Add
ESGR to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ESGR > SEC Filings for ESGR > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following is a discussion and analysis of our results of operations for the three and nine months ended September 30, 2009 and 2008. This discussion and analysis should be read in conjunction with the attached unaudited condensed 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 November 2, 2009, we, through our wholly-owned subsidiary, Nordic Run-Off Limited, entered into a definitive agreement for the purchase of Forsakringsaktiebolaget Assuransinvest MF, or Assuransinvest, for a purchase price of SEK 78.8 million (approximately $11.1 million). Assuransinvest is a Swedish domiciled reinsurer that is in run-off. The purchase price is expected to be funded from available cash on hand. Completion of the transaction is conditioned on, among other things, regulatory approval and satisfaction of various customary closing conditions. The transaction is expected to close in the first quarter of 2010.
On October 15, 2009, we, through our wholly-owned subsidiary, Marlon Insurance Company Limited, completed the previously announced acquisition of Copenhagen Reinsurance Company Ltd., or Copenhagen Re, from Alm. Brand Forsikring A/S for a total purchase price of DKK149.2 million (approximately $30.0 million). Copenhagen Re is a Norwegian domiciled reinsurer that is in run-off. The acquisition was funded from available cash on hand.
On September 30, 2009, we, through our indirect subsidiary, Knapton Holdings Limited, entered into a definitive agreement for the purchase of British Engine Insurance Limited, or British Engine, from RSA Insurance Group plc for a total purchase price of GBP 28.0 million (approximately $45.5 million). British Engine is a U.K. domiciled reinsurer that is in run-off. The purchase price of approximately $45.5 million is expected to be financed in part by a bank loan facility to be finalized before closing and 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 fourth 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% 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 our selected consolidated statement of operations
data for each of the periods indicated.
Three Months Ended
September 30, Nine Months Ended September 30,
2009 2008 2009 2008
(in thousands of U.S. dollars)
INCOME
Consulting fees $ 4,112 $ 7,410 $ 11,627 $ 17,046
Net investment income 24,640 6,849 60,442 28,658
Net realized gains (losses) 2,912 (192 ) 1,982 (262 )
31,664 14,067 74,051 45,442
EXPENSES
Net reduction in loss and loss adjustment
expense liabilities (42,558 ) (3,469 ) (86,630 ) (28,267 )
Salaries and benefits 16,997 6,013 41,328 31,317
General and administrative expenses 12,195 10,121 35,487 36,004
Interest expense 4,262 7,919 13,902 18,878
Net foreign exchange (gain) loss (7,164 ) 25,056 (7,177 ) 18,787
(16,268 ) 45,640 (3,090 ) 76,719
Earnings (loss) before income taxes and share of
net earnings of partly owned company 47,932 (31,573 ) 77,141 (31,277 )
Income taxes (2,660 ) (10,434 ) (2,019 ) (13,389 )
Share of net earnings of partly owned company 196 - 465 -
Earnings (loss) before extraordinary gain 45,468 (42,007 ) 75,587 (44,666 )
Extraordinary gain - negative goodwill - - - 50,280
NET EARNINGS (LOSS) 45,468 (42,007 ) 75,587 5,614
Less: Net (earnings) loss attributable to
noncontrolling interest (10,481 ) 5,572 (20,318 ) (19,189 )
NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP
LIMITED $ 34,987 $ (36,435 ) $ 55,269 $ (13,575 )
|
Comparison of the Three Months Ended September 30, 2009 and 2008
We reported consolidated net earnings (loss), before net (earnings) loss attributable to noncontrolling interest, of approximately $45.5 million for the three months ended September 30, 2009 as compared to approximately $(42.0) million for the same period in 2008. The increase in earnings of approximately $87.5 million was primarily attributable to the following:
(i) An increase in investment income (inclusive of realized gains/(losses)) of $20.9 million primarily as a result of the reduction in the writedowns in fair value of our private equity portfolio classified as other investments of $28.1 million, partially offset by lower investment income reflecting the impact of lower global short-term and intermediate interest rates.
(ii) A movement in foreign exchange earnings from a loss of $25.1 million for the three months ended September 30, 2008 to a gain of $7.2 million for the three months ended September 30, 2009. This increase of $32.3 million arose primarily as a result of holding surplus net foreign currency assets at a time when the U.S. dollar was depreciating against the majority of currencies.
(iii) Reduced interest expense of $3.7 million due primarily to lower interest rates on outstanding term loan facility agreements.
(iv) An increased net reduction in loss and loss adjustment expense liabilities of $39.1 million.
(v) Reduced consulting fees of $3.1 million due primarily to decreased incentive fees earned from third-party arrangements.
(vi) A reduction in income taxes of $7.8 million due to lower tax liabilities recorded on the results of our taxable subsidiaries; partially offset by
(vii) An increase in salary and general and administrative costs of $13.1 million due primarily to increased salary costs related to our discretionary bonus plan as a result of increased net earnings in the period.
We recorded noncontrolling interest in net (earnings) loss of $(10.5) million and $5.6 million for the three months ended September 30, 2009 and 2008, respectively. The increase for the three months ended September 30, 2009 in noncontrolling interest was due primarily to: (1) an increase in net earnings for the three months ended September 30, 2009 as compared to the same period in 2008; and (2) an increase in the number of subsidiary companies for which there exists a noncontrolling interest. Accordingly, net earnings attributable to Enstar Group Limited increased from a loss of approximately $36.4 million for the three months ended September 30, 2008 to earnings of approximately $35.0 million for the three months ended September 30, 2009.
Consulting Fees:
Three Months Ended September 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 12,211 $ 15,332 $ (3,121 )
Reinsurance (8,099 ) (7,922 ) (177 )
Total $ 4,112 $ 7,410 $ (3,298 )
|
We earned consulting fees of approximately $4.1 million and $7.4 million for the three months ended September 30, 2009 and 2008, respectively. The decrease in consulting fees for the period primarily related to decreased incentive fees earned from third-party agreements.
Internal management fees of $8.1 million and $7.9 million were paid in the three months ended September 30, 2009 and 2008, respectively, by our reinsurance companies to our consulting companies. The increase in internal fees paid to the consulting segment was due primarily to increased fees paid from companies we acquired in the fourth quarter 2008 partially offset by 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 September 30,
Net Realized
Net Investment Income Gains/(Losses)
2009 2008 Variance 2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 1,713 $ (7,267 ) $ 8,980 $ - $ - $ -
Reinsurance 22,927 14,116 8,811 2,912 (192 ) 3,104
Total $ 24,640 $ 6,849 $ 17,791 $ 2,912 $ (192 ) $ 3,104
|
Net investment income for the three months ended September 30, 2009 increased by $17.8 million to $24.6 million, as compared to $6.8 million for the same period in 2008. The increase was primarily attributable to the following:
(i) Movement of $28.1 million in the fair value of our investments in New NIB Partners LP, the Flowers Fund, Affirmative Investment LLC and GSC European Mezzanine Fund II, LP from a writedown of $24.3 million for the three months ended September 30, 2008 to an appreciation of $3.8 million for the three months ended September 30, 2009; partially offset by
(ii) 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 2.00% for the three months ended September 30, 2008 to 0.25% for the three months ended September 30, 2009.
(iii) Decrease in the Australian dollar and British pound quarterly average foreign exchange rates to the U.S. dollar.
The average return on our cash and fixed maturities investments for the three months ended September 30, 2009 was 2.35%, as compared to the average return of 5.1% for the three months ended September 30, 2008. The average Standard & Poor's credit rating of our fixed income investments at September 30, 2009 was AA.
Net realized gains for the three months ended September 30, 2009 and 2008 were $2.9 million and $(0.2) million, respectively, with the increase relating primarily to the mark to market gains in the value of our equity portfolio.
Net Reduction in Loss and Loss Adjustment Expense Liabilities:
The following table shows the components of the movement in the net increase in
loss and loss adjustment expense liabilities for the three months ended
September 30, 2009 and 2008.
Three Months Ended
September 30,
2009 2008
(in thousands of
U.S. dollars)
Net Losses Paid $ (50,756 ) $ (36,366 )
Net Change in Case Reserves 91,540 26,468
Net Change in IBNR 3,952 13,850
Reduction in Estimates of Net Ultimate Losses 44,736 3,952
Reduction in Provisions of Unallocated Loss Adjustment Expense
Liabilities 9,830 13,672
Amortization of Fair Value Adjustments (12,008 ) (14,155 )
Net Reduction in Loss and Loss Adjustment Expense Liabilities $ 42,558 $ 3,469
|
The net reduction in loss and loss adjustment expense liabilities for the three months ended September 30, 2009 and 2008 was $42.6 million and $3.5 million, respectively.
The net reduction in loss and loss adjustment expense liabilities for the three months ended September 30, 2009 of $42.6 million was attributable to a reduction in estimates of net ultimate losses of $44.7 million and a reduction in provisions of unallocated loss adjustment expense liabilities, or ULAE, of $9.8 million, relating to 2009 run-off activity, partially offset by the amortization, over the estimated payout period, of fair value adjustments of $12.0 million relating to companies acquired.
The reduction in estimates of net ultimate losses of $44.7 million primarily related to the following:
(i) A reduction in net ultimate losses of $23.8 million in two of our insurance entities whereby previously advised net case and loss adjustment expense, or LAE, reserves of $18.6 million were settled without
payment. The application of our reserving methodologies to the reduced case and LAE reserves resulted in a reduction in net incurred but not reported, or IBNR, reserves of $5.2 million.
(ii) During the three months ended September 30, 2009, we culminated historic case reserve reviews for eight of our insurance and reinsurance subsidiaries' for which no updated advices had been received for a number of years. This review confirmed the redundancy of approximately 4,000 advised case reserves with an aggregate value of $16.6 million.
(iii) A reduction in net ultimate losses of $5.4 million in another of our insurance entities that completed, during September 2009, a Solvent Scheme of Arrangement relating to its U.K. liabilities. A Solvent Scheme of Arrangement is an arrangement between a company and its creditors whereby the company, by making a one-time full and final settlement of its liabilities to policyholders, is able to achieve financial certainty and finality. During the three months ended September 30, 2009, the entity in question settled its remaining U.K. net case reserves of $1.5 million, net IBNR reserves of $3.1 million and net reinsurance recoverables for the net receipt of $0.8 million.
The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended September 30, 2009 and September 30, 2008. Losses incurred and paid are reflected net of reinsurance recoverables.
Three Months Ended September 30,
2009 2008
(in thousands of U.S. dollars)
Balance as of July 1 $ 2,781,577 $ 2,311,590
Less: Reinsurance Recoverables 375,431 529,075
2,406,146 1,782,515
Incurred Related to Prior Years (42,558 ) (3,469 )
Paids Related to Prior Years (50,756 ) (36,366 )
Effect of Exchange Rate Movement 15,867 (102,521 )
Acquired on Acquisition of Subsidiaries - 198,502
Net balance as at September 30 $ 2,328,699 $ 1,838,661
Plus: Reinsurance Recoverables 357,253 526,527
Balance as at September 30 $ 2,685,952 $ 2,365,188
|
Salaries and Benefits:
Three Months Ended September 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 9,420 $ 7,759 $ (1,661 )
Reinsurance 7,577 (1,746 ) (9,323 )
Total $ 16,997 $ 6,013 $ (10,984 )
|
Salaries and benefits, which include expenses relating to our discretionary bonus and employee share plans, were $17.0 million and $6.0 million for the three months ended September 30, 2009 and 2008, respectively.
The increase in salaries and benefits was primarily attributable to:
(i) An increase in the discretionary bonus expense for the three months ended September 30, 2009 of $9.7 million.
(ii) Increased staff costs due to an increase in average staff numbers from 250 for the three months ended September 30, 2008 to 287 as at September 30, 2009; partially offset by
(iii) A reduction in the average British pound exchange rate to U.S. dollars for the three months ended September 30, 2008 and 2009 from approximately 1.895 to 1.641, respectively. Of our total headcount as at September 30, 2009 and September 30, 2008, approximately 67% and 64%, respectively, had their salaries paid in British pounds.
Expenses relating to our discretionary bonus plan will be variable and dependent on our overall profitability.
General and Administrative Expenses:
Three Months Ended September 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ 4,400 $ 3,375 $ (1,025 )
Reinsurance 7,795 6,746 (1,049 )
Total $ 12,195 $ 10,121 $ (2,074 )
|
General and administrative expenses attributable to the consulting segment increased by $1.0 million during the three months ended September 30, 2009, as compared to the three months ended September 30, 2008 due primarily to increased professional fees.
General and administrative expenses attributable to the reinsurance segment increased by $1.0 million during the three months ended September 30, 2009, as compared to the three months ended September 30, 2008. For the three months ended September 30, 2009 as compared to the same period in 2008, we had increased professional fees due primarily to legal fees incurred in respect to issues around the ongoing lawsuit described in "Part II - Other Information - Item 1. Legal Proceedings" of this filing.
Interest Expense:
Three Months Ended September 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ - $ - $ -
Reinsurance 4,262 7,919 (3,657 )
Total $ 4,262 $ 7,919 $ (3,657 )
|
Interest expense of $4.3 million and $7.9 million was recorded for the three months ended September 30, 2009 and 2008, respectively. The decrease in interest expense was 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 term facility agreement of our wholly-owned subsidiary, Cumberland Holdings Limited, which partially funded the Gordian acquisition, or the Cumberland Loan Facility, between September 30, 2008 and September 30, 2009.
(iii) A reduction in the average Australian dollar exchange rate to U.S. dollars from approximately 0.89 for the three months ended September 30, 2008 to approximately 0.83 for the three months ended September 30, 2009, respectively; partially offset by
(iv) Interest costs associated with the term facilities agreement in connection with the, Unionamerica Holdings Limited acquisition, or the Unionamerica Facilities Agreement, which we entered into in December 2008.
Foreign Exchange Gain/Loss:
Three Months Ended September 30,
2009 2008 Variance
(in thousands of U.S. dollars)
Consulting $ (89 ) $ (912 ) $ 823
Reinsurance 7,253 (24,144 ) 31,397
Total $ 7,164 $ (25,056 ) $ 32,220
|
We recorded a foreign exchange gain of $7.2 million for the three months ended September 30, 2009, as compared to a foreign exchange loss of $25.1 million for the same period in 2008. For the three months ended September 30, 2009, the foreign exchange gain arose primarily as a result of the matching of our non-U.S. dollar assets and liabilities at a time when the U.S. dollar has been depreciating against most major currencies along with realized foreign exchange gains earned on the maturity of non-U.S. dollar available-for-sale securities, 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 U.S. dollar. Unrealized foreign exchange gains (losses) on our non-U.S. dollar available-for-sale securities held by us as at September 30, 2009 are recorded through accumulated other comprehensive income.
In addition to the foreign exchange losses recorded in our consolidated statement of earnings for the three-month period ended September 30, 2009, we recorded in our condensed consolidated statement of comprehensive income currency translation adjustment gains, net of noncontrolling interest, for the three months ended September 30, 2009 of $20.7 million, as compared to losses of $14.2 million for the same period in 2008. For the three months ended September 30, 2009, the currency translation adjustment gains arose primarily as a result of translation adjustment gains of $21.2 million relating to Gordian, whose functional currency is Australian Dollars, partially offset by translation adjustment losses of $0.5 million relating to our consulting subsidiaries whose functional currency is British pounds.
The table below provides a summary of foreign exchange related losses recorded in earnings and in accumulated other comprehensive income for the three months ended September 30, 2008:
Three Months Ended September 30, 2008
AUD GBP Other Total
(in thousands of U.S. dollars)
Losses recorded through earnings $ (5,970 ) $ (15,223 ) $ (3,863 ) $ (25,056 )
Losses recorded through accumulated other
comprehensive income (12,898 ) (1,275 ) - (14,173 )
|
Australian Dollar Foreign Exchange
We incurred foreign exchange losses attributable to Gordian, our Australian based operations, recorded through earnings and accumulated other comprehensive income, as summarized in the below table:
Three Months Ended September 30, 2008 (in thousands of U.S. dollars)
RECORDED THROUGH EARNINGS . . . |
|
|