Acquisitions | 12 Months Ended |
Dec. 31, 2013 |
Business Combinations [Abstract] | ' |
Acquisitions | ' |
3 | ACQUISITIONS | | | | | | | | | | | | | | | | | | | | | | | |
2014 |
Torus Insurance Holdings Limited |
Amalgamation Agreement |
On July 8, 2013, the Company, Veranda Holdings Ltd (“Veranda”), an entity in which the Company owns an indirect 60% interest through its 60% interest in Bayshore Holdings Limited (“Bayshore”), Hudson Securityholders Representative LLC and Torus Insurance Holdings Limited (“Torus”) entered into an Agreement and Plan of Amalgamation (the “Amalgamation Agreement”). The Amalgamation Agreement provides for the amalgamation (the “Amalgamation”) of Veranda and Torus (the combined entity, the “Amalgamated Company”). Torus is a global specialty insurer and holding company of six wholly-owned insurance vehicles, including two Lloyd’s syndicates, one of which is in run-off. |
The purchase price for the Amalgamation is approximately $692.0 million and will be paid half in cash and half in the Company’s stock. The Company and Kenmare Holdings Ltd. (its wholly-owned subsidiary) (“Kenmare”) will contribute to Bayshore, the parent company of Veranda, approximately $69.2 million in cash and 2,612,346 shares of the Company (which will consist of a combination of voting ordinary shares, par value $1.00 per share (the “Voting Ordinary Shares”) and newly-created Series B convertible non-voting preference shares, par value $1.00 per share (the “Non-Voting Preferred Shares”)) in exchange for a 60% interest in Bayshore. Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P. (collectively, “Trident”) will contribute to Bayshore approximately $276.8 million in cash in exchange for a 40% interest in Bayshore. Bayshore will use the contributed funds and shares to pay the purchase price for the Amalgamation. |
The number of shares to be issued by the Company is fixed and was determined by reference to an agreed-upon value per share under the Amalgamation Agreement of $132.448, which was the average closing price of the Voting Ordinary Shares over the 20 trading days prior to the date of signing of the Amalgamation Agreement. The final purchase price for the Amalgamation cannot be determined until closing because the overall value of the stock component will be an amount equal to the price of the Company’s Voting Ordinary Shares on the closing date multiplied by the fixed number of shares that will be issued. Following the Amalgamation, the Company and Trident will continue to own, respectively, a 60% and 40% indirect interest in the Amalgamated Company through their ownership of Bayshore. |
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Completion of the Amalgamation is conditioned on, among other things, governmental and regulatory approvals and satisfaction of various customary closing conditions. The transaction is expected to close in the first quarter of 2014. |
Stock Issuance |
FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. (collectively, “First Reserve”) will receive Voting Ordinary Shares, Non-Voting Preferred Shares and cash consideration in the transaction. In the event that the number of Voting Ordinary Shares deliverable to First Reserve at the closing of the Amalgamation would cause First Reserve, as of immediately after such closing, to beneficially own Voting Ordinary Shares that constitute more than 9.5% of the voting power of all shares of the Company, then the Company will issue to First Reserve, at the closing, the total number of shares of Voting Ordinary Shares representing 9.5% of the voting power of all shares of the Company as of immediately after the closing and Non-Voting Preferred Shares representing the remainder of the shares that First Reserve is entitled to under the Amalgamation Agreement. Corsair Specialty Investors, L.P. (“Corsair”) will receive both Voting Ordinary Shares and cash consideration in the transaction. The remaining Torus shareholders will receive all cash. As a result of the Amalgamation, First Reserve will receive approximately 9.5% and 11.5%, respectively, of the Company’s Voting Ordinary Shares and outstanding share capital and Corsair will receive approximately 2.5% and 2.1%, respectively, of the Company’s Voting Ordinary Shares and outstanding share capital. |
The Company and First Reserve will enter into a Shareholder Rights Agreement at the closing of the Amalgamation, under which the Company has agreed that First Reserve will have the right to designate one representative to the Company’s Board of Directors. This designation right terminates if First Reserve ceases to beneficially own at least 75% of the total number of Voting Ordinary Shares and Non-Voting Preferred Shares acquired by it under the Amalgamation Agreement. |
The Company will also enter into a Registration Rights Agreement with First Reserve and Corsair at the closing of the Amalgamation that provides First Reserve and Corsair with certain rights to cause the Company to register under the Securities Act of 1933, as amended (the “Act”), the Voting Ordinary Shares (including the Voting Ordinary Shares into which the Non-Voting Preferred Shares may convert) issued pursuant to the Amalgamation and any securities issued by the Company in connection with the foregoing by way of a share dividend or share split or in connection with any recapitalization, reclassification or similar reorganization (the foregoing, collectively, “Registrable Securities”). Pursuant to the Registration Rights Agreement, the Company must file a resale shelf registration statement for the Registrable Securities within 20 business days after the closing of the Amalgamation. In addition, at any time following the six-month anniversary of the closing of the Amalgamation, First Reserve will be entitled to make three written requests for the Company to register all or any part of the Registrable Securities under the Act, subject to certain exceptions and conditions set forth in the Registration Rights Agreement. Corsair will have the right to make one such request. First Reserve and Corsair will also be granted “piggyback” registration rights with respect to the Company’s registration of Voting Ordinary Shares for its own account or for the account of one or more of its securityholders. |
Trident Co-investment in Torus |
In connection with the Amalgamation Agreement, the Company, Kenmare and Trident entered into an Investors Agreement on July 8, 2013 governing their investments in Bayshore, and Kenmare and Trident entered into individual equity commitment letters obligating each to fund its respective portion of the purchase price for the Amalgamation noted above. Completion of Kenmare’s and Trident’s funding obligations is conditioned on, among other things, the satisfaction of certain conditions tied directly to the satisfaction of the closing conditions under the Amalgamation Agreement. |
Upon the funding of the equity commitments at the closing of the Amalgamation, Kenmare and Trident have agreed to enter into a Shareholders’ Agreement (the “Bayshore Shareholders’ Agreement”). Among other things, the Bayshore Shareholders’ Agreement will provide that Kenmare would appoint three members to the Bayshore board of directors and Trident would appoint two members. |
The Bayshore Shareholders’ Agreement includes a five-year period during which neither party can transfer its ownership interest in Bayshore to a third party (the “Restricted Period”). Following the Restricted Period: (i) each party must offer the other party the right to buy its shares before the shares are offered to a third party; (ii) Kenmare can require Trident to participate in a sale of Bayshore to a third party as long as Kenmare owns 55% of Bayshore; (iii) each party has the right to be included on a pro rata basis in any sales made by the other party; and (iv) each party has the right to buy its pro rata share of any new securities issued by Bayshore. |
During the 90-day period following the fifth anniversary of the closing of the Amalgamation, and at any time following the seventh anniversary of such closing, Kenmare would have the right to redeem Trident’s shares in Bayshore at their then fair market value, which would be payable in cash. Following the seventh anniversary of the closing, Trident would have the right to require Kenmare to purchase Trident’s shares for their then current fair market value, which Kenmare would have the option to pay either in cash or by delivering the Company’s ordinary voting shares. |
Trident is a holder of approximately 9.7% of the Company’s ordinary shares. James D. Carey, a member and senior principal of Stone Point Capital LLC (the Manager of Trident), is a Member of the Company’s Board of Directors. Refer to Note 19 for information regarding the Company’s other transactions with Trident and its affiliates. |
2013 |
Atrium |
On November 25, 2013, Kenmare, the Company’s wholly-owned subsidiary, together with Trident, completed the acquisition of Atrium. The purchaser of Atrium, Northshore Holdings Limited (“Northshore”), is 60% owned by Kenmare and 40% owned by Trident. Atrium is an underwriting business at Lloyd’s of London that manages Syndicate 609 (“S609”) and provides approximately one quarter of the syndicate’s capital. Atrium specializes in accident and health, aviation, marine property, non-marine property, professional liability, property and casualty binding authorities, reinsurance, upstream energy, war and terrorism insurance, cargo and fine art. |
The purchase price for Atrium was $158.0 million. Kenmare’s portion of the purchase price was $94.8 million, and was financed by borrowings under the Company’s revolving credit facility. |
The purchase price and net assets acquired at fair value are as follows: |
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Purchase price | | $ | 158,000 | | | | | | | | | | | | | | | | | | | | | |
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Net assets acquired at fair value | | $ | 119,152 | | | | | | | | | | | | | | | | | | | | | |
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Excess of purchase price over fair value of net assets acquired | | $ | 38,848 | | | | | | | | | | | | | | | | | | | | | |
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The purchase price was allocated to the acquired assets and liabilities of Atrium based on estimated fair values at the acquisition date. The Company recognized goodwill of $38.8 million, all of which was recorded within the active underwriting segment and is attributable primarily to Atrium’s assembled workforce. The Company also recognized indefinite lived intangible assets of $63.0 million and other definite lived intangible assets of $27.0 million. |
The Company has not completed the process of determining the fair value of the intangible assets acquired and deferred taxes. These valuations will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value recorded for these items is a provisional estimate and may be subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill. |
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed at the acquisition date. |
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ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments, available-for-sale, at fair value | | $ | 33,535 | | | | | | | | | | | | | | | | | | | | | |
Short-term investments, trading, at fair value | | | 12,526 | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, available-for-sale, at fair value | | | 156,142 | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, trading, at fair value | | | 10,751 | | | | | | | | | | | | | | | | | | | | | |
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Total investments | | | 212,954 | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 44,842 | | | | | | | | | | | | | | | | | | | | | |
Restricted cash and cash equivalents | | | 12,305 | | | | | | | | | | | | | | | | | | | | | |
Premiums receivable | | | 41,855 | | | | | | | | | | | | | | | | | | | | | |
Reinsurance balances recoverable | | | 32,375 | | | | | | | | | | | | | | | | | | | | | |
Deferred premium | | | 26,224 | | | | | | | | | | | | | | | | | | | | | |
Funds withheld | | | 19,579 | | | | | | | | | | | | | | | | | | | | | |
Intangibles | | | 90,000 | | | | | | | | | | | | | | | | | | | | | |
Other assets | | | 7,977 | | | | | | | | | | | | | | | | | | | | | |
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TOTAL ASSETS | | | 488,111 | | | | | | | | | | | | | | | | | | | | | |
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LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | | | 216,319 | | | | | | | | | | | | | | | | | | | | | |
Insurance and reinsurance balances payable | | | 20,834 | | | | | | | | | | | | | | | | | | | | | |
Unearned premium | | | 42,738 | | | | | | | | | | | | | | | | | | | | | |
Deferred taxes | | | 39,740 | | | | | | | | | | | | | | | | | | | | | |
Other liabilities | | | 49,328 | | | | | | | | | | | | | | | | | | | | | |
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TOTAL LIABILITIES | | | 368,959 | | | | | | | | | | | | | | | | | | | | | |
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NET ASSETS ACQUIRED AT FAIR VALUE | | | 119,152 | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | | 38,848 | | | | | | | | | | | | | | | | | | | | | |
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ACQUISITION DATE FAIR VALUE | | $ | 158,000 | | | | | | | | | | | | | | | | | | | | | |
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The net unearned premiums acquired include a decrease of $16.7 million to adjust net unearned premiums to fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. This amount will be amortized to acquisition costs in the consolidated statements of earnings and comprehensive income over the next two years. The amortization approximates the amount of Atrium’s deferred acquisition costs that would have been recognized as acquisition costs had they not been fair valued under acquisition accounting. As at December 31, 2013, the remaining balance of the fair value adjustment was $16.7 million. |
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The following table summarizes the provisional intangible assets recorded in connection with the acquisition: |
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| | Amount | | | Economic | | | | | | | | | | | | | | | | | | |
Useful Life | | | | | | | | | | | | | | | | | | |
Syndicate capacity | | $ | 32,900 | | | Indefinite | | | | | | | | | | | | | | | | | | |
Management contract | | | 30,100 | | | Indefinite | | | | | | | | | | | | | | | | | | |
Distribution channel | | | 20,000 | | | 15 Years | | | | | | | | | | | | | | | | | | |
Brand | | | 7,000 | | | 10 years | | | | | | | | | | | | | | | | | | |
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Intangible assets as of the acquisition date | | $ | 90,000 | | | | | | | | | | | | | | | | | | | | | |
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The fair value of the Lloyd’s syndicate capacity was estimated using the multi-period excess-earnings method, a form of the income approach. Lloyd’s syndicate capacity represents Atrium’s authorized premium income limit to write insurance business in the Lloyd’s market. Atrium’s proportionate share of S609, (the syndicate through which it conducts its Lloyd’s operations) is approximately 25%. The capacity is renewed annually at no cost to the Company but may be freely purchased or sold, subject to Lloyd’s approval. The ability to write insurance business within the syndicate capacity is indefinite with the premium income limit being set annually by the Company, subject to Lloyd’s approval. |
Atrium provides underwriting, actuarial and support services to S609 pursuant to a management contract. The fair value of the management contract was estimated using the income approach. |
Distribution channels represent broker relationships and the network of insurance companies through which Atrium conducts its operations. The fair value of Atrium’s distribution channel was estimated using the income approach. Critical inputs into the valuation model for customer relationships and broker relationships include estimates of expected premium and attrition rates, and discounting at a weighted average cost of capital. Brand represents the intangible asset related to the name and was valued using the income approach. |
From the date of acquisition to December 31, 2013, the Company earned premiums of $10.7 million, recorded losses incurred of $7.2 million on those earned premiums, and recorded $2.5 million in net earnings related to Atrium in its consolidated statement of earnings. |
Arden |
On September 9, 2013, Kenmare, the Company’s wholly-owned subsidiary, together with Trident, completed the acquisition of Arden. Northshore, the purchaser of Arden, is 60% owned by Kenmare and 40% owned by Trident. Arden is a Bermuda-based reinsurance company that provides reinsurance to Atrium and is currently in the process of running off certain other discontinued businesses. |
Results related to Arden’s reinsurance to Atrium are included within the Company’s active underwriting segment, while results related to Arden’s discontinued business are included within the Company’s non-life run-off segment. |
The purchase price for Arden was $79.6 million. Kenmare’s portion of the purchase price was $47.8 million, and was financed by borrowings under the Company’s revolving credit facility. |
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Purchase price | | $ | 79,600 | | | | | | | | | | | | | | | | | | | | | |
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Net assets acquired at fair value | | $ | 79,600 | | | | | | | | | | | | | | | | | | | | | |
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The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition: |
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| | Active | | | Non-life | | | Total | | | | | | | | | | | | | |
Underwriting | Run-off | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments, trading, at fair value | | $ | 16,340 | | | $ | 12,512 | | | $ | 28,852 | | | | | | | | | | | | | |
Fixed maturities, trading, at fair value | | | 9,351 | | | | 46,077 | | | | 55,428 | | | | | | | | | | | | | |
Other investments | | | — | | | | 2,867 | | | | 2,867 | | | | | | | | | | | | | |
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Total investments | | | 25,691 | | | | 61,456 | | | | 87,147 | | | | | | | | | | | | | |
Cash and cash equivalents | | | — | | | | 23,037 | | | | 23,037 | | | | | | | | | | | | | |
Restricted cash and cash equivalents | | | 10,213 | | | | 21,599 | | | | 31,812 | | | | | | | | | | | | | |
Premiums receivable | | | 74,452 | | | | 49,769 | | | | 124,221 | | | | | | | | | | | | | |
Reinsurance balances recoverable | | | — | | | | 354,810 | | | | 354,810 | | | | | | | | | | | | | |
Other assets | | | — | | | | 12,016 | | | | 12,016 | | | | | | | | | | | | | |
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TOTAL ASSETS | | | 110,356 | | | | 522,687 | | | | 633,043 | | | | | | | | | | | | | |
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LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | | | 56,160 | | | | 427,567 | | | | 483,727 | | | | | | | | | | | | | |
Insurance and reinsurance balances payable | | | — | | | | 59,304 | | | | 59,304 | | | | | | | | | | | | | |
Unearned premium | | | — | | | | 10,412 | | | | 10,412 | | | | | | | | | | | | | |
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TOTAL LIABILITIES | | | 56,160 | | | | 497,283 | | | | 553,443 | | | | | | | | | | | | | |
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NET ASSETS ACQUIRED AT FAIR VALUE | | $ | 54,196 | | | $ | 25,404 | | | $ | 79,600 | | | | | | | | | | | | | |
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From the date of acquisition to December 31, 2013, the Company earned premiums of $21.3 million, recorded losses incurred of $11.8 million on those earned premiums, and recorded $9.8 million in net earnings related to Arden in its consolidated statement of earnings. |
Pavonia |
On March 31, 2013, the Company and its wholly-owned subsidiary, Pavonia Holdings (US), Inc., completed the acquisition of all of the shares of Household Life Insurance Company of Delaware (“HLIC DE”) and HSBC Insurance Company of Delaware (“HSBC DE”) from Household Insurance Group Holding Company, a subsidiary of HSBC Holdings plc. HLIC DE and HSBC DE are both Delaware-domiciled insurers in run-off. HLIC DE owns three other insurers domiciled in Michigan, New York, and Arizona, which are also in run-off (collectively with HLIC DE and HSBC DE, the “Pavonia companies”). The aggregate cash purchase price was $155.6 million and was financed in part by a drawing of $55.7 million under the Company’s revolving credit facility. The Pavonia companies wrote various U.S. and Canadian life insurance, including credit life and disability insurance, term life insurance, assumed life reinsurance and annuities. |
The purchase price and fair value of the assets acquired in the Pavonia acquisition were as follows: |
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Purchase price | | $ | 155,564 | | | | | | | | | | | | | | | | | | | | | |
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Net assets acquired at fair value | | $ | 155,564 | | | | | | | | | | | | | | | | | | | | | |
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The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition: |
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ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments, trading, at fair value | | $ | 40,404 | | | | | | | | | | | | | | | | | | | | | |
Short-term investments, held-to-maturity, at fair value | | | 10,268 | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, trading, at fair value | | | 329,985 | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, held-to-maturity, at fair value | | | 876,474 | | | | | | | | | | | | | | | | | | | | | |
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Total investments | | | 1,257,131 | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 81,849 | | | | | | | | | | | | | | | | | | | | | |
Accrued interest receivable | | | 15,183 | | | | | | | | | | | | | | | | | | | | | |
Funds held by reinsured companies | | | 47,761 | | | | | | | | | | | | | | | | | | | | | |
Other assets | | | 59,002 | | | | | | | | | | | | | | | | | | | | | |
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TOTAL ASSETS | | | 1,460,926 | | | | | | | | | | | | | | | | | | | | | |
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LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Policyholder benefits for life and annuity contracts | | | 1,255,632 | | | | | | | | | | | | | | | | | | | | | |
Reinsurance balances payable | | | 39,477 | | | | | | | | | | | | | | | | | | | | | |
Unearned premium | | | 5,618 | | | | | | | | | | | | | | | | | | | | | |
Other liabilities | | | 4,635 | | | | | | | | | | | | | | | | | | | | | |
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TOTAL LIABILITIES | | | 1,305,362 | | | | | | | | | | | | | | | | | | | | | |
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NET ASSETS ACQUIRED AT FAIR VALUE | | $ | 155,564 | | | | | | | | | | | | | | | | | | | | | |
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As of March 31, 2013, the date of acquisition of the Pavonia companies, all of the companies were either in run-off or, immediately following the acquisition, were placed into run-off, and accordingly are no longer writing any new policies. The Pavonia companies will continue to collect premiums in relation to the unexpired policies assumed on acquisition. |
For the period from the date of the acquisition to December 31, 2013, the Company had earned premiums of $92.2 million, recorded life and annuity benefits and acquisition costs of $88.6 million on those earned premiums, and recorded $3.7 million in net earnings related to the Pavonia companies in its consolidated statement of earnings. |
SeaBright |
On February 7, 2013, the Company completed its acquisition of SeaBright, through the merger of its indirect, wholly-owned subsidiary, AML Acquisition, Corp. (“AML Acquisition”), with and into SeaBright (the “Merger”), with SeaBright surviving the Merger as the Company’s indirect, wholly-owned subsidiary. SeaBright owns SeaBright Insurance Company, an Illinois-domiciled insurer that is commercially domiciled in California, which wrote direct workers’ compensation business. The aggregate cash purchase price paid by the Company for all equity securities of SeaBright was approximately $252.1 million, which was funded in part with $111.0 million borrowed under a four-year term loan facility provided by National Australia Bank (“NAB”) and Barclays Bank PLC. |
Immediately following the acquisition, SeaBright was placed into run-off, and accordingly is no longer writing new insurance policies. Since its acquisition, SeaBright had renewed expiring insurance policies when it was obligated to do so by regulators, but has received approvals from all states relieving it of this obligation to renew any further policies. |
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The purchase price and fair value of the assets acquired in the SeaBright acquisition were as follows: |
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Purchase price | | $ | 252,091 | | | | | | | | | | | | | | | | | | | | | |
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Net assets acquired at fair value | | $ | 252,091 | | | | | | | | | | | | | | | | | | | | | |
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The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition: |
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ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments, trading, at fair value | | $ | 25,171 | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, trading, at fair value | | | 683,780 | | | | | | | | | | | | | | | | | | | | | |
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Total investments | | | 708,951 | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 41,846 | | | | | | | | | | | | | | | | | | | | | |
Accrued interest receivable | | | 6,344 | | | | | | | | | | | | | | | | | | | | | |
Premiums receivable | | | 112,510 | | | | | | | | | | | | | | | | | | | | | |
Reinsurance balances recoverable | | | 117,462 | | | | | | | | | | | | | | | | | | | | | |
Other assets | | | 4,515 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | | 991,628 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | | | 592,774 | | | | | | | | | | | | | | | | | | | | | |
Unearned premium | | | 93,897 | | | | | | | | | | | | | | | | | | | | | |
Loans payable | | | 12,000 | | | | | | | | | | | | | | | | | | | | | |
Insurance balances payable | | | 3,243 | | | | | | | | | | | | | | | | | | | | | |
Other liabilities | | | 37,623 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES | | | 739,537 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET ASSETS ACQUIRED AT FAIR VALUE | | $ | 252,091 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The net unearned premiums acquired include a decrease of $14.4 million to adjust net unearned premiums to fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. This amount has been amortized to acquisition costs in the consolidated statements of earnings during 2013. The amortization approximates the amount of SeaBright’s deferred acquisition costs that would have been recognized as acquisition costs had they not been fair valued under acquisition accounting. As at December 31, 2013, this fair value adjustment was fully amortized. |
Gross and net premiums written by SeaBright from the date of the acquisition to December 31, 2013 totaled $17.8 million and $9.2 million, respectively. Because SeaBright’s exit from the mandatory renewal process was approved, the Company expects that SeaBright will no longer generate premiums written other than for small adjustments related to premium audits and reinstatement premiums on previously written policies. |
From the date of acquisition to December 31, 2013, the Company earned premiums of $112.8 million, recorded losses incurred and acquisition costs of $86.6 million on those earned premiums, and recorded $3.5 million in net losses related to SeaBright in its consolidated statement of earnings. |
Pro Forma Financial Information — Atrium, Arden and the Pavonia companies (Unaudited) |
The following pro forma condensed combined statement of earnings for the years ended December 31, 2013 and 2012 combines the historical consolidated statements of earnings of the Company (inclusive of those of SeaBright since its acquisition on February 7, 2013) with those of Atrium, Arden and Pavonia, giving effect to the business combinations and related transactions of Atrium, Arden and Pavonia as if they had occurred on January 1, 2013 and 2012, respectively. For the year ended December 31, 2013, the results shown for Atrium, Arden and Pavonia represent their results from January 1, 2013 to the respective date of each acquisition. The results for Atrium, Arden and Pavonia post-acquisition are included in the results shown for the Company. |
The pro forma financial information presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions of Atrium, Arden and the Pavonia companies had taken place on January 1, 2013 or 2012, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Unaudited | |
Twelve Months Ended December 31, 2013 | | Enstar Group | | | Atrium | | | Arden | | | Pavonia | | | Pro forma | | | Enstar Group | |
Limited | Adjustments | Limited - Pro |
| | Forma |
Total income | | $ | 416,570 | | | $ | 91,126 | | | $ | 15,911 | | | $ | 48,275 | | | $ | — | | | $ | 571,882 | |
Total expenses | | | (192,748 | ) | | | (68,545 | ) | | | (18,783 | ) | | | (48,094 | ) | | | (9,531 | ) | | | (337,701 | ) |
Noncontrolling interest | | | (15,218 | ) | | | — | | | | — | | | | — | | | | (7,170 | ) | | | (22,388 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 208,604 | | | $ | 22,581 | | | $ | (2,872 | ) | | $ | 181 | | | $ | (16,701 | ) | | $ | 211,793 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings per ordinary | | | | | | | | | | | | | | | | | | | | | | $ | 12.82 | |
share —basic |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings per ordinary | | | | | | | | | | | | | | | | | | | | | | $ | 12.68 | |
share —diluted |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average ordinary shares outstanding — basic | | | | | | | | | | | | | | | | | | | | | | | 16,523,369 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average ordinary shares outstanding — diluted | | | | | | | | | | | | | | | | | | | | | | | 16,703,442 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Summary of the Pro Forma Adjustments to the Pro Forma Condensed Combined Statement of Earnings for the Twelve Months Ended December 31, 2013 (Unaudited): |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Unaudited | | | | | | | |
Expenses | | Atrium | | | Arden | | | Pavonia | | | Total | | | | | | | |
(i) | | Adjustment to interest expense to reflect the financing costs of the acquisition for the year | | $ | (3,105 | ) | | $ | (1,111 | ) | | $ | (442 | ) | | $ | (4,658 | ) | | | | | | |
(ii) | | Adjustment to recognize amortization of definite lived intangible assets | | | (2,033 | ) | | | (218 | ) | | | (2,825 | ) | | | (5,076 | ) | | | | | | |
(iii) | | Net adjustment related to the unlocking and reassessment of the actuarial estimates of the business acquired | | | — | | | | — | | | | (2,166 | ) | | | (2,166 | ) | | | | | | |
(iv) | | Adjustment to income taxes for pro forma adjustments | | | 467 | | | | — | | | | 1,902 | | | | 2,369 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | $ | (4,671 | ) | | $ | (1,329 | ) | | $ | (3,531 | ) | | $ | (9,531 | ) | | | | | | |
(v) | | Adjustment to noncontrolling interest for pro forma adjustments | | $ | (8,406 | ) | | $ | 1,236 | | | $ | — | | | $ | (7,170 | ) | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Unaudited | |
Twelve Months Ended December 31, 2012 | | Enstar Group | | | Atrium | | | Arden | | | Pavonia | | | Pro forma | | | Enstar Group | |
Limited | Adjustments | Limited - Pro |
| | Forma |
Total income | | $ | 163,453 | | | $ | 82,343 | | | $ | 199,939 | | | $ | 280,227 | | | $ | — | | | $ | 725,962 | |
Total expenses | | | 28,066 | | | | (52,277 | ) | | | (108,185 | ) | | | (267,983 | ) | | | (21,855 | ) | | | (422,234 | ) |
Noncontrolling interest | | | (23,502 | ) | | | — | | | | — | | | | — | | | | (47,971 | ) | | | (71,473 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 168,017 | | | $ | 30,066 | | | $ | 91,754 | | | $ | 12,244 | | | $ | (69,826 | ) | | $ | 232,255 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings per ordinary share — basic | | | | | | | | | | | | | | | | | | | | | | $ | 14.13 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings per ordinary | | | | | | | | | | | | | | | | | | | | | | $ | 13.96 | |
share — diluted |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average ordinary shares outstanding — basic | | | | | | | | | | | | | | | | | | | | | | | 16,441,461 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average ordinary shares outstanding — diluted | | | | | | | | | | | | | | | | | | | | | | | 16,638,021 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Summary of the Pro Forma Adjustments to the Pro Forma Condensed Combined Statement of Earnings for the Twelve Months Ended December 31, 2012 (Unaudited): |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Unaudited | | | | | | | |
Expenses | | Atrium | | | Arden | | | Pavonia | | | Total | | | | | | | |
(i) | | Adjustment to interest expense to reflect the financing costs of the acquisition for the year | | $ | (3,685 | ) | | $ | (1,854 | ) | | $ | (2,227 | ) | | $ | (7,766 | ) | | | | | | |
(ii) | | Adjustment to recognize amortization of definite lived intangible assets | | | (2,033 | ) | | | (327 | ) | | | (11,300 | ) | | | (13,660 | ) | | | | | | |
(iii) | | Net adjustment related to the unlocking and reassessment of the actuarial estimates of the business acquired | | | — | | | | — | | | | (8,664 | ) | | | (8,664 | ) | | | | | | |
(iv) | | Adjustment to income taxes for pro forma adjustments | | | 468 | | | | — | | | | 7,767 | | | | 8,235 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | $ | (5,250 | ) | | $ | (2,181 | ) | | $ | (14,424 | ) | | $ | (21,855 | ) | | | | | | |
(v) | | Adjustment to noncontrolling interest for pro forma adjustments | | $ | (11,400 | ) | | $ | (36,571 | ) | | $ | — | | | $ | (47,971 | ) | | | | | | |
2011 |
Clarendon |
On July 12, 2011, the Company, through its wholly-owned subsidiary, Clarendon Holdings, Inc., completed the acquisition of 100% of the shares of Clarendon National Insurance Company (“Clarendon”) from Clarendon Insurance Group, Inc., an affiliate of Hannover Re (“Hannover”). Clarendon is a New Jersey-domiciled insurer that is in run-off. Clarendon owns three other insurers, two domiciled in New Jersey and one domiciled in Florida, that are also in run-off. The purchase price was $219.1 million and was financed in part by $106.5 million under a four-year term loan facility provided by NAB and the remainder from available cash on hand. |
|
In addition, on July 12, 2011, the Company, through its wholly-owned subsidiary, Fitzwilliam Insurance Limited (“Fitzwilliam”), in connection with the acquisition of Clarendon, entered into a reinsurance agreement with Hannover, which provides adverse development cover (“ADC”) to Clarendon to reinsure Hannover for the first $80.0 million of the ADC. The Company provided a parental guarantee to Hannover in the amount of $80.0 million supporting the obligations of Fitzwilliam. |
The purchase price and fair value of the assets acquired in the Clarendon acquisition were as follows: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Purchase price | | $ | 219,077 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net assets acquired at fair value | | $ | 219,077 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments, trading | | $ | 60,376 | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, trading | | | 623,530 | | | | | | | | | | | | | | | | | | | | | |
Equities | | | 5,014 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total investments | | | 688,920 | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 138,518 | | | | | | | | | | | | | | | | | | | | | |
Restricted cash and cash equivalents | | | 7,198 | | | | | | | | | | | | | | | | | | | | | |
Reinsurance balances recoverable | | | 1,065,341 | | | | | | | | | | | | | | | | | | | | | |
Accrued interest and other receivables | | | 9,655 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | | 1,909,632 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | | | 1,654,436 | | | | | | | | | | | | | | | | | | | | | |
Insurance and reinsurance balances payable | | | 1,942 | | | | | | | | | | | | | | | | | | | | | |
Funds withheld | | | 26,277 | | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | | 7,900 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES | | | 1,690,555 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET ASSETS ACQUIRED AT FAIR VALUE | | $ | 219,077 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Laguna |
On March 25, 2011, the Company, through its wholly-owned subsidiary, Kenmare, completed the acquisition of Laguna Life Limited, formerly known as CitiLife Financial Limited (“Laguna”), from Citigroup Insurance Holding Corporation (“Citigroup”), an affiliate of Citigroup Inc. Laguna is an Ireland-based life insurer that is in run-off. The purchase price was €15.0 million (approximately $21.2 million) and was funded from available cash on hand. The originally disclosed purchase price of €30.0 million (approximately $42.4 million) was reduced, prior to completion of the acquisition, after Citigroup received approval from Laguna’s regulator to distribute €15.0 million (approximately $21.2 million) to its shareholders. |
The purchase price and fair value of the net assets acquired in the Laguna acquisition were as follows: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Purchase price | | $ | 21,223 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net assets acquired at fair value | | $ | 34,328 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Excess of net assets over purchase price (gain on bargain purchase) | | $ | (13,105 | ) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
The gain on bargain purchase of approximately $13.1 million, relating to the acquisition of Laguna, arose primarily as a result of the reassessment by the Company, upon acquisition, of the total required estimated costs to manage the business to expiry. The Company’s assessment of costs was lower than the acquired costs recorded by the vendor in the financial statements of Laguna. |
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition: |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments, trading | | $ | 1,154 | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, trading | | | 30,765 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total investments | | | 31,919 | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 13,274 | | | | | | | | | | | | | | | | | | | | | |
Reinsurance balances recoverable | | | 1,459 | | | | | | | | | | | | | | | | | | | | | |
Other assets | | | 1,325 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | | 47,977 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
Losses and loss adjustment expenses | | | 11,898 | | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | | 1,751 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES | | | 13,649 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET ASSETS ACQUIRED AT FAIR VALUE | | $ | 34,328 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |