Consolidated Results of Operations - for the Years Ended December 31, 2017, 2016, and 2015
While our core focus remains acquiring and managing non-life run-off business, in 2013 and 2014, we expanded our business to include active underwriting through our acquisitions of Atrium and StarStone. We partnered with Trident in the Atrium and StarStone acquisitions, with Enstar owning a 59.0% interest, Trident owning a 39.3% interest, and 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, although in 2017 we disposed of Pavonia, which made up the majority of our life and annuities business.
During 2017, we increased our book value per share on a fully diluted basis by 10.8% to $159.19 per share. The increase was primarily attributable to net earnings of $311.5 million. See "Item 6. Selected Financial Data" herein for the computation of fully diluted book value per share. The growth of our fully diluted book value per share since becoming a public company is shown in the table below.
Our business strategy includes generating growth through acquisitions and reinsurance transactions, particularly in our Non-life Run-off segment. Our non-life run-off gross reserves were $5.9 billion as at December 31, 2017, and we continue to evaluate opportunities for future growth. In January and February 2018, we entered into separate agreements to assume net reserves of approximately $811.0 million, $456.4 million and $275.0 million from Novae, Neon and Zurich Australia, respectively. Additionally, in December 2017, we assumed net reserves of $81.4 million from Allianz. We completed the sale of our Pavonia and Laguna businesses during 2017, which formerly comprised the majority of our life and annuities segment. We will continue to employ a disciplined approach when assessing, acquiring or managing portfolios of risk.
We manage claims in a professional and disciplined manner, drawing on our global team of in-house claims management experts as we aim to proactively manage risks and claims efficiently. We employ an opportunistic commutation strategy in which we negotiate with policyholders and claimants with a goal of commuting or settling existing insurance and reinsurance liabilities at a discount to the ultimate liability and also to avoid unnecessary legal and other associated run-off fees and expense.
Our underwriting results can be affected by changes in premium rates, significant losses, development of prior year loss reserves and current year underwriting margins. In general, our expectation for 2018 is that underwriting margins will be slightly higher than in 2017, with premium rates expected to be impacted by both market and general economic conditions. We continue to see overcapacity in many markets which can impact premium rates and/or terms and conditions. If general economic conditions worsen, a decrease in the level of economic activity may impact insurable risks and our ability to write premium that is acceptable to us. We may adjust our level of reinsurance to maintain an amount of net exposure that is aligned with our risk tolerance.
Net investment income is a significant component of our earnings and we see fully priced asset valuations across many asset classes compared to historical averages. If investment conditions or general economic conditions change during 2018, we may experience further pressure on our investment yields and realized or unrealized losses on investments could materialize. For further discussion of our investments, see "Investable Assets" below.
There has been volatility in the financial and foreign exchange markets following the Brexit referendum on June 23, 2016, and this is expected to continue. On March 27, 2017, Article 50 of the Lisbon Treaty was triggered, which allows two years for the United Kingdom and the 27 remaining European Union members to reach an agreement with regard to the terms on which the United Kingdom will leave the European Union, subject to an extension of the two year deadline beyond March 29, 2019 being agreed between the United Kingdom and the remaining European Union members. For companies based in the United Kingdom, including certain of our active underwriting and run-off companies, there is heightened uncertainty regarding trading relationships with countries in the European Union. Both our StarStone and Atrium operations have well-diversified sources of premium, which may mitigate the potential impact of Brexit. The majority of business written in StarStone and Atrium is in U.S. dollars, so the impact of currency volatility on those segments has not been significant. In addition, StarStone already has established operations within the European Economic Area. Lloyd's has lobbied the United Kingdom's government to include the retention of passporting rights in its negotiations with the European Union, whilst also evaluating alternative models to access the markets. In the near-term, access to markets is unaffected, and all contracts entered into up until Brexit are expected to remain valid into the post-Brexit period. With specific reference to our run-off business, we are preparing to build and expand on our existing run-off capabilities within the European Union for the purpose of receiving transfers of new run-off business. We are also investigating the post-Brexit additional requirements in each applicable state for the continued payment of policyholders’ claims in respect of the existing run-off business of our U.K. Non-life Run-off companies.
The loss ratio is calculated by dividing net incurred losses and LAE by net premiums earned. The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned. The operating expense ratio is calculated by dividing operating expenses by net earned premiums. The combined ratio is the sum of the loss ratio, the acquisition cost ratio and the operating expense ratio.
Consolidated Results of Operations - For the Years Ended December 31, 2017, 2016 and 2015
Combined ratios of 99.9% and 108.5% for the active underwriting operations within our Atrium and StarStone segments, respectively. Excluding the impact of hurricanes Harvey, Irma and Maria during 2017, the combined ratios were 86.7% and 96.7% for Atrium and StarStone, respectively (refer to "Underwriting Ratios" above)
Net investment income of $208.8 million and net realized and unrealized gains of $190.3 million
Total gross reserves for losses and LAE of $7,398.1 million, with $2,450.8 million of gross reserves acquired and assumed in our Non-life Run-off operations during 2017
Noncontrolling Interest - Noncontrolling interest in earnings is the share of results from those subsidiary companies in which there are either noncontrolling interests or redeemable noncontrolling interests. In 2017, the noncontrolling interest in earnings was $20.3 million, compared to $39.6 million in 2016. The reduction was primarily due to lower earnings in both Atrium and StarStone as a result of the large losses in the third quarter of 2017, as discussed above; and
2016 versus 2015: We reported consolidated net earnings attributable to Enstar Group Limited shareholders of $264.8 million in 2016, compared to $220.3 million in 2015, an increase of $44.5 million. Our results were impacted by our acquisition activity during 2016 with Allianz, Coca-Cola and Neon. Our results were also impacted by our acquisition activity during 2015, when we acquired Sussex, Wilton Re’s life settlements business, and Alpha, and completed loss portfolio transfer reinsurance transactions with Reciprocal of America, Voya, and Sun Life. The most significant drivers of the change in our financial performance during 2016 as compared to 2015 included:
Atrium - Net earnings attributable to the Atrium segment were $6.4 million in 2016, compared to $16.6 million in 2015, a decrease of $10.1 million. Atrium delivered a solid underwriting performance with a combined ratio of 94.3% for 2016. The 2016 results included a lower level of favorable prior period loss development and some large losses in 2016 compared to a lower level of losses in 2015;
StarStone - Net earnings attributable to the StarStone segment were $25.2 million in 2016, compared to $13.7 million in 2015, an increase of $11.6 million. The decrease in the combined ratio from 98.7% in 2015 to 98.2% in 2016 was primarily due to lower expenses due to the continued execution of expense management initiatives, partially offset by higher losses and acquisition expenses;
Noncontrolling Interest - Noncontrolling interest in earnings is the share of results from those subsidiary companies in which there are either noncontrolling interests or redeemable noncontrolling interests. In 2016, the noncontrolling interest in earnings was $39.6 million, compared to the noncontrolling interest in losses of $10.0 million in 2015; and
Results of Operations by Segment - For the Years Ended December 31, 2017, 2016 and 2015
The following table shows the gross and net premiums written and earned for the Non-life Run-off segment for the years ended December 31, 2017, 2016 and 2015:
Because business in this segment is in run-off, our general expectation is for premiums associated with legacy business to decline in future periods. However, the actual amount in any particular year will be impacted by new acquisitions during the year, and the run-off of premiums from acquisitions completed in recent years.
2017 versus 2016: Premiums written and earned in 2017 and 2016 related primarily to Sussex's run-off business.
The reduction in net IBNR reserves of $393.1 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 59 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2017, 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 $381.5 million for net paid losses of $578.9 million related to the settlement of non-commuted losses in the year and 59 commutations and policy buy-backs of assumed and ceded exposures. Net advised case and LAE reserves settled by way of commutation and policy buyback during the year ended December 31, 2017 amounted to $7.4 million (comprising $23.2 million of assumed case reserves and LAE reserves, partially offset by $15.8 million of ceded incurred reinsurance recoverable case reserves).
The reduction in net IBNR reserves of $349.7 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 56 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2016, 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 $608.2 million for net paid losses of $529.9 million related to the settlement of non-commuted losses in the year and 56 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of two of our top six assumed exposures and one of our top six ceded recoverables). Net advised case and LAE reserves settled by way of commutation and policy buy-back in 2016 amounted to $14.7 million (comprising $39.1 million of assumed case reserves and LAE reserves, partially offset by $24.4 million of ceded incurred reinsurance recoverable case reserves).
The reduction in provisions for bad debt of $13.8 million was a result of the collection of certain reinsurance recoverables against which bad debt provisions had been provided in earlier periods, and the reduction in bad debt provisions for insolvent reinsurers as a result of distributions received, partially offset by additional provisions for contractual disputes with reinsurers.
2017 versus 2016: Acquisition costs for the Non-life Run-off segment were $0.3 million in 2017, compared to $4.2 million in 2016, a decrease of $3.9 million. Acquisition costs in 2017 and 2016 primarily related to net premiums earned on the Sussex run-off business.
2016 versus 2015: Acquisition costs for the Non-life Run-off segment were $4.2 million in 2016, compared to $8.9 million for 2015, a decrease of $4.7 million. Acquisition costs in 2016 and 2015 primarily related to net premiums earned on the portion of the Sussex run-off business.
General and administrative expenses consist of operating expenses and corporate expenses.
2017 versus 2016: General and administrative expenses for the Non-life Run-off segment increased by $20.9 million, from $212.9 million in 2016 to $233.8 million in 2017. The increase in expenses in 2017 related primarily to:
an increase in performance-based salary and benefits due to higher net earnings of the Non-life Run-off segment in 2017 compared to 2016;
an increase in professional fees relating to significant new business transactions and projects.
2016 versus 2015: General and administrative expenses for the Non-life Run-off segment decreased by $0.1 million from $213.0 million in 2015 to $212.9 million in 2016.
2017 versus 2016: Our management companies in the Non-life Run-off segment earned fees and commission income of $43.8 million and $17.4 million in 2017 and 2016, respectively, an increase of $26.4 million. This increase primarily resulted from a $13.6 million increase in profit commission and fee income earned from KaylaRe, as described in Note 21 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K. We also earned an additional $2.6 million of fee income in 2017 from a new third-
2017 versus 2016: Net foreign exchange losses for the Non-life Run-off segment were $7.3 million in 2017 compared to net foreign exchange gains of $1.7 million in 2016. The change of $9.0 million in net foreign exchange losses in 2017 arose primarily as a result of changes in exchange rates and the resulting impact on our foreign currency denominated investments and subsidiaries, which is partially offset by the change in currency translation adjustment in the consolidated statement of comprehensive income.
2016 versus 2015: Net foreign exchange gains for the Non-life Run-off segment were $1.7 million in 2016, compared to net foreign exchange losses of $4.4 million in 2015. The change of $6.1 million is primarily a result of holding more British pound assets than British pound liabilities at a time when the pound depreciated against the U.S. dollar. The Non-life Run-off segment also recorded net foreign exchange (losses) of ($1.6) million and ($5.9) million in currency translation adjustment in the consolidated statement of comprehensive income, net of noncontrolling interest, in 2016 and 2015, respectively. In 2016 and 2015, the currency translation adjustments related primarily to our U.K and Australian based subsidiaries whose functional currency is the British Pound and Australian dollar. In 2016 and 2015, we entered into forward exchange contracts to hedge the foreign currency exposure on our net investment in certain of our subsidiaries in the Non-life Run-off segment whose functional currency is the Australian dollar.
The Atrium segment includes Atrium 5 Ltd. ("Atrium 5"), Atrium Underwriters Limited ("AUL") and Northshore Holdings Limited. Atrium 5 results represent its proportionate share of the results of Syndicate 609 for which it provides 25% of the underwriting capacity and capital. AUL results largely represent fees charged to Syndicate 609 and a 20% profit commission on the results of the syndicate less salaries and general and administrative expenses incurred in managing the syndicate. AUL also includes other Atrium Group non-syndicate fee income and associated expenses. Northshore Holdings Limited results include the amortization of intangible assets that were fair valued upon acquisition.
The following is a discussion and analysis of the results of operations for our Atrium segment for the years ended December 31, 2017, 2016 and 2015, which are summarized below.
2017 versus 2016: Net premiums earned for the Atrium segment were $134.7 million in 2017, compared to $124.4 million in 2016, an increase of $10.3 million. The increase of $10.3 million was seen across all lines of business in 2017 except marine, aviation and transit. The premium increase for the binding authorities line reflects the continued growth of international professional liability business due to new underwriters hired in recent years, as well as the continued success of AU Gold, Atrium's proprietary online underwriting platform. New business has been written by
2016 versus 2015: Net incurred losses and LAE were $58.4 million in 2016, compared to $47.5 million in 2015, an increase of $10.9 million. Net favorable loss development in 2016 and 2015 was $13.0 million and $21.9 million, respectively. Net favorable loss development in 2016 was experienced across most lines of business. Net favorable loss development in 2015 primarily related to the professional indemnity, aviation, marine and upstream energy lines of business. Excluding net favorable prior year loss development, net incurred losses and LAE in 2016 and 2015 were $71.4 million and $69.4 million, respectively. The increase of $2.0 million in net incurred losses and LAE, excluding prior year loss development, was primarily due to notable 2016 losses in the terrorism and aviation lines, compared to a lower level of losses in 2015.
2017 versus 2016: Operating expenses for the Atrium segment were $17.4 million in 2017, compared to $14.2 million in 2016, an increase of $3.2 million. The increase of $3.2 million in 2017 primarily relates to profit commission payable to AUL and bonus costs which are based on the Lloyd’s year of account results. These results are being driven by the favorable prior year loss development, which is greater in 2017 compared to 2016.
2017 versus 2016: Interest expense was $0.6 million in 2017, broadly consistent with $0.2 million in 2016.
2016 versus 2015: Interest expense was $0.2 million in 2016, compared to $4.3 million in 2015, a decrease of $4.1 million. The $4.3 million in interest expense in 2015 was in respect of borrowings under the Enstar revolving credit facility.
2017 versus 2016: Net foreign exchange losses for the Atrium segment were $5.1 million in 2017 compared to $3.3 million in 2016. The net foreign exchange losses in 2017 resulted primarily from recognizing realized losses on the foreign currency available for sale investment portfolio, that were mostly reclassified from accumulated other comprehensive income.
2017 versus 2016: We recorded income tax expense of $1.6 million in 2017, compared to $2.6 million in 2016, a decrease of $1.0 million, primarily due to lower earnings in the Atrium segment. Income tax expense is associated with the operations of Atrium 5 and AUL in the United Kingdom. The effective tax rates for the Atrium segment in 2017 and 2016 were 14.8% and 19.1%, respectively.
2017 versus 2016: Net earnings attributable to noncontrolling interest in our Atrium segment were $3.8 million in 2017, compared to $4.5 million in 2016, a change of $0.7 million, primarily due to lower earnings in the Atrium segment. As of December 31, 2017, Trident and Dowling had a combined 41.0% noncontrolling interest in the Atrium segment.
2016 versus 2015: Net earnings attributable to noncontrolling interest in our Atrium segment were $4.5 million in 2016, compared to $14.3 million in 2015, a change of $9.8 million, primarily due to lower earnings in the Atrium segment. As of December 31, 2016, Trident and Dowling had a combined 41.0% noncontrolling interest in the Atrium segment, although their share of net earnings was higher due primarily to the interest expense recorded in the segment.
The StarStone segment recorded net earnings of $2.8 million in 2017 compared to $25.2 million in 2016, a decrease of $22.4 million. The decrease was primarily attributable to the third quarter catastrophe losses of $53.4 million for hurricanes Harvey, Irma and Maria, partially offset by improved investment results. The combined ratio increased to 108.5% in 2017, compared to 98.2% in 2016, primarily due to the hurricanes in the third quarter of 2017. The catastrophe events contributed 11.7 points to the loss ratio and 11.8 points to the combined ratio. The decrease in net premiums written and earned is primarily due to the 35% whole account quota share reinsurance arrangement with KaylaRe, which covers all business written during underwriting years 2016 and 2017. The decrease of 10.0 points in the acquisition cost ratio is driven by the ceding commission earned on the cession to KaylaRe as described below.
The following table provides gross premiums written by line of business for the StarStone segment for the years ended December 31, 2017, 2016 and 2015:
2016 versus 2015: Gross premiums written in our marine and casualty lines increased during 2016 as a result of selective growth in new business, including new business written by underwriters hired late in 2015 and during 2016. We continued to expand our geographic reach and range of products in our workers' compensation line. Gross premiums written in both our property and aerospace business decreased. Gross premiums written in the property line were higher in 2015 due to an initial assumption of in-force unearned premium of $31.0 million under quota share agreements with Sussex, following the acquisition by Enstar. Aerospace premiums written were lower following our decision in 2015 to discontinue our space product and certain airlines business that no longer met our pricing standards.
2017 versus 2016: Net premiums earned for the StarStone segment were $459.4 million in 2017, compared to $676.6 million in 2016, a decrease of $217.2 million. The decrease of $217.2 million in 2017 was primarily attributable to the 35% whole account quota share reinsurance cession to KaylaRe which covers all business written during underwriting years 2016 and 2017. The amount ceded to KaylaRe was $233.9 million. Excluding the amount ceded to KaylaRe, net premiums earned increased by $16.7 million. The increase was driven by casualty, marine and property, while aerospace and workers' compensation decreased in line with decreases in current and prior year decreases in gross premiums written.
2016 versus 2015: Net incurred losses and LAE were $401.6 million in 2016, compared to $327.7 million in 2015, an increase of $73.9 million. Excluding net prior year loss development, net incurred losses and LAE in 2016 were $415.8 million, compared to $367.0 million in 2015.
Net favorable prior year loss development in 2016 was $14.2 million, compared to $39.4 million in 2015. Net favorable prior year loss development in 2016 was primarily related to marine liability, offshore and terrorism. Net favorable prior year loss development in 2015 was primarily related to construction, general property and terrorism.
2016 versus 2015: Fees and commission income was $5.1 million in 2016, compared to $nil in 2015, an increase of $5.1 million. The increase of $5.1 million in 2016 was primarily due to the KaylaRe cession, as described in Note 21 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
2016 versus 2015: Other income was $0.7 million in 2016, compared to $3.1 million in 2015, a decrease of $2.3 million, primarily due to higher amortization of acquisition-related fair value adjustments being incurred in 2015 after the acquisition of StarStone by Enstar.
2017 versus 2016: Net foreign exchange losses of $0.9 million in 2017, compared to net foreign exchange gains of $0.8 million in 2016, a change of $1.7 million. The net foreign exchange losses were primarily driven by movements in the British Pound and Euro exchange rates against the U.S. Dollar, net of currency matching and hedging activities.
2016 versus 2015: We recorded an income tax expense of $3.7 million in 2016, compared to an income tax benefit of $5.9 million in 2015, a change of $9.6 million. The income tax expense in 2016 primarily related to corporation tax in our U.S. entities, offset by lower U.K corporation tax due to group relief with the Atrium segment. The income tax benefit in 2015 was attributable to a reduction in valuation allowances in the U.S and the result of tax loss offsets in the UK.
2016 versus 2015: Net earnings attributable to noncontrolling interest were $17.5 million in 2016, compared to $9.5 million in 2015, a change of $8.0 million, primarily as a result of increased earnings in the StarStone entities in 2016 compared to 2015.
The following is a discussion and analysis of our results of operations for our other activities for the years ended December 31, 2017, 2016 and 2015, which are summarized below.
2017 versus 2016: Underwriting loss was $0.1 million in 2017, compared to underwriting income of $8.9 million in 2016, a decrease of $9.0 million which primarily results from a $7.2 million decrease in underwriting income in respect of our life businesses, Alpha and Laguna.
2016 versus 2015: Corporate expenses were $61.5 million in 2016, compared to $16.0 million in 2015, an increase of $45.5 million. The increase is primarily due to an increase in stock compensation expense of $18.3 million in 2016 as described above, and other non-recurring corporate expenses.
2017 versus 2016: Interest income was $3.3 million in 2017, reflected on the interest expense line, compared to $1.9 million in 2016, a decrease of $1.5 million. This represents the elimination of interest expense between our reportable segments.
2016 versus 2015: Interest income was $1.9 million in 2016, compared to $18.5 million in 2015, a decrease of $16.6 million. The decrease reflected lower intra-group loan balances following settlement activity.
2017 versus 2016: Net foreign exchange losses were $4.2 million in 2017, compared to net gains of $0.2 million in 2016, a change of $4.4 million which primarily resulted from foreign exchange losses realized by certain of our Life subsidiaries whose functional currency is the Euro, and who were holding more U.S. dollar assets than U.S. dollar liabilities and who consequently recognized a foreign exchange loss at a time when the U.S. dollar depreciated against the Euro. We manage our foreign currency risk on a consolidated basis by seeking to match our liabilities that are payable in foreign currencies with assets that are denominated in such currencies.
For further information refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations" in the Consolidated Financial Statements within Item 8 of this Annual Report on Form 10-K.
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and cash equivalents and funds held. Investments consist primarily of investment grade, liquid, fixed maturity securities of short-to-medium duration, equities and other investments. Cash and cash equivalents and restricted cash and cash equivalents is comprised mainly of cash, high-grade fixed deposits, and other highly liquid instruments such as commercial paper with maturities of less than three months at the time of acquisition and money market funds. Funds held primarily consists of investment grade, liquid, fixed maturity securities of short-to-medium duration. Assets held-for-sale are excluded from our definition of investable assets.
Investable assets were $9.8 billion as at December 31, 2017 as compared to $8.4 billion as at December 31, 2016, an increase of 16.1%. The increase was primarily due to the investments and funds held balance acquired in relation to the QBE and RSA transactions.
We utilize and pay fees to various companies to provide investment advisory and/or management services. These fees, which are predominantly based upon the amount of assets under management, are included in net investment income. The total fees we paid to our investment managers for the year ended 2017 were $7.5 million, including $1.3 million to our largest single investment manager.
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015
We have audited the accompanying consolidated balance sheets of Enstar Group Limited and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017 and the related notes and financial statement schedules I to VI (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Enstar Group Limited ("Enstar") is a Bermuda-based holding company, formed in 2001. Enstar is a multi-faceted insurance group that offers innovative capital release solutions and specialty underwriting capabilities through its network of group companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations. Our ordinary shares are listed on the NASDAQ Global Select Market under the ticker symbol "ESGR". Unless the context indicates otherwise, the terms "Enstar," "we," "us" or "our" mean Enstar Group Limited and its consolidated subsidiaries and the term "Parent Company" means Enstar Group Limited and not any of its consolidated subsidiaries.
Non-life Run-off - This segment is comprised of the operations of our subsidiaries that are running off their property and casualty and other non-life business. It also includes our management business, which manages the run-off portfolios of third parties through our service companies.
Atrium - Atrium Underwriters Ltd. is a managing general agent at Lloyd’s of London ("Lloyd's"), which manages Syndicate 609. Through a corporate capital vehicle, Atrium 5 Ltd., we provide 25% of the syndicate’s underwriting capacity and capital (with the balance provided by traditional Lloyd’s Names). Atrium underwrites specialist marine, energy, aerospace, non-marine and liability classes.
Certain non-life contracts are retrospectively rated and provide for a final adjustment to the premium based on the final settlement of all losses. Premiums on such contracts are adjusted based upon contractual terms, and management judgment is involved with respect to the estimate of the amount of losses that we expect to incur. 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.
Acquisition costs, consisting principally of commissions and brokerage expenses and certain premium taxes and fees incurred at the time a contract or policy is issued and that vary with and are directly related to the successful efforts of acquiring new insurance contracts or renewing existing insurance contracts, are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable
value by line of business based on the related unearned premiums, anticipated claims and claim expenses and anticipated investment income.
Short-term investments comprise investments with a maturity greater than three months up to one year from the date of purchase. Fixed maturities comprise investments with a maturity of greater than one year from the date of purchase.
Short-term and fixed maturity investments classified as trading are carried at fair value, with realized and unrealized holding gains and losses included in net earnings and reported as net realized and unrealized gains and losses.
If we conclude that an investment is other-than-temporarily impaired ("OTTI"), then the difference between the fair value and the amortized cost of the investment is presented as an OTTI charge in the consolidated statements of earnings, with an offset for any non-credit related loss component of the OTTI charge to be recognized in other comprehensive income. Accordingly, only the credit loss component of the OTTI amount would have an impact on our earnings.
Cash equivalents includes all highly liquid debt instruments purchased with an original maturity of three months or less.
Under funds held arrangements, the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable are deducted. Funds held are shown under two categories on the consolidated balance sheets, where funds held upon which we receive the underlying portfolio economics are shown as "Funds held - directly managed", and funds held where we receive a fixed crediting rate are shown as "Funds held by reinsured companies". Funds held by reinsured
Certain of our funds held arrangements also contain embedded derivatives as described above and which are carried at fair value.
Certain of our subsidiaries and branches operate in jurisdictions where they are subject to taxation. Current and deferred income taxes are charged or credited to net income, or, in certain cases, to accumulated other comprehensive income, based upon enacted tax laws and rates applicable in the relevant jurisdiction in the period in which the tax becomes accruable or realizable. Deferred income taxes are provided for all temporary differences between the bases of assets and liabilities used in the financial statements and those used in the various jurisdictional tax returns. When our assessment indicates that it is more likely than not that all or some portion of deferred income tax assets will not be realized, a valuation allowance is recorded against the deferred tax assets.
Basic earnings per share is based on the weighted average number of ordinary shares outstanding and excludes potentially dilutive securities such as restricted shares, restricted share units, warrants, options and convertible securities. Diluted earnings per share is based on the weighted average number of ordinary and ordinary share equivalents outstanding calculated using the treasury stock method for all potentially dilutive securities. When the effect of dilutive securities would be anti-dilutive, these securities are excluded from the calculation of diluted earnings per share.
The difference between the original carrying value of reinsurance liabilities and reinsurance assets acquired at the date of acquisition and their fair value is recorded as an intangible asset or other liability, which we refer to as the fair value adjustment ("FVA"). The FVA is amortized over the estimated payout period of outstanding losses and loss expenses acquired. To the extent the actual payout experience after the acquisition is materially faster or slower than anticipated at the time of the acquisition, there is an adjustment to the estimated ultimate loss reserves, or there are changes in bad debt provisions or in estimates of future run-off costs following accelerated payouts, then the amortization of the FVA is adjusted to reflect such changes.
In our Non-life Run-off segment we have elected to apply the fair value option for certain loss portfolio transfer reinsurance transactions. This is an irrevocable election that applies to all balances under the insurance contract, including funds held assets, reinsurance balances recoverable, and the liability for losses and loss adjustment expenses.
Direct internal and external costs to acquire or develop internal-use software have been capitalized. We only capitalize costs incurred after the preliminary project stage has been completed, and when management has authorized and committed to funding the project and it is probable that the project will be completed and the software will be used to perform the functions intended. Capitalized costs related to internal-use software are amortized on a straight-line basis over the estimated useful lives of the assets. These capitalized costs are also assessed for impairment when impairment indicators exist.
We report a business as held-for-sale when certain criteria are met which include, (1) management either approving the sale or receiving approval to sell the business and is committed to a formal plan to sell the business, (2) the business is available for immediate sale in its present condition, (3) the business is being actively marketed for sale at a price that is reasonable in relation to its current fair value, (4) the sale is anticipated to occur during the next 12 months, among other specified criteria. A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less costs to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Assets and liabilities related to the businesses classified as held-for-sale are separately reported in our Consolidated Balance Sheets beginning in the period in which the business is classified as held-for-sale. Refer to Note 5 for further information regarding our held-for-sale business. The Pavonia business was also classified as a discontinued operation whose results were aggregated and presented within one line in the consolidated statements of earnings.
In August 2017, the Financial Accounting Standards Board (the "FASB") issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification (“ASC”) 815 -
In March 2017, the FASB issued ASU 2017-08, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, which simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. We early adopted this guidance and that adoption did not have an impact on our consolidated financial statements and disclosures.
ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting
In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU’s amendments are effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements and disclosures.
We expect to adopt the new guidance on January 1, 2020 and upon adoption the OTTI approach we currently use for our available-for-sale securities whereby any credit losses are presented as write-downs on individual securities will be replaced by an approach whereby any credit losses are instead presented as an allowance against each security. This revised approach records the full effect of reversals of any credit losses in current period earnings, compared to current U.S. GAAP which amortizes the reversal of credit losses over the lifetime of the security. The length of time an available for sale security has been in an unrealized loss position will no longer be considered in determining whether to record a credit loss. In addition, the historical and implied volatility of the fair value of an available for sale security and recoveries or declines in fair value after the balance sheet date will no longer be considered when making a determination of whether a credit loss exists. For our reinsurance balances recoverable, the ASU will require us to determine a provision for credit losses associated with our reinsurers based on an “expected loss” approach which will likely differ from the provisions for uncollectible reinsurance balances recoverable that we have currently recorded, based on the “incurred loss” approach under existing guidance. We are continuing to review all our financial instruments as well as assets that are subject to credit risk, primarily our reinsurance balance recoverables and available-for-sale debt securities to determine the provisions for credit losses on the instruments and to quantify the impact of adopting the “expected loss” approach required by the ASU.
We expect to adopt the new standard on January 1, 2019 and will recognize and measure our leasing arrangements at the beginning of the earliest period presented using the modified retrospective approach permitted by the ASU. The modified retrospective approach includes a number of specific optional practical expedients which we intend to elect on adoption of the ASU, relating to, (1) the identification and classification of leases that commenced before the effective date, (2) initial direct costs for leases that commenced before the effective date, and (3) the ability to use hindsight in evaluating lessee options to extend or terminate a lease. The election of these practical expedients will allow us to in effect, continue to account for leases that commence before the effective date in accordance with the previous U.S. GAAP unless the lease is modified. The only exception would be that we will be required to recognize a right-of-use asset and a lease liability for all our existing operating leases at each reporting date based on the present value of the remaining minimum lease rental payments that we are disclosing under current U.S. GAAP.
Based on our current review, while the ASU will impact the financial liabilities that we have assumed through loss portfolio transfer reinsurance agreements for which we have elected the fair value option, substantially all of our assets are not within the scope of the new guidance. We expect to adopt this guidance on January 1, 2018 using the modified retrospective approach, however we do not expect that adoption to have a material impact on our consolidated financial statements and related disclosures.
The analysis of our current sources of revenues indicates that substantially all of our revenues are from sources that are within the scope of other FASB topics, primarily ASC 944 - Insurance, and therefore are excluded from the scope of the revenue recognition standard. For those revenue sources within the scope of the revenue recognition standard such as fees earned under consulting arrangements with third- party clients, which are however not material, there are no significant changes in the timing or measurement of those revenues based upon the provisions of the new revenue recognition guidance. Therefore, since substantially all of our revenue sources are excluded from the scope of the new revenue recognition standard, we do not anticipate the adoption of the new guidance to have a material impact on our consolidated financial statements and related disclosures.
From the date of acquisition to December 31, 2016, we did not record any earnings from Dana Companies.
On November 13, 2015, we completed the acquisition of Nationale Suisse Assurance S.A. ("NSA"). We changed the name of NSA to Alpha Insurance SA ("Alpha") at closing and placed the company into run-off. Alpha is a Belgium-based composite insurance company that wrote both non-life and life insurance that we are now operating as part of our non-life run-off segment and other activities, respectively.
From the date of acquisition to December 31, 2015, we earned premiums of $nil, recorded net incurred losses and LAE of $nil on those earned premiums, and recorded $0.1 million in net losses attributable to Enstar Group Limited related to Alpha’s business.
The total consideration for the transaction was $173.1 million, paid in two installments. The first installment of $89.1 million was paid on closing. The second installment of $83.9 million was paid on the first anniversary of closing. The companies are operating as part of our other activities.
Canada Pension Plan Investment Board ("CPPIB"), together with management of Wilton Re, owns 100% of the common stock of Wilton Re. Subsequent to the closing of our transaction with Wilton Re, CPPIB separately acquired certain of our voting and non-voting ordinary shares in several third party transactions during 2015 and 2016, as described in Note 21 - "Related Party Transactions" .
The following unaudited pro forma condensed combined statement of earnings for the year ended December 31, 2015 combines our historical consolidated statements of earnings with those of Sussex, Alpha and Wilton Re, giving effect to the business combinations and related transactions as if they had occurred on January 1, 2015. For the year ended December 31, 2015, the operating results of Sussex, Alpha and Wilton Re have been included in the consolidated financial statements from each of their respective dates of acquisition. The unaudited pro forma financial information presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions of Sussex, Alpha and Wilton Re and related transactions had taken place at the beginning of each period presented, nor is it indicative of future results.
On December 23, 2015, we completed a corporate reorganization of certain of our subsidiary holding companies. Following the reorganization, StarStone Holdings and Northshore are owned by a common parent, North Bay Holdings Limited ("North Bay"), as described in Note 16 - "Noncontrolling Interest".
On February 22, 2018, we entered into an agreement with an Australia subsidiary of Zurich Insurance Group ("Zurich") to reinsure its New South Wales Vehicle Compulsory Third Party ("CTP") insurance business. Under the agreement, which is effective as of January 1, 2018, we will assume gross reinsurance reserves of approximately AUD$350 million (approximately $275.0 million).
On January 29, 2018, we entered into an RITC transaction with AXIS Managing Agency Limited, under which we will reinsure to close the 2015 and prior underwriting years of account of Novae Syndicate 2007. We will assume gross reserves of approximately £840.0 million (approximately $1.1 billion) relating to the portfolio or net reinsurance reserves of approximately £600.0 million (approximately $811.0 million) for cash consideration equal to the net amount assumed.
On February 7, 2017, we entered into an agreement to reinsure the U.K. employers' liability legacy business of RSA Insurance Group PLC ("RSA"). Pursuant to the transaction, our subsidiary assumed gross insurance reserves of £1,046.4 million ($1,301.8 million), relating to 2005 and prior year business. Net insurance reserves assumed were £927.5 million ($1,153.9 million) and the reinsurance premium received was £801.6 million ($997.2 million). We elected the fair value option for this reinsurance contract. The initial fair value adjustment on the gross reserves was $174.1 million, and on the net reserves was $156.7 million. Refer to Note 8 - "Fair Value Measurements" for a description of the fair value process and assumptions.
On February 17, 2016, we entered into a reinsurance agreement with Allianz to reinsure portfolios of Allianz's run-off business. Pursuant to the reinsurance agreement, our subsidiary reinsured 50% of certain portfolios of workers' compensation, construction defect, and asbestos, pollution, and toxic tort business originally held by Fireman's Fund Insurance Company, and in the process assumed net reinsurance reserves of $1.1 billion. Affiliates of Allianz retained $1.1 billion of reinsurance premium as funds withheld collateral for the obligations of our subsidiary under the reinsurance agreement and we transferred $110.0 million to a reinsurance trust to further support our subsidiary's obligations. We have also provided a limited parental guarantee, which is subject to a maximum cap. The combined monetary total of the support offered by us through the trust and parental guarantee was initially be capped at $270.0 million.
In addition to the reinsurance transaction described above, we have entered into a consulting agreement with San Francisco Reinsurance Company, an affiliate of Allianz, with respect to the entire $2.2 billion portfolio, including the 50% share retained by affiliates of Allianz.
On May 27, 2015, we entered into two 100% reinsurance agreements and related administration services agreements with a subsidiary of Voya, pursuant to which we reinsured all of the run-off workers' compensation and occupational accident assumed reinsurance business of the Voya subsidiary and that of its Canadian branch. Pursuant to the transaction, the Voya subsidiary transferred assets into two reinsurance collateral trusts securing our obligations under the reinsurance agreements. We assumed reinsurance reserves of $572.4 million, received total assets of $307.0 million and recorded a deferred charge of $265.4 million, included in other assets. We transferred $67.2 million of additional funds to the trusts to further support our obligations under the reinsurance agreements. We provided a limited parental guarantee, subject to a maximum cap with respect to the reinsurance liabilities. As of December 31, 2017, the amount of the parental guarantee was $129.1 million.
On January 15, 2015, we completed a loss portfolio transfer reinsurance transaction with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers' compensation business that has been in run-off since 2003. The total insurance reserves assumed were $162.1 million with an equivalent amount of cash and investments received as consideration.
Pavonia was a substantial portion of our previously reported Life and Annuities segment. We have classified the assets and liabilities of the remaining businesses to be sold in the second closing as held-for-sale as at December 31, 2017. The following table summarizes the components of assets and liabilities held-for-sale on our consolidated balance sheet as at December 31, 2017 and 2016 in relation to Pavonia:
The Pavonia business qualified as a discontinued operation. The following table summarizes the components of net earnings (losses) from discontinued operations on the consolidated statements of earnings for the years ended December 31, 2017, 2016 and 2015:
The cash, cash equivalents and restricted cash carried on the balance sheet of Pavonia on December 29, 2017 were $135.1 million, as at the date of disposal.
On August 29, 2017, we closed the previously-announced sale of our wholly-owned subsidiary Laguna Life DAC (“Laguna”) to a subsidiary of Monument Insurance Group Limited ("Monument"), for a total consideration of €25.6 million (approximately $30.8 million). We have an investment in Monument, as described further in Note 21 - "Related Party Transactions". Laguna was classified as held-for-sale during 2017 prior to its sale.
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair value; (ii) available-for-sale portfolios of fixed maturity and short-term investments carried at fair value; and (iii) other investments carried at either fair value or cost.
Included within residential and commercial mortgage-backed securities as at December 31, 2017 were securities issued by U.S. governmental agencies with a fair value of $152.4 million (as at December 31, 2016: $362.9 million). Included within corporate securities as at December 31, 2017 were senior secured loans of $68.9 million (as at December 31, 2016: $90.7 million).
The amortized cost and fair values of our fixed maturity and short-term investments classified as available-for-sale were as follows:
The contractual maturities of our fixed maturity and short-term investments classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As at December 31, 2017 and December 31, 2016, the number of securities classified as available-for-sale in an unrealized loss position was 96 and 156, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 37 and 41, respectively.
For the years ended December 31, 2017, 2016 and 2015, we did not recognize any other-than-temporary impairment losses on our available-for-sale securities. We determined that no credit losses existed as at December 31, 2017 and 2016. A description of our other-than-temporary impairment process is included in Note 2 - "Significant Accounting Policies". There were no changes to our process in the years ended December 31, 2017 and 2016.
The following table sets forth the credit ratings of our fixed maturity and short-term investments as of December 31, 2017:
Private equities and private equity funds invest primarily in the financial services industry. All of our investments in private equities and private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates of our initial investments.
Private credit funds invest in direct senior or collateralized loans. The investments are subject to restrictions on redemption and sales that are determined by the governing documents and limit our ability to liquidate our positions in the funds.
Remaining life expectancy for year 0-1 in the table above references policies whose current life expectancy is less than 12 months as of the reporting date. Remaining life expectancy is not an indication of expected maturity. Actual maturity in any category above may vary significantly (either earlier or later) from the remaining life expectancies reported.
Major categories of net investment income for the years ended December 31, 2017, 2016 and 2015 are summarized as follows:
Components of net realized and unrealized gains (losses) for the years ended December 31, 2017, 2016 and 2015 were as follows:
We are required to maintain investments and cash and cash equivalents on deposit to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. We also utilize trust accounts to collateralize business with our insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of our restricted assets, including restricted cash of $257.7 million and $363.8 million, as of December 31, 2017 and 2016, respectively, was as follows:
(1) Our underwriting businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has a loss that cannot be funded from other sources. As at December 31, 2017, our combined Funds at Lloyd's were comprised of cash and investments of $234.8 million and unsecured letters of credit of $165.0 million. At December 31, 2017, we had an unsecured letter of credit agreement for Funds at Lloyd’s purposes ("FAL Facility") to issue up to $165.0 million of letters of credit, with a provision to increase the facility up to $200.0 million. On February 8, 2018, we amended and restated the FAL Facility to issue up to $325.0 million of letters of credit, with a provision to increase the facility up to $400.0 million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and expires in 2022.
The increase in the collateral in trust for third-party agreements was primarily due to the loss portfolio transfer reinsurance transactions with RSA and QBE described in Note 4 - "Significant New Business".
The funds held balance in relation to the Allianz transaction, described in Note 4 - "Significant New Business", moved from a fixed crediting rate to a variable rate of return on the underlying investments on October 1, 2016. This variable return reflects the economics of the investment portfolio underlying the funds held asset and qualifies as an embedded derivative. We have recorded the aggregate of the funds held, typically held at cost, and the embedded derivative as a single amount in our consolidated balance sheet. As at December 31, 2017 and 2016, the funds held at cost had a carrying value of $994.8 million and $1,023.0 million, respectively, and the embedded derivative had a fair value of $4.7 million and ($28.3) million, respectively, the aggregate of which was $999.5 million and $994.7 million, respectively, as included in the table below.
The funds held balance in relation to the QBE reinsurance transaction described in Note 4 - "Significant New Business", for which we elected the fair value option.
Major categories of net investment income underlying the funds held - directly managed account for the year ended December 31, 2017 and 2016 are summarized as follows:
Net Realized Gains (Losses) and Change in Fair Value due to Embedded Derivative and Fair Value Option
In addition, certain of our other investments are measured at fair value using net asset value ("NAV") per share (or its equivalent) as a practical expedient and have not been classified within the fair value hierarchy above. We have categorized our investments that are recorded at fair value on a recurring basis among levels based on the observability of inputs, or at fair value using NAV per share (or its equivalent) as follows:
Our investments in equities are predominantly traded on the major exchanges and are primarily managed by our external advisors. We use an internationally recognized pricing service to estimate the fair value of our equities. Our equities are widely diversified and there is no significant concentration in any specific industry.
For our investments in private equities and private equity funds, we measure fair value by obtaining the most recently available NAV from the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
For our investments in fixed income hedge funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase or decrease in either of these significant inputs in isolation would result in lower or higher fair value estimates for direct investments in CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less subjective inputs because they are based on the historical average of actual spreads and the weighted-average life of the current underlying portfolios, respectively. A significant increase or decrease in either of these significant inputs in isolation would
If valuations from the external CLO equity manager or brokers are not available, we use an income approach based on certain observable and unobservable inputs to value these investments. An income approach is also used to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income approach is followed, the valuation is based on available trade information, such as expected cash flows and market assumptions on default and loss severity rates. Other inputs used in the valuation process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates.
The fair values of our foreign currency exchange contracts, as described in Note 9 - "Derivative Instruments" are classified as Level 2. The fair values are based upon prices in active markets for identical contracts.
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 years ended December 31, 2017 and 2016:
The following table presents a reconciliation of the beginning and ending balances for all insurance contracts measured at fair value on a recurring basis using Level 3 inputs during the year ended December 31, 2017:
Below is a summary of the quantitative information regarding the significant observable and unobservable inputs used in the internal model to determine fair value on a recurring basis as at December 31, 2017:
An increase in the corporate bond rate or credit spread for non-performance risk would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a decrease in the corporate bond rate or credit spread for non-performance risk would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
An increase in the risk cost of capital would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a decrease in the risk cost of capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
An acceleration of the estimated payment pattern would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a deceleration of the estimated payment pattern would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
In addition, the estimate of the capital required to support the liabilities is based upon current industry standards for capital adequacy. If the required capital per unit of risk increases, then the fair value of the liability for losses and LAE and reinsurance balances recoverable would increase. Conversely, a decrease in required capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
As of December 31, 2017, our 4.5% Senior Notes due 2022 had a carrying value of $347.5 million while the fair value based on observable market pricing from a third party service was $357.4 million. The fair value is classified as Level 2.
The following table presents the amounts of the net gains and losses deferred in the currency translation adjustment ("CTA") account, which is a component of AOCI, in shareholders' equity, related to our qualifying foreign currency forward exchange rate contracts for the years ended December 31, 2017 and 2016:
The following table presents the gross notional amounts, estimated fair values recorded within other assets and liabilities and the amounts included in net earnings related to our non-qualifying foreign currency forward exchange rate hedging relationships as at December 31, 2017.
There were no such non-qualifying foreign currency forward contracts utilized as at December 31, 2016 or during the years ended December 31, 2016 and 2015.
During the year ended December 31, 2016 we purchased call options on equities at a cost of $5.5 million and sold these for a realized gain of $5.4 million. We did not have any equity derivative instruments as at or during the year ended December 31, 2017.
The following table shows our reinsurance balances recoverable by rating of reinsurer and our provisions for uncollectible reinsurance balances recoverable ("provisions for bad debt") as at December 31, 2017 and 2016. The provisions for bad debt all relate to the Non-life Run-off segment.
The overall increase in the liability for losses and LAE between December 31, 2016 and December 31, 2017 was primarily attributable to the assumed reinsurance agreements with RSA and QBE in our Non-life Run-off segment, for which we have elected the fair value option, as described in Note 4 - "Significant New Business".
The table below provides a consolidated reconciliation of the beginning and ending liability for losses and LAE for the years ended December 31, 2017, 2016 and 2015:
Case reserves are recognized for known claims (including the cost of related litigation) when sufficient information has been reported to us to indicate the involvement of a specific insurance policy. We use considerable judgment in estimating losses for reported claims on an individual claim basis based upon our knowledge of the circumstances surrounding the claim, the severity of the injury or damage, the jurisdiction of the occurrence, the potential for ultimate exposure, the type of loss, and our experience with the line of business and policy provisions relating to the particular type of claim. The reserves for unpaid reported losses and LAE are established by management based on reports from brokers, ceding companies and insureds and represent the estimated ultimate cost of events or conditions that have been reported to, or specifically identified, by us. We also consider facts currently known and the current state of the law and coverage litigation.
With the exception of our Atrium segment, the loss development tables disclosed below are presented by line of business for our Non-life Run-off and StarStone segments as follows:
Certain lines of business within our Non-Life Run-off segment were not included within the loss development disclosures presented below due to the following reasons:
The incurred loss triangle includes both reported case reserves and IBNR liabilities, as well as cumulative paid losses;
Both the incurred and cumulative paid loss triangles include allocated loss adjustment expense (i.e. claims handling costs allocated to specific individual claims) but exclude unallocated loss adjustment expenses (i.e. the costs associated with internal claims staff and third party administrators as well as consultants that cannot be allocated to specific individual claims);
The amounts included within the loss triangles for the years ended December 31, 2008 through to December 31, 2016, (April 1, 2014 through to December 31, 2016 in the case of StarStone since its date of acquisition), as well as the historical average annual percentage payout ratios as of December 31, 2017 are presented as supplementary information and are therefore unaudited;
Establishing an estimate for loss reserves requires the incorporation of various assumptions and judgment, therefore, the information contained within the loss development disclosures below only allows readers or users of our consolidated financial statements to understand, at the summary level presented in the development tables, the change over time in our reported incurred loss estimates as well as the nature and patterns of the cash flows associated with those estimates. We, therefore, believe that the information provided within the loss development tables disclosed below is of limited use for independent analysis or application of standard actuarial estimations, and any results obtained from doing so should be interpreted with caution. For a more detailed discussion on how our loss reserve estimates are established, refer to the discussion on “Losses and Loss Adjustment Expenses” within our Critical Accounting Policies.
responsible for the payment of losses within the deductible layer. Individual claim counts related to certain assumed reinsurance contracts such as excess-of-loss and quota share treaties are not available to us, and the losses arising from these treaties have been treated as single claims for the purposes of determining claim counts. Therefore, each treaty year within the reinsurance contract is deemed a single claim because the detailed underlying individual claim information is generally not reported to us by our cedents; and
Net change in case and LAE reserves comprises the movement during the year 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 IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
The reduction in estimates of net ultimate losses relating to prior periods of $181.3 million comprised reductions in IBNR reserves of $393.1 million, partially offset by net incurred loss development of $211.8 million, which includes amortization of deferred charges of $14.4 million. The decrease in the estimate of net IBNR reserves of $393.1 million (compared to $349.7 million during the year ended December 31, 2016), was comprised of a decrease of $70.0 million relating to asbestos liabilities (compared to an increase of $39.4 million in 2016), a decrease of $7.5 million relating to environmental liabilities (compared to an increase $35.5 million in 2016), a decrease of $7.2 million relating to general casualty liabilities (compared to $0.8 million in 2016), a decrease of $156.2 million relating to workers' compensation liabilities (compared to $333.2 million in 2016) and a decrease of $152.2 million relating to all other remaining liabilities (compared to $90.6 million in 2016).
The net reduction in incurred losses and LAE for the year ended December 31, 2016 of $285.9 million included current period net incurred losses and LAE of $5.8 million related to current period net earned premium of $7.1 million (primarily for the portion of the run-off business acquired with Sussex). Excluding current period net losses and LAE of $5.8 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $291.7 million, which was attributable to a reduction in estimates of net ultimate losses of $259.1 million, reduction in provisions for bad debt of $13.8 million and a reduction in provision for unallocated LAE of $44.2 million, relating to 2016 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $25.4 million.
The reduction in net IBNR reserves of $349.7 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 56 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2016, 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 $608.2 million for net paid losses of $529.9 million related to the settlement of non-commuted losses in the year and 56 commutations and policy buy-backs of assumed and ceded exposures. Net advised case and LAE reserves settled by way of commutation and policy buy-back during the year ended December 31, 2016 amounted to $14.7 million (comprising $39.1 million of assumed case reserves and LAE reserves, partially offset by $24.4 million of ceded incurred reinsurance recoverable case reserves).
The reduction in provisions for bad debt of $13.8 million was a result of the collection of certain reinsurance recoverables against which bad debt provisions had been provided in earlier periods, and the reduction in bad debt provisions for insolvent reinsurers as a result of distributions received and the reduction of specific provisions held for potential disputes with reinsurers.
The reduction in net IBNR reserves of $377.7 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 79 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2015, 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 $366.3 million for net paid losses of $501.2 million related to the settlement of non-commuted losses in the year and 79 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of two of our top ten assumed exposures and one of our top ten ceded recoverables as at January 1, 2014). Net advised case and LAE reserves settled by way of commutation and policy buy-back during the year ended December 31, 2015 amounted to $56.6 million (comprising $140.3 million of assumed case reserves and LAE reserves partially offset by $83.7 million of ceded incurred reinsurance recoverable case reserves).
The following tables provides a breakdown of the gross and net losses and LAE reserves by line of business as at December 31, 2017 and 2016:
Our non-life run-off segment is unique within the insurance industry in that legacy reserves are continuously being acquired and added to this segment through business acquisitions or through retroactive reinsurance agreements. The loss development tables within this segment include actual loss development as well as the effects of integrating newly acquired reserves. Accordingly, it would not be appropriate to extrapolate redundancies or deficiencies into the future or to infer actual historical accident year development information from the loss development tables provided below. Acquired reserves arising from business acquisitions are presented on a full retrospective basis. Assumed reserves arising from retroactive reinsurance transactions are presented as follows: (i) unpaid reported losses are shown on a full retrospective basis, and (ii) assumed IBNR is shown on a prospective basis as historical IBNR is generally not available to us in these transactions. This presentation approach therefore distorts the loss development trends in the specific years in which these retroactive reinsurance transactions are completed. We have however disclosed additional development tables as appropriate to show the take-on IBNR reserves that we have assumed through the retroactive reinsurance agreements that we have completed in each calendar year, for the lines of business presented below.
Net incurred losses and LAE in the Atrium segment for the years ended December 31, 2017, 2016 and 2015 were as follows:
The following table provides a breakdown of the liability for losses and LAE by line of business for the years ended December 31, 2017 and 2016 for the Atrium segment:
The Atrium segment comprises only 3% of the total consolidated liability for losses and LAE as at December 31, 2017 and therefore has not been disaggregated further for purposes of presenting the accident year disclosures below.
Net incurred losses and LAE for the years ended December 31, 2017, 2016 and 2015 were as follows:
We have acquired long duration contracts that subject us to mortality, longevity and morbidity risks and which are accounted for as life and annuity premiums earned. Life benefit reserves are established using assumptions for investment yields, mortality, morbidity, lapse and expenses, including a provision for adverse deviation. We establish and review our life reserves regularly based upon cash flow projections. We establish and maintain our life reinsurance 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. Refer to Note 2 - "Significant Accounting Policies" - (d) Policy Benefits for Life and Annuity Contracts" for a description of the assumptions used and the process for establishing our assumptions and estimates. Policy benefits for life contracts as at December 31, 2017 and 2016 were $117.2 million and $112.1 million, respectively.
The following tables present a reconciliation of the beginning and ending goodwill, intangible assets and deferred charges for the years ended December 31, 2017 and 2016:
Goodwill as at December 31, 2017 and 2016, related to Non-life Run-off, Atrium and StarStone, was $21.2 million, $38.9 million and $13.0 million, respectively. For the year ended December 31, 2017, we completed our assessment for impairment of goodwill and concluded that there had been no impairment of our carried goodwill amount.
Intangible assets with a definite life - fair value adjustments ("FVA") relates to outstanding losses and LAE, unearned premiums, other liabilities, reinsurance recoverables and other assets from acquisitions of companies. These are included as a component of each balance sheet item. FVA are amortized in proportion to the recovery period for outstanding losses and LAE and reinsurance recoverables and as the unearned premiums expire for business in-force as of the acquisition date. Intangible asset amortization (accretion) of fair value adjustments for the years ended December 31, 2017, 2016 and 2015 was $5.7 million, $19.0 million and $(5.6) million, respectively. The FVA acquired during the year ended December 31, 2017 related to the acquisition of some small U.S. companies.
Interest is payable at least every six months at a LIBOR rate plus a margin and utilization fee as set forth in the credit facility agreement. The margin could vary based upon any change in our long term senior unsecured debt rating assigned by Standard & Poor’s Ratings Services or Fitch Ratings Ltd. We also pay a commitment fee for any unutilized portion of the facility. In the event of default, the interest rate may increase and the agent may cancel lender commitments and may demand early repayment.
As at December 31, 2017 and December 31, 2016, there were borrowings of €50.0 million (approximately $60.1 million) and €75.0 million (approximately $88.5 million), respectively, under the facility that were designated as non-derivative hedges of our net investment in certain subsidiaries whose functional currency is denominated in Euros. The foreign exchange effect of revaluing these Euro borrowings resulted in a loss of $9.4 million and a gain of $6.0 million recognized in the currency translation adjustment within accumulated other comprehensive income (loss) for the years ended December 31, 2017 and 2016, respectively. These amounts were offset against equivalent amounts recognized upon the translation of those subsidiaries' financial statements from their Euro-denominated functional currency into U.S. dollars. There were no ineffective portions of the net investment hedge during the year ended December 31, 2017 and 2016. During the year ended December 31, 2017, we repaid €25.0 million (approximately $29.5 million) of the non-derivative hedge and reclassified the related foreign exchange losses of $1.1 million previously deferred in CTA within accumulated other comprehensive income (loss) into earnings.
Redeemable noncontrolling interest ("RNCI") as of December 31, 2017 comprises the ownership interest held by Trident (39.3%) and Dowling (1.7%) in North Bay Holdings Limited ("North Bay"). On December 23, 2015, we completed a corporate reorganization of certain of our subsidiary holding companies. Following the reorganization, StarStone Holdings, Northshore and all of the interests in a segregated cell of one of our non-life run-off subsidiaries that reinsured all of StarStone’s non-life run-off reserves with effect from January 1, 2014 are owned by a common parent, North Bay. Northshore owns 100% of Atrium and Arden. StarStone Holdings owns 100% of StarStone.
The following is a reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI for the years ended December 31, 2017 and 2016:
The Non-Voting Ordinary Shares are comprised of several different series as of December 31, 2017:
the Series B and Series D shares were created in connection with the 2011 investment transactions, but no shares in these series are issued and outstanding. Holders of the Series C shares have the right to convert such shares, on a share-for-share basis, subject to certain adjustments, into Series D shares at their option.
Employee share awards have been granted under the 2016 and 2006 Equity Incentive Plans.
The following table summarizes the activity related to PSUs during 2017:
Compensation costs of $5.8 million, $nil and $nil relating to these share awards were recognized in our statement of earnings for the years ended December 31, 2017, 2016 and 2015, respectively. The unrecognized compensation cost related to our non-vested share awards as at December 31, 2017 was $18.0 million. This cost is expected to be recognized over the next 2.3 years, which is the weighted average contractual life of the awards.
(1) The aggregate intrinsic value is calculated as the pre-tax difference between the exercise price of the underlying share awards and the closing price per share of our ordinary shares of $200.75 on December 31, 2017.
Compensation expense for SARs is based on the estimated fair value on the date of grant using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, expected term, expected dividend yield and risk-free interest rate. SARs are liability-classified awards for which compensation expense and the liability are re-measured using the then-current Black Scholes assumptions at each interim reporting date based upon the portion of the requisite service period rendered. Compensation costs of $8.9 million, $35.6 million and $8.9 million relating to these share awards were recognized in our statement of earnings for
the years ended December 31, 2017, 2016 and 2015, respectively. The unrecognized compensation cost related to our SARs as at December 31, 2017 was $0.2 million. This cost is expected to be recognized over the next 0.61 years, which is the weighted-average remaining vesting term of the awards.
Our subsidiary, Northshore, has long-term incentive plans that award time-based restricted shares of Northshore to certain Atrium employees. Shares generally vest over two to three years. These share awards have been classified as liability awards. For the years ended December 31, 2017, 2016 and 2015, compensation costs of $3.2 million, $2.8 million and $3.9 million, respectively, relating to the long-term incentive plans were recorded in our consolidated statement of earnings. The unrecognized compensation cost related to the Northshore incentive plan at December 31, 2017 was $5.4 million. This cost is expected to be recognized over the next 1.87 years, which is the weighted average contractual life of the awards.
During the year ended December 31, 2015, 2,393 restricted share units previously credited to the accounts of two directors under the Deferred Compensation Plan were converted into ordinary shares following their resignations.
other comprehensive loss in shareholders' equity. During 2017, an actuarial review was performed, which determined that the plan’s unfunded liability, as at December 31, 2017, was $9.4 million as compared to $10.3 million as at December 31, 2016. As at December 31, 2017 and 2016, we had an accrued liability of $9.4 million and $10.3 million, respectively, for this plan.
We have foreign operating subsidiaries and branch operations principally located in the United States, United Kingdom, Continental Europe and Australia that are subject to federal, foreign, state and local taxes in those jurisdictions. Deferred income tax liabilities have not been accrued with respect to the undistributed earnings of our foreign subsidiaries. If the earnings were to be distributed, as dividends or other distributions, withholding taxes may be imposed by the jurisdiction of the paying subsidiary. For our U.S. subsidiaries, we have not currently accrued any withholding taxes with respect to unremitted earnings as management has no current intention of remitting these earnings. For our United Kingdom subsidiaries, there are no withholding taxes imposed. For our other foreign subsidiaries, it would not be practicable to compute such amounts due to a variety of factors, including the amount, timing, and manner of any repatriation. Because we operate in many jurisdictions, our net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which we operate.
Deferred tax assets and liabilities reflect the tax effect of the differences between the financial reporting and income tax bases of assets and liabilities. Significant components of the deferred tax assets and deferred tax liabilities related to our continuing operations were as follows:
As of December 31, 2017 and 2016, we had deferred tax asset valuation allowances of $188.3 million and $290.9 million, respectively, related to foreign subsidiaries. We recorded a reduction of $102.6 million in our deferred tax valuation allowance for continuing operations during 2017. The valuation allowance was decreased in relation to (i) the decrease of the deferred tax asset due to the reduction in the U.S. income tax rate from 35% to 21%, (ii) the current year utilization of deferred tax assets, partially offset by an increase relating to deferred tax assets for which we have deemed are not likely to be realized.
During the years ended December 31, 2017, 2016 and 2015, there were no unrecognized tax benefits. There were no accruals for the payment of interest and penalties related to unrecognized tax benefits as at December 31, 2017, 2016 and 2015.
We have a separate account managed by Sound Point Capital, with a balance of $63.6 million and $61.2 million as at December 31, 2017 and 2016, respectively, with respect to which we incurred approximately $0.3 million in management fees for each of the years ended December 31, 2017 and 2016.
CPPIB, together with management of Wilton Re, owns 100% of the common stock of Wilton Re. Subsequent to the closing of our transaction with Wilton Re, as described in Note 3 - "Acquisitions", CPPIB purchased voting and non-voting shares in Enstar from FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII-A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. On September 29, 2015, CPPIB exercised its acquired right to appoint a representative, Poul Winslow, to our Board of Directors. During November 2016, CPPIB acquired additional non-voting shares in Enstar from Goldman Sachs affiliates in a private transaction. Following this transaction, CPPIB's shares constitute an approximate 9.1% voting interest and an approximate 16% aggregate economic interest in Enstar. In addition, approximately 4.5% of our voting shares (constituting an aggregate economic interest of approximately 3.8%) are held indirectly by CPPIB through CPPIB Epsilon Ontario Limited Partnership ("CPPIB LP"). CPPIB is the sole limited partner of CPPIB LP, and CPPIB Epsilon Ontario Trust ("CPPIB Trust") is the general partner. CPPIB's director representative is a trustee of CPPIB Trust.
We also have a pre-existing reinsurance recoverable from a company later acquired by Wilton Re, which was carried on our balance sheet at $7.0 million and $9.4 million as of December 31, 2017 and December 31, 2016, respectively.
On December 15, 2016, our equity method investee, KaylaRe Holdings Ltd. ("KaylaRe") completed an initial capital raise of $620.0 million. As of December 31, 2017, we have an approximate 48.2% ownership interest in KaylaRe. We have recorded the investment in KaylaRe using the equity method basis of accounting, pursuant to the conclusion that we are not required to consolidate following an analysis based on the guidance in ASC 810 - Consolidation. Our investment in KaylaRe was carried at $309.8 million and $294.6 million in other assets on our consolidated balance sheet as at December 31, 2017 and December 31, 2016, respectively.
Subsequent to December 31, 2017, we announced that we have entered into an agreement to purchase the remaining 51.8% of KaylaRe from the existing shareholders. In exchange for the shareholdings in KaylaRe, we will issue $398.3 million of ordinary shares. In the transaction, Hillhouse will increase its overall economic interest in Enstar from 9.98% to 17.1% and its voting interest from 3.2% to 9.7%, and Stone Point will increase its economic interest from 6.9% to 7.6% and its voting interest from 8.2% to 9.1%. In addition, the shareholders agreement described above among Enstar and the other KaylaRe shareholders will be effectively terminated. The transaction is subject to regulatory approval and is expected to close during the first quarter of 2018.
Our subsidiary, Enstar Limited, acts as insurance and reinsurance manager to KaylaRe's subsidiary, KaylaRe Ltd., for which it received fee income of $8.7 million during the year ended December 31, 2017 (2016: $6.8 million). Affiliates of Enstar have also entered into various reinsurance agreements with KaylaRe Ltd., and KaylaRe Ltd. will also have the opportunity to participate in future Enstar legacy transactions. We also provide administrative services to KaylaRe and KaylaRe Ltd.
Through a Quota Share Agreement dated December 31, 2017 (the "KaylaRe-StarStone QS"), several of our StarStone affiliates have entered into a Quota Share Treaty with KaylaRe Ltd. pursuant to which KaylaRe Ltd. reinsures 35% of all business written by these StarStone affiliates for risks attaching from January 1, 2016, net of the StarStone affiliates’ reinsurance programs. During the year ended December 31, 2017, StarStone ceded $234.1 million (2016: $117.6 million) of premium earned, $155.4 million (2016: $75.7 million) of net incurred losses and LAE and $99.5 million (2016: $42.5 million) of acquisition costs to KaylaRe Ltd. under the KaylaRe-StarStone QS. The amounts in 2016 were recorded in the aggregate as net incurred losses and LAE of $1.4 million in our consolidated statement of earnings for the year ended December 31, 2017 in accordance with retroactive reinsurance accounting. The amounts in 2017 were recorded in their appropriate category on our consolidated statement of earnings in accordance with prospective reinsurance accounting.
Our consolidated balance sheet as at December 31, 2017 included the following balances related to transactions between us and KaylaRe and KaylaRe Ltd.: reinsurance recoverable of $357.4 million (2016: $242.1 million), prepaid reinsurance premiums of $116.4 million (2016: $109.0 million), funds held of $174.2 million (2016: $182.3 million) recorded in other liabilities, insurance and reinsurance balances payable of $232.9 million (2016: $132.6 million), and ceded acquisition costs of $36.1 million (2016: $41.2 million) recorded as a reduction of deferred acquisition costs.
Investment funds managed by Hillhouse collectively own approximately 3.2% of Enstar’s voting ordinary shares. These funds also own non-voting ordinary shares and warrants to purchase additional non-voting ordinary shares, which together with their voting ordinary shares, represent an approximate 9.98% economic interest in Enstar.
On August 29, 2017, we closed the previously announced sale of our wholly-owned subsidiary Laguna, to a subsidiary of Monument Insurance Group Limited ("Monument"), for a total consideration of €25.6 million (approximately $30.8 million).
Monument was established in October 2016 and we have invested a total of $16.0 million in the common and preferred shares of Monument. We have approximately a 26.6% interest in Monument. In connection with our investment in Monument, we entered into a Shareholders Agreement with the other shareholders.
Effective January 1, 2017 we sold SeaBright Insurance Company (“SeaBright Insurance”) and its licenses to Delaware Life Insurance Company ("Delaware Life"), a subsidiary of Guggenheim Partners, LLC. Following the sale,
SeaBright Insurance was renamed Clear Spring Property and Casualty Company (“Clear Spring”). Clear Spring was subsequently capitalized with $56.0 million of equity, with Enstar retaining at 20% indirect equity interest in Clear Spring.
Our consolidated balance sheet as at December 31, 2017 includes the following balances related to transactions between StarStone National and Clear Spring; reinsurance recoverable of $9.1 million, prepaid reinsurance premiums of $13.7 million, ceded payable of $14.0 million recorded in other liabilities, and ceded acquisition costs of $3.2 million recorded as a reduction of deferred acquisition costs.
Effective January 1, 2017, Cavello Bay entered into a quota share treaty with Clear Spring pursuant to which Cavello Bay reinsures 25.0% of all Workers Compensation business written by Clear Spring. During the year ended December 31, 2017, Cavello Bay accepted $3.6 million of premium earned, $1.2 million of net incurred losses and LAE and $1.7 million of acquisition costs from Clear Spring under this quota share agreement.
Our consolidated balance sheet as at December 31, 2017 includes the following balances related to transactions between Cavello Bay and Clear Spring: losses and LAE of $2.2 million, unearned reinsurance premiums of $3.4 million and funds held of $5.1 million.
The statutory capital and surplus amounts for the years ended December 31, 2017 and 2016 and statutory net income amounts for the years ended December 31, 2017, 2016 and 2015 for our insurance and reinsurance subsidiaries based in Bermuda, the United Kingdom, Australia, the United States and Continental Europe were as follows:
Our Bermuda-based insurance and reinsurance subsidiaries are registered under the Insurance Act 1978 of Bermuda and related regulations, as amended (the "Insurance Act"). The Insurance Act imposes certain solvency and liquidity standards and auditing and reporting requirements and grants the BMA powers to supervise, investigate, require information and the production of documents and intervene in the affairs of insurance companies.
The underwriting capacity of a member of Lloyd’s is supported by providing Funds at Lloyd’s, as described in Note 6 - "Investments". Business plans, including maximum underwriting capacity, for Lloyd’s syndicates requires annual approval by the Lloyd’s Franchise Board, which may require changes to any business plan or additional capital to support underwriting plans.
The Lloyd’s market has applied the Solvency II internal model under Lloyd’s supervision, and our Lloyd’s operations are required to meet Solvency II standards. Effective January 1, 2016, Lloyd's received approval from the PRA to use its internal model under the Solvency II regime.
Our Liechtenstein insurance subsidiary (StarStone Insurance SE) is regulated by the Liechtenstein Financial Market Authority ("FMA") pursuant to the Liechtenstein Insurance Supervisory Act. This subsidiary is obligated to maintain a minimum solvency margin based on the Solvency II regulations. As of December 31, 2017, this subsidiary exceeded the Solvency II requirements by $146.8 million (2016: $12.8 million). The amount of dividends that this subsidiary is permitted to distribute is restricted to freely distributable reserves, which consist of retained earnings, the current year profit and legal reserves. Any dividend exceeding the current year profit requires the FMA’s approval. Solvency and capital requirements for this subsidiary are based on the Solvency II framework and must continue to be met following any distribution.
We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation and arbitration regarding claims. Estimated losses relating to claims arising in the ordinary course of business,
As at December 31, 2017 and 2016, parental guarantees supporting subsidiaries' insurance obligations were $795.7 million and $625.7 million, respectively. The increase relates to new transactions during 2017 as described in Note 3 - "Acquisitions" and Note 4 - "Significant New Business", and includes $165.0 million for letters of credit issued under a Funds at Lloyd's facility as described in Note 6 - "Investments". On February 8, 2018, we amended and restated the FAL Facility to issue up to $325.0 million of letters of credit, with a provision to increase the facility up to $400.0 million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and expires in 2022.
Other liabilities included $205.7 million and $220.5 million for indemnity and defense costs for pending and future claims at December 31, 2017 and 2016, respectively, determined using standard actuarial techniques for asbestos-related exposures. Other liabilities also included $2.2 million and $2.3 million for environmental liabilities associated with Dana properties at December 31, 2017 and 2016, respectively.
Other assets included $122.3 million and $133.0 million at December 31, 2017 and 2016, respectively, for estimated insurance recoveries relating to these liabilities. The recorded asset represents our assessment of the capacity of the insurance agreements to provide for the payment of anticipated defense and indemnity costs for pending claims and projected future demands. The recognition of these recoveries is based on an assessment of the right to recover under the respective contracts and on the financial strength of the insurers. The recorded asset does not represent the limits of our insurance coverage, but rather the amount we would expect to recover if the accrued indemnity and defense costs were paid in full.
The following tables set forth selected and consolidated statement of earnings results by segment for the years ended December 31, 2017, 2016, 2015:
The following table summarizes our gross premiums written for the year ended December 31, 2017 by geographic area. Geographic distribution in subsequent years is subject to variation based upon market conditions and business strategies.
Invested assets are managed on a subsidiary by subsidiary basis, and investment income and realized and unrealized gains on investments are recognized in each segment as earned. Our total assets as at December 31, 2017 and 2016 by segment were as follows (the elimination items include the elimination of intersegment assets):
The table above excludes businesses held for sale. Refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations" of the notes to the consolidated financial statements.
The difference in the amount of other investments shown at fair value and the other investments shown in our consolidated balance sheet relates to the fair value of $283.3 million as of December 31, 2017 for our other investments in funds or companies owned by or affiliated with certain related parties. Refer to Note 21 - "Related Party Transactions" of the notes to the consolidated financial statements.
The Condensed Financial Information of Registrant should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in Part II - Item 8 of this Annual Report on Form 10-K.
Investing activities in the Condensed Statements of Cash Flows primarily represents the flow of funds to and from subsidiaries to provide cash on hand to fund acquisitions and significant new business. Net investment income relates to interest on loans to subsidiaries. For the years ended December 31, 2017, 2016, and 2015, interest paid was $17.6 million, $15.0 million, and $13.0 million, respectively. During the years ended December 31, 2017 and 2016, non-cash investing activities included $31.6 million and $111.6 million, respectively, for dividends and return of capital from subsidiaries and $148.1 million and $452.1 million, respectively, for contributions to subsidiaries. These transactions were to settle intercompany balances, resulting in a net reduction in balances due from subsidiaries and an increase in investments in subsidiaries. There were no non-cash investing activities for the year ended December 31, 2015.
As at December 31, 2017 and 2016, retained earnings was $2,132.9 million and $1,847.6 million, respectively, an increase of $285.4 million. The increase in retained earnings was primarily attributable to net earnings of $311.5 million.