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Enstar Group LTD - Quarter Report: 2019 March (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 March 31, 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% Fixed-to-Floating Rate Perpetual Non-Cumulative Preferred Share, Series D, Par Value $1.00 Per Share
ESGRP
The NASDAQ Stock Market LLC
Depositary Shares, Each Representing a 1/1,000th Interest in a 7.00% Perpetual Non-Cumulative Preferred Share, Series E, Par Value $1.00 Per Share
ESGRO
The NASDAQ Stock Market LLC
As at May 7, 2019, the registrant had outstanding 17,971,679 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 March 31, 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
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2019 (unaudited) and December 31, 2018
 
March 31,
2019
 
December 31,
2018
 
(expressed in thousands of U.S. dollars, except share data)
ASSETS
 
 
 
Short-term investments, trading, at fair value
$
76,060

 
$
114,116

Fixed maturities, trading, at fair value
7,317,054

 
7,248,793

Fixed maturities, available-for-sale, at fair value (amortized cost: 2019 — $142,675; 2018 — $151,433)
146,575

 
151,609

Funds held - directly managed
1,288,210

 
1,198,154

Equities, at fair value
400,420

 
367,125

Other investments, at fair value
2,324,345

 
1,957,757

Equity method investments
221,023

 
204,507

Total investments (Note 3 and Note 8)
11,773,687

 
11,242,061

Cash and cash equivalents
718,050

 
602,096

Restricted cash and cash equivalents
427,601

 
380,488

Premiums receivable
719,979

 
787,468

Deferred tax assets (Note 17)
9,062

 
10,124

Prepaid reinsurance premiums
208,558

 
198,990

Reinsurance balances recoverable (Note 5)
1,551,190

 
1,290,072

Reinsurance balances recoverable, at fair value (Note 5 and Note 8)
735,257

 
739,591

Funds held by reinsured companies
919,738

 
321,267

Deferred acquisition costs
195,733

 
121,101

Goodwill and intangible assets (Note 11)
218,160

 
218,725

Other assets
581,236

 
644,287

TOTAL ASSETS
$
18,058,251

 
$
16,556,270

 
 
 
 
LIABILITIES
 
 
 
Losses and loss adjustment expenses (Note 7)
$
7,248,229

 
$
6,535,449

Losses and loss adjustment expenses, at fair value (Note 7 and Note 8)
2,847,793

 
2,874,055

Policy benefits for life and annuity contracts (Note 9)
100,682

 
105,080

Unearned premiums
951,042

 
842,618

Insurance and reinsurance balances payable
455,738

 
388,086

Deferred tax liabilities (Note 17)
9,204

 
10,542

Debt obligations (Note 12)
1,103,790

 
861,539

Other liabilities
605,263

 
566,369

TOTAL LIABILITIES
13,321,741

 
12,183,738

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 19)

 

 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST (Note 13)
456,346

 
458,543

 
 
 
 
SHAREHOLDERS’ EQUITY (Note 14)
 
 
 
Ordinary shares (par value $1 each, issued and outstanding 2019: 21,467,515; 2018: 21,459,997):

 

Voting Ordinary shares (issued and outstanding 2019: 17,957,833; 2018: 17,950,315)
17,958

 
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
1,809,107

 
1,804,664

Accumulated other comprehensive income
13,279

 
10,440

Retained earnings
2,335,028

 
1,976,539

Total Enstar Group Limited Shareholders’ Equity
4,267,712

 
3,901,933

Noncontrolling interest
12,452

 
12,056

TOTAL SHAREHOLDERS’ EQUITY
4,280,164

 
3,913,989

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
$
18,058,251

 
$
16,556,270

See accompanying notes to the unaudited condensed consolidated financial statements

2
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 2019 and 2018
 
Three Months Ended March 31,
 
2019
 
2018
 
(expressed in thousands of U.S. dollars,
except share and per share data)
INCOME
 
 
 
Net premiums earned
$
335,287

 
$
170,219

Fees and commission income
6,681

 
8,331

Net investment income
78,696

 
66,319

Net realized and unrealized gains (losses)
460,791

 
(143,030
)
Other income
5,812

 
1,943

 
887,267

 
103,782

EXPENSES
 
 
 
Net incurred losses and loss adjustment expenses
312,404

 
19,534

Life and annuity policy benefits
96

 
(46
)
Acquisition costs
93,788

 
30,108

General and administrative expenses
112,074

 
95,260

Interest expense
11,036

 
8,011

Net foreign exchange gains (losses)
(3,850
)
 
5,868

 
525,548

 
158,735

EARNINGS (LOSS) BEFORE INCOME TAXES
361,719

 
(54,953
)
Income tax expense
(4,749
)
 
(172
)
Earnings from equity method investments
8,772

 
14,697

NET EARNINGS (LOSS)
365,742

 
(40,428
)
Net loss (earnings) attributable to noncontrolling interest
2,148

 
(782
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
367,890

 
(41,210
)
Dividends on preferred shares
(9,139
)
 
—

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
358,751

 
$
(41,210
)
 
 
 
 
Earnings (Loss) per ordinary share attributable to Enstar Group Limited:
Basic
$
16.71

 
$
(2.12
)
Diluted
$
16.57

 
$
(2.12
)
Weighted average ordinary shares outstanding:
 
 
 
Basic
21,463,499

 
19,409,021

Diluted
21,645,862

 
19,602,512

See accompanying notes to the unaudited condensed consolidated financial statements

3
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2019 and 2018
 
 
Three Months Ended
March 31,
 
2019
 
2018
 
(expressed in thousands of U.S. dollars)
NET EARNINGS (LOSS)
$
365,742

 
$
(40,428
)
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
Unrealized holding gains (losses) on fixed income available-for-sale investments arising during the period
3,663

 
(346
)
Reclassification adjustment for net realized gains included in net earnings
61

 
30

Unrealized gains (losses) arising during the period, net of reclassification adjustments
3,724

 
(316
)
Total cumulative translation adjustment
(801
)
 
1,225

Total other comprehensive income
2,923

 
909

 
 
 
 
Comprehensive income (loss)
368,665

 
(39,519
)
Comprehensive (income) loss attributable to noncontrolling interest
2,064

 
(756
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
$
370,729

 
$
(40,275
)
See accompanying notes to the unaudited condensed consolidated financial statements


4
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2019 and 2018
 
Three Months Ended March 31,
 
2019
 
2018
 
(expressed in thousands of U.S. dollars)
Share Capital — Voting Ordinary Shares
 
 
 
Balance, beginning of period
$
17,950

 
$
16,402

Issue of shares
8

 
11

Balance, end of period
$
17,958

 
$
16,413

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

 
$
2,600

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

 
$
405

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

 
$
389

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

 
$
—

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

 
$
—

Treasury Shares (Series C Preferred shares)
 
 
 
Balance, beginning and end of period
$
(421,559
)
 
$
(421,559
)
Additional Paid-in Capital
 
 
 
Balance, beginning of period
$
1,804,664

 
$
1,395,067

Issue of voting ordinary shares
466

 
(94
)
Amortization of share-based compensation
3,977

 
5,651

Balance, end of period
$
1,809,107

 
$
1,400,624

Accumulated Other Comprehensive Income (Loss)
 
 
 
Balance, beginning of period
$
10,440

 
$
10,468

Currency translation adjustment
 
 
 
Balance, beginning of period
10,986

 
11,171

Change in currency translation adjustment
(803
)
 
1,229

Balance, end of period
10,183

 
12,400

Defined benefit pension liability
 
 
 
Balance, beginning and end of period
(987
)
 
(3,143
)
Unrealized gains (losses) on available-for-sale investments
 
 
 
Balance, beginning of period
441

 
2,440

Change in unrealized gains (losses) on available-for-sale investments
3,642

 
(294
)
Balance, end of period
4,083

 
2,146

Balance, end of period
$
13,279

 
$
11,403

Retained Earnings
 
 
 
Balance, beginning of period
$
1,976,539

 
$
2,132,912

Net earnings (losses) attributable to Enstar Group Limited
365,742

 
(40,428
)
Net loss (earnings) attributable to noncontrolling interest
2,148

 
(782
)
Dividends on preferred shares
(9,139
)
 
—

Change in redemption value of redeemable noncontrolling interests
(262
)
 
(369
)
Cumulative effect of change in accounting principle
—

 
(1,573
)
Balance, end of period
$
2,335,028

 
$
2,089,760

Noncontrolling Interest (excludes Redeemable Noncontrolling Interest)
 
 
 
Balance, beginning of period
$
12,056

 
$
9,264

Contribution of capital
—

 
49

Net earnings attributable to noncontrolling interest
396

 
(37
)
Balance, end of period
$
12,452

 
$
9,276

 
See accompanying notes to the unaudited condensed consolidated financial statements

5
Table of Contents


ENSTAR GROUP LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2019 and 2018
 
Three Months Ended
March 31,
 
2019
 
2018
 
(expressed in thousands of U.S. dollars)
OPERATING ACTIVITIES:
 
 
 
Net earnings (loss)
$
365,742

 
$
(40,428
)
Adjustments to reconcile net earnings (loss) to cash flows provided by (used in) operating activities:
 
 
 
Realized losses (gains) on sale of investments
(270
)
 
5,978

Unrealized losses (gains) on investments
(460,521
)
 
137,052

Depreciation and other amortization
7,900

 
7,576

Earnings from equity method investments
(8,772
)
 
(14,697
)
Sales and maturities of trading securities
1,486,423

 
904,977

Purchases of trading securities
(1,379,411
)
 
(1,733,720
)
Other non-cash items
4,687

 
6,363

Changes in:
 
 
 
Reinsurance balances recoverable
(256,706
)
 
(347,798
)
Funds held by reinsured companies
(598,471
)
 
(639,394
)
Losses and loss adjustment expenses
685,834

 
1,587,609

Policy benefits for life and annuity contracts
(2,304
)
 
(2,980
)
Insurance and reinsurance balances payable
67,653

 
119,830

Unearned premiums
108,424

 
128,973

Premiums receivable
67,489

 
—

Other operating assets and liabilities
19,441

 
(193,555
)
Net cash flows provided by (used in) operating activities
107,138

 
(74,214
)
INVESTING ACTIVITIES:
 
 
 
Sales and maturities of available-for-sale securities
5,839

 
22,700

Purchase of available-for-sale securities
(147
)
 
(5,039
)
Purchase of other investments
(225,961
)
 
(275,862
)
Proceeds from other investments
58,980

 
32,276

Purchase of equity method investments
(9,762
)
 
—

Other investing activities
(1,956
)
 
(4,304
)
Net cash flows used in investing activities
(173,007
)
 
(230,229
)
FINANCING ACTIVITIES:
 
 
 
Dividends on preferred shares
(9,139
)
 
—

Contribution by noncontrolling interest
—

 
49

Receipt of loans
344,000

 
345,400

Repayment of loans
(102,000
)
 
(132,938
)
Net cash flows provided by financing activities
232,861

 
212,511

EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS
(3,925
)
 
15,059

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
163,067

 
(76,873
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
982,584

 
1,212,836

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,145,651

 
$
1,135,963

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Income taxes paid, net of refunds
$
9

 
$
2,461

Interest paid
$
14,215

 
$
10,530

 
 
 
 
Reconciliation to Consolidated Balance Sheets:
 
 
 
Cash and cash equivalents
718,050

 
652,827

Restricted cash and cash equivalents
427,601

 
483,136

Cash, cash equivalents and restricted cash
$
1,145,651

 
$
1,135,963

See accompanying notes to the unaudited condensed consolidated financial statements

6
Table of Contents


ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019 and December 31, 2018
(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.

7
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ENSTAR GROUP LIMITED
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 offsetting 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 19 - "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 pronouncement was issued by the FASB subsequent to the three months ended March 31, 2019 and is yet to be adopted.
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 and also address certain implementation issues related to these three standards. Specifically, the amendments clarify the scope of the credit losses standard and addresses 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 which equity securities have to be remeasured at historical exchange rates.

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

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. For entities that have already adopted the credit losses standard, the amendments are effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted, and the amendments should be applied on a modified retrospective basis.
For entities that have already adopted ASU 2017-12, which we did during the quarter ended September 30, 2017, the amendments 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 on recognizing and measuring 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 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 and related disclosures 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.
2. SIGNIFICANT NEW BUSINESS
Zurich
On April 16, 2019, we entered into a reinsurance transaction with Zurich Insurance Group ("Zurich"), pursuant to which we will reinsure certain of Zurich's U.S. asbestos and environmental liability insurance portfolios. In the transaction we will assume approximately $0.5 billion of gross reserves, relating to 1986 and prior year business. Completion of the transaction, which is expected to occur in 2019, is subject to, among other things, regulatory approvals and satisfaction of various other customary closing conditions.
Maiden
On March 1, 2019, we entered into a Master Agreement with Maiden Holdings, Ltd. ("Maiden Holdings") and Maiden Reinsurance Ltd. (“Maiden Re Bermuda”). Under the Master Agreement, Enstar and Maiden Re Bermuda agreed to enter into an Adverse Development Cover Reinsurance Agreement (“ADC Agreement”) pursuant to which Maiden Re Bermuda will cede and Enstar will reinsure 100% of the liability of Maiden Re Bermuda, as reinsurer, under Maiden Re Bermuda’s two existing quota share agreements with certain insurance companies owned directly or indirectly by AmTrust Financial Services, Inc. (“AmTrust”) for losses incurred on or prior to December 31, 2018 in excess of a $2.44 billion retention, as such figure may be adjusted based upon Maiden Re Bermuda’s final year end reserves for the underlying business, up to a $675 million limit. The premium payable by Maiden Re Bermuda to Enstar under the ADC Agreement will be $500 million. Completion of the transaction is subject to, among other things, regulatory approvals and satisfaction of various closing conditions. The transaction is expected to close in the second quarter of 2019.
Amerisure
On February 15, 2019, we entered into a loss portfolio transfer reinsurance agreement with Amerisure Mutual Insurance Company ("Amerisure") and Allianz Risk Transfer (Bermuda) Limited (“ART Bermuda”). In the transaction, Amerisure has agreed to cede, and each of Enstar and ART Bermuda has agreed to severally assume, a 50% quota share of the construction defect losses incurred by Amerisure and certain of its subsidiaries on or before December 31, 2012. At closing, Amerisure paid Enstar and ART Bermuda an aggregate premium of $125.0 million, which was adjusted for a broker commission and paid claims and recoveries from April 1, 2018, and Enstar's subsidiary assumed $60.0 million of net reserves in the transaction. This transaction closed in the second quarter.

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

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 18 - "Related Party Transactions".

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

3. 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, 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:
 
March 31, 2019
 
Short-term investments, trading
 
Fixed maturities, trading
 
Fixed maturities, available-for-sale
 
Fixed maturities, funds held - directly managed
 
Total
U.S. government and agency
$
23,188

 
$
318,695

 
$
574

 
$
74,849

 
$
417,306

U.K. government
1,238

 
277,205

 
—

 
—

 
278,443

Other government
5,402

 
673,155

 
72,099

 
19,320

 
769,976

Corporate
43,662

 
4,343,019

 
71,846

 
645,488

 
5,104,015

Municipal
—

 
101,747

 
2,047

 
56,272

 
160,066

Residential mortgage-backed
—

 
342,891

 
9

 
86,105

 
429,005

Commercial mortgage-backed
—

 
645,751

 
—

 
238,373

 
884,124

Asset-backed
2,570

 
614,591

 
—

 
79,207

 
696,368

Total fixed maturity and short-term investments
$
76,060

 
$
7,317,054

 
$
146,575

 
$
1,199,614

 
$
8,739,303

 
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 March 31, 2019 were securities issued by U.S. governmental agencies with a fair value of $294.5 million (as of December 31, 2018: $656.6 million). Included within corporate securities as of March 31, 2019 were senior secured loans of $29.1 million (as of December 31, 2018: $20.4 million).

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

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 March 31, 2019
 
Amortized
Cost
 
Fair Value
 
% of Total
Fair
Value
One year or less
 
$
408,671

 
$
401,606

 
4.6
%
More than one year through two years
 
477,168

 
473,004

 
5.4
%
More than two years through five years
 
1,958,078

 
1,955,798

 
22.4
%
More than five years through ten years
 
2,115,535

 
2,137,694

 
24.5
%
More than ten years
 
1,723,351

 
1,761,704

 
20.1
%
Residential mortgage-backed
 
424,195

 
429,005

 
4.9
%
Commercial mortgage-backed
 
884,640

 
884,124

 
10.1
%
Asset-backed
 
698,724

 
696,368

 
8.0
%
 
 
$
8,690,362

 
$
8,739,303

 
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 March 31, 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
 
$
415,689

 
$
417,306

 
4.8
%
 
$
417,243

 
$
63

 
$
—

 
$
—

 
$
—

 
$
—

U.K. government
 
261,213

 
278,443

 
3.2
%
 
644

 
277,799

 
—

 
—

 
—

 
—

Other government
 
769,300

 
769,976

 
8.8
%
 
308,413

 
198,228

 
55,991

 
171,579

 
35,765

 
—

Corporate
 
5,079,783

 
5,104,015

 
58.4
%
 
132,282

 
506,434

 
2,517,323

 
1,737,171

 
197,543

 
13,262

Municipal
 
156,818

 
160,066

 
1.8
%
 
12,284

 
81,059

 
49,814

 
16,909

 
—

 
—

Residential mortgage-backed
 
424,195

 
429,005

 
4.9
%
 
309,100

 
55,819

 
2,054

 
3,119

 
51,372

 
7,541

Commercial mortgage-backed
 
884,640

 
884,124

 
10.1
%
 
641,337

 
87,319

 
77,117

 
61,139

 
6,514

 
10,698

Asset-backed
 
698,724

 
696,368

 
8.0
%
 
302,491

 
99,371

 
164,249

 
110,806

 
18,111

 
1,340

Total
 
$
8,690,362

 
$
8,739,303

 
100.0
%
 
$
2,123,794

 
$
1,306,092

 
$
2,866,548

 
$
2,100,723

 
$
309,305

 
$
32,841

% of total fair value
 
 
 
 
 
 
 
24.3
%
 
14.9
%
 
32.9
%
 
24.0
%
 
3.5
%
 
0.4
%


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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 fixed maturity investments classified as available-for-sale were as follows:
As of March 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (Non-OTTI)
 
Fair Value
U.S. government and agency
 
$
574

 
$
—

 
$
—

 
$
574

Other government
 
69,918

 
2,730

 
(549
)
 
72,099

Corporate
 
70,120

 
2,230

 
(504
)
 
71,846

Municipal
 
2,054

 
4

 
(11
)
 
2,047

Residential mortgage-backed
 
9

 
—

 
—

 
9

 
 
$
142,675

 
$
4,964

 
$
(1,064
)
 
$
146,575

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 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 March 31, 2019
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
 
Fair
Value
 
Gross Unrealized
Losses
Fixed maturity investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
Other government
 
3,570

 
(318
)
 
6,260

 
(231
)
 
9,830

 
(549
)
Corporate
 
12,351

 
(405
)
 
4,208

 
(99
)
 
16,559

 
(504
)
Municipal
 
1,683

 
(11
)
 
—

 
—

 
1,683

 
(11
)
Total fixed maturity investments
 
$
17,604

 
$
(734
)
 
$
10,468

 
$
(330
)
 
$
28,072

 
$
(1,064
)
  
 
 
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
Fixed maturity investments, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
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 investments
 
$
21,607

 
$
(995
)
 
$
36,510

 
$
(1,054
)
 
$
58,117

 
$
(2,049
)
As of March 31, 2019 and December 31, 2018, the number of securities classified as available-for-sale in an unrealized loss position was 55 and 88, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 43 and 42, respectively.

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

Other-Than-Temporary Impairment on Available-for-sale Fixed Maturity Investments
For the three months ended March 31, 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 March 31, 2019 or December 31, 2018. A description of our other-than-temporary impairment process is included in Note 2 - "Significant Accounting Policies" in the notes to our 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 three months ended March 31, 2019.
Equity Investments
The following table summarizes our equity investments:
 
March 31,
2019
 
December 31,
2018
Publicly traded equity investments in common and preferred stocks
$
171,710

 
$
138,415

Privately held equity investments in common and preferred stocks
228,710

 
228,710

 
$
400,420

 
$
367,125


Our publicly traded equity investments in common and preferred stocks predominantly trade on major exchanges and are managed by our external advisors. 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 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. Included within the above balance as of March 31, 2019 and December 31, 2018 is an indirect investment in AmTrust, with a fair value of $200.0 million and $200.0 million, respectively. Refer to Note 18 - "Related Party Transactions" for further information.
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
 
 
March 31,
2019
 
December 31,
2018
Hedge funds
 
$
979,270

 
$
852,584

Fixed income funds
 
587,093

 
403,858

Equity funds
 
374,249

 
333,681

Private equity funds
 
235,538

 
248,628

CLO equities
 
41,434

 
39,052

CLO equity fund
 
40,348

 
37,260

Private credit funds
 
53,258

 
33,381

Other
 
13,155

 
9,313

 
 
$
2,324,345

 
$
1,957,757


The valuation of our other investments is described in Note 8 - "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:

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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. The hedge funds in which we invest have various imposed lock-up periods of up to three years and redemption terms, predominantly 60 and 90 days. Certain of the hedge funds in which we invest that are past their lock up periods are currently eligible for redemption, while others, with a market value of $891.6 million, are still in the lock-up period. Investments of $72.4 million in fixed income hedge funds were subject to gates or side-pockets, where redemptions are subject to the sale of underlying investments. 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.
•
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. One of the funds in which we invest, with a market value of $43.7 million, has a lock-up period of up to two years and is eligible for quarterly redemptions thereafter with 65 days' notice. Another fund, with a market value of $73.7 million, is not currently eligible for redemption. All other funds have liquidity terms that vary from daily up to 30 days' notice.
•
Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities. The funds have liquidity terms that vary from daily up to quarterly.
•
Private equity funds invest primarily in the financial services industry. All of our investments in private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit our ability to liquidate those investments. These restrictions have been in place since the dates of our initial investments.
•
CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.
•
CLO equity fund invests primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. This fund has a fair value of $40.3 million and approximately 28% of the fund is eligible for redemption.
•
Private credit funds invest in direct senior or collateralized loans. The investments are subject to restrictions on redemption and sales that are determined by the governing documents and limit our ability to liquidate our positions in the funds.
•
Others comprise of 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 March 31, 2019 and December 31, 2018 was primarily attributable to unrealized gains of $204.7 million and net additional subscriptions of $167.0 million to hedge funds, equity funds and fixed income funds.
As of March 31, 2019, we had unfunded commitments of $210.8 million to private equity funds.

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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:
 
March 31, 2019
 
December 31, 2018
 
Investment
 
Ownership %
 
Carrying Value
 
Investment
 
Ownership %
 
Carrying Value
Enhanzed Re
$
94,800

 
47.4
%
 
$
91,883

 
$
94,800

 
47.4
%
 
$
94,800

Citco
50,000

 
31.9
%
 
50,917

 
50,000

 
31.9
%
 
50,812

Monument
26,600

 
26.6
%
 
47,746

 
26,600

 
26.6
%
 
42,193

Clear Spring
11,210

 
20.0
%
 
$
10,070

 
11,210

 
20.0
%
 
10,070

Other
25,012

 
~30%

 
20,407

 
15,250

 
~30%

 
6,632

 
$
207,622

 
 
 
$
221,023

 
$
197,860

 
 
 
$
204,507


Refer to Note 18 - "Related Party Transactions" for further information regarding our investments in Enhanzed Re, Citco, Monument and Clear Spring.
As of March 31, 2019, we had unfunded commitments of $152.3 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 as of March 31, 2019 and December 31, 2018:
 
2019
 
2018
Fixed maturity investments, trading
$
1,199,614

 
$
1,183,374

Other assets
88,596

 
14,780

 
$
1,288,210

 
$
1,198,154



16
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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 as of March 31, 2019 and December 31, 2018:
 
March 31,
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
$
181,689

 
$
1,019,636

 
$
1,201,325

 
$
179,670

 
$
1,044,377

 
$
1,224,047

Net unrealized gains (losses):
 
 
 
 
 
 
 
 
 
 
 
Change in fair value - fair value option accounting
978

 
—

 
978

 
(2,733
)
 
—

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

 
(2,689
)
 
(2,689
)
 
—

 
(37,940
)
 
(37,940
)
Fixed maturity investments within funds held - directly managed, at fair value
$
182,667

 
$
1,016,947

 
$
1,199,614

 
$
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 March 31, 2019 and December 31, 2018, we had funds held by reinsured companies of $919.7 million and $321.3 million, respectively. In connection with the AmTrust RITC transactions, we have recorded in aggregate $601.9 million as funds held, which is expected to be received in the second quarter of 2019 and subsequently invested in accordance with our investment guidelines.
Net Investment Income
Major categories of net investment income are summarized as follows:
 
Three Months Ended
 
March 31,
 
2019
 
2018
Fixed maturity investments
$
58,070

 
$
43,888

Short-term investments and cash and cash equivalents
3,860

 
2,082

Funds held
5,798

 
3,129

Funds held - directly managed
9,750

 
8,626

Investment income from fixed maturities and cash and cash equivalents
77,478

 
57,725

Equity investments
3,380

 
1,490

Other investments
2,114

 
3,314

Life settlements and other
—

 
6,659

Investment income from equities and other investments
5,494

 
11,463

Gross investment income
82,972

 
69,188

Investment expenses
(4,276
)
 
(2,869
)
Net investment income
$
78,696

 
$
66,319



17
Table of Contents
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
 
 
March 31,
 
 
2019
 
2018
Net realized gains (losses) on sale:
 
 
 
 
Gross realized gains on fixed maturity securities, available-for-sale
 
$
4

 
$
7

Gross realized losses on fixed maturity securities, available-for-sale
 
(65
)
 
(37
)
Net realized losses on fixed maturity securities, trading
 
(611
)
 
(6,947
)
Net realized gains (losses) on funds held - directly managed
 
(1,606
)
 
96

Net realized gains on equity investments
 
2,548

 
903

Total net realized gains (losses) on sale
 
$
270

 
$
(5,978
)
Net unrealized gains (losses):
 
 
 
 
Fixed maturity securities, trading
 
$
209,467

 
$
(100,301
)
Fixed maturity securities in funds held - directly managed portfolios
 
38,962

 
(30,924
)
Equity investments
 
7,383

 
3,835

Other Investments
 
204,709

 
(9,662
)
Total net unrealized gains (losses)
 
460,521

 
(137,052
)
Net realized and unrealized gains (losses)
 
$
460,791

 
$
(143,030
)

The gross realized gains and losses on available-for-sale investments included in the table above resulted from sales of $1.2 million and $7.5 million for the three months ended March 31, 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 $427.6 million and $380.5 million, as of March 31, 2019 and December 31, 2018, respectively, was as follows: 
 
 
March 31,
2019
 
December 31,
2018
Collateral in trust for third party agreements
 
$
4,276,436

 
$
4,336,752

Assets on deposit with regulatory authorities
 
583,780

 
579,048

Collateral for secured letter of credit facilities
 
124,576

 
127,841

Funds at Lloyd's (1)
 
642,068

 
354,589

 
 
$
5,626,860

 
$
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 12 - "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 2 - "Significant New Business".

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

4. DERIVATIVES AND HEDGING INSTRUMENTS
Foreign Currency Hedging of Net Investments in Foreign Operations
We use foreign currency forward 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 March 31, 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 as of March 31, 2019 and December 31, 2018.
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Fair Value
 
 
 
Fair Value
 
 
Gross Notional Amount
 
Assets
 
Liabilities
 
Gross Notional Amount
 
Assets
 
Liabilities
Foreign currency forward - AUD
 
$
41,874

 
$
22

 
$
25

 
$
42,258

 
$
1,377

 
$
—

Foreign currency forward - EUR
 
115,575

 
1,568

 
—

 
66,422

 
238

 
300

Total qualifying hedges
 
$
157,449

 
$
1,590

 
$
25

 
$
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 for the three months ended March 31, 2019 and 2018.
 
 
Amount of Gains (Losses) Deferred in AOCI
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Foreign currency forward - AUD
 
$
(327
)
 
$
530

Foreign currency forward - EUR
 
1,855

 
—

Net gains on qualifying derivative hedges
 
$
1,528

 
$
530


Non-derivative Hedging Instruments of Net Investments in Foreign Operations
As of March 31, 2018 there were borrowings of €60.0 million ($73.7 million) under our revolving credit facility that were designated as non-derivative hedges of our net investment in certain subsidiaries whose functional currency is denominated in Euros. These Euro-denominated borrowings were repaid in full and replaced by a Euro-denominated foreign currency forward contract in a qualifying hedging arrangement during the year ended December 31, 2018. The net losses deferred in the CTA account in AOCI relating to these qualifying Euro-loan derivative hedging instruments for the three months ended March 31, 2018 was $1.2 million.
Derivatives Not Designated or Not Qualifying as Hedging Instruments
From time to time, we may also utilize foreign currency forward contracts 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 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.

19
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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 as of March 31, 2019 and December 31, 2018.
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Fair Value
 
 
 
Fair Value
 
 
Gross Notional Amount
 
Assets
 
Liabilities
 
Gross Notional Amount
 
Assets
 
Liabilities
Foreign currency forward - AUD
 
$
73,953

 
$
71

 
$
25

 
$
45,427

 
$
1,952

 
$
310

Foreign currency forward - CAD
 
122,690

 
1,750

 
—

 
55,050

 
1,441

 
—

Foreign currency forward - EUR
 
28,389

 
419

 
14

 
54,282

 
139

 
301

Foreign currency forward - GBP
 
224,951

 
1,448

 
—

 
256,959

 
1,554

 
72

Total non-qualifying hedges
 
$
449,983

 
$
3,688

 
$
39

 
$
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 during the three months ended March 31, 2019 and 2018.
 
 
 Gains (Losses) on non-qualifying-hedges included in net earnings
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Foreign currency forward - AUD
 
$
(765
)
 
$
982

Foreign currency forward - CAD
 
1

 
2,040

Foreign currency forward - EUR
 
1,205

 
(267
)
Foreign currency forward - GBP
 
(4,059
)
 
(6,842
)
Net losses on non-qualifying hedges
 
$
(3,618
)
 
$
(4,087
)

Investments in Call Options on Equities
During the three months ended March 31, 2019 and 2018 we recorded unrealized losses in net earnings of $0.2 million and $2.5 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 $0.2 million and $0.4 million as of March 31, 2019 and December 31, 2018, respectively.

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

5. REINSURANCE BALANCES RECOVERABLE ON PAID AND UNPAID LOSSES
The following tables provide the total reinsurance balances recoverable:
 
 
March 31, 2019
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
Recoverable from reinsurers on unpaid:
 
 
 
 
 
 
 
 
Outstanding losses
 
$
1,007,758

 
$
11,242

 
$
290,095

 
$
1,309,095

IBNR
 
695,921

 
19,726

 
178,143

 
893,790

Fair value adjustments
 
(14,364
)
 
714

 
(1,643
)
 
(15,293
)
Fair value adjustments - fair value option
 
(109,669
)
 
—

 
—

 
(109,669
)
Total reinsurance reserves recoverable
 
1,579,646

 
31,682

 
466,595

 
2,077,923

Paid losses recoverable
 
170,633

 
647

 
37,244

 
208,524

 
 
$
1,750,279

 
$
32,329

 
$
503,839

 
$
2,286,447

Reconciliation to Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
Reinsurance balances recoverable
 
$
1,015,022

 
$
32,329

 
$
503,839

 
$
1,551,190

Reinsurance balances recoverable - fair value option
 
735,257

 
—

 
—

 
735,257

Total
 
$
1,750,279

 
$
32,329

 
$
503,839

 
$
2,286,447

 
 
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
 
(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

 
 
$
1,504,388

 
$
38,512

 
$
486,763

 
$
2,029,663

Reconciliation to Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
Reinsurance balances recoverable
 
$
764,797

 
$
38,512

 
$
486,763

 
$
1,290,072

Reinsurance balances recoverable - 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 8 - "Fair Value Measurements".
As of March 31, 2019 and December 31, 2018, we had reinsurance balances recoverable of $2,286.4 million and $2,029.7 million, respectively. The increase of $256.8 million in reinsurance balances recoverable was primarily related to the AmTrust RITC transactions, which closed during the first quarter of 2019.

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

Top Ten Reinsurers
 
March 31, 2019
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
 
% of
Total
Top ten reinsurers
$
1,202,892

 
$
22,421

 
$
299,058

 
$
1,524,371

 
66.7
%
Other reinsurers > $1 million
532,030

 
8,149

 
201,709

 
741,888

 
32.4
%
Other reinsurers < $1 million
15,357

 
1,759

 
3,072

 
20,188

 
0.9
%
Total
$
1,750,279

 
$
32,329

 
$
503,839

 
$
2,286,447

 
100.0
%

 
December 31, 2018
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
 
% of
Total
Top ten 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
%
 
March 31, 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

 
 
 
 
Top 10 rated A- or better reinsurers recoverables
$
1,285,067

 
$
1,096,272

Top 10 collaterized non-rated reinsurers recoverables (1)
239,304

 
316,238

 
$
1,524,371

 
$
1,412,510

 
 
 
 
Single reinsurers that represent 10% or more of total reinsurance balance recoverables as of March 31, 2019:
 
 
 
 
 
 
 
Hannover Ruck SE (2)
$
297,129

 
$
279,723

Lloyd's Syndicates (3)
$
392,205

 
$
334,509

(1) For the two non-rated reinsurers as of March 31, 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.

22
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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.
 
March 31, 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
$
1,883,418

 
$
54,048

 
$
1,829,370

 
2.9
%
 
$
1,612,464

 
$
51,519

 
$
1,560,945

 
3.2
%
Reinsurers rated below A-, secured
421,205

 
—

 
421,205

 
—
%
 
430,852

 
—

 
430,852

 
—
%
Reinsurers rated below A-, unsecured
143,303

 
107,431

 
35,872

 
75.0
%
 
143,079

 
105,213

 
37,866

 
73.5
%
Total
$
2,447,926

 
$
161,479

 
$
2,286,447

 
6.6
%
 
$
2,186,395

 
$
156,732

 
$
2,029,663

 
7.2
%


6. 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 March 31,
 
2019
 
2018
Beginning carrying value
$
86,585

 
$
80,192

Recorded during the period
20,632

 
—

Amortization
(7,063
)
 
(5,081
)
Ending carrying value
$
100,154

 
$
75,111


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 three months ended March 31, 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 three months ended March 31, 2019, is included in Note 2 - "Significant New Business".

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

7. 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 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 workers' compensation, general casualty, asbestos and environmental, marine, aviation and transit, construction defects, property, motor 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 table summarizes the liability for losses and LAE by segment:
 
March 31, 2019
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
Outstanding losses
$
4,624,209

 
$
86,986

 
$
824,366

 
$
6,647

 
$
5,542,208

IBNR
3,694,932

 
135,411

 
840,306

 
14,335

 
4,684,984

Fair value adjustments
(209,631
)
 
4,691

 
(404
)
 
—

 
(205,344
)
Fair value adjustments - fair value option
(300,774
)
 
—

 
—

 
—

 
(300,774
)
ULAE
346,238

 
2,292

 
26,418

 
—

 
374,948

Total
$
8,154,974

 
$
229,380

 
$
1,690,686

 
$
20,982

 
$
10,096,022

 
 
 
 
 
 
 
 
 
 
Reconciliation to Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Loss and loss adjustment expenses
$
5,307,181

 
$
229,380

 
$
1,690,686

 
$
20,982

 
$
7,248,229

Loss and loss adjustment expenses, at fair value
2,847,793

 
—

 
—

 
—

 
2,847,793

Total
$
8,154,974

 
$
229,380

 
$
1,690,686

 
$
20,982

 
$
10,096,022


 
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
(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 March 31, 2019 was primarily attributable to the AmTrust RITC Transactions in our Non-life Run-off segment, as described in Note 2 - "Significant New Business".

24
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
 
March 31,
 
2019
 
2018
Balance as of beginning of period
$
9,409,504

 
$
7,398,088

Less: reinsurance reserves recoverable
1,867,841

 
1,870,033

Less: deferred charge assets on retroactive reinsurance
86,585

 
80,192

Net balance as of beginning of period
7,455,078

 
5,447,863

Net incurred losses and LAE:
 
 
 
  Current period
217,266

 
95,154

  Prior periods
95,138

 
(75,620)

  Total net incurred losses and LAE
312,404

 
19,534

Net paid losses:
 
 
 
  Current period
(28,029
)
 
(8,103)

  Prior periods
(461,605
)
 
(350,646)

  Total net paid losses
(489,634
)
 
(358,749)

Effect of exchange rate movement
19,679

 
57,727

Assumed business
620,418

 
1,527,551

Net balance as of March 31
7,917,945

 
6,693,926

Plus: reinsurance reserves recoverable
2,077,923

 
2,217,033

Plus: deferred charge assets on retroactive reinsurance
100,154

 
75,111

Balance as of March 31
$
10,096,022

 
$
8,986,070


The tables below provide the net incurred losses and LAE by segment:
 
Three Months Ended
 
March 31, 2019
 
Non-life Run-off
 
Atrium
 
StarStone
 
Other
 
Total
Net losses paid
$
349,069

 
$
22,313

 
$
115,417

 
$
2,835

 
$
489,634

Net change in case and LAE reserves
(77,701
)
 
(413
)
 
2,056

 
595

 
(75,463
)
Net change in IBNR reserves
(232,895
)
 
(5,817
)
 
76,424

 
1,526

 
(160,762
)
Increase in estimates of net ultimate losses
38,473

 
16,083

 
193,897

 
4,956

 
253,409

Increase (reduction) in provisions for unallocated LAE
(15,175
)
 
—

 
1,348

 
—

 
(13,827
)
Amortization of deferred charge assets
7,064

 
—

 
—

 
—

 
7,064

Amortization of fair value adjustments
8,779

 
1,131

 
(193
)
 
—

 
9,717

Changes in fair value - fair value option
56,041

 
—

 
—

 
—

 
56,041

Net incurred losses and LAE
$
95,182

 
$
17,214

 
$
195,052

 
$
4,956

 
$
312,404


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

 
Three Months Ended
 
March 31, 2018
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Total
Net losses paid
$
252,584

 
$
17,530

 
$
88,635

 
$
358,749

Net change in case and LAE reserves
(123,486
)
 
3,890

 
(4,475
)
 
(124,071
)
Net change in IBNR reserves
(154,111
)
 
(1,709
)
 
(8,871
)
 
(164,691
)
Increase (reduction) in estimates of net ultimate losses
(25,013
)
 
19,711

 
75,289

 
69,987

Increase (reduction) in provisions for unallocated LAE
(14,952
)
 
—

 
192

 
(14,760
)
Amortization of deferred charge assets
5,081

 
—

 
—

 
5,081

Amortization of fair value adjustments
2,147

 
(2,539
)
 
(141
)
 
(533
)
Changes in fair value - fair value option
(40,241
)
 
—

 
—

 
(40,241
)
Net incurred losses and LAE
$
(72,978
)
 
$
17,172

 
$
75,340

 
$
19,534


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
 
March 31,
 
2019
 
2018
Balance as of beginning of period
$
7,540,662

 
$
5,949,472

Less: reinsurance reserves recoverable
1,366,123

 
1,377,485

Less: deferred charge assets on retroactive insurance
86,585

 
80,192

Net balance as of beginning of period
6,087,954

 
4,491,795

Net incurred losses and LAE:
 
 
 
  Current period
49,071

 
346

  Prior periods
46,111

 
(73,324
)
  Total net incurred losses and LAE
95,182

 
(72,978
)
Net paid losses:
 
 
 
  Current period
(18,014
)
 
(1
)
  Prior periods
(331,055
)
 
(252,583
)
  Total net paid losses
(349,069
)
 
(252,584
)
Effect of exchange rate movement
20,689

 
55,403

Assumed business
620,418

 
1,517,283

Net balance as of March 31
6,475,174

 
5,738,919

Plus: reinsurance reserves recoverable
1,579,646

 
1,703,481

Plus: deferred charge assets on retroactive reinsurance
100,154

 
75,111

Balance as of March 31
$
8,154,974

 
$
7,517,511



26
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 March 31,
 
2019
 
2018
 
Prior
Period
 
Current
Period
 
Total
 
Prior
Period
 
Current
Period
 
Total
Net losses paid
$
331,055

 
$
18,014

 
$
349,069

 
$
252,583

 
$
1

 
$
252,584

Net change in case and LAE reserves
(97,573
)
 
19,872

 
(77,701
)
 
(123,492
)
 
6

 
(123,486
)
Net change in IBNR reserves
(243,815
)
 
10,920

 
(232,895
)
 
(154,450
)
 
339

 
(154,111
)
Increase (reduction) in estimates of net ultimate losses
(10,333
)
 
48,806

 
38,473

 
(25,359
)
 
346

 
(25,013
)
Increase (reduction) in provisions for unallocated LAE
(15,440
)
 
265

 
(15,175
)
 
(14,952
)
 
—

 
(14,952
)
Amortization of deferred charge assets
7,064

 
—

 
7,064

 
5,081

 
—

 
5,081

Amortization of fair value adjustments
8,779

 
—

 
8,779

 
2,147

 
—

 
2,147

Changes in fair value - fair value option
56,041

 
—

 
56,041

 
(40,241
)
 
—

 
(40,241
)
Net incurred losses and LAE
$
46,111

 
$
49,071

 
$
95,182

 
$
(73,324
)
 
$
346

 
$
(72,978
)

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 March 31, 2019
The increase in net incurred losses and LAE for the three months ended March 31, 2019 of $95.2 million included net incurred losses and LAE of $49.1 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 $49.1 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $46.1 million, which was attributable to an increase in the fair value of liabilities of $56.0 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 $8.8 million and the amortization of the deferred charge assets of $7.1 million, partially offset by a reduction in estimates of net ultimate losses of $10.3 million and a reduction in provisions for unallocated LAE of $15.4 million relating to 2019 run-off activity. The reduction in estimates of net ultimate losses of $10.3 million for the three months ended March 31, 2019 included a net reduction in case and IBNR reserves of $341.4 million, partially offset by net losses paid of $331.1 million.
Three Months Ended March 31, 2018
The reduction in net incurred losses and LAE for the three months ended March 31, 2018 of $73.0 million included net incurred losses and LAE of $0.3 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $0.3 million, the reduction in net incurred losses and LAE liabilities relating to prior periods was $73.3 million, which was attributable to a reduction in estimates of net ultimate losses of $25.4 million, a reduction in provisions for unallocated LAE of $15.0 million, relating to 2018 run-off activity, and a reduction in the fair value of liabilities of $40.2 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 $2.1 million and the amortization of the deferred charge assets of $5.1 million. The reduction in estimates of net ultimate losses of $25.4 million for the three months ended March 31, 2018 included a net change in case and IBNR reserves of $277.9 million, partially offset by net losses paid of $252.6 million.

27
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
 
March 31,
 
2019
 
2018
Balance as of beginning of period
$
241,284

 
$
240,873

Less: reinsurance reserves recoverable
38,768

 
40,531

Net balance as of beginning of period
202,516

 
200,342

Net incurred losses and LAE:
 
 
 
  Current period
18,237

 
17,306

  Prior periods
(1,023
)
 
(134
)
  Total net incurred losses and LAE
17,214

 
17,172

Net paid losses:
 
 
 
  Current period
(7,893
)
 
(7,154
)
  Prior periods
(14,420
)
 
(10,376
)
  Total net paid losses
(22,313
)
 
(17,530
)
Effect of exchange rate movement
281

 
786

Net balance as of March 31
197,698

 
200,770

Plus: reinsurance reserves recoverable
31,682

 
40,025

Balance as of March 31
$
229,380

 
$
240,795


Net incurred losses and LAE in the Atrium segment were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
Prior
Period
 
Current
Period
 
Total
 
Prior
Period
 
Current
Period
 
Total
Net losses paid
14,420

 
7,893

 
22,313

 
10,376

 
7,154

 
17,530

Net change in case and LAE reserves
(6,342
)
 
5,929

 
(413
)
 
(2,384
)
 
6,274

 
3,890

Net change in IBNR reserves
(10,232
)
 
4,415

 
(5,817
)
 
(5,587
)
 
3,878

 
(1,709
)
Increase (reduction) in estimates of net ultimate losses
(2,154
)
 
18,237

 
16,083

 
2,405

 
17,306

 
19,711

Amortization of fair value adjustments
1,131

 
—

 
1,131

 
(2,539
)
 
—

 
(2,539
)
Net incurred losses and LAE
(1,023
)
 
18,237

 
17,214

 
(134
)
 
17,306

 
17,172



28
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
 
March 31,
 
2019
 
2018
Balance as of beginning of period
$
1,608,697

 
$
1,207,743

Less: reinsurance reserves recoverable
462,950

 
452,017

Net balance as of beginning of period
1,145,747

 
755,726

Net incurred losses and LAE:
 
 
 
  Current period
144,950

 
77,502

  Prior periods
50,102

 
(2,162
)
  Total net incurred losses and LAE
195,052

 
75,340

Net paid losses:
 
 
 
  Current period
(1,792
)
 
(948
)
  Prior periods
(113,625
)
 
(87,687
)
  Total net paid losses
(115,417
)
 
(88,635
)
Effect of exchange rate movement
(1,291
)
 
1,538

Assumed business
—

 
10,268

Net balance as of March 31
1,224,091

 
754,237

Plus: reinsurance reserves recoverable
466,595

 
473,527

Balance as of March 31
$
1,690,686

 
$
1,227,764


Net incurred losses and LAE in the StarStone segment were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
Prior Period
 
Current Period
 
Total
 
Prior Period
 
Current Period
 
Total
Net losses paid
$
113,625

 
$
1,792

 
$
115,417

 
$
87,687

 
$
948

 
$
88,635

Net change in case and LAE reserves
(8,824
)
 
10,880

 
2,056

 
(14,217
)
 
9,742

 
(4,475
)
Net change in IBNR reserves
(52,834
)
 
129,258

 
76,424

 
(73,390
)
 
64,519

 
(8,871
)
Increase in estimates of net ultimate losses
51,967

 
141,930

 
193,897

 
80

 
75,209

 
75,289

Increase (reduction) in provisions for unallocated LAE
(1,672
)
 
3,020

 
1,348

 
(2,101
)
 
2,293

 
192

Amortization of fair value adjustments
(193
)
 
—

 
(193
)
 
(141
)
 
—

 
(141
)
Net incurred losses and LAE
$
50,102

 
$
144,950

 
$
195,052

 
$
(2,162
)
 
$
77,502

 
$
75,340


Net incurred losses and LAE for the three months ended March 31, 2019 and 2018 were $195.1 million and $75.3 million, respectively. Net adverse prior year loss development was $50.1 million for the three months ended March 31, 2019 compared to net favorable prior year loss development of $2.2 million for the three months ended March 31, 2018. Excluding prior year loss development, net incurred losses and LAE for the three months ended March 31, 2019 and 2018 were $145.0 million and $77.5 million, respectively. Net adverse prior year loss development for the three months ended March 31, 2019 was primarily related to development on lines of business which we have either exited or which are subject to remediation as part of our underwriting repositioning.

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

8. 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:

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

 
 
March 31, 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
 
$
—

 
$
417,306

 
$
—

 
$
—

 
$
417,306

U.K. government
 
—

 
278,443

 
—

 
—

 
278,443

Other government
 
—

 
769,976

 
—

 
—

 
769,976

Corporate
 
—

 
5,100,843

 
3,172

 
—

 
5,104,015

Municipal
 
—

 
160,066

 
—

 
—

 
160,066

Residential mortgage-backed
 
—

 
429,005

 
—

 
—

 
429,005

Commercial mortgage-backed
 
—

 
884,124

 
—

 
—

 
884,124

Asset-backed
 
—

 
687,068

 
9,300

 
—

 
696,368

 
 
$
—

 
$
8,726,831

 
$
12,472

 
$
—

 
$
8,739,303

 
 
 
 
 
 
 
 
 
 
 
Other assets included within funds held - directly managed
 
74,915

 
13,681

 
—

 
—

 
88,596

 
 
 
 
 
 
 
 
 
 
 
Equities:
 
 
 
 
 
 
 
 
 
 
Publicly traded equity investments
 
$
140,398

 
$
31,312

 
$
—

 
$
—

 
$
171,710

Privately held equity investments
 
—

 


 
228,710

 
—

 
228,710

 
 
$
140,398

 
$
31,312

 
$
228,710

 
$
—

 
$
400,420

 
 
 
 
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
$
—

 
$
—

 
$
—

 
$
979,270

 
$
979,270

Fixed income funds
 
—

 
469,643

 
—

 
117,450

 
587,093

Equity funds
 
—

 
108,337

 
—

 
265,912

 
374,249

Private equity funds
 
—

 
—

 
—

 
235,538

 
235,538

CLO equities
 
—

 
—

 
41,434

 
—

 
41,434

CLO equity fund
 
—

 
—

 
—

 
40,348

 
40,348

Private credit funds
 
—

 
—

 
—

 
53,258

 
53,258

Others
 
—

 
238

 
313

 
12,604

 
13,155

 
 
$
—

 
$
578,218

 
$
41,747

 
$
1,704,380

 
$
2,324,345

Total Investments
 
$
215,313

 
$
9,350,042

 
$
282,929

 
$
1,704,380

 
$
11,552,664

 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
157,543

 
$
106,776

 
$
—

 
$
—

 
$
264,319

 
 
 
 
 
 
 
 
 
 
 
Reinsurance balances recoverable on paid and unpaid losses:
 
$
—

 
$
—

 
$
735,257

 
$
—

 
$
735,257

 
 
 
 
 
 
 
 
 
 
 
Other Assets:
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
 
$
—

 
$
5,278

 
$
—

 
$
—

 
$
5,278

 
 
$
—

 
$
5,278

 
$
—

 
$
—

 
$
5,278

 
 
 
 
 
 
 
 
 
 
 
Losses and LAE:
 
$
—

 
$
—

 
$
2,847,793

 
$
—

 
$
2,847,793

 
 
 
 
 
 
 
 
 
 
 
Other Liabilities:
 
 
 
 
 
 
 
 
 
 
Derivative Instruments
 
$
—

 
$
64

 
$
—

 
$
—

 
$
64

 
 
$
—

 
$
64

 
$
—

 
$
—

 
$
64



31
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




32
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.

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

•
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 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. We use an internationally recognized pricing service to estimate the fair value of our publicly traded equities. We have categorized the majority of our publicly traded equity investments other than preferred stock 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.

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

•
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 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 the CLO equity fund, 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.

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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 4 - "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 March 31, 2019
 
 
Fixed maturity investments
 
Privately-held Equities
 
Other Investments
 
Total
 
 
Corporate
 
Commercial mortgage-backed
 
Asset-backed
 
 
 
Beginning fair value
 
$
37,386

 
$
7,389

 
$
9,121

 
$
228,710

 
$
39,367

 
$
321,973

Sales
 
(2,660
)
 
(608
)
 
(321
)
 
—

 
—

 
(3,589
)
Total realized and unrealized gains
 
257

 
62

 
737

 
—

 
2,380

 
3,436

Transfer into Level 3 from Level 2
 
387

 
—

 
6,225

 
—

 
—

 
6,612

Transfer out of Level 3 into Level 2
 
(32,198
)
 
(6,843
)
 
(6,462
)
 
—

 
—

 
(45,503
)
Ending fair value
 
$
3,172

 
$
—

 
$
9,300

 
$
228,710

 
$
41,747

 
$
282,929

 
 
Three Months Ended March 31, 2018
 
 
Fixed maturity investments
 
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
 
10,832

 
—

 
1,803

 
1,300

 
130

 
14,065

Sales
 
(7,037
)
 
(1,148
)
 
(577
)
 
(3,804
)
 
—

 
(12,566
)
Total realized and unrealized gains (losses)
 
195

 
(25
)
 
83

 
46

 
(550
)
 
(251
)
Transfer into Level 3 from Level 2
 
15,259

 
—

 
4,897

 
—

 
—

 
20,156

Transfer out of Level 3 into Level 2
 
(400
)
 
—

 
(10,066
)
 
(3,437
)
 
—

 
(13,903
)
Ending fair value
 
$
86,027

 
$
1,907

 
$
17,634

 
$
21,997

 
$
56,659

 
$
184,224


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.

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

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
 
March 31, 2019
 
March 31, 2018
 
Liability for losses and LAE
 
Reinsurance balances recoverable
 
Net
 
Liability for losses and LAE
 
Reinsurance balances recoverable
 
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
(7,154
)
 
(3,486
)
 
(3,668
)
 
(1,309
)
 
(1,476
)
 
167

Reduction in unallocated LAE
(4,341
)
 
—

 
(4,341
)
 
(5,882
)
 
—

 
(5,882
)
Change in fair value
77,461

 
21,420

 
56,041

 
(57,155
)
 
(16,914
)
 
(40,241
)
Total incurred losses and LAE
65,966

 
17,934

 
48,032

 
(64,346
)
 
(18,390
)
 
(45,956
)
Paid losses
(115,860
)
 
(27,242
)
 
(88,618
)
 
(158,372
)
 
(18,146
)
 
(140,226
)
Effect of exchange rate movements
23,632

 
4,974

 
18,658

 
57,441

 
10,268

 
47,173

Ending fair value
$
2,847,793

 
$
735,257

 
$
2,112,536

 
$
3,519,453

 
$
888,736

 
$
2,630,717


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
 
 
March 31, 2019
 
March 31, 2018
Changes in fair value due to changes in:
 
 
 
 
Duration
 
$
9,047

 
$
5,540

Corporate bond yield
 
46,994

 
(45,781
)
Change in fair value
 
$
56,041

 
$
(40,241
)

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:
 
 
 
 
March 31, 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)
 
7.40 years
 
7.33 years
Internal model
 
Duration - reinsurance balances recoverable (U)
 
8.01 years
 
7.98 years



37
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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 March 31, 2019, our 4.5% Senior Notes due 2022 (the "Senior Notes") were carried at amortized cost of $348.2 million while the fair value based on observable market pricing from a third party pricing service was $356.3 million. 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 March 31, 2019 and December 31, 2018.

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

9. POLICY BENEFITS FOR LIFE CONTRACTS
We have acquired long duration contracts that subject us to mortality, longevity and morbidity risks and which are accounted for as life and annuity premiums earned. Life benefit reserves are established using assumptions for investment yields, mortality, morbidity, lapse and expenses, including a provision for adverse deviation. We establish and review our life reserves regularly based upon cash flow projections. We establish and maintain our life reinsurance reserves at a level that we estimate will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third-party servicing obligations as they become payable. Policy benefits for life contracts as of March 31, 2019 and December 31, 2018 were $100.7 million and $105.1 million, respectively. Refer to Note 2 - "Significant Accounting Policies" - (d) Policy Benefits for Life and Annuity Contracts" of 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.
On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary Alpha and a subsidiary of Monument. This agreement will transfer our remaining life assurance policies written by Alpha to Monument, via a Portfolio Transfer, subject to regulatory approval. The transaction is expected to close during 2019. 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 they have not been classified as a discontinued operation. In addition, our proposed transfer of these life assurance polices to Monument was not classified as a held-for-sale business transaction since the underlying contracts do not meet the definition of a business. We have an equity method investment in Monument, as described further in Note 18 - "Related Party Transactions".

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

10. 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 March 31,
 
2019
 
2018
 
Premiums
Written
 
Premiums
Earned
 
Premiums
Written
 
Premiums
Earned
Non-life Run-off
 
 
 
 
 
 
 
Gross
$
(20,877
)
 
$
83,966

 
$
7,380

 
$
13,110

Ceded
1,699

 
(7,292
)
 
(7,280
)
 
(5,932
)
Net
$
(19,178
)
 
$
76,674

 
$
100

 
$
7,178

Atrium
 
 
 
 
 
 
 
Gross
$
53,985

 
$
43,386

 
$
49,442

 
$
39,674

Ceded
(7,486
)
 
(4,633
)
 
(7,948
)
 
(4,451
)
Net
$
46,499

 
$
38,753

 
$
41,494

 
$
35,223

StarStone
 
 
 
 
 
 
 
Gross
$
251,373

 
$
268,264

 
$
304,989

 
$
234,943

Ceded
(56,772
)
 
(55,002
)
 
(124,426
)
 
(108,117
)
Net
$
194,601

 
$
213,262

 
$
180,563

 
$
126,826

Other
 
 
 
 
 
 
 
Gross
$
864

 
$
6,673

 
$
1,037

 
$
1,050

Ceded
(19
)
 
(75
)
 
(47
)
 
(58
)
Net
$
845

 
$
6,598

 
$
990

 
$
992

Total
 
 
 
 
 
 
 
Gross
$
285,345

 
$
402,289

 
$
362,848

 
$
288,777

Ceded
(62,578
)
 
(67,002
)
 
(139,701
)
 
(118,558
)
Total
$
222,767

 
$
335,287

 
$
223,147

 
$
170,219

 
Gross premiums written for the three months ended March 31, 2019 and 2018 were $285.3 million and $362.8 million, respectively, a decrease of $77.5 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)

11. GOODWILL AND INTANGIBLE ASSETS
The following table presents a reconciliation of the beginning and ending goodwill and intangible assets during the three months ended March 31, 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
—

 
(565
)
 
—

 
(565
)
 
(565
)
Balance as of March 31, 2019
$
114,807

 
$
16,322

 
$
87,031

 
$
103,353

 
$
218,160

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 March 31,
 
2019
 
2018
Intangible asset amortization
$
565

 
$
1,266


The gross carrying value, accumulated amortization and net carrying value of intangible assets by type was as follows:
 
March 31, 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

 
$
(7,111
)
 
$
12,889

 
$
20,000

 
$
(6,776
)
 
$
13,224

Technology
15,000

 
(14,833
)
 
167

 
15,000

 
(14,778
)
 
222

Brand
7,000

 
(3,734
)
 
3,266

 
7,000

 
(3,559
)
 
3,441

Total
$
42,000

 
$
(25,678
)
 
$
16,322

 
$
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



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

12. 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. Debt obligations as of March 31, 2019 and December 31, 2018 were as follows:
Facility
 
Origination Date
 
Term
 
March 31,
2019
 
December 31,
2018
Senior Notes
 
March 10, 2017
 
5 years
 
$
348,180

 
$
348,054

EGL Revolving Credit Facility
 
August 16, 2018
 
5 years
 
257,000

 
15,000

2018 EGL Term Loan Facility
 
December 27, 2018
 
3 years
 
498,610

 
498,485

Total debt obligations
 
 
 
$
1,103,790

 
$
861,539


The table below provides a summary of the total interest expense:
 
Three Months Ended March 31,
 
2019
 
2018
Interest expense on debt obligations
$
10,726

 
$
7,439

Funds withheld balances and other
310

 
572

Total interest expense
$
11,036

 
$
8,011

Senior Notes
On March 10, 2017, we issued Senior Notes for an aggregate principal amount of $350.0 million. The Senior Notes pay 4.5% interest semi-annually and mature on March 10, 2022. The 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 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 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 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 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 Senior Notes and are included in interest expense in our consolidated statements of earnings. The unamortized costs as of March 31, 2019 and December 31, 2018 were $1.8 million and $1.9 million, respectively.
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 March 31, 2019, we were permitted to borrow up to an aggregate of $600.0 million under the facility. As of March 31, 2019, there was $343.0 million of available unutilized capacity under the facility. Subsequent to March 31, 2019, we repaid $42.0 million, bringing the unutilized capacity under this facility to $385.0 million.

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

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 March 31, 2019 and December 31, 2018 were $1.4 million and $1.5 million, respectively.
Refer to Note 15 - "Debt Obligations and Credit Facilities" of 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.
Unsecured Letters of Credit
We also utilize unsecured letters of credit for 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. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2022. As of March 31, 2019, our combined Funds at Lloyd's were comprised of cash and investments of $642.1 million and unsecured letters of credit of $368.0 million.

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

13. NONCONTROLLING INTERESTS
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest ("RNCI") as of March 31, 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: 
 
 
Three Months Ended
 
For The Year Ended
 
 
March 31, 2019
 
December 31, 2018
Balance at beginning of period
 
$
458,543

 
$
479,606

Capital contributions
 
—

 
55,377

Dividends paid
 
—

 
(3,852
)
Net losses attributable to RNCI
 
(2,544
)
 
(64,794
)
Accumulated other comprehensive earnings (losses) attributable to RNCI
 
85

 
(240
)
Change in redemption value of RNCI
 
262

 
(7,554
)
Balance at end of period
 
$
456,346

 
$
458,543


We carried the RNCI at its estimated redemption value, which is fair value, as of March 31, 2019. The decrease was primarily attributable to a decrease in the net assets due to net losses related to StarStone during the three months ended March 31, 2019.
Refer to Note 18 - "Related Party Transactions" and Note 19 - "Commitments and Contingencies" for additional information regarding RNCI.
Noncontrolling Interest
As of March 31, 2019 and December 31, 2018, we had $12.5 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)

14. SHARE CAPITAL
Refer to Note 17 - "Share Capital" 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 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 May 7, 2019:
 
 
 
 
 
 
 
 
Dividend per:
 
 
Preferred Share Series
 
Date Declared
 
Record Date
 
Date Payable
 
Preferred Share
 
Depositary Share
 
Total dividends paid and declared in the three months ended March 31, 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

 
—

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

 
$
0.43750

 
—

 
 
 
 
 
 
 
 
 
 
 
 
$
9,139



15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per ordinary share:
 
Three Months Ended
 
March 31,
 
2019
 
2018
Numerator:
 
 
 
Net earnings (loss) attributable to Enstar Group Limited ordinary shareholders
$
358,751

 
$
(41,210
)
Denominator:
 
 
 
Weighted average ordinary shares outstanding — basic
21,463,499

 
19,409,021

Effect of dilutive securities:
 
 
 
Share-based compensation plans
122,980

 
115,630

Warrants
59,383

 
77,861

Weighted average ordinary shares outstanding — diluted
21,645,862

 
19,602,512

 
 
 
 
Earnings (losses) per ordinary share attributable to Enstar Group Limited:
 
 
 
Basic
$
16.71

 
$
(2.12
)
Diluted(1)
$
16.57

 
$
(2.12
)

(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)

16. 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" in the notes 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 March 31,
 
 
2019
 
2018
Share-based compensation plans:
 
 
 
 
Restricted shares and restricted share units
 
$
1,843

 
$
2,349

Performance share units
 
1,325

 
2,475

Cash-settled stock appreciation rights
 
56

 
1,241

Other share-based compensation plans:
 
 
 
 
Northshore incentive plan
 
1,046

 
1,108

Deferred compensation and ordinary share plan for non-employee directors
 
827

 
846

Employee share purchase plan
 
103

 
83

Total share-based compensation
 
$
5,200

 
$
8,102

The table below provides the expenses related to our pension plans:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Pension plans:
 
 
 
 
Defined contribution plans
 
$
2,854

 
$
2,638

Defined benefit plan
 
175

 
151

Total pension costs
 
$
3,029

 
$
2,789




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

17. 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 March 31, 2019 and 2018 were 1.3% and (0.4)%, 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 months ended March 31, 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 March 31, 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)

18. 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 StarStone transaction in cash at fair market value within the 90 days following April 1, 2019 (ii) 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 (iii) 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.
On December 26, 2018, the shareholders of North Bay completed a transaction to provide capital support to StarStone in the form of a contribution to its contributed surplus account and a loss portfolio transfer of certain discontinued and discontinuing lines of business. 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.
The RNCI on our balance sheet relating to these Trident co-investment transactions was as follows:
 
March 31, 2019
 
December 31, 2018
Redeemable Noncontrolling Interest
437,322

 
439,428


As of March 31, 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 unrealized gains and interest income;
•
Investments in registered investment companies affiliated with entities owned by Trident or otherwise affiliated with Stone Point, with respect to which we recognized unrealized gains and interest income;
•
Separate accounts managed by Eagle Point Credit Management and PRIMA Capital Advisors, 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;
•
Sound Point Capital 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;
•
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.

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

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:
 
March 31, 2019
 
December 31, 2018
Investments in funds managed by Stone Point
$
611,262

 
$
422,771

Investments in registered investment companies affiliated with entities owned by Trident or Stone Point
27,882

 
32,302

Investments managed by Eagle Point Credit Management and PRIMA Capital Advisors
350,194

 
176,624

Investments in funds managed by Sound Point Capital
19,889

 
29,922

Investments in CLO equity securities with Sound Point Capital as collateral manager
13,466

 
13,449

Separate account managed by Sound Point Capital
115

 
1,079

Total investments
$
1,022,808

 
$
676,147

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
 
March 31,
 
2019
 
2018
Net unrealized gains (losses) on funds managed by Stone Point
$
24,182

 
$
(1,526
)
Net unrealized gains (losses) on registered investment companies affiliated with entities owned by Trident or Stone Point
(4,420
)
 
6,205

Interest income on registered investment companies affiliated with entities owned by Trident
680

 
1,082

Management fees on investments managed by Eagle Point Credit Management and PRIMA Capital Advisors
(87
)
 
(227
)
Net unrealized gains (losses) on investments in funds managed by Sound Point Capital
354

 
(529
)
Net unrealized gains (losses) on investments in CLO equity securities with Sound Point Capital as collateral manager
17

 
(231
)
Interest income on investments in CLO equity securities with Sound Point Capital as collateral manager
482

 
1,310

Management fees on separate account managed by Sound Point Capital
—

 
(81
)
Total net earnings
$
21,208

 
$
6,003


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.
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; (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.

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

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 months ended March 31, 2019 and 2018.
Our consolidated statement of earnings included the following amounts related to transactions between us and KaylaRe and KaylaRe Ltd.:
 
Three Months Ended
 
March 31,
 
2018
Management fee income
$
1,397

 
 
Transactions under KaylaRe-StarStone QS:
 
Ceded premium earned
(52,651
)
Net incurred losses
31,543

Acquisition costs
18,774

 
 
Total net earnings (loss)
$
(937
)


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 March 31, 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 March 31, 2019, our carrying value of the InRe Fund, L.P. ("InRe Fund"), which is managed by Hillhouse Capital, was $793.0 million and the fund was invested in approximately 37% in fixed income securities, 24% in North American equities, 67% in international equities and (28)% 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:
 
March 31,
2019
 
December 31,
2018
Investments in funds managed by Hillhouse Capital, held by equity method investees
$
212,155

 
$
75,192

Our ownership of equity method investments
47.4
%
 
47.4
%
Our indirect investment in funds managed by Hillhouse Capital
$
100,561

 
$
35,641

 
 
 
 
Direct investment in funds managed by Hillhouse Capital:
 
 
 
InRe Fund
$
792,980

 
$
678,420

Other funds
199,732

 
166,646

 
$
992,712

 
$
845,066


The increase in the direct investment in funds managed by Hillhouse was primarily due to unrealized gains in the first quarter of 2019. We incurred fees of approximately $31.9 million for the three months ended March 31, 2019 in relation to the management of the direct investment in funds managed by Hillhouse Capital and its affiliated entities as described above.
Monument
Monument was established in October 2016 and Enstar has invested a total of $26.6 million in the common and preferred shares of Monument. We have approximately a 26.6% interest in Monument. In connection with our investment in Monument, we entered into a Shareholders Agreement with the other shareholders. We recorded the investment in Monument using the equity method basis of accounting, as we concluded that we are not required to consolidate based on the guidance in ASC 810 - Consolidation.
On August 29, 2017, we sold our wholly-owned subsidiary Laguna to a subsidiary of Monument. On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary Alpha Insurance SA and a subsidiary of Monument. This agreement will transfer our remaining life assurance policies to Monument, via a Portfolio Transfer, subject to regulatory approval. The transaction is expected to close in the first half of 2019.
Our investment in the common and preferred shares of Monument, carried in equity method investments on our consolidated balance sheet was as follows:
 
March 31, 2019
 
December 31, 2018
Investment in Monument
$
47,746

 
$
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 recorded the investment in Clear Spring using the equity method basis of accounting, as we concluded that we are not required to consolidate based on the guidance in ASC 810 - Consolidation. Our investment in the common shares of Clear Spring, carried in equity method investments on our consolidated balance sheet, as of March 31, 2019 and December 31, 2018 was as follows:
 
March 31,
2019
 
December 31,
2018
Investment in Clear Spring
$
10,070

 
$
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:
 
March 31, 2019
 
December 31, 2018
Balances under StarStone ceding quota share:
 
 
 
Reinsurance balances recoverable
$
26,415

 
$
23,718

Prepaid insurance premiums
8,527

 
13,821

Ceded payable
11,830

 
14,153

Ceded acquisition costs
2,039

 
3,233

 
 
 
 
Balances under assuming quota share:
 
 
 
Losses and LAE
6,301

 
5,778

Unearned reinsurance premiums
2,132

 
3,455

Funds held
9,833

 
10,242

Our consolidated statement of earnings included the following amounts related to transactions between us and Clear Spring:
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
 
 
 
Transactions under StarStone ceding quota share:
 
 
 
Ceded premium earned
$
(5,485
)
 
$
(7,003
)
Ceded incurred losses and LAE
3,859

 
5,562

Ceded acquisition costs
54

 
1,782

 
 
 
 
Transactions under assuming quota share:
 
 
 
Premium earned
1,371

 
1,751

Net incurred losses and LAE
(965
)
 
(1,390
)
Acquisition costs
(14
)
 
(464
)
 
 
 
 
Total net earnings (loss)
$
(1,180
)
 
$
238


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

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

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.
Our indirect investment in the shares of AmTrust, carried in equities on our consolidated balance sheet was as follows:
 
March 31,
2019
 
December 31,
2018
Investment in AmTrust
$
200,000

 
$
200,000

We recorded the following amounts, related to dividend income, included in net earnings related to our investment in AmTrust:
 
Three Months Ended
 
March 31,
 
2019
 
 
Net investment income
$
1,821


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 March 31, 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:
 
March 31,
2019
 
December 31,
2018
Investment in Citco
$
50,917

 
$
50,812


Enhanzed Re
Enhanzed Reinsurance Ltd. ("Enhanzed Re") is a joint venture between Enstar, Allianz SE 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 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 owns 47.4% of the entity, Allianz owns 24.9%, and an affiliate of Hillhouse Capital owns 27.7%. As of March 31, 2019, Enstar has contributed $94.8 million of its total capital commitment to Enhanzed Re and had an uncalled amount of $128.0 million.
Enstar acts as the (re)insurance manager for Enhanzed Re, also Hillhouse Capital acts as primary investment manager, and an affiliate of Allianz SE provides investment management services. 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.

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

Our investment in the common shares of Enhanzed Re, carried in equity method investments on our consolidated balance sheet was as follows:
 
March 31,
2019
 
December 31,
2018
Investment in EnhanzedRe
$
91,883

 
$
94,800


We received fee income of $0.1 million from Enhanzed Re, recorded within other income on our consolidated statement of earnings, for the three months ended March 31, 2019.

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

19. 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 5 - "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 $1,101.9 million to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's. In connection with the AmTrust RITC transactions, we have recorded, in aggregate $601.9 million as funds held, which is expected to be received in the second quarter of 2019 and subsequently invested in accordance with our investment guidelines.
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 March 31, 2019. Our credit exposure to the U.S. government was $711.8 million as of March 31, 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 March 31, 2019, we had unfunded commitments of $210.8 million and $152.3 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 March 31, 2019 and December 31, 2018, parental guarantees and capital instruments supporting subsidiaries' insurance obligations were $669.6 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 March 31, 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:
 
March 31,
2019
 
December 31,
2018
Other liabilities:
 
 
 
Direct asbestos liabilities
$
262,098

 
$
265,975

Direct environmental liabilities
2,046

 
2,152

Estimated future expenses
17,717

 
19,843

Fair value adjustments
(84,350
)
 
(84,650
)
 
197,511

 
203,320

Other assets:
 
 
 
Insurance recoveries related to direct asbestos and environmental liabilities
178,100

 
183,676

Fair value adjustments
(47,669
)
 
(47,868
)
 
130,431

 
135,808

 
 
 
 
Net liabilities relating to direct asbestos and environmental exposures
$
67,080

 
$
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 18 - "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
March 31,
 
2019
Operating lease cost
$
3,487

Sublease income
(131
)
Total lease cost
$
3,356


The table below provides a summary of the cash flow information and non-cash activity related to our operating leases:
 
Three Months Ended March 31,
 
2019
Operating cash flow information:
 
Cash paid for amounts included in the measurement of lease liabilities
$
3,024

Non-cash activity:
 
Right-of-use assets obtained in exchange for lease obligations
$
51,609



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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
 
March 31, 2019
Right-of-use assets
Other assets
 
$
48,870

Current lease liabilities
Other liabilities
 
9,063

Non-current lease liabilities
Other liabilities
 
40,270


Weighted-average remaining lease term and discount rate used for our operating leases are as follows:
 
 
March 31, 2019
Weighted-average remaining lease term
 
6.6 years

Weighted-average discount rate
 
6.2
%

The table below provides a summary of the maturity of the operating lease liabilities:
 
 
March 31, 2019
2019
 
$
8,223

2020
 
12,469

2021
 
9,022

2022
 
7,454

2023
 
6,605

2024 and beyond
 
18,010

Total lease payments
 
61,783

Less: Imputed interest
 
(12,450
)
Present value of lease liabilities
 
$
49,333



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

20. 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 March 31, 2019
 
Non-Life
Run-Off
 
Atrium
 
StarStone
 
Other
 
Total
Gross premiums written
$
(20,877
)
 
$
53,985

 
$
251,373

 
$
864

 
$
285,345

 
 
 
 
 
 
 
 
 
 
Net premiums written
$
(19,178
)
 
$
46,499

 
$
194,601

 
$
845

 
$
222,767

 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
76,674

 
$
38,753

 
$
213,262

 
$
6,598

 
$
335,287

Net incurred losses and LAE
(95,182
)
 
(17,214
)
 
(195,052
)
 
(4,956
)
 
(312,404
)
Life and Annuity Policy Benefits
—

 
—

 
—

 
(96
)
 
(96
)
Acquisition costs
(28,155
)
 
(13,742
)
 
(51,659
)
 
(232
)
 
(93,788
)
Operating expenses
(43,992
)
 
(3,033
)
 
(35,994
)
 
—

 
(83,019
)
Underwriting income (loss)
(90,655
)
 
4,764

 
(69,443
)
 
1,314

 
(154,020
)
Net investment income (loss)
66,728

 
1,711

 
11,942

 
(1,685
)
 
78,696

Net realized and unrealized gains
436,186

 
2,913

 
20,658

 
1,034

 
460,791

Fees and commission income
4,832

 
1,849

 
—

 
—

 
6,681

Other income
5,504

 
36

 
60

 
212

 
5,812

Corporate expenses
(16,570
)
 
(3,788
)
 
—

 
(8,697
)
 
(29,055
)
Interest income (expense)
(12,116
)
 
—

 
(475
)
 
1,555

 
(11,036
)
Net foreign exchange gains (losses)
3,618

 
825

 
(594
)
 
1

 
3,850

EARNINGS (LOSS) BEFORE INCOME TAXES
397,527

 
8,310

 
(37,852
)
 
(6,266
)
 
361,719

Income tax expense
(2,720
)
 
(685
)
 
(1,259
)
 
(85
)
 
(4,749
)
Earnings from equity method investments
8,584

 
—

 
188

 
—

 
8,772

NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS
403,391

 
7,625

 
(38,923
)
 
(6,351
)
 
365,742

Net loss (earnings) attributable to noncontrolling interest
(2,646
)
 
(3,128
)
 
7,922

 
—

 
2,148

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
400,745

 
4,497

 
(31,001
)
 
(6,351
)
 
367,890

Dividends on preferred shares
—

 
—

 
—

 
(9,139
)
 
(9,139
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
400,745

 
$
4,497

 
$
(31,001
)
 
$
(15,490
)
 
$
358,751

 
 
 
 
 
 
 
 
 
 
Underwriting ratios:
 
 
 
 
 
 
 
 
 
Loss ratio 
 
 
44.4
%
 
91.5
%
 
 
 
 
Acquisition expense ratio
 
 
35.5
%
 
24.2
%
 
 
 
 
Operating expense ratio
 
 
7.8
%
 
16.9
%
 
 
 
 
Combined ratio
 
 
87.7
%
 
132.6
%
 
 
 
 


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

 
Three Months Ended March 31, 2018
 
Non-Life
Run-Off
 
Atrium
 
StarStone
 
Other
 
Total
Gross premiums written
$
7,380

 
$
49,442

 
$
304,989

 
$
1,037

 
$
362,848

 
 
 
 
 
 
 
 
 
 
Net premiums written
$
100

 
$
41,494

 
$
180,563

 
$
990

 
$
223,147

 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
7,178

 
$
35,223

 
$
126,826

 
$
992

 
$
170,219

Net incurred losses and LAE
72,978

 
(17,172
)
 
(75,340
)
 
—

 
(19,534
)
Life and Annuity Policy Benefits
—

 
—

 
—

 
46

 
46

Acquisition costs
(1,470
)
 
(12,065
)
 
(16,425
)
 
(148
)
 
(30,108
)
Operating expenses
(38,403
)
 
(4,177
)
 
(34,557
)
 
—

 
(77,137
)
Underwriting income
40,283

 
1,809

 
504

 
890

 
43,486

Net investment income
51,651

 
1,185

 
7,701

 
5,782

 
66,319

Net realized and unrealized losses
(126,296
)
 
(1,403
)
 
(12,958
)
 
(2,373
)
 
(143,030
)
Fees and commission income
4,898

 
3,433

 
—

 
—

 
8,331

Other income (expense)
2,558

 
64

 
51

 
(730
)
 
1,943

Corporate expenses
(8,633
)
 
(475
)
 
—

 
(9,015
)
 
(18,123
)
Interest income (expense)
(8,530
)
 
—

 
(541
)
 
1,060

 
(8,011
)
Net foreign exchange gains (losses)
(7,177
)
 
(953
)
 
1,095

 
1,167

 
(5,868
)
EARNINGS (LOSS) BEFORE INCOME TAXES
(51,246
)
 
3,660

 
(4,148
)
 
(3,219
)
 
(54,953
)
Income tax benefit (expense)
1,117

 
(280
)
 
(998
)
 
(11
)
 
(172
)
Earnings from equity method investments
14,697

 
—

 
—

 
—

 
14,697

NET EARNINGS (LOSS)
(35,432
)
 
3,380

 
(5,146
)
 
(3,230
)
 
(40,428
)
Net loss (earnings) attributable to noncontrolling interest
(1,429
)
 
(1,411
)
 
2,058

 
—

 
(782
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(36,861
)
 
$
1,969

 
$
(3,088
)
 
$
(3,230
)
 
$
(41,210
)
 
 
 
 
 
 
 
 
 
 
Underwriting ratios:
 
 
 
 
 
 
 
 
 
Loss ratio
 
 
48.8
%
 
59.4
%
 
 
 
 
Acquisition expense ratio
 
 
34.3
%
 
13.0
%
 
 
 
 
Operating expense ratio
 
 
11.8
%
 
27.2
%
 
 
 
 
Combined ratio
 
 
94.9
%
 
99.6
%
 
 
 
 

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:
 
March 31,
 
December 31,
 
2019
 
2018
Assets by Segment:
 
 
 
Non-life Run-off
$
14,661,681

 
$
13,362,749

Atrium
588,126

 
591,722

StarStone
3,464,379

 
3,416,132

Other
(655,935
)
 
(814,333
)
Total assets
$
18,058,251

 
$
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 March 31, 2019 and our results of operations for the three months ended March 31, 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 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 over 95 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 three months ended March 31, 2019, our book value per ordinary share on a fully diluted basis increased by 10.4% to $172.22 per ordinary share. The increase was primarily due to net earnings for the three months ended March 31, 2019.

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The table below summarizes the calculation of our fully diluted book value per ordinary share:
 
March 31,
2019
 
December 31,
2018
 
Change
Numerator:
 
 
 
 
 
Total Enstar Group Limited Shareholder's Equity
$
4,267,712

 
$
3,901,933

 
$
365,779

Less: Series D and E Preferred Shares
510,000

 
510,000

 
—

Total Enstar Group Limited Ordinary Shareholders' Equity (A)
3,757,712

 
3,391,933

 
365,779

Proceeds from assumed conversion of warrants1
20,229

 
20,229

 
—

Numerator for fully diluted book value per ordinary share calculations (B)
$
3,777,941

 
$
3,412,162

 
$
365,779

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Ordinary shares outstanding (C)
21,467,515

 
21,459,997

 
7,518

Effect of dilutive securities:
 
 
 
 
 
Share-based compensation plans
292,885

 
245,165

 
47,720

Warrants(1)
175,901

 
175,901

 
—

Fully diluted ordinary shares outstanding (D)
21,936,301

 
21,881,063

 
55,238

 
 
 
 
 
 
Book value per ordinary share:
 
 
 
 
 
Basic book value per ordinary share = (A) / (C)
$
175.04

 
$
158.06

 
$
16.98

Fully diluted book value per ordinary share = (B) / (D)
$
172.22

 
$
155.94

 
$
16.28

(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 three 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.
In addition, we have also agreed to enter, or have entered into the following run-off transactions:
•
a loss portfolio transfer reinsurance agreement with Amerisure Mutual Insurance Company ("Amerisure"), whereby we assumed net reserves of $60.0 million. This transaction closed in the second quarter of 2019;
•
a master agreement with Maiden Holdings, Ltd. ("Maiden Holdings") and Maiden Reinsurance Ltd. (“Maiden Re Bermuda”), under which we have agreed to enter into an Adverse Development Agreement ("ADC Agreement") pursuant to which Maiden Re Bermuda will cede and Enstar will reinsure 100% of the liability of Maiden Re Bermuda, as reinsurer, under Maiden Re Bermuda’s two existing quota share agreements with certain insurance companies owned directly or indirectly by AmTrust Financial Services, Inc. (“AmTrust”) for losses incurred on or prior to December 31, 2018 in excess of a $2.44 billion retention, as such figure may be adjusted based upon Maiden Re Bermuda’s final year end reserves for the underlying business, up to a $675 million limit. The premium payable by Maiden Re Bermuda to Enstar under the ADC Agreement will be $500 million. Completion of the transaction is subject to, among other things, regulatory approvals and satisfaction of various closing conditions.
•
a reinsurance transaction with Zurich Insurance Group ("Zurich"), pursuant to which we will reinsure approximately $500.0 million of asbestos and environmental reserves relating to 1986 and prior years. Completion is expected to occur in 2019.
As of March 31, 2019 our non-life run-off gross and net reserves were $8.2 billion and $6.5 billion, respectively, and we continue to evaluate opportunities for future growth.

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Table of Contents


We manage claims in a professional and disciplined manner, drawing on our global team of in-house claims management experts as we aim to proactively manage risks and claims efficiently. We employ an opportunistic commutation strategy in which we negotiate with policyholders and claimants with a goal of commuting or settling existing insurance and reinsurance liabilities at a discount to the ultimate liability and also to avoid unnecessary legal and other associated run-off fees and expense.
As a result of the number of transactions we have completed over the years, our organizational structure consists of licensed entities across many jurisdictions. In managing our group, we continue to 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 over time. 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 continue to be under pressure in certain business lines. We continue to see overcapacity in many markets, which can impact premium rates and/or terms and conditions. If general economic conditions worsen, a decrease in the level of economic activity may impact insurable risks and our ability to write premium that is acceptable to us. We may adjust our level of reinsurance to maintain an amount of net exposure that is aligned with our risk tolerance.
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. As previously disclosed, we have affirmed our continued ownership of our active underwriting businesses, Atrium and StarStone.
At StarStone, we recently appointed new executive leadership. We are positioning the underwriting portfolio in 2019 to reflect market opportunities and achieve a mix of business for improved underwriting profitability. We are continuing to evaluate our portfolio and 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 adverse 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 to write less gross premiums in 2019 compared to 2018.
We, in partnership with StarStone's other shareholders, completed a transaction to provide capital support to StarStone in the form of a contribution to its contributed surplus account and a loss portfolio transfer and adverse development cover, effective October 1, 2018, provided through one of our subsidiaries. To fund the transaction in December 2018, the shareholders contributed an aggregate amount of $135.0 million in proportion to their ownership interests. The quota share between StarStone and KaylaRe was not renewed effective January 1, 2019. However losses in the earlier calendar years will continue to fall due under the previous quota share agreement. We have continued to experience underwriting losses in the first quarter of 2019, primarily on exited lines but also due to increased large losses on other lines of business.
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.
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 increases as we acquire more business, partially offset by reductions in the investment portfolio for paid claims.

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•
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, securities may experience unrealized losses prior to maturity. During the first three months of 2019, we recognized net unrealized gains on our investments of $460.5 million, of which $209.5 million and $39.0 million related to our investments in fixed maturities, trading and funds withheld - directly managed, respectively, primarily due to declining sovereign yields and tightening credit spreads. 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 in shareholders' equity. We may 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 three months of 2019, we recognized net unrealized gains on our other investments of $204.7 million, compared to net unrealized losses of $164.0 million for the year ended 2018. We believe our other investments provide diversification against our fixed income investments and an opportunity for improved risk-adjusted returns, however, the returns of these investments may be more 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.
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 Agreement between the United Kingdom and the European Union was not passed by Parliament and the deadline is now October 31, 2019, or the first day of the month after the Withdrawal Agreement is passed, whichever comes first. There remains considerable uncertainty about whether the Withdrawal Agreement will be approved by Parliament, and other options such as renegotiating the Withdrawal Agreement, 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.

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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
Zurich
On April 16, 2019, we entered into reinsurance transaction with Zurich Insurance Group ("Zurich"), pursuant to which we will reinsure certain of Zurich's U.S. asbestos and environmental liability insurance portfolios. In the transaction we will assume approximately $0.5 billion of gross reserves, relating to 1986 and prior year business. Completion of the transaction, which is expected to occur in 2019, is subject to, among other things, regulatory approvals and satisfaction of various other customary closing conditions.
Maiden Re
On March 1, 2019, we entered into a Master Agreement with Maiden Holdings, Ltd. ("Maiden Holdings") and Maiden Reinsurance Ltd. (“Maiden Re Bermuda”). Under the Master Agreement, Enstar and Maiden Re Bermuda agreed to enter into an Adverse Development Cover Reinsurance Agreement (“ADC Agreement”) pursuant to which Maiden Re Bermuda will cede and Enstar will reinsure 100% of the liability of Maiden Re Bermuda, as reinsurer, under Maiden Re Bermuda’s two existing quota share agreements with certain insurance companies owned directly or indirectly by AmTrust Financial Services, Inc. (“AmTrust”) for losses incurred on or prior to December 31, 2018 in excess of a $2.44 billion retention, as such figure may be adjusted based upon Maiden Re Bermuda’s final year end reserves for the underlying business, up to a $675 million limit. The premium payable by Maiden Re Bermuda to Enstar under the ADC Agreement will be $500.0 million. Completion of the transaction is subject to, among other things, regulatory approvals and satisfaction of various closing conditions. The Master Agreement contains customary representations, warranties, covenants and other closing conditions. The transaction is expected to close in the second quarter of 2019.
Amerisure
On February 15, 2019, we entered into a loss portfolio transfer reinsurance agreement with Amerisure Mutual Insurance Company ("Amerisure") and Allianz Risk Transfer (Bermuda) Limited (“ART Bermuda”). In the transaction, Amerisure has agreed to cede, and each of Enstar and ART Bermuda has agreed to severally assume, a 50% quota share of the construction defect losses incurred by Amerisure and certain of its subsidiaries on or before December 31, 2012. At closing, Amerisure paid Enstar a premium of $62.5 million, which was adjusted for a broker commission and paid claims and recoveries from April 1, 2018 and we assumed $60.0 million of net reserves in the transaction. This transaction closed in the second quarter.
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
On October 10, 2018, we entered into a Business Transfer Agreement between our wholly-owned subsidiary Alpha Insurance SA and a subsidiary of Monument Insurance Group Limited ("Monument"). This agreement will transfer our remaining life assurance policies to Monument, via a Portfolio Transfer, subject to regulatory approval. The transaction is expected to close during 2019. We have an investment in Monument, as described further in Note 18 - "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 proposed transfer of these life assurance polices to Monument was not classified as a held-for-sale business transaction since the underlying contracts do not meet the definition of a business.

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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.
Consolidated Results of Operations - For the Three Months Ended March 31, 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
 
 
 
March 31
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
INCOME
 
 
 
 
 
Net premiums earned
$
335,287

 
$
170,219

 
$
165,068

Fees and commission income
6,681

 
8,331

 
(1,650
)
Net investment income
78,696

 
66,319

 
12,377

Net realized and unrealized gains (losses)
460,791

 
(143,030
)
 
603,821

Other income
5,812

 
1,943

 
3,869

 
887,267

 
103,782

 
783,485

EXPENSES
 
 
 
 
 
Net incurred losses and LAE
312,404

 
19,534

 
292,870

Life and annuity policy benefits
96

 
(46
)
 
142

Acquisition costs
93,788

 
30,108

 
63,680

General and administrative expenses
112,074

 
95,260

 
16,814

Interest expense
11,036

 
8,011

 
3,025

Net foreign exchange gains (losses)
(3,850
)
 
5,868

 
(9,718
)
 
525,548

 
158,735

 
366,813

EARNINGS (LOSS) BEFORE INCOME TAXES
361,719

 
(54,953
)
 
416,672

Income tax expense
(4,749
)
 
(172
)
 
(4,577
)
Earnings from equity method investments
8,772

 
14,697

 
(5,925
)
NET EARNINGS (LOSS)
365,742

 
(40,428
)
 
406,170

Net loss (earnings) attributable to noncontrolling interest
2,148

 
(782
)
 
2,930

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED
367,890

 
(41,210
)
 
409,100

Dividends on preferred shares
(9,139
)
 
—

 
(9,139
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
358,751

 
$
(41,210
)
 
$
399,961



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Highlights
Consolidated Results of Operations for the Three Months Ended March 31, 2019:
•
Consolidated net earnings of $358.8 million and basic and diluted net earnings per ordinary share of $16.71 and $16.57, respectively.
•
Non-GAAP operating income of $199.7 million and diluted non-GAAP operating income per ordinary share of $9.22. 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 $400.7 million, including investment results.
•
Net investment income of $78.7 million and net realized and unrealized gains of $460.8 million comprised $0.3 million of net realized gains and $460.5 million of net unrealized gains.
•
Net premiums earned of $335.3 million, including $38.8 million and $213.3 million in our Atrium and StarStone segments, respectively.
•
Combined ratios of 87.7% and 132.6% for the active underwriting operations within our Atrium and StarStone segments, respectively.
Consolidated Financial Condition as of March 31, 2019:
•
Total investments, cash and funds held of $13,839.1 million.
•
Total reinsurance balances recoverable of $2,286.4 million.
•
Total assets of $18,058.3 million.
•
Total gross reserves for losses and LAE of $10,096.0 million, with $897.1 million of gross reserves assumed in our Non-life Run-off operations during the three months ended March 31, 2019.
•
Total shareholders' equity, including preferred shares, of $4,267.7 million and redeemable noncontrolling interest of $456.3 million. Shareholders' equity includes $510.0 million of preferred shares issued in 2018.
•
Diluted book value per ordinary share of $172.22, an increase of 10.4% since December 31, 2018.
Consolidated Overview - For the Three Months Ended March 31, 2019 and 2018
We reported consolidated net earnings attributable to Enstar Group Limited ordinary shareholders of $358.8 million for the three months ended March 31, 2019, an increase in net earnings of $400.0 million from net losses of $41.2 million for the three months ended March 31, 2018. Our first quarter results were positively impacted by unrealized gains on fixed maturity securities, which are accounted for on a trading basis through net earnings, and unrealized gains on our other investments. In addition, comparability between periods is impacted by the loss portfolio transfer reinsurance transactions that we completed in 2019 with AmTrust, and during 2018 with Zurich Australia, Neon and Novae. The most significant drivers of our consolidated financial performance during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 included:
•
Non-life Run-off - Net earnings attributable to the Non-life Run-off segment were $400.7 million for the three months ended March 31, 2019 compared to net losses of $36.9 million for the three months ended March 31, 2018. The increase in net earnings of $437.6 million was primarily due to net realized and unrealized gains of $436.2 million on our investment portfolio in the current period compared to net losses in the comparative period, higher net investment income, partially offset by 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 earnings were $4.5 million for the three months ended March 31, 2019 compared to $2.0 million for the three months ended March 31, 2018. The increase in net earnings was primarily due to net realized and unrealized gains on our investment portfolio and improved underwriting income due to lower loss and other expense ratios;

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•
StarStone - Net losses were $31.0 million for the three months ended March 31, 2019 compared to net losses of $3.1 million for the three months ended March 31, 2018. The increase in net losses was primarily attributable to higher net incurred losses and LAE partially offset by increased net realized and unrealized gains on our investment portfolio. The increase in net incurred losses and LAE was primarily due to prior year adverse development primarily across discontinued lines. 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 - Net realized and unrealized gains were $460.8 million for the three months ended March 31, 2019 compared to net realized and unrealized losses of $143.0 million for the three months ended March 31, 2018. Net unrealized gains for the three months ended March 31, 2019 included net unrealized gains of $209.5 million on fixed maturities investments, which are accounted for on a trading basis through net earnings, and gains of $204.7 million on other investments. The unrealized gains on fixed maturities were primarily driven by tightening corporate credit spreads, partially offset by increased sovereign yields in the current quarter. 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. The net unrealized gains on our other investments were primarily driven by unrealized gains in our equity, fixed income and hedge funds, as a result of a broad recovery in the global equity and fixed income markets in the first quarter of 2019;
•
Net Investment Income - Net investment income was $78.7 million and $66.3 million for the three months ended March 31, 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 noncontrolling interest were $2.1 million for the three months ended March 31, 2019 compared to net earnings attributable to noncontrolling interest of $0.8 million for the three months ended March 31, 2018, respectively. The net losses attributable to noncontrolling interest were primarily driven by the losses in the StarStone segment, as discussed above, partially offset by the net earnings in our Non-life Run-off and Atrium segments;
•
Our non-GAAP operating income, which excludes the impact of unrealized gains and losses on fixed maturity securities and other items, was $199.7 million for the three months ended March 31, 2019, an increase of $160.0 million from non-GAAP operating income of $39.6 million for the three months ended March 31, 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 March 31, 2019.

Results of Operations by Segment - For the Three Months Ended March 31, 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 20 - "Segment Information" in the notes 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.
The below table provides a split by operating segment of the net earnings (loss) attributable to Enstar Group Limited:

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Three Months Ended
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Segment split of net earnings (loss) attributable to Enstar Group Limited:
 
 
 
 
 
Non-life Run-off
$
400,745

 
$
(36,861
)
 
$
437,606

Atrium
4,497

 
1,969

 
2,528

StarStone
(31,001
)
 
(3,088
)
 
(27,913
)
Other
(15,490
)
 
(3,230
)
 
(12,260
)
Net earnings (loss) attributable to Enstar Group Limited ordinary shareholders
$
358,751

 
$
(41,210
)
 
$
399,961

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
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Gross premiums written
$
(20,877
)
 
$
7,380

 
$
(28,257
)
 
 
 
 
 
 
Net premiums written
$
(19,178
)
 
$
100

 
$
(19,278
)
 
 
 
 
 
 
Net premiums earned
$
76,674

 
$
7,178

 
$
69,496

Net incurred losses and LAE
(95,182
)
 
72,978

 
(168,160
)
Acquisition costs
(28,155
)
 
(1,470
)
 
(26,685
)
Operating expenses
(43,992
)
 
(38,403
)
 
(5,589
)
Underwriting income
(90,655
)
 
40,283

 
(130,938
)
Net investment income
66,728

 
51,651

 
15,077

Net realized and unrealized gains (losses)
436,186

 
(126,296
)
 
562,482

Fees and commission income
4,832

 
4,898

 
(66
)
Other income
5,504

 
2,558

 
2,946

Corporate expenses
(16,570
)
 
(8,633
)
 
(7,937
)
Interest expense
(12,116
)
 
(8,530
)
 
(3,586
)
Net foreign exchange gains (losses)
3,618

 
(7,177
)
 
10,795

EARNINGS (LOSS) BEFORE INCOME TAXES
397,527

 
(51,246
)
 
448,773

Income tax benefit (expense)
(2,720
)
 
1,117

 
(3,837
)
Earnings from equity method investments
8,584

 
14,697

 
(6,113
)
NET EARNINGS (LOSS)
403,391

 
(35,432
)
 
438,823

Net earnings attributable to noncontrolling interest
(2,646
)
 
(1,429
)
 
(1,217
)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
400,745

 
$
(36,861
)
 
$
437,606


Overall Results
Three Months Ended March 31: Net earnings were $400.7 million for the three months ended March 31, 2019 compared to net losses of $36.9 million for the three months ended March 31, 2018, an increase of $437.6 million. The increase was primarily attributable to an increase of $562.5 million in net realized and unrealized gains (losses) on our investment portfolio primarily due to unrealized gains on our fixed maturity portfolio and unrealized gains on our equity, fixed income and hedge funds within our other investments; an increase in net investment income of $15.1 million, and an increase in net premiums earned of $69.5 million, partially offset by an increase in net incurred losses and LAE of $168.2 million and an increase in general and administrative expenses of $13.5 million.

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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
 
 
 
March 31
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Gross premiums written
$
(20,877
)
 
$
7,380

 
$
(28,257
)
Ceded reinsurance premiums written
1,699

 
(7,280
)
 
8,979

Net premiums written
$
(19,178
)
 
$
100

 
$
(19,278
)
 
 
 
 
 
 
Gross premiums earned
$
83,966

 
$
13,110

 
$
70,856

Ceded reinsurance premiums earned
(7,292
)
 
(5,932
)
 
(1,360
)
Net premiums earned
$
76,674

 
$
7,178

 
$
69,496

Because business in this segment is in run-off, our general expectation is for premiums associated with legacy business to decline in future periods. However, the actual amount in any particular year will be impacted by new 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 Months Ended March 31: Net premiums written in the three months ended March 31, 2019 of $(19.2) million 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 months ended March 31, 2019 of $76.7 million 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 months ended March 31, 2018 were primarily related to the run-off business assumed as a result of the RITC transaction with Novae.

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 March 31,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
331,055

 
$
18,014

 
$
349,069

 
$
252,583

 
$
1

 
$
252,584

Net change in case and LAE reserves (1)
(97,573
)
 
19,872

 
(77,701
)
 
(123,492
)
 
6

 
(123,486
)
Net change in IBNR reserves (2)
(243,815
)
 
10,920

 
(232,895
)
 
(154,450
)
 
339

 
(154,111
)
Increase (reduction) in estimates of net ultimate losses
(10,333
)
 
48,806

 
38,473

 
(25,359
)
 
346

 
(25,013
)
Increase (reduction) in provisions for unallocated LAE
(15,440
)
 
265

 
(15,175
)
 
(14,952
)
 
—

 
(14,952
)
Amortization of deferred charge assets
7,064

 
—

 
7,064

 
5,081

 
—

 
5,081

Amortization of fair value adjustments
8,779

 
—

 
8,779

 
2,147

 
—

 
2,147

Changes in fair value - fair value option
56,041

 
—

 
56,041

 
(40,241
)
 
—

 
(40,241
)
Net incurred losses and LAE

$
46,111

 
$
49,071

 
$
95,182

 
$
(73,324
)
 
$
346

 
$
(72,978
)
(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 March 31: The increase in net incurred losses and LAE for the three months ended March 31, 2019 of $95.2 million included net incurred losses and LAE of $49.1 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 $49.1 million, the increase in net incurred losses and LAE for the three months ended March 31, 2019 relating to prior periods was $46.1 million, which was attributable to an increase in the fair value of liabilities of $56.0 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 $8.8 million and the amortization of deferred charge assets of $7.1 million, partially offset by a reduction in estimates of net ultimate losses of $10.3 million and a reduction in provisions for unallocated LAE of $15.4 million, relating to 2019 run-off activity. The reduction in estimates of net ultimate losses of $10.3 million for the three months ended March 31, 2019 included a net reduction in case and IBNR reserves of $341.4 million, partially offset by net losses paid of $331.1 million.
The reduction in net incurred losses and LAE for the three months ended March 31, 2018 of $73.0 million included net incurred losses and LAE of $0.3 million related to current period net earned premium, primarily for the run-off business acquired with recent transactions. Excluding current period net incurred losses and LAE of $0.3 million, the reduction in net incurred losses and LAE for the three months ended March 31, 2018 relating to prior periods was $73.3 million, which was attributable to a reduction in estimates of net ultimate losses of $25.4 million, a reduction in provisions for unallocated LAE of $15.0 million, relating to 2018 run-off activity, and a reduction in the fair value of liabilities of $40.2 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, partially offset by the amortization of deferred charge assets of $5.1 million and the amortization of fair value adjustments over the estimated payout period relating to companies acquired of $2.1 million. The reduction in estimates of net ultimate losses of $25.4 million for the three months ended March 31, 2018 included a net change in case and IBNR reserves of $277.9 million, partially offset by net losses paid of $252.6 million.

Acquisition Costs:
Three Months Ended March 31: Acquisition costs were $28.2 million and $1.5 million for the three months ended March 31, 2019 and 2018, respectively. The increase in acquisition costs for the three months ended March 31, 2019 primarily related to the run off business assumed through the AmTrust RITC Transactions and the acquisition of Maiden Re North America.
Fees and Commission Income:
Three Months Ended March 31: Our management companies in the Non-life Run-off segment earned fees and commission income of $4.8 million for the three months ended March 31, 2019 which is broadly consistent with fees and commission income of $4.9 million for the three months ended March 31, 2018.
Other Income:
Three Months Ended March 31: For the three months ended March 31, 2019, we recorded other income of $5.5 million compared to $2.6 million for the three months ended March 31, 2018, an increase of $2.9 million, primarily due to a reduction in net liabilities relating to direct asbestos and environmental exposures carried by our subsidiary DCo LLC.

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General and Administrative Expenses:
General and administrative expenses consist of operating expenses and corporate expenses.
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Operating expenses
$
43,992

 
$
38,403

 
$
5,589

Corporate expenses
16,570

 
8,633

 
7,937

General and administrative expenses
$
60,562

 
$
47,036

 
$
13,526

Three Months Ended March 31: General and administrative expenses were $60.6 million and $47.0 million for the three months ended March 31, 2019 and 2018, respectively. The increase of $13.5 million was primarily attributable to higher performance-based salary and benefits expenses for the three months ended March 31, 2019 as a result of higher net earnings in 2019 compared to 2018.
Interest Expense:
Three Months Ended March 31: Interest expense was $12.1 million for the three months ended March 31, 2019 compared to $8.5 million for the three months ended March 31, 2018, and increase of $3.6 million. The increase 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.
Income Taxes
Three Months Ended March 31: For the three months ended March 31, 2019 income tax expense was $2.7 million compared to an income tax benefit of $1.1 million for the three months ended March 31, 2018, respectively, a change of $3.8 million, which primarily resulted from higher earnings before income taxes in the current period.
Earnings from Equity Method Investments
Three Months Ended March 31: For the three months ended March 31, 2019 and 2018 earnings from equity method investments were $8.6 million and $14.7 million, respectively, a decrease of $6.1 million. The decrease was primarily due to the earnings recognized on our equity method investment in KaylaRe in the comparative period, which did not reoccur in the current period as, since its acquisition on May 14, 2018, Kayla Re is a fully owned subsidiary.
Noncontrolling Interest:
Three Months Ended March 31: The net earnings attributable to the noncontrolling interest of our Non-life Run-off segment were $2.6 million and $1.4 million for the three months ended March 31, 2019 and 2018, respectively, The increase of $1.2 million for the three months ended March 31, 2019 was primarily attributable to an increase in earnings for those companies where there is a noncontrolling interest. The number of subsidiaries in this segment with a noncontrolling interest remained unchanged at two as of March 31, 2019 and March 31, 2018.

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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
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Gross premiums written
$
53,985

 
$
49,442

 
$
4,543

 
 
 
 
 
 
Net premiums written
$
46,499

 
$
41,494

 
$
5,005

 
 
 
 
 
 
Net premiums earned
$
38,753

 
$
35,223

 
$
3,530

Net incurred losses and LAE
(17,214
)
 
(17,172
)
 
(42
)
Acquisition costs
(13,742
)
 
(12,065
)
 
(1,677
)
Operating expenses
(3,033
)
 
(4,177
)
 
1,144

Underwriting income
4,764

 
1,809

 
2,955

Net investment income
1,711

 
1,185

 
526

Net realized and unrealized gains (losses)
2,913

 
(1,403
)
 
4,316

Fees and commission income
1,849

 
3,433

 
(1,584
)
Other income
36

 
64

 
(28
)
Corporate expenses
(3,788
)
 
(475
)
 
(3,313
)
Net foreign exchange gains (losses)
825

 
(953
)
 
1,778

EARNINGS BEFORE INCOME TAXES
8,310

 
3,660

 
4,650

Income tax expense
(685
)
 
(280
)
 
(405
)
NET EARNINGS
7,625

 
3,380

 
4,245

Net earnings attributable to noncontrolling interest
(3,128
)
 
(1,411
)
 
(1,717
)
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
4,497

 
$
1,969

 
$
2,528

 
 
 
 
 
 
Underwriting ratios(1):
 
 
 
 
 
Loss ratio
44.4
%
 
48.8
%
 
(4.4
)%
Acquisition cost ratio
35.5
%
 
34.3
%
 
1.2
 %
Operating expense ratio
7.8
%
 
11.8
%
 
(4.0
)%
Combined ratio
87.7
%
 
94.9
%
 
(7.2
)%
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Overall Results
Three months ended March 31: Net earnings were $4.5 million for the three months ended March 31, 2019 compared to $2.0 million for the three months ended March 31, 2018, an increase of $2.5 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. The combined ratio decreased to 87.7% for the three months ended March 31, 2019 as compared to 94.9% for the three months ended March 31, 2018. The decrease in the combined ratio was primarily due to the decrease in the loss ratio and the operating expense ratio.
Investment results are separately discussed below in "Investable Assets."

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Gross Premiums Written:
The following table provides gross premiums written by line of business for the Atrium segment:
 
Three Months Ended
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Marine, Aviation and Transit
$
13,014

 
$
12,387

 
$
627

Binding Authorities
18,575

 
17,709

 
866

Reinsurance
8,475

 
8,932

 
(457
)
Accident and Health
9,212

 
6,140

 
3,072

Non-Marine Direct and Facultative
4,709

 
4,274

 
435

Total
$
53,985

 
$
49,442

 
$
4,543

The increase in gross premiums written for the three months ended March 31, 2019 was predominantly due to favorable pricing in the Accident and Health line of business and a number of new opportunities.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the Atrium segment:
 
Three Months Ended
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Marine, Aviation and Transit
$
8,399

 
$
7,594

 
$
805

Binding Authorities
19,195

 
16,621

 
2,574

Reinsurance
3,064

 
3,298

 
(234
)
Accident and Health
3,919

 
4,407

 
(488
)
Non-Marine Direct and Facultative
4,176

 
3,303

 
873

Total
$
38,753

 
$
35,223

 
$
3,530

Three Months Ended March 31: Net premiums earned for the Atrium segment were $38.8 million and $35.2 million for the three months ended March 31, 2019 and 2018, respectively. The increase in net premiums earned 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.


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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:
 
Three Months Ended March 31,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
14,420

 
$
7,893

 
$
22,313

 
$
10,376

 
$
7,154

 
$
17,530

Net change in case and LAE reserves (1)
(6,342
)
 
5,929

 
(413
)
 
(2,384
)
 
6,274

 
3,890

Net change in IBNR reserves (2)
(10,232
)
 
4,415

 
(5,817
)
 
(5,587
)
 
3,878

 
(1,709
)
Increase (reduction) in estimates of net ultimate losses
(2,154
)
 
18,237

 
16,083

 
2,405

 
17,306

 
19,711

Amortization of fair value adjustments
1,131

 
—

 
1,131

 
(2,539
)
 
—

 
(2,539
)
Net incurred losses and LAE
$
(1,023
)
 
$
18,237

 
$
17,214

 
$
(134
)
 
$
17,306

 
$
17,172

(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 March 31: Net incurred losses and LAE for the three months ended March 31, 2019 and 2018 were $17.2 million and $17.2 million, respectively. Net favorable prior year loss development was $1.0 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively. Net favorable prior year loss development in the three months ended March 31, 2019 and 2018 was spread across most lines of business. Excluding prior year loss development, net incurred losses and LAE for the three months ended March 31, 2019 and 2018 were $18.2 million and $17.3 million, respectively. The increase in net incurred losses and LAE for the three months ended March 31, 2019 compared with 2018, excluding prior year loss development, was primarily due to the increase in net earned premium. Loss frequency was in line with expectations in the three months ended March 31, 2019.

Acquisition Costs:
Three Months Ended March 31: Acquisition costs were $13.7 million and $12.1 million for the three months ended March 31, 2019 and 2018, respectively. The Atrium acquisition cost ratios were relatively consistent at 35.5% and 34.3% for the three months ended March 31, 2019 and 2018, respectively, with the change driven by changes in the business mix.
Operating Expenses:
Three Months Ended March 31: Operating expenses for the Atrium segment were $3.0 million and $4.2 million for the three months ended March 31, 2019 and 2018, respectively. The decrease in operating expenses was primarily due to lower performance-based compensation 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 Months Ended March 31: Fees and commission income was $1.8 million and $3.4 million for the three months ended March 31, 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 consortiums. 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 2018 and the three months ended March 31, 2019.
Corporate Expenses:
Three Months Ended March 31: Corporate expenses for the Atrium segment were $3.8 million and $0.5 million for the three months ended March 31, 2019 and 2018, respectively. The increase in corporate expenses was primarily due to higher variable compensation costs in the three months ended March 31, 2019 due to better performance in the Atrium segment for the three months ended March 31, 2019.

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Noncontrolling Interest:
Three Months Ended March 31: The net earnings attributable to the noncontrolling interest in the Atrium segment were $3.1 million for the three months ended March 31, 2019, compared to $1.4 million for the three months ended March 31, 2018. The increase in the net earnings attributable to the noncontrolling interest was due to higher earnings in the Atrium segment compared to the comparative period, as discussed above. As of March 31, 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.
The following is a discussion and analysis of the results of operations for our StarStone segment are summarized below.
 
Three Months Ended
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Gross premiums written
$
251,373

 
$
304,989

 
$
(53,616
)
 
 
 
 
 
 
Net premiums written
$
194,601

 
$
180,563

 
$
14,038

 
 
 
 
 
 
Net premiums earned
$
213,262

 
$
126,826

 
$
86,436

Net incurred losses and LAE
(195,052
)
 
(75,340
)
 
(119,712
)
Acquisition costs
(51,659
)
 
(16,425
)
 
(35,234
)
Operating expenses
(35,994
)
 
(34,557
)
 
(1,437
)
Underwriting income (loss)
(69,443
)
 
504

 
(69,947
)
Net investment income
11,942

 
7,701

 
4,241

Net realized and unrealized gains (losses)
20,658

 
(12,958
)
 
33,616

Other income
60

 
51

 
9

Interest expense
(475
)
 
(541
)
 
66

Net foreign exchange gains (losses)
(594
)
 
1,095

 
(1,689
)
LOSS BEFORE INCOME TAXES
(37,852
)
 
(4,148
)
 
(33,704
)
Income tax expense
(1,259
)
 
(998
)
 
(261
)
Earnings from equity method investments
188

 
—

 
188

NET LOSS
(38,923
)
 
(5,146
)
 
(33,777
)
Net loss attributable to noncontrolling interest
7,922

 
2,058

 
5,864

NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(31,001
)
 
$
(3,088
)
 
$
(27,913
)
 
 
 
 
 
 
Underwriting ratios(1):
 
 
 
 
 
Loss ratio 
91.5
%
 
59.4
%
 
32.1
 %
Acquisition cost ratio
24.2
%
 
13.0
%
 
11.2
 %
Operating expense ratio
16.9
%
 
27.2
%
 
(10.3
)%
Combined ratio
132.6
%
 
99.6
%
 
33.0
 %
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
StarStone recently appointed new executive leadership and under this leadership we are repositioning the underwriting portfolio for 2019 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 a mix of business for improved underwriting profitability.
Effective May 14, 2018, Enstar completed the acquisition of the portion of KaylaRe it did not already own. In addition, effective October 1, 2018, the StarStone Group transferred certain reserves relating to discontinued lines of business via an intra-group reinsurance agreement with another Enstar group subsidiary. The transactions between StarStone Group and other group entities, including KaylaRe (the "StarStone Intra-Group Cessions") are eliminated upon consolidation. As a result, our StarStone segment results have changed significantly and the following table summarizes the impact of the StarStone Intra-Group Cessions which are included in our StarStone segment for the three months ended March 31, 2019. 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. We believe the results of the StarStone Group for the three months ended March 31, 2019 are more directly comparable to the results of the StarStone segment for the three months ended March 31, 2018.

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Three Months Ended
 
March 31, 2019
 
StarStone Group
 
StarStone Intra-Group Cessions
 
StarStone Segment
 
(in thousands of U.S. dollars)
Net premiums earned
$
175,382

 
$
37,880

 
$
213,262

Net incurred losses and LAE
(144,764
)
 
(50,288
)
 
(195,052
)
Acquisition costs
(34,548
)
 
(17,111
)
 
(51,659
)
Operating expenses
(35,617
)
 
(377
)
 
(35,994
)
Underwriting loss
(39,547
)
 
(29,896
)
 
(69,443
)
Net investment income
11,853

 
89

 
11,942

Net realized and unrealized gains
18,710

 
1,948

 
20,658

Other income
60

 
—

 
60

Interest income (expenses)
(2,792
)
 
2,317

 
(475
)
Net foreign exchange gain
(242
)
 
(352
)
 
(594
)
LOSS BEFORE INCOME TAXES
(11,958
)
 
(25,894
)
 
(37,852
)
Income tax expense
(1,259
)
 
—

 
(1,259
)
Earnings from equity method investments
188

 
—

 
188

NET LOSS
(13,029
)
 
(25,894
)
 
(38,923
)
Net loss attributable to noncontrolling interest
5,346

 
2,576

 
7,922

NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(7,683
)
 
$
(23,318
)
 
$
(31,001
)
 
 
 
 
 
 
Underwriting ratios:
 
 
 
 
 
Loss ratio (1)
82.5
%
 
132.8
%
 
91.5
%
Acquisition cost ratio (1)
19.7
%
 
45.2
%
 
24.2
%
Operating expense ratio (1)
20.3
%
 
1.0
%
 
16.9
%
Combined ratio (1)
122.5
%
 
178.9
%
 
132.6
%
(1) 
Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
Overall Results
Three Months Ended March 31: Net losses for the StarStone segment were $31.0 million for the three months ended March 31, 2019 compared to net losses of $3.1 million for the three months ended March 31, 2018, a change of $27.9 million. The net losses were primarily due to lower underwriting income of $69.9 million, partially offset by higher net realized and unrealized gains on our investment portfolio of $33.6 million, of which $32.5 million relates to higher unrealized gains, and higher net investment income of $4.2 million. The underwriting income was impacted by older underwriting years that are not reflective of the repositioning activities we have undertaken, and the prior year unfavorable development of $52.0 million was primarily on lines of business that we have exited. The core lines of business performed in line with our expectations during the three months ended March 31, 2019. The combined ratio was 132.6% for the three months ended March 31, 2019 as compared to 99.6% for the three months ended March 31, 2018. The loss ratio increased by 32.1 percentage points and the acquisition cost ratio increased by 11.2 percentage points. In addition, the operating expense ratio decreased by 10.3 percentage points for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
The loss ratio for the StarStone Group increased by 23.1 percentage points, the acquisition cost ratio increased by 6.7 percentage points and the operating expense ratio decreased by 6.9 percentage points. The increase in the loss ratio is primarily due to prior year unfavorable development across lines of business that we have exited and remediated as part of our repositioning exercise to improve underwriting profitability, partially offset by the 35% whole account quota share reinsurance agreement with KaylaRe. 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.


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Gross Premiums Written:
The following table provides gross premiums written by line of business for the StarStone segment:
 
Three Months Ended
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Casualty
$
95,405

 
$
74,869

 
$
20,536

Marine
88,541

 
100,926

 
(12,385
)
Property
28,153

 
82,242

 
(54,089
)
Aerospace
9,112

 
10,008

 
(896
)
Workers' Compensation
30,162

 
36,944

 
(6,782
)
Total
$
251,373

 
$
304,989

 
$
(53,616
)
Three Months Ended March 31: Gross premiums written for the StarStone segment were $251.4 million and $305.0 million for the three months ended March 31, 2019 and 2018, respectively, a decrease of $53.6 million. The property, marine and workers' compensation lines of business decreased by $54.1 million, $12.4 million and $6.8 million, respectively. The decrease in gross premiums written was the result of our strategy to exit certain lines and focus on profitable lines, and we expect to write less gross written premiums in 2019 compared to 2018. The decrease in the property line of business was primarily due to the execution of this strategy. The decrease in the marine line of business was primarily due to the execution of our strategy to exit certain business within this line. The $20.5 million increase in the casualty line of business was primarily due to new business opportunities underwritten through our European platform.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the StarStone segment:    
 
Three Months Ended
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Casualty
$
81,717

 
$
39,767

 
$
41,950

Marine
56,753

 
39,224

 
17,529

Property
44,339

 
24,192

 
20,147

Aerospace
13,520

 
11,608

 
1,912

Workers' Compensation
16,933

 
12,035

 
4,898

Total
$
213,262

 
$
126,826

 
$
86,436

Three Months Ended March 31: Net premiums earned for the StarStone segment were $213.3 million and $126.8 million for the three months ended March 31, 2019 and 2018, respectively, an increase of $86.4 million. The increase in net premiums earned was primarily due to increased premiums earned in the Starstone Group as discussed below and the impact of eliminating the ceded premium earned related to KaylaRe after its acquisition.
Net premiums earned for the StarStone Group for the three months ended March 31, 2019 were $175.4 million, an increase of $48.6 million compared to the three months ended March 31, 2018. The increase was primarily driven by the casualty line of business due to increased premiums written, as discussed above. In contrast to gross premiums written, the property and marine lines of business also contributed to the increase for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, as we earn out the remainder of net premium on certain lines of business that we are either exiting or remediating.


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Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the StarStone segment:
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
Prior
Periods
 
Current
Period
 
Total
 
Prior
Periods
 
Current
Period
 
Total
 
(in thousands of U.S. dollars)
Net losses paid
$
113,625

 
$
1,792

 
$
115,417

 
$
87,687

 
$
948

 
$
88,635

Net change in case and LAE reserves (1)
(8,824
)
 
10,880

 
2,056

 
(14,217
)
 
9,742

 
(4,475
)
Net change in IBNR reserves (2)
(52,834
)
 
129,258

 
76,424

 
(73,390
)
 
64,519

 
(8,871
)
Increase in estimates of net ultimate losses
51,967

 
141,930

 
193,897

 
80

 
75,209

 
75,289

Increase (reduction) in provisions for unallocated LAE
(1,672
)
 
3,020

 
1,348

 
(2,101
)
 
2,293

 
192

Amortization of fair value adjustments
(193
)
 
—

 
(193
)
 
(141
)
 
—

 
(141
)
Net incurred losses and LAE
$
50,102

 
$
144,950

 
$
195,052

 
$
(2,162
)
 
$
77,502

 
$
75,340

(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 March 31: Net incurred losses and LAE for the StarStone segment for the three months ended March 31, 2019 and 2018 were $195.1 million and $75.3 million, respectively. Net adverse prior year loss development was $50.1 million for the three months ended March 31, 2019 compared to net favorable prior year loss development of $2.2 million for the three months ended March 31, 2018. Excluding prior year loss development, net incurred losses and LAE for the three months ended March 31, 2019 and 2018 were $145.0 million and $77.5 million, respectively. Net adverse prior year loss development for the three months ended March 31, 2019 was primarily related to development on lines of business which we have either exited or which are subject to remediation as part of our underwriting repositioning.
Net incurred losses and LAE for the StarStone Group for the three months ended March 31, 2019 and 2018 were $144.8 million and $75.3 million, respectively. The increase in net incurred losses was primarily due to higher net earned premium and adverse prior year loss development. The loss ratios for the StarStone Group were 82.5% and 59.4% for the three months ended March 31, 2019 and 2018, respectively.

Acquisition Costs:
Three Months Ended March 31: Acquisition costs for the StarStone segment were $51.7 million and $16.4 million for the three months ended March 31, 2019 and 2018, respectively, an increase of $35.2 million. The acquisition cost ratios for the three months ended March 31, 2019 and 2018 were 24.2% and 13.0%, respectively, an increase of 11.2 percentage points.
Acquisition costs for the StarStone Group were $34.5 million and $16.4 million for the three months ended March 31, 2019 and 2018, respectively, an increase of $18.1 million. The acquisition cost ratios for the three months ended March 31, 2019 and 2018 were 19.7% and 13.0%, respectively, an increase of 6.7 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 does not benefit as substantially from the quota share ceding overriding commission for the three months ended March 31, 2019.
Operating Expenses:
Three Months Ended March 31: Operating expenses for for the StarStone segment for the three months ended March 31, 2019 and 2018 were $36.0 million and $34.6 million, respectively. The operating expense ratios for the three months ended March 31, 2019 and 2018 were 16.9% and 27.2%, respectively, a decrease of 10.3 percentage points.

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The operating expense ratios for the StarStone Group for the three months ended March 31, 2019 and 2018 were 20.3% and 27.2%, respectively, a decrease of 6.9 percentage points. Expenses were generally consistent with comparative periods, while net premiums earned was higher. 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 months ended March 31, 2019 for the StarStone Group.
Income Taxes:
Three Months Ended March 31: Income tax expense for the StarStone segment for the three months ended March 31, 2019 and 2018 was $1.3 million and $1.0 million, respectively. The income tax expense is generally driven by the geographical distribution of pre-tax earnings (loss) between taxable and non-taxable jurisdictions.
Noncontrolling Interest:
Three Months Ended March 31: The net losses attributable to the noncontrolling interest in the StarStone segment were $7.9 million for the three months ended March 31, 2019, compared to net losses attributable to the noncontrolling interest of $2.1 million for the three months ended March 31, 2018. The net losses attributable to the noncontrolling interest for the three months ended March 31, 2019 were due to the larger net losses in the StarStone Group for the three months ended March 31, 2019.
As of March 31, 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. We have entered into an agreement to dispose of our remaining life business, which comprises the term life products in Alpha, following which, we will 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
 
 
 
March 31,
 
 
 
2019
 
2018
 
Change
 
(in thousands of U.S. dollars)
Net premiums earned
$
6,598

 
$
992

 
$
5,606

Net incurred losses and LAE
(4,956
)
 
—

 
(4,956
)
Life and Annuity Policy Benefits
(96
)
 
46

 
(142
)
Acquisition costs
(232
)
 
(148
)
 
(84
)
Underwriting income
1,314

 
890

 
424

Net investment income
(1,685
)
 
5,782

 
(7,467
)
Net realized and unrealized gains (losses)
1,034

 
(2,373
)
 
3,407

Other income (expenses)
212

 
(730
)
 
942

Corporate expenses
(8,697
)
 
(9,015
)
 
318

Interest Income
1,555

 
1,060

 
495

Net foreign exchange gains
1

 
1,167

 
(1,166
)
LOSS BEFORE INCOME TAXES
(6,266
)
 
(3,219
)
 
(3,047
)
Income tax expense
(85
)
 
(11
)
 
(74
)
NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED
(6,351
)
 
(3,230
)
 
(3,121
)
Dividend on preferred shares
(9,139
)
 
—

 
(9,139
)
NET LOSS ATTRIBUTABLE TO ENSTAR GROUP LIMITED ORDINARY SHAREHOLDERS
$
(15,490
)
 
$
(3,230
)
 
$
(12,260
)
Overall Results:
Net losses were $15.5 million for the three months ended March 31, 2019 compared to net losses of $3.2 million for the three months ended March 31, 2018, an increase in net losses of $12.3 million, which primarily resulted from the dividends on the preferred shares that were issued in June and November 2018, and a net investment loss in the current period.
Investment results are separately discussed below in "Investable Assets."
Underwriting Income:
Three Months Ended March 31: Underwriting income was $1.3 million for the three months ended March 31, 2019, broadly consistent with $0.9 million for the three months ended March 31, 2018. Our other activities includes our remaining life business and other active underwriting.

Corporate Expenses:
Three Months Ended March 31: Corporate expenses were $8.7 million for the three months ended March 31, 2019, broadly consistent with corporate expenses of $9.0 million in the three months ended March 31, 2018.

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Dividend on Preferred Shares:
Three Months Ended March 31: The dividends on preferred shares were $9.1 million and $nil for the three months ended March 31, 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.

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 $13.8 billion as of March 31, 2019 as compared to $12.5 billion as of December 31, 2018, an increase of 10.3%. The increase was primarily due to unrealized gains recorded in the first quarter of 2019 and the investments and funds held balance acquired in relation to the AmTrust RITC 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:
 
 
March 31, 2019
 
 
Non-life
Run-off
 
Atrium
 
StarStone
 
Other
 
Total
 
 
(in thousands of U.S. dollars)
Short-term investments, trading, at fair value
 
$
67,959

 
$
300

 
$
7,801

 
$
—

 
$
76,060

Fixed maturities, trading, at fair value
 
5,907,269

 
134,560

 
1,275,225

 
—

 
7,317,054

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

 
25,989

 
—

 
120,586

 
146,575

Funds held - directly managed
 
1,288,210

 
—

 
—

 
—

 
1,288,210

Equities, at fair value
 
370,591

 
3,624

 
26,205

 
—

 
400,420

Other investments, at fair value
 
2,186,611

 
7,838

 
116,801

 
13,095

 
2,324,345

Equity method investments
 
220,618

 
—

 
405

 

 
221,023

Total investments
 
10,041,258

 
172,311

 
1,426,437

 
133,681

 
11,773,687

Cash and cash equivalents (including restricted cash)
 
694,488

 
76,176

 
338,169

 
36,818

 
1,145,651

Funds held by reinsured companies
 
857,685

 
26,853

 
25,358

 
9,842

 
919,738

Total investable assets
 
$
11,593,431

 
$
275,340

 
$
1,789,964

 
$
180,341

 
$
13,839,076

Duration (in years) (1)
 
5.52

 
1.64

 
2.52

 
5.20

 
4.93

Average credit rating (2)
 
A+

 
AA+

 
A+

 
AA-

 
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 March 31, 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 March 31, 2019 and December 31, 2018.
As of both March 31, 2019 and December 31, 2018, our investment portfolio, including funds held - directly managed had an average credit quality rating of A+. As of March 31, 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 3.9% and 3.8% of our total fixed maturity investment portfolio, respectively. A detailed schedule of average credit ratings by asset class as of March 31, 2019 is included in Note 3 - "Investments" in the notes 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 3 - "Investments" 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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Composition of Investment Portfolio By Asset Class
The following tables summarize the fair value and composition of our investment portfolio by asset class:
 
 
March 31, 2019
 
 
Fair Value
 
 
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
 
$
417,243

 
$
63

 
$
—

 
$
—

 
$
—

 
$
—

 
$
417,306

 
3.5
%
U.K. government
 
644

 
277,799

 
—

 
—

 
—

 
—

 
278,443

 
2.4
%
Other government
 
308,413

 
198,228

 
55,991

 
171,579

 
35,765

 
—

 
769,976

 
6.5
%
Corporate
 
132,282

 
506,434

 
2,517,323

 
1,737,171

 
197,543

 
13,262

 
5,104,015

 
43.4
%
Municipal
 
12,284

 
81,059

 
49,814

 
16,909

 
—

 
—

 
160,066

 
1.4
%
Residential mortgage-backed
 
309,100

 
55,819

 
2,054

 
3,119

 
51,372

 
7,541

 
429,005

 
3.6
%
Commercial mortgage-backed
 
641,337

 
87,319

 
77,117

 
61,139

 
6,514

 
10,698

 
884,124

 
7.5
%
Asset-backed
 
302,491

 
99,371

 
164,249

 
110,806

 
18,111

 
1,340

 
696,368

 
5.9
%
Total
 
2,123,794

 
1,306,092

 
2,866,548

 
2,100,723

 
309,305

 
32,841

 
8,739,303

 
74.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets included within funds held - directly managed
 
 
 
 
 
88,596

 
0.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Publicly traded equities
 
 
 
 
 
 
 
 
 
 
 
 
 
171,710

 
1.5
%
Privately held equities
 
 
 
 
 
 
 
 
 
 
 
 
 
228,710

 
1.9
%
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
400,420

 
3.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
 
 
 
 
 
 
 
 
 
 
 
 
979,270

 
8.3
%
Equity funds
 
 
 
 
 
 
 
 
 
 
 
 
 
374,249

 
3.2
%
Fixed income funds
 
 
 
 
 
 
 
 
 
 
 
 
 
587,093

 
5.0
%
Private equity funds
 
 
 
 
 
 
 
 
 
 
 
 
 
235,538

 
2.0
%
CLO equities
 
 
 
 
 
 
 
 
 
 
 
 
 
41,434

 
0.4
%
CLO equity funds
 
 
 
 
 
 
 
 
 
 
 
 
 
40,348

 
0.3
%
Private credit funds
 
 
 
 
 
 
 
 
 
 
 
 
 
53,258

 
0.5
%
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
13,155

 
0.1
%
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
2,324,345

 
19.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity method investments
 
 
 
 
 
 
 
 
 
 
 
 
 
221,023

 
1.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
2,123,794

 
$
1,306,092

 
$
2,866,548

 
$
2,100,723

 
$
309,305

 
$
32,841

 
$
11,773,687

 
100.0
%

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December 31, 2018
 
Fair Value
 
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 8 - "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:
 
 
March 31, 2019
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Non-OTTI
 
Fair
Value
U.S. government and agency
 
$
415,689

 
$
3,273

 
$
(1,656
)
 
$
417,306

U.K. government
 
261,213

 
17,820

 
(590
)
 
278,443

Other government
 
769,300

 
14,412

 
(13,736
)
 
769,976

Corporate
 
5,079,783

 
85,637

 
(61,405
)
 
5,104,015

Municipal
 
156,818

 
4,019

 
(771
)
 
160,066

Residential mortgage-backed
 
424,195

 
6,719

 
(1,909
)
 
429,005

Commercial mortgage-backed
 
884,640

 
8,496

 
(9,012
)
 
884,124

Asset-backed
 
698,724

 
1,792

 
(4,148
)
 
696,368

 
 
$
8,690,362

 
$
142,168

 
$
(93,227
)
 
$
8,739,303

 
 
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 March 31, 2019:
 
Fair Value
 
Average Credit Rating
 
(in thousands of U.S. dollars)
 
 
JPMorgan Chase & Co
$
111,341

 
A
Apple Inc
96,179

 
AA+
Citigroup Inc
90,123

 
A
Bank of America Corp
90,042

 
A
Morgan Stanley
84,229

 
A-
General Electric Co
80,534

 
BBB+
Wells Fargo & Co
79,211

 
A
HSBC Holdings PLC
66,532

 
A
Anheuser-Busch InBev SA/NV
61,917

 
BBB+
Comcast Corp
60,772

 
A-
 
$
820,880

 
 
Investment Results - Consolidated
The following table summarizes our investment results by major investment category. Additional information is included in Note 3 - "Investments" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of the Quarterly Report on Form 10-Q.
 
 
Three Months Ended March 31, 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
 
$
64,249

 
$
1,467

 
$
11,382

 
$
380

 
$
77,478

Equity securities
 
2,878

 
15

 
487

 
—

 
3,380

Other
 
3,054

 
297

 
784

 
(2,021
)
 
2,114

Gross investment income
 
70,181

 
1,779

 
12,653

 
(1,641
)
 
82,972

Investment expenses
 
(3,453
)
 
(68
)
 
(711
)
 
(44
)
 
(4,276
)
Net investment income (expense)
 
$
66,728

 
$
1,711

 
$
11,942

 
$
(1,685
)
 
$
78,696

 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains and losses:
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
222,277

 
2,130

 
21,808

 
(64
)
 
246,151

Equity securities
 
11,798

 
356

 
(2,223
)
 
—

 
9,931

Other investments
 
202,111

 
427

 
1,073

 
1,098

 
204,709

Net realized and unrealized gains and losses
 
$
436,186

 
$
2,913

 
$
20,658

 
$
1,034

 
$
460,791

 
 
 
 
 
 
 
 
 
 
 
Annualized income from cash and fixed maturities
 
$
256,996

 
$
5,868

 
$
45,528

 
$
1,520

 
$
309,912

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
 
8,460,668

 
260,350

 
1,664,717

 
158,239

 
10,543,974

Annualized Investment Book Yield
 
3.04
%
 
2.25
%
 
2.73
%
 
0.96
 %
 
2.94
%
 
 
 
 
 
 
 
 
 
 
 
Total financial statement return (2)
 
$
502,914

 
$
4,624

 
$
32,600

 
$
(651
)
 
$
539,487

Average aggregate invested assets, at fair value (1)
 
10,739,085

 
268,250

 
1,798,585

 
173,807

 
12,979,727

Financial Statement Portfolio Return
 
4.68
%
 
1.72
%
 
1.81
%
 
(0.37
)%
 
4.16
%

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Three Months Ended March 31, 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
 
$
48,537

 
$
1,060

 
$
7,758

 
$
370

 
$
57,725

Equity securities
 
1,203

 
13

 
274

 
—

 
1,490

Other investments and other
 
3,713

 
168

 
622

 
5,470

 
9,973

Gross investment income
 
53,453

 
1,241

 
8,654

 
5,840

 
69,188

Investment expenses
 
(1,802
)
 
(56
)
 
(953
)
 
(58
)
 
(2,869
)
Net investment income
 
$
51,651

—

$
1,185

—

$
7,701

—

$
5,782

—

$
66,319

 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains and losses:
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
$
(122,526
)
 
$
(1,300
)
 
$
(14,285
)
 
$
5

 
$
(138,106
)
Equity securities
 
220

 
(40
)
 
4,559

 
(1
)
 
4,738

Other investments
 
(3,990
)
 
(63
)
 
(3,232
)
 
(2,377
)
 
(9,662
)
Net realized and unrealized losses
 
$
(126,296
)
 
$
(1,403
)
 
$
(12,958
)
 
$
(2,373
)
 
$
(143,030
)
 
 
 
 
 
 
 
 
 
 
 
Annualized income from cash and fixed maturities
 
$
194,148

 
$
4,240

 
$
31,032

 
$
1,480

 
$
230,900

Average aggregate fixed maturities and cash and cash equivalents, at cost (1)
 
7,396,161

 
265,725

 
1,487,722

 
154,700

 
9,304,308

Annualized Investment Book Yield
 
2.62
 %
 
1.60
 %
 
2.09
 %
 
0.96
%
 
2.48
 %
 
 
 
 
 
 
 
 
 
 
 
Total financial statement return (2)
 
$
(74,645
)
 
$
(218
)
 
$
(5,257
)
 
$
3,409

 
$
(76,711
)
Average aggregate invested assets, at fair value (1)
 
8,408,239

 
274,312

 
1,654,718

 
298,061

 
10,635,330

Financial Statement Portfolio Return
 
(0.89
)%
 
(0.08
)%
 
(0.32
)%
 
1.14
%
 
(0.72
)%
(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 $12.4 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to a $19.8 million increase in net investment income from fixed maturities and cash and cash equivalents, principally due to an increase of $1,239.7 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 Kayla Re, Zurich, Neon, Novae transactions in 2018, and the AmTrust RITC Transactions in 2019. The book yield increased by 46 basis points primarily due to higher reinvestment rates as a result of broad increases in effective yields.
Net Realized and Unrealized Gains (Losses):
Net realized and unrealized gains were $460.8 million for the three months ended March 31, 2019 compared to net realized and unrealized losses of $143.0 million for the three months ended March 31, 2018, an increase of $603.8 million. Included in net realized and unrealized losses are the following items:
•
net realized and unrealized gains (losses) on fixed income securities, including fixed income securities within our fund held portfolios, of $246.2 million for the three months ended March 31, 2019, compared to net realized and unrealized losses of $138.1 million for the three months ended March 31, 2018, a change of $384.3 million, primarily driven by higher valuations due to tightening credit spreads 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 $9.9 million for the three months ended March 31, 2019, compared to $4.7 million for the three months ended March 31, 2018, an increase of $5.2 million, primarily driven by a more favorable movement in international equity markets in 2019 compared to declines in global markets in the comparative period;

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•
net realized and unrealized gains on other investments and other items of $204.7 million for the three months ended March 31, 2019, compared to realized and unrealized losses of $9.7 million for the three months ended March 31, 2018, representing an increase of $214.4 million. The unrealized gains for the three months ended March 31, 2019 primarily comprised unrealized gains in our hedge funds, equity funds, fixed income funds and private equity funds, principally driven by tightening credit spreads and a more favorable movement in international equity markets in 2019. The unrealized losses for the three months ended March 31, 2018 primarily comprised unrealized losses in our private equity funds, equity funds and call options on equity partially offset by unrealized gains on hedge funds.
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 March 31, 2019 included total shareholders' equity of $4.3 billion, redeemable noncontrolling interest of $456.3 million classified as temporary equity, and debt obligations of $1.1 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:
 
 
March 31,
2019
 
December 31,
2018
 
Change
 
 
(in thousands of U.S. dollars)
Ordinary shareholders' equity
 
$
3,757,712

 
$
3,391,933

 
$
365,779

Series D and E Preferred Shares
 
510,000

 
510,000

 
—

Total Enstar Group Limited Shareholders' Equity (A)
 
4,267,712

 
3,901,933

 
365,779

Noncontrolling interest
 
12,452

 
12,056

 
396

Total Shareholders' Equity (B)
 
4,280,164

 
3,913,989

 
366,175

 
 
 
 
 
 
 
Senior Notes
 
348,180

 
348,054

 
126

Revolving credit facility
 
257,000

 
15,000

 
242,000

Term loan facility
 
498,610

 
498,485

 
125

Total debt (C)
 
1,103,790

 
861,539

 
242,251

 
 
 
 
 
 
 
Redeemable noncontrolling interest (D)
 
456,346

 
458,543

 
(2,197
)
 
 
 
 
 
 
 
Total capitalization = (B) + (C) + (D)
 
$
5,840,300

 
$
5,234,071

 
$
606,229

 
 
 
 
 
 
 
Total capitalization attributable to Enstar = (A) + (C)
 
$
5,371,502

 
$
4,763,472

 
$
608,030

 
 
 
 
 
 
 
Debt to total capitalization
 
18.9
%
 
16.5
%
 
2.4
%
Debt and Series D and E Preferred Shares to total capitalization
 
27.6
%
 
26.2
%
 
1.4
%
 
 
 
 
 
 
 
Debt to total capitalization attributable to Enstar
 
20.5
%
 
18.1
%
 
2.4
%
Debt and Series D and E Preferred Shares to total capitalization available to Enstar
 
30.0
%
 
28.8
%
 
1.2
%

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As of March 31, 2019, we had $718.1 million of cash and cash equivalents, excluding restricted cash that supports insurance operations, and included in this amount was $603.9 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 March 31, 2019 for any material withholding taxes on dividends or other distributions, as described in Note 17 - "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 May 8, 2019:
 
 
 
 
 
 
 
 
Dividend per:
 
 
Preferred Share Series
 
Date Declared
 
Record Date
 
Date Payable
 
Preferred Share
 
Depositary Share
 
Total dividends paid and declared in the three months ended March 31, 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

 
—

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

 
$
0.43750

 
—

 
 
 
 
 
 
 
 
 
 
 
 
$
9,139

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 facilities, and during 2017 and 2018, we issued senior notes and preferred shares as described below.
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 and our 4.5% senior notes due 2022 (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 Senior Notes, which limits our right to redeem the Senior Notes at our option, except in the circumstances set forth in the second supplemental indenture. This change enabled the Senior Notes to qualify as Tier 3 capital under the eligible capital rules of the

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Bermuda Monetary Authority. Because this amendment did not materially and adversely affect the holders of or the coupons on the Senior Notes, entry into the second supplemental indenture did not require the consent of the holders of the Senior Notes.
On June 28, 2018, we issued 16,000 Series D Preferred Shares with an aggregate liquidation value of $400.0 million. The net proceeds from the Series D Preferred Shares were used to repay a portion of amounts outstanding under our revolving credit facility, and fully repay our previous term loan facility. On November 21, 2018, we issued 4,400 Series E Preferred Shares with an aggregate liquidation value of $110.0 million. The net proceeds from the Series E Preferred Shares were used to fund our new business in Non-life Run-off operations.
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 March 31, 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" 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. 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:
 
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
 
Change
 
 
(in thousands of U.S. dollars)
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
107,138

 
$
(74,214
)
 
$
181,352

Investing activities
 
(173,007
)
 
(230,229
)
 
57,222

Financing activities
 
232,861

 
212,511

 
20,350

Effect of exchange rate changes on cash
 
(3,925
)
 
15,059

 
(18,984
)
Net increase (decrease) in cash and cash equivalents
 
163,067

 
(76,873
)
 
239,940

Cash and cash equivalents, beginning of period
 
982,584

 
1,212,836

 
(230,252
)
Cash and cash equivalents, end of period
 
$
1,145,651

 
$
1,135,963

 
$
9,688

Details of our consolidated cash flows are included in "Item 1. Financial Statements - Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018."
2019 versus 2018: Cash and cash equivalents increased by $163.1 million during the three months ended March 31, 2019 compared with a decrease of $76.9 million during the three months ended March 31, 2018.
For the three months ended March 31, 2019, cash and cash equivalents increased by $163.1 million, as cash provided by operating and financing activities of $107.1 million and $232.9 million, respectively, was partially offset by cash used in investing activities of $173.0 million. Cash provided by operations is largely as a result of the timing of paid losses. Cash provided by financing activities for the three months ended March 31, 2019 was primarily attributable to the net drawdown on the revolving credit facility of $242.0 million, which was used to fund acquisition activity and other corporate activities. Cash used in investing activities for the three months ended March 31, 2019 primarily related to the net subscriptions of other investments of $167.0 million. In addition, we are continuously seeking to deploy surplus operating cash into our investing activities.
For the three months ended March 31, 2018, cash and cash equivalents decreased by $76.9 million, as cash used in operating and investing activities of $74.2 million and $230.2 million, respectively, was partially offset by cash provided by financing activities of $212.5 million. Cash used in operations is largely a result of net paid losses. Cash used in investing activities was primarily related to net subscriptions of other investments of $243.6 million. Cash provided by financing activities for the three months ended March 31, 2018 was primarily attributable to the net receipt of loans of $212.5 million, which provided capital for the reinsurance transactions in our Non-life Run-off segment that were entered into during the three months ended March 31, 2018.
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 $13.8 billion as of March 31, 2019 as compared to $12.5 billion as of December 31, 2018, an increase of 10.3%. The increase was primarily due to unrealized gains recorded in the first quarter of 2019 and the investments and funds held balance acquired in relation to the AmTrust RITC transactions.
For information regarding our investments strategy, portfolio and results, refer to "Investable Assets" above.
Reinsurance Balances Recoverable
As of March 31, 2019 and December 31, 2018, we had reinsurance balances recoverable of $2,286.4 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 5 - "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 12 - "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 March 31, 2019 and December 31, 2018 were $1,103.8 million and $861.5 million, respectively, as detailed in the below table:
Debt Obligations
 
Origination Date
 
Term
 
March 31,
2019
 
December 31,
2018
Senior Notes
 
March 10, 2017
 
5 years
 
$
348,180

 
$
348,054

EGL Revolving Credit Facility
 
August 16, 2018
 
5 years
 
257,000

 
15,000

2018 EGL Term Loan Facility
 
December 27, 2018
 
3 years
 
498,610

 
498,485

Total debt obligations
 
 
 
$
1,103,790

 
$
861,539

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 March 31, 2019, we were permitted to borrow up to an aggregate of $600.0 million under the facility. As of March 31, 2019, there was $343.0 million of available unutilized capacity under this facility. We are in compliance with the covenants of the facility. Subsequent to March 31, 2019, we repaid $42.0 million, bringing the unutilized capacity under this facility to $385.0 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.

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Contractual Obligations
The following table summarizes, as of March 31, 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
1 Year
 
1 - 3
years
 
3 - 5
years
 
6 - 10
years
 
More than
10 Years
 
(in millions of U.S. dollars)
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Estimated gross reserves for losses and LAE (1)
 
 
 
 
 
 
 
 
 
 
 
Asbestos
$
1,604.2

 
$
97.0

 
$
179.5

 
$
167.7

 
$
299.3

 
$
860.7

Environmental
220.3

 
20.2

 
37.3

 
33.1

 
52.2

 
77.5

General Casualty
1,031.3

 
256.5

 
315.1

 
165.7

 
144.8

 
149.2

Workers' compensation/personal accident
2,234.9

 
257.2

 
368.0

 
277.6

 
399.7

 
932.4

Marine, aviation and transit
505.8

 
152.4

 
165.6

 
70.6

 
61.2

 
56.0

Construction defect
112.3

 
24.7

 
38.1

 
23.3

 
17.7

 
8.5

Professional indemnity/ Directors & Officers
1,082.8

 
286.4

 
361.4

 
185.4

 
149.2

 
100.4

Motor
907.6

 
309.6

 
276.9

 
108.8

 
85.4

 
126.9

Property
265.7

 
105.6

 
89.1

 
34.8

 
21.5

 
14.7

Other
354.2

 
88.7

 
97.3

 
51.9

 
55.6

 
60.7

Total Non-Life Run-off
8,319.1

 
1,598.3

 
1,928.3

 
1,118.9

 
1,286.6

 
2,387.0

Atrium
222.4

 
91.3

 
80.3

 
30.7

 
16.8

 
3.3

StarStone
1,664.7

 
594.1

 
595.6

 
240.5

 
167.9

 
66.6

Other
21.0

 
3.3

 
8.4

 
4.0

 
3.6

 
1.7

ULAE
374.9

 
70.3

 
88.2

 
51.5

 
59.2

 
105.7

Estimated gross reserves for losses and LAE (1)
10,602.1

 
2,357.3

 
2,700.8

 
1,445.6

 
1,534.1

 
2,564.3

 
 
 
 
 
 
 
 
 
 
 
 
Policy benefits for life and annuity contracts (2)
117.8

 
6.0

 
11.3

 
12.0

 
28.1

 
60.4

Operating lease obligations
64.2

 
9.2

 
21.0

 
13.9

 
18.0

 
2.1

Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Investment commitments to private equity funds
210.8

 
98.9

 
95.8

 
16.1

 
—

 
—

Investment commitments to equity method investments
152.3

 
152.3

 
—

 
—

 
—

 
—

Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Loan repayments (including estimated interest payments)
1,266.7

 
50.2

 
943.6

 
272.9

 
—

 
—

Total
$
12,413.9

 
$
2,673.9

 
$
3,772.5

 
$
1,760.5

 
$
1,580.2

 
$
2,626.8

(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 March 31, 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 March 31, 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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(2) 
Policy benefits for life and annuity contracts recorded in our unaudited consolidated balance sheet as of March 31, 2019 of $100.7 million are computed on a discounted basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect a discount of the amount payable.
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 19 - "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 March 31, 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
 
March 31,
 
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
$
358,751

 
$
(41,210
)
Adjustments:
 
 
 
Net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed (1)
(246,151
)
 
138,106

Change in fair value of insurance contracts for which we have elected the fair value option
56,041

 
(40,241
)
Tax effects of adjustments (2)
21,849

 
(11,226
)
Adjustments attributable to noncontrolling interest (3)
9,170

 
(5,802
)
Non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders (4)
$
199,660

 
$
39,627

 
 
 
 
Diluted net earnings (loss) per ordinary share
$
16.57

 
$
(2.12
)
Adjustments:
 
 
 
Net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed (1)
(11.37
)
 
7.06

Change in fair value of insurance contracts for which we have elected the fair value option
2.59

 
(2.05
)
Tax effects of adjustments (2)
1.01

 
(0.57
)
Adjustments attributable to noncontrolling interest (3)
0.42

 
(0.30
)
Diluted non-GAAP operating income (loss) per ordinary share (4)
$
9.22

 
$
2.02

 
 
 
 
Weighted average ordinary shares outstanding - diluted
21,645,862

 
19,602,512

(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 3 - "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 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 include fixed maturity and short-term investments, 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 and our funds held directly managed portfolio:
 
 
Interest Rate Shift in Basis Points
As of March 31, 2019
 
-100
 
-50
 
—
 
+50
 
+100
 
 
(in millions of U.S. dollars)
Total Market Value
 
$
9,167

 
$
8,952

 
$
8,739

 
$
8,522

 
$
8,316

Market Value Change from Base
 
4.9
%
 
2.4
%
 
—

 
(2.5
)%
 
(4.8
)%
Change in Unrealized Value
 
$
428

 
$
213

 
$
—

 
$
(217
)
 
$
(423
)
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
-100
 
-50
 
—
 
+50
 
+100
Total Market Value
 
$
9,147

 
$
8,920

 
$
8,698

 
$
8,484

 
$
8,279

Market Value Change from Base
 
5.2
%
 
2.6
%
 
—

 
(2.5
)%
 
(4.8
)%
Change in Unrealized Value
 
$
449

 
$
222

 
$
—

 
$
(214
)
 
$
(419
)
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 and funds held - directly managed 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 and our funds held directly managed portfolio as of March 31, 2019 and December 31, 2018:
 
 
Credit Spread Shift in Basis Points
As at March 31, 2019
 
—
 
+50
 
+100
 
 
(in millions of U.S. dollars)
Total Market Value
 
$
8,739

 
$
8,529

 
$
8,327

Market Value Change from Base
 
—

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

 
$
(210
)
 
$
(412
)
 
 
 
 
 
 
 
As at December 31, 2018
 
—
 
+50
 
+100
Total Market Value
 
$
8,698

 
$
8,502

 
$
8,314

Market Value Change from Base
 
—

 
(2.3
)%
 
(4.4
)%
Change in Unrealized Value
 
$
—

 
$
(196
)
 
$
(384
)
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 recoverables, and funds held by reinsured companies, as discussed below.
Fixed Maturity and Short-Term Investments
As a holder of $8.7 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 3 - "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
March 31, 2019
 
December 31, 2018
 
Change
AAA
24.3
%
 
28.2
%
 
(3.9
)%
AA
14.9
%
 
14.4
%
 
0.5
 %
A
32.9
%
 
30.2
%
 
2.7
 %
BBB
24.0
%
 
23.4
%
 
0.6
 %
Non-investment grade
3.5
%
 
3.6
%
 
(0.1
)%
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 5 - "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 March 31, 2019, we have a significant concentration of $1,101.9 million to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's. In connection with the AmTrust RITC transactions, we have recorded, in aggregate $601.9 million as funds held, which is expected to be received in the second quarter of 2019 and subsequently invested in accordance with our investment guidelines.
Equity Price Risk
Our portfolio of equity investments, including the equity funds and call options on equities included in other investments and other assets (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 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:
 
March 31,
2019
 
December 31,
2018
 
Change
 
(in millions of U.S. dollars)
Publicly traded equity investments in common and preferred stocks
$
171.7

 
$
138.4

 
$
33.3

Privately held equity investments in common and preferred stocks
228.7

 
228.7

 
—

Private equity funds
235.5

 
248.6

 
(13.1
)
Equity funds
374.2

 
333.7

 
40.5

Fair value of equities at risk
$
1,010.1

 
$
949.4

 
$
60.7

 
 
 
 
 

Impact of 10% decline in fair value
$
101.0

 
$
94.9

 
$
6.1

In addition to the above, at March 31, 2019 we also have investments of $979.3 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.
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

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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 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 currency 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 three months ended March 31, 2019 and 2018, we utilized forward exchange contracts to hedge the foreign currency exposure on our net investment in certain of our subsidiaries whose functional currencies are denominated in Australian dollars. The loan and the forward contracts are discussed in Note 4 - "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 March 31, 2019
 
AUD
 
CAD
 
EUR
 
GBP
 
Other
 
Total
 
 
(in millions of U.S. dollars)
Total net foreign currency exposure
 
$
(20.7
)
 
$
12.6

 
$
30.5

 
$
56.5

 
$
(1.8
)
 
$
77.1

 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax impact of a 10% movement of the U.S. dollar(1)
 
$
(2.1
)
 
$
1.3

 
$
3.1

 
$
5.7

 
$
(0.2
)
 
$
7.7

 
 
 
 
 
 
 
 
 
 
 
 
 
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 March 31, 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 three months ended March 31, 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 19 - "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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about ordinary shares acquired by the Company during the three months ended March 31, 2019, which were shares withheld from employees in order to facilitate the payment of withholding taxes on restricted shares. The Company does not have a share repurchase program.
Period
 
Total Number of Shares Purchased(1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Program
January 1, 2019 - January 31, 2019
 
167

 
$
169.28

 
—

 
—

February 1, 2019 - February 28, 2019
 
—

 
$
—

 
—

 
—

March 1, 2019 - March 31, 2019
 
811

 
$
174.00

 
—

 
—

Total
 
978

 
 
 
—

 
—

(1) Consists of shares withheld from employees in order to facilitate the payment of withholding taxes on restricted shares granted pursuant to our equity incentive plan. The price for the shares is their fair market value, as determined by reference to the closing price of our ordinary shares on the vesting date.

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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).
 
 
 
  
Fourth Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit 3.2(b) of the Company’s Form 10-Q filed on August 11, 2014).
 
 
 
  
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).
 
 
 
 
Second Supplemental Indenture, dated as of March 26, 2019, between the Company and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 of the Company's Form 8-K filed March 26, 2019.
 
 
 
 
Employment Agreement, dated January 8, 2018, by and between Enstar Group Limited and Paul M.J. Brockman.
 
 
 
 
Master Agreement, dated March 1, 2019, by and among Maiden Holdings, Ltd., Maiden Reinsurance Ltd. and Enstar Group Limited.
 
 
 
  
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*
  
Interactive Data Files.
________________________________
*     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 May 8, 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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