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Enstar Group LTD - Quarter Report: 2019 September (Form 10-Q)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
Commission File Number 001-33289
enlogo2016a11inqorqtrlypr.gif
ENSTAR GROUP LIMITED
(Exact name of Registrant as specified in its charter)
BERMUDA
N/A
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Windsor Place, 3rd Floor, 22 Queen Street, Hamilton HM JX, Bermuda
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (441) 292-3645
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
☐
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  þ
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Ordinary shares, par value $1.00 per share
ESGR
The NASDAQ Stock Market
LLC
Depositary Shares, Each Representing a 1/1,000th Interest in a 7.00%
ESGRP
The NASDAQ Stock Market
LLC
Fixed-to-Floating Rate Perpetual Non-Cumulative Preferred Share, Series D, Par Value $1.00 Per Share
 
 
 
Depositary Shares, Each Representing a 1/1,000th Interest in a 7.00%
ESGRO
The NASDAQ Stock Market
LLC
Perpetual Non-Cumulative Preferred Share, Series E, Par Value $1.00 Per Share
 
 
 
As at November 5, 2019, the registrant had outstanding 17,993,168 voting ordinary shares and 3,509,682 non-voting convertible ordinary shares, each par value $1.00 per share.
 

Table of Contents



Enstar Group Limited
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2019

Table of Contents
 
 
 
Page
PART I
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.

Table of Contents


PART I — FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Page    


1
Table of Contents


ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2019 (unaudited) and December 31, 2018
 
September 30,
2019
 
December 31,
2018
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
76,859

 
$
114,116

Short-term investments, available-for-sale, at fair value (amortized cost: 2019 — $9,591; 2018 — $nil)
9,589

 
—

Fixed maturities, trading, at fair value
7,150,544

 
7,248,793

Fixed maturities, available-for-sale, at fair value (amortized cost: 2019 — $405,738; 2018 — $151,433)
406,378

 
151,609

Funds held - directly managed
1,243,448

 
1,198,154

Equities, at fair value
728,426

 
367,125

Other investments, at fair value
2,396,852

 
1,957,757

Equity method investments
282,463

 
204,507

Total investments (Note 4 and Note 9)
12,294,559

 
11,242,061

Cash and cash equivalents
832,608

 
602,096

Restricted cash and cash equivalents
508,305

 
380,488

Premiums receivable
577,528

 
787,468

Deferred tax assets (Note 18)
8,231

 
10,124

Prepaid reinsurance premiums
172,672

 
198,990

Reinsurance balances recoverable (Note 6)
1,533,534

 
1,290,072

Reinsurance balances recoverable, at fair value (Note 6 and Note 9)
731,904

 
739,591

Funds held by reinsured companies
393,269

 
321,267

Deferred acquisition costs
180,025

 
121,101

Goodwill and intangible assets (Note 12)
217,049

 
218,725

Other assets
763,670

 
644,287

TOTAL ASSETS
$
18,213,354

 
$
16,556,270

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses (Note 8)
$
7,376,663

 
$
6,535,449

Losses and loss adjustment expenses, at fair value (Note 8 and Note 9)
2,658,644

 
2,874,055

Policy benefits for life and annuity contracts (Note 10)
—

 
105,080

Unearned premiums
805,981

 
842,618

Insurance and reinsurance balances payable
378,381

 
388,086

Deferred tax liabilities (Note 18)
9,150

 
10,542

Debt obligations (Note 13)
1,210,675

 
861,539

Other liabilities
688,583

 
566,369

TOTAL LIABILITIES
13,128,077

 
12,183,738

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 20)

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST (Note 14)
434,787

 
458,543

 
 
 
 
SHAREHOLDERS’ EQUITY (Note 15)
 
 
 
Ordinary shares (par value $1 each, issued and outstanding 2019: 21,490,210; 2018: 21,459,997):

 

Voting Ordinary shares (issued and outstanding 2019: 17,980,528; 2018: 17,950,315)
17,981

 
17,950

Non-voting convertible ordinary Series C Shares (issued and outstanding 2019 and 2018: 2,599,672)
2,600

 
2,600

Non-voting convertible ordinary Series E Shares (issued and outstanding 2019 and 2018: 910,010)
910

 
910

Preferred Shares:
 
 
 
Series C Preferred Shares (issued and held in treasury 2019 and 2018: 388,571)
389

 
389

Series D Preferred Shares (issued and outstanding 2019 and 2018: 16,000)
400,000

 
400,000

Series E Preferred Shares (issued and outstanding 2019 and 2018: 4,400)
110,000

 
110,000

Treasury shares, at cost (Series C Preferred shares 2019 and 2018: 388,571)
(421,559
)
 
(421,559
)
Additional paid-in capital
1,830,507

 
1,804,664

Accumulated other comprehensive income
5,490

 
10,440

Retained earnings
2,691,482

 
1,976,539

Total Enstar Group Limited Shareholders’ Equity
4,637,800

 
3,901,933

Noncontrolling interest (Note 14)
12,690

 
12,056

TOTAL SHAREHOLDERS’ EQUITY
4,650,490

 
3,913,989

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
18,213,354

 
$
16,556,270

See accompanying notes to the unaudited condensed consolidated financial statements

2
Table of Contents


ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
For the Three and Nine Months Ended September 30, 2019 and 2018
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(expressed in thousands of U.S. dollars,
except share and per share data)
INCOME
 
 
 
 
 
 
 
Net premiums earned
$
270,325

 
$
264,597

 
$
882,175

 
$
663,628

Fees and commission income
6,587

 
6,950

 
19,446

 
23,633

Net investment income
85,472

 
69,430

 
241,900

 
202,218

Net realized and unrealized gains (losses)
148,185

 
(57,223
)
 
878,687

 
(254,671
)
Other income
826

 
8,226

 
17,668

 
818

 
511,395

 
291,980

 
2,039,876

 
635,626

EXPENSES
 
 
 
 
 
 
 
Net incurred losses and loss adjustment expenses
222,417

 
153,974

 
751,159

 
266,327

Life and annuity policy benefits
—

 
423

 
2,290

 
217

Acquisition costs
50,282

 
54,242

 
210,925

 
137,684

General and administrative expenses
113,924

 
102,553

 
343,517

 
300,425

Interest expense
14,950

 
4,640

 
39,022

 
21,573

Net foreign exchange (gains) losses
(13,631
)
 
1,040

 
(20,068
)
 
1,389

 
387,942

 
316,872

 
1,326,845

 
727,615

EARNINGS (LOSS) BEFORE INCOME TAXES
123,453

 
(24,892
)
 
713,031

 
(91,989
)
Income tax expense
(14,597
)
 
(746
)
 
(26,864
)
 
(4,564
)
Earnings from equity method investments
17,703

 
3,317

 
44,188

 
33,659

NET EARNINGS (LOSS)
126,559

 
(22,321
)
 
730,355

 
(62,894
)
Net loss attributable to noncontrolling interest
109

 
11,489

 
4,970

 
19,096

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
126,668

 
(10,832
)
 
735,325

 
(43,798
)
Dividends on preferred shares
(8,925
)
 
(5,133
)
 
(26,989
)
 
(5,133
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
117,743

 
$
(15,965
)
 
$
708,336

 
$
(48,931
)
 
 
 
 
 
 
 
 
Earnings (Loss) per ordinary share attributable to Enstar Group Limited:
 
 
 
 
Basic
$
5.48

 
$
(0.74
)
 
$
32.98

 
$
(2.39
)
Diluted
$
5.42

 
$
(0.74
)
 
$
32.58

 
$
(2.39
)
Weighted average ordinary shares outstanding:
 
 
 
 
 
 
 
Basic
21,488,216

 
21,440,914

 
21,476,586

 
20,444,634

Diluted
21,720,497

 
21,665,356

 
21,741,499

 
20,653,544

See accompanying notes to the unaudited condensed consolidated financial statements

3
Table of Contents


ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three and Nine Months Ended September 30, 2019 and 2018
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(expressed in thousands of U.S. dollars)
NET EARNINGS (LOSS)
$
126,559

 
$
(22,321
)
 
$
730,355

 
$
(62,894
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized holding gains (losses) on fixed income available-for-sale investments arising during the period
(267
)
 
(1,310
)
 
4,640

 
(3,007
)
Reclassification adjustment for net realized gains (losses) included in net earnings
(34
)
 
2

 
(4,191
)
 
53

Unrealized gains (losses) arising during the period, net of reclassification adjustments
(301
)
 
(1,308
)
 
449

 
(2,954
)
Total cumulative translation adjustment
(2,551
)
 
(143
)
 
(4,390
)
 
1,258

Increase in defined benefit pension liability
(952
)
 
—

 
(952
)
 
—

Total other comprehensive loss
(3,804
)
 
(1,451
)
 
(4,893
)
 
(1,696
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
122,755

 
(23,772
)
 
725,462

 
(64,590
)
Comprehensive loss attributable to noncontrolling interest
206

 
11,505

 
4,912

 
19,494

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
122,961

 
$
(12,267
)
 
$
730,374

 
$
(45,096
)
See accompanying notes to the unaudited condensed consolidated financial statements


4
Table of Contents


ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
For the Three and Nine Months Ended September 30, 2019 and 2018
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
 
(expressed in thousands of U.S. dollars)
Share Capital — Voting Ordinary Shares
 
 
 
 
 
 
 
Balance, beginning of period
$
17,975

 
$
17,930

 
$
17,950

 
$
16,402

Issue of shares
6

 
4

 
31

 
1,532

Balance, end of period
$
17,981

 
$
17,934

 
$
17,981

 
$
17,934

Share Capital — Non-Voting Convertible Ordinary Series C Shares
 
 
 
 
 
 
 
Balance, beginning and end of period
$
2,600

 
$
2,600

 
$
2,600

 
$
2,600

Share Capital — Non-Voting Convertible Ordinary Series E Shares
 
 
 
 
 
 
 
Balance, beginning of period
$
910

 
$
910

 
$
910

 
$
405

Issue of shares
—

 
—

 
—

 
505

Balance, end of period
$
910

 
$
910

 
$
910

 
$
910

Share Capital — Series C Convertible Participating Non-Voting Preferred Shares
 
 
 
 
 
 
 
Balance, beginning and end of period
$
389

 
$
389

 
$
389

 
$
389

Share Capital — Series D Preferred Shares
 
 
 
 
 
 
 
Balance, beginning of period
$
400,000

 
$
400,000

 
$
400,000

 
$
—

Issue of shares
—

 
—

 
—

 
400,000

Balance, end of period
$
400,000

 
$
400,000

 
$
400,000

 
$
400,000

Share Capital — Series E Preferred Shares
 
 
 
 
 
 
 
Balance, beginning and end of period
$
110,000

 
$
—

 
$
110,000

 
$
—

Treasury Shares (Series C Preferred Shares)
 
 
 
 
 
 
 
Balance, beginning and end of period
$
(421,559
)
 
$
(421,559
)
 
$
(421,559
)
 
$
(421,559
)
Additional Paid-in Capital
 
 
 
 
 
 
 
Balance, beginning of period
$
1,822,202

 
$
1,808,063

 
$
1,804,664

 
$
1,395,067

Issue of voting ordinary shares
576

 
475

 
1,497

 
413,679

Issuance costs of preferred shares
—

 
(263
)
 
—

 
(10,781
)
Amortization of share-based compensation
7,729

 
4,452

 
24,346

 
14,762

Balance, end of period
$
1,830,507

 
$
1,812,727

 
$
1,830,507

 
$
1,812,727

Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Balance, beginning of period
$
9,196

 
$
10,604

 
$
10,440

 
$
10,468

Currency translation adjustment
 
 
 
 
 
 
 
Balance, beginning of period
9,147

 
12,581

 
10,986

 
11,171

Change in currency translation adjustment
(2,560
)
 
(140
)
 
(4,399
)
 
1,270

Balance, end of period
6,587

 
12,441

 
6,587

 
12,441

Defined benefit pension liability
 
 
 
 
 
 
 
Balance, beginning of period
(987
)
 
(3,143
)
 
(987
)
 
(3,143
)
Change in defined benefit pension liability
(951
)
 
—

 
(951
)
 
—

Balance, end of period
(1,938
)
 
(3,143
)
 
(1,938
)
 
(3,143
)
Unrealized gains (losses) on available-for-sale investments
 
 
 
 
 
 
 
Balance, beginning of period
1,036

 
1,166

 
441

 
2,440

Change in unrealized gains (losses) on available-for-sale investments
(195
)
 
(1,294
)
 
400

 
(2,568
)
Balance, end of period
841

 
(128
)
 
841

 
(128
)
Balance, end of period
$
5,490

 
$
9,170

 
$
5,490

 
$
9,170

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of period
$
2,573,117

 
$
2,098,484

 
$
1,976,539

 
$
2,132,912

Net earnings (losses) attributable to Enstar Group Limited
126,559

 
(22,321
)
 
730,355

 
(62,894
)
Net loss attributable to noncontrolling interest
109

 
11,489

 
4,970

 
19,096

Dividends on preferred shares
(8,925
)
 
(5,133
)
 
(26,989
)
 
(5,133
)
Change in redemption value of redeemable noncontrolling interests
622

 
674

 
6,607

 
785

Cumulative effect of change in accounting principle
—

 
—

 
—

 
(1,573
)

5
Table of Contents


Balance, end of period
$
2,691,482

 
$
2,083,193

 
$
2,691,482

 
$
2,083,193

 
 
 
 
 
 
 
 
Noncontrolling Interest (excludes Redeemable Noncontrolling Interest)
 
 
 
 
 
 
 
Balance, beginning of period
$
12,609

 
$
9,727

 
$
12,056

 
$
9,264

Purchase of noncontrolling shareholders' interest in subsidiaries
—

 
—

 
(47
)
 
—

Contribution of capital
—

 
—

 
—

 
49

Net earnings attributable to noncontrolling interest
81

 
586

 
681

 
1,000

Balance, end of period
$
12,690

 
$
10,313

 
$
12,690

 
$
10,313

 
See accompanying notes to the unaudited condensed consolidated financial statements

6
Table of Contents


ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2019 and 2018
 
Nine Months Ended September 30,
 
2019
 
2018
 
(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings (loss)
$
730,355

 
$
(62,894
)
Adjustments to reconcile net earnings (loss) to cash flows provided by operating activities:
 
 
 
Realized losses (gains) on sale of investments
(57,580
)
 
18,643

Unrealized losses (gains) on investments
(821,107
)
 
236,028

Depreciation and other amortization
24,799

 
27,543

Earnings from equity method investments
(44,188
)
 
(33,659
)
Sales and maturities of trading securities
4,491,827

 
3,586,530

Purchases of trading securities
(4,062,687
)
 
(4,375,988
)
Other non-cash items
26,098

 
12,978

Changes in:
 
 
 
Reinsurance balances recoverable
(236,657
)
 
(305,434
)
Funds held by reinsured companies
(72,002
)
 
(78,646
)
Losses and loss adjustment expenses
632,661

 
1,103,802

Policy benefits for life and annuity contracts
(103,080
)
 
(5,928
)
Insurance and reinsurance balances payable
(9,815
)
 
144,805

Unearned premiums
(36,637
)
 
159,827

Premiums receivable
209,945

 
(137,752
)
Other operating assets and liabilities
(31,698
)
 
(198,900
)
Net cash flows provided by operating activities
640,234

 
90,955

INVESTING ACTIVITIES:
 
 
 
Acquisitions, net of cash acquired
1,071

 
2,317

Sales and maturities of available-for-sale securities
105,312

 
48,889

Purchase of available-for-sale securities
(370,464
)
 
(10,385
)
Purchase of other investments
(733,473
)
 
(784,316
)
Proceeds from other investments
461,372

 
340,298

Purchase of equity method investments
(38,403
)
 
—

Other investing activities
(4,455
)
 
(8,155
)
Net cash flows used in investing activities
(579,040
)
 
(411,352
)
FINANCING ACTIVITIES:
 
 
 
Issuance of preferred shares, net of issuance costs
—

 
389,219

Dividends on preferred shares
(26,989
)
 
(5,133
)
Contribution by noncontrolling interest
—

 
49

Dividends paid to noncontrolling interest
(11,556
)
 
—

Purchase of noncontrolling shareholders' interest in subsidiaries
(47
)
 
—

Receipt of loans
1,070,808

 
441,022

Repayment of loans
(722,574
)
 
(689,819
)
Net cash flows provided by financing activities
309,642

 
135,338

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
(12,507
)
 
232

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
358,329

 
(184,827
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
982,584

 
1,212,836

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,340,913

 
$
1,028,009

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
(219
)
 
$
16,268

Interest paid
$
33,742

 
$
24,618

 
 
 
 
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
832,608

 
553,419

Restricted cash and cash equivalents
508,305

 
474,590

Cash, cash equivalents and restricted cash
$
1,340,913

 
$
1,028,009

See accompanying notes to the unaudited condensed consolidated financial statements

7
Table of Contents


ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular information expressed in thousands of U.S. dollars except share and per share data)

1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments consisting of normal recurring items considered necessary for a fair presentation under U.S. GAAP. The results of operations for any interim period are not necessarily indicative of results of the full year. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. All significant inter-company transactions and balances have been eliminated. In these notes, the terms "we," "us," "our," or "the Company" refer to Enstar Group Limited and its consolidated subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results may differ materially from these estimates. Results of changes in estimates are reflected in earnings in the period in which the change is made. Accounting policies that we believe are most dependent on assumptions and estimates are considered to be our critical accounting policies and are related to the determination of:
•
liability for losses and loss adjustment expenses ("LAE");
•
liability for policy benefits for life contracts;
•
reinsurance balances recoverable on paid and unpaid losses;
•
valuation allowances on reinsurance balances recoverable and deferred tax assets;
•
impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale, and impairments on goodwill, intangible assets and deferred charge asset;
•
gross and net premiums written and net premiums earned;
•
fair value measurements of investments;
•
fair value estimates associated with accounting for acquisitions;
•
fair value estimates associated with loss portfolio transfer reinsurance agreements for which we have elected the fair value option; and
•
redeemable noncontrolling interests.
New Accounting Standards Adopted in 2019
Accounting Standards Update ("ASU") 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the Financial Accounting Standards Board (the "FASB") issued ASU 2018-02, which gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (“AOCI”) that are deemed stranded in AOCI as a result of the Tax Cuts and Jobs Act (the "Tax Act") enacted in the United States at the end of 2017. The amendments in this guidance eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. We adopted the new standard on January 1, 2019, and that adoption did not have a material impact on our consolidated financial statements and related disclosures.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ASUs 2016-02, 2018-10, 2018-11 and 2019-01, Leases
In February 2016, the FASB issued ASU 2016-02, which is codified in Accounting Standards Codification ("ASC") 842 - Leases, amending the guidance on the classification, measurement and disclosure of leases for both lessors and lessees. The ASU requires lessees to recognize a right-of-use asset and an offsetting lease liability on the balance sheet and to disclose qualitative and quantitative information about leasing arrangements. Subsequently, in July 2018, the FASB issued ASU 2018-10, which clarifies how to apply certain aspects of ASC 842. The amendments in the ASU address a number of issues in the new leases guidance, including (1) the rate implicit in the lease, (2) impairment of the net investment in the lease, (3) lessee reassessment of lease classification, (4) lessor reassessment of lease term and purchase options, (5) variable payments that depend on an index or rate, and (6) certain transition adjustments.
In July 2018, the FASB also issued ASU 2018-11, which adds a transition option for all entities and a practical expedient only for lessors to ASU 2016-02. The transition option, which we elected on adoption of the guidance, allows entities to choose not to apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can instead opt to continue to apply the legacy guidance in ASC 840 - Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. This means that entities that elect this option will only provide annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Entities that elect this transition option are still required to adopt the new leases standard using the modified retrospective transition method, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components.
In addition, in March 2019, the FASB issued ASU 2019-01 to clarify that in the year of initial adoption of ASC 842, entities are not subject to the transition disclosure requirements in ASC 250-10-50-3 related to the effect of an accounting change on certain interim period financial information. Prior to this clarification, the transition guidance in ASC 842 only excluded the annual disclosures required in ASC 250-10-50-1(b)(2).
We adopted ASU 2016-02 and the related amendments on January 1, 2019 using the modified retrospective transition method as required by the standard and recognized a right-of-use asset and an associated lease liability of $51.6 million on our consolidated balance sheet, relating primarily to office space and facilities that we have leased to conduct our business operations. Refer to Note 20 - "Commitments and Contingencies" for further details.
Recently Issued Accounting Pronouncements Not Yet Adopted
Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 describes accounting pronouncements that were not adopted as of December 31, 2018. Those pronouncements have not yet been adopted unless discussed above in "New Accounting Standards Adopted in 2019". In addition, the following relevant accounting pronouncements were issued by the FASB during the nine months ended September 30, 2019 and are yet to be adopted.
ASU 2019-07 - Codification Updates to SEC Sections
In July 2019, the FASB issued ASU 2019-07 in response to the Securities and Exchange Commission's ("SEC's") disclosure update and simplification initiative. The ASU clarifies or improves the disclosure and presentation requirements of a variety of Codification Topics by aligning them with the SEC’s regulations, thereby eliminating redundancies and making the Codification easier to apply. We do not expect the disclosure and presentation amendments included in this ASU, which are to be applied prospectively, to have a material impact on our consolidated financial statements and related disclosures.
ASU 2019-05 - Targeted Transition Relief for ASC 326 - Financial Instruments - Credit Losses
In May 2019, the FASB issued ASU 2019-05, which amends ASU 2016-13 on credit losses as codified in ASC 326 to provide entities with an option to irrevocably elect the fair value option for certain financial assets previously measured on an amortized cost basis. Entities that avail themselves of this transition relief will have the option to irrevocably elect the fair value option in ASC 825-10 on an instrument-by-instrument basis for eligible instruments, upon the adoption of ASC 326. The fair value option election, however, does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in ASC 820-10 and ASC 825-10 to

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the eligible instruments for which it has elected the fair value option.
The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted for entities that have already adopted ASU 2016-13. The ASU requires that these amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance as of the date that an entity adopts ASU 2016-13.
We expect to adopt ASU 2019-05 on January 1, 2020 concurrently with our adoption of ASU 2016-13. However, since we do not intend to elect the fair value option for balances recoverable from our reinsurers as well as the balances retained by our insureds under funds held arrangements which are within the scope of ASC 326, we do not expect the adoption of ASU 2019-05 to have a material impact on our consolidated financial statements and related disclosures. This is attributable to the fact that our other financial instruments that are currently measured at amortized cost and which will be eligible for the fair value option election under ASU 2019-05 do not constitute a material proportion of our total assets.
ASU 2019-04 - Codification Improvements to ASC 326 - Financial Instruments - Credit Losses, ASC 815 - Derivatives and Hedging and ASC 825 - Financial Instruments
In April 2019, the FASB issued ASU 2019-04, which amends (1) ASU 2016-13 on credit losses as codified in ASC 326, (2) ASU 2017-12 on hedging activities as codified in ASC 815, and (3) ASU 2016-01 on recognizing and measuring financial instruments as codified in ASC 825-10. The amendments in ASU 2019-04 clarify the scope of these standards and address certain issues related to their implementation. Specifically, the amendments clarify the scope of the credit losses standard and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments. With respect to the hedge accounting standard, the amendments address partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements. On recognizing and measuring financial instruments, the ASU addresses the scope of ASC 825, the requirement for re-measurement under ASC 820 when using the measurement alternative, certain disclosure requirements, and the specification of equity securities that have to be remeasured at historical exchange rates.
The amendments to the credit losses and hedging standards have the same effective dates and transition requirements as the initial standards, unless an entity has already adopted those standards.
We expect to adopt ASU 2016-13 and all the related amendments including ASU 2019-04 on January 1, 2020 using the modified retrospective approach such that the impact of the initial adoption of the standard is recognized through a cumulative effect adjustment to opening retained earnings, as required by the standard. Based on the detailed preliminary analysis of all of our financial assets measured at amortized cost and which are within the scope of ASU 2016-13 and the related amendments, we do not expect the initial adoption of the standard to have a material impact on our consolidated financial statements, although we will be required to amend and in certain cases, significantly enhance our qualitative disclosures around the following specific items - (1) the credit risk inherent within our portfolios of financial assets and how we monitor credit quality, (2) how we determine the estimation of expected credit losses, (3) changes in the estimate of expected credit losses that have occurred during each reporting period, in addition to (4) providing a rollforward analysis of our allowance for credit losses. While our initial assessment of the quantitative impact of the adoption of ASU 2016-13 and its related amendments is not expected to be material based on our detailed preliminary analysis as of September 30, 2019, the overall impact of the standard will be dependent on the composition of our financial assets within the scope of the standard as of January 1, 2020, when we adopt the standard, the prevailing economic conditions and forecasts as well as changes to any of our assumptions and judgments at the time of initial adoption. Our efforts around the implementation of ASU 2016-13 and its related amendments are currently on track and we continue to refine and make certain adjustments to our models, methodologies, assumptions and judgments ahead of the initial adoption of the standard on January 1, 2020.
For entities that have already adopted ASU 2017-12, which we did during the quarter ended September 30, 2017, the amendments included in ASU 2019-04 are effective as of the beginning of the next annual period which is January 1, 2020 for us, although early adoption is permitted. The ASU requires entities to either retrospectively apply the amendments as of the date they adopted ASU 2017-12, or prospectively, as of the date they adopt the amendments, with certain exceptions.
The amendments included in ASU 2019-04 related to the recognition and measurement of financial instruments are effective for interim and annual reporting periods beginning after December 15, 2019 although early adoption is permitted for entities that have already adopted ASU 2016-01 which we did on January 1, 2018. The ASU requires

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entities to apply these amendments on a modified retrospective basis, except for those related to equity securities without readily determinable fair values that are measured using the measurement alternative, which entities are required to apply prospectively.
We expect to adopt ASU 2019-04 on January 1, 2020 using the modified retrospective approach required by the standard however, we do not expect that adoption to have a material impact on our consolidated financial statements in view of the composition of our current balance sheet, specifically our financial instruments within the scope of ASU 2016-01 and ASU 2016-13 as well as our existing hedging strategies which largely relate to net investment and cash flow hedging activities. The adoption of ASU 2016-13 and its related amendments including ASU 2019-04, will however require us to amend and in certain cases, significantly enhance the qualitative disclosures included within our consolidated financial statements as detailed above.
2. ACQUISITIONS
BorgWarner Morse TEC
On October 30, 2019, we completed the acquisition of BorgWarner Morse TEC ("Morse TEC") from BorgWarner Inc ("BorgWarner") through our subsidiary, Enstar Holdings (US) LLC. Morse TEC holds approximately $0.8 billion in liabilities associated with personal injury asbestos claims and environmental claims arising from BorgWarner's legacy manufacturing operations. We will disclose further information on this transaction in our Annual Report on Form 10-K for the year ended December 31, 2019.
KaylaRe
Overview
On May 14, 2018, the Company acquired all of the outstanding shares and warrants of KaylaRe Holdings, Ltd. ("KaylaRe"). In consideration for the acquired shares and warrants of KaylaRe, the Company issued an aggregate of 2,007,017 ordinary shares to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares. Effective May 14, 2018, we consolidated KaylaRe into our consolidated financial statements, and any balances between KaylaRe and Enstar are now eliminated upon consolidation. Effective September 30, 2019, KaylaRe and KaylaRe's subsidiary, KaylaRe Ltd. merged with Cavello Bay Reinsurance Limited, a wholly owned subsidiary of the Company, with Cavello Bay Reinsurance Limited as the surviving company.
Refer to Note 19 - "Related Party Transactions" for additional information relating to KaylaRe.
Purchase Price
The components of the consideration paid to acquire all of the outstanding shares and warrants of KaylaRe were as follows:
Fair value of Enstar ordinary shares issued
 
$
414,750

Fair value of previously held equity method investment
 
336,137

Adjustment for the fair value of preexisting relationships
 
37,169

Total purchase price
 
$
788,056

Net assets acquired at fair value (excluding preexisting relationships)
 
$
746,320

Excess of purchase price over fair value of net assets acquired
 
$
41,736


The purchase price was allocated to the acquired assets and liabilities of KaylaRe based on their estimated fair values at the acquisition date. We recognized goodwill of $41.7 million on the transaction, primarily attributable to (i) the capital synergies from integrating KaylaRe into our group capital structure, (ii) investment management capabilities on a total return basis, and (iii) the incremental acquired capital to be utilized for future non-life run-off transactions.
Fair Value of Enstar Ordinary Shares Issued
The fair value of the Enstar ordinary shares issued was based on the closing price of $206.65 as at May 14, 2018, the date the transaction closed.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Number of Enstar Ordinary shares issued
 
2,007,017
Closing price of Enstar Ordinary shares as of May 14, 2018
 
$
206.65

Fair value of Enstar Ordinary shares issued to shareholders of KaylaRe
 
$
414,750


Fair Value of Previously Held Equity Method Investment
Prior to the close of the transaction, Enstar held a 48.2% interest in KaylaRe, which was accounted for as an equity method investment in accordance with ASC 323 - Investments - Equity Method and Joint Ventures. The acquisition of the remaining 51.8% equity interest in KaylaRe was considered a step acquisition, whereby we remeasured the previously held equity method investment to fair value. We considered multiple factors in determining the fair value of the previously held equity method investment, including: (i) the price negotiated with the selling shareholders for the 51.8% equity interest in KaylaRe, (ii) recent market transactions for similar companies, and (iii) current trading multiples for comparable companies. Based on this analysis, we determined a valuation multiple of 1.05 to KaylaRe's carrying book value to be appropriate to remeasure the previously held equity method investment at fair value. This resulted in the recognition of a gain of $16.0 million on completion of the step acquisition of KaylaRe, which was recorded in earnings from equity method investments for the three months ended June 30, 2018.
Carrying value of previously held equity method investment prior to the close of the transaction
 
$
320,130

Price-to-book multiple
 
1.05
Fair value of previously held equity method investment prior to the close of the transaction
 
$
336,137

 
 
 
Gain recognized on remeasurement of previously held equity method investment to fair value
 
$
16,007


Adjustment for the Fair Value of Preexisting Relationships
Enstar had contractual preexisting relationships with KaylaRe, which were deemed to be effectively settled at fair value on the acquisition date. The difference between the carrying value and the fair value of the preexisting relationships was included as part of the purchase price in accordance with ASC 805 - Business Combinations. The fair value of the balances relating to preexisting reinsurance relationships with KaylaRe was determined using a discounted cash flow approach and, where applicable, consideration was given to stated contractual settlement provisions, when determining the loss to be recorded on the deemed settlement of these preexisting relationships. The fair values of the balances arising from the non-reinsurance preexisting relationships with KaylaRe were deemed to equal their carrying values given their short-term nature and the expectation that they would all be settled within the next twelve months.
As a result of effectively settling all contractual preexisting relationships with KaylaRe, the Company recognized a loss of $15.6 million, which was recorded in other income (loss) in the three months ended June 30, 2018, as summarized below:
ASSETS
Carrying value
 
Fair value
 
Loss on deemed settlement
Funds held by reinsured companies
$
386,793

 
$
386,793

 
$
—

Deferred acquisition costs/Value of business acquired
33,549

 
40,268

 
6,719

TOTAL ASSETS
420,342

 
427,061

 
6,719

LIABILITIES
 
 
 
 
 
Losses and LAE
339,747

 
333,205

 
(6,542
)
Unearned premiums
105,602

 
105,602

 
—

Insurance and reinsurance balances payable
25,897

 
23,559

 
(2,338
)
Other liabilities
1,864

 
1,864

 
—

TOTAL LIABILITIES
473,110

 
464,230

 
(8,880
)
NET ASSETS (LIABILITIES)
$
(52,768
)
 
$
(37,169
)
 
$
15,599



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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fair Value of Net Assets Acquired and Liabilities Assumed
The following table summarizes the fair values of the assets acquired and liabilities assumed (excluding preexisting relationships) in the KaylaRe transaction at the acquisition date, which have all been allocated to the Non-life Run-off segment.
ASSETS
 
 
Fixed maturities, trading, at fair value
 
$
126,393

Other investments, at fair value
 
626,476

Total investments
 
752,869

Cash and cash equivalents
 
5,657

Premiums receivable
 
10,965

Deferred acquisition costs
 
275

Other assets
 
614

TOTAL ASSETS
 
$
770,380

LIABILITIES
 
 
Losses and LAE
 
$
4,059

Unearned premiums
 
10,984

Insurance and reinsurance balances payable
 
13

Other liabilities
 
9,004

TOTAL LIABILITIES
 
24,060

NET ASSETS ACQUIRED AT FAIR VALUE
 
$
746,320


The table below summarizes the results of the KaylaRe operations, which are included in our consolidated statement of earnings from the acquisition date to September 30, 2018:
Premiums earned
 
$
10,188

Incurred losses and LAE
 
(9,190
)
Acquisition costs
 
(332
)
Underwriting income
 
666

Net investment income
 
1,972

Net unrealized gains
 
(6,621
)
General and administrative expenses
 
(573
)
Net loss
 
$
(4,556
)

Maiden Re North America
On December 27, 2018, we completed the acquisition of Maiden Reinsurance North America, Inc. (“Maiden Re North America”) from a subsidiary of Maiden Holdings, Ltd.  The net consideration payable was $286.4 million, subject to post-closing adjustments, and we assumed $1.0 billion of gross loss and loss adjustment expense reserves upon closing. As part of the acquisition, we also novated and assumed certain reinsurance agreements from Maiden Reinsurance Ltd., assuming total gross unaffiliated reserves of $72.1 million for total assets of $70.4 million on a funds held basis. Maiden Reinsurance Ltd. also provided us with a reinsurance cover for loss reserve development in excess of $100.0 million in excess of the net loss and loss adjustment expenses recorded as of June 30, 2018, up to a maximum $25.0 million. In connection with completing the adverse development cover transaction described in Note 3 - "Significant New Business", we and the Maiden companies agreed to finalize the Maiden Re North America purchase price without post-closing adjustment, and to cancel the excess of loss reinsurance cover of $25.0 million. There was no impact to our consolidated statement of earnings or balance sheet as a result of these actions.

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3. SIGNIFICANT NEW BUSINESS
Munich Re
On September 10, 2019, we signed an agreement with subsidiaries of Munich Reinsurance Company ("Munich Re"), pursuant to which we will acquire certain portfolios from their Australian branches of Great Lakes Insurance SE and HSB Engineering Insurance Limited, primarily of long tail insurance business. In the transaction, which is subject to regulatory and Federal Court of Australia approval, we will receive total assets of approximately AUD$228.2 million (approximately $156.2 million) for assuming the associated net insurance reserves. We are pursuing a portfolio transfer of the insurance business under Division 3A of Part III of Australia’s Insurance Act 1973 (Cth), which would provide legal finality for Munich Re. This transaction is expected to close in 2020.
Zurich
On October 1, 2019, we completed the previously announced reinsurance transaction with Zurich Insurance Group ("Zurich"), pursuant to which we reinsured certain of Zurich's U.S. asbestos and environmental liability insurance portfolios. In the transaction, we assumed approximately $0.5 billion of gross reserves, relating to 1986 and prior year business.
Maiden
On August 5, 2019, we and Maiden Reinsurance Ltd. (“Maiden Re Bermuda”) completed a transaction pursuant to the previously announced Master Agreement with Maiden Holdings, Ltd. and Maiden Re Bermuda to provide adverse development cover reinsurance to Maiden Re Bermuda, effective January 1, 2019. In the transaction, Maiden Re Bermuda ceded and we assumed as retrocessionaire Maiden Re Bermuda's liability under its quota share agreement with the Bermuda subsidiary ("AmTrust Bermuda") of AmTrust Financial Services, Inc. (“AmTrust”). The adverse development cover reinsurance is for losses incurred on or prior to December 31, 2018 in excess of a $2.2 billion retention up to a $600.0 million limit, in exchange for consideration of $445.0 million. We assumed total gross reserves of $530.2 million for reinsurance premium of $445.0 million and recorded a deferred charge of $85.2 million. Enstar's reinsurance performance obligations in the transaction are collateralized in accordance with a Master Collateral Agreement among Enstar, Maiden Re Bermuda, AmTrust and certain subsidiaries of AmTrust. The retention, limit and premium were reduced from the previously announced transaction following the parties’ agreement to include only losses under the Bermuda quota share agreement between Maiden Re Bermuda and AmTrust Bermuda.
Amerisure
On April 11, 2019, we completed a loss portfolio transfer reinsurance agreement with Amerisure Mutual Insurance Company ("Amerisure") and Allianz Risk Transfer (Bermuda) Limited (“ART Bermuda”). In the transaction, Amerisure ceded, and each of Enstar and ART Bermuda severally assumed, a 50% quota share of the construction defect losses incurred by Amerisure and certain of its subsidiaries on or before December 31, 2012. Under the agreement, which was effective as of January 1, 2019, we assumed $48.3 million of gross reserves in exchange for consideration of $45.5 million and recorded a deferred charge asset of $2.9 million.
AmTrust RITC Transactions
On February 14, 2019, we completed four RITC transactions with Syndicates 1206, 1861, 2526 and 5820 (collectively the "AmTrust RITC Transactions"), managed by AmTrust Syndicates Limited, under which we reinsured to close the 2016 and prior underwriting years. We assumed, among other items, gross loss reserves of £703.8 million ($897.1 million) and net loss reserves of £486.8 million ($620.4 million) relating to the portfolios in exchange for consideration of £539.9 million ($688.2 million) and recorded a deferred charge asset of $20.6 million. We have an investment in AmTrust, as described further in Note 19 - "Related Party Transactions".

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. INVESTMENTS
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair value; (ii) available-for-sale portfolios of fixed maturity investments and short-term investments, carried at fair value; (iii) other investments, carried at fair value; (iv) equity method investments; and (v) funds held - directly managed.
Fixed Maturity Investments
Asset Types
The fair values of the underlying asset types of our short-term investments and fixed maturity investments, classified as trading and available-for-sale, and the fixed maturity investments included within our funds held - directly managed balance were as follows:
 
September 30, 2019
 
Short-term investments, trading
 
Short-term investments, available-for-sale
 
Fixed maturities, trading
 
Fixed maturities, available-for-sale
 
Fixed maturities, funds held - directly managed
 
Total
U.S. government and agency
$
35,173

 
$
6,370

 
$
318,225

 
$
14,403

 
$
132,655

 
$
506,826

U.K. government
311

 
—

 
295,646

 
—

 
—

 
295,957

Other government
14,314

 
—

 
648,900

 
31,370

 
20,510

 
715,094

Corporate
27,061

 
3,219

 
4,258,528

 
288,011

 
613,066

 
5,189,885

Municipal
—

 
—

 
107,247

 
1,769

 
52,348

 
161,364

Residential mortgage-backed
—

 
—

 
311,846

 
6,460

 
90,201

 
408,507

Commercial mortgage-backed
—

 
—

 
647,005

 
—

 
240,332

 
887,337

Asset-backed
—

 
—

 
563,147

 
64,365

 
81,342

 
708,854

Total fixed maturity and short-term investments
$
76,859

 
$
9,589

 
$
7,150,544

 
$
406,378

 
$
1,230,454

 
$
8,873,824

 
December 31, 2018
 
Short-term investments, trading
 
Fixed maturities, trading
 
Fixed maturities, available-for-sale
 
Fixed maturities, funds held - directly managed
 
Total
U.S. government and agency
$
45,885

 
$
389,735

 
$
573

 
$
74,052

 
$
510,245

U.K. government
2,275

 
298,356

 
—

 
—

 
300,631

Other government
19,064

 
679,525

 
73,185

 
22,036

 
793,810

Corporate
44,900

 
4,081,793

 
75,359

 
637,788

 
4,839,840

Municipal
—

 
73,856

 
2,480

 
53,929

 
130,265

Residential mortgage-backed
—

 
682,962

 
12

 
90,583

 
773,557

Commercial mortgage-backed
—

 
488,598

 
—

 
224,465

 
713,063

Asset-backed
1,992

 
553,968

 
—

 
80,521

 
636,481

Total fixed maturity and short-term investments
$
114,116

 
$
7,248,793

 
$
151,609

 
$
1,183,374

 
$
8,697,892


Included within residential and commercial mortgage-backed securities as of September 30, 2019 were securities issued by U.S. governmental agencies with a fair value of $292.5 million (December 31, 2018: $656.6 million). Included within corporate securities as of September 30, 2019 were senior secured loans of $27.5 million (December 31, 2018: $20.4 million).

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Contractual Maturities
The contractual maturities of our short-term investments and fixed maturity investments, classified as trading and available-for-sale, and the fixed maturity investments included within our funds held - directly managed balance are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As of September 30, 2019
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair
Value
One year or less
 
$
443,741

 
$
437,763

 
5.0
%
More than one year through two years
 
627,938

 
627,114

 
7.1
%
More than two years through five years
 
1,999,134

 
2,016,593

 
22.7
%
More than five years through ten years
 
2,013,150

 
2,089,642

 
23.5
%
More than ten years
 
1,549,806

 
1,698,014

 
19.1
%
Residential mortgage-backed
 
401,266

 
408,507

 
4.6
%
Commercial mortgage-backed
 
859,507

 
887,337

 
10.0
%
Asset-backed
 
711,063

 
708,854

 
8.0
%
 
 
$
8,605,605

 
$
8,873,824

 
100.0
%

Credit Ratings
The following table sets forth the credit ratings of our short-term investments and fixed maturity investments, classified as trading and available-for-sale, and the fixed maturity investments included within our funds held - directly managed balance as of September 30, 2019:
 
 
Amortized
Cost
 
Fair Value
 
% of Total
 
AAA
Rated
 
AA Rated
 
A Rated
 
BBB
Rated
 
Non-
Investment
Grade
 
Not Rated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
495,484

 
$
506,826

 
5.7
%
 
$
506,826

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

U.K. government
 
275,156

 
295,957

 
3.3
%
 
—

 
295,957

 
—

 
—

 
—

 
—

Other government
 
703,795

 
715,094

 
8.1
%
 
303,279

 
154,187

 
66,423

 
156,230

 
34,975

 
—

Corporate
 
5,011,697

 
5,189,885

 
58.5
%
 
127,149

 
558,260

 
2,569,000

 
1,626,305

 
296,641

 
12,530

Municipal
 
147,637

 
161,364

 
1.8
%
 
11,548

 
76,177

 
51,347

 
22,292

 
—

 
—

Residential mortgage-backed
 
401,266

 
408,507

 
4.6
%
 
310,759

 
45,094

 
2,304

 
2,313

 
40,718

 
7,319

Commercial mortgage-backed
 
859,507

 
887,337

 
10.0
%
 
606,878

 
103,702

 
92,312

 
67,072

 
6,743

 
10,630

Asset-backed
 
711,063

 
708,854

 
8.0
%
 
302,808

 
83,926

 
187,062

 
118,084

 
16,120

 
854

Total
 
$
8,605,605

 
$
8,873,824

 
100.0
%
 
$
2,169,247

 
$
1,317,303

 
$
2,968,448

 
$
1,992,296

 
$
395,197

 
$
31,333

% of total fair value
 
 
 
 
 
 
 
24.4
%
 
14.8
%
 
33.4
%
 
22.5
%
 
4.5
%
 
0.4
%


16
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unrealized Gains and Losses Available-for-sale Fixed Maturity Investments
The amortized cost and fair values of our short-term investments and fixed maturity investments classified as available-for-sale were as follows:
As of September 30, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (Non-OTTI)
 
Fair Value
U.S. government and agency
 
$
20,784

 
$
9

 
$
(20
)
 
$
20,773

Other government
 
30,453

 
1,265

 
(348
)
 
31,370

Corporate
 
291,477

 
772

 
(1,019
)
 
291,230

Municipal
 
1,758

 
12

 
(1
)
 
1,769

Residential mortgage-backed
 
6,474

 
2

 
(16
)
 
6,460

Asset-backed
 
64,383

 
12

 
(30
)
 
64,365

 
 
$
415,329

 
$
2,072

 
$
(1,434
)
 
$
415,967

As of December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (Non-OTTI)
 
Fair Value
U.S. government and agency
 
$
576

 
$
—

 
$
(3
)
 
$
573

Other government
 
72,811

 
1,219

 
(845
)
 
73,185

Corporate
 
75,535

 
1,006

 
(1,182
)
 
75,359

Municipal
 
2,499

 
—

 
(19
)
 
2,480

Residential mortgage-backed
 
12

 
—

 
—

 
12

 
 
$
151,433

 
$
2,225

 
$
(2,049
)
 
$
151,609


Gross Unrealized Losses on Available-for-sale Fixed Maturity Investments
The following tables summarize our short-term investments and fixed maturity investments classified as available-for-sale that are in a gross unrealized loss position:
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As of September 30, 2019
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
U.S. government and agency
 
$
—

 
$
—

 
$
8,506

 
$
(20
)
 
$
8,506

 
$
(20
)
Other government
 
2,650

 
(334
)
 
1,682

 
(14
)
 
4,332

 
(348
)
Corporate
 
2,473

 
(466
)
 
172,403

 
(553
)
 
174,876

 
(1,019
)
Municipal
 
127

 
(1
)
 
142

 
—

 
269

 
(1
)
Residential mortgage-backed
 
2

 
—

 
5,117

 
(16
)
 
5,119

 
(16
)
Asset-backed
 
—

 
—

 
30,570

 
(30
)
 
30,570

 
(30
)
Total fixed maturity and short-term investments
 
$
5,252

 
$
(801
)
 
$
218,420

 
$
(633
)
 
$
223,672

 
$
(1,434
)
  
 
 
12 Months or Greater
 
Less Than 12 Months
 
Total
As of December 31, 2018
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
U.S. government and agency
 
$
573

 
$
(3
)
 
$
—

 
$
—

 
$
573

 
$
(3
)
Other government
 
7,351

 
(345
)
 
11,000

 
(500
)
 
18,351

 
(845
)
Corporate
 
11,888

 
(629
)
 
25,227

 
(553
)
 
37,115

 
(1,182
)
Municipal
 
1,783

 
(18
)
 
283

 
(1
)
 
2,066

 
(19
)
Residential mortgage-backed
 
12

 
—

 
—

 
—

 
12

 
—

Total fixed maturity and short-term investments
 
$
21,607

 
$
(995
)
 
$
36,510

 
$
(1,054
)
 
$
58,117

 
$
(2,049
)

17
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of September 30, 2019 and December 31, 2018, the number of securities classified as available-for-sale in an unrealized loss position was 203 and 88, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 15 and 42, respectively.
Other-Than-Temporary Impairment on Available-for-sale Fixed Maturity Investments
For the nine months ended September 30, 2019 and 2018, we did not recognize any other-than-temporary impairment losses on our available-for-sale securities. We determined that no credit losses existed as of September 30, 2019 or December 31, 2018. A description of our other-than-temporary impairment process is included in Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018. There were no changes to our process during the nine months ended September 30, 2019.
Equity Investments
The following table summarizes our equity investments:
 
September 30,
2019
 
December 31,
2018
Publicly traded equity investments in common and preferred stocks
$
312,711

 
$
138,415

Exchange-traded funds
184,024

 
—

Privately held equity investments in common and preferred stocks
231,691

 
228,710

 
$
728,426

 
$
367,125


Equity investments include publicly traded common and preferred stocks, exchange-traded funds and privately held common and preferred stocks. Our publicly traded equity investments in common and preferred stocks predominantly trade on major exchanges and are managed by our external advisors. Our investments in exchange-traded funds trade on a major exchange. Our publicly traded equity investments are widely diversified, and there is no significant concentration in any specific industry.
Our privately held equity investments in common and preferred stocks are direct investments in companies and each investment may have its own unique terms and conditions and there may be restrictions on disposals. The market for these investments is illiquid, and there is no active market. Included within the above balance as of September 30, 2019 and December 31, 2018 is an indirect investment in AmTrust, with a fair value of $203.0 million and $200.0 million, respectively. Refer to Note 19 - "Related Party Transactions" for additional information about our investment in AmTrust.
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
September 30,
2019
 
December 31,
2018
Hedge funds
 
$
997,593

 
$
852,584

Fixed income funds
 
554,067

 
403,858

Equity funds
 
373,814

 
333,681

Private equity funds
 
305,756

 
248,628

CLO equities
 
67,109

 
39,052

CLO equity funds
 
89,493

 
37,260

Private credit funds
 
—

 
33,381

Other
 
9,020

 
9,313

 
 
$
2,396,852

 
$
1,957,757


The valuation of our other investments is described in Note 9 - "Fair Value Measurements". Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month lag. We regularly review and discuss fund performance with the 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. The following is a description of the nature of each of these investment categories:

18
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•
Hedge funds may invest in a wide range of instruments, including debt and equity securities, and utilize various sophisticated strategies to achieve their objectives. We invest in a mixture of fixed income, equity and multi-strategy hedge funds.
•
Fixed income funds comprise a number of positions in diversified fixed income funds that are managed by third-party managers. Underlying investments vary from high-grade corporate bonds to non-investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices.
•
Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities.
•
Private equity funds invest primarily in the financial services industry.
•
CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.
•
CLO equity funds invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.
•
Private credit funds invest in direct senior or collateralized loans.
•
Others comprise various investments including real estate debt funds that invest primarily in European real estate, call options on equities and a fund that provides loans to educational institutions throughout the United States and its territories.
The increase in our other investments carried at fair value between September 30, 2019 and December 31, 2018 was primarily attributable to unrealized gains of $269.8 million and net additional subscriptions of $272.1 million to fixed income funds, private credit funds, CLO equities and CLO equity funds.
As of September 30, 2019, we had unfunded commitments of $368.6 million to private equity funds.
Certain of our other investments are subject to restrictions on redemptions and sales that are determined by the governing documents, which limits our ability to liquidate those investments. These restrictions may include lock-ups, redemption gates, restricted share classes or side pockets, restrictions on the frequency of redemption and notice periods. A gate is the ability to deny or delay a redemption request, whereas a side-pocket is a designated account for which the investor loses its redemption rights. Certain other investments may not have any restrictions governing their sale, but there is no active market and no guarantee that we will be able to execute a sale in a timely manner. In addition, even if certain other investments are not eligible for redemption or sales are restricted, we may still receive income distributions from those other investments. The table below details the estimated date by which proceeds would be received if we had provided notice of our intent to redeem or initiated a sales process as of September 30, 2019:
 
 
Less than 1 Year
 
1-2 years
 
2-3 years
 
More than 3 years
 
Not Eligible/ Restricted
 
Total
 
Redemption Frequency
Hedge funds
 
$
330,127

 
$
—

 
$
498,919

 
$
102,600

 
$
65,947

 
$
997,593

 
Monthly to Bi-annually
Fixed income funds
 
551,028

 
—

 
—

 
—

 
3,039

 
554,067

 
Daily to Quarterly
Equity funds
 
373,814

 
—

 
—

 
—

 
—

 
373,814

 
Daily to Quarterly
Private equity funds
 
—

 
—

 
—

 
—

 
305,756

 
305,756

 
N/A
CLO equities
 
67,109

 
—

 
—

 
—

 
—

 
67,109

 
N/A
CLO equity funds
 
63,895

 
—

 
25,598

 
—

 
—

 
89,493

 
Quarterly to Bi-annually
Other
 
1,870

 
—

 
—

 


 
7,150

 
9,020

 
N/A
 
 
$
1,387,843

 
$
—

 
$
524,517

 
$
102,600

 
$
381,892

 
$
2,396,852

 
 


19
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Equity Method Investments
The following table summarizes our equity method investments:
 
 
September 30, 2019
 
December 31, 2018
 
 
Investment
 
Ownership %
 
Carrying Value
 
Investment
 
Ownership %
 
Carrying Value
Enhanzed Re
 
$
123,240

 
47.4
%
 
$
145,163

 
$
94,800

 
47.4
%
 
$
94,800

Citco
 
50,000

 
31.9
%
 
51,374

 
50,000

 
31.9
%
 
50,812

Monument
 
26,600

 
26.6
%
 
54,720

 
26,600

 
26.6
%
 
42,193

Clear Spring
 
11,210

 
20.0
%
 
10,685

 
11,210

 
20.0
%
 
10,070

Other
 
24,963

 
~30%

 
20,521

 
15,250

 
~30%

 
6,632

 
 
$
236,013

 
 
 
$
282,463

 
$
197,860

 
 
 
$
204,507


Refer to Note 19 - "Related Party Transactions" for further information regarding our investments in Enhanzed Re, Citco, Monument and Clear Spring.
As of September 30, 2019, we had unfunded commitments of $124.3 million related to equity method investments.
Funds Held
Under funds held arrangements, the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries. We either have (i) funds held by reinsured companies, which are carried at amortized cost and on which we receive a fixed crediting rate, or (ii) funds held - directly managed, which are carried at fair value and on which we receive the underlying return on the portfolio. The investment returns on both categories of funds held are recognized in net investment income and net realized and unrealized gains (losses). The funds held balance is credited with investment income and losses payable are deducted.
Funds Held - Directly Managed
Funds held - directly managed, where we receive the underlying return on the investment portfolio, are carried at fair value, either because we elected the fair value option at the inception of the reinsurance contract, or because it represents the aggregate of funds held at amortized cost and the fair value of an embedded derivative. The embedded derivative relates to our contractual right to receive the return on the underlying investment portfolio supporting the reinsurance contract. We include the estimated fair value of these embedded derivatives in the consolidated balance sheets with the host contract in order to reflect the expected settlement of these features with the host contract. The change in the fair value of the embedded derivative is included in net unrealized gains (losses). The following table summarizes the components of the funds held - directly managed:
 
September 30,
2019
 
December 31,
2018
Fixed maturity investments, trading
$
1,230,454

 
$
1,183,374

Other assets
12,994

 
14,780

 
$
1,243,448

 
$
1,198,154



20
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the fixed maturity investment components of funds held - directly managed:
 
September 30,
2019
 
December 31,
2018
 
Funds held - Directly Managed - Fair Value Option
 
Funds held - Directly Managed - Variable Return
 
Total
 
Funds held - Directly Managed - Fair Value Option
 
Funds held - Directly Managed - Variable Return
 
Total
Fixed maturity investments, at amortized cost
$
183,645

 
$
992,370

 
$
1,176,015

 
$
179,670

 
$
1,044,377

 
$
1,224,047

Net unrealized gains (losses):
 
 
 
 
 
 
 
 
 
 
 
Change in fair value - fair value option accounting
5,661

 
—

 
5,661

 
(2,733
)
 
—

 
(2,733
)
Change in fair value - embedded derivative accounting
—

 
48,778

 
48,778

 
—

 
(37,940
)
 
(37,940
)
Fixed maturity investments within funds held - directly managed, at fair value
$
189,306

 
$
1,041,148

 
$
1,230,454

 
$
176,937

 
$
1,006,437

 
$
1,183,374


Refer to the sections above for details of the fixed maturity investments within our funds held - directly managed portfolios.
Funds Held by Reinsured Companies
Funds held by reinsured companies, where we received a fixed crediting rate, are carried at cost on our consolidated balance sheets. As of September 30, 2019 and December 31, 2018, we had funds held by reinsured companies of $393.3 million and $321.3 million, respectively.
Net Investment Income
Major categories of net investment income are summarized as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Fixed maturity investments
$
58,182

 
$
48,062

 
$
175,127

 
$
140,097

Short-term investments and cash and cash equivalents
3,673

 
3,247

 
11,985

 
8,425

Funds held
10,092

 
1,502

 
17,547

 
8,651

Funds held - directly managed
9,381

 
9,776

 
28,742

 
27,990

Investment income from fixed maturities and cash and cash equivalents
81,328

 
62,587

 
233,401

 
185,163

Equity investments
4,416

 
946

 
11,218

 
3,788

Other investments
2,642

 
8,324

 
7,259

 
14,600

Life settlements and other
—

 
—

 
—

 
6,509

Investment income from equities and other investments
7,058

 
9,270

 
18,477

 
24,897

Gross investment income
88,386

 
71,857

 
251,878

 
210,060

Investment expenses
(2,914
)
 
(2,427
)
 
(9,978
)
 
(7,842
)
Net investment income
$
85,472

 
$
69,430

 
$
241,900

 
$
202,218



21
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net Realized and Unrealized Gains and Losses
Components of net realized and unrealized gains and losses were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
Net realized gains (losses) on sale:
 
 
 
 
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
$
56

 
$
—

 
$
4,505

 
$
27

Gross realized losses on fixed maturity securities, available-for-sale
 
(22
)
 
(2
)
 
(314
)
 
(80
)
Net realized gains (losses) on fixed maturity securities, trading
 
33,042

 
(8,797
)
 
53,973

 
(19,310
)
Net realized gains (losses) on funds held - directly managed
 
1,991

 
(1,904
)
 
629

 
(2,849
)
Net realized gains (losses) on equity investments
 
(3,881
)
 
666

 
(1,213
)
 
3,569

Total net realized gains (losses) on sale
 
$
31,186

 
$
(10,037
)
 
$
57,580

 
$
(18,643
)
Net unrealized gains (losses):
 
 
 
 
 
 
 
 
Fixed maturity securities, trading
 
$
82,000

 
$
(13,423
)
 
$
424,872

 
$
(159,691
)
Fixed maturity securities in funds held - directly managed portfolios
 
20,895

 
(405
)
 
95,124

 
(45,430
)
Equity investments
 
10,057

 
1,830

 
31,266

 
6,152

Other Investments
 
4,047

 
(35,188
)
 
269,845

 
(37,059
)
Total net unrealized gains (losses)
 
116,999

 
(47,186
)
 
821,107

 
(236,028
)
Net realized and unrealized gains (losses)
 
$
148,185

 
$
(57,223
)
 
$
878,687

 
$
(254,671
)

The gross realized gains and losses on available-for-sale investments included in the table above resulted from sales of $12.8 million and $0.4 million for the three months ended September 30, 2019 and 2018, respectively, and $96.4 million and $10.9 million for the nine months ended September 30, 2019 and 2018, respectively.
Restricted Assets
We utilize trust accounts to collateralize business with our insurance and reinsurance counterparties. We are also required to maintain investments and cash and cash equivalents on deposit with regulatory authorities and Lloyd's to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. Collateral generally takes the form of assets held in trust, letters of credit or funds held. The assets used as collateral are primarily highly rated fixed maturity securities. The carrying value of our restricted assets, including restricted cash of $508.3 million and $380.5 million, as of September 30, 2019 and December 31, 2018, respectively, was as follows: 
 
 
September 30,
2019
 
December 31,
2018
Collateral in trust for third party agreements
 
$
3,965,101

 
$
4,336,752

Assets on deposit with regulatory authorities
 
424,587

 
579,048

Collateral for secured letter of credit facilities
 
129,463

 
127,841

Funds at Lloyd's (1)
 
758,810

 
354,589

 
 
$
5,277,961

 
$
5,398,230


(1) Our businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has a loss that cannot be funded from other sources. We also utilize unsecured letters of credit for Funds at Lloyd's, as described in Note 13 - "Debt Obligations and Credit Facilities".
The increase in the Funds at Lloyd's was primarily due to the loss portfolio transfer reinsurance transactions as described in Note 3 - "Significant New Business".

22
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. DERIVATIVES AND HEDGING INSTRUMENTS
Foreign Currency Hedging of Net Investments in Foreign Operations
We use foreign currency forward exchange rate contracts in qualifying hedging relationships to hedge the foreign currency exchange rate risk associated with certain of our net investments in foreign operations. As of September 30, 2019 and December 31, 2018, we had forward currency contracts in place, which we had designated as hedges of our net investments in foreign operations.
The following table presents the gross notional amounts and estimated fair values recorded within other assets and other liabilities related to our qualifying foreign currency forward exchange rate contracts:
 
 
September 30, 2019
 
December 31, 2018
 
 
 
 
Fair Value
 
 
 
Fair Value
 
 
Gross Notional Amount
 
Assets
 
Liabilities
 
Gross Notional Amount
 
Assets
 
Liabilities
Foreign currency forward - AUD
 
$
61,269

 
$
191

 
$
—

 
$
42,258

 
$
1,377

 
$
—

Foreign currency forward - EUR
 
109,051

 
2,426

 
—

 
66,422

 
238

 
300

Foreign currency forward - GBP
 
288,840

 
376

 
1,254

 
—

 
—

 
—

Total qualifying hedges
 
$
459,160

 
$
2,993

 
$
1,254

 
$
108,680

 
$
1,615

 
$
300

The following table presents the amounts of the net gains and losses deferred in the cumulative translation adjustment ("CTA") account, which is a component of accumulated other comprehensive income (loss) ("AOCI"), in shareholders' equity, relating to our foreign currency forward exchange rate contracts:
 
 
Amount of Gains (Losses) Deferred in AOCI
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
Foreign currency forward - AUD
 
$
1,673

 
$
678

 
$
1,819

 
$
2,286

Foreign currency forward - EUR
 
4,780

 
52

 
5,076

 
52

Foreign currency forward - GBP
 
8,260

 
—

 
6,669

 
—

Net gains on qualifying derivative hedges
 
$
14,713

 
$
730

 
$
13,564

 
$
2,338


Non-derivative Hedging Instruments of Net Investments in Foreign Operations
From time to time we may make non-US dollar denominated draw-downs against our revolving credit facilities and designate such draw-downs as non-derivative hedges of our net investments in certain subsidiaries whose functional currencies are designated in currencies other than US dollars, which is our functional currency. Our prior Euro-denominated borrowings under our revolving credit facilities were repaid in full during the three months ended September 30, 2018 and replaced by a Euro-denominated foreign currency forward exchange rate contract in a qualifying hedging arrangement. The net gains deferred in the CTA account in AOCI relating to these qualifying Euro-loan derivative hedging instruments for the three and nine months ended September 30, 2018 were $0.7 million and $3.1 million, respectively.
Derivatives Not Designated or Not Qualifying as Hedging Instruments
From time to time, we may also utilize foreign currency forward contracts and interest rate swaps as part of our overall foreign currency risk management strategy or to obtain exposure to a particular financial market, as well as for yield enhancement or risk mitigation in non-qualifying hedging relationships. We may also utilize equity call option instruments either to obtain exposure to a particular equity instrument or for yield enhancement in non-qualifying hedging relationships.

23
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Forward Contracts
The following table presents the gross notional amounts and estimated fair values recorded within other assets and other liabilities related to our non-qualifying foreign currency forward hedging relationships:
 
 
September 30, 2019
 
December 31, 2018
 
 
 
 
Fair Value
 
 
 
Fair Value
 
 
Gross Notional Amount
 
Assets
 
Liabilities
 
Gross Notional Amount
 
Assets
 
Liabilities
Foreign currency forward - AUD
 
$
23,414

 
$
136

 
$
63

 
$
45,427

 
$
1,952

 
$
310

Foreign currency forward - CAD
 
117,816

 
172

 
—

 
55,050

 
1,441

 
—

Foreign currency forward - EUR
 
62,486

 
1,547

 
158

 
54,282

 
139

 
301

Foreign currency forward - GBP
 
29,130

 
444

 
532

 
256,959

 
1,554

 
72

Total non-qualifying hedges
 
$
232,846

 
$
2,299

 
$
753

 
$
411,718

 
$
5,086

 
$
683

The following table presents the amounts of the net gains (losses) included in earnings related to our non-qualifying foreign currency forward contracts:
 
 
 Gains (Losses) on non-qualifying-hedges included in net earnings
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Foreign currency forward - AUD
 
$
1,148

 
$
957

 
$
1,710

 
$
3,453

Foreign currency forward - CAD
 
1,582

 
(1,782
)
 
(910
)
 
5,465

Foreign currency forward - EUR
 
2,473

 
458

 
3,344

 
1,815

Foreign currency forward - GBP
 
10,659

 
4,154

 
12,970

 
$
8,389

Net gains on non-qualifying hedges
 
$
15,862

 
$
3,787

 
$
17,114

 
$
19,122


Investments in Call Options on Equities
During the three and nine months ended September 30, 2019, we recorded unrealized gains included within net earnings of less than $0.1 million and $1.3 million, respectively, and during the three and nine months ended September 30, 2018, we recorded unrealized losses included within net earnings of $0.4 million and $5.4 million, respectively, on the call options on equities that we purchased in 2018 at a cost of $10.0 million. These call options on equities had a fair value of $1.9 million and $0.6 million as of September 30, 2019 and December 31, 2018, respectively.
Other Derivatives
Subsequent to September 30, 2019, we entered into a forward interest rate swap, with a notional amount of AUD$120.0 million, to partially mitigate the risk associated with declining interest rates until the receipt of the assets related to the Munich Re transaction, as discussed in Note 3 - "Significant New Business", which is expected to close in 2020.

24
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. REINSURANCE BALANCES RECOVERABLE ON PAID AND UNPAID LOSSES
The following tables provide the total reinsurance balances recoverable:
 
 
September 30, 2019
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
Recoverable from reinsurers on unpaid:
 
 
 
 
 
 
 
 
Outstanding losses
 
$
945,687

 
$
9,049

 
$
343,089

 
$
1,297,825

IBNR
 
631,722

 
22,056

 
201,815

 
855,593

Fair value adjustments - acquired companies
 
(12,134
)
 
614

 
(2,310
)
 
(13,830
)
Fair value adjustments - fair value option
 
(76,901
)
 
—

 
—

 
(76,901
)
Total reinsurance reserves recoverable
 
1,488,374

 
31,719

 
542,594

 
2,062,687

Paid losses recoverable
 
145,129

 
1,762

 
55,860

 
202,751

Total
 
$
1,633,503

 
$
33,481

 
$
598,454

 
$
2,265,438

 
 
 
 
 
 
 
 
 
Reconciliation to Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
Reinsurance balances recoverable on paid and unpaid losses
 
$
901,599

 
$
33,481

 
$
598,454

 
$
1,533,534

Reinsurance balances recoverable on paid and unpaid losses - fair value option
 
731,904

 
—

 
—

 
731,904

Total
 
$
1,633,503

 
$
33,481

 
$
598,454

 
$
2,265,438

 
 
December 31, 2018
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
Recoverable from reinsurers on unpaid:
 
 
 
 
 
 
 
 
Outstanding losses
 
$
901,772

 
$
18,891

 
$
263,065

 
$
1,183,728

IBNR
 
609,434

 
19,247

 
201,784

 
830,465

Fair value adjustments - acquired companies
 
(14,344
)
 
630

 
(1,899
)
 
(15,613
)
Fair value adjustments - fair value option
 
(130,739
)
 
—

 
—

 
(130,739
)
Total reinsurance reserves recoverable
 
1,366,123

 
38,768

 
462,950

 
1,867,841

Paid losses recoverable
 
138,265

 
(256
)
 
23,813

 
161,822

Total
 
$
1,504,388

 
$
38,512

 
$
486,763

 
$
2,029,663

 
 
 
 
 
 
 
 
 
Reconciliation to Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
Reinsurance balances recoverable on paid and unpaid losses
 
$
764,797

 
$
38,512

 
$
486,763

 
$
1,290,072

Reinsurance balances recoverable on paid and unpaid losses - fair value option
 
739,591

 
—

 
—

 
739,591

Total
 
$
1,504,388

 
$
38,512

 
$
486,763

 
$
2,029,663


Our insurance and reinsurance run-off subsidiaries and assumed portfolios, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. On an annual basis, both Atrium and StarStone purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s and StarStone's third-party reinsurance cover is with highly rated reinsurers or is collateralized by pledged assets or letters of credit.
The fair value adjustments, determined on acquisition of insurance and reinsurance subsidiaries, are based on the estimated timing of loss and LAE recoveries and an assumed interest rate equivalent to a risk free rate for securities with similar duration to the acquired reinsurance balances recoverable plus a spread for credit risk, and are amortized over the estimated recovery period, as adjusted for accelerations in timing of payments as a result of commutation settlements. The determination of the fair value adjustments on the retroactive reinsurance contracts for which we have elected the fair value option is described in Note 9 - "Fair Value Measurements".
As of September 30, 2019 and December 31, 2018, we had reinsurance balances recoverable of $2,265.4 million and $2,029.7 million, respectively. The increase of $235.8 million in reinsurance balances recoverable was primarily

25
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

related to the AmTrust RITC transactions, which closed during the first quarter of 2019, and reserve increases in StarStone, which was partially offset by cash collections and commutations in the first nine months of 2019.
Top Ten Reinsurers
 
September 30, 2019
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
 
% of
Total
Top 10 reinsurers
$
1,130,720

 
$
24,560

 
$
376,529

 
$
1,531,809

 
67.6
%
Other reinsurers > $1 million
489,231

 
8,315

 
219,132

 
716,678

 
31.6
%
Other reinsurers < $1 million
13,552

 
606

 
2,793

 
16,951

 
0.8
%
Total
$
1,633,503

 
$
33,481

 
$
598,454

 
$
2,265,438

 
100.0
%

 
December 31, 2018
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
 
% of
Total
Top 10 reinsurers
$
1,124,079

 
$
25,239

 
$
263,192

 
$
1,412,510

 
69.6
%
Other reinsurers > $1 million
364,098

 
12,091

 
220,123

 
596,312

 
29.4
%
Other reinsurers < $1 million
16,211

 
1,182

 
3,448

 
20,841

 
1.0
%
Total
$
1,504,388

 
$
38,512

 
$
486,763

 
$
2,029,663

 
100.0
%
 
September 30, 2019
 
December 31, 2018
Information regarding top ten reinsurers:
 
 
 
Number of top 10 reinsurers rated A- or better
8

 
7

Number of top 10 non-rated reinsurers (1)
2

 
3

 
 
 
 
Reinsurers rated A- or better in top 10
$
1,302,270

 
$
1,096,272

Collaterized non-rated reinsurers in top 10 (1)
229,539

 
316,238

Total top 10 reinsurance recoverables
$
1,531,809

 
$
1,412,510

 
 
 
 
Single reinsurers that represent 10% or more of total reinsurance balance recoverables as of September 30, 2019:
 
 
 
 
 
 
 
Hannover Ruck SE (2)
$
305,890

 
$
279,723

Lloyd's Syndicates (3)
$
397,379

 
$
334,509

(1) For the two non-rated reinsurers as of September 30, 2019 and three non-rated reinsurers as of December 31, 2018, we hold security in the form of pledged assets in trust or letters of credit issued to us in the full amount of the recoverable.
(2) Hannover Ruck SE is rated AA- by Standard & Poor’s and A+ by A.M. Best.
(3) Lloyd's Syndicates are rated A+ by Standard & Poor's and A by A.M. Best.
 Provisions for Uncollectible Reinsurance Balances Recoverable
We evaluate and monitor concentration of credit risk among our reinsurers, and provisions are made for amounts considered potentially uncollectible.

26
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table shows our reinsurance balances recoverable by rating of reinsurer and our provisions for uncollectible reinsurance balances recoverable ("provisions for bad debt"). The majority of the provisions for bad debt relate to the Non-life Run-off segment.
 
September 30, 2019
 
December 31, 2018
 
Gross
 
Provisions for Bad Debt
 
Net
 
Provisions as a
% of Gross
 
Gross
 
Provisions for Bad Debt
 
Net
 
Provisions as a
% of Gross
Reinsurers rated A- or above
$
1,895,174

 
$
53,360

 
$
1,841,814

 
2.8
%
 
$
1,612,464

 
$
51,519

 
$
1,560,945

 
3.2
%
Reinsurers rated below A-, secured
394,262

 
—

 
394,262

 
—
%
 
430,852

 
—

 
430,852

 
—
%
Reinsurers rated below A-, unsecured
130,448

 
101,086

 
29,362

 
77.5
%
 
143,079

 
105,213

 
37,866

 
73.5
%
Total
$
2,419,884

 
$
154,446

 
$
2,265,438

 
6.4
%
 
$
2,186,395

 
$
156,732

 
$
2,029,663

 
7.2
%


7. DEFERRED CHARGE ASSETS
Deferred charge assets relate to retroactive reinsurance policies providing indemnification of losses and LAE with respect to past loss events in the Non-life Run-off segment. For insurance and reinsurance contracts for which we do not elect the fair value option, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the premiums received at the initial measurement. Deferred charge assets are included in other assets on our consolidated balance sheets. The following table presents a reconciliation of the deferred charge assets:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Beginning carrying value
$
99,094

 
$
71,393

 
$
86,585

 
$
80,192

Recorded during the period
85,183

 
17,208

 
108,689

 
17,208

Amortization
(17,009
)
 
(1,582
)
 
(28,006
)
 
(10,381
)
Ending carrying value
$
167,268

 
$
87,019

 
$
167,268

 
$
87,019


Deferred charge assets are amortized over the estimated claim payment period of the related contract with the periodic amortization reflected in earnings as a component of losses and LAE. Deferred charge assets amortization is adjusted at each reporting period to reflect new estimates of the amount and timing of remaining loss payments. Changes in the estimated amount and the timing of payments of unpaid losses may have an effect on the unamortized deferred charge assets and the amount of periodic amortization. Deferred charge assets are assessed at each reporting period for impairment. If the asset is determined to be impaired, it is written down in the period in which the determination is made. For the nine months ended September 30, 2019, we completed our assessment for impairment of deferred charge assets and concluded that there had been no impairment of our carried deferred charge assets amount.
Further information on deferred charge assets recorded during the nine months ended September 30, 2019, is included in Note 3 - "Significant New Business".

27
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses ("LAE"), also referred to as loss reserves, represents our gross estimates before reinsurance for unpaid reported losses and includes losses that have been incurred but not reported ("IBNR") for our Non-life Run-off, Atrium and StarStone segments and our other activities, using a variety of actuarial methods. We recognize an asset for the portion of the liability that we expect to recover from reinsurers. LAE reserves include allocated loss adjustment expenses ("ALAE"), and unallocated loss adjustment expenses ("ULAE"). ALAE are linked to the settlement of an individual claim or loss, whereas ULAE are based on our estimates of future costs to administer the claims. IBNR represents reserves for loss and LAE that have been incurred but not yet reported to us. This includes amounts for unreported claims, development on known claims and reopened claims. Our loss reserves cover multiple lines of business, which include asbestos, environmental, general casualty, workers' compensation, marine, aviation and transit, construction defects, professional indemnity/directors and officers, motor, property and other non-life lines of business. Refer to Note 10 - "Losses and Loss Adjustment Expenses" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for more information on establishing the liability for losses and LAE.
The following tables summarize the liability for losses and LAE by segment:
 
September 30, 2019
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
Outstanding losses
$
4,256,578

 
$
84,382

 
$
905,415

 
$
8,350

 
$
5,254,725

IBNR
3,729,552

 
140,800

 
906,965

 
15,974

 
4,793,291

Fair value adjustments - acquired companies
(183,702
)
 
4,189

 
(568
)
 
—

 
(180,081
)
Fair value adjustments - fair value option
(182,828
)
 
—

 
—

 
—

 
(182,828
)
ULAE
320,091

 
2,308

 
27,801

 
—

 
350,200

Total
$
7,939,691

 
$
231,679

 
$
1,839,613

 
$
24,324

 
$
10,035,307

 
 
 
 
 
 
 
 
 
 
Reconciliation to Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
$
5,281,047

 
$
231,679

 
$
1,839,613

 
$
24,324

 
$
7,376,663

Loss and loss adjustment expenses, at fair value
2,658,644

 
—

 
—

 
—

 
2,658,644

Total
$
7,939,691

 
$
231,679

 
$
1,839,613

 
$
24,324

 
$
10,035,307


 
December 31, 2018
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
Outstanding losses
$
4,271,769

 
$
94,885

 
$
796,194

 
$
6,052

 
$
5,168,900

IBNR
3,527,767

 
140,521

 
787,894

 
12,809

 
4,468,991

Fair value adjustments - acquired companies
(217,527
)
 
3,476

 
(467
)
 
—

 
(214,518
)
Fair value adjustments - fair value option
(374,752
)
 
—

 
—

 
—

 
(374,752
)
ULAE
333,405

 
2,402

 
25,076

 
—

 
360,883

Total
$
7,540,662

 
$
241,284

 
$
1,608,697

 
$
18,861

 
$
9,409,504

 
 
 
 
 
 
 
 
 
 
Reconciliation to Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
$
4,666,607

 
$
241,284

 
$
1,608,697

 
$
18,861

 
$
6,535,449

Loss and loss adjustment expenses, at fair value
2,874,055

 
—

 
—

 
—

 
2,874,055

Total
$
7,540,662

 
$
241,284

 
$
1,608,697

 
$
18,861

 
$
9,409,504


The overall increase in the liability for losses and LAE between December 31, 2018 and September 30, 2019 was primarily attributable to the AmTrust RITC Transactions, the Amerisure loss portfolio transfer and the Maiden reinsurance agreement in our Non-life Run-off segment, as described in Note 3 - "Significant New Business", and net incurred losses in our StarStone segment.

28
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below provides a reconciliation of the beginning and ending liability for losses and LAE:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Balance as of beginning of period
$
9,833,886

 
$
8,608,387

 
$
9,409,504

 
$
7,398,088

Less: reinsurance reserves recoverable
2,059,998

 
1,866,969

 
1,867,841

 
1,870,033

Less: deferred charge assets on retroactive reinsurance
99,094

 
71,393

 
86,585

 
80,192

Net balance as of beginning of period
7,674,794

 
6,670,025

 
7,455,078

 
5,447,863

Net incurred losses and LAE:
 
 
 
 
 
 
 
  Current period
213,701

 
219,050

 
634,114

 
468,064

  Prior periods
8,716

 
(65,076)

 
117,045

 
(201,737
)
  Total net incurred losses and LAE
222,417

 
153,974

 
751,159

 
266,327

Net paid losses:
 
 
 
 
 
 
 
  Current period
(42,927
)
 
(24,266)

 
(116,597
)
 
(62,843
)
  Prior periods
(410,655
)
 
(296,709)

 
(1,300,585
)
 
(937,846
)
  Total net paid losses
(453,582
)
 
(320,975)

 
(1,417,182
)
 
(1,000,689
)
Effect of exchange rate movement
(83,277
)
 
(26,825
)
 
(95,270
)
 
(108,659
)
Acquired on purchase of subsidiaries
—

 
22,713

 
686

 
366,519

Assumed business
445,000

 
103,615

 
1,110,881

 
1,631,166

Net balance as of September 30
7,805,352

 
6,602,527

 
7,805,352

 
6,602,527

Plus: reinsurance reserves recoverable
2,062,687

 
1,846,187

 
2,062,687

 
1,846,187

Plus: deferred charge assets on retroactive reinsurance
167,268

 
87,019

 
167,268

 
87,019

Balance as of September 30
$
10,035,307

 
$
8,535,733

 
$
10,035,307

 
$
8,535,733


The tables below provide the net incurred losses and LAE by segment:
 
Three Months Ended September 30, 2019
 
Non-life Run-off
 
Atrium
 
StarStone
 
Other
 
Total
Net losses paid
$
288,445

 
$
20,005

 
$
142,183

 
$
2,949

 
$
453,582

Net change in case and LAE reserves
(173,104
)
 
(91
)
 
(14,872
)
 
944

 
(187,123
)
Net change in IBNR reserves
(148,521
)
 
8,702

 
31,946

 
(246
)
 
(108,119
)
Increase (reduction) in estimates of net ultimate losses
(33,180
)
 
28,616

 
159,257

 
3,647

 
158,340

Increase (reduction) in provisions for unallocated LAE
(12,158
)
 
—

 
(11
)
 
—

 
(12,169
)
Amortization of deferred charge assets
17,009

 
—

 
—

 
—

 
17,009

Amortization of fair value adjustments
17,538

 
(216
)
 
541

 
—

 
17,863

Changes in fair value - fair value option
41,374

 
—

 
—

 
—

 
41,374

Net incurred losses and LAE
$
30,583

 
$
28,400

 
$
159,787

 
$
3,647

 
$
222,417

 
Three Months Ended September 30, 2018
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
Net losses paid
$
195,770

 
$
16,310

 
$
108,895

 
$
320,975

Net change in case and LAE reserves
(128,662
)
 
(546
)
 
17,549

 
(111,659
)
Net change in IBNR reserves
(102,148
)
 
2,818

 
71,160

 
(28,170
)
Increase (reduction) in estimates of net ultimate losses
(35,040
)
 
18,582

 
197,604

 
181,146

Increase (reduction) in provisions for unallocated LAE
(24,460
)
 
(2
)
 
1,582

 
(22,880
)
Amortization of deferred charge assets
1,582

 
—

 
—

 
1,582

Amortization of fair value adjustments
4,247

 
(727
)
 
(287
)
 
3,233

Changes in fair value - fair value option
(9,107
)
 
—

 
—

 
(9,107
)
Net incurred losses and LAE
$
(62,778
)
 
$
17,853

 
$
198,899

 
$
153,974



29
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Nine Months Ended September 30, 2019
 
Non-life Run-off
 
Atrium
 
StarStone
 
Other
 
Total
Net losses paid
$
966,617

 
$
60,095

 
$
382,865

 
$
7,605

 
$
1,417,182

Net change in case and LAE reserves
(370,639
)
 
(245
)
 
34,197

 
2,298

 
(334,389
)
Net change in IBNR reserves
(619,648
)
 
(1,916
)
 
123,715

 
3,165

 
(494,684
)
Increase (reduction) in estimates of net ultimate losses
(23,670
)
 
57,934

 
540,777

 
13,068

 
588,109

Increase (reduction) in provisions for unallocated LAE
(38,229
)
 
—

 
2,825

 
—

 
(35,404
)
Amortization of deferred charge assets
28,006

 
—

 
—

 
—

 
28,006

Amortization of fair value adjustments
34,033

 
728

 
310

 
—

 
35,071

Changes in fair value - fair value option
135,377

 
—

 
—

 
—

 
135,377

Net incurred losses and LAE
$
135,517

 
$
58,662

 
$
543,912

 
$
13,068

 
$
751,159


 
Nine Months Ended September 30, 2018
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
Net losses paid
$
644,665

 
$
53,187

 
$
302,837

 
$
1,000,689

Net change in case and LAE reserves
(376,512
)
 
(98
)
 
38,915

 
(337,695
)
Net change in IBNR reserves
(413,898
)
 
2,964

 
75,031

 
(335,903
)
Increase (reduction) in estimates of net ultimate losses
(145,745
)
 
56,053

 
416,783

 
327,091

Increase (reduction) in provisions for unallocated LAE
(48,723
)
 
—

 
4,012

 
(44,711
)
Amortization of deferred charge assets
10,381

 
—

 
—

 
10,381

Amortization of fair value adjustments
10,312

 
(4,102
)
 
(529
)
 
5,681

Changes in fair value - fair value option
(32,115
)
 
—

 
—

 
(32,115
)
Net incurred losses and LAE
$
(205,890
)
 
$
51,951

 
$
420,266

 
$
266,327


Non-Life Run-off Segment
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the Non-life Run-off segment:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Balance as of beginning of period
$
7,803,663

 
$
7,025,750

 
7,540,662

 
$
5,949,472

Less: reinsurance reserves recoverable
1,534,427

 
1,462,139

 
1,366,123

 
1,377,485

Less: deferred charge assets on retroactive insurance
99,094

 
71,393

 
86,585

 
80,192

Net balance as of beginning of period
6,170,142

 
5,492,218

 
6,087,954

 
4,491,795

Net incurred losses and LAE:
 
 
 
 
 
 
 
  Current period
23,845

 
10,017

 
107,291

 
15,476

  Prior periods
6,738

 
(72,795
)
 
28,226

 
(221,366
)
  Total net incurred losses and LAE
30,583

 
(62,778
)
 
135,517

 
(205,890
)
Net paid losses:
 
 
 
 
 
 
 
  Current period
(14,374
)
 
(2,713
)
 
(53,265
)
 
(3,304
)
  Prior periods
(274,071
)
 
(193,057
)
 
(913,352
)
 
(641,361
)
  Total net paid losses
(288,445
)
 
(195,770
)
 
(966,617
)
 
(644,665
)
Effect of exchange rate movement
(73,231
)
 
(26,352
)
 
(84,372
)
 
(102,030
)
Acquired on purchase of subsidiaries
—

 
22,713

 
686

 
173,538

Assumed business
445,000

 
103,615

 
1,110,881

 
1,620,898

Net balance as of September 30
6,284,049

 
5,333,646

 
6,284,049

 
5,333,646

Plus: reinsurance reserves recoverable
1,488,374

 
1,412,090

 
1,488,374

 
1,412,090

Plus: deferred charge assets on retroactive reinsurance
167,268

 
87,019

 
167,268

 
87,019

Balance as of September 30
$
7,939,691

 
$
6,832,755

 
7,939,691

 
$
6,832,755



30
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net incurred losses and LAE in the Non-life Run-off segment were as follows:
 
Three Months Ended September 30,
 
2019
 
2018
 
Prior
Period
 
Current
Period
 
Total
 
Prior
Period
 
Current
Period
 
Total
Net losses paid
$
274,071

 
$
14,374

 
$
288,445

 
$
193,057

 
$
2,713

 
$
195,770

Net change in case and LAE reserves
(175,830
)
 
2,726

 
(173,104
)
 
(128,827
)
 
165

 
(128,662
)
Net change in IBNR reserves
(155,315
)
 
6,794

 
(148,521
)
 
(109,287
)
 
7,139

 
(102,148
)
Increase (reduction) in estimates of net ultimate losses
(57,074
)
 
23,894

 
(33,180
)
 
(45,057
)
 
10,017

 
(35,040
)
Reduction in provisions for unallocated LAE
(12,109
)
 
(49
)
 
(12,158
)
 
(24,460
)
 
—

 
(24,460
)
Amortization of deferred charge assets
17,009

 
—

 
17,009

 
1,582

 
—

 
1,582

Amortization of fair value adjustments
17,538

 
—

 
17,538

 
4,247

 
—

 
4,247

Changes in fair value - fair value option
41,374

 
—

 
41,374

 
(9,107
)
 
—

 
(9,107
)
Net incurred losses and LAE
$
6,738

 
$
23,845

 
$
30,583

 
$
(72,795
)
 
$
10,017

 
$
(62,778
)

Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
Three Months Ended September 30, 2019
The increase in net incurred losses and LAE for the three months ended September 30, 2019 of $30.6 million included net incurred losses and LAE of $23.8 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC Transactions and the acquisition of Maiden Reinsurance North America, Inc. ("Maiden Re North America"). Excluding current period net incurred losses and LAE of $23.8 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $6.7 million, which was attributable to an increase in the fair value of liabilities of $41.4 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily as a result of a decrease in corporate bond yields, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $17.5 million and the amortization of the deferred charge assets of $17.0 million, partially offset by a reduction in estimates of net ultimate losses of $57.1 million and a reduction in provisions for unallocated LAE of $12.1 million relating to 2019 run-off activity. The reduction in estimates of net ultimate losses relating to prior periods of $57.1 million for the three months ended September 30, 2019 included a net reduction in case and IBNR reserves of $331.1 million, partially offset by net losses paid of $274.1 million.
Three Months Ended September 30, 2018
The reduction in net incurred losses and LAE for the three months ended September 30, 2018 of $62.8 million included net incurred losses and LAE of $10.0 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $10.0 million, the reduction in net incurred losses and LAE liabilities relating to prior periods was $72.8 million, which was attributable to a reduction in estimates of net ultimate losses of $45.1 million and a reduction in provisions for unallocated LAE of $24.5 million, relating to 2018 run-off activity, and a reduction in the fair value of liabilities of $9.1 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.2 million and the amortization of the deferred charge assets of $1.6 million. The reduction in estimates of net ultimate losses relating to prior periods of $45.1 million for the three months ended September 30, 2018 included a net reduction in case and IBNR reserves of $238.1 million, partially offset by net losses paid of $193.1 million.

31
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Nine Months Ended September 30,
 
2019
 
2018
 
Prior
Period
 
Current
Period
 
Total
 
Prior
Period
 
Current
Period
 
Total
Net losses paid
$
913,352

 
$
53,265

 
$
966,617

 
$
641,361

 
$
3,304

 
$
644,665

Net change in case and LAE reserves
(394,780
)
 
24,141

 
(370,639
)
 
(377,735
)
 
1,223

 
(376,512
)
Net change in IBNR reserves
(649,053
)
 
29,405

 
(619,648
)
 
(424,847
)
 
10,949

 
(413,898
)
Increase (reduction) in estimates of net ultimate losses
(130,481
)
 
106,811

 
(23,670
)
 
(161,221
)
 
15,476

 
(145,745
)
Increase (reduction) in provisions for unallocated LAE
(38,709
)
 
480

 
(38,229
)
 
(48,723
)
 
—

 
(48,723
)
Amortization of deferred charge assets
28,006

 
—

 
28,006

 
10,381

 
—

 
10,381

Amortization of fair value adjustments
34,033

 
—

 
34,033

 
10,312

 
—

 
10,312

Changes in fair value - fair value option
135,377

 
—

 
135,377

 
(32,115
)
 
—

 
(32,115
)
Net incurred losses and LAE
$
28,226

 
$
107,291

 
$
135,517

 
$
(221,366
)
 
$
15,476

 
$
(205,890
)


Nine Months Ended September 30, 2019
The increase in net incurred losses and LAE for the nine months ended September 30, 2019 of $135.5 million included net incurred losses and LAE of $107.3 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC Transactions and the acquisition of Maiden Re North America. Excluding current period net incurred losses and LAE of $107.3 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $28.2 million, which was attributable to an increase in the fair value of liabilities of $135.4 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily as a result of a decrease in corporate bond yields, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $34.0 million and amortization of the deferred charge assets of $28.0 million, partially offset by a reduction in estimates of net ultimate losses of $130.5 million and a reduction in provisions for unallocated LAE of $38.7 million, relating to 2019 run-off activity. The reduction in estimates of net ultimate losses relating to prior periods of $130.5 million for the nine months ended September 30, 2019 included a net change in case and IBNR reserves of $1,043.8 million, partially offset by net losses paid of $913.4 million.
Nine Months Ended September 30, 2018
The reduction in net incurred losses and LAE for the nine months ended September 30, 2018 of $205.9 million included net incurred losses and LAE of $15.5 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $15.5 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $221.4 million, which was attributable to a reduction in estimates of net ultimate losses of $161.2 million, a reduction in provisions for unallocated LAE of $48.7 million, relating to 2018 run-off activity and a reduction in the fair value of liabilities of $32.1 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by amortization of the deferred charge assets of $10.4 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $10.3 million. The reduction in estimates of net ultimate losses relating to prior periods of $161.2 million for the nine months ended September 30, 2018 included a net change in case and IBNR reserves of $802.6 million, partially offset by net losses paid of $641.4 million.

32
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Atrium
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the Atrium segment:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Balance as of beginning of period
$
222,576

 
$
234,232

 
$
241,284

 
$
240,873

Less: reinsurance reserves recoverable
29,606

 
38,253

 
38,768

 
40,531

Net balance as of beginning of period
192,970

 
195,979

 
202,516

 
200,342

Net incurred losses and LAE:
 
 
 
 
 
 
 
  Current period
27,093

 
20,033

 
63,189

 
56,514

  Prior periods
1,307

 
(2,180
)
 
(4,527
)
 
(4,563
)
  Total net incurred losses and LAE
28,400

 
17,853

 
58,662

 
51,951

Net paid losses:
 
 
 
 
 
 
 
  Current period
(9,387
)
 
(8,080
)
 
(24,531
)
 
(25,699
)
  Prior periods
(10,618
)
 
(8,230
)
 
(35,564
)
 
(27,488
)
  Total net paid losses
(20,005
)
 
(16,310
)
 
(60,095
)
 
(53,187
)
Effect of exchange rate movement
(1,405
)
 
(137
)
 
(1,123
)
 
(1,721
)
Net balance as of September 30
199,960

 
197,385

 
199,960

 
197,385

Plus: reinsurance reserves recoverable
31,719

 
45,382

 
31,719

 
45,382

Balance as of September 30
$
231,679

 
$
242,767

 
$
231,679

 
$
242,767


Net incurred losses and LAE in the Atrium segment were as follows:
 
Three Months Ended September 30,
 
2019
 
2018
 
Prior
Period
 
Current
Period
 
Total
 
Prior
Period
 
Current
Period
 
Total
Net losses paid
$
10,618

 
$
9,387

 
$
20,005

 
$
8,230

 
$
8,080

 
$
16,310

Net change in case and LAE reserves
(2,860
)
 
2,769

 
(91
)
 
(4,142
)
 
3,596

 
(546
)
Net change in IBNR reserves
(6,235
)
 
14,937

 
8,702

 
(5,539
)
 
8,357

 
2,818

Increase (reduction) in estimates of net ultimate losses
1,523

 
27,093

 
28,616

 
(1,451
)
 
20,033

 
18,582

Reduction in provisions for unallocated LAE
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Amortization of fair value adjustments
(216
)
 
—

 
(216
)
 
(727
)
 
—

 
(727
)
Net incurred losses and LAE
$
1,307

 
$
27,093

 
$
28,400

 
$
(2,180
)
 
$
20,033

 
$
17,853


 
Nine Months Ended September 30,
 
2019
 
2018
 
Prior Period
 
Current Period
 
Total
 
Prior Period
 
Current Period
 
Total
Net losses paid
$
35,564

 
$
24,531

 
$
60,095

 
$
27,488

 
$
25,699

 
$
53,187

Net change in case and LAE reserves
(13,032
)
 
12,787

 
(245
)
 
(9,695
)
 
9,597

 
(98
)
Net change in IBNR reserves
(27,787
)
 
25,871

 
(1,916
)
 
(18,254
)
 
21,218

 
2,964

Increase (reduction) in estimates of net ultimate losses
(5,255
)
 
63,189

 
57,934

 
(461
)
 
56,514

 
56,053

Amortization of fair value adjustments
728

 
—

 
728

 
(4,102
)
 
—

 
(4,102
)
Net incurred losses and LAE
$
(4,527
)
 
$
63,189

 
$
58,662

 
$
(4,563
)
 
$
56,514

 
$
51,951



33
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

StarStone
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for our StarStone segment:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Balance as of beginning of period
$
1,784,021

 
$
1,348,405

 
$
1,608,697

 
$
1,207,743

Less: reinsurance reserves recoverable
495,965

 
366,577

 
462,950

 
452,017

Net balance as of beginning of period
1,288,056

 
981,828

 
1,145,747

 
755,726

Net incurred losses and LAE:
 
 
 
 
 
 
 
  Current period
159,165

 
189,000

 
450,464

 
396,074

  Prior periods
622

 
9,899

 
93,448

 
24,192

  Total net incurred losses and LAE
159,787

 
198,899

 
543,912

 
420,266

Net paid losses:
 
 
 
 
 
 
 
  Current period
(17,847
)
 
(13,473
)
 
(36,542
)
 
(33,840
)
  Prior periods
(124,336
)
 
(95,422
)
 
(346,323
)
 
(268,997
)
  Total net paid losses
(142,183
)
 
(108,895
)
 
(382,865
)
 
(302,837
)
Effect of exchange rate movement
(8,641
)
 
(336
)
 
(9,775
)
 
(4,908
)
Acquired on purchase of subsidiaries
—

 
—

 
—

 
192,981

Assumed business
—

 
—

 
—

 
10,268

Net balance as of September 30
1,297,019

 
1,071,496

 
1,297,019

 
1,071,496

Plus: reinsurance reserves recoverable
542,594

 
388,715

 
542,594

 
388,715

Balance as of September 30
$
1,839,613

 
$
1,460,211

 
$
1,839,613

 
$
1,460,211


Net incurred losses and LAE in the StarStone segment were as follows:
 
Three Months Ended September 30,
 
2019
 
2018
 
Prior Period
 
Current Period
 
Total
 
Prior Period
 
Current Period
 
Total
Net losses paid
$
124,336

 
$
17,847

 
$
142,183

 
$
95,422

 
$
13,473

 
$
108,895

Net change in case and LAE reserves
(9,672
)
 
(5,200
)
 
(14,872
)
 
(19,919
)
 
37,468

 
17,549

Net change in IBNR reserves
(112,123
)
 
144,069

 
31,946

 
(63,294
)
 
134,454

 
71,160

Increase in estimates of net ultimate losses
2,541

 
156,716

 
159,257

 
12,209

 
185,395

 
197,604

Increase (reduction) in provisions for unallocated LAE
(2,460
)
 
2,449

 
(11
)
 
(2,023
)
 
3,605

 
1,582

Amortization of fair value adjustments
541

 
—

 
541

 
(287
)
 
—

 
(287
)
Net incurred losses and LAE
$
622

 
$
159,165

 
$
159,787

 
$
9,899

 
$
189,000

 
$
198,899


Three Months Ended September 30, 2019 and 2018
Net incurred losses and LAE for the three months ended September 30, 2019 and 2018 were $159.8 million and $198.9 million, respectively. Net unfavorable prior year loss development was $0.6 million for the three months ended September 30, 2019 compared to net unfavorable prior year loss development of $9.9 million for the three months ended September 30, 2018. Excluding prior year loss development, net incurred losses and LAE for the three months ended September 30, 2019 and 2018 were $159.2 million and $189.0 million, respectively.

34
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Nine Months Ended September 30,
 
2019
 
2018
 
Prior Period
 
Current Period
 
Total
 
Prior Period
 
Current Period
 
Total
Net losses paid
$
346,323

 
$
36,542

 
$
382,865

 
$
268,997

 
$
33,840

 
$
302,837

Net change in case and LAE reserves
(14,922
)
 
49,119

 
34,197

 
(55,541
)
 
94,456

 
38,915

Net change in IBNR reserves
(233,528
)
 
357,243

 
123,715

 
(183,422
)
 
258,453

 
75,031

Increase in estimates of net ultimate losses
97,873

 
442,904

 
540,777

 
30,034

 
386,749

 
416,783

Increase (reduction) in provisions for unallocated LAE
(4,735
)
 
7,560

 
2,825

 
(5,313
)
 
9,325

 
4,012

Amortization of fair value adjustments
310

 
—

 
310

 
(529
)
 
—

 
(529
)
Net incurred losses and LAE
$
93,448

 
$
450,464

 
$
543,912

 
$
24,192

 
$
396,074

 
$
420,266


Nine Months Ended September 30, 2019 and 2018
Net incurred losses and LAE for the nine months ended September 30, 2019 and 2018 were $543.9 million and $420.3 million, respectively. The increase in net incurred losses was primarily due to lower reinsurance recoveries due to lower ceded business principally due to the non-renewal of the KaylaRe quota share and subsequent consolidation and elimination upon acquisition and net unfavorable prior year loss development. Net unfavorable prior year loss development was $93.4 million for the nine months ended September 30, 2019 compared to net unfavorable prior year loss development of $24.2 million for the nine months ended September 30, 2018. Excluding prior year loss development, net incurred losses and LAE for the nine months ended September 30, 2019 and 2018 were $450.5 million and $396.1 million, respectively. Net unfavorable prior year loss development for the nine months ended September 30, 2019 was primarily related to unfavorable development on the U.S. casualty line of business, reflecting an increase in the frequency and severity of losses and social inflation and lines of business which we have either exited or which are subject to remediation as part of our underwriting repositioning.

35
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
•
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
•
Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted third party pricing sources or management's assumptions and internal valuation models may be used to determine the fair values.
In addition, certain of our other investments are measured at fair value using net asset value ("NAV") per share (or its equivalent) as a practical expedient and have not been classified within the fair value hierarchy above. We have categorized our investments that are recorded at fair value on a recurring basis among levels based on the observability of inputs, or at fair value using NAV per share (or its equivalent) as follows:

36
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
 
September 30, 2019
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value Based on NAV as Practical Expedient
 
Total Fair
Value
Investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturity investments:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
—

 
$
506,826

 
$
—

 
$
—

 
$
506,826

U.K. government
 
—

 
295,957

 
—

 
—

 
295,957

Other government
 
—

 
715,094

 
—

 
—

 
715,094

Corporate
 
—

 
5,187,604

 
2,281

 
—

 
5,189,885

Municipal
 
—

 
161,364

 
—

 
—

 
161,364

Residential mortgage-backed
 
—

 
408,507

 
—

 
—

 
408,507

Commercial mortgage-backed
 
—

 
887,335

 
2

 
—

 
887,337

Asset-backed
 
—

 
690,418

 
18,436

 
—

 
708,854

 
 
$
—

 
$
8,853,105

 
$
20,719

 
$
—

 
$
8,873,824

 
 
 
 
 
 
 
 
 
 
 
Other assets included within funds held - directly managed
 
12,994

 
—

 
—

 
—

 
12,994

 
 
 
 
 
 
 
 
 
 
 
Equities:
 
 
 
 
 
 
 
 
 
 
Publicly traded equity investments
 
$
282,437

 
$
30,274

 
$
—

 
$
—

 
$
312,711

Exchange-traded funds
 
184,024

 
—

 
—

 
—

 
184,024

Privately held equity investments
 
—

 
—

 
231,691

 
—

 
231,691

 
 
$
466,461

 
$
30,274

 
$
231,691

 
$
—

 
$
728,426

 
 
 
 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
$
—

 
$
—

 
$
—

 
$
997,593

 
$
997,593

Fixed income funds
 
—

 
473,671

 
—

 
80,396

 
554,067

Equity funds
 
—

 
101,909

 
—

 
271,905

 
373,814

Private equity funds
 
—

 
—

 
—

 
305,756

 
305,756

CLO equities
 
—

 
—

 
67,109

 
—

 
67,109

CLO equity funds
 
—

 
—

 
—

 
89,493

 
89,493

Other
 
—

 
1,870

 
314

 
6,836

 
9,020

 
 
$
—

 
$
577,450

 
$
67,423

 
$
1,751,979

 
$
2,396,852

Total Investments
 
$
479,455

 
$
9,460,829

 
$
319,833

 
$
1,751,979

 
$
12,012,096

 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
360,381

 
$
147,828

 
$
—

 
$
—

 
$
508,209

 
 
 
 
 
 
 
 
 
 
 
Reinsurance balances recoverable on paid and unpaid losses:
 
$
—

 
$
—

 
$
731,904

 
$
—

 
$
731,904

 
 
 
 
 
 
 
 
 
 
 
Other Assets:
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
 
$
—

 
$
5,292

 
$
—

 
$
—

 
$
5,292

 
 
$
—

 
$
5,292

 
$
—

 
$
—

 
$
5,292

 
 
 
 
 
 
 
 
 
 
 
Losses and LAE:
 
$
—

 
$
—

 
$
2,658,644

 
$
—

 
$
2,658,644

 
 
 
 
 
 
 
 
 
 
 
Other Liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
 
$
—

 
$
2,007

 
$
—

 
$
—

 
$
2,007

 
 
$
—

 
$
2,007

 
$
—

 
$
—

 
$
2,007



37
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
 
December 31, 2018
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value Based on NAV as Practical Expedient
 
Total Fair
Value
Investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturity investments:
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
 
$
—

 
$
510,245

 
$
—

 
$
—

 
$
510,245

U.K government
 
—

 
300,631

 
—

 
—

 
300,631

Other government
 
—

 
793,810

 
—

 
—

 
793,810

Corporate
 
—

 
4,802,454

 
37,386

 
—

 
4,839,840

Municipal
 
—

 
130,265

 
—

 
—

 
130,265

Residential mortgage-backed
 
—

 
773,557

 
—

 
—

 
773,557

Commercial mortgage-backed
 
—

 
705,674

 
7,389

 
—

 
713,063

Asset-backed
 
—

 
627,360

 
9,121

 
—

 
636,481

 
 
$
—

 
$
8,643,996

 
$
53,896

 
$
—

 
$
8,697,892

 
 
 
 
 
 
 
 
 
 
 
Other assets included within funds held - directly managed
 
$
—

 
$
14,780

 
$
—

 
$
—

 
$
14,780

 
 
 
 
 
 
 
 
 
 
 
Equities:
 
 
 
 
 
 
 
 
 
 
Publicly traded equity investments
 
$
102,102

 
$
36,313

 
$
—

 
$
—

 
$
138,415

Privately held equity investments
 
—

 
—

 
228,710

 
—

 
228,710

 
 
$
102,102

 
$
36,313

 
$
228,710

 
$
—

 
$
367,125

 
 
 
 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
$
—

 
$
—

 
$
—

 
$
852,584

 
$
852,584

Fixed income funds
 
—

 
290,864

 
—

 
112,994

 
403,858

Equity funds
 
—

 
100,440

 
—

 
233,241

 
333,681

Private equity funds
 
—

 
—

 
—

 
248,628

 
248,628

CLO equities
 
—

 
—

 
39,052

 
—

 
39,052

CLO equity funds
 
—

 
—

 
—

 
37,260

 
37,260

Private credit funds
 
—

 
—

 
—

 
33,381

 
33,381

Other
 
—

 
578

 
315

 
8,420

 
9,313

 
 
$
—

 
$
391,882

 
$
39,367

 
$
1,526,508

 
$
1,957,757

Total Investments
 
$
102,102

 
$
9,086,971

 
$
321,973

 
$
1,526,508

 
$
11,037,554

 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
243,839

 
$
21,146

 
$
—

 
$
—

 
$
264,985

 
 
 
 
 
 
 
 
 
 
 
Reinsurance recoverable:
 
$
—

 
$
—

 
$
739,591

 
$
—

 
$
739,591

 
 
 
 
 
 
 
 
 
 
 
Other Assets:
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
 
$
—

 
$
6,701

 
$
—

 
$
—

 
$
6,701

 
 
$
—

 
$
6,701

 
$
—

 
$
—

 
$
6,701

 
 
 
 
 
 
 
 
 
 
 
Losses and LAE:
 
$
—

 
$
—

 
$
2,874,055

 
$
—

 
$
2,874,055

 
 
 
 
 
 
 
 
 
 
 
Other Liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
 
$
—

 
$
983

 
$
—

 
$
—

 
$
983

 
 
$
—

 
$
983

 
$
—

 
$
—

 
$
983




38
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valuation Methodologies of Financial Instruments Measured at Fair Value
Fixed Maturity Investments and Funds Held - Directly Managed
The fair values for all securities in the fixed maturity investments and funds held - directly managed portfolios are independently provided by the investment accounting service providers, investment managers and investment custodians, each of which utilize internationally recognized independent pricing services. We record the unadjusted price provided by the investment accounting service providers, investment managers or investment custodians 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 accounting service providers, investment managers and investment custodians obtain actual transaction prices for securities that have quoted prices in active markets. Where we utilize single unadjusted broker-dealer quotes, they are generally provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. For determining the fair value of securities 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.
The following describes the techniques generally used to determine the fair value of our fixed maturity investments by asset class, including the investments underlying the funds held - directly managed.
•
U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified as Level 2.
•
Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified as Level 2. Where pricing is unavailable from pricing services, such as in periods of low trading activity or when transactions are not orderly, we obtain non-binding quotes from broker-dealers. Where significant inputs are unable to be corroborated with market observable information, we classify the securities as Level 3.
•
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 as Level 2.
•
Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, prepayment speeds and default rates. The fair values of these securities are classified as Level 2 if the significant inputs are market observable. Where significant inputs are unable to be corroborated with market observable

39
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

information, we classify the securities as Level 3.
Equities
Our investments in equities consist of a combination of publicly and privately traded investments. Our publicly traded equity investments in common and preferred stocks predominantly trade on the major exchanges and are managed by our external advisors. Our publicly traded equities are widely diversified and there is no significant concentration in any specific industry. Our exchange-traded funds trade on major exchanges. We use an internationally recognized pricing service to estimate the fair value of our publicly traded equities and exchange-traded funds. We have categorized the majority of our publicly traded equity investments, other than preferred stock, and our exchange-traded funds as Level 1 investments because the fair values of these investments are based on unadjusted quoted prices in active markets for identical assets. One equity security is trading in an inactive market and, as a result has been classified as Level 2. The fair value estimates of our investments in publicly traded preferred stock are based on observable market data and, as a result, have been categorized as Level 2.
Our privately held equity investments in common and preferred stocks are direct investments in companies that we believe offer attractive risk adjusted returns and/or offer other strategic advantages. Each investment may have its own unique terms and conditions and there may be restrictions on disposals. The market for these investments is illiquid and there is no active market. The Company uses a combination of cost, internal models, reported values from co-investors/managers and observable inputs, such as capital raises and capital transactions between new and existing shareholders to calculate the fair value of the privately held equity investments. The fair value estimates of our investments in privately held equities are based on unobservable market data and, as a result, have been categorized as Level 3.
Other investments, at fair value
We have ongoing due diligence processes with respect to the other investments carried at fair value 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 ("NAV").
The use of NAV as an estimate of the fair value for investments in certain entities that calculate NAV is a permitted practical expedient. Due to the time lag in the NAV reported by certain fund managers we adjust the valuation for capital calls and distributions. Other investments measured at fair value using NAV as a practical expedient have not been classified in the fair value hierarchy. Other investments for which we do not use NAV as a practical expedient have been valued using prices from independent pricing services, investment managers and broker-dealers.
The following describes the techniques generally used to determine the fair value of our other investments.
•
For our investments in hedge funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
Our investments in fixed income funds and equity funds are valued based on a combination of prices from independent pricing services, external fund managers or third-party administrators. For the publicly available prices we have classified the investments as Level 2. For the non-publicly available prices we are using NAV as a practical expedient and therefore these have not been categorized within the fair value hierarchy.
•
For our investments in private equity funds, we measure fair value by obtaining the most recently available NAV from the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
We measure the fair value of our direct investment in CLO equities based on valuations provided by our external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is based on valuations provided by the broker or lead underwriter of the investment (the "broker"). Our CLO equity investments have been classified as Level 3 due to the use of unobservable inputs in the

40
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

valuation and the limited number of relevant trades in secondary markets.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase or decrease in either of these significant inputs in isolation would result in lower or higher fair value estimates for direct investments in CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less subjective inputs because they are based on the historical average of actual spreads and the weighted-average life of the current underlying portfolios, respectively. A significant increase or decrease in either of these significant inputs in isolation would result in higher or lower fair value estimates for direct investments in CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, we receive the valuation from the external CLO manager and brokers and then review the underlying cash flows and key assumptions used by them. We review and update the significant unobservable inputs based on information obtained from secondary markets. These inputs are our responsibility and we assess the reasonableness of the inputs (and if necessary, update the inputs) through communicating with industry participants, monitoring of the transactions in which we participate (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.
If valuations from the external CLO equity manager or brokers are not available, we use an income approach based on certain observable and unobservable inputs to value these investments. An income approach is also used to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income approach is followed, the valuation is based on available trade information, such as expected cash flows and market assumptions on default and loss severity rates. Other inputs used in the valuation process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates.
•
For our investments in CLO equity funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third party administrator. The fair value of this investment is measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
For our investments in private credit funds, we measure fair value by obtaining the most recently available NAV from the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•
Included within other are investments in real estate debt funds, for which we measure fair value by obtaining the most recently available NAV from the external fund manager or third-party administrator. The fair value of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value due to changes in interest rates. Included within cash and cash equivalents are money market funds, fixed interest deposits and highly liquid fixed maturity investments purchased with an original maturity of three months or less.
The majority of our cash and cash equivalents included within the fair value hierarchy are comprised of money market and liquid reserve funds which have been categorized as Level 1. Fixed interest deposits and highly liquid fixed maturity investments with an original maturity of three months or less have been categorized as Level 2. Operating cash balances are not subject to the recurring fair value measurement guidance and are therefore excluded from the fair value hierarchy.


41
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Insurance Contracts - Fair Value Option
The Company uses an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and reinsurance balances recoverable on paid and unpaid losses for certain retroactive reinsurance contracts where we have elected the fair value option in our Non-life Run-off segment. The fair value was calculated as the aggregate of discounted cash flows plus a risk margin. The discounted cash flow approach uses (i) estimated nominal cash flows based upon an appropriate payment pattern developed in accordance with standard actuarial techniques and (ii) a discount rate based upon a high quality rated corporate bond plus a credit spread for non-performance risk. The model uses corporate bond rates across the yield curve depending on the estimated timing of the future cash flows and specific to the currency of the risk. The risk margin was calculated using the present value of the cost of capital. The cost of capital approach uses (i) projected capital requirements, (ii) multiplied by the risk cost of capital representing the return required for non-hedgeable risk based upon the weighted average cost of capital less investment income and (iii) discounted using the weighted average cost of capital.
Derivative Instruments
The fair values of our foreign currency exchange contracts, as described in Note 5 - "Derivatives and Hedging Instruments" are classified as Level 2. The fair values are based upon prices in active markets for identical contracts.
Level 3 Measurements and Changes in Leveling
Transfers into or out of levels are recorded at their fair values as of the end of the reporting period, consistent with the date of determination of fair value.

Investments
The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs:
 
 
Three Months Ended September 30, 2019
 
 
Fixed maturity investments
 
Privately-held Equities
 
Other Investments
 
Total
 
 
Corporate
 
Residential mortgage-backed
 
Commercial mortgage-backed
 
Asset-backed
 
 
 
Beginning fair value
 
$
5,006

 
$
102

 
$
1,370

 
$
25,839

 
$
229,394

 
$
50,452

 
$
312,163

Purchases
 
82

 
—

 
—

 
—

 
6,691

 
22,619

 
29,392

Sales
 
(116
)
 
—

 
(176
)
 
(429
)
 
(2,016
)
 
(361
)
 
(3,098
)
Total realized and unrealized gains (losses)
 
(103
)
 
(1
)
 
148

 
(746
)
 
(2,378
)
 
(5,287
)
 
(8,367
)
Transfer into Level 3 from Level 2
 
277

 
—

 
—

 
—

 
—

 
—

 
277

Transfer out of Level 3 into Level 2
 
(2,865
)
 
(101
)
 
(1,340
)
 
(6,228
)
 
—

 
—

 
(10,534
)
Ending fair value
 
$
2,281

 
$
—

 
$
2

 
$
18,436

 
$
231,691

 
$
67,423

 
$
319,833

 
 
Three Months Ended September 30, 2018
 
 
Fixed maturity investments
 
Privately-held Equities
 
Other Investments
 
Total
 
 
Corporate
 
Residential mortgage-backed
 
Commercial mortgage-backed
 
Asset-backed
 
 
 
Beginning fair value
 
$
27,823

 
$
—

 
$
15,326

 
$
46,608

 
$
2,016

 
$
54,154

 
$
145,927

Purchases
 
205

 
—

 
1,599

 
16,376

 
—

 
—

 
18,180

Sales
 
(3,731
)
 
—

 
(3,271
)
 
(28,182
)
 
—

 
—

 
(35,184
)
Total realized and unrealized gains (losses)
 
92

 
1

 
(726
)
 
(346
)
 
—

 
(5,473
)
 
(6,452
)
Transfer into Level 3 from Level 2
 
292

 
1,794

 
—

 
(1
)
 
1,712

 
—

 
3,797

Transfer out of Level 3 into Level 2
 
(1,302
)
 
—

 
(3,545
)
 
(2,733
)
 
—

 
—

 
(7,580
)
Ending fair value
 
$
23,379

 
$
1,795

 
$
9,383

 
$
31,722

 
$
3,728

 
$
48,681

 
$
118,688



42
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
 
Nine Months Ended September 30, 2019
 
 
Fixed maturity investments
 
Privately-held Equities
 
Other Investments
 
Total
 
 
Corporate
 
Residential mortgage-backed
 
Commercial mortgage-backed
 
Asset-backed
 
 
 
Beginning fair value
 
$
37,386

 
$
—

 
$
7,389

 
$
9,121

 
$
228,710

 
$
39,367

 
$
321,973

Purchases
 
172

 
—

 
—

 
—

 
6,691

 
34,614

 
41,477

Sales
 
(3,157
)
 
—

 
(784
)
 
(759
)
 
(2,016
)
 
(361
)
 
(7,077
)
Total realized and unrealized gains (losses)
 
114

 
(1
)
 
65

 
(7
)
 
(1,694
)
 
(6,197
)
 
(7,720
)
Transfer into Level 3 from Level 2
 
3,535

 
102

 
1,515

 
22,771

 
—

 
—

 
27,923

Transfer out of Level 3 into Level 2
 
(35,769
)
 
(101
)
 
(8,183
)
 
(12,690
)
 
—

 
—

 
(56,743
)
Ending fair value
 
$
2,281

 
$
—

 
$
2

 
$
18,436

 
$
231,691

 
$
67,423

 
$
319,833

 
 
Nine Months Ended September 30, 2018
 
 
Fixed maturity investments
 
Privately-held Equities
 
Other Investments
 
Total
 
 
Corporate
 
Residential mortgage-backed
 
Commercial mortgage-backed
 
Asset-backed
 
 
 
Beginning fair value
 
$
67,178

 
$
3,080

 
$
21,494

 
$
27,892

 
$
—

 
$
57,079

 
$
176,723

Purchases
 
12,008

 
—

 
3,402

 
45,967

 
2,000

 
752

 
64,129

Sales
 
(64,641
)
 
(1,184
)
 
(4,998
)
 
(31,994
)
 
—

 
(600
)
 
(103,417
)
Total realized and unrealized gains (losses)
 
29

 
(32
)
 
(674
)
 
(417
)
 
16

 
(8,550
)
 
(9,628
)
Transfer into Level 3 from Level 2
 
15,551

 
1,794

 
4,897

 
2,078

 
1,712

 
—

 
26,032

Transfer out of Level 3 into Level 2
 
(6,746
)
 
(1,863
)
 
(14,738
)
 
(11,804
)
 
—

 
—

 
(35,151
)
Ending fair value
 
$
23,379

 
$
1,795

 
$
9,383

 
$
31,722

 
$
3,728

 
$
48,681

 
$
118,688


Net realized and unrealized gains related to Level 3 assets in the tables above are included in net realized and unrealized gains (losses) in our unaudited condensed consolidated statements of earnings.
The securities transferred from Level 2 to Level 3 were transferred due to insufficient market observable inputs for the valuation of the specific assets. The transfers from Level 3 to Level 2 were based upon us obtaining market observable information regarding the valuations of the specific assets.
Insurance Contracts - Fair Value Option
The following tables present a reconciliation of the beginning and ending balances for all insurance contracts measured at fair value on a recurring basis using Level 3 inputs:
 
Three Months Ended
 
September 30, 2019
 
September 30, 2018
 
Liability for losses and LAE
 
Reinsurance balances recoverable
 
Net
 
Liability for losses and LAE
 
Reinsurance balances recoverable
 
Net
Beginning fair value
$
2,772,501

 
$
743,304

 
$
2,029,197

 
$
3,221,366

 
$
837,373

 
$
2,383,993

Incurred losses and LAE:
 
 
 
 
 
 
 
 
 
 
 
Reduction in estimates of ultimate losses
(7,386
)
 
2,354

 
(9,740
)
 
(13,898
)
 
1,085

 
(14,983
)
Reduction in unallocated LAE
(6,724
)
 
—

 
(6,724
)
 
(6,075
)
 
—

 
(6,075
)
Change in fair value
57,743

 
16,369

 
41,374

 
(10,573
)
 
(1,466
)
 
(9,107
)
Total incurred losses and LAE
43,633

 
18,723

 
24,910

 
(30,546
)
 
(381
)
 
(30,165
)
Paid losses
(100,654
)
 
(21,816
)
 
(78,838
)
 
(149,132
)
 
(41,819
)
 
(107,313
)
Effect of exchange rate movements
(56,836
)
 
(8,307
)
 
(48,529
)
 
(21,967
)
 
(2,620
)
 
(19,347
)
Ending fair value
$
2,658,644

 
$
731,904

 
$
1,926,740

 
$
3,019,721

 
$
792,553

 
$
2,227,168



43
Table of Contents
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in fair value in the table above are included in net incurred losses and LAE in our consolidated statements of earnings. The following table presents the components of the net change in fair value:
 
 
Three Months Ended
 
 
September 30, 2019
 
September 30, 2018
Changes in fair value due to changes in:
 
 
 
 
Duration
 
$
3,850

 
$
19,006

Corporate bond yield
 
37,524

 
(28,113
)
Change in fair value
 
$
41,374

 
$
(9,107
)

 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
Liability for losses and LAE
 
Reinsurance balances recoverable on paid and unpaid losses
 
Net
 
Liability for losses and LAE
 
Reinsurance balances recoverable on paid and unpaid losses
 
Net
Beginning fair value
$
2,874,055

 
$
739,591

 
$
2,134,464

 
$
1,794,669

 
$
542,224

 
$
1,252,445

Assumed business
—

 
—

 
—

 
1,890,061

 
372,780

 
1,517,281

Incurred losses and LAE:
 
 
 
 
 
 
 
 
 
 
 
Reduction in estimates of ultimate losses
(20,342
)
 
4,059

 
(24,401
)
 
(57,678
)
 
3,469

 
(61,147
)
Reduction in unallocated LAE
(15,076
)
 
—

 
(15,076
)
 
(17,491
)
 
—

 
(17,491
)
Change in fair value
189,422

 
54,045

 
135,377

 
(50,182
)
 
(18,067
)
 
(32,115
)
Total incurred losses and LAE
154,004

 
58,104

 
95,900

 
(125,351
)
 
(14,598
)
 
(110,753
)
Paid losses
(308,267
)
 
(58,139
)
 
(250,128
)
 
(453,180
)
 
(95,354
)
 
(357,826
)
Effect of exchange rate movements
(61,148
)
 
(7,652
)
 
(53,496
)
 
(86,478
)
 
(12,499
)
 
(73,979
)
Ending fair value
$
2,658,644

 
$
731,904

 
$
1,926,740

 
$
3,019,721

 
$
792,553

 
$
2,227,168


Changes in fair value in the table above are included in net incurred losses and LAE in our consolidated statements of earnings. The following table presents the components of the net change in fair value:
 
 
Nine Months Ended
 
 
September 30, 2019
 
September 30, 2018
Changes in fair value due to changes in:
 
 
 
 
Duration
 
$
18,736

 
$
40,825

Corporate bond yield
 
116,641

 
(76,623
)
Risk cost of capital
 
—

 
3,683

Change in fair value
 
$
135,377

 
$
(32,115
)

Below is a summary of the quantitative information regarding the significant observable and unobservable inputs used in the internal model to determine fair value on a recurring basis:
 
 
 
 
September 30, 2019
 
December 31, 2018
Valuation Technique
 
Unobservable (U) and Observable (O) Inputs
 
Weighted Average
Internal model
 
Corporate bond yield (O)
 
A rated
 
A rated
Internal model
 
Credit spread for non-performance risk (U)
 
0.2%
 
0.2%
Internal model
 
Risk cost of capital (U)
 
5.1%
 
5.0%
Internal model
 
Weighted average cost of capital (U)
 
8.5%
 
8.5%
Internal model
 
Duration - liability (U)
 
7.52 years
 
7.33 years
Internal model
 
Duration - reinsurance balances recoverable (U)
 
7.86 years
 
7.98 years



44
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses may increase or decrease due to changes in the corporate bond rate, the credit spread for non-performance risk, the risk cost of capital, the weighted average cost of capital and the estimated payment pattern as described below:
•
An increase in the corporate bond rate or credit spread for non-performance risk would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses. Conversely, a decrease in the corporate bond rate or credit spread for non-performance risk would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses.
•
An increase in the weighted average cost of capital would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses. Conversely, a decrease in the weighted average cost of capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses.
•
An increase in the risk cost of capital would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses. Conversely, a decrease in the risk cost of capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses.
•
The duration of the liability and recoverable is adjusted every period to reflect actual net payments during the period and expected future payments. An acceleration of the estimated payment pattern, a decrease in duration, would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses. Conversely, a deceleration of the estimated payment pattern, an increase in duration, would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses.
In addition, the estimate of the capital required to support the liabilities is based upon current industry standards for capital adequacy. If the required capital per unit of risk increases, then the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses would increase. Conversely, a decrease in required capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses.
Disclosure of Fair Values for Financial Instruments Carried at Cost
As of September 30, 2019, our 4.50% Senior Notes due 2022 (the "2022 Senior Notes") and our 4.95% Senior Notes due 2029 (the "2029 Senior Notes" and, together with the 2022 Senior Notes, the "Senior Notes") were carried at amortized cost of $348.5 million and $493.3 million, respectively, while the fair value based on observable market pricing from a third party pricing service was $362.6 million and $530.7 million, respectively. The Senior Notes are classified as Level 2.
Disclosure of fair value of amounts relating to insurance contracts is not required, except those for which we elected the fair value option, as described above. Our remaining assets and liabilities were generally carried at cost or amortized cost, which due to their short-term nature approximates fair value as of September 30, 2019 and December 31, 2018.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. POLICY BENEFITS FOR LIFE CONTRACTS
On May 31, 2019, we completed the transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument Insurance Group Limited ("Monument"). Our life and annuities operations do not qualify for inclusion in our reportable segments and are therefore included within other activities. The related assets, as well as the results from these operations, were not significant to our consolidated operations and therefore have not been classified as a discontinued operation. In addition, our transfer of these life assurance polices to Monument was not classified as a held-for-sale business transaction since the underlying contracts did not meet the definition of a business. We have an equity method investment in Monument, as described further in Note 19 - "Related Party Transactions".
Life assurance polices subjected us to mortality, longevity and morbidity risks and which are accounted for as life and annuity premiums earned. Life benefit reserves were established using assumptions for investment yields, mortality, morbidity, lapse and expenses, including a provision for adverse deviation. We established and reviewed our life reserves regularly based upon cash flow projections. We established and maintained our life reinsurance reserves at a level that we estimated would, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third-party servicing obligations as they become payable. Policy benefits for life contracts as of December 31, 2018 were $105.1 million. Refer to Note 2 - "Significant Accounting Policies" - (d) Policy Benefits for Life and Annuity Contracts" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for a description of the assumptions used and the process for establishing our assumptions and estimates.


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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

11. PREMIUMS WRITTEN AND EARNED
The following table provides a summary of premiums written and earned in our Non-life Run-off, Atrium and StarStone segments and Other activities:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
Premiums
Written
 
Premiums
Earned
 
Premiums
Written
 
Premiums
Earned
 
Premiums
Written
 
Premiums
Earned
 
Premiums
Written
 
Premiums
Earned
Non-life Run-off
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
$
301

 
$
27,190

 
$
9,912

 
$
17,746

 
$
(24,785
)
 
$
166,707

 
$
16,354

 
$
54,044

Ceded
(4,109
)
 
(10,353
)
 
(5,134
)
 
(7,304
)
 
(1,610
)
 
(24,726
)
 
(13,137
)
 
(26,815
)
Net
$
(3,808
)
 
$
16,837

 
$
4,778

 
$
10,442

 
$
(26,395
)
 
$
141,981

 
$
3,217

 
$
27,229

Atrium
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
$
48,746

 
$
48,340

 
$
39,995

 
$
42,505

 
$
146,519

 
$
133,610

 
$
130,997

 
$
121,974

Ceded
(4,961
)
 
(5,427
)
 
(2,854
)
 
(5,528
)
 
(19,273
)
 
(13,745
)
 
(17,779
)
 
(15,252
)
Net
$
43,785

 
$
42,913

 
$
37,141

 
$
36,977

 
$
127,246

 
$
119,865

 
$
113,218

 
$
106,722

StarStone
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
$
221,157

 
$
268,633

 
$
282,525

 
$
281,467

 
$
706,634

 
$
769,774

 
$
888,867

 
$
761,694

Ceded
(48,166
)
 
(62,361
)
 
(62,799
)
 
(65,112
)
 
(143,111
)
 
(166,317
)
 
(269,339
)
 
(234,892
)
Net
$
172,991

 
$
206,272

 
$
219,726

 
$
216,355

 
$
563,523

 
$
603,457

 
$
619,528

 
$
526,802

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
$
(2,498
)
 
$
4,338

 
$
846

 
$
848

 
$
(1,174
)
 
$
17,024

 
$
2,858

 
$
2,878

Ceded
(5
)
 
(35
)
 
(24
)
 
(25
)
 
(23
)
 
(152
)
 
13

 
(3
)
Net
$
(2,503
)
 
$
4,303

 
$
822

 
$
823

 
$
(1,197
)
 
$
16,872

 
$
2,871

 
$
2,875

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
$
267,706

 
$
348,501

 
$
333,278

 
$
342,566

 
$
827,194

 
$
1,087,115

 
$
1,039,076

 
$
940,590

Ceded
(57,241
)
 
(78,176
)
 
(70,811
)
 
(77,969
)
 
(164,017
)
 
(204,940
)
 
(300,242
)
 
(276,962
)
Total
$
210,465

 
$
270,325

 
$
262,467

 
$
264,597

 
$
663,177

 
$
882,175

 
$
738,834

 
$
663,628

 
Gross premiums written for the three months ended September 30, 2019 and 2018 were $267.7 million and $333.3 million, respectively, a decrease of $65.6 million. Gross premiums written for the nine months ended September 30, 2019 and 2018 were $827.2 million and $1,039.1 million, respectively, a decrease of $211.9 million. The decrease was primarily due to a decrease in gross written premiums in our StarStone segment due to our strategy to exit certain lines of business, and reductions in gross written premiums in our Non-life Run-off segment for which associated unearned premium was also released.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. GOODWILL AND INTANGIBLE ASSETS
The following table presents a reconciliation of the beginning and ending goodwill and intangible assets during the nine months ended September 30, 2019:
 
 
 
Intangible assets
 
 
 
Goodwill
 
Intangible
assets with
a definite life
 
Intangible 
assets with
an indefinite life
 
Total
 
Total
Balance as of January 1, 2019
$
114,807

 
$
16,887

 
$
87,031

 
$
103,918

 
$
218,725

Amortization
—

 
(1,676
)
 
—

 
(1,676
)
 
(1,676
)
Balance as of September 30, 2019
$
114,807

 
$
15,211

 
$
87,031

 
$
102,242

 
$
217,049

Refer to Note 14 - "Goodwill and Intangible Assets" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for more information on goodwill and intangible assets.
The following table provides a summary of the amortization recorded on the intangible assets:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Intangible asset amortization
$
546

 
$
570

 
$
1,676

 
$
3,030


The gross carrying value, accumulated amortization and net carrying value of intangible assets by type was as follows:
 
September 30, 2019
 
December 31, 2018
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
Intangible assets with a definite life:
 
 
 
 
 
 
 
 
 
 
 
Distribution channel
$
20,000

 
$
(7,777
)
 
$
12,223

 
$
20,000

 
$
(6,776
)
 
$
13,224

Technology
15,000

 
(14,928
)
 
72

 
15,000

 
(14,778
)
 
222

Brand
7,000

 
(4,084
)
 
2,916

 
7,000

 
(3,559
)
 
3,441

Total
$
42,000

 
$
(26,789
)
 
$
15,211

 
$
42,000

 
$
(25,113
)
 
$
16,887

Intangible assets with an indefinite life:
 
 
 
 
 
 
 
 
 
 
 
Lloyd’s syndicate capacity
$
37,031

 
$
—

 
$
37,031

 
$
37,031

 
$
—

 
$
37,031

Licenses
19,900

 
—

 
19,900

 
19,900

 
—

 
19,900

Management contract
30,100

 
—

 
30,100

 
30,100

 
—

 
30,100

Total
$
87,031

 
$
—

 
$
87,031

 
$
87,031

 
$
—

 
$
87,031



48
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13. DEBT OBLIGATIONS AND CREDIT FACILITIES
We primarily utilize debt facilities for acquisitions and significant new business and, from time to time, for general corporate purposes. Our debt obligations were as follows:
Facility
 
Origination Date
 
Term
 
September 30,
2019
 
December 31,
2018
4.50% Senior Notes due 2022
 
March 10, 2017
 
5 years
 
$
348,527

 
$
348,054

4.95% Senior Notes due 2029
 
May 28, 2019
 
10 years
 
493,285

 
—

Total senior notes
 
 
 
 
 
841,812

 
348,054

EGL Revolving Credit Facility
 
August 16, 2018
 
5 years
 
20,000

 
15,000

2018 EGL Term Loan Facility
 
December 27, 2018
 
3 years
 
348,863

 
498,485

Total debt obligations
 
 
 
$
1,210,675

 
$
861,539


The table below provides a summary of the total interest expense:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Interest expense on debt obligations
$
14,934

 
$
4,556

 
$
38,696

 
$
20,822

Funds withheld balances and other
16

 
84

 
326

 
751

Total interest expense
$
14,950

 
$
4,640

 
$
39,022

 
$
21,573

Senior Notes
4.50% Senior Notes due 2022
On March 10, 2017, we issued the 2022 Senior Notes for an aggregate principal amount of $350.0 million. The 2022 Senior Notes pay 4.5% interest semi-annually and mature on March 10, 2022. The 2022 Senior Notes are unsecured and unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated obligations, senior to any future obligations that are expressly subordinated to the 2022 Senior Notes, effectively subordinate to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally subordinate to all liabilities of our subsidiaries.
The 2022 Senior Notes are rated BBB- and are redeemable at our option on a make whole basis at any time prior to the date that is one month prior to the maturity of the 2022 Senior Notes. On or after the date that is one month prior to the maturity of the Senior Notes, the notes are redeemable at a redemption price equal to 100% of the principal amount of the notes to be redeemed.
We incurred costs of $2.9 million in issuing the 2022 Senior Notes. These costs included underwriters’ fees, legal and accounting fees, and other fees, and are capitalized and presented as a direct deduction from the principal amount of debt obligations in the consolidated balance sheets. These costs are amortized over the term of the 2022 Senior Notes and are included in interest expense in our consolidated statements of earnings. The unamortized costs as of September 30, 2019 and December 31, 2018 were $1.5 million and $1.9 million, respectively.
4.95% Senior Notes due 2029
On May 28, 2019, we issued the 2029 Senior Notes for an aggregate principal amount of $500.0 million. The 2029 Senior Notes pay 4.95% interest semi-annually and mature on June 1, 2029. The 2029 Senior Notes are unsecured and unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated obligations, senior to any future obligations that are expressly subordinated to the 2029 Senior Notes, effectively subordinate to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and contractually subordinate to all liabilities of our subsidiaries.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The 2029 Senior Notes are rated BBB- and are redeemable at our option on a make whole basis at any time prior to the date that is three months prior to the maturity of the 2029 Senior Notes. On or after the date that is three months prior to the maturity of the 2029 Senior Notes, the notes are redeemable at a redemption price equal to 100% of the principal amount of the notes to be redeemed.
We incurred costs of $6.8 million in issuing the 2029 Senior Notes. These costs included underwriters’ fees, legal and accounting fees, and other fees, and are capitalized and presented as a direct deduction from the principal amount of debt obligations in the consolidated balance sheets. These costs are amortized over the term of the 2029 Senior Notes and are included in interest expense in our consolidated statements of earnings. The unamortized costs as of September 30, 2019 were $6.7 million.
EGL Revolving Credit Facility
On August 16, 2018, we and certain of our subsidiaries, as borrowers and guarantors, entered into a five-year unsecured $600.0 million revolving credit agreement. The credit agreement expires in August 2023 and we have the option to increase the commitments under the facility by up to an aggregate of $400.0 million. Borrowings under the facility will bear interest at a rate based on the Company's long term senior unsecured debt ratings. In connection with our entry into the credit agreement, we terminated and fully repaid our previous revolving credit agreement, which was originated on September 16, 2014 and was most recently amended on July 17, 2018.
As of September 30, 2019, we were permitted to borrow up to an aggregate of $600.0 million under the facility. As of September 30, 2019, there was $580.0 million of available unutilized capacity under the facility. Subsequent to September 30, 2019, we fully repaid all the outstanding amounts under the facility, bringing the unutilized capacity under this facility to $600.0 million.
2018 EGL Term Loan Facility
On December 27, 2018, we entered into and fully utilized a three-year $500.0 million unsecured term loan (the "2018 EGL Term Loan Facility"). The proceeds were partially used to fund the acquisition of Maiden Re North America. We have the option to increase the principal amount of the term loan credit facility up to an aggregate amount of $150 million from the existing lenders or through the addition of new lenders, subject to the terms of the term loan credit agreement.
Interest is payable at least every three months at either ABR or LIBOR plus a margin set forth in the term loan credit agreement. The margin could vary based upon any change in our long term senior unsecured debt rating assigned by S&P or Fitch. During the existence of an event of default, the interest rate may increase and the agent may, and at the request of the required lenders shall, demand early repayment.
We incurred costs of $1.5 million associated with closing the 2018 EGL Term Loan Facility. These costs included bank, legal and accounting fees, and other fees, and are capitalized and presented as a direct deduction from the principal amount of debt obligations in the consolidated balance sheets. These costs are amortized over the term of the facility and are included in interest expense in our consolidated statements of earnings. The unamortized costs as of September 30, 2019 and December 31, 2018 were $1.1 million and $1.5 million, respectively.
We repaid $50.0 million outstanding under the 2018 EGL Term Loan Facility using some of the proceeds from the issuance of our 2029 Senior Notes in May 2019, and we repaid an additional $100.0 million in September 2019 using available funds on hand.
Refer to Note 15 - "Debt Obligations and Credit Facilities" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for further information on the terms of the above facilities.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unsecured Letters of Credit
We utilize unsecured letters of credit to support our insurance and reinsurance performance obligations.
Funds at Lloyd's
On February 8, 2018, we amended and restated our unsecured letter of credit agreement for Funds at Lloyd's ("FAL Facility") to issue up to $325.0 million of letters of credit, with provision to increase the facility up to $400.0 million, subject to lenders' approval. On February 12, 2019, we increased the facility up to $375.0 million and maintained the provision to increase the facility to $400.0 million. On November 6, 2019, we amended and restated the FAL Facility to extend its term by one year while maintaining the size of the facility at $375.0 million with a provision to increase it to $400.0 million. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2023. As of September 30, 2019, our combined Funds at Lloyd's were comprised of cash and investments of $758.8 million and unsecured letters of credit of $368.0 million.
$170 million Letter of Credit Facility
On December 26, 2018, we entered into an unsecured letter of credit facility to issue up to $170.0 million of letters of credit, which we use from time to time to support various reinsurance obligations of our subsidiaries. Pursuant to the facility agreement, we have the option to increase commitments under the facility in an aggregate amount up to $60.0 million. As of September 30, 2019 and December 31, 2018, we had issued an aggregate amount of letters of credit under this facility of $127.4 million and $78.4 million, respectively.
$600 million Letter of Credit Facility
On August 5, 2019, we entered into an unsecured $600.0 million letter of credit facility agreement, pursuant to which we may increase the commitments in an aggregate amount up to $75.0 million. The facility has been initially utilized to post letters of credit in the amount of $445.0 million to collateralize Enstar's reinsurance obligations relating to the Maiden Re adverse development cover transaction, described in Note 4 - "Significant New Business".  As of September 30, 2019, we had issued an aggregate amount of letters of credit under this facility of $445.0 million.



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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14. NONCONTROLLING INTERESTS
We have both redeemable noncontrolling interest and noncontrolling interest on our consolidated balance sheets. Redeemable noncontrolling interest with redemption features that are not solely within our control are classified within temporary equity in the consolidated balance sheets and carried at redemption value, which is fair value. The change in fair value is recognized through retained earnings as if the balance sheet date were also the redemption date. In addition, we also have noncontrolling interest, which does not have redemption features and is classified within equity in the consolidated balance sheets.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest ("RNCI") as of September 30, 2019 and December 31, 2018 comprises the ownership interests held by the Trident V Funds ("Trident") (39.3%) and Dowling Capital Partners, L.P. ("Dowling") (1.7%) in our subsidiary North Bay Holdings Limited ("North Bay"). North Bay owns our investments in StarStone and Atrium.
The following is a reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI: 
 
 
Nine Months Ended
 
For The Year Ended
 
 
September 30, 2019
 
December 31, 2018
Balance at beginning of period
 
$
458,543

 
$
479,606

Capital contributions
 
—

 
55,377

Dividends paid
 
(11,556
)
 
(3,852
)
Net losses attributable to RNCI
 
(5,651
)
 
(64,794
)
Accumulated other comprehensive earnings (losses) attributable to RNCI
 
58

 
(240
)
Change in redemption value of RNCI
 
(6,607
)
 
(7,554
)
Balance at end of period
 
$
434,787

 
$
458,543


We carried the RNCI at its estimated redemption value, which is fair value, as of September 30, 2019. The decrease was primarily attributable to a decrease in the net assets due to dividends paid and net losses related to StarStone during the nine months ended September 30, 2019.
Refer to Note 19 - "Related Party Transactions" and Note 20 - "Commitments and Contingencies" for additional information regarding RNCI.
Noncontrolling Interest
As of September 30, 2019 and December 31, 2018, we had $12.7 million and $12.1 million, respectively, of noncontrolling interest ("NCI") related to external interests in two of our non-life run-off subsidiaries. A reconciliation of the beginning and ending carrying amount of the equity attributable to NCI is included in the unaudited condensed consolidated statement of changes in shareholders equity.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15. SHARE CAPITAL
Refer to Note 17 - "Share Capital" to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information on our share capital.
Dividends Declared and Paid
The following table details the dividends that have been declared and paid on our Series D and E Preferred Shares for the period from January 1, 2019 to November 6, 2019:
 
 
 
 
 
 
 
 
Dividend per:
 
 
Preferred Share Series
 
Date Declared
 
Record Date
 
Date Paid or Payable
 
Preferred Share
 
Depositary Share
 
Total dividends paid and declared in the nine months ended September 30, 2019
 
 
 
 
 
 
 
 
(in U.S. dollars)
 
(in thousands of U.S. dollars)
Series D
 
February 21, 2019
 
February 15, 2019
 
March 1, 2019
 
$
437.50

 
$
0.43750

 
$
7,000

Series E
 
February 21, 2019
 
February 15, 2019
 
March 1, 2019
 
$
486.11

 
$
0.48611

 
2,139

Series D
 
May 3, 2019
 
May 15, 2019
 
June 1, 2019
 
$
437.50

 
$
0.43750

 
7,000

Series E
 
May 3, 2019
 
May 15, 2019
 
June 1, 2019
 
$
437.50

 
$
0.43750

 
1,925

Series D
 
August 5, 2019
 
August 15, 2019
 
September 3, 2019
 
$
437.50

 
$
0.43750

 
7,000

Series E
 
August 5, 2019
 
August 15, 2019
 
September 3, 2019
 
$
437.50

 
$
0.43750

 
1,925

Series D
 
November 5, 2019
 
November 15, 2019
 
December 2, 2019
 
$
437.50

 
$
0.43750

 
—

Series E
 
November 5, 2019
 
November 15, 2019
 
December 2, 2019
 
$
437.50

 
$
0.43750

 
—

 
 
 
 
 
 
 
 
 
 
 
 
$
26,989




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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per ordinary share:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net earnings (loss) attributable to Enstar Group Limited ordinary shareholders
$
117,743

 
$
(15,965
)
 
$
708,336

 
$
(48,931
)
Denominator:
 
 
 
 
 
 
 
Weighted average ordinary shares outstanding — basic
21,488,216

 
21,440,914

 
21,476,586

 
20,444,634

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based compensation plans
169,162

 
143,833

 
204,288

 
129,313

Warrants
63,119

 
80,609

 
60,625

 
79,597

Weighted average ordinary shares outstanding — diluted
21,720,497

 
21,665,356

 
21,741,499

 
20,653,544

 
 
 
 
 
 
 
 
Earnings (losses) per ordinary share attributable to Enstar Group Limited:
 
 
 
 
 
 
 
Basic
$
5.48

 
$
(0.74
)
 
$
32.98

 
$
(2.39
)
Diluted(1)
$
5.42

 
$
(0.74
)
 
$
32.58

 
$
(2.39
)

(1) During a period of loss, the basic weighted average ordinary shares outstanding is used in the denominator of the diluted loss per ordinary share computation as the effect of including potentially dilutive securities would be anti-dilutive.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17. SHARE-BASED COMPENSATION AND PENSIONS
We provide various employee benefits including share-based compensation, an employee share purchase plan, an annual incentive compensation program, and pension plans. These are described in Note 19 - "Share-Based Compensation and Pensions" to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018.
The table below provides the expenses related to the share-based compensation plans and other share-based compensation plans and pension plans:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Share-based compensation plans:
 
 
 
 
 
 
 
 
Restricted shares and restricted share units
 
$
1,778

 
$
1,800

 
$
4,910

 
$
6,149

Performance share units
 
5,678

 
2,416

 
18,133

 
7,338

Cash-settled stock appreciation rights
 
102

 
(350
)
 
(109
)
 
898

Other share-based compensation plans:
 
 
 
 
 
 
 
 
Northshore incentive plan
 
1,029

 
943

 
3,061

 
2,390

Deferred compensation and ordinary share plan for non-employee directors
 
116

 
119

 
992

 
1,048

Employee share purchase plan
 
102

 
115

 
309

 
325

Total share-based compensation
 
$
8,805

 
$
5,043

 
$
27,296

 
$
18,148

During the three months ended September 30, 2019, we revised the performance multiplier on all 2017 Performance Share Units from Threshold to above Target due to the financial performance of the Company. The performance multipliers on the 2018 and 2019 Performance Share Units were held at Target.
The table below provides the expenses related to our pension plans:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Pension plans:
 
 
 
 
 
 
 
 
Defined contribution plans
 
$
2,851

 
$
2,818

 
$
8,646

 
$
8,640

Defined benefit plan
 
160

 
151

 
510

 
453

Total pension costs
 
$
3,011

 
$
2,969

 
$
9,156

 
$
9,093




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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18. INCOME TAXATION
Interim Tax Calculation Method
We use the estimated annual effective tax rate method for computing our interim tax provision. This method applies our best estimate of the effective tax rate expected for the full year to our year-to-date earnings before income taxes. We provide for income tax expense or benefit based upon our pre-tax earnings and the provisions of currently enacted tax laws. Certain items deemed to be unusual, infrequent or not reliably estimated are excluded from the estimated annual effective tax rate. In the event such items are identified, the actual tax expense or benefit is reported in the same period as the related item. Certain other items are not included in the estimated annual effective tax rate, such as changes in the assessment of valuation allowance on deferred tax assets and uncertain tax positions, if any.
Interim Tax Expense
The effective tax rates on income for the three months ended September 30, 2019 and 2018 were 10.3% and (3.5)%, respectively. The effective tax rates on income for the nine months ended September 30, 2019 and 2018 were 3.5% and (7.8)%, respectively. The effective tax rate on income differs from the statutory rate of 0% due to tax on foreign operations, primarily the United States and the United Kingdom. We have foreign operating subsidiaries and branch operations principally located in the United States, United Kingdom, Continental Europe and Australia that are subject to federal, foreign, state and local taxes in those jurisdictions. Deferred income tax liabilities have not been accrued with respect to the undistributed earnings of our foreign subsidiaries. If the earnings were to be distributed, as dividends or other distributions, withholding taxes may be imposed by the jurisdiction of the paying subsidiary. For our U.S. subsidiaries, we have not currently accrued any withholding taxes with respect to un-remitted earnings as management has no current intention of remitting these earnings. For our United Kingdom subsidiaries, there are no withholding taxes imposed. For our other foreign subsidiaries, it would not be practicable to compute such amounts due to a variety of factors, including the amount, timing, and manner of any repatriation. Because we operate in many jurisdictions, our net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which we operate.
Assessment of Valuation Allowance on Deferred Tax Asset
We have estimated the future taxable income of our foreign subsidiaries and have provided a valuation allowance in respect of loss carryforwards where we do not expect to realize a benefit. We have considered all available evidence using a "more than likely than not" standard in determining the amount of the valuation allowance. During the three and nine months ended September 30, 2019, we had no change in our assessment of our valuation allowance on deferred tax assets.
Accounting for Uncertainty in Income Taxes
There were no unrecognized tax benefits relating to uncertain tax positions as of September 30, 2019 and December 31, 2018.
Tax Examinations
Our operating subsidiaries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. With limited exceptions, our major subsidiaries that operate in the United States, United Kingdom and Australia are no longer subject to tax examinations for years before 2014.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19. RELATED PARTY TRANSACTIONS
Stone Point Capital LLC
Through several private transactions occurring from May 2012 to July 2012 and an additional private transaction that closed in May 2018, investment funds managed by Stone Point Capital LLC ("Stone Point") have acquired an aggregate of 1,635,986 of our voting ordinary shares (which now constitutes approximately 9.1% of our outstanding voting ordinary shares). On November 6, 2013, we appointed James D. Carey to our 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, the manager of the Trident funds.
In addition, we have entered into certain agreements with Trident with respect to Trident’s co-investments in the Atrium, Arden, and StarStone acquisitions. These include investors’ agreements and shareholders’ agreements, which provide for, among other things: (i) our right to redeem Trident’s equity interest in the Atrium/Arden and StarStone transactions in cash at fair market value at any time following September 6, 2020 and April 1, 2021, respectively; and (ii) Trident’s right to have its equity interest in the Atrium/Arden and StarStone transactions redeemed by us at fair market value (which we may satisfy in either cash or our ordinary shares) following September 6, 2020 and April 1, 2021, respectively. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the boards of the holding companies established in connection with the Atrium/Arden and StarStone co-investment transactions. Trident also has a second representative on these boards who is a Stone Point employee.
We, in partnership with StarStone's other shareholders, have recently completed two transactions to provide capital support to StarStone in the form of:
(i) a contribution to its contributed surplus account and a loss portfolio transfer, effective October 1, 2018. To fund the transaction, the North Bay shareholders contributed an aggregate amount of $135.0 million to North Bay in proportion to their ownership interests. Trident’s proportionate contribution of $53.1 million was temporarily funded by North Bay and was reimbursed in the first quarter of 2019; and
(ii) a loss portfolio transfer, effective April 1, 2019, for which shareholders agreed to contribute an aggregate amount of $48.0 million.
The RNCI on our balance sheet relating to these Trident co-investment transactions was as follows:
 
September 30, 2019
 
December 31, 2018
Redeemable Noncontrolling Interest
416,662

 
439,428


As of September 30, 2019, we had the following relationships with Stone Point and its affiliates:
•
Investments in funds (carried within other investments) managed by Stone Point, with respect to which we recognized net unrealized gains (losses);
•
Investments in registered investment companies affiliated with entities owned by Trident or otherwise affiliated with Stone Point, with respect to which we recognized net unrealized gains (losses) and interest income;
•
Separate accounts managed by Eagle Point Credit Management, PRIMA Capital Advisors and SKY Harbor Capital Management, which are affiliates of entities owned by Trident, with respect to which we incurred management fees;
•
Investments in funds (carried within other investments) managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as a director, with respect to which we recognized net unrealized gains (losses);
•
Sound Point Capital has acted as collateral manager for certain of our direct investments in CLO debt and equity securities, with respect to which we recognized net unrealized gains (losses) and interest income;
•
Marble Point Capital, which is an affiliate of an entity owned by Trident, has acted as collateral manager for certain of our direct investments in CLO equity securities, with respect to which we recognized net unrealized gains (losses) and interest income;

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•
A separate account managed by Sound Point Capital, with respect to which we incurred management fees; and
•
In the fourth quarter of 2018, we invested $25.0 million in Mitchell TopCo Holdings, the parent company of Mitchell International and Genex Services, as a co-investor alongside Stone Point.
The following table presents the amounts included in our consolidated balance sheet related to our related party transactions with Stone Point and its affiliated entities:
 
September 30, 2019
 
December 31, 2018
Short-term investments, available-for-sale, at fair value
$
3,219

 
$
—

Fixed maturities, trading, at fair value
313,943

 
176,193

Fixed maturities, available-for-sale, at fair value
113,507

 
—

Equities, at fair value
124,723

 
57,319

Other investments, at fair value:

 

Hedge funds
19,621

 
19,535

Fixed income funds
456,156

 
324,561

Private equity funds
60,215

 
52,925

CLO equities
45,549

 
15,372

CLO equity funds
89,493

 
37,260

Private Debt
—

 
10,387

Real estate fund
—

 
8,025

Cash and cash equivalents
27,819

 
11,739

Other assets
553

 
5,216

Other liabilities
5,235

 
4,240

The following table presents the amounts included in net earnings related to our related party transactions with Stone Point and its affiliated entities:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net investment income
$
2,257

 
$
1,601

 
$
5,009

 
$
5,429

Net realized and unrealized (losses) gains
(3,442
)
 
8,783

 
26,305

 
16,787

Total net (losses) earnings
$
(1,185
)
 
$
10,384

 
$
31,314

 
$
22,216


KaylaRe
On December 15, 2016, KaylaRe completed an initial capital raise of $620.0 million. We originally owned approximately 48.2% of KaylaRe's common shares and recorded our investment in KaylaRe using the equity method basis of accounting, as we concluded that we were not required to consolidate based on the guidance in ASC 810 - Consolidation.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On May 14, 2018, the Company acquired all of the outstanding shares and warrants of KaylaRe, following the receipt of all required regulatory approvals. In consideration for the acquired shares and warrants of KaylaRe, the Company issued an aggregate of 2,007,017 ordinary shares, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares to the shareholders of KaylaRe as follows: (i) 1,204,353 voting ordinary shares and 505,239 Series E Shares to a fund managed by Hillhouse Capital Management, Ltd. ("Hillhouse Capital"); (ii) 285,986 voting ordinary shares to Trident; and (iii) 11,439 voting ordinary shares to the minority shareholder. In addition, the Shareholders Agreement between Enstar and the other KaylaRe shareholders was effectively terminated. Effective May 14, 2018, we consolidated KaylaRe into our consolidated financial statements, and any balances between KaylaRe and Enstar are now eliminated upon consolidation. Refer to Note 3 - "Acquisitions" in the notes to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information. Effective September 30, 2019, KaylaRe and KaylaRe Ltd. merged with Cavello Bay Reinsurance Limited, a wholly owned subsidiary of the Company, with Cavello Bay Reinsurance Limited as the surviving company.
Our subsidiary, Enstar Limited, acts as insurance and reinsurance manager to KaylaRe's subsidiary, KaylaRe Ltd., for which it received fee income. Affiliates of Enstar have also entered into various reinsurance agreements with KaylaRe Ltd. We provide administrative services to KaylaRe and KaylaRe Ltd.
Through a Quota Share Agreement dated December 15, 2016 (the "KaylaRe-StarStone QS"), several of our StarStone affiliates entered into a Quota Share Treaty with KaylaRe Ltd. pursuant to which KaylaRe Ltd. reinsures 35% of all business written by these StarStone affiliates for risks attaching from January 1, 2016, net of the StarStone affiliates’ external reinsurance programs. The reinsurance of StarStone's U.S. and U.K. affiliates was non-renewed as of January 1, 2018 and January 1, 2019, respectively.
In addition, Fitzwilliam Insurance Limited ("Fitzwilliam"), one of our non-life run-off subsidiaries, ceded $177.2 million of loss reserves to KaylaRe Ltd. in 2016. Under the terms of this reinsurance agreement, Fitzwilliam is entitled to receive a profit commission calculated with reference to reserve savings made during the currency of this agreement. Our Non-life Run-off subsidiaries did not cede any additional business to KaylaRe Ltd. during three and nine months ended September 30, 2019 and 2018.
Our consolidated statement of earnings included the following amounts related to transactions between us and KaylaRe and KaylaRe Ltd. that occurred prior to our full acquisition:
 
Nine Months Ended
 
September 30, 2018
Management fee income
$
1,453

 
 
Transactions under KaylaRe-StarStone QS:
 
Ceded premium earned
(52,651
)
Net incurred losses
31,654

Acquisition costs
18,774

 
 
Total net loss
$
(770
)

Hillhouse
Investment funds managed by Hillhouse Capital, collectively own approximately 9.7% of Enstar’s voting ordinary shares. These funds also own non-voting ordinary shares and warrants to purchase additional non-voting ordinary shares, which together with their voting ordinary shares, represent an approximate 17.0% economic interest in Enstar. Jie Liu, a Partner of Hillhouse Capital, is a member of our Board.
As of September 30, 2019 and December 31, 2018 our equity method investee, Enhanzed Re, had investments in a fund managed by Hillhouse Capital, as described below.
As of September 30, 2019, our carrying value of the InRe Fund, L.P. ("InRe Fund"), which is managed by Hillhouse Capital, was $807.2 million and the fund was invested in approximately 20% in fixed income securities, 6% in North American equities, 71% in international equities and 3% in financing, derivatives and other items.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our consolidated balance sheet included the following balances related to transactions between us and Hillhouse Capital and its affiliated entities:
 
September 30,
2019
 
December 31,
2018
Investments in funds managed by Hillhouse Capital, held by equity method investees
$
287,132

 
$
75,192

Our ownership of equity method investments
47.4
%
 
47.4
%
Our indirect investment in funds managed by Hillhouse Capital
$
136,101

 
$
35,641

 
 
 
 
Direct investment in funds managed by Hillhouse Capital:
 
 
 
InRe Fund
$
807,177

 
$
678,420

Other funds
208,004

 
166,646

 
$
1,015,181

 
$
845,066


The increase in the direct investment in funds managed by Hillhouse was primarily due to unrealized gains for the nine months ended September 30, 2019. We incurred fees of approximately $45.6 million, included within the funds' reported NAV, for the nine months ended September 30, 2019 in relation to the direct investment in funds managed by Hillhouse Capital and its affiliated entities as described above.
Monument
Monument Insurance Group Limited ("Monument") was established in March 2016 to focus primarily on the acquisition of European life re-insurance companies or life business portfolios in run-off and to efficiently manage the run-off of the assumed businesses and portfolios. Enstar has invested a total of $26.6 million in the common and preferred shares of Monument and owns approximately 26.6% of the total economic interest in Monument. We have accounted for our equity interest in Monument as an equity method investment as we have significant influence over its operating and financial policies.
On May 31, 2019, we completed the previously announced transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument. In this transaction, we transferred policy benefits for life and annuity contracts with a carrying value of $99.1 million (or approximately €88.8 million) and total assets with a fair value of $101.6 million (or approximately €91.1 million) to a subsidiary of Monument.
Our investment in the common and preferred shares of Monument, carried in equity method investments on our consolidated balance sheet was as follows:
 
September 30, 2019
 
December 31, 2018
Investment in Monument
$
54,720

 
$
42,193


Clear Spring (formerly SeaBright)
Effective January 1, 2017, we sold SeaBright Insurance Company (“SeaBright Insurance”) and its licenses to Delaware Life Insurance Company ("Delaware Life"), a subsidiary of Guggenheim Partners, LLC. Following the sale, SeaBright Insurance was renamed Clear Spring Property and Casualty Company (“Clear Spring”). Clear Spring was subsequently capitalized with $56.0 million of equity, with Enstar retaining a 20% indirect equity interest in Clear Spring. We have accounted for our equity interest in Clear Spring as an equity method investment as we have significant influence over its operating and financial policies.
Our investment in the common shares of Clear Spring, carried in equity method investments on our consolidated balance sheet, was as follows:
 
September 30, 2019
 
December 31, 2018
Investment in Clear Spring
$
10,685

 
$
10,070



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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Effective January 1, 2017, StarStone National Insurance Company (“StarStone National”) entered into a quota share treaty with Clear Spring pursuant to which Clear Spring reinsures 33.3% of core workers compensation business written by StarStone National. This agreement was terminated as of December 31, 2018.
Effective January 1, 2017, we also entered into a quota share treaty with Clear Spring pursuant to which an Enstar subsidiary reinsures 25% of all workers compensation business written by Clear Spring. This is recorded as other activities.
Our consolidated balance sheet included the following balances related to transactions between us and Clear Spring:
 
September 30, 2019
 
December 31, 2018
Balances under StarStone ceding quota share:
 
 
 
Reinsurance balances recoverable
$
26,959

 
$
23,718

Prepaid insurance premiums
1,439

 
13,821

Ceded payable
5,409

 
14,153

Ceded acquisition costs
365

 
3,233

 
 
 
 
Balances under assuming quota share:
 
 
 
Losses and LAE
6,370

 
5,778

Unearned reinsurance premiums
360

 
3,455

Funds held
8,973

 
10,242

Our consolidated statement of earnings included the following amounts related to transactions between us and Clear Spring:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Transactions under StarStone ceding quota share:
 
 
 
 
 
 
 
Ceded premium earned
$
(3,548
)
 
$
(6,926
)
 
$
(13,304
)
 
$
(21,564
)
Ceded incurred losses and LAE
1,063

 
3,823

 
8,051

 
12,429

Ceded acquisition costs
243

 
981

 
305

 
4,892

 
 
 
 
 
 
 
 
Transactions under assuming quota share:
 
 
 
 
 
 
 
Premium earned
887

 
3,482

 
3,326

 
5,391

Net incurred losses and LAE
(576
)
 
(2,346
)
 
(2,013
)
 
(3,107
)
Acquisition costs
(88
)
 
(721
)
 
(79
)
 
(1,275
)
 
 
 
 
 
 
 
 
Total net loss
$
(2,019
)
 
$
(1,707
)
 
$
(3,714
)
 
$
(3,234
)



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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

AmTrust
In November 2018, pursuant to a Subscription Agreement with Evergreen Parent L.P. ("Evergreen"), K-Z Evergreen, LLC and Trident Pine Acquisition LP ("Trident Pine"), we purchased equity in Evergreen in the aggregate amount of $200.0 million. Evergreen is an entity formed by private equity funds managed by Stone Point and the Karfunkel-Zyskind family that acquired the approximately 45% of the issued and outstanding shares of common stock of AmTrust Financial Services, Inc. ("AmTrust") that the Karfunkel-Zyskind Family and certain of its affiliates and related parties did not already own or control. The equity interest was in the form of three separate classes of equity securities issued at the same price and in the same proportion as the equity interest purchased by Trident Pine. Following the closing of the transaction, Enstar owns approximately 7.5% of the equity interest in Evergreen and Trident Pine owns approximately 21.8%. Evergreen owns all of the equity interest in AmTrust. In addition, upon the successful closing of the transaction we received a fee of $3.5 million, half of which was payable upon closing and the other on the first anniversary of the closing. The fee was recorded in other income within our consolidated statements of earnings for the year ended December 31, 2018.
In connection with the Maiden Re Bermuda adverse development cover transaction described above in Note 3 - "Significant New Business", we have also entered into a Master Collateral Agreement with Maiden Re Bermuda, AmTrust and certain subsidiaries of AmTrust, pursuant to which our reinsurance performance obligations in that transaction are collateralized.
Our indirect investment in the shares of AmTrust, carried in equities on our consolidated balance sheet was as follows:
 
September 30, 2019
 
December 31, 2018
Investment in AmTrust
$
203,007

 
$
200,000

We recorded the following amounts, related to dividend income, included in net earnings related to our investment in AmTrust:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2019
 
 
 
 
Net investment income
$
1,900

 
5,550


Citco
In June 2018, our subsidiary made a $50.0 million indirect investment in the shares of Citco III Limited ("Citco"), a fund administrator with global operations. Pursuant to an investment agreement and in consideration for participation therein, a related party of Hillhouse Capital provided investment support to our subsidiary. In a private transaction that preceded our co-investment opportunity, certain Citco shareholders, including Trident, agreed to sell all or a portion of their interests in Citco. As of September 30, 2019, Trident owned an approximate 3.4% interest in Citco. Mr. Carey currently serves as an observer to the board of directors of Citco in connection with Trident's investment therein.
Our indirect investment in the shares of Citco, carried in equity method investments on our consolidated balance sheet, was as follows:
 
September 30, 2019
 
December 31, 2018
Investment in Citco
$
51,374

 
$
50,812


Enhanzed Re
Enhanzed Reinsurance Ltd. ("Enhanzed Re") is a joint venture between Enstar, Allianz SE ("Allianz") and Hillhouse Capital that was capitalized in December 2018. Enhanzed Re is a Bermuda-based Class 4 and Class E reinsurer and will reinsure life, non-life run-off, and property and casualty insurance business, initially sourced from

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Allianz SE and Enstar. Enstar, Allianz and Hillhouse Capital affiliates have made equity investment commitments in aggregate of $470.0 million to Enhanzed Re. Enstar, Allianz and an affiliate of Hillhouse Capital own 47.4%, 24.9% and 27.7%, respectively, of Enhanzed Re's total equity. As of September 30, 2019, Enstar has contributed $123.2 million of its total capital commitment to Enhanzed Re and had an uncalled amount of $100.0 million. We have accounted for our equity interest in Enhanzed Re as an equity method investment as we have significant influence over its operating and financial policies.
Enstar acts as the (re)insurance manager for Enhanzed Re, while Hillhouse Capital acts as the primary investment manager, and an affiliate of Allianz SE provides investment management services to Enhanzed Re. Enhanzed Re writes business from affiliates of its operating sponsors, Allianz SE and Enstar. It also underwrites other business to maximize diversification by risk and geography.
Our investment in the common shares of Enhanzed Re, carried in equity method investments on our consolidated balance sheet was as follows:
 
September 30, 2019
 
December 31, 2018
Investment in Enhanzed Re
$
145,163

 
$
94,800


We received fee income of $0.2 million and $0.4 million from Enhanzed Re, recorded within other income on our consolidated statement of earnings, for the three and nine months ended September 30, 2019, respectively.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

20. COMMITMENTS AND CONTINGENCIES
Concentrations of Credit Risk
We believe that there are no significant concentrations of credit risk associated with our cash and cash equivalents, fixed maturity investments, or other investments. Cash, cash equivalents and fixed maturity investments are managed pursuant to guidelines that follow prudent standards of diversification and limit the allowable holdings of a single issue and issuers. Other investments are managed pursuant to guidelines that emphasize diversification and liquidity. Pursuant to these guidelines, we manage and monitor risk across a variety of investment funds and vehicles, markets and counterparties. We are also subject to custodial credit risk on our investments, which we manage by diversifying our holdings amongst large financial institutions that are highly regulated.
We have exposure to credit risk on certain of our assets pledged to ceding companies under insurance contracts. In addition, we are potentially exposed should any insurance intermediaries be unable to fulfill their contractual obligations with respect to payments of balances owed to and by us.
Credit risk exists in relation to reinsurance balances recoverable. We remain liable to the extent that retrocessionaires do not meet their contractual obligations and, therefore, we evaluate and monitor concentration of credit risk among our reinsurers. These amounts are discussed in Note 6 - "Reinsurance Balances Recoverable on Paid and Unpaid Losses".
We are also subject to credit risk in relation to funds held by reinsured companies. Under funds held arrangements, the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable are deducted. We are subject to credit risk if the reinsured company is unable to honor the value of the funds held balances, such as in the event of insolvency. However, we generally have the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by us to the reinsured for losses payable and other amounts contractually due. We routinely monitor the creditworthiness of reinsured companies with whom we have funds held arrangements. We have a significant concentration of $1,049.8 million to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's.
We limit the amount of credit exposure to any one counterparty, and none of our counterparty credit exposures, excluding U.S. government instruments and the funds held counterparty noted above, exceeded 10% of shareholders’ equity as of September 30, 2019. Our credit exposure to the U.S. government was $799.3 million as of September 30, 2019.
Legal Proceedings
We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation and arbitration regarding claims. Estimated losses relating to claims arising in the ordinary course of business, including the anticipated outcome of any pending arbitration or litigation, are included in the liability for losses and LAE in our consolidated balance sheets. In addition to claims litigation, we 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. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on our business, results of operations or financial condition. We anticipate that, similar to the rest of the insurance and reinsurance industry, we 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.
Unfunded Investment Commitments
As of September 30, 2019, we had unfunded commitments of $368.6 million and $124.3 million to private equity funds and equity method investments, respectively.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Guarantees
As of September 30, 2019 and December 31, 2018, parental guarantees and capital instruments supporting subsidiaries' insurance obligations were $675.7 million and $614.5 million, respectively. We also have a FAL facility, which on February 12, 2019, we increased to issue up to $375.0 million of letters of credit, and maintained the provision to increase the facility up to $400.0 million. The FAL Facility is available to satisfy our Funds at Lloyd’s requirements and expires in 2022. As of September 30, 2019 there were $368.0 million letters of credit issued under this facility which have a parental guarantee.
Asbestos Personal Injury Liabilities
We acquired DCo LLC ("DCo") on December 30, 2016, as described in Note 3 - "Acquisitions" of our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018. DCo continues to process asbestos personal injury claims in the normal course of business and is separately managed.
Other liabilities on our consolidated balance sheets include amounts for indemnity and defense costs for pending and future claims, determined using standard actuarial techniques for asbestos-related exposures. Other liabilities also include amounts for environmental liabilities associated with DCo's properties.
Other assets on our consolidated balance sheets include estimated insurance recoveries relating to these liabilities. The recorded asset represents our assessment of the capacity of the insurance agreements to provide for the payment of anticipated defense and indemnity costs for pending claims and projected future demands. The recognition of these recoveries is based on an assessment of the right to recover under the respective contracts and on the financial strength of the insurers. The recorded asset does not represent the limits of our insurance coverage, but rather the amount we would expect to recover if the accrued indemnity and defense costs were paid in full.
Included within other assets and other liabilities are the fair value adjustments that were initially recognized when DCo was acquired. These fair value adjustments continue to be amortized in proportion to the original expected payout patterns for the future claims and recoveries. The carrying value of the asbestos and environmental liabilities, insurance recoveries, future estimated expenses and the fair value adjustments related to DCo was as follows:
 
September 30,
2019
 
December 31,
2018
Other liabilities:
 
 
 
Direct asbestos liabilities
$
245,787

 
$
265,975

Direct environmental liabilities
1,586

 
2,152

Estimated future expenses
16,739

 
19,843

Fair value adjustments
(83,750
)
 
(84,650
)
 
180,362

 
203,320

Other assets:
 
 
 
Insurance recoveries related to direct asbestos and environmental liabilities
168,507

 
183,676

Fair value adjustments
(47,270
)
 
(47,868
)
 
121,237

 
135,808

 
 
 
 
Net liabilities relating to direct asbestos and environmental exposures
$
59,125

 
$
67,512


Redeemable Noncontrolling Interest
We have the right to purchase the RNCI interests from the RNCI holders at certain times in the future (each such right, a "call right"), and the RNCI holders have the right to sell their RNCI interests to us at certain times in the future (each such right, a "put right"). The RNCI rights held by Trident are described in Note 19 - "Related Party Transactions". Dowling has a right to participate if Trident exercises its put right.

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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Leases
We adopted the new leasing standard and the related amendments on January 1, 2019 using the modified retrospective transition method as required by the standard, and based on the detailed analysis of our operating lease arrangements we have recognized a right-of-use asset and an offsetting lease liability on our consolidated balance sheet, relating primarily to office space and facilities that we have leased to conduct our business operations. On an ongoing basis we determine whether an arrangement is a lease or contains a lease at inception and also complete an assessment to determine the classification of each lease as either a finance lease or an operating lease. Our leases are all currently classified as operating leases.
Our leases have remaining lease terms of one year to 38 years, some of which include options to extend the lease term for up to five years and some of which include options to terminate the lease within one year. We consider these options in determining the lease term used to establish our right-of-use assets and lease liabilities. Only those renewal options that we believe we are reasonably certain to exercise are taken into account when determining lease terms. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of our leases do not provide an implicit discount rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We have lease agreements that contain both lease and non-lease components. For real estate leases, we account for lease components together with non-lease components such as common-area maintenance costs as a single lease component.
As part of our adoption of the new leasing standard, we elected the practical expedient package as well as the hindsight practical expedient permitted by the FASB in ASC 842. The practical expedient package covers the application of the new leasing standard to leases that commenced before January 1, 2019, the effective date of the standard and gives an entity the option of not reassessing, (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The hindsight practical expedient permits an entity to consider changes in facts and circumstances from commencement through to the effective date of the new standard when determining the lease term and assessing any potential impairment of the recorded right-of-use asset. All these practical expedients were consistently applied to our leases as required by the leasing standard.
The table below provides a summary of the components of our lease cost including the gross sublease income received under sublease arrangements related to certain office spaces that we have leased to conduct our business operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2019
Operating lease cost
$
4,010

 
$
10,696

Sublease income
(183
)
 
(451
)
Total lease cost
$
3,827

 
$
10,245


The table below provides a summary of the cash flow information and non-cash activity related to our operating leases:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2019
Operating cash flow information:
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
$
2,945

 
$
9,138

Non-cash activity:
 
 
 
Right-of-use assets obtained in exchange for lease obligations
$
1,353

 
$
53,581



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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below provides a summary of the leases recorded on our consolidated balance sheets:
 
Balance sheet classification
 
September 30, 2019
Right-of-use assets
Other assets
 
$
45,174

Current lease liabilities
Other liabilities
 
9,907

Non-current lease liabilities
Other liabilities
 
36,776


Weighted-average remaining lease term and discount rate used for our operating leases are as follows:
 
 
September 30, 2019
Weighted-average remaining lease term
 
6.4 years

Weighted-average discount rate
 
6.2
%

The table below provides a summary of the maturity of the operating lease liabilities:
 
 
September 30, 2019
2019
 
$
2,503

2020
 
13,030

2021
 
9,729

2022
 
7,856

2023
 
6,943

2024 and beyond
 
17,625

Total lease payments
 
57,686

Less: Imputed interest
 
(11,003
)
Present value of lease liabilities
 
$
46,683



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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

21. SEGMENT INFORMATION
We have three reportable segments of business that are each managed, operated and separately reported: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. Our other activities, which do not qualify as a reportable segment, include our corporate expenses, debt servicing costs, holding company income and expenses, foreign exchange, our remaining life business and other miscellaneous items. These segments are described in Note 1 - "Description of Business" to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2018.
The following tables set forth selected and unaudited condensed consolidated statement of earnings results by segment:

 
Three Months Ended September 30, 2019
 
Non-Life
Run-Off
 
Atrium
 
StarStone
 
Other
 
Total
Gross premiums written
$
301

 
$
48,746

 
$
221,157

 
$
(2,498
)
 
$
267,706

 
 
 
 
 
 
 
 
 
 
Net premiums written
$
(3,808
)
 
$
43,785

 
$
172,991

 
$
(2,503
)
 
$
210,465

 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
16,837

 
$
42,913

 
$
206,272

 
$
4,303

 
$
270,325

Net incurred losses and LAE
(30,583
)
 
(28,400
)
 
(159,787
)
 
(3,647
)
 
(222,417
)
Acquisition costs
4,634

 
(14,466
)
 
(40,273
)
 
(177
)
 
(50,282
)
Operating expenses
(51,395
)
 
(3,742
)
 
(31,084
)
 
—

 
(86,221
)
Underwriting income (loss)
(60,507
)
 
(3,695
)
 
(24,872
)
 
479

 
(88,595
)
Net investment income (loss)
73,752

 
1,736

 
12,131

 
(2,147
)
 
85,472

Net realized and unrealized gains
138,174

 
582

 
9,159

 
270

 
148,185

Fees and commission income
4,196

 
2,391

 
—

 
—

 
6,587

Other income (expense)
(285
)
 
35

 
76

 
1,000

 
826

Corporate expenses
(11,983
)
 
(2,896
)
 
—

 
(12,824
)
 
(27,703
)
Interest income (expense)
(17,964
)
 
—

 
—

 
3,014

 
(14,950
)
Net foreign exchange gains (losses)
13,056

 
(924
)
 
1,475

 
24

 
13,631

EARNINGS (LOSS) BEFORE INCOME TAXES
138,439

 
(2,771
)
 
(2,031
)
 
(10,184
)
 
123,453

Income tax expense
(13,382
)
 
(222
)
 
(993
)
 
—

 
(14,597
)
Earnings from equity method investments
17,703

 
—

 
—

 
—

 
17,703

NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
142,760

 
(2,993
)
 
(3,024
)
 
(10,184
)
 
126,559

Net loss (earnings) attributable to noncontrolling interest
(1,439
)
 
1,228

 
320

 
—

 
109

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
141,321

 
(1,765
)
 
(2,704
)
 
(10,184
)
 
126,668

Dividends on preferred shares
—

 
—

 
—

 
(8,925
)
 
(8,925
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
141,321

 
$
(1,765
)
 
$
(2,704
)
 
$
(19,109
)
 
$
117,743

 
 
 
 
 
 
 
 
 
 
Underwriting ratios:
 
 
 
 
 
 
 
 
 
Loss ratio 
 
 
66.2
%
 
77.5
%
 
 
 
 
Acquisition expense ratio
 
 
33.7
%
 
19.5
%
 
 
 
 
Operating expense ratio
 
 
8.7
%
 
15.1
%
 
 
 
 
Combined ratio
 
 
108.6
%
 
112.1
%
 
 
 
 


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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Three Months Ended September 30, 2018
 
Non-Life
Run-Off
 
Atrium
 
StarStone
 
Other
 
Total
Gross premiums written
$
9,912

 
$
39,995

 
$
282,525

 
$
846

 
$
333,278

 
 
 
 
 
 
 
 
 
 
Net premiums written
$
4,778

 
$
37,141

 
$
219,726

 
$
822

 
$
262,467

 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
10,442

 
$
36,977

 
$
216,355

 
$
823

 
$
264,597

Net incurred losses and LAE
62,778

 
(17,853
)
 
(198,899
)
 
—

 
(153,974
)
Life and Annuity Policy Benefits
—

 
—

 
—

 
(423
)
 
(423
)
Acquisition costs
160

 
(13,215
)
 
(41,079
)
 
(108
)
 
(54,242
)
Operating expenses
(37,473
)
 
(3,952
)
 
(38,000
)
 
—

 
(79,425
)
Underwriting income (loss)
35,907

 
1,957

 
(61,623
)
 
292

 
(23,467
)
Net investment income (loss)
59,247

 
1,597

 
9,504

 
(918
)
 
69,430

Net realized and unrealized gains (losses)
(58,506
)
 
194

 
989

 
100

 
(57,223
)
Fees and commission income
3,708

 
3,242

 
—

 
—

 
6,950

Other income (expense)
8,106

 
7

 
117

 
(4
)
 
8,226

Corporate expenses
(11,433
)
 
(2,770
)
 
—

 
(8,925
)
 
(23,128
)
Interest income (expense)
(5,951
)
 
—

 
—

 
1,311

 
(4,640
)
Net foreign exchange gains (losses)
17

 
(262
)
 
(585
)
 
(210
)
 
(1,040
)
EARNINGS (LOSS) BEFORE INCOME TAXES
31,095

 
3,965

 
(51,598
)
 
(8,354
)
 
(24,892
)
Income tax benefit (expense)
(125
)
 
(737
)
 
118

 
(2
)
 
(746
)
Earnings from equity method investments
3,317

 
—

 
—

 
—

 
3,317

NET EARNINGS (LOSS)
34,287

 
3,228

 
(51,480
)
 
(8,356
)
 
(22,321
)
Net loss (earnings) attributable to noncontrolling interest
(1,659
)
 
(1,266
)
 
14,414

 
—

 
11,489

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
32,628

 
1,962

 
(37,066
)
 
(8,356
)
 
(10,832
)
Dividend on preferred shares
—

 
—

 
—

 
(5,133
)
 
(5,133
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
32,628

 
$
1,962

 
$
(37,066
)
 
$
(13,489
)
 
$
(15,965
)
 
 
 
 
 
 
 
 
 
 
Underwriting ratios:
 
 
 
 
 
 
 
 
 
Loss ratio
 
 
48.3
%
 
91.9
%
 
 
 
 
Acquisition expense ratio
 
 
35.7
%
 
19.0
%
 
 
 
 
Operating expense ratio
 
 
10.7
%
 
17.6
%
 
 
 
 
Combined ratio
 
 
94.7
%
 
128.5
%
 
 
 
 


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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Nine Months Ended September 30, 2019
 
Non-Life
Run-Off
 
Atrium
 
StarStone
 
Other
 
Total
Gross premiums written
$
(24,785
)
 
$
146,519

 
$
706,634

 
$
(1,174
)
 
$
827,194

 
 
 
 
 
 
 
 
 
 
Net premiums written
$
(26,395
)
 
$
127,246

 
$
563,523

 
$
(1,197
)
 
$
663,177

 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
141,981

 
$
119,865

 
$
603,457

 
$
16,872

 
$
882,175

Net incurred losses and LAE
(135,517
)
 
(58,662
)
 
(543,912
)
 
(13,068
)
 
(751,159
)
Life and Annuity Policy Benefits
—

 
—

 
—

 
(2,290
)
 
(2,290
)
Acquisition costs
(40,033
)
 
(41,023
)
 
(129,315
)
 
(554
)
 
(210,925
)
Operating expenses
(139,595
)
 
(9,968
)
 
(100,430
)
 
—

 
(249,993
)
Underwriting income (loss)
(173,164
)
 
10,212

 
(170,200
)
 
960

 
(332,192
)
Net investment income (loss)
206,337

 
5,500

 
36,341

 
(6,278
)
 
241,900

Net realized and unrealized gains
815,902

 
5,464

 
51,472

 
5,849

 
878,687

Fees and commission income
13,673

 
5,773

 
—

 
—

 
19,446

Other income
15,136

 
106

 
455

 
1,971

 
17,668

Corporate expenses
(47,287
)
 
(10,186
)
 
—

 
(36,051
)
 
(93,524
)
Interest income (expense)
(45,699
)
 
—

 
(475
)
 
7,152

 
(39,022
)
Net foreign exchange gains (losses)
20,426

 
(1
)
 
(355
)
 
(2
)
 
20,068

EARNINGS (LOSS) BEFORE INCOME TAXES
805,324

 
16,868

 
(82,762
)
 
(26,399
)
 
713,031

Income tax expense
(23,501
)
 
(1,930
)
 
(1,348
)
 
(85
)
 
(26,864
)
Earnings (loss) from equity method investments
44,406

 
—

 
(218
)
 
—

 
44,188

NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
826,229

 
14,938

 
(84,328
)
 
(26,484
)
 
730,355

Net loss (earnings) attributable to noncontrolling interest
(6,351
)
 
(6,127
)
 
17,448

 
—

 
4,970

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
819,878

 
8,811

 
(66,880
)
 
(26,484
)
 
735,325

Dividends on preferred shares
—

 
—

 
—

 
(26,989
)
 
(26,989
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
819,878

 
$
8,811

 
$
(66,880
)
 
$
(53,473
)
 
$
708,336

 
 
 
 
 
 
 
 
 
 
Underwriting ratios:
 
 
 
 
 
 
 
 
 
Loss ratio
 
 
48.9
%
 
90.1
%
 
 
 
 
Acquisition expense ratio
 
 
34.2
%
 
21.4
%
 
 
 
 
Operating expense ratio
 
 
8.4
%
 
16.7
%
 
 
 
 
Combined ratio
 
 
91.5
%
 
128.2
%
 
 
 
 


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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Nine Months Ended September 30, 2018
 
Non-Life
Run-Off
 
Atrium
 
StarStone
 
Other
 
Total
Gross premiums written
$
16,354

 
$
130,997

 
$
888,867

 
$
2,858

 
$
1,039,076

 
 
 
 
 
 
 
 
 
 
Net premiums written
$
3,217

 
$
113,218

 
$
619,528

 
$
2,871

 
$
738,834

 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
27,229

 
$
106,722

 
$
526,802

 
$
2,875

 
$
663,628

Net incurred losses and LAE
205,890

 
(51,951
)
 
(420,266
)
 
—

 
(266,327
)
Life and Annuity Policy Benefits
—

 
—

 
—

 
(217
)
 
(217
)
Acquisition costs
(4,524
)
 
(37,996
)
 
(94,775
)
 
(389
)
 
(137,684
)
Operating expenses
(114,254
)
 
(12,259
)
 
(106,699
)
 
—

 
(233,212
)
Underwriting income (loss)
114,341

 
4,516

 
(94,938
)
 
2,269

 
26,188

Net investment income
168,189

 
4,067

 
25,950

 
4,012

 
202,218

Net realized and unrealized losses
(230,829
)
 
(1,889
)
 
(15,150
)
 
(6,803
)
 
(254,671
)
Fees and commission income
13,093

 
10,540

 
—

 
—

 
23,633

Other income (expense)
1,330

 
127

 
(432
)
 
(207
)
 
818

Corporate expenses
(33,453
)
 
(5,083
)
 
—

 
(28,677
)
 
(67,213
)
Interest income (expense)
(24,562
)
 
—

 
(547
)
 
3,536

 
(21,573
)
Net foreign exchange gains (losses)
(202
)
 
(1,262
)
 
(1,063
)
 
1,138

 
(1,389
)
EARNINGS (LOSS) BEFORE INCOME TAXES
7,907

 
11,016

 
(86,180
)
 
(24,732
)
 
(91,989
)
Income tax expense
(227
)
 
(1,756
)
 
(2,568
)
 
(13
)
 
(4,564
)
Earnings from equity method investments
33,659

 
—

 
—

 
—

 
33,659

NET EARNINGS (LOSS)
41,339

 
9,260

 
(88,748
)
 
(24,745
)
 
(62,894
)
Net loss (earnings) attributable to noncontrolling interest
(4,182
)
 
(3,798
)
 
27,076

 
—

 
19,096

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
37,157

 
5,462

 
(61,672
)
 
(24,745
)
 
(43,798
)
Dividends on preferred shares
—

 
—

 
—

 
(5,133
)
 
(5,133
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
37,157

 
$
5,462

 
$
(61,672
)
 
$
(29,878
)
 
$
(48,931
)
 
 
 
 
 
 
 
 
 
 
Underwriting ratios:
 
 
 
 
 
 
 
 
 
Loss ratio
 
 
48.7
%
 
79.8
%
 
 
 
 
Acquisition expense ratio
 
 
35.6
%
 
18.0
%
 
 
 
 
Operating expense ratio
 
 
11.5
%
 
20.2
%
 
 
 
 
Combined ratio
 
 
95.8
%
 
118.0
%
 
 
 
 



71
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assets by Segment
Invested assets are managed on a subsidiary-by-subsidiary basis, and investment income and realized and unrealized gains (losses) on investments are recognized in each segment as earned. Our total assets by segment were as follows:
 
September 30,
 
December 31,
 
2019
 
2018
Assets by Segment:
 
 
 
Non-life Run-off
$
14,691,105

 
$
13,362,749

Atrium
568,515

 
591,722

StarStone
3,524,111

 
3,416,132

Other
(570,377
)
 
(814,333
)
Total assets
$
18,213,354

 
$
16,556,270



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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition as of September 30, 2019 and our results of operations for the three and nine months ended September 30, 2019 and 2018 should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2018. Some of the information contained in this discussion and analysis or included elsewhere in this quarterly 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" and "Risk Factors" included in this quarterly report and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.
Table of Contents
Section
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Business Overview
We are a multi-faceted insurance group that offers innovative capital release solutions and specialty underwriting capabilities through our network of group companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations. Our core focus is acquiring and managing insurance and reinsurance companies and portfolios of insurance and reinsurance business in run-off. Since the formation of our Bermuda-based holding company in 2001, we have completed approximately 100 acquisitions or portfolio transfers.
The substantial majority of our acquisitions have been in the non-life run-off business, which generally includes property and casualty, workers’ compensation, asbestos and environmental, construction defect, marine, aviation and transit, and other closed business.
While our core focus remains acquiring and managing non-life run-off business, we expanded our business to include active underwriting through our acquisitions of Atrium and StarStone in 2013 and 2014, respectively. We partnered with Trident in the Atrium and StarStone acquisitions, with Enstar owning a 59.0% interest, Trident owning a 39.3% interest, and Dowling owning a 1.7% interest.
We have three reportable segments of business that are each managed, operated and reported upon separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. For additional information relating to our segments, see "Item 1. Business - Operating Segments" in our Annual Report on Form 10-K for the year ended December 31, 2018.
Our business strategies are discussed in "Item 1. Business - Company Overview", "- Business Strategy", and "- Recent Acquisitions and Significant New Business" in our Annual Report on Form 10-K for the year ended December 31, 2018.
Key Performance Indicator
Our primary corporate objective is to grow our fully diluted book value per ordinary share. 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 our active underwriting strategies. The drivers of our book value growth are discussed in "Item 1. Business - Business Strategy" in our Annual Report on Form 10-K for the year ended December 31, 2018.
During the nine months ended September 30, 2019, our book value per ordinary share on a fully diluted basis increased by 21.1% to $188.81 per ordinary share. The increase was primarily due to net earnings for the nine months ended September 30, 2019, as discussed more fully below.

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The table below summarizes the calculation of our fully diluted book value per ordinary share:
 
September 30,
2019
 
December 31,
2018
 
Change
Numerator:
 
 
 
 
 
Total Enstar Group Limited Shareholder's Equity
$
4,637,800

 
$
3,901,933

 
$
735,867

Less: Series D and E Preferred Shares
510,000

 
510,000

 
—

Total Enstar Group Limited Ordinary Shareholders' Equity (A)
4,127,800

 
3,391,933

 
735,867

Proceeds from assumed conversion of warrants(1)
20,229

 
20,229

 
—

Numerator for fully diluted book value per ordinary share calculations (B)
$
4,148,029

 
$
3,412,162

 
$
735,867

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Ordinary shares outstanding (C)
21,490,210

 
21,459,997

 
30,213

Effect of dilutive securities:
 
 
 
 
 
Share-based compensation plans
302,861

 
245,165

 
57,696

Warrants(1)
175,901

 
175,901

 
—

Fully diluted ordinary shares outstanding (D)
21,968,972

 
21,881,063

 
87,909

 
 
 
 
 
 
Book value per ordinary share:
 
 
 
 
 
Basic book value per ordinary share = (A) / (C)
$
192.08

 
$
158.06

 
$
34.02

Fully diluted book value per ordinary share = (B) / (D)
$
188.81

 
$
155.94

 
$
32.87

(1) There are warrants outstanding to acquire 175,901 Series C Non-Voting Ordinary Shares for an exercise price of $115.00 per share, subject to certain adjustments (the "Warrants"). The Warrants were issued in April 2011 and expire in April 2021. The Warrant holder may, at its election, satisfy the exercise price of the Warrants on a cashless basis by surrender of shares otherwise issuable upon exercise of the Warrants in accordance with a formula set forth in the Warrants.
Current Outlook
Run-off
Our business strategy includes generating growth through acquisitions and reinsurance transactions, particularly in our Non-life Run-off segment. During the first nine months of 2019, we completed four reinsurance-to-close transactions with AmTrust ("AmTrust RITC Transactions"), in which we assumed aggregate gross and net reserves $897.1 million and $620.4 million, respectively, and recorded a deferred charge asset of $20.6 million, we entered into an adverse development cover reinsurance transaction with Maiden Re Bermuda, whereby we assumed total gross reserves of $530.2 million for reinsurance premium of $445.0 million and recorded a deferred charge of $85.2 million, and we also closed a loss portfolio transfer reinsurance agreement with Amerisure Mutual Insurance Company ("Amerisure"), whereby we assumed net reserves of $48.3 million.
In addition, we have also agreed to enter, or have entered, into the following run-off transactions:
•
a reinsurance transaction with Zurich Insurance Group ("Zurich"), pursuant to which we reinsured approximately $0.5 billion of asbestos and environmental reserves relating to 1986 and prior years. This transaction closed on October 1, 2019;
•
the acquisition of BorgWarner Morse TEC ("Morse TEC") from BorgWarner Inc ("BorgWarner"), through our subsidiary Enstar Holding (US) LLC. Morse TEC holds approximately $0.8 billion in liabilities associated with personal injury asbestos claims and environmental claims arising from BorgWarner's legacy manufacturing operations. This transaction closed on October 30, 2019; and
•
an agreement with subsidiaries of Munich Reinsurance Company ("Munich Re"), pursuant to which we will acquire certain long tail insurance portfolios and will receive total assets of approximately AUD$228.2 million (approximately $156.2 million). Completion is expected to occur in 2020.

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Effective July 1, 2019, we also completed a portfolio transfer under Part VII of the Financial Services and Markets Act 2000 with RSA Insurance Group PLC ("RSA"). We originally entered into a reinsurance agreement with RSA in 2017 and the successful completion of the Part VII transfer provides legal finality to RSA's obligations and we are now responsible for managing the claims related to this portfolio.
In addition, we are also pursuing an Insurance Business Transfer ("IBT") under the newly enacted Insurance Business Transfer Act in Oklahoma, with respect to an intra-group transaction. As this legislation becomes more widely used in the U.S. we expect it will offer us additional opportunities and flexibility in how we structure transactions.
As of September 30, 2019, our non-life run-off gross and net reserves were $7.9 billion and $6.3 billion, respectively, and we continue to evaluate opportunities for future growth.
We manage claims in a professional and disciplined manner, drawing on our global team of in-house claims management experts as we aim to proactively manage risks and claims efficiently.
As a result of the number of transactions to acquire run-off liabilities that we have completed over the years, our organizational structure consists of licensed entities across many jurisdictions. In managing our group, we continually look for opportunities to simplify our legal structure by way of company amalgamations and mergers, reinsurance, or other transactions to improve capital efficiency and decrease ongoing compliance and operational costs. In addition, we seek to pool risk in areas where we maintain the expertise to manage such risk to achieve operational efficiencies, which allows us to most efficiently manage our assets to achieve capital diversification benefits.
Underwriting
Our underwriting results can be affected by changes in premium rates, significant losses, development of prior year loss reserves and current year underwriting margins. Underwriting margins, premium rates, and terms of conditions have been under pressure in certain business lines, and we have seen overcapacity in many markets, which can impact premium rates and/or terms and conditions. If general economic conditions worsen, a decrease in the level of economic activity may impact insurable risks and our ability to write premium that is acceptable to us. We may adjust our level of reinsurance to maintain an amount of net exposure that is aligned with our risk tolerance.
Our industry continues to experience challenging underwriting market conditions, and our strategy is to continue to focus on a disciplined underwriting approach and strong risk management practices.
At StarStone, our new executive leadership appointed in the second half of 2018 has made significant progress in repositioning the underwriting portfolio this year to reflect market opportunities and to achieve a mix of business for improved underwriting profitability. We will continue to focus on profitable lines, taking action to remediate certain lines that we wish to continue writing and exiting lines of business that we no longer find attractive. We cannot be certain that we will not incur additional unfavorable development in the future, and we may also incur significant costs as we exit business lines, which may impact StarStone's return to profitability. We expect StarStone to write less gross premiums in 2019 compared to 2018.
In partnership with StarStone's other shareholders, we have recently completed two transactions to provide capital support to StarStone in the form of:
(i) a contribution to its contributed surplus account and a loss portfolio transfer and adverse development cover, effective October 1, 2018. To fund the transaction, the shareholders contributed an aggregate amount of $135.0 million in December 2018 in proportion to their ownership interests; and
(ii) a loss portfolio transfer, effective April 1, 2019, for which shareholders agreed to contribute an aggregate amount of $48.0 million.
The quota shares between StarStone's U.S. and U.K. affiliates and KaylaRe were non-renewed as of January 1, 2018 and January 1, 2019, respectively. However, losses in the earlier calendar years will continue to fall due under the previous quota share agreement. StarStone has continued to experience underwriting losses in the first nine months of 2019, primarily on exited lines of business, but also due to increased frequency and severity of losses on our U.S. casualty line of business.

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Investments
Markets are inherently uncertain and investment performance may be impacted by changes in market volatility. We expect to maintain our investment strategy, which is to seek superior risk adjusted returns while preserving liquidity and capital and maintaining a prudent diversification of assets. We will continue allocating a portion of our portfolio to non-investment grade securities or alternative investments, in accordance with our investment guidelines, which provide diversification against our fixed income investments and an opportunity for improved risk-adjusted returns. In addition, we may use derivative instruments in our risk mitigation and yield enhancement strategies.
Our total investment results are a significant component of earnings and are comprised of:
•
Net investment income. In a rising interest rate environment, our net investment income would improve as maturities are reinvested at higher rates. Conversely, in a declining interest rate environment, our net investment income would decline as maturities are reinvested at lower rates. All else being equal, we would also expect our net investment income to grow as total investable assets increase as we acquire more business, partially offset by reductions in the investment portfolio for paid claims.
•
Net realized and unrealized gains or losses. These arise from investments in fixed maturities, funds held, equity securities and other investments. Given the nature of our investments in fixed maturities and the average duration of our fixed maturity securities, the return of our fixed maturities investments will be impacted by changes in interest rates. In a rising rate environment, these securities may experience unrealized losses prior to maturity. Conversely, in a declining rate environment, securities may experience unrealized gains prior to maturity. During the first nine months of 2019, we recognized net unrealized gains on our investments of $821.1 million, of which $424.9 million and $95.1 million related to our investments in fixed maturities, trading and funds withheld - directly managed, respectively, primarily due to declining interest rates. We generally account for our fixed maturity securities as "trading", whereas other companies in our industry may use "available-for-sale" accounting. The difference is that unrealized changes on investments classified as trading are recorded through earnings, whereas unrealized changes on investments classified as available-for-sale are recorded directly in shareholders' equity. We may therefore experience further unrealized gains and losses on our fixed maturity investments, depending on investment market conditions and general economic conditions. Unrealized amounts would only become realized in the event of a sale of the specific securities prior to maturity or a credit default. For further information on the sensitivity of our portfolio to changes in interest rates, refer to the Interest Rate Risk section within Item 3. "Quantitative and Qualitative Disclosures About Market Risk", included within this Quarterly Report on Form 10-Q. For further discussion of our investments, see "Investable Assets" below. During the first nine months of 2019, we recognized net unrealized gains on our other investments of $269.8 million, compared to net unrealized losses of $164.0 million for the year ended 2018. We believe our other investments provide diversification from our fixed income investments and an opportunity for improved risk-adjusted returns. However, the returns of these investments may be relatively volatile, and we may experience significant unrealized gains or losses in a particular quarter or year.
U.S. Taxation Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). As of January 1, 2018 we non-renewed certain of our active underwriting affiliate reinsurance transactions ceded from our U.S. operating entities to our non-U.S. affiliates. We will continue to assess the impact of the Tax Act on our business as the regulations develop. Our subsidiaries' reinsurance strategies may be different than in the past, which may result in more risk being retained in our U.S. insurance companies, which would have the effect of requiring more capital in those companies and potentially increase our overall group effective tax rate over time.
On July 10, 2019, the U.S. Internal Revenue Service and Department of the Treasury released proposed regulations relating to passive foreign investment company (“PFIC”) that may have an impact on foreign insurance companies and their investors, and other participants in transactions involving foreign insurers. The new proposed regulations withdraw a set of proposed regulations that were issued in April 2015. We do not anticipate any impact on our business.  
Brexit
There has been volatility in the financial and foreign exchange markets following the Brexit referendum on June 23, 2016, and this is expected to continue. On March 29, 2017, Article 50 of the Lisbon Treaty was triggered, which allowed two years for the United Kingdom and the 27 remaining European Union members to reach an agreement with regard to the terms on which the United Kingdom will leave the European Union. However the negotiated Withdrawal

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Agreement between the United Kingdom and the European Union was not passed by the U.K. Parliament, and both parties have agreed to an additional extension to January 31, 2020. In connection with the extension being agreed, the U.K. Parliament has voted to hold a general election which will take place on December 12, 2019, at which point a new government may be formed and may attempt to approve the Withdrawal Agreement in the U.K. Parliament. Other options, such as renegotiating the Withdrawal Agreement, holding a second referendum, leaving the European Union with no deal or revoking Article 50 all remain possible. Additional delays and uncertainty may impact our business, and clients and potential partners may delay transactions until Brexit is resolved.
For companies based in the United Kingdom, including certain of our active underwriting and run-off companies, there continues to be heightened uncertainty regarding trading relationships with countries in the European Union after Brexit, pending the conclusion of the Brexit negotiations between the United Kingdom and the European Union. Both our StarStone and Atrium operations have well-diversified sources of premium, which may mitigate the potential impact of Brexit. The majority of business written in StarStone and Atrium is in U.S. dollars, so the impact of currency volatility on those segments has not been significant. In addition, StarStone already has established operations within the European Economic Area. On May 23, 2018, Lloyd's announced that it had received license approval from the Belgian insurance regulator for Lloyd's Insurance Company SA, which will be able to write non-life risks from the European Economic Area. In the near-term, access to markets is unaffected, and all contracts entered into up until Brexit are expected to remain valid into the post-Brexit period. With specific reference to our run-off business, we are expanding upon our existing run-off capabilities within the European Union for the purpose of receiving transfers of new run-off business. We have also investigated the post-Brexit additional requirements in each applicable state for the continued payment of policyholders’ claims in respect of the existing run-off business of our United Kingdom Non-life Run-off companies.
Recent Developments
Our transactions typically take the form of either acquisitions of companies or loss portfolio transfers, where a reinsurance contract transfers a portfolio of loss and loss adjustment expenses ("LAE") liabilities from a (re)insurance counterparty to an Enstar-owned reinsurer.
Acquisitions and Significant New Business
BorgWarner Morse TEC
On October 30, 2019, we completed the acquisition of BorgWarner Morse TEC ("Morse TEC") from BorgWarner Inc ("BorgWarner") through our subsidiary, Enstar Holdings (US) LLC. Morse TEC holds approximately $0.8 billion in liabilities associated with personal injury asbestos claims and environmental claims arising from BorgWarner's legacy manufacturing operations.
Munich Re
On September 10, 2019, we signed an agreement with subsidiaries of Munich Reinsurance Company ("Munich Re"), pursuant to which we will acquire certain portfolios from their Australian branches of Great Lakes Insurance and HSB Engineering Insurance Limited, primarily of long tail insurance business. In the transaction, which is subject to regulatory and Federal Court of Australia approval, we will receive total assets of approximately AUD$228.2 million (approximately $156.2 million) for assuming the associated net insurance reserves. We are pursuing a portfolio transfer of the insurance business under Division 3A of Part III of Australia’s Insurance Act 1973 (Cth), which would provide legal finality for Munich Re.
Zurich
On October 1, 2019, we completed the previously announced reinsurance transaction with Zurich Insurance Group ("Zurich"), pursuant to which we reinsured certain of Zurich's U.S. asbestos and environmental liability insurance portfolios. In the transaction we assumed approximately $0.5 billion of gross reserves, relating to 1986 and prior year business.
Maiden Re
On August 5, 2019, we and Maiden Reinsurance Ltd. (“Maiden Re Bermuda”) completed a transaction pursuant to the previously announced Master Agreement with Maiden Holdings, Ltd. and Maiden Re Bermuda to provide adverse development cover reinsurance to Maiden Re Bermuda, effective January 1, 2019. In the transaction, Maiden Re Bermuda ceded and we assumed as retrocessionaire Maiden Re Bermuda's liability under its quota share agreement with the Bermuda subsidiary ("AmTrust Bermuda") of AmTrust Financial Services, Inc. (“AmTrust”). The adverse development cover reinsurance is for losses incurred on or prior to December 31, 2018 in excess of a $2.2 billion

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retention up to a $600.0 million limit, and in exchange we assumed total gross reserves of $530.2 million for reinsurance premium of $445.0 million and recorded a deferred charge of $85.2 million. Enstar's reinsurance performance obligations in the transaction are collateralized in accordance with a Master Collateral Agreement among Enstar, Maiden Re Bermuda, AmTrust and certain subsidiaries of AmTrust. The retention, limit and premium were reduced from the previously announced transaction following the parties’ agreement to include only losses under the Bermuda quota share agreement between Maiden Re Bermuda and AmTrust Bermuda.
Amerisure
On April 11, 2019, we completed a loss portfolio transfer reinsurance agreement with Amerisure Mutual Insurance Company ("Amerisure") and Allianz Risk Transfer (Bermuda) Limited (“ART Bermuda”). In the transaction, Amerisure ceded, and each of Enstar and ART Bermuda severally assumed, a 50% quota share of the construction defect losses incurred by Amerisure and certain of its subsidiaries on or before December 31, 2012. Under the agreement, which was effective as of January 1, 2019, we assumed $48.3 million of gross reserves in exchange for consideration of $45.5 million and recorded a deferred charge asset of $2.9 million.
AmTrust RITC Transactions
On February 14, 2019, we completed four RITC transactions with Syndicates 1206, 1861, 2526 and 5820, managed by AmTrust Syndicates Limited, under which we reinsured to close the 2016 and prior underwriting years. We assumed, among other items, gross loss reserves of £703.8 million ($897.1 million) and net loss reserves of £486.8 million ($620.4 million) relating to the portfolios in exchange for consideration of £539.9 million ($688.2 million) and recorded a deferred charge asset of $20.6 million.
Businesses Sold, Held for Sale and Assets Sold
Alpha Life Business Transfer
On May 31, 2019, we completed the transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument Insurance Group Limited ("Monument"). We have an investment in Monument, as described further in Note 19 - "Related Party Transactions" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. Our policy benefits operations do not qualify for inclusion in our reportable segments and are therefore included within other activities. The related assets, as well as the results from these operations, were not significant to our consolidated operations and therefore they have not been classified as a discontinued operation. In addition, our transfer of these life assurance polices to Monument was not classified as a held-for-sale business transaction since the underlying contracts did not meet the definition of a business.
Underwriting Ratios
In presenting our results for the Atrium and StarStone segments, we discuss the loss ratio, acquisition cost ratio, operating expense ratio, and the combined ratio of our active underwriting operations within these segments. Management believes that these ratios provide the most meaningful measure for understanding our underwriting profitability. These measures are calculated using GAAP amounts presented on the unaudited condensed consolidated statements of earnings for both Atrium and StarStone.
The loss ratio is calculated by dividing net incurred losses and LAE by net premiums earned. The acquisition cost ratio is calculated by dividing acquisition costs by net premiums earned. The operating expense ratio is calculated by dividing operating expenses by net premiums earned. The combined ratio is the sum of the loss ratio, the acquisition cost ratio and the operating expense ratio.
The Atrium segment also includes corporate expenses that are not directly attributable to the underwriting results in the segment. The corporate expenses include general and administrative expenses related to amortization of the definite-lived intangible assets in the holding company, and expenses relating to Atrium Underwriters Limited ("AUL") employee salaries, benefits, bonuses and current year share grant costs. The AUL general and administrative expenses are incurred in managing the syndicate. These are principally funded by the profit commission fees earned from Syndicate 609, which is a revenue item not included in the insurance ratios.

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Consolidated Results of Operations - For the Three and Nine Months Ended September 30, 2019 and 2018
The following table sets forth our unaudited condensed consolidated statements of earnings for each of the periods indicated. For a discussion of the critical accounting policies that affect the results of operations, see "Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2018, and within this Quarterly Report on Form 10-Q.  
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
INCOME
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
270,325

 
$
264,597

 
$
5,728

 
$
882,175

 
$
663,628

 
$
218,547

Fees and commission income
6,587

 
6,950

 
(363
)
 
19,446

 
23,633

 
(4,187
)
Net investment income
85,472

 
69,430

 
16,042

 
241,900

 
202,218

 
39,682

Net realized and unrealized gains (losses)
148,185

 
(57,223
)
 
205,408

 
878,687

 
(254,671
)
 
1,133,358

Other income
826

 
8,226

 
(7,400
)
 
17,668

 
818

 
16,850

 
511,395

 
291,980

 
219,415

 
2,039,876

 
635,626

 
1,404,250

EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Net incurred losses and LAE
222,417

 
153,974

 
68,443

 
751,159

 
266,327

 
484,832

Life and annuity policy benefits
—

 
423

 
(423
)
 
2,290

 
217

 
2,073

Acquisition costs
50,282

 
54,242

 
(3,960
)
 
210,925

 
137,684

 
73,241

General and administrative expenses
113,924

 
102,553

 
11,371

 
343,517

 
300,425

 
43,092

Interest expense
14,950

 
4,640

 
10,310

 
39,022

 
21,573

 
17,449

Net foreign exchange (gains) losses
(13,631
)
 
1,040

 
(14,671
)
 
(20,068
)
 
1,389

 
(21,457
)
 
387,942

 
316,872

 
71,070

 
1,326,845

 
727,615

 
599,230

EARNINGS (LOSS) BEFORE INCOME TAXES
123,453

 
(24,892
)
 
148,345

 
713,031

 
(91,989
)
 
805,020

Income tax expense
(14,597
)
 
(746
)
 
(13,851
)
 
(26,864
)
 
(4,564
)
 
(22,300
)
Earnings from equity method investments
17,703

 
3,317

 
14,386

 
44,188

 
33,659

 
10,529

NET EARNINGS (LOSS)
126,559

 
(22,321
)
 
148,880

 
730,355

 
(62,894
)
 
793,249

Net loss attributable to noncontrolling interest
109

 
11,489

 
(11,380
)
 
4,970

 
19,096

 
(14,126
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
126,668

 
(10,832
)
 
137,500

 
735,325

 
(43,798
)
 
779,123

Dividends on preferred shares
(8,925
)
 
(5,133
)
 
(3,792
)
 
(26,989
)
 
(5,133
)
 
(21,856
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
117,743

 
$
(15,965
)
 
$
133,708

 
$
708,336

 
$
(48,931
)
 
$
757,267

Highlights
Consolidated Results of Operations for the Three Months Ended September 30, 2019:
•
Consolidated net earnings of $117.7 million and basic and diluted net earnings per ordinary share of $5.48 and $5.42, respectively.
•
Non-GAAP operating income of $36.0 million and diluted non-GAAP operating income per ordinary share of $1.66. For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance with GAAP and diluted non-GAAP operating income per ordinary share to diluted net earnings (loss) per ordinary share calculated in accordance with GAAP, see "Non-GAAP Financial Measures" below.
•
Net earnings from Non-life Run-off segment of $141.3 million, including investment results.
•
Net investment income of $85.5 million and net realized and unrealized gains of $148.2 million comprised $31.2 million of net realized gains and $117.0 million of net unrealized gains.
•
Net premiums earned of $270.3 million, including $42.9 million and $206.3 million in our Atrium and StarStone segments, respectively.
•
Combined ratios of 108.6% and 112.1% for the active underwriting operations within our Atrium and StarStone segments, respectively.

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Consolidated Results of Operations for the Nine Months Ended September 30, 2019:
•
Consolidated net earnings of $708.3 million and basic and diluted net earnings per ordinary share of $32.98 and $32.58, respectively.
•
Non-GAAP operating income of $338.9 million and diluted non-GAAP operating income per ordinary share of $15.59. For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance with GAAP and diluted non-GAAP operating income per ordinary share to diluted net earnings (loss) per ordinary share calculated in accordance with GAAP, see "Non-GAAP Financial Measures" below.
•
Net earnings from Non-life Run-off segment of $819.9 million, including investment results.
•
Net investment income of $241.9 million and net realized and unrealized gains of $878.7 million, comprised of $57.6 million of net realized gains and $821.1 million of net unrealized gains.
•
Net premiums earned of $882.2 million, including $119.9 million and $603.5 million in our Atrium and StarStone segments, respectively.
•
Combined ratios of 91.5% and 128.2% for the active underwriting operations within our Atrium and StarStone segments, respectively.
Consolidated Financial Condition as of September 30, 2019:
•
Total investments, cash and funds held of $14,028.7 million.
•
Total reinsurance balances recoverable of $2,265.4 million.
•
Total assets of $18,213.4 million.
•
Total gross reserves for losses and LAE of $10,035.3 million, with $1,476.3 million of gross reserves assumed in our Non-life Run-off operations during the nine months ended September 30, 2019.
•
Total Enstar Group Limited shareholders' equity, including preferred shares, of $4,637.8 million and redeemable noncontrolling interest of $434.8 million. Shareholders' equity includes $510.0 million of preferred shares issued in 2018.
•
Diluted book value per ordinary share of $188.81, an increase of 21.1% since December 31, 2018.
Consolidated Overview - For the Three Months Ended September 30, 2019 and 2018
We reported consolidated net earnings attributable to Enstar Group Limited ordinary shareholders of $117.7 million for the three months ended September 30, 2019, an increase in net earnings of $133.7 million from net losses of $16.0 million for the three months ended September 30, 2018. Our third quarter results were positively impacted by unrealized gains on fixed maturity securities, which are primarily accounted for on a trading basis through net earnings, and unrealized gains on our equity securities. In addition, comparability between periods is impacted by the loss portfolio transfer reinsurance transactions that we completed in 2019 with Maiden, AmTrust and Amerisure, and during 2018 with Zurich Australia, Neon and Novae. The most significant drivers of our consolidated financial performance during the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 included:
•
Non-life Run-off - Net earnings attributable to the Non-life Run-off segment were $141.3 million for the three months ended September 30, 2019 compared to $32.6 million for the three months ended September 30, 2018. The increase in net earnings of $108.7 million was primarily due to net realized and unrealized gains of $138.2 million on our investment portfolio in the current period compared to net losses in the comparative period, partially offset by an increase in net incurred losses and LAE in the current period compared to a reduction in net incurred losses and LAE in the comparative period;
•
Atrium - Net losses were $1.8 million for the three months ended September 30, 2019 compared to net earnings of $2.0 million for the three months ended September 30, 2018. The decrease in net earnings was primarily due to a higher loss ratio caused by increased loss frequency in the current period, including Hurricane Dorian and certain space and aviation losses;

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•
StarStone - Net losses were $2.7 million for the three months ended September 30, 2019 compared to net losses of $37.1 million for the three months ended September 30, 2018. The decrease in net losses was primarily attributable to lower net incurred losses and LAE and increased net realized and unrealized gains on our investment portfolio. The segment results in 2019 also include the consolidation of StarStone Group's reinsurance to KaylaRe following Enstar's acquisition of the portion of KaylaRe it did not already own, and the results of a loss portfolio transfer on discontinued lines;
•
Net Realized and Unrealized Gains (Losses) - Net realized and unrealized gains were $148.2 million for the three months ended September 30, 2019 compared to net realized and unrealized losses of $57.2 million for the three months ended September 30, 2018. Net unrealized gains for the three months ended September 30, 2019 included net unrealized gains of $82.0 million and $20.9 million on our investments in fixed maturities, trading and funds withheld - directly managed, respectively, and gains of $10.1 million and $4.0 million on equity securities and other investments, respectively. The unrealized gains on fixed maturities were primarily driven by declining interest rates. Many insurance companies use available-for-sale accounting where unrealized amounts are recorded directly to shareholders’ equity and therefore do not impact earnings. Unrealized amounts would only become realized in the event of a sale of the specific securities prior to maturity or a credit default;
•
Net Investment Income - Net investment income was $85.5 million and $69.4 million for the three months ended September 30, 2019 and 2018, respectively. The increase was primarily due to an increase in average investable assets in our Non-Life Run-off segment due to the transactions noted above, and higher reinvestment rates;
•
Noncontrolling Interest - The net losses attributable to the noncontrolling interest are directly related to the results from those subsidiary companies in which there are either noncontrolling interests or redeemable noncontrolling interests. The net losses attributable to noncontrolling interest were $0.1 million for the three months ended September 30, 2019 compared to net losses attributable to noncontrolling interest of $11.5 million for the three months ended September 30, 2018. The net losses attributable to noncontrolling interest were primarily driven by the losses in the Atrium and StarStone segments, as discussed above, partially offset by the net earnings in our Non-life Run-off segment;
•
Non-GAAP operating income - Our non-GAAP operating income, which excludes the impact of net realized and unrealized gains and losses on fixed maturity securities and other items, was $36.0 million for the three months ended September 30, 2019, an increase of $38.6 million from non-GAAP operating loss of $2.5 million for the three months ended September 30, 2018. For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance with GAAP, see "Non-GAAP Financial Measures" below. The increase primarily related to unrealized gains on other investments during the three months ended September 30, 2019.
Consolidated Overview - For the Nine Months Ended September 30, 2019 and 2018
We reported consolidated net earnings attributable to Enstar Group Limited shareholders of $708.3 million for the nine months ended September 30, 2019, an increase in net earnings of $757.3 million from net losses of $48.9 million for the nine months ended September 30, 2018. Our results for the nine months ended September 30, 2019 were impacted by unrealized gains on fixed maturity securities, which are accounted for on a trading basis through earnings, and unrealized gain on our other investments. Our comparative results were also impacted by our acquisition and disposition activity and completed loss portfolio transfer reinsurance transactions, which are noted above.
The most significant drivers of our consolidated financial performance during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 included:
•
Non-life Run-off - Net earnings attributable to the Non-life Run-off segment were $819.9 million and $37.2 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in net earnings of $782.7 million was primarily due to net realized and unrealized gains on our investment portfolio in the current period, higher investment income, partially offset by an increase in net incurred losses and LAE in the current period;
•
Atrium - Net earnings for the nine months ended September 30, 2019 and 2018 were $8.8 million and $5.5 million, respectively. The increase was primarily attributable to higher net earned premium and higher unrealized gains, partially offset by higher losses, higher corporate expenses and lower fees and commission income;

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•
StarStone - Net losses were $66.9 million and $61.7 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in net losses was primarily attributable to the increase in net incurred losses and LAE, higher acquisition costs and lower losses attributable to noncontrolling interest, partially offset by higher net earned premiums, net realized and unrealized gains on our investment portfolio and higher net investment income;
•
Other Activities - Net losses were $53.5 million and $29.9 million for the nine months ended September 30, 2019 and 2018, respectively, with the increase in net losses primarily attributable to dividends on preferred shares, partially offset by higher net realized and unrealized gains;
•
Net Realized and Unrealized Gains (Losses) - Net realized and unrealized gains were $878.7 million for the nine months ended September 30, 2019 compared to net realized and unrealized losses of $254.7 million for the nine months ended September 30, 2018. Net unrealized gains for the nine months ended September 30, 2019 included net unrealized gains of $424.9 million and $95.1 million on our investments in fixed maturities, trading and funds withheld - directly managed, respectively, and unrealized gains of $269.8 million and $31.3 million on other investments and equity securities, respectively. The unrealized gains on fixed maturities were primarily driven by declining interest rates in the current period and the unrealized gains on other investments were principally driven by our investments in hedge funds, equity funds, fixed income funds and private equity funds;
•
Net Investment Income - Net investment income was $241.9 million and $202.2 million for the nine months ended September 30, 2019 and 2018, respectively. The increase of $39.7 million was primarily attributable to an increase in average investable assets in our Non-life Run-off segment due to the transactions noted above and higher reinvestment rates;
•
Noncontrolling Interest - For the nine months ended September 30, 2019 and 2018, the net losses attributable to noncontrolling interest were $5.0 million and $19.1 million, respectively, primarily reflecting losses from the StarStone segment, partially offset by net earnings in the Atrium segment, as discussed above; and
•
Non-GAAP operating income - Our Non-GAAP operating income, which excludes the impact of net realized and unrealized gains and losses on fixed maturity securities and other items, was $338.9 million for the nine months ended September 30, 2019, an increase of $218.9 million from non-GAAP operating income of $120.0 million for the nine months ended September 30, 2018. For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance with GAAP, see "Non-GAAP Financial Measures" below.

Results of Operations by Segment - For the Three and Nine Months Ended September 30, 2019 and 2018
We have three segments of business that are each managed, operated and reported on separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. Other activities, which do not qualify as a reportable segment, are included in "Other Activities" and discussed in Note 21 - "Segment Information" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. For a description of our segments, see "Item 1. Business - Operating Segments" in our Annual Report on Form 10-K for the year ended December 31, 2018.

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The below table provides a split by operating segment of the net earnings (loss) attributable to Enstar Group Limited ordinary shareholders:
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Segment split of net earnings (loss) attributable to Enstar Group Limited:
 
 
 
 
 
 
 
 
 
 
 
Non-life Run-off
$
141,321

 
$
32,628

 
$
108,693

 
$
819,878

 
$
37,157

 
$
782,721

Atrium
(1,765
)
 
1,962

 
(3,727
)
 
8,811

 
5,462

 
3,349

StarStone
(2,704
)
 
(37,066
)
 
34,362

 
(66,880
)
 
(61,672
)
 
(5,208
)
Other
(19,109
)
 
(13,489
)
 
(5,620
)
 
(53,473
)
 
(29,878
)
 
(23,595
)
Net earnings (loss) attributable to Enstar Group Limited ordinary shareholders
$
117,743

 
$
(15,965
)
 
$
133,708

 
$
708,336

 
$
(48,931
)
 
$
757,267

The following is a discussion of our results of operations by segment.
Non-life Run-off Segment
The following is a discussion and analysis of the results of operations for our Non-life Run-off segment.
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Gross premiums written
$
301

 
$
9,912

 
$
(9,611
)
 
$
(24,785
)
 
$
16,354

 
$
(41,139
)
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written
$
(3,808
)
 
$
4,778

 
$
(8,586
)
 
$
(26,395
)
 
$
3,217

 
$
(29,612
)
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
16,837

 
$
10,442

 
$
6,395

 
$
141,981

 
$
27,229

 
$
114,752

Net incurred losses and LAE (1)
(30,583
)
 
62,778

 
(93,361
)
 
(135,517
)
 
205,890

 
(341,407
)
Acquisition costs
4,634

 
160

 
4,474

 
(40,033
)
 
(4,524
)
 
(35,509
)
Operating expenses
(51,395
)
 
(37,473
)
 
(13,922
)
 
(139,595
)
 
(114,254
)
 
(25,341
)
Underwriting income (loss) (1)
(60,507
)
 
35,907

 
(96,414
)
 
(173,164
)
 
114,341

 
(287,505
)
Net investment income
73,752

 
59,247

 
14,505

 
206,337

 
168,189

 
38,148

Net realized and unrealized gains (losses)
138,174

 
(58,506
)
 
196,680

 
815,902

 
(230,829
)
 
1,046,731

Fees and commission income
4,196

 
3,708

 
488

 
13,673

 
13,093

 
580

Other income (expenses)
(285
)
 
8,106

 
(8,391
)
 
15,136

 
1,330

 
13,806

Corporate expenses
(11,983
)
 
(11,433
)
 
(550
)
 
(47,287
)
 
(33,453
)
 
(13,834
)
Interest expense
(17,964
)
 
(5,951
)
 
(12,013
)
 
(45,699
)
 
(24,562
)
 
(21,137
)
Net foreign exchange gains (losses)
13,056

 
17

 
13,039

 
20,426

 
(202
)
 
20,628

EARNINGS BEFORE INCOME TAXES
138,439

 
31,095

 
107,344

 
805,324

 
7,907

 
797,417

Income tax expense
(13,382
)
 
(125
)
 
(13,257
)
 
(23,501
)
 
(227
)
 
(23,274
)
Earnings from equity method investments
17,703

 
3,317

 
14,386

 
44,406

 
33,659

 
10,747

NET EARNINGS
142,760

 
34,287

 
108,473

 
826,229

 
41,339

 
784,890

Net earnings attributable to noncontrolling interest
(1,439
)
 
(1,659
)
 
220

 
(6,351
)
 
(4,182
)
 
(2,169
)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
141,321

 
$
32,628

 
$
108,693

 
$
819,878

 
$
37,157

 
$
782,721

(1) Comparability between periods is impacted by the current period net incurred losses and LAE as acquired unearned premium is earned, and changes in fair value due to the fair value election on certain business. Refer to Net Incurred Losses and LAE table for further details.


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Overall Results
Three Months Ended September 30: Net earnings were $141.3 million for the three months ended September 30, 2019 compared to $32.6 million for the three months ended September 30, 2018, an increase of $108.7 million. The increase was primarily attributable to an increase of $196.7 million in net realized and unrealized gains (losses) on our investment portfolio primarily due to unrealized gains on our fixed maturity portfolio and equity securities, an increase in net investment income of $14.5 million and an increase in earnings from equity method investments of $14.4 million, partially offset by a change in net incurred losses and LAE of $93.4 million, and an increase in general and administrative expenses of $14.5 million and an increase in interest expense of $12.0 million.
Nine Months Ended September 30: Net earnings were $819.9 million and $37.2 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $782.7 million. The increase was primarily attributable to an increase of $1,046.7 million in net realized and unrealized gains on our investment portfolio primarily due to declining interest rates and unrealized gains on our hedge funds, equity funds, fixed income funds and private equity funds within our other investments, an increase in net earned premium of $114.8 million, an increase of $38.1 million in net investment income, an increase in net foreign exchange gains of $20.6 million, and an increase in other income of $13.8 million, partially offset by a change in net incurred losses and LAE of $341.4 million, and an increase in general and administrative expenses, acquisition costs and interest expense of $39.2 million, $35.5 million and $21.1 million, respectively.
The major components of earnings are discussed below, except for investment results, which are separately discussed below in "Investable Assets."
Net Premiums Earned:
The following table shows the gross and net premiums written and earned for the Non-life Run-off segment:
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Gross premiums written
$
301

 
$
9,912

 
$
(9,611
)
 
$
(24,785
)
 
$
16,354

 
$
(41,139
)
Ceded reinsurance premiums written
(4,109
)
 
(5,134
)
 
1,025

 
(1,610
)
 
(13,137
)
 
11,527

Net premiums written
$
(3,808
)
 
$
4,778

 
$
(8,586
)
 
$
(26,395
)
 
$
3,217

 
$
(29,612
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums earned
$
27,190

 
$
17,746

 
$
9,444

 
$
166,707

 
$
54,044

 
$
112,663

Ceded reinsurance premiums earned
(10,353
)
 
(7,304
)
 
(3,049
)
 
(24,726
)
 
(26,815
)
 
2,089

Net premiums earned
$
16,837

 
$
10,442

 
$
6,395

 
$
141,981

 
$
27,229

 
$
114,752

As business in this segment is in run-off, our general expectation is for premiums associated with legacy business to decline in future periods. However, the actual amount in any particular year will be impacted by new transactions during the year and the run-off of premiums from transactions completed in recent years. Premiums earned in this segment are generally offset by net incurred losses and LAE related to the premiums. Premiums earned may be higher than premiums written as we may assume unearned premium without writing the premium ourselves.
Three and Nine Months Ended September 30: Net premiums written in the three and nine months ended September 30, 2019 of $(3.8) million and $(26.4) million, respectively, were primarily related to reductions in net written premium on legacy business for which corresponding unearned premium was also released. Net premiums earned in the three and nine months ended September 30, 2019 of $16.8 million and $142.0 million, respectively, were primarily related to the run-off business assumed as a result of the AmTrust RITC transactions and the acquisition of Maiden Reinsurance North America, Inc. ("Maiden Re North America"). Premiums written and earned in the three and nine months ended September 30, 2018 were primarily related to the run-off business assumed as a result of the RITC transaction with Novae.


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Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment:
 
Three Months Ended September 30,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
274,071

 
$
14,374

 
$
288,445

 
$
193,057

 
$
2,713

 
$
195,770

Net change in case and LAE reserves (1)
(175,830
)
 
2,726

 
(173,104
)
 
(128,827
)
 
165

 
(128,662
)
Net change in IBNR reserves (2)
(155,315
)
 
6,794

 
(148,521
)
 
(109,287
)
 
7,139

 
(102,148
)
Increase (reduction) in estimates of net ultimate losses
(57,074
)
 
23,894

 
(33,180
)
 
(45,057
)
 
10,017

 
(35,040
)
Reduction in provisions for unallocated LAE
(12,109
)
 
(49
)
 
(12,158
)
 
(24,460
)
 
—

 
(24,460
)
Amortization of deferred charge assets
17,009

 
—

 
17,009

 
1,582

 
—

 
1,582

Amortization of fair value adjustments
17,538

 
—

 
17,538

 
4,247

 
—

 
4,247

Changes in fair value - fair value option
41,374

 
—

 
41,374

 
(9,107
)
 
—

 
(9,107
)
Net incurred losses and LAE
$
6,738

 
$
23,845

 
$
30,583

 
$
(72,795
)
 
$
10,017

 
$
(62,778
)
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Three Months Ended September 30: The increase in net incurred losses and LAE for the three months ended September 30, 2019 of $30.6 million included net incurred losses and LAE of $23.8 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC Transactions and the acquisition of Maiden Reinsurance North America, Inc. ("Maiden Re North America"). Excluding current period net incurred losses and LAE of $23.8 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $6.7 million, which was attributable to an increase in the fair value of liabilities of $41.4 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily as a result of a decrease in corporate bond yields, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $17.5 million and amortization of the deferred charge assets of $17.0 million, partially offset by a reduction in estimates of net ultimate losses of $57.1 million and a reduction in provisions for unallocated LAE of $12.1 million relating to 2019 run-off activity. The reduction in estimates of net ultimate losses relating to prior periods of $57.1 million for the three months ended September 30, 2019 included a net reduction in case and IBNR reserves of $331.1 million, partially offset by net losses paid of $274.1 million.
The reduction in net incurred losses and LAE for the three months ended September 30, 2018 of $62.8 million included net incurred losses and LAE of $10.0 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $10.0 million, the reduction in net incurred losses and LAE liabilities relating to prior periods was $72.8 million, which was attributable to a reduction in estimates of net ultimate losses of $45.1 million, a reduction in provisions for unallocated LAE of $24.5 million, relating to 2018 run-off activity and a decrease in the fair value of liabilities of $9.1 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.2 million and the amortization of the deferred charge assets of $1.6 million. The reduction in estimates of net ultimate losses relating to prior periods of $45.1 million for the three months ended September 30, 2018 included a net change in case and IBNR reserves of $238.1 million, partially offset by net losses paid of $193.1 million.

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The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment for the nine months ended September 30, 2019 and 2018:
 
Nine Months Ended September 30,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
913,352

 
$
53,265

 
$
966,617

 
$
641,361

 
$
3,304

 
$
644,665

Net change in case and LAE reserves (1)
(394,780
)
 
24,141

 
(370,639
)
 
(377,735
)
 
1,223

 
(376,512
)
Net change in IBNR reserves (2)
(649,053
)
 
29,405

 
(619,648
)
 
(424,847
)
 
10,949

 
(413,898
)
Increase (reduction) in estimates of net ultimate losses
(130,481
)
 
106,811

 
(23,670
)
 
(161,221
)
 
15,476

 
(145,745
)
Increase (reduction) in provisions for unallocated LAE
(38,709
)
 
480

 
(38,229
)
 
(48,723
)
 
—

 
(48,723
)
Amortization of deferred charge assets
28,006

 
—

 
28,006

 
10,381

 
—

 
10,381

Amortization of fair value adjustments
34,033

 
—

 
34,033

 
10,312

 
—

 
10,312

Changes in fair value - fair value option
135,377

 
—

 
135,377

 
(32,115
)
 
—

 
(32,115
)
Net incurred losses and LAE
$
28,226

 
$
107,291

 
$
135,517

 
$
(221,366
)
 
$
15,476

 
$
(205,890
)
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Nine Months Ended September 30: The increase in net incurred losses and LAE for the nine months ended September 30, 2019 of $135.5 million included net incurred losses and LAE of $107.3 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC Transactions and the acquisition of Maiden Re North America. Excluding current period net incurred losses and LAE of $107.3 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $28.2 million, which was attributable to an increase in the fair value of liabilities of $135.4 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily as a result of a decrease in corporate bond yields, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $34.0 million and amortization of the deferred charge assets of $28.0 million, partially offset by a reduction in estimates of net ultimate losses of $130.5 million and a reduction in provisions for unallocated LAE of $38.7 million, relating to 2019 run-off activity. The reduction in estimates of net ultimate losses relating to prior periods of $130.5 million for the nine months ended September 30, 2019 included a net change in case and IBNR reserves of $1,043.8 million, partially offset by net losses paid of $913.4 million.
The reduction in net incurred losses and LAE for the nine months ended September 30, 2018 of $205.9 million included net incurred losses and LAE of $15.5 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $15.5 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $221.4 million, which was attributable to a reduction in estimates of net ultimate losses of $161.2 million, a reduction in provisions for unallocated LAE of $48.7 million relating to 2018 run-off activity and a reduction in the fair value of liabilities of $32.1 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by amortization of the deferred charge assets of $10.4 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $10.3 million. The reduction in estimates of net ultimate losses relating to prior periods of $161.2 million for the nine months ended September 30, 2018 included a net change in case and IBNR reserves of $802.6 million, partially offset by net losses paid of $641.4 million.

Acquisition Costs:
Three and Nine Months Ended September 30: Acquisition costs were $(4.6) million and $(0.2) million for the three months ended September 30, 2019 and 2018, respectively, and $40.0 million and $4.5 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in acquisition costs for the nine months ended September 30, 2019 primarily related to the run-off business assumed through the AmTrust RITC Transactions and the acquisition of Maiden Re North America.

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Other Income:
Three Months Ended September 30: For the three months ended September 30, 2019, we recorded other expense of $0.3 million compared to other income of $8.1 million for the three months ended September 30, 2018, a change of $8.4 million, primarily due to recoveries on other assets in the comparative period that did not reoccur in the current period.
Nine Months Ended September 30: Other income was $15.1 million for the nine months ended September 30, 2019 compared to $1.3 million for the nine months ended September 30, 2018, an increase of $13.8 million, primarily due to a loss of $15.6 million recognized in the nine months ended September 30, 2018 in respect of the settlement of all contractual preexisting relationships in relation to the acquisition of KaylaRe Holdings Ltd which did not reoccur in the current period.
General and Administrative Expenses:
General and administrative expenses consist of operating expenses and corporate expenses.
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Operating expenses
$
51,395

 
$
37,473

 
$
13,922

 
$
139,595

 
$
114,254

 
$
25,341

Corporate expenses
11,983

 
11,433

 
550

 
47,287

 
33,453

 
13,834

General and administrative expenses
$
63,378

 
$
48,906

 
$
14,472

 
$
186,882

 
$
147,707

 
$
39,175

Three and Nine Months Ended September 30: General and administrative expenses were $63.4 million and $48.9 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $14.5 million. For the nine months ended September 30, 2019 and 2018, general and administrative expenses were $186.9 million and $147.7 million, respectively, an increase of $39.2 million. The increases for the three and nine months ended September 30, 2019 were primarily attributable to the accrual of higher performance-based salary and benefits expenses for the three and nine months ended September 30, 2019 as a result of higher net earnings in 2019 compared to 2018.
Interest Expense:
Three and Nine Months Ended September 30: Interest expense was $18.0 million and $6.0 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $12.0 million. Interest expense was $45.7 million and $24.6 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $21.1 million. The increase for the three and nine months ended September 30, 2019 was primarily driven by interest on the 2018 EGL Term Loan Facility which was entered into on December 27, 2018 and partially used to fund the acquisition of Maiden Re North America, and interest on the 2029 Senior Notes.
Net Foreign Exchange Gains (Losses):
Three and Nine Months Ended September 30: Net foreign exchange gains were $13.1 million compared to $17 thousand for the three months ended September 30, 2019 and 2018, respectively. Net foreign exchange gains were $20.4 million and net foreign exchange losses were $0.2 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in net foreign exchange gains for the three and nine months ended September 30, 2019 was primarily due to increased volatility in the currency markets in the three months ended September 30, 2019.
Income Taxes:
Three Months Ended September 30: For the three months ended September 30, 2019 income tax expense was $13.4 million compared to $0.1 million for the three months ended September 30, 2018, a change of $13.3 million, which primarily resulted from higher earnings before income taxes in the current period.
Nine Months Ended September 30: For the nine months ended September 30, 2019 and 2018, income tax expenses were $23.5 million and $0.2 million, respectively, an increase of $23.3 million, which primarily resulted from higher earnings before income taxes in the current period.

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Earnings from Equity Method Investments:
Three Months Ended September 30: For the three months ended September 30, 2019 and 2018, earnings from equity method investments were $17.7 million and $3.3 million, respectively, an increase of $14.4 million. The increase was primarily due to the earnings recognized on our equity method investment in Enhanzed Reinsurance Ltd. ("Enhanzed Re") in the current period.
Nine Months Ended September 30: For the nine months ended September 30, 2019 and 2018, earnings from equity method investments were $44.4 million and $33.7 million, respectively, an increase of $10.7 million. The increase was primarily due to increased earnings from our investments in Enhanzed Re and Monument, partially offset by earnings on our equity method investment in KaylaRe in the comparative period, which did not reoccur in the current period. Since its acquisition on May 14, 2018, Kayla Re is our wholly-owned subsidiary.

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Atrium Segment
The Atrium segment includes Atrium 5 Ltd. ("Atrium 5"), Atrium Underwriters Limited ("AUL") and Northshore Holdings Limited. Atrium 5 results represent its proportionate share of the results of Syndicate 609 for which it provides 25% of the underwriting capacity and capital. AUL results largely represent fees charged to Syndicate 609 and a 20% profit commission on the results of the syndicate less salaries and general and administrative expenses incurred in managing the syndicate. AUL also includes other Atrium Group non-syndicate fee income and associated expenses. Northshore Holdings Limited results include the amortization of intangible assets that were fair valued upon acquisition.
The following is a discussion and analysis of the results of operations for our Atrium segment are summarized below.
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Gross premiums written
$
48,746

 
$
39,995

 
$
8,751

 
$
146,519

 
$
130,997

 
$
15,522

 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written
$
43,785

 
$
37,141

 
$
6,644

 
$
127,246

 
$
113,218

 
$
14,028

 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
42,913

 
$
36,977

 
$
5,936

 
$
119,865

 
$
106,722

 
$
13,143

Net incurred losses and LAE
(28,400
)
 
(17,853
)
 
(10,547
)
 
(58,662
)
 
(51,951
)
 
(6,711
)
Acquisition costs
(14,466
)
 
(13,215
)
 
(1,251
)
 
(41,023
)
 
(37,996
)
 
(3,027
)
Operating expenses
(3,742
)
 
(3,952
)
 
210

 
(9,968
)
 
(12,259
)
 
2,291

Underwriting income (loss)
(3,695
)
 
1,957

 
(5,652
)
 
10,212

 
4,516

 
5,696

Net investment income
1,736

 
1,597

 
139

 
5,500

 
4,067

 
1,433

Net realized and unrealized gains (losses)
582

 
194

 
388

 
5,464

 
(1,889
)
 
7,353

Fees and commission income
2,391

 
3,242

 
(851
)
 
5,773

 
10,540

 
(4,767
)
Other income
35

 
7

 
28

 
106

 
127

 
(21
)
Corporate expenses
(2,896
)
 
(2,770
)
 
(126
)
 
(10,186
)
 
(5,083
)
 
(5,103
)
Net foreign exchange losses
(924
)
 
(262
)
 
(662
)
 
(1
)
 
(1,262
)
 
1,261

EARNINGS (LOSS) BEFORE INCOME TAXES
(2,771
)
 
3,965

 
(6,736
)
 
16,868

 
11,016

 
5,852

Income tax expense
(222
)
 
(737
)
 
515

 
(1,930
)
 
(1,756
)
 
(174
)
NET EARNINGS (LOSS)
(2,993
)
 
3,228

 
(6,221
)
 
14,938

 
9,260

 
5,678

Net loss (earnings) attributable to noncontrolling interest
1,228

 
(1,266
)
 
2,494

 
(6,127
)
 
(3,798
)
 
(2,329
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(1,765
)
 
$
1,962

 
$
(3,727
)
 
$
8,811

 
$
5,462

 
$
3,349

 
 
 
 
 
 
 
 
 
 
 
 
Underwriting ratios(1):
 
 
 
 
 
 
 
 
 
 
 
Loss ratio
66.2
%
 
48.3
%
 
17.9
 %
 
48.9
%
 
48.7
%
 
0.2
 %
Acquisition cost ratio
33.7
%
 
35.7
%
 
(2.0
)%
 
34.2
%
 
35.6
%
 
(1.4
)%
Operating expense ratio
8.7
%
 
10.7
%
 
(2.0
)%
 
8.4
%
 
11.5
%
 
(3.1
)%
Combined ratio
108.6
%
 
94.7
%
 
13.9
 %
 
91.5
%
 
95.8
%
 
(4.3
)%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Overall Results
Three Months Ended September 30: Net loss was $1.8 million for the three months ended September 30, 2019 compared to net earnings of $2.0 million for the three months ended September 30, 2018, a decrease of $3.7 million. The decrease in net earnings was primarily due to an increase in the combined ratio, partially offset by lower earnings attributable to noncontrolling interest. The combined ratio increased to 108.6% for the three months ended September 30, 2019 as compared to 94.7% for the three months ended September 30, 2018. The increase in the combined ratio was primarily due to the increase in the loss ratio due to increased loss frequency in the current period, including Hurricane Dorian and certain space and aviation losses.

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Nine Months Ended September 30: Net earnings were $8.8 million for the nine months ended September 30, 2019 compared to $5.5 million for the nine months ended September 30, 2018, an increase of $3.3 million. The increase in net earnings was primarily due to an improvement in the combined ratio and improved investment results, partially offset by higher corporate expenses and lower fee and commission income. The combined ratio improved to 91.5% for the nine months ended September 30, 2019 as compared to 95.8% for the nine months ended September 30, 2018. The decrease in the combined ratio was primarily due to the decrease in the operating expense ratio, principally driven by a reduction in operating expenses and an increase in net earned premium.

Investment results are separately discussed below in "Investable Assets."
Gross Premiums Written:
The following table provides gross premiums written by line of business for the Atrium segment:
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Marine, Aviation and Transit
$
11,691

 
$
8,696

 
$
2,995

 
$
35,361

 
$
30,823

 
$
4,538

Binding Authorities
21,915

 
18,396

 
3,519

 
57,563

 
53,744

 
3,819

Reinsurance
4,389

 
3,375

 
1,014

 
16,293

 
16,150

 
143

Accident and Health
4,633

 
4,551

 
82

 
18,382

 
16,069

 
2,313

Non-Marine Direct and Facultative
6,118

 
4,977

 
1,141

 
18,920

 
14,211

 
4,709

Total
$
48,746

 
$
39,995

 
$
8,751

 
$
146,519

 
$
130,997

 
$
15,522

Three and Nine Months Ended September 30: The increase in gross premiums written for the three months ended September 30, 2019 was predominantly due to increases in all lines of business, principally the binding authorities and marine, aviation and transit line of business due to an improvement in pricing and new business written in the quarter. The increase in gross premiums written for the nine months ended September 30, 2019 was predominantly due to increases in the non-marine direct and facultative lines of business and increases in marine, aviation and transit and binding authorities lines of business primarily due to an improvement in pricing and new business written in the quarter.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the Atrium segment:
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Marine, Aviation and Transit
$
9,524

 
$
7,045

 
$
2,479

 
$
25,302

 
$
22,105

 
$
3,197

Binding Authorities
19,771

 
17,675

 
2,096

 
55,191

 
50,056

 
5,135

Reinsurance
4,591

 
3,837

 
754

 
11,253

 
9,637

 
1,616

Accident and Health
4,036

 
4,452

 
(416
)
 
13,960

 
14,276

 
(316
)
Non-Marine Direct and Facultative
4,991

 
3,968

 
1,023

 
14,159

 
10,648

 
3,511

Total
$
42,913

 
$
36,977

 
$
5,936

 
$
119,865

 
$
106,722

 
$
13,143

Three and Nine Months Ended September 30: Net premiums earned for the Atrium segment were $42.9 million and $37.0 million for the three months ended September 30, 2019 and 2018, respectively, and $119.9 million and $106.7 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in net premiums earned for the three months ended September 30, 2019 was primarily due to increases in the marine, aviation and transit and binding authorities lines of business. The increase in net premiums earned for the nine months ended September 30, 2019 was primarily due to the binding authorities line of business following continued growth of products placed on AU Gold, Atrium’s proprietary online underwriting platform, and increases in the non-marine direct and facultative and marine, aviation and transit lines of business.

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Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the Atrium segment for the three months ended September 30, 2019 and 2018:
 
Three Months Ended September 30,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
10,618

 
$
9,387

 
$
20,005

 
$
8,230

 
$
8,080

 
$
16,310

Net change in case and LAE reserves (1)
(2,860
)
 
2,769

 
(91
)
 
(4,142
)
 
3,596

 
(546
)
Net change in IBNR reserves (2)
(6,235
)
 
14,937

 
8,702

 
(5,539
)
 
8,357

 
2,818

Increase (reduction) in estimates of net ultimate losses
1,523

 
27,093

 
28,616

 
(1,451
)
 
20,033

 
18,582

Reduction in provisions for unallocated LAE
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Amortization of fair value adjustments
(216
)
 
—

 
(216
)
 
(727
)
 
—

 
(727
)
Net incurred losses and LAE
$
1,307

 
$
27,093

 
$
28,400

 
$
(2,180
)
 
$
20,033

 
$
17,853

(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Three Months Ended September 30: Net incurred losses and LAE for the three months ended September 30, 2019 and 2018 were $28.4 million and $17.9 million, respectively. Net unfavorable prior year loss development was $1.3 million compared to net favorable development of $2.2 million for the three months ended September 30, 2018. Net unfavorable prior year loss development in the three months ended September 30, 2019 was spread across a number of lines of business following deterioration in a number of claims during the quarter. Excluding prior year loss development, net incurred losses and LAE for the three months ended September 30, 2019 and 2018 were $27.1 million and $20.0 million, respectively. The increase in net incurred losses and LAE for the three months ended September 30, 2019 compared with 2018, excluding prior year loss development, was primarily due to increased net earned premium and increased loss frequency in the current period, including Hurricane Dorian and certain space and aviation losses. The loss ratio was 66.2% and 48.3% for the three months ended September 30, 2019 and 2018, respectively.
The following table shows the components of net incurred losses and LAE for the Atrium segment for the nine months ended September 30, 2019 and 2018:
 
Nine Months Ended September 30,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
35,564

 
$
24,531

 
$
60,095

 
$
27,488

 
$
25,699

 
$
53,187

Net change in case and LAE reserves (1)
(13,032
)
 
12,787

 
(245
)
 
(9,695
)
 
9,597

 
(98
)
Net change in IBNR reserves (2)
(27,787
)
 
25,871

 
(1,916
)
 
(18,254
)
 
21,218

 
2,964

Increase (reduction) in estimates of net ultimate losses
(5,255
)
 
63,189

 
57,934

 
(461
)
 
56,514

 
56,053

Amortization of fair value adjustments
728

 
—

 
728

 
(4,102
)
 
—

 
(4,102
)
Net incurred losses and LAE
$
(4,527
)
 
$
63,189

 
$
58,662

 
$
(4,563
)
 
$
56,514

 
$
51,951

(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.

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Nine Months Ended September 30: Net incurred losses and LAE for the nine months ended September 30, 2019 and 2018 were $58.7 million and $52.0 million, respectively. Net favorable prior year loss development was $4.5 million and $4.6 million for the nine months ended September 30, 2019 and 2018, respectively. Net favorable prior year loss development in the nine months ended September 30, 2019 and 2018 was spread across most lines of business. Excluding prior year loss development, net incurred losses and LAE for the nine months ended September 30, 2019 and 2018 were $63.2 million and $56.5 million, respectively. The loss ratio was 48.9% and 48.7% for the nine months ended September 30, 2019 and 2018, respectively.

Acquisition Costs:
Three and Nine Months Ended September 30: Acquisition costs were $14.5 million and $13.2 million for the three months ended September 30, 2019 and 2018, respectively, and $41.0 million and $38.0 million for the nine months ended September 30, 2019 and 2018, respectively. The Atrium acquisition cost ratios were 33.7% and 35.7% for the three months ended September 30, 2019 and 2018, respectively, and 34.2% and 35.6% for the nine months ended September 30, 2019 and 2018, respectively. The reduction in the acquisition cost ratios for both periods is primarily due to the receipt of profit commissions in respect of underwriting consortia led by Atrium and agreed reduced brokerage rates for some accounts.
Operating Expenses:
Three and Nine Months Ended September 30: Operating expenses for the Atrium segment were $3.7 million and $4.0 million for the three months ended September 30, 2019 and 2018, respectively, and $10.0 million and $12.3 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease in operating expenses was primarily due to lower performance-based compensation and bonus expense within Atrium 5. The large catastrophe losses, primarily hurricanes Harvey, Irma and Maria, in the third quarter of 2017 continue to impact the earning of performance-based compensation expenses and agency profit commission in Atrium 5.
Fees and Commission Income:
Three and Nine Months Ended September 30: Fees and commission income was $2.4 million and $3.2 million for the three months ended September 30, 2019 and 2018, respectively, and $5.8 million and $10.5 million for the nine months ended September 30, 2019 and 2018, respectively. The fees primarily represent profit commission fees earned by us in relation to AUL’s management of Syndicate 609 and other underwriting consortia. The decrease was primarily due to the large catastrophe losses, primarily hurricanes Harvey, Irma and Maria, in the third quarter of 2017, which continue to impact the profit commission in the three and nine months ended September 30, 2019.
Corporate Expenses:
Three and Nine Months Ended September 30: Corporate expenses for the Atrium segment were $2.9 million and $2.8 million for the three months ended September 30, 2019 and 2018, respectively, and $10.2 million and $5.1 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in corporate expenses was primarily due to higher variable compensation costs in the nine months ended September 30, 2019 due to improved performance in the Atrium segment for the nine months ended September 30, 2019.
Noncontrolling Interest:
Three and Nine Months Ended September 30: The net losses attributable to the noncontrolling interest in the Atrium segment were $1.2 million for the three months ended September 30, 2019, compared to net earnings attributable to the noncontrolling interest of $1.3 million for the three months ended September 30, 2018. The net earnings attributable to the noncontrolling interest in the Atrium segment were $6.1 million and $3.8 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in the net earnings attributable to the noncontrolling interest for nine months ended September 30, 2019 was primarily due to higher earnings, as discussed above. As of September 30, 2019 and 2018, Trident and Dowling had a combined 41.0% noncontrolling interest in the Atrium segment.

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StarStone Segment
The results of our StarStone segment include the results of StarStone and StarStone Specialty Holdings Limited ("StarStone Group"). Our StarStone segment also includes the results of KaylaRe's reinsurance of the StarStone Group from the date that Enstar completed the acquisition of the portion of KaylaRe it did not already own and other intra-group cessions.
Effective May 14, 2018, Enstar completed the acquisition of the portion of KaylaRe it did not already own. In addition, effective October 1, 2018 and April 1, 2019, the StarStone Group transferred certain reserves relating to exited lines of business via intra-group reinsurance agreements with another Enstar group subsidiary. These transactions between StarStone Group and other group entities, including KaylaRe are reflected within StarStone Intra-Group Cessions below (the "StarStone Intra-Group Cessions") and are eliminated upon consolidation. The following table summarizes the impact of the StarStone Intra-Group Cessions, which are included in our StarStone segment for the three and nine months ended September 30, 2019 and 2018. The discussion below also describes the results of the StarStone Group, which does not reflect the impact of the StarStone Intra-Group Cessions, as well as the StarStone segment which does include the impact of the StarStone Intra-Group Cessions.
StarStone's new executive leadership has made significant progress in repositioning the underwriting portfolio this year to focus on core lines of business, which have a track record of performing and exiting under-performing lines of business in order to achieve improved underwriting profitability. As part of the new strategy for the StarStone segment, we have exited or disposed of various operations and investments that are no longer considered to be key to the new strategy. We have also closed StarStone offices in non-core locations. The StarStone leadership has separated the book into "core lines" and "exited lines" to manage the performance during the repositioning phase. The exited lines represent segments or lines of business where new business has ceased and includes some aerospace, casualty and property lines.
 
Three Months Ended September 30,
 
2019
 
2018
 
StarStone Group
 
StarStone Intra-Group Cessions
 
StarStone Segment
 
StarStone Group
 
StarStone Intra-Group Cessions
 
StarStone Segment
 
(in thousands of U.S. dollars)
Net premiums earned
$
186,671

 
$
19,601

 
$
206,272

 
$
161,459

 
$
54,896

 
$
216,355

Net incurred losses and LAE
(135,066
)
 
(24,721
)
 
(159,787
)
 
(148,911
)
 
(49,988
)
 
(198,899
)
Acquisition costs
(36,238
)
 
(4,035
)
 
(40,273
)
 
(20,773
)
 
(20,306
)
 
(41,079
)
Operating expenses
(31,026
)
 
(58
)
 
(31,084
)
 
(36,952
)
 
(1,048
)
 
(38,000
)
Underwriting loss
(15,659
)
 
(9,213
)
 
(24,872
)
 
(45,177
)
 
(16,446
)
 
(61,623
)
Net investment income
12,131

 
—

 
12,131

 
9,504

 
—

 
9,504

Net realized and unrealized gains
7,623

 
1,536

 
9,159

 
989

 
—

 
989

Other income
76

 
—

 
76

 
117

 
—

 
117

Interest income (expenses)
(4,276
)
 
4,276

 
—

 
(573
)
 
573

 
—

Net foreign exchange (loss) gain
676

 
799

 
1,475

 
(120
)
 
(465
)
 
(585
)
EARNINGS (LOSS) BEFORE INCOME TAXES
571

 
(2,602
)
 
(2,031
)
 
(35,260
)
 
(16,338
)
 
(51,598
)
Income tax benefit (expense)
(993
)
 
—

 
(993
)
 
118

 
—

 
118

NET LOSS
(422
)
 
(2,602
)
 
(3,024
)
 
(35,142
)
 
(16,338
)
 
(51,480
)
Net loss attributable to noncontrolling interest
173

 
147

 
320

 
14,414

 
—

 
14,414

NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(249
)
 
$
(2,455
)
 
$
(2,704
)
 
$
(20,728
)
 
$
(16,338
)
 
$
(37,066
)
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting ratios(1):
 
 
 
 
 
 
 
 
 
 
 
Loss ratio 
72.4
%
 
126.1
%
 
77.5
%
 
92.2
%
 
91.1
%
 
91.9
%
Acquisition cost ratio
19.4
%
 
20.6
%
 
19.5
%
 
12.9
%
 
37.0
%
 
19.0
%
Operating expense ratio 
16.6
%
 
0.3
%
 
15.1
%
 
22.9
%
 
1.9
%
 
17.6
%
Combined ratio
108.4
%
 
147.0
%
 
112.1
%
 
128.0
%
 
130.0
%
 
128.5
%
(1) 
Refer to "Underwriting Ratios" for a description of how these ratios are calculated.

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In addition, the below table presents StarStone Group's underwriting income split by the lines of business that we consider core and exited:
 
Three Months Ended September 30,
 
2019
 
2018
 
Core Lines
 
Exited Lines
 
StarStone Group
 
Core Lines
 
Exited Lines
 
StarStone Group
 
(in thousands of U.S. dollars)
Net premiums earned
$
164,808

 
$
21,863

 
$
186,671

 
$
122,322

 
$
39,137

 
$
161,459

Net incurred losses and LAE
(98,819
)
 
(36,247
)
 
(135,066
)
 
(95,132
)
 
(53,779
)
 
(148,911
)
Acquisition costs
(31,409
)
 
(4,829
)
 
(36,238
)
 
(15,001
)
 
(5,772
)
 
(20,773
)
Operating expenses
(28,055
)
 
(2,971
)
 
(31,026
)
 
(26,703
)
 
(10,249
)
 
(36,952
)
Underwriting income (loss)
$
6,525

 
$
(22,184
)
 
$
(15,659
)
 
$
(14,514
)
 
$
(30,663
)
 
$
(45,177
)
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting ratios(1):
 
 
 
 
 
 
 
 
 
 
 
Loss ratio 
60.0
%
 
165.8
%
 
72.4
%
 
77.8
%
 
137.4
%
 
92.2
%
Acquisition cost ratio
19.1
%
 
22.1
%
 
19.4
%
 
12.3
%
 
14.7
%
 
12.9
%
Operating expense ratio
16.9
%
 
13.6
%
 
16.6
%
 
21.8
%
 
26.2
%
 
22.9
%
Combined ratio
96.0
%
 
201.5
%
 
108.4
%
 
111.9
%
 
178.3
%
 
128.0
%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Three Months Ended September 30: Net losses for the StarStone Group were $0.2 million for the three months ended September 30, 2019 compared to net losses of $20.7 million for the three months ended September 30, 2018, a change of $20.5 million. The result benefited from $12.1 million of net investment income and $7.6 million of net realized and unrealized gains, partially offset by the underwriting loss of $15.7 million that was principally due to losses from exited business lines and a reflection of the improving trends due to pricing and repositioning of the portfolio. The loss ratio for the StarStone Group decreased by 19.8 percentage points, reflecting repositioning actions to improve underwriting profitability. The acquisition cost ratio increased by 6.5 percentage points and the operating expense ratio decreased by 6.3 percentage points due to the non-renewal of the quota share arrangement with KaylaRe, resulting in a lower ceding commission and higher net premiums earned.
Net losses for the StarStone segment were $2.7 million for the three months ended September 30, 2019 compared to net losses of $37.1 million for the three months ended September 30, 2018, a decrease in net losses of $34.4 million. The decrease in net losses was primarily due to a decrease in underwriting losses of $36.8 million, higher net realized and unrealized gains on our investment portfolio of $8.2 million and an increase in net investment income of $2.6 million, partially offset by a decrease in losses attributable to noncontrolling interest of $14.1 million. The improvement in the underwriting performance was primarily due to the repositioning actions to improve underwriting profitability in core lines and reduced exposure in exited lines of business. The combined ratio was 112.1% for the three months ended September 30, 2019 as compared to 128.5% for the three months ended September 30, 2018. The loss ratio decreased by 14.4 percentage points, the acquisition cost ratio increased by 0.5 percentage points and the operating expense ratio decreased by 2.5 percentage points for the three months ended September 30, 2019.

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Nine Months Ended September 30,
 
2019
 
2018
 
StarStone Group
 
StarStone Intra-Group Cessions
 
StarStone Segment
 
StarStone Group
 
StarStone Intra-Group Cessions
 
StarStone Segment
 
(in thousands of U.S. dollars)
Net premiums earned
$
525,010

 
$
78,447

 
$
603,457

 
$
416,395

 
$
110,407

 
$
526,802

Net incurred losses and LAE
(399,530
)
 
(144,382
)
 
(543,912
)
 
(329,537
)
 
(90,729
)
 
(420,266
)
Acquisition costs
(99,047
)
 
(30,268
)
 
(129,315
)
 
(54,630
)
 
(40,145
)
 
(94,775
)
Operating expenses
(99,929
)
 
(501
)
 
(100,430
)
 
(104,561
)
 
(2,138
)
 
(106,699
)
Underwriting loss
(73,496
)
 
(96,704
)
 
(170,200
)
 
(72,333
)
 
(22,605
)
 
(94,938
)
Net investment income
36,252

 
89

 
36,341

 
25,950

 
—

 
25,950

Net realized and unrealized gains (losses)
45,851

 
5,621

 
51,472

 
(15,150
)
 
—

 
(15,150
)
Other income (expenses)
455

 
—

 
455

 
(432
)
 
—

 
(432
)
Interest income (expenses)
(9,635
)
 
9,160

 
(475
)
 
(1,592
)
 
1,045

 
(547
)
Net foreign exchange (loss) gain
(1,198
)
 
843

 
(355
)
 
137

 
(1,200
)
 
(1,063
)
LOSS BEFORE INCOME TAXES
(1,771
)
 
(80,991
)
 
(82,762
)
 
(63,420
)
 
(22,760
)
 
(86,180
)
Income tax expense
(1,348
)
 
—

 
(1,348
)
 
(2,568
)
 
—

 
(2,568
)
Loss from equity method investments
(218
)
 
—

 
(218
)
 
—

 
—

 
—

NET LOSS
(3,337
)
 
(80,991
)
 
(84,328
)
 
(65,988
)
 
(22,760
)
 
(88,748
)
Net loss attributable to noncontrolling interest
1,362

 
16,086

 
17,448

 
27,076

 
—

 
27,076

NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(1,975
)
 
$
(64,905
)
 
$
(66,880
)
 
$
(38,912
)
 
$
(22,760
)
 
$
(61,672
)
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting ratios(1):
 
 
 
 
 
 
 
 
 
 
 
Loss ratio 
76.1
%
 
184.1
%
 
90.1
%
 
79.1
%
 
82.2
%
 
79.8
%
Acquisition cost ratio
18.9
%
 
38.6
%
 
21.4
%
 
13.1
%
 
36.4
%
 
18.0
%
Operating expense ratio
19.0
%
 
0.6
%
 
16.7
%
 
25.2
%
 
1.9
%
 
20.2
%
Combined ratio
114.0
%
 
223.3
%
 
128.2
%
 
117.4
%
 
120.5
%
 
118.0
%
(1) 
Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
In addition, the below table presents StarStone Group's underwriting income split by the lines of business that we consider core and exited:
 
Nine Months Ended September 30,
 
2019
 
2018
 
Core Lines
 
Exited Lines
 
StarStone Group
 
Core Lines
 
Exited Lines
 
StarStone Group
 
(in thousands of U.S. dollars)
Net premiums earned
$
450,832

 
$
74,178

 
$
525,010

 
$
321,371

 
$
95,024

 
$
416,395

Net incurred losses and LAE
(296,340
)
 
(103,190
)
 
(399,530
)
 
(214,678
)
 
(114,859
)
 
(329,537
)
Acquisition costs
(81,597
)
 
(17,450
)
 
(99,047
)
 
(43,639
)
 
(10,991
)
 
(54,630
)
Operating expenses
(82,947
)
 
(16,982
)
 
(99,929
)
 
(80,700
)
 
(23,861
)
 
(104,561
)
Underwriting loss
$
(10,052
)
 
$
(63,444
)
 
$
(73,496
)
 
$
(17,646
)
 
$
(54,687
)
 
$
(72,333
)
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting ratios(1):
 
 
 
 
 
 
 
 
 
 
 
Loss ratio 
65.7
%
 
139.1
%
 
76.1
%
 
66.8
%
 
120.9
%
 
79.1
%
Acquisition cost ratio
18.1
%
 
23.5
%
 
18.9
%
 
13.6
%
 
11.6
%
 
13.1
%
Operating expense ratio
18.4
%
 
22.9
%
 
19.0
%
 
25.1
%
 
25.1
%
 
25.2
%
Combined ratio
102.2
%
 
185.5
%
 
114.0
%
 
105.5
%
 
157.6
%
 
117.4
%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.

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Nine Months Ended September 30: Net losses for the StarStone Group were $2.0 million for the nine months ended September 30, 2019 compared to net losses of $38.9 million for the nine months ended September 30, 2018, a decrease in net losses of $36.9 million. The result benefited from $36.3 million of net investment income and $45.9 million of net realized and unrealized gains, partially offset by an underwriting loss of $73.5 million, primarily due to prior year losses from exited lines of business as well as unfavorable current year losses, principally within our U.S. casualty line of business within core lines. The acquisition cost ratio increased by 5.8 percentage points and the operating expense ratio decreased by 6.2 percentage points for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The non-renewal of the quota share arrangement with KaylaRe resulted in a lower ceding commission and higher net premiums earned, which led to an increase in the acquisition cost ratio and a decrease in the operating expense ratio, respectively.

Net losses for the StarStone segment were $66.9 million for the nine months ended September 30, 2019 compared to net losses of $61.7 million for the nine months ended September 30, 2018, an increase in net losses of $5.2 million. The increase in net losses was primarily due to an increase in underwriting losses of $75.3 million and a decrease in losses attributable to noncontrolling interest of $9.6 million, partially offset by an increase in net realized and unrealized gains on our investment portfolio of $66.6 million and an increase in net investment income of $10.4 million. Our results for the nine months ended September 30, 2019 include prior year unfavorable net loss development of $93.4 million, which primarily reflects prior year large losses on exited lines of business and the strengthening of our U.S. casualty reserves in the second quarter of 2019, as discussed above. The loss ratio increased by 10.3 percentage points, the acquisition cost ratio increased by 3.4 percentage points and the operating expense ratio decreased by 3.5 percentage points for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.

Investment results are separately discussed below in "Investments."

Gross Premiums Written:
The following table provides gross premiums written by line of business for the StarStone segment:
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Casualty
$
98,130

 
$
86,497

 
$
11,633

 
$
288,018

 
$
254,920

 
$
33,098

Marine
47,774

 
57,388

 
(9,614
)
 
190,952

 
231,695

 
(40,743
)
Property
29,309

 
93,498

 
(64,189
)
 
92,630

 
254,734

 
(162,104
)
Aerospace
17,076

 
20,486

 
(3,410
)
 
46,603

 
48,375

 
(1,772
)
Workers' Compensation
28,868

 
24,656

 
4,212

 
88,431

 
99,143

 
(10,712
)
Total
$
221,157

 
$
282,525

 
$
(61,368
)
 
$
706,634

 
$
888,867

 
$
(182,233
)
Three Months Ended September 30: Gross premiums written for the StarStone segment were $221.2 million and $282.5 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of $61.4 million. The decrease in gross premiums written reflects a continuation of the trends in the previous quarters and was primarily driven by the property and marine lines of business, which decreased by $64.2 million and $9.6 million, respectively. We wrote less premium in 2019 compared to 2018 largely as a result of our strategy to exit certain lines of business and to focus on core lines. The decrease in gross premiums written reflects the execution of this strategy.
Nine Months Ended September 30: Gross premiums written were $706.6 million and $888.9 million for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $182.2 million. We wrote less premium in 2019 compared to 2018 largely as a result of our strategy to exit certain lines of business and to focus on core lines. The decrease in gross premiums written reflects the execution of this strategy. The property and marine lines of business decreased by $162.1 million and $40.7 million, respectively. The $33.1 million increase in the casualty line of business was primarily due to improving rates in the U.S. and new business opportunities underwritten through our European platform.

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Net Premiums Earned:
The following table provides net premiums earned by line of business for the StarStone segment:    
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
 
 
 
 
 
 
Casualty
$
84,923

 
$
69,122

 
$
15,801

 
$
241,704

 
$
178,746

 
$
62,958

Marine
52,529

 
62,905

 
(10,376
)
 
163,948

 
150,663

 
13,285

Property
34,549

 
49,009

 
(14,460
)
 
103,787

 
114,093

 
(10,306
)
Aerospace
8,603

 
19,904

 
(11,301
)
 
33,939

 
44,594

 
(10,655
)
Workers' Compensation
25,668

 
15,415

 
10,253

 
60,079

 
38,706

 
21,373

Total
$
206,272

 
$
216,355

 
$
(10,083
)
 
$
603,457

 
$
526,802

 
$
76,655

Three Months Ended September 30: Net premiums earned for the StarStone segment were $206.3 million and $216.4 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of $10.1 million. The decrease in net premiums earned was primarily due to the impact of lower gross premiums written as a result of our repositioning activities.
Net premiums earned for the StarStone Group for the three months ended September 30, 2019 were $186.7 million, an increase of $25.2 million compared to the three months ended September 30, 2018. The increase was primarily driven by lower ceded premiums due to the non-renewal of the quota share with KaylaRe.
Nine Months Ended September 30: Net premiums earned for the StarStone segment were $603.5 million and $526.8 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $76.7 million. The increase in net premiums earned was primarily due to increased premiums earned in the StarStone Group and the impact of eliminating the ceded premium earned related to KaylaRe after its acquisition.
Net premiums earned for the StarStone Group for the nine months ended September 30, 2019 were $525.0 million, an increase of $108.6 million compared to the nine months ended September 30, 2018. The increase was primarily driven by lower ceded premiums due to the non-renewal of the quota share with KaylaRe.

Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the StarStone segment:
 
Three Months Ended September 30,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
124,336

 
$
17,847

 
$
142,183

 
$
95,422

 
$
13,473

 
$
108,895

Net change in case and LAE reserves (1)
(9,672
)
 
(5,200
)
 
(14,872
)
 
(19,919
)
 
37,468

 
17,549

Net change in IBNR reserves (2)
(112,123
)
 
144,069

 
31,946

 
(63,294
)
 
134,454

 
71,160

Increase in estimates of net ultimate losses
2,541

 
156,716

 
159,257

 
12,209

 
185,395

 
197,604

Increase (reduction) in provisions for unallocated LAE
(2,460
)
 
2,449

 
(11
)
 
(2,023
)
 
3,605

 
1,582

Amortization of fair value adjustments
541

 
—

 
541

 
(287
)
 
—

 
(287
)
Net incurred losses and LAE
$
622

 
$
159,165

 
$
159,787

 
$
9,899

 
$
189,000

 
$
198,899

(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.

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Three Months Ended September 30: Net incurred losses and LAE for the three months ended September 30, 2019 and 2018 were $159.8 million and $198.9 million, respectively. Net unfavorable prior year loss development was $0.6 million for the three months ended September 30, 2019 compared to net unfavorable prior year loss development of $9.9 million for the three months ended September 30, 2018. Excluding prior year net loss development, net incurred losses and LAE for the three months ended September 30, 2019 and 2018 were $159.2 million and $189.0 million, respectively.
The following table shows the components of net incurred losses and LAE for the StarStone segment for the nine months ended September 30, 2019 and 2018:
 
Nine Months Ended September 30,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
346,323

 
$
36,542

 
$
382,865

 
$
268,997

 
$
33,840

 
$
302,837

Net change in case and LAE reserves (1)
(14,922
)
 
49,119

 
34,197

 
(55,541
)
 
94,456

 
38,915

Net change in IBNR reserves (2)
(233,528
)
 
357,243

 
123,715

 
(183,422
)
 
258,453

 
75,031

Increase in estimates of net ultimate losses
97,873

 
442,904

 
540,777

 
30,034

 
386,749

 
416,783

Increase (reduction) in provisions for unallocated LAE
(4,735
)
 
7,560

 
2,825

 
(5,313
)
 
9,325

 
4,012

Amortization of fair value adjustments
310

 
—

 
310

 
(529
)
 
—

 
(529
)
Net incurred losses and LAE
$
93,448

 
$
450,464

 
$
543,912

 
$
24,192

 
$
396,074

 
$
420,266

(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Nine Months Ended September 30: Net incurred losses and LAE for the nine months ended September 30, 2019 and 2018 were $543.9 million and $420.3 million, respectively. The increase in net incurred losses was primarily due to lower reinsurance recoveries due to the non-renewal of the KaylaRe quota share and subsequent consolidation and elimination upon acquisition and net unfavorable prior year loss development. Net unfavorable prior year loss development was $93.4 million for the nine months ended September 30, 2019 compared to net unfavorable prior year loss development of $24.2 million for the nine months ended September 30, 2018. Excluding prior year loss development, net incurred losses and LAE for the nine months ended September 30, 2019 and 2018 were $450.5 million and $396.1 million, respectively. Net unfavorable prior year loss development for the nine months ended September 30, 2019 was primarily related to unfavorable development on the U.S. casualty line of business, reflecting an increase in the frequency and severity of losses and social inflation and lines of business which we have either exited or which are subject to remediation as part of our underwriting repositioning.

Acquisition Costs:
Three Months Ended September 30: Acquisition costs for the StarStone segment were $40.3 million and $41.1 million for the three months ended September 30, 2019 and 2018, respectively, a decrease of $0.8 million. The acquisition cost ratios for the three months ended September 30, 2019 and 2018 were 19.5% and 19.0%, respectively.
Acquisition costs for the StarStone Group were $36.2 million and $20.8 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $15.5 million. The acquisition cost ratios for the three months ended September 30, 2019 and 2018 were 19.4% and 12.9%, respectively, an increase of 6.5 percentage points. The increase in the acquisition cost ratio is primarily attributable to the non-renewal of the quota share arrangement with KaylaRe, and as a result, the StarStone Group did not benefit as substantially from the quota share ceding overriding commission for the three months ended September 30, 2019.
Nine Months Ended September 30: Acquisition costs for the StarStone segment were $129.3 million and $94.8 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $34.5 million. The acquisition cost ratios for the nine months ended September 30, 2019 and 2018 were 21.4% and 18.0%, respectively, an increase of 3.4 percentage points.

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Acquisition costs for the StarStone Group were $99.0 million and $54.6 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $44.4 million. The acquisition cost ratios for the nine months ended September 30, 2019 and 2018 were 18.9% and 13.1%, respectively, an increase of 5.8 percentage points.
Operating Expenses:
Three and Nine Months Ended September 30: Operating expenses for the StarStone segment for the three months ended September 30, 2019 and 2018 were $31.1 million and $38.0 million, respectively, and $100.4 million and $106.7 million for the nine months ended September 30, 2019 and 2018, respectively. The operating expense ratios for the three months ended September 30, 2019 and 2018 were 15.1% and 17.6%, respectively, a decrease of 2.5 percentage points. The operating expense ratios for the nine months ended September 30, 2019 and 2018 were 16.7% and 20.2%, respectively, a decrease of 3.5 percentage points.
The operating expense ratios for the StarStone Group for the three months ended September 30, 2019 and 2018 were 16.6% and 22.9%, respectively, a decrease of 6.3 percentage points. The operating expense ratios for the nine months ended September 30, 2019 and 2018 were 19.0% and 25.2%, respectively, a decrease of 6.2 percentage points. The decrease in the operating expense ratio is primarily attributable to the non-renewal of the quota share arrangement with KaylaRe, leading to higher net earned premium for the three and nine months ended September 30, 2019 for the StarStone Group.
Income Taxes:
Three and Nine Months Ended September 30: Income tax expense for the StarStone segment for the three months ended September 30, 2019 was $1.0 million compared to an income tax benefit of $0.1 million for the three months ended September 30, 2018. For the nine months ended September 30, 2019, income tax expense was $1.3 million compared to $2.6 million for the nine months ended September 30, 2018. The income tax benefit (expense) is generally driven by the geographical distribution of pre-tax earnings (loss) between taxable and non-taxable jurisdictions.
Noncontrolling Interest:
Three Months Ended September 30: The net losses attributable to the noncontrolling interest in the StarStone segment were $0.3 million for the three months ended September 30, 2019, compared to net losses attributable to the noncontrolling interest of $14.4 million for the three months ended September 30, 2018. The net losses attributable to the noncontrolling interest for the three months ended September 30, 2018 were primarily due to the net losses in the StarStone Group for the three months ended September 30, 2018.
Nine Months Ended September 30: The net losses attributable to the noncontrolling interest in the StarStone segment were $17.4 million for the nine months ended September 30, 2019, compared to net losses attributable to the noncontrolling interest of $27.1 million for the nine months ended September 30, 2018. The net losses attributable to the noncontrolling interest for the nine months ended September 30, 2019 were due to the net losses in both the StarStone Group and the StarStone Intra-Group Cessions for the nine months ended September 30, 2019.
As of September 30, 2019 and 2018, Trident and Dowling had a combined 41.0% noncontrolling interest in the StarStone Group.

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Other
Our other activities, which do not qualify as a reportable segment, include our corporate expenses, debt servicing costs, preferred share dividends, holding company income and expenses, foreign exchange, our remaining life business and other miscellaneous items. On May 31, 2019, we completed the transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument. As a result, we now have de minimis residual life business in our consolidated operations.
The following is a discussion and analysis of our results of operations for our other activities, which are summarized below:
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Net premiums earned
$
4,303

 
$
823

 
$
3,480

 
$
16,872

 
$
2,875

 
$
13,997

Net incurred losses and LAE
(3,647
)
 
—

 
(3,647
)
 
(13,068
)
 
—

 
(13,068
)
Life and Annuity Policy Benefits
—

 
(423
)
 
423

 
(2,290
)
 
(217
)
 
(2,073
)
Acquisition costs
(177
)
 
(108
)
 
(69
)
 
(554
)
 
(389
)
 
(165
)
Underwriting income
479

 
292

 
187

 
960

 
2,269

 
(1,309
)
Net investment expense
(2,147
)
 
(918
)
 
(1,229
)
 
(6,278
)
 
4,012

 
(10,290
)
Net realized and unrealized gains (losses)
270

 
100

 
170

 
5,849

 
(6,803
)
 
12,652

Other income (expenses)
1,000

 
(4
)
 
1,004

 
1,971

 
(207
)
 
2,178

Corporate expenses
(12,824
)
 
(8,925
)
 
(3,899
)
 
(36,051
)
 
(28,677
)
 
(7,374
)
Interest Income
3,014

 
1,311

 
1,703

 
7,152

 
3,536

 
3,616

Net foreign exchange gains (losses)
24

 
(210
)
 
234

 
(2
)
 
1,138

 
(1,140
)
LOSS BEFORE INCOME TAXES
(10,184
)
 
(8,354
)
 
(1,830
)
 
(26,399
)
 
(24,732
)
 
(1,667
)
Income tax expense
—

 
(2
)
 
2

 
(85
)
 
(13
)
 
(72
)
NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
(10,184
)
 
(8,356
)
 
(1,828
)
 
(26,484
)
 
(24,745
)
 
(1,739
)
Dividends on preferred shares
(8,925
)
 
(5,133
)
 
(3,792
)
 
(26,989
)
 
(5,133
)
 
(21,856
)
NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(19,109
)
 
$
(13,489
)
 
$
(5,620
)
 
$
(53,473
)
 
$
(29,878
)
 
$
(23,595
)
Overall Results:
Three Months Ended September 30: Net losses were $19.1 million for the three months ended September 30, 2019, compared to net losses of $13.5 million for the three months ended September 30, 2018, an increase in net losses of $5.6 million, which primarily resulted from $8.9 million of dividends on the preferred shares that were issued in June and November 2018 and a $3.9 million increase in corporate expenses.
Nine Months Ended September 30: Net losses were $53.5 million for the nine months ended September 30, 2019, compared to net losses of $29.9 million for the nine months ended September 30, 2018, an increase in net losses of $23.6 million, which primarily resulted from $27.0 million of dividends on the preferred shares that were issued in June and November 2018, a decrease in net investment income of $10.3 million and a $7.4 million increase in corporate expenses, partially offset by a $12.7 million increase in net realized and unrealized gains in the current period.
Investment results are separately discussed below in "Investable Assets."
Underwriting Income:
Three and Nine Months Ended September 30: Underwriting income was $0.5 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $1.0 million and $2.3 million for nine months ended September 30, 2019 and 2018, respectively, a decrease of $1.3 million. Our other activities includes our remaining life business and other active underwriting.

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Corporate Expenses:
Three and Nine Months Ended September 30: Corporate expenses were $12.8 million for the three months ended September 30, 2019 compared to $8.9 million in the three months ended September 30, 2018. Corporate expenses were $36.1 million in the nine months ended September 30, 2019 compared to $28.7 million in the nine months ended September 30, 2018. The increase for both the three and nine months ended September 30, 2019, was primarily related to an increase in performance-related compensation as a result of higher consolidated net earnings in 2019 compared to 2018.
Interest Income:
Three and Nine Months Ended September 30: Interest income was $3.0 million and $1.3 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $1.7 million. Interest income was $7.2 million and $3.5 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $3.6 million. This represents the elimination of interest expense between our reportable segments.

Dividends on Preferred Shares:
Three and Nine Months Ended September 30: The dividends on preferred shares were $8.9 million and $5.1 million for the three months ended September 30, 2019 and 2018, respectively, and $27.0 million and $5.1 million for the nine months ended September 30, 2019 and 2018, respectively. On June 28, 2018, we issued 16,000 Series D Preferred Shares with an aggregate liquidation value of $400.0 million. On November 21, 2018, we issued 4,400 Series E Preferred Shares with an aggregate liquidation value of $110.0 million. The dividends on the Series D and E Preferred Shares are non-cumulative and may be paid quarterly in arrears on the first day of March, June, September and December of each year, only when, as and if declared.

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Investable Assets
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and cash equivalents, funds held by reinsured companies and funds held - directly managed. Investments consist primarily of investment grade, liquid, fixed maturity securities of short-to-medium duration, equities, and other investments. Cash and cash equivalents and restricted cash and cash equivalents are comprised mainly of cash, fixed deposits, and other highly liquid instruments such as commercial paper with maturities of less than three months at the time of acquisition and money market funds. Funds held primarily consist of investment grade, liquid, fixed maturity securities of short-to-medium duration.
Investable assets were $14.0 billion as of September 30, 2019 as compared to $12.5 billion as of December 31, 2018, an increase of 11.8%. The increase was primarily due to unrealized gains recorded in 2019 and the investments and funds held balance acquired in relation to the AmTrust RITC, Amerisure and Maiden transactions completed in 2019.
A description of our investment strategies is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Investments" in our Annual Report on Form 10-K for the year ended December 31, 2018.
Composition of Investable Assets By Segment
Across all of our segments, we strive to structure our investments in a manner that recognizes our liquidity needs for future liabilities. We consider the duration characteristics of our liabilities in determining the extent to which we invest in assets of comparable duration depending on our other investment strategies and to the extent practicable. If our liquidity needs or general liability profile change unexpectedly, we may adjust the structure of our investment portfolio to meet our revised expectations. The following tables summarize the composition of total invested assets by segment:
 
 
September 30, 2019
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
 
 
(in thousands of U.S. dollars)
Short-term investments, trading, at fair value
 
$
76,156

 
$
579

 
$
124

 
$
—

 
$
76,859

Short-term investments, available-for-sale, at fair value
 
3,219

 
—

 
6,370

 
—

 
9,589

Fixed maturities, trading, at fair value
 
5,986,657

 
141,368

 
1,022,519

 
—

 
7,150,544

Fixed maturities, available-for-sale, at fair value
 
361,491

 
18,844

 
26,043

 
—

 
406,378

Funds held - directly managed
 
1,243,448

 
—

 
—

 
—

 
1,243,448

Equities, at fair value
 
598,316

 
4,292

 
125,818

 
—

 
728,426

Other investments, at fair value
 
2,262,915

 
8,926

 
125,011

 
—

 
2,396,852

Equity method investments
 
282,463

 
—

 
—

 
—

 
282,463

Total investments
 
10,814,665

 
174,009

 
1,305,885

 
—

 
12,294,559

Cash and cash equivalents (including restricted cash)
 
753,325

 
71,322

 
508,498

 
7,768

 
1,340,913

Funds held by reinsured companies
 
325,537

 
25,977

 
32,773

 
8,982

 
393,269

Total investable assets
 
$
11,893,527

 
$
271,308

 
$
1,847,156

 
$
16,750

 
$
14,028,741

Duration (in years) (1)
 
5.36

 
1.72

 
1.87

 
0.00

 
4.74

Average credit rating (2)
 
A+

 
AA-

 
AA-

 
AAA

 
A+


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December 31, 2018
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
 
 
(in thousands of U.S. dollars)
Short-term investments, trading, at fair value
 
$
106,375

 
$
541

 
$
7,200

 
$
—

 
$
114,116

Fixed maturities, trading, at fair value
 
5,790,219

 
139,121

 
1,319,453

 
—

 
7,248,793

Fixed maturities, available-for-sale, at fair value
 
—

 
29,975

 
—

 
121,634

 
151,609

Funds held - directly managed
 
1,198,154

 
—

 
—

 
—

 
1,198,154

Equities, at fair value
 
335,632

 
3,193

 
28,300

 
—

 
367,125

Other investments, at fair value
 
1,825,307

 
7,166

 
113,024

 
12,260

 
1,957,757

Equity method investments
 
204,507

 
—

 
—

 
—

 
204,507

Total investments
 
9,460,194

 
179,996

 
1,467,977

 
133,894

 
11,242,061

Cash and cash equivalents (including restricted cash)
 
585,956

 
54,679

 
318,811

 
23,138

 
982,584

Funds held by reinsured companies
 
263,713

 
26,489

 
20,823

 
10,242

 
321,267

Total investable assets
 
$
10,309,863

 
$
261,164

 
$
1,807,611

 
$
167,274

 
$
12,545,912

Duration (in years) (1)
 
5.41

 
1.70

 
2.66

 
5.70

 
4.86

Average credit rating (2)
 
A+

 
AA-

 
A+

 
AA-

 
A+

(1) The duration calculation includes cash and cash equivalents, short-term investments, fixed maturities and the fixed maturities within our funds held - directly managed portfolios at September 30, 2019 and December 31, 2018.
(2) The average credit ratings calculation includes cash and cash equivalents, short-term investments, fixed maturities and the fixed maturities within our funds held - directly managed portfolios at September 30, 2019 and December 31, 2018.
As of both September 30, 2019 and December 31, 2018, our investment portfolio, including funds held - directly managed, had an average credit quality rating of A+. As of September 30, 2019 and December 31, 2018, our fixed maturity investments (classified as trading and available-for-sale and our fixed maturity investments included within funds held - directly managed) that were non-investment grade (i.e. rated lower than BBB- and non-rated securities) comprised 4.8% and 3.8% of our total fixed maturity investment portfolio, respectively. A detailed schedule of average credit ratings by asset class as of September 30, 2019 is included in Note 4 - "Investments" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Schedules of maturities by asset class are included in Note 4 - "Investments" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.


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Composition of Investment Portfolio By Asset Class
The following tables summarize the composition of our investment portfolio by asset class:
 
 
September 30, 2019
 
 
AAA Rated
 
AA Rated
 
A Rated
 
BBB Rated
 
Non-investment Grade
 
Not Rated
 
Total
 
%
 
 
(in thousands of U.S. dollars, except percentages)
Fixed maturity and short-term investments, trading and available-for-sale and funds held - directly managed
 
 
 
 
U.S. government & agency
 
$
506,826

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
506,826

 
4.1
%
U.K. government
 
—

 
295,957

 
—

 
—

 
—

 
—

 
295,957

 
2.4
%
Other government
 
303,279

 
154,187

 
66,423

 
156,230

 
34,975

 
—

 
715,094

 
5.9
%
Corporate
 
127,149

 
558,260

 
2,569,000

 
1,626,305

 
296,641

 
12,530

 
5,189,885

 
42.3
%
Municipal
 
11,548

 
76,177

 
51,347

 
22,292

 
—

 
—

 
161,364

 
1.3
%
Residential mortgage-backed
 
310,759

 
45,094

 
2,304

 
2,313

 
40,718

 
7,319

 
408,507

 
3.3
%
Commercial mortgage-backed
 
606,878

 
103,702

 
92,312

 
67,072

 
6,743

 
10,630

 
887,337

 
7.2
%
Asset-backed
 
302,808

 
83,926

 
187,062

 
118,084

 
16,120

 
854

 
708,854

 
5.8
%
Total
 
2,169,247

 
1,317,303

 
2,968,448

 
1,992,296

 
395,197

 
31,333

 
8,873,824

 
72.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets included within funds held - directly managed
 
 
 
 
 
12,994

 
0.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Publicly traded equities
 
 
 
 
 
 
 
 
 
 
 
 
 
312,711

 
2.5
%
Exchange-traded funds
 
 
 
 
 
 
 
 
 
 
 
 
 
184,024

 
1.5
%
Privately held equities
 
 
 
 
 
 
 
 
 
 
 
 
 
231,691

 
1.9
%
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
728,426

 
5.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
 
 
 
 
 
 
 
 
 
 
 
 
997,593

 
8.1
%
Fixed income funds
 
 
 
 
 
 
 
 
 
 
 
 
 
554,067

 
4.5
%
Equity funds
 
 
 
 
 
 
 
 
 
 
 
 
 
373,814

 
3.0
%
Private equity funds
 
 
 
 
 
 
 
 
 
 
 
 
 
305,756

 
2.5
%
CLO equities
 
 
 
 
 
 
 
 
 
 
 
 
 
67,109

 
0.5
%
CLO equity funds
 
 
 
 
 
 
 
 
 
 
 
 
 
89,493

 
0.7
%
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
9,020

 
0.1
%
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
2,396,852

 
19.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity method investments
 
 
 
 
 
 
 
 
 
 
 
 
 
282,463

 
2.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
2,169,247

 
$
1,317,303

 
$
2,968,448

 
$
1,992,296

 
$
395,197

 
$
31,333

 
$
12,294,559

 
100.0
%

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December 31, 2018
 
AAA Rated
 
AA Rated
 
A Rated
 
BBB Rated
 
Non-investment Grade
 
Not Rated
 
Total
 
%
 
(in thousands of U.S. dollars, except percentages)
Fixed maturity and short-term investments, trading and available-for-sale and funds held - directly managed
U.S. government & agency
$
502,819

 
$
7,426

 
$
—

 
$
—

 
$
—

 
$
—

 
$
510,245

 
4.5
%
U.K. government
2,144

 
298,487

 
—

 
—

 
—

 
—

 
300,631

 
2.7
%
Other government
322,606

 
213,639

 
69,601

 
154,800

 
32,592

 
572

 
793,810

 
7.1
%
Corporate
129,059

 
470,571

 
2,306,532

 
1,731,398

 
197,822

 
4,458

 
4,839,840

 
43.1
%
Municipal
7,934

 
69,270

 
41,666

 
11,395

 
—

 
—

 
130,265

 
1.2
%
Residential mortgage-backed
644,418

 
51,729

 
8,658

 
10,495

 
54,727

 
3,530

 
773,557

 
6.9
%
Commercial mortgage-backed
487,054

 
70,620

 
77,538

 
60,879

 
7,297

 
9,675

 
713,063

 
6.3
%
Asset-backed
358,574

 
68,174

 
125,644

 
66,136

 
17,573

 
380

 
636,481

 
5.7
%
Total
2,454,608

 
1,249,916

 
2,629,639

 
2,035,103

 
310,011

 
18,615

 
8,697,892

 
77.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets included within funds held - directly managed
 
 
 
 
 
14,780

 
0.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Publicly traded equities
 
 
 
 
 
 
 
 
 
 
 
 
138,415

 
1.2
%
Privately held equities
 
 
 
 
 
 
 
 
 
 
 
 
228,710

 
2.0
%
Total
 
 
 
 
 
 
 
 
 
 
 
 
367,125

 
3.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
 
 
 
 
 
 
 
 
 
 
 
852,584

 
7.6
%
Fixed income funds
 
 
 
 
 
 
 
 
 
 
 
 
403,858

 
3.6
%
Equity funds
 
 
 
 
 
 
 
 
 
 
 
 
333,681

 
3.0
%
Private equity funds
 
 
 
 
 
 
 
 
 
 
 
 
248,628

 
2.2
%
CLO equities
 
 
 
 
 
 
 
 
 
 
 
 
39,052

 
0.3
%
CLO equity funds
 
 
 
 
 
 
 
 
 
 
 
 
37,260

 
0.3
%
Private credit funds
 
 
 
 
 
 
 
 
 
 
 
 
33,381

 
0.3
%
Other
 
 
 
 
 
 
 
 
 
 
 
 
9,313

 
0.1
%
Total
 
 
 
 
 
 
 
 
 
 
 
 
1,957,757

 
17.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity method investments
 
 
 
 
 
 
 
 
 
 
 
 
204,507

 
1.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
$
2,454,608

 
$
1,249,916

 
$
2,629,639

 
$
2,035,103

 
$
310,011

 
$
18,615

 
$
11,242,061

 
100.0
%
A description of our investment valuation processes is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" of our Annual Report on Form 10-K for the year ended December 31, 2018 and Note 9 - "Fair Value Measurements" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.

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The following tables summarize the amortized cost, gross unrealized gains and losses and the fair value of our short-term investments and fixed maturity investments, classified as trading and available-for-sale, and the fixed maturity investments included within our funds held - directly managed:
 
 
September 30, 2019
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
495,484

 
$
11,675

 
$
(333
)
 
$
506,826

U.K. government
 
275,156

 
22,626

 
(1,825
)
 
295,957

Other government
 
703,795

 
23,368

 
(12,069
)
 
715,094

Corporate
 
5,011,697

 
211,377

 
(33,189
)
 
5,189,885

Municipal
 
147,637

 
13,732

 
(5
)
 
161,364

Residential mortgage-backed
 
401,266

 
7,932

 
(691
)
 
408,507

Commercial mortgage-backed
 
859,507

 
30,759

 
(2,929
)
 
887,337

Asset-backed
 
711,063

 
2,518

 
(4,727
)
 
708,854

 
 
$
8,605,605

 
$
323,987

 
$
(55,768
)
 
$
8,873,824

 
 
December 31, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
512,360

 
$
1,904

 
$
(4,019
)
 
$
510,245

U.K. government
 
301,749

 
6,526

 
(7,644
)
 
300,631

Other government
 
814,614

 
5,261

 
(26,065
)
 
793,810

Corporate
 
5,019,018

 
12,195

 
(191,373
)
 
4,839,840

Municipal
 
132,928

 
494

 
(3,157
)
 
130,265

Residential mortgage-backed
 
772,457

 
5,846

 
(4,746
)
 
773,557

Commercial mortgage-backed
 
729,232

 
2,613

 
(18,782
)
 
713,063

Asset-backed
 
642,618

 
1,032

 
(7,169
)
 
636,481

 
 
$
8,924,976

 
$
35,871

 
$
(262,955
)
 
$
8,697,892

We generally account for our fixed maturity securities as "trading", whereas other companies in our industry may utilize "available-for-sale" accounting. The difference is that unrealized changes on investments classified as trading are recorded through earnings, whereas unrealized changes on investments classified as available-for-sale are recorded directly to shareholders' equity. We may experience unrealized gains or losses on our fixed maturity investments, depending on investment conditions and general economic conditions. Unrealized amounts would only become realized in the event of a sale of the specific securities prior to maturity or a credit default. For further information on the sensitivity of our portfolio to changes in interest rates, refer to the Interest Rate Risk section within "Item 3. Quantitative and Qualitative Disclosures About Market Risk", included within this Quarterly Report on Form 10-Q.

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The following table summarizes the composition of our top ten corporate issuers included within our short-term investments and fixed maturity investments, classified as trading and available-for-sale and the fixed maturity investments included within our funds held - directly managed balance as of September 30, 2019:
 
Fair Value
 
Average Credit Rating
 
(in thousands of U.S. dollars)
 
 
JPMorgan Chase & Co
$
106,013

 
A
Citigroup Inc
101,913

 
BBB
Bank of America Corp
101,194

 
A
Apple Inc
95,475

 
AA+
Morgan Stanley
90,504

 
A-
Comcast Corp
72,858

 
A-
Wells Fargo & Co
71,369

 
A
HSBC Holdings PLC
67,952

 
A
Walmart Inc
58,610

 
AA
Goldman Sachs Group Inc
55,210

 
A-
 
$
821,098

 
 
Investment Results
The following tables summarize our investment results by major investment category and by segment. Additional information is included in Note 4 - "Investments" to our unaudited condensed consolidated financial statements included within Item 1 of the Quarterly Report on Form 10-Q.
 
 
Three Months Ended September 30, 2019
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
 
 
(in thousands of U.S. dollars)
Net investment income:
 
 
 
 
 
 
 
 
 
 
Fixed maturities and cash and cash equivalents
 
$
69,049

 
$
1,652

 
$
10,639

 
$
(12
)
 
$
81,328

Equity securities
 
3,925

 
16

 
475

 
—

 
4,416

Other
 
3,188

 
138

 
1,485

 
(2,169
)
 
2,642

Gross investment income
 
76,162

 
1,806

 
12,599

 
(2,181
)
 
88,386

Investment expenses
 
(2,410
)
 
(70
)
 
(468
)
 
34

 
(2,914
)
Net investment income (expense)
 
$
73,752

 
$
1,736

 
$
12,131

 
$
(2,147
)
 
$
85,472

 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains and losses:
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
130,091

 
564

 
7,306

 
1

 
137,962

Equity securities
 
6,493

 
31

 
(348
)
 
—

 
6,176

Other investments
 
1,590

 
(13
)
 
2,201

 
269

 
4,047

Net realized and unrealized gains
 
$
138,174

 
$
582

 
$
9,159

 
$
270

 
$
148,185

 
 
 
 
 
 
 
 
 
 
 
Annualized income from cash and fixed maturities
 
$
276,196

 
$
6,608

 
$
42,556

 
$
(48
)
 
$
325,312

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
 
8,632,415

 
251,305

 
1,619,635

 
15,279

 
10,518,634

Annualized Investment Book Yield
 
3.20
%
 
2.63
%
 
2.63
%
 
(0.31
)%
 
3.09
%
 
 
 
 
 
 
 
 
 
 
 
Total financial statement return (2)
 
$
211,926

 
$
2,318

 
$
21,290

 
$
(1,877
)
 
$
233,657

Average aggregate invested assets, at fair value (1)
 
11,662,416

 
264,029

 
1,844,433

 
18,293

 
13,789,171

Financial Statement Portfolio Return
 
1.82
%
 
0.88
%
 
1.15
%
 
(10.26
)%
 
1.69
%

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Three Months Ended September 30, 2018
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
 
 
(in thousands of U.S. dollars)
Net investment income:
 
 
 
 
 
 
 
 
 
 
Fixed maturities and cash and cash equivalents
 
$
51,748

 
$
1,457

 
$
9,017

 
$
365

 
$
62,587

Equity securities
 
459

 
6

 
480

 
1

 
946

Other investments and other
 
8,762

 
196

 
636

 
(1,270
)
 
8,324

Gross investment income
 
60,969

 
1,659

 
10,133

 
(904
)
 
71,857

Investment expenses
 
(1,722
)
 
(62
)
 
(629
)
 
(14
)
 
(2,427
)
Net investment income (expense)
 
$
59,247

 
$
1,597

 
$
9,504

 
$
(918
)
 
$
69,430

 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains and losses:
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
$
(22,867
)
 
$
(10
)
 
$
(1,655
)
 
$
1

 
$
(24,531
)
Equity securities
 
2,139

 
112

 
245

 
—

 
2,496

Other investments
 
(37,778
)
 
92

 
2,399

 
99

 
(35,188
)
Net realized and unrealized gains (losses)
 
$
(58,506
)
 
$
194

 
$
989

 
$
100

 
$
(57,223
)
 
 
 
 
 
 
 
 
 
 
 
Annualized income from cash and fixed maturities
 
$
206,992

 
$
5,828

 
$
36,068

 
$
1,460

 
$
250,348

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
 
7,548,860

 
267,750

 
1,528,574

 
166,763

 
9,511,947

Annualized Investment Book Yield
 
2.74
%
 
2.18
%
 
2.36
%
 
0.88
 %
 
2.63
%
 
 
 
 
 
 
 
 
 
 
 
Total financial statement return (2)
 
$
741

 
$
1,791

 
$
10,493

 
$
(818
)
 
$
12,207

Average aggregate invested assets, at fair value (1)
 
9,274,048

 
274,200

 
1,643,839

 
182,381

 
11,374,468

Financial Statement Portfolio Return
 
0.01
%
 
0.65
%
 
0.64
%
 
(0.45
)%
 
0.11
%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
(2) This is the sum of net investment income and net realized and unrealized gains (losses) from our U.S. GAAP consolidated financial statements.
Net Investment Income:
Net investment income increased by $16.0 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, primarily due to an $18.7 million increase in net investment income from fixed maturities and cash and cash equivalents, principally due to an increase of $1,006.7 million in our average aggregate fixed maturities and cash and cash equivalents. The increase in our average aggregate fixed maturities and cash and cash equivalents was primarily due to the AmTrust RITC, Amerisure and Maiden transactions in 2019, and the Kayla Re, Zurich, Neon, Novae transactions in 2018. The book yield increased by 46 basis points primarily due to the contractual yield received on the 2019 transactions and higher reinvestment rates.
Net Realized and Unrealized Gains (Losses):
Net realized and unrealized gains were $148.2 million for the three months ended September 30, 2019 compared to net realized and unrealized losses of $57.2 million for the three months ended September 30, 2018, a change of $205.3 million. Included in net realized and unrealized gains (losses) are the following items:
•
net realized and unrealized gains on fixed income securities, including fixed income securities within our fund held portfolios, of $138.0 million for the three months ended September 30, 2019, compared to net realized and unrealized losses of $24.5 million for the three months ended September 30, 2018, a change of $162.5 million, primarily driven by higher valuations due to declining interest rates in the current period, compared to lower valuations in the comparative period due to increased sovereign yields;
•
net realized and unrealized gains on equity securities of $6.2 million for the three months ended September 30, 2019, compared to $2.5 million for the three months ended September 30, 2018, an increase of $3.6 million, primarily driven by a more favorable movement in international equity markets in 2019 compared the comparative period; and

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•
net realized and unrealized gains on other investments and other items of $4.0 million for the three months ended September 30, 2019, compared to realized and unrealized losses of $35.2 million for the three months ended September 30, 2018, representing an increase of $39.2 million. The unrealized gains for the three months ended September 30, 2019 primarily comprised unrealized gains in fixed income funds, principally driven by declining interest rates, and private equity funds, partially offset by unrealized losses on our hedge funds, equity funds and CLO equities. The unrealized losses for the three months ended September 30, 2018 primarily comprised unrealized losses in our hedge funds and equity funds, partially offset by unrealized gains in our CLO equities, fixed income funds and private equity funds.

The following tables summarize our investment results for the nine months ended September 30, 2019 and 2018:
 
 
Nine Months Ended September 30, 2019
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
 
 
(in thousands of U.S. dollars)
Net investment income:
 
 
 
 
 
 
 
 
 
 
Fixed maturities and cash and cash equivalents
 
$
194,854

 
$
4,854

 
$
32,744

 
$
949

 
$
233,401

Equity securities
 
9,706

 
52

 
1,460

 
—

 
11,218

Other
 
9,836

 
839

 
3,941

 
(7,357
)
 
7,259

Gross investment income
 
214,396

 
5,745

 
38,145

 
(6,408
)
 
251,878

Investment expenses
 
(8,059
)
 
(245
)
 
(1,804
)
 
130

 
(9,978
)
Net investment income (expense)
 
$
206,337

 
$
5,500

 
$
36,341

 
$
(6,278
)
 
$
241,900

 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains and losses:
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
521,862

 
4,338

 
48,438

 
4,151

 
578,789

Equity securities
 
31,675

 
578

 
(2,200
)
 
—

 
30,053

Other investments
 
262,365

 
548

 
5,234

 
1,698

 
269,845

Net realized and unrealized gains and losses
 
$
815,902

 
$
5,464

 
$
51,472

 
$
5,849

 
$
878,687

 
 
 
 
 
 
 
 
 
 
 
Annualized income from cash and fixed maturities
 
$
259,805

 
$
6,472

 
$
43,659

 
$
1,265

 
$
311,201

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
 
8,621,207

 
255,591

 
1,644,970

 
87,240

 
10,609,008

Annualized Investment Book Yield
 
3.01
%
 
2.53
%
 
2.65
%
 
1.45
 %
 
2.93
%
 
 
 
 
 
 
 
 
 
 
 
Total financial statement return (2)
 
$
1,022,239

 
$
10,964

 
$
87,813

 
$
(429
)
 
$
1,120,587

Average aggregate invested assets, at fair value (1)
 
11,314,815

 
266,108

 
1,819,670

 
97,396

 
13,497,989

Financial Statement Portfolio Return
 
9.03
%
 
4.12
%
 
4.83
%
 
(0.44
)%
 
8.30
%

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Nine Months Ended September 30, 2018
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
 
 
(in thousands of U.S. dollars)
Net investment income:
 
 
 
 
 
 
 
 
 
 
Fixed maturities and cash and cash equivalents
 
$
155,141

 
$
3,751

 
$
25,153

 
$
1,118

 
$
185,163

Equity securities
 
2,719

 
36

 
1,033

 
—

 
3,788

Other investments and other
 
15,727

 
477

 
1,887

 
3,018

 
21,109

Gross investment income
 
173,587

 
4,264

 
28,073

 
4,136

 
210,060

Investment expenses
 
(5,398
)
 
(197
)
 
(2,123
)
 
(124
)
 
(7,842
)
Net investment income
 
$
168,189

 
$
4,067

 
$
25,950

 
$
4,012

 
$
202,218

 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains and losses:
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
$
(204,572
)
 
$
(1,966
)
 
$
(20,801
)
 
$
6

 
$
(227,333
)
Equity securities
 
4,315

 
157

 
5,249

 
—

 
9,721

Other investments
 
(30,572
)
 
(80
)
 
402

 
(6,809
)
 
(37,059
)
Net realized and unrealized losses
 
$
(230,829
)
 
$
(1,889
)
 
$
(15,150
)
 
$
(6,803
)
 
$
(254,671
)
 
 
 
 
 
 
 
 
 
 
 
Annualized income from cash and fixed maturities
 
$
206,855

 
$
5,001

 
$
33,537

 
$
1,491

 
$
246,884

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
 
7,625,029

 
265,920

 
1,508,229

 
163,643

 
9,562,821

Annualized Investment Book Yield
 
2.71
 %
 
1.88
%
 
2.22
%
 
0.91
 %
 
2.58
 %
 
 
 
 
 
 
 
 
 
 
 
Total financial statement return (2)
 
$
(62,640
)
 
$
2,178

 
$
10,800

 
$
(2,791
)
 
$
(52,453
)
Average aggregate invested assets, at fair value (1)
 
8,988,208

 
273,349

 
1,648,170

 
242,195

 
11,151,922

Financial Statement Portfolio Return
 
(0.70
)%
 
0.80
%
 
0.66
%
 
(1.15
)%
 
(0.47
)%
(1) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
(2) This is the sum of net investment income and net realized and unrealized gains (losses) from our U.S. GAAP consolidated financial statements.
Net Investment Income:
Net investment income increased by $39.7 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to a $48.2 million increase in net investment income from fixed maturities and cash and cash equivalents, principally due to an increase of $1,046.2 million in our average aggregate fixed maturities and cash and cash equivalents. The increase in our average aggregate fixed maturities and cash and cash equivalents was primarily due the AmTrust RITC, Amerisure and Maiden transactions in 2019. The book yield increased by 35 basis points, primarily due to the contractual yield received on the 2019 transactions and higher reinvestment rates.
Net Realized and Unrealized Gains (Losses):
Net realized and unrealized gains were $878.7 million for the nine months ended September 30, 2019 compared to net realized and unrealized losses of $254.7 million for the nine months ended September 30, 2018, a change of $1,133.4 million. Included in net realized and unrealized gains (losses) are the following items:
•
net realized and unrealized gains on fixed income securities, including fixed income securities within our funds held portfolios, of $578.8 million for the nine months ended September 30, 2019, compared to net realized and unrealized losses of $227.3 million for the nine months ended September 30, 2018, an increase of $806.1 million, primarily driven by higher valuations due to declining interest rates in the current period, compared to lower valuations in the comparative period due to increased sovereign yields;
•
net realized and unrealized gains on equity securities of $30.1 million for the nine months ended September 30, 2019, compared to $9.7 million for the nine months ended September 30, 2018, an increase of $20.3 million, primarily driven by a more favorable movement in international equity markets in 2019 compared to the comparative period; and

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•
net realized and unrealized gains on other investments and other items of $269.8 million for the nine months ended September 30, 2019, compared to realized and unrealized losses of $37.1 million for the nine months ended September 30, 2018, representing a change of $306.9 million. The unrealized gains for the nine months ended September 30, 2019 primarily comprised unrealized gains in our hedge funds, equity funds, fixed income funds and private equity funds, principally driven by declining interest rates and a more favorable movement in international equity markets in 2019. The unrealized losses for the nine months ended September 30, 2018 primarily comprised unrealized losses in our equity funds, call options on equity and hedge funds, partially offset by unrealized gains on our fixed income funds, CLO equities and private equities.

Liquidity and Capital Resources
Overview
Enstar aims to generate cash flows from our insurance operations and investments, preserve sufficient capital for future acquisitions, and develop relationships with lenders who provide borrowing capacity at competitive rates.
Our capital resources as of September 30, 2019 included total Enstar Group Limited shareholders' equity of $4.6 billion, redeemable noncontrolling interest of $434.8 million classified as temporary equity, and debt obligations of $1.2 billion. The redeemable noncontrolling interest may be settled in the future in cash or Enstar ordinary shares, at our option. Based on our current loss reserves position, our portfolios of in-force insurance and reinsurance business, and our investment positions, we believe we are well capitalized.
The following table details our capital position:
 
 
September 30,
2019
 
December 31,
2018
 
Change
 
 
(in thousands of U.S. dollars)
Ordinary shareholders' equity
 
$
4,127,800

 
$
3,391,933

 
$
735,867

Series D and E Preferred Shares
 
510,000

 
510,000

 
—

Total Enstar Group Limited Shareholders' Equity (A)
 
4,637,800

 
3,901,933

 
735,867

Noncontrolling interest
 
12,690

 
12,056

 
634

Total Shareholders' Equity (B)
 
4,650,490

 
3,913,989

 
736,501

 
 
 
 
 
 
 
Senior Notes
 
841,812

 
348,054

 
493,758

Revolving credit facility
 
20,000

 
15,000

 
5,000

Term loan facility
 
348,863

 
498,485

 
(149,622
)
Total debt (C)
 
1,210,675

 
861,539

 
349,136

 
 
 
 
 
 
 
Redeemable noncontrolling interest (D)
 
434,787

 
458,543

 
(23,756
)
 
 
 
 
 
 
 
Total capitalization = (B) + (C) + (D)
 
$
6,295,952

 
$
5,234,071

 
$
1,061,881

 
 
 
 
 
 
 
Total capitalization attributable to Enstar = (A) + (C)
 
$
5,848,475

 
$
4,763,472

 
$
1,085,003

 
 
 
 
 
 
 
Debt to total capitalization
 
19.2
%
 
16.5
%
 
2.7
%
Debt and Series D and E Preferred Shares to total capitalization
 
27.3
%
 
26.2
%
 
1.1
%
 
 
 
 
 
 
 
Debt to total capitalization attributable to Enstar
 
20.7
%
 
18.1
%
 
2.6
%
Debt and Series D and E Preferred Shares to total capitalization available to Enstar
 
29.4
%
 
28.8
%
 
0.6
%

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As of September 30, 2019, we had $832.6 million of cash and cash equivalents, excluding restricted cash that supports insurance operations, and included in this amount was $685.5 million held by foreign subsidiaries outside of Bermuda. Based on our group's current corporate structure with a Bermuda domiciled parent company and the jurisdictions in which we operate, if the cash and cash equivalents held by our foreign subsidiaries were to be distributed to us, as dividends or otherwise, such amounts would not be subject to incremental income taxes, however in certain circumstances withholding taxes may be imposed by some jurisdictions, including the United States. Based on existing tax laws, regulations and our current intentions, there was no accrual as of September 30, 2019 for any material withholding taxes on dividends or other distributions, as described in Note 18 - "Income Taxation" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Dividends
Enstar has not historically declared a dividend on its ordinary shares. We retain earnings and utilize distributions from our subsidiaries to invest in our business strategies. We do not currently expect to pay any dividends on our ordinary shares.
On June 28, 2018, we issued 16,000 Series D Preferred Shares with an aggregate liquidation value of $400.0 million. On November 21, 2018, we issued 4,400 Series E Preferred Shares with an aggregate liquidation value of $110.0 million. The dividends on the Series D and E Preferred Shares are non-cumulative and may be paid quarterly in arrears on the first day of March, June, September and December of each year, only when, as and if declared.
The following table details the dividends that have been declared and paid on our Series D and E Preferred Shares from January 1, 2019 to November 6, 2019:
 
 
 
 
 
 
 
 
Dividend per:
 
 
Preferred Share Series
 
Date Declared
 
Record Date
 
Date Paid or Payable
 
Preferred Share
 
Depositary Share
 
Total dividends paid and declared in the nine months ended September 30, 2019
 
 
 
 
 
 
 
 
(in U.S. dollars)
 
(in thousands of U.S. dollars)
Series D
 
February 21,
2019
 
February 15,
2019
 
March 1,
2019
 
$
437.50

 
$
0.43750

 
$
7,000

Series E
 
February 21,
2019
 
February 15,
2019
 
March 1,
2019
 
$
486.11

 
$
0.48611

 
2,139

Series D
 
May 3,
2019
 
May 15,
2019
 
June 1,
2019
 
$
437.50

 
$
0.43750

 
7,000

Series E
 
May 3,
2019
 
May 15,
2019
 
June 1,
2019
 
$
437.50

 
$
0.43750

 
1,925

Series D
 
August 5,
2019
 
August 15,
2019
 
September 3,
2019
 
$
437.50

 
$
0.43750

 
7,000

Series E
 
August 5,
2019
 
August 15,
2019
 
September 3,
2019
 
$
437.50

 
$
0.43750

 
1,925

Series D
 
November 5,
2019
 
November 15,
2019
 
December 2,
2019
 
$
437.50

 
$
0.43750

 
—

Series E
 
November 5,
2019
 
November 15,
2019
 
December 2,
2019
 
$
437.50

 
$
0.43750

 
—

 
 
 
 
 
 
 
 
 
 
 
 
$
26,989

Sources and Uses of Cash
Holding Company Liquidity
The potential sources of cash flows to Enstar as a holding company consist of cash flows from our subsidiaries including dividends, advances and loans, and interest income on loans to our subsidiaries. We also borrow under our credit and loan facilities, and we have also issued senior notes and preferred shares.

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We use cash to fund new acquisitions of companies and significant new business. We also utilize cash for our operating expenses associated with being a public company and to pay interest and principal on loans from subsidiaries and debt obligations, including loans under our credit facilities, our 4.50% senior notes due 2022 (the “2022 Senior Notes”) and our 4.95% senior notes due 2029 (the "2029 Senior Notes” and, together with the 2022 Senior Notes, the "Senior Notes").
We may, from time to time, raise capital from the issuance of equity, debt or other securities as we continuously evaluate our strategic opportunities. We filed an automatic shelf registration statement on October 10, 2017 with the U.S. Securities and Exchange Commission ("SEC") to allow us to conduct future offerings of certain securities, if desired, including debt, equity and other securities.
On March 26, 2019, we entered into a second supplemental indenture relating to our 2022 Senior Notes, which limits our right to redeem the 2022 Senior Notes at our option, except in the circumstances set forth in the second supplemental indenture. This change enabled the 2022 Senior Notes to qualify as Tier 3 capital under the eligible capital rules of the Bermuda Monetary Authority. Because this amendment did not materially and adversely affect the holders of or the coupons on the 2022 Senior Notes, entry into the second supplemental indenture did not require the consent of the holders of the 2022 Senior Notes. The 2029 Senior Notes qualify as Tier 3 capital under the eligible capital rules of the Bermuda Monetary Authority.
As we are a holding company and have no substantial operations of our own, our assets consist primarily of investments in subsidiaries and our loans and advances to subsidiaries. Dividends from our insurance subsidiaries are restricted by insurance regulation, as described below.
Operating Company Liquidity
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 Continental 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 "Item 1. Business - Regulation" in our Annual Report on Form 10-K for the year ended December 31, 2018. As of September 30, 2019, all of our insurance and reinsurance subsidiaries’ capital resources levels were in excess of the minimum levels required. The ability of our subsidiaries to pay dividends is subject to certain restrictions, as described in Note 22 - "Dividend Restrictions and Statutory Financial Information" to our consolidated financial statements included within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018. Variability in ultimate loss payments may also result in increased liquidity requirements for our subsidiaries.
In the Non-life Run-off segment, sources of funds primarily consist of cash and investment portfolios acquired on the completion of acquisitions and loss portfolio transfer reinsurance agreements. Cash balances acquired upon our purchase of insurance or reinsurance companies are classified as cash provided by investing activities. Cash acquired from loss portfolio transfer reinsurance agreements is classified as cash provided by operating activities. We expect to use funds acquired from cash and investment portfolios, collected premiums, collections from reinsurance debtors, fees and commission income, investment income and proceeds from sales and redemptions of investments to meet expected claims payments and operational expenses, with the remainder used for acquisitions and additional investments. In the Non-life Run-off segment, we generally expect negative operating cash flows to be met by positive investing cash flows.
In the Atrium and StarStone segments, we expect a net provision of cash from operations as investment income earned and collected premiums should generally be in excess of total net claim payments, losses incurred on earned premiums and operating expenses.
Overall, we expect our cash flows, together with our existing capital base and cash and investments acquired on the acquisition of insurance and reinsurance subsidiaries, to be sufficient to meet cash requirements and to operate our business.

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Cash Flows
The following table summarizes our consolidated cash flows provided by (used in) operating, investing and financing activities:
 
 
Nine Months Ended September 30,
 
 
 
 
2019
 
2018
 
Change
 
 
(in thousands of U.S. dollars)
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
640,234

 
$
90,955

 
$
549,279

Investing activities
 
(579,040
)
 
(411,352
)
 
(167,688
)
Financing activities
 
309,642

 
135,338

 
174,304

Effect of exchange rate changes on cash
 
(12,507
)
 
232

 
(12,739
)
Net increase (decrease) in cash and cash equivalents
 
358,329

 
(184,827
)
 
543,156

Cash and cash equivalents, beginning of period
 
982,584

 
1,212,836

 
(230,252
)
Cash and cash equivalents, end of period
 
$
1,340,913

 
$
1,028,009

 
$
312,904

Details of our consolidated cash flows are included in "Item 1. Financial Statements - Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018."
2019 versus 2018: Cash and cash equivalents increased by $358.3 million during the nine months ended September 30, 2019 compared with a decrease of $184.8 million during the nine months ended September 30, 2018.
For the nine months ended September 30, 2019, cash and cash equivalents increased by $358.3 million, as cash provided by operating and financing activities of $640.2 million and $309.6 million, respectively, was partially offset by cash used in investing activities of $579.0 million. Cash provided by operations was largely a result of the timing of paid losses and net sales of fixed maturities, trading. Cash provided by financing activities for the nine months ended September 30, 2019 was primarily attributable to the net debt obligations drawdown of $348.2 million due to the issuance of the 2029 Senior Notes, partially offset by a $150.0 million repayment of the Term Loan. Cash used in investing activities for the nine months ended September 30, 2019 primarily related to the net subscriptions of other investments of $272.1 million and the purchase of available-for-sale securities of $265.2 million. In addition, we are continuously seeking to deploy surplus operating cash into our investing activities.
For the nine months ended September 30, 2018, cash and cash equivalents decreased by $184.8 million, as cash used in investing activities of $411.4 million was partially offset by cash provided by operating and financing activities of $91.0 million and $135.3 million, respectively. Cash used in investing activities for the nine months ended September 30, 2018 was primarily related to net subscriptions of other investments of $444.0 million. Cash provided by operations was largely a result of net paid losses in our Non-life Run-off segment. Cash provided by financing activities for the nine months ended September 30, 2018 was primarily attributable to the net proceeds from the issuance of the Series D Preferred Shares of $389.2 million, partially offset by net repayment of loans of $248.8 million.
Investable Assets
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and cash equivalents and funds held. Investable assets were $14.0 billion as of September 30, 2019 as compared to $12.5 billion as of December 31, 2018, an increase of 11.8%. The increase was primarily due to unrealized gains recorded in the first half of 2019 and the investments and funds held balance acquired in relation to the AmTrust RITC, Amerisure and Maiden transactions.
For information regarding our investments strategy, portfolio and results, refer to "Investable Assets" above.
Reinsurance Balances Recoverable
As of September 30, 2019 and December 31, 2018, we had reinsurance balances recoverable on paid and unpaid losses of $2,265.4 million and $2,029.7 million, respectively.

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Our insurance and reinsurance run-off subsidiaries and portfolios, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. On an annual basis, both Atrium and StarStone purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s and StarStone's third-party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.
We 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.
For further information regarding our unaudited condensed reinsurance balances recoverable, refer to Note 6 - "Reinsurance Balances Recoverable on Paid and Unpaid Losses" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Debt Obligations
We utilize debt financing and loan facilities primarily for acquisitions, significant new business and, from time to time, for general corporate purposes. For information regarding our debt arrangements, including our loan covenants, refer to Note 13 - "Debt Obligations and Credit Facilities" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. Our debt obligations as of September 30, 2019 and December 31, 2018 were $1,210.7 million and $861.5 million, respectively, as detailed in the below table:
Facility
 
Origination Date
 
Term
 
September 30,
2019
 
December 31,
2018
4.50% Senior Notes due 2022
 
March 10, 2017
 
5 years
 
$
348,527

 
$
348,054

4.95% Senior Notes due 2029
 
May 28, 2019
 
10 years
 
493,285

 
—

Total Senior Notes
 
 
 
 
 
841,812

 
348,054

EGL Revolving Credit Facility
 
August 16, 2018
 
5 years
 
20,000

 
15,000

2018 EGL Term Loan Facility
 
December 27, 2018
 
3 years
 
348,863

 
498,485

Total debt obligations
 
 
 
$
1,210,675

 
$
861,539

Our debt obligations balance has increased from $861.5 million as of December 31, 2018 to $1,210.7 million as of September 30, 2019, primarily as a result of the issuance of the 2029 Senior Notes, partially offset by a $150.0 million repayment of the 2018 EGL Term Loan Facility.
On August 16, 2018, we and certain of our subsidiaries, as borrowers and guarantors, entered into a five-year unsecured $600.0 million revolving credit agreement. The credit agreement expires in August 2023 and we have the option to increase the commitments under the facility by up to an aggregate of $400.0 million. Borrowings under the facility will bear interest at a rate based on the Company's long term senior unsecured debt ratings. As of September 30, 2019, we were permitted to borrow up to an aggregate of $600.0 million under the facility. As of September 30, 2019, there was $580.0 million of available unutilized capacity under this facility. We are in compliance with the covenants of the facility. Subsequent to September 30, 2019, we fully repaid all the outstanding amounts under the facility bringing the unutilized capacity under this facility to $600.0 million.
On December 27, 2018, we entered into and fully utilized a three-year $500.0 million unsecured term loan (the "2018 EGL Term Loan Facility"). Interest is payable at least every three months at the London Interbank Offered Rate ("LIBOR") or the alternate base rate ("ABR") plus a margin set forth in the agreement. In the event of default, the interest rate may increase and the agent may, and at the request of the required lenders shall, cancel lender commitments and demand early repayment. The proceeds were partially used to fund the acquisition of Maiden Reinsurance North America, Inc. We repaid $50.0 million outstanding under the 2018 EGL Term Loan Facility using some of the proceeds from the issuance of our 2029 Senior Notes in May 2019 and repaid an additional $100.0 million in September 2019 using available funds on hand.
On May 28, 2019, we issued the 2029 Senior Notes for an aggregate principal amount of $500.0 million. The 2029 Senior Notes pay 4.95% interest semi-annually and mature on June 1, 2029. The 2029 Senior Notes are unsecured and unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated obligations, senior to any future obligations that are expressly subordinated to the 2029 Senior Notes, effectively subordinate to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and contractually subordinate to all liabilities of our subsidiaries.

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Letters of Credit
We utilize unsecured letters of credit to support our insurance and reinsurance obligations.
Funds at Lloyd's
On February 8, 2018, we amended and restated our unsecured letter of credit agreement for Funds at Lloyd's ("FAL Facility") to issue up to $325.0 million of letters of credit, with provision to increase the facility up to $400.0 million, subject to lenders approval. On February 12, 2019, we increased the facility up to $375.0 million and maintained the provision to increase the facility to $400.0 million. On November 6, 2019, we amended and restated the FAL Facility to extend its term by one year while maintaining the size of the facility at $375.0 million with a provision to increase it to $400.0 million. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2023. As of September 30, 2019, our combined Funds at Lloyd's were comprised of cash and investments of $758.8 million and unsecured letters of credit of $368.0 million.
$170 million Letter of Credit Facility
On December 26, 2018, we entered into an unsecured letter of credit facility to issue up to $170.0 million of letters of credit, which we use from time to time to support various reinsurance obligations of our subsidiaries. Pursuant to the facility agreement, we have the option to increase commitments under the facility in an aggregate amount up to $60.0 million. As of September 30, 2019 and December 31, 2018, we had issued an aggregate amount of letters of credit under this facility of $127.4 million and $78.4 million, respectively.
$600 million Letter of Credit Facility
On August 5, 2019, we entered into an unsecured $600.0 million letter of credit facility agreement, pursuant to which we may increase the commitments in an aggregate amount up to $75.0 million. The facility has been initially utilized to post letters of credit in the amount of $445.0 million to collateralize Enstar's reinsurance obligations relating to the Maiden Re adverse development cover transaction.  As of September 30, 2019, we had issued an aggregate amount of letters of credit under this facility of $445.0 million.


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Contractual Obligations
The following table summarizes, as of September 30, 2019, our future payments under contractual obligations and estimated payments for losses and LAE and policy benefits by expected payment date and updates the table on page 99 of our Annual Report on Form 10-K for the year ended December 31, 2018. The table excludes short-term liabilities and includes only obligations that are expected to be settled in cash.  
  
Total
 
Less than or equal to 1 year
 
More than 1 year - less than or equal to 3 years
 
More than 3 years - less than or equal to 5 years
 
More than 5 years - less than or equal to 10 years
 
More than
10 Years
 
(in millions of U.S. dollars)
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Estimated gross reserves for losses and LAE (1)
 
 
 
 
 
 
 
 
 
 
 
Asbestos
$
1,469.6

 
$
89.1

 
$
165.0

 
$
154.6

 
$
275.2

 
$
785.7

Environmental
221.0

 
20.2

 
37.2

 
32.8

 
51.7

 
79.1

General Casualty
1,047.9

 
228.3

 
278.5

 
199.5

 
202.1

 
139.5

Workers' compensation/personal accident
2,420.2

 
231.4

 
332.6

 
350.5

 
519.7

 
986.0

Marine, aviation and transit
446.3

 
131.6

 
142.9

 
63.0

 
55.9

 
52.9

Construction defect
141.8

 
34.4

 
50.4

 
28.5

 
20.1

 
8.4

Professional indemnity/ Directors & Officers
973.9

 
259.8

 
325.9

 
165.7

 
132.7

 
89.8

Motor
731.5

 
244.0

 
209.2

 
86.5

 
74.4

 
117.4

Property
187.8

 
74.2

 
61.5

 
24.6

 
15.7

 
11.8

Other
346.1

 
82.0

 
90.4

 
49.8

 
55.8

 
68.1

Total Non-Life Run-off
7,986.1

 
1,395.0

 
1,693.6

 
1,155.5

 
1,403.3

 
2,338.7

Atrium
225.2

 
92.5

 
81.3

 
31.1

 
17.0

 
3.3

StarStone
1,812.4

 
641.6

 
648.9

 
264.8

 
184.1

 
73.0

Other
24.3

 
3.6

 
9.8

 
4.7

 
4.1

 
2.1

ULAE
350.2

 
64.1

 
79.7

 
49.2

 
57.8

 
99.4

Estimated gross reserves for losses and LAE (1)
10,398.2

 
2,196.8

 
2,513.3

 
1,505.3

 
1,666.3

 
2,516.5

 
 
 
 
 
 
 
 
 
 
 
 
Operating lease obligations
59.6

 
13.3

 
19.1

 
13.4

 
11.7

 
2.1

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Investment commitments to private equity funds
368.6

 
142.7

 
119.4

 
106.5

 
—

 
—

Investment commitments to equity method investments
124.3

 
124.3

 
—

 
—

 
—

 
—

Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Loan repayments (including estimated interest payments)
1,544.8

 
55.7

 
793.8

 
71.5

 
623.8

 
—

Total
$
12,495.5

 
$
2,532.8

 
$
3,445.6

 
$
1,696.7

 
$
2,301.8

 
$
2,518.6

(1) 
The reserves for losses and LAE represent management’s estimate of the ultimate cost of settling losses. The estimation of losses is based on various complex and subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our financial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may be significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different from the amounts disclosed above. The amounts in the above table represent our estimates of known liabilities as of September 30, 2019 and do not take into account corresponding reinsurance balance recoverable amounts that would be due to us. Furthermore, certain of the reserves included in the unaudited condensed consolidated financial statements as of September 30, 2019 were acquired by us and initially recorded at fair value with subsequent amortization, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect the fair value adjustment in the amount payable.

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In addition to the contractual obligations in the table above, we also have the right to purchase the redeemable noncontrolling interests ("RNCI") from the RNCI holders at certain times in the future (each such right, a "call right") and the RNCI holders have the right to sell their RNCI to us at certain times in the future (each such right, a "put right"). The RNCI rights are described in Note 21 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018.
For additional information relating to our commitments and contingencies, see Note 20 - "Commitments and Contingencies" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
At September 30, 2019, we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies
Our critical accounting policies are discussed in Management's Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2018 and have not materially changed.
Non-GAAP Financial Measures
In addition to presenting net earnings (losses) attributable to Enstar Group Limited ordinary shareholders and diluted earnings (losses) per ordinary share determined in accordance with U.S. GAAP, we believe that presenting non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders and fully diluted non-GAAP operating income (loss) per ordinary share, non-GAAP financial measures as defined in Item 10(e) of Regulation S-K, provides investors with valuable measures of our performance.
Non-GAAP operating income (loss) excludes: (i) net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed, (ii) change in fair value of insurance contracts for which we have elected the fair value option, (iii) gain (loss) on sale of subsidiaries, (iv) net earnings (loss) from discontinued operations, (v) tax effect of these adjustments where applicable, and (vi) attribution of share of adjustments to noncontrolling interest where applicable. We eliminate the impact of net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed and change in fair value of insurance contracts for which we have elected the fair value option because these items are subject to significant fluctuations in fair value from period to period, driven primarily by market conditions and general economic conditions, and therefore their impact on our earnings is not reflective of the performance of our core operations.  We eliminate the impact of gain (loss) on sale of subsidiaries and net earnings (loss) from discontinued operations as these are non-recurring rather than being reflective of the performance of our core operations.
Further, these non-GAAP measures enable readers of the consolidated financial statements to more easily analyze our results in a manner more aligned with the manner in which management analyzes our underlying performance. We believe that presenting these non-GAAP financial measures, which may be defined and calculated differently by other companies, improves the understanding of our consolidated results of operations. These measures should not be viewed as a substitute for those calculated in accordance with U.S. GAAP.

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Non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders is calculated by the addition or subtraction of certain items from within our consolidated statements of earnings to or from net earnings (loss) attributable to Enstar Group Limited ordinary shareholders, the most directly comparable GAAP financial measure, as illustrated in the table below:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(expressed in thousands of U.S. dollars, except share and per share data)
Net earnings (loss) attributable to Enstar Group Limited ordinary shareholders
$
117,743

 
$
(15,965
)
 
$
708,336

 
$
(48,931
)
Adjustments:
 
 
 
 
 
 
 
Net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed (1)
(137,962
)
 
24,531

 
(578,789
)
 
227,333

Change in fair value of insurance contracts for which we have elected the fair value option
41,374

 
(9,107
)
 
135,377

 
(32,115
)
Tax effects of adjustments (2)
12,663

 
(1,207
)
 
55,048

 
(17,167
)
Adjustments attributable to noncontrolling interest (3)
2,210

 
(799
)
 
18,949

 
(9,089
)
Non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders (4)
$
36,028

 
$
(2,547
)
 
$
338,921

 
$
120,031

 
 
 
 
 
 
 
 
Diluted net earnings (loss) per ordinary share
$
5.42

 
$
(0.74
)
 
$
32.58

 
$
(2.39
)
Adjustments:
 
 
 
 
 
 
 
Net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed (1)
(6.34
)
 
1.14

 
(26.62
)
 
11.02

Change in fair value of insurance contracts for which we have elected the fair value option
1.90

 
(0.42
)
 
6.23

 
(1.55
)
Tax effects of adjustments (2)
0.58

 
(0.06
)
 
2.53

 
(0.83
)
Adjustments attributable to noncontrolling interest (3)
0.10

 
(0.04
)
 
0.87

 
(0.44
)
Diluted non-GAAP operating income (loss) per ordinary share (4)
$
1.66

 
$
(0.12
)
 
$
15.59

 
$
5.81

 
 
 
 
 
 
 
 
Weighted average ordinary shares outstanding - diluted
21,720,497

 
21,665,356

 
21,741,499

 
20,653,544

(1) Represents the net realized and unrealized gains and losses related to fixed maturity securities. Our fixed maturity securities are held directly on our balance sheet and also within the "Funds held - directly managed" balance. The changes in the value of these managed funds held balances are described in our financial statement notes as: (i) funds held - directly managed, (ii) embedded derivative on funds held - directly managed, and (iii) the fair value option on funds held - directly managed. Refer to Note 4 - "Investments" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q for further details on our net realized and unrealized gains and losses.
(2) Represents an aggregation of the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates, calculated at the applicable jurisdictional tax rate.
(3) Represents the impact of the adjustments on the net earnings (loss) attributable to noncontrolling interest associated with the specific subsidiaries to which the adjustments relate.
(4) Non-GAAP financial measure.

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Cautionary Statement Regarding Forward-Looking Statements
This quarterly report and the documents incorporated by reference contain statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our ordinary shares and the insurance and reinsurance sectors in general. Statements that include words such as "estimate," "project," "plan," "intend," "expect," "anticipate," "believe," "would," "should," "could," "seek," "may" and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not statements of historical fact, reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward looking statements should, therefore, be considered in light of various important factors, including those set forth in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2018. These factors include:
•
risks associated with implementing our business strategies and initiatives;
•
the adequacy of our loss reserves and the need to adjust such reserves as claims develop over time;
•
risks relating to our acquisitions, including our ability to evaluate opportunities, successfully price acquisitions, evaluate opportunities, address operational challenges, support our planned growth and assimilate acquired companies into our internal control system in order to maintain effective internal controls, provide reliable financial reports and prevent fraud;
•
risks relating to our active underwriting businesses, including unpredictability and severity of catastrophic and other major loss events, failure of risk management and loss limitation methods, the risk of a ratings downgrade or withdrawal, cyclicality of demand and pricing in the insurance and reinsurance markets;
•
risks relating to the performance of our investment portfolio and our ability to structure our investments in a manner that recognizes our liquidity needs;
•
changes and uncertainty in economic conditions, including interest rates, inflation, currency exchange rates, equity markets and credit conditions, which could affect our investment portfolio, our ability to finance future acquisitions and our profitability;
•
the risk that ongoing or future industry regulatory developments will disrupt our business, affect the ability of our subsidiaries to operate in the ordinary course or to make distributions to us, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;
•
risks relating to the variability of statutory capital requirements and the risk that we may require additional capital in the future, which may not be available or may be available only on unfavorable terms;
•
risks relating to the availability and collectability of our reinsurance;
•
losses due to foreign currency exchange rate fluctuations;
•
increased competitive pressures, including the consolidation and increased globalization of reinsurance providers;
•
emerging claim and coverage issues;
•
lengthy and unpredictable litigation affecting assessment of losses and/or coverage issues;
•
loss of key personnel;
•
the ability of our subsidiaries to distribute funds to us and the resulting impact on our liquidity;
•
our ability to comply with covenants in our debt agreements;
•
changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at management’s discretion;
•
operational risks, including system, data security or human failures and external hazards;

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•
risks relating to our ability to obtain regulatory approvals, including the timing, terms and conditions of any such approvals, and to satisfy other closing conditions in connection with our acquisition agreements, which could affect our ability to complete acquisitions;
•
our ability to implement our strategies relating to our active underwriting businesses;
•
risks relating to our subsidiaries with liabilities arising from legacy manufacturing operations;
•
tax, regulatory or legal restrictions or limitations applicable to us or the insurance and reinsurance business generally;
•
changes in tax laws or regulations applicable to us or our subsidiaries, or the risk that we or one of our non-U.S. subsidiaries become subject to significant, or significantly increased, income taxes in the United States or elsewhere;
•
changes in Bermuda law or regulation or the political stability of Bermuda; and
•
changes in accounting policies or practices.
The factors listed above should be not construed as exhaustive and should be read in conjunction with the other cautionary statements and Risk Factors that are included in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2018. We undertake no obligation to publicly update or review any forward looking statement, whether to reflect any change in our expectations with regard thereto, or as a result of new information, future developments or otherwise, except as required by law.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following risk management discussion and the estimated amounts generated from sensitivity analysis presented are forward-looking statements of market risk assuming certain market conditions occur. Future results may differ materially from these estimated results due to, among other things, actual developments in the global financial markets, changes in the composition of our investment portfolio, or changes in our business strategies. The results of analysis we use to assess and mitigate risk are not projections of future events or losses. See "Cautionary Statement Regarding Forward-Looking Statements" for additional information regarding our forward-looking statements.
We are principally exposed to four types of market risk: interest rate risk, credit risk, equity price risk and foreign currency risk. Our policies to address these risks in 2019 are not materially different than those used in 2018, other than as described herein, and, based on our current knowledge and expectations, we do not currently anticipate significant changes in our market risk exposures or in how we will manage those exposures in future reporting periods.
Interest Rate and Credit Spread Risk
Interest rate risk is the price sensitivity of a security to changes in interest rates. Our investment portfolio and funds held - directly managed includes fixed maturity and short-term investments and we also have investments in fixed income funds and fixed income exchange-traded funds, whose fair values will fluctuate with changes in interest rates. We attempt to maintain adequate liquidity in our fixed maturity investments portfolio with a strategy designed to emphasize the preservation of our invested assets and provide sufficient liquidity for the prompt payment of claims and contract liabilities, as well as for settlement of commutation payments. We also monitor the duration and structure of our investment portfolio.
The following table summarizes the aggregate hypothetical change in fair value from an immediate parallel shift in the treasury yield curve, assuming credit spreads remain constant, in our fixed maturity and short-term investments portfolio classified as trading and available-for-sale, our funds held directly managed portfolio, fixed income funds and our fixed income exchange-traded funds:
 
 
Interest Rate Shift in Basis Points
As of September 30, 2019
 
-100
 
-50
 
—
 
+50
 
+100
 
 
(in millions of U.S. dollars)
Total Market Value
 
$
10,092

 
$
9,857

 
$
9,612

 
$
9,373

 
$
9,144

Market Value Change from Base
 
5.0
%
 
2.5
%
 
—

 
(2.5
)%
 
(4.9
)%
Change in Unrealized Value
 
$
480

 
$
245

 
$
—

 
$
(239
)
 
$
(468
)
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
-100
 
-50
 
—
 
+50
 
+100
Total Market Value
 
$
9,555

 
$
9,325

 
$
9,101

 
$
8,885

 
$
8,677

Market Value Change from Base
 
5.0
%
 
2.5
%
 
—

 
(2.4
)%
 
(4.7
)%
Change in Unrealized Value
 
$
454

 
$
224

 
$
—

 
$
(216
)
 
$
(424
)
Actual shifts in interest rates may not change by the same magnitude across the maturity spectrum or on an individual security and, as a result, the impact on the fair value of our fixed maturity securities, short-term investments, funds held - directly managed and fixed income exchange-traded fund may be materially different from the resulting change in value indicated in the tables above.

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The following table summarizes the aggregate hypothetical change in fair value from an immediate parallel shift in credit spreads assuming interest rates remain fixed, in our fixed maturity and short-term investments portfolio classified as trading and available-for-sale, our funds held directly managed portfolio, fixed income funds and our fixed income exchange-traded funds:
 
 
Credit Spread Shift in Basis Points
As at September 30, 2019
 
—
 
+50
 
+100
 
 
(in millions of U.S. dollars)
Total Market Value
 
$
9,612

 
$
9,404

 
$
9,203

Market Value Change from Base
 
 
 
(2.2
)%
 
(4.3
)%
Change in Unrealized Value
 
 
 
$
(208
)
 
$
(409
)
 
 
 
 
 
 
 
As at December 31, 2018
 
—
 
+50
 
+100
Total Market Value
 
$
9,101

 
$
8,896

 
$
8,699

Market Value Change from Base
 
 
 
(2.3
)%
 
(4.4
)%
Change in Unrealized Value
 
 
 
$
(205
)
 
$
(402
)
Credit Risk
Credit risk relates to the uncertainty of a counterparty’s ability to make timely payments in accordance with contractual terms of the instrument or contract. We are exposed to direct credit risk primarily within our portfolios of fixed maturity and short-term investments, and through customers, brokers and reinsurers in the form of premiums receivable, reinsurance balances recoverable, and funds held by reinsured companies, as discussed below.
Fixed Maturity and Short-Term Investments
As a holder of $8.9 billion of fixed maturity and short-term investments, we also have exposure to credit risk as a result of investment ratings downgrades or issuer defaults. In an effort to mitigate this risk, our investment portfolio consists primarily of investment grade-rated, liquid, fixed maturity investments of short-to-medium duration and mutual funds. A table of credit ratings for our fixed maturity and short-term investments is in Note 4 - "Investments" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. In addition, we manage our portfolio pursuant to guidelines that follow what we believe are prudent standards of diversification. The guidelines limit the allowable holdings of a single issue and issuers and, as a result, we do not believe we have significant concentrations of credit risk. A summary of our fixed maturity and short-term investments by credit rating is as follows:
Credit rating
September 30, 2019
 
December 31, 2018
 
Change
AAA
24.4
%
 
28.2
%
 
(3.8
)%
AA
14.8
%
 
14.4
%
 
0.4
 %
A
33.4
%
 
30.2
%
 
3.2
 %
BBB
22.5
%
 
23.4
%
 
(0.9
)%
Non-investment grade
4.5
%
 
3.6
%
 
0.9
 %
Not rated
0.4
%
 
0.2
%
 
0.2
 %
Total
100.0
%
 
100.0
%
 

 
 
 
 
 
 
Average credit rating
A+

 
A+

 
 
Reinsurance Balances Recoverable
We have exposure to credit risk as it relates to our reinsurance balances recoverable. Our insurance subsidiaries remain liable to the extent that retrocessionaires do not meet their contractual obligations and, therefore, we evaluate and monitor concentration of credit risk among our reinsurers. A discussion of our reinsurance balances recoverable is in Note 6 - "Reinsurance Balances Recoverable on Paid and Unpaid Losses" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.

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Funds Held
Under funds held arrangements, the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable are deducted. We are subject to credit risk if the reinsured company is unable to honor the value of the funds held balances, such as in the event of insolvency. However, we generally have the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by us to the reinsured for losses payable and other amounts contractually due. Our funds held are shown under two categories on the consolidated balance sheets, where funds held upon which we receive the underlying portfolio economics are shown as "Funds held - directly managed", and funds held where we receive a fixed crediting rate are shown as "Funds held by reinsured companies". Both types of funds held are subject to credit risk. We routinely monitor the creditworthiness of reinsured companies with whom we have funds held arrangements. As of September 30, 2019, we have a significant concentration of $1,049.8 million to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's.
Equity Price Risk
Our portfolio of equity investments, excluding our fixed income exchange-traded funds but including the equity funds and call options on equities included in other investments (collectively, "equities at risk"), has exposure to equity price risk, which is the risk of potential loss in fair value resulting from adverse changes in stock prices. Our fixed income exchange-traded funds are excluded from the below analysis and have been included within the interest rate and credit spread risk analysis, as the exchange-traded funds are part of our fixed income investment strategy. Our global equity portfolio is correlated with a blend of the S&P 500 and MSCI World indices, and changes in this blend of indices would approximate the impact on our portfolio. The following table summarizes the aggregate hypothetical change in fair value from a 10% decline in the overall market prices of our equities at risk:
 
September 30,
2019
 
December 31,
2018
 
Change
 
(in millions of U.S. dollars)
Publicly traded equity investments in common and preferred stocks
$
312.7

 
$
138.4

 
$
174.3

Privately held equity investments in common and preferred stocks
231.7

 
228.7

 
3.0

Private equity funds
305.8

 
248.6

 
57.2

Equity funds
373.8

 
333.7

 
40.1

Call options on equity
1.9

 
—

 
1.9

Fair value of equities at risk
$
1,225.9

 
$
949.4

 
$
276.5

 
 
 
 
 

Impact of 10% decline in fair value
$
122.6

 
$
94.9

 
$
27.7

In addition to the above, at September 30, 2019 we had investments of $997.6 million (December 31, 2018: $852.6 million) in hedge funds, included within our other investments, at fair value, that have exposure, among other items, to equity price risk.
Foreign Currency Risk
Our foreign currency policy is to broadly manage, where possible, our foreign currency risk by seeking to match our liabilities under insurance and reinsurance policies that are payable in foreign currencies with assets that are denominated in such currencies, subject to regulatory constraints. In addition, we may selectively utilize foreign currency forward contracts to mitigate foreign currency risk. To the extent our foreign currency exposure is not matched or hedged, we may experience foreign exchange losses or gains, which would be reflected in our results of operations and financial condition.

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Through our subsidiaries located in various jurisdictions, we conduct our insurance and reinsurance operations in a variety of non-U.S. currencies. The functional currency for the majority of our subsidiaries is the U.S. dollar. Fluctuations in foreign currency exchange rates relative to a subsidiary's functional currency will have a direct impact on the valuation of our assets and liabilities denominated in other currencies. All changes in foreign exchange rates, with the exception of non-U.S. dollar denominated investments classified as available-for-sale, are recognized in foreign exchange gains (losses) in our unaudited condensed consolidated statements of earnings. Changes in foreign exchange rates relating to non-U.S. dollar denominated investments classified as available-for-sale are recorded in unrealized gains (losses) on investments, which is a component of accumulated other comprehensive income (loss) in shareholders’ equity.
We have exposure to foreign currency risk through our ownership of European, British and Australian subsidiaries, and equity method investments, whose functional currencies are the Euro, British pound and Australian dollar, respectively. The foreign exchange gain or loss resulting from the translation of their financial statements from functional currency into U.S. dollars is recorded in the cumulative translation adjustment account, which is a component of accumulated other comprehensive income (loss) in shareholders’ equity. During the year ended December 31, 2018, we fully repaid our borrowing of Euros under our revolving credit facility, which was hedging the foreign currency exposure on our net investment in certain of our subsidiaries whose functional currency is denominated in Euros, and replaced the hedge with a Euro-denominated foreign currency forward contract. During the nine months ended September 30, 2019 and 2018, we utilized forward exchange contracts to hedge the foreign currency exposure on our net investment in certain of our subsidiaries, and equity method investments whose functional currencies are denominated in Euros, British pounds and Australian dollars. The loan and the forward contracts are discussed in Note 5 - "Derivatives and Hedging Instruments" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report. We utilized hedge accounting to record the foreign exchange gain or loss on these instruments in the cumulative translation account.
In addition, we also have exposure to foreign currency risk through our investment and run-off portfolios and from time to time, we may utilize foreign currency forward contracts to hedge these foreign currency exposures in British pounds, Canadian dollars, Euros and Australian dollars which were not designated for hedge accounting.
The table below summarizes our net exposures to foreign currencies:
As of September 30, 2019
 
AUD
 
CAD
 
EUR
 
GBP
 
Other
 
Total
 
 
(in millions of U.S. dollars)
Total net foreign currency exposure
 
$
(21.7
)
 
$
(30.2
)
 
$
32.8

 
$
14.5

 
$
1.2

 
$
(3.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax impact of a 10% movement of the U.S. dollar(1)
 
$
(2.2
)
 
$
(3.0
)
 
$
3.3

 
$
1.5

 
$
0.1

 
$
(0.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
AUD
 
CAD
 
EUR
 
GBP
 
Other
 
Total
 
 
(in millions of U.S. dollars)
Total net foreign currency exposure
 
$
17.5

 
$
20.2

 
$
17.2

 
$
(35.8
)
 
$
1.7

 
$
20.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax impact of a 10% movement of the U.S. dollar(1)
 
$
1.8

 
$
2.0

 
$
1.7

 
$
(3.6
)
 
$
0.2

 
$
2.1

(1) 
Assumes 10% change in the U.S. dollar relative to other currencies
Effects of Inflation
Inflation may have a material effect on our consolidated results of operations by its effect on our assets and our liabilities. Inflation could lead to higher interest rates, resulting in a decrease in the market value of our fixed maturity portfolio. We may choose to hold our fixed maturity investments to maturity, which would result in the unrealized gains or losses accreting back over time. Inflation may also affect the value of certain of our liabilities, primarily our estimate for losses and LAE, such as our cost of claims which includes medical treatments, litigation costs and judicial awards. Although our estimate for losses and LAE is established to reflect the likely payments in the future, we would be subject to the risk that inflation could cause these amounts to be greater than the current estimate for losses and LAE. We seek to take this into account when setting reserves and pricing new business.

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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2019. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that we maintained effective disclosure controls and procedures to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and timely reported as specified in the rules and forms of the U.S. Securities and Exchange Commission and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of legal proceedings, see Note 20 - "Commitments and Contingencies" in the notes to our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Our results of operations and financial condition are subject to numerous risks and uncertainties described in “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. The risk factors identified therein have not materially changed, except as set forth below:
Recently enacted U.S. tax reform legislation, various international tax transparency initiatives, and possible future tax reform legislation and regulations could materially affect us and our shareholders.

On December 22, 2017, the US government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act is broad and contains many provisions that will have significant implications on us, and potentially on our shareholders, including re-measurement of deferred taxes and surplus due to the reduction in corporation income tax rate, and imposition of a new base-erosion anti-abuse tax (“BEAT”) on affiliate transactions (including reinsurance arrangements between affiliated companies). In response to the introduction of BEAT, we non-renewed (as of January 1, 2018) certain of our active underwriting affiliate reinsurance transactions between our operating entities that are subject to U.S. taxation and our non-U.S. affiliates that are not. We continue to assess the future impact of BEAT on our transaction structuring.
The Tax Act also includes modifications of the taxation of non-U.S. companies owned by U.S. shareholders. Certain aspects of the Tax Act require clarification through future regulatory action and accordingly, we are unable to definitively determine the impact to our shareholders. The Tax Act may increase the likelihood that we or our non-U.S. subsidiaries or joint ventures managed by us will be deemed a “controlled foreign corporation” (CFC) within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”) for U.S. federal tax purposes. Specifically, the Tax Act expands the definition of “United States shareholder” for CFC purposes to include U.S. persons who own, directly or constructively, 10% or more of the value of a non-U.S. corporation’s shares, rather than looking only to voting power held. The Tax Act also expands certain attribution rules for share ownership in a way that would cause non-U.S. subsidiaries to now be treated as CFCs if owned in a group, such as Enstar, that has a non-U.S. parent company and also includes at least one U.S. subsidiary. In the event a corporation is characterized as a CFC, any “United States shareholder” of the CFC is required to include in taxable income each year the shareholder’s proportionate share of certain insurance and related investment income for the taxable year, even if such income is not distributed.
The Tax Act also contains modifications to certain provisions relating to passive foreign investment company (“PFIC”) status that if applicable to us could result in adverse tax consequences to U.S. persons who own our ordinary shares. On July 10, 2019, the U.S. Internal Revenue Service and Department of the Treasury released proposed regulations relating to PFICs that may have an impact on foreign insurance companies and their investors, and other participants in transactions involving foreign insurers. The new proposed regulations withdraw a set of proposed regulations that were issued in April 2015.  The proposed regulations provide guidance relating to changes in the PFIC regime made by the Tax Act, address the application and interaction of certain “look-through” rules contained in the Internal Revenue Code and introduce new rules relating to the determination of the “active conduct” test. While the proposed regulations make it more difficult to qualify for certain exceptions to PFIC status, we believe that we will not be a PFIC for U.S. federal income purposes for the foreseeable future under the proposed regulations. In particular, we believe that the income of our non-U.S. subsidiaries that are insurance companies is derived in the "active conduct of an insurance business" by corporations that are predominately engaged in such business under the provision of the Tax Act, and that this is also the case for us when the operations of our subsidiaries are considered as a whole, under the look-through rules applicable to foreign holding companies. There are currently no final regulations regarding the application of the PFIC provisions of the Code to an insurance company, so the application of those provisions to insurance companies remains unclear in certain respects. The proposed regulations are expected to become final in early 2020.

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The U.S. and other countries and governing bodies have also enacted reform legislation aimed at increasing transparency on companies’ global tax footprint and profile. The Organization for Economic Co-operation and Development (the "OECD") is an intergovernmental economic organization founded to stimulate economic progress and trade. It develops economic policy recommendations to encourage policy reform in member countries. Created by the OECD under the initiative known as the “Base Erosion and Profit Shifting Project (“BEPS”), “Country-by-Country Reporting” (Action 13) aims to ensure that multi-national businesses provide appropriate and accurate information to each respective member and non-member region based on various metrics. These metrics are directed at counteracting the effects of global preferential tax regimes and increasing tax transparency. Bermuda has adopted OECD compliant Country-by-Country Reporting regulations for Bermuda headquartered companies which requires the Company to file a report containing results of our global operations. It is uncertain how cooperating jurisdictions, including those in which we operate, will utilize the data collected in our Bermuda filing. These initiatives could increase the burden and costs of compliance.
In December 2017, the EU Code Group included Bermuda on a list of jurisdictions that it was putting on notice of being considered to be non-cooperative for tax purposes. To avoid such consideration, Bermuda passed The Economic Substance Act 2018 (the “ESA”) in December 2018, which came into effect on January 1, 2019 and requires compliance by pre-existing entities on July 1, 2019. The legislation requires Bermuda companies engaging in a “relevant activity” (which includes insurance business and holding entity activities) to be locally managed and directed, to carry on core income generating activities in Bermuda, to maintain adequate physical presence in Bermuda, and to have an adequate level of local full time qualified employees and incur adequate operating expenditure in Bermuda. The guidance as to how Bermuda authorities will interpret and enforce the ESA is pending, and we therefore cannot predict their potential impact on our results of operations and financial condition. In the event that we are required to maintain additional staff or operations in Bermuda, we may incur increased operating expenditures that could negatively impact our results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The Company did not repurchase any of its shares during the three months ended September 30, 2019. The Company does not have a share repurchase program.

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ITEM 6. EXHIBITS
Exhibit
No.
  
Description
  
Memorandum of Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-K/A filed on May 2, 2011).
 
 
 
  
Fifth Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on June 13, 2019).
 
 
 
  
Certificate of Designations of Series C Participating Non-Voting Perpetual Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on June 17, 2016).
 
 
 
 
Certificate of Designations of 7.00% fixed-to-floating rate perpetual non-cumulative preference shares, Series D (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on June 27, 2018).
 
 
 
 
Certificate of Designations of 7.00% perpetual non-cumulative preference shares, Series E (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on November 21, 2018).
 
 
 
 
Letter of Credit Facility Agreement, dated as of August 5, 2019, by and among Enstar Group Limited and certain of its subsidiaries, National Australia Bank Limited, London Branch, The Bank of Nova Scotia and each of the lenders party thereto (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed August 7, 2019).
 
 
 
  
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
  
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
104
 
Cover page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)
________________________________
*     filed herewith
** furnished herewith
† Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby agrees to supplementally furnish to the SEC upon request any omitted schedule or exhibit.



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 6, 2019.
 
ENSTAR GROUP LIMITED
 
 
By:
/S/ GUY BOWKER
 
Guy Bowker
Chief Financial Officer, Authorized Signatory, Principal Financial Officer and Principal Accounting Officer



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