ENDURANCE SPECIALTY HOLDINGS LTD - 10-Q Quarterly Report

Shares Outstanding

Description of Class

as of May 6, 2004

Ordinary Shares – $1.00 par value

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the period ended March 31, 2004, or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-31599

ENDURANCE SPECIALTY HOLDINGS LTD.
(Exact Name of Registrant as Specified in Its Charter)

Bermuda
(State or other jurisdiction
of incorporation or organization)

98-0392908
(I.R.S. Employer Identification No.)

Wellesley House
90 Pitts Bay Road
Pembroke HM 08, Bermuda
(Address of principal executive offices,
including postal code)

Registrant’s Telephone Number, Including Area Code: (441) 278-0400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

INDEX

		Page

Part I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets at March 31, 2004 and December 31, 2003	2
	Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2004 and 2003	3
	Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2004 and 2003	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 4. Controls and Procedures		31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		32
Item 2. Changes in Securities and Use of Proceeds		32
Item 3. Defaults Upon Senior Securities		32
Item 4. Submission of Matters to a Vote of Security Holders		32
Item 5. Other Information		33
Item 6. Exhibits and Reports on Form 8-K		33
SIGNATURES		34

Back to Contents

ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars except share amounts)

		MARCH 31,		DECEMBER 31,
		2004		2003

ASSETS		(UNAUDITED)

Cash and cash equivalents	$	274,001	$	150,923
Fixed maturity investments available for sale, at fair value (amortized cost: $2,657,937 and $2,497,152 at March 31, 2004 and December 31, 2003, respectively)		2,706,914		2,523,309
Premiums receivable, net (includes $432 and $nil from related parties at March 31, 2004 and December 31, 2003, respectively)		781,463		518,539
Deferred acquisition costs		241,960		183,387
Securities lending collateral		30,620		—
Prepaid reinsurance premiums		4,643		2,335
Accrued investment income		23,515		20,434
Intangible assets		31,463		32,407
Other assets		32,938		27,630

Total assets	$	4,127,517	$	3,458,964


LIABILITIES

Reserve for losses and loss expenses	$	1,019,318	$	833,158
Reserve for unearned premiums		1,129,102		824,685
Reinsurance balances payable		25,324		23,977
Securities lending payable		30,620		—
Bank debt		103,029		103,029
Net payable for investments purchased		24,705		—
Other liabilities		32,316		29,300

Total liabilities		2,364,414		1,814,149


SHAREHOLDERS’ EQUITY

Common shares
Ordinary – 63,943,486 issued and outstanding (2003 – 63,912,000)		63,943		63,912
Additional paid-in capital		1,192,908		1,189,570
Accumulated other comprehensive income		71,699		46,068
Retained earnings		434,553		345,265

Total shareholders’ equity		1,763,103		1,644,815

Total liabilities and shareholders’ equity	$	4,127,517	$	3,458,964

See accompanying notes to unaudited condensed consolidated financial statements.

Back to Contents

ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(In thousands of United States dollars, except share and per share amounts)

			2004			2003

Revenues
	Gross premiums written	$	720,631		$	362,115


	Net premiums written		717,007			360,054
	Change in unearned premiums		(301,181	)		(170,401	)


	Net premiums earned (includes $0.5 million and $0.1 million from related parties in three months ended March 31, 2004 and 2003, respectively)		415,826			189,653
	Net investment income		24,675			14,356
	Net realized gains on sales of investments		5,176			4,404

Total revenues			445,677			208,413

Expenses
	Losses and loss expenses (includes $0.2 million and $nil from related parties in three months ended March 31, 2004 and 2003, respectively)		222,009			104,145
	Acquisition expenses (includes $0.1 million and $nil from related parties in three months ended March 31, 2004 and 2003, respectively)		85,518			34,560
	General and administrative expenses		31,767			19,466
	Amortization of intangibles		944			405
	Net foreign exchange losses (gains)		3,159			(2,506	)
	Interest expense		828			1,207

Total expenses			344,225			157,277

Income before income taxes			101,452			51,136
	Income tax (expense) benefit		(580	)		65

Net income			100,872			51,201

Other comprehensive income (loss)
	Holding gains on investments arising during the period (net of applicable deferred income taxes in 2004 – $1,875 and 2003 – $48)		26,122			3,417
	Foreign currency translation adjustments		4,732			(3,022	)
	Net loss on derivatives designated as cash flow hedge		(47	)		(1,442	)
	Reclassification adjustment for net realized gains included in net income		(5,176	)		(4,404	)

Other comprehensive income (loss)			25,631			(5,451	)

Comprehensive income		$	126,503		$	45,750

Per share data
	Weighted average number of common and common equivalent shares outstanding:
	Basic		64,083,528			58,457,745

	Diluted		68,554,793			59,671,510

	Basic earnings per share	$	1.57		$	0.88

	Diluted earnings per share	$	1.47		$	0.86

See accompanying notes to unaudited condensed consolidated financial statements.

Back to Contents

ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(In thousands of United States dollars)

			2004			2003

Common shares
	Balance, beginning of period	$	63,912		$	55,000
	Issuance of common shares		31			9,600

	Balance, end of period		63,943			64,600


Additional paid-in capital
	Balance, beginning of period		1,189,570			1,009,415
	Issuance of common shares		138			195,744
	Issuance of restricted share units		4,957			3,064
	Settlement of restricted share units		(1,499	)		—
	Public offering costs		(834	)		(3,711	)
	Stock-based compensation expense		576			600

	Balance, end of period		1,192,908			1,205,112


Accumulated other comprehensive income
	Cumulative foreign currency translation adjustments:
	Balance, beginning of period		20,722			3,662
	Foreign currency translation adjustments		4,732			(3,022	)

	Balance, end of period		25,454			640

	Unrealized holding gains on investments:
	Balance, beginning of period		26,230			47,045
	Net unrealized holding gains (losses) arising during the period, net of reclassification adjustment		20,946			(987	)

	Balance, end of period		47,176			46,058

	Accumulated derivative loss on cash flow hedging instruments:
	Balance, beginning of period		(884	)		—
	Net change from current period hedging transactions		(340	)		(1,457	)
	Net derivative loss reclassified to earnings		293			15

	Balance, end of period		(931	)		(1,442	)

	Total accumulated other comprehensive income		71,699			45,256


Retained earnings
	Balance, beginning of period		345,265			102,378
	Net income		100,872			51,201
	Issuance of restricted share units in lieu of dividends		(74	)		—
	Dividends on common shares		(11,510	)		—

	Balance, end of period		434,553			153,579


Total shareholders’ equity		$	1,763,103		$	1,468,547

See accompanying notes to unaudited condensed consolidated financial statements.

Back to Contents

ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(In thousands of United States dollars)

				2004			2003


Cash flows provided by operating activities:
	Net income		$	100,872		$	51,201
	Adjustments to reconcile net income to net cash provided by operating activities
		Depreciation and amortization		9,212			6,955
		Net realized gains on sales of investments		(5,176	)		(4,404	)
		Deferred taxes		(1,641	)		2,405
		Stock-based compensation expense		1,325			600
		Premiums receivable, net		(262,924	)		(114,883	)
		Deferred acquisition costs		(58,573	)		(40,039	)
		Prepaid reinsurance premiums		(2,308	)		796
		Accrued investment income		(3,081	)		(6,352	)
		Other assets		(6,276	)		(2,245	)
		Reserve for losses and loss expenses		186,160			96,914
		Reserve for unearned premiums		304,417			169,463
		Reinsurance balances payable		1,347			3,259
		Other liabilities		6,402			(1,966	)

Net cash provided by operating activities				269,756			161,704


Cash flows used in investing activities:
	Proceeds from sales of fixed maturity investments			464,823			283,661
	Proceeds from maturities and calls on fixed maturity investments			82,043			35,517
	Purchases of fixed maturity investments			(679,921	)		(574,262	)
	Purchases of fixed assets			(1,219	)		(777	)

Net cash used in investing activities				(134,274