ENSTAR GROUP(ESGRP) - 2024 Q4 - Annual Report

Part I Business Enstar specializes in capital release for run-off (re)insurance portfolios, with a strategy of acquiring, managing liabilities, investing, and redeploying capital, organized into Run-off and Investments segments - Enstar's core business is offering capital release solutions by acquiring and managing run-off (re)insurance portfolios[23] - On July 29, 2024, Enstar entered a merger agreement with a Sixth Street-backed entity, expected to close mid-2025, making Enstar a wholly-owned subsidiary[24] - Effective January 1, 2024, Enstar reorganized into two reportable segments: Run-off and Investments, discontinuing former Assumed Life and Legacy Underwriting segments[79][80] - The company's business strategy follows a four-step process: Acquire New Business, Manage Liabilities, Manage Investments, and Redeploy Capital/Return Value[34][46][57][72] - Enstar's major operating insurance subsidiaries are in the US, Bermuda, and UK, with Bermuda entities accounting for 84% of net liability for losses and LAE as of year-end 2024[83] Our Business And Strategy Enstar acquires and manages run-off (re)insurance portfolios, employing a four-pillar strategy: new business sourcing, liability management, investment portfolio management, and capital redeployment - Enstar offers diverse capital release solutions, including Loss Portfolio Transfers (LPTs), Adverse Development Covers (ADCs), run-off company acquisitions, and a new Forward Exit Option (FEO)[35][37][38][39][40] - Liability management strategies include active claims management, claims oversight, negotiating commutations and policy buybacks, and managing reinsurance recoverables[47][49][50][52] - The investment strategy classifies assets into core (investment-grade fixed income) and non-core (equities, hedge funds, private equity) for diversification and enhanced returns[58][62][64] - Excess capital from liability settlements is primarily redeployed into the business for future transactions and financing, with share repurchases also returning value to shareholders[73] Competition Increased competition from new entrants and alternative capital in the legacy (re)insurance market pressures deal pricing, though Enstar leverages its reputation and relationships for competitive advantage - The legacy market faces increased competition from new entrants backed by alternative capital, pressuring deal pricing and leading to some competitor exits[75][76] - PwC data shows 13 different acquirers completed run-off transactions in 2024, up from 12 in 2023, indicating a diverse competitive landscape[75] - Enstar's long-term business relationships, price competitiveness, and established transaction management reputation provide a significant competitive advantage[77] Our Organization Effective January 1, 2024, Enstar operates with two segments, Run-off and Investments, discontinuing former Assumed Life and Legacy Underwriting segments - As of January 1, 2024, Enstar operates under two reportable segments: Run-off and Investments[79] - The former Assumed Life and Legacy Underwriting segments were discontinued as reportable segments due to cessation of active business activities[79][81] Major Operating Subsidiaries by Net Liability for Losses and LAE (as of Dec 31, 2024) | Regulated Company Jurisdiction | % of Net Liability for Losses and LAE | | :--- | :--- | | United States | 8% | | Clarendon National Insurance Company | | | Fletcher Reinsurance Company | | | Yosemite Insurance Company | | | Bermuda | 84% | | Cavello Bay Reinsurance Limited | | | Fitzwilliam Insurance Limited | | | SGL No.1 Limited | | | United Kingdom | 8% | | Mercantile Indemnity Company Limited | | | River Thames Insurance Company Limited | | Human Capital Resources Enstar had 790 employees as of December 31, 2024, focusing on DE&I, competitive compensation, and professional development, earning "Outstanding Place to Work" for the third year - Employee count was 790 as of December 31, 2024, a slight decrease from 805 in the prior year[84] - DE&I efforts in 2024 resulted in half of new hires being women and the establishment of two new Employee Resource Groups, totaling five[87] Global Gender Metrics as of December 31, 2024 | Category | Female | Male | | :--- | :--- | :--- | | Total Workforce | 51% | 49% | | Senior Management | 38% | 62% | | Board of Directors | 17% | 83% | - For the third consecutive year, Enstar received the 'Outstanding Place to Work 2024' award from People Insight, reflecting strong employee engagement[91] Enterprise Risk Management Enstar's ERM Framework identifies, assesses, and manages risks through disciplined acquisitions, rewarded investment risk, loss reserving within appetite, and a "Three Lines Model" governance structure - The ERM Framework identifies, assesses, treats, monitors, and reports on risks affecting strategic, operational, and financial objectives[93] - The risk management strategy focuses on disciplined acquisitions, rewarded investment risk, maintaining loss reserving risk within appetite, and minimizing various operational and financial risks[95][101] - A "Three Lines Model" (Management, Risk & Compliance, and Internal Audit) delineates accountabilities and provides checks and balances in risk management[105] - An Emerging Risk Framework monitors difficult-to-quantify risks that may crystallize over time, overseen by management and group risk committees[109] Regulation Enstar's (re)insurance business is extensively regulated across multiple jurisdictions, with the BMA as group supervisor, imposing solvency, governance, and reporting requirements - The Bermuda Monetary Authority (BMA) acts as Enstar's group supervisor, coordinating regulation and assessing group-wide solvency and governance[110][112][113] - Bermuda-regulated subsidiaries must meet minimum liquidity, solvency margin, and Enhanced Capital Requirements (ECR), with restricted dividend payments requiring BMA approval for run-off companies[120][121] - U.K. subsidiaries, regulated by PRA and FCA, must comply with Solvency II framework's Solvency Capital Requirements (SCR), requiring regulatory approval for dividend payments[123][125][126] - U.S. subsidiaries are subject to state-level regulation, including risk-based capital (RBC) requirements and limitations on dividend payments to the parent company[133][134][135] Risk Factors Enstar faces significant risks including merger uncertainties, run-off reserve adequacy, evolving tax legislation, liquidity and capital constraints, investment market volatility, regulatory compliance, operational vulnerabilities, and share ownership structure Risks Relating to the Proposed Merger The pending merger with Sixth Street introduces risks including non-completion, business disruption, contractual restrictions, significant costs, management distraction, and potential conflicts of interest post-merger - The merger is subject to conditions, including regulatory approvals, and non-completion could adversely affect business, financial condition, and stock price[166] - During the pre-closing period, Enstar faces contractual restrictions limiting alternative business opportunities or strategic changes without buyer approval[163][168] - Significant cash distributions are expected with the merger, including a ~$500 million return of capital to shareholders and subsequent distributions for parent company debt servicing[179] - Post-merger, the new parent company's ownership of ordinary shares may create conflicts of interest with other security holders, prioritizing its investment value[180] Risks Relating to our Run-off Business Run-off business risks include inadequate loss reserves for long-tail liabilities like A&E claims, challenges in a competitive acquisitions market, and potential impacts of climate change on liabilities and investments - Inadequate loss reserves could materially harm financial results, as reserve estimation involves significant judgment and actual losses may exceed estimates[181][183] - As of December 31, 2024, the company held $1.8 billion in A&E liabilities and $545 million in defendant A&E liabilities, facing significant estimation uncertainty due to long latency and evolving legal environments[184] - Sustaining growth through acquisitions is challenging in a highly competitive market, and failure to consummate transactions could hinder future growth[186] - Climate change presents risks, potentially adversely affecting returns from the run-off business and the investment portfolio's value[191] Risks Relating to Taxation Enstar faces tax risks from OECD Pillar II and Bermuda's new 15% CIT, though it expects five-year deferrals, with a risk of foreign tax authorities asserting taxable presence in higher-tax jurisdictions - The OECD Pillar II initiative and Bermuda's new 15% Corporate Income Tax (CIT) could materially affect the company, though Enstar expects a five-year deferral for both, postponing impact until at least 2030[194][198][199] - Qualification for Bermuda CIT and UTPR deferrals depends on operating in six or fewer jurisdictions, tested annually, and could be lost with operational expansion[197][199][433] - Bermuda CIT enactment allowed a deferred tax asset via an Economic Transition Adjustment (ETA), but the five-year tax deferral will reduce its utilizable portion[200][434] - Tax authorities in higher-tax jurisdictions like the U.S., U.K., or Australia could assert Enstar's foreign subsidiaries have a taxable presence, leading to unexpected tax liabilities[203] Risks Relating to Liquidity and Capital Resources Enstar's liquidity and capital face risks from statutory capital requirements, potential future capital needs, collateral posting for reinsurance, and restricted subsidiary dividend distributions - Statutory capital requirements are market-sensitive, and inadequate capital could lead to regulatory restrictions and trigger counterparty rights in reinsurance agreements[205][207] - Future capital needs may necessitate raising additional funds via debt or equity, which might be unavailable or on unfavorable terms[208] - Reinsurance subsidiaries often must post collateral, and inability to do so could significantly hinder business operations and new transaction completion[211] - As a holding company, Enstar relies on subsidiary distributions for obligations, but these are limited by insurance laws and regulations across jurisdictions[213] Risks Relating to our Investments Enstar's financial results are exposed to investment risks from interest rate and credit spread fluctuations, illiquid and volatile alternative assets, subjective valuations, and suboptimal liquidations due to unpredictable liability payouts - A significant portion of income derives from invested assets, primarily fixed income securities, whose value is subject to market fluctuations from interest rate and credit spread changes[216] - Investments in alternative assets like hedge funds, private equity, and CLOs may be illiquid, volatile, and carry greater risk than traditional fixed income securities[220][221] - Investment valuation, especially for alternative and less-liquid assets, involves subjective methodologies and estimations, potentially leading to inaccurate valuations and adverse financial results[222][223] - Unpredictable liability payments create liquidity demands, potentially forcing suboptimal investment liquidations and harming portfolio performance[224] Risks Relating to Laws and Regulation Enstar faces significant regulatory risks from extensive insurance laws, evolving frameworks like Solvency II, and compliance with economic sanctions and anti-corruption laws, with potential for severe penalties - The company is subject to extensive global insurance laws and regulations restricting operations, limiting subsidiary dividend capacity, and prescribing solvency and capital standards[226] - Failure to comply with regulations may lead to governmental authorities suspending business activities, imposing monetary penalties, or commencing delinquency proceedings[226] - Regulatory frameworks like Solvency II in Europe and similar Bermuda regimes require significant compliance resources and may impose additional capital requirements[227] - The business is subject to sanctions and foreign corrupt practices laws, and violations could lead to civil or criminal penalties and adversely affect financial condition[229][230] Risks Relating to our Operations Enstar's operational risks include dependence on key personnel, potential conflicts of interest, cybersecurity threats, and reliance on outsourced providers, all of which could adversely affect business - The company's success depends on executive officers and key personnel, especially for run-off acquisitions, and their loss could materially harm the business[231] - Cybersecurity events, computer viruses, or IT system failures could disrupt business, cause critical information loss, and lead to increased costs and reputational damage[233] - The introduction of Artificial Intelligence (AI) creates new risks, including model vulnerabilities and potential for biased outputs, requiring robust governance[234] - Enstar outsources certain functions to third-party providers, and a breach of their obligations could adversely affect business and results of operations[239] Risks Relating to Ownership of our Shares Ownership of Enstar's shares carries risks from market price volatility, thin trading, concentrated ownership, anti-takeover provisions, and potential difficulties for shareholders to protect their interests under Bermuda law - The market price for Enstar's securities may experience significant volatility, and thinly traded ordinary shares could decline in value with large sales[241][242] - A few significant shareholders, including Stone Point Capital LLC funds, collectively own a substantial portion of voting shares, exercising significant influence over corporate matters[243] - Corporate structure and Bermuda law provisions may discourage third-party takeovers, potentially depriving shareholders of takeover premiums[244][246] - Dividends on preferred shares are non-cumulative and payable only when declared, with no current intention to pay dividends on ordinary shares[247][248] Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[256] Cybersecurity Risk Disclosures Enstar manages cybersecurity risks with a NIST-based information security program, robust governance, a Three Lines Model, and an incident response plan, with no material threats reported to date - The company's information security program is based on the National Institute of Standards and Technology (NIST) Cybersecurity Framework[257] - Cybersecurity governance includes management oversight by the CIO and GISO, with ultimate oversight delegated to the Board's Risk Committee[259][260] - A Cyber and Data Incident Response Plan, involving a Cyber Incident Response Team and Crisis Oversight Committee, assesses and addresses potential threats[262] - As of the report date, no cybersecurity threats have materially affected or are reasonably likely to materially affect the company's business, operations, or financial condition[265] Properties Enstar leases office space globally, including its Bermuda principal office, and believes current properties are sufficient for foreseeable operational needs - Enstar leases all its office space, with its principal executive office in Hamilton, Bermuda[266] - The company believes its current leased properties are sufficient for foreseeable operations[266] Legal Proceedings Legal proceedings information is incorporated by reference from Note 26 of the consolidated financial statements - A discussion of legal proceedings is incorporated by reference from Note 26 of the consolidated financial statements[268] Mine Safety Disclosures The company reports this item is not applicable - Not applicable[269] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Enstar's ordinary shares trade on NASDAQ (ESGR), with 1,030 shareholders, no historical ordinary dividends, and no repurchases in Q4 2024, underperforming key indices from 2019-2024 - The company's ordinary shares trade on the NASDAQ under the symbol "ESGR"[271] - Enstar has not historically declared ordinary share dividends, preferring to retain earnings for business investment or share repurchases[272] - There were no repurchases of the company's equity securities during the fourth quarter of 2024[273] Indexed Returns for Years Ended December 31 (2019-2024) | Index | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Enstar | 100.00 | 99.05 | 119.69 | 111.69 | 142.29 | 155.69 | | S&P 500 Index | 100.00 | 118.40 | 152.39 | 124.79 | 157.59 | 197.02 | | S&P Property & Casualty Index | 100.00 | 106.96 | 127.58 | 151.65 | 168.05 | 227.67 | Management's Discussion and Analysis of Financial Condition and Results of Operations Enstar's 2024 net income decreased to $540 million due to tax expense, goodwill impairment, and lower other income, despite strong investment returns and $1.6 billion in assumed net loss reserves - A merger agreement with a Sixth Street-backed entity was signed July 29, 2024, for $338 per share, totaling $5.1 billion, resulting in a $63 million goodwill impairment charge[286][287] - During 2024, Enstar completed several significant run-off transactions, assuming $1.6 billion in net loss reserves for $1.5 billion in consideration[290][623] Consolidated Financial Highlights (2022-2024) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net Income (Loss) Attributable to Enstar Ordinary Shareholders (in millions) | $540M | $1,082M | ($906M) | | Book Value Per Share (BVPS) | $380.29 | $343.45 | $262.24 | | Return on Equity (ROE) (%) | 10.7% | 24.2% | (15.6)% | | Run-off Liability Earnings (RLE %) (%) | 1.3% | 1.1% | 6.3% | | Total Investment Return (TIR %) (%) | 6.3% | 7.2% | (9.0)% | - The decrease in 2024 net income was primarily due to a $62 million tax expense (vs. a $250 million benefit in 2023), the $63 million goodwill impairment, and a $221 million decrease in other income[294] Operational Highlights 2024 operational highlights include a $5.1 billion merger agreement with Sixth Street, triggering a $63 million goodwill impairment, $1.6 billion in assumed net loss reserves from run-off transactions, and Cavello receiving an 'A' S&P rating - On July 29, 2024, Enstar entered a merger agreement for $338 per share, totaling $5.1 billion, expected to close mid-2025[286] - The merger agreement resulted in a full $63 million goodwill impairment charge in 2024, as the deal's valuation was less than the company's book value[287] - Enstar completed seven significant run-off transactions in 2024, assuming approximately $1.6 billion in net loss reserves[290] - In March 2024, Cavello, Enstar's main run-off consolidator, received an 'A' Insurer Financial Strength Rating from S&P with a stable outlook[289] Consolidated Results of Operations Enstar's 2024 net income attributable to ordinary shareholders decreased to $540 million from $1.1 billion in 2023, driven by tax swing, lower other income, and goodwill impairment, despite stable investment returns - Net income attributable to Enstar ordinary shareholders fell by $542 million to $540 million in 2024, compared to $1.1 billion in 2023[294] - Primary drivers for the 2024 profit decline were a shift from a $250 million tax benefit in 2023 to a $62 million tax expense in 2024, a $63 million goodwill impairment, and a $221 million decrease in other income[294] - Book value per share (BVPS) increased by 10.7% to $380.29 at year-end 2024, up from $343.45 at year-end 2023[297] - The 2023 net income of $1.1 billion was a significant improvement from the $906 million net loss in 2022, primarily due to favorable investment returns and a large gain from the Enhanzed Re life annuity block novation[300] Results of Operations by Segment Effective January 1, 2024, Enstar's Run-off segment reported a $44 million net loss in 2024 due to goodwill impairment, while the Investments segment generated $1.0 billion net income, slightly down from 2023 - The Run-off segment's net loss of $44 million in 2024 was mainly caused by a $63 million goodwill impairment and a $44 million decrease in favorable prior period development compared to 2023[348] - The Investments segment's net income decreased by $40 million to $1.0 billion in 2024, driven by a $114 million negative swing in fixed income returns and a $31 million negative swing in equity method investments[373] - The former Assumed Life segment ceased operations, recognizing a final net income of $277 million in 2023 from the novation of its life annuity block to Monument Re[389][390] - Corporate and Other activities resulted in a net loss of $456 million in 2024, an increase from a $337 million loss in 2023, largely due to a significant negative change in income tax from a benefit to an expense[400] Current Outlook Enstar maintains a positive run-off business outlook with ILS ventures, a cautious investment outlook due to volatility, and expects a five-year deferral for Bermuda's new 15% Corporate Income Tax - The company is expanding run-off solutions into the Insurance Linked Securities (ILS) market, including a third-party capital platform transaction and a forward exit option (FEO)[409][410] - The investment outlook is uncertain due to geopolitical tensions and interest rate volatility, but higher rates offer opportunities for reinvestment at higher yields[415][416][418] - Enstar monitors both economic inflation, which has subsided, and social inflation, which remains a persistent industry headwind[421][422] - The company expects to qualify for a five-year deferral of the new 15% Bermuda Corporate Income Tax, delaying its applicability until at least 2030[430][432] Liquidity and Capital Resources Enstar maintains strong liquidity with $1.1 billion cash and $7.9 billion total capitalization, an $800 million undrawn credit facility, and $483 million operating cash flow, despite subsidiary dividend restrictions - As of December 31, 2024, the company had $1.1 billion in cash and cash equivalents and total capitalization of $7.9 billion[437][441] - Holding company cash increased to $534 million, partly to fund the expected $500 million return of capital to shareholders upon merger closing[443] - The company has an $800 million revolving credit facility that was undrawn as of year-end 2024[445] - Cash provided by operating activities was $483 million in 2024, a decrease from $523 million in 2023[459][460] Debt Obligations as of December 31, 2024 | Facility | Due Date | Amount (in millions) | | :--- | :--- | :--- | | 4.95% Senior Notes | May 2029 | $497 | | 3.10% Senior Notes | Sep 2031 | $496 | | 5.75% Junior Subordinated Notes | Aug 2040 | $346 | | 5.50% Junior Subordinated Notes | Jan 2042 | $494 | | Total Debt Obligations | | $1,833 | Critical Accounting Estimates Critical accounting estimates include highly uncertain loss and LAE reserves (especially for A&E), deferred tax asset valuation allowances, Bermuda CIT's Economic Transition Adjustment, and Level 3 investment/insurance contract valuations using internal models - The estimation of reserves for losses and LAE is the most critical accounting estimate, involving complex judgments; IBNR reserves constituted 46.5% of total net Run-off reserves as of year-end 2024[482][484][485] - Valuation allowances on deferred tax assets require assessing the 'more likely than not' realization based on future taxable income projections[511] - The new Bermuda Corporate Income Tax required an Economic Transition Adjustment (ETA) valuation, resulting in a $205 million deferred tax asset in 2023, reduced by $77 million in 2024 due to a five-year tax deferral[514][518] - Fair value for certain insurance contracts uses an internal model based on discounted cash flows plus a risk margin, with key unobservable inputs like WACC and average liability payout period[525][901] Quantitative and Qualitative Disclosures About Market Risk Enstar faces interest rate, credit, equity price, and foreign currency risks, managing them through investment strategy, credit quality, and hedging, with a 100 bps interest rate increase hypothetically decreasing fixed income value by $402 million - The company's primary market risks are interest rate, credit, equity price, and foreign currency risk[533] Interest Rate Sensitivity Analysis (as of Dec 31, 2024) | Interest Rate Shift (bps) | Change in Unrealized Value (in millions) | | :--- | :--- | | -100 | $439 | | -50 | $215 | | +50 | ($205) | | +100 | ($402) | - As of December 31, 2024, the fixed income portfolio had an average credit quality rating of A+, with 5.2% rated below investment grade[539][385] - The fair value of equities at risk was $2.6 billion as of December 31, 2024, and a 10% market decline would result in a hypothetical loss of $262 million[543][544] - Total net foreign currency exposure was $11 million as of December 31, 2024, with a 10% adverse USD movement having a pre-tax impact of $1 million[546] Financial Statements and Supplementary Data This section presents Enstar's audited consolidated financial statements for 2024, including balance sheets, statements of operations, comprehensive income, equity changes, and cash flows, with detailed notes on key accounting policies, merger, investments, and loss reserves - The independent auditor's report from PricewaterhouseCoopers LLP provides an unqualified opinion on consolidated financial statements and internal control effectiveness[553][555] - Critical Audit Matters include valuation of losses and LAE (including fair value) and defendant asbestos liabilities, due to significant management judgment and complexity[562][563][567] Consolidated Balance Sheet Summary (as of Dec 31, 2024) | Category | Amount (in millions) | | :--- | :--- | | Total Investments | $16,453 | | Cash and Cash Equivalents | $1,554 | | Total Assets | $20,407 | | Losses and Loss Adjustment Expenses | $11,404 | | Debt Obligations | $1,833 | | Total Liabilities | $14,310 | | Total Shareholders' Equity | $6,097 | Consolidated Statement of Operations Summary (Year Ended Dec 31, 2024) | Category | Amount (in millions) | | :--- | :--- | | Total Revenues | $1,205 | | Total Expenses | $544 | | Net Income | $581 | | Net Income Attributable to Enstar Ordinary Shareholders | $540 | | Diluted Earnings Per Share | $35.90 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports this item is not applicable - Not applicable[1096] Controls and Procedures As of December 31, 2024, management concluded disclosure controls and internal control over financial reporting were effective, with no material changes reported in Q4 2024 - Management, including the CEO and CFO, concluded disclosure controls and procedures were effective as of December 31, 2024[1097] - Management concluded internal control over financial reporting was effective as of December 31, 2024, based on the COSO framework[1100] - There were no material changes in internal control over financial reporting during the fourth quarter of 2024[1102] Part III Directors, Executive Officers and Corporate Governance Information for Items 10-14 is incorporated by reference from the definitive proxy statement for the 2025 Annual General Meeting of Shareholders - Information for Items 10 through 14 is incorporated by reference from the definitive proxy statement for the 2025 Annual General Meeting of Shareholders[1106] Part IV Exhibits, Financial Statement Schedules Financial statements and schedules are provided under Item 8, with exhibits listed in the accompanying exhibit index - Financial Statements and Schedules are located in Item 8 of the report[1111] - A list of exhibits is provided in the exhibit index preceding the signature page[1111] Form 10-K Summary The company has opted to omit the Form 10-K summary - The Form 10-K summary has been omitted at the company's option[1110]