ENSTAR GROUP LTD – 10-K – 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. For a comparison of our Results of Operations by Segment, Corporate and Other activities and Sources and Uses of Cash within Liquidity and Capital Resources for the years endedDecember 31, 2020 and 2019, see our revised Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for the year endedDecember 31, 2020 included in the Current Report on Form 8-K filed with theSecurities and Exchange Commission ("SEC") onJune 11, 2021 . Table of Contents Section Page Operational Highlights 44 Consolidated Results of Operations - for the Years EndedDecember 31, 2021 , 2020 and 2019 45 • Underwriting Results 47 • Investment Results 53 • General and Administrative Expenses 57 Key Performance Measures 58 New Business 62 Non-GAAP Financial Measures 63 Other Financial Measures 71 Results of Operations by Segment - for the Years EndedDecember 31, 2021 and 2020 72 • Run-off Segment 73 • Enhanzed Re Segment 74 • Investments Segment 75 • Legacy Underwriting Segment 79 Corporate and Other 80 Current Outlook 81 Liquidity and Capital Resources 83 Critical Accounting Estimates 90Enstar Group Limited | 2021 Form 10-K 43
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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. We continue to operate our
business during heightened uncertainty and investment volatility as a result of
the COVID-19 pandemic.
During 2021 we:
Assumed
We assumed
five LPTs totaling
We may generate favorable RLE through active claims management and/or claims
management influence on these run-off transactions.
We anticipate investment returns as we manage the$3.5 billion of investment assets we assumed in these transactions. In addition, we recorded$0.3 billion of DCA in connection with these transactions which we will subsequently amortize.
Exited Our Strategic Relationship with
We entered into a series of transactions with
and
parties6, in order to exit our strategic relationship, as follows:
•Repurchased 3,749,400 of our ordinary shares held by funds managed byHillhouse Group , for a price of$234.52 per share, totaling$879 million in aggregate, which represented a discount to book value7. •Purchased the entire 27.7% equity interest in Enhanzed Re held by an affiliate ofHillhouse Group . Following completion of the transaction, our equity interest in Enhanzed Re increased to 75.1% resulting in consolidation (previously accounted for as an equity method investment). •Redeemed$2.7 billion and liquidated theInRe Fund L.P. (the "InRe Fund "), which was previously managed by an affiliate ofHillhouse Group , as part of our strategic re-alignment to reduce our exposure to hedge fund investments. Our investment in theInRe Fund has delivered an inception to date total return of 271.0% or$1.3 billion (a 30.0% annualized average per year)8.
Executed Capital Transactions
We completed a$500 million senior notes offering9, the net proceeds of which were used to redeem$70 million of debt expiring in 2022 through a tender offer and to engage in other corporate opportunities.
Continued our Exit of Active Underwriting Platforms
Completed the strategic exit from our active underwriting lines with our sales
of:
•Northshore to theTrident V, L.P. ,Trident V Parallel Fund, L.P. andTrident V Professionals Fund, L.P. funds (collectively, the "Trident V Funds") through an exchange transaction (the "Exchange Transaction"), whereby we exchanged a portion of our indirect interest in Northshore, the holding company that owns Atrium and Arden, for an indirect interest inStarStone U.S. Holdings, Inc. and its subsidiaries ("StarStoneU.S. "), now owned through an interest in Core Specialty; and
•SUL, together with the right to operate Lloyd's Syndicate 1301, to Inigo for
consideration of
6 As described in Note 22 to our consolidated financial statements.
7 Book value per share as of
8 Total return of theInRe Fund inception to date and average per year were computed using the modified Dietz method, which divides the total gain or loss in value of the portfolio, net of external flows, by the average value of the portfolio over the period of measurement. 9 Under the eligible capital rules of the BMA, the senior notes qualify as Tier 3 capital.Enstar Group Limited | 2021 Form 10-K 44
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Consolidated Results of Operations - For the Years Ended
and 2019
We use the following GAAP measures to monitor the performance of and manage the
company:
•BVPS which we use to measure the value of our company over time;
•ROE which measures our profitability by dividing our earnings attributable to
the company by our shareholders' equity;
•TIR which measures the annual rate of return we obtain, both realized and
unrealized, on our investments; and
•RLE which measures the 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.
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 annual incentive compensation program.
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
The following table sets forth highlights from our consolidated statements of
earnings for the years ended
Year Ended December 31, % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
(in millions of U.S. dollars)
Underwriting Results
Net premiums earned $ 245 $ 572 $ 804 (57.2) % (28.9) %
Net incurred losses and LAE
Current period (172) (405) (580) (57.5) % (30.2) %
Prior Period 283 (11) (34) NM (67.6) %
Total net incurred losses and LAE 111 (416) (614) (126.7) % (32.2) %
Acquisition costs (57) (171) (241) (66.7) % (29.0) %
Investment Results
Net investment income $ 312 $ 303 $ 308 3.0 % (1.6) %
Net realized (losses) gains (61) 19 5 (421.1) % 280.0 %
Net unrealized gains 178 1,623 1,007 (89.0) % 61.2 %
Earnings from equity method investments 93 239 56 (61.1) %
326.8 %
General and administrative expenses
$ (413) (26.9) %
21.5 %
NET EARNINGS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS$ 437 $ 1,719 $ 902 (74.6) % 90.6 % GAAP measures: BVPS$ 316.34 $ 286.45 $ 201.39 10.4 % 42.2 % ROE 7.1 % 39.7 % 26.6 % (32.6) pp 13.1 pp RLE 2.8 % (0.1) % (0.5) % 2.9 pp 0.4 pp TIR 2.5 % 14.1 % 10.0 % (11.6) pp 4.1 pp Non-GAAP measures: Adjusted BVPS*$ 310.80 $ 281.20 $ 197.93 10.5 % 42.1 % Adjusted ROE* 9.2 % 43.6 % 19.6 % (34.4) pp 24.0 pp Adjusted RLE * 2.0 % 2.5 % 2.8 % (0.5) pp (0.3) pp Adjusted TIR* 3.6 % 12.4 % 6.3 % (8.8) pp 6.1 pp NM - not meaningful
*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 | Consolidated Results of Operations
Net earnings attributable to Enstar ordinary shareholders decreased by
billion
•significant outperformance by our investments in 2020 driven by net unrealized
gains of
•improved underwriting performance resulting from favorable actual versus
expected experience in 2021.
Net earnings attributable to Enstar ordinary shareholders increased by
million
•the performance of our investments in 2020, driven by an increase of
million
•strong performance in our earnings from equity method investments, which
increased by
We have discussed the results of our operations by aggregating certain captions from our consolidated statement 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
and acquisition costs.
•Investment results: includes net investment income, net realized (losses)
gains, net unrealized gains and earnings from equity method investments.
•General and administrative results: includes general and administrative
expenses.
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Underwriting Results Our strategy is focused on effectively managing portfolios and businesses in run-off. Although we have largely exited our live underwriting platforms, we still record net premiums earned and the associated current period net incurred losses and acquisition costs as a result of new transactions during the year and the run-off of unearned premiums from transactions completed in recent years.
Premiums earned in the Run-off segment are offset by the related current period
net incurred losses and LAE and acquisition costs.
The components of underwriting results for the years endedDecember 31, 2021 and 2020 are as follows: 2021 2020 Legacy Corporate and Legacy Corporate and Run-off Enhanzed Re Underwriting other Total Run-off Underwriting other Total Net premiums earned$ 182 $ 5 $ 58 $ -$ 245 $ 59 $ 513 $ -$ 572 Net incurred losses and LAE: Current period 144 2 26 - 172 30 375 - 405 Prior periods (338) - (6) 61 (283) (175) (4) 190 11 Total net incurred losses and LAE (194) 2 20 61 (111) (145) 371 190 416 Acquisition costs 44 - 13 - 57 20 151 - 171 Underwriting results$ 332 $ 3 $ 25$ (61) $ 299 $ 184 $ (9)$ (190) $ (15) 2021 versus 2020: Current Period
The current period underwriting results from our (re)insurance operations
include net earned premiums that have been declining as we transition away from
active underwriting activities.
[[Image Removed: esgr-20211231_g5.jpg]] The decrease in current period net incurred losses and LAE and acquisition costs were driven by reduced levels of activity arising from our exit of our active underwriting platform. We continue to earn premium from ourStarStone International and AmTrust RITC business. In comparison, the 2020 results were primarily driven by the AmTrust RITCs entered into in 2019.Enstar Group Limited | 2021 Form 10-K 48
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Prior Periods - RLE The following tables summarize RLE and Adjusted RLE* by acquisition year for the years endedDecember 31, 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. Our calculation of RLE includes the impact of DCA amortization, amortization of fair value adjustments and changes to the discount and risk margin factors relating to the fair value of liabilities where we elected the fair value option. Refer to the table below for a summary of RLE and Adjusted RLE* for the year endedDecember 31, 2021 : 2021 RLE Adjusted RLE* Average adjusted Average net net loss Adj RLE* Acquisition Year PPD loss reserves RLE % Adjusted PPD* reserves* % (in millions of U.S. dollars) 2011 and prior$ 28 $ 522 5.4 % $ 24 $ 557 4.3 % 2012 5 41 12.2 % 2 40 5.0 % 2013 9 134 6.7 % 2 54 3.7 % 2014 25 945 2.6 % 29 78 37.2 % 2015 13 333 3.9 % 11 316 3.5 % 2016 9 813 1.1 % 9 859 1.0 % 2017 89 1,006 8.8 % 25 993 2.5 % 2018 44 1,201 3.7 % 26 1,182 2.2 % 2019 9 1,168 0.8 % 45 1,653 2.7 % 2020 12 1,815 0.7 % (3) 1,765 (0.2) % 2021 40 2,072 1.9 % 24 2,253 1.1 % Total$ 283 $ 10,050 2.8 % $ 194$ 9,750 2.0 % 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 2011 and prior, 2017 and 2018 acquisition years. PPD was positively impacted by a decrease of$75 million in 2021 relating to the change in the discount rate component of the fair value of liabilities for which we have elected the fair value option in the 2017 and 2018 acquisition years as a result of increases in interest rates.
Adjusted PPD* excludes the impact of the changes in the discount rate upon the
fair value of liabilities where we have elected the fair value option, the
impact of changes in ULAE and the amortization of fair value adjustments
relating to purchased subsidiaries.
Other notable events within our acquisition years were:
Our 2019 acquisition year had lower than expected asbestos related claim
frequency related to our defendant A&E liabilities. RLE % does not include the
impact of changes to our defendant A&E liabilities.
Our 2020 acquisition year had adverse development on the motor book offset by favorable development in other portfolios relating to the 2018 and 2019 accident years.
Acquisition year 2021 experienced favorable claim activity in professional
indemnity/directors' and officers' and motor lines of business relative to
expectations at take-on.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Refer to the table below for a summary of RLE and Adjusted RLE* for the year endedDecember 31, 2020 : 2020 RLE Adjusted RLE* Average adjusted Average net net loss Acquisition Year PPD loss reserves RLE % Adjusted PPD* reserves* Adjusted
RLE* %
(in millions of
2011 and prior$ 38 $ 623 6.1 % $ 43 $ 658 6.5 % 2012 7 54 13.0 % 8 51 15.9 % 2013 15 174 8.6 % 6 68 8.4 % 2014 1 1,064 0.1 % 2 99 2.2 % 2015 10 405 2.5 % 9 388 2.3 % 2016 20 912 2.2 % 31 963 3.2 % 2017 (50) 1,108 (4.5) % 31 1,093 2.9 % 2018 17 1,450 1.2 % 48 1,436 3.3 % 2019 3 1,316 0.2 % 86 1,776 4.8 % 2020 (72) 1,006 (7.2) % (77) 977 (7.9) % Total$ (11) $ 8,112 (0.1) % $ 187$ 7,509 2.5 % 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 2011 and prior, 2016, 2017 and 2018 acquisition years, offset by adverse development in our 2020 acquisition year as detailed below. PPD was adversely impacted by an increase of$119 million in 2020 relating to the change in the discount rate component of the fair value of liabilities for which we have elected the fair value option in the 2017 and 2018 acquisition years as a result of decreases in interest rates. This did not impact Adjusted PPD*.
Other notable events within our acquisition years were:
Our 2016 and 2019 acquisition years were favorably impacted by lower than
expected asbestos related claim frequency related to our defendant A&E
liabilities. RLE % does not include the impact of changes to our defendant A&E
liabilities.
Our 2017 and 2018 acquisition years had favorable development on losses relating primarily to older accident years on asbestos related claims and reduced asbestos related claim frequency partially offset by the adverse impact on RLE % of changes in the discount rate component of the fair value of liabilities for which we have elected the fair value option. Our 2020 acquisition year was driven by adverse development on the motor book, offset by favorable development in other portfolios relating to older accident years.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
The components of underwriting results for the year endedDecember 31, 2019 are as follows: 2019 Legacy Corporate and Run-off Underwriting other Total (in millions of U.S. dollars) Net premiums earned$ 168 $ 636 $ -$ 804 Net incurred losses and LAE: Current period 124 456 - 580 Prior periods (277) 106 205 34 Total net incurred losses and LAE (153) 562 205 614 Acquisition costs 74 167 -$ 241 Underwriting results$ 247 $ (93)$ (205) $ (51) 2020 versus 2019: Current Period [[Image Removed: esgr-20211231_g6.jpg]] The decrease in net premiums earned, current period net incurred losses and LAE and acquisition costs were mainly driven by our exit of certain lines of business in 2019 andStarStone International being placed into an orderly run-off in 2020. Current period net incurred losses and LAE and acquisition costs incurred in 2020 were driven by net premiums earned, primarily due to AmTrust RITCs entered into in 2019. Our 2019 current period net incurred losses and LAE and acquisition costs included business assumed as a result of the AmTrust RITC transactions and the acquisition ofMaiden Reinsurance North America . Net incurred losses and LAE for 2020 included$71 million of COVID-19 related losses, mainly related to casualty and property and accident and health business, and$19 million of exit costs associated with theStarStone International run-off.
Prior Periods - RLE
Refer to the table below for a summary of RLE and Adjusted RLE* for the year endedDecember 31, 2019 : 2019 RLE Adjusted RLE* Average adjusted Average net net loss Acquisition Year PPD loss reserves RLE % Adjusted PPD* reserves* Adjusted RLE* % (in millions of U.S. dollars) 2011 and prior$ 70 $ 905 7.7 % $ 71 $ 931 7.6 % 2012 2$ 67 3.0 % - 63 - % 2013 14 289 4.8 % 5 80 6.3 % 2014 (110) 1,094 (10.1) % 2 118 1.7 % 2015 15 453 3.3 % 10 427 2.3 % 2016 8 1,019 0.8 % 10 1,079 0.9 % 2017 (84) 1,107 (7.6) % (3) 1,162 (0.3) % 2018 35 1,830 1.9 % 82 1,850 4.4 % 2019 16 703 2.3 % 8 907 0.9 % Total$ (34) $ 7,467 (0.5) % $ 185$ 6,617 2.8 % Enstar Group Limited | 2021 Form 10-K 51
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
2019: Overall, RLE % and Adjusted RLE* % were primarily driven by a mix of favorable and unfavorable actual claims experience compared with our expected claims trends. This was notably favorable in our 2011 and prior and 2018 acquisition years offset by adverse development in our 2017 acquisition year. Additionally, PPD was adversely impacted by an increase of$117 million in 2019 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. This did not impact Adjusted PPD*. Our 2014 acquisition year had adverse development in our StarStone active underwriting business primarily relating to casualty lines of business, which we exclude from our Adjusted RLE* calculation as we exclude our exited underwriting businesses. A$136 million reduction in estimates of net ultimate losses in our workers' compensation line of business arose across multiple portfolios, where reported loss development was generally significantly less than expected development. The lower than expected actual development was driven by significant proactive settlement activity on individual claimants where we were able to settle claims lower than the case reserve estimates. A$39 million reduction in estimates of net ultimate losses in our professional indemnity/directors' and officers' line of business arose based on the annual actuarial analysis which reflected the better than expected loss development during 2019. A$7 million increase in estimates of net ultimate losses in our asbestos line of business arose primarily due to changes in our actuarial assumptions related to dismissal rates. During 2019, the number of new defendants and filed claims was less than expected but this was offset by a lowering of the dismissal rate. In asbestos, the dismissal rates are extremely high as many of the claims do not have merit against the insured. However, we have seen a trend in bothU.S. andU.K. exposure of the dismissal rate trending down in the range of 2 to 3 pp.
We completed 6 commutations across several portfolios that contributed to a
million
*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 | Consolidated Results of Operations
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.
We consider the duration characteristics of our liabilities in determining our
selection of asset durations depending on our other investment strategies and to
the extent practicable.
The components of our investment results split between our fixed income ("Fixed
Income") assets (which includes our short-term and fixed maturity investments
classified as trading and AFS, fixed maturity investments included within funds
held-directly managed, cash and cash equivalents, including restricted cash and
cash equivalents, and funds held by reinsured companies) and other investments
("Other Investments") (which includes equities, the remainder of funds
held-directly managed and equity method investments) for the years ended
December 31, 2021 , 2020 and 2019 are as follows:
2021 2020 2019
Fixed Income Other Investments Total Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 239 $ 73 $ 312 $ 256 $ 47 $ 303 $ 280 $ 28 $ 308
Net realized gains
(losses) (4) (57) (61) 18 1 19 4 1 5
Net unrealized (losses)
gains (206) 384 178 288 1,335 1,623 512 495 1,007
Earnings from equity
method investments - 93 93 - 239 239 - 56 56
TIR ($) $ 29 $ 493 $ 522 $ 562 $ 1,622 $ 2,184 $ 796 $ 580 $ 1,376
TIR % 0.2 % 8.8 % 2.5 % 5.1 % 36.9 % 14.1 % 7.5 % 18.5 % 10.0 %
Adjusted TIR %* 1.6 % 8.8 % 3.6 % 2.4 % 36.9 % 12.4 % 2.7 % 18.5 % 6.3 %
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Net Investment Income
[[Image Removed: esgr-20211231_g7.jpg]]
2021 versus 2020: Net investment income increased primarily due to:
•increase in our average aggregate fixed income assets due to 2021 new business; partially
offset by
•decrease in the investment yield primarily due to reinvestment of fixed maturities at
lower yields and time required to invest premium from 2021 transactions.
2020 versus 2019: Net investment income decreased primarily due to:
•decrease in net investment income from fixed maturities and cash and cash equivalents,
reflective of a decrease in the investment yield primarily due to lower rates; partially
offset by
•increase in our average aggregate fixed income assets from new business transactions in
2020.
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Net Realized and Unrealized Gains (Losses)
[[Image Removed: esgr-20211231_g8.jpg]] 2021 versus 2020: Net realized and unrealized gains (losses) decreased primarily due to: •net realized and unrealized losses on fixed income securities of$210 million in 2021 compared to net realized and unrealized gains of$306 million in the prior year, a difference of$516 million , which was primarily driven by rising interest rates acrossU.S. ,U.K. and European markets, partially offset by a tightening in credit spreads. •net realized and unrealized gains on other investments, including equities decreased by$1.0 billion or 75.5% from the prior year. This was primarily 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 the year, including Chinese American Depository Receipts ("ADRs"), to which the fund had exposure; partially offset by •net realized and unrealized gains of$327 million in our public equity, private equity and CLO equities driven by the 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 theInRe Fund . [[Image Removed: esgr-20211231_g9.jpg]] 2020 versus 2019: Net realized and unrealized gains increased primarily due to: •net realized and unrealized gains on fixed income securities decreased by$209 million or 40.6%, primarily driven by a decline in interest rates. •net realized and unrealized gains on other investments, including equities, increased by$839 million or 169.0%, primarily a result of: •unrealized gains for 2020 primarily comprised unrealized gains of$1.2 billion in theInRe Fund , which were driven by strong performance inU.S. and Chinese equity markets across multiple sectors, including consumer discretionary, communication services, information technology and consumer staples.Enstar Group Limited | 2021 Form 10-K
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Earnings from equity method investments
EffectiveSeptember 1, 2021 , Enhanzed Re was consolidated by us10. Prior to that date, the results of Enhanzed Re were recorded in earnings from equity method investments on a one quarter lag. [[Image Removed: esgr-20211231_g10.jpg]] 2021 versus 2020: earnings from equity method investments decreased, 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; •a reduction in Monument Re earnings as a result of a decrease in bargain purchase gains relative to the comparative period. 2020 versus 2019: Earnings from equity method investments increased, primarily due to: •an increase in earnings from Enhanzed Re, which reflected significant net realized and unrealized gains on investments in the second and third quarters of 2020, and an increase in earnings from Monument Re.
10 Refer to Note 4 to the consolidated financial statements for further
information.
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Return on investments
The below charts are in millions of
[[Image Removed: esgr-20211231_g11.jpg]][[Image Removed: esgr-20211231_g12.jpg]][[Image Removed: esgr-20211231_g13.jpg]][[Image Removed: esgr-20211231_g14.jpg]]
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measures.
Fixed income securities
•The TIR on fixed income assets was$29 million in 2021, as the net investment income was partially offset by decline in the market value of our fixed income securities, primarily driven by rising interest rates acrossU.S. ,U.K. and European markets.
•The 2020 TIR on fixed income assets was
driven by a significant decrease in interest rates in 2020 as central banks
lowered interest rates to mitigate the economic impact of COVID-19 pandemic.
•The 2019 TIR on fixed income assets was$234 million higher than in 2020 as interest rates declined and credit spreads tightened in 2019, benefiting fixed income securities.
Other investments, including equities
•Our 2021 TIR on other investments, including equities, was$493 million , primarily led by strong performances in our public equity, private equity, and CLO equity positions, driven by the tightening of high yield and loan spreads and a rally in global equity markets. This was partially offset by net realized and unrealized losses in theInRe Fund , primarily due to the deterioration of global and Chinese equity markets through the second half of 2021, including ADRs, to which theInRe Fund had exposure. •Our 2020 TIR on other investments, including equities, was$1.6 billion primarily driven by unrealized gains of$1.2 billion in theInRe Fund , driven by strong performance inU.S. and Chinese equity markets across multiple sectors, including consumer discretionary, communication services, information technology and consumer staples. •Our 2019 TIR, on other investments, including equities, was$580 million , driven by positive performance of theInRe Fund , along with our holdings across public equity, private equity, and CLO equity, against the backdrop of benign market volatility, positive investor sentiment, and strong demand for risk assets.Enstar Group Limited | 2021 Form 10-K
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Item 7 | Management Discussion and Analysis | Consolidated Results of Operations
Duration and average credit rating
The fair value, duration and average credit rating by segment is as follows:
2021 2020
Fair Value Average Credit Fair Value Average Credit
Segment ($) Duration (in years) (1) Rating (2) ($)
Duration (in years) (1) Rating (2) Investments Run-off$ 12,680 4.54 A+$ 9,781 5.09 A+ Enhanzed Re 1,454 14.62 A- - n/a n/a Total - Investments 14,134 5.69 A+ 9,781 5.09 A+ Legacy Underwriting 212 2.37 AA- 911 1.96 AA- Total$ 14,346 5.72 A+$ 10,692 4.82 A+
(1) The duration calculation includes cash and cash equivalents, short-term
investments, fixed maturity securities and the fixed maturity securities within
our funds held-directly managed portfolios at
(2) The average credit ratings calculation includes cash and cash equivalents, short-term investments, fixed maturity securities and the fixed maturity securities within our funds held - directly managed portfolios atDecember 31, 2021 and 2020. As of bothDecember 31, 2021 and 2020, our fixed income securities and cash and cash equivalents had an average credit quality rating of A+. As ofDecember 31, 2021 and 2020, our fixed income securities that were non-investment grade (i.e. rated lower than BBB- and non-rated securities) comprised 5.6% and 3.7% of our total fixed income securities portfolio, respectively. The increase in the duration of our fixed income securities and cash and cash equivalents portfolio is due to the impact of the Enhanzed Re acquisition. The increase in non-investment grade fixed income securities is due to the fact that a portion of theInRe Fund redemption proceeds were reinvested into fixed income strategies involving below investment grade investments during the year11.
General and administrative expenses
[[Image Removed: esgr-20211231_g15.jpg]]
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. 2020 to 2019: The$89 million increase in general and administrative expenses was primarily driven by$64 million of restructuring and other exit costs associated with placingStarStone International into run-off. Additionally, an increase in salaries and benefits expenses from the comparative period was a result of increased performance-based salaries and benefits costs driven by our strong performance in 2020.
11 Refer to the 'Results of Operations by Segment - Investments' section for
further information.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Key Performance Measures
Overall Measures of Performance
[[Image Removed: esgr-20211231_g16.jpg]]
[[Image Removed: esgr-20211231_g17.jpg]]
BVPS and Adjusted BVPS* increased by 10.4% and 10.5%, respectively, from
December 31, 2020 to December 31, 2021 , as a result of repurchasing 18.6% of our
ordinary shares at a 24.0% discount to book value, combined with comprehensive
income for the year which added 6.1% to both BVPS and Adjusted BVPS* as of
December 31, 2021 .
ROE and Adjusted ROE*
2021 versus 2020: decreased by 32.6 and 34.4 percentage points ("pp"),
respectively, primarily as a result of:
i.net unrealized gains from our investment in theInRe Fund of$1.2 billion in 2020 compared with net unrealized and realized losses of$58 million in 2021. We have liquidated this fund, crystallizing much of the gains of 2020 and we are in the process of redeploying these amounts. This decline in net realized and unrealized gains in theInRe Fund contributed 27.5 and 32.9 pp to the total reduction in ROE and Adjusted ROE*, respectively. ii.net realized and unrealized gains on fixed maturity securities of$306 million in 2020 compared to losses of$210 million in 2021, primarily driven by rising interest rates. This unfavorable movement impacted the ROE by 10.5 pp with no impact to Adjusted ROE* as this is excluded from the calculation of the measure. This was partially offset by: iii.favorable prior period development ("PPD") of$283 million in 2021, which was$294 million better than 2020, primarily due to improved actual versus expected experience on our workers' compensation portfolios and adverse development on our motor line of business in 2020 combined with a favorable change in the interest rate components of the valuation of liabilities for which we have elected the fair value option. This favorable result contributed 4.8 pp to the ROE.
2020 versus 2019: increased by 13.1 and 24.0 pp, respectively, primarily as a
result of:
i.an increase in net realized and unrealized gains from other investments and equities, including theInRe Fund , of$839 million in 2020. This contributed 16.2 and 20.7 pp to the total increase in ROE and Adjusted ROE*, respectively. ii.an increase in earnings from equity method investments of$183 million driven by our investments inEnhanzed Re12 and Monument Insurance Group Limited ("Monument Re") in 2020. These earnings contributed 3.9 and 4.8 pp to ROE and Adjusted ROE*, respectively.
This was partially offset by:
iii.a decrease in net realized and unrealized gains on fixed maturity securities of$209 million in 2020. This unfavorable movement impacted our ROE by 8.1 pp with no impact to Adjusted ROE* as this is excluded from the calculation of the measure.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
12 Effective
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Return on Run-off Liabilities
The below charts are in millions (RLE and Adjusted RLE*) and billions (Net Loss
Reserves and Adjusted Net Loss Reserves*) of
[[Image Removed: esgr-20211231_g18.jpg]]
[[Image Removed: esgr-20211231_g19.jpg]][[Image Removed: esgr-20211231_g20.jpg]][[Image Removed: esgr-20211231_g21.jpg]]
2021 versus 2020: our RLE % increased by 2.9 pp from 2020 to 2.8%, whilst our
Adjusted RLE* % decreased by 0.5 pp from 2020 to 2.0%.
Rate of Return: The 2.9 pp increase in RLE % primarily consists of:
i.1.8 pp increase arising from the change in the discount rate component of the fair value of liabilities for which we have elected the fair value option as a result of increases in interest rates;
ii.0.8 pp decrease arising from an increase in the amortization of DCA. The
increased amortization expense is the result of cumulative effect adjustments
due to favorable prior period development on recent acquisition years; and
iii.1.6 pp increase arising from additional favorable prior period development which is additionally analyzed within our 'Consolidated Results of Operations' 13.
The 0.5 pp decrease in Adjusted RLE* % primarily consists of:
i.1.0 pp decrease resulting from a reduced level of favorable prior period
development on net ultimate defendant A&E liabilities;
ii.0.7 pp decrease arising from an increase in the amortization of DCA as noted
above; and
iii.1.2 pp increase in additional favorable prior period development which is
additionally analyzed within our 'Consolidated Results of Operations' 13.
Volume: our net loss reserves and adjusted net loss reserves* increased by 35.2% and 43.2% respectively, as a result of acquiring and assuming$4.5 billion of net loss reserves. This was partially offset by$1.4 billion of net claims paid during the year.
2020 versus 2019: our RLE % increased by 0.4 pp from the prior year, whilst our
Adjusted RLE* % decreased by 0.3 pp.
Rate of Return: The RLE % in 2020 was broadly consistent with 2019, with the increase of 0.4 pp arising from PPD of$(11) million and$(34) million in 2020 and 2019 respectively. The key components of PPD in each of 2020 and 2019 were:
i.A reduction in estimates of net ultimate losses of
million
ii.Changes in the fair value of liabilities for which we have elected the fair value option of$119 million and$117 million for 2020 and 2019, with both of these charges arising from decreases in interest rates.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
13 Refer to 'Underwriting Results' below for further discussion.
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Item 7 | Management Discussion and Analysis | Key Performance Measures
The 0.3 pp decrease in Adjusted RLE* % consists of:
i.1.6 pp decrease in Adjusted PPD* primarily due to adverse development on the
motor book in 2020 compared to 2019; and
ii.1.3 pp increase in favorable prior period development on net ultimate
defendant A&E liabilities in 2020 compared to 2019 driven by a lower than
expected asbestos related claim frequency in 2020.
Volume: our net loss reserves and adjusted net loss reserves* increased by 11.3%
and 15.3%, respectively from 201914 to 2020, as a result of acquiring and
assuming
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
14 Net loss reserves and Adjusted net loss reserves* as of
were
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Item 7 | Management Discussion and Analysis | Key Performance Measures
Return on Investments
The below charts are in billions of
[[Image Removed: esgr-20211231_g22.jpg]] [[Image Removed: esgr-20211231_g23.jpg]] [[Image Removed: esgr-20211231_g24.jpg]] [[Image Removed: esgr-20211231_g25.jpg]]
2021 versus 2020: our TIR % and Adjusted TIR %* decreased by 11.6 pp and 8.8 pp,
respectively, from 2020.
Rate of Return: our TIR and Adjusted TIR decreased largely as a result of net realized and unrealized gains of$1.6 billion in 2020 compared with net realized and unrealized gains of$117 million in 2021. Significant equity market performance in 2020 contrasted with more moderate equity performance in 2021, resulting in a$1.0 billion reduction in the gains on our other investments, including equities, coupled with a$516 million reduction in the gains on our fixed maturity securities primarily as a result of interest rate reductions in 2020 and rising interest rates in 2021.
In 2020, we earned net realized and unrealized gains of
included
Fund
million
declines.
In 2021, we earned net realized and unrealized gains of$117 million , with$58 million in realized and unrealized losses from ourInRe Fund as we crystallized much of the gains we previously recorded, combined with gains of$327 million in other equity, equity and CLO funds as a result of high yield and loan spread tightening and rallies in global equity markets. This was offset by net realized and unrealized losses of$210 million on our fixed maturity securities primarily from rising interest rates acrossU.S. ,U.K. and European markets, partially offset by tightening in credit spreads.
Volume: Investable assets and Adjusted investable assets* grew by 25.7% and
29.4% from 2020 to 2021, respectively, as a result of assuming
new transactions during the year and an overall increase in cash and cash
equivalents of
2020 versus 2019: our TIR and Adjusted TIR* increased by 4.1 pp and 6.1 pp,
respectively, from 2019.
Rate of Return: our TIR and Adjusted TIR* increased as a result of outstanding performance in our other investments, including theInRe Fund , in comparison to the prior period. This was driven by rallies in equity markets across multiple sectors, including consumer discretionary, communication services, information technology and consumer staples. Net realized and unrealized gains on other investments, including equities, were$1.3 billion in 2020, including net unrealized gains of$1.2 billion in our InRe investment, in comparison to$496 million in 2019. Volume: Investable assets and Adjusted investable assets* grew by 22.7% and 21.1% from 201916 to 2020, respectively, as a result of assuming$1.7 billion from new transactions during the year and an overall increase in cash and cash equivalents of$541 million17.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
15 Total cash, cash equivalents and restricted cash increased by
from 2020 to 2021, of which
held-for-sale.
16 Investable assets and Adjusted investable assets* as of
were
17Total cash, cash equivalents and restricted cash increased by$402 million from 2019 to 2020, which included a decrease of$139 million related to cash of businesses held-for-sale.Enstar Group Limited | 2021 Form 10-K 61
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Item 7 | Management Discussion and Analysis | New Business
New Business
We define new business as material transactions other than business acquisitions
which generally take the form of reinsurance or direct business transfers.
When we acquire new business, 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, as well as negotiations if we believe the
liabilities could be reduced in the future through successful claims management.
The difference between the liabilities assumed and the assets acquired is
recorded as a deferred charge asset or gain, 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 deferred charge gain or asset.
The table below sets forth a summary of new business that we have completed
between
Total Assets Deferred Charge Total Assets from Total Liabilities Remaining Limit
Transaction Assumed Asset (1) Transactions from Transactions Type of Transaction upon Acquisition Line of Business Jurisdiction
(in millions of U.S. dollars)
Casualty and professional
AXA Group (2) $ 1,395 $ 92 $ 1,487 $ 1,487 ADC $ 808 lines Global
Excess workers'
CNA (2) 652 105 757 757 LPT 179 compensation U.S.
Surplus lines broker
Hiscox 532 N/A 532 532 LPT 189 business U.S. , U.K. and Europe
Workers' compensation and
ProSight (3) 478 24 502 502 LPT/ADC 230 general liability U.S.
Energy, construction and
Liberty Mutual (2) 363 26 389 389 LPT 121 homebuilders liability U.S.
Commercial and personal
RSA 95 1 96 96 ADC 175 lines U.K. and Ireland
Coca-Cola 42 6 48 48 LPT 21 Workers' compensation U.S.
Total 2021 $ 3,557 $ 254 $ 3,811 $ 3,811
(1) Where the estimated ultimate losses payable exceed the premium consideration
received at the inception of the agreement, a DCA is recorded.
(2) We have ceded 10% of these transactions to Enhanzed Re on the same terms and conditions as those received by us. EffectiveSeptember 1, 2021 Enhanzed Re was consolidated by us (previously accounted for as an equity method investment) and all intercompany transactions and balances between Enhanzed Re and Enstar were eliminated upon consolidation. (3) Includes$178 million of liabilities from the ADC element of the transaction.Enstar Group Limited | 2021 Form 10-K 62
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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 annual 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.
We have changed our non-GAAP measures in 2021 as follows:
•Conformed our naming convention so that all non-GAAP measures are prefixed by
the word, "adjusted". We believe this makes a clear distinction between GAAP and
non-GAAP measures. For example, our fully diluted book value per share
("FDBVPS") is now named adjusted book value per ordinary share.
•Replaced our claims saving metric with Adjusted RLE*, that now includes the
amortization cost of DCA as we believe this represents the notional lower yield
we accept when we enter into a transaction where we record a DCA. Additionally,
we are representing this as a yield on average Adjusted net loss reserves* to
facilitate comparisons across acquisition years and different reporting periods.
•Amended our calculation of operating income (loss) for the year by additionally
adjusting for the amortization of fair value adjustments as we believed it was
relevant for this measure to be consistent with our calculation of Adjusted
RLE*. Additionally, we now express this measure as an Adjusted ROE* after
adjustments to our balance sheet items relating to any adjustments in the
numerator.
•We created new measures of Adjusted TIR* and Adjusted RLE* to show performance
yields on our two streams of income arising from our capital release solutions.
•We added management's view of investable assets which "looks through" the legal form of our investments to the underlying economic exposure, consistent with the way we view our investment portfolio composition.
We have presented the results and GAAP reconciliations for these measures for
the years ended 2019, 2020 and 2021.
Purpose of Non-GAAP Measure over GAAP
Non-GAAP Measure Definition
Measure
Adjusted book value Total Enstar ordinary shareholders' Increases the number of ordinary shares per ordinary share equity, adjusted to add:
to reflect the exercise of warrants and
-proceeds from assumed exercise of
equity awards granted but not yet vested
warrants
as, over the long term, this presents a
prudent view of our book value per
Divided by
share.
Number of ordinary shares outstanding,
We use this non-GAAP measure in our
adjusted for:
annual incentive compensation program.
-shares issued from assumed exercise of
warrants,
-the ultimate effect of any dilutive
securities on the number of ordinary
shares outstanding
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
Purpose of Non-GAAP Measure over GAAP
Non-GAAP Measure Definition
Measure
Adjusted return on Adjusted operating income (loss) Although we have historically disclosed equity attributable to Enstar ordinary
adjusted operating income (loss)
shareholders divided by adjusted opening
attributable to Enstar ordinary
Enstar ordinary shareholder's equity
shareholders, calculating the operating
income (loss) as a percentage of our
adjusted opening Enstar ordinary
shareholders' equity provides a more
valuable and consistent measure of the
performance of our business, and
Adjusted operating Net earnings (loss) attributable to enhances comparisons to prior periods:
income (loss) Enstar ordinary shareholders, adjusted
attributable to for: •by adjusting investment returns for the
Enstar ordinary -net realized and unrealized (gains) temporary impact of the change in fair
shareholders losses on fixed maturity investments and value of fixed maturity securities (both
(numerator) funds held-directly managed
credit spreads and interest rates) which
-change in fair value of insurance
we hold until the earlier of maturity or
contracts for which we have elected the
used to fund any settlement of related
fair value option (1)
liabilities which are generally recorded
-amortization of fair value adjustments
at cost.
-net gain/loss on purchase and sales of
•by removing the impact of non-cash
subsidiaries
charges that obscure our trends on a
-net earnings from discontinued
consistent basis.
operations
•by removing items that are not
-tax effects of adjustments
indicative of our ongoing operations;
-adjustments attributable to
noncontrolling interest
We use this non-GAAP measure in our
annual incentive compensation program.
Adjusted opening Opening Enstar ordinary shareholders'
Enstar ordinary equity, less: We now include the amortization of fair
shareholders' equity -unrealized gains (losses) on fixed value adjustments as a non-GAAP
(denominator) maturity investments and funds
adjustment to the adjusted operating
held-directly managed,
income (loss) attributable to Enstar
-fair value of insurance contracts for
ordinary shareholders as it is
which we have elected the fair value
considered to be a non-cash charge and
option (1),
not indicative of our operating results.
-fair value adjustments, and
Prior periods were restated for this
-net assets of held for sale or disposed revision.
subsidiaries classified as discontinued
operations
Adjusted total Adjusted total investment return
Provides a key measure of the return
investment return (%) (dollars) recognized in earnings for the generated on the capital held in the
applicable period divided by period
business and is reflective of our
average adjusted total investable
investment strategy.
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: Adjusts investment returns for the (numerator) -net realized and unrealized (gains)
temporary impact of the change in fair
losses on fixed maturity investments and
value of fixed maturity securities (both
funds held-directly managed credit spreads and interest rates) which
Adjusted average Total average investable assets, we hold until the earlier of maturity or
aggregate total adjusted for: used to fund any settlement of related
investable assets -unrealized (gains) losses on fixed liabilities which are generally recorded
(denominator) maturities, AFS investments included at cost.
within AOCI
-unrealized (gains) losses on fixed
maturities, trading instruments
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
Purpose of Non-GAAP Measure over GAAP
Non-GAAP Measure Definition Measure
Adjusted run-off Adjusted PPD divided by average adjusted net Calculating the RLE as a percentage of
liability earnings (%) loss reserves our adjusted average net loss reserves
provides a more meaningful measurement of
our claims management performance.
Adjusted prior period Prior period net incurred losses and LAE,
development
adjusted to: We use this measure to evaluate our
(numerator) Remove: ability to settle our obligations for
-Legacy Underwriting and Enhanzed Re amounts less than our initial estimate at
operations the point of acquiring the obligations.
-the reduction/(increase) in provisions for
unallocated LAE (ULAE) In order to provide a complete and
-amortization of fair value adjustments, consistent picture of our claims
-change in fair value of insurance contracts performance, we combine the reduction
for which we have elected the fair value (increase) in estimates of prior period
option (1), net ultimate losses relating to our
and Add: Run-off segment with the amortization of
-the reduction/(increase) in estimates of deferred charge assets, both of which are
our defendant A&E ultimate net liabilities. included in net incurred losses and LAE
and have an inverse effect on our
results. We also include our performance
Adjusted net loss Net losses and LAE, adjusted to: in managing our defendant A&E
reserves Remove: liabilities, that do not form part of
(denominator) -Legacy Underwriting and Enhanzed Re net loss reserves.
loss reserves
-the net ULAE provision The remaining components of net incurred
-net fair value adjustments associated with losses and LAE and net loss reserves are
the acquisition of companies, not considered key components of our
-the fair value adjustments for contracts claims performance as they are either not
for which we have elected the fair value non-life run-off in nature, or are
option (1) and considered to be non-cash charges that
Add: obscure our trends on a consistent basis.
-net nominal defendant asbestos and
environmental exposures. We use this measure to assess the
performance of our claim strategies and
part of the performance assessment of our
past acquisitions.
Investable assets - Investable assets, adjusted to reallocate Management's view "looks through" the
management's view certain categories of investments based on legal form of an investment and
management's view of the underlying economic aggregates the classification based upon
exposure of a particular investment. the underlying economic exposure of each
investment, which is consistent with the
Refer to the reconciliation for further manner in which management views our
details. investment portfolio composition.
(1) Comprises the discount rate and risk margin components.
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of BVPS to Adjusted BVPS* as of
2021 2020 2019
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 $ 5,586 17,657,944 $ 316.34 $ 6,164 21,519,602 $ 286.45 $ 4,332 21,511,505 $ 201.39
Non-GAAP adjustments:
Share-based compensation plans 315,205 298,095 302,565 Warrants - - 20 175,901 20 175,901 Adjusted book value per ordinary share*$ 5,586 17,973,149$ 310.80 $ 6,184 21,993,598$ 281.20 $ 4,352 21,989,971$ 197.93
(1) Equity comprises Enstar ordinary shareholders' equity, which is calculated
as Enstar shareholders' equity less preferred shares (
adjustments.
*Non-GAAP measure.
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
The table below presents a reconciliation of ROE to Adjusted ROE* for the years
ended
2021 2020 2019
Net earnings Opening Net Opening Net earnings Opening
(1) equity (1) (Adj) ROE earnings (1) equity (1) (Adj) ROE (1) equity (1) (Adj) ROE
(in millions of U.S. dollars)
Net earnings/Opening equity/ROE
(1) $ 437 $ 6,164 7.1 % $ 1,719 $ 4,332 39.7 % $ 902 $ 3,392 26.6 %
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) 210 (560) (306) (277) (516) 227
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) (75) (33) 119 (130) 117 (244)
Amortization of fair value
adjustments / Fair value
adjustments 16 (128) 27 (152) 51 (199)
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) (7) (210)
Tax effects of adjustments (4) (21) 23 36
Adjustments attributable to
noncontrolling interest (5) 6 13 109 15 86
Adjusted net earnings/Adjusted
opening equity/Adjusted ROE* $ 500 $ 5,443 9.2 % $ 1,576 $ 3,616 43.6 % $ 598 $ 3,052 19.6 %
(1) Net earnings comprises net 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 (
2020
(2) Represents the net realized and unrealized gains and losses related to fixed
maturity securities. Our fixed maturity securities are held directly on our
balance sheet and also within the "Funds held - directly managed" balance18.
(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.
18 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
The below tables present a reconciliation of PPD to Adjusted PPD* and RLE to
Adjusted RLE*:
As at December 31,
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 $ 283 $ 11,555 $ 8,544 $ 10,050 2.8
%
Non-GAAP Adjustments: Reduction in estimates of net ultimate losses - current period - (142) - (71) Enhanzed Re - (179) - (90) Legacy Underwriting (7) (140) (955) (548) Reduction in provisions for ULAE (61) (412) (334) (373) Amortization of fair value adjustments 16 106 128 117 Changes in fair value - fair value option (1) (75) 107 33 70 Change in estimate of net ultimate liabilities - defendant A&E 38 574 615 595 Adjusted PPD/Adjusted net loss reserves/Adjusted RLE*$ 194 $ 11,469 $ 8,031 $ 9,750 2.0 % As at December 31, 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$ (11) $ 8,544 $ 7,680 $ 8,112 (0.1) % Non-GAAP Adjustments: Reduction in estimates of net ultimate losses - current period - (273) - (137) Legacy Underwriting (4) (702) (1,184) (943) Reduction in provisions for ULAE (48) (334) (332) (333) Amortization of fair value adjustments 28 128 152 140 Changes in fair value - fair value option (1) 119 33 130 82 Change in estimate of net ultimate liabilities - defendant A&E 103 615 561 588 Adjusted PPD/Adjusted net loss reserves/Adjusted RLE*$ 187 $ 8,011 $ 7,007 $ 7,509 2.5 % As at December 31, 2019 2019 2018 2019 2019 Net loss Net loss Average net PPD reserves Reserves loss reserves RLE % (in millions of U.S. dollars) PPD/Net loss reserves/RLE$ (34) $ 7,680 $ 7,254 $ 7,467 (0.5) % Non-GAAP Adjustments: Reduction in estimates of net ultimate losses - current period - (401) - (201) Legacy Underwriting 105 (842) (1,162) (1,002) Reduction in provisions for ULAE (58) (332) (333) (333) Amortization of fair value adjustments 51 152 199 176 Changes in fair value - fair value option (1) 117 130 244 187 Change in estimate of net ultimate liabilities - defendant A&E 4 561 85 323 Adjusted PPD/Adjusted net loss reserves/Adjusted RLE*$ 185 $ 6,948 $ 6,287 $ 6,617 2.8 %
(1) Comprises the discount rate and risk margin components.
*Non-GAAP measure.
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
The table below presents a reconciliation of our TIR to our Adjusted TIR* for
the years ended
2021 2020 2019
Fixed Income Other Investments Total Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 239 $ 73 $ 312 $ 256 $ 47 $ 303 $ 280 $ 28 $ 308
Net realized (losses) gains (4) (57) (61) 18 1 19 4 1 5
Net unrealized (losses) gains (206) 384 178 288 1,335 1,623 512 495 1,007
Earnings from equity method
investments - 93 93 - 239 239 - 56 56
TIR ($) $ 29 $ 493 $ 522 $ 562 $ 1,622 $ 2,184 $ 796 $ 580 $ 1,376
Non-GAAP adjustment:
Net realized and unrealized
losses (gains) on fixed
maturity investments and funds
held-directly managed 210 - 210 (306) - (306) (516) - (516)
Adjusted TIR ($)* $ 239 $ 493 $ 732 $ 256 $ 1,622 $ 1,878 $ 280 $ 580 $ 860
Total investments $ 12,254 $ 5,022 $ 17,276 $ 9,319 $ 5,938 $ 15,257 $ 9,035 $ 3,585 $ 12,620
Cash and cash equivalents,
including restricted cash and
cash equivalents 2,092 - 2,092 1,373 - 1,373 971 - 971
Funds held by reinsured
companies 2,340 - 2,340 636 - 636 476 - 476
Total investable assets $ 16,686 $ 5,022
Average aggregate invested assets, at fair value (1) 15,250 5,590 20,840 11,046 4,397 15,443 10,631 3,127 13,758 TIR % 0.2 % 8.8 % 2.5 % 5.1 % 36.9 % 14.1 % 7.5 % 18.5 % 10.0 % Non-GAAP adjustment: Net unrealized (gains) on fixed maturities, AFS investments included within AOCI and net unrealized (gains) on fixed maturities, trading instruments (89) - (89) (560) - (560) (275) - (275)
Adjusted investable assets*
Adjusted average aggregate invested assets, at fair value (2) 14,971 5,590 20,561 10,756 4,397 15,153 10,519 3,127 13,646 Adjusted TIR %* 1.6 % 8.8 % 3.6 % 2.4 % 36.9 % 12.4 % 2.7 % 18.5 % 6.3 %
(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 | Non-GAAP Financial Measures
The below tables present a reconciliation of our total investable assets from the consolidated balance sheet view in accordance with GAAP to management's non-GAAP view of the underlying economic exposure for the years endedDecember 31, 2021 and 2020: Bonds, CLO Equities, privately Exchange traded equities and held equity, funds backed by private debt private credit and Other assets and Management's View of Consolidated Balance Sheet fixed income held in equity real estate held in liabilities in Underlying Economic View 2021 securities format fund format CLO equity funds funds held format 2021 Exposure Short-term and fixed maturity investments, trading and AFS and funds held - directly managed, excluding other assets Total$ 12,254 $ 12,254 Fixed maturities Other assets included within funds held - directly managed 201 (201) - Equities Publicly traded equities 281 5 286 Exchange-traded funds 1,342 (969) (64) 309 Privately held equities 372 (57) (8) 307 Total 1,995 902 Equities* Other Investments Hedge funds 291 291 Hedge funds Fixed income funds 573 969 64 1,606 Bond/loan funds* Equity funds 5 (5) - Private equity funds 752 (110) 642 Private equity funds* CLO equities 161 32 207 400 CLO equities* CLO equity funds 207 (207) - Private credit funds 275 25 85 385 Private credit* Real estate debt fund 69 33 102 Real estate* Total 2,333 3,426 Equity method Equity method investments 493 493 investments Total investments 17,276 17,075 Cash and cash Cash and cash equivalents equivalents (including (including restricted cash) 2,092 2,092 restricted cash) Funds held by reinsured companies 2,340 201 2,541 Funds held* Total investable
Total investable assets$ 21,708 $ 21,708 assets
*Non-GAAP financial measure.
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Item 7 | Management Discussion and Analysis | Non-GAAP Financial Measures
Equities,
privately held
Exchange traded equity, private
funds backed by credit and real Other assets and Management's View of
Consolidated Balance Sheet fixed income Bond fund held in estate held in Real estate liabilities in Underlying Economic
View 2020 securities equity format fund format held in other CLO equity funds funds held format 2020 Exposure
Short-term and fixed
maturity investments,
trading and AFS and funds
held - directly managed,
excluding other assets
Total 9,319 9,319 Fixed maturities
Other assets included within
funds held - directly
managed 15 (15) -
Equities
Publicly traded equities 261 261
Exchange-traded funds 311 (156) (54) 191 292
Privately held equities 275 3 278
Total 847 831 Equities*
Other Investments
Hedge funds 2,638 2,638 Hedge funds
Fixed income funds 553 156 54 763 Bond/loan funds*
Equity funds 191 (191) -
Private equity funds 363 (137) 226 Private equity funds*
CLO equities 128 167 295 CLO equities*
CLO equity funds 167 (167) -
Private credit funds 192 107 299 Private credit*
Real estate debt fund - 27 12 39 Real estate*
Other 12 (12) -
Total 4,244 4,260
Equity method
Equity method investments 832 832 investments
Total investments 15,257 15,242
Cash and cash
Cash and cash equivalents equivalents (including
(including restricted cash) 1,373 1,373 restricted cash)
Funds held by reinsured
companies 636 15 651 Funds held*
Total investable
Total investable assets $ 17,266 $ 17,266 assets
*Non-GAAP measure.
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Item 7 | Management Discussion and Analysis | Other Financial Measures
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
2021 2020 2019
Legacy Legacy
Investments Legacy Underwriting Total Investments Underwriting Total Investments Underwriting Total
(in millions of U.S. dollars)
Net investment income:
Fixed income securities $ 273 $ 3 $ 276 $ 243 $ 25 $ 268 $ 250 $ 30 $ 280
Cash and restricted cash - - - 2 2 4 9 5 14
Other investments, including
equities 73 - 73 39 8 47 20 8 28
Less: Investment expenses (37) - (37) (14) (2) (16) (12) (2) (14)
Net investment income $ 309 $ 3 $ 312 $ 270 $ 33 $ 303 $ 267 $ 41 $ 308
Net realized gains:
Fixed income securities $ (4) $ - $ (4) $ 16 $ 2 $ 18
$ 4 $ -
Other investments, including
equities
(57) - (57) 1 - 1 1 - 1 Net realized (losses) gains$ (61) $ -$ (61) $ 17 $ 2$ 19 $ 5 $ -$ 5 Net unrealized (losses) gains): Fixed income securities, trading (203) (3) (206) 284 4 288 481 31 512 Other investments, including equities 384 - 384 1,327 8 1,335 488 7 495 Net unrealized (losses) gains$ 181 $ (3)$ 178 $ 1,611 $ 12$ 1,623 $ 969 $ 38$ 1,007 Earnings from equity method investments 93 - 93 239 - 239 56 - 56 TIR ($)$ 522 $ -$ 522 $ 2,137 $ 47$ 2,184 $ 1,297 $ 79$ 1,376 Fixed maturity and short-term investments, trading and AFS and funds held - directly managed$ 12,072 $ 182
Other assets included within
funds held - directly managed 201
- 201 15 - 15 14 - 14 Equities 1,995 - 1,995 774 73 847 577 150 727 Other investments 2,319 14 2,333 4,146 98 4,244 2,387 131 2,518 Equity method investments 493 - 493 597 235 832 326 - 326 Total investments$ 17,080 $ 196$ 17,276 $ 14,201 $ 1,056 $ 15,257 $ 11,475 $ 1,145 $ 12,620 Cash and cash equivalents, including restricted cash and cash equivalents 2,062 30 2,092 1,112 261 1,373 671 300 971 Funds held by reinsured companies 2,306 34 2,340 554 82 636 345 131 476 Total investable assets$ 21,448 $ 260$ 21,708 $ 15,867 $ 1,399 $ 17,266 $ 12,491 $ 1,576 $ 14,067 Average aggregate invested assets, at fair value (1)$ 20,594 $ 246$ 20,840 $ 13,982 $ 1,461 $ 15,443 $ 12,140 $ 1,618 $ 13,758 TIR % (2) 2.5 % - % 2.5 % 15.3 % 3.2 % 14.1 % 10.7 % 4.9 % 10.0 % Income from fixed income assets (3) 273 3 276 245 27 272 259 35 294 Average aggregate fixed income assets, at cost (3)(4) 14,733 231 14,964 9,508 1,246 10,754 9,104 1,414 10,518 Investment book yield (5) 1.9 % 1.3 % 1.8 % 2.6 % 2.2 % 2.5 % 2.8 % 2.5 % 2.8 %
(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
Results of Operations by Segment - For the Years Ended
2020
Upon completion of our strategic transactions related to both Atrium and StarStone, our chief operating decision maker, our CEO, changed their view of how to evaluate our businesses, allocate resources and assess performance, as a result the segment structure was revised effectiveJanuary 1, 2021 . Following the acquisition of Enhanzed Re onSeptember 1, 2021 , our business is organized into four reportable segments: (i) Run-off; (ii) Enhanzed Re; (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 segments19.
The following is a discussion of our results of operations by segment.
19 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.
2021 2020 Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ 182 $ 59 $ 123
Other income:
Reduction in estimates of net ultimate defendant A&E
liabilities - prior periods
38 103 (65)
Reduction in estimated future defendant A&E expenses 5 9 (4)
All other income 30 20 10
Total other income 73 132 (59)
255 191 64
EXPENSES
Net incurred losses and LAE:
Current period 144 30 114
Prior period (338) (175) (163)
Total net incurred losses and LAE (194) (145) (49)
Acquisition costs 44 20 24
General and administrative expenses 188 173 15
38 48 (10)
SEGMENT NET EARNINGS $ 217 $ 143 $ 74
2021 versus 2020: Segment income from our Run-off segment increased by
million
•Net premiums earned increased by$123 million fromStarStone International business and new business transactions executed in this and 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$49 million due to a$163 million increase in favorable development on prior period losses partially offset by an increase in current period losses of$114 million due to the transfer of theStarStone International business from the Legacy Underwriting segment onJanuary 1, 2021 .
•The
consists of:
•$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;
•$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$59 million primarily driven by reduced levels of favorable development in our estimate of ultimate net defendant A&E liabilities; and
•Acquisition costs increased by
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Enhanzed Re Segment
Enhanzed Re Segment
We purchased an additional 27.7% in Enhanzed Re, a company that was previously
accounted for as an equity method investment. We now own 75.1% of this company
and have consolidated it as of September 1, 2021 . The Enhanzed Re segment
consists of life and property aggregate excess of loss (catastrophe) business.
As we report the results of this segment on a one quarter lag, our results for
the year ended December 31, 2021 only include one month of earnings. The
following is a discussion and analysis of the results of operations for our
Enhanzed Re segment.
2021
INCOME (in millions of U.S. dollars)
Net premiums earned $ 5
5
EXPENSES
Net incurred losses and LAE - current period
2
Policyholder benefit expenses
(4)
General and administrative expenses 1
(1)
SEGMENT NET EARNINGS $ 6
Overall Results
Segment earnings were $6 million as a result of net premiums earned and a
reduction in policyholder benefit expenses. This was partially offset by net
incurred losses and LAE driven by the recognition of net premiums earned during
the period.
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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.
2021 2020 Change
INCOME (in millions of U.S. dollars)
Net investment income:
Fixed income securities $ 273 $ 243 $ 30
Cash and restricted cash - 2 (2)
Other investments, including equities 73 39 34
Less: Investment expenses (37) (14) (23)
Total net investment income 309 270 39
Net realized (losses) gains:
Fixed income securities (4) 16 (20)
Other investments, including equities (57) 1
(58)
Total net realized (losses) gains (61) 17
(78)
Net unrealized gains (losses): Fixed income securities, trading (203) 284
(487)
Other investments, including equities 384 1,327 (943)
Total net unrealized gains 181 1,611 (1,430)
429 1,898 (1,469)
EXPENSES
General and administrative expenses 37 35
2
37 35
2
Earnings from equity method investments 93 239 (146) SEGMENT NET EARNINGS$ 485 $ 2,102 $ (1,617) Overall Results 2021 versus 2020: Segment income 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 current year net realized and unrealized losses of$58 million related to theInRe Fund , in comparison to net unrealized gains of$1.2 billion in the prior year, and current year 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 the prior year. Enstar Group Limited | 2021 Form 10-K 75
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Investments Segment
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:
2021
Run-off Enhanzed Re (1)
Credit Credit Rating
Fair Value % Total Total % Duration (years) (2) Rating (3) Fair Value % Duration (years) (2) (3)
(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 % 12.10 BBB 615 5.1 %
Corporate 6,532 54.1 % 6.4 A- 193 1.6 % 6.70 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 % 19.20 A- 1,033 8.5 %
$ 10,618 88.0 % 5.4 A $ 1,454 12.0 % 16.40 A- $ 12,072 100.0 %
(1) Investments under the Enhanzed Re caption comprise those that support our
life reinsurance business.
(2) The duration calculation includes short-term investments, fixed maturities and the fixed maturities within our funds held-directly managed portfolios atDecember 31, 2021 and 2020.
(3) The average credit ratings calculation includes short-term investments,
fixed maturities and the fixed maturities within our funds held - directly
managed portfolios at
2020
Fair Value % Duration (years) (1) Credit 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 $ 865 10.0 % 3.5 AAA
U.K. government 33 0.4 % 8.4 AA-
Other government 487 5.6 % 6.8 AA
Corporate 5,420 62.6 % 6.9 A-
Municipal 160 1.8 % 9.9 A+
Residential mortgage-backed 487 5.6 % 2.0 AAA
Commercial mortgage-backed 766 8.8 % 3.8 AA+
Asset-backed 451 5.2 % 0.3 AA-
Total $ 8,669 100.0 % 5.7 A+
(1) The duration calculation includes short-term investments, fixed maturities
and the fixed maturities within our funds held-directly managed portfolios at
December 31, 2021 and 2020.
(2) The average credit ratings calculation includes short-term investments,
fixed maturities and the fixed maturities within our funds held - directly
managed portfolios at
Run-off portfolio: As of
average credit quality of A and a weighted average duration of 5.4 years.
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Investments Segment
Enhanzed Re portfolio: As of
an average credit quality of A- and a weighted average duration of 16.4 years.
Other investments, including equities
Refer to the below table for the composition of our other investments, including
equities:
2021 2020
(in millions of U.S. dollars)
Equities
Publicly traded equities $ 281 $ 261
Exchange-traded funds 1,342 238
Privately held equities 372 275
Total 1,995 774
Other investments
Hedge funds 291 2,618
Fixed income funds 559 507
Equity funds 5 191
Private equity funds 752 336
CLO equities 161 128
CLO equity funds 207 167
Private credit funds 275 187
Real estate debt fund 69 12
Other - -
Total $ 2,319 $ 4,146
Our equities investments increased by $1.2 billion compared to the prior year,
primarily due to fixed income exchange-traded funds held in the Enhanzed Re
portfolio. Our other hedge fund investments declined by $2.3 billion compared to
the prior year, primarily due to the liquidation of the InRe Fund .
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:
2021 2020
Earnings from
equity method Earnings from Equity
Ownership % Carrying Value investments Ownership % Carrying Value Method Investments
Enhanzed Re - % $ - $ 82 47.4 % $ 330 $ 147
Citco (1) 31.9 % 56 4 31.9 % 53 2
Monument Re (2) 20.0 % 194 14 20.0 % 194 88
Core Specialty 24.7 % 225 (6) 25.2 % 235 -
Other 27.0 % 18 (1) 27.0 % 20 2
$ 493 $ 93 $ 832 $ 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 different
classes of preferred shares which have fixed dividend yields and whose balances
are included in the Investment amount.
The carrying value of our equity method investments decreased largely due to of
our acquisition of Enhanzed Re during the year, which resulted in us
consolidating Enhanzed Re effective
Our earnings from equity method investments decreased, due to reductions in both Enhanzed Re and Monument Re earnings. The reduction in Enhanzed Re earnings was primarily driven by catastrophe losses from the European
20 Refer to Note 4 to the consolidated financial statements for further
information.
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Investments Segment
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. The reduction in Monument Re earnings was as a result of a
decrease in bargain purchase gains in 2021 in comparison to 2020.
Earnings from equity method investments for the year ended December 31, 2020
were driven primarily by our investments in Enhanzed Re, which reflected
significant net realized and unrealized gains on investments in the second and
third quarters of 2020, and Monument Re.
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Item 7 | Management Discussion and Analysis | Results of Operations by Segment |
Legacy Underwriting Segment
Legacy Underwriting Segment
The following is a discussion and analysis of the results of operations for our
Legacy Underwriting segment.
2021 2020 Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ 58 $ 513 $ (455)
Net investment income 3 33 (30)
Net realized gains - 2 (2)
Net unrealized (losses) gains (3) 12 (15)
Other (expenses) income (15) 27 (42)
43 587 (544)
EXPENSES
Net incurred losses and LAE
Current Period 26 375 (349)
Prior Period (6) (4) (2)
Total net incurred losses and LAE 20 371
(351)
Acquisition costs 13 151
(138)
General and administrative expenses 10 158 (148)
43 680 (637)
SEGMENT EARNINGS $ - $ (93) $ 93
Overall Results
2021 versus 2020:
The results for 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 .
As of
underwriting years for the economic benefit of Atrium, and there is no net
retention by Enstar.
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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.
2021 2020 Change
INCOME (in millions of U.S. dollars)
Other income (expense):
Amortization of fair value adjustments (1) $ (16) $ (12) $ (4)
All other expense - (7) 7
Total other expense (16) (19) 3
Net gain on purchase and sales of subsidiaries 73 3 70
57 (16) 73
EXPENSES
Net incurred losses and LAE:
Amortization of DCAs (2) 120 43 77
Amortization of fair value adjustments 16 28 (12)
Changes in fair value - fair value option (3) (75) 119 (194)
Total net incurred losses and LAE 61 190 (129)
Policyholder benefit expenses 1 - 1
General and administrative expenses 131 136 (5)
193 326 (133)
Interest expense (69) (59) (10)
Net foreign exchange gains (losses) 12 (16) 28
Income tax expense (27) (24) (3)
Net earnings from discontinued operations, net of
income taxes - 16 (16)
Net (earnings) loss attributable to noncontrolling
interest
(15) 28 (43) Dividends on preferred shares (36) (36) -
NET LOSS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS
(1) Amortization of fair value adjustments relates to the acquisition of
LLC
(2) For the years endedDecember 31, 2021 , 2020 and 2019, amortization of deferred charge assets includes net cumulative effect adjustments of$71 million ,$2 million and$11 million , respectively, arising as a result of prior period development on net ultimate liabilities recorded in our Run-off segment.
(3) Comprises the discount rate and risk margin components.
Overall Results
2021 versus 2020: Net loss from corporate and other activities decreased by
million
•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 ; •Reduction in net incurred losses of$129 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:
•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
We are subject to economic factors such as interest rates, inflationary
pressures, foreign exchange rates, favorable and unfavorable underwriting
events, regulation, tax policy changes, political risks and other market risks
that can impact our strategy and operations21.
Impact of COVID-19
Due to the ongoing and evolving nature of the COVID-19 pandemic, we are continuing to assess the impact on our business, operations and financial condition as it occurs. The overall financial and operational impact to us has been minimal to-date, with virtually all of our employees working remotely or on an agile basis.
As of
segments had COVID-19 related net liabilities of
million
Inflation We continue to monitor inflationary impacts resulting from government stimulus, sharp increases in demand, labor force and supply chain disruptions, among other factors, on our loss cost trends. Our run-off net loss reserves primarily consists of casualty, workers' compensation and asbestos lines of business which, as long tailed lines of business, have not so far, been impacted by recent inflationary pressures in comparison to other property and auto lines of business, for example. Governmental policy responses to inflation may increase interest rates which, in the short term, will have a significant impact on our investments, in particular our fixed maturity securities. We will continue to monitor our liquidity, capital and potential earnings impact of these changes but remain focused on medium to long term asset allocation decisions.
Inflation may result in increased wage pressures for our operating expenses, as
we remain focused on being a competitive employer in our market.
Run-off Outlook
We continue to evaluate transactions in our active pipeline including LPTs, ADCs, and other transaction types including acquisitions, and 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.
Transactions
OnJanuary 10, 2022 , we entered into an agreement with Aspen Insurance Holdings Limited ("Aspen") to assume$3.1 billion of net loss reserves in a LPT transaction, subject to a limit of$3.6 billion . An existing ADC betweenAspen and us that closed inJune 2020 will be absorbed into this LPT.
Enhanzed Re
Upon completion of the Step Acquisition of Enhanzed Re onSeptember 1, 2021 , we acquired liabilities for future policyholder benefits of$1.5 billion . We may enter into further life and annuity reinsurance transactions, which would increase our exposure to interest rate movements and longevity risks, as well as other risks associated with life reinsurance. We also acquired Enhanzed Re's share of Allianz's catastrophe reinsurance business and associated net losses related to events occurring during 2021. This includes the German Floods, Hurricane Ida, the European Storms and theTexas Winter Storms , as well as net loss reserves relating to prior period loss events, which primarily relates to business interruption claims arising from COVID-19.
Although we have not renewed the catastrophe treaties for 2022, our future
results could be impacted by net favorable or unfavorable prior period loss
development on the acquired reserves.
21 For additional information on the risks, refer to "Item 1A. Risk Factors -
Risks Relating to our Run-off Business."
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Item 7 | Management Discussion and Analysis | Current Outlook
Investment Outlook
Global financial markets were far more stable in 2021 than during 2020.
Supportive fiscal and monetary policies and gradual reopening of economies
around the world resulted in strong economic growth. Risk assets rallied, M&A
activity accelerated, corporate credit spreads continued to tighten, and
defaults remained well below average as companies posted strong corporate
earnings.
Against this backdrop,
As a result, we anticipate elevated volatility in the global investment markets this year as governments and central banks take action to address rising inflation by tightening monetary policy. TheU.S. Federal Reserve has indicated that it intends to cut back on its bond-buying program and initiate a series of interest rate increases as early as the first quarter of 2022. Higher interest rates would create a negative unrealized impact on our fixed income investments, but could also provide us with the opportunity to reinvest at higher yields as our securities mature or we invest premium received from new business. Furthermore, a portion of our portfolio is allocated to floating-rate assets, which should mitigate some of the impact of rising rates. In addition to our core fixed income portfolio, our other investments, including equities, are expected to provide higher returns and diversification benefits over the long-term, although this may be more volatile in the short term.
We are actively seeking investment opportunities with inflationary pass-through
components, including private credit, real estate, and infrastructure.
In the fourth quarter of 2021, we completed the orderly liquidation of theInRe Fund . We anticipate redeploying$1.0 billion of this capital into various other investments in 2022, including those mentioned above.
Capital Outlook and Transactions
S&P Model
S&P has announced that it intends to change its capital adequacy model. While the proposed model proposes changes to insurance diversification credits which could benefit us, it also proposes disallowing rating credit for Tier 3 Senior Debt and the recalibration of capital charges to higher confidence levels. The proposal has not been finalized, but it could increase the level of capital S&P requires for a particular financial strength rating.
As part of our capital management strategy, we will continue to make our own
assessment of the appropriate level of capital to support our business
operations.
Debt Issuance
On
Finance") issued Junior Subordinated Notes due 2042 (the "2042 Junior
Subordinated Notes") in an aggregate principal amount of
The 2042 Junior Subordinated Notes are unsecured junior subordinated obligations
of Enstar Finance, and are fully and unconditionally guaranteed by Enstar.
The net proceeds will be used to fund the payment at maturity of the outstanding$280 million aggregate principal amount of our 4.5% Senior Notes, which mature onMarch 10, 2022 . We intend to use the remaining net proceeds from this offering for general corporate purposes, including, but not limited to, funding our acquisitions, working capital and other business opportunities.Enstar Group Limited | 2021 Form 10-K
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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
Liquidity and Capital Resources
Overview 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. Our capital resources as ofDecember 31, 2021 included ordinary shareholders' equity of$5.6 billion , preferred equity of$510 million , redeemable noncontrolling interest of$179 million and debt obligations of$1.7 billion . Based on our current loss reserves position, our portfolios of in-force (re)insurance business, and our investment positions, we believe we are well capitalized.
The following table details our capital position:
2021 2020 Change
(in millions of U.S. dollars)
Ordinary shareholders' equity $ 5,586 $ 6,164 $ (578)
Series D and E Preferred Shares 510 510 -
Total Enstar Shareholders' Equity 6,096 6,674 (578)
Noncontrolling interest 230 14 216
Total Shareholders' Equity 6,326 6,688 (362)
Debt obligations 1,691 1,373 318
Redeemable noncontrolling interest 179 365 (186)
Total capitalization $ 8,196 $ 8,426 $ (230)
Total capitalization attributable to Enstar $ 7,787
Debt to total capitalization 20.6 % 16.3 % 4.3 % Debt and Series D and E Preferred Shares to total capitalization 26.9 % 22.3 % 4.6 % Debt to total capitalization attributable to Enstar 21.7 % 17.1 % 4.6 % Debt and Series D and E Preferred Shares to total capitalization attributable to Enstar 28.3 % 23.4 % 4.9 %
As of
excluding restricted cash that supports (re)insurance operations, and included
in this amount was
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.
Dividends
Historically, we have not declared and have no current expectation to declare a dividend on our ordinary shares. Our strategy has been to retain earnings and invest distributions from operating subsidiaries into our business. We may re-evaluate this strategy from time to time based on overall market conditions and other factors. In 2021, we repurchased 3,749,400 ordinary shares as part of our strategic separation with Hillhouse Group22. We have issued 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.
22 As described in Note 18 to the consolidated financial statements.
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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
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.
Sources and Uses of Cash Holding Company Liquidity The potential sources of cash flows to Enstar as a holding company consist of cash flows from our subsidiaries including dividends, advances and loans, and interest income on loans to our subsidiaries. We also utilize our credit and loan facilities, and we have issued senior notes and preferred shares and guaranteed junior subordinated notes issued by one of our subsidiaries.
On
Subordinated Notes due 2031 (the "2031 Subordinated Notes") which were issued to
Allianz, Enhanzed Re's minority shareholder.
We use cash to fund new acquisitions of companies and significant new business. We also utilize cash for our operating expenses associated with being a public company and to pay dividends on our preference shares and interest and principal on loans from subsidiaries and debt obligations, including loans under our credit facilities, our Senior Notes, our Junior Subordinated Notes and the 2031 Subordinated Notes (together with the Junior Subordinated Notes, the "Subordinated Notes").
Under the eligible capital rules of the BMA, the Senior Notes qualify as Tier 3
capital and the Preferred Shares and Subordinated Notes qualify as Tier 2
capital when considering the Bermuda Solvency Capital Requirements.
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 onAugust 17, 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.
Enstar Finance is a wholly-owned finance subsidiary and is dependent upon funds from other subsidiaries to pay any amounts due under the Junior Subordinated Notes. In addition, as noted above, we are a holding company that conducts substantially all of our operations through our subsidiaries. Our only significant assets are the capital stock of our subsidiaries. Because substantially all of our operations are conducted through our (re)insurance subsidiaries, substantially all of our consolidated assets are held by our subsidiaries and most of our cash flow, and, consequently, our ability to pay any amounts due under the guaranty of the Junior Subordinated Notes, is dependent upon the earnings of our subsidiaries and the transfer of funds by those subsidiaries to us in the form of distributions or loans. In addition, the ability of our (re)insurance subsidiaries to make distributions or other transfers to Enstar Finance or us is limited by applicable insurance laws and regulations, as described below. These laws and regulations and the determinations by the regulators implementing them may significantly restrict such distributions and transfers, and, as a result, adversely affect the overall liquidity of Enstar Finance or us. The ability of all of our subsidiaries to make distributions and transfers to Enstar Finance and us may also be restricted by, among other things, other applicable laws and regulations and the terms of our credit facilities and our subsidiaries' bank loans and other issued debt instruments. Operating Company Liquidity
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.
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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
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 may also result in increased liquidity requirements for our subsidiaries.
Our sources of funds 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 receivable.
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.
We expect to use funds acquired from cash and investment portfolios, collected premiums, collections from reinsurance debtors, fees and commission income, investment income and proceeds from sales and redemptions of investments to meet expected claims payments and operational expenses, with the remainder used for acquisitions and additional investments. Cash provided by operating activities was positive for 2021 and 2020 as the cash from new business and the sale of trading securities exceeded cash used in the purchase of trading securities, with the net proceeds being used in the purchase of AFS securities and other investments included within investing cash flows. Overall, we expect our cash flows, together with our existing capital base and cash and investments acquired and from new business, to be sufficient to meet cash requirements and to operate our business.
Cash Flows
The following table summarizes our consolidated cash flows provided by (used in)
operating, investing and financing activities.
2021 2020 Change
(in millions of U.S. dollars)
Cash provided by (used in):
Operating activities $ 3,801 $ 2,786 $ 1,015
Investing activities (2,573) (2,335) (238)
Financing activities (737) 118 (855)
Net cash flows from discontinued operations - (22) 22
Effect of exchange rate changes on cash 4 (6) 10
Net increase (decrease) in cash and cash
equivalents 495 541 (46)
Cash and cash equivalents, beginning of year 1,373 971 402
Net change in cash of businesses held-for-sale 224 (139) 363
Cash and cash equivalents, end of year
1,373
Reconciliation to Consolidated Balance Sheets: Cash and cash equivalents$ 1,646 $ 901 $ 745 Restricted cash and cash equivalents 446 472 (26) Total cash, cash equivalents and restricted cash$ 2,092 $
1,373
Details of our consolidated cash flows are included in "Item 8. Financial Statements and Supplementary Data - Consolidated Statements of Cash Flows for the years endedDecember 31, 2021 , 2020 and 2019" of this Annual Report on Form 10-K.
2021 versus 2020: Cash and cash equivalents increased by
compared to
2021: Cash and cash equivalents increased by$495 million in 2021, as cash provided by operating activities of$3.8 billion was partially offset by cash used in investing and financing activities of$2.6 billion and$737 million , respectively.Enstar Group Limited | 2021 Form 10-K 85
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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
Cash provided by operations in 2021 was predominantly driven by:
(i) the cash inflows from net sales and maturities of trading securities of
billion
(ii) cash, restricted cash and cash equivalents from new business of
billion
(iii) the timing of paid losses.
Cash used in investing activities in 2021 primarily related to:
(i) net purchases of AFS securities of
(ii) net subscriptions of other investments of
(iii) the impact of consolidating the opening cash and restricted cash balances
of the
Cash used in financing activities in 2021 was attributable to share repurchases and preferred share dividends, partially offset by the net receipt of loans of$242 million .
The change in cash of businesses held-for-sale is due to the disposal of
Northshore.
2020: Cash and cash equivalents increased by$541 million in 2020, as cash provided by operating and financing activities of$2.8 billion and$118 million , respectively, was partially offset by cash used in investing activities of$2.3 billion .
Cash provided by operations in 2020 was predominantly driven by:
(i) the proceeds from net sales and maturities of trading securities of
billion
(ii) cash and restricted cash acquired in Run-off reinsurance transactions of
(iii) the timing of paid losses.
Cash provided by financing activities in 2020 was primarily attributable to the net receipt of loans of$180 million , partially offset by share repurchases and preferred share dividends. Cash used in investing activities in 2020 was primarily related to net purchases of AFS securities of$1.9 billion and net subscriptions of other investments of$380 million .
The change in cash of businesses held-for-sale was due to the disposal of
StarStone
Northshore as held-for-sale as of
Investable Assets
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and cash equivalents and funds held. Investable assets were$21.7 billion as ofDecember 31, 2021 as compared to$17.3 billion as ofDecember 31, 2020 , an increase of 25.7% primarily attributable to the Step Acquisition of Enhanzed Re and significant new business in 2021.
Reinsurance Balances Recoverable on Paid and Unpaid Losses
As of
paid and unpaid losses of
Our (re)insurance run-off subsidiaries and assumed portfolios, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of (re)insurance assumed. Previously, on an annual basis,StarStone International , included within the Run-off segment fromJanuary 1, 2021 , purchased a tailored outwards reinsurance program designed to manage its risk profile. The majority ofStarStone International's third-party reinsurance is with highly rated reinsurers or is collateralized by letters of credit.
We remain liable to the extent that retrocessionaires do not meet their
obligations under these agreements, and, therefore, we evaluate and monitor
concentration of credit risk among our reinsurers. Provisions are made for
amounts considered potentially uncollectible.
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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
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
Origination Date Term 2021 2020
(in millions of U.S. dollars)
4.50% Senior Notes due 2022 March 10, 2017 5 years $ 280 $ 349
4.95% Senior Notes due 2029 May 28, 2019 10 years 495 494
3.10% Senior Notes due 2031 August 24, 2021 10 years 495 -
Total Senior Notes 1,270 843
5.75% Junior Subordinated Notes
due 2040 August 26, 2020 20 years 345 345
5.50% Enhanzed Re's Subordinated
Notes due 2031 December 20, 2018 12.1 years 76 -
Total Subordinated Notes 421 345
EGL Revolving Credit Facility August 16, 2018 5 years - 185
Total debt obligations $ 1,691 $ 1,373
Our debt obligations increased by $318 million from December 31, 2020 , primarily
due to the issuance of our 2031 Senior Notes and the Step Acquisition of
Enhanzed Re, where we acquired the obligations under the 2031 Subordinated Notes
partially offset by the repayment of our Revolving Credit Facility and our
tender offer for a portion of our 2022 Senior Notes.
On
notes due 2042 that are guaranteed by us.
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: Positive) 2022 and 2029 Senior Notes BBB BBB- 2031 Senior Notes BBB- BBB- 2040 and 2042 Junior Subordinated Notes (2) BB+ BB+ 2031 Subordinated Notes Not Rated Not Rated Series D and E preferred shares BB+ BB+ (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.
(2) 2042 Junior Subordinated Notes issued on
consolidated financial statements for further information.
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 rating23.
23 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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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
Contractual Obligations The following table summarizes, as ofDecember 31, 2021 , our future payments under material contractual obligations and estimated payments for losses and LAE and future policyholder benefits for the Run-off and Enhanzed Re segments 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$ 1,978 $ 181 $ 313 $ 281 $ 422 $ 781 Environmental 380 47 64 56 86 127 General Casualty 3,499 340 420 717 1,326 696 Workers' compensation/personal accident 2,902 312 485 439 549 1,117 Marine, aviation and transit 525 155 154 80 83 53 Construction defect 132 25 35 23 27 22 Professional indemnity/ Directors & Officers 1,565 244 318 304 510 189 Motor 745 214 178 91 104 158 Property 435 151 160 58 48 18 Other 535 168 146 68 73 80 Total outstanding losses and IBNR 12,696 1,837 2,273 2,117 3,228
3,241
ULAE 421 69 85 65 92 110 Estimated gross reserves for losses and LAE for the Run-off segment (1) 13,117 1,906 2,358 2,182 3,320
3,351
Estimated gross reserves for losses and LAE for the Enhanzed Re segment Catastrophe 179 89 90 - - - ULAE 3 1 2 - - - Estimated gross reserves for losses and LAE for the Enhanzed Re segment (1) 182 90 92 - - - Future policyholder benefits (2) 1,639 62 161 145 275 996 Investing Activities Unfunded investment commitments (3) 1,824 527 717 396 184 - Financing Activities Loan repayments (including estimated interest payments) 2,471 354 130 129 1,327 531 Total$ 19,233 $ 2,939 $ 3,458 $ 2,852 $ 5,106 $ 4,878 (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, 2021 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, 2021 were acquired by us and initially recorded at fair value with subsequent amortization, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect the fair value adjustment in the amount payable. (2) Future policyholder benefits recorded in our audited consolidated balance sheet as ofDecember 31, 2021 of$1.5 billion are computed on a discounted basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect a discount of the amount payable.
(3) Refer to "Unfunded Investment Commitments" in Note 24 to our consolidated
financial statements for further details.
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Item 7 | Management Discussion and Analysis | Liquidity and Capital Resources
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.
In addition to the contractual obligations noted in the table above, as ofDecember 31, 2021 , we have the right to purchase the redeemable non-controlling interest ("RNCI") related toStarStone International from theTrident V Funds andDowling Capital Partners I, L.P. andCapital City Partners LLC (collectively, the "Dowling Funds") after a certain time in the future (a "call right") and the RNCI holders have the right to sell their RNCI interests to us after a certain time in the future (a "put right").
Off-Balance Sheet Arrangements
As ofDecember 31, 2021 , we have entered into certain investment commitments and parental guarantees24. We also utilize unsecured and secured letters of credit ("LOCs") and a deposit facility25. 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.
24 Refer to Note 24 to our consolidated financial statements for further
details.
25 Refer to Note 16 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 considerable uncertainty in several areas,
including use of actual or industry data for model inputs, and variability of
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, 2021 and 2020, IBNR reserves (net of reinsurance balances
recoverable) accounted for $6.8 billion , or 59.4%, and $4.1 billion , or 54.1%,
respectively, of our total Run-off net losses and LAE reserves, excluding
ULAE26.
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
portfolio27.
•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 its full expected losses based upon judgements of historical trends on earlier accident years.
26 For a breakdown of our Run-off gross and net losses and LAE reserves by line
of business, and ULAE, as of
consolidated financial statements.
27Refer to Note 9 to our consolidated financial statements for further
description of the methodologies used for establishing reserves.
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•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 that 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)
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 emanates 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, 2021 and 2020, the net loss reserves for asbestos-related claims comprised 16.7% and 20.8%, respectively, of total Run-off net reserves for losses and LAE liabilities excluding ULAE. In addition as ofDecember 31, 2021 and 2020, we also have$826 million and$913 million of defendant asbestos liabilities28 . 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, 2021 and 2020, the net loss reserves for environmental pollution-related claims comprised 3.2% and 3.5%, respectively, of total Run-off net reserves for losses and LAE excluding ULAE. In addition, we also have$11 million of direct environmental liabilities29.
Asbestos and Environmental Reserving
The ultimate losses from A&E claims cannot be estimated using traditional actuarial reserving techniques that extrapolate losses to an ultimate basis using loss development. Claims are spread across multiple policy years based on the still evolving case law in each jurisdiction, making historical development patterns unreliable to
28 As described in Note 11 in our consolidated financial statements.
29 As described in Note 11 in our consolidated financial statements.
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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
portfolio30.
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. 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:
•Trends with respect to average claim indemnity, which are used to extrapolate
future claim costs.
•Trends in claim filing pattern, which will be used to estimate the number of
future claim filings.
Sensitivity to Underlying Assumptions of our Actuarial Methods
While we believe our reserve for losses and LAE atDecember 31, 2021 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 +/-$165 Asbestos$ 1,898 +/- 10% in average indemnity +/-$190 +/- 10% in tail development factor (5+ years) +/-$200 General Casualty 3,369 +/- 1% in loss cost trend +/-$205 +/- 2.5% increase in medical Workers' Compensation 2,629 inflation +/-$545 Professional Indemnity/Directors and Officers 1,336 +/- 2.5% in loss cost trend +/-$165 Motor 531 +/- 2.5% in loss cost trend +/-$50 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.
30 Refer to Note 9 in our consolidated financial statements, for further
description of the methodologies used for establishing reserves.
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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.
Change in Reserve Assumptions
Changes in reserve estimates can be driven by updated experience and by changes
in assumptions. These are inextricably linked as updated information leads to
changes in assumptions. We have estimated what portion of changes in ultimate
losses from acquisition years 2012 to 2021 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 (0.6) % (0.5) % (0.1) %
General Casualty 2.3 % 1.7 % 0.6 %
Workers' Compensation (5.0) % (3.8) % (1.2) %
Professional Indemnity/Directors
and Officers (1.0) % (1.8) % 0.8 %
Motor 2.3 % 2.6 % (0.3) %
All Lines (1.4) % (1.1) % (0.3) %
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 reserves31.
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 future filed claims +/- $50
$573 +/- 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 inextricably 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 assumptions32.
Change in Total Liability Change due to Experience Change due to Assumptions
(in millions of U.S. Dollars)
$(38) $(28) $(10)
31 As described in Note 11 in our consolidated financial statements.
32 For information on our defendant A&E liabilities, refer to Note 11 and Note 2
in our consolidated financial statements.
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Item 7 | Management Discussion and Analysis | Critical Accounting Estimates
Deferred Charge Assets DCAs33 may be recorded at the inception of a Run-off retroactive reinsurance contract depending on whether the estimated undiscounted ultimate losses payable are in excess of the premiums received (deferred charge asset).
The premium consideration that we charge ceding companies is generally
contractual and not subject to significant judgment, but is sometimes lower than
the undiscounted estimated ultimate losses payable due to the time value of
money.
Additionally, any subsequent movement in ultimate losses on the contracts with a recognized DCA will result in an adjustment to the deferral until that deferral is exhausted. The uncertainty in the timing and magnitude of the movements in the DCA are directly tied to the uncertainty in the movement in ultimate losses. Favorable or adverse movements to ultimate losses result in a 60% to 90% impact of that movement to the DCA, depending on the loss payout patterns. During 2021, net favorable incurred loss movement of$88 million from contracts with DCAs resulted in a net$71 million reduction in the deferred balance.
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 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. While our forecasts of future taxable income have been consistent the past few years, resulting in a valuation allowance reduction of$1.5 million from 2020 to 2021, these forecasts are a judgement and involve a level of uncertainty, such that a 10% decrease to forecasted future income could increase the valuation allowance by up to 7% or$4 million34.
Level 3 Fair Value Measurements
We measure fair value in accordance with ASC 820, Fair Value Measurements. The
guidance dictates a framework for measuring fair value and a fair value
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 unobservable inputs, the most prevalent being the median peer multiple. The median peer multiple calculates a multiple based on the average value from a group of peer companies and that multiple is then applied to the invested company as a key input to calculate the value. We consider the following sensitivity a reasonable deviation for this key input:
33 As described under "Deferred Charge Assets" within Note 2 in our consolidated
financial statements.
34 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
Estimated Range in Actual range for median
Sensitivity Investments Variation peer multiple
(in millions of U.S. dollars)
+/- 10% median peer
multiple $ 329 +/- $16 * +/- 2%
* No downside sensitivity due to the application of the distribution waterfall
to the privately held security.
The 2% movement in the median peer multiple in 2021 was driven by the changes in
the average value of the peer company group, and resulted in a
adjustment to the privately held equity securities.
Fair Value Option - Insurance Contracts
We have elected to apply the fair value option for certain LPT reinsurance transactions. This is an irrevocable election that applies to all balances under the insurance contract, including funds held assets, 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, 2021 and 2020. 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 standard actuarial techniques 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.
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Item 7 | Management Discussion and Analysis | Critical Accounting Estimates
We consider the following sensitivity a reasonable deviation for these key
assumptions:35:
Net Fair Value Liabilities Sensitivity
(in millions of U.S. dollars) $ 1,557 +/- 50bps WACC +/-$10 $ 1,557 +/- 1 year in average payout +/-$15 $ 1,557 +/- 50bps yield curve +/-$45 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 2021, there was a$97 million decrease in the liability due to an increase in the yield curve.
The WACC decreased 0.25% from 2019 to 2020, resulting in a
in the liability, and remained unchanged from 2020 to 2021.
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 estimate payment pattern will impact the average payout that would result in an impact of the value of the liability.
During 2021, there was an acceleration in the payment pattern, which decreased
the average payout that resulted in a
Recently Issued Accounting Pronouncements Not Yet Adopted36
On
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 ofJanuary 1, 2021 (and record transition adjustments as ofJanuary 1, 2021 ) in the 2023 financial statements. We intend to adopt ASU 2018-12 effectiveJanuary 1, 2023 .
This will impact our accounting and disclosure requirements for our
long-duration life (re)insurance contracts. In addition to the impact to our
balance sheet upon adoption, we also expect this to impact our earnings
thereafter.
35The observable and unobservable inputs used in the model are further described
in Note 12 in our consolidated financial statements.
36See Note 2 to the consolidated financial statements for a more detailed
discussion of ASU 2018-12, as well as other accounting pronouncements issued but
not yet adopted and newly adopted accounting pronouncements.
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