Acquisitions

9 Months Ended

Sep. 30, 2019

2. ACQUISITIONS

BorgWarner Morse TEC

On October 30, 2019, we completed the acquisition of BorgWarner Morse TEC ("Morse TEC") from BorgWarner Inc ("BorgWarner") through our subsidiary, Enstar Holdings (US) LLC. Morse TEC holds approximately $0.8 billion in liabilities associated with personal injury asbestos claims and environmental claims arising from BorgWarner's legacy manufacturing operations. We will disclose further information on this transaction in our Annual Report on Form 10-K for the year ended December 31, 2019.

KaylaRe

Overview

On May 14, 2018, the Company acquired all of the outstanding shares and warrants of KaylaRe Holdings, Ltd. ("KaylaRe"). In consideration for the acquired shares and warrants of KaylaRe, the Company issued an aggregate of 2,007,017 ordinary shares to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares. Effective May 14, 2018, we consolidated KaylaRe into our consolidated financial statements, and any balances between KaylaRe and Enstar are now eliminated upon consolidation. Effective September 30, 2019, KaylaRe and KaylaRe's subsidiary, KaylaRe Ltd. merged with Cavello Bay Reinsurance Limited, a wholly owned subsidiary of the Company, with Cavello Bay Reinsurance Limited as the surviving company.

Refer to Note 19 - "Related Party Transactions" for additional information relating to KaylaRe.

Purchase Price

The components of the consideration paid to acquire all of the outstanding shares and warrants of KaylaRe were as follows:



Fair value of Enstar ordinary shares issued	$	414,750
Fair value of previously held equity method investment	336,137
Adjustment for the fair value of preexisting relationships	37,169
Total purchase price	$	788,056
Net assets acquired at fair value (excluding preexisting relationships)	$	746,320
Excess of purchase price over fair value of net assets acquired	$	41,736

The purchase price was allocated to the acquired assets and liabilities of KaylaRe based on their estimated fair values at the acquisition date. We recognized goodwill of $41.7 million on the transaction, primarily attributable to (i) the capital synergies from integrating KaylaRe into our group capital structure, (ii) investment management capabilities on a total return basis, and (iii) the incremental acquired capital to be utilized for future non-life run-off transactions.

Fair Value of Enstar Ordinary Shares Issued

The fair value of the Enstar ordinary shares issued was based on the closing price of $206.65 as at May 14, 2018, the date the transaction closed.



Number of Enstar Ordinary shares issued	2,007,017
Closing price of Enstar Ordinary shares as of May 14, 2018	$	206.65
Fair value of Enstar Ordinary shares issued to shareholders of KaylaRe	$	414,750

Fair Value of Previously Held Equity Method Investment

Prior to the close of the transaction, Enstar held a 48.2% interest in KaylaRe, which was accounted for as an equity method investment in accordance with ASC 323 - Investments - Equity Method and Joint Ventures. The acquisition of the remaining 51.8% equity interest in KaylaRe was considered a step acquisition, whereby we remeasured the previously held equity method investment to fair value. We considered multiple factors in determining the fair value of the previously held equity method investment, including: (i) the price negotiated with the selling shareholders for the 51.8% equity interest in KaylaRe, (ii) recent market transactions for similar companies, and (iii) current trading multiples for comparable companies. Based on this analysis, we determined a valuation multiple of 1.05 to KaylaRe's carrying book value to be appropriate to remeasure the previously held equity method investment at fair value. This resulted in the recognition of a gain of $16.0 million on completion of the step acquisition of KaylaRe, which was recorded in earnings from equity method investments for the three months ended June 30, 2018.



Carrying value of previously held equity method investment prior to the close of the transaction	$	320,130
Price-to-book multiple	1.05
Fair value of previously held equity method investment prior to the close of the transaction	$	336,137

Gain recognized on remeasurement of previously held equity method investment to fair value	$	16,007

Adjustment for the Fair Value of Preexisting Relationships

Enstar had contractual preexisting relationships with KaylaRe, which were deemed to be effectively settled at fair value on the acquisition date. The difference between the carrying value and the fair value of the preexisting relationships was included as part of the purchase price in accordance with ASC 805 - Business Combinations. The fair value of the balances relating to preexisting reinsurance relationships with KaylaRe was determined using a discounted cash flow approach and, where applicable, consideration was given to stated contractual settlement provisions, when determining the loss to be recorded on the deemed settlement of these preexisting relationships. The fair values of the balances arising from the non-reinsurance preexisting relationships with KaylaRe were deemed to equal their carrying values given their short-term nature and the expectation that they would all be settled within the next twelve months.

As a result of effectively settling all contractual preexisting relationships with KaylaRe, the Company recognized a loss of $15.6 million, which was recorded in other income (loss) in the three months ended June 30, 2018, as summarized below:



ASSETS	Carrying value			Fair value			Loss on deemed settlement
Funds held by reinsured companies	$	386,793		$	386,793		$	—
Deferred acquisition costs/Value of business acquired	33,549			40,268			6,719
TOTAL ASSETS	420,342			427,061			6,719
LIABILITIES
Losses and LAE	339,747			333,205			(6,542		)
Unearned premiums	105,602			105,602			—
Insurance and reinsurance balances payable	25,897			23,559			(2,338		)
Other liabilities	1,864			1,864			—
TOTAL LIABILITIES	473,110			464,230			(8,880		)
NET ASSETS (LIABILITIES)	$	(52,768	)	$	(37,169	)	$	15,599

Fair Value of Net Assets Acquired and Liabilities Assumed

The following table summarizes the fair values of the assets acquired and liabilities assumed (excluding preexisting relationships) in the KaylaRe transaction at the acquisition date, which have all been allocated to the Non-life Run-off segment.



ASSETS
Fixed maturities, trading, at fair value	$	126,393
Other investments, at fair value	626,476
Total investments	752,869
Cash and cash equivalents	5,657
Premiums receivable	10,965
Deferred acquisition costs	275
Other assets	614
TOTAL ASSETS	$	770,380
LIABILITIES
Losses and LAE	$	4,059
Unearned premiums	10,984
Insurance and reinsurance balances payable	13
Other liabilities	9,004
TOTAL LIABILITIES	24,060
NET ASSETS ACQUIRED AT FAIR VALUE	$	746,320

The table below summarizes the results of the KaylaRe operations, which are included in our consolidated statement of earnings from the acquisition date to September 30, 2018:



Premiums earned	$	10,188
Incurred losses and LAE	(9,190		)
Acquisition costs	(332		)
Underwriting income	666
Net investment income	1,972
Net unrealized gains	(6,621		)
General and administrative expenses	(573		)
Net loss	$	(4,556	)

Maiden Re North America

On December 27, 2018, we completed the acquisition of Maiden Reinsurance North America, Inc. (“Maiden Re North America”) from a subsidiary of Maiden Holdings, Ltd. The net consideration payable was $286.4 million, subject to post-closing adjustments, and we assumed $1.0 billion of gross loss and loss adjustment expense reserves upon closing. As part of the acquisition, we also novated and assumed certain reinsurance agreements from Maiden Reinsurance Ltd., assuming total gross unaffiliated reserves of $72.1 million for total assets of $70.4 million on a funds held basis. Maiden Reinsurance Ltd. also provided us with a reinsurance cover for loss reserve development in excess of $100.0 million in excess of the net loss and loss adjustment expenses recorded as of June 30, 2018, up to a maximum $25.0 million. In connection with completing the adverse development cover transaction described in Note 3 - "Significant New Business", we and the Maiden companies agreed to finalize the Maiden Re North America purchase price without post-closing adjustment, and to cancel the excess of loss reinsurance cover of $25.0 million. There was no impact to our consolidated statement of earnings or balance sheet as a result of these actions.