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| ESGR > SEC Filings for ESGR > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
The following is a discussion and analysis of our results of operations for the three and six months ended June 30, 2009 and 2008. This discussion and analysis should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Business Overview
Enstar Group Limited, or Enstar, was formed in August 2001 under the laws of Bermuda to acquire and manage insurance and reinsurance companies in run-off, and to provide management, consulting and other services to the insurance and reinsurance industry.
Since our formation we have acquired a number of insurance and reinsurance companies and are now administering those businesses in run-off. We derive our net earnings from the ownership and management of these companies primarily by settling insurance and reinsurance claims below the recorded loss reserves and from returns on the portfolio of investments retained to pay future claims. In addition, we have formed other businesses that provide management and consultancy services, claims inspection services and reinsurance collection services to our affiliates and third-party clients for both fixed and success-based fees.
Recent Transactions
On May 29, 2009, we, through our indirect subsidiary, Nordic Run-Off Limited, entered into a definitive agreement for the purchase of Copenhagen Reinsurance Company Ltd., or Copenhagen Re, from Alm. Brand Forsikring A/S for a total purchase price of approximately $28.0 million. Copenhagen Re is a Norwegian domiciled reinsurer that is in run-off. We expect the purchase price to be financed from available cash on hand. Completion of the transaction is conditioned on, among other things, regulatory approval and satisfaction of various customary closing conditions. We expect the transaction to close in the third quarter of 2009.
On January 31, 2009, we, through our indirect subsidiary, Sun Gulf Holdings Inc., completed the acquisition of all of the outstanding capital stock of Constellation Reinsurance Company Limited, or Constellation, for a total purchase price of approximately $2.5 million. Constellation is a New York domiciled reinsurer that is in run-off. The acquisition was funded from available cash on hand.
We own 50.1% of Shelbourne Group Limited, which in turn owns 100% of Shelbourne Syndicate Services Limited, the Managing Agency for Lloyd's Syndicate 2008, a syndicate approved by Lloyd's of London on December 16, 2007 to undertake Reinsurance to Close or "RITC" transactions (the transferring of liabilities from one Lloyd's Syndicate to another) with Lloyd's syndicates in run-off. In February 2009, Lloyd's Syndicate 2008 entered into a RITC agreement with a Lloyd's syndicate with total gross insurance reserves of approximately $67.0 million. JCF FPK I L.P., or JCF FPK, a joint investment program between J.C. Flowers II L.P., or the Flowers Fund, and Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC, or FPK, owns 25.0% of Shelbourne Group Limited.
The Flowers Fund is a private investment fund advised by J.C. Flowers & Co. LLC.
J. Christopher Flowers, a member of our board of directors and one of our
largest shareholders, is the founder and Managing Member of J.C. Flowers & Co.
LLC. John J. Oros, our Executive Chairman and a member of our board of
directors, is a Managing Director of J.C. Flowers & Co. LLC. In July 2008, FPK
acted as lead managing underwriter in our public share offering. An affiliate of
the Flowers Fund controls approximately 41% of FPK.
Results of Operations
The following table sets forth Enstar's selected consolidated statement of
operations data for each of the periods indicated.
Six Months Ended
Three Months Ended June 30, June 30,
2009 2008 2009 2008
INCOME
Consulting fees $ 4,179 $ 3,578 $ 7,515 $ 9,633
Net investment income 18,493 21,219 35,802 21,809
Net realized gains (losses) 5,080 1,014 (930 ) (70 )
27,752 25,811 42,387 31,372
EXPENSES
Net reduction in loss and loss adjustment
expense liabilities (17,393 ) (25,483 ) (44,072 ) (24,798 )
Salaries and benefits 11,914 13,947 24,331 25,304
General and administrative expenses 10,910 13,972 23,292 25,883
Interest expense 4,675 7,643 9,640 10,958
Net foreign exchange gain (1,611 ) (4,935 ) (13 ) (6,270 )
8,495 5,144 13,178 31,077
Earnings before income taxes and share of net
earnings of partly owned company 19,257 20,667 29,209 295
Income taxes 23 (3,193 ) 641 (2,954 )
Share of net earnings of partly owned company - - 269 -
Earnings (loss) before extraordinary gain 19,280 17,474 30,119 (2,659 )
Extraordinary gain - negative goodwill - - - 50,280
NET EARNINGS 19,280 17,474 30,119 47,621
Less: Net earnings attributable to
noncontrolling interest (10,529 ) (6,301 ) (9,837 ) (24,761 )
NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP
LIMITED $ 8,751 $ 11,173 $ 20,282 $ 22,860
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Comparison of the Three Months Ended June 30, 2009 and 2008
We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $19.3 million for the three months ended June 30, 2009 as compared to approximately $17.5 million for the same period in 2008. The increase in earnings of approximately $1.8 million was primarily attributable to the following:
(i) an increase in investment income (net of realized gains) of $1.3 million primarily as a result of the reversal of prior period writedowns on our equity portfolio partially offset by lower investment income reflecting the impact of lower global short-term and intermediate interest rates;
(ii) reduction in salary and general and administrative costs of $5.1 million due to reduced costs primarily as a result of a lower British pound exchange rate to the U.S. dollar;
(iii) reduced interest expense of $3.0 million due primarily to lower interest rates on outstanding loans along with lower outstanding principal on the term loan facility agreement of our wholly owned subsidiary, Cumberland Holdings Limited, or the Cumberland Loan Facility; and
(iv) a reduction in income taxes of $3.2 million due to lower tax liabilities on the results of our taxable subsidiaries; partially offset by
(v) decreased reduction in loss and loss adjustment expense liabilities of $8.1 million; and
(vi) a reduction in foreign exchange gains of $3.3 million.
We recorded noncontrolling interest in earnings of $10.5 million and $6.3 million for the three months ended June 30, 2009 and 2008, respectively. The increase for the three months ended June 30, 2009 in noncontrolling interest was due primarily to an increase in the number of subsidiary companies for which there exists a noncontrolling interest. Accordingly, net earnings attributable to Enstar Group Limited decreased from approximately $11.2 million for the three months ended June 30, 2008 to approximately $8.8 million for the three months ended June 30, 2009.
Consulting Fees:
Three Months Ended June 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 12,426 $ 12,615 $ (189 )
Reinsurance (8,247 ) (9,037 ) 790
Total $ 4,179 $ 3,578 $ 601
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We earned consulting fees of approximately $4.2 million and $3.6 million for the three months ended June 30, 2009 and 2008, respectively.
Internal management fees of $8.2 million and $9.0 million were paid in the quarters ended June 30, 2009 and 2008, respectively, by our reinsurance companies to our consulting companies. The decrease in internal fees paid to the consulting segment was due primarily to a decrease in fees paid by our reinsurance companies in respect of internal collection and audit services.
Net Investment Income and Net Realized Gains:
Three Months Ended June 30,
Net Realized
Net Investment Income Gains/(Losses)
2009 2008 Variance 2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 900 $ 1,707 $ (807 ) $ - $ - $ -
Reinsurance 17,593 19,512 (1,919 ) 5,080 1,014 4,066
Total $ 18,493 $ 21,219 $ (2,726 ) $ 5,080 $ 1,014 $ 4,066
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Net investment income for the three months ended June 30, 2009 decreased by $2.7 million to $18.5 million, as compared to $21.2 million for the same period in 2008. The decrease was primarily attributable to the following:
(i) lower investment income from fixed maturities and cash and cash equivalents, reflecting the impact of lower global short-term and intermediate interest rates - the average U.S. Federal Funds Rate has decreased from 2.08% for the three months ended June 30, 2008 to 0.25% for the three months ended June 30, 2009;
(ii) decrease in the Australian dollar and British pound quarterly average foreign exchange rates; partially offset by
(iii) an appreciation of $0.4 million in the fair value of our investments in New NIB Partners L.P., the Flowers Fund, Affirmative Investment LLC and GSC European Mezzanine Fund II, LP for the three months ended June 30, 2009.
The average return on the cash and fixed maturity investments for the three months ended June 30, 2009 was 1.96%, as compared to the average return of 2.88% for the three months ended June 30, 2008. The average Standard & Poor's credit rating of our fixed income investments at June 30, 2009 was AA.
Net realized gains for the three months ended June 30, 2009 and 2008 were $5.1 million and $1.0 million, respectively. The change between 2008 and 2009 of approximately $4.1 million relates primarily to mark to market gains in 2009 in the market value of our equity portfolio.
Net Reduction in Loss and Loss Adjustment Expense Liabilities:
The net reduction in loss and loss adjustment expense liabilities for the three months ended June 30, 2009 and 2008 were $17.4 million and $25.5 million, respectively. The net reduction in loss and loss adjustment expense liabilities for the three months ended June 30, 2009 of $17.4 million was attributable to a reduction in estimates of net ultimate losses of $17.7 million and a reduction in estimates of loss adjustment expense liabilities, or LAE, of $9.4 million, relating to 2009 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments of $9.8 million relating to companies acquired. The reduction in estimates of net ultimate losses of $17.7 million primarily related to the reduction in estimates of net ultimate losses of $13.0 million in one of our subsidiaries. This reduction in estimates of ultimate losses of $13.0 million was comprised of net favorable incurred loss development for the six months ended June 30, 2009 of $2.6 million and reductions in IBNR reserves of $10.4 million. The net favorable incurred loss development of $2.6 million, whereby net advised case and LAE reserves of $6.6 million were settled for net paid losses of $4.0 million, arose from the settlement of losses during the period below carried reserves. The net reduction in the estimate of the subsidiary's IBNR loss and loss adjustment expense liabilities of $10.4 million was the result of the application of our reserving methodologies to the reduced case and LAE reserves following the subsidiary's semi-annual actuarial review of reserves as required by local regulation.
The reduction in estimates of net ultimate losses of $25.2 million for the three months ended June 30, 2008 was primarily attributable to the reduction in estimates of net ultimate losses of $25.5 million related to one of our subsidiaries, which reduction was comprised of net favorable incurred loss development of $12.1 million and related reductions in IBNR reserves of $13.4 million. The net favorable incurred loss development of $12.1 million, whereby net advised case and LAE reserves of $21.2 million were settled for net paid losses of $9.1 million, arose from the settlement of non-commuted losses during the period below carried reserves and three commutations of assumed and ceded exposures at less than case and LAE reserves. The net reduction in the estimate of the subsidiary's IBNR loss and loss adjustment expense liabilities of $13.4 million was the result of an independent actuarial review and the application of our reserving methodologies to the reduced case and LAE reserves. During the three months ended June 30, 2008, another of our reinsurance subsidiaries commuted its largest exposure, which was fully reinsured by a single reinsurer with a AA- rating from Standard & Poors. The subsidiary paid net claims of $221.2 million and reduced net IBNR loss reserves by the same amount.
The following table shows the components of the movement in the net reduction in loss and loss adjustment expense liabilities for the three months ended June 30, 2009 and 2008.
Three Months Ended June 30,
2009 2008
(in thousands of U.S. dollars)
Net Losses Paid $ 67,449 $ 260,866
Net Change in Case and LAE Reserves (26,896 ) (43,985 )
Net Change in IBNR (57,946 ) (242,364 )
Net Reduction in Loss and Loss Adjustment
Expense Liabilities $ (17,393 ) $ (25,483 )
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The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended June 30, 2009 and June 30, 2008. Losses incurred and paid are reflected net of reinsurance recoverables.
Three Months Ended June 30,
2009 2008
(in thousands of U.S. dollars)
Balance as of April 1 $ 2,797,827 $ 2,700,687
Less: Reinsurance recoverables 379,615 662,929
2,418,212 2,037,758
Incurred Related to Prior Years (17,393 ) (25,483 )
Paids Related to Prior Years (67,449 ) (260,866 )
Effect of Exchange Rate Movement 72,776 31,106
Net balance as at June 30 $ 2,406,146 $ 1,782,515
Plus: Reinsurance recoverables 375,431 529,075
Balance as at June 30 $ 2,781,577 $ 2,311,590
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Salaries and Benefits:
Three Months Ended June 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 8,953 $ 8,775 $ (178 )
Reinsurance 2,961 5,172 2,211
Total $ 11,914 $ 13,947 $ 2,033
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Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $11.9 million and $13.9 million for the three months ended June 30, 2009 and 2008, respectively.
The reduction in total salaries and benefits of approximately $2.0 million is primarily attributable to:
(i) a reduction in the quarterly average British pound exchange rate to U.S. dollars for the three months ended June 30, 2008 and 2009 from approximately 1.972 to 1.552, respectively. Of our total headcount as at June 30, 2009 and June 30, 2008, approximately 67% and 63%, respectively, had their salaries paid in British pounds;
(ii) a reduction in the discretionary bonus expense for the three months ended June 30, 2009 of $0.5 million; partially offset by
(iii) increased staff costs due to an increase in average staff numbers for the three months ended June 30, 2008 of 249 to an average of 286 for the three months ended June 30, 2009.
Expenses relating to our discretionary bonus plan will be variable and dependent on our overall profitability.
General and Administrative Expenses:
Three Months Ended June 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 4,183 $ 5,004 $ 821
Reinsurance 6,727 8,968 2,241
Total $ 10,910 $ 13,972 $ 3,062
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General and administrative expenses attributable to the consulting segment decreased by $0.8 million during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008.
General and administrative expenses attributable to the reinsurance segment decreased by $2.2 million during the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The reduction in general and administrative expenses is primarily attributable to the following:
(i) a reduction in the quarterly average British pound exchange rate to U.S. dollars for the three months ended June 30, 2008 and 2009 from approximately 1.972 to 1.552, respectively;
(ii) a reduction in consulting and third-party management expenses; partially offset by
(iii) increased legal fees incurred in our U.S. subsidiaries; and
(iv) increased costs resulting from companies acquired subsequent to June 30, 2008.
Interest Expense:
Three Months Ended June 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ - $ - $ -
Reinsurance 4,675 7,643 2,968
Total $ 4,675 $ 7,643 $ 2,968
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Interest expense of $4.7 million and $7.6 million was recorded for the three months ended June 30, 2009 and 2008, respectively. The decrease in interest expense is primarily attributable to the combination of:
(i) a reduction in the principal balance on the outstanding loan relating to the acquisition of AMP Limited's Australian-based closed reinsurance and insurance operations, or Gordian;
(ii) a reduction in the Australian LIBOR interest rate on the Cumberland Loan Facility between June 30, 2008 and June 30, 2009; and
(iii) a reduction in the average Australian dollar exchange rate to U.S. dollars from approximately 0.944 to 0.762 for the three months ended June 30, 2008 and June 30, 2009, respectively.
Foreign Exchange Gain:
Three Months Ended June 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 663 $ 3 $ 660
Reinsurance 948 4,932 (3,984 )
Total $ 1,611 $ 4,935 $ (3,324 )
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We recorded a foreign exchange gain of $1.6 million for the quarter ended June 30, 2009, as compared to a foreign exchange gain of $4.9 million for the same period in 2008. For the quarter ended June 30, 2009, the foreign exchange gain arose primarily as a result of holding surplus British pounds relating primarily to cash collateral requirements to support British pound denominated letters of credit required by U.K. regulators, partially offset by foreign exchange losses arising as a result of the holding of surplus U.S. dollar assets in one of our subsidiaries whose functional currency is Australian dollars at a time when the U.S. dollar has been depreciating against the currency.
For the three months ended June 30, 2008, the foreign exchange gain arose primarily as a result of the holding of surplus net Australian dollars and Euros in the reinsurance segment at a time when these currencies had been appreciating against the U.S. dollar.
Income Tax Recovery/(Expense):
Three Months Ended June 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ (1,700 ) $ (7 ) $ (1,693 )
Reinsurance 1,723 (3,186 ) 4,909
Total $ 23 $ (3,193 ) $ 3,216
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We recorded an income tax recovery/(expense) of $0.1 million and $(3.2) million for the three months ended June 30, 2009 and 2008, respectively. During the three months ended June 30, 2009 and 2008, we incurred net income tax recovery/(expense) for our subsidiaries that operate in taxable jurisdictions of $0.1 million and $(6.7) million, respectively. For the three months ended June 30, 2008, this was partially offset by the expiration of the statute of limitations on certain previously recorded uncertain tax liabilities. In accordance with FIN 48, those liabilities were reversed with the corresponding adjustment being made to income tax recovery in the income statement. The benefit of the expiration of the statute of limitations on uncertain tax liabilities resulted in a recovery by us for the quarter ended June 30, 2008 of $3.5 million.
Noncontrolling Interest
Three Months Ended June 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ - $ - $ -
Reinsurance (10,529 ) (6,301 ) (4,228 )
Total $ (10,529 ) $ (6,301 ) $ (4,228 )
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We recorded noncontrolling interest in earnings of $10.5 million and $6.3 million for the three months ended June 30, 2009 and 2008, respectively. The increase for the three months ended June 30, 2009 in noncontrolling interest was due primarily to an increase in the number of subsidiary companies for which there exists a noncontrolling interest.
Comparison of the Six Months Ended June 30, 2009 and 2008
We reported consolidated net earnings, before extraordinary item and net earnings attributable to noncontrolling interest, of approximately $30.1 million for the six months ended June 30, 2009 as compared to a net (loss) of approximately $(2.7) million for the same period in 2008. The increase in earnings of approximately $32.8 million was primarily a result of the following:
(i) an increase in investment income of $14.0 million primarily due to a decrease in the cumulative writedowns on our private equity investments of $21.0 million, partially offset by lower investment income reflecting the impact of lower global short-term and intermediate interest rates and a $0.9 million increase in net realized losses;
(ii) an increased reduction in loss and loss adjustment expense liabilities of $19.3 million;
(iii) a reduction in salary and general and administrative costs of $3.6 million due to lower actual expenses primarily as a result of a lower British pound exchange rate to the U.S. dollar; and
(iv) a reduction in income taxes of $3.6 million due to lower tax liabilities on the results of our taxable subsidiaries; partially offset by
(v) a reduction in foreign exchange gains and consulting fees of $8.4 million.
We recorded noncontrolling interest in earnings of $9.8 million and $24.8 million for the six months ended June 30, 2009 and 2008, respectively. The decrease for the six months ended June 30, 2009 in noncontrolling interest was due primarily to the noncontrolling interest's share of the negative goodwill relating to the Gordian
acquisition in 2008. Accordingly, net earnings attributable to Enstar Group Limited decreased from approximately $22.9 million for the six months ended June 30, 2008 to approximately $20.3 million for the six months ended June 30, 2009.
Consulting Fees:
Six Months Ended June 30,
2009 2008 Variance
(in thousands of U.S. dollars)
. . .
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