We provide for the annual grant of bonus compensation to our officers and employees, including our senior executive officers. Bonus awards are based on a percentage of our consolidated net after-tax profits. The percentage is 15% unless our Compensation Committee exercises its discretion to change the percentage no later than 30 days after our year end. Bonus awards are payable in cash, ordinary shares or a combination of both.
We strive to apply the highest standards of discipline and professionalism to our claims adjusting, processing and settlement, and disputes with cedants are rare. However, we are from time to time involved in various disputes and legal proceedings in the ordinary course of our claims adjusting process. The majority of the losses ceded to us are from the subscription insurance market (where there are often many insurers and reinsurers underwriting each policy), and we often are involved in disputes commenced by other co-insurers who act in unison with any litigation or dispute resolution controlled by the lead underwriter. Coverage disputes arise when the insured/reinsured and insurer/reinsurer cannot reach agreement as to the interpretation of the policy and/or application of the policy to a claim. Most insurance and reinsurance policies contain dispute resolution clauses requiring arbitration or mediation. In the absence of a contractual dispute resolution process, civil litigation would be commenced. We aim to reach a commercially acceptable resolution to any dispute, using arbitration or litigation as a last resort. We regularly monitor and provide internal reports on disputes involving arbitration and litigation and engage external legal counsel to provide professional advice and assist with case management.
The change in our estimated total loss reserves for both latent and all other exposures compared to that of the previous period, less net losses paid during the period, is recorded as a reduction in net ultimate losses on our statement of earnings for the period. Our estimated total loss reserve at December 31, 2014 was determined by estimating the ultimate losses and deducting paid-to-date losses. The estimated ultimate losses, for both latent and all other (non-latent) liabilities, were determined by the amount of advised case reserves and the application of the actuarial methodologies described above to estimate IBNR reserves. Future changes in our estimates of ultimate losses are likely to have a significant impact on future operating results. Our operating objective is to commute our loss exposures and manage non-commuted loss development in a disciplined manner such that future incurred loss development will be less than expected. A combination of future commutations and better-than-expected incurred loss development of non-commuted exposures could improve the trend of loss development and, after the application of actuarial methodologies to the improved trend, reduce the December 31, 2014 estimates of ultimate losses with a positive impact on our future results. However, it is not possible to project future commutation settlements or whether incurred loss development will be better than expected, and it is possible that ultimate loss reserves could increase based on the factors discussed herein.
reviewed by management. We determine 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.
Our other investments are comprised of private equity, fixed income, fixed income hedge, real estate debt and CLO equity funds, along with direct investments in CLO equities, all of which are recorded at fair value on our balance sheet. These other investments are stated at fair value, which ordinarily will be the most recently reported net asset value as advised by the fund manager or administrator. Many of the fund investments publish net asset values on a daily basis and provide daily liquidity; others report on a monthly basis. Private equities typically report quarterly. We believe the reported net asset value represents the fair value market participants would apply to an interest in the various private equities or funds. The change in fair value is included in net realized and unrealized gains on investments and recognized in net earnings.
interest with redemption features that are not solely within our control within temporary equity in our consolidated balance sheets and carry them at the redemption value, which is fair value. We recognize 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.
Excluding current period loss development, net losses and loss adjustment expense liabilities in our non-life run-off segment were reduced by $288.9 million and $257.1 million for the years ended December 31, 2014 and 2013, respectively, which comprised prior period loss development due to changes to estimates of historical reserves that were recognized in 2014 and 2013.
(vi) a net underwriting loss primarily related to Torus’ discontinued business of $1.4 million for the year ended December 31, 2014 (comprised primarily of net premiums earned of $31.2 million less losses incurred on current period premiums of $24.2 million and acquisition costs of $8.4 million), which was a decrease of $25.5 million in net underwriting result from the net underwriting gain related to SeaBright of $24.1 million for the year ended December 31, 2013 (comprised of net premiums earned of $112.6 million less losses incurred on current period premiums of $74.1 million and acquisition costs of $14.4 million);
(v) an increase in net realized and unrealized gains of $7.6 million; and
(i) a decrease of $39.0 million in net unrealized and realized gains in our private equity and other investment holdings attributable to:
(ii) a decrease of $18.4 million in net unrealized and realized gains on our equity portfolio. The decrease between 2014 and 2013 was due mostly to lower returns from equity markets; partially offset by
Acquisition costs for the non-life run-off segment were $8.4 million and $14.4 million for the years ended December 31, 2014 and 2013, respectively. Acquisition costs are directly related to the amount of net premiums earned by us that, for the year ended December 31, 2014, related primarily to the portion of Torus’ business that was placed into run-off and, for the same period in 2013, related to SeaBright. We did not have any acquisition costs for the year ended December 31, 2012 as our non-life run-off segment did not have any net premiums earned during the period.
(ii) additional general and administrative expenses of $11.8 million incurred in relation to the acquisition of SeaBright, which we completed in 2013.
Noncontrolling interest in the loss of the Torus segment of $7.3 million resulted in net loss attributable to Enstar Group Limited of $10.5 million for the year ended December 31, 2014.
The following table provides gross premiums written by line of business for the Torus segment from April 1, 2014 to December 31, 2014:
Net premiums earned in our life and annuities segment were $105.7 million and $95.0 million for the years ended December 31, 2014 and 2013, respectively. The increase in net premiums earned was the result of three additional months of premiums from Pavonia in 2014 as compared to 2013 (we acquired Pavonia on March 31, 2013). This increase was partially offset by acquisition costs for the years ended December 31, 2014 and 2013 of approximately $15.0 million and $8.8 million, respectively, primarily attributable to commissions on credit premiums earned by Pavonia. Substantially all of the net premiums earned in the years ended December 31, 2014 and 2013 related to the U.S. and Canadian business of the Pavonia companies.
(ii) a net decrease of $188.2 million in the purchases, sales and maturities of available-for-sale securities between 2014 and 2013; and
business, we invest a portion of our fixed maturity investments in longer duration securities that we intend to hold to maturity. We classify these securities as held-to-maturity in our consolidated balance sheet. This held-to-maturity portfolio is recorded at amortized cost. As a result, we do not record changes in the fair value of this portfolio, which should reduce the impact on shareholders’ equity of fluctuations in fair value of those investments.
For our non-life run-off segment, our strategy of commuting our liabilities has the potential to accelerate the natural payout of losses. Therefore, we maintain a relatively short-duration investment portfolio in order to provide liquidity for commutation opportunities and avoid having to liquidate longer dated investments. Accordingly, the majority of our investment portfolio consists of highly rated fixed maturities, including U.S. government and agency investments, highly rated sovereign and supranational investments, high-grade corporate investments, and mortgage-backed and asset-backed investments. We allocate a portion of our investment portfolio to other investments, including private equity funds, fixed income funds, fixed income hedge funds, equity funds, real estate debt fund, CLO equities and CLO equity funds. At December 31, 2014, these other investments totaled $836.9 million, or 13.9%, of our total balance sheet investments (December 31, 2013: $569.3 million or 10.3%).
This class comprises several private equity funds that invest primarily in the financial services industry. All of our investments in private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates the initial investments were made.
Amounts of loans payable outstanding, and accrued interest, as of December 31, 2014 and 2013 total approximately $320.0 million and $452.4 million, respectively, and comprise:
On December 24, 2014, Sussex, an indirect, wholly-owned subsidiary of the Company, as borrower and guarantor, entered into the Companion Facility with National Australia Bank Limited and Barclays Bank PLC, or the Lenders. The Companion Facility provides for a four-year term loan facility pursuant to which Sussex was permitted to borrow up to an aggregate of $109.0 million to fund 50% of the consideration payable for the acquisition of Companion. Sussex fully drew down on the Companion Facility and completed the acquisition of Companion on January 27, 2015.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Premiums from term life insurance, credit life and disability insurance and assumed life reinsurance are generally recognized as revenue when due from policyholders. Term life, assumed life reinsurance and credit life and disability policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with such revenue to result in the recognition of profit over the life of the contracts.
The total consideration for the transaction will be 33.7 million (approximately $38.5 million) (subject to certain possible closing adjustments). The Company expects to finance the purchase price from cash on hand. Completion of the transaction is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close during the second quarter of 2015.
FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. (collectively, “First Reserve”) received 1,501,211 Voting Ordinary Shares, 714,015 Non-Voting Preferred Shares and cash consideration in the transaction. Following the approval of the Company’s shareholders of an amendment to its bye-laws on June 10, 2014, First Reserve’s Non-Voting Preferred Shares converted on a share-for-share basis into 714,015 shares of newly created Series E Non-Voting Convertible Common Shares (the “Series E Non-Voting Ordinary Shares”). Corsair Specialty Investors, L.P. (“Corsair”) received 397,115 Voting Ordinary Shares and cash consideration in the transaction. The remaining Torus shareholders received all cash. As a result of the amalgamation, First Reserve now owns approximately 9.5% and 11.5%, respectively, of the Company’s Voting Ordinary Shares and outstanding share capital.
From April 1, 2014, the date of acquisition, to December 31, 2014, the Company earned premiums of $373.6 million, recorded net increase in ultimate losses and loss adjustment expense liabilities of $218.4 million on those earned premiums, and recorded $10.6 million in net loss (after noncontrolling interest) in its consolidated statement of earnings related to the active underwriting portion of the Torus segment.
The net unearned premiums acquired included a decrease of $16.7 million to adjust net unearned premiums to fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. As at December 31, 2014, $16.0 million has been amortized to acquisition costs in the consolidated statements of earnings and comprehensive income. As at December 31, 2014, the remaining balance of the fair value adjustment was $0.7 million, which will be amortized to acquisition costs in 2015.
Effective January 1, 2014, Syndicate 2008 entered into an RITC of the 2011 and prior underwriting years of account of another Lloyd’s syndicate, under which Syndicate 2008 assumed total net insurance reserves of approximately £17.0 million (approximately $28.1 million) for cash consideration of an equal amount.
The following tables set forth certain information regarding the credit ratings (provided by major rating agencies) of the Company’s fixed maturity and short-term investments classified as available-for-sale:
The Company measures the fair value of its direct investment in CLO equities based on valuations provided by the Company’s external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is valued based on valuations provided by the broker or lead underwriter of the investment (the “broker”). The Company’s CLO equity investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of relevant trades in secondary markets.
The following tables present the Company’s fair value hierarchy for those assets classified as held-to-maturity in the consolidated balance sheet but for which disclosure of the fair value is required as of December 31, 2014 and December 31, 2013:
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, 2013:
The following table provides the total losses and loss adjustment expense liabilities as at December 31, 2014 and 2013:
Net change in case and loss adjustment expense reserves (“LAE reserves”) comprises the movement during the year in specific case reserve liabilities as a result of claims settlements or changes advised to the Company by its policyholders and attorneys, less changes in case reserves recoverable advised by the Company to its reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the change in the Company’s actuarial estimates of losses incurred but not reported.
At December 31, 2014, the allocation of the goodwill to the Company’s non-life run-off, Atrium and Torus segments was $21.2 million, $38.9 million and $13.0 million, respectively, as compared to $21.2 million, $38.9 million and $nil as at December 31, 2013. For the year ended December 31, 2014, the Company completed its assessment for impairment of goodwill and concluded that there had been no impairment of its carried goodwill amount.
The Companion Facility is secured by a first priority security interest in all of the assets of Sussex, including the capital stock of Companion, and by a first priority security interest in the stock of Sussex. Interest is payable at the end of each interest period chosen by Sussex, or, at the latest, each six months. The interest rate is LIBOR plus 2.75%.
The Company was in compliance with all covenants under the Prior Credit Agreement and no material early termination fees were incurred in connection with the termination.
In connection with the agreement to acquire Torus, on July 8, 2013, the Company’s Board of Directors created 4,000,000 shares of Series B Convertible Participating Non-Voting Perpetual Preferred Stock, par value $1.00 per share (the “Non-Voting Preferred Shares”), from the authorized and unissued preference shares. On completion of the Torus acquisition on April 1, 2014, the Company issued in total 1,501,211 Voting Ordinary Shares and 714,015 Non-Voting Preferred Shares to First Reserve and 397,115 Voting Ordinary Shares to Corsair.
may only vote on matters as required under Bermuda law, and if required to vote under Bermuda law in connection with any merger, consolidation or amalgamation of the Company, would have aggregate voting power not to exceed 0.01% of the aggregate voting power of the Company’s issued share capital; and
Following several private transactions occurring from May 2012 to July 2012, Trident acquired 1,350,000 of the Company’s Voting Ordinary Shares (which now constitutes approximately 8.5% of the Company’s outstanding Voting Ordinary Shares). On November 6, 2013, the Company appointed James D. Carey to its Board of Directors. Mr. Carey is the sole member of an entity that is one of four general partners of the entities serving as general partners for Trident, is a member of the investment committees of such general partners, and is a member and senior principal of Stone Point Capital LLC, the manager of the Trident funds.
As at December 31, 2014, the Company has investments in four funds (carried within other investments) and a registered investment company affiliated with entities owned by Trident or otherwise affiliated with Stone Point Capital LLC. The fair value of the investments in the four funds was $202.6 million as of December 31, 2014 (December 31, 2013: two funds with a fair value $87.7 million), while the fair value of the Company’s investment in the registered investment company was $25.6 million and $nil as at December 31, 2014 and 2013, respectively. Subsequent to December 31, 2014, the Company made a commitment to invest up to an additional $40.0 million in one of these funds. For the year ended December 31, 2014 and 2013, the Company recognized $(0.7) million and $3.8 million respectively, in net realized and unrealized losses and gains in respect of these investments.
As of December 31, 2014 and 2013, the Company’s life and annuities subsidiaries exceeded their minimum RBC requirements by $107.6 million (2013: $104.5 million). These subsidiaries are restricted by state laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders, depositors or investors. Any dividends in excess of limits are deemed “extraordinary” and require approval. As of December 31, 2014 and 2013, the maximum dividend payout which may be made without prior approval is $11.9 million (2013: $nil).
As at December 31, 2014, the total amount of net assets of the Company’s consolidated subsidiaries that were restricted was $1.23 billion (2013: $732.5 million).
The Company’s total assets by segment were as follows (the elimination items include the elimination of intersegment assets, revenues and expenses):