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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
Commission File Number 0-07477
THE ENSTAR GROUP, INC.
(Exact name of registrant as specified in its charter)
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Georgia
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63-0590560 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
401 Madison Avenue
Montgomery, Alabama
(Address of principal executive offices)
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36104
(Zip Code) |
(334) 834-5483
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Name of Each Exchange on |
Title of Each Class |
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Which Registered |
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Not applicable
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Not applicable |
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.01 par value
(including rights attached thereto)
Indicate by check mark whether the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x
Indicate
by check mark whether the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No x
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 x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. x
Indicate
by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated
filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer
x Non-Accelerated
Filer o
Indicate
by check mark whether the Registrant is a shell company (as
defined in
Rule 12b-2 of the
Exchange
Act). Yes o No x
The
aggregate market value of the Registrants Common Stock
held by non-affiliates of the Registrant as of June 30,
2005, was $252,279,716 (based on the closing price on such date
of the Registrants Common Stock on The Nasdaq National
Market).
The
number of shares of the Registrants Common Stock,
$.01 par value per share, outstanding at September 19,
2006 was 5,739,384.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2006 Annual Meeting of
Shareholders are incorporated herein by reference in
Part II and Part III.
EXPLANATORY NOTE
The Enstar Group, Inc. (the Company or
Enstar) is filing this Amendment No. 1 on
Form 10-K/A (this Form 10-K/A) to the
Companys Annual Report on Form 10-K for the year
ended December 31, 2005, initially filed with the
Securities and Exchange Commission (the SEC) on
March 16, 2006 (the Original 10-K Filing),
to restate the disclosures in the notes to its consolidated
financial statements included in Item 8 of
Part II Financial Statements and
Supplementary Data. This restatement had no impact on the
net income, net income per share or shareholders equity of
the Company or its partially owned affiliates and no material
weakness in the Companys internal control over financial
reporting existed. The Company has also updated Item 7 of
Part II, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and
Item 9A of Part II, Controls and
Procedures to give effect to the restatement. The
restatement is described in more detail in Note 2 to the
Companys consolidated financial statements.
In addition, the Company has amended Item 1A of
Part I, Risk Factors, to provide a more
detailed description of the risks associated with the Company
and Item 15 of Part IV to reflect the filing of
currently dated certifications from the Companys Chief
Executive Officer and Chief Financial Officer, as required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The
certifications of the Companys Chief Executive Officer and
Chief Financial Officer are attached to this Form 10-K/A as
Exhibits 31.1, 31.2, 32.1, and 32.2. No other information in
this Form 10-K/A has been updated to reflect any subsequent
information or events since the date of the Original 10-K
Filing. For the convenience of the reader, this Form 10-K/A
sets forth the Original 10-K Filing in its entirety, as amended.
Concurrently with the filing of this Form 10-K/A, we are
filing amendments on Form 10-Q/A to our Quarterly Reports
on Form 10-Q for the period ended March 31, 2006 and
for the period ended June 30, 2006.
TABLE OF CONTENTS
THIS
FORM 10-K/A AND
OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY THE ENSTAR
GROUP, INC. OR MEMBERS OF ITS MANAGEMENT TEAM CONTAIN STATEMENTS
WHICH MAY CONSTITUTE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.
SECTIONS 77Z-2 AND 78U-5 (SUPP. 1996). THOSE STATEMENTS
INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF THE ENSTAR GROUP, INC. AND MEMBERS OF ITS
MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT
ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. THERE ARE A NUMBER OF IMPORTANT
FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THESE
FACTORS INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH IN ITEM 1A.
RISK FACTORS. THE ENSTAR GROUP, INC. UNDERTAKES NO
OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO
REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED
EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME.
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PART I
General
Enstar is a publicly traded company engaged in the operation of
several equity affiliates in the financial services industry.
Enstar also continues its active search for one or more
additional operating businesses which meet its acquisition
criteria. See Strategy for Business
Acquisitions.
Through the operations of its partially owned equity affiliates,
Castlewood Holdings Limited (Castlewood Holdings)
and B.H. Acquisition Limited (B.H. Acquisition), and
their subsidiaries, the Company acquires and manages insurance
and reinsurance companies in run-off (insurance and reinsurance
companies that have ceased the underwriting of new policies).
The management of these businesses includes claims
administration, adjustment and settlement together with the
collection of reinsurance recoveries. Castlewood Holdings, a
Bermuda-based company, also provides management, consulting and
other services to the insurance and reinsurance industry for
both fixed and success-based fee arrangements. In general,
reinsurance is an arrangement in which the reinsurer agrees to
indemnify an insurance or reinsurance company against all or a
portion of the risks underwritten by such insurance or
reinsurance company under one or more insurance or reinsurance
contracts.
For a discussion of certain risks and uncertainties relating to
the Companys participation in the reinsurance industry,
see Item 1A. Risk Factors. For business segment
information, see Note 12 of the Notes to Consolidated
Financial Statements.
Activities Related to the Reinsurance Industry
In July 2000, the Company, through B.H. Acquisition, a joint
venture with Castlewood Limited (Castlewood) and an
entity controlled by Trident II, L.P.
(Trident), acquired as an operating business two
reinsurance companies, Brittany Insurance Company Ltd.
(Brittany) and Compagnie Europeenne
dAssurances Industrielles S.A. (CEAI).
Brittany and CEAI are principally engaged in the active
management of books of reinsurance business from international
markets. The Company owns 50% of the voting stock and a 33%
economic interest in B.H. Acquisition. Castlewood owns 33% of
the voting stock and a 45% economic interest in B.H.
Acquisition. The Companys ownership in B.H. Acquisition is
accounted for using the equity method of accounting.
In November 2001, the Company, together with Trident and the
shareholders and senior management of Castlewood (the
Castlewood Principals), completed the formation of a
new venture, Castlewood Holdings, to acquire and manage
insurance and reinsurance companies, including companies in
run-off, and to provide management, consulting and other
services to the insurance and reinsurance industry (the
Castlewood Holdings Transaction). The Company owns
50% of the voting stock of Castlewood Holdings and the
Castlewood Principals and Trident each own 25% of Castlewood
Holdings voting stock. The Company owns a 32.63% economic
interest in Castlewood Holdings. Castlewood is a private
Bermuda-based firm, experienced in managing and acquiring
reinsurance operations. The Companys ownership in
Castlewood Holdings is accounted for using the equity method of
accounting.
As a result of this transaction, the Companys 33% direct
economic interest in B.H. Acquisition increased by an additional
indirect economic interest through Castlewood Holdings. At
December 31, 2005, the Companys beneficial ownership
in B.H. Acquisition was 47.68%. The Companys combined
voting interest in B.H. Acquisition is limited to 50%.
In conjunction with the closing of the Castlewood Holdings
Transaction, a wholly owned subsidiary of Castlewood Holdings
completed the acquisition of two reinsurance companies in
run-off, River Thames
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Insurance Company Limited (River Thames), based in
London, England, and Overseas Reinsurance Corporation Limited
(Overseas Reinsurance), based in Bermuda
(collectively, the River Thames Transaction). The
total purchase price of River Thames and Overseas Reinsurance
was approximately $15.2 million.
In August 2002, Castlewood Holdings purchased Hudson Reinsurance
Company Limited (Hudson), a Bermuda-based company,
for approximately $4.1 million. Hudson reinsured risks
relating to property, casualty and workers compensation,
on a worldwide basis, and is now administering the run-off of
its claims.
Also in 2002, Castlewood Holdings capitalized Fitzwilliam
(SAC) Insurance Limited (Fitzwilliam), a wholly
owned subsidiary. Fitzwilliam, based in Bermuda, offers
specialized reinsurance protections to related companies,
clients of Castlewood Holdings and other third-party companies.
In March 2003, Castlewood Holdings and Shinsei Bank, Limited
(Shinsei) completed the acquisition of all of the
outstanding capital stock of The Toa-Re Insurance Company
(UK) Limited (Toa-UK), a London-based
subsidiary of The Toa Reinsurance Company, Limited, for
approximately $46 million. Toa-UK underwrote reinsurance
business throughout the world between 1980 and 1994, when it
stopped writing new business and is currently operating in
run-off. The acquisition was effected through Hillcot Holdings
Ltd. (Hillcot), a newly formed Bermuda company, in
which Castlewood Holdings has a 50.1% economic interest and a
50% voting interest. Upon completion of the transaction,
Toa-UKs name was changed to Hillcot Re Limited. Hillcot is
included in Castlewood Holdings consolidated financial
statements, with the remaining 49.9% economic interest reflected
as minority interest. J. Christopher Flowers
(Mr. Flowers), a member of the Companys
board of directors and the Companys largest shareholder,
is a director and the largest shareholder of Shinsei. Castlewood
Holdings results of operations include the results of
Toa-UK from the date of acquisition in March 2003.
In August 2004, Castlewood Holdings implemented an employee
stock-based compensation plan. The plan allows for the award of
Castlewood Holdings Class D non-voting shares to
certain senior employees up to a maximum of 7.5% of the total
issued share capital of Castlewood Holdings. As a result of
awards made in 2005 and 2004, the Companys economic
interest in Castlewood Holdings of
331/3%
has been diluted by 0.70% to 32.63% as of December 31,
2005. As awarded shares vest and as additional shares are
awarded in the future, the Companys economic interest
could decrease to a minimum of 30.83%. The Companys voting
interest will remain at 50%.
During 2004, Castlewood Holdings, through one of its
subsidiaries, invested a total of approximately
$9.1 million in Cassandra Equity LLC and Cassandra Equity
(Cayman) LP, (collectively, Cassandra), for a 27%
interest in each. Cassandra was formed to invest in equity
shares of a publicly traded international reinsurance company.
J.C. Flowers I LP also owned a 27% interest in Cassandra. J.C.
Flowers I LP is a private investment fund, the general partner
of which is JCF Associates I LLC. Mr. Flowers is the
managing member of JCF Associates I LLC. In March 2005,
Cassandra sold all of its holdings for total proceeds of
approximately $40.0 million. Castlewood Holdings
proportionate share of the proceeds was approximately
$10.8 million.
Also during 2004, Castlewood Holdings, through one of its
subsidiaries, completed the acquisition of Mercantile Indemnity
Company Ltd. (Mercantile), Harper Insurance Limited
(Harper) (formerly Turegum Insurance Company) and
Longmynd Insurance Company Ltd. (Longmynd) (formerly
Security Insurance (UK) Ltd.) for a total purchase price of
approximately $4.5 million. Castlewood Holdings recorded an
extraordinary gain of approximately $21.8 million relating
to the excess of the fair value of the net assets acquired over
the cost of these acquisitions.
In May 2005, Castlewood Holdings, through one of its
subsidiaries, purchased Fieldmill Insurance Company Limited
(formerly known as Harleysville Insurance Company
(UK) Limited) for approximately $1.4 million.
In December 2005, Castlewood Holdings and Shinsei signed
definitive agreements for the purchase of Aioi Insurance Company
of Europe Limited (Aioi Europe), a London-based
subsidiary of Aioi Insurance Company, Limited. Aioi Europe has
underwritten general insurance and reinsurance business in
Europe for its
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own account until 2002 when it generally ceased underwriting,
and placed into
run-off, its general
insurance and reinsurance business. The aggregate purchase price
to be paid for Aioi Europe is £62 million
(approximately $108 million), with £50 million in
cash upon the closing of the transaction and
£12 million in the form of a promissory note, payable
twelve months from the date of the closing. The acquisition will
be effected through Hillcot, a Bermuda-based company, which is
jointly owned by Castlewood Holdings and Shinsei. Subject to
regulatory approval, the acquisition is expected to be completed
during the first quarter of 2006.
Other Activities
The Company owned membership units of B-Line LLC
(B-Line) from November 1998 to December 2003. Based
in Seattle, Washington, B-Line provides services to credit card
issuers and other holders of similar receivables. B-Line also
purchases credit card receivables and recovers payments on these
accounts. In December 2003, the Company sold its entire interest
in B-Line to B-Line Holdings LLC, an affiliate of Golden Gate
Capital, for cash of approximately $7.8 million, net of
expenses, resulting in a pre-tax gain of approximately
$3.3 million.
During 2003, the Company funded approximately $15.3 million
to JCF CFN LLC and related entities (collectively, the JCF
CFN Entities) in exchange for a 60% interest in such
entities. In addition, Castlewood Holdings funded approximately
$10.2 million to the JCF CFN Entities in exchange for a 40%
interest, which is reflected in the Companys financial
statements as a minority interest. The JCF CFN Entities were
formed to serve as members of Green Tree Investment Holdings LLC
(formerly known as CFN Investment Holdings LLC) and related
entities (collectively, Green Tree), which, in turn,
were formed to effect the acquisition of a portfolio of home
equity and manufactured housing loan securities and the
associated servicing businesses from Conseco Finance Corp.
(Conseco Finance).
In January 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 46
(FIN 46), Consolidation of Variable
Interest Entities, as amended by FIN 46R issued in
December 2003, which requires consolidation by a business
enterprise of variable interest entities (VIE) if
the enterprise is determined to be the primary beneficiary. In
accordance with FIN 46R, the Company has consolidated the
JCF CFN Entities since their inception.
The JCF CFN Entities invested in Green Tree together with
affiliates of J.C. Flowers I LP, affiliates of Fortress
Investment Group LLC and affiliates of Cerberus Capital
Management, L.P. In June 2003, the JCF CFN Entities invested
approximately $25.1 million in exchange for a 3.995%
interest in Green Tree. Green Tree completed the purchase of
certain assets of Conseco Finance for approximately
$630 million in cash plus certain assumed liabilities. J.C.
Flowers I LP is a private investment fund, the general partner
of which is JCF Associates I LLC. The managing member of JCF
Associates I LLC is Mr. Flowers, a member of the
Companys board of directors and the Companys largest
shareholder. The JCF CFN Entities accounted for the investment
in Green Tree under the equity method of accounting. Because the
JCF CFN Entities are consolidated, Green Tree was treated as a
partially owned equity affiliate of the Company.
In July 2004, the JCF CFN Entities, along with certain
affiliates of J.C. Flowers I LP, completed the sale of their
entire interests in Green Tree to FIT CFN Holdings LLC, an
affiliate of Fortress Investment Group LLC, and Cerberus Green
Tree Investments, LLC and Cerberus JCF Coinvest, LLC, each an
affiliate of Cerberus Capital Management L.P. In exchange for
their entire interest, the JCF CFN Entities received aggregate
sales proceeds of approximately $40 million in cash. Of
this amount, Castlewood Holdings received aggregate sales
proceeds of approximately $16 million. The proceeds
received by the JCF CFN Entities at completion of the sale were
reduced by prior cash distributions of approximately
$7.2 million made by Green Tree during 2004. The Company
recorded a pre-tax realized gain of approximately
$6.9 million on the sale. The JCF CFN Entities have been
inactive since July 2004.
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Affirmative Investment LLC |
In June 2005, the Company committed to contribute up to
$10 million for a 14%, non-voting interest in Affirmative
Investment LLC (Affirmative Investment), a newly
formed Delaware limited liability company. J.C. Flowers I LP
committed the capital necessary for the remaining 86% interest
in Affirmative Investment. Both J.C. Flowers I LP and
Affirmative Associates LLC, the managing member of Affirmative
Investment, are controlled by Mr. Flowers, a member of the
Companys board of directors and the Companys largest
shareholder. In July 2005, the Company funded its initial
capital contribution of approximately $2.6 million. Since
that time, the Company has funded additional capital
contributions of approximately $5.7 million. At
December 31, 2005, the Companys total investment in
Affirmative Investment was approximately $8.5 million,
including equity in earnings from July 1 to
December 31, 2005. The Companys ownership in
Affirmative Investment is accounted for using the equity method
of accounting.
Also in June 2005, Affirmative Investment acquired
1,183,000 shares of common stock of Affirmative Insurance
Holdings, Inc. (Affirmative Insurance), through open
market purchases. In August, Affirmative Investment acquired 50%
of the membership interests of New Affirmative LLC
(NAL), a newly formed Delaware limited liability
company, for approximately $40.7 million in cash and the
1,183,000 shares of Affirmative Insurance. The remaining
50% of the membership interests of NAL were acquired by Delaware
Street Capital Master Fund, LP or its affiliates
(DSC) for approximately $37.5 million in cash
and 1,459,699 shares of Affirmative Insurance common stock.
In turn, NAL, pursuant to a Stock Purchase Agreement with Vesta
Insurance Group, Inc. (VIG) and Vesta Fire Insurance
Corporation, a subsidiary of VIG (together with VIG,
Vesta), acquired from Vesta an aggregate of
5,218,228 shares of Affirmative Insurance common stock for
a purchase price of $15.00 per share. Upon the closing of
the transaction with Vesta and the transfer of the shares of
Affirmative Insurance from Affirmative Investment and DSC,
NALs ownership percentage in Affirmative Insurance was
approximately 52.9%. Affirmative Investments ownership in
NAL is accounted for using the equity method of accounting.
Affirmative Investment accounts for its investment in NAL three
months in arrears.
In December 2005, the Company invested approximately
$3.5 million in New NIB Partners LP (NIB
Partners), a newly formed Province of Alberta limited
partnership, in exchange for an approximately .2% limited
partnership interest. Castlewood Holdings, through two of its
wholly-owned subsidiaries, also invested approximately
$24.5 million in NIB Partners for an approximately 1.4%
interest. NIB Partners was formed for the purpose of purchasing,
together with certain affiliated entities, 100% of the
outstanding share capital of NIBC N.V. (formerly, NIB Capital
N.V.) and its affiliates (NIBC). NIBC is a merchant
bank focusing on the mid-market segment in northwest Europe with
a global distribution network.
New NIB Partners and certain related entities are indirectly
controlled by New NIB Limited, an Irish corporation. Mr. Flowers
is a director of New NIB Limited and is on the supervisory board
of NIBC. Certain affiliates of J.C. Flowers I LP also
participated in the acquisition of NIBC.
Organizational Structure
The Companys executive offices are located at 401 Madison
Avenue, Montgomery, Alabama 36104, and its telephone number is
(334) 834-5483. The Company has six employees whose
principal duties currently include managing the assets of the
Company, seeking and evaluating potential acquisition
candidates, fulfilling reporting requirements associated with
being a publicly traded company, and handling various other
accounting and tax matters. The Company is a Georgia corporation
and successor by a 1996 merger to a Delaware corporation of the
same name.
Subsidiaries
At December 31, 2005, the Company had two wholly-owned
subsidiaries: Enstar Financial Services, Inc., a Florida
corporation, and Enstar Group Operations, Inc., a Georgia
corporation, both of which are currently inactive. In addition,
the Company consolidates the JCF CFN Entities, recording a
minority interest for
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Castlewood Holdings 40% interest. Since the sale of their
interests in Green Tree in July 2004, the JCF CFN Entities have
been inactive.
Strategy for Business Acquisitions
The Companys strategy for making a suitable acquisition is
to utilize the considerable experience, knowledge and business
contacts of the Companys executive officers and directors.
Each of the Companys directors has been asked by
management to assist the Company actively in pursuing potential
acquisitions. Management follows up on the leads and meets with
various prospective targets. This pursuit occupies a significant
amount of the time of the Companys senior officers. The
Company conducts rigorous financial and legal due diligence with
respect to any entity about which it has a strong interest.
The Company primarily focuses on potential acquisitions in the
financial services industry which complement its current
operating businesses, investigating acquisition opportunities
both within and outside the United States when management
believes that such opportunities might be attractive. The
Company may pay consideration in the form of cash, securities of
the Company or some combination of both. The Company may also
borrow money in connection with an acquisition. If debt is
involved, the Companys shareholders would be subject to
the risks normally associated with leveraged transactions.
Depending upon the level of indebtedness, a leveraged
transaction could have important consequences to the Company,
including the following: (i) if the acquired business is
unable to achieve satisfactory operating results, the Company
could prove unable to service such indebtedness; (ii) a
substantial portion of the Companys cash flow from
operations may be dedicated to the payment of principal and/or
interest on its indebtedness and would not be available for
other purposes; (iii) the Companys ability to obtain
additional financing in the future for working capital, capital
expenditures or other acquisitions may be limited; and
(iv) the Companys level of indebtedness could limit
its flexibility in planning for, or reacting to, changes in its
industry.
Competition
The Company, along with its partially owned equity affiliates,
Castlewood Holdings and B.H. Acquisition, and their subsidiaries
(collectively, with the Company, the Group), compete
in international markets with domestic and international
reinsurance companies to acquire reinsurance companies in
run-off. The acquisition of reinsurance companies in run-off is
highly competitive. Some of these competitors have greater
financial resources than the Group, have been operating for
longer than the Group and have established long-term and
continuing business relationships throughout the reinsurance
industry, which can be a significant competitive advantage. As
such, the Group may not be able to compete successfully in the
future for suitable acquisition candidates.
Additionally, the Company faces intense competition in its
search for operating businesses outside of the reinsurance
industry. In this regard, the Company competes with strategic
buyers, financial buyers and others who are looking to acquire
suitable operating businesses, many of whom have greater
financial resources than the Company or have greater flexibility
in structuring acquisition transactions or strategic
relationships.
Where You Can Find More Information
The Company makes its annual report on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and all
amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the Exchange Act) available (free
of charge) on or through its Internet website located at
http://www.enstargroup.com, as soon as reasonably practicable
after they are filed with or furnished to the Securities and
Exchange Commission.
Item 1A. Risk
Factors
The following risk factors, in addition to other information
provided in the Companys periodic and interim reports,
should be considered when evaluating the Company. The risks
described below are not the only ones that the Company faces.
There may be additional risks and uncertainties. If any of the
following
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risks actually occur, the Companys business, financial
condition or results of operations could be materially and
adversely affected and the trading price of the Companys
common shares could decline significantly.
Risks Related to the Companys Business
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The Company has made, and expects to continue to make,
strategic acquisitions and investments, and these activities may
not be financially beneficial to the Company or its
shareholders. |
The Company and its partially owned equity affiliates,
Castlewood Holdings and B.H. Acquisition, and their
subsidiaries, have made several acquisitions and investments and
expect to continue to make such acquisitions and investments.
See Business Activities Related to the
Reinsurance Industry and Business Other
Activities included in Item 1 of this Annual Report
on Form 10-K/A.
The Company cannot assure you that any of these acquisitions or
investments will be financially advantageous for the Company or
its shareholders. In addition, as described below, the
Companys entry into the reinsurance industry, through the
operations of its partially-owned equity affiliates, Castlewood
Holdings and B.H. Acquisition, and their subsidiaries, exposes
the Company to risks and uncertainties inherent in the
reinsurance industry which could materially and adversely affect
the business, financial condition and results of operations of
the Company.
The business of any future acquisition target may be subject to
numerous, unpredictable risks. For example, an acquisition
target may be subject to government regulation. In sum, the
Company cannot assure you that it will make any acquisition that
will bring value or prove financially advantageous to the
Company or its shareholders.
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Acquisitions are a component of the Companys growth
strategy, and its failure to complete future acquisitions
successfully could reduce its earnings and slow its
growth. |
The Companys business strategy has emphasized growth
through acquisitions, but it may not be able to continue to
identify operating businesses for acquisition or it may not be
able to make acquisitions on terms that it considers
economically acceptable. The Company faces intense competition
in its search for one or more operating businesses. The Company
competes with strategic and financial buyers and others looking
to acquire suitable operating businesses, who have greater
financial resources and greater flexibility in structuring
acquisition transactions or strategic relationships than the
Company. In addition, there may be certain financing
contingencies that will restrict the ability of the Company to
make a given acquisition.
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The Company is dependent on its executive officers,
directors and other key personnel. |
The success of the Company is highly dependent on the ability of
Nimrod T. Frazer, the Companys Chairman and Chief
Executive Officer, and the other executive officers and
directors of the Company to identify and consummate acquisitions
on favorable terms. J. Christopher Flowers has been a director
since October 1996 and for the period December 1998 to July 2003
served as Vice Chairman of the Board of Directors. Additionally,
in March 2000, John J. Oros was named Executive Vice President
and elected as a director of the Company. Mr. Oros was
subsequently elected President and Chief Operating Officer in
June 2001. The Company believes Mr. Flowers and
Mr. Oros extensive business and financial talent and
experience greatly enhance the Companys ability to locate
operating businesses. The Company would be materially and
adversely affected if it were unable to retain the services of
Messrs. Frazer, Flowers or Oros.
Additionally, the success of the Company is also dependent, in
part, on key personnel at its partially-owned equity affiliates.
The experiences and reputations of the key personnel in the
reinsurance industry are important factors in their ability to
attract new business.
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The Companys stock price may experience volatility,
thereby causing a potential loss of value to its
investors. |
The market price for the Companys common stock may
fluctuate substantially due to, among other things, the
following factors:
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|
|
announcements with respect to an acquisition or investment; |
|
|
|
changes in the value of the Companys assets; |
|
|
|
quarterly operating results of the Company; |
|
|
|
changes in general conditions in the economy; |
|
|
|
the financial markets; and |
|
|
|
adverse press or news announcements. |
The Company has experienced price volatility in the past. For
example, during the period from January 1, 2006 through
March 15, 2006, the lowest closing price for shares of
Enstar common stock was $65.00 (occurring on January 5,
2006) and the highest closing price for shares of Enstar common
stock was $81.94 (occurring on February 22, 2006). During
2005, the lowest closing price for shares of Enstar common stock
was $49.40 (occurring on April 20, 2005) and the highest
closing price for shares of Enstar common stock was $72.58
(occurring on December 15, 2005). In addition, from time to
time the stock market experiences significant price and volume
fluctuations. This volatility affects the market prices of
securities issued by many companies for reasons unrelated to
their operating performance.
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|
|
Significant fluctuation in the market price of the
Companys common stock could result in securities class
action claims against it. |
Significant price and value fluctuations have occurred with
respect to the securities of insurance and insurance-related
companies. The Companys common stock price is likely to be
volatile in the future. In the past, following periods of
downward volatility in the market price of a companys
securities, class action litigation has often been pursued
against such companies. If similar litigation were pursued
against the Company, it could result in substantial costs and a
diversion of managements attention and resources.
|
|
|
Future actual or potential stock sales by the
Companys major stockholders could cause its stock price to
fall. |
A substantial amount of the Companys common stock becoming
available (or being perceived to become available) for sale in
the public market could cause the market price of the stock to
fall or prevent it from increasing. The Companys common
stock historically has been thinly traded with an average daily
trading volume between January 1, 2005 and March 15,
2006 of 3,937 shares. In addition, Enstar generally has not
received meaningful analyst coverage. Actual or potential sales
by officers, directors or large shareholders of the
Companys stock could be viewed negatively by other
investors.
|
|
|
The Companys lack of industry diversification makes
it more vulnerable to economic downturns. |
The Company does not plan to diversify across several
industries. In fact, the Company may decide to acquire
additional businesses operating in a single industry. The
concentration of investments in the insurance industry makes the
Company more vulnerable to adverse effects of occurrences that
may affect this industry.
|
|
|
Provisions in the Companys articles of incorporation
and bylaws and Georgia Law may inhibit a takeover, which could
adversely affect the value of the Companys common
stock. |
The Companys Articles of Incorporation and Bylaws contain
provisions that may discourage other persons from attempting to
acquire control of the Company. Such provisions include, among
others, a classified board of directors and procedural
requirements in connection with shareholder nominations for
election of directors.
7
The Company is a Georgia corporation and has elected to be
governed by the business combination provisions of
the Georgia Code, that could be viewed as having the effect of
discouraging an attempt to obtain control of the Company. The
business combination provisions generally would prohibit the
Company from engaging in various business combination
transactions with any interested stockholder for a period of
five years after the date of the transaction in which the person
became an interested stockholder unless certain designated
conditions are met.
The Company has also adopted a share purchase rights plan, which
could make it uneconomical for a third party to acquire the
Company on a hostile basis. The market price of the
Companys common stock may be affected by the forgoing
provisions and agreements which inhibit or discourage take-over
attempts.
|
|
|
Conflicts of interest might prevent the Company from
pursuing desirable investment and business opportunities. |
The Companys directors and executive officers may have
ownership interests or other involvement with entities that
could compete against it, either in the pursuit of acquisition
targets or in general business operations. The Company has
procedures in place to ensure that directors do not deliberate
or vote on transactions where the Companys interests
conflict with those of entities with which the director is
involved. However, these procedures cannot guarantee that the
Company will pursue all advantageous transactions that it would
otherwise pursue in the absence of a conflict of interest.
|
|
|
Regulatory challenges to the Companys tax filing
positions could result in additional taxes. |
The Company has claimed deductions for net operating loss
carryforwards (NOLs) totaling approximately
$94.8 million on its federal income tax returns for its
taxable years ended August 31, 1997 through 2004. Although
the Company believes that it is entitled to the deductions for
NOLs that it has claimed on its federal income tax returns for
the taxable years ended August 31, 1997 through 2004, there
can be no assurance that the Internal Revenue Service will not
challenge the Companys position or as to the result of any
such challenge.
|
|
|
Fluctuations in currency exchange rates may cause the
Group to experience losses. |
The Group maintains a portion of its investment portfolio in
investments denominated in currencies other than United States
dollars. Consequently, the Company may experience foreign
exchange losses.
The Company publishes its consolidated financial statements in
U.S. dollars. Therefore, fluctuations in exchange rates
used to convert other currencies, particularly other European
currencies including the Euro and British pound, into
U.S. dollars will impact the Companys reported
consolidated financial condition, results of operations and cash
flows from year to year.
Risks Related to the Reinsurance Industry
Through the Companys partially owned equity affiliates,
Castlewood Holdings and B.H. Acquisition, and their
subsidiaries, the Company has acquired and manages books of
reinsurance business. The Company is exposed to the following
risks and uncertainties, among others, through its participation
in the reinsurance industry.
|
|
|
Fluctuations in the reinsurance industry could cause the
Groups operating results to fluctuate. |
The reinsurance industry historically has been subject to
significant fluctuations and uncertainties. Factors that affect
the industry in general could also cause the Groups
operating results to fluctuate. The industrys
profitability may be affected significantly by:
|
|
|
|
|
fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested capital and may impact the ultimate payout of loss
amounts and the costs of administering books of reinsurance
business; |
8
|
|
|
|
|
volatile and unpredictable developments and catastrophic events
which could adversely affect the recoverability of reinsurance
from the Groups reinsurers; |
|
|
|
changes in reserves resulting from different types of claims
that may arise and the development of judicial interpretations
relating to the scope of insurers liability; and |
|
|
|
the overall level of economic activity and the competitive
environment in the industry. |
|
|
|
If the Reinsurance Subsidiaries loss reserves are
inadequate to cover their actual losses, the Reinsurance
Subsidiaries net income would be reduced or they could
incur a loss. |
The reinsurance subsidiaries of Castlewood Holdings and B.H.
Acquisition (the Reinsurance Subsidiaries) are
required to maintain reserves to cover their estimated ultimate
liability of losses and loss adjustment expenses for both
reported and unreported claims incurred. These reserves are only
estimates of what the Reinsurance Subsidiaries think the
settlement and administration of claims will cost based on facts
and circumstances known to the Reinsurance Subsidiaries. The
Castlewood Holdings subsidiaries commutation activity and
claims settlement and development in recent years resulted in
net reductions in provisions for loss and loss adjustment
expenses of $96.0 million, $13.7 million and
$24.0 million for the years ended December 31, 2005,
December 31, 2004 and December 31, 2003, respectively.
The B.H. Acquisition subsidiaries commutation activity and
claims settlement and development in recent years resulted in
net reductions in provisions for loss and loss adjustment
expenses of $0.5 million and $0.2 million for the
years ended December 31, 2005 and December 31, 2003,
respectively, and an increase of $0.4 million for the year
ended December 31, 2004. Although this recent experience
indicates that their loss reserves have been adequate to meet
their liabilities, because of the inherent uncertainties that
surround estimating loss reserves and loss adjustment expenses,
the Reinsurance Subsidiaries cannot be certain that ultimate
losses will not exceed these estimates of losses and loss
adjustment reserves. If the Reinsurance Subsidiaries
reserves are insufficient to cover their actual losses and loss
adjustment expenses, the Reinsurance Subsidiaries would have to
augment their reserves and incur a charge to their earnings.
These charges could be material and could ultimately reduce the
Companys net income.
The difficulty in estimating the Reinsurance Subsidiaries
reserves is increased because the Reinsurance Subsidiaries
loss reserves include reserves for potential asbestos and
environmental liabilities. At December 31, 2005, the
Castlewood Holdings subsidiaries reported gross asbestos and
environmental loss reserves of $578.1 million, or 71.7% of
the total gross loss reserves. Net asbestos and environmental
loss reserves at December 31, 2005 amounted to
$384.0 million, or 64.7% of total net loss reserves. At
December 31, 2005, the B.H. Acquisition subsidiaries
reported gross asbestos and environment loss reserves of
$33.6 million and net asbestos and environmental loss
reserves of $29.8 million. Asbestos and environmental
liabilities are especially hard to estimate for many reasons,
including the long waiting periods between exposure and
manifestation of any bodily injury or property damage,
difficulty in identifying the source of the asbestos or
environmental contamination, long reporting delays and
difficulty in properly allocating liability for the asbestos or
environmental damage. Developed case law and adequate claim
history do not exist for such claims, especially because
significant uncertainty exists about the outcome of coverage
litigation and whether past claim experience will be
representative of future claim experience. In view of the
changes in the legal and tort environment that affect the
development of such claims, the uncertainties inherent in
valuing asbestos and environmental claims are not likely to be
resolved in the near future. Ultimate values for such claims
cannot be estimated using traditional reserving techniques and
there are significant uncertainties in estimating the amount of
the Reinsurance Subsidiaries potential losses for these
claims. The Reinsurance Subsidiaries have not made any changes
in reserve estimates that might arise as a result of any
potential federal reform of asbestos litigation. Although
Castlewood Holdings subsidiaries increased their asbestos
and environmental gross loss reserves by $32.4 million in
2003 (and increased net reserves by $38.9 million), they
reduced those gross loss reserves by $13.7 million in 2004
and $172.3 million in 2005 (and decreased net reserves by
$33.4 million in 2004 and $100.6 million in 2005) as a
result of industry-wide adverse claims development, subsequent
successful commutations, policy buybacks and favorable claims
settlements. Despite the reduction in asbestos and environmental
loss reserves in 2004 and 2005, there can be no assurance that
the reserves
9
established by the Reinsurance Subsidiaries will be adequate or
will not be adversely affected by the development of other
latent exposures.
|
|
|
The value of the Reinsurance Subsidiaries investment
portfolios and the investment income they receive from those
portfolios could decline as a result of market fluctuations and
economic conditions. |
The fair market value of the fixed income securities classified
as available-for-sale and equity securities in the Reinsurance
Subsidiaries investment portfolios, amounting to
$216.6 million at December 31, 2005, and the
investment income from these assets fluctuate depending on
general economic and market conditions. For example, the fair
market value of the Reinsurance Subsidiaries fixed income
securities generally increases or decreases in an inverse
relationship with fluctuations in interest rates. The fair
market value of their fixed income securities can also decrease
as a result of any downturn in the business cycle that causes
the credit quality of those securities to deteriorate. The net
investment income that the Reinsurance Subsidiaries realize from
investments in fixed income securities will generally increase
or decrease with interest rates. The changes in the market value
of the Reinsurance Subsidiaries securities that are
classified as available-for-sale are reflected in their
financial statements. As a result, a decline in the value of the
securities in the Reinsurance Subsidiaries portfolio could
reduce their net income or cause them to incur a loss.
|
|
|
The Reinsurance Subsidiaries reinsurers may not
satisfy their obligations to them. |
The Reinsurance Subsidiaries are subject to credit risk with
respect to their reinsurers because the transfer of risk to a
reinsurer does not relieve the Reinsurance Subsidiaries of their
liability to the insured. In addition, reinsurers may be
unwilling to pay the Reinsurance Subsidiaries even though they
are able to do so. At December 31, 2005, the Castlewood
Holdings subsidiaries balances receivable from reinsurers
amounted to $250.2 million of which $164.4 million was
associated with a single reinsurer with a credit rating of A,
which represented 10% or more of the total balance. At
December 31, 2005, the B.H. Acquisition subsidiaries
balances receivable from reinsurers amounted to
$3.8 million of which $0.9 million was associated with
two reinsurers, which represented 10% or more of the total
balance. The failure of one or more of the Reinsurance
Subsidiaries reinsurers to honor their obligations in a
timely fashion would impact the Reinsurance Subsidiaries
and the Groups cash flows and reduce their net income, and
could cause the Reinsurance Subsidiaries and the Company to
incur a significant loss.
|
|
|
The reinsurance industry is highly competitive and the
Group may not be able to compete successfully in the
future. |
The Group competes in international markets with domestic and
international reinsurance companies. Some of these competitors
have greater financial resources than the Group, have been
operating for longer than the Group and have established
long-term and continuing business relationships throughout the
reinsurance industry, which can be a significant competitive
advantage. As such, the Group may not be able to compete
successfully in the future.
|
|
|
Insurance laws and regulations restrict the Groups
ability to operate and any failure to comply with those laws and
regulations could have a material adverse effect on the
Groups business. |
The Group, through its Reinsurance Subsidiaries, is subject to
extensive regulation under foreign insurance laws. These laws
limit the amount of dividends that can be paid to the Company,
Castlewood Holdings and B.H. Acquisition by their Reinsurance
Subsidiaries, impose restrictions on the amount and type of
investments that they can hold, prescribe solvency standards
that must be met and maintained by them and require them to
maintain reserves. The Groups failure to comply with these
laws could subject it to fines and penalties and restrict it
from conducting business. The application of these laws could
affect the Companys liquidity and ability to pay dividends
on its common shares and could restrict the Companys
ability to expand its business operations through acquisitions
involving the Companys partially owned affiliates and
their subsidiaries. At December 31, 2005, the required
statutory capital and surplus of the Bermuda, U.K. and Swiss
insurance and reinsurance companies owned by Castlewood Holdings
amounted to $48.9 million compared to the actual statutory
capital and surplus of $285.6 million. At December 31,
2005, the required
10
statutory capital and surplus of the Bermuda and Belgian
insurance and reinsurance companies owned by B.H. Acquisition
amounted to $7.6 million compared to the actual statutory
capital and surplus of $32.2 million.
|
|
|
If the Group fails to comply with applicable insurance
laws, rules and regulations, the Group could be subject to
disciplinary actions, damages, penalties or restrictions that
could have a material adverse effect on the Groups
business. |
The Company cannot assure that the Group has or can maintain all
required licenses and approvals or that its business fully
complies with the wide variety of applicable laws and
regulations or the relevant authoritys interpretation of
the laws and regulations. In addition, some regulatory
authorities have relatively broad discretion to grant, renew or
revoke licenses and approvals. If the Group does not have the
requisite licenses and approvals or does not comply with
applicable regulatory requirements, the insurance regulatory
authorities could preclude or temporarily suspend the Group from
carrying on some or all of its activities or monetarily penalize
the Group. These types of actions could have a material adverse
effect on the Companys business.
Item 1B. Unresolved
Staff Comments
None.
The Companys corporate headquarters are located at 401
Madison Avenue, Montgomery, Alabama. In December 2004, the
Company signed a one year lease beginning January 1, 2005
on this office building. The lease also provides renewal options
for three periods of one year each. In December 2005, the
Company signed a one year renewal option beginning
January 1, 2006. Additionally, pursuant to an oral
agreement, the Company leases space in a warehouse at 703 Howe
Street, Montgomery, Alabama on a
month-to-month basis.
The Company leases the office building and warehouse space from
unaffiliated third parties for $3,000 and $350 per month,
respectively. The Company believes the rental amounts are
competitive with market rates and that the cancellation or
termination of either of these leases would not have a material
adverse effect on the Companys results of operations. In
September 2005, the Company entered into an agreement with J.C.
Flowers & Co. LLC continuing through October 2014 for
the use of certain office space and administrative services from
J.C. Flowers & Co. LLC for monthly payments of $4,146.
Either party may, at its option with or without cause, terminate
this agreement upon thirty (30) days prior written notice
to the other party. J.C. Flowers & Co. LLC is managed
by Mr. Flowers, a member of the Companys board of
directors and the Companys largest shareholder. The
Company does not own any real property.
|
|
Item 3. |
Legal Proceedings |
The Company is not a party to any pending litigation and no
proceeding was terminated during the fourth quarter of 2005.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of shareholders of the
Company during the quarter ended December 31, 2005.
11
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
The Companys common stock (the Common Stock)
is traded on The Nasdaq National Market (Nasdaq)
under the ticker symbol ESGR. The following table reflects the
range of high and low selling prices of the Companys
Common Stock by quarter for 2005 and 2004, as reflected in the
Nasdaq Trade and Quote Summary Reports:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
First Quarter
|
|
|
64.97 |
|
|
|
56.12 |
|
|
|
48.40 |
|
|
|
40.61 |
|
Second Quarter
|
|
|
67.85 |
|
|
|
49.03 |
|
|
|
53.98 |
|
|
|
39.82 |
|
Third Quarter
|
|
|
69.94 |
|
|
|
63.40 |
|
|
|
53.00 |
|
|
|
44.56 |
|
Fourth Quarter
|
|
|
72.85 |
|
|
|
60.19 |
|
|
|
63.00 |
|
|
|
49.25 |
|
At March 3, 2006, there were approximately
2,676 holders of record of the Companys Common Stock.
The Company has not declared or paid a cash dividend on any of
its securities since 1989. The Company currently intends to
retain its earnings to finance the growth and development of its
future business and does not anticipate paying cash dividends in
the foreseeable future. The payment of cash dividends in the
future will depend upon such factors as the Companys
earnings, capital requirements, financial condition, contractual
restrictions and other factors deemed relevant by the Board of
Directors. See Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations.
The information required by this Item with respect to securities
authorized for issuance under equity compensation plans is
included under the section entitled Equity Compensation
Plan Information of the Proxy Statement for the 2006
Annual Meeting of Shareholders (the Proxy Statement)
and such section is deemed incorporated herein by reference.
12
|
|
Item 6. |
Selected Financial Data |
The following table sets forth selected financial information
with respect to the Company for each of the five years in the
period ended December 31, 2005 and is derived in part from
the audited consolidated financial statements of the Company.
The data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Item 7) and the audited
consolidated financial statements, including the related notes
thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands, except per share data) | |
Income before extraordinary gain and cumulative effect of a
change in accounting principle
|
|
$ |
19,045 |
|
|
$ |
5,977 |
|
|
$ |
13,226 |
|
|
$ |
21,526 |
|
|
$ |
1,574 |
|
Extraordinary gain, net of income taxes
|
|
|
|
|
|
|
4,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
19,045 |
|
|
$ |
10,392 |
|
|
$ |
13,226 |
|
|
$ |
22,493 |
|
|
$ |
1,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before extraordinary gain and change in
accounting principle basic
|
|
$ |
3.45 |
|
|
$ |
1.09 |
|
|
$ |
2.42 |
|
|
$ |
3.94 |
|
|
$ |
.30 |
|
Extraordinary gain basic
|
|
|
|
|
|
|
.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting
principle basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$ |
3.45 |
|
|
$ |
1.89 |
|
|
$ |
2.42 |
|
|
$ |
4.12 |
|
|
$ |
.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
5,517,909 |
|
|
|
5,496,819 |
|
|
|
5,465,753 |
|
|
|
5,465,753 |
|
|
|
5,277,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before extraordinary gain and change in
accounting principle assuming dilution
|
|
$ |
3.25 |
|
|
$ |
1.03 |
|
|
$ |
2.25 |
|
|
$ |
3.74 |
|
|
$ |
.29 |
|
Extraordinary gain assuming dilution
|
|
|
|
|
|
|
.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting
principle assuming dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share assuming dilution
|
|
$ |
3.25 |
|
|
$ |
1.79 |
|
|
$ |
2.25 |
|
|
$ |
3.91 |
|
|
$ |
.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution
|
|
|
5,856,144 |
|
|
|
5,800,993 |
|
|
|
5,881,410 |
|
|
|
5,753,553 |
|
|
|
5,449,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
185,220 |
|
|
$ |
158,977 |
|
|
$ |
152,620 |
|
|
$ |
128,609 |
|
|
$ |
99,621 |
|
|
Total liabilities
|
|
|
20,097 |
|
|
|
12,803 |
|
|
|
6,688 |
|
|
|
8,360 |
|
|
|
1,964 |
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
11,449 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
165,123 |
|
|
|
146,174 |
|
|
|
134,483 |
|
|
|
120,249 |
|
|
|
97,657 |
|
13
The following tables set forth selected financial information of
B.H. Acquisition and Castlewood Holdings for each of the
five years in the period ended December 31, 2005. The table
for Green Tree sets forth selected financial information for the
period of ownership in 2003 and 2004.
B.H.
Acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Income before cumulative effect of a change in accounting
principle
|
|
$ |
179 |
|
|
$ |
359 |
|
|
$ |
888 |
|
|
$ |
22,398 |
|
|
$ |
4,798 |
|
Net income
|
|
|
179 |
|
|
|
359 |
|
|
|
888 |
|
|
|
25,367 |
|
|
|
4,798 |
|
Total assets
|
|
|
105,578 |
|
|
|
110,414 |
|
|
|
120,474 |
|
|
|
125,428 |
|
|
|
136,085 |
|
Total liabilities
|
|
|
66,733 |
|
|
|
71,748 |
|
|
|
82,167 |
|
|
|
88,009 |
|
|
|
114,033 |
|
Total equity
|
|
|
38,845 |
|
|
|
38,666 |
|
|
|
38,307 |
|
|
|
37,419 |
|
|
|
22,052 |
|
The 2002 accounting change for B.H. Acquisition relates to the
adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets.
Castlewood
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Income (loss) before extraordinary gain
|
|
$ |
80,710 |
|
|
$ |
16,535 |
|
|
$ |
30,592 |
|
|
$ |
60,619 |
|
|
$ |
(407 |
) |
Net income (loss)
|
|
|
80,710 |
|
|
|
38,294 |
|
|
|
30,592 |
|
|
|
60,619 |
|
|
|
(407 |
) |
Total assets
|
|
|
1,199,963 |
|
|
|
1,347,853 |
|
|
|
632,347 |
|
|
|
514,597 |
|
|
|
527,845 |
|
Total liabilities
|
|
|
898,513 |
|
|
|
1,139,123 |
|
|
|
456,436 |
|
|
|
347,124 |
|
|
|
464,149 |
|
Minority interest
|
|
|
40,544 |
|
|
|
31,392 |
|
|
|
28,295 |
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
260,906 |
|
|
|
177,338 |
|
|
|
147,616 |
|
|
|
167,473 |
|
|
|
63,696 |
|
Net income for Castlewood Holdings for the year 2001 is reported
for the period August 16, 2001 (date of incorporation) to
December 31, 2001. The 2004 extraordinary gain relates to
the excess of the net assets acquired over the cost in the
acquisition of Mercantile, Harper and Longmynd by Castlewood
Holdings.
Green
Tree:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(Dollars in thousands) | |
Net income
|
|
$ |
99,114 |
|
|
$ |
96,318 |
|
Total assets
|
|
|
|
|
|
|
1,020,514 |
|
Total liabilities
|
|
|
|
|
|
|
399,457 |
|
Total equity
|
|
|
|
|
|
|
621,057 |
|
Net income for Green Tree for the year 2003 is reported from the
date of inception to December 31, 2003. Net income for
Green Tree for the year 2004 is reported from January 1 to
July 15, 2004, the date of sale of the JCF CFN
Entities entire interest in Green Tree.
14
Affirmative
Investment:
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
2005 | |
|
|
| |
|
|
(Dollars in | |
|
|
thousands) | |
Net income
|
|
$ |
856 |
|
Total assets
|
|
|
60,199 |
|
Total liabilities
|
|
|
|
|
Total equity
|
|
|
60,199 |
|
In July 2005, the Company acquired a 14% ownership percentage in
Affirmative Investment.
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion should be read in conjunction with the
Selected Financial Data (Item 6) and the audited
consolidated financial statements, including the related
footnotes thereto. Historical results of operations and the
percentage relationships among any amounts included in the
Consolidated Statements of Income, and any trends which might
appear to be inferable therefrom, are not necessarily indicative
of trends in operations or the results of operations for any
future period.
Overview
Through the operations of the Companys partially owned
equity affiliates, Castlewood Holdings and
B.H. Acquisition, and their subsidiaries, the Company
acquires and manages insurance and reinsurance companies in
run-off. The management of these businesses includes claims
administration, adjustment and settlement together with the
collection of reinsurance recoveries. Castlewood Holdings, a
Bermuda-based company, also provides management, consulting and
other services to the insurance and reinsurance industry for
both fixed and success-based fee arrangements. In general,
reinsurance is an arrangement in which the reinsurer agrees to
indemnify an insurance or reinsurance company against all or a
portion of the risks underwritten by such insurance or
reinsurance company under one or more insurance or reinsurance
contracts. For a discussion of certain risks and uncertainties
relating to the Companys participation in the reinsurance
industry see Item 1A. Risk Factors.
The Company is also actively engaged in the search for one or
more additional operating businesses which meet the
Companys acquisition criteria. See Item 1.
Business Strategy for Business
Acquisitions.
Restatement of Financial Statements
The Company has amended certain disclosures in its
Form 10-K/A as a
result of restated information from its partially owned equity
affiliates, Castlewood Holdings and B.H. Acquisition. The
following managements discussion and analysis of financial
condition and results of operations give effect to the
restatement. This restatement had no impact on the net income,
net income per share or shareholders equity of Enstar or
its partially owned equity affiliates. For a more detailed
description of the restatement, see Note 2,
Restatement of Financial Statements to the
accompanying consolidated financial statements.
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN 46R which requires
consolidation by a business enterprise of a VIE if the
enterprise is determined to be the primary beneficiary. The
Company believes that each of the JCF CFN Entities
qualifies as a VIE and that the Company is the primary
beneficiary of each such entity. As such, the JCF CFN
Entities are included in the accompanying consolidated financial
statements, with Castlewood Holdings 40% interest in the
JCF CFN Entities reflected as a minority interest in the
Companys
15
financial statements. The JCF CFN Entities have been
inactive since the sale of their entire interests in Green Tree
in July 2004.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), which is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123R
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25), and amends
SFAS No. 95, Statement of Cash Flows. The
approach in SFAS 123R generally is similar to the approach
described in SFAS 123. However, SFAS 123R requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the earnings statements based
on their grant date fair values. Pro forma disclosure will no
longer be an alternative.
The Company adopted SFAS 123R as of January 1, 2006
using the modified-prospective method. Under this transition
method, compensation cost is recognized beginning with the
effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the
effective date and (b) based on the requirements of
SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123R that remain unvested on the
effective date. As permitted by SFAS 123, through
December 31, 2005 the Company accounted for share-based
payments to employees using APB 25s intrinsic value
method and, as such, generally has not recognized compensation
cost for employee stock options. We estimate that 2006 pretax
compensation expense for stock options will be approximately
$213,000.
SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
previously required. This requirement will reduce net operating
cash flows and increase net financing cash flows. While we
cannot estimate what those amounts will be in the future
(because they depend on, among other things, when stock options
will be exercised), the amounts of operating cash flows
recognized in prior periods for such excess tax deductions were
$0 and $606,000 in 2005 and 2004, respectively.
Critical Accounting Policies
In the ordinary course of business, the Company has made a
number of estimates and assumptions relating to the reporting of
results of operations and financial condition in the preparation
of its financial statements in conformity with accounting
principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates
under different assumptions and conditions. The most significant
accounting estimates inherent in the preparation of the
Companys consolidated financial statements include
estimates associated with its evaluation of income tax valuation
allowance.
Income Tax Valuation Allowance The Company
recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. The effect of temporary
differences on the financial statements includes certain
operating losses of partially owned foreign subsidiaries and tax
credit carryforwards. The Company has established a valuation
allowance for the uncertainty of the realization of these and
any other net deferred tax assets. However, utilization of the
remaining deferred tax assets at December 31, 2005, is
based on managements assessment of the Companys
earnings history, expectations of future taxable income, and
other relevant considerations.
|
|
|
Castlewood Holdings and B.H. Acquisition |
Certain amounts in Castlewood Holdings and B.H.
Acquisitions consolidated financial statements are the
result of transactions that require the use of best estimates
and assumptions to determine reported values. These amounts
could ultimately be materially different than what has been
provided for in their consolidated financial statements. The
assessment of loss reserves and reinsurance recoverable are
considered to be the values requiring the most inherently
subjective and complex estimates. In addition, the assessment of
the possible impairment of goodwill involves certain estimates
and assumptions. As such, the accounting policies for these
amounts are of critical importance to their consolidated
financial statements.
16
Loss and Loss Adjustment Expenses Because a
significant amount of time can lapse between the assumption of
risk, the occurrence of a loss event, the reporting of the event
to an insurance or reinsurance company and the ultimate payment
of the claim on the loss event, Castlewood Holdings and
B.H. Acquisitions liability for unpaid losses and
loss expenses is based largely upon estimates. Castlewood
Holdings and B.H. Acquisitions management must use
considerable judgment in the process of developing these
estimates. The liability for unpaid losses and loss expenses for
property and casualty business includes amounts determined from
loss reports on individual cases and amounts for losses incurred
but not reported. Such reserves are estimated by management
based upon reports received from ceding companies, supplemented
by Castlewood Holdings and B.H. Acquisitions
own estimates of reserves for which ceding company reports have
not been received, and independent actuarial estimates of
ultimate unpaid losses. Castlewood Holdings and
B.H. Acquisitions reserves are largely comprised of
casualty exposures including asbestos and environmental
exposures and therefore these claims are subject to a higher
degree of estimation volatility as a result of changes in the
legal environment, jury awards, medical cost trends and general
inflation. Castlewood Holdings and B.H. Acquisition
regularly review and update these estimates using the most
current information available and employing various actuarial
methods. The ultimate liability for a loss is likely to differ
from the original estimate due to the factors discussed above.
Adjustments resulting from changes in our estimates are recorded
in the period such adjustments are determined. The establishment
of reserves, or the adjustment of reserves for reported losses,
could result in significant upward or downward changes to our
financial condition or results of our operations in the period
such amounts are reported.
Reinsurance Balances Receivable One of the
ways loss exposure is managed is through the use of reinsurance.
While reinsurance arrangements are designed to limit losses and
to permit recovery of a portion of direct unpaid losses,
reinsurance does not relieve Castlewood Holdings or B.H.
Acquisition of their liabilities to their insureds. Accordingly,
loss reserves represent total gross losses, and reinsurance
recoverable represents anticipated recoveries of a portion of
those unpaid losses as well as amounts recoverable from
reinsurers with respect to claims, which have already been paid.
Goodwill On January 1, 2002, Castlewood
Holdings and B.H. Acquisition adopted SFAS 142. This
statement requires that goodwill be assessed for impairment on
at least an annual basis. In determining goodwill, Castlewood
Holdings must determine the fair values of the assets of an
acquired company. The determination of fair value necessarily
involves many assumptions. 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 run-off
strategy. Fair value adjustments are based on the estimated
timing of loss and loss adjustment expense payments and an
assumed interest rate, and are amortized over the estimated
payout period, as adjusted for accelerations on commutation
settlements, using the constant yield method options. If the
assumptions made in initially valuing the assets change
significantly in the future, Castlewood Holdings may be required
to record impairment charges which could have a material impact
on the financial statements.
Castlewood Holdings assessed its recorded goodwill in 2005 in
accordance with SFAS 142 and determined that there had been
no impairment in its carrying value.
SFAS 142 also requires that negative goodwill be reversed
immediately. During 2004, Castlewood Holdings took negative
goodwill into earnings upon the acquisition of three companies,
and presented it as an extraordinary gain.
Recent Developments
In December 2005, Castlewood Holdings and Shinsei signed
definitive agreements for the purchase of Aioi Europe, a
London-based subsidiary of Aioi Insurance Company, Limited. The
aggregate purchase price to be paid for Aioi Europe is
£62 million (approximately $108 million), with
£50 million in cash upon the closing of the
transaction and £12 million in the form of a
promissory note, payable twelve months from the date of the
closing. The acquisition will be effected through Hillcot, a
Bermuda-based company, which is jointly owned by Castlewood
Holdings and Shinsei. Castlewood Holdings commitment is
proportionate to its 50.1% ownership percentage to Hillcot.
Subject to regulatory approval, the acquisition is expected to be
17
completed during the first quarter of 2006. J. Christopher
Flowers (Mr. Flowers), a member of the
Companys board of directors and the Companys largest
shareholder, is a director and the largest shareholder of
Shinsei.
In February 2006, the Company announced that it approved a
commitment of up to $25.0 million in
J.C. Flowers II LP (the J.C. Flowers
Fund), a private investment fund to be formed by J.C.
Flowers & Co. LLC. The transaction is expected to close
in the second quarter of 2006. The Company intends to use cash
on hand to fund its commitment.
In March 2006, the Company announced that its partially owned
equity affiliate, Castlewood Holdings, approved a commitment of
up to $75.0 million in the J.C. Flowers Fund.
Castlewood Holdings intends to use cash on hand to fund its
commitment.
J.C. Flowers & Co. LLC is controlled by
Mr. Flowers. No fees will be payable by the Company or
Castlewood Holdings to J.C. Flowers II LP, J.C.
Flowers & Co. LLC, or Mr. Flowers in connection
with the Companys or Castlewood Holdings investment
in the J.C. Flowers Fund.
Liquidity and Capital Resources
The Companys primary uses of liquidity include, but are
not limited to, funding normal operating expenses as well as
various expenses incurred in connection with the Companys
search for one or more suitable acquisitions. In addition, the
Company uses cash on hand to fund commitments made in connection
with the purchase of its partially owned equity affiliates and
other investment opportunities. The primary sources of the
Companys liquidity include the receipt of dividends and
distributions from partially owned equity affiliates.
Net cash used in operating activities was approximately
$2.0 million in 2005 compared to net cash provided by
operating activities of approximately $8.6 million in 2004.
This decrease was primarily due to the substantial reduction in
distributions from partially owned equity affiliates from 2004
to 2005. The Company received distributions of $11,000 in 2005
from Affirmative Investment compared to distributions of
approximately $7.2 million from Green Tree and a
$3.0 million dividend from Castlewood Holdings in 2004.
Net cash used in investing activities was approximately
$25.6 million for 2005. During 2005 the Company funded
capital contributions to Affirmative Investment of approximately
$8.4 million and invested approximately $3.5 million
in NIB Partners. In addition, the Company purchased marketable
securities for approximately $9.5 million. These amounts
were partially offset by the receipt of approximately
$11.2 million in proceeds from the sale of marketable
securities. The Company also purchased approximately
$15.5 million of certificates of deposit in excess of
maturities.
Net cash provided by investing activities was approximately
$32.9 million for 2004 and consisted primarily of proceeds
received from the sale of Green Tree. In July 2004, the JCF CFN
Entities, along with certain affiliates of J.C. Flowers I
LP, completed the sale of their entire interests in Green Tree.
In exchange for their entire interests, the JCF CFN Entities
received aggregate sales proceeds of approximately
$40.0 million in cash. The proceeds received by the JCF CFN
Entities at completion of the sale were reduced by cash
distributions of approximately $7.2 million made by Green
Tree in 2004 prior to the completion of the sale.
Net cash used in financing activities was approximately
$15.6 million in 2004. During 2004, approximately
$16.1 million was distributed to Castlewood Holdings as the
minority interest portion of the approximately
$40.0 million in distributions received from Green Tree.
This amount was partially offset by the receipt of $555,000 from
the exercise of certain stock options in May 2004. There were no
cash flows from financing activities during 2005.
The Companys assets, aggregating approximately
$185.2 million at December 31, 2005, include
approximately $54.0 million in cash and cash equivalents
and approximately $19.7 million in short-term certificates
of deposit. The Company believes its current liquidity is
adequate to fund any foreseeable cash requirements including its
$25.0 million commitment in the J.C. Flowers Fund.
18
Contractual Obligations and Commitments
In December 2004, the Company signed a one year lease beginning
January 1, 2005 on an office building at 401 Madison
Avenue, Montgomery, Alabama which serves as the corporate
headquarters. The lease also provides renewal options for three
periods of one year each. In December 2005, the Company signed a
one year renewal option beginning January 1, 2006.
Additionally, pursuant to an oral agreement, the Company leases
space in a warehouse at 703 Howe Street, Montgomery,
Alabama on a
month-to-month basis.
The Company leases the office building and warehouse space from
unaffiliated third parties for $3,000 and $350 per month,
respectively. The Company believes the rental amounts are
competitive with market rates and that the cancellation or
termination of either of these leases would not have a material
adverse effect on the Companys results of operations. In
September 2005, the Company entered into an agreement with
J.C. Flowers & Co. LLC continuing through October
2014 for the use of certain office space and administrative
services from J.C. Flowers & Co. LLC for monthly
payments of $4,146. Either party may, at its option with or
without cause, terminate this agreement upon thirty
(30) days prior written notice to the other party. J.C.
Flowers & Co. LLC is managed by Mr. Flowers, a
member of the Companys board of directors and the
Companys largest shareholder. The Company does not own any
real property. Including payments made to J.C.
Flowers & Co. LLC, the Company incurred rent expense in
the amount of $77,000, $80,000 and $80,000 for the
three years ended December 31, 2005, 2004 and 2003,
respectively.
In February 2006, the Company announced that it approved a
commitment of up to $25.0 million in the J.C. Flowers Fund,
a private investment fund to be formed by J.C.
Flowers & Co. LLC. The transaction is expected to close
in the second quarter. The Company intends to use cash on hand
to fund its commitment.
In March 2006, the Company announced that its partially owned
equity affiliate, Castlewood Holdings, approved a commitment of
up to $75.0 million in the J.C. Flowers Fund. Castlewood
Holdings intends to use cash on hand to fund its commitment.
J.C. Flowers & Co. LLC is controlled by
J. Christopher Flowers, a member of the Companys
board of directors and the Companys largest shareholder.
No fees will be payable by the Company or Castlewood Holdings to
J.C. Flowers II LP, J.C. Flowers & Co. LLC, or J.
Christopher Flowers in connection with the Companys
investment in the J.C. Flowers Fund.
Results of Operations
Interest income was approximately $2.3 million in 2005
compared to $983,000 in 2004. Interest income was earned from
cash, cash equivalents and certificates of deposit. Interest
income increased substantially during 2005 as a result of the
receipt of approximately $24.0 million in proceeds from the
sale of Green Tree in July 2004, which caused the Companys
average cash and certificate of deposit balance to be
approximately $79.4 million in 2005 compared to
$74.5 million in 2004. In addition, interest rates earned
on the Companys cash, cash equivalents and certificates of
deposit increased during 2005 as evidenced by federal funds
interest rate increases of 3.25% from June 2004 through December
2005.
Other investment income of approximately $1.8 million in
2005 resulted from gains on the sale of certain marketable
securities from June through December 2005 and the receipt of
dividends on those marketable securities.
Earnings of partially owned equity affiliates were approximately
$26.5 million in 2005 compared to $8.3 million in
2004. The Company recorded equity in earnings of $59,000 and
$118,000 from B.H. Acquisition in 2005 and 2004,
respectively. The Company recorded equity in earnings of
approximately $26.3 million in 2005 from Castlewood
Holdings compared to approximately $4.0 million in 2004.
The Company recorded equity in earnings from Affirmative
Investment of $120,000 for the period from July 1 to
December 31, 2005 (the Company made its initial capital
contribution to Affirmative Investment on July 1, 2005).
The Company reported equity in earnings of approximately
$4.3 million from Green Tree for the period from January 1
to July 15, 2004 (the Company sold its entire interest in
Green Tree in July 2004). The Companys reported income was
reduced by approximately $3.0 million in 2004 to reflect
Castlewood
19
Holdings minority interest in Green Tree. Also in 2004,
the Company reported income of approximately $4.4 million,
net of income taxes, as its proportionate share of the excess of
the net assets acquired over the cost in the acquisition of
Mercantile, Harper and Longmynd by Castlewood Holdings. For
further discussion of the reasons underlying the changes in
earnings of partially owned equity affiliates, see
Results of Operations Partially
Owned Equity Affiliates.
In 2004, the Company recorded a gain on the sale of its entire
interest in Green Tree of approximately $6.9 million. There
were no sales of partially owned equity affiliates during 2005.
Other income was $402,000 in 2005 compared to $498,000 in 2004.
These amounts include a quarterly investment advisory fee of
$100,000 from Castlewood Holdings and B.H. Acquisition for
each of the four quarters in 2005 and 2004.
General and administrative expenses were approximately
$3.1 million and approximately $3.0 million in 2005
and 2004, respectively. Of these amounts, approximately
$1.3 million, including non-cash compensation of $33,000 in
2004, related to employee expenses in both 2005 and 2004,
respectively. General and administrative expenses also include
legal and professional fees as well as travel expenses incurred
in connection with the Companys search for one or more
additional operating companies. Additionally, the Company incurs
legal and professional fees in connection with reporting
requirements associated with being a publicly traded company,
and in connection with handling various other accounting and tax
matters. Legal and professional fees and travel expenses were
approximately $1.2 million and approximately $1.0 in 2005
and 2004, respectively.
Income tax expense was approximately $8.9 million and
approximately $4.8 million in 2005 and 2004, respectively.
The effective tax rate for 2005 differed from the statutory rate
primarily due to changes in the valuation allowance related to
deferred tax assets and changes in tax contingencies. The
Companys effective tax rate for 2004 approximated the
statutory rates.
Consolidated net income was approximately $19.0 million in
2005 compared to approximately $10.4 million in 2004. The
increase in net income for 2005 compared to 2004 is primarily a
result of an increase in earnings from partially owned equity
affiliates of approximately $18.2 million, an increase in
interest income of approximately $1.4 million, the
inclusion of other investment income of approximately
$1.8 million in 2005 and the lack of any reduction for
minority interest, which was approximately $3.0 million in
2004. This increase was partially offset by the gain on sale of
partially owned equity affiliates of approximately
$6.9 million and the extraordinary gain, net of income
taxes, of approximately $4.4 million, both of which
occurred in 2004.
Interest income was $983,000 in 2004 compared to $821,000 in
2003. Interest income was earned from cash, cash equivalents and
certificates of deposit. Interest income increased during 2004
as a result of the receipt of approximately $24.0 million
in July 2004, representing the Companys share of proceeds
from the sale of Green Tree. In addition, interest rates earned
on the Companys cash, cash equivalents and certificates of
deposit increased during the last quarter of 2004.
Earnings of partially owned equity affiliates were approximately
$8.3 million in 2004 compared to $15.9 million in
2003. The Company recorded equity in earnings of $118,000 and
$293,000 from B.H. Acquisition in 2004 and 2003,
respectively. The Company recorded equity in earnings of
approximately $4.0 million in 2004 from Castlewood Holdings
compared to approximately $9.6 million in 2003. The
Companys equity in earnings from
B-Line was
approximately $1.7 million in 2003 (the Company sold its
entire interest in
B-Line in December
2003). The Company reported equity in earnings of approximately
$4.3 million from Green Tree for the period from January 1
to July 15, 2004 (the Company sold its entire interest in
Green Tree in July 2004) compared to approximately
$4.2 million for the period from June 23 to
December 31, 2003 (the Company made its investment in Green
Tree in June 2003). The Companys reported income was
reduced by approximately $3.0 million and approximately
$1.1 million in 2004 and 2003, respectively, to reflect
Castlewood Holdings minority interest in Green Tree. In
addition, the Company
20
reported income of approximately $4.4 million, net of
income taxes, as its proportionate share of the excess of the
net assets acquired over the cost in the acquisition of
Mercantile, Harper and Longmynd by Castlewood Holdings. For
further discussion of the reasons underlying the changes in
earnings of partially owned equity affiliates, see
Results of Operations Partially
Owned Equity Affiliates.
In July 2004, the JCF CFN Entities completed the sale of their
entire interests in Green Tree. In exchange for their entire
interest, the JCF CFN Entities received aggregate sales proceeds
of approximately $40 million in cash. Of this amount,
Castlewood Holdings received aggregate sales proceeds of
approximately $16 million. The proceeds received by the JCF
CFN Entities at completion of the sale were reduced by prior
cash distributions of approximately $7.2 million made by
Green Tree during 2004. The Company recorded a gain of
approximately $6.9 million on the sale. In December 2003,
the Company sold its entire interest in
B-Line for
approximately $7.8 million in cash, resulting in a gain of
approximately $3.3 million.
Other income was $498,000 in 2004 compared to $484,000 in 2003.
These amounts include a quarterly investment advisory fee of
$100,000 from Castlewood Holdings and B.H. Acquisition for
each of the four quarters in 2004 and 2003.
General and administrative expenses were approximately
$3.0 million and approximately $3.1 million in 2004
and 2003, respectively. Of these amounts, approximately
$1.3 million and $1.4 million, including non-cash
compensation, related to employee expenses in 2004 and 2003,
respectively. General and administrative expenses also include
legal and professional fees as well as travel expenses incurred
in connection with the Companys search for one or more
additional operating companies. Additionally, the Company incurs
legal and professional fees in connection with reporting
requirements associated with being a publicly traded company,
and in connection with handling various other accounting and tax
matters. Legal and professional fees and travel expenses were
approximately $1.0 million and $950,000 in 2004 and 2003,
respectively.
Income tax expense was approximately $4.8 million and
approximately $3.0 million in 2004 and 2003, respectively.
The Companys effective tax rate for 2004 approximated the
statutory rate. The effective tax rate for 2003 differed from
the statutory rate primarily due to changes in the valuation
allowance related to deferred tax assets.
Consolidated net income was approximately $10.4 million in
2004 compared to approximately $13.2 million in 2003. The
change in net income for 2004 compared to 2003 is primarily a
result of a decrease in earnings from partially owned equity
affiliates of approximately $7.5 million, an increase in
the gain on sale of partially owned equity affiliates of
approximately $3.7 million, an increase in income taxes of
approximately $1.8 million, an increase in minority
interest of approximately $1.9 million and an increase from
the extraordinary gain, net of income taxes, of approximately
$4.4 million.
Results of Operations Partially Owned Equity
Affiliates
Since a substantial portion of the Companys results of
operations are comprised of the results of operations of
Castlewood Holdings and B.H. Acquisition, we have provided the
following additional summary information with respect to those
companies results of operations. This discussion and
analysis should be read in conjunction with the audited
consolidated financial statements of the partially owned equity
affiliates and related notes that are included in this Annual
Report.
Castlewood Holdings earned consulting fees of approximately
$22.0 million and $23.7 million for the years ended
December 31, 2005 and 2004, respectively. Castlewood
Holdings generates its consulting fees based on a combination of
fixed and success-based fee arrangements. Consulting income will
vary depending on the success and timing of completion of
success-based fee arrangements. Included in these amounts were
approximately $1.3 million in consulting fees charged to
B.H. Acquisition, a related party, in both 2005 and 2004.
21
Net investment income, including realized gains and losses, for
the year ended December 31, 2005 increased
$19.0 million to $29.5 million compared to
$10.5 million for the year ended December 31, 2004.
The increase was attributable to having a larger average cash
and investment balance in 2005 ($913.9 million) versus 2004
($446.8 million) and the increase in investment yield in
the year. The average investment return on the cash and fixed
maturities investments for the year ended December 31, 2005
was 3.1% compared to the average return of 2.3% for the year
ended December 31, 2004.
Net reduction in loss and loss adjustment expense liabilities
for the years ended December 31, 2005 and 2004 was
$96.0 million and $13.7 million, respectively. The net
reduction in loss and loss adjustment expense liabilities for
both 2005 and 2004 was attributable to the reduction in
estimates of ultimate losses that arose from commutations,
policy buy-backs and settlement of losses in the year below
carried reserves and the resulting reductions in actuarial
estimates of losses incurred but not reported.
Salaries and benefits, which include accrued bonuses, were
$40.8 million and $26.3 million for the years ended
December 31, 2005 and 2004, respectively. Castlewood
Holdings is a service based company and, as such, employee
salaries and benefits are its largest cost. Castlewood Holdings
has in place a discretionary bonus plan. Included as part of the
salary cost is an accrual relating to this plan. The increase in
2005 compared to 2004 was primarily due to an increased number
of employees and an increase in the bonus accrual.
General and administrative expenses were $11.0 million and
$10.7 million for the years ended December 31, 2005
and 2004, respectively. General and administrative expenses
include rent and rent related costs, professional fees (legal,
investment, audit and actuarial) and travel expenses. Castlewood
Holdings operates in both the UK and Bermuda, and staff travel
frequently in connection with Castlewood Holdings search
for acquisition opportunities and in the general management of
the business.
Castlewood Holdings has recorded a foreign exchange loss of
$4.6 million compared to a foreign exchange gain of
$3.7 million in 2004. Through its subsidiaries, Castlewood
Holdings conducts business in a variety of foreign
(non-U.S.) currencies,
the principal exposures being Euros and British pounds. At each
balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of Castlewood
Holdings are adjusted to reflect the current exchange rate.
Revenue and expense items are translated into U.S. dollars
at average rates of exchange for the year. The resulting
exchange gains or losses are included in net income. The loss in
the current year arose as a result of Castlewood Holdings having
surplus British pounds and Euros at various points in the
year. For 2004, the foreign exchange gain arose primarily as a
result of the Company disposing of its surplus Swiss Franc cash
balances.
Castlewood Holdings share of equity in earnings of
partly-owned companies for the years ended December 31,
2005 and 2004, was $192,000 and $6.9 million, respectively.
The 2005 amount represents Castlewood Holdings
proportionate share of equity in the earnings of B.H.
Acquisition and Cassandra Equity (Cayman) LP. The 2004 amount
also included Castlewood Holdings proportionate share of
earnings of the JCF CFN Entities.
Income taxes of $914,000 and $1.9 million were recorded for
the years ended December 31, 2005 and 2004, respectively.
Under current Bermuda law, Castlewood Holdings and its Bermuda
subsidiaries are not required to pay taxes in Bermuda on either
income or capital gains. Castlewood Holdings and its Bermuda
subsidiaries have received an undertaking from the Bermuda
government that, in the event of income or capital gains taxes
being imposed, Castlewood Holdings and its Bermuda subsidiaries
will be exempted from such taxes until the year 2016. United
Kingdom subsidiaries record income taxes based on their
graduated statutory rates, net of tax benefits arising from tax
loss carryforwards.
Castlewood Holdings has recorded a minority interest in earnings
of $9.7 million and $3.1 million in 2005 and 2004,
respectively, reflecting the remaining 49.9% economic interest
in the earnings from Hillcot.
Castlewood Holdings reported consolidated net earnings of
approximately $80.7 million in 2005 compared to
approximately $38.3 million in 2004. The increase in 2005
from 2004 was primarily a result of an increase in investment
income and a decrease in loss and loss adjustment expense
liabilities offset by
22
higher salaries and benefits costs, a foreign exchange loss and
in 2004, the recording of $21.8 million in negative
goodwill.
Castlewood Holdings earned consulting fees of approximately
$23.7 million and $24.7 million for the years ended
December 31, 2004 and 2003, respectively. Castlewood
Holdings generates its consulting fees based on a combination of
fixed and success-based fee arrangements. Consulting income will
vary depending on the success and timing of completion of
success-based fee arrangements. Included in these amounts were
approximately $1.3 million in consulting fees charged to
B.H. Acquisition, a related party, in both 2004 and 2003.
Net investment income, excluding unrealized gains and losses,
for the years ended December 31, 2004 and 2003, was
$10.5 million and $7.1 million, respectively. The
increase was attributable to the combination of the acquisition
of Harper Insurance Limiteds investment portfolio of
$536.9 million in October 2004 and the increase in the
investment yield during 2004. In addition, in 2003, Castlewood
Holdings recognized a realized loss on derivative instruments of
$862,000.
Net reduction in loss and loss adjustment expense liabilities
for the years ended December 31, 2004 and 2003 was
$13.7 million and $24.0 million, respectively. The net
reduction in loss and loss adjustment expense liabilities for
both 2004 and 2003 was attributable to the settlement of losses
for amounts below carried reserve balances and the re-evaluation
of required insurance reserves for loss and loss adjustment
expenses in its subsidiaries. This re-evaluation was made based
on an independent actuarial review.
Salaries and benefits, which include accrued bonuses, were
$26.3 million and $15.7 million for the years ended
December 31, 2004 and 2003, respectively. Castlewood
Holdings is a service based company and, as such, employee
salaries and benefits are its largest cost. Castlewood Holdings
has in place a discretionary bonus plan. Included as part of the
salary cost is an accrual relating to this plan. The increase in
2004 compared to 2003 was primarily due to an increased number
of employees, the implementation of an employee share plan and a
reduction in the 2003 bonus accrual due to a change in
methodology adopted in that year.
General and administrative expenses were $10.7 million and
$7.0 million for the years ended December 31, 2004 and
2003, respectively. General and administrative expenses include
rent and rent related costs, professional fees (legal,
investment, audit and actuarial) and travel expenses. Castlewood
Holdings operates in both the UK and Bermuda, and staff travel
frequently in connection with Castlewood Holdings search
for acquisition opportunities and in the general management of
the business.
Castlewood Holdings has recorded foreign exchange gains of
$3.7 million and $2.4 million for the years ended
December 31, 2004 and 2003, respectively. Through its
subsidiaries, Castlewood Holdings conducts business in a variety
of foreign (non-U.S.)
currencies, the principal exposures being Euros and British
pounds. At each balance sheet date, recorded balances that are
denominated in a currency other than the functional currency of
Castlewood Holdings are adjusted to reflect the current exchange
rate. Revenue and expense items are translated into
U.S. dollars at average rates of exchange for the year. The
resulting exchange gains or losses are included in net income.
The foreign exchange gain in 2004 arose primarily as a result of
the Company disposing of its surplus Swiss Franc cash balances
obtained as part of the Harper acquisition. For 2003, the gain
was attributable to the company disposing of its British pound
available for sale investment portfolio.
Castlewood Holdings share of equity in earnings of
partly-owned companies for the years ended December 31,
2004 and 2003, was $6.9 million and $1.6 million,
respectively. This amount represents Castlewood Holdings
proportionate share of equity in the earnings of B.H.
Acquisition and JCF CFN in 2004 and 2003 and Cassandra in 2004.
Income taxes of $1.9 million and $1.5 million were
recorded for the years ended December 31, 2004 and 2003,
respectively. Under current Bermuda law, Castlewood Holdings and
its Bermuda subsidiaries are not required to pay taxes in
Bermuda on either income or capital gains. Castlewood Holdings
and its Bermuda
23
subsidiaries have received an undertaking from the Bermuda
government that, in the event of income or capital gains taxes
being imposed, Castlewood Holdings and its Bermuda subsidiaries
will be exempted from such taxes until the year 2016. United
Kingdom subsidiaries record income taxes based on their
graduated statutory rates, net of tax benefits arising from tax
loss carryforwards.
Castlewood Holdings has recorded a minority interest in earnings
of $3.1 million and $5.1 million in 2004 and 2003,
respectively, reflecting the remaining 49.9% economic interest
in the earnings from Hillcot.
Negative goodwill of $21.8 million was recorded for the
year ended December 31, 2004. This amount represents the
excess of the fair value of net assets acquired of
$26.2 million over the cost of $4.4 million in the
acquisition of Mercantile, Harper and Longmynd. This excess has,
in accordance with SFAS 141 Business
Combinations, been recognized as an extraordinary gain in
2004. The fair values of the reinsurance assets and liabilities
acquired are derived from probability weighted ranges of the
associated projected cash flows, based on actuarially prepared
information and management run-off strategy. Any amendment to
the fair values resulting from changes in such information or
strategy will be recognized when they occur.
Castlewood Holdings reported consolidated net earnings of
approximately $38.3 million in 2004 compared to
approximately $30.6 million in 2003. The increase in 2004
from 2003 was primarily a result of an extraordinary gain of
$21.8 million in 2004, partially offset by a substantial
increase in the loss and loss adjustment expense liabilities and
a substantial increase in salaries and benefit expense.
Net investment income for the year ended December 31, 2005
was $2.4 million compared to $1.5 million for the year
ended December 31, 2004. Investment income consists
primarily of interest income earned from cash, cash equivalents
and investments. The increase in net investment income in 2005
was attributable to an increase in the average cash balances
along with an increase in interest rates in the year.
B.H. Acquisition reported a net increase in loss and loss
adjustment expense liabilities of $552,000 for the year ended
December 31, 2005 compared to a decrease of $428,000 for
the year ended December 31, 2004.
General and administrative expenses were $2.3 million for
the year ended December 31, 2005 compared to
$2.8 million for the year ended December 31, 2004.
General and administrative expenses include professional fees
(legal, audit and actuarial), management and consulting
expenses, and provisions for doubtful accounts. The decrease in
2005 compared to 2004 was primarily a result of a decrease in
legal fees.
B.H. Acquisition recorded foreign exchange losses of $67,000 and
$142,000 for the years ended December 31, 2005 and 2004,
respectively. Through its subsidiaries, B.H. Acquisition
conducts business in a variety of foreign
(non-U.S.) currencies,
the principal exposures being Euros and British pounds. At each
balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of B.H. Acquisition
are adjusted to reflect the current exchange rate. Revenue and
expense items are translated into U.S. dollars at average
rates of exchange for the years. The resulting exchange gains or
losses are included in net income.
Amortization of the run-off provision was $667,000 and
$1.3 million for the years ended December 31, 2005 and
2004, respectively. The Company established a provision at the
date of acquisition equal to the anticipated expenses to be
incurred over the expected life of the run-off. This provision
is amortized on a straight-line basis over this period. In 2005
an additional provision of $667,000 was established and the
expected life of the run-off was extended one year.
Net earnings for the year ended December 31, 2005 were
$179,000 compared to $359,000 for the year ended
December 31, 2004.
24
Net investment income for the year ended December 31, 2004
was $1.5 million compared to $1.3 million for the year
ended December 31, 2003. Investment income consists
primarily of interest income earned from cash, cash equivalents,
debt securities and mutual funds. The increase in net investment
income in 2004 was attributable to an increase in interest rates
earned on the cash, cash equivalents and investments.
B.H. Acquisition reported a net decrease in loss and loss
adjustment expense liabilities of $428,000 for the year ended
December 31, 2004 compared to a increase of $230,000 for
the year ended December 31, 2003.
General and administrative expenses were $2.8 million for
the year ended December 31, 2004 compared to
$1.6 million for the year ended December 31, 2003.
General and administrative expenses include professional fees
(legal, audit and actuarial), management and consulting
expenses, and provisions for doubtful accounts. In 2003, there
was an adjustment to the provision for doubtful accounts
associated with reinsurance recoverables of $693,000, resulting
in a reduction to general and administrative expenses in that
year. There was no such adjustment in 2004. The remaining
increase in general and administrative expenses for 2004 was
mainly a result of increased legal and audit fees.
B.H. Acquisition recorded a foreign exchange loss of $142,000
for the year ended December 31, 2004 compared to a gain of
$927,000 for the year ended December 31, 2003. Through its
subsidiaries, B.H. Acquisition conducts business in a
variety of foreign
(non-U.S.) currencies,
the principal exposures being Euros and British pounds. At each
balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of
B.H. Acquisition are adjusted to reflect the current
exchange rate. Revenue and expense items are translated into
U.S. dollars at average rates of exchange for the years.
The resulting exchange gains or losses are included in net
income. In 2004, B.H. Acquisition made an attempt to more
closely match its foreign currency exposure, resulting in a
small loss for the year. For 2003, the gain generated was
attributable to B.H. Acquisition having a surplus Euro
position at various points during the year.
Amortization of the run-off provision was $1.3 million and
$500,000 for the years ended December 31, 2004 and 2003,
respectively. The Company established a provision at the date of
acquisition equal to the anticipated expenses to be incurred
over the expected life of the run-off. This provision is
amortized on a straight-line basis over this period. In 2003 an
additional provision of $2.1 million was established and
the expected life of the run-off was extended two years.
Net earnings for the year ended December 31, 2004 were
$359,000 compared to $888,000 for the year ended
December 31, 2003.
Related Party Transactions
In 2002, the Company entered into an investment advisory
agreement with Castlewood Holdings and B.H. Acquisition for
an annual fee of $400,000. This amount is included in other
income in the Companys consolidated statements of income
for each of the three years ended December 31, 2005.
During 2003, the Company invested approximately
$15.3 million in the JCF CFN Entities. In July 2004, the
JCF CFN Entities completed the sale of their entire interest in
Green Tree for aggregate sales proceeds of approximately
$40 million in cash. Of this amount, Castlewood
Holdings aggregate sales proceeds were approximately
$16 million. The proceeds received by the JCF CFN Entities
at completion of the sale were reduced by prior cash
distributions of approximately $7.2 million made by Green
Tree during 2004. The Company recorded a pre-tax realized gain
of approximately $6.9 million on the sale. Each of the JCF
CFN Entities is controlled by JCF Associates I LLC,
the managing member of which is Mr. Flowers. No fees were
paid by the Company or will be payable by the Company to J.C.
Flowers I LP, JCF Associates I LLC, or
Mr. Flowers in connection with the Companys
investment in JCF CFN. In March 2003, Castlewood Holdings and
Shinsei completed the acquisition of all of the outstanding
capital stock of
Toa-UK, a London-based
company, for approximately $46 million. The acquisition was
effected through Hillcot, a newly formed Bermuda company, in
which Castlewood Holdings has a 50.1% economic interest and a
50% voting interest. Upon completion of the transaction,
Toa-UKs name was
changed to Hillcot Re Limited. Hillcot is included
25
in Castlewood Holdings consolidated financial statements,
with the remaining 49.9% economic interest reflected as minority
interest. Mr. Flowers, a member of the Companys board
of directors and the Companys largest shareholder, is a
director of Shinsei.
During 2004, Castlewood Holdings, through one of its
subsidiaries, invested a total of approximately
$9.1 million in Cassandra for a 27% interest. Cassandra was
formed to invest in equity shares of a publicly traded
international reinsurance company. J.C. Flowers I LP
also owns a 27% interest in Cassandra.
J.C. Flowers I LP is a private investment fund,
the general partner of which is JCF Associates I LLC.
Mr. Flowers is the managing member of JCF
Associates I LLC. In March 2005, Cassandra sold all of
its holdings for total proceeds of approximately
$40.0 million. Castlewood Holdings proportionate
share of the proceeds was approximately $10.8 million.
In June 2005, the Company committed to contribute up to
$10 million for a 14%, non-voting interest in Affirmative
Investment LLC (Affirmative Investment), a newly
formed Delaware limited liability company.
J.C. Flowers I LP committed the capital necessary
for the remaining 86% interest in Affirmative Investment. Both
J.C. Flowers I LP and Affirmative Associates LLC,
the managing member of Affirmative Investment, are controlled by
Mr. Flowers, a member of the Companys board of
directors and the Companys largest shareholder. As of
December 31, 2005, the Company has funded capital
contributions of approximately $8.3 million.
In September 2005, the Company entered into an agreement with
J.C. Flowers & Co. LLC continuing through
October 2014 for the use of certain office space and
administrative services from J.C. Flowers &
Co. LLC for monthly payments of $4,146. Either party may,
at its option with or without cause, terminate this agreement
upon thirty (30) days prior written notice to the other
party.
In December 2005, the Company invested approximately
$3.5 million in New NIB Partners LP
(NIB Partners), a newly formed Province of
Alberta limited partnership, in exchange for an approximately
..2% limited partnership interest. Castlewood Holdings, through
two of its wholly-owned subsidiaries, also invested
approximately $24.5 million in NIB Partners for an
approximately 1.4% interest. NIB Partners was formed for
the purpose of purchasing, together with certain affiliated
entities, 100% of the outstanding share capital of
NIBC N.V. (formerly, NIB Capital N.V.) and its
affiliated (NIBC). NIBC is a merchant bank focusing
on the mid-market segment in northwest Europe with a global
distribution network.
New NIB Partners and certain related entities are
indirectly controlled by New NIB Limited, an Irish
corporation. Mr. Flowers is a director of New
NIB Limited and is on the supervisory board of NIBC.
Certain affiliates of J.C. Flowers I LP also
participated in the acquisition of NIBC.
In December 2005, Castlewood Holdings and Shinsei signed
definitive agreements for the purchase of Aioi Europe, a
London-based subsidiary of Aioi Insurance Company, Limited. The
aggregate purchase price to be paid for Aioi Europe is
£62 million (approximately $108 million), with
£50 million in cash upon the closing of the
transaction and £12 million in the form of a
promissory note, payable twelve months from the date of the
closing. The acquisition will be effected through Hillcot, a
Bermuda-based company, which is jointly owned by Castlewood
Holdings and Shinsei. Castlewood Holdings commitment is
proportionate to its 50.1% ownership percentage in Hillcot.
Subject to regulatory approval, the acquisition is expected to
be completed during the first quarter of 2006. Mr. Flowers,
a member of the Companys board of directors and the
Companys largest shareholder, is a director of Shinsei.
Also in December 2005 JCF Re Holdings LP (JCF
Re), a Cayman Limited partnership, entered into a
subscription and shareholders agreement with Fitzwilliam
(SAC) Insurance Limited (Fitzwilliam), a wholly
owned subsidiary of Castlewood Holdings, for the establishment
of a segregated cell and paid approximately $1.9 million to
Fitzwilliam as capital and contributed surplus. During 2005,
Fitzwilliam booked management fees of $40,000 from JCF Re.
In February 2006, the Company announced that it approved a
commitment of up to $25.0 million in
J.C. Flowers II LP (the J.C. Flowers
Fund), a private investment fund to be formed by
J.C. Flowers & Co. LLC. The transaction is
expected to close in the second quarter of 2006. The Company
intends to use cash on hand to fund its commitment.
26
In March 2006, the Company announced that its partially owned
equity affiliate, Castlewood Holdings, approved a commitment of
up to $75.0 million in the J.C. Flowers Fund. Castlewood
Holdings intends to use cash on hand to fund its commitment.
J.C. Flowers & Co. LLC is controlled by J. Christopher
Flowers, a member of the Companys board of directors and
the Companys largest shareholder. No fees will be payable
by the Company or Castlewood Holdings to J.C. Flowers II
LP, J.C. Flowers & Co. LLC, or J. Christopher Flowers
in connection with the Companys or Castlewood
Holdings investment in the J.C. Flowers Fund.
Forward-Looking Statements
Certain statements made in this report, and other written or
oral statements made by or on behalf of the Company, may
constitute forward-looking statements under the
federal securities laws. Forward-looking statements are only
predictions and are not guarantees of performance. These
statements are based on beliefs and assumptions of our
management, which in turn are based on currently available
information. The forward-looking statements also involve risks
and uncertainties, which could cause actual results to differ
materially from those contained in any forward-looking
statement. There are a number of important factors that could
cause our actual results to differ materially from those
indicated by such forward-looking statements. These factors
include, without limitation, those set forth in Item 1A.
Risk Factors.
We believe these forward-looking statements are reasonable.
However, you should not place undue reliance on any
forward-looking statements, which are based on current
expectations. Furthermore, forward-looking statements reflect
information as of the date they are made, and we undertake no
obligation to publicly update them in light of new information
or future events.
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Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
The Company is exposed to market risk from changes in interest
rates. At December 31, 2005, the Company had cash and cash
equivalents of approximately $54.0 million in interest
bearing accounts (interest at floating rates) and approximately
$19.7 million of short-term certificates of deposit
(interest at fixed rates). Accordingly, each one percent change
in market interest rates would change interest income by
approximately $737,000 per year. However, any future
transactions affecting the Companys cash and cash
equivalents and certificates of deposit will change this
estimate. Additionally, although interest rate changes would
affect the fair value of the Companys certificates of
deposits, the weighted average original term of certificates
held by the Company at December 31, 2005 was approximately
five months. The short-term nature of these certificates
limits the Companys risk of changes in the fair value of
these certificates.
The Company is also exposed to three types of market risk
through its holdings in partially owned equity affiliates and
their subsidiaries: interest rate risk, foreign currency risk
and credit risk.
The portfolios of fixed income securities of Castlewood Holdings
and B.H. Acquisition are exposed to interest rate risk.
Fluctuation in interest rates have a direct impact on the market
valuation of these securities. In general, the fair market value
of a portfolio of fixed income securities increases or decreases
inversely with changes in market interest rates. Castlewood
Holdings and B.H Acquisition attempt to manage this interest
rate risk by monitoring the duration and structure of their
investment portfolios relative to the duration and structure of
their liability portfolios.
Foreign currency risk is the risk that the Company will incur
economic losses due to adverse changes in foreign currency
exchange rates. Castlewood Holdings and B.H. Acquisition conduct
business in a variety of foreign
(non-U.S.) currencies,
the principal exposures being in Euros and British pounds.
Assets and liabilities denominated in foreign currencies are
exposed to risk stemming from changes in currency exchange
rates. These entities attempt to manage their exposure to
foreign currency exchange risk by broadly matching assets
against liabilities. Exchange rate fluctuations impact the
Companys and its partially owned equity affiliates
reported consolidated financial condition, results of operations
and cash flows from year to year.
Castlewood Holdings and B.H. Acquisition are also exposed to
credit risk on losses recoverable from reinsurers. These
companies credit risk exposure was assumed at the time
they acquired various subsidiaries. They manage this risk by
conducting a detailed review of each potential
acquisitions reinsurance portfolio during the due
diligence process.
27
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Item 8. |
Financial Statements and Supplementary Data |
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The Enstar Group, Inc.s (the Companys)
management is responsible for establishing and maintaining
adequate internal control over financial reporting. Pursuant to
the rules and regulations of the Securities and Exchange
Commission, internal control over financial reporting is a
process designed by, or under the supervision of, the
Companys principal executive and principal financial
officers and effected by the Companys board of directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America and includes those policies and
procedures that:
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Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company; |
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Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and |
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Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements. |
Management has evaluated the effectiveness of its internal
control over financial reporting as of December 31, 2005
based on the control criteria established in a report entitled
Internal Control Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on such evaluation, we have concluded that the
Companys internal control over financial reporting is
effective as of December 31, 2005.
The independent registered public accounting firm of
Deloitte & Touche LLP, as auditors of the
Companys consolidated financial statements, has issued an
attestation report on managements assessment of the
Companys internal control over financial reporting, which
report is included herein.
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/s/ Nimrod T. Frazer
Nimrod T. Frazer
Chairman of the Board of Directors
and Chief Executive Officer
March 16, 2006 |
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/s/ Cheryl D. Davis
Cheryl D. Davis
Chief Financial Officer, Vice President and
Secretary
March 16, 2006 |
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Enstar Group, Inc.:
We have audited managements assessment, included in the
accompanying Management Report on Internal Control over
Financial Reporting, that The Enstar Group, Inc. and
Subsidiaries (the Company) maintained effective
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of
December 31, 2005 and the related consolidated statements
of income, comprehensive income, shareholders equity, and
cash flows for the year then ended, and our report dated
March 16, 2006 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche LLP
Birmingham, Alabama
March 16, 2006
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Enstar Group, Inc.:
We have audited the accompanying consolidated balance sheets of
The Enstar Group, Inc. and Subsidiaries (the
Company) as of December 31, 2005 and 2004, and
the related consolidated statements of income, comprehensive
income, shareholders equity, and cash flows for each of
the three years in the period ended December 31, 2005.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits. We did
not audit the 2003 financial statements of Green Tree Investment
Holdings II, LLC and Green Tree Investment
Holdings III, LLC, the Companys investment in which
is accounted for by use of the equity method. The Companys
interest of $4,235,824 in Green Tree Investment
Holdings II, LLC and Green Tree Investment
Holdings III, LLCs net income for the year ended
December 31, 2003, is included in the accompanying
consolidated financial statements. The 2003 financial statements
of Green Tree Investment Holdings II, LLC and Green Tree
Investment Holdings III, LLC were audited by other auditors
whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for such
companies, is based solely on the reports of such other auditors.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the
reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other
auditors such consolidated financial statements present fairly,
in all material respects, the financial position of The Enstar
Group, Inc. and Subsidiaries as of December 31, 2005 and
2004, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated
March 16, 2006 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
As discussed in Note 2, the accompanying notes to the
consolidated financial statements have been restated.
/s/ Deloitte & Touche LLP
Birmingham, Alabama
March 16, 2006
(September 18, 2006 as to the effects of the restatement
discussed in Note 2)
30
REPORT OF INDEPENDENT AUDITORS
The Members
Green Tree Investment Holdings II, LLC
We have audited the accompanying consolidated balance sheet of
Green Tree Investment Holdings II, LLC (the Company) as of
December 31, 2003, and the related consolidated statements
of operations, members equity, and cash flows for the
period from March 26, 2003 (inception) through
December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2003, and
the consolidated results of its operations and its cash flows
for the period from March 26, 2003 (inception) through
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 13, 2004
31
REPORT OF INDEPENDENT AUDITORS
The Members
Green Tree Investment Holdings III, LLC
We have audited the accompanying consolidated balance sheet of
Green Tree Investment Holdings III, LLC (the Company) as of
December 31, 2003, and the related consolidated statements
of operations, members equity, and cash flows for the
period from May 20, 2003 (inception) through
December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2003, and
the consolidated results of its operations and its cash flows
for the period from May 20, 2003 (inception) through
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 13, 2004
32
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
54,032 |
|
|
$ |
81,675 |
|
|
Certificates of deposit
|
|
|
19,686 |
|
|
|
4,058 |
|
|
Other current assets
|
|
|
129 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
73,847 |
|
|
|
85,865 |
|
Partially owned equity affiliates
|
|
|
107,329 |
|
|
|
72,618 |
|
Other investments
|
|
|
3,542 |
|
|
|
|
|
Other assets
|
|
|
502 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
185,220 |
|
|
$ |
158,977 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
595 |
|
|
$ |
345 |
|
|
Accounts payable to affiliates
|
|
|
|
|
|
|
358 |
|
|
Income taxes payable
|
|
|
5,467 |
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,062 |
|
|
|
1,342 |
|
Deferred income tax liabilities
|
|
|
10,401 |
|
|
|
7,730 |
|
Accrued taxes
|
|
|
2,325 |
|
|
|
2,625 |
|
Deferred compensation
|
|
|
853 |
|
|
|
662 |
|
Other liabilities
|
|
|
456 |
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,097 |
|
|
|
12,803 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock ($.01 par value; 55,000,000 shares
authorized, 5,960,260 shares issued at December 31,
2005 and 2004
|
|
|
60 |
|
|
|
60 |
|
|
Additional paid-in capital
|
|
|
190,008 |
|
|
|
190,008 |
|
|
Deferred compensation of partially owned equity affiliate
|
|
|
(40 |
) |
|
|
(125 |
) |
|
Accumulated other comprehensive income from partially owned
equity affiliates, net
|
|
|
210 |
|
|
|
391 |
|
|
Accumulated deficit
|
|
|
(19,305 |
) |
|
|
(38,350 |
) |
|
Treasury stock, at cost (442,351 shares)
|
|
|
(5,810 |
) |
|
|
(5,810 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
165,123 |
|
|
|
146,174 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
185,220 |
|
|
$ |
158,977 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
33
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Interest income
|
|
$ |
2,333 |
|
|
$ |
983 |
|
|
$ |
821 |
|
Other investment income
|
|
|
1,824 |
|
|
|
|
|
|
|
|
|
Earnings of partially owned equity affiliates
|
|
|
26,513 |
|
|
|
8,348 |
|
|
|
15,860 |
|
Gain on sale of partially owned equity affiliates
|
|
|
|
|
|
|
6,911 |
|
|
|
3,256 |
|
Other income (includes related party income of $400 for 2005,
2004 and 2003)
|
|
|
402 |
|
|
|
498 |
|
|
|
484 |
|
General and administrative expenses
|
|
|
(3,110 |
) |
|
|
(2,981 |
) |
|
|
(3,105 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and extraordinary
gain
|
|
|
27,962 |
|
|
|
13,759 |
|
|
|
17,316 |
|
Income taxes
|
|
|
(8,917 |
) |
|
|
(4,809 |
) |
|
|
(2,987 |
) |
|
|
|
|
|
|
|
|
|
|
Income before minority interest and extraordinary gain
|
|
|
19,045 |
|
|
|
8,950 |
|
|
|
14,329 |
|
Minority interest
|
|
|
|
|
|
|
(2,973 |
) |
|
|
(1,103 |
) |
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
|
|
|
19,045 |
|
|
|
5,977 |
|
|
|
13,226 |
|
Extraordinary gain, net of income taxes of $2,741
|
|
|
|
|
|
|
4,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
19,045 |
|
|
$ |
10,392 |
|
|
$ |
13,226 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
5,517,909 |
|
|
|
5,496,819 |
|
|
|
5,465,753 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution
|
|
|
5,856,144 |
|
|
|
5,800,993 |
|
|
|
5,881,410 |
|
|
|
|
|
|
|
|
|
|
|
Income per common share before extraordinary gain
basic
|
|
$ |
3.45 |
|
|
$ |
1.09 |
|
|
$ |
2.42 |
|
Extraordinary gain, net of income taxes basic
|
|
|
|
|
|
|
.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$ |
3.45 |
|
|
$ |
1.89 |
|
|
$ |
2.42 |
|
|
|
|
|
|
|
|
|
|
|
Income per common share before extraordinary gain
assuming dilution
|
|
$ |
3.25 |
|
|
$ |
1.03 |
|
|
$ |
2.25 |
|
Extraordinary gain, net of income taxes assuming
dilution
|
|
|
|
|
|
|
.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share assuming dilution
|
|
$ |
3.25 |
|
|
$ |
1.79 |
|
|
$ |
2.25 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
34
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income
|
|
$ |
19,045 |
|
|
$ |
10,392 |
|
|
$ |
13,226 |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on investments, net of income
tax expense (benefit) of $761, $0 and $(364)
|
|
|
1,226 |
|
|
|
|
|
|
|
(586 |
) |
|
Reclassification adjustment for (gains) losses included in
net income, net of income tax (expense) benefit of $(761),
$(199) and $548
|
|
|
(1,226 |
) |
|
|
(321 |
) |
|
|
882 |
|
|
Unrealized gain (loss) on cash flow hedge, net of income tax
(benefit) expense of $(41) and $41
|
|
|
|
|
|
|
(66 |
) |
|
|
66 |
|
|
Currency translation adjustment, net of income tax (benefit)
expense of $(112), $68 and $112
|
|
|
(181 |
) |
|
|
109 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(181 |
) |
|
|
(278 |
) |
|
|
543 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
18,864 |
|
|
$ |
10,114 |
|
|
$ |
13,769 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
35
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive | |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred | |
|
Income | |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation | |
|
(Loss) of | |
|
|
|
|
|
|
|
|
|
|
Additional | |
|
of Partially | |
|
Partially | |
|
|
|
|
|
|
|
|
Common | |
|
Paid-In | |
|
Owned Equity | |
|
Owned Equity | |
|
Accumulated | |
|
Treasury | |
|
|
|
|
Stock | |
|
Capital | |
|
Affiliates | |
|
Affiliates | |
|
Deficit | |
|
Stock | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at January 1, 2003
|
|
$ |
59 |
|
|
$ |
188,425 |
|
|
$ |
(583 |
) |
|
$ |
126 |
|
|
$ |
(61,968 |
) |
|
$ |
(5,810 |
) |
|
$ |
120,249 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,226 |
|
|
|
|
|
|
|
13,226 |
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299 |
|
|
Unrealized holding losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(586 |
) |
|
|
|
|
|
|
|
|
|
|
(586 |
) |
|
Reclassification adjustment for losses included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
882 |
|
|
|
|
|
|
|
|
|
|
|
882 |
|
|
Unrealized gain on hedge assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
66 |
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
181 |
|
|
Issuance of officers stock options
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
59 |
|
|
|
188,591 |
|
|
|
(284 |
) |
|
|
669 |
|
|
|
(48,742 |
) |
|
|
(5,810 |
) |
|
|
134,483 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,392 |
|
|
|
|
|
|
|
10,392 |
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
Reclassification adjustment for gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(321 |
) |
|
|
|
|
|
|
|
|
|
|
(321 |
) |
|
Unrealized loss on hedge assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
Exercise of stock options
|
|
|
1 |
|
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555 |
|
|
Issuance of shares from deferred compensation plan
|
|
|
|
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224 |
|
|
Tax benefit from exercise of stock options and issuance of
shares from deferred compensation plan
|
|
|
|
|
|
|
606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606 |
|
|
Issuance of officers stock options
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
60 |
|
|
|
190,008 |
|
|
|
(125 |
) |
|
|
391 |
|
|
|
(38,350 |
) |
|
|
(5,810 |
) |
|
|
146,174 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,045 |
|
|
|
|
|
|
|
19,045 |
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85 |
|
|
Unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,226 |
|
|
|
|
|
|
|
|
|
|
|
1,226 |
|
|
Reclassification adjustment for gains included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,226 |
) |
|
|
|
|
|
|
|
|
|
|
(1,226 |
) |
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
60 |
|
|
$ |
190,008 |
|
|
$ |
(40 |
) |
|
$ |
210 |
|
|
$ |
(19,305 |
) |
|
$ |
(5,810 |
) |
|
$ |
165,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
36
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
19,045 |
|
|
$ |
10,392 |
|
|
$ |
13,226 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of partially owned equity affiliates
|
|
|
(26,513 |
) |
|
|
(8,348 |
) |
|
|
(15,860 |
) |
|
|
Dividends and distributions received from partially owned equity
affiliates
|
|
|
11 |
|
|
|
10,216 |
|
|
|
20,826 |
|
|
|
Minority interest in earnings of JCF CFN
|
|
|
|
|
|
|
2,973 |
|
|
|
1,103 |
|
|
|
Gain on sale of marketable securities
|
|
|
(1,768 |
) |
|
|
|
|
|
|
|
|
|
|
Gain on sale of partially owned equity affiliates
|
|
|
|
|
|
|
(6,911 |
) |
|
|
(3,256 |
) |
|
|
Extraordinary gain, net of income taxes
|
|
|
|
|
|
|
(4,415 |
) |
|
|
|
|
|
|
Noncash compensation expense
|
|
|
|
|
|
|
33 |
|
|
|
166 |
|
|
|
Deferred income taxes
|
|
|
2,482 |
|
|
|
5,395 |
|
|
|
688 |
|
|
|
Tax benefit from exercise of stock options and issuance of
shares from deferred compensation plan
|
|
|
|
|
|
|
606 |
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
4,708 |
|
|
|
(1,594 |
) |
|
|
(3,014 |
) |
|
|
Other, net
|
|
|
23 |
|
|
|
270 |
|
|
|
705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,012 |
) |
|
|
8,617 |
|
|
|
14,584 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
(9,460 |
) |
|
|
|
|
|
|
|
|
|
Proceeds from sale of marketable securities
|
|
|
11,228 |
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of partially owned equity affiliates
|
|
|
|
|
|
|
32,831 |
|
|
|
7,766 |
|
|
Capital contribution to Affirmative Investment LLC
|
|
|
(8,406 |
) |
|
|
|
|
|
|
|
|
|
Investment in NIB Partners
|
|
|
(3,542 |
) |
|
|
|
|
|
|
|
|
|
Capital contribution to Castlewood Holdings Limited
|
|
|
|
|
|
|
|
|
|
|
(7,169 |
) |
|
Investment of JCF CFN in Green Tree
|
|
|
|
|
|
|
|
|
|
|
(24,744 |
) |
|
Purchase of certificates of deposit
|
|
|
(22,097 |
) |
|
|
(8,120 |
) |
|
|
(10,213 |
) |
|
Maturities of certificates of deposit
|
|
|
6,646 |
|
|
|
8,145 |
|
|
|
10,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(25,631 |
) |
|
|
32,856 |
|
|
|
(24,198 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests capital contribution in JCF CFN, net
|
|
|
|
|
|
|
|
|
|
|
10,006 |
|
|
Distributions to minority interest
|
|
|
|
|
|
|
(16,120 |
) |
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
|
|
|
|
(15,565 |
) |
|
|
10,006 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(27,643 |
) |
|
|
25,908 |
|
|
|
392 |
|
Cash and cash equivalents at the beginning of the year
|
|
|
81,675 |
|
|
|
55,767 |
|
|
|
55,375 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$ |
54,032 |
|
|
$ |
81,675 |
|
|
$ |
55,767 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: Income taxes
paid
|
|
$ |
1,606 |
|
|
$ |
731 |
|
|
$ |
5,332 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
37
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1: |
Nature of Business |
The Enstar Group, Inc. and Subsidiaries, (Enstar or
the Company), is a publicly traded company engaged
in the operation of several equity affiliates in the financial
services industry. Enstar also continues its active search for
one or more additional operating businesses which meet its
acquisition criteria.
The Company, through the operations of its partially owned
equity affiliates, Castlewood Holdings Limited (Castlewood
Holdings) and B.H. Acquisition Limited (B.H.
Acquisition), and their subsidiaries, acquires and manages
insurance and reinsurance companies in run-off. The management
of these businesses includes claims administration, adjustment
and settlement together with the collection of reinsurance
recoveries. Castlewood Holdings, a Bermuda-based company, also
provides management, consulting and other services to the
insurance and reinsurance industry for both fixed and
success-based fee arrangements. In general, reinsurance is an
arrangement in which the reinsurer agrees to indemnify an
insurance or reinsurance company against all or a portion of the
risks underwritten by such insurance or reinsurance company
under one or more insurance or reinsurance contracts.
The Company consolidates JCF CFN LLC and related entities
(collectively, the JCF CFN Entities). The JCF CFN
Entities were formed to serve as members of Green Tree
Investment Holdings LLC (formerly known as CFN Investment
Holdings LLC) and related entities (collectively, Green
Tree), which, in turn, were formed to effect the
acquisition of a portfolio of home equity and manufactured
housing loan securities and the associated servicing businesses
from Conseco Finance Corp. (Conseco Finance). In
July 2004, the JCF CFN Entities completed the sale of their
entire interest in Green Tree and since that time have been
inactive. See Note 5 for further discussion of this
transaction.
|
|
Note 2: |
Restatement of Financial Statements |
Subsequent to the issuance of the Companys consolidated
financial statements for the year ended December 31, 2005,
the consolidated financial statements of the Companys
partially owned equity affiliates, Castlewood Holdings and B.H.
Acquisition, were restated to reflect certain reclassifications
described below. As a result of these restatements, the Company
has restated certain disclosures in the notes to the
consolidated financial statements relating to financial
information of Castlewood Holdings and B.H. Acquisition. These
restatements had no impact on the net income, net income per
share or shareholders equity of Enstar or its partially
owned equity affiliates.
The reclassifications made by Castlewood Holdings and B.H.
Acquisition were between certain line items of income and
expenses on their respective consolidated statements of
earnings. Underwriting income, previously included in income,
was renamed Net reduction in loss and loss adjustment
expense liabilities and reclassified as an expense item.
In addition, Castlewood Holdings net foreign exchange loss
(gain) was also reclassified from income to expense. These
reclassifications are reflected in the Companys
consolidated financial statements in Note 5(f)
Partially Owned Equity Affiliates Summarized Financial
Information and Note 12 Segment
Information.
|
|
Note 3: |
Significant Accounting Policies |
(a) Principles of Consolidation The
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Enstar Financial
Services, Inc. and Enstar Group Operations, Inc, both of which
are currently inactive. In addition, the Company consolidates
the JCF CFN Entities, recording a minority interest in its
financial statements for Castlewood Holdings 40% interest.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Use of Estimates The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the
38
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates. The estimates
susceptible to significant change are those related to the
valuation allowance for deferred tax assets and loss and loss
adjustment expenses included in earnings of partially owned
equity affiliates.
(c) Cash Equivalents Cash equivalents
consist of short term, highly liquid investments with original
purchased maturities of three months or less.
(d) Partially Owned Equity Affiliates
Partially owned equity affiliates are accounted for under the
equity method of accounting. Equity method investments are
recorded at cost and are adjusted periodically to recognize the
Companys proportionate share of the affiliates
income or loss, additional contributions made and dividends and
capital distributions received. In the event any of the
partially owned equity affiliates were to incur a loss and the
Companys cumulative proportionate share of the loss
exceeded the carrying amount of the equity method investment,
application of the equity method would be suspended and the
Companys proportionate share of further losses would not
be recognized until the Company committed to provide further
financial support to the affiliate. The Company would resume
application of the equity method once the affiliate becomes
profitable and the Companys proportionate share of the
affiliates earnings equals the Companys cumulative
proportionate share of losses that were not recognized during
the period the application of the equity method was suspended.
(e) Property and Equipment Property and
equipment, which consists of leasehold improvements and
furniture and fixtures, is stated at cost less accumulated
depreciation and is depreciated using the straight line method
over the estimated useful lives of the related assets,
principally 3 to 7 years. Property and equipment is
included in other assets in the Companys consolidated
balance sheets. Property and equipment was immaterial as of
December 31, 2005 and 2004.
(f) Financial Instruments The Company
holds certificates of deposit (CDs) offered by
commercial banks. These certificates had a weighted average
maturity of approximately five months at December 31, 2005.
The estimated fair value of CDs at December 31, 2005 and
2004, based on interest rates available on CDs of comparable
amounts, maturities, and credit quality, was approximately equal
to their carrying values.
(g) Income Taxes The Company computes
deferred tax assets and liabilities based on the differences
between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the years in
which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amounts that are more likely than not to be
realized.
(h) Comprehensive Income The Company
reports comprehensive income in accordance with Statement of
Financial Accounting Standards (SFAS) 130,
Reporting Comprehensive Income which defines
comprehensive income as certain changes in equity from non-owner
sources. The Company recorded other comprehensive income from
its partially owned equity affiliates. This other comprehensive
income arose from unrealized holding gains and losses from debt
and equity securities that are classified as available-for-sale
and are carried at fair value, unrealized gains on hedge assets
and currency translation adjustments resulting from the
translations of financial information of subsidiaries into
U.S. dollars.
The components of accumulated other comprehensive income are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Currency translation adjustment, net of income tax expense of
$130 and $243
|
|
$ |
210 |
|
|
$ |
391 |
|
|
|
|
|
|
|
|
(i) Deferred Compensation of Partially Owned Equity
Affiliates The Company records its proportionate
share of deferred compensation reported by Castlewood Holdings,
one of its partially owned equity
39
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
affiliates. The deferred compensation arises from stock based
compensation awards entered into with certain senior employees
of Castlewood Holdings.
(j) Recent Accounting Pronouncements In
January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, as
amended by FIN 46R issued in December 2003, which requires
consolidation by a business enterprise of variable interest
entities (VIE) if the enterprise is determined to be
the primary beneficiary. This interpretation was effective for
new variable interests created or obtained after
January 31, 2003 and for periods beginning after
June 15, 2003 for variable interests that were acquired
before February 1, 2003. The Company believes that each of
the JCF CFN Entities qualifies as a VIE and that the Company is
the primary beneficiary of each such entity. As such, the JCF
CFN Entities are included in the accompanying consolidated
financial statements, with Castlewood Holdings 40%
interest in the JCF CFN Entities reflected as a minority
interest in the Companys financial statements. The JCF CFN
Entities have been inactive since the sale of their entire
interests in Green Tree in July 2004.
In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), which is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123R
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25), and amends
SFAS No. 95, Statement of Cash Flows. The
approach in SFAS 123R generally is similar to the approach
described in SFAS 123. However, SFAS 123R requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the earnings statements based
on their grant date fair values. Pro forma disclosure will no
longer be an alternative.
The Company adopted SFAS 123R as of January 1, 2006
using the modified-prospective method. Under this transition
method, compensation cost is recognized beginning with the
effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the
effective date and (b) based on the requirements of
SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123R that remain unvested on the
effective date. As permitted by SFAS 123, through
December 31, 2005 the Company accounted for share-based
payments to employees using APB 25s intrinsic value
method and, as such, generally has not recognized compensation
cost for employee stock options. We estimate that 2006 pretax
compensation expense for stock options will be approximately
$213,000.
SFAS 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
previously required. This requirement will reduce net operating
cash flows and increase net financing cash flows. While we
cannot estimate what those amounts will be in the future
(because they depend on, among other things, when stock options
will be exercised), the amounts of operating cash flows
recognized in prior periods for such excess tax deductions were
$0 and $606,000 in 2005 and 2004, respectively.
(k) Revenue Recognition Revenue includes
interest income earned from cash, cash equivalents and
certificates of deposit, the Companys proportionate share
of earnings from partially owned equity affiliates, gains on
sales of marketable securities and other income. Interest income
is recorded when earned. The Companys proportionate share
of earnings from partially owned equity affiliates is recorded
as such earnings are recognized by the partially owned equity
affiliate with the exception of
B-Line LLC
(B-Line).
Prior to its sale of
B-Line in the fourth
quarter of 2003, the Company accounted for its investment in
B-Line three months in
arrears.
(l) Stock-Based Compensation For the
three years ended December 31, 2005, the Company utilized
various stock-based compensation plans for the benefit of
non-employee directors
and certain officers. In 1997, the Company adopted the Deferred
Compensation and Stock Plan for
Non-Employee Directors
and a long-term incentive program made up of three stock option/
incentive plans. Additionally, in 2001, the Company adopted the
2001 Outside Directors Stock Option Plan (the
2001 Directors Plan) and amended certain
40
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
provisions of an existing plan. The Company accounts for these
plans under the intrinsic value recognition and measurement
principles of APB 25 and related interpretations.
Compensation expense for the Deferred Compensation and Stock
Plan for Non-Employee
Directors is recognized at the first of every quarter for
retainer fees and upon the occurrence of various Board of
Director and committee meetings. There is no compensation
expense recognized in net earnings for grants under stock
option/incentive plans that had an exercise price equal to the
market value of the Companys underlying common stock on
the date of grant. In connection with options granted in
November 2001, the market value of the Companys common
stock on the date of grant exceeded the exercise price,
resulting in a charge to earnings for that year. In addition,
compensation expense was recognized over the vesting life of
these options through June 2004. Had compensation costs for
grants under the Companys stock option/incentive plans
been determined based on the fair value recognition provision of
SFAS 123, Accounting for Stock-Based
Compensation, the Companys pro forma net income and
net income per share for 2005, 2004 and 2003 would have been as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands, | |
|
|
except per share data) | |
Net income, as reported
|
|
$ |
19,045 |
|
|
$ |
10,392 |
|
|
$ |
13,226 |
|
Add: Stock-based employee compensation expense included in
reported net income, net of income taxes
|
|
|
118 |
|
|
|
138 |
|
|
|
102 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
income taxes
|
|
|
(365 |
) |
|
|
(555 |
) |
|
|
(361 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
18,798 |
|
|
$ |
9,975 |
|
|
$ |
12,967 |
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
3.45 |
|
|
$ |
1.89 |
|
|
$ |
2.42 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$ |
3.41 |
|
|
$ |
1.81 |
|
|
$ |
2.37 |
|
|
|
|
|
|
|
|
|
|
|
|
Assuming dilution as reported
|
|
$ |
3.25 |
|
|
$ |
1.79 |
|
|
$ |
2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
Assuming dilution pro forma
|
|
$ |
3.21 |
|
|
$ |
1.72 |
|
|
$ |
2.20 |
|
|
|
|
|
|
|
|
|
|
|
The pro forma stock-based employee compensation reflected above
is based on the application of Emerging Issues Task Force
No. 00-23,
Issues Related to the Accounting for Stock Compensation
Under APB 25 and FASB Interpretation No. 44, to
the straight-line vesting of such awards over the full vesting
period.
The fair values for options granted under the Companys
stock option plans were calculated at the date of grant using
the Black-Scholes option pricing model with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
3.03 |
% |
|
|
3.08 |
% |
|
|
3.88 |
% |
Dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility
|
|
|
21.74 |
% |
|
|
20.46 |
% |
|
|
22.58 |
% |
Expected life, in years
|
|
|
4.37 |
|
|
|
2.12 |
|
|
|
2.35 |
|
Based on these assumptions, the estimated weighted average fair
value at the date of grant for options vesting during the years
ended December 31, 2005, 2004 and 2003 were $9.50, $5.15
and $5.14, respectively.
(m) Other Income Other income includes
$400,000 for each of the three years ended December 31,
2005 in investment advisory fees charged to Castlewood Holdings
and BH Acquisition, partially owned equity affiliates of
the Company.
41
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(n) Currency Translation Adjustment The
Company records foreign currency translation adjustments as its
portion of other comprehensive income from its partially owned
equity affiliates. Through their subsidiaries, Castlewood
Holdings and B.H. Acquisition conduct business in a variety
of foreign (non-U.S.)
currencies, the principal exposures being Euros and British
pounds. At each balance sheet date, recorded balances that are
denominated in a currency other than the functional currency are
adjusted to reflect the current exchange rate. Revenue and
expense items are translated into U.S. dollars at average
rates of exchange for the year. The resulting exchange gains or
losses are included in net income.
|
|
Note 4: |
Marketable Securities |
In June 2005, the Company purchased certain shares of common
stock in a publicly-traded U.S. corporation for
approximately $9.5 million. The Company sold these
securities for total proceeds of approximately
$11.2 million, resulting in a realized gain of
approximately $1.8 million. This gain is included in other
investment income in the Companys consolidated statements
of income.
|
|
Note 5: |
Partially Owned Equity Affiliates |
(a) B.H. Acquisition In July 2000, the
Company, through B.H. Acquisition, a joint venture with
Castlewood Limited (Castlewood) and an entity
controlled by Trident II, L.P. (Trident),
acquired as an operating business two reinsurance companies,
Brittany Insurance Company Ltd. (Brittany) and
Compagnie Europeenne dAssurances Industrielles S.A.
(CEAI). Brittany and CEAI are principally engaged in
the active management of books of reinsurance business from
international markets. The Company owns 50% of the voting stock
and a 33% economic interest in B.H. Acquisition. Castlewood
owns 33% of the voting stock and a 45% economic interest in B.H.
Acquisition. The Companys ownership in B.H. Acquisition is
accounted for using the equity method of accounting.
(b) Castlewood Holdings Limited In
November 2001, the Company, together with Trident and the
shareholders and senior management of Castlewood (the
Castlewood Principals), completed the formation of a
new venture, Castlewood Holdings, to acquire and manage
insurance and reinsurance companies, including companies in
run-off (insurance and
reinsurance companies that have ceased the underwriting of new
policies), and to provide management, consulting and other
services to the insurance and reinsurance industry (the
Castlewood Holdings Transaction). The Company owns
50% of the voting stock of Castlewood Holdings and the
Castlewood Principals and Trident each own 25% of Castlewood
Holdings voting stock. The Company owns a 32.63% economic
interest in Castlewood Holdings. Castlewood is a private
Bermuda-based firm, experienced in managing and acquiring
reinsurance operations. The Companys ownership in
Castlewood Holdings is accounted for using the equity method of
accounting.
As a result of this transaction, the Companys 33% direct
economic interest in B.H. Acquisition increased by an
additional indirect economic interest through Castlewood
Holdings. At December 31, 2005, the Companys
beneficial ownership in B.H. Acquisition was 47.68%. The
Companys combined voting interest in B.H. Acquisition
is limited to 50%.
In conjunction with the closing of the Castlewood Holdings
Transaction, a wholly owned subsidiary of Castlewood Holdings
completed the acquisition of two reinsurance companies in
run-off, River Thames Insurance Company Limited (River
Thames), based in London, England, and Overseas
Reinsurance Corporation Limited (Overseas
Reinsurance), based in Bermuda (collectively, the
River Thames Transaction). The total purchase price
of River Thames and Overseas Reinsurance was approximately
$15.2 million.
In August 2002, Castlewood Holdings purchased Hudson Reinsurance
Company Limited (Hudson), a Bermuda-based company,
for approximately $4.1 million. Hudson reinsured risks
relating to property, casualty and workers compensation,
on a worldwide basis, and is now administering the run-off of
its claims.
42
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Also in 2002, Castlewood Holdings capitalized Fitzwilliam
(SAC) Insurance Limited (Fitzwilliam), a wholly
owned subsidiary. Fitzwilliam, based in Bermuda, offers
specialized reinsurance protections to related companies,
clients of Castlewood Holdings and other third-party companies.
In March 2003, Castlewood Holdings and Shinsei Bank, Limited
(Shinsei) completed the acquisition of all of the
outstanding capital stock of The
Toa-Re Insurance
Company (UK) Limited
(Toa-UK), a
London-based subsidiary of The Toa Reinsurance Company, Limited,
for approximately $46 million.
Toa-UK underwrote
reinsurance business throughout the world between 1980 and 1994,
when it stopped writing new business and is currently operating
in run-off. The acquisition was effected through Hillcot
Holdings Ltd. (Hillcot), a newly formed Bermuda
company, in which Castlewood Holdings has a 50.1% economic
interest and a 50% voting interest. Upon completion of the
transaction,
Toa-UKs name was
changed to Hillcot Re Limited. Hillcot is included in
Castlewood Holdings consolidated financial statements,
with the remaining 49.9% economic interest reflected as minority
interest. J. Christopher Flowers
(Mr. Flowers), a member of the Companys
board of directors and the Companys largest shareholder,
is a director and the largest shareholder of Shinsei. Castlewood
Holdings results of operations include the results of
Toa-UK from the date of
acquisition in March 2003.
In August 2004, Castlewood Holdings implemented an employee
stock-based compensation plan. The plan allows for the award of
Castlewood Holdings Class D non-voting shares to
certain senior employees up to a maximum of 7.5% of the total
issued share capital of Castlewood Holdings. As a result of
awards made in 2005 and 2004, the Companys economic
interest in Castlewood Holdings of
331/3%
has been diluted by 0.70% to 32.63% as of December 31,
2005. As awarded shares vest and as additional shares are
awarded in the future, the Companys economic interest
could decrease to a minimum of 30.83%. The Companys voting
interest will remain at 50%.
During 2004, Castlewood Holdings, through one of its
subsidiaries, invested a total of approximately
$9.1 million in Cassandra Equity LLC and Cassandra Equity
(Cayman) LP, (collectively, Cassandra), for a 27%
interest in each. Cassandra was formed to invest in equity
shares of a publicly traded international reinsurance company.
J.C. Flowers I LP also owned a 27% interest in
Cassandra. J.C. Flowers I LP is a private investment
fund, the general partner of which is JCF Associates I LLC.
Mr. Flowers is the managing member of JCF Associates I LLC.
In March 2005, Cassandra sold all of its holdings for total
proceeds of approximately $40.0 million. Castlewood
Holdings proportionate share of the proceeds was
approximately $10.8 million.
Also during 2004, Castlewood Holdings, through one of its
subsidiaries, completed the acquisition of Mercantile Indemnity
Company Ltd., Harper Insurance Limited and Longmynd Insurance
Company Ltd. for a total purchase price of approximately
$4.5 million. Castlewood Holdings recorded an extraordinary
gain of approximately $21.8 million relating to the excess
of the fair value of the net assets acquired over the cost of
these acquisitions.
In May 2005, Castlewood Holdings, through one of its
subsidiaries, purchased Fieldmill Insurance Company Limited
(formerly known as Harleysville Insurance Company
(UK) Limited) for approximately $1.4 million.
In December 2005, Castlewood Holdings and Shinsei signed
definitive agreements for the purchase of Aioi Insurance Company
of Europe Limited (Aioi Europe), a London-based
subsidiary of Aioi Insurance Company, Limited. Aioi Europe has
underwritten general insurance and reinsurance business in
Europe for its own account until 2002 when it generally ceased
underwriting, and placed into run-off, its general insurance and
reinsurance business. The aggregate purchase price to be paid
for Aioi Europe is £62 million (approximately
$108 million), with £50 million in cash upon the
closing of the transaction and £12 million in the form
of a promissory note, payable twelve months from the date of the
closing. The acquisition will be effected through Hillcot, a
Bermuda-based company, which is jointly owned by Castlewood
Holdings and
43
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shinsei. Subject to regulatory approval, the acquisition is
expected to be completed during the first quarter of 2006.
(c) B-Line The Company owned membership
units of B-Line from November 1998 to December 2003. Based in
Seattle, Washington, B-Line provides services to credit card
issuers and other holders of similar receivables. B-Line also
purchases credit card receivables and recovers payments on these
accounts. In December 2003, the Company sold its entire interest
in B-Line to B-Line Holdings LLC, an affiliate of Golden Gate
Capital, for cash of approximately $7.8 million, net of
expenses, resulting in a pre-tax gain of approximately
$3.3 million.
(d) Green Tree During 2003, the Company
funded approximately $15.3 million to the JCF CFN Entities
in exchange for a 60% interest in such entities. In addition,
Castlewood Holdings funded approximately $10.2 million to
the JCF CFN Entities in exchange for a 40% interest.
The JCF CFN Entities invested in Green Tree together with
affiliates of J.C. Flowers I LP, affiliates of Fortress
Investment Group LLC and affiliates of Cerberus Capital
Management, L.P. In June 2003, the JCF CFN Entities invested
approximately $25.1 million in exchange for a 3.995%
interest in Green Tree. Green Tree completed the purchase of
certain assets of Conseco Finance for approximately
$630 million in cash plus certain assumed liabilities. The
assets consisted primarily of a portfolio of home equity and
manufactured housing loan securities as well as the associated
servicing businesses. J.C. Flowers I LP is a private investment
fund, the general partner of which is JCF Associates I LLC. The
managing member of JCF Associates I LLC is Mr. Flowers, a
member of the Companys board of directors and the
Companys largest shareholder. The JCF CFN Entities
accounted for the investment in Green Tree under the equity
method of accounting. Because the JCF CFN Entities are
consolidated, Green Tree was treated as a partially owned equity
affiliate of the Company.
In July 2004, the JCF CFN Entities, along with certain
affiliates of J.C. Flowers I LP, completed the sale of their
entire interests in Green Tree to FIT CFN Holdings LLC, an
affiliate of Fortress Investment Group LLC, and Cerberus Green
Tree Investments, LLC and Cerberus JCF Coinvest, LLC, each an
affiliate of Cerberus Capital Management L.P. In exchange for
their entire interest, the JCF CFN Entities received aggregate
sales proceeds of approximately $40 million in cash. Of
this amount, Castlewood Holdings received aggregate sales
proceeds of approximately $16 million. The proceeds
received by the JCF CFN Entities at completion of the sale were
reduced by prior cash distributions of approximately
$7.2 million made by Green Tree during 2004. The Company
recorded a pre-tax realized gain of approximately
$6.9 million on the sale.
(e) Affirmative Investment LLC In June
2005, the Company committed to contribute up to $10 million
for a 14%, non-voting interest in Affirmative Investment LLC
(Affirmative Investment), a newly formed Delaware
limited liability company. J.C. Flowers I LP committed the
capital necessary for the remaining 86% interest in Affirmative
Investment. Both J.C. Flowers I LP and Affirmative Associates
LLC, the managing member of Affirmative Investment, are
controlled by Mr. Flowers, a member of the Companys
board of directors and the Companys largest shareholder.
In July 2005, the Company funded its initial capital
contribution of approximately $2.6 million. Since that
time, the Company has funded additional capital contributions of
approximately $5.7 million. At December 31, 2005, the
Companys total investment in Affirmative Investment was
approximately $8.5 million, including equity in earnings
from July 1 to December 31, 2005. The Companys
ownership in Affirmative Investment is accounted for using the
equity method of accounting.
Also in June 2005, Affirmative Investment acquired
1,183,000 shares of common stock of Affirmative Insurance
Holdings, Inc. (Affirmative Insurance), through open
market purchases. In August, Affirmative Investment acquired 50%
of the membership interests of New Affirmative LLC
(NAL), a newly formed Delaware limited liability
company, for approximately $40.7 million in cash and the
1,183,000 shares of Affirmative Insurance. The remaining
50% of the membership interests of NAL were acquired by Delaware
44
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Street Capital Master Fund, LP or its affiliates
(DSC) for approximately $37.5 million in cash
and 1,459,699 shares of Affirmative Insurance common stock.
In turn, NAL, pursuant to a Stock Purchase Agreement with Vesta
Insurance Group, Inc. (VIG) and Vesta Fire Insurance
Corporation, a subsidiary of VIG (together with VIG,
Vesta), acquired from Vesta an aggregate of
5,218,228 shares of Affirmative Insurance common stock for
a purchase price of $15.00 per share. Upon the closing of
the transaction with Vesta and the transfer of the shares of
Affirmative Insurance from Affirmative Investment and DSC,
NALs ownership percentage in Affirmative Insurance was
approximately 52.9%. Affirmative Investments ownership in
NAL is accounted for using the equity method of accounting.
Affirmative Investment accounts for its investment in NAL three
months in arrears.
(f) Summarized Financial Information In
accordance with APB No. 18, The Equity Method of
Accounting for Investments in Common Stock, the Company
prepared summarized financial information for
B.H. Acquisition and Castlewood Holdings as of
December 31, 2005 and 2004 and for each of the three years
ended December 31, 2005. Summarized financial information
for Affirmative Investment is presented as of December 31,
2005 and for the period from June 30, 2005 (date of
formation) through December 31, 2005. Summarized financial
information for Green Tree for 2004 is presented for the period
from January 1 to July 15. The information for 2003 is
presented as of December 31 and for the period from
June 23 to December 31 (Green Tree was acquired in
June 2003 and sold in July 2004). Summarized financial
information for B-Line
is presented for the period from January 1, 2003 through
December 23, 2003 (date of sale). The summarized financial
information presented below for B.H. Acquisition and Castlewood
Holdings is derived from their audited financial statements. The
summarized financial information presented below for Affirmative
Investment is derived from its 2005 unaudited financial
statements. The summarized financial information presented below
for Green Tree is derived from its 2003 audited financial
statements and 2004 quarterly financial statements. Prior to the
fourth quarter of 2003, the Company accounted for its investment
in B-Line three months
in arrears. In 2003, the Company recorded the results of
operations of B-Line
through the date of the sale. The summarized information
presented below for
B-Line has been derived
from its unaudited quarterly financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
B.H. | |
|
Castlewood | |
|
Affirmative | |
|
|
Acquisition | |
|
Holdings | |
|
Investment | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Total assets
|
|
$ |
105,578 |
|
|
$ |
1,199,963 |
|
|
$ |
60,199 |
|
Total liabilities
|
|
|
66,733 |
|
|
|
898,513 |
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
40,544 |
|
|
|
|
|
Total equity
|
|
|
38,845 |
|
|
|
260,906 |
|
|
|
60,199 |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
B.H. | |
|
Castlewood | |
|
|
Acquisition | |
|
Holdings | |
|
|
| |
|
| |
|
|
(Dollars in thousands) | |
Total assets
|
|
$ |
110,414 |
|
|
$ |
1,347,853 |
|
Total liabilities
|
|
|
71,748 |
|
|
|
1,139,123 |
|
Minority interest
|
|
|
|
|
|
|
31,392 |
|
Total equity
|
|
|
38,666 |
|
|
|
177,338 |
|
45
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
B.H. | |
|
Castlewood | |
|
Affirmative | |
|
|
Acquisition | |
|
Holdings | |
|
Investment | |
|
|
| |
|
| |
|
| |
|
|
(Restated) | |
|
(Restated) | |
|
|
|
|
(Dollars in thousands) | |
Revenue
|
|
|
|
|
|
$ |
22,006 |
|
|
|
|
|
Operating income
|
|
$ |
179 |
|
|
|
91,132 |
|
|
$ |
2,246 |
|
Net income
|
|
|
179 |
|
|
|
80,710 |
|
|
|
856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
|
| |
|
|
B.H. | |
|
Castlewood | |
|
|
|
|
Acquisition | |
|
Holdings | |
|
Green Tree | |
|
|
| |
|
| |
|
| |
|
|
(Restated) | |
|
(Restated) | |
|
|
|
|
(Dollars in thousands) | |
Revenue
|
|
|
|
|
|
$ |
23,703 |
|
|
$ |
262,327 |
|
Operating income
|
|
$ |
359 |
|
|
|
14,675 |
|
|
|
123,842 |
|
Net income
|
|
|
359 |
|
|
|
38,294 |
|
|
|
99,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003 | |
|
|
| |
|
|
|
|
B.H. | |
|
Castlewood | |
|
|
|
|
B-Line | |
|
Acquisition | |
|
Holdings | |
|
Green Tree | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Restated) | |
|
(Restated) | |
|
|
|
|
(Dollars in thousands) | |
Revenue
|
|
$ |
67,958 |
|
|
|
|
|
|
$ |
24,746 |
|
|
$ |
244,758 |
|
Operating income
|
|
|
20,215 |
|
|
$ |
888 |
|
|
|
35,570 |
|
|
|
100,699 |
|
Net income
|
|
|
20,215 |
|
|
|
888 |
|
|
|
30,592 |
|
|
|
96,318 |
|
The Companys consolidated accumulated deficit includes
undistributed earnings of its partially owned equity affiliates
of approximately $52.6 million and approximately
$26.1 million at December 31, 2005 and 2004,
respectively.
|
|
Note 6: |
Other Investments |
In December 2005, the Company invested approximately
$3.5 million in New NIB Partners LP (NIB
Partners), a newly formed Province of Alberta limited
partnership, in exchange for an approximately .2% limited
partnership interest. Castlewood Holdings, through two of its
wholly-owned subsidiaries, also invested approximately
$24.5 million in NIB Partners for an approximately 1.4%
interest. NIB Partners was formed for the purpose of purchasing,
together with certain affiliated entities, 100% of the
outstanding share capital of NIBC N.V. (formerly, NIB Capital
N.V.) and its affiliates (NIBC). NIBC is a merchant
bank focusing on the mid-market segment in northwest Europe with
a global distribution network. The Companys investment in
NIB Partners is accounted for at cost.
New NIB Partners and certain related entities are indirectly
controlled by New NIB Limited, an Irish corporation.
Mr. Flowers is a director of New NIB Limited and is on the
supervisory board of NIBC. Certain affiliates of
J.C. Flowers I LP also participated in the acquisition
of NIBC.
|
|
Note 7: |
Commitments and Contingencies |
In December 2004, the Company signed a one year lease beginning
January 1, 2005 on an office building at 401 Madison
Avenue, Montgomery, Alabama which serves as the corporate
headquarters. The lease also provides renewal options for three
periods of one year each. In December 2005, the Company signed a
one year renewal option beginning January 1, 2006.
Additionally, pursuant to an oral agreement, the Company leases
space in a warehouse at 703 Howe Street, Montgomery,
Alabama on a
month-to-month basis.
The Company leases the office building and warehouse space from
unaffiliated third parties for $3,000 and
46
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$350 per month, respectively. The Company believes the
rental amounts are competitive with market rates and that the
cancellation or termination of either of these leases would not
have a material adverse effect on the Companys results of
operations. In September 2005, the Company entered into an
agreement with J.C. Flowers & Co. LLC continuing
through October 2014 for the use of certain office space and
administrative services from J.C. Flowers & Co.
LLC for monthly payments of $4,146. Either party may, at its
option with or without cause, terminate this agreement upon
thirty (30) days prior written notice to the other party.
J.C. Flowers & Co. LLC is managed by
Mr. Flowers, a member of the Companys board of
directors and the Companys largest shareholder. The
Company does not own any real property. Including payments made
to J.C. Flowers & Co. LLC, the Company incurred rent
expense in the amount of $77,000, $80,000 and $80,000 for the
three years ended December 31, 2005, 2004 and 2003,
respectively.
In February 2006, the Company announced that it approved a
commitment of up to $25.0 million in
J.C. Flowers II LP (the J.C. Flowers
Fund), a private investment fund to be formed by J.C.
Flowers & Co. LLC. The transaction is expected to close
in the second quarter. The Company intends to use cash on hand
to fund its commitment.
J.C. Flowers & Co. LLC is controlled by
J. Christopher Flowers, a member of the Companys
board of directors and the Companys largest shareholder.
No fees will be payable by the Company to
J.C. Flowers II LP, J.C. Flowers & Co.
LLC, or J. Christopher Flowers in connection with the
Companys investment in the J.C. Flowers Fund.
The provision for income taxes consists of the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Current tax expense (benefit)
|
|
$ |
6,134 |
|
|
$ |
(586 |
) |
|
$ |
2,299 |
|
Deferred taxes
|
|
|
2,783 |
|
|
|
5,395 |
|
|
|
688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,917 |
|
|
$ |
4,809 |
|
|
$ |
2,987 |
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of income taxes computed at statutory rates
to the actual tax provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Federal income taxes at statutory rate
|
|
$ |
9,507 |
|
|
$ |
4,678 |
|
|
$ |
5,887 |
|
State income taxes, net of federal benefit
|
|
|
(86 |
) |
|
|
502 |
|
|
|
291 |
|
Minority interest
|
|
|
|
|
|
|
(1,011 |
) |
|
|
(375 |
) |
Change in valuation allowance
|
|
|
(189 |
) |
|
|
640 |
|
|
|
(2,818 |
) |
Other
|
|
|
(315 |
) |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,917 |
|
|
$ |
4,809 |
|
|
$ |
2,987 |
|
|
|
|
|
|
|
|
|
|
|
47
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
reported for income tax purposes. The following items comprise
the Companys deferred taxes at December 31, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in thousands) | |
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
Alternative minimum tax credit carryforwards
|
|
$ |
631 |
|
|
$ |
4,850 |
|
|
Losses of partially owned equity affiliates
|
|
|
6,172 |
|
|
|
5,171 |
|
|
Other
|
|
|
1,262 |
|
|
|
992 |
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
8,065 |
|
|
|
11,013 |
|
|
Valuation allowance
|
|
|
(5,624 |
) |
|
|
(5,813 |
) |
|
|
|
|
|
|
|
|
|
|
2,441 |
|
|
|
5,200 |
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of partially owned equity affiliates
|
|
|
(12,712 |
) |
|
|
(12,687 |
) |
|
Other
|
|
|
(130 |
) |
|
|
(243 |
) |
|
|
|
|
|
|
|
|
|
|
(12,842 |
) |
|
|
(12,930 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$ |
10,401 |
|
|
$ |
7,730 |
|
|
|
|
|
|
|
|
The Company provides U.S. taxes for the anticipated
repatriation of certain earnings of foreign subsidiaries. Losses
incurred by those foreign subsidiaries result in deferred tax
assets. The ultimate realization of the deferred tax assets
depends on the ability to generate sufficient taxable income in
the future in the appropriate jurisdictions. A valuation
allowance is recorded when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The Company has provided a valuation allowance for operating
losses of partially owned foreign subsidiaries for the years
2005 and 2004, respectively. During 2005 and 2004, the Company
changed the valuation allowance by approximately $(189,000) and
$640,000, respectively to approximately $5.6 million and
$5.8 million, respectively. During 2003, the Company
decreased the valuation allowance by approximately
$2.8 million to approximately $5.2 million to reflect
the utilization of credits.
The Company has established reserves for tax-related
uncertainties based on its best estimates of whether, and the
extent to which, additional taxes and interest will be due.
These reserves are adjusted in light of changing facts and
circumstances. At December 31, 2005, the accrual of
$2.3 million for tax contingencies is reflected in accrued
taxes on the balance sheet.
|
|
Note 9: |
Shareholders Equity |
(a) Share Purchase Rights Plan In
January 1997, the Board of Directors of the Company adopted a
Share Purchase Rights Plan (the Rights Plan). The
Rights Plan entitles shareholders to purchase one share of
common stock for each outstanding share of common stock of the
Company (a Right). Until the occurrence of a
Distribution Triggering Event as described below,
all future issuances of common stock by the Company will also
carry the Rights. The Rights will have no dividend or voting
rights and will expire on the tenth anniversary of their
issuance unless exercised or redeemed prior to that time.
Rights may not be exercised and are not detached from the common
stock until ten days after the occurrence of a Distribution
Triggering Event. The exercise price of the Rights is fixed at
$40. The Rights generally are redeemable by the Board of
Directors of the Company at a nominal price of $.01 per
Right at any time prior to the time that they are detached from
the common stock and separate certificates evidencing the Rights
are delivered. As of December 31, 2005, no Rights were
exercised.
Distribution Triggering Events. Shortly after a person or
group acquires beneficial ownership of a fifteen percent (15%)
interest or announces its intention to commence a tender or
exchange offer, the consummation
48
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of which would result in beneficial ownership of fifteen percent
(15%) of the Companys common stock (a Distribution
Triggering Event), the Rights will separate from the
common stock. Upon distribution of the Rights, they become
exercisable and are transferable separately from the
Companys common stock. Each Right (other than Rights
beneficially owned by the acquiror) is then immediately
converted into the right to buy that number of shares of common
stock of the Company (or in certain circumstances, shares of
stock of the acquiring company) that has a market value of two
times the exercise price of the Right.
(b) Treasury Stock In April 1998, the
Company announced a stock repurchase program under which the
Company could repurchase up to $5.0 million of its common
stock in the open market at prices per share deemed favorable
from time to time by the Company. The Company repurchased
54,525 shares of its common stock for approximately
$815,000 as part of this plan. Through this plan and a similar
plan completed in the first quarter of 1998, the Company has
repurchased a total of 442,351 shares for approximately
$5.8 million as of December 31, 2005.
(c) Deferred Compensation of Partially Owned Equity
Affiliates The Company recorded its
proportionate share of deferred compensation reported by
Castlewood Holdings, one of its partially owned equity
affiliates. The deferred compensation arose from stock based
compensation awards entered into during 2002 with certain senior
employees of Castlewood Holdings.
|
|
Note 10: |
Stock Compensation |
(a) Deferred Compensation and Stock Plan for
Non-Employee Directors In September 1997, the
Company adopted a Deferred Compensation and Stock Plan for
Non-Employee Directors. The purposes of this plan are to enable
the Company to attract and retain qualified persons to serve as
non-employee directors, to solidify the common interests of its
non-employee directors and shareholders by enhancing the equity
interest of non-employee directors in the Company, and to
encourage the highest level of non-employee director performance
by providing such non-employee directors with a proprietary
interest in the Companys performance and progress by
permitting 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. Approximately $853,000 and $662,000 in stock
compensation were deferred under this plan as of
December 31, 2005, and 2004, respectively. In May 2004
Jeffrey S. Halis resigned from the Companys board of
directors. Upon his resignation, Mr. Halis was issued
12,156 shares of the Companys common stock in
connection with this plan, representing approximately $225,000
in deferred compensation.
(b) Long-Term Incentive Program In
January 1997, the Company adopted a long-term incentive program
made up of three stock option/incentive plans. Under the
program, the Company established the 1997 Amended CEO Stock
Option Plan (the CEO Plan), the 1997 Amended Outside
Directors Stock Option Plan (the
1997 Directors Plan), and the 1997
Amended Omnibus Incentive Plan (the Incentive Plan).
In May 2001, the Company adopted the 2001 Directors
Plan and amended certain provisions of the Incentive Plan.
(Note 3).
Under the CEO Plan, Nimrod T. Frazer, the Companys Chief
Executive Officer and Chairman, was granted options for
150,000 shares of common stock with an exercise price of
$10.50 in 1997. The options granted under the CEO Plan vested in
four equal installments of 37,500 options through
January 1, 2000, and expire in January 2007.
Under the 1997 Directors Plan, each of the
Companys four outside directors was granted options for
25,000 shares of common stock in 1997. The options have an
exercise price of $10.8125 and vested in five equal installments
of 5,000 options through January 1, 2001. The options
granted under the 1997 Directors Plan expire in
January 2007. In May 2004, Mr. Halis exercised options for
25,000 shares of the Companys common stock at a total
exercise price of approximately $270,000 in connection with this
plan.
49
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Incentive Plan was established for the benefit of key
employees and directors and provides generally for stock
appreciation awards, incentive stock options and nonqualified
stock options. In March 2000, John J. Oros, the Companys
President and Chief Operating Officer, was granted options for
100,000 shares of common stock with an exercise price of
$12.75. These options vested in three installments: 50,000 on
March 2, 2001 and 25,000 each on March 2, 2002 and
2003. These options expire in February 2010.
In connection with the consummation of the River Thames
Transaction in November 2001, Messrs. Frazer and Oros were
granted options under the Incentive Plan to purchase a total of
100,000 shares (50,000 per individual) at
$18.00 per share. These options vested on various dates
through July 2004 and will expire in June 2011. Since the market
price per share of the Companys common stock on the date
of grant exceeded the exercise price, the Company recognized a
charge to earnings in 2004 and 2003 of $19,000 and $95,000,
respectively.
In connection with the consummation of the Castlewood Holdings
Transaction in November 2001, Messrs. Frazer and Oros were
granted options under the Incentive Plan to purchase a total of
100,000 shares (50,000 per individual) at
$19.25 per share. These options vested on various dates
through July 2004 and will expire in September 2011. Since the
market price per share of the Companys common stock on the
date of grant exceeded the exercise price, the Company
recognized a charge to earnings in 2004 and 2003 of $14,000 and
$71,000, respectively.
Under the 2001 Directors Plan, the Companys
then current outside (non-employee) directors were each granted
options in June 2001 for 15,000 shares of common stock with
an exercise price of $18.90 per share. Options granted to
each of the three outside directors under the plan vested in
three equal installments of 5,000 shares in each of January
2002, January 2003 and January 2004. The options granted under
this plan must be exercised no later than January 2011. In May
2004, Mr. Halis exercised options for 15,000 shares of
the Companys common stock at a total exercise price of
approximately $284,000 in connection with this plan.
In May 2003, the Companys shareholders approved certain
amendments to the Companys Incentive Plan. The amendments
increased the total number of shares of common stock available
to be granted under the plan from 322,500 to 522,500, and
increased the aggregate number of shares of common stock that
may be granted to any individual participant from 200,000 to
300,000.
In August 2003, under the Incentive Plan, the Company granted
60,000 options to Mr. Frazer, 100,000 options to
Mr. Oros, and 5,000 options to Gregory L. Curl, a member of
the Companys board of directors. The options granted to
Messrs. Frazer and Oros vest in four equal annual
installments starting January 1, 2005. The options granted
to Mr. Curl vested on August 19, 2004. All options
have an exercise price of $40.00, the closing market price on
the date of grant, and expire in August 2013.
In April 2005, under the Incentive Plan, the Company granted
5,000 options to Paul J. Collins, a member of the Companys
board of directors. The options granted to Mr. Collins vest
on April 4, 2006, have an exercise price of $57.81, the
closing market price on the date of grant, and expire in April
2015.
50
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Transactions under the Companys stock option/incentive
plans as of and for the three years ended December 31, 2005
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Under option, January 1
|
|
|
720,000 |
|
|
|
760,000 |
|
|
|
595,000 |
|
Granted
|
|
|
5,000 |
|
|
|
|
|
|
|
165,000 |
|
Exercised
|
|
|
|
|
|
|
(40,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under option, December 31
|
|
|
725,000 |
|
|
|
720,000 |
|
|
|
760,000 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31
|
|
|
600,000 |
|
|
|
560,000 |
|
|
|
540,000 |
|
|
|
|
|
|
|
|
|
|
|
Available to be granted, December 31
|
|
|
52,500 |
|
|
|
57,500 |
|
|
|
57,500 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise prices per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under option, January 1
|
|
$ |
20.21 |
|
|
$ |
19.88 |
|
|
$ |
14.30 |
|
|
Granted
|
|
|
57.81 |
|
|
|
|
|
|
|
40.00 |
|
|
Exercised
|
|
|
|
|
|
|
13.85 |
|
|
|
|
|
|
Under option, December 31
|
|
|
20.47 |
|
|
|
20.21 |
|
|
|
19.88 |
|
|
Exercisable, December 31
|
|
|
16.25 |
|
|
|
14.56 |
|
|
|
13.85 |
|
Stock options outstanding and exercisable under these plans as
of December 31, 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
Exercisable | |
| |
|
| |
Ranges of | |
|
Weighted Average | |
|
|
Exercise | |
|
Number of | |
|
Weighted Average | |
|
Remaining | |
|
Number of | |
|
Weighted Average | |
Prices | |
|
Options | |
|
Exercise Price | |
|
Contractual Life | |
|
Options | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$10 20 |
|
|
|
555,000 |
|
|
$ |
14.33 |
|
|
|
3.5 years |
|
|
|
555,000 |
|
|
|
$14.33 |
|
|
40 60 |
|
|
|
170,000 |
|
|
|
40.52 |
|
|
|
7.7 years |
|
|
|
45,000 |
|
|
|
$40.00 |
|
|
|
Note 11: |
Income per Share |
The table below illustrates the reconciliation between net
income per common share basic and net income per
common share assuming dilution for 2005, 2004 and
2003. Net income per common share basic is computed
by dividing net income by the weighted average shares
outstanding. Net income per common share assuming
dilution is computed by dividing net income by the sum of the
weighted average shares outstanding and common share
equivalents. Common share equivalents consist of stock units
deferred
51
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
under the Deferred Compensation and Stock Plan for Non-Employee
Directors and stock options granted under the Companys
stock option/incentive plans (Note 10).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands, | |
|
|
except per share data) | |
Income before extraordinary gain
|
|
$ |
19,045 |
|
|
$ |
5,977 |
|
|
$ |
13,226 |
|
Extraordinary gain, net of income taxes
|
|
|
|
|
|
|
4,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
19,045 |
|
|
$ |
10,392 |
|
|
$ |
13,226 |
|
|
|
|
|
|
|
|
|
|
|
Income per common share before extraordinary gain
basic
|
|
$ |
3.45 |
|
|
$ |
1.09 |
|
|
$ |
2.42 |
|
Extraordinary gain, net of income taxes basic
|
|
|
|
|
|
|
.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$ |
3.45 |
|
|
$ |
1.89 |
|
|
$ |
2.42 |
|
|
|
|
|
|
|
|
|
|
|
Income per common share before extraordinary gain
assuming dilution
|
|
$ |
3.25 |
|
|
$ |
1.03 |
|
|
$ |
2.25 |
|
Extraordinary gain, net of income taxes assuming
dilution
|
|
|
|
|
|
|
.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share assuming dilution
|
|
$ |
3.252 |
|
|
$ |
1.79 |
|
|
$ |
2.25 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
5,517,909 |
|
|
|
5,496,819 |
|
|
|
5,465,753 |
|
Common share equivalents
|
|
|
338,235 |
|
|
|
304,174 |
|
|
|
415,657 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution
|
|
|
5,856,144 |
|
|
|
5,800,993 |
|
|
|
5,881,410 |
|
|
|
|
|
|
|
|
|
|
|
There were 165,000 antidilutive common stock equivalents for the
year ended December 31, 2003. There were no antidilutive
common stock equivalents for the years ended December 31,
2005 and 2004.
|
|
Note 12: |
Segment Information |
The Company separately evaluates the performance of B.H.
Acquisition and Castlewood Holdings based on the different
services provided by each of the entities, and such evaluation
is based on 100% of the entities results of operations.
Because the Company separately evaluates the financial results
of each of its partially owned equity affiliates on a gross
basis, the amounts presented herein represent the gross results
of each entity. The amounts in excess of the Companys
ownership percentage are eliminated as part of the
reconciliation from the gross amounts presented to the measure
of profit or loss included in the consolidated financial
statements. Prior to the sale of the Companys interests in
Green Tree and B-Line in July 2004 and December 2003,
respectively, the Company separately evaluated the performance
of the JCF CFN Entities and B-Line. The Company also reviews
separate financial results for Affirmative Investment and
Enstars corporate activity.
B.H. Acquisition, through its wholly owned subsidiaries,
Brittany and CEAI, is principally engaged in the active
management of books of reinsurance business from international
markets. Castlewood Holdings acquires and manages insurance and
reinsurance companies, including companies in run-off, and
provides management, consulting and other services to the
insurance and reinsurance industry. Affirmative Investment was
formed to facilitate the participation of its members in the
purchase, sale and ownership of membership interests of NAL and
common stock of Affirmative Insurance. The JCF CFN Entities were
formed to serve as a member of Green Tree which, in turn, was
formed to effect the acquisition of a portfolio of home equity
and manufactured housing loan securities and associated
servicing businesses from Conseco Finance. B-Line provided
services to credit card issuers and other holders of similar
receivables. B-Line also purchased credit card receivables and
recovered payments on these accounts.
52
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The consolidated financial information for B.H. Acquisition and
Castlewood Holdings is reported for all years presented.
Summarized financial information for Affirmative Investment is
presented as of December 31, 2005 and for the period from
June 30, 2005 (date of formation) to December 31,
2005. Summarized financial information for JCF CFN for 2004 is
presented for the period from January 1 to July 15. The
information for 2003 is presented for the period from
June 23 to December 31 (Green Tree was acquired by JCF
CFN in June 2003 and sold in July 2004). Summarized
financial information for
B-Line is presented for
the period from January 1, 2003 through December 23,
2003 (date of sale). A reconciliation of the consolidated
financial information by segment to the Companys
consolidated financial statements as of December 31, 2005
and 2004 and for each of the three years ended December 31,
2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
|
|
B.H. | |
|
Castlewood | |
|
Affirmative | |
|
|
|
|
Corporate | |
|
Acquisition | |
|
Holdings | |
|
Investment | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Total reportable segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partially owned equity affiliates
|
|
|
|
|
|
$ |
12,906 |
|
|
$ |
85,908 |
|
|
$ |
8,515 |
|
|
$ |
107,329 |
|
|
Corporate assets
|
|
$ |
77,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
77,891 |
|
|
$ |
12,906 |
|
|
$ |
85,908 |
|
|
$ |
8,515 |
|
|
$ |
185,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
|
|
B.H. | |
|
Castlewood | |
|
|
|
|
Corporate | |
|
Acquisition | |
|
Holdings | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Total reportable segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partially owned equity affiliates
|
|
|
|
|
|
$ |
12,843 |
|
|
$ |
59,775 |
|
|
$ |
72,618 |
|
|
Corporate assets
|
|
$ |
86,359 |
|
|
|
|
|
|
|
|
|
|
|
86,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
86,359 |
|
|
$ |
12,843 |
|
|
$ |
59,775 |
|
|
$ |
158,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
|
|
B.H. | |
|
Castlewood | |
|
Affirmative | |
|
|
|
|
Corporate | |
|
Acquisition | |
|
Holdings | |
|
Investment | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Restated) | |
|
(Restated) | |
|
|
|
|
|
|
(Dollars in thousands) | |
Revenue
|
|
|
|
|
|
|
|
|
|
$ |
22,006 |
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
1,824 |
|
|
$ |
2,406 |
|
|
|
29,504 |
|
|
$ |
(1,390 |
) |
|
|
|
|
Interest income
|
|
|
2,333 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Net (increase) reduction in loss and loss adjustment expense
liabilities
|
|
|
|
|
|
|
(552 |
) |
|
|
96,007 |
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(3,110 |
) |
|
|
(2,275 |
) |
|
|
(51,783 |
) |
|
|
|
|
|
|
|
|
Amortization of run-off provision
|
|
|
|
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange loss
|
|
|
|
|
|
|
(67 |
) |
|
|
(4,602 |
) |
|
|
|
|
|
|
|
|
Share of net income of partly-owned companies
|
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
2,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,449 |
|
|
|
179 |
|
|
|
91,324 |
|
|
|
856 |
|
|
|
|
|
Income taxes
|
|
|
(8,917 |
) |
|
|
|
|
|
|
(914 |
) |
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(9,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(7,468 |
) |
|
$ |
179 |
|
|
$ |
80,710 |
|
|
$ |
856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys economic ownership %
|
|
|
|
|
|
|
33 |
% |
|
|
32.63 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of partially owned equity affiliates
|
|
|
|
|
|
$ |
59 |
|
|
$ |
26,334 |
|
|
$ |
120 |
|
|
$ |
26,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys economic ownership percentage in Castlewood
Holdings decreased from 32.89% to 32.63% during the second
quarter of 2005. The Companys economic ownership
percentage used in the above table represents a weighted average
for the year (Note 5).
54
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
|
| |
|
|
|
|
B.H. | |
|
Castlewood | |
|
|
|
|
Corporate | |
|
Acquisition | |
|
Holdings | |
|
JCF CFN | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(Restated) | |
|
(Restated) | |
|
|
|
|
|
|
(Dollars in thousands) | |
Revenue
|
|
|
|
|
|
|
|
|
|
$ |
23,703 |
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
$ |
1,489 |
|
|
|
10,502 |
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss adjustment expense liabilities
|
|
|
|
|
|
|
428 |
|
|
|
13,706 |
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(2,981 |
) |
|
|
(2,839 |
) |
|
|
(36,967 |
) |
|
|
|
|
|
|
|
|
Amortization of run-off provision
|
|
|
|
|
|
|
1,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Green Tree
|
|
|
6,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
498 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
|
|
|
|
|
(142 |
) |
|
|
3,731 |
|
|
|
|
|
|
|
|
|
Share of net income of partly-owned companies
|
|
|
|
|
|
|
|
|
|
|
6,881 |
|
|
$ |
4,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,411 |
|
|
|
359 |
|
|
|
21,556 |
|
|
|
4,255 |
|
|
|
|
|
Income taxes
|
|
|
(7,550 |
) |
|
|
|
|
|
|
(1,924 |
) |
|
|
|
|
|
|
|
|
Minority interest
|
|
|
(2,973 |
) |
|
|
|
|
|
|
(3,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary gain
|
|
|
(5,112 |
) |
|
|
359 |
|
|
|
16,535 |
|
|
|
4,255 |
|
|
|
|
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
21,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(5,112 |
) |
|
$ |
359 |
|
|
$ |
38,294 |
|
|
$ |
4,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys economic ownership %
|
|
|
|
|
|
|
33 |
% |
|
|
32.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,618 |
|
|
|
|
|
|
|
|
|
Companys portion of earnings from JCF CFN
|
|
|
|
|
|
|
|
|
|
|
(1,487 |
) |
|
|
|
|
|
|
|
|
Companys portion of pre-tax extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
(7,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of partially owned equity affiliates
|
|
|
|
|
|
$ |
118 |
|
|
$ |
3,975 |
|
|
$ |
4,255 |
|
|
$ |
8,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax amount of $7,550,000 included in the corporate
segment includes $2,741,000 which is netted against the
Companys proportionate share of an extraordinary gain in
the Companys consolidated statement of income. The
Companys economic ownership percentage in Castlewood
Holdings decreased from
331/3%
to 32.89% during the three months ended September 30, 2004.
The Companys economic ownership percentage used in the
above table represents a weighted average for the year
(Note 5).
55
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003 | |
|
|
| |
|
|
|
|
B.H. | |
|
Castlewood | |
|
|
|
|
Corporate | |
|
B-Line | |
|
Acquisition | |
|
Holdings | |
|
JCF CFN | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Restated) | |
|
(Restated) | |
|
|
|
|
|
|
(Dollars in thousands) | |
Revenue
|
|
|
|
|
|
$ |
67,958 |
|
|
|
|
|
|
$ |
24,746 |
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
$ |
1,331 |
|
|
|
7,072 |
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) reduction in loss and loss adjustment expense
liabilities
|
|
|
|
|
|
|
|
|
|
|
(230 |
) |
|
|
24,044 |
|
|
|
|
|
|
|
|
|
General and administrative
expenses
|
|
|
(3,105 |
) |
|
|
(38,890 |
) |
|
|
(1,648 |
) |
|
|
(22,654 |
) |
|
|
|
|
|
|
|
|
Amortization of run-off provision
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
(8,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of B-Line
|
|
|
3,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
484 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain
|
|
|
|
|
|
|
|
|
|
|
927 |
|
|
|
2,362 |
|
|
|
|
|
|
|
|
|
Share of net income of partly-owned companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,623 |
|
|
$ |
4,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,456 |
|
|
|
20,215 |
|
|
|
888 |
|
|
|
37,193 |
|
|
|
4,236 |
|
|
|
|
|
Income taxes
|
|
|
(2,987 |
) |
|
|
|
|
|
|
|
|
|
|
(1,490 |
) |
|
|
|
|
|
|
|
|
Minority interest
|
|
|
(1,103 |
) |
|
|
|
|
|
|
|
|
|
|
(5,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(2,634 |
) |
|
$ |
20,215 |
|
|
$ |
888 |
|
|
$ |
30,592 |
|
|
$ |
4,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys economic ownership %
|
|
|
|
|
|
|
8.34 |
% |
|
|
33 |
% |
|
|
331/3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,197 |
|
|
|
|
|
|
|
|
|
Companys portion of earnings from JCF CFN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of partially owned equity affiliates
|
|
|
|
|
|
$ |
1,686 |
|
|
$ |
293 |
|
|
$ |
9,645 |
|
|
$ |
4,236 |
|
|
$ |
15,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys ownership percentage in the JCF CFN Entities
changed from 100% to 60% in June 2003 when Castlewood Holdings
became a 40% member. A minority interest for Castlewood
Holdings portion of earnings from the JCF CFN Entities is
reported in the Corporate column.
56
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13: |
Unaudited Quarterly Financial Information |
A summary of the Companys unaudited quarterly results of
operations for the years ended December 31, 2005 and 2004
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter | |
|
|
| |
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands, except per share data) | |
|
|
(Unaudited) | |
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
482 |
|
|
$ |
561 |
|
|
$ |
608 |
|
|
$ |
682 |
|
Other investment income
|
|
|
|
|
|
|
604 |
|
|
|
487 |
|
|
|
733 |
|
Earnings of partially owned equity affiliates
|
|
|
265 |
|
|
|
1,046 |
|
|
|
1,186 |
|
|
|
24,016 |
|
Other income
|
|
|
100 |
|
|
|
101 |
|
|
|
100 |
|
|
|
101 |
|
General and administrative expenses
|
|
|
(780 |
) |
|
|
(861 |
) |
|
|
(617 |
) |
|
|
(852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
67 |
|
|
|
1,451 |
|
|
|
1,764 |
|
|
|
24,680 |
|
Income taxes
|
|
|
(28 |
) |
|
|
(655 |
) |
|
|
(794 |
) |
|
|
(7,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
39 |
|
|
$ |
796 |
|
|
$ |
970 |
|
|
$ |
17,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$ |
0.01 |
|
|
$ |
0.14 |
|
|
$ |
0.18 |
|
|
$ |
3.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share assuming dilution
|
|
$ |
0.01 |
|
|
$ |
0.14 |
|
|
$ |
0.17 |
|
|
$ |
2.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
177 |
|
|
$ |
201 |
|
|
$ |
259 |
|
|
$ |
346 |
|
Earnings of partially owned equity affiliates
|
|
|
3,000 |
|
|
|
1,980 |
|
|
|
(237 |
) |
|
|
3,605 |
|
Gain on sale of Green Tree
|
|
|
|
|
|
|
|
|
|
|
6,911 |
|
|
|
|
|
Other income
|
|
|
100 |
|
|
|
198 |
|
|
|
100 |
|
|
|
100 |
|
General and administrative expenses
|
|
|
(727 |
) |
|
|
(780 |
) |
|
|
(610 |
) |
|
|
(864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, minority interest and extraordinary
gain
|
|
|
2,550 |
|
|
|
1,599 |
|
|
|
6,423 |
|
|
|
3,187 |
|
Income taxes
|
|
|
(829 |
) |
|
|
(450 |
) |
|
|
(2,093 |
) |
|
|
(1,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and extraordinary gain
|
|
|
1,721 |
|
|
|
1,149 |
|
|
|
4,330 |
|
|
|
1,750 |
|
Minority interest
|
|
|
(623 |
) |
|
|
(446 |
) |
|
|
(1,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary gain
|
|
|
1,098 |
|
|
|
703 |
|
|
|
2,426 |
|
|
|
1,750 |
|
Extraordinary gain, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,098 |
|
|
$ |
703 |
|
|
$ |
2,426 |
|
|
$ |
6,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before extraordinary gain
basic
|
|
$ |
0.20 |
|
|
$ |
0.13 |
|
|
$ |
0.44 |
|
|
$ |
0.32 |
|
Extraordinary gain, net of income taxes basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$ |
0.20 |
|
|
$ |
0.13 |
|
|
$ |
0.44 |
|
|
$ |
1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before extraordinary gain
assuming dilution
|
|
$ |
0.19 |
|
|
$ |
0.12 |
|
|
$ |
0.42 |
|
|
$ |
0.30 |
|
Extraordinary gain, net of income taxes assuming
dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share assuming dilution
|
|
$ |
0.19 |
|
|
$ |
0.12 |
|
|
$ |
0.42 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
THE ENSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded other investment income in the second,
third and fourth quarters of 2005. Other investment income is
comprised of gains on sales of marketable securities and
dividend income.
The substantial increase in earnings from partially owned equity
affiliates in the fourth quarter of 2005 was primarily
attributable to the reduction in estimates of ultimate losses
that arose from commutations, policy buy-backs and settlement of
losses in the year below carried reserves and the resulting
reductions in actuarial estimates of losses incurred but not
reported.
The Company recorded a minority interest for Castlewood
Holdings portion of earnings from the JCF CFN Entities in
the first, second and third quarters of 2004.
In the fourth quarter of 2004, the Company recorded an
extraordinary gain of approximately $4.4 million, net of
income taxes. This gain represents the Companys
proportionate share of the excess of the fair value of net
assets acquired over the cost in the acquisition of Mercantile,
Harper and Longmynd by Castlewood Holdings.
|
|
Note 14: |
Subsequent Events |
In December 2005, Castlewood Holdings and Shinsei signed
definitive agreements for the purchase of Aioi Insurance Company
of Europe Limited (Aioi Europe), a London-based
subsidiary of Aioi Insurance Company, Limited. The aggregate
purchase price to be paid for Aioi Europe is
£62 million (approximately $108 million), with
£50 million in cash upon the closing of the
transaction and £12 million in the form of a
promissory note, payable twelve months from the date of the
closing. The acquisition will be effected through Hillcot, a
Bermuda-based company, which is jointly owned by Castlewood
Holdings and Shinsei. Castlewood Holdings commitment is
proportionate to its 50.1% ownership percentage in Hillcot.
Subject to regulatory approval, the acquisition is expected to
be completed during the first quarter of 2006.
In February 2006, the Company announced that it approved a
commitment of up to $25.0 million in J.C. Flowers II
LP (the J.C. Flowers Fund), a private investment
fund to be formed by J.C. Flowers & Co. LLC. The
transaction is expected to close in the second quarter of 2006.
The Company intends to use cash on hand to fund its commitment.
In March 2006, the Company announced that its partially owned
equity affiliate, Castlewood Holdings, approved a commitment of
up to $75.0 million in the J.C. Flowers Fund. Castlewood
Holdings intends to use cash on hand to fund its commitment.
J.C. Flowers & Co. LLC is controlled by J. Christopher
Flowers, a member of the Companys board of directors and
the Companys largest shareholder. No fees will be payable
by the Company or Castlewood Holdings to J.C. Flowers II
LP, J.C. Flowers & Co. LLC, or J. Christopher Flowers
in connection with the Companys or Castlewood
Holdings investment in the J.C. Flowers Fund.
58
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
Item 9A. |
Controls and Procedures |
Disclosure controls and procedures are the Companys
controls and other procedures that are designed to ensure that
information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act, is
recorded, processed, summarized and reported, within the time
periods specified in SEC rules and forms. Disclosure controls
and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits
under the Exchange Act are accumulated and communicated to the
Companys management, including its principal executive
officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
As described in Note 2 to the consolidated financial
statements hereto, subsequent to the period covered by this
report, management of the Company was informed that the
consolidated financial statements of the Companys
partially owned equity affiliates, Castlewood Holdings and B.H.
Acquisition, would be restated. After consulting with the Audit
Committee we determined to restate our financial statements for
fiscal year ended December 31, 2005 and for the first two
quarters of fiscal 2006 and to file a
Form 10-K/A
amending our Annual Report on
Form 10-K for our
fiscal year ended December 31, 2005 with restated
consolidated financial statements and
Forms 10-Q/A
amending our interim condensed consolidated financial statements
for the first two quarters of fiscal 2006. The restatement
relates only to the information provided in Note 5,
Partially Owned Equity Affiliates and Note 12,
Segment Information and do not impact any of our
primary financial statements. We considered the impact of these
matters on our evaluation of disclosure controls and procedures.
As required by Securities and Exchange Commission
(SEC) rules, the Company has evaluated the
effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by
this amended report. Based on this evaluation, the
Companys management, including its principal executive
officer and principal financial officer, concluded that, as of
the end of the period covered by this
Form 10-K/A, the
design and operation of the Companys disclosure controls
and procedures are effective. In reaching this conclusion
management considered the facts and circumstances that resulted
in the restatement of the financial statements as described in
Note 2 to the consolidated financial statements.
Specifically, management considered the fact that the
restatement did not occur as a result of a breakdown of the
Companys internal controls but was the result of
restatements of the consolidated financial statements of the
Companys partially owned equity affiliates. Management
does not consider controls over the recording of transactions by
its partially owned equity affiliates to be a part of the
Companys internal control structure. Additionally, the
Company considered the fact that the restatement had no impact
on the net income, net income per share or shareholders
equity of Enstar or its partially owned equity affiliates.
There were no changes to the Companys internal controls
over financial reporting during the period covered by this
amended report that materially affected, or are reasonably
likely to materially affect, the Companys internal
controls over financial reporting subsequent to the date of
their evaluation.
Managements report on internal control over financial
reporting and the attestation report of the Companys
independent auditors are included under Item 8 under the
captions Managements Report on Internal Control Over
Financial Reporting and Report of Independent
Registered Public Accounting Firm.
59
Item 9B. Other Information
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The information required by this Item with respect to directors
and executive officers of the Registrant is included under the
sections entitled Election of Directors,
Executive Officers and Other
Matters Section 16(a) Beneficial Ownership
Reporting Compliance of the Proxy Statement and such
sections are deemed incorporated herein by reference.
Code of Ethics
In March 2004, the Company adopted a Code of Ethics for Senior
Executive and Financial Officers (the Code of
Ethics) that applies to our chief executive officer, chief
operating officer, chief financial officer and chief accounting
officer and persons performing similar functions.
|
|
Item 11. |
Executive Compensation |
The information required by this Item is included under the
sections entitled Employment Agreements,
Executive Compensation, Stock Option
Exercises, Election of Directors
Compensation of Directors, and Compensation
Committee Interlocks and Insider Participation of the
Proxy Statement and such sections are deemed incorporated herein
by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by this Item is included under the
sections entitled Common Stock Ownership by
Management, Principal Shareholders and
Equity Compensation Plan Information appearing in
the Proxy Statement and such sections are deemed incorporated
herein by reference.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by this Item is included under the
sections entitled Employment Agreements,
Certain Transactions, Election of
Directors Compensation of Directors and
Executive Compensation appearing in the Proxy
Statement and such sections are deemed incorporated herein by
reference.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information required by this Item is included under the
section entitled Principal Accounting Firm Fees and
Services appearing in the Proxy Statement and such section
is deemed incorporated herein by reference.
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) 1. Financial Statements
|
|
|
The following financial statements are set forth under
Item 8 of this Annual Report and are for the fiscal period
ended December 31, 2005. |
Management Report on Internal Control Over Financial Reporting
60
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2005 and
2004.
Consolidated Statements of Income for the years ended
December 31, 2005, 2004 and 2003.
Consolidated Statements of Comprehensive Income for the years
ended December 31, 2005, 2004 and 2003.
Consolidated Statements of Shareholders Equity for the
years ended December 31, 2005, 2004 and 2003.
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
The following financial statements of Castlewood Holdings are
filed as schedules to this Annual Report.
|
|
|
|
|
|
|
Page | |
|
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
F-2 |
|
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
|
|
F-3 |
|
Consolidated Statements of Earnings (As Restated) for the years
ended December 31, 2005, 2004 and 2003
|
|
|
F-4 |
|
Consolidated Statements of Comprehensive Income for the years
ended December 31, 2005, 2004 and 2003
|
|
|
F-5 |
|
Consolidated Statements of Changes in Shareholders Equity
for the years ended December 31, 2005, 2004 and 2003
|
|
|
F-6 |
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
|
|
F-7 |
|
Notes to the Consolidated Financial Statements
|
|
|
F-8 |
|
The following financial statements of B.H. Acquisition are filed
as schedules to this Annual Report.
|
|
|
|
|
|
|
Page | |
|
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
F-31 |
|
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
|
|
F-32 |
|
Consolidated Statements of Earnings and Retained Earnings (As
Restated) for the years ended December 31, 2005, 2004 and
2003
|
|
|
F-33 |
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
|
|
F-34 |
|
Notes to the Consolidated Financial Statements
|
|
|
F-35 |
|
61
|
|
|
|
|
Reference |
|
|
Number |
|
Description of Exhibits |
|
|
|
|
2.1 |
|
|
Shareholders Agreement, dated as of July 3, 2000, among
B.H. Acquisition Limited, the Company and the other parties
thereto (incorporated by reference to Exhibit 2.1 to the
Current Report on Form 8-K, dated July 18, 2000). |
|
2.2 |
|
|
Investment Agreement, dated as of July 3, 2000, among B.H.
Acquisition Limited, the Company and the other parties thereto
(incorporated by reference to Exhibit 2.2 to the Current
Report on Form 8-K, dated July 18, 2000). |
|
2.3 |
|
|
Share Sale and Purchase Agreement, dated as of March 31,
2000, between PetroFina S.A. and B.H. Acquisition Limited
(incorporated by reference to Exhibit 2.3 to the Current
Report on Form 8-K, dated July 18, 2000). |
|
2.4 |
|
|
Share Sale and Purchase Agreement, dated as of March 31,
2000, between PetroFina S.A., Brittany Holdings Limited and B.H.
Acquisition Limited (incorporated by reference to
Exhibit 2.4 to the Current Report on Form 8-K, dated
July 18, 2000). |
|
2.5 |
|
|
Share Purchase and Capital Commitment Agreement, dated as of
October 1, 2001, between the Company, Castlewood Holdings,
Trident, Marsh & McLennan Capital Professionals Fund,
L.P., Marsh & McLennan Employees Securities
Company, L.P. and the other parties thereto (incorporated by
reference to Exhibit 2.1 to the Current Report on
Form 8-K, dated December 13, 2001). |
|
2.6 |
|
|
Amendment No. 1 and Waiver of Certain Closing Conditions to
the Share Purchase and Capital Commitment Agreement, dated as of
November 29, 2001 (incorporated by reference to
Exhibit 2.2 to the Current Report on Form 8-K, dated
December 13, 2001). |
|
2.7 |
|
|
Purchase and Sale Agreement, dated March 10, 2004, by and
among J.C. Flowers I L.P., JCF CFN LLC, JCF CFN II LLC, JCF
AIV II LP, JCF AIV III LP, JCF Associates I LLC and
FIT CFN Holdings LLC (incorporated by reference to
Exhibit 99.2 to the Current Report on Form 8-K, dated
March 23, 2004). |
|
2.8 |
|
|
Purchase and Sale Agreement, dated October 29, 2004, by and
among Zurich Insurance Company, Harper Holding Sarl and Kenmare
Holdings Limited (incorporated by reference to Exhibit 99.2
to the Current Report on Form 8-K, dated November 4,
2004). |
|
2.9 |
|
|
Sale and Purchase Agreement, dated October 29, 2004, by and
among Zurich Insurance Company, Harper Holding Sarl, and Kenmare
Holdings Limited (incorporated by reference to Exhibit 99.2
to the Current Report on Form 8-K/A dated November 12,
2004). |
|
3.1 |
|
|
Articles of Incorporation of the Company, as amended on
June 10, 1998 (incorporated by reference to
Exhibit 3.1 to the Quarterly Report on Form 10-Q,
dated August 4, 1998). |
|
3.2 |
|
|
Bylaws of the Company, as amended on May 20, 1999
(incorporated by reference to Exhibit 3.2 to the Quarterly
Report on Form 10-Q, dated August 6, 1999). |
|
4.1 |
|
|
Rights Agreement between the Company and American Stock
Transfer & Trust Company, as Rights Agent, dated as of
January 20, 1997 (incorporated by reference to
Exhibit 4.1 to Amendment No. 2 to the Registration
Statement on Form 10, dated March 27, 1997). |
|
4.2 |
|
|
Amendment Agreement, dated as of October 20, 1998, to the
Rights Agreement, dated as of January 20, 1997, between the
Company and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K dated October 20, 1998). |
|
10.1 |
|
|
1997 Amended CEO Stock Option Plan (incorporated by reference to
Appendix A to the Proxy Statement for the Annual Meeting of
Shareholders, dated May 23, 1997).* |
|
10.2 |
|
|
1997 Amended Outside Directors Stock Option Plan
(incorporated by reference to Appendix B to the Proxy Statement
for the Annual Meeting of Shareholders, dated May 23,
1997).* |
62
|
|
|
|
|
Reference |
|
|
Number |
|
Description of Exhibits |
|
|
|
|
10.3 |
|
|
1997 Amended Omnibus Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q,
dated August 14, 2001).* |
|
10.4 |
|
|
Amendment to 1997 Amended Omnibus Incentive Plan (incorporated
by reference to Annex A to the Proxy Statement for the
Annual Meeting of Shareholders, dated April 22, 2003).* |
|
10.5 |
|
|
2001 Outside Directors Stock Option Plan (incorporated by
reference to Annex B to the Proxy Statement for the Annual
Meeting of Shareholders, dated May 8, 2001).* |
|
10.6 |
|
|
Revolving Credit Note, dated July 31, 1997, made by the
Company in favor of First Union National Bank (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q, dated August 14, 1997). |
|
10.7 |
|
|
Stock Pledge Agreement between the Company and First Union
National Bank, dated July 31, 1997 (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q, dated August 14, 1997). |
|
10.8 |
|
|
Deferred Compensation and Stock Plan for Non-Employee Directors
(incorporated by reference to Exhibit 99.1 to the Quarterly
Report on Form 10-Q, dated October 30, 1997).* |
|
10.9 |
|
|
Investment Agreement, dated October 20, 1998, between the
Company and J. Christopher Flowers, together with certain
exhibits thereto (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K dated October 20,
1998). |
|
10.10 |
|
|
Form of Severance Benefits Agreement between the Company and
each of Nimrod T. Frazer, Cheryl D. Davis and Amy M. Dunaway,
each dated May 21, 1998 (incorporated by reference to
Exhibit 10.8 to the Annual Report on Form 10-K, dated
March 29, 1999).* |
|
10.11 |
|
|
Amended and Restated Employment Agreement between the Company
and John Oros dated March 2, 2000 (incorporated by
reference to Exhibit 10.9 to the Annual Report on
Form 10-K, dated March 22, 2000).* |
|
10.12 |
|
|
Agreement Regarding Stock Purchase and Stock Options dated as of
June 27, 2001 between the Company and Nimrod T. Frazer
(incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q, dated November 14, 2001).* |
|
10.13 |
|
|
Agreement Regarding Stock Purchase and Stock Options dated as of
June 27, 2001 between the Company and John Oros
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q, dated November 14, 2001).* |
|
10.14 |
|
|
Limited Liability Company Agreement of JCF CFN LLC, dated as of
December 19, 2002, between JCF Associates I, LLC and
the Company (incorporated by reference to Exhibit 10.13 to
the Annual Report on Form 10-K, dated March 31, 2003). |
|
10.15 |
|
|
Agreement Relating to the Sale and Purchase of the Entire Issued
Share Capital of Toa-UK, dated as of March 27, 2003,
between The Toa Reinsurance Company, Limited, Hillcot,
Castlewood Holdings and Shinsei (incorporated by reference to
the Amended Current Report on Form 8-K/A, dated
June 12, 2003). |
|
10.16 |
|
|
Amendment No. 1, dated as of June 20, 2003, to the
Limited Liability Company Agreement of JCF CFN LLC, dated as of
December 19, 2002 (incorporated by reference to
Exhibit 2.2 to the Current Report on Form 8-K, dated
July 2, 2003). |
|
10.17 |
|
|
Limited Liability Company Agreement of JCF CFN II, LLC,
dated as of June 20, 2003, between JCF Associates I,
LLC, the Company and Castlewood Holdings Limited (incorporated
by reference to Exhibit 2.3 to the Current Report on
Form 8-K, dated July 2, 2003). |
|
10.18 |
|
|
Subscription Agreement, dated as of June 30, 2005, between
Affirmative Investment LLC, J.C. Flowers I LP and the
Company (incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q, dated August 9, 2005). |
63
|
|
|
|
|
Reference |
|
|
Number |
|
Description of Exhibits |
|
|
|
|
10.19 |
|
|
Limited Liability Company Agreement of Affirmative Investment
LLC, dated as of June 30, 2005, between Affirmative
Associates LLC, J.C. Flowers I LP and the Company (incorporated
by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q, dated August 9, 2005). |
|
14 |
|
|
Code of Ethics (incorporated by reference to Exhibit 14 to
the Annual Report on Form 10-K, dated March 15, 2004). |
|
21 |
|
|
Subsidiaries of The Enstar Group, Inc. as of March 16, 2006
(incorporated by reference to Exhibit 21 to the Annual Report on
Form 10-K, dated March 16, 2006). |
|
31.1 |
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 as adopted under Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 as adopted under Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
* |
Indicates a management contract or compensatory plan or
arrangement. |
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
Nimrod T. Frazer |
|
Chairman of the Board of Director, |
|
and Chief Executive Officer |
September 19, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
/s/ NIMROD T. FRAZER
Nimrod
T. Frazer |
|
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
|
|
March 16, 2006 |
|
/s/ CHERYL D. DAVIS
Cheryl
D. Davis |
|
Chief Financial Officer, Vice President of Corporate Taxes and
Secretary (Principal Financial and Accounting Officer)
|
|
March 16, 2006 |
/s/ JOHN J. OROS
John
J. Oros |
|
President and Chief Operating Officer
|
|
March 16, 2006 |
/s/ T. WHIT ARMSTRONG
T.
Whit Armstrong |
|
Director
|
|
March 16, 2006 |
/s/ PAUL J. COLLINS
Paul
J. Collins |
|
Director
|
|
March 16, 2006 |
/s/ GREGORY L. CURL
Gregory
L. Curl |
|
Director
|
|
March 16, 2006 |
/s/ T. WAYNE DAVIS
T.
Wayne Davis |
|
Director
|
|
March 16, 2006 |
/s/ J. CHRISTOPHER
FLOWERS
J.
Christopher Flowers |
|
Director
|
|
March 16, 2006 |
65
Castlewood Holdings Limited
Consolidated Financial Statements and Report of Independent
Registered Public Accounting Firm
For the years ended December 2005, 2004 and 2003
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Castlewood Holdings Limited
We have audited the accompanying consolidated balance sheets of
Castlewood Holdings Limited and subsidiaries (the
Company) as of December 31, 2005 and 2004, and
the related consolidated statements of earnings, comprehensive
income, changes in shareholders equity and cash flows for
the years ended December 31, 2005, 2004 and 2003. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Castlewood Holdings Limited and subsidiaries as of
December 31, 2005 and 2004 and the results of their
operations and their cash flows for the years ended
December 31, 2005, 2004 and 2003 in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 24, the accompanying 2005, 2004 and
2003 consolidated statements of earnings have been restated.
Hamilton, Bermuda
July 4, 2006 (September 18, 2006 as
to the effects of the restatement
discussed in Note 24)
F-2
CASTLEWOOD
HOLDINGS LIMITED
CONSOLIDATED
BALANCE SHEETS
as of December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands of U.S. dollars, except share and per
share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Short-term investments, available
for sale, at fair value (amortized cost: 2005
$216,624; 2004 $304,558)
|
|
$
|
216,624
|
|
|
$
|
304,558
|
|
Fixed maturities, held to
maturity, at amortized cost
|
|
|
296,584
|
|
|
|
228,232
|
|
Trading securities, at fair value
(cost: 2005 $Nil; 2004 $58,845)
|
|
|
|
|
|
|
58,845
|
|
Other investments (cost:
2005 $26,360; 2004 $Nil)
|
|
|
26,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
539,568
|
|
|
|
591,635
|
|
Cash and cash equivalents
|
|
|
280,212
|
|
|
|
301,969
|
|
Restricted cash and cash
equivalents
|
|
|
65,117
|
|
|
|
48,487
|
|
Accrued interest receivable
|
|
|
2,805
|
|
|
|
2,861
|
|
Accounts receivable
|
|
|
8,227
|
|
|
|
7,479
|
|
Reinsurance balances receivable
|
|
|
250,229
|
|
|
|
341,627
|
|
Investment in partly-owned
companies
|
|
|
17,480
|
|
|
|
28,101
|
|
Goodwill
|
|
|
21,222
|
|
|
|
21,222
|
|
Other assets
|
|
|
15,103
|
|
|
|
4,472
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,199,963
|
|
|
$
|
1,347,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
$
|
806,559
|
|
|
$
|
1,047,313
|
|
Reinsurance balances payable
|
|
|
30,844
|
|
|
|
62,396
|
|
Accounts payable and accrued
liabilities
|
|
|
35,337
|
|
|
|
23,349
|
|
Income taxes payable
|
|
|
282
|
|
|
|
1,101
|
|
Other liabilities
|
|
|
25,491
|
|
|
|
4,964
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
898,513
|
|
|
|
1,139,123
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST
|
|
|
40,544
|
|
|
|
31,392
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Share capital
|
|
|
|
|
|
|
|
|
Authorized issued and fully paid,
par value $1 each (Authorized 2005: 99,000,000; 2004:
99,000,000)
|
|
|
|
|
|
|
|
|
Ordinary shares (Issued 2005:
18,540; 2004: 18,395)
|
|
|
19
|
|
|
|
18
|
|
Ordinary non-voting redeemable
shares
|
|
|
|
|
|
|
|
|
(Issued 2005: 22,641,774;
2004: 22,893,662)
|
|
|
22,642
|
|
|
|
22,894
|
|
Additional paid-in capital
|
|
|
89,090
|
|
|
|
85,341
|
|
Deferred compensation
|
|
|
(112
|
)
|
|
|
(371
|
)
|
Accumulated other comprehensive
income
|
|
|
1,010
|
|
|
|
1,909
|
|
Retained earnings
|
|
|
148,257
|
|
|
|
67,547
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
260,906
|
|
|
|
177,338
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
$
|
1,199,963
|
|
|
$
|
1,347,853
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-3
CASTLEWOOD
HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF EARNINGS (AS RESTATED SEE NOTE
24)
for the years ended December 31, 2005, 2004 and
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands of U.S. dollars, except share and per
share data)
|
|
|
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
$
|
22,006
|
|
|
$
|
23,703
|
|
|
$
|
24,746
|
|
Net investment income
|
|
|
28,236
|
|
|
|
11,102
|
|
|
|
8,032
|
|
Net realized gains (losses)
|
|
|
1,268
|
|
|
|
(600
|
)
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,510
|
|
|
|
34,205
|
|
|
|
31,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss
adjustment expense liabilities
|
|
|
(96,007
|
)
|
|
|
(13,706
|
)
|
|
|
(24,044
|
)
|
Salaries and benefits
|
|
|
40,821
|
|
|
|
26,290
|
|
|
|
15,661
|
|
General and administrative expenses
|
|
|
10,962
|
|
|
|
10,677
|
|
|
|
6,993
|
|
Net foreign exchange loss (gain)
|
|
|
4,602
|
|
|
|
(3,731
|
)
|
|
|
(2,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,622
|
)
|
|
|
19,530
|
|
|
|
(3,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES,
MINORITY INTEREST AND SHARE OF NET EARNINGS OF PARTLY-OWNED
COMPANIES
|
|
|
91,132
|
|
|
|
14,675
|
|
|
|
35,570
|
|
INCOME TAXES
|
|
|
(914
|
)
|
|
|
(1,924
|
)
|
|
|
(1,490
|
)
|
MINORITY INTEREST
|
|
|
(9,700
|
)
|
|
|
(3,097
|
)
|
|
|
(5,111
|
)
|
SHARE OF NET EARNINGS OF
PARTLY-OWNED COMPANIES
|
|
|
192
|
|
|
|
6,881
|
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS BEFORE EXTRAORDINARY
GAIN
|
|
|
80,710
|
|
|
|
16,535
|
|
|
|
30,592
|
|
EXTRAORDINARY GAIN
NEGATIVE GOODWILL
|
|
|
|
|
|
|
21,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
80,710
|
|
|
$
|
38,294
|
|
|
$
|
30,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share before
extraordinary gain basic
|
|
$
|
4,397.89
|
|
|
$
|
914.49
|
|
|
$
|
1,699.56
|
|
Extraordinary gain per
share basic
|
|
|
|
|
|
|
1,203.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4,397.89
|
|
|
$
|
2,117.91
|
|
|
$
|
1,699.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share before
extraordinary gain diluted
|
|
$
|
4,304.30
|
|
|
$
|
906.13
|
|
|
$
|
1,699.56
|
|
Extraordinary gain per
share diluted
|
|
|
|
|
|
|
1,192.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4,304.30
|
|
|
$
|
2,098.53
|
|
|
$
|
1,699.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares
outstanding basic
|
|
|
18,352
|
|
|
|
18,081
|
|
|
|
18,000
|
|
Weighted average ordinary shares
outstanding diluted
|
|
|
18,751
|
|
|
|
18,248
|
|
|
|
18,000
|
|
See accompanying notes to the consolidated financial
statements.
F-4
CASTLEWOOD
HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 2005, 2004 and
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
NET EARNINGS
|
|
$
|
80,710
|
|
|
$
|
38,294
|
|
|
$
|
30,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses)
on investments arising during the period
|
|
|
1,268
|
|
|
|
(609
|
)
|
|
|
(4,400
|
)
|
Reclassification adjustment for
net realized (gains) losses included in net earnings
|
|
|
(1,268
|
)
|
|
|
600
|
|
|
|
4,289
|
|
Unrealized (losses) gains on
investments of partially-owned equity affiliate arising during
the year
|
|
|
|
|
|
|
(340
|
)
|
|
|
340
|
|
Currency translation adjustment
|
|
|
(899
|
)
|
|
|
539
|
|
|
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(899
|
)
|
|
|
190
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
79,811
|
|
|
$
|
38,484
|
|
|
$
|
31,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-5
CASTLEWOOD
HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
for the years ended December 31, 2005, 2004 and
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Share
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Capital
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
Opening balance, January 1,
2003
|
|
$
|
40,520
|
|
|
$
|
67,878
|
|
|
$
|
(1,748
|
)
|
|
$
|
611
|
|
|
$
|
60,212
|
|
|
$
|
167,473
|
|
Redemption of Class E shares
|
|
|
(12,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,990
|
)
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
896
|
|
|
|
|
|
|
|
|
|
|
|
896
|
|
Contribution of capital
|
|
|
|
|
|
|
14,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,338
|
|
Dividend paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,801
|
)
|
|
|
(53,801
|
)
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,592
|
|
|
|
30,592
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,108
|
|
|
|
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
27,530
|
|
|
|
82,216
|
|
|
|
(852
|
)
|
|
|
1,719
|
|
|
|
37,003
|
|
|
|
147,616
|
|
Redemption of Class E shares
|
|
|
(4,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,618
|
)
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
481
|
|
|
|
|
|
|
|
|
|
|
|
481
|
|
Grant of Class D shares
|
|
|
|
|
|
|
3,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,125
|
|
Dividend paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,750
|
)
|
|
|
(7,750
|
)
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,294
|
|
|
|
38,294
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
22,912
|
|
|
|
85,341
|
|
|
|
(371
|
)
|
|
|
1,909
|
|
|
|
67,547
|
|
|
|
177,338
|
|
Redemption of Class E shares
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(252
|
)
|
Redemption of Class D shares
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30
|
)
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
259
|
|
Grant of Class D shares
|
|
|
1
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,780
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,710
|
|
|
|
80,710
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(899
|
)
|
|
|
|
|
|
|
(899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
$
|
22,661
|
|
|
$
|
89,090
|
|
|
$
|
(112
|
)
|
|
$
|
1,010
|
|
|
$
|
148,257
|
|
|
$
|
260,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-6
CASTLEWOOD
HOLDINGS LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
for the years ended December 31, 2005, 2004 and
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands of U.S. dollars)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
80,710
|
|
|
$
|
38,294
|
|
|
$
|
30,592
|
|
Adjustments to reconcile net
earnings to net cash flows (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
9,700
|
|
|
|
3,097
|
|
|
|
5,111
|
|
Negative goodwill
|
|
|
|
|
|
|
(21,759
|
)
|
|
|
|
|
Share of net earnings of
partly-owned companies
|
|
|
(192
|
)
|
|
|
(6,881
|
)
|
|
|
(1,623
|
)
|
Depreciation and amortization
|
|
|
493
|
|
|
|
462
|
|
|
|
375
|
|
Amortization of deferred
compensation
|
|
|
259
|
|
|
|
481
|
|
|
|
896
|
|
Amortization of bond premiums and
discounts
|
|
|
564
|
|
|
|
304
|
|
|
|
581
|
|
Net realized (gains) losses on sale
of securities
available-for-sale
|
|
|
(1,768
|
)
|
|
|
600
|
|
|
|
960
|
|
Net realized loss on trading
securities
|
|
|
500
|
|
|
|
|
|
|
|
|
|
Change in net unrealized holding
losses on trading securities
|
|
|
|
|
|
|
471
|
|
|
|
|
|
Class D share stock
compensation
|
|
|
3,780
|
|
|
|
3,125
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on sale of trading
securities
|
|
|
76,695
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
56
|
|
|
|
1,275
|
|
|
|
3,531
|
|
Accounts receivable
|
|
|
(1,397
|
)
|
|
|
1,536
|
|
|
|
(2,906
|
)
|
Reinsurance balances receivable
|
|
|
116,887
|
|
|
|
33,349
|
|
|
|
13,030
|
|
Other assets
|
|
|
(10,579
|
)
|
|
|
(1,088
|
)
|
|
|
(167
|
)
|
Losses and loss adjustment expenses
|
|
|
(282,718
|
)
|
|
|
(56,084
|
)
|
|
|
(31,262
|
)
|
Reinsurance balances payable
|
|
|
(31,552
|
)
|
|
|
91
|
|
|
|
9,776
|
|
Accounts payable and accrued
liabilities
|
|
|
12,424
|
|
|
|
2,758
|
|
|
|
(5,560
|
)
|
Income taxes payable
|
|
|
(802
|
)
|
|
|
(46
|
)
|
|
|
406
|
|
Other liabilities
|
|
|
20,619
|
|
|
|
959
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided
by operating activities
|
|
|
(6,321
|
)
|
|
|
944
|
|
|
|
24,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired on purchase of
subsidiaries
|
|
|
18,006
|
|
|
|
109,149
|
|
|
|
25,734
|
|
Cash used for purchase of
subsidiaries
|
|
|
(1,445
|
)
|
|
|
(4,455
|
)
|
|
|
(46,426
|
)
|
Cash used for investment in
partly-owned companies
|
|
|
|
|
|
|
(9,147
|
)
|
|
|
(10,200
|
)
|
Distributions from partly-owned
companies
|
|
|
10,813
|
|
|
|
16,395
|
|
|
|
193
|
|
Proceeds from sale of
available-for-sale
securities
|
|
|
201,712
|
|
|
|
184,973
|
|
|
|
234,565
|
|
Purchase of
available-for-sale
securities
|
|
|
(112,010
|
)
|
|
|
(76,600
|
)
|
|
|
(211,013
|
)
|
Maturity of
available-for-sale
securities
|
|
|
|
|
|
|
14,563
|
|
|
|
53,042
|
|
Purchase of
held-to-maturity
securities
|
|
|
(133,492
|
)
|
|
|
|
|
|
|
|
|
Maturity of held-to-maturity
securities
|
|
|
46,220
|
|
|
|
|
|
|
|
|
|
Purchase of other investments
|
|
|
(26,360
|
)
|
|
|
|
|
|
|
|
|
Movement in restricted
cash & cash equivalents
|
|
|
(16,630
|
)
|
|
|
(37,279
|
)
|
|
|
(4,650
|
)
|
Purchase of fixed assets
|
|
|
(887
|
)
|
|
|
(571
|
)
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided
by investing activities
|
|
|
(14,073
|
)
|
|
|
197,028
|
|
|
|
40,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of capital
|
|
|
|
|
|
|
|
|
|
|
14,338
|
|
Redemption of Class E shares
|
|
|
(252
|
)
|
|
|
(4,618
|
)
|
|
|
(12,990
|
)
|
Redemption of Class D shares
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
Dividend paid
|
|
|
|
|
|
|
(7,750
|
)
|
|
|
(53,801
|
)
|
Dividend paid to minority interest
|
|
|
(548
|
)
|
|
|
|
|
|
|
|
|
Acquisition of shares and
contribution to surplus of subsidiary by minority interest
|
|
|
|
|
|
|
|
|
|
|
23,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in financing
activities
|
|
|
(830
|
)
|
|
|
(12,368
|
)
|
|
|
(29,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRANSLATION ADJUSTMENT
|
|
|
(533
|
)
|
|
|
345
|
|
|
|
661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
(21,757
|
)
|
|
|
185,949
|
|
|
|
36,662
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR
|
|
|
301,969
|
|
|
|
116,020
|
|
|
|
79,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF
YEAR
|
|
$
|
280,212
|
|
|
$
|
301,969
|
|
|
$
|
116,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
(1,733
|
)
|
|
$
|
(1,932
|
)
|
|
$
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial
statements.
F-7
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
(in thousands of U.S. dollars, except share and per
share data)
|
|
1.
|
DESCRIPTION
OF BUSINESS
|
Castlewood Holdings Limited (Castlewood Holdings)
was incorporated under the laws of Bermuda on August 16,
2001 and with its subsidiaries (collectively, the
Company) acquires and manages insurance and
reinsurance companies in run-off, and provides management,
consultancy and other services to the insurance and reinsurance
industry.
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Basis of preparation The consolidated
financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America. The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. The major estimates reflected in the
Companys financial statements include, but are not limited
to, the reserves for losses and loss adjustment expenses and
reinsurance balances receivable. Certain reclassifications have
been made to prior years amounts to conform to the current
years presentation. In the current year, restricted cash
and cash equivalents was broken out of cash and cash equivalents
which, for the years ended December 31, 2005, 2004 and
2003, decreased cash and cash equivalents and cash flows
provided by investing activities by $16,630, $37,729 and $4,650,
respectively.
Basis of consolidation The consolidated
financial statements include the assets, liabilities and results
of operations of the Company as of December 31, 2005 and
2004 and for the years ended December 31, 2005, 2004 and
2003. Results of operations for subsidiaries acquired are
included from the dates of their acquisition by the Company.
Intercompany transactions are eliminated on consolidation.
Cash and cash equivalents For purposes of the
consolidated statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial
maturity of three months or less to be cash and cash equivalents.
Investments
a) Short Term Investments: Mutual funds
whose underlying assets consist of investments having maturities
of greater than six and less than twelve months when purchased,
are classified as
available-for-sale
investments and are carried at fair value, based on net asset
values as reported by the mutual funds. Due to the nature of the
mutual funds underlying assets any changes in net asset value of
the funds are included in net investment income.
b) Fixed Maturities: Debt investments
classified as
held-to-maturity
investments are carried at purchase cost adjusted for
amortization of premiums and discounts. Amortization expenses
derive from the difference between the nominal value and
purchase cost and they are spread over the time to maturity of
the debt securities.
Investments classified as held-to-maturity and
available-for-sale
are reviewed on a regular basis to determine if they have
sustained an impairment of value that is considered to be other
than temporary. There are several factors that are considered in
the assessment of an investment, which include (i) the time
period during which there has been a significant decline below
cost, (ii) the extent of the decline below cost,
(iii) the Companys intent and ability to hold the
security, (iv) the potential for the security to recover in
value, (v) an analysis of the financial condition of the
issuer and (vi) an analysis of the collateral structure and
credit support of the security, if applicable. The
identification of potentially impaired investments involves
significant management judgment. Any unrealized depreciation in
value
F-8
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
considered by management to be other than temporary is
recognized in net earnings in the period that it is determined.
Realized gains and losses on sales of investments classified as
available-for-sale are recognized in net investment income on
the specific identification basis.
c) Trading Securities: Debt investments
classified as trading securities are carried at fair value, with
unrealized holding gains and losses recognized within the net
earnings.
d) Other Investments: The Company
accounts for its other investments on the equity basis based on
the most recently available financial information. The Company
has no significant influence and does not participate in the
management of these investments. Investments in limited
partnerships and other flow-through entities are carried on the
equity basis whereby the investment is initially recorded at
cost and adjusted to reflect the Companys share of
after-tax earnings or losses, unrealized investment gains and
losses and reduced by dividends received.
Investment in partly-owned companies
Investment in partly-owned companies, where the Company has
significant influence, are carried on the equity basis whereby
the investment is initially recorded at cost and adjusted to
reflect the Companys share of after-tax earnings or
losses, unrealized investment gains and losses and reduced by
dividends received.
Losses and loss adjustment expenses The
liability for losses and loss adjustment expenses includes an
amount determined from loss reports and individual cases and an
amount, based on historical loss experience and industry
statistics, for losses incurred but not reported. These
estimates are continually reviewed and are necessarily subject
to the impact of future changes in such factors as claim
severity and frequency. While the management believes that the
amount is adequate, the ultimate liability may be significantly
in excess of, or less than, the amounts provided. Adjustments
will be reflected as part of net increase or reduction in loss
and loss adjustment expense liabilities in the periods in which
they become known. Premium and commission adjustments may be
triggered by incurred losses and any amounts are reflected in
net loss and loss adjustment expense liabilities at the same
time the related incurred loss is recognized.
The Companys insurance and reinsurance subsidiaries
establish provisions for loss adjustment expenses relating to
future run-off costs. These provisions are assessed at each
reporting date and adjusted should estimates of the annual costs
or the run-off period change.
Reinsurance balances receivable Amounts
receivable from reinsurers are estimated in a manner consistent
with the loss reserve associated with the underlying policy.
Consulting fee income Fixed fee income is
recognized in accordance with the term of the agreements. Fees
based on hourly charge rates are recognized as services are
provided. Performance fees are recognized when all of the
contractual requirements specified in the agreement are met.
Translation of foreign currencies At each
balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of the Company are
adjusted to reflect the current exchange rate. Revenue and
expense items are translated into U.S. dollars at average
rates of exchange for the years. The resulting exchange gains or
losses are included in net earnings.
Assets and liabilities of subsidiaries are translated into
U.S. dollars at the year-end rates of exchange. Revenues
and expenses of subsidiaries are translated into
U.S. dollars at the average rates of exchange for the
years. The resultant translation adjustment for self-sustaining
subsidiaries is classified as a separate component of other
comprehensive income, and for integrated operations is included
in net earnings.
Earnings per share Basic earnings per share
is defined as net earnings available to ordinary shareholders
divided by the weighted average number of ordinary shares
outstanding for the period, giving no effect to dilutive
securities. Diluted earnings per share is defined as net
earnings available to ordinary shareholders divided by the
weighted average number of ordinary and ordinary share
equivalents outstanding calculated
F-9
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
using the treasury stock method for all potentially dilutive
securities. When the effect of dilutive securities would be
anti-dilutive, these securities are excluded from the
calculation of diluted earnings per share.
Derivative Instruments The Company accounts
for its derivative instruments using Statement of Financial
Accounting Standards (FAS) No. 133
Accounting for Derivative Instruments and Hedging
Activities. FAS 133 requires an entity to recognize
all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The Company
uses investment derivatives to manage currency exposures and
will also enter into such instruments to obtain exposure to a
specific transaction. None of these derivatives are designated
as hedges, and accordingly, financial options and foreign
currency forward contracts entered into during 2005, 2004 and
2003 were carried at fair value, with the corresponding realized
and unrealized gains and losses included in net investment
income in the consolidated statements of earnings. No
derivatives were held as at December 31, 2005 and 2004.
Acquisitions Goodwill represents the excess
of the purchase price over the fair value of the net assets
received related to the acquisition of Castlewood Limited by
Castlewood Holdings. FAS No. 142 Goodwill and
Other Intangible Assets requires that the Company perform
an initial valuation of its goodwill assets and to update this
analysis on an annual basis. If, as a result of the assessment,
the Company determines the value of its goodwill asset is
impaired, goodwill is written down in the period in which the
determination is made. An annual impairment valuation has
concluded that there is no impairment to the value of the
Companys goodwill asset. Negative goodwill arises where
the fair value of assets acquired exceeds the purchase price of
those acquired assets and, in accordance with FAS 141,
Business Combinations, has been recognized as an
extraordinary gain.
Stock Based Compensation The Company has
elected to follow Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for
its employee stock awards. The intrinsic value method has been
used to account for stock based employee compensation. Pursuant
to APB Opinion No. 25, compensation expense for employee
stock awards is measured using the intrinsic value at the fair
value of the shares at the date of grant and recognized as the
awards vest using the straight-line method. Had the Company
applied FAS No. 123 Accounting for Stock-Based
Compensation in accounting for its restricted share
awards, there would have been no material impact in the
financial statements in 2005 and 2004.
New Accounting Pronouncements In December
2004, the Financial Accounting Standards Board
(FASB) issued FAS 123(R) Share Based
Payments. This statement requires compensation costs
related to share-based payment transactions to be recognized in
the financial statements. The amount of compensation costs will
be measured based on the grant-date fair value of the awards
issued and will be recognized over the period that an employee
provides services in exchange for the award or the requisite
service or vesting period. FAS 123(R) is effective for the
first interim or annual reporting period beginning after
January 1, 2006 and may not be applied retroactively to
prior years financial statements. As the Companys
current equity-based compensation plans are based on book value,
the Company believes that the adoption of FAS 123(R) will
not have a material impact on its consolidated financial
statements. The Company has adopted FAS 123(R) using the
modified prospective method for the fiscal year beginning
January 1, 2006.
In June 2005, the FASB directed its staff to issue the proposed
FASB Staff Position (FSP) Emerging Issues Task Force
(EITF)
Issue 03-1
as final and retitled it as FSP
FAS 115-1,
The Meaning of
Other-Than-Temporary
Impairment and its Application to Certain Investments. It
replaces existing guidance in
EITF 03-1,
The Meaning of
Other-Than-Temporary
Impairment and its Application to Certain Investments, and
clarifies that an impairment should be recognized as a loss no
later than when the impairment is deemed
other-than-temporary,
even if the decision to sell the investment has not been made.
FSP
FAS 115-1
is effective for
other-than-temporary
impairment analysis conducted in periods beginning after
December 15, 2005. The Company believes that its current
policy on the recognition of
other-than-temporary
impairments substantially complies with FSP
FAS 115-1,
and therefore the adoption of this standard is not expected to
have a significant impact on the net earnings of the Company.
F-10
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2003 In 2003, a 50.1% owned subsidiary of
Castlewood Holdings, Hillcot Holdings Ltd. (Hillcot
Holdings), completed the acquisition of Hillcot
Reinsurance Company Limited (Hillcot), (formerly
Toa-Re Insurance Company (UK) Limited), a reinsurance company
based in London, England.
The purchase price and fair value of assets acquired were as
follows:
|
|
|
|
|
Purchase price
|
|
$
|
45,820
|
|
Direct costs of acquisition
|
|
|
606
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
46,426
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
46,426
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition of Hillcot:
|
|
|
|
|
Cash and investments
|
|
$
|
113,967
|
|
Reinsurance balances receivable
|
|
|
65,184
|
|
Losses and loss adjustment expenses
|
|
|
(128,384
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(4,341
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
46,426
|
|
|
|
|
|
|
2004 In 2004, Castlewood Holdings, through
its wholly owned subsidiary, Kenmare Holdings Ltd., completed
the acquisition of Mercantile Indemnity Company Ltd, Harper
Insurance Limited (Harper), (formerly Turegum
Insurance Company) and Longmynd Insurance Company Ltd. (formerly
Security Insurance Company (UK) Ltd.).
The purchase price and fair value of assets acquired were as
follows:
|
|
|
|
|
Purchase price
|
|
$
|
3,581
|
|
Direct costs of acquisition
|
|
|
874
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
4,455
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
26,214
|
|
|
|
|
|
|
Excess of net assets over purchase
price (negative goodwill)
|
|
$
|
(21,759
|
)
|
|
|
|
|
|
The negative goodwill arose primarily as a result of a
negotiated discount between the cost of acquisition and fair
value of net assets acquired for an acquisition where
indemnities for aggregate adverse loss development were received
by Castlewood.
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed as at the date of the
acquisitions:
|
|
|
|
|
Cash, investments and accrued
interest
|
|
$
|
560,568
|
|
Reinsurance balances receivable
|
|
|
200,243
|
|
Losses and loss adjustment expenses
|
|
|
(732,779
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(1,818
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
26,214
|
|
|
|
|
|
|
F-11
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The seller of Harper has indemnified Castlewood Holdings for
adverse loss development subject to certain limits. Reinsurance
balances receivable acquired include $88,379 in relation to
these indemnities.
2005 In 2005, Castlewood Holdings, through
its wholly owned subsidiary, Kenmare Holdings Ltd., completed
the acquisition of Fieldmill Insurance Company Limited (formerly
Harleysville Insurance Company (UK) Limited).
The purchase price and fair value of assets acquired were as
follows:
|
|
|
|
|
Purchase price
|
|
$
|
1,403
|
|
Direct costs of the acquisition
|
|
|
42
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,445
|
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
1,445
|
|
|
|
|
|
|
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of the
acquisition:
|
|
|
|
|
Cash and investments
|
|
$
|
18,006
|
|
Reinsurance balances receivable
|
|
|
25,489
|
|
Losses and loss adjustment expenses
|
|
|
(41,965
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(85
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
1,445
|
|
|
|
|
|
|
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 managements run-off strategy. Interest rates used to
determine the fair value of gross loss reserves are based upon
risk free rates applicable to the average duration of the loss
reserves. Interest rates used to determine the fair value of
reinsurance receivables are increased to reflect the credit risk
associated with the reinsurers from whom the receivables are, or
will become, due. Any amendment to the fair values resulting
from changes in such information or strategy will be recognized
when they occur.
|
|
4.
|
RESTRICTED
CASH AND CASH EQUIVALENTS
|
Cash and cash equivalents in the amount of $65,117 and $48,487
as of December 31, 2005 and 2004, respectively, are
restricted for use as collateral against letters of credit, in
the amount of $47,848 and $45,287 as of December 31, 2005
and 2004, respectively, and as guarantee under trust agreements.
Letters of credit are issued to ceding insurers as security for
the obligations of insurance subsidiaries under reinsurance
agreements with those ceding insurers.
Available-for-sale
The cost and fair value of investments in mutual funds
classified as
available-for-sale
as at December 31, 2005 and 2004 were $216,624 and
$304,558, respectively. For the years ended December 31,
2005 and 2004, $215,817 and $278,178 of the investments in
mutual funds were Goldman Sachs mutual funds, respectively.
Mutual funds invest in fixed income and money market securities
denominated in U.S. dollars, with an average target
duration of nine months. The mutual funds can be redeemed on a
single trading days notice.
F-12
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Held-to-maturity
The amortized cost and estimated fair value of investments
in debt securities
held-to-maturity
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
|
|
As at December 31, 2005
|
|
Amortized Cost
|
|
|
Holding Gains
|
|
|
Holding Losses
|
|
|
Fair Value
|
|
|
U.S. Treasury securities
|
|
$
|
120,568
|
|
|
$
|
|
|
|
$
|
(2,075
|
)
|
|
$
|
118,493
|
|
U.S. Agencies securities
|
|
|
98,409
|
|
|
|
|
|
|
|
(1,229
|
)
|
|
|
97,180
|
|
Corporate debt securities
|
|
|
77,607
|
|
|
|
|
|
|
|
(2,010
|
)
|
|
|
75,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
296,584
|
|
|
$
|
|
|
|
$
|
(5,314
|
)
|
|
$
|
291,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
|
|
As at December 31, 2004
|
|
Amortized Cost
|
|
|
Holding Gains
|
|
|
Holding Losses
|
|
|
Fair Value
|
|
|
U.S. Treasury securities
|
|
$
|
151,436
|
|
|
$
|
|
|
|
$
|
(1,003
|
)
|
|
$
|
150,433
|
|
U.S. Agencies securities
|
|
|
20,414
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
20,279
|
|
Corporate debt securities
|
|
|
56,382
|
|
|
|
3
|
|
|
|
(426
|
)
|
|
|
55,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
228,232
|
|
|
$
|
3
|
|
|
$
|
(1,564
|
)
|
|
$
|
226,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized losses on
held-to-maturity
debt securities were split as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Due within one year
|
|
$
|
666
|
|
|
$
|
181
|
|
After 1 through 5 years
|
|
|
3,674
|
|
|
|
991
|
|
After 5 through 10 years
|
|
|
283
|
|
|
|
61
|
|
After 10 years
|
|
|
691
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,314
|
|
|
$
|
1,564
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2005 and 2004, the number of securities
in an unrealized loss position was 70 and 87, respectively, with
a fair value of $268,870 and $225,993, respectively. Of these
securities, the number of securities that have been in an
unrealized loss position for 12 months or longer was 57 and
Nil, respectively, with a fair value of $137,143 and $Nil,
respectively. As of December 31, 2005 and 2004, none of
these securities were considered to be other than temporarily
impaired. Management 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
December 31, 2005 of debt securities classified as
held-to-maturity
by contractual maturity are shown below.
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Due within one year
|
|
$
|
81,552
|
|
|
$
|
80,886
|
|
After 1 through 5 years
|
|
|
181,826
|
|
|
|
178,152
|
|
After 5 through 10 years
|
|
|
15,170
|
|
|
|
14,887
|
|
After 10 years
|
|
|
18,036
|
|
|
|
17,345
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
296,584
|
|
|
$
|
291,270
|
|
|
|
|
|
|
|
|
|
|
Expected maturities could differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
F-13
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Trading In 2005, the entire investment
portfolio classified as trading securities was sold. The
estimated fair value of investments in debt securities
classified as trading securities as at December 31, 2004
was as follows:
|
|
|
|
|
|
|
Fair Value
|
|
|
Corporate debt securities
|
|
$
|
41,718
|
|
U.S. Agencies securities
|
|
|
17,127
|
|
|
|
|
|
|
|
|
$
|
58,845
|
|
|
|
|
|
|
Other
investments
The cost and estimated fair value of the other investments are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
As at December 31, 2005
|
|
Cost
|
|
|
Value
|
|
|
New NIB Partners LP
|
|
$
|
24,532
|
|
|
$
|
24,532
|
|
GSC European Mezzanine Fund II, LP
|
|
|
1,828
|
|
|
|
1,828
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,360
|
|
|
$
|
26,360
|
|
|
|
|
|
|
|
|
|
|
New NIB Partners LP In 2005, Fitzwilliam
Insurance Company Limited (Fitzwilliam) and River
Thames Insurance Company Limited (River Thames),
subsidiaries of Castlewood Holdings, invested $24,532 in an
Alberta limited partnership, New NIB Partners LP (New
NIB). New NIB was formed for the purpose of purchasing,
together with certain affiliated entities, 100% of the
outstanding share capital of NIBC N.V. (formerly NIB Capital
Bank N.V.) (NIB Capital), a Dutch bank, for
approximately $2,156,000. Fitzwilliam and River Thames,
combined, own 1.3801% of New NIB.
GSC European Mezzanine Fund II, LP In 2005,
Overseas Reinsurance Corporation Limited (Overseas
Re), a subsidiary of Castlewood Holdings, made a capital
commitment of up to $10,000 in the GSC European Mezzanine
Fund II, LP (the GSC Fund). The GSC Fund
invests in mezzanine securities of middle and large market
companies throughout Western Europe. As at December 31,
2005, the capital contributed to the GSC Fund was $1,828 with
the remaining of the commitment being $8,172. Overseas Res
commitment of $10,000 represents 8.9% of the total commitments
made to the GSC Fund.
Major categories of net investment income are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Interest from short-term
investments
|
|
$
|
8,429
|
|
|
$
|
5,539
|
|
|
$
|
4,440
|
|
Interest from fixed maturities
|
|
|
8,897
|
|
|
|
3,140
|
|
|
|
2,567
|
|
Interest from trading securities
|
|
|
309
|
|
|
|
|
|
|
|
|
|
Interest on cash and cash
equivalents
|
|
|
12,251
|
|
|
|
3,540
|
|
|
|
1,875
|
|
Dividends from equity securities
|
|
|
39
|
|
|
|
|
|
|
|
|
|
Change in net unrealized holding
loss on trading securities
|
|
|
|
|
|
|
(471
|
)
|
|
|
|
|
Amortization of bond premiums or
discounts
|
|
|
(564
|
)
|
|
|
(304
|
)
|
|
|
(581
|
)
|
Investment expenses (Note 16)
|
|
|
(1,125
|
)
|
|
|
(342
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,236
|
|
|
$
|
11,102
|
|
|
$
|
8,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2005, 2004 and 2003,
gross realized gains on sale of
available-for-sale
securities were $1,768, $68 and $64, respectively, and gross
realized losses on sale of
available-for-sale
securities were $Nil, $668 and $162, respectively.
F-14
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
REINSURANCE
BALANCES RECEIVABLE
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Recoverable from reinsurers on:
|
|
|
|
|
|
|
|
|
Paid losses
|
|
$
|
36,830
|
|
|
$
|
30,974
|
|
Outstanding losses
|
|
|
77,676
|
|
|
|
101,316
|
|
Losses incurred but not reported
|
|
|
244,011
|
|
|
|
393,373
|
|
Fair value adjustment
|
|
|
(108,288
|
)
|
|
|
(184,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,229
|
|
|
$
|
341,627
|
|
|
|
|
|
|
|
|
|
|
The fair value adjustment, determined on acquisition of a
reinsurance subsidiary, was based on the estimated timing of
loss and loss adjustment expense payments and an assumed
interest rate of 5.0%, and is amortized over the estimated
payout period, as adjusted for accelerations on commutation
settlements, using the constant yield method. Interest rates
used to determine the fair value of reinsurance balances
receivable reflect the credit risk associated with the
reinsurers from who the receivables are, or will become due.
The Companys acquired reinsurance subsidiaries used
retrocessional agreements to reduce their exposure to the risk
of reinsurance assumed. The Company remains liable to the extent
the retrocessionaires do not meet their obligations under these
agreements, and therefore, the Company evaluates and monitors
concentration of credit risk. Provisions are made for amounts
considered potentially uncollectable. The allowance for
uncollectable reinsurance recoverable was $102,559 and $120,956
at December 31, 2005 and 2004, respectively.
At December 31, 2005 and 2004, reinsurance receivables with
a carrying value of $164,363 and $149,255, respectively, were
associated with a single reinsurer which represented 10% or more
of total reinsurance balances receivable. In the event that all
or any of the reinsuring companies are unable to meet their
obligations under existing reinsurance agreements, the Company
will be liable for such defaulted amounts.
|
|
7.
|
INVESTMENT
IN PARTLY-OWNED COMPANIES
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Investment in B.H. Acquisition
Ltd.
|
|
$
|
17,480
|
|
|
$
|
17,400
|
|
Investment in Cassandra Equity
(Cayman) LP
|
|
|
|
|
|
|
10,701
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,480
|
|
|
$
|
28,101
|
|
|
|
|
|
|
|
|
|
|
B.H.
Acquisition Ltd.
The Company holds 45% of the ordinary shares of B.H. Acquisition
Ltd. (BH). The ordinary shares held by the Company
have 33% of BHs voting rights. BH wholly owns two
insurance companies in run-off, Brittany Insurance Company Ltd.,
incorporated in Bermuda, and Compagnie Européenne
dAssurances Industrielles S.A., incorporated in Belgium.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Balance at January 1
|
|
$
|
17,400
|
|
|
$
|
17,237
|
|
Share of net earnings
|
|
|
80
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
17,480
|
|
|
$
|
17,400
|
|
|
|
|
|
|
|
|
|
|
F-15
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cassandra
Equity (Cayman) LP
In 2004, the Companys wholly-owned subsidiary, Hudson
Reinsurance Company Ltd. (Hudson), purchased a 27%
interest in Cassandra Equity (Cayman) LP (Cassandra)
for $9,147.
Cassandra was established to invest in equity shares of a
publicly traded international reinsurance company. On
March 1, 2005, Cassandra sold 100% of its equity
shareholdings for total proceeds of $40,048. The Companys
share of total proceeds was $10,813.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Investment
|
|
$
|
10,701
|
|
|
$
|
9,147
|
|
Share of net earnings
|
|
|
112
|
|
|
|
1,830
|
|
Distributions
|
|
|
(10,813
|
)
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
|
|
|
$
|
10,701
|
|
|
|
|
|
|
|
|
|
|
JCF CFN
Entities
In 2003, the Company purchased a 40% interest in each of JCF CFN
LLC and JCF CFN II LLC (collectively, the JCF CFN
Entities) for a total of $10,200. On November 11,
2003, the Company transferred its investment to Hudson.
In 2004, the JCF CFN Entities were sold and the company received
distributions of $16,119.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Balance at January 1
|
|
$
|
|
|
|
$
|
11,571
|
|
Investment
|
|
|
|
|
|
|
|
|
Share of net earnings
|
|
|
|
|
|
|
4,888
|
|
Share of other comprehensive income
|
|
|
|
|
|
|
(340
|
)
|
Distributions
|
|
|
|
|
|
|
(16,119
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 and 2004, consolidated retained
earnings include $6,611 and $11,465, respectively, of
undistributed earnings of companies accounted for by the equity
method.
|
|
8.
|
LOSSES
AND LOSS ADJUSTMENT EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Outstanding
|
|
$
|
433,722
|
|
|
$
|
564,183
|
|
Incurred but not reported
|
|
|
645,969
|
|
|
|
821,555
|
|
Fair value adjustment
|
|
|
(273,132
|
)
|
|
|
(338,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
806,559
|
|
|
$
|
1,047,313
|
|
|
|
|
|
|
|
|
|
|
The fair value adjustment, determined on acquisition of a
reinsurance subsidiary, was based on the estimated timing of
loss and loss adjustment expense payments and an assumed
interest rate of 4.18%, and is amortized over the estimated
payout period, as adjusted for accelerations on commutation
settlements, using the constant yield method. Interest rates
used to determine the fair value of gross loss reserves are
based upon risk free rates applicable to the average duration of
the loss reserves.
In establishing the liability for losses and loss adjustment
expenses related to asbestos and environmental claims,
management considers facts currently known and the current state
of the law and coverage litigation.
F-16
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Liabilities are recognized for known claims (including the cost
of related litigation) when sufficient information has been
developed to indicate the involvement of a specific insurance
policy, and management can reasonably estimate its liability. In
addition, liabilities have been established to cover additional
exposures on both known and unasserted claims. Estimates of the
liabilities are reviewed and updated continually. Developed case
law and adequate claim history do not exist for such claims,
especially because significant uncertainty exists about the
outcome of coverage litigation and whether past claim experience
will be representative of future claim experience. In view of
the changes in the legal and tort environment that affect the
development of such claims, the uncertainties inherent in
valuing asbestos and environmental claims are not likely to be
resolved in the near future. Ultimate values for such claims
cannot be estimated using traditional reserving techniques and
there are significant uncertainties in estimating the amount of
the Companys potential losses for these claims. There can
be no assurance that the reserves established by the Company
will be adequate or will not be adversely affected by the
development of other latent exposures. The Companys
liability for unpaid losses and loss adjustment expenses as of
December 31, 2005 and 2004 included $383,956 and $479,048,
respectively, that represents an estimate of its net ultimate
liability for asbestos and environmental claims. The gross
liability for such claims as at December 31, 2005 and 2004
was $578,079 and $743,294, respectively.
Activity in the liability for unpaid losses and loss adjustment
expenses is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance as at January 1
|
|
$
|
1,047,313
|
|
|
$
|
381,531
|
|
|
$
|
284,409
|
|
Less reinsurance recoverables
|
|
|
310,653
|
|
|
|
151,376
|
|
|
|
99,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
736,660
|
|
|
|
230,155
|
|
|
|
184,518
|
|
Effect of exchange rate movement
|
|
|
3,652
|
|
|
|
4,124
|
|
|
|
10,575
|
|
Incurred related to prior years
|
|
|
(96,007
|
)
|
|
|
(13,706
|
)
|
|
|
(24,044
|
)
|
Paid related to prior years
|
|
|
(69,007
|
)
|
|
|
(19,019
|
)
|
|
|
(4,094
|
)
|
Acquired on purchase of
subsidiaries
|
|
|
17,862
|
|
|
|
535,106
|
|
|
|
63,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance as at December 31
|
|
|
593,160
|
|
|
|
736,660
|
|
|
|
230,155
|
|
Plus reinsurance recoverables
|
|
|
213,399
|
|
|
|
310,653
|
|
|
|
151,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at December 31
|
|
$
|
806,559
|
|
|
$
|
1,047,313
|
|
|
$
|
381,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net reduction in loss and loss adjustment expense
liabilities for the years ended December 31, 2005, 2004 and
2003 was primarily due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Reduction (increase) in estimates
of ultimate losses
|
|
$
|
65,307
|
|
|
$
|
(1,000
|
)
|
|
$
|
13,614
|
|
Reduction in provisions for bad
debts
|
|
|
20,200
|
|
|
|
|
|
|
|
|
|
Reduction in provisions for loss
adjustment expenses
|
|
|
10,500
|
|
|
|
14,706
|
|
|
|
10,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss
adjustment expense liabilities
|
|
$
|
96,007
|
|
|
$
|
13,706
|
|
|
$
|
24,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reduction in estimates of ultimate losses arose from
commutations and policy buy-backs, the settlement of losses in
the year below carried reserves, lower than expected incurred
adverse loss development and the resulting reductions in
actuarial estimates of losses incurred but not reported. As a
result of the collection of certain reinsurance receivables,
against which bad debt provisions had been provided in earlier
periods, the Company reduced its aggregate provisions for bad
debt in 2005.
F-17
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
REINSURANCE
BALANCES PAYABLE
|
Under the terms of certain of the Companys acquisitions,
distributions from certain acquired companies in excess of their
purchase price are shared with the sellers, subject to aggregate
caps. In 2005, the Company paid $22,000 as final settlement of
these rights to distributions from certain acquired companies.
The payable reflected in the financial statements as at
December 31, 2004 was $19,757.
Authorized
shares of par value $1 each
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Class A ordinary voting shares
|
|
|
6,000
|
|
|
|
6,000
|
|
Class B ordinary voting shares
|
|
|
6,000
|
|
|
|
6,000
|
|
Class C ordinary voting shares
|
|
|
6,153
|
|
|
|
6,153
|
|
Class D ordinary non-voting
shares
|
|
|
741
|
|
|
|
744
|
|
Class E ordinary non-voting
redeemable shares
|
|
|
40,501,552
|
|
|
|
40,501,552
|
|
Shares not allocated to a class
|
|
|
58,479,554
|
|
|
|
58,479,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,000,000
|
|
|
|
99,000,000
|
|
|
|
|
|
|
|
|
|
|
Issued
and fully paid shares of par value $1 each
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Class A ordinary voting shares
|
|
$
|
6
|
|
|
$
|
6
|
|
Class B ordinary voting shares
|
|
|
6
|
|
|
|
6
|
|
Class C ordinary voting shares
|
|
|
6
|
|
|
|
6
|
|
Class D ordinary non-voting
shares
|
|
|
1
|
|
|
|
|
|
Class E ordinary non-voting
redeemable shares
|
|
|
22,642
|
|
|
|
22,894
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,661
|
|
|
$
|
22,912
|
|
|
|
|
|
|
|
|
|
|
Class E non-voting redeemable shares are held by
Class C shareholders and are redeemable at their par value
based upon distributions to Class A and Class B
shareholders.
Class E shares are non-voting and were issued to the
shareholders of Castlewood Limited (a subsidiary of the
Company), together with the Class C shares, upon the
acquisition of Castlewood Limited by the Company. Upon the
declaration of dividends by the Company on Class C Shares,
the holders of Class E Shares have the option to redeem
Class E Shares. The amount of Class E Shares that are
eligible for redemption is equal to the total dividend declared
on the Class C Shares, as the Class E Shares are
redeemable at their par value of $1 per share. The holders of
Class E shares are not entitled to any dividends or rights
to participate in any distributions of assets upon liquidation.
Class E Shares are not mandatorily redeemable nor is their
redemption an unconditional obligation. Instead, the redemption
of Class E Shares is dependent on the payment of dividends
on Class C Shares, an event which was not definitely
certain to occur. There is no mechanism in the Companys
bye-laws or any privilege or rights which would allow for the
Class C shareholders to force the Company to make a
dividend payment.
All outstanding Class E shares were fully redeemed during
the second quarter of 2006.
F-18
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
ADDITIONAL
PAID-IN CAPITAL
|
During the years ended December 31, 2005, 2004 and 2003,
shareholders of the Company have made contributions in the
amount of $Nil, $Nil and $14,338, respectively.
As part of the 2001 acquisition of Castlewood Limited by the
Company, the non-management shareholders of the Company agreed
to fund up to $79 million in (re)insurance acquisitions by
the Company. The capital contribution by those two shareholder
groups in 2003 represents the final payment of that
$79 million commitment. $65 million of the commitment
was funded by the non-management shareholders prior to 2003.
|
|
12.
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME
|
Other comprehensive income for the years ended December 31,
2005, 2004 and 2003 is comprised of cumulative translation
adjustments and unrealized gains and losses on investments as
shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cumulative translation adjustments
|
|
$
|
1,010
|
|
|
$
|
1,909
|
|
|
$
|
1,379
|
|
Unrealized gains and losses on
investments
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,010
|
|
|
$
|
1,909
|
|
|
$
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2002, the Company entered into an agreement with
employees that provided for stock awards. Employee stock awards
for 153 Class C ordinary shares and 1,007,552 Class E
ordinary shares were granted to the employees. The shares vest
over a period of four years. The Company has charged
compensation expense of $259, $481 and $896 relating to these
restricted share awards in 2005, 2004 and 2003, respectively.
During 2004, the Company established an employee share plan.
Employee stock awards for 17 and 744 Class D ordinary
shares were granted to employees in the 2005 and
2004 years, respectively. The shares vest over a period of
five years. The Company has charged compensation expense of
$3,780 and $3,125 relating to these restricted share awards in
2005 and 2004, respectively.
F-19
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the comparison of basic and
diluted earnings per share for the years ended December 31,
2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
BASIC EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
80,710
|
|
|
$
|
38,294
|
|
|
$
|
30,592
|
|
Weighted average shares
outstanding basic
|
|
|
18,352
|
|
|
|
18,081
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4,397.89
|
|
|
$
|
2,117.91
|
|
|
$
|
1,699.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
80,710
|
|
|
$
|
38,294
|
|
|
$
|
30,592
|
|
Weighted average shares
outstanding basic
|
|
|
18,352
|
|
|
|
18,081
|
|
|
|
18,000
|
|
Share equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares
|
|
|
399
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding diluted
|
|
|
18,751
|
|
|
|
18,248
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4,304.30
|
|
|
$
|
2,098.53
|
|
|
$
|
1,699.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company provides pension benefits to eligible employees
through various plans sponsored by the Company. All pension
plans, except as described below, are structured as defined
contribution plans. Pension expense for the years ended
December 31, 2005, 2004 and 2003 was $1,342, $1,126 and
$835, respectively.
Hillcot has a defined benefit pension plan which the plan
trustees resolved to wind up effective January 1, 2003. At
December 31, 2003, based upon an actuarial valuation, the
plan was fully funded and the plan actuary has reported that
there is no regulatory requirement for Hillcot to further fund
the plan prior to its liquidation. During 2003, plan liabilities
of Hillcots deferred benefit pension plan were reduced by
$3,106 as a result of an actuarial surplus and the impact of a
cap on liabilities arising from the termination of the plan.
This reduction was treated as a reduction in general and
administrative expenses in 2003. The liquidation of the plan is
scheduled to be completed during 2006.
|
|
16.
|
RELATED
PARTY TRANSACTIONS
|
The Company has entered into certain transactions with companies
and partnerships managed or controlled by affiliates of
Mr. J. Christopher Flowers. Mr. Flowers is a member of
the Companys Board of Directors and the largest
shareholder of The Enstar Group, Inc. (Enstar),
which has an approximately one-third economic and 50% voting
interest in the Company.
The transactions involving companies and partnerships where
Mr. Flowers has an involvement are as follows:
|
|
|
|
|
On March 1, 2006, the Company approved a commitment to
invest up to $75,000 to J.C. Flowers II L.P., a private
investment fund formed by J.C. Flowers & Co. LLC
(Flowers LLC). Mr. Flowers controls Flowers
LLC. John J. Oros, a member of the Companys board of
directors and President and Chief Operating Officer of Enstar,
is a managing director of Flowers LLC.
|
|
|
|
|
|
In December 2005, JCF Re Holdings LP (JCF Re), a
Cayman limited partnership, entered into a subscription and
shareholders agreement with Fitzwilliam for the establishment of
a segregated cell and
|
F-20
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
paid $1,932 to Fitzwilliam as capital and contributed surplus.
During the year, Fitzwilliam booked management fees of $40 from
JCF Re.
|
|
|
|
|
|
In December 2005, the Company invested $24,532 in New NIB, which
was formed to hold, together with certain related entities, 100%
of the share capital of NIB Capital. Mr. Flowers serves on the
supervisory board of NIB Capital. Several officers and directors
of the Company made personal investments in New NIB.
|
|
|
|
|
|
In June 2005, the Company, through its subsidiary Castlewood
(US) Inc., entered into a license agreement with Flowers LLC for
the use of certain office space and administrative services from
Flowers LLC for an annual payment of $50 running through 2014.
|
|
|
|
In 2004, Hudson invested $9,147 in Cassandra for a 27% interest.
JC Flowers I LP also owned a 27% interest in
Cassandra. Mr. Flowers is the managing member of
JCF Associates I LLC, which is the general partner of
JC Flowers I LP.
|
|
|
|
In 2003, the Company and Shinsei Bank, Limited, through their
jointly owned company, Hillcot Holdings, completed the
acquisition of Hillcot. Mr. Flowers is a director of
Shinsei Bank, Limited.
|
|
|
|
|
|
During 2003, the Company invested $10,000 in the JCF CFN
Entities. The JCF CFN Entities were controlled by JCF
Associates I, LLC, the managing member of which was
Mr. Flowers. In 2004, the holdings of the JCF CFN Entities
were sold.
|
During the years ended December 31, 2005, 2004 and 2003,
Castlewood earned consulting fees of $1,250, $1,250 and $1,250,
respectively, from subsidiaries of BH.
In 2002, the Company and BH entered into an investment advisory
agreement with Enstar for an agreed annual fee of $400. For the
years ended December 31, 2005, 2004 and 2003, the Company
incurred fees relating to this agreement of $365, $362 and $330,
respectively.
In April 2005, Castlewood (US) Inc. entered into a lease
agreement for use of certain office space with its President and
Chief Operating Officer running through to 2008 for an annual
cost of $131. For the year ended December 31, 2005
Castlewood (US) Inc. incurred rent expense of $119.
As at December 31, 2005 and 2004, no amounts on account of
investment fees and other expenses were payable to these related
parties and $40 and $Nil, respectively, were receivable from
them.
The Company, in common with the insurance and reinsurance
industry in general, is subject to litigation and arbitration in
the normal course of its business operations. While the outcome
of the litigation cannot be predicted with certainty, the
Company is disputing and will continue to dispute all
allegations that management believes are without merit. As of
December 31, 2005, the Company was not a party to any
material litigation or arbitration.
Under current Bermuda law, Castlewood Holdings and its Bermuda
subsidiaries are not required to pay taxes in Bermuda on either
income or capital gains. Castlewood Holdings and its Bermuda
subsidiaries have received an undertaking from the Bermuda
government that, in the event of income or capital gains taxes
being imposed, Castlewood Holdings and its Bermuda subsidiaries
will be exempted from such taxes until the year 2016.
F-21
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has operating subsidiaries and branch operations in
the United States, Barbados, the United Kingdom and Switzerland
and is subject to the relevant taxes in those jurisdictions. The
weighted average expected tax provision has been calculated
using the pre-tax accounting income in each jurisdiction
multiplied by that jurisdictions applicable statutory tax
rate.
Deferred income taxes arise from the recognition of temporary
differences between income determined for financial reporting
purposes and income tax purposes. Such differences result from
differing bases of depreciation and amortization for tax and
book purposes.
As of December 31, 2005 and 2004, UK insurance subsidiaries
and branch operations had tax loss carry-forwards, which do not
expire, and deductions available for tax purposes of
approximately $272,254 and $223,060, respectively. At the time
of the acquisition of each of the Companys U.K. insurance
and reinsurance subsidiaries, each company had tax loss
carry-forwards that arose prior to acquisition as such entities
had performed poorly and generated tax losses. Under U.K. tax
law, the tax loss carry-forwards attributable to the acquired
companies are retained by them on acquisition by the Company and
are available to offset future taxable income generated by the
acquired company without time limit and, in accordance with
S107(4) of the Finance Act 2000, are also available to offset
taxable income generated by the Companys U.K. consulting
subsidiaries.
As the insurance and reinsurance subsidiaries investment
income is largely offset by expenses, the only future taxable
revenue of such entities consists of the reduction in net loss
and loss adjustment expense liabilities. As the timing and
benefit of such future activities is unpredictable, the Company
has determined that it is more likely than not that the
carry-forwards will not be utilized and, therefore a valuation
allowance of 100% has been provided.
A valuation allowance has been provided for the tax benefit of
these items as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Benefit of loss carry-forward
|
|
$
|
81,676
|
|
|
$
|
66,941
|
|
Valuation allowance
|
|
|
(81,676
|
)
|
|
|
(66,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The actual income tax rate for the years ended December 31,
2005, 2004 and 2003, differed from the amount computed by
applying the effective rate of 0% under the Bermuda law to
earnings before income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Earnings before income taxes
|
|
$
|
81,624
|
|
|
$
|
40,218
|
|
|
$
|
32,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Foreign taxes at local expected
tax rates
|
|
|
0.7
|
%
|
|
|
4.8
|
%
|
|
|
4.6
|
%
|
Other
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
1.1
|
%
|
|
|
4.8
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
|
STATUTORY
REQUIREMENTS
|
The Companys insurance and reinsurance operations are
subject to insurance laws and regulations in the jurisdictions
in which they operate, including Bermuda, Switzerland and the
United Kingdom. Statutory capital
F-22
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and surplus as reported to the relevant regulatory authorities
for the insurance and reinsurance subsidiaries of the Company as
of December 31, 2005 and 2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bermuda
|
|
|
UK
|
|
|
Switzerland
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
Required statutory capital and
surplus
|
|
$
|
15,944
|
|
|
$
|
20,514
|
|
|
$
|
17,458
|
|
|
$
|
16,028
|
|
|
$
|
15,481
|
|
|
$
|
25,161
|
|
Actual statutory capital and
surplus
|
|
$
|
117,622
|
|
|
$
|
62,538
|
|
|
$
|
123,429
|
|
|
$
|
100,992
|
|
|
$
|
44,565
|
|
|
$
|
29,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bermuda
|
|
|
U.K.
|
|
|
Switzerland
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
Statutory Income
|
|
$
|
59,276
|
|
|
$
|
111
|
|
|
$
|
28,894
|
|
|
$
|
(60,592
|
)
|
|
$
|
20,004
|
|
|
$
|
(55,929
|
)
|
Maximum available to be
distributed as dividends
|
|
$
|
101,678
|
|
|
$
|
42,024
|
|
|
$
|
26,075
|
|
|
$
|
5,699
|
|
|
$
|
|
|
|
$
|
|
|
As at December 31, 2005 and 2004, retained earnings of
$8,510 and $8,494 of one of BHs subsidiaries requires
regulatory approval prior to distribution.
The Company leases office space under operating leases expiring
in various years through 2015. The leases are renewable at the
option of the lessee under certain circumstances. The following
is a schedule of future minimum rental payments on
non-cancelable leases as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
1,420
|
|
2007
|
|
|
880
|
|
2008
|
|
|
719
|
|
2009
|
|
|
445
|
|
2010
|
|
|
229
|
|
2011 through 2015
|
|
|
955
|
|
|
|
|
|
|
|
|
$
|
4,648
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2005, 2004
and 2003 was $1,696, $1,402 and $1,272, respectively.
The determination of reportable segments is based on how senior
management monitors the Companys operations. The Company
measures the results of its operations under two major business
categories: consulting and reinsurance. 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 related to net earnings after
income taxes of the reinsurance segment.
F-23
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
Consulting
|
|
|
Reinsurance
|
|
|
Total
|
|
|
Consulting fees
|
|
$
|
38,046
|
|
|
$
|
(16,040
|
)
|
|
$
|
22,006
|
|
Net investment income
|
|
|
576
|
|
|
|
27,660
|
|
|
|
28,236
|
|
Net realized gains
|
|
|
|
|
|
|
1,268
|
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,622
|
|
|
|
12,888
|
|
|
|
51,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss
adjustment expense liabilities
|
|
|
|
|
|
|
(96,007
|
)
|
|
|
(96,007
|
)
|
Salaries and benefits
|
|
|
26,864
|
|
|
|
13,957
|
|
|
|
40,821
|
|
General and administrative expenses
|
|
|
9,246
|
|
|
|
1,716
|
|
|
|
10,962
|
|
Net foreign exchange loss
|
|
|
10
|
|
|
|
4,592
|
|
|
|
4,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,120
|
|
|
|
(75,742
|
)
|
|
|
(39,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes,
minority interest and share of net earnings of partly-owned
companies
|
|
|
2,502
|
|
|
|
88,630
|
|
|
|
91,132
|
|
Income taxes
|
|
|
(883
|
)
|
|
|
(31
|
)
|
|
|
(914
|
)
|
Minority interest
|
|
|
|
|
|
|
(9,700
|
)
|
|
|
(9,700
|
)
|
Share of net earnings of
partly-owned companies
|
|
|
|
|
|
|
192
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
1,619
|
|
|
$
|
79,091
|
|
|
$
|
80,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
Consulting
|
|
|
Reinsurance
|
|
|
Total
|
|
|
Consulting fees
|
|
$
|
32,992
|
|
|
$
|
(9,289
|
)
|
|
$
|
23,703
|
|
Net investment income
|
|
|
460
|
|
|
|
10,642
|
|
|
|
11,102
|
|
Net realized losses
|
|
|
|
|
|
|
(600
|
)
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,452
|
|
|
|
753
|
|
|
|
34,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss
adjustment expense liabilities
|
|
|
|
|
|
|
(13,706
|
)
|
|
|
(13,706
|
)
|
Salaries and benefits
|
|
|
20,312
|
|
|
|
5,978
|
|
|
|
26,290
|
|
General and administrative expenses
|
|
|
6,874
|
|
|
|
3,803
|
|
|
|
10,677
|
|
Net foreign exchange (gain)
|
|
|
(89
|
)
|
|
|
(3,642
|
)
|
|
|
(3,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,097
|
|
|
|
(7,567
|
)
|
|
|
19,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes,
minority interest and share of net earnings of partly-owned
companies
|
|
|
6,355
|
|
|
|
8,320
|
|
|
|
14,675
|
|
Income taxes
|
|
|
(1,939
|
)
|
|
|
15
|
|
|
|
(1,924
|
)
|
Minority interest
|
|
|
|
|
|
|
(3,097
|
)
|
|
|
(3,097
|
)
|
Share of net earnings of
partly-owned companies
|
|
|
|
|
|
|
6,881
|
|
|
|
6,881
|
|
Extraordinary gain
|
|
|
|
|
|
|
21,759
|
|
|
|
21,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
4,416
|
|
|
$
|
33,878
|
|
|
$
|
38,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
Consulting
|
|
|
Reinsurance
|
|
|
Total
|
|
|
Consulting fees
|
|
$
|
31,112
|
|
|
$
|
(6,366
|
)
|
|
$
|
24,746
|
|
Net investment income
|
|
|
265
|
|
|
|
7,767
|
|
|
|
8,032
|
|
Net realized losses
|
|
|
(862
|
)
|
|
|
(98
|
)
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,515
|
|
|
|
1,303
|
|
|
|
31,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss
adjustment expense liabilities
|
|
|
|
|
|
|
(24,044
|
)
|
|
|
(24,044
|
)
|
Salaries and benefits
|
|
|
12,234
|
|
|
|
3,427
|
|
|
|
15,661
|
|
General and administrative expenses
|
|
|
6,821
|
|
|
|
172
|
|
|
|
6,993
|
|
Net foreign exchange (gain)
|
|
|
(219
|
)
|
|
|
(2,143
|
)
|
|
|
(2,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,836
|
|
|
|
(22,588
|
)
|
|
|
(3,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes,
minority interest and share of net earnings of partly-owned
companies
|
|
|
11,679
|
|
|
|
23,891
|
|
|
|
35,570
|
|
Income taxes
|
|
|
(1,490
|
)
|
|
|
|
|
|
|
(1,490
|
)
|
Minority interest
|
|
|
|
|
|
|
(5,111
|
)
|
|
|
(5,111
|
)
|
Share of net earnings of partly
owned companies
|
|
|
|
|
|
|
1,623
|
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
10,189
|
|
|
$
|
20,403
|
|
|
$
|
30,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.
|
CONDENSED
UNAUDITED QUARTERLY FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Consulting fees
|
|
$
|
8,481
|
|
|
$
|
5,180
|
|
|
$
|
3,857
|
|
|
$
|
4,488
|
|
Net investment income and net
realized gains
|
|
|
8,355
|
|
|
|
7,866
|
|
|
|
8,255
|
|
|
|
5,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,836
|
|
|
|
13,046
|
|
|
|
12,112
|
|
|
|
9,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss
adjustment expense liabilities
|
|
|
(89,541
|
)
|
|
|
(1,043
|
)
|
|
|
(3,873
|
)
|
|
|
(1,550
|
)
|
Salaries and benefits
|
|
|
22,292
|
|
|
|
6,133
|
|
|
|
7,522
|
|
|
|
4,874
|
|
General and administrative expenses
|
|
|
1,583
|
|
|
|
3,239
|
|
|
|
3,457
|
|
|
|
2,683
|
|
Net foreign exchange loss
|
|
|
2,184
|
|
|
|
223
|
|
|
|
1,138
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,482
|
)
|
|
|
8,552
|
|
|
|
8,244
|
|
|
|
7,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
698
|
|
|
|
(285
|
)
|
|
|
(151
|
)
|
|
|
(1,176
|
)
|
Minority interest
|
|
|
(8,269
|
)
|
|
|
(439
|
)
|
|
|
(612
|
)
|
|
|
(380
|
)
|
Share of net earnings of
partly-owned companies
|
|
|
49
|
|
|
|
63
|
|
|
|
32
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
72,796
|
|
|
$
|
3,833
|
|
|
$
|
3,137
|
|
|
$
|
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
Basic
|
|
$
|
3,966.65
|
|
|
$
|
209.27
|
|
|
$
|
171.62
|
|
|
$
|
51.75
|
|
Net earnings per share
Diluted
|
|
$
|
3,882.25
|
|
|
$
|
204.42
|
|
|
$
|
167.32
|
|
|
$
|
50.36
|
|
Weighted average shares
outstanding Basic
|
|
|
18,352
|
|
|
|
18,316
|
|
|
|
18,279
|
|
|
|
18,242
|
|
Weighted average shares
outstanding Diluted
|
|
|
18,751
|
|
|
|
18,751
|
|
|
|
18,749
|
|
|
|
18,744
|
|
F-25
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Quarters Ended
|
|
|
|
December 31
|
|
|
September 30
|
|
|
June 30
|
|
|
March 31
|
|
|
Consulting fees
|
|
$
|
8,226
|
|
|
$
|
4,809
|
|
|
$
|
6,290
|
|
|
$
|
4,378
|
|
Net investment income and net
realized gains
|
|
|
4,607
|
|
|
|
3,208
|
|
|
|
480
|
|
|
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,833
|
|
|
|
8,017
|
|
|
|
6,770
|
|
|
|
6,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reduction in loss and loss
adjustment expense liabilities
|
|
|
(7,654
|
)
|
|
|
(1,879
|
)
|
|
|
(2,333
|
)
|
|
|
(1,840
|
)
|
Salaries and benefits
|
|
|
11,475
|
|
|
|
6,422
|
|
|
|
4,241
|
|
|
|
4,152
|
|
General and administrative expenses
|
|
|
2,453
|
|
|
|
3,251
|
|
|
|
2,847
|
|
|
|
2,126
|
|
Net foreign exchange (gain)/loss
|
|
|
(2,476
|
)
|
|
|
(282
|
)
|
|
|
104
|
|
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,798
|
|
|
|
7,512
|
|
|
|
4,859
|
|
|
|
3,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(1,179
|
)
|
|
|
(291
|
)
|
|
|
(188
|
)
|
|
|
(266
|
)
|
Minority interest
|
|
|
(2,201
|
)
|
|
|
(484
|
)
|
|
|
44
|
|
|
|
(456
|
)
|
Share of net earnings of
partly-owned companies
|
|
|
4,048
|
|
|
|
1,807
|
|
|
|
342
|
|
|
|
684
|
|
Extraordinary gain (Note 3)
|
|
|
21,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
31,462
|
|
|
$
|
1,537
|
|
|
$
|
2,109
|
|
|
$
|
3,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share before
extraordinary gains Basic
|
|
$
|
536.64
|
|
|
$
|
85.29
|
|
|
$
|
117.17
|
|
|
$
|
177.00
|
|
Extraordinary gain
Basic
|
|
|
1,203.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
Basic
|
|
$
|
1,740.06
|
|
|
$
|
85.29
|
|
|
$
|
117.17
|
|
|
$
|
177.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share before
extraordinary gains Diluted
|
|
$
|
531.73
|
|
|
$
|
85.10
|
|
|
$
|
117.17
|
|
|
$
|
177.00
|
|
Extraordinary gain
Diluted
|
|
|
1,192.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
Diluted
|
|
$
|
1,724.13
|
|
|
$
|
85.10
|
|
|
$
|
117.17
|
|
|
$
|
177.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding Basic
|
|
|
18,081
|
|
|
|
18,020
|
|
|
|
18,000
|
|
|
|
18,000
|
|
Weighted average shares
outstanding Diluted
|
|
|
18,248
|
|
|
|
18,062
|
|
|
|
18,000
|
|
|
|
18,000
|
|
On March 30, 2006, the Company and Shinsei Bank, Limited
(Shinsei), through their jointly owned company
Hillcot Holdings, completed the acquisition of Aioi Insurance
Company of Europe Limited (Aioi), a reinsurance
company based in London, England, for total consideration of
£62 million, of which £50 million was paid
in cash and £12 million ($20,856) by way of vendor
loan note. Subsequent to the acquisition, Aiois name was
changed to Brampton Insurance Company Limited. 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.
F-26
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price and fair value of assets acquired are as
follows:
|
|
|
|
|
Purchase price
|
|
$
|
108,885
|
|
Direct costs of acquisition
|
|
|
337
|
|
|
|
|
|
|
|
|
|
109,222
|
|
Net assets acquired at fair value
|
|
|
117,898
|
|
|
|
|
|
|
Excess of net assets over purchase
price (negative goodwill)
|
|
|
(8,676
|
)
|
Less: Minority interest share of
negative goodwill
|
|
|
4,329
|
|
|
|
|
|
|
|
|
$
|
(4,347
|
)
|
|
|
|
|
|
Shinsei, the minority interest shareholder of Hillcot Holdings,
funded its share of the acquisition with a contribution to
Hillcot Holdings surplus of $22,918 and an advance of
$20,958. The advance is non-interest bearing and has no fixed
terms of repayment. Mr. J. Christopher Flowers, a member of the
Companys board of directors, is a director of Shinsei and
its largest shareholder.
The following summarizes the estimated fair values of the assets
acquired and the liabilities assumed as at the date of the
acquisition:
|
|
|
|
|
Cash, investments and accrued
interest
|
|
$
|
322,383
|
|
Accounts receivable
|
|
|
10,491
|
|
Reinsurance balances payable
|
|
|
(6,728
|
)
|
Losses and loss adjustment expenses
|
|
|
(208,248
|
)
|
|
|
|
|
|
Net assets acquired at fair value
|
|
$
|
117,898
|
|
|
|
|
|
|
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 managements run-off strategy. Any amendment to the
fair values resulting from changes in such information or
strategy will be recognized when they occur.
On April 12, 2006, Hillcot Holdings entered into a facility
loan agreement for $44,356 with an international bank (the
Facility). On April 13, 2006, Hillcot Holdings
drew down $44,356 from the Facility, the proceeds of which were
used to repay shareholder funds advanced for the acquisition of
Aioi. The interest rate on the Facility is LIBOR plus 2% and the
Facility is repayable within four years. The Facility is
secured by a first charge over Hillcot Holdings shares in
Aioi together with a floating charge over Hillcot Holdings
assets.
On April 26, 2006, the Company declared and paid a dividend
to its Class A, B and C shareholders in an aggregate amount
of $27,948 and redeemed 22,138,000 of Class E non-voting
redeemable shares.
On May 5, 2006, Aioi completed the repurchase of
£40 million ($73,800) of its shares. On May 8,
2006, the proceeds of the share repurchase were used to repay
the vendor loan note and accumulated interest of
£12.1 million ($22,325); reduce the Facility loan by
$25,156; and return $23,167 to Hillcot Holdings shareholders.
On May 23, 2006, the Company entered into a definitive
Agreement and Plan of Merger with The Enstar Group, Inc.
(Enstar), a Georgia corporation, and CWMS Subsidiary
Corp., a Georgia corporation and a direct wholly-owned
subsidiary of the Company, pursuant to which CWMS Subsidiary
Corp. will be merged (the Merger) with and into
Enstar, and Enstar, which will be renamed Enstar USA, Inc., will
become a direct wholly-owned subsidiary of the Company. Holders
of shares of Enstar common stock will be entitled to receive one
ordinary share of the Company in the Merger for each share of
Enstar common stock they own.
F-27
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The board of directors of each of Enstar and the Company
unanimously approved the terms and conditions of the Merger
Agreement. The transaction is expected to close during the third
quarter of 2006.
On May 23, 2006, the Company entered into a
Recapitalization Agreement (the Recapitalization
Agreement), which provides, among other things, for: a
recapitalization of the Company in which all outstanding shares
will be exchanged for newly created ordinary shares; the
appointment of the board of directors of the Company immediately
following the Merger; the repurchase for $20,000 of certain
shares of the Company from Trident II, L.P. and its
affiliates; payments to certain officers and employees of the
Company; the purchase, for $6,200, by the Company of the shares
of BH beneficially owned by an affiliate of Trident II,
L.P. and the adoption of new bye-laws that will include, among
other things, certain restrictions on transfers and voting of
the ordinary shares. Company shareholders holding the number of
shares required to approve the Recapitalization Agreement and
the transactions contemplated thereby have agreed to vote in
favor of such agreements and transactions.
The Recapitalization Agreement also restricts the transfer by
the Company shareholders party thereto of Company ordinary
shares they receive in the recapitalization for one year,
subject to certain exceptions, and provides that, at the time of
the recapitalization, certain shareholders of the Company will
enter into a registration rights agreement entitling them to
require the Company to register their ordinary shares of the
Company for resale under the United States Securities Act of
1933, as amended, beginning one year after the consummation of
the Merger, although Trident II, L.P. and certain of its
affiliates also have the right to require the Company to
register up to 750,000 of the Companys
ordinary shares 90 days from the date of the registration
rights agreement and prior to the first anniversary of such date.
On May 23, 2006, the Company entered into a tax
indemnification agreement with Mr. Flowers pursuant to
which the Company will reimburse and indemnify Mr. Flowers
for, and hold him harmless on an after-tax basis against, any
increase in Mr. Flowers U.S. federal, state or
local income tax liability (including any interests or penalties
relating thereto), and reasonable attorneys fees, incurred
by Mr. Flowers as a result of certain dispositions of
shares of Enstar or dispositions of all or substantially all of
the Enstar assets by the Company within the period beginning
immediately after the effective time of the Merger and ending
five years after the last day of the taxable year that includes
the effective time.
The Company has entered into a letter agreement, dated
May 23, 2006, with two directors of Enstar,
Messrs. Armstrong and Davis, in which the Company, subject
to the consummation of the Merger, agrees to repurchase from
Messrs. Armstrong and Davis, upon their request, during a
30-day
period commencing January 15, 2007, at then prevailing
market prices, such number of ordinary shares as provides an
amount sufficient for Messrs. Armstrong and Davis to pay
taxes on compensation income resulting from the exercise of
options by them on May 23, 2006 for 50,000 shares of
Enstar common stock in the aggregate. The Companys
obligation to repurchase ordinary shares is limited to
25,000 ordinary shares from each of Messrs. Armstrong
and Davis.
In June 2006, a subsidiary of the Company entered into a
definitive agreement for the purchase of Cavell Holdings Limited
(U.K.) (Cavell), a U.K. company, for a purchase
price of £31.8 million ($58,800). Cavell owns a U.K.
insurance company and a Norwegian reinsurer, both of which are
currently in run-off. The transaction is expected to close in
the third quarter of 2006.
In June 2006, a subsidiary of the Company also entered into a
definitive agreement for the purchase of a minority interest in
a U.S. holding company that owns two property and casualty
insurers based in the United States. The transaction is expected
to close in the fourth quarter of 2006.
On June 7, 2006, the commitment made by the Company in
March 2006 to invest an aggregate of $75,000 in J.C.
Flowers II L.P. (the JCF II Fund), a
private investment fund, was accepted by the JCF II Fund.
The Companys commitment may be drawn down by the
JCF II Fund over approximately the next five years. No fees
will be payable by Castlewood to J.C. Flowers II L.P., J.C.
Flowers & Co. LLC, or Mr. Flowers in connection
with this investment.
F-28
CASTLEWOOD
HOLDINGS LIMITED
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
24.
|
RESTATEMENT
OF FINANCIAL STATEMENTS
|
Subsequent to the issuance of the Companys 2005
consolidated financial statements, the Companys management
determined that the presentation of net foreign exchange
loss/(gain) and net reduction in loss and loss adjustment
expense liabilities should have been part of expenses, rather
than part of income as previously reported. As a result, the
accompanying consolidated statements of earnings and certain
disclosures for the years ended December 31, 2005, 2004 and
2003 have been restated to reflect the reclassifications between
income and expenses. The table below summarizes the effects of
the restatement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
As previously
|
|
|
As
|
|
|
As previously
|
|
|
As
|
|
|
As previously
|
|
|
As
|
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
reported
|
|
|
restated
|
|
|
Total income
|
|
$
|
142,915
|
|
|
$
|
51,510
|
|
|
$
|
51,642
|
|
|
$
|
34,205
|
|
|
$
|
58,224
|
|
|
$
|
31,818
|
|
Total expenses
|
|
$
|
51,783
|
|
|
$
|
(39,622
|
)
|
|
$
|
36,967
|
|
|
$
|
19,530
|
|
|
$
|
22,654
|
|
|
$
|
(3,752
|
)
|
The reclassification had no impact on net earnings or any
related per share amounts.
F-29
B.H. Acquisition Ltd.
Consolidated Financial Statements and Report of Independent
Registered Public Accounting Firm
For the years ended December 31, 2005, 2004 and 2003
F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
B.H. Acquisition Ltd.
We have audited the accompanying consolidated balance sheets of
B.H. Acquisition Ltd. and subsidiaries (the Company)
as of December 31, 2005 and 2004, and the related
consolidated statements of earnings and retained earnings and
cash flows for the years ended December 31, 2005, 2004 and
2003. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of B.H.
Acquisition Ltd. and subsidiaries as of December 31, 2005
and 2004 and the results of their operations and their cash
flows for the years ended December 31, 2005, 2004 and 2003
in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 11, the accompanying 2005, 2004 and
2003 consolidated statements of earnings and retained earnings
have been restated.
/s/ Deloitte & Touche
Hamilton, Bermuda
March 1, 2006
(September 18, 2006 as to the effects of the restatement
discussed in Note 11)
F-31
B.H. ACQUISITION LTD.
CONSOLIDATED BALANCE SHEETS
as of December 31, 2005 and 2004
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS |
Cash and cash equivalents
|
|
$ |
22,219 |
|
|
$ |
24,724 |
|
Restricted cash and cash equivalents
|
|
|
11,321 |
|
|
|
9,388 |
|
Investments at fair value
|
|
|
66,462 |
|
|
|
45,077 |
|
Reinsurance balances receivable
|
|
|
3,800 |
|
|
|
29,736 |
|
Funds withheld by ceding companies
|
|
|
1,776 |
|
|
|
1,489 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
105,578 |
|
|
$ |
110,414 |
|
|
|
|
|
|
|
|
|
LIABILITIES |
Losses and loss adjustment expenses
|
|
$ |
58,470 |
|
|
$ |
62,349 |
|
Reinsurance balances payable
|
|
|
5,558 |
|
|
|
8,841 |
|
Accounts payable and accrued liabilities
|
|
|
2,705 |
|
|
|
558 |
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
66,733 |
|
|
|
71,748 |
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
Share capital Authorized, issued and fully paid 12,000 common
shares of par value $l each
|
|
|
12 |
|
|
|
12 |
|
Additional paid-in capital
|
|
|
17,242 |
|
|
|
17,242 |
|
Retained earnings
|
|
|
21,591 |
|
|
|
21,412 |
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
38,845 |
|
|
|
38,666 |
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$ |
105,578 |
|
|
$ |
110,414 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-32
B.H. ACQUISITION LTD.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
for the years ended December 31, 2005, 2004 and 2003 (As
Restated See Note 11)
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
2,406 |
|
|
$ |
1,489 |
|
|
$ |
1,331 |
|
Other income
|
|
|
|
|
|
|
90 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,406 |
|
|
|
1,579 |
|
|
|
1,339 |
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (reduction) in loss and loss adjustment expense
liabilities
|
|
|
552 |
|
|
|
(428 |
) |
|
|
230 |
|
General and administrative expenses
|
|
|
2,275 |
|
|
|
2,839 |
|
|
|
1,648 |
|
Foreign exchange loss (gain)
|
|
|
67 |
|
|
|
142 |
|
|
|
(927 |
) |
Release of run-off provision
|
|
|
(667 |
) |
|
|
(1,333 |
) |
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,227 |
|
|
|
1,220 |
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
179 |
|
|
|
359 |
|
|
|
888 |
|
Retained earnings, beginning of year
|
|
|
21,412 |
|
|
|
21,053 |
|
|
|
20,165 |
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of year
|
|
$ |
21,591 |
|
|
$ |
21,412 |
|
|
$ |
21,053 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-33
B.H. ACQUISITION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2005, 2004 and 2003
(expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$ |
179 |
|
|
$ |
359 |
|
|
$ |
888 |
|
|
Adjustments to reconcile net earnings to net cash flows used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of run-off provision
|
|
|
(667 |
) |
|
|
(1,333 |
) |
|
|
(500 |
) |
|
|
Amortization of fair value adjustment
|
|
|
1,286 |
|
|
|
3,518 |
|
|
|
3,153 |
|
|
|
Unrealized loss on holding of trading securities
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of trading securities
|
|
|
(36,382 |
) |
|
|
(12,666 |
) |
|
|
(15,167 |
) |
|
|
Proceeds on sale of trading securities
|
|
|
14,956 |
|
|
|
7,000 |
|
|
|
4,030 |
|
|
|
Reinsurance balances receivable
|
|
|
28,400 |
|
|
|
7,755 |
|
|
|
3,061 |
|
|
|
Funds withheld by ceding companies
|
|
|
(287 |
) |
|
|
952 |
|
|
|
353 |
|
|
|
Losses and loss adjustment expenses
|
|
|
(6,962 |
) |
|
|
(12,191 |
) |
|
|
(4,867 |
) |
|
|
Reinsurance balances payable
|
|
|
(3,283 |
) |
|
|
(1,391 |
) |
|
|
(5,028 |
) |
|
|
Accounts payable and accrued liabilities
|
|
|
2,147 |
|
|
|
(160 |
) |
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in operating activities
|
|
|
(572 |
) |
|
|
(8,157 |
) |
|
|
(13,687 |
) |
|
|
|
|
|
|
|
|
|
|
Investing Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in restricted cash & cash equivalents, being
net cash flow (used in) provided by investing activity
|
|
|
(1,933 |
) |
|
|
764 |
|
|
|
1,516 |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(2,505 |
) |
|
|
(7,393 |
) |
|
|
(12,171 |
) |
Cash and cash equivalents, beginning of year
|
|
|
24,724 |
|
|
|
32,117 |
|
|
|
44,288 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
22,219 |
|
|
$ |
24,724 |
|
|
$ |
32,117 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
F-34
B.H. ACQUISITION LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
(expressed in thousands of U.S. dollars)
|
|
1. |
Description of Business |
B.H. Acquisition Ltd. (B.H.) was incorporated under
the laws of Bermuda on April 3, 2000, and on July 3,
2000, acquired 100% of the common shares of Brittany Insurance
Company Ltd. (Brittany) and Compagnie
Européenne dAssurances Industrielles S.A.
(CEAI) (collectively the Company) for
cash consideration of $20,500 and $8,000, respectively. B.H. did
not operate prior to July 3, 2000.
Brittany is incorporated under the laws of Bermuda and is in
run-off. Prior to run-off, its principal activity was to
reinsure property, casualty and excess liability risks, such as
environmental and health exposures, of its former affiliates and
third parties. Brittany novated its entire book of related party
business prior to the acquisition.
CEAI is incorporated under the laws of Belgium and is in
run-off. Its principal activity is the run-off of its insurance
and reinsurance risks throughout the world.
|
|
2. |
Significant Accounting Policies |
Basis of preparation
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. The major estimates reflected in
the Companys financial statements include, but are not
limited to, losses and loss adjustment expenses recoverable from
reinsurers and losses and loss adjustment expenses. In the
current year, restricted cash and cash equivalents was broken
out of cash and cash equivalents which, for the years ended
December 31, 2005, 2004 and 2003 decreased cash and cash
equivalents and cash flows provided by investing activities by
$(1,933), $764 and $1,516.
Basis of
consolidation
The accompanying consolidated financial statements include the
assets, liabilities and results of operations of B.H. and its
wholly owned subsidiaries, Brittany and CEAI. Intercompany
transactions are eliminated on consolidation.
Cash and cash
equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments purchased
with an initial maturity of three months or less to be cash
equivalents.
Investments
Trading investments are carried at fair value with unrealized
gains and losses included in net earnings. Realized gains and
losses on sales of securities are recognized in net earnings on
the specific identification basis.
Premiums
Premiums are recognized as revenue on a pro-rata basis over the
periods of the respective policies and contracts of reinsurance.
Premiums which are subject to adjustments are estimated based
upon available information. Any variances from the estimates are
recorded in the periods in which they become known.
F-35
B.H. ACQUISITION LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Losses and loss adjustment
expenses
The liability for losses and loss adjustment expenses includes
an amount determined from loss reports and individual cases and
an amount, based on historical loss experience and industry
statistics, for losses incurred but not reported. These
estimates are continually reviewed and are necessarily subject
to the impact of future changes in such factors as claim
severity and frequency. While the directors and management
believe that the amount is adequate, the ultimate liability may
be significantly in excess of, or less than, the amounts
provided. Adjustments will be reflected as part of net increase
or reduction in loss and loss adjustment expense liabilities in
the periods in which they become known. Premium and commission
adjustments may be triggered by incurred losses and any amounts
are reflected in net loss and loss adjustment expense
liabilities at the same time the related incurred loss is
recognized.
The Companys insurance and reinsurance subsidiaries
establish provisions relating to future run-off costs. These
provisions are reassessed at each reporting date and adjusted
should estimates of the annual costs or run-off period change.
Translation of foreign
currencies
At each balance sheet date, recorded balances that are
denominated in a currency other than the functional currency of
the Company are adjusted to reflect the current exchange rate.
Revenue and expense items are translated into U.S. dollars
at average rates of exchange for the years. The resulting
exchange gains or losses are included in net earnings.
|
|
3. |
Restricted Cash & Cash Equivalents |
Cash equivalents and investments in the amount of $11,321 and
$9,388 as of December 31, 2005 and 2004, respectively, are
restricted as collateral against letters of credit in the amount
of $6,034 and $6,090 as of December 31, 2005 and 2004,
respectively. Letters of credit are issued to ceding insurers as
security for the obligations of insurance subsidiaries under
reinsurance agreements with those ceding insurers.
Trading investments with estimated fair values of $66,462 and
$45,077 as of December 31, 2005 and 2004, respectively,
consist of mutual funds.
The mutual funds invest in US Treasury, US Government Agency,
corporate debt, asset backed securities and money market
instruments.
Major categories of net investment income are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Interest from debt securities and mutual funds
|
|
$ |
1,983 |
|
|
$ |
916 |
|
|
$ |
624 |
|
Interest on cash and cash equivalents
|
|
|
499 |
|
|
|
631 |
|
|
|
881 |
|
Unrealized loss on holding of trading security
|
|
|
(41 |
) |
|
|
|
|
|
|
|
|
Investment expenses
|
|
|
(35 |
) |
|
|
(58 |
) |
|
|
(174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,406 |
|
|
$ |
1,489 |
|
|
$ |
1,331 |
|
|
|
|
|
|
|
|
|
|
|
F-36
B.H. ACQUISITION LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
5. |
Reinsurance Balances Receivable |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Paid losses recoverable
|
|
$ |
1,042 |
|
|
$ |
6,219 |
|
Losses and loss adjustment expenses recoverable
|
|
|
3,457 |
|
|
|
26,680 |
|
Fair value adjustment
|
|
|
(699 |
) |
|
|
(3,163 |
) |
|
|
|
|
|
|
|
|
|
$ |
3,800 |
|
|
$ |
29,736 |
|
|
|
|
|
|
|
|
The fair value adjustment, determined on acquisition of the
reinsurance subsidiaries, is based upon the estimated timing of
loss and loss adjustment expense recoveries and an assumed
interest rate of 3.5%, and is amortized over the estimated
recovery period, as adjusted for accelerations on commutation
settlements, using the constant yield method. Interest rates
used to determine the fair value of reinsurance balances
receivable reflect the credit risk associated with the
reinsurers from who the receivables are, or will become due.
The Companys acquired reinsurance subsidiaries used
retrocessional agreements to reduce their exposure to the risk
of reinsurance assumed. The Company remains liable to the extent
the retrocessionaires do not meet their obligations under these
agreements, and therefore the Company evaluates and monitors
concentration of credit risk. Provisions are made for amounts
considered potentially uncollectable. The allowance for
uncollectable reinsurance recoverable was $11,165 and $11,869 at
December 31, 2005 and 2004, respectively.
At December 31, 2005 and 2004, reinsurance receivables with
a carrying value of $886 and $20,225, respectively, were
associated with two and one reinsurers, respectively, who
represented 10% or more of total reinsurance balances
receivable. In the event that all or any of the reinsuring
companies are unable to meet their obligations under existing
reinsurance agreements, the Company will be liable for such
defaulted amounts.
|
|
6. |
Losses and Loss Adjustment Expenses |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Outstanding
|
|
$ |
33,394 |
|
|
$ |
35,702 |
|
Incurred but not reported
|
|
|
32,941 |
|
|
|
36,661 |
|
Run-off costs provision
|
|
|
3,496 |
|
|
|
4,367 |
|
Fair value adjustment
|
|
|
(11,361 |
) |
|
|
(14,381 |
) |
|
|
|
|
|
|
|
|
|
$ |
58,470 |
|
|
$ |
62,349 |
|
|
|
|
|
|
|
|
F-37
B.H. ACQUISITION LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Activity in the liability for losses and loss adjustment
expenses is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Balance as at January 1
|
|
$ |
62,349 |
|
|
$ |
71,217 |
|
Less reinsurance recoverables
|
|
|
23,517 |
|
|
|
28,505 |
|
|
|
|
|
|
|
|
|
|
|
38,832 |
|
|
|
42,712 |
|
Effect of exchange rate movement
|
|
|
(2,344 |
) |
|
|
270 |
|
Incurred related to prior years
|
|
|
552 |
|
|
|
(428 |
) |
Paid related to prior years
|
|
|
19,539 |
|
|
|
(2,389 |
) |
Amortization of run-off provision
|
|
|
(667 |
) |
|
|
(1,333 |
) |
|
|
|
|
|
|
|
Net balance as at December 31
|
|
|
55,712 |
|
|
|
38,832 |
|
|
Plus reinsurance recoverables
|
|
|
2,758 |
|
|
|
23,517 |
|
|
|
|
|
|
|
|
Balance as at December 31
|
|
$ |
58,470 |
|
|
$ |
62,349 |
|
|
|
|
|
|
|
|
The Companys reserve for unpaid losses and loss adjustment
expenses as of December 31, 2005 and 2004 included $29,763
and $14,112, respectively, that represents an estimate of its
net ultimate liability for asbestos and environmental claims.
The gross liability for such claims as at December 31, 2005
and 2004 was $33,635 and $34,403, respectively.
In establishing the liability for unpaid losses and loss
adjustment expenses related to asbestos and environmental
claims, management considers facts currently known and the
current state of the law and coverage litigation. Liabilities
are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to
indicate the involvement of a specific insurance policy, and
management can reasonably estimate its liability. In addition,
liabilities have been established to cover additional exposures
on both known and unasserted claims. Estimates of the
liabilities are reviewed and updated continually. Developed case
law and adequate claim history do not exist for such claims,
especially because significant uncertainty exists about the
outcome of coverage litigation and whether past claim experience
will be representative of future claim experience. In view of
the changes in the legal and tort environment that affect the
development of such claims, the uncertainties inherent in
valuing asbestos and environmental claims are not likely to be
resolved in the near future. Ultimate values for such claims
cannot be estimated using traditional reserving techniques and
there are significant uncertainties in estimating the amount of
the Companys potential losses for these claims. There can
be no assurance that the reserves established by the Company
will be adequate or will not be adversely affected by the
development of other latent exposures.
The fair value adjustment, determined on acquisition of the
reinsurance subsidiaries, was based on the estimated timing of
loss and loss adjustment expense payments and an assumed
interest rate of 3.5%, and is amortized over the estimated
payout period, as adjusted for accelerations on commutation
settlements, using the constant yield method. Interest rates
used to determine the fair value of gross loss reserves are
based upon risk free rates applicable to the average duration of
the loss reserves.
Reductions in estimates of ultimate losses arise from
commutations, policy buy-backs and loss settlements below
carried reserves and the resulting reductions in actuarial
estimates of losses incurred but not reported.
Run-off costs provision represents the Companys estimate
of the future administrative costs of managing the run-off of
Brittany and CEAI.
F-38
B.H. ACQUISITION LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
7. |
Related Party Transactions |
In 2002, the Company and Castlewood Holdings Limited
(Castlewood) entered into an investment advisory
agreement with The Enstar Group, Inc (Enstar) for an
agreed annual fee of $400. For the years ended December 31,
2005, 2004 and 2003 the Company incurred fees relating to this
agreement of $35, $56 and $174. Enstar and Castlewood are
shareholders in the Company.
The Company was charged by Castlewood administration fees for
the years ended December 31, 2005, 2004 and 2003 amounting
to $1,250, $1,250 and $1,250, respectively. As at
December 31, 2005, and 2004, amounts included in accounts
payable and accrued liabilities were $Nil and $Nil, respectively.
B.H. and its reinsurance subsidiaries, in common with the
insurance and reinsurance industry in general, are subject to
litigation and arbitration in the normal course of their
business operations. While the outcome of the litigation cannot
be predicted with certainty, the Company is disputing and will
continue to dispute all allegations that management believes are
without merit. As of December 31, 2005, the Company was not
a party to any material litigation or arbitration other than
described below.
On or about July 8, 1997, Brittany was informed by
correspondence that an underwriting agency company who provided
underwriting agency and run-off services has claimed that they
are owed run-off remuneration totaling $2,321 for the period
January 1, 1984 to December 31, 1996. The underwriting
agency is currently in liquidation. Brittany continues to deny
any liability under this claim, and will vigorously defend this
position.
Under current Bermuda law, B.H. and Brittany are not required to
pay taxes in Bermuda on either income or capital gains. B.H. and
Brittany have received an undertaking from the Bermuda
government that, in the event of income or capital gains taxes
being imposed, they will be exempted from such taxes until the
year 2016.
CEAIs effective tax rate is approximately 40%. CEAI has
tax loss carry-forwards at December 31, 2005 and 2004 of
approximately $9,062 and $9,654 respectively, which do not
expire. A valuation allowance has been provided for the tax
benefit of these loss carry-forwards as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Benefit of loss carry-forward
|
|
$ |
3,625 |
|
|
$ |
3,862 |
|
Valuation allowance
|
|
|
(3,625 |
) |
|
|
(3,862 |
) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
10. |
Statutory Requirements |
B.H.s ability to pay dividends and its operating expenses
is dependent on cash dividends from its reinsurance subsidiaries
Brittany and CEAI.
The reinsurance subsidiaries are required to file annual
statements with insurance regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities
(statutory basis) and maintain minimum levels of
solvency and liquidity. As of December 31, 2005 and 2004,
the reinsurance subsidiaries solvency and liquidity
amounts were in excess of the minimum levels required.
Retained earnings of reinsurance subsidiaries are not restricted
as minimum capital solvency margins are covered by share capital
and additional paid-in capital. As of December 31, 2005 and
2004, retained earnings of $18,911 and $18,876 requires
regulatory approval prior to distribution.
F-39
B.H. ACQUISITION LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Subsequent to the issuance of the Companys 2005
consolidated financial statements, the Companys management
determined that the presentation of Net increase (reduction) in
loss and loss adjustment expense liabilities should have been
part of expenses rather than part of income as previously
reported. As a result, the accompanying consolidated statements
of earnings and retained earnings for the years ended
December 31, 2005, 2004 and 2003 have been restated to
reflect the reclassification between income and expense. The
table below summarizes the effects of the restatement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
As | |
|
|
|
As | |
|
|
|
As | |
|
|
|
|
Previously | |
|
As | |
|
Previously | |
|
As | |
|
Previously | |
|
As | |
|
|
Reported | |
|
Restated | |
|
Reported | |
|
Restated | |
|
Reported | |
|
Restated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total income
|
|
$ |
1,854 |
|
|
$ |
2,406 |
|
|
$ |
2,007 |
|
|
$ |
1,579 |
|
|
$ |
1,109 |
|
|
$ |
1,339 |
|
Total expenses
|
|
$ |
1,675 |
|
|
$ |
2,227 |
|
|
$ |
1,648 |
|
|
$ |
1,220 |
|
|
$ |
221 |
|
|
$ |
451 |
|
F-40