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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended June 30, 2003, 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 98-0392908
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
Crown House
4 Par-la-Ville Road
Hamilton, Bermuda HM 08
(Address of Principal Executive (Zip Code)
Offices)
(441) 278-0400
Registrant's Telephone Number, Including Area Code
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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Description of Class as of August 8, 2003
- --------------------------------- --------------------
Ordinary Shares - $1.00 par value 63,661,185
Class A Shares - $1.00 par value 938,815
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets June 30, 2003 and December 31,
2002 2
Unaudited Condensed Consolidated Statements of Income and
Comprehensive Income for the Three and Six Months Ended June
30, 2003 and 2002 3
Unaudited Condensed Consolidated Statements of Changes in
Shareholders' Equity for the Six Months Ended June 30, 2003 and
2002 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002 5
Notes to the Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 21
Item 4. Controls and Procedures 49
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 50
Item 2. Changes in Securities and Use of Proceeds 50
Item 3. Defaults Upon Senior Securities 50
Item 4. Submission of Matters to a Vote of Security Holders 50
Item 5. Other Information 51
Item 6. Exhibits and Reports on Form 8-K 51
SIGNATURES 52
CERTIFICATIONS 53
1
ENDURANCE SPECIALTY HOLDINGS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of United States dollars except share amounts)
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED) (AUDITED)
ASSETS
Cash and cash equivalents $ 290,983 $ 256,840
Fixed maturity investments available for sale, at fair value
(amortized cost: $1,986,071 and $1,358,027 at June 30, 2003
and December 31, 2002, respectively) 2,044,726 1,406,409
Premiums receivable, net (includes $115 and $45,368 from
related parties at June 30, 2003 and December 31, 2002,
respectively) 654,446 264,355
Deferred acquisition costs 198,855 81,676
Prepaid reinsurance premiums 3,517 7,501
Accrued investment income 16,020 11,209
Intangible assets 34,058 14,344
Other assets 15,267 12,260
---------- ----------
Total assets $3,257,872 $2,054,594
========== ==========
LIABILITIES
Reserve for losses and loss expenses $ 492,739 $ 200,840
Reserve for unearned premiums 929,969 403,305
Reinsurance balances payable 27,262 16,443
Bank debt 141,429 192,000
Net payable for investments purchased 95,210 6,470
Other liabilities 23,461 18,036
---------- ----------
Total liabilities 1,710,070 837,094
---------- ----------
SHAREHOLDERS' EQUITY
Common shares
Ordinary - 63,661,185 issued and outstanding (2002 - 54,061,185) 63,661 54,061
Class A - 938,815 issued and outstanding (2002 - 938,815) 939 939
Additional paid-in capital 1,205,875 1,009,415
Accumulated other comprehensive income 62,136 50,707
Retained earnings 215,191 102,378
---------- ----------
Total shareholders' equity 1,547,802 1,217,500
---------- ----------
Total liabilities and shareholders' equity $3,257,872 $2,054,594
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
2
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands of United States dollars, except share and per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Gross premiums written and acquired $ 652,656 $ 264,266 $ 1,014,771 $ 395,187
============ ============ ============ ============
Net premiums written and acquired 652,349 242,773 1,012,403 373,694
Change in unearned premiums (359,883) (167,643) (530,284) (280,932)
------------ ------------ ------------ ------------
Net premiums earned (includes $474 and $5,451 from
related parties for the six months ended June 30,
2003 and 2002, respectively) 292,466 75,130 482,119 92,762
Net investment income 16,666 10,249 31,022 15,867
Net foreign exchange gains 2,088 1,403 4,594 1,118
Net realized gains on sales of investments 3,513 892 7,917 892
------------ ------------ ------------ ------------
Total revenues 314,733 87,674 525,652 110,639
------------ ------------ ------------ ------------
Expenses
Losses and loss expenses (includes $234 and $2,945
from related parties for the six months ended
June 30, 2003 and 2002, respectively) 165,531 36,293 269,676 45,864
Acquisition expenses (includes $52 and $1,124 from
related parties for the six months ended June 30,
2003 and 2002, respectively) 57,481 12,069 92,041 14,777
General and administrative expenses 23,077 7,992 42,543 15,421
Amortization of intangibles 945 -- 1,350 --
Interest expense 1,173 -- 2,380 --
------------ ------------ ------------ ------------
Total expenses 248,207 56,354 407,990 76,062
------------ ------------ ------------ ------------
Income before income taxes 66,526 31,320 117,662 34,577
Income tax benefit 265 -- 330 --
------------ ------------ ------------ ------------
Net income 66,791 31,320 117,992 34,577
------------ ------------ ------------ ------------
Other comprehensive income (loss)
Holding gains on investments arising during the
period (2003: net of applicable deferred income
taxes of $599 - three month period; $647 - six
month period) 13,742 19,775 17,159 15,000
Foreign currency translation adjustments 6,944 -- 3,922 --
Net (loss) on derivatives designated as cash flow
hedge (293) -- (1,735) --
Reclassification adjustment for net realized gains
included in net income (3,513) (892) (7,917) (892)
------------ ------------ ------------ ------------
Other comprehensive income 16,880 18,883 11,429 14,108
------------ ------------ ------------ ------------
Comprehensive income $ 83,671 $ 50,203 $ 129,421 $ 48,685
============ ============ ============ ============
Per share data
Weighted average number of common and common
equivalent shares outstanding:
Basic 64,733,238 60,000,000 61,613,563 60,000,000
============ ============ ============ ============
Diluted 67,657,667 60,000,000 63,770,814 60,000,000
============ ============ ============ ============
Basic earnings per share $ 1.03 $ 0.52 $ 1.92 $ 0.58
============ ============ ============ ============
Diluted earnings per share $ 0.99 $ 0.52 $ 1.85 $ 0.58
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands of United States dollars)
2003 2002
----------- -----------
Common shares
Balance, beginning of period $ 55,000 $ 60,000
Issuance of common shares 9,600 --
----------- -----------
Balance, end of period 64,600 60,000
----------- -----------
Additional paid-in capital
Balance, beginning of period 1,009,415 1,102,000
Issuance of common shares 195,744 --
Issuance of restricted share units 3,075 --
Public offering costs (3,774) --
Stock-based compensation expense 1,415 --
----------- -----------
Balance, end of period 1,205,875 1,102,000
----------- -----------
Accumulated other comprehensive income
Cumulative foreign currency translation adjustments:
Balance, beginning of period 3,662 --
Foreign currency translation adjustments 3,922 --
----------- -----------
Balance, end of period 7,584 --
----------- -----------
Unrealized holding gains (losses) on investments:
Balance, beginning of period 47,045 (58)
Net unrealized holding gains arising during the period, net of
reclassification adjustment 9,242 14,108
----------- -----------
Balance, end of period 56,287 14,050
----------- -----------
Accumulated derivative gain (loss) on cash flow hedging instruments:
Balance, beginning of period -- --
Net change from current period hedging transactions (2,088) --
Net derivative loss reclassified to earnings 353 --
----------- -----------
Balance, end of period (1,735) --
----------- -----------
Total accumulated other comprehensive income 62,136 14,050
----------- -----------
Retained earnings
Balance, beginning of period 102,378 312
Net income 117,992 34,577
Issuance of restricted share units (11) --
Dividends on common shares (5,168) --
----------- -----------
Balance, end of period 215,191 34,889
----------- -----------
Total shareholders' equity $ 1,547,802 $ 1,210,939
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
4
ENDURANCE SPECIALTY HOLDINGS LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands of United States dollars)
2003 2002
----------- -----------
Cash flows provided by (used in) operating activities:
Net income $ 117,992 $ 34,577
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 16,858 2,654
Net realized gains on sales of investments (7,917) (892)
Deferred taxes 679 --
Stock-based compensation expense 1,415 --
Premiums receivable, net (70,189) (141,009)
Deferred acquisition costs (31,026) (40,119)
Prepaid reinsurance premiums 3,984 7,193
Accrued investment income (4,811) (9,767)
Other assets (3,049) (3,765)
Reserve for losses and loss expenses 240,255 45,863
Reserve for unearned premiums 112,148 206,404
Reinsurance balances payable 10,819 (17,889)
Other liabilities 187 4,193
----------- -----------
Net cash provided by operating activities 387,345 87,443
----------- -----------
Cash flows provided by (used in) investing activities:
Proceeds from sales of fixed maturity investments 649,239 89,928
Purchases of fixed maturity investments (1,190,574) (1,112,053)
Purchases of fixed assets (2,865) (887)
Net cash acquired in HartRe acquisition 45,876 --
Purchase of net assets - LaSalle (1,532) (9,630)
----------- -----------
Net cash used in investing activities (499,856) (1,032,642)
----------- -----------
Cash flows provided by (used in) financing activities:
Issuance of common shares 205,344 --
Offering costs paid (3,774) --
Bank debt repaid (50,571) --
Dividends paid (5,168) --
----------- -----------
Net cash provided by financing activities 145,831 --
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 823 --
----------- -----------
Net increase (decrease) in cash and cash equivalents 34,143 (945,199)
Cash and cash equivalents, beginning of period 256,840 1,162,440
----------- -----------
Cash and cash equivalents, end of period $ 290,983 $ 217,241
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
5
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
1. General
Endurance Specialty Holdings Ltd. ("Endurance Holdings") was organized as
a Bermuda holding company on June 27, 2002. Endurance Holdings writes
specialty lines of insurance and reinsurance on a global basis through its
three wholly-owned operating subsidiaries: Endurance Specialty Insurance
Ltd. ("Endurance Bermuda"), based in Bermuda; Endurance Worldwide
Insurance Limited ("Endurance U.K."), based in London, England; and
Endurance Reinsurance Corporation of America ("Endurance U.S."), based in
White Plains, New York.
The accompanying unaudited condensed consolidated financial statements
have been prepared on the basis of accounting principles generally
accepted in the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Results for the three and six
month periods ended June 30, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003. The
unaudited condensed consolidated financial statements include the accounts
of Endurance Holdings and its wholly-owned subsidiaries, which are
collectively referred to herein as the "Company". All intercompany
transactions and balances have been eliminated on consolidation.
Management is required to make estimates and assumptions that affect the
amounts reported in the unaudited condensed consolidated financial
statements and accompanying disclosures. Actual results could differ from
those estimates. Among other matters, significant estimates and
assumptions are used to record premiums written and ceded, and to record
reserves for losses and loss expenses and contingencies. Estimates and
assumptions are periodically reviewed and the effects of revisions are
recorded in the consolidated financial statements in the period that they
are determined to be necessary.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. These
unaudited condensed consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements
and notes thereto for the year ended December 31, 2002 contained in
Endurance Holdings' final prospectus filed with the United States
Securities and Exchange Commission on February 28, 2003 (Registration No.
333-102026) in connection with the initial public offering of Endurance
Holdings' ordinary shares.
Certain reclassifications have been made for 2002 to conform to the 2003
presentation.
2. Significant events
On March 5, 2003, Endurance Holdings completed an initial public offering
which resulted in the issuance of 9,600,000 of its ordinary shares. The
ordinary shares are listed for trading on the New York Stock Exchange
under the symbol "ENH". Total proceeds received net of underwriting
discounts and other offering expenses were $201.6 million. Net proceeds
have been credited to shareholders' equity. Pursuant to the terms of its
term loan facility, upon consummation of the public offering, the Company
repaid $50.6 million of its outstanding principal under the term loan. The
Company invested the remaining net proceeds of the offering in
investment-grade, fixed maturity investments.
6
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
3. Debt and financing arrangements
On August 13, 2002, the Company entered into a $192 million three-year
term loan facility and a $108 million letter of credit and revolving
credit facility with a syndicate of commercial banks. At June 30, 2003,
the Company had $141.4 million of the term loan outstanding after the
repayment of $50.6 million in conjunction with the public offering and
letters of credit totaling $67.0 million outstanding. Under the terms of
the term loan facility, the Company is committed to making further
repayments of $38.4 million by September 30, 2003, $76.8 million by
September 30, 2004 and $26.2 million by September 30, 2005.
On August 8, 2003, the Company and its lenders amended the three-year term
loan facility and amended and restated the letter of credit and revolving
credit facility. The amendments extended the letter of credit and
revolving credit facility for an additional year, increased the size of
the letter of credit and revolving credit facility to $500 million and
revised certain representations and covenants in the three-year term loan
facility and the letter of credit and revolving credit facility. The
lenders under the amended and restated letter of credit and revolving
credit facility are JPMorgan Chase Bank, Bank One, Bank of Bermuda, Bank
of New York, Bank of Nova Scotia, Barclays Bank, Comerica Bank,
Commerzbank, Credit Lyonnais, Deutsche Bank, Fleet National Bank, Goldman
Sachs, ING Bank, Lloyds TSB, Merrill Lynch, Royal Bank of Scotland and
Wachovia Bank. The administrative agent under the amended and restated
letter of credit and revolving credit facility is JPMorgan Chase Bank.
Interest rates on the term loan are LIBOR plus a spread that is based on
the Company's debt to capital ratio. The interest rate applied to the
outstanding balance averaged 2.96% during the six month period ended June
30, 2003. The letter of credit and revolving credit facility now expires
on August 11, 2004, at which point any revolving credit balance will be
converted into a six-month term loan. The amended agreements contain
certain covenants including requirements that debt, as defined in the
agreements, to shareholders' equity does not exceed a ratio of 0.35:1;
consolidated tangible net worth must exceed $1.0 billion; and the
Company's unencumbered cash and investment grade assets must exceed the
greater of $400 million or outstanding debt and letters of credit. In
addition, the Company must apply 25% of the cash proceeds received from
any sale of equity securities and 100% of the cash proceeds from any debt
offerings to the repayment of outstanding principal of term loans
outstanding under the term loan facility. The Company was in compliance
with all covenants of these agreements at June 30, 2003.
The Company recorded interest expense of $2.4 million for the six month
period ended June 30, 2003 and at June 30, 2003, the fair value of the
borrowings approximates the carrying value.
As part of its overall strategy to manage the level of interest rate
exposure, the Company has entered into an interest rate swap contract to
hedge the variable cash outflows related to the term loan facility. The
contract became effective on March 27, 2003 and provides for the exchange
of floating rate payments for fixed rate payments (2.62% per annum) on a
declining notional amount corresponding to the outstanding principal
amount of the $100 million drawn down on the term loan facility on
September 27, 2002. The agreement has been designated as a "cash flow
hedge" under SFAS No. 133, and accordingly, the changes in fair value of
the derivative are recorded in other comprehensive income and recognized
as a component of interest expense in the statement of income when the
variable interest expense affects earnings. At June 30, 2003 the fair
value of the interest rate swap amounted to a liability of $1.7 million
and is included on the balance sheet as a component of other liabilities;
the estimated net amount of the existing loss that is expected to be
reclassified into earnings in the next twelve months is $1.3 million. The
fair value of the interest rate swap was estimated by calculating the net
present value of expected future cash flows based on market rates at June
30, 2003.
7
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
4. Business combination
On May 15, 2003, Endurance U.S. completed a transaction with The Hartford
Fire Insurance Company and HartRe Company, L.L.C. (collectively, "HartRe")
to assume the majority of the in-force reinsurance business of HartRe, to
acquire exclusive renewal rights to that business and to hire certain
employees of HartRe necessary for the operation of the assumed business.
The transaction was structured as a bordereaux quota share retrocession of
the majority of HartRe's reinsurance business, a purchase of HartRe's
renewal rights with respect to such business and an agreement with respect
to the claims handling for the business. The effective date of the
arrangement was April 1, 2003. Some of the contracts included in HartRe's
in-force reinsurance business were proportionally assumed by the Company
from the original inception dates of the underlying contracts. The Company
did not assume any of HartRe's historical reinsurance liabilities from
expired policies.
The primary reasons for the transaction were to acquire potentially
profitable business, to increase the Company's presence in the U.S.
domestic reinsurance marketplace and to increase the U.S. based staff of
the Company. The transaction was accounted for as a purchase method
business combination in accordance with SFAS No. 141, "Business
Combinations".
The initial purchase price payable by the Company was $30.5 million and
the fair value of the net assets acquired was $30.3 million, resulting in
$0.2 million of goodwill.
The fair value of net assets acquired is summarized as follows:
Assets
Cash $ 70,876
Premiums receivable, net 319,902
Acquisition cost of in-force contracts 86,153
Other identifiable intangible assets 19,563
--------
Assets acquired 496,494
--------
Liabilities
Unearned premiums 414,517
Reserve for losses and loss expenses 51,645
--------
Liabilities acquired 466,162
--------
Net assets acquired $ 30,332
========
Other identifiable intangible assets include the fair value of the
customer lists, including the underwriter relationships, and the
non-solicit and non-compete rights purchased. These other identifiable
assets are estimated to have finite lives of up to ten years and they are
being amortized over such periods.
8
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
4. Business combination, cont'd.
Estimated amortization expense for the next five years as of June 30, 2003
is as follows:
Year Ended
June 30, Amount
---------- -------
2004 $ 2,156
2005 2,156
2006 1,906
2007 1,906
2008 1,906
-------
$10,030
=======
The acquisition cost of in-force contracts are included in deferred
acquisition costs in the consolidated balance sheet and are amortized
pro-rata over the remaining terms of the related in-force contracts. The
related amortization expense in the three and six months ended June 30,
2003 of $20.6 million is included in acquisition expenses in the condensed
consolidated statement of income.
In addition to the initial purchase price, Endurance U.S. may be required
to pay further amounts to HartRe. Such contingent amounts are based on the
renewal and profitability of the in-force business acquired. Upon renewal
of the business acquired over the two years following April 1, 2003,
commissions are due at a range of 1-5% of premiums depending on the line
of business. Contingent renewal commissions are only payable to the extent
they exceed $10 million for the first year following closing and $5
million for the second year following closing. These amounts are
guaranteed and constitute part of the initial purchase price. In addition,
a profit sharing commission will be paid if the net loss ratio of the
business associated with the property treaty, property catastrophe, and
aviation lines is less than a blended target loss ratio for the 2003
accident year. The contingent profit commission will be equal to 50% of
underwriting profits generated by the difference between the ultimate loss
ratio and target loss ratio multiplied by the earned premiums for the 2003
accident year. At June 30, 2003, the majority of the in-force contracts
acquired had not yet come up for renewal, and as such, amounts potentially
payable to HartRe based on renewals were not yet determinable. The
profitability component of the contingent payments will not be
determinable until further maturation of the 2003 accident year results on
the business acquired from HartRe. Any such contingent amounts will be
recorded in the period in which they are determined to be payable.
Operating results of the HartRe business acquired have been included in
the consolidated financial statements from April 1, 2003, which is the
effective date of the retrocession agreement. As required by SFAS No. 141,
the following selected unaudited pro forma information is being provided
to present a summary of the combined results of the Company and the HartRe
business acquired assuming the transaction had been effected on January 1,
2002.
9
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
4. Business combination, cont'd.
The unaudited pro forma data is for informational purposes only and does
not necessarily represent results that would have occurred if the
transaction had taken place on the basis assumed above.
THREE MONTHS ENDED
June 30, 2003 June 30, 2002
Net premiums written and acquired $ 652,349 $ 310,161
Total revenues $ 314,998 $ 102,784
Total expenses $ (248,207) $ (68,449)
Net income $ 66,791 $ 34,335
Basic earnings per share $ 1.03 $ 0.57
Diluted earnings per share $ 0.99 $ 0.57
SIX MONTHS ENDED
June 30, 2003 June 30, 2002
Net premiums written and acquired $ 1,288,933 $ 507,264
Total revenues $ 611,398 $ 134,668
Total expenses $ (485,754) $ (94,438)
Net income $ 125,644 $ 40,230
Basic earnings per share $ 2.04 $ 0.67
Diluted earnings per share $ 1.97 $ 0.67
5. Earnings per share
Basic earnings per common share are calculated by dividing net income
available to holders of Endurance Holdings' ordinary shares and class A
shares (collectively referred to as "common shares") by the weighted
average number of common shares outstanding. In addition to the actual
common shares outstanding, the weighted average number of common shares
included in the basic earnings per common share calculation also includes
the fully vested restricted share units discussed in note 6. Diluted
earnings per common share are based on the weighted average number of
common shares and dilutive potential common shares outstanding during the
period of calculation using the treasury stock method.
10
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
5. Earnings per share cont'd.
The following tables set forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED JUNE 30,
2003 2002
----------- -----------
Numerator:
Net income available to common shareholders $ 66,791 $ 31,320
----------- -----------
Denominator:
Weighted average shares - basic
Ordinary shares outstanding 64,600,000 60,000,000
Restricted share units outstanding 133,238 --
----------- -----------
64,733,238 60,000,000
Share equivalents
Warrants 2,048,434 --
Options 875,995 --
----------- -----------
Weighted average shares - diluted 67,657,667 60,000,000
----------- -----------
Basic earnings per common share $ 1.03 $ 0.52
----------- -----------
Diluted earnings per common share $ 0.99 $ 0.52
----------- -----------
SIX MONTHS ENDED JUNE 30,
2003 2002
----------- -----------
Numerator:
Net income available to common shareholders $ 117,992 $ 34,577
----------- -----------
Denominator:
Weighted average shares - basic
Ordinary shares outstanding 61,523,757 60,000,000
Restricted share units outstanding 89,806 --
----------- -----------
61,613,563 60,000,000
Share equivalents
Warrants 1,535,333 --
Options 621,918 --
----------- -----------
Weighted average shares - diluted 63,770,814 60,000,000
----------- -----------
Basic earnings per common share $ 1.92 $ 0.58
----------- -----------
Diluted earnings per common share $ 1.85 $ 0.58
----------- -----------
On May 15, 2003, the Company declared a dividend of $0.08 per common
share.
11
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
6. Stock-based employee compensation plans
The Company has a stock-based employee compensation plan (the "Option
Plan") which provides for the grant of options to purchase shares of the
Company's common shares, share appreciation rights, restricted shares,
share bonuses and other awards to key employees. On March 1, 2003, the
Company settled $3.1 million of its 2002 annual bonus obligations to
certain employees with grants of 133,234 fully vested restricted share
units. The restricted share units will be automatically settled over a
three year period. At the Company's exclusive option, the restricted share
units may be settled in cash, ordinary shares or in a combination thereof.
The fair value of the restricted share units at the date of grant was
equal to the 2002 bonus obligation recognized during the year ended
December 31, 2002, and as such, no additional compensation expense has
been recognized in 2003. Holders of restricted share units receive
additional incremental restricted share units when the Company pays
dividends on its common shares.
Effective January 1, 2002, the Company adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation",
prospectively to all employee awards granted, modified, or settled after
January 1, 2002. Awards under the Option Plan vest over periods of up to
five years. Therefore, the cost related to stock-based employee
compensation included in the determination of net income for 2003 and 2002
is less than that which would have been recognized if the fair value based
method had been applied to all awards granted.
The following tables illustrate the effect on net income and earnings per
share if the fair value based method had been applied to all outstanding
and unvested awards:
THREE MONTHS ENDED
JUNE 30,
2003 2002
---------- ----------
Net income, as reported $ 66,791 $ 31,320
Add: Stock-based employee compensation expense
included in reported net income, net of related tax
effects 815 --
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1,335) (967)
---------- ----------
Pro forma net income $ 66,271 $ 30,353
========== ==========
Earnings per share:
Basic - as reported $ 1.03 $ 0.52
========== ==========
Basic - pro forma $ 1.02 $ 0.51
========== ==========
Diluted - as reported $ 0.99 $ 0.52
========== ==========
Diluted - pro forma $ 0.98 $ 0.51
========== ==========
12
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
6. Stock-based employee compensation plans, cont'd.
SIX MONTHS ENDED
JUNE 30,
2003 2002
---------- ----------
Net income, as reported $ 117,992 $ 34,577
Add: Stock-based employee compensation expense
included in reported net income, net of related tax
effects 1,415 --
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (4,131) (2,237)
---------- ----------
Pro forma net income $ 115,276 $ 32,340
========== ==========
Earnings per share:
Basic - as reported $ 1.92 $ 0.58
========== ==========
Basic - pro forma $ 1.87 $ 0.54
========== ==========
Diluted - as reported $ 1.85 $ 0.58
========== ==========
Diluted - pro forma $ 1.81 $ 0.54
========== ==========
7. Segment reporting
The determination of the Company's business segments is based on how the
Company monitors the performance of its underwriting operations. The
Company has six reportable business segments: property per risk treaty
reinsurance, property catastrophe reinsurance, casualty treaty
reinsurance, property individual risk, casualty individual risk and other
specialty lines.
o Property Per Risk Treaty Reinsurance - reinsures individual
property risks of ceding companies on a treaty basis.
o Property Catastrophe Reinsurance - reinsures catastrophic
perils for ceding companies on a treaty basis.
o Casualty Treaty Reinsurance - reinsures third party liability
exposures from ceding companies on a treaty basis.
o Property Individual Risk - insurance and facultative
reinsurance of commercial properties.
o Casualty Individual Risk - insurance and facultative
reinsurance of third party liability exposures.
o Other Specialty Lines - insurance and reinsurance of unique
opportunities, including aerospace, self insured risks and a
limited number of other reinsurance programs such as surety,
marine, energy, personal accident, terrorism and others.
Because the Company does not manage its assets by segment, investment
income and total assets are not allocated to the individual segments.
Management measures segment results on the basis of the combined ratio
that is obtained by dividing the sum of the losses and loss expenses,
acquisition expenses and general and administrative expenses by net
premiums earned.
13
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
7. Segment reporting, cont'd.
General and administrative expenses incurred by segments are allocated
directly. Remaining corporate overhead is allocated based on each
segment's proportional share of gross premiums written and acquired. The
following table provides a summary of the segment revenues and results for
the three months ended June 30, 2003 and the reserve for losses and loss
expenses as of June 30, 2003:
Property Per Property Casualty
Risk Treaty Catastrophe Treaty
Reinsurance Reinsurance Reinsurance
------------ ----------- -----------
Revenues
Gross premiums written and acquired $ 222,412 $ 65,838 $ 118,929
--------- --------- ---------
Net premiums written and acquired 222,412 65,838 118,895
--------- --------- ---------
Net premiums earned 78,255 43,473 73,449
--------- --------- ---------
Expenses
Losses and loss expenses 45,047 5,151 49,407
Acquisition expenses 22,143 4,253 19,860
General and administrative expenses 6,366 2,438 4,052
--------- --------- ---------
73,556 11,842 73,319
--------- --------- ---------
Underwriting income $ 4,699 $ 31,631 $ 130
========= ========= =========
Loss ratio 57.6% 11.8% 67.3%
Acquisition expense ratio 28.3% 9.8% 27.0%
General and administrative expense ratio 8.1% 5.6% 5.5%
--------- --------- ---------
Combined ratio 94.0% 27.2% 99.8%
--------- --------- ---------
Reserve for losses and loss expenses $ 99,528 $ 50,454 $ 143,306
========= ========= =========
Property Casualty Other
Individual Individual Specialty
Risk Risk Lines
------------ ----------- -----------
Revenues
Gross premiums written and acquired $ 23,155 $ 69,430 $ 152,892
--------- --------- ---------
Net premiums written and acquired 22,882 69,430 152,892
--------- --------- ---------
Net premiums earned 16,813 38,451 42,025
--------- --------- ---------
Expenses
Losses and loss expenses 7,873 26,560 31,493
Acquisition expenses 1,670 4,012 5,543
General and administrative expenses 1,046 3,626 5,549
--------- --------- ---------
10,589 34,198 42,585
--------- --------- ---------
Underwriting income (loss) $ 6,224 $ 4,253 $ (560)
========= ========= =========
Loss ratio 46.8% 69.1% 74.9%
Acquisition expense ratio 9.9% 10.4% 13.2%
General and administrative expense ratio 6.2% 9.4% 13.2%
--------- --------- ---------
Combined ratio 62.9% 88.9% 101.3%
--------- --------- ---------
Reserve for losses and loss expenses $ 23,107 $ 84,671 $ 91,673
========= ========= =========
14
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
7. Segment reporting, cont'd.
The following table provides a summary of the segment revenues and results
for the three months ended June 30, 2002 and the reserve for losses and
loss expenses as of June 30, 2002:
Property Per Property Casualty
Risk Treaty Catastrophe Treaty
Reinsurance Reinsurance Reinsurance
------------ ----------- -----------
Revenues
Gross premiums written and acquired 31,406 144,750 31,544
--------- --------- ---------
Net premiums written and acquired 31,406 123,257 31,544
--------- --------- ---------
Net premiums earned 5,595 39,676 12,723
--------- --------- ---------
Expenses
Losses and loss expenses 3,082 14,820 8,144
Acquisition expenses 1,090 6,733 2,121
General and administrative expenses 184 4,834 1,089
--------- --------- ---------
4,356 26,387 11,354
--------- --------- ---------
Underwriting income $ 1,239 $ 13,289 $ 1,369
========= ========= =========
Loss ratio 55.1% 37.4% 64.0%
Acquisition expense ratio 19.5% 17.0% 16.7%
General and administrative expense ratio 3.3% 12.2% 8.6%
--------- --------- ---------
Combined ratio 77.9% 66.6% 89.3%
--------- --------- ---------
Reserve for losses and loss expenses $ 3,867 $ 17,286 $ 12,062
========= ========= =========
Property Casualty Other
Individual Individual Specialty
Risk Risk Lines
------------ ----------- -----------
Revenues
Gross premiums written and acquired $ 19,622 $ 26,323 $ 10,621
--------- --------- ---------
Net premiums written and acquired 19,622 26,323 10,621
--------- --------- ---------
Net premiums earned 5,600 5,870 5,666
--------- --------- ---------
Expenses
Losses and loss expenses 1,790 4,620 3,837
Acquisition expenses 549 520 1,056
General and administrative expenses 647 135 1,103
--------- --------- ---------
2,986 5,275 5,996
--------- --------- ---------
Underwriting income (loss) $ 2,614 $ 595 $ (330)
========= ========= =========
Loss ratio 32.0% 78.7% 67.7%
Acquisition expense ratio 9.8% 8.9% 18.6%
General and administrative expense ratio 11.6% 2.3% 19.5%
--------- --------- ---------
Combined ratio 53.4% 89.9% 105.8%
--------- --------- ---------
Reserve for losses and loss expenses $ 2,678 $ 5,104 $ 4,867
========= ========= =========
15
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
7. Segment reporting, cont'd.
The following table reconciles total segment results to consolidated
income before income taxes for the three months ended June 30, 2003 and
2002, respectively:
2003 2002
-------- --------
Total underwriting income $ 46,377 $ 18,776
Net investment income 16,666 10,249
Net foreign exchange gains 2,088 1,403
Net realized gains on sales of investments 3,513 892
Amortization of intangibles (945) --
Interest expense (1,173) --
-------- --------
Consolidated income before income taxes $ 66,526 $ 31,320
======== ========
16
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
7. Segment reporting, cont'd.
The following table provides a summary of the segment revenues and results
for the six months ended June 30, 2003:
Property Per Property Casualty
Risk Treaty Catastrophe Treaty
Reinsurance Reinsurance Reinsurance
------------ ----------- -----------
Revenues
Gross premiums written and acquired $ 314,391 $ 126,472 $ 202,356
--------- --------- ---------
Net premiums written and acquired 314,391 127,182 200,057
--------- --------- ---------
Net premiums earned 119,291 79,500 113,701
--------- --------- ---------
Expenses
Losses and loss expenses 69,841 11,443 76,061
Acquisition expenses 31,262 9,460 30,787
General and administrative expenses 11,769 5,230 7,965
--------- --------- ---------
112,872 26,133 114,813
--------- --------- ---------
Underwriting income (loss) $ 6,419 $ 53,367 $ (1,112)
========= ========= =========
Loss ratio 58.5% 14.4% 66.9%
Acquisition expense ratio 26.2% 11.9% 27.1%
General and administrative expense ratio 9.9% 6.6% 7.0%
--------- --------- ---------
Combined ratio 94.6% 32.9% 101.0%
--------- --------- ---------
Property Casualty Other
Individual Individual Specialty
Risk Risk Lines
------------ ----------- -----------
Revenues
Gross premiums written and acquired $ 37,752 $ 102,952 $ 230,848
--------- --------- ---------
Net premiums written and acquired 36,973 102,952 230,848
--------- --------- ---------
Net premiums earned 31,828 70,366 67,433
--------- --------- ---------
Expenses
Losses and loss expenses 10,112 50,713 51,506
Acquisition expenses 3,255 7,877 9,400
General and administrative expenses 2,204 6,172 9,203
--------- --------- ---------
15,571 64,762 70,109
--------- --------- ---------
Underwriting income (loss) $ 16,257 $ 5,604 $ (2,676)
========= ========= =========
Loss ratio 31.8% 72.1% 76.4%
Acquisition expense ratio 10.2% 11.2% 13.9%
General and administrative expense ratio 6.9% 8.8% 13.6%
--------- --------- ---------
Combined ratio 48.9% 92.1% 103.9%
--------- --------- ---------
17
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
7. Segment reporting, cont'd.
The following table provides a summary of the segment revenues and results
for the six months ended June 30, 2002:
Property Per Property Casualty
Risk Treaty Catastrophe Treaty
Reinsurance Reinsurance Reinsurance
------------ ----------- -----------
Revenues
Gross premiums written and acquired 44,784 $ 166,334 $ 76,440
--------- --------- ---------
Net premiums written and acquired 44,784 144,841 76,440
--------- --------- ---------
Net premiums earned 6,901 44,875 19,754
--------- --------- ---------
Expenses
Losses and loss expenses 3,867 17,286 12,062
Acquisition expenses 1,260 7,240 3,749
General and administrative expenses 1,747 6,491 2,983
--------- --------- ---------
6,874 31,017 18,794
--------- --------- ---------
Underwriting income $ 27 $ 13,858 $ 960
========= ========= =========
Loss ratio 56.0% 38.5% 61.1%
Acquisition expense ratio 18.3% 16.1% 19.0%
General and administrative expense ratio 25.3% 14.5% 15.1%
--------- --------- ---------
Combined ratio 99.6% 69.1% 95.2%
--------- --------- ---------
Property Casualty Other
Individual Individual Specialty
Risk Risk Lines
------------ ----------- -----------
Revenues
Gross premiums written and acquired $ 31,582 $ 28,937 $ 47,110
--------- --------- ---------
Net premiums written and acquired
31,582 28,937 47,110
--------- --------- ---------
Net premiums earned 7,303 6,541 7,388
--------- --------- ---------
Expenses
Losses and loss expenses 2,678 5,104 4,867
Acquisition expenses 677 542 1,309
General and administrative expenses 1,232 1,129 1,839
--------- --------- ---------
4,587 6,775 8,015
--------- --------- ---------
Underwriting income (loss) $ 2,716 $ (234) $ (627)
========= ========= =========
Loss ratio 36.7% 78.0% 65.9%
Acquisition expense ratio 9.3% 8.3% 17.7%
General and administrative expense ratio 16.9% 17.3% 24.9%
--------- --------- ---------
Combined ratio 62.9% 103.6% 108.5%
--------- --------- ---------
18
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
7. Segment reporting, cont'd.
The following table reconciles total segment results to consolidated
income before income taxes for the six months ended June 30, 2003 and
2002, respectively:
2003 2002
--------- ---------
Total underwriting income $ 77,859 $ 16,700
Net investment income 31,022 15,867
Net foreign exchange gains 4,594 1,118
Net realized gains on sales of investments 7,917 892
Amortization of intangibles (1,350) --
Interest expense (2,380) --
--------- ---------
Consolidated income before income taxes $ 117,662 $ 34,577
========= =========
8. Commitments and contingencies
Concentrations of credit risk. As of June 30, 2003 and December 31 2002,
substantially all the Company's cash and investments were held by one
custodian. The Company's investment guidelines limit the amount of credit
exposure to any one issuer other than the U.S. Treasury.
Major production sources. During the six month period ended June 30, 2003,
the Company obtained 74% of its gross premiums written through three
brokers: Aon Corporation - 32.6%, Marsh & McLennan Companies, Inc. -
21.9%, and Willis Companies - 19.4%. Gross premiums written excludes
$395.8 million of gross premiums acquired from HartRe.
Letters of credit. As of June 30, 2003, the Company's bankers have issued
letters of credit of approximately $67.0 million (2002 - $nil) in favor of
certain ceding companies.
Investment commitments. As of June 30, 2003, the Company had committed
cash and cash equivalents and fixed maturity investments of $104.7 million
(2002 - $nil) in favor of certain ceding companies.
Employment agreements. The Company has entered into employment agreements
with certain officers that provide for option awards, executive benefits
and severance payments under certain circumstances.
19
ENDURANCE SPECIALTY HOLDINGS LTD.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS - CONTINUED
(Amounts in tables expressed in thousands of United States dollars, except
share and per share amounts)
8. Commitments and contingencies, cont'd.
Operating Leases. The Company leases office space and office equipment
under operating leases. Future minimum lease commitments at June 30, 2003
are as follows:
Year Ended
June 30, Amount
---------- ------
2004 $ 1,866
2005 1,881
2006 1,348
2007 1,230
2008 1,136
2009 and thereafter 6,947
-------
$14,408
=======
Total rent expense under operating leases for the six month period ended
June 30, 2003 was $987,000 (2002 - $206,000).
On July 18, 2003, the Company entered into an operating lease to rent new
office space from August 1, 2003 for a period of ten years at an annual
base rent of $2,360,000. The Company will also be obligated to pay
maintenance expenses related to the space.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our financial condition and
results of operations for the three and six month periods ended June 30, 2003
and 2002. This discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and related notes
contained in this Form 10-Q and the audited consolidated financial statements
and related notes for the fiscal year ended December 31, 2002, as well as the
discussions of critical accounting policies and qualitative and quantitative
disclosure about market risk, contained in our final prospectus filed with the
Securities and Exchange Commission on February 28, 2003 (Registration No.
333-102026) in connection with the initial public offering of our ordinary
shares.
Some of the information contained in this discussion and analysis or set forth
elsewhere in this Form 10-Q, including information with respect to our plans and
strategy for our business, includes forward looking statements that involve risk
and uncertainties. Please see the section captioned "Cautionary Statement
Regarding Forward-Looking Statements" for more information on factors that could
cause actual results to differ materially from the results described in or
implied by any forward-looking statements contained in this discussion and
analysis.
Overview
Endurance Specialty Holdings Ltd. ("Endurance Holdings") was organized as a
Bermuda holding company on June 27, 2002. Endurance Holdings has three
wholly-owned operating subsidiaries: Endurance Specialty Insurance Ltd.
("Endurance Bermuda"), based in Bermuda; Endurance Worldwide Insurance Limited
("Endurance U.K."), based in London, England; and Endurance Reinsurance
Corporation of America " ("Endurance U.S."), based in New York. Endurance
Holdings and its wholly-owned subsidiaries are collectively referred to in this
discussion and analysis as the "Company".
The Company writes specialty lines of commercial property and casualty insurance
and reinsurance on a global basis, and seeks to create a portfolio of specialty
lines which are profitable and have limited correlation with one another. The
Company defines specialty lines as those lines of insurance and reinsurance that
require dedicated, specialized underwriting skills and resources in order to be
profitably underwritten. The Company believes that a well constructed portfolio
of diversified risks will produce less volatile results than each of the
individual lines of business independently and will provide a superior
risk-adjusted return on our capital. Our portfolio of specialty lines of
business is organized into the following segments: property per risk treaty
reinsurance, property catastrophe reinsurance, casualty treaty reinsurance,
property individual risk, casualty individual risk and other specialty lines.
The insurance lines that the Company writes are included in the property
individual risk, casualty individual risk, and other specialty lines segments.
The reinsurance lines that the Company writes are included in the property per
risk treaty reinsurance, property catastrophe reinsurance, casualty treaty
reinsurance, and other specialty lines segments.
Property insurance and reinsurance provides coverage of an insurable interest in
tangible property for property loss, damage or loss of use. The Company writes
property lines through its property per risk treaty reinsurance, property
catastrophe reinsurance, property individual risk and other specialty lines
segments.
Casualty insurance and reinsurance is primarily concerned with the losses caused
by injuries to third parties, i.e., not the insured, or to property owned by
third parties and the legal liability imposed on the insured resulting
therefrom. It includes, but is not limited to, employers' liability, workers'
compensation, public liability, automobile liability, personal liability and
aviation liability insurance. The Company writes casualty lines through its
casualty treaty reinsurance, casualty individual risk, and other specialty lines
segments.
21
Application of Critical Accounting Estimates
Our condensed consolidated financial statements are based on the selection of
accounting policies and application of significant accounting estimates, which
require management to make significant estimates and assumptions. We believe
that some of the more critical judgments in the areas of accounting estimates
and assumptions that affect our financial condition and results of operations
are related to the recognition of premiums written and ceded and reserves for
losses and loss expenses. For a detailed discussion of our critical accounting
estimates please refer to our final prospectus filed with the Securities and
Exchange Commission on February 28, 2003 (Registration No. 333-102026). There
were no material changes in the application of our critical accounting estimates
subsequent to that report. We have discussed the application of these critical
accounting estimates with our Board of Directors and Audit Committee.
Results of operations - for the three month periods
ended June 30, 2003 and June 30, 2002
Results of operations for the three months ended June 30, 2003 and 2002 were as
follows:
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Underwriting income/(loss)
Revenues
Gross premiums written and acquired $ 652,656 $ 264,266 $ 388,390
--------- --------- ---------
Net premiums written and acquired 652,349 242,773 409,576
--------- --------- ---------
Net premiums earned 292,466 75,130 217,336
--------- --------- ---------
Expenses
Losses and loss expenses 165,531 36,293 129,238
Acquisition expenses 57,481 12,069 45,412
General and administrative expenses 23,077 7,992 15,085
--------- --------- ---------
246,089 56,354 189,735
--------- --------- ---------
Underwriting income 46,377 18,776 27,601
Net investment income 16,666 10,249 6,417
Net foreign exchange gains 2,088 1,403 685
Net realized gains on sales of investments 3,513 892 2,621
Amortization of intangibles (945) -- (945)
Interest expense (1,173) -- (1,173)
Income tax benefit 265 -- 265
--------- --------- ---------
Net income $ 66,791 $ 31,320 $ 35,471
========= ========= =========
Loss ratio 56.6% 48.3% 8.3%
Acquisition expense ratio 19.7% 16.1% 3.6%
General and administrative expense ratio 7.9% 10.6% (2.7%)
--------- --------- ---------
Combined ratio 84.2% 75.0% 9.2%
--------- --------- ---------
Reserve for losses and loss expenses $ 492,739 $ 45,864 $ 446,875
========= ========= =========
Premiums. In the three months ended June 30, 2003, gross premiums written and
acquired were $652.7 million compared to gross premiums written and acquired of
$264.3 million for the period ended June 30, 2002. Gross premiums written and
acquired increased during the three months to June 30, 2003 principally as a
result of the acquisition of the majority of the in-force reinsurance business
of HartRe
22
which contributed $395.8 million in premiums written and acquired across a
number of business segments including property per risk treaty reinsurance,
property catastrophe reinsurance, casualty treaty reinsurance and other
specialty lines. For more information on the Hart Re transaction, please refer
to "-Significant transactions and events" below. There was additional
contribution to premium growth in the three month period as a result of the
formation of Endurance U.S. which has observed favorable underwriting
opportunities across the property per risk treaty and casualty treaty
reinsurance segments. Significant premium growth has been recorded in Endurance
Bermuda within the casualty individual risk segment which has experienced
favorable underwriting conditions in the healthcare and excess general liability
lines. During the three months ended June 30, 2002 the Company recorded acquired
premiums of $88.6 million from LaSalle Re Limited on a one-time basis which
offset the items contributing to premium growth in 2003.
There were negligible premiums ceded in the three months ended June 30, 2003
compared to $21.5 million for the three months ended June 30, 2002. The Company
currently does not purchase significant levels of reinsurance protection as part
of its overall underwriting strategy.
Net premiums earned for the three months ended June 30, 2003 were $292.5 million
compared to net premiums earned for the three months ended June 30, 2002 of
$75.1 million. Net premiums earned increased in 2003 as a result of the higher
level of premiums written and acquired in the three months ended June 30, 2003
compared to 2002, in addition to the earning of net premiums that were written
in the period since the inception of the Company.
Net Investment Income. Net investment income for the three months ended June 30,
2003 was $16.7 million, compared to net investment income of $10.2 million for
the three months ended June 30, 2002. Investment income was derived primarily
from interest earned on fixed maturity investments partially offset by
investment management fees. The increase in net investment income was due to an
83.3% increase in invested assets due primarily to net premium inflows when
compared to June 30, 2002. Investment management fees for the three months ended
June 30, 2003 were $0.6 million compared to $0.3 million in the three months
ended June 30, 2002.
The annualized period book yield (which is the average yield of the invested
portfolio after adjusting for accretion and amortization from the purchase
price) and total return of the investment portfolio (calculated using beginning
and ending market values, adjusted for external cash flows) for the three months
ending June 30, 2003 were 3.64% and 8.00%, respectively. For the three months
ended June 30, 2002, the annualized period book yield and total return were
4.53% and 10.66%, respectively. The decrease in book yield was attributable to
the continued investment of large premium inflows in a decreasing interest rate
environment. The yield on the benchmark five year U.S. Treasury bond decreased
160 basis points during the one year period ending June 30, 2003 while, during
the same period, the Federal Reserve cut short term interest rates by 75 basis
points. At June 30, 2003, the proportion of cash and cash equivalent securities
in the Company's investment portfolio has been reduced to 8% of invested assets
and the overall portfolio duration has extended to 2.85 years. The invested
portfolio represents cash and cash equivalents and fixed maturity investments,
with an average credit rating of Aaa, managed by the investment managers.
Net Realized Investment Gains. Net realized investment gains for the three
months ended June 30, 2003 were $3.5 million, compared to net realized
investment gains in the three months ended June 30, 2002 of $0.9 million. Net
investment gains in the three months to June 30, 2003 were realized from the
sale of fixed maturity securities. Endurance Holdings liquidated $50.0 million
of its fixed maturity security portfolio in the period in order to contribute
further capital to Endurance U.S. In addition, sales of securities were executed
as part of the ongoing management of our investment portfolio. During the three
months ended June 30, 2002 there were few sales of securities.
Losses and Loss Expenses. Losses and loss expenses for the three months ended
June 30, 2003 and 2002 were $165.5 million and $36.3 million, respectively. The
loss ratios for the three months ended June 30, 2003 and 2002 were 56.6% and
48.3%, respectively. The increase in loss ratio in the year is due to a shift
23
in the mix of business towards casualty business. The impact of the HartRe
transaction and the other areas of premium growth discussed above has resulted
in a lower weighting of property catastrophe reinsurance which produced a low
incidence of loss activity over the last year due to the absence of significant
catastrophes during the year.
The Company participates in lines of business where claims may not be reported
for many years. Accordingly, management does not believe that reported claims
are the only valid means for estimating ultimate obligations. The overall loss
reserves were established by the Company's actuaries and reflect management's
best estimate of ultimate losses.
During the three month period ended June 30, 2003, the Company had experienced
lower levels of reported losses than previously anticipated in the property
catastrophe reinsurance segment and to a lesser extent the casualty individual
risk segment, which resulted in favorable adjustments to the Company's prior
period loss reserves. These trends partially offset the increase in overall loss
ratios discussed above. Should any further events or trends become evident in
the future, the reserves for the Company will be adjusted as necessary.
Acquisition Expenses. Acquisition expenses for the three months ended June 30,
2003 were $57.5 million compared to acquisition expenses of $12.1 million for
the three months ended June 30, 2002. The acquisition expense ratio for the
three months ended June 30, 2003 was 19.7% compared to an acquisition expense
ratio of 16.1% for the three months ended June 30, 2002. The increase in
acquisition expense ratio is due to the growth of the Company's underwriting
activities and a consequent shift in the mix of business towards treaty
reinsurance. The HartRe transaction, in particular, resulted in the acquisition
of treaty business incurring on average a commission rate of 21.8%.
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2003 were $23.1 million, compared to general and
administrative expenses of $8.0 million for the three months ended June 30,
2002. Expenditure has increased in the year in line with the growth in
underwriting activity and ultimately, staffing levels. At June 30, 2003 the
Company had 191 employees compared to 59 employees at June 30, 2002.
The general and administrative expense ratio for the three months ended June 30,
2003 was 7.9% compared to a general and administrative expense ratio of 10.6%
for the three months ended June 30, 2002. In the period ended June 30, 2003, the
ratio has declined as a result of growth in premiums earned.
Net Income. Net income for the three months ended June 30, 2003 was $66.8
million compared to $31.3 million for the three months ended June 30, 2002. Net
income in the 2003 period was comprised of net underwriting income of $46.4
million, net investment income of $16.7 million, net realized investment gains
of $3.5 million, net foreign exchange gains of $2.1 million, interest expense of
$1.2 million, amortization of intangible assets of $0.9 million and tax benefit
of $0.3 million. Net income in the 2002 period was comprised of net underwriting
income of $18.8 million, net investment income of $10.2 million, net realized
investment gains of $0.9 million and net foreign exchange gains of $1.4 million.
The increase in net income for the three months ended June 30, 2003 compared to
the same period in 2002 is due to the expansion of the Company's underwriting
activities and personnel and continued implementation of its business plan
subsequent to June 30, 2002.
Comprehensive Income. Comprehensive income for the three months ended June 30,
2003 was $83.7 million compared to comprehensive income for the three months
ended June 30, 2002 of $50.2 million. Comprehensive income for the 2003 period
was comprised of the net income of $66.8 million described above, an increase in
net unrealized investment gains of $10.2 million, gains on foreign currency
translation adjustments of $6.9 million and a net loss on derivatives designated
as a cash flow hedge of $0.3 million. Comprehensive income for the 2002 period
was comprised of the net income of $31.3 million described above and a net
increase in unrealized investment gains of $18.9 million.
24
Underwriting results by operating segments
The determination of the Company's business segments is based on how the Company
monitors the performance of its underwriting operations. Management measures
segment results on the basis of the combined ratio, which is obtained by
dividing the sum of the losses and loss expenses, acquisition expenses and
general and administrative expenses by net premiums earned. As a newly formed
company, our historical combined ratio may not be indicative of future
underwriting performance. The Company does not manage its assets by segment;
accordingly, investment income and total assets are not allocated to the
individual segments. General and administrative expenses incurred by segments
are allocated directly. Remaining corporate overhead is allocated based on each
segment's proportional share of gross premiums written and acquired.
Property per risk treaty reinsurance
Our Property Per Risk Treaty Reinsurance business segment reinsures individual
property risks of ceding companies on a treaty basis. Our property per risk
reinsurance contracts cover claims from individual insurance policies written by
our ceding company clients and include both personal lines and commercial lines
exposures. The following table summarizes the underwriting results, associated
ratios and the reserve for losses and loss expenses for the Property Per Risk
Treaty Reinsurance business segment for the three months ended June 30, 2003 and
2002, respectively.
THREE MONTHS ENDED
June 30, June 30,
2003 2002 Change
-------- -------- --------
Revenues
Gross premiums written and acquired $222,412 $ 31,406 $191,006
-------- -------- --------
Net premiums written and acquired 222,412 31,406 191,006
-------- -------- --------
Net premiums earned 78,255 5,595 72,660
-------- -------- --------
Expenses
Losses and loss expenses 45,047 3,082 41,965
Acquisition expenses 22,143 1,090 21,053
General and administrative expenses 6,366 184 6,182
-------- -------- --------
73,556 4,356 69,200
-------- -------- --------
Underwriting income $ 4,699 $ 1,239 $ 3,460
======== ======== ========
Loss ratio 57.6% 55.1% 2.5%
Acquisition expense ratio 28.3% 19.5% 8.8%
General and administrative expense ratio 8.1% 3.3% 4.8%
-------- -------- --------
Combined ratio 94.0% 77.9% 16.1%
-------- -------- --------
Reserve for losses and loss expenses $ 99,528 $ 3,867 $ 95,661
======== ======== ========
Premiums. For the three months ended June 30, 2003 gross premiums written and
acquired were $222.4 million and net premiums earned were $78.3 million compared
to gross premiums written and acquired of $31.4 million and net premiums earned
of $5.6 million for the same period in 2002. The increase in gross premiums
written and acquired was primarily a result of the acquisition of the majority
of the in-force reinsurance business of HartRe which contributed $143.7 million
in premiums written and acquired. The balance of the increase in premiums
written and acquired in the year is a result of the formation of Endurance U.S.
and the efforts of an expanded underwriting team. The ratio of net premiums
earned to net premiums written during the three months to June 30, 2003 was
35.2% compared to 17.8% for the three months to June 30, 2002. These levels of
earnings compared to premiums written are due to the
25
earning of policies attaching contracts which have comprised 71.3% of premiums
written and acquired in this segment since the inception of the Company. The
majority of the policies attaching contracts have a 24-month risk period and, as
such, the premiums are earned over that risk period. The higher ratio of net
premiums earned to net premiums written for the three months to June 30, 2003
was a result of the earning of premiums that have been recorded over the period
since the inception of the Company.
Losses and Loss Expenses. Losses and loss expenses for the three months ended
June 30, 2003 and June 30, 2002 were $45.1 million and $3.1 million,
respectively. The loss ratio was 57.6% for the three months ended June 30, 2003
and 55.1% for the same period in 2002.
Acquisition Expenses. Acquisition expenses for the three months ended June 30,
2003 were $22.1 million or 28.3% of net premiums earned. For the three months
ended June 30, 2002, acquisition expenses were $1.1 million or 19.5% of net
premiums earned. The higher expense ratio in the three months to June 30, 2003
is due to an increased percentage of business in this segment relating to quota
share reinsurance contracts, which incur higher commissions.
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2003 and June 30, 2002 were $6.4 million and $0.2
million, respectively. This increase is due to the Company having been in its
early stages of development in the three months ended June 30, 2002 and
therefore incurred lower levels of operating expenses at that time. Expenditure
has increased in the year in line with the growth in underwriting activity and
ultimately, staffing levels.
Property catastrophe reinsurance
Our Property Catastrophe Reinsurance business segment reinsures catastrophic
perils for ceding companies on a treaty basis. Our property catastrophe
reinsurance contracts provide protection for most catastrophic losses that are
covered in the underlying insurance policies written by our ceding company
clients. Protection under property catastrophe treaties is provided on an
occurrence basis, allowing our ceding company clients to combine losses that
have been incurred in any single event from multiple underlying policies.
26
The following table summarizes the underwriting results, associated ratios and
the reserve for losses and loss expenses for the Property Catastrophe
Reinsurance business segment for the three months ended June 30, 2003 and 2002,
respectively.
THREE MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 65,838 $ 144,750 $ (78,912)
--------- --------- ---------
Net premiums written and acquired 65,838 123,257 (57,419)
--------- --------- ---------
Net premiums earned 43,473 39,676 3,797
--------- --------- ---------
Expenses
Losses and loss expenses 5,151 14,820 (9,669)
Acquisition expenses 4,253 6,733 (2,480)
General and administrative expenses 2,438 4,834 (2,396)
--------- --------- ---------
11,842 26,387 (14,545)
--------- --------- ---------
Underwriting income $ 31,631 $ 13,289 $ 18,342
========= ========= =========
Loss ratio 11.8% 37.4% (25.6%)
Acquisition expense ratio 9.8% 17.0% (7.2%)
General and administrative expense ratio 5.6% 12.2% (6.6%)
--------- --------- ---------
Combined ratio 27.2% 66.6% (39.4%)
--------- --------- ---------
Reserve for losses and loss expenses $ 50,454 $ 17,286 $ 33,168
========= ========= =========
Premiums. For the three months ended June 30, 2003, gross premiums written and
acquired were $65.8 million and net premiums earned were $43.5 million compared
to gross premiums written and acquired of $144.8 million and net premiums earned
of $39.7 million for the same period in 2002. The majority of the contracts
associated with this segment are written on a losses occurring basis.
Accordingly, the premium is earned evenly over the contract term, most often a
twelve month period. The decrease in gross premiums written and acquired is
largely the result of the acquisition of $88.6 million in premiums from LaSalle
Re Limited in the three month period ended June 30, 2002 offset by premiums
acquired from HartRe of $29.0 million in 2003. The growth in premiums earned is
a result of the earning of premiums that have been written over the twelve
months leading up to June 30, 2003 compared to the shorter period of premium
generation to June 30, 2002.
Losses and Loss Expenses. Losses and loss expenses for the three months ended
June 30, 2003 and June 30, 2002 were $5.2 million and $14.8 million,
respectively. The loss ratio was 11.8% for the three months ended June 30, 2003
and 37.4% for the same period in 2002. The loss ratios in 2003 and 2002 in this
segment were principally attributable to the very low levels of catastrophe
losses experienced in the respective periods. The reduction in loss ratio in
2003 is principally because the Company is experiencing lower levels of reported
losses than previously anticipated relating to the 2002 European floods, which
resulted in favorable adjustments to such reserves.
Acquisition Expenses. Acquisition expenses for the three months ended June 30,
2003 were $4.3 million or 9.8% of net premiums earned. For the three months
ended June 30, 2002, acquisition expenses were $6.7 million or 17.0% of net
premiums earned. The impact of ceded reinsurance purchased in 2002, which
yielded very low ceding commissions overall, resulted in the expense ratio in
that year being higher than in 2003 when a negligible amount of reinsurance was
purchased.
27
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2003 and June 30, 2002 were $2.4 million and $4.8
million, respectively. This decrease is due to the lower level of premiums
written and acquired in 2003 and therefore lower indirect overhead allocation.
Casualty treaty reinsurance
Our Casualty Treaty Reinsurance business segment reinsures third party liability
exposures from ceding companies on a treaty basis. The exposures that we
reinsure include automobile liability, professional liability, directors' and
officers' liability, umbrella liability and workers' compensation. We generally
focus on business that is exposed to severity losses and not expected to produce
high levels of claims frequency. The following table summarizes the underwriting
results, associated ratios and the reserve for losses and loss expenses for the
Casualty Treaty Reinsurance business segment for the three months ended June 30,
2003 and 2002, respectively.
THREE MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 118,929 $ 31,544 $ 87,385
--------- --------- ---------
Net premiums written and acquired 118,895 31,544 87,351
--------- --------- ---------
Net premiums earned 73,449 12,723 60,726
--------- --------- ---------
Expenses
Losses and loss expenses 49,407 8,144 41,263
Acquisition expenses 19,860 2,121 17,739
General and administrative expenses 4,052 1,089 2,963
--------- --------- ---------
73,319 11,354 61,965
--------- --------- ---------
Underwriting income $ 130 $ 1,369 $ (1,239)
========= ========= =========
Loss ratio 67.3% 64.0% 3.3%
Acquisition expense ratio 27.0% 16.7% 10.3%
General and administrative expense ratio 5.5% 8.6% (3.1%)
--------- --------- ---------
Combined ratio 99.8% 89.3% 10.5%
--------- --------- ---------
Reserve for losses and loss expenses $ 143,306 $ 12,062 $ 131,244
========= ========= =========
Premiums. In the three months ended June 30, 2003, gross premiums written and
acquired were $118.9 million and net premiums earned were $73.4 million compared
to gross premiums written and acquired of $31.5 million and net premiums earned
of $12.7 million for the same period in 2002. The increase in gross premiums
written and acquired is almost entirely due to the acquisition of the majority
of the in-force reinsurance business of HartRe which contributed $86.1 million
in premiums written and acquired. Premium levels have been static for existing
business, as expected, given that the second quarter is not a significant
renewal period for this segment. The ratio of net premiums earned to net
premiums written in the three months to June 30, 2003 was 61.8% compared to
40.3% for the three months to June 30, 2002. These levels of earnings compared
to premiums written are due to the effect of policies attaching contracts which
have comprised 74.3% of premiums written in this segment since the inception of
the Company. The majority of the policies attaching contracts have a 24-month
risk period and, as such, the premiums are earned over that risk period. The
higher ratio of net premiums earned to net premiums written for the three months
to June 30, 2003 is a result of the earning of premiums that have been recorded
over the period since the inception of the Company.
28
Losses and Loss Expenses. Losses and loss expenses for the three months ended
June 30, 2003 and June 30, 2002 were $49.4 million and $8.1 million,
respectively. The loss ratio was 67.3% for the three months ended June 30, 2003
and 64.0% for the same period in 2002. Claims may not be reported for many years
in the lines of business included in this segment. Accordingly, loss reserves
have been established by the Company's actuaries and reflect management's best
estimate of ultimate losses.
Acquisition Expenses. Acquisition expenses for the three months ended June 30,
2003 were $19.9 million or 27.0% of net premiums earned. For the three months
ended June 30, 2002, acquisition expenses were $2.1 million or 16.7% of net
premiums earned. The higher expense ratio in the three months to June 30, 2003
is due to an increased weighting of business in this segment relating to quota
share reinsurance contracts which incur higher commissions.
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2003 and June 30, 2002 were $4.1 million and $1.1
million, respectively. Expenditure has increased in the year in line with the
growth in underwriting activity and ultimately, staffing levels.
Property individual risk
Our Property Individual Risk business segment is comprised of the insurance and
facultative reinsurance of commercial properties. The policies written in this
segment provide coverage for one insured for each policy. The types of risks
insured are generally commercial properties with sufficiently large values to
require multiple insurers and reinsurers to accommodate their insurance capacity
needs. The following table summarizes the underwriting results, associated
ratios and the reserve for losses and loss expenses for the Property Individual
Risk business segment for the three months ended June 30, 2003 and 2002,
respectively.
THREE MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 23,155 $ 19,622 $ 3,533
--------- --------- ---------
Net premiums written and acquired 22,882 19,622 3,260
--------- --------- ---------
Net premiums earned 16,813 5,600 11,213
--------- --------- ---------
Expenses
Losses and loss expenses 7,873 1,790 6,083
Acquisition expenses 1,670 549 1,121
General and administrative expenses 1,046 647 399
--------- --------- ---------
10,589 2,986 7,603
--------- --------- ---------
Underwriting income $ 6,224 $ 2,614 $ 3,610
========= ========= =========
Loss ratio 46.8% 32.0% 14.8%
Acquisition expense ratio 9.9% 9.8% 0.1%
General and administrative expense ratio 6.2% 11.6% (5.4%)
--------- --------- ---------
Combined ratio 62.9% 53.4% 9.5%
--------- --------- ---------
Reserve for losses and loss expenses $ 23,107 $ 2,678 $ 20,429
========= ========= =========
Premiums. In the three months ended June 30, 2003, gross premiums written and
acquired were $23.2 million and net premiums earned were $16.8 million compared
to gross premiums written and acquired of $19.6 million and net premiums earned
of $5.6 million for the same period in 2002. Policies written in this segment
are written on a losses occurring basis and typically earn over the 12-month
period of the
29
contract. The increase in premiums written and acquired in the three months
ended June 30, 2003 is due primarily to new business generated by Endurance U.K.
which wrote no business in the three months ended June 30, 2002. The level of
premiums written in Endurance Bermuda has remained static. The increase in
premiums earned is a result of the earning of premiums that have been written
over the twelve months leading up to June 30, 2003 compared to the shorter
period of premium generation to June 30, 2002.
Losses and Loss Expenses. Losses and loss expenses for the three months ended
June 30, 2003 and June 30, 2002 were $7.9 million and $1.8 million,
respectively. The loss ratio was 46.8% for the three months ended June 30, 2003
and 32.0% for the same period in 2002. The increase in loss ratio is principally
the result of tornado damage in the mid-west U.S. in May.
Acquisition Expenses. Acquisition expenses for the three months ended June 30,
2003 were $1.7 million or 9.9% of net premiums earned. For the three months
ended June 30, 2002, acquisition expenses were $0.6 million or 9.8% of net
premiums earned.
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2003 and June 30, 2002 were $1.1 million and $0.7
million, respectively. Expenditure has increased in the year in line with the
growth in staffing levels. However, the general and administrative expense ratio
has decreased as premiums earned have increased significantly.
Casualty individual risk
Our Casualty Individual Risk business segment is comprised of the insurance and
facultative reinsurance of third party liability exposures. This includes third
party general liability insurance, directors' and officers' liability insurance,
errors and omissions insurance and employment practices liability insurance, all
written for a wide range of industry groups, as well as medical professional
liability insurance which is written for large institutional healthcare
providers. The table on the following page summarizes the underwriting results,
associated ratios and the reserve for losses and loss expenses for the Casualty
Individual Risk business segment for the three months ended June 30, 2003 and
2002, respectively.
30
THREE MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 69,430 $ 26,323 $ 43,107
--------- --------- ---------
Net premiums written and acquired 69,430 26,323 43,107
--------- --------- ---------
Net premiums earned 38,451 5,870 32,581
--------- --------- ---------
Expenses
Losses and loss expenses 26,560 4,620 21,940
Acquisition expenses 4,012 520 3,492
General and administrative expenses 3,626 135 3,491
--------- --------- ---------
34,198 5,275 28,923
--------- --------- ---------
Underwriting income $ 4,253 $ 595 $ 3,658
========= ========= =========
Loss ratio 69.1% 78.7% (9.6%)
Acquisition expense ratio 10.4% 8.9% 1.5%
General and administrative expense ratio 9.4% 2.3% 7.1%
--------- --------- ---------
Combined ratio 88.9% 89.9% (1.0%)
--------- --------- ---------
Reserve for losses and loss expenses $ 84,671 $ 5,104 $ 79,567
========= ========= =========
Premiums. In the three months ended June 30, 2003, gross premiums written and
acquired were $69.4 million and net premiums earned were $38.5 million compared
to gross premiums written and acquired of $26.3 million and net premiums earned
of $5.9 million for the same period in 2002. All premiums written by this
segment are earned ratably over the terms of the insurance policies, typically
12-month periods. The Company has observed improved market conditions in the
year with pricing either holding firm or increasing. The healthcare line in
particular has seen significant pricing increases. Capacity is increasing across
all lines but has not yet impacted pricing adversely. Premiums written and
acquired have increased in the year as a result of an expanded staff of 24 at
June 30, 2003 (June 30, 2002 - 7 staff) that the Company has put in place to
take advantage of the opportune underwriting conditions. The increase in
premiums earned is a result of the earning of premiums that have been written
over the twelve months leading up to June 30, 2003 compared to the shorter
period of premium generation to June 30, 2002.
Losses and Loss Expenses. Losses and loss expenses for the three months ended
June 30, 2003 and June 30, 2002 were $26.6 million and $4.6 million,
respectively. The loss ratio was 69.1% for the three months ended June 30, 2003
and 78.7% for the same period in 2002. The Company has received only a limited
number of notices of potential losses for this segment, none of which has
reached a level which would result in our paying a claim. Accordingly, the
losses and loss expenses were established by the Company's actuaries based on
historical industry loss data and program-specific loss information. The lower
than anticipated levels of reported losses relating to prior periods has
resulted in favorable adjustments to prior period reserves and a reduction in
the loss ratio.
Acquisition Expenses. Acquisition expenses for the three months ended June 30,
2003 were $4.0 million or 10.4% of net premiums earned compared to $0.5 million
and 8.9% for the three months ended June 30, 2002. The lower acquisition
expenses in the prior period resulted from this business segment having been in
the early stages of underwriting activity and therefore, having not yet
established a typical expense ratio.
31
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2003 and June 30, 2002 were $3.6 million and $0.1
million, respectively. This increase is due to the staff increases in this
segment which have culminated in a headcount of 24 at June 30, 2003 compared to
just 7 staff at June 30, 2002.
Other Specialty Lines
Our Other Specialty Lines business segment is comprised of the insurance and
reinsurance of unique opportunities, including Aerospace, Self Insured Risks and
a limited number of other reinsurance programs such as surety, marine, energy,
personal accident, terrorism and others. Aerospace includes aviation hull,
aircraft liability and aircraft products coverage, and the space business
includes satellite launch and in-orbit coverage. Our Self Insured Risks business
provides traditional property and casualty insurance products to entities that
are able to bear a significant portion of their own risk. The coverages the
Company provides include general liability, automobile liability, workers'
compensation and property insurance. At the end of the second quarter of 2003,
the Company consolidated the Self Insured Risks department into the Casualty
Individual Risk department in order to more appropriately reflect the nature of
the business being underwritten. The following table summarizes the underwriting
results, associated ratios and the reserve for losses and loss expenses for the
Other Specialty Lines business segment for the three months ended June 30, 2003
and 2002, respectively.
THREE MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 152,892 $ 10,621 $ 142,271
--------- --------- ---------
Net premiums written and acquired 152,892 10,621 142,271
--------- --------- ---------
Net premiums earned 42,025 5,666 36,359
--------- --------- ---------
Expenses
Losses and loss expenses 31,493 3,837 27,656
Acquisition expenses 5,543 1,056 4,487
General and administrative expenses 5,549 1,103 4,446
--------- --------- ---------
42,585 5,996 36,589
--------- --------- ---------
Underwriting loss $ (560) $ (330) $ (230)
========= ========= =========
Loss ratio 74.9% 67.7% 7.2%
Acquisition expense ratio 13.2% 18.6% (5.4%)
General and administrative expense ratio 13.2% 19.5% (6.3%)
--------- --------- ---------
Combined ratio 101.3% 105.8% (4.5%)
--------- --------- ---------
Reserve for losses and loss expenses $ 91,673 $ 4,867 $ 86,806
========= ========= =========
Premiums. In the three months ended June 30, 2003, gross premiums written and
acquired were $152.9 million and net premiums earned were $42.0 million compared
to gross premiums written and acquired of $10.6 million and net premiums earned
of $5.7 million for the same period in 2002. The increase in gross premiums
written and acquired is almost entirely due to the acquisition of the in-force
reinsurance business of HartRe which contributed $71.2 million in aerospace
premiums written and acquired and $65.9 million in other specialty accounts. The
remaining increase in premiums written and acquired was due primarily to the
Company's expansion of its existing aerospace underwriting. The growth in
premiums earned is a result of the earning of premiums that have been written
since the inception of the Company given that 76.3% of premiums were written on
a policies attaching basis and are typically earned ratably over a 24-month risk
period.
32
Losses and Loss Expenses. Losses and loss expenses for the three months ended
June 30, 2003 and June 30, 2002 were $31.5 million and $3.8 million,
respectively. The loss ratio was 74.9% for the three months ended June 30, 2003
and 67.7% for the same period in 2002.
Acquisition Expenses. Acquisition expenses for the three months ended June 30,
2003 were $5.5 million or 13.2% of net premiums earned. For the three months
ended June 30, 2002, acquisition expenses were $1.1 million or 18.6% of net
premiums earned. The reduction in expense ratio in the year is due to the
changes in mix of business brought about by the development of the Company's
aerospace book and acquisition of the in-force reinsurance business of HartRe.
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2003 and June 30, 2002 were $5.6 million and $1.1
million, respectively. Expenditure has increased in the year in line with the
growth in underwriting activity and ultimately, staffing levels. However, the
general and administrative expense ratio has decreased as premiums earned have
increased significantly.
33
Results of operations - for the six month periods
ended June 30, 2003 and June 30, 2002
Results of operations for the six months ended June 30, 2003 and 2002 were as
follows:
June 30, June 30,
2003 2002 Change
----------- ----------- -----------
Underwriting income/(loss)
Revenues
Gross premiums written and acquired $ 1,014,771 $ 395,187 $ 619,584
----------- ----------- -----------
Net premiums written and acquired 1,012,403 373,694 638,709
----------- ----------- -----------
Net premiums earned 482,119 92,762 389,357
----------- ----------- -----------
Expenses
Losses and loss expenses 269,676 45,864 223,812
Acquisition expenses 92,041 14,777 77,264
General and administrative expenses 42,543 15,421 27,122
----------- ----------- -----------
404,260 76,062 328,198
----------- ----------- -----------
Underwriting income 77,859 16,700 61,159
Net investment income 31,022 15,867 15,155
Net foreign exchange gains 4,594 1,118 3,476
Net realized gains on sales of investments 7,917 892 7,025
Amortization of intangibles (1,350) -- (1,350)
Interest expense (2,380) -- (2,380)
Income tax benefit 330 -- 330
----------- ----------- -----------
Net income $ 117,992 $ 34,577 $ 83,415
=========== =========== ===========
Loss ratio 55.9% 49.4% 6.5%
Acquisition expense ratio 19.1% 15.9% 3.2%
General and administrative expense ratio 8.8% 16.6% (7.8%)
----------- ----------- -----------
Combined ratio 83.8% 81.9% 1.9%
----------- ----------- -----------
Reserve for losses and loss expenses $ 492,739 $ 45,864 $ 446,875
=========== =========== ===========
Premiums. In the six months ended June 30, 2003, gross premiums written and
acquired were $1,014.8 million compared to gross premiums written and acquired
of $395.2 million for the same period ended June 30, 2002. Gross premiums
written and acquired increased during the six months to June 30, 2003 partly as
a result of the acquisition of the majority of the in-force reinsurance business
of HartRe which contributed $395.8 million in premiums written and acquired
across a number of business segments including property per risk treaty
reinsurance, property catastrophe reinsurance, casualty treaty reinsurance and
other specialty lines. For more information on the HartRe transaction, please
refer to "-Significant transactions and events" below. There was additional
contribution to premium growth of $133.7 million in the six month period as a
result of the formation of Endurance U.S. and Endurance U.K. which have observed
favorable underwriting opportunities across the property per risk treaty,
casualty treaty reinsurance and property individual risk segments. Significant
premium growth has been recorded in Endurance Bermuda within the aerospace line
of business which has seen an increase in premiums written of $43.9 million for
the six month period and the casualty individual risk segment which has
experienced favorable underwriting conditions in the healthcare and excess
general liability lines to produce an increase in premiums written of $74.0
million for the six month period. In general, premium growth can be attributed
to the significant expansion of our team of underwriters and support staff. In
the
34
six month period to June 30, 2002 the Company was in a stage of expansion and
did not have the same underwriting resources as in 2003.
Reinsurance premiums ceded for the six months ended June 30, 2003 were $2.4
million compared to $21.5 million for the six months ended June 30, 2002. The
Company currently does not purchase significant levels of reinsurance protection
as part of its overall underwriting strategy.
Net premiums earned for the six months ended June 30, 2003 were $482.1 million
compared to net premiums earned for the six months ended June 30, 2002 of $92.8
million. Net premiums earned increased in 2003 as a result of the higher level
of premiums written and acquired in the six months ended June 30, 2003 compared
to 2002, in addition to the earning of net premiums that were written in the
period since the inception of the Company.
Net Investment Income. Net investment income for the six months ended June 30,
2003 was $31.0 million, compared to net investment income of $15.9 million for
the six months ended June 30, 2002. Investment income was derived primarily from
interest earned on fixed maturity investments partially offset by investment
management fees. The increase in net investment income was due to an 83.3%,
increase in invested assets due primarily to net premium inflows when compared
to June 30, 2002. Investment management fees for the six months ended June 30,
2003 were $1.1 million compared to $0.5 million in the six months ended June 30,
2002.
The annualized period book yield (which is the average yield of the invested
portfolio after adjusting for accretion and amortization from the purchase
price) and total return of the investment portfolio (calculated using beginning
and ending market values, adjusted for external cash flows) for the six months
ending June 30, 2003 were 3.64% and 5.91%, respectively. For the six months
ended June 30, 2002, the annualized period book yield and total return were
4.53% and 5.35%, respectively. The decrease in book yield was attributable to
the continued investment of large premium inflows in a decreasing interest rate
environment. The yield on the benchmark five year U.S. Treasury bond decreased
160 basis points during the one year period ending June 30, 2003 while, during
the same period, the Federal Reserve cut short term interest rates by 75 basis
points. At June 30, 2003, the proportion of cash and cash equivalent securities
in the Company's investment portfolio has been reduced to 8% of invested assets
and the overall portfolio duration has been extended to 2.85 years. The invested
portfolio represents cash and cash equivalents and fixed maturity investments,
with an average credit rating of Aaa, managed by the investment managers.
Net Realized Investment Gains. Net realized investment gains for the six months
ended June 30, 2003 were $7.9 million, compared to net realized investment gains
in the six months ended June 30, 2002 of $0.9 million. Net investment gains in
the six months to June 30, 2003 were realized from the sale of fixed maturity
securities. Endurance Holdings liquidated $50.0 million of its fixed maturity
security portfolio in the period in order to contribute further capital to
Endurance U.S. In addition, sales of securities were executed as part of the
ongoing management of our investment portfolio. During the six months ended June
30, 2002 there were few sales of securities.
Losses and Loss Expenses. Losses and loss expenses for the six months ended June
30, 2003 and 2002 were $269.7 million and $45.9 million, respectively. The loss
ratios for the six months ended June 30, 2003 and 2002 were 55.9% and 49.4%,
respectively. The increase in loss ratio in the year is principally due to a
shift in the mix of business towards casualty business. The impact of the HartRe
transaction and the other areas of premium growth discussed above has resulted
in a lower weighting of property catastrophe reinsurance which produced a low
incidence of loss activity over the last year due to the absence of significant
catastrophes during the period.
The Company participates in lines of business where claims may not be reported
for many years. Accordingly, management does not believe that reported claims
are the only valid means for estimating ultimate obligations. The overall loss
reserves were established by the Company's actuaries and reflect management's
best estimate of ultimate losses.
35
During the six month period ended June 30, 2003, the Company had experienced
lower levels of reported losses than previously anticipated in the property
catastrophe reinsurance segment and to a lesser extent the casualty individual
risk segment, which resulted in favorable adjustments to the Company's prior
period loss reserves. These trends partially offset the increase in overall loss
ratios discussed above. Should any further events or trends become evident in
the future, the reserves for the Company will be adjusted as necessary.
Acquisition Expenses. Acquisition expenses for the six months ended June 30,
2003 were $92.0 million compared to acquisition expenses of $14.8 million for
the six months ended June 30, 2002. The acquisition expense ratio for the six
months ended June 30, 2003 was 19.1% compared to an acquisition expense ratio of
15.9% for the six months ended June 30, 2002. The increase in acquisition
expense ratio is due to the growth of the Company's underwriting activities and
a consequent shift in the mix of business towards treaty reinsurance.
General and Administrative Expenses. General and administrative expenses for the
six months ended June 30, 2003 were $42.5 million, compared to general and
administrative expenses of $15.4 million for the six months ended June 30, 2002.
Expenditure has increased in the year in line with the growth in underwriting
activity and ultimately, staffing levels. At June 30, 2003 the Company had 191
employees compared to 59 employees at June 30, 2002.
The general and administrative expense ratio for the six months ended June 30,
2003 was 8.8% compared to a general and administrative expense ratio of 16.6%
for the six months ended June 30, 2002. In the period ended June 30, 2003, the
ratio has declined as a result of growth in premiums earned.
Net Income. Net income for the six months ended June 30, 2003 was $118.0 million
compared to $34.6 million for the six months ended June 30, 2002. Net income in
the 2003 period was comprised of net underwriting income of $77.9 million, net
investment income of $31.0 million, net realized investment gains of $7.9
million, net foreign exchange gains of $4.6 million, interest expense of $2.4
million, amortization of intangible assets of $1.4 million and tax benefit of
$0.3 million. Net income in the 2002 period was comprised of net underwriting
income of $16.7 million, net investment income of $15.9 million, net realized
investment gains of $0.9 million and a net foreign exchange gain of $1.1
million. The increase in net income for the six months ended June 30, 2003
compared to the same period in 2002 is due to the expansion of the Company's
underwriting activities and personnel and continued implementation of its
business plan subsequent to June 30, 2002.
Comprehensive Income. Comprehensive income for the six months ended June 30,
2003 was $129.4 million compared to comprehensive income for the six months
ended June 30, 2002 of $48.7 million. Comprehensive income for the 2003 period
was comprised of the net income of $118.0 million described above, an increase
in net unrealized investment gains of $9.2 million, gains on foreign currency
translation adjustments of $3.9 million and a net loss on derivatives designated
as a cash flow hedge of $1.7 million. Comprehensive income for the 2002 period
was comprised of the net income of $34.6 million described above and a net
increase in unrealized investment gains of $14.1 million.
36
Underwriting results by operating segments
Property per risk treaty reinsurance
The following table summarizes the underwriting results and associated ratios
for the Property Per Risk Treaty Reinsurance business segment for the six months
ended June 30, 2003 and 2002, respectively.
SIX MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 314,391 $ 44,784 $ 269,607
--------- --------- ---------
Net premiums written and acquired 314,391 44,784 269,607
--------- --------- ---------
Net premiums earned 119,291 6,901 112,390
--------- --------- ---------
Expenses
Losses and loss expenses 69,841 3,867 65,974
Acquisition expenses 31,262 1,260 30,002
General and administrative expenses 11,769 1,747 10,022
--------- --------- ---------
112,872 6,874 105,998
--------- --------- ---------
Underwriting income $ 6,419 $ 27 $ 6,392
========= ========= =========
Loss ratio 58.5% 56.0% 2.5%
Acquisition expense ratio 26.2% 18.3% 7.9%
General and administrative expense ratio 9.9% 25.3% (15.4%)
--------- --------- ---------
Combined ratio 94.6% 99.6% (5.0%)
--------- --------- ---------
Reserve for losses and loss expenses $ 99,528 $ 3,867 $ 95,661
========= ========= =========
Premiums. For the six months ended June 30, 2003 gross premiums written and
acquired were $314.4 million and net premiums earned were $119.3 million
compared to gross premiums written and acquired of $44.8 million and net
premiums earned of $6.9 million for the same period in 2002. The increase in
gross premiums written and acquired was in large part due to the acquisition of
the majority of the in-force reinsurance business of HartRe which contributed
$143.7 million in premiums written and acquired. In addition, part of the
increase in premiums written and acquired is a result of the formation of
Endurance U.S. and Endurance U.K. which combined have contributed $80.7 million
in premium growth for the six month period. The ratio of net premiums earned to
net premiums written during the six months to June 30, 2003 was 37.9% compared
to 15.4% for the six months to June 30, 2002. These levels of earnings compared
to premiums written are due to the earning of policies attaching contracts which
have comprised 71.3% of premiums written in this segment since the inception of
the Company. The majority of the policies attaching contracts have a 24-month
risk period and, as such, the premiums are earned over that risk period. The
higher ratio of net premiums earned to net premiums written for the six months
to June 30, 2003 was a result of the earning of premiums that have been recorded
over the period since the inception of the Company.
Losses and Loss Expenses. Losses and loss expenses for the six months ended June
30, 2003 and June 30, 2002 were $69.8 million and $3.9 million, respectively.
The loss ratio was 58.5% for the six months ended June 30, 2003 and 56.0% for
the same period in 2002.
37
Acquisition Expenses. Acquisition expenses for the six months ended June 30,
2003 were $31.3 million or 26.2% of net premiums earned. For the six months
ended June 30, 2002, acquisition expenses were $1.3 million or 18.3% of net
premiums earned. The higher expense ratio in the six months to June 30, 2003 is
due to an increased percentage of business in this segment relating to quota
share reinsurance contracts, which incur higher commissions.
General and Administrative Expenses. General and administrative expenses for the
six months ended June 30, 2003 and June 30, 2002 were $11.8 million and $1.8
million, respectively. This increase is due to the Company having been in its
early stages of development in the six months ended June 30, 2002 and therefore
incurred lower levels of operating expenses at that time. Expenditure has
increased in the year in line with the growth in underwriting activity and
ultimately, staffing levels. General and administrative expenses as a percentage
of net premiums earned has decreased as premiums have increased significantly.
Property catastrophe reinsurance
The following table summarizes the underwriting results and associated ratios
for the Property Catastrophe Reinsurance business segment for the six months
ended June 30, 2003 and 2002, respectively.
SIX MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 126,472 $ 166,334 $ (39,862)
--------- --------- ---------
Net premiums written and acquired 127,182 144,841 (17,659)
--------- --------- ---------
Net premiums earned 79,500 44,875 34,625
--------- --------- ---------
Expenses
Losses and loss expenses 11,443 17,286 (5,843)
Acquisition expenses 9,460 7,240 2,220
General and administrative expenses 5,230 6,491 (1,261)
--------- --------- ---------
26,133 31,017 (4,884)
--------- --------- ---------
Underwriting income $ 53,367 $ 13,858 $ 39,509
========= ========= =========
Loss ratio 14.4% 38.5% (24.1%)
Acquisition expense ratio 11.9% 16.1% (4.2%)
General and administrative expense ratio 6.6% 14.5% (7.9%)
--------- --------- ---------
Combined ratio 32.9% 69.1% (36.2%)
--------- --------- ---------
Reserve for losses and loss expenses $ 50,454 $ 17,286 $ 33,168
========= ========= =========
Premiums. For the six months ended June 30, 2003, gross premiums written and
acquired were $126.5 million and net premiums earned were $79.5 million compared
to gross premiums written and acquired of $166.3 million and net premiums earned
of $44.9 million for the same period in 2002. The majority of the contracts
associated with this segment are written on a losses occurring basis.
Accordingly, the premium is earned evenly over the term, most often a twelve
month period. The decrease in gross premiums written and acquired is the result
of the one-time recognition of $88.6 million in premiums acquired from LaSalle
Re Limited in the six month period ended June 30, 2002 which normally would
incept over a twelve month period. The growth in premiums earned is a result of
the earning of premiums that have been written over the twelve months leading up
to June 30, 2003 compared to the shorter period of premium generation to June
30, 2002.
38
Losses and Loss Expenses. Losses and loss expenses for the six months ended June
30, 2003 and June 30, 2002 were $11.4 million and $17.3 million, respectively.
The loss ratio was 14.4% for the six months ended June 30, 2003 and 38.5% for
the same period in 2002. The loss ratios in 2003 and 2002 in this segment were
principally attributable to the small number of catastrophe losses experienced
in the respective periods. The reduction in loss ratio in the 2003 is
principally because the Company is experiencing lower levels of reported losses
than previously anticipated relating to the 2002 European floods, which resulted
in favorable adjustments to such reserves.
Acquisition Expenses. Acquisition expenses for the six months ended June 30,
2003 were $9.5 million or 11.9% of net premiums earned. For the six months ended
June 30, 2002, acquisition expenses were $7.2 million or 16.1% of net premiums
earned. The impact of ceded reinsurance purchased in 2002, which yielded very
low ceding commissions overall, resulted in the expense ratio in that year being
higher than in 2003 when a negligible amount of reinsurance was purchased.
General and Administrative Expenses. General and administrative expenses for the
six months ended June 30, 2003 and June 30, 2002 were $5.2 million and $6.5
million, respectively. This decrease is due to the lower level of premiums
written and acquired in 2003 and therefore lower indirect overhead allocation.
Casualty treaty reinsurance
The following table summarizes the underwriting results and associated ratios
for the Casualty Treaty Reinsurance business segment for the six months ended
June 30, 2003 and 2002, respectively.
SIX MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 202,356 $ 76,440 $ 125,916
--------- --------- ---------
Net premiums written and acquired 200,057 76,440 123,617
--------- --------- ---------
Net premiums earned 113,701 19,754 93,947
--------- --------- ---------
Expenses
Losses and loss expenses 76,061 12,062 63,999
Acquisition expenses 30,787 3,749 27,038
General and administrative expenses 7,965 2,983 4,982
--------- --------- ---------
114,813 18,794 96,019
--------- --------- ---------
Underwriting (loss) income $ (1,112) $ 960 $ (2,072)
========= ========= =========
Loss ratio 66.9% 61.1% 5.8%
Acquisition expense ratio 27.1% 19.0% 8.1%
General and administrative expense ratio 7.0% 15.1% (8.1%)
--------- --------- ---------
Combined ratio 101.0% 95.2% 5.8%
--------- --------- ---------
Reserve for losses and loss expenses $ 143,306 $ 12,062 $ 131,244
========= ========= =========
Premiums. In the six months ended June 30, 2003, gross premiums written and
acquired were $202.4 million and net premiums earned were $113.7 million
compared to gross premiums written and acquired of $76.4 million and net
premiums earned of $19.8 million for the same period in 2002. The increase in
gross premiums written and acquired is in large part due to the acquisition of
the majority of the in-force reinsurance business of HartRe which contributed
$86.1 million in premiums written and acquired. The remainder of premium
increase is a result of organic growth helped by an increased underwriting
staff, in particular at the Endurance U.S. platform, which has contributed $45.5
million in additional premiums in the six month period. The ratio of net
premiums earned to net premiums written in the six months to June
39
30, 2003 was 56.8% compared to 25.8% for the six months to June 30, 2002. These
levels of earnings compared to premiums written are due to the effect of
policies attaching contracts which have comprised 74.3% of premiums written in
this segment since the inception of the Company. The majority of the policies
attaching contracts have a 24-month risk period and, as such, the premiums are
earned over that risk period. The higher ratio of net premiums earned to net
premiums written for the six months to June 30, 2003 is a result of the earning
of premiums that have been recorded over the period since the inception of the
Company.
Losses and Loss Expenses. Losses and loss expenses for the six months ended June
30, 2003 and June 30, 2002 were $76.1 million and $12.1 million, respectively.
The loss ratio was 66.9% for the six months ended June 30, 2003 and 61.1% for
the same period in 2002. Claims may not be reported for many years in the lines
of business included in this segment and there has been a low frequency of
reported loss activity to date. Accordingly, loss reserves have been established
by the Company's actuaries and reflect management's best estimate of ultimate
losses.
Acquisition Expenses. Acquisition expenses for the six months ended June 30,
2003 were $30.8 million or 27.1% of net premiums earned. For the six months
ended June 30, 2002, acquisition expenses were $3.8 million or 19.0% of net
premiums earned. The higher expense ratio in the six months to June 30, 2003 is
due to an increased weighting of business in this segment relating to quota
share reinsurance contracts which incur higher commissions.
General and Administrative Expenses. General and administrative expenses for the
six months ended June 30, 2003 and June 30, 2002 were $8.0 million and $3.0
million, respectively. Expenditure has increased in the year in line with the
growth in underwriting activity and ultimately, staffing levels.
Property individual risk
The following table summarizes the underwriting results and associated ratios
for the Property Individual Risk business segment for the six months ended June
30, 2003 and 2002, respectively.
SIX MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 37,752 $ 31,582 $ 6,170
--------- --------- ---------
Net premiums written and acquired 36,973 31,582 5,391
--------- --------- ---------
Net premiums earned 31,828 7,303 24,525
--------- --------- ---------
Expenses
Losses and loss expenses 10,112 2,678 7,434
Acquisition expenses 3,255 677 2,578
General and administrative expenses 2,204 1,232 972
--------- --------- ---------
15,571 4,587 10,984
--------- --------- ---------
Underwriting income $ 16,257 $ 2,716 $ 13,541
========= ========= =========
Loss ratio 31.8% 36.7% (4.9%)
Acquisition expense ratio 10.2% 9.3% 0.9%
General and administrative expense ratio 6.9% 16.9% (10.0%)
--------- --------- ---------
Combined ratio 48.9% 62.9% (14.0%)
--------- --------- ---------
Reserve for losses and loss expenses $ 23,107 $ 2,678 $ 20,429
========= ========= =========
40
Premiums. In the six months ended June 30, 2003, gross premiums written and
acquired were $37.8 million and net premiums earned were $31.8 million compared
to gross premiums written and acquired of $31.6 million and net premiums earned
of $7.3 million for the same period in 2002. Policies written in this segment
are written on a losses occurring basis and typically earn over the 12-month
period of the contract. The increase in premiums written and acquired in the six
months ended June 30, 2003 is due primarily to new business generated by
Endurance U.K. which wrote no business in the six months ended June 30, 2002.
The level of premiums written in Endurance Bermuda has remained static. The
increase in premiums earned is a result of the earning of premiums that have
been written over the twelve months leading up to June 30, 2003 compared to the
shorter period of premium generation to June 30, 2002.
Losses and Loss Expenses. Losses and loss expenses for the six months ended June
30, 2003 and June 30, 2002 were $10.1 million and $2.7 million, respectively.
The loss ratio was 31.8% for the six months ended June 30, 2003 and 36.7% for
the same period in 2002. The increase in loss ratio is partially the result of
tornado damage in the mid-west U.S. in May 2003.
Acquisition Expenses. Acquisition expenses for the six months ended June 30,
2003 were $3.3 million or 10.2% of net premiums earned. For the six months ended
June 30, 2002, acquisition expenses were $0.7 million or 9.3% of net premiums
earned.
General and Administrative Expenses. General and administrative expenses for the
six months ended June 30, 2003 and June 30, 2002 were $2.2 million and $1.2
million, respectively. Expenditure has increased in the year in line with the
growth in staffing levels. However, the general and administrative expense ratio
has decreased as premiums earned have increased significantly.
41
Casualty individual risk
The following table summarizes the underwriting results and associated ratios
for the Casualty Individual Risk business segment for the six months ended June
30, 2003 and 2002, respectively.
SIX MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 102,952 $ 28,937 $ 74,015
--------- --------- ---------
Net premiums written and acquired 102,952 28,937 74,015
--------- --------- ---------
Net premiums earned 70,366 6,541 63,825
--------- --------- ---------
Expenses
Losses and loss expenses 50,713 5,104 45,609
Acquisition expenses 7,877 542 7,335
General and administrative expenses 6,172 1,129 5,043
--------- --------- ---------
64,762 6,775 57,987
--------- --------- ---------
Underwriting income $ 5,604 $ (234) $ 5,838
========= ========= =========
Loss ratio 72.1% 78.0% (5.9%)
Acquisition expense ratio 11.2% 8.3% 2.9%
General and administrative expense ratio 8.8% 17.3% (8.5%)
--------- --------- ---------
Combined ratio 92.1% 103.6% (11.5%)
--------- --------- ---------
Reserve for losses and loss expenses $ 84,671 $ 5,104 $ 79,567
========= ========= =========
Premiums. During the six months ended June 30, 2003, gross premiums written and
acquired were $103.0 million and net premiums earned were $70.4 million compared
to gross premiums written and acquired of $28.9 million and net premiums earned
of $6.5 million for the same period in 2002. All premiums written by this
segment are earned ratably over the terms of the insurance policies, typically
12-month periods. Premiums written and acquired have increased in the year as a
result of the market conditions together with an expanded staff that the Company
has put in place to take advantage of the opportune underwriting conditions. The
increase in premiums earned is a result of the earning of premiums that have
been written over the twelve months leading up to June 30, 2003 compared to the
shorter period of premium generation to June 30, 2002.
Losses and Loss Expenses. Losses and loss expenses for the six months ended June
30, 2003 and June 30, 2002 were $50.7 million and $5.1 million, respectively.
The loss ratio was 72.1% for the six months ended June 30, 2003 and 78.0% for
the same period in 2002. The Company has received only a limited number of
notices of potential losses for this segment, none of which has reached a level
which would result in our paying a claim. Accordingly, the losses and loss
expenses were established by the Company's actuaries based on historical
industry loss data and program-specific loss information. The lower than
anticipated levels of reported losses relating to the 2002 underwriting year has
resulted in favorable adjustments to the prior period reserves and a reduction
in the loss ratio.
Acquisition Expenses. Acquisition expenses for the six months ended June 30,
2003 were $7.9 million or 11.2% of net premiums earned compared to $0.5 million
and 8.3% for the six months ended June 30, 2002. The lower acquisition expenses
in the prior period resulted from this business segment having been in the early
stages of underwriting activity and therefore, having not yet established a
typical expense ratio.
42
General and Administrative Expenses. General and administrative expenses for the
six months ended June 30, 2003 and June 30, 2002 were $6.2 million and $1.1
million, respectively. This increase is due to the staff increases in this
segment which have culminated in a headcount of 24 at June 30, 2003 compared to
just 7 staff at June 30, 2002. General and administrative expenses as a
percentage of net premiums earned has decreased as premiums have increased
significantly.
Other Specialty Lines
The following table summarizes the underwriting results and associated ratios
for the Other Specialty Lines business segment for the six months ended June 30,
2003 and 2002, respectively.
SIX MONTHS ENDED
June 30, June 30,
2003 2002 Change
--------- --------- ---------
Revenues
Gross premiums written and acquired $ 230,848 $ 47,110 $ 183,738
--------- --------- ---------
Net premiums written and acquired 230,848 47,110 183,738
--------- --------- ---------
Net premiums earned 67,433 7,388 60,045
--------- --------- ---------
Expenses
Losses and loss expenses 51,506 4,867 46,639
Acquisition expenses 9,400 1,309 8,091
General and administrative expenses 9,203 1,839 7,364
--------- --------- ---------
70,109 8,015 62,094
--------- --------- ---------
Underwriting loss $ (2,676) $ (627) $ (2,049)
========= ========= =========
Loss ratio 76.4% 65.9% 10.5%
Acquisition expense ratio 13.9% 17.7% (3.8%)
General and administrative expense ratio 13.6% 24.9% (11.3%)
--------- --------- ---------
Combined ratio 103.9% 108.5% (4.6%)
--------- --------- ---------
Reserve for losses and loss expenses $ 91,673 $ 4,867 $ 86,806
========= ========= =========
Premiums. In the six months ended June 30, 2003, gross premiums written and
acquired were $230.9 million and net premiums earned were $67.4 million compared
to gross premiums written and acquired of $47.1 million and net premiums earned
of $7.4 million for the same period in 2002. The increase in gross premiums
written and acquired was in large part due to the acquisition of the in-force
reinsurance business of HartRe which contributed $71.2 million in aerospace
premiums written and acquired and $65.9 million in other specialty accounts. The
remaining increase in premiums written and acquired was due primarily to the
Company's expansion of its existing aerospace underwriting. The growth in
premiums earned is a result of the earning of premiums that have been written
since the inception of the Company given that 76.3% of premiums were written on
a policies attaching basis and are typically earned ratably over a 24-month risk
period.
Losses and Loss Expenses. Losses and loss expenses for the six months ended June
30, 2003 and June 30, 2002 were $51.5 million and $4.9 million, respectively.
The loss ratio was 76.4% for the six months ended June 30, 2003 and 65.9% for
the same period in 2002. The increased loss ratio in 2003 is the result of the
impact of losses incurred in a small number of programs in the Self Insured
Risks line of business.
Acquisition Expenses. Acquisition expenses for the six months ended June 30,
2003 were $9.4 million or 13.9% of net premiums earned. For the six months ended
June 30, 2002, acquisition expenses were $1.3 million or 17.7% of net premiums
earned. The reduction in expense ratio in the year is due to the changes
43
in mix of business brought about by the development of the Company's aerospace
book and acquisition of the in-force reinsurance business of HartRe.
General and Administrative Expenses. General and administrative expenses for the
six months ended June 30, 2003 and June 30, 2002 were $9.2 million and $1.8
million, respectively. Expenditure has increased in the year in line with the
growth in underwriting activity and ultimately, staffing levels. However, the
general and administrative expense ratio has decreased as premiums earned have
increased significantly.
Significant transactions and events
On August 8, 2003, the Company and its lenders amended the three-year term loan
facility and amended and restated the letter of credit and revolving credit
facility. The amendments extended the letter of credit and revolving credit
facility for an additional year, increased the size of the letter of credit and
revolving credit facility to $500 million and revised certain representations
and covenants in the three-year term loan facility and the letter of credit and
revolving credit facility. The letter of credit and revolving credit facility
now expires on August 11, 2004, at which point any revolving credit balance will
be converted into a six-month term loan. The amended agreements contain certain
covenants including requirements that debt, as defined in the agreements, to
shareholders' equity does not exceed a ratio of 0.35:1; consolidated tangible
net worth must exceed $1.0 billion; and the Company's unencumbered cash and
investment grade assets must exceed the greater of $400 million or outstanding
debt and letters of credit. The lenders under the amended and restated letter of
credit and revolving credit facility are JPMorgan Chase Bank, Bank One, Bank of
Bermuda, Bank of New York, Bank of Nova Scotia, Barclays Bank, Comerica Bank,
Commerzbank, Credit Lyonnais, Deutsche Bank, Fleet National Bank, Goldman Sachs,
ING Bank, Lloyds TSB, Merrill Lynch, Royal Bank of Scotland and Wachovia Bank.
The administrative agent under the amended and restated letter of credit and
revolving credit facility is JPMorgan Chase Bank.
On May 28, 2003, A.M. Best upgraded the financial strength rating of Endurance's
operating subsidiaries from "A-" (Excellent) to "A" (Excellent) and on June 5,
2003 Standard & Poor's assigned a financial strength rating to Endurance's
operating subsidiaries of "A-" (Strong). A.M. Best maintains a letter scale
rating system ranging from "A++" (Superior) to "F" (in liquidation). Standard &
Poor's maintains a letter scale rating system ranging from "AAA" (Extremely
Strong) to "R" (under regulatory supervision). The rating "A" (Excellent) by
A.M. Best is the third highest of fifteen rating levels, and "A-" (Strong) by
Standard & Poor's is the seventh highest of twenty-one rating levels. The
objective of A.M. Best's and Standard & Poor's rating systems is to provide an
opinion of an insurer's financial strength and ability to meet ongoing
obligations to its policyholders. Our ratings reflect A.M. Best's and Standard &
Poor's opinions of our financial strength, are not evaluations directed to
investors in our ordinary shares or class A shares and are not recommendations
to buy, sell or hold our ordinary shares or class A shares.
On May 15, 2003, Endurance U.S. completed a transaction with The Hartford Fire
Insurance Company and HartRe Company, L.L.C. (collectively, "HartRe") to assume
the majority of the in-force reinsurance business of HartRe, to acquire
exclusive renewal rights to that business and to hire certain employees of
HartRe necessary for the operation of the assumed business. The transaction was
structured as a quota share retrocession of the majority of HartRe's reinsurance
business, a purchase of HartRe's renewal rights with respect to such business
and an agreement with respect to claims handling for the business. The effective
date of the arrangement was April 1, 2003. Some of the contracts included in
HartRe's in-force reinsurance business were proportionally assumed by the
Company from the original inception dates of the underlying contracts. The
Company did not assume any of HartRe's historical reinsurance liabilities from
expired policies. The primary reasons for the transaction were to acquire
potentially profitable business, to increase the Company's presence in the U.S.
domestic reinsurance marketplace and to increase the U.S. based staff of the
Company. The transaction was accounted for as a purchase method business
combination in accordance with SFAS No. 141, "Business Combinations".
At closing, Endurance U.S. agreed to pay a $15 million minimum override
commission on unearned premium acquired and a $10 million minimum advance on
renewal rights commissions. On the one year anniversary of the closing,
Endurance U.S. agreed to pay an additional $5 million minimum advance on
44
renewal rights commissions. These amounts are guaranteed and constitute part of
the initial purchase price.
In addition to the initial purchase price, Endurance U.S. may be required to pay
further amounts to HartRe. Such contingent amounts are based on the renewal and
profitability of the in-force business acquired. Endurance U.S. committed to pay
HartRe override commissions on reinsured business. The override commissions vary
between 0-5% depending on the line of business. At closing, unearned premiums
assumed by Endurance U.S. were valued at $414.5 million. Upon renewal of the
business acquired over the two years following April 1, 2003, renewal rights
commissions are due at a range of 1%-5% of premiums depending on category of
business. Contingent renewal rights commissions are only payable to the extent
they exceed $10 million for the first year following closing and $5 million for
the second year following closing.
In addition to the override commission and the renewal rights commission, a
profit sharing commission will be paid if the net loss ratio of the business
associated with the property treaty, property catastrophe, and aviation lines is
less than a blended target loss ratio for the 2003 accident year. The profit
sharing commission will be equal to 50% of underwriting profits generated by the
difference between the ultimate loss ratio and target loss ratio multiplied by
the earned premiums for the 2003 accident year.
At June 30, 2003, the majority of the in-force contracts acquired had not yet
come up for renewal, and as such, amounts potentially payable to HartRe based on
renewals were not yet determinable. The profitability component of the
contingent payments will not be determinable until further maturation of the
2003 accident year results on the business acquired from HartRe. Any such
contingent amounts will be recorded in the period in which they are determined
to be payable.
On March 5, 2003, the Company consummated the initial public offering of its
ordinary shares, $1.00 par value per share. The managing underwriters were
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P.
Morgan Securities Inc., Credit Suisse First Boston LLC and Deutsche Bank
Securities Inc. All of the ordinary shares were sold by the Company and there
were no selling shareholders in the offering. The aggregate net proceeds to the
Company from the offering were $201.6 million after deducting an aggregate of
$15.5 million in underwriting discounts and commissions paid to the underwriters
and an estimated $3.7 million in other direct expenses incurred in connection
with the offering.
Upon consummation of the offering, the Company applied $50.6 million of the net
proceeds of the offering to the repayment of principal under the Company's term
loan facility. On June 12, 2003, the Company contributed $50 million to the
capital of its subsidiary, Endurance Specialty Insurance Ltd., for further
contribution to its United States subsidiary, Endurance Reinsurance Corporation
of America. The Company has invested the remaining net proceeds of the offering
in long-term, investment-grade, interest bearing instruments.
Liquidity and capital resources
Endurance Holdings is a holding company that does not have any significant
operations or assets other than its ownership of the shares of its direct and
indirect subsidiaries, including Endurance Bermuda, Endurance U.K. and Endurance
U.S. Endurance Holdings relies primarily on dividends and other permitted
distributions from its insurance subsidiaries to pay its operating expenses,
interest on debt and dividends, if any, on its common shares. There are
restrictions on the payment of dividends by Endurance Bermuda, Endurance U.K.
and Endurance U.S. to Endurance Holdings, which are described in more detail
below.
The ability of Endurance Bermuda to pay dividends is dependent on its ability to
meet the requirements of applicable Bermuda law and regulations. Under Bermuda
law, Endurance Bermuda may not declare or pay a dividend if there are reasonable
grounds for believing that Endurance Bermuda is, or would after the payment be,
unable to pay its liabilities as they become due, or the realizable value of
Endurance Bermuda's assets would thereby be less than the aggregate of its
liabilities and its issued share capital and
45
share premium accounts. Further, Endurance Bermuda, as a regulated insurance
company in Bermuda, is subject to additional regulatory restrictions on the
payment of dividends or distributions. As of June 30, 2003, Endurance Bermuda
could pay a dividend or return additional paid-in capital totaling approximately
$271 million without prior regulatory approval based upon insurance and Bermuda
Companies Act regulations.
We have agreed with the New York Insurance Department not to take a dividend
from Endurance U.S. until December 2004 without prior regulatory approval.
Endurance U.K. is subject to significant regulatory restrictions limiting its
ability to pay dividends. Accordingly, we do not currently intend to seek a
dividend from Endurance U.K.
Our aggregate invested assets as of June 30, 2003 totaled $2.2 billion compared
to aggregate invested assets of $1.7 billion as of December 31, 2002. The
increase in invested assets since December 31, 2002 resulted from collections of
premiums on insurance policies and reinsurance contracts, investment income and
proceeds from the initial public offering, offset by losses and loss expenses
paid, acquisition expenses paid, reinsurance premiums paid, general and
administrative expenses paid. Total net cash flow from operations from December
31, 2002 through June 30, 2003 was approximately $387.4 million.
In accordance with the terms of our term loan facility, we prepaid $50.6 million
of the outstanding principal on our term loan facility on March 5, 2003 with a
portion of the proceeds from our initial public offering of our ordinary shares.
We have $20.0 million and $18.4 million in principal payments due and payable on
September 27, 2003 and September 30, 2003, respectively, for outstanding
borrowings under our term loan facility. Our remaining term loan borrowings are
subject to principal payments of $76.8 million in September, 2004 and $26.2
million in September, 2005. Our term loan borrowings currently bear interest at
the London Interbank Offered Rate ("LIBOR") plus 1.0%: 2.00% per annum on our
first term loan borrowing and 2.31% per annum on our second term loan borrowing.
The different rates are a result of entering into LIBOR contracts on each loan
borrowing at different dates.
On an ongoing basis, we expect our internally generated funds, together with
borrowings available under our credit facilities and our capital base
established by our initial public offering and the private placement, to be
sufficient to operate our business. There can be no assurance that we will not
be required to incur other indebtedness to implement our business strategy or
pay claims.
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Quantitative and qualitative information about market risk
There have been no material changes in market risk from the information provided
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Quantitative and Qualitative Information about
Market Risk" included in our final prospectus filed with the Securities and
Exchange Commission on February 28, 2003 (Registration No. 333-102026).
Currency
Our functional currency is U.S. dollars for Endurance Bermuda and Endurance U.S.
and British Sterling for Endurance U.K. The reporting currency for all entities
is U.S. dollars. We maintain a portion of our investments and liabilities in
currencies other than the U.S. dollar. We have made a significant investment in
the capitalization of Endurance U.K. Endurance U.K. is subject to the United
Kingdom's Financial Services Authority rules concerning the matching of the
currency of its assets to the currency of its liabilities. Depending on the
profile of Endurance U.K.'s liabilities, it may be required to hold some of its
assets in currencies corresponding to the currencies of its liabilities. We may,
from time to time, experience losses resulting from fluctuations in the values
of foreign currencies, which could have a material adverse effect on our results
of operations.
Effects of inflation
The effects of inflation could cause the severity of claims to rise in the
future. Our estimates for losses and loss expenses include assumptions about
future payments for settlement of claims and claims handling expenses, such as
medical treatments and litigation costs. To the extent inflation causes these
costs to increase above reserves established for these claims, we will be
required to increase the reserve for losses and loss expenses with a
corresponding reduction in our earnings in the period in which the deficiency is
identified.
Reserve for losses and loss expenses
As of June 30, 2003, the Company had accrued losses and loss expense reserves of
$492.7 million. This amount represents the Company's actuarial best estimate of
the ultimate liability for payment of losses and loss expenses. During the six
month period ended June 30, 2003, the Company paid losses and loss expenses of
$30.4 million.
As of June 30, 2003, the Company had been notified of only a relatively small
number of claims and potential claims under its insurance policies and
reinsurance contracts. Of these notifications, management expected a limited
number of the claims to penetrate layers in which we provide coverage. Case
reserves reported to us in the amount of $60.9 million were recorded for these
reported claims and potential claims at June 30, 2003.
The Company participates in lines of business where claims may not be reported
for many years. Accordingly, management does not believe that reported claims on
their own are currently a valid means for estimating ultimate obligations. See
"--Critical Accounting Policies -- Reserve for Losses and Loss Expenses."
included in our final prospectus filed with the Securities and Exchange
Commission on February 28, 2003 (Registration No. 333-102026).
Cautionary statement regarding forward-looking statements
Some of the statements contained herein, and certain statements that the Company
may make in a press release or that Company officials may make orally may
include forward-looking statements which reflect the Company's current views
with respect to future events and financial performance. Such statements include
forward-looking statements both with respect to us in general and the insurance
and reinsurance sectors specifically, both as to underwriting and investment
matters. Statements which include the words
47
"expect," "intend," "plan," "believe," "project," "anticipate," "seek," "will,"
and similar statements of a future or forward-looking nature identify
forward-looking statements for purposes of the federal securities laws or
otherwise.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. We believe that these factors include, but are not limited to, the
following:
- the effects of competitors' pricing policies, and of changes in laws
and regulations on competition, including industry consolidation and
development of competing financial products;
- the impact of acts of terrorism and acts of war;
- the effects of terrorist related insurance legislation and laws;
- greater frequency or severity of claims and loss activity, including
as a result of natural or man-made catastrophic events, than our
underwriting, reserving or investment practices have anticipated;
- decreased level of demand for property and casualty insurance or
reinsurance or increased competition due to an increase in capacity
of property and casualty reinsurers;
- the inability to obtain or maintain financial strength or
claims-paying ratings by one or more of our subsidiaries;
- uncertainties in our reserving process;
- Endurance Holdings or Endurance Bermuda becomes subject to income
taxes in the United States or the United Kingdom;
- changes in regulations or tax laws applicable to us, our
subsidiaries, brokers or customers;
- acceptance of our products and services, including new products and
services;
- changes in the availability, cost or quality of reinsurance or
retrocessional coverage;
- loss of key personnel;
- political stability of Bermuda;
- changes in accounting policies or practices; and
- changes in general economic conditions, including inflation, foreign
currency exchange rates and other factors which could affect our
investment portfolio.
The foregoing review of important factors should not be construed as exhaustive.
We undertake no obligation to publicly update or review any forward-looking
statement, whether as a result of new information, future developments or
otherwise.
48
Item 4. Controls and Procedures
In July 2003, we carried out an evaluation, under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and
15d-14. Management necessarily applied its judgement in assessing the costs and
benefits of such controls and procedures which, by their nature, can provide
only reasonable assurance regarding management's control objectives. It should
be noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to timely alert them to any
material information relating to the Company (including its consolidated
subsidiaries) that must be included in our periodic SEC filings. In addition,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
49
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal proceedings generally arising in the
normal course of its business. The Company does not believe that the eventual
outcome of any such proceeding will have a material effect on its financial
condition or business. The Company's subsidiaries are regularly engaged in the
investigation and the defense of claims arising out of the conduct of their
business. Pursuant to the Company's insurance and reinsurance arrangements,
disputes are generally required to be finally settled by arbitration.
Item 2. Changes in Securities and Use of Proceeds
(c) Use of Proceeds
On March 5, 2003, the Company consummated the initial public offering of its
ordinary shares, $1.00 par value per share. The managing underwriters were
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P.
Morgan Securities Inc., Credit Suisse First Boston LLC and Deutsche Bank
Securities Inc. The ordinary shares sold in the offering were registered under
the Securities Act of 1933, as amended on a Registration Statement on Form S-1
(Registration No. 333-102026) that was declared effective by the Securities and
Exchange Commission on February 27, 2003. Of the ordinary shares registered
under the Registration Statement, 9,600,000 were sold at a price to the public
of $23.00 per share. All of the ordinary shares were sold by the Company and
there were no selling shareholders in the offering. The offering terminated
without the sale of 1,440,000 ordinary shares registered on the Registration
Statement. The aggregate gross proceeds from the ordinary shares sold by the
Company were $220.8 million. The estimated aggregate net proceeds to the Company
from the offering were approximately $201.6 million after deducting an aggregate
of $15.5 million in underwriting discounts and commissions paid to the
underwriters and an estimated $3.7 million in other direct expenses incurred in
connection with the offering.
None of the proceeds from the offering were paid, directly or indirectly, to any
of the Company's officers or directors or any of their associates, or to any
persons owning ten percent or more of the Company's outstanding ordinary shares
or to any of the Company's affiliates. Upon consummation of the offering, the
Company applied $50.6 million of the net proceeds of the offering to the
repayment of principal under the Company's term loan facility. On June 12, 2003,
the Company contributed $50 million to the capital of its subsidiary, Endurance
Specialty Insurance Ltd., for further contribution to its United States
subsidiary, Endurance Reinsurance Corporation of America. The Company has
invested the remaining net proceeds of the offering in long-term,
investment-grade, interest bearing instruments.
For a description of working capital restrictions and other limitations upon the
payment of dividends, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Item 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
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Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following sets forth those exhibits filed pursuant to Item 601
of Regulation S-K:
Exhibit
Number Description
-------- -----------
10.1 Amended and Restated Credit Agreement, dated as of
August 8, 2003, among the Company, various lending
institutions and JP Morgan Chase Bank, as
Administrative agent.
10.2 Third Amendment to the Term Loan Agreement, dated as of
August 8, 2003, among the Company, various lending
institutions and JP Morgan Chase Bank, as
Administrative agent.
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Exchange Act.
32 Certification Pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) The following reports on Form 8-K were filed during the quarter
ended June 30, 2003:
Date of Report Item Reported
-------------- -------------
May 5, 2003 The issuance by the Company of the press release
and related investor financial supplement
reporting the Company's results for the quarter
ended March 31, 2003.
May 15, 2003 The purchase by the Company from HartRe Company,
L.L.C. of renewal rights on a selected group of
contracts representing a majority of HartRe's
current in-force premiums and quota share
reinsurance of the unearned premium reserves
associated with such contracts as of April 1,
2003.
June 27, 2003 The slides from presentation by management to
investors at Wachovia Securities Nantucket Equity
Conference on June 27, 2003.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: August 13, 2003 By: /s/ Kenneth J. LeStrange
------------------------------------
Kenneth J. LeStrange
Chairman of the Board, Chief
Executive Officer, President
Date: August 13, 2003 By: /s/ James R. Kroner
------------------------------------
James R. Kroner
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
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