e10vqza
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q/A
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Quarterly Period Ended March 31, 2008
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Transition Period From          to          
 
 
001-33289
Commission File Number
 
 
ENSTAR GROUP LIMITED
(Exact name of registrant as specified in its charter)
 
 
     
Bermuda
 
N/A
 
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
 
P.O. Box HM 2267
Windsor Place, 3rd Floor
18 Queen Street
Hamilton HM JX
Bermuda
(Address of principal executive office, including zip code)
 
 
(441) 292-3645
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of May 9, 2008, the registrant had outstanding 11,944,289 ordinary shares, par value $1.00 per share.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
PART I — FINANCIAL INFORMATION
 
Item 1.
    Financial Statements (Restated):     1  
       
  Condensed Consolidated Balance Sheets, As of March 31, 2008 and December 31, 2007 (Unaudited)
    1  
       
  Condensed Consolidated Statements of Earnings, Three Months Ended March 31, 2008 and 2007 (Unaudited)
    2  
       
  Condensed Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2008 and 2007 (Unaudited)
    3  
       
  Condensed Consolidated Statements of Changes in Shareholders’ Equity, Three Months Ended March 31, 2008 and 2007 (Unaudited)
    4  
       
  Condensed Consolidated Statements of Cash Flows, Three Months Ended March 31, 2008 and 2007 (Unaudited)
    5  
       
  Notes to Condensed Consolidated Financial Statements (Unaudited) (Restated)
    6  
          Report of the Independent Registered Public Accounting Firm     22  
 
Item 4.
    Controls and Procedures     23  
 
Item 6.
    Exhibits     24  
 
EXPLANATORY NOTE
 
This amendment to Form 10-Q is being filed to correct an error in the pro forma condensed combined income statement for the three months ended March 31, 2008 contained in Note 2 to the Unaudited Condensed Consolidated Financial Statements set forth in “Item 1. Financial Statements.” The error did not impact our revenue, net earnings or shareholders’ equity. Please see Note 11 to the Unaudited Condensed Consolidated Financial Statements for more information. We are also revising “Item 4. Controls and Procedures.”


 

 
Item 1.  FINANCIAL STATEMENTS
 
ENSTAR GROUP LIMITED
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2008 and December 31, 2007
 
                 
    March 31,
    December 31,
 
    2008     2007  
    (expressed in thousands of U.S. dollars, except share data)  
 
ASSETS
               
Short-term investments, available for sale, at fair value (amortized cost:
               
2008 — $111,058; 2007 — $15,480)
  $ 111,049     $ 15,480  
Fixed maturities, available for sale, at fair value (amortized cost: 2008 — $514,523; 2007 — $7,006)
    516,056       6,878  
Fixed maturities, held to maturity, at amortized cost (fair value: 2008 — $153,661; 2007 — $210,998)
    152,785       211,015  
Fixed maturities, trading, at fair value (amortized cost: 2008 — $316,699; 2007 — $318,199)
    327,799       323,623  
Equities, trading, at fair value (cost: 2008 — $4,973; 2007 — $5,087)
    4,615       4,900  
Other investments, at fair value
    105,391       75,300  
                 
Total investments
    1,217,695       637,196  
Cash and cash equivalents
    1,480,695       995,237  
Restricted cash and cash equivalents
    317,691       168,096  
Accrued interest receivable
    21,076       7,200  
Accounts receivable, net
    35,094       25,379  
Income taxes recoverable
          658  
Reinsurance balances receivable
    758,659       465,277  
Goodwill
    21,222       21,222  
Other assets
    142,824       96,878  
                 
TOTAL ASSETS
  $ 3,994,956     $ 2,417,143  
                 
                 
LIABILITIES
               
Losses and loss adjustment expenses
  $ 2,700,687     $ 1,591,449  
Reinsurance balances payable
    226,949       189,870  
Accounts payable and accrued liabilities
    25,597       21,383  
Income taxes payable
    921        
Loans payable
    329,963       60,227  
Other liabilities
    77,891       40,178  
                 
TOTAL LIABILITIES
    3,362,008       1,903,107  
                 
MINORITY INTEREST
    168,106       63,437  
                 
SHAREHOLDERS’ EQUITY
               
Share capital
               
Authorized issued and fully paid, par value $1 each (authorized 2008: 156,000,000; 2007: 156,000,000)
               
Ordinary shares (issued and outstanding 2008: 11,947,517; 2007: 11,920,377)
    11,948       11,920  
Non-voting convertible ordinary shares (issued 2008: 2,972,892; 2007: 2,972,892)
    2,973       2,973  
Treasury stock at cost (non-voting convertible ordinary shares 2008: 2,972,892; 2007: 2,972,892)
    (421,559 )     (421,559 )
Additional paid-in capital
    593,712       590,934  
Accumulated other comprehensive income
    5,785       6,035  
Retained earnings
    271,983       260,296  
                 
TOTAL SHAREHOLDERS’ EQUITY
    464,842       450,599  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 3,994,956     $ 2,417,143  
                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


1


 

ENSTAR GROUP LIMITED
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three-Month Periods Ended March 31, 2008 and 2007
 
                 
    Three Months Ended March 31,  
    2008     2007  
    (expressed in thousands of U.S. dollars, except share and per share data)  
 
INCOME
               
Consulting fees
  $ 6,055     $ 4,661  
Net investment income
    590       19,938  
Net realized (losses) gains
    (1,084 )     571  
                 
      5,561       25,170  
                 
EXPENSES
               
Net increase in loss and loss adjustment expense liabilities
    685       2,510  
Salaries and benefits
    11,357       12,802  
General and administrative expenses
    11,911       5,673  
Interest expense
    3,315       3,176  
Net foreign exchange (gain) loss
    (1,335 )     54  
                 
      25,933       24,215  
                 
(LOSS) EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST
    (20,372 )     955  
INCOME TAXES
    239       (1,016 )
MINORITY INTEREST
    (3,376 )     (2,248 )
                 
(LOSS) BEFORE EXTRAORDINARY GAIN
    (23,509 )     (2,309 )
Extraordinary gain — Negative goodwill (net of minority interest of $15,084 and $nil, respectively)
    35,196       15,683  
                 
NET EARNINGS
  $ 11,687     $ 13,374  
                 
PER SHARE DATA:
               
Loss per share before extraordinary gain — basic and diluted
  $ (1.97 )   $ (0.21 )
Extraordinary gain per share — basic and diluted
    2.95       1.41  
                 
Earnings per share — basic and diluted
  $ 0.98     $ 1.20  
                 
Weighted average shares outstanding — basic and diluted
    11,927,542       11,160,448  
 
See accompanying notes to the unaudited condensed consolidated financial statements


2


 

ENSTAR GROUP LIMITED
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three-Month Periods Ended March 31, 2008 and 2007
 
                 
    Three Months Ended
 
    March 31,  
    2008     2007  
    (expressed in thousands of U.S. dollars)  
 
NET EARNINGS
  $ 11,687     $ 13,374  
                 
Other comprehensive income:
               
Unrealized holding gains on investments arising during the period
    568       571  
Reclassification adjustment for net realized losses (gains) included in net earnings
    1,084       (571 )
Currency translation adjustment
    (1,902 )     640  
                 
Other comprehensive (loss) income
    (250 )     640  
                 
COMPREHENSIVE INCOME
  $ 11,437     $ 14,014  
                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


3


 

ENSTAR GROUP LIMITED
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
For the Three-Month Periods Ended March 31, 2008 and 2007
 
                 
    Three Months Ended
 
    March 31,  
    2008     2007  
    (expressed in thousands of U.S. dollars)  
 
Share Capital — Ordinary Shares
               
Balance, beginning of period
  $ 11,920     $ 19  
Conversion of shares
          6,029  
Issue of shares
          5,775  
Shares repurchased
          (7 )
Share awards granted/vested
    28       38  
                 
Balance, end of period
  $ 11,948     $ 11,854  
                 
Share Capital — Non-Voting Convertible Ordinary Shares
               
Balance, beginning of period
  $ 2,973     $  
Conversion of shares
          2,973  
                 
Balance, end of period
  $ 2,973     $ 2,973  
                 
Treasury Stock
               
Balance, beginning of period
  $ (421,559 )   $  
Shares acquired, at cost
          (421,559 )
                 
Balance, end of period
  $ (421,559 )   $ (421,559 )
                 
Additional Paid-in Capital
               
Balance, beginning of period
  $ 590,934     $ 111,371  
Share awards granted/vested
    2,562       3,750  
Shares repurchased
          (16,755 )
Issue of shares
          490,269  
Amortization of share awards
    216       1,738  
                 
Balance, end of period
  $ 593,712     $ 590,373  
                 
Accumulated Other Comprehensive Income
               
Balance, beginning of period
  $ 6,035     $ 4,565  
Other comprehensive (loss)/income
    (250 )     640  
                 
Balance, end of period
  $ 5,785     $ 5,205  
                 
Retained Earnings
               
Balance, beginning of period
  $ 260,296     $ 202,655  
Adjustment to initially apply FIN 48
          4,858  
                 
Adjusted balance, beginning of period
    260,296       207,513  
Conversion of shares
          (9,002 )
Net earnings
    11,687       13,374  
                 
Balance, end of period
  $ 271,983     $ 211,885  
                 
 
See accompanying notes to the unaudited condensed consolidated financial statements


4


 

ENSTAR GROUP LIMITED
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three-Month Periods Ended March 31, 2008 and 2007
 
                 
    Three Months Ended March 31,  
    2008     2007  
    (expressed in thousands of U.S. dollars)  
 
OPERATING ACTIVITIES:
               
Net earnings
  $ 11,687     $ 13,374  
Adjustments to reconcile net earnings to cash flows provided by operating activities:
               
Minority interest
    3,376       2,248  
Negative goodwill
    (35,196 )     (15,683 )
Share-based compensation expense
    216       1,738  
Net realized and unrealized investment loss (gain)
    1,084       (576 )
Share of net loss (earnings) from other investments
    26,510       (1,459 )
Other items
    1,723       1,018  
Depreciation and amortization
    191       156  
Amortization of bond premiums and discounts
    (148 )     (99 )
Net movement of trading securities
    (4,202 )     117,261  
Changes in assets and liabilities:
               
Reinsurance balances receivable
    (160,775 )     29,363  
Other assets
    (33,814 )     (692 )
Losses and loss adjustment expenses
    520,829       (18,346 )
Reinsurance balances payable
    14,419       (18,040 )
Accounts payable and accrued liabilities
    (4,198 )     (150 )
Other liabilities
    32,686       13,522  
                 
Net cash flows provided by operating activities
    374,388       123,635  
                 
INVESTING ACTIVITIES:
               
Acquisitions, net of cash acquired
    7,067       22,899  
Purchase of available-for-sale securities
    (163,267 )     (33,231 )
Sales and maturities of available-for-sale securities
    21,089       113,084  
Maturity of held-to-maturity securities
    61,682       16,583  
Movement in restricted cash and cash equivalents
    (149,595 )     (43,119 )
Funding of other investments
    (20,090 )     1,038  
Other investing activities
    (37 )     (127 )
                 
Net cash flows (used in) provided by investing activities
    (243,151 )     77,127  
                 
FINANCING ACTIVITIES:
               
Contribution to surplus of subsidiary by minority interest
    86,209        
Receipt of loans
    307,813       26,825  
Repayment of loans
    (39,800 )     (462 )
Repurchase of shares
          (16,762 )
                 
Net cash flows provided by financing activities
    354,222       9,601  
                 
TRANSLATION ADJUSTMENT
    (1 )     46  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    485,458       210,409  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    995,237       450,817  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 1,480,695     $ 661,226  
                 
                 
 
 
Supplement Cash Flow Information
               
Net income taxes (paid)
  $ (1,037 )   $ (1,927 )
Interest paid
  $ (1,609 )   $ (462 )
 
See accompanying notes to the unaudited condensed consolidated financial statements


5


 

ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008 and December 31, 2007
(Expressed in thousands of U.S. Dollars, except per share amounts)
(unaudited)
 
1.  BASIS OF PREPARATION AND CONSOLIDATION
 
Our condensed consolidated financial statements have not been audited. These statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position and results of operations as at the end of and for the periods presented. Results of operations for subsidiaries acquired are included from the dates of their acquisition by the Company. Intercompany transactions are eliminated on consolidation. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant inter-company accounts and transactions have been eliminated. In these notes, the terms “we,” “us,” “our,” or “the Company” refer to Enstar Group Limited and its direct and indirect subsidiaries. The following information is unaudited and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007.
 
Significant Accounting Policies
 
Retroactive reinsurance contracts — Premiums on ceded retroactive contracts are earned when written with a corresponding reinsurance recoverable established for the amount of reserves ceded. The initial gain, if applicable, is deferred and amortized into income over an actuarially determined expected payout period.
 
Adoption of New Accounting Standards
 
The terms “FAS” and “FASB” used in these notes refer to Statements of Financial Accounting Standards issued by the United States Financial Accounting Standards Board.
 
We adopted FAS 157, “Fair Value Measurements” (“FAS 157”), effective January 1, 2008. Under this standard, fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, we use various valuation approaches, including market and income approaches. FAS 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
 
  •  Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
 
Assets and liabilities utilizing Level 1 inputs include exchange-listed equity securities that are actively traded.
 
  •  Level 2 — Valuations based on quoted prices in markets that are not active or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
 
Assets and liabilities utilizing Level 2 inputs include: exchange-listed equity securities that are not actively traded; U.S. government and agency securities; non-U.S. government obligations; corporate and municipal bonds; mortgage-backed securities (“MBS”) and asset-backed securities (“ABS”).


6


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
1.  BASIS OF PREPARATION AND CONSOLIDATION — (cont’d)
 
 
  •  Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own assumptions about assumptions that market participants might use.
 
     Assets and liabilities utilizing Level 3 inputs include: hedge funds with partial transparency; and credit funds and short duration high yield funds that are traded in less liquid markets.
 
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors, including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified between levels.
 
The adoption of FAS 157 did not result in any cumulative-effect adjustment to our beginning retained earnings at January 1, 2008, or any material impact on our results of operations, financial position or liquidity. In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which permits a one-year deferral of the application of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, we have also adopted FSP FAS 157-2 effective January 1, 2008, and FAS 157 will not be applied to our goodwill and other intangible assets measured annually for impairment testing purposes only. We will adopt FAS 157 for non-financial assets and non-financial liabilities on January 1, 2009. The Company is currently evaluating the related provisions of FAS 157 and their potential impact on future financial statements.
 
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). This standard permits an entity to irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement attribute for many financial instruments and certain other items including insurance contracts. An entity electing the fair value option would be required to recognize changes in fair value in earnings and provide disclosure that will assist investors and other users of financial information to more easily understand the effect of the company’s choice to use fair value on its earnings. Further, the entity is required to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. This standard does not eliminate the disclosure requirements about fair value measurements included in FAS 157 and FAS No. 107, “Disclosures about Fair Value of Financial Instruments.” The adoption of FAS 159 did not impact retained earnings as of January 1, 2008 because the Company did not make any elections.
 
Accounting Standards Not Yet Adopted
 
In December 2007, the FASB issued FAS No. 141(R) “Business Combinations” (“FAS 141(R)”). FAS 141(R) replaces FAS No. 141 “Business Combinations” (“FAS 141”) but retains the fundamental requirements in FAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. FAS 141(R) also requires acquisition-related costs to be recognized separately from the acquisition, recognize assets acquired and liabilities assumed arising from contractual contingencies at their acquisition-date fair values and recognize goodwill as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets


7


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
1.  BASIS OF PREPARATION AND CONSOLIDATION — (cont’d)
 
acquired. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (January 1, 2009 for calendar year-end companies). The Company is currently evaluating the provisions of FAS 141(R) and its potential impact on future financial statements.
 
In December 2007, the FASB issued FAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest that should be reported as equity in the consolidated financial statements. FAS 160 requires consolidated net income to be reported at the amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement also establishes a method of accounting for changes in a parent’s ownership interest in a subsidiary that does result in deconsolidation. FAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (January 1, 2009 for calendar year-end companies). The presentation and disclosure of FAS 160 shall be applied retrospectively for all periods presented. The Company is currently evaluating the provisions of FAS 160 and its potential impact on future financial statements.
 
In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“FAS 161”). This Statement expands the disclosure requirements of FAS 133 and requires the reporting entity to provide enhanced disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and credit-risk related contingent features in derivative agreements. FAS 161 will be effective for fiscal years beginning after November 15, 2008 (January 1, 2009 for calendar year-end companies), and interim periods within those fiscal years. The Company is currently evaluating the provisions of FAS 161 and its potential impact on future financial statements.
 
2.   ACQUISITIONS
 
On February 29, 2008, the Company completed the acquisition of Guildhall Insurance Company Limited (“Guildhall”), a reinsurance company based in the U.K., for total consideration of £33.4 million (approximately $65.9 million). The purchase price was financed by the drawdown of approximately £16.5 million (approximately $32.5 million) from a facility loan agreement with a London-based bank; approximately £5.0 million (approximately $10.0 million) from J.C. Flowers II L.P. (the “Flowers Fund”), by way of non-voting equity participation; and the balance of approximately £11.9 million (approximately $23.5 million) from available cash on hand. The Flowers Fund is a private investment fund advised by J.C. Flowers & Co. LLC. J. Christopher Flowers, a member of the Company’s board of directors and one of its largest shareholders, is the founder and Managing Member of J.C. Flowers & Co. LLC. John J. Oros, the Company’s Executive Chairman and a member of its board of directors, is a Managing Director of J.C. Flowers & Co. LLC. Mr. Oros splits his time between J.C. Flowers & Co. LLC and the Company.
 
The acquisition has been accounted for using the purchase method of accounting, which requires that the acquirer record the assets and liabilities acquired at their estimated fair value.
 
         
Purchase price
  $ 65,571  
Direct costs of acquisition
    303  
         
Total purchase price
  $ 65,874  
         
Net assets acquired at fair value
  $ 65,874  
         


8


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   ACQUISITIONS — (cont’d)
 
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition:
 
         
Cash, restricted cash and investments
  $ 108,994  
Reinsurance balances receivable
    33,298  
Accounts receivable
    4,631  
Losses and loss adjustment expenses
    (79,107 )
Accounts payable
    (1,942 )
         
Net assets acquired at fair value
  $ 65,874  
         
 
On March 5, 2008, the Company completed the acquisition from AMP Limited (“AMP”) of AMP’s Australian-based closed reinsurance and insurance operations (“Gordian”). The purchase price, including acquisition expenses, was approximately AU$436.9 million (approximately $405.4 million) and was financed by AU$301.0 million (approximately $276.5 million), including an arrangement fee of AU$4.5 million (approximately $4.2 million), from bank financing provided jointly by a London-based bank and a German bank; approximately AU$41.6 million (approximately $39.5 million) from the Flowers Fund, by way of non-voting equity participation; and approximately AU$98.7 million (approximately $93.6 million) from available cash on hand.
 
The acquisition has been accounted for using the purchase method of accounting, which requires that the acquirer record the assets and liabilities acquired at their estimated fair value.
 
         
Purchase price
  $ 401,086  
Direct costs of acquisition
    4,326  
         
Total purchase price
  $ 405,412  
         
Net assets acquired at fair value
  $ 455,692  
         
Excess of net assets over purchase price
  $ 50,280  
Less minority interest share of negative goodwill
    (15,084 )
         
Negative goodwill
  $ 35,196  
         
 
The negative goodwill arose primarily as a result of income earned by Gordian between the date of the balance sheet on which the agreed purchase price was based, June 30, 2007, and the date the acquisition closed, March 5, 2008, and the desire of the vendors to achieve a substantial reduction in regulatory capital requirements and therefore to dispose of Gordian at a discount to fair value.
 
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition:
 
         
Cash, restricted cash and investments
  $ 872,755  
Reinsurance balances receivable
    99,645  
Accounts receivable
    31,253  
Losses and loss adjustment expenses
    (509,638 )
Insurance and reinsurance balances payable
    (22,660 )
Accounts payable
    (15,663 )
         
Net assets acquired at fair value
  $ 455,692  
         


9


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   ACQUISITIONS — (cont’d)
 
The fair values of reinsurance assets and liabilities acquired are derived from probability weighted ranges of the associated projected cash flows, based on actuarially prepared information and management’s run-off strategy. Any amendment to the fair values resulting from changes in such information or strategy will be recognized when they occur.
 
The following proforma condensed combined income statement for the three months ended March 31, 2008 combines the historical consolidated statements of income of the Company with those of Gordian, which was acquired in the first quarter of 2008, giving effect to the business combinations and related transactions as if they had occurred on January 1, 2008.
 
                                 
                      Enstar
 
    Enstar
                Group
 
    Group
          Proforma
    Limited
 
Three Months Ended March 31, 2008:
  Limited     Gordian     Adjustment     Proforma  
 
Total income
  $ (1,748 )   $ 14,082     $ (5,194 )(a)   $ 7,140  
Total expenses
    (26,262 )     15,860       (7,619 )(c)     (18,021 )
                                 
Net (loss) before extraordinary gain
    (28,010 )     29,942       (12,813 )     (10,881 )
Extraordinary gain
    35,196                   35,196  
                                 
Net earnings (loss)
  $ 7,186     $ 29,942     $ (12,813 )   $ 24,315  
                                 
Net (loss) per ordinary share before extraordinary gain — basic and diluted
                          $ (0.91 )
Extraordinary gain — basic and diluted
                            2.95  
                                 
Net earnings per ordinary share — basic and diluted
                          $ 2.04  
                                 
Weighted average shares — basic and diluted
                            11,927,542  
 
The following proforma condensed combined income statement for the three months ended March 31, 2007 combines the historical consolidated statements of income of the Company with those of The Enstar Group, Inc. (“EGI”), BH Acquisition Ltd. (“BH”) and Inter-Ocean Holdings, Ltd. (“Inter-Ocean”), each of which was acquired in the first quarter of 2007, and Gordian, which was acquired in the first quarter of 2008, giving effect to the business combinations and related transactions as if they had occurred on January 1, 2007.
                                                                         
                                                    Enstar
 
                                                    Group
 
    Enstar
                      Proforma
                Proforma
    Limited-
 
Three Months Ended March 2007:
  Group     BH     EGI     Inter-Ocean     Adjustment     Sub-total     Gordian     Adjustment     Proforma  
 
Total income
  $ 21,797     $ 1,252     $ 1,058     $ 6,555     $ (721 )(b)   $ 29,941     $ 18,394     $ (3,602 )(a)   $ 44,733  
Total expenses
    (25,128 )     (774 )     (6,913 )     (5,435 )     721  (d)     (37,529 )     1,539       (8,458 )(c)     (44,448 )
                                                                         
Net (loss) earnings before extraordinary gain
    (3,331 )     478       (5,855 )     1,120             (7,588 )     19,933       (12,060 )     285  
Extraordinary gain
    15,683                               15,683                   15,683  
                                                                         
Net earnings (loss)
  $ 12,352     $ 478     $ (5,855 )   $ 1,120     $     $ 8,095     $ 19,933     $ (12,060 )   $ 15,968  
                                                                         
Net earnings per ordinary share before extraordinary gain — basic
                                                                  $ 0.03  
Extraordinary gain — basic
                                                                    1.41  
                                                                         
Net earnings per ordinary share — basic
                                                                  $ 1.44  
                                                                         
Net earnings per ordinary share before extraordinary gain — diluted
                                                                  $ 0.02  
Extraordinary gain — diluted
                                                                    1.37  
                                                                         
Net earnings per ordinary share — diluted
                                                                  $ 1.39  
                                                                         
Weighted average shares — basic
                                                                    11,160,448  
Weighted average shares — diluted
                                                                    11,425,716  


10


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.   ACQUISITIONS — (cont’d)
 
Notes to the Pro Forma Condensed Combined Income Statement
 
                 
    2008     2007  
 
Income:
               
(a) Adjustment to conform the accounting policy for investments to that of the Company
  $ (5,194 )   $ (3,602 )
(b) Elimination of fees earned prior to acquisition
          (721 )
Expenses:
               
(c) (i) Adjustment to interest expense to reflect the financing costs of the acquisition for the period
    (3,965 )     (5,015 )
    (ii) Adjustment to recognize the amortization of increased run-off provisions
    (236 )     (205 )
    (iii) Adjustment to recognize amortization of fair value adjustments recorded at date of acquisition
    (4,976 )     (4,319 )
    (iv) To adjust income taxes for pro forma adjustments at the statutory rate of 30%
    1,558       1,081  
                 
      (7,619 )     (8,458 )
(d) Elimination of fees paid prior to acquisition
          721  
 
3.   SIGNIFICANT NEW BUSINESS
 
In December 2007, the Company, in conjunction with JCF FPK I L.P. (“JCF FPK”) and a newly-hired executive management team, formed U.K.-based Shelbourne Group Limited (“Shelbourne”) to invest in Reinsurance to Close or “RITC” transactions (the transferring of liabilities from one Lloyd’s Syndicate to another) with Lloyd’s of London insurance and reinsurance syndicates in run-off. JCF FPK is a joint investment program between Fox-Pitt, Kelton, Cochran, Caronia & Waller (“FPKCCW”) and the Flowers Fund. Shelbourne is a holding company of a Lloyd’s Managing Agency, Shelbourne Syndicate Services Limited. The Company owns 50.1% of Shelbourne, 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 RITC transactions with Lloyd’s syndicates in run-off. In February 2008, Lloyd’s Syndicate 2008 entered into RITC agreements with four Lloyd’s syndicates with total gross insurance reserves of approximately $471.2 million.
 
On February 29, 2008, the Company funded its capital commitment of approximately £36.0 million (approximately $72.0 million) by way of a letter of credit issued by a London-based bank to Lloyd’s Syndicate 2008. The letter of credit was secured by a parental guarantee from the Company in the amount of £12.0 million (approximately $24.0 million); approximately £11.0 million (approximately $22.0 million) from the Flowers Fund (acting in its own capacity and not through JCF FPK), by way of a non-voting equity participation; and approximately £13.0 million (approximately $26.0 million) from available cash on hand. JCF FPK’s capital commitment to Lloyd’s Syndicate 2008 is approximately £14.0 million (approximately $28.0 million).
 
The Flowers Fund is a private investment fund advised by J.C. Flowers & Co. LLC. J. Christopher Flowers, a member of the Company’s board of directors and one of its largest shareholders, is the founder and Managing Member of J.C. Flowers & Co. LLC. John J. Oros, the Company’s Executive Chairman and a member of its board of directors, is a Managing Director of J.C. Flowers & Co LLC. Mr. Oros splits his time between J.C. Flowers & Co. LLC and the Company. In addition, an affiliate of the Flowers Fund controls approximately 41% of FPKCCW.


11


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.   INVESTMENTS
 
Available-for-sale
 
The amortized cost and estimated fair value of investments in debt securities classified as available for sale are as follows:
 
                                 
          Gross
    Gross
       
          Unrealized
    Unrealized
       
    Amortized
    Holding
    Holding
    Fair
 
    Cost     Gains     Losses     Value  
 
As at March 31, 2008
                               
U.S. Treasury and Agency securities
  $ 142,358     $ 443     $ (6 )   $ 142,795  
Non-U.S. Government securities
    184,394       984       (45 )     185,333  
Corporate debt securities
    180,853       660       (503 )     181,010  
Other debt securities
    6,918                   6,918  
Short term investments
    111,058       36       (45 )     111,049  
                                 
    $ 625,581     $ 2,123     $ (599 )   $ 627,105  
                                 
As at December 31, 2007
                               
Corporate debt securities
  $ 757     $ 42     $ (170 )   $ 629  
Other debt securities
    6,249                   6,249  
Short term investments
    15,480                   15,480  
                                 
    $ 22,486     $ 42     $ (170 )   $ 22,358  
                                 
 
The gross unrealized losses on available for sale debt securities as at March 31 were split as follows:
 
                 
    2008     2007  
 
Due within one year
  $ 53     $  
After 1 through 5 years
    243        
After 5 through 10 years
    160        
After 10 years
    143       170  
                 
    $ 599     $ 170  
                 
 
As at March 31, 2008 the number of securities classified as available-for-sale in an unrealized loss position was 50, with a fair value of $77.6 million. None of these securities has been in an unrealized loss position for 12 months or longer.


12


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.   INVESTMENTS — (cont’d)
 
Held-to-maturity
 
The amortized cost and estimated fair value of investments in debt securities classified as held-to-maturity are as follows:
 
                                 
          Gross
    Gross
       
          Unrealized
    Unrealized
       
    Amortized
    Holding
    Holding
    Fair
 
    Cost     Gains     Losses     Value  
 
As at March 31, 2008
                               
U.S. Treasury and Agency securities
  $ 92,078     $ 1,638     $ (208 )   $ 93,508  
Non-U.S. Government securities
    2,636             (9 )     2,627  
Corporate debt securities
    58,071       387       (932 )     57,526  
                                 
    $ 152,785     $ 2,025     $ (1,149 )   $ 153,661  
                                 
As at December 31, 2007
                               
U.S. Treasury and Agency securities
  $ 132,332     $ 816     $ (314 )   $ 132,834  
Non-U.S. Government securities
    2,534             (12 )     2,522  
Corporate debt securities
    76,149       159       (666 )     75,642  
                                 
    $ 211,015     $ 975     $ (992 )   $ 210,998  
                                 
 
The gross unrealized losses on held-to-maturity debt securities as at March 31 were split as follows:
 
                 
    2008     2007  
 
Due within one year
  $ 113     $ 161  
After 1 through 5 years
    380       217  
After 5 through 10 years
    11       13  
After 10 years
    645       601  
                 
    $ 1,149     $ 992  
                 
 
As at March 31, 2008, the number of securities classified as held-to-maturity in an unrealized loss position was 36 with a fair value of $33.8 million. Of these securities, the number of securities that have been in an unrealized loss position for 12 months or longer was 34 with a fair value of $18.2 million. As of March 31, 2008, none of these securities were considered to be other than temporarily impaired. The Company has the intent and ability to hold these securities until their maturities. The unrealized losses from these securities were not a result of credit, collateral or structural issues.
 
The amortized cost and estimated fair values as at March 31, 2008 of debt securities classified as held-to-maturity by contractual maturity are shown below.
 
                 
    Amortized
    Fair
 
    Cost     Value  
 
Due within one year
  $ 42,933     $ 42,936  
After 1 through 5 years
    100,904       102,245  
After 5 through 10 years
    161       149  
After 10 years
    8,787       8,331  
                 
    $ 152,785     $ 153,661  
                 


13


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.   INVESTMENTS — (cont’d)
 
Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Trading
 
The estimated fair value of investments in debt securities and short-term investments classified as trading securities as of March 31 was as follows:
 
                 
    2008     2007  
 
U.S. Treasury and Agency securities
  $ 255,499     $ 237,943  
Non-U.S. Government securities
    3,231       3,244  
Corporate debt securities
    69,069       82,436  
                 
    $ 327,799     $ 323,623  
                 
 
Other Investments
 
At March 31, 2008 and December 31, 2007, the Company had $105.4 million and $75.3 million, respectively, of other investments recorded in limited partnerships, limited liability companies and equity funds. These other investments represented 3.5% and 4.2% of total investments and cash and cash equivalents at March 31, 2008 and December 31, 2007, respectively. All of the Company’s other investments relating to our investments in limited partnerships and limited liability companies are subject to restrictions on redemptions and sales which are determined by the governing documents and limit the Company’s ability to liquidate these investments in the short term. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. These investments are accounted for under the equity method. As at March 31, 2008 and December 31, 2007, the Company had unfunded capital commitments relating to its other investments of $62.3 and $74.6 million, respectively. As at March 31, 2008, 61.7% of the other investments are with a related party.
 
In accordance with FAS 157, we have categorized our investments held at March 31, 2008 between levels as follows:
 
                                 
    March 31, 2008  
                      Total Fair
 
    Level 1     Level 2     Level 3     Value  
 
Fixed maturities - available for sale
  $     $ 627,105     $     $ 627,105  
Fixed maturities - trading
          326,748       1,051       327,799  
Equity securities
    4,615                   4,615  
Other investments
                105,391       105,391  
                                 
Total investments
  $ 4,615     $ 953,853     $ 106,442     $ 1,064,910  
                                 


14


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.   INVESTMENTS — (cont’d)
 
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the period ended March 31, 2008:
 
                                 
    Three Months Ended March 31, 2008  
    Fixed
                   
    Maturity
    Equity
    Other
       
    Investments     Securities     Investments     Total  
 
Level 3 investments as of January 1, 2008
  $ 1,051     $     $ 75,300     $ 76,351  
Net purchases (sales and distributions)
                55,461       55,461  
Total realized and unrealized losses
                (25,370 )     (25,370 )
Net transfers in and/or (out) of Level 3
                       
                                 
Level 3 investments as of March 31, 2008
  $ 1,051     $     $ 105,391     $ 106,442  
                                 
 
The amount of total losses for the period included in earnings attributable to the fair value of changes in assets still held at the reporting date was $26.5 million.
 
5.   LOANS PAYABLE
 
On February 18, 2008, the Company fully repaid the outstanding principal and accrued interest on the loans used to partially finance the acquisitions of Cavell Holdings Limited (U.K.), Marlon Insurance Company Limited and Marlon Management Services Limited totaling $40.5 million.
 
In February 2008, a wholly-owned subsidiary of the Company, Cumberland Holdings Limited (“Cumberland”), entered into a term facility agreement jointly with a London-based bank and a German bank (the “Cumberland Facility”). On March 4, 2008, the Company drew down AU$215.0 million (approximately $197.5 million) from the Facility A Commitment (“Facility A”) and AU$86.0 million (approximately $79.0 million) from the Facility B Commitment (“Facility B”) to partially fund the Gordian acquisition.
 
  •  The interest rate on the Facility A is LIBOR plus 2%. Facility A is repayable in five years and is secured by a first charge over Cumberland’s shares in Gordian. Facility A contains various financial and business covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. As of March 31, 2008, all of the financial covenants relating to Facility A were met.
 
  •  The interest rate on Facility B is LIBOR plus 2.75%. Facility B is repayable in six years and is secured by a first charge over Cumberland’s shares in Gordian. Facility B contains various financial and business covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. As of March 31, 2008, all of the financial covenants relating to Facility B were met.
 
In February 2008, a wholly-owned subsidiary of the Company, Rombalds Limited (“Rombalds”), entered into a term facility agreement with a London-based bank (the “Rombalds Facility”). On February 28, 2008, the Company drew down $32.5 million from the Rombalds Facility to partially fund the acquisition of Guildhall. The interest rate on the Rombalds Facility is LIBOR plus 2%. The facility is repayable in five years and is secured by a first charge over Rombalds shares in Guildhall. The Rombalds Facility contains various financial and business covenants, including limitations on liens on the stock of restricted subsidiaries, restrictions as to the disposition of the stock of restricted subsidiaries and limitations on mergers and consolidations. As of March 31, 2008, all of the financial covenants relating to the Rombalds Facility were met.


15


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
On May 6, 2008, the Company fully repaid outstanding principal and accrued interest on the loan used to partially finance the acquisition of Brampton Insurance Company Limited totaling $19.9 million.
 
6.   EMPLOYEE BENEFITS
 
Our share-based compensation plans provide for the grant of various awards to our employees and to members of the Board of Directors. These are described in Note 12 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2007. The information below includes both the employee and director components of our share-based compensation.
 
(a)  Employee share plans
 
                 
          Weighted
 
          Average Fair
 
          Value of
 
    Number of
    the Award
 
    Shares     per Share  
 
Nonvested — January 1, 2008
    25,862     $ 122.42  
Granted
    27,140       95.45  
Vested
    (27,140 )     95.45  
                 
Nonvested — March 31, 2008
    25,862       111.27  
                 
 
i) 2004 - 2005 employee share plan
 
Compensation costs of $0.2 million and $1.7 million relating to the issuance of share-awards to employees of the Company in 2004 and 2005 have been recognized in the Company’s statement of earnings for the three months ended March 31, 2008 and 2007, respectively.
 
The determination of the share-award expenses was based on the fair-market value per common share of EGI as of the grant date and is recognized over the vesting period.
 
As of March 31, 2008, total unrecognized compensation costs related to the non-vested share awards amounted to $0.4 million. These costs are expected to be recognized over a weighted average period of 0.57 years.
 
ii) 2006-2010 Annual Incentive Plan and 2006 Equity Incentive Plan
 
For the three months ended March 31, 2008 and 2007, 27,140 and 38,387 shares were awarded to directors, officers and employees under the 2006 Equity Incentive Plan. The total value of the award for the three months ended March 31, 2008 was $2.6 million and was charged against the 2006-2010 Annual Incentive Plan accrual established for the year ended December 31, 2007. The total value of the award for the three months ended March 31, 2007 was $3.8 million of which $0.5 million was charged as an expense for the three months ended March 31, 2007 and $3.3 million was charged against the 2006-2010 Annual Incentive Plan accrual established for the year ended December 31, 2006.
 
The accrued expense relating to the 2006-2010 Annual Incentive Plan for the three months ended March 31, 2008 and 2007 was $2.1 million and $2.4 million, respectively.


16


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
6.   EMPLOYEE BENEFITS — (cont’d)
 
(b)  Options
 
                         
          Weighted
       
          Average
    Intrinsic
 
    Number of
    Exercise
    Value of
 
    Shares     Price     Shares  
 
Outstanding — January 1, 2008
    490,371     $ 25.40        
Granted
                 
Exercised
                 
Forfeited
                 
                         
Outstanding — March 31, 2008
    490,371     $ 25.40     $ 42,108  
                         
 
Stock options outstanding and exercisable as of March 31, 2008 were as follows:
 
                         
Ranges of
              Weighted Average
 
Exercise
  Number of
    Weighted Average
    Remaining
 
Prices
  Options     Exercise Price     Contractual Life  
 
$10 - 20
    323,645     $ 17.20       2.9 years  
$40 - 60
    166,726       41.32       5.4 years  
 
(c)  Deferred Compensation and Stock Plan for Non-Employee Directors
 
EGI, prior to its merger with a subsidiary of the Company (the “Merger”), had in place a Deferred Compensation and Stock Plan for Non-Employee Directors which permitted non-employee directors to receive all or a portion of their retainer and meeting fees in common stock and to defer all or a portion of their retainer and meeting fees in stock units. Upon completion of the Merger, each stock unit was converted from a right to receive a share of EGI common stock into a right to receive an Enstar Group Limited ordinary share. No additional amounts will be deferred under the plan.
 
On June 5, 2007, the Compensation Committee of the board of directors of the Company approved the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors (the “EGL Deferred Compensation Plan”)
 
The EGL Deferred Compensation Plan became effective immediately. The EGL Deferred Compensation Plan provides each member of the Company’s board of directors who is not an officer or employee of the Company or any of its subsidiaries (each, a “Non-Employee Director”) with the opportunity to elect (i) to receive all or a portion of his or her compensation for services as a director in the form of the Company’s ordinary shares instead of cash and (ii) to defer receipt of all or a portion of such compensation until retirement or termination.
 
Non-Employee Directors electing to receive compensation in the form of ordinary shares will receive whole ordinary shares (with any fractional shares payable in cash) as of the date compensation would otherwise have been payable. Non-Employee Directors electing to defer compensation will have such compensation converted into share units payable as a lump sum distribution after the director’s “separation from service” as defined under Section 409A of the Internal Revenue Code of 1986, as amended. The lump sum share unit distribution will be made in the form of ordinary shares, with fractional shares paid in cash.
 
For the three months ended March 31, 2008 and 2007, 994 and Nil shares were issued to Non-Employee Directors under the plan.


17


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
7.   EARNINGS PER SHARE
 
The following table sets forth the comparison of basic and diluted earnings per share for the three-month periods ended March 31, 2008 and 2007.
 
                 
    2008     2007  
 
Net loss before extraordinary gain
  $ (23,509 )   $ (2,309 )
Weighted average shares outstanding — basic and diluted
    11,927,542       11,160,448  
                 
Loss per share before extraordinary gain — basic and diluted
  $ (1.97 )   $ (0.21 )
                 
 
The following securities have not been included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented.
 
                 
Share equivalents:
  2008     2007  
 
Unvested shares
  $ 25,862     $ 92,293  
Restricted share units
    2,141        
Options
    262,440       172,975  
                 
Total
  $ 290,443     $ 265,268  
                 
 
The Company amended its earnings per share calculation for 2007 to reflect the anti-dilutive nature of unvested shares and options.
 
The weighted average ordinary shares outstanding shown for the three months ended March 31, 2007 reflect the conversion of Class A, B, C and D shares to ordinary shares on January 31, 2007, as part of the recapitalization completed in connection with the Merger, as if the conversion occurred on January 1, 2007. For the three months ended March 31, 2007, the ordinary shares issued to acquire EGI are reflected in the calculation of the weighted average ordinary shares outstanding from January 31, 2007, the date of issue.
 
8.   COMMITMENTS AND CONTINGENCIES
 
On March 28, 2008, the Company committed to subscribe for its pro-rata share of the rights offering in New NIB Partners L.P. (“New NIB”). Our total commitment was €5.0 million (approximately $7.9 million) and was paid to New NIB on April 11, 2008.
 
As at March 31, 2008, the Company has guaranteed the obligations of two of its subsidiaries in respect of letter of credit issued on their behalf by London-based banks in the amount of £19.5 million (approximately $38.7 million) in respect of capital commitments to Lloyds Syndicate 2008 and insurance contract requirements of one of the subsidiaries. The guarantees will be triggered should losses incurred by the subsidiaries exceed available cash on hand resulting in the letters of credit being drawn. As at March 31, 2008, the Company has not recorded any liabilities associated with the guarantees.


18


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
9.   RELATED PARTY TRANSACTIONS
 
The Company has entered into certain transactions with companies and partnerships that are affiliated with J. Christopher Flowers and John J. Oros. Messrs Flowers and Oros are members of the Company’s board of directors and Mr. Flowers is one of the largest shareholders of Enstar.
 
  •  During the quarter, the Company funded an additional $24.4 million of its outstanding capital commitment to entities affiliated with Messrs. Flowers and Oros. The Company had, as of March 31, 2008 and December 31, 2007, investments in entities affiliated with Mr. Flowers with a total value of $65.0 million and $71.6 million, respectively, and outstanding commitments to entities managed by Mr. Flowers, for the same periods, of $57.6 million and $76.3 million, respectively. The Company’s outstanding commitments may be drawn down over approximately the next six years.
 
  •  In February 2008, the Flowers Fund funded its commitment of approximately $70.9 million for its share of the economic interest in each of the Gordian, Guildhall and Shelbourne transactions.
 
  •  In February 2008, the Company entered into an AU$301.0 million (approximately $276.5 million) joint loan facility with an Australian and German bank in which each bank has 50% participation. The Flowers Fund is a significant shareholder of the German bank.
 
  •  In March 2008, the Company provided an additional capital commitment of approximately $7.9 million in respect of an entity affiliated with Mr. Flowers in which the Company currently invests. The commitment was funded by the Company on April 11, 2008.
 
For related party investments associated with Messrs. Flowers and Oros, as at March 31 2008, these investments accounted for 92.5% of the total unfunded capital commitments of the Company, 61.7% of the total amount of investments classified as Other Investments by the Company and 99.7% of the total write-downs in the quarter by the Company.
 
10.   SEGMENT INFORMATION
 
The determination of reportable segments is based on how senior management monitors the Company’s operations. The Company measures the results of its operations under two major business categories: reinsurance and consulting.
 
Consulting fees for the reinsurance segment are intercompany fees paid to the consulting segment. Salary and benefits for the reinsurance segment relate to the discretionary bonus expense on the net income after taxes of the reinsurance segment.
 


19


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
10.   SEGMENT INFORMATION — (cont’d)
 
                         
    Three Months Ended March 31, 2008  
    Reinsurance     Consulting     Total  
 
Consulting fees
  $ (7,248 )   $ 13,303     $ 6,055  
Net investment income (loss)
    5,498       (4,908 )     590  
Net realized loss
    (1,084 )           (1,084 )
                         
      (2,834 )     8,395       5,561  
                         
Net increase in loss and loss adjustment expense liabilities
    685             685  
Salaries and benefits
    2,062       9,295       11,357  
General and administrative expenses
    8,289       3,622       11,911  
Interest expense
    3,315             3,315  
Net foreign exchange gain
    (963 )     (372 )     (1,335 )
                         
      13,388       12,545       25,933  
                         
Loss before income taxes and minority interest
    (16,222 )     (4,150 )     (20,372 )
Income taxes
    (1,561 )     1,800       239  
Minority interest
    (3,376 )           (3,376 )
                         
Loss before extraordinary gain
    (21,159 )     (2,350 )     (23,509 )
Extraordinary gain
    35,196             35,196  
                         
Net earnings (loss)
  $ 14,037     $ (2,350 )   $ 11,687  
                         
 
                         
    Three Months Ended March 31, 2007  
    Reinsurance     Consulting     Total  
 
Consulting fees
  $ (6,198 )   $ 10,859     $ 4,661  
Net investment income
    19,245       693       19,938  
Net realized gains
    571             571  
                         
      13,618       11,552       25,170  
                         
Net increase in loss and loss adjustment expense liabilities
    2,510             2,510  
Salaries and benefits
    2,864       9,938       12,802  
General and administrative expenses
    2,305       3,368       5,673  
Interest expense
    3,176             3,176  
Net foreign exchange loss
    7       47       54  
                         
      10,862       13,353       24,215  
                         
Earnings (loss) before income taxes and minority interest
    2,756       (1,801 )     955  
Income taxes
    (108 )     (908 )     (1,016 )
Minority interest
    (2,248 )           (2,248 )
                         
Net earnings (loss) before extraordinary gain
    400       (2,709 )     (2,309 )
Extraordinary gain
    15,683             15,683  
                         
Net earnings (loss)
  $ 16,083     $ (2,709 )   $ 13,374  
                         

20


 

 
ENSTAR GROUP LIMITED
 
NOTES TO THE UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
11.   RESTATEMENT
 
Subsequent to the issuance of the Company’s March 31, 2008 unaudited condensed consolidated financial statements, the Company’s management identified an error in Note 2 — Acquisitions in relation to total expenses for Gordian for the three-month period ended March 31, 2008, included in the calculation of the proforma condensed combined income statement for the three-month period ended March 31, 2008. As a result, the March 31, 2008 proforma condensed combined income statement shown in Note 2 has been restated to correct the error. The tables below summarize the effects of the restatement.
 
As previously reported:
 
                                 
                      Enstar
 
    Enstar
                Group
 
    Group
          Proforma
    Limited
 
Three Months Ended March 31, 2008:
  Limited     Gordian     Adjustment     Proforma  
 
Total income
  $ (1,748 )   $ 14,082     $ (5,194 )   $ 7,140  
Total expenses
    (26,262 )     (8,854 )     (7,619 )     (42,735 )
                                 
Net (loss) before extraordinary gain
    (28,010 )     5,228       (12,813 )     (35,595 )
Extraordinary gain
    35,196                   35,196  
                                 
Net earnings (loss)
  $ 7,186     $ 5,228     $ (12,813 )   $ (399 )
                                 
Net (loss) per ordinary share before extraordinary gain — basic and diluted
                          $ (2.98 )
Extraordinary gain — basic and diluted
                            2.95  
                                 
Net (loss) per ordinary share — basic and diluted
                          $ (0.03 )
                                 
Weighted average shares — basic and diluted
                            11,927,542  
 
As restated:
 
                                 
                      Enstar
 
    Enstar
                Group
 
    Group
          Proforma
    Limited
 
Three Months Ended March 31, 2008:
  Limited     Gordian     Adjustment     Proforma  
 
Total income
  $ (1,748 )   $ 14,082     $ (5,194 )   $ 7,140  
Total expenses
    (26,262 )     15,860       (7,619 )     (18,021 )
                                 
Net (loss) before extraordinary gain
    (28,010 )     29,942       (12,813 )     (10,881 )
Extraordinary gain
    35,196                   35,196  
                                 
Net earnings (loss)
  $ 7,186     $ 29,942     $ (12,813 )   $ 24,315  
                                 
Net (loss) per ordinary share before extraordinary gain — basic and diluted
                          $ (0.91 )
Extraordinary gain — basic and diluted
                            2.95  
                                 
Net earnings per ordinary share — basic and diluted
                          $ 2.04  
                                 
Weighted average shares — basic and diluted
                            11,927,542  


21


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders
of Enstar Group Limited
 
We have reviewed the accompanying condensed consolidated balance sheet of Enstar Group Limited and subsidiaries (the “Company”) as of March 31, 2008, and the related condensed consolidated statements of earnings and comprehensive income, changes in shareholders’ equity and cash flows for the three-month periods ended March 31, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Enstar Group Limited and subsidiaries as of December 31, 2007 and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended; and in our report dated February 29, 2008, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2007 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
As discussed in Note 11, the unaudited condensed consolidated financial statements have been restated.
 
/s/ Deloitte & Touche
 
Hamilton, Bermuda
May 12, 2008 (June 5, 2008 as to the effects of the restatement discussed in Note 11)


22


 

Item 4.   CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
In connection with the filing of our original Form 10-Q on May 12, 2008, our management performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2008. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls
 
In connection with the filing of our original Form 10-Q on May 12, 2008, our management performed an evaluation, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2008. Based upon that evaluation there were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
On June 3, 2008, our management concluded that the proforma condensed combined income statement for the three-month period ended March 31, 2008 included in “Note 2 — Acquisitions” to our Unaudited Condensed Combined Financial Statements for the three-month period ended March 31, 2008 in our Quarterly Report on Form 10-Q contained an error. Accordingly, we have filed this Amended Quarterly Report on Form 10-Q to correct that error. See “Note 11 — Restatement” to the Unaudited Condensed Combined Financial Statements included in this amended report. The error did not impact our revenue, net earnings or shareholders’ equity.
 
As a result of the error noted above, management concluded that the error resulted from a deficiency in the operating effectiveness of our internal control over financial reporting related to the preparation and review of proforma financial information disclosed in connection with significant business acquisitions. Specifically, the review of the underlying spreadsheet that was utilized in preparing the proforma information described above by a senior member of our finance department at our principal office prescribed by our existing control procedures was not performed. This deficiency constitutes a material weakness in internal control over financial reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
 
The preparation of the proforma condensed combined income statement for the three-month period ended March 31, 2008 in “Note 2 — Acquisitions” required us to disclose operating results of an acquired business for the three-month period ended March 31, 2008 that we acquired on March 5, 2008. Specifically, the error originated in a spreadsheet prepared by financial personnel at our principal office that was not adequately reviewed. To address this material weakness, we have extended existing control procedures applicable to the use of certain spreadsheets to cover in all instances spreadsheets used to prepare proforma financial information. These existing control procedures require concurring review of certain spreadsheets by a senior member of the finance department at our principal office.


23


 

Item 6.   EXHIBITS
 
         
  15 .1*   Deloitte & Touche Letter Regarding Unaudited Interim Financial Information.
  31 .1*   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2*   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1**   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32 .2**   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
* Filed herewith
 
** Furnished herewith


24


 

SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on June 5, 2008.
 
ENSTAR GROUP LIMITED
 
  By: 
/s/  Richard J. Harris
Richard J. Harris
Chief Financial Officer, Authorized Signatory and
Principal Accounting and Financial Officer


25


 

EXHIBIT INDEX
 
         
Exhibit
   
No.
 
Description
 
  15 .1*   Deloitte & Touche Letter Regarding Unaudited Interim Financial Information.
  31 .1*   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31 .2*   Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32 .1**   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32 .2**   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
* Filed herewith
 
** Furnished herewith


26