Ariel Indemnity Limited Audited Condensed General Purpose Financial Statements December 31, 2016 (U.S. dollars)
Table of Contents Report of Independent Auditors... 1-2 Condensed Financial Statements Condensed Balance Sheets... 3-5 Condensed Statements of Income... 6-7 Condensed Statements of Capital and Surplus... 8 Notes to the Condensed General Purpose Financial Statements... 9-19
Ernst & Young Ltd. 3 Bermudiana Road Hamilton HM 08, Bermuda P.O. Box 463 Hamilton HM BX, Bermuda Tel: +1 441 295 7000 Fax: +1 441 295 5193 ey.com Independent Auditors Report The Board of Directors Ariel Indemnity Limited We have audited the accompanying condensed financial statements of Ariel Indemnity Limited, which comprise the condensed balance sheet as of December 31, 2016, and the related condensed statement of income and condensed statement of capital and surplus for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Condensed Financial Statements Management is responsible for the preparation and fair presentation of the condensed financial statements based on the financial reporting provisions of The Insurance Act 1978, amendments thereto and the Insurance Account Rules 2016 with respect to Condensed General Purpose Financial Statements (the Legislation ). Management is also responsible for the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these condensed financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the condensed financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the condensed financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the condensed financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the condensed 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 Company'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 condensed financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 A member firm of Ernst & Young Global Limited
Basis for Adverse Opinion on U.S. generally accepted accounting principles As described in Note 3 to the condensed general purpose financial statements, the condensed general purpose financial statements are prepared by the Company based on the financial reporting provisions of the Legislation, which is a basis of accounting other than U.S. generally accepted accounting principles. The effects on the condensed financial statements of the variances between the basis of accounting described in Note 3 and U.S. generally accepted accounting principles are material. Adverse Opinion on U.S. generally accepted accounting principles In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion on U.S. generally accepted accounting principles paragraph, the condensed financial statements referred to above do not present fairly, in accordance with U.S. generally accepted accounting principles, the financial position of the Company as of December 31, 2016, or the results of its operations or its cash flows for the year then ended. Opinion on Condensed Financial Statements In our opinion, the condensed financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016, and the results of its operations for the year then ended, in accordance with the financial reporting provisions of the Legislation described in Note 3. April 27, 2017 Chartered Professional Accountants 2 A member firm of Ernst & Young Global Limited
CONDENSED BALANCE SHEET Ariel Indemnity Limited As at December 31, 2016 expressed in ['000s] United States Dollars LINE No. 2016 2015 1. CASH AND CASH EQUIVALENTS 28,057 2. QUOTED INVESTMENTS: (a) Bonds and Debentures i. Held to maturity ii. Other 60,767 (b) Total Bonds and Debentures 60,767 - (c) Equities i. Common stocks ii. Preferred stocks iii. Mutual funds (d) Total equities - - (e) Other quoted investments (f) Total quoted investments 60,767-3. UNQUOTED INVESTMENTS: (a) Bonds and Debentures i. Held to maturity ii. Other (b) Total Bonds and Debentures - - (c) Equities i. Common stocks ii. Preferred stocks iii. Mutual funds (d) Total equities - - (e) Other unquoted investments (f) Total unquoted investments - - 4. INVESTMENTS IN AND ADVANCES TO AFFILIATES (a) Unregulated entities that conduct ancillary services (b) Unregulated non-financial operating entities (c) Unregulated financial operating entities (d) Regulated non-insurance financial operating entities (e) Regulated insurance financial operating entities (f) Total investments in affiliates - - (g) Advances to affiliates 12,511 (h) Total investments in and advances to affiliates 12,511-5. INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE: (a) First liens (b) Other than first liens (c) Total investments in mortgage loans on real estate - - 6. POLICY LOANS 7. REAL ESTATE: (a) Occupied by the company (less encumbrances) (b) Other properties (less encumbrances) (c) Total real estate - - 8. COLLATERAL LOANS 9. INVESTMENT INCOME DUE AND ACCRUED 51 10. ACCOUNTS AND PREMIUMS RECEIVABLE: (a) In course of collection 7,190 (b) Deferred - not yet due (c) Receivables from retrocessional contracts (d) Total accounts and premiums receivable 7,190-11. REINSURANCE BALANCES RECEIVABLE: (a) Foreign affiliates (b) Domestic affiliates (c) Pools & associations (d) All other insurers (e) Total reinsurance balance receivable - - 12. FUNDS HELD BY CEDING REINSURERS 1,152 3
CONDENSED BALANCE SHEET Ariel Indemnity Limited As at December 31, 2016 expressed in ['000s] United States Dollars LINE No. 2016 2015 13. SUNDRY ASSETS: (a) Derivative instruments (b) Segregated accounts companies - long-term business - variable annuities (c) Segregated accounts companies - long-term business - other (d) Segregated accounts companies - general business (e) Deposit assets (f) Deferred acquisition costs (g) Net receivables for investments sold (h) Receivables for investments sold 78 (i) Other Sundry Assets (Specify) (j) Other Sundry Assets (Specify) (k) Total sundry assets 78-14. LETTERS OF CREDIT, GUARANTEES AND OTHER INSTRUMENTS (a) Letters of credit (b) Guarantees (c) Other instruments (e) Total letters of credit, guarantees and other instruments - - 15. TOTAL 109,806 - TOTAL INSURANCE RESERVES, OTHER LIABILITIES AND STATUTORY CAPITAL AND SURPLUS 16. UNEARNED PREMIUM RESERVE (a) Gross unearned premium reserves (b) Less: Ceded unearned premium reserve i. Foreign affiliates ii. Domestic affiliates iii. Pools & associations iv. All other insurers (c) Total ceded unearned premium reserve - - (d) Net unearned premium reserve - - 17. LOSS AND LOSS EXPENSE PROVISIONS: (a) Gross loss and loss expense provisions 53,622 (b) Less : Reinsurance recoverable balance i. Foreign affiliates ii. Domestic affiliates iii. Pools & associations iv. All other reinsurers (c) Total reinsurance recoverable balance - - (d) Net loss and loss expense provisions 53,622-18. OTHER GENERAL BUSINESS INSURANCE RESERVES 19. TOTAL GENERAL BUSINESS INSURANCE RESERVES 53,622 - LONG-TERM BUSINESS INSURANCE RESERVES 20. RESERVE FOR REPORTED CLAIMS 21. RESERVE FOR UNREPORTED CLAIMS 22. POLICY RESERVES - LIFE 23. POLICY RESERVES - ACCIDENT AND HEALTH 24. POLICYHOLDERS' FUNDS ON DEPOSIT 25. LIABILITY FOR FUTURE POLICYHOLDERS' DIVIDENDS 26. OTHER LONG-TERM BUSINESS INSURANCE RESERVES 27. TOTAL LONG-TERM BUSINESS INSURANCE RESERVES (a) Total Gross Long-Term Business Insurance Reserves - - (b) Less: Reinsurance recoverable balance on long-term business (i) Foreign Affiliates (ii) Domestic Affiliaties (iii) Pools and Associations (iv) All Other Insurers (c) Total Reinsurance Recoverable Balance - - 4
CONDENSED BALANCE SHEET Ariel Indemnity Limited As at December 31, 2016 expressed in ['000s] United States Dollars LINE No. 2016 2015 (d) Total Net Long-Term Business Insurance Reserves - - OTHER LIABILITIES 28. INSURANCE AND REINSURANCE BALANCES PAYABLE 29. COMMISSIONS, EXPENSES, FEES AND TAXES PAYABLE 30. LOANS AND NOTES PAYABLE 31. (a) INCOME TAXES PAYABLE (b) DEFERRED INCOME TAXES 32. AMOUNTS DUE TO AFFILIATES 2,323 33. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 346 34. FUNDS HELD UNDER REINSURANCE CONTRACTS: 35. DIVIDENDS PAYABLE 36. SUNDRY LIABILITIES: (a) Derivative instruments (b) Segregated accounts companies (c) Deposit liabilities (d) Net payable for investments purchased (e) Other sundry liabilities (specify) (f) Other sundry liabilities (specify) (g) Other sundry liabilities (specify) (h) Total sundry liabilities - - 37. LETTERS OF CREDIT, GUARANTEES AND OTHER INSTRUMENTS: (a) Letters of credit (b) Guarantees (c) Other instruments (d) Total letters of credit, guarantees and other instruments - - 38. TOTAL OTHER LIABILITIES 2,669-39. TOTAL INSURANCE RESERVES AND OTHER LIABILITIES 56,291 - CAPITAL AND SURPLUS 40. TOTAL CAPITAL AND SURPLUS 53,515-41. TOTAL 109,806 - TRUE TRUE - - 5
CONDENSED STATEMENT OF INCOME Ariel Indemnity Limited As at December 31, 2016 expressed in ['000s] United States Dollars LINE No. 2016 2015 GENERAL BUSINESS UNDERWRITING INCOME 1. GROSS PREMIUMS WRITTEN (a) Direct gross premiums written (b) Assumed gross premiums written (4,002) (c) Total gross premiums written (4,002) - 2. REINSURANCE PREMIUMS CEDED 3. NET PREMIUMS WRITTEN (4,002) - 4. INCREASE (DECREASE) IN UNEARNED PREMIUMS 5. NET PREMIUMS EARNED (4,002) - 6. OTHER INSURANCE INCOME 7. TOTAL GENERAL BUSINESS UNDERWRITING INCOME (4,002) - GENERAL BUSINESS UNDERWRITING EXPENSES 8. NET LOSSES INCURRED AND NET LOSS EXPENSES INCURRED (22,151) 9. COMMISSIONS AND BROKERAGE (65) 10. TOTAL GENERAL BUSINESS UNDERWRITING EXPENSES (22,216) - 11. NET UNDERWRITING PROFIT (LOSS) - GENERAL BUSINESS 18,214 - LONG-TERM BUSINESS INCOME 12. GROSS PREMIUMS AND OTHER CONSIDERATIONS: (a) Direct gross premiums and other considerations (b) Assumed gross premiums and other considerations (c) Total gross premiums and other considerations - - 13. PREMIUMS CEDED 14. NET PREMIUMS AND OTHER CONSIDERATIONS: (a) Life (b) Annuities (c) Accident and health (d) Total net premiums and other considerations - - 15. OTHER INSURANCE INCOME 16. TOTAL LONG-TERM BUSINESS INCOME - - LONG-TERM BUSINESS DEDUCTIONS AND EXPENSES 17. CLAIMS - LIFE 18. POLICYHOLDERS' DIVIDENDS 19. SURRENDERS 20. MATURITIES 21. ANNUITIES 22. ACCIDENT AND HEALTH BENEFITS 23. COMMISSIONS 24. OTHER 25. TOTAL LONG-TERM BUSINESS DEDUCTIONS AND EXPENSES - - 26. INCREASE (DECREASE) IN POLICY RESERVES (ACTUARIAL LIABILITIES): (a) Life (b) Annuities 6
CONDENSED STATEMENT OF INCOME Ariel Indemnity Limited As at December 31, 2016 expressed in ['000s] United States Dollars LINE No. 2016 2015 (c) Accident and health (d) Total increase (decrease) in policy reserves - - 27. TOTAL LONG-TERM BUSINESS EXPENSES - - 28. NET UNDERWRITING PROFIT (LOSS) - LONG-TERM BUSINESS - - 29. COMBINED NET UNDERWRITING RESULTS BEFORE THE UNDERNOTED ITEMS 18,214 - UNDERNOTED ITEMS 30. COMBINED OPERATING EXPENSE (a) General and administration 2,096 (b) Personnel cost 837 (c) Other (d) Total combined operating expenses 2,933-31. COMBINED INVESTMENT INCOME - NET 1,438 32. COMBINED OTHER INCOME (DEDUCTIONS) 167 33. COMBINED INCOME BEFORE TAXES 16,886-34. COMBINED INCOME TAXES (IF APPLICABLE): (a) Current 13 (b) Deferred (c) Total 13-35. COMBINED INCOME BEFORE REALIZED GAINS (LOSSES) 16,873-36. COMBINED REALIZED GAINS (LOSSES) 226 37. COMBINED INTEREST CHARGES 38. NET INCOME 17,099-7
CONDENSED STATEMENT OF CAPITAL AND SURPLUS Ariel Indemnity Limited As at December 31, 2016 expressed in ['000s] United States Dollars LINE No. 2016 2015 1. CAPITAL: (a) Capital Stock (i) Common Shares 120 authorized 120,000 shares of par value $ 1.000 each issued and fully paid 120,000 shares (ii) (A) Preferred shares: authorized value fully paid aggregate liquidation value for 2016 2015 shares of par each issued and shares (B) Preferred shares issued by a subsidiary: authorized shares of par value each issued and fully paid shares aggregate liquidation value for 2016 2015 (iii) Treasury Shares repurchased value shares of par each issued (b) Contributed surplus 49,880 (c) Any other fixed capital (i) Hybrid capital instruments (ii) Guarantees and others (iii) Total any other fixed capital - - (d) Total Capital 50,000-2. SURPLUS: (a) Surplus - Beginning of Year (13,450) (b) Add: Income for the year 17,099 - (c) Less: Dividends paid and payable (d) Add (Deduct) change in unrealized appreciation (depreciation) of investments (134) (e) Add (Deduct) change in any other surplus (f) Surplus - End of Year 3,515-3. MINORITY INTEREST 4. TOTAL CAPITAL AND SURPLUS 53,515-8
1. General Matters to be set forth in a General Note to the Condensed Financial Statements Ariel Indemnity Limited ( the Company") is a Bermuda exempted limited liability company, incorporated in Bermuda on January 30, 2012, and registered as a Class 3A insurer under The Insurance Act 1978, amendments thereto and related regulations (the "Insurance Act"). The Company is a wholly-owned subsidiary of Arrow Corporate Member Holdings LLC ( ACMH ), a Delaware limited liability company, which is directly owned by Maybrooke Holdings S.A. ( Maybrooke ), a societe anonyme organised under the laws of the Grand Duchy of Luxembourg. Maybrooke is a joint venture which is 50% owned by BTG Pactual Holding Internacional SA ( BTG Pactual Internacional ) and 50% owned by Stanhope Investments. BTG Pactual Internacional is a wholly-owned subsidiary of Banco BTG Pactual SA, a bank headquartered in Brazil and listed on the BM&FBOVESPA. Stanhope Investments is wholly-owned by the Abu Dhabi Investment Council. On February 3 2015, BTG Pactual Internacional, entered into a stock purchase agreement with Maybrooke, whereby BTG Pactual Internacional agreed to sell and Maybrooke agreed to purchase all the direct and indirect subsidiaries of Ariel Re (Holdings) Limited ( Ariel Holdings, an indirect parent of the Company) acquired from Global Atlantic Financial Group Limited ( GAFG ), a company that was organized under the laws of the Cayman Islands and continued into Bermuda and Ariel Holdings (collectively the Sellers ) on February 2, 2015. On July 8, 2014 The Sellers entered into a Stock Purchase Agreement with BTG Pactual Internacional, whereby BTG Pactual Internacional agreed to purchase, and the Sellers agreed to sell, all of the direct and indirect subsidiaries of Ariel Holdings including the Company ( the BTG transaction ). The BTG transaction closed on February 2, 2015. On April 30, 2013, The Goldman Sachs Group Inc. (the GS Group ), a Delaware corporation, sold a majority share in its reinsurance business, including the Company, to GAFG. On April 5, 2012, the name of the Company was changed from Arrow Indemnity Limited to Ariel Indemnity Limited. 2. Business underwritten The Company was incorporated for the sole purpose of assuming a portfolio of property and casualty insurance and reinsurance liabilities from Arden Reinsurance Company Ltd. ( Arden ), formerly named Ariel Reinsurance Company Ltd., as part of the GS Group s acquisition of the majority of Arden s underwriting operations in Bermuda on April 1, 2012. Arden is owned by Northshore Holdings Limited, a third party. Effective April 1, 2012, the Company entered into a Loss Portfolio Transfer Contract ( LPT ) with Arden under which the Company assumed, as of April 1, 2012, the majority of Arden s net insurance and reinsurance loss reserves. The LPT provides retroactive reinsurance protection for events which occurred prior to April 1, 2012 and were covered by Arden s underlying insurance and reinsurance contracts. 9
The Company s business assumed from Arden is principally focused on catastrophe exposed property, marine, space and aviation reinsurance business. Catastrophe reinsurance covers unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, volcanic eruptions, fires, freezes, industrial explosions and other man-made or natural disasters. Loss experience associated with catastrophe reinsurance is characterized by infrequent events of high severity. Although catastrophe exposed business constitutes the majority of the business assumed by the Company, Arden also underwrote property and professional liability insurance on a direct basis, which is included in the LPT assumed by the Company. 3. Accounting standards and principles In accordance with Section 17A of the Insurance Act of 1978 and the Insurance Account Rules 2016, the Company has prepared condensed general purpose financial statements. These statements have been presented in accordance with the Insurance Account Rules 2016 and the Company has used US GAAP as a basis for preparing these statements. The Bermuda Monetary Authority has permitted insurers to present the statements without prior year comparatives for the first year. 4. Significant accounting policies a. Use of estimates in financial statements The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While the estimates included in the financial statements reflect the Company s best estimates and assumptions, actual results could differ materially from these estimates. The significant estimates reflected in the Company s financial statements include the reserve for losses and loss adjustment expenses, premium estimates, and the fair value measurement of certain fixed maturities. Estimates and assumptions are periodically reviewed and the effects of revisions are recorded in the financial statements in the periods in which they are determined. b. Valuation of investments The Company accounts for its fixed maturity investments at fair value. Fixed maturities are classified as available-for-sale. Available-for-sale fixed maturities are carried at fair value, with unrealized gains and losses, net of tax, reported in line 2(d) of the condensed statement of capital and surplus. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity or call date, if applicable. Such amortization and accretion is included in net investment income. 10
The Company recognizes Other Than Temporary Impairment ( OTTI ) for securities classified as available-for-sale in accordance with FASB ASC Topic 320, Investments- Debt and Equity Securities. At least quarterly, management reviews impaired securities for OTTI. The Company considers several factors when determining if a security is otherthan-temporarily impaired, including but not limited to: its intent and ability to hold the impaired security until an anticipated recovery in value, the issuer s ability to meet current and future principal and interest obligations for fixed maturity securities, the length and severity of the impairment, the financial condition and near term and long term prospects for the issuer. In making these evaluations, the Company exercises considerable judgment. If the Company intends to sell or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, then the Company recognizes a charge to earnings for the full amount of the impairment (the difference between the amortized cost and fair value of the security). For fixed maturity securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell, the Company separates the impairment into two components: credit loss and non-credit loss. Credit losses are recorded in line 36 on the condensed statement of income and non-credit losses are recorded in line 2(e) on the condensed statement of capital and surplus. The credit loss component is the difference between the security s amortized cost and the present value of its expected future cash flows discounted at the current effective rate. The remaining difference between the security s fair value and the present value of its expected future cash flows is the non-credit loss. For corporate bonds both historical default (by rating) data is used as a proxy for the probability of default, and loss given default (by issuer) projections are applied to the par amount of the bond. Potential losses incurred on structured securities are based on expected loss models rather than incurred loss models. Expected cash flows include assumptions about key systematic risks (e.g. unemployment rates, housing prices) and loan-specific information (e.g. delinquency rates, loan-to-volume ratios). Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third parties, along with assumptions and judgments about the future performance of the underlying collateral. c. Cash and cash equivalents Cash and cash equivalents include cash on hand and highly liquid overnight deposits held in the ordinary course of business. d. Net premiums earned Premiums written and ceded are recorded in accordance with the terms of the underlying policies and contracts of insurance and reinsurance. 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. 11
e. Loss and loss adjustment expense reserves The loss and loss adjustment expense reserve is estimated based upon reports received from ceding companies, supplemented by the Company s estimates of losses for which ceding company reports have not been received and historical company and industry experience for unreported claims. The loss and loss adjustment expense reserve includes estimates of the cost of claims that were reported, but not yet paid, and the cost of claims incurred but not yet reported ( IBNR ). The loss and loss adjustment expense reserve represents management s best estimate at a given point in time and is subject to the effects of trends in loss severity and frequency. The inherent uncertainties of estimating liability for losses are greater for reinsurers than for primary insurers, due to the diversity of development patterns among different types of reinsurance contracts and the necessary reliance on ceding companies for information regarding reported claims. These estimates are reviewed regularly and adjusted as experience develops or new information becomes available. Any such adjustments are accounted for as changes in estimates and reflected in the results of operations in the period in which they are made. It is possible that the ultimate liability may materially differ from such estimates. f. Foreign currency The Company's functional currency is the United States Dollar. Assets and liabilities denominated in non-u.s. currencies are remeasured at rates of exchange prevailing on the date of the condensed balance sheet and revenues and expenses are translated at average rates of exchange for the period. Foreign currency gains or losses on settlement or remeasurement are recognized in income. 5. Premium income see 4(d) Investment income see 4(b) Commission income n/a 6. Foreign exchange - see 4(f) 7. Foreign exchange control conditions n/a 8. Contingencies and commitments n/a 9. Defaults n/a 10. Arrears of dividends n/a 11. Loans to directors and officers n/a 12. Retirement benefits n/a 12
13. Fair value amounts for all quoted and unquoted investments Fair value hierarchy of investments based on the following levels: a) Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities that the reporting entity can access at the measurement date b) Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly c) Level 3: Unobservable inputs As at December 31, 2016 Level 1 Level 2 Level 3 Total (in thousands) Quoted Investments Bonds and Debentures U.S. Treasury securities and U.S. government and agency securities $ 60,767 $ - $ - $ 60,767 Net assets at fair value $ 60,767 $ - $ - $ 60,767 14. Contractual maturity profile The maturity distribution for available-for-sale fixed-maturity securities held provided in the table below. Actual maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Group may have the right to put or sell the obligations back to the issuers. Structured securities are included in the category representing their contractual maturity. As at December 31, 2016 (in thousands) Due in one year or less $ 60,767 Due after one year through five years - Due after five years through ten years - Due after ten years - Total $ 60,767 15. Related part transactions The Company pays administrative service fees to affiliates for services performed on behalf of the Company. The Company has an Administrative Service Agreement with Ariel Re Bda Limited ( ARBL ), an affiliated company. Administrative and performance fees for the period ending December 31, 2016 were $2.3 million. The Company is also liable for expense reimbursements to affiliates for expenses paid on behalf of the Company. 13
16. Subsequent events Pursuant to the Sale and Purchase Agreement, dated as of November 14, 2016, by and among Maybrooke, Stanhope Investments, BTG Pactual Internacional and Argo Group International Holdings, Ltd. (collectively, the "SPA Parties") (the "Sale and Purchase Agreement"), the SPA Parties agreed that the Company would be sold to one or both of BTG Pactual Internacional and Stanhope Investments. On January 31, 2017, ACMH (the Seller), entered into a securities purchase agreement with Bruton Lane Ltd. ( Bruton ), a Bermuda exempted limited liability company ( the Buyer ), whereby ACMH agreed to sell and Bruton agreed to purchase 100% of the shares of the Company. The Company evaluated subsequent events through April 27, 2017, the date the financial statements were issued. 17. Any other information a. Loss Portfolio Transfer In connection with ACMH s acquisition of the Arden operations, the Company entered into a loss portfolio transfer contract with Arden under which the Company assumed, as of April 1, 2012, the majority of Arden s net insurance and reinsurance loss reserves. The loss portfolio contract provides retroactive reinsurance protection for events which occurred prior to April 1, 2012 and were covered by Arden s underlying insurance and reinsurance contracts. The Company received cash and premiums receivable net of acquisition costs as consideration for the liabilities assumed. As required by the loss portfolio transfer contract, the liquid assets are held in trust or collateral accounts for the benefit of Arden however all investment income produced by these assets is fully credited to the Company. b. Income Taxes Pursuant to the BTG transaction described in note 1, the Company ceased to be a controlled foreign corporation under the United States Internal Revenue Code in 2015 and its 953(d) election ceased to apply on January 1, 2016. The Company has received an undertaking from the Government of Bermuda which exempts it from all local income, withholding and capital gains taxes until March 31, 2035. Therefore, no such taxes are accrued in Bermuda. c. Unrealized foreign exchange gains Unrealized foreign exchange gains of $0.4 million relating to loss and loss expense provisions have been recorded in Line 17 of the Condensed Balance Sheet. 14
Matters to be set forth in Notes to the Condensed Statement of Capital and Surplus 1(a) Capital stock Authorized capital stock a. Authorized 120,000 common shares of $1.00 par value each. b. Preference share dividends n/a c. Redemption of preference shares n/a d. Conversion provisions n/a Issued capital stock a. Issued 120,000 common shares of $1.00 par value each. b. Amounts called and unpaid n/a c. Amounts not called n/a Issued capital stock a. Shares repurchased n/a 1(b) Contributed surplus During 2016 the Company did not receive nor return any capital contributions. 2(c) Dividends paid and payable n/a 15
1. Cash and time deposits Matters to be set forth in Notes to the Condensed Balance Sheet Under the LPT agreement, the Company is required to collateralize its reinsurance obligations. At December 31, 2016, $1.0 million of cash, was held in trust or collateral accounts to support these obligations. 2. Quoted investments See general notes to the condensed financial statements, note 3(b) regarding method of valuation of investments. Under the LPT agreement, the Company is required to collateralize its reinsurance obligations. At December 31, 2016, $60.8 million of investments at fair value, were held in trust or collateral accounts to support these obligations. 3. Unquoted investments n/a 4. Investments and advances to affiliates The Company provided Ariel Reinsurance Ltd. ( ARL ), an affiliated company, an advance in the amount of $12.5 million, for cash collateral securing the letter of credit facilities detailed in note 37. In the ordinary course of business, affiliate balances receivable for the period ended December 31, 2016 were $11 thousand. 5. Investments in mortgage loans on real estate n/a 6. Policy loans n/a 7. Real estate n/a 8. Collateral loans n/a 9. Investment income due and accrued Interest income of $51 thousand was accrued for the period ended December 31, 2016. 10. Accounts and premiums receivable Premiums receivable representing accrued reinstatement premiums assumed under the LPT contract were $7.2 million for the period ended December 31, 2016. 11. Reinsurance balances receivable n/a 16
12. Funds held by ceding reinsurers Prefunded claims held by ceding insurers were $1.2 million for the period ended December 31, 2016. 13. Sundry assets Receivables for investments sold represents cash due to the Company for securities sold prior to December 31, 2016, but where the cash has not been received as at December 31, 2016. Receivables for investments sold was held in trust or collateral accounts to support reinsurance obligations 14. Letters of credit, guarantees and other instruments n/a 16. Unearned premiums - see general notes to the condensed financial statements, note 4(d) 17. Loss and loss expense provisions (a) Movement in loss and loss expense provisions: 2016 Gross loss and loss expense provisions at beginning of year 91,546 Less: Reinsurance recoverable at beginning of year 705 Net loss and loss expense provisions at beginning of year 90,841 Net losses incurred and net loss expenses incurred related to: Current year - Prior years (22,151) Total net incurred losses & loss expenses (22,151) Net losses and loss expenses paid or payable related to: Current year - Prior years (14,629) Total losses and loss expenses paid or payable (14,629) Foreign exchange and other (439) Net loss and loss expense provisions at end of year 53,622 Add: Reinsurance recoverable at end of year - Gross loss and loss expense provisions at end of year 53,622 (b) Reason for change in net losses and loss expenses for prior years During 2016 the Company experienced net favorable development on prior accident years of $22.2 million due to reductions in various marine and energy and natural catastrophe reserves. Marine and energy losses saw positive development primarily from reserve releases on Deepwater Horizon and SS Rena, while aviation saw positive development on Tam 3054 in 2007 and Air France in 2009. This is partially offset by adverse developments on the Siri Rig of 2009. Adjustments to accrued reinstatement premiums relating to the favorable reserve developments resulted in negative premiums of $4.0 million. 17
(c) Disclosures i. Total restricted assets: 2016 Cash and cash equivalents 1,031 Total quoted investments 60,767 Funds held by ceding reinsurers 1,152 Other assets 12,629 Total encumbered assets 75,579 ii. Unsecured policyholder obligations: 2016 Gross loss and loss expense provisions at end of year 53,622 Plus: Insurance and reinsurance balances payable - Less: Reinsurance recoverable at end of year - Less: Premiums receivable (7,190) Less: Total encumbered assets (75,579) Unsecured policyholder obligations: asset deficit/(excess) (29,147) In addition to the above restricted assets, policyholder obligations are supported by letters of credit. See note 37. 20. Reserves for reported claims - see general notes to the condensed financial statements, note 4(e) 21. Reserves for unreported claims - see general notes to the condensed financial statements, note 4(e) 28. Insurance and reinsurance balances payable n/a 29. Commission, expenses, fees and taxes payable n/a 30. Loans and notes payable n/a 31. Income taxes (a) Income taxes payable n/a (b) Deferred income taxes n/a 32. Amounts due to affiliates Ariel Re Bda Limited ( ARBL ), an affiliated company, provides administrative services in terms of an Administrative Service Agreement. Administrative and performance fees owing for the period ended December 31, 2016 were $2.3 million. The outstanding amounts do not bear interest. Payments are due within 30 days of receipt of invoice. 18
33. Accounts payable and accrued liabilities Accounts payable and accrued liabilities represent accruals of general operating expenses amounting to $0.3 million for the period ended December 31, 2016. 34. Funds held under reinsurance contracts n/a 35. Dividends payable n/a 36. Sundry liabilities n/a 37. Letters of credit, guarantees and other instruments Letters of credit are issued by a certain financial institution on behalf of the Company to serve as collateral for obligations of the Company. At December 31, 2016 letters of credit with an aggregate amount of $12.1 million were outstanding, comprising $11.3 million in support of reinsurance obligations and $0.8 million in support of the Company s 953 (d) election under the United States Internal Revenue Code, which ceased to apply from January 1, 2016. 6. Other insurance income n/a 15. Other insurance income n/a 32. Combined other income (deductions) Matters to be set forth in Notes to the Condensed Statement of Income Other income of $0.2 million represents realized and unrealized foreign exchange gains and losses. 36. Combined realized gains (losses) The realized gains of $0.2 million represent net gains and losses from the disposition of available-for-sale fixed maturity investments. 19