ENSTAR GROUP LTD – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context indicates otherwise, the terms "Enstar," "we," "us" or "our"
mean
The following discussion and analysis of our financial condition as ofSeptember 30, 2022 and our results of operations for the three and nine months endedSeptember 30, 2022 and 2021 should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Some of the information contained in this discussion and analysis or included elsewhere in this quarterly report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Cautionary Statement Regarding Forward-Looking Statements" and Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Table of Contents Section Page Operational Highlights 9
Consolidated Results of Operations - for the Three and Nine Months Ended
11
September 30, 2022 and 2021
• Overall Measures of Performance 15
• Underwriting Results 16
• Investment Results 21
• General and Administrative Expenses 25
New Business 26
Non-GAAP Financial Measures 27
Other Financial Measures 36
Results of Operations by Segment - for the Three and Nine Months Ended 38
September 30, 2022 and 2021
• Run-off Segment 38
• A ssumed Life Segment 40
• Investments Segment 41
• Legacy Underwriting Segment 45
Corporate and Other 46
Current Outlook 48
Liquidity and Capital Resources 51
Enstar Group Limited | Third Quarter 2022 | Form 10-Q 8
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Item 2 | Management's Discussion and Analysis | Operational Highlights
Operational Highlights
Our consolidated results reflect our continued progress on providing capital
release solutions to our clients by acquiring and managing their run-off
portfolios.
Operational highlights for the nine months ended
Assumed
billion
•OnMay 20, 2022 we completed a loss portfolio transfer ("LPT") transaction with Aspen Insurance Holdings Limited ("Aspen") with respect to$3.1 billion of net loss reserves, subject to a limit of$3.6 billion . An existing ADC betweenAspen and us that closed inJune 2020 was absorbed into this LPT. •As a result of this LPT transaction, we assumed an incremental$1.9 billion of net loss reserves with a diverse mix of property, liability and specialty lines of business, in exchange for incremental premium of$1.9 billion ,1 and assumed claims control. •OnAugust 31, 2022 , we closed a LPT transaction withProbitas Managing Agency Limited ("Probitas") and assumed$61 million of net loss reserves with respect to the 2018 and prior year of account exposures of Probitas' managed Syndicate 1492 which cover general liability and financial risks underwritten worldwide. The LPT will convert into a reinsurance to close ("RITC") effectiveJanuary 1, 2023 , subject to regulatory approvals.
Commenced Unwind of Enhanzed Re's Reinsurance Transactions
•OnJune 29, 2022 , Enhanzed Re paid a$200 million dividend, of which$150 million was retained by the Company, and$50 million was paid to Allianz SE ("Allianz") in respect of its ownership interest in Enhanzed Re. As a result of the one quarter reporting lag, the impact was reflected in our third quarter results.
•Following the completion of our strategic review of Enhanzed Re earlier this
year, on
through which we agreed to a series of transactions2 that will allow us to
unwind Enhanzed Re in an orderly manner.
•Enhanzed Re completed the following transactions in the third quarter of 2022, the impact of which will be reflected in our fourth quarter results as a result of the one quarter reporting lag:
•Commuted the catastrophe reinsurance business with Allianz, resulting in the
recognition of a favorable commutation gain of
•Repaid the
affiliate of Allianz.
•Following receipt of regulatory approval onOctober 31, 2022 , Enhanzed Re is expected to complete a novation of the reinsurance closed block of life annuity policies toMonument Re Limited ("Monument Re") on or aboutNovember 7, 2022 . We will settle the life liabilities and the related assets at carrying value in return for cash consideration as of the closing date. As atJune 30, 2022 , the carrying value of these items was$1.3 billion and$1.1 billion , respectively, which we would record as$270 million of other income if measured as of this date.
•Activity for the period from
amount of other income recorded.
•A portion of our other income recorded will be subject to deferral to account for our 20% ownership interest in Monument Re and our net earnings attributable to Enstar will be reduced by the amount attributable to Allianz's noncontrolling interest in Enhanzed Re. The final impact of the novation will be reflected in our first quarter 2023 results as a result of the one quarter reporting lag.
Executed Capital Transactions
•We completed a$500 million junior subordinated notes offering inJanuary 2022 , the net proceeds of which were primarily used to fund the payment at maturity of the outstanding$280 million aggregate principal amount of our senior notes, which matured inMarch 2022 .
1 Refer to "New Business" section for further details.
2 Refer to "Note 17" to our condensed consolidated financial statements for
further details.
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Item 2 | Management's Discussion and Analysis | Operational Highlights
•We repurchased 697,580 voting ordinary shares during the nine months endedSeptember 30, 2022 for an aggregate$163 million , representing an average price per share of$233.92 . During the nine months endedSeptember 30, 2022 , we utilized$105 million of the$200 million authorized under the 2022 Repurchase Program and the remaining$59 million authorized under the 2021 Repurchase Program to repurchase our ordinary shares. There were no share repurchases during the three months endedSeptember 30, 2022 .Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Consolidated Results of Operations - For the Three and Nine Months Ended
Primary GAAP Financial Measures
We use the following GAAP measures to manage the company and monitor our
performance:
•Net earnings and Net earnings attributable to Enstar ordinary shareholders,
which collectively provide a measure of our performance focusing on
underwriting, investment and expense results;
•Comprehensive income attributable to Enstar, which provides a measure of the total return, including unrealized investment gains and losses on investments, as well as other elements of other comprehensive income;
•Book value per share ("BVPS"), which we use to measure the value of our company
over time;
•Return on equity ("ROE"), which measures our profitability by dividing our
earnings attributable to the company by our shareholders' equity;
•Total investment return ("TIR"), which measures the rate of return we obtain,
earned and both realized and unrealized, on our investments; and
•Run-off liability earnings ("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.
Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
The following table sets forth certain condensed consolidated financial
information:
Three Months Ended Nine Months Ended
September 30, September 30, $ / pp
2022 2021 $ / pp Change 2022 2021 Change
(in millions of U.S. dollars, except per share data)
Underwriting Results
Net premiums earned $ 4 $ 52 $ (48) $ 52 $ 204 $ (152)
Net incurred losses and LAE
Current period (13) (42) 29 (39) (146) 107
Prior period 109 69 40 331 189 142
Total net incurred losses and LAE 96 27 69 292 43
249
Policyholder benefit expenses (7) - (7) (25) - (25) Acquisition costs - (11) 11 (20) (50) 30 Investment Results Net investment income 116 93 23 302 231 71 Net realized (losses) gains (36) 6 (42) (111) 1 (112) Net unrealized (losses) gains (546) (280) (266) (1,518) 110
(1,628)
Earnings (losses) from equity method investments (20) (14) (6) 12 101
(89)
General and administrative expenses (67) (93) 26 (235) (269) 34 NET (LOSS) EARNINGS (478) (188) (290) (1,266) 405 (1,671) NET (LOSS) EARNINGS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS$ (444) $ (196) $ (248) $ (1,219) $ 365 $ (1,584) COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO ENSTAR$ (612) $ (217) $ (395) $ (1,843) $ 315 $ (2,158) GAAP measures: ROE (10.6) % (2.9) % (7.7) pp (21.8) % 5.9 % (27.7) pp Annualized ROE (29.1) % 7.9 % (37.0) pp Annualized RLE 3.8 % 2.5 % 1.3 pp Annualized TIR (8.7) % 2.8 % (11.5) pp Non-GAAP measures: Adjusted ROE* (2.9) % (2.8) % (0.1) pp (7.0) % 7.7 % (14.7) pp Annualized Adjusted ROE* (9.4) % 10.2 % (19.6) pp Annualized Adjusted RLE * 0.5 % 1.4 % (0.9) pp Annualized Adjusted TIR* (1.0) % 4.1 % (5.1) pp As of September 30, December 31, 2022 2021 $ Change GAAP measure: BVPS$ 208.60 $ 316.34 $ (107.74) Non-GAAP measure: Adjusted BVPS*$ 206.25 $ 310.80 $ (104.55) pp - Percentage point(s)
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Overall Results
Three Months Ended
Net loss attributable to Enstar ordinary shareholders for the three months endedSeptember 30, 2022 was$444 million , an increase from the comparative quarter of$248 million as a result of: •An increase in our negative total investment return of$291 million , consisting of the aggregate net investment income, net realized and unrealized losses and losses from equity method investments, primarily driven by an increase in net realized and unrealized losses on our fixed maturity securities of$331 million as a result of rising interest rates and widening credit spreads. This was partially offset by a decrease in net realized and unrealized losses on our other investments, including equities, of$23 million , and an increase in net investment income of$23 million primarily due to an increase in average aggregate fixed income assets and reinvestment at higher yields.
•Absence of the comparative quarter net gain on purchase and sales of
subsidiaries of
the step acquisition of Enhanzed Re.
•Lower net premiums earned of
This was partially offset by:
Reduced total expenses of
•Reductions of
million
run-off our active underwriting platforms, including
•An increase in favorable prior period development in net incurred losses and LAE of$40 million driven by a reduction in the fair value of liabilities for which we have elected the fair value option; in addition to
•A reduction of
driven by reductions to long-term incentive plan costs.
The above resulted in a
for the three months ended
Comprehensive loss attributable to Enstar increased by$395 million due to the$290 million increase in net loss and a$153 million increase in other comprehensive loss, which was primarily due to an increase in unrealized losses on our fixed income available-for-sale investments as a result of rising interest rates.
As a result of the current quarter net loss and comprehensive loss attributable
to Enstar as noted above, our ROE decreased by 7.7 pp.
Nine Months Ended
Net loss attributable to Enstar ordinary shareholders was$1.2 billion for the nine months endedSeptember 30, 2022 , an unfavorable movement of$1.6 billion from the comparative period, as a result of: •Total negative investment return of$1.3 billion compared to total investment return of$443 million , primarily driven by an increase in net realized and unrealized losses on our fixed maturity securities of$978 million , and net realized and unrealized losses on our other investments, including equities, of$468 million for the nine months endedSeptember 30, 2022 , compared to net gains of$294 million for the comparative period. A decrease of$89 million in earnings from equity method investments further contributed to the decrease in our TIR, as a result of consolidating Enhanzed Re effectiveSeptember 1, 2021 . This was partially offset by an increase in net investment income of$71 million due to higher yielding investments. •Rising interest rates and widening credit spreads led to the net losses on our fixed income securities, and global equity market declines and widening high yield credit spreads led to the net losses on our other investments, including equities. These factors contributed to an annualized TIR of (8.7)% for the nine months endedSeptember 30, 2022 , in comparison to an annualized TIR of 2.8% for the comparative period. •An absence of the prior period net gain on purchase and sales of subsidiaries of$62 million , primarily driven by the bargain purchase gain recognized on the step acquisition of Enhanzed Re and a net gain on sales of subsidiaries of$15 million .Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
•Lower net earned premiums of
This was partially offset by:
Reduced total expenses of
•Reductions of$107 million in current period net incurred losses and LAE and$30 million in acquisition costs as a result of largely exiting or placing into run-off our active underwriting platforms, includingStarStone International ; •An increase in favorable development in net incurred losses and LAE of$142 million , which improved our annualized RLE to 3.8% for the nine months endedSeptember 30, 2022 in comparison to annualized RLE of 2.5% for the comparative period; in addition to •A reduction of$34 million in general and administrative expenses primarily driven by reductions to long-term incentive plan costs and a decrease in IT costs as a result of reduced project activity, partially offset by the absence of a proportional reduction in accrued performance-based costs which were recorded in the comparative period.
The above resulted in the
loss of
Comprehensive loss attributable to Enstar moved unfavorably by$2.2 billion , from income of$315 million for the nine months endedSeptember 30, 2021 to a loss of$1.8 billion for the nine months endedSeptember 30, 2022 , primarily due to the$1.7 billion year-over-year net loss as compared to net earnings variance and a$591 million increase in other comprehensive loss, which was primarily due to an increase in unrealized losses on our fixed income available-for-sale investments as a result of rising interest rates.
BVPS decreased by 34.1% primarily as a result of comprehensive loss attributable
to Enstar of
As a result of the current period net loss and comprehensive loss attributable
to Enstar as noted above, our ROE decreased by 27.7 pp.
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Item 2 | Management's Discussion and Analysis | Key Performance Measures
Overall Measures of Performance
BVPS and Adjusted BVPS*
[[Image Removed: esgr-20220930_g2.jpg]] BVPS and Adjusted BVPS* decreased by 34.1% and 33.6%, respectively, fromDecember 31, 2021 toSeptember 30, 2022 , primarily due to recognized and unrecognized investment losses of$2.0 billion for the nine months endedSeptember 30, 2022 .
ROE and Adjusted ROE*
[[Image Removed: esgr-20220930_g3.jpg]]
Three and Nine Months Ended
and 27.7 pp for the three and nine months ended
respectively, primarily due to:
i.an increase in net realized and unrealized losses on fixed maturity
securities, which contributed 8.7 and 17.8 pp to the total reduction in ROE for
the three and nine months ended
ii.net realized and unrealized losses on other investments, including equities, for the three and nine months endedSeptember 30, 2022 compared to net losses and net gains for the equivalent periods endedSeptember 30, 2021 , respectively. This contributed 1.1 and 13.1 pp to the total reduction in ROE for the three and nine months endedSeptember 30, 2022 , respectively; and iii.a reduction in earnings from equity method investments, which contributed 1.4 pp to the total reduction in ROE for the nine months endedSeptember 30, 2022 .
These negative factors were partially offset by:
iv. higher favorable PPD, which offset the reduction in ROE by 1.6 and 2.9 pp
for the three and nine months ended
v. higher net investment income, which offset the reduction in ROE by 1.4 and
1.7 pp for the three and nine months ended
Adjusted ROE* decreased by 0.1 and 14.7 pp for the three and nine months endedSeptember 30, 2022 , respectively, as it excludes the impact of net realized and unrealized losses on fixed maturity securities.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
We discuss the results of our operations by aggregating certain captions from
our condensed consolidated statements of earnings, as we believe it provides a
more meaningful view of our results and eliminates repetition that would arise
if captions were discussed on an individual basis.
In order to facilitate discussion, we have grouped the following captions:
•Underwriting results: includes net premiums earned, net incurred losses and
LAE, policyholder benefit expenses and acquisition costs.
•Investment results: includes net investment income, net realized (losses) gains, net unrealized (losses) gains and (losses) earnings from equity method investments.
•General and administrative results: includes general and administrative
expenses.
Underwriting Results Our strategy is focused on effectively managing portfolios and businesses in run-off. Although we have largely exited our active underwriting platforms, we still record net premiums earned and the associated current period net incurred losses and LAE and acquisition costs as a result of the run-off of unearned premiums from transactions completed in recent years.
Premiums earned in the Run-off segment are generally offset by the related
current period net incurred losses and LAE and acquisition costs.
The components of underwriting results are as follows:
Three Months Ended September 30,
2022 2021
Corporate and Legacy Corporate and
Run-off Assumed Life3 Legacy Underwriting other Total Run-off Underwriting other Total
(in millions of U.S. dollars)
Net premiums earned$ 1 $ 2 $ 1 $ -$ 4 $ 39 $ 13 $ -$ 52 Net incurred losses and LAE: Current period 10 - 3 - 13 35 7 - 42 Prior periods (61) - (2) (46) (109) (86) (2) 19 (69) Total net incurred losses and LAE (51) - 1 (46) (96) (51) 5 19 (27) Policyholder benefit expenses - 7 - - 7 - - - - Acquisition costs 1 - (1) - - 8 3 - 11 Underwriting results$ 51 $ (5) $ 1 $ 46$ 93 $ 82 $ 5$ (19) $ 68 Nine Months Ended September 30, 2022 2021 Corporate and Legacy Corporate and Run-off Assumed Life Legacy Underwriting other Total Run-off Underwriting other Total (in millions of U.S. dollars) Net premiums earned$ 27 $ 17 $ 8 $ -$ 52 $ 154 $ 50 $ -$ 204 Net incurred losses and LAE: Current period 35 - 4 - 39 121 25 - 146 Prior periods (232) (29) 2 (72) (331) (184) (5) - (189) Total net incurred losses and LAE (197) (29) 6 (72) (292) (63) 20 - (43) Policyholder benefit expenses - 25 - - 25 - - - - Acquisition costs 18 - 2 - 20 37 13 - 50 Underwriting results$ 206 $ 21 $ - $ 72$ 299 $ 180 $ 17 $ -$ 197 3 During the third quarter of 2022, we changed the segment name from "Enhanzed Re" to "Assumed Life". Refer to the "Assumed Life Segment" section for further details. Enstar Group Limited | Third Quarter 2022 | Form 10-Q 16
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Current Period - Three and Nine Months Ended
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.
The below charts are in millions of
[[Image Removed: esgr-20220930_g4.jpg]] [[Image Removed: esgr-20220930_g5.jpg]]
The reductions in net premiums earned and current period net incurred losses and
LAE were driven by reduced levels of activity arising from our exit of our
active underwriting platforms beginning in 2020.
We continue to earn premium from ourStarStone International business and from our Assumed Life segment. In comparison, our 2021 earned premium was primarily driven byStarStone International and AmTrust RITC business, which was entered into in 2019.
Prior Periods - RLE - Three Months Ended
The following tables summarize RLE % and Adjusted RLE %* by acquisition year,
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.
Three Months Ended September 30, 2022
RLE Adjusted RLE*
Average adjusted
Average net loss net loss
Acquisition Year PPD reserves Annualized RLE % Adjusted PPD* reserves* Annualized Adj RLE %*
(in millions of U.S. dollars)
2012 and prior $ 2 $ 554 $ 7 $ 583
2013 4 178 1 36
2014 17 711 1 52
2015 6 275 5 261
2016 3 704 2 744
2017 71 592 3 745
2018 5 835 (9) 888
2019 8 1,015 7 1,493
2020 (1) (11) 600 (13) 577
2021 10 3,857 21 4,223
2022 (1) (6) 2,580 1.9 % (11) 2,437 1.1 %
Total $ 109 $ 11,901 3.7 % $ 14 $ 12,039 0.5 %
(1) We have reclassified $784 million of average net loss reserves and $772
million of average adjusted net loss reserves* recorded in acquisition year 2020
arising from an ADC between Aspen and us to acquisition year 2022 to reflect the
absorption of the ADC into the 2022 Aspen LPT transaction. There was no recorded
PPD or Adjusted PPD* relating to the Aspen ADC during the three months ended
September 30, 2022 .
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Three Months Ended
Our Annualized RLE % was positively impacted by a reduction of$82 million in the fair value of liabilities for which we have elected the fair value option and a net reduction in estimates of net ultimate losses of$48 million , partially offset by$32 million of amortization of DCAs. Favorable PPD in the 2017 and 2018 acquisition years was driven predominantly by a reduction in the fair value of liabilities for which we have elected the fair value option.
Favorable development as a result of lower claim activity on our marine,
aviation, and transit line of business and favorable claim settlements on our
workers' compensation line of business had a favorable impact on PPD in
acquisition year 2019.
Whilst acquisition year 2018 also benefited from the favorable development on
our marine, aviation and transit and workers' compensation lines of business,
there was an increase in estimates of net ultimate losses as a result of worse
than expected claims experience and adverse development on claims in relation to
our general casualty and motor lines of business, which also impacted
acquisition year 2020.
Acquisition year 2021 PPD benefited from favorable claim settlements on our
workers' compensation line of business but was adversely impacted by worse than
expected claims experience on our general casualty line of business and
accelerated amortization of DCAs (offsetting favorable development pursuant to
our accounting policies).
Our Annualized Adjusted RLE %*, which excludes fair value adjustments, the
reduction in provisions for ULAE and the changes in the loss liabilities of the
Assumed Life and Legacy Underwriting segments, was positively impacted by the
net reduction in estimates of net ultimate losses relating to the Run-off
segment, partially offset by amortization of DCAs, as described above.
Three Months Ended September 30, 2021
RLE Adjusted RLE*
Average adjusted
Average net loss net loss
Acquisition Year PPD reserves Annualized RLE % Adjusted PPD* reserves* Annualized Adj RLE %*
(in millions of U.S. dollars)
2012 and prior $ 12 $ 552 $ 8 $ 586
2013 2 215 - 49
2014 23 937 6 73
2015 11 335 10 318
2016 (1) 813 1 857
2017 13 976 2 988
2018 2 1,147 2 1,136
2019 9 1,155 17 1,636
2020 2 1,749 (1) 1,701
2021 (4) 3,520 8 4,086
Total $ 69 $ 11,399 2.4 % $ 53 $ 11,430 1.9 %
Three Months Ended
Our Annualized RLE % was positively impacted by a net reduction in estimates of
net ultimate losses of
amortization of DCAs.
Acquisition years 2011, 2015 and 2021 benefited from better than expected claims experience and favorable results from actuarial loss reserve reviews relating to our workers' compensation line of business.
Favorable results from actuarial loss reserve studies with respect to our
property line of business had a favorable impact on acquisition years 2014 and
2019.
Acquisition years 2015 and 2019 also benefited from better than expected claims
experience on our construction defect line of business.
Acquisition year 2018 benefited from the favorable development on our workers' compensation and property lines of business, in addition to better than expected claims experience on our marine, aviation and transit line of business, but was adversely impacted by worse than expected claims experience across multiple lines of business.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
The favorable movements were partially offset by accelerated amortization of
DCAs relating to the 2021 acquisition year.
Our Annualized Adjusted RLE %* was positively impacted by the net reduction in
estimates of net ultimate losses relating to the Run-off segment, partially
offset by amortization of DCAs, as described above.
Prior Periods - RLE - Nine Months Ended
The following tables summarize RLE % and Adjusted RLE %* by acquisition year:
Nine Months Ended September 30, 2022
RLE Adjusted RLE*
Average adjusted
Average net loss net loss
Acquisition Year PPD reserves Annualized RLE % Adjusted PPD* reserves* Annualized Adj RLE %*
(in millions of U.S. dollars)
2012 and prior $ 3 $ 581 $ 12 $ 611
2013 - 187 1 39
2014 35 766 1 48
2015 7 284 5 270
2016 7 730 14 774
2017 189 724 6 823
2018 47 925 (1) 960
2019 - 1,052 (7) 1,524
2020 (1) (10) 701 (19) 675
2021 59 3,972 41 4,382
2022 (1) (6) 1,638 1.9 % (11) 1,562 1.1 %
Total $ 331 $ 11,560 3.8 % $ 42 $ 11,668 0.5 %
(1) We have reclassified $2 million of PPD, $2 million of Adjusted PPD*, $784
million of average net loss reserves and $772 million of average adjusted net
loss reserves* recorded in acquisition year 2020 arising from an ADC between
Aspen and us to acquisition year 2022 to reflect the absorption of the ADC into
the 2022 Aspen LPT transaction.
Nine Months Ended
Our Annualized RLE % was positively impacted by a reduction of$228 million in the fair value of liabilities for which we have elected the fair value option and a net reduction in estimates of net ultimate losses of$209 million , partially offset by$145 million of amortization of DCAs. Favorable PPD in the 2017 and 2018 acquisition years was driven predominantly by a reduction in the fair value of liabilities for which we have elected the fair value option.
Acquisition year 2020 was adversely impacted by worse than expected claims
experience and adverse development on claims in relation to our general casualty
and motor lines of business.
Acquisition year 2021 PPD benefited from favorable claim settlements on our workers' compensation and professional indemnity/directors and officers lines of business and favorable claim activity on the catastrophe book in the Assumed Life segment, which more than offset the adverse impact of worse than expected claims experience on our general casualty line of business and accelerated amortization of DCAs (offsetting favorable development pursuant to our accounting policies).
Our Annualized Adjusted RLE %* was positively impacted by the net reduction in
estimates of net ultimate losses relating to the Run-off segment, partially
offset by amortization of DCA, as described above.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Nine Months Ended September 30, 2021
RLE Adjusted RLE*
Average adjusted
Average net loss net loss
Acquisition Year PPD reserves Annualized RLE % Adjusted PPD* reserves* Annualized Adj RLE %*
(in millions of U.S. dollars)
2012 and prior $ 21 $ 569 $ 17 $ 603
2013 5 141 - 56
2014 36 971 23 83
2015 11 346 10 329
2016 4 831 5 876
2017 66 1,023 4 1,008
2018 29 1,232 20 1,208
2019 6 1,188 25 1,684
2020 25 1,858 13 1,806
2021 (14) 2,095 (14) 2,306
Total $ 189 $ 10,254 2.5 % $ 103 $ 9,959 1.4 %
Nine Months Ended
Our Annualized RLE % was positively impacted by a net reduction in estimates of net ultimate losses of$143 million and a reduction of$68 million in the fair value of liabilities for which we have elected the fair value option, partially offset by$55 million of amortization of DCAs. Favorable PPD in the 2017 and 2018 acquisition years was driven predominantly by a reduction in the fair value of liabilities for which we have elected the fair value option as a result of increases in interest rates. Acquisition years 2014, 2018 and 2019 benefited from favorable development on our property and marine, transit and aviation lines of business as a result of favorable results from actuarial loss reserve studies.
Acquisition years 2015, 2017, 2020 and 2021 benefited from better than expected
claims experience.
The favorable movements were partially offset by accelerated amortization of DCA relating to the 2021 acquisition year and regular amortization across multiple acquisition years. Annualized Adjusted RLE %* was positively impacted by the net reduction in estimates of net ultimate losses relating to the Run-off segment, partially offset by amortization of DCA, as described above. Annualized Adjusted RLE %* further benefited from a$19 million favorable impact as a result of lower than expected asbestos related claim frequency related to our defendant A&E liabilities attributable primarily to the 2019 acquisition year.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
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Item 2 | Management's 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.
The components of our investment results split between our fixed income assets
(which includes our short-term and fixed maturity investments classified as
trading and AFS, 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, collectively our "Fixed
Income" assets) and other investments ("Other Investments") (which includes
equities, the remainder of funds held-directly managed and equity method
investments) are as follows:
Three Months Ended
2022 2021
Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 94 $ 22 $ 116 $ 81 $ 12 $ 93
Net realized (losses) gains (23) (13) (36) 6 - 6
Net unrealized losses (395) (151) (546) (93) (187) (280)
Losses from equity method
investments - (20) (20) - (14) (14)
TIR ($) $ (324) $ (162) $ (486) $ (6) $ (189) $ (195)
Annualized TIR % (8.6) % (12.6) % (9.7) % (0.1) % (13.9) % (3.6) %
Annualized Adjusted TIR %* 2.3 % (12.6) % (1.3) % 2.0 % (13.9) % (2.0) %
Nine Months Ended
2022 2021
Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 239 $ 63 $ 302 $ 190 $ 41 $
231
Net realized (losses) gains (88) (23) (111) (1) 2 1 Net unrealized (losses) gains (1,073) (445) (1,518) (182) 292 110 Earnings from equity method investments - 12 12 - 101 101 TIR ($)$ (922) $ (393)$ (1,315) $ 7 $ 436$ 443 Annualized TIR % (8.2) % (10.0) % (8.7) % 0.1 % 9.9 % 2.8 % Annualized Adjusted TIR %* 2.0 % (10.0) % (1.0) % 1.7 % 9.9 %
4.1 %
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Net Investment Income
The below charts are in millions of
[[Image Removed: esgr-20220930_g6.jpg]] [[Image Removed: esgr-20220930_g7.jpg]]
Three and Nine Months Ended
income increased primarily due to:
•an increase in our average aggregate fixed income assets of
•an increase in our annualized book yield by 59 and 24 basis points, respectively, due to a combination of investment of new premium and reinvestment of fixed maturities at higher yields and the impact of rising interest rates on the$2.7 billion of our fixed maturity investments that are subject to floating interest rates. Our floating rate investments generated increased net investment income of$16 million and$39 million , respectively, which equates to an increase of 257 basis points and 165 basis points, respectively, on those investments in comparison to the prior period.
Net Realized and Unrealized (Losses) Gains
The below charts are in millions of
[[Image Removed: esgr-20220930_g8.jpg]][[Image Removed: esgr-20220930_g9.jpg]]
Three Months Ended
losses increased by
•an increase in net realized and unrealized losses on fixed income securities of$331 million , primarily driven by rising interest rates acrossU.S. ,U.K. and European markets, in addition to widening credit spreads in the current period; partially offset by •a decrease in net realized and unrealized losses on other investments, including equities, of$23 million . Net losses for the three months endedSeptember 30, 2022 were primarily driven by losses from our public equities, private equity funds and hedge funds, largely as a result of global equity market declines and the widening of high yield credit spreads. Net losses for the three months endedSeptember 30, 2021 were driven by net unrealized losses in theInRe Fund , principally a result of volatility in Chinese and other global equity markets.Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Nine Months Ended September 30, 2022 versus 2021: The negative variance of $1.7
billion when comparing net realized and unrealized losses to net realized and
unrealized gains was the result of:
•an increase in net realized and unrealized losses on fixed income securities of
$978 million , primarily driven by rising interest rates across U.S. , U.K. and
European markets, in addition to widening credit spreads in the current period;
and
•net realized and unrealized losses on other investments, including equities, of
$468 million for the nine months ended September 30, 2022 , compared to net gains
of $294 million for the comparative period. The unfavorable movement of $762
million was primarily driven by:
•Losses from our public equities, fixed income funds, CLO equities and hedge
funds for the nine months ended September 30, 2022 , largely as a result of
global equity market declines and the widening of high yield credit spreads; in
comparison to
•Net realized and unrealized gains for the nine months ended September 30, 2021 ,
which were led by gains in private equity funds, fixed income funds, private
debt funds, equity and equity funds, CLO equities, hedge funds and real estate
funds, principally driven by a rally in risk assets and global equity markets as
economies continued to re-open following the shutdowns related to the COVID-19
pandemic.
Earnings (losses) from equity method investments
The below charts are in millions of
[[Image Removed: esgr-20220930_g10.jpg]]
[[Image Removed: esgr-20220930_g11.jpg]]
Nine Months Ended September 30, 2022 versus 2021: Earnings from equity method
investments decreased, primarily due to our acquisition of the controlling
interest in Enhanzed Re, which resulted in us consolidating Enhanzed Re
effective September 1, 2021 . Prior to that date, the results of Enhanzed Re were
recorded in earnings from equity method investments. The consolidated net loss
from Enhanzed Re was $231 million for the nine months ended September 30, 2022
driven by unrealized investment losses.
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Investable Assets
The below charts are in billions of
[[Image Removed: esgr-20220930_g12.jpg]] [[Image Removed: esgr-20220930_g13.jpg]] •Investable assets decreased by 11.0% fromDecember 31, 2021 toSeptember 30, 2022 , primarily due to a decline in the carrying value of our fixed income securities and other investments, including equities, and due to assets used to support net paid losses, partially offset by an increase in funds held by reinsured companies as a result of theAspen transaction. •Adjusted investable assets* decreased by 1.8% fromDecember 31, 2021 toSeptember 30, 2022 , as a result of a decline in the carrying value of our other investments, including equities, and the impact of net paid losses, partially offset by an increase in funds held by reinsured companies as a result of theAspen transaction. •Cash and cash equivalents decreased by$735 million fromDecember 31, 2021 toSeptember 30, 2022 , primarily as a result of the redeployment of a portion of theInRe Fund redemptions to other investments, including equities.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measures.
Duration and average credit rating on fixed income securities and cash and cash
equivalents
The fair value, duration and average credit rating of investments by segment is
as follows:
September 30, 2022 December 31, 2021
Fair Value ($) Duration
Average Credit Fair Value ($)
Duration Average Credit
Segment (1) (in years) (2) Rating (3) (1) (in years) (2) Rating (3)
(in millions of (in millions of
Investments U.S. dollars) U.S. dollars)
Run-off $ 9,421 4.03 A+ $ 12,680 4.54 A+
Assumed Life 1,074 9.21 A- 1,454 14.62 A-
Total - Investments 10,495 4.57 A+ 14,134 5.69 A+ Legacy Underwriting 172 2.30 AA 212 2.37 AA- Total$ 10,667 4.54 A+$ 14,346 5.72 A+
(1) The fair value of our fixed income securities and cash and cash equivalents
by segment does not include the carrying value of cash and cash equivalents
within our funds held-directly managed portfolios.
(2) The duration calculation includes cash and cash equivalents, short-term
investments and fixed maturity securities, as well as the fixed maturity
securities and cash and cash equivalents within our funds held-directly managed
portfolios.
(3) The average credit ratings calculation includes cash and cash equivalents,
short-term investments, fixed maturity securities and the fixed maturity
securities within our funds held - directly managed portfolios.
The overall decrease in the balance of our fixed income securities and cash and cash equivalents of$3.7 billion for the nine months endedSeptember 30, 2022 was driven by the redeployment of a portion of theInRe Fund redemptions from cash and cash equivalents to other investments, including equities, the recognition of net unrealized losses on our fixed income securities as described above and the impact of net paid losses.
As of both
and cash and cash equivalents had an average credit quality rating of A+.
As ofSeptember 30, 2022 andDecember 31, 2021 , our fixed income securities that were non-investment grade (i.e. rated lower than BBB- and non-rated securities) comprised 6.7% and 5.6% of our total fixed income securities portfolio, respectively. The increase in non-investment grade fixed income securities was driven by the redeployment of a portion of theInRe Fund redemptions to higher-yielding fixed income securities in the period.Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
General and Administrative Expenses for the For the Three and Nine Months Ended
The below charts are in millions of
[[Image Removed: esgr-20220930_g14.jpg]]
Three Months EndedSeptember 30, 2022 versus 2021: The$26 million decrease in general and administrative expenses was primarily a result of reductions in salaries and benefits expenses, driven by a$20 million reduction to long-term incentive plan costs as a result of reducing performance share unit ("PSU") award values based on projected results.
[[Image Removed: esgr-20220930_g15.jpg]]
Nine Months EndedSeptember 30, 2022 versus 2021: The$34 million decrease in general and administrative expenses was primarily driven by reductions in salaries and benefits expenses, including a$20 million reduction to long-term incentive plan costs as a result of reducing PSU award values based on projected results, and further impacted by reduced head count. In addition, we incurred reductions in IT costs as a result of reduced project activity.
This was partially offset by a
accrued short term incentives.
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Item 2 | Management's Discussion and Analysis | New Business
New Business
We define new business as material transactions, which generally take the form
of reinsurance or direct business transfers, or business acquisitions.
When we acquire new business through reinsurance or direct business transfers, the liabilities we assume typically exceed the fair value of the assets we receive. This is generally due to the future earnings expected on the assets, as well as negotiations if we believe the liabilities could potentially be reduced in the future through successful claims management. The difference between the liabilities assumed and the assets acquired is recorded as a DCA or deferred 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 DCA or deferred gain.
The table below sets forth a summary of new business that we have completed
between
Total Assets Total Assets from Total Liabilities Remaining Limit upon
Transaction Assumed DCA (1) Transactions from Transactions Type of Transaction Acquisition Line of Business Jurisdiction
(in millions of U.S. dollars)
Property, liability and
Aspen (2) $ 1,881 $ 28 $ 1,909 $ 1,909 LPT 403 specialty lines U.S. , U.K. and Europe
General casualty,
financial and property
Probitas 60 1 61 61 LPT(3) No limit lines U.K. and international
Total 2022 $ 1,941 $ 29 $ 1,970 $ 1,970
(1) Where the estimated ultimate losses payable exceed the premium consideration
received at the inception of the agreement, a DCA is recorded.
(2) We agreed to assume$3.1 billion of net loss reserves, subject to a limit of$3.6 billion . Pursuant to terms of the contract, the amount of net loss reserves assumed, in addition to the premium consideration provided in the LPT agreement, were adjusted for the original ADC cash premium of$770 million as well as claims paid betweenOctober 1, 2021 andMay 20, 2022 and other contractual obligations totaling$432 million .
(3) The LPT will convert into a RITC transaction as of
to regulatory approval.
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
Non-GAAP Financial Measures In addition to our key financial measures presented in accordance with GAAP, we present other non-GAAP financial measures that we use to manage our business, compare our performance against prior periods and against our peers, and as performance measures in our incentive compensation program. These non-GAAP financial measures provide an additional view of our operational performance over the long-term and provide the opportunity to analyze our results in a way that is more aligned with the manner in which our management measures our underlying performance. The presentation of these non-GAAP financial measures, which may be defined and calculated differently by other companies, is used to enhance the understanding of certain aspects of our financial performance. It is not meant to be considered in isolation, superior to, or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. Some of the adjustments reflected in our non-GAAP measures are recurring items, such as the exclusion of adjustments to net realized and unrealized (gains)/losses on fixed maturity investments recognized in our income statement, the fair value of certain of our loss reserve liabilities for which we have elected the fair value option, and the amortization of fair value adjustments. Management makes these adjustments in assessing our performance so that the changes in fair value due to interest rate movements, which are applied to some but not all of our assets and liabilities as a result of preexisting accounting elections, do not impair comparability across reporting periods.
It is important for the readers of our periodic filings to understand that these
items will recur from period to period.
However, we exclude these items for the purpose of presenting a comparable view across reporting periods of the impact of our underlying claims management and investment without the effect of interest rate fluctuations on assets that we anticipate to hold to maturity and non-cash changes to the fair value of our reserves. Similarly, our non-GAAP measures reflect the exclusion of certain items that we deem to be nonrecurring, unusual or infrequent when the nature of the charge or gain is such that it is not reasonably likely that such item may recur within two years, nor was there a similar charge or gain in the preceding two years. This includes adjustments related to bargain purchase gains on acquisitions of businesses, net gains or losses on sales of subsidiaries, net assets of held for sale or disposed subsidiaries classified as discontinued operations and other items that we separately disclose.
We have presented the results and GAAP reconciliations for these measures
further below. The following tables present more information on each non-GAAP
measure.
Purpose of Non-GAAP Measure over GAAP
Non-GAAP Measure Definition
Measure
Adjusted book value Total Enstar ordinary shareholders' equity
Increases the number of ordinary shares to per ordinary share
reflect the exercise of equity awards
Divided by
granted but not yet vested as, over the
long term, this presents both management
Number of ordinary shares outstanding,
and investors with a more economically
adjusted for:
accurate measure of the realizable value of
-the ultimate effect of any dilutive
shareholder returns by factoring in the
securities on the number of ordinary
impact of share dilution.
shares outstanding
We use this non-GAAP measure in our
incentive compensation program.
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
Adjusted return on Adjusted operating income (loss) Calculating the operating income (loss) as a equity (%) attributable to Enstar ordinary
percentage of our adjusted opening Enstar
shareholders divided by adjusted
ordinary shareholders' equity provides a more
opening Enstar ordinary shareholder's
consistent measure of the performance of our
equity
business by enabling comparison between the
financial periods presented.
We
eliminate the impact of net realized and
unrealized (gains) losses on fixed maturity
investments and funds-held directly managed
and
the change in fair value of insurance
contracts for which we have elected the fair
value option, as:
Adjusted operating Net earnings (loss) attributable to •we typically hold most of our fixed maturity
income (loss) Enstar ordinary shareholders, adjusted investments until the earlier of maturity or
attributable to for: the time that they are used to fund any
Enstar ordinary -net realized and unrealized (gains) settlement of related liabilities which are
shareholders losses on fixed maturity investments generally recorded at cost; and
(numerator) and funds held-directly managed
•removing the fair value option improves
-change in fair value of insurance
comparability since there are limited
contracts for which we have elected
acquisition years for which we elected the
the fair value option (1)
fair value option.
-amortization of fair value
adjustments
Therefore, we believe that excluding their
-net gain/loss on purchase and sales
impact on our earnings improves comparability
of subsidiaries (if any) of
our core operational performance across
-net earnings from discontinued
periods.
operations (if any)
-tax effects of adjustments We
include the amortization of fair value
-adjustments attributable to
adjustments as a non-GAAP adjustment to the
noncontrolling interests
adjusted operating income (loss) attributable
to
Enstar ordinary shareholders as it is a
non-cash charge that is not reflective of the
impact of our claims management strategies on
Adjusted opening Opening Enstar ordinary shareholders' our loss portfolios.
Enstar ordinary equity, less:
shareholders' equity -net unrealized gains (losses) on We eliminate the net gain (loss) on the
(denominator) fixed maturity investments and funds
purchase and sales of subsidiaries and net
held-directly managed,
earnings from discontinued operations, as
-fair value of insurance contracts for
these items are not indicative of our ongoing
which we have elected the fair value
operations.
option (1),
-fair value adjustments, and We
use this non-GAAP measure in our incentive
-net assets of held for sale or compensation program.
disposed subsidiaries classified as
discontinued operations (if any)
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
Adjusted total Adjusted total investment return (dollars)
Provides a key measure of the return generated on
investment return recognized in earnings for the applicable
the capital held in the business and is (%) period divided by period average adjusted
reflective of our investment strategy.
total investable assets.
Provides a consistent measure of investment
returns as a percentage of all assets generating
investment returns.
Adjusted total Total investment return (dollars), adjusted
investment return for:
We adjust our investment returns to eliminate the
($) (numerator)
-net realized and unrealized (gains) losses
impact of the change in fair value of fixed
on fixed maturity investments and funds
maturity securities (both credit spreads and
held-directly managed interest rates), as we typically hold most of
Adjusted average Total average investable assets, adjusted these investments until the earlier of maturity
aggregate total for: or used to fund any settlement of related
investable assets -net unrealized (gains) losses on fixed
liabilities which are generally recorded at cost.
(denominator)
maturities, AFS investments included within
AOCI
-net unrealized (gains) losses on fixed
maturities, trading instruments
Adjusted run-off Adjusted PPD divided by average adjusted Calculating the RLE as a percentage of our
liability earnings net loss reserves adjusted average net loss reserves provides a
(%)
more meaningful and comparable measurement of the
impact of our claims management strategies on our
loss portfolios across acquisition years and also
to our overall financial periods.
We use this measure to evaluate the impact of our
claims management strategies because it provides
visibility into our ability to settle our claims
obligations for amounts less than our initial
Adjusted prior Prior period net incurred losses and LAE, estimate at the point of acquiring the
period development adjusted to:
obligations.
(numerator) Remove:
-Legacy Underwriting and Assumed Life
In order to provide a complete and consistent
operations
picture of our claims management performance, we
-the reduction/(increase) in provisions for
combine:
unallocated LAE (ULAE)
•the reduction (increase) in estimates of prior
-amortization of fair value adjustments,
period net ultimate losses relating to our
-change in fair value of insurance
Run-off segment; with
contracts for which we have elected the
•the amortization of deferred charge assets (as
fair value option (1),
the amortization will increase or decrease as a
and
result of the periodic development in accordance
Add:
with our accounting policies).
-the reduction/(increase) in estimates of
our defendant A&E ultimate net liabilities.
Both adjustments are included in net incurred
losses and LAE.
We also include our performance in managing
claims on our defendant A&E liabilities, that do
not form part of loss reserves.
The remaining components of periodic recurring
net incurred losses and LAE and net loss reserves
are not considered key components of our claims
management performance for the following
reasons:
•The results of our Legacy Underwriting segment
have been economically transferred to a third
party primarily through use of reinsurance and a
Capacity Lease Agreement(2); as such, the results
are not a relevant contribution to Adjusted RLE,
Adjusted net loss Net losses and LAE, adjusted to: which is designed to analyze the impact of our
reserves Remove: claims management strategies;
(denominator) -Legacy Underwriting and Assumed Life net
•The results of our Assumed Life segment relate
loss reserves
only to our exposure to active property
-current period net loss reserves
catastrophe business; as this business is not in
-the net ULAE provision
run-off, the results are not a relevant
-net fair value adjustments associated with
contribution to Adjusted RLE;
the acquisition of companies,
•The change in fair value of insurance contracts
-the fair value adjustments for contracts
for which we have elected the fair value
for which we have elected the fair value
option(1) has been removed to support
option (1) and
comparability between the two acquisition years
Add:
for which we elected the fair value option in
-net nominal defendant asbestos and
reserves assumed and the acquisition years for
environmental exposures.
which we did not make this election
(specifically, this election was only made in the
2017 and 2018 acquisition years and the election
of such option is irrevocable);
•The reduction/(increase) in provisions for ULAE
are not considered directly related to the
reserves and their exclusion provides alignment
with our insurance contract disclosures, which is
a key measure of our comparability between the
acquisition years over time; and
•The amortization of fair value adjustments are
non-cash charges that obscure our trends on a
consistent basis.
We use this measure to assess the performance of
our claim strategies and part of the performance
assessment of our past acquisitions.
(1) Comprises the discount rate and risk margin components.
(2) As described in Note 5 to our consolidated financial statements in our
Annual Report on Form 10-K for the year ended
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
Reconciliation of GAAP to Non-GAAP Measures
The table below presents a reconciliation of BVPS to Adjusted BVPS*:
September 30, 2022 December 31, 2021
Per Share Per Share
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 $ 3,550 17,018,571 $ 208.60 $ 5,586 17,657,944 $
316.34
Non-GAAP adjustments:
Share-based compensation plans 193,951 315,205 Adjusted book value per ordinary share*$ 3,550 17,212,522$ 206.25 $ 5,586 17,973,149$ 310.80 (1) Equity comprises Enstar ordinary shareholders' equity, which is calculated as Enstar shareholders' equity less preferred shares ($510 million ) prior to any non-GAAP adjustments. The tables below present a reconciliation of Annualized ROE to Annualized Adjusted ROE*: Three Months Ended September 30, 2022 September 30, 2021 Net (loss) Opening Annualized Net (loss) Opening Annualized (Adj) earnings (1) equity (1) (Adj) ROE (Adj) ROE earnings (1) equity (1) (Adj) ROE ROE (in millions of U.S. dollars) Net loss/Opening equity/ROE/Annualized ROE (1)$ (444) $ 4,183 (10.6) % (42.5) %$ (196) $ 6,677 (2.9) % (11.7) % Non-GAAP adjustments: Remove: Net realized and unrealized losses (gains) on fixed maturity investments and funds held - directly managed / Net unrealized losses (gains) on fixed maturity investments and funds held - directly managed (2) 418 1,245 87
(339)
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) (82) (239) (10)
(91)
Amortization of fair value adjustments / Fair value adjustments 4 (99) 5
(120)
Net gain on purchase and sales of subsidiaries - - (47)
-
Tax effects of adjustments (4) (2) - (5) - Adjustments attributable to noncontrolling interests (5) (42) - (8) - Adjusted operating loss/Adjusted opening equity/Adjusted ROE/Annualized adjusted ROE*$ (148) $ 5,090 (2.9) % (11.6) %$ (174) $ 6,127 (2.8) % (11.4) % (1) Net (loss) earnings comprises net (loss) earnings attributable to Enstar ordinary shareholders, prior to any non-GAAP adjustments. Opening equity comprises Enstar ordinary shareholders' equity, which is calculated as opening Enstar shareholders' equity less preferred shares ($510 million ), prior to any non-GAAP adjustments.
(2) Represents the net realized and unrealized losses (gains) related to fixed
maturity securities. Our fixed maturity securities are held directly on our
balance sheet and also within the "Funds held - directly managed" balance.
(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 interests associated with the specific
subsidiaries to which the adjustments relate.
*Non-GAAP measure.
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
Nine Months Ended
September 30, 2022 September 30, 2021
Net (loss) Opening Annualized Net (loss) Opening Annualized (Adj)
earnings (1) equity (1) (Adj) ROE (Adj) ROE earnings (1) equity (1) (Adj) ROE ROE
(in millions of U.S. dollars)
Net (loss) earnings/Opening
equity/ROE/Annualized ROE (1) $ (1,219) $ 5,586 (21.8) % (29.1) % $ 365 $ 6,164 5.9 % 7.9 %
Non-GAAP adjustments:
Net realized and unrealized losses on fixed maturity investments and funds held - directly managed / Net unrealized gains on fixed maturity investments and funds held - directly managed (2) 1,161 (89) 183
(560)
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) (228) (107) (68) (33) Amortization of fair value adjustments / Fair value adjustments 11 (106) 13
(128)
Net gain on purchase and sales of subsidiaries - - (62)
-
Tax effects of adjustments (4) (6) - (18) - Adjustments attributable to noncontrolling interests (5) (90) - 4 - Adjusted operating (loss) income/Adjusted opening equity/Adjusted ROE/Annualized adjusted ROE*$ (371) $ 5,284 (7.0) % (9.4) % $ 417$ 5,443 7.7 % 10.2 % (1) Net (loss) earnings comprises net (loss) earnings attributable to Enstar ordinary shareholders, prior to any non-GAAP adjustments. Opening equity comprises Enstar ordinary shareholders' equity, which is calculated as opening Enstar shareholders' equity less preferred shares ($510 million ), prior to any non-GAAP adjustments. (2) Represents the net realized and unrealized losses related to fixed maturity securities. Our fixed maturity securities are held directly on our balance sheet and also within the "Funds held - directly managed" balance.
(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 interests associated with the specific
subsidiaries to which the adjustments relate.
*Non-GAAP measure.
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
The tables below present a reconciliation of PPD to Adjusted PPD* and Annualized
RLE to Annualized Adjusted RLE*:
Three Months
Ended As of Three Months Ended
September 30, September 30, September 30,
2022 2022 June 30, 2022 2022 September 30, 2022
Net loss Net loss Average net
PPD reserves reserves loss reserves Annualized RLE %
(in millions of U.S. dollars)
PPD/net loss reserves/Annualized RLE $ 109 $ 11,564 $ 12,238 $ 11,901 3.7 %
Non-GAAP Adjustments:
Assumed Life - (139) (147) (143)
Legacy Underwriting (2) (136) (140) (138)
Net loss reserves - current period - (36) (26) (31)
Reduction in provisions for ULAE / Net ULAE
provisions (15) (480) (504) (492)
Amortization of fair value adjustments / Net
fair value adjustments associated with the
acquisition of companies 4 95 99 97
Changes in fair value - fair value option /
Net fair value adjustments for contracts for
which we have elected the fair value option
(1) (82) 305 239 272
Change in estimate of net ultimate
liabilities - defendant A&E / Net nominal
defendant A&E liabilities - 571 574 573
Adjusted PPD/Adjusted net loss
reserves/Annualized Adjusted RLE* $ 14 $ 11,744 $ 12,333 $ 12,039
0.5 %
(1) Comprises the discount rate and risk margin components.
*Non-GAAP measure.
Three Months
Ended As of Three Months Ended
September 30, September 30, September 30,
2021 2021 June 30, 2021 2021 September 30, 2021
Net loss Net loss Average net
PPD reserves reserves loss reserves Annualized RLE %
(in millions of U.S. dollars)
PPD/net loss reserves/Annualized RLE $ 69 $ 11,963 $ 10,835 $ 11,399 2.4 %
Non-GAAP Adjustments:
Assumed Life - (177) - (89)
Legacy Underwriting (2) (147) (156) (152)
Net loss reserves - current period - (130) (91) (111)
Reduction in provisions for ULAE / Net ULAE
provisions (14) (432) (410) (421)
Amortization of fair value adjustments / Net
fair value adjustments associated with the
acquisition of companies 5 109 120 115
Changes in fair value - fair value option /
Net fair value adjustments for contracts for
which we have elected the fair value option
(1) (10) 100 91 96
Change in estimate of net ultimate
liabilities - defendant A&E / Net nominal
defendant A&E liabilities 5 601 584 593
Adjusted PPD/Adjusted net loss
reserves/Annualized Adjusted RLE* $ 53 $ 11,887 $ 10,973 $ 11,430
1.9 %
(1) Comprises the discount rate and risk margin components.
*Non-GAAP measure.
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
Nine Months
Ended As of Nine Months Ended
September 30, September 30, December 31, September 30,
2022 2022 2021 2022 September 30, 2022
Net loss Net loss Average net
PPD reserves reserves loss reserves Annualized RLE %
(in millions of U.S. dollars)
PPD/net loss reserves/Annualized RLE $ 331 $ 11,564 $ 11,555 $ 11,560 3.8 %
Non-GAAP Adjustments:
Assumed Life (29) (139) (181) (160)
Legacy Underwriting 3 (136) (153) (145)
Net loss reserves - current period - (36) - (18)
Reduction in provisions for ULAE / Net ULAE
provisions (50) (480) (416) (448)
Amortization of fair value adjustments / Net
fair value adjustments associated with the
acquisition of companies 11 95 106 101
Changes in fair value - fair value option /
Net fair value adjustments for contracts for
which we have elected the fair value option
(1) (228) 305 107 206
Change in estimate of net ultimate
liabilities - defendant A&E / Net nominal
defendant A&E liabilities 4 571 574 572
Adjusted PPD/Adjusted net loss
reserves/Annualized Adjusted RLE* $ 42 $ 11,744 $ 11,592 $ 11,668
0.5 %
(1) Comprises the discount rate and risk margin components.
*Non-GAAP measure.
Nine Months
Ended As of Nine Months Ended
September 30, September 30, December 31, September 30,
2021 2021 2020 2021 September 30, 2021
Net loss Net loss Average net
PPD reserves reserves loss reserves Annualized RLE %
(in millions of U.S. dollars)
PPD/net loss reserves/Annualized RLE $ 189 $ 11,963 $ 8,544 $ 10,254 2.5 %
Non-GAAP Adjustments:
Assumed Life - (177) - (89)
Legacy Underwriting (4) (147) (955) (552)
Net loss reserves - current period - (130) - (65)
Reduction in provisions for ULAE / Net ULAE
provisions (46) (432) (334) (383)
Amortization of fair value adjustments / Net
fair value adjustments associated with the
acquisition of companies 13 109 128 119
Changes in fair value - fair value option /
Net fair value adjustments for contracts for
which we have elected the fair value option
(1) (68) 100 33 67
Change in estimate of net ultimate
liabilities - defendant A&E / Net nominal
defendant A&E liabilities 19 601 615 608
Adjusted PPD/Adjusted net loss
reserves/Annualized Adjusted RLE* $ 103 $ 11,887 $ 8,031 $ 9,959
1.4 %
(1) Comprises the discount rate and risk margin components.
*Non-GAAP measure.
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
The tables below present a reconciliation of our Annualized TIR to our
Annualized Adjusted TIR*:
Three Months Ended
September 30, 2022 September 30, 2021
Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 94 $ 22 $ 116 $ 81 $ 12 $ 93
Net realized (losses) gains (23) (13) (36) 6 -
6
Net unrealized (losses) gains (395) (151) (546) (93) (187)
(280)
(Losses) from equity method investments - (20) (20) - (14) (14) TIR ($)$ (324) $ (162)$ (486) $ (6) $ (189)$ (195) Non-GAAP adjustment: Net realized and unrealized losses (gains) on fixed maturity investments and funds held-directly managed 418 - 418 87 - 87 Adjusted TIR ($)* $ 94 $ (162)$ (68) $ 81 $ (189)$ (108) Total investments$ 9,356 $ 4,870$ 14,226 $ 12,453 $ 4,509$ 16,962 Cash and cash equivalents, including restricted cash and cash equivalents 1,357 - 1,357 2,035 -
2,035
Funds held by reinsured companies 3,727 - 3,727 2,410 -
2,410
Net variable interest entity assets - - - 178 270 448 Total investable assets$ 14,440 $ 4,870$ 19,310 $ 17,076 $ 4,779$ 21,855 Average aggregate invested assets, at fair value (1) 15,002 5,138 20,140 16,435 5,454 21,889 Annualized TIR % (2) (8.6) % (12.6) % (9.7) % (0.1) % (13.9) % (3.6) % Non-GAAP adjustment: Net unrealized losses (gains) on fixed maturities, AFS investments included within AOCI and net unrealized losses (gains) on fixed maturities, trading instruments 1,928 - 1,928 (326) - (326) Adjusted investable assets*$ 16,368 $ 4,870$ 21,238 $ 16,750 $ 4,779$ 21,529 Adjusted average aggregate invested assets, at fair value* (3)$ 16,590 $ 5,138
Annualized adjusted TIR %* (4)
2.3 % (12.6) % (1.3) % 2.0 % (13.9) %
(2.0) %
(1) This amount is a two period average of the total investable assets, as
presented above, and is comprised of amounts disclosed in our quarterly and
annual
(2) Annualized TIR % is calculated by dividing the annualized TIR ($) by average
aggregate invested assets, at fair value.
(3) This amount is a two period average of the adjusted investable assets*, as
presented above.
(4) Annualized adjusted TIR %* is calculated by dividing the annualized adjusted
TIR* ($) by adjusted average aggregate invested assets, at fair value*.
*Non-GAAP measure.
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
Nine Months Ended
September 30, 2022 September 30, 2021
Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 239 $ 63 $ 302 $ 190 $ 41 $ 231
Net realized (losses) gains (88) (23) (111) (1) 2
1
Net unrealized (losses) gains (1,073) (445) (1,518) (182) 292
110
Earnings from equity method investments - 12 12 - 101 101 TIR ($)$ (922) $ (393)$ (1,315) $ 7 $ 436$ 443 Non-GAAP adjustment: Net realized and unrealized losses on fixed maturity investments and funds held-directly managed 1,161 - 1,161 183 - 183 Adjusted TIR ($)*$ 239 $ (393)$ (154) $ 190 $ 436$ 626 Total investments$ 9,356 $ 4,870$ 14,226 $ 12,453 $ 4,509$ 16,962 Cash and cash equivalents, including restricted cash and cash equivalents 1,357 - 1,357 2,035 -
2,035
Funds held by reinsured companies 3,727 - 3,727 2,410 -
2,410
Net variable interest entity assets - - - 178 270 448 Total investable assets$ 14,440 $ 4,870$ 19,310 $ 17,076 $ 4,779$ 21,855 Average aggregate invested assets, at fair value (1) 14,960 5,232 20,192 14,887 5,850 20,737 Annualized TIR % (2) (8.2) % (10.0) % (8.7) % 0.1 % 9.9 % 2.8 % Non-GAAP adjustment: Net unrealized losses (gains) on fixed maturities, AFS investments included within AOCI and net unrealized losses (gains) on fixed maturities, trading instruments 1,928 - 1,928 (326) - (326) Adjusted investable assets*$ 16,368 $ 4,870$ 21,238 $ 16,750 $ 4,779$ 21,529 Adjusted average aggregate invested assets, at fair value* (3)$ 15,861 $ 5,232
Annualized adjusted TIR %* (4)
2.0 % (10.0) % (1.0) % 1.7 % 9.9 %
4.1 %
(1) This amount is a four period average of the total investable assets, as
presented above, and is comprised of amounts disclosed in our quarterly and
annual
(2) Annualized TIR % is calculated by dividing the annualized TIR ($) by average
aggregate invested assets, at fair value.
(3) This amount is a four period average of the adjusted investable assets*, as
presented above.
(4) Annualized adjusted TIR %* is calculated by dividing the annualized adjusted
TIR* ($) by adjusted average aggregate invested assets, at fair value*.
*Non-GAAP measure.
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Item 2 | Management's 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 tables provide the calculation of our Annualized TIR by segment:
Three Months Ended
September 30, 2022 September 30, 2021
Investments Legacy Underwriting Total Investments Legacy Underwriting Total
(in millions of U.S. dollars)
Net investment income: Fixed income securities$ 94 $ 2$ 96 $ 70 $ 1$ 71 Cash and restricted cash 2 - 2 (1) - (1) Other investments, including equities 22 - 22 12 - 12 Less: Investment expenses (4) - (4) 11 - 11 Net investment income$ 114 $ 2$ 116 $ 92 $ 1$ 93 Net realized losses: Fixed income securities$ (23) $ -$ (23) $ 5 $ 1$ 6 Other investments, including equities (13) - (13) - - - Net realized losses$ (36) $ -$ (36) $ 5 $ 1$ 6 Net unrealized losses: Fixed income securities, trading (391) (4) (395) (91) (2) (93) Other investments, including equities (151) - (151) (187) - (187) Net unrealized losses$ (542) $ (4)$ (546) $ (278) $ (2)$ (280) Earnings (losses) from equity method investments (20) - (20) (14) - (14) TIR ($)$ (484) $ (2)$ (486) $ (195) $ -$ (195) Fixed maturity and short-term investments, trading and AFS and funds held - directly managed$ 9,155 $ 155$ 9,310 $ 12,045 $ 188$ 12,233 Other assets included within funds held - directly managed 46 - 46 220 - 220 Equities 1,199 - 1,199 1,952 - 1,952 Other investments 3,191 12 3,203 2,038 14 2,052 Equity method investments 468 - 468 505 - 505 Total investments$ 14,059 $ 167$ 14,226 $ 16,760 $ 202$ 16,962 Cash and cash equivalents, including restricted cash and cash equivalents 1,340 17 1,357 2,005 30 2,035 Funds held by reinsured companies 3,704 23 3,727 2,373 37 2,410 Net variable interest entity assets - - - 448 - 448 Total investable assets$ 19,103 $ 207$ 19,310 $ 21,586 $ 269$ 21,855 Average aggregate invested assets, at fair value (1)$ 19,931 $ 209$ 20,140 $ 21,642 $ 247$ 21,889 Annualized TIR % (2) (9.7) % (3.8) % (9.7) % (3.6) % - % (3.6) % Annualized income from fixed income assets (3) 384 8 392 276 4 280 Average aggregate fixed income assets, at cost (3)(4) 16,666 210 16,876 15,943 231 16,174 Annualized Investment book yield (5) 2.30 % 3.81 % 2.32 % 1.73 % 1.73 % 1.73 %
(1) This amount is a two period average of the total investable assets, as
presented above, and is comprised of amounts disclosed in our quarterly and
annual
(2) Annualized total investment return % is calculated by dividing the
annualized 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 a two period average of the amounts disclosed in our
quarterly and annual
(5) Annualized investment book yield % is calculated by dividing the annualized
income from fixed income assets by average aggregate fixed income assets, at
cost.
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Item 2 | Management's Discussion and Analysis | Other Financial Measures
Nine Months Ended
September 30, 2022 September 30, 2021
Investments Legacy Underwriting Total Investments Legacy Underwriting Total
(in millions of U.S. dollars)
Net investment income:
Fixed income securities $ 247 $ 7 $ 254 $ 208 $ 2 $ 210
Cash and restricted cash 3 1 4 (1) - (1)
Other investments, including equities 63 - 63 41 - 41
Less: Investment expenses (19) - (19) (19) - (19)
Net investment income $ 294 $ 8 $ 302 $ 229 $ 2 $ 231
Net realized losses:
Fixed income securities $ (88) $ - $ (88) $ (1) $ - $ (1)
Other investments, including equities (23) - (23) 2 - 2
Net realized losses $ (111) $ - $ (111) $ 1 $ - $ 1
Net unrealized losses:
Fixed income securities, trading (1,061) (12) (1,073) (180) (2) (182)
Other investments, including equities (445) - (445) 292 - 292
Net unrealized losses $ (1,506) $ (12) $ (1,518) $ 112 $ (2) $ 110
Earnings from equity method investments 12 - 12 101 - 101
TIR ($) $ (1,311) $ (4) $ (1,315) $ 443 $ - $ 443
Fixed maturity and short-term
investments, trading and AFS and funds
held - directly managed $ 9,155 $ 155 $ 9,310 $ 12,045 $ 188 $ 12,233
Other assets included within funds held -
directly managed 46 - 46 220 - 220
Equities 1,199 - 1,199 1,952 - 1,952
Other investments 3,191 12 3,203 2,038 14 2,052
Equity method investments 468 - 468 505 - 505
Total investments $ 14,059 $ 167 $ 14,226 $ 16,760 $ 202 $ 16,962
Cash and cash equivalents, including
restricted cash and cash equivalents 1,340 17 1,357 2,005 30 2,035
Funds held by reinsured companies 3,704 23 3,727 2,373 37 2,410
Net variable interest entity assets - - - 448 - 448
Total investable assets $ 19,103 $ 207 $ 19,310 $ 21,586 $ 269 $ 21,855
Average aggregate invested assets, at
fair value (1) $ 19,972 $ 220 $ 20,192 $ 20,493 $ 244 $ 20,737
Annualized TIR % (2) (8.8) % (2.4) % (8.7) % 2.9 % - % 2.8 %
Annualized income from fixed income
assets (3) 333 11 344 276 3 279
Average aggregate fixed income assets, at
cost (3)(4) 15,758 215 15,973 14,324 228 14,552
Annualized Investment book yield (5) 2.11 % 5.12 % 2.15 % 1.92 % 1.31 % 1.91 %
(1) This amount is a four period average of the total investable assets, as
presented above, and is comprised of amounts disclosed in our quarterly and
annual
(2) Annualized total investment return % is calculated by dividing the
annualized 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 a four period average of the amounts disclosed in our
quarterly and annual
(5) Annualized investment book yield % is calculated by dividing the annualized
income from fixed income assets by average aggregate fixed income assets, at
cost.
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
Results of Operations by Segment - For the Three and Nine Months Ended
30, 2022
Our business is organized into four reportable segments: (i) Run-off; (ii) Assumed Life; (iii) Investments; and (iv) Legacy Underwriting. In addition, our corporate and other activities, which do not qualify as an operating segment, include income and expense items that are not directly attributable to our reportable segments.
The following is a discussion of our results of operations by segment.
Run-off Segment
The following is a discussion and analysis of the results of operations for our
Run-off segment.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 $ Change 2022 2021 $ Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ 1 $ 39 $ (38) $ 27 $ 154 $ (127)
Other income:
Reduction in estimates of net ultimate
defendant A&E liabilities - prior periods - 5 (5) 4 19 (15)
Reduction in estimated future defendant
A&E expenses - 1 (1) 1 4 (3)
All other income 2 6 (4) 14 25 (11)
Total other income 2 12 (10) 19 48 (29)
Total income 3 51 (48) 46 202 (156)
EXPENSES
Net incurred losses and LAE:
Current period 10 35 (25) 35 121 (86)
Prior periods:
Reduction in estimates of net ultimate
losses (46) (72) 26 (183) (139) (44)
Reduction in provisions for ULAE (15) (14) (1) (49) (45) (4)
Total prior periods (61) (86) 25 (232) (184) (48)
Total net incurred losses and LAE (51) (51) - (197) (63) (134)
Acquisition costs 1 8 (7) 18 37 (19)
General and administrative expenses 34 47 (13) 109 139 (30)
Total expenses (16) 4 (20) (70) 113 (183)
SEGMENT NET EARNINGS $ 19 $ 47 $ (28) $ 116 $ 89 $ 27
Overall Results
Three Months Ended
segment decreased by
•A
the reduction in estimates of net ultimate losses.
•Results for the three months ended
business as a result of favorable claim settlements, most notably in the 2018
and 2019 acquisition years, and
marine, aviation and transit line of business as a result of lower claim
activity, relating to the 2014, 2018 and 2019 acquisition years; partially
offset by
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Run-off Segment
•Adverse development in the 2018, 2020 and 2021 acquisition years on our general
casualty and motor lines of business of $21 million and $19 million ,
respectively, primarily due to worse than expected claims experience and adverse
development on claims.
•Results for the three months ended
favorable development on our workers' compensation, property, construction
defect and marine, aviation and transit lines as a result of better than
expected claims experience and favorable results from actuarial reviews.
•A reduction in other income of$10 million , primarily driven by lower favorable prior period development related to our defendant A&E liabilities in comparison to the prior period; and •Reductions in net premiums earned that were greater than the reductions in current period net incurred losses and LAE and acquisition costs, following our exit of ourStarStone International business beginning in 2020; partially offset by •A decrease in general and administrative expenses of$13 million , primarily driven by a continued decrease in salaries and benefits and other costs following our exit of our StarStone business beginning in 2020 and a reduction in IT costs as a result of reduced project activity.
Nine Months Ended
segment increased by
•A
the reduction in estimates of net ultimate losses.
•Results for the nine months endedSeptember 30, 2022 were driven by favorable development of$104 million on our workers' compensation line of business as a result of favorable claim settlements, most notably in the 2018 and 2021 acquisition years. We also had favorable development of$85 million on our professional indemnity/directors and officers line of business relating to the 2018 and 2021 acquisition years and favorable development of$38 million on our marine, aviation and transit lines of business relating to the 2014, 2018 and 2019 acquisition years as a result of lower claims activity; partially offset by •Adverse development on our general casualty and motor lines of business of$31 million and$20 million , respectively, most notably impacting the 2018, 2020 and 2021 acquisition years, as a result of worse than expected claims experience and adverse development on claims.
•Results for the nine months ended
favorable development on our workers' compensation, property and marine,
aviation and transit lines of business as a result of better than expected
claims experience and favorable results from actuarial reviews.
•A decrease in general and administrative expenses of$30 million , primarily driven by a continued decrease in salaries and benefits and other costs following our exit of our StarStone business beginning in 2020 and a reduction in IT costs as a result of reduced project activity; partially offset by
•A reduction in other income of
prior period development related to our defendant A&E liabilities; and
•Reductions in net premiums earned that were greater than the reductions in current period net incurred losses and LAE and acquisition costs, following our exit of ourStarStone International business beginning in 2020.Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Assumed Life Segment
Assumed Life Segment
On September 1, 2021 we purchased an additional 27.7% in Enhanzed Re, a company
that was previously accounted for as an equity method investment. We now own
75.1% of this company and have consolidated it as of September 1, 2021 .
The Assumed Life segment consists of life and property aggregate excess of loss
(catastrophe) business. The catastrophe business was not renewed for 2022.
During the third quarter of 2022, we entered into a Master Agreement with
Allianz through which we agreed to a series of transactions that will allow us
to unwind Enhanzed Re in an orderly manner. As the transactions relate to our
Assumed Life segment and our Enhanzed Re reinsurance business, we have:
•Commuted the catastrophe reinsurance business with Allianz, which was completed
in the third quarter; and
•Entered into an agreement to novate our reinsurance closed block of life
annuity policies to Monument Re, which is expected to close on or about
7, 2022
We report the Enhanzed Re component results of this segment on a one quarter lag and expect to record the results of the commutation of the catastrophe business in the fourth quarter of 2022 and the novation of the life business in the first quarter of 2023, respectively.
Given our planned rationalization of the Enhanzed Re reinsurance business, we
have renamed the segment from Enhanzed Re to Assumed Life effective this
quarterly reporting period. We may leverage this segment for any future
potential assumed life business transactions if and when they occur.
The following is a discussion and analysis of the results of operations for our
Assumed Life segment.
Three Months Ended Nine Months Ended
September 30, 2022
INCOME (in millions of U.S. dollars)
Net premiums earned $ 2 $ 17
Total income 2 17
EXPENSES
Net incurred losses and LAE:
Prior periods: Reduction in estimates of net ultimate losses - (29) Total prior periods - (29) Total net incurred losses and LAE - (29) Policyholder benefit expenses 7 25 General and administrative expenses 2 6 Total expenses 9 2 SEGMENT NET (LOSS) EARNINGS $ (7) $ 15 Overall Results
Three Months Ended
was primarily driven by policyholder benefit expenses.
Nine Months Ended
was primarily driven by:
•Favorable PPD of
catastrophe business; partially offset by
•Policyholder benefit expenses that were only partially offset by net premiums
earned on the life reinsurance business and in-force catastrophe reinsurance
treaties.
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Item 2 | Management's 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 $ Change 2022 2021 $ Change
(in millions of U.S. dollars)
INCOME
Net investment income:
Fixed income securities $ 94 $ 70 $ 24 $ 247 $ 208 $ 39
Cash and restricted cash 2 (1) 3 3 (1) 4
Other investments, including
equities 22 12 10 63 41 22
Less: Investment expenses (4) 11 (15) (19) (19) -
Total net investment income 114 92 22 294 229 65
Net realized (losses) gains:
Fixed income securities (23) 5 (28) (88) (1) (87)
Other investments, including
equities (13) - (13) (23) 2 (25)
Net realized (losses) gains: (36) 5 (41) (111) 1 (112)
Net unrealized (losses) gains:
Fixed income securities (391) (91) (300) (1,061) (180) (881)
Other investments, including
equities (151) (187) 36 (445) 292 (737)
Total net unrealized (losses)
gains: (542) (278) (264) (1,506) 112 (1,618)
Total income (464) (181) (283) (1,323) 342 (1,665)
EXPENSES
General and administrative
expenses 9 8 1 28 24 4
Total expenses 9 8 1 28 24 4
Earnings (losses) from equity
method investments (20) (14) (6) 12 101 (89)
SEGMENT NET (LOSS) EARNINGS $ (493) $ (203) $ (290) $ (1,339) $ 419 $ (1,758)
Overall Results
Three and Nine Months Ended September 30, 2022 versus 2021: Net loss from our
Investments segment was $493 million and $1.3 billion for the three and nine
months ended September 30, 2022 , respectively, compared to net losses of $203
million and net earnings of $419 million for the three and nine months ended
September 30, 2021 , respectively. The unfavorable movements of $290 million and
$1.8 billion , respectively, were primarily due to:
•An increase in net realized and unrealized losses on our fixed income
securities of
interest rates and widening credit spreads;
•Net realized and unrealized losses on our other investments, including equities, of$164 million and$468 million , respectively, in comparison to net losses of$187 million and net gains of$294 million , respectively, in the comparative periods, primarily driven by negative performance from our public equities, CLO equities and hedge funds as a result of significant volatility in global equity markets and widening high yield credit spreads; and •An$89 million decrease in earnings from equity method investments for the nine months endedSeptember 30, 2022 , largely due to our acquisition of the controlling interest in Enhanzed Re, effectiveSeptember 1, 2021 (consolidated net loss from Enhanzed Re was$231 million for the nine months endedSeptember 30, 2022 ). Prior to that date, the results of Enhanzed Re were recorded in earnings from equity method investments within the Investments segment; partially offset by:Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Investments Segment
•Increases in our net investment income of $22 million and $65 million ,
respectively, which is primarily due to an increase in our average aggregate
fixed income assets due to new business during the past year, in addition to the
investment of new premium and reinvestment of fixed maturities at higher yields
and the impact of rising interest rates on the $2.7 billion of our fixed
maturity investments that are subject to floating interest rates. Our floating
rate investments generated increased net investment income of $16 million and
$39 million , respectively, which equates to an increase of 257 and 165 basis
points, respectively, on those investments in comparison to the prior period.
Total investment losses on the fixed income securities that support our Enhanzed
Re life reinsurance business for the three and nine months ended September 30,
2022 were $141 million and $269 million , respectively.
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:
September 30, 2022
Run-off Assumed Life (1)
Credit Credit
Fair Value % Total Total % Duration (years) (2) Rating (2) Fair Value % Duration (years) (2) Rating (2)
(in millions of U.S. dollars, except percentages)
Fixed maturity and short-term
investments, trading and AFS
and funds held - directly
managed
U.S. government & agency $ 540 5.9 % 5.7 AAA $ - - % n/a n/a $ 540 5.9 %
U.K. government 95 1.0 % 8.7 AA- - - % n/a n/a 95 1.0 %
Other government 297 3.2 % 5.5 AA- 154 1.7 % 10.7 BBB+ 451 4.9 %
Corporate 4,797 52.5 % 5.4 BBB+ 214 2.3 % 7.0 BBB+ 5,011 54.8 %
Municipal 202 2.2 % 8.1 AA- - - % n/a n/a 202 2.2 %
Residential mortgage-backed 480 5.2 % 4.7 AA+ - - % n/a n/a 480 5.2 %
Commercial mortgage-backed 911 10.0 % 2.5 AA - - % n/a n/a 911 10.0 %
Asset-backed 759 8.3 % 0.5 A+ - - % n/a n/a 759 8.3 %
Structured products - - % n/a n/a 706 7.7 % 10.0 A 706 7.7 %
$ 8,081 88.3 % 4.7 A $ 1,074 11.7 % 9.5 A- $ 9,155 100.0 %
(1) Investments under the Assumed Life caption comprise those that support our
life reinsurance business.
(2) The duration and the average credit ratings calculation includes short-term
investments, fixed maturities and the fixed maturities within our funds
held-directly managed portfolios.
December 31, 2021
Run-off Assumed Life (1)
Fair Value % Duration (years) (2) Credit Rating (2) Fair Value % Duration (years) (2) Credit Rating (2) Total Total %
(in millions of U.S. dollars, except percentages)
Fixed maturity and
short-term investments,
trading and AFS and funds
held - directly managed
U.S. government & agency $ 737 6.1 % 6.4 AAA $ - - % n/a n/a $ 737 6.1 %
U.K. government 82 0.7 % 9.8 AA- - - % n/a n/a 82 0.7 %
Other government 387 3.2 % 6.8 AA 228 1.9 % 12.1 BBB 615 5.1 %
Corporate 6,532 54.1 % 6.4 A- 193 1.6 % 6.7 A- 6,725 55.7 %
Municipal 272 2.3 % 9.2 AA- - - % n/a n/a 272 2.3 %
Residential mortgage-backed 597 4.9 % 2.8 AA+ - - % n/a n/a 597 4.9 %
Commercial mortgage-backed 1,074 8.9 % 3.1 AA+ - - % n/a n/a 1,074 8.9 %
Asset-backed 937 7.8 % 0.3 AA- - - % n/a n/a 937 7.8 %
Structured products - - % n/a n/a 1,033 8.5 % 19.2 A- 1,033 8.5 %
Total $ 10,618 88.0 % 5.4 A 1,454 12.0 % 16.4 A- $ 12,072 100.0 %
Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Investments Segment
(1) Investments under the Assumed Life caption comprise those that support our
life reinsurance business.
(2) The duration and the average credit ratings calculation includes short-term
investments, fixed maturities and the fixed maturities within our funds
held-directly managed portfolios.
The overall decrease in the balance of our fixed income securities of$2.9 billion for the nine months endedSeptember 30, 2022 was primarily driven by the recognition of net unrealized losses on our fixed income securities and assets used to support net paid losses during the period. The change in the corporate average credit rating for the Run-off portfolio from A- as ofDecember 31, 2021 to BBB+ as ofSeptember 30, 2022 was driven by the redeployment of a portion of theInRe Fund redemptions to higher-yielding fixed income securities in the period.
Other investments, including equities
Refer to the below table for the composition of our other investments, including
equities:
September 30, 2022 December 31, 2021
(in millions of U.S. dollars)
Equities
Publicly traded equities $ 360 $ 281
Exchange-traded funds 475 1,342
Privately held equities 364 372
Total 1,199 1,995
Other investments
Hedge funds 476 291
Fixed income funds 583 559
Equity funds 3 5
Private equity funds 1,247 752
CLO equities 144 161
CLO equity funds 208 207
Private credit funds 345 275
Real estate debt fund 185 69
Total $ 3,191 $ 2,319
Our equities decreased by $796 million and other investments increased by $872
million from December 31, 2021 to September 30, 2022 , primarily due to the
redeployment from exchange-traded funds into various non-core asset strategies,
in line with our strategic asset allocation. The balances of both equities and
other investments were negatively impacted by the recognition of net unrealized
losses during the period.
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:
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, 2022 September 30, 2022 December 31, 2021 September 30, 2021
Earnings from equity method Earnings (losses) from Equity
Ownership % Carrying Value investments Ownership % Carrying Value Method Investments
(in millions of U.S. dollars)
Enhanzed Re - % $ - $ - $ - - % $ - $ (22)$ 82 Citco (1) 31.9 % 58 - 2 31.9 % 56 1 2 Monument Re (2) 20.0 % 174 (16) 15 20.0 % 194 2 19 Core Specialty 19.9 % 220 (4) (5) 24.7 % 225 5 (2) Other 27.0 % 16 - - 27.0 % 18 - - $ 468$ (20) $ 12 $ 493 $ (14)$ 101
(1) We own 31.9% of the common shares in
turn owns 15.4% of the convertible preferred shares, amounting to a 6.2%
interest in the total equity of
(2) We own 20.0% of the common shares in Monument Re as well as preferred shares
which have a fixed dividend yield and whose balance is included in the
Investment amount.
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Investments Segment
The carrying value of our equity method investments decreased from December 31,
2021 as a result of recognizing unfavorable cumulative translation adjustments
of $30 million due to the strengthening of the US dollar against the Euro, which
was primarily driven by our investment in Monument Re whose reporting currency
is the Euro. This was partially offset by the recognition of $12 million in
earnings from equity method investments for the nine months ended September 30,
2022 .
Overall, the earnings from equity method investments decreased for the nine
months ended September 30, 2022 in comparison to the comparative period largely
due to our acquisition of the controlling interest in Enhanzed Re, effective
September 1, 2021 (consolidated net loss from Enhanzed Re was $231 million for
the nine months ended September 30, 2022 ).
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Item 2 | Management's 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 $ Change 2022 2021 $ Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ 1 $ 13 $ (12) $ 8 $ 50 $ (42)
Net investment income 2 1 1 8 2 6
Net realized losses - 1 (1) - - -
Net unrealized losses (4) (2) (2) (12) (2) (10)
Other income (expense) 1 (2) 3 4 (11) 15
Total income - 11 (11) 8 39 (31)
EXPENSES
Net incurred losses and LAE:
Current period 3 7 (4) 4 25 (21)
Prior periods (2) (2) - 2 (5) 7
Total net incurred losses and
LAE 1 5 (4) 6 20 (14)
Acquisition costs (1) 3 (4) 2 13 (11)
General and administrative
expenses - 3 (3) - 6 (6)
Total expenses - 11 (11) 8 39 (31)
SEGMENT NET (LOSS) EARNINGS $ - $ - $
- $ - $ - $ - Overall Results
Three and Nine Months Ended
The Legacy Underwriting segment results compriseSGL No.1 Limited's ("SGL No.1") 25% gross share of the 2020 and prior underwriting years ofAtrium Underwriting Group Limited's (collectively, "Atrium") syndicate 609 at Lloyd's, less the impact of reinsurance agreements withArden Reinsurance Company Ltd. ("Arden") and a Syndicate 609 Capacity Lease Agreement withAtrium 5 Limited . Consequently, as ofJanuary 1, 2021 ,SGL No.1 settles its share of the 2020 and prior underwriting years for the economic benefit of Atrium, and there is no net retention by Enstar.Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Corporate and other
Corporate and other
The following is a discussion and analysis of our results of operations for our
Corporate and other activities.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 $ Change 2022 2021 $ Change
INCOME (in millions of U.S. dollars)
Other income (expense):
Amortization of fair value
adjustments (1) $ (1) $ 1 $ (2) $ (6) $ (9) $ 3
All other (expense) income (6) - (6) 16 (1) 17
Total other (expense) income (7) 1 (8) 10 (10) 20
Net gain on sales of
subsidiaries - 47 (47) - 62 (62)
Total (expense) income (7) 48 (55) 10 52 (42)
EXPENSES
Net incurred losses and LAE -
prior periods:
Amortization of DCAs (2) 32 24 8 145 55 90
Amortization of fair value
adjustments 4 5 (1) 11 13 (2)
Changes in fair value - fair
value option (3) (82) (10) (72) (228) (68) (160)
Total net incurred losses and
LAE - prior periods (2) (46) 19 (65) (72) - (72)
General and administrative
expenses 22 35 (13) 92 100 (8)
Total expenses (24) 54 (78) 20 100 (80)
Interest expense (23) (18) (5) (71) (51) (20)
Net foreign exchange gains 17 2 15 27 9 18
Income tax (expense) benefit (8) (10) 2 (4) (13) 9
Net loss (earnings) attributable
to noncontrolling interests 43 1 42 74 (13) 87
Dividends on preferred shares (9) (9) - (27) (27) -
NET EARNINGS (LOSS) ATTRIBUTABLE
TO ENSTAR ORDINARY SHAREHOLDERS $ 37 $ (40) $ 77 $ (11) $ (143) $ 132
(1) Amortization of fair value adjustments relates to the acquisition of
and
(2) The three and nine months endedSeptember 30, 2022 included accelerated amortization of$19 million and$115 million , respectively, corresponding to increased favorable PPD on net ultimate liabilities recorded in our Run-off segment. The three and nine months endedSeptember 30, 2021 included accelerated amortization of$11 million and$22 million , respectively, corresponding to increased favorable PPD on net ultimate liabilities recorded in our Run-off segment.
(3) Comprises the discount rate and risk margin components.
Overall Results
Three Months EndedSeptember 30, 2022 versus 2021: Net earnings from our Corporate and other activities were$37 million for the three months endedSeptember 30, 2022 , compared to a net loss of$40 million for the three months endedSeptember 30, 2021 . The favorable movement of$77 million was primarily due to:
•Favorable PPD of
PPD of
million
•A$72 million favorable change in the fair value of liabilities relating to our assumed retroactive reinsurance agreements for which we have elected the fair value option due to increases in interest rates; partially offset by
•An
recent acquisition years.
•An increase in net losses attributable to noncontrolling interests of$42 million , as a result of net losses sustained in 2022 for those companies where there are noncontrolling interests;Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Corporate and other
•An increase in net foreign exchange gains of
of strengthening of the
•A decrease in general and administrative expenses of$13 million , primarily driven by a reduction in long-term incentive plan costs as a result of reducing the certain PSU award values based on projected performance; partially offset by •Absence of the prior year net gain on purchase and sales of subsidiaries of$47 million , driven by the gain recognized on the step acquisition of Enhanzed Re.
Nine Months Ended
and other activities decreased by
•The attribution of net losses to noncontrolling interests of$74 million in the current period in comparison to the attribution of net earnings of$13 million in the comparative quarter, as a result of net losses sustained in 2022 for those companies where there are noncontrolling interests;
•An increase in favorable PPD of
driven by:
•A$160 million favorable change in the fair value of liabilities relating to our assumed retroactive reinsurance agreements for which we have elected the fair value option due to increases in interest rates; partially offset by
•A
recent acquisition years.
•Other income of
expense of
million
•An increase in net foreign exchange gains of$18 million , primarily as a result of strengthening of theU.S. dollar against theU.K. pound and Euro; partially offset by •Absence of the prior year net gain on purchase and sales of subsidiaries of$62 million , primarily driven by the following two components, both of which were recognized in the comparative period: i) a$47 million gain recognized on the step acquisition of Enhanzed Re and ii) a net gain on sales of subsidiaries of$15 million ; and •An increase in interest expense of$20 million , primarily due to the issuance of the 2031 Senior Notes inAugust 2021 and the 2042 Junior Subordinated Notes inJanuary 2022 .Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Current Outlook
Current Outlook
Run-off Outlook
Transactions
In August 2022 , we executed an LPT agreement with a wholly owned subsidiary of
Argo Group International Holdings, Ltd. ("Argo") covering a number of its U.S.
casualty insurance portfolios, with a policy limit of $1.1 billion . The closing
of the transaction is subject to regulatory approval and other closing
conditions which we expect to be completed in the fourth quarter of 2022.
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. Should we execute additional transactions, our mix of
loss reserves by line of business, asset mix and both rate and timing of
earnings may be impacted in the medium term.
We expect we will invest a significant portion of premium on new transactions in
fixed maturity securities which will deliver book yields at the current elevated
rates.
We are also continuing to evaluate the feasibility of initiatives to optimize
our future return and capital position, including restructuring initiatives for
some of the older loss portfolios that we have carried for a number of years.
Seasonality
We complete most of our annual loss reserve studies in the fourth quarter of each year and, as a result, tend to record the largest movements, both favorable and adverse, to net incurred losses and LAE in this period. In the interim periods where a reserve study has not been completed, we perform quarterly reviews to ascertain whether changes to claims paid or case reserves have varied from our expectations developed during the last annual reserve review. In this event, we consider the timing and magnitude of the actual versus expected development, and we may record an interim adjustment to our recorded reserves if, and when, warranted.
Following the completion of annual loss reserve studies on approximately 20% of
our portfolios in the third quarter, we observed the following trends:
•Favorable development on our workers' compensation line of business, where our claims settlement experience continues to drive positive outcomes; partially offset by •Adverse development on our general casualty line of business, where we have observed additional claims settlements on larger claims, and our motor line of business, where we continue to experience higher-than expected development; and
•Increased claim cost severity on our construction defect line of business,
primarily attributable to inflationary pressures on labor and materials.
We expect our fourth quarter annual loss reserve studies to deliver results
consistent with previous years.
Enhanzed Re
Following the completion of a strategic review of Enhanzed Re, we took into consideration the existing strategic position of Enhanzed Re, current marketplace offerings and the ability of Enhanzed Re to take advantage of future opportunities, and concluded that the available options did not align with our long-term strategy. As such, we entered into the Master Agreement inAugust 2022 and commenced an orderly unwind of the reinsurance operations of the entity. In addition to the transactions completed to date, and as noted in Operational Highlights, we completed the commutation of the catastrophe reinsurance business with Allianz, and expect to complete our novation of the reinsurance of the closed block of life annuity policies to Monument Re, the impacts of these two transactions will be recorded in our fourth quarter 2022 and first quarter 2023 results respectively, in accordance with the one quarter reporting lag.Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Current Outlook
Investment Outlook
We expect global financial markets to remain volatile for the remainder of 2022
and into 2023 as a result of inflationary pressures, tightening of financial
conditions by global central banks, ongoing disruptions and decoupling of supply
chains, geopolitical conflicts and tensions.
To date, we have recognized significant unrealized losses on our fixed income
investments, a trend that may continue in the event of further interest rate
increases and credit spread widening.
As we generally aim to maintain fixed income securities that are shorter or of
equivalent duration to the timing of our estimated payments for losses and LAE,
we expect that unrealized losses, on securities we continue to hold, to be
recouped as our fixed maturity assets get closer to their maturity and the
prices pull to par. We may undertake tactical repositioning of our portfolio as
opportunities arise to achieve a better result than waiting for certain fixed
maturity securities to pull to par value.
Elevated interest rates can represent an opportunity for us in the medium to
long term, notably;
•We hold approximately 14% of our portfolio in individual fixed maturity securities that have floating interest rates which, should interest rates remain elevated, we expect to be accretive to future investment income book yields. In the nine months endedSeptember 30, 2022 , we have earned$106 million of net investment income from our floating rate investments which are generally indexed to LIBOR. •Higher interest rates also provide us with the opportunity to reinvest at higher yields as our securities mature or as we invest premium received from new business. Global equity markets are expected to remain turbulent in the remainder of 2022 and into 2023, and this, combined with our reporting lag on certain investments, will impact the valuation of our non-core risk investments. Anticipations of economic downturn will further negatively impact our non-core investments but may also impact expectations of future interest rates with the resulting impact to our fixed income securities. The carrying value of our equity method investments and the fair value of other strategic investments that operate in the property catastrophe market could be adversely impacted as a result of varying levels of exposure to Hurricane Ian, a Category 4 hurricane that caused widespread damage at the end ofSeptember 2022 . We do not have any significant direct exposure to this event. However, we remain committed to our strategic asset allocation investment strategy and expect our other investments, including equities, to provide higher risk adjusted returns and diversification benefits over the medium to long term. In addition, we continue to seek investment opportunities that have inflationary pass-through components, including investments in private credit, real estate, and infrastructure asset classes.
Inflation
We continue to monitor the inflationary impacts resulting from pandemic-related government stimulus, supply-demand imbalances, and labor force and supply chain disruptions, on our loss cost trends. Our Run-off net loss reserves primarily consist of general casualty, workers' compensation and asbestos lines of business which, as long tailed lines of business, have not, so far, been significantly impacted by ongoing inflationary pressures in comparison to other lines of business such as property and auto lines. The limited impact of inflation on our loss cost trends reflects a combination of the opportunity we have to re-price seasoned books of business and our claims management model that seeks to settle claims in an efficient and responsive manner to protect and mitigate the impact to us from adverse outcomes and social inflation. We continue to monitor claims in difficult legislative districts, seek to actively settle claims and monitor for reserving adequacy. Global economic policy responses to inflation have led to increases in interest rates, which, in the short term, have had a significant impact on our investments, in particular our fixed maturity securities. Any further rise in interest rates will have further negative impacts on our fixed income investments. We continue to monitor liquidity, capital and potential earnings impact of these changes but remain focused on medium to long term asset allocation decisions.
Inflation will also result in increased wage pressures underlying our general
and administrative expenses, as we remain focused on being a competitive
employer in our market.
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Item 2 | Management's Discussion and Analysis | Current Outlook
In August 2022 , the U.S. government signed the Inflation Reduction Act ("IRA")
into law, which includes the implementation of a new alternative minimum tax and
an excise tax on stock buybacks, among other provisions. While the provisions of
the IRA will have no impact to our third quarter and foreseeable results given
we do not meet the average annual adjusted income threshold and other relevant
requirements, we will continue to closely monitor and assess the potential
impact of the IRA as the regulations develop.
Russian Invasion of
The Russian invasion ofUkraine and the resulting impact on global commodity markets has increased commodity inflation rates, disrupted supply chains and generated significant insurance losses. In response, many countries have established comprehensive sanctions regimes and geopolitical tension betweenNATO andRussia has increased. To quantify our exposure, we have performed an analysis of, and continue to monitor, our direct investment and underwriting risks, our acquisition pipeline and the potential for operational disruption (including disruption via our third party service providers). We have concluded that we have no significant direct impacts from this event. We continue to monitor for, and respond to, all changes in the global sanctions regime, updating our procedures accordingly.Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's 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 ofSeptember 30, 2022 included ordinary shareholders' equity of$3.6 billion , preferred equity of$510 million , noncontrolling interests of$98 million , redeemable noncontrolling interests of$166 million , and debt obligations of$1.9 billion . Based on our current loss reserves4 and investment positions, we believe we are well capitalized.
The following table details our capital position:
September 30, 2022 December 31, 2021 $ Change
(in millions of U.S. dollars)
Ordinary shareholders' equity $ 3,550 $ 5,586 $ (2,036)
Series D and E Preferred Shares 510 510 -
Total Enstar shareholders' equity 4,060 6,096 (2,036)
Noncontrolling interests 98 230 (132)
Total shareholders' equity 4,158 6,326 (2,168)
Debt obligations 1,905 1,691 214
Redeemable noncontrolling interests 166 179 (13)
Total capitalization $ 6,229 $ 8,196 $ (1,967)
Total capitalization attributable to Enstar $ 5,965 $ 7,787 $ (1,822)
Debt to total capitalization 30.6 % 20.6 %
Debt and Series D and E Preferred Shares to
total capitalization 38.8 % 26.9 %
Debt to total capitalization attributable to
Enstar 31.9 % 21.7 %
Debt and Series D and E Preferred Shares to
total capitalization attributable to Enstar 40.5 % 28.3 %
For purposes of the financial covenants in our credit facilities, total debt
excludes hybrid capital (defined as our Subordinated Notes) not exceeding 15% of
total capital attributable to Enstar. As of September 30, 2022 , we were in
compliance with the financial covenants in our credit facilities.
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 amounts 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.
Share Repurchases and Dividends
We believe that the best investment is in our business, by funding future
transactions and meeting our financing obligations. We may choose to return
value to shareholders in the form of share repurchases or dividends. To date, we
have not declared any dividends on our ordinary shares. For details on our share
repurchase programs, refer to Note 11 to our unaudited condensed consolidated
financial statements. We may re-evaluate this strategy from time to time based
on overall market conditions and other factors.
4 Including gross loss reserves, future policyholder benefits and defendant A&E
liabilities.
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Item 2 | Management's Discussion and Analysis | Liquidity and Capital Resources
We have 16,000 Series D Preferred Shares with an aggregate liquidation value of$400 million and 4,400 Series E Preferred Shares with an aggregate liquidation value of$110 million . The dividends on both Series of Preferred Shares are non-cumulative and may be paid quarterly in arrears, only when, as and if declared.
Any payment of common or preferred dividends must be approved by our Board. Our
ability to pay ordinary and preferred dividends is subject to certain
restrictions.
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. We use cash to fund new acquisitions of companies. We also utilize cash for our operating expenses associated with being a public company and to pay dividends on our preferred shares and interest and principal on loans from subsidiaries and debt obligations, including loans under our credit facilities, our Senior Notes, our Junior Subordinated Notes and Enhanzed Re's 2031 Subordinated Notes (together with the Junior Subordinated Notes, the "Subordinated Notes"). Under the eligible capital rules of theBermuda Monetary Authority ("BMA"), the Senior Notes qualify as Tier 3 capital and the Preferred Shares and Subordinated Notes qualify as Tier 2 capital when considering theBermuda Solvency Capital Requirements ("BSCR"). We may, from time to time, raise capital from the issuance of equity, debt or other securities as we continuously evaluate our strategic opportunities. We filed an automatic shelf registration statement inAugust 2020 with theSEC to allow us to conduct future offerings of certain securities, if desired, including debt, equity and other securities. As we are a holding company and have no substantial operations of our own, our assets consist primarily of investments in subsidiaries and our loans and advances to subsidiaries. Dividends from our (re)insurance subsidiaries are restricted by (re)insurance laws and regulations, as described below. The ability of all of our subsidiaries to make distributions and transfers to us may also be restricted by, among other things, other applicable laws and regulations and the terms of our credit facilities and our subsidiaries' bank loans and other issued debt instruments.
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.
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
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Item 2 | Management's Discussion and Analysis | Liquidity and Capital Resources
pay to us, which in turn may limit our ability to pay dividends and make other
payments.
As of
requirement levels were in excess of the minimum levels required.
Our subsidiaries' ability to pay dividends and make other forms of distributions may also be limited by our repayment obligations under certain of our outstanding credit facility agreements and other debt instruments. Variability in ultimate loss payments and collateral amounts required may also result in increased liquidity requirements for our subsidiaries.
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 recoverables.
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 from cash and investment portfolios, collected premiums, collections from reinsurance debtors, 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 for the nine months endedSeptember 30, 2022 and 2021 was positive as our cash provided by sales and maturities of trading securities and cash received as a result of assuming new business exceeded cash used in the purchase of trading securities and net paid losses, with the net proceeds being used to purchase 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 (used in) provided by
operating, investing and financing activities:
Nine Months Ended September 30,
2022 2021 $ Change
(in millions of U.S. dollars)
Cash provided by (used in):
Operating activities $ 340 $ 3,858 $ (3,518)
Investing activities (1,064) (2,051) 987
Financing activities (31) (676) 645
Effect of exchange rate changes on cash 20 4 16
Net (decrease) increase in cash and cash equivalents (735) 1,135 (1,870)
Cash, cash equivalents and restricted cash, beginning of
period
2,092 1,373 719 Net change in cash of businesses held-for-sale - 223 (223)
Cash and cash equivalents and restricted cash, end of
period
$ 1,357
Reconciliation to Condensed Consolidated Balance Sheets:
Cash and Cash equivalents
$ 923$ 1,587 $ (664) Restricted cash and cash equivalents 434 448 (14)
Cash and restricted cash and cash equivalents of the
- 696 (696) Total cash, cash equivalents and restricted cash $ 1,357
Nine Months Ended
decreased by
compared to an increase of
30, 2021
Cash provided by operations of
30, 2022
(i) the cash inflows from net sales and maturities of trading securities of$1.6 billion ; andEnstar Group Limited | Third Quarter 2022 | Form 10-Q 53
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Item 2 | Management's Discussion and Analysis | Liquidity and Capital Resources
(ii) cash, restricted cash and cash equivalents from new business of
(iii) net paid losses of
Cash used in investing activities of
Cash used in financing activities of
dividends paid to our noncontrolling interests of
share dividends of
issuance of debt of
Cash provided by operations for the nine months ended
predominantly driven by:
(i) cash, restricted cash and cash equivalents from new business of
(ii) the cash inflows from net sales and maturities of trading securities of
(iii) net paid losses of
Cash used in investing activities for the nine months ended
primarily related to:
(i) net purchases of AFS securities of
(ii) the purchase and sales of subsidiaries, net of cash acquired and sold,
respectively, of
(iii) the impact of consolidating the opening cash and restricted cash balances
of the
Cash used in financing activities for the nine months endedSeptember 30, 2021 was attributable to share repurchases of$890 million and preferred share dividends of$27 million , partially offset by the net proceeds from the issuance of debt of$242 million .
The change in cash of businesses held-for-sale for the nine months ended
("Northshore").
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$19.3 billion as ofSeptember 30, 2022 as compared to$21.7 billion as ofDecember 31, 2021 . This represents a decrease of 11.0% primarily due to a decline in the carrying value of our fixed income securities and other investments, including equities, and net paid losses, partially offset by an increase in funds held by reinsured companies as a result of theAspen transaction.
Reinsurance Balances Recoverable on Paid and Unpaid Losses
As of
recoverable on paid and unpaid losses of
respectively.
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.
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.
Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's 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 ofSeptember 30, 2022 andDecember 31, 2021 were as follows: September 30, Facility Origination Date Term 2022 December 31, 2021 (in millions of U.S. dollars) 4.50% Senior Notes due 2022 March 10, 2017 5 years $ - $ 280 4.95% Senior Notes due 2029 May 28, 2019 10 years 496 495 3.10% Senior Notes due 2031 August 24, 2021 10 years 495 495 Total Senior Notes 991 1,270 5.75% Junior Subordinated Notes due 2040 August 26, 2020 20 years 345 345 5.50% Junior Subordinated Notes due 2042 January 14, 2022 20 years 493 - 5.50% Enhanzed Re's Subordinated Notes due 2031 December 20, 2018 12.1 years 76 76 Total Subordinated Notes 914 421 Total debt obligations$ 1,905 $ 1,691 Our debt obligations increased by$214 million fromDecember 31, 2021 primarily due to the issuance of our 2042 Junior Subordinated Notes, partially offset by the repayment upon maturity of our 2022 Senior Notes.
Credit Ratings
The following table presents our credit ratings as of
Credit ratings (1) Standard and Poor's Fitch Ratings Long-term issuer BBB (Outlook: Positive) BBB+ (Outlook: Stable) 2029 Senior Notes BBB BBB 2031 Senior Notes BBB- BBB 2040 and 2042 Junior Subordinated Notes BB+ BBB- 2031 Subordinated Notes Not Rated Not Rated Series D and E Preferred Shares BB+ BBB- (1) Credit ratings are provided by third parties,Standard & Poor's and Fitch Ratings, and are subject to certain limitations and disclaimers. For information on these ratings, refer to the rating agencies' websites and other publications.
Agency ratings are not a recommendation to buy, sell or hold any of our
securities and may be revised or withdrawn at any time by the issuing
organization. Each agency's rating should be evaluated independently of any
other agency's rating5.
5 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" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Liquidity and Capital Resources
Contractual Obligations
The following table includes only material changes in our contractual
obligations as disclosed in "Part II, Item 7" Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our Annual Report
on Form 10-K for the year ended
changes resulting from the
As of
payment date for the Run-off segment was as follows:
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
for the Run-off segment(1)
Asbestos $ 1,674 $ 155 $ 267 $ 240 $ 358 $ 654
Environmental 364 48 67 54 80 115
General Casualty 4,246 733 892 602 1,296 723
Workers' compensation/personal accident 2,647 271 438 405 505 1,028
Marine, aviation and transit 524 168 165 78 72 41
Construction defect 116 19 29 20 26 22
Professional indemnity/ Directors and Officers 1,299 280 338 192 352 137
Motor 539 130 117 69 86 137
Property 465 169 169 62 48 17
Other 652 226 181 81 79 85
Total outstanding losses and IBNR 12,526 2,199 2,663 1,803 2,902 2,959
ULAE 483 99 117 72 93 102
Total estimated gross reserves for losses and
LAE for the Run-off segment (1) $ 13,009 $
2,298
(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 condensed 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 ofSeptember 30, 2022 and do not take into account corresponding reinsurance recoverable amounts that would be due to us. Furthermore, certain of the reserves included in the condensed consolidated financial statements as ofSeptember 30, 2022 were acquired by us and initially recorded at fair value with subsequent amortization, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect the fair value adjustment in the amount payable. We generally seek to maintain investment portfolios that are shorter or of equivalent duration to our 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, which may require additional liquidity.
Off-Balance Sheet Arrangements
As ofSeptember 30, 2022 , we have entered into certain investment commitments and parental guarantees6. We also utilize unsecured and secured letters of credit and a deposit facility. We do not believe it is reasonably likely that these arrangements will have a material current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, cash requirements or capital resources.
6 Refer to Note 16 to our condensed consolidated financial statements for
further details.
Enstar Group Limited | Third Quarter 2022 | Form 10-Q
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