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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 31, 2003
The Enstar Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 0-07477 63-0590560
(State or other jurisdiction of incorporation) (Commission File Number) (IRS Employer Identification Number)
401 MADISON AVENUE
MONTGOMERY, ALABAMA 36104
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (334) 834-5483
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 31, 2003, Castlewood Holdings Limited ("Castlewood Holdings")
and Shinsei Bank, Limited ("Shinsei") completed the acquisition of all of the
outstanding capital stock of The Toa-Re Insurance Company (U.K.) Limited
("Toa-UK"), a London-based subsidiary of The Toa Reinsurance Company, Limited,
for (pound)29,000,000 (approximately US$46,000,000 as of the date of closing).
Toa-UK underwrote reinsurance business throughout the world between 1980 and
1994. In October 1994, Toa-UK stopped writing new business and has been
operating an orderly run-off since that time.
The acquisition was effected through Hillcot Holdings Ltd.
("Hillcot"), a newly formed Bermuda company, in which Castlewood Holdings and
Shinsei have a 50.1% and 49.9% economic and voting interest, respectively.
Castlewood Holdings, a Bermuda corporation, is a venture formed in
2001 to pursue the management and acquisition of insurance and reinsurance
companies, including companies in run-off, and to provide management,
consulting and other services to the insurance and reinsurance industry. The
Enstar Group, Inc. ("Enstar") and Trident II, L.P. ("Trident") each own
one-third economic interests in Castlewood Holdings, with the remaining
one-third owned by the senior management of Castlewood Limited, a Bermuda-based
subsidiary of Castlewood Holdings. Enstar also holds 50% of the voting stock of
Castlewood Holdings.
Castlewood Holdings' share of the transaction was funded from cash on
hand and the drawdown of Enstar's and Trident's remaining capital commitments
to Castlewood Holdings. Enstar's remaining commitment to Castlewood Holdings of
approximately $7.2 million was funded in March 2003 from cash on hand.
The terms of the Toa-UK transaction were determined through arm's
length negotiations among representatives of the parties. Neither Enstar, nor
any of its affiliates had, nor to the knowledge of Enstar did any director or
officer of Enstar or any associate of any director or officer of Enstar have,
any material relationship with The Toa Reinsurance Company, Limited. J.
Christopher Flowers, Vice Chairman of Enstar's board of directors and Enstar's
largest shareholder, is also a director of Shinsei.
Upon completion of the transaction, Toa-UK's name was changed to
Hillcot Re Limited.
On March 31, 2003, Enstar issued a press release (the "Press Release")
announcing the completion of the Toa-UK transaction. The Press Release is filed
herewith as Exhibit 99.1 and is incorporated herein by reference thereto.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
1. Audited Consolidated Financial Statements of Hillcot
Re Limited as of and for the year ended December 31,
2002, attached as Appendix A hereto.
(b) Pro Forma Financial Information.
1. Unaudited Pro Forma Combined Condensed Financial
Information of Enstar for the year ended December
31, 2002, attached as Appendix B hereto.
2. Unaudited Pro Forma Combined Condensed Financial
Information of Castlewood Holdings for the year
ended December 31, 2002, attached as Appendix C
hereto.
(c) Exhibits
2.1 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
(the "Sale and Purchase Agreement"). The Exhibits
and Schedules to the Sale and Purchase Agreement
have been omitted for purposes of this filing, but
will be furnished supplementally to the Commission
upon request. The table of contents of the Sale and
Purchase Agreement contains a list of all such
Exhibits and Schedules.*
99.1 Text of Press Release of Enstar, dated March 31,
2003.*
* Previously filed.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 12, 2003
THE ENSTAR GROUP, INC.
By: /s/ Cheryl D. Davis
------------------------------------
Cheryl D. Davis
Chief Financial Officer, Vice
President of Corporate Taxes and
Secretary
APPENDIX A
HILLCOT RE LIMITED
(FORMERLY THE TOA-RE INSURANCE
COMPANY (UK) LIMITED)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2002
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholder of Hillcot Re Limited:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income and comprehensive income, of changes in
shareholder's equity, and of cash flows present fairly, in all material
respects, the financial position of Hillcot Re Limited and its subsidiaries at
December 31, 2002, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
London
May 15, 2003
HILLCOT RE LIMITED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
--------------------------------------------------------------------------------
2002
-------------------
ASSETS
Investments
Fixed maturities, available-for-sale, at fair value
(amortized cost: (pound)54,136,274) (pound) 55,359,493
Other invested assets 535,244
-------------------
Total investments 55,894,737
Cash and cash equivalents 15,080,446
Restricted cash 2,000,000
Reinsurance recoverable (net of allowance of (pound)3,813,933) 39,043,243
Accounts receivable arising out of reinsurance operations 1,743,008
Accrued investment income 651,492
Equipment 95,433
Other assets 146,030
-------------------
Total assets (pound) 114,654,389
===================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Losses and loss expenses (pound) 74,033,243
Accounts payable and other liabilities 2,361,272
Accrued termination benefits 1,521,470
Reinsurance payable 688,009
-------------------
Total liabilities 78,603,994
Commitments and contingencies
Stockholder's Equity:
Non-cumulative participating preference shares,
par value (pound)1 per share, 4,000,000 shares authorized,
issued and outstanding 4,000,000
Common shares, par value (pound)1 per share,
46,000,000 shares authorized, issued and outstanding 46,000,000
Accumulated other comprehensive income 1,123,219
Retained deficit (15,072,824)
-------------------
Total stockholder's equity 36,050,395
-------------------
Total liabilities and stockholder's equity (pound) 114,654,389
===================
The accompanying notes are an integral part of the consolidated
financial statements.
2
HILLCOT RE LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------
REVENUES
Net premiums earned (pound) 41,948
Net investment income 2,872,861
Net realized gain on foreign currency exchange 1,858,793
Realized gains on sales of fixed maturities 198,698
Other income 668,819
------------------
Total revenues 5,641,119
EXPENSES
Losses and loss expenses incurred 1,026,062
Administrative expenses 2,632,246
Termination benefits 1,521,470
Other expenses 859,112
------------------
Total expenses 6,038,890
------------------
Loss before income tax (397,771)
Income tax expense --
------------------
Net loss (397,771)
Change in net unrealized appreciation of investments 1,883,441
Minimum pension liability adjustment (100,000)
------------------
Comprehensive income (pound) 1,385,670
==================
The accompanying notes are an integral part of the consolidated
financial statements.
3
HILLCOT RE LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2002
ACCUMULATED
OTHER TOTAL
PREFERRED COMMON COMPREHENSIVE RETAINED STOCKHOLDER'S
STOCK STOCK (LOSS) INCOME DEFICIT EQUITY
----------------- ------------------- ----------------- ------------------- ------------------
Balance, January 1, 2002 (pound) 4,000,000 (pound) 46,000,000 (pound) (660,222) (pound) (14,675,053) (pound) 34,664,725
Comprehensive income:
Net loss -- -- -- (397,771) (397,771)
Other comprehensive income -- -- 1,783,441 -- 1,783,441
----------------- ------------------- ----------------- ------------------- ------------------
Total comprehensive income -- -- 1,783,441 (397,771) 1,385,670
----------------- ------------------- ----------------- ------------------- ------------------
Balance, December 31, 2002 (pound) 4,000,000 (pound) 46,000,000 (pound) 1,123,219 (pound) (15,072,824) (pound) 36,050,395
================= =================== ================= ================== =================
The accompanying notes are an integral part of the consolidated
financial statements.
4
HILLCOT RE LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------
2002
------------------
CASH FROM OPERATING ACTIVITIES
Net loss (pound) (397,771)
Adjustments to reconcile net income to net cash used in
operating activities:
Decrease in losses and loss expenses (3,748,250)
Decrease in reinsurance recoverable 769,764
Increase in accrued termination benefits 1,521,470
Amortization of premium/discount on fixed maturities 937,947
Decrease in accounts receivable arising out of reinsurance operations 449,556
Decrease in other assets 363,202
Net realized gains on fixed maturities (198,698)
Depreciation 104,130
Other (190,918)
------------------
Net cash flows used in operating activities (389,568)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturities (34,905,926)
Proceeds from the sale of fixed maturities 32,023,946
Purchases of property and equipment (5,583)
Proceeds from the sale of property and equipment 5,566
------------------
Net cash flows used in investing activities (2,881,997)
------------------
Net decrease in cash and cash equivalents (3,271,565)
Cash and cash equivalents -- beginning of year 18,352,011
------------------
Cash and cash equivalents -- end of year (pound) 15,080,446
==================
The accompanying notes are an integral part of the consolidated
financial statements.
5
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Hillcot Re Limited (the "Company") is an insurer authorized in the
United Kingdom to write most classes of property and casualty insurance
business. The Company actively underwrote between 1980 and 1994, when,
following a strategic review of its worldwide activities by the
Company's former parent, Toa Reinsurance Company Limited, the Company
ceased underwriting and commenced the run-off of its liabilities. The
business underwritten was primarily London Market non-marine treaty
reinsurance, underwritten via a multi-company pool, although a limited
amount of marine and aviation business was also underwritten for part
of the period. The Company was also a member of the Institute of London
Underwriters, and wrote small marine and aviation accounts via a
sub-agent. Since the business was placed into run-off in 1994, the
Company has conducted the orderly run-off of its pool liabilities via
its principal subsidiary, Hillcot Underwriting Management Limited
(formerly Toa Re Underwriting Management Limited), a wholly owned and
fully consolidated subsidiary of the Company. As discussed in note 13,
on March 31, 2003 the Company was purchased by Hillcot Holdings Ltd.
and the name of Company changed to Hillcot Re Limited.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
Company's wholly owned subsidiaries. The consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. Intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance 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 date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Management periodically reviews its estimates and assumptions including
the adequacy of reserves for losses and loss expenses, reinsurance
allowance for doubtful accounts and litigation liabilities, as well as
the recoverability of deferred taxes. Actual results may differ from
the estimates and assumptions used in preparing the consolidated
financial statements.
INVESTMENTS
The Company's fixed maturity portfolio is considered to be
"available-for-sale" under the definition included in the Financial
Accounting Standard Board's ("FASB") Statement of Financial Accounting
Standards ("FAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The Company's investment portfolio is reported
at fair value, based on the quoted market prices of these securities.
Unrealized gains or losses on available-for-sale securities, net of
deferred income taxes, are included in accumulated other comprehensive
income, a separate component of stockholder's equity.
6
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
The cost of fixed maturity securities are adjusted for impairments in
value deemed to be other-than-temporary. These adjustments are recorded
as investment losses.
Premiums and discounts are amortized or accreted over the lives of the
related fixed maturities as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains or losses are included in earnings and are
derived using the specific identification method. All security
transactions are recorded on a trade date basis.
Net investment income includes interest and dividend income together
with amortization of market premiums and discounts and is net of
investment management and custody fees.
OTHER INVESTED ASSETS
The other invested assets are comprised of 75,000 shares of Banco Delta
Asia S. A. R. L., a bank located in Macau. This investment has been
valued at cost as there is no public market on which these shares are
traded. The cost is considered to approximate the fair market value of
this stock.
CASH AND CASH EQUIVALENTS
Cash equivalents include demand deposits and all highly liquid
investments with original maturities of 90 days or less.
RESTRICTED CASH
The Company has cash in a segregated portfolio to provide collateral or
guarantees for Letters of Credit as described in Note 11. The total
value of restricted cash as of December 31, 2002 was (pound)2,000,000.
PREMIUMS
As the Company's insurance business has been in run-off since 1994,
premiums are generally recognized as written upon notification of an
additional loss from the ceding company. Thus, no unearned premium
reserve is recorded.
Reinsurance premiums are estimated based on information provided by
ceding companies. The information used in establishing these estimates
is reviewed and subsequent adjustments are recorded in the period in
which they are determined.
LOSSES AND LOSS EXPENSES
Losses and loss expenses includes reserves for unpaid reported losses
and loss expenses and losses incurred but not reported. The reserve for
losses and loss expenses is established by management based on amounts
reported by insureds and ceding companies and represents the estimated
ultimate cost of events or conditions that have been reported to or
specifically identified by the Company.
The reserve for losses incurred but not reported is estimated by
management based on loss patterns, the contract form, type of insurance
program, and experience in the relevant industries.
Management believes that the reserves for losses and loss expenses are
sufficient to cover losses that fall within coverages assumed by the
Company. However, there can be no assurance that losses will not exceed
the Company's total reserves. The methodology of estimating loss
7
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
reserves is periodically reviewed to ensure that the assumptions
resulting there from are reflected in the income of the year in which
adjustments are made.
REINSURANCE
In the ordinary course of business, the Company assumes and cedes
reinsurance with other insurance companies. Ceded reinsurance contracts
do not relieve the Company of its obligation to its insureds.
Reinsurance recoverable includes the balances due from reinsurance
companies for paid and unpaid losses and loss expenses that will be
recovered from reinsurers, based on contracts in force. A reserve for
uncollectible reinsurance has been determined based upon a review of
the financial condition of the reinsurers and an assessment of other
available information.
TERMINATION BENEFITS
The Company accounts for one-time involuntary termination benefits
using the guidance outlined in EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity." The Company recognizes a liability if, before the end of the
year, management approves and commits to a termination plan that
establishes benefits that the employees will receive and the benefit
arrangement has been communicated to the employees.
DEFINED BENEFIT PENSION PLAN
The Company had a defined benefit pension plan that covered
substantially all if its employees. On November 6, 2002, the Company
passed a resolution curtailing the plan and the Company notified
employees that the plan would be wound up and all assets would be
distributed to the plan participants. The Company accounts for the
defined benefit pension plan under FASB 87, "Employers' Accounting for
Pensions" and FAS 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits." It is the Company's policy to contribute to the plan to meet
minimum statutory funding requirements.
EQUIPMENT
Equipment is stated at cost less accumulated depreciation. Depreciation
of equipment is calculated using the straight-line method over the
equipments' estimated useful lives, which vary between 3-5 years.
COMPREHENSIVE INCOME
Comprehensive income represents all changes in equity of an enterprise
that result from recognized transactions and other economic events
during the period. Other comprehensive income refers to revenues,
expenses, gains and losses that under accounting principles generally
accepted in the United States of America are included in comprehensive
income but excluded from net income, such as unrealized gains or losses
on certain investments in fixed maturity securities and minimum pension
liability adjustments.
TRANSLATION OF FOREIGN CURRENCIES
Financial transactions entered into in foreign currencies are
translated into Great Britain Pounds ("Sterling") in accordance with
FAS No. 52, "Foreign Currency Translation" ("FAS 52"). Foreign currency
assets and liabilities are translated into Sterling using exchange
rates in effect at the end of the year. Income and expenses are
translated using the average exchange rates for the year. Foreign
currency transaction gains and losses are included in net income.
8
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
INCOME TAXES
Income taxes have been provided in accordance with the provisions of
FAS No. 109, "Accounting for Income Taxes" on those operations that are
subject to income taxes. Deferred tax assets and liabilities result
from temporary differences between the amounts recorded in the
consolidated financial statements and the tax basis of the Company's
assets and liabilities. Such temporary differences are primarily due to
capital allowances and tax benefits of net operating loss
carry-forwards. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance against deferred tax assets
is recorded if it is more likely than not that all or some portion of
the benefits related to deferred tax assets will not be realized.
RISKS AND UNCERTAINTIES
Investment securities are exposed to various risks, such as interest
rate, market, and credit. Due to the level of risk associated with
investment securities and the level of uncertainty related to changes
in the value of investment securities, it is at least reasonably
possible that changes in risks in the near term would materially affect
the amounts reported in the financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximate their
carrying values at December 31, 2002.
RECENT ACCOUNTING DEVELOPMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued
FAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("FAS 146"). SFAS 146 addresses financial accounting and
reporting costs associated with exit or disposal activities and
nullifies EITF Issue No 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
FAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost as defined is recognized at the
date of an entity's commitment to an exit plan. SFAS 146 also
establishes that fair value is the objective for initial measurement of
the liability. SFAS 146 is effective for exit and disposal activities
that are initiated after December 31, 2002. As the Company's plan to
pay one-time termination benefits relating to the impending sale of the
Company was initiated prior to December 31, 2002, the Company currently
continues to account for these benefits using the guidance outlined in
EITF 94-3.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guaranties, Including
Indirect Guarantees of Indebtedness of Others", ("FIN 45"). FIN 45
requires that upon issuance of certain types of guarantees, a guarantor
must recognize a liability for the fair value of an obligation assumed
under a guaranty. FIN 45 also requires additional disclosures by a
guarantor in its financial statements about the obligations associate
with guarantees issued. The recognition provisions of FIN 45 are
effective for any guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002.
The Company has adopted the disclosure requirements for the year ended
December 31, 2002. The Company is currently evaluating the effects of
the initial recognition provisions of FIN 45, however the Company does
not expect that the adoption of FIN 45 will have a material effect on
the Company's financial condition and results of operations.
9
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", ("FIN 46"). The objective of FIN 46 is
to improve financial reporting by companies involved with variable
interest entities. This new model for consolidation applies to an
entity which either (1) the powers or rights of the equity holders do
not give them sufficient decision making powers or (2) the equity
investment at risk is insufficient to finance that entity's activities
without receiving additional subordinated financial support from other
parties. FIN 46 requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of
loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements of FIN 46 apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company does not expect the adoption of FIN 46 to have
a material impact on the Company's financial condition or results of
operations.
3. INVESTMENTS
FIXED MATURITIES
The amortized cost, gross unrealized gains, gross unrealized losses,
and fair value of fixed maturities at December 31, 2002 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------ ----------------- --------------- ------------------
Debt securities issued by the
government of the United Kingdom (pound) 49,264,659 (pound) 1,158,790 (pound) -- (pound) 50,423,449
Corporate debt securities (pound) 4,871,615 69,350 4,921 4,936,044
------------------ ----------------- --------------- ------------------
Total (pound) 54,136,274 (pound) 1,228,140 (pound) 4,921 (pound) 55,359,493
================== ================= =============== ==================
Fixed maturities at December 31, 2002, by contractual maturity, are
shown below. 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.
FAIR AMORTIZED
VALUE COST
--------------------- --------------------
Due in one year or less (pound) 7,897,238 (pound) 7,813,441
Due after one through five years 47,033,451 45,901,171
Due after five years through ten years 428,804 421,662
--------------------- --------------------
Total (pound) 55,359,493 (pound) 54,136,274
===================== ====================
10
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Proceeds from the sales of fixed maturities during 2002 were
(pound)32,023,946. Gross gains of (pound)323,028 and gross losses of
(pound)124,330 were realized on sales of fixed maturities in 2002.
NET INVESTMENT INCOME
The components of net investment income for the year ended December 31,
2002 are as follows:
Interest income (pound) 3,162,106
Investment expenses (289,245)
----------------------
Net investment income (pound) 2,872,861
======================
4. EQUIPMENT
The following are the components of equipment:
Office machinery (pound) 64,715
Computer equipment 877,359
Furniture and fittings 565,141
Automobiles 154,760
--------------------
Total gross equipment 1,661,975
Less: accumulated depreciation (1,566,542)
-------------------
Net equipment (pound) 95,433
===================
The Company leases office space under non-cancellable operating lease
agreements that expire at various times. Future minimum annual lease
commitments for non-cancellable operating leases at December 31, 2002
are as follows:
2003 (pound) 222,565
2004 158,580
-----------------
Total (pound) 381,145
=================
Depreciation expense for equipment was (pound)104,130 for the year
ended December 31, 2002. Total rent expense for the year ended December
31, 2002 was (pound)233,690.
During 2002 the Company disposed of equipment with a net book value of
(pound)665. The total proceeds from these disposals were (pound)5,566
and the Company recorded a gain of (pound)4,901.
11
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
5. LOSSES AND LOSS EXPENSES
The Company establishes reserves for estimated unpaid losses and losses
expense under the terms of its contracts and agreements. These reserves
include estimates for both claims reported and for claims incurred but
not reported and include expenses associated with settling these
claims. The process for establishing reserves for claims can be complex
and imprecise, as it requires informed estimates and judgments. The
Company's estimates and judgment may be revised as additional
experience or other data becomes available. The Company continually
evaluates its estimates as new information becomes available. While the
Company believes that its reserve for loss and loss expenses as of
December 31,2002 is adequate, new information or trends may lead to
future developments in ultimate losses and loss expenses to be
significantly greater than the reserves provided. Any such revisions
could result in future changes in estimates of losses or reinsurance
recoverable and would be reflected in the Company's results of
operations in the period in which the estimates change.
The reconciliation of unpaid losses and loss expenses for the year
ended December 31,2002 is as follows:
Gross losses and loss expenses, beginning of year (pound) 77,781,493
Reinsurance recoverable 39,813,007
--------------------
Net losses and loss expenses, beginning of year 37,968,486
--------------------
Incurred losses and loss expenses for claims related to
prior years 1,026,062
Paid losses and loss expenses for claims related to
prior years (1,754,337)
Foreign exchange adjustment (2,250,211)
--------------------
Net losses and loss expenses, end of year 34,990,000
Reinsurance recoverable 39,043,243
--------------------
Gross losses and loss expenses, end of year (pound) 74,033,243
=====================
As a result of the changes in estimates of insured events in prior years,
the losses and loss expenses incurred related to prior years increased by
(pound)1,026,062. This increase in incurred loss and loss expenses related
to prior years resulted from higher than expected losses and related
expenses on the Company's various lines of business.
Losses and loss adjustment expenses net of reinsurance recoverable are
largely denominated in U.S. dollars. Cash and investment balances are
largely denominated in Sterling. As a result of decreases in the U.S.
dollar/Sterling exchange rate during 2002, the Company recorded an exchange
gain of (pound)1,858,793.
12
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
Gross and net losses and loss expenses incurred are comprised of the
following:
GROSS REINSURANCE NET
----------------- ----------------- -----------------
Losses and loss expenses paid (pound) 3,787,486 (pound) 2,033,149 (pound) 1,754,337
Change in unpaid losses and loss
expenses 905,620 1,633,895 (728,275)
----------------- ----------------- ----------------
Losses and loss expenses incurred (pound) 4,693,106 (pound) 3,667,044 (pound) 1,026,062
================= ================= ================
Included in the Company's liabilities for loss and loss expenses are
liabilities for asbestos and environmental claims. The Company performs
a review of its asbestos and environmental liability reserves on an
annual basis with due regard to actuarial review and current market
sentiment. The Company's gross and net asbestos and environmental
exposures as of December 31,2002 are as follows:
GROSS NET
----- ---
Asbestos (pound) 6,246,561 (pound) 2,718,274
Environmental 1,102,896 925,643
------------------ -----------------
Total (pound) 7,349,457 (pound) 3,643,917
================== =================
During 2002, the Company made payments of (pound)62,071 and
(pound)11,738 relating to the settling of asbestos and environmental
exposure claims, respectively.
6. REINSURANCE
Although reinsurance agreements contractually obligate the Company's
reinsurers to reimburse it for the agreed upon portion of its gross
paid losses, they do not discharge the primary liability of the
Company. The amounts for net premiums written and net premiums earned
in the statements of operations are net of reinsurance. Direct and
ceded amounts for these items for the year ended December 31,2002 are
as follows:
PREMIUMS PREMIUMS
WRITTEN EARNED
---------------- -----------------
Direct (pound) 265,462 (pound) 265,462
Ceded (223,514) (223,514)
---------------- -----------------
Net Premiums (pound) 41,948 (pound) 41,948
================ =================
The Company's provision of reinsurance recoverable as of December
31,2002 is as follows:
Gross reinsurance recoverable (pound) 42,857,176
Provision for uncollectible balances on reinsurance recoverable (3,813,933)
-------------------
Net reinsurance recoverable (pound) 39,043,243
===================
13
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
The Company evaluates the financial condition of its reinsurers and
potential reinsurers on a regular basis and also monitors
concentrations of credit risk with reinsurers. At December 31, 2002,
the largest concentration of reinsurance recoverable, which amounted to
23% percent, was with various Lloyd's Syndicates. No other individual
reinsurer accounted for more than 5 percent of the total reinsurance
recoverable.
The allowance for unrecoverable reinsurance is required principally due
to the failure of reinsurers to indemnify the Company, primarily
because of disputes under reinsurance contracts and insolvencies.
Reinsurance disputes continue to be significant, particularly on larger
and more complex claims, such as those related to asbestos and
environmental pollution. Allowances have been established for amounts
estimated to be uncollectible.
7. PENSION
The Company sponsored a defined benefit pension plan that covered
substantially all of its employees. Pension benefits were based on
years of service and compensation levels during years of active
service. Pension plan assets are administered by the trustees and are
principally invested in fixed income securities. During 2002, in
anticipation of the sale of the Company and the wind-up of the plan,
the Company made additional contributions.
As a result of the proposed sale of the Company (Note 13), the Company
terminated its liability to contribute to the Plan. By resolution of
the trustees it was resolved that the Plan be wound up and all members
of the Plan were notified accordingly. Effective 1 January 2003, the
Company ceased making contributions and all members ceased to accrue
future benefits. The Company recognized a loss of (pound)100,000
associated with this curtailment.
Components of the net periodic cost of the Company's defined benefit
pension plan for the year ended December 31, 2002 are as follows:
Service cost (pound) 300,000
Interest cost 200,000
Expected return on plan assets (200,000)
Amortization of transition obligation 200,000
-----------------
Net periodic benefit cost 500,000
Charge related to curtailment 100,000
-----------------
Pension expense (pound) 600,000
=================
14
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
As of December 31, 2002, the funded status of the Company's defined
benefit pension plan was as follows:
Projected benefit obligation, beginning of the year (pound) 4,700,000
Service cost 300,000
Interest cost 200,000
Actuarial gain 900,000
Curtailment (1,300,000)
------------------
Projected benefit obligation, end of year (pound) 4,800,000
------------------
Fair value of plan assets, beginning of year 2,300,000
Actual return on investments (300,000)
Employer contribution 900,000
------------------
Fair value of plan assets, end of year (pound) 2,900,000
------------------
Projected benefit obligation in excess of fair value of plan assets (pound) 1,900,000
Unrecognized actuarial loss (100,000)
------------------
Net amount recognized (pound) 1,800,000
==================
Amounts recognized in the balance sheet:
Accrued pension liability (pound) 1,900,000
Accumulated other comprehensive income (100,000)
------------------
Net amount recognized (pound) 1,800,000
==================
Interest rate for discounting liabilities 4.50%
Consumer price inflation 2.25%
Expected return on plan assets 6.00%
Rate of compensation increase 3.75%
8. TERMINATION BENEFITS
At of December 31, 2002 the Company was making preparations to sell the
Company. As part of the sale, the Company notified all 25 of its
employees that they would be involuntarily terminated once the sale of
the Company was complete. In order to compensate these employees for
their prior service, the Company has established an involuntary
termination benefits package for all of its current employees. Each
individual employee's award is dependant of the employee's length of
service to the Company and current staff level. The one-time
termination benefit package was approved and communicated to the
employees during December 2002. The Company estimates the termination
benefit liability to be (pound)1,521,470. This amount is not expected
to materially change from the communication date to the date the
benefits are paid. No benefits were paid during 2002.
15
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
9. TAXATION
Income taxes were different from the amount computed by applying the
statutory tax rate to income before taxes as follows:
Loss before income taxes (pound) 397,771
Statutory tax rate 30%
---------------
Application of tax rate 119,331
Tax effect of:
Net operating loss not recognized (135,201)
Expenses not deductible for tax purposes 10,374
Depreciation in excess of capital allowances 2,766
Other 2,730
---------------
Income tax expense --
===============
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of December 31, 2002 are as
follows:
Deferred tax assets:
Tax losses (pound) 2,780,454
Capital allowances 80,000
-----------------
Total gross deferred tax assets 2,860,454
Less: valuation allowance (2,860,454)
-----------------
Deferred tax asset, net of valuation allowance --
-----------------
Deferred tax liabilities: --
-----------------
Net deferred tax asset (pound) --
=================
The valuation allowance of (pound)2,860,454 as of December 31, 2002
reflect management's assessment, based on available information, that
it is more likely than not that the deferred tax asset will not be
realized due to there being significant uncertainty as to whether
sufficient taxable profits will be generated in the future. Adjustments
to the valuation allowances are made when there is a change in
management's assessment of the amount of deferred tax asset that is
realizable.
As of December 31, 2002, the Company has net operating loss
carryforwards for U.K. income tax purposes of approximately (pound)9.3
million that are available to offset future U.K. taxable income.
16
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
10. DIVIDENDS
During 2002, no dividends were declared or paid to the shareholders of
the non-cumulative participating preference shares.
No dividends were declared or paid to common shareholders during the
year.
11. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is party to a number of legal proceedings arising in the
ordinary course of the Company's business and have not been finally
adjudicated. While the results of the litigation cannot be predicted
with certainty, management believes that the outcome of these matters
will not have a material impact on the results of operations or
financial condition of the Company.
CONCENTRATIONS OF CREDIT RISK
The investment portfolio is managed following prudent standards of
diversification. Specific provisions limit the allowable holdings of a
single issue and issuers. The Company believes that there are no
significant concentrations of credit risk associated with its
investments.
LETTERS OF CREDIT
The Company maintains a letter of credit facility in order to guarantee
its indebtedness to certain United States cedants. At the balance sheet
date, outstanding letters of credit totaled (pound)1,127,975. This
letter of credit is supported by a cash deposit of (pound)2,000,000.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table details the individual components and related the
related tax effects of the changes in accumulated other comprehensive
income for 2002:
BEFORE TAX TAX NET-OF-TAX
AMOUNT EXPENSE AMOUNT
------------------ ----------- ------------------
Unrealized gains on investments:
Unrealized gains arising during the year (pound) 1,974,926 (pound) -- (pound) 1,974,926
Less: reclassification of gains realized in income (91,485) -- (91,485)
------------------ ----------- ------------------
Net unrealized gain on investments and change
in accumulated other comprehensive income 1,883,441 -- 1,883,441
Minimum pension liability adjustment (100,000) -- (100,000)
------------------ ----------- ------------------
Total accumulated other comprehensive income(pound) (pound) 1,783,441 (pound) -- (pound) 1,783,441
================== =========== ==================
17
HILLCOT RE LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
--------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS
On February 18, 2003, the Company entered into an agreement to sell its
ownership interests in Banco Delta Asia S.A.R.L. to Toa Reinsurance
Company Limited for consideration of (pound)535,244. As the Company is
selling the shares to its former parent at book value, the Company will
not recognize a gain or loss on the transaction.
On March 31, 2003, the Company and its subsidiaries, Hillcot
Underwriting Management Limited (formerly Toa-Re Underwriting
Management Limited) and Hillcot Management Services Limited (formerly
Toa-Re Management Services Limited), were purchased by Hillcot Holdings
Ltd, a holding company incorporated in Bermuda. On March 31, 2003, the
Company's name was changed to Hillcot Re Limited.
18
APPENDIX B
THE ENSTAR GROUP, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 2002
THE ENSTAR GROUP, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
should be read in conjunction with the historical consolidated financial
statements and notes thereto in The Enstar Group, Inc. and Subsidiary ("Enstar")
Annual Report on Form 10-K for the year ended December 31, 2002 previously filed
with the Securities and Exchange Commission.
The following unaudited pro forma combined condensed financial information gives
effect to the acquisition of Hillcot Re Ltd. ("Hillcot"), (formerly The Toa-Re
Insurance Company (UK) Limited), by Castlewood Holdings Limited ("Castlewood
Holdings"), one of Enstar's partially owned equity affiliates, on March 31,
2003. Enstar's ownership in Castlewood Holdings is accounted for using the
equity method of accounting.
The unaudited pro forma combined condensed statement of income of Enstar for the
year ended December 31, 2002 has been presented as if Castlewood Holdings'
acquisition of Hillcot had been consummated on January 1, 2002.
All material adjustments required to reflect Enstar's investment in Castlewood
Holdings are set forth in the "Pro forma Adjustments" column and are described
in more detail in the notes to the unaudited pro forma combined condensed
financial information. The pro forma adjustments are based on available
information and certain assumptions that Enstar believes are reasonable.
The unaudited pro forma combined condensed financial information is not
necessarily indicative of the operating results that would have been reported
had Castlewood Holdings' acquisition of Hillcot occurred on January 1, 2002, nor
is it necessarily indicative of future results.
THE ENSTAR GROUP, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2002
Pro forma
Enstar Adjustments Pro forma
----------- -------------- -----------
Interest income $ 1,499 (140)(2) $ 1,359
Earnings of partially owned equity affiliates 28,621 $ (100)(1) 28,521
Other income 608 608
General and administrative expenses (3,130) (3,130)
----------- -------------- -----------
Income before income taxes and cumulative effect of a
change in accounting principle 27,598 (240) 27,358
Income taxes (6,072) (6,072)
----------- -------------- -----------
Income before cumulative effect of a change in accounting
principle 21,526 (240) 21,286
Cumulative effect of a change in accounting principle, net
of income taxes of $13 967 967
----------- -------------- -----------
Net income $ 22,493 $ (240) $ 22,253
=========== ============== ===========
Weighted average shares outstanding - basic 5,465,753 5,465,753
=========== ===========
Weighted average shares outstanding - assuming dilution 5,753,553 5,753,553
=========== ===========
Income per common share before change in accounting
principle - basic $ 3.94 $ 3.89
Cumulative effect of a change in accounting principle, net
of income taxes - basic 0.18 0.18
----------- -----------
Net income per common share - basic $ 4.12 $ 4.07
=========== ===========
Income per common share before change in accounting
principle - assuming dilution $ 3.74 $ 3.70
Cumulative effect of a change in accounting principle, net
of income taxes - assuming dilution 0.17 0.17
----------- -----------
Net income per common share - assuming dilution $ 3.91 $ 3.87
=========== ===========
THE ENSTAR GROUP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
1. To record Enstar's change in equity in earnings of Castlewood Holdings
resulting from the acquisition of Hillcot by Castlewood Holdings
assuming the acquisition occurred on January 1, 2002. This adjustment
represents Enstar's proportionate share of Hillcot's losses for the
year ended December 31, 2002.
2. To remove interest income assumed not earned on funds used in Enstar's
capital contribution to Castlewood Holdings, which was used to fund
Castlewood Holdings' 50.1% ownership interest in Hillcot Holdings,
Ltd., the parent company of Hillcot.
APPENDIX C
CASTLEWOOD HOLDINGS LIMITED
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 2002
CASTLEWOOD HOLDINGS LIMITED
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information has
been derived from the historical financial statements of Castlewood Holdings
Limited (Castlewood Holdings) and Hillcot Re Ltd. (Hillcot) (formerly The Toa-Re
Insurance Company (UK) Limited), a reinsurance company based in London, England.
The unaudited pro forma combined condensed financial information gives effect to
the acquisition, by Castlewood Holdings of Hillcot, via Castlewood Holdings'
50.1% owned subsidiary Hillcot Holdings, Ltd. on March 31, 2003. Total
consideration paid for all of the outstanding capital stock of Hillcot was
(pound)29,000,000 (US$ 46,000,000).
The unaudited pro forma combined condensed statement of operations of Castlewood
Holdings for the year ended December 31, 2002 has been presented as if the
acquisition of Hillcot had been consummated on January 1, 2002. The acquisition
has been accounted for using the purchase method of accounting and, accordingly,
the total purchase cost has been allocated to the acquired assets and
liabilities based on their fair values.
The historical financial information of Hillcot has been derived from its
historical financial statements as prepared in accordance with accounting
principles generally accepted in the United States (US GAAP).
The historical financial statements of Hillcot are denominated in British pounds
sterling and, as such, the historical financial statement information presented
in the unaudited pro forma combined condensed financial information has been
translated into United States dollars using weighted average period exchange
rates.
All material adjustments required to reflect Castlewood Holdings' acquisition of
Hillcot are set forth in the "Pro Forma Adjustments" column and are described in
more detail in the notes to the pro forma combined condensed financial
information.
The pro forma results of operations are presented for illustrative purposes only
and are not necessarily indicative of future operations or the actual results
that would have occurred had the acquisition been consummated on January 1,
2002.
CASTLEWOOD HOLDINGS LIMITED
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF EARNINGS
for the year ended December 31, 2002
(Expressed in thousands of U.S. dollars)
Castlewood Pro Forma
Holdings Hillcot Adjustments Notes Combined
---------- ---------- ----------- ---------- ----------
INCOME
Underwriting income $ 48,758 $ (1,476) $ -- $ 47,282
Consulting fees 20,627 -- -- 20,627
Net investment income 8,927 4,607 -- 13,534
Other income -- 1,003 -- 1,003
---------- ---------- ---------- ----------
78,312 4,134 -- 82,446
---------- ---------- ---------- ----------
EXPENSES
Salaries and benefits 24,222 2,282 -- 26,504
General and administrative expenses 7,962 5,237 -- 13,199
Foreign exchange gain (4,930) (2,788) -- (7,718)
---------- ---------- ---------- ----------
27,254 4,731 -- 31,985
---------- ---------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES, SHARE OF
NET INCOME OF PARTLY-OWNED COMPANY,
EXTRAORDINARY GAIN, AND MINORITY INTEREST 51,058 (597) -- 50,461
INCOME TAXES (518) -- -- (518)
SHARE OF NET INCOME OF PARTLY-OWNED COMPANY 10,079 -- -- 10,079
MINORITY INTEREST -- -- 298 (2) 298
---------- ---------- ---------- ----------
NET EARNINGS (LOSS) $ 60,619 $ (597) $ 298 $ 60,320
========== ========== ========== ==========
CASTLEWOOD HOLDINGS LIMITED
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
1 The historical statement of operations information of Castlewood
Holdings and Hillcot has been derived from each respective company's
historical financial statements for the fiscal year ended December 31,
2002, as prepared in accordance with US GAAP.
The historical statement of operations of Hillcot is denominated in
British pounds sterling and, as such, the historical statement of
operations information of Hillcot has been translated using the
weighted average exchange rate of 1.50 US dollar per British pounds
sterling for year ended December 31, 2002.
2 The allocation of Hillcot's loss for the year ended December 31, 2002
to minority interest is as follows:
Loss $ 597
Castlewood Holdings' percentage share of the loss (50.1% of $597) 299
-------
Minority interest $ 298
=======