While our core focus remains acquiring and managing non-life run-off business, in recent years, we expanded our business by entering into the active underwriting business through our acquisitions of Atrium and Torus. We partnered with the Trident V funds in the Atrium and Torus acquisitions, with Enstar owning an approximate 59.0% interest and Trident V owning an approximate 39.3% interest in the acquired companies (with Dowling owning a 1.7% interest). We also expanded our portfolio of run-off businesses to include closed life and annuities, primarily through our acquisition of Pavonia from HSBC Holdings plc on March 31, 2013.
methodologies. This time lag varies by portfolio from one to five years depending on the relative mix of domicile, percentages of product mix of insurance, reinsurance and retrocessional reinsurance, primary insurance, excess reinsurance, reinsurance of direct and reinsurance of reinsurance within any given exposure category. Exposure portfolios written from a non-U.S. domicile are assumed to have a greater time lag than portfolios written from a U.S.-domicile. Portfolios with a larger proportion of reinsurance exposures are assumed to have a greater time-lag than portfolios with a larger proportion of insurance exposures.
3. Reserve-to-Paid Method. In this method, the ratio of estimated industry reserves to industry paid-to-date losses is multiplied by our paid-to-date losses to estimate our reserves. Specific considerations in the application of this method include the completeness of our paid-to-date loss information, the potential acceleration or deceleration in our payments (relative to the industry) due to our claims handling practices, and the impact of large individual settlements. Each year, paid-to-date loss information is updated (for both us and the industry) and updates to industry estimated reserves are reviewed. This method has the advantage of relying purely on paid loss data and so is not influenced by subjectivity of case reserve loss estimates. A potential disadvantage is that the application to our portfolios that do not have complete inception-to-date paid loss history could produce misleading results. To address this potential disadvantage, a variation of the method is also considered by multiplying the ratio of estimated industry reserves to industry losses paid during a recent period of time (e.g., 5 years) times our paid losses during that period.
1. $74 Billion Ultimate Industry Asbestos Losses - This level of industry-wide losses and its comparison to industry-wide paid, incurred and outstanding case reserves is the base benchmarking assumption applied to Paid Market Share, Reserve-to-Paid, IBNR:Case Ratio and the Ultimate-to-Incurred asbestos reserving methodologies.
2. $40 Billion Ultimate Industry Environmental Losses - This level of industry-wide losses and its comparison to industry-wide paid, incurred and outstanding case reserves is the base benchmarking assumption applied to Paid Market Share, Reserve-to-Paid, IBNR:Case Ratio and the Ultimate-to-Incurred environmental reserving methodologies.
consistently leading to large positive, or adverse, incurred losses upon settlement, it might be an indication - particularly if the size of the losses were increasing - that certain loss reserves on remaining exposures are deficient. Moreover, removing the loss development resulting from large settlements allows for a review of loss development related only to those contracts that remain exposed to losses. Were this not done, it is possible that savings on large wholesale settlements could mask significant underlying development on remaining exposures.
Net realized and unrealized gains on investments - Net realized and unrealized gains were $62.6 million and $70.7 million for the years ended December 31, 2014 and 2013, respectively. The decrease in net realized and unrealized gains between 2014 and 2013 was attributable primarily to a decrease in net realized and unrealized gains of $58.9 million on our private equity investments and equity portfolios, partially offset by an increase in net realized and unrealized gains of $50.8 million on our fixed maturity securities, due largely to decreases in U.S. interest rates when applied to a larger base of fixed maturity investments following our 2014 and 2013 acquisitions.
Life and annuity policy benefits - Life and annuity policy benefits were $108.0 million and $78.4 million for the years ended December 31, 2014 and 2013, respectively. The increase in 2014 was due to the inclusion of a full year of results for Pavonia for 2014 as compared to nine months for 2013. The movements relate entirely to our life and annuities segment and are described in greater detail in the segment discussion below.
(i) an increase in net reduction in prior period ultimate losses and loss adjustment expense liabilities of $31.8 million (comprised of an increase in total net reduction in ultimate losses and loss adjustment expense liabilities of $81.7 million for the year ended December 31, 2014, partially offset by a reduction in net increase in current period ultimate losses and loss adjustment expense liabilities of $49.9 million for the year ended December 31, 2014);
Noncontrolling interest in earnings decreased by $2.3 million to $9.8 million for the year ended December 31, 2014 as a result of lower earnings in those companies in which there are noncontrolling interests. Net earnings attributable to Enstar Group Limited increased by $3.4 million, or 1.7%, from $199.9 million for the year ended December 31, 2013 to $203.3 million for the year ended December 31, 2014.
(i) an increase in stock compensation costs of approximately $4.7 million due to new equity-based awards made during the year to our employees. As we continue to grow our organization we anticipate increased utilization of equity-based awards in future years as a way of incentivizing our employees;
General and administrative expenses for the non-life run-off segment increased by $12.2 million, from $55.7 million in the year ended December 31, 2012 to $68.0 million in the year ended December 31, 2013. The increase in expenses in 2013 related primarily to:
The decrease in income taxes of $34.8 million was due principally to a lower effective tax rate due to decreased pre-tax net income recorded in our U.S. and U.K. based subsidiaries as compared to the prior year as well as a decrease in the valuation allowance on our deferred tax assets in the U.S.
We recorded a noncontrolling interest in earnings of our non-life run-off segment of $12.1 million and $23.5 million for the years ended December 31, 2013 and 2012, respectively.
Following the Pavonia acquisition, we reevaluated our segment reporting and began including the results of Laguna within the life and annuities segment for each of the years ended December 31, 2014, 2013 and 2012. Accordingly, our 2014 and 2013 results for the life and annuities segment are substantially different than our 2012 results, when we only owned Laguna.
We expect to use funds acquired from cash and investment portfolios, collected premiums, collections from reinsurance debtors, fees and commission income, investment income and proceeds from sales and redemptions of investments, to meet expected claims payments and operational expenses with the remainder used for acquisitions and additional investments. With the acquisitions of Atrium, Torus and Pavonia we now expect a net provision of cash from operations as investment income earned and collected premiums will generally be in excess of total net claim payments, losses incurred on earned premiums and operating expenses. We expect our operating cash flows, together with our existing capital base and cash and investments acquired on the acquisition of our insurance and reinsurance subsidiaries, to be sufficient to meet cash requirements and to operate our business. We currently do not intend to pay dividends on our ordinary shares.
(iv) an increase in losses and loss adjustment expenses of $706.9 million in 2013 compared to $623.2 million in 2012 due to reserves acquired from our current year acquisition activity; and
The following tables summarize the composition of the amortized cost and fair value of our fixed maturity investments, short-term investments, equities and other investments carried at fair value at the date indicated by ratings as assigned by major rating agencies.
The following tables summarize the composition of the amortized cost and fair value of our held-to-maturity fixed maturity investments by ratings as assigned by major rating agencies.
This class comprises a number of positions in diversified fixed income funds that are managed by third party managers. Underlying investments vary from high grade corporate bonds to non-investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices. The funds have liquidity terms that vary from daily up to quarterly.
This class comprises investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by us in these securities.
On September 16, 2014, we and certain of our subsidiaries, as borrowers and as guarantors, entered into the EGL Revolving Credit Facility Agreement with National Australia Bank Limited (or NAB), Barclays Bank PLC (or Barclays), and Royal Bank of Canada (or RBC), as mandated lead arrangers and original lenders, and NAB as agent, or the Credit Agreement.
On June 25, 2014, we fully repaid the remaining $89.0 million of outstanding principal and accrued interest on the SeaBright Facility out of the proceeds of distributions from SeaBright. We had previously repaid $22.0 million of the outstanding principal on the SeaBright Facility on March 31, 2014. All security pursuant to the SeaBright Facility was released in connection with the full repayment of the facility.
As at December 31, 2014 and 2013, we had, in total, parental guarantees supporting a subsidiary’s insurance obligations in the amount of approximately $238.6 million and $228.5 million, respectively.
The consolidated financial statements include the assets, liabilities and results of operations of the Company as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. Intercompany transactions are eliminated on consolidation.
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the consolidated financial statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include, but are not limited to:
equity funds that carry their investments at fair value, along with direct investments in CLO equities. These other investments are stated at fair value, which ordinarily will be the most recently reported net asset value as advised by the fund manager or administrator. Many of the Company’s fund investments publish net asset values on a daily basis and provide daily liquidity; others report on a monthly basis. Private equities typically report quarterly. The Company believes the reported net asset value represents the fair value market participants would apply to an interest in the various private equities or funds. The change in fair value is included in net realized and unrealized gains on investments and recognized in net earnings.
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.
On February 5, 2015, the Company’s wholly-owned subsidiary, Harper Holdings SARL, entered into a definitive agreement with Nationale Suisse to acquire its Belgian subsidiary, Nationale Suisse Assurance S.A. (“NSA”). NSA is a Belgium-based insurance company writing non-life insurance (which the Company expects to operate in run-off as part of its non-life run-off segment) and life insurance (which the Company expects to operate in run-off as part of its life and annuities segment).
The purchase price for Atrium was $158.0 million. Kenmare’s portion of the purchase price was $94.8 million, and was financed by borrowings under the Company’s revolving credit facility.
The purchase price for Arden was $79.6 million. Kenmare’s portion of the purchase price was $47.8 million, and was financed by borrowings under the Company’s revolving credit facility.
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
Effective January 1, 2015, Lloyd’s Syndicate 2008, 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 (“RITC”) of the 2012 and prior underwriting years of account of another Lloyd’s syndicate, under which Syndicate 2008 assumed total net insurance reserves of approximately £17.2 million (approximately $26.9 million) for cash consideration of an equal amount.
The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity investments classified as held-to-maturity:
This class comprises 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.
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 December 31, 2014, the Company had one corporate security classified as Level 3.
For its investments in the CLO equity funds, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager. The Company uses an income approach to corroborate the reasonableness of reported net asset value. The CLO equity funds have been classified as Level 3 due to a lack of observable and relevant trades in secondary markets.
The reduction in estimates of net ultimate losses relating to prior periods of $224.6 million comprised reductions in IBNR reserves of $262.4 million partially offset by net incurred loss development of $37.8 million. The decrease in the aggregate estimate of net IBNR reserves of $262.4 million (compared to $265.2 million during the year ended December 31, 2013), was comprised of $59.4 million relating to asbestos liabilities (compared to $69.8 million in 2013), $6.2 million relating to environmental liabilities (compared to $4.9 million in 2013), $62.5 million relating to general casualty liabilities (compared to $42.6 million in 2013), $63.6 million relating to workers compensation liabilities (compared to $42.1 million in 2013) and $70.7 million relating to all other remaining liabilities (compared to $105.8 million in 2013).
The aggregate reduction in net IBNR reserves of $262.4 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data, following 98 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures. The prior period estimate of aggregate net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2014, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $285.8 million for net paid losses of $323.6 million, related to the settlement of non-commuted losses in the year and 98 commutations and policy buy-backs of assumed and ceded exposures (including the partial commutation of two of the Company’s top ten assumed exposures and two of the Company’s top ten ceded recoverables as at January 1, 2014). Net advised case and LAE reserves settled by way of commutation and policy buyback during the year ended December 31, 2014 amounted to $29.1 million (comprising $99.5 million of assumed case reserves and LAE reserves partially offset by $70.4 million of ceded incurred reinsurance recoverable case reserves).
The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the years ended December 31, 2014 and 2013 (losses incurred and paid are reflected net of reinsurance recoverables):
The estimated amortization expense for each of the five succeeding fiscal years related to the Company’s intangible assets with a definite life is as follows:
On September 30, 2014, the Company fully repaid the remaining $66.0 million of outstanding principal and accrued interest on the Clarendon Facility out of the proceeds of distributions from Clarendon. The Company had previously repaid $13.0 million of the outstanding principal on the Clarendon Facility on March 17, 2014. All security pursuant to the Clarendon Facility was released in connection with the full repayment of the facility.
In addition, with the resignation of Kenneth J. LeStrange from the Board of Directors, 1,560 restricted share units previously credited to his account under the Deferred Compensation Plan were converted into the same number of the Company’s ordinary shares on January 2, 2015, with fractional shares paid in cash.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a part of income tax expense. During the years ended December 31, 2014, 2013 and 2012, the Company recognized a benefit for the reversal of interest and penalties related to unrecognized tax benefits due to the expiration of the statute of limitations in the amount of $nil, $0.2 million and $nil, respectively. The Company had approximately $nil, $0.7 million and $1.5 million accrued for the payment of interest and penalties related to unrecognized tax benefits at December 31, 2014, 2013 and 2012, respectively.