News Column

ENSTAR GROUP LTD - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 11, 2014

Table of Contents: Section Page Business Overview 65 Key Performance Indicator 66 Acquisitions 66 Significant New Business 68



Consolidated Results of Operations-for the Three and Six Months Ended June 30, 2014 and 2013

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Results of Operations by Segment-for the Three and Six Months Ended June 30, 2014 and 2013 73 Non-life Run-off Segment 73 Atrium Segment 86 Torus Segment 92 Life and Annuities Segment 95 Liquidity and Capital Resources 101 Reinsurance Balances Recoverable 101 Cash Flows 102 Investments 103 Loans Payable 110 Aggregate Contractual Obligations 111 Commitments and Contingencies 112 Critical Accounting Policies 112 Off-Balance Sheet Arrangements and Special Purpose Entity Arrangements 112 Non-GAAP Financial Measures 112 The following discussion and analysis of our financial condition and results of operations for the three and six months ended June 30, 2014 and 2013 should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto and the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.



Business Overview

Enstar Group Limited, or Enstar, is a Bermuda-based holding company that was formed in 2001 and became publicly traded in 2007. We are listed on the NASDAQ Global Select Market under the ticker symbol "ESGR." Enstar and our operating subsidiaries acquire and manage diversified insurance businesses through a network of service companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations. Our primary corporate objective is growing our net book value per share. We believe this is driven primarily by growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions, effectively managing companies and portfolios of business that we have acquired, and executing on our active underwriting strategies. Our core focus is acquiring and managing insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and providing management, consulting and other services to the insurance and reinsurance industry. Since our formation, we have completed the acquisition of over 60 insurance and reinsurance companies and portfolios of insurance and reinsurance business and are now administering those businesses. This includes 13 Reinsurance to Close, or "RITC" transactions, with Lloyd's of London insurance and reinsurance syndicates in run-off, whereby the portfolio of run-off liabilities is transferred from one Lloyd's syndicate to another. The substantial majority of our acquisitions have been in the non-life run-off business, which for us generally includes property and casualty, workers' compensation, asbestos and environmental, construction defect, marine, aviation and transit, and other closed business. In recent years, we 65



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diversified our portfolio of run-off businesses to include closed life and annuities, primarily through our acquisition of the U.S. life and annuities operations of HSBC Holdings plc (which we now refer to as Pavonia). In addition to portfolio diversification, we believe our life and annuities business has the potential to provide us with a more regular earnings and cash flow stream, which may, to a degree, counter some of the volatility inherent in our core non-life run-off business over the long term. In 2013, we entered the active underwriting business through our acquisitions of approximately 60% interests in Atrium Underwriting Group Limited (or Atrium) on November 25, 2013 and Arden Reinsurance Company Ltd (or Arden) on September 9, 2013. Atrium's wholly-owned subsidiary, Atrium Underwriters Ltd, manages and underwrites specialist insurance and reinsurance business for Lloyd's Syndicate 609. Atrium's wholly-owned subsidiary, Atrium 5 Ltd, provides approximately 25% of the underwriting capacity and capital to Syndicate 609, with the balance provided by traditional Lloyd's Names. Arden provides reinsurance to Atrium 5 Ltd. through an approximate 65% quota share reinsurance arrangement, and is currently in the process of running off certain other portfolios of run-off business. On April 1, 2014, we acquired Torus Insurance Holdings Limited (or Torus). Torus is an A- rated global specialty insurer with multiple global underwriting platforms, including Lloyd's Syndicate 1301. Torus offers a diverse range of property, casualty and specialty insurance through its operations in the U.K., Continental Europe, the U.S. and Bermuda. Prior to acquisition, Torus ceased underwriting certain lines of business in order to focus on core property, casualty and specialty lines. The results of the discontinued lines of business which were placed into run-off are included within our non-life run-off segment. During the three months ended June 30, 2014, a Fitzwilliam Insurance Limited segregated cell, of which Enstar owns 60% and Trident owns 40%, entered into a 100% quota share reinsurance of Torus' non-life run-off reserves with effect from January 1, 2014. We believe that Torus and Atrium, our active underwriting businesses, provide an additional earnings stream, and also enhance our ability to compete for non-life run-off and other acquisition targets by providing opportunities for us to offer, through Torus, renewal rights or loss portfolio reinsurance transactions in connection with such acquisitions, which may be attractive to certain vendors or may present alternative ways in which proposed transactions can be structured. Overall, Enstar has four segments of business that are each managed, operated and reported on differently: (i) Non-life run-off; (ii) Atrium; (iii) Torus; and (iv) Life and annuities.



The table below summarizes the total number of employees we had as at June 30, 2014 and December 31, 2013 by operating segment:

2014 2013 Non-life run-off 515 529 Atrium 156 161 Torus 498 - Life and annuities 49 49 Total 1,218 739 Key Performance Indicator Our primary corporate objective is growing our net book value per share. We increased our book value per share on a fully diluted basis by $8.74 from $105.20 per share, as at December 31, 2013, to $113.94, as at June 30, 2014. The increase was primarily due to the issuance of voting and non-voting shares with a value of approximately $356.1 million to certain shareholders of Torus upon completion of the Torus acquisition, as well as net earnings for the six months ended June 30, 2014. 66



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Acquisitions

Torus Insurance Holdings Limited

On April 1, 2014, Kenmare Holdings Ltd. (or Kenmare), our wholly-owned subsidiary, together with Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P., which are managed by Stone Point Capital LLC (or collectively, Trident), completed the acquisition of Torus. At closing, Torus became directly owned by Bayshore Holdings Ltd. (or Bayshore), which was 60% owned by Kenmare and 40% owned by Trident. The purchase price for Torus was established in the amended and restated amalgamation agreement as $646.0 million, to be paid partly in cash and partly in Enstar's stock. The number of Enstar shares to be issued was fixed at the signing of the amalgamation agreement on July 8, 2013 and was determined by reference to an agreed-upon value per share of $132.448, which was the average closing price of our voting ordinary shares, par value $1.00 per share (or the Voting Ordinary Shares), over the 20 trading days prior to such signing date. On the day before closing of the amalgamation, the Voting Ordinary Shares had a closing price of $136.31 per share. At closing, we contributed cash of $41.6 million towards the purchase price and $3.6 million towards related transaction expenses, as well as 1,898,326 Voting Ordinary Shares and 714,015 shares of Series B Convertible Participating Non-Voting Perpetual Preferred Stock (or the Non-Voting Preferred Shares). Based on a price of $136.31 per share, our contribution of cash and shares to the purchase price totaled $397.7 million in the aggregate. Trident contributed cash of $258.4 million towards the purchase price and $2.4 million towards related transaction expenses. Based on a price of $136.31 per share, the aggregate purchase price paid by us and Trident was $656.1 million. FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. (or collectively, First Reserve) received 1,501,211 Voting Ordinary Shares, 714,015 Non-Voting Preferred Shares and cash consideration in the transaction. Following the approval of our shareholders of an amendment to our bye-laws on June 10, 2014, First Reserve's Non-Voting Preferred Shares converted on a share-for-share basis into 714,015 shares of newly created Series E Non-Voting Convertible Ordinary Shares, or the Series E Non-Voting Ordinary Shares. Corsair Specialty Investors, L.P. (or Corsair) received 397,115 Voting Ordinary Shares and cash consideration in the transaction. The remaining Torus shareholders received all cash. As a result of the amalgamation, First Reserve now owns approximately 9.5% and 11.5%, respectively, of our Voting Ordinary Shares and outstanding share capital. Upon the closing of the Torus acquisition, Bayshore, Kenmare and Trident entered into a Shareholders' Agreement, which was subsequently amended, as described in "Dowling Co-investments in Bayshore and Northshore" below. In satisfaction of certain of our obligations under the Registration Rights Agreement we entered into with First Reserve and Corsair at the closing of the Amalgamation, we filed a resale shelf registration statement with the SEC on April 29, 2014 with respect to the Voting Ordinary Shares (including the Voting Ordinary Shares into which the Series E Non-Voting Ordinary Shares may convert) that we issued pursuant to the amalgamation.



Changes in Ownership Interests relating to Holding Companies for our Active Underwriting Businesses

Atrium Employee Equity Awards

On April 17, 2014, Northshore Holdings Ltd. (or Northshore), the parent company of Atrium and Arden, implemented long-term incentive plans that awarded time-based restricted shares of Northshore to certain Atrium employees. These equity awards will have the effect of modestly reducing 67



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Kenmare's equity interest in Northshore (as well as Trident's equity interest) over the course of the vesting periods as Atrium employees acquire shares. Shares generally vest over two or three years, although certain awards began vesting in 2014.



Dowling Co-investments in Bayshore and Northshore Holdings Ltd.

On May 8, 2014, Dowling Capital Partners I, L.P. (or Dowling), purchased common shares of both Bayshore and Northshore from Kenmare and Trident (on a pro rata basis in accordance with their respective interests) for an aggregate amount of $15.4 million. Prior to the sale of shares to Dowling, Kenmare and Trident owned 60% and 40% of Bayshore, respectively, and 57.1% and 38.1% of Northshore on a fully diluted basis, respectively (assuming full vesting of Atrium employees' restricted shares totaling 4.8%). Following the sale of Bayshore shares to Dowling, Kenmare, Trident and Dowling own 59%, 39.3% and 1.7% of Bayshore, respectively. Following the sale of Northshore shares to Dowling, Kenmare, Trident, certain Atrium employees and Dowling own 56.1%, 37.4%, 4.8% and 1.7% of Northshore, respectively, on a fully diluted basis. In connection with the sale of Bayshore shares, the Bayshore Shareholders' Agreement was amended and restated. The Amended and Restated Bayshore Shareholders' Agreement, among other things, provides that Kenmare has the right to appoint three members to the Bayshore board of directors and Trident has the right to appoint two members. The Amended and Restated Bayshore Shareholders' Agreement includes a five-year period, or the "Restricted Period," during which no shareholder can transfer its ownership interest in Bayshore to a third party unless approved by a super-majority of the shareholders. Following the Restricted Period: (i) each shareholder must offer Kenmare and Trident the right to buy its shares before the shares are offered to a third party; (ii) Kenmare can require each other shareholder to participate in a sale of Bayshore to a third party as long as Kenmare owns 55% of the aggregate number of outstanding shares of Bayshore held by Kenmare and Trident; (iii) each shareholder has the right to be included on a pro rata basis in any sales made by another shareholder; and (iv) each of Kenmare, Trident and Dowling has the right to buy its pro rata share of any new securities issued by Bayshore. The Amended and Restated Bayshore Shareholders' Agreement also provides that during the 90-day period following the fifth anniversary of the Torus closing, and at any time following the seventh anniversary of such closing, Kenmare would have the right to purchase the Bayshore shares owned by all other shareholders of Bayshore at their then fair market value, which would be payable in cash. Following the seventh anniversary of the Torus closing, Trident would have the right to require Kenmare to purchase all of Trident's shares in Bayshore for their then current fair market value and Dowling would have the right to participate in such transaction by requiring Kenmare to purchase all of its shares in Bayshore on the same terms. Kenmare would have the option to pay for such shares either in cash or by delivering our Voting Ordinary Shares. In connection with the sale of Northshore shares, the Northshore Shareholders' Agreement was amended and restated. The Amended and Restated Northshore Shareholders' Agreement provides for substantially the same rights and obligations as the Amended and Restated Bayshore Shareholders' Agreement, except that the fifth and seventh anniversaries refer to the Arden closing.



Significant New Business

Reciprocal of America

On July 6, 2012, our wholly-owned subsidiary, Providence Washington Insurance Company, entered into a definitive loss portfolio transfer reinsurance agreement with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers' compensation business. The 68



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estimated total liabilities to be assumed are approximately $164.5 million, with an equivalent amount of assets to be received as consideration. Completion of the transaction is conditioned upon, among other things, regulatory approvals and satisfaction of customary closing conditions. The transaction is expected to close by the end of 2014.



Shelbourne RITC Transactions

Effective January 1, 2014, Lloyd's Syndicate 2008 (or S2008), which is managed by our wholly-owned subsidiary and Lloyd's managing agent, Shelbourne Syndicate Services Limited, entered into a reinsurance to close contract of the 2011 and prior underwriting year of account of another Lloyd's syndicate, under which S2008 assumed total net insurance reserves of approximately 17.0 million (approximately $28.1 million) for consideration of an equal amount. Effective December 31, 2012, S2008 entered into a 100% quota share reinsurance agreement with another Lloyd's syndicate in respect of its 2009 and prior years of account (or the 2009 Liabilities), under which S2008 assumed total gross insurance reserves of approximately 193.0 million (approximately $313.3 million) for consideration of an equal amount. Effective January 1, 2014, the 2012 Lloyd's underwriting year of account of S2008 entered into a partial RITC transaction with respect to the 2009 Liabilities.



Consolidated Results of Operations - For the Three and Six Months Ended June 30, 2014 and 2013

The following table sets forth our selected unaudited condensed consolidated statement of earnings data for each of the periods indicated.

Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 (expressed in thousands of U.S. dollars) INCOME Net premiums earned $ 216,916$ 75,596$ 278,574$ 107,257 Fees and commission income 7,509 2,960 14,507 5,407 Net investment income 33,649 27,252 57,997 45,215 Net realized and unrealized gains (losses) 38,411 (27,919 ) 72,984 2,201 296,485 77,889 424,062 160,080 EXPENSES Net increase (reduction) in ultimate losses and loss adjustment expense liabilities 59,749 (27,422 ) 47,699 (18,261 ) Acquisition costs 50,379 9,632 63,540 12,000 Life and annuity policy benefits 27,732 25,562 54,541 26,322 Salaries and benefits 55,683 25,687 87,073 49,297 General and administrative expenses 37,177 20,002 59,427 37,948 Interest expense 3,529 3,091 7,263 5,526 Net foreign exchange (gains) losses (525 ) (8,403 ) 1,070 (3,321 ) 233,724 48,149 320,613 109,511 EARNINGS BEFORE INCOME TAXES 62,761 29,740 103,449 50,569 INCOME TAXES (8,452 ) (4,542 ) (15,728 ) (12,386 ) NET EARNINGS 54,309 25,198 87,721 38,183 Less: Net earnings attributable to noncontrolling interest (2,516 ) (6,001 ) (6,341 ) (7,027 ) NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED $ 51,793$ 19,197$ 81,380$ 31,156 69



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Certain reclassifications have been made to the 2013 comparatives of net increase (reduction) in ultimate losses and loss adjustment expense liabilities, acquisition costs and life and annuity policy benefits to conform to current year presentation. These reclassifications had no impact on net earnings previously reported.



The following table provides a split by operating segment of the net earnings attributable to Enstar Group Limited:

Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 (in thousands of U.S. dollars) Segment split of earnings (losses) attibutable to Enstar Group Limited: Non-life run-off $ 54,513$ 21,016$ 80,113$ 34,900 Atrium 636 - 1,133 - Torus (6,426 ) - (6,968 ) - Life and annuities 3,070 (1,819 ) 7,102 (3,744 ) Net earnings attributable to Enstar Group Limited $ 51,793$ 19,197$ 81,380$ 31,156 The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related footnotes. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Cautionary Statement Regarding Forward-Looking Statements" and in "Risk Factors" included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 and in Item 1A of Part II of this Quarterly Report on Form 10-Q. We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $54.3 million and $87.7 million for the three and six months ended June 30, 2014, respectively, as compared to $25.2 million and $38.2 million for the same periods in 2013. Our comparative results were impacted by our 2013 and 2014 acquisitions, among other factors. Subsequent to June 30, 2013, we completed the acquisitions of Arden (on September 9, 2013), Atrium (on November 25, 2013) and Torus (on April 1, 2014). Our comparative results for the six months ended June 30, 2014 were also impacted by our March 31, 2013 acquisition of Pavonia.



The change in consolidated net earnings for the three and six month periods was attributable primarily to the following:

Net premiums earned - Combined net premiums earned for our four operating segments were $216.9 million and $278.6 million for the three and six months ended June 30, 2014, respectively, as compared to $75.6 million and $107.3 million for the same periods in 2013. The significant increase in 2014 was due primarily to the net premiums earned by Torus and Atrium, partially offset by a reduction in net premiums earned by SeaBright during the three months ended June 30, 2014, as described in greater detail in the segment discussion below. Net investment income - Net investment income was $33.6 million and $58.0 million for the three and six months ended June 30, 2014, respectively, as compared to $27.3 million and $45.2 million for the same periods in 2013. The increase in each of the periods during 2014 was largely attributable to the net investment income earned on a larger base of cash and fixed maturity investments as a result of the Arden, Atrium and Torus transactions (as well as the Pavonia transaction with respect to the increase during the six month period), although this was partially offset by lower reinvestment yields on new purchases of fixed maturity investments. 70



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Net realized and unrealized gains (losses) - Net realized and unrealized gains (losses) were $38.4 million and $73.0 million for the three and six months ended June 30, 2014, respectively, as compared to $(27.9) million and $2.2 million for the same periods in 2013. The increase in net realized and unrealized gains between the 2014 and 2013 periods was attributable primarily to an increase in realized and unrealized gains on fixed income securities in each of our operating segments due primarily to marginal decreases in U.S. investment yields for 2014 (particularly in longer dated fixed maturity investments) as compared to increases in yields for 2013. Net increase (reduction) in ultimate losses and loss adjustment expense liabilities - For the three and six months ended June 30, 2014 net ultimate losses and loss adjustment expense liabilities increased by $59.7 million and $47.7 million, respectively, compared to reductions of $27.4 million and $18.3 million in the three and six months ended June 30, 2013, respectively. The total increase of $87.2 million for the three months ended June 30, 2014 compared to the comparative period in 2013 was due primarily to increases in net ultimate losses of $16.6 million relating to Atrium and $80.3 million relating to Torus. The total increase of $66.0 million for the six months ended June 30, 2014 compared to 2013 was due to increases in net ultimate losses of $33.7 million relating to Atrium and $80.3 million relating to Torus, partially offset by a $48.1 million larger reduction in the non-life run-off segment in 2014 compared to the same period in 2013. Acquisition costs - Acquisition costs were $50.4 million and $63.5 million for the three and six months ended June 30, 2014, respectively, as compared to $9.6 million and $12.0 million for the same periods in 2013. The significant increase for 2014 was due to the acquisition costs associated with the net premiums earned by Atrium and Torus. Life and annuity policy benefits - Life and annuity policy benefits were $27.7 million and $54.5 million for the three and six months ended June 30, 2014, respectively, as compared to $25.6 million and $26.3 million for the same periods in 2013. The significant increase for the six months ended June 30, 2014 as compared to the same period in 2013 was due primarily to the acquisition of Pavonia on March 31, 2013. The movements for both the three and six month periods ended June 30, 2014 and 2013 related entirely to our life and annuities segment and are described in greater detail in the segment discussion below. Salaries and benefits - Salaries and benefits were $55.7 million and $87.1 million for the three and six months ended June 30, 2014, respectively, as compared to $25.7 million and $49.3 million for the same periods in 2013. These increases were due predominantly to the salaries and benefits costs associated with our increased head count relating to the Atrium and Torus acquisitions, as well as the Pavonia acquisition that was completed during the six-month period in 2013, in addition to an increase in our bonus accrual amount for 2014 due to higher net earnings. General and administrative expenses - General and administrative expenses for the three and six months ended June 30, 2014 were $37.2 million and $59.4 million, respectively, compared to $20.0 million and $37.9 million, respectively, for the same periods in 2013. The increases were due principally to the acquisition expenses associated with the Arden, Atrium and Torus acquisitions. Income tax expense - Income tax expenses were $8.5 million and $15.7 million for the three and six months ended June 30, 2014, respectively, as compared to $4.5 million and $12.4 million for the same periods in 2013. Income tax expense is generated through our foreign operations outside of Bermuda, principally in the United States, U.K and Australia. Our income tax expense may fluctuate significantly from period to period depending on the geographic distribution of pre-tax earnings or loss in any given period between different jurisdictions with different tax rates. For the three and six months ended June 30, 2014, the effective tax rate was 13.5% and 15.2%, respectively, compared to 15.3% and 24.5% for the same periods in 2013. The lower effective tax rate for the six months ended 71



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June 30, 2014 compared to the same period in 2013 was attributable to higher earnings in our non-tax paying subsidiaries.

Noncontrolling interest - Noncontrolling interest for the three and six months ended June 30, 2014 decreased by $3.5 million and $0.7 million, respectively, relative to the same periods for 2013. The decrease was attributable primarily to losses associated with our active underwriting companies (in which there are redeemable noncontrolling interests and noncontrolling interests), which were acquired subsequent to June 30, 2013. 72



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Results of Operations by Segment - For the Three and Six Months Ended June 30, 2014 and 2013

Non-life Run-off Segment



Three Months Ended June 30, 2014 and 2013

The following is a discussion and analysis of the results of operations for our non-life run-off segment for the three months ended June 30, 2014 and 2013 which are summarized below: Three Months Ended June 30, 2014 2013 (in thousands of U.S. dollars) INCOME Net premiums earned $ 17,084$ 41,216 Fees and commission income 12,218 3,536 Net investment income 22,267 17,180 Net realized and unrealized gains (losses) 30,926 (17,238 ) 82,495 44,694 EXPENSES Net increase (reduction) in ultimate losses and loss adjustment expense liabilities: -Current period 10,209 35,504 -Prior periods (47,411 ) (62,926 ) (37,202 ) (27,422 ) Acquisition costs 5,652 5,712 Salaries and benefits 31,463 24,626 General and administrative expenses 15,579 16,046 Interest expense 2,325 2,631 Net foreign exchange gains (632 ) (8,450 ) 17,185 13,143 EARNINGS BEFORE INCOME TAXES 65,310 31,551 INCOME TAXES (5,223 ) (4,534 ) NET EARNINGS 60,087 27,017 Less: Net earnings attributable to noncontrolling interest (5,574 )



(6,001 )

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED $ 54,513$ 21,016



Summary Comparison of Three Months Ended June 30, 2014 and 2013

In our non-life run-off segment, we reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $60.1 million and $27.0 million for the three months ended June 30, 2014 and 2013, respectively.



The increase in earnings of $33.1 million was attributable primarily to the following:

(i) an increase in net realized and unrealized gains of $48.2 million; 73



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(iii) an increase in investment income of $5.1 million; partially offset by

(iv) a decrease of $15.5 million in net reduction in ultimate losses and loss

adjustment expense liabilities related to prior periods; (v) a decrease in net foreign exchange gains of $7.8 million; and (vi) an increase in salaries and benefits of $6.8 million. For the three months ended June 30, 2014 the total of: (i) net premiums earned of $17.1 million; less (ii) current period increase in net ultimate losses and loss adjustment expense liabilities of $10.2 million; and less (iii) acquisition costs of $5.7 million amounted to $1.2 million and primarily related to the Torus run-off business. For the three months ended June 30, 2013 the total of: (i) net premiums earned of $41.2 million; less (ii) current period increase in net ultimate losses and loss adjustment expense liabilities of $35.3 million; and less (iii) acquisition costs of $5.7 million, amounted to $nil million and related to SeaBright. Noncontrolling interest in earnings for the non-life run-off segment decreased by $0.4 million to $5.6 million for the three months ended June 30, 2014 as a result of lower earnings in those companies in which there are noncontrolling interests. Net earnings for the non-life run-off segment attributable to Enstar Group Limited increased by $33.5 million, or 159.5%, from $21.0 million for the three months ended June 30, 2013 to $54.5 million for the three months ended June 30, 2014. Net Premiums Earned: Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Gross premiums written $ 6,720$ 4,444 Ceded reinsurance premiums written (904 ) (3,274 ) Net premiums written 5,816 $ 4,646 1,170 Gross premiums earned 22,406 45,414 Ceded reinsurance premiums earned (5,322 ) (4,198 ) Net premiums earned $ 17,084$ (24,132 )$ 41,216 Premiums Written Gross non-life run-off premiums written consist of direct premiums written and premiums assumed by Torus' run-off business and SeaBright. Upon acquisition, SeaBright was placed into run-off and, as a result, stopped writing new insurance policies.



We would expect to have in future periods relatively low levels of gross and net premiums written relating to the Torus run-off business.

Premiums Earned

Gross non-life run-off premiums earned for the three months ended June 30, 2014 and 2013 totaled $22.4 million and $45.4 million, respectively. Ceded reinsurance premiums earned for the three

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months ended June 30, 2014 and 2013 totaled $5.3 million and $4.2 million, respectively. Accordingly, net premiums earned for the three months ended June 30, 2014 and 2013 totaled $17.1 million and $41.2 million, respectively.

Premiums written and earned in 2014 primarily relate to the Torus' run-off business whereas premiums written and earned in 2013 relate to SeaBright.

Fees and Commission Income: Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Internal 10,183 576 External 2,035 2,960 Total $ 12,218$ 8,682$ 3,536 Our management companies in the non-life run-off segment earned fees and commission income of approximately $12.2 million and $3.5 million for the three months ended June 30, 2014 and 2013, respectively. The increase in fees and commission income of $8.7 million related primarily to management fees charged to our Torus segment. These internal fees are eliminated upon consolidation of our results of operations. While our consulting subsidiaries continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, the core focus of these subsidiaries is providing in-house services to companies within the Enstar group.



Net Investment Income and Net Realized and Unrealized Gains (Losses):

Three Months Ended June 30, Net Realized and Unrealized Net Investment Income Gains (Losses) 2014 Variance 2013 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 22,267$ 5,087$ 17,180$ 30,926$ 48,164$ (17,238 )



Net investment income for the non-life run-off segment for the three months ended June 30, 2014 increased by $5.1 million to $22.3 million, as compared to $17.2 million for the three months ended June 30, 2013. The increase was primarily a result of higher investment balances due to assets acquired in respect of the Torus run-off business.

Net realized and unrealized gains (losses) for the non-life run-off segment for the three months ended June 30, 2014 and 2013 were $30.9 million and $(17.2) million, respectively. The increase of $48.2 million was primarily attributable to:



(i) gains of $9.9 million in relation to the fixed maturity investments of the

segment due primarily to marginal declines in the longer end of the U.S. yield curve for the three months ended June 30, 2014, as compared to



losses of $31.5 million for the same period in 2013 due to increases

across the U.S. yield curve during that time; and (ii) an increase of $6.1 million in realized and unrealized gains on the private equity and other investment holdings of the segment. 75



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Annualized Returns

The below table presents the annualized investment returns (inclusive of net investment income and net realized and unrealized gains (losses)) earned by the non-life run-off segment on its cash and investments for the three months ended June 30, 2014 and 2013: Average Cash and Annualized Return Investment Balances 2014 2013 2014 2013 (in thousands of U.S. dollars) Cash and fixed maturity investments 2.29 % (1.89) % $ 3,968,276$ 3,596,031 Other investments and equities 15.01 % 10.65 % 812,552 589,034 Combined overall 4.45 % (0.01) % 4,780,828 4,185,064



The average credit ratings by fair value of our fixed maturity investments for our non-life run-off segment as at June 30, 2014 and 2013 were AA- and A+, respectively.

Net (Reduction) Increase in Ultimate Losses and Loss Adjustment Expense Liabilities:

The following table shows the components of the movement in the net reduction in ultimate losses and loss adjustment expense liabilities for the non-life run-off segment for the three months ended June 30 2014 and 2013 (a reclassification of $5.7 million was made from 2013 current period net losses paid to acquisition costs in order to conform to current year presentation): Three Months Ended June 30, 2014 2013 Prior Current Total Prior Current Periods Period Total Variance Periods Period Total (in thousands of U.S. dollars) Net losses paid $ 116,315$ 260$ 116,575$ 40,884$ 2,784$ 43,668 Net change in case and LAE reserves (78,596 ) 175 (78,421 ) (74,166 ) 10,133 (64,033 )



Net change in IBNR reserves (64,504 ) 9,774 (54,730 )

(15,218 ) 22,587 7,369 (Reduction) increase in estimates of net ultimate losses (26,785 ) 10,209 (16,576 )



3,580 (48,500 ) 35,504 (12,996 ) Paid loss recoveries on bad debt provision

(11,206 ) - (11,206 ) - - - Reduction in provisions for unallocated loss adjustment expense liabilities (12,874 ) - (12,874 ) (16,795 ) - (16,795 ) Amortization of fair value adjustments 3,454 - 3,454 2,369 - 2,369 Net (reduction) increase in ultimate losses and loss adjustment expense liabilities $ (47,411 )$ 10,209$ (37,202 ) 9,780 $ (62,926 )$ 35,504$ (27,422 ) Net change in case and LAE reserves comprise the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the 76



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settlement or movement of assumed claims. Net change in incurred but not reported, or IBNR, reserves represents the change in our actuarial estimates of losses incurred but not reported, less amounts recoverable.

Three Months Ended June 30, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended June 30, 2014 of $37.2 million included an increase in incurred losses of $10.2 million related to current period earned premium, related primarily to the portion of the run-off business acquired with Torus. Excluding current period incurred losses of $10.2 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $47.4 million, which was attributable to a reduction in estimates of net ultimate losses of $26.8 million, paid loss recoveries on bad debt provisions of $11.2 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $12.9 million, relating to 2014 runoff activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $3.5 million.



The reduction in estimates of net ultimate losses relating to prior periods of $26.8 million was related primarily to:

(i) our quarterly review of historic case reserves for which no updated

advices had been received for a number of years. This review identified

the redundancy of a number of advised case reserves with an estimated

aggregate value of approximately $6.8 million;



(ii) a reduction in IBNR reserves of $10.0 million primarily as a result of

the application, on a basis consistent with the assumptions applied in

the prior period, of our actuarial methodologies to revised historical

loss development data to estimate loss reserves required to cover liabilities for unpaid loss and loss adjustment expenses relating to non-commuted exposures in Lloyd's Syndicate 2008. The prior period estimate of aggregate net IBNR liabilities was reduced as a result of the continued favorable trend of loss development compared to prior forecasts; and



(iii) favorable claims settlements during the three months ended June 30, 2014

resulting in a reduction in estimates of net ultimate losses of

approximately $12.8 million.

Three Months Ended June 30, 2013

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended June 30, 2013 of $27.4 million included losses incurred of $35.5 million related to premiums earned in the period by SeaBright. Excluding SeaBright's incurred losses of $35.5 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $62.9 million. This decrease was attributable to a reduction in estimates of net ultimate losses of $48.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $16.8 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $2.4 million.



The reduction in estimates of net ultimate losses relating to prior periods of $48.5 million was due primarily to:

(i) our review of historic case reserves for which no updated advices had been

received for a number of years. This review identified the redundancy of a

number of advised case reserves with an estimated aggregate value of approximately $8.3 million; 77



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(ii) net favorable incurred loss development of $25.0 million (excluding the

impact of redundant case reserves of $8.3 million) which included the settlement of net ceded case reserves of $26.2 million (excluding ceded IBNR recoverable) for net paid receipts of $74.3 million relating to the



settlement of five commutations and policy buy-backs of assumed and ceded

exposures including the commutation of one of our top ten ceded reinsurance balances recoverable; and (iii) a reduction in IBNR reserves of $20.2 million as a result of the



application, on a basis consistent with the assumptions applied in the

prior period, of our actuarial methodologies to revised historical loss

development data to estimate loss reserves required to cover liabilities

for unpaid loss and loss adjustment expenses relating to non-commuted

exposures in one of our Bermuda-based reinsurance subsidiaries. The prior period estimate of aggregate net IBNR liabilities for this subsidiary was reduced as a result of the favorable trend of loss development during 2013 compared to prior forecasts. Salaries and Benefits: Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 31,463$ (6,837 )$ 24,626 Salaries and benefits for the non-life run-off segment, which include expenses relating to our discretionary bonus and employee share plans, were $31.5 million and $24.6 million for the three months ended June 30, 2014 and 2013, respectively. The increase in salaries and benefits was related primarily to:



(i) an increase in the discretionary bonus provision of approximately $4.3

million due to the increase in net earnings for the three months ended

June 30, 2014 as compared to 2013. Expenses relating to our discretionary

bonus plan will be variable and are dependent on our overall profitability; and (ii) an increase in total salaries effective April 1, 2014, following a salary review across the segment, as compared to the same period in 2013 when a salary freeze had generally been in effect; partially offset by (iii) a reduction in our average head count in our non-life run-off segment from approximately 568 for the three months ended June 30, 2013 to approximately 517 for the three months ended June 30, 2014.



Net Foreign Exchange Gains:

Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 632$ (7,818 )$ 8,450 We recorded net foreign exchange gains for the non-life run-off segment of $0.6 million and $8.5 million for the three months ended June 30, 2014 and 2013, respectively. The net foreign exchange gains for the three months ended June 30, 2013 arose primarily as a result of holding surplus U.S. dollar assets in one of our subsidiaries whose functional currency is Australian dollars at a time when the Australian dollar depreciated sharply against the U.S. dollar. 78



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In addition to the net foreign exchange gains recorded in our consolidated statement of earnings, we recorded in our unaudited condensed consolidated statement of comprehensive income currency translation adjustment gains (losses), net of noncontrolling interest, related to our non-life run-off segment of $2.1 million and $(12.5) million for the three months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014 and 2013, the currency translation adjustments related primarily to our Australian-based subsidiaries. As the functional currency of these subsidiaries are Australian dollars, we record any U.S. dollar gains or losses on the translation of their net Australian dollar assets through accumulated other comprehensive income. Income Tax Expense: Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 5,223$ (689 )$ 4,534



We recorded income tax expense for the non-life run-off segment of $5.2 million and $4.5 million for the three months ended June 30, 2014 and 2013, respectively.

Income tax expense is generated primarily through our foreign operations outside of Bermuda, principally in the United States, Europe and Australia. The effective tax rate, which is calculated as income tax expense or benefit divided by income before tax, is driven primarily by the geographic distribution of pre-tax net income between jurisdictions with comparatively higher tax rates and those with comparatively lower income tax rates and as a result may fluctuate significantly from period to period. The effective tax rate was 7.9% for the three months ended June 30, 2014 compared with 14.4% for same period in 2013, associated primarily with us having proportionately higher net income in our non-tax paying subsidiaries than in the prior period. Noncontrolling Interest: Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 5,574$ 427$ 6,001



We recorded a noncontrolling interest in earnings of the non-life run-off segment of $5.6 million and $6.0 million for the three months ended June 30, 2014 and 2013, respectively.

The decrease for the three months ended June 30, 2014 was due primarily to the decrease in earnings for those companies in our non-life run-off segment where there exists a noncontrolling interest. 79



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Six Months Ended June 30, 2014 and 2013

The following is a discussion and analysis of the results of operations for our non-life run-off segment for the six months ended June 30, 2014 and 2013 which are summarized below: Six Months Ended June 30, 2014 2013 (in thousands of U.S. dollars) INCOME Net premiums earned $ 19,611$ 72,136 Fees and commission income 15,173 6,164 Net investment income 36,600 34,871 Net realized and unrealized gains 60,555 13,040 131,939 126,211 EXPENSES Net increase (reduction) in ultimate losses and loss adjustment expense liabilities -Current period 11,641 64,037 -Prior periods (78,024 ) (82,298 ) (66,383 ) (18,261 ) Acquisition costs 5,652 8,099 Salaries and benefits 57,311 48,090 General and administrative expenses 31,342



32,461

Interest expense 4,887



5,051

Net foreign exchange losses (gains) 1,498 (3,514 ) 34,307 71,926 EARNINGS BEFORE INCOME TAXES 97,632 54,285 INCOME TAXES (8,874 ) (12,358 ) NET EARNINGS 88,758 41,927 Less: Net earnings attributable to noncontrolling interest (8,645 )



(7,027 )

NET EARNINGS ATTRIBUTABLE TO ENSTAR GROUP LIMITED $ 80,113$ 34,900



Summary Comparison of Six Months Ended June 30, 2014 and 2013

In our non-life run-off segment, we reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $88.8 million and $41.9 million for the six months ended June 30, 2014 and 2013, respectively. 80



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The increase in earnings of $46.8 million was attributable primarily to the following:

(i) an increase in net realized and unrealized gains of $47.5 million; (ii) an increase in fees and commission income of $9.0 million; and (iii) a reduction in income taxes of $3.5 million; partially offset by (iv) an increase in salaries and benefits of $9.2 million;



(v) a decrease of $4.3 million in net reduction in ultimate losses and loss

adjustment expense liabilities related to prior periods; and



(vi) a net foreign exchange loss of $1.5 million for the six months ended

June 30, 2014, as compared to a net foreign exchange gain of $3.5 million

for the same period in 2013.

For the six months ended June 30, 2014 the total of: (i) net premiums earned of $19.6 million; less (ii) current period increase in net ultimate losses and loss adjustment expense liabilities of $11.6 million; and less (iii) acquisition costs of $5.7 million amounted to $1.2 million and primarily related to the Torus run-off business. For the six months ended June 30, 2013 the total of: (i) net premiums earned of $72.1 million; less (ii) current period increase in net ultimate losses and loss adjustment expense liabilities of $64.0 million; and less (iii) acquisition costs of $8.1 million, amounted to $nil million and related to SeaBright. Noncontrolling interest in earnings for the non-life run-off segment increased by $1.6 million to $8.6 million for the six months ended June 30, 2014 as a result of higher earnings in those companies in which there are noncontrolling interests. Net earnings for the non-life run-off segment attributable to Enstar Group Limited increased by $45.2 million, or 129.5%, from $34.9 million for the six months ended June 30, 2013 to $80.1 million for the six months ended June 30, 2014. Net Premiums Earned: Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Gross premiums written $ 8,039$ 16,542

Ceded reinsurance premiums written (1,180 )

(5,664 ) Net premiums written 6,859 $ (4,019 ) 10,878 Gross premiums earned 25,174 79,550

Ceded reinsurance premiums earned (5,563 )

(7,414 ) Net premiums earned $ 19,611$ (52,525 )$ 72,136 Premiums Written Gross non-life run-off premiums written consist of direct premiums written and premiums assumed primarily by Torus' run-off business for 2014 and by SeaBright for 2013. Gross and net non-life run-off premiums written for the six months ended June 30, 2014 totaled $8.0 million and $6.9 million, respectively, as compared to $16.5 million and $10.9 million for the same period in 2013.



Premiums Earned

Gross non-life run-off premiums earned for the six months ended June 30, 2014 and 2013 totaled $25.2 million and $79.5 million, respectively. Ceded reinsurance premiums earned for the six months

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ended June 30, 2014 and 2013 totaled $5.6 million and $7.4 million, respectively. Accordingly, net premiums earned for the six months ended June 30, 2014 and 2013 totaled $19.6 million and $72.1 million, respectively.

Premiums earned in 2014 primarily relate to Torus' run-off business whereas premiums earned in 2013 relate to SeaBright.

Fees and Commission Income: Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Internal $ 10,961$ 757 External 4,212 5,407 Total $ 15,173$ 9,009$ 6,164 Our management companies in the non-life run-off segment earned fees and commission income of approximately $15.2 million and $6.2 million for the six months ended June 30, 2014 and 2013, respectively. The increase in fees and commission income of $9.0 million related primarily to management fees charged to our Torus segment. These internal fees are eliminated upon consolidation of our results of operations.



Net Investment Income and Net Realized and Unrealized Gains:

Six Months Ended June 30, Net Investment Income Net Realized and Unrealized Gains 2014 Variance 2013 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 36,600$ 1,729$ 34,871$ 60,555$ 47,515$ 13,040 Net investment income for the non-life run-off segment for the six months ended June 30, 2014 increased by $1.7 million to $36.6 million, as compared to $34.9 million for the six months ended June 30, 2013. The increase was primarily a result of higher investment balances due to assets acquired in respect of the Torus run-off business. Net realized and unrealized gains for the non-life run-off segment for the six months ended June 30, 2014 and 2013 were $60.6 million and $13.1 million, respectively. The increase of $47.5 million was attributable primarily to the combination of the following items:



(i) gains of $18.1 million in relation to fixed maturity investments of the

segment due primarily to declines in the longer end of the U.S. yield

curve for the year to date as compared to losses of $29.8 million for the

same period in 2013 due to increases across the U.S. yield curve; and



(ii) an increase of $4.0 million in realized and unrealized gains on the

private equity and other investment holdings of the segment; partially

offset by



(iii) a decrease of $4.4 million in realized and unrealized gains on our

equity portfolios as equity markets generally continued to advance in

2014, but not to the same extent as for the same period in 2013. 82



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Annualized Returns

The below table presents the annualized investment returns (inclusive of net investment income and net realized and unrealized gains) earned by the non-life run-off segment on its cash and investments for the six months ended June 30, 2014 and 2013: Average Cash and Annualized Return Investment Balances 2014 2013 2014 2013 (in thousands of U.S. dollars) Cash and fixed maturity investments 2.21 % (0.04 )% $ 3,996,896$ 3,407,285 Other investments and equities 13.42 % 15.99 % 788,716 567,732 Combined overall 4.06 % 2.41 % 4,785,612 3,975,017



The average credit ratings by fair value of our fixed maturity investments for our non-life run-off segment as at June 30, 2014 and 2013 were AA- and A+, respectively.

Net (Reduction) Increase in Ultimate Losses and Loss Adjustment Expense Liabilities:

The following table shows the components of the movement in the net (reduction) increase in ultimate losses and loss adjustment expense liabilities for the six months ended June 30, 2014 and 2013 (a reclassification of $8.1 million was made from 2013 current period net losses paid to acquisition costs in order to conform to current year presentation): Six Months Ended June 30, 2014 2013 Prior Current Total Prior Current Periods Period Total Variance Periods Period Total (in thousands of U.S. dollars) Net losses paid $ 203,470$ 792$ 204,262$ 122,018$ 5,324$ 127,342 Net change in case and LAE reserves (141,845 ) 1,026 (140,819 ) (137,612 ) 15,379 (122,233 ) Net change in IBNR reserves (101,901 ) 9,823 (92,078 ) (37,968 ) 43,334 5,366 (Reduction) increase in estimates of net ultimate losses (40,276 ) 11,641 (28,635 )



39,110 (53,562 ) 64,037 10,475 Paid loss recoveries on bad debt provisions

(11,206 ) - (11,206 ) - - - Reduction in provisions for unallocated loss adjustment expense liabilities (26,233 ) - (26,233 ) (33,198 ) - (33,198 ) Amortization of fair value adjustments (309 ) - (309 ) 4,462 - 4,462 Net (reduction) increase in ultimate losses and loss adjustment expense liabilities $ (78,024 )$ 11,641$ (66,383 ) 48,122 $ (82,298 )$ 64,037$ (18,261 )



Six Months Ended June 30, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the six months ended June 30, 2014 of $66.4 million included an increase in incurred losses of $11.6 million related to

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current period earned premium, which was primarily with respect to the portion of the run-off business acquired with Torus. Excluding current period incurred losses of $11.6 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $78.0 million, which was attributable to a reduction in estimates of net ultimate losses of $40.3 million, paid loss recoveries on bad debt provisions of $11.2 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $26.2 million, relating to 2014 runoff activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $(0.3) million.



The reduction in estimates of net ultimate losses relating to prior periods of $40.3 million was related primarily to:

(i) our quarterly review of historic case reserves for which no updated

advices had been received for a number of years. This review identified

the redundancy of a number of advised case reserves with an estimated

aggregate value of approximately $13.6 million;



(ii) a reduction in IBNR reserves of $10.0 million primarily as a result of

the application, on a basis consistent with the assumptions applied in

the prior period, of our actuarial methodologies to revised historical

loss development data to estimate loss reserves required to cover liabilities for unpaid loss and loss adjustment expenses relating to non-commuted exposures in Lloyd's Syndicate 2008. The prior period estimate of aggregate net IBNR liabilities was reduced as a result of the



continued favorable trend of loss development during the six months ended

June 30, 2014 compared to prior forecasts; and (iii) favorable claims settlements during the six months ended June 30, 2014 resulting in a reduction in estimates of net ultimate losses of approximately $19.5 million.



Six Months Ended June 30, 2013

The net reduction in ultimate losses and loss adjustment expense liabilities for the six months ended June 30, 2013 of $18.3 million included incurred losses of $64.0 million related to premiums earned in the period by SeaBright. Excluding SeaBright's incurred losses of $64.0 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $82.3 million, which was attributable to a reduction in estimates of net ultimate losses of $53.6 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $33.2 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.5 million.



The reduction in estimates of net ultimate losses relating to prior periods of $53.6 million was related primarily to:

(i) our quarterly review of historic case reserves for which no updated

advices had been received for a number of years. This review identified

the redundancy of a number of advised case reserves with an estimated

aggregate value of approximately $16.6 million;



(ii) net incurred loss development of $1.0 million (excluding the impact of

redundant case reserves of $16.6 million) which included the settlement

of net ceded case reserves of $26.2 million (excluding ceded IBNR

recoverable) for net paid receipts of $74.3 million relating to the

settlement of five commutations and policy buy-backs of assumed and ceded

exposures including the commutation of one of our top ten ceded reinsurance balances recoverable; and (iii) a reduction in IBNR reserves of $20.2 million as a result of the



application, on a basis consistent with the assumptions applied in the

prior period, of our actuarial methodologies to revised historical loss

development data to estimate loss reserves required to cover liabilities

for unpaid loss and loss adjustment expenses relating to non-commuted

exposures in one of our Bermuda-based reinsurance subsidiaries. The prior period estimate of aggregate net 84



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Table of Contents IBNR liabilities for this subsidiary was reduced as a result of the favorable trend of loss development during 2013 compared to prior forecasts. Acquisition Costs: Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 5,652$ 2,447$ 8,099 Acquisition costs for the non-life run-off segment were $5.7 million and $8.1 million for the six months ended June 30, 2014 and 2013, respectively. Acquisition costs are directly related to the amount of net premiums earned by us which, for the six months ended June 30, 2014, directly related to the portion of Torus' business that was placed into run-off and, for the same period in 2013, directly related only to SeaBright. A reclassification of $8.1 million was made from 2013 current period net losses paid to acquisition costs in order to conform to current year presentation. Salaries and Benefits: Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 57,311$ (9,221 )$ 48,090 Salaries and benefits for the non-life run-off segment, which include expenses relating to our discretionary bonus and employee share plans, were $57.3 million and $48.1 million for the six months ended June 30, 2014 and 2013, respectively. The increase in salaries and benefits was related primarily to:



(i) an increase in the discretionary bonus provision of approximately $8.2

million due to the increase in net earnings for the six months ended June

30, 2014 as compared to 2013. Expenses relating to our discretionary bonus

plan will be variable and are dependent on our overall profitability; and

(ii) an increase in total salaries effective April 1, 2014, following a salary review across the segment, as compared to the same period in 2013 when a salary freeze had generally been in effect; partially offset by (iii) a reduction in our average headcount in our non-life segment from approximately 562 for the six months ended June 30, 2013 to approximately 520 for the six months ended June 30, 2013.



Net Foreign Exchange (Losses) Gains:

Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ (1,498 )$ (5,012 )$ 3,514 We recorded net foreign exchange (losses) gains for the non-life run-off segment of $(1.5) million and $3.5 million for the six months ended June 30, 2014 and 2013, respectively. The net foreign exchange losses for the six months ended June 30, 2014 arose primarily as a result of the holding of surplus U.S. dollar assets by our Australian subsidiary at a time when the Australian dollar had 85



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appreciated against the U.S. dollar. The net foreign exchange gains for the six months ended June 30, 2013 arose principally as a result of the holding of surplus U.S. dollar assets by our Australian subsidiary at a time when the Australian dollar had depreciated against the U.S. dollar.

In addition to the net foreign exchange (losses) gains recorded in our consolidated statement of earnings, we recorded in our unaudited condensed consolidated statement of comprehensive income currency translation adjustment gains, net of noncontrolling interest, related to our non-life run-off segment of $5.3 million for the six months ended June 30, 2014 as compared to losses, net of noncontrolling interest, of $12.8 million for the six months ended June 30, 2013. For both the six months ended June 30, 2014 and 2013, the currency translation adjustments related primarily to our Australian-based subsidiaries. Income Tax Expense: Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 8,874$ 3,484$ 12,358 We recorded income tax expense for the non-life run-off segment of $8.9 million and $12.4 million for the six months ended June 30, 2014 and 2013, respectively. The decrease in income taxes of $3.5 million was due principally to decreased pre-tax net income recorded in our U.S. and U.K.-based subsidiaries. The effective tax rate was 9.1% for the six months ended June 30, 2014 as compared with 22.8% for the same period in 2013. In 2014, we had proportionately greater net income in our non-tax paying subsidiaries than in the prior period. Noncontrolling Interest: Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 8,645$ (1,618 )$ 7,027 We recorded a noncontrolling interest in earnings of the non-life run-off segment of $8.6 million and $7.0 million for the six months ended June 30, 2014 and 2013, respectively. The increase for the six months ended June 30, 2014 was due primarily to the increase in earnings for those companies where there exists a noncontrolling interest. Atrium Segment Our Atrium segment is comprised of the operations and financial results of Northshore, a holding company that owns Atrium and its subsidiaries (acquired November 25, 2013) and Arden (acquired September 9, 2013). Arden provides quota share reinsurance to Atrium. This quota share arrangement is eliminated upon consolidation. Results related to Arden's run-off lines of business are included within our non-life run-off segment. Atrium's subsidiary, Atrium Underwriters Ltd., or AUL, is the managing agent for Lloyd's Syndicate 609. AUL earns fees and profit commissions on business underwritten for the Syndicate. Atrium's subsidiary, Atrium 5 Ltd, impacts our results with respect to the 25% underwriting capacity and capital it provides to Syndicate 609. The remaining underwriting capacity is provided by traditional Lloyd's Names. 86



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The following is a discussion and analysis of our results of operations for the Atrium segment for the three and six months ended June 30, 2014, which are summarized below: Three Months Ended June 30, 2014 Six Months Ended June 30, 2014 Enstar Enstar Holding Specific Holding Specific Atrium Companies Expenses Total Atrium Companies Expenses Total (in thousands of U.S. dollars) INCOME Net premiums earned $ 33,997 $ - $ - $ 33,997$ 66,636 $ - $ - $ 66,636 Fees and commission income 5,474 - - 5,474 10,295 - - 10,295 Net investment income 497 - - 497 977 - - 977 Net realized and unrealized gains 4 - - 4 (103 ) - - (103 ) 39,972 - - 39,972 77,805 - - 77,805 EXPENSES Net increase in ultimate losses and loss adjustment expense liabilities 16,611 - - 16,611 33,742 - - 33,742 Acquisition costs 11,167 - - 11,167 20,728 - - 20,728 Salaries and benefits 4,226 - - 4,226 7,759 - - 7,759 General and administrative expenses 3,329 661 - 3,990 6,201 1,830 - 8,031 Interest expense - - 1,204 1,204 5 - 2,371 2,376 Net foreign exchange gains (435 ) - - (435 ) (986 ) - - (986 ) 34,898 661 1,204 36,763 67,449 1,830 2,371 71,650 EARNINGS (LOSS) BEFORE INCOME TAXES 5,074 (661 ) (1,204 ) 3,209 10,356 (1,830 ) (2,371 ) 6,155 INCOME TAXES (1,280 ) - - (1,280 ) (2,619 ) - - (2,619 ) NET EARNINGS (LOSS) 3,794 (661 ) (1,204 ) 1,929 7,737 (1,830 ) (2,371 ) 3,536 Less: Net (earnings) loss attributable to noncontrolling interest (1,570 ) 277 - (1,293 ) (3,148 ) 745 - (2,403 ) NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED $ 2,224$ (384 )$ (1,204 )$ 636$ 4,589$ (1,085 )$ (2,371 )$ 1,133 Loss ratio (1) 48.9 % 50.6 % Acquisition cost ratio (2) 32.8 % 31.1 % Other operating expense ratio (3) 22.2 % 20.9 % Combined ratio (4) 103.9 % 102.6 %



(1) Loss ratio is obtained by dividing net increase in ultimate losses and loss

adjustment expense liabilities by net premiums earned.

(2) Acquisition cost ratio is obtained by dividing acquisition costs by net

premiums earned.

(3) Other operating expense ratio is obtained by dividing the sum of general and

administrative expenses and salaries and benefits attributable to Atrium by

net premiums earned. Other operating expense ratio is a non-GAAP financial

measure because it excludes the general and administrative expenses of the

Atrium segment holding companies. The most directly comparable GAAP financial

measure would be to include these holding company expenses, which would result in a ratio of 87



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24.2% and 23.7% for the three and six months ended June 30, 2014,

respectively. See "Non-GAAP Financial Measures" for more information on this

ratio.

(4) Our combined ratio is the sum of: (i) our loss ratio, (ii) our acquisition

cost ratio and (iii) our other operating expense ratio (which is a non-GAAP

financial measure, as described in footnote 3). Our historical combined ratio

may not be indicative of future underwriting performance.

Three Months Ended June 30, 2014

For the Atrium segment, we reported net earnings, before net earnings attributable to noncontrolling interest, of approximately $1.9 million for the three months ended June 30, 2014.

The results were primarily driven by:

(i) net underwriting result of $6.2 million (net premiums earned of $34.0 million less $16.6 million in net increase in ultimate losses and loss adjustment expense liabilities and $11.2 million of acquisition costs); (ii) fees and commission income of $5.5 million; and (iii) net investment income and net realized and unrealized gains of $0.5 million; partially offset by



(iv) salaries and benefits and general and administrative expenses of $8.2

million; (v) interest expense of $1.2 million; and (vi) income taxes of $1.3 million. Noncontrolling interest in earnings of the Atrium segment of $1.3 million resulted in net earnings attributable to Enstar Group Limited of $0.6 million for the three months ended June 30, 2014. The noncontrolling interests' share of earnings is greater than their 41.54% share of the Atrium segment's net earnings primarily due to interest expense in respect of borrowings under our revolving credit facility that are recorded within the Atrium segment and 100% attributable to us.



Six Months Ended June 30, 2014

For the Atrium segment, we reported net earnings, before net earnings attributable to noncontrolling interest, of approximately $3.5 million for the six months ended June 30, 2014.

The results were primarily driven by:

(i) net underwriting result of $12.2 million (net premiums earned of $66.6 million less $33.7 million in net increase in ultimate losses and loss adjustment expense liabilities and $20.7 million of acquisition costs); (ii) fees and commission income of $10.3 million; and (iii) net investment income and net realized and unrealized gains of $0.9 million; partially offset by



(iv) salaries and benefits and general and administrative expenses of $15.8

million; (v) interest expense of $2.4 million; and (vi) income taxes of $2.6 million. 88



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Noncontrolling interest in earnings of the Atrium segment of $2.4 million resulted in net earnings attributable to Enstar Group Limited of $1.1 million for the six months ended June 30, 2014. The noncontrolling interests' share of earnings is greater than their 41.54% share of the Atrium segment's net earnings primarily due to interest expense in respect of borrowings under our revolving credit facility that are recorded within the segment and 100% attributable to us. For 2014, we expect the income and expenses associated with the Atrium segment to increase as compared to 2013 as a result of owning these companies for a full year. Earnings attributable to noncontrolling interest in 2014 will be dependent on the level of earnings for these companies.



Gross Premiums Written:

The following table provides gross premiums written by line of business for the Atrium segment for the three and six months ended June 30, 2014:

Gross Premiums Written Gross Premiums Written Three Months % of Total Gross Six Months % of Total Gross Ended June 30, Premiums Ended June 30, Premiums 2014 Written 2014 Written (in thousands of U.S. dollars) Marine Property $ 5,877.2 14.7 % $ 13,909.7 15.9 % Property and Casualty Binding Authorities 6,900.4 17.3 % 14,143.5 16.2 % Upstream Energy 7,898.9 19.8 % 14,130.9 16.2 % Reinsurance 3,031.7 7.6 % 8,842.6 10.1 % Accident and Health 2,447.6 6.1 % 8,163.4 9.3 % Professional Liability 4,502.5 11.3 % 8,637.3 9.9 % Non-marine Property 4,845.1 12.2 % 8,749.2 10.0 % Aviation 1,730.1 4.3 % 5,625.7 6.4 % War and Terrorism 2,623.2 6.7 % 5,231.9 6.0 % Total $ 39,856.7 100.0 % $ 87,434.2 100.0 %



Gross premiums written were $39.9 million and $87.4 million for the three and six months ended June 30, 2014, respectively.

Net Premiums Earned:

The following table provides net premiums earned by line of business for the Atrium segment for the three and six months ended June 30, 2014:

Net Premiums Earned Three Months % of Total Net Six Months % of Total Net Ended June 30, Premiums Ended June 30, Premiums 2014 Earned 2014 Earned (in thousands of U.S. dollars) Marine Property $ 5,515.3 16.2 % $ 10,780.4 16.2 % Property and Casualty Binding Authorities 6,121.0 18.0 % 11,627.6 17.4 % Upstream Energy 4,579.6 13.5 % 9,595.1 14.4 % Reinsurance 2,803.2 8.2 % 5,812.4 8.7 % Accident and Health 3,055.8 9.0 % 6,998.1 10.5 % Professional Liability 3,901.2 11.5 % 6,902.3 10.4 % Non-marine Property 3,619.8 10.6 % 7,276.4 10.9 % Aviation 2,200.2 6.5 % 3,966.1 6.0 % War and Terrorism 2,201.0 6.5 % 3,677.5 5.5 % Total $ 33,997.1 100.0 % $ 66,635.9 100.0 % 89



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Table of Contents Fees and Commission Income: June 30, 2014 Three Months Ended Six Months Ended (in thousands of U.S. dollars) Total $ 5,474 $ 10,295



The Atrium segment earned fees and commission income of approximately $5.5 million and $10.3 million for the three and six months ended June 30, 2014, respectively. The fees represent management and profit commission fees earned by us in relation to Atrium's management of Syndicate 609.

Net Increase in Ultimate Losses and Loss Adjustment Expenses Liabilities:

For the three months ended June 30, 2014, we recorded an overall net increase in ultimate losses and loss adjustment expense liabilities for the Atrium segment of $16.6 million, including net favorable prior period reserve development of $2.3 million due to claims improvement and reserve releases, largely related to our aviation and non-marine direct and facultative lines of business. A net increase in ultimate losses and loss adjustment expense liabilities for the current period of $18.9 million has been recorded based on expected loss ratios on current period earned premium. For the six months ended June 30, 2014, we recorded an overall net increase in ultimate losses and loss adjustment expense liabilities for the Atrium segment of $33.7 million, including net favorable prior period reserve development of $6.5 million due to claims improvement and reserve releases, largely related to our aviation and non-marine direct and facultative lines of business. A net increase in ultimate losses and loss adjustment expense liabilities for the six months ended June 30, 2014 of $40.2 million has been recorded on expected loss ratios on current period earned premium.



There is no assurance that conditions or trends that have affected the development of our reserves in the past will continue, and prior period development may not be indicative of development in future periods.

Salaries and Benefits: June 30, 2014 Three Months Ended Six Months Ended (in thousands of U.S. dollars) Total $ 4,226 $ 7,759 Salaries and benefits for the Atrium segment were $4.2 million and $7.8 million for the three and six months ended June 30, 2014, respectively. For the three months ended June 30, 2014, these costs included salaries and benefits of $1.9 million, share grant costs of $1.9 million and discretionary bonus costs of approximately $0.4 million. For the six months ended June 30, 2014, the total of $7.8 million was comprised of salaries and benefits of $3.6 million, share grant costs of $2.3 million and discretionary bonus of $1.9 million. The share grant costs relate to the Atrium employee equity awards, which are described in " -Acquisitions". Expenses relating to the discretionary bonus plan will be variable and dependent on Atrium's overall profitability. 90



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General and Administrative Expenses:

June 30, 2014 Three Months Ended Six Months Ended (in thousands of U.S. dollars) Total $ 3,990 $ 8,031 General and administrative expenses for the Atrium segment were $4.0 million and $8.0 million for the three and six months ended June 30, 2014, respectively. This was comprised of $3.3 million and $6.2 million related to Atrium and Arden for the three and six month periods ended June 30, 2014, respectively, and related primarily to office expenses and professional fees. In addition, expenses of $0.7 million and $1.8 million for the three and six months ended June 30, 2014, respectively, related primarily to the amortization of the definite-lived intangible assets in the Atrium segment holding companies. Interest Expense: June 30, 2014 Three Months Ended Six Months Ended (in thousands of U.S. dollars) Total $ 1,204 $ 2,376 Interest expense for the Atrium segment of $1.2 million and $2.4 million was recorded for the three and six months ended June 30, 2014, respectively. The interest expense recorded in the segment was in respect of borrowings under our revolving credit facility that are recorded in the segment and 100% attributable to us. Noncontrolling Interest: June 30, 2014 Three Months Ended Six Months Ended (in thousands of U.S. dollars) Total $ 1,293 $ 2,403 We recorded noncontrolling interest in earnings of the Atrium segment of $1.3 million and $2.4 million for the three and six months ended June 30, 2014. As of June 30, 2014, Trident, Dowling and Atrium management had a combined 41.54% noncontrolling interest in the Atrium segment. 91



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Torus Segment

Our Torus segment is comprised of the operations and financial results of Bayshore, a holding company that owns Torus and its subsidiaries. Results related to Torus' run-off lines of business are included within our non-life run-off segment.

The following is a discussion and analysis of our results of operations for Torus for the three and six months ended June 30, 2014, which are summarized below. Because we acquired Torus on April 1, 2014, the results in this segment were the same for the three months and six months ended June 30, 2014, with the exception of general and administrative expenses, which is discussed below. Three Months Ended June 30 2014 Six Months Ended June 30 2014 Holding Holding Torus Companies Total Torus Companies Total (in thousands of U.S. dollars) INCOME Net premiums earned $ 138,239 $ - $ 138,239$ 138,239 $ - $ 138,239 Fees and commision income - - - - - - Net investment income 1,365 - 1,365 1,365 - 1,365 Net realized and unrealized gains 3,218 - 3,218 3,218 - 3,218 142,822 - 142,822 142,822 - 142,822 EXPENSES Net increase in ultimate losses and loss adjustment expense liabilities 80,340 - 80,340 80,340 - 80,340 Acquisition costs 29,602 - 29,602 29,602 - 29,602 Salaries and benefits 16,970 630 17,600 16,970 630 17,600 General and administrative expenses 13,136 11,907 25,043 13,136 12,800 25,936 Net foreign exchange losses 614 6 620 614 11 625 140,662 12,543 153,205 140,662 13,441 154,103 EARNINGS (LOSS) BEFORE INCOME TAXES 2,160 (12,543 ) (10,383 ) 2,160 (13,441 ) (11,281 ) INCOME TAXES (394 ) - (394 ) (394 ) - (394 ) NET EARNINGS (LOSS) 1,766 (12,543 ) (10,777 ) 1,766 (13,441 ) (11,675 ) Less: Net (earnings) lossattributable to noncontrolling interest (905 ) 5,256 4,351



(905 ) 5,612 4,707

NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED $ 861$ (7,287 )$ (6,426 )$ 861$ (7,829 )$ (6,968 ) Loss ratio(1) 58.1 % 58.1 % Acquisition cost ratio(2) 21.4 % 21.4 % Other operating expense ratio(3) 21.8 % 21.8 % Combined ratio 101.3 % 101.3 %



(1) Loss ratio is obtained by dividing net increase in ultimate losses and loss

adjustment expense liabilities by net premiums earned.

(2) Acquisition cost ratio is obtained by dividing acquisition costs by net

premiums earned.

(3) Other operating expense ratio is obtained by dividing the sum of general and

administrative expenses and salaries and benefits attributable to Torus by

net premiums earned. Other operating expense ratio is a non-GAAP financial

measure because it excludes the general and administrative and salaries and

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GAAP financial measure would be to include these holding company expenses,

which would result in a ratio of 30.8% and 31.5% for the three and six months

ended June 30, 2014, respectively. See "Non-GAAP Financial Measures" for more

information on this ratio.

(4) Our combined ratio is the sum of: (i) our loss ratio, (ii) our acquisition

cost ratio and (iii) our other operating expense ratio (which is a non-GAAP

financial measure, as described in footnote 3). Our historical combined ratio

may not be indicative of future underwriting performance.

For the Torus segment, we reported net loss, before net loss attributable to noncontrolling interest, of approximately $10.8 million for the three months ended June 30, 2014.



The results were primarily driven by:

(i) net underwriting result of $28.3 million (net premiums earned of

$138.2 million less $80.3 million in net increase in losses and loss

adjustment expense liabilities and $29.6 million of acquisition costs);

(ii) net investment income and net realized and unrealized gains of $4.6 million; partially offset by



(iii) salaries and benefits and general and administrative expenses totaling

$42.6 million; (iv) foreign exchange losses of $0.6 million; and (v) income taxes of $0.4 million. Noncontrolling interest in the net loss of the Torus segment of $4.3 million resulted in net loss attributable to Enstar Group Limited of $6.4 million for the three months ended June 30, 2014.



Gross Premiums Written:

The following table provides gross premiums written by line of business for the Torus segment for the three months ended June 30, 2014:

Gross Premiums Written Three Months Ended June 30, % of Total Gross 2014 Premiums Written Property $ 45,854.9 26.9 % Marine & Excess Casualty 31,955.3 18.7 % Aviation and Space 22,950.4 13.4 % Non-U.S. Management and Professional Liability 8,161.1 4.8 % Accident and Health 2,927.8 1.7 % U.S. Management and Professional Liability 7,360.3 4.3 % Healthcare 8,845.6 5.2 % U.S. Casualty 34,095.0 20.0 % Workers Compensation 8,495.1 5.0 % Total $ 170,645.5 100.0 % 93



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Net Premiums Earned:

The following table provides net premiums earned by line of business for the Torus segment for the three months ended June 30, 2014:

Net Premiums Earned Three Months Ended June 30, % of Total Net 2014 Premiums Earned Property $ 26,008.0 18.8 % Marine & Excess Casualty 26,868.6 19.4 % Aviation and Space 17,880.5 12.9 % Non-U.S. Management and Professional Liability 10,231.1 7.4 % Accident and Health 2,581.7 1.9 % U.S. Management and Professional Liability 6,884.5 5.0 % Healthcare 8,223.1 5.9 % U.S. Casualty 17,020.0 12.3 % Workers Compensation 3,920.3 2.8 % Other 18,621.4 13.6 % Total $ 138,239.2 100.0 %



Net Increase in Ultimate Losses and Loss Adjustment Expense Liabilities:

For the three months ended June 30, 2014, we recorded an overall net increase in ultimate losses and loss adjustment expense liabilities for the Torus segment of $80.3 million principally due to an increase in estimates of net ultimate losses related to the current period, which has been recorded based on expected loss ratios on current period earned premium.



There is no assurance that conditions or trends that have affected the development of our reserves in the past will continue, and prior period development may not be indicative of development in future periods.

Salaries and Benefits:

Salaries and benefits costs for the Torus segment were $17.6 million for the three months ended June 30, 2014. The salary and benefit expense was related primarily to $15.2 million of direct expense for employees of Torus, inclusive of discretionary bonus costs accrued of approximately $1.8 million, and $0.6 million of costs associated with employee share awards granted to certain Torus employees in the period.



General and Administrative Expenses:

General and administrative expenses for the Torus segment were $25.0 million and $25.9 million for the three and six months ended June 30, 2014, respectively. The amounts for the six month period ended June 30, 2014 were comprised of $13.1 million directly incurred by Torus' operations, $10.0 million relating to management fee expenses charged by our non-life run-off segment to Bayshore and $2.8 million of acquisition related expenses incurred by Bayshore.



Noncontrolling Interest:

We recorded noncontrolling interest in the net loss of the Torus segment of $4.3 million and $4.7 million for the three and six months ended June 30, 2014. As of June 30, 2014, Trident and Dowling held a combined 41.02% noncontrolling interest in the Torus segment. 94



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Life and Annuities Segment

Three Months Ended June 30, 2014

The following is a discussion and analysis of the results of operations for our life and annuities segment for the three months ended June 30, 2014 and 2013 which are summarized below: Three Months Ended June 30, 2014 2013 (in thousands of U.S. dollars) INCOME Net premiums earned $ 27,596$ 34,380 Fees and commission income 13 - Net investment income 9,952 10,072 Net realized and unrealized gains (losses) 4,263 (10,681 ) 41,824 33,771 EXPENSES Life and annuity policy benefits 27,732 25,562 Acquisition costs 3,958 3,920 Salaries and benefits 2,394 1,061 General and administrative expenses 2,761



4,532

Interest expense 432 460 Net foreign exchange (gains) losses (78 ) 47 37,199 35,582 EARNINGS (LOSS) BEFORE INCOME TAXES 4,625 (1,811 ) INCOME TAXES (1,555 ) (8 ) NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED $ 3,070$ (1,819 ) For the life and annuities segment, net earnings (loss) attributable to Enstar Group Limited increased by $4.9 million, from $(1.8) million for the three months ended June 30, 2013 to $3.1 million for the three months ended June 30, 2014. Net Premiums Earned: Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Term life insurance $ 7,478$ (1,566 )$ 9,044 Assumed life reinsurance 6,229 (449 ) 6,678 Credit life and disability 13,889 (4,769 ) 18,658 $ 27,596$ (6,784 )$ 34,380 Net premiums earned were $27.6 million and $34.4 million for the three months ended June 30, 2014 and 2013, respectively. The decrease in net premiums earned is the result of the run-off of policies during the period. The premiums in our life and annuities segment are expected to reduce by approximately 15 to 20% per annum as the blocks of business continue to run-off and policies lapse. We recorded acquisition costs for the three months ended June 30, 2014 and 2013 of approximately 95



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$4.0 million and $3.9 million, respectively, associated with premiums earned by Pavonia. Substantially all of the net premiums earned in the three months ended June 30, 2014 and 2013 relate to the U.S. and Canadian business of the Pavonia companies. For our life and annuities business, although we no longer write new business, our strategy differs from our non-life run-off business, in particular because we are unable to shorten the duration of the liabilities in this business through either early claims settlement, commutations or policy buy backs. Instead, we will hold the policies associated with the life and annuities business to their natural maturity or lapse and will pay claims as they fall due. We aim to earn profits in this segment through investments and operating efficiencies.



Net Investment Income and Net Realized and Unrealized Gains (Losses):

Three Months Ended June 30, Net Realized and Unrealized Net Investment Income Gains (Losses) 2014 Variance 2013 2014

Variance 2013 (in thousands of U.S. dollars) Total $ 9,952$ (120 )$ 10,072$ 4,263$ 14,944$ (10,681 )



Net investment income for the life and annuities segment for each of the three months ended June 30, 2014 and 2013 was $10.0 million.

Net realized and unrealized gains (losses) for the three months ended June 30, 2014 and 2013 were $4.3 million and ($10.7) million, respectively. The increase in net realized and unrealized gains of $14.9 million was primarily due to unrealized gains on fixed maturity investments in respect of the Pavonia companies. The gains were mostly due to marginal declines in the longer end of the U.S. yield curve versus increases in yields in the previous year. The current operations of one of the Pavonia companies relates solely to periodic payment annuities. We have a long duration held-to-maturity investment portfolio to manage the cash flow obligations of these annuities. This held-to-maturity portfolio is carried at amortized cost and as such we would not anticipate any unrealized gains or losses on the portfolio. The carrying value of the held-to-maturity portfolio comprises approximately 70% of the Pavonia investments. The remaining 30% of our Pavonia investments comprise fixed maturity investments classified as trading securities, which relate to our non-periodic payment annuity business.



Annualized Returns

The table below presents the annualized investment returns (inclusive of net investment income and net realized and unrealized gains (losses), earned by the life and annuities segment on its cash and investments for the three months ended June 30, 2014 and 2013: Average Cash and Annualized Return Investment Balances 2014 2013 2014 2013 (in thousands of U.S. dollars) Cash and fixed maturity investments 4.29 % (0.18 )% $ 1,304,140$ 1,382,679 Other investments and equities 5.99 % - % 15,478 - Combined overall 4.31 % (0.18 )% $ 1,319,618$ 1,382,679



The average credit ratings of our fixed maturity investments of our life and annuities segment as at both June 30, 2014 and 2013 were A+.

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Life and Annuity Policy Benefits:

Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Periodic payment annuity benefits paid $ 15,315 $ $ 12,695 Reductions in periodic payment annuity benefit reserves (7,271 ) (6,406 ) Net change in periodic payment annuity benefit reserves 8,044



(1,755 ) 6,289

Net life claims benefits paid 19,435 17,383 Net change in life claims benefit reserves (3,640 ) (612 ) Amortization of fair value adjustments 3,893 2,502 Net ultimate change in life benefit reserves 19,688 (415 ) 19,273 Total $ 27,732$ (2,170 )$ 25,562 Life and annuity policy benefits were $27.7 million and $25.6 million for the three months ended June 30, 2014 and 2013, respectively. The increase is primarily attributable to periodic payment annuity benefits paid, mostly due to an increase in scheduled settlements processed in the period. Net ultimate change in life benefit reserves of $19.7 million in the three months ended June 30, 2014 was comprised of net life claims benefits paid of $19.4 million and amortization of fair value adjustments of $3.9 million, partially offset by net change in life claims benefit reserves of $3.6 million. Salaries and Benefits: Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 2,394$ (1,333 )$ 1,061 Salaries and benefits costs for the life and annuities segment were $2.4 million and $1.1 million for the three months ended June 30, 2014 and 2013, respectively. The increase for the three months ended June 30, 2014 was largely attributable to the transition of employees from the seller of Pavonia to us over the course of the three months ended June 30, 2013. Because individuals transitioned to us at various dates in 2013, the comparative period did not contain an entire three months of salaries and benefits for the Pavonia employees.



General and Administrative Expenses:

Three Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 2,761$ 1,771$ 4,532 General and administrative expenses for the life and annuities segment were $2.8 million and $4.5 million for the three months ended June 30, 2014 and 2013, respectively. The decrease in expenses for the three months ended June 30, 2014 is primarily attributable to non-recurring costs incurred in 2013 in relation to the transition of the Pavonia business. During the three months ended June 30, 2013, the Pavonia employees generally worked pursuant to a transition services agreement which was treated as general and administrative expenses by Pavonia. 97



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Six Months Ended June 30, 2014

The following is a discussion and analysis of the results of operations for our life and annuities segment for the six months ended June 30, 2014 and 2013 which are summarized below: Six Months Ended June 30, 2014 2013 (in thousands of U.S. dollars) INCOME Net premiums earned $ 54,088$ 35,121 Fees and commission income 34 - Net investment income 19,941 10,344 Net realized and unrealized gains (losses) 9,314 (10,839 ) 83,377 34,626 EXPENSES Life and annuity policy benefits 54,541 26,322 Acquisition costs 7,558 3,901 Salaries and benefits 4,403 1,207 General and administrative expenses 5,113 6,244 Interest expense 886 475 Net foreign exchange (gains) losses (67 ) 193 72,434 38,342 EARNINGS (LOSS) BEFORE INCOME TAXES 10,943 (3,716 ) INCOME TAXES (3,841 ) (28 )



NET EARNINGS (LOSS) ATTRIBUTABLE TO ENSTAR GROUP LIMITED $ 7,102

$ (3,744 )

For the life and annuities segment, net earnings (loss) attributable to Enstar Group Limited increased by $10.8 million, from $(3.7) million for the six months ended June 30, 2013 to $7.1 million for the six months ended June 30, 2014. Net Premiums Earned: Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Term life insurance $ 15,423$ 5,638$ 9,785 Assumed life reinsurance 10,497 3,819 6,678 Credit life and disability 28,168 9,510 18,658 $ 54,088$ 18,967$ 35,121 Net premiums earned were $54.1 million and $35.1 million for the six months ended June 30, 2014 and 2013, respectively. The increase in net premiums earned is the result of three additional months of premiums from Pavonia in 2014 as compared to 2013 (we acquired Pavonia on March 31, 2013). We recorded acquisition costs for the three months ended June 30, 2014 and 2013 of approximately $7.6 million and $3.9 million, respectively, associated with premiums earned by Pavonia. Substantially all of the premiums earned relate to the U.S. and Canadian business of the Pavonia companies. 98



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Net Investment Income and Net Realized and Unrealized Gains (Losses):

Six Months Ended June 30, Net Realized and Unrealized Gains Net Investment Income (Losses) 2014 Variance 2013 2014 Variance 2013 (in thousands of U.S. dollars)

Total $ 19,941$ 9,597$ 10,344$ 9,314$ 20,153$ (10,839 ) Net investment income for the life and annuities segment for the six months ended June 30, 2014 and 2013 was $19.9 million and $10.3 million, respectively. The increase was primarily due to the inclusion of the Pavonia companies for the full six months for 2014. These cash and fixed maturity investments were acquired on March 31, 2013. Net realized and unrealized gains (losses) for the six months ended June 30, 2014 and 2013 were $9.3 million and ($10.8) million, respectively. The increase in net realized and unrealized gains of $20.1 was primarily due to unrealized gains on fixed maturity investments in respect of the Pavonia companies. The gains were mostly due to marginal declines in the longer end of the U.S. yield curve versus increases in yields in the previous year.



Annualized Returns

The table below presents the annualized investment returns (inclusive of net investment income and net realized and unrealized gains (losses)) earned by the life and annuities segment on its cash and investments for the six months ended June 30, 2014 and 2013: Average Cash and Annualized Return Investment Balances 2014 2013 2014 2013 (in thousands of U.S. dollars) Cash and fixed maturity investments 4.27 % (0.14 )% $ 1,324,532$ 716,871 Other investments and equities 14.31 % - % 13,703 - Combined overall 4.37 % (0.14 )% $ 1,338,235$ 716,871



The average credit ratings of our fixed maturity investments for the life and annuities segment for both June 30, 2014 and 2013 was A+.

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Life and Annuity Policy Benefits:

Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Periodic payment annuity benefits paid $ 28,705$ 12,695 Reductions in periodic payment annuity benefit reserves (14,506 ) (6,406 ) Net change in periodic payment annuity benefit reserves 14,199 (7,910 ) 6,289 Net life claims benefits paid 41,870 17,383 Net change in life claims benefit reserves (9,219 ) 148 Amortization of fair value adjustments 7,691 2,502 Net ultimate change in life benefit reserves 40,342 (20,309 ) 20,033 Total $ 54,541$ (28,219 )$ 26,322 Life and annuity policy benefits were $54.5 million and $26.3 million for the six months ended June 30, 2014 and 2013, respectively. The increase is primarily attributable to the inclusion of the Pavonia business results for six months in 2014 as opposed to three months in 2013. The annuity business incurred some additional periodic payment annuity benefits in the six months ended June 30, 2014, relating to an increase in scheduled settlements processed during the period. Net ultimate change in life benefit reserves in the six months ended June 30, 2014 of $40.3 million was comprised of net life claims benefits paid of $41.9 million and amortization of fair value adjustments of $7.7 million, partially offset by net change in life claims benefit reserves of $9.2 million. Salaries and Benefits: Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 4,403$ (3,196 )$ 1,207 Salaries and benefits costs for the life and annuities segment related to our life and annuities segment were $4.4 million and $1.2 million for the six months ended June 30, 2014 and 2013, respectively. The increase in salaries and benefits expenses for the six months ended June 30, 2014 as compared to the same period in 2013 was primarily attributable to having six months of Pavonia expenses in 2014 as compared to three months in 2013. In addition, during the three months ended June 30, 2013, the Pavonia employees generally worked pursuant to a transition services agreement, which was treated as general and administrative expense by Pavonia.



General and Administrative Expenses:

Six Months Ended June 30, 2014 Variance 2013 (in thousands of U.S. dollars) Total $ 5,113$ 1,131$ 6,244 General and administrative expenses for the life and annuities segment were $5.1 million and $6.2 million for the six months ended June 30, 2014 and 2013, respectively. The decrease in expenses for the six months ended June 30, 2014 is primarily attributable to non-recurring salary related transition costs incurred during the six months ended June 30, 2013. 100



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Liquidity and Capital Resources

Our capital management strategy is to preserve sufficient capital to enable us to make future acquisitions while maintaining a conservative investment strategy. As we are a holding company and have no substantial operations of our own, our assets consist primarily of investments in subsidiaries. The potential sources of the cash flows to Enstar as a holding company consist of dividends, advances and loans from our subsidiary companies. Most of those subsidiaries are regulated entities, and restrictions on their ability to pay dividends and make other distributions may apply. At June 30, 2014, we had total cash and cash equivalents, restricted cash and cash equivalents and investments of $7.89 billion, compared to $6.56 billion at December 31, 2013. Our cash and cash equivalent portfolio is comprised mainly of cash, high-grade fixed deposits, commercial paper with maturities of less than three months and money market funds.



Reinsurance Balances Recoverable

Our acquired insurance and reinsurance subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. Our insurance and reinsurance subsidiaries remain liable to the extent that retrocessionaires do not meet their obligations under these agreements, and therefore, we evaluate and monitor concentration of credit risk among our reinsurers. Provisions are made for amounts considered potentially uncollectible. On an annual basis, both Torus and Atrium purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium's total third party reinsurance cover is with Lloyd's Syndicates or other highly rated reinsurers. The majority of Torus' total third party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit. As of June 30, 2014 and December 31, 2013, we had, excluding reinsurance recoverables related to our life and annuities segment, reinsurance balances recoverable of $1.50 billion and $1.33 billion, respectively. The increase of $165.6 million in reinsurance balances recoverable was primarily a result of the Torus acquisition, partially offset by commutations and cash collections made during the period ended June 30, 2014. As at June 30, 2014, the reinsurance balances recoverable associated with the Company's life and annuities business consists of term life business ceded by Pavonia to reinsurers under various quota share arrangements. All of the reinsurers are rated A- and above by a major rating agency. For both June 30, 2014 and December 31, 2013, the provision for uncollectible reinsurance recoverable relating to reinsurance balances recoverable was $338.6 million. To estimate the provision for uncollectible reinsurance recoverable, the balances are first allocated to applicable reinsurers using management judgment. As part of this process, ceded incurred but not reported (or IBNR) reserves are allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total non-life run-off reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of June 30, 2014 decreased to 18.1% as compared to 19.9% as of December 31, 2013, primarily as a result of reinsurance balances recoverable of Torus acquired during the year requiring minimal provisions for uncollectible reinsurance recoverable, and cash collections from reinsurers with minimal bad debt provisions. 101



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Cash Flows

The following table summarizes our consolidated cash flows from operating, investing and financing activities for the six months ended June 30, 2014 and 2013:

Six Months Ended June 30, Total cash provided by (used in): 2014 2013 (in thousands of U.S. dollars) Operating activities $ 324,197$ (11,423 ) Investing activities (158,314 ) (254,889 ) Financing activities 217,104 225,260 Effect of exchange rate changes on cash 1,327 3,059 Net increase (decrease) in cash and cash equivalents 384,314 (37,993 ) Cash and cash equivalents, beginning of period 643,841



654,890

Cash and cash equivalents, end of period $ 1,028,155



$ 616,897

See "Item 1. Financial Statements - Unaudited Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2014 and 2013" for further information.

Operating

Net cash provided by our operating activities for the six month period ended June 30, 2014 was $324.2 million compared to net cash used of $11.4 million for the six month period ended June 30, 2013. This $335.6 million increase was due primarily to the following:



(i) a decrease in the net changes in assets and liabilities of $240.3

million between 2014 and 2013; offset by a



(ii) an increase of $256.5 million in sales and maturities of trading

securities between 2014 and 2013; and



(iii) a decrease of $338.6 million in purchases of trading securities

between 2014 and 2013. Investing Investing cash flows consist primarily of net proceeds on the sale and purchase of available-for-sale and other investments. Net cash used in investing activities was $158.3 million during the six month period ended June 30, 2014 compared to $254.9 million during the six month period ended June 30, 2013. The decrease of $96.6 million between 2014 and 2013 was due primarily to the following: (i) a decrease of $321.5 million in net cash used for acquisitions between 2014 and 2013. During the six months ended June 30, 2014, we acquired cash balances in excess of cash used to fund acquisitions, as compared to the acquisitions we completed in 2013; partially offset by (ii) a decrease of $81.2 million in the sales and maturities of available-for-sale securities between 2014 and 2013;



(iii) an increase of $93.4 million in the funding of other investments

between 2014 and 2013; and



(iv) an increase of $71.0 million in the purchase of available-for-sale

securities between 2014 and 2013. 102



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Financing

Net cash provided by financing activities was $217.1 million during the six month period ended June 30, 2014 compared to $225.3 million during the six month period ended June 30, 2013. The decrease of $8.2 million in cash provided by financing activities was attributable primarily to the following: (i) a decrease of $157.0 million in cash received attributable to bank loans between 2014 and 2013 due primarily to there being no acquisition borrowing required in 2014; and



(ii) an increase of $133.3 million in the repayment of bank loans between

2014 and 2013; and (iii) a distribution of capital to noncontrolling interests of $10.0 million in 2014 compared to $nil in 2013; partially offset by (iv) an increase in contributions by noncontrolling and redeemable noncontrolling interests of $290.3 million primarily associated with the Torus acquisition.



Investments

Aggregate invested assets, comprising cash and cash equivalents, restricted cash and cash equivalents, fixed maturity investments, equities and other investments, were $7.89 billion as of June 30, 2014 compared to $6.56 billion as of December 31, 2013, an increase of $1.3 billion. The increase in cash and invested assets resulted principally from the completion of the acquisition of Torus. We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities; (ii) available-for-sale portfolios of fixed maturity and short-term investments; and (iii) a held-to-maturity portfolio of fixed maturity investments. Our available-for-sale and trading portfolios are recorded at fair value. Our held-to-maturity portfolio relates to our periodic payment annuities, business within our life and annuities segment. In an effort to match the expected cash flow requirements of the long-term liabilities associated with the business, we invest a portion of our fixed maturity investments in longer duration securities that we intend to hold to maturity. We classify these securities as held-to-maturity in our unaudited condensed consolidated balance sheet. This held-to-maturity portfolio is recorded at amortized cost. As a result, we do not record changes in the fair value of this portfolio, which should reduce the impact on shareholders' equity of fluctuations in fair value of those investments. 103



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The table below shows the aggregate amounts of our investments carried at fair value as of June 30, 2014 and December 31, 2013:

June 30, 2014 December 31, 2013 % of Total Fair % of Total Fair Fair Value Value Fair Value Value (in thousands of U.S. dollars) U.S. government and agency $ 717,700 13.1 % $ 468,289 10.0 % Non-U.S. government 550,573 10.0 % 562,516 12.1 % Corporate 2,343,759 42.7 % 2,201,579 47.2 % Municipal 32,593 0.6 % 41,034 0.9 % Residential mortgaged-backed 361,885 6.6 % 235,964 5.1 % Commercial mortgage-backed 161,822 3.0 % 114,637 2.5 % Asset-backed 457,420 8.3 % 285,066 6.1 % Fixed maturity investments 4,625,752 84.3 % 3,909,085 83.9 % Other investments 716,303 13.1 % 569,293 12.2 % Equities-U.S. 89,830 1.6 % 115,285 2.5 % Equities-International 57,312 1.0 % 66,748 1.4 % Total investments $ 5,489,197 100.0 % $ 4,660,411 100.0 %



The table below shows the aggregate fair values of our investments classified as held-to-maturity as of June 30, 2014 and December 31, 2013:

June 30, 2014 December 31, 2013 % of Total Fair % of Total Fair Fair Value Value Fair Value Value (in thousands of U.S. dollars) U.S. government and agency $ 19,171 2.3 % $ 18,132 2.3 % Non-U.S. government 45,473 5.4 % 22,327 2.8 % Corporate 780,355 92.3 % 759,100 94.9 % Total investments $ 844,999 100.0 % $ 799,559 100.0 % As at June 30, 2014, we held investments on our balance sheet totaling $6.34 billion compared to $5.52 billion at December 31, 2013, with net unrealized appreciation included in accumulated comprehensive income of $3.3 million at June 30, 2014 compared to $3.1 million at December 31, 2013. As at June 30, 2014, we had approximately $3.6 billion of restricted assets compared to approximately $2.9 billion at December 31, 2013. Across all our segments, we strive to structure our investments in a manner that recognizes our liquidity needs for future liabilities. In that regard, we attempt to correlate the maturity and duration of our investment portfolio to our general liability profile. If our liquidity needs or general liability profile unexpectedly change, we may adjust the structure of our investment portfolio to meet new business needs. For our non-life run-off segment, our strategy of commuting our liabilities has the potential to accelerate the natural payout of losses. Therefore, we maintain a relatively short-duration investment portfolio in order to provide liquidity for commutation opportunities and avoid having to liquidate longer dated investments. Accordingly, the majority of our investment portfolio consists of highly rated fixed maturities, including U.S. government and agency investments, highly rated sovereign and supranational investments, high-grade corporate investments, and mortgage-backed and asset-backed investments. We allocate a portion of our investment portfolio to other investments, including private equity funds, fixed income funds, fixed income hedge funds, equity funds and a real estate debt fund. At June 30, 2014, these other investments totaled $716.3 million, or 11.3%, of our total balance sheet investments (December 31, 2013: $569.3 million or 10.3%). 104



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For our life and annuities segment, we do not commute our policy benefits for life and annuity contracts liabilities and, as a result, we maintain a longer duration investment portfolio that attempts to match the cash flows and duration of our liability profile. Accordingly, the majority of this portfolio consists of highly rated fixed maturity investments, primarily corporate bonds. Our fixed maturity investments associated with our PPA business are primarily highly rated corporate bonds with which we attempt to match duration and cash flows to the liability profile for this business. As these fixed maturity investments are classified as held-to-maturity, we invest surplus cash flows from maturities into longer dated fixed maturities. As at June 30, 2014, the duration of our fixed maturity investment portfolio associated with our PPA business was shorter than the liabilities, as a significant amount of the liabilities extend beyond 30 years and it is difficult, due to limited investment options, to match duration and cash flows beyond that period. Our fixed maturity investments associated with our non-PPA life business are primarily highly rated corporate bonds with which we attempt to match duration and cash flows to the liability profile for this business (the non-PPA life business has a short-duration liability profile). These fixed maturity investments are classified as trading, and therefore we may sell existing securities to buy higher yielding securities and funds in the future. As at June 30, 2014, the duration of our fixed maturity investment portfolio associated with our non-PPA life business was shorter than the liabilities, however, we have the discretion to change this in the future.



Fixed Maturity and Short-term Investments

The maturity distribution for our fixed maturity and short-term investments held as of June 30, 2014 and December 31, 2013 was as follows:

June 30, 2014 December 31, 2013 % of % of Fair Value Total Fair Value Total (in thousands of U.S. dollars) Due in one year or less $ 910,138 16.6 % $ 871,881 18.5 % Due after one year through five years 2,488,274 45.5 % 2,114,772 44.9 % Due after five years through ten years 431,073 7.9 % 478,033 10.2 % Due after ten years 660,139 12.1 % 608,291 12.9 % 4,489,624 82.1 % 4,072,977 86.5 % Residential mortgage-backed 361,885 6.6 % 235,964 5.0 % Commercial mortgage-backed 161,822 2.9 % 114,637 2.4 % Asset-backed 457,420 8.4 % 285,066 6.1 % Total $ 5,470,751 100.0 % $ 4,708,644 100.0 % As at June 30, 2014 and December 31, 2013, our fixed maturity and short-term investment portfolios had an average credit quality rating of AA- and A+, respectively. At June 30, 2014 and December 31, 2013, our fixed maturity investments rated BBB or lower comprised 9.0% and 9.5% of our total investment portfolio, respectively. At June 30, 2014, we had $238.6 million of short-term investments (December 31, 2013: $313.5 million). Short-term investments are managed as part of our investment portfolio and have a maturity of one year or less when purchased. Short-term investments are carried at fair value. 105



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The following tables summarize the composition of the amortized cost and fair value of our fixed maturity investments, short-term investments, equities and other investments carried at fair value at the date indicated by ratings as assigned by major rating agencies. Non- Amortized Fair % of Total AAA Investment At June 30, 2014 Cost Value Investments Rated AA Rated A Rated BBB Rated Grade Not Rated (in thousands of U.S. dollars) Fixed maturity and short-term investments U.S. government & agency $ 715,099$ 717,700



13.1 % $ 875$ 710,825$ 6,000$ 0 $ 0 $ 0 Non-U.S. government

540,169 550,573 10.0 % 197,058 203,676 107,112 30,123 12,604 0 Corporate 2,322,156 2,343,759 42.7 % 131,032 646,638 1,161,387 350,492 32,090 22,120 Municipal 32,266 32,593 0.6 % 8,757 15,927 7,909 0 0 0 Residential mortgage-backed 360,156 361,885 6.6 % 28,071 321,598 10,309 497 1,405 5 Commercial mortgage-backed 161,939 161,822 3.0 % 85,566 24,029 29,338 19,722 3,167 0 Asset-backed 455,664 457,420 8.3 % 286,755 68,343 28,936 11,420 61,952 14 Total fixed maturity and short-term investments $ 4,587,449 4,625,752 84.3 % 738,114 1,991,036 1,350,991 412,254 111,218 22,139 16.0 % 43.0 % 29.2 % 8.9 % 2.4 % 0.5 % Equities U.S. 89,830 1.6 % 0 0 0 0 0 89,830 International 57,312 1.0 % 0 0 0 0 0 57,312 Total equities 147,142 2.6 % 0 0 0 0 0 147,142 Other investments Private equity funds 215,152 3.9 % 0 0 0 0 0 215,152 Fixed income funds 223,445 4.1 % 0 0 0 0 0 223,445 Fixed income hedge funds 66,028 1.2 % 0 0 0 0 0 66,028 Equity fund 162,655 3.0 % 0 0 0 0 0 162,655 Real estate debt fund 33,231 0.6 % 0 0 0 0 0 33,231 CLO equities 10,800 0.2 % 0 0 0 0 0 10,800 Other 4,992 0.1 % 0 0 0 0 0 4,992 Total other investments 716,303 13.1 % 0 0 0 0 0 716,303 Total investments $ 5,489,197 100.0 % $ 738,114$ 1,991,036$ 1,350,991$ 412,254$ 111,218$ 885,584 13.5 % 36.3 % 24.6 % 7.5 % 2.0 % 16.1 % 106



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Table of Contents Non- Amortized Fair % of Total AAA Investment At December 31, 2013 Cost Value Investments Rated AA Rated A Rated BBB Rated Grade Not Rated

(in thousands of U.S. dollars) Fixed maturity and short-term investments U.S. government & agency $ 468,198$ 468,289 10.0 % $ 4,391$ 458,477$ 434 $ - $ - $ 4,987 Non-U.S. government 553,724 562,516 12.1 % 215,224 208,322 115,423 11,095 12,452 - Corporate 2,197,955 2,201,579 47.2 % 143,552 542,216 1,052,315 388,815 26,507 48,174 Municipal 40,889 41,034 0.9 % 8,500 25,355 7,179 - - - Residential mortgage-backed 236,984 235,964 5.1 % 12,596 204,217 7,507 3,960 809 6,875 Commercial mortgage-backed 115,351 114,637 2.5 % 38,081 31,893 29,631 8,826 6,206 - Asset-backed 283,940 285,066 6.1 % 207,146 34,808 13,260 4,733 7,174 17,945 Total fixed maturity and short-term investments $ 3,897,041 3,909,085 83.9 % 629,490 1,505,288 1,225,749 417,429 53,148 77,981 16.1 % 38.5 % 31.3 % 10.7 % 1.4 % 2.0 % Equities U.S. 115,285 2.5 % - - - - - 115,285 International 66,748 1.4 % - - - - - 66,748 Total equities 182,033 3.9 % - - - - - 182,033 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 100.0 % Other investments Private equity funds 161,229 3.5 % - - - - - 161,229 Fixed income funds 194,375 4.2 % - - - - - 194,375 Fixed income hedge funds 68,157 1.4 % - - - - - 68,157 Equity fund 109,355 2.3 % - - - - - 109,355 Real estate debt fund 32,113 0.7 % - - - - - 32,113 Other 4,064 0.1 % - - - - - 4,064 Total other investments 569,293 12.2 % - - - - - 569,293 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 100.0 % Total investments $ 4,660,411 100.0 % $ 629,490$ 1,505,288$ 1,225,749$ 417,429$ 53,148$ 829,307 13.5 % 32.3 % 26.3 % 9.0 % 1.1 % 17.8 % 107



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The following tables summarizes the composition of the amortized cost and fair value of our held-to-maturity fixed maturity investments as at June 30, 2014 and December 31, 2013 by ratings as assigned by major rating agencies. Non- Amortized Fair % of Total AAA AA A BBB Investment Not At June 30, 2014 Cost Value Investments Rated Rated Rated Rated Grade Rated (in thousands of U.S. dollars) Fixed maturity investments U.S. government & agency $ 19,736$ 19,171 2.3 % $ 6,468$ 12,642$ 0$ 0 $ 0 $ 63 Non-U.S. government 45,943 45,473 5.4 % 0 30,329 15,145 0 0 0 Corporate 787,556 780,355 92.3 % 47,069 209,555 477,468 35,408 10,456 396 Total fixed maturity investments $ 853,235$ 844,999 100.0 % $ 53,537$ 252,526$ 492,613$ 35,408$ 10,456$ 459 6.3 % 29.9 % 58.3 % 4.2 % 1.2 % 0.1 % Non- Amortized Fair % of Total AAA AA A BBB Investment Not At December 31, 2013 Cost Value Investments Rated Rated Rated Rated Grade Rated (in thousands of U.S. dollars) Fixed maturity investments U.S. government & agency $ 19,992$ 18,132 2.3 % $ - $ 18,058 $ - $ - $ - $ 74 Non-U.S. government 23,592 22,327 2.8 % - 22,327 - - - - Corporate 815,803 759,100 94.9 % 44,552 198,803 463,000 47,157 5,125 462 Total fixed maturity investments $ 859,387$ 799,559 100.0 % $ 44,552$ 239,188$ 463,000$ 47,157$ 5,125$ 536 5.6 % 29.9 % 57.9 % 5.9 % 0.6 % 0.1 % Eurozone Exposure At June 30, 2014, we did not own any investments in fixed maturity investments (which includes bonds that are classified as cash and cash equivalents) or fixed income funds issued by the sovereign governments of Portugal, Italy, Ireland, Greece or Spain. Our fixed maturity investments and fixed income funds exposures to Eurozone Governments (which includes regional and municipal governments including guaranteed agencies) as at June 30, 2014 by rating are highlighted in the following table: Ratings AAA AA A Not Rated Total (in thousands of U.S. dollars) Germany $ 50,062$ 22,108 $ - $ - $ 72,170 Supranational 7,588 9,067 - - 16,655 Netherlands 7,479 16,140 6,088 - 29,707 France - 15,171 8,047 - 23,218 Finland 2,989 - - - 2,989 Belgium - 25,822 - - 25,822 Austria - 1,791 - - 1,791 68,118 90,099 14,135 0 172,352 Euro Region Government Funds 0 0 0 12,336 12,336 $ 68,118$ 90,099$ 14,135$ 12,336$ 184,688 108



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Our fixed maturity investments exposure to Eurozone Governments (which include regional and municipal governments including guaranteed agencies) as at June 30, 2014 by maturity date are highlighted in the following table. Our fixed income fund holdings have daily liquidity and are not included in the maturity table below. By Maturity Date 3 months 3 to 6 6 months to 1 1 to 2 more than or less months year years 2 years Total (in thousands of U.S. dollars) Germany $ 1,370$ 12,943 $ 1,483 $ 20,511$ 35,863$ 72,170 Supranational - - 2,526 6,673 7,456 16,655 Netherlands 1,508 - 3,306 4,444 20,449 29,707 France - - 4,294 3,324 15,600 23,218 Finland - 515 - 450 2,024 2,989 Belgium - - - 2,738 23,084 25,822 Austria - - - 653 1,138 1,791 $ 2,878$ 13,458$ 11,609$ 38,793$ 105,614$ 172,352 At June 30, 2014, we owned investments in corporate securities (which includes bonds that are classified as cash and cash equivalents) of issuers where the ultimate parent company was located within the Eurozone. This includes securities that were issued by subsidiaries whose location was outside of the Eurozone. Our exposures as at June 30, 2014 by country and listed by rating, sector and maturity date is highlighted in the following tables: Ratings AAA AA A BBB Total (in thousands of U.S. dollars) Germany $ 4,950$ 1,444$ 65,947$ 10,584$ 82,925 Belgium 2,698 - 42,376 - 45,074 Netherlands 10,944 55,381 29,165 7,297 102,787 France 7,579 28,261 18,223 8,816 62,879 Ireland 474 10,968 - - 11,442 Spain - - - 19,696 19,696 Italy - - 19,777 5,620 25,397 Luxembourg 5,900 4,633 721 637 11,891 Finland 454 - - - 454 $ 32,999$ 100,687$ 176,209$ 52,650$ 362,545 Sector Financial Energy Industrial Telecom Utility Other Total (in thousands of U.S. dollars) Germany $ 18,598$ 1,406$ 55,862$ 3,418$ 1,665$ 1,976$ 82,925 Belgium 1,370 - - - - 43,704 45,074 Netherlands 60,450 13,494 18,187 - 213 10,443 102,787 France 19,831 - 34,170 425 4,666 3,787 62,879 Ireland 9,041 - - - - 2,401 11,442 Spain 6,684 - - 8,746 3,081 1,185 19,696 Italy 1,245 9,081 10,696 - 4,375 - 25,397 Luxembourg 721 4,633 637 - - 5,900 11,891 Finland 454 - - - - - 454 $ 118,394$ 28,614$ 119,552$ 12,589$ 14,000$ 69,396$ 362,545 109



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Table of Contents By Maturity Date 3 months or 3 to 6 6 months to 1 more than 2 less months year 1 to 2 years years Total (in thousands of U.S. dollars) Germany $ 6,753$ 3,707 $ 8,559 $ 25,093$ 38,813$ 82,925 Belgium - - 1,536 2,089 41,449 45,074 Netherlands 1,794 16,178 10,971 15,467 58,377 102,787 France 5,360 437 2,985 16,976 37,121 62,879 Ireland - 2,621 1,359 2,244 5,218 11,442 Spain 4,455 - 3,302 5,959 5,980 19,696 Italy - 2,621 - 1,245 21,531 25,397 Luxembourg - - - 721 11,170 11,891 Finland - - - 454 - 454 $ 18,362$ 25,564$ 28,712$ 70,248$ 219,659$ 362,545



Fixed maturity investments issued by companies located in the United Kingdom and Switzerland are not included in the tables.

None of the fixed maturity investments we owned at June 30, 2014 were considered impaired and we do not expect to incur any significant losses on these securities.

Loans Payable

Our long-term debt consists of loan facilities used to partially finance certain of our acquisitions and significant new business transactions, and our revolving credit facility, or the EGL Revolving Credit Facility, which can be used for permitted acquisitions and for general corporate purposes. We draw down on the loan facilities at the time of an acquisition or significant new business transactions although in some circumstances we have made additional draw-downs to refinance existing debt of the acquired company.



We made the following repayments and borrowings under our loan facilities during the six months ended June 30, 2014:

EGL Revolving Credit Facility

On March 26, 2014, we borrowed $70.0 million under the EGL Revolving Credit Facility. On May 27, 2014, we repaid $9.25 million of the outstanding principal under the EGL Revolving Credit Facility.

As of June 30, 2014, the unused portion of the EGL Revolving Credit Facility was approximately $55.5 million.

Clarendon Facility On March 17, 2014, we repaid $13.0 million of the outstanding principal on the term facility related to our 2011 acquisition of Clarendon National Insurance Company, or the Clarendon Facility, reducing the outstanding principal as of June 30, 2014 to approximately $66.0 million.



SeaBright Facility

On June 25, 2014, we fully repaid the remaining $89.0 million of outstanding principal and accrued interest on the term facility related to the acquisition of SeaBright, or the SeaBright Facility. We had previously repaid $22.0 million of the outstanding principal on the SeaBright Facility on March 31, 2014. 110



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Total amounts of loans payable outstanding, including accrued interest, as of June 30, 2014 and December 31, 2013 totaled $386.2 million and $452.4 million, respectively. As of June 30, 2014, all of the covenants relating to our two outstanding credit facilities (tthe Clarendon Facility and the EGL Revolving Credit Facility) were met.



Refer to Item 7 included in our Annual Report on Form 10-K for the year ended December 31, 2013 for a description of these credit facilities.

Aggregate Contractual Obligations

The following table shows our aggregate contractual obligations and commitments by time period remaining to due date as at June 30, 2014 and updates the table on page 114 of our Annual Report on Form 10-K for the year ended December 31, 2013: Payments Due by Period Less than 1 - 3 3 - 5 More than Total 1 year years years 5 years (in thousands of U.S. dollars) Operating Activities Estimated gross reserves for losses and loss adjustment expenses (1) $ 5,125.0$ 1,131.8$ 1,870.2$ 829.8$ 1,293.2 Policy benefits for life and annuity contracts (2) 2,611.1 83.4 152.0 138.6 2,237.1 Operating lease obligations 48.4 12.4 18.1 13.9 4.0 Investing Activities Investment commitments 115.6 47.9 60.4 7.3 - Financing Activities Loan repayments (including estimated interest payments) 391.3 391.3 - - - Total $ 8,291.4$ 1,666.8$ 2,100.7$ 989.6$ 3,534.3



(1) The reserves for losses and loss adjustment expenses represent management's

estimate of the ultimate cost of settling losses. The estimation of losses is

based on various complex and subjective judgments. Actual losses paid may

differ, perhaps significantly, from the reserve estimates reflected in our

financial statements. Similarly, the timing of payment of our estimated

losses is not fixed and there may be significant changes in actual payment

activity. The assumptions used in estimating the likely payments due by

period are based on our historical claims payment experience and industry

payment patterns, but due to the inherent uncertainty in the process of

estimating the timing of such payments, there is a risk that the amounts paid

in any such period can be significantly different from the amounts disclosed

above.



The amounts in the above table represent our estimates of known liabilities

as of June 30, 2014 and do not take into account corresponding reinsurance

recoverable amounts that would be due to us. Furthermore, reserves for losses

and loss adjustment expenses recorded in the unaudited condensed consolidated

financial statements as of June 30, 2014 are computed on a fair value basis,

whereas the expected payments by period in the table above are the estimated

payments at a future time and do not reflect the fair value adjustment in the

amount payable.



(2) Policy benefits for life and annuity contracts recorded in our unaudited

condensed consolidated balance sheet as at June 30, 2014 of $1,241.9 million

are computed on a discounted basis, whereas the expected payments by period

in the table above are the estimated payments at a future time and do not

reflect the fair value adjustments of the amount payable. 111



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Commitments and Contingencies

Investments

The following table provides a summary of our outstanding unfunded investment commitments as at June 30, 2014 and December 31, 2013:

June 30, 2014 December



31, 2013

Original Commitments Original



Commitments

Commitments Funded Unfunded Commitments Funded Unfunded

(in thousands of U.S. dollars)



$ 311,000$ 195,362$ 115,638$ 291,000$ 176,760$ 114,240

Guarantees As at June 30, 2014 and December 31, 2013, we had, in total, parental guarantees supporting the obligations of our subsidiary, Fitzwilliam Insurance Limited, in the amount of $238.6 million and $228.5 million, respectively.



Acquisitions and Significant New Business

We have entered into a definitive agreement with respect to the Reciprocal of America loss portfolio transfer, which is expected to close by the end of 2014 and which is described above in "-Significant New Business."



Legal Proceedings

Refer to "Item 1. Legal Proceedings" of Part II of this Quarterly Report on Form 10-Q for a description of litigation matters.

Critical Accounting Policies

Our critical accounting policies are discussed in Management's Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

Off-Balance Sheet and Special Purpose Entity Arrangements

At June 30, 2014, we did not have any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.

Non-GAAP Financial Measures

In "Segment Reporting-Arden" and "Segment Reporting-Torus" above, we provide loss ratio, acquisition cost ratio, other operating expense ratio, and the combined ratio in our discussions of the results for the Atrium and Torus segments in order to provide more complete information regarding our underwriting results for these businesses. The ratios are calculated by dividing the related expense by net earned premiums, and the combined ratio is the sum of these ratios. Our other operating expense ratio is considered to be a "non-GAAP" financial measure, which may be defined or calculated differently by other companies. We calculate this ratio by dividing the sum of general and administrative expenses and salaries and benefits attributable to Atrium/Arden and Torus, respectively, by net premiums earned. Other operating expense ratio excludes the expenses of the holding companies within the segments, such as holding company general and administrative expenses and salaries and benefits expenses, if any, that are not attributable to Atrium, Arden and Torus, respectively. We believe this is the most useful presentation because the excluded expenses are not incremental and/or directly attributable to the individual underwriting operations at 112



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these companies. The most directly comparable GAAP financial measure would be calculated by dividing the sum of all general and administrative expenses and salaries and benefits (if any) for the Atrium and Torus segments (including holding company expenses), respectively, by net premiums earned.



Cautionary Statement Regarding Forward-Looking Statements

This quarterly report contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, with respect to our financial condition, results of operations, business strategies, operating efficiencies, competitive positions, growth opportunities, plans and objectives of our management, as well as the markets for our ordinary shares and the insurance and reinsurance sectors in general. Statements that include words such as "estimate," "project," "plan," "intend," "expect," "anticipate," "believe," "would," "should," "could," "seek," "may" and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise. All forward-looking statements are necessarily estimates or expectations, and not statements of historical fact, reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward looking statements should, therefore, be considered in light of various important factors, including those set forth in this quarterly report.



Factors that could cause actual results to differ materially from those suggested by the forward looking statements include:

risks associated with implementing our business strategies and initiatives;

risks that we may require additional capital in the future, which may not

be available or may be available only on unfavorable terms;



the adequacy of our loss reserves and the need to adjust such reserves as

claims develop over time;



risks relating to the availability and collectability of our reinsurance;

changes and uncertainty in economic conditions, including interest rates,

inflation, currency exchange rates, equity markets and credit conditions,

which could affect our investment portfolio, our ability to finance future

acquisitions and our profitability; losses due to foreign currency exchange rate fluctuations;



increased competitive pressures, including the consolidation and increased

globalization of reinsurance providers; emerging claim and coverage issues;



lengthy and unpredictable litigation affecting assessment of losses and/or

coverage issues;



continued availability of exit and finality opportunities provided by

solvent schemes of arrangement; loss of key personnel; the ability of our subsidiaries to distribute funds to us and the resulting impact on our liquidity;



changes in our plans, strategies, objectives, expectations or intentions,

which may happen at any time at management's discretion;



operational risks, including system or human failures and external hazards;

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the risk that ongoing or future industry regulatory developments will disrupt our business, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;



risks relating to our acquisitions, including our ability to successfully

price acquisitions, evaluate opportunities, address operational

challenges, assimilate acquired companies into our internal control

system, and support our planned growth; risks relating to our ability to obtain regulatory approvals, including



the timing, terms and conditions of any such approvals, and to satisfy

other closing conditions in connection with our acquisition agreements,

which could affect our ability to complete acquisitions;



risks relating to our life and annuities business, including mortality and

morbidity rates, lapse rates, the performance of assets to support the insured liabilities, and the risk of catastrophic events; risks relating to our active underwriting businesses, including



unpredictability and severity of catastrophic and other major loss events,

failure of risk management and loss limitation methods, the risk of a

ratings downgrade, cyclicality of demand and pricing in the insurance and

reinsurance markets; our ability to implement our strategies relating to the active underwriting market;



risks relating to our ability to structure our investments in a manner

that recognizes our liquidity needs; tax, regulatory or legal restrictions or limitations applicable to us or

the insurance and reinsurance business generally;



changes in tax laws or regulations applicable to us or our subsidiaries,

or the risk that we or one of our non-U.S. subsidiaries become subject to

significant, or significantly increased, income taxes in the United States

or elsewhere; changes in Bermuda law or regulation or the political stability of Bermuda; and changes in accounting policies or practices. The factors listed above should be not construed as exhaustive and should be read in conjunction with the other cautionary statements and Risk Factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2013, as well as in Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and in the other materials filed and to be filed with the U.S. Securities and Exchange Commission. We undertake no obligation to publicly update or review any forward looking statement, whether to reflect any change in our expectations with regard thereto, or as a result of new information, future developments or otherwise, except as required by law.


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Source: Edgar Glimpses


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