ENSTAR GROUP LTD – 10-K – | Management Discussion and Analysis | Operational Highlights
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this annual report.
Some of the information contained in this discussion and analysis or included
elsewhere in this annual report, including information with respect to our plans
and strategy for our business, includes forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results and the timing of
events could differ materially from those anticipated by these forward-looking
statements as a result of many factors, including those discussed under
"Cautionary Statement Regarding Forward-Looking Statements", "Item 1A. Risk
Factors" and elsewhere in this annual report.
Table of Contents
Section Page
Operational Highlights 45
Consolidated Results of Operations - for the Years Ended December 31 ,
202 2 , 202 1 and 20 20 47
• Underwriting Results 53
• Investment Results 58
• General and Administrative Expenses 62
Key Performance Measures 51
New Business 63
Non-GAAP Financial Measures 64
Other Financial Measures 71
Results of Operations by Segment - for the Years Ended December 31, 2022 ,
2021 and 2020 72
• Run-off Segment 73
• Assumed Life Segment 75
• Investments Segment 76
• Legacy Underwriting Segment 80
Corporate and Other 81
Current Outlook 83
Liquidity and Capital Resources 86
Critical Accounting Estimates 94
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Item 7 | Management Discussion and Analysis | Operational
Highlights Operational Highlights
Our consolidated results for the year ended
continued progress on providing capital release solutions to our clients by
acquiring and managing their run-off portfolios.
During 2022 we:
Assumed
billion
•InMay 2022 , we completed a loss portfolio transfer ("LPT") transaction with Aspen Insurance Holdings Limited ("Aspen") with respect to$3.1 billion of net loss reserves, subject to a limit of$3.6 billion . Our existing ADC withAspen , which had acquired reserves of$782 million and closed inJune 2020 , was absorbed into this LPT. As a result of this LPT transaction, we assumed an incremental$1.9 billion of net loss reserves with a diverse mix of property, liability and specialty lines of business, in exchange for incremental premium of$1.8 billion5, and assumed claims control. •InAugust 2022 , we closed a LPT transaction withProbitas Managing Agency Limited ("Probitas") and assumed$61 million of net loss reserves with respect to the 2018 and prior year of account exposures of Probitas' managed Syndicate 1492 which cover general liability and financial risks underwritten worldwide. The LPT converted into a reinsurance to close ("RITC") effectiveJanuary 1, 2023 following regulatory approvals. •InNovember 2022 , we closed a LPT transaction with a wholly owned subsidiary of Argo Group International Holdings, Ltd. ("Argo") covering a number of its directU.S. casualty insurance portfolios, including construction, for accident years 2011 to 2019.
At closing, we assumed
premium of
Substantially Completed the Unwind of Enhanzed Re's Reinsurance Transactions
•InJune 2022 , Enhanzed Re paid a$200 million dividend, of which$150 million was retained by the Company, and$50 million was paid to Allianz SE ("Allianz") in respect of its ownership interest in Enhanzed Re. •Following the completion of our strategic review of Enhanzed Re earlier this year, inAugust 2022 , we entered into a Master Agreement with Allianz through which we agreed to a series of transactions6 that allowed us to unwind the Enhanzed Re reinsurance transactions in an orderly manner.
•Enhanzed Re completed and recognized the following transactions during the year
ended
•Commuted the catastrophe reinsurance business with Allianz, resulting in the
recognition of a favorable commutation gain of
•Repaid the
Enhanzed Re to an affiliate of Allianz.
•InNovember 2022 , Enhanzed Re completed a novation of the reinsurance closed block of life annuity policies toMonument Re Limited ("Monument Re"). We settled the life liabilities and the related assets at carrying value in return for cash consideration as of the closing date. As atSeptember 30, 2022 , the carrying value of the life liabilities and related assets was$1.2 billion and$980 million , respectively, which would be recorded as$328 million7 of other income if measured as of this date. •Our net earnings attributable to Enstar will be reduced by the amount attributable to Allianz's 24.9% noncontrolling interest in Enhanzed Re at the time of the transaction and a portion of our other income recorded will be subject to deferral over the expected settlement period for the life annuity policies to
5 Refer to "New Business" section for further details.
6 Refer to Note 1 to our consolidated financial statements for further details.
7The$328 million of other income will consist of the gain or loss on the novation transaction and the impact of the realization of AOCI relating to the adoption of the LDTI standard which was retrospectively applied as of theJanuary 1, 2023 adoption date. Refer to Note 2 to our consolidated financial statements for further details.Enstar Group Limited | 2022 Form 10-K
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
account for our pre-existing 20% ownership interest in Monument Re, resulting in
an expected overall increase in our first quarter 2023 net earnings of
million
•Activity for the period from
the amount of other income and net earnings recorded.
•OnDecember 28, 2022 , Enhanzed Re repurchased the entire 24.9% ownership interest Allianz held in Enhanzed Re for$174 million . The purchase price will be subject to a post-closing adjustment based on the final net book value of Enhanzed Re as ofDecember 31, 2022 . Following the completion of this transaction, Enhanzed Re became a wholly-owned subsidiary of Enstar. •The final impact of the novation and the share repurchase will be reflected in our first quarter 2023 results, as we report the results of Enhanzed Re on a one quarter reporting lag.
Executed Capital Transactions
•We completed a$500 million junior subordinated notes offering inJanuary 2022 , the net proceeds of which were primarily used to fund the payment at maturity of the outstanding$280 million aggregate principal amount of our senior notes, which matured inMarch 2022 . •We repurchased 697,580 voting ordinary shares during the year endedDecember 31, 2022 for an aggregate$163 million , representing an average price per share of$233.92 . During the year endedDecember 31, 2022 , we utilized$105 million of the$200 million authorized under the 2022 Repurchase Program and the remaining$59 million authorized under the 2021 Repurchase Program to repurchase our ordinary shares. There were no share repurchases during the three months endedDecember 31, 2022 .Enstar Group Limited | 2022 Form 10-K 47
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Consolidated Results of Operations - For the Years Ended
and 2020
Primary GAAP Financial Measures
We use the following GAAP measures to manage the company and monitor our
performance:
•Net earnings and net earnings attributable to Enstar ordinary shareholders,
which collectively provide a measure of our performance focusing on
underwriting, investment and expense results;
•Comprehensive income attributable to Enstar, which provides a measure of the total return, including unrealized investment gains and losses on investments, as well as other elements of other comprehensive income;
•Book value per share ("BVPS"), which we use to measure the value of our company
over time;
•Return on equity ("ROE"), which measures our profitability by dividing our
earnings attributable to the company by our shareholders' equity;
•Total investment return ("TIR"), which measures the rate of return we obtain,
both realized and unrealized, on our investments; and
•Run-off liability earnings ("RLE") and RLE %, which measure both the dollar
amount of prior period development we achieve on managing our acquired
portfolios (RLE) and the percentage rate of return we obtain on managing our
run-off liabilities by dividing our prior period net incurred losses and LAE by
our average net loss reserves (RLE %).
We amended our calculation of TIR to include the unrealized gains (losses), net
of reclassification adjustments and excluding foreign exchange on our AFS
securities, included within other comprehensive income ("OCI"). We believe this
represents a better measure of "total" investment return, and eliminates the
discrepancy between the numerator and denominator, whereby the fair value of AFS
securities includes any unrealized gains (losses) in AOCI. The change in the
calculation was applied to all periods presented herein.
Effective December 31, 2022 , we voluntarily changed our accounting policy for
calculating the amortization of our DCAs and retrospectively applied this change
to all applicable prior period financial statement information. As of January 1,
2020 , the cumulative effect of this change resulted in a $158 million increase
to retained earnings. The favorable impacts to net earnings for the years ended
December 31, 2022 , 2021 and 2020 were $163 million , $65 million and $4 million ,
respectively.
We regard DCA as an adjustment to the liabilities that we acquire and record at
book value. As a result, DCA reflects the time value of money difference between
the premium received and liabilities recorded. As a result of the change:
•We no longer adjust DCA amortization as if any change in ultimates losses were
known on inception; and
•We have removed DCA amortization from our measures of RLE and RLE % as we now
view DCA as a separate overall cost of the acquisition of the contract. The
change in the calculation was applied to all prior periods presented herein.
Further information on this change in accounting principle can be found in Note
2 and Note 9 to our consolidated financial statements.
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
The following table sets forth certain consolidated financial information for
the years ended
Year Ended December 31,
$ / pp $ / pp
2022 2021 Change 2020 Change
(in millions of U.S. dollars)
Underwriting Results
Net premiums earned $ 66 $ 245 $ (179) $ 572 $ (327)
Net incurred losses and LAE
Current period 48 172 (124) 405 (233)
Prior Period (756) (403) (353) (32) (371)
Total net incurred losses and LAE (708) (231) (477) 373 (604)
Policyholder benefit expenses 25 (3) 28 - (3)
Amortization of net deferred charge assets 80 55 25 39 16
Acquisition costs 23 57 (34) 171 (114)
Investment Results
Net investment income $ 455 $ 312 143 $ 303 9
Net realized (losses) gains (135) (61) (74) 19 (80)
Net unrealized (losses) gains (1,479) 178 (1,657) 1,623 (1,445)
(Loss) earnings from equity method
investments (74) 93 (167) 239 (146)
General and administrative expenses
(36)$ 502 (135) NET (LOSS) EARNINGS$ (945) $ 553 (1,498)$ 1,731 (1,178) NET (LOSS) EARNINGS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS$ (906) $ 502 (1,408)$ 1,723 (1,221) COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO ENSTAR$ (1,429) $ 440 (1,869)$ 1,832 (1,392) GAAP measures: BVPS$ 246.20 $ 329.20 $ (83.00) $ 293.97 $ 35.23 ROE (15.6) % 7.9 % (23.5) pp 38.4 % (30.5) pp RLE % 6.3 % 3.9 % 2.4 pp 0.4 % 3.5 pp TIR % (9.0) % 2.0 % (11.0) pp 14.6 % (12.6) pp Non-GAAP measures: Adjusted BVPS*$ 243.09 $ 323.43 $ (80.34) $ 288.56 $ 34.87 Adjusted ROE* (1.1) % 10.1 % (11.2) pp 41.9 % (31.8) pp Adjusted RLE % * 3.9 % 3.6 % 0.3 pp 3.5 % 0.1 pp Adjusted TIR %* (0.2) % 3.6 % (3.8) pp 12.4 % (8.8) pp
pp - Percentage point(s)
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Overall Results
Year Ended
Net loss attributable to Enstar ordinary shareholders was$906 million for the year endedDecember 31, 2022 , which compares to net income of$502 million from 2021, as a result of: •Negative investment results (sum of net investment income, net realized (losses) gains, net unrealized (losses) gains and (loss) earnings for equity method investments) of$1.2 billion compared to favorable investment results of$522 million for the year endedDecember 31, 2021 , primarily driven by:Enstar Group Limited | 2022 Form 10-K
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
•Net realized and unrealized losses of$1.6 billion , primarily related to fixed income assets, for the year endedDecember 31, 2022 , compared to net gains of$117 million for the year endedDecember 31, 2021 . Rising interest rates acrossU.S. ,U.K. and European markets, in addition to widening investment grade credit spreads led to the net losses on our fixed income securities, and global equity market declines and widening high yield and leveraged loan credit spreads led to the net losses on our other investments, including equities. •Losses from equity method investments of$74 million compared to earnings of$93 million for the year endedDecember 31, 2021 further contributed to the decrease in our earned investment returns, primarily as a result of recognizing a$52 million other-than-temporary impairment relating to the carrying value of one of our equity method investments and consolidating Enhanzed Re effectiveSeptember 1, 2021 . Prior to that date, the results of Enhanzed Re were recorded in earnings from equity method investments within the Investments segment. Our earnings relating to Enhanzed Re prior to the consolidation in 2021 were$82 million . •This was partially offset by an increase in net investment income of$143 million due to investment of new premium, reinvestment of maturing investments at higher yields and fixed income securities with floating rates which reset at higher rates of interest income.
•A net gain on purchase and sales of subsidiaries of
primarily driven by the bargain purchase gain recognized on the step acquisition
of Enhanzed Re and a net gain on sales of subsidiaries of
•Lower net earned premiums of
This was partially offset by:
•Reduced total expenses of
•Reductions of$124 million in current period net incurred losses and LAE and$34 million in acquisition costs as a result of largely exiting or placing into run-off our active underwriting platforms, includingStarStone International ; •An increase in favorable development in net incurred losses and LAE for prior periods of$353 million , primarily driven by a change in fair value of our 2017 and 2018 portfolios where we elected the fair value option and reductions in estimates of net ultimate losses. This resulted in RLE of 6.3% in 2022 in comparison to RLE of 3.9% in 2021; in addition to •A reduction of$36 million in general and administrative expenses primarily driven by reductions to long-term incentive plan costs and a decrease in IT costs as a result of reduced project activity, partially offset by the absence of a proportional reduction in accrued performance-based costs which were recorded in the comparative period.
The above factors contributed to our 2022 net loss of
to 2021 net earnings of
Comprehensive loss attributable to Enstar was$1.4 billion for the year endedDecember 31, 2022 , as compared to comprehensive income of$440 million for the year endedDecember 31, 2021 . The variance was primarily due to an increase in unrealized losses on our fixed income securities, AFS, as a result of rising interest rates. The unrealized losses on our fixed income securities, AFS, combined with our investment results, contributed to an unfavorable TIR of (9.0)% in 2022, in comparison to a TIR of 2.0% in 2021.
BVPS decreased by 25.2% primarily as a result of comprehensive loss attributable
to Enstar of
As a result of the current period net loss and comprehensive loss attributable
to Enstar described above, our ROE decreased by 23.5 pp.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Year Ended
Net earnings attributable to Enstar ordinary shareholders decreased by
billion
•Reduced investment results of$1.7 billion , driven by significant outperformance by our investments in 2020, during which period we had net unrealized gains of$1.6 billion not repeated in 2021. In 2021, we redeemed and liquidated theInRe Fund , which provided$1.2 billion of unrealized gains in 2020, and our other investments, including equities, were impacted by reducedU.S. and Chinese equity market returns combined with rising interest rates. •Lower net premiums earned of$327 million , primarily relating to our legacy underwriting business which we exited in 2020. In 2021, we continued to earn premium from our Run-off segment relating to our AmTrust RITC transactions andStarStone International business, which was put into run-off effectiveJune 2020 and transferred to the Run-off segment effectiveJanuary 1, 2021 .
•Decreased other income of
experience with our defendant A&E liabilities.
This was partially offset by:
•The net gain on purchase and sales of subsidiaries of
driven by a bargain purchase gain associated with our step acquisition of
Enhanzed Re.
•Reduced total expenses of
•the exit of our legacy underwriting businesses resulting in a reduction of$349 million in current period net incurred losses and LAE,$138 million in acquisition costs and$148 million in general and administrative costs within the Legacy Underwriting segment; in addition to •an increase in favorable development in net incurred losses and LAE of$371 million , primarily driven by a change in fair value of our 2017 and 2018 portfolios where we elected the fair value option. This improved our RLE to 3.9% in 2021 compared to 0.4% in 2020.
The reductions in income and operating expenses described above resulted in a
Comprehensive income attributable to Enstar decreased by$1.4 billion from$1.8 billion in 2020 to$440 million in 2021 due an increase in unrealized losses on our fixed income securities, AFS as a result of rising interest rates. The unrealized losses on our fixed income securities, AFS, combined with the unfavorable movement in our investment results, contributed to our TIR of 2.0% for 2021 which was significantly lower than our TIR of 14.6% for 2020.
BVPS increased by 12.0% as a result of repurchasing 18.6% of our ordinary shares
at a 24.0% discount to book value, combined with comprehensive income
attributable to Enstar of
Overall, our ROE decreased by 30.5 pp.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Overall Measures of Performance
BVPS and Adjusted BVPS*
[[Image Removed: esgr-20221231_g8.jpg]] BVPS and Adjusted BVPS* decreased by 25.2% and 24.8%, respectively, fromDecember 31, 2021 toDecember 31, 2022 , primarily due to realized and unrealized investment losses of$1.8 billion (recorded through the income statement and other comprehensive income) for the year endedDecember 31, 2022 .
ROE and Adjusted ROE*
[[Image Removed: esgr-20221231_g9.jpg]]
2022 versus 2021
ROE decreased by 23.5 pp primarily due to the components in the following
diagram:
[[Image Removed: esgr-20221231_g10.jpg]]Adjusted ROE* decreased by 11.2 pp, as it excludes the impact of net realized and unrealized losses on fixed income securities.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
2021 versus 2020
ROE decreased by 30.5 pp primarily due to the components in the following
diagram:
[[Image Removed: esgr-20221231_g11.jpg]] Adjusted ROE* decreased by 31.8 pp, as the impact of excluding the favorable change in the interest rate components of the valuation of liabilities for which we have elected the fair value option offset the exclusion of the unfavorable impact of net realized and unrealized losses on fixed income securities.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
We discuss the results of our operations by aggregating certain captions from our consolidated statements of earnings, as we believe it provides a more meaningful view of our results and eliminates repetition that would arise if captions were discussed on an individual basis.
In order to facilitate discussion, we have grouped the following captions:
•Underwriting results: includes net premiums earned, net incurred losses and
LAE, policyholder benefit expenses and acquisition costs.
•Investment results: includes net investment income, net realized (losses) gains, net unrealized (losses) gains (recorded through the income statement and other comprehensive income) and (losses) earnings from equity method investments.
•General and administrative results: includes general and administrative
expenses.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Underwriting Results
Our strategy is focused on effectively managing (re)insurance portfolios
underwritten in previous years that we assume through our provision of capital
release solutions and acquisition of portfolios and businesses in run-off.
Although we have largely exited our active underwriting platforms, we still record net premiums earned and the associated current period net incurred losses and LAE and acquisition costs as a result of the run-off of unearned premiums from transactions completed in recent years.
Premiums earned in the Run-off segment are generally offset by the related
current period net incurred losses and LAE and acquisition costs.
The components of underwriting results for the years ended
2021 and 2020 are as follows:
2022 2021
Corporate and Legacy Corporate and
Run-off Assumed Life Legacy Underwriting other Total Run-off Assumed Life Underwriting other Total
(in millions of U.S. dollars)
Net premiums earned $ 40 $ 17 $ 9 $ - $ 66 $ 182 $ 5 $ 58 $ - $ 245
Net incurred losses
and LAE:
Current period 44 - 4 - 48 144 2 26 - 172
Prior periods (486) (55) 3 (218) (756) (338) - (6) (59) (403)
Total net incurred
losses and LAE (442) (55) 7 (218) (708) (194) 2 20 (59) (231)
Policyholder benefit
expenses - 25 - - 25 - (4) - 1 (3)
Acquisition costs 22 - 1 - 23 44 - 13 - 57
Underwriting results $ 460 $ 47 $ 1 $ 218 $ 726 $ 332 $ 7 $ 25 $ 58 $ 422
2020
Legacy Corporate and
Run-off Underwriting other Total
(in millions of U.S. dollars)
Net premiums earned $ 59 $ 513 $ - $ 572
Net incurred losses and LAE:
Current period 30 375 - 405
Prior periods (175) (4) 147 (32)
Total net incurred losses and LAE (145) 371 147 373
Acquisition costs 20 151 - $ 171
Underwriting results $ 184 $ (9) $ (147) $ 28
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Current Period
The current period underwriting results from our (re)insurance operations
include net earned premiums that have been declining as a result of our
transition away from active underwriting activities.
[[Image Removed: esgr-20221231_g12.jpg]]
The reductions in net premiums earned and current period net incurred losses and
LAE were driven by reduced levels of activity arising from our exit of our
active underwriting platforms beginning in 2020.
For the year endedDecember 31, 2022 , we earned premium from ourStarStone International business and from our Assumed Life segment. In comparison, our 2021 and 2020 earned premium was primarily driven byStarStone International and AmTrust RITC business, which was entered into in 2019.
Prior Periods - RLE
The following tables summarize RLE, RLE %, Adjusted RLE* and Adjusted RLE %* by acquisition year for the years endedDecember 31, 2022 , 2021 and 2020, which management believes is useful in measuring and monitoring performance of our claims management activity on the portfolios that we have acquired. This permits comparability between acquisition years of different loss reserve volumes. Refer to the table below for a summary of RLE and Adjusted RLE* for the year endedDecember 31, 2022 : 2022 RLE Adjusted RLE* Average Average net Adjusted RLE / adjusted net Adj RLE* Acquisition Year RLE / PPD loss reserves RLE % PPD* loss reserves* % (in millions of U.S. dollars) 2012 and prior$ 15 $ 549 2.7 %$ 27 $ 615 4.4 % 2013 (1) 186 (0.5) % 2 41 4.9 % 2014 30 765 3.9 % 15 82 18.3 % 2015 12 312 3.8 % 13 319 4.1 % 2016 14 731 1.9 % 22 808 2.7 % 2017 183 745 24.6 % 30 905 3.3 % 2018 58 913 6.4 % 19 985 1.9 % 2019 59 1,156 5.1 % 54 1,685 3.2 % 2020 (120) 719 (16.7) % (120) 720 (16.7) % 2021 435 3,861 11.3 % 356 4,443 8.0 % 2022 71 2,032 71 2,033 Total$ 756 $ 11,969 6.3 %$ 489 $ 12,636 3.9 % Enstar Group Limited | 2022 Form 10-K 55
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Item 7 | Management Discussion and Analysis | Key Performance Measures
2022:
Our RLE % was positively impacted by a net reduction in estimates of net
ultimate losses of
of liabilities for which we have elected the fair value option and a
million
We recorded:
Favorable RLE of
contracts where our cedants have experienced continued favorable ground-up
performance.
Favorable RLE in the 2017 acquisition year was driven predominantly by a
reduction in the fair value of liabilities for which we have elected the fair
value option.
Favorable RLE in the 2018 acquisition year was driven by favorable claims activity from major claims reviews on our professional indemnity/directors and officers and marine, aviation and transit lines of business for our Lloyd's syndicate books combined with a reduction in the fair value of liabilities where we have elected the fair value option.
Favorable RLE in the 2019 acquisition year was driven by continued favorable
experience in an ADC contract.
Unfavorable RLE in the 2020 acquisition year was adversely impacted by general casualty liabilities where we experienced additional claim reporting latency and unexpected increased severity on a small number of large New York Labor Law claims, which resulted in increased overall ultimate loss estimates on one portfolio. In addition, we experienced higher than expected claims severity, primarily on older liabilities, and slower than expected claim settlement rates related to our ride share motor portfolio. This was partially offset by favorable development on other portfolios. Favorable RLE in the 2021 acquisition year was driven by continued favorable experience in our workers' compensation portfolios, which benefited from lower severity trends on certain existing claims, reduced levels of expected frequency of claims for excess workers' compensation risks, favorable claim settlements, and accelerated and favorable claim settlement patterns on certain portfolios. In addition, we recorded favorable development on an ADC contract where the cedants have experienced continued favorable ground-up performance. We also recorded favorable claim activity on the Assumed Life segment catastrophe book, combined with the recognition of a gain on commutation of the catastrophe reinsurance business of$59 million . Favorable RLE in the 2022 acquisition year was primarily driven by a portfolio where our initial estimate of claims handling costs (or ULAE) were reduced, as we achieved better than expected current and future cost economies of scale on this transaction. Our Adjusted RLE %* was positively impacted by the net reduction in estimates of net ultimate losses relating to the Run-off segment, as described above. It excludes the impact of the changes in the discount rate upon the fair value of liabilities where we have elected the fair value option and the amortization of fair value adjustments relating to purchased subsidiaries.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Refer to the table below for a summary of RLE and Adjusted RLE* for the year endedDecember 31, 2021 : 2021 RLE Adjusted RLE* Average Average net Adjusted RLE / adjusted net Acquisition Year RLE / PPD loss reserves RLE % PPD* loss reserves* Adjusted
RLE* %
(in millions of
2012 and prior$ 34 $ 558 6.1 %$ 39 $ 633 6.2 % 2013 9 133 6.8 % 3 58 5.2 % 2014 25 945 2.6 % 30 102 29.4 % 2015 21 370 5.7 % 22 378 5.8 % 2016 10 815 1.2 % 8 894 0.9 % 2017 89 1,006 8.8 % 34 1,069 3.2 % 2018 45 1,208 3.7 % 38 1,237 3.1 % 2019 47 1,320 3.6 % 92 1,871 4.9 % 2020 (27) 1,845 (1.5) % (27) 1,845 (1.5) % 2021 150 2,144 7.0 % 142 2,368 6.0 % Total$ 403 $ 10,344 3.9 %$ 381 $ 10,455 3.6 % 2021: Overall, RLE % and Adjusted RLE* % were primarily driven by net favorable actual claims experience compared with our expected claims trends. This was notable in the 2012 and prior, 2017 and 2018 acquisition years.
RLE was positively impacted by a net reduction in estimates of net ultimate
losses of
liabilities for which we have elected the fair value option and a
reduction in provisions for ULAE.
Adjusted RLE* excludes the impact of the changes in the discount rate upon the
fair value of liabilities where we have elected the fair value option, the
impact of changes in ULAE and the amortization of fair value adjustments
relating to purchased subsidiaries.
Other notable events within our acquisition years were:
Adjusted RLE* for our 2019 acquisition year had lower than expected asbestos related claim frequency related to our defendant A&E liabilities. RLE and RLE % does not include the impact of changes to our defendant A&E liabilities. Our 2020 acquisition year had adverse development on our motor book offset by favorable development in other portfolios relating to the 2018 and 2019 accident years.
Acquisition year 2021 experienced favorable claim activity in our professional
indemnity/directors and officers and motor lines of business relative to
expectations at take-on.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Refer to the table below for a summary of RLE and Adjusted RLE* for the year endedDecember 31, 2020 : 2020 RLE Adjusted RLE* Average adjusted Average net Adjusted RLE / net loss Acquisition Year RLE / PPD loss reserves RLE % PPD* reserves* Adjusted RLE* % (in millions of U.S. dollars) 2012 and prior$ 44 $ 674 6.5 %$ 51 $ 756 6.7 % 2013 16$ 174 9.2 % 9 73 12.3 % 2014 1 1,064 0.1 % 3 111 2.7 % 2015 20 451 4.4 % 21 463 4.5 % 2016 21 915 2.3 % 36 999 3.6 % 2017 (50) 1,108 (4.5) % 39 1,178 3.3 % 2018 18 1,459 1.2 % 69 1,504 4.6 % 2019 33 1,495 2.2 % 130 2,034 6.4 % 2020 (71) 1,011 (7.0) % (71) 1,011 (7.0) % Total$ 32 $ 8,351 0.4 %$ 287 $ 8,129 3.5 % 2020: Overall, RLE % and Adjusted RLE* % were primarily driven by a mix of favorable and unfavorable actual claims experience compared with our expected claims trends. Our experience was notably favorable in our 2012 and prior, 2016, 2017 and 2018 acquisition years, offset by adverse development in our 2020 acquisition year as detailed below. RLE was adversely impacted by an increase of$119 million in 2020 relating to the change in the discount rate component of the fair value of liabilities for which we have elected the fair value option in the 2017 and 2018 acquisition years as a result of decreases in interest rates, which was offset by a net reduction in estimates of net ultimate losses of$130 million and a$49 million reduction in provisions for ULAE.
Other notable events within our acquisition years were:
Adjusted RLE* for our 2016 and 2019 acquisition years were favorably impacted by lower than expected asbestos related claim frequency related to our defendant A&E liabilities. RLE and RLE % does not include the impact of changes to our defendant A&E liabilities. Our 2017 and 2018 acquisition years had favorable development on losses relating primarily to older accident years on asbestos related claims and reduced asbestos related claim frequency, partially offset by the adverse impact on RLE % of changes in the discount rate component of the fair value of liabilities for which we have elected the fair value option. Our 2020 acquisition year was driven by adverse development on the motor book, offset by favorable development in other portfolios relating to older accident years.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Investment Results
We strive to structure our investment holdings and the duration of our
investments in a manner that recognizes our liquidity needs, including our
obligation to pay losses and future policyholder benefit expenses.
The components of our investment results split between our fixed income assets (which includes our short-term and fixed maturity investments classified as trading and AFS, funds held-directly managed, cash and cash equivalents, including restricted cash and cash equivalents, and funds held by reinsured companies, collectively our "Fixed Income" assets) and other investments (which includes equities and equity method investments, collectively our "Other Investments") for the years endedDecember 31, 2022 , 2021 and 2020 are as follows: 2022 2021 2020 Fixed Income Other Investments Total Fixed Income Other Investments Total Fixed Income Other Investments Total (in millions of U.S. dollars) Net investment income$ 373 $ 82$ 455 $ 239 $ 73$ 312 $ 256 $ 47$ 303 Net realized (losses) gains (111) (24) (135) (4) (57) (61) 18 1 19 Net unrealized (losses) gains (1,070) (409) (1,479) (206) 384 178 288 1,335 1,623 Earnings (losses) from equity method investments - (74) (74) - 93 93 - 239 239 Other comprehensive income: Unrealized (losses) gains on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange (570) - (570) (100) - (100) 70 - 70 TIR ($)$ (1,378) $ (425)$ (1,803) $ (71) $ 493$ 422 $ 632 $ 1,622$ 2,254 TIR % (9.3) % (8.2) % (9.0) % (0.5) % 8.8 % 2.0 % 5.7 % 36.9 % 14.6 % Adjusted TIR %* 2.3 % (8.2) % (0.2) % 1.6 % 8.8 % 3.6 % 2.4 % 36.9 % 12.4 %
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Net Investment Income
[[Image Removed: esgr-20221231_g13.jpg]]
2022 versus 2021: Net investment income increased primarily due to:
•an increase in our average aggregate fixed income assets of
new business acquired during 2022 and late 2021; and
•an increase in our book yield of 63 basis points due to a combination of investment of new premium and reinvestment of fixed income securities at higher yields and the impact of rising short-term interest rates on the$2.9 billion of our fixed income securities that are subject to floating interest rates. Our floating rate investments generated increased net investment income of$59 million , which equates to an increase of 195 basis points on those investments in comparison to the prior year.
2021 versus 2020: Net investment income increased primarily due to:
•an increase in our average aggregate fixed income assets of
new business during 2021; partially offset by
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Item 7 | Management Discussion and Analysis | Key Performance Measures
•a decrease in the investment yield primarily due to time required to invest
premium from 2021 transactions.
Net Realized and Unrealized (Losses) Gains included in Comprehensive Income
[[Image Removed: esgr-20221231_g14.jpg]]
2022 versus 2021: The negative variance of
realized and unrealized losses in 2022 to net realized losses and net unrealized
gains in 2021 was the result of:
•an increase in net realized and unrealized losses on fixed income assets, including OCI of$1.4 billion , primarily driven by more than 270 basis points of rising interest rates acrossU.S. ,U.K. and European markets, in addition to widening of investment-grade credit spreads through 2022; and
•net realized and unrealized losses on other investments, including equities, of
variance of
•losses from our public equities, fixed income funds, CLO equities and hedge
funds in 2022, largely as a result of global equity market declines and the
widening of high yield and leveraged loan credit spreads; in comparison to
•net realized and unrealized gains recognized in 2021 in our fixed income funds, public equity, private equity CLO equities, private debt and real estate holdings, driven by the tightening of high yield and loan spreads and rallies in global equity markets.
2021 versus 2020: Net realized and unrealized gains decreased primarily due to:
•net realized and unrealized losses on fixed income assets, including OCI of$310 million in 2021 compared to net realized annualized gains, including OCI of$376 million in the prior year, a negative variance of$686 million , which was primarily driven by rising interest rates acrossU.S. ,U.K. and European markets, partially offset by a tightening in credit spreads; and
•a decrease in net realized and unrealized gains on other investments, including
equities, of
driven by:
•net realized and unrealized losses of$58 million in theInRe Fund primarily due to the deterioration of global and Chinese equity markets through the second half of 2021, including Chinese American Depository Receipts ("ADRs"), to which the fund had exposure; partially offset byEnstar Group Limited | 2022 Form 10-K
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Item 7 | Management Discussion and Analysis | Key Performance Measures
•net realized and unrealized gains of $327 million in our public equity, private
equity and CLO equities, driven by tightening of high yield and loan spreads and
rallies in global equity markets.
•This was in comparison to net realized and unrealized gains of $1.3 billion
recognized in 2020, mainly driven by unrealized gains of $1.2 billion relating
to the InRe Fund .
Earnings (losses) from equity method investments
EffectiveSeptember 1, 2021 , Enhanzed Re was consolidated by us8. Prior to that date, the results of Enhanzed Re were recorded in earnings (losses) from equity method investments on a one quarter lag. [[Image Removed: esgr-20221231_g15.jpg]]
2022 versus 2021: The negative variance of
2022 from equity method investments to earnings in 2021 was primarily due to:
•our acquisition of the controlling interest in and subsequent consolidation of Enhanzed Re in 2021 (which included$82 million of equity method earnings prior to its consolidation inSeptember 2021 ); and
•recognizing a
of one of our equity method investments.
The consolidated net loss from Enhanzed Re was$235 million for the year endedDecember 31, 2022 , driven by unrealized investment losses which compared to the$82 million from Enhanzed Re that was included in equity method investment earnings in 2021.
2021 versus 2020: Earnings from equity method investments decreased, primarily
due to:
•a reduction in Enhanzed Re earnings, primarily driven by catastrophe losses from the European storms, German floods and worsening of COVID-19 claims sustained in the second quarter of 2021 for which our share of losses was$35 million , partially offset by significant net realized and unrealized gains on investments in the last quarter of 2020; and
•a reduction in Monument Re earnings as a result of a decrease in bargain
purchase gains relative to the comparative period.
8 Refer to Note 4 to the consolidated financial statements for further
information.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Investable Assets
The below charts are in billions of
[[Image Removed: esgr-20221231_g16.jpg]] [[Image Removed: esgr-20221231_g17.jpg]] •Investable assets decreased by 10.0% fromDecember 31, 2021 toDecember 31, 2022 , primarily due to a decline in the carrying value of our fixed income assets and other investments, including equities, and due to assets used to support net paid losses, partially offset by assets assumed from new transactions during the year. •Adjusted investable assets* decreased by 1.2% fromDecember 31, 2021 toDecember 31, 2022 , as a result of a decline in the carrying value of our other investments, including equities, and the impact of net paid losses, partially offset by assets assumed from new transactions during the year. •Cash and cash equivalents decreased by$762 million fromDecember 31, 2021 toDecember 31, 2022 , primarily as a result of the redeployment of a portion of theInRe Fund redemptions to other investments, including equities.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measures.
Duration and average credit rating
The fair value, duration and average credit rating by segment is as follows:
2022 2021
Fair Value Average Duration Average Credit Fair Value Average Duration Average Credit
Segment ($) (1) (in years) (2) Rating (3) ($) (1) (in years) (2) Rating (3)
Investments
Run-off $ 9,871 4.02 A+ $ 12,680 4.54 A+
Assumed Life 908 8.90 A- 1,454 14.62 A-
Total - Investments 10,779 4.44 A+ 14,134 5.69 A+
Legacy Underwriting 179 2.26 AA- 212 2.37 AA-
Total $ 10,958 4.40 A+ $ 14,346 5.72 A+
(1) The fair value of our fixed income securities and cash and cash equivalents
by segment does not include the carrying value of cash and cash equivalents
within our funds held-directly managed portfolios.
(2) The average duration calculation includes cash and cash equivalents, short-term investments and fixed income securities, as well as the fixed income securities and cash and cash equivalents within our funds held-directly managed portfolios. (3) The average credit ratings calculation includes cash and cash equivalents, short-term investments, fixed income securities and the fixed income securities within our funds held - directly managed portfolios. The overall decrease in the balance of our fixed income securities and cash and cash equivalents of$3.4 billion for the year endedDecember 31, 2022 was driven by the redeployment of a portion of theInRe Fund redemptions from cash and cash equivalents to other investments, including equities, the recognition of net unrealized losses on our fixed income securities as described above and the impact of net paid losses.
As of both
cash equivalents had an average credit quality rating of A+ .
As of
non-investment grade (i.e. rated lower than BBB- and non-rated securities)
comprised 6.5% and 5.6% of our total fixed income securities portfolio,
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Item 7 | Management Discussion and Analysis | New Business
respectively. The increase in non-investment grade fixed income securities was
driven by the redeployment of a portion of the
higher-yielding fixed income securities during the year.
General and administrative expenses
[[Image Removed: esgr-20221231_g18.jpg]]
2022 to 2021: The$36 million decrease in general and administrative expenses was driven by reductions in professional fees and salaries and benefits expenses, driven by a reduction in variable incentive plan results. This was partially offset by an increase in accrued short term incentives. 2021 to 2020: The$135 million decrease in general and administrative expenses was primarily driven by the decision to placeStarStone International in run-off and the sale of Atrium. There was an additional decrease in salaries and benefits expenses due to reductions in performance-based salaries and benefits costs and lower headcount.Enstar Group Limited | 2022 Form 10-K 63
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
New Business
We define new business as material transactions, which generally take the form
of reinsurance or direct business transfers, or business acquisitions.
When we acquire new business through reinsurance or direct business transfers,
the liabilities we assume typically exceed the fair value of the assets we
receive. This is generally due to the future earnings expected on the assets.
The difference between the liabilities assumed and the assets acquired is recorded as a DCA or DGL, which is then amortized over the expected settlement period. As such, the performance of the new business is assessed over time by comparing the net of investment income, loss reserve development and amortization of the DCA or DGL.
The table below sets forth a summary of new business that we have completed
between
Total Assets Total Assets from Total Liabilities Remaining Limit
Transaction Assumed DCA (1) Transactions from Transactions Type of Transaction upon Acquisition Line of Business Jurisdiction
(in millions of U.S. dollars)
Property, liability
Aspen (2) $ 1,824 $ 47 $ 1,871 $ 1,871 LPT $ 537 and specialty lines U.S. , U.K. and Europe
General casualty,
financial and property
Probitas 60 1 61 61 LPT(3) No limit lines U.K. and international
General casualty,
construction defect,
and professional
Argo (4) 631 93 724 724 LPT $ 66 indemnity lines U.S.
Total 2022 $ 2,515 $ 141 $ 2,656 $ 2,656
(1) Where the estimated ultimate losses payable exceed the premium consideration
received at the inception of the agreement, a DCA is recorded.
(2) We agreed to assume$3.1 billion of net loss reserves, subject to a limit of$3.6 billion . Pursuant to terms of the contract, the amount of net loss reserves assumed, in addition to the premium consideration provided in the LPT agreement, were adjusted for the original ADC cash premium of$770 million as well as claims paid betweenOctober 1, 2021 andMay 20, 2022 and other contractual obligations totaling$394 million .
(3) The LPT converted into a RITC transaction effective
following regulatory approval.
(4) The amount of net loss reserves assumed were adjusted for claims paid
between
comprised of
liabilities.
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
Non-GAAP Financial Measures In addition to our key financial measures presented in accordance with GAAP, we present other non-GAAP financial measures that we use to manage our business, compare our performance against prior periods and against our peers, and as performance measures in our incentive compensation program. These non-GAAP financial measures provide an additional view of our operational performance over the long-term and provide the opportunity to analyze our results in a way that is more aligned with the manner in which our management measures our underlying performance. The presentation of these non-GAAP financial measures, which may be defined and calculated differently by other companies, is used to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Some of the adjustments reflected in our non-GAAP measures are recurring items, such as the exclusion of adjustments to net realized and unrealized (gains)/losses on fixed income securities recognized in our income statement, the fair value of certain of our loss reserve liabilities for which we have elected the fair value option, and the amortization of fair value adjustments. Management makes these adjustments in assessing our performance so that the changes in fair value due to interest rate movements, which are applied to some but not all of our assets and liabilities as a result of preexisting accounting elections, do not impair comparability across reporting periods.
It is important for the readers of our periodic filings to understand that these
items will recur from period to period.
However, we exclude these items for the purpose of presenting a comparable view across reporting periods of the impact of our underlying claims management and investment without the effect of interest rate fluctuations on assets that we anticipate to hold to maturity and non-cash changes to the fair value of our reserves. Similarly, our non-GAAP measures reflect the exclusion of certain items that we deem to be nonrecurring, unusual or infrequent when the nature of the charge or gain is such that it is not reasonably likely that such item may recur within two years, nor was there a similar charge or gain in the preceding two years. This includes adjustments related to bargain purchase gains on acquisitions of businesses, net gains or losses on sales of subsidiaries, net assets of held for sale or disposed subsidiaries classified as discontinued operations, and other items that we separately disclose.
We have changed our non-GAAP measures in 2022 as follows:
•The opening GAAP balances of our 2021 and 2020 Adjusted BVPS*, Adjusted ROE* and Adjusted RLE* measures have been retrospectively adjusted for a change in accounting principle9. •We no longer remove ULAE from our Adjusted RLE and RLE % calculations as our estimate of future claims handling costs is connected to our claims settlement strategies and outcomes and the RLE measures now reflect the direct and indirect performance of the management of our liabilities.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
9 Refer to the "Consolidated Results of Operations" section for a more detailed
description of the change in accounting principle.
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
The results and GAAP reconciliations for these measures are set forth after the
following table, which presents more information on each non-GAAP measure.
Non-GAAP Measure Definition Purpose of Non-GAAP Measure over GAAP Measure Adjusted book value Total Enstar ordinary shareholders' Increases the number of ordinary shares to per ordinary share equity
reflect the exercise of equity awards granted
but
not yet vested as, over the long term,
Divided by
this presents both management and investors
with a more economically accurate measure of
Number of ordinary shares outstanding, the
realizable value of shareholder returns
adjusted for: by
factoring in the impact of share dilution.
-the ultimate effect of any dilutive
securities on the number of ordinary We
use this non-GAAP measure in our incentive
shares outstanding compensation program.
Adjusted return on Adjusted operating income (loss) Calculating the operating income (loss) as a
equity (%) attributable to Enstar ordinary
percentage of our adjusted opening Enstar
shareholders divided by adjusted
ordinary shareholders' equity provides a more
opening Enstar ordinary shareholder's
consistent measure of the performance of our
equity
business by enabling comparison between the
financial periods presented.
We
eliminate the impact of net realized and
unrealized (gains) losses on fixed maturity
investments and funds-held directly managed
and
the change in fair value of insurance
contracts for which we have elected the fair
value option, as:
Adjusted operating Net earnings (loss) attributable to •we typically hold most of our fixed income
income (loss) Enstar ordinary shareholders, adjusted securities until the earlier of maturity or
attributable to for: the time that they are used to fund any
Enstar ordinary -net realized and unrealized (gains) settlement of related liabilities which are
shareholders losses on fixed maturity investments generally recorded at cost; and
(numerator) and funds held-directly managed,
•removing the fair value option improves
-change in fair value of insurance
comparability since there are limited
contracts for which we have elected
acquisition years for which we elected the
the fair value option (1),
fair value option.
-amortization of fair value
adjustments,
Therefore, we believe that excluding their
-net gain/loss on purchase and sales
impact on our earnings improves comparability
of subsidiaries (if any), of
our core operational performance across
-net earnings from discontinued
periods.
operations (if any),
-tax effects of adjustments, and We
include fair value adjustments as non-GAAP
-adjustments attributable to
adjustments to the adjusted operating income
noncontrolling interests
(loss) attributable to Enstar ordinary
shareholders as they are non-cash charges
that are not reflective of the impact of our
claims management strategies on our loss
Adjusted opening Opening Enstar ordinary shareholders'
portfolios.
Enstar ordinary equity, less: shareholders' equity -net unrealized gains (losses) on We eliminate the net gain (loss) on the (denominator) fixed maturity investments and funds
purchase and sales of subsidiaries and net
held-directly managed,
earnings from discontinued operations, as
-fair value of insurance contracts for
these items are not indicative of our ongoing
which we have elected the fair value
operations.
option (1),
-fair value adjustments, and We
use this non-GAAP measure in our incentive
-net assets of held for sale or compensation program.
disposed subsidiaries classified as
discontinued operations (if any)
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
Non-GAAP Measure Definition Purpose of Non-GAAP Measure over GAAP Measure
Adjusted run-off Adjusted PPD divided by average adjusted Calculating the RLE as a percentage of our
liability earnings net loss reserves adjusted average net loss reserves provides a
(%)
more meaningful and comparable measurement of
the impact of our claims management strategies
on our loss portfolios across acquisition
years and also to our overall financial
periods.
We use this measure to evaluate the impact of
our claims management strategies because it
Adjusted prior Prior period net incurred losses and LAE, provides visibility into our ability to settle
period development adjusted to: our claims obligations for amounts less than
(numerator) Remove(3):
our initial estimate at the point of acquiring
-Legacy Underwriting and Assumed Life
the obligations.
operations,
-amortization of fair value adjustments,
The following components of periodic recurring
-change in fair value of insurance
net incurred losses and LAE and net loss
contracts for which we have elected the
reserves are not considered key components of
fair value option (1),
our claims management performance for the
and
following reasons:
Add:
-the reduction/(increase) in estimates of
•The results of our Legacy Underwriting
net ultimate liabilities and reduction in
segment have been economically transferred to
estimated future expenses of our defendant
a third party primarily through use of
A&E liabilities.
reinsurance and a Capacity Lease Agreement(2);
as such, the results are not a relevant
contribution to Adjusted RLE, which is
designed to analyze the impact of our claims
management strategies;
•The results of our Assumed Life segment
relate only to our exposure to active property
catastrophe business; as this business is not
in run-off, the results are not a relevant
contribution to Adjusted RLE;
•The change in fair value of insurance
contracts for which we have elected the fair
Adjusted net loss Net losses and LAE, adjusted to: value option(1) has been removed to support
reserves Remove(3): comparability between the two acquisition
(denominator) -Legacy Underwriting and Assumed Life net
years for which we elected the fair value
loss reserves,
option in reserves assumed and the acquisition
-current period net loss reserves,
years for which we did not make this election
-net fair value adjustments associated
(specifically, this election was only made in
with the acquisition of companies,
the 2017 and 2018 acquisition years and the
-the fair value adjustments for contracts
election of such option is irrevocable); and
for which we have elected the fair value
•The amortization of fair value adjustments
option (1) and
are non-cash charges that obscure our trends
Add:
on a consistent basis.
-net nominal defendant A&E liability
exposures and estimated future expenses
We include our performance in managing claims
and estimated future expenses on our defendant
A&E liabilities because such performance is
relevant to assessing our claims management
strategies even though such liabilities are
not included within the loss reserves.
We use this measure to assess the performance
of our claim strategies and part of the
performance assessment of our past
acquisitions. Adjusted total Adjusted total investment return (dollars) Provides a key measure of the return generated investment return recognized in earnings for the applicable on the capital held in the business and is (%) period divided by period average adjusted
reflective of our investment strategy.
total investable assets.
Provides a consistent measure of investment
returns as a percentage of all assets
generating investment returns.
Adjusted total Total investment return (dollars),
investment return adjusted for: We adjust our investment returns to eliminate
($) (numerator) -net realized and unrealized (gains)
the impact of the change in fair value of
losses on fixed maturity investments and
fixed income securities (both credit spreads
funds held-directly managed; and
and interest rates), as we typically hold most
-unrealized (gains) losses on fixed income
of these investments until the earlier of
securities, AFS included within OCI, net
maturity or used to fund any settlement of
of reclassification adjustments and
related liabilities which are generally
excluding foreign exchange. recorded at cost.
Adjusted average Total average investable assets, adjusted
aggregate total for:
investable assets -net unrealized (gains) losses on fixed
(denominator) income securities, AFS included within
AOCI
-net unrealized (gains) losses on fixed
income securities, trading
(1) Comprises the discount rate and risk margin components.
(2) As described in Note 5 to our consolidated financial statements.
(3) Effective for 2022, we are no longer excluding ULAE as it relates to our
losses and LAE liabilities and are now including estimated future expenses as it
relates to our defendant A&E liabilities in the calculation of Adjusted RLE*, as
these provisions are related to our insurance liabilities and contribute to our
claims management performance. The comparative periods in 2021 and 2020 have
been adjusted accordingly.
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of BVPS to Adjusted BVPS* as of
2022 2021 2020
Per Share Per Share Per Share
Equity (1) Ordinary Shares Amount Equity (1) Ordinary Shares Amount Equity (1) Ordinary Shares Amount
(in millions of U.S. dollars, except share and per share data)
Book value per ordinary share $ 4,191 17,022,420 $ 246.20 $ 5,813 17,657,944 $ 329.20 $ 6,326 21,519,602 $ 293.97
Non-GAAP adjustment:
Share-based compensation plans 218,171 315,205 298,095 Warrants - - - - 20 175,901 Adjusted book value per ordinary share*$ 4,191 17,240,591$ 243.09 $ 5,813 17,973,149$ 323.43 $ 6,346 21,993,598$ 288.56 (1) Equity comprises Enstar ordinary shareholders' equity, which is calculated as Enstar shareholders' equity less preferred shares ($510 million as of each ofDecember 31, 2022 , 2021 and 2020), prior to any non-GAAP adjustments.
*Non-GAAP measure.
The table below presents a reconciliation of ROE to Adjusted ROE* for the years
ended
2022 2021 2020
Net (loss) Opening (Adj) ROE Net (loss) Opening (Adj) ROE Net (loss) Opening (Adj) ROE
earnings (1) equity (1) earnings (1) equity (1) earnings (1) equity (1)
(in millions of U.S. dollars)
Net (loss) earnings/Opening
equity/ROE (1) $ (906) $ 5,813 (15.6) % $ 502 $ 6,326 7.9 % $ 1,723 $ 4,490 38.4 %
Non-GAAP adjustments:
Net realized and unrealized
losses (gains) on fixed maturity
investments and funds held -
directly managed / Unrealized
(losses) gains on fixed maturity
investments and funds held -
directly managed (2) 1,181 (89) 210 (560) (306) (277)
Change in fair value of
insurance contracts for which we
have elected the fair value
option / Fair value of insurance
contracts for which we have
elected the fair value option
(3) (200) (107) (75) (33) 119 (130)
Amortization of fair value
adjustments / Fair value
adjustments (18) (106) 16 (128) 27 (152)
Net gain on purchase and sales
of subsidiaries - - (73) - (3) -
Net earnings from discontinued
operations / Net assets of
entities classified as held for
sale and discontinued operations - - - - (16) (266)
Tax effects of adjustments (4) (7) - (21) - 23 -
Adjustments attributable to
noncontrolling interest (5) (111) - 6 - 13 109
Adjusted net (loss)
earnings/Adjusted opening
equity/Adjusted ROE* $ (61) $ 5,511 (1.1) % $ 565 $ 5,605 10.1 % $ 1,580 $ 3,774 41.9 %
(1) Net (loss) earnings comprises net (loss) earnings attributable to Enstar
ordinary shareholders, prior to any non-GAAP adjustments. Opening equity
comprises Enstar ordinary shareholders' equity, which is calculated as opening
Enstar shareholders' equity less preferred shares ($510 million as of each of
December 31, 2021 , 2020 and 2019), prior to any non-GAAP adjustments.
(2) Represents the net realized and unrealized gains and losses related to fixed
income securities. Our fixed income securities are held directly on our balance
sheet and also within the "Funds held - directly managed" balance10.
10 Refer to Note 6 to our consolidated financial statements for further details
on our net realized and unrealized gains and losses.
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
(3) Comprises the discount rate and risk margin components.
(4) 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.
(5) 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.
*Non-GAAP measure.
The below tables present a reconciliation of PPD to Adjusted PPD* and RLE to
Adjusted RLE*:
Year Ended As at December 31, Year Ended
2022 2022 2021 2022 2022
Net loss Net loss Average net
PPD reserves reserves loss reserves RLE %
(in millions of U.S. dollars)
PPD/net loss reserves/RLE $ 756 $ 12,011 $ 11,926 $ 11,969 6.3 %
Non-GAAP Adjustments:
Net loss reserves - current period - (45) - (23)
Assumed Life (55) - (181) (91)
Legacy Underwriting 3 (135) (153) (144)
Amortization of fair value adjustments / Net fair
value adjustments associated with the acquisition
of companies (18) 124 106 115
Changes in fair value - fair value option / Net
fair value adjustments for contracts for which we
have elected the fair value option (1) (200) 294 107 201
Change in estimate of net ultimate liabilities -
defendant A&E / Net nominal defendant A&E
liabilities 2 572 573 573
Reduction in estimated future expenses -
defendant A&E / Estimated future expenses -
defendant A&E 1 35 37 37
Adjusted PPD/Adjusted net loss reserves/Adjusted
RLE* $ 489 $ 12,856 $ 12,415 $ 12,636 3.9 %
Year Ended As at December 31, Year Ended
2021 2021 2020 2021 2021
Net loss Net loss Average net
PPD reserves reserves loss reserves RLE %
(in millions of U.S. dollars)
PPD/net loss reserves/RLE $ 403 $ 11,926 $ 8,763 $ 10,344 3.9 %
Non-GAAP Adjustments:
Net loss reserves - current period - (143) - (72)
Assumed Life - (179) - (90)
Legacy Underwriting (6) (140) (955) (548)
Amortization of fair value adjustments / Net fair
value adjustments associated with the acquisition
of companies 16 106 128 117
Changes in fair value - fair value option / Net
fair value adjustments for contracts for which we
have elected the fair value option (1) (75) 107 33 70
Change in estimate of net ultimate liabilities -
defendant A&E / Net nominal defendant A&E
liabilities 38 573 615 594
Reduction in estimated future expenses -
defendant A&E / Estimated future expenses -
defendant A&E 5 37 43 40
Adjusted PPD/Adjusted net loss reserves/Adjusted
RLE* $ 381 $ 12,287 $ 8,627 $ 10,455 3.6 %
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
Year Ended As at December 31, Year Ended
2020 2020 2019 2020 2020
Net loss Net loss Average net
PPD reserves Reserves loss reserves RLE %
(in millions of U.S. dollars)
PPD/Net loss reserves/RLE $ 32 $ 8,763 $ 7,941 $ 8,352 0.4 %
Non-GAAP Adjustments:
Net loss reserves - current period - (273) - (137)
Legacy Underwriting (4) (702) (1,184) (943)
Amortization of fair value adjustments / Net fair
value adjustments associated with the acquisition
of companies 28 128 152 140
Changes in fair value - fair value option / Net
fair value adjustments for contracts for which we
have elected the fair value option (1) 119 33 130 82
Change in estimate of net ultimate liabilities -
defendant A&E / Net nominal defendant A&E
liabilities 103 615 561 588
Reduction in estimated future expenses -
defendant A&E / Estimated future expenses -
defendant A&E 9 43 52 48
Adjusted PPD/Adjusted net loss reserves/Adjusted
RLE* $ 287 $ 8,607 $ 7,652 $ 8,129 3.5 %
(1) Comprises the discount rate and risk margin components.
*Non-GAAP measure.
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Item 7 | Management Discussion and Analysis | Other Financial Measures
The table below presents a reconciliation of our TIR to our Adjusted TIR* for
the years ended
2022 2021 2020
Fixed Income Other Investments Total Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 373 $ 82 $ 455 $ 239 $ 73 $ 312 $ 256 $ 47 $ 303
Net realized (losses) gains (111) (24) (135) (4) (57) (61) 18 1 19
Net unrealized (losses) gains (1,070) (409) (1,479) (206) 384 178 288 1,335 1,623
Earnings from equity method
investments - (74) (74) - 93 93 - 239 239
Other comprehensive income:
Unrealized (losses) gains on
fixed income securities, AFS, net
of reclassification adjustments
excluding foreign exchange (570) - (570) (100) - (100) 70 - 70
TIR ($) $ (1,378) $ (425) $ (1,803) $ (71) $ 493 $ 422 $ 632 $ 1,622 $ 2,254
Non-GAAP adjustments:
Net realized and unrealized
losses (gains) on fixed maturity
investments and funds
held-directly managed 1,181 - 1,181 210 - 210 (306) - (306)
Unrealized (losses) gains on
fixed income securities, AFS, net
of reclassification adjustments
excluding foreign exchange 570 - 570 100 - 100 (70) - (70)
Adjusted TIR ($)* $ 373 $ (425) $ (52) $ 239 $ 493 $ 732 $ 256 $ 1,622 $ 1,878
Total investments $ 9,685 $ 4,943 $ 14,628 $ 12,254 $ 5,022 $ 17,276 $ 9,319 $ 5,938 $ 15,257
Cash and cash equivalents,
including restricted cash and
cash equivalents 1,330 - 1,330 2,092 - 2,092 1,373 - 1,373
Funds held by reinsured companies 3,582 - 3,582 2,340 - 2,340 636 - 636
Total investable assets $ 14,597 $ 4,943
Average aggregate invested assets, at fair value (1) 14,891 5,188 20,079 15,250 5,590 20,840 11,046 4,397 15,443 TIR % (9.3) % (8.2) % (9.0) % (0.5) % 8.8 % 2.0 % 5.7 % 36.9 % 14.6 % Non-GAAP adjustment: Net unrealized (gains) on fixed income securities, AFS included within AOCI and net unrealized (gains) on fixed income securities, trading 1,827 - 1,827 (89) - (89) (560) - (560) Adjusted investable assets*$ 16,424 $ 4,943$ 21,367 $ 16,597 $ 5,022$ 21,619 $ 10,768 $ 5,938$ 16,706 Adjusted average aggregate invested assets, at fair value (2)$ 15,977 $ 5,188$ 21,165 $ 14,971 $ 5,590$ 20,561 $ 10,756 $ 4,397$ 15,153 Adjusted TIR %* 2.3 % (8.2) % (0.2) % 1.6 % 8.8 % 3.6 % 2.4 % 36.9 % 12.4 %
(1) This amount is a five period average of the total investable assets, as
presented above, and is comprised of amounts disclosed in our quarterly and
annual
(2) This amount is a five period average of the Adjusted investable assets*, as
presented above.
*Non-GAAP measure.
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment
Other Financial Measures In addition to our non-GAAP financial measures presented above, we refer to TIR, which provides a key measure of the return generated on the capital held in the business. It is reflective of our investment strategy and it provides a consistent measure of investment returns as a percentage of all assets generating investment returns.
The following table provides the calculation of our TIR by segment for the years
ended
2022 2021 2020
Legacy
Investments Legacy Underwriting Total Investments Legacy Underwriting Total Investments Underwriting Total
(in millions of U.S. dollars)
Net investment income:
Fixed income securities $ 380 $ 9 $ 389 $ 273 $ 3 $ 276 $ 243 $ 25 $ 268
Cash and restricted cash 8 1 9 - - - 2 2 4
Other investments, including equities 82 - 82 73 - 73 39 8 47
Less: Investment expenses (25) - (25) (37) - (37) (14) (2) (16)
Net investment income $ 445 $ 10 $ 455 $ 309 $ 3 $ 312 $ 270 $ 33 $ 303
Net realized (losses) gains:
Fixed income securities $ (111) $ - $ (111) $ (4) $ -
Other investments, including equities (24)
- (24) (57) - (57) 1 - 1 Net realized (losses) gains$ (135) $ -$ (135) $ (61) $ -$ (61) $ 17 $ 2$ 19 Net unrealized (losses) gains: Fixed income securities (1,060) (10) (1,070) (203) (3) (206) 284 4
288
Other investments, including equities (409) - (409) 384 - 384 1,327 8
1,335
Net unrealized (losses) gains$ (1,469) $ (10)$ (1,479) $ 181 $ (3)$ 178 $ 1,611 $ 12$ 1,623 (Losses) earnings from equity method investments (74) - (74) 93 - 93 239 -
239
Other comprehensive (loss) income: Unrealized (losses) gains on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange (570) - (570) (100) - (100) 67 3 70 TIR ($)$ (1,803) $ -$ (1,803) $ 422 $ -$ 422 $ 2,204 $ 50$ 2,254 Fixed maturity and short-term investments, trading and AFS and funds held - directly managed$ 9,472 $ 159$ 9,631 $ 12,072 $ 182$ 12,254 $ 8,669 $ 650 $ 9,319 Other assets included within funds held - directly managed 54 - 54 201 - 201 15 - 15 Equities 1,250 - 1,250 1,995 - 1,995 774 73 847 Other investments 3,282 14 3,296 2,319 14 2,333 4,146 98 4,244 Equity method investments 397 - 397 493 - 493 597 235 832 Total investments$ 14,455 $ 173$ 14,628 $ 17,080 $ 196$ 17,276 $ 14,201 $ 1,056 $ 15,257 Cash and cash equivalents, including restricted cash and cash equivalents 1,310 20 1,330 2,062 30 2,092 1,112 261
1,373
Funds held by reinsured companies 3,560 22 3,582 2,306 34 2,340 554 82 636 Total investable assets$ 19,325 $ 215$ 19,540 $ 21,448 $ 260$ 21,708 $ 15,867 $ 1,399 $ 17,266 Average aggregate invested assets, at fair value (1)$ 19,861 $ 218$ 20,079 $ 20,594 $ 246$ 20,840 $ 13,982 $ 1,461 $ 15,443 TIR % (2) (9.1) % - % (9.0) % 2.0 % - % 2.0 % 15.8 % 3.4 % 14.6 % Income from fixed income assets (3) 388 10 398 273 3 276 245 27
272
Average aggregate fixed income assets, at cost (3)(4) 15,904 214 16,118 14,733 231 14,964 9,508 1,246 10,754 Investment book yield (5) 2.44 % 4.67 % 2.47 % 1.85 % 1.30 % 1.84 % 2.58 % 2.17 % 2.53 %
(1) This amount is a five period average of the total investable assets, as
presented above, and is comprised of amounts disclosed in our quarterly and
annual
(2) Total investment return % is calculated by dividing total investment return
($) by average aggregate invested assets, at fair value.
(3) Fixed income assets include fixed income securities and cash and restricted
cash, and funds held by reinsured companies.
(4) These amounts are an average of the amounts disclosed in our quarterly and
annual
(5) Investment book yield % is calculated by dividing income from fixed income
assets by average aggregate fixed income assets, at cost.
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Run-off Segment
Results of Operations by Segment - For the Years Ended
and 2020
Our business is organized into four reportable segments: (i) Run-off; (ii) Assumed Life; (iii) Investments; and (iv) Legacy Underwriting. In addition, our corporate and other activities, which do not qualify as an operating segment, includes income and expense items that are not directly attributable to our reportable segments11.
The following is a discussion of our results of operations by segment.
11 For a description of our segments and our corporate and other activities, see
"Item 1. Business - Operating Segments" and "Corporate and Other" below,
respectively.
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Run-off Segment
Run-off Segment
The following is a discussion and analysis of the results of operations for our
Run-off segment.
2022 2021 Change 2020 Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ 40 $ 182 $ (142) $ 59 $ 123
Other income:
Reduction in estimates of net
ultimate defendant A&E liabilities -
prior periods 2 38 (36) 103 (65)
Reduction in estimated future
defendant A&E expenses 1 5 (4) 9 (4)
All other income 19 30 (11) 20 10
Total other income 22 73 (51) 132 (59)
Total income 62 255 (193) 191 64
EXPENSES
Net incurred losses and LAE:
Current period 44 144 (100) 30 114
Prior period (486) (338) (148) (175) (163)
Total net incurred losses and LAE (442) (194) (248) (145) (49)
Acquisition costs 22 44 (22) 20 24
General and administrative expenses 143 188 (45) 173 15
Total expenses (277) 38 (315) 48 (10)
SEGMENT NET EARNINGS $ 339 $ 217 $ 122 $ 143 $ 74
2022 versus 2021: Net earnings from our Run-off segment increased by
million
•A
the reduction in estimates of net ultimate losses.
•Results for the year endedDecember 31, 2022 were driven by favorable development of$318 million on our workers' compensation line of business as a result of favorable claim settlements, most notably in the 2017 to 2021 acquisition years. We also had favorable development of$56 million on our marine, aviation and transit lines of business relating to the 2014, 2018 and 2019 acquisition years as a result of favorable experience across a variety of claim types; partially offset by •Adverse development on our general casualty and motor lines of business of$57 million and$74 million , respectively, most notably impacting the 2020 acquisition year, as a result of worse than expected claims experience, adverse development on claims and higher than expected claims severity. •Results for the year endedDecember 31, 2021 were primarily related to favorable development on our workers' compensation, property and marine, aviation and transit lines of business as a result of better than expected claims experience and favorable results from actuarial reviews, partially offset by adverse development on our general casualty line of business due to an increase in opioid exposure and increased expectations of latent claims and a lengthening of the payment pattern related to our 2019 acquisition year. •A decrease in general and administrative expenses of$45 million , primarily driven by a continued decrease in salaries and benefits and other costs following our exit of our StarStone business beginning in 2020 and a reduction in IT costs as a result of reduced project activity; partially offset by
•A reduction in other income of
prior period development related to our defendant A&E liabilities; and
•Reductions in net premiums earned that were greater than the reductions in current period net incurred losses and LAE and acquisition costs, following our exit of ourStarStone International business beginning in 2020.Enstar Group Limited | 2022 Form 10-K
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Assumed Life Segment
2021 versus 2020: Net earnings from our Run-off segment increased by
million
•Net premiums earned increased by$123 million fromStarStone International business and new business transactions executed in recent periods. Net premiums earned of$182 million included$106 million of premiums fromStarStone International , which was transferred into the Run-off Segment onJanuary 1, 2021 , whereas net premiums earned in 2020 were primarily related to AmTrust RITC transactions assumed in 2019.
•Net incurred losses and LAE decreased by
increase in favorable PPD partially offset by an increase in current period
losses of
business from the Legacy Underwriting segment on
•The
•$51 million increase in favorable development on the workers' compensation line
of business in 2021 as a result of reduced claims activity, favorable
settlements on open claims and the completion of commutations;
•$105 million reduction in adverse development on the motor line of business compared to 2020. 2020 was impacted by higher than expected severity in respect of a recently assumed LPT;
•$41 million increase in favorable development on the construction defect line
of business in 2021; and
•$82 million increase in favorable development on the property and other lines
of business in 2021.
This favorable prior period developments were partially offset by;
•$142 million increases in prior period estimates of net ultimate losses in our
general casualty line of business due to an increase in opioid exposure and
greater than expected adverse development.
In addition:
•Other income decreased by
period development related to our defendant A&E liabilities; and
•Acquisition costs increased by
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Investments Segment
Assumed Life Segment
On September 1, 2021 , we purchased an additional 27.7% in Enhanzed Re, a company
that was previously accounted for as an equity method investment, and increased
our ownership to 75.1%. We have consolidated it as of September 1, 2021 and
record the results on a one quarter lag.
On
Allianz12.
The Assumed Life segment consists of life and property aggregate excess of loss (catastrophe) business. The catastrophe business was not renewed for 2022. During the third quarter of 2022, we entered into a Master Agreement with Allianz through which we agreed to a series of transactions that will allow us to unwind Enhanzed Re in an orderly manner. For the year endedDecember 31, 2022 we have:
•Commuted the catastrophe reinsurance business with Allianz; and
•Closed an agreement in
life annuity policies to Monument Re.
We expect to record the results of the novation of the life business and the
acquisition of the remaining ownership interest in Enhanzed Re in the first
quarter of 2023.
Given our rationalization of the Enhanzed Re reinsurance business, we renamed
the segment from Enhanzed Re to Assumed Life during the third quarter of 2022.
We may leverage this segment for any future potential assumed life business
transactions if and when they occur.
The following is a discussion and analysis of the results of operations for our
Assumed Life segment.
2022 2021 Change
(in millions of U.S. dollars)
INCOME
Net premiums earned $ 17 $ 5 $ 12
Total income 17 5 12
EXPENSES
Net incurred losses and LAE:
Current period - 2
(2)
Prior period (55) -
(55)
Total net incurred losses and LAE (55) 2
(57)
Policyholder benefit expenses 25 (4)
29
General and administrative expenses 7 1 6 Total expenses (23) (1) (22) SEGMENT NET EARNINGS$ 40 $ 6 $ 34 Overall Results
Segment earnings increased by
•A decrease in net incurred losses and LAE, as a result of favorable claim
activity and the recognition of a
related to the catastrophe reinsurance business with Allianz; and
•An increase in net premiums earned on the life reinsurance business and
in-force catastrophe reinsurance treaties; partially offset by
•An increase in policyholder benefit expenses.
12 Refer to Note 26 to the consolidated financial statements for further
information.
13 We recognized a net gain on commutation of$59 million , of which$33 million related to the accelerated amortization of the risk margin fair value adjustment liability originally recorded upon acquisition of Enhanzed Re's catastrophe reinsurance business, and is included in amortization of fair value adjustments in our Corporate and Other activities.Enstar Group Limited | 2022 Form 10-K
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Investments Segment
Investments Segment
The following is a discussion and analysis of the results of operations for our
Investments segment.
2022 2021 Change 2020 Change
INCOME (in millions of U.S. dollars)
Net investment income:
Fixed income securities $ 380 $ 273 $ 107 $ 243 $ 30
Cash and restricted cash 8 - 8 2 (2)
Other investments, including
equities 82 73 9 39 34
Less: Investment expenses (25) (37) 12 (14) (23)
Total net investment income 445 309 136 270 39
Net realized (losses) gains:
Fixed income securities (111) (4) (107) 16 (20)
Other investments, including
equities (24) (57) 33 1 (58)
Total net realized (losses) gains (135) (61) (74) 17 (78)
Net unrealized (losses) gains:
Fixed income securities (1,060) (203) (857) 284 (487)
Other investments, including
equities (409) 384 (793) 1,327 (943)
Total net unrealized (losses)
gains (1,469) 181 (1,650) 1,611 (1,430)
Total income (1,159) 429 (1,588) 1,898 (1,469)
EXPENSES
General and administrative
expenses 37 37 - 35 2
Total expenses 37 37 - 35 2
Earnings (losses) from equity
method investments (74) 93 (167) 239 (146)
SEGMENT NET (LOSS) EARNINGS $ (1,270) $ 485 $ (1,755) $ 2,102 $ (1,617)
Overall Results
2022 versus 2021: Net loss from our Investments segment was
compared to net earnings of
•An increase in net realized and unrealized losses on our fixed income
securities of
investment grade credit spreads;
•Net realized and unrealized losses on our other investments, including equities, of$433 million , in comparison to gains of$327 million in 2021. The unfavorable variance of$760 million was primarily driven by negative performance from our public equities, CLO equities and hedge funds as a result of significant volatility in global equity markets and widening high yield credit spreads; and •Losses from equity method investments of$74 million , in comparison to earnings of$93 million in 2021, primarily due to the recognition of an other-than-temporary impairment to the carrying value of one of our equity method investments and our acquisition of the controlling interest in Enhanzed Re, effectiveSeptember 1, 2021 . Prior to that date, the results of Enhanzed Re were recorded in earnings from equity method investments. Our consolidated net loss from Enhanzed Re for the year endedDecember 31, 2022 was$235 million which compared to$82 million from Enhanzed Re that was included in equity method investment earnings in 2021; partially offset by •An increase in our net investment income of$136 million , which is primarily due to the investment of new premium and reinvestment of fixed income securities at higher yields and the impact of rising interest rates on the$2.9 billion of our fixed income securities that are subject to floating interest rates. Our floating rateEnstar Group Limited | 2022 Form 10-K 77
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Investments Segment
investments generated increased net investment income of
equates to an increase of 195 basis points on those investments in comparison to
2021.
Total investment losses on the fixed income securities that support our Enhanzed Re life reinsurance business for the years endedDecember 31, 2022 and 2021 were$304 million and$17 million , respectively. 2021 versus 2020: Net earnings from our Investments segment decreased by$1.6 billion primarily as a result of decreases in net realized and unrealized gains of$1.5 billion . The decrease is largely a result of 2021 net realized and unrealized losses of$58 million related to theInRe Fund , in comparison to net unrealized gains of$1.2 billion in 2020, and 2021 net realized and unrealized losses on our fixed income securities of$207 million , in comparison to net realized and unrealized gains of$300 million in 2020.
Total Investments
Fixed income securities
Refer to the below tables for the fair value, duration, and credit rating of our
fixed income securities by business:
2022
Run-off Assumed Life (1)
Credit Credit
Fair Value % Total Total % Duration (years) (2) Rating (2) Fair Value % Duration (years) (2) Rating (2)
(in millions of U.S. dollars, except percentages)
Fixed maturity and
short-term investments,
trading and AFS and funds
held - directly managed
U.S. government & agency $ 496 5.2 % 5.9 AAA $ - - % n/a n/a $ 496 5.2 %
U.K. government 81 0.9 % 6.5 AA- - - % n/a n/a 81 0.9 %
Other government 289 3.1 % 6.0 AA- 134 1.4 % 10.3 BBB+ 423 4.5 %
Corporate 5,031 53.0 % 5.6 A- 188 2.0 % 6.7 BBB+ 5,219 55.0 %
Municipal 201 2.1 % 7.9 AA- - - % n/a n/a 201 2.1 %
Residential
mortgage-backed 536 5.7 % 4.6 AA+ - - % n/a n/a 536 5.7 %
Commercial mortgage-backed 1,021 10.8 % 2.1 AA - - % n/a n/a 1,021 10.8 %
Asset-backed 909 9.6 % 0.5 A+ - - % n/a n/a 909 9.6 %
Structured products - - % n/a n/a 586 6.2 % 9.7 A 586 6.2 %
$ 8,564 90.4 % 4.6 A $ 908 9.6 % 9.2 A- $ 9,472 100.0 %
(1) Investments under the Assumed Life caption comprise those that support our
life reinsurance business.
(2) The average duration and average credit rating calculations include
short-term investments, fixed maturities and the fixed maturities within our
funds held-directly managed portfolios at
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Investments Segment
2021
Run-off Assumed Life (1)
Fair Value % Duration (years) (2) Credit Rating (2) Fair Value % Duration (years) (2) Credit Rating (2) Total Total %
(in millions of U.S. dollars, except percentages)
Fixed maturity and
short-term investments,
trading and AFS and funds
held - directly managed
U.S. government & agency $ 737 6.1 % 6.4 AAA $ - - % n/a n/a $ 737 6.1 %
U.K. government 82 0.7 % 9.8 AA- - - % n/a n/a 82 0.7 %
Other government 387 3.2 % 6.8 AA 228 1.9 % 12.1 BBB 615 5.1 %
Corporate 6,532 54.1 % 6.4 A- 193 1.6 % 6.7 A- 6,725 55.7 %
Municipal 272 2.3 % 9.2 AA- - - % n/a n/a 272 2.3 %
Residential mortgage-backed 597 4.9 % 2.8 AA+ - - % n/a n/a 597 4.9 %
Commercial mortgage-backed 1,074 8.9 % 3.1 AA+ - - % n/a n/a 1,074 8.9 %
Asset-backed 937 7.8 % 0.3 AA- - - % n/a n/a 937 7.8 %
Structured products - - % n/a n/a 1,033 8.5 % 19.2 A- 1,033 8.5 %
Total $ 10,618 88.0 % 5.4 A 1,454 12.0 % 16.4 A- $ 12,072 100.0 %
(1) Investments under the Assumed Life caption comprise those that support our
life reinsurance business.
(2) The average duration and average credit ratings calculation includes
short-term investments, fixed maturities and the fixed maturities within our
funds held - directly managed portfolios at
The overall decrease in the balance of our fixed income securities of$2.6 billion for the year endedDecember 31, 2022 was primarily driven by the recognition of net unrealized losses on our fixed income securities and assets used to support net paid losses during the period, partially offset by assets assumed from net transactions during the year.
Other investments, including equities
Refer to the below table for the composition of our other investments, including
equities:
2022 2021
Run-off Assumed Life Total Run-off Total
(in millions of U.S. dollars)
Equities
Publicly traded equities $ 385 $ - $ 385 $ 281 $ 281
Exchange-traded funds 507 - 507 1,342 1,342
Privately held equities 358 - 358 372 372
Total $ 1,250 $ - $ 1,250 $ 1,995 $ 1,995
Other investments
Hedge funds $ 549 $ - $ 549 $ 291 $ 291
Fixed income funds 533 14 547 559 559
Equity funds 3 - 3 5 5
Private equity funds 1,282 - 1,282 752 752
CLO equities 148 - 148 161 161
CLO equity funds 203 - 203 207 207
Private credit funds 362 - 362 275 275
Real estate debt fund 202 - 202 69 69
Total $ 3,282 $ 14 $ 3,296 $ 2,319 $ 2,319
Our equities decreased by $745 million and our other investments increased by
$977 million compared to the prior year, primarily due to the redeployment from
exchange-traded funds into various non-core asset strategies, in line with our
strategic asset allocation. The balances of both equities and other investments
were negatively impacted by net unrealized losses during the period.
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Legacy Underwriting Segment
Equity Method Investments
Refer to the below table for a summary of our equity method investments, which
does not include those investments we have elected to measure under the fair
value option:
2022 2021 2020
Earnings Earnings
(losses) from (losses) from Earnings from Equity
Equity Method Equity Method Method Investments
Ownership % Carrying Value Investments Ownership % Carrying Value Investments
(in millions of U.S. dollars)
Enhanzed Re - % $ - $ - - % $ - $ 82 $ 147
Citco (1) 31.9 % 60 5 31.9 % 56 4 2
Monument Re (2) 20.0 % 110 (65) 20.0 % 194 14 88
Core Specialty 19.9 % 211 (14) 24.7 % 225 (6) -
Other 27.0 % 16 - 27.0 % 18 (1) 2
$ 397 $ (74) $ 493 $ 93 $ 239
(1) We own 31.9% of the common shares in HH CTCO Holdings Limited which in turn
owns 15.4% of the convertible preferred shares, amounting to a 6.2% interest in
the total equity of Citco III Limited ("Citco").
(2) We own 20.0% of the common shares in Monument Re as well as preferred shares
which have a fixed dividend yield and whose balance is included in the
investment amount.
Carrying Value
The carrying value of our equity method investments decreased fromDecember 31, 2021 as a result of recognizing a$52 million other-than-temporary impairment in one of our equity method investments. Unfavorable cumulative translation adjustments of$16 million due to the strengthening of theU.S. dollar against the Euro, relating primarily to our investment in Monument Re whose reporting currency is the Euro, further contributed to the decrease in the carrying value of our equity method investments for the year endedDecember 31, 2022 .
Earnings (Losses) from Equity Method Investments
We recognized losses from equity method investments in 2022, in comparison to earnings in 2021, primarily due the other-than-temporary impairment charge and our acquisition of the controlling interest in Enhanzed Re, effectiveSeptember 1, 2021 . Prior to that date, the results of Enhanzed Re were recorded in earnings from equity method investments.
Our earnings from equity method investments decreased from 2020 to 2021, due to
reductions in both Enhanzed Re and Monument Re earnings. The reduction in
Enhanzed Re earnings was primarily driven by catastrophe losses, partially
offset by significant investment gains in the last quarter of 2020. The
reduction in Monument Re earnings was as a result of a decrease in bargain
purchase gains in 2021 in comparison to 2020.
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Item 7 | Management Discussion and Analysis | Corporate and Other
Legacy Underwriting Segment
The following is a discussion and analysis of the results of operations for our
Legacy Underwriting segment.
2022 2021 Change 2020 Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ 9 $ 58 $ (49) $ 513 $ (455)
Net investment income 10 3 7 33 (30)
Net realized gains - - - 2 (2)
Net unrealized (losses) gains (10) (3) (7) 12 (15)
Other income (expenses) 1 (15) 16 27 (42)
Total income 10 43 (33) 587 (544)
EXPENSES
Net incurred losses and LAE
Current Period 4 26 (22) 375 (349)
Prior Period 3 (6) 9 (4) (2)
Total net incurred losses and LAE 7 20 (13) 371 (351)
Acquisition costs 1 13 (12) 151 (138)
General and administrative expenses 2 10 (8) 158 (148)
Total expenses 10 43 (33) 680 (637)
SEGMENT (LOSS) EARNINGS $ - $ - $ - $ (93) $ 93
Overall Results
The results for 2022 and 2021 comprise SGL No.1 Limited ("SGL No.1")'s 25% gross
share of the 2020 and prior underwriting years of Atrium's syndicate 609 whereas
the results for 2020 comprise SGL No.1's 25% net share of Atrium's syndicate 609
and StarStone International , which was transferred to the Run-off segment
effective January 1, 2021 .
From January 1, 2021 to December 31, 2022 , SGL No.1 settled its share of the
2020 and prior underwriting years for the economic benefit of Atrium, and there
was no net retention by Enstar.
The contractual arrangements between SGL No. 1, Arden and Atrium relating to the
remaining net loss reserve liabilities, cash, investments and other assets that
support the liabilities as of December 31, 2022 will settle in 2023. As a
result, we do not expect to record any transactions in the Legacy Underwriting
segment in 2023.
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Item 7 | Management Discussion and Analysis | Corporate and Other
Corporate and Other
The following is a discussion and analysis of our results of operations for our
corporate and other activities.
2022 2021 Change 2020 Change
INCOME (in millions of U.S. dollars)
Other income (expense):
Amortization of fair value
adjustments (1) $ (7) $ (16) $ 9 $ (12) $ (4)
All other income (expense) 19 - 19 (7) 7
Total other income (expense) 12 (16) 28 (19) 3
Net gain on purchase and sales of
subsidiaries - 73 (73) 3 70
Total income 12 57 (45) (16) 73
EXPENSES
Net incurred losses and LAE:
Amortization of fair value adjustments (18) 16 (34) 28 (12) Changes in fair value - fair value option (2) (200) (75) (125) 119 (194) Total net incurred losses and LAE (218) (59) (159) 147 (206) Policyholder benefit expenses - 1 (1) - 1 Amortization of net deferred charge assets 80 55 25 39 16 General and administrative expenses 142 131 11 136 (5) Total expenses 4 128 (124) 322 (194) Interest expense (89) (69) (20) (59) (10) Net foreign exchange gains (losses) 15 12 3 (16) 28 Income tax benefit (expense) 12 (27) 39 (24) (3) Net earnings from discontinued operations, net of income taxes - - - 16 (16) Net loss (earnings) attributable to noncontrolling interests 75 (15) 90 28 (43) Dividends on preferred shares (36) (36) - (36) - NET LOSS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS$ (15) $ (206) $
191
(1) Amortization of fair value adjustments relates to the acquisition of
LLC
(2) Comprises the discount rate and risk margin components.
Overall Results
2022 versus 2021: Net loss from corporate and other activities decreased by
million
•A change in net loss (earnings) attributable to noncontrolling interests of$90 million , as a result of net losses sustained in 2022 for those companies where there are noncontrolling interests;
•A favorable change in income tax benefit of
current year pre-tax losses reported in the US for which we are able to
recognize a partial deferred tax asset; and
•A reduction in net incurred losses of
•A$125 million favorable change in the fair value of liabilities relating to our assumed retroactive reinsurance agreements for which we have elected the fair value option due to increases in interest rates; and
•A
primarily driven by the release of fair value adjustment liabilities of
million
This was partially offset by:
•An absence of the prior year net gain on purchase and sales of subsidiaries of
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2021 versus 2020: Net loss from corporate and other activities decreased by
million
•A net gain recognized on the purchase and sales of subsidiaries of$73 million , which has two components: i) the$47 million gain recognized on the Step Acquisition of Enhanzed Re and ii) the net gain on sales of subsidiaries of$26 million , primarily as a result of the gain on the sale of SUL of$23 million ; •A reduction in net incurred losses of$206 million primarily driven by the change in the fair value of liabilities for which we have elected the fair value option due to increases in corporate bond yields, partially offset by tightening credit spreads for the year endedDecember 31, 2021 , in comparison to declining interest rates partially offset by widening credit spreads for the year endedDecember 31, 2020 . This was partially offset by:
•An unfavorable change in net (earnings) loss attributable to noncontrolling
interest of
where there is a noncontrolling interest.
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Item 7 | Management Discussion and Analysis | Current Outlook
Current Outlook
Run-off Outlook
Transactions
On February 16, 2023 , certain of our wholly-owned subsidiaries entered into an
LPT agreement with certain subsidiaries of QBE Insurance Group Limited ("QBE")
relating to a diversified portfolio of business underwritten between 2020 and
2018. The LPT agreement covers ground up net loss reserves of $1.9 billion and
provides an additional $900 million of development coverage. Upon completion, a
portion of the portfolio currently underwritten via QBE's Lloyd's syndicates 386
and 2999 will be transferred to Enstar's Syndicate 2008.
On February 21, 2023 , one of our wholly-owned subsidiaries entered into an
agreement with RACQ Insurance Limited ("RACQ") to reinsure 80% of RACQ's motor
vehicle Compulsory Third Party ("CTP") insurance liabilities, covering accident
years 2021 and prior. RACQ will cede net reserves of AUD$360 million (USD $243
million ), and our subsidiary will provide AUD$200 million (USD $135 million ) of
additional cover in excess of the ceded reserves.
The closing of both transactions is subject to regulatory approval and other
closing conditions.
We continue to evaluate transactions in our active pipeline including LPTs, ADCs, and other transaction types including acquisitions. We seek opportunities to execute on creative and accretive transactions by offering innovative capital release solutions that enable our clients to meet their capital and risk management objectives. Should we execute additional transactions, our mix of loss reserves by line of business, asset mix and both rate and timing of earnings may be impacted in the medium term. We expect we will invest a significant portion of premium on new transactions in fixed income securities which will deliver accretive book yields at the current elevated rates. Seasonality We complete most of our annual loss reserve studies in the fourth quarter of each year and, as a result, tend to record the largest movements, both favorable and adverse, to net incurred losses and LAE in this period. In the interim periods where a reserve study has not been completed, we perform quarterly reviews to ascertain whether changes to claims paid or case reserves have varied from our expectations developed during the last annual reserve review. In this event, we consider the timing and magnitude of the actual versus expected development, and we may record an interim adjustment to our recorded reserves if, and when, warranted.
Enhanzed Re
OnNovember 7, 2022 , we completed the novation of our closed block of life business. We expect to recognize other income of$328 million , which we will record in the first quarter of 2023 as a result of the one quarter reporting lag with Enhanzed Re. The amount of other income we will ultimately recognize will include the gain or loss on novation, activity for the period fromOctober 1, 2022 toNovember 7, 2022 and the reclassification of amounts from AOCI, comprising the remeasurement adjustment to our future policyholder benefit liabilities upon adoption of the LDTI standard onJanuary 1, 2023 . Our net earnings attributable to Enstar will be reduced by the amount attributable to Allianz's 24.9% noncontrolling interest in Enhanzed Re at the time of the transaction and a portion of our other income recorded will be subject to deferral over the expected settlement period for the life annuity policies to account for our pre-existing 20% ownership interest in Monument Re. Investment Outlook We expect global financial markets to remain uncertain into 2023 as a result of a potential economic recession, continued inflationary pressures, notably from the increased cost of services and a tight labor market with resultant tightening of financial conditions by global central banks, and continued geopolitical conflicts and tensions.
In 2022, we recognized significant unrealized losses on our fixed income
securities, a trend that could continue, albeit with a likely less severe
impact, in the event that interest rates continue to rise and/or credit spreads
widen. If
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we renew credit facilities in the current environment, we would likely incur a
higher rate of borrowing and interest costs as a result.
We expect that unrealized losses on our fixed income securities will be recouped as these assets get closer to their maturity and the prices pull to par. We may undertake tactical repositioning of our portfolio as opportunities arise to achieve a better result, rather than waiting for certain fixed income securities to pull to par value.
Elevated interest rates can represent an opportunity for us in the medium to
long term, notably;
•We hold approximately 15% of our portfolio in individual fixed income securities that have floating interest rates which, should interest rates remain elevated, we expect to be accretive to future investment income book yields. We have earned$155 million of net investment income for the year endedDecember 31, 2022 from our floating rate investments, which are generally indexed to LIBOR. •Higher interest rates have provided us with the opportunity to reinvest at higher yields as our securities mature or as we invest premium received from new business. Global equity markets are expected to remain cautious in 2023, and this, combined with our reporting lag on certain investments, will impact the valuation of our non-core risk investments. We invest in public equity, private equity and alternatives (including hedge fund investments), which may vary in the magnitude of their exposure to any potential economic recession. Anticipations of an economic downturn, including lower earnings and lower equity multiples on equities in 2023, may further negatively impact our non-core investments but may also impact expectations of future interest rates with the resulting impact to our fixed income securities. Despite these challenges, we remain committed to our strategic asset allocation and expect our non-core investments to provide attractive risk adjusted returns and diversification benefits over the medium to long term. We expect to continue to benefit from our allocation to investments with inflationary pass-through components, including investments in private equity, private credit, real estate, and infrastructure asset classes and will continue to seek other attractive investment opportunities throughout 2023.
Inflation
We continue to monitor the inflationary impacts resulting from pandemic-related
government stimulus and labor force supply pressures on our loss cost trends.
Our Run-off net loss reserves primarily consist of general casualty, workers' compensation and asbestos lines of business which, as long tailed lines of business, have not been significantly impacted by ongoing inflationary pressures in comparison to other lines of business, such as property and auto lines. The currently observed and limited impact of economic inflation on our loss cost trends reflects a combination of the opportunity we have to re-price seasoned books of business and our claims management model that seeks to settle claims in an efficient and responsive manner to protect and mitigate the impact to us from adverse outcomes. While we do not currently see any new trends in the longer term trend of social inflation on certain claims, we continue to monitor claims in difficult legislative districts, seek to actively settle claims and monitor for reserving adequacy.
Global economic policy responses to inflation have led to increases in interest
rates, which, in the short term, have had a significant impact on our
investments, in particular our fixed income securities. Any further rise in
interest rates will have further negative impacts on our fixed income
securities.
There remains uncertainty around the pace and direction of inflation, and it is
unlikely that a pause in rate increases, or even a cut in rates, will occur
until late 2023 or even 2024. We continue to monitor liquidity, capital and
potential earnings impact of these changes but remain focused on medium to long
term asset allocation decisions.
Inflation, tight labor conditions and higher service costs continue to put
pressure on wages and prices, which could impact our underlying our general and
administrative expenses as we remain focused on being a competitive employer in
our market.
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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
Russian Invasion ofUkraine The Russian invasion ofUkraine and the resulting impact on global commodity markets has increased commodity inflation rates, disrupted supply chains and generated significant insurance losses. In response, many countries have established comprehensive sanctions regimes increasing both geopolitical tension betweenNATO andRussia and market volatility. To quantify our exposure, we have performed an analysis of, and continue to monitor, our direct investment and underwriting risks, our acquisition pipeline and the potential for operational disruption (including disruption via our third party service providers). We have concluded that we have no significant direct impacts from this event. We continue to monitor for, and respond to, all changes in the global sanctions regime, updating our procedures accordingly.Enstar Group Limited | 2022 Form 10-K
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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
Liquidity and Capital Resources
Overview We believe that we have sufficient liquidity and capital resources to meet our business requirements for the next 12 months and thereafter. We aim to generate cash flows from our (re)insurance operations and investments, preserve sufficient capital for future acquisitions and new business, and develop relationships with lenders who provide borrowing capacity at competitive rates.
Liquidity and Capital Resources Highlights
Sources of Cash During 2022:
•We received cash, restricted cash and cash equivalents from new business of
•We issued Junior Subordinated notes due 2042 of
•In the fourth quarter, we borrowed and fully repaid
our revolving credit facility.
Uses of Cash During 2022:
•We repurchased 697,580 of our outstanding ordinary shares for an aggregate
price of
•We repaid Senior Notes due 2022 and the Enhanzed Re Subordinated notes due 2031
with aggregate principal balances totaling
•We paid
•We paid
As of
excluding restricted cash, that supports (re)insurance operations. Included in
this amount was
[[Image Removed: esgr-20221231_g19.jpg]]
[[Image Removed: esgr-20221231_g20.jpg]]
The decrease in total capitalization was due to the increase in realized and
unrealized investment losses of
which excludes the impact of unrealized investment losses and includes
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discounts for loss reserves, our economic balance sheet strengthened during the
year primarily due to higher interest rates.
Under the eligible capital rules of theBermuda Monetary Authority ("BMA"), the Preferred Shares qualify as Tier 2 capital when considering the Bermuda Solvency Capital Requirements ("BSCR"). For purposes of the financial covenants in our credit facilities, total debt excludes hybrid capital (defined as our Subordinated Notes) not exceeding 15% of total capital attributable to Enstar. As ofDecember 31, 2022 , we were in compliance with the financial covenants in our credit facilities.
Liquidity and Capital Resources of Holding Company and Subsidiaries
Holding Company Liquidity
We conduct substantially all of our operations through our subsidiaries. As such, the potential sources of liquidity to Enstar as a holding company consist of cashflows from our subsidiaries including dividends, advances and loans, and interest income on loans to our subsidiaries. We also utilize credit loan facilities, and we have issued senior notes and preferred shares and guaranteed our Junior Subordinated Notes. As ofDecember 31, 2022 , we had$600 million of available unutilized capacity under our unsecured revolving credit agreement, which expires inAugust 2023 , and may request additional commitments under the facility up to an additional$400 million . To date, we have not requested any additional commitments under the facility. We use cash to fund new acquisitions of companies. We also utilize cash for our operating expenses associated with being a public company and to pay dividends on our preferred shares and interest and principal on loans from subsidiaries and debt obligations, including loans under our credit facilities, our Senior Notes and our Junior Subordinated Notes. We may, from time to time, raise capital from the issuance of equity, debt or other securities as we continuously evaluate our strategic opportunities. We filed an automatic shelf registration statement inAugust 2020 with theSEC 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 (re)insurance subsidiaries are restricted by (re)insurance laws and regulations, as described below. The ability of all of our subsidiaries to make distributions and transfers to us may also be restricted by, among other things, other applicable laws and regulations and the terms of our credit facilities and our subsidiaries' bank loans and other issued debt instruments. Based on our group's current corporate structure with aBermuda 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 amount would not be subject to incremental income taxes; however, in certain circumstances withholding taxes may be imposed by some jurisdictions, including bythe United States .
Based on existing tax laws, regulations and our current intentions, there were
no accruals as of
dividends or other distributions.
Enstar Finance is a wholly-owned finance subsidiary under which we have issued our Junior Subordinated Notes. Similar to our holding company, Enstar Finance is dependent upon funds from other subsidiaries to pay any amounts due under the Junior Subordinated Notes in the form of distributions or loans, which may be restricted by, among other things, other applicable laws and regulations and the terms of our credit facilities and our subsidiaries' bank loans and other issued debt instruments.
Operating Company Liquidity
We expect that our operating companies will generate sufficient liquidity,
together with our existing capital base and cash and investments acquired and
from new business, to meet cash requirements and to operate our business.
Sources of funds to our operating companies primarily consist of cash and
investment portfolios acquired on the completion of acquisitions and new
business, investment income earned, proceeds from sales and maturities of
investments and collection of reinsurance recoverables. We also collect premiums
and fees and commission income.
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Cash balances acquired upon the purchase of (re)insurance companies are
classified as cash provided by investing activities, whereas cash from new
business is classified as cash provided by operating activities.
The primary uses of funds by our operating companies are claims payments,
investment purchases, operating expenses and collateral requirements.
The ability of our (re)insurance subsidiaries to pay dividends and make other
distributions is limited by the applicable laws and regulations of the
jurisdictions in which our (re)insurance subsidiaries operate, including
Europe, which subject these subsidiaries to significant regulatory restrictions.
These laws and regulations require, among other things, certain of our (re)insurance 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.
As of
requirement levels were in excess of the minimum levels required.
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 credit facility agreements and other debt instruments. Variability in ultimate loss payments and collateral amounts required may also result in increased liquidity requirements for our subsidiaries.
Sources and Uses of Cash
Cash and cash equivalents decreased by$762 million in 2022, which was largely due to cash used in investing and financing activities of$919 million and$116 million , respectively, partially offset by cash provided by operating activities of$257 million . Cash and cash equivalents increased by$495 million in 2021, which was largely due to cash provided by operating activities of$3.8 billion , partially offset by cash used in investing and financing activities of$2.6 billion and$737 million , respectively. Cash and cash equivalents increased by$541 million in 2021, which was largely due to cash provided by operating and financing activities of$2.8 billion and$118 million , respectively, partially offset by cash used in investing activities of$2.3 billion .Enstar Group Limited | 2022 Form 10-K 89
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Analysis of Sources and Uses of Cash
2022 2021 2020 2022 vs 2021 2021 vs 2020
(in millions of U.S. dollars)
Operating Cash Flow Activities
Net paid losses $ (1,680) $ (1,431)
Cash acquired on completion of acquisitions
and new business
140 2,015 1,558 (1,875) 457 Net sales and maturities of trading securities 991 3,111 1,653 (2,120) 1,458 Net investment income 416 357 326 59 31 Other sources (uses) 390 (251) 734 641 (985) Net cashflows provided by operating activities 257 3,801 2,786 (3,544) 1,015 Investing Cash Flow Activities Net sales and maturities (purchases) of AFS securities 207 (2,148) (1,921) 2,355 (227) Net purchases of Other Investments (1,132) (580) (380) (552) (200) Impact of consolidating the opening cash and restricted cash balances of the InRe Fund - 574 - (574) 574 Other sources (uses) 6 (419) (34) 425 (385) Net cash flows used in investing activities (919) (2,573) (2,335) 1,654 (238) Financing Cash Flow Activities Net proceeds from loans 138 242 180 (104) 62 Preferred share dividends (36) (36) (36) - - Share repurchases (163) (942) (26) 779 (916) Other uses (55) (1) - (54) (1) Net cash flows (used in) provided by financing activities$ (116) $ (737)
Analysis of Sources and Uses of Cash
Operating Cash Flow Activities
2022 vs 2021: the$3.5 billion decrease in cash provided by operating activities was driven by a decrease in the net sales and maturities of trading securities of$2.1 billion , which was primarily driven by the deployment of the InRe funds, liquidated in 2021, into other investments in line with our asset allocation strategy. The decrease was further driven by a reduction in cash provided from acquisitions of new business of$1.9 billion , as a result of receiving increased non-cash consideration in 2022, including$1.9 billion of funds held by reinsured companies in relation to the Aspen LPT and$520 million of fixed income securities, AFS, in relation to the Argo LPT, in comparison to 2021. The decrease was partially offset by increases of$641 million from other sources and$59 million from net investment income received. 2021 vs 2020: the$1.0 billion increase in cash provided by operating activities was driven by an increase in the cash inflows from net sales and maturities of trading securities of$1.5 billion , which was primarily driven by the liquidation of theInRe Fund , a$457 million increase in cash, restricted cash and cash equivalents from assuming new business, and a$31 million increase in net investment income received. This was partially offset by decreases of$985 million from other sources.
Investing Cash Flow Activities
2022 vs 2021: the$1.7 billion decrease in cash used in investing activities was primarily due to net sales and maturities of fixed income securities, AFS of$207 million in 2022, in comparison to net purchases of$2.1 billion in 2021, partially offset by an increase in purchases of other investments, primarily driven by the deployment of the InRe funds, of$552 million . 2021 vs 2020: the$238 million increase in cash used in investing activities was driven by an increase in the net purchases of fixed income securities, AFS of$227 million and an increase in net purchases of other investments of$200 million , partially offset by the impact of consolidating the opening cash and restricted cash balances of theInRe Fund of$574 million , in 2021.Enstar Group Limited | 2022 Form 10-K
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Financing Cash Flow Activities
2022 vs 2021: the$621 million decrease in cash used in financing activities was primarily driven by the decrease in share repurchases of$779 million , as our 2021 share repurchases were driven by strategic repurchases as described below, in addition to a decrease in the net proceeds from loans of$104 million . 2021 vs 2020: cash used in financing activities was$737 million in 2021, in comparison to cash provided by financing activities of$118 million in 2020. This was primarily due to$942 million of share repurchases in 2021, including$879 million attributable to the repurchase ofHillhouse Group's entire interest in Enstar, offsetting an increase in the net proceeds from loans of$62 million . Debt Obligations We utilize debt financing and loan facilities primarily for funding acquisitions and significant new business, investment activities and, from time to time, for general corporate purposes.
Our debt obligations as of
December 31,
Origination Term 2022 2021
(in millions of U.S. dollars)
4.50% Senior Notes due 2022 March 2017 5 years $ - $ 280
4.95% Senior Notes due 2029 May 2019 10 years 496 495
3.10% Senior Notes due 2031 August 2021 10 years 495 495
Total Senior Notes 991 1,270
5.75% Junior Subordinated Notes due 2040 August 2020 20 years 345 345
5.50% Junior Subordinated Notes due 2042 January 2022 20 years 493 -
5.50% Enhanzed Re's Subordinated Notes
due 2031 December 2018 12.1 years - 76
Total Subordinated Notes 838 421
Total debt obligations $ 1,829 $ 1,691
Our debt obligations increased by $138 million from December 31, 2021 , primarily
due to the issuance of our 2042 Junior Subordinated Notes. This was partially
offset by the repayment upon maturity of our 2022 Senior Notes using proceeds
from the 2042 Junior Subordinated Notes and the repayment of Enhanzed Re's 2031
Subordinated Notes in accordance with our strategic wind-down of Enhanzed Re's
operations.
Under the eligible capital rules of the Bermuda Monetary Authority ("BMA"), the
Senior Notes qualify as Tier 3 capital and the Junior Subordinated Notes qualify
as Tier 2 capital when considering the Bermuda Solvency Capital Requirements
("BSCR").
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Credit Ratings
The following table presents our credit ratings as of
Credit ratings (1) Standard and Poor's Fitch Ratings Long-term issuer BBB (Outlook: Positive) BBB+ (Outlook: Stable) 2029 Senior Notes BBB BBB 2031 Senior Notes BBB- BBB 2040 and 2042 Junior Subordinated Notes BB+ BBB- Series D and E Preferred Shares BB+ BBB- (1) Credit ratings are provided by third parties, Standard and Poor's and Fitch Ratings, and are subject to certain limitations and disclaimers. For information on these ratings, refer to the rating agencies' websites and other publications.
Agency ratings are not a recommendation to buy, sell or hold any of our
securities and may be revised or withdrawn at any time by the issuing
organization. Each agency's rating should be evaluated independently of any
other agency's rating14.
14 For information on risks related to our credit ratings, refer to "Item 1A.
Risk Factors - Risks Relating to Liquidity and Capital Resources" and "Item 1A.
Risk Factors - Risks Relating to Ownership of our Shares."
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Contractual Obligations The following table summarizes, as ofDecember 31, 2022 , our future payments under material contractual obligations and estimated payments for losses and LAE for the Run-off segment by expected payment date. The table includes only obligations that are expected to be settled in cash. Short-term Long Term Less than 1 - 3 3 - 5 6 - 10 More than Total 1 Year years years years 10 Years (in millions of U.S. dollars) Operating Activities Estimated gross reserves for losses and LAE (1) Asbestos$ 1,693 $ 156 $ 290 $ 246 $ 359 $ 642 Environmental 352 42 70 54 80 106 General Casualty 4,374 751 1,015 660 1,344 604 Workers' compensation/personal accident 2,401 237 359 347 490 968 Marine, aviation and transit 505 183 163 68 53 38 Construction defect 402 96 138 43 85 40 Professional indemnity/ Directors & Officers 1,406 331 399 219 373 84 Motor 568 139 167 63 79 120 Property 546 202 193 75 58 18 Other 668 248 211 77 64 68 Total outstanding losses and IBNR 12,915 2,385 3,005 1,852 2,985
2,688
ULAE 422 82 102 61 84 93 Estimated gross reserves for losses and LAE for the Run-off segment (1) 13,337 2,467 3,107 1,913 3,069 2,781 Financing Activities Loan repayments (including estimated interest payments) 3,050 89 176 176 1,337 1,272 Total$ 16,387 $ 2,556 $ 3,283 $ 2,089 $ 4,406 $ 4,053 (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 consolidated 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 ofDecember 31, 2022 and do not take into account corresponding reinsurance recoverable amounts that would be due to us. Furthermore, certain of the reserves included in the consolidated financial statements as ofDecember 31, 2022 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.
Reserves for Losses and LAE
We generally attempt to match the duration of our investment portfolio to the duration of our general liability profile. We generally seek to maintain investment portfolios that are shorter or of equivalent duration to the liabilities in order to provide liquidity for the settlement of losses and, where possible, to avoid having to liquidate longer-dated investments. The settlement of liabilities also has the potential to accelerate the natural payout of losses and policyholder benefits, which may require additional liquidity. As of as ofDecember 31, 2022 and 2021, the weighted average durations of our Run-off segment gross reserves for losses and LAE were 4.65 and 6.18, respectively. The decrease from 2021 was driven by shorter average payouts from new acquisitions and an increase in yield curves during the year endedDecember 31, 2022 .Enstar Group Limited | 2022 Form 10-K
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Future Policyholder Benefits
InNovember 2022 , Enhanzed Re completed a novation of the reinsurance closed block of life annuity policies to Monument Re. We settled the life liabilities and the related assets at carrying value in return for cash consideration, and expect to record a gain on novation in our first quarter 2023 results as a result of the one quarter reporting lag15. Given the novation, we did not include the expected payments of the liability in the table above.
Debt Obligations
The amounts presented in this table represent Enstar's total debt obligations.
Refer to the 'Debt Obligations' section above for further details.
RNCI
In addition to the contractual obligations noted in the table above, we have the
right to purchase the redeemable non-controlling interest ("RNCI") related to
StarStone International from the Trident V Funds and Dowling Capital Partners I,
L.P. and Capital City Partners LLC (collectively, the "Dowling Funds") after
March 31, 2023 (a "call right") and the RNCI holders have the right to sell
their RNCI interests to us after December 31, 2022 (a "put right").
Share Repurchases and Dividends
Our strategy is to retain earnings and invest distributions from our operating subsidiaries into our business. We may choose to return value to shareholders in the form of share repurchases or dividends. For details on our share repurchase programs, refer to Note 19 to our consolidated financial statements. To date, we have not declared any dividends on our ordinary shares. We may re-evaluate this strategy from time to time based on overall market conditions and other factors. We have 16,000 Series D Preferred Shares with an aggregate liquidation value of$400 million and 4,400 Series E Preferred Shares with an aggregate liquidation value of$110 million . The dividends on both Series of Preferred Shares are non-cumulative and may be paid quarterly in arrears, only when, as and if declared.
Any payment of common or preferred dividends must be approved by our Board. Our
ability to pay ordinary and preferred dividends is subject to certain
restrictions.
Off-Balance Sheet Arrangements
As ofDecember 31, 2022 , we have entered into certain investment commitments and parental guarantees16. We also utilize unsecured and secured letters of credit17 ("LOCs") and a deposit facility. We do not believe it is reasonably likely that these arrangements will have a material current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, cash requirements or capital resources. Short-term Long Term Less than More than 1 Year 1 Year Total (in millions of U.S. dollars) Investing Activities Unfunded investment commitments (1) 391 1,402
1,793
(1) Refer to Note 25 to our consolidated financial statements for further
details.
15 Refer to Note 26 to our consolidated financial statements for further
details.
16 Refer to Note 25 to our consolidated financial statements for further
details.
17 Refer to Note 17 to our consolidated financial statements for further
details.
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Item 7 | Management Discussion and Analysis | Critical Accounting Estimates
Critical Accounting Estimates
We believe the following accounting policies are most dependent on significant
judgments and estimates used in the preparation of our financial statements.
Losses and LAE
Run-off
Losses and LAE liabilities represent our best estimate of the ultimate remaining
liability for unpaid losses and LAE for incurred claims as of the balance sheet
date. This includes provisions for claims that have been reported but are unpaid
at the balance sheet date (Outstanding Loss Reserves, or "OLR") and for
obligations on claims that have been incurred but not reported ("IBNR") at the
balance sheet date. IBNR may also include provisions to account for the
possibility that reported claims may settle for amounts that differ from the
established case reserves as well as the potential for closed claims to re-open.
Establishing loss reserves can be complex and is subject to considerable
uncertainty. Because a significant amount of time can lapse between our
assumption of the risk, the occurrence of a loss event, the reporting of the
event to us and the ultimate payment of the claim on the loss event, the
liability for unpaid losses and LAE is based largely upon estimates. Certain
types of exposure, typically latent health exposures such as asbestos-related
claims, have inherently long reporting delays, in some cases many years, from
the date a loss occurred to the manifestation and reporting of a claim and
ultimately until the final settlement of the claim, and that could impact the
amount of reliance we place on our actual historical data.
We use considerable judgment in the process of developing these estimates of
loss reserves, which involves uncertainty in several areas, including use of
actual or industry data for model inputs, and various projection assumptions and
judgements depending on product lines, coverage type, or policy year. We may
record additional estimates based upon our judgement as to the applicability of
the facts, circumstances and external environment to each portfolio.
As of December 31, 2022 and 2021, IBNR reserves (net of reinsurance balances
recoverable) accounted for $6.1 billion , or 51.3%, and $6.8 billion , or 59.4%,
respectively, of our total Run-off net losses and LAE reserves, excluding
ULAE18.
Our estimate of loss reserves for each portfolio generally relies on the
following key judgments:
•The degree of reliance upon historic actual claims trends or industry data for
claims trends.
•Separation of each portfolio into homogenous data sets, generally by line of
business, or reserving class.
•Methods used in analyzing and projecting potential reserve positions and the
mix of methods selected to form an aggregate reserve position for each
portfolio19.
•Our degree of reliance or adjustment as a result of external factors such as economic conditions (inflation and unemployment statistics), legal conditions (judicial rulings in each relevant jurisdiction) and social & environmental factors (medical cost trends, changes in regulations or public health). •Consideration of additional information such as changes in claims handling activities, third party claims operating reviews, third party actuarial reviews or changes in our reinsurance programs. Judgments are based on numerous factors and may be revised as additional data becomes available, as new or improved methods are developed, or as laws change. This means that ultimate loss payments may differ from the losses and LAE estimate made at the balance sheet date.
In addition, key assumptions are made within each method, although the
sensitivity to each assumption may vary within each method and even within each
reserving class and accident year of each method. Such assumptions would
include:
•Loss development factors are used to extrapolate current losses on an accident year to our full expected losses based upon judgements of historical trends on earlier accident years. 18 For a breakdown of our Run-off gross and net losses and LAE reserves by line of business, and ULAE, as ofDecember 31, 2022 and 2021, refer to Note 10 to our consolidated financial statements.
19Refer to Note 10 to our consolidated financial statements for further
description of the methodologies used for establishing reserves.
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Item 7 | Management Discussion and Analysis | Critical Accounting Estimates
•Tail factors further extrapolate our longer tailed lines where payments expected in later years or decades can be more uncertain than settlements that preceded them both in the timing and amount of cash flows. As such, lines with more expected payments in the tail are more sensitive to tail assumptions.
•Expected loss ratios are used for years where we do not yet have credible
experience.
•Loss cost trend factors are used to extrapolate future loss expectations based
upon observed trends.
We perform, at least annually, a formal review process of each portfolio of
reserves in accordance with Actuarial Standards of Practice. These reviews may
be performed using internal or independent credentialed actuaries.
In addition, we project expected paid and incurred loss development for each class of business, which is monitored on a quarterly basis. Should actual paid and incurred development differ significantly from the expected paid and incurred development, we will investigate the cause and, in conjunction with our actuaries, consider whether any adjustment to total loss reserves is required. Adjustments resulting from changes in our estimates are recorded in the period when such adjustments are determined. The ultimate liability for losses and LAE is likely to differ from the original estimate due to a number of factors, primarily consisting of the overall claims activity occurring during any period, including the completion of commutations of assumed liabilities and ceded reinsurance receivables, policy buy-backs and general incurred claims activity.
Loss Reserving (Latent Claims)
Sensitivity to Underlying Assumptions of our Actuarial Methods
While we believe our reserve for losses and LAE atDecember 31, 2022 is reasonable, the estimation of these reserves is a complex process that depends on a number of factors and assumptions. As noted previously, our best estimate of our loss reserves involves considerable judgement, considering the results from a number of reserving methodologies. Therefore, these estimates are susceptible to changes in assumptions. We consider each of the following sensitivities a reasonable deviation for the key assumptions for each of our significant lines of business. Estimated range in Line of Business Net Reserves Sensitivity variation (in millions of U.S. Dollars) +/- 10% in expected number of claims +/-$125 Asbestos$ 1,628 +/- 10% in average indemnity +/-$165 +/- 10% in tail development factor (5+ years) +/-$190 General Casualty 4,254 +/- 1% in loss cost trend +/-$195 +/- 2.5% increase in medical Workers' Compensation 2,175 inflation +/-$455 Professional Indemnity/Directors and Officers 1,250 +/- 2.5% in loss cost trend +/-$105 Motor 377 +/- 2.5% in loss cost trend +/-$35 Asbestos - Reserve estimates for this line are subject to greater variability than reserves for more traditional exposures. Claims are spread across multiple policy years based on the still evolving case law in various jurisdictions and inconsistent court decisions and judicial interpretations, making historical development patterns unreliable to forecast the future claim payments. A key consideration in setting our asbestos reserves is the volume of future claim filings, and the average indemnity of those claims.General Casualty - This is a long tail class of business with long reporting and paid developing factors, and we generally use a combination of reserving methodologies on this line. Because of the long tail nature, the reserves are susceptible to variation in loss development factors and loss cost trends that may develop over an extended period of time over multiple accident years. A key assumption in setting our general casualty reserves is the provision for claim payments in the tail. Workers' Compensation - We generally use a combination of loss development and expected loss ratio methods due to the long tail nature of this line. A portion of our workers' compensation reserves cover medical expense for future treatments of injured workers. Given the long development patterns associated with workers' compensation business, these claims are exposed to medical inflation. Enstar Group Limited | 2022 Form 10-K
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Item 7 | Management Discussion and Analysis | Critical Accounting Estimates
Professional Indemnity/Directors and Officers - Due to the nature of this line,
there is increased uncertainty in the number and severity of claims, which
results in an expectation of high volatility and uncertainty in loss trends.
Motor - This business is generally more short tail in nature, and the majority of the claims are resolved within a few years of occurrence. A key component in estimating motor reserves is the severity of claims.
Asbestos Claims
A number of our subsidiaries, and counterparties who underwrote the insurance policy portfolios we assumed, have exposure to bodily injury claims from alleged exposure to asbestos.
•The United States asbestos exposure arises mainly from general liability
insurance policies underwritten prior to 1986, which our subsidiaries or
counterparties either wrote directly, on a primary or excess basis, or as
reinsurance.
•Our United Kingdom asbestos exposures emanate from Employers' Liability
insurance policies written in 2005 and prior.
Asbestos bodily injury claims differ from other bodily injury claims due to the long latency period for asbestos, which often triggers a policyholder's coverage over multiple policy periods. The long latency period, combined with the lack of clear judicial precedent with respect to coverage interpretations and expanded theories of liability, increases the uncertainty of the asbestos claim reserve estimates. As ofDecember 31, 2022 and 2021, the net loss reserves for asbestos-related claims comprised 13.6% and 16.7%, respectively, of total Run-off net reserves for losses and LAE liabilities excluding ULAE. In addition as ofDecember 31, 2022 and 2021, we also had$786 million and$826 million of defendant asbestos liabilities, respectively20 . Environmental Claims Our subsidiaries and counterparties who underwrote the insurance policy portfolios we assumed have exposure to environmental claims from general liability insurance policies written prior to the mid-1980s, that were not specifically written to cover damage to the environment from gradual releases of pollutants. Similar to asbestos, there is additional uncertainty with respect to environmental reserves as compared to other general liability exposures. This added uncertainty is due to the multiple policy periods and allocation of claims to policy years, number of solvent potentially responsible parties at any site, ultimate cost of the remediation, the number of ultimate sites and changes to judicial precedence. As ofDecember 31, 2022 and 2021, the net loss reserves for environmental pollution-related claims comprised 2.8% and 3.2%, respectively, of total Run-off net reserves for losses and LAE excluding ULAE. In addition, we also have$10 million and$11 million as ofDecember 31, 2022 and 2021, respectively, of direct environmental liabilities21.
Asbestos and Environmental Reserving
The ultimate losses from A&E claims cannot be estimated using traditional actuarial reserving methods that extrapolate losses to an ultimate basis using loss development, and therefore we use alternative projection methods. Claims are spread across multiple policy years based on the still evolving case law in each jurisdiction, making historical development patterns unreliable to forecast the future claim payments. Our estimate of loss reserves for A&E claims relies on the following key factors and judgements:
•The degree of reliance or adjustment based on the legal and social environment,
to which these liabilities are particularly sensitive. The current legal
environment and the impact of specific settlements that may be used as
precedents to settle future claims are key with these types of claims.
•The degree of reliance upon actual claims data and trends or industry data for
claims trends.
•Methods used in analyzing and projecting potential reserve positions and the
mix of methods selected to form an aggregate reserve position for each
portfolio22.
Judgements are based on numerous factors and may be revised as additional data becomes available, as new or improved methods are developed, or as laws change. This means that ultimate loss payments may differ from the losses and LAE estimate made at the balance sheet date.
20 As described in Note 12 in our consolidated financial statements.
21 As described in Note 12 in our consolidated financial statements.
22 Refer to Note 10 in our consolidated financial statements, for further
description of the methodologies used for establishing reserves.
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Item 7 | Management Discussion and Analysis | Critical Accounting Estimates
Key assumptions are made within each method, although the sensitivity to each assumption may vary within each method and even within each reserving class and accident year of each method. When the asbestos exposure analysis (frequency and severity) method is applied, such assumptions would include:
•Trends with respect to average claim indemnity, which are used to extrapolate
future claim costs.
•Trends in claim filing patterns, which will be used to estimate the number of
future claims.
We also use a combination of additional actuarial methods, including the paid
survival ratio, paid market share, decay factor, and other methods to
periodically reevaluate the continued reasonableness of recorded loss reserves.
Change in Reserve Assumptions
Changes in reserve estimates can be driven by updated experience and by changes
in assumptions. These are linked as updated information leads to changes in
assumptions. We have estimated what portion of changes in ultimate losses from
acquisition years 2013 to 2022 are attributable to experience and what portion
are attributable to assumptions.
Change in Ultimate
Line of Business Losses Change due to Experience Change due to Assumptions
Asbestos (0.7) % (0.5) % (0.2) %
General Casualty 2.1 % (0.1) % 2.2 %
Workers' Compensation (7.6) % (5.2) % (2.4) %
Professional Indemnity/Directors
and Officers 1.4 % (0.1) % 1.5 %
Motor 4.0 % 1.1 % 2.9 %
Defendant asbestos and environmental liabilities
Defendant A&E liabilities on our consolidated balance sheets include amounts for indemnity and defense costs for pending and future claims, determined using standard actuarial techniques for asbestos-related exposures. Defendant A&E liabilities also include amounts for environmental liabilities associated with our properties. These are non-insurance liabilities since they are held by non-insurance subsidiaries and are presented separately on our consolidated balance sheets. These reserves will be sensitive to similar industry trends and assumptions as observed in our A&E reserves as described under the Loss and LAE section above, specifically claim trends and indemnity. However, we use utilize different methodologies to estimate the defendant A&E liabilities as compared to our loss reserves23.
Key drivers for this estimate are the amount of future claim filings and average
indemnity, which are key indicators of the amount of liabilities. The table
below provides sensitivities of these drivers for defendant A&E.
Net Liability Sensitivity Estimated Range in Variation
(in millions of U.S. Dollars)
+/- 10% in expected number of claims +/- $45
$572 +/- 10% in average indemnity +/- $55
Change in Liability Assumptions
Similar to reserves, changes in defendant A&E liabilities can be driven by
updated experience and by changes in assumptions. These are linked as updated
information leads to changes in assumptions. We have estimated what portion of
changes in the liabilities are attributable to experience and what portion are
attributable to assumptions24.
Change in Total Liability Change due to Experience Change due to Assumptions
(in millions of U.S. Dollars)
$(2) $(2) $-
23 As described in Note 12 in our consolidated financial statements.
24 For information on our defendant A&E liabilities, refer to Note 2 and Note 12
in our consolidated financial statements.
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Item 7 | Management Discussion and Analysis | Critical Accounting Estimates
Valuation Allowances on Deferred Tax Assets
At each balance sheet date, we assess the need to establish a valuation allowance that reduces deferred tax assets (including those generated from operations as well as those acquired in business combinations) when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized.
The determination of the need for a valuation allowance is based on all
available information including
•projections of future taxable income;
•our forecast of future taxable income considers several factors, including actual net earnings in recent years, future sustainability and likelihood of positive earnings; and •tax planning strategies.
Projections of future taxable income incorporate assumptions of future business
and operations that may differ from actual experience.
If our assumptions and estimates that resulted in our forecast of future taxable income prove to be incorrect, an additional valuation allowance could become necessary, which could have a material adverse effect on our financial condition. From 2021 to 2022, we had an increase in our valuation allowance of$52 million , driven mostly by increase in our DTA associated with unrealized investment losses and net operating loss carryforwards in theU.S. andU.K. jurisdictions as we do not make a hold to recovery assertion on unrealized losses. In assessing the recoverability of the DTA, we consider forecasts of future income for ourU.S. business using assumptions about future macroeconomic and company specific conditions and events. While our forecasts of future taxable income have remained consistent, these forecasts are judgmental and involve a level of uncertainty, such that a 10% decrease to forecasted future income could increase the valuation allowance by up to 8% or$15 million25.
Level 3 Fair Value Measurements
We measure fair value using a standard hierarchy based on the quality of inputs
used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements).
Level 3 fair value measurements are based on unobservable inputs where there is
little or no market activity. We utilize unadjusted third party pricing sources
and internal valuation models to determine these fair values. Our assessment of
the significance of these unobservable inputs to the fair value measurement
requires judgement.
Our Level 3 investments consist primarily of privately held equity securities,
and we value these securities using observable and unobservable inputs. While
the observable inputs are based on readily available market data, the
unobservable inputs involve increased uncertainty and judgement in their
selection and application. Key drivers of the valuation are the peer multiple
and the expected term (in years). The peer multiple is calculated from a group
of peer companies and that multiple is then applied to the invested company as a
key input to calculate the value. The expected term is used in the option
pricing model as a key input to calculate the value of the privately held equity
securities. The option pricing model is only used for one investment which has a
more complex securities structure that includes different liquidation
preferences for each security class. We consider the following sensitivity a
reasonable deviation for this key input:
Sensitivity Investments Estimated Range in Variation
(in millions of U.S. dollars)
+/- 10% peer multiple $ 294 +/- $29
+/- 3 year exit term $ 190 +/- $22
25 For information on valuation allowances on deferred tax assets, refer to
"Income Taxes" within Note 2 in our consolidated financial statements.
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Item 7 | Management Discussion and Analysis | Critical Accounting Estimates
Fair Value Option - Insurance Contracts
We have elected to apply the fair value option for certain LPT reinsurance transactions that originated in 2017 and 2018. This is an irrevocable election that applies to all balances under the insurance contract, including reinsurance recoverable and the liability for losses and LAE. The fair value of the liability for losses and LAE and reinsurance recoverable under these contracts is presented separately in our consolidated balance sheet as ofDecember 31, 2022 and 2021. Changes in the fair value of the liability for losses and LAE and reinsurance balances recoverable on paid and unpaid losses are included in net incurred losses and LAE in our consolidated statement of operations. We use an internal model to calculate the fair value of the liability for losses and LAE and reinsurance recoverable asset for certain retroactive reinsurance contracts where we have elected the fair value option.
The fair value is 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 actuarial methods and
ii.a discount rate based upon high quality rated corporate bond yields 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.
The fair value model uses a combination of observable and unobservable inputs in its use and application. While the observable inputs are based on readily available market data, the unobservable inputs involve increased uncertainty and judgement in their selection and application. Specifically, the risk margin calculated is dependent on the following inputs:
a.Yield curve using high quality rated corporate bond rates across different
currencies, notably the British Pound, US dollar, and the Euro.
b.Weighted average cost of capital ("WACC"), which represents a proxy for the
industry cost of capital, and is calculated utilizing various inputs.
c.Average payout of the liabilities, which reflects the timing of expected
future claim payments.
We consider the following sensitivity a reasonable deviation for these key
assumptions26:
Net Fair Value Liabilities Sensitivity
(in millions of U.S. dollars) $ 1,011 +/- 50bps WACC +/-$5 $ 1,011 +/- 1 year in average payout +/-$35 $ 1,011 +/- 50bps yield curve +/-$25 While the yield curve is an observable input since it is based on readily determinable corporate bond rates, it generally has the biggest impact to the fair value in a given year apart from changes in loss estimates. At year-end 2022, there was a$219 million decrease in the liability due to an increase in the yield curve along with a$21 million decrease in the liability due to a 0.45% increase in the credit spread for non-performance risk as credit spreads have widened with the increase in yield curve.
The WACC remained unchanged from 2020 to 2022.
26The observable and unobservable inputs used in the model are further described
in Note 13 in our consolidated financial statements.
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The average payout of the liability is adjusted every period to reflect actual net payments during the period and expected future payments, and any acceleration or deceleration of the estimated payment pattern will impact the average payout that would result in an impact to the value of the liability.
During 2022, there was an acceleration in the payment pattern, which decreased
the average payout and resulted in a
Recently Issued Accounting Pronouncements Not Yet Adopted27
In
2018-12,
Accounting for Long-Duration Contracts.
The amendments are intended to improve the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity, and will require more frequent updating of assumptions and a standardized discount rate for the future policy benefit liability.
Companies are required to apply the guidance as of and record transition
adjustments from
which point the measurement impact is recognized. We will adopt ASU 2018-12
effective
ITEM 6. RESERVED
27See Note 2 to the consolidated financial statements for a more detailed
discussion of ASU 2018-12, as well as newly adopted accounting pronouncements.
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