Enstar(ESGR) - 2023 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Management's Discussion and Analysis of Financial Condition and Results of Operations Enstar's net earnings significantly improved to $483 million, driven by favorable investment returns and other income, despite lower prior period development Consolidated Financial Performance Summary (Nine Months Ended Sep 30) | Financial Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Earnings (Loss) Attributable to Enstar | $483 million | ($1,133) million | $1,616 million | | Return on Equity (ROE) | 10.8% | (19.5)% | 30.3 pp | | Book Value Per Share (BVPS) | $282.37 | - | - | | Total Investment Return (TIR) (Annualized) | 4.7% | (13.0)% | 17.7 pp | | Run-off Liability Earnings (RLE) | 0.3% | 4.0% | (3.7) pp | - Completed a Loss Portfolio Transfer (LPT) with QBE, assuming $2.0 billion in net loss reserves for $1.9 billion in consideration, and another with RACQ, assuming $179 million in net loss reserves[19] - Completed the unwind of Enhanzed Re, recognizing a $275 million net gain on the novation of a life annuity portfolio to Monument Re in Q1 2023[21] - Repurchased all 1,597,712 outstanding non-voting convertible ordinary shares from CPP Investments for $341 million in March 2023[23] Operational Highlights Enstar completed key LPT transactions, unwound Enhanzed Re, repurchased shares, and enhanced its credit facility and rating Key Transactions in 2023 | Counterparty | Transaction Type | Net Loss Reserves Assumed | Consideration | | :--- | :--- | :--- | :--- | | QBE | LPT | $2.0 billion | $1.9 billion | | RACQ | LPT | $179 million | $179 million | - The unwind of Enhanzed Re was completed, resulting in an inception-to-date return of 24%, including a $275 million net gain from novating a life annuity block[21] - Capital activities included repurchasing all outstanding Series C and Series E non-voting ordinary shares for $341 million, increasing the revolving credit facility to $800 million, and receiving a credit rating upgrade to BBB+ from S&P[23] Consolidated Results of Operations Net earnings reached $483 million due to $660 million in favorable investment returns, despite lower prior period development, increasing BVPS by 7.7% Financial Results (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Earnings Attributable to Enstar | $483M | ($1,133M) | | Total Investment Return in Earnings | $660M | ($1,300M) | | Favorable Prior Period Development | $35M | $476M | | Other Income | $280M | $33M | - BVPS and Adjusted BVPS increased by 7.7% and 7.0% respectively from year-end 2022, driven by comprehensive income and accretive share repurchases[34] - Net investment income increased by $169 million year-over-year, primarily due to reinvesting at higher yields and rising interest rates on floating-rate securities[30][83] Non-GAAP Financial Measures Enstar uses non-GAAP measures like Adjusted BVPS and ROE to assess core performance by excluding interest rate volatility and non-recurring items - Management uses non-GAAP measures to assess performance by excluding the impact of interest rate movements on assets and liabilities, which they believe impairs comparability[106][107] Reconciliation of BVPS to Adjusted BVPS* | As of | BVPS (GAAP) | Adjusted BVPS* (Non-GAAP) | | :--- | :--- | :--- | | Sep 30, 2023 | $282.37 | $277.01 | | Dec 31, 2022 | $262.24 | $258.92 | Reconciliation of ROE to Adjusted ROE* (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | ROE (GAAP) | 10.8% | (19.5)% | | Adjusted ROE (Non-GAAP)* | 10.8% | (5.2)% | Results of Operations by Segment Investments segment drove profitability with $627 million in earnings, while Run-off recorded a $42 million loss and Assumed Life gained $276 million Segment Net Earnings (Loss) (Nine Months Ended Sep 30, 2023) | Segment | Net Earnings (Loss) | | :--- | :--- | | Run-off | ($42 million) | | Assumed Life | $276 million | | Investments | $627 million | | Legacy Underwriting | $0 | | Corporate and other (attributable to Enstar) | ($378 million) | - The Run-off segment's performance declined due to a $160 million decrease in favorable prior period development compared to the prior year[134] - The Assumed Life segment's earnings were driven by a $275 million pre-tax gain on the novation of the Enhanzed Re life annuity block[141][142] Current Outlook Enstar anticipates market volatility but sees long-term opportunities from higher interest rates and continues to pursue run-off transactions - Entered into an agreement with AIG to provide up to $400 million of adverse development cover on Validus Re's carried loss reserves, effective November 1, 2023[167] - Expects market volatility to persist but views elevated interest rates as a medium-to-long-term opportunity for higher investment yields, with 18% ($3.4 billion) of the portfolio in floating-rate investments[171][174] - The company's largest movements in loss reserves typically occur in the fourth quarter following annual loss reserve studies[169] Liquidity and Capital Resources Enstar maintains strong liquidity, with $303 million from operations, an increased $800 million revolving credit facility, and $1.83 billion in total debt Cash Flow Summary (Nine Months Ended Sep 30, 2023) | Cash Flow Activity | Amount | | :--- | :--- | | Provided by Operating Activities | $303 million | | Used in Investing Activities | ($193 million) | | Used in Financing Activities | ($542 million) | | Net Decrease in Cash | ($446 million) | - In May 2023, the company increased its revolving credit facility from $600 million to $800 million, extending expiry to May 2028, with $800 million available as of September 30, 2023[191][343] - Total debt obligations stood at $1.83 billion as of September 30, 2023, consisting of $991 million in Senior Notes and $840 million in Junior Subordinated Notes[210] Quantitative and Qualitative Disclosures about Market Risk Principal market risks include interest rate, credit, equity price, and foreign currency, with no material changes in 2023 - The company's primary market risks are interest rate, credit, equity price, and foreign currency risk. No material changes to these risks or related management policies occurred in the first nine months of 2023[220] Financial Statements Unaudited financial statements show total assets of $21.0 billion and equity of $4.9 billion, reflecting ASU 2018-12 adoption Condensed Consolidated Balance Sheet Highlights | Balance Sheet Item | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Investments | $14.8 billion | $14.6 billion | | Total Assets | $21.0 billion | $22.2 billion | | Total Liabilities | $16.0 billion | $16.8 billion | | Total Enstar Shareholders' Equity | $4.9 billion | $5.0 billion | - The company adopted ASU 2018-12 regarding long-duration contracts on January 1, 2023, resulting in a $363 million increase to Accumulated Other Comprehensive Income (AOCI) due to remeasurement[242][303] Notes to the Unaudited Condensed Consolidated Financial Statements Notes detail LPTs, the $14.8 billion investment portfolio, $12.9 billion loss liability, fair value measurements, $1.8 billion debt, and equity changes - Completed LPTs with QBE and RACQ, assuming a combined $2.2 billion in net loss reserves for $2.0 billion in consideration[245] - The liability for losses and loss adjustment expenses stood at $12.9 billion as of September 30, 2023, with a net favorable prior period development of $35 million for the nine months ended[284] - In March 2023, the company repurchased all 1,597,712 of its non-voting convertible ordinary shares for $341 million[353] Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2023[374] - No material changes to internal controls over financial reporting occurred during the third quarter of 2023[375] PART II — OTHER INFORMATION Legal Proceedings Enstar is involved in routine legal proceedings, not expected to materially impact its financial condition - The company is involved in routine legal proceedings and does not expect them to have a material impact on its financial condition[366][377] Risk Factors No material changes to risk factors previously disclosed in the 2022 Annual Report on Form 10-K - Risk factors identified in the 2022 Form 10-K have not materially changed[378] Unregistered Sales of Equity Securities and Use of Proceeds No ordinary shares were repurchased in Q3 2023, and the share repurchase program was terminated in March 2023 - No shares were purchased during the third quarter of 2023. The company's share repurchase program was terminated in March 2023[379][380] Exhibits The Exhibit Index lists key corporate documents, material agreements, and required CEO/CFO certifications - The Exhibit Index lists key corporate documents, material agreements, and required CEO/CFO certifications[385]