The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. Some of the information contained in this discussion and analysis or included elsewhere in this annual report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Cautionary Statement Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this annual report.
Consolidated Results of Operations - for the Years Ended December 31, 2014, 2013, and
Results of Operations by Segment - for the Years Ended December 31, 2014, 2013, and
Until 2013, all but one of our acquisitions had been in the non-life run-off business, which for us generally includes property and casualty, workers’ compensation, asbestos and environmental, construction defect, marine, aviation and transit, and other closed business.
Our strategies with respect to these new lines of business and our core non-life run-off business are discussed in “Item 1. Business - Company Overview,” “-Strategy” and “-Recent Transactions.”
We operate our business internationally through our insurance and reinsurance subsidiaries and our consulting subsidiaries in Bermuda, the United Kingdom, the United States, Europe and Australia.
Our primary corporate objective is growing our net book value per share. We believe this is driven primarily by growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions, effectively managing companies and portfolios of business that we have acquired, and executing on our active underwriting strategies. Our growth in book value per share on a fully diluted basis since becoming a public company on January 31, 2007 is set forth in the table below. We have achieved a compounded annual growth rate on our fully diluted book value per share of approximately 17.9% during this time.
The following description summarizes these and other financial statement measures that largely drive the amount of book value per share that we attain.
Our non-life run-off segment earnings comprise primarily reductions, or potential increases, of net ultimate losses and loss adjustment expense liabilities. These liabilities are comprised of outstanding loss or case reserves (or OLR), losses incurred but not reported (or IBNR) and unallocated loss adjustment expenses (or ULAE) reserves.
Our net investment income is a function of the average invested assets and the average yield that we earn on those invested assets. The investment yield on our fixed maturity investments is a function of market interest rates as well as the credit quality and duration of our fixed maturities portfolio. Our net realized and unrealized gains or losses on investments includes realized gains and losses on our fixed maturity securities and changes in fair value of our trading securities and other investments. We recognize realized gains and losses at the time of sale, and they, along with the changes in fair value
of our trading securities, reflect the results of changing market conditions, including changes in market interest rates and changes in the market’s perception of the credit quality of our fixed maturity holdings. The change in fair value of other investments is principally a function of the success of the funds in which we are invested, which depends on, among other things, the underlying strategies of the funds, the ability of the fund managers to execute the fund strategies and general economic and investment market conditions.
Net earnings attributable to noncontrolling interest relates to the share of earnings of our subsidiaries in which there is either a noncontrolling interest or a redeemable noncontrolling interest.
We believe the following accounting policies affect the more significant judgment and estimates used in the preparation of our financial statements.
The most significant liability and asset of an acquired company are typically the liability for losses and loss adjustment expenses and the asset related to any reinsurance balances recoverable on these liabilities that may be contractually due to the acquired entity. The market for acquisition of run-off companies is not sufficiently active and transparent to enable us to identify reliable, market exit values
On acquisition, we make a provision for unallocated loss adjustment expense liabilities. This provision considers the adequacy of the provision maintained and recorded by the seller in light of our run-off strategy and estimated unallocated loss adjustment expenses to be incurred over the life of the acquired run-off as projected by the seller’s actuaries or, in their absence, our actuaries. To the extent that our estimate of the total unallocated loss adjustment expense provision is different from the seller’s, an adjustment will be made. While our objective is to accelerate the run-off by completing commutations of assumed and ceded business (which would have the effect of shortening the life, and
The following table provides a breakdown of gross losses and loss adjustment expense reserves by type of exposure as of December 31, 2014 and 2013.
To the extent that the nature of the acquired loss reserves are conducive to commutation, our aim is to settle the majority of the acquired loss reserves within a timeframe of approximately five to seven years from the date of acquisition. To the extent that acquired reserves are not conducive to commutation, we will instead adopt a disciplined claims management approach to pay only valid claims on a timely basis and endeavor to reduce the level of acquired loss adjustment expense provisions by withdrawing, where appropriate, from existing litigation and otherwise streamlining claims handling procedures.
Once commutation targets are identified, they are prioritized into target years of completion. At the beginning of each year, the approach to commutation negotiations is determined by the commutation team, including claims and exposure analysis and broker account reconciliations. On completion of this analysis, settlement parameters are set around incurred liabilities. Commutation discussions can take many months or even years to come to fruition. Commutation targets not completed in a particular year are re-prioritized for the following year.
Because a significant amount of time can lapse between the assumption of risk, the occurrence of a loss event, the reporting of the event to an insurance or reinsurance company and the ultimate payment of the claim on the loss event, the liability for unpaid losses and loss adjustment expenses is based largely upon estimates. Our management must use considerable judgment in the process of developing these estimates. The liability for unpaid losses and loss adjustment expenses for property and casualty business includes amounts determined from loss reports on individual cases and amounts for IBNR reserves. Such reserves, including IBNR reserves, are estimated by management based upon loss reports received from ceding companies, supplemented by our own estimates of losses for which no ceding company loss reports have yet been received and the results of annual independent actuarial studies.
Nearly all of our unpaid claims liabilities are considered to have a long claims payout tail. Gross loss reserves for our non-life run-off subsidiaries relate primarily to casualty exposures, including latent claims, of which approximately 12.8% (2013: 13.5%) relate to asbestos and environmental, or A&E, exposures.
1. Gross, ceded and net incurred loss report - This report provides, for each reporting period, the total (including commuted policies) gross, ceded and net incurred loss development for each company and a commentary on each company’s loss development prepared by our Chief Actuary. The report highlights the causes of any unusual or significant loss development activity (including commutations) and includes commentary on quality and reliability of underlying data.
4. Analysis of paid, incurred and ultimate losses - This analysis for each company, and in the aggregate, provides a summary of the gross, ceded and net paid and incurred losses and the impact of applying our external actuaries’ recommended loss reserves. This report, reviewed in conjunction with the previous reports, provides an analytical tool to review each company’s incurred loss or gain and reduction in IBNR reserves to assess whether the ultimate reduction in loss reserves appears reasonable in light of known developments within each company.
When establishing loss reserves we have an expectation that, in the absence of commutations and significant favorable or unfavorable non-commuted loss development compared to expectations, loss reserves will not exceed the high, or be less than the low, end of the following ranges of gross losses and loss adjustment expense reserves implied by the various methodologies used by each of our insurance subsidiaries as of December 31, 2014.
The estimation of unpaid claim liabilities is subject to a high degree of uncertainty for a number of reasons. First, unpaid claim liabilities for property and casualty exposures in general are impacted by changes in the legal environment, jury awards, medical cost trends and general inflation. Moreover, for latent exposures in particular, developed case law and adequate claim history do not exist. There is significant coverage litigation related to these exposures, which creates further uncertainty in the estimation of the liabilities. As a result, for these types of exposures, it is especially unclear whether past claim experience will be representative of future claim experience. Ultimate values for such claims cannot be estimated using reserving techniques that extrapolate losses to an ultimate basis using loss development factors, and the uncertainties surrounding the estimation of unpaid claim liabilities are not likely to be resolved in the near future. There can be no assurance that the reserves we establish will be adequate or will not be adversely affected by the development of other latent exposures.
2. Paid Market Share Method. In this method, our estimated market share is applied to the industry estimated unpaid losses or estimate of industry ultimate losses. The ratio of our historical calendar year payments to industry historical calendar year payments is examined to estimate our market share. This ratio is then applied to the estimate of industry unpaid losses or estimate of industry ultimate losses. Each year, calendar year payment data is updated (for both us and industry), estimates of industry unpaid losses are reviewed and the selection of our estimated market share is revisited. This method has the advantage that trends in calendar year market share can be incorporated into the selection of company share of remaining market payments. A potential disadvantage of this method is that it is particularly sensitive to assumptions regarding the time-lag between industry payments and our payments.
considerations in the application of this method include the presence of policies reserved at policy limits, changes in overall industry case reserve adequacy and recent loss reporting history. Each year, our case reserves are updated, the estimate of industry reserves is updated and the applicability of the industry IBNR:Case Ratio is reviewed. This method has the advantage that it incorporates the most recent estimates of amounts needed to settle open cases included in current case reserves. A potential disadvantage is that results could be misleading where our case reserve adequacy differs significantly from overall industry case reserve adequacy. In these instances, the industry IBNR:Case Ratios were adjusted to reflect our portfolio case reserve adequacy.
As of December 31, 2014, we had 30 separate insurance and/or reinsurance subsidiaries in the non-life run-off segment whose reserves are categorized into approximately 262 reserve categories in total, including 32 distinct asbestos reserving categories and 22 distinct environmental reserving categories.
In selecting a recorded reserve, management considers the range of results produced by the methods, and the strengths and weaknesses of the methods in relation to the data available and the specific characteristics of the portfolio under consideration. Trends in both our data and industry data are also considered in the reserve selection process. Recent trends or changes in the relevant tort and legal environments are also considered when assessing methodology results and selecting an appropriate recorded reserve amount for each portfolio.
cumulative loss development method are those in which the exposure is mature, full loss development data is available, and the historical observed loss development is relatively stable.
4. Bornhuetter-Ferguson Expected Loss Projection Reported and Paid Methods. The Bornhuetter-Ferguson Expected Loss Projection Method based on reported loss data relies on the assumption that remaining unreported losses are a function of the total expected losses rather than a function of currently reported losses. The expected losses used in this analysis are based on initial selected ultimate loss ratios by year. The expected losses are multiplied by the unreported percentage to produce expected unreported losses. The unreported percentage is calculated as one minus the reciprocal of the selected cumulative incurred LDFs. Finally, the expected unreported losses are added to the current reported losses to produce ultimate losses. The calculations underlying the Bornhuetter-Ferguson Expected Loss Projection Method based on paid loss data are similar to the Bornhuetter-Ferguson calculations based on reported losses, with the exception that paid losses and unpaid percentages replace reported losses and unreported percentages. The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature years. For these immature years, the amounts reported or paid may be small and unstable and therefore not predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when changing reporting patterns or payment patterns distort historical development of losses. Similar to the loss development methods, the Bornhuetter-Ferguson method may be applied to loss and ALAE on a combined or separate basis. The Bornhuetter-Ferguson method may not be appropriate in circumstances where the liabilities being analyzed are very mature, as it is not sensitive to the remaining amount of case reserves outstanding, or the actual development to date.
Quarterly loss development is expected to be fairly erratic for the types of exposure insured and reinsured by us. Several quarters of low incurred loss development can be followed by spikes of relatively large incurred losses. This is characteristic of latent claims and other insurance losses that are reported and settled many years after the inception of the policy. Given the high degree of statistical uncertainty, and potential volatility, it would be unusual to adjust reserves on the basis of one, or even several, quarters of loss development activity. As a result, unless the incurred loss activity in any one quarter is of such significance that management is able to quantify the impact on the ultimate liability for losses and loss adjustment expenses, reductions or increases in losses and loss adjustment expense liabilities are carried out in the fourth quarter based on the annual reserve review described above.
Policy benefits for life and annuity contracts as at December 31, 2014 and 2013 were as follows:
Our policy benefits for life and annuity contracts (or policy benefits) are estimated using standard actuarial techniques and cash flow models in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 944, Financial Services - Insurance. We establish and maintain our policy benefits 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 future cash flow benefit obligations and third party servicing obligations as they become payable. We review our policy benefits regularly and perform loss recognition testing based upon cash flow projections.
Our acquired insurance and reinsurance subsidiaries in all four of our business segments, prior to acquisition by us, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance they assumed. Loss reserves represent total gross losses, and reinsurance receivables represent anticipated recoveries of a portion of those unpaid losses as well as amounts receivable from reinsurers with respect to claims that have already been paid. While reinsurance arrangements are designed to limit losses and to permit recovery of a portion of direct unpaid losses, reinsurance does not relieve us of our liabilities to our insureds or reinsureds. Therefore, we evaluate and monitor concentration of credit risk among our reinsurers, including companies that are insolvent, in run-off or facing financial difficulties. Provisions are made for amounts considered potentially uncollectible.
We generally recognize premiums from term life insurance, credit life and disability insurance and assumed life reinsurance as revenue when due from policyholders. Term life insurance, assumed life reinsurance and credit life and disability insurance policies include those contracts with fixed and guaranteed premiums and benefits. We match benefits and expenses with revenue to result in the recognition of profit over the life of the contracts.
Our non-life run-off, active underwriting and life and annuity businesses invest in trading portfolios of fixed maturity and short-term investments and equities, a held-to-maturity portfolio of fixed maturity investments and an available-for-sale portfolio of fixed maturity investments. We record both the trading and available-for-sale portfolios at fair value on our balance sheet. For our trading portfolios, the unrealized gain or loss associated with the difference between the fair value and the amortized cost of the investments is recorded in net earnings. For our available-for-sale portfolios, the unrealized gain or loss (other than credit losses) is excluded from net earnings and reported as a separate component of accumulated other comprehensive income. Fixed maturity investments classified as held-to-maturity, which are securities that we have the positive intent and ability to hold to maturity, are carried at amortized cost. The cost of short-term investments and fixed maturities are adjusted for amortization of premiums and accretion of discounts.
Our other investments comprise investments in various private equity, fixed income, fixed income hedge, equity, real estate debt and CLO equity funds, along with direct investments in CLO equities. All of these other investments are recorded at fair value.
Fixed maturity investments are subject to fluctuations in fair value due to changes in interest rates, changes in issuer-specific circumstances such as credit rating and changes in industry-specific
Our fixed maturity portfolio is managed by our Chief Investment Officer and outside investment advisors with oversight from our Investment Committee. Fair value prices for all investments in the fixed maturity portfolios are independently provided by the investment custodians, investment accounting service providers and investment managers, each of which utilize internationally recognized independent pricing services. Interactive Data Corporation is, however, the main pricing service utilized to estimate the fair value measurements for our fixed maturity investments. We record the unadjusted price provided by the investment custodians, investment accounting service providers or the investment managers and validate this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to our knowledge of the current investment market. Our internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
The independent pricing services used by the investment custodians, investment accounting service providers and investment managers obtain actual transaction prices for investments that have quoted prices in active markets. For determining the fair value of investments that are not actively traded, in general, pricing services use “matrix pricing” in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.
We have ongoing due diligence processes with respect to funds in which we invest and their managers. These processes are designed to assist us in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, we obtain the audited financial statements for funds annually, and regularly review and discuss the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, we may incorporate adjustments to the reported net asset value (and not use the permitted practical expedient) on an investment by investment basis. These adjustments may involve significant management judgment. As at December 31, 2014, there were no material adjustments made to the reported net asset value.
For our investments in private equity funds, we measure fair value by obtaining the most recently provided capital statement from the external fund manager or third-party administrator. The funds calculate net asset value on a fair value basis. Due to a lag in the valuations reported by the managers, we record changes in the investment value with up to a three-month lag. For all publicly-traded companies within these funds, we adjust the reported net asset value based on the latest share price as of our reporting date. We have classified our investments in private equity funds as Level 3 investments because they reflect our own judgment about the assumptions that market participants might use.
The real estate debt fund in which we invest has been classified as a Level 3 investment because its fair value is estimated using the most recent published net asset value.
For investments in the CLO equity funds, we measure fair value by obtaining the most recently published net asset value as advised by the external fund manager. We use an income approach to corroborate the reasonableness of reported net asset value. The CLO equity funds have been classified as Level 3 due to a lack of observable and relevant trades in secondary markets.
Intangible assets represent the fair value adjustments related to unpaid losses and loss expenses, unearned premium, reinsurance balances recoverable and policy benefits for life and annuity contracts along with the fair values of Lloyd’s syndicate capacity, customer relationships, management contract and brand arising from the acquisition of Atrium and the syndicate capacity, U.S insurance licenses, technology and brand arising from the acquisition of Torus. Definite-lived intangible assets are amortized over their estimated useful lives. We recognize the amortization of all intangible assets in our consolidated statement of earnings. Indefinite-lived intangible assets are not subject to amortization. The carrying values of intangible assets are reviewed for indicators of impairment on at least an annual basis or sooner whenever events or changes in circumstances indicate that the assets may be impaired. Impairment is recognized if the carrying values of the intangible assets are not recoverable from their undiscounted cash flows and are measured as the difference between the carrying value and the fair value.
In connection with the acquisitions of Arden, Atrium and Torus, certain subsidiaries have issued shares to a noncontrolling interest. These shares provide certain redemption rights to the holder, which may be settled in Enstar’s own shares or cash, at our option. We classify redeemable noncontrolling
The following table sets forth our consolidated statements of earnings data for each of the periods indicated:
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. Some of the information contained in this discussion and analysis or included elsewhere in this annual report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Cautionary Statement Regarding Forward-Looking Statements,” “Item 1A. Risk Factors,” and elsewhere in this annual report.
The $3.4 million increase in consolidated net earnings for the year ended December 31, 2014 was attributable primarily to:
issuance of new insurance policies in the two segments. The net reductions in ultimate losses and loss adjustment expense liabilities in our non-life run-off segment for the years ended December 31, 2014 and 2013 were $264.7 million and $183.0 million, respectively, which includes current period incurred losses and loss adjustment expenses of $24.2 million and $74.1 million, respectively. Current period activity relates to losses incurred on current premiums earned in connection with mandatory renewal, and premium audits and reinstatement premiums, on previously written policies.
General and administrative expenses - General and administrative expenses were $141.3 million and $86.6 million for the years ended December 31, 2014 and 2013, respectively. The increase of $54.7 million was principally due to the general and administrative expenses incurred in 2014 associated with the Torus and Atrium acquisitions (excluding $12.5 million of inter-segment expenses).
Income tax expense - Income tax expenses were $11.1 million and $35.6 million for the years ended December 31, 2014 and 2013, respectively. Income tax expense is generated through our foreign operations outside of Bermuda, principally in the United States, U.K and Australia. Our income tax expense may fluctuate significantly from period to period depending on the geographic distribution of pre-tax earnings or loss in any given period between different jurisdictions with different tax rates, along with our determination of any required changes in our previously determined valuation allowances on our deferred tax assets.
Overall, net earnings attributable to Enstar Group Limited increased $5.1 million, or 2.5%, from $208.6 million for the year ended December 31, 2013 to $213.7 million for the year ended December 31, 2014.
We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $223.8 million and $191.5 million for the years ended December 31, 2013 and 2012,
respectively. Our comparative results were impacted by our 2013 acquisitions of SeaBright (on February 7, 2013), Pavonia (on March 31, 2013), Arden (on September 9, 2013) and Atrium (on November 25, 2013), among other factors. The increase in consolidated net earnings for the year ended December 31, 2013 was attributable primarily to the following:
Net realized and unrealized gains on investments - Net realized and unrealized gains were $70.7 million and $73.6 million for the years ended December 31, 2013 and 2012, respectively. The decrease in net realized and unrealized gains between 2013 and 2012 was attributable primarily to net realized and unrealized losses in 2013 of $28.3 million on our fixed maturity securities, due primarily to increases in U.S. interest rates when applied to a larger base of fixed maturity investments following the acquisitions of SeaBright, Pavonia, Arden and Atrium (as compared to net realized and unrealized gains of $28.7 million in 2012), although this was largely offset by significant increases in our net realized and unrealized gains on our equities and other investments. Approximately $886.7 million of investments within Pavonia have been classified as held-to-maturity and therefore do not contribute to reported net realized or unrealized gains / (losses).
(i) net reduction in prior period ultimate losses and loss adjustment expense liabilities of $257.1 million and $238.0 million for the years ended December 31, 2013 and 2012, respectively; less
Life and annuity policy benefits - Life and annuity policy benefits were $78.4 million and $(0.3) million for the years ended December 31, 2013 and 2012, respectively. The significant increase in 2013 was due to the acquisition of Pavonia. The movements relate entirely to our life and annuities segment and are described in greater detail in the segment discussion below.
Income tax expense - Income tax expense was $35.6 million and $44.3 million for the years ended December 31, 2013 and 2012, respectively. Income tax expense is generated through our foreign operations outside of Bermuda, principally in the United States, U.K and Australia.
We previously monitored and reported our results of operations in three segments: non-life run-off, life and annuities, and active underwriting. The active underwriting segment was primarily comprised of the results of operations of Atrium and Arden. As a result of the acquisition of Torus on April 1, 2014, we began reporting and monitoring our results of operations in the following four segments.
The following is a discussion and analysis of our results of operations for our non-life run-off segment for the years ended December 31, 2014, 2013 and 2012, which are summarized below:
In our non-life run-off segment, we reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $213.1 million and $212.0 million for the years ended December 31, 2014 and 2013, respectively. The increase in earnings of approximately $1.1 million was attributable primarily to the following:
(iii) an increase in fees and commission income of $6.6 million;
(v) an increase in net investment income of $7.2 million; partially offset by
(vii) a decrease in net realized and unrealized gains of $31.3 million;
(x) an increase in general and administrative expenses of $2.3 million.
(i) an increase of $24.1 million in net underwriting result comprised of net premiums earned, less losses incurred on current period premiums and acquisition costs related to SeaBright;
(ii) an increase of $19.2 million in prior period net reduction in ultimate losses and loss adjustment expense liabilities (excluding losses incurred relating to premiums earned by SeaBright in the year of $74.1 million);
Accordingly, net non-life run-off premiums earned for the years ended December 31, 2014 and 2013 totaled $31.2 million and $112.6 million, respectively.
Premiums written and earned in 2014 related primarily to Torus’ run-off business whereas premiums written and earned in 2013 related to SeaBright. Because business related to Torus’ discontinued lines and SeaBright are in run-off, we would expect to have relatively low levels of net earned premium in future periods.
Our management companies in the non-life run-off segment earned fees and commission income of approximately $12.8 million and $9.3 million for the years ended December 31, 2013 and 2012, respectively. The increase in fees and commission income of $3.5 million related primarily to an increase in management fees earned from third-party agreements.
(i) an increase of $1.4 million in investment income from equities and other investments; and
(ii) an increase of $9.8 million in other investment income related primarily to recoveries received in excess of their cost on acquired insolvent debts; partially offset by
(iii) net unrealized and realized gains of $7.1 million in 2014 related to fixed maturity securities, which was an increase of $26.0 million from the losses of $18.9 million in 2013. In 2013, there were significant increases in the intermediate part of the U.S. yield curve resulting in losses associated with lower valuations for fixed maturity securities. In 2014, our fixed income portfolio experienced unrealized gains largely due to our yield curve positioning as gains in longer duration securities more than offset marginal valuation losses in the intermediate part of the U.S. yield curve.
Net investment income for the non-life run-off segment for the year ended December 31, 2013 decreased by $12.8 million to $64.0 million, as compared to $76.8 million for the year ended December 31, 2012. The decrease was primarily a result of lower yields obtained on our cash and fixed maturity portfolios, as securities with higher yields matured and were reinvested at lower yields. This decrease was partially offset by net investment income attributable to higher cash and investment balances due to the SeaBright acquisition, which closed on February 7, 2013.
Net realized and unrealized gains for the non-life run-off segment for the year ended December 31, 2013 and 2012 were $79.4 million and $71.7 million, respectively. The increase of $7.7 million was attributable primarily to the combination of the following items:
The below table presents the annualized investment returns (inclusive of net investment income and net realized and unrealized gains) earned by the non-life run-off segment on its cash and investments for the years ended December 31, 2014, 2013 and 2012:
Net (Reduction) Increase in Ultimate Losses and Loss Adjustment Expense Liabilities:
(1) For the year ended December 31, 2012, we had no premium income and therefore no current period activity.
$59.4 million relating to asbestos liabilities (compared to $69.8 million in 2013), $6.2 million relating to environmental liabilities (compared to $4.9 million in 2013), $62.5 million relating to general casualty liabilities (compared to $42.6 million in 2013), $63.6 million relating to workers compensation liabilities (compared to $42.1 million in 2013) and $70.7 million relating to all other remaining liabilities (compared to $105.8 million in 2013).
The aggregate reduction in net IBNR reserves of $262.4 million, relating to prior periods, was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 98 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures. The prior period estimate of aggregate net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2014, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $285.8 million for net paid losses of $323.6 million, related to the settlement of non-commuted losses in the year and 98 commutations and policy buy-backs of assumed and ceded exposures (including the partial commutation of two of our top ten assumed exposures and two of our top ten ceded recoverables as at January 1, 2014). Net advised case and LAE reserves settled by way of commutation and policy buyback during the year ended December 31, 2014 amounted to $29.1 million (comprising $99.5 million of assumed case reserves and LAE reserves partially offset by $70.4 million of ceded incurred reinsurance recoverable case reserves).
adjustment expenses relating to non-commuted exposures. The prior period estimate of aggregate net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2013, 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 $310.5 million for net paid losses of $360.2 million related to the settlement of non-commuted losses in the year and 108 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of one of our top ten assumed exposures and one of our top ten ceded recoverables as at January 1, 2013). Net advised case and LAE reserves settled by way of commutation and policy buy-backs during the year ended December 31, 2013 amounted to $29.8 million (comprising $97.3 million of assumed case reserves and LAE reserves partially offset by $67.5 million of ceded incurred reinsurance recoverable case reserves).
The increase in aggregate provisions for bad debt of $2.0 million was a result of additional provisions being allowed in the quarter for contractual disputes with reinsurers, offset by cash collections and commutations on certain reinsurance receivables against which bad debt provisions had been provided in earlier periods.
Salaries and benefits for the non-life run-off segment, which include expenses relating to our discretionary bonus and employee share plans, were $127.8 million and $117.1 million for the years ended December 31, 2014 and 2013, respectively.
(iii) an increase in salaries of approximately 3% as part of annual staff performance reviews.
General and administrative expenses for the non-life run-off segment increased by $2.3 million, from $68.0 million in the year ended December 31, 2013 to $70.3 million in the year ended December 31, 2014. The increase in expenses in 2014 related primarily to:
(ii) an increase in rent and related expenses of $2.5 million due largely to an increase in office space and fees associated with the termination of various U.K. lease agreements as we consolidate staff into one office location; partially offset by
(i) an increase in bank charges of $4.2 million due to arrangement fees for our revolving credit facility; and
Interest expense of $7.5 million and $12.1 million for the non-life run-off segment was recorded for the years ended December 31, 2014 and 2013, respectively. The decrease in interest expense was primarily a result of the reduction in loans outstanding as a result of the repayment of both the Clarendon and SeaBright loan facilities during 2014. For 2015, we would anticipate that interest expense will largely be consistent with 2014 as the interest expense related to the Companion loan facility (which we fully drew down on January 27, 2015) will offset the reductions associated with the repayment of the Clarendon and SeaBright facilities.
Interest expense of $12.1 million and $8.4 million for the non-life run-off segment was recorded for the years ended December 31, 2013 and 2012, respectively. The increase in interest expense was a result of an increased total amount of loans outstanding during the year ended December 31, 2013 as compared to the same period in 2012, due largely to the SeaBright acquisition.
We recorded net foreign exchange losses of $8.0 million for the non-life run-off segment for the year ended December 31, 2014 as compared to net foreign exchange gains of $5.9 million for the year ended December 31, 2013. The net foreign exchange losses for the year ended December 31, 2014 arose primarily as a result of the holding of surplus Euro and British pound assets at a time when the U.S. dollar appreciated against these currencies.
In addition to the net foreign exchange (losses) gains recorded in our consolidated statement of earnings, we recorded in our consolidated statement of comprehensive income currency translation adjustment losses, net of noncontrolling interest, related to our non-life run-off segment of $6.4 million and $13.5 million for the years ended December 31, 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, the currency translation adjustments related primarily to our Australian-based subsidiaries.
holding surplus British pound assets at a time when the U.S. dollar was appreciating against this currency, along with net foreign exchange losses in the fair value of our Australian dollar forward exchange contract in place at that time.
We recorded income tax recovery (expense) for our non-life run-off segment of $0.6 million and $(34.2) million for the years ended December 31, 2014 and 2013, respectively.
The effective tax rate was (0.3)% for the year ended December 31, 2014 compared with 13.9% for the year ended December 31, 2013 due to having proportionately lower net income in our tax paying subsidiaries in 2014 than in 2013 as well as a decrease in the valuation allowance on our deferred tax assets in the U.S.
We recorded income tax expense for the non-life run-off segment of $34.2 million and $44.3 million for the years ended December 31, 2013 and 2012, respectively.
The decrease for the year ended December 31, 2014 was due primarily to the decrease in earnings for those companies where there exists a noncontrolling interest. The number of subsidiaries in this segment with a noncontrolling interest decreased from 8 as at December 31, 2013 to 7 as at December 31, 2014.
The following is a discussion and analysis of our results of operations for the Atrium segment for the year ended December 31, 2014 and for the period from the date of acquisition of Atrium and Arden to December 31, 2013. The results of Atrium 5 Ltd., or Atrium 5, represent its proportionate share of the results of Syndicate 609 for which it provides 25% of the underwriting capacity and capital (in the Atrium 5 column). The results of Atrium Underwriters Ltd, or AUL, (in the AUL column) 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. Elimination items represent Atrium 5’s share of fees and commissions paid to AUL. The results of Northshore Holdings Limited relate primarily to amortization of intangible assets (in the Holding Companies column) and Enstar’s acquisition financing costs (in the Enstar Specific Expenses column). Northshore owns Atrium and its subsidiaries and Arden.
(4) Our combined ratio is the sum of: (i) our loss ratio; (ii) our acquisition cost ratio; and (iii) our other operating expense ratio. The combined ratio is a non-GAAP financial measure as described in footnotes (1) and (3). The most directly comparable GAAP financial measure would be to include these holding company and AUL expenses, which would result in a ratio of 98.4% for the year ended December 31, 2014. Our historical combined ratio may not be indicative of future underwriting performance.
The Atrium loss and other operating expense ratios exclude expenses related to the holding companies, which we believe is the most meaningful presentation because these expenses are not incremental and/or directly related to the individual underwriting operations at Atrium. In the loss ratio, the excluded net increases in ultimate losses and loss adjustment expense liabilities of the holding companies relate to amortization of fair value purchase accounting adjustment established at the date of acquisition for Atrium’s losses and loss adjustment expenses. In the other operating expense ratio, the excluded holding company general and administrative expenses relate to amortization of the definite-lived intangible assets. The excluded salaries and benefits expenses relate to AUL managing agency employee salaries, benefits, bonuses and current year share grant costs.
(i) net underwriting result of $37.1 million (comprised of net premiums earned of $135.9 million less $55.4 million in net increase in ultimate losses and loss adjustment expense liabilities and $43.4 million of acquisition costs);
For the Atrium segment, we reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $9.4 million from the dates of the acquisitions of Atrium and Arden to December 31, 2013.
Noncontrolling interest in earnings of the Atrium segment of $4.2 million resulted in net earnings attributable to Enstar Group Limited of $5.2 million for the year ended December 31, 2013.
The following table provides gross premiums written by line of business for the Atrium segment for the year ended December 31, 2014:
The following table provides net premiums earned by line of business for the Atrium segment for the year ended December 31, 2014:
For the year ended December 31, 2014, we recorded an overall net increase in ultimate losses and loss adjustment expense liabilities in the Atrium segment of $55.4 million, including net favorable prior year development of $18.7 million due to claims improvement and reserve releases largely related to our non-marine direct and facultative and upstream energy lines of business following reserve reviews. A $74.1 million increase in net ultimate losses and loss adjustment expenses for the current period was recorded based on the combination of expected loss ratios on current period earned premium, as well as incurred losses during the year including from the war and terrorism and aviation lines of business, and actual estimates of ultimate loss and loss adjustment expense liabilities.
Salaries and benefits for the Atrium segment were $20.1 million and $2.7 million for the years ended December 31, 2014 and 2013, respectively. For the year ended December 31, 2014, the total of $20.1 million was comprised of salaries and benefits of $7.5 million, total current and prior year related share grant costs of $5.2 million and discretionary bonus of approximately $7.4 million. The total current and prior year share grant costs relate to Northshore incentive plan awards to Atrium employees. Expenses relating to the discretionary bonus will be variable and dependent on Atrium’s overall profitability. Expenses relating to the share grant costs are expected to decrease in 2015, as only current year costs will be recorded.
General and administrative expenses for the Atrium segment were $14.8 million and $2.7 million for the years ended December 31, 2014 and 2013, respectively. 2014 expenses were comprised of $12.6 million related to AUL’s direct expenses and Atrium’s share of the syndicate expenses for the year ended December 31, 2014. In addition, expenses of $2.2 million for the year ended December 31, 2014 related to the amortization of the definite-lived intangible assets in the Atrium segment holding companies.
The following is a discussion and analysis of our results of operations for the Torus segment for the year ended December 31, 2014 which are summarized below. These results reflect both the results of Torus Insurance Holdings Limited and its subsidiaries (in the Torus column) and the expenses related to Enstar management fees, the amortization of intangible assets, and acquisition-related expenses, each as incurred by Bayshore Holdings Limited (in the Holding Companies column), the company that owns Torus and its subsidiaries.
(2) Acquisition cost ratio is obtained by dividing acquisition costs by net premiums earned by Torus. Acquisition cost ratio is a non-GAAP financial measure because it excludes the net premiums earned of the Torus holding companies. The most directly comparable GAAP financial measure would be to include this holding company expense, which would result in a ratio of 17.6% for the year ended December 31, 2014.
We provide loss ratio, acquisition cost ratio, other operating expense ratio, and the combined ratio in our discussions of the results for the Torus segment in order to provide more complete information regarding our underwriting results. The ratios are calculated by dividing the related expense by net earned premiums, and the combined ratio is the sum of these ratios. Our ratios are considered to be “non-GAAP” financial measures, which may be defined or calculated differently by other companies.
The Torus ratios exclude expenses related to the holding companies, which we believe is the most meaningful presentation because these expenses are not incremental and/or directly related to the individual underwriting operations at Torus. In the loss ratio, the excluded net premiums earned and net increases in ultimate losses and loss adjustment expense liabilities of the holding companies relate to amortization of our fair value adjustment associated with unearned premium reserves acquired on the acquisition date. Torus includes all of its fair value purchase accounting adjustments established at the date of acquisition as part of the holding companies. In the other operating expense ratio, the excluded general and administrative expenses relate to management fee expenses charged by our non-life run-off segment to Torus primarily related to our direct costs incurred in managing Torus, the amortization of the definite-lived intangible assets, and acquisition-related expenses, in each case as incurred at the holding company level.
(i) salaries and benefits and general and administrative expenses of $113.3 million;
(v) net investment income and net realized and unrealized gains of $8.1 million.
The following table provides net premiums earned by line of business for the Torus segment from April 1, 2014 to December 31, 2014.
For the year ended December 31, 2014, we recorded an overall net increase in ultimate losses and loss adjustment expense liabilities for the Torus segment of $218.4 million, which includes an adjustment of $2.9 million for amortization of fair value adjustments within the holding company. The segment recorded a net favorable prior period reserve development of $8.4 million due to claims improvement and reserve releases, largely related to our marine and non-marine property lines of business. A $229.5 million increase in net ultimate losses and loss adjustment expense liabilities for the current period was recorded based on expected loss ratios on current period earned premium and loss development during the year ended December 31, 2014, including additional net losses incurred of $7.7 million in Torus’ power and utility business and $13.2 million in the aviation and space line.
Net investment income for the Torus segment for the period from April 1, 2014 to December 31, 2014 was $5.9 million. Net realized and unrealized gains for the Torus segment for the period from April 1, 2014 to December 31, 2014 were $2.1 million. The average credit ratings of our fixed maturity investments in the Torus segment as at December 31, 2014 were AA-.
Salaries and benefits for the Torus segment from April 1, 2014 to December 31, 2014 were $55.8 million. The salaries and benefits were related primarily to $52.5 million of direct salaries and benefits for approximately 500 employees of Torus, inclusive of discretionary bonus costs accrued of approximately $4.6 million, and $3.2 million costs associated with employee share awards granted in the period.
General and administrative expenses for the Torus segment from April 1, 2014 to December 31, 2014 were $57.5 million. The amounts consisted of $40.5 million directly incurred by Torus’ operations and $17.0 million of holding company costs relating to: (i) management fee expenses of $10.2 million charged by our non-life run-off segment to Bayshore primarily relating to our direct costs incurred in managing Torus; (ii) expenses of $3.8 million related to the amortization of the definite-lived intangible assets; and (iii) $2.9 million of acquisition related expenses incurred by Bayshore.
We recorded noncontrolling interest in the net loss of the Torus segment of $7.3 million for the year ended December 31, 2014. As of December 31, 2014, Trident and Dowling held a combined 41.02% noncontrolling interest in the Torus segment.
The following is a discussion and analysis of our results of operations for our life and annuities segment for the years ended December 31, 2014, 2013 and 2012, which are summarized below.
Net realized and unrealized (losses) gains for the life and annuities segment for the years ended December 31, 2014 and 2013 were $12.4 million and $(9.3) million, respectively. The increase in net realized and unrealized gains of $21.7 million was due primarily to unrealized gains on fixed maturity investments in respect of the Pavonia companies. The gains were due mostly to declines across the U.S. yield curve compared to increases in U.S. yield curves in the previous year.
The current operations of one of the Pavonia companies relates solely to periodic payment annuities. We have a long duration held-to-maturity investment portfolio to manage the cash flow obligations of these annuities. This held-to-maturity portfolio is carried at amortized cost, and earns investment income. As a result we would not anticipate any unrealized gains or losses on the portfolio. The carrying value of the held-to-maturity portfolio comprises approximately 70% of the Pavonia investments. The remaining 30% of the Pavonia investments consists of fixed maturity investments classified as trading securities, which relate to the non-periodic payment annuity business.
Net realized and unrealized (losses) gains for the life and annuities segment for the years ended December 31, 2013 and 2012 were ($9.3) million and $1.9 million, respectively. The increase in net realized and unrealized losses of $11.1 million was due primarily to unrealized losses on fixed maturity investments acquired with the non-periodic payment annuity business, which were due largely to increases in U.S. yield curves during the year ended December 31, 2013.
The table below presents the annualized investment returns (inclusive of net investment income and net realized and unrealized gains (losses)) earned by the life and annuities segment on its average cash and investments for the years ended December 31, 2014, 2013 and 2012:
The average credit ratings of our fixed maturity investments in the life and annuities segment as at December 31, 2014, 2013 and 2012 were A+, A+ and AA-, respectively.
Life and annuity policy benefits were $108.0 million and $78.4 million for the years ended December 31, 2014 and 2013, respectively. The increase was attributable primarily to the inclusion of the Pavonia business results for twelve months in 2014 as opposed to nine months in 2013. PPA benefits paid during the year ended December 31, 2014 were $52.7 million, which was an average of approximately $4.4 million per month, partially offset by a reduction in PPA benefit reserves of $25.2 million. Net ultimate change in life benefit reserves of $80.6 million year ended December 31, 2014 was comprised of net life claims benefits paid of $101.6 million and amortization of fair value adjustments of $12.8 million, partially offset by net change in life claims benefit reserves of $33.8 million.
Our future cash flows depend upon the availability of dividends or other statutorily permissible payments from our subsidiaries. The ability to pay dividends and make other distributions is limited by the applicable laws and regulations of the jurisdictions in which our insurance and reinsurance subsidiaries operate, including Bermuda, the United Kingdom, the United States, Australia and Europe, which subject these subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, certain of our insurance and reinsurance subsidiaries to maintain minimum capital resources requirements and limit the amount of dividends and other payments that these subsidiaries can pay to us, which in turn may limit our ability to pay dividends and make other payments. For more information on these laws and regulations, see “Business - Regulation”.
As of December 31, 2014, all of our insurance and reinsurance subsidiaries’ capital resources levels were in excess of the minimum levels required. Our subsidiaries’ ability to pay dividends and make other forms of distributions may be limited by our repayment obligations under certain of our outstanding loan facility agreements.
Historically, our sources of funds primarily consisted of cash and investment portfolios acquired on the completion of the acquisition of an insurance or reinsurance company in run-off. These acquired cash and investment balances are classified as cash provided by investing activities. With our recent acquisitions of Pavonia, Atrium and Torus we now collect premiums. We expect to incur and pay losses associated with those premiums.
Our acquired insurance and reinsurance run-off subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. Our insurance and reinsurance subsidiaries remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, we evaluate and monitor concentration of credit risk among our reinsurers. Provisions are made for amounts considered potentially uncollectible.
As of December 31, 2014 and 2013, we had reinsurance balances recoverable of $1.33 billion and $1.36 billion, respectively. The decrease of $32.3 million in reinsurance balances recoverable was primarily a result of commutations and cash collections made during the year ended December 31, 2014 in our non-life run-off segment, partially offset by balances associated with the Torus acquisition.
Included within total reinsurance balances recoverable of $1.33 billion are: (i) reinsurance balances recoverable from A- and above rated reinsurers amounting to $1.05 billion, net of provisions for uncollectible reinsurance recoverables of $81.0 million; (ii) reinsurance balances recoverable from less than A- rated reinsurers amounting to $204.5 million, against which there are no provisions for uncollectible reinsurance recoverables because the balances are secured by collateral such as trust funds or letters of credit; and (iii) reinsurance balances recoverable from less than A- rated reinsurers amounting to $81.2 million, net of provisions for uncollectible reinsurance recoverables of $208.9 million, which are unsecured.
Net cash provided by our operating activities for the year ended December 31, 2014 was $497.6 million compared to net cash used in our operating activities of $62.4 million for the year ended December 31, 2013. This $560.0 million increase in cash provided by operating activities was due primarily to the following:
(ii) an increase in losses and loss adjustment expenses of $967.3 million in 2014 compared to $706.9 million in 2013 due to reserves acquired from our current year acquisitions activity partially offset by decreases in reserves due to commutations and claim settlements during the year.
(i) a net increase of $115.7 million in the purchases, sales and maturities of trading securities between 2013 and 2012;
(v) an increase in unearned premiums of $82.0 million in 2013 due to our current year acquisition activity of companies that wrote or continue to write premiums.
Investing cash flows consist primarily of cash acquired net of acquisitions along with net proceeds on the sale and purchase of available-for-sale and other investments. Net cash used in investing activities was $292.1 million and $365.8 million during the years ended December 31, 2014 and 2013, respectively. The decrease of $73.7 million in investing cash flows between 2014 and 2013 was due primarily to the following:
(i) net cash provided by acquisitions was $37.5 million in 2014 relating to Torus (which required significantly less cash used because we funded the majority of our share of the purchase price by issuing new shares), compared to net cash used of $409.6 million in 2013, due primarily to the acquisitions of Pavonia, Arden, and Atrium during 2013; partially offset by
(iii) a net increase of $166.1 million in the purchase and redemption of other investments between 2014 and 2013.
(ii) an increase of $78.6 million in restricted cash and cash equivalents during 2013, compared to a decrease of $73.2 million in 2012;
Net cash provided by financing activities was $131.6 million during the year ended December 31, 2014 compared to $423.1 million during the year ended December 31, 2013. The decrease of $291.5 million in cash provided by financing activities was attributable primarily to the following:
(i) a reduction in funds provided by bank loans of $299.8 million between 2014 and 2013. In 2013, we drew down approximately $370.0 million on our revolving credit facility and other loan facilities for the acquisitions of SeaBright, Pavonia, Arden and Atrium; whereas for 2014, we used $70.0 million of our revolving credit facility in connection with our acquisition of Torus; and
(ii) an increase in repayments of loans of $159.7 million between 2014 and 2013 due primarily to the repayment of both the SeaBright and Clarendon loan facilities during 2014; partially offset by
(iii) contributions to surplus by Trident and Dowling of $290.8 million in 2014 (related to the acquisition of Torus) as compared to contributions by Trident of $96.7 million in 2013 in connection with the acquisitions of Atrium and Arden.
Net cash provided by (used in) financing activities was $423.1 million during the year ended December 31, 2013 compared to ($233.8) million during the year ended December 31, 2012. The increase of $656.9 million in cash provided by financing activities was attributable primarily to the following:
We hold trading portfolios of fixed maturities, short-term investments, equities and other investments; available-for-sale portfolios of fixed maturities; and a held-to-maturity portfolio of fixed maturities. Our available-for-sale and trading portfolios are recorded at fair value.
Our held-to-maturity portfolio relates to our PPA business within our life and annuities segment. In an effort to match the expected cash flow requirements of the long-term liabilities associated with the
The table below shows the aggregate amounts of our investments carried at fair value as of December 31, 2014 and 2013:
The table below shows the aggregate fair values of our investments classified as held-to-maturity and carried at amortized cost as of December 31, 2014 and 2013:
At December 31, 2014, we had approximately $130.5 million of short-term investments (December 31, 2013: $313.5 million). Short-term investments are managed as part of our investment portfolio and have a maturity of greater than three months up to one year when purchased. Short-term investments are carried at fair value.
At December 31, 2014 and 2013, our gross unrealized losses on our available-for-sale investments totaled $4.6 million and $0.4 million, respectively. At December 31, 2014 and 2013, we held 120 and nil, respectively, available-for-sale investments that were in an unrealized loss position for longer than twelve months. As at December 31, 2014 and 2013, no investments were considered other-than-temporarily impaired.
At December 31, 2014 and 2013, our gross unrealized losses on our held-to-maturity investments totaled $3.7 million and $60.0 million, respectively. Our held-to-maturity investments relate entirely to our Pavonia PPA business acquired on March 31, 2013.
The table below shows the fair value of our portfolio of other investments held at December 31, 2014 and 2013:
As of December 31, 2014 and 2013, we had approximately $197.3 million and $161.2 million, respectively, of other investments recorded in private equity funds, which represented 2.6% and 2.5% of total investments, cash and cash equivalents and restricted cash and cash equivalents at December 31, 2014 and 2013, respectively. Due to a lag in the valuations reported by the managers, we record changes in the investment value with up to a three-month lag. Management regularly reviews and discusses fund performance with our fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments.
This class comprises two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.
This class primarily comprises a fund that provides loans to educational institutions throughout the U.S. and its territories. Through these investments, we participate in the performance of the underlying loan pools. This investment matures when the loans are paid down and cannot be redeemed before maturity. Also included within this class is a catastrophe bond acquired as part of our acquisition of Torus.
At December 31, 2014, we did not own any investments in fixed maturity securities (which include bonds that are classified as cash and cash equivalents) or fixed income funds issued by sovereign governments of Portugal, Italy, Ireland, Greece or Spain.
Our acquisition term loan facilities related to our 2011 acquisition of Clarendon National Insurance Company, or the Clarendon Facility, our 2013 acquisition of SeaBright, or the SeaBright Facility, and our 2015 acquisition of Companion, or the Companion Facility.
The Credit Agreement provides for an unsecured five-year revolving credit facility (expiring in September 2019) pursuant to which we are permitted to borrow up to an aggregate of $500 million, or the EGL Revolving Credit Facility, which is available to fund permitted acquisitions and for general corporate purposes. The Credit Agreement replaces and refinances our Prior Credit Agreement (as defined below). Our ability to draw on the EGL Revolving Credit Facility is subject to customary conditions.
The Credit Agreement refinanced and replaced, in its entirety, our Revolving Credit Facility Agreement, originally dated June 14, 2011, as amended from time to time, and as amended and restated pursuant to the Restatement Agreement, dated July 8, 2013, among us and certain of our subsidiaries, NAB and Barclays, as mandated lead arrangers, NAB, Barclays and RBC, as original lenders, and NAB as agent, or the Prior Credit Agreement. The Prior Credit Agreement had permitted us to borrow up to an aggregate of $375 million on a secured basis over a five-year term, or the Prior EGL Revolving Credit Facility. Effective September 16, 2014 and concurrent with our entry into the Credit Agreement, we terminated the Prior Credit Agreement. Outstanding borrowings under the Prior EGL Revolving Credit Facility totaled $319.6 million and were refinanced on September 16, 2014 with borrowings pursuant to the EGL Revolving Credit Facility.
We were in compliance with all covenants under the Prior Credit Agreement and no material early termination fees were incurred in connection with the termination.
The Prior EGL Revolving Credit Facility had been secured by a first priority lien on the stock of certain of our subsidiaries and certain of our bank accounts held with Barclays and into which amounts received in respect of any capital release from certain of our subsidiaries were required to be paid. In connection with the termination of the Prior Credit Agreement, all security pursuant to the Prior EGL Revolving Credit Facility was released, effective September 16, 2014.
On February 27, 2015, the Credit Agreement was amended and restated, in order to: (i) increase the amount we are permitted to borrow to $665.0 million; (ii) add Lloyd’s Bank plc as a Lender; and (iii) reallocate the capacity provided among the four Lenders into equal shares.
(2) Policy benefits for life and annuity contracts recorded in our audited consolidated balance sheet as at December 31, 2014 of $1,220.9 million are computed on a discounted basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect a discount of the amount payable.
The following table provides a summary of our outstanding unfunded investment commitments for the years ended December 31, 2014 and 2013:
As of December 31, 2014, we had entered into definitive agreements with respect to the purchase of Companion, which closed on January 27, 2015, and the Reciprocal of America loss portfolio transfer, which closed on January 15, 2015. On February 5, 2015, we entered into a definitive agreement with respect to the purchase of NSA. These agreements are described in “Item 1. Business - Recent Transactions.”
At December 31, 2014, we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
Consolidated Statements of Earnings for the years ended December 31, 2014, 2013 and 2012
We have audited the accompanying consolidated balance sheets of Enstar Group Limited and subsidiaries as of December 31, 2014 and 2013, and 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, 2014. In connection with our audits of the consolidated financial statements, we also have audited financial statement Schedules I, II, III, IV, and VI as of December 31, 2014 and 2013, and for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements and financial statement Schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement Schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enstar Group Limited and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement Schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Enstar Group Limited (“Enstar” or the “Company”) was formed in August 2001 under the laws of Bermuda. The Company’s core focus is acquiring and managing insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and providing management, consulting and other services to the insurance and reinsurance industry. Since the Company’s formation, it has completed the acquisition of over 65 insurance and reinsurance companies and portfolios of insurance and reinsurance business. The Company also operates active underwriting businesses, including the Atrium group of companies, which manage and underwrite specialist insurance and reinsurance business for Lloyd’s Syndicate 609, and the Torus group of companies, an A-rated global specialty insurance group with multiple global underwriting platforms. Additionally the Company operates closed life and annuities businesses.
With the Company’s 2014 acquisition of Torus Insurance Holdings Limited (“Torus”) and its 2013 acquisitions of the Pavonia companies (“Pavonia”), Arden Reinsurance Company Ltd. (“Arden”) and Atrium Underwriters Ltd. (“Atrium”), it now measures the results of its operations in four segments:
(ii) Atrium - This active underwriting segment is comprised of the operations and financial results of Northshore Holdings Limited, a holding company that owns Atrium and its subsidiaries and Arden. Atrium is a managing general agent at Lloyd’s of London, which manages Syndicate 609 through a corporate capital vehicle, Atrium 5 Ltd., and provides approximately 25% of the syndicate’s underwriting capacity and capital (with the balance provided by traditional Lloyd’s Names). Atrium specializes in accident and health, aviation, marine, property, non-marine direct and facultative, liability, property and casualty binding authorities, reinsurance, upstream energy, war and terrorism insurance, cargo and fine art. Arden is a Bermuda-based reinsurance company that provides reinsurance to Atrium (through an approximately 65% quota share reinsurance arrangement with Atrium 5 Ltd.) and is currently in the process of running off certain other third-party business. Results related to Arden’s run-off business are included within the Company’s non-life run-off segment.
valuation of certain other investments that are measured using significant unobservable inputs;
Fixed maturity investments classified as available-for-sale and held-to-maturity are reviewed quarterly to determine if they have sustained an impairment of value that is, based on management’s judgement, considered to be other than temporary. The process includes reviewing each fixed maturity investment that is below cost and: (1) determining if the Company has the intent to sell the fixed maturity investment; (2) determining if it is more likely than not that the Company will be required to sell the fixed maturity investment before its anticipated recovery; and (3) assessing whether a credit loss exists, that is, whether the Company expects that the present value of the cash flows expected to be collected from the fixed maturity investment is less than the amortized cost basis of the investment. In evaluating credit losses, the Company considers a variety of factors in the assessment of a fixed maturity investment including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline below cost and par; (3) the potential for the investment to recover in value; (4) an analysis of the financial condition of the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the investment to make scheduled interest or principal payments. If management concludes 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 the Company’s earnings.
Other investments include investments in limited partnerships and limited liability companies (collectively “private equities”) and fixed income, hedge, equity, real estate debt and CLO
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 Company’s reinsurance and insurance business, 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.
The liability for losses and loss adjustment expenses in the non-life run-off segment includes an amount determined from reported claims and an amount, based on historical loss experience and industry statistics, for losses incurred but not reported determined using a variety of actuarial methods. These estimates are continually reviewed and are necessarily subject to the impact of future changes in factors such as claim severity and frequency, changes in economic conditions including the impact of inflation, legal developments and changes in social attitudes. While management believes that the amount is adequate, the ultimate liability may be significantly in excess of, or less than, the amounts provided. Adjustments will be reflected as part of net increase or reduction in losses and loss adjustment expense liabilities in the periods in which they become known. Premium and commission adjustments may be triggered by incurred losses and any amounts are recorded in the same period that the related incurred loss is recognized.
estimated level of IBNR reserves may be significantly higher than the advised case reserves. In such an instance, the commutation settlement of a block of such policies may be greater than the advised case reserves but less than the aggregate of the advised case reserves plus the estimated related IBNR reserves, resulting in a total saving to the remaining liability.
The reserves for losses and loss expenses in the Atrium and Torus segments includes reserves for unpaid reported losses and for IBNR reserves. The reserves for unpaid reported losses and loss expenses 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 the Company. The reserve for IBNR losses is established by management based on actuarially determined estimates of ultimate losses and loss expenses. Inherent in the estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and
Similarly, reinsurance balances recoverable related to the Company’s assumed case reserves are calculated by applying the terms of any applicable reinsurance coverage to movements in the underlying assumed case reserves. The Company’s estimate of reinsurance balances recoverable related to its assumed IBNR reserves is recognized on a basis consistent with the underlying assumed IBNR reserves.
Non-life premiums written are earned on a pro-rata basis over the period the coverage is provided. Reinsurance premiums are recorded at the inception of the policy, are based upon contractual terms and for certain business are estimated based on underlying contracts or from information provided by clients and/or brokers. Changes in reinsurance premium estimates are expected and may result in adjustments in future periods. These estimates change over time as additional information regarding changes in underlying exposures is obtained. Any subsequent differences arising on such estimates are recorded as premiums written in the period in which they are determined.
the contracts, reviewed and adjusted at the point of acquisition, as required, and are locked-in throughout the life of the contract unless a premium deficiency develops. The assumptions are reviewed no less than annually and are unlocked if they would result in a material adverse reserve change. The Company establishes these estimates based upon transaction-specific historical experience, information provided by the ceding company for the assumed business and industry experience. Actual results could differ materially from these estimates. As the experience on the contracts emerges, the assumptions are reviewed by management. The Company determines whether actual and anticipated experience indicates that existing policy benefits, together with the present value of future gross premiums, are sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. If such a review indicates that policy benefits should be greater than those currently held, then the locked-in assumptions are revised and a charge for policy benefits is recognized at that time.
In connection with the acquisitions of Arden, Atrium and Torus, certain subsidiaries have issued shares to a noncontrolling interest. These shares provide certain redemption rights to the holder, which may be settled in the Company’s own shares or cash, at the Company’s option. The Company classifies redeemable noncontrolling interest with redemption features that are not solely within the control of the Company within temporary equity in its consolidated balance sheets and carries them at the redemption value, which is fair value. The Company recognizes changes in the fair value that exceed the carrying value of redeemable noncontrolling interest through retained earnings as if the balance sheet date were also the redemption date.
Fixed fee income is recognized in accordance with the term of the Company’s third-party management agreements. Time-based fees are recognized as services are provided. Success-based fees are recognized when all of the contractual requirements specified in the agreement are met. Profit commissions are recorded on an accrual basis, and are earned in line with the annual accounting results of the syndicate managed by Atrium.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. The Company performs an initial valuation of its goodwill assets and assesses goodwill for impairment on an annual basis. If, as a result of the assessment, the Company determines the value of its goodwill asset is impaired, goodwill is written down in the period in which the determination is made.
Intangible assets represent the fair value adjustments related to unpaid losses and loss expenses, reinsurance balances recoverable and policy benefits for life and annuity contracts along with the fair values of Lloyd’s syndicate capacity, customer relationships, management contract and brand arising
in which an acquirer obtains control of the acquired entity. The amendments in this ASU apply to the separate financial statements of an acquired entity and its subsidiaries that are a business (either public or non-public) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. If an acquired entity elects the option to apply pushdown accounting in its separate financial statements, it should disclose information in the current reporting period that enables users of financial statements to evaluate the effect of pushdown accounting. This ASU applies to all pushdown elections occurring after November 18, 2014 and its adoption did not have an impact on the Company’s consolidated financial statements.
In December 2013, the FASB issued ASU No. 2013-12, which defines the term “public business entity.” The definition of a public business entity will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to public business entities. The amendment in this ASU provides a single definition of public business entity for use in future financial accounting and reporting guidance. The amendment did not affect existing requirements and did not have an effective date. Its adoption by the Company during the year did not have an impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, with the objective of improving the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 seeks to reduce the diversity in practice by providing guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The Company adopted this guidance effective January 1, 2014 and its adoption did not have a material impact on the consolidated financial statements.
In November 2014, the FASB issued ASU No. 2014-16, which is based on the final consensus reached by the Emerging Issues Task Force on Issue 13-G. The ASU is intended to reduce the diversity in practice related to how entities determine the nature of the host contract of a hybrid instrument issued in the form of a share (e.g., convertible preferred stock) as part of the analysis for determining whether the hybrid instrument contains any embedded derivatives that must be bifurcated under ASC 815-15. Currently, reporting entities use one of two acceptable methods (as long as the accounting policy is applied consistently) for determining the nature of a host contract: the chameleon approach and the whole-instrument approach. Under the ASU, entities with instruments within the scope of the ASU would be required to apply the whole-instrument approach when determining the nature of the host contract in a hybrid financial instrument issued in the form of a share. The chameleon approach would no longer be
permitted. ASU 2014-16 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Company is currently evaluating the impact of this guidance, however, it is not expected to have a material impact on the Company’s consolidated financial statements.
The total consideration for the transaction was $218.0 million, which was financed 50% through borrowings under a bank loan facility provided by National Australia Bank Limited (“NAB”) and Barclays Bank PLC (“Barclays”) and 50% from cash on hand.
On April 1, 2014, Kenmare Holdings Ltd. (“Kenmare”), a wholly-owned subsidiary of the Company, together with Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P., which are managed by Stone Point Capital LLC (collectively, “Trident”), completed the acquisition of Torus Insurance Holdings Limited (“Torus”). Torus is an A- rated global specialty insurer with six wholly-owned insurance vehicles, including Lloyd’s Syndicate 1301. At closing, Torus became directly owned by Bayshore Holdings Ltd. (“Bayshore”), which was 60% owned by Kenmare and 40% owned by Trident.
The purchase price for Torus was established in the amended and restated amalgamation agreement as $646.0 million, to be paid partly in cash and partly in the Company’s stock. The number of Company shares to be issued was fixed at the signing of the amalgamation agreement on July 8, 2013 and was determined by reference to an agreed-upon value per share of $132.448, which was the average closing price of the Company’s voting ordinary shares, par value $1.00 per share (the “Voting Ordinary Shares”), over the 20 trading days prior to such signing date. On the day before closing of the amalgamation, the Voting Ordinary Shares had a closing price of $136.31 per share. At closing, the Company contributed cash of $41.6 million towards the purchase price and $3.6 million towards related transaction expenses, as well as 1,898,326 Voting Ordinary Shares and 714,015 shares of Series B Convertible Participating Non-Voting Perpetual Preferred Stock of the Company (the “Non-Voting Preferred Shares”). Based on a price of $136.31 per share, the Company’s contribution of cash and shares to the purchase price totaled $397.7 million in the aggregate. Trident contributed cash of $258.4 million towards the purchase price and $2.4 million towards related transaction expenses. Based on a price of $136.31 per share, the aggregate purchase price paid by the Company and Trident was $656.1 million.
The purchase price was allocated to the acquired assets and liabilities of Torus based on estimated fair values at the acquisition date. The Company recognized goodwill of $13.0 million, all of which was recorded within the Torus segment and is attributable primarily to Torus’ assembled workforce. The Company also recognized indefinite lived intangible assets of $23.9 million and other definite lived intangible assets of $20.0 million.
The following table summarizes the fair values of the assets acquired and liabilities assumed in the Torus transaction at the acquisition date, allocated by segment.
The fair value of the Lloyd’s syndicate capacity was estimated using the multi-period excess-earnings method, a form of the income approach. Lloyd’s syndicate capacity represents Torus’s authorized premium income limit to write insurance business in the Lloyd’s market. The capacity is renewed annually at no cost to the Company but may be freely purchased or sold, subject to Lloyd’s approval. The ability to write insurance business within the syndicate capacity is indefinite, with the premium income limit being set annually by the Company, subject to Lloyd’s approval.
U.S. insurance licenses represent the intangible asset related to Torus’ licenses and have been valued based on recent market transactions.
Brand represents the intangible asset related to the Torus name and was valued using the income approach.
Changes in Ownership Interests relating to Holding Companies for our Active Underwriting Businesses
On May 8, 2014, Dowling Capital Partners I, L.P. (“Dowling”) purchased common shares of both Bayshore and Northshore from Kenmare and Trident (on a pro rata basis in accordance with their respective interests) for an aggregate amount of $15.4 million.
Prior to the sale of shares to Dowling, Kenmare and Trident owned 60% and 40% of Bayshore and Northshore, respectively. Following the sale Kenmare, Trident and Dowling owned 59.0%, 39.3% and 1.7%, of Bayshore and Northshore, respectively.
In connection with the sale of Bayshore shares, the Bayshore Shareholders’ Agreement was amended and restated. The Amended and Restated Bayshore Shareholders’ Agreement, among other things, provides that Kenmare has the right to appoint three members to the Bayshore board of directors and Trident has the right to appoint two members. The Amended and Restated Bayshore Shareholders’ Agreement includes a five-year period (the “Restricted Period”) during which no shareholder can transfer its ownership interest in Bayshore to a third party unless approved by a super-majority of the shareholders. Following the Restricted Period: (i) each shareholder must offer Kenmare and Trident the right to buy its shares before the shares are offered to a third party; (ii) Kenmare can require each other shareholder to participate in a sale of Bayshore to a third party as long as Kenmare owns 55% of the aggregate number of outstanding shares of Bayshore held by Kenmare and Trident; (iii) each shareholder has the right to be included on a pro rata basis in any sales made by another shareholder; and (iv) each of Kenmare, Trident and Dowling has the right to buy its pro rata share of any new securities issued by Bayshore.
In connection with the sale of Northshore shares, the Northshore Shareholders’ Agreement was amended and restated. The Amended and Restated Northshore Shareholders’ Agreement provides for substantially the same rights and obligations as the Amended and Restated Bayshore Shareholders’ Agreement, except that the fifth and seventh anniversaries refer to the Arden closing (which occurred on September 9, 2013).
The purchase price and net assets acquired at fair value are as follows:
The purchase price was allocated to the acquired assets and liabilities of Atrium based on estimated fair values at the acquisition date. The Company recognized goodwill of $38.8 million, all of which was recorded within the Atrium segment and is attributable primarily to Atrium’s assembled workforce. The Company also recognized indefinite-lived intangible assets of $63.0 million and other definite lived intangible assets of $27.0 million.
The fair value of the Lloyd’s syndicate capacity was estimated using the multi-period excess-earnings method. Lloyd’s syndicate capacity represents Atrium’s authorized premium income limit to
write insurance business in the Lloyd’s market. Atrium’s proportionate share of Syndicate 609 (the syndicate through which it conducts its Lloyd’s operations) is approximately 25%. The capacity is renewed annually at no cost to the Company but may be freely purchased or sold, subject to Lloyd’s approval. The ability to write insurance business within the syndicate capacity is indefinite with the premium income limit being set annually by the Company, subject to Lloyd’s approval.
Distribution channels represent broker relationships and the network of insurance companies through which Atrium conducts its operations. The fair value of Atrium’s distribution channel was estimated using the income approach. Critical inputs into the valuation model for customer relationships and broker relationships include estimates of expected premium and attrition rates, and discounting at a weighted average cost of capital. Brand represents the intangible asset related to the Atrium name and was valued using the income approach.
On March 31, 2013, the Company and its wholly-owned subsidiary, Pavonia Holdings (US), Inc., completed the acquisition of all of the shares of Household Life Insurance Company of Delaware (“HLIC DE”) and HSBC Insurance Company of Delaware (“HSBC DE”) from Household Insurance Group Holding Company, a subsidiary of HSBC Holdings plc. HLIC DE and HSBC DE are both Delaware-domiciled insurers in run-off. HLIC DE owns three other insurers domiciled in Michigan, New York, and Arizona, which are also in run-off (collectively with HLIC DE and HSBC DE, the “Pavonia companies”). The aggregate cash purchase price was $155.6 million and was financed in part by a drawing of $55.7 million under the Company’s revolving credit facility. The Pavonia companies wrote various U.S. and Canadian life insurance, including credit life and disability insurance, term life insurance, assumed life reinsurance and annuities.
As of March 31, 2013, the date of acquisition of the Pavonia companies, all of the companies were either in run-off or, immediately following the acquisition, were placed into run-off, and accordingly are no longer writing any new policies. The Pavonia companies continue to collect premiums in relation to the unexpired policies assumed on acquisition.
On February 7, 2013, the Company completed its acquisition of SeaBright Holdings Inc. (“SeaBright”), through the merger of its indirect, wholly-owned subsidiary, AML Acquisition, Corp. with and into SeaBright (the “Merger”), with SeaBright surviving the Merger as the Company’s indirect, wholly-owned subsidiary. SeaBright owns SeaBright Insurance Company, an Illinois-domiciled insurer that is commercially domiciled in California, which wrote direct workers’ compensation business. The aggregate cash purchase price paid by the Company for all equity securities of SeaBright was approximately $252.1 million, which was funded in part with $111.0 million borrowed under a four-year term loan facility provided by NAB and Barclays.
Effective January 1, 2013, Syndicate 2008 entered into an RITC of the 2009 underwriting year of account of another Lloyd’s syndicate and a 100% quota share reinsurance agreement with a further Lloyd’s syndicate in respect of its 2010 underwriting year of account, under which Syndicate 2008 assumed total gross insurance reserves of approximately £33.8 million (approximately $51.4 million) for cash consideration of an equal amount.
Effective December 31, 2012, Syndicate 2008 entered into a 100% quota share reinsurance agreement with another Lloyd’s syndicate in respect of its 2009 and prior years of account (the “2009 liabilities”), under which Syndicate 2008 assumed total gross insurance reserves of approximately £193.0 million (approximately $313.3 million) for consideration of an equal amount. Effective January 1, 2014, the 2012 Lloyd’s underwriting year of account of Syndicate 2008 entered into a partial RITC transaction with respect to the 2009 liabilities.
The Company holds: (i) trading portfolios of fixed maturity investments, short-term investments, equities and other investments; (ii) a held-to-maturity portfolio of fixed maturity investments; and (iii) available-for-sale portfolios of fixed maturity and short-term investments. The Company’s trading and available-for-sale portfolios are recorded at fair value. The Company’s held-to-maturity portfolio is recorded at amortized cost.
In the normal course of the Company’s investing activities, it actively manages allocations to non-controlling tranches of structured securities issued by variable interest entities (“VIEs”). These structured securities include residential mortgage-backed, commercial mortgage-backed and asset-backed securities and are included in the tables below.
The estimated fair values of the Company’s investments in fixed maturity investments, short-term investments and equities classified as trading securities were as follows:
The increase in the Company’s investments classified as trading securities of $268.2 million was due primarily to additional fixed maturity investments acquired in the Torus acquisition.
The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity and short-term investments classified as trading:
The Company holds a portfolio of held-to-maturity securities to support the annuity business acquired with Pavonia. The amortized cost and estimated fair values of the Company’s fixed maturity investments classified as held-to-maturity were as follows:
As at December 31, 2014 and December 31, 2013, none of these securities were considered to be other than temporarily impaired.
The amortized cost and estimated fair values of the Company’s fixed maturity and short-term investments classified as available-for-sale were as follows:
Included within residential mortgage-backed securities as at December 31, 2014 were securities issued by U.S. governmental agencies with a fair value of $1.1 million (as at December 31, 2013: $12.5 million).
The following tables summarize the Company’s fixed maturity and short-term investments classified as available-for-sale in an unrealized loss position as well as the aggregate fair value and gross unrealized loss by length of time the securities have continuously been in an unrealized loss position:
The contractual maturities of the Company’s fixed maturity and short-term investments classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The estimated fair values of the Company’s other investments were as follows:
This class comprises hedge funds that invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of three years from the time of the Company’s initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice.
This class primarily comprises a fund that provides loans to educational institutions throughout the U.S. and its territories. Through these investments, the Company participates in the performance of the underlying loan pools. This investment matures when the loans are paid down and cannot be redeemed before maturity. Also included within this class is a catastrophe bond acquired as part of the Company’s acquisition of Torus.
Certain funds included in other investments may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible debt. In such cases, a common mechanism used is a “side-pocket,” whereby the illiquid security is assigned to a separate memorandum capital account or designated account. Typically, the investor loses its redemption rights in the designated account. Only when the illiquid security is sold, or is otherwise deemed liquid by the fund, may investors redeem their interest in the side-pocket.
At December 31, 2014, the Company had $2.0 million of investments subject to side-pockets ($3.2 million as of December 31, 2013). As of December 31, 2014, management has not made any adjustments to the fair value estimate reported by the fund managers for the side-pocketed investments.
The following is a summary of valuation techniques or models the Company uses to measure fair value by asset and liability classes.
Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.
The Company has categorized all of its investments in equities other than preferred stock as Level 1 investments because the fair values of these investments are based on quoted prices in active markets for identical assets or liabilities. The fair value estimates of the Company’s preferred stock is based on observable market data and, as a result, has been categorized as Level 2, with the exception of one investment in preferred stock that has been categorized as Level 3.
The Company has ongoing due diligence processes with respect to funds in which it invests and their managers. These processes are designed to assist the Company in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, the Company obtains the audited financial statements for funds annually, and regularly reviews and discusses the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, the Company may incorporate adjustments to the reported net asset value (and not use the permitted practical expedient) on an investment by investment basis. These adjustments may involve significant management judgment. As at December 31, 2014, there were no material adjustments made to the reported net asset value.
For its investments in fixed income hedge funds, the Company measures fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The investments in the funds are classified as Level 3.
respectively. A significant increase (or decrease) in either of these significant inputs in isolation would result in higher (or lower) fair value estimates for direct investments in the Company’s CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, the Company receives the valuation from the external CLO manager and brokers and then reviews the underlying cash flows and key assumptions used by the manager/broker. The Company reviews and updates the significant unobservable inputs based on information obtained from secondary markets. These inputs are the responsibility of the Company and the Company assesses the reasonableness of the inputs (and if necessary, updates the inputs) through communicating with industry participants, monitoring of the transactions in which the Company participates (for example, to evaluate default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends that may impact future cash flows.
The Company’s remaining other investments have been valued based on the latest available capital statements, and have all been classified as Level 3.
In accordance with the provisions of the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification 820, the Company has categorized its investments that are recorded at fair value among levels as follows:
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 twelve months ended December 31, 2014:
The amount of net gains (losses) for the twelve months ended December 31, 2014 included in earnings attributable to the fair value of changes in assets still held at December 31, 2014 was $30.1 million. All of this amount was included in net realized and unrealized gains.
Components of net realized and unrealized gains (losses) for the years ended December 31, 2014, 2013 and 2012 were as follows:
Major categories of net investment income for the years ended December 31, 2014, 2013 and 2012 are summarized as follows:
The following table provides the total reinsurance balances recoverable as at December 31, 2014 and, 2013:
The Company’s acquired insurance and reinsurance run-off subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. The Company’s insurance and reinsurance subsidiaries remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, the Company evaluates and monitors concentration of credit risk among its reinsurers. Provisions are made for amounts considered potentially uncollectible.
As of December 31, 2014 and 2013, the provision for uncollectible reinsurance recoverable relating to reinsurance balances recoverable was $289.9 million and $338.6 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the balances are first allocated to applicable reinsurers using management judgment. As part of this process, ceded IBNR reserves are allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total non-life reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of December 31, 2014 decreased to 17.9% as compared to 19.9% as of December 31, 2013, primarily as a result of reinsurance balances recoverable of Torus acquired during the year that required minimal provisions for uncollectible reinsurance recoverable, offset by commutations and cash collections from reinsurers with minimal bad debt provisions.
respectively, of IBNR reserves recoverable. With the exception of one non-rated reinsurer from which $175.2 million was recoverable (December 31, 2013: $256.2 million recoverable from one non-rated reinsurer and $41.4 million recoverable from one BBB+ rated reinsurer), the other top ten reinsurers, as at December 31, 2014 and 2013, were all rated A- or better. Reinsurance balances recoverable by reinsurer were as follows:
Included within total reinsurance balances recoverable of $1,331.6 million are: (i) reinsurance balances recoverable from A- and above rated reinsurers amounting to $1,045.9 million, net of provisions for uncollectible reinsurance recoverable of $81.0 million; (ii) reinsurance balances recoverable from less than A- rated reinsurers amounting to $204.5 million, against which there are no provisions for uncollectible reinsurance recoverable, because the balances are secured by collateral such as trust funds or letters of credit; and (iii) reinsurance balances recoverable from less than A-rated reinsurers amounting to $81.2 million, net of provisions for uncollectible reinsurance recoverable of $208.9 million, which are unsecured.
The liability for losses and loss adjustment expenses includes an amount determined from reported claims and an amount based on historical loss experience and industry statistics for losses
incurred but not reported using a variety of actuarial methods. The Company’s loss reserves cover multiple lines of business, which include workers compensation, general casualty, asbestos and environmental, marine, aviation and transit, construction defects and other non-life lines of business.
The reserves for unpaid reported losses and loss adjustment expenses are established by management based on reports from brokers, ceding companies and insureds and represents the estimated ultimate cost of events or conditions that have been reported to, or specifically identified by the Company. The reserve for IBNR losses and loss expenses is established by management based on actuarially determined estimates of ultimate losses and loss expenses. Inherent in the estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ materially from the amounts recorded in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, will be recorded in earnings in the period in which they become known. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves established in previous calendar years.
The total net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the Company’s non-life run-off, Atrium and Torus segments for the years ended December 31, 2014, 2013 and 2012 were as follows:
The tables below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the years ended December 31, 2014, 2013 and 2012 of the non-life run-off segment (losses incurred and paid are reflected net of reinsurance recoverables):
The net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the non-life run-off segment for the years ended December 31, 2014, 2013 and 2012 was as follows:
(1) For the year ended December 31, 2012, the Company had no premium income and therefore no current period activity.
The net reduction in ultimate losses and loss adjustment expense liabilities for the year ended December 31, 2014 of $264.7 million included current period incurred losses and loss adjustment expenses of $24.2 million related to current period net earned premium of $31.2 million (primarily for the portion of the run-off business acquired with Torus). Excluding current period net ultimate losses and loss adjustment expense liabilities of $24.2 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $288.9 million, which was attributable to a reduction in estimates of net ultimate losses of $224.6 million, paid loss recoveries on provisions for bad debt of $11.2 million, reduction in provisions for bad debt of $7.7 million and a reduction in
of $69.8 million relating to asbestos liabilities (compared to $36.4 million in 2012), $4.9 million relating to environmental liabilities (compared to $2.6 million in 2012), $42.6 million relating to general casualty liabilities (compared to $96.3 million in 2012), $42.1 million relating to workers compensation liabilities (compared to $52.7 million in 2012) and $105.8 million relating to all other remaining liabilities (compared to $79.4 million in 2012).
The net reduction in ultimate losses and loss adjustment expense liabilities for the year ended December 31, 2012 of $238.0 million was attributable to a reduction in estimates of net ultimate losses of $218.1 million, a reduction in aggregate provisions for bad debt of $3.1 million and a reduction in estimates of unallocated loss adjustment expense liabilities of $39.3 million, relating to 2012 run-off activity, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $22.6 million.
The reduction in estimates of net ultimate losses of $218.1 million comprised net incurred loss development of $49.3 million and reductions in net IBNR reserves of $267.4 million. During the three months ended December 31, 2012, one of the Company’s insurance entities, following an exposure-based review of all advised claims, allocated $52.4 million of net IBNR reserves to specific net case and LAE reserves. Excluding this allocation, net incurred loss development for the year ended December 31, 2012 was a favorable $3.1 million and reductions in net IBNR reserves amounted to $215.0 million. The decrease in the aggregate estimate of net IBNR reserves of $215.0 million, excluding the allocation of $52.4 million from net IBNR reserves to specific net case and LAE reserves (compared to $224.8 million during the year ended December 31, 2011), was comprised of $36.4 million relating to asbestos liabilities (compared to $57.9 million in 2011), $2.6 million relating to environmental liabilities (compared to $2.8 million in 2011), $96.3 million relating to general casualty liabilities (compared to $91.6 million in 2011), and $79.7 million relating to all other remaining liabilities (compared to $72.5 million in 2011).
The Company began reporting with respect to its Atrium segment in the fourth quarter of 2013 following the acquisition of Atrium and began reporting with respect to its Torus segment in the second quarter of 2014 following the acquisition of Torus. The Company did not have an active underwriting business for the year ended December 31, 2012.
The following tables provide a summary of net premiums written and earned in our non-life run-off, Atrium, Torus and life and annuities segments for the years ended December 31, 2014, 2013 and 2012:
The following table shows the Company’s goodwill and intangible assets as at December 31, 2014 and 2013:
(ii) Other intangible assets include the distribution channel, Lloyd’s capacity, technology and brand related to the Company’s acquisitions of Atrium and Torus. These assets are amortized on a straight-line basis over a period ranging from four to fifteen years.
Intangible assets with an indefinite life include assets associated with the Lloyd’s syndicate capacity for Torus and Atrium, Torus’ U.S. insurance licenses, and Atrium’s management contract with Syndicate 609 in relation to underwriting, actuarial and support services it provides.
The gross carrying value, accumulated amortization and net carrying value of intangible assets by type at December 31, 2014 and 2013 were as follows:
The Company’s long-term debt consists of loan facilities used to partially finance certain of the Company’s acquisitions or significant new business transactions and its Revolving Credit Facility (the “EGL Revolving Credit Facility”), which can be used for permitted acquisitions and general corporate purposes. The EGL Revolving Credit Facility replaced the Company’s prior revolving credit facility on September 16, 2014.
The Company had a term facility related to the 2011 acquisition of Clarendon National Insurance Company (the “Clarendon Facility”), and a term facility related to the 2013 acquisition of SeaBright (the “SeaBright Facility”), which have been fully repaid as discussed below. The Company has a term facility related to the 2015 acquisition of Companion (the “Companion Facility”).
Amounts of loans payable outstanding, and accrued interest, as of December 31, 2014 and 2013 total $320.0 million and $452.4 million, respectively, and comprise:
The Companion Facility imposes various financial and business covenants on Sussex including limitations on mergers and consolidations, acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets (except for certain permitted dispositions), restrictions on dividends, and limitations on liens.
On September 16, 2014, the Company and certain of its subsidiaries, as borrowers and as guarantors, entered into the EGL Revolving Credit Facility Agreement with NAB, Barclays and Royal Bank of Canada (“RBC”), as mandated lead arrangers and original lenders, and NAB as agent (the “Credit Agreement”).
The Credit Agreement provides for an unsecured five-year revolving credit facility (expiring in September 2019) pursuant to which the Company is permitted to borrow up to an aggregate of $500 million, which is available to fund permitted acquisitions and for general corporate purposes. The Credit Agreement replaces and refinances the Company’s Prior Credit Agreement (as defined below). The Company’s ability to draw on the EGL Revolving Credit Facility is subject to customary conditions.
Interest is payable at the end of each interest period chosen by the Company or, at the latest, each six months. The interest rate is LIBOR plus a margin factor initially set at 2.75%. The margin factor is subject to variation (ranging from 2.50% to 3.25%) in the event of a change to the Company’s long term senior unsecured debt rating assigned by Standard & Poor’s Ratings Services or Fitch Ratings Ltd. Any unused portion of the EGL Revolving Credit Facility will be subject to a commitment fee of 35% of the applicable margin factor. The EGL Revolving Credit Facility imposes various financial and business covenants on the Company and its subsidiaries, including certain limitations on mergers and consolidations, acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets, and limitations on liens.
During the existence of any event of default (as specified in the Credit Agreement), the agent may cancel the commitments of the lenders, declare all or a portion of outstanding amounts immediately due and payable or declare all or a portion of outstanding amounts payable upon demand. During the existence of any payment default, the interest rate would be increased by 1.0%. The EGL Revolving Credit Facility terminates and all amounts borrowed must be repaid on the fifth anniversary of the date of the Credit Agreement.
On June 25, 2014, the Company fully repaid the remaining $89.0 million of outstanding principal and accrued interest on the SeaBright Facility out of the proceeds of distributions from SeaBright. The Company had previously repaid $22.0 million of the outstanding principal on the SeaBright Facility on March 31, 2014. All security pursuant to the SeaBright Facility was released in connection with the full repayment of the facility.
Northshore owns 100% of Atrium and Arden and Bayshore owns 100% of Torus. The RNCI is classified outside of permanent shareholders’ equity on the Company’s consolidated balance sheets due to the redemption rights held. The Company recognizes changes in the redemption value of the RNCI in Bayshore’s and Northshore’s earnings as if the balance sheet date were also the redemption date. As at December 31, 2014 and 2013, there were no adjustments recorded through retained earnings as the redemption value of Trident’s interests approximated their carrying values.
Issued and fully paid non-voting convertible ordinary shares of par value $1.00 each:
As of December 31, 2014, the Series A Non-Voting Ordinary Shares were held in treasury and the Series C and E shares were issued and outstanding. The Series C shares were issued to affiliates of Goldman, Sachs & Co. (“Goldman Sachs”) during 2011. In the Goldman Sachs transaction, the Company created Series B and Series D Non-Voting Ordinary Shares, but no shares in these series are issued and outstanding.
Additionally, the amended bye-laws approved by the Company’s shareholders provide that all other Non-Voting Ordinary Shares authorized under the Company’s bye-laws but not classified as Series A, B, C or D Non-Voting Ordinary Shares will be classified as Series E Non-Voting Ordinary Shares.
will automatically convert at a one-for-one exchange ratio (subject to adjustment for share splits, dividends, recapitalizations, consolidations or similar transactions) into Voting Ordinary Shares if the registered holder transfers them in a widely dispersed offering;
require the registered holders’ written consent in order to vary the rights of the shares in a significant and adverse manner.
The following table sets forth the comparison of basic and diluted earnings per share for the years ended December 31, 2014, 2013 and 2012:
The employee share awards for the years ended December 31, 2014, 2013 and 2012 are summarized as follows:
The Company has recorded compensation expense for the SARs 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.
As at December 31, 2014, the Company has 1,068,001 SARs outstanding to certain employees pursuant to the terms of the Equity Plan and has recorded in salaries and benefits, for the year ended December 31, 2014, compensation expense of $7.0 million in respect of the awards. The Company did not grant any SARs during the years ended December 31, 2013 or 2012.
The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black-Scholes option valuation model as at December 31, 2014:
(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 the Company’s ordinary shares of $152.89 on December 31, 2014.
For the years ended December 31, 2014, 2013 and 2012, compensation costs for each year of $0.1 million relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan (“Share Plan”) were recognized in the Company’s statement of earnings. For the years ended December 31, 2014, 2013 and 2012, 6,031, 4,959 and 5,442 shares, respectively, have been issued to employees under the Share Plan.
During 2014, Northshore implemented long-term incentive plans that awarded time-based restricted shares of Northshore to certain Atrium employees. Shares generally vest over two to three years, although certain awards began vesting in 2014. These share awards have been classified by the Company as liability awards.
For the year ended December 31, 2014, compensation costs of $5.2 million relating to the long-term incentive plans were recorded as part of salaries and benefits within the Company’s consolidated statement of earnings.
Following the decisions not to stand for relection of Whit Armstrong and Charles T. Akre, Jr. from the Board of Directors, 11,749 restricted share units previously credited to their accounts under the Deferred Compensation Plan were converted into the same number of the Company’s ordinary shares on July 1, 2014, with fractional shares paid in cash. Also on July 1, 2014, 14,922 restricted stock units previously credited to Mr. Armstrong’s account under a deferred compensation plan assumed in the Company’s merger with Enstar USA, Inc., now a wholly-owned subsidiary of the Company, were converted into the same number of the Company’s ordinary shares.
Under current Bermuda law, the Company and its Bermuda subsidiaries are exempted from paying any taxes in Bermuda on their income or capital gains until March 2035.
As of December 31, 2014 and 2013, U.S. subsidiaries had deductible losses for tax purposes of approximately $370.7 million and $315.0 million, respectively. Under U.S. tax law, these tax losses can be carried forward and could be available to offset future taxable income of the companies that experienced the losses.
The Company had unrecognized tax benefits of $nil, $2.2 million and $5.8 million relating to uncertain tax positions as of December 31, 2014, 2013 and 2012, respectively.
During the years ended December 31, 2014, 2013 and 2012, there were certain reductions to unrecognized tax benefits due to the expiration of statutes of limitations of $2.2 million, $0.3 million and $nil, respectively, which were included in net earnings.
The Company’s operating subsidiaries in specific countries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, the Company’s major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2011, 2011 and 2008, respectively.
Because the Company operates in many jurisdictions, its 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 it operates. The Company cannot predict what, if any, legislation will actually be proposed or enacted, or what the effect of any such legislation might be on the Company’s financial condition and results of operations.
In addition, the Company has entered into certain agreements with Trident with respect to Trident’s co-investments in Atrium, Arden, and Torus. These include investors’ agreements and shareholders’ agreements, which provide for, among other things: (i) the Company’s right to redeem Trident’s equity interest in the Atrium/Arden and Torus transactions in cash at fair market value within the 90 days following the fifth anniversary of the Arden and Torus closings, respectively, and at any time following the seventh anniversary of the Arden and Torus closings, respectively; and (ii) Trident’s right to have its equity co-investment interests in the Atrium/Arden and Torus transactions redeemed by the Company at fair market value (which the Company may satisfy in either cash or its ordinary shares) following the seventh anniversaries of the Arden closing and Torus closing, respectively. As of December 31, 2014, the Company has included $374.6 million as redeemable non-controlling interest on its balance sheet relating to these Trident co-investment transactions. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the boards of Torus and the holding companies established in connection with the Atrium/Arden and Torus co-investment transactions.
During 2015, a Goldman Sachs affiliate began providing investment management services to one of the Company’s subsidiaries pursuant to an arms-length agreement reflecting customary terms and conditions.
Affiliates of Goldman Sachs own approximately 22% of Global Atlantic Financial Group (“GAFG”), which owns entities that provide reinsurance to Arden. As at December 31, 2014 and 2013, the Company’s total reinsurance recoverable from GAFG entities amounted to $230.5 million and $340.8 million, respectively. As at December 31, 2014 and 2013, reinsurance balances recoverable from a particular non-rated GAFG entity with a carrying value of $175.2 million and $256.1 million, respectively, represented 10% or more of the Company’s total non-life run-off reinsurance balances recoverable. The $175.2 million and $256.1 million recoverable from that GAFG entity at December 31, 2014 and 2013, respectively, was secured by a trust fund. The balance of $55.3 million and $84.7 million as at December 31, 2014 and 2013, respectively, was recoverable from GAFG entities rated A- and higher.
The Company’s insurance and reinsurance subsidiaries prepare their statutory financial statements in conformity with statutory accounting practices prescribed or permitted by the applicable local regulatory authority. The statutory financial statements may vary materially from statements prepared in accordance with U.S. GAAP.
As of December 31, 2014, the Company participated in the Lloyd’s market through its interests in: (i) Atrium Underwriting Group, which manages Syndicate 609 and provides approximately one quarter of the syndicate’s capital; (ii) Shelbourne, which consists of an approved Lloyd’s managing agent, a corporate member and Syndicate 2008, a wholly aligned syndicate that has permission to underwrite RITC and other legacy or discontinued business type transactions with other Lloyd’s syndicates; and (iii) Torus’ Syndicate 1301 and Torus Underwriting Management Limited (the Lloyd’s managing agent for this syndicate). The Lloyd’s market is currently in the Solvency II internal model application process under Lloyd’s supervision. The Company’s Lloyd’s operations will therefore be required to meet Solvency II standards when they come into effect.
As at December 31, 2014, the Company’s total capital commitment to its Lloyd’s Syndicates was £250.7 million (approximately $390.6 million). The capital commitment was financed from available cash on hand of $310.6 million and a letter of credit facility of $80.0 million.
The Company’s U.S. non-life run-off and active underwriting insurance and reinsurance subsidiaries are subject to the insurance laws and regulations of the states in which they are domiciled, licensed and/or eligible to conduct business. These laws restrict the amount of dividends the subsidiaries can pay to the Company. The restrictions are generally based on statutory net income and/or certain levels of statutory surplus as determined in accordance with the relevant statutory accounting requirements of the individual domiciliary states or states in which any of the insurance or reinsurance subsidiaries are domiciled. Generally, prior regulatory approval must be obtained before an insurer may pay a dividend or make a distribution above a specified level.
permitted statutory accounting practices that differ significantly from the statutory accounting principles established by the National Association of Insurance Commissioners (“NAIC”). The U.S. insurance and reinsurance subsidiaries are also required to maintain minimum levels of solvency and liquidity as determined by law, and to comply with risk-based capital requirements and licensing rules.
As of December 31, 2014, all of the Company’s U.S. non-life insurance and reinsurance subsidiaries exceeded their required levels of risk-based capital, with the exception of one subsidiary that was acquired while under supervision. On an aggregate basis, the Company’s U.S. non-life insurance and reinsurance subsidiaries (excluding the subsidiary under supervision) exceeded their minimum levels of risk-based capital as of December 31, 2014 by $549.1 million (December 31, 2013: $642.7 million). The subsidiary under regulatory supervision was below its minimum required risk-based capital level by approximately $5.6 million as of December 31, 2013 but, as of December 31, 2014, exceeds its minimum level by approximately $10.8 million.
statutory financial statements do not reflect deferred acquisition costs, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts reported in the U.S. GAAP basis financial statements for comparable items.
The financial statements of this subsidiary are prepared in accordance with applicable accounting standards under the historical cost convention, as modified by the revaluation of investments, and comply with financial reporting standards of the Accounting Standards Board, as promulgated by the Institute of Chartered Accountants in Ireland.
As of December 31, 2014, the Company’s investments were held by 31 different custodians. These custodians are all large financial institutions that are highly regulated. These institutions have controls over their investment processes that are certified annually. The largest concentration of fixed maturities investments, by fair value, at a single custodian was $3.6 billion and $2.8 billion as of December 31, 2014 and 2013, respectively.
The Company leases office space under operating leases expiring in various years through 2019. The leases are renewable at the option of the lessee under certain circumstances. The following is a schedule of future minimum rental payments on non-cancellable leases as of December 31, 2014:
The following table provides a summary of the Company’s outstanding unfunded investment commitments for the years ended December 31, 2014 and 2013:
As of December 31, 2014, the Company had entered into definitive agreements with respect to the purchase of Companion, which closed on January 27, 2015, and the Reciprocal of America loss portfolio transfer, which closed on January 15, 2015. On February 5, 2015, the Company entered into a definitive agreement with respect to the purchase of NSA, which is expected to close during the second quarter of 2015. The Companion and NSA acquisition agreements are described in Note 3 -“Acquisitions,” and the Reciprocal of America agreement is described in Note 4 - “Significant New Business.”
The Company is, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation and arbitration regarding claims. In addition to claims litigation, the Company may be subject to other lawsuits and regulatory actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or omissions, employment claims or regulatory activity. The Company does not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on its business, results of operations or financial condition. The Company anticipates that, similar to the rest of the insurance and reinsurance industry, it will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental and other claims.
The Company monitors and reports its results of operations in four segments: non-life run-off, Atrium, Torus and life and annuities. These segments are described in Note 1 - “Description of Business.”
The following tables set forth selected and consolidated statement of earnings results by segment for the years ended December 31, 2014, 2013, 2012:
(1) The difference in the amount of equities shown at fair value and the equities shown in the Company’s consolidated balance sheet relates to the fair value of $25.6 million as of December 31, 2014 for its investment in a registered investment company affiliated with entities owned by Trident. Refer to Note 18 of the notes to the consolidated financial statements.