
Corporate	  	 	2,923,615	  	  	 	1,598,876	  	
Municipal	  	 	227,512	  	  	 	20,446	  	
Residential mortgage-backed	  	 	163,024	  	  	 	115,594	  	
Commercial mortgage-backed	  	 	178,301	  	  	 	130,848	  	
Asset-backed	  	 	138,554	  	  	 	78,929	  	
Equities — U.S.	  	 	99,618	  	  	 	92,406	  	
Equities — International	  	 	31,776	  	  	 	22,182	  	
 	  	 	 	 	  	 	 	 	
 	  	$	4,631,157	  	  	$	2,686,909	  	
 	  	 	 	 	  	 	 	 	
The increase of $1.94 billion in the Company’s investments in fixed maturities, short-term investments and equities classified as trading securities for the three months ended March 31, 2013 was primarily a result of the completion of the acquisitions of SeaBright and the Pavonia companies.
The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s investments in fixed maturity securities and short-term investments classified as trading:

As at March 31, 2013	  	Fair
Value	 	  	% of Total
Fair Value	 	
AAA	  	$	556,686	  	  	 	12.4	% 	
AA	  	 	1,673,044	  	  	 	37.2	% 	
A	  	 	1,720,627	  	  	 	38.2	% 	
BBB or lower	  	 	521,664	  	  	 	11.6	% 	
Not Rated	  	 	27,742	  	  	 	0.6	% 	
 	  	 	 	 	  	 	 	 	
 	  	$	4,499,763	  	  	 	100.0	% 	

 	 	 	 	 	 	 	 	 	
As at December 31, 2012	  	Fair
Value	 	  	% of Total
Fair Value	 	
AAA	  	$	418,297	  	  	 	16.3	% 	
AA	  	 	958,267	  	  	 	37.2	% 	
A	  	 	812,428	  	  	 	31.6	% 	
BBB or lower	  	 	376,347	  	  	 	14.6	% 	
Not Rated	  	 	6,982	  	  	 	0.3	% 	
 	  	 	 	 	  	 	 	 	
 	  	$	2,572,321	  	  	 	100.0	% 	

15

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

4.	INVESTMENTS — (cont’d)	
 
Other Investments
The estimated fair values of the Company’s other investments were as follows:

 	  	March 31,
2013	 	  	December 31,
2012	 	
Private equity funds	  	$	131,463	  	  	$	127,696	  	
Fixed income funds	  	 	156,012	  	  	 	156,235	  	
Fixed income hedge funds	  	 	56,911	  	  	 	53,933	  	
Equity fund	  	 	61,335	  	  	 	55,881	  	
Real estate debt fund	  	 	21,418	  	  	 	16,179	  	
Other	  	 	4,895	  	  	 	4,921	  	
 	  	 	 	 	  	 	 	 	
 	  	$	432,034	  	  	$	414,845	  	
 	  	 	 	 	  	 	 	 	
These investments are discussed in further detail below.
Private equity funds
This class is comprised of several private equity funds that invest primarily in the financial services industry. All of the Company’s investments in private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate those investments. These restrictions have been in place since the dates the initial investments were made by the Company.
As of March 31, 2013 and December 31, 2012, the Company had $131.5 million and $127.7 million, respectively, of other investments recorded in private equity funds, which represented 2.1% and 3.0% of total investments, cash and cash equivalents and restricted cash and cash equivalents at March 31, 2013 and December 31, 2012, respectively. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. Management regularly reviews and discusses fund performance with their 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.
Fixed income funds
This class is comprised of 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 to monthly.
Fixed income hedge funds
This class is comprised of hedge funds that invest in a diversified portfolio of debt securities. The hedge funds are not currently eligible for redemption due to imposed lock-up periods of three years from the time of the Company’s initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice. The first investment in the funds will be eligible for redemption in March 2014.
Equity fund
This class is comprised of an equity fund that invests in a diversified portfolio of international publicly-traded equity securities.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.	INVESTMENTS — (cont’d)	
 
Real estate debt fund
This class is comprised of a real estate debt fund that invests primarily in U.S. commercial real estate loans and securities. A redemption request for this fund can be made 10 days after the date of any monthly valuation; the fund states that it will make commercially reasonable efforts to redeem the investment within the next monthly period.
Other
This class is comprised of primarily a fund that provides loans to educational institutions throughout the U.S. and its territories. Through these investments, the Company participates in the performance of the underlying loans. This investment matures when the loans are paid down and cannot be redeemed before maturity.
Redemption restrictions on other investments
Certain funds included in other investments are subject to a lock-up period. A lock-up period refers to the initial amount of time an investor is contractually required to invest before having the ability to redeem the investment. Funds that do provide for periodic redemptions may, depending on the funds’ governing documents, have the ability to deny or delay a redemption request, which is called a “gate.” The fund may restrict redemptions because the aggregate amount of redemption requests as of a particular date exceeds a specified level. The gate is a method for executing an orderly redemption process that allows for redemption requests to be executed in a timely manner to reduce the possibility of adversely affecting the remaining investors in the fund. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion to be settled in cash sometime after the redemption date.
Certain funds included in other investments may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible debt. In such cases, a common mechanism used is a “side-pocket,” whereby the illiquid security is assigned to a separate memorandum capital account or designated account. Typically, the investor loses its redemption rights in the designated account. Only when the illiquid security is sold, or is otherwise deemed liquid by the fund, may investors redeem their interest in the side-pocket.
At March 31, 2013 and December 31, 2012, the Company had no investments subject to gates or side-pockets.
The following table presents the fair value, unfunded commitments and redemption frequency for all other investments. These investments are all valued at net asset value as at March 31, 2013:

 	 	Total Fair
Value	 	 	Gated/Side
Pocket
Investments	 	 	Investments
without Gates
or Side Pockets	 	 	Unfunded
Commitments	 	 	Redemption Frequency	
Private equity funds	 	$	131,463	  	 	$	—	  	 	$	131,463	  	 	$	83,521	  	 	Not eligible	
Fixed income funds	 	 	156,012	  	 	 	—	  	 	 	156,012	  	 	 	—	  	 	Daily to monthly	
Fixed income hedge funds	 	 	56,911	  	 	 	—	  	 	 	56,911	  	 	 	—	  	 	Quarterly after lock-up periods expire	
Equity fund	 	 	61,335	  	 	 	—	  	 	 	61,335	  	 	 	—	  	 	Bi-monthly	
Real estate debt fund	 	 	21,418	  	 	 	—	  	 	 	21,418	  	 	 	—	  	 	Monthly	
Other	 	 	4,895	  	 	 	—	  	 	 	4,895	  	 	 	655	  	 	Not eligible	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	432,034	  	 	$	—	  	 	$	432,034	  	 	$	84,176	  	 	 	

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

4.	INVESTMENTS — (cont’d)	
 
Fair Value of Financial Instruments
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. The Company uses a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
 
 	•	 	Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.	
 
 	•	 	Level 2 — Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.	
 
 	•	 	Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company’s own judgment about assumptions that market participants might use.	
The following is a summary of valuation techniques or models the Company uses to measure fair value by asset and liability classes.
Fixed Maturity Investments
The Company’s fixed maturity portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors with oversight from the Company’s Investment Committee. Fair values for all securities in the fixed maturities portfolio are independently provided by the investment custodian, investment accounting service provider and investment managers, each of which utilize internationally recognized independent pricing services. Interactive Data Corporation is, however, the main pricing service utilized to estimate the fair value measurements for the Company’s fixed maturity investments. The Company records the unadjusted price provided by the investment custodian, investment accounting service provider or the investment manager and validates this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to the Company’s knowledge of the current investment market. The Company’s internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
The independent pricing services used by the investment custodian, investment accounting service provider and investment managers obtain actual transaction prices for securities that have quoted prices in active markets. For determining the fair value of securities that are not actively traded, in general, pricing services use “matrix pricing” in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.
 
18

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

4.	INVESTMENTS — (cont’d)	
 
The following describes the techniques generally used to determine the fair value of the Company’s fixed maturity investments by asset class.
 
 	•	 	U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.	
 
 	•	 	Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.	
 
 	•	 	Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at March 31, 2013, the Company had one corporate security classified as Level 3.	
 
 	•	 	Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.	
 
 	•	 	Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.	
 
 	•	 	Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at March 31, 2013, the Company had no residential or commercial mortgage-backed securities classified as Level 3.	
 
19

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

4.	INVESTMENTS — (cont’d)	
 
Equities
The Company’s equities are predominantly traded on the major exchanges and are primarily managed by two external advisors. The Company uses Interactive Data Corporation, an internationally recognized pricing service, to estimate the fair value for all of its equities. The Company’s equities are widely diversified and there is no significant concentration in any specific industry.
The Company has categorized all of its investments in equities as Level 1 investments because the fair values of these investments are based on quoted prices in active markets for identical assets or liabilities. Because their fair value estimates are based on observable market data, the Company has categorized its investments in preferred stock as Level 2, with the exception of one investment in preferred stock that has been categorized as Level 3.
Other Investments
The Company has ongoing due diligence processes with respect to funds in which it invests and their managers. These processes are designed to assist the Company in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements for funds annually, and regularly reviews and discusses the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, the Company may incorporate adjustments to the reported net asset value (and not use the permitted practical expedient) on an investment by investment basis. These adjustments may involve significant management judgment.
For its investments in private equity funds, the Company measures fair value by obtaining the most recently provided capital statement from the external fund manager or third-party administrator. The funds calculate net asset value on a fair value basis. For all publicly-traded companies within these funds, the Company adjusts the reported net asset value based on the latest share price as of the Company’s reporting date. The Company has classified its investments in private equity funds as Level 3.
The fixed income funds and equity fund in which the Company invests have been classified as Level 2 investments because their fair value is estimated using the published net asset value and because the fixed income funds and equity fund are highly liquid.
For its investments in fixed income hedge funds, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The investments in the funds are classified as Level 3.
The real estate debt fund in which the Company invests has been valued based on the most recent published net asset value. This investment has been classified as Level 3.
The Company’s remaining other investments are valued based on the latest available capital statements and have been classified as Level 3.
 
20

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

4.	INVESTMENTS — (cont’d)	
 
Fair Value Measurements
In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification (“ASC”) 820, the Company has categorized its investments that are recorded at fair value among levels as follows:

 	  	March 31, 2013	 	
 	  	Quoted Prices in
Active Markets
for Identical Assets
(Level 1)	 	  	Significant Other
Observable Inputs
(Level 2)	 	  	Significant
Unobservable  Inputs
(Level 3)	 	  	Total Fair
Value	 	
U.S. government and agency	  	$	—	  	  	$	450,921	  	  	$	—	  	  	$	450,921	  	
Non-U.S. government	  	 	—	  	  	 	514,590	  	  	 	—	  	  	 	514,590	  	
Corporate	  	 	—	  	  	 	3,011,904	  	  	 	555	  	  	 	3,012,459	  	
Municipal	  	 	—	  	  	 	227,512	  	  	 	—	  	  	 	227,512	  	
Residential mortgage-backed	  	 	—	  	  	 	167,244	  	  	 	—	  	  	 	167,244	  	
Commercial mortgage-backed	  	 	—	  	  	 	178,301	  	  	 	—	  	  	 	178,301	  	
Asset-backed	  	 	—	  	  	 	138,846	  	  	 	—	  	  	 	138,846	  	
Equities — U.S.	  	 	84,255	  	  	 	11,363	  	  	 	4,000	  	  	 	99,618	  	
Equities — International	  	 	12,066	  	  	 	19,710	  	  	 	—	  	  	 	31,776	  	
Other investments	  	 	—	  	  	 	217,347	  	  	 	214,687	  	  	 	432,034	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total investments	  	$	96,321	  	  	$	4,937,738	  	  	$	219,242	  	  	$	5,253,301	  	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	December 31, 2012	 	
 	  	Quoted Prices in
Active Markets
for Identical Assets
(Level 1)	 	  	Significant Other
Observable Inputs
(Level 2)	 	  	Significant
Unobservable  Inputs
(Level 3)	 	  	Total Fair
Value	 	
U.S. government and agency	  	$	—	 	  	$	366,863	  	  	$	—	 	  	$	366,863	  	
Non-U.S. government	  	 	—	 	  	 	389,578	  	  	 	—	 	  	 	389,578	  	
Corporate	  	 	—	 	  	 	1,715,330	  	  	 	540	  	  	 	1,715,870	  	
Municipal	  	 	—	 	  	 	20,446	  	  	 	—	 	  	 	20,446	  	
Residential mortgage-backed	  	 	—	 	  	 	120,092	  	  	 	—	 	  	 	120,092	  	
Commercial mortgage-backed	  	 	—	 	  	 	131,329	  	  	 	—	 	  	 	131,329	  	
Asset-backed	  	 	—	 	  	 	79,264	  	  	 	—	 	  	 	79,264	  	
Equities — U.S.	  	 	83,947	  	  	 	5,058	  	  	 	3,401	  	  	 	92,406	  	
Equities — International	  	 	10,377	  	  	 	11,805	  	  	 	—	 	  	 	22,182	  	
Other investments	  	 	—	 	  	 	212,115	  	  	 	202,730	  	  	 	414,845	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total investments	  	$	94,324	  	  	$	3,051,880	  	  	$	206,671	  	  	$	3,352,875	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
During 2013 and 2012, the Company had no transfers between Levels 1 and 2.
 
21

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

4.	INVESTMENTS — (cont’d)	
 
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2013:

 	  	Fixed
Maturity
Investments	 	  	Other
Investments	 	 	Equity
Securities	 	  	Total	 	
Level 3 investments as of January 1, 2013	  	$	540	  	  	$	202,730	  	 	$	3,401	  	  	$	206,671	  	
Purchases	  	 	—	  	  	 	8,991	  	 	 	—	  	  	 	8,991	  	
Sales	  	 	—	  	  	 	(9,284	) 	 	 	—	  	  	 	(9,284	) 	
Total realized and unrealized gains through earnings	  	 	15	  	  	 	12,250	  	 	 	599	  	  	 	12,864	  	
Net transfers into and/or (out of) Level 3	  	 	—	  	  	 	—	  	 	 	—	  	  	 	—	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Level 3 investments as of March 31, 2013	  	$	555	  	  	$	214,687	  	 	$	4,000	  	  	$	219,242	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
The amount of net gains/(losses) for the three months ended March 31, 2013 included in earnings attributable to the fair value of changes in Level 3 assets still held at March 31, 2013 was $13.4 million. All of this amount was included in net realized and unrealized gains.
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three months ended March 31, 2012:

 	  	Fixed
Maturity
Investments	 	  	Other
Investments	 	 	Equity
Securities	 	  	Total	 	
Level 3 investments as of January 1, 2012	  	$	519	  	  	$	137,727	  	 	$	2,975	  	  	$	141,221	  	
Purchases	  	 	—	 	  	 	38,163	  	 	 	—	 	  	 	38,163	  	
Sales	  	 	—	 	  	 	(1,143	) 	 	 	—	 	  	 	(1,143	) 	
Total realized and unrealized gains through earnings	  	 	21	  	  	 	2,607	  	 	 	375	  	  	 	3,003	  	
Net transfers into and/or (out of) Level 3	  	 	—	 	  	 	—	 	 	 	—	 	  	 	—	 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Level 3 investments as of March 31, 2012	  	$	540	  	  	$	177,354	  	 	$	3,350	  	  	$	181,244	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
The amount of net gains/(losses) for the three months ended March 31, 2012 included in earnings attributable to the fair value of changes in Level 3 assets still held at March 31, 2012 was $2.5 million. All of this amount was included in net realized and unrealized gains.
Net Realized and Unrealized Gains
Components of net realized and unrealized gains are as follows:

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
Gross realized gains on available-for-sale securities	  	$	65	  	 	$	430	  	
Gross realized losses on available-for-sale securities	  	 	(17	) 	 	 	(423	) 	
Net realized gains on trading securities	  	 	6,009	  	 	 	4,095	  	
Net unrealized gains on trading securities	  	 	5,132	  	 	 	18,940	  	
Net realized and unrealized gains on other investments	  	 	18,931	  	 	 	2,340	  	
 	  	 	 	 	 	 	 	 	
Net realized and unrealized gains	  	$	30,120	  	 	$	25,382	  	
 	  	 	 	 	 	 	 	 	
Proceeds from sales and maturities of available-for-sale securities	  	$	59,631	  	 	$	90,276	  	

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

4.	INVESTMENTS — (cont’d)	
 
Net Investment Income
Major categories of net investment income are summarized as follows:

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
Interest from fixed maturity investments	  	$	20,625	  	 	$	20,493	  	
Net amortization of bond premiums and discounts	  	 	(8,513	) 	 	 	(8,706	) 	
Dividends from equities	  	 	1,091	  	 	 	621	  	
Other investments	  	 	61	  	 	 	228	  	
Interest from cash and cash equivalents and short-term investments	  	 	3,081	  	 	 	4,371	  	
Interest on other receivables	  	 	618	  	 	 	1,210	  	
Other income	  	 	1,397	  	 	 	2,564	  	
Interest on deposits held with clients	  	 	1,194	  	 	 	297	  	
Investment expenses	  	 	(1,591	) 	 	 	(635	) 	
 	  	 	 	 	 	 	 	 	
 	  	$	17,963	  	 	$	20,443	  	
 	  	 	 	 	 	 	 	 	
Restricted Assets
The Company is required to maintain investments on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The investments in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted investments as of March 31, 2013 and December 31, 2012 was as follows:

 	  	March 31,
2013	 	  	December 31,
2012	 	
Collateral in trust for third party agreements	  	$	576,671	  	  	$	570,391	  	
Securities on deposit with regulatory authorities	  	 	520,231	  	  	 	212,012	  	
Collateral for secured letter of credit facility	  	 	242,243	  	  	 	246,608	  	
 	  	 	 	 	  	 	 	 	
 	  	$	1,339,145	  	  	$	1,029,011	  	
 	  	 	 	 	  	 	 	 	
The increase in securities on deposit with regulatory authorities was primarily attributable to the restricted assets acquired in connection with the Seabright acquisition.
 
5.	DERIVATIVE INSTRUMENTS	
The Company uses foreign currency forward contracts as part of its overall foreign currency risk management strategy or to obtain exposure to a particular financial market and for yield enhancement. These derivatives were not designated as hedging investments.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.	DERIVATIVE INSTRUMENTS — (cont’d)	
 
The following table sets out the foreign currency forward contracts outstanding as at March 31, 2013 and December 31, 2012 and the estimated fair value of derivative instruments recorded on the balance sheet:

Foreign Currency
Forward Contract	 	Contract Date	 	 	Settlement Date	 	 	Contract Amount	 	 	Settlement
Amount	 	 	Fair Value as at	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	March 31,
2013	 	 	December 31,
2012	 	 	 	 	 	 	 	 	 	 	
Australian dollar	 	 	February 8, 2012	  	 	 	May 10, 2013	  	 	 	AU$35.0 million	  	 	$	36,099	  	 	$	(388	) 	 	$	(238	) 	 	 	 	 	 	 	 	 	 	
British pound	 	 	March 6, 2012	  	 	 	March 6, 2013	  	 	 	UKP17.0 million	  	 	 	26,611	  	 	 	—	 	 	 	(1,023	) 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	(388	) 	 	$	(1,261	) 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The following table sets out the changes in fair value and realized gains on derivative instruments recorded in net earnings for the periods ended March 31, 2013 and 2012, respectively.

Foreign Currency
Forward Contract	 	Contract Date	 	 	Settlement Date	 	 	Contract Amount	 	 	Settlement
Amount	 	 	Net Foreign Exchange Gains (Losses)	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	March 31,
2013	 	 	March 31,
2012	 	 	 	 	 	 	 	 	 	 	
Australian dollar	 	 	February 8, 2012	  	 	 	December 19, 2012	  	 	 	AU$25.0 million	  	 	$	26,165	  	 	$	—	  	 	$	(157	) 	 	 	 	 	 	 	 	 	 	
Australian dollar	 	 	February 8, 2012	  	 	 	May 10, 2013	  	 	 	AU$35.0 million	  	 	 	36,099	  	 	 	(150	) 	 	 	(552	) 	 	 	 	 	 	 	 	 	 	
British pound	 	 	March 6, 2012	  	 	 	March 6, 2013	  	 	 	UKP17.0 million	  	 	 	26,611	  	 	 	1,023	  	 	 	267	  	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	$	873	  	 	$	(442	) 	 	 	 	 	 	 	 	 	 	

6.	PREMIUMS WRITTEN AND EARNED	
Net premiums written by SeaBright totaled $9.7 million from the date of acquisition to March 31, 2013, and net earned premiums, over the same period, totaled $30.9 million.

 	  	Premiums Written	 	 	Premiums Earned	 	
Property and Casualty	  	 	 	 	 	 	 	 	
Direct	  	$	11,856	  	 	$	33,581	  	
Assumed	  	 	242	  	 	 	555	  	
Ceded	  	 	(2,390	) 	 	 	(3,216	) 	
 	  	 	 	 	 	 	 	 	
Net	  	$	9,708	  	 	$	30,920	  	
 	  	 	 	 	 	 	 	 	
As of March 31, 2013, the date of acquisition of the Pavonia companies, all of the companies were either in run-off or, immediately following the acquisition, were placed into run-off, and accordingly are no longer writing new policies.
No premiums related to the Pavonia acquisition were included in the Company’s unaudited condensed consolidated statement of earnings for the three months ended March 31, 2013.
 
7.	REINSURANCE BALANCES RECOVERABLE	

 	  	March 31,
2013	 	 	December 31,
2012	 	
Recoverable from reinsurers on:	  	 	 	 	 	 	 	 	
Outstanding losses	  	$	689,577	  	 	$	665,303	  	
Losses incurred but not reported	  	 	340,985	  	 	 	295,922	  	
Fair value adjustments	  	 	(82,812	) 	 	 	(85,005	) 	
 	  	 	 	 	 	 	 	 	
Total reinsurance reserves recoverable	  	 	947,750	  	 	 	876,220	  	
Paid losses recoverable	  	 	242,781	  	 	 	246,699	  	
 	  	 	 	 	 	 	 	 	
 	  	$	1,190,531	  	 	$	1,122,919	  	

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

7.	REINSURANCE BALANCES RECOVERABLE — (cont’d)	
 
The Company’s acquired insurance and reinsurance subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. The Company’s insurance and reinsurance subsidiaries remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, the Company evaluates and monitors concentration of credit risk among its reinsurers. Provisions are made for amounts considered potentially uncollectible.
As of March 31, 2013 and December 31, 2012, the Company had total reinsurance balances recoverable of $1.19 billion and $1.12 billion, respectively. The increase of $67.6 million in total reinsurance balances recoverable was primarily a result of the completion of acquisitions in the period partially offset by commutations and cash collections made during the three months ended March 31, 2013. At March 31, 2013 and December 31, 2012, the provision for uncollectible reinsurance recoverable relating to total reinsurance balances recoverable was $341.1 million and $343.9 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the balances are first allocated to applicable reinsurers. This determination is based on a detailed process, although management judgment is involved. As part of this process, ceded incurred but not reported (“IBNR”) reserves are allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of March 31, 2013 decreased to 22.3% as compared to 23.4% as of December 31, 2012, primarily as a result of reinsurance balances recoverable of companies acquired during the period against which there were minimal provisions for uncollectible reinsurance recoverable.
The fair value adjustments, determined on acquisition of insurance and reinsurance subsidiaries, are based on the estimated timing of loss and loss adjustment expense recoveries and an assumed interest rate equivalent to a risk free rate for securities with similar duration to the reinsurance recoverables acquired plus a spread to reflect credit risk, and are amortized over the estimated recovery period, as adjusted for accelerations in timing of payments as a result of commutation settlements.
At March 31, 2013 and December 31, 2012, the Company’s top ten reinsurers accounted for 65.0% and 63.1%, respectively, of reinsurance recoverables (which includes loss reserves recoverable and recoverables on paid losses) and included $254.6 million and $194.5 million, respectively, of IBNR reserves recoverable. With the exception of one BBB+ rated reinsurer from which $34.7 million was recoverable (December 31, 2012: $37.7 million), the other top ten reinsurers, as at March 31, 2013 and December 31, 2012, were all rated A- or better. Reinsurance recoverables by reinsurer were as follows:

 	  	March 31, 2013	 	 	December 31, 2012	 	
 	  	Reinsurance
Recoverable	 	  	% of
Total	 	 	Reinsurance
Recoverable	 	  	% of
Total	 	
Top ten reinsurers	  	$	774,109	  	  	 	65.0	% 	 	$	708,953	  	  	 	63.1	% 	
Other reinsurers’ balances > $1 million	  	 	409,014	  	  	 	34.4	% 	 	 	409,666	  	  	 	36.5	% 	
Other reinsurers’ balances < $1 million	  	 	7,408	  	  	 	0.6	% 	 	 	4,300	  	  	 	0.4	% 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total	  	$	1,190,531	  	  	 	100.0	% 	 	$	1,122,919	  	  	 	100.0	% 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
As at March 31, 2013 and December 31, 2012, reinsurance balances recoverable with a carrying value of $282.1 million and $144.1 million, respectively, were associated with two and one reinsurers, respectively, which represented 10% or more of total reinsurance balances recoverable. Of the $282.1 million and $144.1 million recoverable from reinsurers as at March 31, 2013 and December 31, 2012, $93.2 million and $121.6 million, respectively, is secured by a trust fund held for the benefit of the Company’s insurance and reinsurance subsidiaries. As at March 31, 2013 and December 31, 2012, the two and one reinsurers, respectively, had a minimum credit rating of A+, as provided by a major rating agency.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
8.	LOSSES AND LOSS ADJUSTMENT EXPENSES	

 	  	March 31,
2013	 	 	December 31,
2012	 	
Outstanding	  	$	2,603,708	  	 	$	2,369,356	  	
Incurred but not reported	  	 	1,818,297	  	 	 	1,588,310	  	
Fair value adjustment	  	 	(267,085	) 	 	 	(296,512	) 	
 	  	 	 	 	 	 	 	 	
 	  	$	4,154,920	  	 	$	3,661,154	  	
 	  	 	 	 	 	 	 	 	
Refer to Note 8 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 for more information on establishing reserves.
Loss and loss adjustment expenses increased by $493.8 million in the three months ended March 31, 2013 primarily as a result of the completion of the acquisition of SeaBright and the assumption of Lloyd’s syndicate business by S2008.
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2013 and 2012. Losses incurred and paid are reflected net of reinsurance recoverables.

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
Balance as at January 1	  	$	3,661,154	  	 	$	4,282,916	  	
Less: total reinsurance reserves recoverable	  	 	876,220	  	 	 	1,383,003	  	
 	  	 	 	 	 	 	 	 	
 	  	 	2,784,934	  	 	 	2,899,913	  	
Net increase (reduction) in ultimate loss and loss adjustment expense liabilities related to:	  	 	 	 	 	 	 	 	
Current period	  	 	30,920	  	 	 	—	  	
Prior periods	  	 	(19,372	) 	 	 	(10,818	) 	
 	  	 	 	 	 	 	 	 	
Total net increase (reduction) in ultimate loss and loss adjustment expense liabilities	  	 	11,548	  	 	 	(10,818	) 	
 	  	 	 	 	 	 	 	 	
Net losses paid related to:	  	 	 	 	 	 	 	 	
Current period	  	 	(4,927	) 	 	 	—	  	
Prior periods	  	 	(80,434	) 	 	 	(61,731	) 	
 	  	 	 	 	 	 	 	 	
Total net losses paid	  	 	(85,361	) 	 	 	(61,731	) 	
 	  	 	 	 	 	 	 	 	
Effect of exchange rate movement	  	 	(26,557	) 	 	 	14,253	  	
Acquired on purchase of subsidiaries	  	 	479,982	  	 	 	—	  	
Assumed business	  	 	42,624	  	 	 	2,400	  	
 	  	 	 	 	 	 	 	 	
Net balance as at March 31	  	 	3,207,170	  	 	 	2,844,017	  	
Plus: total reinsurance reserves recoverable	  	 	947,750	  	 	 	1,294,606	  	
 	  	 	 	 	 	 	 	 	
Balance as at March 31	  	$	4,154,920	  	 	$	4,138,623	  	

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

8.	LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d)	
 
The net (increase) reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2013 and 2012 was due to the following:

 	  	2013	 	 	2012	 	
 	  	Prior
Periods	 	 	Current
Period	 	 	Total	 	 	Prior
Periods	 	 	Current
Period	 	  	Total	 	
Net losses paid	  	$	(80,434	) 	 	$	(4,927	) 	 	$	(85,361	) 	 	$	(61,731	) 	 	$	—	  	  	$	(61,731	) 	
Net change in case and LAE reserves	  	 	62,745	  	 	 	(5,245	) 	 	 	57,500	 	 	 	60,136	 	 	 	—	 	  	 	60,136	 	
Net change in IBNR reserves	  	 	22,750	  	 	 	(20,748	) 	 	 	2,002	 	 	 	4,893	 	 	 	—	 	  	 	4,893	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Reduction (increase) in estimates of net ultimate losses	  	 	5,061	 	 	 	(30,920	) 	 	 	(25,859	) 	 	 	3,298	 	 	 	—	 	  	 	3,298	 	
Reduction in provisions for bad debt	  	 	—	 	 	 	—	 	 	 	—	 	 	 	2,255	 	 	 	—	 	  	 	2,255	 	
Reduction in provisions for unallocated loss adjustment expense liabilities	  	 	16,404	 	 	 	—	 	 	 	16,404	 	 	 	12,852	 	 	 	—	 	  	 	12,852	 	
Amortization of fair value adjustments	  	 	(2,093	) 	 	 	—	 	 	 	(2,093	) 	 	 	(7,587	) 	 	 	—	 	  	 	(7,587	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Net reduction (increase) in ultimate loss and loss adjustment expense liabilities	  	$	19,372	  	 	$	(30,920	) 	 	$	(11,548	) 	 	$	10,818	  	 	$	—	  	  	$	10,818	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Net change in case and loss adjustment expense reserves (“LAE reserves”) comprises the movement during the quarter in specific case reserve liabilities as a result of claims settlements or changes advised to the Company by its policyholders and attorneys, less changes in case reserves recoverable advised by the Company to its reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR reserves represents the change in the Company’s actuarial estimates of losses incurred but not reported, less amounts recoverable.
The net increase in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2013 of $11.5 million included losses incurred of $30.9 million related to SeaBright. Excluding SeaBright’s incurred losses of $30.9 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $19.4 million, which was attributable to a reduction in estimates of net ultimate losses of $5.1 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $16.4 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $2.1 million.
From the date of acquisition to March 31, 2013, SeaBright had losses incurred of $30.9 million primarily related to IBNR reserves relating to net premiums earned through March 31, 2013.
Excluding the impact of losses incurred of $30.9 million relating to SeaBright, the reduction in estimates of
net ultimate losses was $5.1 million, and was primarily related to:
 
 	(i)	the Company’s quarterly review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimate aggregate value of approximately $8.3 million; partially offset by	
 
 	(ii)	net incurred loss development of $26.0 million (excluding redundant case reserve reductions of $8.3 million), largely offset by reductions in IBNR reserves of $22.8 million.	
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2012 of $10.8 million was attributable to a reduction in estimates of net ultimate losses of $3.3 million, a reduction in provisions for bad debt of $2.3 million and a reduction in provisions for unallocated
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8.	LOSSES AND LOSS ADJUSTMENT EXPENSES — (cont’d)	
 
loss adjustment expense liabilities of $12.9 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $7.6 million. The reduction in estimates of net ultimate losses of $3.3 million for the three months ended March 31, 2012 comprised net incurred loss development of $1.6 million and reductions in IBNR reserves of $4.9 million.
 
9.	POLICY BENEFITS FOR LIFE AND ANNUITY CONTRACTS	
Policy benefits for life and annuity contracts as of March 31, 2013 were as follows:

 	  	March 31, 2013	 	
Life	  	$	335,233	  	
Annuities	  	 	1,006,542	  	
 	  	 	 	 	
 	  	 	1,341,775	  	
Fair value adjustment	  	 	(86,143	) 	
 	  	 	 	 	
 	  	$	1,255,632	  	

10.	RETROSPECTIVELY RATED CONTRACTS	
On October 1, 2003, SeaBright began selling workers’ compensation insurance policies for which the premiums varied based on loss experience. Accrued retrospective premiums are determined based upon the loss experience of business subject to such experience rating adjustment. Accrued retrospective premiums are determined by and allocated to individual policyholder accounts. Accrued retrospective premiums are recorded as additions to written or earned premium, and return retrospective premiums are recorded as reductions from written or earned premium. During the period from February 7, 2013 to March 31, 2013, none of the Company’s direct premiums written related to retrospectively rated contracts. The Company accrued $8.7 million for retrospective premiums receivable and $25.6 million for return retrospective premiums at March 31, 2013.
 
11.	INTANGIBLE ASSETS	

 	  	Intangible
Assets With  a
Definite-
Life	 	 	

Balance as at December 31, 2012	  	$	211,507	 	 	 	
Recognized during the period	  	 	61,002	  	 	 	
Intangible assets amortization	  	 	(2,093	) 	 	 	
 	  	 	 	 	 	 	
Balance as at March 31, 2013	  	$	270,416	  	 	 	
 	  	 	 	 	 	 	
Intangible assets with a definite-life represent the fair value adjustments (“FVA”) related to outstanding losses and loss adjustment expenses, policy benefits for life and annuity contracts and reinsurance recoverables. The FVA are recorded as a component of each line item. FVA are amortized in proportion to future premiums for policy benefits for life and annuity contracts over the estimated payout or recovery period for outstanding losses and loss adjustment expenses and reinsurance recoverables.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11.	INTANGIBLE ASSETS — (cont’d)	
 
The gross carrying value, accumulated amortization and net carrying value of intangible assets with a definite-life by type at March 31, 2013 and December 31, 2012 were as follows:

 	  	March 31, 2013	 	 	December 31, 2012	 	
 	  	Gross Carrying
Value	 	 	Accumulated
Amortization	 	 	Net Carrying
Value	 	 	Gross Carrying
Value	 	 	Accumulated
Amortization	 	 	Net Carrying
Value	 	
Fair value adjustments	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Losses and loss adjustment expenses	  	$	530,509	  	 	$	263,424	  	 	$	267,085	  	 	$	552,455	  	 	$	255,943	  	 	$	296,512	  	
Reinsurance recoverables	  	 	(181,570	) 	 	 	(98,758	) 	 	 	(82,812	) 	 	 	(178,377	) 	 	 	(93,372	) 	 	 	(85,005	) 	
Policy benefits for life and annuity contracts	  	 	86,143	  	 	 	—	  	 	 	86,143	  	 	 	—	  	 	 	—	  	 	 	—	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fair value adjustments	  	$	435,082	  	 	$	164,666	  	 	$	270,416	  	 	$	374,078	  	 	$	162,571	  	 	$	211,507	  	

12.	LOANS PAYABLE	
The Company’s long-term debt consists of loan facilities used to partially finance certain of the Company’s acquisitions or significant new business transactions, its Revolving Credit Facility (the “EGL Revolving Credit Facility”), which can be used for permitted acquisitions and for general corporate purposes, and surplus notes acquired in connection with the SeaBright acquisition. The Company’s three outstanding credit facilities (its term facility related to the Company’s 2011 acquisition of Clarendon National Insurance Company (the “Clarendon Facility”), its term facility related to the acquisition of SeaBright (the “SeaBright Facility”), and the EGL Revolving Credit Facility) are described in Note 9 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
On February 5, 2013, the Company, through AML Acquisition, fully drew down the $111.0 million SeaBright Facility in connection with the acquisition of SeaBright.
On February 5, 2013 and March 26, 2013, the Company borrowed $56.0 million and $60.0 million, respectively, under the EGL Revolving Credit Facility. As of March 31, 2013, the unused portion of the EGL Revolving Credit Facility was $134.0 million.
As of March 31, 2013, all of the covenants relating to the three credit facilities were met.
Total amounts of loans payable outstanding, including accrued interest, as of March 31, 2013 and December 31, 2012, totaled $347.0 million and $107.4 million, respectively, and were comprised as follows:

Facility	  	Date of Facility	 	  	March 31,
2013	 	  	December 31,
2012	 	
EGL Revolving Credit Facility	  	 	June 30, 2011	  	  	$	116,000	  	  	$	—	 	
SeaBright Facility	  	 	December 21, 2012	  	  	 	111,000	  	  	 	—	 	
Clarendon Facility	  	 	July 12, 2011	  	  	 	106,500	  	  	 	106,500	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Total long-term bank debt	  	 	 	 	  	 	333,500	  	  	 	106,500	  	
SeaBright Surplus Notes	  	 	 	 	  	 	12,000	  	  	 	—	 	
Accrued interest	  	 	 	 	  	 	1,470	  	  	 	930	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
Total loans payable	  	 	 	 	  	$	346,970	  	  	$	107,430	  	

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

12.	LOANS PAYABLE — (cont’d)	
 
SeaBright Surplus Notes
On May 26, 2004, SeaBright issued, in a private placement, $12.0 million in subordinated floating rate Surplus Notes due in 2034. The note holder is ICONS, Ltd., with Wilmington Trust Company acting as Trustee. Interest, paid quarterly in arrears, is calculated at the beginning of the interest payment period using the three-month LIBOR plus 400 basis points. The quarterly interest rate cannot exceed the initial interest rate by more than 10% per year, cannot exceed the corporate base (prime) rate by more than 2% and cannot exceed the highest rate permitted by New York law. The rate or amount of interest required to be paid in any quarter is also subject to limitations imposed by the Illinois Insurance Code. Interest amounts not paid as a result of these limitations become “Excess Interest,” which SeaBright may be required to pay in the future, subject to the same limitations and all other provisions of the Surplus Notes Indenture. Excess Interest has not applied during the periods the notes have been outstanding. The interest rate in effect as at March 31, 2013 was 4.3%.
Interest and principal may be paid only upon the prior approval of the Illinois Department of Insurance. In the event of default, as defined, or failure to pay interest due to lack of Illinois Department of Insurance approval, SeaBright would be prohibited from paying dividends on its capital stock. If an event of default occurs and is continuing, the principal and accrued interest would become immediately due and payable.
The notes are redeemable prior to 2034 by SeaBright, in whole or in part, on any interest payment date.
Interest expense from February 7, 2013 (the date of acquisition of SeaBright) to March 31, 2013 was $0.1 million.
 
13.	EMPLOYEE BENEFITS	
The Company’s share-based compensation plans provide for the grant of various awards to its employees and to members of the Board of Directors. These are described in Note 11 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The information below includes both the employee and director components of the Company’s share-based compensation.
During the three months ended March 31, 2013, the Company completed the acquisitions of SeaBright and the Pavonia companies, which resulted in an increase in the number of employees from 383 at December 31, 2012 to 661 at March 31, 2013. The Company did not assume any significant post-retirement benefit obligations on completion of these acquisitions.
Employee share plans
Employee share awards for the three months ended March 31, 2013 and 2012 are summarized as follows:

 	  	March 31, 2013	 	 	March 31, 2012	 	
 	  	Number
of Shares	 	 	Weighted
Average  Fair
Value of
the Award	 	 	Number
of Shares	 	 	Weighted
Average  Fair
Value of
the Award	 	
Nonvested — January 1	  	 	160,644	  	 	$	15,902	  	 	 	203,930	  	 	$	20,026	  	
Granted	  	 	1,308	  	 	 	138	  	 	 	1,564	  	 	 	140	  	
Vested	  	 	(46,793	) 	 	 	(5,436	) 	 	 	(44,850	) 	 	 	(4,404	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Nonvested — March 31	  	 	115,159	  	 	$	14,313	  	 	 	160,644	  	 	$	15,902	  	

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

13.	EMPLOYEE BENEFITS — (cont’d)	
 
2011-2015 Annual Incentive Compensation Program
For the three months ended March 31, 2013 and 2012, nil and 191 shares, respectively, were awarded to directors, officers and employees under the 2006 Equity Incentive Plan (the “Equity Plan”). The total value of the award for the three months ended March 31, 2012 was $0.1 million and was charged against the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program (the “Incentive Program”) accrual established for the year ended December 31, 2011.
The accrued expense relating to the Incentive Program for the three months ended March 31, 2013 and 2012 was $2.1 million and $1.7 million, respectively.
2006 Equity Incentive Plan
The total unrecognized compensation cost related to the Company’s non-vested share awards under the Equity Plan as at March 31, 2013 and 2012 was $6.8 million and $9.7 million, respectively. This cost is expected to be recognized evenly over the next 2.5 years. Compensation costs of $0.8 million and $0.7 million relating to share awards were recognized in the Company’s statement of earnings for the three months ended March 31, 2013 and 2012, respectively.
Enstar Group Limited Employee Share Purchase Plan
Compensation costs of less than $0.1 million relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan were recognized in the Company’s statement of earnings for each of the three month periods ended March 31, 2013 and 2012. For the three month periods ended March 31, 2013 and 2012, 1,308 and 1,373 shares, respectively, were issued to employees under such plan.
Deferred Compensation and Ordinary Share Plan for Non-Employee Directors
For the three months ended March 31, 2013 and 2012, 632 and 822 restricted share units, respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors. The Company recorded expenses related to the restricted share units for each of the three month periods ended March 31, 2013 and 2012 of $0.1 million.
Pension Plan
The Company provides pension benefits to eligible employees through various plans sponsored by the Company. All pension plans, except for the noncontributory defined benefit pension plan acquired in the 2010 PW Acquisition Co. transaction (the “PWAC Plan”), are structured as defined contribution plans. Pension expense for the three months ended March 31, 2013 and 2012 was $1.1 million and $1.9 million, respectively.
The Company recorded pension expense relating to the PWAC Plan of $0.2 million for each of the three month periods ended March 31, 2013 and 2012. The PWAC Plan is described in Note 11 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
32
14.	EARNINGS PER SHARE	
The following table sets forth the comparison of basic and diluted earnings per share for the three month periods ended March 31, 2013 and 2012:

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	  	          2012           	 	
Basic earnings per ordinary share:	  	 	 	 	  	 	 	 	
Net earnings attributable to Enstar Group Limited	  	$	11,959	  	  	$	9,674	  	
Weighted average ordinary shares outstanding — basic	  	 	16,514,193	  	  	 	16,427,595	  	
 	  	 	 	 	  	 	 	 	
Net earnings per ordinary share attributable to Enstar	  	 	 	 	  	 	 	 	
Group Limited — basic	  	$	0.72	  	  	$	0.59	  	
 	  	 	 	 	  	 	 	 	
Diluted earnings per ordinary share:	  	 	 	 	  	 	 	 	
Net earnings attributable to Enstar Group Limited	  	$	11,959	  	  	$	9,674	  	
Weighted average ordinary shares outstanding — basic	  	 	16,514,193	  	  	 	16,427,595	  	
Share equivalents:	  	 	 	 	  	 	 	 	
Unvested shares	  	 	124,695	  	  	 	167,925	  	
Restricted share units	  	 	16,514	  	  	 	13,508	  	
Warrants	  	 	20,654	  	  	 	—	 	
Options	  	 	—	 	  	 	62,682	  	
 	  	 	 	 	  	 	 	 	
Weighted average ordinary shares outstanding — diluted	  	 	16,676,056	  	  	 	16,671,710	  	
 	  	 	 	 	  	 	 	 	
Net earnings per ordinary share attributable to Enstar	  	 	 	 	  	 	 	 	
Group Limited — diluted	  	$	0.72	  	  	$	0.58	  	

15.	RELATED PARTY TRANSACTIONS	
Following several private transactions occurring from May 2012 to July 2012, Trident V, L.P. and certain of its affiliates (“Trident”) acquired approximately 9.7% of the Company’s ordinary shares. The Company has investments in two funds affiliated with entities owned by Trident. As of March 31, 2013, the fair value of the investments in the two funds was $65.0 million. On April 1, 2013, the Company committed an additional $10.0 million to one of these funds.
Affiliates of Goldman Sachs & Co. (“Goldman Sachs”) own approximately 4.8% of the Company’s voting ordinary shares and 100% of the Company’s non-voting convertible ordinary shares. Sumit Rajpal, a managing director of Goldman Sachs, was appointed to the Board of Directors in connection with Goldman Sachs’ investment in the Company. On April 22, 2013, the Company entered into an investment commitment of $15.0 million with a fund affiliated with Goldman Sachs.
 
16.	TAXATION	
Earnings before income taxes include the following components:

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	  	          2012           	 	
Domestic (Bermuda)	  	$	9,934	  	  	$	(17,734	) 	
Foreign	  	 	10,895	  	  	 	36,883	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	20,829	  	  	$	19,149	  	

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

16.	TAXATION — (cont’d)	
 
Tax expense for income taxes is comprised of:

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
Current:	  	 	 	 	 	 	 	 	
Domestic (Bermuda)	  	$	—	 	 	$	—	 	
Foreign	  	 	14,279	 	 	 	2,858	  	
 	  	 	 	 	 	 	 	 	
 	  	 	14,279	 	 	 	2,858	  	
 	  	 	 	 	 	 	 	 	
Deferred:	  	 	 	 	 	 	 	 	
Domestic (Bermuda)	  	 	—	 	 	 	—	 	
Foreign	  	 	(6,435	)	 	 	884	  	
 	  	 	 	 	 	 	 	 	
 	  	 	(6,435	)	 	 	884	  	
 	  	 	 	 	 	 	 	 	
Total tax expense	  	$	7,844	  	 	$	3,742	  	
 	  	 	 	 	 	 	 	 	
Under current Bermuda law, the Company and its Bermuda subsidiaries are exempted from paying any taxes in Bermuda on their income or capital gains until March 2035.
The Company has operating subsidiaries and branch operations in the United Kingdom, Australia, the United States and Europe and is subject to federal, foreign, state and local taxes in those jurisdictions. In addition, certain distributions from some foreign sources may be subject to withholding taxes.
The expected income tax provision for the foreign operations computed on pre-tax income at the weighted average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.
The actual income tax rate differed from the amount computed by applying the effective rate of 0% under Bermuda law to earnings before income taxes as shown in the following reconciliation:

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	  	          2012           	 	
Earnings before income tax	  	 	$20,829    	  	  	 	$19,149    	  	
 	  	 	 	 	  	 	 	 	
Expected tax rate	  	 	0.0 %	  	  	 	0.0 %	  	
Foreign taxes at local expected rates	  	 	33.5 %	  	  	 	27.1 %	  	
Change in uncertain tax positions	  	 	(11.4)%	  	  	 	0.3 %	  	
Change in valuation allowance	  	 	15.3 %	  	  	 	(8.7)%	  	
Other	  	 	0.3 %	  	  	 	0.8 %	  	
 	  	 	 	 	  	 	 	 	
Effective tax rate	  	 	37.7 %	  	  	 	19.5 %	  	
 	  	 	 	 	  	 	 	 	
The Company has estimated future taxable income of its foreign subsidiaries and has provided a valuation allowance in respect of those loss carryforwards where it does not expect to realize a benefit. The Company has considered all available evidence using a “more likely than not” standard in determining the amount of the valuation allowance.
The Company had unrecognized tax benefits of $2.5 million and $5.8 million relating to uncertain tax positions as of March 31, 2013 and December 31, 2012, respectively. During the quarter ended March 31, 2013, there were reductions to unrecognized tax benefits of $3.3 million due to the expiration of statutes of limitation.
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16.	TAXATION — (cont’d)	
 
The Company’s operating subsidiaries in specific countries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, the Company’s major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2006, 2009 and 2006, respectively.
 
17.	COMMITMENTS AND CONTINGENCIES	
Leases
The Company leases office space under operating leases expiring in various years through 2018. The leases are renewable at the option of the lessee under certain circumstances. The following is a schedule of future minimum rental payments for the next five years on non-cancellable leases as of March 31, 2013 inclusive of those related to the acquisitions of SeaBright and the Pavonia companies:

2013	  	$	5,428	  	
2014	  	 	6,625	  	
2015	  	 	5,889	  	
2016	  	 	3,446	  	
2017	  	 	1,148	  	
2018	  	 	474	  	
 	  	 	 	 	
 	  	$	23,010	  	
 	  	 	 	 	
Guarantees
As at March 31, 2013 and December 31, 2012, the Company had, in total, parental guarantees supporting Fitzwilliam Insurance Limited’s obligations in the amount of $217.7 million and $213.3 million, respectively.
Acquisitions
The Company has entered into a definitive agreement with respect to the Reciprocal of America loss portfolio transfer, which is expected to close in the second quarter of 2013. The Reciprocal of America agreement is described in Note 3 – “Significant New Business.”
Legal Proceedings
In connection with the Company’s acquisition of SeaBright, two purported class action lawsuits were filed against SeaBright, the members of its board of directors, AML Acquisition, and, in one of the cases, the Company. The first suit was filed September 13, 2012 in the Superior Court of the State of Washington and the second suit was filed September 20, 2012 in the Court of Chancery of the State of Delaware. The lawsuits allege, among other things, that SeaBright’s directors breached their fiduciary duties when negotiating, approving and seeking stockholder approval of the Merger, and that SeaBright and the Company or its merger subsidiary aided and abetted the alleged breaches of fiduciary duties. In the suits, plaintiffs sought to enjoin defendants from taking any action to consummate the transactions contemplated by the Merger Agreement, as well as monetary damages, including attorneys’ fees and expenses. The Company believes these suits are without merit. Nevertheless, in order to avoid the potential cost and distraction of continued litigation and to eliminate any risk of delay to the closing of the Merger, the Company, SeaBright and the SeaBright director defendants agreed in principle to settle the two lawsuits, without admitting any liability or wrongdoing. The settlement required SeaBright to make supplemental information available to its stockholders through a filing of a Current Report on
 
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17.	COMMITMENTS AND CONTINGENCIES — (cont’d)	
 
Form 8-K with the U.S. Securities and Exchange Commission. The settlement did not change the amount of the consideration that the Company paid to SeaBright’s stockholders in any way, nor did it alter any deal terms. The settlement is subject to execution and delivery of definitive documentation, approval by the Washington court of the settlement and approval by the Delaware court of the dismissal of the Delaware suit. If the settlement becomes effective, both lawsuits will be dismissed.
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on its business, results of operations or financial condition. Nevertheless, there can be no assurance that such pending legal proceedings will not have a material effect on the Company’s business, financial condition or results of operations. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental claims. There can be no assurance that any such future litigation will not have a material effect on the Company’s business, financial condition or results of operations.
 
18.	SEGMENT REPORTING	
Due to the Company’s acquisition of the Pavonia companies on March 31, 2013, the Company has reevaluated its segment reporting and has determined that in future periods, beginning with the three and six month periods ending June 30, 2013, the Company will report in two segments: (1) property and casualty and (2) life and annuity. Certain new significant accounting policies applicable to the life and annuity segment are described in Note 1 – “Significant New Accounting Policies.”
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Enstar Group Limited
We have reviewed the condensed consolidated balance sheet of Enstar Group Limited and subsidiaries as of March 31, 2013, and the related condensed consolidated statements of earnings and comprehensive income, changes in shareholders’ equity and cash flows for the three-month period ended March 31, 2013. These condensed consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2012, and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended; and in our report dated February 28, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG Audit Limited
Hamilton, Bermuda
May 9, 2013
 
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Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2013 and 2012 should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
Business Overview
Enstar Group Limited, or Enstar, was formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry.
Since our formation, we have completed the acquisition of over 60 insurance and reinsurance companies and portfolios of insurance and reinsurance business and are now administering those businesses in run-off, including 12 Reinsurance to Close, or “RITC” transactions, with Lloyd’s of London insurance and reinsurance syndicates in run-off, whereby the portfolio of run-off liabilities is transferred from one Lloyd’s syndicate to another. Insurance and reinsurance companies and portfolios of insurance and reinsurance business we acquire that are in run-off no longer underwrite new policies. We derive our net earnings from the ownership and management of these companies and portfolios of business in run-off primarily by settling insurance and reinsurance claims below the acquired value of loss reserves and from returns on the portfolio of investments retained to pay future claims. In addition, we provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.
Our primary corporate objective is to grow our net book value per share. We believe growth in our net book value is driven primarily by growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions and effectively managing companies and portfolios of business that we previously acquired.
Acquisitions
SeaBright
On February 7, 2013, we completed our acquisition of SeaBright Holdings, Inc., or SeaBright, through the merger of our of indirect, wholly-owned subsidiary, AML Acquisition, Corp., with and into SeaBright, or the Merger, with SeaBright surviving the Merger as our indirect, wholly-owned subsidiary. SeaBright owns SeaBright Insurance Company, an Illinois-domiciled insurer that is commercially domiciled in California, which wrote workers’ compensation business. The aggregate cash purchase price paid for all equity securities of SeaBright was approximately $252.1 million, which was funded in part with $111.0 million borrowed under a four-year term loan facility provided by National Australia Bank and Barclays Bank PLC.
Pavonia
On March 31, 2013, we and our wholly-owned subsidiary, Pavonia Holdings (US), Inc., or Pavonia, completed the acquisition of all of the shares of Household Life Insurance Company of Delaware, or HLIC DE, and HSBC Insurance Company of Delaware, or HSBC DE, from Household Insurance Group Holding Company, an affiliate of HSBC Holdings plc. HLIC DE and HSBC DE are both Delaware-domiciled insurers in run-off. HLIC DE owns three other insurers domiciled in Michigan, New York, and Arizona, respectively, all of which are in run-off (collectively with HLIC DE and HSBC DE, the Pavonia companies). The aggregate cash purchase price was $155.6 million and was financed in part by a drawing of $55.7 million under our revolving credit facility. The Pavonia companies wrote various U.S. and Canadian life insurance, including credit insurance, term life insurance, assumed reinsurance, corporate owned life insurance, and annuities.
As of the date of acquisition of Pavonia, all of the companies were either in run-off or, immediately following the acquisition, were placed into run-off, and accordingly are no longer writing new policies. We will continue to collect premiums on business that remains in-force.
 
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Significant New Business
Shelbourne
Effective January 1, 2013, Lloyd’s Syndicate 2008, or Syndicate 2008, which is managed by our wholly-owned subsidiary and Lloyd’s managing agent, Shelbourne Syndicate Services Limited, entered into an RITC contract of the 2009 underwriting year of account of another Lloyd’s syndicate and a 100% quota share reinsurance agreement with a further Lloyd’s syndicate in respect of its 2010 underwriting year of account, under which Syndicate 2008 assumed total gross insurance reserves of approximately £33.8 million (approximately $51.4 million) for consideration of an equal amount.
American Physicians
On April 26, 2013, we, through our wholly-owned subsidiary, Providence Washington Insurance Company, or PWIC, completed the assignment and assumption of a portfolio of workers’ compensation business from American Physicians Assurance Corporation and APSpecialty Insurance Company. Total assets and liabilities assumed were approximately $35.3 million.
Reciprocal of America
On July 6, 2012, PWIC entered into a definitive loss portfolio transfer reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers’ compensation business. The estimated total liabilities to be assumed are approximately $174.0 million, with an equivalent amount of assets to be received as consideration. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close in the second quarter of 2013.
 
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Results of Operations
The following table sets forth our selected consolidated statement of earnings data for each of the periods indicated.

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
 	  	(in thousands of U.S. dollars)	 	
INCOME	  	 	 	 	 	 	 	 	
Net premiums earned	  	$	30,920	  	 	$	—	 	
Consulting fees	  	 	2,447	  	 	 	2,194	  	
Net investment income	  	 	17,963	  	 	 	20,443	  	
Net realized and unrealized gains	  	 	30,120	  	 	 	25,382	  	
 	  	 	 	 	 	 	 	 	
 	  	 	81,450	  	 	 	48,019	  	
 	  	 	 	 	 	 	 	 	
EXPENSES	  	 	 	 	 	 	 	 	
Net increase (reduction) in ultimate loss and loss adjustment expense liabilities:	  	 	 	 	 	 	 	 	
Losses incurred on current period premiums earned	  	 	30,920	  	 	 	—	 	
Reduction in estimates of net ultimate losses	  	 	(5,062	) 	 	 	(3,298	) 	
Reduction in provisions for bad debt	  	 	—	  	 	 	(2,255	) 	
Reduction in provisions for unallocated loss adjustment expense liabilities	  	 	(16,403	) 	 	 	(12,852	) 	
Amortization of fair value adjustments	  	 	2,093	  	 	 	7,587	  	
 	  	 	 	 	 	 	 	 	
 	  	 	11,548	  	 	 	(10,818	) 	
Salaries and benefits	  	 	23,610	  	 	 	20,451	  	
General and administrative expenses	  	 	17,946	  	 	 	14,858	  	
Interest expense	  	 	2,435	  	 	 	2,111	  	
Net foreign exchange losses	  	 	5,082	  	 	 	2,268	  	
 	  	 	 	 	 	 	 	 	
 	  	 	60,621	  	 	 	28,870	  	
 	  	 	 	 	 	 	 	 	
Earnings before income taxes	  	 	20,829	  	 	 	19,149	  	
Income taxes	  	 	(7,844	) 	 	 	(3,742	) 	
 	  	 	 	 	 	 	 	 	
NET EARNINGS	  	 	12,985	  	 	 	15,407	  	
Less: Net earnings attributable to noncontrolling interest	  	 	(1,026	) 	 	 	(5,733	) 	
 	  	 	 	 	 	 	 	 	
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED	  	$	11,959	  	 	$	9,674	  	
 	  	 	 	 	 	 	 	 	
Comparison of the Three Months Ended March 31, 2013 and 2012
We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $13.0 million and $15.4 million for the three months ended March 31, 2013 and 2012, respectively. The decrease in earnings of approximately $2.4 million was attributable primarily to the following:
 
 	(i)	an increase in income tax expense of $4.1 million due principally to higher net earnings within our taxable subsidiaries, partially offset by tax benefits arising on reductions in our uncertain tax positions;	
 
 	(ii)	an increase in salaries and benefit expenses of $3.2 million due to an increase in headcount in the period largely related to SeaBright;	
 
 	(iii)	an increase in general and administrative expenses of $3.1 million due primarily to operating expenses associated with our acquisition of SeaBright;	
 
 	(iv)	an increase in net foreign exchange losses of $2.8 million; and	
 
 	(v)	a decrease in net investment income of $2.5 million; partially offset by	
 
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 	(vi)	an increase in net realized and unrealized gains of $4.7 million due primarily to: (a) an increase in the fair value of our equity securities and (b) increased returns from our other investments; and	
 
 	(vii)	a larger reduction in ultimate loss and loss adjustment expense liabilities (excluding losses incurred relating to SeaBright) of $8.6 million.	
Noncontrolling interest in earnings decreased by $4.7 million to $1.0 million for the three months ended March 31, 2013 primarily as a result of lower earnings in those companies in which there are noncontrolling interests. Net earnings attributable to Enstar Group Limited increased from $9.7 million for the three months ended March 31, 2012 to $12.0 million for the three months ended March 31, 2013.
Due to our acquisition of the Pavonia companies on March 31, 2013, we have reevaluated our segment reporting and have determined that in future periods, beginning with the three and six month periods ending June 30, 2013, we will report in two segments: (1) property and casualty and (2) life and annuity.
Premiums Written and Earned:

 	  	Three Months Ended March 31,	 	
 	  	        2013        	 	 	        Variance         	 	  	        2012        	 	
 	  	(in thousands of U.S. dollars)	 	
Gross premiums written	  	$	12,098	  	 	 	 	 	  	$	        —	  	
Reinsurance premiums ceded	  	 	(2,390	) 	 	 	 	 	  	 	—	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	
Net premiums written	  	$	9,708	  	 	$	9,708	  	  	$	—	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	
Earned premium	  	$	34,136	  	 	 	 	 	  	$	—	  	
Earned premium ceded	  	 	(3,216	) 	 	 	 	 	  	 	—	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	
Net premiums earned	  	$	30,920	  	 	$	30,920	  	  	$	—	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	
Premiums Written
Gross premiums written consists of direct premiums written and premiums assumed by SeaBright from the National Council on Compensation Insurance (or NCCI) residual market pools. Upon acquisition, SeaBright was placed into run-off and as a result stopped writing new insurance policies. SeaBright is, however, renewing expiring insurance policies when it is obligated to do so by state insurance regulations. We have received approvals from all but four states relieving us of our obligations to renew existing policies. We are continuing to work with the remaining four state regulators to obtain their approvals.
Gross and net premiums written by SeaBright from the date of acquisition to March 31, 2013 totaled $12.1 million and $9.7 million, respectively. Once our exit from all states is complete, we do not expect to have any written premium relating to SeaBright included as part of our net earnings.
On April 17, 2013, A.M. Best Company, or A.M. Best, downgraded the financial strength rating of SeaBright to “B++” (Good) from “A-” (Excellent). SeaBright’s business is particularly sensitive to its A.M. Best rating because of its focus on larger customers, which tend to give substantial weight to the A.M. Best rating of their insurers. “A-” is typically the lowest acceptable A.M. Best rating for many of these customers. As a result of SeaBright’s entry into run-off, the expected progress of its exit plans from the remaining states and the A.M. Best downgrade, we expect further declines in our written premiums.
Premiums Earned
Our direct premiums earned totaled $34.1 million for the period from the date of acquisition to March 31, 2013. Ceded premiums earned for the period from the date of the SeaBright acquisition to March 31, 2013 totaled $3.2 million. Accordingly, net premiums earned totaled $30.9 million for the period from the date of acquisition to March 31, 2013.
With our expectation that premiums written by SeaBright will decrease and eventually be eliminated, we believe that there will be a similar reduction in premiums earned as the existing written policies expire.
 
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As of March 31, 2013, the date of the Pavonia acquisition, all of the Pavonia companies were either in run-off or, immediately following the acquisition, were placed into run-off, and accordingly are no longer writing any new policies. The Pavonia companies will continue to collect premiums in relation to the unexpired policies assumed on acquisition. No premiums or earnings related to the Pavonia companies were included in our unaudited condensed consolidated statement of earnings for the three months ended March 31, 2013.
Net Investment Income and Net Realized and Unrealized Gains:

 	  	Three Months Ended March 31,	 	
 	  	Net Investment Income	 	  	Net Realized and Unrealized
Gains	 	
 	  	2013	 	  	Variance	 	  	2012	 	  	2013	 	  	Variance	 	  	2012	 	
 	  	(in thousands of U.S. dollars)	 	
Total	  	$	17,963	  	  	$	(2,480	) 	  	$	20,443	  	  	$	30,120	  	  	$	4,738	  	  	$	25,382	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net investment income for the three months ended March 31, 2013 decreased by $2.5 million to $18.0 million, as compared to $20.4 million for the three months ended March 31, 2012. The decrease was primarily a result of lower absolute yields obtained on cash and fixed maturities due to declining yields in global fixed maturities markets, partially offset by additional net investment income attributable to the cash and investments we acquired with SeaBright.
Net realized and unrealized gains for the three months ended March 31, 2013 increased by $4.7 million to $30.1 million, as compared to $25.4 million for the three months ended March 31, 2012. The increase was primarily attributable to a combination of the following:
 
 	(i)	an increase of $16.6 million in returns from other investments due to greater amounts invested in, and the improved performance of, our investments in this asset class;	
 
 	(ii)	an increase of $1.9 million in realized gains on our equities due largely to increased trading in this asset class;	
 
 	(iii)	net realized and unrealized gains of $1.7 million recognized by SeaBright from the date of acquisition to March 31, 2013; partially offset by	
 
 	(iv)	a decrease of $14.0 million in unrealized gains on fixed maturities and short-term investments; and	
 
 	(v)	a decrease of $1.8 million in unrealized gains from equities.	
The average annualized return on the cash and fixed maturities (inclusive of net realized and unrealized gains, but excluding net investment income and net realized and unrealized gains related to our other investments and equities) for the three months ended March 31, 2013 was 1.7% as compared to the average return of 2.8% for the three months ended March 31, 2012. The average credit ratings of our fixed maturities at March 31, 2013 and March 31, 2012 were A+ and AA-, respectively. The average annualized return on our other investments and equities (inclusive of net realized and unrealized gains) for the three months ended March 31, 2013 was 21.7% as compared to the average annualized return of 16.5% for the three months ended March 31, 2012.
As a result of the increase of $1.94 billion in our cash and investment balances related to the completion of the acquisitions of SeaBright and the Pavonia companies, we expect our net investment income to increase in 2013 over that earned in 2012.
 
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Net (Increase) Reduction in Ultimate Loss and Loss Adjustment Expense Liabilities:
The following table shows the components of the movement in the net (increase) reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2013 and 2012:

 	 	2013	 	 	2012	 	
 	 	Prior Periods	 	 	Current Period	 	 	Total	 	 	Prior Periods	 	 	Current Period	 	 	Total	 	
 	 	(in thousands of U.S. dollars)	 	
Net losses paid	 	$	(80,434	) 	 	$	(4,927	) 	 	$	(85,361	) 	 	$	(61,731	) 	 	$	—	  	 	$	(61,731	) 	
Net change in case and LAE reserves	 	 	62,745	 	 	 	(5,245	)	 	 	57,500	 	 	 	60,136	 	 	 	—	 	 	 	60,136	 	
Net change in IBNR reserves	 	 	22,750	  	 	 	(20,748	) 	 	 	2,002	  	 	 	4,893	  	 	 	—	 	 	 	4,893	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Reduction (increase) in estimates of net ultimate losses	 	 	5,061	  	 	 	(30,920	) 	 	 	(25,859	) 	 	 	3,298	  	 	 	—	 	 	 	3,298	 	
Reduction in provisions for bad debt	 	 	—	  	 	 	—	 	 	 	—	  	 	 	2,255	  	 	 	—	 	 	 	2,255	 	
Reduction in provisions for unallocated loss adjustment expense liabilities	 	 	16,404	 	 	 	—	 	 	 	16,404	 	 	 	12,852	 	 	 	—	 	 	 	12,852	 	
Amortization of fair value adjustments	 	 	(2,093	) 	 	 	—	 	 	 	(2,093	) 	 	 	(7,587	) 	 	 	—	 	 	 	(7,587	) 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net reduction (increase) in ultimate loss and loss adjustment expense liabilities	 	$	19,372	  	 	$	(30,920	) 	 	$	(11,548	) 	 	$	10,818	  	 	$	—	  	 	$	10,818	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net change in case and loss adjustment expense reserves, or LAE reserves, comprises the movement during the quarter in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in incurred but not reported reserves, or IBNR reserves, represents the change in our actuarial estimates of losses incurred but not reported, less amounts recoverable.
The net increase in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2013 of $11.5 million included losses incurred of $30.9 million related to SeaBright. Excluding SeaBright’s incurred losses of $30.9 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $19.4 million, which was attributable to a reduction in estimates of net ultimate losses of $5.1 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $16.4 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $2.1 million.
From the date of acquisition to March 31, 2013, SeaBright had losses incurred of $30.9 million primarily related to IBNR reserves relating to net premiums earned through March 31, 2013.
Excluding the impact of losses incurred of $30.9 million relating to SeaBright, the reduction in estimates of net ultimate losses was $5.1 million, and was primarily related to:
 
 	(iii)	our quarterly review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimate aggregate value of approximately $8.3 million; partially offset by	
 
 	(iv)	net incurred loss development of $26.0 million (excluding redundant case reserve reductions of $8.3 million), largely offset by reductions in IBNR reserves of $22.8 million.	
The net reduction in ultimate loss and loss adjustment expense liabilities for the three months ended March 31, 2012 of $10.8 million was attributable to a reduction in estimates of net ultimate losses of $3.3 million, a reduction in provisions for bad debt of $2.3 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $12.9 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $7.6 million. The reduction in estimates of net ultimate losses of $3.3 million for the three months ended March 31, 2012 comprised net incurred loss development of $1.6 million and reductions in IBNR reserves of $4.9 million.
 
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The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2013 and 2012. Losses incurred and paid are reflected net of reinsurance recoverables.

 	  	Three Months Ended March 31,	 	
 	  	          2013           	 	 	          2012           	 	
 	  	(in thousands of U.S. dollars)	 	
Balance as at January 1	  	$	3,661,154	  	 	$	4,282,916	  	
Less: total reinsurance reserves recoverable	  	 	876,220	  	 	 	1,383,003	  	
 	  	 	 	 	 	 	 	 	
 	  	 	2,784,934	  	 	 	2,899,913	  	
Net increase (reduction) in ultimate loss and loss adjustment expense liabilities related to:	  	 	 	 	 	 	 	 	
Current period	  	 	30,920	  	 	 	—	  	
Prior periods	  	 	(19,372	) 	 	 	(10,818	) 	
 	  	 	 	 	 	 	 	 	
Total net increase (reduction) in ultimate loss and loss adjustment expense liabilities	  	 	11,548	  	 	 	(10,818	) 	
 	  	 	 	 	 	 	 	 	
Net losses paid related to:	  	 	 	 	 	 	 	 	
Current period	  	 	(4,927	) 	 	 	—	  	
Prior periods	  	 	(80,434	) 	 	 	(61,731	) 	
 	  	 	 	 	 	 	 	 	
Total net losses paid	  	 	(85,361	) 	 	 	(61,731	) 	
 	  	 	 	 	 	 	 	 	
Effect of exchange rate movement	  	 	(26,557	) 	 	 	14,253	  	
Acquired on purchase of subsidiaries	  	 	479,982	  	 	 	—	  	
Assumed business	  	 	42,624	  	 	 	2,400	  	
 	  	 	 	 	 	 	 	 	
Net balance as at March 31	  	 	3,207,170	  	 	 	2,844,017	  	
Plus: total reinsurance reserves recoverable	  	 	947,750	  	 	 	1,294,606	  	
 	  	 	 	 	 	 	 	 	
Balance as at March 31	  	$	4,154,920	  	 	$	4,138,623	  	
 	  	 	 	 	 	 	 	 	
Salaries and Benefits:

 	  	Three Months Ended March 31,	 	
 	  	    2013    	 	  	    Variance    	 	 	    2012    	 	
 	  	(in thousands of U.S. dollars)	 	
Total	  	$	23,610	  	  	$	(3,159	) 	 	$	20,451	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $23.6 million and $20.5 million for the three months ended March 31, 2013 and 2012, respectively.
The increase for the three months ended March 31, 2013, as compared to the same period in 2012, was primarily associated with the salaries and benefits expense related to our acquisition of SeaBright. The Pavonia companies were acquired on March 31, 2013 and, as such, there were no salary and benefit costs incurred for the three months ended March 31, 2013. With the completion of the acquisitions of both SeaBright and the Pavonia companies, our staff numbers have increased from 383 as at December 31, 2012 to 661 as at March 31, 2013. As a result, we anticipate that salary and benefits costs, excluding costs associated with discretionary bonus, will be higher for 2013 over those for 2012.
General and Administrative Expenses:

 	  	Three Months Ended March 31,	 	
 	  	    2013    	 	  	    Variance    	 	 	    2012    	 	
 	  	(in thousands of U.S. dollars)	 	
Total	  	$	17,946	  	  	$	(3,088	) 	 	$	14,858	  	

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General and administrative expenses increased by $3.1 million during the three months ended March 31, 2013, as compared to the three months ended March 31, 2012. The increase in expenses for 2013 related primarily to general and administrative expenses incurred by SeaBright of $3.5 million from the date of acquisition to March 31, 2013, partially offset by a moderate reduction in our professional fees of $0.4 million. We expect general and administrative expenses to increase in 2013 over 2012 levels due primarily to the SeaBright and Pavonia acquisitions.
Net Foreign Exchange Losses:

 	  	Three Months Ended March 31,	 	
 	  	    2013    	 	  	    Variance    	 	 	    2012    	 	
 	  	(in thousands of U.S. dollars)	 	
Total	  	$	5,082	  	  	$	(2,814	) 	 	$	2,268	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
We recorded net foreign exchange losses of $5.1 million and $2.3 million for the three months ended March 31, 2013 and 2012, respectively. The net foreign exchange losses for the three months ended March 31, 2013 arose primarily as a result of the holding of surplus British pound and Euro assets at a time when the U.S. dollar was appreciating against these currencies. During the period, the British pound to U.S. dollar exchange rate decreased from $1.6255 as at December 31, 2012 to $1.5185 as at March 31, 2013, while the Euro to U.S. dollar exchange rate decreased from $1.3184 to $1.2841.
In addition to the net foreign exchange losses recorded in our consolidated statement of earnings for the three months ended March 31, 2013, we recorded in our condensed consolidated statement of comprehensive income currency translation adjustment losses, net of noncontrolling interest, of $1.4 million as compared to gains, net of noncontrolling interest, of $1.8 million for the same period in 2012. For the three months ended March 31, 2013, the currency translation adjustments related primarily to our U.K.-based and Ireland-based subsidiaries. As the functional currencies of these subsidiaries are British pounds and Euros, respectively, we record any U.S. dollar gains or losses on the translation of their net British pounds or Euro assets through accumulated other comprehensive income.
Income Tax Expense:

 	  	Three Months Ended March 31,	 	
 	  	    2013    	 	  	    Variance    	 	 	    2012    	 	
 	  	(in thousands of U.S. dollars)	 	
Total	  	$	7,844	  	  	$	(4,102	) 	 	$	3,742	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	
We recorded income tax expense of $7.8 million and $3.7 million for the three months ended March 31, 2013 and 2012, respectively. The increase in taxes for the three months ended March 31, 2013 was due predominantly to higher overall net earnings in our taxable subsidiaries as compared to those earned in the same period in 2012, partially offset by tax benefits arising on reduction in our uncertain tax positions.
Noncontrolling Interest:

 	  	Three Months Ended March 31,	 	
 	  	    2013    	 	  	    Variance    	 	  	    2012    	 	
 	  	(in thousands of U.S. dollars)	 	
Total	  	$	1,026	  	  	$	4,707	  	  	$	5,733	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	
We recorded a noncontrolling interest in earnings of $1.0 million and $5.7 million for the three months ended March 31, 2013 and 2012, respectively. The decrease in noncontrolling interest for the three months ended March 31, 2013 was due primarily to a decrease in earnings for those companies where there exists a noncontrolling interest. The number of subsidiaries with a noncontrolling interest decreased from eight as at March 31, 2012 to seven as at March 31, 2013.
 
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Liquidity and Capital Resources
Our capital management strategy is to preserve sufficient capital to enable us to make future acquisitions while maintaining a conservative investment strategy. As we are a holding company and have no substantial operations of our own, our assets consist primarily of investments in subsidiaries. The potential sources of the cash flows to Enstar as a holding company consist of dividends, advances and loans from our subsidiary companies. Most of those subsidiaries are regulated entities, and restrictions on their ability to pay dividends and make other distributions may apply.
At March 31, 2013, we had total cash and cash equivalents, restricted cash and cash equivalents and investments of $6.24 billion, compared to $4.31 billion at December 31, 2012. The increase of $1.93 billion was primarily a result of the completion of the SeaBright and Pavonia acquisitions. Our cash and cash equivalents portfolio is comprised mainly of cash, high-grade fixed deposits, commercial paper with maturities of less than three months and money market funds.
Reinsurance Recoverables
As of March 31, 2013 and December 31, 2012, we had total reinsurance balances recoverable of $1.19 billion and $1.12 billion, respectively. The increase of $67.6 million in total reinsurance balances recoverable was primarily a result of the completion of acquisitions in the period partially offset by commutations and cash collections made during the three months ended March 31, 2013. At March 31, 2013 and December 31, 2012, the provision for uncollectible reinsurance recoverable relating to total reinsurance balances recoverable was $341.1 million and $343.9 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the reinsurance balances recoverable are first allocated to applicable reinsurers. This determination is based on a detailed process, although management judgment is involved. As part of this process, ceded IBNR reserves are allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of March 31, 2013 decreased to 22.3% as compared to 23.4% as of December 31, 2012, primarily as a result of reinsurance balances recoverable of companies acquired during the period against which there were minimal provisions for uncollectible reinsurance recoverable.
Cash Flows
The following table summarizes our consolidated cash flows from operating, investing and financing activities for the three months ended March 31, 2013 and 2012:

 	  	Three Months Ended March 31,	 	
Total cash (used in) provided by:	  	          2013           	 	 	          2012           	 	
 	  	(in thousands of U.S. dollars)	 	
Operating activities	  	$	10,592	  	 	$	(14,047	) 	
Investing activities	  	 	(270,675	) 	 	 	(25,034	) 	
Financing activities	  	 	225,260	  	 	 	(11,250	) 	
Effect of exchange rate changes on cash	  	 	20,289	  	 	 	(7,328	) 	
 	  	 	 	 	 	 	 	 	
Decrease in cash and cash equivalents	  	$	(14,534	) 	 	$	(57,659	) 	
 	  	 	 	 	 	 	 	 	
See “Item 1. Financial Statements – Unaudited Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2013 and 2012” for further information.
Operating
Net cash provided by (used in) our operating activities for the three month period ended March 31, 2013 was $10.6 million compared to ($14.0) million for the three month period ended March 31, 2012. This $24.6 million increase in cash provided by operating activities was due primarily to the following:
 
 	(i)	an increase of $239.0 million in the sales and maturities of trading securities between 2013 and 2012; partially offset by	
 
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 	(ii)	a decrease in the net changes in assets and liabilities of $19.6 million between 2013 and 2012; and	
 
 	(iii)	an increase of $182.2 million in purchases of trading securities between 2013 and 2012.	
Investing
Investing cash flows consist primarily of net cash acquired in connection with acquisitions along with net proceeds on the sale and maturities of available-for-sale securities and other investments. Net cash used in investing activities was $270.6 million for the three months ended March 31, 2013 compared to $25.0 million for the three months ended March 31, 2012. This $245.6 million increase in cash used in investing activities was due primarily to the following:
 
 	(i)	the use of $284.0 million in net cash for the acquisitions of Pavonia and SeaBright during the three months ended March 31, 2013, as compared to nil for the three months ended March 31, 2012;	
 
 	(ii)	a decrease of $30.6 million in the sales and maturities of available-for-sale securities between 2013 and 2012; partially offset by	
 
 	(iii)	a decrease of $42.3 million in the funding of other investments between 2013 and 2012; and	
 
 	(iv)	a decrease of $26.1 million in restricted cash and cash equivalents between 2013 and 2012.	
We expect to continue to have net proceeds on sales and maturities of available-for-sale securities, as new securities purchased are designated as trading securities.
Financing
Net cash provided by financing activities was $225.3 million during the three months ended March 31, 2013 compared to net cash used of $11.3 million during the three months ended March 31, 2012. This $236.5 million increase in cash provided by financing activities was primarily attributable to the following:
 
 	(i)	a $227.0 million increase in cash received attributable to bank loans during the three months ended March 31, 2013 primarily in connection with our acquisition funding requirements; and	
 
 	(ii)	a decrease of $9.5 million in dividends paid to noncontrolling interest between 2013 and 2012.	
Investments
The table below shows the aggregate amounts of our investments as of March 31, 2013 and December 31, 2012:

 	  	March 31, 2013	 	 	December 31, 2012	 	
 	  	    Fair Value    	 	  	% of Total
    Fair Value    	 	 	    Fair Value    	 	  	% of Total
    Fair Value    	 	
 	  	(in thousands of U.S. dollars)	 	
U.S. government and agency	  	$	450,921	  	  	 	8.6	% 	 	$	366,863	  	  	 	10.9	% 	
Non-U.S. government	  	 	514,590	  	  	 	9.8	% 	 	 	389,578	  	  	 	11.6	% 	
Corporate	  	 	3,012,459	  	  	 	57.3	% 	 	 	1,715,870	  	  	 	51.2	% 	
Municipal	  	 	227,512	  	  	 	4.3	% 	 	 	20,446	  	  	 	0.6	% 	
Residential mortgaged-backed	  	 	167,244	  	  	 	3.2	% 	 	 	120,092	  	  	 	3.6	% 	
Commercial mortgage-backed	  	 	178,301	  	  	 	3.4	% 	 	 	131,329	  	  	 	3.9	% 	
Asset-backed	  	 	138,846	  	  	 	2.7	% 	 	 	79,264	  	  	 	2.4	% 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Fixed maturities	  	 	4,689,873	  	  	 	89.3	% 	 	 	2,823,442	  	  	 	84.2	% 	
Other investments	  	 	432,034	  	  	 	8.2	% 	 	 	414,845	  	  	 	12.4	% 	
Equities-U.S.	  	 	99,618	  	  	 	1.9	% 	 	 	92,406	  	  	 	2.8	% 	
Equities-International	  	 	31,776	  	  	 	0.6	% 	 	 	22,182	  	  	 	0.6	% 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total investments	  	$	5,253,301	  	  	 	100.0	% 	 	$	3,352,875	  	  	 	100.0	% 	

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As at March 31, 2013, we held investments totaling $5.25 billion, compared to $3.35 billion at December 31, 2012, with net unrealized appreciation included in accumulated comprehensive income of $4.3 million compared to $5.7 million at December 31, 2012. As at March 31, 2013, we had approximately $1.3 billion of restricted assets compared to approximately $1.0 billion at December 31, 2012.
We strive to structure our investments in a manner that recognizes our liquidity needs for future liabilities. In that regard, we attempt to correlate the maturity and duration of our investment portfolio to our general liability profile. If our liquidity needs or general liability profile unexpectedly change, we may adjust the structure of our investment portfolio to meet new business needs.
Our strategy of commuting our property and casualty liabilities has the potential to accelerate the natural payout of these losses. Therefore, we maintain a relatively short-duration investment portfolio in order to provide liquidity for commutation opportunities and avoid having to liquidate longer dated investments. Accordingly, the majority of our investment portfolio related to our property and casualty business consists of highly rated fixed maturities, including U.S. government and agency investments, highly rated sovereign and supranational investments, high-grade corporate investments, and mortgage-backed and asset-backed investments. We allocate a portion of our investment portfolio to other investments, including private equity funds, fixed income funds, fixed income hedge funds, an equity fund and a real estate debt fund. At March 31, 2013, these other investments totaled $432.0 million, or 8.2%, of our total investments (December 31, 2012: $414.8 million or 12.4%). We expect to increase amounts invested in other investments because we have not fully funded all existing investment commitments in this asset class.
Fixed Maturity Investments
Our investment guidelines govern the types of investments we make, including with respect to credit quality ratings.
The maturity distribution for our fixed maturity investments held as of March 31, 2013 and December 31, 2012 was as follows:

 	  	March 31, 2013	 	 	December 31, 2012	 	
 	  	    Fair Value    	 	  	% of Total
    Fair Value    	 	 	    Fair Value    	 	  	% of Total
    Fair Value    	 	
 	  	(in thousands of U.S. dollars)	 	
Due in one year or less	  	$	931,779	  	  	 	19.9	% 	 	$	1,032,614	  	  	 	36.6	% 	
Due after one year through five years	  	 	1,989,518	  	  	 	42.4	% 	 	 	1,342,257	  	  	 	47.5	% 	
Due after five years through ten years	  	 	545,889	  	  	 	11.7	% 	 	 	99,957	  	  	 	3.5	% 	
Due after ten years	  	 	738,296	  	  	 	15.7	% 	 	 	17,929	  	  	 	0.6	% 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Fixed maturities	  	 	4,205,482	  	  	 	89.7	% 	 	 	2,492,757	  	  	 	88.2	% 	
Residential mortgage-backed	  	 	167,244	  	  	 	3.6	% 	 	 	120,092	  	  	 	4.3	% 	
Commercial mortgage-backed	  	 	178,301	  	  	 	3.8	% 	 	 	131,329	  	  	 	4.7	  	
Asset-backed	  	 	138,846	  	  	 	2.9	% 	 	 	79,264	  	  	 	2.8	% 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total	  	$	4,689,873	  	  	 	100.0	% 	 	$	2,823,442	  	  	 	100.0	% 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
As at March 31, 2013 and December 31, 2012, our fixed maturity investments and short-term investment portfolio had an average credit quality rating of A+ and AA-, respectively. At March 31, 2013 and December 31, 2012, our fixed maturity investments rated BBB or lower comprised 10.0% and 11.3% of our total investment portfolio, respectively.
At March 31, 2013, we had $408.3 million of short-term investments (December 31, 2012: $319.1 million). Short-term investments are managed as part of our investment portfolio and have a maturity of one year or less when purchased. Short-term investments are carried at fair value.
 
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The following table summarizes the composition of the amortized cost and fair value of our fixed maturity investments, short term investments and other investments at the date indicated by ratings as assigned by major rating agencies.

At March 31, 2013	 	Amortized
Cost	 	 	Fair Value	 	 	% of Total
Investments	 	 	AAA
Rated	 	 	AA Rated	 	 	A Rated	 	 	BBB
Rated	 	 	Non-Investment
Grade	 	 	Not
Rated	 	
 	 	(in thousands of U.S. dollars)	 	
Fixed maturity investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. government & agency	 	$	446,354	  	 	$	450,921	  	 	 	8.6	% 	 	$	—	 	 	$	401,027	  	 	$	49,894	  	 	$	—	 	 	$	—	 	 	$	—	 	
Non-U.S. government	 	 	510,825	  	 	 	514,590	  	 	 	9.8	% 	 	 	270,632	  	 	 	181,008	  	 	 	62,268	  	 	 	682	  	 	 	—	 	 	 	—	 	
Corporate	 	 	3,001,228	  	 	 	3,012,459	  	 	 	57.3	% 	 	 	157,752	  	 	 	771,755	  	 	 	1,588,243	  	 	 	424,092	  	 	 	43,286	  	 	 	27,331	  	
Municipal	 	 	226,280	  	 	 	227,512	  	 	 	4.3	% 	 	 	40,006	  	 	 	154,612	  	 	 	31,871	  	 	 	141	  	 	 	—	 	 	 	882	  	
Residential mortgage-backed	 	 	166,858	  	 	 	167,244	  	 	 	3.2	% 	 	 	5,214	  	 	 	147,415	  	 	 	4,746	  	 	 	8,269	  	 	 	1,596	  	 	 	4	  	
Commercial mortgage-backed	 	 	177,886	  	 	 	178,301	  	 	 	3.4	% 	 	 	51,770	  	 	 	53,385	  	 	 	29,986	  	 	 	32,523	  	 	 	10,637	  	 	 	—	 	
Asset-backed	 	 	138,587	  	 	 	138,846	  	 	 	2.7	% 	 	 	116,896	  	 	 	11,109	  	 	 	9,439	  	 	 	140	  	 	 	1,238	  	 	 	24	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fixed maturity investments	 	$	4,668,018	  	 	 	4,689,873	  	 	 	89.3	% 	 	 	642,270	  	 	 	1,720,311	  	 	 	1,776,447	  	 	 	465,847	  	 	 	56,757	  	 	 	28,241	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	13.7	% 	 	 	36.7	% 	 	 	37.9	% 	 	 	9.9	% 	 	 	1.2	% 	 	 	0.6	% 	
Equities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S.	 	 	 	 	 	 	99,618	  	 	 	1.9	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	99,618	  	
International	 	 	 	 	 	 	31,776	  	 	 	0.6	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	31,776	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total equities	 	 	 	 	 	 	131,394	  	 	 	2.5	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	131,394	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	0	% 	 	 	0	% 	 	 	0	% 	 	 	0	% 	 	 	0	% 	 	 	100.0	% 	
Other investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Private equity funds	 	 	 	 	 	 	131,463	  	 	 	2.5	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	131,463	  	
Fixed income funds	 	 	 	 	 	 	156,012	  	 	 	3.0	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	156,012	  	
Fixed income hedge funds	 	 	 	 	 	 	56,911	  	 	 	1.1	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	56,911	  	
Equity fund	 	 	 	 	 	 	61,335	  	 	 	1.2	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	61,335	  	
Real estate debt fund	 	 	 	 	 	 	21,418	  	 	 	0.3	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	21,418	  	
Other	 	 	 	 	 	 	4,895	  	 	 	0.1	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,895	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other investments	 	 	 	 	 	 	432,034	  	 	 	8.2	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	432,034	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	0	% 	 	 	0	% 	 	 	0	% 	 	 	0	% 	 	 	0	% 	 	 	100.0	% 	
Total investments	 	 	 	 	 	$	5,253,301	  	 	 	100.0	% 	 	$	642,270	  	 	$	1,720,311	  	 	$	1,776,447	  	 	$	465,847	  	 	$	56,757	  	 	$	591,669	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	12.2	% 	 	 	32.8	% 	 	 	33.8	% 	 	 	8.9	% 	 	 	1.1	% 	 	 	11.2	% 	
 
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At December 31, 2012	 	Amortized
Cost	 	 	Fair Value	 	 	% of Total
Investments	 	 	AAA
Rated	 	 	AA Rated	 	 	A Rated	 	 	BBB
Rated	 	 	Non-Investment
Grade	 	 	Not
Rated	 	
 	 	(in thousands of U.S. dollars)	 	
Fixed maturity investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. government & agency	 	$	362,288	  	 	$	366,863	  	 	 	10.9	% 	 	$	—	 	 	$	366,863	  	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	
Non-U.S. government	 	 	380,401	  	 	 	389,578	  	 	 	11.6	% 	 	 	244,366	  	 	 	103,515	  	 	 	39,051	  	 	 	2,646	  	 	 	—	 	 	 	—	 	
Corporate	 	 	1,694,652	  	 	 	1,715,870	  	 	 	51.2	% 	 	 	140,708	  	 	 	434,903	  	 	 	803,663	  	 	 	301,787	  	 	 	27,409	  	 	 	7,400	  	
Municipal	 	 	19,743	  	 	 	20,446	  	 	 	0.6	% 	 	 	—	 	 	 	14,470	  	 	 	5,837	  	 	 	139	  	 	 	—	 	 	 	—	 	
Residential mortgage-backed	 	 	119,538	  	 	 	120,092	  	 	 	3.6	% 	 	 	17,218	  	 	 	81,253	  	 	 	2,858	  	 	 	16,940	  	 	 	1,823	  	 	 	—	 	
Commercial mortgage-backed	 	 	130,841	  	 	 	131,329	  	 	 	3.9	% 	 	 	62,597	  	 	 	9,828	  	 	 	29,884	  	 	 	21,406	  	 	 	7,614	  	 	 	—	 	
Asset-backed	 	 	78,644	  	 	 	79,264	  	 	 	2.4	% 	 	 	64,237	  	 	 	8,177	  	 	 	5,070	  	 	 	174	  	 	 	1,606	  	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fixed maturity investments	 	$	2,786,107	  	 	 	2,823,442	  	 	 	84.2	% 	 	 	529,126	  	 	 	1,019,009	  	 	 	886,363	  	 	 	343,092	  	 	 	38,452	  	 	 	7,400	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	18.7	% 	 	 	36.1	% 	 	 	31.4	% 	 	 	12.2	% 	 	 	1.4	% 	 	 	0.2	% 	
Equities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S.	 	 	 	 	 	 	92,406	  	 	 	2.8	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	92,406	  	
International	 	 	 	 	 	 	22,182	  	 	 	0.6	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	22,182	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total equities	 	 	 	 	 	 	114,588	  	 	 	3.4	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	114,588	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	0	%   	 	 	0	%   	 	 	0	%   	 	 	0	%   	 	 	0	%   	 	 	100.0	% 	
Other investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Private equity funds	 	 	 	 	 	 	127,696	  	 	 	3.8	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	127,696	  	
Fixed income funds	 	 	 	 	 	 	156,235	  	 	 	4.7	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	156,235	  	
Fixed income hedge funds	 	 	 	 	 	 	53,933	  	 	 	1.6	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	53,933	  	
Equity fund	 	 	 	 	 	 	55,881	  	 	 	1.7	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	55,881	  	
Real estate debt fund	 	 	 	 	 	 	16,179	  	 	 	0.5	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	16,179	  	
Other	 	 	 	 	 	 	4,921	  	 	 	0.1	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,921	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other investments	 	 	 	 	 	 	414,845	  	 	 	12.4	% 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	414,845	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	0	%   	 	 	0	%   	 	 	0	%   	 	 	0	%   	 	 	0	%   	 	 	100.0	% 	
Total investments	 	 	 	 	 	$	3,352,875	  	 	 	100.0	% 	 	$	529,126	  	 	$	1,019,009	  	 	$	886,363	  	 	$	343,092	  	 	$	38,452	  	 	$	536,833	  	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	15.8	% 	 	 	30.4	% 	 	 	26.5	% 	 	 	10.2	% 	 	 	1.1	% 	 	 	16.0	% 	
 
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Eurozone Exposure
At March 31, 2013, we did not own any investments in fixed maturities (which includes bonds that are classified as cash and cash equivalents) and fixed income funds issued by the sovereign governments of Portugal, Italy, Ireland, Greece or Spain. Our fixed maturity investments and fixed income funds exposures to Eurozone Governments (which includes regional and municipal governments including guaranteed agencies) by rating are highlighted in the following table:

 	  	Rating	 	  	 	 	
 	  	AAA	 	  	AA	 	  	A	 	  	Not
rated	 	  	Total	 	
 	  	(in thousands of U.S. dollars)	 	
Germany	  	$	44,630	  	  	$	13,660	  	  	$	—	 	  	$	—	 	  	$	58,290	  	
Supranationals	  	 	9,478	  	  	 	7,885	  	  	 	—	 	  	 	—	 	  	 	17,363	  	
Denmark	  	 	1,556	  	  	 	—	 	  	 	—	 	  	 	—	 	  	 	1,556	  	
Netherlands	  	 	25,834	  	  	 	2,390	  	  	 	—	 	  	 	—	 	  	 	28,224	  	
Norway	  	 	16,834	  	  	 	23,032	  	  	 	—	 	  	 	—	 	  	 	39,866	  	
France	  	 	—	 	  	 	26,280	  	  	 	—	 	  	 	—	 	  	 	26,280	  	
Belgium	  	 	—	 	  	 	2,807	  	  	 	—	 	  	 	—	 	  	 	2,807	  	
Finland	  	 	462	  	  	 	—	 	  	 	—	 	  	 	—	 	  	 	462	  	
Sweden	  	 	1,999	  	  	 	15,455	  	  	 	—	 	  	 	—	 	  	 	17,454	  	
Austria	  	 	—	 	  	 	1,386	  	  	 	—	 	  	 	—	 	  	 	1,386	  	
Czech Republic	  	 	—	 	  	 	—	 	  	 	779	  	  	 	—	 	  	 	779	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	 	100,793	  	  	 	92,895	  	  	 	779	  	  	 	—	 	  	 	194,467	  	
Euro Region Government Funds	  	 	—	  	  	 	—	 	  	 	—	  	  	 	12,101	  	  	 	12,101	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	100,793	  	  	$	92,895	  	  	$	779	  	  	$	12,101	  	  	$	206,568	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Our fixed maturities exposure to Eurozone Governments (which include regional and municipal governments including guaranteed agencies) by maturity date are highlighted in the following table. Our fixed income fund holdings have daily liquidity and are not included in the maturity table below.

 	  	Maturity Date	 	  	 	 	
 	  	3 months
or less	 	  	3 to 6
months	 	  	6 months
to 1 year	 	  	1 to 2
years	 	  	more than
2 years	 	  	Total	 	
 	  	(in thousands of U.S. dollars)	 	
Germany	  	$	—	 	  	$	753	  	  	$	—	 	  	$	1,897	  	  	$	55,640	  	  	$	58,290	  	
Supranationals	  	 	7,016	  	  	 	5,880	  	  	 	766	  	  	 	—	 	  	 	3,701	  	  	 	17,363	  	
Denmark	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	1,556	  	  	 	1,556	  	
Netherlands	  	 	5,001	  	  	 	—	 	  	 	3,750	  	  	 	680	  	  	 	18,793	  	  	 	28,224	  	
Norway	  	 	861	  	  	 	—	 	  	 	602	  	  	 	519	  	  	 	37,884	  	  	 	39,866	  	
France	  	 	—	 	  	 	523	  	  	 	7,692	  	  	 	2,597	  	  	 	15,468	  	  	 	26,280	  	
Belgium	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	2,807	  	  	 	2,807	  	
Finland	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	462	  	  	 	462	  	
Sweden	  	 	687	  	  	 	—	 	  	 	614	  	  	 	13,126	  	  	 	3,027	  	  	 	17,454	  	
Austria	  	 	—	 	  	 	—	 	  	 	—	 	  	 	474	  	  	 	912	  	  	 	1,386	  	
Czech Republic	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	779	  	  	 	779	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	13,565	  	  	$	7,156	  	  	$	13,424	  	  	$	19,293	  	  	$	141,029	  	  	$	194,467	  	

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At March 31, 2013, we owned investments in corporate securities (which includes bonds that are classified as cash and cash equivalents) where the ultimate parent company of the issuer was located within the Eurozone. This includes investments that were issued by subsidiaries whose location was outside of the Eurozone. Our exposures by country and listed by rating, sector and maturity date are highlighted in the following tables:

 	  	Rating	 	  	 	 	
 	  	AAA	 	  	AA	 	  	A	 	  	BBB	 	  	BB and
below	 	  	Total	 	
 	  	(in thousands of U.S. dollars)	 	
Germany	  	$	303	  	  	$	1,598	  	  	$	32,400	  	  	$	5,748	  	  	$	—	 	  	$	40,049	  	
Belgium	  	 	—	 	  	 	—	 	  	 	14,456	  	  	 	—	 	  	 	—	 	  	 	14,456	  	
Netherlands	  	 	3,342	  	  	 	43,150	  	  	 	43,752	  	  	 	33,295	  	  	 	—	 	  	 	123,539	  	
Sweden	  	 	—	 	  	 	13,829	  	  	 	4,719	  	  	 	—	 	  	 	—	 	  	 	18,548	  	
Norway	  	 	—	 	  	 	6,968	  	  	 	1,529	  	  	 	—	 	  	 	30,376	  	  	 	38,873	  	
France	  	 	24,761	  	  	 	8,698	  	  	 	24,136	  	  	 	3,119	  	  	 	10,409	  	  	 	71,123	  	
Spain	  	 	—	  	  	 	2,968	  	  	 	—	  	  	 	13,456	  	  	 	—	 	  	 	16,424	  	
Italy	  	 	—	 	  	 	—	 	  	 	8,318	  	  	 	24,480	  	  	 	513	  	  	 	33,311	  	
Austria	  	 	396	  	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	396	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	28,802	  	  	$	77,211	  	  	$	129,310	  	  	$	80,098	  	  	$	41,298	  	  	$	356,719	  	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	Sector	 	  	 	 	
 	  	Financial	 	  	Industrial	 	  	Utility	 	  	Energy	 	  	Telecom	 	  	Food	 	  	Total	 	
 	  	(in thousands of U.S. dollars)	 	  	 	 	
Germany	  	$	7,735	  	  	$	16,743	  	  	$	—	  	  	$	—	 	  	$	5,430	  	  	$	10,141	  	  	$	40,049	  	
Belgium	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	14,456	  	  	 	14,456	  	
Netherlands	  	 	73,334	  	  	 	—	 	  	 	23,112	  	  	 	21,068	  	  	 	—	 	  	 	6,025	  	  	 	123,539	  	
Sweden	  	 	14,848	  	  	 	—	  	  	 	3,258	  	  	 	—	 	  	 	442	  	  	 	—	 	  	 	18,548	  	
Norway	  	 	31,905	  	  	 	—	 	  	 	—	 	  	 	6,968	  	  	 	—	 	  	 	—	 	  	 	38,873	  	
France	  	 	49,132	  	  	 	7,616	  	  	 	6,962	  	  	 	—	 	  	 	4,176	  	  	 	3,237	  	  	 	71,123	  	
Spain	  	 	2,968	  	  	 	—	 	  	 	—	  	  	 	—	 	  	 	13,456	  	  	 	—	 	  	 	16,424	  	
Italy	  	 	1,006	  	  	 	—	 	  	 	—	  	  	 	8,318	  	  	 	23,987	  	  	 	—	 	  	 	33,311	  	
Austria	  	 	396	  	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	—	 	  	 	396	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	181,324	  	  	$	24,359	  	  	$	33,332	  	  	$	36,354	  	  	$	47,491	  	  	$	33,859	  	  	$	356,719	  	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	  	Maturity Date	 	  	 	 	
 	  	3 months
or less	 	  	3 to 6
months	 	  	6 months
to 1 year	 	  	1 to 2
years	 	  	more
than 2
years	 	  	Total	 	
 	  	(in thousands of U.S. dollars)	 	
Germany	  	$	6,143	  	  	$	2,505	  	  	$	8,052	  	  	$	5,662	  	  	$	17,687	  	  	$	40,049	  	
Belgium	  	 	—	 	  	 	—	 	  	 	406	  	  	 	—	 	  	 	14,050	  	  	 	14,456	  	
Netherlands	  	 	13,832	  	  	 	8,112	  	  	 	6,599	  	  	 	22,587	  	  	 	72,409	  	  	 	123,539	  	
Sweden	  	 	—	 	  	 	—	 	  	 	7,947	  	  	 	996	  	  	 	9,605	  	  	 	18,548	  	
Norway	  	 	19,389	  	  	 	—	 	  	 	—	 	  	 	—	 	  	 	19,484	  	  	 	38,873	  	
France	  	 	4,872	  	  	 	4,795	  	  	 	3,296	  	  	 	20,531	  	  	 	37,629	  	  	 	71,123	  	
Spain	  	 	13,284	  	  	 	—	 	  	 	3,140	  	  	 	—	  	  	 	—	 	  	 	16,424	  	
Italy	  	 	—	 	  	 	513	  	  	 	11,433	  	  	 	12,554	  	  	 	8,811	  	  	 	33,311	  	
Austria	  	 	—	 	  	 	—	 	  	 	—	 	  	 	396	  	  	 	—	 	  	 	396	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 	  	$	57,520	  	  	$	15,925	  	  	$	40,873	  	  	$	62,726	  	  	$	179,675	  	  	$	356,719	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Investments issued by companies located in the United Kingdom and Switzerland are not included in the tables above. None of the investments we owned at March 31, 2013 were considered impaired and we do not expect to incur any significant losses on these investments.
 
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Long-Term Debt
Our long-term debt consists of loan facilities used to partially finance certain of our acquisitions and significant new business transactions, our revolving credit facility, or the EGL Revolving Credit Facility, which can be used for permitted acquisitions and for general corporate purposes, and surplus notes acquired in connection with the SeaBright acquisition. We draw down on the loan facilities at the time of an acquisition or significant new business transaction, although in some circumstances we have made additional draw-downs to refinance existing debt of the acquired company.
On February 5, 2013, we fully drew down the $111.0 million available under a four-year term loan facility provided by National Australia Bank and Barclays Bank PLC, or the SeaBright Facility, in connection with the acquisition of SeaBright. In addition, on February 5, 2013 and March 26, 2013, we borrowed $56.0 million and $60.0 million, respectively, under the EGL Revolving Credit Facility.
Total amounts of loans payable outstanding, including accrued interest, as of March 31, 2013 and December 31, 2012, totaled $347.0 million and $107.4 million, respectively.
As of March 31, 2013, all of the covenants relating to our three outstanding credit facilities (the SeaBright Facility, the term facility related to our 2011 acquisition of Clarendon National Insurance Company, and the EGL Revolving Credit Facility) were met.
Refer to Item 7 included in our Annual Report on Form 10-K for the year ended December 31, 2012 for a description of these credit facilities.
SeaBright Surplus Notes
On May 26, 2004, SeaBright issued, in a private placement, $12.0 million in subordinated floating rate Surplus Notes due in 2034. The note holder is ICONS, Ltd., with Wilmington Trust Company acting as Trustee. Interest, paid quarterly in arrears, is calculated at the beginning of the interest payment period using the three-month LIBOR plus 400 basis points. The quarterly interest rate cannot exceed the initial interest rate by more than 10% per year, cannot exceed the corporate base (prime) rate by more than 2% and cannot exceed the highest rate permitted by New York law. The rate or amount of interest required to be paid in any quarter is also subject to limitations imposed by the Illinois Insurance Code. Interest amounts not paid as a result of these limitations become “Excess Interest,” which SeaBright may be required to pay in the future, subject to the same limitations and all other provisions of the Surplus Notes Indenture. Excess Interest has not applied during the periods the notes have been outstanding. The interest rate in effect as at March 31, 2013 was 4.3%.
Interest and principal may be paid only upon the prior approval of the Illinois Department of Insurance. In the event of default, as defined, or failure to pay interest due to lack of Illinois Department of Insurance approval, SeaBright would be prohibited from paying dividends on its capital stock. If an event of default occurs and is continuing, the principal and accrued interest would become immediately due and payable.
The notes are redeemable prior to 2034 by SeaBright, in whole or in part, on any interest payment date. We intend to repay the notes at the earliest possible repayment date, subject to receipt of approval from the Illinois Department of Insurance.
Interest expense from February 7, 2013 (the date of acquisition of SeaBright) to March 31, 2013 was $0.1 million.
 
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Aggregate Contractual Obligations
We have updated the amounts and categories of our contractual obligations previously provided on page 98 of our Annual Report on Form 10-K for the year ended December 31, 2012 to reflect changes in gross reserves, operating lease obligations, investment commitments and loan repayments during the three months ended March 31, 2013, as well as the assumption of policy benefits for life and annuity contracts as a result of the acquisition of the Pavonia companies.

 	  	Payments Due by Period	 	
 	  	Total	 	  	Less than
1 year	 	  	1 - 3 years	 	  	3 - 5 years	 	  	More than
5 years	 	
 	  	(in millions of U.S. dollars)	 	
Operating Activities	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Estimated gross reserves for loss and loss adjustment expenses (1)	  	$	4,422.0	  	  	$	827.0	  	  	$	1,454.9	  	  	$	769.6	  	  	$	1,370.5	  	
Policy benefits for life and annuity contracts (2)	  	 	2,632.0	  	  	 	82.7	  	  	 	155.8	  	  	 	139.4	  	  	 	2,254.1	  	
Operating lease obligations	  	 	23.0	  	  	 	5.4	  	  	 	16.0	  	  	 	1.6	  	  	 	—	 	
Investing Activities	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Investment commitments	  	 	84.2	  	  	 	44.3	  	  	 	31.6	  	  	 	8.3	  	  	 	—	 	
Financing Activities	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Loan repayments (including interest payments)	  	 	358.8	  	  	 	153.4	  	  	 	205.4	  	  	 	—	 	  	 	—	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	7,520.0	  	  	$	1,112.8	  	  	$	1,863.7	  	  	$	918.9	  	  	$	3,624.6	  	

(1)	The reserves for loss and loss adjustment expenses represent management’s estimate of the ultimate cost of settling losses. The estimation of losses is based on various complex and subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our financial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may be significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different from the amounts disclosed above.	
The amounts in the above table represent our estimates of known liabilities as of March 31, 2013 and do not take into account corresponding reinsurance recoverable amounts that would be due to us. Furthermore, reserves for loss and loss adjustment expenses recorded in the unaudited condensed consolidated financial statements as of March 31, 2013 are computed on a fair value basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect the fair value adjustment in the amount payable.
 
(2)	Policy benefits for life and annuity contracts recorded in our unaudited condensed consolidated balance sheet as at March 31, 2013 of $1,255.6 million are computed on a discounted basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect a discount of the amount payable.	
Commitments and Contingencies
There have been no material changes in our commitments or contingencies since December 31, 2012. Refer to Item 7 included in our Annual Report on Form 10-K for the year ended December 31, 2012 for more information. Refer also to Item 1, “Legal Proceedings” in Part II of this Quarterly Report on Form 10-Q for information regarding our litigation matters.
Critical Accounting Policies
Our critical accounting policies are discussed in Management’s Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2012. As a result of the SeaBright and Pavonia acquisitions, we have adopted certain new critical accounting policies during the three months ended March 31, 2013, which are described below.
 
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Premium revenue recognition
Property and casualty
Our property and casualty premiums written are earned on a pro-rata basis over the coverage period. Our reinsurance premiums are recorded at the inception of the policy and are estimated based upon information in underlying contracts and information provided by clients and/or brokers. A change in reinsurance premium estimates is made when additional information regarding changes in underlying exposures is obtained. Such changes in estimates are expected and may result in significant adjustments in future periods. We record any adjustments as premiums written in the period they are determined.
With respect to retrospectively rated contracts (where additional premium would be due should losses exceed pre-determined, contractual thresholds), any additional premiums are based upon contractual terms and management judgment is involved in estimating the amount of losses that we expect to be ceded. Additional premiums would be recognized at the time loss thresholds specified in the contract are exceeded and are earned over the coverage period, or are earned immediately if the period of risk coverage has passed. Changes in estimates of losses recorded on contracts with additional premium features would result in changes in additional premiums recognized.
Life and annuity
We generally recognize premiums from traditional life, credit and annuity policies with life contingencies as revenue when due from policyholders. Traditional life and credit policies include those contracts with fixed and guaranteed premiums and benefits. We match benefits and expenses with revenue to result in the recognition of profit over the life of the contracts. We report premiums from annuity contracts without life contingencies as annuity deposits. Policy benefits and claims that are charged to expenses include benefit claims incurred in the period in excess of related policyholders’ account balances. The Pavonia companies did not write any variable annuity reinsurance business.
Life and annuity benefits
We estimate our life and annuity benefit and claim reserves on a present value basis using standard actuarial techniques and cash flow models. We establish and maintain our life and annuity reserves at a level that we estimate will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third party servicing obligations as they become payable.
Since the development of the life and annuity reserves is based upon cash flow projection models, we must make estimates and assumptions based on experience and industry mortality tables, longevity and morbidity rates, lapse rates, expenses and investment experience, including a provision for adverse deviation. The assumptions used to determine policy benefit reserves were adjusted at the time we acquired the Pavonia companies. These assumptions are locked-in throughout the life of the contract unless there is material adverse change.
We review these assumptions no less than annually. The review process involves analyzing assumptions and determining whether actual and anticipated experience indicates that existing policy reserves, together with the present value of future gross premiums, are sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. If management’s review indicates that reserves should be greater than those currently held, then the locked-in assumptions would be revised and a charge for life and annuity benefits would be recognized at that time.
Because of the many assumptions and estimates used in establishing reserves and the long-term nature of the contracts, the reserving process, while based on actuarial techniques, is inherently uncertain.
Off-Balance Sheet and Special Purpose Entity Arrangements
At March 31, 2013, we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
 
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Cautionary Statement Regarding Forward-Looking Statements
This quarterly report contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our ordinary shares and the insurance and reinsurance sectors in general. Statements that include words such as “estimate,” “project,” “plan,” “intend,” “expect,” “anticipate,” “believe,” “would,” “should,” “could,” “seek,” “may” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not statements of historical fact, reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward looking statements should, therefore, be considered in light of various important factors, including those set forth in this quarterly report.
Factors that could cause actual results to differ materially from those suggested by the forward looking statements include:
 
 	•	 	risks associated with implementing our business strategies and initiatives;	
 
 	•	 	risks that we may require additional capital in the future, which may not be available or may be available only on unfavorable terms;	
 
 	•	 	the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;	
 
 	•	 	risks relating to the availability and collectability of our reinsurance;	
 
 	•	 	changes and uncertainty in economic conditions, including interest rates, inflation, currency exchange rates, equity markets and credit conditions, which could affect our investment portfolio, our ability to finance future acquisitions and our profitability;	
 
 	•	 	losses due to foreign currency exchange rate fluctuations;	
 
 	•	 	increased competitive pressures, including the consolidation and increased globalization of reinsurance providers;	
 
 	•	 	emerging claim and coverage issues;	
 
 	•	 	lengthy and unpredictable litigation affecting assessment of losses and/or coverage issues;	
 
 	•	 	continued availability of exit and finality opportunities provided by solvent schemes of arrangement;	
 
 	•	 	loss of key personnel;	
 
 	•	 	the ability of our subsidiaries to distribute funds to us;	
 
 	•	 	changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at management’s discretion;	
 
 	•	 	operational risks, including system or human failures and external hazards;	
 
 	•	 	the risk that ongoing or future industry regulatory developments will disrupt our business, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;	
 
 	•	 	risks relating to our acquisitions, including our ability to successfully price acquisitions, evaluate opportunities and address operational challenges;	
 
 	•	 	risks relating to our ability to obtain regulatory approvals, including the timing, terms and conditions of any such approvals, and to satisfy other closing conditions in connection with our acquisition agreements, which could affect our ability to complete acquisitions;	
 
 	•	 	risks relating to our ability to structure our investments in a manner that recognizes our liquidity needs;	
 
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 	•	 	tax, regulatory or legal restrictions or limitations applicable to us or the insurance and reinsurance business generally;	
 
 	•	 	changes in tax laws or regulations applicable to us or our subsidiaries, or the risk that we or one of our non-U.S. subsidiaries become subject to significant, or significantly increased, income taxes in the United States or elsewhere;	
 
 	•	 	changes in Bermuda law or regulation or the political stability of Bermuda; and	
 
 	•	 	changes in accounting policies or practices.	
The factors listed above should be not construed as exhaustive and should be read in conjunction with the other cautionary statements and Risk Factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2012, as well as in the other materials filed and to be filed with the U.S. Securities and Exchange Commission. We undertake no obligation to publicly update or review any forward looking statement, whether to reflect any change in our expectations with regard thereto, or as a result of new information, future developments or otherwise, except as required by law.
 
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Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	
There have been no material changes in our market risk exposures since December 31, 2012. For more information refer to “Quantitative and Qualitative Disclosures about Market Risk” included in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2012.
 
Item 4.	CONTROLS AND PROCEDURES	
Evaluation of Disclosure Controls and Procedures
Our management performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2013. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
Our management has performed an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in our internal control over financial reporting that occurred during the three months ended March 31, 2013. Based upon that evaluation there were no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II — OTHER INFORMATION
 
Item 1.	LEGAL PROCEEDINGS	
In connection with our acquisition of SeaBright, two purported class action lawsuits were filed against SeaBright, the members of its board of directors, our merger subsidiary (AML Acquisition, Corp.) and, in one of the cases, us. The first suit was filed September 13, 2012 in the Superior Court of the State of Washington and the second suit was filed September 20, 2012 in the Court of Chancery of the State of Delaware. The lawsuits allege, among other things, that SeaBright’s directors breached their fiduciary duties when negotiating, approving and seeking stockholder approval of the Merger, and that SeaBright and we or our merger subsidiary aided and abetted the alleged breaches of fiduciary duties. In the suits, plaintiffs sought to enjoin defendants from taking any action to consummate the transactions contemplated by the Merger Agreement, as well as monetary damages, including attorneys’ fees and expenses. We believe these suits are without merit. Nevertheless, in order to avoid the potential cost and distraction of continued litigation and to eliminate any risk of delay to the closing of the Merger, we, SeaBright and the SeaBright director defendants agreed in principle to settle the two lawsuits, without admitting any liability or wrongdoing. The settlement required SeaBright to make supplemental information available to its stockholders through a filing of a Current Report on Form 8-K with the U.S. Securities and Exchange Commission. The settlement did not change the amount of the merger consideration that we paid to SeaBright’s stockholders in any way, nor did it alter any deal terms. The settlement is subject to execution and delivery of definitive documentation, approval by the Washington court of the settlement and approval by the Delaware court of the dismissal of the Delaware suit. If the settlement becomes effective, both lawsuits will be dismissed.
We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation regarding claims. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material adverse effect on our business, results of operations or financial condition. Nevertheless, we cannot assure you that lawsuits, arbitrations or other litigation will not have a material adverse effect on our business, financial condition or results of operations. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental claims. There can be no assurance that any such future litigation will not have a material adverse effect on our business, financial condition or results of operations.
 
Item 1A.	RISK FACTORS	
Our results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012. The risk factors identified therein have not materially changed.
 
Item 6.	EXHIBITS	
The information required by this item is set forth on the exhibit index that follows the signature page of this report.
 
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 9, 2013.

 	 	 	 	ENSTAR GROUP LIMITED	
 	 	 	 	
 	 	 	 	By:	 	/s/ Richard J. Harris	
 	 	 	 	 	 	Richard J. Harris	
 	 	 	 	 	 	Chief Financial Officer, Authorized Signatory and
Principal Accounting and Financial Officer	
 
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EXHIBIT INDEX

Exhibit
No.	 	Description	
  3.1	 	Memorandum of Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K/A filed on May 5, 2011).	
  3.2	 	Third Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit 3.1(b) of the Company’s Form 10-Q filed on August 5, 2011).	
  3.3	 	Certificate of Designations for the Series A Convertible Participating Non-Voting Perpetual Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 21, 2011).	
15.1*	 	KPMG Audit Limited Letter Regarding Unaudited Interim Financial Information.	
31.1*	 	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
31.2*	 	Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
32.1**	 	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
32.2**	 	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
101**	 	Interactive Data Files.	
 
  *	Filed herewith	
 
**	Furnished herewith	
 
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Exhibit 15.1
May 9, 2013
Enstar Group Limited
3rd Floor, Windsor Place
22 Queen Street
Hamilton HM 11
Bermuda
With respect to registration statements No. 333-149551, 333-148863, 333-148862 and 333-141793 on Form S-8, we acknowledge our awareness of the use therein of our report dated May 9, 2013 related to our review of interim financial information.
Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.
/s/ KPMG Audit Limited
Hamilton, Bermuda

Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Dominic F. Silvester, certify that:
 
1.	I have reviewed this Quarterly Report on Form 10-Q of Enstar Group Limited;	
 
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 
 	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 
 	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 
 	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 
 	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
 	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 
 	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Dated: May 9, 2013	
 	
/S/ DOMINIC F. SILVESTER	
Dominic F. Silvester	
Chief Executive Officer	

Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Richard J. Harris, certify that:
 
1.	I have reviewed this Quarterly Report on Form 10-Q of Enstar Group Limited;	
 
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 
 	a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 
 	b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 
 	c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 
 	d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
 	a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 
 	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

Dated: May 9, 2013	
 	
/S/ RICHARD J. HARRIS	
Richard J. Harris	
Chief Financial Officer	

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Enstar Group Limited (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dominic F. Silvester, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
 	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

Dated: May 9, 2013	
 	
/S/ DOMINIC F. SILVESTER	
Dominic F. Silvester	
Chief Executive Officer	

Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Enstar Group Limited (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard J. Harris, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
 
 	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and	
 
 	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

Dated: May 9, 2013	
 	
/S/ RICHARD J. HARRIS	
Richard J. Harris	
Chief Financial Officer