Our independent, external actuaries use industry benchmarking methodologies to estimate appropriate IBNR reserves for our A&E exposures. These methods are based on comparisons of our loss experience on A&E exposures relative to industry loss experience on A&E exposures. Estimates of IBNR are derived separately for each of our relevant subsidiaries and, for some subsidiaries, separately for distinct portfolios of exposure. The discussion that follows describes, in greater detail, the primary actuarial methodologies used by our independent actuaries to estimate IBNR for A&E exposures.
The following key assumptions were used to estimate A&E reserves at December 31, 2013:
Consolidated Results of Operations - For the Years Ended December 31, 2013, 2012 and 2011
Income tax expense - Income tax expense was $35.6 million and $44.3 million for the years ended December 31, 2013 and 2012, respectively. Income tax expense is generated through our foreign operations outside of Bermuda, principally in the United States, U.K and Australia. Our income tax expense may fluctuate significantly from period to period depending on the geographic distribution of pre-tax earnings or loss in any given period between different jurisdictions with different tax rates.
Results of Operations by Segment - For the Years Ended December 31, 2013, 2012 and 2011
Noncontrolling interest in earnings decreased by $11.4 million to $12.1 million for the year ended December 31, 2013 as a result of lower earnings in those companies in which there are noncontrolling interests. Net earnings attributable to Enstar Group Limited increased by $36.0 million, or 22.0%, from $163.9 million for the year ended December 31, 2012 to $199.9 million for the year ended December 31, 2013.
Our management companies earned fees and commission income of approximately $12.8 million and $9.3 million for the years ended December 31, 2013 and 2012, respectively. The increase in fees and commission income of $3.5 million related primarily to an increase in management fees earned from third-party agreements. Fees and commission income as a percentage of net earnings has declined in recent periods, and we would expect it to remain at or around current levels in future periods, excluding the impact of any one-time incentive based fees that we might receive. While we intend to continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, our core focus continues to be acquiring and managing insurance and reinsurance companies and portfolios of business in run-off.
Net realized and unrealized gains for the year ended December 31, 2012 and 2011 were $71.7 million and $8.6 million, respectively. The increase of $63.1 million was primarily attributable to a combination of the following:
The average credit ratings of our fixed maturity investments as at December 31, 2013, 2012 and 2011 were A+, AA- and AA-, respectively.
(i) a decrease in legal and professional fees of $10.9 million due largely to higher 2011 legal fees and settlement costs associated with certain litigation that did not recur in 2012, along with reductions in audit, actuarial and consulting fees of approximately $4.0 million; and
The effective tax rate was 18.8% for the year ended December 31, 2012 compared with 10.8% in the year ended December 31, 2011. Our tax expense increased by $19.0 million for the year ended December 31, 2012 due principally to increased taxable earnings from our U.K.-based subsidiaries.
Our active underwriting segment is comprised of the operations and financial results of Atrium and its subsidiaries (acquired November 25, 2013) and Arden (acquired September 9, 2013). Results related to Arden’s reinsurance to Atrium are included within our active underwriting segment, while results related to Arden’s run-off business are included within our non-life run-off segment. Following the closing of the Torus amalgamation, the active underwriting segment will also include substantially all of Torus Insurance Holdings Limited and its subsidiaries (some of Torus’ lines of business are in run-off and will accordingly be accounted for within our non-life run-off segment).
Net cash provided by (used in) financing activities was $423.1 million during the year ended December 31, 2013 compared to ($233.8) million during the year ended December 31, 2012. The increase of $656.9 million in cash provided by financing activities was primarily attributable to the following:
Aggregate invested assets, comprising cash and cash equivalents, restricted cash and cash equivalents, fixed maturities, short-term investments, equities and other investments, were $6.56 billion as of December 31, 2013 compared to $4.31 billion as of December 31, 2012, an increase of 52.2%. The increase in cash and invested assets resulted principally from the completion of the acquisitions of SeaBright, Pavonia, Arden, and Atrium.
The table below shows the aggregate amounts of our investments carried at fair value as of December 31, 2013 and 2012:
The fair value of our fixed maturity investments will fluctuate with changes in the interest rate environment and when changes occur in the overall investment market and in overall economic conditions. We recorded no impairments in 2013 and 2012.
The table below shows the fair value of our portfolio of other investments held at December 31, 2013 and 2012:
Eurozone Governments (which includes regional and municipal governments including guaranteed agencies) by rating are highlighted in the following table:
During the existence of any event of default (as specified in the Restated Credit Agreement), the agent may cancel the commitments of the lenders, declare all or a portion of outstanding amounts immediately due and payable, declare all or a portion of outstanding amounts payable upon demand or proceed against the security. During the existence of any payment default, the interest rate would be increased by 1.0%. The EGL Revolving Credit Facility terminates and all amounts borrowed must be repaid on the fifth anniversary of the date of the Restated Credit Agreement. As of December 31, 2013, all of the financial covenants relating to the EGL Revolving Credit Facility were met.
On August 26, 2013, we fully repaid the outstanding principal and accrued interest of $12.1 million associated with the subordinated floating rate surplus notes issued by SeaBright in a private placement in May 2004. Interest expense for the period from February 7, 2013 (the date of acquisition of SeaBright) to December 31, 2013 was $0.3 million.
The following table shows our aggregate contractual obligations and commitments by time period remaining to due date as at December 31, 2013.
The following table provides a summary of our outstanding unfunded investment commitments for the years ended December 31, 2013 and 2012:
Other investments include investments in limited partnerships and limited liability companies (collectively “private equities”) and fixed income, hedge, equity and real estate debt funds (collectively “funds”) that carry their investments at fair value. These funds 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.
The Company has not completed the process of determining the fair value of the intangible assets acquired and deferred taxes. These valuations will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value recorded for these items is a provisional estimate and may be subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill.
On September 9, 2013, Kenmare, the Company’s wholly-owned subsidiary, together with Trident, completed the acquisition of Arden. Northshore, the purchaser of Arden, is 60% owned by Kenmare and 40% owned by Trident. Arden is a Bermuda-based reinsurance company that provides reinsurance to Atrium and is currently in the process of running off certain other discontinued businesses.
Gross and net premiums written by SeaBright from the date of the acquisition to December 31, 2013 totaled $17.8 million and $9.2 million, respectively. Because SeaBright’s exit from the mandatory renewal process was approved, the Company expects that SeaBright will no longer generate premiums written other than for small adjustments related to premium audits and reinstatement premiums on previously written policies.
Effective January 1, 2014, S2008 entered into an RITC transaction with another Lloyd’s syndicate in respect of its 2011 and prior underwriting years of account, under which S2008 assumed net insurance reserves of approximately £15.3 million (approximately $25.3 million) for consideration of an approximately equal amount.
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. As at December 31, 2013, there were no significant adjustments made to the reported net asset value.
At December 31, 2013 and 2012, the top ten reinsurers of the Company’s business accounted for 68.3% and 63.1%, respectively, of total reinsurance balances recoverable (which includes loss reserves recoverable and recoverables on paid losses) and included $290.1 million and $194.5 million, respectively, of IBNR reserves recoverable. With the exception of one BBB+ rated reinsurer and one non-rated reinsurer from which $41.4 million and $256.2 million, respectively, was recoverable (December 31, 2012: $37.7 million and $nil, respectively), the other top ten reinsurers, as at December 31, 2013 and 2012, were all rated A- or better. Reinsurance balances recoverable by reinsurer were as follows:
The tables below provide a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the years ended December 31, 2013, 2012 and 2011, split between the non-life run-off segment and the active underwriting segment, was as follows (losses incurred and paid are reflected net of reinsurance recoverables):
The net reduction (increase) in ultimate losses and loss adjustment expense liabilities for the years ended December 31, 2013, 2012 and 2011 was as follows:
The following tables show the Company’s goodwill and intangible assets as at December 31, 2013 and 2012:
On March 4, 2011, the Company, through Clarendon Holdings, Inc., entered into a $106.5 million term facility agreement (the “Clarendon Facility”) with NAB. The Clarendon Facility provides a four-year term loan facility, which was fully drawn upon on July 12, 2011 to fund 50% of the purchase price of Clarendon.
It is reasonably possible that the amount of unrecognized tax benefits with respect to certain of the unrecognized tax positions could decrease by up to approximately $2.0 million within the next 12 months if the statute of limitations expires on certain tax periods.
As at December 31, 2013, the amount of consolidated retained earnings of the Company that was free of restrictions and therefore potentially available to be distributed to the Company’s ordinary shareholders was $1,177.5 million (2012: $972.9 million). This amount is held primarily within our insurance and reinsurance subsidiaries and represents retained earnings held in those companies in excess of their minimum regulatory requirements. Although these amounts are in excess of statutory minimums, regulators may nonetheless further restrict distributions, and therefore actual amounts available for distribution to shareholders are likely to be significantly less. In addition, the Company does not intend to pay dividends on its ordinary shares, as it intends instead to reinvest any distributions from its subsidiaries back into the Company, primarily as a means to fund future acquisitions.
The following table provides a summary of the Company’s outstanding unfunded investment commitments for the years ended December 31, 2013 and 2012:
The elimination items includes the elimination of intersegment revenues and expenses.