limited (previously named torus insurance (bermuda) … 2015 full filings class...

StarStoneInsuranceBermudaLimited(previouslynamedTorusInsurance(Bermuda)Limited)AnnualReportandAccountsFortheyearendedDecember31,2015

StarStone Insurance Bermuda Limited

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Index to consolidated financial statements For the year ended December 31, 2013

Independent auditors’ report 2

Consolidated statements of operations

and comprehensive income 3

Consolidated balance sheets 4

Consolidated statements of shareholders’ equity 6

Consolidated statements of cash flows 7

Notes to the consolidated financial statements 8

StarStone Insurance Bermuda Limited Index to consolidated financial statements

For the year ended December 31, 2015

Limited


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StarStone Insurance Bermuda Limited Independent auditors’ report

The Board of Directors StarStone Insurance Bermuda Limited

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of StarStone Insurance Bermuda Limited (previously named Torus Insurance (Bermuda) Limited) and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income, changes in shareholder’s equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with

U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant

to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due

to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits

in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial

statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material

misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor

considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order

to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the

appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as

well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of StarStone Insurance Bermuda Limited and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

Chartered Professional Accountants Hamilton, Bermuda March 30, 2016

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StarStone Insurance Bermuda Limited Consolidated statements of operations and comprehensive income For the year ended December 31, 2013

USD in millions except share and per share amount(s)

See accompanying Notes to the Consolidated Financial Statements

Year ended Year ended

December 31, December 31,

2015 2014

As adjusted

$m $m

Revenues

Gross premiums wri tten 708.0 702.2

Ceded premiums written (181.0) (201.1)

Net premiums written 527.0 501.1

Gross premiums earned 709.1 763.5

Ceded premiums earned (187.9) (277.0)

Net earned premium 521.2 486.5

Net investment income 12.5 13.2

Net rea l i zed and unrea l i zed investment (losses ) / ga in (6.3) 0.4

Net foreign exchange ga ins / (losses ) 0.2 (1.6)

Other income 0.7 3.4

Tota l Revenues 528.3 501.9

Expenses

Net losses and loss adjustment expenses before deferred ga in 301.6 287.5

Movement in retroactive reinsurance deferred ga in (0.4) 45.3

Net losses and loss adjustment expenses 301.2 332.8

Direct pol icy acquis i tion expenses 96.1 80.2

Operating and adminis tration expenses 115.7 127.8

Amortization of value of in‐force bus iness ‐ 0.6

StarStone share awards vesting on change of control ‐ 19.3

Tota l expenses 513.0 560.7

Profi t / (Loss) from operations before income tax 15.3 (58.8)

Income tax credit / (expense) 5.9 (1.4)

Net profit / (loss) 21.2 (60.2)

Other comprehensive loss

Reclass i fi cation of net rea l ized (ga ins ), net of income taxes , included in net loss ‐ (0.5)

Other comprehens ive loss ‐ (0.5)

Total comprehensive profit / (loss) 21.2 (60.7)

StarStone Insurance Bermuda Limited Consolidated statements of operations and comprehensive income

For the years ended December 31, 2015 and 2014


Limited sheets

As at December 31, 2013

in millions share and per share amount(s)

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StarStone Insurance Bermuda Limited Consolidated balance sheets




As at As at


2015 2014

As adjusted

$m $m

Assets

Investments:

Fixed maturi ties under the fa i r va lue option (amortized cost—2015: $1,033.2m, 2014: $835.5m) 1,009.7 836.4

Other investments , at fa i r va lue 344.9 177.0

Short‐term investments , at fa i r value (amorti zed cost—2015: $7.4m, 2014: $21.9m) 7.4 21.9

Tota l investments 1,362.0 1,035.3

Cash and cash equiva lents 165.7 481.4

Reinsurance recoverables:

Unpaid losses 515.1 668.2

Paid losses 20.7 23.8

Ceded unearned premiums 117.0 129.3

Receivables:

Underwri ting premiums 249.4 272.4

Other insurance / reinsurance balances 18.4 18.8

Due from affi l ia tes 115.2 19.0

Deferred pol icy acquis i tion costs 58.1 60.9

Intangible assets 47.2 48.0

Goodwi l l 30.4 30.4

Software development costs (net of accumulated depreciation of 2015: $20.3m, 2014: $18.3m) 6.5 9.7

Office properties and equipment (net of accumulated depreciation of 2015: $16.6m, 2014: $16.4m) 4.1 5.1

Other assets 28.8 44.0

Total Assets 2,738.6 2,846.3

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StarStone Insurance Bermuda Limited Consolidated balance sheets (continued)



These financial statements were approved by the Board of Directors on March 30, 2016 and signed on their behalf by

Kathleen Barker

Director and Chief Financial Officer


As at As at


2015 2014

As adjusted

$m $m

Liabilities

Insurance reserves:

Losses and loss adjustment expenses 1,111.6 1,196.7

Unearned premiums 416.5 434.6

Tota l insurance reserves 1,528.1 1,631.3

Payables:

Reinsurance balances payable 350.5 367.3

Deferred retroactive reinsurance gain 44.9 45.3

Due to affi l ia tes 7.8 1.2

Accrued expenses and other payables 25.6 40.7

Tota l Payables 428.8 454.5

Total Liabilities 1,956.9 2,085.8

Shareholders’ Equity

Common shares : 1,000,000 shares of par va lue $1.0 1.0 1.0

Addi tiona l paid‐in capi ta l 1,086.1 1,086.1

Accumulated defici t (305.4) (326.6)

Total Shareholders’ Equity 781.7 760.5

Total Liabilities and Shareholders’ Equity 2,738.6 2,846.3

Limited of equity



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StarStone Insurance Bermuda Limited Consolidated statements of shareholders’ equity




2015 2014

$m $m

Share Capital - Common Shares:

Balance at beginning of year 1.0 1.0

Balance at end of year 1.0 1.0

Additional paid-in capital:

Balance at beginning of year 923.4

Impact of amalgamation 144.2

Restated balance at beginning of year 1,086.1 1,067.6

Share-based compensation - 18.5

Balance at end of year 1,086.1 1,086.1

Accumulated Other Comprehensive Income (Loss):

Balance at beginning of year - 0.5

Unrealized loss on available for sale investments in the year - (0.5)

Balance at end of year - -

Accumulated deficit:

Balance at beginning of year (108.4)

Impact of amalgamation (153.2)

Restated balance at beginning of year (326.6) (261.6)

Net profit/(loss) for the year 21.2 (60.2)

Dividends on preferred shares (StarStone Insurance Holdings Limited shares cancelled and redeemed in 2014) - (4.8)

Balance at end of year (305.4) (326.6)

Total Shareholders' Equity 781.7 760.5

Limited of flows



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StarStone Insurance Bermuda Limited Consolidated statements of cash flows






2015 2014

As adjusted

Operating Activities: $m $m

Net profi t / (loss ) 21.2 (60.2)

Adjustments:

Depreciation and amortization 4.6 7.9

Share‐based compensation expense credi ted through equity ‐ 18.5

Net rea l i zed and unrea l i zed investment losses 6.3 3.4

Tax (credi t) / charge (5.9) 1.4

Amortization of value of in force bus iness ‐ 0.6

Foreign exchange (0.2) 1.6

Amortization of investments 5.1 ‐

Changes in:

Losses and loss adjustment expenses (85.1) 16.2

Unearned premiums (18.1) (61.4)

Reinsurers share of paid and unpaid losses 156.2 (271.4)

Ceded unearned premiums 12.3 15.0

Deferred pol icy acquis i tion costs 2.8 (0.6)

Reinsurance premiums payable 1.1 254.5

Premiums receivable 23.0 90.0

Other insurance/reinsurance balances receivable 0.4 17.3

Due from/to affi l iates (89.6) (17.8)

Accrued expenses and other payables (15.1) (15.3)

Other assets 6.3 (13.6)

Foreign currency remeasurement gain 6.9 12.3

32.2 (1.6)

Investing Activities:

Purchase of fixed maturi ties ‐ fa i r va lue option (1,126.2) (400.7)

Purchase of fixed maturi ties ‐ avai lable for sa le ‐ (45.2)

Proceeds from sa les and maturi ties of fixed maturi ties ‐ fa i r va lue option 893.7 639.7

Proceeds from sa les and maturi ties of fixed maturi ties ‐ ava i lable for sa le ‐ 179.6

Purchases of other investments (240.4) (167.4)

Sa les of other investments 62.0 3.1

Net (purchases )/sa les of short‐term investments 14.5 (9.6)

Investments transferred on RITC of s2243 38.3 ‐

(358.1) 199.5

3.1 ‐

‐ (4.8)

3.1 (4.8)

7.1 (13.8)

(315.7) 179.3

481.4 302.1

165.7 481.4

Cash and cash equiva lents at beginning of year

Net cash generated by/(used in) operating activities

Net cash (used in)/generated by investing activities

Financing Activities:

Net cash acquired on purchase of subs idiaries

Dividends paid on Preferred Shares

Net cash generated by/(used in) financing activities

Effect of exchange rate movements on cash and cash equiva lents

(Decrease) increase in cash and cash equiva lents

Cash and cash equiva lents at end of year

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StarStone Insurance Bermuda Limited Notes to the consolidated financial statements


USD in millions

1. GENERAL

StarStone Insurance Bermuda Limited (“StarStone Bermuda”), collectively with its subsidiaries, the “Company” or “Group”, was

incorporated on 21 November 2007 under the laws of Bermuda. On 8 December 2015 the company changed its name from Torus

Insurance (Bermuda) Limited to StarStone Insurance Bermuda Limited and on 29 December 2015 it merged with its immediate

holding company, StarStone Insurance Holdings Limited (“SIHL”, previously named Torus Insurance Holdings Limited). The newly

merged entity is named StarStone Insurance Bermuda Limited. Under the pooling of interest method, the financial statements have

been presented as if the merger was effective from 1 January 2014.

On 1 April 2014, Enstar Group Limited (Enstar) and Stone Point Capital LLC (Stone Point) completed the purchase of the entire share

capital of SIHL, following the receipt of regulatory approval. From 1 April 2014, SIHL was owned by Bayshore Holdings Limited, an

entity owned 59% by Enstar, with the Trident V funds (“Trident”)(managed by Stone Point Capital LLC) owning 39.3% and Dowling

Capital Partners owning 1.7%. Following the merger between SIHL and StarStone Bermuda, the holding in SIHL has been replaced by

the equivalent holding in StarStone Bermuda. Enstar is the ultimate parent company of the Company associated with its

investments or its reinsurers. Prior to 1 April 2014, SIHL was owned by private equity interests, one of which owned a controlling

interest.

The Company is registered as a Class 4 insurer under the Insurance Act 1978, amendments thereto and related regulations (the

“Act”). It underwrites commercial, professional, specialty insurance and reinsurance products to a global client base through six

wholly owned insurance subsidiaries:

StarStone Insurance Limited (“StarStone UK” previously named Torus Insurance (UK) Limited), a Financial Conduct Authority

(“FCA”) and Prudential Regulatory Authority (“PRA”) regulated UK business,

StarStone Specialty Insurance Company (“StarStone Specialty”, previously named Torus Specialty Insurance Company), a US

excess and surplus lines insurer,

StarStone National Insurance Company (“StarStone National”, previously named Torus National Insurance Company), a US

admitted markets insurer,

StarStone Insurance Europe AG (“StarStone Europe”, previously named Torus Insurance (Europe) AG) a Liechtenstein based

European Specialty Insurer,

StarStone Corporate Capital Limited (“SCC”, previously named Torus Corporate Capital Limited ), a company that provides 100%

of the capital supporting the underwriting activity of Lloyd’s Syndicate 2243. With effect from 1 January 2015, syndicate 2243

has been reinsured to close through Syndicate 2008 (capital provided by affiliated company, Shelbourne Syndicate Services

Limited).

StarStone Corporate Capital 1 Limited (“SCC1”, previously named Torus Underwriting Limited), a company which provides

capital supporting the underwriting activity of Lloyd’s Syndicate 1301.

On April 1, 2013 StarStone launched its Lloyd’s Managing Agency StarStone Underwriting Limited (“SUL”, previously named Torus

Underwriting Management Limited). With effect from 1 January 2014, the Company has entered into a Loss Portfolio Transfer reinsurance contract (“LPT”) with

Fitzwilliam Insurance Limited (“FW”) for all discontinued lines of business in relation to the 2013 and prior underwriting years.

Earned results on these discontinued lines for 2014 onwards are 100% reinsured under the terms of this agreement.

On November 13, 2015 StarStone purchased the entire share capital of Vander Haeghen & Co SA and Arena SA, two managing

agencies based in Belgium.

The Company and its insurance subsidiaries have a financial strength rating of A‐ (Excellent) from AM Best. For business written through Lloyd’s Syndicate 1301, Lloyd’s is rated A (Excellent) by A.M. Best, AA‐ by Fitch Ratings and A+ by

Standard and Poor’s – these ratings apply to all Lloyd’s syndicates.

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USD in millions

2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements incorporate the assets, liabilities and results of StarStone Bermuda and its subsidiaries and

have been prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”). Inter‐ company

transactions and balances have been eliminated in preparing these financial statements. 2.1. Use of estimates Assumptions and estimates made by management have a significant effect on the amounts reported within the consolidated financial statements. The most significant of these relate to the losses and loss adjustment expenses, reinsurance recoverables, the valuation of goodwill and intangible assets and deferred tax valuation allowances. All material assumptions and estimates are regularly reviewed and recorded in the period in which they are determined, but actual results could turn out to be significantly different from those expected when the assumptions or estimates were made. 2.2. Insurance operations Gross premiums written – For direct insurance business, ultimate premiums are recognized as written upon inception of the policy.

Any subsequent adjustments to written premiums are recognized in the period in which they are determined. For insurance policies which are greater than one year in duration and the premium is payable in annual installments, the total

premium under the policy is recognized as written premium at the policy inception. Where there is a long term agreement in place and policies are subject to annual re‐signing, premium is recognized as written when

the policy is re‐signed.

For assumed reinsurance contracts, written premium is recognized based on estimates of ultimate premiums provided by the ceding

companies. Initial estimates of written premium are recognized in the period in which the risks incept. Subsequent adjustments,

based on confirmation of actual premium by the ceding companies or revisions in estimates, are recorded in the period in which they

are determined.

Earned premiums – Premiums written are earned as revenue over the period of the contract in proportion to the level of protection

provided. Generally this is on a pro‐rata basis over the term of the policies to which they relate. Where the amount of insurance

protection varies according to a predetermined schedule, the premium is earned over the period of cover in line with the

underwriter’s assessment of the level of protection provided. Premiums written which are not yet recognized as earned premium

are recorded in the consolidated balance sheet as unearned premiums. Ceded premiums – Reinsurance premiums ceded are expensed over the period under which the coverage is provided. For contracts

written on a ‘losses occurring during basis’, the reinsurance premiums are expensed on a pro‐rata basis over the period the

reinsurance coverage is provided. For contracts written on a ‘risk attaching during basis’, reinsurance premiums are expensed based

on the risk period of coverage provided on the underlying contracts. Reinstatement premiums that reinstate coverage are estimated

based on loss experience and are recorded in accordance with the contract terms based upon the ultimate loss estimate associated

with each contract. Reinstatement premiums are generally written and earned at the time the associated loss event occurs. Risk transfer – Reinsurance accounting is applied on reinsurance arrangements where the risk transfer requirements of US GAAP have been met which include the following key conditions: 1) The reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance contracts.

2) It is reasonably possible that the reinsurer may realize a significant loss from the transaction.

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USD in millions

2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2. Insurance operations (continued) Retroactive reinsurance – Retroactive reinsurance reimburses a ceding company for liabilities incurred as a result of past insurable

events covered by the underlying policies reinsured. Underwriting income generated in connection with retroactive reinsurance

contracts is deferred and amortized into income over the settlement period while losses are charged to income immediately.

Subsequent changes in estimated or actual cash flows under such retroactive reinsurance contracts are accounted for by adjusting

the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of

the reinsurance transaction, with a corresponding charge or credit to income. Deferred policy acquisition costs – Acquisition costs are deferred and amortized over the same period as the related premiums are

earned. Acquisition costs that are capitalized are incremental direct costs related to the successful acquisition of new or renewal

contracts. This consists primarily of fees and commissions paid to brokers, premium taxes, and underwriter compensation costs.

Premium deficiency – A premium deficiency reserve is recognized by limiting any deferred acquisition costs, to the extent that the

expected claims costs and claims adjustment expenses exceed the deferred acquisition costs, unearned premium and anticipated

investment income. Deferred acquisition costs are limited to the amount expected to be recovered from earned future premium and

anticipated investment income. If the premium deficiency is greater than the deferred acquisition costs, a liability will be recognized. Losses – A reserve for losses and loss adjustment expenses is established where the insured event has occurred on or before the

balance sheet date. The balance reflects the estimated ultimate cost of settling the claim and includes provisions for reported claims

(“case reserves”), estimates relating to incurred but not reported claims (“IBNR”) and estimates related to development on

outstanding case reserves and loss adjustment expenses. We review our reserves for losses and loss adjustment expenses on a quarterly basis. Management estimates IBNR after reviewing

detailed actuarial analysis and considering qualitative factors that may not be fully reflected in the actuarial techniques.

Management utilize the results of multiple actuarial reviews to estimate the required level of provisions. This assists in giving greater

understanding of the trends inherent in the data being projected. The projections given by the various methodologies also assist in

setting the range of possible outcomes. The estimate is highly dependent on management’s judgment as to which estimation

technique is most appropriate for the characteristics of the business class and the extent of the development of each accident year. IBNR reserves are generally subject to a greater degree of uncertainty than the reported claims. Classes of business where the IBNR

proportion of the total reserve is high will typically display greater variations between initial estimates and final outcomes because of

the greater degree of uncertainty involved in estimating these reserves. Classes of business where claims are typically reported

relatively quickly after the claim event tend to display lower levels of volatility. In calculating the estimated cost of losses and loss

adjustment expenses the Company uses a variety of estimation techniques. In the initial years, the estimation of the claims is based

on pricing assumptions and comparison to industry benchmarks. Once adequate data is available, the estimation is generally based

upon statistical analyses of historical experience, which assumes that the development pattern of the current claims will be

consistent with past experience.

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USD in millions

2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

2.2. Insurance operations (continued) Losses (continued) Allowance is made, however, for changes or uncertainties which may create distortions in the underlying statistics or which might

cause the cost of unsettled claims to increase or reduce when compared with the cost of previously settled claims including:

changes in processes which might accelerate or slow down the development and/or recording of paid or incurred claims

compared with the statistics from previous periods;

changes in the legal environment;

the effects of inflation;

changes in the mix of business;

the impact of large losses; and

any movements in industry benchmarks.

A component of these estimation techniques is usually the estimation of case reserves. In estimating the cost of these the Group has

regard to the claim circumstance as reported, any information available from loss adjusters and any available information on the

cost of settling claims with similar characteristics. Large claims impacting each relevant business class are generally assessed separately, being measured on a case by case basis or

projected separately in order to allow for the possible distortive effect of their development and incidence. Due to the inherent

uncertainty in estimating losses and loss expenses, there can be no assurance that the ultimate liability will not be settled for a

significantly greater or lesser amount than that recorded. The estimates are reviewed regularly and any necessary adjustments to

unpaid losses are reflected in the income in the period in which they are determined. Provisions are calculated net of any estimated amounts of salvage and subrogation recoveries, but gross of any reinsurance

recoveries. No benefit is taken for discounting the reserves. Loss adjustment expenses – A liability is established for all costs expected to be incurred in connection with the settlement of

unpaid claims. These include the direct cost relating to the investigation of the claims and other costs which cannot be associated

with specific claims but are related to claims paid or in the process of settlement such as internal costs of the claims functions.

Reinsurance recoverables – In the normal course of business, reinsurance (including foreign reinsurance) is purchased from

reinsurers to reduce the amount of loss arising from claims. Reinsurance recoverables include balances due from reinsurers for

unpaid losses and loss adjustment expenses that are expected to be recoverable from reinsurers under the terms of the reinsurance

agreements.

Reinsurance recoverables are stated net of a reserve for uncollectable reinsurance. This reserve is calculated based on

management’s estimate of any amounts that the Group is unable to recover from the reinsurer due to insolvency/known liquidity

issues, contractual dispute or any other reason which in management’s judgment warrants a reserve against a particular reinsurer. In the determination of the reserve for uncollectable reinsurance, the Group considers the recoverable balance by reinsurer net of

any collateral held. The definition of collateral for this purpose is generally limited to assets held in trust, letters of credit and

liabilities held by the Group with the same legal entity for which the Group believes there is a legal right of offset.

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USD in millions


2.3. Operating and administrative expenses Operating and administrative costs are expensed over the period in which they are incurred.

2.4. Investments Fixed maturities – The Group has a fixed maturity investment portfolio, which is accounted for using the fair value option.

The Company accounts for its investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards

Codification (“ASC”) 320 Investments – Debt and Equity Securities, which requires that fixed‐maturity and equity securities that have

readily determinable daily values be segregated into categories based upon the Company’s intention for those securities. In

accordance with ASC 320, the Company has classified its fixed‐maturity securities under the fair value option.

The Company may sell its securities held under the fair value option category in response to changes in interest rates, risk/reward

characteristics, liquidity needs or other factors.

For those investments that the Group has elected the fair value option in accordance with US GAAP (the “fair value option” under

Accounting Standards Codification (“ASC”) 825‐10‐25) unrealized gains and losses are included in the statement of operations line

item net realized and unrealized investment gains and losses at each subsequent reporting date.

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold.

Net investment income is stated net of investment management and custody fees. Investment income is recognized when

earned and includes interest and dividend income together with amortization of market premiums and discounts.

Other investments – Other investments include investments in catastrophe bonds and holdings in collateralized loan obligations

(“CLO”) equity and fixed income funds. These investments are initially recorded at cost and adjusted up or down to reflect the

quoted market price. Short‐term investments – Short‐term investments are categorized as trading investments and comprise securities which are due to

mature within one year of the date of purchase. Fair value – US GAAP defines fair value as the price received to transfer an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date reflecting the highest and best use valuation concepts. ASC 820

establishes a framework for measuring fair value in US GAAP by creating a hierarchy of fair value measurements that distinguishes

market data between observable independent market inputs and unobservable market assumptions by the reporting entity. ASC 820

further expands disclosures about such fair value measurements.

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USD in millions


2.4. Investments (continued) The Company determines the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy

prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three

levels, which are described further below:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the

ability to access at the measurement date. These primarily consist of financial instruments whose value is based on quoted

market prices.

Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. The majority of the Group’s financial instruments are measured at fair value using the Level 2 inputs.

Level 3 inputs are unobservable inputs for the asset or liability. The level in fair value hierarchy within which a fair value

measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its

entirety. 2.5. Cash and cash equivalents Cash and cash equivalents include cash in hand and fixed interest deposits with a maturity date of three months or less at the date when purchased. 2.6. Value of in‐force business acquired Upon the Group’s acquisition of Broadgate Underwriting Limited, Glacier Insurance AG and Sideris Re Holdings Limited, an intangible asset representing the present value of estimated future profits associated with unearned premiums was recorded. The value of in‐force insurance contracts is amortized over the period in which the related premiums are earned. These were fully amortized in 2014. 2.7. Lloyd’s syndicates The Company records its share of Syndicate 1301’s and Syndicate 2243’s assets, liabilities, revenues and expenses under U.S. GAAP.

The share reported is based on the company’s share of corporate member participation. For the 2015 underwriting year this was

39.3% (2014: 78.9%) for Syndicate 1301 and nil (2014: 100%) for Syndicate 2243. The Stamp capacity of Syndicate 2243 was

transferred to Syndicate 1301 in 2013. With effect from 1 January 2015, Syndicate 2243 has been reinsured to close through

Syndicate 2008 which is managed by a company related through common control. The Company records adjustments to recognize

underwriting results as incurred, including the ultimate cost of losses incurred. These adjustments to losses are based on actuarial

analysis of the Syndicate accounts, including forecasts of expected ultimate losses.

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USD in millions


2.8. Goodwill and intangible assets

The Company accounts for intangible assets that arise from business combinations in accordance with ASC 805. A purchase price

paid that is in excess of net assets (“goodwill”) arising from a business combination is recorded as an asset, and is not amortized.

Goodwill is deemed to have an indefinite life and is not amortized but tested at least annually for impairment. Where the total fair

value of net assets acquired exceeds consideration paid, the acquirer will record a gain as a result of the bargain purchase, to be

recognized through earnings within “Other income” at the close of the transaction. In accordance with the Business Combinations

topic of FASB ASC, or ASC 805, this amount is recognized upon the acquisition of the businesses as part of other income. The fair

values of the reinsurance assets and liabilities acquired are derived from probability‐weighted ranges of the associated projected

cash flows, based on actuarially prepared information and management’s strategy. Any changes to the fair values resulting from

changes in such information or strategy will be recognized when they occur.

Intangible assets with a finite life are amortized over the estimated useful life of the asset. Intangible assets with an indefinite useful

life are not amortized. Intangible assets attributed to state licenses and to syndicate capacity are deemed to have an indefinite life.

Refer also to Note 7 “Goodwill and Intangible Assets.”

Goodwill and intangible assets are tested for impairment on an annual basis or more frequently if events or changes in

circumstances indicate that the carrying amount may not be recoverable. Such events or changes in circumstances may include an

economic downturn in a geographic market or change in the assessment of future operations.

When the fair value of a reporting unit more likely than not (a likelihood of more than 50%) exceeds its carrying amount the

quantitative annual impairment test is not required. The quantitative goodwill impairment test has two steps. The first step

identifies potential impairment loss by comparing the fair value of a reporting unit with its book value, including goodwill. Reporting

units are consistent with the segmental basis. If the carrying value exceeds the fair value, the second step calculates the possible

impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied goodwill is less than the

carrying amount a write down would be recorded. The measurement of fair values in reporting units is determined on a number of

factors and assumptions including ranges of future discounted earnings, forecast revenue and operating expenses and future tax

rates. The Company has an unconditional option to bypass the qualitative assessment described in the preceding paragraph in any period

and proceed directly to the quantitative assessment. The Company may resume performing the qualitative assessment in any

subsequent period.

If the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in

earnings. 2.9. Software development costs StarStone capitalizes costs related to computer software developed for internal use during the application development stage of

software development projects. These costs generally consist of certain external, payroll and payroll‐related costs. StarStone begins

amortization of these costs once the project is completed and ready for its internal use. Amortization is on a straight line basis and

over a useful life of three to five years.

Page|15



USD in millions

2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) 2.10. Office properties and equipment Tangible assets are capitalized and depreciated in equal annual installments over their estimated useful lives. The lives of assets used in computing depreciation are based on the estimate of the period over which the asset will provide useful

economic benefit to the Group. The useful economic life to be used for each asset category is as below: Leasehold asset ‐ Over the period of the lease

Leasehold improvements ‐ 5 years, or the life of the lease if shorter

Office equipment ‐ 5 years

Computer equipment ‐ 3 to 5 years 2.11. Foreign currency translation The reporting currency of the Group is US dollars. It is also considered to be the functional currency for the operating subsidiaries

and Lloyd’s syndicates. Monetary assets and liabilities that are denominated in currencies other than the functional currency are revalued at the period end

rates of exchange. The gains and losses arising from the revaluation are included in earnings. Unearned premium reserve and

deferred acquisition costs are treated as non‐monetary and therefore translated at the rates of exchange applicable when the

transaction was entered into.

Revenues and expenses that are denominated in foreign currencies are translated at the average rates of exchange for the period. Realized gains and losses from non‐functional currencies that arise from the settlement of transactions at rates of exchange that

differ from those prevailing when the transaction was originally recorded are recorded in earnings. 2.12. Accounting for income tax Income taxes are accounted for under the asset and liability method. Under this method the deferred income taxes reflect the net

tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the

amounts that are recognized for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates

expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The deferral of the tax losses is evaluated based upon management’s estimates of the future profitability of the Group’s taxable

entities based on the current forecasts and the period to which losses may be carried forward together with the historical record of

profits made by the Group. When the Group does not believe that, on the basis of available information, it is more likely than not

that the deferred tax asset will be fully recovered, a valuation allowance is recognized against its deferred tax assets to reduce assets

to the recoverable amount. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the

period that includes the enactment date.

2.13. Share compensation The Group participates in share and option‐based employee compensation plans, the terms and conditions of which are described in

Note 13. The Company has adopted the provisions of ASC 718 for all awards granted to its employees. For equity settled awards, the

cost of the awards/options, based on their assessed fair value at date of grant, is recognized over the period that the awards/options

vest and included in additional paid in capital. For awards treated as liabilities the fair value is assessed at each year end and changes

to the liability are recognized in the income statement.

Page|16



USD in millions


2.14. Recent accounting pronouncements New Accounting Standards Adopted in 2015 There were no new accounting standards adopted during 2015 that impacted our consolidated financial statements and disclosures. Recently Issued Accounting Pronouncements Not Yet Adopted Accounting Standards Update (“ASU”) 2016‐01, Recognition and Measurement of Financial Instruments In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016‐01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many of the current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures. ASU 2015‐16, Business Combinations, Simplifying the Accounting for Measurement‐Period Adjustments In September 2015, the FASB issued ASU 2015‐16, which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement‐period adjustments that occur in periods after a business combination is consummated. Under the new guidance, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.

ASU 2015‐09, Disclosures about Short‐Duration Contracts

In May 2015, the FASB issued ASU No. 2015‐09, which makes targeted improvements to disclosure requirements for insurance companies that issue short‐duration contracts. The ASU requires enhanced disclosures, on an annual basis, related to the reserve for losses and loss expenses which include (1) net incurred and paid claims development information by accident year, (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the reserve for losses and LAE, (3) for each accident year presented of incurred claims development, information about claim frequency (unless impracticable), and the amounts of IBNR liabilities, including expected development on reported claims, included in the reserve for losses and LAE, (4) a description of, and any significant changes to the methods for determining both IBNR and expected development on reported claims, and (5) for each accident year presented of incurred claims development, quantitative information about claims frequency, as well as a description of methodologies used for determining claim frequency information. The ASU is effective for annual periods beginning after December 15, 2015. We expect this guidance to have an impact on our disclosures, but we do not expect it will have a material impact on our consolidated financial statements.

Page|17



USD in millions


2.14. Recent accounting pronouncements (continued) Recently Issued Accounting Pronouncements Not Yet Adopted (continued) ASU 2015‐07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value or its Equivalent In May 2015, the FASB issued ASU No. 2015‐07, which will eliminate the requirement to categorize investments in the fair value hierarchy if their fair value is measured at the net asset value (“NAV”) per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. In addition, the scope of current disclosure requirements for investments eligible to be measured at NAV is limited to investments for which the practical expedient is applied. Reporting entities are required to adopt the ASU retrospectively. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. We expect this guidance to have an impact on our disclosures, but we do not expect it will have a material impact on our consolidated financial statements.

ASU 2015‐02, Amendments to the Consolidation Analysis In February 2015, the FASB issued ASU 2015‐02, which requires entities to evaluate whether they should consolidate certain legal entities. The new consolidation guidance changes the way entities evaluate whether (1) they should consolidate limited partnerships and similar entities; (2) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (3) variable interests in a VIE held by related parties of the registrant require the registrant to consolidate the VIE. The new guidance also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which decision making rights are conveyed through a contractual arrangement. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures. ASU 2014‐9, Revenue from Contracts with Customers In May 2014, the FASB issued ASU No. 2014‐9, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry‐specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC including ASC 944 — Insurance. However, while contracts within the scope of ASC 944 are excluded from the scope of the ASU, certain insurance‐related contracts should be accounted for under the ASU, for example contracts under which service providers charge their customers fixed fees in exchange for an agreement to provide services for an uncertain future event. Certain of the ASU’s provisions also apply to transfers of non‐financial assets and include guidance on recognition and measurement. The ASU is effective for interim and annual reporting periods beginning after December 15, 2016. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.

Page|18



USD in millions


2.15. Related party transactions Since April 2014 StarStone has been owned by Bayshore Holdings Limited (Bayshore), an entity owned 59% by Enstar, with the

Trident V funds (managed by Stone Point Capital LLC) owning 39.3% and Dowling Capital Partners owning 1.7%. Management

consider Enstar to be the controlling party of the StarStone group. During the year the Company paid fees for the provision of

services to a number of companies related through common control.

In 2014, the Company entered into a Loss Portfolio Transfer reinsurance contract (“LPT”) with Fitzwilliam Insurance Limited (“FW”), a

vehicle owned by Bayshore. Under the LPT contract FW assumed all discontinued lines of business in relation to the 2013 and prior

underwriting years. See note 6 for more details. The Company holds investment portfolios to support the LPT managed by Eagle

Point Credit Management Limited, Sky Harbor Capital Management and Stone Point Capital Management LP, which are owned by

Trident V.

From January 1, 2015 the Company has reinsured certain US workers compensation business from Sussex Insurance Company, a

company related through common control.

For the 2015 underwriting year, SGL No. 1 Limited participates 50% in Syndicate 1301 and has reinsured this business under a stop

loss agreement to the Company. SGL No. 1 Limited has also reinsured the prospective business relating to Syndicate 2243 to the

Company.

The details of the transactions and balances, excluding FW which is covered in note 7, are set out below:

John Shettle was a non‐executive director of Montpelier Re prior to the acquisition by Endurance Specialty Holdings Limited in March

2015. During the year the Company ceded $1.5 million (2014: $1.1 million) of reinsurance premium to Montpelier Re and has an

outstanding recoverable balance of $3.9 million at December 31, 2015 (2014: $4.9 million). These contracts were entered into on an

arm’s length basis.

2015 2014 2015 2014

As adjusted As adjusted

Affiliated Company $m $m $m $m

Bayshore Holdings Ltd ‐ 7.8 7.6 7.8

Enstar (EU) Limited (5.7) (4.4) (1.1) 5.2

Enstar Limited (1.6) (1.7) 0.2 3.8

Enstar Group Limited ‐ ‐ (4.4) (0.9)

Enstar (US) Inc (1.8) (1.6) (1.9) 1.9

Kenmare Holdings Limited 0.1 ‐ 3.0 ‐

Sussex Insurance Company 9.3 ‐ (8.9) ‐

SGL No. 1 Limited (2.1) ‐ (18.3) ‐

Other (1.6) (0.6) (0.5) (0.1)

Total (3.4) (0.5) (24.3) 17.7

Impact on consolidated statement

of operations ‐ income/(expenses)Balance receivable/(payable) as at

Year ended December 31, December 31,

Page|19



USD in millions

3. ACQUISITIONS

On September 30, 2015, the Company completed the acquisition from National Suisse Assurance of all outstanding shares of Vander

Haeghen & Co SA (“Vander Haeghen”) and Arena SA (“Arena”). Vander Haeghen and Arena are two specialty underwriting agencies

based in Belgium, the former of which specializes in luxury car and other specialist insurance products and the latter is a leading

sports club insurance agency. The basis of this transaction is to gain access to these markets.

The results of Vander Haeghen and Arena for the period from October 1, 2015 to December 31, 2015 were nil. The purchase price for Vander Haeghen and Arena was $1.8 million including acquisition related expenses. The fair value of the assets acquired and the liabilities assumed as a result of the acquisition of Vander Haeghen and Arena were as follows:

The gain on bargain purchase of $0.4 million represents the excess of the cumulative fair value of net assets acquired of $2.2 million

over the cost of $1.8 million. This excess has, in accordance with the provisions of the Business Combinations topic of FASB ASC 805,

been recognized as other income for the year ended December 31, 2015. During the period between April 1, 2015 and June 30,

2015 the Group has assumed the business of Vander Haeghen and Arena from National Suisse Assurance. From July 1, 2015 the

Group is the direct insurer of this business.

Acquisition Date

September 30, 2015

$m

Cash and Cash Equiva lents 4.9

Underwriting Premiums 3.2

Office properties and equipment 0.1

Other assets 0.3

Total Assets Acquired 8.5

Accrued Expenses and other payables 6.3

Total Liabilities Assumed 6.3

Net Assets 2.2

Page|20



USD in millions

4. INVESTMENTS Fixed Maturities – Fair Value Option. The amortized cost, gross unrealized gains and losses and estimated fair value of investments

that the Company has elected the fair value option as at December 31, 2015 and 2014 are as follows:

As at December 31, 2015 Cost or Gross Gross Estimated

Fixed maturities and short‐term investments Amortized Unrealized Unrealized Fair Value

Cost Gains Losses

$m $m $m $m

US Government and agency securi ties 267.4 0.1 (1.1) 266.4

Municipa ls 4.9 ‐ ‐ 4.9

Non‐US government s tates , terri tories and possess ions 40.0 ‐ (0.8) 39.2

Corporate securi ties 340.0 0.3 (4.7) 335.6

Asset‐backed securi ties 160.6 0.0 (16.7) 143.9

Mortgage‐backed Securi ties 220.3 0.6 (1.2) 219.7

Short‐term Investments 7.4 ‐ ‐ 7.4

Tota l investments 1,040.6 1.0 (24.5) 1,017.1

As at December 31, 2014 Cost or Gross Gross Estimated

As adjusted Amortized Unrealized Unrealized Fair Value

Fixed maturities and short‐term investments Cost Gains Losses

$m $m $m $m

US Government and agency securi ties 342.2 1.1 (0.1) 343.2

Municipa ls 6.4 ‐ 6.4

Non‐US government s tates , terri tories and possess ions 29.9 0.2 ‐ 30.1

Corporate securi ties 174.3 0.4 (0.2) 174.5

Asset‐backed securi ties 130.8 0.1 (1.7) 129.2

Mortgage‐backed Securi ties 151.9 1.4 (0.3) 153.0

Short‐term Investments 21.9 ‐ 21.9

Tota l investments 857.4 3.2 (2.3) 858.3

Page|21



USD in millions

4. INVESTMENTS (continued) The following table sets forth the credit ratings as of December 31, 2015 and 2014 for investments that the Group has elected the

fair value option:

As at December 31, 2015 Cost or Estimated AAA AA A BBB Non‐

Fixed maturities and short‐term investments Amortized Fair Value Rated Rated Rated Rated Investment

Cost Grade

$m $m $m $m $m $m $m

US Government and agency securi ties 267.4 266.4 266.4 ‐ ‐ ‐ ‐

Municipa ls 4.9 4.9 0.9 2.5 1.5 ‐ ‐

Non‐US government states , terri tories and possess ions 40.0 39.2 5.2 32.7 1.3 ‐ ‐

Corporate securi ties 340.0 335.6 10.5 38.4 211.5 75.2 ‐

Asset‐backed securi ties 160.6 144.0 57.4 2.7 3.0 17.1 63.8

Mortgage ‐backed Securi ties 220.3 219.6 188.6 7.7 13.9 9.0 0.4

Short‐term Investments 7.4 7.4 5.0 2.4 ‐ ‐ ‐

Tota l investments 1,040.6 1,017.1 534.0 86.4 231.2 101.3 64.2

As at December 31, 2014 Cost or Estimated AAA AA A BBB Non‐

As adjusted Amortized Fair Value Rated Rated Rated Rated Investment

Fixed maturities and short‐term investments Cost Grade

$m $m $m $m $m $m $m

US Government and agency securi ties 342.2 343.2 ‐ 343.2 ‐ ‐ ‐

Municipa ls 6.4 6.4 1.2 (0.0) 5.2 ‐ ‐

Non‐US government states , terri tories and possess ions 29.9 30.1 17.6 10.1 2.4 ‐ ‐

Corporate securi ties 174.3 174.5 9.6 46.2 112.6 6.1 ‐

Asset‐backed securi ties 130.8 129.2 41.5 1.4 2.5 11.9 71.9

Mortgage ‐backed Securi ties 151.9 153.0 35.8 90.0 11.7 15.5 ‐

Short‐term Investments 21.9 21.9 0.9 8.8 10.5 1.7 ‐

Tota l investments 857.4 858.3 106.6 499.7 144.9 35.2 71.9

Page|22



USD in millions

4. INVESTMENTS (continued) The following table represents the breakdown of investment maturities by year as of December 31, 2015 and 2014 for investments that the Group has elected the fair value option:

The above analysis is based on the stated maturity date of the security and includes the Short‐term investments, as disclosed in the

Balance Sheet.

As at December 31, 2015 Amortized Estimated % of Total

Cost Fair Value Fair Value

$m $m

Due in one year or less 38.2 38.0 3.7%

Due after one year through five years 545.4 540.8 53.2%

Due after five years through ten years 74.4 73.0 7.2%

Due after ten years 1.7 1.7 0.2%

Subtota l 659.7 653.5 64.3%

Mortgage and asset‐backed securi ties 380.9 363.6 35.7%

Tota l investments 1,040.6 1,017.1 100.0%

As at December 31, 2014 Amortized Estimated % of Total

As adjusted Cost Fair Value Fair Value

$m $m

Due in one year or less 106.1 106.4 12.4%

Due after one year through five years 460.7 461.7 53.8%

Due after five years through ten years 1.9 2.0 0.2%

Due after ten years 5.9 5.9 0.7%

Subtota l 574.6 576.0 67.1%

Mortgage and asset‐backed securi ties 282.8 282.3 32.9%

Tota l investments 857.4 858.3 100.0%

Page|23



USD in millions

4. INVESTMENTS (continued) Other Investments The following table reflects the Company’s other investments at fair value at December 31, 2015 and December 31, 2014:

Collateralized Loan Obligation (“CLO”) equities comprise investments in the equity tranches of term‐financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by the Company in these securities. Global Fixed Income Funds and High Yield Fixed Income Funds comprise a number of positions in diversified fixed income funds that are managed by third party managers. Underlying investments vary from high grade corporate bonds to non‐investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices. The funds have liquidity terms that vary from daily up to quarterly. Overseas deposits represent monies kept in overseas funds managed by Lloyd’s. These funds are required in order to protect policyholders in overseas markets and enable the syndicate to operate in those markets. The access to these funds is restricted and the company cannot influence the investment strategy. The fair value measurements were classified as Level 2. The catastrophe bonds are variable rate notes where the return is contingent upon certain climatic or geological events. The fair value is determined by obtaining two quotes for the catastrophe bonds from unrelated companies. The Balanced Fund comprises a number of positions in diversified fixed income and equity funds that are managed by third party managers. The fund has regularly published prices and is redeemable bi‐monthly.

Estimated Estimated

Fair Value Fair Value

As adjusted

$m $m

Col latera l i sed Loan Obl igations Equity 2.6 3.9

Global Fixed Income Funds 201.7 63.8

High Yield Fixed Income Funds 94.0 95.1

Overseas depos i ts 4.6 12.2

Catastrophe bonds ‐ 2.0

Balanced fund 42.0 ‐

Total other investments 344.9 177.0

As at December

31, 2014

As at December

31, 2015

Page|24



USD in millions

4. INVESTMENTS (continued) Classification within the fair value hierarchy under US GAAP The Company’s investments are allocated between Levels 1, 2 and 3 as follows:

During 2015, the Company transferred $40.8 million of asset‐backed securities from Level 2 to Level 3. During 2015, there were no

transfers between Levels 1 and 2. Transfers into or out of Level 3 are recorded at their fair values as of the end of the reporting

period, consistent with the date of determination of fair value. The transfers from Level 2 to Level 3 relate to securities valued using

single unadjusted broker‐dealer quotes. The Company was unable to obtain sufficient information to determine if the broker quotes

used significant observable inputs. The single broker quotes are provided by market makers or broker‐dealers who are recognized as

market participants in the markets in which they are providing the quotes.

As at December 31, 2015 Level 1 Level 2 Level 3 Total

$m $m $m $m

At Fair Value:

US Government and agency securi ties ‐ 266.4 ‐ 266.4

Municipa ls ‐ 4.9 ‐ 4.9

Non‐US Government states , terri tories and possess ions ‐ 39.2 ‐ 39.2

Corporate securi ties ‐ 335.6 ‐ 335.6

Asset‐backed securi ties ‐ 66.5 77.5 144.0

Mortgage‐backed securi ties ‐ 217.6 2.0 219.6

Short‐term investments ‐ 7.4 ‐ 7.4

Other investments ‐ 342.4 2.5 344.9

‐ 1,280.0 82.0 1,362.0

As at December 31, 2014 Level 1 Level 2 Level 3 Total

As adjusted $m $m $m $m

At Fair Value:

US Government and agency securi ties ‐ 343.4 ‐ 343.4

US States , terri tories and possess ions ‐ 6.4 ‐ 6.4

Non‐US Government states , terri tories and possess ions ‐ 30.0 ‐ 30.0

Corporate securi ties ‐ 174.5 ‐ 174.5

Asset‐backed securi ties ‐ 129.2 ‐ 129.2

Mortgage‐backed securi ties ‐ 153.0 ‐ 153.0

Short‐term investments ‐ 21.8 ‐ 21.8

Other investments ‐ 173.1 3.9 177.0

‐ 1,031.4 3.9 1,035.3

Page|25



USD in millions

4. INVESTMENTS (continued) The financial assets and liabilities recorded at fair value include fixed maturity securities, short‐term investments and other

investments. The fair values of our fixed maturity securities and short‐term investments are generally based on prices obtained from

independent pricing vendors, index providers or broker‐dealers using observable inputs. Fixed maturity securities and short‐term

investments are generally valued using the market approach. The inputs used to determine the fair value of our financial assets and

liabilities are as follows:

US Government securities The fair values of U.S. Government securities were based on quoted prices in active markets for similar instruments. U.S.

government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass‐through agencies such as the

Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. The significant inputs

used to determine the fair value of these securities include the spread above the risk‐free yield curve, reported trades and broker‐

dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified

within Level 2.

US Agency securities The Company’s U.S. Agency portfolio consisted of securities issued by financial institutions guaranteed by the Federal Deposit

Insurance Corporation. The observable inputs used to price these securities may include the spread above the risk‐ free yield curve,

reported trades and broker‐dealer quotes. The fair value measurements were classified as Level 2.

Municipals The fair values of municipal securities were determined based on observable inputs that may include the spread above the risk‐free

yield curve, reported trades, broker‐dealer quotes, benchmark securities, bids, credit risks and economic indicators. The fair value

measurements were classified as Level 2. Non‐US Government states, territories and possessions

The Company’s Foreign Government states, territories and possessions bond portfolio consisted of securities issued primarily by

governments, provinces and agencies as well as debt issued by financial institutions that is guaranteed by non‐U.S. governments. The

fair values of the foreign government securities were determined based on observable inputs that may include the spread above the

risk‐free yield curve, reported trades and broker‐dealer quotes. The fair value measurements were classified as Level 2.

Corporate securities

The observable inputs used to price corporate issues may include the spread above the risk‐free yield curve, reported trades, broker‐

dealer quotes, benchmark securities, bids, credit risks and industry and economic indicators. The fair value measurements were

classified as Level 2.

Asset backed securities

The significant inputs used to determine the fair value of these asset backed securities (“ABS”) include the spread above the risk‐free

yield curve, reported trades, broker‐dealer quotes, bids, security cash flows and structures, type of collateral, prepayment speeds,

delinquencies, loss severities and default rates. These are considered observable market inputs and, therefore, the fair values of

these securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non‐binding quotes from

broker‐dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly.

Broker‐dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are

classified within Level 3.

Page|26



USD in millions

4. INVESTMENTS (continued) Mortgage backed securities

The significant inputs used to determine the fair value of these mortgaged backed securities include the spread above the risk‐free

yield curve, reported trades, broker‐dealer quotes, bids, security cash flows and structures, type of collateral, prepayment speeds,

delinquencies, loss severities and default rates. These are considered observable market inputs and, therefore, the fair values of

these securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non‐binding quotes from

broker‐dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly.

Broker‐dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are

classified within Level 3.

Short‐term investments Short‐term investments were carried at fair value based on observable inputs or carried at amortized cost, which approximates fair

value. The fair value measurements were classified as Level 2. Fixed income and balanced funds The fixed income and balanced funds in which the Company invests have been classified as Level 2 investments because their fair value is estimated using the published net asset value and because the funds are highly liquid. CLO equities The Company measures the fair value of its direct investment in CLO equities based on valuations provided by the Company’s external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is valued based on valuations provided by the broker or lead underwriter of the investment (the “broker”). The Company’s CLO equity investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of relevant trades in secondary markets. In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase (or decrease) in either of these significant inputs in isolation would result in lower (or higher) fair value estimates for direct investments in the Company’s CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs because they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (or decrease) in either of these significant inputs in isolation would result in higher (or lower) fair value estimates for direct investments in the Company’s CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates. On a quarterly basis, the Company receives the valuation from the external CLO manager and brokers and then reviews the underlying cash flows and key assumptions used by the manager/broker. The Company reviews and updates the significant unobservable inputs based on information obtained from secondary markets. These inputs are the responsibility of the Company and the Company assesses the reasonableness of the inputs (and if necessary, updates the inputs) through communicating with industry participants, monitoring of the transactions in which the Company participates (for example, to evaluate default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends that may impact future cash flows. If valuations from the external CLO equity manager or brokers were not available, the Company would use an income approach based on certain observable and unobservable inputs to value these investments. An income approach is also used to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income approach is followed, the valuation is based on available trade information, such as expected cash flows and market assumptions on default and loss severity

Page|27



USD in millions

4. INVESTMENTS (continued) CLO equities (continued) rates. Other inputs used in the valuation process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates. Catastrophe bonds The fair values of the catastrophe bonds were determined based on observable inputs that may include the spread above the risk‐

free yield curve, reported trades, broker‐dealer quotes, benchmark securities, bids, credit risks and specific catastrophic events. The

fair value measurements were classified as Level 2.

5. INVESTMENT TRANSACTIONS The following table sets out an analysis of investment purchases, sales and maturities:

The following is a summary of net investment income:

Year ended

December 31,

2015 2014

As adjusted

$m $m

Purchase of fi xed maturi ties ‐ fa i r va lue option (1,126.2) (400.7)

Purchase of fi xed maturi ties ‐ ava i lable for sa le ‐ (45.2)

Proceeds from sales and maturi ties of fi xed maturi ties ‐ fa i r va lue option 893.7 639.7

Proceeds from sales and maturi ties of fi xed maturi ties ‐ ava i lable for sale ‐ 179.6

Purchases of other investments (240.4) (167.4)

Sa les of other investments 62.0 3.1

Net (purchases )/sa les of short‐term investments 14.5 (9.6)

Net sa les/(purchases ) (396.4) 199.5

December 31,

Year ended

Year ended

December 31,

2015 2014

As adjusted

$m $m

Fixed maturi ties 17.8 12.7

Other investments 1.0 0.2

Short‐term investments 0.1 0.3

Investment lncome a l located to Fi tzwi l l iam through Loss Portfol io Transfer (6.4) ‐

Net investment income 12.5 13.2

Year ended

December 31,

Page|28



USD in millions

5. INVESTMENT TRANSACTIONS (continued) The Company utilizes various companies to provide investment execution, advisory and/or management services. Fees for these

services, which vary depending on the amount of assets under management, are included in net investment income. The total fees

paid to investment managers for the year ended December 31, 2015 were $1.1 million (2014: $1.8 million).

The following table summarizes the pre‐tax realized investment gains and losses and the change in unrealized gains and losses on investments recorded at Fair Value in earnings:

Year ended

December 31,

2015 2014

As adjusted

$m $m

Pre‐tax rea l i zed investment ga ins 1.9 3.9

Tota l pre‐tax rea l ized investment ga ins 1.9 3.9

Unrea l i zed ga ins and losses

Fixed income and other investments (26.1) (7.3)

Tota l change in unrea l i zed losses , net of tax (tax: $ni l for al l periods ) (26.1) (7.3)

Net rea l i zed and unrea l i zed investment losses before a l location (24.2) (3.4)

Investment losses/(ga ins) a l located to Fi tzwi l l iam through Loss Portfol io Transfer 17.9 (3.8)

Net rea l i zed and unrea l i zed investment (losses )/ga ins (6.3) 0.4

December 31,

Year ended

Page|29



USD in millions

6. REINSURANCE

The Group purchases reinsurance in order to mitigate its risk exposure and to enable the Group to underwrite higher limits and

increase the aggregate level of underwriting capacity. The purchase of the reinsurance does not legally discharge the Group from its

primary gross liability and the Group is required to pay the loss and is liable to the extent that the reinsurer is unable to meet its

obligations under the agreement. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying

liabilities. The effects of reinsurance on premiums written and earned as well as losses and loss adjustment expenses are as follows:

During 2015, StarStone Companies continued to purchase various reinsurance agreements across all lines of business written. The

Company purchases both Group wide reinsurance policies as well as entity specific policies.

Significant reinsurance programs executed during the 2015 financial year were the Global Property, Marine and Offshore Energy,

Medical Professional Liability/Healthcare and Aviation covers. The Global Property structure covers all general property, onshore

energy, construction and power and utilities risks written, also now protecting the new homeowners’ book of business in the US.

The Marine and Offshore Energy structure provides interlocking clause benefits on the individual lower level covers. Maximum limit

cover continues to extend to $100 million, with the composite layers incorporating Terrorism, Construction and Aviation Hull War

protection. Both the Property and Marine and Offshore Energy programs were providing cover on both a per risk and catastrophe

basis. The Medical Professional Liability/Healthcare programs consists of both a variable quota share and excess of loss treaty and

covers all healthcare and US and European management and professional lines business. Finally, the Aviation programs consist of

multiple reinsurance agreements with a ‘core’ program as the backbone providing a maximum cover limit of $175.0 million (2014:

$175.0 million), then more specific space, general aviation and hull specific excess of loss covers.



2015 2014

As adjusted

$m $m

Premiums written:

Di rect and facul tative 557.5 683.7

Assumed treaty 150.5 18.5

Ceded (181.0) (201.1)

Net premiums written 527.0 501.1

Premiums earned:

Di rect and facul tative 526.8 759.9

Assumed treaty 182.3 3.6

Ceded (187.8) (277.0)

Net premiums earned 521.2 486.5

Insurance losses and loss adjustment expenses :

Di rect and facul tative (315.3) (471.8)

Assumed treaty (153.5) (3.6)

Ceded 167.5 142.6

Net losses and loss adjustment expenses (301.2) (332.8)

Page|30



USD in millions

6. REINSURANCE (continued)

The Company manages the risk of a reinsurer failing to meet its obligations under coverage that we have purchased by maintaining a

list of approved reinsurers, performing credit assessments of reinsurers, monitoring the creditworthiness of approved reinsurers,

and monitoring concentration of credit risk. Excluding any balances with affiliated companies, for the reinsurance balance

recoverable as at December 31, 2015 on the business written by the Group’s insurance subsidiaries, 59% (2014: 50%) is recoverable

from reinsurers with an AM Best rating of A+ or higher, 28% (2014: 26%) is recoverable from reinsurers with an AM Best rating of A

and 13% (2014: 24%) from insurers with a rating of A‐ or below. Reinsurers that are not considered to meet StarStone’ security

requirements have been required to provide collateral or a guarantee from a parent or group company with appropriate security. In 2014, the Company completed a Loss Portfolio Transfer transaction (“LPT”) with Fitzwilliam Insurance Limited (“Fitzwilliam”), a subsidiary of Enstar Group Limited, under which all of the Company’s legacy discontinued liabilities were ceded to Fitzwilliam under a retroactive reinsurance agreement with an aggregate limit of $518 million. Under the terms of the LPT transaction, the Company ceded approximately $359.7 million of retrospective losses and loss adjustment expenses and $45.6 million for prepaid premiums net of acquisition costs in relation to future insurable losses. The $359.7 million of loss and allocated loss adjustment expense reserves ceded to Fitzwilliam was net of $168.8 million of ceded loss and allocated loss adjustment expense reserves under existing third‐party reinsurance contracts. The following table displays the impact of the Loss Portfolio Transfer on the Consolidated Statements of Operations and Consolidated Balance Sheet.

Year ended

December 31,

2015

Year ended

December 31,

2014

As adjusted

Opening balance with Fitzwilliam on January 1 $m $m

Reinsurance recoverables 325.3 359.7

Other reinsurance balances 16.1 0.0

Ceded unearned premium and deferred acquis i tion costs 7.4 45.6

Reinsurance balances payable (277.5) (405.3)

Ba lance due from Fitzwi l l iam 71.3 ‐

Movement in losses during the year

Retroactive reinsurance benefi t 44.2 73.0

Prospective reinsurance benefi t/(loss) 5.8 (0.6)

Total 50.0 72.4

Investment return on assets to support the LPT 11.7 (1.1)

Funds paid directly by Fitzwilliam (28.4) ‐

Closing balance with Fitzwilliam on December 31

Reinsurance recoverables 215.0 325.3

Other reinsurance balances 16.1 16.1

Ceded unearned premium and deferred acquis i tion costs 7.1 7.4

Other receivables 104.4 ‐Reinsurance balances payable (238.0) (277.5)

Ba lance due from Fitzwi l l iam 104.6 71.3

Page|31



USD in millions

6. REINSURANCE (continued)

The Loss Portfolio Transfer is predominantly a retroactive reinsurance contract. In the event that the cumulative claim and allocated claim adjustment expenses ceded under the Loss Portfolio Transfer exceed the consideration paid, the resulting gain from such excess is deferred. A portion of the deferred gain is cumulatively recognized in earnings in the period such excess arises as if the revised estimate was available at the inception date of the Loss Portfolio Transfer.

At the end of the year, the amounts ceded under the Loss Portfolio Transfer increased by $50.0 million (2014: $72.4 million), resulting in a prospective gain of $5.8 million (2014: $(0.6) million) and change in retroactive gain of $44.2m (2014: $73.0 million). $44.6 million (2014:$27.7 million) of the cumulative retroactive gain has been recognized in the consolidated statement of operations, the remaining $44.9 million (2014: $45.3 million) will be recognized in earnings in future periods in proportion to projected recoveries under the Loss Portfolio Transfer. Over the life of the contract, there is no economic impact as long as any additional losses are within the limit under the contract.

The LPT agreement with Fitzwilliam is on a Funds withheld basis. StarStone has established a segregated investment account to hold the securities in relation to the LPT. The LPT investments are shown as part of investments in the consolidated balance sheet and have a fair value as at December 31, 2015 of $172.0 million (2014:$277.5 million). The Company has an additional balance due from Fitzwilliam of $66.0 million (2014: $nil). In addition, Enstar and Trident guaranteed the payment obligations of Fitzwilliam up to the full aggregate reinsurance limit.

Retroactive reinsurance benefit

Year ended

December 31,

2015

Year ended

December 31,

2014

As adjusted

$m $m

Opening balance 45.3 0.0

Retroactive reinsurance benefi t 44.2 73.0

Amorti sed to income s tatement (44.6) (27.7)

Movement in losses in the year (0.4) 45.3

Clos ing balance 44.9 45.3

Page|32



USD in millions

7. GOODWILL AND INTANGIBLE ASSETS The following table shows an analysis of goodwill and other intangible assets as at December 31, 2015.

In 2009 the Company acquired Praetorian Insurance and recorded a total of $11.8 million of intangible assets at the acquisition date. The acquired assets consist of insurance licenses which are deemed to have an indefinite life. Also in 2009, the Company amalgamated with Sideris Re Holdings Limited and Sideris Insurance Bermuda Limited. The intangible

asset acquired consists of syndicate capacity which represents the authorization to write insurance and reinsurance business into the

Lloyd’s of London market. Following the reinsurance to close of Syndicate 2243 the intangible asset has been written down to zero

in 2015, with the $0.2 million expense reported in operating and administration expenses.

In 2010, the Company acquired Glacier Insurance and the Direct and Facultative book of Glacier Reinsurance and recorded $30.4

million of Goodwill, $0.5 million of indefinite lived intangible asset related to the cost to establish a European subsidiary, $30.9

million related to the carrying value of in‐force business acquired (fully amortized by year end 2012), and $5.0 million of customer

and broker relationships. During 2012 the Company reassessed the nature of the customer and broker relationships and determined

that these had a ten year life instead of an indefinite life.

Also in 2010, the Company acquired StarStone National and recorded a total $8.1 million of intangible assets at the acquisition date.

The acquired assets consist of insurance licenses which are deemed to have an indefinite life. During 2012, the Company recorded $24.6 million of syndicate capacity as a result of the acquisition of SCC1. The intangible asset

acquired consists of syndicate capacity which represents the authorization to write insurance and reinsurance business into the

Lloyd’s of London market. Syndicate capacity has an indefinite useful life. The December 31, 2013 carrying value of in‐force business

contracts was $0.6 million which has been fully amortized in 2014.

Any costs in relation to renewing or extending the term of recognized intangible assets are expensed in the period they are incurred.

Total

$m $m $m $m $m $m $m $m

Balance as at

December 31, 2013, as adjusted 30.4 19.9 24.8 0.5 0.6 3.3 15.2 94.7

Amortizations ‐ ‐ ‐ ‐ (0.6) (0.5) (5.5) (6.6)

Ba lance as at

December 31, 2014, as adjusted 30.4 19.9 24.8 0.5 ‐ 2.8 9.7 88.1

Amortizations ‐ ‐ ‐ ‐ ‐ (0.6) (3.2) (3.8)

Impairment ‐ ‐ (0.2) ‐ ‐ ‐ ‐ (0.2)

Ba lance as at December 31, 2015 30.4 19.9 24.6 0.5 ‐ 2.2 6.5 84.1

Software

development

costs Goodwill

Insurance

licenses

Syndicate

capacity

European

subsidiary

acquired

Value of

in‐force

business

Customer &

broker

relationships

Page|33



USD in millions

8. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Reserves for losses and loss adjustment expenses (“LAE”) are established by management based on the estimated ultimate cost of

settling the claim and include provisions for both reported claims and estimates relating to IBNR. The Group uses statistical and

actuarial methods to estimate ultimate expected losses and loss adjustment expenses. The period of time from the occurrence of a

loss, the reporting of a loss and the settlement of the liability may be several months or years. During this period, additional facts

and trends may arise and as these factors become apparent, the loss reserves are adjusted as required.

The following table represents a reconciliation of beginning and ending consolidated losses and loss adjustment expense reserves.

1Net losses and LAE of $301.6 million (2014: $287.5 million) exclude the movement in deferred gain of $(0.4) million (2014: $45.3 million) (see note 6).


2015 2014

As adjusted

$m $m

Gross loss and LAE at beginning of year 1,196.7 1,180.5

Reinsurance recoverable on unpaid losses (668.2) (386.2)

Net loss and LAE at beginning of year 528.5 794.3

Net effects of foreign exchange rate (14.7) 2.1

Reinsurance to close of s2243 and s1301 (64.1) ‐

Loss portfol io trans fer to Fitzwi l l iam ‐ (359.7)

Provision for net losses and LAE for claims incurred:

Current year 337.4 295.7

Prior periods (35.8) (8.2)

Total provis ion1 301.6 287.5

Net losses paid and LAE payments for claims incurred:

Current year (66.1) (49.5)

Prior periods (88.6) (146.2)

Total paid (154.8) (195.7)

Net unpaid losses and LAE reserves at end of the year 596.5 528.5

Reinsurance recoverable on unpaid losses at end of the year 515.1 668.2

Gross loss and LAE reserves at end of the year 1,111.6 1,196.7

Page|34



USD in millions

8. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (continued)

For the year ended December 31, 2015, the Company recorded an overall net increase in ultimate losses and loss adjustment expense liabilities of $301.6 million. The Company recorded a net favorable prior period reserve development of $35.8 million primarily due to construction, excess casualty and terrorism lines of business. A $337.4 million increase in net ultimate losses and loss adjustment expense liabilities for the current period reflected provision for the year at expected loss ratios and strengthening across a number of lines, particularly airlines. For the year ended December 31, 2014, the Company recorded an overall net increase in ultimate losses and loss adjustment expense liabilities of $287.5 million. The Company recorded a net favorable prior period reserve development of $8.2 million due to claims improvement and reserve releases, largely related to our marine and non‐marine property lines of business. A $295.7 million increase in net ultimate losses and loss adjustment expense liabilities for the current period was recorded based on expected loss ratios on current period earned premium and loss development during the year ended December 31, 2014, including additional net losses incurred of $10.2 million in the aviation and space line. 9. INCOME TAXES Income tax is comprised of current and deferred tax for the years ended December 31, 2015 and 2014 as follows:

The Group provides for income taxes based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. FIN 48 requirements as incorporated in ASC 740‐10 have not had a material impact on the Group’s results or financial condition. The

Company had no unrecognized tax benefits relating to uncertain tax positions as at December 31, 2015 and 2014.

During the years ended December 31, 2015 and 2014, the Company did not incur or accrue interest and penalties in respect of tax

liabilities.

StarStone Bermuda is incorporated under the laws of Bermuda and is therefore subject to Bermuda law with respect to taxation.

Under current law, the company is not taxed on any Bermuda income or capital gains taxes and has received an undertaking from

the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, it will be exempt

from those taxes until 2035.



2015 2014

As adjusted

$m $m

Current 2.4 7.7

Deferred (8.3) (6.3)

Income tax (benefi t)/expense (5.9) 1.4

Page|35



USD in millions

9. INCOME TAXES (continued)

The Company has subsidiaries operating in the United Kingdom, the United States, Brazil, Liechtenstein and India that are subject to

the tax laws of those countries. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Our US

subsidiaries are engaged in business in the United States and are therefore subject to US corporate tax. The tax rates applicable in

our main subsidiaries are 20.25% in the United Kingdom, 33.25% in the United States and 12.5% in Liechtenstein. The UK rate of

corporation tax was decreased to 20% effective 1 April 2015.

Various UK rates of corporation tax impact the current and prior periods and the valuation of temporary differences. A rate of 23%

applied from April 1, 2013; 21% from April 1, 2014; and 20% from April 1, 2015. A composite rate of 20.25% has been used in

respect of the year ended 31 December 2015 (2014: 21.5%). Further reductions in the UK corporation tax rate had been enacted

prior to December 31, 2015, being rates of 19% from April 1, 2017 and 18% from April 1, 2020. The valuation of closing deferred tax

assets and liabilities has taken into account the enacted rates of corporation tax as at the balance sheet date.

The expected tax provision has been calculated using the pre‐tax loss multiplied by the applicable enacted statutory tax rate. The

reconciliation between the provision for income taxes and the expected tax at the weighted average rate is provided below:



2015 2014

As adjusted

Income Tax Reconciliation $m $m

3.3 (1.8)

Current tax ‐ prior year adjustment (2.9) 4.8

Deferred tax ‐ prior year adjustment 3.1 4.5

Deferred tax movement 1.1 ‐

Effect of change in tax rates 0.1 0.6

0.2 (0.3)

Payment for group rel ief ‐ (0.9)

Tax Bas is Balance sheet prior year adjustment bas is 1.8 ‐

Change in valuation a l lowance (12.6) (5.5)

Tota l income tax (benefi t)/expense (5.9) 1.4

Expected tax provis ion at weighted average loca l rates

Disa l lowed expenses and non‐taxable income

Page|36



USD in millions

9. INCOME TAXES (continued)

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities are as follows:

The deferred tax asset primarily represents the corporate income tax losses incurred in the United Kingdom, Liechtenstein and the

United States which are available to be carried forward for application against future income and the effect of temporary differences

between the value of assets and liabilities for financial statement purposes and such values as measured by the appropriate tax laws

and regulations. In assessing whether deferred tax assets can be realized, the Group considers the requirements of ASC 740 on

whether, based on the weight of available evidence, it is more likely than not that part, or all, of the deferred tax asset will not be

realized. The expiration dates for losses to be carried forward differ in the three main jurisdictions: there is no time limit in the

United Kingdom or Liechtenstein; in the United States losses may be carried forward up to 20 years. In these tax jurisdictions, the

company’s subsidiaries are no longer subject to tax examinations for the years 2011 and prior in the United Kingdom, 2012 and prior

in Liechtenstein and 2011 and prior in the United States subject to net operating loss utilization. Upon evaluation of the relevant

factors, management considers that a valuation allowance of $57.5 million (2014: $70.6 million) should be carried against the

deferred tax asset as at December 31, 2015.

As at As at


2015 2014

As adjusted

$m $m

Deferred tax assets and liabilities

Losses ava i lable to carry forward 43.6 45.1

Decelerated capi ta l a l lowances 2.3 2.9

Other timing differences 23.3 24.4

Total gross deferred tax assets 69.2 72.4

Less va luation a l lowance (57.5) (70.6)

Net deferred tax assets and liabilities 11.7 1.8

The net balance cons is ts of:

Deferred tax assets 16.8 9.2

Deferred tax l i abi l i ties (5.1) (7.4)

11.7 1.8

Page|37



USD in millions

10. CAPITAL STRUCTURE The Company’s authorized and issued common share capital as at December 31, 2015 and 2014 is set out below:

On 29 December 2015 the company merged with its immediate holding company, StarStone Insurance Holdings Limited (“SIHL”,

previously named Torus Insurance Holdings Limited). The newly merged entity is named StarStone Insurance Bermuda Limited.

Under the pooling of interest method, the financial statements have been presented as if the merger has been effective from 1

January 2014. The adjustments to additional paid in capital and retained earnings are set out on page 6.

11. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS As a holding company, StarStone Insurance Bermuda Limited relies on dividends and other distributions from its insurance

subsidiaries to provide cash flow to meet ongoing cash requirements, including any future debt service payments and other

expenses, and to pay dividends, if any, to its shareholders. The ability of the Insurance Subsidiaries to pay dividends or other

distributions is subject to the laws and regulations applicable to each jurisdiction, as well as the Insurance Subsidiaries’ need to

maintain capital requirements adequate to maintain their insurance and reinsurance operations and their financial strength ratings

issued by independent rating agencies.

Bermuda

StarStone Bermuda is registered as a Class 4 insurer under The Insurance Act 1978, amendments thereto and related regulations

(the “Act”). Under the Act, StarStone Bermuda is required to prepare Statutory Financial Statements and to file a Statutory Financial

Return. The Act also requires StarStone Bermuda to meet certain minimum capital and surplus requirements. To satisfy these

requirements, StarStone Bermuda was required to maintain a minimum level of statutory capital and surplus of $184.6 million at

December 31, 2015 (2014: $196.5 million), which was met. Statutory capital and surplus as reported under the Act is different from

shareholder’s equity as determined in conformity with US GAAP due to certain items, such as deferred acquisition costs, that are

capitalized under US GAAP but expensed under the Act. StarStone Bermuda is also required to maintain a minimum liquidity ratio

under the Act, which was met for the periods ended December 31, 2015 and 2014.

Effective December 31, 2008, the Bermuda Monetary Authority (“BMA”) introduced a risk based capital model, the Bermuda

Statutory Capital Requirement ("BSCR") as a tool to measure risk and determine an enhanced capital requirement and target capital

level (defined as 120% of the enhanced capital requirement “ECR”) for Class 4 insurers. While the required statutory capital and

surplus has increased under the BSCR, StarStone Bermuda has capital and surplus in excess of the target capital level.

StarStone Bermuda is prohibited from declaring or paying a dividend if its statutory capital is less than its ECR, or if it is in breach of

its solvency margin or minimum liquidity ratio, or if the declaration or payment of such dividend would cause subsequent breach.

As at December 31, 2015 As at December 31, 2014

As adjusted As adjusted

Number $m Number $m

Authorized share capital

Common Shares $1.0 per share 1,000,000.0 1.0 1,000,000.0 1.0

Issued share capital

Is sued common shares of $1.0 per share 1,000,000.0 1.0 1,000,000.0 1.0

Additional paid in capital 1,086.1 1,086.1

Page|38



USD in millions

11. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS (continued)

Bermuda (continued)

Further, StarStone Bermuda shall not pay dividends in any year which would exceed 25% of its prior year statutory capital and

surplus or reduce its prior year statutory capital by 15% or more, without the prior notification to, and in certain cases the approval

of, the BMA. In addition, The Bermuda Companies Act 1981 limits StarStone Bermuda's ability to pay dividends and distributions to

shareholders if there are reasonable grounds for believing that StarStone Bermuda would be unable to pay its liabilities as they

become due or if the realisable value of its assets would be less than the aggregate of its liabilities, issued share capital and

additional paid‐in capital.

United States

As defined by the regulations of the state of Delaware, the maximum amount of dividends that can be paid by StarStone National

and StarStone Specialty to shareholders, without prior approval of the insurance commissioner, is subject to certain restrictions.

Dividends are not considered to be extraordinary and may be paid out of earned surplus without prior approval if during the

preceding twelve month period the dividends declared and paid do not exceed the greater of (1) 10% of surplus as regards

policyholders for the prior year or (2) prior year’s net income excluding realized capital gains.

United Kingdom

The Group’s UK based insurance subsidiary, StarStone UK, is regulated by the U.K. FCA and PRA. StarStone UK is required to

maintain adequate financial resources and to exceed the minimum capital resources requirement. The Company exceeded the

required minimum statutory capital by $140.1 million as of December 31, 2015 (2014: $110.4 million). The U.K.’s rules require

StarStone UK to obtain regulatory approval from the FCA and PRA for any proposed or actual payment of a dividend.

Liechtenstein

The Group’s European insurance subsidiary StarStone Europe is based in Liechtenstein and is regulated by the Financial Market

Authority Liechtenstein. Under the Liechtenstein Insurance Regulations, StarStone Europe is required to meet certain minimum

capital and surplus requirements. To satisfy these requirements, the company was required to maintain a minimum level of

statutory capital and surplus of $17.7 million at December 31, 2015 which was met (2014: $18.2 million).

Page|39



USD in millions

11. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS (continued)

The actual and required statutory capital and surplus for the principal operating subsidiaries of the Company as at December 31,

2015 and 2014 is:

The Company’s ability to pay dividends is potentially dependent on the ability of its subsidiaries to pay dividends.

12. RETIREMENT PLANS The Company operates defined contribution retirement plans for the majority of its employees at varying rates of their salaries,

up to a maximum of 20%. Total contributions to the retirement plan were $3.4 million (2014: $4.2 million).

13. SHARE BASED PAYMENTS The company participates in three schemes through its ultimate parent company:

a long‐term incentive plan (“LTIP”)

a cash‐settled stock appreciation rights award (“SARs”) and

the Enstar Group Limited Employee Share Purchase Plan (“ESPP”).

Details of these schemes are provided below.

The total charge recognized for the year for all share‐based payment arrangements is $4.1 million (2014 ‐ $22.4 million), with a corresponding credit to equity for the equity‐settled awards of $nil (2014 ‐ $18.5 million).

13.1 Share based compensation schemes operated by the ultimate holding company Enstar Group Limited

LTIP

The ultimate parent undertaking, Enstar Group Limited (“Enstar”), has granted a Restricted Stock Award to certain of the Company’s senior employees. These restricted shares are scheduled to vest in three equal installments, on each of March 31, 2015, 2016 and 2017. The shares will vest based on service conditions only. A share‐based payment charge of $2.2 million (2014: $0.7 million) has been recognized in the profit and loss account during the year in relation to the above scheme, being the proportionate cost relating to the 2015 service period of the restricted shares that will vest in future. Enstar recharged the company $2.2 million for these shares, accordingly this amount has been charged to the profit and loss account.

US Bermuda Europe UK

Required Statutory Capita l and Surplus 28.0 184.6 17.7 26.8

Actua l Statutory Capi ta l and Surplus 206.1 576.9 38.0 166.9

US Bermuda Europe UK

Required Statutory Capita l and Surplus 26.2 196.5 18.2 26.9

Actua l Statutory Capi ta l and Surplus 166.7 654.6 38.2 137.3

Year ended December 31, 2015

Year ended December 31, 2014, as adjusted

Page|40



USD in millions

13. SHARE BASED PAYMENTS (continued)

13.1 Share based compensation schemes operated by the ultimate holding company Enstar Group Limited (continued)

LTIP (continued)

The following disclosures are given in respect of share awards activity during the year.

Note: The vesting of shares in 2015, and in subsequent years, is dependent on the recipient being employed by the Company (or a subsidiary) on the respective vesting dates. There are no performance criteria attached to the grant of the above shares. The unrecognized compensation cost related to the non‐vested share awards as at December 31, 2015 was $3.5 million. This cost is expected to be recognized over the next 1.91 years. SARs Enstar has also granted cash‐settled SARs to certain employees. SARs give the holder the right, upon exercise, to receive in cash the difference between the market price per share of Enstar’s ordinary shares at the time of exercise and the exercise price of the SARs. The exercise price of the SARs is equal to the market price of Enstar’s ordinary shares on the date of the grant. Vested SARs are exercisable for periods not to exceed 10 years from the date of grant. The Company has recorded a share‐based payment charge of $1.9 million (2014: $2.4 million) for the SARs based on the estimated fair value on the date of grant using the Black‐Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, expected term, expected dividend yield and risk‐free interest rate. SARs are liability‐classified awards for which compensation expense and the liability are re‐measured using the then‐current Black‐Scholes assumptions at each reporting date based upon the portion of the requisite service period rendered. The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black‐Scholes valuation

model as at 31 December 2015.

Number of

shares

Weighted

Average

Share Price of

Award

Non‐vested at January 1, 2015 15,675 $136.16

Granted 29,951 $148.42

Vested (5,465) $136.16

Forfei ted (246) $136.16

Non‐vested at December 31, 2015 39,915 $145.47

As at 31

December

2015

As at 31

December

2014

As adjusted

Weighted average fa i r va lue per SAR $37.80 $48.33

Weighted average volati l i ty 19.80 21.30

Weighted average ri sk‐free interest rate 1.71% 0.82%

Dividend yield Ni l Ni l

Page|41



USD in millions


13.1 Share based compensation schemes operated by the ultimate holding company Enstar Group Limited (Continued)

SARs (continued) The following table summarizes the SARs activity.

The aggregate intrinsic value is calculated as the pre‐tax difference between the exercise price of the underlying share awards and the closing price per share of Enstar’s ordinary shares of $150.04 on 31 December 2015. The unrecognized compensation cost related to the share awards as at December 31, 2015 was $3.5 million. This cost is expected to be recognized over the next 1.41 years. 13.1 Share based compensation schemes operated by the ultimate holding company Enstar Group Limited (Continued)

ESPP In addition to the above share awards all employees are entitled to participate in the Enstar Group Limited Employee Share Purchase Plan (“ESPP”). Under the rules of the ESPP employees are entitled to purchase shares in the ultimate parent company, via payroll deductions, at a 15% discount to their quoted value. Compensation costs of less than $0.1 million (2014: $0.1 million) have been charged to reflect the discount associated with shares purchased in the year. Full disclosure of all of the above share awards is published in the financial statements of the ultimate parent undertaking, Enstar Group Limited. 13.2 Share based compensation schemes operated by the company during 2014

In addition to participating in the Enstar schemes above, the company used to operate the following schemes, which were closed

during 2014.

JOE Awards. Under the JOE plan certain employees were offered the opportunity to acquire an interest in B Ordinary shares of

StarStone Insurance Bermuda Limited. The shares were jointly owned with the Company’s employee benefit trust. The trustee was

entitled to all of the value up to the strike price and the employee was entitled to any further appreciation in value. The options

contained service conditions and vested on April 1, 2013 and April 1, 2014. The options included accelerated vesting provisions in the

event of a change in control or listing. On April 1, 2014, following the purchase of StarStone by the new parent companies, the

remaining 400,000 outstanding shares under this scheme vested and employees received $5.47 per award, in place of B Ordinary

shares. The scheme is now closed.

Stock options. The Company had also established a share option plan under which certain employees were granted options to

acquire Class B ordinary shares of the Company. The vesting conditions of the options issued under this plan are the same as those

for the awards issued under the JOE.

There were no compensation costs charged in the twelve months ended December 31, 2014. Upon change of control per note 1,

these options were cancelled.

Number of SARs

Weighted

Average Exercise

Price of SARs

Weighted

Average

Remaining

Contractual Term

(in years)

Aggregate

Intrinsic Value

Balance at January 1, 2015 232,935 $136.39

Granted 15,000 $144.90

Exerci sed (26,000) 136.16

Forfei ted (19,240) 136.16

Balance at December 31, 2015 202,695 $137.07 4.86 $2.6 million

Page|42



USD in millions


13.2 Share based compensation schemes operated by the company during 2014 (continued)

The Company had also issued RSU’s to employees. Certain of the RSU’s granted vested based on service and performance conditions.

The remaining RSU’s vested based on service conditions only.

Compensation cost in respect of RSU’s charged to income was $19.3 million (including employer taxes) for the year ended December

31, 2014. This reflects compensation for all the outstanding RSU’s, the majority of which vested upon change of control on April 1,

2014 with a small number vesting during the final months of 2014 upon completion of the requisite service periods. $18.5 million

(excluding employer taxes) was credited to equity.

Under the terms of the purchase agreement with Enstar, the awards were settled in cash ($5.47 each) rather than shares.

14. COMMITMENTS AND CONTINGENCIES 14.1 Restricted assets

The Group is required to maintain investment assets in trust funds with various regulatory authorities to support its insurance and

reinsurance operations. These funds on deposit are available to settle insurance and reinsurance liabilities. These requirements are

as specified in the statutory regulations of the individual jurisdictions. The level of restricted assets excluding Funds at Lloyd’s held by

the Group as at December 31, 2015 was $895.4 million (2014: $426.3 million).

14.2 Operating leases

The company rents space for its offices. Future minimum rental commitments under existing operating leases are:

14.3 Concentrations of risk Areas where significant concentration of risk may exist include investments, reinsurance recoverable and cash and cash equivalent

balances. The cash balances and investment portfolio are managed following prudent standards of diversification. Specific provisions

limit the allowable holdings of a single institution issue and issuers. Similar principles are followed for the purchase of reinsurance.

The Group believes that there are no significant concentrations of credit risk associated with its investments or its reinsurers.

14.4 Banking Facilities In July 2009, StarStone Bermuda entered into a multi‐currency revolving Letter of Credit facility with Barclays Bank Plc. to be applied

in the issuance of Letters of Credit for the company’s reinsurance business. The commitment under the facility is for $45.0 million

(2014: $75.0 million) and as at the end of the year, Letters of Credit to the value of $40.3 million (2014: $41.2 million) have been

issued.

This facility is collateralized by eligible assets of the company in the form of cash and investments held under a custodian trust

account.

The terms of the facility require that certain financial covenants be met through the filing of compliance certificates.

As at December 31, 2015 2016 2017 2018 2019 2020 Total

Operating lease obl igations 6.1 5.7 5.7 3.7 1.4 2.8 25.4

As at December 31, 2014, as adjusted 2015 2016 2017 2018 2019 Total

Operating lease obl igations 5.2 5.4 5.1 5.1 3.0 4.0 27.8

Later Years

Later Years

Page|43



USD in millions

14. COMMITMENTS AND CONTINGENCIES (continued) 14.5 Lloyd’s Syndicates The Company’s Lloyd’s Operations included in the consolidated financial statements represents its participation in Syndicate 1301.

Syndicate 1301’s stamp capacity is GBP £175.0 million ($257.9 million) for the 2015 underwriting year. Syndicate 1301’s stamp

capacity was GBP £180.0 million ($280.0 million) for the 2014 underwriting year. Stamp capacity is a measure of the amount of

premiums a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. The Syndicate

stamp capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate premiums recorded in the Company’s

financial statements are gross of commission. The Company controlled 39.3% of Syndicate 1301’s stamp capacity for the 2015

underwriting year (2014: 78.9%) through its wholly‐owned Lloyd’s corporate member, SCC1.

StarStone Bermuda posts cash to Lloyd’s of London to support the Company’s participation in Syndicate 1301 and Syndicate 2243’s

stamp capacity.

At December 31, 2015, StarStone Bermuda posted investments with a fair value totaling $177.3 million (2014: $214.4 million SCC1

and SCC) with Lloyd’s of London to support its capital requirements with respect to SCC1.

If the Syndicates increase stamp capacity and the Company participates in the additional stamp capacity, or if Lloyd’s changes the

capital requirements, the Company may be required to supply additional cash collateral acceptable to Lloyd’s. If the Company is

unwilling or unable to provide additional acceptable collateral, the Company will be required to reduce its participation in the stamp

capacity.

15. EVENTS SINCE DECEMBER 31, 2015 TO THE APPROVAL DATE OF THE ACCOUNTS ON MARCH 30, 2016

On February 26, 2016 the immediate holding company of StarStone Insurance Bermuda Limited, Bayshore Holdings Limited, changed

its name to StarStone Specialty Holdings Limited.

StarStone Insurance Bermuda Limited 2 Church Street Hamilton, HM 11 Bermuda Telephone: +1 441 295 7475

StarStone.com

KPMG Audit Limited

Crown House

4 Par-la-Ville Road

Hamilton HM 08 Bermuda

Mailing Address:

P.O. Box HM 906

Hamilton HM DX Bermuda

Telephone +1 441 295 5063

Fax +1 441 295 8280

Internet www.kpmg.bm

ABCD

© 2016 KPMG Audit Limited, a Bermuda limited liability company and a member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved.

Independent Auditor’s Report

The Board of Directors

StarStone Insurance Bermuda Limited

We have audited the accompanying consolidated financial statements of StarStone Insurance Bermuda

Limited (previously named Torus Insurance (Bermuda) Limited) and its subsidiaries, which comprise the

consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of

operations and comprehensive income, changes in shareholders’ equity, and cash flows for the years then

ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial

statements in accordance with U.S. generally accepted accounting principles; this includes the design,

implementation, and maintenance of internal control relevant to the preparation and fair presentation of

consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of

America. Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the

consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the

assessment of the risks of material misstatement of the consolidated financial statements, whether due to

fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's

preparation and fair presentation of the consolidated financial statements in order to design audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also

includes evaluating the appropriateness of accounting policies used and the reasonableness of significant

accounting estimates made by management, as well as evaluating the overall presentation of the

consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our

audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly in all material respects,

the financial position of StarStone Insurance Bermuda Limited and its subsidiaries as of December 31, 2015

and 2014, and the results of their operations and their cash flows for the years then ended in accordance

with U.S. generally accepted accounting principles.

Chartered Professional Accountants

Hamilton, Bermuda

March 30, 2016

http://www.kpmg.bm/

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