Enstar Group LTD - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 2020
Commission File Number 001-33289
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
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | |||||||||
| Ordinary shares, par value $1.00 per share | ESGR | The NASDAQ Stock Market | LLC | ||||||||
| Depositary Shares, Each Representing a 1/1,000th Interest in a 7.00% | ESGRP | The NASDAQ Stock Market | LLC | ||||||||
| Fixed-to-Floating Rate Perpetual Non-Cumulative Preferred Share, Series D, Par Value $1.00 Per Share | |||||||||||
| Depositary Shares, Each Representing a 1/1,000th Interest in a 7.00% | ESGRO | The NASDAQ Stock Market | LLC | ||||||||
| Perpetual Non-Cumulative Preferred Share, Series E, Par Value $1.00 Per Share | |||||||||||
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
As at November 4, 2020, the registrant had outstanding 18,564,268 voting ordinary shares and 3,509,682 non-voting convertible ordinary shares, each par value $1.00 per share.
Enstar Group Limited
Quarterly Report on Form 10-Q
For the Period Ended September 30, 2020
Table of Contents
| Page | ||||||||
| PART I | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| CONSOLIDATED FINANCIAL STATEMENTS | Page | ||||
1
ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2020 (unaudited) and December 31, 2019
| September 30, 2020 | December 31, 2019 | ||||||||||
| (expressed in thousands of U.S. dollars, except share data) | |||||||||||
| ASSETS | |||||||||||
| Short-term investments, trading, at fair value | $ | 7,133 | $ | 51,490 | |||||||
Short-term investments, available-for-sale, at fair value (amortized cost: 2020 — $278,221; 2019 — $128,311; net of allowance: 2020 — $nil) | 278,175 | 128,335 | |||||||||
| Fixed maturities, trading, at fair value | 4,999,642 | 6,143,335 | |||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost: 2020 — $2,837,359; 2019 — $1,537,815; net of allowance: 2020 — $912) | 2,883,472 | 1,538,052 | |||||||||
| Funds held - directly managed | 1,066,639 | 1,187,552 | |||||||||
| Equities, at fair value | 653,159 | 726,721 | |||||||||
| Other investments, at fair value | 3,704,870 | 2,518,031 | |||||||||
| Equity method investments | 516,795 | 326,277 | |||||||||
| 14,109,885 | 12,619,793 | ||||||||||
| Cash and cash equivalents | 640,601 | 624,472 | |||||||||
| Restricted cash and cash equivalents | 556,721 | 346,877 | |||||||||
| Premiums receivable | 450,977 | 491,511 | |||||||||
| 157,827 | 155,793 | ||||||||||
Reinsurance balances recoverable on paid and unpaid losses (net of allowance: 2020 — $135,117) (Note 7) | 1,338,495 | 1,485,616 | |||||||||
| 543,161 | 695,518 | ||||||||||
| 365,288 | 448,855 | ||||||||||
| Funds held by reinsured companies | 657,490 | 475,732 | |||||||||
| Deferred acquisition costs | 52,899 | 116,513 | |||||||||
| 62,959 | 191,568 | ||||||||||
| Other assets | 677,797 | 699,081 | |||||||||
| 2,156,488 | 1,474,770 | ||||||||||
| TOTAL ASSETS | $ | 21,770,588 | $ | 19,826,099 | |||||||
| LIABILITIES | |||||||||||
| $ | 7,878,206 | $ | 7,247,282 | ||||||||
| 2,422,678 | 2,621,122 | ||||||||||
| 754,037 | 847,685 | ||||||||||
| Unearned premiums | 335,336 | 533,692 | |||||||||
| Insurance and reinsurance balances payable | 581,615 | 420,546 | |||||||||
| 6,493 | 16,074 | ||||||||||
| 1,447,908 | 1,191,207 | ||||||||||
| Other liabilities | 478,888 | 444,818 | |||||||||
| 1,653,343 | 1,208,531 | ||||||||||
| TOTAL LIABILITIES | 15,558,504 | 14,530,957 | |||||||||
| 376,731 | 438,791 | ||||||||||
Ordinary shares (par value $1 each, issued and outstanding 2020: 22,069,444; 2019: 21,511,505): | |||||||||||
Voting Ordinary shares (issued and outstanding 2020: 18,559,762; 2019: 18,001,823) | 18,560 | 18,002 | |||||||||
Non-voting convertible ordinary Series C Shares (issued and outstanding 2020 and 2019: 2,599,672) | 2,600 | 2,600 | |||||||||
Non-voting convertible ordinary Series E Shares (issued and outstanding 2020 and 2019: 910,010) | 910 | 910 | |||||||||
| Preferred Shares: | |||||||||||
Series C Preferred Shares (issued and held in treasury 2020 and 2019: 388,571) | 389 | 389 | |||||||||
Series D Preferred Shares (issued and outstanding 2020 and 2019: 16,000) | 400,000 | 400,000 | |||||||||
Series E Preferred Shares (issued and outstanding 2020 and 2019: 4,400) | 110,000 | 110,000 | |||||||||
Treasury shares, at cost (Series C Preferred shares 2020 and 2019: 388,571) | (421,559) | (421,559) | |||||||||
Joint Share Ownership Plan (voting ordinary shares, held in trust 2020: 565,630) | (566) | — | |||||||||
| Additional paid-in capital | 1,832,130 | 1,836,778 | |||||||||
| Accumulated other comprehensive income | 61,873 | 7,171 | |||||||||
| Retained earnings | 3,816,548 | 2,887,892 | |||||||||
| Total Enstar Shareholders’ Equity | 5,820,885 | 4,842,183 | |||||||||
| 14,468 | 14,168 | ||||||||||
| TOTAL SHAREHOLDERS’ EQUITY | 5,835,353 | 4,856,351 | |||||||||
| TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY | $ | 21,770,588 | $ | 19,826,099 | |||||||
See accompanying notes to the unaudited condensed consolidated financial statements
2
ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
For the Three and Nine Months Ended September 30, 2020 and 2019
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (expressed in thousands of U.S. dollars, except share and per share data) | |||||||||||||||||||||||
| INCOME | |||||||||||||||||||||||
| Net premiums earned | $ | 161,724 | $ | 175,802 | $ | 463,946 | $ | 618,711 | |||||||||||||||
| Fees and commission income | 10,787 | 6,437 | 28,325 | 18,931 | |||||||||||||||||||
| Net investment income | 72,130 | 81,502 | 241,287 | 231,424 | |||||||||||||||||||
| Net realized and unrealized gains | 500,005 | 145,060 | 838,552 | 858,489 | |||||||||||||||||||
| Other income | 48,404 | 822 | 67,761 | 15,368 | |||||||||||||||||||
| 793,050 | 409,623 | 1,639,871 | 1,742,923 | ||||||||||||||||||||
| EXPENSES | |||||||||||||||||||||||
| Net incurred losses and loss adjustment expenses | 109,686 | 163,258 | 339,678 | 566,111 | |||||||||||||||||||
| Acquisition costs | 37,708 | 33,310 | 132,818 | 162,192 | |||||||||||||||||||
| General and administrative expenses | 115,828 | 97,365 | 359,086 | 296,304 | |||||||||||||||||||
| Interest expense | 15,003 | 14,950 | 42,436 | 39,022 | |||||||||||||||||||
| Net foreign exchange (gains) losses | 8,156 | (13,665) | 1,375 | (20,097) | |||||||||||||||||||
| 286,381 | 295,218 | 875,393 | 1,043,532 | ||||||||||||||||||||
| EARNINGS BEFORE INCOME TAXES | 506,669 | 114,405 | 764,478 | 699,391 | |||||||||||||||||||
| Income tax expense | (13,915) | (13,465) | (25,295) | (25,265) | |||||||||||||||||||
| Earnings from equity method investments | 149,065 | 17,703 | 152,725 | 44,188 | |||||||||||||||||||
| NET EARNINGS FROM CONTINUING OPERATIONS | 641,819 | 118,643 | 891,908 | 718,314 | |||||||||||||||||||
| NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | 4,031 | 7,916 | 810 | 12,041 | |||||||||||||||||||
| NET EARNINGS | 645,850 | 126,559 | 892,718 | 730,355 | |||||||||||||||||||
| Net (earnings) loss attributable to noncontrolling interest | (21,912) | 109 | 30,802 | 4,970 | |||||||||||||||||||
| NET EARNINGS ATTRIBUTABLE TO ENSTAR | 623,938 | 126,668 | 923,520 | 735,325 | |||||||||||||||||||
| Dividends on preferred shares | (8,925) | (8,925) | (26,775) | (26,989) | |||||||||||||||||||
| NET EARNINGS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 615,013 | $ | 117,743 | $ | 896,745 | $ | 708,336 | |||||||||||||||
| Earnings per ordinary share attributable to Enstar: | |||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Net earnings from continuing operations | $ | 28.39 | $ | 5.26 | $ | 41.56 | $ | 32.65 | |||||||||||||||
| Net earnings from discontinued operations | 0.11 | 0.22 | 0.02 | 0.33 | |||||||||||||||||||
| Net earnings per ordinary share | $ | 28.50 | $ | 5.48 | $ | 41.58 | $ | 32.98 | |||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Net earnings from continuing operations | $ | 28.13 | $ | 5.21 | $ | 41.12 | $ | 32.25 | |||||||||||||||
| Net earnings from discontinued operations | 0.11 | 0.21 | 0.02 | 0.33 | |||||||||||||||||||
| Net earnings per ordinary share | $ | 28.24 | $ | 5.42 | $ | 41.14 | $ | 32.58 | |||||||||||||||
| Weighted average ordinary shares outstanding: | |||||||||||||||||||||||
| Basic | 21,578,106 | 21,488,216 | 21,564,447 | 21,476,586 | |||||||||||||||||||
| Diluted | 21,778,729 | 21,720,497 | 21,799,627 | 21,741,499 | |||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
3
ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three and Nine Months Ended September 30, 2020 and 2019
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (expressed in thousands of U.S. dollars) | |||||||||||||||||||||||
| NET EARNINGS | $ | 645,850 | $ | 126,559 | $ | 892,718 | $ | 730,355 | |||||||||||||||
| Other comprehensive income (loss), net of income taxes: | |||||||||||||||||||||||
| Unrealized gains (losses) on fixed income available-for-sale investments arising during the period | 21,198 | (267) | 74,969 | 4,640 | |||||||||||||||||||
| Reclassification adjustment for change in allowance for credit losses recognized in net earnings | (2,379) | — | 71 | — | |||||||||||||||||||
| Reclassification adjustment for net realized losses included in net earnings | (9,488) | (34) | (13,498) | (4,191) | |||||||||||||||||||
| Unrealized gains (losses) arising during the period, net of reclassification adjustments | 9,331 | (301) | 61,542 | 449 | |||||||||||||||||||
| Cumulative currency translation adjustment | 1,891 | (2,551) | — | (4,390) | |||||||||||||||||||
| Increase in defined benefit pension liability | — | (952) | — | (952) | |||||||||||||||||||
| Total other comprehensive income (loss) | 11,222 | (3,804) | 61,542 | (4,893) | |||||||||||||||||||
| Comprehensive income | 657,072 | 122,755 | 954,260 | 725,462 | |||||||||||||||||||
| Comprehensive (income) loss attributable to noncontrolling interest | (22,546) | 206 | 23,962 | 4,912 | |||||||||||||||||||
| COMPREHENSIVE INCOME ATTRIBUTABLE TO ENSTAR | $ | 634,526 | $ | 122,961 | $ | 978,222 | $ | 730,374 | |||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
4
ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
For the Three and Nine Months Ended September 30, 2020 and 2019
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (expressed in thousands of U.S. dollars) | |||||||||||||||||||||||
| Share Capital — Voting Ordinary Shares | |||||||||||||||||||||||
| Balance, beginning of period | $ | 18,635 | $ | 17,975 | $ | 18,002 | $ | 17,950 | |||||||||||||||
| Issue of shares | 6 | 6 | 732 | 31 | |||||||||||||||||||
| Shares repurchased | (81) | — | (174) | — | |||||||||||||||||||
| Balance, end of period | $ | 18,560 | $ | 17,981 | $ | 18,560 | $ | 17,981 | |||||||||||||||
| Share Capital — Non-Voting Convertible Ordinary Series C Shares | |||||||||||||||||||||||
| Balance, beginning and end of period | $ | 2,600 | $ | 2,600 | $ | 2,600 | $ | 2,600 | |||||||||||||||
| Share Capital — Non-Voting Convertible Ordinary Series E Shares | |||||||||||||||||||||||
| Balance, beginning and end of period | $ | 910 | $ | 910 | $ | 910 | $ | 910 | |||||||||||||||
| Share Capital — Series C Convertible Participating Non-Voting Preferred Shares | |||||||||||||||||||||||
| Balance, beginning and end of period | $ | 389 | $ | 389 | $ | 389 | $ | 389 | |||||||||||||||
| Share Capital — Series D Preferred Shares | |||||||||||||||||||||||
| Balance, beginning and end of period | $ | 400,000 | $ | 400,000 | $ | 400,000 | $ | 400,000 | |||||||||||||||
| Share Capital — Series E Preferred Shares | |||||||||||||||||||||||
| Balance, beginning and end of period | $ | 110,000 | $ | 110,000 | $ | 110,000 | $ | 110,000 | |||||||||||||||
| Treasury Shares (Series C Preferred Shares) | |||||||||||||||||||||||
| Balance, beginning and end of period | $ | (421,559) | $ | (421,559) | $ | (421,559) | $ | (421,559) | |||||||||||||||
| Joint Share Ownership Plan — Voting Ordinary Shares, Held in Trust | |||||||||||||||||||||||
| Balance, beginning of period | $ | (566) | $ | — | $ | — | $ | — | |||||||||||||||
| Issue of shares | — | — | (566) | — | |||||||||||||||||||
| Balance, end of period | $ | (566) | $ | — | $ | (566) | $ | — | |||||||||||||||
| Additional Paid-in Capital | |||||||||||||||||||||||
| Balance, beginning of period | $ | 1,835,115 | $ | 1,822,202 | $ | 1,836,778 | $ | 1,804,664 | |||||||||||||||
| Issue of voting ordinary shares | 503 | 576 | (857) | 1,497 | |||||||||||||||||||
| Shares repurchased | (12,782) | — | (25,215) | — | |||||||||||||||||||
| Amortization of share-based compensation | 9,294 | 7,729 | 21,424 | 24,346 | |||||||||||||||||||
| Balance, end of period | $ | 1,832,130 | $ | 1,830,507 | $ | 1,832,130 | $ | 1,830,507 | |||||||||||||||
| Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||
| Balance, beginning of period | $ | 51,285 | $ | 9,196 | $ | 7,171 | $ | 10,440 | |||||||||||||||
| Currency translation adjustment | |||||||||||||||||||||||
| Balance, beginning of period | 6,824 | 9,147 | 8,548 | 10,986 | |||||||||||||||||||
| Change in currency translation adjustment | 2,477 | (2,560) | 753 | (4,399) | |||||||||||||||||||
| Balance, end of period | 9,301 | 6,587 | 9,301 | 6,587 | |||||||||||||||||||
| Defined benefit pension liability | |||||||||||||||||||||||
| Balance, beginning of period | (945) | (987) | (945) | (987) | |||||||||||||||||||
| Change in defined benefit pension liability | — | (951) | — | (951) | |||||||||||||||||||
| Balance, beginning and end of period | (945) | (1,938) | (945) | (1,938) | |||||||||||||||||||
| Unrealized gains (losses) on available-for-sale investments | |||||||||||||||||||||||
| Balance, beginning of period | 45,406 | 1,036 | (432) | 441 | |||||||||||||||||||
| Change in unrealized gains (losses) on available-for-sale investments | 8,111 | (195) | 53,949 | 400 | |||||||||||||||||||
| Balance, end of period | 53,517 | 841 | 53,517 | 841 | |||||||||||||||||||
| Balance, end of period | $ | 61,873 | $ | 5,490 | $ | 61,873 | $ | 5,490 | |||||||||||||||
| Retained Earnings | |||||||||||||||||||||||
| Balance, beginning of period | $ | 3,190,104 | $ | 2,573,117 | $ | 2,887,892 | $ | 1,976,539 | |||||||||||||||
| Net earnings | 645,850 | 126,559 | 892,718 | 730,355 | |||||||||||||||||||
| Net (earnings) loss attributable to noncontrolling interest | (21,912) | 109 | 30,802 | 4,970 | |||||||||||||||||||
| Dividends on preferred shares | (8,925) | (8,925) | (26,775) | (26,989) | |||||||||||||||||||
| Change in redemption value of redeemable noncontrolling interests | 11,431 | 622 | 38,059 | 6,607 | |||||||||||||||||||
| Cumulative effect of change in accounting principle | — | — | (6,148) | — | |||||||||||||||||||
| Balance, end of period | $ | 3,816,548 | $ | 2,691,482 | $ | 3,816,548 | $ | 2,691,482 | |||||||||||||||
| Noncontrolling Interest (excludes Redeemable Noncontrolling Interest) | |||||||||||||||||||||||
| Balance, beginning of period | $ | 13,553 | $ | 12,609 | $ | 14,168 | $ | 12,056 | |||||||||||||||
| Purchase of noncontrolling shareholders' interest in subsidiaries | — | — | — | (47) | |||||||||||||||||||
| Net earnings (loss) attributable to noncontrolling interest | 915 | 81 | 300 | 681 | |||||||||||||||||||
| Balance, end of period | $ | 14,468 | $ | 12,690 | $ | 14,468 | $ | 12,690 | |||||||||||||||
| Total Shareholders' Equity | $ | 5,835,353 | $ | 4,650,490 | $ | 5,835,353 | $ | 4,650,490 | |||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements
5
ENSTAR GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2020 and 2019
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| (expressed in thousands of U.S. dollars) | |||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net earnings | $ | 892,718 | $ | 730,355 | |||||||
| Net earnings from discontinued operations, net of income taxes | (810) | (12,041) | |||||||||
| Adjustments to reconcile net earnings to cash flows provided by operating activities: | |||||||||||
| Realized gains on sale of investments | (114,894) | (49,243) | |||||||||
| Unrealized gains on investments | (723,658) | (809,246) | |||||||||
| Depreciation and other amortization | 42,210 | 23,652 | |||||||||
| Earnings from equity method investments | (152,725) | (44,188) | |||||||||
| Sales and maturities of trading securities | 2,778,993 | 4,133,200 | |||||||||
| Purchases of trading securities | (1,531,190) | (3,876,661) | |||||||||
| Other non-cash items | 20,847 | 26,098 | |||||||||
| Changes in: | |||||||||||
| Reinsurance balances recoverable on paid and unpaid losses | 266,289 | (207,579) | |||||||||
| Funds held by reinsured companies | (211,850) | (48,814) | |||||||||
| Losses and loss adjustment expenses | 697,516 | 474,707 | |||||||||
| Defendant asbestos and environmental liabilities | (93,648) | (22,957) | |||||||||
| Insurance and reinsurance balances payable | 172,358 | 38,382 | |||||||||
| Unearned premiums | (106,748) | (21,999) | |||||||||
| Premiums receivable | (18,950) | 195,751 | |||||||||
| Other operating assets and liabilities | 187,572 | (99,849) | |||||||||
| Net cash flows provided by operating activities | 2,104,030 | 429,568 | |||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Sales and maturities of available-for-sale securities | 1,673,800 | 100,154 | |||||||||
| Purchase of available-for-sale securities | (3,125,184) | (363,221) | |||||||||
| Purchase of other investments | (812,586) | (731,588) | |||||||||
| Proceeds from other investments | 282,330 | 460,554 | |||||||||
| Purchase of equity method investments | (33,000) | (38,403) | |||||||||
| Other investing activities | 3,606 | (1,204) | |||||||||
| Net cash flows used in investing activities | (2,011,034) | (573,708) | |||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Dividends on preferred shares | (26,775) | (26,989) | |||||||||
| Dividends paid to redeemable noncontrolling interest | — | (11,556) | |||||||||
| Purchase of noncontrolling shareholders' interest in subsidiaries | — | (47) | |||||||||
| Repurchase of shares | (25,390) | — | |||||||||
| Receipt of loans | 858,788 | 1,070,808 | |||||||||
| Repayment of loans | (604,000) | (722,574) | |||||||||
| Net cash flows provided by financing activities | 202,623 | 309,642 | |||||||||
| DISCONTINUED OPERATIONS CASH FLOWS: | |||||||||||
| Net cash flows provided by operating activities | 114,024 | 210,666 | |||||||||
| Net cash flows used in investing activities | (134,759) | (5,332) | |||||||||
| Net cash flows from discontinued operations | (20,735) | 205,334 | |||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH AND CASH EQUIVALENTS | 1,727 | (12,507) | |||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 276,611 | 358,329 | |||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 971,349 | 901,996 | |||||||||
| NET CHANGE IN CASH OF BUSINESSES HELD FOR SALE | (50,638) | (205,333) | |||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 1,197,322 | $ | 1,054,992 | |||||||
| Supplemental Cash Flow Information: | |||||||||||
| Income taxes paid, net of refunds | $ | 15,870 | $ | (271) | |||||||
| Interest paid | $ | 37,275 | $ | 33,742 | |||||||
| Reconciliation to Consolidated Balance Sheets: | |||||||||||
| Cash and cash equivalents | 640,601 | 557,677 | |||||||||
| Restricted cash and cash equivalents | 556,721 | 497,315 | |||||||||
| Cash, cash equivalents and restricted cash | $ | 1,197,322 | $ | 1,054,992 | |||||||
See accompanying notes to the unaudited condensed consolidated financial statements
6
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular information expressed in thousands of U.S. dollars except share and per share data)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
These unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments consisting of normal recurring items considered necessary for a fair presentation under U.S. GAAP. The results of operations for any interim period are not necessarily indicative of results for 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, 2019. All significant inter-company transactions and balances have been eliminated. In these notes, the terms "we," "us," "our," "Enstar," 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 as described in further detail in Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations." 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");
•reinsurance balances recoverable on paid and unpaid losses;
•defendant asbestos and environmental liabilities and related insurance balances recoverable;
•valuation allowances on reinsurance balances recoverable and deferred tax assets;
•impairment charges, including credit allowances on investment securities classified as available-for-sale ("AFS"), and impairments on goodwill, intangible assets and deferred charge assets;
•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.
Updated Accounting Policies
The following accounting policies have been updated to reflect our adoption of Accounting Standards Update ("ASU") 2016-13 - Financial Instruments - Credit losses - Measurement of Credit Losses on Financial Instruments, effective January 1, 2020 as described in detail below under "New Accounting Standards Adopted in 2020."
Short-term investments and fixed maturity investments
We perform a detailed analysis every reporting period to identify any credit losses on our investment portfolios not measured at fair value through net earnings.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Some of the factors that we consider when assessing whether an allowance for credit losses is required on our debt securities include: (1) the extent to which the fair value has been less than the amortized cost; (2) the financial condition, near-term and long-term prospects of the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices; (3) the likelihood of the recoverability of principal and interest; and (4) whether it is more likely than not that we will be required to sell the security prior to an anticipated recovery in value.
With effect from January 1, 2020, credit losses on our AFS debt securities are recognized through an allowance account which is deducted from the amortized cost basis of the security, with the net carrying value of the security presented on the consolidated balance sheet at the amount expected to be collected. To calculate the amount of the credit loss, we compare the present value of the expected future cash flows with the amortized cost basis of the AFS debt security, with the amount of the credit loss recognized being limited to the excess of the amortized cost basis over the fair value of the AFS debt security, effectively creating a “fair value floor”. See "New Accounting Standards Adopted in 2020" below for the discussion on our adoption of the credit losses standard.
For our AFS debt securities that we do not intend to sell or for which it is more likely than not that we will not be required to sell before an anticipated recovery in value, we separate the credit loss component of any unrealized losses from the amount related to all other factors and report the credit loss component in net realized investment gains (losses) in our consolidated statements of earnings. The unrealized losses related to non-credit factors is reported in other comprehensive income. The allowance for credit losses account is adjusted for any additional credit losses, write-offs and subsequent recoveries.
For our AFS debt securities where we record a credit loss, a determination is made as to the cause of the credit loss and whether we expect a recovery in the fair value of the security. For our AFS debt securities where we expect a recovery in fair value, the constant effective yield method is utilized, and the investment is amortized to par.
For our AFS debt securities that we intend to sell or for which it is more likely than not that we will be required to sell before an anticipated recovery in fair value, the full amount of the unrealized loss is included in net realized investment gains (losses). The new cost basis of the investment is the previous amortized cost basis less the credit loss recognized in net realized investment gains (losses). The new cost basis is not adjusted for any subsequent recoveries in fair value.
We report the investment income accrued on our AFS debt securities within other assets and therefore separately from the underlying AFS debt securities. In addition, due to the short-term period during which accrued investment income remains unpaid, which is typically six months, since the coupon on our AFS debt securities is paid semi-annually, we have elected not to establish an allowance for credit losses on our accrued investment income balances. Accrued investment income is written off through net realized investment gains (losses) at the time the issuer of the debt security defaults or is expected to default on payments.
Uncollectible debt securities are written off when we determine that no additional payments of principal or interest will be received.
Reinsurance Balances Recoverable on Paid and Unpaid Losses
Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liability for losses and loss adjustment expenses. We report our reinsurance balances recoverable on paid and unpaid losses net of an allowance for estimated uncollectible amounts. The allowance is based upon our ongoing review of the outstanding balances and reflects factors such as the duration of the collection period, credit quality, changes in reinsurer credit standing, default rates specific to the individual reinsurer, the geographical location of the reinsurer, contractual disputes with reinsurers over individual contentious claims, contract language or coverage issues, industry analyst reports and consensus economic forecasts.
A probability-of-default methodology that reflects current and forecasted economic conditions is used to estimate the allowance for uncollectible reinsurance due to credit-related factors. See "New Accounting Standards Adopted in 2020" below for the discussion on our adoption of the credit losses standard.
The allowance also includes estimated uncollectible amounts related to dispute risk with reinsurers. Amounts deemed to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the allowance, as well as any subsequent collections of amounts previously written off, are reported as part of the net incurred losses and loss adjustment expenses in our consolidated statements of earnings.
On an ongoing basis, we also evaluate and monitor the financial condition of our reinsurers under voluntary schemes of arrangement to minimize our exposure to significant losses from potential insolvencies.
Premiums Receivable and Unearned Premium Reserves
Premiums are recognized as revenues on a pro-rata basis over the coverage period. Unearned premium reserves represent the unexpired portion of policy premiums. For retrospectively rated contracts as well as those whose written premium amounts are recorded based on premium estimates at inception, accrued premiums arising from changes to these estimates are included in premium balances receivable where appropriate. Premium balances receivable are reported net of an allowance for expected credit losses as appropriate. The allowance is based upon our ongoing review of amounts outstanding, historical loss data, including delinquencies and write-offs, current and forecasted economic conditions and other relevant factors. However, the credit risk on our premiums receivable balances is substantially reduced where we have the ability to cancel the underlying policy if the policyholder does not pay the related premium.
New Accounting Standards Adopted in 2020
ASU 2020-04 – Reference Rate Reform
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04 – Reference Rate Reform – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which is codified in Accounting Standards Codification ("ASC") 848 and which provides entities with temporary optional expedients and exceptions to the existing US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Inter-bank Offered Rate ("LIBOR") and other inter-bank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR").
Under the provisions of this guidance, entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also elect various optional expedients for hedging relationships affected by reference rate reform, if certain criteria are met. In addition, entities can make a one-time election to sell, transfer or both sell and transfer debt securities classified as held-to-maturity (“HTM”) that refer to a rate affected by reference rate reform, to AFS or to trading. However, such debt securities must have been classified as HTM before January 1, 2020. Once elected, the amendments in this guidance must be applied prospectively for all eligible contract modifications.
The ASU was effective upon issuance and can be applied through to December 31, 2022. We adopted the ASU upon its issuance and as we transition from LIBOR to alternative reference rates, we will elect the temporary optional expedients and exceptions to the existing US GAAP guidance on contract modifications and hedge accounting permitted by the ASU, as appropriate. The adoption of this standard did not have any impact on our consolidated financial statements and disclosures.
ASU 2020-03 – Codification Improvements to Financial Instruments
In March 2020, the FASB issued ASU 2020-03, which makes narrow-scope improvements to various topics within the codification relating to financial instruments, including the new credit losses standard. The amendments related to certain specific issues covered by the ASU were effective immediately upon the issuance of the ASU, while certain specific issues covered by the ASU and affecting the credit losses standard in ASU 2016-13 are effective in 2020 for those entities that have already adopted ASU 2016-13. We adopted the amendments in this ASU upon its issuance and that adoption did not have a material impact on our consolidated financial statements and the related disclosures.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ASUs 2016-13, 2018-19, 2019-04, 2019-05, 2019-10 and 2019-11, Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, which is codified in ASC 326 - Financial Instruments - Credit Losses, amending the guidance on the impairment of financial instruments and significantly changing how entities measure credit losses for most financial assets and certain other financial instruments, including reinsurance balances recoverable on paid and unpaid losses that are not measured at fair value through net earnings. The ASU replaced the “incurred loss” approach that was previously applied to determine credit losses with an “expected loss” model for financial instruments measured at amortized cost. Under the "expected loss" model, the estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses and subsequent adjustments to such losses are recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.
ASU 2016-13 also amends the other-than-temporary impairment ("OTTI") model that was previously applicable to AFS debt securities, with the new approach now requiring the recognition of impairments relating to credit losses through an allowance account and limiting the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. This revised approach records the full effect of reversals of any credit losses in current period earnings, compared to previous guidance where this reversal was amortized over the lifetime of the security. Under this revised approach, the length of time a security has been in an unrealized loss position will no longer be considered in determining whether to record a credit loss. In addition, the historical and implied volatility of the fair value of a security and recoveries or declines in fair value after the balance sheet date will no longer be considered when making a determination of whether a credit loss exists.
We adopted and all the related amendments on January 1, 2020 using the modified retrospective approach for our financial instruments carried at amortized cost, and prospectively for our AFS debt securities as required by the standard, resulting in an overall reduction in retained earnings of $6.1 million as summarized below:
•A cumulative effect adjustment of $3.0 million relating to our financial instruments carried at amortized cost, which primarily relates to our insurance balances recoverable on paid and unpaid losses. We already carried significant specific allowances for credit losses of $147.6 million on our reinsurance balances recoverable on paid and unpaid losses, relating primarily to our Non-life Run-off segment and therefore the adoption of this standard did not have a material impact on our balance sheet; and
•$3.1 million related to our AFS debt securities whose fair values were less than their amortized cost basis.
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, 2019 describes accounting pronouncements that were not adopted as of December 31, 2019. Those pronouncements have not yet been adopted unless discussed above in "New Accounting Standards Adopted in 2020." In addition, we are yet to adopt the following accounting pronouncements that the FASB issued during and subsequent to the nine months ended September 30, 2020.
ASU 2020-09 – Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762
In October 2020, the FASB issued ASU 2020-09, which amends and supersedes various SEC paragraphs in ASC 270, ASC 460, ASC 470 and ASC 505 pursuant to the issuance of the SEC's Release No. 33-10762. Through Release No. 33-10762, the SEC made amendments to the financial disclosure requirements in Regulation S-X for guarantors and issuers of guaranteed securities registered or being registered, and issuers’ affiliates whose securities collateralize securities registered or being registered, to improve those requirements for both investors and registrants. The changes made by the SEC are intended to provide investors with material information given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens to registrants. In addition, by reducing the costs and burdens of compliance, issuers may be encouraged to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protection they may not be provided in offerings conducted on an unregistered basis. Finally, by making it less burdensome and less costly for issuers to include guarantees or pledges of affiliate securities as collateral when they structure debt offerings, the revisions may increase the number of registered offerings that include these credit enhancements, which could result in a lower cost of capital and an increased level of investor protection.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amended rules in Release No. 33-10762 are effective on January 4, 2021 although early compliance is permitted, hence we elected early compliance with the new rules. Because the amendments made by the FASB in this ASU are to ensure alignment of the relevant SEC paragraphs in ASC 270, ASC 460, ASC 470 and ASC 505 with the amended rules in Release No. 33-10762, the amendments made by the FASB to these SEC paragraphs will not have a material impact on our disclosures, since we already elected early compliance with the amended rules in Release No. 33-10762.
ASU 2020-08 – Codification Improvements to Subtopic 310-20 - Receivables - Nonrefundable Fees and Other Costs
In October 2020, the FASB issued ASU 2020-08 to clarify that an entity should re-evaluate whether a callable debt security is within the scope of ASC 310-20-35-33 during each reporting period. All entities are required to apply the amendments in this ASU on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities.
The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2020, and early adoption is not permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and the related disclosures.
ASU 2020-06 – Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. For convertible instruments, the ASU eliminates two of the three accounting models in ASC 470-20 that require separate accounting for embedded conversion features. The ASU also simplifies an issuer's application of the derivatives scope exception in ASC 815-40 for contracts in its own equity and removes some of the conditions that preclude a freestanding contract from being classified in equity, thereby allowing more of such contracts to qualify for equity classification.
The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2021 and, although early adoption is permitted, the amendments may not be adopted earlier than during interim and annual reporting periods beginning after December 15, 2020. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and the related disclosures.
2. ACQUISITIONS
Morse TEC
On October 30, 2019, we completed the acquisition of Morse TEC LLC ("Morse TEC"). For further details, refer to Note 3 - "Acquisitions" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
3. SIGNIFICANT NEW BUSINESS
Hannover Re
On August 6, 2020, we completed a novation agreement with Hannover Reück SE and an affiliate (“Hannover Re”), pursuant to which we assumed certain legacy asbestos, environmental and workers' compensation exposures. In the transaction, we assumed loss reserves of $209.7 million in exchange for net novation consideration of $182.5 million. We elected the fair value option for this novation agreement and recorded an initial fair value adjustment of $27.2 million on the assumed loss reserves. Refer to Note 11 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Munich Re
On July 1, 2020, we completed a business transfer transaction with Great Lakes Insurance SE and HSB Engineering Insurance Limited, both subsidiaries of Munich Reinsurance Company ("Munich Re"), pursuant to which we assumed certain portfolios from their Australian branches. In the transaction, we assumed net loss reserves of AUD$142.2 million ($98.0 million), which primarily relate to public and products liability, property and engineering exposures, in exchange for net consideration of an equal amount.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AXA Group
On June 1, 2020, we completed a loss portfolio transfer reinsurance agreement with AXA XL, a division of AXA SA, to reinsure specified legacy construction general liability multi-year policies. We assumed gross loss reserves of $179.7 million, which was equal to the net reinsurance premium consideration received in the transaction. In addition, we provided additional collateral of $24.5 million to support our obligations to AXA XL per the terms of the reinsurance agreement. Effective October 1, 2020, we have ceded 10% of this transaction to Enhanzed Reinsurance Ltd. ("Enhanzed Re"), in which we have an investment, on the same terms and conditions as those received by Enstar.
Aspen
On June 1, 2020, we completed an adverse development cover reinsurance transaction with Aspen Insurance Holdings Limited. In the transaction, we assumed $781.6 million of gross reserves for losses incurred on or prior to December 31, 2019 on a diversified mix of property, liability and specialty lines of business across the U.S., U.K. and Europe, in exchange for reinsurance premium consideration of $770.0 million and recorded a deferred charge asset of $11.7 million. Pursuant to the agreement, we provide $770.0 million of cover in excess of a $3.8 billion retention, and an additional $250.0 million of cover in excess of a $4.8 billion retention.
Lyft
On March 31, 2020, we entered into a novation agreement with affiliates of Lyft, Inc. (“Lyft”) and certain underwriting companies of Zurich North America (“Zurich”). In the transaction, in exchange for premium consideration of $465.0 million, we reinsured legacy automobile business underwritten by Zurich between October 1, 2015 and September 30, 2018 and which previously had been reinsured by Lyft’s wholly owned subsidiary, Pacific Valley Insurance Company ("PVIC"). Under a separate but related agreement, PVIC provides retrocession reinsurance coverage to us on the Lyft business reinsured in excess of an $816.0 million limit. The transaction was effective on March 31, 2020.
4. DIVESTITURES, HELD-FOR-SALE BUSINESSES AND DISCONTINUED OPERATIONS
Atrium Exchange Transaction
On August 13, 2020, we announced an exchange transaction with Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P. (collectively, the "Trident V Funds") managed by Stone Point Capital LLC ("Stone Point"). As part of the exchange, we entered into a recapitalization agreement with the Trident V Funds, Dowling Capital Partners I, L.P. and Capital City Partners LLC (collectively, the "Dowling Funds"), North Bay Holdings Limited ("North Bay"), and StarStone Specialty Holdings Limited ("SSHL").
Enstar currently owns an indirect 59.0% interest in North Bay and the Trident V Funds and the Dowling Funds currently own 39.3% and 1.7%, respectively. North Bay owns 100.0% of SSHL, the holding company for the StarStone group, which includes StarStone's U.S. operations, including StarStone U.S. Holdings, Inc. and its subsidiaries ("StarStone U.S.") and its non-U.S. operations ("StarStone International"). North Bay also owns approximately 92.1% of Northshore Holdings Limited ("Northshore"), the holding company that owns Atrium Underwriting Group Limited and its subsidiaries (collectively, "Atrium") and Arden Reinsurance Company Ltd. ("Arden"). The remaining share ownership of Northshore is held on behalf of certain Atrium employees.
Pursuant to the terms of the recapitalization agreement, we agreed to exchange a portion of our indirect interest in Northshore for all of the Trident V Funds’ indirect interest in StarStone U.S. (the “Exchange Transaction”). The Exchange Transaction is conditioned on the closing of the sale of StarStone U.S. to Core Specialty Insurance Holdings, Inc. ("Core Specialty"), as described further below, and is subject to regulatory approval and other closing conditions. The exchange transaction is expected to close in the first quarter of 2021.
Upon completion of the sale of StarStone U.S. to Core Specialty and the Exchange Transaction with the Trident V Funds, we expect to own indirectly approximately 26.1% of Core Specialty, which will then own StarStone U.S., and approximately 11.0% of Northshore, which will continue to own Atrium and Arden. Our ultimate ownership in Northshore at the closing of the Exchange Transaction may vary based on, among other things, the final valuation of StarStone U.S. in its sale to Core Specialty and if, and to the extent, certain employees of Atrium elect to defer the payout of certain long-term equity awards. Upon the closing of the Exchange Transaction, the Trident V Funds
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
will not own any interest in Core Specialty and are expected to own approximately 80.0% of Northshore, and the Dowling Funds will own approximately 0.5% of Core Specialty and retain their approximately 1.6% interest in Northshore. The Exchange Transaction will have no impact on the ultimate ownership of SSHL, which will own StarStone International, with us, the Trident V Funds and the Dowling Funds retaining our and their current ownership interests in SSHL of 59.0%, 39.3% and 1.7%, respectively.
Upon completion of the Exchange Transaction, our investment in Northshore will be accounted for as a privately held equity investment and will be carried at fair value.
We have classified the assets and liabilities of Northshore as held-for-sale as of September 30, 2020. The impending disposal of Enstar's majority equity interest in Northshore does not represent a strategic shift that will have a major effect on our operations and financial results, and therefore the disposal is not reported as a discontinued operation during the current or prior periods. The following table summarizes the components of Northshore's assets and liabilities held-for-sale on our consolidated balance sheets as of September 30, 2020:
| September 30, 2020 | |||||
| ASSETS | |||||
| Short-term investments, available-for-sale, at fair value | $ | 1,852 | |||
| Fixed maturities, trading, at fair value | 154,325 | ||||
| Fixed maturities, available-for-sale, at fair value | 9,252 | ||||
| Equities, at fair value | 18,120 | ||||
| Other investments, at fair value | 87,795 | ||||
| Total investments | 271,344 | ||||
| Cash and cash equivalents | 61,221 | ||||
| Restricted cash and cash equivalents | 10,152 | ||||
| Premiums receivable | 59,484 | ||||
| Deferred tax assets | 97 | ||||
| Reinsurance balances recoverable on paid and unpaid losses | 30,673 | ||||
| Funds held by reinsured companies | 30,092 | ||||
| Deferred acquisition costs | 24,522 | ||||
| Goodwill and intangible assets | 115,085 | ||||
| Other assets | 48,308 | ||||
| TOTAL ASSETS HELD-FOR-SALE | $ | 650,978 | |||
| LIABILITIES | |||||
| Losses and loss adjustment expenses | $ | 248,532 | |||
| Unearned premiums | 91,608 | ||||
| Insurance and reinsurance balances payable | 10,916 | ||||
| Deferred tax liabilities | 14,010 | ||||
| Other liabilities | 66,020 | ||||
| TOTAL LIABILITIES HELD-FOR-SALE | $ | 431,086 | |||
| NET ASSETS HELD-FOR-SALE | $ | 219,892 | |||
As of September 30, 2020, included in the table above were restricted investments of $117.6 million.
The unrealized gains (losses) on AFS investments in accumulated other comprehensive income (loss) ("AOCI"), a component of shareholders' equity, included ($0.3) million as at September 30, 2020 related to Northshore. Upon completion of the Exchange Transaction, the balance at closing will be included in earnings as a component of the gain on sale.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recapitalization of StarStone U.S.
On June 10, 2020, we announced an agreement to recapitalize StarStone U.S. and appoint a new management team and Board. As part of the recapitalization, we entered into a definitive agreement to sell StarStone U.S. to Core Specialty, a newly formed entity with equity backing from funds managed by SkyKnight Capital, L.P., Dragoneer Investment Group and Aquiline Capital Partners LLC. We currently have a 59.0% interest in StarStone U.S. The purchase price will be based on a $30.0 million premium to the GAAP tangible book value of StarStone U.S. to be determined on the month end prior to the closing date and will consist of $235.0 million of common shares of Core Specialty and cash. The $235.0 million of common shares of Core Specialty is expected to represent an estimated 26.1% interest in Core Specialty after certain co-investments and management equity awards. Our investment in Core Specialty will be accounted for as an equity method investment. Given the proposed transaction, we have classified the StarStone U.S. results as discontinued operations for the periods presented.
In connection with the sale, one of our Non-life Run-off subsidiaries will enter into a loss portfolio transfer reinsurance agreement with StarStone U.S. pursuant to which we will reinsure all of the net loss reserves of StarStone U.S. in respect of premium earned prior to the calendar month end prior to the closing date. We will receive a reinsurance premium equal to the assumed reserves, plus approximately $16.0 million. The reinsurance agreement will contain an aggregate limit on our liability equal to $130.0 million in excess of the assumed reserves, and our subsidiary's obligations under the reinsurance agreement will be guaranteed by Enstar.
The closing of the transaction is subject to regulatory approvals and other closing conditions and is expected to occur in the fourth quarter of 2020.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
StarStone U.S. comprises a substantial portion of the StarStone segment. We have classified the assets and liabilities of StarStone U.S. as held-for-sale as of September 30, 2020. The following table summarizes the components of StarStone U.S.'s assets and liabilities held-for-sale on our consolidated balance sheets as of September 30, 2020 and December 31, 2019:
| September 30, 2020 | December 31, 2019 (1) | ||||||||||
| ASSETS | |||||||||||
| Fixed maturities, trading, at fair value | $ | 140,124 | $ | 202,994 | |||||||
| Fixed maturities, available-for-sale, at fair value | 525,842 | 375,337 | |||||||||
| Equities, at fair value | 5,494 | 3,000 | |||||||||
| Other investments, at fair value | 6,864 | 6,389 | |||||||||
| Total investments | 678,324 | 587,720 | |||||||||
| Cash and cash equivalents | 54,303 | 78,613 | |||||||||
| Restricted cash and cash equivalents | 9,390 | 5,815 | |||||||||
| Premiums receivable | 105,339 | 99,367 | |||||||||
| Deferred tax assets | 14,890 | 15,191 | |||||||||
| Reinsurance balances recoverable on paid and unpaid losses | 477,739 | 530,604 | |||||||||
| Funds held by reinsured companies | 29,678 | 35,861 | |||||||||
| Deferred acquisition costs | 32,071 | 36,992 | |||||||||
| Goodwill and intangible assets | 24,900 | 24,900 | |||||||||
| Other assets | 78,876 | 59,707 | |||||||||
| TOTAL ASSETS HELD-FOR-SALE | $ | 1,505,510 | $ | 1,474,770 | |||||||
| LIABILITIES | |||||||||||
| Losses and loss adjustment expenses | $ | 830,456 | $ | 836,761 | |||||||
| Unearned premiums | 217,375 | 218,166 | |||||||||
| Insurance and reinsurance balances payable | 49,822 | 22,453 | |||||||||
| Other liabilities | 124,604 | 131,151 | |||||||||
| TOTAL LIABILITIES HELD-FOR-SALE | $ | 1,222,257 | $ | 1,208,531 | |||||||
| NET ASSETS HELD-FOR-SALE | $ | 283,253 | $ | 266,239 | |||||||
(1) In accordance with U.S. GAAP, the assets and liabilities of StarStone U.S. as of December 31, 2019 have been reclassified to held-for-sale as a result of the business qualifying as a discontinued operation.
As of September 30, 2020 and December 31, 2019, included in the table above were restricted investments of $146.5 million and $131.0 million, respectively.
The unrealized gains (losses) on AFS investments balance in accumulated other comprehensive income (loss) ("AOCI"), a component of shareholders' equity, included $16.1 million and $(1.0) million as at September 30, 2020 and December 31, 2019, respectively, related to StarStone U.S. Upon completion of the sale, the balance at closing will be included in earnings as a component of the gain on sale.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The StarStone U.S. business qualifies as a discontinued operation. The following table summarizes the components of net earnings (loss) from discontinued operations, net of income taxes, related to StarStone U.S., on the consolidated statements of earnings for the three and nine months ended September 30, 2020 and 2019:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| INCOME | |||||||||||||||||||||||
| Net premiums earned | $ | 75,414 | $ | 94,523 | $ | 241,363 | $ | 263,464 | |||||||||||||||
| Fees and commission income | — | 150 | — | 515 | |||||||||||||||||||
| Net investment income | 3,649 | 3,970 | 11,063 | 11,831 | |||||||||||||||||||
| Net realized and unrealized gains | 1,910 | 3,125 | 2,757 | 20,198 | |||||||||||||||||||
| Other income | 55 | 4 | 80 | 10 | |||||||||||||||||||
| 81,028 | 101,772 | 255,263 | 296,018 | ||||||||||||||||||||
| EXPENSES | |||||||||||||||||||||||
| Net incurred losses and loss adjustment expenses | 44,939 | 59,159 | 157,648 | 185,048 | |||||||||||||||||||
| Acquisition costs | 14,776 | 16,972 | 47,570 | 48,733 | |||||||||||||||||||
| General and administrative expenses | 16,675 | 16,558 | 47,404 | 47,213 | |||||||||||||||||||
| Interest expense | 535 | — | 1,715 | 1,355 | |||||||||||||||||||
| Net foreign exchange (gains) losses | (3) | 34 | (5) | 29 | |||||||||||||||||||
| 76,922 | 92,723 | 254,332 | 282,378 | ||||||||||||||||||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | 4,106 | 9,049 | 931 | 13,640 | |||||||||||||||||||
| Income tax benefit (expense) | (75) | (1,133) | (121) | (1,599) | |||||||||||||||||||
| NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | $ | 4,031 | $ | 7,916 | $ | 810 | $ | 12,041 | |||||||||||||||
| Net loss (earnings) from discontinued operations attributable to noncontrolling interest | (1,654) | (3,247) | (332) | (4,939) | |||||||||||||||||||
| NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 2,377 | $ | 4,669 | $ | 478 | $ | 7,102 | |||||||||||||||
The following table presents the cash flows of StarStone U.S. for the nine months ended September 30, 2020 and 2019:
| Nine Months Ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Operating activities | $ | 114,024 | $ | 210,666 | |||||||
| Investing activities | (134,759) | (5,332) | |||||||||
| Change in cash and restricted cash of business held-for-sale | $ | (20,735) | $ | 205,334 | |||||||
16
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intercompany transactions between StarStone U.S. (Discontinued Operations) and Continuing Operations
The table below presents a summary of the total income and expenses recognized in continuing operations for the three and nine months ended September 30, 2020 and 2019, relating to intercompany transactions, primarily intragroup reinsurances, between StarStone U.S. and our other subsidiaries:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Total income | $ | 1,709 | $ | 3,373 | $ | 9,072 | $ | 8,082 | |||||||||||||||
| Total expenses (income) | (1,783) | (4,582) | (16,682) | 41,884 | |||||||||||||||||||
| Net earnings (loss) | $ | 3,492 | $ | 7,955 | $ | 25,754 | $ | (33,802) | |||||||||||||||
Run-off of StarStone International (non-U.S.)
On June 10, 2020, we also announced that we placed StarStone International into an orderly run-off (the "StarStone International Run-Off"). The liabilities associated with the StarStone International Run-Off vary in duration, and the run-off is expected to occur over a number of years. Steps to reduce the size of StarStone International's operations have begun and will involve several phases to occur over time. As a result, we cannot anticipate with certainty the expected completion date of the StarStone International Run-Off.
We continue to evaluate additional strategic options for StarStone International's operations and business. Consequently, such options could have the effect of mitigating costs associated with placing the business into run-off. The remaining StarStone International operations will continue to serve the needs of policyholders and ensure that the companies continue to meet all regulatory requirements. The results of StarStone International are included within continuing operations in the StarStone segment.
Recent developments relating to StarStone International include:
•On October 14, 2020, we completed the sale of Vander Haeghen & Co. SA ("VdH"), a Belgium-based insurance agency majority owned by two StarStone International entities, for a purchase price of €3.8 million ($4.5 million). We expect to recognize a gain on the sale of $3.6 million in the fourth quarter of 2020.
•On October 2, 2020, StarStone International sold the renewal rights for its financial lines portfolio for consideration of approximately $0.5 million.
Reconciliation to the Consolidated Balance Sheet
The following table provides a reconciliation of the assets and liabilities of Northshore and StarStone U.S. held-for-sale on our consolidated balance sheet:
| September 30, 2020 | |||||
| Assets held-for-sale: | |||||
| Northshore (Atrium and Arden Re) | $ | 650,978 | |||
| StarStone U.S. | 1,505,510 | ||||
| Total | $ | 2,156,488 | |||
| Liabilities held-for-sale: | |||||
| Northshore (Atrium and Arden Re) | $ | 431,086 | |||
| StarStone U.S. | 1,222,257 | ||||
| Total | $ | 1,653,343 | |||
17
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. INVESTMENTS
We hold: (i) trading portfolios of short-term and fixed maturity investments and equities, carried at fair value; (ii) AFS portfolios of short-term and fixed maturity investments, carried at fair value; (iii) other investments, carried at fair value; (iv) equity method investments; and (v) funds held - directly managed.
Short-Term and Fixed Maturity Investments
Asset Types
The fair values of the underlying asset categories comprising our short-term and fixed maturity investments classified as trading and AFS and the fixed maturity investments included within our funds held - directly managed balance were as follows:
| September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Short-term investments, trading | Short-term investments, AFS | Fixed maturities, trading | Fixed maturities, AFS | Fixed maturities, funds held - directly managed | Total | ||||||||||||||||||||||||||||||
| U.S. government and agency | $ | 3,399 | $ | 252,449 | $ | 148,378 | $ | 298,140 | $ | 87,264 | $ | 789,630 | |||||||||||||||||||||||
| U.K. government | — | — | 71,803 | 42,974 | — | 114,777 | |||||||||||||||||||||||||||||
| Other government | 2,872 | — | 327,406 | 136,130 | 24,039 | 490,447 | |||||||||||||||||||||||||||||
| Corporate | 862 | 25,726 | 3,474,857 | 1,653,722 | 524,742 | 5,679,909 | |||||||||||||||||||||||||||||
| Municipal | — | — | 79,296 | 30,806 | 51,737 | 161,839 | |||||||||||||||||||||||||||||
| Residential mortgage-backed | — | — | 157,773 | 293,811 | 77,655 | 529,239 | |||||||||||||||||||||||||||||
| Commercial mortgage-backed | — | — | 382,735 | 228,207 | 232,177 | 843,119 | |||||||||||||||||||||||||||||
| Asset-backed | — | — | 357,394 | 199,682 | 56,587 | 613,663 | |||||||||||||||||||||||||||||
| Total fixed maturity and short-term investments | $ | 7,133 | $ | 278,175 | $ | 4,999,642 | $ | 2,883,472 | $ | 1,054,201 | $ | 9,222,623 | |||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Short-term investments, trading | Short-term investments, AFS | Fixed maturities, trading | Fixed maturities, AFS | Fixed maturities, funds held - directly managed | Total | ||||||||||||||||||||||||||||||
| U.S. government and agency | $ | — | $ | 111,583 | $ | 208,296 | $ | 269,661 | $ | 106,537 | $ | 696,077 | |||||||||||||||||||||||
| U.K. government | 24,411 | 1,069 | 122,012 | 14,280 | — | 161,772 | |||||||||||||||||||||||||||||
| Other government | 21,958 | 387 | 575,017 | 84,760 | 20,734 | 702,856 | |||||||||||||||||||||||||||||
| Corporate | 5,121 | 13,915 | 3,959,288 | 866,557 | 603,389 | 5,448,270 | |||||||||||||||||||||||||||||
| Municipal | — | 1,381 | 87,451 | 2,399 | 49,456 | 140,687 | |||||||||||||||||||||||||||||
| Residential mortgage-backed | — | — | 215,521 | 99,188 | 86,205 | 400,914 | |||||||||||||||||||||||||||||
| Commercial mortgage-backed | — | — | 534,357 | 49,046 | 230,343 | 813,746 | |||||||||||||||||||||||||||||
| Asset-backed | — | — | 441,393 | 152,161 | 76,681 | 670,235 | |||||||||||||||||||||||||||||
| Total fixed maturity and short-term investments | $ | 51,490 | $ | 128,335 | $ | 6,143,335 | $ | 1,538,052 | $ | 1,173,345 | $ | 9,034,557 | |||||||||||||||||||||||
Included within residential and commercial mortgage-backed securities as of September 30, 2020 were securities issued by U.S. governmental agencies with a fair value of $458.8 million (December 31, 2019: $333.3 million). Included within corporate securities as of September 30, 2020 were senior secured loans of $nil (December 31, 2019: $31.4 million).
18
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Contractual Maturities
The contractual maturities of our short-term and fixed maturity investments, classified as trading and AFS and the fixed maturity investments included within our funds held - directly managed balance are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| As of September 30, 2020 | Amortized Cost | Fair Value | % of Total Fair Value | |||||||||||||||||
| One year or less | $ | 556,125 | $ | 559,086 | 6.1 | % | ||||||||||||||
| More than one year through two years | 589,231 | 598,559 | 6.5 | % | ||||||||||||||||
| More than two years through five years | 2,080,715 | 2,163,967 | 23.5 | % | ||||||||||||||||
| More than five years through ten years | 2,010,769 | 2,149,170 | 23.3 | % | ||||||||||||||||
| More than ten years | 1,595,695 | 1,765,820 | 19.1 | % | ||||||||||||||||
| Residential mortgage-backed | 521,383 | 529,239 | 5.7 | % | ||||||||||||||||
| Commercial mortgage-backed | 821,995 | 843,119 | 9.1 | % | ||||||||||||||||
| Asset-backed | 631,133 | 613,663 | 6.7 | % | ||||||||||||||||
| $ | 8,807,046 | $ | 9,222,623 | 100.0 | % | |||||||||||||||
Credit Ratings
The following table sets forth the credit ratings of our short-term and fixed maturity investments classified as trading and AFS and the fixed maturity investments included within our funds held - directly managed balance as of September 30, 2020:
| Amortized Cost | Fair Value | % of Total | AAA Rated | AA Rated | A Rated | BBB Rated | Non- Investment Grade | Not Rated | |||||||||||||||||||||||||||||||||||||||||||||
| U.S. government and agency | $ | 769,544 | $ | 789,630 | 8.6 | % | $ | 789,630 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||
| U.K. government | 111,169 | 114,777 | 1.2 | % | — | 102,624 | 8,739 | — | — | 3,414 | |||||||||||||||||||||||||||||||||||||||||||
| Other government | 466,575 | 490,447 | 5.3 | % | 242,097 | 150,005 | 43,003 | 45,884 | 9,458 | — | |||||||||||||||||||||||||||||||||||||||||||
| Corporate | 5,339,160 | 5,679,909 | 61.6 | % | 206,345 | 583,595 | 2,704,861 | 1,912,857 | 267,765 | 4,486 | |||||||||||||||||||||||||||||||||||||||||||
| Municipal | 146,087 | 161,839 | 1.8 | % | 7,137 | 83,519 | 51,538 | 19,645 | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed | 521,383 | 529,239 | 5.7 | % | 517,915 | — | 2,154 | 1,612 | 5,251 | 2,307 | |||||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed | 821,995 | 843,119 | 9.1 | % | 576,643 | 111,720 | 77,391 | 64,898 | 5,308 | 7,159 | |||||||||||||||||||||||||||||||||||||||||||
| Asset-backed | 631,133 | 613,663 | 6.7 | % | 249,237 | 99,942 | 145,494 | 96,960 | 21,780 | 250 | |||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 8,807,046 | $ | 9,222,623 | 100.0 | % | $ | 2,589,004 | $ | 1,131,405 | $ | 3,033,180 | $ | 2,141,856 | $ | 309,562 | $ | 17,616 | |||||||||||||||||||||||||||||||||||
| % of total fair value | 28.1 | % | 12.3 | % | 32.9 | % | 23.2 | % | 3.3 | % | 0.2 | % | |||||||||||||||||||||||||||||||||||||||||
19
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Unrealized Gains and Losses on AFS Short-term and Fixed Maturity Investments
The amortized cost, unrealized gains and losses, allowance for credit losses and fair values of our short-term and fixed maturity investments classified as AFS as of September 30, 2020 were as follows:
| Gross Unrealized Losses | ||||||||||||||||||||||||||||||||
| As of September 30, 2020 | Amortized Cost | Gross Unrealized Gains | Non-Credit Related Losses | Allowance for Credit Losses(1) | Fair Value | |||||||||||||||||||||||||||
| U.S. government and agency | $ | 546,799 | $ | 4,071 | $ | (281) | $ | — | $ | 550,589 | ||||||||||||||||||||||
| U.K. government | 42,025 | 995 | (46) | — | 42,974 | |||||||||||||||||||||||||||
| Other government | 131,861 | 4,279 | (10) | — | 136,130 | |||||||||||||||||||||||||||
| Corporate | 1,646,014 | 40,601 | (6,383) | (784) | 1,679,448 | |||||||||||||||||||||||||||
| Municipal | 29,810 | 1,012 | (16) | — | 30,806 | |||||||||||||||||||||||||||
| Residential mortgage-backed | 292,153 | 2,211 | (551) | (2) | 293,811 | |||||||||||||||||||||||||||
| Commercial mortgage-backed | 226,292 | 4,347 | (2,351) | (81) | 228,207 | |||||||||||||||||||||||||||
| Asset-backed | 200,626 | 642 | (1,541) | (45) | 199,682 | |||||||||||||||||||||||||||
| $ | 3,115,580 | $ | 58,158 | $ | (11,179) | $ | (912) | $ | 3,161,647 | |||||||||||||||||||||||
(1) The Company adopted ASU 2016-13 and the related amendments on January 1, 2020. Refer to Note 1 - "Significant Accounting Policies" for further details.
The amortized cost, unrealized gains and losses and fair values of our short-term and fixed maturity investments classified as AFS as of December 31, 2019 were as follows:
| As of December 31, 2019 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses (Non-OTTI) | Fair Value | ||||||||||||||||||||||
| U.S. government and agency | $ | 381,488 | $ | 78 | $ | (322) | $ | 381,244 | ||||||||||||||||||
| U.K. government | 15,067 | 282 | — | 15,349 | ||||||||||||||||||||||
| Other government | 84,116 | 1,119 | (88) | 85,147 | ||||||||||||||||||||||
| Corporate | 880,667 | 3,739 | (3,934) | 880,472 | ||||||||||||||||||||||
| Municipal | 3,770 | 12 | (2) | 3,780 | ||||||||||||||||||||||
| Residential mortgage-backed | 99,646 | 221 | (679) | 99,188 | ||||||||||||||||||||||
| Commercial mortgage-backed | 49,219 | 30 | (203) | 49,046 | ||||||||||||||||||||||
| Asset-backed | 152,153 | 127 | (119) | 152,161 | ||||||||||||||||||||||
| $ | 1,666,126 | $ | 5,608 | $ | (5,347) | $ | 1,666,387 | |||||||||||||||||||
Gross Unrealized Losses on AFS Short-term and Fixed Maturity Investments
The following table summarizes our short-term and fixed maturity investments classified as AFS that were in a gross unrealized loss position, for which an allowance for credit losses has not been recorded, as of September 30,
20
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2020, aggregated by major security type and length of time in continuous unrealized loss position:
| 12 Months or Greater | Less Than 12 Months | Total | ||||||||||||||||||||||||||||||||||||
| As of September 30, 2020 | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||
| U.S. government and agency | $ | — | $ | — | $ | 170,590 | $ | (281) | $ | 170,590 | $ | (281) | ||||||||||||||||||||||||||
| U.K. government | — | — | 2,911 | (46) | 2,911 | (46) | ||||||||||||||||||||||||||||||||
| Other government | — | — | 7,392 | (10) | 7,392 | (10) | ||||||||||||||||||||||||||||||||
| Corporate | — | — | 498,974 | (5,585) | 498,974 | (5,585) | ||||||||||||||||||||||||||||||||
| Municipal | — | — | 3,551 | (16) | 3,551 | (16) | ||||||||||||||||||||||||||||||||
| Residential mortgage-backed | — | — | 136,602 | (383) | 136,602 | (383) | ||||||||||||||||||||||||||||||||
| Commercial mortgage-backed | — | — | 69,226 | (1,652) | 69,226 | (1,652) | ||||||||||||||||||||||||||||||||
| Asset-backed | — | — | 135,857 | (1,386) | 135,857 | (1,386) | ||||||||||||||||||||||||||||||||
| Total fixed maturity and short-term investments | $ | — | $ | — | $ | 1,025,103 | $ | (9,359) | $ | 1,025,103 | $ | (9,359) | ||||||||||||||||||||||||||
The following table summarizes our short-term and fixed maturity investments classified as AFS that are in a gross unrealized loss position as of December 31, 2019, aggregated by major security type and length of time in continuous unrealized loss position:
| 12 Months or Greater | Less Than 12 Months | Total | ||||||||||||||||||||||||||||||||||||
| As of December 31, 2019 | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||
| U.S. government and agency | $ | — | $ | — | $ | 193,574 | $ | (322) | $ | 193,574 | $ | (322) | ||||||||||||||||||||||||||
| Other government | 1,080 | (23) | 37,796 | (65) | 38,876 | (88) | ||||||||||||||||||||||||||||||||
| Corporate | 2,754 | (306) | 338,965 | (3,628) | 341,719 | (3,934) | ||||||||||||||||||||||||||||||||
| Municipal | 128 | — | 761 | (2) | 889 | (2) | ||||||||||||||||||||||||||||||||
| Residential mortgage-backed | — | — | 52,005 | (679) | 52,005 | (679) | ||||||||||||||||||||||||||||||||
| Commercial mortgage-backed | — | — | 35,777 | (203) | 35,777 | (203) | ||||||||||||||||||||||||||||||||
| Asset-backed | — | — | 101,591 | (119) | 101,591 | (119) | ||||||||||||||||||||||||||||||||
| Total fixed maturity and short-term investments | $ | 3,962 | $ | (329) | $ | 760,469 | $ | (5,018) | $ | 764,431 | $ | (5,347) | ||||||||||||||||||||||||||
As of September 30, 2020 and December 31, 2019, the number of securities classified as AFS in an unrealized loss position for which an allowance for credit loss is not recorded was 721 and 479, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 0 and 12, respectively.
The contractual terms of a majority of these investments do not permit the issuers to settle the securities at a price less than the amortized cost basis of the security. While credit spreads have increased, and in certain cases credit ratings were downgraded, we currently do not expect the issuers of these fixed income securities to settle them at a price less than their amortized cost basis and therefore it is expected that we will recover the entire amortized cost basis of each security. Furthermore, we do not intend to sell the securities that are currently in an unrealized loss position, and it is also not more likely than not that we will be required to sell the securities before the recovery of their amortized cost bases.
Allowance for Credit Losses on AFS Fixed Maturity Investments
We adopted and the related amendments on January 1, 2020 prospectively, and recognized an allowance for credit losses of $3.1 million on initial adoption of the guidance. Our allowance for credit losses is derived based on various data sources, multiple key inputs and forecast scenarios. These include default rates specific to the individual security, vintage of the security, geography of the issuer of the security, industry analyst reports, credit ratings and consensus economic forecasts.
21
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
To determine the credit losses on our AFS securities, we use the probability of default ("PD") and loss given default ("LGD") methodology through a third-party proprietary tool which calculates the expected credit losses based on a discounted cash flow method. The tool uses effective interest rates to discount the expected cash flows associated with each AFS security to determine its fair value, which is then compared with its amortized cost basis to derive the credit loss on the security.
The methodology and inputs used to determine the credit loss by security type are as follows:
•Corporate and Government: Expected cashflows are derived that are specific to each security. The PD is based on a quantitative model that converts agency ratings to term structures that vary by country, industry and the state of the credit cycle. This is used along with macroeconomic forecasts to produce scenario conditioned PDs. The LGD is based on default studies provided by a third party which we use along with macroeconomic forecasts to produce scenario conditioned LGDs.
•Municipals: Expected cash flows are derived that are specific to each security. The PD model produces scenario conditioned PD output over the lifetime of the municipal security. These PDs are based on key macroeconomic and instrument specific risk factors. The LGD is derived based on a model which uses assumptions specific to the municipal securities.
For corporates, government and municipal securities, we use an explicit reversion and a three year forecast period, which we consider to be a reasonable duration during which an economic forecast could continue to be reliable.
•Asset backed, Commercial and Residential mortgaged-backed: Expected cash flows are derived that are specific to each security. The PD and LGD for each security is based on a quantitative model that generates scenario conditioned PD and LGD term structures based on the underlying collateral type, waterfall and other trustee information. This model also considers prepayments. For these security types, there is no explicit reversion and the forecasts are deemed reasonable and supportable over the life of the portfolio.
Due to the short-term period during which accrued investment income remains unpaid, which is typically six months since the coupon on our debt securities is paid semi-annually, we elected not to establish an allowance for credit losses on our accrued investment income balances. Accrued investment income is written off through net realized investment gains (losses) at the time the issuer of the debt security defaults or is expected to default on payments.
The following tables provide a reconciliation of the beginning and ending allowance for credit losses on our AFS debt securities:
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Other government | Corporate | Residential mortgage-backed | Commercial mortgage backed | Asset-backed | Total | ||||||||||||||||||||||||||||||
| Allowance for credit losses, beginning of period | $ | — | $ | (3,090) | $ | — | $ | (494) | $ | (89) | $ | (3,673) | |||||||||||||||||||||||
| Cumulative effect of change in accounting principle | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Allowances for credit losses on securities for which credit losses were not previously recorded | — | (39) | (2) | (78) | (45) | (164) | |||||||||||||||||||||||||||||
| Additions to the allowance for credit losses arising from purchases of securities accounted for as PCD assets | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Reductions for securities sold during the period | — | 341 | — | — | — | 341 | |||||||||||||||||||||||||||||
| Reductions in the allowance for credit losses on securities we either intend to sell or more likely than not, we will be required to sell before the recovery of their amortized cost basis | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| (Increase) decrease to the allowance for credit losses on securities that had an allowance recorded in the previous period | — | 2,004 | — | 491 | 89 | 2,584 | |||||||||||||||||||||||||||||
| Allowance for credit losses, end of period | $ | — | $ | (784) | $ | (2) | $ | (81) | $ | (45) | $ | (912) | |||||||||||||||||||||||
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Other government | Corporate | Residential mortgage-backed | Commercial mortgage backed | Asset-backed | Total | ||||||||||||||||||||||||||||||
| Allowance for credit losses, beginning of period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Cumulative effect of change in accounting principle | (22) | (2,987) | — | (50) | — | (3,059) | |||||||||||||||||||||||||||||
| Allowances for credit losses on securities for which credit losses were not previously recorded | — | (10,359) | (2) | (572) | (134) | (11,067) | |||||||||||||||||||||||||||||
| Additions to the allowance for credit losses arising from purchases of securities accounted for as PCD assets | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Reductions for securities sold during the period | 22 | 2,108 | — | — | — | 2,130 | |||||||||||||||||||||||||||||
| Reductions in the allowance for credit losses on securities we either intend to sell or more likely than not, we will be required to sell before the recovery of their amortized cost basis | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| (Increase) decrease to the allowance for credit losses on securities that had an allowance recorded in the previous period | — | 10,454 | — | 541 | 89 | 11,084 | |||||||||||||||||||||||||||||
| Allowance for credit losses, end of period | $ | — | $ | (784) | $ | (2) | $ | (81) | $ | (45) | $ | (912) | |||||||||||||||||||||||
During the three and nine months ended September 30, 2020 we did not have any write-offs charged against the allowance for credit losses or any recoveries of amounts previously written-off.
Our allowance for credit losses decreased during the three months ended September 30, 2020 primarily due to improved market conditions. Our modeling process for determining credit losses remained the same as the prior quarter and took into account the adverse impact that the COVID-19 pandemic still has on capital markets and the global economy in general.
Other-Than-Temporary Impairment on AFS Fixed Maturity Investments
For the three and nine months ended September 30, 2019, we did not recognize any other-than-temporary impairment losses on our AFS securities. We determined that no other-than-temporary credit losses existed as of December 31, 2019. A description of our other-than-temporary impairment process is included in Note 2 - "Significant Accounting Policies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
As discussed in detail in Note 1 - "Significant Accounting Policies" above, we adopted ASU 2016-13 and the related amendments on January 1, 2020 with this new guidance replacing the OTTI model that was previously applicable to our AFS debt securities. The new approach now requires the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value.
Equity Investments
The following table summarizes our equity investments classified as trading:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Publicly traded equity investments in common and preferred stocks | $ | 303,932 | $ | 327,875 | |||||||
| Exchange-traded funds | 78,182 | 133,047 | |||||||||
| Privately held equity investments in common and preferred stocks | 271,045 | 265,799 | |||||||||
| $ | 653,159 | $ | 726,721 | ||||||||
Equity investments include publicly traded common and preferred stocks, exchange-traded funds and privately held common and preferred stocks. Our publicly traded equity investments in common and preferred stocks predominantly trade on major exchanges and are managed by our external advisors. Our investments in exchange-traded funds also trade on major exchanges.
23
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. There is no active market for these investments. Included within the above balance as of September 30, 2020 and December 31, 2019 is an investment in the parent company of AmTrust Financial Services, Inc. ("AmTrust"), with a fair value of $245.4 million and $240.1 million, respectively. Refer to Note 20 - "Related Party Transactions" for further information.
Other Investments, at fair value
The following table summarizes our other investments carried at fair value:
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Hedge funds | $ | 2,087,091 | $ | 1,121,904 | ||||||||||
| Fixed income funds | 684,031 | 481,039 | ||||||||||||
| Equity funds | 290,129 | 410,149 | ||||||||||||
| Private equity funds | 320,455 | 323,496 | ||||||||||||
| CLO equities | 84,532 | 87,555 | ||||||||||||
| CLO equity funds | 140,458 | 87,509 | ||||||||||||
| Private credit funds | 90,476 | — | ||||||||||||
| Other | 7,698 | 6,379 | ||||||||||||
| $ | 3,704,870 | $ | 2,518,031 | |||||||||||
The valuation of our other investments is described in Note 11 - "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:
•Hedge funds may invest in a wide range of instruments, including debt and equity securities, and utilize various sophisticated strategies, including derivatives, to achieve their objectives. We invest in a mixture of fixed income, equity and multi-strategy hedge funds.
•Fixed income funds comprise a number of positions in diversified fixed income funds that are managed by third-party managers. Underlying investments vary from high-grade corporate bonds to non-investment grade senior secured loans and bonds, in both liquid and illiquid markets. The liquid fixed income funds have regularly published prices.
•Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities.
•Private equity funds invest primarily in the financial services industry.
•CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.
•CLO equity funds invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans.
•Private credit funds invest in direct senior or collateralized loans.
•Others comprise various investments including real estate debt funds that invest primarily in European commercial real estate equity and a fund that provides loans to educational institutions throughout the U.S. and its territories.
The increase in our other investments carried at fair value between September 30, 2020 and December 31, 2019 was primarily attributable to unrealized gains of $670.7 million and net additional subscriptions of $530.3 million to hedge funds, fixed income funds, private credit funds, CLO equities and CLO equity funds.
As of September 30, 2020, we had unfunded commitments of $792.2 million to other investments.
24
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Certain of our other investments are subject to restrictions on redemptions and sales that are determined by the governing documents, which limits our ability to liquidate those investments. These restrictions may include lock-ups, redemption gates, restricted share classes or side pockets, restrictions on the frequency of redemption and notice periods. A gate is the ability to deny or delay a redemption request, whereas a side-pocket is a designated account for which the investor loses its redemption rights. Certain other investments may not have any restrictions governing their sale, but there is no active market and no guarantee that we will be able to execute a sale in a timely manner. In addition, even if certain other investments are not eligible for redemption or sales are restricted, we may still receive income distributions from those other investments. The table below details the estimated date by which proceeds would be received if we had provided notice of our intent to redeem or initiated a sales process as of September 30, 2020:
| Less than 1 Year | 1-2 years | 2-3 years | Not Eligible/ Restricted | Total | Redemption Frequency | ||||||||||||||||||||||||||||||
| Hedge funds | $ | 793,268 | $ | 1,131,505 | $ | 102,600 | $ | 59,718 | $ | 2,087,091 | Monthly to Bi-annually | ||||||||||||||||||||||||
| Fixed income funds | 671,333 | — | — | 12,698 | 684,031 | Daily to Quarterly | |||||||||||||||||||||||||||||
| Equity funds | 290,129 | — | — | — | 290,129 | Daily to Quarterly | |||||||||||||||||||||||||||||
| Private equity funds | — | — | — | 320,455 | 320,455 | N/A | |||||||||||||||||||||||||||||
| CLO equities | 84,532 | — | — | — | 84,532 | N/A | |||||||||||||||||||||||||||||
| CLO equity funds | 101,597 | 29,113 | 9,748 | — | 140,458 | Quarterly to Bi-annually | |||||||||||||||||||||||||||||
| Private credit funds | — | 10,000 | 80,476 | 90,476 | N/A | ||||||||||||||||||||||||||||||
| Other | 7,698 | 7,698 | N/A | ||||||||||||||||||||||||||||||||
| $ | 1,940,859 | $ | 1,170,618 | $ | 112,348 | $ | 481,045 | $ | 3,704,870 | ||||||||||||||||||||||||||
Refer to Note 20 - "Related Party Transactions" for further information regarding certain of our other investments.
Equity Method Investments
The following table summarizes our equity method investments:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| Investment | Ownership % | Carrying Value | Investment | Ownership % | Carrying Value | |||||||||||||||||||||||||||||||||
| Enhanzed Re | $ | 154,050 | 47.4 | % | $ | 271,678 | $ | 154,050 | 47.4 | % | $ | 182,856 | ||||||||||||||||||||||||||
| Citco | 50,000 | 31.9 | % | 51,946 | 50,000 | 31.9 | % | 51,742 | ||||||||||||||||||||||||||||||
Monument Re (1) | 59,600 | 20.0 | % | 161,994 | 26,600 | 20.0 | % | 60,598 | ||||||||||||||||||||||||||||||
| Clear Spring | 11,210 | 20.0 | % | 10,944 | 11,210 | 20.0 | % | 10,645 | ||||||||||||||||||||||||||||||
| Other | 24,963 | ~30% | 20,233 | 24,963 | ~30% | 20,436 | ||||||||||||||||||||||||||||||||
| $ | 299,823 | $ | 516,795 | $ | 266,823 | $ | 326,277 | |||||||||||||||||||||||||||||||
(1) We own 20.0% of the common shares in Monument Re as well as different classes of preferred shares which have fixed dividend yields.
Refer to Note 20 - "Related Party Transactions" for further information regarding our investments in Enhanzed Re, Citco, Monument Re and Clear Spring.
As of September 30, 2020, we had unfunded commitments of $68.7 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.
25
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Funds Held - Directly Managed
Funds held - directly managed, where we receive the underlying return on the investment portfolio, are carried at fair value, either because we elected the fair value option at the inception of the reinsurance contract, or because it represents the aggregate of funds held at amortized cost and the fair value of an embedded derivative. The embedded derivative relates to our contractual right to receive the return on the underlying investment portfolio supporting the reinsurance contract. We include the estimated fair value of these embedded derivatives in the consolidated balance sheets with the host contract in order to reflect the expected settlement of these features with the host contract. The change in the fair value of the embedded derivative is included in net unrealized gains (losses). The following table summarizes the components of the funds held - directly managed:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Fixed maturity investments, trading | $ | 1,054,201 | $ | 1,173,345 | |||||||
| Cash and cash equivalents | 6,432 | 10,296 | |||||||||
| Other assets | 6,006 | 3,911 | |||||||||
| $ | 1,066,639 | $ | 1,187,552 | ||||||||
The following table summarizes the fixed maturity investment components of funds held - directly managed:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 106,768 | $ | 861,511 | $ | 968,279 | $ | 185,859 | $ | 940,194 | $ | 1,126,053 | |||||||||||||||||||||||
| Net unrealized gains (losses): | |||||||||||||||||||||||||||||||||||
| Change in fair value - fair value option accounting | 9,077 | — | 9,077 | 5,438 | — | 5,438 | |||||||||||||||||||||||||||||
| Change in fair value - embedded derivative accounting | — | 76,845 | 76,845 | — | 41,854 | 41,854 | |||||||||||||||||||||||||||||
| Fixed maturity investments within funds held - directly managed, at fair value | $ | 115,845 | $ | 938,356 | $ | 1,054,201 | $ | 191,297 | $ | 982,048 | $ | 1,173,345 | |||||||||||||||||||||||
Refer to the sections above for details of the fixed maturity investments within our funds held - directly managed portfolios.
Funds Held by Reinsured Companies
Funds held by reinsured companies, where we received a fixed crediting rate, are carried at cost on our consolidated balance sheets. As of September 30, 2020 and December 31, 2019, we had funds held by reinsured companies of $657.5 million and $475.7 million, respectively. The increase related to $204.2 million of additional funds held balances related to the AXA Group transaction.
26
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net Investment Income
Major categories of net investment income are summarized as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Fixed maturity investments | $ | 47,275 | $ | 54,085 | $ | 153,554 | $ | 163,246 | |||||||||||||||
| Short-term investments and cash and cash equivalents | 826 | 3,526 | 4,203 | 11,430 | |||||||||||||||||||
| Funds held | 8,346 | 10,091 | 32,715 | 18,901 | |||||||||||||||||||
| Funds held - directly managed | 7,703 | 9,381 | 27,204 | 28,742 | |||||||||||||||||||
| Investment income from fixed maturities and cash and cash equivalents | 64,150 | 77,083 | 217,676 | 222,319 | |||||||||||||||||||
| Equity investments | 4,771 | 4,416 | 14,496 | 11,218 | |||||||||||||||||||
| Other investments | 6,000 | 2,642 | 19,384 | 7,259 | |||||||||||||||||||
| Investment income from equities and other investments | 10,771 | 7,058 | 33,880 | 18,477 | |||||||||||||||||||
| Gross investment income | 74,921 | 84,141 | 251,556 | 240,796 | |||||||||||||||||||
| Investment expenses | (2,791) | (2,639) | (10,269) | (9,372) | |||||||||||||||||||
| Net investment income | $ | 72,130 | $ | 81,502 | $ | 241,287 | $ | 231,424 | |||||||||||||||
Net Realized and Unrealized Gains
Components of net realized and unrealized gains were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Net realized gains (losses) on sale: | ||||||||||||||||||||||||||
| Gross realized gains on fixed maturity securities, AFS | $ | 9,871 | $ | 44 | $ | 19,995 | $ | 4,493 | ||||||||||||||||||
| Gross realized losses on fixed maturity securities, AFS | (786) | (10) | (7,379) | (302) | ||||||||||||||||||||||
| Credit recoveries (losses) on fixed maturity securities, AFS | 2,248 | — | (389) | — | ||||||||||||||||||||||
| Net realized gains on fixed maturity securities, trading | 30,531 | 25,245 | 87,911 | 45,636 | ||||||||||||||||||||||
| Net realized gains on funds held - directly managed | 3,292 | 1,991 | 5,545 | 629 | ||||||||||||||||||||||
| Net realized gains (losses) on equity investments | 8,286 | (3,881) | 9,165 | (1,213) | ||||||||||||||||||||||
| Net realized investment gains (losses) on derivatives | 46 | — | 46 | — | ||||||||||||||||||||||
| Total net realized gains on sale | $ | 53,488 | $ | 23,389 | $ | 114,894 | $ | 49,243 | ||||||||||||||||||
| Net unrealized gains (losses): | ||||||||||||||||||||||||||
| Fixed maturity securities, trading | $ | 14,324 | $ | 86,840 | $ | 58,795 | $ | 413,175 | ||||||||||||||||||
| Fixed maturity securities in funds held - directly managed portfolios | 7,814 | 20,895 | 42,619 | 95,124 | ||||||||||||||||||||||
| Equity investments | 4,210 | 10,057 | (48,409) | 31,266 | ||||||||||||||||||||||
| Other Investments | 420,169 | 3,879 | 670,653 | 269,681 | ||||||||||||||||||||||
| Total net unrealized gains | 446,517 | 121,671 | 723,658 | 809,246 | ||||||||||||||||||||||
| Net realized and unrealized gains | $ | 500,005 | $ | 145,060 | $ | 838,552 | $ | 858,489 | ||||||||||||||||||
The gross realized gains and losses on AFS investments included in the table above resulted from sales of $409.6 million and $7.6 million for the three months ended September 30, 2020 and 2019, respectively, and $1,455.9 million and $91.2 million for the nine months ended September 30, 2020 and 2019, respectively.
27
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliation to the Consolidated Statements of Comprehensive Income
The following table provides a reconciliation of the gross realized gains and losses and credit recoveries (losses) on our AFS fixed maturity debt securities that arose during the three and nine months ended September 30, 2020 within our continuing and discontinued operations and the offsetting reclassification adjustments included within our consolidated statements of comprehensive income:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Included within continuing operations: | |||||||||||||||||||||||
| Gross realized gains on fixed maturity securities, AFS | $ | 9,871 | $ | 44 | $ | 19,995 | $ | 4,493 | |||||||||||||||
| Gross realized losses on fixed maturity securities, AFS | (786) | (10) | (7,379) | (302) | |||||||||||||||||||
| Included within discontinued operations: | |||||||||||||||||||||||
| Gross realized gains on fixed maturity securities, AFS | 489 | 12 | 1,025 | 12 | |||||||||||||||||||
| Gross realized losses on fixed maturity securities, AFS | (86) | (12) | (143) | (12) | |||||||||||||||||||
| Total reclassification adjustment | $ | 9,488 | $ | 34 | $ | 13,498 | $ | 4,191 | |||||||||||||||
| Included within continuing operations: | |||||||||||||||||||||||
| Credit recoveries (losses) on fixed maturity securities, AFS | $ | 2,248 | $ | — | $ | (389) | $ | — | |||||||||||||||
| Included within discontinued operations: | |||||||||||||||||||||||
| Credit recoveries (losses) on fixed maturity securities, AFS | 131 | — | 318 | — | |||||||||||||||||||
| Total reclassification adjustment | $ | 2,379 | $ | — | $ | (71) | $ | — | |||||||||||||||
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 $556.7 million and $346.9 million, as of September 30, 2020 and December 31, 2019, respectively, was as follows:
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Collateral in trust for third party agreements | $ | 5,189,537 | $ | 4,103,847 | ||||||||||
| Assets on deposit with regulatory authorities | 276,941 | 309,659 | ||||||||||||
| Collateral for secured letter of credit facilities | 121,700 | 132,670 | ||||||||||||
Funds at Lloyd's (1) | 546,996 | 639,316 | ||||||||||||
| $ | 6,135,174 | $ | 5,185,492 | |||||||||||
(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 14 - "Debt Obligations and Credit Facilities."
The increase in restricted assets during the nine months ended September 30, 2020 primarily related to new business as described in Note 3 - "Significant New Business," partially offset by reductions due to paid losses and other releases of collateral.
28
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. DERIVATIVES AND HEDGING INSTRUMENTS
Foreign Currency Hedging of Net Investments in Foreign Operations
We use foreign currency forward exchange rate contracts in qualifying hedging relationships to hedge the foreign currency exchange rate risk associated with certain of our net investments in foreign operations. As of September 30, 2020 and December 31, 2019, we had forward currency contracts in place, which we had designated as hedges of our net investments in foreign operations.
The following table presents the gross notional amounts and estimated fair values recorded within other assets and other liabilities related to our qualifying foreign currency forward exchange rate contracts:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | |||||||||||||||||||||||||||||||||||||
| Gross Notional Amount | Assets | Liabilities | Gross Notional Amount | Assets | Liabilities | |||||||||||||||||||||||||||||||||
| Foreign currency forward - AUD | $ | 68,847 | $ | 282 | $ | — | $ | 64,620 | $ | 52 | $ | 2,033 | ||||||||||||||||||||||||||
| Foreign currency forward - EUR | 140,663 | 839 | — | 112,284 | 246 | 1,635 | ||||||||||||||||||||||||||||||||
| Foreign currency forward - GBP | 329,245 | 5,664 | — | 318,387 | 344 | 7,784 | ||||||||||||||||||||||||||||||||
| Total qualifying hedges | $ | 538,755 | $ | 6,785 | $ | — | $ | 495,291 | $ | 642 | $ | 11,452 | ||||||||||||||||||||||||||
The following table presents the net gains and losses deferred in the cumulative translation adjustment ("CTA") account, which is a component of AOCI, in shareholders' equity, relating to our foreign currency forward exchange rate contracts:
| Amount of Gains (Losses) Deferred in AOCI | ||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Foreign currency forward - AUD | $ | (2,813) | $ | 1,673 | $ | (1,777) | $ | 1,819 | ||||||||||||||||||
| Foreign currency forward - EUR | (5,525) | 4,780 | (6,001) | 5,076 | ||||||||||||||||||||||
| Foreign currency forward - GBP | (11,315) | 8,260 | 10,002 | 6,669 | ||||||||||||||||||||||
| Net gains (losses) on qualifying derivative hedges | $ | (19,653) | $ | 14,713 | $ | 2,224 | $ | 13,564 | ||||||||||||||||||
Derivatives Not Designated or Not Qualifying as Net Investments 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.
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 exchange rate hedging relationships:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | |||||||||||||||||||||||||||||||||||||
| Gross Notional Amount | Assets | Liabilities | Gross Notional Amount | Assets | Liabilities | |||||||||||||||||||||||||||||||||
| Foreign currency forward - AUD | $ | 19,076 | $ | 145 | $ | 81 | $ | 913 | $ | 839 | $ | 892 | ||||||||||||||||||||||||||
| Foreign currency forward - CAD | 52,212 | 525 | 89 | 66,266 | 10 | 1,482 | ||||||||||||||||||||||||||||||||
| Foreign currency forward - EUR | 22,272 | — | 132 | 74,444 | 507 | 1,440 | ||||||||||||||||||||||||||||||||
| Foreign currency forward - GBP | 43,254 | 744 | — | 11,940 | 13 | 292 | ||||||||||||||||||||||||||||||||
| Total non-qualifying hedges | $ | 136,814 | $ | 1,414 | $ | 302 | $ | 153,563 | $ | 1,369 | $ | 4,106 | ||||||||||||||||||||||||||
29
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the net gains (losses) included in earnings related to our non-qualifying foreign currency forward contracts:
| Gains (Losses) on non-qualifying-hedges included in net earnings | ||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Foreign currency forward - AUD | $ | 13 | $ | 1,148 | $ | (432) | $ | 1,710 | ||||||||||||||||||
| Foreign currency forward - CAD | (1,171) | 1,582 | 1,600 | (910) | ||||||||||||||||||||||
| Foreign currency forward - EUR | (817) | 2,473 | 135 | 3,344 | ||||||||||||||||||||||
| Foreign currency forward - GBP | (2,219) | 10,659 | (719) | $ | 12,970 | |||||||||||||||||||||
| Net gains (losses) on non-qualifying hedges | $ | (4,194) | $ | 15,862 | $ | 584 | $ | 17,114 | ||||||||||||||||||
Investments in Call Options on Equities
During the three and nine months ended September 30, 2020, we recorded unrealized losses of $nil and less than $0.1 million, respectively, in net earnings on the call options on equities that we had purchased in 2018 at a cost of $10.0 million. During the three and nine months ended September 30, 2019, we had recorded unrealized gains of less than $0.1 million and $1.3 million, respectively, in net earnings on these call options on equities. These call options on equities had a fair value of less than $0.1 million as at December 31, 2019 and expired without being exercised during the nine months ended September 30, 2020.
Forward Interest Rate Swaps
In October 2019, we entered into a forward interest rate swap, with a notional amount of AUD$120.0 million, to partially mitigate the risk associated with declining interest rates until the completion of the Munich Re transaction which closed on July 1, 2020, as described in Note 3 - "Significant New Business."
During the three and nine months ended September 30, 2020, we recorded unrealized gains included within net earnings of $nil and $0.8 million, respectively, on the forward interest rate swap. This forward interest rate swap was terminated on April 7, 2020, for an inception-to-date net realized gain of $0.5 million. The carrying value of the forward interest rate swap, recorded in other liabilities as of December 31, 2019, was $0.3 million.
Credit Default Swaps, Futures and Currency Forward Contracts
From time to time we may also utilize (i) credit default swaps to both hedge and replicate credit exposure, (ii) government bond futures contracts for interest rate management, and (iii) foreign currency forward contracts for currency hedging, to collectively manage credit and duration risk, as well as for yield enhancement on some of our fixed income portfolios.
The following table presents the gross notional amounts and estimated fair values recorded within other assets and other liabilities related to our credit default swaps, government bond futures contracts and currency forward contracts:
| September 30, 2020 | ||||||||||||||||||||
| Fair Value | ||||||||||||||||||||
| Gross Notional Amount | Assets | Liabilities | ||||||||||||||||||
| Credit default swaps | $ | 7,865 | $ | — | $ | 169 | ||||||||||||||
| Futures contracts - long positions | 48,051 | 100 | — | |||||||||||||||||
| Futures contracts - short positions | (33,318) | — | 85 | |||||||||||||||||
| Currency forward contracts - long positions | 1,508 | 12 | — | |||||||||||||||||
| Currency forward contracts - short positions | (1,819) | — | 29 | |||||||||||||||||
| Total | $ | 22,287 | $ | 112 | $ | 283 | ||||||||||||||
We initially entered into these credit default swaps, government bond futures contracts and currency forward contracts during the nine month period ended September 30, 2020 and therefore we did not have any of these contracts in place as of December 31, 2019.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the amounts of the net gains included in earnings related to our credit default swaps, government bond futures contracts and currency forward contracts:
Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | ||||||||||
Credit default swaps | $ | 106 | $ | 106 | |||||||
Futures contracts | (6) | (43) | |||||||||
Currency forward contracts | (43) | 123 | |||||||||
Total net gains | $ | 57 | $ | 186 | |||||||
We initially entered into these credit default swaps, government bond futures contracts and currency forward contracts during the nine month period ended September 30, 2020 and therefore we did not have any of these contracts in place during the three and nine months ended September 30, 2019.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. REINSURANCE BALANCES RECOVERABLE ON PAID AND UNPAID LOSSES
The following tables provide the total reinsurance balances recoverable on paid and unpaid losses:
| September 30, 2020 | ||||||||||||||||||||
| Non-life Run-off | StarStone | Total | ||||||||||||||||||
| Recoverable from reinsurers on unpaid: | ||||||||||||||||||||
| Outstanding losses | $ | 858,988 | $ | 258,215 | $ | 1,117,203 | ||||||||||||||
| IBNR | 439,594 | 143,073 | 582,667 | |||||||||||||||||
| ULAE | 7,674 | — | 7,674 | |||||||||||||||||
| Fair value adjustments - acquired companies | (11,986) | (1,378) | (13,364) | |||||||||||||||||
| Fair value adjustments - fair value option | (27,029) | — | (27,029) | |||||||||||||||||
| Total reinsurance reserves recoverable | 1,267,241 | 399,910 | 1,667,151 | |||||||||||||||||
| Paid losses recoverable | 136,548 | 77,957 | 214,505 | |||||||||||||||||
| Total | $ | 1,403,789 | $ | 477,867 | $ | 1,881,656 | ||||||||||||||
| Reconciliation to Consolidated Balance Sheet: | ||||||||||||||||||||
| Reinsurance balances recoverable on paid and unpaid losses | $ | 860,628 | $ | 477,867 | $ | 1,338,495 | ||||||||||||||
| Reinsurance balances recoverable on paid and unpaid losses - fair value option | 543,161 | — | 543,161 | |||||||||||||||||
| Total | $ | 1,403,789 | $ | 477,867 | $ | 1,881,656 | ||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Total | |||||||||||||||||||||||
| Recoverable from reinsurers on unpaid: | ||||||||||||||||||||||||||
| Outstanding losses | $ | 972,293 | $ | 9,011 | $ | 264,131 | $ | 1,245,435 | ||||||||||||||||||
| IBNR | 673,059 | 19,286 | 93,185 | 785,530 | ||||||||||||||||||||||
| Fair value adjustments - acquired companies | (13,652) | 519 | (2,122) | (15,255) | ||||||||||||||||||||||
| Fair value adjustments - fair value option | (88,086) | — | — | (88,086) | ||||||||||||||||||||||
| Total reinsurance reserves recoverable | 1,543,614 | 28,816 | 355,194 | 1,927,624 | ||||||||||||||||||||||
| Paid losses recoverable | 181,375 | 1,541 | 70,594 | 253,510 | ||||||||||||||||||||||
| Total | $ | 1,724,989 | $ | 30,357 | $ | 425,788 | $ | 2,181,134 | ||||||||||||||||||
| Reconciliation to Consolidated Balance Sheet: | ||||||||||||||||||||||||||
| Reinsurance balances recoverable on paid and unpaid losses | $ | 1,029,471 | $ | 30,357 | $ | 425,788 | $ | 1,485,616 | ||||||||||||||||||
| Reinsurance balances recoverable on paid and unpaid losses - fair value option | 695,518 | — | — | 695,518 | ||||||||||||||||||||||
| Total | $ | 1,724,989 | $ | 30,357 | $ | 425,788 | $ | 2,181,134 | ||||||||||||||||||
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, StarStone purchases a tailored outwards reinsurance program designed to manage its risk profile. The majority of 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 on paid and unpaid losses 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 11 - "Fair Value Measurements."
As of September 30, 2020 and December 31, 2019, we had reinsurance balances recoverable on paid and unpaid losses of $1.9 billion and $2.2 billion, respectively. The decrease of $299.5 million in reinsurance balances
32
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recoverable on paid and unpaid losses was primarily due to the Hannover Re transaction, cash collections in the first nine months of 2020 and the classification of Atrium as held-for-sale at September 30, 2020; partially offset by reserve increases on StarStone International, which includes estimated recoverables on losses related to the COVID-19 pandemic.
Top Ten Reinsurers
| September 30, 2020 | |||||||||||||||||||||||
| Non-life Run-off | StarStone | Total | % of Total | ||||||||||||||||||||
| Top 10 reinsurers | $ | 828,479 | $ | 344,444 | $ | 1,172,923 | 62.3 | % | |||||||||||||||
| Other reinsurers > $1 million | 556,623 | 132,049 | 688,672 | 36.6 | % | ||||||||||||||||||
| Other reinsurers < $1 million | 18,687 | 1,374 | 20,061 | 1.1 | % | ||||||||||||||||||
| Total | $ | 1,403,789 | $ | 477,867 | $ | 1,881,656 | 100.0 | % | |||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Total | % of Total | |||||||||||||||||||||||||
| Top 10 reinsurers | $ | 1,154,110 | $ | 22,051 | $ | 295,443 | $ | 1,471,604 | 67.4 | % | |||||||||||||||||||
| Other reinsurers > $1 million | 551,636 | 7,761 | 129,335 | 688,732 | 31.6 | % | |||||||||||||||||||||||
| Other reinsurers < $1 million | 19,243 | 545 | 1,010 | 20,798 | 1.0 | % | |||||||||||||||||||||||
| Total | $ | 1,724,989 | $ | 30,357 | $ | 425,788 | $ | 2,181,134 | 100.0 | % | |||||||||||||||||||
| September 30, 2020 | December 31, 2019 | ||||||||||
| Information regarding top ten reinsurers: | |||||||||||
| Number of top 10 reinsurers rated A- or better | 8 | 8 | |||||||||
Number of top 10 non-rated reinsurers (1) | 2 | 2 | |||||||||
| Reinsurers rated A- or better in top 10 | $ | 910,751 | $ | 1,199,479 | |||||||
Non-rated reinsurers in top 10 (1) | 262,172 | 272,125 | |||||||||
| Total top 10 reinsurance recoverables | $ | 1,172,923 | $ | 1,471,604 | |||||||
| Single reinsurers that represent 10% or more of total reinsurance balance recoverables as of September 30, 2020: | |||||||||||
Hannover Ruck SE (2) | $ | — | $ | 259,077 | |||||||
Lloyd's Syndicates (3) | $ | 346,601 | $ | 396,246 | |||||||
(1) The reinsurance balances recoverable from the two non-rated top 10 reinsurers was comprised of:
•$183.4 million and $190.8 million as of September 30, 2020 and December 31, 2019 respectively, due from a US state backed reinsurer that is supported by assessments on active auto writers operating within the state; and
•$78.8 million and $81.4 million as of September 30, 2020 and December 31, 2019 respectively, due from a reinsurer who has provided us with security in the form of pledged assets in trust for the full amount of the recoverable balance.
(2) Hannover Ruck SE is rated AA- by Standard & Poor’s and A+ by A.M. Best. The transaction described in Note 3 - "Significant New Business" had the effect of moving this reinsurer to be less than 10%.
(3) Lloyd's Syndicates are rated A+ by Standard & Poor's and A by A.M. Best.
Allowance for Estimated Uncollectible Reinsurance Balances Recoverable on Paid and Unpaid Losses
We evaluate and monitor the credit risk related to our reinsurers, and an allowance for estimated uncollectible reinsurance balances recoverable on paid and unpaid losses ("allowance for estimated uncollectible reinsurance") is established for amounts considered potentially uncollectible.
With respect to our process for determining the allowances for estimated uncollectible reinsurance, we adopted and the related amendments on January 1, 2020 and recorded a cumulative effect adjustment of $0.2 million to increase the opening retained earnings on the initial adoption of the guidance. Our allowance for estimated uncollectible reinsurance is derived based on various data sources, multiple key inputs and
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
forecast scenarios. These include the duration of the collection period, credit quality, changes in reinsurer credit standing, default rates specific to the individual reinsurer, the geographical location of the reinsurer, contractual disputes with reinsurers over individual contentious claims, contract language or coverage issues, industry analyst reports and consensus economic forecasts.
To determine the allowance for estimated uncollectible reinsurance, we use the PD and LGD methodology whereby each reinsurer is allocated an appropriate PD percentage based on the expected payout duration by portfolio. This PD percentage is then multiplied by an appropriate LGD percentage to arrive at an overall credit allowance percentage which is then applied to the reinsurance balance recoverable for each reinsurer, net of any specific bad debt provisions, collateral or other contract related offsets, to arrive at the overall allowance for estimated uncollectible reinsurance by reinsurer.
The following tables show our gross and net balances recoverable from our reinsurers as well as the related allowance for estimated uncollectible reinsurance broken down by the credit ratings of our reinsurers. The majority of the allowance for estimated uncollectible reinsurance relates to the Non-life Run-off segment.
| September 30, 2020 | |||||||||||||||||||||||
| Gross | Allowance for estimated uncollectible reinsurance | Net | Provisions as a % of Gross | ||||||||||||||||||||
| Reinsurers rated A- or above | $ | 1,429,984 | $ | 57,465 | $ | 1,372,519 | 4.0 | % | |||||||||||||||
| Reinsurers rated below A-, secured | 419,431 | — | 419,431 | — | % | ||||||||||||||||||
| Reinsurers rated below A-, unsecured | 167,358 | 77,652 | 89,706 | 46.4 | % | ||||||||||||||||||
| Total | $ | 2,016,773 | $ | 135,117 | $ | 1,881,656 | 6.7 | % | |||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Gross | Allowance for estimated uncollectible reinsurance | Net | Provisions as a % of Gross | ||||||||||||||||||||
| Reinsurers rated A- or above | $ | 1,731,270 | $ | 43,427 | $ | 1,687,843 | 2.5 | % | |||||||||||||||
| Reinsurers rated below A-, secured | 463,840 | — | 463,840 | — | % | ||||||||||||||||||
| Reinsurers rated below A-, unsecured | 133,663 | 104,212 | 29,451 | 78.0 | % | ||||||||||||||||||
| Total | $ | 2,328,773 | $ | 147,639 | $ | 2,181,134 | 6.3 | % | |||||||||||||||
The table below provides a reconciliation of the beginning and ending allowance for estimated uncollectible reinsurance balances for the three and nine months ended September 30, 2020:
| Three Months Ended | Nine Months Ended | ||||||||||
| September 30, 2020 | September 30, 2020 | ||||||||||
| Allowance for estimated uncollectible reinsurance, beginning of period | $ | 143,653 | $ | 147,639 | |||||||
| Cumulative effect of change in accounting principle | — | (195) | |||||||||
| Effect of exchange rate movement | 745 | (701) | |||||||||
| Current period change in the allowance | 815 | (718) | |||||||||
| Write-offs charged against the allowance | (9,625) | (10,225) | |||||||||
| Recoveries collected | (471) | (683) | |||||||||
| Allowance for estimated uncollectible reinsurance, end of period | $ | 135,117 | $ | 135,117 | |||||||
Past-Due Status:
We consider a reinsurance recoverable asset to be past due when it is 90 days past due and record a credit allowance when there is reasonable uncertainty about the collectability of a disputed amount during the reporting period. We did not have significant past due balances older than one year for any of the periods presented.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. 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. The premium consideration that we charge the ceding companies may be lower than the undiscounted estimated ultimate losses payable due to the time value of money. After receiving the premium consideration in full from our cedents at the inception of the contract, we invest the premium received over an extended period of time thereby generating investment income. We expect to generate profits from these retroactive reinsurance policies when taking into account the premium received and expected investment income, less contractual obligations and expenses.
Deferred charge assets are included in other assets on our consolidated balance sheets. The following table presents a reconciliation of the deferred charge assets:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Beginning carrying value | $ | 258,516 | $ | 99,094 | $ | 272,462 | $ | 86,585 | |||||||||||||||
| Recorded during the period | — | 85,183 | 11,746 | 108,689 | |||||||||||||||||||
| Amortization | (10,316) | (17,009) | (36,008) | (28,006) | |||||||||||||||||||
| Ending carrying value | $ | 248,200 | $ | 167,268 | $ | 248,200 | $ | 167,268 | |||||||||||||||
Deferred charge assets are amortized over the estimated claim payment period of the related contract with the periodic amortization reflected in earnings as a component of losses and LAE. Deferred charge assets amortization is adjusted at each reporting period to reflect new estimates of the amount and timing of remaining loss payments. Changes in the estimated amount and the timing of payments of unpaid losses may have an effect on the unamortized deferred charge assets and the amount of periodic amortization. Deferred charge assets are assessed at each reporting period for impairment. If the asset is determined to be impaired, it is written down in the period in which the determination is made. For the nine months ended September 30, 2020, 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 and nine months ended September 30, 2020 is included in Note 3 - "Significant New Business."
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. 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 asbestos, environmental, general casualty, workers' compensation/personal accident, marine, aviation and transit, construction defect, professional indemnity/directors and officers, motor, property and other non-life lines of business. Refer to Note 10 - "Losses and Loss Adjustment Expenses" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019 for more information on establishing the liability for losses and LAE.
The following tables summarize the liability for losses and LAE by segment and for our other activities:
| September 30, 2020 | |||||||||||||||||||||||
| Non-life Run-off | StarStone | Other | Total | ||||||||||||||||||||
| Outstanding losses | $ | 4,461,854 | $ | 698,118 | $ | 10,479 | $ | 5,170,451 | |||||||||||||||
| IBNR | 4,360,063 | 611,986 | 15,817 | 4,987,866 | |||||||||||||||||||
| Fair value adjustments - acquired companies | (147,500) | (339) | — | (147,839) | |||||||||||||||||||
| Fair value adjustments - fair value option | (81,299) | — | — | (81,299) | |||||||||||||||||||
| ULAE | 330,472 | 41,233 | — | 371,705 | |||||||||||||||||||
| Total | $ | 8,923,590 | $ | 1,350,998 | $ | 26,296 | $ | 10,300,884 | |||||||||||||||
| Reconciliation to Consolidated Balance Sheet: | |||||||||||||||||||||||
| Loss and loss adjustment expenses | $ | 6,500,912 | $ | 1,350,998 | $ | 26,296 | $ | 7,878,206 | |||||||||||||||
| Loss and loss adjustment expenses, at fair value | 2,422,678 | — | — | 2,422,678 | |||||||||||||||||||
| Total | $ | 8,923,590 | $ | 1,350,998 | $ | 26,296 | $ | 10,300,884 | |||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Outstanding losses | $ | 4,407,082 | $ | 89,141 | $ | 743,829 | $ | 9,512 | $ | 5,249,564 | |||||||||||||||||||
| IBNR | 3,945,407 | 136,543 | 556,135 | 13,565 | 4,651,650 | ||||||||||||||||||||||||
| Fair value adjustments - acquired companies | (170,689) | 3,700 | (522) | — | (167,511) | ||||||||||||||||||||||||
| Fair value adjustments - fair value option | (217,933) | — | — | — | (217,933) | ||||||||||||||||||||||||
| ULAE | 331,494 | 2,288 | 18,852 | — | 352,634 | ||||||||||||||||||||||||
| Total | $ | 8,295,361 | $ | 231,672 | $ | 1,318,294 | $ | 23,077 | $ | 9,868,404 | |||||||||||||||||||
| Reconciliation to Consolidated Balance Sheet: | |||||||||||||||||||||||||||||
| Loss and loss adjustment expenses | $ | 5,674,239 | $ | 231,672 | $ | 1,318,294 | $ | 23,077 | $ | 7,247,282 | |||||||||||||||||||
| Loss and loss adjustment expenses, at fair value | 2,621,122 | — | — | — | 2,621,122 | ||||||||||||||||||||||||
| Total | $ | 8,295,361 | $ | 231,672 | $ | 1,318,294 | $ | 23,077 | $ | 9,868,404 | |||||||||||||||||||
The overall increase in the liability for losses and LAE between December 31, 2019 and September 30, 2020 was primarily attributable to the AXA Group, Aspen and Lyft reinsurance transactions, as described in Note 3 - "Significant New Business" and net incurred losses and LAE in the period, partially offset by losses paid and foreign exchange gains in the period.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below provides a consolidated reconciliation of the beginning and ending liability for losses and LAE:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Balance as of beginning of period | $ | 10,593,436 | $ | 9,354,891 | $ | 9,868,404 | $ | 9,048,796 | |||||||||||||||
| Less: reinsurance reserves recoverable | 1,858,161 | 1,873,766 | 1,927,624 | 1,708,272 | |||||||||||||||||||
| Less: deferred charge assets on retroactive reinsurance | 258,516 | 99,094 | 272,462 | 86,585 | |||||||||||||||||||
Less: cumulative effect of change in accounting principle on the determination of the allowance for estimated uncollectible reinsurance balances (1) | — | — | 643 | — | |||||||||||||||||||
| Net balance as of beginning of period | 8,476,759 | 7,382,031 | 7,667,675 | 7,253,939 | |||||||||||||||||||
| Net incurred losses and LAE: | |||||||||||||||||||||||
| Current period | 78,965 | 156,344 | 314,083 | 457,720 | |||||||||||||||||||
| Prior periods | 30,721 | 6,914 | 25,595 | 108,391 | |||||||||||||||||||
| Total net incurred losses and LAE | 109,686 | 163,258 | 339,678 | 566,111 | |||||||||||||||||||
| Net paid losses: | |||||||||||||||||||||||
| Current period | (17,194) | (36,733) | (32,304) | (107,679) | |||||||||||||||||||
| Prior periods | (344,060) | (397,514) | (1,070,063) | (1,255,903) | |||||||||||||||||||
| Total net paid losses | (361,254) | (434,247) | (1,102,367) | (1,363,582) | |||||||||||||||||||
| Effect of exchange rate movement | 99,129 | (83,277) | (6,139) | (95,270) | |||||||||||||||||||
| Acquired on purchase of subsidiaries | — | — | — | 686 | |||||||||||||||||||
| Assumed business | 280,497 | 445,000 | 1,705,970 | 1,110,881 | |||||||||||||||||||
| Reclassification to assets and liabilities held-for-sale | (219,284) | — | (219,284) | — | |||||||||||||||||||
| Net balance as of September 30 | 8,385,533 | 7,472,765 | 8,385,533 | 7,472,765 | |||||||||||||||||||
Plus: reinsurance reserves recoverable (2) | 1,667,151 | 1,876,613 | 1,667,151 | 1,876,613 | |||||||||||||||||||
| Plus: deferred charge assets on retroactive reinsurance | 248,200 | 167,268 | 248,200 | 167,268 | |||||||||||||||||||
| Balance as of September 30 | $ | 10,300,884 | $ | 9,516,646 | $ | 10,300,884 | $ | 9,516,646 | |||||||||||||||
(1) The Company adopted ASU 2016-13 and the related amendments on January 1, 2020. Refer to Note 1 - "Significant Accounting Policies" for further details. This amount excludes $0.4 million related to the adoption impact of on StarStone U.S., which has been classified as a discontinued operation with the related assets and liabilities disclosed as held-for-sale on our consolidated balance sheets.
(2) Net of allowance for estimated uncollectible reinsurance.
The tables below provide the components of net incurred losses and LAE by segment and for our other activities:
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Net losses paid | $ | 283,882 | $ | 17,189 | $ | 56,727 | $ | 3,456 | $ | 361,254 | |||||||||||||||||||
| Net change in case and LAE reserves | (49,887) | 2,701 | 5,456 | 103 | (41,627) | ||||||||||||||||||||||||
| Net change in IBNR reserves | (221,800) | 2,386 | (8,579) | 1,484 | (226,509) | ||||||||||||||||||||||||
| Increase in estimates of net ultimate losses | 12,195 | 22,276 | 53,604 | 5,043 | 93,118 | ||||||||||||||||||||||||
| Reduction in provisions for unallocated LAE | (14,605) | (29) | (5,020) | — | (19,654) | ||||||||||||||||||||||||
| Amortization of deferred charge assets | 10,316 | — | — | — | 10,316 | ||||||||||||||||||||||||
| Amortization of fair value adjustments | 5,310 | (252) | (194) | — | 4,864 | ||||||||||||||||||||||||
| Changes in fair value - fair value option | 21,042 | — | — | — | 21,042 | ||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 34,258 | $ | 21,995 | $ | 48,390 | $ | 5,043 | $ | 109,686 | |||||||||||||||||||
37
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Net losses paid | $ | 288,445 | $ | 20,005 | $ | 122,848 | $ | 2,949 | $ | 434,247 | |||||||||||||||||||
| Net change in case and LAE reserves | (173,104) | (91) | (17,860) | 944 | (190,111) | ||||||||||||||||||||||||
| Net change in IBNR reserves | (148,521) | 8,702 | (4,713) | (246) | (144,778) | ||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (33,180) | 28,616 | 100,275 | 3,647 | 99,358 | ||||||||||||||||||||||||
| Reduction in provisions for unallocated LAE | (12,158) | — | (188) | — | (12,346) | ||||||||||||||||||||||||
| Amortization of deferred charge assets | 17,009 | — | — | — | 17,009 | ||||||||||||||||||||||||
| Amortization of fair value adjustments | 17,538 | (216) | 541 | — | 17,863 | ||||||||||||||||||||||||
| Changes in fair value - fair value option | 41,374 | — | — | — | 41,374 | ||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 30,583 | $ | 28,400 | $ | 100,628 | $ | 3,647 | $ | 163,258 | |||||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Net losses paid | $ | 826,250 | $ | 48,416 | $ | 218,200 | $ | 9,501 | $ | 1,102,367 | |||||||||||||||||||
| Net change in case and LAE reserves | (300,573) | 3,635 | (60,887) | 965 | (356,860) | ||||||||||||||||||||||||
| Net change in IBNR reserves | (581,979) | 14,227 | 17,032 | 2,252 | (548,468) | ||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (56,302) | 66,278 | 174,345 | 12,718 | 197,039 | ||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | (34,509) | (29) | 23,475 | — | (11,063) | ||||||||||||||||||||||||
| Amortization of deferred charge assets | 36,008 | — | — | — | 36,008 | ||||||||||||||||||||||||
| Amortization of fair value adjustments | 21,653 | (246) | (561) | — | 20,846 | ||||||||||||||||||||||||
| Changes in fair value - fair value option | 96,848 | — | — | — | 96,848 | ||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 63,698 | $ | 66,003 | $ | 197,259 | $ | 12,718 | $ | 339,678 | |||||||||||||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Net losses paid | $ | 966,617 | $ | 60,095 | $ | 329,265 | $ | 7,605 | $ | 1,363,582 | |||||||||||||||||||
| Net change in case and LAE reserves | (370,639) | (245) | 13,508 | 2,298 | (355,078) | ||||||||||||||||||||||||
| Net change in IBNR reserves | (619,648) | (1,916) | 15,042 | 3,165 | (603,357) | ||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (23,670) | 57,934 | 357,815 | 13,068 | 405,147 | ||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | (38,229) | — | 739 | — | (37,490) | ||||||||||||||||||||||||
| Amortization of deferred charge assets | 28,006 | — | — | — | 28,006 | ||||||||||||||||||||||||
| Amortization of fair value adjustments | 34,033 | 728 | 310 | — | 35,071 | ||||||||||||||||||||||||
| Changes in fair value - fair value option | 135,377 | — | — | — | 135,377 | ||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 135,517 | $ | 58,662 | $ | 358,864 | $ | 13,068 | $ | 566,111 | |||||||||||||||||||
38
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Non-life Run-off Segment
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the Non-life Run-off segment:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Balance as of beginning of period | $ | 8,979,234 | $ | 7,803,663 | $ | 8,295,361 | $ | 7,540,662 | |||||||||||||||
| Less: reinsurance reserves recoverable | 1,429,489 | 1,534,427 | 1,543,614 | 1,366,123 | |||||||||||||||||||
| Less: deferred charge assets on retroactive insurance | 258,516 | 99,094 | 272,462 | 86,585 | |||||||||||||||||||
Plus: cumulative effect of change in accounting principal on allowance for estimated uncollectible reinsurance (1) | — | — | 703 | — | |||||||||||||||||||
| Net balance as of beginning of period | 7,291,229 | 6,170,142 | 6,479,988 | 6,087,954 | |||||||||||||||||||
| Net incurred losses and LAE: | |||||||||||||||||||||||
| Current period | 8,218 | 23,845 | 24,153 | 107,291 | |||||||||||||||||||
| Prior periods | 26,040 | 6,738 | 39,545 | 28,226 | |||||||||||||||||||
| Total net incurred losses and LAE | 34,258 | 30,583 | 63,698 | 135,517 | |||||||||||||||||||
| Net paid losses: | |||||||||||||||||||||||
| Current period | (739) | (14,374) | (1,777) | (53,265) | |||||||||||||||||||
| Prior periods | (283,143) | (274,071) | (824,473) | (913,352) | |||||||||||||||||||
| Total net paid losses | (283,882) | (288,445) | (826,250) | (966,617) | |||||||||||||||||||
| Effect of exchange rate movement | 86,047 | (73,231) | (15,257) | (84,372) | |||||||||||||||||||
| Acquired on purchase of subsidiaries | — | — | — | 686 | |||||||||||||||||||
| Assumed business | 280,497 | 445,000 | 1,705,970 | 1,110,881 | |||||||||||||||||||
| Reclassification to assets and liabilities held-for-sale | — | — | — | — | |||||||||||||||||||
| Net balance as of September 30 | 7,408,149 | 6,284,049 | 7,408,149 | 6,284,049 | |||||||||||||||||||
Plus: reinsurance reserves recoverable (2) | 1,267,241 | 1,488,374 | 1,267,241 | 1,488,374 | |||||||||||||||||||
| Plus: deferred charge assets on retroactive reinsurance | 248,200 | 167,268 | 248,200 | 167,268 | |||||||||||||||||||
| Balance as of September 30 | $ | 8,923,590 | $ | 7,939,691 | $ | 8,923,590 | $ | 7,939,691 | |||||||||||||||
(1) The Company adopted ASU 2016-13 and the related amendments on January 1, 2020. Refer to Note 1 - "Significant Accounting Policies" for further details.
(2) Net of allowance for estimated uncollectible reinsurance.
Net incurred losses and LAE in the Non-life Run-off segment were as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Period | Current Period | Total | Prior Period | Current Period | Total | ||||||||||||||||||||||||||||||
| Net losses paid | $ | 283,143 | $ | 739 | $ | 283,882 | $ | 274,071 | $ | 14,374 | $ | 288,445 | |||||||||||||||||||||||
| Net change in case and LAE reserves | (49,854) | (33) | (49,887) | (175,830) | 2,726 | (173,104) | |||||||||||||||||||||||||||||
| Net change in IBNR reserves | (229,312) | 7,512 | (221,800) | (155,315) | 6,794 | (148,521) | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | 3,977 | 8,218 | 12,195 | (57,074) | 23,894 | (33,180) | |||||||||||||||||||||||||||||
| Reduction in provisions for unallocated LAE | (14,605) | — | (14,605) | (12,109) | (49) | (12,158) | |||||||||||||||||||||||||||||
| Amortization of deferred charge assets | 10,316 | — | 10,316 | 17,009 | — | 17,009 | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | 5,310 | — | 5,310 | 17,538 | — | 17,538 | |||||||||||||||||||||||||||||
| Changes in fair value - fair value option | 21,042 | — | 21,042 | 41,374 | — | 41,374 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 26,040 | $ | 8,218 | $ | 34,258 | $ | 6,738 | $ | 23,845 | $ | 30,583 | |||||||||||||||||||||||
39
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
Three Months Ended September 30, 2020
The increase in net incurred losses and LAE for the three months ended September 30, 2020 of $34.3 million included net incurred losses and LAE of $8.2 million related to current period net earned premium, primarily in respect of the run-off business acquired with the AmTrust RITC transactions. Excluding current period net incurred losses and LAE of $8.2 million, the increase in net incurred losses and LAE relating to prior periods was $26.0 million, which was primarily attributable to an increase in the fair value of liabilities of $21.0 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily due to narrowing credit spreads on corporate bond yields in the period, amortization of the deferred charge assets of $10.3 million, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $5.3 million, and an increase in estimates of net ultimate losses of $4.0 million, partially offset by a reduction in provisions for unallocated LAE of $14.6 million relating to 2020 run-off activity. Net ultimate losses relating to prior periods were relatively unchanged with an increase in estimates of net ultimate losses of $4.0 million for the three months ended September 30, 2020 and included net losses paid of $283.1 million, partially offset by a net reduction in case and IBNR reserves of $279.2 million. Unfavorable development of approximately $128.4 million within our motor line of business, was offset by favorable development across workers compensation and other lines of business.
Three Months Ended September 30, 2019
Net incurred losses and LAE for the three months ended September 30, 2019 of $30.6 million included net incurred losses and LAE of $23.8 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC transactions and the acquisition of Maiden Reinsurance North America, Inc. ("Maiden Re North America"). Excluding current period net incurred losses and LAE of $23.8 million, the increase in net incurred losses and LAE relating to prior periods was $6.7 million, which was attributable to an increase in the fair value of liabilities of $41.4 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily as a result of a decrease in corporate bond yields, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $17.5 million and amortization of the deferred charge assets of $17.0 million, partially offset by a reduction in estimates of net ultimate losses of $57.1 million and a reduction in provisions for unallocated LAE of $12.1 million relating to 2019 run-off activity. The reduction in estimates of net ultimate losses relating to prior periods of $57.1 million for the three months ended September 30, 2019 included a net reduction in case and IBNR reserves of $331.1 million, partially offset by net losses paid of $274.1 million.
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Period | Current Period | Total | Prior Period | Current Period | Total | ||||||||||||||||||||||||||||||
| Net losses paid | $ | 824,473 | $ | 1,777 | $ | 826,250 | $ | 913,352 | $ | 53,265 | $ | 966,617 | |||||||||||||||||||||||
| Net change in case and LAE reserves | (301,382) | 809 | (300,573) | (394,780) | 24,141 | (370,639) | |||||||||||||||||||||||||||||
| Net change in IBNR reserves | (603,546) | 21,567 | (581,979) | (649,053) | 29,405 | (619,648) | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (80,455) | 24,153 | (56,302) | (130,481) | 106,811 | (23,670) | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | (34,509) | — | (34,509) | (38,709) | 480 | (38,229) | |||||||||||||||||||||||||||||
| Amortization of deferred charge assets | 36,008 | — | 36,008 | 28,006 | — | 28,006 | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | 21,653 | — | 21,653 | 34,033 | — | 34,033 | |||||||||||||||||||||||||||||
| Changes in fair value - fair value option | 96,848 | — | 96,848 | 135,377 | — | 135,377 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 39,545 | $ | 24,153 | $ | 63,698 | $ | 28,226 | $ | 107,291 | $ | 135,517 | |||||||||||||||||||||||
Nine Months Ended September 30, 2020
The increase in net incurred losses and LAE for the nine months ended September 30, 2020 of $63.7 million included net incurred losses and LAE of $24.2 million related to current period net earned premium, primarily for the
40
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
run-off business acquired with the AmTrust RITC transactions. Excluding current period net incurred losses and LAE of $24.2 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $39.5 million, which was attributable to an increase in the fair value of liabilities of $96.8 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily due to declining interest rates on corporate bond yields in the period, amortization of the deferred charge assets of $36.0 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired of $21.7 million, partially offset by a reduction in estimates of net ultimate losses of $80.5 million and a reduction in provisions for unallocated LAE of $34.5 million relating to 2020 run-off activity. For the nine months ended September 30, 2020, the change in net ultimate losses relating to prior periods was favorable with a reduction of $80.5 million, which included a net change in case and IBNR reserves of $904.9 million, partially offset by net losses paid of $824.5 million. The favorable development was largely attributed to workers compensation as well as other lines of business, partially offset by unfavorable development of $122.4 million within our motor line of business.
Nine Months Ended September 30, 2019
The increase in net incurred losses and LAE for the nine months ended September 30, 2019 of $135.5 million included net incurred losses and LAE of $107.3 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC transactions and the acquisition of Maiden Re North America. Excluding current period net incurred losses and LAE of $107.3 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $28.2 million, which was attributable to an increase in the fair value of liabilities of $135.4 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily as a result of a decrease in corporate bond yields, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $34.0 million and amortization of the deferred charge assets of $28.0 million, partially offset by a reduction in estimates of net ultimate losses of $130.5 million and a reduction in provisions for unallocated LAE of $38.7 million relating to 2019 run-off activity. The reduction in estimates of net ultimate losses of $130.5 million for the nine months ended September 30, 2019 included a net change in case and IBNR reserves of $1,043.8 million, partially offset by net losses paid of $913.4 million.
Atrium
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the Atrium segment:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Balance as of beginning of period | $ | 239,731 | $ | 222,576 | $ | 231,672 | $ | 241,284 | |||||||||||||||
| Less: reinsurance reserves recoverable | 27,250 | 29,606 | 28,816 | 38,768 | |||||||||||||||||||
Less: cumulative effect of change in accounting principal on allowance for estimated uncollectible reinsurance (1) | — | — | 851 | — | |||||||||||||||||||
| Net balance as of beginning of period | 212,481 | 192,970 | 202,005 | 202,516 | |||||||||||||||||||
| Net incurred losses and LAE: | |||||||||||||||||||||||
| Current period | 23,129 | 27,093 | 70,075 | 63,189 | |||||||||||||||||||
| Prior periods | (1,134) | 1,307 | (4,072) | (4,527) | |||||||||||||||||||
| Total net incurred losses and LAE | 21,995 | 28,400 | 66,003 | 58,662 | |||||||||||||||||||
| Net paid losses: | |||||||||||||||||||||||
| Current period | (7,717) | (9,387) | (17,004) | (24,531) | |||||||||||||||||||
| Prior periods | (9,472) | (10,618) | (31,412) | (35,564) | |||||||||||||||||||
| Total net paid losses | (17,189) | (20,005) | (48,416) | (60,095) | |||||||||||||||||||
| Effect of exchange rate movement | 1,997 | (1,405) | (308) | (1,123) | |||||||||||||||||||
| Reclassification to assets and liabilities held-for-sale | (219,284) | — | (219,284) | — | |||||||||||||||||||
| Net balance as of September 30 | — | 199,960 | — | 199,960 | |||||||||||||||||||
Plus: reinsurance reserves recoverable (2) | — | 31,719 | — | 31,719 | |||||||||||||||||||
| Balance as of September 30 | $ | — | $ | 231,679 | $ | — | $ | 231,679 | |||||||||||||||
(1) The Company adopted ASU 2016-13 and the related amendments on January 1, 2020. Refer to Note 1 - "Significant Accounting Policies" for further details.
(2) Net of allowance for estimated uncollectible reinsurance.
41
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net incurred losses and LAE in the Atrium segment were as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Period | Current Period | Total | Prior Period | Current Period | Total | ||||||||||||||||||||||||||||||
| Net losses paid | $ | 9,472 | $ | 7,717 | $ | 17,189 | $ | 10,618 | $ | 9,387 | $ | 20,005 | |||||||||||||||||||||||
| Net change in case and LAE reserves | (2,292) | 4,993 | 2,701 | (2,860) | 2,769 | (91) | |||||||||||||||||||||||||||||
| Net change in IBNR reserves | (8,110) | 10,496 | 2,386 | (6,235) | 14,937 | 8,702 | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (930) | 23,206 | 22,276 | 1,523 | 27,093 | 28,616 | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | 48 | (77) | (29) | — | — | — | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | (252) | — | (252) | (216) | — | (216) | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | (1,134) | $ | 23,129 | $ | 21,995 | $ | 1,307 | $ | 27,093 | $ | 28,400 | |||||||||||||||||||||||
Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
Three Months Ended September 30, 2020 and 2019
Net incurred losses and LAE for the three months ended September 30, 2020 and 2019 were $22.0 million and $28.4 million, respectively. Net favorable prior period loss development was $1.1 million for the three months ended September 30, 2020 compared to net unfavorable prior period loss development of $1.3 million for the three months ended September 30, 2019. Excluding prior period loss development, net incurred losses and LAE for the three months ended September 30, 2020 were $23.1 million and included $1.5 million of losses related to the COVID-19 pandemic. Excluding prior period loss development, net incurred losses and LAE for the three months ended September 30, 2019 were $27.1 million.
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Period | Current Period | Total | Prior Period | Current Period | Total | ||||||||||||||||||||||||||||||
| Net losses paid | $ | 31,412 | $ | 17,004 | $ | 48,416 | $ | 35,564 | $ | 24,531 | $ | 60,095 | |||||||||||||||||||||||
| Net change in case and LAE reserves | (9,517) | 13,152 | 3,635 | (13,032) | 12,787 | (245) | |||||||||||||||||||||||||||||
| Net change in IBNR reserves | (25,769) | 39,996 | 14,227 | (27,787) | 25,871 | (1,916) | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (3,874) | 70,152 | 66,278 | (5,255) | 63,189 | 57,934 | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | 48 | (77) | (29) | — | — | — | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | (246) | — | (246) | 728 | — | 728 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | (4,072) | $ | 70,075 | $ | 66,003 | $ | (4,527) | $ | 63,189 | $ | 58,662 | |||||||||||||||||||||||
Nine Months Ended September 30, 2020 and 2019
Net incurred losses and LAE for the nine months ended September 30, 2020 and 2019 were $66.0 million and $58.7 million, respectively. Net favorable prior year loss development was $4.1 million and $4.5 million for the nine months ended September 30, 2020 and 2019, respectively. The current period net favorable prior period loss development was driven by favorable development across several lines of business. Excluding prior period loss development, net incurred losses and LAE for the nine months ended September 30, 2020 were $70.1 million and included $14.3 million of losses related to the COVID-19 pandemic. Excluding prior period loss development, net incurred losses and LAE for the nine months ended September 30, 2019 were $63.2 million.
42
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
StarStone
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for our StarStone segment:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Balance as of beginning of period | $ | 1,349,763 | $ | 1,305,026 | $ | 1,318,294 | $ | 1,247,989 | |||||||||||||||
| Less: reinsurance reserves recoverable | 401,422 | 309,733 | 355,194 | 303,381 | |||||||||||||||||||
Less: cumulative effect of change in accounting principal on allowance for estimated uncollectible reinsurance (1) | — | — | 495 | — | |||||||||||||||||||
| Net balance as of beginning of period | 948,341 | 995,293 | 962,605 | 944,608 | |||||||||||||||||||
| Net incurred losses and LAE: | |||||||||||||||||||||||
| Current period | 44,734 | 101,808 | 208,414 | 274,070 | |||||||||||||||||||
| Prior periods | 3,656 | (1,180) | (11,155) | 84,794 | |||||||||||||||||||
| Total net incurred losses and LAE | 48,390 | 100,628 | 197,259 | 358,864 | |||||||||||||||||||
| Net paid losses: | |||||||||||||||||||||||
| Current period | (7,755) | (11,653) | (12,142) | (27,624) | |||||||||||||||||||
| Prior periods | (48,972) | (111,195) | (206,058) | (301,641) | |||||||||||||||||||
| Total net paid losses | (56,727) | (122,848) | (218,200) | (329,265) | |||||||||||||||||||
| Effect of exchange rate movement | 11,084 | (8,641) | 9,424 | (9,775) | |||||||||||||||||||
| Net balance as of September 30 | 951,088 | 964,432 | 951,088 | 964,432 | |||||||||||||||||||
Plus: reinsurance reserves recoverable (2) | 399,910 | 356,520 | 399,910 | 356,520 | |||||||||||||||||||
| Balance as of September 30 | $ | 1,350,998 | $ | 1,320,952 | $ | 1,350,998 | $ | 1,320,952 | |||||||||||||||
(1) The Company adopted ASU 2016-13 and the related amendments on January 1, 2020. Refer to Note 1 - "Significant Accounting Policies" for further details. This amount excludes $0.4 million related to the adoption impact of on StarStone U.S., which has been classified as a discontinued operation with the related assets and liabilities disclosed as held-for-sale on our consolidated balance sheets.
(2) Net of allowance for estimated uncollectible reinsurance.
Net incurred losses and LAE in the StarStone segment were as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Period | Current Period | Total | Prior Period | Current Period | Total | ||||||||||||||||||||||||||||||
| Net losses paid | $ | 48,972 | $ | 7,755 | $ | 56,727 | $ | 111,195 | $ | 11,653 | $ | 122,848 | |||||||||||||||||||||||
| Net change in case and LAE reserves | (20,068) | 25,524 | 5,456 | (8,866) | (8,994) | (17,860) | |||||||||||||||||||||||||||||
| Net change in IBNR reserves | (24,755) | 16,176 | (8,579) | (101,938) | 97,225 | (4,713) | |||||||||||||||||||||||||||||
| Increase in estimates of net ultimate losses | 4,149 | 49,455 | 53,604 | 391 | 99,884 | 100,275 | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | (299) | (4,721) | (5,020) | (2,112) | 1,924 | (188) | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | (194) | — | (194) | 541 | — | 541 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 3,656 | $ | 44,734 | $ | 48,390 | $ | (1,180) | $ | 101,808 | $ | 100,628 | |||||||||||||||||||||||
Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
Three Months Ended September 30, 2020 and 2019
Net incurred losses and LAE for the three months ended September 30, 2020 and 2019 were $48.4 million and $100.6 million, respectively. Net unfavorable prior period loss development was $3.7 million for the three months ended September 30, 2020 compared to net favorable prior period loss development of $1.2 million for the three months ended September 30, 2019. Net unfavorable prior period loss development for the three months
43
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ended September 30, 2020 was driven by adverse development in the casualty and property lines of business. Net favorable prior period loss development for the three months ended September 30, 2019 was primarily related to development on lines of business that we had either exited or had been subject to remediation as part of our underwriting repositioning initiatives before our decision to place StarStone International into run-off. Excluding prior period net loss development, net incurred losses and LAE for the three months ended September 30, 2020 were $44.7 million and included a $4.4 million reduction in exit costs associated with the StarStone International Run-Off, partially offset by $1.4 million in net incurred losses and LAE related to the COVID-19 pandemic. Excluding prior period net loss development, net incurred losses and LAE for the three months ended September 30, 2019 were $101.8 million.
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Period | Current Period | Total | Prior Period | Current Period | Total | ||||||||||||||||||||||||||||||
| Net losses paid | $ | 206,058 | $ | 12,142 | $ | 218,200 | $ | 301,641 | $ | 27,624 | $ | 329,265 | |||||||||||||||||||||||
| Net change in case and LAE reserves | (85,798) | 24,911 | (60,887) | (22,538) | 36,046 | 13,508 | |||||||||||||||||||||||||||||
| Net change in IBNR reserves | (130,738) | 147,770 | 17,032 | (192,034) | 207,076 | 15,042 | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (10,478) | 184,823 | 174,345 | 87,069 | 270,746 | 357,815 | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | (116) | 23,591 | 23,475 | (2,585) | 3,324 | 739 | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | (561) | — | (561) | 310 | — | 310 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | (11,155) | $ | 208,414 | $ | 197,259 | $ | 84,794 | $ | 274,070 | $ | 358,864 | |||||||||||||||||||||||
Nine Months Ended September 30, 2020 and 2019
Net incurred losses and LAE for the nine months ended September 30, 2020 and 2019 were $197.3 million and $358.9 million, respectively. Net favorable prior period loss development was $11.2 million for the nine months ended September 30, 2020 compared to net unfavorable prior period loss development of $84.8 million for the nine months ended September 30, 2019. Net favorable prior period loss development for the nine months ended September 30, 2020 was driven by favorable development in the workers compensation and casualty lines of business. Net unfavorable prior period loss development for the nine months ended September 30, 2019 was primarily related to development on lines of business that we had either exited or had been subject to remediation as part of our underwriting repositioning initiatives before our decision to place StarStone International into run-off.
Excluding prior period loss development, net incurred losses and LAE for the nine months ended September 30, 2020 were $208.4 million and included $22.8 million of COVID-19 related losses and $23.7 million of exit costs associated with the StarStone International Run-Off. Excluding prior period loss development, net incurred losses and LAE for the nine months ended September 30, 2019 were $274.1 million.
44
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. DEFENDANT ASBESTOS AND ENVIRONMENTAL LIABILITIES
We acquired DCo LLC ("DCo") on December 30, 2016, and Morse TEC on October 30, 2019, as described in Note 3 - "Acquisitions" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019. DCo and Morse TEC hold liabilities associated with personal injury asbestos claims and environmental claims arising from their legacy manufacturing operations. These companies continue to process asbestos personal injury claims in the normal course of business. Defendant asbestos liabilities on our consolidated balance sheets include amounts for loss payments and defense costs for pending and future asbestos-related claims, determined using standard actuarial techniques for asbestos exposures. Defendant environmental liabilities include estimated clean-up costs associated with the acquired companies' former operations based on engineering reports. For further details on the methodologies used for determining liabilities, refer to Note 11 - "Defendant Asbestos and Environmental Liabilities" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
Insurance balances recoverable 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 indemnify our subsidiaries for the anticipated defense and loss payments for pending claims and projected future claims. 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 and projected loss and defense costs were paid in full.
Included within insurance balances recoverable and defendant asbestos and environmental liabilities are the fair value adjustments that were initially recognized upon acquisition. These fair value adjustments are amortized in proportion to the actual payout of 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 and Morse TEC as of September 30, 2020 and December 31, 2019 were as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Defendant asbestos and environmental liabilities: | |||||||||||
| Defendant asbestos liabilities | $ | 980,678 | $ | 1,100,593 | |||||||
| Defendant environmental liabilities | 8,214 | 10,279 | |||||||||
| Estimated future expenses | 45,509 | 51,637 | |||||||||
| Fair value adjustments | (280,364) | (314,824) | |||||||||
| Defendant asbestos and environmental liabilities | $ | 754,037 | $ | 847,685 | |||||||
| Insurance balances recoverable: | |||||||||||
Insurance recoveries related to defendant asbestos and environmental liabilities (net of allowance: 2020 - $5,907) | 447,800 | 549,593 | |||||||||
| Fair value adjustments | (82,512) | (100,738) | |||||||||
| Insurance balances recoverable | $ | 365,288 | $ | 448,855 | |||||||
| Net liabilities relating to defendant asbestos and environmental exposures | $ | 388,749 | $ | 398,830 | |||||||
45
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below provides a consolidated reconciliation of the beginning and ending liability for defendant asbestos and environmental exposures for the three and nine months ended September 30, 2020 and 2019:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Balance as of beginning of period | $ | 808,062 | $ | 184,264 | $ | 847,685 | $ | 203,320 | |||||||||||||||
| Less: Insurance balances recoverable | 428,277 | 122,236 | 448,855 | 135,808 | |||||||||||||||||||
Plus: Cumulative effect of change in accounting principle on the determination of the allowance for estimated uncollectible insurance balances (1) | — | — | 3,167 | — | |||||||||||||||||||
| Net balance as of beginning of period | 379,785 | 62,028 | 401,997 | 67,512 | |||||||||||||||||||
| Total net paid claims | 52,891 | (2,204) | 51,977 | (1,326) | |||||||||||||||||||
| Amounts recorded in other (income) expense: | |||||||||||||||||||||||
| Reduction in estimates of ultimate net liabilities | (48,439) | — | (75,332) | (4,259) | |||||||||||||||||||
| Reduction in estimated future expenses | (3,124) | (800) | (6,127) | (3,104) | |||||||||||||||||||
| Amortization of fair value adjustments | 7,636 | 102 | 16,234 | 303 | |||||||||||||||||||
| Total other (income) expense | (43,927) | (698) | (65,225) | (7,060) | |||||||||||||||||||
Net balance as at September 30 | 388,749 | 59,126 | 388,749 | 59,126 | |||||||||||||||||||
Plus: Insurance balances recoverable (2) | 365,288 | 121,237 | 365,288 | 121,237 | |||||||||||||||||||
Balance as at September 30 | $ | 754,037 | $ | 180,363 | $ | 754,037 | $ | 180,363 | |||||||||||||||
(1) The Company adopted and the related amendments on January 1, 2020. Refer to Note 1 - "Significant Accounting Policies" for further details.
(2) Net of allowance for estimated uncollectible insurance balances.
Allowance for Estimated Uncollectible Insurance Balances Recoverable on Defendant Asbestos Liabilities
We evaluate and monitor the credit risk related to our insurers and an allowance for estimated uncollectible insurance balances recoverable on our defendant asbestos liabilities ("allowance for estimated uncollectible insurance") is established for amounts considered potentially uncollectible. Our allowance for estimated uncollectible insurance is derived based on various data sources, multiple key inputs and forecast scenarios. These include the duration of the collection period, credit quality, changes in insurer credit standing, default rates specific to the individual insurer, the geographical location of the insurer, contractual disputes with insurers over individual contentious claims, contract language or coverage issues, industry analyst reports and consensus economic forecasts. To determine the allowance for estimated uncollectible insurance, we use the PD and LGD methodology as described in Note 7 - "Reinsurance Balances Recoverable on Paid and Unpaid Losses" above.
The table below provides a reconciliation of the beginning and ending allowance for estimated uncollectible insurance balances related to our defendant asbestos liabilities, for the three and nine months ended September 30, 2020:
| Three Months Ended | Nine Months Ended | ||||||||||
| September 30, 2020 | September 30, 2020 | ||||||||||
| Allowance for estimated uncollectible insurance balances, beginning of period | $ | 8,346 | $ | 3,818 | |||||||
| Cumulative effect of change in accounting principle | — | 3,167 | |||||||||
| Current period change in the allowance | (2,439) | (1,078) | |||||||||
| Allowance for estimated uncollectible insurance balances, end of period | $ | 5,907 | $ | 5,907 | |||||||
During the three and nine months ended September 30, 2020, we did not have any write-offs charged against the allowance for estimated uncollectible insurance or any recoveries of amounts previously written off.
We did not have significant past due balances receivable from our insurers related to our defendant asbestos liabilities, that were older than one year for any of the periods presented.
46
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. 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 assets and liabilities 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:
47
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| September 30, 2020 | ||||||||||||||||||||||||||||||||
| 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: | ||||||||||||||||||||||||||||||||
| Short-term and fixed maturity investments: | ||||||||||||||||||||||||||||||||
| U.S. government and agency | $ | — | $ | 789,630 | $ | — | $ | — | $ | 789,630 | ||||||||||||||||||||||
| U.K. government | — | 114,777 | — | — | 114,777 | |||||||||||||||||||||||||||
| Other government | — | 490,447 | — | — | 490,447 | |||||||||||||||||||||||||||
| Corporate | — | 5,679,909 | — | — | 5,679,909 | |||||||||||||||||||||||||||
| Municipal | — | 161,839 | — | — | 161,839 | |||||||||||||||||||||||||||
| Residential mortgage-backed | — | 529,239 | — | — | 529,239 | |||||||||||||||||||||||||||
| Commercial mortgage-backed | — | 843,119 | — | — | 843,119 | |||||||||||||||||||||||||||
| Asset-backed | — | 613,663 | — | — | 613,663 | |||||||||||||||||||||||||||
| $ | — | $ | 9,222,623 | $ | — | $ | — | $ | 9,222,623 | |||||||||||||||||||||||
| Other assets included within funds held - directly managed | — | 12,438 | — | — | 12,438 | |||||||||||||||||||||||||||
| Equities: | ||||||||||||||||||||||||||||||||
| Publicly traded equity investments | $ | 282,904 | $ | 21,028 | $ | — | $ | — | $ | 303,932 | ||||||||||||||||||||||
| Exchange-traded funds | 78,182 | — | — | — | 78,182 | |||||||||||||||||||||||||||
| Privately held equity investments | — | — | 271,045 | — | 271,045 | |||||||||||||||||||||||||||
| $ | 361,086 | $ | 21,028 | $ | 271,045 | $ | — | $ | 653,159 | |||||||||||||||||||||||
| Other investments: | ||||||||||||||||||||||||||||||||
| Hedge funds | $ | — | $ | — | $ | — | $ | 2,087,091 | $ | 2,087,091 | ||||||||||||||||||||||
| Fixed income funds | — | 428,645 | — | 255,386 | 684,031 | |||||||||||||||||||||||||||
| Equity funds | — | 4,558 | — | 285,571 | 290,129 | |||||||||||||||||||||||||||
| Private equity funds | — | — | — | 320,455 | 320,455 | |||||||||||||||||||||||||||
| CLO equities | — | 84,532 | — | — | 84,532 | |||||||||||||||||||||||||||
| CLO equity funds | — | — | — | 140,458 | 140,458 | |||||||||||||||||||||||||||
| Private credit funds | — | — | 10,000 | 80,476 | 90,476 | |||||||||||||||||||||||||||
| Other | — | — | 314 | 7,384 | 7,698 | |||||||||||||||||||||||||||
| $ | — | $ | 517,735 | $ | 10,314 | $ | 3,176,821 | $ | 3,704,870 | |||||||||||||||||||||||
| Total Investments | $ | 361,086 | $ | 9,773,824 | $ | 281,359 | $ | 3,176,821 | $ | 13,593,090 | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 270,267 | $ | 139,140 | $ | — | $ | — | $ | 409,407 | ||||||||||||||||||||||
| Reinsurance balances recoverable on paid and unpaid losses: | $ | — | $ | — | $ | 543,161 | $ | — | $ | 543,161 | ||||||||||||||||||||||
| Other Assets: | ||||||||||||||||||||||||||||||||
| Derivatives qualifying as hedges | $ | — | $ | 6,785 | $ | — | $ | — | $ | 6,785 | ||||||||||||||||||||||
| Derivatives not qualifying as hedges | — | 1,526 | — | — | 1,526 | |||||||||||||||||||||||||||
| Derivative instruments | $ | — | $ | 8,311 | $ | — | $ | — | $ | 8,311 | ||||||||||||||||||||||
| Losses and LAE: | $ | — | $ | — | $ | 2,422,678 | $ | — | $ | 2,422,678 | ||||||||||||||||||||||
| Other Liabilities: | ||||||||||||||||||||||||||||||||
| Derivatives qualifying as hedges | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| Derivatives not qualifying as hedges | — | 585 | — | — | 585 | |||||||||||||||||||||||||||
| Derivative instruments | $ | — | $ | 585 | $ | — | $ | — | $ | 585 | ||||||||||||||||||||||
48
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| December 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: | ||||||||||||||||||||||||||||||||
| Short-term and fixed maturity investments: | ||||||||||||||||||||||||||||||||
| U.S. government and agency | $ | — | $ | 696,077 | $ | — | $ | — | $ | 696,077 | ||||||||||||||||||||||
| U.K government | — | 161,772 | — | — | 161,772 | |||||||||||||||||||||||||||
| Other government | — | 702,856 | — | — | 702,856 | |||||||||||||||||||||||||||
| Corporate | — | 5,448,270 | — | — | 5,448,270 | |||||||||||||||||||||||||||
| Municipal | — | 140,687 | — | — | 140,687 | |||||||||||||||||||||||||||
| Residential mortgage-backed | — | 400,914 | — | — | 400,914 | |||||||||||||||||||||||||||
| Commercial mortgage-backed | — | 813,746 | — | — | 813,746 | |||||||||||||||||||||||||||
| Asset-backed | — | 670,235 | — | — | 670,235 | |||||||||||||||||||||||||||
| $ | — | $ | 9,034,557 | $ | — | $ | — | $ | 9,034,557 | |||||||||||||||||||||||
| Other assets included within funds held - directly managed | $ | — | $ | 14,207 | $ | — | $ | — | $ | 14,207 | ||||||||||||||||||||||
| Equities: | ||||||||||||||||||||||||||||||||
| Publicly traded equity investments | $ | 297,310 | $ | 30,565 | $ | — | $ | — | $ | 327,875 | ||||||||||||||||||||||
| Exchange-traded funds | 133,047 | — | — | — | 133,047 | |||||||||||||||||||||||||||
| Privately held equity investments | — | — | 265,799 | — | 265,799 | |||||||||||||||||||||||||||
| $ | 430,357 | $ | 30,565 | $ | 265,799 | $ | — | $ | 726,721 | |||||||||||||||||||||||
| Other investments: | ||||||||||||||||||||||||||||||||
| Hedge funds | $ | — | $ | — | $ | — | $ | 1,121,904 | $ | 1,121,904 | ||||||||||||||||||||||
| Fixed income funds | — | 398,143 | — | 82,896 | 481,039 | |||||||||||||||||||||||||||
| Equity funds | — | 111,040 | — | 299,109 | 410,149 | |||||||||||||||||||||||||||
| Private equity funds | — | — | — | 323,496 | 323,496 | |||||||||||||||||||||||||||
| CLO equities | — | — | 87,555 | — | 87,555 | |||||||||||||||||||||||||||
| CLO equity funds | — | — | — | 87,509 | 87,509 | |||||||||||||||||||||||||||
| Other | — | 34 | 314 | 6,031 | 6,379 | |||||||||||||||||||||||||||
| $ | — | $ | 509,217 | $ | 87,869 | $ | 1,920,945 | $ | 2,518,031 | |||||||||||||||||||||||
| Total Investments | $ | 430,357 | $ | 9,588,546 | $ | 353,668 | $ | 1,920,945 | $ | 12,293,516 | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 144,984 | $ | 222,191 | $ | — | $ | — | $ | 367,175 | ||||||||||||||||||||||
| Reinsurance balances recoverable on paid and unpaid losses: | $ | — | $ | — | $ | 695,518 | $ | — | $ | 695,518 | ||||||||||||||||||||||
| Other Assets: | ||||||||||||||||||||||||||||||||
| Derivatives qualifying as hedges | $ | — | $ | 642 | $ | — | $ | — | $ | 642 | ||||||||||||||||||||||
| Derivatives not qualifying as hedges | — | 1,369 | — | — | 1,369 | |||||||||||||||||||||||||||
| Derivative instruments | $ | — | $ | 2,011 | $ | — | $ | — | $ | 2,011 | ||||||||||||||||||||||
| Losses and LAE: | $ | — | $ | — | $ | 2,621,122 | $ | — | $ | 2,621,122 | ||||||||||||||||||||||
| Other Liabilities: | ||||||||||||||||||||||||||||||||
| Derivatives qualifying as hedges | $ | — | $ | 11,452 | $ | — | $ | — | $ | 11,452 | ||||||||||||||||||||||
| Derivatives not qualifying as hedges | — | 4,106 | — | — | 4,106 | |||||||||||||||||||||||||||
| Derivative instruments | $ | — | $ | 15,558 | $ | — | $ | — | $ | 15,558 | ||||||||||||||||||||||
49
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Valuation Methodologies of Financial Instruments Measured at Fair Value
Short-term and Fixed Maturity Investments
The fair values for all securities in the short-term and 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 for 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 other such inputs as are available from market sources to determine a reasonable fair value.
The following describes the techniques generally used to determine the fair value of our short-term and fixed maturity investments by asset class, including the investments underlying the funds held - directly managed.
•U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified as Level 2.
•Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified as Level 2. Where pricing is unavailable from pricing services, such as in periods of low trading activity or when transactions are not orderly, we obtain non-binding quotes from broker-dealers. Where significant inputs are unable to be corroborated with market observable information, we classify the securities as Level 3.
•Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair values of these securities are classified as Level 2.
•Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, prepayment speeds and default rates. The fair values of these securities are classified as Level 2 if the significant inputs are market observable. Where significant inputs are unable to be corroborated with market observable information, we classify the securities as Level 3.
50
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 major exchanges and are managed by our external advisors. Our exchange-traded funds also trade on major exchanges. 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 and exchange-traded funds. We have categorized the majority of our publicly traded equity investments, other than preferred stock, and our exchange-traded funds as Level 1 investments because the fair values of these investments are based on unadjusted quoted prices in active markets for identical assets. One equity security is trading in an inactive market and, as a result has been classified as Level 2. The fair value estimates of our investments in publicly traded preferred stock are based on observable market data and, as a result, have been categorized as Level 2.
Our privately held equity investments in common and preferred stocks are direct investments in companies that we believe offer attractive risk adjusted returns and/or offer other strategic advantages. Each investment may have its own unique terms and conditions and there may be restrictions on disposals. The market for these investments is illiquid and there is no active market. We use a combination of cost, internal models, reported values from co-investors/managers and observable inputs, such as capital raises and capital transactions between new and existing shareholders to calculate the fair value of the privately held equity investments. The fair value estimates of our investments in privately held equities are based on unobservable market data and, as a result, have been categorized as Level 3.
Other investments, at fair value
We have ongoing due diligence processes with respect to the other investments carried at fair value in which we invest and their managers. These processes are designed to assist us in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, we obtain the audited financial statements for funds annually, and regularly review and discuss the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values ("NAV").
The use of NAV as an estimate of the fair value for investments in certain entities that calculate NAV is a permitted practical expedient. Due to the time lag in the NAV reported by certain fund managers we adjust the valuation for capital calls and distributions. Other investments measured at fair value using NAV as a practical expedient have not been classified in the fair value hierarchy. Other investments for which we do not use NAV as a practical expedient have been valued using prices from independent pricing services, investment managers and broker-dealers.
The following describes the techniques generally used to determine the fair value of our other investments.
•For our investments in hedge funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•Our investments in fixed income funds and equity funds are valued based on a combination of prices from independent pricing services, external fund managers or third-party administrators. For the publicly available prices we have classified the investments as Level 2. For the non-publicly available prices we are using NAV as a practical expedient and therefore these have not been categorized within the fair value hierarchy.
•For our investments in private equity funds, we measure fair value by obtaining the most recently available NAV from the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
•We measure the fair value of our direct investment in CLO equities based on valuations provided by independent pricing services, our external CLO equity manager, and valuations provided by the broker or lead underwriter of the investment (the "broker"). The fair values measured using prices provided by independent pricing services have been classified as Level 2 and fair values using prices from brokers have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of
51
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
relevant trades in secondary markets.
•For our investments in the CLO equity funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third party administrator. The fair value of these investments 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 is an investment in a real estate debt fund, 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 this investment is measured using the NAV as a practical expedient and therefore has not been categorized within the fair value hierarchy.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value due to changes in interest rates. Included within cash and cash equivalents are money market funds, fixed interest deposits and highly liquid fixed maturity investments purchased with an original maturity of three months or less.
The majority of our cash and cash equivalents included within the fair value hierarchy are comprised of money market and liquid reserve funds which have been categorized as Level 1. Fixed interest deposits and highly liquid fixed maturity investments with an original maturity of three months or less have been categorized as Level 2. Operating cash balances are not subject to the recurring fair value measurement guidance and are therefore excluded from the fair value hierarchy.
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 derivative instruments, as described in Note 6 - "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.
52
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Investments
The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs:
| Three Months Ended September 30, 2020 | ||||||||||||||||||||
| Privately-held Equities | Other Investments | Total | ||||||||||||||||||
| Beginning fair value | $ | 271,000 | $ | 314 | $ | 271,314 | ||||||||||||||
| Purchases | — | 10,000 | 10,000 | |||||||||||||||||
| Sales | — | — | — | |||||||||||||||||
| Total realized and unrealized gains | 45 | — | 45 | |||||||||||||||||
| Transfer out of Level 3 into Level 2 | — | — | — | |||||||||||||||||
| Ending fair value | $ | 271,045 | $ | 10,314 | $ | 281,359 | ||||||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Fixed maturity investments | Privately-held Equities | Other Investments | Total | ||||||||||||||||||||||||||||||||||||||
| Corporate | Residential mortgage-backed | Commercial mortgage-backed | Asset-backed | ||||||||||||||||||||||||||||||||||||||
| Beginning fair value | $ | 5,006 | $ | 102 | $ | 1,370 | $ | 25,839 | $ | 229,394 | $ | 50,452 | $ | 312,163 | |||||||||||||||||||||||||||
| Purchases | 82 | — | — | — | 3,691 | 22,619 | 26,392 | ||||||||||||||||||||||||||||||||||
| Sales | (116) | — | (176) | (295) | (2,016) | (361) | (2,964) | ||||||||||||||||||||||||||||||||||
| Total realized and unrealized gains (losses) | (103) | (1) | 148 | (743) | (2,378) | (5,287) | (8,364) | ||||||||||||||||||||||||||||||||||
| Transfer into Level 3 from Level 2 | 277 | — | — | — | — | — | 277 | ||||||||||||||||||||||||||||||||||
| Transfer out of Level 3 into Level 2 | (2,865) | (101) | (1,340) | (5,978) | — | — | (10,284) | ||||||||||||||||||||||||||||||||||
| Ending fair value | $ | 2,281 | $ | — | $ | 2 | $ | 18,823 | $ | 228,691 | $ | 67,423 | $ | 317,220 | |||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| Privately-held Equities | Other Investments | Total | ||||||||||||||||||
| Beginning fair value | $ | 265,799 | $ | 87,869 | $ | 353,668 | ||||||||||||||
| Purchases | 1,392 | 47,092 | 48,484 | |||||||||||||||||
| Sales | — | (539) | (539) | |||||||||||||||||
| Total realized and unrealized gains (losses) | 3,854 | (40,368) | (36,514) | |||||||||||||||||
| Transfer into Level 3 from Level 2 | — | — | — | |||||||||||||||||
| Transfer out of Level 3 into Level 2 | — | (83,740) | (83,740) | |||||||||||||||||
| Ending fair value | $ | 271,045 | $ | 10,314 | $ | 281,359 | ||||||||||||||
| Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Fixed maturity investments | Privately-held Equities | Other Investments | Total | |||||||||||||||||||||||||||||||||||||||||
| Corporate | Residential mortgage-backed | Commercial mortgage-backed | Asset-backed | |||||||||||||||||||||||||||||||||||||||||
| Beginning fair value | $ | 37,386 | $ | — | $ | 7,389 | $ | 9,121 | $ | 228,710 | $ | 39,367 | $ | 321,973 | ||||||||||||||||||||||||||||||
| Purchases | 172 | — | — | — | 3,691 | 34,614 | 38,477 | |||||||||||||||||||||||||||||||||||||
| Sales | (3,157) | — | (784) | (625) | (2,016) | (361) | (6,943) | |||||||||||||||||||||||||||||||||||||
| Total realized and unrealized gains (losses) | 114 | (1) | 65 | (4) | (1,694) | (6,197) | (7,717) | |||||||||||||||||||||||||||||||||||||
| Transfer into Level 3 from Level 2 | 3,535 | 102 | 1,515 | 22,771 | — | — | 27,923 | |||||||||||||||||||||||||||||||||||||
| Transfer out of Level 3 into Level 2 | (35,769) | (101) | (8,183) | (12,440) | — | — | (56,493) | |||||||||||||||||||||||||||||||||||||
| Ending fair value | $ | 2,281 | $ | — | $ | 2 | $ | 18,823 | $ | 228,691 | $ | 67,423 | $ | 317,220 | ||||||||||||||||||||||||||||||
Net realized and unrealized gains related to Level 3 assets in the tables above are included in net realized and unrealized gains (losses) in our unaudited condensed consolidated statements of earnings.
The securities transferred from Level 2 to Level 3 were transferred due to insufficient market observable inputs for the valuation of the specific assets. The transfers from Level 3 to Level 2 were based upon obtaining market observable information regarding the valuations of the specific assets.
53
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Valuations Techniques and Inputs
The table below presents the quantitative information related to the fair value measurements for our privately held equity investments measured at fair value on a recurring basis using Level 3 inputs:
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||||||
| Fair Value as of September 30, 2020 | Valuation Techniques | Unobservable Input | Range (Average) (1) | |||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||
| $ | 245.4 | Transactional value | Implied price per share at recent purchase transaction | 13.50 - 13.85 | ||||||||||||||||
| $ | 25.6 | Cost as approximation of fair value | Cost as approximation of fair value | |||||||||||||||||
| $ | 271.0 | |||||||||||||||||||
(1) The average represents the arithmetic average of the inputs and is not weighted by the relative fair value.
Insurance Contracts - Fair Value Option
The following table presents a reconciliation of the beginning and ending balances for all insurance contracts measured at fair value on a recurring basis using Level 3 inputs:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Liability for losses and LAE | Reinsurance balances recoverable | Net | Liability for losses and LAE | Reinsurance balances recoverable | Net | ||||||||||||||||||||||||||||||
| Beginning fair value | $ | 2,454,539 | $ | 671,384 | $ | 1,783,155 | $ | 2,772,501 | $ | 743,304 | $ | 2,029,197 | |||||||||||||||||||||||
| Assumed business | 1,526 | (180,972) | 182,498 | — | — | — | |||||||||||||||||||||||||||||
| Incurred losses and LAE: | |||||||||||||||||||||||||||||||||||
| Reduction in estimates of ultimate losses | (25,595) | 56,702 | (82,297) | (7,386) | 2,354 | (9,740) | |||||||||||||||||||||||||||||
| Reduction in unallocated LAE | (4,641) | — | (4,641) | (6,724) | — | (6,724) | |||||||||||||||||||||||||||||
| Change in fair value | 19,092 | (1,950) | 21,042 | 57,743 | 16,369 | 41,374 | |||||||||||||||||||||||||||||
| Total incurred losses and LAE | (11,144) | 54,752 | (65,896) | 43,633 | 18,723 | 24,910 | |||||||||||||||||||||||||||||
| Paid losses | (86,745) | (11,192) | (75,553) | (100,654) | (21,816) | (78,838) | |||||||||||||||||||||||||||||
| Effect of exchange rate movements | 64,502 | 9,189 | 55,313 | (56,836) | (8,307) | (48,529) | |||||||||||||||||||||||||||||
| Ending fair value | $ | 2,422,678 | $ | 543,161 | $ | 1,879,517 | $ | 2,658,644 | $ | 731,904 | $ | 1,926,740 | |||||||||||||||||||||||
The net assumed business of $182.5 million in the current period relates to the Hannover Re novation transaction disclosed in Note 3 - "Significant New Business." Changes in fair value in the table above are included in net incurred losses and LAE in our consolidated statements of earnings.
The following table presents the components of the net change in fair value:
| Three Months Ended September 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Changes in fair value due to changes in: | ||||||||||||||
| Duration | $ | 11,767 | $ | 3,850 | ||||||||||
| Corporate bond yield | 9,275 | 37,524 | ||||||||||||
| Change in fair value | $ | 21,042 | $ | 41,374 | ||||||||||
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Liability for losses and LAE | Reinsurance balances recoverable on paid and unpaid losses | Net | Liability for losses and LAE | Reinsurance balances recoverable on paid and unpaid losses | Net | ||||||||||||||||||||||||||||||
| Beginning fair value | $ | 2,621,122 | $ | 695,518 | $ | 1,925,604 | $ | 2,874,055 | $ | 739,591 | $ | 2,134,464 | |||||||||||||||||||||||
| Assumed business | 1,526 | (180,972) | 182,498 | — | — | — | |||||||||||||||||||||||||||||
| Incurred losses and LAE: | |||||||||||||||||||||||||||||||||||
| Reduction in estimates of ultimate losses | (61,109) | 48,580 | (109,689) | (20,342) | 4,059 | (24,401) | |||||||||||||||||||||||||||||
| Reduction in unallocated LAE | (14,353) | — | (14,353) | (15,076) | — | (15,076) | |||||||||||||||||||||||||||||
| Change in fair value | 130,075 | 33,227 | 96,848 | 189,422 | 54,045 | 135,377 | |||||||||||||||||||||||||||||
| Total incurred losses and LAE | 54,613 | 81,807 | (27,194) | 154,004 | 58,104 | 95,900 | |||||||||||||||||||||||||||||
| Paid losses | (230,187) | (49,627) | (180,560) | (308,267) | (58,139) | (250,128) | |||||||||||||||||||||||||||||
| Effect of exchange rate movements | (24,396) | (3,565) | (20,831) | (61,148) | (7,652) | (53,496) | |||||||||||||||||||||||||||||
| Ending fair value | $ | 2,422,678 | $ | 543,161 | $ | 1,879,517 | $ | 2,658,644 | $ | 731,904 | $ | 1,926,740 | |||||||||||||||||||||||
Changes in fair value in the table above are included in net incurred losses and LAE in our consolidated statements of earnings. The following table presents the components of the net change in fair value:
| Nine Months Ended September 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Changes in fair value due to changes in: | ||||||||||||||
| Duration | $ | 19,617 | $ | 18,736 | ||||||||||
| Corporate bond yield | 75,524 | 116,641 | ||||||||||||
| Weighted cost of capital | (5,048) | — | ||||||||||||
| Risk cost of capital | 6,755 | — | ||||||||||||
| Change in fair value | $ | 96,848 | $ | 135,377 | ||||||||||
Below is a summary of the quantitative information regarding the significant observable and unobservable inputs used in the internal model to determine fair value on a recurring basis:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||
| Valuation Technique | Unobservable (U) and Observable (O) Inputs | Weighted Average | 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% | 5.1% | |||||||||||||||||
| Internal model | Weighted average cost of capital (U) | 8.25% | 8.5% | |||||||||||||||||
| Internal model | Duration - liability (U) | 7.92 years | 7.82 years | |||||||||||||||||
| Internal model | Duration - reinsurance balances recoverable (U) | 7.71 years | 8.68 years | |||||||||||||||||
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.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
•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
Senior Notes
As of September 30, 2020, our 4.50% Senior Notes due 2022 (the "2022 Senior Notes") and our 4.95% Senior Notes due 2029 (the "2029 Senior Notes" and, together with the 2022 Senior Notes, the "Senior Notes") were carried at amortized cost of $349.2 million and $493.9 million, respectively, while the fair value based on observable market pricing from a third party pricing service was $363.2 million and $556.8 million, respectively. The Senior Notes are classified as Level 2.
Junior Subordinated Notes
As of September 30, 2020, our 5.75% Fixed-Rate Reset Junior Subordinated Notes due 2040 (the “Junior Subordinated Notes”) were carried at amortized cost of $344.8 million, while the fair value based on observable market pricing from a third party pricing service was $357.7 million. The Junior Subordinated Notes are classified as Level 2.
Insurance Contracts
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.
Remaining Assets and Liabilities
Our remaining assets and liabilities were generally carried at cost or amortized cost, which due to their short-term nature approximates fair value as of September 30, 2020 and December 31, 2019.
56
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. PREMIUMS WRITTEN AND EARNED
The following table provides a summary of premiums written and earned by segment and for our other activities:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Premiums Written | Premiums Earned | Premiums Written | Premiums Earned | Premiums Written | Premiums Earned | Premiums Written | Premiums Earned | ||||||||||||||||||||||||||||||||||||||||
| Non-life Run-off | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross | $ | 3,535 | $ | 20,426 | $ | 301 | $ | 27,190 | $ | 1,707 | $ | 52,899 | $ | (24,785) | $ | 166,707 | |||||||||||||||||||||||||||||||
| Ceded | (111) | (2,950) | (4,109) | (10,353) | 690 | (8,876) | (1,610) | (24,726) | |||||||||||||||||||||||||||||||||||||||
| Net | $ | 3,424 | $ | 17,476 | $ | (3,808) | $ | 16,837 | $ | 2,397 | $ | 44,023 | $ | (26,395) | $ | 141,981 | |||||||||||||||||||||||||||||||
| Atrium | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross | $ | 49,083 | $ | 48,690 | $ | 48,746 | $ | 48,340 | $ | 155,551 | $ | 144,675 | $ | 146,519 | $ | 133,610 | |||||||||||||||||||||||||||||||
| Ceded | (2,580) | (6,264) | (4,961) | (5,427) | (19,458) | (16,492) | (19,273) | (13,745) | |||||||||||||||||||||||||||||||||||||||
| Net | $ | 46,503 | $ | 42,426 | $ | 43,785 | $ | 42,913 | $ | 136,093 | $ | 128,183 | $ | 127,246 | $ | 119,865 | |||||||||||||||||||||||||||||||
| StarStone | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross | $ | 58,566 | $ | 123,813 | $ | 110,586 | $ | 151,895 | $ | 300,135 | $ | 362,638 | $ | 363,352 | $ | 409,135 | |||||||||||||||||||||||||||||||
| Ceded | (15,228) | (27,697) | (34,566) | (40,146) | (73,069) | (86,072) | (72,269) | (69,142) | |||||||||||||||||||||||||||||||||||||||
| Net | $ | 43,338 | $ | 96,116 | $ | 76,020 | $ | 111,749 | $ | 227,066 | $ | 276,566 | $ | 291,083 | $ | 339,993 | |||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross | $ | 293 | $ | 5,705 | $ | (2,498) | $ | 4,338 | $ | 3,237 | $ | 15,173 | $ | (1,174) | $ | 17,024 | |||||||||||||||||||||||||||||||
| Ceded | 1 | 1 | (5) | (35) | 1 | 1 | (23) | (152) | |||||||||||||||||||||||||||||||||||||||
| Net | $ | 294 | $ | 5,706 | $ | (2,503) | $ | 4,303 | $ | 3,238 | $ | 15,174 | $ | (1,197) | $ | 16,872 | |||||||||||||||||||||||||||||||
| Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross | $ | 111,477 | $ | 198,634 | $ | 157,135 | $ | 231,763 | $ | 460,630 | $ | 575,385 | $ | 483,912 | $ | 726,476 | |||||||||||||||||||||||||||||||
| Ceded | (17,918) | (36,910) | (43,641) | (55,961) | (91,836) | (111,439) | (93,175) | (107,765) | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 93,559 | $ | 161,724 | $ | 113,494 | $ | 175,802 | $ | 368,794 | $ | 463,946 | $ | 390,737 | $ | 618,711 | |||||||||||||||||||||||||||||||
Gross premiums written for the three months ended September 30, 2020 and 2019 were $111.5 million and $157.1 million, respectively, a decrease of $45.7 million. The decrease was primarily due to a decrease in gross premiums written in our StarStone segment of $52.0 million, partially offset by an increase Non-life Run-off segment of $3.2 million. The decrease in the StarStone segment was due to StarStone International being placed into an orderly run-off.
Gross premiums written for the nine months ended September 30, 2020 and 2019 were $460.6 million and $483.9 million, respectively, a decrease of $23.3 million. The decrease was primarily due to a decrease in gross premiums written in our StarStone segment of $63.2 million, partially offset by a reduction in negative gross premiums written in our Non-life Run-off segment of $26.5 million and an increase in the Atrium segment of $9.0 million. The decrease in the StarStone segment was primarily due to StarStone International being placed into an orderly run-off. The negative gross premium written in the Non-life Run-off segment for the nine months ended September 30, 2019 was due to premium adjustments on the acquired unearned premium primarily related to the run-off business assumed as a result of the AmTrust RITC transactions and the acquisition of Maiden Re North America. The increase in the Atrium segment was driven by increases in the binding authorities, marine, aviation and transit and non-marine direct and facultative lines of business. The binding authorities line of business benefited from new opportunities to write new business, while the marine, aviation and non-marine direct and facultative lines of business continued to benefit from an increase in rates and new opportunities in the U.S.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. GOODWILL AND INTANGIBLE ASSETS
The following table presents a reconciliation of the beginning and ending goodwill and intangible assets for the nine months ended September 30, 2020:
| Intangible assets | |||||||||||||||||||||||||||||
| Goodwill | Intangible assets with a definite life | Intangible assets with an indefinite life | Total | Total | |||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | 109,807 | $ | 14,630 | $ | 67,131 | $ | 81,761 | $ | 191,568 | |||||||||||||||||||
| Impairment losses (StarStone International) | (8,000) | — | (4,000) | (4,000) | (12,000) | ||||||||||||||||||||||||
| Amortization | — | (1,524) | — | (1,524) | (1,524) | ||||||||||||||||||||||||
| Reclassification to assets held-for-sale (Atrium) | (38,848) | (13,106) | (63,131) | (76,237) | (115,085) | ||||||||||||||||||||||||
Balance as of September 30, 2020 | $ | 62,959 | $ | — | $ | — | $ | — | $ | 62,959 | |||||||||||||||||||
Goodwill
The changes in the goodwill by segment were as follows for the nine months ended September 30, 2020:
| Non-life Run-Off | Atrium | StarStone | Total | ||||||||||||||||||||
Balance as of December 31, 2019: | $ | 62,959 | $ | 38,848 | $ | 8,000 | $ | 109,807 | |||||||||||||||
| Impairment losses (StarStone International) | — | — | (8,000) | (8,000) | |||||||||||||||||||
| Reclassification to assets held-for-sale (Atrium) | — | (38,848) | — | (38,848) | |||||||||||||||||||
| Balance as of September 30, 2020: | |||||||||||||||||||||||
| Goodwill | 62,959 | — | 8,000 | 70,959 | |||||||||||||||||||
| Accumulated impairment losses | — | — | (8,000) | (8,000) | |||||||||||||||||||
| $ | 62,959 | $ | — | $ | — | $ | 62,959 | ||||||||||||||||
On August 13, 2020, we announced the Atrium Exchange Transaction, which resulted in the assets and liabilities of the Atrium segment being classified as held-for-sale as of September 30, 2020.
On June 10, 2020, we announced the StarStone International Run-Off. During the three and nine months ended September 30, 2020, we recognized impairment losses of $nil and $8.0 million respectively, related to the goodwill allocated to StarStone International.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible Assets
The gross carrying value, accumulated amortization and net carrying value of intangible assets by segment and by type as of September 30, 2020 and December 31, 2019 was as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Gross carrying value | Accumulated amortization | Net carrying value | Gross carrying value | Accumulated amortization | Net carrying value | ||||||||||||||||||||||||||||||
| Atrium segment: | |||||||||||||||||||||||||||||||||||
| Intangible assets with a definite life: | |||||||||||||||||||||||||||||||||||
| Distribution channel | $ | — | $ | — | $ | — | $ | 20,000 | $ | (8,111) | $ | 11,889 | |||||||||||||||||||||||
| Brand | — | — | — | 7,000 | (4,259) | 2,741 | |||||||||||||||||||||||||||||
| Intangible assets with an indefinite life: | |||||||||||||||||||||||||||||||||||
| Lloyd’s syndicate capacity | — | — | — | 33,031 | — | 33,031 | |||||||||||||||||||||||||||||
| Management contract | — | — | — | 30,100 | — | 30,100 | |||||||||||||||||||||||||||||
| Total Atrium segment intangible assets | $ | — | $ | — | $ | — | $ | 90,131 | $ | (12,370) | $ | 77,761 | |||||||||||||||||||||||
| StarStone segment: | |||||||||||||||||||||||||||||||||||
| Intangible assets with an indefinite life: | |||||||||||||||||||||||||||||||||||
| Lloyd’s syndicate capacity | 4,000 | (4,000) | — | 4,000 | — | 4,000 | |||||||||||||||||||||||||||||
| Total intangible assets | $ | 4,000 | $ | (4,000) | $ | — | $ | 94,131 | $ | (12,370) | $ | 81,761 | |||||||||||||||||||||||
Atrium
As described above, the assets and liabilities related to the Atrium segment have been classified as held-for-sale as of September 30, 2020. The following table presents the amortization recorded on the intangible assets prior to the reclassification to held-for-sale:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Intangible asset amortization | $ | 508 | $ | 546 | $ | 1,524 | $ | 1,676 | |||||||||||||||
StarStone
During the three and nine months ended September 30, 2020, we recognized impairment losses of $nil and $4.0 million respectively, on StarStone's Lloyd's syndicate capacity following our decision to place StarStone International into run-off.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
843014. DEBT OBLIGATIONS AND CREDIT FACILITIES
We utilize debt financing and credit facilities primarily for funding acquisitions and significant new business, investment activities and, from time to time, for general corporate purposes. Our debt obligations were as follows:
| Facility | Origination Date | Term | September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
4.50% Senior Notes due 2022 | March 10, 2017 | 5 years | $ | 349,155 | $ | 348,616 | ||||||||||||||||||||
4.95% Senior Notes due 2029 | May 28, 2019 | 10 years | 493,940 | 493,600 | ||||||||||||||||||||||
| Total Senior Notes | 843,095 | 842,216 | ||||||||||||||||||||||||
5.75% Junior Subordinated Notes due 2040 | August 26, 2020 | 20 years | 344,813 | — | ||||||||||||||||||||||
| EGL Revolving Credit Facility | August 16, 2018 | 5 years | 260,000 | — | ||||||||||||||||||||||
| 2018 EGL Term Loan Facility | December 27, 2018 | 3 years | — | 348,991 | ||||||||||||||||||||||
| Total debt obligations | $ | 1,447,908 | $ | 1,191,207 | ||||||||||||||||||||||
During the nine months ended September 30, 2020, the EGL Revolving Credit Facility was utilized for funding (i) significant new business as described in Note 3 - "Significant New Business," (ii) investment opportunities and (iii) to provide additional liquidity in the first half of the year during the financial disruption associated with the COVID-19 pandemic. In addition, we issued the Junior Subordinated Notes and used the proceeds to repay the 2018 EGL Term Loan Facility.
The table below provides a summary of the total interest expense:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Interest expense on debt obligations | $ | 14,652 | $ | 14,623 | $ | 41,522 | $ | 38,157 | |||||||||||||||
| Amortization of debt issuance costs | 351 | 311 | 914 | 539 | |||||||||||||||||||
| Funds withheld balances and other | — | 16 | — | 326 | |||||||||||||||||||
| Total interest expense | $ | 15,003 | $ | 14,950 | $ | 42,436 | $ | 39,022 | |||||||||||||||
Senior Notes
4.50% Senior Notes due 2022
On March 10, 2017, we issued the 2022 Senior Notes for an aggregate principal amount of $350.0 million. The 2022 Senior Notes pay 4.50% interest semi-annually and mature on March 10, 2022. We incurred costs of $2.9 million in issuing the 2022 Senior Notes. The unamortized costs as of September 30, 2020 and December 31, 2019 were $0.8 million and $1.4 million, respectively.
Refer to Note 15 - "Debt Obligations and Credit Facilities" in our 10-K for the year ended December 31, 2019 for further information regarding the 2022 Senior Notes.
4.95% Senior Notes due 2029
On May 28, 2019, we issued the 2029 Senior Notes for an aggregate principal amount of $500.0 million. The 2029 Senior Notes pay 4.95% interest semi-annually and mature on June 1, 2029. We incurred costs of $6.8 million in issuing the 2029 Senior Notes. The unamortized costs as of September 30, 2020 and December 31, 2019 were $6.1 million and $6.4 million, respectively.
Refer to Note 15 - "Debt Obligations and Credit Facilities" in our 10-K for the year ended December 31, 2019 for further information regarding the 2029 Senior Notes.
Junior Subordinated Notes
5.75% Junior Subordinated Notes due 2040
On August 26, 2020, our wholly-owned subsidiary, Enstar Finance LLC ("Enstar Finance") issued the Junior Subordinated Notes for an aggregate principal amount of $350.0 million. The Junior Subordinated Notes pay interest (i) from the date of original issue to August 30, 2025 at the fixed rate of 5.75% per annum and (ii) from September 1, 2025, during each five-year period thereafter, at a rate per annum equal to the five-year treasury rate as of two business days prior to the beginning of such five-year period plus 5.468%, as reset at the beginning of
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
each such five-year period. Absent certain conditions, interest on the Junior Subordinated Notes is payable semi-annually, commencing on March 1, 2021, and the Junior Subordinated Notes are scheduled to mature on September 1, 2040.
The Junior Subordinated Notes are rated BB+ and are unsecured junior subordinated obligations of Enstar Finance. The Junior Subordinated Notes are fully and unconditionally guaranteed by us on an unsecured and junior subordinated basis. These debt securities of Enstar Finance are effectively subordinate to the obligations of our other subsidiaries.
We incurred costs of $5.2 million in issuing the Junior Subordinated 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 Junior Subordinated Notes and are included in interest expense in our consolidated statements of earnings. The unamortized costs as of September 30, 2020 were $5.2 million.
The net proceeds of $344.8 million, plus cash on hand, were used to repay $350.0 million of borrowings under our 2018 EGL Term Loan Facility, discussed further below.
EGL Revolving Credit Facility
As of September 30, 2020, we were permitted to borrow up to an aggregate of $600.0 million under the revolving credit facility. As of September 30, 2020, there was $340.0 million of available unutilized capacity under the facility. Subsequent to September 30, 2020, we have neither borrowed nor repaid any additional amounts under the facility, as such the unutilized capacity remains at $340.0 million. We have the option to increase the commitments under the facility by up to an aggregate amount of $400.0 million from the existing lenders, or through the addition of new lenders, subject to the terms of the agreement.
Borrowings under the facility bear interest at a rate based on the Company's long term senior unsecured debt ratings. Interest is payable at least every month at either the alternate base rate ("ABR") or LIBOR plus a margin as set forth in the revolving credit agreement.
Refer to Note 15 - "Debt Obligations and Credit Facilities" in our 10-K for the year ended December 31, 2019 for further information regarding the revolving credit facility.
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"). During 2019, we repaid principal of $150.0 million, and during the three months ended September 30, 2020, we repaid the remaining $350.0 million of principal on the facility. As of September 30, 2020, there was no amount outstanding on the 2018 EGL Term Loan Facility.
We incurred costs of $1.5 million associated with closing the 2018 EGL Term Loan Facility. These costs were amortized over the term of the facility and are included in general and administrative expenses in our consolidated statements of earnings. The unamortized costs as of September 30, 2020 and December 31, 2019 were $nil and $1.0 million, respectively.
Letters of Credit
We utilize unsecured and secured letters of credit to support certain of our insurance and reinsurance performance obligations.
Funds at Lloyd's
We had an unsecured letter of credit agreement for Funds at Lloyd's ("FAL Facility") as of September 30, 2020, to issue up to $375.0 million of letters of credit, with provision to increase the facility by an additional $25.0 million up to an aggregate amount of $400.0 million, subject to lenders approval. On November 5, 2020, we amended and restated the FAL Facility to reduce its capacity to $275.0 million (with provision to increase the facility by an additional $75.0 million) and extend its term by two years. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2025. As of September 30, 2020 and December 31, 2019, our combined Funds at Lloyd's were comprised of cash and investments of $547.0 million and $639.3 million, respectively, and unsecured letters of credit of $252.0 million as of both dates.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$120.0 million Letter of Credit Facility
We use this facility to support certain reinsurance collateral obligations of our subsidiaries. Pursuant to the facility agreement, we have the option to increase commitments under the facility by an additional $60.0 million. As of September 30, 2020 and December 31, 2019, we had issued an aggregate amount of letters of credit under this facility of $120.0 million and $115.3 million, respectively.
$800.0 million Syndicated Letter of Credit Facility
During 2019, we entered into an unsecured $760.0 million letter of credit facility agreement, most recently amended on June 3, 2020. On August 4, 2020, we exercised our option to increase the commitments available under the facility by an aggregate amount of $40.0 million, bringing the total size of the facility to $800.0 million. The facility is used to collateralize certain reinsurance obligations, including $456.8 million relating to the reinsurance transaction with Maiden Reinsurance Ltd. As of September 30, 2020 and December 31, 2019, we had issued an aggregate amount of letters of credit under this facility of $619.8 million and $608.0 million, respectively.
$65.0 million Letter of Credit Facility
On August 4, 2020, we entered into a $65.0 million secured letter of credit facility agreement pursuant to which we issued a letter of credit to collateralize a portion of our reinsurance performance obligations relating to our novation transaction with Hannover Re, which we completed on August 6, 2020, as discussed in Note 3 - "Significant New Business". As of September 30, 2020, we had issued an aggregate amount of letters of credit under this facility of $61.0 million.
Refer to Note 15 - "Debt Obligations and Credit Facilities" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019 for further information on the terms of the above letter of credit facilities.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. NONCONTROLLING INTERESTS
We have both redeemable noncontrolling interest ("RNCI") and noncontrolling interest ("NCI") on our consolidated balance sheets. RNCI with redemption features that are not solely within our control are classified within temporary equity in the consolidated balance sheets and carried at redemption value, which is fair value. The change in fair value is recognized through retained earnings as if the balance sheet date were also the redemption date. In addition, we also have NCI, which does not have redemption features and is classified within equity in the consolidated balance sheets.
Redeemable Noncontrolling Interest
RNCI as of September 30, 2020 and December 31, 2019 comprised the ownership interests held by the Trident V Funds ("Trident") (39.3%) and funds advised by Dowling Capital Partners, L.P. ("Dowling") (1.7%) in our subsidiary North Bay Holdings Limited ("North Bay"). North Bay owns our investments in Atrium and StarStone.
The following is a reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Balance at beginning of period | $ | 366,533 | $ | 435,696 | $ | 438,791 | $ | 458,543 | ||||||||||||||||||
| Dividends paid | — | — | — | (11,556) | ||||||||||||||||||||||
| Net earnings (losses) attributable to RNCI | 20,997 | (190) | (31,102) | (5,651) | ||||||||||||||||||||||
| Accumulated other comprehensive earnings attributable to RNCI | 1,220 | (97) | 7,593 | 58 | ||||||||||||||||||||||
| Foreign currency translation adjustments | (588) | — | (753) | — | ||||||||||||||||||||||
| Change in redemption value of RNCI | (11,431) | (622) | (38,059) | (6,607) | ||||||||||||||||||||||
Cumulative effect of change in accounting principle attributable to RNCI (1) | — | — | 261 | — | ||||||||||||||||||||||
| Balance at end of period | $ | 376,731 | $ | 434,787 | $ | 376,731 | $ | 434,787 | ||||||||||||||||||
(1) The Company adopted and the related amendments on January 1, 2020. Refer to Note 1 - "Significant Accounting Policies" for further details.
We carried the RNCI at its estimated redemption value, which is fair value, as of September 30, 2020 and December 31, 2019.
The increase in the three months ended September 30, 2020 was attributable to $21.0 million of net earnings primarily related to StarStone due to higher underwriting income in the period; partially offset by, an $11.4 million reduction in redemption value. The redemption value decreased as a result of the agreement to sell Northshore.
The decrease in the nine months ended September 30, 2020 was attributable to $31.1 million of net losses related to StarStone resulting from exit costs associated with the decision to place StarStone International into run-off; and $38.1 million due to change in redemption value. The redemption value decreased as a result of the StarStone International Run-Off decision and the agreement to sell both StarStone U.S and Northshore.
Refer to Note 21 - "Commitments and Contingencies" for additional information regarding RNCI.
Noncontrolling Interest
As of September 30, 2020 and December 31, 2019, we had $14.5 million and $14.2 million, respectively, of NCI related to external interests in three of our 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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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. SHARE CAPITAL
Refer to Note 17 - "Share Capital" to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019 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, 2020 to November 6, 2020:
| Dividend per: | ||||||||||||||||||||||||||||||||||||||
| Preferred Share Series | Date Declared | Record Date | Date Paid or Payable | Preferred Share | Depositary Share | Total dividends paid in the nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| (in U.S. dollars) | (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||||
| Series D | February 4, 2020 | February 15, 2020 | March 2, 2020 | $ | 437.50 | $ | 0.43750 | $ | 7,000 | |||||||||||||||||||||||||||||
| Series E | February 4, 2020 | February 15, 2020 | March 2, 2020 | $ | 437.50 | $ | 0.43750 | 1,925 | ||||||||||||||||||||||||||||||
| Series D | May 5, 2020 | May 15, 2020 | June 1, 2020 | $ | 437.50 | $ | 0.43750 | 7,000 | ||||||||||||||||||||||||||||||
| Series E | May 5, 2020 | May 15, 2020 | June 1, 2020 | $ | 437.50 | $ | 0.43750 | 1,925 | ||||||||||||||||||||||||||||||
| Series D | August 5, 2020 | August 15, 2020 | September 1, 2020 | $ | 437.50 | $ | 0.43750 | 7,000 | ||||||||||||||||||||||||||||||
| Series E | August 5, 2020 | August 15, 2020 | September 1, 2020 | $ | 437.50 | $ | 0.43750 | 1,925 | ||||||||||||||||||||||||||||||
| Series D | November 5, 2020 | November 15, 2020 | December 1, 2020 | $ | 437.50 | $ | 0.43750 | — | ||||||||||||||||||||||||||||||
| Series E | November 5, 2020 | November 15, 2020 | December 1, 2020 | $ | 437.50 | $ | 0.43750 | — | ||||||||||||||||||||||||||||||
| $ | 26,775 | |||||||||||||||||||||||||||||||||||||
Share Repurchases
On March 9, 2020, our Board of Directors adopted a stock trading plan for the purpose of repurchasing a limited number of our Company’s ordinary shares, not to exceed $150.0 million in aggregate (the "Repurchase Program"). On March 23, 2020, we suspended our Repurchase Program due to uncertainty in the global financial markets resulting from the COVID-19 pandemic. The Repurchase Program resumed on September 21, 2020 and expires on March 1, 2021.
From inception to September 30, 2020, we repurchased 174,464 ordinary shares at an average price of $145.53, for an aggregate price of $25.4 million under the Repurchase Program. As of September 30, 2020, the remaining capacity under the Repurchase Program was $124.6 million. Subsequent to September 30, 2020, we repurchased 3,816 ordinary shares for an aggregate price of $0.6 million under the Repurchase program.
Joint Share Ownership Plan
On January 21, 2020, 565,630 Voting Ordinary Shares were issued to the trustee of the Enstar Group Limited Employee Benefit Trust (the "EB Trust"). Voting rights in respect of shares held in the EB Trust have been contractually waived. We have consolidated the EB Trust, and shares held in the EB Trust are classified like treasury shares as contra-equity in our consolidated balance sheet.
The EB Trust supports awards made under our Joint Share Ownership Plan, a sub-plan to our Amended and Restated 2016 Equity Incentive Plan (the "JSOP"). An award of 565,630 shares was made to our Chief Executive Officer on January 21, 2020, which cliff-vests after 3 years from grant. The accounting for stock-settled JSOP awards is similar to options, whereby the grant date fair value of $13.6 million is expensed over the life of the award. To determine the grant date fair value of $24.13 per share, we utilized a Monte-Carlo valuation model with the following assumptions: (i) volatility of 18.66%; (ii) dividend yield of 0.00%; and (iii) risk-free interest rate of 1.55%. For further information on the EB Trust and JSOP award, including the vesting conditions, refer to Note 17 - "Share Capital" and Note 19 - "Share-Based Compensation and Pensions" to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per ordinary share:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Earnings (losses) attributable to Enstar ordinary shareholders: | |||||||||||||||||||||||
Net earnings from continuing operations (1) | $ | 612,636 | $ | 113,074 | $ | 896,267 | $ | 701,234 | |||||||||||||||
Net earnings from discontinued operations (2) | 2,377 | 4,669 | 478 | 7,102 | |||||||||||||||||||
| Net earnings attributable to Enstar ordinary shareholders: | $ | 615,013 | $ | 117,743 | $ | 896,745 | $ | 708,336 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
Weighted-average ordinary shares outstanding — basic (3) | 21,578,106 | 21,488,216 | 21,564,447 | 21,476,586 | |||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
Share-based compensation plans (4) | 143,581 | 169,162 | 180,437 | 204,288 | |||||||||||||||||||
| Warrants | 57,042 | 63,119 | 54,743 | 60,625 | |||||||||||||||||||
| Weighted-average ordinary shares outstanding — diluted | 21,778,729 | 21,720,497 | 21,799,627 | 21,741,499 | |||||||||||||||||||
| Earnings (loss) per ordinary share attributable to Enstar: | |||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||
| Net earnings from continuing operations | $ | 28.39 | $ | 5.26 | $ | 41.56 | $ | 32.65 | |||||||||||||||
| Net earnings from discontinued operations | 0.11 | 0.22 | 0.02 | 0.33 | |||||||||||||||||||
| Net earnings per ordinary share | $ | 28.50 | $ | 5.48 | $ | 41.58 | $ | 32.98 | |||||||||||||||
| Diluted: | |||||||||||||||||||||||
| Net earnings from continuing operations | $ | 28.13 | $ | 5.21 | $ | 41.12 | $ | 32.25 | |||||||||||||||
| Net earnings from discontinued operations | 0.11 | 0.21 | 0.02 | 0.33 | |||||||||||||||||||
| Net earnings per ordinary share | $ | 28.24 | $ | 5.42 | $ | 41.14 | $ | 32.58 | |||||||||||||||
(1) Net earnings (loss) from continuing operations attributable to Enstar ordinary shareholders equals net earnings (loss) from continuing operations, plus net loss (earnings) from continuing operations attributable to noncontrolling interest, less dividends on preferred shares.
(2) Net earnings (loss) from discontinued operations attributable to Enstar ordinary shareholders equals net earnings (loss) from discontinued operations, net of income taxes, plus net loss (earnings) from discontinued operations attributable to noncontrolling interest; refer to Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" for a breakdown by period.
(3) Weighted-average ordinary shares for basic earnings per share includes ordinary shares (voting and non-voting) but excludes ordinary shares held in the EB Trust in respect of JSOP awards.
(4) Share-based dilutive securities include restricted shares, restricted share units, and performance share units. Certain share-based compensation awards, including the ordinary shares held in the EB Trust in respect of JSOP awards, were excluded from the calculation for the three and nine months ended September 30, 2020 because they were anti-dilutive.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. SHARE-BASED COMPENSATION
We provide various employee benefits including share-based compensation, an employee share purchase plan and an annual incentive compensation program. These are described in Note 19 - "Share-Based Compensation and Pensions" to our consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
The table below provides a summary of the compensation costs for all of our share-based compensation plans:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Share-based compensation plans: | |||||||||||||||||||||||
| Restricted shares and restricted share units | $ | 2,251 | $ | 1,778 | $ | 6,180 | $ | 4,910 | |||||||||||||||
| Performance share units | 5,698 | 5,678 | 10,886 | 18,133 | |||||||||||||||||||
| Cash-settled stock appreciation rights | 3,705 | 102 | 230 | (109) | |||||||||||||||||||
| Joint share ownership plan expense | 1,146 | — | 3,151 | — | |||||||||||||||||||
| Other share-based compensation plans: | |||||||||||||||||||||||
| Northshore incentive plan | 209 | 1,029 | 656 | 3,061 | |||||||||||||||||||
| StarStone incentive plan | — | — | (223) | — | |||||||||||||||||||
| Deferred compensation and ordinary share plan for non-employee directors | 139 | 116 | 1,098 | 992 | |||||||||||||||||||
| Employee share purchase plan | 110 | 102 | 318 | 309 | |||||||||||||||||||
| Total share-based compensation | $ | 13,258 | $ | 8,805 | $ | 22,296 | $ | 27,296 | |||||||||||||||
19. INCOME TAXATION
Interim Tax Calculation Method
We use the estimated annual effective tax rate method for computing our interim tax provision. This method applies our best estimate of the effective tax rate expected for the full year to our year-to-date earnings before income taxes. We provide for income tax expense or benefit based upon our pre-tax earnings and the provisions of currently enacted tax laws. Certain items deemed to be unusual, infrequent or not reliably estimated are excluded from the estimated annual effective tax rate. In the event such items are identified, the actual tax expense or benefit is reported in the same period as the related item. Certain other items are not included in the estimated annual effective tax rate, such as changes in the assessment of valuation allowance on deferred tax assets and uncertain tax positions, if any.
Interim Tax Expense
The effective tax rates on income for the three months ended September 30, 2020 and 2019 were 2.1% and 10.2%, respectively. The effective tax rates on income for the nine months ended September 30, 2020 and 2019 were 2.8% and 3.4%, respectively. The effective tax rate on income differs from the statutory rate of 0% due to tax on foreign operations, primarily the U.S. and the U.K.
We have foreign operating subsidiaries and branch operations principally located in the U.S., U.K., Continental Europe and Australia that are subject to federal, foreign, state and local taxes in those jurisdictions. Deferred tax liabilities have not been accrued with respect to the undistributed earnings of our foreign subsidiaries. If the earnings were to be distributed, as dividends or other distributions, withholding taxes may be imposed by the jurisdiction of the paying subsidiary. For our U.S. subsidiaries, we have not currently accrued any withholding taxes with respect to unremitted earnings as management has indefinitely reinvested these earnings. For our U.K. 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
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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 Assets
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 likely than not" standard in determining the amount of the valuation allowance. During the three and nine months ended September 30, 2020, we have maintained a valuation allowance for deferred tax assets which management does not believe meet the "more likely than not" criteria.
Unrecognized Tax Benefits
There were no unrecognized tax benefits as of September 30, 2020 and December 31, 2019.
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 U.S., U.K. and Australia are no longer subject to tax examinations for years before 2015.
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20. 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 constitutes approximately 8.8% 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.
Our interests in StarStone and Atrium are held through North Bay, which is a joint venture between us and the Trident V Funds that are advised by Stone Point. We currently own an indirect 59.0% interest in North Bay and the Trident V Funds and the Dowling Funds currently own 39.3% and 1.7%, respectively. North Bay owns 100% of SSHL, the holding company for the StarStone group, which includes StarStone U.S. and StarStone International. North Bay also owns approximately 92% of Northshore, the holding company that owns Atrium and Arden. North Bay also owns the preferred equity of three segregated cells of Fitzwilliam Insurance Limited (the “Fitzwilliam Cells”) that have provided reinsurance to StarStone and are considered part of StarStone International.
On June 10, 2020, North Bay and one of its subsidiaries entered into an agreement to sell StarStone U.S. to Core Specialty in a recapitalization transaction described in Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations".
Pursuant to the terms of a Recapitalization Agreement entered into on August 13, 2020 among us, the Trident V Funds and the Dowling Funds (the "Recapitalization Agreement"), we agreed to exchange a portion of our indirect interest in Northshore for all of the Trident V Funds’ indirect interest in StarStone U.S. (the “Exchange Transaction”), which is described in Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations".
In addition to the terms described in Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations", the Recapitalization Agreement also provides for a preferred return to us of any cash received upon the sale of StarStone U.S. to reimburse us for certain funding provided to one of the Fitzwilliam Cells. To the extent the cash received upon the sale of StarStone U.S. exceeds the amount needed to reimburse us for the funding provided to the Fitzwilliam Cell, the portion of such cash that would otherwise be allocated to the Trident V Funds will be paid to us instead, and we would receive fewer shares in Northshore in the Exchange Transaction.
In connection with the closing of the Exchange Transaction, we will enter into amended and restated shareholders’ agreements with the Trident V Funds and the Dowling Funds with respect to our investment in SSHL and Northshore. With respect to SSHL, we will have the right to designate three of five members of the SSHL board of directors and the Trident V Funds will have the right to designate the other two members. The Trident V Funds will also have certain customary rights as a minority shareholder to approve certain material matters and transactions. Each shareholder of SSHL will provide us and the Trident V Funds with a right of first offer to acquire its shares in SSHL if such shareholder wishes to sell them. Each shareholder will also have certain rights to participate in sales of SSHL shares by the other shareholders, and we will have certain rights to cause the Trident V Funds and the Dowling Funds to sell their SSHL shares if we wish to sell control of SSHL or the StarStone International business.
Also pursuant to the terms of the proposed shareholders’ agreement for SSHL, at any time after December 31, 2022, the Trident V Funds will have the right to cause us to purchase their shares in SSHL at their fair market value, and the Dowling Funds will have the right to participate in any such sale transaction initiated by the Trident V Funds. We will be entitled to pay the purchase price for such SSHL shares in cash or in unrestricted ordinary shares of Enstar that are then listed or admitted to trading on a national securities exchange. At any time after March 31, 2023, we will have the right to cause the Trident V Funds and the Dowling Funds to sell their shares in SSHL to us at their fair market value. We would be obligated to pay the purchase price for such SSHL shares in cash.
Pursuant to the terms of the proposed shareholders’ agreement for Northshore, for so long as we own 50% or more of the Northshore shares we acquire upon the closing of the Exchange Transaction, we will have the right to designate one member to the board of directors of Northshore and each of its material subsidiaries. Our shares in Northshore will be subject to an 18-month restriction on transfer following the closing of the Exchange Transaction, after which the Trident V Funds will have a right of first offer to acquire our shares in Northshore if we wish to sell
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them. We will have certain rights to participate in sales of Northshore shares by the Trident V Funds, and the Trident V Funds will have certain rights to cause us to sell our Northshore shares if the Trident V Funds wish to sell control of Northshore or the Atrium business.
Pursuant to the terms of the existing shareholders’ agreements related to StarStone and Atrium, Mr. Carey serves as a representative of the Trident V Funds on the boards of the holding companies, including North Bay, established in connection with the Atrium/Arden and StarStone co-investment transactions. Trident also has a second representative on these boards who is a Stone Point employee.
We, in partnership with StarStone's other shareholders, have previously completed two transactions to provide capital support to StarStone in the form of:
(i) a contribution to its contributed surplus account and a loss portfolio transfer, effective October 1, 2018. To fund the transaction, the North Bay shareholders contributed an aggregate amount of $135.0 million to North Bay in proportion to their ownership interests. Trident’s proportionate contribution of $53.1 million was temporarily funded by North Bay and was reimbursed in the first quarter of 2019; and
(ii) a loss portfolio transfer, effective April 1, 2019, for which shareholders agreed to contribute an aggregate amount of $48.0 million.
In addition, Enstar has separately entered into a loss portfolio transfer and adverse development cover with StarStone effective October 1, 2019, whereby StarStone transferred $189.4 million in loss reserves and unearned premium to a wholly-owned Enstar subsidiary in exchange for premium of $189.4 million. Enstar also provided an additional $59.0 million adverse development cover in excess of the $189.4 million.
The RNCI on our balance sheet relating to these Trident co-investment transactions was as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Redeemable Noncontrolling Interest | $ | 361,026 | $ | 420,499 | |||||||
As of September 30, 2020, we had the following additional relationships with Stone Point and its affiliates:
•Investments in funds (carried within other investments) managed by Stone Point, with respect to which we recognized net unrealized gains (losses);
•Investments in registered investment companies affiliated with entities owned by Trident or otherwise affiliated with Stone Point, with respect to which we recognized net unrealized gains (losses) and interest income;
•Separate accounts managed by Eagle Point Credit Management, PRIMA Capital Advisors and SKY Harbor Capital Management, which are affiliates of entities owned by Trident, with respect to which we incurred management fees;
•Investments in funds (carried within other investments) managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as a director, with respect to which we recognized net unrealized gains (losses);
•Sound Point Capital has acted as collateral manager for certain of our direct investments in CLO debt and equity securities, with respect to which we recognized net unrealized gains (losses) and interest income;
•Marble Point Capital, which is an affiliate of an entity owned by Trident, has acted as collateral manager for certain of our direct investments in CLO debt and 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 in prior periods;
•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 certain Trident funds; and
•In the second quarter of 2020, we invested $10.0 million in a 2 year senior secured unrated floating rate term loan facility with an extension option which was arranged and managed by Sound Point Capital. The facility's borrower, Amplify U.S. Inc., is a subsidiary of Evergreen (as defined below) and has used the proceeds to purchase AmTrust's preferred stock. The facility ranks senior to all other claims of the borrower, the purchased preferred stock and cash flows therefrom serve as collateral, and AmTrust has provided an unsecured guarantee for the facility. For further information on our relationships with Evergreen and AmTrust, refer to the AmTrust section below.
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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:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Short-term investments, AFS, at fair value | $ | — | $ | 1,431 | |||||||
| Fixed maturities, trading, at fair value | 219,435 | 269,131 | |||||||||
| Fixed maturities, AFS, at fair value | 93,779 | 160,303 | |||||||||
| Equities, at fair value | 94,353 | 121,794 | |||||||||
| Other investments, at fair value: | |||||||||||
| Hedge funds | 18,510 | 18,993 | |||||||||
| Fixed income funds | 335,033 | 381,449 | |||||||||
| Private equity funds | 32,050 | 34,858 | |||||||||
| CLO equities | 33,358 | 32,560 | |||||||||
| CLO equity funds | 140,458 | 87,509 | |||||||||
| Private Debt | 27,079 | 16,312 | |||||||||
| Real estate fund | 24,475 | 18,106 | |||||||||
| Total investments | 1,018,530 | 1,142,446 | |||||||||
| Cash and cash equivalents | 21,293 | 54,080 | |||||||||
| Other assets | 6,327 | 10 | |||||||||
| Other liabilities | 162 | 4,710 | |||||||||
| Net investment | $ | 1,045,988 | $ | 1,191,826 | |||||||
The following table presents the amounts included in net earnings related to our related party transactions with Stone Point and its affiliated entities:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net investment income | $ | 2,312 | $ | 2,257 | $ | 11,189 | $ | 5,009 | |||||||||||||||
| Net realized and unrealized (losses) gains | 35,925 | (3,442) | (36,862) | 26,305 | |||||||||||||||||||
| Total net (losses) earnings | $ | 38,237 | $ | (1,185) | $ | (25,673) | $ | 31,314 | |||||||||||||||
Hillhouse Capital
Investment funds managed by Hillhouse Capital (defined below) collectively own approximately 9.4% 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 16.6% economic interest in Enstar. In February 2017, Jie Liu, a Partner of AnglePoint (defined below), was appointed to our Board.
We have made direct investments in funds (the “Hillhouse Funds”) managed by Hillhouse Capital Management, Ltd. and Hillhouse Capital Advisors, Ltd. (together, “Hillhouse Capital”) and AnglePoint Asset Management Ltd. ("AnglePoint"). As of September 30, 2020, our carrying value of our direct investment the InRe Fund, L.P. (the "InRe Fund"), which is managed by AnglePoint, was $1.8 billion with the InRe Fund's assets being invested in approximately (1)% in net short fixed income securities, 22% in North American equities, 49% in international equities and 30% in financing, derivatives and other items.
As of September 30, 2020 and December 31, 2019 our equity method investee, Enhanzed Reinsurance Ltd. ("Enhanzed Re"), had investments in a fund managed by AnglePoint, as set forth in the table below.
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Our consolidated balance sheet included the following balances related to transactions with Hillhouse Capital and AnglePoint (as applicable):
| September 30, 2020 | December 31, 2019 | ||||||||||
| Investments in funds managed by AnglePoint, held by Enhanzed Re | $ | 653,040 | $ | 327,799 | |||||||
| Our ownership of equity method investments | 47.4 | % | 47.4 | % | |||||||
| Our share of Investments in funds managed by AnglePoint held by Enhanzed Re (through our ownership of equity method investments) | $ | 309,541 | $ | 155,377 | |||||||
| Investment in other funds managed by Hillhouse Capital and AnglePoint: | |||||||||||
| InRe Fund | $ | 1,843,532 | $ | 918,633 | |||||||
| Other funds | 306,214 | 232,968 | |||||||||
| $ | 2,149,746 | $ | 1,151,601 | ||||||||
The increase in the investment in the Hillhouse Funds was primarily due to additional subscriptions of $300.0 million and unrealized gains for the nine months ended September 30, 2020. We incurred management and performance fees of approximately $263.3 million, included within the Hillhouse Funds' reported NAV, for the nine months ended September 30, 2020 in relation to the investment in funds managed by Hillhouse Capital and AnglePoint as described above.
Monument Re
Monument Insurance Group Limited ("Monument Re") was established in October 2016 and Enstar has invested a total of $59.6 million in the common and preferred shares of Monument Re as at September 30, 2020 (December 31, 2019: $26.6 million). We own 20% of the common shares of Monument Re, as well as different classes of preferred shares which have fixed dividend yields, and which collectively represented a total economic interest of 23.0% as at September 30, 2020 (December 31, 2019: 23.5%). In connection with our investment in Monument Re, we entered into a Shareholders Agreement with the other shareholders and have accounted for our equity interest in Monument Re as an equity method investment since we have significant influence over its operating and financial policies.
On May 31, 2019, we completed the transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument Re. In this transaction, we transferred policy benefits for life and annuity contracts with a carrying value of €88.8 million (or $99.1 million) and total assets with a fair value of €91.1 million (or $101.6 million) to a subsidiary of Monument Re.
Our investment in the common and preferred shares of Monument Re, which is included in equity method investments on our consolidated balance sheet, was as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Investment in Monument Re | $ | 161,994 | $ | 60,598 | |||||||
During the three and nine months ended September 30, 2020 we received director fees from Monument Re of less than $0.1 million and $0.1 million, respectively, in connection with one of our representatives serving on Monument Re's board of directors.
Clear Spring (formerly SeaBright)
Effective January 1, 2017, we sold SeaBright Insurance Company (“SeaBright Insurance”) to Clear Spring PC Acquisition Corp., a subsidiary of Delaware Life Insurance Company ("Delaware Life"). Following the sale, SeaBright Insurance was capitalized with $56.0 million of equity, with Enstar retaining a 20% indirect equity interest in SeaBright Insurance. Subsequently, SeaBright Insurance was renamed Clear Spring Property and Casualty Company ("Clear Spring").
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We have accounted for our equity interest in Clear Spring as an equity method investment as we have significant influence over its operating and financial policies.
Our investment in the common shares of Clear Spring which is included in equity method investments on our consolidated balance sheet, was as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Investment in Clear Spring | $ | 10,944 | $ | 10,645 | |||||||
Effective January 1, 2017, StarStone National Insurance Company (“StarStone National”) entered into a ceding 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 an assuming 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 between us and Clear Spring:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Balances under StarStone ceding quota share included, in assets or liabilities held-for-sale: | |||||||||||
| Reinsurance balances recoverable | $ | 20,998 | $ | 22,812 | |||||||
| Prepaid insurance premiums | — | 51 | |||||||||
| Ceded payable | 3,551 | 3,616 | |||||||||
| Ceded acquisition costs | — | 21 | |||||||||
| Balances under assuming quota share: | |||||||||||
| Losses and LAE | 3,995 | 6,135 | |||||||||
| Unearned reinsurance premiums | — | 13 | |||||||||
| Funds held | 7,468 | 8,611 | |||||||||
Our consolidated statement of earnings included the following amounts between us and Clear Spring:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Transactions under StarStone ceding quota share, included in net earnings (loss) from discontinued operations: | |||||||||||||||||||||||
| Ceded premium earned | $ | 60 | $ | (3,548) | $ | 61 | $ | (13,304) | |||||||||||||||
| Ceded incurred losses and LAE | (525) | 1,063 | (1,814) | 8,051 | |||||||||||||||||||
| Ceded acquisition costs | (17) | 243 | (44) | 305 | |||||||||||||||||||
| Transactions under assuming quota share: | |||||||||||||||||||||||
| Premium earned | (15) | 887 | (15) | 3,326 | |||||||||||||||||||
| Net incurred losses and LAE | 132 | (576) | 1,014 | (2,013) | |||||||||||||||||||
| Acquisition costs | 4 | (88) | 11 | (79) | |||||||||||||||||||
| Total net earnings (loss) | $ | (361) | $ | (2,019) | $ | (787) | $ | (3,714) | |||||||||||||||
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
AmTrust
In November 2018, pursuant to a Subscription Agreement with Evergreen Parent L.P. ("Evergreen"), K-Z Evergreen, LLC and Trident Pine Acquisition LP ("Trident Pine"), we purchased equity in Evergreen in the aggregate amount of $200.0 million. Evergreen is an entity formed by private equity funds managed by Stone Point and the Karfunkel-Zyskind family that acquired the approximately 45% of the issued and outstanding shares of common stock of AmTrust 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. In a second transaction in December 2019, Enstar acquired an additional $25.9 million of Evergreen securities from another investor.
Following the closing of the second transaction, Enstar owns approximately 8.5% 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 $3.3 million, half of which was payable upon closing and the other on the first anniversary of the closing. The fee was recorded in full 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:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Investment in AmTrust | $ | 245,361 | $ | 240,115 | |||||||
The following table presents the amounts included in net earnings related to our related party transactions with AmTrust:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net investment income | $ | — | $ | 1,900 | $ | 4,367 | $ | 5,550 | |||||||||||||||
| Net realized and unrealized gains | 45 | — | 3,854 | — | |||||||||||||||||||
| Total net earnings | $ | 45 | $ | 1,900 | $ | 8,221 | $ | 5,550 | |||||||||||||||
Citco
In June 2018, we 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 us with investment support. In a private transaction that preceded our co-investment opportunity, certain Citco shareholders, including Trident, agreed to sell all or a portion of their interests in Citco. As of September 30, 2020, 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, which is included in equity method investments on our consolidated balance sheet, was as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Investment in Citco | $ | 51,946 | $ | 51,742 | |||||||
Enhanzed Re
Enhanzed Re is a joint venture between Enstar, Allianz SE ("Allianz") and Hillhouse Capital that was capitalized in December 2018. Enhanzed Re is a Bermuda-based Class 4 and Class E reinsurer and will reinsure life, non-life run-off, and property and casualty insurance business, initially sourced from Allianz and Enstar. Enstar, Allianz and Hillhouse Capital affiliates have made equity investment commitments in aggregate of $470.0 million to
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Enhanzed Re. Enstar owns 47.4% of the entity, Allianz owns 24.9% and an affiliate of Hillhouse Capital owns 27.7%. As of September 30, 2020, Enstar contributed $154.1 million of its total capital commitment to Enhanzed Re and had an uncalled amount of $68.7 million. We have accounted for our equity interest in Enhanzed Re as an equity method investment as we have significant influence over its operating and financial policies.
Enstar acts as the (re)insurance manager for Enhanzed Re, for which it receives fee income recorded within other income, AnglePoint acts as the primary investment manager, and an affiliate of Allianz 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.
Our investment in the common shares of Enhanzed Re, which is included in equity method investments on our consolidated balance sheet, was as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Investment in Enhanzed Re | $ | 271,678 | $ | 182,856 | |||||||
We have ceded 10% of the Zurich transaction, as discussed in Note 4 - "Significant New Business" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019, to Enhanzed Re on the same terms and conditions as those received by Enstar.
Effective October 1, 2020, we have ceded 10% of the AXA Group transaction, as described in Note 3 - "Significant New Business," to Enhanzed Re on the same terms and conditions as those received by Enstar.
Our consolidated balance sheet included the following balances between us and Enhanzed Re:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Balances under ceding quota share: | |||||||||||
| Insurance balances payables | $ | 1,759 | $ | 1,443 | |||||||
| Reinsurance balances recoverable | 53,762 | 59,601 | |||||||||
| Funds held | 47,808 | 50,089 | |||||||||
| Other assets | 498 | 1,033 | |||||||||
Our consolidated statement of earnings included the following amounts between us and Enhanzed Re:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Amounts under ceding quota share: | |||||||||||||||||||||||
| Net incurred losses and LAE | $ | (1) | $ | — | $ | (14) | $ | — | |||||||||||||||
| Acquisition costs | (46) | — | (23) | — | |||||||||||||||||||
| Net investment income | (819) | — | (819) | — | |||||||||||||||||||
| Net realized and unrealized gains | (679) | — | (679) | — | |||||||||||||||||||
| Other income | 3,113 | — | — | — | |||||||||||||||||||
| Fees and commission income | 161 | 150 | 393 | 402 | |||||||||||||||||||
| Total Net earnings | 1,729 | 150 | (1,142) | 402 | |||||||||||||||||||
| Change in realized gain (losses) on available-for-sale investments | (2,239) | — | (2,239) | — | |||||||||||||||||||
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21. COMMITMENTS AND CONTINGENCIES
Concentration 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. Our cash and investments are managed pursuant to guidelines that follow prudent standards of diversification and liquidity, and limit the allowable holdings of a single issue and issuers. 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 insurance and reinsurance balances recoverable on paid and unpaid losses. We remain liable to the extent that counterparties do not meet their contractual obligations and, therefore, we evaluate and monitor concentration of credit risk among our insurers and reinsurers.
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 may be placed into trust or subject to other security arrangements. However, we generally have the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by us. As of September 30, 2020, we had a significant funds held concentration of $948.3 million to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from S&P.
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 counterparty noted above, exceeded 10% of shareholders’ equity as of September 30, 2020. Our credit exposure to the U.S. government was $1.2 billion as of September 30, 2020.
Legal Proceedings
We are, from time to time, involved in various legal proceedings in the ordinary course of business, including litigation and arbitration regarding claims. Estimated losses relating to claims arising in the ordinary course of business, including the anticipated outcome of any pending arbitration or litigation, are included in the liability for losses and LAE in our consolidated balance sheets. In addition to claims litigation, we may be subject to other lawsuits and regulatory actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or omissions, employment claims or regulatory activity. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on our business, results of operations or financial condition. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental and other claims.
Unfunded Investment Commitments
As of September 30, 2020, we had unfunded commitments of $792.2 million to other investments, $68.7 million to equity method investments and $15.0 million to fixed maturity investments.
Guarantees
As of September 30, 2020 and December 31, 2019, parental guarantees and capital instruments supporting subsidiaries' insurance obligations were $1.4 billion and $1.0 billion, respectively. We also guarantee the Junior Subordinated Notes and the FAL facility, which are described in Note 14 - "Debt Obligations and Credit Facilities."
In connection with the sale of StarStone U.S., the net loss reserves of StarStone U.S. will be reinsured to an Enstar Non-life Run-off entity upon completion of the sale which is expected to occur in the fourth quarter of 2020. The obligations under the loss portfolio transfer reinsurance agreement will be guaranteed by Enstar. Refer to Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" for further details.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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"). Pursuant to the Exchange Transaction described in Note 20 - "Related Party Transactions" we have agreed to exchange a portion of our indirect interest in Northshore for all of the Trident V Funds' indirect interest in StarStone U.S. Following the closing of the Exchange Transaction, we will maintain a call right over the portion of SSHL owned by the Trident V Funds and the Dowling Funds, and they will maintain put rights to transfer those interests to us.
Leases
Our leases are all currently classified as operating leases whereby the related lease expense is recognized within general and administrative expenses in our consolidated statements of earnings on a straight-line basis over the term of the lease. We also recognize a right-of-use asset and an offsetting lease liability within other assets and other liabilities, respectively, in our consolidated balance sheets, for each operating lease that we enter into.
Our leases are primarily related to office space and facilities used to conduct business operations and have remaining lease terms of one year to 37 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. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Since a majority of our leases do not provide an implicit discount rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date of the lease in determining the present value of lease payments. For more information on our leasing arrangements and the related accounting, refer to Note 23 - "Commitments and Contingencies" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
The table below provides the lease cost and other information relating to our operating leases:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Lease cost: | |||||||||||||||||||||||
| Operating lease cost | $ | 3,036 | $ | 4,010 | $ | 9,560 | $ | 10,696 | |||||||||||||||
Short-term lease cost(1) | 63 | — | 182 | — | |||||||||||||||||||
| Total lease cost | 3,099 | 4,010 | 9,742 | 10,696 | |||||||||||||||||||
Sub-lease income(2) | (139) | (183) | (415) | (451) | |||||||||||||||||||
| Total net lease cost | $ | 2,960 | $ | 3,827 | $ | 9,327 | $ | 10,245 | |||||||||||||||
| Other information: | |||||||||||||||||||||||
| Operating cash paid for amounts included in the measurement of lease liabilities | $ | 2,856 | $ | 2,945 | $ | 10,184 | $ | 9,138 | |||||||||||||||
| Non-cash activity: right-of-use assets relating to leases | (179) | 1,353 | 84 | 53,581 | |||||||||||||||||||
| Weighted-average remaining lease term | 6.1 years | 6.4 years | |||||||||||||||||||||
| Weighted-average discount rate | 6.4 | % | 6.2 | % | |||||||||||||||||||
(1) Leases with an initial lease term of twelve months or less are not recognized within our consolidated balance sheets.
(2) Sub-lease income consists of rental income received from third parties to whom we have sub-leased some of our leased office spaces and is included within other income in our consolidated statements of earnings.
The table below provides a summary of the operating leases recorded on our consolidated balance sheets:
| Balance sheet classification | September 30, 2020 | December 31, 2019 | |||||||||||||||
Right-of-use assets (1) (2) | Other assets | $ | 33,224 | $ | 46,747 | ||||||||||||
Current lease liabilities (2) | Other liabilities | 7,955 | 11,403 | ||||||||||||||
Non-current lease liabilities (2) | Other liabilities | 28,126 | 34,785 | ||||||||||||||
(1) Following our decision to put the StarStone International operations into orderly run-off effective June 10, 2020, we recorded total impairment charges of $3.5 million on the right-of-use assets relating to certain StarStone International operating leases as of September 30, 2020.
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(2) The right-of-use assets and the total lease liability balances exclude balances of $1.5 million and $1.0 million respectively, related to Atrium which have been reclassified to held-for-sale balances on our consolidated balance sheet as of September 30, 2020.
The table below provides a summary of the contractual maturities of our operating lease liabilities:
| September 30, 2020 | ||||||||
| 2020 | $ | 2,938 | ||||||
| 2021 | 9,347 | |||||||
| 2022 | 7,829 | |||||||
| 2023 | 7,032 | |||||||
| 2024 | 5,328 | |||||||
| 2025 and beyond | 12,579 | |||||||
Total lease payments (1) | 45,053 | |||||||
| Less: Imputed interest | (8,972) | |||||||
| Present value of lease liabilities | $ | 36,081 | ||||||
(1) Amount excludes short-term leases.
77
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
22. 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 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, 2019.
The following tables set forth selected and unaudited condensed consolidated statement of earnings results by segment and for our other activities:
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Gross premiums written | $ | 3,535 | $ | 49,083 | $ | 58,566 | $ | 293 | $ | 111,477 | |||||||||||||||||||
| Net premiums written | $ | 3,424 | $ | 46,503 | $ | 43,338 | $ | 294 | $ | 93,559 | |||||||||||||||||||
| Net premiums earned | $ | 17,476 | $ | 42,426 | $ | 96,116 | $ | 5,706 | $ | 161,724 | |||||||||||||||||||
| Net incurred losses and LAE | (34,258) | (21,995) | (48,390) | (5,043) | (109,686) | ||||||||||||||||||||||||
| Acquisition costs | (2,730) | (14,242) | (20,608) | (128) | (37,708) | ||||||||||||||||||||||||
| Operating expenses | (50,345) | (3,008) | (20,440) | — | (73,793) | ||||||||||||||||||||||||
| Underwriting income (loss) | (69,857) | 3,181 | 6,678 | 535 | (59,463) | ||||||||||||||||||||||||
| Net investment income (loss) | 66,918 | 1,778 | 6,298 | (2,864) | 72,130 | ||||||||||||||||||||||||
| Net realized and unrealized gains | 486,671 | 1,533 | 11,801 | — | 500,005 | ||||||||||||||||||||||||
| Fees and commission income | 3,637 | 7,150 | — | — | 10,787 | ||||||||||||||||||||||||
| Other income | 48,023 | 72 | 99 | 210 | 48,404 | ||||||||||||||||||||||||
| Corporate expenses | (22,494) | (6,084) | (3,137) | (10,320) | (42,035) | ||||||||||||||||||||||||
| Interest income (expense) | (16,705) | — | (510) | 2,212 | (15,003) | ||||||||||||||||||||||||
| Net foreign exchange gains (losses) | (9,663) | 2,275 | (761) | (7) | (8,156) | ||||||||||||||||||||||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | 486,530 | 9,905 | 20,468 | (10,234) | 506,669 | ||||||||||||||||||||||||
| Income tax expense | (9,271) | (2,520) | (733) | (1,391) | (13,915) | ||||||||||||||||||||||||
| Earnings from equity method investments | 149,065 | — | — | — | 149,065 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS | 626,324 | 7,385 | 19,735 | (11,625) | 641,819 | ||||||||||||||||||||||||
| NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | — | — | 4,031 | — | 4,031 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) | 626,324 | 7,385 | 23,766 | (11,625) | 645,850 | ||||||||||||||||||||||||
| Net earnings attributable to noncontrolling interest | (2,519) | (2,996) | (16,397) | — | (21,912) | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR | 623,805 | 4,389 | 7,369 | (11,625) | 623,938 | ||||||||||||||||||||||||
| Dividends on preferred shares | — | — | — | (8,925) | (8,925) | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 623,805 | $ | 4,389 | $ | 7,369 | $ | (20,550) | $ | 615,013 | |||||||||||||||||||
| Underwriting ratios: | |||||||||||||||||||||||||||||
Loss ratio | 51.8 | % | 50.3 | % | |||||||||||||||||||||||||
| Acquisition expense ratio | 33.6 | % | 21.4 | % | |||||||||||||||||||||||||
| Operating expense ratio | 7.1 | % | 21.4 | % | |||||||||||||||||||||||||
| Combined ratio | 92.5 | % | 93.1 | % | |||||||||||||||||||||||||
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Gross premiums written | $ | 301 | $ | 48,746 | $ | 110,586 | $ | (2,498) | $ | 157,135 | |||||||||||||||||||
| Net premiums written | $ | (3,808) | $ | 43,785 | $ | 76,020 | $ | (2,503) | $ | 113,494 | |||||||||||||||||||
| Net premiums earned | $ | 16,837 | $ | 42,913 | $ | 111,749 | $ | 4,303 | $ | 175,802 | |||||||||||||||||||
| Net incurred losses and LAE | (30,583) | (28,400) | (100,628) | (3,647) | (163,258) | ||||||||||||||||||||||||
| Acquisition costs | 4,634 | (14,466) | (23,301) | (177) | (33,310) | ||||||||||||||||||||||||
| Operating expenses | (51,395) | (3,742) | (14,525) | — | (69,662) | ||||||||||||||||||||||||
| Underwriting income (loss) | (60,507) | (3,695) | (26,705) | 479 | (90,428) | ||||||||||||||||||||||||
| Net investment income (loss) | 73,752 | 1,736 | 8,161 | (2,147) | 81,502 | ||||||||||||||||||||||||
| Net realized and unrealized gains | 138,174 | 582 | 6,034 | 270 | 145,060 | ||||||||||||||||||||||||
| Fees and commission income (expense) | 4,196 | 2,391 | (150) | — | 6,437 | ||||||||||||||||||||||||
| Other income (expense) | (285) | 35 | 72 | 1,000 | 822 | ||||||||||||||||||||||||
| Corporate expenses | (11,983) | (2,896) | — | (12,824) | (27,703) | ||||||||||||||||||||||||
| Interest income (expense) | (17,964) | — | — | 3,014 | (14,950) | ||||||||||||||||||||||||
| Net foreign exchange gains (losses) | 13,056 | (924) | 1,509 | 24 | 13,665 | ||||||||||||||||||||||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | 138,439 | (2,771) | (11,079) | (10,184) | 114,405 | ||||||||||||||||||||||||
| Income tax benefit (expense) | (13,382) | (222) | 139 | — | (13,465) | ||||||||||||||||||||||||
| Earnings from equity method investments | 17,703 | — | — | — | 17,703 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS | 142,760 | (2,993) | (10,940) | (10,184) | 118,643 | ||||||||||||||||||||||||
| NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | — | — | 7,916 | — | 7,916 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) | 142,760 | (2,993) | (3,024) | (10,184) | 126,559 | ||||||||||||||||||||||||
| Net (earnings) loss attributable to noncontrolling interest | (1,439) | 1,228 | 320 | — | 109 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR | 141,321 | (1,765) | (2,704) | (10,184) | 126,668 | ||||||||||||||||||||||||
| Dividend on preferred shares | — | — | — | (8,925) | (8,925) | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 141,321 | $ | (1,765) | $ | (2,704) | $ | (19,109) | $ | 117,743 | |||||||||||||||||||
| Underwriting ratios: | |||||||||||||||||||||||||||||
| Loss ratio | 66.2 | % | 90.0 | % | |||||||||||||||||||||||||
| Acquisition expense ratio | 33.7 | % | 20.9 | % | |||||||||||||||||||||||||
| Operating expense ratio | 8.7 | % | 13.0 | % | |||||||||||||||||||||||||
| Combined ratio | 108.6 | % | 123.9 | % | |||||||||||||||||||||||||
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Non-Life Run-Off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Gross premiums written | $ | 1,707 | $ | 155,551 | $ | 300,135 | $ | 3,237 | $ | 460,630 | |||||||||||||||||||
| Net premiums written | $ | 2,397 | $ | 136,093 | $ | 227,066 | $ | 3,238 | $ | 368,794 | |||||||||||||||||||
| Net premiums earned | $ | 44,023 | $ | 128,183 | $ | 276,566 | $ | 15,174 | $ | 463,946 | |||||||||||||||||||
| Net incurred losses and LAE | (63,698) | (66,003) | (197,259) | (12,718) | (339,678) | ||||||||||||||||||||||||
| Acquisition costs | (13,226) | (43,235) | (76,026) | (331) | (132,818) | ||||||||||||||||||||||||
| Operating expenses | (147,117) | (8,757) | (66,385) | — | (222,259) | ||||||||||||||||||||||||
| Underwriting income (loss) | (180,018) | 10,188 | (63,104) | 2,125 | (230,809) | ||||||||||||||||||||||||
| Net investment income (loss) | 223,425 | 4,382 | 21,625 | (8,145) | 241,287 | ||||||||||||||||||||||||
| Net realized and unrealized gains (losses) | 838,483 | 3,392 | (3,323) | — | 838,552 | ||||||||||||||||||||||||
| Fees and commission income | 12,588 | 15,737 | — | — | 28,325 | ||||||||||||||||||||||||
| Other income (expense) | 68,087 | 105 | 216 | (647) | 67,761 | ||||||||||||||||||||||||
| Corporate expenses | (48,014) | (14,494) | (39,153) | (35,166) | (136,827) | ||||||||||||||||||||||||
| Interest income (expense) | (48,785) | — | (1,611) | 7,960 | (42,436) | ||||||||||||||||||||||||
| Net foreign exchange gains (losses) | 385 | 1,115 | (5,509) | 2,634 | (1,375) | ||||||||||||||||||||||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | 866,151 | 20,425 | (90,859) | (31,239) | 764,478 | ||||||||||||||||||||||||
| Income tax expense | (18,276) | (3,303) | (2,325) | (1,391) | (25,295) | ||||||||||||||||||||||||
| Earnings from equity method investments | 152,725 | — | — | — | 152,725 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS | 1,000,600 | 17,122 | (93,184) | (32,630) | 891,908 | ||||||||||||||||||||||||
| NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | — | — | 810 | — | 810 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) | 1,000,600 | 17,122 | (92,374) | (32,630) | 892,718 | ||||||||||||||||||||||||
| Net (earnings) loss attributable to noncontrolling interest | 504 | (7,024) | 37,322 | — | 30,802 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR | 1,001,104 | 10,098 | (55,052) | (32,630) | 923,520 | ||||||||||||||||||||||||
| Dividends on preferred shares | — | — | — | (26,775) | (26,775) | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 1,001,104 | $ | 10,098 | $ | (55,052) | $ | (59,405) | $ | 896,745 | |||||||||||||||||||
| Underwriting ratios: | |||||||||||||||||||||||||||||
| Loss ratio | 51.5 | % | 71.3 | % | |||||||||||||||||||||||||
| Acquisition expense ratio | 33.7 | % | 27.5 | % | |||||||||||||||||||||||||
| Operating expense ratio | 6.9 | % | 24.0 | % | |||||||||||||||||||||||||
| Combined ratio | 92.1 | % | 122.8 | % | |||||||||||||||||||||||||
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ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Non-Life Run-Off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Gross premiums written | $ | (24,785) | $ | 146,519 | $ | 363,352 | $ | (1,174) | $ | 483,912 | |||||||||||||||||||
| Net premiums written | $ | (26,395) | $ | 127,246 | $ | 291,083 | $ | (1,197) | $ | 390,737 | |||||||||||||||||||
| Net premiums earned | $ | 141,981 | $ | 119,865 | $ | 339,993 | $ | 16,872 | $ | 618,711 | |||||||||||||||||||
| Net incurred losses and LAE | (135,517) | (58,662) | (358,864) | (13,068) | (566,111) | ||||||||||||||||||||||||
| Acquisition costs | (40,033) | (41,023) | (80,582) | (554) | (162,192) | ||||||||||||||||||||||||
| Operating expenses | (139,595) | (9,968) | (53,217) | — | (202,780) | ||||||||||||||||||||||||
| Underwriting income (loss) | (173,164) | 10,212 | (152,670) | 3,250 | (312,372) | ||||||||||||||||||||||||
| Net investment income (loss) | 206,337 | 5,500 | 25,865 | (6,278) | 231,424 | ||||||||||||||||||||||||
| Net realized and unrealized gains | 815,902 | 5,464 | 31,274 | 5,849 | 858,489 | ||||||||||||||||||||||||
| Fees and commission income (expense) | 13,673 | 5,773 | (515) | — | 18,931 | ||||||||||||||||||||||||
| Other income (expense) | 15,136 | 106 | 445 | (319) | 15,368 | ||||||||||||||||||||||||
| Corporate expenses | (47,287) | (10,186) | — | (36,051) | (93,524) | ||||||||||||||||||||||||
| Interest income (expense) | (45,699) | — | (475) | 7,152 | (39,022) | ||||||||||||||||||||||||
| Net foreign exchange gains (losses) | 20,426 | (1) | (326) | (2) | 20,097 | ||||||||||||||||||||||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | 805,324 | 16,868 | (96,402) | (26,399) | 699,391 | ||||||||||||||||||||||||
| Income tax benefit (expense) | (23,501) | (1,930) | 251 | (85) | (25,265) | ||||||||||||||||||||||||
| Earnings (loss) from equity method investments | 44,406 | — | (218) | — | 44,188 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS | 826,229 | 14,938 | (96,369) | (26,484) | 718,314 | ||||||||||||||||||||||||
| NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | — | — | 12,041 | — | 12,041 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) | 826,229 | 14,938 | (84,328) | (26,484) | 730,355 | ||||||||||||||||||||||||
| Net (earnings) loss attributable to noncontrolling interest | (6,351) | (6,127) | 17,448 | — | 4,970 | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR | 819,878 | 8,811 | (66,880) | (26,484) | 735,325 | ||||||||||||||||||||||||
| Dividends on preferred shares | — | — | — | (26,989) | (26,989) | ||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 819,878 | $ | 8,811 | $ | (66,880) | $ | (53,473) | $ | 708,336 | |||||||||||||||||||
| Underwriting ratios: | |||||||||||||||||||||||||||||
| Loss ratio | 48.9 | % | 105.6 | % | |||||||||||||||||||||||||
| Acquisition expense ratio | 34.2 | % | 23.7 | % | |||||||||||||||||||||||||
| Operating expense ratio | 8.4 | % | 15.6 | % | |||||||||||||||||||||||||
| Combined ratio | 91.5 | % | 144.9 | % | |||||||||||||||||||||||||
81
ENSTAR GROUP LIMITED
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets by Segment
Invested assets are managed on a 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 and for our other activities were as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Assets by Segment: | |||||||||||
Non-life Run-off (1) | $ | 17,961,439 | $ | 15,775,407 | |||||||
Atrium (2) | 638,529 | 580,405 | |||||||||
StarStone (3) | 4,021,240 | 3,985,138 | |||||||||
| Other | (850,620) | (514,851) | |||||||||
| Total assets | $ | 21,770,588 | $ | 19,826,099 | |||||||
(1) The total assets within the Non-life Run-off segment include assets of $12.4 million related to Arden's operations that have been included within Northshore's held-for-sale assets in Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations."
(2) The total assets within the Atrium segment are all included within Northshore's held-for-sale assets in Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations."
(3) The total assets within the StarStone segment include assets of $1.5 billion related to StarStone U.S. which are disclosed as held-for-sale assets in Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations."
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition as of September 30, 2020 and our results of operations for the three and nine months ended September 30, 2020 and 2019 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, 2019. Some of the information contained in this discussion and analysis or included elsewhere in this quarterly report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" included in this Quarterly Report on Form 10-Q and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.
Table of Contents
| Section | Page | |||||||
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 or announced over 100 acquisitions or portfolio transfers. The substantial majority of our acquisitions have been in the Non-life Run-off business, which generally includes property and casualty, workers’ compensation, asbestos and environmental, construction defect, marine, aviation and transit, and other closed business.
We manage our investment portfolio with the goal of achieving superior risk-adjusted returns, while growing profitability and generating long-term growth in shareholder value.
While our core focus remains acquiring and managing Non-life Run-off business, we own 59.0% interests in the Atrium and StarStone groups of companies, with Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P. (collectively, the "Trident V Funds") owning 39.3% interests, and Dowling Capital Partners I, L.P. and Capital City Partners LLC (collectively, the "Dowling Funds") owning 1.7% interests.
On August 13, 2020, we announced an exchange transaction with the Trident V Funds. As part of the exchange, we entered into a recapitalization agreement with the Trident V Funds and the Dowling Funds pursuant to which, we agreed to exchange a portion of our indirect interest in Northshore Holdings Limited ("Northshore"), the holding company that owns Atrium Underwriting Group Limited and its subsidiaries (collectively, "Atrium") and Arden Reinsurance Company Ltd. ("Arden"), for all of the Trident V Fund's indirect interest in StarStone US Holdings, Inc. and its subsidiaries ("StarStone U.S."). Upon completion of the exchange transaction, we expect to indirectly own
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approximately 11.0% of Northshore, which will continue to own Atrium and Arden, and our investment will be accounted for as a privately held equity investment and carried at fair value.
On June 10, 2020, we announced an agreement to sell StarStone U.S. to a newly formed company, Core Specialty Insurance Holdings, Inc. ("Core Specialty"), which we expect will close during the fourth quarter of 2020, pending regulatory approvals. We will retain a minority interest of approximately 26.1% in Core Specialty following completion of the exchange transaction with the Trident V Funds. In connection with the sale, a new management team and Board will be appointed for StarStone U.S. and the net loss reserves of StarStone U.S. will be reinsured to an Enstar Non-life Run-off entity upon completion of the sale. On June 10, 2020, we also announced that we are placing the StarStone non-U.S. operations ("StarStone International") into an orderly run-off (the "StarStone International Run-Off").
For further information on these transactions, refer to Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q and the "Atrium Segment" and "StarStone Segment" sections below.
Our business strategies are discussed in "Item 1. Business - Company Overview", "- Business Strategy", "-Strategic Growth" and "- Recent Acquisitions and Significant New Business" in our Annual Report on Form 10-K for the year ended December 31, 2019.
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Key Performance Indicator
Our primary corporate objective is growing our book value per share, and we believe that long-term growth in fully diluted book value per share is the most appropriate measure of our financial performance. We create growth in our book value through the execution of the strategies discussed in "Item 1. Business - Business Strategy" in our Annual Report on Form 10-K for the year ended December 31, 2019.
During the nine months ended September 30, 2020, our fully diluted book value per ordinary share increased by 22.4% to $242.36. The increase was primarily due to the net earnings for the nine months ended September 30, 2020, which was primarily the result of net unrealized investment gains, partially offset by COVID-19 related losses and exit costs associated with the StarStone International Run-Off, as discussed more fully below.
The table below summarizes the calculation of our fully diluted book value per ordinary share:
| September 30, 2020 | December 31, 2019 | Change | |||||||||||||||
| (expressed in thousands of U.S. dollars, except share and per share data) | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Total Enstar shareholder's equity | $ | 5,820,885 | $ | 4,842,183 | $ | 978,702 | |||||||||||
| Less: Series D and E preferred shares | 510,000 | 510,000 | — | ||||||||||||||
| Total Enstar ordinary shareholders' equity (A) | 5,310,885 | 4,332,183 | 978,702 | ||||||||||||||
Proceeds from assumed conversion of warrants(1) | 20,229 | 20,229 | — | ||||||||||||||
| Numerator for fully diluted book value per ordinary share calculations (B) | $ | 5,331,114 | $ | 4,352,412 | $ | 978,702 | |||||||||||
| Denominator: | |||||||||||||||||
Ordinary shares outstanding (C) (2) | 21,503,814 | 21,511,505 | (7,691) | ||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||
Share-based compensation plans (3) | 317,073 | 302,565 | 14,508 | ||||||||||||||
Warrants(1) | 175,901 | 175,901 | — | ||||||||||||||
| Fully diluted ordinary shares outstanding (D) | 21,996,788 | 21,989,971 | 6,817 | ||||||||||||||
| Book value per ordinary share: | |||||||||||||||||
| Basic book value per ordinary share = (A) / (C) | $ | 246.97 | $ | 201.39 | $ | 45.58 | |||||||||||
| Fully diluted book value per ordinary share = (B) / (D) | $ | 242.36 | $ | 197.93 | $ | 44.43 | |||||||||||
(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.
(2) Ordinary shares outstanding includes voting and non-voting shares but excludes ordinary shares held in the Enstar Group Limited Employee Benefit Trust (the "EB Trust") in respect of awards made under our Joint Share Ownership Plan, a sub-plan to our Amended and Restated 2016 Equity Incentive Plan (the "JSOP").
(3) Share-based dilutive securities include restricted shares, restricted share units, and performance share units ("PSUs"). The amounts for PSUs and ordinary shares held in the EB trust in respect of the JSOP are adjusted at the end of each period end to reflect the latest estimated performance multipliers for the respective awards. The JSOP shares did not have a dilutive effect as at September 30, 2020.
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Non-GAAP Financial Measure
In addition to presenting net earnings (loss) attributable to Enstar ordinary shareholders and diluted earnings (loss) per ordinary share determined in accordance with U.S. GAAP, we believe that presenting non-GAAP operating income (loss) attributable to Enstar ordinary shareholders and non-GAAP diluted operating income (loss) per ordinary share provides investors with valuable measures of our performance.
Non-GAAP operating income (loss) attributable to Enstar 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 ordinary shareholders, the most directly comparable GAAP financial measure, as illustrated in the table below:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (expressed in thousands of U.S. dollars, except share and per share data) | |||||||||||||||||||||||
| Net earnings attributable to Enstar ordinary shareholders | $ | 615,013 | $ | 117,743 | $ | 896,745 | $ | 708,336 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Net realized and unrealized (gains) on fixed maturity investments and funds held - directly managed (1) | (67,294) | (135,005) | (207,097) | (558,755) | |||||||||||||||||||
| Change in fair value of insurance contracts for which we have elected the fair value option | 21,042 | 41,374 | 96,848 | 135,377 | |||||||||||||||||||
| Net (earnings) from discontinued operations | (4,031) | (7,916) | (810) | (12,041) | |||||||||||||||||||
Tax effects of adjustments (2) | 5,771 | 12,042 | 19,070 | 50,841 | |||||||||||||||||||
Adjustments attributable to noncontrolling interest (3) | 3,881 | 4,500 | (536) | 17,397 | |||||||||||||||||||
Non-GAAP operating income attributable to Enstar ordinary shareholders (4) | $ | 574,382 | $ | 32,738 | $ | 804,220 | $ | 341,155 | |||||||||||||||
| Diluted net earnings per ordinary share | $ | 28.24 | $ | 5.42 | $ | 41.14 | $ | 32.58 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Net realized and unrealized (gains) on fixed maturity investments and funds held - directly managed (1) | (3.09) | (6.21) | (9.50) | (25.71) | |||||||||||||||||||
| Change in fair value of insurance contracts for which we have elected the fair value option | 0.97 | 1.90 | 4.44 | 6.23 | |||||||||||||||||||
| Net (earnings) from discontinued operations | (0.19) | (0.36) | (0.04) | (0.55) | |||||||||||||||||||
Tax effects of adjustments (2) | 0.26 | 0.55 | 0.87 | 2.34 | |||||||||||||||||||
Adjustments attributable to noncontrolling interest (3) | 0.18 | 0.21 | (0.02) | 0.80 | |||||||||||||||||||
Diluted non-GAAP operating income per ordinary share (4) | $ | 26.37 | $ | 1.51 | $ | 36.89 | $ | 15.69 | |||||||||||||||
| Weighted average ordinary shares outstanding: | |||||||||||||||||||||||
| Basic | 21,578,106 | 21,488,216 | 21,564,447 | 21,476,586 | |||||||||||||||||||
| Diluted | 21,778,729 | 21,720,497 | 21,799,627 | 21,741,499 | |||||||||||||||||||
(1) Represents the net realized and unrealized gains and losses related to fixed maturity securities included in net earnings (loss). Our fixed maturity securities are held directly on our balance sheet and also within the "Funds held - directly managed" balance. Refer to Note 5 - "Investments" 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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Basis of Non-GAAP Operating Income (Loss) Financial Measure
Our non-GAAP measure shown above, as defined in Item 10(e) of Regulation S-K, enables readers of the consolidated financial statements to analyze our results in a way that is more aligned with the manner in which our management measures our underlying performance. We believe that presenting this non-GAAP financial measure, which may be defined and calculated differently by other companies, improves the understanding of our consolidated results of operations. This measure should not be viewed as a substitute for those calculated in accordance with U.S. GAAP.
Non-GAAP operating income (loss) is net earnings attributable to Enstar ordinary shareholders excluding: (i) net realized and unrealized (gains) losses on fixed maturity investments and funds held - directly managed included in net earnings (loss); (ii) change in fair value of insurance contracts for which we have elected the fair value option; (iii) gain (loss) on sale of subsidiaries, if any; (iv) net earnings (loss) from discontinued operations, if any; (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. When applicable, we eliminate the impact of gain (loss) on sale of subsidiaries and net earnings (loss) on discontinued operations because these are not reflective of the performance of our core operations. Diluted Non-GAAP operating income (loss) per ordinary share is diluted net earnings per ordinary share excluding the per diluted share amounts of each of the adjustments used to calculate non-GAAP operating income.
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 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.
The StarStone segment also includes corporate expenses that are not directly attributable to the underwriting results in the segment and are not included in the insurance ratios. The corporate expenses include non-recurring expenses, reorganization expenses and holding company expenses.
Current Outlook
The evolving COVID-19 pandemic has caused significant disruption in global financial markets and economies worldwide. Although the overall financial and operational impact to us has been minimal to-date, with virtually all of our employees working remotely, the scope, duration and magnitude of the direct and indirect effects of the COVID-19 pandemic are changing rapidly and are difficult to anticipate. As with others in our industry, we are subject to economic factors such as interest rates, inflationary pressures, market volatility, foreign exchange rates, underwriting events, regulation, tax policy changes, political risks and other market risks that can impact our strategy and operations. For additional information on the risks posed by the COVID-19 pandemic, refer to "Risk Factors" included in this Quarterly Report on Form 10-Q.
The value of our investment portfolio has been impacted by the ongoing uncertainty and volatility in financial markets caused by the COVID-19 pandemic. For our fixed income portfolio, the COVID-19 pandemic has resulted in interest rates dropping to historically low levels which, in conjunction with credit spreads widening in the first quarter
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of 2020 and recovering in both the second and third quarters of 2020, has generated net unrealized gains in our fixed income portfolio for the nine month period. As of September 30, 2020, our fixed income portfolio remained well-positioned with an A+ average credit rating. The COVID-19 pandemic has increased the risk of defaults and downgrades across many industries, and we continue to monitor credit risk during this time of volatility. We expect interest rates and credit spreads will remain volatile in the near-term.
Our other investments, including equities, hedge funds, investments accounted for under equity method accounting and other non-fixed income investments, carry higher expected returns, have a longer investment time horizon, and provide diversification from our fixed income portfolio. Given their higher risk and return profile, we expect their returns to be more volatile over the short term relative to our fixed income investments. Heightened volatility in equity markets was introduced during the COVID-19 pandemic, though equity prices have generally recovered from the sharp declines experienced in the first quarter of 2020. This recovery has resulted in unrealized gains in our equity and other investments year-to-date. We anticipate continued volatility in the global investment markets as a result of the economic conditions caused by the COVID-19 pandemic. Our results for the three and nine months ended September 30, 2020 included the impact of unrealized investment gains of $446.5 million and $723.7 million, respectively. Investments that are accounted for under equity method typically report their financial statement information to the Company three months following the end of the reporting period. Accordingly, the potential effects of volatility across the global financial markets, including the impact of COVID-19 during 2020, on our equity method investments is generally reflected in our financial statements on a quarter lag basis. We continue to remain focused on actively managing our well diversified investment strategy and generating strong investment returns across our investment portfolio.
During the three and nine months ended September 30, 2020, our Non-life Run-off segment had no underwriting losses related to the COVID-19 pandemic. However, our Atrium and StarStone segments have incurred COVID-19 related net underwriting losses as follows:
COVID-19 net incurred losses and LAE for the Atrium segment primarily included losses in the accident and health lines of business, whereas losses in the StarStone segment included losses primarily in the casualty and property lines of business. We expect gross premiums written in certain business lines, primarily commercial lines, may be impacted due to the severely reduced business activity following government restrictions that have temporarily prevented many businesses from operating in their usual manner, which may be partially offset by improving pricing conditions and new business opportunities. The amounts of Non-life Run-off, Atrium and StarStone losses referenced herein represent our estimate of underwriting losses related to the COVID-19 pandemic incurred through September 30, 2020. Given the uncertainties associated with the COVID-19 pandemic and its impact, and the limited information upon which our current estimates have been made, our preliminary reserves and the estimated liability for losses and LAE arising from the COVID-19 pandemic may materially change.
We expect to see continued opportunities in the NLRO market with companies looking for alternative and optimized capital solutions and greater certainty around incurred losses on books of business that are in run-off. Our strategy is to administer the run-off of claims profitably through closing claims in an efficient and effective manner. However, there may be increased competition in the NLRO market and increased volatility in run-off portfolios that have come to market. We believe we have a competitive advantage in the run-off market and will continue to apply our disciplined approach to underwriting and pricing transactions.
Strategic Development with Atrium
On August 13, 2020, we announced an exchange transaction with the Trident V Funds. As part of the exchange transaction, we entered into a recapitalization agreement with the Trident V Funds and the Dowling Funds pursuant to which we agreed to exchange a portion of our indirect interest in Northshore, the holding company that owns Atrium and Arden, for all of the Trident V Fund's indirect interest in StarStone U.S. Upon completion of the exchange transaction, our indirect investment in Northshore, which will continue to own Atrium and Arden, will be accounted for as a privately held equity investment and carried at fair value.
For additional information about this strategic development, refer to Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q and the "Atrium Segment" section below.
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Strategic Developments with StarStone
Recapitalization of StarStone U.S.
On June 10, 2020, we announced an agreement to sell StarStone U.S. to Core Specialty, a newly formed company in which we will retain a minority interest. In connection with the sale, a new management team and Board will be appointed for StarStone U.S. and the net loss reserves of StarStone U.S. will be reinsured to one of our Non-life Run-off subsidiaries.
StarStone U.S. is a specialty property and casualty insurance group principally focused on the excess and surplus lines ("E&S") market in the U.S., marketing these insurance products in all 50 states, primarily through a network of independent insurance brokers. StarStone U.S. is organized into four separately managed business units: excess casualty, management professional liability, healthcare liability and workers’ compensation. StarStone U.S. believes that significant growth opportunities exist in the E&S segment of the P&C market due to dislocation in the overall property and casualty market.
Run-off of StarStone International (non-U.S.)
On June 10, 2020, we also announced that we are placing StarStone International into an orderly run-off. The liabilities associated with the StarStone International Run-Off vary in duration, and the run-off is expected to occur over a number of years. Steps to reduce the size of StarStone International's operations have begun and will involve several phases to occur over time. As a result, we cannot anticipate with certainty the expected completion date of the StarStone International Run-Off. We continue to evaluate additional strategic options for StarStone International's operations and business, which could have the effect of mitigating costs associated with placing the business into run-off. The remaining StarStone International operations will continue to serve the needs of policyholders and ensure that the companies continue to meet all regulatory requirements.
Recent developments relating to StarStone International include:
•On October 14, 2020, we completed the sale of Vander Haeghen & Co. SA ("VdH"), a Belgium-based insurance agency majority owned by two StarStone International entities, for a purchase price of €3.8 million ($4.5 million). We expect to recognize a gain on the sale of $3.6 million in the fourth quarter of 2020.
•On October 2, 2020, StarStone International sold the renewal rights for its financial lines portfolio for consideration of approximately $0.5 million.
•Atrium's Syndicate 609, for which Atrium provides 25% of the underwriting capacity and capital, expects to write new business of approximately $21.3 million in 2021 that was previously underwritten by StarStone International, primarily in the marine and energy liability, upstream energy and terrorism classes of business.
For additional information about these strategic developments, refer to Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q and the "StarStone Segment" section below.
Non-life Run-off Business Opportunities
On October 15, 2020, we announced that we had completed an insurance business transfer (“IBT”) in the U.S., having received judicial approval from the Oklahoma County District Court. The transaction occurred between two of our subsidiaries and, although common in many parts of the world, it was the first of its kind to occur in the U.S. The IBT mechanism provides another option as to how we might structure U.S. transactions in the future.
During 2020, our acquisition activity in the Non-life Run-off segment proceeded in the ordinary course, and we completed transactions with Hannover Re, Munich Re, AXA Group, Aspen and Lyft. Collectively, these transactions represent approximately $1.7 billion of assets and liabilities. Refer to Note 3 - "Significant New Business" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q for further details on these transactions.
Strategic Investment in Watford
As of November 2, 2020, we held approximately 9.1% of the common shares of Watford Holdings Ltd. (“Watford”). Following a series of communications with the board of directors of Watford relating to its strategic options, including non-binding indications of interest to acquire the company, we entered into a Voting and Support Agreement with Watford and Arch Capital Group Ltd. ("Arch"), pursuant to which we have agreed, among other things, to support the recently announced acquisition of Watford by Arch for $35.00 per common share through a merger transaction. Upon completion of the merger transaction, which is subject to customary closing conditions including regulatory approval, we expect to record a net gain on our investment in Watford of approximately $18.6 million.
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Consolidated Results of Operations - For the Three and Nine Months Ended September 30, 2020 and 2019
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, 2019, and within this Quarterly Report on Form 10-Q.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| INCOME | |||||||||||||||||||||||||||||||||||
| Net premiums earned | $ | 161,724 | $ | 175,802 | $ | (14,078) | $ | 463,946 | $ | 618,711 | $ | (154,765) | |||||||||||||||||||||||
| Fees and commission income | 10,787 | 6,437 | 4,350 | 28,325 | 18,931 | 9,394 | |||||||||||||||||||||||||||||
| Net investment income | 72,130 | 81,502 | (9,372) | 241,287 | 231,424 | 9,863 | |||||||||||||||||||||||||||||
Net realized and unrealized gains (1) | 500,005 | 145,060 | 354,945 | 838,552 | 858,489 | (19,937) | |||||||||||||||||||||||||||||
| Other income | 48,404 | 822 | 47,582 | 67,761 | 15,368 | 52,393 | |||||||||||||||||||||||||||||
| 793,050 | 409,623 | 383,427 | 1,639,871 | 1,742,923 | (103,052) | ||||||||||||||||||||||||||||||
| EXPENSES | |||||||||||||||||||||||||||||||||||
| Net incurred losses and LAE | 109,686 | 163,258 | (53,572) | 339,678 | 566,111 | (226,433) | |||||||||||||||||||||||||||||
| Acquisition costs | 37,708 | 33,310 | 4,398 | 132,818 | 162,192 | (29,374) | |||||||||||||||||||||||||||||
| General and administrative expenses | 115,828 | 97,365 | 18,463 | 359,086 | 296,304 | 62,782 | |||||||||||||||||||||||||||||
| Interest expense | 15,003 | 14,950 | 53 | 42,436 | 39,022 | 3,414 | |||||||||||||||||||||||||||||
| Net foreign exchange (gains) losses | 8,156 | (13,665) | 21,821 | 1,375 | (20,097) | 21,472 | |||||||||||||||||||||||||||||
| 286,381 | 295,218 | (8,837) | 875,393 | 1,043,532 | (168,139) | ||||||||||||||||||||||||||||||
| EARNINGS BEFORE INCOME TAXES | 506,669 | 114,405 | 392,264 | 764,478 | 699,391 | 65,087 | |||||||||||||||||||||||||||||
| Income tax expense | (13,915) | (13,465) | (450) | (25,295) | (25,265) | (30) | |||||||||||||||||||||||||||||
| Earnings from equity method investments | 149,065 | 17,703 | 131,362 | 152,725 | 44,188 | 108,537 | |||||||||||||||||||||||||||||
| NET EARNINGS FROM CONTINUING OPERATIONS | 641,819 | 118,643 | 523,176 | 891,908 | 718,314 | 173,594 | |||||||||||||||||||||||||||||
| NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | 4,031 | 7,916 | (3,885) | 810 | 12,041 | (11,231) | |||||||||||||||||||||||||||||
| NET EARNINGS | 645,850 | 126,559 | 519,291 | 892,718 | 730,355 | 162,363 | |||||||||||||||||||||||||||||
| Net loss (earnings) attributable to noncontrolling interest | (21,912) | 109 | (22,021) | 30,802 | 4,970 | 25,832 | |||||||||||||||||||||||||||||
| NET EARNINGS ATTRIBUTABLE TO ENSTAR | 623,938 | 126,668 | 497,270 | 923,520 | 735,325 | 188,195 | |||||||||||||||||||||||||||||
| Dividends on preferred shares | (8,925) | (8,925) | — | (26,775) | (26,989) | 214 | |||||||||||||||||||||||||||||
| NET EARNINGS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 615,013 | $ | 117,743 | $ | 497,270 | $ | 896,745 | $ | 708,336 | $ | 188,409 | |||||||||||||||||||||||
(1) This includes amounts relating to both fixed income securities and other investments. We have historically utilized trading accounting for fixed income securities, where unrealized amounts are reflected in earnings. However, from October 1, 2019 we have elected to use AFS accounting and, as trading fixed income securities mature, the proceeds are reinvested into AFS securities for the Non-life Run-off and StarStone segments. For a breakdown between realized and unrealized gains and losses, refer to Note 5 - "Investments" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
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Highlights
Consolidated Results of Operations for the Three Months Ended September 30, 2020:
•Consolidated net earnings attributable to Enstar ordinary shareholders of $615.0 million and basic and diluted net earnings per ordinary share of $28.50 and $28.24, respectively.
•Non-GAAP operating income attributable to Enstar ordinary shareholders of $574.4 million and diluted non-GAAP operating income per ordinary share of $26.37. For a reconciliation of non-GAAP operating income attributable to Enstar ordinary shareholders to net earnings attributable to Enstar ordinary shareholders calculated in accordance with GAAP, and diluted non-GAAP operating income per ordinary share to diluted net earnings per ordinary share calculated in accordance with GAAP, see "Non-GAAP Financial Measure" above.
•Net earnings from our Non-life Run-off segment of $623.8 million, which included the impact of net realized and unrealized gains of $486.7 million, comprising $51.0 million of net realized gains and $435.6 million of net unrealized gains, driven primarily by increases in the valuation of our other investments due to narrowing credit spreads and favorable movements in equity markets. Also contributing to net earnings was $149.1 million of earnings from equity method investments, driven primarily by our investments in Enhanzed Re and Monument Re, and other income of $48.0 million, driven primarily by the reduction in the estimate of ultimate net defendant asbestos and environmental liabilities.
•Combined ratio of 92.5% for our Atrium segment, with net premiums earned of $42.4 million. Excluding the estimated underwriting losses related to the COVID-19 pandemic, the combined ratio for the Atrium segment was 89.0% for the three months ended September 30, 2020.
•Combined ratio of 93.1% for our StarStone segment, with net premiums earned of $96.1 million. Excluding the reduction in estimated underwriting losses related to the COVID-19 pandemic, driven by a reduction in the premium deficiency provision, the combined ratio for the StarStone segment was 94.0% for the three months ended September 30, 2020.
Consolidated Results of Operations for the Nine Months Ended September 30, 2020:
•Consolidated net earnings attributable to Enstar ordinary shareholders of $896.7 million and basic and diluted net earnings per ordinary share of $41.58 and $41.14, respectively.
•Non-GAAP operating income attributable to Enstar ordinary shareholders of $804.2 million and diluted non-GAAP operating income per ordinary share of $36.89. For a reconciliation of non-GAAP operating income attributable to Enstar ordinary shareholders to net earnings attributable to Enstar ordinary shareholders calculated in accordance with GAAP, and diluted non-GAAP operating income per ordinary share to diluted net earnings per ordinary share calculated in accordance with GAAP, see "Non-GAAP Financial Measure" above.
•Net earnings from Non-life Run-off segment of $1.0 billion, including net realized and unrealized gains of $838.5 million, comprised of $110.2 million of net realized gains and $728.3 million of net unrealized gains, driven primarily by increases in the valuation of our other investments due to declining interest rates and improving equity valuations. Also contributing to net earnings was $152.7 million of earnings from equity method investments, driven primarily by our investments in Enhanzed Re and Monument Re, and other income of $68.1 million, driven primarily by the reduction in the estimate of ultimate net defendant asbestos and environmental liabilities.
•Combined ratio of 92.1% for our Atrium segment, with net premiums earned of $128.2 million. Excluding the estimated underwriting losses related to the COVID-19 pandemic, the combined ratio for the Atrium segment was 80.9% for the nine months ended September 30, 2020.
•Combined ratio of 122.8% for our StarStone segment, with net premiums earned of $276.6 million. Excluding the estimated underwriting losses related to the COVID-19 pandemic, the combined ratio for the StarStone segment was 108.7% for the nine months ended September 30, 2020.
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Consolidated Financial Condition as of September 30, 2020:
•Total investable assets of $16.0 billion.
•Total reinsurance balances recoverable on paid and unpaid losses of $1.9 billion.
•Total assets of $21.8 billion.
•Total gross and net reserves for losses and LAE of $10.3 billion and $8.4 billion, respectively. During the nine months ended September 30, 2020, our Non-life Run-off segment assumed net reserves of $1.7 billion.
•Total capital under management of $7.7 billion, including common equity of $5.3 billion, preferred equity of $510.0 million, noncontrolling interests of $391.2 million and debt of $1.4 billion.
•Fully diluted book value per ordinary share of $242.36, an increase of 22.4% since December 31, 2019, which was primarily the result of net unrealized investment gains, partially offset by COVID-19 related losses and exit costs associated with the StarStone International Run-Off, as discussed further below.
Consolidated Overview
In addition to the exit costs associated with the StarStone International Run-Off and the impact of the COVID-19 pandemic in 2020, the comparability of our results across different periods was impacted by the acquisitions and reinsurance transactions we completed during the nine months ended September 30, 2020 with Hannover Re, Munich Re, AXA Group, Aspen and Lyft and in 2019 with Morse TEC, Zurich, Maiden Re, Amerisure and AmTrust. Refer to Note 3 - "Significant New Business" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q for further details on the 2020 transactions and "Item 1. Business - Recent Acquisitions and Significant New Business" in our Annual Report on Form 10-K for the year ended December 31, 2019 for further details on the 2019 transactions.
Consolidated Overview - For the Three Months Ended September 30, 2020 and 2019
We reported consolidated earnings attributable to Enstar ordinary shareholders of $615.0 million for the three months ended September 30, 2020, an increase of $497.3 million from net earnings of $117.7 million for the three months ended September 30, 2019. The most significant drivers of our consolidated financial performance during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 included:
•Non-life Run-off - Net earnings attributable to the Non-life Run-off segment were $623.8 million for the three months ended September 30, 2020 compared to $141.3 million for the three months ended September 30, 2019. The increase in net earnings of $482.5 million was primarily due to net realized and unrealized gains of $486.7 million on our investment portfolio in the current period compared to $138.2 million in the comparative period. Current period net realized and unrealized gains were driven primarily by an increase in the valuation of our other investments, primarily due to narrowing credit spreads and favorable movement in equity markets. The current period investment gains were partially offset by net incurred losses and LAE of $34.3 million, including $21.0 million relating to fair value accounting on certain liabilities for which we had elected the fair value option, primarily due to narrowing credit spreads on corporate bond yields in the period. Also contributing to net earnings in the current period was $149.1 million of earnings from equity method investments, driven primarily by our investments in Enhanzed Re and Monument Re, and other income of $48.0 million, which was largely driven by the reduction in the estimate of ultimate net defendant asbestos and environmental liabilities.
•Atrium - Net earnings attributable to the Atrium segment were $4.4 million for the three months ended September 30, 2020 compared to net losses of $1.8 million for the three months ended September 30, 2019. The increase in net earnings was primarily due to an increase in underwriting income and higher fees and commission income in the current period.
•StarStone - Net earnings attributable to the StarStone segment were $7.4 million for the three months ended September 30, 2020 compared to net losses of $2.7 million for the three months ended September 30, 2019. The change was primarily due to higher underwriting income in the current period.
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•Non-GAAP Operating Income - Our non-GAAP operating income attributable to Enstar ordinary shareholders, which excludes the impact of net realized and unrealized gains and losses on fixed maturity investments and other items, was $574.4 million for the three months ended September 30, 2020, an increase of $541.6 million from non-GAAP operating income attributable to Enstar ordinary shareholders of $32.7 million for the three months ended September 30, 2019. The increase was primarily attributable to net realized and unrealized gains on our other investments of $420.2 million during the three months ended September 30, 2020. Also contributing to the increase in non-GAAP operating income in the current period was $149.1 million of earnings from equity method investments and other income of $48.0 million, as discussed above. For a reconciliation of non-GAAP operating income attributable to Enstar ordinary shareholders to net earnings attributable to Enstar ordinary shareholders calculated in accordance with GAAP, see "Non-GAAP Financial Measure" above.
Consolidated Overview - For the Nine Months Ended September 30, 2020 and 2019
We reported consolidated net earnings attributable to Enstar ordinary shareholders of $896.7 million for the nine months ended September 30, 2020, an increase of $188.4 million from net earnings of $708.3 million for the nine months ended September 30, 2019. The most significant drivers of our consolidated financial performance during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 included:
•Non-life Run-off - Net earnings attributable to the Non-life Run-off segment were $1.0 billion and $819.9 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in net earnings of $181.2 million was primarily due to higher earnings from equity method investments in the current period, driven primarily by our investments in Enhanzed Re and Monument Re, and other income of $68.1 million in the current period, which was largely driven by the reduction in the estimate of ultimate net defendant asbestos and environmental liabilities. Net realized and unrealized gains were $838.5 million in the current period and were driven by increases in the valuation of our other investments and fixed maturity securities, primarily due to favorable movements in equity valuations and declining interest rates.
•Atrium - Net earnings for the nine months ended September 30, 2020 and 2019 were $10.1 million and $8.8 million, respectively. The increase was primarily due to higher fees and commission income, partially offset by higher corporate expenses and a lower investment return in the current period.
•StarStone - Net losses were $55.1 million and $66.9 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease in net losses was primarily driven by a lower combined ratio, partially offset by exit costs associated with the StarStone International Run-Off and a lower investment return in the current period.
•Non-GAAP operating income - Our Non-GAAP operating income, which excludes the impact of net realized and unrealized gains and losses on fixed maturity securities and other items, was $804.2 million for the nine months ended September 30, 2020, an increase of $463.1 million from non-GAAP operating income of $341.2 million for the nine months ended September 30, 2019. The increase was primarily attributable to net realized and unrealized gains on our other investments of $670.7 million during the nine months ended September 30, 2020. Also contributing to the increase in net earnings for the current period was $152.7 million of earnings from equity method investments and other income of $67.8 million, as discussed above. For a reconciliation of non-GAAP operating income attributable to Enstar ordinary shareholders to net earnings attributable to Enstar ordinary shareholders calculated in accordance with GAAP, see "Non-GAAP Financial Measure" above.
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Results of Operations by Segment - For the Three and Nine Months Ended September 30, 2020 and 2019
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. 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 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, 2019.
The below table provides a split by operating segment and our other activities of the net earnings (loss) attributable to Enstar ordinary shareholders:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Segment split of net earnings attributable to Enstar ordinary shareholders: | |||||||||||||||||||||||||||||||||||
| Non-life Run-off | $ | 623,805 | $ | 141,321 | $ | 482,484 | $ | 1,001,104 | $ | 819,878 | $ | 181,226 | |||||||||||||||||||||||
| Atrium | 4,389 | (1,765) | 6,154 | 10,098 | 8,811 | 1,287 | |||||||||||||||||||||||||||||
| StarStone | 7,369 | (2,704) | 10,073 | (55,052) | (66,880) | 11,828 | |||||||||||||||||||||||||||||
| Other | (20,550) | (19,109) | (1,441) | (59,405) | (53,473) | (5,932) | |||||||||||||||||||||||||||||
| Net earnings attributable to Enstar ordinary shareholders | $ | 615,013 | $ | 117,743 | $ | 497,270 | $ | 896,745 | $ | 708,336 | $ | 188,409 | |||||||||||||||||||||||
The following is a discussion of our results of operations by segment.
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Non-life Run-off Segment
The following is a discussion and analysis of the results of operations for our Non-life Run-off segment.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Gross premiums written | $ | 3,535 | $ | 301 | $ | 3,234 | $ | 1,707 | $ | (24,785) | $ | 26,492 | |||||||||||||||||||||||
| Net premiums written | $ | 3,424 | $ | (3,808) | $ | 7,232 | $ | 2,397 | $ | (26,395) | $ | 28,792 | |||||||||||||||||||||||
| Net premiums earned | $ | 17,476 | $ | 16,837 | $ | 639 | $ | 44,023 | $ | 141,981 | $ | (97,958) | |||||||||||||||||||||||
Net incurred losses and LAE (1) | (34,258) | (30,583) | (3,675) | (63,698) | (135,517) | 71,819 | |||||||||||||||||||||||||||||
| Acquisition costs | (2,730) | 4,634 | (7,364) | (13,226) | (40,033) | 26,807 | |||||||||||||||||||||||||||||
| Operating expenses | (50,345) | (51,395) | 1,050 | (147,117) | (139,595) | (7,522) | |||||||||||||||||||||||||||||
Underwriting income (loss) (1) | (69,857) | (60,507) | (9,350) | (180,018) | (173,164) | (6,854) | |||||||||||||||||||||||||||||
| Net investment income | 66,918 | 73,752 | (6,834) | 223,425 | 206,337 | 17,088 | |||||||||||||||||||||||||||||
Net realized and unrealized gains (losses) (2) | 486,671 | 138,174 | 348,497 | 838,483 | 815,902 | 22,581 | |||||||||||||||||||||||||||||
| Fees and commission income | 3,637 | 4,196 | (559) | 12,588 | 13,673 | (1,085) | |||||||||||||||||||||||||||||
| Other income (expense) | 48,023 | (285) | 48,308 | 68,087 | 15,136 | 52,951 | |||||||||||||||||||||||||||||
| Corporate expenses | (22,494) | (11,983) | (10,511) | (48,014) | (47,287) | (727) | |||||||||||||||||||||||||||||
| Interest expense | (16,705) | (17,964) | 1,259 | (48,785) | (45,699) | (3,086) | |||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | (9,663) | 13,056 | (22,719) | 385 | 20,426 | (20,041) | |||||||||||||||||||||||||||||
| EARNINGS BEFORE INCOME TAXES | 486,530 | 138,439 | 348,091 | 866,151 | 805,324 | 60,827 | |||||||||||||||||||||||||||||
| Income tax expense | (9,271) | (13,382) | 4,111 | (18,276) | (23,501) | 5,225 | |||||||||||||||||||||||||||||
| Earnings from equity method investments | 149,065 | 17,703 | 131,362 | 152,725 | 44,406 | 108,319 | |||||||||||||||||||||||||||||
| NET EARNINGS | 626,324 | 142,760 | 483,564 | 1,000,600 | 826,229 | 174,371 | |||||||||||||||||||||||||||||
| Net loss (earnings) attributable to noncontrolling interest | (2,519) | (1,439) | (1,080) | 504 | (6,351) | 6,855 | |||||||||||||||||||||||||||||
| NET EARNINGS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 623,805 | $ | 141,321 | $ | 482,484 | $ | 1,001,104 | $ | 819,878 | $ | 181,226 | |||||||||||||||||||||||
(1) Comparability between periods is impacted by the current period net incurred losses and LAE as acquired unearned premium is earned, and by changes in fair value due to the election of the fair value option on certain business. Refer to Net Incurred Losses and LAE table for further details.
(2) This includes amounts relating to both fixed income securities and other investments. We have historically utilized trading accounting for fixed income securities, where unrealized amounts are reflected in earnings. However, from October 1, 2019, we have elected to use AFS accounting and, as trading fixed income securities mature, the proceeds are reinvested into AFS securities for the Non-life Run-off segment.
Overall Results
Three Months Ended September 30: Net earnings were $623.8 million for the three months ended September 30, 2020 compared to $141.3 million for the three months ended September 30, 2019, an increase of $482.5 million. This increase was primarily due to net realized and unrealized gains of $486.7 million on our investment portfolio in the current period compared to $138.2 million in the comparative period, a change of $348.5 million. Current period net realized and unrealized gains were driven by increases in the valuation of our other investments primarily due to more favorable movement in equity markets and tightening credit spreads. Also contributing to net earnings in the current period was $149.1 million of earnings from equity method investments, driven primarily by our investments in Enhanzed Re and Monument Re, and other income of $48.0 million, which was largely driven by the reduction in the estimate of ultimate net defendant asbestos and environmental liabilities.
During the three months ended September 30, 2020, our net ultimate losses related to prior periods were relatively unchanged with an increase in estimates of net ultimate losses of $4.0 million. Unfavorable development within our motor line of business was largely offset by favorable development across workers' compensation and other lines of business. Additionally, we had favorable changes in our estimates of ultimate net defendant asbestos and environmental liabilities of $48.4 million, which is a component of other income. In the aggregate, our estimates of net ultimate losses for prior periods and our estimate of ultimate net defendant asbestos and environmental liabilities experienced favorable reductions of $44.5 million during the three months ended September 30, 2020.
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Nine Months Ended September 30: Net earnings were $1.0 billion and $819.9 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $181.2 million. The increase was primarily due to earnings from equity method investments of $152.7 million in the current period, driven primarily by our investments in Enhanzed Re and Monument Re; other income of $68.1 million in the current period, which was largely driven by the reduction in the estimate of ultimate net defendant asbestos and environmental liabilities; and a higher investment return in the current period.
During the nine months ended September 30, 2020, the change in net ultimate losses related to prior periods was favorable with a reduction in net ultimate losses of $80.5 million. The favorable development was largely attributed to strong reserve savings across workers' compensation and other lines of business, partially offset by unfavorable development within our motor line of business. Additionally, we had favorable changes in our estimates of ultimate net defendant asbestos and environmental liabilities of $75.3 million, which is a component of other income. In the aggregate, our estimates of net ultimate losses for prior periods and our estimate of ultimate net defendant asbestos and environmental liabilities experienced favorable reductions of $155.8 million during the nine months ended September 30, 2020.
An analysis of the components of the segment's net earnings is shown below. Investment results are separately discussed below in "Investments Results - Consolidated."
Net Premiums Earned:
The following table shows the gross and net premiums written and earned for the Non-life Run-off segment:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Gross premiums written | $ | 3,535 | $ | 301 | $ | 3,234 | $ | 1,707 | $ | (24,785) | $ | 26,492 | |||||||||||||||||||||||
| Ceded reinsurance premiums written | (111) | (4,109) | 3,998 | 690 | (1,610) | 2,300 | |||||||||||||||||||||||||||||
| Net premiums written | $ | 3,424 | $ | (3,808) | $ | 7,232 | $ | 2,397 | $ | (26,395) | $ | 28,792 | |||||||||||||||||||||||
| Gross premiums earned | $ | 20,426 | $ | 27,190 | $ | (6,764) | $ | 52,899 | $ | 166,707 | $ | (113,808) | |||||||||||||||||||||||
| Ceded reinsurance premiums earned | (2,950) | (10,353) | 7,403 | (8,876) | (24,726) | 15,850 | |||||||||||||||||||||||||||||
| Net premiums earned | $ | 17,476 | $ | 16,837 | $ | 639 | $ | 44,023 | $ | 141,981 | $ | (97,958) | |||||||||||||||||||||||
As business in this segment is in run-off, our general expectation is for premiums associated with legacy business to decline in future periods. However, the actual amount in any particular period will be impacted by new transactions during the period and the run-off of premiums from transactions completed in recent years. Premiums earned in this segment are generally offset by net incurred losses and LAE related to the premiums. Premiums earned may be higher than premiums written as we may assume unearned premium without writing the premium ourselves.
Three and Nine Months Ended September 30: Net premiums written in the three and nine months ended September 30, 2020 were $3.4 million and $2.4 million, respectively. Net premiums earned in the three and nine months ended September 30, 2020 of $17.5 million and $44.0 million, respectively, were primarily related to the AmTrust RITC transactions assumed in 2019. Premiums written and earned in the three and nine months ended September 30, 2019 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").
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Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Periods | Current Period | Total | Prior Periods | Current Period | Total | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Net losses paid | $ | 283,143 | $ | 739 | $ | 283,882 | $ | 274,071 | $ | 14,374 | $ | 288,445 | |||||||||||||||||||||||
Net change in case and LAE reserves (1) | (49,854) | (33) | (49,887) | (175,830) | 2,726 | (173,104) | |||||||||||||||||||||||||||||
Net change in IBNR reserves (2) | (229,312) | 7,512 | (221,800) | (155,315) | 6,794 | (148,521) | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | 3,977 | 8,218 | 12,195 | (57,074) | 23,894 | (33,180) | |||||||||||||||||||||||||||||
| Reduction in provisions for unallocated LAE | (14,605) | — | (14,605) | (12,109) | (49) | (12,158) | |||||||||||||||||||||||||||||
| Amortization of deferred charge assets | 10,316 | — | 10,316 | 17,009 | — | 17,009 | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | 5,310 | — | 5,310 | 17,538 | — | 17,538 | |||||||||||||||||||||||||||||
| Changes in fair value - fair value option | 21,042 | — | 21,042 | 41,374 | — | 41,374 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 26,040 | $ | 8,218 | $ | 34,258 | $ | 6,738 | $ | 23,845 | $ | 30,583 | |||||||||||||||||||||||
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Three Months Ended September 30: The increase in net incurred losses and LAE for the three months ended September 30, 2020 of $34.3 million included net incurred losses and LAE of $8.2 million related to current period net earned premium, primarily in respect of the run-off business acquired with the AmTrust RITC transactions. Excluding current period net incurred losses and LAE of $8.2 million, the increase in net incurred losses and LAE relating to prior periods was $26.0 million, which was primarily attributable to an increase in the fair value of liabilities of $21.0 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily due to narrowing credit spreads on corporate bond yields in the period, amortization of the deferred charge assets of $10.3 million, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $5.3 million, and an increase in estimates of net ultimate losses of $4.0 million, partially offset by a reduction in provisions for unallocated LAE of $14.6 million relating to 2020 run-off activity. Net ultimate losses relating to prior periods were relatively unchanged with an increase in estimates of net ultimate losses of $4.0 million for the three months ended September 30, 2020 and included net losses paid of $283.1 million, partially offset by a net reduction in case and IBNR reserves of $279.2 million. Unfavorable development of approximately $128.4 million within our motor line of business, was offset by favorable development across workers compensation and other lines of business. Additionally, we had favorable changes in our estimates of ultimate net defendant asbestos and environmental liabilities of $48.4 million which is a component of other income. In the aggregate, our estimates of net ultimate losses for prior periods and our estimate of ultimate net defendant asbestos and environmental liabilities experienced favorable reductions of $44.5 million during the three months ended September 30, 2020.
Net incurred losses and LAE for the three months ended September 30, 2019 of $30.6 million included net incurred losses and LAE of $23.8 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC transactions and the acquisition of Maiden Reinsurance North America, Inc. ("Maiden Re North America"). Excluding current period net incurred losses and LAE of $23.8 million, the increase in net incurred losses and LAE relating to prior periods was $6.7 million, which was attributable to an increase in the fair value of liabilities of $41.4 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily as a result of a decrease in corporate bond yields, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $17.5 million and amortization of the deferred charge assets of $17.0 million, partially offset by a reduction in estimates of net ultimate losses of $57.1 million and a reduction in provisions for unallocated LAE of $12.1 million relating to 2019 run-off activity. The reduction in estimates of net ultimate losses relating to prior periods of $57.1 million for the three months ended September 30, 2019 included a net reduction in case and IBNR reserves of $331.1 million, partially offset by net losses paid of $274.1 million.
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The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment for the nine months ended September 30, 2020 and 2019:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Periods | Current Period | Total | Prior Periods | Current Period | Total | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Net losses paid | $ | 824,473 | $ | 1,777 | $ | 826,250 | $ | 913,352 | $ | 53,265 | $ | 966,617 | |||||||||||||||||||||||
Net change in case and LAE reserves (1) | (301,382) | 809 | (300,573) | (394,780) | 24,141 | (370,639) | |||||||||||||||||||||||||||||
Net change in IBNR reserves (2) | (603,546) | 21,567 | (581,979) | (649,053) | 29,405 | (619,648) | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (80,455) | 24,153 | (56,302) | (130,481) | 106,811 | (23,670) | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | (34,509) | — | (34,509) | (38,709) | 480 | (38,229) | |||||||||||||||||||||||||||||
| Amortization of deferred charge assets | 36,008 | — | 36,008 | 28,006 | — | 28,006 | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | 21,653 | — | 21,653 | 34,033 | — | 34,033 | |||||||||||||||||||||||||||||
| Changes in fair value - fair value option | 96,848 | — | 96,848 | 135,377 | — | 135,377 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 39,545 | $ | 24,153 | $ | 63,698 | $ | 28,226 | $ | 107,291 | $ | 135,517 | |||||||||||||||||||||||
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Nine Months Ended September 30: The increase in net incurred losses and LAE for the nine months ended September 30, 2020 of $63.7 million included net incurred losses and LAE of $24.2 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC transactions. Excluding current period net incurred losses and LAE of $24.2 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $39.5 million, which was attributable to an increase in the fair value of liabilities of $96.8 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily due to declining interest rates on corporate bond yields in the period, amortization of the deferred charge assets of $36.0 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired of $21.7 million, partially offset by a reduction in estimates of net ultimate losses of $80.5 million and a reduction in provisions for unallocated LAE of $34.5 million relating to 2020 run-off activity. For the nine months ended September 30, 2020, the change in net ultimate losses relating to prior periods was favorable with a reduction of $80.5 million, which included a net change in case and IBNR reserves of $904.9 million, partially offset by net losses paid of $824.5 million. The favorable development was largely attributed to workers compensation as well as other lines of business, partially offset by unfavorable development of $122.4 million within our motor line of business. Additionally, we had favorable changes in our estimates of ultimate net defendant asbestos and environmental liabilities of $75.3 million which is a component of other income. In the aggregate, our estimates of net ultimate losses for prior periods and our estimate of ultimate net defendant asbestos and environmental liabilities experienced favorable reductions of $155.8 million during the nine months ended September 30, 2020.
The increase in net incurred losses and LAE for the nine months ended September 30, 2019 of $135.5 million included net incurred losses and LAE of $107.3 million related to current period net earned premium, primarily for the run-off business acquired with the AmTrust RITC transactions and the acquisition of Maiden Re North America. Excluding current period net incurred losses and LAE of $107.3 million, the increase in net incurred losses and LAE liabilities relating to prior periods was $28.2 million, which was attributable to an increase in the fair value of liabilities of $135.4 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option primarily as a result of a decrease in corporate bond yields, amortization of fair value adjustments over the estimated payout period relating to companies acquired of $34.0 million and amortization of the deferred charge assets of $28.0 million, partially offset by a reduction in estimates of net ultimate losses of $130.5 million and a reduction in provisions for unallocated LAE of $38.7 million relating to 2019 run-off activity. The reduction in estimates of net ultimate losses of $130.5 million for the nine months ended September 30, 2019 included a net change in case and IBNR reserves of $1,043.8 million, partially offset by net losses paid of $913.4 million.
Acquisition Costs:
Three and Nine Months Ended September 30: Acquisition costs were $2.7 million and $(4.6) million for the three months ended September 30, 2020 and 2019, respectively, and $13.2 million and $40.0 million for the nine
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months ended September 30, 2020 and 2019, respectively. The reduction in acquisition costs compared to the prior nine month period was due to a lower level of net premiums earned and lower associated acquisition costs in respect of the run-off business assumed through the AmTrust RITC transactions and the acquisition of Maiden Re North America.
Fees and Commission Income:
Three and Nine Months Ended September 30: Our management companies in the Non-life Run-off segment earned fees and commission income of $3.6 million and $4.2 million for the three months ended September 30, 2020 and 2019, respectively, and $12.6 million and $13.7 million for the nine months ended September 30, 2020 and 2019, respectively.
Other Income (Expense):
Three Months Ended September 30: For the three months ended September 30, 2020, we recorded other income of $48.0 million compared to other expense of $0.3 million for the three months ended September 30, 2019, a change of $48.3 million, primarily driven by the reduction in the estimate of ultimate net defendant asbestos and environmental liabilities in the current period.
Nine Months Ended September 30: Other income was $68.1 million for the nine months ended September 30, 2020 compared to $15.1 million for the nine months ended September 30, 2019, an increase of $53.0 million, primarily driven by the reduction in the estimate of ultimate net defendant asbestos and environmental liabilities in the current period.
General and Administrative Expenses:
General and administrative expenses consist of operating expenses and corporate expenses.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Operating expenses | $ | 50,345 | $ | 51,395 | $ | (1,050) | $ | 147,117 | $ | 139,595 | $ | 7,522 | |||||||||||||||||||||||
| Corporate expenses | 22,494 | 11,983 | 10,511 | 48,014 | 47,287 | 727 | |||||||||||||||||||||||||||||
| General and administrative expenses | $ | 72,839 | $ | 63,378 | $ | 9,461 | $ | 195,131 | $ | 186,882 | $ | 8,249 | |||||||||||||||||||||||
Three and Nine Months Ended September 30: General and administrative expenses were $72.8 million and $63.4 million for the three months ended September 30, 2020 and 2019, respectively, an increase of $9.5 million. This increase was primarily attributable to higher performance-based compensation costs as a result of higher earnings in the current period.
For the nine months ended September 30, 2020 and 2019, general and administrative expenses were $195.1 million and $186.9 million, respectively, an increase of $8.2 million. This increase was primarily attributable to higher performance-based compensation costs as a result of higher earnings in the current period.
Interest Expense:
Three and Nine Months Ended September 30: Interest expense was $16.7 million and $18.0 million for the three months ended September 30, 2020 and 2019, and $48.8 million and $45.7 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $3.1 million for the nine month period. The increase reflects higher debt balances in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. During the nine months ended September 30, 2020, the EGL Revolving Credit Facility was utilized for funding (i) significant new business as described in Note 3 - "Significant New Business" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q, (ii) investment opportunities and (iii) to provide liquidity in the first half of the year during the financial disruption associated with the COVID-19 pandemic.
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Net Foreign Exchange Gains (Losses):
Three and Nine Months Ended September 30: Net foreign exchange losses were $9.7 million compared to net foreign exchange gains of $13.1 million for the three months ended September 30, 2020 and 2019, respectively. Net foreign exchange gains were $0.4 million and $20.4 million for the nine months ended September 30, 2020 and 2019, respectively. The net foreign exchange losses for the three months ended September 30, 2020 and the net foreign exchange gains for the nine months ended September 30, 2020 were primarily due to increased volatility in foreign exchange markets associated with the COVID-19 pandemic and the resulting impact on non-U.S. dollar denominated investments and technical balances.
Income Taxes:
Three and Nine Months Ended September 30: For the three months ended September 30, 2020, income tax expense was $9.3 million compared to $13.4 million for the three months ended September 30, 2019, a decrease of $4.1 million. For the nine months ended September 30, 2020 and 2019, income tax expenses were $18.3 million and $23.5 million, respectively, a decrease of $5.2 million. The income tax benefit (expense) is generally driven by the geographical distribution of pre-tax earnings (loss) between taxable and non-taxable jurisdictions.
Earnings (Losses) from Equity Method Investments:
Three Months Ended September 30: For the three months ended September 30, 2020 and 2019, earnings from equity method investments were $149.1 million and $17.7 million, respectively, an increase of $131.4 million. The earnings in the current period were primarily driven by our investments in Enhanzed Re and Monument Re.
Nine Months Ended September 30: For the nine months ended September 30, 2020 and 2019, earnings from equity method investments were $152.7 million and $44.4 million, respectively, an increase of $108.3 million. The earnings in the current period were primarily driven by our investments in Enhanzed Re and Monument Re.
Noncontrolling Interest:
Three and Nine Months Ended September 30: The net (earnings) loss attributable to the noncontrolling interest of our Non-life Run-off segment were $(2.5) million and $(1.4) million for the three months ended September 30, 2020 and 2019, respectively, and $0.5 million and $(6.4) million for the nine months ended September 30, 2020 and 2019, respectively. The increase in net earnings attributable to the noncontrolling interest of $1.1 million for the three months ended September 30, 2020 was due to higher earnings for those companies where there is a noncontrolling interest; whereas the decrease in net earnings attributable to the noncontrolling interest of $6.9 million for the nine months ended September 30, 2020 was due to lower earnings for those companies where there is a noncontrolling interest.
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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.
On August 13, 2020, we announced an exchange transaction with the Trident V Funds. As part of the exchange transaction, we entered into a recapitalization agreement with the Trident V Funds and the Dowling Funds pursuant to which we agreed to exchange a portion of our indirect interest in Northshore, the holding company that owns Atrium and Arden, for all of the Trident V Fund's indirect interest in StarStone U.S. Upon completion of the exchange transaction, we expect to own approximately 11.0% of Northshore, which will continue to own Atrium and Arden, and our investment will be accounted for as a privately held equity investment and carried at fair value.
For further information, refer to Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
The following is a discussion and analysis of the results of operations for our Atrium segment.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Gross premiums written | $ | 49,083 | $ | 48,746 | $ | 337 | $ | 155,551 | $ | 146,519 | $ | 9,032 | |||||||||||||||||||||||
| Net premiums written | $ | 46,503 | $ | 43,785 | $ | 2,718 | $ | 136,093 | $ | 127,246 | $ | 8,847 | |||||||||||||||||||||||
| Net premiums earned | $ | 42,426 | $ | 42,913 | $ | (487) | $ | 128,183 | $ | 119,865 | $ | 8,318 | |||||||||||||||||||||||
| Net incurred losses and LAE | (21,995) | (28,400) | 6,405 | (66,003) | (58,662) | (7,341) | |||||||||||||||||||||||||||||
| Acquisition costs | (14,242) | (14,466) | 224 | (43,235) | (41,023) | (2,212) | |||||||||||||||||||||||||||||
| Operating expenses | (3,008) | (3,742) | 734 | (8,757) | (9,968) | 1,211 | |||||||||||||||||||||||||||||
| Underwriting income | 3,181 | (3,695) | 6,876 | 10,188 | 10,212 | (24) | |||||||||||||||||||||||||||||
| Net investment income | 1,778 | 1,736 | 42 | 4,382 | 5,500 | (1,118) | |||||||||||||||||||||||||||||
Net realized and unrealized gains (1) | 1,533 | 582 | 951 | 3,392 | 5,464 | (2,072) | |||||||||||||||||||||||||||||
| Fees and commission income | 7,150 | 2,391 | 4,759 | 15,737 | 5,773 | 9,964 | |||||||||||||||||||||||||||||
| Other income | 72 | 35 | 37 | 105 | 106 | (1) | |||||||||||||||||||||||||||||
| Corporate expenses | (6,084) | (2,896) | (3,188) | (14,494) | (10,186) | (4,308) | |||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | 2,275 | (924) | 3,199 | 1,115 | (1) | 1,116 | |||||||||||||||||||||||||||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | 9,905 | (2,771) | 12,676 | 20,425 | 16,868 | 3,557 | |||||||||||||||||||||||||||||
| Income tax expense | (2,520) | (222) | (2,298) | (3,303) | (1,930) | (1,373) | |||||||||||||||||||||||||||||
| NET EARNINGS (LOSS) | 7,385 | (2,993) | 10,378 | 17,122 | 14,938 | 2,184 | |||||||||||||||||||||||||||||
| Net loss (earnings) attributable to noncontrolling interest | (2,996) | 1,228 | (4,224) | (7,024) | (6,127) | (897) | |||||||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 4,389 | $ | (1,765) | $ | 6,154 | $ | 10,098 | $ | 8,811 | $ | 1,287 | |||||||||||||||||||||||
Underwriting ratios(2): | |||||||||||||||||||||||||||||||||||
| Loss ratio | 51.8 | % | 66.2 | % | (14.4) | % | 51.5 | % | 48.9 | % | 2.6 | % | |||||||||||||||||||||||
| Acquisition cost ratio | 33.6 | % | 33.7 | % | (0.1) | % | 33.7 | % | 34.2 | % | (0.5) | % | |||||||||||||||||||||||
| Operating expense ratio | 7.1 | % | 8.7 | % | (1.6) | % | 6.9 | % | 8.4 | % | (1.5) | % | |||||||||||||||||||||||
| Combined ratio | 92.5 | % | 108.6 | % | (16.1) | % | 92.1 | % | 91.5 | % | 0.6 | % | |||||||||||||||||||||||
(1) For the Atrium segment, we utilize trading accounting, where unrealized amounts are reflected in earnings.
(2) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
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Overall Results
Three Months Ended September 30: Net earnings were $4.4 million for the three months ended September 30, 2020 compared to a net loss of $1.8 million for the three months ended September 30, 2019, an increase of $6.2 million. The increase in net earnings was primarily due to an increase in underwriting income and higher fees and commission income in the current period. The combined ratio for the three months ended September 30, 2020 was 92.5%, compared to 108.6% for the prior period. Excluding the impact of losses related to the COVID-19 pandemic of $1.5 million, the combined ratio for the three months ended September 30, 2020 was 89.0%.
Nine Months Ended September 30: Net earnings were $10.1 million for the nine months ended September 30, 2020 compared to $8.8 million for the nine months ended September 30, 2019, an increase of $1.3 million. The increase was primarily due to higher fees and commission income, partially offset by higher corporate expenses and a lower investment return in the current period. The combined ratio for the nine months ended September 30, 2020 was 92.1% compared to 91.5% for the prior period. Excluding the impact of losses related to the COVID-19 pandemic of $14.3 million, the combined ratio for the nine months ended September 30, 2020 was 80.9%.
An analysis of the components of the segment's net earnings before the attribution of net earnings to noncontrolling interest is shown below. Investment results are separately discussed below in "Investments Results - Consolidated."
Gross Premiums Written:
The following table provides gross premiums written by line of business for the Atrium segment:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Marine, Aviation and Transit | $ | 12,290 | $ | 11,691 | $ | 599 | $ | 41,678 | $ | 35,361 | $ | 6,317 | |||||||||||||||||||||||
| Binding Authorities | 22,679 | 21,915 | 764 | 65,080 | 57,563 | 7,517 | |||||||||||||||||||||||||||||
| Reinsurance | 3,618 | 4,389 | (771) | 14,659 | 16,293 | (1,634) | |||||||||||||||||||||||||||||
| Accident and Health | 2,120 | 4,633 | (2,513) | 11,758 | 18,382 | (6,624) | |||||||||||||||||||||||||||||
| Non-Marine Direct and Facultative | 8,376 | 6,118 | 2,258 | 22,376 | 18,920 | 3,456 | |||||||||||||||||||||||||||||
| Total | $ | 49,083 | $ | 48,746 | $ | 337 | $ | 155,551 | $ | 146,519 | $ | 9,032 | |||||||||||||||||||||||
Three and Nine Months Ended September 30: Gross premiums written for the Atrium segment were $49.1 million and $48.7 million for the three months ended September 30, 2020 and 2019, respectively. Gross premiums written for the Atrium segment were $155.6 million and $146.5 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in gross premiums written for the nine months ended September 30, 2020 was seen predominantly across the binding authorities, marine, aviation and transit and non-marine direct and facultative lines of business. The binding authorities line of business benefited from new opportunities to write new business, while the marine, aviation and transit and non-marine direct and facultative lines of business continue to benefit from an increase in rates and new opportunities in the US. The reduction in the accident and health line of business was largely driven by the impact of the COVID-19 pandemic as well as underwriting actions to not renew certain contracts in the current period.
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Net Premiums Earned:
The following table provides net premiums earned by line of business for the Atrium segment:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Marine, Aviation and Transit | $ | 10,476 | $ | 9,524 | $ | 952 | $ | 31,452 | $ | 25,302 | $ | 6,150 | |||||||||||||||||||||||
| Binding Authorities | 20,436 | 19,771 | 665 | 58,850 | 55,191 | 3,659 | |||||||||||||||||||||||||||||
| Reinsurance | 3,550 | 4,591 | (1,041) | 9,942 | 11,253 | (1,311) | |||||||||||||||||||||||||||||
| Accident and Health | 2,212 | 4,036 | (1,824) | 10,587 | 13,960 | (3,373) | |||||||||||||||||||||||||||||
| Non-Marine Direct and Facultative | 5,752 | 4,991 | 761 | 17,352 | 14,159 | 3,193 | |||||||||||||||||||||||||||||
| Total | $ | 42,426 | $ | 42,913 | $ | (487) | $ | 128,183 | $ | 119,865 | $ | 8,318 | |||||||||||||||||||||||
Three and Nine Months Ended September 30: Net premiums earned for the Atrium segment were $42.4 million and $42.9 million for the three months ended September 30, 2020 and 2019, respectively. Net premiums earned for the Atrium segment were $128.2 million and $119.9 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in net premiums earned for the nine months ended September 30, 2020 was primarily due to ongoing growth in the binding authorities, marine, aviation and transit and non-marine direct and facultative lines of business.
Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the Atrium segment:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Periods | Current Period | Total | Prior Periods | Current Period | Total | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Net losses paid | $ | 9,472 | $ | 7,717 | $ | 17,189 | $ | 10,618 | $ | 9,387 | $ | 20,005 | |||||||||||||||||||||||
Net change in case and LAE reserves (1) | (2,292) | 4,993 | 2,701 | (2,860) | 2,769 | (91) | |||||||||||||||||||||||||||||
Net change in IBNR reserves (2) | (8,110) | 10,496 | 2,386 | (6,235) | 14,937 | 8,702 | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (930) | 23,206 | 22,276 | 1,523 | 27,093 | 28,616 | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | 48 | (77) | (29) | — | — | — | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | (252) | — | (252) | (216) | — | (216) | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | (1,134) | $ | 23,129 | $ | 21,995 | $ | 1,307 | $ | 27,093 | $ | 28,400 | |||||||||||||||||||||||
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Three Months Ended September 30: Net incurred losses and LAE for the three months ended September 30, 2020 and 2019 were $22.0 million and $28.4 million, respectively. Net favorable prior period loss development was $1.1 million for the three months ended September 30, 2020 compared to net unfavorable prior period loss development of $1.3 million for the three months ended September 30, 2019. Excluding prior period loss development, net incurred losses and LAE for the three months ended September 30, 2020 were $23.1 million and included $1.5 million of losses related to the COVID-19 pandemic. Excluding prior period loss development, net incurred losses and LAE for the three months ended September 30, 2019 were $27.1 million. The loss ratios were 51.8% and 66.2% for the three months ended September 30, 2020 and 2019, respectively. Excluding the impact of losses related to the COVID-19 pandemic, the loss ratio for the three months ended September 30, 2020 was 48.4%.
For the three months ended September 30, 2020, net incurred losses and LAE for the Atrium segment included $1.5 million of losses related to the COVID-19 pandemic, with Enstar's share totaling $0.9 million, primarily relating to accident and health business.
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The following table shows the components of net incurred losses and LAE for the Atrium segment for the nine months ended September 30, 2020 and 2019:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Periods | Current Period | Total | Prior Periods | Current Period | Total | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Net losses paid | $ | 31,412 | $ | 17,004 | $ | 48,416 | $ | 35,564 | $ | 24,531 | $ | 60,095 | |||||||||||||||||||||||
Net change in case and LAE reserves (1) | (9,517) | 13,152 | 3,635 | (13,032) | 12,787 | (245) | |||||||||||||||||||||||||||||
Net change in IBNR reserves (2) | (25,769) | 39,996 | 14,227 | (27,787) | 25,871 | (1,916) | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (3,874) | 70,152 | 66,278 | (5,255) | 63,189 | 57,934 | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | 48 | (77) | (29) | — | — | — | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | (246) | — | (246) | 728 | — | 728 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | (4,072) | $ | 70,075 | $ | 66,003 | $ | (4,527) | $ | 63,189 | $ | 58,662 | |||||||||||||||||||||||
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Nine Months Ended September 30: Net incurred losses and LAE for the nine months ended September 30, 2020 and 2019 were $66.0 million and $58.7 million, respectively. Net favorable prior year loss development was $4.1 million and $4.5 million for the nine months ended September 30, 2020 and 2019, respectively. The current period net favorable prior period loss development was driven by favorable development across several lines of business. Excluding prior period loss development, net incurred losses and LAE for the nine months ended September 30, 2020 were $70.1 million and included $14.3 million of losses related to the COVID-19 pandemic. Excluding prior period loss development, net incurred losses and LAE for the nine months ended September 30, 2019 were $63.2 million. The loss ratios were 51.5% and 48.9% for the nine months ended September 30, 2020 and 2019, respectively. Excluding the impact of losses related to the COVID-19 pandemic, the loss ratio for the nine months ended September 30, 2020 was 40.3%.
For the nine months ended September 30, 2020, net incurred losses and LAE for the Atrium segment included $14.3 million of losses related to the COVID-19 pandemic, with Enstar's share totaling $8.4 million, primarily relating to accident and health business.
Acquisition Costs:
Three and Nine Months Ended September 30: Acquisition costs were $14.2 million and $14.5 million for the three months ended September 30, 2020 and 2019, respectively, and $43.2 million and $41.0 million for the nine months ended September 30, 2020 and 2019, respectively. The acquisition cost ratios were 33.6% and 33.7% for the three months ended September 30, 2020 and 2019, respectively, and 33.7% and 34.2% for the nine months ended September 30, 2020 and 2019, respectively. The reduction in the acquisition cost ratio for the nine months ended September 30, 2020 was primarily due to agreed reductions in brokerage rates for certain accounts.
Operating Expenses:
Three and Nine Months Ended September 30: Operating expenses for the Atrium segment were $3.0 million and $3.7 million for the three months ended September 30, 2020 and 2019, respectively, and $8.8 million and $10.0 million for the nine months ended September 30, 2020 and 2019, respectively. The operating expense ratios were 7.1% and 8.7% for the three months ended September 30, 2020 and 2019, respectively, and 6.9% and 8.4% for the nine months ended September 30, 2020 and 2019, respectively. The reduction in the operating expense ratio for the three months ended September 30, 2020 was driven primarily by a decrease in operating expenses whereas the reduction for the nine months ended September 30, 2020 was primarily driven by an increase in net premiums earned in the current period.
104
Fees and Commission Income:
Three and Nine Months Ended September 30: Fees and commission income was $7.2 million and $2.4 million for the three months ended September 30, 2020 and 2019, respectively, and $15.7 million and $5.8 million for the nine months ended September 30, 2020 and 2019, respectively. The fees represent profit commission fees earned in relation to AUL’s management of Syndicate 609 and other underwriting consortiums. The increase was primarily due to higher profit commissions from Syndicate 609 and the space consortium in the current periods.
Corporate Expenses:
Three and Nine Months Ended September 30: Corporate expenses for the Atrium segment were $6.1 million and $2.9 million for the three months ended September 30, 2020 and 2019, respectively, and $14.5 million and $10.2 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in corporate expenses was primarily due to higher variable compensation costs in the three and nine months ended September 30, 2020 due to improved performance in the Atrium segment in the current periods.
Noncontrolling Interest:
Three and Nine Months Ended September 30: The net earnings attributable to the noncontrolling interest in the Atrium segment were $3.0 million for the three months ended September 30, 2020, compared to net losses attributable to the noncontrolling interest of $1.2 million for the three months ended September 30, 2019. The net earnings attributable to the noncontrolling interest in the Atrium segment were $7.0 million and $6.1 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in the net earnings attributable to the noncontrolling interest for the three and nine months ended September 30, 2020 was primarily due to higher earnings, as discussed above.
As of September 30, 2020 and December 31, 2019, the Trident V Funds and the Dowling Funds had a combined 41.0% noncontrolling interest in the Atrium segment.
105
StarStone Segment
The results of the StarStone segment include the results of StarStone Specialty Holdings Limited and subsidiaries ("StarStone Group") and intra-group reinsurance cessions, which are eliminated upon consolidation. In partnership with StarStone's other shareholders, we have previously completed a number of transactions to provide strategic and capital support to StarStone in the form of capital contributions and reinsurance. Refer to Note 3 - "Acquisitions" and Note 21 - "Related Party Transactions" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019 for further information.
Recent Strategic Developments
During the second quarter of 2020, we completed a strategic review of the StarStone segment. Following this review, we have taken various actions to position ourselves for improved profitability going forward, as further described below.
StarStone U.S.
On June 10, 2020, we announced an agreement to recapitalize StarStone U.S. and appoint a new management team and Board. As part of the recapitalization, we entered into a definitive agreement to sell StarStone U.S. to Core Specialty, a newly formed entity with equity backing from funds managed by SkyKnight Capital, L.P., Dragoneer Investment Group and Aquiline Capital Partners LLC. We currently have a 59.0% interest in StarStone U.S. The purchase price will be based on a $30.0 million premium to the GAAP tangible book value of StarStone U.S. to be determined on the month end prior to the closing date and will consist of $235.0 million of common shares of Core Specialty and cash. The $235.0 million of common shares of Core Specialty is expected to represent an estimated 26.1% interest in Core Specialty after certain co-investments and management equity awards. Our investment in Core Specialty will be accounted for as an equity method investment.
In connection with the sale, one of our U.S. Non-life Run-off subsidiaries will enter into a loss portfolio transfer reinsurance agreement with StarStone U.S. pursuant to which we will reinsure all of the net loss reserves of StarStone U.S. in respect of premium earned prior to the calendar month end prior to the closing date. We will receive a reinsurance premium equal to the assumed reserves, plus approximately $16.0 million. The reinsurance agreement will contain an aggregate limit on our liability equal to $130.0 million in excess of the assumed reserves, and our subsidiary's obligations under the reinsurance agreement will be guaranteed by Enstar.
The closing of the transaction is subject to regulatory approvals and other closing conditions and is expected to occur in the fourth quarter of 2020.
StarStone International (non-U.S.)
On June 10, 2020, we also announced that we are placing StarStone International into an orderly run-off. The liabilities associated with the StarStone International Run-Off vary in duration, and the run-off is expected to occur over a number of years. For further information on the expected liability payout pattern, refer to the contractual obligations table in the liquidity and capital resources section included within Item 2 of this Quarterly Report on Form 10-Q. Steps to reduce the size of StarStone International's operations have begun and will involve several phases to occur over time. As a result, we cannot anticipate with certainty the expected completion date of the StarStone International Run-Off. We have taken actions described below and continue to evaluate additional strategic options for the remainder of StarStone International's operations and business, including the European platform. Consequently, such options could have the effect of mitigating costs associated with placing the business into run-off. The remaining StarStone International operations will continue to serve the needs of policyholders and ensure that the companies continue to meet all regulatory requirements.
Recent developments relating to StarStone International include:
•On October 14, 2020, we completed the sale of Vander Haeghen & Co. SA ("VdH"), a Belgium-based insurance agency majority owned by two StarStone International entities, for a purchase price of €3.8 million ($4.5 million). We expect to recognize a gain on the sale of $3.6 million in the fourth quarter of 2020.
•On October 2, 2020, StarStone International sold the renewal rights for its financial lines portfolio for consideration of $0.5 million.
•Atrium's Syndicate 609, for which it provides 25% of the underwriting capacity and capital, expects to write new business of approximately $21.3 million in 2021 which was previously underwritten by StarStone International, primarily in the marine and energy liability, upstream energy and terrorism classes of business.
For further information, refer to Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
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Discussion of Results of Operations
The following is a discussion and analysis of the results of operations for our StarStone segment. Given the impact of the strategic developments in the segment, we have updated the layout of the following tables. In previous reports, we had distinguished the results of sub-components of the segment between StarStone Group and Intra-group reinsurances, and between core and exited lines of business, which is no longer considered to be as meaningful. Under U.S. GAAP, StarStone U.S. qualified as discontinued operations whereas StarStone International (non-U.S.) qualified as continuing operations. Current and prior period results are not indicative of future results.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| Gross premiums written | $ | 58,566 | $ | 110,586 | $ | (52,020) | $ | 300,135 | $ | 363,352 | $ | (63,217) | |||||||||||||||||||||||
| Net premiums written | $ | 43,338 | $ | 76,020 | $ | (32,682) | $ | 227,066 | $ | 291,083 | $ | (64,017) | |||||||||||||||||||||||
| Net premiums earned | $ | 96,116 | $ | 111,749 | $ | (15,633) | $ | 276,566 | $ | 339,993 | $ | (63,427) | |||||||||||||||||||||||
| Net incurred losses and LAE | (48,390) | (100,628) | 52,238 | (197,259) | (358,864) | 161,605 | |||||||||||||||||||||||||||||
| Acquisition costs | (20,608) | (23,301) | 2,693 | (76,026) | (80,582) | 4,556 | |||||||||||||||||||||||||||||
| Operating expenses | (20,440) | (14,525) | (5,915) | (66,385) | (53,217) | (13,168) | |||||||||||||||||||||||||||||
| Underwriting income (loss) | 6,678 | (26,705) | 33,383 | (63,104) | (152,670) | 89,566 | |||||||||||||||||||||||||||||
| Net investment income | 6,298 | 8,161 | (1,863) | 21,625 | 25,865 | (4,240) | |||||||||||||||||||||||||||||
Net realized and unrealized gains (losses) (1) | 11,801 | 6,034 | 5,767 | (3,323) | 31,274 | (34,597) | |||||||||||||||||||||||||||||
| Fees and commission expense | — | (150) | 150 | — | (515) | 515 | |||||||||||||||||||||||||||||
| Other income | 99 | 72 | 27 | 216 | 445 | (229) | |||||||||||||||||||||||||||||
| Corporate expenses | (3,137) | — | (3,137) | (39,153) | — | (39,153) | |||||||||||||||||||||||||||||
| Interest expense | (510) | — | (510) | (1,611) | (475) | (1,136) | |||||||||||||||||||||||||||||
| Net foreign exchange losses (gains) | (761) | 1,509 | (2,270) | (5,509) | (326) | (5,183) | |||||||||||||||||||||||||||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | 20,468 | (11,079) | 31,547 | (90,859) | (96,402) | 5,543 | |||||||||||||||||||||||||||||
| Income tax benefit (expense) | (733) | 139 | (872) | (2,325) | 251 | (2,576) | |||||||||||||||||||||||||||||
| Loss from equity method investments | — | — | — | — | (218) | 218 | |||||||||||||||||||||||||||||
| NET EARNINGS (LOSS) FROM CONTINUING OPERATIONS | 19,735 | (10,940) | 30,675 | (93,184) | (96,369) | 3,185 | |||||||||||||||||||||||||||||
| NET EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | 4,031 | 7,916 | (3,885) | 810 | 12,041 | (11,231) | |||||||||||||||||||||||||||||
| NET EARNINGS (LOSS) | 23,766 | (3,024) | 26,790 | (92,374) | (84,328) | (8,046) | |||||||||||||||||||||||||||||
| Net loss (earnings) attributable to noncontrolling interest | (16,397) | 320 | (16,717) | 37,322 | 17,448 | 19,874 | |||||||||||||||||||||||||||||
| NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | 7,369 | $ | (2,704) | $ | 10,073 | $ | (55,052) | $ | (66,880) | $ | 11,828 | |||||||||||||||||||||||
Underwriting ratios(2): | |||||||||||||||||||||||||||||||||||
Loss ratio | 50.3 | % | 90.0 | % | (39.7) | % | 71.3 | % | 105.6 | % | (34.3) | % | |||||||||||||||||||||||
| Acquisition cost ratio | 21.4 | % | 20.9 | % | 0.5 | % | 27.5 | % | 23.7 | % | 3.8 | % | |||||||||||||||||||||||
| Operating expense ratio | 21.4 | % | 13.0 | % | 8.4 | % | 24.0 | % | 15.6 | % | 8.4 | % | |||||||||||||||||||||||
| Combined ratio | 93.1 | % | 123.9 | % | (30.8) | % | 122.8 | % | 144.9 | % | (22.1) | % | |||||||||||||||||||||||
(1) This includes amounts relating to both fixed income securities and other investments. We have historically utilized trading accounting for fixed income securities, where unrealized amounts are reflected in earnings. However, from October 1, 2019, we have elected to use AFS accounting and, as trading fixed income securities mature, the proceeds are reinvested into AFS securities for the StarStone segment.
(2) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
107
Overall Results
Three Months Ended September 30: Net earnings for the StarStone segment were $7.4 million for the three months ended September 30, 2020 compared to net losses of $2.7 million for the three months ended September 30, 2019, an increase in net earnings of $10.1 million. The increase was primarily due to higher underwriting income in the current period.
Net underwriting income for the StarStone segment was $6.7 million for the three months ended September 30, 2020. The StarStone segment combined ratio was 93.1% for the three months ended September 30, 2020 as compared to 123.9% for the three months ended September 30, 2019.
Nine Months Ended September 30: Net losses for the StarStone segment were $55.1 million for the nine months ended September 30, 2020 compared to $66.9 million for the nine months ended September 30, 2019, a decrease in net losses of $11.8 million. The decrease in net losses was driven by a reduction in underwriting losses, partially offset by exit costs associated with the StarStone International Run-Off of $41.4 million and net realized and unrealized investment losses of $3.3 million in 2020 compared to gains of $31.3 million in 2019.
Net underwriting losses for the StarStone segment were $63.1 million for the nine months ended September 30, 2020 and included exit costs associated with the StarStone International Run-Off of $27.9 million. The StarStone segment combined ratio was 122.8% for the nine months ended September 30, 2020 as compared to 144.9% for the nine months ended September 30, 2019. Excluding the impact of exit costs discussed later, the combined ratio for the nine months ended was 112.5% and included net underwriting losses related to the COVID-19 pandemic of $38.9 million.
An analysis of the components of the segment's net earnings before the attribution of net earnings to noncontrolling interest is shown below. Investment results are separately discussed below in "Investments Results - Consolidated."
Exit Costs
The following table summarizes the financial impact of the exit costs associated with the StarStone International Run-Off for the three and nine months ended September 30, 2020:
| Three Months Ended | Nine Months Ended | |||||||||||||
| September 30, 2020 | September 30, 2020 | |||||||||||||
| Description: | Results of Operations Line Item: | (in millions of U.S. dollars) | ||||||||||||
| Provision for unallocated LAE (run-off basis) | Net incurred losses and LAE | $ | 4.4 | $ | (23.7) | |||||||||
| Provision for employee severance-related costs | Corporate expenses | (2.6) | (10.6) | |||||||||||
| Goodwill impairment | Corporate expenses | — | (8.0) | |||||||||||
| Capitalized software write-down | Corporate expenses | — | (7.6) | |||||||||||
| Earnings acceleration of prepaid reinsurance premiums | Net premiums earned | — | (4.1) | |||||||||||
| Intangible asset impairment | Corporate expenses | — | (4.0) | |||||||||||
| Operating leases right-of-use asset write-down | Corporate expenses | — | (3.5) | |||||||||||
| Other asset write-downs | Corporate expenses | — | (2.9) | |||||||||||
| Valuation allowance on deferred tax assets | Income tax expense | — | (2.3) | |||||||||||
| Sub-total | Net (loss) earnings | 1.8 | (66.7) | |||||||||||
| Redeemable non-controlling interest | Net loss (earnings) attributable to noncontrolling interest | (0.7) | 25.3 | |||||||||||
| Total (increase) reduction in StarStone net earnings attributable to the StarStone International Run-Off | Net (loss) earnings attributable to Enstar ordinary shareholders | $ | 1.1 | $ | (41.4) | |||||||||
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Underwriting Impact of COVID-19
For the three and nine months ended September 30, 2020, the StarStone segment included net underwriting losses related to the COVID-19 pandemic as follows:
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||
| StarStone Segment | Noncontrolling Interests' Share | Enstar's share of StarStone Segment | StarStone Segment | Noncontrolling Interests' Share | Enstar's share of StarStone Segment | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
StarStone International (1) | $ | (891) | $ | 80 | $ | (811) | $ | 38,933 | $ | (12,274) | $ | 26,659 | |||||||||||||||||||||||
| StarStone U.S. (Discontinued Operations) | 2,500 | (1,025) | 1,475 | 10,000 | (4,100) | 5,900 | |||||||||||||||||||||||||||||
| Total StarStone Segment COVID-19 net underwriting losses | $ | 1,609 | $ | (945) | $ | 664 | $ | 48,933 | $ | (16,374) | $ | 32,559 | |||||||||||||||||||||||
(1) Includes the impact of outwards reinstatement premiums of $0.7 million and a reduction in the premium deficiency provision of $3.0 million for the three months ended September 30, 2020; and outwards reinstatement premiums of $2.8 million and the premium deficiency provision of $13.3 million for the nine months ended September 30, 2020.
Underwriting Impact of Exit Costs
The underwriting impact of the exit costs relating to net premiums earned and net incurred losses and LAE as shown in the table above, are summarized in the following table:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2020 | ||||||||||||||||||||||||||||||||||
| Subtotal Before Exit Costs | Exit Costs | Total | Subtotal Before Exit Costs | Exit Costs | Total | ||||||||||||||||||||||||||||||
| A | B | C=A+B | D | E | F=D+E | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Net premiums earned | $ | 96,116 | $ | — | $ | 96,116 | $ | 280,712 | $ | (4,146) | $ | 276,566 | |||||||||||||||||||||||
| Net incurred losses and LAE | (52,800) | 4,410 | (48,390) | (173,556) | (23,703) | (197,259) | |||||||||||||||||||||||||||||
| Acquisition costs | (20,608) | — | (20,608) | (76,026) | — | (76,026) | |||||||||||||||||||||||||||||
| Operating expenses | (20,440) | — | (20,440) | (66,285) | (100) | (66,385) | |||||||||||||||||||||||||||||
| Underwriting income (loss) | 2,268 | 4,410 | 6,678 | (35,155) | (27,949) | (63,104) | |||||||||||||||||||||||||||||
Underwriting ratios(1): | |||||||||||||||||||||||||||||||||||
| Loss ratio | 54.9 | % | 50.3 | % | 61.8 | % | 71.3 | % | |||||||||||||||||||||||||||
| Acquisition cost ratio | 21.4 | % | 21.4 | % | 27.1 | % | 27.5 | % | |||||||||||||||||||||||||||
| Operating expense ratio | 21.3 | % | 21.4 | % | 23.6 | % | 24.0 | % | |||||||||||||||||||||||||||
| Combined ratio | 97.6 | % | 93.1 | % | 112.5 | % | 122.8 | % | |||||||||||||||||||||||||||
(1) Refer to "Underwriting Ratios" for a description of how these ratios are calculated.
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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 | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Casualty | $ | 12,576 | $ | 25,002 | $ | (12,426) | $ | 68,418 | $ | 77,645 | $ | (9,227) | |||||||||||||||||||||||
| Marine | 24,363 | 40,699 | (16,336) | 132,721 | 168,657 | (35,936) | |||||||||||||||||||||||||||||
| Property | 5,611 | 29,757 | (24,146) | 64,970 | 80,671 | (15,701) | |||||||||||||||||||||||||||||
| Aerospace | 15,598 | 12,397 | 3,201 | 32,105 | 33,648 | (1,543) | |||||||||||||||||||||||||||||
| Workers' Compensation | 418 | 2,731 | (2,313) | 1,921 | 2,731 | (810) | |||||||||||||||||||||||||||||
| Total | $ | 58,566 | $ | 110,586 | $ | (52,020) | $ | 300,135 | $ | 363,352 | $ | (63,217) | |||||||||||||||||||||||
Three Months Ended September 30: Gross premiums written for the StarStone segment were $58.6 million and $110.6 million for the three months ended September 30, 2020 and 2019, respectively, a decrease of $52.0 million. Excluding aerospace, the decreases across all other lines were due to StarStone International being placed into an orderly run-off. The increase in the aerospace lines was driven by binding authority business underwritten through our European platform before we implemented the StarStone International Run-Off.
Nine Months Ended September 30: Gross premiums written were $300.1 million and $363.4 million for the nine months ended September 30, 2020 and 2019, respectively, a decrease of $63.2 million. The decreases across all lines were primarily due to StarStone International being placed into an orderly run-off.
In light of the decision to implement the StarStone International Run-off, gross premiums written will decline materially in future periods.
Net Premiums Earned:
The following table provides net premiums earned by line of business for the StarStone segment:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Casualty | $ | 20,471 | $ | 22,314 | $ | (1,843) | $ | 66,419 | $ | 66,733 | $ | (314) | |||||||||||||||||||||||
| Marine | 39,424 | 46,747 | (7,323) | 113,016 | 147,542 | (34,526) | |||||||||||||||||||||||||||||
| Property | 28,800 | 32,710 | (3,910) | 73,370 | 92,186 | (18,816) | |||||||||||||||||||||||||||||
| Aerospace | 6,886 | 8,280 | (1,394) | 21,365 | 32,944 | (11,579) | |||||||||||||||||||||||||||||
| Workers' Compensation | 535 | 1,698 | (1,163) | 2,396 | 588 | 1,808 | |||||||||||||||||||||||||||||
| Total | $ | 96,116 | $ | 111,749 | $ | (15,633) | $ | 276,566 | $ | 339,993 | $ | (63,427) | |||||||||||||||||||||||
Three Months Ended September 30: Net premiums earned for the StarStone segment were $96.1 million and $111.7 million for the three months ended September 30, 2020 and 2019, respectively, a decrease of $15.6 million. The decrease in net premiums earned was mainly due to StarStone International being placed into an orderly run-off.
Nine Months Ended September 30: Net premiums earned for the StarStone segment were $276.6 million and $340.0 million for the nine months ended September 30, 2020 and 2019, respectively, a decrease of $63.4 million. The decrease in net premiums earned was mainly due to StarStone International being placed into an orderly run-off.
As noted above with respect to gross premiums written, in light of the decision to implement the StarStone International Run-off, net premiums earned will decline materially in future periods.
110
Net Incurred Losses and LAE:
The following table shows the components of net incurred losses and LAE for the StarStone segment:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Periods | Current Period | Total | Prior Periods | Current Period | Total | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Net losses paid | $ | 48,972 | $ | 7,755 | $ | 56,727 | $ | 111,195 | $ | 11,653 | $ | 122,848 | |||||||||||||||||||||||
Net change in case and LAE reserves (1) | (20,068) | 25,524 | 5,456 | (8,866) | (8,994) | (17,860) | |||||||||||||||||||||||||||||
Net change in IBNR reserves (2) | (24,755) | 16,176 | (8,579) | (101,938) | 97,225 | (4,713) | |||||||||||||||||||||||||||||
| Increase in estimates of net ultimate losses | 4,149 | 49,455 | 53,604 | 391 | 99,884 | 100,275 | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | (299) | (4,721) | (5,020) | (2,112) | 1,924 | (188) | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | (194) | — | (194) | 541 | — | 541 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | 3,656 | $ | 44,734 | $ | 48,390 | $ | (1,180) | $ | 101,808 | $ | 100,628 | |||||||||||||||||||||||
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Three Months Ended September 30: Net incurred losses and LAE for the three months ended September 30, 2020 and 2019 were $48.4 million and $100.6 million, respectively. Net unfavorable prior period loss development was $3.7 million for the three months ended September 30, 2020 compared to net favorable prior period loss development of $1.2 million for the three months ended September 30, 2019. Net unfavorable prior period loss development for the three months ended September 30, 2020 was driven by adverse development in the casualty and property lines of business. Net favorable prior period loss development for the three months ended September 30, 2019 was primarily related to development on lines of business that we had either exited or had been subject to remediation as part of our underwriting repositioning initiatives before our decision to place StarStone International into run-off. Excluding prior period net loss development, net incurred losses and LAE for the three months ended September 30, 2020 were $44.7 million and included a $4.4 million reduction in exit costs associated with the StarStone International Run-Off, partially offset by $1.4 million in net incurred losses and LAE related to the COVID-19 pandemic. Excluding prior period net loss development, net incurred losses and LAE for the three months ended September 30, 2019 were $101.8 million. The loss ratios for the StarStone segment were 50.3% and 90.0% for the three months ended September 30, 2020 and 2019, respectively. Excluding the impact of the reduction in exit costs associated with the StarStone International Run-Off, the loss ratio for the three months ended September 30, 2020 was 54.9%.
For the three months ended September 30, 2020, the StarStone segment included net incurred losses and LAE related to the COVID-19 pandemic of $1.4 million, with Enstar's share totaling $0.8 million, primarily related to casualty business.
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The following table shows the components of net incurred losses and LAE for the StarStone segment for the nine months ended September 30, 2020 and 2019:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Prior Periods | Current Period | Total | Prior Periods | Current Period | Total | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Net losses paid | $ | 206,058 | $ | 12,142 | $ | 218,200 | $ | 301,641 | $ | 27,624 | $ | 329,265 | |||||||||||||||||||||||
Net change in case and LAE reserves (1) | (85,798) | 24,911 | (60,887) | (22,538) | 36,046 | 13,508 | |||||||||||||||||||||||||||||
Net change in IBNR reserves (2) | (130,738) | 147,770 | 17,032 | (192,034) | 207,076 | 15,042 | |||||||||||||||||||||||||||||
| Increase (reduction) in estimates of net ultimate losses | (10,478) | 184,823 | 174,345 | 87,069 | 270,746 | 357,815 | |||||||||||||||||||||||||||||
| Increase (reduction) in provisions for unallocated LAE | (116) | 23,591 | 23,475 | (2,585) | 3,324 | 739 | |||||||||||||||||||||||||||||
| Amortization of fair value adjustments | (561) | — | (561) | 310 | — | 310 | |||||||||||||||||||||||||||||
| Net incurred losses and LAE | $ | (11,155) | $ | 208,414 | $ | 197,259 | $ | 84,794 | $ | 274,070 | $ | 358,864 | |||||||||||||||||||||||
(1) Net change in case and LAE reserves comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
(2) Net change in IBNR reserves represents the gross change in our actuarial estimates of IBNR reserves, less amounts recoverable.
Nine Months Ended September 30: Net incurred losses and LAE for the nine months ended September 30, 2020 and 2019 were $197.3 million and $358.9 million, respectively. Net favorable prior period loss development was $11.2 million for the nine months ended September 30, 2020 compared to net unfavorable prior period loss development of $84.8 million for the nine months ended September 30, 2019. Net favorable prior period loss development for the nine months ended September 30, 2020 was driven by favorable development in the workers compensation and casualty lines of business. Net unfavorable prior period loss development for the nine months ended September 30, 2019 was primarily related to development on lines of business that we had either exited or had been subject to remediation as part of our underwriting repositioning initiatives before our decision to place StarStone International into run-off.
Excluding prior period loss development, net incurred losses and LAE for the nine months ended September 30, 2020 were $208.4 million and included $22.8 million of COVID-19 related losses and $23.7 million of exit costs associated with the StarStone International Run-Off. Excluding prior period loss development, net incurred losses and LAE for the nine months ended September 30, 2019 were $274.1 million. The loss ratios for the StarStone segment were 71.3% and 105.6% for the nine months ended September 30, 2020 and 2019, respectively. Excluding the impact of exit costs associated with the StarStone International Run-Off, the loss ratio for the nine months ended September 30, 2020 was 61.8% and included COVID-19 related losses of $22.8 million.
For the nine months ended September 30, 2020, StarStone segment net incurred losses and LAE included $22.8 million of losses related to the COVID-19 pandemic, with Enstar's share totaling $17.0 million, primarily related to casualty and property business.
Acquisition Costs:
Three and Nine Months Ended September 30: Acquisition costs for the StarStone segment were $20.6 million and $23.3 million for the three months ended September 30, 2020 and 2019, respectively, a decrease of $2.7 million. Acquisition costs for the StarStone segment were $76.0 million and $80.6 million for the nine months ended September 30, 2020 and 2019, respectively, a decrease of $4.6 million. The acquisition cost ratios for the nine months ended September 30, 2020 and 2019 were 27.5% and 23.7%, respectively. The acquisition cost ratios for the three months ended September 30, 2020 and 2019 were 21.4% and 20.9%, respectively. The increases in the acquisition cost ratios were driven by the reduction in net premiums earned in the current periods and the impact of COVID-19-related premium deficiency of $13.3 million for the nine months ended September 30, 2020.
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Operating Expenses:
Three and Nine Months Ended September 30: Operating expenses for the StarStone segment for the three months ended September 30, 2020 and 2019 were $20.4 million and $14.5 million, respectively. The operating expense ratios for the three months ended September 30, 2020 and 2019 were 21.4% and 13.0%. Operating expenses for the StarStone segment for the nine months ended September 30, 2020 and 2019 were $66.4 million and $53.2 million, respectively. The operating expense ratios for the three months ended September 30, 2020 and 2019 were 24.0% and 15.6%, respectively. The increases were due to restructuring costs and the reduction in net premiums earned in the current periods.
Corporate Expenses:
Three and Nine Months Ended September 30: Corporate expenses for the StarStone segment were $3.1 million and $nil for the three months ended September 30, 2020 and 2019, respectively, and $39.2 million and $nil for the nine months ended September 30, 2020 and 2019, respectively. Corporate expenses for the three and nine months ended September 30, 2020 included exit costs associated with the StarStone International Run-Off of $2.6 million and $36.4 million, respectively, and are summarized above.
Discontinued Operations (StarStone U.S.):
Three Months Ended September 30: The net earnings from discontinued operations, net of income taxes for the StarStone segment for the three months ended September 30, 2020 was $4.0 million compared to $7.9 million for the three months ended September 30, 2019. For the three months ended September 30, 2020, the net earnings from discontinued operations, net of income taxes, included $2.5 million in net incurred losses and LAE related to the COVID-19 pandemic, with Enstar's share totaling $1.5 million, primarily related to casualty business.
Nine Months Ended September 30: The net earnings from discontinued operations, net of income taxes for the nine months ended September 30, 2020 was $0.8 million compared to $12.0 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, the net earnings from discontinued operations, net of income taxes, included $10.0 million net incurred losses and LAE related to the COVID-19 pandemic, with Enstar's share totaling $5.9 million, primarily related to casualty business.
The StarStone U.S. business included in discontinued operations includes the results of intra-group reinsurance cessions which were non-renewed as of January 1, 2018. The effect of these intra-group reinsurance cessions on net earnings, net of income taxes for the StarStone U.S. business was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||
| StarStone U.S. Group net earnings (loss) before Intra-Group Cessions | $ | 6,192 | $ | 15,146 | $ | 24,386 | $ | (24,510) | |||||||||||||||
| Intra-Group Cessions | (2,161) | (7,230) | (23,576) | 36,551 | |||||||||||||||||||
| StarStone U.S. net earnings, net of income taxes | $ | 4,031 | $ | 7,916 | $ | 810 | $ | 12,041 | |||||||||||||||
Noncontrolling Interest:
Three and Nine Months Ended September 30: As of September 30, 2020 and December 31, 2019, the Trident V Funds and Dowling Funds had a combined 41.0% noncontrolling interest in the StarStone Group. The net earnings (loss) attributable to them is based on their proportionate share of earnings (loss).
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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 and other miscellaneous items. On May 31, 2019, we completed the transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument Re.
The following is a discussion and analysis of our results of operations for our other activities, which are summarized below:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Net premiums earned | $ | 5,706 | $ | 4,303 | $ | 1,403 | $ | 15,174 | $ | 16,872 | $ | (1,698) | |||||||||||||||||||||||
| Net incurred losses and LAE | (5,043) | (3,647) | (1,396) | (12,718) | (13,068) | 350 | |||||||||||||||||||||||||||||
| Acquisition costs | (128) | (177) | 49 | (331) | (554) | 223 | |||||||||||||||||||||||||||||
| Underwriting income | 535 | 479 | 56 | 2,125 | 3,250 | (1,125) | |||||||||||||||||||||||||||||
| Net investment losses | (2,864) | (2,147) | (717) | (8,145) | (6,278) | (1,867) | |||||||||||||||||||||||||||||
| Net realized and unrealized gains | — | 270 | (270) | — | 5,849 | (5,849) | |||||||||||||||||||||||||||||
| Other income (expense) | 210 | 1,000 | (790) | (647) | (319) | (328) | |||||||||||||||||||||||||||||
| Corporate expenses | (10,320) | (12,824) | 2,504 | (35,166) | (36,051) | 885 | |||||||||||||||||||||||||||||
| Interest Income | 2,212 | 3,014 | (802) | 7,960 | 7,152 | 808 | |||||||||||||||||||||||||||||
| Net foreign exchange gains (losses) | (7) | 24 | (31) | 2,634 | (2) | 2,636 | |||||||||||||||||||||||||||||
| LOSS BEFORE INCOME TAXES | (10,234) | (10,184) | (50) | (31,239) | (26,399) | (4,840) | |||||||||||||||||||||||||||||
| Income tax expense | (1,391) | — | (1,391) | (1,391) | (85) | (1,306) | |||||||||||||||||||||||||||||
| NET LOSS ATTRIBUTABLE TO ENSTAR | (11,625) | (10,184) | (1,441) | (32,630) | (26,484) | (6,146) | |||||||||||||||||||||||||||||
| Dividends on preferred shares | (8,925) | (8,925) | — | (26,775) | (26,989) | 214 | |||||||||||||||||||||||||||||
| NET LOSS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS | $ | (20,550) | $ | (19,109) | $ | (1,441) | $ | (59,405) | $ | (53,473) | $ | (5,932) | |||||||||||||||||||||||
Overall Results:
Net losses were $20.6 million for the three months ended September 30, 2020, compared to net losses of $19.1 million for the three months ended September 30, 2019, an increase in net losses of $1.4 million. Net losses were $59.4 million for the nine months ended September 30, 2020, compared to net losses of $53.5 million for the nine months ended September 30, 2019, an increase in net losses of $5.9 million, which was primarily driven by a lower investment return in the current period and partially offset by net foreign exchange gains in the current period. Investment results are separately discussed below in "Investable Assets."
Corporate expenses were $10.3 million and $12.8 million for the three months ended September 30, 2020 and 2019, respectively, a decrease of $2.5 million. Corporate expenses were $35.2 million and $36.1 million for the nine months ended September 30, 2020 and 2019, respectively. The decreases for the three and nine months ended September 30, 2020 primarily related to lower fixed compensation in the current periods.
The dividends on preferred shares were $8.9 million for the three months ended September 30, 2020 and 2019, and $26.8 million and $27.0 million for the nine months ended September 30, 2020 and 2019, respectively.
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Investable Assets
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and cash equivalents and funds held. Investments consist primarily of investment grade, liquid, fixed maturity securities of short-to-medium duration, equities and other investments. Cash and cash equivalents and restricted cash and cash equivalents are comprised mainly of cash, high-grade fixed deposits, and other highly liquid instruments such as commercial paper with maturities of less than three months at the time of acquisition and money market funds. Funds held primarily consist of investment grade, liquid, fixed maturity securities of short-to-medium duration.
Investable assets were $16.0 billion as of September 30, 2020 as compared to $14.1 billion as of December 31, 2019, an increase of 13.5%. The increase was primarily due to assets acquired in relation to the Hannover Re, Munich Re, Lyft, Aspen and AXA Group transactions and unrealized gains on investments.
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, 2019.
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 and in order to meet our obligation to pay losses. We consider the duration characteristics of our liabilities in determining the extent to which we correlate with 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 investable assets by segment, and for our other activities:
| September 30, 2020 | |||||||||||||||||||||||
| Non-life Run-off | StarStone | Other | Total | ||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||
| Short-term investments, trading, at fair value | $ | 7,133 | $ | — | $ | — | $ | 7,133 | |||||||||||||||
| Short-term investments, AFS, at fair value | 276,005 | 2,170 | — | 278,175 | |||||||||||||||||||
| Fixed maturities, trading, at fair value | 4,494,177 | 505,465 | — | 4,999,642 | |||||||||||||||||||
| Fixed maturities, AFS, at fair value | 2,661,649 | 221,823 | — | 2,883,472 | |||||||||||||||||||
| Funds held - directly managed | 1,066,639 | — | — | 1,066,639 | |||||||||||||||||||
| Equities, at fair value | 581,136 | 72,023 | — | 653,159 | |||||||||||||||||||
| Other investments, at fair value | 3,610,498 | 94,372 | — | 3,704,870 | |||||||||||||||||||
| Equity method investments | 516,795 | — | — | 516,795 | |||||||||||||||||||
| Total investments | 13,214,032 | 895,853 | — | 14,109,885 | |||||||||||||||||||
| Cash and cash equivalents (including restricted cash) | 941,051 | 234,966 | 21,305 | 1,197,322 | |||||||||||||||||||
| Funds held by reinsured companies | 560,772 | 88,888 | 7,830 | 657,490 | |||||||||||||||||||
| Total investable assets | $ | 14,715,855 | $ | 1,219,707 | $ | 29,135 | $ | 15,964,697 | |||||||||||||||
Duration (in years) (1) | 5.27 | 2.17 | — | 4.97 | |||||||||||||||||||
Average credit rating (2) | A+ | AA- | AAA | A+ | |||||||||||||||||||
(1) The duration calculation includes cash and cash equivalents, short-term investments, fixed maturities and the fixed maturities within our funds held - directly managed portfolios at September 30, 2020 and December 31, 2019.
(2) The average credit ratings calculation includes cash and cash equivalents, short-term investments, fixed maturities and the fixed maturities within our funds held - directly managed portfolios at September 30, 2020 and December 31, 2019.
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| December 31, 2019 | |||||||||||||||||||||||||||||
| Non-life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||
| Short-term investments, trading, at fair value | $ | 50,268 | $ | 1,222 | $ | — | $ | — | $ | 51,490 | |||||||||||||||||||
| Short-term investments, AFS, at fair value | 121,780 | — | 6,555 | — | 128,335 | ||||||||||||||||||||||||
| Fixed maturities, trading, at fair value | 5,378,533 | 155,510 | 609,292 | — | 6,143,335 | ||||||||||||||||||||||||
| Fixed maturities, AFS, at fair value | 1,446,912 | 15,310 | 75,830 | — | 1,538,052 | ||||||||||||||||||||||||
| Funds held - directly managed | 1,187,552 | — | — | — | 1,187,552 | ||||||||||||||||||||||||
| Equities, at fair value | 576,893 | 22,079 | 127,749 | — | 726,721 | ||||||||||||||||||||||||
| Other investments, at fair value | 2,386,776 | 7,417 | 123,838 | — | 2,518,031 | ||||||||||||||||||||||||
| Equity method investments | 326,277 | — | — | — | 326,277 | ||||||||||||||||||||||||
| Total investments | 11,474,991 | 201,538 | 943,264 | — | 12,619,793 | ||||||||||||||||||||||||
| Cash and cash equivalents (including restricted cash) | 666,705 | 58,369 | 241,708 | 4,567 | 971,349 | ||||||||||||||||||||||||
| Funds held by reinsured companies | 336,470 | 27,451 | 103,191 | 8,620 | 475,732 | ||||||||||||||||||||||||
| Total investable assets | $ | 12,478,166 | $ | 287,358 | $ | 1,288,163 | $ | 13,187 | $ | 14,066,874 | |||||||||||||||||||
Duration (in years) (1) | 5.24 | 1.86 | 2.07 | — | 4.86 | ||||||||||||||||||||||||
Average credit rating (2) | A+ | AA- | A+ | AAA | A+ | ||||||||||||||||||||||||
(1) The duration calculation includes cash and cash equivalents, short-term investments, fixed maturities and the fixed maturities within our funds held - directly managed portfolios at September 30, 2020 and December 31, 2019.
(2) The average credit ratings calculation includes cash and cash equivalents, short-term investments, fixed maturities and the fixed maturities within our funds held - directly managed portfolios at September 30, 2020 and December 31, 2019.
As of both September 30, 2020 and December 31, 2019, our investment portfolio, including funds held - directly managed, had an average credit quality rating of A+. As of September 30, 2020 and December 31, 2019, our fixed maturity investments (classified as trading and AFS 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 3.5% and 4.5% of our total fixed maturity investment portfolio, respectively. A detailed schedule of average credit ratings by asset class as of September 30, 2020 is included in Note 5 - "Investments" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Schedules of maturities by asset class are included in Note 5 - "Investments" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
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Composition of Investment Portfolio By Asset Class
The following tables summarize the composition of our investment portfolio by asset class:
| September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| AAA Rated | AA Rated | A Rated | BBB Rated | Non-investment Grade | Not Rated | Total | % | |||||||||||||||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term and fixed maturity investments, trading and AFS and funds held - directly managed | ||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government & agency | $ | 789,630 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 789,630 | 5.6 | % | ||||||||||||||||||||||||||||||||||
| U.K. government | — | 102,624 | 8,739 | — | — | 3,414 | 114,777 | 0.8 | % | |||||||||||||||||||||||||||||||||||||||||
| Other government | 242,097 | 150,005 | 43,003 | 45,884 | 9,458 | — | 490,447 | 3.5 | % | |||||||||||||||||||||||||||||||||||||||||
| Corporate | 206,345 | 583,595 | 2,704,861 | 1,912,857 | 267,765 | 4,486 | 5,679,909 | 40.2 | % | |||||||||||||||||||||||||||||||||||||||||
| Municipal | 7,137 | 83,519 | 51,538 | 19,645 | — | — | 161,839 | 1.1 | % | |||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed | 517,915 | — | 2,154 | 1,612 | 5,251 | 2,307 | 529,239 | 3.7 | % | |||||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed | 576,643 | 111,720 | 77,391 | 64,898 | 5,308 | 7,159 | 843,119 | 6.0 | % | |||||||||||||||||||||||||||||||||||||||||
| Asset-backed | 249,237 | 99,942 | 145,494 | 96,960 | 21,780 | 250 | 613,663 | 4.3 | % | |||||||||||||||||||||||||||||||||||||||||
| Total | 2,589,004 | 1,131,405 | 3,033,180 | 2,141,856 | 309,562 | 17,616 | 9,222,623 | 65.2 | % | |||||||||||||||||||||||||||||||||||||||||
| Other assets included within funds held - directly managed | 12,438 | 0.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Equities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Publicly traded equities | 303,932 | 2.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Exchange-traded funds | 78,182 | 0.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Privately held equities | 271,045 | 1.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 653,159 | 4.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Other investments | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedge funds | 2,087,091 | 14.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Fixed income funds | 684,031 | 4.8 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity funds | 290,129 | 2.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Private equity funds | 320,455 | 2.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| CLO equities | 84,532 | 0.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| CLO equity funds | 140,458 | 1.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Private credit funds | 90,476 | 0.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | 7,698 | 0.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 3,704,870 | 26.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity method investments | 516,795 | 3.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Total investments | $ | 2,589,004 | $ | 1,131,405 | $ | 3,033,180 | $ | 2,141,856 | $ | 309,562 | $ | 17,616 | $ | 14,109,885 | 100.0 | % | ||||||||||||||||||||||||||||||||||
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| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| AAA Rated | AA Rated | A Rated | BBB Rated | Non-investment Grade | Not Rated | Total | % | ||||||||||||||||||||||||||||||||||||||||
| (in thousands of U.S. dollars, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Fixed maturity and short-term investments, trading and AFS and funds held - directly managed | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government & agency | $ | 696,077 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 696,077 | 5.5 | % | |||||||||||||||||||||||||||||||
| U.K. government | — | 161,772 | — | — | — | — | 161,772 | 1.3 | % | ||||||||||||||||||||||||||||||||||||||
| Other government | 316,150 | 154,072 | 63,270 | 144,557 | 24,807 | — | 702,856 | 5.6 | % | ||||||||||||||||||||||||||||||||||||||
| Corporate | 140,889 | 600,081 | 2,759,671 | 1,634,572 | 311,167 | 1,890 | 5,448,270 | 43.2 | % | ||||||||||||||||||||||||||||||||||||||
| Municipal | 10,088 | 56,389 | 50,938 | 23,272 | — | — | 140,687 | 1.1 | % | ||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed | 310,595 | 47,474 | 2,295 | 1,882 | 34,055 | 4,613 | 400,914 | 3.2 | % | ||||||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed | 567,453 | 80,517 | 87,081 | 63,565 | 5,556 | 9,574 | 813,746 | 6.4 | % | ||||||||||||||||||||||||||||||||||||||
| Asset-backed | 304,542 | 79,930 | 159,087 | 110,201 | 15,694 | 781 | 670,235 | 5.3 | % | ||||||||||||||||||||||||||||||||||||||
| Total | 2,345,794 | 1,180,235 | 3,122,342 | 1,978,049 | 391,279 | 16,858 | 9,034,557 | 71.6 | % | ||||||||||||||||||||||||||||||||||||||
| Other assets included within funds held - directly managed | 14,207 | 0.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Equities | |||||||||||||||||||||||||||||||||||||||||||||||
| Publicly traded equities | 327,875 | 2.6 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Exchange-traded funds | 133,047 | 1.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Privately held equities | 265,799 | 2.1 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total | 726,721 | 5.8 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Hedge funds | 1,121,904 | 8.9 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Fixed income funds | 481,039 | 3.8 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Equity funds | 410,149 | 3.3 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Private equity funds | 323,496 | 2.5 | % | ||||||||||||||||||||||||||||||||||||||||||||
| CLO equities | 87,555 | 0.7 | % | ||||||||||||||||||||||||||||||||||||||||||||
| CLO equity funds | 87,509 | 0.7 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Private credit funds | — | — | % | ||||||||||||||||||||||||||||||||||||||||||||
| Other | 6,379 | — | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total | 2,518,031 | 19.9 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Equity method investments | 326,277 | 2.6 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total investments | $ | 2,345,794 | $ | 1,180,235 | $ | 3,122,342 | $ | 1,978,049 | $ | 391,279 | $ | 16,858 | $ | 12,619,793 | 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, 2019 and Note 11 - "Fair Value Measurements" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
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The amortized cost, unrealized gains and losses, allowance for credit losses and fair values of our short-term and fixed maturity investments as of September 30, 2020 were as follows:
| Gross Unrealized Losses | ||||||||||||||||||||||||||||||||
| As of September 30, 2020 | Amortized Cost | Gross Unrealized Gains | Non-Credit Related Losses | Allowance for Credit Losses(1) | Fair Value | |||||||||||||||||||||||||||
| U.S. government and agency | $ | 769,544 | $ | 20,612 | $ | (526) | $ | — | $ | 789,630 | ||||||||||||||||||||||
| U.K. government | 111,169 | 3,882 | (274) | — | 114,777 | |||||||||||||||||||||||||||
| Other government | 466,575 | 24,927 | (1,055) | — | 490,447 | |||||||||||||||||||||||||||
| Corporate | 5,339,160 | 357,069 | (15,536) | (784) | 5,679,909 | |||||||||||||||||||||||||||
| Municipal | 146,087 | 16,023 | (271) | — | 161,839 | |||||||||||||||||||||||||||
| Residential mortgage-backed | 521,383 | 9,223 | (1,365) | (2) | 529,239 | |||||||||||||||||||||||||||
| Commercial mortgage-backed | 821,995 | 36,811 | (15,606) | (81) | 843,119 | |||||||||||||||||||||||||||
| Asset-backed | 631,133 | 2,962 | (20,387) | (45) | 613,663 | |||||||||||||||||||||||||||
| $ | 8,807,046 | $ | 471,509 | $ | (55,020) | $ | (912) | $ | 9,222,623 | |||||||||||||||||||||||
(1) The Company adopted ASU 2016-13 and the related amendments on January 1, 2020. Refer to Note 1 - "Significant Accounting Policies" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q for further details.
The amortized cost, unrealized gains and losses and fair values of our short-term and fixed maturity investments as of December 31, 2019 were as follows:
| As of December 31, 2019 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses (Non-OTTI) | Fair Value | ||||||||||||||||||||||
| U.S. government and agency | $ | 690,343 | $ | 6,663 | $ | (929) | $ | 696,077 | ||||||||||||||||||
| U.K. government | 155,261 | 6,628 | (117) | 161,772 | ||||||||||||||||||||||
| Other government | 684,116 | 24,994 | (6,254) | 702,856 | ||||||||||||||||||||||
| Corporate | 5,231,512 | 235,406 | (18,648) | 5,448,270 | ||||||||||||||||||||||
| Municipal | 131,130 | 9,595 | (38) | 140,687 | ||||||||||||||||||||||
| Residential mortgage-backed | 396,331 | 5,981 | (1,398) | 400,914 | ||||||||||||||||||||||
| Commercial mortgage-backed | 796,730 | 20,673 | (3,657) | 813,746 | ||||||||||||||||||||||
| Asset-backed | 674,250 | 1,806 | (5,821) | 670,235 | ||||||||||||||||||||||
| $ | 8,759,673 | $ | 311,746 | $ | (36,862) | $ | 9,034,557 | |||||||||||||||||||
We have historically accounted for our fixed income securities as "trading," where unrealized amounts are reflected in earnings. However, from October 1, 2019, we have elected to use AFS accounting and, as trading fixed income securities mature, the proceeds are reinvested into AFS securities for the Non-life Run-off and StarStone segments. The difference is that unrealized changes on investments classified as trading are recorded through earnings, whereas unrealized changes on investments classified as AFS are recorded directly to shareholders' equity. We may experience unrealized 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 and fixed maturity investments, classified as trading and AFS and the fixed maturity investments included within our funds held - directly managed balance as of September 30, 2020:
| Fair Value | Average Credit Rating | ||||||||||
| (in thousands of U.S. dollars) | |||||||||||
| Bank of America Corp | $ | 107,601 | A | ||||||||
| Citigroup Inc | 103,749 | A- | |||||||||
| Morgan Stanley | 100,296 | A- | |||||||||
| JPMorgan Chase & Co | 93,385 | A | |||||||||
| Wells Fargo & Co | 86,810 | A | |||||||||
| Comcast Corp | 85,102 | A- | |||||||||
| Apple Inc | 79,948 | AA+ | |||||||||
| AT&T Inc | 59,322 | BBB | |||||||||
| HSBC Holdings PLC | 54,328 | A- | |||||||||
| Walmart Inc | 50,813 | AA | |||||||||
| $ | 821,354 | ||||||||||
Investment Results - Consolidated
In addition to the impact of the COVID-19 pandemic in 2020, the comparability of our investment results across different periods was impacted by the acquisitions and reinsurance transactions we completed during 2020 with Hannover Re, Munich Re, AXA Group, Aspen and Lyft and in 2019 with Morse TEC, Zurich, Maiden Re, Amerisure and AmTrust. Refer to Note 3 - "Significant New Business" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q for further details on the 2020 transactions and "Item 1. Business - Recent Acquisitions and Significant New Business" in our Annual Report on Form 10-K for the year ended December 31, 2019 for further details on the 2019 transactions.
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The following tables summarize our investment results by major investment category and by segment as well as our other activities. Additional information is included in Note 5 - "Investments" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Non-Life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Net investment income: | |||||||||||||||||||||||||||||
Fixed income securities (1) | $ | 56,646 | $ | 1,151 | $ | 5,675 | $ | — | $ | 63,472 | |||||||||||||||||||
| Cash and restricted cash | 88 | 535 | 53 | 2 | 678 | ||||||||||||||||||||||||
| Other investments, including equities | 12,028 | 102 | 1,507 | (2,866) | 10,771 | ||||||||||||||||||||||||
| Less: Investment expenses | (1,844) | (10) | (937) | — | (2,791) | ||||||||||||||||||||||||
| Total net investment income (expense) | $ | 66,918 | $ | 1,778 | $ | 6,298 | $ | (2,864) | $ | 72,130 | |||||||||||||||||||
| Net realized gains (losses): | |||||||||||||||||||||||||||||
Fixed income securities (1) | $ | 42,761 | $ | 31 | $ | 2,364 | $ | — | $ | 45,156 | |||||||||||||||||||
| Other investments, including equities | 8,287 | 4 | 41 | — | 8,332 | ||||||||||||||||||||||||
| Total net realized gains | $ | 51,048 | $ | 35 | $ | 2,405 | $ | — | $ | 53,488 | |||||||||||||||||||
| Net unrealized gains: | |||||||||||||||||||||||||||||
Fixed income securities, trading (1) | $ | 18,900 | $ | 242 | $ | 2,996 | $ | — | $ | 22,138 | |||||||||||||||||||
| Other investments, including equities | 416,723 | 1,256 | 6,400 | — | 424,379 | ||||||||||||||||||||||||
| Total net unrealized gains | $ | 435,623 | $ | 1,498 | $ | 9,396 | $ | — | $ | 446,517 | |||||||||||||||||||
| Total investment return included in earnings (A) | $ | 553,589 | $ | 3,311 | $ | 18,099 | $ | (2,864) | $ | 572,135 | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||||||||
Unrealized gains (losses), on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange (B) (1) | $ | 127 | $ | (35) | $ | 499 | $ | — | $ | 591 | |||||||||||||||||||
| Total investment return = (A) + (B) | $ | 553,716 | $ | 3,276 | $ | 18,598 | $ | (2,864) | $ | 572,726 | |||||||||||||||||||
Annualized income from fixed income assets (2) | $ | 226,936 | $ | 6,744 | $ | 22,912 | $ | 8 | $ | 256,600 | |||||||||||||||||||
Average aggregate fixed income assets, at cost (2)(3) | 9,655,624 | 261,074 | 1,046,616 | 21,478 | 10,984,792 | ||||||||||||||||||||||||
| Annualized investment book yield | 2.35 | % | 2.58 | % | 2.19 | % | 0.04 | % | 2.34 | % | |||||||||||||||||||
Average aggregate invested assets, at fair value (3) | $ | 13,988,360 | $ | 303,793 | $ | 1,215,379 | $ | 21,478 | $ | 15,529,010 | |||||||||||||||||||
| Investment return included in net earnings | 3.96 | % | 1.09 | % | 1.49 | % | (13.33) | % | 3.68 | % | |||||||||||||||||||
| Total investment return | 3.96 | % | 1.08 | % | 1.53 | % | (13.33) | % | 3.69 | % | |||||||||||||||||||
(1) Fixed income securities Includes both trading and AFS short-term and fixed maturity investments as well as funds held - directly managed whereas, fixed income securities, trading excludes AFS investments and fixed income, AFS excludes trading investments.
(2) Fixed income assets includes fixed income securities and cash and restricted cash.
(3) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
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| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Non-Life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Net investment income: | |||||||||||||||||||||||||||||
Fixed income securities (1) | $ | 63,565 | $ | 956 | $ | 2,918 | $ | (394) | $ | 67,045 | |||||||||||||||||||
| Cash and restricted cash | 5,484 | 696 | 3,476 | 382 | 10,038 | ||||||||||||||||||||||||
| Other investments, including equities | 7,113 | 154 | 1,960 | (2,169) | 7,058 | ||||||||||||||||||||||||
| Less: Investment expenses | (2,410) | (70) | (193) | 34 | (2,639) | ||||||||||||||||||||||||
| Total net investment income (expense) | $ | 73,752 | $ | 1,736 | $ | 8,161 | $ | (2,147) | $ | 81,502 | |||||||||||||||||||
| Net realized gains (losses): | |||||||||||||||||||||||||||||
Fixed income securities (1) | $ | 26,143 | $ | (42) | $ | 1,168 | $ | 1 | $ | 27,270 | |||||||||||||||||||
| Other investments, including equities | (3,960) | 37 | 42 | — | (3,881) | ||||||||||||||||||||||||
| Total net realized gains (losses) | $ | 22,183 | $ | (5) | $ | 1,210 | $ | 1 | $ | 23,389 | |||||||||||||||||||
| Net unrealized gains (losses): | |||||||||||||||||||||||||||||
Fixed income securities, trading (1) | $ | 103,948 | $ | 606 | $ | 3,181 | $ | — | $ | 107,735 | |||||||||||||||||||
| Other investments, including equities | 12,043 | (19) | 1,643 | 269 | 13,936 | ||||||||||||||||||||||||
| Total net unrealized gains | $ | 115,991 | $ | 587 | $ | 4,824 | $ | 269 | $ | 121,671 | |||||||||||||||||||
| Total investment return included in earnings (A) | $ | 211,926 | $ | 2,318 | $ | 14,195 | $ | (1,877) | $ | 226,562 | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||||||||
Unrealized gains (losses), on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange (B) (1) | $ | 21 | $ | 18 | $ | (26) | $ | — | $ | 13 | |||||||||||||||||||
| Total investment return = (A) + (B) | $ | 211,947 | $ | 2,336 | $ | 14,169 | $ | (1,877) | $ | 226,575 | |||||||||||||||||||
Annualized income from fixed income assets (2) | $ | 276,196 | $ | 6,608 | $ | 25,576 | $ | (48) | $ | 308,332 | |||||||||||||||||||
Average aggregate fixed income assets, at cost (2)(3) | 8,632,415 | 251,305 | 1,210,051 | 15,279 | 10,109,050 | ||||||||||||||||||||||||
| Annualized investment book yield | 3.20 | % | 2.63 | % | 2.11 | % | (0.31) | % | 3.05 | % | |||||||||||||||||||
Average aggregate invested assets, at fair value (3) | $ | 11,662,416 | $ | 264,029 | $ | 1,419,869 | $ | 18,293 | $ | 13,364,607 | |||||||||||||||||||
| Investment return included in net earnings | 1.82 | % | 0.88 | % | 1.00 | % | (10.26) | % | 1.70 | % | |||||||||||||||||||
| Total investment return | 1.82 | % | 0.88 | % | 1.00 | % | (10.26) | % | 1.70 | % | |||||||||||||||||||
(1) Fixed income securities Includes both trading and AFS short-term and fixed maturity investments as well as funds held - directly managed whereas, fixed income securities, trading excludes AFS investments and fixed income, AFS excludes trading investments.
(2) Fixed income assets includes fixed income securities and cash and restricted cash.
(3) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
Net Investment Income:
Net investment income decreased by $9.4 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to a $3.6 million and $9.4 million decrease in net investment income from fixed maturities and cash and cash equivalents, respectively. There was an increase of $875.7 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 Lyft, Aspen, AXA Group, Munich Re and Hannover Re transactions in 2020, and the Morse TEC, Zurich, Maiden Re and Amerisure transactions in 2019. Our annualized book yield decreased 71 basis points for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to lower rates.
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Net Realized and Unrealized Gains (Losses):
Net realized and unrealized gains were $500.0 million for the three months ended September 30, 2020 compared to $145.1 million for the three months ended September 30, 2019, an increase of $354.9 million. Included in net realized and unrealized gains (losses) are the following items:
•Net realized and unrealized gains on fixed income securities, including fixed income securities within our funds held portfolios, of $67.3 million for the three months ended September 30, 2020, compared to gains of $135.0 million for the three months ended September 30, 2019, a decrease of $67.7 million. Gains in the current period were primarily attributable to an increase in the valuation of our fixed maturity investments due to tighter credit spreads. Gains in the comparative period were due to a significant decline in rates, partially offset by a moderate widening in spreads.
•Net realized and unrealized gains on other investments, including equities of $432.7 million for the three months ended September 30, 2020 compared to $10.1 million for the three months ended September 30, 2019, an increase of $422.7 million. The unrealized gains for the three months ended September 30, 2020 primarily comprised unrealized gains in our hedge funds, fixed income funds, equities, equity funds, private equity funds, CLO equities and CLO equity funds. The gains were principally driven by tightening credit spreads and more favorable movement in equity markets in the current period as risk assets continued to recover from the unrealized losses associated with COVID-19 pandemic during the first quarter of 2020. The unrealized gains for the three months ended September 30, 2019 primarily comprised unrealized gains in fixed income funds, principally driven by declining interest rates, equity and private equity funds, partially offset by unrealized losses on our hedge funds, equity funds and CLO equities.
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The following tables summarize our investment results for the nine months ended September 30, 2020 and 2019:
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
| Non-Life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Net investment income: | |||||||||||||||||||||||||||||
Fixed income securities (1) | $ | 192,998 | $ | 3,792 | $ | 17,340 | $ | — | $ | 214,130 | |||||||||||||||||||
| Cash and restricted cash | 2,229 | 322 | 892 | 103 | 3,546 | ||||||||||||||||||||||||
| Other investments, including equities | 36,455 | 420 | 5,253 | (8,248) | 33,880 | ||||||||||||||||||||||||
| Less: Investment expenses | (8,257) | (152) | (1,860) | — | (10,269) | ||||||||||||||||||||||||
| Total net investment income (expense) | $ | 223,425 | $ | 4,382 | $ | 21,625 | $ | (8,145) | $ | 241,287 | |||||||||||||||||||
| Net realized gains (losses): | |||||||||||||||||||||||||||||
Fixed income securities (1) | $ | 102,588 | $ | (338) | $ | 3,433 | $ | — | $ | 105,683 | |||||||||||||||||||
| Other investments, including equities | 7,579 | 135 | 1,497 | — | 9,211 | ||||||||||||||||||||||||
| Total net realized gains (losses) | $ | 110,167 | $ | (203) | $ | 4,930 | $ | — | $ | 114,894 | |||||||||||||||||||
| Net unrealized gains (losses): | |||||||||||||||||||||||||||||
Fixed income securities, trading (1) | $ | 105,787 | $ | 3,658 | $ | (8,031) | $ | — | $ | 101,414 | |||||||||||||||||||
| Other investments, including equities | 622,529 | (63) | (222) | — | 622,244 | ||||||||||||||||||||||||
| Total net unrealized gains (losses) | $ | 728,316 | $ | 3,595 | $ | (8,253) | $ | — | $ | 723,658 | |||||||||||||||||||
| Total investment return included in earnings (A) | $ | 1,061,908 | $ | 7,774 | $ | 18,302 | $ | (8,145) | $ | 1,079,839 | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||||||||
Unrealized gains (losses), on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange (B) (1) | $ | 41,683 | $ | 9 | $ | 2,037 | $ | — | $ | 43,729 | |||||||||||||||||||
| Total investment return = (A) + (B) | $ | 1,103,591 | $ | 7,783 | $ | 20,339 | $ | (8,145) | $ | 1,123,568 | |||||||||||||||||||
Annualized income from fixed income assets (2) | $ | 260,303 | $ | 5,485 | $ | 24,309 | $ | 137 | $ | 290,235 | |||||||||||||||||||
Average aggregate fixed income assets, at cost (2)(3) | 9,421,717 | 259,825 | 1,036,768 | 17,168 | 10,735,478 | ||||||||||||||||||||||||
| Annualized investment book yield | 2.76 | % | 2.11 | % | 2.34 | % | 0.80 | % | 2.70 | % | |||||||||||||||||||
Average aggregate invested assets, at fair value (3) | $ | 13,055,657 | $ | 294,798 | $ | 1,223,575 | $ | 17,168 | $ | 14,591,198 | |||||||||||||||||||
| Investment return included in net earnings | 8.13 | % | 2.64 | % | 1.50 | % | (47.44) | % | 7.40 | % | |||||||||||||||||||
| Total investment return | 8.45 | % | 2.64 | % | 1.66 | % | (47.44) | % | 7.70 | % | |||||||||||||||||||
(1) Fixed income securities Includes both trading and AFS short-term and fixed maturity investments as well as funds held - directly managed whereas, fixed income securities, trading excludes AFS investments and fixed income, AFS excludes trading investments.
(2) Fixed income assets includes fixed income securities and cash and restricted cash.
(3) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
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| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
| Non-Life Run-off | Atrium | StarStone | Other | Total | |||||||||||||||||||||||||
| Net investment income: | |||||||||||||||||||||||||||||
Fixed income securities (1) | $ | 187,471 | $ | 4,146 | $ | 18,094 | $ | 567 | $ | 210,278 | |||||||||||||||||||
| Cash and restricted cash | 7,383 | 708 | 3,568 | 382 | 12,041 | ||||||||||||||||||||||||
| Other investments, including equities | 19,542 | 891 | 5,401 | (7,357) | 18,477 | ||||||||||||||||||||||||
| Less: Investment expenses | (8,059) | (245) | (1,198) | 130 | (9,372) | ||||||||||||||||||||||||
| Total net investment income (expense) | $ | 206,337 | $ | 5,500 | $ | 25,865 | $ | (6,278) | $ | 231,424 | |||||||||||||||||||
| Net realized gains (losses): | |||||||||||||||||||||||||||||
Fixed income securities (1) | $ | 44,764 | $ | 41 | $ | 1,500 | $ | 4,151 | $ | 50,456 | |||||||||||||||||||
| Other investments, including equities | (1,600) | 140 | 247 | — | (1,213) | ||||||||||||||||||||||||
| Total net realized gains | $ | 43,164 | $ | 181 | $ | 1,747 | $ | 4,151 | $ | 49,243 | |||||||||||||||||||
| Net unrealized gains: | |||||||||||||||||||||||||||||
Fixed income securities, trading (1) | $ | 477,098 | $ | 4,297 | $ | 26,904 | $ | — | $ | 508,299 | |||||||||||||||||||
| Other investments, including equities | 295,640 | 986 | 2,623 | 1,698 | 300,947 | ||||||||||||||||||||||||
| Total net unrealized gains | $ | 772,738 | $ | 5,283 | $ | 29,527 | $ | 1,698 | $ | 809,246 | |||||||||||||||||||
| Total investment return included in earnings (A) | $ | 1,022,239 | $ | 10,964 | $ | 57,139 | $ | (429) | $ | 1,089,913 | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||||||||
Unrealized gains (losses), on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange (B) (1) | $ | 1,522 | $ | 307 | $ | (26) | $ | (1,072) | $ | 731 | |||||||||||||||||||
| Total investment return = (A) + (B) | $ | 1,023,761 | $ | 11,271 | $ | 57,113 | $ | (1,501) | $ | 1,090,644 | |||||||||||||||||||
Annualized income from fixed income assets (2) | $ | 259,805 | $ | 6,472 | $ | 28,883 | $ | 1,265 | $ | 296,425 | |||||||||||||||||||
Average aggregate fixed income assets, at cost (2)(3) | 8,621,207 | 255,591 | 1,180,412 | 87,240 | 10,144,450 | ||||||||||||||||||||||||
| Annualized investment book yield | 3.01 | % | 2.53 | % | 2.45 | % | 1.45 | % | 2.92 | % | |||||||||||||||||||
Average aggregate invested assets, at fair value (3) | $ | 11,314,815 | $ | 266,108 | $ | 1,345,180 | $ | 97,396 | $ | 13,023,499 | |||||||||||||||||||
| Investment return included in net earnings | 9.03 | % | 4.12 | % | 4.25 | % | (0.44) | % | 8.37 | % | |||||||||||||||||||
| Total investment return | 9.05 | % | 4.24 | % | 4.25 | % | (1.54) | % | 8.37 | % | |||||||||||||||||||
(1) Fixed income securities Includes both trading and AFS short-term and fixed maturity investments as well as funds held - directly managed whereas, fixed income securities, trading excludes AFS investments and fixed income, AFS excludes trading investments.
(2) Fixed income assets includes fixed income securities and cash and restricted cash.
(3) These amounts are an average of the amounts disclosed in our quarterly U.S. GAAP consolidated financial statements.
Net Investment Income:
Net investment income increased by $9.9 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. There was an increase of $3.9 million in net investment income from fixed maturities and a $15.4 million increase in other investment income and equities, partly offset by a decrease of $8.5 million in net investment income from cash and cash equivalents. There was an increase of $591.0 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 Hannover Re, Munich Re, Lyft, Aspen and AXA Group transactions in 2020 and the AmTrust RITC, Amerisure, Zurich and Maiden Re transactions in 2019. The book yield decreased by 22 basis points, primarily due to lower rates.
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Net Realized and Unrealized Gains (Losses):
Net realized and unrealized gains were $838.6 million for the nine months ended September 30, 2020 compared to net realized and unrealized gains of $858.5 million for the nine months ended September 30, 2019, a decrease of $19.9 million. Included in net realized and unrealized gains (losses) are the following items:
•Net realized and unrealized gains on fixed income securities, including fixed income securities within our funds held portfolios, of $207.1 million for the nine months ended September 30, 2020, compared to net realized and unrealized gains of $558.8 million for the nine months ended September 30, 2019, a decrease of $351.7 million. The gains in the current period were primarily driven by a decline in interest rates, partially offset by a widening of credit spreads. The gains in 2019 were due to a combination of lower interest rates and tightening credit spreads;
•Net realized and unrealized gains on other investments, including equities of $631.5 million for the nine months ended September 30, 2020 compared to $299.7 million for the nine months ended September 30, 2019, an increase of $331.7 million. The unrealized gains for the nine months ended September 30, 2020 primarily comprised unrealized gains in our hedge funds, private equity funds, fixed income funds and private debt funds principally driven by declining interest rates and improving equity valuations, partially offset by unrealized losses in our equity, equity funds and CLO equities, due to recent disruption in global financial markets associated with the COVID-19 pandemic. The unrealized gains for the nine months ended September 30, 2019 primarily comprised of unrealized gains in in our hedge funds, equities, equity funds, fixed income funds, and private equity funds, principally driven by declining interest rates, tightening credit spreads, and a favorable movement in equity markets in 2019.
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Liquidity and Capital Resources
Overview
We aim to generate cash flows from our insurance operations and investments, preserve sufficient capital for future acquisitions, and develop relationships with lenders who provide borrowing capacity at competitive rates.
Our capital resources as of September 30, 2020 included ordinary shareholders' equity of $5.3 billion, preferred equity of $510.0 million, redeemable noncontrolling interest of $376.7 million classified as temporary equity, and debt obligations of $1.4 billion. Based on our current loss reserves position, our portfolios of in-force insurance and reinsurance business, and our investment positions, we believe we are well capitalized.
The following table details our capital position:
| September 30, 2020 | December 31, 2019 | Change | ||||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||
| Ordinary shareholders' equity | $ | 5,310,885 | $ | 4,332,183 | $ | 978,702 | ||||||||||||||
| Series D and E Preferred Shares | 510,000 | 510,000 | — | |||||||||||||||||
| Total Enstar Shareholders' Equity (A) | 5,820,885 | 4,842,183 | 978,702 | |||||||||||||||||
| Noncontrolling interest | 14,468 | 14,168 | 300 | |||||||||||||||||
| Total Shareholders' Equity (B) | 5,835,353 | 4,856,351 | 979,002 | |||||||||||||||||
| Senior Notes | 843,095 | 842,216 | 879 | |||||||||||||||||
| Junior Subordinated Notes | 344,813 | — | 344,813 | |||||||||||||||||
| Revolving credit facility | 260,000 | — | 260,000 | |||||||||||||||||
| Term loan facility | — | 348,991 | (348,991) | |||||||||||||||||
| Total debt (C) | 1,447,908 | 1,191,207 | 256,701 | |||||||||||||||||
| Redeemable noncontrolling interest (D) | 376,731 | 438,791 | (62,060) | |||||||||||||||||
| Total capitalization = (B) + (C) + (D) | $ | 7,659,992 | $ | 6,486,349 | $ | 1,173,643 | ||||||||||||||
| Total capitalization attributable to Enstar = (A) + (C) | $ | 7,268,793 | $ | 6,033,390 | $ | 1,235,403 | ||||||||||||||
| Debt to total capitalization | 18.9 | % | 18.4 | % | 0.5 | % | ||||||||||||||
| Debt and Series D and E Preferred Shares to total capitalization | 25.6 | % | 26.2 | % | (0.6) | % | ||||||||||||||
| Debt to total capitalization attributable to Enstar | 19.9 | % | 19.7 | % | 0.2 | % | ||||||||||||||
| Debt and Series D and E Preferred Shares to total capitalization available to Enstar | 26.9 | % | 28.2 | % | (1.3) | % | ||||||||||||||
As of September 30, 2020, we had $640.6 million of cash and cash equivalents, excluding restricted cash that supports insurance operations, and included in this amount was $349.2 million held by foreign subsidiaries outside of Bermuda. Based on our group's current corporate structure with a Bermuda domiciled parent company and the jurisdictions in which we operate, if the cash and cash equivalents held by our foreign subsidiaries were to be distributed to us, as dividends or otherwise, such amounts would not be subject to incremental income taxes, however in certain circumstances withholding taxes may be imposed by some jurisdictions, including the United States. Based on existing tax laws, regulations and our current intentions, there was no accrual as of September 30, 2020 for any material withholding taxes on dividends or other distributions, as described in Note 19 - "Income Taxation" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Dividends
Historically, Enstar has not declared a dividend on its ordinary shares. The strategy has been to retain earnings and invest distributions from operating subsidiaries into our business. We may reevaluate this strategy from time to time based on overall market conditions and other factors.
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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 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, 2020 to November 6, 2020:
| Dividend per: | ||||||||||||||||||||||||||||||||||||||
| Preferred Share Series | Date Declared | Record Date | Date Paid or Payable | Preferred Share | Depositary Share | Total dividends paid in the nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| (in U.S. dollars) | (in thousands of U.S. dollars) | |||||||||||||||||||||||||||||||||||||
| Series D | February 4, 2020 | February 15, 2020 | March 2, 2020 | $ | 437.50 | $ | 0.43750 | $ | 7,000 | |||||||||||||||||||||||||||||
| Series E | February 4, 2020 | February 15, 2020 | March 2, 2020 | $ | 437.50 | $ | 0.43750 | 1,925 | ||||||||||||||||||||||||||||||
| Series D | May 5, 2020 | May 15, 2020 | June 1, 2020 | $ | 437.50 | $ | 0.43750 | 7,000 | ||||||||||||||||||||||||||||||
| Series E | May 5, 2020 | May 15, 2020 | June 1, 2020 | $ | 437.50 | $ | 0.43750 | 1,925 | ||||||||||||||||||||||||||||||
| Series D | August 5, 2020 | August 15, 2020 | September 1, 2020 | $ | 437.50 | $ | 0.43750 | 7,000 | ||||||||||||||||||||||||||||||
| Series E | August 5, 2020 | August 15, 2020 | September 1, 2020 | $ | 437.50 | $ | 0.43750 | 1,925 | ||||||||||||||||||||||||||||||
| Series D | November 5, 2020 | November 15, 2020 | December 1, 2020 | $ | 437.50 | $ | 0.43750 | — | ||||||||||||||||||||||||||||||
| Series E | November 5, 2020 | November 15, 2020 | December 1, 2020 | $ | 437.50 | $ | 0.43750 | — | ||||||||||||||||||||||||||||||
| $ | 26,775 | |||||||||||||||||||||||||||||||||||||
Any payment of common or preferred dividends must be approved by our Board of Directors. Our ability to pay common and preferred dividends is subject to certain restrictions, as described in Note 22 - "Dividend Restrictions and Statutory Financial Information" to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
Sources and Uses of Cash
Holding Company Liquidity
The potential sources of cash flows to Enstar as a holding company consist of cash flows from our subsidiaries including dividends, advances and loans, and interest income on loans to our subsidiaries. We also borrow under our credit and loan facilities, and we have issued senior notes and preferred shares, and guaranteed junior subordinated notes issued by one of our subsidiaries.
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 dividends on our preference shares and interest and principal on loans from subsidiaries and debt obligations, including loans under our credit facilities, our 4.50% senior notes due 2022 (the “2022 Senior Notes”), our 4.95% senior notes due 2029 (the "2029 Senior Notes” and, together with the 2022 Senior Notes, the "Senior Notes") and our 5.75% Junior Subordinated Notes due 2040 (the “Junior Subordinated Notes”). The Senior Notes and the Junior Subordinated Notes qualify as Tier 3 and Tier 2 capital, respectively, under the eligible capital rules of the Bermuda Monetary Authority.
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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 August 17, 2020 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.
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.
U.S. Finance Company Liquidity
Enstar Finance LLC ("Enstar Finance") is a wholly-owned finance subsidiary and is dependent upon funds from other subsidiaries to pay any amounts due under the Junior Subordinated Notes. In addition, we are a holding company that conducts substantially all of our operations through our subsidiaries. Our only significant assets are the capital stock of our subsidiaries. Because substantially all of our operations are conducted through our insurance subsidiaries, substantially all of our consolidated assets are held by our subsidiaries and most of our cash flow, and, consequently, our ability to pay any amounts due on the guaranty of the Junior Subordinated Notes, is dependent upon the earnings of our subsidiaries and the transfer of funds by those subsidiaries to us in the form of distributions or loans.
In addition, the ability of our insurance and reinsurance subsidiaries to make distributions or other transfers to Enstar Finance or us is limited by applicable insurance laws and regulations. These laws and regulations and the determinations by the regulators implementing them may significantly restrict such distributions and transfers, and, as a result, adversely affect the overall liquidity of Enstar Finance or us. The ability of all of our subsidiaries to make distributions and transfers to Enstar Finance and us may also be restricted by, among other things, other applicable laws and regulations and the terms of our bank loans and our subsidiaries’ bank loans and other issued debt instruments.
Operating Company Liquidity
The ability of our insurance and reinsurance subsidiaries 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 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, 2019. As of September 30, 2020, all of our insurance and reinsurance subsidiaries’ capital resources levels were in excess of the minimum levels required. The ability of our subsidiaries to pay dividends is subject to certain restrictions, as described in Note 22 - "Dividend Restrictions and Statutory Financial Information" to our consolidated financial statements included within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019. Our subsidiaries' ability to pay dividends and make other forms of distributions may also be limited by our repayment obligations under certain of our outstanding loan facility agreements. Variability in ultimate loss payments and valuations of investments held in collateral accounts 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; however, cash provided by operating activities was positive for the nine months ended September 30, 2020 and 2019 as the proceeds from sales and maturities of trading securities exceeded cash used in the purchase of trading securities, with the net proceeds being used in the purchase of available-for-sale securities included within investing cash flows.
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In the Atrium segment, 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. As a result of the announcement to sell StarStone U.S. and place StarStone International into run-off, we expect net neutral cash flows from operations as net claim payments, losses incurred on earned premiums and operating expenses are met by cash inflows from investment income, collection of premium receivable and proceeds from sales and maturities of investments.
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.
Cash Flows
The following table summarizes our consolidated cash flows provided by (used in) operating, investing and financing activities:
| Nine Months Ended September 30, | ||||||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||||||
| (in thousands of U.S. dollars) | ||||||||||||||||||||
| Cash provided by (used in): | ||||||||||||||||||||
| Operating activities | $ | 2,104,030 | $ | 429,568 | $ | 1,674,462 | ||||||||||||||
| Investing activities | (2,011,034) | (573,708) | (1,437,326) | |||||||||||||||||
| Financing activities | 202,623 | 309,642 | (107,019) | |||||||||||||||||
| Discontinued operations cash flows: | ||||||||||||||||||||
| Net cash flows provided by operating activities | 114,024 | 210,666 | (96,642) | |||||||||||||||||
| Net cash flows used in investing activities | (134,759) | (5,332) | (129,427) | |||||||||||||||||
| Net cash flows from discontinued operations | (20,735) | 205,334 | (226,069) | |||||||||||||||||
| Effect of exchange rate changes on cash | 1,727 | (12,507) | 14,234 | |||||||||||||||||
| Net increase in cash and cash equivalents | 276,611 | 358,329 | (81,718) | |||||||||||||||||
| Cash and cash equivalents, beginning of period | 971,349 | 901,996 | 69,353 | |||||||||||||||||
| Net change in cash of businesses held-for-sale | (50,638) | (205,333) | 154,695 | |||||||||||||||||
| Cash and cash equivalents, end of period | $ | 1,197,322 | $ | 1,054,992 | $ | 142,330 | ||||||||||||||
Details of our consolidated cash flows are included in "Item 1. Financial Statements - Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019."
Nine Months Ended September 30: Cash and cash equivalents increased by $276.6 million during the nine months ended September 30, 2020 compared to $358.3 million during the nine months ended September 30, 2019.
For the nine months ended September 30, 2020, cash and cash equivalents increased by $276.6 million, as cash provided by operating and financing activities of $2.1 billion and $202.6 million, respectively, was partially offset by cash used in investing activities of $2.0 billion. Cash provided by operations was largely the result of the proceeds from net sales and maturities of trading securities and cash and restricted cash acquired in Non-life Run-off reinsurance transactions partly offset by the timing of paid losses. Cash provided by financing activities for the nine months ended September 30, 2020 was primarily attributable to the net debt obligations drawdown of $254.8 million which is discussed in the "Debt Obligations" section below and which was used to fund significant new business. During the nine months ended September 30, 2020, we repurchased 174,464 shares for $25.4 million, and paid $26.8 million of dividends on preferred shares, which are cash outflows within cash provided by financing activities. Cash used in investing activities for the nine months ended September 30, 2020 primarily related to net purchases of AFS securities of $1.5 billion and net subscriptions of other investments of $530.3 million. Change in cash of business held-for-sale is due to the classification of the assets and liabilities of Northshore as held-for-sale as of September 30, 2020.
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For the nine months ended September 30, 2019, cash and cash equivalents increased by $358.3 million, as cash provided by operating and financing activities of $429.6 million and $309.6 million, respectively, was partially offset by cash used in investing activities of $573.7 million. Cash provided by operations was largely a result of paid losses and net sales and maturities of trading securities. Cash provided by financing activities for the nine months ended September 30, 2019 was primarily attributable to an increase in debt obligations of $348.2 million due to the issuance of the 2029 Senior Notes, partially offset by a $150.0 million repayment of the 2018 EGL Term Loan Facility. Cash used in investing activities for the nine months ended September 30, 2019 was primarily related to net subscriptions of other investments of $271.0 million and net purchases of AFS securities of $263.1 million.
Investable Assets
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and cash equivalents and funds held. Investable assets were $16.0 billion as of September 30, 2020 as compared to $14.1 billion as of December 31, 2019, an increase of 13.5%. The increase was primarily due to assets acquired in relation to the Hannover Re, Munich Re, Lyft, Aspen and AXA Group transactions and unrealized gains on investments. For information regarding our investments strategy, portfolio and results, refer to "Investable Assets" above.
Reinsurance Balances Recoverable
As of September 30, 2020 and December 31, 2019, we had reinsurance balances recoverable on paid and unpaid losses of $1.9 billion and $2.2 billion, respectively.
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, StarStone purchases a tailored outwards reinsurance program designed to manage their risk profiles. The majority of 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 7 - "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 credit facilities primarily for funding acquisitions and significant new business, investment activities and, from time to time, for general corporate purposes. Our debt obligations were as follows:
| Facility | Origination Date | Term | September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| 4.50% Senior Notes due 2022 | March 10, 2017 | 5 years | $ | 349,155 | $ | 348,616 | ||||||||||||||||||||
| 4.95% Senior Notes due 2029 | May 28, 2019 | 10 years | 493,940 | 493,600 | ||||||||||||||||||||||
| Total Senior Notes | 843,095 | 842,216 | ||||||||||||||||||||||||
| 5.75% Junior Subordinated Notes due 2040 | August 26, 2020 | 20 years | 344,813 | — | ||||||||||||||||||||||
| EGL Revolving Credit Facility | August 16, 2018 | 5 years | 260,000 | — | ||||||||||||||||||||||
| 2018 EGL Term Loan Facility | December 27, 2018 | 3 years | — | 348,991 | ||||||||||||||||||||||
| Total debt obligations | $ | 1,447,908 | $ | 1,191,207 | ||||||||||||||||||||||
During the nine months ended September 30, 2020, the EGL Revolving Credit Facility was utilized for funding (i) significant new business as described in Note 3 - "Significant New Business," (ii) investment opportunities and (iii) to provide additional liquidity in the first half of the year during the financial disruption associated with the COVID-19 pandemic. In addition, we issued the Junior Subordinated Notes and used the proceeds to repay the 2018 EGL Term Loan Facility.
Senior Notes
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For information regarding our Senior Notes, refer to Note 14 - "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.
Junior Subordinated Notes
On August 26, 2020, our wholly-owned subsidiary, Enstar Finance issued the Junior Subordinated Notes for an aggregate principal amount of $350.0 million. The Junior Subordinated Notes are fully and unconditionally guaranteed by us on an unsecured and junior subordinated basis.
The Junior Subordinated Notes are exclusively the obligations of Enstar Finance and us, to the extent of the guarantee, and are not guaranteed by any of our other subsidiaries, which are separate and distinct legal entities and, except for Enstar Finance, have no obligation, contingent or otherwise, to pay holders any amounts due on the Junior Subordinated Notes or to make any funds available for payment on the Junior Subordinated Notes, whether by dividends, loans or other payments.
Generally, if an event of default occurs, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding Junior Subordinated Notes may declare the principal and accrued and unpaid interest on all of the Junior Subordinated Notes to be due and payable immediately.
For further information regarding the Junior Subordinated Notes, refer to Note 14 - "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.
Credit Facilities
As of September 30, 2020, we were permitted to borrow up to an aggregate of $600.0 million under our revolving credit facility. As of September 30, 2020, there was $340.0 million of available unutilized capacity under the facility. We are in compliance with the covenants of the facility. Subsequent to September 30, 2020, we have neither borrowed nor repaid any additional amounts under the facility, as such the unutilized capacity remains at $340.0 million. We have the option to increase the commitments under the facility by up to an aggregate amount of $400.0 million from the existing lenders, or through the addition of new lenders subject to the terms of the agreement.
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"). During 2019, we repaid principal of $150.0 million, and during the three months ended September 30, 2020, we repaid the remaining $350.0 million of principal on the facility. As of September 30, 2020, there was no amount outstanding on the 2018 EGL Term Loan Facility.
For further information regarding our credit facilities, refer to Note 14 - "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.
Letters of Credit
We utilize unsecured and secured letters of credit to support certain of our insurance and reinsurance performance obligations.
Funds at Lloyd's
We had an unsecured letter of credit agreement for Funds at Lloyd's (the "FAL Facility") as at September 30, 2020, to issue up to $375.0 million of letters of credit, with provision to increase the facility by an additional $25.0 million up to an aggregate amount of $400.0 million, subject to lenders approval. On November 5, 2020, we amended and restated the FAL Facility to reduce its capacity to $275.0 million (with provision to increase the facility by an additional $75.0 million) and extend its term by two years. The FAL Facility is available to satisfy our Funds at Lloyd's requirements and expires in 2025. As of September 30, 2020 and December 31, 2019, our combined Funds at Lloyd's were comprised of cash and investments of $547.0 million and $639.3 million, respectively, and unsecured letters of credit of $252.0 million as of both dates.
$120.0 million Letter of Credit Facility
We use this facility to support certain reinsurance collateral obligations of our subsidiaries. Pursuant to the facility agreement, we have the option to increase commitments under the facility by an additional $60.0 million. As of both September 30, 2020 and December 31, 2019, we had issued an aggregate amount of letters of credit under this facility of $120.0 million.
$800.0 million Syndicated Letter of Credit Facility
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During 2019, we entered into an unsecured $760.0 million letter of credit facility agreement, most recently amended on June 3, 2020. On August 4, 2020, we exercised our option to increase the commitments available under the facility by an aggregate amount of $40.0 million, bringing the total size of the facility to $800.0 million. The facility is used to collateralize certain reinsurance obligations, including $456.8 million relating to the reinsurance transaction with Maiden Reinsurance Ltd. As of September 30, 2020 and December 31, 2019, we had issued an aggregate amount of letters of credit under this facility of $619.8 million and $608.0 million, respectively.
$65.0 million Letter of Credit Facility
On August 4, 2020, we entered into a $65.0 million secured letter of credit facility agreement pursuant to which we issued a letter of credit in the amount of approximately $61.0 million to collateralize a portion of our reinsurance performance obligations relating to our novation transaction with Hannover Re, which we completed on August 6, 2020, as discussed in Note 3 - "Significant New Business" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
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Contractual Obligations
The following table summarizes, as of September 30, 2020, 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 89 of our Annual Report on Form 10-K for the year ended December 31, 2019. The table excludes short-term liabilities and includes only obligations that are expected to be settled in cash.
| Total | Less than or equal to 1 year | More than 1 year - less than or equal to 3 years | More than 3 years - less than or equal to 5 years | More than 5 years - less than or equal to 10 years | More than 10 years | ||||||||||||||||||||||||||||||
| (in millions of U.S. dollars) | |||||||||||||||||||||||||||||||||||
| Operating Activities | |||||||||||||||||||||||||||||||||||
Estimated gross reserves for losses and LAE (1) | |||||||||||||||||||||||||||||||||||
| Asbestos | $ | 1,779.2 | $ | 153.8 | $ | 266.0 | $ | 219.6 | $ | 350.5 | $ | 789.3 | |||||||||||||||||||||||
| Environmental | 318.6 | 35.7 | 61.3 | 49.0 | 69.7 | 102.9 | |||||||||||||||||||||||||||||
| General Casualty | 1,710.4 | 207.5 | 289.5 | 305.2 | 682.4 | 225.8 | |||||||||||||||||||||||||||||
| Workers' compensation/personal accident | 2,014.2 | 164.1 | 265.9 | 326.4 | 457.8 | 800.0 | |||||||||||||||||||||||||||||
| Marine, aviation and transit | 348.3 | 105.2 | 108.4 | 50.7 | 44.7 | 39.3 | |||||||||||||||||||||||||||||
| Construction defect | 123.1 | 34.7 | 45.0 | 21.8 | 12.9 | 8.7 | |||||||||||||||||||||||||||||
| Professional indemnity/ Directors & Officers | 979.8 | 200.5 | 257.4 | 154.1 | 237.9 | 129.9 | |||||||||||||||||||||||||||||
| Motor | 1,009.3 | 366.6 | 303.6 | 112.6 | 88.8 | 137.7 | |||||||||||||||||||||||||||||
| Property | 145.1 | 59.2 | 46.4 | 18.6 | 12.2 | 8.7 | |||||||||||||||||||||||||||||
| Other | 393.9 | 107.5 | 85.6 | 53.2 | 63.1 | 84.5 | |||||||||||||||||||||||||||||
| Total Non-Life Run-off | 8,821.9 | 1,434.8 | 1,729.1 | 1,311.2 | 2,020.0 | 2,326.8 | |||||||||||||||||||||||||||||
| StarStone International (Non-U.S.) | 1,310.1 | 448.4 | 466.9 | 207.3 | 152.1 | 35.4 | |||||||||||||||||||||||||||||
| Other | 26.3 | 6.4 | 8.5 | 3.4 | 8.0 | — | |||||||||||||||||||||||||||||
| ULAE | 371.7 | 67.5 | 83.4 | 53.9 | 70.1 | 96.8 | |||||||||||||||||||||||||||||
Estimated gross reserves for losses and LAE (1) | 10,530.0 | 1,957.1 | 2,287.9 | 1,575.8 | 2,250.2 | 2,459.0 | |||||||||||||||||||||||||||||
Held-for-sale liabilities: StarStone U.S. gross reserves for losses and LAE(2) | 830.5 | 246.2 | 289.4 | 152.3 | 107.0 | 35.6 | |||||||||||||||||||||||||||||
Held-for-sale liabilities : Atrium gross reserves for losses and LAE (3) | 245.1 | 96.4 | 89.0 | 35.9 | 19.9 | 3.9 | |||||||||||||||||||||||||||||
Operating lease obligations(4) | 45.5 | 10.2 | 15.8 | 10.2 | 7.3 | 2.0 | |||||||||||||||||||||||||||||
Atrium operating lease obligations (5) | 1.0 | 0.6 | 0.4 | — | — | — | |||||||||||||||||||||||||||||
| Investing Activities | |||||||||||||||||||||||||||||||||||
| Investment commitments to other investments | 792.2 | 418.8 | 182.0 | 111.8 | 79.6 | — | |||||||||||||||||||||||||||||
| Investment commitments to fixed maturities | 15.0 | 15.0 | — | — | — | — | |||||||||||||||||||||||||||||
| Investment commitments to equity method investments | 68.7 | 68.7 | — | — | — | — | |||||||||||||||||||||||||||||
| Financing Activities | |||||||||||||||||||||||||||||||||||
| Loan repayments (including estimated interest payments) | 2,126.9 | 67.4 | 718.9 | 89.8 | 699.6 | 551.2 | |||||||||||||||||||||||||||||
| Total | $ | 14,654.9 | $ | 2,880.4 | $ | 3,583.4 | $ | 1,975.8 | $ | 3,163.6 | $ | 3,051.7 | |||||||||||||||||||||||
(1)The reserves for losses and LAE represent management’s estimate of the ultimate cost of settling losses. The estimation of losses is based on various complex and subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our financial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may be significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different from the amounts disclosed above. The amounts in the above table represent our estimates of known liabilities as of September 30, 2020 and do not take into account corresponding reinsurance balance recoverable amounts that would be due to us. Furthermore, certain of the reserves included in the unaudited condensed consolidated financial statements as of September 30, 2020 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.
(2) In connection with the sale of StarStone U.S. disclosed within Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations," these liabilities are classified as held-for-sale as of September 30, 2020. Our Non-life Run-off segment will be assuming these liabilities, together with the associated reinsurance asset, via a loss portfolio transfer reinsurance agreement which is expected to occur contemporaneously with the sale of StarStone U.S. in the second half of 2020, subject to regulatory and other closing conditions.
(3) In connection with the Atrium Exchange Transaction disclosed within Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations," these liabilities are classified as held-for-sale as of September 30, 2020.
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(4) The variance of $0.4 million between our operating lease obligations disclosure of $45.5 million included within our contractual obligations table above and our undiscounted total lease payments of $45.1 million disclosed within Note 21 - "Commitments and Contingencies", is attributable to lease liabilities related to our short-term leases which are not included in our lease disclosures in Note 21 and offsetting lease liabilities on premises we have sub-leased to third-parties and which are excluded from the operating lease obligations disclosure on the table above.
(5) Pursuant to the Atrium Exchange Transaction discussed within Note 4 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations," the operating lease obligations related to Atrium are disclosed separately from the rest of the Company's lease obligations as of September 30, 2020.
In addition to the contractual obligations in the table on the previous page, we also have the right to purchase the RNCI related to Atrium and StarStone from the Trident V Funds and the Dowling Funds after a certain time in the future (a "call right") and the RNCI holders have the right to sell their RNCI to us after a certain time in the future (a "put right"). Pursuant to the Exchange Transaction described in Note 20 - "Related Party Transactions" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q, we have agreed to exchange a portion of our indirect interest in the holding company for Atrium for all of the Trident V Funds' indirect interest in StarStone U.S. Following the closing of the Exchange Transaction, we will maintain a call right over a portion of StarStone International owned by the Trident V Funds and the Dowling Funds, and they will maintain put rights to transfer those interests to us.
For additional information relating to our commitments and contingencies, see Note 21 - "Commitments and Contingencies" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
At September 30, 2020, 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, 2019. Except as discussed above, in the updates included in "Note 1 - Significant Accounting Policies" to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q, our critical accounting policies have not materially changed.
Cautionary Statement Regarding Forward-Looking Statements
This quarterly report and the documents incorporated by reference herein 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 securities 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, 2019. 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, 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, and cyclicality of demand and pricing in the insurance and reinsurance markets;
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•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;
•risks relating to the evolving COVID-19 global pandemic and the significant disruption and economic and financial turmoil that has taken place as a result of government measures to protect public health;
•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 the 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;
•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;
•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 Risk Factors that are included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019. 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 2020 are not materially different than those used in 2019 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. However, due to the ongoing uncertainty and volatility in financial markets as a result of the economic conditions caused by the COVID-19 pandemic, we expect interest rates, credit spreads and global equity markets to remain volatile in the near-term. Furthermore, the pandemic has increased the risk of defaults across many industries. As a result, we continue to closely monitor market risk during this time.
Interest Rate and Credit Spread Risk
Interest rate risk is the price sensitivity of a security to changes in interest rates. Credit spread risk is the price sensitivity of a security to changes in credit spreads. Our investment portfolio and funds held - directly managed includes fixed maturity and short-term investments, whose fair values will fluctuate with changes in interest rates and credit spreads. 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 AFS, our funds held directly managed portfolio, our fixed income funds and our fixed income exchange-traded funds, and excludes investments classified as held-for-sale:
| Interest Rate Shift in Basis Points | ||||||||||||||||||||||||||||||||
| As of September 30, 2020 | -100 | -50 | — | +50 | +100 | |||||||||||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||||||||||
| Total Market Value | $ | 10,551 | $ | 10,266 | $ | 9,985 | $ | 9,712 | $ | 9,453 | ||||||||||||||||||||||
| Market Value Change from Base | 5.7 | % | 2.8 | % | — | % | (2.7) | % | (5.3) | % | ||||||||||||||||||||||
| Change in Unrealized Value | $ | 566 | $ | 281 | $ | — | $ | (273) | $ | (532) | ||||||||||||||||||||||
| As of December 31, 2019 | -100 | -50 | — | +50 | +100 | |||||||||||||||||||||||||||
| Total Market Value | $ | 10,141 | $ | 9,893 | $ | 9,648 | $ | 9,415 | $ | 9,193 | ||||||||||||||||||||||
| Market Value Change from Base | 5.1 | % | 2.5 | % | — | % | (2.4) | % | (4.7) | % | ||||||||||||||||||||||
| Change in Unrealized Value | $ | 493 | $ | 245 | $ | — | $ | (233) | $ | (455) | ||||||||||||||||||||||
Actual shifts in interest rates may not change by the same magnitude across the maturity spectrum or on an individual security and, as a result, the impact on the fair value of our fixed maturity securities, short-term investments, funds held - directly managed and fixed income exchange-traded fund may be materially different from the resulting change in value indicated in the tables above.
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The following table summarizes the aggregate hypothetical change in fair value from an immediate parallel shift in credit spreads assuming interest rates remain fixed, in our fixed maturity and short-term investments portfolio classified as trading and AFS, our funds held directly managed portfolio, our fixed income funds and our fixed income exchange-traded funds, and excludes investments classified as held-for-sale:
| Credit Spread Shift in Basis Points | ||||||||||||||||||||
| As at September 30, 2020 | — | +50 | +100 | |||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||
| Total Market Value | $ | 9,985 | $ | 9,718 | $ | 9,466 | ||||||||||||||
| Market Value Change from Base | (2.7) | % | (5.2) | % | ||||||||||||||||
| Change in Unrealized Value | $ | (267) | $ | (519) | ||||||||||||||||
| As at December 31, 2019 | — | +50 | +100 | |||||||||||||||||
| Total Market Value | $ | 9,648 | $ | 9,429 | $ | 9,218 | ||||||||||||||
| Market Value Change from Base | (2.3) | % | (4.5) | % | ||||||||||||||||
| Change in Unrealized Value | $ | (219) | $ | (430) | ||||||||||||||||
Credit Risk
Credit risk relates to the uncertainty of a counterparty’s ability to make timely payments in accordance with contractual terms of the instrument or contract. We are exposed to direct credit risk primarily within our portfolios of fixed maturity and short-term investments, and through customers, brokers and reinsurers in the form of premiums receivable, reinsurance balances recoverable on paid and unpaid losses, respectively, as discussed below.
Fixed Maturity and Short-Term Investments
As a holder of $9.2 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 5 - "Investments" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. As of September 30, 2020, 40.4% of our fixed maturity and short-term investment portfolio was rated AA or higher by a major rating agency (December 31, 2019: 39.1%) with 3.3% rated lower than BBB- (December 31, 2019: 4.3%). The portfolio as a whole, including cash, restricted cash, fixed maturity and short term investments and funds held - directly managed, had an average credit quality rating of A+ as of September 30, 2020 (December 31, 2019: A+).
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 believe we do not have significant concentrations of credit risk.
A summary of our fixed maturity and short-term investments by credit rating is as follows:
| Credit rating | September 30, 2020 | December 31, 2019 | Change | ||||||||||||||
| AAA | 28.1 | % | 26.0 | % | 2.1 | % | |||||||||||
| AA | 12.3 | % | 13.1 | % | (0.8) | % | |||||||||||
| A | 32.9 | % | 34.5 | % | (1.6) | % | |||||||||||
| BBB | 23.2 | % | 21.9 | % | 1.3 | % | |||||||||||
| Non-investment grade | 3.3 | % | 4.3 | % | (1.0) | % | |||||||||||
| Not rated | 0.2 | % | 0.2 | % | — | % | |||||||||||
| Total | 100.0 | % | 100.0 | % | |||||||||||||
| Average credit rating | A+ | A+ | |||||||||||||||
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Reinsurance Balances Recoverable
We have exposure to credit risk as it relates to our reinsurance balances recoverable on paid and unpaid losses. 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 7 - "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.
Funds Held
Under funds held arrangements, the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries. The funds balance is credited with investment income and losses payable are deducted. We are subject to credit risk if the reinsured company is unable to honor the value of the funds held balances, such as in the event of insolvency. However, we generally have the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by us to the reinsured for losses payable and other amounts contractually due. Our funds held are shown under two categories on the consolidated balance sheets, where funds held upon which we receive the underlying portfolio economics are shown as "Funds held - directly managed", and funds held where we receive a fixed crediting rate are shown as "Funds held by reinsured companies." Both types of funds held are subject to credit risk. We routinely monitor the creditworthiness of reinsured companies with whom we have funds held arrangements. As of September 30, 2020, we had a significant concentration of $948.3 million with one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's.
Equity Price Risk
Our portfolio of equity investments, excluding our fixed income exchange-traded funds but including the equity funds and call options on equities included in other investments (collectively, "equities at risk"), has exposure to equity price risk, which is the risk of potential loss in fair value resulting from adverse changes in stock prices. Our fixed income exchange-traded funds are excluded from the below analysis and have been included within the interest rate and credit spread risk analysis, as the exchange-traded funds are part of our fixed income investment strategy. Our global equity portfolio is correlated with a blend of the S&P 500 and MSCI World indices, and changes in this blend of indices would approximate the impact on our portfolio. The following table summarizes the aggregate hypothetical change in fair value from a 10% decline in the overall market prices of our equities at risk:
| September 30, 2020 | December 31, 2019 | Change | |||||||||||||||
| (in millions of U.S. dollars) | |||||||||||||||||
| Publicly traded equity investments in common and preferred stocks | $ | 303.9 | $ | 327.9 | $ | (24.0) | |||||||||||
| Privately held equity investments in common and preferred stocks | 271.0 | 265.8 | 5.2 | ||||||||||||||
| Private equity funds | 320.5 | 323.5 | (3.0) | ||||||||||||||
| Equity funds | 290.1 | 410.1 | (120.0) | ||||||||||||||
| Call options on equity | — | 0.1 | (0.1) | ||||||||||||||
| Fair value of equities at risk | $ | 1,185.5 | $ | 1,327.4 | $ | (141.9) | |||||||||||
| Impact of 10% decline in fair value | $ | 118.6 | $ | 132.7 | $ | (14.1) | |||||||||||
In addition to the above, as of September 30, 2020, we had investments of $2.1 billion (December 31, 2019: $1.1 billion) in hedge funds, included within our other investments, at fair value, that have exposure, among other items, to equity price risk.
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Foreign Currency Risk
The table below summarizes our net exposures to foreign currencies:
| AUD | CAD | EUR | GBP | Other | Total | |||||||||||||||||||||||||||||||||
| As of September 30, 2020 | (in millions of U.S. dollars) | |||||||||||||||||||||||||||||||||||||
| Total net foreign currency exposure | $ | 0.7 | $ | 9.5 | $ | 72.0 | $ | (26.4) | $ | 0.5 | $ | 56.3 | ||||||||||||||||||||||||||
Pre-tax impact of a 10% movement of the U.S. dollar(1) | $ | 0.1 | $ | 1.0 | $ | 7.2 | $ | (2.6) | $ | 0.1 | $ | 5.6 | ||||||||||||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| Total net foreign currency exposure | $ | 20.2 | $ | (10.6) | $ | 12.9 | $ | (11.9) | $ | 0.6 | $ | 11.2 | ||||||||||||||||||||||||||
Pre-tax impact of a 10% movement of the U.S. dollar(1) | $ | 2.0 | $ | (1.1) | $ | 1.3 | $ | (1.2) | $ | 0.1 | $ | 1.1 | ||||||||||||||||||||||||||
(1)Assumes 10% change in the U.S. dollar relative to other currencies.
Through our subsidiaries located in various jurisdictions, we conduct our insurance and reinsurance operations in a variety of non-U.S. currencies. We have the following exposures to foreign currency risk:
•Transaction Risk: The functional currency for the majority of our subsidiaries is the U.S. dollar. Within these entities, any fluctuations in foreign currency exchange rates relative to the U.S. dollar has 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 AFS investments, are recognized in our consolidated statements of earnings. Changes in foreign exchange rates relating to non-U.S. dollar AFS investments are recorded in accumulated other comprehensive income (loss) in shareholders’ equity. Our subsidiaries with non-U.S. dollar functional currencies are also exposed to fluctuations in foreign currency exchange rates relative to their own functional currency.
•Translation Risk: Our net investments in certain European, British, and Australian subsidiaries have functional currencies of the Euro, British pound and Australian dollar, respectively. The foreign exchange gain or loss resulting from the translation of their financial statements from their respective functional currency into U.S. dollars is recorded in the cumulative translation adjustment account, which is a component of accumulated other comprehensive income (loss) in shareholders’ equity.
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.
•Selectively utilizing foreign currency forward contracts to mitigate foreign currency risk.
•Borrowing to hedge the foreign currency exposure on our net investment in certain of our subsidiaries whose functional currency is denominated in non-U.S. dollars, which is referred to as a non-derivative hedge.
The instruments we use to manage foreign currency risk are discussed in Note 6 - "Derivatives and Hedging Instruments" in the notes to our unaudited condensed consolidated financial statements included within Item 1 of this Quarterly Report on Form 10-Q. 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 consolidated results of operations and financial condition.
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. However, the actual effects of inflation on our consolidated results of operations cannot be accurately known until claims are ultimately settled.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2020. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that we maintained effective disclosure controls and procedures to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and timely reported as specified in the rules and forms of the U.S. Securities and Exchange Commission and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2020 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 21 - "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, 2019. The risk factors identified therein have not materially changed, except as set forth below:
The impact of COVID-19 and related risks has adversely affected our business, results of operations, financial condition, and liquidity and capital resources, and any future impact on our business is difficult to predict at this time.
The ongoing COVID-19 pandemic has caused significant disruption to the economy and financial markets globally, and the full extent of the potential impacts of COVID-19 are not yet known. Our results of operations, financial condition, and liquidity and capital resources have been adversely impacted by the COVID-19 pandemic, and the future impact of the pandemic is difficult to predict. In particular, we believe we are subject to the following risks related to the COVID-19 pandemic:
•Investments. Due in large part to the uncertainty caused by the COVID-19 pandemic in global financial markets, our investment portfolio has experienced significant volatility. In the first quarter of 2020, we experienced significant unrealized losses (largely due to widening credit spreads on fixed income investments and changes in the fair value of our equity investments), heightened credit risk, and declines in yields on our fixed income investments. Although these unrealized losses reversed since the first quarter, our investment portfolios may continue to experience significant volatility and could be adversely impacted by unfavorable market conditions caused by the COVID-19 pandemic, which could cause continued volatility in our results of operations and negatively impact our financial condition.
•Debt and Equity Financing. As a result of the economic conditions caused by the COVID-19 pandemic, capital and credit markets continue to experience volatility that could negatively impact our ability to raise additional capital through the debt or equity markets or through bank or other debt financing. If we are unable obtain adequate capital on suitably attractive terms, or at all, we may be unable to implement our future growth or operating plans and our business, financial condition, and results of operations could be materially adversely affected.
•Liquidity. Due to the change in fair value of our investments caused by the COVID-19 pandemic, we and our insurance and reinsurance subsidiaries may need additional capital to maintain compliance with regulatory capital requirements and/or be required to post additional collateral under existing reinsurance arrangements, which could reduce our liquidity. Due to current market conditions, we may not be able to secure letters of credit to satisfy certain of our existing collateral obligations, including through the extension or renewal of existing facilities, or such letters of credit may only be available on unfavorable terms. In addition, we may experience a reduction in the amount of available distribution or dividend capacity from our regulated insurance and reinsurance subsidiaries, which would also reduce liquidity.
•Acquisitions and New Business. Our ability to complete acquisitions of companies and portfolios of insurance and reinsurance business in our Non-life Run-off segment may be adversely impacted by circumstances created by the COVID-19 pandemic, including as a result of the limited availability of external financing or funding to acquire new business, the willingness of counterparties to engage in transactions in light of uncertain economic conditions or financial stress, and the additional scrutiny of regulators whose approval is required to complete transactions due to the uncertain economic conditions, as well as other factors that we are unable to predict.
•Active Underwriting Segments. We have experienced underwriting losses relating to the COVID-19 pandemic in our Atrium and StarStone segments across various lines of business. Although we have established reserves against these losses as of September 30, 2020, given the uncertainty surrounding the COVID-19 pandemic and its impact on the insurance industry, our preliminary estimates of losses and loss adjustment expenses and estimates of reinsurance recoverable arising from the COVID-19 pandemic may materially change. Unanticipated issues relating to claims and coverage may emerge, which could adversely affect our business by increasing the scope of coverage beyond our intent and/or increasing the frequency and severity of claims.
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•Operational Disruptions. We rely on the continued productivity of our senior executive team, our employees, and our agents, brokers, third party administrators, suppliers and outsourcing providers to carry out our operations. If any of these people are unable to continue to work productively, or at all, due to illness, government restrictions, remote working conditions, or other disruptions related to the COVID-19 pandemic, our ability to conduct our operations may be adversely affected. In addition, like many other companies, the vast majority of our employees are working remotely, and we are therefore more dependent on our information technology systems and the continued access by our employees and service providers to reliable internet and telecommunications systems. We will be adversely affected if these systems do not function effectively or are disrupted due to heightened demand, cybersecurity attacks and data security incidents, or for any other related reason. These types of operational disruptions that impact our people and/or systems and others we may not foresee, would negatively impact our ability to settle claims efficiently, complete acquisitions, integrate our acquired businesses, manage our investments, or otherwise conduct our business.
Circumstances caused by the COVID-19 pandemic are complex, uncertain and rapidly evolving. We therefore may not be able to accurately predict the longer-term effects that the COVID-19 pandemic may have on our financial condition or results of operations. To the extent the COVID-19 pandemic adversely affects our financial condition or results of operations, it may also have the effect of heightening additional risks described in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2019.
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 September 30, 2020.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Program (2) | ||||||||||||||||||||||
| Beginning dollar amount available to be repurchased | $ | 137,474 | ||||||||||||||||||||||||
July 1, 2020 - July 31, 2020 (1) | 103 | $ | 151.66 | — | — | |||||||||||||||||||||
| August 1, 2020 - August 31, 2020 | — | $ | — | — | — | |||||||||||||||||||||
| September 1, 2020 - September 30, 2020 | 81,954 | $ | 156.96 | 81,954 | (12,864) | |||||||||||||||||||||
| 82,057 | 81,954 | $ | 124,610 | |||||||||||||||||||||||
(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.
(2) Ordinary shares repurchased pursuant to the Company's Board-approved ordinary share repurchase program announced on March 9, 2020, which authorized the repurchase of up to $150.0 million of ordinary shares. The share repurchase plan was suspended on March 23, 2020 due to uncertainty in the global financial markets resulting from the COVID-19 pandemic. The repurchase program resumed on September 21, 2020 and expires on March 1, 2021. From inception to September 30, 2020, we repurchased 174,464 ordinary shares for an aggregate price of $25.4 million under the Repurchase Program. As of September 30, 2020, the remaining capacity under the Repurchase Program was $124.6 million.
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ITEM 6. EXHIBITS
| Exhibit No. | Description | |||||||
| Memorandum of Association of Enstar Group Limited (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-K/A filed on May 2, 2011). | ||||||||
| Fifth Amended and Restated Bye-Laws of Enstar Group Limited (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on June 13, 2019). | ||||||||
| Certificate of Designations of Series C Participating Non-Voting Perpetual Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on June 17, 2016). | ||||||||
| Certificate of Designations of 7.00% fixed-to-floating rate perpetual non-cumulative preference shares, Series D (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on June 27, 2018). | ||||||||
| Certificate of Designations of 7.00% perpetual non-cumulative preference shares, Series E (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on November 21, 2018). | ||||||||
Junior Subordinated Indenture dated as of August 26, 2020, among Enstar Finance LLC, Enstar Group Limited and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Form 8-K filed on August 26, 2020). | ||||||||
First Supplemental Indenture dated as of August 26, 2020, among Enstar Finance LLC, Enstar Group Limited and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed on August 26, 2020). | ||||||||
10.1* | Amendment No. 1 to North Bay Voting and Shareholders Agreement, dated as of July 14, 2020, among Kenmare Holdings Ltd., Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P. | |||||||
Transition Agreement, dated July 17, 2020, by and between Enstar Group Limited and Guy Bowker (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on July 17, 2020). | ||||||||
Recapitalization Agreement, dated as of August 13, 2020, among North Bay Holdings Limited, Enstar Group Limited, Kenmare Holdings Ltd., Trident V, L.P., Trident V Parallel Fund, L.P., Trident V Professionals Fund, L.P., Dowling Capital Partners I, L.P., Capital City Partners LLC and StarStone Specialty Holdings Limited (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 17, 2020). | ||||||||
22.1* | Subsidiary Guarantors and Issuers of Guaranteed Securities. | |||||||
31.1* | 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. | |||||||
31.2* | 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. | |||||||
32.1** | 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. | |||||||
32.2** | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |||||||
| 104 | Cover page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) | |||||||
________________________________
* filed herewith
** furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 6, 2020.
| 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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