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 ofMarch 31, 2023 and our results of operations for the three months endedMarch 31, 2023 and 2022 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, 2022 . 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, 2022 . Table of Contents Section Page Operational Highlights 9
Consolidated Results of Operations - for the Three Months Ended
10
and 2022
• Overall Measures of Performance 14
• Underwriting Results 15
• Investment Results 18
• General and Administrative Expenses 21
Non-GAAP Financial Measures 22
Other Financial Measures 28
Results of Operations by Segment - for the Three Months Ended March 31, 29
2023 and 2022
• Run-off Segment 29
• Assumed Life Segment 30
• Investments Segment 32
• Legacy Underwriting Segment 35
Corporate and Other 36
Current Outlook 37
Liquidity and Capital Resources 40
Enstar Group Limited | First Quarter 2023 | 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 seasoned liabilities relating to both their continuing and discontinued portfolios.
Operational highlights for the three months ended
Completed Unwind of Enhanzed Re's Reinsurance Transactions
•InNovember 2022 , our subsidiaryEnhanzed Reinsurance Ltd. ("Enhanzed Re") completed a novation of the reinsurance closed block of life annuity policies toMonument Re Limited , a subsidiary ofMonument Insurance Group Limited ("Monument Re"). •Given our one quarter lag in reporting Enhanzed Re's results, we recognized a$275 million net gain on novation within other income in the first quarter of 2023, which was comprised of1: ?the reclassification benefit to income of$363 million from accumulated other comprehensive income ("AOCI") related to the settlement of the novated future policyholder benefit liabilities; ?the loss of$39 million on the carrying value of the net assets of$133 million as of the closing date of the transaction in exchange for cash consideration of$94 million ; and
?a deferral of a portion of the net gain, equal to
preexisting 20% ownership interest in Monument Re.
•Our net earnings attributable to Enstar were further reduced by$81 million , the amount attributable to Allianz SE's ("Allianz") 24.9% noncontrolling interest in Enhanzed Re at the time of the transaction. In total, first quarter 2023 net earnings attributable to Enstar from this novation transaction were$194 million . •OnDecember 28, 2022 , Enhanzed Re repurchased the entire 24.9% ownership interest Allianz held in Enhanzed Re for$174 million , which was based on the final net book value of Enhanzed Re as ofDecember 31, 2022 . Enhanzed Re is now a wholly-owned subsidiary of Enstar.
•Following the completion of these transactions, we have concluded the unwind of
Enhanzed Re, achieving an inception to date return from Enhanzed Re of 24%.
Executed Capital Transactions
•InMarch 2023 , we repurchased 1,597,712 of our non-voting convertible ordinary shares held byCanada Pension Plan Investment Board ("CPP Investments") for an aggregate$341 million , representing a price per share of$213.13 and a 5% discount to the trailing 10-day volume weighted average price of our voting ordinary shares as of the close of business onMarch 22, 2023 . The shares comprised all of our outstanding Series C and Series E non-voting ordinary shares.
1 Refer to "Assumed Life" section for further details.
Enstar Group Limited | First Quarter 2023 | 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 Months Ended
and 2022
Primary GAAP Financial Measures
We use the following GAAP measures to manage the company and monitor our
performance:
•Net earnings and net earnings attributable to Enstar ordinary shareholders,
which collectively provide a measure of our performance focusing on
underwriting, investment and expense results;
•Comprehensive income attributable to Enstar, which provides a measure of the total return, including unrealized investment gains and losses on investments, as well as other elements of other comprehensive income;
•Book value per share ("BVPS"), which we use to measure the value of our company
over time;
•Return on equity ("ROE"), which measures our profitability by dividing our
earnings attributable to the company by our shareholders' equity;
•Total investment return ("TIR"), which measures the rate of return we obtain,
both realized and unrealized, on our investments; and
•Run-off liability earnings ("RLE") and RLE %, which measure both the dollar
amount of prior period development we achieve on managing our acquired
portfolios (RLE) and the percentage rate of return we obtain on managing our
run-off liabilities by dividing our prior period net incurred losses and LAE by
our average net loss reserves (RLE %).
Enstar Group Limited | First Quarter 2023 | Form 10-Q 10
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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
March 31, $ / pp
2023 2022 Change
(in millions of U.S. dollars, except per share
data)
Underwriting Results
Net premiums earned $ 8 $ 34 $ (26)
Net incurred losses and LAE
Current period 10 13 (3)
Prior period (10) (176) 166
Total net incurred losses and LAE - (163) 163
Policyholder benefit expenses - 12 (12)
Acquisition costs 2 8 (6)
Investment Results
Net investment income 156 80 76
Net realized losses (36) (37) 1
Net unrealized gains (losses) 224 (381) 605
Earnings from equity method investments 11 31 (20)
Other income 280 14 266
Amortization of net deferred charge assets 17 18 (1)
General and administrative expenses 89 85 4
$ -
NET EARNINGS (LOSS) 519 (247) 766
Net earnings attributable to noncontrolling interests (86) (11) (75)
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS $ 424 $ (267) $ 691
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENSTAR $ 239 $ (465) $ 704
GAAP measures:
ROE 9.5 % (4.6) % 14.1 pp
Annualized ROE 38.0 % (18.4) % 56.4 pp
RLE 0.1 % 1.5 % (1.4) pp
Annualized TIR 9.5 % (11.0) % 20.5 pp
Non-GAAP measures:
Adjusted ROE* 6.8 % (1.1) % 7.9 pp
Annualized Adjusted ROE* 27.3 % (4.4) % 31.7 pp
Adjusted RLE * 0.3 % 0.4 % (0.1) pp
Annualized Adjusted TIR* 6.3 % 0.5 % 5.8 pp
As of
March 31, December 31,
2023 2022 $ Change
GAAP measure:
BVPS $ 282.74 $ 262.24 $ 20.50
Non-GAAP measure:
Adjusted BVPS* $ 277.38 $ 258.92 $ 18.46
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 | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Overall Results
Three Months Ended
Net earnings attributable to Enstar ordinary shareholders for the three months
ended
million
•A favorable total investment return of$355 million for the three months endedMarch 31, 2023 , consisting of the aggregate of net investment income, net realized losses, unrealized gains and earnings from equity method investments. The total investment return was primarily driven by net realized and unrealized gains on our other investments, including equities, and fixed income securities of$147 million and$41 million , respectively, in comparison to net realized and unrealized losses in the comparative period of$84 million and$334 million , respectively, as a result of a rally in global equity markets and a decline in interest rates for the three months endedMarch 31, 2023 . An increase in net investment income of$76 million further contributed to the favorable results, consistent with the increasing investment income we've recorded on a sequential quarterly basis, primarily due to investment of new premiums and reinvestment of fixed income securities at higher yields; and •An increase in other income of$266 million , largely driven by the net gain recognized from the novation of the Enhanzed Re reinsurance closed block of life annuity policies. This was partially offset by: •A decrease in favorable development in net incurred losses and LAE for prior periods of$166 million . First quarter 2023 net favorable development of$10 million was primarily due to favorable development on our estimates of net ultimate losses and provisions for ULAE of$33 million , partially offset by a$20 million increase in the fair value of our 2017 and 2018 portfolios where we elected the fair value option due to a decrease in interest rates. First quarter 2022 net favorable development of$176 million was primarily due to favorable development on our estimates of net ultimate losses and provisions for ULAE of$80 million and a$98 million reduction in the fair value of liabilities where we elected the fair value option due to an increase in first quarter 2022 interest rates. This resulted in RLE of 0.1% for the three months endedMarch 31, 2023 in comparison to RLE of 1.5% in the comparative quarter; and •An increase in net earnings attributable to noncontrolling interests of$75 million , as a result of recording the portion of the gain on novation of the Enhanzed Re reinsurance closed block of life annuity policies attributable to Allianz's equity interest in Enhanzed Re. The above factors contributed to net earnings of$519 million for the three months endedMarch 31, 2023 as compared to net loss of$247 million in the comparative quarter, as well as net earnings attributable to Enstar ordinary shareholders of$424 million as compared to net losses attributable to Enstar ordinary shareholders of$267 million in the comparative quarter.
As a result of the current quarter net earnings attributable to Enstar as noted
above, our ROE increased by 14.1 pp.
Comprehensive income attributable to Enstar for the three months endedMarch 31, 2023 was$239 million as compared to comprehensive net loss of$465 million in the comparative quarter. The first quarter 2023 comprehensive income was primarily due to net earnings of$519 million and unrealized gains on fixed income securities, AFS, net of reclassification adjustments, of$75 million , partially offset by the reclassification adjustment of$363 million associated with the novation described above. The unrealized gains on our fixed income securities, AFS, combined with our investment results contributed to a favorable Annualized TIR of 9.5% for the three months endedMarch 31, 2023 , in comparison to a negative Annualized TIR of (11.0)% in the comparative quarter. BVPS and Adjusted BVPS* increased by 7.8% and 7.1%, respectively, fromDecember 31, 2022 toMarch 31, 2023 , due to comprehensive income for the three months endedMarch 31, 2023 , which contributed 5.4% to both BVPS and Adjusted BVPS*, combined with the repurchase of all our non-voting convertible ordinary shares at a discount to year-end book value.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
BVPS and Adjusted BVPS* as of December 31, 2022 reported in this Quarterly
Report on Form 10-Q reflect the impact of our adoption of ASU 2018-12, which had
the effect of retrospectively increasing such measures by $16.04 and $15.83 ,
respectively, from the amounts reported in our Annual Report on Form 10-K for
the year ended December 31, 2022 . The higher opening BVPS and Adjusted BVPS* for
the year negatively impacted our growth in BVPS and Adjusted BVPS* for the
quarter, which would have otherwise been 14.8% and 14.1%, respectively. Our
future policyholder benefit liabilities, which were adjusted for the
retrospective application of ASU 2018-12, were settled in the fourth quarter of
2022 following the completion of the novation as described above, but the
transaction was recognized in the first quarter of 2023 as we report the results
of Enhanzed Re on a one quarter lag. Consequently, the adoption of ASU 2018-12
had no impact on our BVPS or Adjusted BVPS* as of March 31, 2023 .
Similarly, at the time the repurchase of our non-voting convertible ordinary
shares was negotiated, the price represented a 13.0% discount to year-end book
value as reported in our Annual Report on Form 10-K for the year ended December
31, 2022 . Following the adoption of ASU 2018-12 on a retrospective basis, the
price paid in the repurchase transaction represented a 23.0% discount to
year-end book value as reported in this Quarterly Report on Form 10-Q.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Key Performance Measures
Overall Measures of Performance
BVPS and Adjusted BVPS*
[[Image Removed: 63]]
BVPS and Adjusted BVPS* increased by 7.8% and 7.1%, respectively, from December 31, 2022
to March 31, 2023 , primarily as a result of comprehensive income attributable to Enstar of
$239 million and the repurchase of our non-voting convertible ordinary shares at a
discount to year-end book value. The adoption of ASU 2018-12 impacted our BVPS and
Adjusted BVPS* as of December 31, 2022 , as described in greater detail above.
ROE and Adjusted ROE
[[Image Removed: 88]]
Three Months Ended
three months ended
i.net realized and unrealized gains on fixed income securities and other
investments, including equities, which contributed 6.7 pp and 4.7 pp,
respectively, to ROE;
ii.increased other income, comprised primarily of the gain recognized on the novation of the Enhanzed Re reinsurance closed block of life annuity policies, which contributed 6.0 pp to ROE; and
iii.increased net investment income, which contributed 2.1 pp to ROE.
These favorable factors were partially offset by:
iv. decreased favorable prior period development, or RLE, which offset the
increase in ROE by 2.8 pp; and
v. increased earnings attributable to noncontrolling interests, which offset the
increase in ROE by 1.7 pp.
Adjusted ROE* increased by 7.9 pp for the three months ended
it excludes the impact of net realized and unrealized gains on fixed income
securities.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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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 gains (losses) (recorded through the condensed statements of earnings and other comprehensive income) and earnings (losses) from equity method investments.
•General and administrative results: includes general and administrative
expenses.
Underwriting Results
Our strategy is focused on effectively managing (re)insurance portfolios
underwritten in previous years that we assume through our provision of capital
release solutions and acquisition of portfolios and businesses in run-off.
Although we have largely exited our active underwriting platforms, we still record net premiums earned and the associated current period net incurred losses and LAE and acquisition costs as a result of the run-off of unearned premiums from transactions completed in recent years.
Premiums earned in the Run-off segment are generally offset by the related
current period net incurred losses and LAE and acquisition costs.
The components of underwriting results are as follows:
Three Months Ended March 31,
2023 2022
Corporate and Corporate and
Run-off Assumed Life Legacy Underwriting other Total Run-off Assumed Life Legacy Underwriting other Total
(in millions of U.S. dollars)
Net premiums earned $ 8 $ - $ - $ - $ 8 $ 17 $ 14 $ 3 $ - $ 34
Net incurred losses
and LAE:
Current period 10 - - - 10 11 - 2 - 13
Prior periods (33) - - 23 (10) (50) (29) (1) (96) (176)
Total net incurred
losses and LAE (23) - - 23 - (39) (29) 1 (96)
(163)
Policyholder benefit expenses - - - - - - 12 - - 12 Acquisition costs 2 - - - 2 8 - - - 8 Underwriting results$ 29 $ - $ -$ (23) $ 6 $ 48 $ 31 $ 2 $ 96$ 177
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.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Three Months Ended
Three Months Ended March 31, 2023
RLE Adjusted RLE*
Average
Average net Adjusted RLE / adjusted net Annualized Adj
Acquisition Year RLE / PPD loss reserves RLE % Annualized RLE % PPD* loss reserves* Adjusted RLE %* RLE %*
(in millions of U.S. dollars)
2013 and prior $ 7 $ 712 $ 8 $ 705
2014 2 551 (1) 67
2015 1 287 1 305
2016 - 681 2 750
2017 (12) 573 1 799
2018 (10) 745 (2) 833
2019 (1) 1,047 - 1,576
2020 13 562 14 565
2021 7 3,394 10 3,881
2022 3 3,067 1.9 % 3 3,073
Total $ 10 $ 11,619 0.1 % 0.3 % $ 36 $ 12,554 0.3 % 1.1 %
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Our RLE % was almost flat for the three months ended
favorable reductions in estimates of net ultimate losses and reductions in
provisions for ULAE were largely offset by unfavorable changes in the fair value
of liabilities for which we have elected the fair value option.
Unfavorable RLE in the 2017 and 2018 acquisition years was driven predominantly by an increase in the fair value of liabilities for which we have elected the fair value option. Acquisition year 2018 was also adversely impacted by adverse to expected claims experience on certain of our general casualty portfolios.
Favorable RLE in the 2020 acquisition year was driven by a release of
business.
Favorable RLE in the 2021 acquisition year was driven by continued favorable
claims experience to expected on our workers' compensation line of business.
Our Adjusted RLE %* was positively impacted by the net reduction in estimates of
net ultimate losses and the reduction in provisions for ULAE relating to the
Run-off segment. It excludes the impact of the changes in the discount rate upon
the fair value of liabilities where we have elected the fair value option and
the amortization of fair value adjustments relating to purchased subsidiaries.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Three Months Ended
Three Months Ended March 31, 2022
RLE Adjusted RLE*
Average
Average net adjusted net Annualized Adj
Acquisition Year PPD loss reserves RLE % Annualized RLE % Adjusted PPD* loss
reserves* RLE % RLE %*
(in millions of U.S. dollars)
2013 and prior $ 1 $ 773 $ 3 $ 696
2014 5 826 8 99
2015 - 331 1 338
2016 - 759 8 838
2017 78 855 1 982
2018 25 1,010 6 1,073
2019 (1) 1,228 (5) 1,765
2020 - 789 - 789
2021 68 4,210 31 4,755
2022 - 832 - 832
Total $ 176 $ 11,613 1.5 % 6.1 % $ 53 $ 12,167 0.4 % 1.7 %
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Overall, our RLE % was positively impacted by a reduction of
relating to the change in the discount rate component of the fair value of
liabilities for which we have elected the fair value option in the 2017 and 2018
acquisition years as a result of increases in interest rates.
Favorable RLE in the 2021 acquisition year was driven by favorable claim
activity on the Assumed Life segment catastrophe book and continued favorable
development in our Run-off segment workers' compensation portfolios as a result
of favorable loss activity in the period.
Our Adjusted RLE %* was positively impacted by the net reduction in estimates of
net ultimate losses and the reduction in provisions for ULAE relating to the
Run-off segment, as described above.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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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, funds held-directly managed, cash and cash equivalents,
including restricted cash and cash equivalents, and funds held by reinsured
companies, collectively our "Fixed Income" assets) and other investments (which
includes equities and equity method investments and are collectively referred to
as our "Other Investments") are as follows:
Three Months Ended March 31,
2023 2022
Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 132 $ 24 $ 156 $ 61 $ 19 $ 80
Net realized losses (25) (11) (36) (35) (2) (37)
Net unrealized gains (losses) 66 158 224 (299) (82) (381)
Earnings from equity method
investments - 11 11 - 31 31
Other comprehensive income:
Unrealized gains (losses) on fixed
income securities, AFS, net of
reclassification adjustments,
excluding foreign exchange 87 - 87 (252) - (252)
TIR ($) $ 260 $ 182 $ 442 $ (525) $ (34) $ (559)
Annualized TIR % 7.6 % 14.7 % 9.5 % (14.1) % (2.6) % (11.0) %
Annualized Adjusted TIR %* 3.5 % 14.7 % 6.3 % 1.6 % (2.6) %
0.5 %
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measure.
Net Investment Income
The below charts are in millions of
[[Image Removed: 78]]
Three Months Ended
primarily due to:
•an increase in our annualized investment book yield of 167 basis points 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$3.0 billion of our fixed maturity investments that are subject to floating interest rates. Our floating rate investments generated increased net investment income of$27 million , which equates to an increase of 361 basis points on those investments in comparison to the prior period.Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
Net Realized and Unrealized (Losses) Gains included in Comprehensive Income
The below charts are in millions of
[[Image Removed: 951]] Three Months EndedMarch 31, 2023 versus 2022: The favorable variance of$945 million when comparing net realized and unrealized gains for the three months endedMarch 31, 2023 to net realized and unrealized losses for the comparative period was the result of: •net realized and unrealized gains, including amounts recognized in OCI, on fixed income securities of$128 million , compared to net realized and unrealized losses of$586 million in the comparative period. The favorable variance of$714 million was primarily driven by a decline in interest rates in the current period, in comparison to increases in interest rates acrossU.S. ,U.K. and European markets and widening credit spreads in the prior period; and •net realized and unrealized gains on other investments, including equities, of$147 million , compared to net realized and unrealized losses of$84 million in the comparative period. The favorable variance of$231 million was primarily driven by: •Net unrealized gains for the three months endedMarch 31, 2023 primarily driven by our public equities, CLO equity, fixed income funds, private equity funds and hedge funds, largely as a result of a rally in global equity markets; and •Net losses for the three months endedMarch 31, 2022 primarily driven by our fixed income funds, public equities, hedge funds and CLO equities, largely as a result of global equity market declines and the widening of high yield credit spreads. This was partially offset by gains on our private equity funds, private credit funds and real estate funds, which are typically recorded on a one quarter lag.
Earnings from equity method investments
The below charts are in millions of
[[Image Removed: 3154]] Three Months EndedMarch 31, 2023 versus 2022: Earnings from equity method investments decreased, primarily due to a loss of$1 million from our investment in Monument Re for the three months endedMarch 31, 2023 , in comparison to earnings of$24 million in the comparative period, and partially offset by a$5 million increase in earnings from our investment in Core Specialty.Enstar Group Limited | First Quarter 2023 | Form 10-Q
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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: 71]] [[Image Removed: 75]] Investable assets and adjusted investable assets* decreased by 9.0% and 12.2% fromDecember 31, 2022 toMarch 31, 2023 , respectively, primarily due to: •the novation of the Enhanzed Re reinsurance closed block of life annuity policies (and the associated assets of$949 million ); •the impact of net paid losses; •the repurchase of our non-voting convertible ordinary shares; and •the settlement of our participation in Atrium's Syndicate 609 relating to the 2020 and prior underwriting years.
*Non-GAAP measure; refer to "Non-GAAP Financial Measures" section for
reconciliation to the applicable GAAP financial measures.
Duration and average credit rating on fixed income securities and cash and cash
equivalents
The fair value, duration and average credit rating of investments by segment is
as follows:
March 31, 2023 December 31, 2022
Fair Value Average Duration Average Credit Fair Value Average Duration Average Credit
Segment ($) (1) (in years) (2) Rating (3) ($) (1) (in years) (2) Rating (3)
Investments
Run-off $ 9,595 4.14 A+ $ 9,871 4.02 A+
Assumed Life - 0.00 n/a 908 8.90 A-
Total - Investments 9,595 4.14 A+ 10,779 4.44 A+
Legacy Underwriting - 0.00 n/a 179 2.26 AA-
Total $ 9,595 4.14 A+ $ 10,958 4.40 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 income securities, as well as the fixed income securities
and cash and cash equivalents within our funds held-directly managed portfolios.
(3) The average credit ratings calculation includes cash and cash equivalents, short-term investments, fixed income securities and the fixed income securities within our funds held - directly managed portfolios. The overall decrease in the balance of our fixed income securities and cash and cash equivalents of$1.4 billion for the three months endedMarch 31, 2023 was primarily driven by the derecognition of the assets supporting the Enhanzed Re reinsurance closed block of life annuity policies that were novated during the first quarter of 2023, the impact of net paid losses, the settlement of our participation in Atrium's Syndicate 609 relating to the 2020 and prior underwriting years and the repurchase of our non-voting convertible ordinary shares.
As of both
cash and cash equivalents had an average credit quality rating of A+.
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Item 2 | Management's Discussion and Analysis | Consolidated Results of
Operations
As of March 31, 2023 and December 31, 2022 , our fixed income securities that
were non-investment grade (i.e. rated lower than BBB- and non-rated securities)
comprised 4.2% and 6.5% of our total fixed income securities portfolio,
respectively.
General and Administrative Expenses for the For the Three Months Ended
2023
The below chart is in millions of
[[Image Removed: 134]]
Three Months Ended
general and administrative expenses was primarily a result of increases in
audit, legal and bank facility fees.
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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 investments 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.
The following table presents more information on each non-GAAP measure. The
results and GAAP reconciliations for these measures are set forth further below.
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.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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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 income
securities and funds-held directly managed
and
the change in fair value of insurance
contracts for which we have elected the fair
value option, as:
Adjusted operating Net earnings (loss) attributable to •we typically hold most of our fixed income
income (loss) Enstar ordinary shareholders, adjusted securities until the earlier of maturity or
attributable to for: the time that they are used to fund any
Enstar ordinary -net realized and unrealized (gains) settlement of related liabilities which are
shareholders losses on fixed income securities and generally recorded at cost; and
(numerator) funds held-directly managed,
•removing the fair value option improves
-change in fair value of insurance
comparability since there are limited
contracts for which we have elected
acquisition years for which we elected the
the fair value option (1),
fair value option.
-amortization of fair value
adjustments,
Therefore, we believe that excluding their
-net gain/loss on purchase and sales
impact on our earnings improves comparability
of subsidiaries (if any), of
our core operational performance across
-net earnings from discontinued
periods.
operations (if any),
-tax effects of adjustments, and We
include fair value adjustments as non-GAAP
-adjustments attributable to
adjustments to the adjusted operating income
noncontrolling interests
(loss) attributable to Enstar ordinary
shareholders as they are non-cash charges
that are not reflective of the impact of our
claims management strategies on our loss
Adjusted opening Opening Enstar ordinary shareholders'
portfolios.
Enstar ordinary equity, less: shareholders' equity -net unrealized gains (losses) on We eliminate the net gain (loss) on the (denominator) fixed income securities 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)
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
Adjusted run-off Adjusted PPD divided by average adjusted Calculating the RLE as a percentage of our
liability earnings net loss reserves.
adjusted average net loss reserves provides a (%)
more meaningful and comparable measurement of
the impact of our claims management
strategies on our loss portfolios across
acquisition years and also to our overall
financial periods.
We use this measure to evaluate the impact of
our claims management strategies because it
Adjusted prior Prior period net incurred losses and LAE, provides visibility into our ability to
period development adjusted to: settle our claims obligations for amounts
(numerator) Remove:
less than our initial estimate at the point
-Legacy Underwriting and Assumed Life
of acquiring the obligations.
operations
-amortization of fair value adjustments,
The following components of periodic
-change in fair value of insurance
recurring net incurred losses and LAE and net
contracts for which we have elected the
loss reserves are not considered key
fair value option (1),
components of our claims management
and
performance for the following reasons:
Add:
-the reduction/(increase) in estimates of
•The results of our Legacy Underwriting
net ultimate liabilities and reduction in
segment have been economically transferred to
estimated future expenses of our defendant
a third party primarily through use of
A&E liabilities.
reinsurance and a Capacity Lease
Agreement(2); as such, the results are not a
relevant contribution to Adjusted RLE, which
is designed to analyze the impact of our
claims management strategies;
•The results of our Assumed Life segment
relate only to our exposure to active
property catastrophe business; as this
business is not in run-off, the results are
not a relevant contribution to Adjusted RLE;
•The change in fair value of insurance
contracts for which we have elected the fair
value option(1) has been removed to support
Adjusted net loss Net losses and LAE, adjusted to: comparability between the two acquisition
reserves Remove: years for which we elected the fair value
(denominator) -Legacy Underwriting and Assumed Life net
option in reserves assumed and the
loss reserves
acquisition years for which we did not make
-current period net loss reserves
this election (specifically, this election
-net fair value adjustments associated
was only made in the 2017 and 2018
with the acquisition of companies,
acquisition years and the election of such
-the fair value adjustments for contracts
option is irrevocable); and
for which we have elected the fair value
•The amortization of fair value adjustments
option (1) and
are non-cash charges that obscure our trends
Add:
on a consistent basis.
-net nominal defendant A&E liability
exposures and estimated future expenses.
We include our performance in managing claims
and estimated future expenses on our
defendant A&E liabilities because such
performance is relevant to assessing our
claims management strategies even though such
liabilities are not included within the loss
reserves.
We use this measure to assess the performance
of our claim strategies and part of the
performance assessment of our past
acquisitions. Adjusted total Adjusted total investment return (dollars) Provides a key measure of the return investment return recognized in earnings for the applicable generated on the capital held in the business (%) period divided by period average adjusted
and is reflective of our investment strategy.
total investable assets.
Provides a consistent measure of investment
returns as a percentage of all assets
generating investment returns.
Adjusted total Total investment return (dollars),
investment return adjusted for: We adjust our investment returns to eliminate
($) (numerator) -net realized and unrealized (gains)
the impact of the change in fair value of
losses on fixed income securities and
fixed income securities (both credit spreads
funds held-directly managed; and
and interest rates), as we typically hold
-unrealized (gains) losses on fixed income
most of these investments until the earlier
securities, AFS included within OCI, net
of maturity or used to fund any settlement of
of reclassification adjustments and
related liabilities which are generally
excluding foreign exchange. recorded at cost.
Adjusted average Total average investable assets, adjusted
aggregate total for:
investable assets -net unrealized (gains) losses on fixed
(denominator) income securities, AFS included within
AOCI
-net unrealized (gains) losses on fixed
income securities, trading
(1) Comprises the discount rate and risk margin components.
(2) As described in Note 5 to our consolidated financial statements in our
Annual Report on Form 10-K for the year ended
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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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*:
March 31, 2023 December 31, 2022
Per Share Per Share
Equity (1) Ordinary Shares Amount Equity (1) (2) Ordinary Shares Amount
(in
millions of
Book value per ordinary share
15,445,128$ 282.74 $ 4,464 17,022,420 $
262.24
Non-GAAP adjustment:
Share-based compensation plans 298,797 218,171 Adjusted book value per ordinary share*$ 4,367 15,743,925$ 277.38 $ 4,464 17,240,591$ 258.92 (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.
(2) Enstar ordinary shareholders' equity as of
retrospectively adjusted for the impact of adopting ASU 2018-12. Refer to Note 7
to our condensed consolidated financial statements for further information.
The table below presents a reconciliation of ROE to Adjusted ROE* and Annualized
ROE to Annualized Adjusted ROE*:
Three Months Ended
March 31, 2023 March 31, 2022
Opening
Net (loss) equity (1) Annualized Net (loss) Opening Annualized (Adj)
earnings (1) (2) (Adj) ROE (Adj) ROE earnings (1) equity (1) (Adj) ROE ROE
(in millions of U.S. dollars)
Net earnings (loss)/Opening
equity/ROE/Annualized ROE (1) $ 424 $ 4,464 9.5 % 38.0 % $ (267) $ 5,813 (4.6) % (18.4) %
Non-GAAP adjustments:
Remove:
Net realized and unrealized (gains)
losses on fixed income securities
and funds held - directly managed /
Net unrealized (gains) losses on
fixed income securities and funds
held - directly managed (3) (41) 1,827 334
(89)
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 (4) 20 (294) (98) (107) Amortization of fair value adjustments / Fair value adjustments 3 (124) 2 (106) Tax effects of adjustments (5) (3) - (26) - Adjustments attributable to noncontrolling interests (6) (2) - (5) - Adjusted operating earnings (loss)/Adjusted opening equity/Adjusted ROE/Annualized adjusted ROE*$ 401 $ 5,873 6.8 % 27.3 %$ (60) $ 5,511 (1.1) % (4.4) % (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) Enstar ordinary shareholders' equity as of
retrospectively adjusted for the impact of adopting ASU 2018-12. Refer to Note 7
to our condensed consolidated financial statements for further information.
(3) Represents the net realized and unrealized losses (gains) related to fixed income securities. Our fixed income securities are held directly on our balance sheet and also within the "Funds held - directly managed" balance.
(4) Comprises the discount rate and risk margin components.
(5) 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.
(6) 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.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Non-GAAP Financial Measures
The tables below present a reconciliation of RLE to Adjusted RLE* and Annualized
RLE to Annualized Adjusted RLE*:
Three Months
Ended As of Three Months Ended
March 31, December 31,
March 31, 2023 2023 2022 March 31, 2023 March 31, 2023
Net loss Net loss Average net
RLE / PPD reserves reserves loss reserves RLE % Annualized RLE %
(in millions of U.S. dollars)
PPD/net loss reserves/RLE/Annualized RLE $ 10 $ 11,226 $ 12,011 $ 11,619 0.1 % 0.3 %
Non-GAAP Adjustments:
Net loss reserves - current period - (9) - (5)
Legacy Underwriting - - (139) (70)
Amortization of fair value adjustments /
Net fair value adjustments associated with
the acquisition of companies 3 121 124 123
Changes in fair value - fair value option
/ Net fair value adjustments for contracts
for which we have elected the fair value
option (1) 20 278 294 286
Change in estimate of net ultimate
liabilities - defendant A&E / Net nominal
defendant A&E liabilities 2 560 572 566
Reduction in estimated future expenses -
defendant A&E / Estimated future expenses
- defendant A&E 1 34 35 35
Adjusted PPD/Adjusted net loss reserves/
Adjusted RLE/Annualized Adjusted RLE* $ 36 $ 12,210 $ 12,897 $ 12,554 0.3 % 1.1 %
(1) Comprises the discount rate and risk margin components.
*Non-GAAP measure.
Three Months
Ended As of Three Months Ended
March 31, March 31, December 31,
2022 2022 2021 March 31, 2022 March 31, 2022
Net loss Net loss Average net
RLE / PPD reserves reserves loss reserves RLE % Annualized RLE %
(in millions of U.S. dollars)
PPD/net loss reserves/RLE/Annualized RLE $ 176 $ 11,300 $ 11,926 $ 11,613 1.5 % 6.1 %
Non-GAAP Adjustments:
Net loss reserves - current period - (13) - (7)
Assumed Life (29) (152) (181) (166)
Legacy Underwriting (1) (143) (153) (149)
Amortization of fair value adjustments /
Net fair value adjustments associated with
the acquisition of companies 2 104 106 105
Changes in fair value - fair value option
/ Net fair value adjustments for contracts
for which we have elected the fair value
option (1) (98) 201 107 154
Change in estimate of net ultimate
liabilities - defendant A&E / Net nominal
defendant A&E liabilities 3 586 573 580
Reduction in estimated future expenses -
defendant A&E / Estimated future expenses
- defendant A&E - 37 37 37
Adjusted PPD/Adjusted net loss
reserves/Adjusted RLE/Annualized Adjusted
RLE* $ 53 $ 11,920 $ 12,415 $ 12,167 0.4 % 1.7 %
(1) Comprises the discount rate and risk margin components.
*Non-GAAP measure.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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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
March 31, 2023 March 31, 2022
Fixed Income Other Investments Total Fixed Income Other Investments Total
(in millions of U.S. dollars)
Net investment income $ 132 $ 24 $ 156 $ 61 $ 19 $ 80
Net realized losses (25) (11) (36) (35) (2) (37)
Net unrealized gains (losses) 66 158 224 (299) (82)
(381)
Earnings from equity method investments - 11 11 - 31
31
Other comprehensive income: Unrealized gains (losses) on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange 87 - 87 (252) - (252) TIR ($)$ 260 $ 182$ 442 $ (525) $ (34)$ (559) Non-GAAP adjustments: Net realized and unrealized (gains) losses on fixed maturity investments and funds held-directly managed (41) - (41) 334 -
334
Unrealized (gains) losses on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange (87) - (87) 252 - 252 Adjusted TIR ($)*$ 132 $ 182$ 314 $ 61 $ (34)$ 27 Total investments$ 8,467 $ 4,905$ 13,372 $ 11,416 $ 5,826$ 17,242 Cash and cash equivalents, including restricted cash and cash equivalents 1,143 - 1,143 1,135 -
1,135
Funds held by reinsured companies 3,258 - 3,258 2,241 - 2,241 Total investable assets$ 12,868 $ 4,905$ 17,773 $ 14,792 $ 5,826$ 20,618 Average aggregate invested assets, at fair value (1) 13,676 4,939 18,615 14,917 5,326 20,243 Annualized TIR % (2) 7.6 % 14.7 % 9.5 % (14.1) % (2.6) % (11.0) % Non-GAAP adjustment: Net unrealized losses on fixed maturities, AFS investments included within AOCI and net unrealized losses (gains) on fixed maturities, trading instruments 994 - 994 521 - 521 Adjusted investable assets*$ 13,862 $ 4,905$ 18,767 $ 15,313 $ 5,826$ 21,139 Adjusted average aggregate invested assets, at fair value* (3)$ 15,081 $
4,939
$ 20,459 Annualized adjusted TIR %* (4) 3.5 % 14.7 % 6.3 % 1.6 % (2.6) %
0.5 %
(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.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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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
March 31, 2023 March 31, 2022
Investments Legacy Underwriting Total Investments Legacy Underwriting Total
(in millions of U.S. dollars)
Net investment income: Fixed income securities$ 131 $ -$ 131 $ 68 $ 4$ 72 Cash and restricted cash 5 - 5 - - - Other investments, including equities 24 - 24 19 - 19 Less: Investment expenses (4) - (4) (11) - (11) Net investment income$ 156 $ -$ 156 $ 76 $ 4$ 80 Net realized losses: Fixed income securities$ (25) $ -$ (25) $ (35) $ -$ (35) Other investments, including equities (11) - (11) (2) - (2) Net realized losses$ (36) $ -$ (36) $ (37) $ -$ (37) Net unrealized gains (losses): Fixed income securities, trading 66 - 66 (293) (6) (299) Other investments, including equities 158 - 158 (82) - (82) Net unrealized gains (losses)$ 224 $ -$ 224 $ (375) $ (6)$ (381) Earnings from equity method investments 11 - 11 31 - 31 Other comprehensive income Unrealized gains (losses) on fixed income securities, AFS, net of reclassification adjustments excluding foreign exchange 87 - 87 (252) - (252) TIR ($)$ 442 $ -$ 442 $ (557) $ (2)$ (559) Fixed maturity and short-term investments, trading and AFS and funds held - directly managed$ 8,452 $ -$ 8,452 $ 11,037 $ 158$ 11,195 Other assets included within funds held - directly managed 15 - 15 221 - 221 Equities 1,078 - 1,078 2,444 - 2,444 Other investments 3,417 - 3,417 2,851 12 2,863 Equity method investments 410 - 410 519 - 519 Total investments$ 13,372 $ -$ 13,372 $ 17,072 $ 170$ 17,242 Cash and cash equivalents, including restricted cash and cash equivalents 1,143 - 1,143 1,102 33 1,135 Funds held by reinsured companies 3,258 - 3,258 2,209 32 2,241 Total investable assets$ 17,773 $ -$ 17,773 $ 20,383 $ 235$ 20,618 Average aggregate invested assets, at fair value (1)$ 18,615 $ -$ 18,615 $ 20,012 $ 231$ 20,243 Annualized TIR % (2) 9.5 % - % 9.5 % (11.1) % (3.5) % (11.0) % Annualized income from fixed income assets (3) 544 - 544 272 16 288 Average aggregate fixed income assets, at cost (3)(4) 15,199 - 15,199 14,850 220 15,070 Annualized Investment book yield (5) 3.58 % - % 3.58 % 1.83 % 7.27 % 1.91 %
(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 | Results of Operations by Segment
Results of Operations by Segment - For the Three Months Ended
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
March 31,
2023 2022 $ Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ 8 $ 17 $ (9)
Other income:
Reduction in estimates of net ultimate defendant A&E liabilities
- prior periods 2 3 (1)
Reduction in estimated future defendant A&E expenses 1 - 1
All other income 2 7 (5)
Total other income 5 10 (5)
Total income 13 27 (14)
EXPENSES
Net incurred losses and LAE:
Current period 10 11 (1)
Prior periods:
Reduction in estimates of net ultimate losses (15) (29) 14
Reduction in provisions for ULAE (18) (21) 3
Total prior periods (33) (50) 17
Total net incurred losses and LAE (23) (39) 16
Acquisition costs 2 8 (6)
General and administrative expenses 39 39 -
Total expenses 18 8 10
SEGMENT NET (LOSS) EARNINGS $ (5) $ 19 $ (24)
Overall Results
Three Months Ended
was
quarter, primarily due to:
•A$17 million decrease in the reduction in estimates of net ultimate losses in the current quarter, mainly driven by a$14 million decrease in favorable prior period development in comparison to the comparative quarter.
•We recognized favorable development of
line of business in the current quarter as a result of continued favorable
claims experience, most notably in the 2021 acquisition year.
•In comparison, we recognized favorable development of$34 million on our workers' compensation line of business in the comparative quarter as a result of favorable loss activity in the period, partially offset by adverse development of$13 million on our property line of business due to unfavorable loss emergence relating to construction risks; 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 | First Quarter 2023 | 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
The Assumed Life segment consists of life and property aggregate excess of loss
(catastrophe) business relating to Enhanzed Re, which we have consolidated since
September 1, 2021 following the completion of a step acquisition that increased
our ownership interest to 75.1%. We report the Enhanzed Re component results of
this segment on a one quarter lag.
The Enhanzed Re catastrophe business was not renewed for 2022. During the third
quarter of 2022, Enhanzed Re entered into a Master Agreement, through which we
completed a series of commutation and novation agreements that allowed us to
unwind Enhanzed Re's operations in an orderly manner.
Transactions completed in the fourth quarter of 2022 were recognized in the
first quarter of 2023, including the novation of our reinsurance closed block of
life annuity policies to Monument Re and the repurchase of the remaining 24.9%
interest in Enhanzed Re from Allianz.
Following the completion of the transactions, we have ceased all continuing
reinsurance obligations for this segment. 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
March 31, 2023 March 31, 2022 Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ - $ 14 $ (14)
Other income 275 - 275
Total income 275 14 261
EXPENSES
Net incurred losses and LAE:
Prior periods: Reduction in estimates of net ultimate losses - (28) 28 Reduction in provisions for unallocated LAE - (1) 1 Total prior periods - (29) 29 Total net incurred losses and LAE - (29) 29 Policyholder benefit expenses - 12 (12) General and administrative expenses - 2 (2) Total expenses - (15) 15 SEGMENT NET EARNINGS $ 275 $ 29 $ 246 Overall Results Three Months EndedMarch 31, 2023 versus 2022: The increase in net earnings from our Assumed Life segment of$246 million was primarily due to an increase in other income of$275 million , solely due to the net gain recognized on the completion of the novation of the Enhanzed Re reinsurance closed block of life annuity policies.
The
components:
•the reclassification benefit to income of$363 million from AOCI related to the settlement of the novated liabilities (in accordance with our adoption of ASU 2018-12, the discount rate assumption for our long-duration liabilities was required to be periodically adjusted for changes in interest rates, which had the effect of reducing our future policyholder benefit liabilities and increasing the net assets transferred in the novation); •the loss of$39 million on the carrying value of the net assets of$133 million as of the closing date of the transaction in exchange for cash consideration of$94 million (as noted above, the retrospective adoption of ASU 2018-12 resulted in an increase in net assets which gave rise to the transactional loss prior to our realization of the$363 million reclassification benefit); andEnstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Assumed Life Segment
•a deferral of a portion of the net gain, $49 million , to account for our
preexisting 20% ownership interest in Monument Re, calculated from the total
gain of $324 million less Allianz's 24.9% interest equal to $81 million (the
deferred gain will be amortized over the expected settlement period for the life
annuity policies to account).
Our net earnings attributable to Enstar were further reduced by $81 million , the
amount attributable to Allianz's 24.9% noncontrolling interest in Enhanzed Re at
the time of the transaction. This amount has been recorded within our "Corporate
and other activities". Our total first quarter 2023 net earnings attributable to
Enstar from this novation transaction were $194 million .
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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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
March 31,
2023 2022 $ Change
(in millions of U.S. dollars)
INCOME
Net investment income:
Fixed income securities $ 131 $ 68 $ 63
Cash and restricted cash 5 - 5
Other investments, including equities 24 19 5
Less: Investment expenses (4) (11) 7
Total net investment income 156 76 80
Net realized losses:
Fixed income securities (25) (35) 10
Other investments, including equities (11) (2)
(9)
Net realized losses: (36) (37)
1
Net unrealized gains (losses): Fixed income securities 66 (293)
359
Other investments, including equities 158 (82)
240
Total net unrealized gains (losses): 224 (375) 599 Total income 344 (336) 680 EXPENSES General and administrative expenses 11 9
2
Total expenses 11 9
2
Earnings from equity method investments 11 31 (20) SEGMENT NET EARNINGS (LOSS)$ 344 $ (314) $ 658 Overall Results Three Months EndedMarch 31, 2023 versus 2022: Net earnings from our Investments segment was$344 million for the three months endedMarch 31, 2023 compared to net losses of$314 million for the three months endedMarch 31, 2022 . The favorable movement of$658 million was primarily due to: •net realized and unrealized gains on fixed income securities of$41 million , compared to net realized and unrealized losses of$328 million in the comparative period. The favorable variance of$369 million was primarily driven by a decline in interest rates in the current period, in comparison to an increase in interest rates acrossU.S. ,U.K. and European markets and widening credit spreads in the prior period; •net realized and unrealized gains on other investments, including equities, of$147 million , compared to net realized and unrealized losses of$84 million in the comparative period. The favorable variance of$231 million was primarily driven by: •Net unrealized gains for the three months endedMarch 31, 2023 primarily from our public equities, CLO equity, fixed income funds, private equity funds and hedge funds, largely as a result of a rally in global equity markets; •Net losses for the three months endedMarch 31, 2022 driven by our fixed income funds, public equities, hedge funds and CLO equities, largely as a result of global equity market declines and the widening of high Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Investments Segment
yield credit spreads. This was partially offset by gains on our private equity
funds, private credit funds and real estate funds, which are typically recorded
on a one quarter lag; and
•an increase in our net investment income of $80 million , which is primarily due
to the investment of new premium and reinvestment of fixed income securities at
higher yields and the impact of rising interest rates on the $3.0 billion of our
fixed income securities that are subject to floating interest rates. Our
floating rate investments generated increased net investment income of
$27 million , which equates to an increase of 361 basis points on those
investments in comparison to the prior period.
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:
March 31, 2023
Run-off
Fair Value % Duration (years) (1) Credit Rating (1)
(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 $ 475 5.6 % 6.2 AAA
U.K. government 72 0.9 % 6.9 A+
Other government 301 3.5 % 6.1 AA-
Corporate 4,752 56.2 % 5.8 A-
Municipal 193 2.3 % 9.2 AA-
Residential mortgage-backed 558 6.6 % 4.7 AA+
Commercial mortgage-backed 1,079 12.8 % 1.9 AA
Asset-backed 1,022 12.1 % 0.6 A+
$ 8,452 100.0 % 4.7 A+
(1) The average duration and average credit ratings calculation includes
short-term investments, fixed maturities and the fixed maturities within our
funds held-directly managed portfolios.
December 31, 2022
Run-off Assumed Life (2)
Fair Value % Duration (years) (1) Credit Rating (1) Fair Value % Duration (years) (1) Credit Rating (1) 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 $ 496 5.2 % 5.9 AAA $ - - % n/a n/a $ 496 5.2 %
U.K. government 81 0.9 % 6.5 AA- - - % n/a n/a 81 0.9 %
Other government 289 3.1 % 6.0 AA- 134 1.4 % 10.3 BBB+ 423 4.5 %
Corporate 5,031 53.0 % 5.6 A- 188 2.0 % 6.7 BBB+ 5,219 55.0 %
Municipal 201 2.1 % 7.9 AA- - - % n/a n/a 201 2.1 %
Residential
mortgage-backed 536 5.7 % 4.6 AA+ - - % n/a n/a 536 5.7 %
Commercial mortgage-backed 1,021 10.8 % 2.1 AA - - % n/a n/a 1,021 10.8 %
Asset-backed 909 9.6 % 0.5 A+ - - % n/a n/a 909 9.6 %
Structured products - - % n/a n/a 586 6.2 % 9.7 A 586 6.2 %
Total $ 8,564 90.4 % 4.6 A $ 908 9.6 % 9.2 A- $ 9,472 100.0 %
(1) The average duration and average credit ratings calculation includes
short-term investments, fixed maturities and the fixed maturities within our
funds held-directly managed portfolios.
(2) Investments under the Assumed Life caption comprise those that support our
life reinsurance business.
The overall decrease in the balance of our fixed income securities of
billion
derecognition of the assets supporting the Enhanzed Re reinsurance closed
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Item 2 | Management's Discussion and Analysis | Results of Operations by Segment
| Investments Segment
block of life annuity policies that were novated during the first quarter of
2023, the impact of net paid losses and the repurchase of our non-voting
convertible ordinary shares.
Other investments, including equities
Refer to the below table for the composition of our other investments, including
equities:
March 31, 2023 December 31, 2022
(in millions of U.S. dollars)
Equities
Publicly traded equities $ 306 $ 385
Exchange-traded funds 415 507
Privately held equities 357 358
Total $ 1,078 $ 1,250
Other investments
Hedge funds $ 584 $ 549
Fixed income funds (1) 550 547
Equity funds 4 3
Private equity funds 1,353 1,282
CLO equities 140 148
CLO equity funds 212 203
Private credit funds 351 362
Real estate debt fund 223 202
Total $ 3,417 $ 3,296
(1) Balance as of
supported the life reinsurance business within our Assumed Life segment.
Our equities decreased by$172 million and other investments increased by$121 million fromDecember 31, 2022 toMarch 31, 2023 , primarily due to the funding of the repurchase of our non-voting convertible ordinary shares and the redeployment from exchange-traded funds and publicly traded equities into various non-core asset strategies, in line with our strategic asset allocation.
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
As of Ended As of Three Months Ended
March 31, 2023 March 31, 2023 December 31, 2022 March 31, 2022
Earnings from
Equity Method Earnings from Equity
Ownership % Carrying Value Investments Ownership % Carrying Value Method Investments
(in millions of
Citco (1) 31.9 % 61 1 31.9 % 60 1
Monument Re (2) 20.0 % 111 (1) 20.0 % 110 24
Core Specialty 19.9 % 222 11 19.9 % 211 6
Other 27.0 % 16 - 27.0 % 16 -
$ 410 $ 11 $ 397 $ 31
(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.
The carrying value of our equity method investments increased from
2022
investments for the three months ended
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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
March 31,
2023 2022 $ Change
INCOME (in millions of U.S. dollars)
Net premiums earned $ - $ 3 $ (3)
Net investment income - 4 (4)
Net unrealized losses - (6) 6
Other income - 1 (1)
Total income - 2 (2)
EXPENSES
Net incurred losses and LAE:
Current period - 2
(2)
Prior periods - (1)
1
Total net incurred losses and LAE - 1
(1)
General and administrative expenses - 1 (1) Total expenses - 2 (2) SEGMENT NET (LOSS) EARNINGS $ - $ - $ - Overall Results
Three 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 .
As of
underwriting years for the economic benefit of Atrium, and there was no net
retention by Enstar.
The contractual arrangements between SGL No. 1, Arden and Atrium relating to the
reinsurance agreements and the Capacity Lease Agreement will settle in the
second quarter of 2023. Other than the settlement of these amounts, we do not
expect to record any transactions in the Legacy Underwriting segment in 2023.
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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
March 31,
2023 2022 $ Change
INCOME (in millions of U.S. dollars)
Other income (expense):
Amortization of fair value adjustments (1) $ (4) $ (1) $ (3)
All other income 4 4 -
Total other income - 3 (3)
Total income - 3 (3)
EXPENSES
Net incurred losses and LAE - prior periods:
Amortization of fair value adjustments 3 2 1 Changes in fair value - fair value option (2) 20 (98) 118 Total net incurred losses and LAE - prior periods 23 (96) 119 Amortization of net deferred charge assets 17 18 (1) General and administrative expenses 39 34 5 Total expenses 79 (44) 123 Interest expense (23) (25) 2 Net foreign exchange gains (losses) 6 (3) 9 Income tax benefit 1 - 1 Net earnings attributable to noncontrolling interests (86) (11) (75) Dividends on preferred shares (9) (9) -
NET LOSS ATTRIBUTABLE TO ENSTAR ORDINARY SHAREHOLDERS
(1) Amortization of fair value adjustments relates to the acquisition of DCo and
Morse TEC.
(2) Comprises the discount rate and risk margin components.
Overall Results
Three Months EndedMarch 31, 2023 versus 2022: Net loss attributable to Enstar ordinary shareholders from our Corporate and other activities increased by$189 million , primarily due to: •Changes in the fair value of the 2017 and 2018 portfolios where we elected the fair value option resulted in a$20 million increase in liabilities in the first quarter of 2023 due to a decline in interest rates, in comparison to a$98 million reduction of such liabilities in the comparative quarter due to an increase in interest rates; and •An increase in net earnings attributable to noncontrolling interests of$75 million , which was primarily a result of attributing$81 million of the gain on novation of the Enhanzed Re reinsurance closed block of life annuity policies to Allianz's 24.9% equity interest in Enhanzed Re at the time of the transaction.Enstar Group Limited | First Quarter 2023 | Form 10-Q 36
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Item 2 | Management's Discussion and Analysis | Current Outlook
Current Outlook
Run-off Outlook
Transactions
On April 7, 2023 , certain of our wholly-owned subsidiaries closed a LPT
agreement with certain subsidiaries of QBE Insurance Group Limited ("QBE"),
relating to a diversified portfolio of business underwritten between 2020 and
2018. The reinsurance agreement requires our subsidiaries to assume subject loss
reserves of $1.9 billion and provide $900 million of cover in excess of the
ceded reserves. Upon closing, a portion of the portfolio currently underwritten
via QBE's Lloyd's syndicates 386 and 2999 was reinsured to Enstar's Syndicate
2008. The amount of net loss reserves assumed, as well as the settlement and
limit amounts provided in the master agreement, will be adjusted for claims paid
between January 1, 2023 and April 7, 2023 , pursuant to the terms of the
contract.
On February 21, 2023 , one of our wholly-owned subsidiaries entered into an
agreement with RACQ Insurance Limited ("RACQ") to reinsure 80% of RACQ's motor
vehicle Compulsory Third Party ("CTP") insurance liabilities, covering accident
years 2021 and prior. The reinsurance agreement is effective as of July 1, 2022 .
RACQ will cede net reserves of AUD $360 million (USD $245 million ), and our
subsidiary will provide AUD $200 million (USD $136 million ) of additional cover
in excess of the ceded reserves. The closing of the transaction is subject to
regulatory approval and other closing conditions, which we expect to be
completed in the second quarter of 2023.
We continue to evaluate transactions in our active pipeline including LPTs,
ADCs, and other transaction types including acquisitions. We seek opportunities
to execute on creative and accretive transactions by offering innovative capital
release solutions that enable our clients to meet their capital and risk
management objectives. In addition to non-life run-off solutions, we remain open
to and are formally evaluating other assumed life opportunities where we believe
they can provide an attractive diversified earnings profile and the right
risk-reward balance.
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 to long term.
We expect we will invest a significant portion of premium on new transactions in
fixed income securities, which will deliver accretive investment book yields at
the current elevated rates.
Seasonality
We complete most of our annual loss reserve studies in the fourth quarter of
each year and, as a result, tend to record the largest movements, both favorable
and adverse, to net incurred losses and LAE in this period.
In the interim periods where a reserve study has not been completed, we perform
quarterly reviews to ascertain whether changes to claims paid or case reserves
have varied from our expectations developed during the last annual reserve
review. In this event, we consider the timing and magnitude of the actual versus
expected development, and we may record an interim adjustment to our recorded
reserves if, and when, warranted.
Investment Outlook
We expect global financial markets to remain uncertain through 2023 as a result
of a potential economic recession, continued inflationary pressures and
tightening of financial conditions by global central banks and continued
geopolitical conflicts and tensions.
Market expectations around the future path of interest rates will represent a continued source of volatility, as global central banks attempt to address inflation while simultaneously navigating events posing risks to financial stability. In the event that interest rates continue to rise and/or credit spreads widen, we may recognize unrealized losses on our fixed income securities and incur a higher rate of borrowing and interest costs if we renew credit facilities in the current environment.
Despite this, elevated interest rates can represent an opportunity for us in the
medium to long term, notably;
•We hold approximately 17% of our portfolio in individual fixed income securities that have floating interest rates which, should interest rates remain elevated, we expect to be accretive to future investment book yields. We have earned$56 million and$29 million of net investment income from our floating rate investments for the three months endedMarch 31, 2023 and 2022, respectively, which are generally indexed to LIBOR.Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Current Outlook
•Higher interest rates have provided us with the opportunity to reinvest at
higher yields as our securities mature or as we invest premium received from new
business.
We expect that the unrealized losses we recognized on our fixed income
securities over the prior year will be recouped as these assets get closer to
their maturity and the prices pull to par. We may also undertake tactical
repositioning of our portfolio as opportunities arise to achieve better
investment yields, rather than waiting for certain fixed income securities to
pull to par value.
Global equity markets are expected to remain cautious through 2023, and this,
combined with our reporting lag on certain investments, will impact the
valuation of our non-core risk investments. We invest in public equity, private
equity and alternatives (including hedge fund investments), which may vary in
the magnitude of their exposure to any potential economic recession.
Anticipations of an economic downturn continue to persist despite the majority
of equity indices posting gains in the first quarter of 2023. Lower earnings and
lower equity multiples on equities may further negatively impact our non-core
investments but may also impact expectations of future interest rates with the
resulting impact to our fixed income securities.
Despite these challenges, we remain committed to our strategic asset allocation
and expect our non-core investments to provide attractive risk adjusted returns
and diversification benefits over the medium to long term.
We expect to continue to benefit from our allocation to investments with
inflationary pass-through components, including investments in private equity,
private credit, real estate, and infrastructure asset classes and will continue
to seek other attractive investment opportunities throughout 2023.
Inflation
We continue to monitor the inflationary impacts resulting from pandemic-related
government stimulus and labor force supply pressures on our loss cost trends.
Our Run-off net loss reserves primarily consist of general casualty, workers'
compensation and asbestos lines of business which, as long tailed lines of
business, have not been significantly impacted by ongoing inflationary pressures
in comparison to other lines of business, such as property and auto lines.
The currently observed and limited impact of economic inflation on our loss cost
trends reflects a combination of the opportunity we have to re-price seasoned
books of business upon their acquisition and our claims management model that
seeks to settle claims in an efficient and responsive manner to protect and
mitigate the impact to us from adverse outcomes.
While we do not currently see any new trends in the longer term trend of social
inflation on certain claims, we continue to monitor claims in difficult
legislative districts, seek to actively settle claims and monitor for reserving
adequacy.
As described above, global economic policy responses to inflation have led to
increases in interest rates, which, in the short term, have had a significant
impact on our investments, in particular our fixed income securities. Any
further rise in interest rates will have further negative impacts on our fixed
income securities.
There remains uncertainty around the pace and direction of inflation, including
if and when a pause in rate increases, or even a cut in rates, will occur. We
continue to monitor liquidity, capital and potential earnings impact of these
changes but remain focused on medium to long term asset allocation decisions.
Inflation, tight labor conditions and higher service costs continue to put
pressure on wages and prices, which could impact our underlying our general and
administrative expenses as we remain focused on being a competitive employer in
our market.
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Item 2 | Management's Discussion and Analysis | Current Outlook
Banking Volatility
In March 2023 , three midsize U.S. regional banks collapsed after fears of
financial instability led to mass deposit withdrawals. Although the Federal
Deposit Insurance Corporation ("FDIC") and state regulators intervened and
enacted various strategies in an attempt to stabilize the situation, the events
still had an impact on the wider banking industry. Investor uncertainties led to
a broader sell-off of U.S. and European bank stocks and culminated in the
take-over of Credit Suisse Group AG ("Credit Suisse") by UBS Group AG ("UBS"),
resulting in significant impairments to Additional Tier One ("AT1") financial
instruments previously issued by Credit Suisse.
We have performed an analysis of, and continue to monitor, our investments,
deposits, underwriting risks, LOC capacity and availability, and any other
direct and indirect exposures we may have with the impacted
and Credit Suisse. We have not identified any material direct or indirect
exposures.
Russian Invasion ofUkraine The Russian invasion ofUkraine and the resulting impact on global commodity markets has increased commodity prices, disrupted supply chains and generated significant insurance losses. In response, many countries have established comprehensive sanctions regimes increasing both geopolitical tension betweenNATO andRussia and market volatility. To quantify our exposure, we have performed an analysis of, and continue to monitor, our direct investment and underwriting risks, our acquisition pipeline and the potential for operational disruption (including disruption via our third party service providers). We have concluded that we have no significant direct impacts from this event. We continue to monitor for, and respond to, all changes in the global sanctions regime, updating our procedures accordingly.Enstar Group Limited | First Quarter 2023 | 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.
Liquidity and Capital Resources Highlights
Sources of Cash During the First Quarter of 2023:
•We borrowed and, prior to quarter end, fully repaid
our revolving credit facility; and
•We received
reinsurance closed block of life annuity policies.
Uses of Cash During the First Quarter of 2023:
•We repurchased 1,597,712 of our outstanding non-voting convertible ordinary
shares for an aggregate price of
•We paid
As ofMarch 31, 2023 we had$828 million of cash and cash equivalents, excluding restricted cash, that supports (re)insurance operations. Included in this amount was$377 million held by our foreign subsidiaries outside ofBermuda . We closed 2022 with an estimated solvency capital ratio in excess of 200%, and we believe that we have sufficient liquidity and capital resources to meet our business requirements for the next 12 months and thereafter. [[Image Removed: 549755818040]] [[Image Removed: 549755818044]] Under the eligible capital rules of theBermuda Monetary Authority ("BMA"), our Preferred Shares qualify as Tier 2 capital when considering the Bermuda Solvency Capital Requirements ("BSCR"). For purposes of the financial covenants in our credit facilities, total debt excludes hybrid capital (defined as our Subordinated Notes) not exceeding 15% of total capital attributable to Enstar. As ofMarch 31, 2023 , we were in compliance with the financial covenants in our credit facilities.Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Liquidity and Capital Resources
Liquidity and Capital Resources of Holding Company and subsidiaries
Holding Company Liquidity
We conduct substantially all of our operations through our subsidiaries. As such, the potential sources of liquidity to Enstar as a holding company consist of cashflows from our subsidiaries, including dividends, advances and loans, and interest income on loans to our subsidiaries. We also utilize credit loan facilities, and we have issued senior notes and preferred shares and guaranteed our Junior Subordinated Notes. As ofMarch 31, 2023 , we had$600 million of available unutilized capacity under our unsecured revolving credit agreement, which expires inAugust 2023 , and may request additional commitments under the facility up to an additional$400 million . To date, we have not requested any additional commitments under the facility. We are in the process of renewing the unsecured revolving credit facility with a view to finalize prior to the maturity of the facility. We use cash to fund new acquisitions of companies. We also utilize cash for our operating expenses associated with being a public company and to pay dividends on our preferred shares and interest and principal on loans from subsidiaries and debt obligations, including loans under our credit facilities, our Senior Notes and our Junior Subordinated Notes. We may, from time to time, raise capital from the issuance of equity, debt or other securities as we continuously evaluate our strategic opportunities. We filed an automatic shelf registration statement inMarch 2023 with theSEC to allow us to conduct future offerings of certain securities, if desired, including debt, equity and other securities. As we are a holding company and have no substantial operations of our own, our assets consist primarily of investments in subsidiaries and our loans and advances to subsidiaries. Dividends from our (re)insurance subsidiaries are restricted by (re)insurance laws and regulations, as described below. The ability of all of our subsidiaries to make distributions and transfers to us may also be restricted by, among other things, other applicable laws and regulations and the terms of our credit facilities and our subsidiaries' bank loans and other issued debt instruments. Based on our group's current corporate structure with aBermuda domiciled parent company and the jurisdictions in which we operate, if the cash and cash equivalents held by our foreign subsidiaries were to be distributed to us, as dividends or otherwise, such amount would not be subject to incremental income taxes; however, in certain circumstances withholding taxes may be imposed by some jurisdictions, including bythe United States . Based on existing tax laws, regulations and our current intentions, there were no accruals as ofMarch 31, 2023 for any material withholding taxes on dividends or other distributions.
Enstar Finance is a wholly-owned finance subsidiary under which we have issued our Junior Subordinated Notes. Similar to our holding company, Enstar Finance is dependent upon funds from other subsidiaries to pay any amounts due under the Junior Subordinated Notes in the form of distributions or loans, which may be restricted by, among other things, other applicable laws and regulations and the terms of our credit facilities and our subsidiaries' bank loans and other issued debt instruments.
Operating Company Liquidity
We expect that our operating companies will generate sufficient liquidity, together with our existing capital base and cash and investments acquired and from new business transactions, to meet cash requirements and to operate our business.
Sources of funds to our operating companies primarily consist of cash and
investment portfolios acquired on the completion of acquisitions and new
business, investment income earned, proceeds from sales and maturities of
investments and collection of reinsurance recoverables. We also collect small
amounts of premiums and fee and commission income.
Cash balances acquired upon the purchase of (re)insurance companies are
classified as cash provided by investing activities, whereas cash from new
business is classified as cash provided by operating activities.
The primary uses of funds by our operating companies are claims payments,
investment purchases, operating expenses and collateral requirements.
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Item 2 | Management's Discussion and Analysis | Liquidity and Capital Resources
The ability of our (re)insurance subsidiaries to pay dividends and make other
distributions is limited by the applicable laws and regulations of the
jurisdictions in which our (re)insurance subsidiaries operate, including
Europe, which subject these subsidiaries to significant regulatory restrictions.
These laws and regulations require, among other things, certain of our (re)insurance subsidiaries to maintain minimum capital requirements and limit the amount of dividends and other payments that these subsidiaries can pay to us, which in turn may limit our ability to pay dividends and make other payments.
As of
levels were in excess of the minimum levels required.
Our subsidiaries' ability to pay dividends and make other forms of distributions may also be limited by our repayment obligations under certain of our outstanding credit facility agreements and other debt instruments. Variability in ultimate loss payments and collateral amounts required may also result in increased liquidity requirements for our subsidiaries.
Sources and Uses of Cash
Cash and cash equivalents decreased by$187 million for the three months endedMarch 31, 2023 , which was largely due to cash used in financing activities of$349 million , partially offset by cash provided by operating activities and investing activities of$70 million and$94 million , respectively. Cash and cash equivalents decreased by$957 million for the three months endedMarch 31, 2022 , which was largely due to cash used in operating and investing activities of$643 million and$481 million , respectively, partially offset by cash provided by financing activities of$162 million . Analysis of Sources and Uses of Cash Three Months Ended March 31, 2023 2022 $ Change (in millions of U.S. dollars) Operating Cash Flow Activities Net paid losses$ (677)
Net sales and maturities (purchases) of trading securities 310
(191) 501 Net investment income 116 103 13 Cash consideration received for novation 94 - 94 Other sources (uses) 227 (137) 364 Net cash flows provided by (used in) operating activities 70 (643) 713 Investing Cash Flow Activities Net sales and maturities of AFS securities 147 102 45 Net purchases of Other Investments (54) (583) 529 Other sources (uses) 1 - 1 Net cash flows provided by (used in) investing activities 94 (481) 575 Financing Cash Flow Activities Net proceeds from loans - 213 (213) Preferred share dividends (9) (9) - Share repurchases (340) (42) (298)
Net cash flows (used in) provided by financing activities
$ 162 $ (511) Enstar Group Limited | First Quarter 2023 | Form 10-Q 42
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Analysis of Sources and Uses of Cash
Operating Cash Flow Activities
2023 vs 2022: cash provided by operating activities of$70 million for the three months endedMarch 31, 2023 was driven by cash from other sources of$227 million , which was largely generated by the release of funds held balances to cover net paid claims on certain portfolios, and net sales and maturities of trading securities of$310 million . We also received cash consideration for the Enhanzed Re gain on novation of$94 million and$116 million from net investment income received. Partially offsetting cash provided by operating activities was net paid losses of$677 million . In comparison, cash used in operating activities of$643 million for the three months endedMarch 31, 2022 was driven by net paid losses of$418 million and net purchases of trading securities of$191 million , partially offset by net investment income received of$103 million .
Investing Cash Flow Activities
2023 vs 2022: cash provided by investing activities of$94 million for the three months endedMarch 31, 2023 was primarily due to net sales and maturities of fixed income securities, AFS of$147 million , partially offset by net purchases of other investments of$54 million . In comparison, cash used in investing activities of$481 million for the three months endedMarch 31, 2022 was primarily due to net purchases of other investments of$583 million , partially offset by net sales and maturities of fixed income securities, AFS of$102 million .
Financing Cash Flow Activities
2023 vs 2022: cash used in financing activities of$349 million for the three months endedMarch 31, 2023 was primarily driven by an increase in share repurchases of$298 million , as a result of our strategic repurchase of our non-voting convertible ordinary shares during the first quarter of 2023. In comparison, cash provided by financing activities of$162 million for the three months endedMarch 31, 2022 was largely driven by net proceeds from loans of$213 million . Debt Obligations We utilize debt financing and loan facilities primarily for funding acquisitions and significant new business, investment activities and, from time to time, for general corporate purposes. Our debt obligations as ofMarch 31, 2023 andDecember 31, 2022 were as follows: Facility Origination Date Term March 31, 2023 December 31, 2022 (in millions of U.S. dollars)
4.95% Senior Notes due 2029 May 2019 10 years $ 496 $ 496 3.10% Senior Notes due 2031 August 2021 10 years 495 495 Total Senior Notes 991 991 5.75% Junior Subordinated Notes due 2040 August 2020 20 years 345 345 5.50% Junior Subordinated Notes due 2042 January 2022 20 years 494 493 Total Junior Subordinated Notes 839 838 Total debt obligations$ 1,830 $ 1,829
Under the eligible capital rules of the BMA, the Senior Notes qualify as Tier 3
capital and the Junior Subordinated Notes qualify as Tier 2 capital when
considering the BSCR.
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Item 2 | Management's Discussion and Analysis | Liquidity and Capital Resources
Credit Ratings
The following table presents our credit ratings as of
Credit ratings (1) Standard and Poor's Fitch Ratings Long-term issuer BBB (Outlook: Positive) BBB+ (Outlook: Stable) 2029 Senior Notes BBB BBB 2031 Senior Notes BBB- BBB 2040 and 2042 Junior Subordinated Notes BB+ BBB- Series D and E Preferred Shares BB+ BBB- (1) Credit ratings are provided by third parties,Standard & 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 rating2.
Contractual Obligations
Reserves for Losses and LAE
We generally attempt to match the duration of our investment portfolio to the duration of our general liability profile and generally seek to maintain investment portfolios that are shorter or of equivalent duration to the liabilities in order to provide liquidity for the settlement of losses and, where possible, to avoid having to liquidate longer-dated investments. The settlement of liabilities also has the potential to accelerate the natural payout of losses and policyholder benefits, which may require additional liquidity. As ofMarch 31, 2023 andDecember 31, 2022 , the weighted average estimated durations of our Run-off segment gross reserves for losses and LAE were 4.85 and 4.65 years, respectively. The increase from 2022 was driven by changes in reserve balances and a decrease in yield curves for the three months endedMarch 31, 2023 .
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 and strategic share repurchases, refer to Note 12 to our condensed consolidated financial statements. We may re-evaluate this strategy from time to time based on overall market conditions and other factors. We have 16,000 Series D Preferred Shares with an aggregate liquidation value of$400 million and 4,400 Series E Preferred Shares with an aggregate liquidation value of$110 million . The dividends on both Series of Preferred Shares are non-cumulative and may be paid quarterly in arrears, only when, as and if declared.
Any payment of common or preferred dividends must be approved by our Board. Our
ability to pay ordinary and preferred dividends is subject to certain
restrictions.
2 For information on risks related to our credit ratings, refer to "Item 1A. Risk Factors - Risks Relating to Liquidity and Capital Resources" and "Item 1A. Risk Factors - Risks Relating to Ownership of our Shares" in our Annual Report on Form 10-K for the year endedDecember 31, 2022 .Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Item 2 | Management's Discussion and Analysis | Liquidity and Capital Resources
Off-Balance Sheet Arrangements
As ofMarch 31, 2023 , we have entered into certain investment commitments and parental guarantees3. We also utilize unsecured and secured letters of credit4 and a deposit facility. We do not believe it is reasonably likely that these arrangements will have a material current or future effect on our financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, cash requirements or capital resources. Short-Term Long-Term Less than More than 1 Year 1 Year Total (in millions of U.S. dollars) Investing Activities Unfunded investment commitments (1)$ 385 $ 1,375 $ 1,760 Financing Activities Letters of credit - 1,762 1,762
(1) Refer to Note 15 to our condensed consolidated financial statements for
further details.
3 Refer to Note 15 to our condensed consolidated financial statements for
further details.
4 Refer to Note 17 to our consolidated financial statements included in our
Annual Report on Form 10-K for the year ended
details.
Enstar Group Limited | First Quarter 2023 | Form 10-Q
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Arthur J. Gallagher & Co. Acquires AccurART
Enstar Group Limited Reports First Quarter 2023 Results – Form 8-K
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